-----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, OBbM8jA2gvVlDCCCYYhSZLneo5A1uN9GWhiuEk+d4LSZwgfOslGMMN0tCPzK3JDb M8EGufKZFviYlvAHffRILA== 0000950144-01-003596.txt : 20010319 0000950144-01-003596.hdr.sgml : 20010319 ACCESSION NUMBER: 0000950144-01-003596 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 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: 1570209 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 g67461e10-k.txt 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, 2000 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 28, 2001 the Corporation had 136,111,025 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $3,709,025,000 based upon the reported closing price of $27.25 on the NASDAQ National Market System on that date. 2 DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 2000 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 2001 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 .......................................................... 18 Item 13 Certain Relationships and Related Transactions ............................ 18 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 $28.1 billion, total deposits of $14.8 billion and stockholders' equity of $2.0 billion at December 31, 2000. Based on total assets at December 31, 2000, the Corporation was the 35th 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 consolidated total assets of $19.8 billion, deposits of $10.7 billion and stockholders' equity of $1.3 billion at December 31, 2000. The Bank accounted for 70% of the total consolidated assets of the Corporation at December 31, 2000. A consumer-oriented bank, Banco Popular has the largest retail franchise in Puerto Rico, operating 199 branches and 478 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 61 offices in Puerto Rico, and Popular Mortgage, Inc., a mortgage loan company with 21 offices in Puerto Rico. In May 2000, the Corporation acquired Centro Finance, a small finance company in Puerto Rico that subsequently merged into Popular Finance, Inc. Centro Finance had nine offices and a loan portfolio of approximately $27 million at acquisition date. 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 the outstanding stock of Popular North America, Inc. ("PNA"), ATH Costa Rica and CREST. The last two corporations provide ATM switching and driving services in San Jose, Costa Rica. GM Group, Inc. 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 through offices in Puerto Rico, Venezuela, Miami and the Dominican Republic. At December 31, 2000, GM Group, Inc. had total assets of $72.2 million. In addition, Popular, Inc. has an 85% investment in Newco Mortgage Holding Corporation (d/b/a Levitt Mortgage), a mortgage banking organization with operations in Puerto Rico. At December 31, 2000, the assets of Levitt Mortgage totaled $7.3 million. On August 24, 2000, PIB sold its total investment in Banco Fiduciario, S.A., a commercial bank in the Dominican Republic, to the larger Banco Hipotecario Dominicano, but retained an option to acquire up to 20% of the resulting institution. 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, 2000, PNA had five direct subsidiaries, all of which were wholly- 4 5 owned: Banco Popular North America ("BPNA"), a full service commercial bank incorporated in New York State, Equity One, Inc. a diversified consumer finance company, Popular Cash Express, Inc., a retail financial services company, BanPonce Trust I, a statutory business trust, and Banco Popular, National Association ("Banco Popular, N.A.") chartered in Orlando, Florida. Banco Popular, N.A. commenced operations as a full service commercial bank on July 1, 2000. As of December 31, 2000, it operated one branch, its assets amounted to $21 million and it had deposits of $11.5 million. Popular Insurance, Inc., a wholly-owned non-bank subsidiary of Banco Popular, N.A. and an indirect subsidiary of PNA, also commenced operations on July 1, 2000. Popular Insurance, Inc. is a general insurance agency that offers insurance products in Puerto Rico. As of December 31, 2000, its assets amounted to $9 million. Popular Holdings USA, Inc., which previously was the holding company of BPNA, merged with and into PNA on November 1 , 2000. The banking operations of BPNA in the mainland United States are based in six states. In New York, BPNA operated 32 branches, which accounted for aggregate assets of $2.1 billion and total deposits of $1.9 billion at December 31, 2000. BPNA also operated 21 branches in Illinois and 16 in California with total assets of $1.8 billion and $451 million, respectively, and deposits of $1.2 billion and $388 million, respectively. In addition, BPNA had 12 branches in New Jersey with total assets of $457 million and deposits of $417 million as of December 31, 2000 and nine branches in Florida with aggregate total assets of $200 million and deposits of $172 million. In Texas, BPNA operates five branches with aggregate assets of $273 million and total deposits of $97 million at the same date. In July 2000, the Corporation acquired Aurora National Bank in Chicago, Illinois which was merged into BPNA. Aurora Bank had two branches and approximately $111 million in deposits at acquisition date. 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 11 offices in eight states and total assets of $105 million as of December 31, 2000. Equity One, Inc., a wholly owned subsidiary of PNA, is engaged in the business of granting personal and mortgage loans and providing dealer financing through 136 offices in 30 states. It had total assets of $2.1 billion as of December 31, 2000. Popular Cash Express, Inc., a wholly owned subsidiary of PNA, offers services such as check cashing, money transfers to other countries, money order sales and processing of payments through 86 offices and 46 mobile check cashing units in five states in the United States and in Washington, D.C. Its assets totaled $57.2 million as of December 31, 2000. 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 5 6 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-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 17 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 2000, which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL The Corporation, PIB and PNA 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 were 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 generally have 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 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, BPNA and Banco Popular, N.A. 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, in the case of BPNA, the Federal Reserve Board and the New York State Banking Department and in the case of Banco Popular, N.A., the Office of Comptroller of the Currency ("OCC"). Banco Popular, BPNA and Banco Popular, N.A. 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 other types of 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, BPNA and Banco Popular, N.A. See "- Financial Services Modernization" below for information about recent legislation that changed these rules. In addition to the impact of 6 7 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. 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 were implemented by Banco Popular prior to the date the agreement was signed. These requirements resulted in part from the activities of a former customer of Banco Popular who is under indictment for money laundering. Law enforcement authorities are conducting an ongoing investigation relating principally to the circumstances surrounding those activities and Banco Popular is cooperating fully in that investigation. F D I C I A 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 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, 2000, Banco Popular, BPNA and Banco Popular, N.A. were all 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. 7 8 The capital-based prompt corrective action provisions of FDICIA apply to FDIC-insured depository institutions such as Banco Popular, BPNA and Banco Popular, N.A. but they are not directly applicable to holding companies such as the Corporation, PIB and PNA, 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, BPNA and Banco Popular, N.A. are subject to restrictions under federal law that limit the transfer of funds by any of them to the Corporation, PIB, PNA, or 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, BPNA and Banco Popular, N.A. to any of the Corporation, PIB, PNA, 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 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, any 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 or PNA 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, BPNA and Banco Popular, N.A. are currently the only depository institution subsidiaries of the Corporation, PIB and PNA. Because the Corporation, PIB and PNA 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 or PNA, 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 whose deposits 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, BPNA and Banco Popular, N.A. are 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 depository institution's cross-guarantee liability with respect to commonly controlled FDIC-insured depository institutions. 8 9 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 may 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, 2000, Banco Popular could have declared a dividend of approximately $205 million without the approval of the Federal Reserve Board The payment of dividends by Banco Popular, BPNA and Banco Popular, N.A. may also be affected by other regulatory 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 FDIC-insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA" above. See "-Puerto Rico Regulation-General" below for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular, BPNA and Banco Popular, N.A. 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 FDIC-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. 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. The Deposit Insurance Funds Act of 1996 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 1.96 cents per $100 of deposits. As of December 31, 2000, the Corporation had a BIF deposit assessment base of approximately $14.2 billion. 9 10 BROKERED DEPOSITS FDIC regulations adopted under 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, BPNA or Banco Popular, N.A. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 2000 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). 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 are required to maintain a leverage ratio of 4%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are 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. Banco Popular, N.A. is subject to substantially similar requirements of the OCC. See Consolidated Financial Statements, Note 19 "Regulatory Capital Requirements" on pages F-47 and F-48 for the capital ratios of the Corporation, Banco Popular and BPNA. Failure to meet capital guidelines could subject the Corporation and its depository institution 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 10 11 prior to May 31, 1997 expressly prohibiting interstate mergers. States are also allowed to permit de novo interstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish or 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 (if permitted under state laws) 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 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 institution subsidiaries must be well-capitalized (as described above) and well-managed and (ii) it must file a declaration with the Federal Reserve Board that it elects to be a "financial holding company." A depository institution is deemed to be "well managed" if at its most recent inspection, examination or subsequent review by the appropriate federal banking agency (or the appropriate state banking agency), the depository institution received at least a "satisfactory" composite rating and at least a "satisfactory" rating for management. 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 subsidiary 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"). 11 12 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 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 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, 2000, the legal lending limit for the Bank under this provision was approximately $93.7 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. 12 13 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 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 statements 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, 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, 2000, the Corporation employed 10,651 persons. None of its employees are represented by a collective bargaining group. SEGMENT DISCLOSURE Note 30 to the Financial Statements, "Segment Reporting" on pages F-57 and F-58 is herein incorporated by reference. The principal market for the Corporation is Puerto Rico, where the Corporation had $20 billion or 72% of its total assets as of December 31, 2000 and received $1.8 billion or 69% 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, 2000 were estimated at $86 billion, $40 billion and $34 billion, respectively. At that date the Corporation's commercial banking operation in the island had an estimated market share of 28% and 31% 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 52% market share, while the mortgage and small loan company operations have market shares of approximately 22% and 11%, respectively. ITEM 2. PROPERTIES As of December 31, 2000, Banco Popular owned (and wholly or partially occupied) approximately 80 properties including centralized offices, operations, branch premises and other facilities throughout the Commonwealth of Puerto Rico. Banco Popular also owned 10 lots in Puerto Rico used as parking facilities for premises or held for future expansion or branches relocation and one building in the U.S. Virgin Island. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 136 locations in Puerto Rico and 7 locations in the U.S. Virgin Islands. At December 31, 2000, BPNA had 116 offices (principally bank branches) of which 55 were owned and 61 were leased. These offices were located throughout New York, Illinois, New Jersey, California, Texas and Florida. The Corporation's management 13 14 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 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. 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 operation department, 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. 14 15 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 for each quarterly period during 2000 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 28, 2001, the Corporation had 9,061 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 $27.25 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, leaving $1.25 billion aggregate amount of securities available for future issuance 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, 2000. 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). 15 16 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. A United States citizen who is a 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: ------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Excluding Interest on Deposits 1.6 1.7 1.8 1.8 2.0 Including Interest on Deposits 1.3 1.4 1.4 1.4 1.4 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 1.6 1.7 1.8 1.8 2.0 Including Interest on Deposits 1.3 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: 16 17
Year ended December 31, ----------------------------------------------------------------------- (In thousands) 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Long-term obligations $1,451,912 $2,127,599 $1,582,160 $1,678,696 $1,111,713 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-18 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 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-68, 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, 2001 (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. 17 18 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 Corporation's 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: (1) Financial Statements: Report of Independent Accountants Consolidated Statements of Condition as of December 31, 2000 and 1999 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 2000 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2000 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, 2000. Dated: October 11, 2000 Filed: October 16, 2000 Items reported: Item 5 - Other Events (Operational results for the quarter and nine month period ended September 30, 2000) 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: 02-07-2001 (Principal Executive Officer) -------------- By: S\JORGE A. JUNQUERA -------------------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-07-2001 (Principal Financial Officer) ----------------- By: S\AMILCAR L. JORDAN -------------------------------- Amilcar L. Jordan Senior Vice President Dated: 02-07-2001 (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 02-07-2001 ------------ - --------------------------- Vice Chairman of Antonio Luis Ferre the Board ------------ S\JUAN J. BERMUDEZ - --------------------------- Juan J. Bermudez Director 02-07-2001 ------------ S\FRANCISCO J. CARRERAS - --------------------------- Francisco J. Carreras Director 02-07-2001 ------------ S\DAVID H. CHAFEY, JR. - --------------------------- David H. Chafey Jr. Director 02-07-2001 ------------ S\HECTOR R. GONZALEZ - --------------------------- Hector R. Gonzalez Director 02-07-2001 ------------ S\JORGE A. JUNQUERA - --------------------------- Jorge A. Junquera Director 02-07-2001 ------------
19 20 S/MANUEL MORALES JR - --------------------------- Manuel Morales Jr. Director 02-07-2001 ------------ S\ALBERTO M. PARACCHINI - --------------------------- Alberto M. Paracchini Director 02-07-2001 ------------ S\FRANCISCO M. REXACH, JR. - --------------------------- Francisco M. Rexach Jr. Director 02-07-2001 ------------ S/FELIX J. SERRALLES JR - --------------------------- Felix J. Serralles Jr. Director 02-07-2001 ------------ S/JULIO E. VIZCARRONDO JR - --------------------------- Julio E. Vizcarrondo Jr. Director 02-07-2001 ------------
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). 4.11 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). 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).
21 22 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). 4.21 Junior Subordinated Indenture, among BanPonce Financial Corp., (Popular North America, Inc.) BanPonce Corporation (Popular, Inc) and the First National Bank of Chicago, as Debenture Trustee (incorporated herein by reference to Exhibit (4)(a) of Popular's Current Report on Form 8-K (File No. 0-13818), dated and file on February 19, 1997). 4.22 Amended and Restated Trust Agreement of BanPonce Trust I, among BanPonce Financial Corp., (Popular North America, Inc.) as Depositor, BanPonce Corporation, (Popular, Inc.) as Guarantor, The First National Bank of Chicago, as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee, and the Administrative Trustee named therein (incorporated herein by reference to Exhibit (4)(f) of Popular's Current Report on Form 8-K (File No. 0-13818) dated and file on February 19, 1997). 4.23 Form of Capital Security Certificate for BanPonce Trust I (incorporated herein by reference to Exhibit (4)(g) of Popular's Current Report on Form 8-K (File No. 0-13818) dated and file on February 19, 1997). 4.24 Guarantee Agreement relating to BanPonce Trust I, by and among BanPonce Financial Corp., (Popular North America, Inc.) as Guarantor, BanPonce Corporation, (Popular, Inc.)as Additional Guarantor, and the First National Bank of Chicago, as Guarantee Trustee (incorporated herein by reference to Exhibit (4)(h) of Popular's Current Report on Form 8-K (File No. 0-13818) dated and file on February 19, 1997). 4.25 Form of Junior Subordinated Deferrable Interest Debenture for BanPonce Financial Corp. (Popular North America, Inc.) (incorporated herein by reference to Exhibit (4)(i) of Popular's Current Report on Form 8-K (File No. 0-13818) dated and file on February 19, 1997). 4.26 Form of Subordinated Note of Popular, Inc. (incorporated herein by reference to Exhibit 4.10 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13818). 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)).
22 23 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). 10.8 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). 10.13 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). 10.15 Banco Popular de Puerto Rico Employees' Stock Plan (Puerto Rico) (incorporated herein by reference to Popular's Registration Statement on Form S-8 (333-80169), dated June 8, 1999). 10.15a Certificate of Resolution of the Board of Director of Banco Popular de Puerto Rico, authorizing Amendments to the Banco Popular de Puerto Rico Employees' Stock Plan (Puerto Rico). 10.16 Distribution Agreement of the Banco Popular de Puerto Rico Bank Notes, dated September 24, 1996, among Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co. Inc. and Credit Suisse First Boston Corporation. 10.17 Amendment, dated May 12, 2000, to The Distribution Agreement, dated September 24, 1996, among Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co., Inc. and Credit Suisse First Boston Corporation.
23 24 10.18 Issuing and Paying Agency Agreement of the Banco Popular de Puerto Rico Bank Notes, dated September 24, 1996, among Banco Popular de Puerto Rico and The Chase Manhattan Bank. 10.19 Amendment No. 1, dated May 12, 2000 to Issuing and Paying Agency Agreement, dated September 24, 1996, among Banco Popular de Puerto Rico and The Chase Manhattan Bank. 10.20 Interest Calculation Agreement of the Banco Popular de Puerto Rico Notes, dated September 24, 1996, among Banco Popular de Puerto Rico and The Chase Manhattan Bank. 10.21 Amendment No. 1, dated May 12, 2000 to the Interest Calculation Agreement, dated September 24, 1996, among Banco Popular de Puerto Rico and The Chase Manhattan Bank. 10.22 Amended Administrative Procedures for Fixed and Floating Rate Bank Notes, dated May 12, 2000 to the Exhibit G of The Distribution Agreement, dated September 24, 1996, among Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill Lynch Pierce, Fenner & Smith Incorporated, Bear Stearns & Co., Inc. and Credit Suisse First Boston Corporation. 10.23 Form of Global Fixed and Floating Rate Bank Note of the Banco Popular de Puerto Rico Bank Notes, dated September 24, 1996. 10.24 Amended and Restated Credit Agreement, dated October 13, 2000, among Popular, Inc., Popular North America, Inc., The Lenders named Herein, The Chase Manhattan Bank, as Administrative Agent for The Lenders and Bank One, N.A. and Barclays Bank PLC-Miami Agency, as Agents for the Lenders and Chase Securities, Inc., as advisor, arranger and book manager. 10.25 Distribution Agreement, dated October 6, 1995, among BanPonce Corporation (Popular, Inc.), Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 10.7 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13818). 10.26 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. (Popular North America, Inc.), BanPonce Corporation (Popular, Inc.), Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 10.12 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-13818). 12.1 Computation of Ratio of Earnings to Fixed Charges. 13.1 Popular's Annual Report to Shareholders for the year ended December 31, 2000. 21.1 Schedule of Subsidiaries of Popular, Inc. 23.1 Consents of Independent Accountants. 99.1 Popular's Proxy Statement for the April 23, 2001 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.
24 EX-4.26 2 g67461ex4-26.txt FORM OF NOTE 1 EXHIBIT 4.26 FORM OF NOTE [Include if this Note is a Global Note -- THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE TRANSFERRED TO, OR REGISTERED OR EXCHANGED, IN WHOLE OR IN PART, FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY OR A NOMINEE THEREOF AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. EVERY NOTE AUTHENTICATED AND DELIVERED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS NOTE SHALL BE A GLOBAL SECURITY SUBJECT TO THE FOREGOING, EXCEPT IN SUCH LIMITED CIRCUMSTANCES. Unless this Note is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Company or its agent for registration of transfer, exchange, or payment, and any Security issued upon registration of transfer of, or in exchange for, or in lieu of, this Note is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment hereon is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.] THIS SECURITY IS NOT A SAVINGS ACCOUNT, DEPOSIT OR OTHER OBLIGATION OF ANY BANK OR NONBANK SUBSIDIARY OF THE COMPANY, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. CUSIP NO. $ ______________ No. BANPONCE CORPORATION _____% Subordinated Notes due __________________ , 2005 BANPONCE CORPORATION, a corporation duly organized and existing under the laws of the Commonwealth of Puerto Rico (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to , or 2 registered assigns, the principal sum of ________________________________ Dollars on ________________________________________________________ , and to pay interest thereon from _____________ or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ____________ and ___________ in each year, commencing _________ , at the rate of ____% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the _________ or ____________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of interest on this Security due on any Interest Payment Date (other than interest on this Security due to the Holder hereof at Maturity) shall be paid by check mailed to the Person entitled thereto at his last address as it appears on the Security Register or, if a Depositary with respect to this Security is specified above or if $10,000,000 aggregate principal amount of Securities of this series with the Interest Payment Dates specified above are registered in the name of the Holder hereof, in immediately available funds by wire transfer to such account as may have been designated by the Person entitled thereto as set forth herein in time for the Paying Agent under the Indenture to make such payments in accordance with its normal procedures. Payment of the principal of (and premium, if any) and interest on this Security due to the Holder hereof at Maturity shall be paid in immediately available funds upon presentation of this Security for surrender at the office or agency of the Paying Agent in the Borough of Manhattan, The City of New York, provided that this Security is presented for surrender in time for the Paying Agent to make such -2- 3 payment in such funds in accordance with its normal procedures. Any such designation for wire transfer purposes shall be made by filing the appropriate information with the Trustee at its Corporate Trust Office in the Borough of Manhattan, The City of New York and, unless revoked by written notice to the Trustee received on or prior to the Regular Record Date immediately preceding the applicable Interest Payment Day or the fifteenth calendar day preceding Maturity, shall remain in effect with respect to any further payments with respect to this Note payable to such Holder. Any payment of principal, premium or interest on this Security due on any day which is not a Business Day in The City of New York need not be made on such day, but may be made on the next succeeding Business Day in The City of New York with the same force and effect as if made on the due date and no interest shall accrue for the period from and after such date. "Business Day" shall mean, as used herein with respect to any particular location, any day, other than Saturday and Sunday, which is not a day on which banking institutions in such location are authorized or obligated by law or executive order to close. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -3- 4 IN WITNESS WHEREOF, BANPONCE CORPORATION has caused this instrument to be signed by its duly authorized officer, and has caused a facsimile of its corporate seal to be affixed hereto or imprinted hereon. Dated: BANPONCE CORPORATION By: ------------------------ Name: Title: By: ------------------------ Name: Title: Attest: By: ------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. THE FIRST NATIONAL BANK OF CHICAGO, As Trustee By: ---------------------------- Name: Title: -4- 5 BANPONCE CORPORATION ___% SUBORDINATED NOTES DUE ____________ , 2005 REVERSE OF SECURITY This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of November 30, 1995 (herein called the "Indenture"), between the Company and The First National Bank of Chicago, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $ _________________. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture), and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, agrees that each holder of Senior Indebtedness, whether created or acquired before or after the issuance of the Securities of this series, shall be deemed conclusively to have relied on such provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. The Indenture also provides that if, upon the occurrence of certain events of bankruptcy or insolvency relating to the Company, there remains, after giving effect to such subordination provisions, any amount of cash, property or securities available for payment or distribution in respect of Securities of this series (as defined in the Indenture, "Excess Proceeds"), and if, at such time, any Entitled Person (as defined in the Indenture) has not received payment in full of all amounts due or to become due on or in respect of Other Financial Obligations (as defined in the Indenture), then such Excess Proceeds shall first be applied to pay or provide for the payment in full of such Other Financial Obligations before any payment or distribution may be made in respect of Securities of this series. This Security is also issued subject to the provisions of the Indenture regarding payments to Entitled Persons in respect of Other Financial Obligations. Each 6 Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination of this Security and payment of Excess Proceeds as provided in the Indenture and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. In the event that the Company shall be obligated to pay any Additional Amounts due to a change in law, regulation or interpretation, the Company may, at its option, redeem this Security as a whole at a redemption price of 100% of the principal amount thereof together with accrued interest to the date fixed for redemption. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. If this Security is a Global Security (as specified on the face hereof), this Security is exchangeable -2- 7 only if (x) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for this Global Security or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, (y) the Company in its sole discretion determines that this Global Security shall be exchangeable for definitive Securities in registered form or (z) an Event of Default, or an event which with notice or lapse of time or both would become an Event of Default, with respect to the Securities represented hereby has occurred and is continuing. If this Security is exchangeable pursuant to the preceding sentence, it shall be exchangeable for definitive Securities in registered form, bearing interest at the same rate, having the same date of issuance, redemption provisions, Maturity Date and other terms and of differing denominations aggregating a like amount. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registerable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, including limitations on the exchange of a Global Security, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof -3- 8 for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. This Note shall be governed by and construed in accordance with the laws of the State of New York. -4- 9 -------------- ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT--________ Custodian ____________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right Under Uniform Gifts to Minors Act of survivorship and not as tenants in common ________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or Other Identifying Number of Assignee ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ the within Note of BANPONCE CORPORATION and does hereby irrevocably constitute and appoint ____________________________________________________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: ----------------------- ----------------------------------------- ----------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever. -5- EX-10.15 3 g67461ex10-15.txt CERTIFICATED OF RESOLUTION 1 EXHIBIT-10.15(A) CERTIFICATE OF RESOLUTION The undersigned, Assistant Secretary of the Board of Directors of Banco Popular de Puerto Rico (the "Bank"), does hereby certify that at a meeting of the Board of Directors of the Bank held on the 11th of October 2000, at which a quorum was present and acting throughout, a resolution was duly and regularly adopted, which is in full force and effect and unrescinded, and read as follows WHEREAS, Banco Popular de Puerto Rico (the "Bank") has established the Banco Popular de Puerto Rico Employees' Stock Plan (Puerto Rico) (the "Plan"); and WHEREAS, under Article X of the Plan the Bank has reserved the right to amend the Plan at any time and from time to time as the Board of Directors (the "Board") of the Bank may determine; and WHEREAS, the Bank has exercised its power to amend the Plan on various previous occasions; and WHEREAS, the Bank wishes to further amend the Plan to make it a more effective tool in the recruitment and maintenance of its personnel and to comply with all applicable laws and regulations. NOW, THEREFORE, BE IT RESOLVED, that the Board hereby authorizes the amendment of the Plan to provide for the following: (1) provide for the contribution by participants in the Plan on an after tax basis of up to 10% of the such participant's compensation (as defined in the Plan for these purposes) and to allow quarterly withdrawals of such after tax contributions and the earnings thereon in amounts not less than $1,000; (2) provide that all participant contributions to the Plan will be made on the basis of whole percentages of compensation (as defined in the Plan for these purposes) and that all participant contributions to the Plan currently made in fixed dollar amounts be converted to whole percentages of compensation; (3) provide that, for the purpose of determining the amount of participant pre-tax and after-tax contributions, the definition of compensation in the Plan shall be the participant's total compensation received from the Bank, including, but no limited to, overtime pay, bonuses and incentive and profit sharing distributions paid in cash to the employee; (4) effective December 31, 2000, provide for the diversification of participant contributions to the Plan made on or after December 31, 2000 that have not been matched by allowing participants in the Plan to elect the investment of their contributions to the Plan among the following investment options: 1. Vanguard Total Bond Market Index. 2. Fidelity Advisor Equity growth Institutional. 3. Federated Equity-Income A. 4. Deutsche International Equity. 2 5. Dreyfus Emerging Leaders. 6. Federated Government Obligations Fund. 7. Common Stock of Popular, Inc. (5) provide that in the event a participant does not direct the investment of his Plan account, the Plan Administrator will determine and direct such contributions until such time as the participant assumes the direction of his contributions; (6) provide that all of the Bank's contributions to the Plan will be invested exclusively in common stock of Popular, Inc. and may not be transferred therefrom by the participant until such time as the participant has attained 50 years of age and has accumulated 10 years of service; (7) provide that upon the attainment of age 50 with 10 years of service the participant will be able to direct the investment of the complete balance of his Plan account; (8) provide for the change of the Plan's vesting schedule to the following schedule:
YEARS OF SERVICE VESTING PERCENTAGE ---------------- ------------------ 0 to 1 year 0% 1 to 2 years 20% 2 to 3 years 40% 3 to 4 years 60% 4 to 5 years 80% Over 5 years 100%
(9) provide that upon a transfer of employment of an employee of the Bank who is a participant in the Plan from the Bank to a subsidiary or affiliate of the Popular, Inc., such employee's Plan account will be transferred in a direct trust to trust transfer to the employee's new employer's qualified plan and that if the transfer of employment is made at the Bank's initiative such employee will become fully vested, as of the effective date of the transfer of employment, in the Plan account transferred; (10) provide that the Bank's discretionary matching contributions to the Plan will be determined by the Board, prior to the commencement of the Plan year for which it will be effective, and providing that for any Plan year in which the Board does not take action determining the amount of the discretionary profit sharing contribution, such contribution will be 2% of a participant's basic compensation which is contributed to the Plan on a pre-tax basis and invested in common stock of Popular, Inc.; (11) provide that the Plan will be renamed the Banco Popular de Puerto Rico Savings and Stock Plan; (12) provide for such other amendments as may be necessary for the Plan to be in agreement with the employment practices and policies of Popular, Inc., its subsidiaries and affiliates and to bring the Plan into compliance with applicable law and regulations. 3 RESOLVED, that Tere Loubriel as an authorized representative of the Bank be authorized and empowered to effectuate the foregoing resolution through an amendment and restatement of the Plan; RESOLVED, that Tere Loubriel be further authorized and empowered to take those steps which in her sole discretion are necessary to effectuate the foregoing resolutions including, but not limited to, execution of an amended and restated Plan document and the submission of the same to the applicable regulatory authorities for the issuance of rulings required to comply with applicable law; RESOLVED, that Tere Loubriel be further authorized and empowered to produce such other ancillary documents including, but not limited to, a summary plan description which in her sole discretion may be required to fully implement the amended and restated Plan and to communicate the actions of the Board to all employees of the Bank. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Bank in San Juan, Puerto Rico, this 28th day of February 2001. Brunilda Santos de Alvarez Assistant Secretary EX-10.16 4 g67461ex10-16.txt DISTRIBUTION AGREEMENT 1 EXHIBIT 10.16 Banco Popular de Puerto Rico Bank Notes Due From 7 Days to 15 Years from Date of Issue DISTRIBUTION AGREEMENT September 24, 1996 MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED World Financial Center North Tower, 10th Floor New York, New York 10281-1310 BEAR, STEARNS & CO. INC. 245 Park Avenue New York, New York 10167 CS FIRST BOSTON CORPORATION 55 East 52nd Street New York, New York 10055 Ladies and Gentlemen: Banco Popular de Puerto Rico, a banking corporation chartered under the laws of the Commonwealth of Puerto Rico, confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation (each referred to as an "Agent" and collectively referred to as the "Agents") with respect to (i) the issue and sale by it of its senior unsecured debt obligations not insured by the Federal Deposit Insurance Corporation (the "FDIC") with maturities from 7 days to one year from date of issue ("Short-Term Bank Notes") and (ii) the issue and sale by it of its senior unsecured debt obligations not insured by the FDIC with maturities of greater than one year to 15 years from date of issue ("Medium-Term Bank Notes," and together with the Short-Term Bank Notes, the "Bank Notes"). Banco Popular de Puerto Rico is referred to herein as the "Bank" with respect to Bank Notes issued and sold by it hereunder. The Bank Notes are to be issued pursuant to an Issuing and Paying Agency Agreement, dated as of September 24, 1996 (the "Issuing and Paying Agency Agreement"), between the Bank and The Chase Manhattan 2 Bank, as the Issuing and Paying Agent (the "Issuing and Paying Agent"). As of the date hereof, the Bank has authorized the issuance of up to $600,000,000 aggregate principal amount of Bank Notes outstanding at any one time. It is understood, however, that the Bank may from time to time authorize the issuance of an additional amount of Bank Notes and that such Bank Notes may be distributed through or sold to one or more of the Agents pursuant to the terms of this Agreement, all as though the issuance of such Bank Notes were authorized as of the date hereof. The Bank is a wholly owned subsidiary of BanPonce Corporation (the "Parent"). This Agreement provides both for the sale of Bank Notes by the Bank (i) to the Agents as principal for resale to investors and other purchasers and for the sale of Bank Notes by the Bank, (ii) directly to investors agented by the Agents (as may from time to time be agreed to by the Bank and the Agents), in which case the Agents will act as agents of the Bank in soliciting Bank Note purchasers and (iii) directly to investors. SECTION 1. Appointment as Agents. (a) Appointment of Agents. Subject to the terms and conditions stated herein, and subject to the reservation by the Bank of the right to sell Bank Notes directly to investors on its own behalf in those jurisdictions where it is authorized to do so, the Bank hereby agrees that Bank Notes will be sold exclusively to or through the Agents. The Agents are authorized to engage the services of any other broker or dealer in connection with the offer or sale of the Bank Notes purchased by an Agent as principal for resale to others but are not authorized to appoint sub-agents. In connection with sales by the Agents of Bank Notes purchased by an Agent as principal to other brokers or dealers, an Agent may allow any portion of the discount it has received in connection with such purchase from the Bank to such brokers or dealers. (b) Sale of Bank Notes. The Bank shall not approve the solicitation of purchases of Bank Notes in excess of the amount which shall be authorized to be issued or outstanding, as the case may be, by the Bank from time to time or in excess of the aggregate principal amount of Bank Notes specified in the Offering Circular (as such term is hereinafter defined). The Agents will have no responsibility for maintaining records with respect to the aggregate principal amount of Bank Notes sold or outstanding, or of otherwise monitoring the availability of Bank Notes for sale. (c) Purchases as Principal. The Agents shall not have any obligation to purchase Bank Notes from the Bank as principal, but -2- 3 the Agents may agree from time to time to purchase Bank Notes as principal. Any such purchase of Bank Notes by an Agent as principal shall be made in accordance with Section 3(a) hereof. (d) Solicitations as Agent. If agreed upon by an Agent and the Bank, the Agent acting solely as agent for the Bank and not as principal, will solicit purchases of the Bank Notes. The Agent will communicate to the Bank, orally, each offer to purchase Bank Notes solicited by such Agent on an agency basis, other than those offers rejected by the Agent. The Agent shall have the right, in its absolute discretion, to reject any proposed purchase of Bank Notes, as a whole or in part, and any such rejection shall not be deemed a breach of any Agent's agreement contained herein. The Bank may accept or reject any proposed purchase of the Bank Notes, in its absolute discretion, in whole or in part and any such rejection shall not be deemed a breach of the Bank's agreement contained herein. The Agent shall make reasonable efforts to assist the Bank in obtaining performance by each purchaser whose offer to purchase Bank Notes has been solicited by the Agent and accepted by the Bank. The Agent shall not have any liability to the Bank in the event any such agency purchase is not consummated for any reason other than a breach by the Agent of its obligations hereunder. If the Bank shall default on its obligation to deliver Bank Notes to a purchaser whose offer it has accepted, the Bank shall (i) hold the Agent harmless against any loss, claim or damage arising from or as a result of such default by the Bank and (ii) notwithstanding such default, pay to the Agent any commission to which it would be entitled in connection with such sale. (e) Additional Agents. The Bank may, from time to time, engage additional agents either as principal or as an agent for the sale of the Bank Notes. In the event that the Bank elects to engage such additional agents, the Bank shall provide advance notice as soon as reasonably possible (which advance notice may include notice via facsimile) to the Agents then parties to this Agreement. The engagement of any additional agents shall be on terms and conditions (including, without limitation, commission rates), substantially similar to those set forth in this Agreement. (f) Reliance. The Bank and the Agents agree that any Bank Notes purchased by the Agents shall be purchased, and any Bank Notes the placement of which an Agent arranges shall be placed by such Agent, in reliance on the representations, warranties, covenants and agreements of the Bank contained herein and on the terms and conditions and in the manner provided herein. SECTION 2. Representations and Warranties. -3- 4 (a) The Bank represents and warrants to each Agent as of the date hereof, as of the date of each acceptance by the Bank of an offer for the purchase of Bank Notes (whether to the Agent as principal or through the Agent as agent), as of the date of each delivery of Bank Notes (whether to such Agent as principal or through such Agent as agent) (the date of each such delivery to an Agent as principal being hereafter referred to as a "Settlement Date"), and as of the times the Offering Circular shall be amended or supplemented or there is filed with the Securities and Exchange Commission (the "Commission") or any bank regulatory agency any document incorporated by reference into the Offering Circular (each of the times referenced above being referred to hereafter as a "Representation Date"), as follows: (i) Offering Circular. The Bank has prepared an offering circular, dated September 24, 1996, to be used by the Agents in connection with the Agents' solicitation of purchasers of or offering of the Bank Notes. Such offering circular is referred to herein as the "Offering Circular"; provided, however, that if any amendment or supplement shall be provided to the Agents for use in connection with the offering of the Bank Notes, the term "Offering Circular" shall be deemed to refer to and include such amendment or supplement from and after the time it is first provided to the Agents for use. Any reference to the Offering Circular shall be deemed to refer to and include all documents incorporated by reference therein including the Call Reports and the Periodic Reports (as such terms are hereinafter defined) incorporated by reference therein, and any reference herein to the terms "amend," "amendment" or "supplement" with respect to the Offering Circular shall be deemed to include the filing of any Call Report or Periodic Report with any bank regulatory agency or the Commission after the date of this Agreement or the Offering Circular, as the case may be. The Offering Circular, as of the date hereof, does not and, as of the applicable Representation Date, will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in the Offering Circular made in reliance upon and in conformity with information furnished to the Bank in writing by the Agents expressly for use therein. -4- 5 (i) Offering Circular. The Bank has prepared an offering circular, dated September 24, 1996, to be used by the Agents in connection with the Agents' solicitation of purchasers of or offering of the Bank Notes. Such offering circular is referred to herein as the "Offering Circular"; provided, however, that if any amendment or supplement shall be provided to the Agents for use in connection with the offering of the Bank Notes, the term "Offering Circular" shall be deemed to refer to and include such amendment or supplement from and after the time it is first provided to the Agents for use. Any reference to the Offering Circular shall be deemed to refer to and include all documents incorporated by reference therein including the Call Reports and the Periodic Reports (as such terms are hereinafter defined) incorporated by reference therein, and any reference herein to the terms "amend," "amendment" or "supplement" with respect to the Offering Circular shall be deemed to include the filing of any Call Report or Periodic Report with any bank regulatory agency or the Commission after the date of this Agreement or the Offering Circular, as the case may be. The Offering Circular, as of the date hereof, does not and, as of the applicable Representation Date, will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in the Offering Circular made in reliance upon and in conformity with information furnished to the Bank in writing by the Agents expressly for use therein. -4- 6 The Bank will incorporate by reference in the Offering Circular the publicly available portions of each of its Consolidated Reports of Condition and Income (each, a "Call Report"), which the Bank has filed with the Federal Reserve Board (which forwards such filings to the FDIC), as well as any amendments or supplements thereto, beginning with and including the Call Report for the period ended December 31, of the third calendar year prior to the date of the Offering Circular to and including the most recent Call Report filed or published prior to an offering pursuant to the Offering Circular. The publicly available portions of any Call Reports filed by the Bank subsequent to the date of the Offering Circular and prior to the termination of the offering of the Bank Notes will be incorporated therein by reference. In addition, the Bank has been authorized by the Parent to incorporate by reference in the Offering Circular, and will incorporate by reference into the Offering Circular, the Parent's annual reports on Form 10-K for its most recently ended fiscal year, quarterly reports on Form 10-Q since its most recently ended fiscal year, current reports on Form 8-K since its most recently ended fiscal year and any other document filed by the Parent with the Commission pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder (the "Periodic Reports"). The documents incorporated by reference into the Offering Circular, at the time they were or hereafter are filed with the applicable federal regulatory authorities, complied or when so filed will comply in all material respects with the 1934 Act or the rules and regulations otherwise applicable thereto, as the case may be and, when read together with the other information in the Offering Circular, did not and will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were or are made, not misleading. (ii) Due Organization, Valid Existence and Good Standing. The Bank is a banking corporation duly organized, validly existing and in good standing under the laws of the jurisdiction under which it is chartered and is licensed, registered or qualified to conduct the business in which it is engaged in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such -5- 7 license, registration or qualification, except to the extent that the failure to be so licensed, registered or qualified or to be in good standing would not have a material adverse effect on the Bank and its subsidiaries taken as a whole. The Bank is a wholly owned subsidiary of the Parent, a Puerto Rico corporation registered as a bank holding company under the Bank Holding Company Act of 1956 which has securities registered under the 1934 Act. (iii) Due Authorization, Execution and Delivery of this Agreement, the Issuing and Paying Agency Agreement and the Interest Calculation Agreement. This Agreement, the Issuing and Paying Agency Agreement and the Interest Calculation Agreement dated as of September 24, 1996 (the "Interest Calculation Agreement"), between the Bank and The Chase Manhattan Bank, as calculation agent (the "Calculation Agent"), and the Short-Term and Medium-Term Letters of Representations dated September 23, 1996 (the "Letters of Representations"), among the Bank, the Issuing and Paying Agent and The Depository Trust Company have been duly authorized, executed and delivered by the Bank and are valid and legally binding agreements of the Bank, enforceable against the Bank in accordance with their respective terms, subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium and similar laws of general applicability relating to, or affecting, creditors' rights and to general equity principles. (iv) Due Authorization, Execution and Delivery of the Bank Notes. The Bank Notes have been duly authorized and, when issued and authenticated against payment of the consideration therefor, the Bank Notes will be valid and legally binding obligations of the Bank, enforceable against the Bank in accordance with their respective terms, subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium and similar laws of general applicability relating to, or affecting, creditors' rights and to general equity principles. (v) Exemption from Registration. The Bank Notes are exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"), and neither registration of the Bank Notes under the 1933 Act nor qualification of an indenture under the Trust Indenture Act of 1939, as amended, will be required in connection with the offer, sale, issuance or delivery of the Bank Notes pursuant -6- 8 to this Agreement or any applicable Terms Agreement (as defined in Section 3(a) hereof). (vi) Exemption from Investment Company Act. The Bank is not required to register under the provisions of the Investment Company Act of 1940, as amended (the "Investment Company Act"), or to take any other action with respect to or under the Investment Company Act. (vii) No Other Approvals Required. No consent, approval or authorization of or filing with any governmental body or agency is required for the performance by the Bank of its obligations under this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of Representations and any applicable Terms Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Bank Notes and except for the waiver of the Commissioner of Financial Institutions of Puerto Rico pursuant to Section 14(d) of the Puerto Rico Banking Act, which waiver has been obtained. (viii) Description of Bank Notes; Compliance with Law. The Bank Notes are substantially in the form heretofore delivered to the Agents and conform to the description thereof contained in the Offering Circular under the caption "Description of Notes." The form of the Bank Notes complies with all applicable provisions of law. (ix) Priority of Bank Notes. The Bank Notes are unsecured and unsubordinated debt obligations of the Bank and rank pari passu among themselves and with all other unsecured and unsubordinated debt obligations of the Bank except, pursuant to Section 11(d)(11) of the Federal Deposit Insurance Act, the Bank's unsecured deposit liabilities. (x) No Violation. Neither the Bank or any of its subsidiaries nor the Parent or any of its subsidiaries is in violation of its charter or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage loan agreement, note, lease or other instrument to which it is a party or by which it or any of them or their properties may be bound. The execution, issuance and delivery by the Bank of the Bank Notes, and the execution, delivery and performance by the Bank of this Agreement, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of -7- 9 Representations and any applicable Terms Agreement, will not violate any law, rule, regulation, order, judgment or decree applicable to the Parent and its subsidiaries or to the Bank and its subsidiaries or violate any provision of the Bank's charter or by-laws, or conflict with or result in a breach of or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Parent and its subsidiaries or the Bank and its subsidiaries (including, but not limited to, Section 14(d) of the Banking Act of Puerto Rico) pursuant to any material contract, indenture, mortgage loan agreement, note, lease or other instrument to which the Parent or any of its subsidiaries or the Bank or any of its subsidiaries, or the property of any of them, is bound or subject. (xi) No Material Adverse Change. Since the respective dates as of which information is given in the Offering Circular, (a) there has not been any material adverse change in the condition, financial or otherwise, or business affairs or business prospects of the Bank and its subsidiaries or the Parent and its subsidiaries, as the case may be, on a consolidated basis, whether or not arising in the ordinary course of business, other than as set forth or contemplated in the Offering Circular (including the material incorporated by reference therein), and (b) there have been no material transactions entered into by the Bank or any of its subsidiaries or the Parent and any of its subsidiaries other than those in the ordinary course of business. (xii) Rating. The Bank Notes of the Bank have been rated by a "nationally recognized statistical rating agency" (as that term is defined by the Commission for purposes of Rule 436(g)(2) under the 1933 Act), in one of its four highest categories. (xiii) Financial Statements and Financial Information. The consolidated financial statements and other financial information of the Parent and its consolidated subsidiaries included or incorporated by reference in the Offering Circular present fairly the consolidated financial position of the Parent and its consolidated subsidiaries as of the date indicated therein and the consolidated results of their operations for the periods specified therein; and except as stated therein, such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis; the Call Reports and other financial information of the Bank included -8- 10 or incorporated by reference in the Offering Circular present fairly the financial position of the Bank and the results of operations for the periods specified therein, and except as stated therein, have been prepared in conformity with regulatory instructions issued by the Federal Financial Institution Examination Council applied on a consistent basis; financial information of certain financial institutions, if any, proposed to be acquired by the Parent and the Bank included or incorporated by reference in the Offering Circular present fairly the financial position of such financial institutions as of the dates indicated therein and the results of their operations for the periods specified therein. (xiv) Legal Proceedings. Except as may be set forth in the Offering Circular, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Bank, threatened against or affecting, the Parent or any of its subsidiaries or the Bank or any of its subsidiaries, which might, in the opinion of the Bank, result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Bank and its subsidiaries on a consolidated basis, or might materially and adversely affect the properties or assets thereof or might materially and adversely affect the consummation of this Agreement, the Issuing and Paying Agency Agreement or the Interest Calculation Agreement or any transaction contemplated hereby or thereby. (xv) Taxes. No taxes, withholdings or other charges are required to be withheld or deducted under the laws of the Commonwealth of Puerto Rico or any political subdivision thereof from any payment made by the Bank on the Bank Notes and the Bank Notes are not subject to any registration tax, stamp duty or similar tax or duty imposed by the Commonwealth of Puerto Rico or any political subdivision thereof. (b) Additional Certifications. Any certificate signed by any officer of the Bank and delivered to the Agents or to counsel for the Agents in connection with an offering of Bank Notes, or the sale of Bank Notes to an Agent as principal, contemplated by this Agreement shall be deemed a representation and warranty by the Bank to the Agents as to the matters covered thereby on the date of such certificate and at each Representation Date referred to in Section 2(a) hereof subsequent thereto. SECTION 3. Purchases as Principal; Solicitations as Agents. -9- 11 (a) Purchases as Principal. Unless otherwise agreed by an Agent and the Bank, Bank Notes shall be purchased by the Agent as principal. Such purchases shall be made in accordance with terms agreed upon by the Agent and the Bank with respect to such information (as applicable) as is specified in Exhibit A hereto (a "Terms Agreement") (which terms shall be agreed upon orally and which may or may not be confirmed in a writing in the form of Exhibit A prepared by the Agent and mailed or sent via facsimile transmission to the Bank). The Agent's commitment to purchase Bank Notes as principal shall be deemed to have been made on the basis of the representations and warranties of the Bank herein contained and shall be subject to the terms and conditions herein set forth. Unless otherwise negotiated, each purchase of Bank Notes shall be at a discount from the principal amount of each such Bank Note with such discount being agreed upon between the Bank and the applicable Agent at the time of trade. The Agent may engage the services of any other broker or dealer in connection with the resale of the Bank Notes purchased as principal and may allow any portion of the discount received in connection with such purchases from the Bank to such brokers and dealers. At the time of each purchase of Bank Notes by an Agent as principal, the Agent shall specify whether the officers' certificates, opinions of counsel are required to be delivered pursuant to Sections 8(b) and 8(c) hereof. (b) Solicitations as Agents. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, when agreed upon by the Bank and an Agent, such Agent, as an agent of the Bank, will use its reasonable efforts to solicit offers to purchase the Bank Notes upon the terms and conditions set forth herein and in the Offering Circular. All Bank Notes sold through an Agent as agent will be sold at 100% of their principal amount unless otherwise agreed to by the Bank and the Agent. The Bank reserves the right, in its sole discretion, to suspend solicitation of purchases of the Bank Notes through the Agents, as agents, or any of them, commencing at any time for any period of time or permanently. Upon receipt of instructions from the Bank, the Agents will forthwith suspend solicitation of purchases from the Bank until such time as the Bank has advised the Agents that such solicitation may be resumed. The Bank agrees to pay each Agent a commission, generally in the form of a discount, equal to the applicable percentage of the principal amount of each Bank Note sold by the Bank as a result of a solicitation made by such Agent as set forth in Exhibit B hereto, -10- 12 unless otherwise negotiated. The Agents may reallow any portion of the commission payable pursuant hereto to dealers in connection with the offer and sale of any Bank Notes. (c) Administrative Procedures. The purchase price, interest rate or formula, maturity date and other terms of the Bank Notes (as applicable) specified in Exhibit A hereto shall be agreed upon by the Bank and the applicable Agent and set forth in a pricing supplement to the Offering Circular to be prepared in connection with each sale of Bank Notes. Administrative procedures with respect to the sale of Bank Notes shall be agreed upon from time to time by the Agents and the Bank (the "Administrative Procedures"). The initial Administrative Procedures, as agreed upon by the Agents and the Bank, are attached hereto as Exhibit G. The Agents and the Bank agree to perform the respective duties and obligations specifically provided to be performed by the Agents and the Bank herein and in the Administrative Procedures. (d) Delivery. The documents required to be delivered by Section 6 hereof shall be delivered at the office of Brown & Wood LLP, on the date hereof, or at such other time as the Agents and the Bank may agree upon in writing (the "Closing Time"). SECTION 4. Covenants of the Bank. The Bank covenants with the Agents as follows: (a) Amending Offering Circular. The Bank will give the Agents notice of its intention to prepare any additional offering circular supplement with respect to the sale of the Bank Notes or any amendment or supplement to the Offering Circular and will furnish the Agents with copies of any such amendment or supplement or other documents proposed to be distributed a reasonable time in advance of such proposed distribution and will not distribute any such amendment or supplement or other documents in a form to which the Agents or counsel for the Agents shall reasonably object. The Bank will advise the Agents (i) of any request by any bank regulatory agency or the Commission for any amendment of or supplement to the Offering Circular (including, without limitation, the documents incorporated by reference therein) or for any additional information; (ii) of the institution or threat by any bank regulatory agency or the Commission of any proceeding with respect to the Offering Circular (including, without limitation, the documents incorporated by reference therein) or any amendment or supplement thereto or the offering or sale of the Bank Notes, and (iii) of the receipt by the Bank of any notification with respect to the suspension of the qualification of the Bank Notes for sale in any jurisdiction or the initiation or threatening of -11- 13 any proceeding for such purpose. The Bank will use its reasonable best efforts to prevent the issuance of any order or similar action interfering with the offering or sale of the Bank Notes or the use of the Offering Circular, and, if issued, to obtain as soon as possible the withdrawal thereof. (b) Copies of Offering Circular. The Bank will deliver to the Agents as many copies of the Offering Circular (as amended or supplemented, including documents incorporated by reference therein) as the Agents shall reasonably request in connection with sales or solicitations of offers to purchase the Bank Notes. (c) Revisions of Offering Circular -- Material Changes. Except as otherwise provided in Subsection (d) of this Section 4, if any event shall occur or condition exist as a result of which it is necessary, in the reasonable opinion of counsel for the Agents or counsel for the Bank, to amend or supplement the Offering Circular in order that the Offering Circular will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, immediate notice shall be given, and confirmed in writing, to the Agents to cease the solicitation of offers to purchase the Bank Notes in their capacity as agents and to cease sales of any Bank Notes the Agents may then own as principal, and the Bank will promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission. The Agents shall, at such time as the Bank shall have furnished to the Agents an amended or supplemented Offering Circular in form satisfactory to the Agents and their counsel, resume solicitation of offers to purchase Bank Notes using the Offering Circular so amended and supplemented. (d) Suspension of Certain Obligations. The Bank shall not be required to comply with the provisions of Subsection (c) of this Section 4 during any period from the later of the time (i) the Agents shall have suspended solicitation of purchases of the Bank Notes in their capacity as agents pursuant to a request from the Bank and (ii) no Agent shall then hold any Bank Notes purchased as principal pursuant hereto, until the time the Bank shall determine that solicitation of purchases of the Bank Notes should be resumed or the Agent shall subsequently purchase Bank Notes from the Bank as principal. (e) Regulatory Reports. The Bank shall provide the Agents with copies of any publicly available reports (financial or otherwise) furnished to or filed by either the Bank or the Parent -12- 14 with any United States or State supervisory or regulatory authority as promptly as practicable after such reports become publicly available. (f) Preparation of Pricing Supplements. The Bank will prepare, with respect to any Bank Notes to be sold through or to the Agents pursuant to this Agreement, a pricing supplement with respect to such Bank Notes in a form previously approved by the Agents. (g) Blue Sky Qualifications. The Bank will endeavor, in cooperation with the Agents, to qualify the Bank Notes for offering and sale under the applicable securities laws of such States and other jurisdictions of the United States as the Agents and the Bank may designate, and will maintain such qualifications in effect for as long as may be required for the distribution of the Bank Notes; provided, however, that the Bank shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Bank will file such statements and reports as may be required by the laws of each jurisdiction in which the Bank Notes have been qualified as above provided. The Bank will promptly advise the Agents of the receipt by the Bank of any notification with respect to the suspension of the qualification of the Bank Notes for sale in any such State or jurisdiction or the initiating or threatening of any proceeding for such purpose. (h) Stand-Off Agreement. In connection with a purchase by an Agent of Bank Notes as principal, between the date of the agreement to purchase such Bank Notes and the Settlement Date with respect to such purchase, the Bank will not, without the prior consent of the Agent who is party to such agreement, offer or sell in the United States, or enter into any agreement to sell in the United States, any debt securities or deposit obligations of the Bank (other than the Bank Notes that are to be sold pursuant to such agreement and deposit and other bank obligations issued and sold directly by the Bank in the ordinary course of its business). SECTION 5. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement or any agreement by an Agent to purchase Bank Notes as principal is terminated, the Bank will pay all reasonable expenses incident to the performance of their obligations under this Agreement including: (a) the preparation, printing and delivery of the Offering Circular and all amendments and supplements thereto; (b) the preparation of this Agreement; (c) -13- 15 the preparation, issuance and delivery of the Bank Notes, including fees and expenses related to the use of book-entry notes; (d) the reasonable fees and disbursements of the Bank's counsel, of the Issuing and Paying Agent and of any calculation agents or exchange rate agents; (e) the reasonable fees and disbursements of counsel to the Agents incurred in connection with the establishment of the program relating to the Bank Notes and incurred from time to time in connection with the transactions contemplated thereby; (f) any fees charged by rating agencies for rating of the Bank Notes; (g) any advertising and other actual, out-of-pocket expenses of the Agents incurred with the approval of the Bank; (h) the qualification of the Bank Notes under State securities laws in accordance with the provisions of Section 4(g) hereof, including the filing fees and the reasonable fees and disbursements of counsel for the Agents in connection therewith and in connection with the preparation of any Blue Sky Survey and any Legal Investment Survey; (i) the cost of preparing and providing any CUSIP or other identification numbers for the Bank Notes; and (j) any filing fee payable to the National Association of Securities Dealers, Inc. SECTION 6. Conditions of Agents' Obligations. The obligations of the Agents to solicit offers to purchase the Bank Notes as agents of the Bank, the obligations of any purchasers of Bank Notes sold through an Agent as agent, and any obligation of an Agent to purchase Bank Notes pursuant to any agreement by such Agent to purchase Bank Notes as principal (or otherwise), will be subject at all times to the accuracy of the representations and warranties on the part of the Bank herein and to the accuracy of the statements of the Bank's and the Parent's officers made in any certificate furnished pursuant to the provisions hereof, to the performance and observance by the Bank of all covenants and agreements herein contained and to the following additional conditions precedent: (a) Legal Opinions. On the date hereof, the Agents shall have received the following legal opinions, dated as of the date hereof and in form and substance satisfactory to the Agents: (i) Opinion of Counsel to the Bank and the Parent. The opinion of Brunilda Santos de Alvarez, Counsel to the Bank and the Parent, substantially in the form of Exhibit C-1 hereto. (ii) Opinion of Special Counsel to the Bank and the Parent. The opinion of Pietrantoni Mendez & Alvarez, Special -14- 16 Counsel to the Bank and the Parent, substantially in the form of Exhibit C-2 hereto. (iii) Opinion of Counsel to the Agents. The opinion of Brown & Wood LLP, counsel to the Agents, covering such matters as they may reasonably request. (b) Officers' Certificates. On the date hereof and on each Settlement Date, the Agents shall have received a certificate of (i) the Bank, signed by the President, Senior Executive Vice President, Executive Vice President, Senior Vice President or Vice President, and the Chief Financial Officer, Chief Accounting Officer, Treasurer or Head of Corporate Finance of the Bank satisfactory to the Agents, substantially in the form of Exhibit D hereto, and (ii) the Parent, signed by the President, Senior Executive Vice President, Executive Vice President, Senior Vice President or Vice President, and the Chief Financial Officer, Chief Accounting Officer, Treasurer or Head of Corporate Finance of the Parent satisfactory to the Agents, substantially in the form of Exhibit E hereto, each dated the date hereof or such Settlement Date, as the case may be. (c) Representations Certificate. On the date hereof, the Agents shall have received a certificate of the Parent, substantially in the form of Exhibit F hereto. (d) Other Documents. On the date hereof and on each Settlement Date, counsel to the Agents shall have been furnished with such documents and opinions as such counsel may reasonably request for the purpose of enabling such counsel to pass upon the issuance and sale of the Bank Notes as herein contemplated and related proceedings, or in order to evidence the accuracy and completeness of any of the representations and warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Bank in connection with the issuance and sale of Bank Notes as herein contemplated shall be satisfactory in form and substance to the Agents and to counsel to the Agents. If any condition specified in this Section 6 shall not have been fulfilled when and as required to be fulfilled, this Agreement (or, at the option of the Agent, any applicable agreement by such Agent to purchase Bank Notes as principal) may be terminated by the Agents by notice to the Bank at any time at or prior to the Closing Time and any such termination shall be without liability of any party to any other party, except that the provisions of Section 5 hereof, the indemnity and contribution agreement set forth in Sections 9 and 10 hereof, and the provisions of Sections 11, 14 and 15 hereof shall remain in effect. -15- 17 SECTION 7. Delivery of and Payment for Bank Notes Sold through an Agent. Delivery of Bank Notes sold through an Agent as agent shall be made by the Bank to such Agent for the account of any purchaser only against payment therefor in immediately available funds. In the event that a purchaser shall fail either to accept delivery of or to make payment for a Bank Note on the date fixed for settlement, the Agent shall promptly notify the Bank and deliver the Bank Note to the Bank, and, if the Agent has theretofore paid the Bank for such Bank Note, the Bank will promptly return such funds to the Agent. If such failure shall have occurred for any reason other than default by the applicable Agent to perform its obligations hereunder, the Bank will reimburse such Agent on an equitable basis for its loss of the use of funds during the period when the funds were credited to the account of the Bank. SECTION 8. Additional Covenants of the Bank. The Bank covenants and agrees with each Agent that: (a) Reaffirmation of Representations and Warranties. Each acceptance by the Bank of an offer for the purchase of Bank Notes (whether to an Agent as principal or through the Agent as agent), and each delivery of Bank Notes to the Agents, shall be deemed to be an affirmation that the representations and warranties of the Bank contained in this Agreement and in any certificate theretofore delivered to the Agents pursuant hereto are true and correct at the time of such acceptance or sale, as the case may be, and an undertaking that such representations and warranties will be true and correct at the time of delivery to the purchaser or his agent, or to the applicable Agent, of the Bank Note or Bank Notes relating to such acceptance or sale, as the case may be, as though made at and as of each such time (and it is understood that such representations and warranties shall relate to the Offering Circular as amended and supplemented to each such time, including any amendment resulting from the incorporation by reference of documents filed by the Bank or the Parent). (b) Subsequent Delivery of Certificates. Each time that (i) the Offering Circular shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of Bank Notes or similar changes), (ii) (if required by an Agent) there is filed with the Commission or any bank regulatory agency any document incorporated by reference into the Offering Circular, (iii) (if required by an Agent) the Bank sells Bank Notes to such Agent as principal or (iv) the Bank issues and -16- 18 sells Bank Notes in a form not previously certified to the Agents by the Bank, the Bank shall furnish or cause to be furnished forthwith to the Agents certificates from the Bank and the Parent dated the date of such amendment or supplement, the date of such filing, or the Settlement Date, as the case may be, to the effect that the statements contained in the certificates which were last furnished to the Agents by the Bank and the Parent pursuant to Section 6(b) hereof are true and correct at the time of such amendment, supplement or sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Offering Circular as amended and supplemented to such time, including any amendment resulting from incorporation by reference of documents filed by the Bank and the Parent) or, in lieu of such certificates, certificates of the same form as the certificates referred to in said Section 6(b), modified as necessary to relate to the Offering Circular as amended and supplemented to the time of delivery of such certificates. (c) Subsequent Delivery of Legal Opinions. Each time that (i) the Offering Circular shall be amended or supplemented with respect to the Bank Notes (other than by an amendment or supplement (x) providing solely for a change in interest rates of the Bank Notes or similar changes, or (y) setting forth financial statements or other information as of and for a fiscal period (unless, in the reasonable judgment of the Agents, an opinion of counsel should be furnished in light of such an amendment)), (ii) (if required by an Agent) there is filed with the Commission or any bank regulatory agency any document incorporated by reference into the Offering Circular, (iii) (if required by an Agent) the Bank sells Bank Notes to such Agent as principal or (iv) the Bank issues and sells Bank Notes in a form not previously certified to the Agents by the Bank, the Bank shall furnish or cause to be furnished forthwith to the Agents and the Agents' counsel a letter from each counsel last furnishing an opinion referred to in Sections 6(a)(i) hereof to the effect that the Agents may rely on such last opinion to the same extent as though it were dated the date of such letter authorizing reliance (except that statements in such last opinion shall be deemed to relate to the Offering Circular as amended and supplemented at the time of delivery of such letter authorizing reliance) or in lieu of such letter, each such counsel may deliver a letter in the same form as its letter referred to in Sections 6(a)(i), but modified as necessary to relate to the Offering Circular as amended and supplemented at the time of delivery of such letter. SECTION 9. Indemnification. -17- 19 (a) Indemnification of Agents. The Bank agrees to indemnify and hold harmless each Agent and each person, if any, who controls each Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Offering Circular (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Bank; and (iii) against any and all expense whatsoever (including the reasonable fees and disbursements of counsel chosen by the Agents), as reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that (A) the Bank will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement made therein in reliance upon and in conformity with written information furnished to the Bank by such Agent specifically for use in connection with the preparation thereof, and (B) such indemnity with respect to the Offering Circular (or any amendment or supplement thereto) shall not inure to the benefit of any Agent (or any person controlling any Agent) from whom the person asserting any such loss, claim, damage or liability purchased the Bank Notes which are the subject thereof if such Agent did not send a copy of the Offering Circular (or any amendment or supplement thereto) excluding documents incorporated therein by reference to such person at or prior to the confirmation -18- 20 of the sale of such Notes to such person and the untrue statement or omission of a material fact contained in the Offering Circular (or any amendment or supplement thereto) was corrected in the Offering Circular (or any amendment or supplement thereto). (b) Indemnification of Bank. Each Agent agrees, severally and not jointly, to indemnify and hold harmless the Bank and each person, if any, who controls the Bank within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in Subsection (a) of this Section, as incurred, but only with respect to untrue statements, or alleged untrue statements, made in the Offering Circular (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Bank by such Agent expressly for use in the Offering Circular (or any amendment or supplement thereto). (c) General. Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the same counsel would be inappropriate due to actual or potential differing interests between the indemnified parties. SECTION 10. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 9 hereof is for any reason held to be unavailable to or insufficient to hold harmless the indemnified parties although applicable in accordance with its terms, the Bank, on the one hand, and the Agents, on the other hand, shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Bank, on the one hand, and the Agents, on the other hand, as incurred, in such proportions that each Agent is responsible for -19- 21 that portion represented by the percentage that the total commissions and underwriting discounts received by such Agent with respect to the Notes giving rise to the liability with respect to which indemnity is sought to the date of such liability bears to the total sales price received by the Bank from the sale of Bank Notes giving rise to such liability to the date of such liability, and the Bank is responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls the Agents within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Agents, and each person, if any, who controls the Bank within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Bank. The obligations of each of the Agents and of the Bank under this Section to contribute are several in proportion to the respective purchases or sales made by or through it to which such loss, claim, damage or liability (or action in respect thereof) relates and are not joint. SECTION 11. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Bank pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Agents or any controlling person of an Agent, or by or on behalf of the Bank, and shall survive each delivery of and payment for any of the Bank Notes. SECTION 12. Termination. (a) Termination of this Agreement. This Agreement (excluding any agreement hereunder by an Agent to purchase Bank Notes as principal) may be terminated for any reason, at any time by either the Bank or any of the Agents as to itself, immediately upon the giving of 30 days' written notice of such termination to the other party hereto in accordance with the provisions of Section 13 hereof. (b) Termination of an Agreement to Purchase Bank Notes as Principal. An Agent may terminate an agreement hereunder by such Agent to purchase Bank Notes as principal, immediately upon notice to the Bank, at any time prior to the Settlement Date relating -20- 22 thereto (i) if there has been, since the date of such agreement or since the respective dates as of which information is given in the Offering Circular, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Bank and its subsidiaries, or of the Parent and its subsidiaries, as the case may be, on a consolidated basis, whether or not arising in the ordinary course of business, or (ii) if there shall have occurred any material adverse change in the financial markets in the United States or any outbreak or escalation of hostilities or other national or international calamity or crisis the effect of which is such as to make it, in the judgment of such Agent, impracticable to market the Bank Notes or enforce contracts for the sale of the Bank Notes, or (iii) if trading in any securities of the Bank or the Parent shall have been suspended by the Commission or a national securities exchange, or if trading generally on the New York Stock Exchange, the American Stock Exchange, or Chicago Board of Trade shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, by either of said exchanges or by order of the Commission or any other governmental authority, or if a banking moratorium shall have been declared by either federal, New York State or Puerto Rico authorities, as the case may be, or (iv) if the rating assigned by any nationally recognized securities rating agency to any debt securities of the Bank as of the date of any agreement by an Agent to purchase the Bank Notes as principal shall have been lowered since that date or if any such rating agency shall have publicly announced that it has placed under surveillance or review, other than with positive implications, its rating of any debt securities or deposits of the Bank, or (v) if there shall have come to such Agent's attention any facts that would cause such Agent to believe that the Offering Circular or any amendments thereto or supplements thereof, at the time it was required to be delivered to a purchaser of Bank Notes, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time of such delivery, not misleading. (c) General. In the event of any such termination, none of the parties will have any liability to the other parties hereto, except that (i) the Agents shall be entitled to any commissions earned in accordance with the third paragraph of Section 3(b) hereof, (ii) if at the time of termination (a) an Agent shall own any Bank Notes purchased with the intention of reselling them or (b) an offer to purchase any of the Bank Notes has been accepted by the Bank but the time of delivery to the purchaser or his agent of the Bank Note or Bank Notes relating thereto has not occurred, the -21- 23 covenants set forth in Sections 4 and 8 hereof shall remain in effect until such Bank Notes are so resold or delivered, as the case may be, and (iii) the provisions of Section 5 hereof, the indemnity and contribution agreements set forth in Sections 9 and 10 hereof, and the provisions of Sections 11, 14 and 15 hereof shall remain in effect. SECTION 13. Notices. Unless otherwise provided herein, all notices required under the terms and provisions hereof shall be in writing, either delivered by hand, by mail or by telex, telecopier or telegram, and any such notice shall be effective when received at the address specified below. If to the Bank: Banco Popular de Puerto Rico 209 Munoz Rivera Avenue, Suite 913 Hato Rey, Puerto Rico 00918 Attention: Richard Barrios Facsimile Number: (787) 754-9290 If to the Parent: BanPonce Corporation 209 Munoz Rivera Avenue, Suite 1112 Hato Rey, Puerto Rico 00918 Attention: Jose L. Lopez Facsimile Number: (787) 751-2137 If to Merrill Lynch & Co.: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center North Tower, 10th Floor New York, New York 10281-1310 Attention: Product Management-Bank Notes Facsimile Number: (212) 449-2234 If to Bear, Stearns & Co. Inc.: Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Attention: Medium-Term Notes Department Facsimile Number: (212) 272-6227 -22- 24 If to CS First Boston Corporation: CS First Boston Corporation 55 East 52nd Street New York, New York 10055 Attention: Short-Medium Term Finance Group Facsimile Number: (212) 318-1498 or at such other address as such party may designate from time to time by notice duly given in accordance with the terms of this Section 13. SECTION 14. Parties. This Agreement shall inure to the benefit of and be binding upon the Agents, the Bank and its respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers and directors referred to in Sections 9 and 10 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein or therein contained. This Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the parties hereto and respective successors and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Bank Notes shall be deemed to be a successor by reason merely of such purchase. SECTION 15. Governing Law. This Agreement and all the rights and obligations of the parties shall be governed by and construed in accordance with the laws of New York applicable to agreements made and to be performed in such State. SECTION 16. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. -23- 25 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Bank a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between each of the Agents and the Bank in accordance with its terms. Very truly yours, BANCO POPULAR DE PUERTO RICO By: -------------------------------------- Name: Jose L. Lopez Title: Senior Vice President By: -------------------------------------- Name: Richard Barrios Title: Senior Vice President CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ------------------------------ Name: Title: BEAR, STEARNS & CO. INC. By: ------------------------------ Name: Title: CS FIRST BOSTON CORPORATION By: ------------------------------ Name: Title: -24- 26 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Bank a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between each of the Agents and the Bank in accordance with its terms. Very truly yours, BANCO POPULAR DE PUERTO RICO By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ----------------------------- Name: Title: BEAR, STEARNS & CO. INC. By: ----------------------------- Name: Title: CS FIRST BOSTON CORPORATION By: ----------------------------- Name: Title: -25- 27 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Bank a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between each of the Agents and the Bank in accordance with its terms. Very truly yours, BANCO POPULAR DE PUERTO RICO By: ----------------------------- Name: Title: By: ----------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ---------------------------- Name: Title: BEAR, STEARNS & CO. INC. By: ---------------------------- Name: Title: CS FIRST BOSTON CORPORATION By: ---------------------------- Name: Title: -26- 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Bank a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between each of the Agents and the Bank in accordance with its terms. Very truly yours, BANCO POPULAR DE PUERTO RICO By: --------------------------- Name: Title: By: --------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ------------------------------ Name: Title: BEAR, STEARNS & CO. INC. By: ------------------------------ Name: Title: CS FIRST BOSTON CORPORATION By: ------------------------------ Name: Title: -27- 29 EXHIBIT A The following terms, if applicable, shall be agreed to by the Agent and the Bank in connection with each sale of Bank Notes to the Agent as principal: Principal Amount: $______ Choose One: [ ] Medium-Term Bank Note [ ] Short-Term Bank Note Interest Rate: If Fixed Rate Note, Interest Rate: If Floating Rate Note: Interest Rate Basis: Initial Interest Rate: Spread or Spread Multiplier, if any: Interest Reset Date(s): Interest Payment Date(s): Index Maturity: Maximum Interest Rate, if any: Minimum Interest Rate, if any: Interest Reset Period: Interest Payment Period: Calculation Agent: If Redeemable: Initial Redemption Date: Additional Redemption Dates: Initial Redemption Percentage: Annual Redemption Percentage Reduction: If Repayable: Optional Repayment Date(s): Date of Maturity: Purchase Price: ________% Settlement Date and Time: Additional Terms: Also, in connection with the purchase of Bank Notes by the Agent as principal, agreement as to whether the following will be required: A-1 30 (a) Officers' Certificates pursuant to Section 8(b) of the Distribution Agreement. (b) Legal Opinions pursuant to Section 8(c) of the Distribution Agreement. A-2 31 EXHIBIT B Unless otherwise negotiated, compensation for the services of the Agents when acting as agents hereunder, the Bank shall pay the applicable Agent, on a discount basis, a commission for the sale of each Bank Note equal to the principal amount of such Bank Note multiplied by the appropriate percentage set forth below:
PERCENT OF MATURITY RANGES PRINCIPAL AMOUNT - --------------- ---------------- From 7 days to less than 9 months............................................ .050% From 9 months to less than 1 year............................................ .125 From 1 year to less than 18 months........................................... .150 From 18 months to less than 2 years.......................................... .200 From 2 years to less than 3 years............................................ .250 From 3 years to less than 4 years............................................ .350 From 4 years to less than 5 years............................................ .450 From 5 years to less than 6 years............................................ .500 From 6 years to less than 7 years............................................ .550 From 7 years to less than 10 years........................................... .600 From 10 years to less than 15 years.......................................... .625 15 years..................................................................... .700
B-1 32 EXHIBIT C-1 [FORM OF OPINION OF COUNSEL TO THE BANK AND THE PARENT] __________,199__ MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED World Financial Center North Tower, 10th Floor New York, New York 10281-1310 BEAR, STEARNS & CO. INC. 245 Park Avenue New York, New York 10167 CS FIRST BOSTON CORPORATION 55 East 52nd Street New York, New York 10055 Ladies and Gentlemen: In connection with the execution today (i) by you and Banco Popular de Puerto Rico (the "Bank") of the Distribution Agreement (the "Distribution Agreement"), (ii) by BanPonce Corporation (the "Parent") of the Representations Certificate pursuant to Section 6(c) of the Distribution Agreement (the "Representations Certificate"), (iii) by the Bank and The Chase Manhattan Bank (in such capacity, the "Issuing and Paying Agent") of the Issuing and Paying Agency Agreement (the "Issuing and Paying Agency Agreement"), (iv) by the Bank and The Chase Manhattan Bank (in such capacity, the "Calculation Agent") of the Interest Calculation Agreement (the "Interest Calculation Agreement") and (v) by the Bank, the Issuing and Paying Agent and The Depository Trust Company of the Short-Term and Medium-Term Letters of Representations (the "Letters of Representations"), all of which are dated September 23, 1996, relating to the issuance and sale by the Bank of its Bank Notes due from 7 days to 15 years from the date of issue (the "Bank Notes"), I, as counsel for the Bank and the Parent, the parent corporation and the bank holding company of the Bank, have examined such corporate records, certificates and other documents, and such questions of law, as I have considered necessary or appropriate for C-1-1 33 the purposes of this opinion. Upon the basis of such examination, it is my opinion that: (i) The Bank is a banking corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, the Parent is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Puerto Rico and each of the Bank and the Parent is licensed, registered or qualified to conduct the business in which it is engaged in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such license, registration or qualification, except to the extent that the failure to be so licensed, registered or qualified or to be in good standing would not have a material adverse effect on it and its subsidiaries and the Parent and its subsidiaries taken as a whole. The Bank is a wholly owned subsidiary of the Parent, a bank holding company which has securities registered under the Securities Exchange Act of 1934, as amended (the "1934 Act"). (ii) Neither the Bank or any of its subsidiaries nor the Parent or any of its subsidiaries is in violation of its charter or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or any of them or their properties may be bound. The execution, issuance and delivery by the Bank of the Bank Notes, the execution, delivery and performance by the Bank of the Distribution Agreement, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of Representations and any agreement by an agent party to the Distribution Agreement to purchase the Bank Notes as principal, and the execution, delivery and performance by the Parent of the Representations Certificate, will not violate any law, rule, regulation, order, judgment or decree applicable to the Parent and its subsidiaries or to the Bank and any of its subsidiaries or violate any provision of the Bank's or the Parent's Charter, Bylaws, Articles of Incorporation or Articles of Association, as the case may be, or conflict with or result in a breach of or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Parent and its subsidiaries or the Bank and its subsidiaries pursuant to any material contract, indenture, mortgage loan agreement, note, lease or other instrument to which the Parent or any of its subsidiaries or the Bank or any of its subsidiaries, or the property of any of them, is bound or C-1-2 34 subject, except for any conflict, breach or violation that would, individually or in the aggregate, not have a material adverse effect on the financial condition, business or results of operations of the Parent or its subsidiaries (including the Bank); provided, however, that, for purposes of this paragraph (ii), I express no opinion with respect to federal or state securities laws, antifraud laws, fraudulent transfer laws, the Employee Retirement Income Security Act of 1974 and related laws or laws that restrict transactions between United States persons and citizens or residents of certain foreign countries; provided, further, that insofar as performance by the Bank or the Parent of its obligations under the Distribution Agreement, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Bank Notes, the Letters of Representations and any other related agreement is concerned, I express no opinion as to bankruptcy, liquidation, insolvency, reorganization, moratorium, receivership and similar laws of general applicability relating to, or affecting, creditors' rights generally and specifically the rights of creditors of the FDIC-insured institutions and to general equity principles. (iii) Except as may be set forth in the Offering Circular, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to my knowledge, threatened against or affecting, the Parent or any of its subsidiaries or the Bank or any of its subsidiaries, which might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Bank and its subsidiaries, on a consolidated basis, or might materially and adversely affect the properties or assets thereof or would reasonably be expected to materially and adversely affect the consummation of this Agreement, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of Representations or any transaction contemplated hereby or thereby. (iv) The Representations Certificate has been duly authorized, executed and delivered by a duly authorized officer of the Parent and is a valid and legally binding agreement of the Parent enforceable in accordance with its terms, subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium, receivership and similar laws of general applicability relating to, or affecting, creditors' rights and to general equity principles. C-1-3 35 (v) I have no knowledge of any facts that would lead me to believe that the Offering Circular (other than financial statements and other financial data included therein, as to which I express no opinion) as of its date contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The foregoing opinion is limited to the federal laws of the United States and the laws of the Commonwealth of Puerto Rico, and I am expressing no opinion as to the effect of the laws of any other jurisdiction. Capitalized terms used herein and not otherwise defined have the meanings set forth in the Distribution Agreement. This opinion letter is solely for the benefit of the parties to whom it is addressed. It may be relied upon by Brown & Wood LLP as to matters of the laws of the Commonwealth of Puerto Rico but it may not be relied upon, nor may copies be delivered to, any other parties or persons without my prior written consent. Very truly yours, C-1-4 36 EXHIBIT C-2 [FORM OF OPINION OF COUNSEL TO THE BANK AND THE PARENT] _________, 199__ MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED World Financial Center North Tower, 10th Floor New York, New York 10281-1310 BEAR, STEARNS & CO. INC. 245 Park Avenue New York, New York 10167 CS FIRST BOSTON CORPORATION 55 East 52nd Street New York, New York 10055 Ladies and Gentlemen: In connection with the execution today (i) by you and Banco Popular de Puerto Rico (the "Bank"), of the Distribution Agreement (the "Distribution Agreement"), (ii) by BanPonce Corporation (the "Parent") of the Representations Certificate pursuant to Section 6(c) of the Distribution Agreement (the "Representations Certificate"), (iii) by the Bank and The Chase Manhattan Bank (in such capacity, the "Issuing and Paying Agent") of the Issuing and Paying Agency Agreement (the "Issuing and Paying Agency Agreement"), (iv) by the Bank and The Chase Manhattan Bank (in such capacity, the "Calculation Agent") of the Interest Calculation Agreement (the "Interest Calculation Agreement") and (v) by the Bank, the Issuing and Paying Agent and The Depository Trust Company of the Short-Term and Medium-Term Letters of Representations (the "Letters of Representations"), all of which are dated September 23, 1996, relating to the issuance and sale by the Bank of its Bank Notes due from 7 days to 15 years from the date of issue (the "Bank Notes"), I, as counsel for the Bank and the Parent, the parent corporation and the bank holding company of the Bank, have examined such corporate records, certificates and other documents, and such questions of law, as I have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, it is my opinion that: C-2-1 37 (vi) The Distribution Agreement, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement and the Letters of Representations have been duly authorized, executed and delivered by the Bank and are valid and legally binding agreements of the Bank, [enforceable in accordance with their respective terms,] subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium, receivership and similar laws of general applicability relating to, or affecting, creditors' rights generally and specifically the rights of creditors of the FDIC-insured institutions and to general equity principles or by safety and soundness concerns raised by the applicable banking regulators. (vii) The Bank Notes of the Bank have been duly authorized and, when issued and authenticated against payment of the consideration therefor, the Bank Notes will be valid and binding obligations of the Bank, enforceable in accordance with their respective terms, subject to applicable bankruptcy, fraudulent transfer, liquidation, insolvency, reorganization, moratorium, receivership and similar laws of general applicability relating to, or affecting, creditors' rights generally and specifically the rights of creditors of the FDIC-insured institutions and to general equity principles or by safety and soundness concerns raised by the applicable banking regulators. (viii) The Bank Notes of the Bank are exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"). Neither registration of the Bank Notes under the 1933 Act nor qualification of an indenture under the Trust Indenture Act of 1939, as amended, will be required in connection with the offer, sale, issuance or delivery of such Bank Notes pursuant to the Distribution Agreement or any applicable agreement by an agent party to the Distribution Agreement. (ix) The Bank is not required to register under the provisions of the Investment Company Act of 1940, as amended (the "Investment Company Act"), or to take any other action with respect to or under the Investment Company Act. (x) No consent, approval or authorization of or filing with any governmental body or agency is required for the performance by the Bank of any obligation under the Distribution Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of Representations and any applicable agreement by an C-2-2 38 Agent party to the Distribution Agreement to purchase the Bank Notes as principal, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Bank Notes, the rules of the National Association of Securities Dealers in connection with the sale and distribution of the Notes by the Agents and except for the waiver of the Commissioner of Financial Institutions of Puerto Rico pursuant to Section 14(d) of the Puerto Rico Banking Act, which waiver has been obtained. (xi) The Bank Notes are substantially in the form delivered to the Agents and conform to the description thereof contained in the Offering Circular under the caption "Description of Notes." (xii) The Bank Notes are unsecured and unsubordinated debt obligations of the Bank and rank pari passu with all other unsecured and unsubordinated debt obligations of the Bank except, pursuant to Section 11(d)(ll) of the Federal Deposit Insurance Act, the Bank's unsecured deposit liabilities. [(xiii) No taxes, withholdings or other charges imposed by the Commonwealth of Puerto Rico or any political subdivision thereof, the United States, the State of New York or the City of New York are required to be withheld or charged in respect of any payment by the Bank on the Bank Notes and the Bank Notes are not subject to any registration tax, stamp duty or similar tax or duty imposed by the Commonwealth of Puerto Rico or any political subdivision thereof.] The foregoing opinion is limited to the federal laws of the United States and the laws of the Commonwealth of Puerto Rico, and I am expressing no opinion as to the effect of the laws of any other jurisdiction. Capitalized terms used herein and not otherwise defined have the meanings set forth in the Distribution Agreement. This opinion letter is solely for the benefit of the parties to whom it is addressed. It may be relied upon by Brown & Wood LLP as to matters of the laws of the Commonwealth of Puerto Rico but it may not be relied upon, nor may copies be delivered to, any other parties or persons without our prior written consent. Very truly yours, C-2-3 39 EXHIBIT D BANCO POPULAR DE PUERTO RICO OFFICERS' CERTIFICATE We, [Officers' Names], [Officers' Titles], respectively, of Banco Popular de Puerto Rico, a banking corporation chartered under the laws of the Commonwealth of Puerto Rico (the "Bank"), pursuant to Section 6(b)(i) of the Distribution Agreement, dated September __, 1996 (the "Distribution Agreement"), among the Bank, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation hereby certify on behalf of the Bank that [to the best of our knowledge]: (i) Since ________, 19__, there has been no material adverse change in the condition, financial or otherwise, of the Bank and its subsidiaries, on a consolidated basis, or in the earnings, business affairs or business prospects of the Bank and its subsidiaries, on a consolidated basis, whether or not arising in the ordinary course of business other than as set forth or contemplated in the Offering Circular, dated September 24, 1996, as amended or supplemented to the date hereof, relating to the Bank's Bank Notes; (ii) The other representations and warranties of the Bank contained in Section 2 of the Distribution Agreement are true and correct with the same force and effect as though expressly made at and as of the date hereof; and (iii) The Bank has performed or complied with the Distribution Agreement and with all agreements and documentation executed in connection therewith and satisfied all conditions on its part to be performed or satisfied at or prior to the date hereof. D-1 40 IN WITNESS WHEREOF, we have hereunto signed our names and affixed the seal of the Bank this ___ day of _________, 19 __. BANCO POPULAR DE PUERTO RICO By: --------------------------------------- Name: Title: [SEAL] By: --------------------------------------- Name: Title: D-2 41 EXHIBIT E BANPONCE CORPORATION OFFICERS' CERTIFICATE We, [Officers' Names], [Officers' Titles], respectively, of BanPonce Corporation, a corporation organized under the laws of the Commonwealth of Puerto Rico (the "Parent"), pursuant to Section 6(b)(ii) of the Distribution Agreement, dated September __, 1996 (the "Distribution Agreement"), among the Bank, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation hereby certify on behalf of the Bank that [to the best of our knowledge]: 1 Since _______, 19__, there has been no material adverse change in the condition, financial or otherwise, of the Bank and its subsidiaries or the Parent and its subsidiaries, as the case may be, on a consolidated basis, or in the earning, business affairs or business prospects of the Bank and its subsidiaries or the Parent and its subsidiaries, as the case may be, on a consolidated basis, whether or not arising in the ordinary course of business other than as set forth or contemplated in the Offering Circular, dated September 24, 1996, as amended or supplemented to the date hereof, relating to the Bank's Bank Notes; 2 The representations and warranties of the Parent contained in the Representations Certificate dated September __, 1996, furnished by the Parent to the Agents pursuant to Section 6(c) of the Distribution Agreement, are true and correct with the same force and effect as though expressly made at and as of the date hereof; and 3 The Parent has performed or complied with the Distribution Agreement and with all agreements and documentation executed in connection therewith and satisfied all conditions on its part to be performed or satisfied at or prior to the date hereof. E-1 42 IN WITNESS WHEREOF, we have hereunto signed our names and affixed the seal of the Parent the ___ day of _______, 19__. BANCO CORPORATION By: --------------------------------------- Name: Title: [SEAL] By: --------------------------------------- Name: Title: E-2 43 EXHIBIT F REPRESENTATIONS CERTIFICATE OF PARENT To induce Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation (each referred to as an "Agent" and collectively referred to as the "Agents") to enter into the Distribution Agreement of even date herewith (the "Distribution Agreement") among Banco Popular de Puerto Rico (the "Bank") and the Agents, to induce The Chase Manhattan Bank to enter into the Issuing and Paying Agency Agreement (the "Issuing and Paying Agency Agreement") between the Bank and The Chase Manhattan Bank and to induce The Chase Manhattan Bank to enter into the Interest Calculation Agreement (the "Interest Calculation Agreement") between the Bank and The Chase Manhattan Bank, each with respect to the issue and sale by the Bank of its Bank Notes (the "Bank Notes"), the undersigned, [Officers' Names], [Officers' Titles in accordance with Section 6(c) of the Distribution Agreement] of BanPonce Corporation (the "Parent"), hereby represent and warrant on behalf of the Parent to each Agent and to The Chase Manhattan Bank as of the date hereof, as of each time that there is filed with the Securities and Exchange Commission (the "Commission") any document relating to the Parent incorporated by reference in the Offering Circular, dated September __, 1996, as of the date of each acceptance by the Bank of an offer for the purchase of Bank Notes (whether by an Agent as principal or through such Agent as agent), as of each applicable Settlement Date and as of each applicable Representation Date, as follows: (i) Authorization to Incorporate by Reference. The Parent has authorized the Bank to incorporate by reference in the Offering Circular its annual reports on Form 10-K for its most recently ended fiscal year, quarterly reports on Form 10-Q since its most recently ended fiscal year, current reports on Form 8-K since its most recently ended fiscal year and any other document filed by the Parent with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations thereunder (the "Incorporated Documents"). (ii) Incorporated Documents. The Incorporated Documents, at the time they were or hereafter are filed with the applicable federal regulatory authorities, complied or when so filed will comply, as the case may be, in all material respects with the requirements of the 1934 Act and the rules and regulations promulgated thereunder or the rules and F-1 44 regulations otherwise applicable thereto, as the case may be, and, when read together with the other information in the Offering Circular, did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were or are made, not misleading. (iii) Due Organization, Valid Existence and Good Standing. The Parent is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Puerto Rico, and is licensed, registered or qualified to conduct the business in which it is engaged in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such license, registration or qualification, except to the extent that the failure to be so licensed, registered or qualified or to be in good standing would not have a material adverse effect on the Parent and its subsidiaries taken as a whole. (iv) No Material Adverse Change. Since the respective dates as of which information is given in the Offering Circular, there has not been any material adverse change, or any development which could be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Bank and its subsidiaries or the Parent and its subsidiaries, as the case may be, on a consolidated basis, whether or not arising in the ordinary course of business, other than as set forth or contemplated in the Offering Circular. In addition, to induce the Agents to enter into the Distribution Agreement, the Parent agrees to indemnify and hold harmless each Agent and each person, if any, who controls each Agent within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 of the 1934 Act (each, a "Controlling Person") to the same extent and upon the same terms that the Bank agrees to indemnify and hold harmless each Agent and each such Controlling Person in Section 9 of the Distribution Agreement and to contribute to the payment of any losses, liabilities, claims, damages or expenses incurred by each Agent or each such Controlling Person to the same extent and upon the same terms that the Bank agrees to contribute in Section 10 of the Distribution Agreement; provided, however, that such indemnification or contribution granted by the Parent shall be an obligation of the Parent if and only to the extent that such indemnification or contribution granted by the Bank is unavailable F-2 45 to or insufficient to hold such Agent or Controlling Person harmless with respect to any losses, liabilities, claims, damages or expenses (or actions in respect thereof) referred to above. All representations and warranties contained in this certificate shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Agents or any Controlling Person of the Agents, or by or on behalf of the Parent and shall survive each delivery of and payment for any of the Bank Notes. All terms used herein but not otherwise defined shall have the meanings assigned to such terms in the Distribution Agreement. IN WITNESS WHEREOF, I have hereunto signed my name on behalf of the Parent the _____ day of __________ , 19___. BANPONCE CORPORATION By: --------------------------------------- Name: Title: [SEAL] By: --------------------------------------- Name: Title: F-3 46 EXHIBIT G ADMINISTRATIVE PROCEDURES FOR FIXED RATE AND FLOATING RATE BANK NOTES With maturities of 7 days to 15 years (Dated as of September 24, 1996) The Short-Term Bank Notes ("Short-Term Notes"), Medium-Term Bank Notes ("Medium-Term Notes," and together with the Short-Term Senior Notes, the "Notes") are to be offered on a continuous basis for sale by Banco Popular de Puerto Rico (the "Bank") through each of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation who, as agents (each, an "Agent" and collectively, the "Agents"), will purchase the Notes, as principal from the Bank for resale to investors and other purchasers at varying prices relating to prevailing market prices at the time of resale as determined by the applicable Agent or, if so specified in the applicable Pricing Supplement, for resale at a fixed public offering price. If agreed to by the Bank and the applicable Agent, such Agent may utilize its reasonable efforts on an agency basis to solicit offers to purchase the Notes at 100% of the principal amount thereof. Only those provisions in these Administrative procedures that are applicable to the particular role that an Agent will perform shall apply. The Notes are being sold pursuant to a Distribution Agreement dated September 24, 1996 (the "Distribution Agreement") between the Bank and the Agents. The Distribution Agreement provides both for the sale of Notes by the Bank to the Agents as principal for resale to investors and other purchasers and for the sale of Notes by the Bank through the Agents as agents and not as principal in which case the Agents will act as agents of the Bank in soliciting Note purchases. The Notes will be issued pursuant to an issuing and paying agency agreement dated as of September 24, 1996 (the "Issuing and Paying Agency Agreement") between the Bank and The Chase Manhattan Bank, as issuing and paying agent (the "Issuing and Paying Agent"). As used herein, the term "Offering Circular" refers to the most recent offering circular, as such document may be amended or supplemented, which has been prepared by the Bank for use by the Agents in connection with the offering of the Notes. The Notes will be issued in book-entry form (each beneficial interest in a global Note, a "Book-Entry Note" and collectively, the "Book-Entry Notes") and represented by one or more fully registered global Notes (each, a "Global Note" and collectively, G-1 47 the "Global Notes") delivered to the Issuing and Paying Agent, as agent for The Depository Trust Company, as depositary ("DTC," which term includes any successor thereof), and recorded in the book-entry system maintained by DTC. Book-Entry Notes represented by a Global Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, by the owners of such Book-Entry Notes only upon certain limited circumstances described in the Offering Circular and the applicable Global Note. In connection with the qualification of Book-Entry Notes for eligibility in the book-entry system maintained by DTC, the Issuing and Paying Agent will perform the custodial, document control and administrative functions described below, in accordance with its respective obligations under the Short-Term and Medium-Term Letters of Representations from the Bank and the Issuing and Paying Agent to DTC, dated September 23, 1996, and a Certificate Agreement, dated December 2, 1988, as amended September 24, 1996, between the Issuing and Paying Agent and DTC (the "Certificate Agreement"), and its obligations as a participant in DTC, including DTC's Same-Day Funds Settlement System ("SDFS"). Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed thereto in the Notes. Date of Issuance/ Each Note will be dated as of the date of its Authentication: authentication by the Issuing and Paying Agent. Each Note shall also bear an original issue date (the "Original Issue Date") which shall be the settlement date for such Note. The Original Issue Date shall remain the same for all Notes subsequently issued upon transfer, exchange or substitution of an original Note regardless of their dates of authentication. Maturities: Each Short-Term Note will mature on a date (the "Maturity Date") selected by the purchaser and agreed to by the Bank which is not less than seven days and not more than one year from its Original Issue Date, as selected by the initial purchaser and agreed to by the Bank; and each Medium-Term Note will have a Maturity Date selected by G-2 48 the purchaser and agreed to by the Bank which is from more than one year to not more than 15 years from its Original Issue Date; provided, however, that Floating Rate Notes will mature on an Interest Payment Date. Registration: Notes will be issued only in fully registered form. Calculation of Unless otherwise specified therein and in the Interest: applicable Pricing Supplement, interest (including payments for partial periods) on Fixed Rate Notes having maturities of more than one year will be computed and paid on the basis of a 360-day year of twelve 30-day months. Unless otherwise specified therein and in the applicable Pricing Supplement, interest on Fixed Rate Notes having maturities of one year or less will be computed on the basis of the actual number of days of the year divided by 360 and will be payable only at maturity. Unless otherwise specified therein and in the applicable Pricing Supplement, interest on Floating Rate Notes will be calculated and paid on the basis of the actual number of days in the year divided by 360 in the case of Commercial Paper Rate Notes, LIBOR Notes, Federal Funds Rate Notes, Prime Rate Notes and Eleventh District Cost of Funds Rate Notes, and by the actual number of days in the year divided by 365 or 366, as the case may be, in the case of Treasury Rate Notes. Redemption/Repayment The Notes will be subject to redemption by the Bank on and after their respective Initial Redemption Dates, if any, Initial Redemption Dates, if any, will be fixed at the time of sale and set forth in the applicable Pricing Supplement and in the applicable Note. If no Initial Redemption Dates are indicated with G-3 49 respect to a Note, such Note will not be redeemable prior to its Maturity Date. The Notes will be subject to repayment at the option of the holders thereof in accordance with the terms of the Notes on their respective Holder's Optional Repayment Dates, if any, Holder's Optional Repayment Dates, if any, will be fixed at the time of sale and set forth in the applicable Pricing Supplement and in the applicable Note. If no Holder's Optional Repayment Dates are indicated with respect to a Note, such Note will not be repayable at the option of the holder prior to its Maturity Date. Acceptance and When the Agent is soliciting offers to purchase the Rejection of Offers: Notes, the Bank shall have the sole right to accept offers to purchase Notes and may reject any such offer, in whole or in part. Each Agent shall promptly communicate to the Bank, orally, each offer to purchase Notes solicited by such Agent on an agency basis, other than those offers rejected by the Agent. Each Agent shall have the right, without notice to the Bank, to reject any proposed purchase of Notes through it, in whole or in part. Preparation of If any offer to purchase a Note is accepted by the Pricing Supplement: Bank, the Bank, with the approval of the Agent which presented such offer (the "Presenting Agent"), will prepare a Pricing Supplement reflecting the terms of such Note. Procedure for Changing When the Agents are soliciting offers to purchase the Rates or Other Notes from the Bank and a decision has been reached Variable Terms: to change the interest rate or any other variable term on any Notes being sold by the Bank, the Bank will promptly G-4 50 advise the Agents and the Agents will forthwith suspend solicitation of offers to purchase such Notes. The Agents will telephone the Bank with recommendations as to the changed interest rates or other variable terms. At such time as the Bank advises the Agents of the new interest rates or other variable terms, the Agents may resume solicitation of offers to purchase such Notes. Until such time, only "indications of interest" may be recorded. Immediately after acceptance by the Bank of an offer to purchase at a new interest rate or new variable term, the Bank and the Presenting Agent shall follow the procedures set forth under the applicable "Settlement Procedures." Suspension of While the Agents are soliciting offers to purchase Solicitation; Amendment Notes from the Bank, the Bank may instruct the or Supplement: Agents to suspend solicitation of offers to purchase Notes at any time. Upon receipt of such instructions, the Agents will forthwith suspend solicitation of offers to purchase Notes from the Bank until such time as the Bank has advised them that solicitation of offers to purchase may be resumed. If the Bank decides to amend the Offering Circular (including incorporating any documents by reference therein) or supplement any of such documents (other than to change rates or other variable terms), it will immediately notify, with confirmation in writing to follow, the Agents and will furnish the Agents and their counsel with copies of the proposed amendment (including any document proposed to be incorporated by reference therein) or supplement; provided, however, that the Bank shall be required to provide such notice and copies only to the extent that it is G-5 51 required to do so pursuant to the terms of the Distribution Agreement. One copy of such proposed amendment or supplement will be delivered or mailed to the Agents at the following respective addresses: Merrill Lynch & Co., World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310, (212) 449-0393, telecopier: (212) 449-2234, Attention: Product Management -- Medium-Term Notes; Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, (212) 272-6227, telecopier: (212) 272-5371, Attention: Medium-Term Notes Department; and CS First Boston Corporation, 55 East 52nd Street, New York, New York 10038, (212) 909-7198, telecopier: (212) 318-1498, Attention: Short-Medium Term Finance Group. In the event that at the time the solicitation of offers to purchase from the Bank is suspended (other than to change interest rates, maturities, prices or other similar variable terms with respect to the Notes) there shall be any offers to purchase Notes that have been accepted by the Bank which have not been settled, the Bank will promptly advise the Agents whether such offers may be settled and whether copies of the Offering Circular, as theretofore amended and/or supplemented may be delivered in connection with the settlement of such orders. The Bank will have the sole responsibility for such decision and for any arrangements which may be made in the event that the Bank determines that such orders may not be settled or that copies of such Offering Circular may not be so delivered. Delivery of A copy of the most recent Offering Circular and Offering Circular: Pricing Supplement must accompany or precede the earlier of G-6 52 (a) the written confirmation of a sale sent to a customer or his agent and (b) the delivery of Notes to a customer or his agent. Authenticity of The Agents will have no obligations or liability to Signatures: the Bank or the Issuing and Paying Agent in respect of the authenticity of the signature of any officer, employee or agent of the Bank or the Issuing and Paying Agent on any Note. Documents Incorporated The Bank shall supply the Agents with an adequate by Reference: supply of all documents incorporated by reference in the Offering Circular. Business Day: "Business Day" means, with respect to any Note, any day that is not a Saturday or Sunday and that is not a day which is a bank holiday in Puerto Rico or a day on which banking institutions in The City of New York or in the city in which the Bank is headquartered are authorized or required by law, regulation or executive order to close, and with respect to LIBOR Notes only, any day that is also a London Business Day. "London Business Day" means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. Issuance: All Fixed Rate Notes of the Bank issued in book-entry form having the same Original Issue Date, Interest Rate, Interest Payment Dates, Regular Record Dates, Default Rate, Maturity Date, redemption and/or repayment terms, if any, original issue discount terms, if any, and otherwise having identical terms and provisions (collectively, the "Fixed Rate Terms") will be represented initially by a single Global Note in fully registered form; and all Floating Rate Notes of the Bank issued in book-entry form having the same Original Issue Date, interest rate basis upon which interest may be determined (each, an "Interest Rate Basis"), which may be the Commercial Paper Rate, LIBOR, the Treasury Rate, the Federal Funds Rate, the Prime Rate, the Eleventh District Cost of Funds Rate and any other rate set forth by the Bank in a Floating Rate Note, Initial Interest Rate, Index Maturity, Spread and/or Spread Multiplier, if any, Regular Record Dates, Maximum Interest Rate, if any, Minimum Interest Rate, if any, G-7 53 Interest Payment Dates, Interest Payment Period, Interest Reset Dates, Interest Reset Period, Alternate Rate Event Spread, LIBOR Screen, if any, Calculation Agent, Default Rate, Maturity Date, redemption or repayment terms, if any, original issue discount terms, if any, and otherwise having identical terms and provisions (collectively, the "Floating Rate Terms"), will be represented initially by a single Global Note. Identification: The Bank has arranged with the CUSIP Service Bureau of Standard & Poor's Ratings Group (the "CUSIP Service Bureau") for the reservation of one series of CUSIP numbers assignable to Notes with maturities more than one year and one series of CUSIP numbers assignable to Notes with maturities of 7 days or more up to and including one year, each of which series consists of approximately 900 CUSIP numbers which have been reserved for and relating to Global Notes, and the Bank has delivered to DTC such list of such CUSIP numbers. The Issuing and Paying Agent will assign CUSIP numbers to Global Notes as described below under Settlement Procedure C. DTC will notify the CUSIP Service Bureau periodically of the CUSIP numbers that the Issuing and Paying Agent has assigned to the Global Notes. The Issuing and Paying Agent will notify the Bank at any time when fewer than 100 of the reserved CUSIP numbers of any series remain unassigned to Global Notes and, if it deems it necessary, the Bank will reserve additional CUSIP numbers of such series for assignment to Global Notes. Upon obtaining such additional CUSIP numbers, the Bank will deliver a list of such additional numbers to the Issuing and Paying Agent and DTC. Book-Entry Notes having an aggregate principal amount G-8 54 in excess of $200,000,000 and otherwise required to be represented by the same Global Note will instead be represented by two or more Global Notes which shall all be assigned the same CUSIP number. Registration: Unless otherwise specified by DTC, each Global Note will be registered in the name of Cede & Co., as nominee for DTC, on the register maintained by the Issuing and Paying Agent. The owner of a Book-Entry Note (i.e., an owner of a beneficial interest in a Global Note) (or one or more indirect participant&in DTC designated by such owner) will designate one or more participants in DTC (with respect to such Book-Entry Note, the "Participants") to act as agent for such beneficial owner in connection with the book-entry system maintained by DTC, and DTC will record in book-entry form, in accordance with instructions provided by such Participants, a credit balance with respect to such Book-Entry Notes in the account of such Participants. The ownership interest of such beneficial owner in such Global Note will be recorded through the records of such Participants or through the separate records of such Participants and one or more indirect participants in DTC. Transfers: Transfers of a beneficial interest in a Global Note will be accomplished by book entries made by DTC and, in turn, by Participants (and in certain cases, one or more indirect participants in DTC) acting on behalf of beneficial transferors and transferees of such Global Note. Exchanges: The Issuing and Paying Agent may deliver to DTC and the CUSIP Service Bureau at any time a written notice specifying (a) the CUSIP numbers of G-9 55 two or more Global Notes outstanding on such date that represent Notes having the same Fixed Rate Terms or Floating Rate Terms, as the case may be (other than Original Issue Dates), and for which interest has been paid to the same date; (b) a date, occurring at least 30 days after such written notice is delivered and at least 30 days before the next Interest Payment Date for the related Book-Entry Notes, on which such Global Notes shall be exchanged for one or more replacement Global Notes; and (c) a new CUSIP number, obtained from the Issuing and Paying Agent, to be assigned to such replacement Global Note. Upon receipt of such notice, DTC will send to its Participants a written reorganization notice to the effect that such exchange will occur on such date. Prior to the specified exchange date, the Issuing and Paying Agent will deliver to the CUSIP Service Bureau written notice setting forth such exchange date and the new CUSIP number and stating that, as of such exchange date, the CUSIP numbers of the Global Notes to be exchanged will no longer be valid. On the specified exchange date, the Issuing and Paying Agent will exchange such Global Notes for a single Global Note bearing the new CUSIP number, and the CUSIP numbers of the exchanged Global Notes will, in accordance with CUSIP Service Bureau procedures, be cancelled and not immediately reassigned. Notwithstanding the foregoing, if the Global Notes to be exchanged exceed $200,000,000 in aggregate principal amount, one replacement Global Note will be authenticated and issued to represent each $200,000,000 of principal amount of the exchanged Global Notes and an additional Global Note or Global Notes will be authenticated and issued in G-10 56 exchange for any remaining principal amount of such exchanged Global Notes representing such Book-Entry Notes (see "Denominations" below). Denominations: All Book-Entry Notes will be denominated in U.S. dollars. Book-Entry Notes will be issued in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Global Notes representing Book-Entry Notes will be denominated in principal amounts not in excess of $200,000,000. If one or more Book-Entry Notes having an aggregate principal amount in excess of $200,000,000 would, but for the preceding sentence, be represented by a single Global Note, then one Global Note will be issued to represent each $200,000,000 principal amount of such Book-Entry Note or Notes and an additional Global Note or Global Notes will be issued to represent any remaining principal amount of such Book-Entry Notes. In such case, each of the Global Notes representing such Book-Entry Notes shall be assigned the same CUSIP number. Each owner of a beneficial interest in one or more Book-Entry Notes is required to hold that beneficial interest in denominations of $250,000 principal amount or any integral multiple of $1,000 in excess thereof of each such Book-Entry Note at all times. Interest: General. Interest on each Book-Entry Note will accrue from the Original Issue Date or the most recent Interest Payment Date for which interest has been paid. Each payment of interest on a Book-Entry Note shall include interest accrued through the day preceding, as the case may be, the Interest Payment Date, Maturity Date or date of earlier redemption or repayment. Interest payable on the G-11 57 Maturity Date or date of earlier redemption or repayment of a Book-Entry Note will be payable to the holder to whom the principal of such Book-Entry Note is payable. DTC will arrange for each pending deposit message described under Settlement Procedure D below to be transmitted to Standard & Poor's Ratings Group, which will use the information in the message to include certain terms of the related Book-Entry Note in the appropriate daily bond report published by Standard & Poor's Ratings Group. Regular Record Dates. Unless otherwise specified in the applicable Pricing Supplement, the Regular Record Date with respect to any Interest Payment Date for a Fixed Rate Book-Entry Note with a maturity of more than one year shall be the June 1 or December 1 next preceding the applicable Interest Payment Date. The Regular Record Date with respect to any Interest Payment Date for a Floating Rate Book-Entry Note shall be the date 15 calendar days (whether or not a Business Day) prior to such Interest Payment Date. Unless otherwise specified in the applicable Pricing Supplement, interest on a Fixed Rate Book-Entry Note with a maturity of one year or less will be payable only at maturity to the person to whom principal shall be payable. Interest Payment Dates. Interest payments will be made on each Interest Payment Date commencing with the first Interest Payment Date following the Original Issue Date; provided, however, that the first payment of interest on any Note originally issued between a Regular Record Date and an Interest Payment Date will be made on the second Interest Payment Date G-12 58 following the Original Issue Date. If any Interest Payment Date of a Fixed Rate Book-Entry Note falls on a day which is not a Business Day, the related payment of interest on such Fixed Rate Book-Entry Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date. If any Interest Payment Date with respect to any Floating Rate Book-Entry Note would otherwise be a day that is not a Business Day, such Interest Payment Date will be the next succeeding Business Day, except that in the case of a LIBOR Book-Entry Note, if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. Fixed Rate Book-Entry Notes. Unless otherwise specified in the applicable Pricing Supplement, interest payments on Fixed Rate Book-Entry Notes having maturities of more than one year will be payable semi-annually on June 15 and December 15 of each year and on the Maturity Date. Unless otherwise specified in the applicable Pricing Supplement, interest on Fixed Rate Book-Entry Notes having maturities of one year or less will be payable only at maturity. Floating Rate Notes. Unless otherwise specified in the applicable Pricing Supplement, interest payments on Floating Rate Book-Entry Notes will be made as specified in the Floating Rate Book-Entry Note. Notice of Interest Payments and Regular Record Dates. On the first Business Day after any Regular Record G-13 59 Date, the Issuing and Paying Agent will deliver to DTC a written list of Regular Record Dates and Interest Payment Dates that will occur during the six-month period beginning on such first Business Day with respect to Floating Rate Book-Entry Notes. Promptly after each Interest Determination Date for Floating Rate Book-Entry Notes, the Issuing and Paying Agent will notify Standard & Poor's Ratings Group of the interest rates determined on such Interest Determination Date. Payments of Principal Payments of Interest Only. Promptly after each and Interest: Regular Record Date, the Issuing and Paying Agent will deliver to the Bank and DTC a written notice specifying by CUSIP number the amount of interest to be paid on each Book-Entry Note on the following Interest Payment Date (other than an Interest Payment Date coinciding with the Maturity Date) and the total of such amounts. DTC will confirm the amount payable on each Book-Entry Note on such Interest Payment Date by reference to the daily bond reports published by Standard & Poor's Ratings Group. On such Interest Payment Date, the Bank will pay to the Issuing and Paying Agent, and the Issuing and Paying Agent in turn will pay to DTC, an amount sufficient to pay the total amount of interest then due and owing (other than on the Maturity Date), at the times and in the manner set forth below under "Manner of Payment." Payments on the Maturity Date. On or about the first Business Day of each month, the Issuing and Paying Agent will deliver to DTC a written list of principal of, premium, if any, and interest on, each Book-Entry Note maturing on any Maturity Date, date of earlier redemption or Holder's G-14 60 Optional Repayment Date in the following month. The Issuing and Paying Agent and DTC will confirm the amounts of such principal of, premium, if any, and interest on, a Book-Entry Note on or about the fifth Business Day preceding the Maturity Date of such Book-Entry Note. On such Maturity Date, the Bank will pay to the Issuing and Paying Agent, and the Issuing and Paying Agent in turn will pay to DTC, the principal amount of such Book-Entry Note, together with interest and premium, if any, due on such Maturity Date, at the times and in the manner set forth below under "Manner of Payment." If any Maturity Date or date of earlier redemption or repayment of a Fixed Rate Book-Entry Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on, such Fixed Rate Book-Entry Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment were due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date or date of earlier redemption or repayment, as the case may be. Floating Rate Book-Entry Notes will mature on an Interest Payment Date. If any Interest Payment Date or date of earlier redemption or repayment with respect to any Floating Rate Book-Entry Note would otherwise be a day that is not a Business Day, such Interest Payment Date or date of earlier redemption or repayment will be the next succeeding Business Day, except that in the case of a LIBOR Note, if such Business Day is in the next succeeding calendar month, such Interest Payment Date or date of earlier redemption or repayment will be the immediately preceding Business Day. Promptly after payment to DTC of G-15 61 the principal of, premium, if any, and interest due on, the Maturity Date or Interest Payment Date of all Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will cancel such Global Note and deliver such Global Note to the Bank with an appropriate debit advice. On the first Business Day of each month, the Issuing and Paying Agent will deliver to the Bank a written statement indicating the total principal amount of outstanding Global Notes as of the close of business on the immediately preceding Business Day. Manner of Payment. The total amount of any principal of, premium, if any, and interest on, Book-Entry Notes due on any Interest Payment Date or Maturity Date shall be paid by the Bank to the Issuing and Paying Agent in immediately available funds available for use by the Issuing and Paying Agent no later than 10:00 A.M., New York City time, on such date. The Bank will make such payment on such Book-Entry Notes by instructing the Issuing and Paying Agent to withdraw funds from an account maintained by the Bank at the Issuing and Paying Agent. The Bank will confirm such instructions in writing to the Issuing and Paying Agent. Upon receipt of such funds, the Issuing and Paying Agent will pay by separate wire transfer (using message entry instructions in a form previously specified by DTC) to an account previously specified by DTC, in funds available for immediate use by DTC, each payment of principal of, premium, if any, and interest on, a Book-Entry Note on such date. Thereafter on such date, DTC will pay, in accordance with its SDFS operating procedures then in effect, such amounts in funds G-16 62 available for immediate use to the respective Participants in whose names Book-Entry Notes are recorded in the book-entry system maintained by DTC. Neither the Bank nor the Issuing and Paying Agent will have any responsibility or liability for the payment by DTC of the principal of, premium, if any, or interest on, the Book-Entry Notes to such Participants. Withholding Taxes. The amount of any taxes required under applicable law to be withheld from any interest payment on a Book-Entry Note will be determined and withheld by the Participant, indirect participant in DTC or other person responsible for forwarding payments and materials directly to the beneficial owner of such Book-Entry Note. Settlement Procedures: Settlement procedures with regard to Book-Entry Notes purchased by each Agent as principal or sold by each Agent, as agent of the Bank, will be as follows: A. The Presenting Agent will advise the Bank by telephone, confirmed by facsimile, of the following settlement information: 1. Taxpayer identification number of the purchaser. 2. Principal amount of such Book-Entry Notes. 3. (a) Fixed Rate Book-Entry Notes: (i) Interest Rate; (ii) Interest Payment Dates for Fixed Rate Book-Entry Notes; and (iii) Regular Record G-17 63 Dates for Fixed Rate Book-Entry Notes with maturities of more than one year (if other than the June 1 or December 1 prior to each Interest Payment Date). (b) Floating Rate Book- Entry Notes: (i) Initial Interest Rate; (ii) Interest Rate Basis; (iii) Index Maturity; (iv) Spread and/or Spread Multiplier, if any; (v) Regular Record Dates (if other than the 15th day prior to each Interest Payment Date); (vi) Maximum Interest Rate, if any; (vii) Minimum Interest Rate, if any; (viii) Interest Payment Dates; (ix) Interest Payment Period; (x) Interest Reset Dates; (xi) Calculation Agent; (xii) Interest Reset Period; (xiii) Alternate Rate Event Spread; (xiv) LIBOR Screen, if any; 4. Price to public, if any, of such Book-Entry Notes (if such Book-Entry Notes are not being G-18 64 offered "at the market"). 5. Trade Date. 6. Settlement Date (Original Issue Date). 7. Maturity Date. 8. Redemption provisions, if any, including: Initial Redemption Date, Initial Redemption Percentage and Annual Redemption Percentage Reduction. Repayment provisions, if any, including: Holder's Optional Repayment Date(s). 9. Net proceeds to the Bank. 10. Whether such Book-Entry Notes are being sold to the Presenting Agent as principal or to an investor or other purchaser through the Presenting Agent acting as agent for the Bank. 11. The presenting Agent's commission or discount, as applicable. 12. Whether such Book-Entry Notes are being issued with Original Issue Discount and the terms thereof. 13. Default Rate. 14. Such other information specified with respect to such Book-Entry Notes. B. If any offer to purchase a Note is accepted by the Bank, the Bank, with the approval of the Presenting Agent, will prepare a Pricing Supplement reflecting the G-19 65 information set forth in Settlement Procedure A above, and will transmit the Pricing Supplement to the Presenting Agent by electronic or facsimile transmission. C. The Bank will advise the Issuing and Paying Agent by electronic means, telephone (confirmed in writing at any time on the same date), facsimile transmission or by other acceptable means of the information set forth in Settlement Procedure A above, and the name of the Presenting Agent. The Issuing and Paying Agent, on behalf of the Bank, will assign a CUSIP number of the appropriate series to the Global Note representing such Book-Entry Notes and will notify the Bank by facsimile transmission or other electronic transmission of such CUSIP number as soon as practicable, and as soon thereafter as practicable, the Bank will notify the Presenting Agent by telephone of such CUSIP number. Each such instruction given by the Bank to the Issuing and Paying Agent will constitute a representation and warranty by the Bank to the Issuing and Paying Agent and the Agents that (i) the issuance and delivery of such Global Note has been duly and validly authorized by the Bank and (ii) that such Global Note, when completed, authenticated and delivered pursuant to the Issuing and Paying Agency Agreement, will constitute the valid and legally binding obligation of the Bank. D. The Issuing and Paying Agent will communicate to DTC and the Presenting Agent through DTC's G-20 66 Participant Terminal System a pending deposit message specifying the following settlement information: 1. The information set forth in Settlement Procedure A. 2. The identification numbers of the participant accounts maintained by DTC on behalf of the Issuing and Paying Agent and the Presenting Agent. 3. Identification as a Fixed Rate Book-Entry Note or Floating Rate Book-Entry Note. 4. The initial Interest Payment Date for each Global Note representing such Book-Entry Notes, the number of days by which such date succeeds the related Regular Record Date for DTC purposes and, if then calculable, the amount of interest payable on such Interest Payment Date (which amount shall have been confirmed by the Issuing and Paying Agent). 5. The CUSIP number of each Global Note representing such Book-Entry Notes. 6. Whether such Global Note represents any other Notes issued or to be issued in book-entry form. E. The Issuing and Paying Agent will complete, authenticate and deliver to DTC by retention as custodian for DTC the Global Note representing such Book-Entry Notes in a form that has been approved by the Bank, the Issuing and Paying Agent G-21 67 and the Agents. F. DTC will credit the Book-Entry Notes represented by such Global Note to the participant account of the Issuing and Paying Agent maintained by DTC except as provided in Settlement Procedure H below. G. The Issuing and Paying Agent will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Book-Entry Notes to the Issuing and Paying Agent's participant account and credit such Book-Entry Notes to the participant account of the Presenting Agent maintained by DTC and (ii) to debit the settlement account of the Presenting Agent and credit the settlement account of the Issuing and Paying Agent maintained by DTC, in an amount equal to the price of such Book-Entry Notes less such Agent's commission. Any entry of such deliver order shall be deemed to constitute a representation and warranty by the Issuing and Paying Agent to DTC that (i) the Global Note representing such Book-Entry Notes has been issued and authenticated and (ii) the Issuing and Paying Agent is holding such Global Note pursuant to the Certificate Agreement. H. In the case of Book-Entry Notes sold through an Agent acting as agent, the Presenting Agent will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Book-Entry Notes to the Presenting Agent's participant account and credit such Book-Entry Notes to the participant account G-22 68 of the Participants maintained by DTC and (ii) to debit the settlement accounts of such Participants and credit the settlement account of the Presenting Agent maintained by DTC in an amount equal to the initial public offering price of such Book-Entry Notes. I. Transfers of funds in accordance with SDFS deliver orders described in Settlement Procedures G and H will be settled in accordance with SDFS operating procedures in effect on the Settlement Date. J. The Issuing and Paying Agent will credit to an account of the Bank maintained at the Issuing and Paying Agent funds available for immediate use in the amount transferred to the Issuing and Paying Agent in accordance with Settlement Procedure G. K. In the case of Book-Entry Notes sold through an Agent acting as agent, the Presenting Agent will confirm the purchase of such Book-Entry Notes to the purchaser either by transmitting to the Participant with respect to such Book-Entry Notes a confirmation order through DTC's Participant Terminal System or by mailing a written confirmation to such purchaser. Settlement Procedures For offers to purchase Book-Entry Notes accepted by Timetable: the Bank, Settlement Procedures A through K set forth above shall be completed as soon as possible. However, all information on sales settling one day or more after the Trade Date will be transmitted to DTC no later than 10:00 a.m. on the Settlement Date. G-23 69 If a sale is to be settled on the same Business Day as the Trade Date, Settlement Procedure A shall be completed no later than 11:00 a.m. on such Business Day, Settlement Procedure C shall be completed no later than 12:00 p.m. on such Business Day, and Settlement Procedure D shall be completed no later than 1:00 p.m. on such Business Day. If a sale is to be settled more than one Business Day after the Trade Date, Settlement Procedures A and B must be completed no later than 4:00 p.m. on the Trade Date and Settlement Procedures C and D may, if necessary, be completed at any time on the first Business Day after such Trade Date. Settlement Procedure I is subject to extension in accordance with any extension of Fedwire closing deadlines and in the other events specified in the SDFS operating procedures in effect on the Settlement Date. If settlement of a Book-Entry Note is rescheduled or cancelled, the Issuing and Paying Agent will deliver to DTC, through DTC's Participant Terminal System, a cancellation message to such effect by no later than 2:00 p.m., New York City time, on the Business Day immediately preceding the scheduled Settlement Date. Failure to Settle: If the Issuing and Paying Agent fails to enter an SDFS deliver order with respect to a Book-Entry Note pursuant to Settlement Procedure G, then the Issuing and Paying Agent may deliver to DTC, through DTC's Participant Terminal System, as soon as practicable a withdrawal message instructing DTC to debit such Book-Entry Note to the participant account of the Issuing and Paying Agent G-24 70 maintained at DTC. DTC will process the withdrawal message, provided that such participant account contains a principal amount of the Global Note representing such Book-Entry Note that is at least equal to the principal amount to be debited. If withdrawal messages are processed with respect to all Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will mark such Global Note "cancelled," make appropriate entries in its records and return such Global Note to the Bank. The CUSIP number assigned to such Global Note shall, in accordance with CUSIP Service Bureau procedures, be cancelled and not immediately reassigned. If withdrawal messages are processed with respect to some of the Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will exchange such Global Note for two Global Notes, one of which shall represent the Book-Entry Notes for which such withdrawal messages are processed and shall be cancelled immediately after issuance, and the other of which shall represent the other Book-Entry Notes previously represented by the surrendered Global Note and shall bear the CUSIP number of the surrendered Global Note. In the case of any Book-Entry Note sold through an Agent, acting as agent, if the purchase price for any Book-Entry Note is not timely paid to the Participants with respect to such Book-Entry Note by the beneficial purchaser thereof (or a person, including an indirect participant in DTC, acting on behalf of such purchaser), such Participants and, in turn, the applicable Agent may enter SDFS deliver orders through DTC's Participant Terminal System reversing the orders entered pursuant to Settlement Procedures G and H, G-25 71 respectively. Thereafter, the Issuing and Paying Agent will deliver the withdrawal message and take the related actions described in the preceding paragraph. If such failure shall have occurred for any reason other than default by the applicable Agent to perform its obligations hereunder or under the Distribution Agreement, the Bank will reimburse such Agent on an equitable basis for its loss of the use of funds during the period when the funds were credited to the account of the Bank. Notwithstanding the foregoing, upon any failure to settle with respect to a Book-Entry Note, DTC may take any actions in accordance with its SDFS operating procedures then in effect. In the event of a failure to settle with respect to a Book-Entry Note that was to have been represented by a Global Note also representing other Book-Entry Notes, the Issuing and Paying Agent will provide, in accordance with Settlement Procedure E, for the authentication and issuance of a Global Note representing such remaining Book-Entry Notes and will make appropriate entries in its records. G-26 EX-10.17 5 g67461ex10-17.txt AMENDMENT TO DISTRIBUTION AGREEMENT 1 EXHIBIT 10.17 BANCO POPULAR DE PUERTO RICO AMENDMENT TO DISTRIBUTION AGREEMENT WITH RESPECT TO BANK NOTES May 12, 2000 Popular Securities, Inc. 209 Munoz Rivera Avenue Suite 1020 Hato Rey, Puerto Rico 00918 Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center North Tower, 10th Floor New York, New York 10281-1310 Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Ladies and Gentlemen: We refer to the Distribution Agreement dated September 24, 1996 (the "Distribution Agreement"), between the undersigned (the "Bank") and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co. Inc. and CS First Boston Corporation (now Credit Suisse First Boston Corporation) (collectively, the "Original Agents") as Agents, with respect to the issue and sale by the Bank of up to U.S.$600,000,000 aggregate principal amount outstanding at any one time, or the equivalent thereof in other currencies or currency units, of its senior unsecured debt obligations not insured by the Federal Deposit Insurance Corporation (the "FDIC") with maturities from 7 days to one year from date of issue ("Short-Term Bank Notes") and its senior unsecured debt obligations not insured by the FDIC with maturities of greater than one year to 15 years from date of issue ("Medium-Term Bank Notes," and together with the Short-Term Bank Notes, the "Bank Notes"). Unless otherwise defined herein, capitalized terms used herein have the meanings ascribed to them in the Distribution Agreement. 2 The Bank proposes to issue and sell up to U.S.$1,000,000,000 aggregate principal amount outstanding at any one time, or the equivalent thereof in other currencies or currency units, of Bank Notes from time to time after the date hereof, pursuant to the terms of the Distribution Agreement and the Issuing and Paying Agency Agreement, dated September 24, 1996, between the Bank and The Chase Manhattan Bank, as Issuing and Paying Agent, as amended as of the date hereof (the "Issuing and Paying Agency Agreement"), to or through one or more of you as Agents. The Bank reserves the right to sell Bank Notes directly on its own behalf in those jurisdictions where it is authorized to do so. Accordingly, it is hereby agreed by you and us that the Distribution Agreement, as amended by this letter agreement, is and shall continue to be in full force and effect with respect to the Banks Notes and as so amended is hereby ratified and confirmed and is binding on the parties hereto. The Bank hereby engages Popular Securities, Inc. as an additional agent (an "Agent" and together with the Original Agents, the "Agents") pursuant to Section 1(e) of the Distribution Agreement. The Original Agents hereby acknowledge such engagement, and each Agent hereby agrees that it shall comply with Rule 2720 of the National Association of Securities Dealers, Inc. with respect to offers and sales of the Bank Notes. As of any time on or after the date of this letter agreement: (i) each reference in the Distribution Agreement to the "Offering Circular" shall mean and be a reference to the Bank's Offering Circular dated May 12, 2000 (including all documents incorporated by reference therein which were filed under the Exchange Act at or before such time); (ii) each reference in the Distribution Agreement to the Issuing and Paying Agency Agreement or the Interest Calculation Agreement, dated September 24, 1996, between the Bank and The Chase Manhattan Bank, as calculation agent, shall mean and be a reference to such agreement as amended as of the date hereof; (iii) each reference in the Distribution Agreement to the "Letters of Representations" shall mean and be a reference to the Bring-Down Short-Term Letter of Representations and the Bring-Down Medium-Term Letter of Representations dated as of the date hereof among the Bank, the Issuing and Paying Agent and The Depository Trust Company; and (iv) each reference in the Distribution Agreement to "BanPonce Corporation" shall mean and be a reference to Popular, Inc. Section 2(a)(vii) of the Distribution Agreement is hereby replaced in its entirety with the following sentence: "(vii) No Other Approvals Required. No consent, approval or authorization of or filing with any governmental body or agency is required for -2- 3 Popular Securities, Inc. Merrill Lynch & Co. Bear Stearns & Co. Inc. Credit Suisse First Boston Corporation Page 3 the performance by the Bank of its obligations under this Agreement, the Bank Notes, the Issuing and Paying Agency Agreement, the Interest Calculation Agreement, the Letters of Representations and any applicable Terms Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Bank Notes." As of any time on or after the date of this letter agreement, the opinion of counsel to the Bank and the Parent to be delivered pursuant to Section 6(a)(i) of the Distribution Agreement shall be in the form of Exhibit C-1 to this letter agreement. As of any time on or after the date of this letter agreement, the opinion of counsel to the Bank to be delivered pursuant to Section 6(a)(ii) of the Agreement shall be delivered by Sullivan & Cromwell and shall be in the form of Exhibit C-2 to this letter agreement. Exhibit G to the Distribution Agreement is hereby replaced in its entirety with Exhibit G attached hereto. As of any time on or after the date of this letter agreement, each reference in the Distribution Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Distribution Agreement shall mean and be a reference to the Distribution Agreement as amended by this letter agreement. This letter agreement may be executed by any one of the parties hereto in any number of counterparts, each of which shall be an original, but all of such counterparts shall together constitute one and the same instrument. This letter agreement will be governed by and construed in accordance with the laws of the State of New York. -3- 4 Popular Securities, Inc. Merrill Lynch & Co. Bear Stearns & Co. Inc. Credit Suisse First Boston Corporation Page 4 If you agree to the terms and provisions hereof, please evidence such agreement by executing and returning to us the enclosed eight duplicates hereof, whereupon this letter agreement and acceptance shall represent a binding agreement between the Bank and you as of the date first above written. Very truly yours, BANCO POPULAR DE PUERTO RICO By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: -4- 5 Popular Securities, Inc. Merrill Lynch & Co. Bear Stearns & Co. Inc. Credit Suisse First Boston Corporation Page 5 The foregoing letter agreement is hereby confirmed and accepted. POPULAR SECURITIES, INC. By: ------------------------------ Name: Title: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ----------------------------- Name: Title: BEAR, STEARNS & CO. INC. By: ----------------------------- Name: Title: CREDIT SUISSE FIRST BOSTON CORPORATION By: ----------------------------- Name: Title: -5- EX-10.18 6 g67461ex10-18.txt ISSUING AND PAYING AGENCY AGREEMENT 1 EXHIBIT 10.18 BANCO POPULAR DE PUERTO RICO ISSUING AND PAYING AGENCY AGREEMENT THIS AGREEMENT, dated as of September 24, 1996, between Banco Popular de Puerto Rico, a banking association chartered under the laws of the Commonwealth of Puerto Rico (the "Bank") and The Chase Manhattan Bank, as issuing and paying agent (the "Issuing and Paying Agent," which term shall also refer to any duly appointed successor thereto). WITNESSETH: Section 1. Appointment of Issuing and Paying Agent. The Bank proposes to issue from time to time its Bank Notes (each, a "Bank Note" and collectively, the "Bank Notes") in such amounts as may be duly authorized by the Bank pursuant to the Distribution Agreement dated September 24, 1996 (the "Distribution Agreement"), among the Bank and the agents named therein (the "Agents"). Each Bank Note will be issued in book-entry form and will be represented by a global certificate (each, a "Global Bank Note" and collectively, the "Global Bank Notes") registered in the name of The Depository Trust Company, as depository ("DTC", which term includes any successor thereof), or a nominee thereof (which successor shall be a clearing agency registered under the Securities Exchange Act of 1934, as amended, if so required by applicable law) (each beneficial interest in a Global Bank Note, a "Book-Entry Bank Note" and collectively, the "Book-Entry Bank Notes"). The Bank hereby appoints the Issuing and Paying Agent to act, on the terms and conditions specified herein, as issuing and paying agent for the Global Bank Notes and as registrar, transfer agent and authenticating agent for the Global Bank Notes and to perform such other responsibilities as are described herein and in the Administrative Procedures attached as Exhibit G to the Distribution Agreement as such Administrative Procedures may be amended from time to time by agreement of the Bank and the Agents with notice of such amendments to the Issuing and Paying Agent, and the Issuing and Paying Agent hereby accepts such appointments. The aggregate principal amount of the Global Bank Notes which may be issued pursuant to this Agreement outstanding at any one time is unlimited. 2 The Issuing and Paying Agent shall exercise due care in the performance of its obligations hereunder and shall perform such obligations in a manner consistent with industry standards. Section 2. Global Bank Note Forms; Terms; Execution. (i) The Global Bank Notes shall be substantially (i) in the form set forth in Exhibit A-1 hereto if such Global Bank Note bears interest at a fixed rate of interest (each such Global Bank Note, a "Fixed Rate Global Bank Note" and collectively, the "Fixed Rate Global Bank Notes"), (ii) in the form of Exhibit A-2 hereto if such Global Bank Note bears interest at a floating rate of interest determined by reference to an interest rate basis specified therein (each such Global Bank Note, a "Floating Rate Global Bank Note" and collectively, the "Floating Rate Global Bank Notes"), or (iii) in such other form as the Bank may from time to time designate. (ii) Each issued Bank Note shall have a maturity of 7 days to 15 years from its original date of issuance. The Bank Notes shall be issued in minimum denominations of $250,000 and in integral multiples of $1,000 in excess thereof. The interest rate borne by any particular Global Bank Note may vary from the interest rates borne by any other Global Bank Notes. Any such variation shall not affect the interest rate borne by any other Global Bank Notes previously issued hereunder. (iii) The Bank will from time to time deliver or cause to be delivered to the Issuing and Paying Agent a supply of blank Global Bank Notes in such quantities as the Bank shall determine, bearing consecutive control numbers. Each Global Bank Note will have been executed by the manual or facsimile signature of an Authorized Representative (as defined in Section 3 hereof) of the Bank. The Issuing and Paying Agent will acknowledge receipt of the Global Bank Notes delivered to it and will hold such blank Global Bank Notes in safekeeping in accordance with its customary practice and shall complete, authenticate and deliver such Global Bank Notes in accordance with the provisions hereof. Section 3. Authorized Representatives. From time to time, the Bank will furnish the Issuing and Paying Agent with a certificate executed by an officer of the Bank certifying the incumbency and specimen signatures of those officers of the Bank authorized to execute Global Bank Notes on behalf of the Bank by manual or facsimile signature and to give instructions and notices on behalf of the Bank hereunder (the "Authorized Representatives"). Until the Issuing and Paying Agent receives a subsequent -2- 3 certificate, the Issuing and Paying Agent shall be entitled to rely on the last such certificate delivered to it for the purposes of determining the identities of Authorized Representatives of the Bank. Any Global Bank Note bearing the manual or facsimile signatures of persons who are Authorized Representatives of the Bank on the date such signatures are affixed shall bind the Bank after the completion, authentication and delivery thereof by the Issuing and Paying Agent, notwithstanding that such persons shall have ceased to hold office on the date such Global Bank Note is so completed, authenticated and delivered by the Issuing and Paying Agent. Section 4. Issuance Instructions; Completion, Authentication and Delivery of Global Bank Notes. (i) All instructions regarding the completion, authentication and delivery of Global Bank Notes shall be given by an Authorized Representative of the Bank by telephone (confirmed in writing), by facsimile transmission or by other acceptable written means by such Authorized Representative. (ii) Upon receipt of the instructions described above, the Issuing and Paying Agent shall cause to be withdrawn the necessary and applicable Global Bank Notes from safekeeping and, in accordance with such instructions, shall: (a) complete each Global Bank Note; (b) record each Global Bank Note in the Bank Note Register (as defined in Section 10 hereof); (c) cause each Global Bank Note to be manually authenticated by any one of the signatories of the Issuing and Paying Agent duly authorized and designated by it for such purpose; and (d) hold each Global Bank Note in safekeeping on behalf of the registered holder thereof; provided that instructions regarding the completion and authentication of a Global Bank Note, whether delivered by facsimile transmission or by other written means, are received by the Issuing and Paying Agent by 11:00 A.M., New York City time, on the Business Day immediately preceding the date of settlement relating to such Global Bank Note (or 9:00 A.M., New York City time, on the date of settlement relating to such Bank Note if the trade date and the date of settlement relating to such Bank Note are the same day). As -3- 4 used in this Agreement, the term "Business Day" shall mean any day that is not a Saturday or Sunday and that is not a day which is a bank holiday in Puerto Rico or a day on which banking institutions in The City of New York or the city in which the Bank is headquartered are authorized or required by law, regulation or executive order to close, and with respect to LIBOR Notes (as defined in the applicable Floating Rate Global Bank Note) only, any day that is also a London Business Day. As used in this Agreement, "London Business Day" means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. Section 5. Reliance on Instructions; Request for Instructions. The Issuing and Paying Agent shall incur no liability to the Bank in acting hereunder upon instructions contemplated hereby which the Issuing and Paying Agent reasonably believed in good faith to have been given by an Authorized Representative of the Bank. In the event a discrepancy exists between the instructions as originally received by the Issuing and Paying Agent and any subsequent written confirmation thereof, such original instructions will be deemed controlling; provided that the Issuing and Paying Agent gives notice to the Bank of such discrepancy promptly upon the receipt of such written confirmation. Any application by the Issuing and Paying Agent for written instructions from the Bank may, at the option of the Issuing and Paying Agent, set forth in writing any action proposed to be taken or omitted by the Issuing and Paying Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Issuing and Paying Agent shall not be required, however, to follow any such proposal in the absence of further written instructions from the Bank. The Issuing and Paying Agent shall not be liable for any action taken by, or omission of, the Issuing and Paying Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer of the Bank actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Issuing and Paying Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. Section 6. The Bank's Representations and Warranties. Each instruction given to the Issuing and Paying Agent in accordance with Section 4 hereof shall constitute a representation and warranty to the Issuing and Paying Agent by the Bank that the issuance and delivery of the Global Bank Notes have been duly and -4- 5 validly authorized by the Bank and that the Global Bank Notes, when completed and authenticated pursuant hereto, will constitute the valid and legally binding obligations of the Bank subject to applicable bankruptcy, liquidation, insolvency, reorganization, moratorium and similar laws of general applicability relating to, or affecting, creditors' rights and to general equity principles. The Bank further warrants that it is free to enter into this Agreement and to perform the terms hereof. Section 7. Payments of Interest; Interest Payment Dates; Record Dates. Interest payments on Global Bank Notes with maturities of more than one year will be made: (i) in the case of the Fixed Rate Global Bank Notes, semi--annually on June 15 and December 15 of each year (unless otherwise specified in any applicable Fixed Rate Global Bank Notes) and (ii) in the case of Floating Rate Global Bank Notes, on such dates as are specified therein (collectively, the "Interest Payment Dates") and, in each case, at maturity or upon earlier redemption or repayment if so indicated in the applicable Global Bank Note. All such interest payments (other than interest due at maturity or upon earlier redemption or repayment) will be made to the Holders (as defined in Section 10 hereof) in whose names Fixed Rate Global Bank Notes are registered at the close of business on the June 1 or December 1 (unless otherwise specified in any applicable Fixed Rate Global Bank Notes) (whether or not a Business Day) next preceding such Interest Payment Dates and in whose names Floating Rate Global Bank Notes are registered at the close of business on the fifteenth calendar day (whether or not a Business Day) prior to each such Interest Payment Date (each such June 1, December 1 and fifteenth calendar day, a "Record Date"). Notwithstanding the foregoing, if the Original Issue Date of any Global Bank Note with a maturity of more than one year occurs between a Record Date and the next succeeding Interest Payment Date, the first payment of interest on any such Global Bank Note will be made on the second Interest Payment Date succeeding the Original Issue Date (as defined in the Global Bank Notes). Interest payments will be calculated and made in the manner provided in the applicable Global Bank Note. If the Bank does not deposit adequate funds pursuant to Section 9 hereof with respect to the interest due on a Global Bank Note with a maturity of more than one year on an Interest Payment Date, such interest will cease to be due to the Holder of such Global Bank Note as of the close of business on the Record Date relating to such Interest Payment Date and will be paid to the Holder of such Global Bank Note as of the close of business on a special record date to be fixed by the Issuing and Paying Agent when funds for the payment of such interest have been deposited -5- 6 pursuant to Section 9 hereof. Notice of such special record date shall be given by the Issuing and Paying Agent, at the Bank's expense, to the registered Holder of such Global Bank Note not less than 10 calendar days prior to such special record date. Interest payments on Fixed Rate Global Bank Notes with maturities of one year or less will be made only upon maturity upon presentation and surrender of the applicable Fixed Rate Global Bank Note (unless otherwise specified in the applicable Fixed Rate Global Bank Note). Interest payments on Fixed Rate Global Bank Notes with maturities of one year or more will be calculated in the manner provided in the applicable Fixed Rate Global Bank Note. Interest payments on Floating Rate Global Bank Notes with maturities of one year or more will be made on the Interest Payment Dates specified in such Floating Rate Global Bank Note and, in each case, at maturity or upon earlier redemption or repayment. Interest payments on Floating Rate Global Bank Notes with maturities of one year or less will be calculated in the manner provided in the applicable Floating Rate Global Bank Note. Section 8. Payment of Principal. The Issuing and Paying Agent will pay the Holder of each Global Bank Note the principal amount of each such Global Bank Note, together with accrued interest and premium, if any, at maturity or upon earlier redemption or repayment. Section 9. Deposit of Funds. The total amount of any principal of, premium, if any, and interest due on Global Bank Notes on any Interest Payment Date or any maturity date or date of redemption or repayment shall be paid by the Bank to the Issuing and Paying Agent as of 10:00 A.M., New York City time, in funds available for use by the Issuing and Paying Agent on such date. The Bank will make such payment on such Global Bank Notes via Fedwire to an account specified by the Issuing and Paying Agent. Upon receipt of funds from the Bank, on such date or as soon as possible thereafter, the Issuing and Paying Agent will pay by separate wire transfer (using message entry instructions in a form previously specified by DTC) to an account previously specified by DTC, in funds available for immediate use by DTC, each payment of principal of, premium, if any, and interest due on a Global Bank Note on such date. The Issuing and Paying Agent shall hold such amounts paid to it by the Bank in trust for the Holders but shall, pending payment by it to the account specified above, not be under any liability for interest on monies, at any time received by it pursuant to any of the terms of this Agreement or of the Global Bank Notes, nor -6- 7 shall the Issuing and Paying Agent be required to invest such monies. Section 10. Bank Note Register; Registration. Transfer, Exchange; Persons Deemed Owners. (i) The Issuing and Paying Agent shall maintain at its offices the Bank Note Register. The Issuing and Paying Agent is hereby appointed as Registrar for the purpose of registering each Global Bank Note and transfers of each Global Bank Note as herein provided. The term "Bank Note Register" shall mean the definitive record in which shall be recorded the names, addresses and taxpayer identifying numbers of the holders of the Global Bank Notes (the "Holders"), the serial and CUSIP numbers of each such Global Bank Note and the Original Issue Date thereof and details with respect to the transfer and exchange of each Global Bank Note. (ii) Upon surrender for registration of transfer of any Global Bank Note at the offices of the Issuing and Paying Agent, the Bank shall execute, and the Issuing and Paying Agent shall complete, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Global Bank Notes, of any authorized denominations and having identical terms and provisions and for an equal aggregate principal amount. (iii) At the option of the Holder of a Global Bank Note, such Global Bank Note may be exchanged for other Global Bank Notes of any authorized denominations of an equal aggregate principal amount and having identical terms and provisions, upon surrender of the Global Bank Notes to be exchanged at the designated offices of the Issuing and Paying Agent. Whenever any Global Bank Notes are so surrendered for exchange, the Bank shall execute, and the Issuing and Paying Agent shall complete, authenticate and deliver, the Global Bank Notes which the Holder of the Global Bank Note making the exchange is entitled to receive. Except as provided below, owners of beneficial interests in a Global Bank Note representing Book-Entry Bank Notes will not be entitled to have such Book-Entry Bank Notes registered in their names, will not receive or be entitled to receive physical delivery of Bank Notes in certificated form and will not be considered the owners or holders thereof under this Agreement. However, if DTC notifies the Bank that it is unwilling or unable to continue as depositary or if at any time DTC ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 days, or the Bank in its sole discretion determines not to have Book-Entry Bank Notes represented by one or more Global Bank Notes, then Global Bank Notes -7- 8 representing Book-Entry Bank Notes may be exchanged in whole for definitive Bank Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof, upon surrender of the Global Bank Notes to be exchanged at the offices of the Issuing and Paying Agent. (iv) Notwithstanding the foregoing, the Issuing and Paying Agent shall not register the transfer of or exchange (i) any Global Bank Note that has been called for redemption in whole or in part, except the unredeemed portion of Global Bank Notes being redeemed in part, (ii) any Global Bank Note during the period beginning at the opening of business 15 days before the mailing of a notice of such redemption and ending at the close of business on the day of such mailing, or (iii) any Global Bank Note in violation of the legend contained on the face of such Global Bank Note. (v) All Global Bank Notes issued upon any registration of transfer or exchange of Global Bank Notes shall be the valid obligations of the Bank, evidencing the same debt, and entitled to the same benefits as the Global Bank Notes surrendered upon such registration of transfer or exchange. (vi) Every Global Bank Note presented or surrendered for registration of transfer or for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer with such evidence of due authorization and guaranty of signature as may reasonably be required by the Issuing and Paying Agent, in form satisfactory to the Issuing and Paying Agent, duly executed by the Holder thereof or his attorney duly authorized in writing. (vii) No service charge shall be made to a Holder of Global Bank Notes for any transfer or exchange of Global Bank Notes, but the Bank may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (viii) The Bank and the Issuing and Paying Agent, and any agent of the Bank or the Issuing and Paying Agent may treat the Holder in whose name a Global Bank Note is registered as the owner of such Global Bank Note for all purposes, whether or not such Global Bank Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. Section 11. Mutilated, Destroyed. Lost, or Stolen Global Bank Notes. In case any Global Bank Note shall at any time become mutilated, destroyed, lost or stolen, and such Global Bank Note or -8- 9 evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent (together with indemnity hereinafter referred to and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, the Bank shall execute a new Global Bank Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Global Bank Note or in lieu of the Global Bank Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Global Bank Note, only upon receipt of evidence satisfactory to Issuing and Paying Agent and the Bank that such Global Bank Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to each of them. The Issuing and Paying Agent shall authenticate any such substituted Global Bank Note and deliver the same upon the written request or authorization of any Authorized Representative of the Bank. Upon the issuance of any substituted Global Bank Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation, authentication and delivery of a new Global Bank Note. If any Global Bank Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Global Bank Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Global Bank Note) upon compliance by the Holder with the provisions of this Section. Section 12. Cancellation. All Global Bank Notes surrendered for payment, registration of transfer or exchange shall, if surrendered to any person other than the Issuing and Paying Agent, be delivered to the Issuing and Paying Agent and shall be promptly cancelled by it. The Bank may at any time deliver to the Issuing and Paying Agent for cancellation any Global Bank Notes previously authenticated and delivered hereunder which the Bank may have acquired in any manner whatsoever, and all Global Bank Notes so delivered shall be promptly cancelled by the Issuing and Paying Agent. No Global Bank Note shall be authenticated in lieu of or in exchange for any Global Bank Note canceled as provided in this Section, except as expressly permitted by this Agreement. All canceled Global Bank Notes held by the Issuing and Paying Agent shall be returned to the Bank. Section 13. Redemption of Global Bank Notes. (i) If any Global Bank Notes are to be redeemed prior to maturity, the Bank shall notify the Issuing and Paying Agent not -9- 10 more than 60 nor less than 45 calendar days prior to the date fixed by the Bank for such redemption (the "Redemption Date") of the Bank's election to redeem such Global Bank Notes in whole or in part in increments of $1,000 (provided that any remaining principal amount of such Global Bank Notes shall be at least $250,000). (ii) Whenever less than all the Global Bank Notes at any time outstanding are to be redeemed, the terms of the Global Bank Notes to be so redeemed shall be selected by the Bank. If less than all the Global Bank Notes with identical terms at any time outstanding are to be redeemed, the Global Bank Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. The Issuing and Paying Agent shall promptly notify the Bank in writing of the Global Bank Notes selected for redemption and, in the case of Global Bank Notes selected for partial redemption, the principal amount thereof to be redeemed. (iii) Unless otherwise specified in the applicable Global Bank Note, notice of redemption shall be given by the Issuing and Paying Agent, at the Bank's expense, by first-class mail, postage prepaid, mailed not more than 60 nor less than 30 calendar days prior to the Redemption Date, to each Holder of such Global Bank Note to be redeemed, at its address appearing in the Bank Note Register. All notices of redemption shall identify the Global Bank Notes to be redeemed (including CUSIP number) and shall state: (i) the Redemption Date; (ii) the redemption price, which shall be determined in accordance with the terms of the Global Bank Note (the "Redemption Price"), (iii) if less than all of the Global Bank Notes at any time outstanding are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Global Bank Notes to be redeemed; (iv) that on the Redemption Date the Redemption Price plus accrued interest, if any, to the Redemption Date will become due and payable with respect to each Global Bank Note to be redeemed and that interest thereon will cease to accrue on and after said date; and (v) the place or places where such Global Bank Notes are to be surrendered for payment. (iv) Notice of redemption having been given as described above, the Global Bank Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price, and from and after such date such Global Bank Notes shall cease to bear interest. The Bank shall deposit funds with the Issuing and Paying Agent prior to the Redemption Date which are sufficient to redeem such Global Bank Notes which are scheduled to be so redeemed. Upon surrender of any such Global Bank Notes for redemption in accordance with such notice, the Issuing and Paying -10- 11 Agent shall pay such Global Bank Notes at the Redemption Price, together with unpaid interest accrued on such Global Bank Notes at the applicable rate borne by such Global Bank Notes to the Redemption Date. (v) Any Global Bank Note which is to be redeemed only in part shall be surrendered to the Issuing and Paying Agent, and the Issuing and Paying Agent shall complete, authenticate and deliver to the Holder of such Global Bank Note, without service charge, a new Global Bank Note or Global Bank Notes, of any authorized denomination as requested by such Holder (which shall be $250,000 or an integral multiple of $1,000 in excess thereof), in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Global Bank Note so surrendered. (vi) The Bank, in issuing the Global Bank Notes, may use "CUSIP" numbers (if then generally in use) and, if so, the Issuing and Paying Agent shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Global Bank Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Global Bank Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. Section 14. Repayment of Global Bank Notes. (i) In order for any Global Bank Note to be repaid in whole or in part at the option of the Holder thereof, such Global Bank Note must be delivered by the Holder thereof, with the form entitled "Option to Elect Repayment" (set forth in such Global Bank Note) duly completed, to the Issuing and Paying Agent at its offices located at the address set forth in Section 20 hereof, or such other place or places of which the Bank shall from time to time notify the Holders of the Global Bank Notes, not more than 60 nor less than 30 calendar days prior to any date fixed for such repayment of such Global Bank Notes (the "Optional Repayment Date"). (ii) Upon surrender of any Global Bank Note for repayment in accordance with the provisions set forth above, the Global Bank Note to be repaid shall, on the Optional Repayment Date, become due and payable, and the Issuing and Paying Agent shall pay such Global Bank Note on the Optional Repayment Date at a -11- 12 price equal to 100% of the principal amount thereof, together with accrued interest to the Optional Repayment Date. (iii) If less than the entire principal amount of any Global Bank Note is to be repaid, the Holder thereof shall specify the portion thereof (which shall be in increments of $1,000) which such Holder elects to have repaid and shall surrender such Global Bank Note to the Issuing and Paying Agent, and the Issuing and Paying Agent shall complete, authenticate and deliver to the Holder of such Global Bank Note, without service charge, a new Global Bank Note or Global Bank Notes in an aggregate principal amount equal to and in exchange for the unrepaid portion of the principal of the Global Bank Note so surrendered and in such denominations as shall be specified by such Holder (which shall be $250,000 or an integral multiple of $1,000 in excess thereof). Section 15. Acceleration of Maturity. If an Event of Default (as defined in the applicable Global Bank Note) with respect to a Bank Note shall occur, then the Holder of the applicable Bank Note may declare the principal amount of, and accrued interest and premium, if any, on such Bank Note due and payable by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. The Bank shall promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent shall promptly mail by first-class mail, postage prepaid, copies of such notice to the Holders of the Bank Notes upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Any Event of Default with respect to a Bank Note may be waived by the Holder thereof. Section 16. Application of Funds; Return of Unclaimed Funds. Any monies paid by the Bank and held by the Issuing and Paying Agent in trust for payment of principal of, premium, if any, or interest on, any Global Bank Notes that remain unclaimed for two years following the date on which such principal, premium or interest shall have become due and payable shall be returned to the Bank by the Issuing and Paying Agent and the Issuing and Paying Agent shall inform the Bank as to the specific Global Bank Notes to which such monies related, and any Holder shall thereafter look, as an unsecured general creditor, only to the Bank for the payment thereof and all liability of the Issuing and Paying Agent with respect to such trust monies shall thereupon cease. Any funds deposited by the Bank with the Issuing and Paying Agent for the payment of principal of, premium, if any, or interest on, any Bank Note shall be held in trust on behalf of the Bank by the Issuing -12- 13 and Paying Agent for the payment of principal of, premium, if any, or interest on, any Bank Note until paid or returned to the Bank. Section 17. Cancellation of Unissued Notes. Upon the written request of the Bank, the Issuing and Paying Agent promptly shall cancel and return to the Bank all unissued Bank Notes in its possession. Section 18. Liability. Neither the Issuing and Paying Agent nor its directors, officers, employees or agents shall be liable to the Bank for any act or omission hereunder except in the case of gross negligence or willful misconduct. The duties and obligations of the Issuing and Paying Agent, its directors, officers and employees shall be determined by the express provisions of this Agreement and no implied covenants shall be read into this Agreement against any of them. Notwithstanding any other provision elsewhere contained in this Agreement, the Issuing and Paying Agent is acting solely as agent of the Bank and does not assume any obligation or relationship of trust or agency for or with any Holders. Neither the Issuing and Paying Agent nor any of its directors, officers or employees shall be required to ascertain whether any issuance or sale of Bank Notes (or any amendment or termination of this Agreement) has been duly authorized (provided that the Issuing and Paying Agent in good faith has determined that the facsimile or manual signature of the Authorized Representative or any person who has been designated by the Authorized Representative in writing to the Issuing and Paying Agent reasonably resembles the specimen signatures filed with the Issuing and Paying Agent) or is in compliance with any other agreement to which the Bank is a party (whether or not the Issuing and Paying Agent is also a party to such other agreement), and the Issuing and Paying Agent and each of its officers and employees shall be entitled to rely upon any instructions reasonably believed (in accordance with Section 3 hereof) by the Issuing and Paying Agent and its officers and employees to be given on behalf of the Bank by an Authorized Representative or by any person who has been designated by an Authorized Representative in writing to the Issuing and Paying Agent as a person authorized to give such instructions hereunder, whether or not in fact given by the Authorized Representative or such designated person. The Issuing and Paying Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Issuing and Paying Agent shall not be responsible for any misconduct or gross negligence on the part of any agent or attorney appointed with due care by it hereunder. The Issuing and Paying Agent may consult with counsel of -13- 14 its selection and the advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. The Issuing and Paying Agent shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement. Section 19. Indemnification. Risk of Funds. The Bank shall indemnify and hold harmless the Issuing and Paying Agent, its directors, officers, employees and agents from and against all actions, claims, losses, damages, liabilities, losses and expenses (including reasonable legal fees and expenses) relating to or arising out of their actions or inactions taken or omitted to be taken by the Issuing and Paying Agent in good faith in connection with its performance under this Agreement including, but not limited to, any actions taken or omitted upon instructions by the Bank (in accordance with Section 3) or the issuance, delivery, payment or non-payment of any Bank Note or interest thereon, or other receipt or other funds for the payment of the Bank Notes or interest or premium thereon; provided, however, that the Issuing and Paying Agent shall be liable for any liabilities, losses, claims, damages, costs and expenses (including reasonable legal fees and expenses) caused by the gross negligence, bad faith or willful misconduct of its directors, officers, employees or agents. This indemnity shall survive the termination of this Agreement. No provision of this Agreement shall require the Issuing and Paying Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 20. Compensation of the Issuing and Paying Agent. The Bank agrees to pay the compensation of the Issuing and Paying Agent, at such rates as shall be mutually agreed upon in writing between the Bank and the Issuing and Paying Agent from time to time. The Bank shall reimburse upon demand the Issuing and Paying Agent for all reasonable out-of-pocket expenses (including reasonable legal fees and expenses), disbursements and advances incurred or made by the Issuing and Paying Agent with respect to the Bank in accordance with any provisions of this Agreement, except any such expense, disbursement or advance proven to be attributable to the breach of this Agreement or the gross -14- 15 negligence, bad faith or willful misconduct of the Issuing and Paying Agent, upon receipt of such invoices as the Bank may reasonably require. The provisions of this Section 20 shall survive the termination of this Agreement. Section 21. Notices. (i) All communications by or on behalf of the Bank relating to the issuance, transfer, exchange or payment of Bank Notes or interest thereon shall be directed to the offices of the Issuing and Paying Agent located at 450 West 33rd Street, New York, New York 10001, Telecopy: (212) 946-7682, Attention: Agency Administration, or to such other offices as the Issuing and Paying Agent shall specify in writing to the Bank. The Bank will send all Global Bank Notes to be completed and delivered by the Issuing and Paying Agent to such offices or such other offices as the Issuing and Paying Agent shall specify in writing to the Bank. (ii) All other notices and communications hereunder shall be in writing and shall be addressed as follows: (a) if to the Bank: Banco Popular de Puerto Rico 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Attention: Richard Barrios Telecopy: (787) 754-9290 (b) if to the Issuing and Paying Agent: The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 Attention: Agency Administration Telecopy: (212) 946-7682 Section 22. Resignation or Removal of Issuing and Paying Agent and Appointment of Successor Issuing and Paying Agent; Merger, Conversion and Consolidation. The Bank agrees, for the benefit of the Holders from time to time of the Bank Notes, that there shall at all times be an Issuing and Paying Agent hereunder which shall be a bank or trust company organized and doing business under the laws of the United States or any state thereof or the Commonwealth of Puerto Rico authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $10,000,000 and subject to supervision and examination by -15- 16 federal, state or Commonwealth authority, until all the Global Bank Notes authenticated and delivered hereunder (A) shall have been delivered to the Issuing and Paying Agent for cancellation or (B) shall have become due and payable and funds sufficient to pay the principal of, premium, if any, and interest on, the Global Bank Notes shall have been made available for payment and either paid or returned to the Bank, whichever event occurs earlier. The foregoing capital and surplus requirements shall not be applicable if the Bank or an affiliate of the Bank is appointed as successor Issuing and Paying Agent. The Issuing and Paying Agent may resign at any time as such agent upon written notice to the Bank of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall be not less than 90 calendar days after the giving of such notice by the Issuing and Paying Agent to the Bank. The Issuing and Paying Agent may be removed at any time as such agent by the filing with it of an instrument in writing signed by a duly authorized officer of the Bank and specifying such removal and the date, which shall be at least 30 calendar days following receipt of such written notice, upon which it is intended to become effective. Any such resignation or removal shall take effect on the date of the appointment by the Bank of a successor issuing and paying agent and the acceptance of such appointment by such successor issuing and paying agent that qualifies as such under the first paragraph of this Section. In the event of the resignation or removal of the Issuing and Paying Agent, if a successor issuing and paying agent has not been appointed by the Bank within 90 calendar days after the giving of notice of resignation or within 30 calendar days after receipt of notice of removal, the Issuing and Paying Agent may, at the expense of the Bank, petition any court of competent jurisdiction for appointment of a successor Issuing and Paying Agent. Upon any such resignation or removal, the Issuing and Paying Agent shall transfer to the successor Issuing and Paying Agent (or, if none shall have been appointed, to the Bank) all monies held by the Issuing and Paying Agent on behalf of the Bank in respect of any Global Bank Notes, any unissued Global Bank Notes and all books and records or copies thereof related to Global Bank Notes maintained by the Issuing and Paying Agent, including a copy of the Bank Note Register. Any resignation or removal hereunder shall not affect the Issuing and Paying Agent's rights to the payment of fees earned or charges incurred through the effective date of such resignation or removal. Any corporation or bank into which the Issuing and Paying Agent hereunder may be merged or converted, or any corporation or -16- 17 bank with which the Issuing and Paying Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Issuing and Paying Agent shall be a party, or any corporation or bank to which the Issuing and Paying Agent shall sell or otherwise transfer all or substantially all of the assets and business of the Issuing and Paying Agent, provided that it shall be qualified under the first paragraph of this Section, shall be the successor Issuing and Paying Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. Section 23. Benefit of Agreement. This Agreement is solely for the benefit of the parties hereto, Holders of Bank Notes, and their successors and assigns, and nothing herein, express or implied, shall give to any other persons any benefits or any legal or equitable right, remedy or claim under or by virtue of this Agreement. No party hereto may assign any of its rights or obligations hereunder except with the prior written consent of all the parties hereto. Section 24. Bank Notes Held by the Issuing and Paying Agent. The Issuing and Paying Agent, in its individual or other capacity, may become the owner or pledgee of the Bank Notes with the same rights it would have if it were not acting as an issuing and paying agent hereunder. Section 25. Amendment. This Agreement shall not be amended by any party hereto except in writing executed by the duly authorized officers of all parties. Section 26. Governing Law. This Agreement shall be governed by, construed and enforced in accordance with, the laws of the State of New York applicable to agreements made and to be performed in such State, without regard to conflicts of laws principles. Section 27. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, and each such counterpart, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. -17- 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the day and year first above written. BANCO POPULAR DE PUERTO RICO By: ------------------------------- Name: Jose L. Lopez Title: Senior Vice President By: ------------------------------- Name: Richard Barrios Title: Senior Vice President THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: ------------------------------- Name: Title: -18- 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the day and year first above written. BANCO POPULAR DE PUERTO RICO By: ------------------------------- Name: Title: By: ------------------------------- Name: Title: THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: ------------------------------- Name: Lisa J. Price Title: Vice President -19- 20 Exhibit A-1 THIS NOTE IS AN OBLIGATION SOLELY OF BANCO POPULAR DE PUERTO RICO (THE "BANK") AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY, ANY OTHER BANK OR BANPONCE CORPORATION. THIS NOTE DOES NOT EVIDENCE DEPOSITS OF THE BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THIS NOTE RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES (AS PROVIDED IN SECTION 11(D)(11) OF THE FEDERAL DEPOSIT INSURANCE ACT) AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THIS NOTE WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THIS NOTE COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY") TO THE BANK OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR, OR IN LIEU OF, THIS NOTE IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THIS NOTE IS ISSUABLE ONLY IN FULLY REGISTERED FORM IN MINIMUM DENOMINATIONS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. EACH OWNER OF A BENEFICIAL INTEREST IN THIS NOTE MUST BE AN INSTITUTIONAL INVESTOR WHO IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $250,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF THIS NOTE AT ALL TIMES. A-1-1 21 No. FXR-_______ CUSIP NO.: REGISTERED BANCO POPULAR DE PUERTO RICO GLOBAL BANK NOTE (Fixed Rate) ORIGINAL ISSUE DATE: PRINCIPAL AMOUNT: INTEREST RATE: ____% MATURITY DATE: INTEREST PAYMENT DATE(S): REGULAR RECORD DATES (FOR NOTES [ ] At Maturity only WITH MATURITIES OF GREATER THAN ONE [ ] May 15 and November 15 YEAR) (if other than May 1 or [ ] Other: November 1, prior to each Interest Payment Date): INITIAL REDEMPTION DATE: INITIAL REDEMPTION PERCENTAGE: ANNUAL REDEMPTION PERCENTAGE HOLDER'S OPTIONAL REDUCTION: REPAYMENT DATE(S): DAY COUNT CONVENTION [ ] 30/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/ACTUAL FOR THE PERIOD FROM TO . ADDENDUM ATTACHED: ORIGINAL ISSUE DISCOUNT: [ ] Yes [ ] Yes [ ] No [ ] No Total Amount of OID: DEFAULT RATE: ____% Yield to Maturity: Initial Accrual Period: OTHER PROVISIONS: The Bank, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of ______________ United States Dollars on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date) and to pay interest thereon from and including the Original Issue Date specified above or from and including the most recent interest payment date to which interest on this Note (or any predecessor Note) has been paid or duly provided for, semi-annually on May 15 and November 15 of each year (unless otherwise specified on the face hereof) (each, an "Interest Payment Date") and at maturity or upon earlier redemption or repayment, if applicable, commencing on the first Interest Payment Date next succeeding the Original Issue Date (or, if the Original Issue Date is between a Regular Record Date (as defined below) and the Interest Payment Date immediately following such Regular Record A-1-2 22 Date, on the second Interest Payment Date following the Original Issue Date), at the Interest Rate per annum specified above, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the Default Rate per annum specified above on any overdue principal and premium, if any, and on any overdue installment of interest. If no Default Rate is specified above, the Default Rate shall be the Interest Rate on this Note specified above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on the Regular Record Date, which shall be the May 1 and November 1 (whether or not a Business Day (as defined below)), as the case may be, prior to such Interest Payment Date (unless otherwise specified on the face hereof) (each, a "Regular Record Date"); provided, however, that interest payable at maturity or upon earlier redemption or repayment, if applicable, will be payable to the person to whom principal shall be payable. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the holder as of the close of business on such Regular Record Date, and may either be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on a special record date for the payment of such defaulted interest (the "Special Record Date") to be fixed by the Bank, notice of which shall be given to the holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner. Payment of principal of, premium, if any, and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Bank will at all times appoint and maintain an issuing and paying agent (the "Issuing and Paying Agent", which term shall include any successor Issuing and Paying Agent), authorized by the Bank to pay principal of, premium, if any, and interest on this Note on behalf of the Bank pursuant to an issuing and paying agency agreement (the "Issuing and Paying Agency Agreement") and having an office or agency (the "Issuing and Paying Agent Office") in The City of New York or the city in which the Bank is headquartered (the "Place of Payment"), where this Note may be presented or surrendered for payment and where notices, designations or requests in respect of payments with respect to this Note may be served. The Bank has initially appointed The Chase Manhattan Bank as the Issuing and Paying Agent, with the Issuing and Paying Agent Office currently located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration. The Bank may remove the Issuing and Paying Agent pursuant to the terms A-1-3 23 of the Issuing and Paying Agency Agreement and may appoint a successor Issuing and Paying Agent. Payment of principal of, premium, if any, and interest on this Note due at maturity or upon earlier redemption or repayment, if applicable, will be made in immediately available funds upon presentation and surrender of this Note to the Issuing and Paying Agent at the Issuing and Paying Agent Office; provided that this Note is presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payment in accordance with its normal procedures. Payments of interest on this Note (other than at maturity or upon earlier redemption or repayment) will be made by wire transfer to such account as has been appropriately designated to the Issuing and Paying Agent by the person entitled to such payments. Reference herein to "this Note", "hereof", "herein" and comparable terms shall include an Addendum hereto if an Addendum is specified above. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-1-4 24 IN WITNESS WHEREOF, the Bank has caused this Note to be duly executed. By: ------------------------------- Authorized Signatory By: ------------------------------- Authorized Signatory Dated: ISSUING AND PAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Issuing and Paying Agency Agreement. THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: --------------------------------------- Authorized Signatory A-1-5 25 [Reverse] This Note is one of a duly authorized issue of Bank Notes due from 7 days to 15 years from date of issue of the Bank (the "Notes"). Payments of interest hereon will include interest accrued to but excluding the relevant Interest Payment Date or Maturity Date or date of earlier redemption or repayment, as the case may be. Unless otherwise specified on the face hereof, interest on Notes with maturities of more than one year will be computed on the basis of a 360-day year of twelve 30-day months. Unless otherwise specified on the face hereof, interest on Notes with maturities of one year or less will be computed on the basis of the actual number of days in the year divided by 360 and will be payable only at maturity to the person to whom principal shall be payable. Any provision contained herein with respect to the calculation of the rate of interest applicable to this Note, its Interest Payment Dates or any other matter relating hereto may be modified as specified in an Addendum relating hereto if so specified on the face hereof. If any Interest Payment Date, Maturity Date or date of earlier redemption or repayment of this Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on this Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Maturity Date or date of earlier redemption or repayment, as the case may be. "Business Day" means, unless otherwise specified on the face hereof, any day that is not a Saturday or Sunday and that in The City of New York or in the city in which the Bank is headquartered is not a bank holiday or a day on which banking institutions are required by law, regulation or executive order to close. This Note will not be subject to any sinking fund. If so provided on the face of this Note, this Note may be redeemed by the Bank either in whole or in part on (unless otherwise specified on the face hereof) and after the Initial Redemption Date, if any, specified on the face hereof. If no Initial Redemption Date is specified on the face hereof, this Note may not be redeemed prior to the Maturity Date. On and after the Initial Redemption Date, if any, this Note may be redeemed in increments of $1,000 (provided that any remaining principal amount hereof shall be at least A-1-6 26 $250,000) at the option of the Bank at the applicable Redemption Price (as defined below), together with unpaid interest accrued hereon at the applicable rate borne by this Note to the date of redemption (each such date, a "Redemption Date"), on written notice given not more than 60 nor less than 30 calendar days prior to the Redemption Date to the registered holder hereof (unless otherwise specified on the face hereof). Whenever less than all the Notes at any time outstanding are to be redeemed, the terms of the Notes to be so redeemed shall be selected by the Bank. If less than all the Notes with identical terms at any time outstanding are to be redeemed, the Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date specified on the face hereof by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. This Note may be subject to repayment at the option of the holder hereof in accordance with the terms hereof on any Holder's Optional Repayment Date(s), if any, specified on the face hereof. If no Holder's Optional Repayment Date is specified on the face hereof, this Note will not be repayable at the option of the holder hereof prior to maturity. On any Holder's Optional Repayment Date, this Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof will be at least $250,000) at the option of the holder hereof at a repayment price equal to 100% of the principal amount to be repaid, together with accrued and unpaid interest hereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof on a Holder's Optional Repayment Date, this Note must be delivered, with the form entitled "Option to Elect Repayment" attached hereto duly completed, to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other address which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to such Holder's Optional Repayment Date. In the event of repayment of this Note in part only, a new Note for the unrepaid portion hereof shall be issued in the name of the A-1-7 27 holder hereof upon the surrender hereof. Exercise of such repayment option by the holder hereof shall be irrevocable. If this Note is an Original Issue Discount Note and if an Event of Default with respect to this Note shall have occurred and be continuing, the Default Amount (as defined hereafter) of this Note may be declared due and payable in the manner and with the effect provided herein. The "Default Amount" shall be equal to the adjusted issue price as of the first day of the accrual period as determined under Final Treasury Regulation Section 1.1275-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended, in which the date of acceleration occurs increased by the daily portion of the original issue discount for each day in such accrual period ending on the date of acceleration, as determined under Final Treasury Regulation Section 1.1272-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended. Upon payment of (i) the principal, or premium, if any, so declared due and payable and (ii) interest on any overdue principal and overdue interest or premium, if any (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Bank's obligations in respect of the payment of principal of, premium, if any, and interest on this Note shall terminate. In case any Note shall at any time become mutilated, destroyed, lost or stolen, and such Note or evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent shall be delivered to the Issuing and Paying Agent, the Bank shall issue a new Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of the Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Note, only upon receipt of evidence satisfactory to the Bank and the Issuing and Paying Agent that such Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to the Bank and the Issuing and Paying Agent. Upon the issuance of any substituted Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation and delivery of a new Note. If any Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the holder with the provisions of this paragraph. A-1-8 28 No recourse shall be had for the payment of principal of, premium, if any, or interest on this Note for any claim based hereon, or otherwise in respect hereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor corporation, banking association or other legal entity (collectively, "corporation"), either directly or through the Bank or any corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The occurrence of any of the following events shall constitute an "Event of Default" with respect to this Note: (i) default in the payment of any interest with respect to any of the Notes issued by the Bank when due, which continues for 30 calendar days; (ii) default in the payment of any principal of, or premium, if any, on any of the Notes issued by the Bank when due; (iii) the entry by a court having jurisdiction in the premises of (a) a decree or order for relief in respect of the Bank in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order appointing a conservator, receiver, liquidator, assignee, trustee, sequestrator or any other similar official of the Bank, or of substantially all of the property of the Bank, or ordering the winding up or liquidation of the affairs of the Bank, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Bank to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding, or the filing by the Bank of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Bank to the filing of such petition or to the appointment of or taking possession by a custodian, conservator, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Bank or of substantially all of the property of the Bank, or the making by the Bank of an assignment for the benefit of creditors, or the taking of corporate action by the Bank in furtherance of any such action. If an Event of Default shall occur A-1-9 29 and be continuing, the holder of this Note may declare the principal amount of, accrued interest and premium, if any, on this Note due and payable immediately by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. Any Event of Default with respect to this Note may be waived by the holder hereof. The Issuing and Paying Agency Agreement provides that the Bank will promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent will promptly mail by first-class mail, postage prepaid, copies of such notice to the holders of the Notes, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Nothing contained herein shall prevent any consolidation or merger of the Bank with any other corporation or successive consolidations or mergers in which the Bank or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Bank as an entirety or substantially as an entirety to any other corporation authorized to acquire and operate the same; provided, however (and the Bank hereby covenants and agrees) that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) immediately after such consolidation, merger, sale or conveyance the corporation (whether the Bank or such other corporation) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of the terms, covenants and conditions of the Notes to be observed or performed by the Bank; and (ii) the corporation (if other than the Bank) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall be organized under the laws of the United States of America, any state thereof, the District of Columbia or the Commonwealth of Puerto Rico and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest on this Note. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation of the due and punctual performance of all of the covenants in the Notes to be performed or observed by the Bank, such successor corporation shall succeed to and be substituted for the Bank with the same effect as if it had been named in this Note as the Bank and thereafter the predecessor corporation shall be relieved of all obligations and covenants in this Note and may be liquidated and dissolved. A-1-10 30 Any action by the holder of this Note shall bind all future holders of this Note, and of any Note issued in exchange or substitution herefor or in place hereof, in respect of anything done or permitted by the Bank or by the Issuing and Paying Agent in pursuance of such action. The Issuing and Paying Agent shall maintain at its offices a register (the register maintained in such office or any other office or agency of the Issuing and Paying Agent in The City of New York herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Issuing and Paying Agent shall provide for the registration of the Notes and of transfers of the Notes. The transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Issuing and Paying Agent in the Place of Payment, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Issuing and Paying Agent duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No provision of this Note shall alter or impair the obligation of the Bank, which is absolute and unconditional, to pay principal of, premium, if any, and interest on this Note in U.S. dollars at the times, places and rate herein prescribed in accordance with its terms. No service charge shall be made to a holder of this Note for any transfer or exchange of this Note, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Beneficial interests represented by this Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, only if (x) The Depository Trust Company, as Depositary (the "Depositary") notifies the Bank that it is unwilling or unable to continue as Depositary for this Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 calendar days, or (y) the Bank in its sole discretion determines not to have such beneficial interests represented by this Note. Any Note representing such beneficial interests that is exchangeable pursuant to the preceding sentence shall be A-1-11 31 exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Such definitive Notes shall be registered in the name or names of such person or persons as the Depositary shall instruct the Issuing and Paying Agent. Prior to due presentment of this Note for registration of transfer, the Bank, the Issuing and Paying Agent or any agent of the Bank or the Issuing and Paying Agent may treat the holder in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. All notices to the Bank under this Note shall be in writing and addressed to the Bank at 209 Munoz Rivera Avenue, Suite 913, Hato Rey, Puerto Rico 00918, Attention: Richard Barrios, or to such other address of the Bank as the Bank may notify the holders of the Notes. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles and all applicable federal laws and regulations. A-1-12 32 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM-- as tenants in common TEN ENT-- as tenants by the entireties JT TEN-- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT-- ______________ Custodian _________________ (Cust) (Minor) under Uniform Gifts to Minors Act (State) Additional abbreviations may also be used though not in the above list. A-1-13 33 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto _______________________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE -------------------------------------------------- -------------------------------------------------- (Please print or typewrite name and address, including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints __________________________________________ to transfer said Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated: _______________________ ________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. Signature Guarantee A-1-14 34 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Bank to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount hereof to be repaid, together with accrued and unpaid interest hereon, payable to the date of repayment, to the undersigned, at _______________________________________________________________ _______________________________________________________________________________. (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the undersigned must give notice to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other place or places of which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to the date of repayment, with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000) which the holder elects to have repaid and specify the denomination or denominations (which shall be $250,000 or an integral multiple of $1,000 in excess thereof) of the Notes to be issued to the holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid): $__________________________________ __________________________________ NOTICE: The signature on this Dated:_____________________________ "Option to Elect Repayment" form must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. Signature Guarantee A-1-15 35 Exhibit A-2 THIS NOTE IS AN OBLIGATION SOLELY OF BANCO POPULAR DE PUERTO RICO (THE "BANK") AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY, ANY OTHER BANK OR BANPONCE CORPORATION. THIS NOTE DOES NOT EVIDENCE DEPOSITS OF THE BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THIS NOTE RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES (AS PROVIDED IN SECTION 11(D)(11) OF THE FEDERAL DEPOSIT INSURANCE ACT) AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THIS NOTE WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THIS NOTE COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY") TO THE BANK OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR, OR IN LIEU OF, THIS NOTE IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THIS NOTE IS ISSUABLE ONLY IN FULLY REGISTERED FORM IN MINIMUM DENOMINATIONS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. EACH OWNER OF A BENEFICIAL INTEREST IN THIS NOTE MUST BE AN INSTITUTIONAL INVESTOR WHO IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $250,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF THIS NOTE AT ALL TIMES. A-2-1 36 No. FLR-_________ REGISTERED CUSIP NO.: _________ BANCO POPULAR DE PUERTO RICO GLOBAL BANK NOTE (Floating Rate) ORIGINAL ISSUE DATE: PRINCIPAL AMOUNT: INITIAL INTEREST RATE: ____% MATURITY DATE: INTEREST RATE BASIS OR BASES INDEX MATURITY: IF LIBOR: REGULAR RECORD DATES (if other than [ ] Libor Telerate the 15th day prior to each Interest [ ] Libor Reuters Payment Date): INDEX CURRENCY: MINIMUM INTEREST RATE: SPREAD (PLUS OR MINUS) AND/OR SPREAD INTEREST PAYMENT PERIOD: MULTIPLIER: MAXIMUM INTEREST RATE: INTEREST RESET PERIOD: INTEREST PAYMENT DATES: CALCULATION AGENT: INITIAL INTEREST RESET DATES: ANNUAL REDEMPTION PERCENTAGE REDUCTION: INTEREST RESET DATES: HOLDER'S OPTIONAL REPAYMENT DATE(S): INITIAL REDEMPTION PERCENTAGE: DAY COUNT CONVENTION [ ] 30/360 for the period from to [ ] Actual/360 for the period from to INTEREST CALCULATION: [ ] Regular Floating Rate Note [ ] Actual/Actual for the period [ ] Floating Rate/Fixed Rate Fixed from to Rate Commencement Date: Fixed Interest Rate: ORIGINAL ISSUE DISCOUNT [ ] Inverse Floating Rate Note [ ] Yes Fixed Interest Rate: [ ] No ADDENDUM ATTACHED: Total Amount of OID: [ ] Yes Yield to Maturity: [ ] No Initial Accrual Period: OTHER PROVISIONS: DEFAULT RATE: ____% The Bank, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of __________________________________ ________________________________________ United States Dollars on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date) and to pay interest thereon from and including the original Issue Date specified above or from and including the most recent interest payment date to which interest A-2-2 37 on this Note (or any predecessor Note) has been paid or duly provided for, on the Interest Payment Dates specified above (each, an "Interest Payment Date") and at maturity or upon earlier redemption or repayment, if applicable, commencing on the first Interest Payment Date next succeeding the Original Issue Date (or, if the Original Issue Date is between a Regular Record Date (as defined below) and the Interest Payment Date immediately following such Regular Record Date, on the second Interest Payment Date following the Original Issue Date), at a rate per annum equal to the Initial Interest Rate specified above until the Initial Interest Reset Date specified above and thereafter at a rate per annum determined in accordance with the provisions hereof and any Addendum relating hereto depending upon the Interest Rate Basis or Bases, if any, and such other terms specified above, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the Default Rate per annum specified above on any overdue principal and premium, if any, and on any overdue installment of interest. If no Default Rate is specified above, the Default Rate shall be the Interest Rate on this Note specified above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on the Regular Record Date, which shall be the 15th calendar day (whether or not a Business Day(as defined below)) prior to such Interest Payment Date (unless otherwise specified on the face hereof) (each, a "Regular Record Date"); provided, however, that interest payable at maturity or upon earlier redemption or repayment, if applicable, will be payable to the person to whom principal shall be payable. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the holder as of the close of business on such Regular Record Date and may either be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on a special record date for the payment of such defaulted interest (the "Special Record Date") to be fixed by the Bank, notice of which shall be given to the holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner. Payment of principal of, premium, if any, and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Bank will at all times appoint and maintain an issuing and paying agent (the "Issuing and Paying Agent", which term shall include any successor Issuing and Paying Agent), authorized by the Bank to pay principal of, premium, if any, and interest on this Note on behalf of the Bank pursuant to an issuing and paying agency agreement (the "Issuing and Paying Agency Agreement") and having an office or agency (the "Issuing and Paying Agent Office") in The City of New York or the city in which the Bank is headquartered (the "Place of Payment"), where this Note may be presented or surrendered for payment and where notices, designations or requests in respect of payments with respect to this Note may be served. The Bank has initially appointed The Chase A-2-3 38 Manhattan Bank as the Issuing and Paying Agent, with the Issuing and Paying Agent Office currently located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration. The Bank may remove the Issuing and Paying Agent pursuant to the terms of the Issuing and Paying Agency Agreement and may appoint a successor Issuing and Paying Agent. Payment of principal of, premium, if any, and interest on this Note due at maturity or upon earlier redemption or repayment, if applicable, will be made in immediately available funds upon presentation and surrender of this Note to the Issuing and Paying Agent at the Issuing and Paying Agent Office; provided that this Note is presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payment in accordance with its normal procedures. Payments of interest on this Note (other than at maturity or upon earlier redemption or repayment) will be made by wire transfer to such account as has been appropriately designated to the Issuing and Paying Agent by the person entitled to such payments. Reference herein to "this Note", "hereof", "herein" and comparable terms shall include an Addendum hereto if an Addendum is specified above. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-2-4 39 IN WITNESS WHEREOF, the Bank has caused this Note to be duly executed. By: ------------------------------------ Authorized Signatory By: ------------------------------------ Authorized Signatory Dated: ISSUING AND PAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Issuing and Paying Agency Agreement. THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: -------------------------------------------- Authorized Signatory A-2-5 40 [Reverse] This Note is one of a duly authorized issue of Bank Notes due from 30 days to 15 years from date of issue of the Bank (the "Notes"). If any Interest Payment Date (other than an Interest Payment Date at the Maturity Date or date of earlier redemption or repayment of this Note) would otherwise fall on a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding day that is a Business Day, except that if an Interest Rate Basis is LIBOR, as indicated on the face hereof, and such next Business Day falls in the next succeeding calendar month, such Interest Payment Date shall be the immediately preceding day that is a Business Day. Except as provided above, interest payments will be made on the Interest Payment Dates shown on the face hereof. If the Maturity Date or date of earlier redemption or repayment of this Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on this Note will be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date or date of earlier redemption or repayment, as the case may be. This Note will not be subject to any sinking fund. If so provided on the face of this Note, this Note may be redeemed by the Bank either in whole or in part on (unless otherwise specified on the face hereof) and after the Initial Redemption Date, if any, specified on the face hereof. If no Initial Redemption Date is specified on the face hereof, this Note may not be redeemed prior to the Maturity Date. On and after the Initial Redemption Date, if any, this Note may be redeemed in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $250,000) at the option of the Bank at the applicable Redemption Price (as defined below), together with unpaid interest accrued hereon at the applicable rate borne by this Note to the date of redemption (each such date, a "Redemption Date"), on written notice given not more than 60 nor less than 30 calendar days prior to the Redemption Date to the registered holder hereof (unless otherwise specified on the face hereof). Whenever less than all the Notes at any time outstanding are to be redeemed, the terms of the Notes to be so redeemed shall be selected by the Bank. If less than all the Notes with identical terms at any time outstanding are to be redeemed, the Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date specified on the face hereof by the Annual Redemption Percentage Reduction, if any, A-2-6 41 specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. This Note may be subject to repayment at the option of the holder hereof in accordance with the terms hereof on any Holder's Optional Repayment Date(s), if any, specified on the face hereof. If no Holder's Optional Repayment Date is specified on the face hereof, this Note will not be repayable at the option of the holder hereof prior to maturity. On any Holder's Optional Repayment Date, this Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof will be at least $250,000) at the option of the holder hereof at a repayment price equal to 100% of the principal amount to be repaid, together with accrued and unpaid interest hereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof on a Holder's Optional Repayment Date, this Note must be delivered, with the form entitled "Option to Elect Repayment" attached hereto duly completed, to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other address which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to such Holder's Optional Repayment Date. In the event of repayment of this Note in part only, a new Note for the unrepaid portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. Exercise of such repayment option by the holder hereof shall be irrevocable. The interest rate borne by this Note shall be determined as follows: 1. If this Note is designated as a Regular Floating Rate Note on the face hereof or if no designation is made for Interest Calculation on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described on the face hereof. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect for the period from the Original Issue Date to the Initial Interest Reset Date will be the Initial Interest Rate. 2. If this Note is designated as a Floating Rate/Fixed Rate Note on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described on the face hereof. Commencing on the A-2-7 42 Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that (i) the interest rate in effect for the period from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate; and (ii) the interest rate in effect commencing on, and including, the Fixed Rate Commencement Date to the Maturity Date or date of earlier redemption or repayment shall be the Fixed Interest Rate, if such a rate is specified on the face hereof, or if no such Fixed Interest Rate is so specified, the interest rate in effect hereon on the Business Day immediately preceding the Fixed Rate Commencement Date. 3. If this Note is designated as an Inverse Floating Rate Note on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest equal to the Fixed Interest Rate indicated on the face hereof minus the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described on the face hereof; provided, however, that, unless otherwise specified on the face hereof, the interest rate hereon will not be less than zero percent. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect for the period from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate. Notwithstanding the foregoing, if this Note is designated on the face hereof as having an Addendum attached, this Note shall bear interest in accordance with the terms described in such Addendum. Except as provided above, the interest rate in effect on each day shall be (a) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as defined below) immediately preceding such Interest Reset Date or (b) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the next preceding Interest Reset Date. Each Interest Rate Basis shall be the rate determined in accordance with the applicable provision below. If any Interest Reset Date (which term includes the term Initial Interest Reset Date unless the context otherwise requires) would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding day that is a Business Day, except that if an Interest Rate Basis specified on the face hereof is LIBOR and such next Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. A-2-8 43 Unless otherwise specified on the face hereof, interest payable on this Note on any Interest Payment Date shall be the amount of interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid (or from and including the Original Issue Date specified on the face hereof, if no interest has been paid), to but excluding the related Interest Payment Date or Maturity Date or date of earlier redemption or repayment, as the case may be. Unless otherwise specified on the face hereof, accrued interest hereon shall be an amount calculated by multiplying the face amount hereof by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day in the period for which accrued interest is being calculated. Unless otherwise specified on the face hereof, the interest factor for each such day shall be computed and paid on the basis of a 360--day year of twelve 30--day months if the Day Count Convention specified on the face hereof is "30/360" for the period specified thereunder, or by dividing the interest rate applicable to such day by 360 if the Day Count Convention specified on the face hereof is "Actual/360" for the period specified thereunder or by the actual number of days in the year if the Day Count Convention specified on the face hereof is "Actual/Actual" for the period specified thereunder. If interest on this Note is to be calculated with reference to two or more Interest Rate Bases as specified on the face hereof, the interest factor will be calculated in each period in the same manner as if only one of the applicable Interest Rate Bases applied. Unless otherwise specified on the face hereof, the "Interest Determination Date" with respect to the Commercial Paper Rate, the Federal Funds Rate and the Prime Rate will be the second Business Day preceding each Interest Reset Date; the "Interest Determination Date" with respect to the Eleventh District Cost of Funds Rate will be the last working day of the month immediately preceding each Interest Reset Date on which the Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes the Index (as defined below); the "Interest Determination Date" with respect to LIBOR shall be the second London Business Day (as defined below) preceding each Interest Reset Date; the "Interest Determination Date" with respect to the Treasury Rate will be the day in the week in which the related Interest Reset Date falls on which day Treasury Bills (as defined below) are normally auctioned (Treasury Bills are normally sold at auction on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday); provided, however, that if an auction is held on the Friday of the week preceding the related Interest Reset Date, the related Interest Determination Date shall be such preceding Friday; and provided, further, that if an auction shall fall on any Interest Reset Date, then the Interest Reset Date shall instead be the first Business Day following such auction. If the interest rate of this Note is determined with reference to two or more Interest Rate Bases as specified on the face hereof, the Interest Determination Date pertaining to this Note will be the latest Business Day which is at least two Business Days prior to such Interest Reset Date on which each Interest Rate Basis is A-2-9 44 determinable. Each Interest Rate Basis shall be determined on such date, and the applicable interest rate shall take effect on the Interest Reset Date. Unless otherwise specified on the face hereof, the "Calculation Date" pertaining to any Interest Determination Date will be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day and (ii) the Business Day immediately preceding the applicable Interest Payment Date or Maturity Date or date of earlier redemption or repayment, as the case may be. All calculations on this Note shall be made by the Calculation Agent specified on the face hereof or such successor thereto as is duly appointed by the Bank. All percentages resulting from any calculation on this Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one--millionths of a percentage point rounded upward (e.g., 9.876545% (or 0.09876545) would be rounded to 9.87655% (or 0.0987655) and 9.876544% (or 0.09876544) would be rounded to 9.87654% (or 0.0987654)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). As used herein, "Business Day" means, unless otherwise specified on the face hereof, any day that is not a Saturday or Sunday and that in The City of New York or in the city in which the Bank is headquartered is not a bank holiday or a day on which banking institutions are required by law, regulation or executive order to close and, if an Interest Rate Basis shown on the face hereof is LIBOR, is also a London Business Day. As used herein, unless otherwise specified on the face hereof, "London Business Day" means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. Determination of Commercial Paper Rate. If an Interest Rate Basis for this Note is the Commercial Paper Rate, as indicated on the face hereof, the Commercial Paper Rate shall be determined as of the applicable Interest Determination Date (a "Commercial Paper Rate Interest Determination Date"), as the Money Market Yield (as defined below) on such date of the rate for commercial paper having the Index Maturity specified on the face hereof as published by the Board of Governors of the Federal Reserve System in the weekly statistical, release entitled "Statistical Release H.15(519), Selected Interest Rates," or any successor publication of the Board of Governors of the Federal Reserve System ("H.15(519)") under the heading "Commercial Paper". In the event that such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate shall be the Money Market Yield on such Commercial Paper Rate Interest Determination Date of the rate for commercial paper having the Index Maturity shown on the face hereof as published in the daily statistical release entitled "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any successor publication published by A-2-10 45 the Federal Reserve Bank of New York ("Composite Quotations") under the heading "Commercial Paper" (with an Index Maturity of one month or three months being deemed to be equivalent to an Index Maturity of 30 days or 90 days, respectively). If by 3:00 P.M., New York City time, on the related Calculation Date such rate is not yet published in either H.15(519) or Composite Quotations, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date shall be calculated by the Calculation Agent and shall be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity specified on the face hereof placed for an industrial issuer whose bond rating is "AA," or the equivalent, from a nationally recognized securities rating agency; provided, however, that if any of the dealers selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date shall be the rate in effect on such Commercial Paper Rate Interest Determination Date. "Money Market Yield" shall be a yield (expressed as a percentage) calculated in accordance with the following formula: Money Market Yield = D x 360 x 100 ------------ 360--(D x M)
where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal and "M" refers to the actual number of days in the interest period for which interest is being calculated. Determination of Eleventh District Cost of Funds Rate. If an Interest Rate Basis for this Note is the Eleventh District Cost of Funds Rate, as indicated on the face hereof, the Eleventh District Cost of Funds Rate shall be determined as of the applicable Interest Determination Date (an "Eleventh District Cost of Funds Rate Interest Determination Date"), as the rate equal to the monthly weighted average cost of funds for the calendar month immediately preceding the month in which such Eleventh District Cost of Funds Rate Interest Determination Date falls, as set forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on Telerate Page 7058 on any related Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate for such Eleventh District Cost of Funds Rate Interest Determination Date shall be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month immediately preceding the date of such announcement. If the FHLB of San Francisco fails to announce such rate for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of A-2-11 46 Funds Rate determined as of such Eleventh District Cost of Funds Rate Interest Determination Date shall be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. "Telerate Page 7058" means the display designated as page "7058" on the Dow Jones Telerate Service (or such other page as may replace the 7058 page on that service for the purpose of displaying the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District). Determination of Federal Funds Rate. If an Interest Rate Basis for this Note is the Federal Funds Rate, as indicated on the face hereof, the Federal Funds Rate shall be determined as of the applicable Interest Determination Date (a "Federal Funds Rate Interest Determination Date"), as the rate on such date for federal funds as published in H.15(519) under the heading "Federal Funds (Effective)" or, if not so published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Federal Funds Rate Interest Determination Date, as published in Composite Quotations under the heading "Federal Funds/Effective Rate." If by 3:00 P.M., New York City time, on the related Calculation Date such rate is not published in either H.15(519) or Composite Quotations, then the Federal Funds Rate on such Federal Funds Rate Interest Determination Date shall be calculated by the Calculation Agent and shall be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date by three leading brokers of federal funds transactions in The City of New York selected by the Calculation Agent; provided, however, that if any of the brokers selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date shall be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date. Determination of LIBOR. If an Interest Rate Basis for this Note is LIBOR, as indicated on the face hereof, LIBOR shall be determined by the Calculation Agent as of the applicable Interest Determination Date (a "LIBOR Interest Determination Date") in accordance with the following provisions: (a) With respect to any LIBOR Interest Determination Date, LIBOR will be, as specified on the face hereof, either: (i) the rate for deposits in U.S. dollars having the Index Maturity designated on the face hereof, commencing on the second London Business Day immediately following that LIBOR Interest Determination Date, that appears on the Telerate Page 3750 as of 11:00 A.M., London time, on that LIBOR Interest Determination Date ("LIBOR Telerate") or (ii) the arithmetic mean of the offered rates for deposits in U.S. dollars having the Index Maturity designated on the face hereof, commencing on the second London Business Day immediately following that LIBOR Interest Determination Date, that appear on the Reuters Screen LIBO Page as of 11:00 A.M., London time, on that LIBOR A-2-12 47 Interest Determination Date, if at least two such offered rates appear on the Reuters Screen LIBO Page ("LIBOR Reuters"). "Telerate Page 3750" means the display designated as page "3750" on the Telerate Service (or such other page as may replace the 3750 page on that service or such other service or services as may be nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for U.S. dollar deposits). "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks). If neither LIBOR Telerate nor LIBOR Reuters is specified on the face hereof, LIBOR will be determined as if LIBOR Telerate had been specified. If no rate appears on the Telerate Page 3750, or if fewer than two offered rates appear on the Reuters Screen LIBO Page, as applicable, LIBOR in respect of that LIBOR Interest Determination Date will be determined as if the parties had specified the rate described in (b) below. (b) With respect to a LIBOR Interest Determination Date on which no rate appears on Telerate Page 3750, as specified in (a)(i) above, or on which fewer than two offered rates appear on the Reuters Screen LIBO Page, as specified in (a)(ii) above, as applicable, LIBOR will be determined on the basis of the rates at which deposits in U.S. dollars having the Index Maturity designated on the face hereof, are offered at approximately 11:00 A.M., London time, on that LIBOR Interest Determination Date by four major banks in the London interbank market selected by the Calculation Agent ("Reference Banks") to prime banks in the London interbank market commencing on the second London Business Day immediately following that LIBOR Interest Determination Date and in a principal amount equal to an amount of not less than $1,000,000 that is representative for a single transaction in such market at such time. The Calculation Agent will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, LIBOR in respect of that LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two quotations are provided, LIBOR in respect of that LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., New York City time, on that LIBOR Interest Determination Date by three major banks in The City of New York selected by the Calculation Agent for loans in U.S. dollars to leading European banks having the Index Maturity designated on the face hereof, commencing on the second London Business Day immediately following that LIBOR Interest Determination Date and in a principal amount equal to an amount of not less than $1,000,000 that is representative for a single transaction in such market at such time; provided, however, that if the banks selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR with respect to such LIBOR Interest A-2-13 48 Determination Date will be the rate of LIBOR in effect on such date. Determination of Prime Rate. If an Interest Rate Basis for this Note is the Prime Rate, as indicated on the face hereof, the Prime Rate shall be determined as of the applicable Interest Determination Date (a "Prime Rate Interest Determination Date") as the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan". If such rate is not published prior to 3:00 P.M., New York City time, on the related Calculation Date, then the Prime Rate shall be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen USPRIMEl Page (as defined below) as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen USPRIMEl Page for such Prime Rate Interest Determination Date, the Prime Rate shall be the arithmetic mean of the prime rates quoted on the basis of the actual number of days in the year divided by a 360--day year as of the close of business on such Prime Rate Interest Determination Date by four major money center banks in The City of New York selected by the Calculation Agent. If fewer than four major money center banks provide such quotations, the Prime Rate will be determined by the Calculation Agent and will be the arithmetic mean of four prime rates, quoted on the basis of the actual number of days in the year divided by a 360-day year, as of the close of business on such Prime Rate Interest Determination Date as furnished in The City of New York by the major money center banks, if any, that have provided quotations and as many substitute banks or trust companies as is necessary in order to obtain four such prime rate quotations, provided such substitute banks or trust companies are organized and doing business under the laws of the United States, or any state thereof, each having total equity capital of at least U.S.$500 million and being subject to supervision or examination by federal or state authority, selected by the Calculation Agent to provide such rate or rates; provided, however, that if the banks or trust companies selected as aforesaid are not quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date shall be the Prime Rate in effect on such Prime Rate Interest Determination Date. "Reuters Screen USPRIMEl Page" means the display designated as page "USPRIMEl" on the Reuters Monitor Money Rates Service (or such other page as may replace the USPRIMEl page on that service for the purpose of displaying prime rates or base lending rates of major United States banks). Determination of Treasury Rate. If an Interest Rate Basis for this Note is the Treasury Rate, as specified on the face hereof, the Treasury Rate shall be determined as of the applicable Interest Determination Date (a "Treasurer Rate Interest Determination Date") as the rate applicable to the most recent auction of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified on the face hereof, as such rate is published in H.15(519) under the heading "Treasury Bills -- auction average (investment)" or, if not published by 3:00 P.M., New York A-2-14 49 City time, on the related Calculation Date, the auction average rate (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as otherwise announced by the United States Department of the Treasury. In the event that the results of the auction of Treasury Bills having the Index Maturity specified on the face hereof are not reported as provided by 3:00 P.M., New York City time, on such Calculation Date, or if no such auction is held in a particular week, then the Treasury Rate shall be calculated by the Calculation Agent and shall be a yield to maturity (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate Interest Determination Date, of three leading primary United States government securities dealers selected by the Calculation Agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity specified on the face hereof; provided, however, that if any of the dealers selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate determined as of such Treasury Rate Interest Determination Date shall be the Treasury Rate in effect on such Treasury Rate Interest Determination Date. Any provision contained herein, including the determination of an Interest Rate Basis, the specification of an Interest Rate Basis, calculation of the interest rate applicable to this Note, its Interest Payment Dates or any other matter relating hereto may be modified as specified in an Addendum relating hereto if so specified on the face hereof. Notwithstanding the foregoing, the interest rate hereon shall not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, specified on the face hereof. In addition to any Maximum Interest Rate applicable hereto pursuant to the above provisions, the interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. The Calculation Agent shall calculate the interest rate hereon in accordance with the foregoing on or before each Calculation Date. Unless otherwise specified on the face hereof, The Chase Manhattan Bank will be the Calculation Agent. At the request of the Holder hereof, the Calculation Agent shall provide to the Holder hereof the interest rate hereon then in effect and, if determined, the interest rate which shall become effective as of the next Interest Reset Date. If this Note is an Original Issue Discount Note and if an Event of Default with respect to this Note shall have occurred and be continuing, the Default Amount (as defined hereafter) of this Note may be declared due and payable in the manner and with the effect provided herein. The "Default Amount" shall be equal to the adjusted issue price as of the first day of the accrual period as determined under Final Treasury Regulation Section 1.1275-1(b) (or successor regulation) under the United States Internal Revenue Code A-2-15 50 of 1986, as amended, in which the date of acceleration occurs increased by the daily portion of the original issue discount for each day in such accrual period ending on the date of acceleration, as determined under Final Treasury Regulation Section 1.1272--1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended. Upon payment of (i) the principal, or premium, if any, so declared due and payable and (ii) interest on any overdue principal and overdue interest or premium, if any (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Bank's obligations in respect of the payment of principal of, premium, if any, and interest on this Note shall terminate. In case any Note shall at any time become mutilated, destroyed, lost or stolen, and such Note or evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent shall be delivered to the Issuing and Paying Agent, the Bank shall issue a new Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of the Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Note, only upon receipt of evidence satisfactory to the Bank and the Issuing and Paying Agent that such Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to the Bank and the Issuing and Paying Agent. Upon the issuance of any substituted Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation and delivery of a new Note. If any Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the holder with the provisions of this paragraph. No recourse shall be had for the payment of principal of, premium, if any, or interest on this Note for any claim based hereon, or otherwise in respect hereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor corporation, banking association or other legal entity (collectively, "corporation"), either directly or through the Bank or any corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The occurrence of any of the following events shall constitute an "Event of Default" with respect to this Note: (i) default in the payment of any interest with respect to any of the Notes issued by the Bank when due, which continues for 30 calendar days; (ii) default in the payment of any principal of, or premium, if any, on any of the Notes issued by the Bank when due; (iii) the entry by a A-2-16 51 court having jurisdiction in the premises of (a) a decree or order for relief in respect of the Bank in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order appointing a conservator, receiver, liquidator, assignee, trustee, sequestrator or any other similar official of the Bank, or of substantially all of the property of the Bank, or ordering the winding up or liquidation of the affairs of the Bank, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Bank to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding, or the filing by the Bank of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Bank to the filing of such petition or to the appointment of or taking possession by a custodian, conservator, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Bank or of substantially all of the property of the Bank, or the making by the Bank of an assignment for the benefit of creditors, or the taking of corporate action by the Bank in furtherance of any such action. If an Event of Default shall occur and be continuing, the holder of this Note may declare the principal amount of, accrued interest and premium, if any, on this Note due and payable immediately by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. Any Event of Default with respect to this Note may be waived by the holder hereof. The Issuing and Paying Agency Agreement provides that the Bank will promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent will promptly mail by first-class mail, postage prepaid, copies of such notice to the holders of the Notes, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Nothing contained herein shall prevent any consolidation or merger of the Bank with any other corporation or successive consolidations or mergers in which the Bank or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Bank as an entirety or substantially as an entirety to any other corporation authorized to acquire and operate the same; provided, however (and the Bank hereby covenants and agrees) that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) immediately after such consolidation, merger, sale or conveyance the corporation (whether the Bank or such other corporation) formed by or surviving any such consolidation or merger, or the A-2-17 52 corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of the terms, covenants and conditions of the Notes to be observed or performed by the Bank; and (ii) the corporation (if other than the Bank) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall be organized under the laws of the United States of America, any state thereof, the District of Columbia or the Commonwealth of Puerto Rico and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest on this Note. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation of the due and punctual performance of all of the covenants in the Notes to be performed or observed by the Bank, such successor corporation shall succeed to and be substituted for the Bank with the same effect as if it had been named in this Note as the Bank and thereafter the predecessor corporation shall be relieved of all obligations and covenants in this Note and may be liquidated and dissolved. Any action by the holder of this Note shall bind all future holders of this Note, and of any Note issued in exchange or substitution hereof or in place hereof, in respect of anything done or permitted by the Bank or by the Issuing and Paying Agent in pursuance of such action. The Issuing and Paying Agent shall maintain at its offices a register (the register maintained in such office or any other office or agency of the Issuing and Paying Agent in The City of New York herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Issuing and Paying Agent shall provide for the registration of the Notes and of transfers of the Notes. The transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Issuing and Paying Agent in the Place of Payment, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Issuing and Paying Agent duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No provision of this Note shall alter or impair the obligation of the Bank, which is absolute and unconditional, to pay principal of, premium, if any, and interest on this Note in U.S. dollars at the times, places and rate herein prescribed in accordance with its terms. No service charge shall be made to a holder of this Note for any transfer or exchange of this Note, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. A-2-18 53 Beneficial interests represented by this Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, only if (x) The Depository Trust Company, as Depositary (the "Depositary") notifies the Bank that it is unwilling or unable to continue as Depositary for this Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 calendar days, or (y) the Bank in its sole discretion determines not to have such beneficial interests represented by this Note. Any Note representing such beneficial interests that is exchangeable pursuant to the preceding sentence shall be exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. Such definitive Notes shall be registered in the name or names of such person or persons as the Depositary shall instruct the Issuing and Paying Agent. Prior to due presentment of this Note for registration of transfer, the Bank, the Issuing and Paying Agent or any agent of the Bank or the Issuing and Paying Agent may treat the holder in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. All notices to the Bank under this Note shall be in writing and addressed to the Bank at 209 Munoz Rivera Avenue, Suite 913, Hato Rey, Puerto Rico 00918, Attention: Richard Barrios, or to such other address of the Bank as the Bank may notify the holders of the Notes. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles and all applicable federal laws and regulations. A-2-19 54 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM-- as tenants in common TEN ENT-- as tenants by the entireties JT TEN-- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - __________ Custodian _________ (Cust) (Minor) under Uniform Gifts to Minors Act ---------------------------------- (State) Additional abbreviations may also be used though not in the above list. A-2-20 55 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto ________________________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE -------------------------------------------------- -------------------------------------------------- (Please print or typewrite name and address, including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints ___________________________________________ to transfer said Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated: _____________________________ ________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. Signature Guarantee A-2-21 56 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Bank to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount hereof to be repaid, together with accrued and unpaid interest hereon, payable to the date of repayment, to the undersigned, at________________________________________________________________. (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the undersigned must give to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other place or places of which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to the date of repayment, with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000) which the holder elects to have repaid and specify the denomination or denominations (which shall be $250,000 or an integral multiple of $1,000 in excess thereof) of the Notes to be issued to the holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid): $_________________________________ ______________________________ NOTICE: The signature on this Dated: ___________________________ "Option to Elect Repayment" form must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. Signature Guarantee A-2-22 EX-10.19 7 g67461ex10-19.txt AMENDMENT NO.1 ISSUING & PAYING AGENCY AGREEMENT 1 EXHIBIT 10.19 AMENDMENT NO. 1 TO ISSUING AND PAYING AGENCY AGREEMENT May 12, 2000 WHEREAS, the parties hereto have previously entered into an Issuing and Paying Agency Agreement, dated as of September 24, 1996, between Banco Popular de Puerto Rico, a banking association chartered under the laws of the Commonwealth of Puerto Rico (the "Bank"), and The Chase Manhattan Bank, as issuing and paying agent (the "Issuing and Paying Agent") relating to the issue and sale by the Bank of its Bank Notes; and WHEREAS, the Bank and the Issuing and Paying Agent wish to amend the Issuing and Paying Agency Agreement as provided herein; NOW, THEREFORE, the Bank and the Issuing and Paying Agent hereby agree to amend the Issuing and Paying Agency Agreement as follows: 1. As of any time on or after the date of this amendment: (i) each reference in the Issuing and Paying Agency Agreement to the "Distribution Agreement" shall mean and be a reference to the Distribution Agreement, dated September 24, 1996, among the Bank and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation (now Credit Suisse First Boston Corporation) as amended as of the date hereof; (ii) each reference in Sections 2(ii), 10(iii), 13(i), 13(v) and 14(3) of the Issuing and Paying Agency Agreement to "$250,000" shall mean and be a reference to "$100,000"; and (iii) each reference in the Issuing and Paying Agency Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Issuing and Paying Agency Agreement shall mean and be a reference to the Issuing and Paying Agency Agreement as amended hereby. 2. The last sentence of Section 4(ii) of the Issuing and Paying Agency Agreement is hereby replaced in its entirety with the following sentence: "As used in this Agreement, the term "Business Day" shall mean, for any Bank Note, a day that meets all the following applicable requirements: (A) for all Bank Notes, is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a bank holiday in Puerto Rico or a day on which banking institutions in New York City or in the city in which the Bank is headquartered generally are authorized or obligated by law, regulation or executive order to close; (B) if the Bank Note is a LIBOR Note (as defined in the Offering Circular), is also a London Business Day; 2 and (C) if the Bank Note has a specified currency other than U.S. dollars, is also a day on which banking institutions are not authorized or obligated by law, regulation or executive order to close in the principal financial center of the country issuing the specified currency; and (ii) "London Business Day" in Exhibit G to the Distribution Agreement shall mean any day on which dealings in the relevant index currency are transacted in the London interbank market." 3. As of any time on or after the date of this amendment, the Issuing and Paying Agency Agreement, as amended hereby, is and shall continue to be in full force and effect and as so amended is hereby ratified and confirmed and is binding on the parties hereto. 4. This amendment may be executed by any one of the parties hereto in any number of counterparts, each of which shall be an original, but all of such counterparts shall together constitute one and the same instrument. -2- 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Issuing and Paying Agency Agreement to be executed on their behalf as of the day and year first above written. BANCO POPULAR DE PUERTO RICO By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Issuing and Paying Agent By: ---------------------------------------- Name: Title: CONSENTED AND AGREED TO: THE CHASE MANHATTAN BANK, as Calculation Agent under the Interest Calculation Agreement, dated as of September 24, 1996, between the Bank and the Calculation Agent, as amended By: ---------------------------------------------------- Name: Title: -3- EX-10.20 8 g67461ex10-20.txt INTEREST CALCULATION AGREEMENT 1 EXHIBIT 10.20 INTEREST CALCULATION AGREEMENT Between BANCO POPULAR DE PUERTO RICO and THE CHASE MANHATTAN BANK THIS AGREEMENT is made as of September 24, 1996 between Banco Popular de Puerto Rico, a banking association chartered under the laws of the Commonwealth of Puerto Rico (the "Bank") and The Chase Manhattan Bank, as the interest calculation agent (the "Calculation Agent," which term shall include any successor thereto). WHEREAS, the Bank proposes to issue and sell on a continuous basis floating rate bank notes ("Floating Rate Notes") and fixed rate bank notes ("Fixed Rate Notes") (the Fixed Rate Notes and Floating Rate Notes are collectively referred to herein as the "Notes") pursuant to the terms and conditions of a Distribution Agreement, dated September 24, 1996 (the "Distribution Agreement"), by and among the Bank and the agents named therein (the "Agents," such term to include any additional agent that may be appointed by the Bank and described in a written notice to the Agents, the Issuing and Paying Agent (as defined below) and the Calculation Agent) up to such aggregate principal amount as may from time to time be authorized by the Bank to be at any time outstanding; WHEREAS, the Bank desires to appoint The Chase Manhattan Bank as Calculation Agent and The Chase Manhattan Bank desires to accept such appointment, pursuant to the terms and conditions set forth herein; and WHEREAS, the Bank is entitled to the benefits of the Issuing and Paying Agency Agreement dated as of September 24, 1996 (the "Issuing and Paying Agency Agreement"), between the Bank and The Chase Manhattan Bank as Issuing and Paying Agent (the "Issuing and Paying Agent"); 2 NOW IT IS HEREBY AGREED THAT: SECTION 1. Appointment of Calculation Agent. The Bank hereby appoints The Chase Manhattan Bank as calculation agent with respect to any Floating Rate Notes to be issued by the Bank under the Issuing and Paying Agency Agreement. The Calculation Agent hereby accepts its appointment as an independent party for the purposes of calculating the interest rate of, and the amount of interest payable on, the Floating Rate Notes, for each interest accrual period, upon the terms and conditions set forth herein. The calculation of the interest rate bases for the interest rates applicable to a Floating Rate Note shall be determined by reference to such interest rate basis or bases specified in the form of each Floating Rate Note supplied to the Calculation Agent. SECTION 2. Calculation of Interest Rate Bases. (a) The Calculation Agent shall calculate the interest rate of, and the amount of interest payable on, the Floating Rate Notes for each interest accrual period and shall communicate the same to the Bank and the Issuing and Paying Agent upon the terms and conditions contained herein. The Bank shall cause the Issuing and Paying Agent to provide the Calculation Agent with not less than two (2) but not more than seven (7) Business Days' notice of the Interest Determination Date (as defined in the applicable Floating Rate Note) with respect to which a particular Floating Rate Note calculation is to be made by the Calculation Agent, and the Calculation Agent shall notify the Issuing and Paying Agent of such Floating Rate Note calculation on or before the applicable Calculation Date (as defined in the Floating Rate Note) and shall confirm such calculation in writing within twenty-four (24) hours after so notifying the Issuing and Paying Agent. (b) In no event shall the interest rate on the Floating Rate Notes be less than the Minimum Interest Rate, if any, or higher than the Maximum Interest Rate, if any, designated in the applicable Floating Rate Note and related pricing supplement (each, a "Pricing Supplement"), and in no event shall the interest rate on the Floating Rate Notes be higher than the maximum rate permitted by applicable law. (c) The Calculation Agent shall calculate the amount of interest payable on each Floating Rate Note in the manner and at the times set forth in each such Floating Rate Note. -2- 3 (d) The Calculation Agent will, upon the request of any holder of a Floating Rate Note, provide the interest rate then in effect, and the interest rate which will become effective as a result of a determination made on the most recent Interest Determination Date with respect to such Floating Rate Note. SECTION 3. Status of Calculation Agent. Any acts taken by the Calculation Agent under this Agreement or in connection with any Floating Rate Notes, including, specifically, but without limitation, the calculation of any interest rate for a Floating Rate Note, shall be deemed to have been taken by the Calculation Agent solely in its capacity as an agent acting on behalf of the Bank and shall not create or imply any obligation to, or any trust or agency relationship with, any of the owners or holders of the Floating Rate Notes. SECTION 4. Fees and Expenses. The Calculation Agent shall be entitled to such compensation for its services under this Agreement as may be agreed upon with the Bank, and the Bank shall pay such compensation and shall reimburse the Calculation Agent for all reasonable expenses, disbursements and advances (including reasonable legal fees and expenses) incurred or made by the Calculation Agent pursuant to the services rendered by it under this Agreement upon receipt of such invoices as the Bank may reasonably require. SECTION 5. Rights and Liabilities of the Calculation Agent. From time to time, the Bank will furnish the Calculation Agent with a written list of the names of officers of the Bank authorized to give instructions and notices on behalf of the Bank hereunder (each, an "Instructing Representative"). The Calculation Agent shall be protected and shall incur no liability for, or in respect of, any action taken or omitted to be taken, or suffered by it in reliance upon any Floating Rate Note or written instruction, notice, request, direction, order, certificate, consent, report, affidavit, statement or other paper, document or communication reasonably believed by it in good faith to be genuine and to have been approved or signed by the proper party or parties. Any instruction, notice, request, direction, order, certificate, consent, report, affidavit, statement or other paper, document or communication from the Bank or given by it and sent, delivered or directed to the Calculation Agent under, pursuant to, or as permitted by, any provision of this Agreement shall be sufficient for purposes of this Agreement if such instruction, notice, request, direction, order, -3- 4 certificate, consent, report, affidavit, statement, or other paper, document, communication or comment is in writing and signed by an Instructing Representative. The Calculation Agent may conclusively rely, as to the truth of the statements expressed therein, upon any order, written instruction, notice, request, direction, certificate, consent, report, affidavit, statement, or other paper, document or communication, reasonably believed by it in good faith to be genuine, from the Bank or given by it and sent, delivered or directed to the Calculation Agent and conforming to the requirements of this Agreement, and the Calculation Agent shall be protected in acting upon any such order, written instruction, notice, request, direction, certificate, consent, report, affidavit, statement, or other paper, document or communication. The Calculation Agent may consult with counsel satisfactory to it and the advice of such counsel or any opinion of counsel shall constitute full and complete authorization and protection of the Calculation Agent with respect to any action taken, omitted to be taken, or suffered by it hereunder in good faith and in accordance with and in reliance upon the advice of such counsel. The Calculation Agent shall not be liable for any error resulting from the use of or reliance on a source or publication required to be used by any Floating Rate Note, this Agreement or any other document. Neither the Calculation Agent nor its officers, directors, employees, agents or attorneys shall be liable to the Bank or any other party for any act or omission hereunder, or for any error of judgment made in good faith by it or them except in the case of gross negligence or willful misconduct. No party shall be liable for any default resulting from force majeure, which shall be deemed to include any circumstances beyond the reasonable control of the party affected. SECTION 6. Duties of Calculation Agent. The Calculation Agent shall be obligated only to perform such duties as are specifically set forth herein and no other duties or obligations on the part of the Calculation Agent, in its capacity as such, shall be implied by this Agreement. SECTION 7. Termination, Resignation or Removal of the Calculation Agent. The Calculation Agent may at any time terminate this Agreement by giving written notice to the Bank and the Issuing and Paying Agent specifying the date on which the desired resignation shall become effective (the "Effective Date"); provided that such notice shall be given not less than ninety (90) days prior to the Effective Date unless the Bank otherwise agrees in writing. The Bank may terminate this -4- 5 Agreement at any time by giving written notice to the Calculation Agent and specifying the Effective Date of such termination. Notwithstanding the foregoing, no termination by either the Calculation Agent or the Bank shall become effective prior to the date of the appointment of a successor Calculation Agent and the acceptance of such appointment by such successor Calculation Agent as provided in Section 8 hereof. Upon termination by either party pursuant to the provisions of this Section, the Calculation Agent shall be entitled to the payment of any compensation owed to it by the Bank hereunder and to the reimbursement of all reasonable expenses incurred in connection with the services rendered by it hereunder, as provided by Section 4 hereof. The provisions of Sections 5, 9 and 13 hereof shall remain in full force and effect following termination by either party. SECTION 8. Appointment of Successor Calculation Agent. In the event of the termination of this Agreement pursuant to Section 7 hereof, the Bank shall promptly appoint a successor Calculation Agent whose appointment shall become effective as of the Effective Date. Any successor Calculation Agent appointed by the Bank and approved by the Issuing and Paying Agent following termination of this Agreement pursuant to the provisions of Section 7 hereof, shall execute and deliver to the original Calculation Agent, the Bank and the Issuing and Paying Agent an instrument accepting such appointment. Thereupon, such successor Calculation Agent shall, without any further act, deed or conveyance, become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of the Calculation Agent and with like effect as if originally named as Calculation Agent hereunder, and the original Calculation Agent shall thereupon be obligated to transfer and deliver such relevant records or copies thereof maintained by the Calculation Agent in connection with the performance of its obligations hereunder. Upon the appointment of a successor Calculation Agent and acceptance by it of such appointment the Calculation Agent so superseded shall cease to be such Calculation Agent hereunder. In the event of termination of this Agreement by the Calculation Agent or the Bank pursuant to Section 7 hereof, if a successor Calculation Agent has not been appointed by the Bank by the Effective Date of such termination, the Calculation Agent may, at the expense of the Bank, petition any court of competent jurisdiction for appointment of a successor Calculation Agent. Any successor Calculation Agent so appointed by such court shall immediately and without further act be superseded by any -5- 6 successor Calculation Agent appointed as provided above within one year from the date of the appointment by such court. SECTION 9. Indemnification. The Bank shall indemnify and hold harmless the Calculation Agent, its officers, directors, agents or attorneys and employees from and against all actions, claims, damages, liabilities, losses and expenses (including reasonable legal and other professional fees and expenses) relating to or arising out of actions or omissions in any capacity hereunder, except actions, claims, damages, liabilities, losses and expenses caused by the gross negligence or willful misconduct of the Calculation Agent, its officers, directors or employees. The Calculation Agent shall incur no liability and shall be indemnified and held harmless by the Bank for any error resulting from use of or reliance on a source of publication required to be used by the Floating Rate Notes or this Agreement. The Calculation Agent shall incur no liability and shall be indemnified and held harmless by the Bank for, or in respect of, any actions taken, omitted to be taken or suffered to be taken in good faith by the Calculation Agent in reliance upon (i) an opinion or advice of counsel, or (ii) a written instruction from the Bank. The provisions of this Section shall survive the termination of this Agreement. SECTION 10. Merger, Consolidation or Sale of Business by the Calculation Agent. Any corporation into which the Calculation Agent may be merged or consolidated, or any corporation resulting from any merger or consolidation to which the Calculation Agent may be a party, or any corporation to which the Calculation Agent may sell or otherwise transfer all or substantially all of its assets and business and which assumes the obligations of the Calculation Agent hereunder, shall, to the extent permitted by applicable law, become the Calculation Agent under this Agreement without the execution or filing of any paper or any further act by the parties hereto. Notice in writing of any such merger, consolidation or sale shall be given by the Calculation Agent to the Bank and to the Issuing and Paying Agent prior to or upon the effectiveness of such merger, consolidation or sale. SECTION 11. Notices. Any notice or other communication required to be given hereunder shall be delivered in person, sent by letter or by telecopy to the addresses given below or such other address as a party hereto may have subsequently specified in writing: -6- 7 If to the Bank: Banco Popular de Puerto Rico 209 Munoz Rivera Avenue, Suite 913 Hato Rey, Puerto Rico 00918 Attention: Richard Barrios Telecopy: (787) 754--9290 If to the Calculation Agent or the Issuing and Paying Agent: The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 Attention: Agency Administration Telecopy: (212) 946--7682 Any notice hereunder given by letter or telecopy shall be deemed to have been received when it would have been received in the ordinary course of post or transmission, as the case may be. SECTION 12. Benefit of Agreement. Except as provided herein, this Agreement is solely for the benefit of the parties hereto and their successors and assigns and no other person shall acquire or have any rights under or by virtue hereof. The terms "successors" and "assigns" shall not include any purchaser of any Floating Rate Notes by reason merely of such purchase. SECTION 13. Governing Law. This Agreement is to be delivered and performed in, and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York applicable to agreements to be entered into and to be performed in such state without regard to conflicts of laws principles. SECTION 14. Severability. If any provision of this Agreement shall be held or deemed to be or shall, in fact, be invalid, inoperative or unenforceable as applied in any particular case in any or all jurisdictions because it conflicts with any provision of any constitution, statute, rule or public policy or for any other reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case, circumstances or jurisdiction, or of rendering -7- 8 any other provision or provisions of this Agreement invalid, inoperative or unenforceable, to any extent whatsoever. SECTION 15. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of such counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. SECTION 16. Amendments. This Agreement may be amended from time to time by any instrument in writing executed and delivered by each of the parties hereto. SECTION 17. Amendment of the Issuing and Paying Agency Agreement. Anything in the Issuing and Paying Agency Agreement to the contrary notwithstanding, any amendment or supplement thereto shall not become effective with respect to this Agreement or the Calculation Agent in its capacity as such unless and until the Calculation Agent shall have consented in writing to such amendment or supplement. SECTION 18. Amendments to Forms of Notes. The Bank shall not, without first obtaining the prior written consent of the Calculation Agent, make any change to the Notes if such change would materially and adversely affect the Calculation Agent's duties and obligations under this Agreement. SECTION 19. Complete Agreement. This Agreement embodies the entire understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 20. Conflicts with Other Agreements. In any conflict relating to the rights or obligations of the Calculation Agent in connection with calculation of interest on the Floating Rate Notes, the terms of this Agreement shall govern such rights and obligations. SECTION 21. Ownership of Securities. The Calculation Agent, its officers, employees and shareholders may become the owners of or acquire any interest in any Notes, with the same rights that it or they would have if it were not the Calculation Agent, and may engage or be interested in any financial or other transaction with the Bank as freely as if it were not the Calculation Agent. -8- 9 SECTION 22. Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not; provided, however, this Section 22 shall not by itself authorize any delegation of duties by the Calculation Agent or any assignment other than any assignment expressly permitted by the terms of this Agreement. SECTION 23. Definitions. Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in the Issuing and Paying Agency Agreement. SECTION 24. Pricing Supplements. The Bank shall promptly deliver copies of each Pricing Supplement to the Calculation Agent. -9- 10 IN WITNESS WHEREOF, this Agreement has been entered into the day and year first above written. BANCO POPULAR DE PUERTO RICO By: ----------------------------- Name: Jose L. Lopez Title: Senior Vice President By: ----------------------------- Name: Richard Barrios Title: Senior Vice President THE CHASE MANHATTAN BANK, as Calculation Agent By: ----------------------------- Name: Title: -10- 11 IN WITNESS WHEREOF, this Agreement has been entered into the day and year first above written. BANCO POPULAR DE PUERTO RICO By: ----------------------------- Name: Title: By: ----------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Calculation Agent By: /s/ Lisa J. Price ----------------------------- Name: Lisa J. Price Title: Vice President -11- EX-10.21 9 g67461ex10-21.txt AMENDMENT NO.1 INTEREST CALCULATION AGREEMENT 1 EXHIBIT 10.21 AMENDMENT NO. 1 TO INTEREST CALCULATION AGREEMENT May 12, 2000 WHEREAS, the parties hereto have previously entered into an Interest Calculation Agreement, dated as of September 24, 1996 (the "Interest Calculation Agreement"), between Banco Popular de Puerto Rico, a banking association chartered under the laws of the Commonwealth of Puerto Rico (the "Bank"), and The Chase Manhattan Bank, as interest calculation agent (the "Calculation Agent") relating to the issue and sale by the Bank of its Bank Notes; and WHEREAS, the Bank and the Calculation Agent wish to amend the Interest Calculation Agreement as provided herein; NOW, THEREFORE, the Bank and the Calculation Agent hereby agree to amend the Interest Calculation Agreement as follows: 1. As of any time on or after the date of this amendment: (i) each reference in the Interest Calculation Agreement to the "Distribution Agreement" shall mean and be a reference to the Distribution Agreement, dated as of September 24, 1996, among the Bank and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation (now Credit Suisse First Boston Corporation) as amended as of the date hereof; (ii) each reference in the Interest Calculation Agreement to the "Issuing and Paying Agency Agreement" shall mean and be a reference to the Issuing and Paying Agency Agreement, dated as of September 24, 1996, between the Bank and The Chase Manhattan Bank, as Issuing and Paying Agent, as amended as of the date hereof ; and (iii) each reference in the Interest Calculation Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Interest Calculation Agreement shall mean and be a reference to the Interest Calculation Agreement as amended hereby. 2. As of any time on or after the date of this amendment, the Interest Calculation Agreement, as amended hereby, is and shall continue to be in full force and effect and as so amended is hereby ratified and confirmed and is binding on the parties hereto. 3. This amendment may be executed by any one of the parties hereto in any number of counterparts, each of which shall be an original, but all of such counterparts shall together constitute one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Interest Calculation Agreement to be executed on their behalf as of the day and year first above written. BANCO POPULAR DE PUERTO RICO By: -------------------------------------------------- Name: Title: By: -------------------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Calculation Agent By: -------------------------------------------------- Name: Title: -2- EX-10.22 10 g67461ex10-22.txt ADMINISTRATION PROCEDURES 1 EXHIBIT 10.22 ADMINISTRATIVE PROCEDURES FOR FIXED RATE AND FLOATING RATE BANK NOTES With maturities of 7 days to 15 years (Dated as of May 12, 2000) The Short-Term Bank Notes ("Short-Term Notes"), Medium-Term Bank Notes ("Medium-Term Notes," and together with the Short-Term Senior Notes, the "Notes") are to be offered on a continuous basis for sale by Banco Popular de Puerto Rico (the "Bank") through each of Popular Securities, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation who, as agents (each, an "Agent" and collectively, the "Agents"), will purchase the Notes, as principal from the Bank for resale to investors and other purchasers at varying prices relating to prevailing market prices at the time of resale as determined by the applicable Agent or, if so specified in the applicable Pricing Supplement, for resale at a fixed public offering price. If agreed to by the Bank and the applicable Agent, such Agent may utilize its reasonable efforts on an agency basis to solicit offers to purchase the Notes at 100% of the principal amount thereof. Only those provisions in these Administrative procedures that are applicable to the particular role that an Agent will perform shall apply. The Notes are being sold pursuant to a Distribution Agreement dated September 24, 1996, as amended as of May 12, 2000 (the "Distribution Agreement"), between the Bank and the Agents. The Distribution Agreement provides both for the sale of Notes by the Bank to the Agents as principal for resale to investors and other purchasers and for the sale of Notes by the Bank through the Agents as agents and not as principal in which case the Agents will act as agents of the Bank in soliciting Note purchases. The Notes will be issued pursuant to an issuing and paying agency agreement dated as of September 24, 1996, as amended as of May 12, 2000 (the "Issuing and Paying Agency Agreement"), between the Bank and The Chase Manhattan Bank, as issuing and paying agent (the "Issuing and Paying Agent"). As used herein, the term "Offering Circular" refers to the most recent offering circular, as such document may be amended or supplemented, which has been prepared by the Bank for use by the Agents in connection with the offering of the Notes. G-1 2 The Notes will be issued in book-entry form (each beneficial interest in a global Note, a "Book-Entry Note" and collectively, the "Book-Entry Notes") and represented by one or more fully registered global Notes (each, a "Global Note" and collectively, the "Global Notes") delivered to the Issuing and Paying Agent, as agent for The Depository Trust Company, as depositary ("DTC," which term includes any successor thereof), and recorded in the book-entry system maintained by DTC. Book-Entry Notes represented by a Global Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, by the owners of such Book-Entry Notes only upon certain limited circumstances described in the Offering Circular and the applicable Global Note. In connection with the qualification of Book-Entry Notes for eligibility in the book-entry system maintained by DTC, the Issuing and Paying Agent will perform the custodial, document control and administrative functions described below, in accordance with its respective obligations under the Short-Term and Medium-Term Letters of Representations from the Bank and the Issuing and Paying Agent to DTC, dated September 23, 1996, the Short-Term and Medium-Term Bring-Down Letters of Representations from the Bank and the Issuing and Paying Agent to DTC, dated May 12, 2000, and a Certificate Agreement, dated December 2, 1988, as amended September 24, 1996, between the Issuing and Paying Agent and DTC (the "Certificate Agreement"), and its obligations as a participant in DTC, including DTC's Same-Day Funds Settlement System ("SDFS"). Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed thereto in the Notes. Date of Issuance/ Each Note will be dated as of the date of Authentication: its authentication by the Issuing and Paying Agent. Each Note shall also bear an original issue date (the "Original Issue Date") which shall be the settlement date for such Note. The Original Issue Date shall remain the same for all Notes subsequently issued upon transfer, exchange or substitution of an original Note regardless of their dates of authentication. Maturities: Each Short-Term Note will mature on a date (the "Maturity Date") selected by G-2 3 the purchaser and agreed to by the Bank which is not less than seven days and not more than one year from its Original Issue Date, as selected by the initial purchaser and agreed to by the Bank; and each Medium-Term Note will have a Maturity Date selected by the purchaser and agreed to by the Bank which is from more than one year to not more than 15 years from its Original Issue Date; provided, however, that Floating Rate Notes will mature on an Interest Payment Date. Registration: Notes will be issued only in fully registered form. Calculation of Unless otherwise specified therein and in Interest: the applicable Pricing Supplement, interest (including payments for partial periods) on Fixed Rate Notes having maturities of more than one year will be computed and paid on the basis of a 360-day year of twelve 30-day months. Unless otherwise specified therein and in the applicable Pricing Supplement, interest on Fixed Rate Notes having maturities of one year or less will be computed on the basis of the actual number of days of the year divided by 360 and will be payable only at maturity. Unless otherwise specified therein and in the applicable Pricing Supplement, interest on Floating Rate Notes will be calculated and paid on the basis of the actual number of days in the year divided by 360 in the case of Commercial Paper Rate Notes, LIBOR Notes, Federal Funds Rate Notes, Prime Rate Notes and Eleventh District Cost of Funds Rate Notes, and by the actual number of days in the year divided by 365 or 366, as the case may be, in the case of Treasury Rate Notes. Redemption/Repayment The Notes will be subject to G-3 4 redemption by the Bank on and after their respective Initial Redemption Dates, if any, Initial Redemption Dates, if any, will be fixed at the time of sale and set forth in the applicable Pricing Supplement and in the applicable Note. If no Initial Redemption Dates are indicated with respect to a Note, such Note will not be redeemable prior to its Maturity Date. The Notes will be subject to repayment at the option of the holders thereof in accordance with the terms of the Notes on their respective Holder's Optional Repayment Dates, if any, Holder's Optional Repayment Dates, if any, will be fixed at the time of sale and set forth in the applicable Pricing Supplement and in the applicable Note. If no Holder's Optional Repayment Dates are indicated with respect to a Note, such Note will not be repayable at the option of the holder prior to its Maturity Date. Acceptance and When the Agent is soliciting offers to Rejection of Offers: purchase the Notes, the Bank shall have the sole right to accept offers to purchase Notes and may reject any such offer, in whole or in part. Each Agent shall promptly communicate to the Bank, orally, each offer to purchase Notes solicited by such Agent on an agency basis, other than those offers rejected by the Agent. Each Agent shall have the right, without notice to the Bank, to reject any proposed purchase of Notes through it, in whole or in part. Preparation of If any offer to purchase a Note is accepted Pricing Supplement: by the Bank, the Bank, with the approval by the Bank, the (the "Presenting Agent"), will prepare a Pricing G-4 5 Supplement reflecting the terms of such Note. Procedure for Changing When the Agents are soliciting offers to Rates or Other purchase the Notes from the Bank and a Variable Terms: decision has been reached to change the interest rate or any other variable term on any Notes being sold by the Bank, the Bank will promptly advise the Agents and the Agents will forthwith suspend solicitation of offers to purchase such Notes. The Agents will telephone the Bank with recommendations as to the changed interest rates or other variable terms. At such time as the Bank advises the Agents of the new interest rates or other variable terms, the Agents may resume solicitation of offers to purchase such Notes. Until such time, only "indications of interest" may be recorded. Immediately after acceptance by the Bank of an offer to purchase at a new interest rate or new variable term, the Bank and the Presenting Agent shall follow the procedures set forth under the applicable "Settlement Procedures." Suspension of While the Agents are soliciting offers to Solicitation; Amendment purchase Notes from the Bank, the Bank may or Supplement: instruct the Agents to suspend solicitation of offers to purchase Notes at any time. Upon receipt of such instructions, the Agents will forthwith suspend solicitation of offers to purchase Notes from the Bank until such time as the Bank has advised them that solicitation of offers to purchase may be resumed. If the Bank decides to amend the Offering Circular (including incorporating any documents by reference therein) or supplement any of such documents (other than to change rates or other variable terms), G-5 6 it will immediately notify, with confirmation in writing to follow, the Agents and will furnish the Agents and their counsel with copies of the proposed amendment (including any document proposed to be incorporated by reference therein) or supplement; provided, however, that the Bank shall be required to provide such notice and copies only to the extent that it is required to do so pursuant to the terms of the Distribution Agreement. One copy of such proposed amendment or supplement will be delivered or mailed to the Agents at the following respective addresses: Popular Securities, Inc., 209 Munoz Rivera Avenue, Suite 1020, Hato Rey, Puerto Rico 00918, (787)766-4200, telecopier: (787)766-3485, Attention: Ken McGrath; Merrill Lynch & Co., World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310, (212)449-0393, telecopier: (212)449-2234, Attention: Product Management-- Medium-Term Notes; Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, (212)272-6227, telecopier: (212)272-5371, Attention: Medium-Term Notes Department; and CS First Boston Corporation, 55 East 52nd Street, New York, New York 10038, (212)909-7198, telecopier: (212)318-1498, Attention: Short-Medium Term Finance Group. In the event that at the time the solicitation of offers to purchase from the Bank is suspended (other than to change interest rates, maturities, prices or other similar variable terms with respect to the Notes) there shall be any offers to purchase Notes that have been accepted by the Bank which have not been settled, the Bank will promptly advise the Agents whether such offers may be settled and whether copies of the Offering Circular, as G-6 7 theretofore amended and/or supplemented may be delivered in connection with the settlement of such orders. The Bank will have the sole responsibility for such decision and for any arrangements which may be made in the event that the Bank determines that such orders may not be settled or that copies of such Offering Circular may not be so delivered. Delivery of A copy of the most recent Offering Circular Offering Circular: and Pricing Supplement must accompany or precede the earlier of (a) the written confirmation of a sale sent to a customer or his agent and (b) the delivery of Notes to a customer or his agent. Authenticity of The Agents will have no obligations or Signatures: liability to the Bank or the Issuing and Paying Agent in respect of the authenticity of the signature of any officer, employee or agent of the Bank or the Issuing and Paying Agent on any Note. Documents Incorporated The Bank shall supply the Agents with an by Reference: adequate supply of all documents incorporated by reference in the Offering Circular. Business Day: "Business Day" means for any Bank Note, a day that meets all the following applicable requirements: (A) for all Bank Notes, is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a bank holiday in Puerto Rico or a day on which banking institutions in New York City or in the city in which the Bank is headquartered generally are authorized or obligated by law, regulation or executive order to close; (B) if the Bank Note is a LIBOR Note (as defined in the Offering Circular), is also a London Business Day; and (C) if the G-7 8 Bank Note has a specified currency other than U.S. dollars, is also a day on which banking institutions are not authorized or obligated by law, regulation or executive order to close in the principal financial center of the country issuing the specified currency; and "London Business Day" means any day on which dealings in the relevant index currency are transacted in the London interbank market. Issuance: All Fixed Rate Notes of the Bank issued in book-entry form having the same Original Issue Date, Interest Rate, Interest Payment Dates, Regular Record Dates, Default Rate, Maturity Date, redemption and/or repayment terms, if any, original issue discount terms, if any, and otherwise having identical terms and provisions (collectively, the "Fixed Rate Terms") will be represented initially by a single Global Note in fully registered form; and all Floating Rate Notes of the Bank issued in book-entry form having the same Original Issue Date, interest rate basis upon which interest may be determined (each, an "Interest Rate Basis"), which may be the Commercial Paper Rate, LIBOR, the Treasury Rate, the Federal Funds Rate, the Prime Rate, the Eleventh District Cost of Funds Rate and any other rate set forth by the Bank in a Floating Rate Note, Initial Interest Rate, Index Maturity, Spread and/or Spread Multiplier, if any, Regular Record Dates, Maximum Interest Rate, if any, Minimum Interest Rate, if any, Interest Payment Dates, Interest Payment Period, Interest Reset Dates, Interest Reset Period, Alternate Rate Event Spread, LIBOR Screen, if any, Calculation Agent, Default Rate, Maturity Date, redemption or repayment terms, if any, original issue discount G-8 9 terms, if any, and otherwise having identical terms and provisions (collectively, the "Floating Rate Terms"), will be represented initially by a single Global Note. Identification: The Bank has arranged with the CUSIP Service Bureau of Standard & Poor's Ratings Group (the "CUSIP Service Bureau") for the reservation of one series of CUSIP numbers assignable to Notes with maturities more than one year and one series of CUSIP numbers assignable to Notes with maturities of 7 days or more up to and including one year, each of which series consists of approximately 900 CUSIP numbers which have been reserved for and relating to Global Notes, and the Bank has delivered to DTC such list of such CUSIP numbers. The Issuing and Paying Agent will assign CUSIP numbers to Global Notes as described below under Settlement Procedure C. DTC will notify the CUSIP Service Bureau periodically of the CUSIP numbers that the Issuing and Paying Agent has assigned to the Global Notes. The Issuing and Paying Agent will notify the Bank at any time when fewer than 100 of the reserved CUSIP numbers of any series remain unassigned to Global Notes and, if it deems it necessary, the Bank will reserve additional CUSIP numbers of such series for assignment to Global Notes. Upon obtaining such additional CUSIP numbers, the Bank will deliver a list of such additional numbers to the Issuing and Paying Agent and DTC. Book-Entry Notes having an aggregate principal amount in excess of $200,000,000 and otherwise required to be represented by the same Global Note will instead be represented by two or more Global Notes which shall all be assigned the same CUSIP number. Registration: Unless otherwise specified by DTC, each Global Note will be registered in the name of Cede & Co., as nominee for DTC, on the register maintained by the Issuing and Paying Agent. The owner of a Book-Entry Note (i.e., an owner of a beneficial interest in a Global Note) (or one or more indirect participant&in DTC designated by such owner) will designate one or more participants in DTC (with respect to such Book-Entry Note, the "Participants") to act as agent for such beneficial owner in connection with the book-entry system maintained by DTC, and DTC will record in book-entry form, in accordance with instructions provided by such Participants, a credit balance with respect to such Book-Entry Notes in the account of such Participants. The ownership interest of such beneficial owner in such Global Note will be recorded through the records of such Participants or through the separate records of such Participants and one or more indirect participants in DTC. G-9 10 Transfers: Transfers of a beneficial interest in a Global Note will be accomplished by book entries made by DTC and, in turn, by Participants (and in certain cases, one or more indirect participants in DTC) acting on behalf of beneficial transferors and transferees of such Global Note. Exchanges: The Issuing and Paying Agent may deliver to DTC and the CUSIP Service Bureau at any time a written notice specifying (a) the CUSIP numbers of two or more Global Notes outstanding G-10 11 on such date that represent Notes having the same Fixed Rate Terms or Floating Rate Terms, as the case may be (other than Original Issue Dates), and for which interest has been paid to the same date; (b) a date, occurring at least 30 days after such written notice is delivered and at least 30 days before the next Interest Payment Date for the related Book-Entry Notes, on which such Global Notes shall be exchanged for one or more replacement Global Notes; and (c) a new CUSIP number, obtained from the Issuing and Paying Agent, to be assigned to such replacement Global Note. Upon receipt of such notice, DTC will send to its Participants a written reorganization notice to the effect that such exchange will occur on such date. Prior to the specified exchange date, the Issuing and Paying Agent will deliver to the CUSIP Service Bureau written notice setting forth such exchange date and the new CUSIP number and stating that, as of such exchange date, the CUSIP numbers of the Global Notes to be exchanged will no longer be valid. On the specified exchange date, the Issuing and Paying Agent will exchange such Global Notes for a single Global Note bearing the new CUSIP number, and the CUSIP numbers of the exchanged Global Notes will, in accordance with CUSIP Service Bureau procedures, be cancelled and not immediately reassigned. Notwithstanding the foregoing, if the Global Notes to be exchanged exceed $200,000,000 in aggregate principal amount, one replacement Global Note will be authenticated and issued to represent each $200,000,000 of principal amount of the exchanged Global Notes and an additional Global Note or Global Notes will be authenticated and issued in G-11 12 exchange for any remaining principal amount of such exchanged Global Notes representing such Book-Entry Notes (see "Denominations" below). Denominations: All Book-Entry Notes will be denominated in U.S. dollars. Book-Entry Notes will be issued in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. Global Notes representing Book-Entry Notes will be denominated in principal amounts not in excess of $200,000,000. If one or more Book-Entry Notes having an aggregate principal amount in excess of $200,000,000 would, but for the preceding sentence, be represented by a single Global Note, then one Global Note will be issued to represent each $200,000,000 principal amount of such Book-Entry Note or Notes and an additional Global Note or Global Notes will be issued to represent any remaining principal amount of such Book-Entry Notes. In such case, each of the Global Notes representing such Book-Entry Notes shall be assigned the same CUSIP number. Each owner of a beneficial interest in one or more Book-Entry Notes is required to hold that beneficial interest in denominations of $100,000 principal amount or any integral multiple of $1,000 in excess thereof of each such Book-Entry Note at all times. Interest: General. Interest on each Book-Entry Note will accrue from the Original Issue Date or the most recent Interest Payment Date for which interest has been paid. Each payment of interest on a Book-Entry Note shall include interest accrued through the day preceding, as the case may be, the Interest Payment Date, Maturity Date or date of earlier redemption or G-12 13 repayment. Interest payable on the Maturity Date or date of earlier redemption or repayment of a Book-Entry Note will be payable to the holder to whom the principal of such Book-Entry Note is payable. DTC will arrange for each pending deposit message described under Settlement Procedure D below to be transmitted to Standard & Poor's Ratings Group, which will use the information in the message to include certain terms of the related Book-Entry Note in the appropriate daily bond report published by Standard & Poor's Ratings Group. Regular Record Dates. Unless otherwise specified in the applicable Pricing Supplement, the Regular Record Date with respect to any Interest Payment Date for a Fixed Rate Book-Entry Note with a maturity of more than one year shall be the June 1 or December 1 next preceding the applicable Interest Payment Date. The Regular Record Date with respect to any Interest Payment Date for a Floating Rate Book-Entry Note shall be the date 15 calendar days (whether or not a Business Day) prior to such Interest Payment Date. Unless otherwise specified in the applicable Pricing Supplement, interest on a Fixed Rate Book-Entry Note with a maturity of one year or less will be payable only at maturity to the person to whom principal shall be payable. Interest Payment Dates. Interest payments will be made on each Interest Payment Date commencing with the first Interest Payment Date following the Original Issue Date; provided, however, that the first payment of interest on any Note originally issued between a Regular Record Date and an G-13 14 Interest Payment Date will be made on the second Interest Payment Date following the Original Issue Date. If any Interest Payment Date of a Fixed Rate Book-Entry Note falls on a day which is not a Business Day, the related payment of interest on such Fixed Rate Book-Entry Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date. If any Interest Payment Date with respect to any Floating Rate Book-Entry Note would otherwise be a day that is not a Business Day, such Interest Payment Date will be the next succeeding Business Day, except that in the case of a LIBOR Book-Entry Note, if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. Fixed Rate Book-Entry Notes. Unless otherwise specified in the applicable Pricing Supplement, interest payments on Fixed Rate Book-Entry Notes having maturities of more than one year will be payable semi-annually on June 15 and December 15 of each year and on the Maturity Date. Unless otherwise specified in the applicable Pricing Supplement, interest on Fixed Rate Book-Entry Notes having maturities of one year or less will be payable only at maturity. Floating Rate Notes. Unless otherwise specified in the applicable Pricing Supplement, interest payments on Floating Rate Book-Entry Notes will be made as specified in the Floating Rate Book-Entry Note. G-14 15 Notice of Interest Payments and Regular Record Dates. On the first Business Day after any Regular Record Date, the Issuing and Paying Agent will deliver to DTC a written list of Regular Record Dates and Interest Payment Dates that will occur during the six-month period beginning on such first Business Day with respect to Floating Rate Book-Entry Notes. Promptly after each Interest Determination Date for Floating Rate Book-Entry Notes, the Issuing and Paying Agent will notify Standard & Poor's Ratings Group of the interest rates determined on such Interest Determination Date. Payments of Principal Payments of Interest Only. Promptly after and Interest: each Regular Record Date, the Issuing and Paying Agent will deliver to the Bank and DTC a written notice specifying by CUSIP number the amount of interest to be paid on each Book-Entry Note on the following Interest Payment Date (other than an Interest Payment Date coinciding with the Maturity Date) and the total of such amounts. DTC will confirm the amount payable on each Book-Entry Note on such Interest Payment Date by reference to the daily bond reports published by Standard & Poor's Ratings Group. On such Interest Payment Date, the Bank will pay to the Issuing and Paying Agent, and the Issuing and Paying Agent in turn will pay to DTC, an amount sufficient to pay the total amount of interest then due and owing (other than on the Maturity Date), at the times and in the manner set forth below under "Manner of Payment." Payments on the Maturity Date. On or about the first Business Day of each month, the Issuing and Paying Agent will deliver to DTC a written list of G-15 16 principal of, premium, if any, and interest on, each Book-Entry Note maturing on any Maturity Date, date of earlier redemption or Holder's Optional Repayment Date in the following month. The Issuing and Paying Agent and DTC will confirm the amounts of such principal of, premium, if any, and interest on, a Book-Entry Note on or about the fifth Business Day preceding the Maturity Date of such Book-Entry Note. On such Maturity Date, the Bank will pay to the Issuing and Paying Agent, and the Issuing and Paying Agent in turn will pay to DTC, the principal amount of such Book-Entry Note, together with interest and premium, if any, due on such Maturity Date, at the times and in the manner set forth below under "Manner of Payment." If any Maturity Date or date of earlier redemption or repayment of a Fixed Rate Book-Entry Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on, such Fixed Rate Book-Entry Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment were due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date or date of earlier redemption or repayment, as the case may be. Floating Rate Book-Entry Notes will mature on an Interest Payment Date. If any Interest Payment Date or date of earlier redemption or repayment with respect to any Floating Rate Book-Entry Note would otherwise be a day that is not a Business Day, such Interest Payment Date or date of earlier redemption or repayment will be the next succeeding Business Day, except that in the case of a LIBOR Note, if such Business Day is in the G-16 17 next succeeding calendar month, such Interest Payment Date or date of earlier redemption or repayment will be the immediately preceding Business Day. Promptly after payment to DTC of the principal of, premium, if any, and interest due on, the Maturity Date or Interest Payment Date of all Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will cancel such Global Note and deliver such Global Note to the Bank with an appropriate debit advice. On the first Business Day of each month, the Issuing and Paying Agent will deliver to the Bank a written statement indicating the total principal amount of outstanding Global Notes as of the close of business on the immediately preceding Business Day. Manner of Payment. The total amount of any principal of, premium, if any, and interest on, Book-Entry Notes due on any Interest Payment Date or Maturity Date shall be paid by the Bank to the Issuing and Paying Agent in immediately available funds available for use by the Issuing and Paying Agent no later than 10:00 A.M., New York City time, on such date. The Bank will make such payment on such Book-Entry Notes by instructing the Issuing and Paying Agent to withdraw funds from an account maintained by the Bank at the Issuing and Paying Agent. The Bank will confirm such instructions in writing to the Issuing and Paying Agent. Upon receipt of such funds, the Issuing and Paying Agent will pay by separate wire transfer (using message entry instructions in a form previously specified by DTC) to an account previously specified by DTC, in funds available for immediate use by DTC, G-17 18 each payment of principal of, premium, if any, and interest on, a Book-Entry Note on such date. Thereafter on such date, DTC will pay, in accordance with its SDFS operating procedures then in effect, such amounts in funds available for immediate use to the respective Participants in whose names Book-Entry Notes are recorded in the book-entry system maintained by DTC. Neither the Bank nor the Issuing and Paying Agent will have any responsibility or liability for the payment by DTC of the principal of, premium, if any, or interest on, the Book-Entry Notes to such Participants. Withholding Taxes. The amount of any taxes required under applicable law to be withheld from any interest payment on a Book-Entry Note will be determined and withheld by the Participant, indirect participant in DTC or other person responsible for forwarding payments and materials directly to the beneficial owner of such Book-Entry Note. Settlement Procedures: Settlement procedures with regard to Book-Entry Notes purchased by each Agent as principal or sold by each Agent, as agent of the Bank, will be as follows: A. The Presenting Agent will advise the Bank by telephone, confirmed by facsimile, of the following settlement information: 1. Taxpayer identification number of the purchaser. 2. Principal amount of such Book-Entry Notes. 3. (a) Fixed Rate Book-Entry Notes: G-18 19 (i) Interest Rate; (ii) Interest Payment Dates for Fixed Rate Book-Entry Notes; and (iii) Regular Record Dates for Fixed Rate Book-Entry Notes with maturities of more than one year (if other than the June 1 or December 1 prior to each Interest Payment Date). (b) Floating Rate Book-Entry Notes: (i) Initial Interest Rate; (ii) Interest Rate Basis; (iii) Index Maturity; (iv) Spread and/or Spread Multiplier, if any; (v) Regular Record Dates (if other than the 15th day prior to each Interest Payment Date); (vi) Maximum Interest Rate, if any; (vii) Minimum Interest Rate, if any; (viii) Interest Payment Dates; (ix) Interest Payment Period; (x) Interest Reset Dates; (xi) Calculation Agent; (xii) Interest Reset Period; G-19 20 (xiii) Alternate Rate Event Spread; (xiv) LIBOR Screen, if any; 4. Price to public, if any, of such Book-Entry Notes (if such Book-Entry Notes are not being offered "at the market"). 5. Trade Date. 6. Settlement Date (Original Issue Date). 7. Maturity Date. 8. Redemption provisions, if any, including: Initial Redemption Date, Initial Redemption Percentage and Annual Redemption Percentage Reduction. Repayment provisions, if any, including: Holder's Optional Repayment Date(s). 9. Net proceeds to the Bank. 10. Whether such Book-Entry Notes are being sold to the Presenting Agent as principal or to an investor or other purchaser through the Presenting Agent acting as agent for the Bank. 11. The presenting Agent's commission or discount, as applicable. 12. Whether such Book-Entry Notes are being issued with Original Issue Discount and the terms thereof. 13. Default Rate. G-20 21 14. Such other information specified with respect to such Book-Entry Notes. B. If any offer to purchase a Note is accepted by the Bank, the Bank, with the approval of the Presenting Agent, will prepare a Pricing Supplement reflecting the information set forth in Settlement Procedure A above, and will transmit the Pricing Supplement to the Presenting Agent by electronic or facsimile transmission. C. The Bank will advise the Issuing and Paying Agent by electronic means, telephone (confirmed in writing at any time on the same date), facsimile transmission or by other acceptable means of the information set forth in Settlement Procedure A above, and the name of the Presenting Agent. The Issuing and Paying Agent, on behalf of the Bank, will assign a CUSIP number of the appropriate series to the Global Note representing such Book-Entry Notes and will notify the Bank by facsimile transmission or other electronic transmission of such CUSIP number as soon as practicable, and as soon thereafter as practicable, the Bank will notify the Presenting Agent by telephone of such CUSIP number. Each such instruction given by the Bank to the Issuing and Paying Agent will constitute a representation and warranty by the Bank to the Issuing and Paying Agent and the Agents that (i) the issuance and delivery of such Global Note has been duly and validly authorized by the Bank and G-21 22 (ii) that such Global Note, when completed, authenticated and delivered pursuant to the Issuing and Paying Agency Agreement, will constitute the valid and legally binding obligation of the Bank. D. The Issuing and Paying Agent will communicate to DTC and the Presenting Agent through DTC's Participant Terminal System a pending deposit message specifying the following settlement information: 1. The information set forth in Settlement Procedure A. 2. The identification numbers of the participant accounts maintained by DTC on behalf of the Issuing and Paying Agent and the Presenting Agent. 3. Identification as a Fixed Rate Book-Entry Note or Floating Rate Book-Entry Note. 4. The initial Interest Payment Date for each Global Note representing such Book-Entry Notes, the number of days by which such date succeeds the related Regular Record Date for DTC purposes and, if then calculable, the amount of interest payable on such Interest Payment Date (which amount shall have been confirmed by the Issuing and Paying Agent). 5. The CUSIP number of each Global Note representing such Book-Entry Notes. 6. Whether such Global Note represents any other Notes is- G-22 23 sued or to be issued in book-entry form. E. The Issuing and Paying Agent will complete, authenticate and deliver to DTC by retention as custodian for DTC the Global Note representing such Book-Entry Notes in a form that has been approved by the Bank, the Issuing and Paying Agent and the Agents. F. DTC will credit the Book-Entry Notes represented by such Global Note to the participant account of the Issuing and Paying Agent maintained by DTC except as provided in Settlement Procedure H below. G. The Issuing and Paying Agent will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Book-Entry Notes to the Issuing and Paying Agent's participant account and credit such Book-Entry Notes to the participant account of the Presenting Agent maintained by DTC and (ii) to debit the settlement account of the Presenting Agent and credit the settlement account of the Issuing and Paying Agent maintained by DTC, in an amount equal to the price of such Book-Entry Notes less such Agent's commission. Any entry of such deliver order shall be deemed to constitute a representation and warranty by the Issuing and Paying Agent to DTC that (i) the Global Note representing such Book-Entry Notes has been issued and authenticated and (ii) the Issuing and Paying Agent is holding such Global Note pursuant to the Certificate Agreement. G-23 24 H. In the case of Book-Entry Notes sold through an Agent acting as agent, the Presenting Agent will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Book-Entry Notes to the Presenting Agent's participant account and credit such Book-Entry Notes to the participant account of the Participants maintained by DTC and (ii) to debit the settlement accounts of such Participants and credit the settlement account of the Presenting Agent maintained by DTC in an amount equal to the initial public offering price of such Book-Entry Notes. I. Transfers of funds in accordance with SDFS deliver orders described in Settlement Procedures G and H will be settled in accordance with SDFS operating procedures in effect on the Settlement Date. J. The Issuing and Paying Agent will credit to an account of the Bank maintained at the Issuing and Paying Agent funds available for immediate use in the amount transferred to the Issuing and Paying Agent in accordance with Settlement Procedure G. K. In the case of Book-Entry Notes sold through an Agent acting as agent, the Presenting Agent will confirm the purchase of such Book-Entry Notes to the purchaser either by transmitting to the Participant with respect to such Book-Entry Notes a confirmation order through DTC's Participant Terminal System or by mailing a G-24 25 written confirmation to such purchaser. Settlement Procedures For offers to purchase Book-Entry Notes Timetable: accepted by the Bank, Settlement Procedures A through K set forth above shall be completed as soon as possible. However, all information on sales settling one day or more after the Trade Date will be transmitted to DTC no later than 10:00 a.m. on the Settlement Date. If a sale is to be settled on the same Business Day as the Trade Date, Settlement Procedure A shall be completed no later than 11:00 a.m. on such Business Day, Settlement Procedure C shall be completed no later than 12:00 p.m. on such Business Day, and Settlement Procedure D shall be completed no later than 1:00 p.m. on such Business Day. If a sale is to be settled more than one Business Day after the Trade Date, Settlement Procedures A and B must be completed no later than 4:00 p.m. on the Trade Date and Settlement Procedures C and D may, if necessary, be completed at any time on the first Business Day after such Trade Date. Settlement Procedure I is subject to extension in accordance with any extension of Fedwire closing deadlines and in the other events specified in the SDFS operating procedures in effect on the Settlement Date. If settlement of a Book-Entry Note is rescheduled or cancelled, the Issuing and Paying Agent will deliver to DTC, through DTC's Participant Terminal System, a cancellation message to such effect by no later than 2:00 p.m., New York City time, on the Business Day immediately preceding the scheduled G-25 26 Settlement Date. Failure to Settle: If the Issuing and Paying Agent fails to enter an SDFS deliver order with respect to a Book-Entry Note pursuant to Settlement Procedure G, then the Issuing and Paying Agent may deliver to DTC, through DTC's Participant Terminal System, as soon as practicable a withdrawal message instructing DTC to debit such Book-Entry Note to the participant account of the Issuing and Paying Agent maintained at DTC. DTC will process the withdrawal message, provided that such participant account contains a principal amount of the Global Note representing such Book-Entry Note that is at least equal to the principal amount to be debited. If withdrawal messages are processed with respect to all Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will mark such Global Note "cancelled," make appropriate entries in its records and return such Global Note to the Bank. The CUSIP number assigned to such Global Note shall, in accordance with CUSIP Service Bureau procedures, be cancelled and not immediately reassigned. If withdrawal messages are processed with respect to some of the Book-Entry Notes represented by a Global Note, the Issuing and Paying Agent will exchange such Global Note for two Global Notes, one of which shall represent the Book-Entry Notes for which such withdrawal messages are processed and shall be cancelled immediately after issuance, and the other of which shall represent the other Book-Entry Notes previously represented by the surrendered Global Note and shall bear the CUSIP number of the surrendered Global Note. In the case of any Book-Entry Note G-26 27 sold through an Agent, acting as agent, if the purchase price for any Book-Entry Note is not timely paid to the Participants with respect to such Book-Entry Note by the beneficial purchaser thereof (or a person, including an indirect participant in DTC, acting on behalf of such purchaser), such Participants and, in turn, the applicable Agent may enter SDFS deliver orders through DTC's Participant Terminal System reversing the orders entered pursuant to Settlement Procedures G and H, respectively. Thereafter, the Issuing and Paying Agent will deliver the withdrawal message and take the related actions described in the preceding paragraph. If such failure shall have occurred for any reason other than default by the applicable Agent to perform its obligations hereunder or under the Distribution Agreement, the Bank will reimburse such Agent on an equitable basis for its loss of the use of funds during the period when the funds were credited to the account of the Bank. Notwithstanding the foregoing, upon any failure to settle with respect to a Book-Entry Note, DTC may take any actions in accordance with its SDFS operating procedures then in effect. In the event of a failure to settle with respect to a Book-Entry Note that was to have been represented by a Global Note also representing other Book-Entry Notes, the Issuing and Paying Agent will provide, in accordance with Settlement Procedure E, for the authentication and issuance of a Global Note representing such remaining Book-Entry Notes and will make appropriate entries in its records. G-27 EX-10.23 11 g67461ex10-23.txt FIXED RATE 1 EXHIBIT 10.23 THIS NOTE IS AN OBLIGATION SOLELY OF BANCO POPULAR DE PUERTO RICO (THE "BANK") AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY ANY OTHER BANK OR POPULAR, INC. THIS NOTE DOES NOT EVIDENCE DEPOSITS OF THE BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THIS NOTE RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES (AS PROVIDED IN SECTION 11(D)(11) OF THE FEDERAL DEPOSIT INSURANCE ACT) AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THIS NOTE WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THIS NOTE COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY") TO THE BANK OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR, OR IN LIEU OF, THIS NOTE IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THIS NOTE IS ISSUABLE ONLY IN FULLY REGISTERED FORM IN MINIMUM DENOMINATIONS OF $100,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. EACH OWNER OF A BENEFICIAL INTEREST IN THIS NOTE MUST BE AN INSTITUTIONAL INVESTOR WHO IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $100,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF THIS NOTE AT ALL TIMES. No. FXR-__________ CUSIP NO.: ___________ REGISTERED BANCO POPULAR DE PUERTO RICO GLOBAL BANK NOTE (Fixed Rate) ORIGINAL ISSUE DATE: PRINCIPAL AMOUNT: 2 INTEREST RATE: ______________% MATURITY DATE: INTEREST PAYMENT DATE(S): REGULAR RECORD DATES (FOR NOTES [ ] At Maturity only WITH MATURITIES OF GREATER THAN [ ] May 15 and November 15 ONE YEAR) [ ] Other: (if other than May 1 or November 1, prior to each Interest Payment Date): INITIAL REDEMPTION INITIAL REDEMPTION DATE: PERCENTAGE: ANNUAL REDEMPTION HOLDER'S OPTIONAL PERCENTAGE REDUCTION: REPAYMENT DATE(S): DAY COUNT CONVENTION [ ] 30/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/ACTUAL FOR THE PERIOD FROM TO . ADDENDUM ATTACHED: ORIGINAL ISSUE DISCOUNT: [ ] YES [ ] YES [ ] NO [ ] NO Total Amount of OID: DEFAULT RATE: _________% Yield to Maturity: Initial Accrual Period: OTHER PROVISIONS: The bank, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of _________________________ United States Dollars on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date) and to pay interest thereon from and including the Original Issue Date specified above or from and including the most recent interest payment date to which interest on this Note (or any predecessor Note) has been paid or duly provided for, semi-annually on May 15 and November 15 of each year (unless otherwise specified on the face hereof) (each, an "Interest Payment Date") and at maturity or upon earlier redemption or repayment, if applicable, commencing on the first Interest Payment Date next succeeding the Original Issue Date (or, if the Original Issue Date is between a Regular Record Date (as defined below) and the Interest Payment Date immediately following such Regular Record Date, on the second Interest Payment Date following the Original Issue Date), at the Interest Rate per annum specified above, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the Default Rate per annum specified above on any overdue principal and premium, if any, and on any overdue installment of interest. If no Default Rate is specified above, the Default Rate shall be the Interest Rate on this Note specified above. The interest so payable, and punctually paid or duly provided for, on -2- 3 any Interest Payment Date will be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on the Regular Record Date, which shall be the May 1 and November 1 (whether or not a Business Day (as defined below)), as the case may be, prior to such Interest Payment Date (unless otherwise specified on the face hereof) (each, a "Regular Record Date"); provided, however, that interest payable at maturity or upon earlier redemption or repayment, if applicable, will be payable to the person to whom principal shall be payable. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the holder as of the close of business on such Regular Record Date, and may either be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on a special record date for the payment of such defaulted interest (the "Special Record Date") to be fixed by the Bank, notice of which shall be given to the holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner. Payment of principal of, premium, if any, and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Bank will at all times appoint and maintain an issuing and paying agent (the "Issuing and Paying Agent", which term shall include any successor Issuing and Paying Agent), authorized by the Bank to pay principal of, premium, if any, and interest on this Note on behalf of the Bank pursuant to an issuing and paying agency agreement (the "Issuing and Paying Agency Agreement") and having an office or agency (the "Issuing and Paying Agent Office") in The City of New York or the city in which the Bank is headquartered (the "Place of Payment"), where this Note may be presented or surrendered for payment and where notices, designations or requests in respect of payments with respect to this Note may be served. The Bank has initially appointed The Chase Manhattan Bank as the Issuing and Paying Agent, with the Issuing and Paying Agent Office currently located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration. The Bank may remove the Issuing and Paying Agent pursuant to the terms of the Issuing and Paying Agency Agreement and may appoint a successor Issuing and Paying Agent. Payment of principal of, premium, if any, and interest on this Note due at maturity or upon earlier redemption or repayment, if applicable, will be made in immediately available funds upon presentation and surrender of this Note to the Issuing and Paying Agent at the Issuing and Paying Agent Office; provided that this Note is presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payment in accordance with its normal -3- 4 procedures. Payments of interest on this Note (other than at maturity or upon earlier redemption or repayment) will be made by wire transfer to such account as has been appropriately designated to the Issuing and Paying Agent by the person entitled to such payments. Reference herein to "this Note", "hereof", "herein" and comparable terms shall include an Addendum hereto if an Addendum is specified above. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. -4- 5 IN WITNESS WHEREOF, the Bank has cause this Note to be duly executed. By: ---------------------------------------- Authorized Signatory By: ---------------------------------------- Authorized Signatory Dated: ISSUING AND PAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Issuing and Paying Agency Agreement. THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: ---------------------------------------- Authorized Signatory -5- 6 [Reverse] This Note is one of a duly authorized issue of Bank Notes due from 7 days to 15 years from date of issue of the Bank (the "Notes"). Payments of interest hereon will include interest accrued to but excluding the relevant Interest Payment Date or Maturity Date or date of earlier redemption or repayment, as the case may be. Unless otherwise specified on the face hereof, interest on Notes with maturities of more than one year will be computed on the basis of a 360-day year of twelve 30-day months. Unless otherwise specified on the face hereof, interest on Notes with maturities of one year or less will be computed on the basis of the actual number of days in the year divided by 360 and will be payable only at maturity to the person to whom principal shall be payable. Any provision contained herein with respect to the calculation of the rate of interest applicable to this Note, its Interest Payment Dates or any other matter relating hereto may be modified as specified in an Addendum relating hereto if so specified on the face hereof. If any Interest Payment Date, Maturity Date or date of earlier redemption or repayment of this Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on this Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Maturity Date or date of earlier redemption or repayment, as the case may be. "Business Day" means, unless otherwise specified on the face hereof, a day that meets all the following applicable requirements: (A) is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a bank holiday in Puerto Rico or a day on which banking institutions in New York City or in the city in which the Bank is headquartered generally are authorized or obligated by law, regulation or executive order to close; and (B) if the Note has a specified currency other than U.S. dollars, is also a day on which banking institutions are not authorized or obligated by law, regulation or executive order to close in the principal financial center of the country issuing the specified currency. This Note will not be subject to any sinking fund. If so provided on the face of this Note, this Note may be redeemed by the Bank either in whole or in part on (unless otherwise specified on the face hereof) and after the Initial Redemption Date, if any, specified on the face hereof. If no Initial Redemption Date is specified on the face hereof, this Note may not be redeemed prior to the Maturity Date. -6- 7 On and after the Initial Redemption Date, if any, this Note may be redeemed in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000) at the option of the Bank at the applicable Redemption Price (as defined below), together with unpaid interest accrued hereon at the applicable rate borne by this Note to the date of redemption (each such date, a "Redemption Date"), on written notice given not more than 60 nor less than 30 calendar days prior to the Redemption Date to the registered holder hereof (unless otherwise specified on the face hereof). Whenever less than all the Notes at any time outstanding are to be redeemed, the terms of the Notes to be so redeemed shall be selected by the Bank. If less than all the Notes with identical terms at any time outstanding are to be redeemed, the Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date specified on the face hereof by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. The Note may be subject to repayment at the option of the holder hereof in accordance with the terms hereof on any Holder's Optional Repayment Date(s), if any, specified on the face hereof. If no Holder's Optional Repayment Date is specified on the face hereof, this Note will not be repayable at the option of the holder hereof prior to maturity. On any Holder's Optional Repayment Date, this Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof will be at least $100,000) at the option of the holder hereof at a repayment price equal to 100% of the principal amount to the repaid, together with accrued and unpaid interest hereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof on a Holder's Optional Repayment Date, this Note must be delivered, with the form entitled "Option to Elect Repayment" attached hereto duly completed, to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other address which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to such Holder's Optional Repayment Date. In the event of repayment of this Note in part only, a new Note for the unrepaid portion hereof shall be issued in the name of the -7- 8 holder hereof upon the surrender hereof. Exercise of such repayment option by the holder hereof shall be irrevocable. If this Note is an Original Issue Discount Note and if an Event of Default with respect to this Note shall have occurred and be continuing, the Default Amount (as defined hereafter) of this Note may be declared due and payable in the manner and with the effect provided herein. The "Default Amount" shall be equal to the adjusted issue price as of the first day of the accrual period as determined under Final Treasury Regulation Section 1.1275-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended, in which the date of acceleration occurs increased by the daily portion of the original issue discount for each day in such accrual period ending on the date of acceleration, as determined under Final Treasury Regulation Section 1.1272-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended. Upon payment of (i) the principal, or premium, if any, so declared due and payable and (ii) interest on any overdue principal and overdue interest or premium, if any (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Bank's obligations in respect of the payment of principal of, premium, if any, and interest on this Note shall terminate. In case any Note shall at any time become mutilated, destroyed, lost or stolen, and such Note or evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent shall be delivered to the Issuing and Paying Agent, the Bank shall issue a new Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of the Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Note, only upon receipt of evidence satisfactory to the Bank and the Issuing and Paying Agent that such Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to the Bank and the Issuing and Paying Agent. Upon the issuance of any substituted Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation and delivery of a new Note. If any Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the holder with the provisions of this paragraph. -8- 9 No recourse shall be had for the payment of principal of, premium, if any, or interest on this Note for any claim based hereon, otherwise in respect hereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor corporation, banking association or other legal entity (collectively, "corporation"), either directly or through the Bank or any corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The occurrence of any of the following events shall constitute an "Event of Default" with respect to this Note: (i) default in the payment of any interest with respect to any of the Notes issued by the Bank when due, which continues for 30 calendar days; (ii) default in the payment of any principal of, or premium, if any, on any of the Notes issued by the Bank when due; (iii) the entry by a court having jurisdiction in the premises of (a) a decree or order for relief in respect of the Bank in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order appointing a conservator, receiver, liquidator, assignee, trustee, sequestrator or any other similar official of the Bank, or of substantially all of the property of the Bank, or ordering the winding up or liquidation of the affairs of the Bank, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Bank to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding, or the filing by the Bank of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Bank to the filing of such petition or to the appointment of or taking possession by the custodian, conservator, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Bank or of substantially all of the property of the Bank, or the making by the Bank of an assignment for the benefit of creditors, or the taking of corporate action by the Bank in furtherance of any such action. If an Event of Default shall occur and be continuing, the holder of this Note may declare the principal -9- 10 amount of, accrued interest and premium, if any, on this Note due and payable immediately by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. Any Event of Default with respect to this Note may be waived by the holder hereof. The Issuing and Paying Agency Agreement provides that the Bank will promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent will promptly mail by first-class mail, postage prepaid, copies of such notice to the holders of the Notes, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Nothing contained herein shall present any consolidation or merger of the Bank with any other corporation or successive consolidations or mergers in which the Bank or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Bank as an entirety or substantially as an entirety to any other corporation authorized to acquire and operate the same; provided, however, (and the Bank hereby covenants and agrees) that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) immediately after such consolidation, merger, sale or conveyance the corporation (whether the Bank or such other corporation) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of the terms, covenants and conditions of the Notes to be observed or performed by the Bank; and (ii) the corporation (if other than the Bank) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall be organized under the laws of the United States of America, any state thereof, the District of Columbia or the Commonwealth of Puerto Rico and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest on this Note. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation of the due and punctual performance of all of the covenants in the Notes to be performed or observed by the Bank, such successor corporation shall succeed to and be substituted for the Bank with the same effect as if it had been named in this Note as the Bank and thereafter the predecessor corporation shall be relieved of all obligations and covenants in this Note and may be liquidated and dissolved. Any action by the holder of this Note shall bind all future holders of this Note, and of any Note issued in exchange or -10- 11 substitution herefor or in place hereof, in respect of anything done or permitted by the Bank or by the Issuing and Paying Agent in pursuance of such action. The Issuing and Paying Agent shall maintain at its offices a register (the register maintained in such office or any other office or agency of the Issuing and Paying Agent in The City of New York herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Issuing and Paying Agent shall provide for the registration of the Notes and of transfers of the Notes. The transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Issuing and Paying Agent in the Place of Payment, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Issuing and Paying Agent duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No provision of this Note shall alter or impair the obligation of the Bank, which is absolute and unconditional, to pay principal of, premium, if any, and interest on this Note in U.S. dollars at the times, places and rate herein prescribed in accordance with its terms. No service charge shall be made to a holder of this Note for any transfer or exchange of this Note, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Beneficial interests represented by this Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, only if (x) The Depository Trust Company, as Depositary (the "Depositary") notifies the Bank that it is unwilling or unable to continue as Depositary for this Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 calendar days, or (y) the Bank in its sole discretion determines not to have such beneficial interests represented by this Note. Any Note representing such beneficial interests that is exchangeable pursuant to the preceding sentence shall be exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. Such definitive Notes shall be registered -11- 12 in the name or names of such person or persons as the Depositary shall instruct the Issuing and Paying Agent. Prior to due presentment of this Note for registration of transfer, the Bank, the Issuing and Paying Agent or any agent of the Bank or the Issuing and Paying Agent may treat the holder in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. All notices to the Bank under this Note shall be in writing and addressed to the Bank at 209 Munoz Rivera Avenue, Suite 913, Hato Rey, Puerto Rico 00918, Attention: Richard Barrios, or to such other address of the Bank as the Bank may notify the holders of the Notes. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles and all applicable federal laws and regulations. -12- 13 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ___________ Custodian ___________ (Cust) (Minor) under Uniform Gift to Minors Act --------------------------------- (State) Additional abbreviations may also be used though not in the above list. -13- 14 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto ______________________________________________________________ _______________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [_____________________] _______________________________________________________________________________ _______________________________________________________________________________ (Please print or typewrite name and address, including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints___________________________________________________________________ _______________________________________________________________________________ to transfer said Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated: ---------------- ------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - ------------------------ Signature Guarantee -14- 15 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Bank to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount hereof to be repaid, together with accrued and unpaid interest hereon, payable to the date of repayment, to the undersigned, at _______________________________________________________________ _______________________________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the undersigned must give notice to the Issuing and Paying~Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other place or places of which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to the date of repayment, with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000) which the holder elects to have repaid and specify the denomination or denominations (which shall be $100,000 or an integral multiple of $1,000 in excess thereof) of the Notes to be issued to the holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid): $------------------------ ------------------------------------------- NOTICE: The signature on this "Option to Dated: Elect Repayment" form must correspond ------------------- with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - ------------------------ Signature Guarantee -15- 16 EXHIBIT____ THIS NOTE IS AN OBLIGATION SOLELY OF BANCO POPULAR DE PUERTO RICO (THE "BANK") AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY ANY OTHER BANK OR POPULAR, INC. THIS NOTE DOES NOT EVIDENCE DEPOSITS OF THE BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THIS NOTE RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES (AS PROVIDED IN SECTION 11(D)(11) OF THE FEDERAL DEPOSIT INSURANCE ACT) AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THIS NOTE WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THIS NOTE COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY") TO THE BANK OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR, OR IN LIEU OF, THIS NOTE IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THIS NOTE IS ISSUABLE ONLY IN FULLY REGISTERED FORM IN MINIMUM DENOMINATIONS OF $100,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. EACH OWNER OF A BENEFICIAL INTEREST IN THIS NOTE MUST BE AN INSTITUTIONAL INVESTOR WHO IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $100,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF THIS NOTE AT ALL TIMES. No. FXR-__________ CUSIP NO.: ___________ REGISTERED BANCO POPULAR DE PUERTO RICO GLOBAL BANK NOTE (Fixed Rate) ORIGINAL ISSUE DATE: PRINCIPAL AMOUNT: 17 INTEREST RATE: ______________% MATURITY DATE: INTEREST PAYMENT DATE(S): REGULAR RECORD DATES (FOR NOTES [ ] At Maturity only WITH MATURITIES OF GREATER THAN [ ] May 15 and November 15 ONE YEAR) [ ] Other: (if other than May 1 or November 1, prior to each Interest Payment Date): INITIAL REDEMPTION INITIAL REDEMPTION DATE: PERCENTAGE: ANNUAL REDEMPTION HOLDER'S OPTIONAL PERCENTAGE REDUCTION: REPAYMENT DATE(S): DAY COUNT CONVENTION [ ] 30/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/360 FOR THE PERIOD FROM TO . [ ] ACTUAL/ACTUAL FOR THE PERIOD FROM TO . ADDENDUM ATTACHED: ORIGINAL ISSUE DISCOUNT: [ ] YES [ ] YES [ ] NO [ ] NO Total Amount of OID: DEFAULT RATE: _________% Yield to Maturity: Initial Accrual Period: OTHER PROVISIONS: The bank, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of _________________________ United States Dollars on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date) and to pay interest thereon from and including the Original Issue Date specified above or from and including the most recent interest payment date to which interest on this Note (or any predecessor Note) has been paid or duly provided for, semi-annually on May 15 and November 15 of each year (unless otherwise specified on the face hereof) (each, an "Interest Payment Date") and at maturity or upon earlier redemption or repayment, if applicable, commencing on the first Interest Payment Date next succeeding the Original Issue Date (or, if the Original Issue Date is between a Regular Record Date (as defined below) and the Interest Payment Date immediately following such Regular Record Date, on the second Interest Payment Date following the Original Issue Date), at the Interest Rate per annum specified above, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the Default Rate per annum specified above on any overdue principal and premium, if any, and on any overdue installment of interest. If no Default Rate is specified above, the Default Rate shall be the Interest Rate on this Note specified above. The interest so payable, and punctually paid or duly provided for, on -2- 18 any Interest Payment Date will be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on the Regular Record Date, which shall be the May 1 and November 1 (whether or not a Business Day (as defined below)), as the case may be, prior to such Interest Payment Date (unless otherwise specified on the face hereof) (each, a "Regular Record Date"); provided, however, that interest payable at maturity or upon earlier redemption or repayment, if applicable, will be payable to the person to whom principal shall be payable. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the holder as of the close of business on such Regular Record Date, and may either be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on a special record date for the payment of such defaulted interest (the "Special Record Date") to be fixed by the Bank, notice of which shall be given to the holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner. Payment of principal of, premium, if any, and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Bank will at all times appoint and maintain an issuing and paying agent (the "Issuing and Paying Agent", which term shall include any successor Issuing and Paying Agent), authorized by the Bank to pay principal of, premium, if any, and interest on this Note on behalf of the Bank pursuant to an issuing and paying agency agreement (the "Issuing and Paying Agency Agreement") and having an office or agency (the "Issuing and Paying Agent Office") in The City of New York or the city in which the Bank is headquartered (the "Place of Payment"), where this Note may be presented or surrendered for payment and where notices, designations or requests in respect of payments with respect to this Note may be served. The Bank has initially appointed The Chase Manhattan Bank as the Issuing and Paying Agent, with the Issuing and Paying Agent Office currently located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration. The Bank may remove the Issuing and Paying Agent pursuant to the terms of the Issuing and Paying Agency Agreement and may appoint a successor Issuing and Paying Agent. Payment of principal of, premium, if any, and interest on this Note due at maturity or upon earlier redemption or repayment, if applicable, will be made in immediately available funds upon presentation and surrender of this Note to the Issuing and Paying Agent at the Issuing and Paying Agent Office; provided that this Note is presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payment in accordance with its normal -3- 19 procedures. Payments of interest on this Note (other than at maturity or upon earlier redemption or repayment) will be made by wire transfer to such account as has been appropriately designated to the Issuing and Paying Agent by the person entitled to such payments. Reference herein to "this Note", "hereof", "herein" and comparable terms shall include an Addendum hereto if an Addendum is specified above. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. -4- 20 IN WITNESS WHEREOF, the Bank has cause this Note to be duly executed. By: -------------------------------------------- Authorized Signatory By: -------------------------------------------- Authorized Signatory Dated: ISSUING AND PAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Issuing and Paying Agency Agreement. THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: -------------------------------------------- Authorized Signatory -5- 21 [Reverse] This Note is one of a duly authorized issue of Bank Notes due from 7 days to 15 years from date of issue of the Bank (the "Notes"). Payments of interest hereon will include interest accrued to but excluding the relevant Interest Payment Date or Maturity Date or date of earlier redemption or repayment, as the case may be. Unless otherwise specified on the face hereof, interest on Notes with maturities of more than one year will be computed on the basis of a 360-day year of twelve 30-day months. Unless otherwise specified on the face hereof, interest on Notes with maturities of one year or less will be computed on the basis of the actual number of days in the year divided by 360 and will be payable only at maturity to the person to whom principal shall be payable. Any provision contained herein with respect to the calculation of the rate of interest applicable to this Note, its Interest Payment Dates or any other matter relating hereto may be modified as specified in an Addendum relating hereto if so specified on the face hereof. If any Interest Payment Date, Maturity Date or date of earlier redemption or repayment of this Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on this Note shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Maturity Date or date of earlier redemption or repayment, as the case may be. "Business Day" means, unless otherwise specified on the face hereof, a day that meets all the following applicable requirements: (A) is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a bank holiday in Puerto Rico or a day on which banking institutions in New York City or in the city in which the Bank is headquartered generally are authorized or obligated by law, regulation or executive order to close; and (B) if the Note has a specified currency other than U.S. dollars, is also a day on which banking institutions are not authorized or obligated by law, regulation or executive order to close in the principal financial center of the country issuing the specified currency. This Note will not be subject to any sinking fund. If so provided on the face of this Note, this Note may be redeemed by the Bank either in whole or in part on (unless otherwise specified on the face hereof) and after the Initial Redemption Date, if any, specified on the face hereof. If no Initial Redemption Date is specified on the face hereof, this Note may not be redeemed prior to the Maturity Date. -6- 22 On and after the Initial Redemption Date, if any, this Note may be redeemed in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000) at the option of the Bank at the applicable Redemption Price (as defined below), together with unpaid interest accrued hereon at the applicable rate borne by this Note to the date of redemption (each such date, a "Redemption Date"), on written notice given not more than 60 nor less than 30 calendar days prior to the Redemption Date to the registered holder hereof (unless otherwise specified on the face hereof). Whenever less than all the Notes at any time outstanding are to be redeemed, the terms of the Notes to be so redeemed shall be selected by the Bank. If less than all the Notes with identical terms at any time outstanding are to be redeemed, the Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by it. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date specified on the face hereof by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. The Note may be subject to repayment at the option of the holder hereof in accordance with the terms hereof on any Holder's Optional Repayment Date(s), if any, specified on the face hereof. If no Holder's Optional Repayment Date is specified on the face hereof, this Note will not be repayable at the option of the holder hereof prior to maturity. On any Holder's Optional Repayment Date, this Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof will be at least $100,000) at the option of the holder hereof at a repayment price equal to 100% of the principal amount to the repaid, together with accrued and unpaid interest hereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof on a Holder's Optional Repayment Date, this Note must be delivered, with the form entitled "Option to Elect Repayment" attached hereto duly completed, to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other address which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to such Holder's Optional Repayment Date. In the event of repayment of this Note in part only, a new Note for the unrepaid portion hereof shall be issued in the name of the -7- 23 holder hereof upon the surrender hereof. Exercise of such repayment option by the holder hereof shall be irrevocable. If this Note is an Original Issue Discount Note and if an Event of Default with respect to this Note shall have occurred and be continuing, the Default Amount (as defined hereafter) of this Note may be declared due and payable in the manner and with the effect provided herein. The "Default Amount" shall be equal to the adjusted issue price as of the first day of the accrual period as determined under Final Treasury Regulation Section 1.1275-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended, in which the date of acceleration occurs increased by the daily portion of the original issue discount for each day in such accrual period ending on the date of acceleration, as determined under Final Treasury Regulation Section 1.1272-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended. Upon payment of (i) the principal, or premium, if any, so declared due and payable and (ii) interest on any overdue principal and overdue interest or premium, if any (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Bank's obligations in respect of the payment of principal of, premium, if any, and interest on this Note shall terminate. In case any Note shall at any time become mutilated, destroyed, lost or stolen, and such Note or evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent shall be delivered to the Issuing and Paying Agent, the Bank shall issue a new Note, of like tenor and principal amount, having a serial number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of the Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Note, only upon receipt of evidence satisfactory to the Bank and the Issuing and Paying Agent that such Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to the Bank and the Issuing and Paying Agent. Upon the issuance of any substituted Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation and delivery of a new Note. If any Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the holder with the provisions of this paragraph. -8- 24 No recourse shall be had for the payment of principal of, premium, if any, or interest on this Note for any claim based hereon, otherwise in respect hereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor corporation, banking association or other legal entity (collectively, "corporation"), either directly or through the Bank or any corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The occurrence of any of the following events shall constitute an "Event of Default" with respect to this Note: (i) default in the payment of any interest with respect to any of the Notes issued by the Bank when due, which continues for 30 calendar days; (ii) default in the payment of any principal of, or premium, if any, on any of the Notes issued by the Bank when due; (iii) the entry by a court having jurisdiction in the premises of (a) a decree or order for relief in respect of the Bank in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order appointing a conservator, receiver, liquidator, assignee, trustee, sequestrator or any other similar official of the Bank, or of substantially all of the property of the Bank, or ordering the winding up or liquidation of the affairs of the Bank, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Bank to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding, or the filing by the Bank of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Bank to the filing of such petition or to the appointment of or taking possession by the custodian, conservator, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Bank or of substantially all of the property of the Bank, or the making by the Bank of an assignment for the benefit of creditors, or the taking of corporate action by the Bank in furtherance of any such action. If an Event of Default shall occur and be continuing, the holder of this Note may declare the principal -9- 25 amount of, accrued interest and premium, if any, on this Note due and payable immediately by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. Any Event of Default with respect to this Note may be waived by the holder hereof. The Issuing and Paying Agency Agreement provides that the Bank will promptly notify, and provide copies of any such notice to, the Issuing and Paying Agent, and the Issuing and Paying Agent will promptly mail by first-class mail, postage prepaid, copies of such notice to the holders of the Notes, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Nothing contained herein shall present any consolidation or merger of the Bank with any other corporation or successive consolidations or mergers in which the Bank or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Bank as an entirety or substantially as an entirety to any other corporation authorized to acquire and operate the same; provided, however, (and the Bank hereby covenants and agrees) that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) immediately after such consolidation, merger, sale or conveyance the corporation (whether the Bank or such other corporation) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of the terms, covenants and conditions of the Notes to be observed or performed by the Bank; and (ii) the corporation (if other than the Bank) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall be organized under the laws of the United States of America, any state thereof, the District of Columbia or the Commonwealth of Puerto Rico and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest on this Note. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation of the due and punctual performance of all of the covenants in the Notes to be performed or observed by the Bank, such successor corporation shall succeed to and be substituted for the Bank with the same effect as if it had been named in this Note as the Bank and thereafter the predecessor corporation shall be relieved of all obligations and covenants in this Note and may be liquidated and dissolved. Any action by the holder of this Note shall bind all future holders of this Note, and of any Note issued in exchange or -10- 26 substitution herefor or in place hereof, in respect of anything done or permitted by the Bank or by the Issuing and Paying Agent in pursuance of such action. The Issuing and Paying Agent shall maintain at its offices a register (the register maintained in such office or any other office or agency of the Issuing and Paying Agent in The City of New York herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Issuing and Paying Agent shall provide for the registration of the Notes and of transfers of the Notes. The transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Issuing and Paying Agent in the Place of Payment, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Issuing and Paying Agent duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No provision of this Note shall alter or impair the obligation of the Bank, which is absolute and unconditional, to pay principal of, premium, if any, and interest on this Note in U.S. dollars at the times, places and rate herein prescribed in accordance with its terms. No service charge shall be made to a holder of this Note for any transfer or exchange of this Note, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Beneficial interests represented by this Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, only if (x) The Depository Trust Company, as Depositary (the "Depositary") notifies the Bank that it is unwilling or unable to continue as Depositary for this Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 calendar days, or (y) the Bank in its sole discretion determines not to have such beneficial interests represented by this Note. Any Note representing such beneficial interests that is exchangeable pursuant to the preceding sentence shall be exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. Such definitive Notes shall be registered -11- 27 in the name or names of such person or persons as the Depositary shall instruct the Issuing and Paying Agent. Prior to due presentment of this Note for registration of transfer, the Bank, the Issuing and Paying Agent or any agent of the Bank or the Issuing and Paying Agent may treat the holder in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. All notices to the Bank under this Note shall be in writing and addressed to the Bank at 209 Munoz Rivera Avenue, Suite 913, Hato Rey, Puerto Rico 00918, Attention: Richard Barrios, or to such other address of the Bank as the Bank may notify the holders of the Notes. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles and all applicable federal laws and regulations. -12- 28 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ___________ Custodian ___________ (Cust) (Minor) under Uniform Gift to Minors Act ----------------------------------------- (State) Additional abbreviations may also be used though not in the above list. -13- 29 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto _______________________________________________________________ ________________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [_________________________] ________________________________________________________________________________ ________________________________________________________________________________ (Please print or typewrite name and address, including postal zip code, of assignee) the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints __________________________________________________________________ ________________________________________________________________________________ to transfer said Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated: ------------------- ----------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - ------------------------ Signature Guarantee -14- 30 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Bank to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to l00% of the principal amount hereof to be repaid, together with accrued and unpaid interest hereon, payable to the date of repayment, to the undersigned, at _______________________________________________________________ _______________________________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the undersigned must give notice to the Issuing and Paying~Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other place or places of which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to the date of repayment, with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000) which the holder elects to have repaid and specify the denomination or denominations (which shall be $100,000 or an integral multiple of $1,000 in excess thereof) of the Notes to be issued to the holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid): $------------------------ -------------------------------------------- NOTICE: The signature on this "Option to Dated: Elect Repayment" form must correspond with ------------------- the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - ------------------------ Signature Guarantee -15- 31 EXHIBIT ____________ THIS NOTE IS AN OBLIGATION SOLELY OF BANCO POPULAR DE PUERTO RICO (THE "BANK") AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY, ANY OTHER BANK OR POPULAR, INC. THIS NOTE DOES NOT EVIDENCE DEPOSITS OF THE BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THIS NOTE RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES (AS PROVIDED IN SECTION 11(D)(11) OF THE FEDERAL DEPOSIT INSURANCE ACT) AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THIS NOTE WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THIS NOTE COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE "DEPOSITARY") TO THE BANK OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR, OR IN LIEU OF, THIS NOTE IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. THIS NOTE IS ISSUABLE ONLY IN FULLY REGISTERED FORM IN MINIMUM DENOMINATIONS OF $100,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. EACH OWNER OF A BENEFICIAL INTEREST IN THIS NOTE MUST BE AN INSTITUTIONAL INVESTOR WHO IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $100,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF THIS NOTE AT ALL TIMES. No. FLR-__________ REGISTERED CUSIP NO.: __________ BANCO POPULAR DE PUERTO RICO GLOBAL BANK NOTE (Floating Rate) 32 ORIGINAL ISSUE DATE: PRINCIPAL AMOUNT: INITIAL INTEREST RATE: MATURITY DATE: INTEREST RATE BASIS OR BASES: INDEX MATURITY: IF LIBOR: REGULAR RECORD [ ] Libor Telerate DATES (if other than the 15th day [ ] Libor Reuters prior to each Interest Payment Date): INDEX CURRENCY: MINIMUM INTEREST RATE: SPREAD (PLUS OR MINUS) AND/OR SPREAD MULTIPLIER: INTEREST PAYMENT PERIOD: MAXIMUM INTEREST RATE: INTEREST RESET PERIOD: INTEREST PAYMENT DATES: CALCULATION AGENT: INITIAL INTEREST RESET DATES: ANNUAL REDEMPTION PERCENTAGE REDUCTION: INTEREST RESET DATES: HOLDER'S OPTIONAL REPAYMENT DATE(S): INITIAL REDEMPTION DATE: DAY COUNT CONVENTION [ ] 30/360 for the period INITIAL REDEMPTION PERCENTAGE: from to [ ] Actual/360 for the period from to INTEREST CALCULATION: [ ] Regular Floating Rate Note [ ] Actual/Actual for the period [ ] Floating Rate/Fixed Rate from to Fixed Rate Commencement Date: Fixed Interest Rate: ORIGINAL ISSUE DISCOUNT [ ] Inverse Floating Rate Note [ ] Yes Fixed Interest Rate: [ ] No ADDENDUM ATTACHED: Total Amount of OID: [ ] Yes Yield to Maturity: [ ] No Initial Accrual Period: OTHER PROVISIONS: DEFAULT RATE: ________ 2 33 The Bank, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of ______________________________________ United States Dollars on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date) and to pay interest thereon from and including the Original Issue Date specified above or from and including the most recent interest payment date to which interest on this Note (or any predecessor Note) has been paid or duly provided for, on the Interest Payment Dates specified above (each, an "Interest Payment Date") and at maturity or upon earlier redemption or repayment, if applicable, commencing on the first Interest Payment Date next succeeding the Original Issue Date (or, if the Original Issue Date is between a Regular Record Date (as defined below) and the Interest Payment Date immediately following such Regular Record Date, on the second Interest Payment Date following the Original Issue Date), at a rate per annum equal to the Initial Interest Rate specified above until the Initial Interest Reset Date specified above and thereafter at a rate per annum determined in accordance with the provisions hereof and any Addendum relating hereto depending upon the Interest Rate Basis or Bases, if any, and such other terms specified above, until the principal hereof is paid or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the Default Rate per annum specified above on any overdue principal and premium, if any, and on any overdue installment of interest. If no Default Rate is specified above, the Default Rate shall be the Interest Rate on this Note specified above. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on the Regular Record Date, which shall be the l5th calendar day (whether or not a Business Day (as defined below)) prior to such Interest Payment Date (unless otherwise specified on the face hereof) (each, a "Regular Record Date"); provided, however, that interest payable at maturity or upon earlier redemption or repayment, if applicable, will be payable to the person to whom principal shall be payable. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the holder as of the close of business on such Regular Record Date and may either be paid to the person in whose name this Note (or any predecessor Note) is registered at the close of business on a special record date for the payment of such defaulted interest (the "Special Record Date") to be fixed by the Bank, notice of which shall be given to the holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner. 3 34 Payment of principal of, premium, if any, and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The Bank will at all times appoint and maintain an issuing and paying agent (the "Issuing and Paying Agent", which term shall include any successor Issuing and Paying Agent), authorized by the Bank to pay principal of, premium, if any, and interest on this Note on behalf of the Bank pursuant to an issuing and paying agency agreement (the "Issuing and Paying Agency Agreement") and having an office or agency (the "Issuing and Paying Agent Office") in The City of New York or the city in which the Bank is headquartered (the "Place of Payment"), where this Note may be presented or surrendered for payment and where notices, designations or requests in respect of payments with respect to this Note may be served. The Bank has initially appointed The Chase Manhattan Bank as the Issuing and Paying Agent, with the Issuing and Paying Agent Office currently located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration. The Bank may remove the Issuing and Paying Agent pursuant to the terms of the Issuing and Paying Agency Agreement and may appoint a successor Issuing and Paying Agent. Payment of principal of, premium, if any, and interest on this Note due at maturity or upon earlier redemption or repayment, if applicable, will be made in immediately available funds upon presentation and surrender of this Note to the Issuing and Paying Agent at the Issuing and Paying Agent Office; provided that this Note is presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payment in accordance with its normal procedures. Payments of interest on this Note (other than at maturity or upon earlier redemption or repayment) will be made by wire transfer to such account as has been appropriately designated to the Issuing and Paying Agent by the person entitled to such payments. Reference herein to "this Note", "hereof", "herein" and comparable terms shall include an Addendum hereto if an Addendum is specified above. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. 4 35 IN WITNESS WHEREOF, the Bank has caused this Note to be duly executed. By: ------------------------------------------- Authorized Signatory By: ------------------------------------------- Authorized Signatory Dated: ISSUING AND PAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Issuing and Paying Agency Agreement. THE CHASE MANHATTAN BANK as Issuing and Paying Agent By: ----------------------------------- Authorized Signatory 5 36 [Reverse] This Note is one of a duly authorized issue of Bank Notes due from 7 days to 15 years from date of issue of the Bank (the "Notes"). If any Interest Payment Date (other than an Interest Payment Date at the Maturity Date or date of earlier redemption or repayment of this Note) would otherwise fall on a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding day that is a Business Day, except that if an Interest Rate Basis is LIBOR, as indicated on the face hereof, and such next Business Day falls in the next succeeding calendar month, such Interest Payment Date shall be the immediately preceding day that is a Business Day. Except as provided above, interest payments will be made on the Interest Payment Dates shown on the face hereof. If the Maturity Date or date of earlier redemption or repayment of this Note falls on a day which is not a Business Day, the related payment of principal of, premium, if any, or interest on this Note will be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date or date of earlier redemption or repayment, as the case may be. This Note will not be subject to any sinking fund. If so provided on the face of this Note, this Note may be redeemed by the Bank either in whole or in part on (unless otherwise specified on the face hereof) and after the Initial Redemption Date, if any, specified on the face hereof. If no Initial Redemption Date is specified on the face hereof, this Note may not be redeemed prior to the Maturity Date. On and after the Initial Redemption Date, if any, this Note may be redeemed in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000) at the option of the Bank at the applicable Redemption Price (as defined below), together with unpaid interest accrued hereon at the applicable rate borne by this Note to the date of redemption (each such date, a "Redemption Date"), on written notice given not more than 60 nor less than 30 calendar days prior to the Redemption Date to the registered holder hereof (unless otherwise specified on the face hereof). Whenever less than all the Notes at any time outstanding are to be redeemed, the terms of the Notes to be so redeemed shall be selected by the Bank. If less than all the Notes with identical terms at any time outstanding are to be redeemed, the Notes to be so redeemed shall be selected by the Issuing and Paying Agent by lot or in any usual manner approved by 6 37 it. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date specified on the face hereof by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is l00% of such principal amount. This Note may be subject to repayment at the option of the holder hereof in accordance with the terms hereof on any Holder's Optional Repayment Date(s), if any, specified on the face hereof. If no Holder's Optional Repayment Date is specified on the face hereof, this Note will not be repayable at the option of the holder hereof prior to maturity. On any Holder's Optional Repayment Date, this Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof will be at least $100,000) at the option of the holder hereof at a repayment price equal to 100% of the principal amount to be repaid, together with accrued and unpaid interest hereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof on a Holder's Optional Repayment Date, this Note must be delivered, with the form entitled "Option to Elect Repayment" attached hereto duly completed, to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other address which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior such Holder's Optional Repayment Date. In the event of repayment of this Note in part only, a new Note for the unrepaid portion hereof shall be issued in the name of the holder hereof upon the surrender hereof. Exercise of such repayment option by the holder hereof shall be irrevocable. The interest rate borne by this Note shall be determined as follows: 1. If this Note is designated as a Regular Floating Rate Note on the face hereof or if no designation is made for Interest Calculation on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus 7 38 or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described, on the face hereof. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect for the period from the Original Issue Date to the Initial Interest Reset Date will be the Initial Interest Rate. 2. If this Note is designated as a Floating Rate/Fixed Rate Note on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described on the face hereof. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that (i) the interest rate in effect for the period from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate; and (ii) the interest rate in effect commencing on, and including, the Fixed Rate Commencement Date to the Maturity Date or date of earlier redemption or repayment shall be the Fixed Interest Rate, if such a rate is specified on the face hereof, or if no such Fixed Interest Rate is so specified, the interest rate in effect hereon on the Business Day immediately preceding the Fixed Rate Commencement Date. 3. If this Note is designated as an Inverse Floating Rate Note on the face hereof, then, except as described below or in an Addendum hereto, this Note shall bear interest equal to the Fixed Interest Rate on the face hereof minus the rate determined by reference to the applicable Interest Rate Basis or Bases shown on the face hereof (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any, specified and applied in the manner described on the face hereof; provided, however, that, unless otherwise specified on the face hereof, the interest rate hereon will not be less than zero percent. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note is payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect for the 8 39 period from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate. Notwithstanding the foregoing, if this Note is designated on the face hereof as having an Addendum attached, this Note shall bear interest in accordance with the terms described in such Addendum. 4. FLOATING INTEREST RATES (a) INTEREST RATE RESET. The interest rate on this Note will be reset from time to time, as provided in this Section 4, and each date upon which such rate is reset as so provided is hereinafter called an "Interest Reset Date". Unless otherwise specified on the face hereof, the Interest Reset Dates with respect to this Note will be as follows: (i) if the Interest Reset Period is daily, each Business Day; (ii) if the Interest Reset Period is weekly and the Interest Rate Basis is not the Treasury Rate, the Wednesday of each week; (iii) if the Interest Reset Period is weekly and the Interest Rate Basis is the Treasury Rate, except as otherwise provided in the definition of "Treasury Interest Determination Date" in Section 4(j) below, the Tuesday of each week; (iv) if the Interest Reset Period is monthly, the third Wednesday of each month; (v) if the Interest Reset Period is quarterly, the third Wednesday of each March, June, September and December; (vi) if the Interest Reset Period is semi-annual, the third Wednesday of each of two months in each year specified under "Interest Reset Period" on the face hereof; and (vii) if the Interest Reset Period is annual, the third Wednesday of the month in each year specified under "Interest Reset Period" on the face hereof; provided, however, that (x) the Interest Rate Basis in effect from the Original Issue Date to but excluding the first Interest Reset Date will be the Initial Interest Rate and (y) if the Interest Reset Period is daily or weekly, the Interest Rate Basis in effect for each day following the second Business Day immediately prior to 9 40 an Interest Payment Date to but excluding such Interest Payment Date, and for each day following the second Business Day immediately prior to the day of Maturity of the principal hereof to but excluding such day of Maturity, will be the Interest Rate Basis in effect on such applicable second Business Day; and provided, further, that, if any Interest Reset Date would otherwise be a day that is not a Business Day, such Interest Reset Date shall be the next succeeding day that is a Business Day, except that, unless otherwise specified on the face hereof, if the Interest Rate Basis is LIBOR and such next succeeding Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. Subject to applicable provisions of law and except as otherwise specified herein, on each Interest Reset Date the interest rate on this Note shall be the rate determined in accordance with such of the following Sections 4(b) through 4(f) as provide for determination of the Interest Rate Basis for this Note. The Calculation Agent shall determine the interest rate of this Note in accordance with the applicable Section below. Unless the Interest Rate Basis is LIBOR, the Calculation Agent will determine the interest rate of this Note that takes effect on any Interest Reset Date on a day no later than the Calculation Date (as defined in Section 4(j) below) corresponding to such Interest Reset Date. However, the Calculation Agent need not wait until the Calculation Date to determine such interest rate if the rate information it needs to make such determination in the manner specified in the applicable provisions of Sections 4(b) through 4(f) hereof is available from the relevant sources specified in such applicable provisions. Upon request of the Holder to the Calculation Agent, the Calculation Agent will provide the interest rate then in effect on this Note and, if determined, the interest rate that will become effective on the next Interest Reset Date. (b) DETERMINATION OF COMMERCIAL PAPER RATE. If the Interest Rate Basis is the Commercial Paper Rate, the Interest Rate Basis that takes effect on any Interest Reset Date shall equal the Money Market Yield (as defined in Section 4(j) below) of the rate, for the second Business Day immediately preceding such Interest Reset Date (the "Commercial Paper Interest Determination Date"), for commercial paper having the Index Maturity, as published in H.15(519) (as defined in Section 4(j) below) under the heading "Commercial Paper -- Non-financial". If the Commercial Paper Rate 10 41 cannot be determined as described above, the following procedures will apply in determining the Commercial Paper Rate: (i) If the rate described above does not appear in H.15(519) at 3:00 P.M., New York City time, on the Calculation Date (as defined in Section 4(j) below) corresponding to such Commercial Paper Interest Determination Date (unless the calculation is made earlier and the rate is available from that source at that time), then the Commercial Paper Rate will be the rate, for such Commercial Paper Interest Determination Date, for commercial paper having the Index Maturity, as published in H.15 Daily Update (as defined in Section 4(j) below) or any other recognized electronic source used for displaying that rate, under the heading "Commercial Paper -- Non-financial". (ii) If the rate described in clause (i) above does not appear in H.15(519), H.15 Daily Update or another recognized electronic source at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), the Commercial Paper Rate will be the Money Market Yield of the arithmetic mean of the following offered rates for U.S. dollar commercial paper that has the Index Maturity and is placed for an industrial issuer whose bond rating is "Aa", or the equivalent, from a nationally recognized rating agency: the rates offered as of 11:00 A.M., New York City time, on such Commercial Paper Interest Determination Date by three leading U.S. dollar commercial paper dealers in New York City selected by the Calculation Agent. (iii) If fewer than three dealers selected by the Calculation Agent are quoting as described in clause (ii) above, the Commercial Paper Rate shall be the Commercial Paper Rate in effect on such Commercial Paper Interest Determination Date (or, in the case of the first Interest Reset Date, the Initial Interest Rate). The Interest Rate Basis determined in accordance with this Section 4(b) will be adjusted by the addition or subtraction of the Spread, if any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if any. (c) DETERMINATION OF PRIME RATE. If the Interest Rate Basis is the prime rate, the Interest Rate Basis that takes effect on any Interest Reset Date shall equal the rate, for the second 11 42 Business Day immediately preceding such Interest Reset Date (the "Prime Interest Determination Date"), published in H.15(519) under the heading "Bank Prime Loan". If the prime rate cannot be determined as described above, the following procedures will apply in determining the prime rate: (i) If the rate described above does not appear in H.15(519) at 3:00 P.M., New York City time, on the Calculation Date corresponding to such Prime Interest Determination Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), then the prime rate will be the rate, for such Prime Interest Determination Date, as published in H.15 Daily Update or another recognized electronic source used for the purpose of displaying that rate, under the heading "Bank Prime Loan". (ii) If the rate described in clause (i) above does not appear in H.15(519), H.15 Daily Update or another recognized electronic source at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), then the prime rate will be the arithmetic mean of the following rates as they appear on the Reuters Screen US PRIME 1 Page (as defined in Section 4(j) below): the rate of interest publicly announced by each bank appearing on that page as that bank's prime rate or base lending rate, as of 11:00 A.M., New York City time, on such Prime Interest Determination Date. (iii) If fewer than four of the rates referred to in clause (ii) above appear on the Reuters Screen US PRIME 1 Page, the prime rate will be the arithmetic mean of the prime rates or base lending rates, as of the close of business on such Prime Interest Determination Date, of three major banks in New York City selected by the Calculation Agent. For this purpose, the Calculation Agent will use rates quoted on the basis of the actual number of days in the year divided by a 360-day year. (iv) If fewer than three banks selected by the Calculation Agent are quoting as described in clause (iii) above, the prime rate shall be the prime rate in effect on such Prime Interest Determination Date (or, in 12 43 the case of the first Interest Reset Date, the Initial Interest Rate). The Interest Rate Basis determined in accordance with this Section 4(c) will be adjusted by the addition or subtraction of the Spread, if any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if any. (d) DETERMINATION OF LIBOR. If the Interest Rate Basis is LIBOR, the Interest Rate Basis that takes effect on any Interest Reset Date shall be LIBOR on the corresponding LIBOR Interest Determination Date (as defined in Section 4(j) below) and shall be determined in accordance with the following provisions: LIBOR will be either of the following rates, whichever appears on the face hereof: (x) the offered rate appearing on the Telerate LIBOR Page (as defined in Section 4(j) below); or (y) the arithmetic mean of the offered rates appearing on the Reuters Screen LIBOR Page (as defined in Section 4(j) below) unless that page by its terms cites only one rate, in which case that rate; in either case, as of 11:00 A.M., London time, on such LIBOR Interest Determination Date for deposits of the Index Currency having the Index Maturity beginning on such Interest Reset Date. If no reference page is specified on the face hereof, Telerate LIBOR Page will apply to this Note: (i) If Telerate LIBOR Page is specified on the face hereof and the rate referenced in clause (x) above does not appear on that page, or if Reuters Screen LIBOR Page is specified on the face hereof and fewer than two of the rates referenced in clause (y) above appear on that page or no rate appears on any page on which only one rate normally appears, then LIBOR will be determined on the basis of the rates, at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date, at which deposits of the following kind are offered to prime banks in the London interbank market by four major banks in that market selected by the Calculation Agent: deposits of the Index Currency having the Index Maturity beginning on such Interest Reset Date and in a Representative Amount (as defined in Section 4(j) below). The 13 44 Calculation Agent will request the principal London office of each such bank to provide a quotation of its rate. If at least two quotations are provided, LIBOR for such LIBOR Interest Determination Date will be the arithmetic mean of the quotations. (ii) If fewer than two quotations are provided as described in clause (i) above, LIBOR for such LIBOR Interest Determination Date will be the arithmetic mean of the rates for loans of the following kind to leading European banks quoted, at approximately 11:00 A.M. in the principal financial center for the country issuing the Index Currency, on such LIBOR Interest Determination Date, by three major banks in that financial center selected by the Calculation Agent: loans of the Index Currency having the Index Maturity beginning on such Interest Reset Date and in a Representative Amount. (iii) If fewer than three banks selected by the Calculation Agent are quoting as described in clause (ii) above, LIBOR will be the LIBOR in effect on such LIBOR Interest Determination Date (or, in the case of the first Interest Reset Date, the Initial Interest Rate). The Interest Rate Basis determined in accordance with this Section 4(d) will be adjusted by the addition or subtraction of the Spread, if any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if any. If the Interest Rate Basis is LIBOR and no currency is specified on the face hereof as the Index Currency, the Index Currency shall be U.S. dollars. (e) DETERMINATION OF TREASURY RATE. If the Interest Rate Basis is the Treasury Rate, the Interest Rate Basis that takes effect on any Interest Reset Date shall equal the rate for the auction on the corresponding Treasury Interest Determination Date (as defined in Section 4(j) below) of direct obligations of the United States ("Treasury Bills") having the Index Maturity, as that rate appears on Telerate Page 56 or 57 under the heading "Investment Rate". If the Treasury Rate cannot be determined as described above, the following procedures will apply in determining the Treasury Rate: (i) If the rate described above does not appear on either Telerate Page 56 or 57 at 3:00 P.M., New York City time, on the Calculation Date corresponding to such Treasury Interest Determination Date (unless the calculation is made 14 45 earlier and the rate is available from that source at that time), the Treasury Rate will be the Bond Equivalent Yield (as defined in Section 4(j) below) of the rate, for such Treasury Interest Determination Date and for Treasury Bills having the Index Maturity, as published in H.15 Daily Update, or another recognized electronic source used for displaying that rate, under the heading "U.S. Government Securities/Treasury Bills/Auction High". (ii) If the rate described in clause (i) above does not appear in H.15 Daily Update or another recognized electronic source at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), the Treasury Rate will be the Bond Equivalent Yield of the auction rate, for such Treasury Interest Determination Date and for Treasury Bills having the Index Maturity, as announced by the U.S. Department of the Treasury. (iii) If the auction rate described in clause (ii) above is not so announced by 3:00 P.M., New York City time, on such Calculation Date, or if no such auction is held for the relevant week, then the Treasury Rate will be the Bond Equivalent Yield of the rate, for such Treasury Interest Determination Date and for Treasury Bills having a remaining maturity closest to the Index Maturity, as published in H.15(519) under the heading "U.S. Government Securities/Treasury Bills/Secondary Market". (iv) If the rate described in clause (iii) above does not appear in H.15(519) at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), then the Treasury Rate will be the rate, for such Treasury Interest Determination Date and for Treasury Bills having a remaining maturity closest to the Index Maturity, as published in H.15 Daily Update, or another recognized electronic source used for displaying that rate, under the heading "U.S. Government Securities/ Treasury Bills /Secondary Market". (v) If the rate described in clause (iv) above does not appear in H.15 Daily Update or another recognized electronic source at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is available from one of those sources at that time), the 15 46 Treasury Rate will be the Bond Equivalent Yield of the arithmetic mean of the following secondary market bid rates for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity: the rates bid as of approximately 3:30 P.M., New York City time, on such Treasury Interest Determination Date, by three primary U.S. government securities dealers in New York City selected by the Calculation Agent. (vi) If fewer than three dealers selected by the Calculation Agent are quoting as described in clause (v) above, the Treasury Rate shall be the Treasury Rate in effect on such Treasury Interest Determination Date (or, in the case of the first Interest Reset Date, the Initial Interest Rate). The Interest Rate Basis determined in accordance with this Section 4(e) will be adjusted by the addition or subtraction of the Spread, if any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if any, specified on the face hereof. (f) DETERMINATION OF FEDERAL FUNDS RATE. If the Interest Rate Basis is the Federal Funds Rate, the Interest Rate Basis that takes effect on any Interest Reset Date shall equal the rate, on the second Business Day immediately preceding such Interest Reset Date (the "Federal Funds Interest Determination Date"), for Federal Funds as published in H.15(519) under the heading "Federal Funds (Effective)", as that rate is displayed on Telerate Page 120. If the Federal Funds Rate cannot be determined as described above, the following procedures will apply in determining the Federal Funds Rate: (i) If the rate described above is not displayed on Telerate Page 120 at 3:00 P.M., New York City time, on the Calculation Date corresponding to such Federal Funds Interest Determination Date (unless the calculation is made earlier and the rate is available from that source at that time), then the Federal Funds Rate will be the rate described above as published in H.15 Daily Update, or another recognized electronic source used for displaying that rate, under the heading "Federal Funds (Effective)". (ii) If the rate described in clause (i) above is not displayed on Telerate Page 120 and does not appear in H.15 (519), H.15 Daily Update or another recognized electronic source at 3:00 P.M., New York City time, on such Calculation Date (unless the calculation is made earlier and the rate is 16 47 available from one of those sources at that time), the federal funds Rate will be the arithmetic mean of the rates for the last transaction in overnight, U.S. dollar federal funds arranged, before 9:00 A.M., New York City time, on such Federal Funds Interest Determination Date, by three leading brokers of U.S. dollar federal funds transactions in New York City selected by the Calculation Agent. (iii) If fewer than three brokers selected by the Calculation Agent are quoting as described in clause (ii) above, the Federal Funds Rate will be the Federal Funds Rate in effect on such Federal Funds Interest Determination Date (or, in the case of the first Interest Reset Date, the Initial Interest Rate). The interest rate determined in accordance with this Section 4(f) will be adjusted by the addition or subtraction of the Spread, if any, or by multiplying such Interest Rate Basis by the Spread Multiplier, if any. (g) MINIMUM AND MAXIMUM LIMITS. Notwithstanding the foregoing, the rate at which interest accrues on this Note (i) shall not at any time be higher than the Maximum Rate, if any, or less than the Minimum Rate, if any, specified on the face hereof, in each case on an accrual basis, and (ii) shall not at any time be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. (h) CALCULATION OF INTEREST. Payments of interest hereon with respect to any Interest Payment Date or at the Maturity of the principal hereof will include interest accrued to but excluding such Interest Payment Date or the date of such Maturity, as the case may be. Accrued interest from the date of issue or from the last date to which interest has been paid or duly provided for shall be calculated by the Calculation Agent by multiplying the Principal Amount by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factors calculated for each day from and including the Original Issue Date or from and including the last date to which interest has been paid or duly provided for, to but excluding the date for which accrued interest is being calculated. The interest factor for each such day shall be expressed as a decimal and computed by dividing the interest rate (also expressed as a decimal) in effect on such day by 360, if the Interest Rate Basis is the Commercial Paper Rate, prime rate, LIBOR, or Federal Funds Rate, or by the actual number 17 48 of days in the year, if the Interest Rate Basis is the Treasury Rate. All percentages resulting from any calculation with respect to this Note will be rounded upward or downward, as appropriate, to the next higher or lower one hundred-thousandth of a percentage point (e.g., 9.876541% (or .09876541) being rounded down to 9.87654% (or .0987654) and 9.876545% (or .09876545) being rounded up to 9.87655% (or .0987655)). All amounts used in or resulting from any calculation with respect to this Note will be rounded upward or downward, as appropriate, to the nearest cent, in the case of U.S. dollars, or to the nearest corresponding hundredth of a unit, in the case of a currency other than U.S. dollars, with one-half cent or one-half of a corresponding hundredth of a unit or more being rounded upward. (i) CALCULATION AGENT. The Company has initially appointed the institution named on the face of this Note as Calculation Agent, to act as such agent with respect to this Note, but the Company may, in its sole discretion, appoint any other institution (including any Affiliate of the Company) to serve as such agent from time to time. The Company will give the Trustee prompt written notice of any change in any such appointment. Insofar as this Note provides for any such agent to obtain rates, quotes or other data from a bank, dealer or other institution for use in making any determination hereunder, such agent may do so from any institution or institutions of the kind contemplated hereby notwithstanding that any one or more of such institutions are any such agent, Affiliates of any such agent or Affiliates of the Company. All determinations made by the Calculation Agent may be made by such agent in its sole discretion and, absent manifest error, shall be conclusive for all purposes and binding on the Holder of this Note and the Company. The Calculation Agent shall have no liability therefor. (j) DEFINITIONS OF CALCULATION TERMS. As used in this Note, the following terms have the meanings set forth below: "Bond Equivalent Yield" means a yield expressed as a percentage and calculated in accordance with the following formula: Bond Equivalent Yield = D x N x 100, 360 - (D x M) 18 49 where - "D" equals the annual rate for Treasury Bills quoted on a bank discount basis and expressed as a decimal; - "N" equals 365 or 366, as the case may be; and - "M" equals the actual number of days in the period from and including the relevant Interest Reset Date to but excluding the next succeeding Interest Reset Date. "Business Day" means, for this Note, a day that meets the requirements set forth in each of clauses (i) through (iv) below, in each case to the extent such requirements apply to this Note as specified below: (i) is a Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in The City of New York generally are authorized or obligated by law, regulation or executive order to close; (ii) if the Interest Rate Basis is LIBOR, is also a London Business Day; and (iii) if the Specified Currency for payment of principal of or interest on this Note is other than U.S. dollars, is also a day on which banking institutions in the principal financial center of the country issuing such Specified Currency generally are not authorized or obligated by law, regulation or executive order to close. The "Calculation Date" corresponding to any Commercial Paper Interest Determination Date, Prime Interest Determination Date, LIBOR Interest Determination Date, Treasury Interest Determination Date or Federal Funds Interest Determination Date, as the case may be, means the earlier of: (i) the tenth day after such interest determination date or, if any such day is not a Business Day, the next succeeding Business Day; and (ii) the Business Day immediately preceding the Interest Payment Date or the date of Maturity of the principal hereof, whichever is the day on which the next payment of interest will be due. 19 50 The Calculation Date corresponding to any Interest Reset Date means the Calculation Date corresponding to the relevant interest determination date immediately preceding such Interest Reset Date. "H.15(519)" means the weekly statistical release entitled "Statistical Release H.15 (519)", or any successor publication, published by the Board of Governors of the Federal Reserve System. "H.15 Daily Update" means the daily update of H.15 (519) available through the worldwide web site of the Board of Governors of the Federal Reserve System, at http://www. bog.frb.fed.us/releases/h15/update, or any successor site or publication. The "LIBOR Interest Determination Date" corresponding to any Interest Reset Date means the second London Business Day preceding such Interest Reset Date, unless the Index Currency is pounds sterling, in which case the LIBOR Interest Determination Date will be the Interest Reset Date. "London Business Day" means any day on which dealings in the Index Currency are transacted in the London interbank market. "Money Market Yield" means a yield expressed as a percentage and calculated in accordance with the following formula: Money Market Yield = D x 360 x 100, 360 - (D x M) where - "D" equals the per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal; and - "M" equals the actual number of days in the period from and including the relevant Interest Reset Date to but excluding the next succeeding Interest Reset Date. "Representative Amount" means an amount that, in the Calculation Agent's judgment, is representative of a single transaction in the relevant market at the relevant time. 20 51 "Reuters Screen LIBOR Page" means the display on the Reuters Monitor Money Rates Service, or any successor service, on the page designated as "LIBO" or any replacement page or pages on which London interbank rates of major banks for the Index Currency are displayed. "Reuters Screen US PRIME 1 Page" means the display on the "US PRIME 1" page on the Reuters Monitor Money Rates Service, or any successor service, or any replacement page or pages on that service, for the purpose of displaying prime rates or base lending rates of major U.S. banks. "Telerate LIBOR Page" means Telerate Page 3750 or any replacement page or pages on which London interbank rates of major banks for the Index Currency are displayed. "Telerate Page" means the display on Bridge Telerate, Inc., or any successor service, on the page or pages specified on the face hereof, or any replacement page or pages on that service. The "Treasury Interest Determination Date" corresponding to any Interest Reset Date means the day of the week in which such Interest Reset Date falls on which Treasury bills would normally be auctioned. If, as the result of a legal holiday, an auction is so held on the Friday in the week immediately preceding the week in which such Interest Reset Day falls, such Friday will be the corresponding Treasury Interest Determination Date. If an auction date shall fall on a day that would otherwise be an Interest Reset Date, then such Interest Reset Date shall instead be the first Business Day immediately following such auction date. "Treasury Notes" means direct, noncallable, fixed rate obligations of the U.S. government. References in this Note to U.S. dollars shall mean, as of any time, the coin or currency that is then legal tender for the payment of public and private debts in the United States of America. References in this Note to the euro shall mean, as of any time, the coin or currency (if any) that is then legal tender for the payment of public and private debts in all EMU Countries. References in this Note to a particular currency other than U.S. dollars and euros shall mean, as of any time, the coin or 21 52 currency that is then legal tender for the payment of public and private debts in the country issuing such currency on the Original Issue Date. References in this Note to a particular heading or headings on any of Designated CMT Telerate Page, H.15(519), H.15 Daily Update, Reuters Screen LIBOR Page, Reuters Screen US Prime 1 Page, Telerate LIBOR Page or Telerate Page include any successor or replacement heading or headings as determined by the Calculation Agent. 5. ADDITIONAL PROVISIONS At the request of the Holder hereof, the Calculation Agent shall provide to the Holder hereof the interest rate hereon then in effect and, if determined, the interest rate which shall become effective as of the next Interest Reset Date. If this Note is an Original Issue Discount Note and if an Event of Default with respect to this Note shall have occurred and be continuing, the Default Amount (as defined hereafter) of this Note may be declared due and payable in the manner and with the effect provided herein. The "Default Amount" shall be equal to the adjusted issue price as of the first day of the accrual period as determined under Final Treasury Regulation Section 1.1275-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended, in which the date of acceleration occurs increased by the daily portion of the original issue discount for each day in such accrual period ending on the date of acceleration, as determined under Final Treasury Regulation Section 1.1272-1(b) (or successor regulation) under the United States Internal Revenue Code of 1986, as amended. Upon payment of (i) the principal, or premium, if any, so declared due and payable and (ii) interest on any overdue principal and overdue interest or premium, if any (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Bank's obligations in respect of the payment of principal of, premium, if any, and interest on this Note shall terminate. In case any Note shall at any time become mutilated, destroyed, lost or stolen, and such Note or evidence of the loss, theft or destruction thereof satisfactory to the Bank and the Issuing and Paying Agent and such other documents or proof as may be required by the Bank and the Issuing and Paying Agent shall be delivered to the Issuing and Paying Agent, the Bank shall issue a new Note, of like tenor and principal amount, having a serial 22 53 number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of the Note destroyed, lost or stolen but, in the case of any destroyed, lost or stolen Note, only upon receipt of evidence satisfactory to the Bank and the Issuing and Paying Agent that such Note was destroyed, stolen or lost, and, if required, upon receipt of indemnity satisfactory to the Bank and the Issuing and Paying Agent. Upon the issuance of any substituted Note, the Bank and the Issuing and Paying Agent may require the payment of a sum sufficient to cover all expenses and reasonable charges connected with the preparation and delivery of a new Note. If any Note which has matured or has been redeemed or repaid or is about to mature or to be redeemed or repaid shall become mutilated, destroyed, lost or stolen, the Bank may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the holder with the provisions of this paragraph. No recourse shall be had for the payment of principal of, premium, if any, or interest on this Note for any claim based hereon, or otherwise in respect hereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor corporation, banking association or other legal entity (collectively, "corporation"), either directly or through the Bank or any corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The occurrence of any of the following events shall constitute an "Event of Default" with respect to this Note: (i) default in the payment of any interest with respect to any of the Notes issued by the Bank when due, which continues for 30 calendar days; (ii) default in the payment of any principal of, or premium, if any, on any of the Notes issued by the Bank when due; (iii) the entry by a court having jurisdiction in the premises of (a) a decree or order for relief in respect of the Bank in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or (b) a decree or order appointing a conservator, receiver, liquidator, assignee, trustee, sequestrator or any other similar official of the Bank, or of substantially all of the property of the Bank, or ordering the winding up or liquidation of the affairs of the Bank, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 23 54 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Bank to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding, or the filing by the Bank of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Bank to the filing of such petition or to the appointment of or taking possession by a custodian, conservator, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Bank or of substantially all of the property of the Bank, or the making by the Bank of an assignment for the benefit of creditors, or the taking of corporate action by the Bank in furtherance of any such action. If an Event of Default shall occur and be continuing, the holder of this Note may declare the principal amount of, accrued interest and premium, if any, on this Note due and payable immediately by written notice to the Bank. Upon such declaration and notice, such principal amount, accrued interest and premium, if any, shall become immediately due and payable. Any Event of Default with respect to this Note may be waived by the holder hereof. The Issuing and Paying Agency Agreement provides that the Bank will promptly notify, and provide copies of any such notice to, the Issuing and paying Agent, and the Issuing and Paying Agent will promptly mail by first-class mail, postage prepaid, copies of such notice to the holders of the Notes, upon the occurrence of an Event of Default or of the curing or waiver of an Event of Default. Nothing contained herein shall prevent any consolidation or merger of the Bank with any other corporation or successive consolidations or mergers in which the Bank or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Bank as an entirety or substantially as an entirety to any other corporation authorized to acquire and operate the same; provided, however, (and the Bank hereby covenants and agrees) that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) immediately after such consolidation, merger, sale or conveyance the corporation (whether the Bank or such other corporation) formed by or surviving any such consolidation or merger, or the 24 55 corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of the terms, covenants and conditions of the Notes to be observed or performed by the Bank; and (ii) the corporation (if other than the Bank) formed by or surviving any such consolidation or merger, or the corporation to which such sale or conveyance shall have been made, shall be organized under the laws of the United States of America, any state thereof, the District of Columbia or the Commonwealth of Puerto Rico and shall expressly assume the due and punctual payment of the principal of, premium, if any, and interest on this Note. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation of the due and punctual performance of all of the covenants in the Notes to be performed or observed by the Bank, such successor corporation shall succeed to and be substituted for the Bank with the same effect as if it had been named in this Note as the Bank and thereafter the predecessor corporation shall be relieved of all obligations and covenants in this Note and may be liquidated and dissolved. Any action by the holder of this Note shall bind all future holders of this Note, and of any Note issued in exchange or substitution herefor or in place hereof, in respect of anything done or permitted by the Bank or by the Issuing and Paying Agent in pursuance of such action. The Issuing and Paying Agent shall maintain at its offices a register (the register maintained in such office or any other office or agency of the Issuing and Paying Agent in The City of New York herein referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Issuing and Paying Agent shall provide for the registration of the Notes and of transfers of the Notes. The transfer of this Note is registrable in the Note Register, upon surrender of this Note for registration of transfer at the office or agency of the Issuing and Paying Agent in the Place of Payment, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Issuing and Paying Agent duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. 25 56 No provision of this Note shall alter or impair the obligation of the Bank, which is absolute and unconditional, to pay principal of, premium, if any, and interest on this Note in U.S. dollars at the times, places and rate herein prescribed in accordance with its terms. No service charge shall be made to a holder of this Note for any transfer or exchange of this Note, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Beneficial interests represented by this Note are exchangeable for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, only if (x) The Depository Trust Company, as Depositary (the "Depositary") notifies the Bank that it is unwilling or unable to continue as Depositary for this Note or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depositary is not appointed by the Bank within 60 calendar days, or (y) the Bank in its sole discretion determines not to have such beneficial interests represented by this Note. Any Note representing such beneficial interests that is exchangeable pursuant to the preceding sentence shall be exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount, in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. Such definitive Notes shall be registered in the name or names of such person or persons as the Depositary shall instruct the Issuing and Paying Agent. Prior to due presentment of this Note for registration of transfer, the Bank, the Issuing and Paying Agent or any agent of the Bank or the Issuing and Paying Agent may treat the holder in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Bank, the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary except as required by applicable law. All notices to the Bank under this Note shall be in writing and addressed to the Bank at 209 Munoz Rivera Avenue, 5th Floor, Hato Rey, Puerto Rico 00918, Attention: Richard Barrios, or to such other address of the Bank as the Bank may notify the holders of the Notes. 26 57 This Note shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles and all applicable federal laws and regulations. 27 58 ABBREVIATIONS The following abbreviations, when used in the inscription on the face of the within Note, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - __________ Custodian _________ (Cust) (Minor) under Uniform Gifts to Minors Act --------------------------------------- (State) Additional abbreviations may also be used though not in the above list. 28 59 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto _______________________________________________________________ ________________________________________________________________________________ PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER OF ASSIGNEE -------------------------- / / --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please print or typewrite name and address, including postal zip code, of assignee) the within Note and all rights thereunder and hereby irrevocably constitutes and appoints ______________________________________________________________________ ________________________________________________________________________________ to transfer said Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated: --------------------- ------------------------------------------------ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - --------------------------- Signature Guarantee 29 60 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Bank to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount hereof to be repaid, together with accrued and unpaid interest hereon, payable to the date of repayment, to the undersigned, at ________________________________________________________________ ________________________________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the undersigned must give to the Issuing and Paying Agent at its offices located at 450 West 33rd Street, New York, New York 10001, Attention: Agency Administration, or at such other place or places of which the Bank shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 calendar days prior to the date of repayment, with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000) which the holder elects to have repaid and specify the denomination or denominations (which shall be $100,000 or an integral multiple of $1,000 in excess thereof) of the Notes to be issued to the holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid): $ ------------------------ ------------------------------------------------ Dated: NOTICE: The signature on this "Option to ------------------- Elect Repayment" form must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement or any change whatsoever. - ------------------------------ Signature Guarantee 30 EX-10.24 12 g67461ex10-24.txt U.S. $465,000 AMENDED AND RESTATED 1 CONFORMED COPY EXHIBIT 10.24 - -------------------------------------------------------------------------------- US$465,000,000 AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT Dated as of October 13, 2000 among POPULAR, INC., POPULAR NORTH AMERICA, INC., THE LENDERS NAMED HEREIN, THE CHASE MANHATTAN BANK, as Administrative Agent and BANK ONE N.A. and BARCLAYS BANK PLC - MIAMI AGENCY, as agents CHASE SECURITIES, INC. as advisor, arranger and book manager 2 [CS&M Ref. No. 6700-751] 3 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms................................................................... 1 SECTION 1.02. Terms Generally................................................................. 12 SECTION 1.03. Certain Date References......................................................... 12 ARTICLE II THE CREDITS SECTION 2.01. Commitments..................................................................... 12 SECTION 2.02. Loans........................................................................... 12 SECTION 2.03. Competitive Bid Procedure....................................................... 14 SECTION 2.04. Borrowing Procedure............................................................. 16 SECTION 2.05. Interest Elections.............................................................. 16 SECTION 2.06. Termination and Reduction of Commitments........................................ 17 SECTION 2.07. Evidence of Debt; Repayment of Loans............................................ 18 SECTION 2.08. Prepayment...................................................................... 18 SECTION 2.09. Fees............................................................................ 19 SECTION 2.10. Interest on Loans............................................................... 20 SECTION 2.11. Default Interest................................................................ 20 SECTION 2.12. Alternate Rate of Interest...................................................... 20 SECTION 2.13. Reserve Requirements; Change in Circumstances................................... 21 SECTION 2.14. Change in Legality.............................................................. 22 SECTION 2.15. Indemnity....................................................................... 22 SECTION 2.16. Payments........................................................................ 23 SECTION 2.17. Pro Rata Treatment.............................................................. 23 SECTION 2.18. Sharing of Setoffs.............................................................. 23 SECTION 2.19. Taxes........................................................................... 24 SECTION 2.20. Assignment of Commitments Under Certain Circumstances............................................................ 26 SECTION 2.21. Cross Guaranty.................................................................. 27 SECTION 2.22. Extension of Termination Date................................................... 28 SECTION 2.23. Increase in Commitments......................................................... 29
4 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. Organization; Powers............................................................ 31 SECTION 3.02. Authorization................................................................... 31 SECTION 3.03. Enforceability.................................................................. 31 SECTION 3.04. Governmental Approvals.......................................................... 31 SECTION 3.05. Financial Statements............................................................ 31 SECTION 3.06. No Material Adverse Change...................................................... 32 SECTION 3.07. Title to Properties; Possession Under Leases.................................... 32 SECTION 3.08. Subsidiaries.................................................................... 32 SECTION 3.09. Litigation; Compliance with Laws................................................ 32 SECTION 3.10. Agreements...................................................................... 32 SECTION 3.11. Federal Reserve Regulations..................................................... 33 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act.............................................................. 33 SECTION 3.13. Use of Proceeds................................................................. 33 SECTION 3.14. Tax Returns..................................................................... 33 SECTION 3.15. No Material Misstatements....................................................... 33 SECTION 3.16. Employee Benefit Plans.......................................................... 33 SECTION 3.17. Environmental and Safety Matters................................................ 34 SECTION 3.18. Capital Commitments............................................................. 34 ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. All Credit Events............................................................... 34 SECTION 4.02. First Credit Event.............................................................. 35 ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. Existence; Businesses and Properties............................................ 36 SECTION 5.02. Insurance....................................................................... 36 SECTION 5.03. Obligations and Taxes........................................................... 36 SECTION 5.04. Financial Statements, Reports, etc.............................................. 37 SECTION 5.05. Litigation and Other Notices.................................................... 38 SECTION 5.06. Employee Benefits............................................................... 38 SECTION 5.07. Maintaining Records; Access to Properties and Inspections....................... 39 SECTION 5.08. Use of Proceeds................................................................. 39 SECTION 5.09. Continuance of Business......................................................... 39 SECTION 5.10. Compliance with Regulatory Standards............................................ 39 SECTION 5.11. Capital Requirements............................................................ 39
5 iii ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. Liens........................................................................... 40 SECTION 6.02. Sale and Lease-Back Transactions................................................ 41 SECTION 6.03. Mergers, Consolidations, Sales of Assets........................................ 41 SECTION 6.04. Business of Borrowers and Subsidiaries.......................................... 41 SECTION 6.05. Consolidated Tangible Net Worth................................................. 41 SECTION 6.06. Ratio of Long-Term Indebtedness to Total Capitalization......................... 41 SECTION 6.07. Non-Performing Assets........................................................... 41 SECTION 6.08. Double Leverage................................................................. 41 ARTICLE VII EVENTS OF DEFAULT.......................... 42 ARTICLE VIII THE ADMINISTRATIVE AGENT.................... 44 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices......................................................................... 46 SECTION 9.02. Survival of Agreement........................................................... 47 SECTION 9.03. Binding Effect.................................................................. 47 SECTION 9.04. Successors and Assigns.......................................................... 47 SECTION 9.05. Expenses; Indemnity............................................................. 49 SECTION 9.06. Right of Setoff................................................................. 50 SECTION 9.07. Applicable Law.................................................................. 50 SECTION 9.08. Waivers; Amendment.............................................................. 50 SECTION 9.09. Interest Rate Limitation........................................................ 51 SECTION 9.10. Entire Agreement................................................................ 51 SECTION 9.11. WAIVER OF JURY TRIAL............................................................ 51 SECTION 9.12. Severability.................................................................... 52 SECTION 9.13. Counterparts.................................................................... 52 SECTION 9.14. Headings........................................................................ 52 SECTION 9.15. Jurisdiction; Consent to Service of Process..................................... 52 SECTION 9.16. Confidentiality................................................................. 53
6 iv 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 13, 2000, 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"), The Chase Manhattan Bank, a New York banking corporation, as agent (in such capacity, the "Administrative Agent") for the Lenders and Bank One N.A. and Barclays Bank PLC - Miami Agency, as agents for the Lenders. The Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement dated as of October 18, 1999, 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 $465,000,000, 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. 8 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. "Administrative Agent Fees" shall have the meaning assigned to such term in Section 2.09(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. 9 3 "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:
Ratings Facility Fee LIBOR Spread (bp) Drawn Cost (bp) (S&P/Moody's) (bp) -------------- ------------ ----------------- --------------- Category 1 A/A2 or Higher 10.00 25.00 35.00 Category 2 A-/A3 12.50 30.00 42.50 Category 3 BBB+/Baa1 15.00 35.00 50.00 Category 4 BBB/Baa2 20.00 42.50 62.50 Category 5 BBB-/Baa3 or 25.00 50.00 75.00 lower
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. 10 4 "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. "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 11 5 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 October 13, 2000. "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. 12 6 "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. "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. 13 7 "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 2.09(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 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 22, 2000, 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. 14 8 "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. "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 15 9 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 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 16 10 December 31, (ii) the Maturity Date and (iii) the date such Borrowing is prepaid in accordance with Section 2.08 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. 17 11 "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. "Maturity Date" shall mean the first anniversary of the Termination Date (as the Termination Date may be extended pursuant to Section 2.22). "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". 18 12 "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. "Participation Fee" shall have the meaning assigned to such term in Section 2.09(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). 19 13 "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. "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 2.06, (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 $465,000,000. "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 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 20 14 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. "Termination Date" means October 12, 2001, 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 2.09(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; 21 15 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. 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 2.17), 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 22 16 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 2.12 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 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 23 17 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 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 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 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 inviting the Lenders to submit Competitive Bids. (b) Each Lender may make one or more Competitive Bids to the applicable Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be 24 18 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 Lender is willing to make, (y) the Competitive Bid Rate or Rates at which the 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 respect of which a Competitive Bid shall have been made and the identity of the 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 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; 25 19 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 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. (g) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a 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 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 26 20 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 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 27 21 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. (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. 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 28 22 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 2.08. (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 2.07. Evidence of Debt; Repayment of Loans. (a) The outstanding principal balance of each Loan shall be payable on the 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 2.10. (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 2.07 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. 29 23 SECTION 2.08. 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 Lenders of the Aggregate Revolving Credit Exposure and (ii) if the Aggregate Revolving 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 2.08 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.08 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.09. 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 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). 30 24 (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 2.10. Interest on Loans. (a) Subject to the provisions of Section 2.11, 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. (b) Subject to the provisions of Section 2.11, 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, 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 2.11, 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 31 25 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 2.11. 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 plus (ii) 2.00%. SECTION 2.12. 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 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 2.13. 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 32 26 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 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 33 27 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 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 34 28 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. 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. (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 2.17. 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 payment of Facility Fees to 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 35 29 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 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 2.18. 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 adjustments 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 2.19. Taxes. (a) Any and all payments by a Borrower hereunder and under any other Loan Document shall be made, in accordance with Section 2.16, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges 36 30 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. (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 37 31 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 W-8BEN or Form W-8ECI, 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-8BEN, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN, 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 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 38 32 "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 required to pay any additional amount to any Lender or any Governmental Authority on account 39 33 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, 40 34 (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 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 41 35 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. 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 42 36 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. (c) If (and only if) Lenders (including Substitute Lenders) holding Commitments that represent at least 66 2/3% 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 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 $600,000,000; 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 43 37 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 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 44 38 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. 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. 45 39 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, 1999, audited by and accompanied by the opinion of PricewaterhouseCoopers L.L.P., independent public accountants, and (ii) as of and for the fiscal quarter and portion of the fiscal year ended June 30, 2000. 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, 1999. 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 46 40 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 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 47 41 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 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 48 42 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. 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. 49 43 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. (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. 50 44 (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. (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 51 45 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 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; 52 46 (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 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); 53 47 (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. 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 54 48 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. 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. 55 49 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; (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 56 50 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 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 57 51 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 .70 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%. 58 52 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, 59 53 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 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 60 54 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; (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 61 55 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. 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 62 56 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. 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 63 57 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 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. 64 58 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. 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 65 59 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 66 60 responsibility with respect to any statements, warranties or representations made in or in 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). 67 61 (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 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. 68 62 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 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 69 63 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. 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 2.17 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. 70 64 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. 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 71 65 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 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. 72 66 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 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.] 73 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 /s/ Jorge A. Junquera --------------------------------------- Name: Jorge A. Junquera Title: Senior Executive Vice President by /s/ Richard Barrios --------------------------------------- Name: Richard Barrios Title: Senior Vice President POPULAR NORTH AMERICA, INC., by /s/ Jorge A. Junquera --------------------------------------- Name: Jorge A. Junquera Title: Senior Executive Vice President by /s/ Richard Barrios --------------------------------------- Name: Richard Barrios Title: Senior Vice President THE CHASE MANHATTAN BANK, individually and as Administrative Agent, by /s/ Christine Herrick --------------------------------------- Name: Christine Herrick Title: Vice President BANK ONE N.A., by /s/ John P. Heskin --------------------------------------- Name: John P. Heskin Title: Commercial Banking Officer 74 BARCLAYS BANK PLC, by /s/ Sergio J. Cuervo --------------------------------------- Name: Sergio J. Cuervo Title: Director 75 69 CREDIT SUISSE FIRST BOSTON, by /s/ Jay Chall --------------------------------------- Name: Jay Chall Title: Director by /s/ James H. Lee --------------------------------------- Name: James H. Lee Title: Assistant Vice President LASALLE BANK NATIONAL ASSOCIATION, by /s/ John Giuffre --------------------------------------- Name: John Giuffre Title: First Vice President COMERICA BANK, by /s/ Laura A. Wrocklage --------------------------------------- Name: Laura A. Wrocklage Title: First Vice President NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK BRANCH, AND/OR CAYMAN ISLANDS BRANCH, by /s/ Georg L. Peters --------------------------------------- Name: Georg L. Peters Title: Vice President by /s/ Josef Haas --------------------------------------- Name: Josef Haas Title: Vice President 76 70 BANCA INTESA S.P.A., by /s/ Anthony F. Giobbi --------------------------------------- Name: Anthony F. Giobbi Title: First Vice President by /s/ Charles W. Kennedy --------------------------------------- Name: Charles W. Kennedy Title: First Vice President BANCA MONTE DEI PASCHI DI SIENA S.P.A. NEW YORK BRANCH, by /s/ Giulio Natalicchi --------------------------------------- Name: Giulio Natalicchi Title: Senior Vice President & General Manager by /s/ Brian R. Landy --------------------------------------- Name: Brian R. Landy Title: Vice President BANCO BILBAO VIZCAYA ARGENTARIA, S.A., by /s/ Olga Matta --------------------------------------- Name: Olga Matta Title: Executive Vice President by /s/ Rafael Blanco --------------------------------------- Name: Rafael Blanco Title: Senior Executive Vice President 77 CITIBANK, N.A., by /s/ Elena Manrara --------------------------------------- Name: Elena Manrara Title: Vice President BANCA DI ROMA, by /s/ William J. Fontana --------------------------------------- Name: William J. Fontana Title: Vice President by /s/ Alessandro Paoli --------------------------------------- Name: Alessandro Paoli Title: Asst. Treasurer 78 CAJA DE AHORROS Y MONTE DE PIEDAD DE MADRID, by /s/ Paul Barrabes --------------------------------------- Name: Paul Barrabes Title: I.F.I.S. by /s/ Francisco Fernadez Montes --------------------------------------- Name: Francisco Fernandez Montes Title: Capital Markets WESTDEUTSCHE LANDESBANK GIROZENTRALE, by /s/ Raymond K. Miller --------------------------------------- Name: Raymond K. Miller Title: Director by /s/ Edward R. Bauzyk --------------------------------------- Name: Edward R. Bauzyk Title: Associate Director THE BANK OF NOVA SCOTIA, by /s/ James R. Trimble --------------------------------------- Name: James R. Trimble Title: Managing Director EX-10.25 13 g67461ex10-25.txt DISTRIBUTION AGREEMENT 1 EXHIBIT 10.25 BANPONCE CORPORATION MEDIUM-TERM NOTES DUE FROM 9 MONTHS TO 30 YEARS FROM DATE OF ISSUE DISTRIBUTION AGREEMENT October 6, 1995 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center North Tower New York, New York 10281 CS FIRST BOSTON CORPORATION 55 East 52nd Street New York, New York 10055 FIRST CHICAGO CAPITAL MARKETS, INC. One First National Plaza Mail Suite 0407 Chicago, Illinois 60670-0327 Ladies and Gentlemen: BanPonce Corporation, a Puerto Rico corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (each, an "Agent" and collectively, the "Agents") with respect to the issue and sale by the Company of its Medium-Term Notes described herein (the "Notes"). The Notes are to be issued pursuant to an Indenture, dated as of February 15, 1995 (the "Indenture"), between the Company and The First National Bank of Chicago, as trustee (the "Trustee"). As of the date hereof, the Company has authorized the issuance and sale of Notes with an aggregate initial offering price of up to $1,000,000,000 through the Agents pursuant to the terms of this Agreement. It is understood, however, that the Company may from time to time authorize the issuance of additional Notes and that such additional Notes may be sold through or to the Agents pursuant to the terms of this Agreement, all as though the issuance of such Notes were authorized as of the date hereof. This Agreement provides both for the sale of Notes by the Company directly to purchasers, in which case the Agents will act as agents of the Company in soliciting Note purchasers, and, as may from time to time be agreed to by the Company and any Agent, to such Agent as principal for resale to purchasers. 2 The Company has filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-3 (No. 33-61601) for the registration of debt securities, including the Notes, under the Securities Act of 1933, as amended (the "1933 Act"), and the offering thereof from time to time in accordance with Rule 415 of the rules and regulations of the SEC under the 1933 Act (the "1933 Act Regulations"). Such registration statement has been declared effective by the SEC and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). Such registration statement (and any further registration statements which may be filed by the Company for the purpose of registering additional Notes and in connection with which this Agreement is included as an exhibit) and the prospectus constituting a part thereof, and any prospectus supplements relating to the Notes, including all documents incorporated therein by reference, as from time to time amended or supplemented by the filing of documents pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), or the 1933 Act or otherwise, are referred to herein collectively as the "Registration Statement" and the "Prospectus", respectively, except that if any revised prospectus shall be provided to the Agents by the Company for use in connection with the offering of the Notes which is not required to be filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations, the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Agents for such use. SECTION 1. Appointment as Agents. (a) Appointment of Agents. Subject to the terms and conditions stated herein and subject to the reservation by the Company of the right to sell Notes directly on its own behalf, the Company hereby appoints each Agent as its agent for the purpose of soliciting purchases of the Notes from the Company by others and agrees that, except as otherwise contemplated herein, whenever the Company determines to sell Notes directly to an Agent as principal for resale to others, it will enter into a Terms Agreement (hereafter defined) relating to such sale in accordance with the provisions of Section 3(b) hereof. The Agents are not authorized to appoint sub-agents or to engage the services of any other broker or dealer in connection with the offer or sale of the Notes. The Company agrees that, during the period that the Agents are acting as the Company's agents hereunder, the Company will not contact or solicit potential investors introduced to it by the Agents to purchase the Notes. Notwithstanding anything to the contrary contained herein, the Company may, upon one day's prior written notice to the Agents, authorize any other person, partnership or corporation (an "Additional Agent") to act as its agent to solicit offers for the purchase of all or part of the Notes of the Company. Unless the Agents otherwise agree, the appointment of an Additional Agent shall be effected by the Company's addition of the name and address of the Additional Agent to the signature page of a 2 3 counterpart of this Agreement, the execution of such counterpart by the Additional Agent, and the delivery of executed copies of such counterpart to each Agent and its counsel. Thereafter the term "Agents" as used in this Agreement shall mean the Agents and such Additional Agent. At such time, the Additional Agent shall specify its requirement for the delivery of certificates, letters and opinions as are set forth in Section 5 hereof. It is understood that if from time to time the Company is approached by a prospective agent offering to solicit a specific purchase of Notes, the Company may engage such agent with respect to such specific purchase, provided that (i) such agent is engaged on terms substantially similar (including the same commission schedule as set forth hereto as Schedule A) to the applicable terms of this Agreement and (ii) each Agent is given notice of such purchase promptly, including the terms thereof and a copy of the agreement setting forth the terms of engagement of such agent by the Company, in each case after the purchase is agreed to. (b) Reasonable Efforts Solicitations; Right to Reject Offers. Upon receipt of instructions from the Company, each Agent will use its reasonable efforts to solicit purchases of such principal amount of the Notes as the Company and such Agent shall agree upon from time to time during the term of this Agreement, it being understood that the Company shall not approve the solicitation of purchases of Notes in excess of the amount which shall be authorized by the Company from time to time or in excess of the principal amount of Notes registered pursuant to the Registration Statement. The Agents will have no responsibility for maintaining records with respect to the aggregate principal amount of Notes sold, or of otherwise monitoring the availability of Notes for sale under the Registration Statement. Each Agent will communicate to the Company, orally or in writing, each offer to purchase Notes from such Agent, other than those offers rejected by such Agent. Each Agent shall have the right, in its discretion reasonably exercised, to reject any proposed purchase of Notes, as a whole or in part, and any such rejection shall not be deemed a breach of such Agent's agreement contained herein. The Company may accept or reject any proposed purchase of the Notes, in whole or in part. (c) Solicitations as Agent; Purchases as Principal. In soliciting purchases of the Notes on behalf of the Company, each Agent shall act solely as agent for the Company and not as principal. Each Agent shall make reasonable efforts to assist the Company in obtaining performance by each purchaser whose offer to purchase Notes has been solicited by such Agent and accepted by the Company. No Agent shall have any liability to the Company in the event any such purchase is not consummated for any reason, except in the event that such sale is not consummated due to the failure of such Agent to perform its obligations hereunder. No Agent shall have an obligation to purchase Notes from the Company as principal, but any Agent may agree from time to time to purchase Notes as principal. Any such purchase of Notes by an Agent as principal 3 4 shall be made pursuant to a Terms Agreement in accordance with Section 3(b) hereof. (d) Reliance. The Company and each Agent agree that any Notes the placement of which such Agent arranges shall be placed by such Agent, and any Notes purchased by an Agent shall be purchased in reliance on the representations, warranties, covenants and agreements of the Company contained herein and on the terms and conditions and in the manner provided herein. SECTION 2. Representations and Warranties of the Company. (a) The Company represents and warrants to the Agents as of the date hereof, as of the date of each acceptance by the Company of an offer for the purchase of Notes (whether through an Agent as agent or to an Agent as principal), as of the date of each delivery of Notes (whether through an Agent as agent or to an Agent as principal) (the date of each such delivery to an Agent as principal being hereafter referred to as a "Settlement Date"), and as of any time that the Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of Notes or similar changes and other than an amendment or supplement that relates to an offering of debt securities other than the Notes) or there is filed with the SEC any document incorporated by reference into the Prospectus (other than any Current Report on Form 8-K relating exclusively to the issuance of debt securities other than the Notes under the Registration Statement) (each of the times referenced above being referred to herein as a "Representation Date") as follows: (i) Due Incorporation and Qualification. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Puerto Rico with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"); and the Company is not required to register as a foreign corporation in any jurisdiction in order to conduct the business presently conducted by it. (ii) Subsidiaries. Each subsidiary of the Company which is a significant subsidiary as defined in Rule 405 of Regulation C of the 1933 Act Regulations (each, a "Significant Subsidiary") has been duly incorporated and is validly existing as a corporation or a bank in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business 4 5 and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify and be in good standing would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable (subject to the provisions of Section 55 of Title 12 of the United States Code in the case of Significant Subsidiaries which are national banking associations) and, except as otherwise disclosed in the Prospectus and except for directors' qualifying shares, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity or, if such is not the case, that any such security interest, mortgage pledge, lien, encumbrance, claim or equity, when exercised, enforced or otherwise asserted, will not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. (iii) Registration Statement and Prospectus. At the time the Registration Statement became effective, the Registration Statement complied, and as of the applicable Representation Date will comply, in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the SEC promulgated thereunder. The Registration Statement, at the time it became effective, did not, and at each time thereafter at which any amendment to the Registration Statement becomes effective and any Annual Report on Form 10-K is filed by the Company with the SEC and as of each Representation Date will not, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; the Prospectus, as of the date hereof does not, and as of each Representation Date will not, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by the Agents expressly for use in the Registration Statement or Prospectus. 5 6 (iv) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the SEC, complied or when so filed will comply, as the case may be, in all material respects with the requirements of the 1934 Act and the rules and regulations promulgated thereunder (the "1934 Act Regulations"), and, when read together and with the other information in the Prospectus, did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were or are made, not misleading. (v) Accountants. The accountants who certified the financial statements and supporting schedules included or incorporated by reference in the Prospectus are independent public accountants within the meaning of the 1933 Act and the 1933 Act Regulations. (vi) Financial Statements. The consolidated financial statements and any supporting schedules included or incorporated by reference in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company and its consolidated subsidiaries as of the dates indicated and the consolidated results of their operations for the periods specified; except as stated therein, said financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis during the periods involved; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. (vii) Authorization and Validity of this Agreement, the Indenture and the Notes. This Agreement has been duly authorized, executed and delivered by the Company; the Indenture has been duly authorized and is a valid and binding obligation of the Company enforceable in accordance with its terms subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors rights and to general equity principles; the Notes have been duly and validly authorized for issuance, offer and sale pursuant to this Agreement and, when issued, authenticated and delivered pursuant to the provisions of this Agreement and the Indenture against payment of the consideration therefor specified in the Prospectus or pursuant to any Terms Agreement, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws relating to or affecting creditors' 6 7 rights generally and to general equity principles; the Notes and the Indenture will be substantially in the form heretofore delivered to the Agents and conform in all material respects to all statements relating thereto contained in the Prospectus; and the Notes will be entitled to the benefits provided by the Indenture. (viii) Material Changes or Material Transactions. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated therein or contemplated thereby, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business. (ix) No Defaults; Regulatory Approvals. Neither the Company nor any of the Significant Subsidiaries is in violation of its charter or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it or any of them or their properties may be bound; the execution, delivery and performance of this Agreement and the Indenture and the consummation of the transactions contemplated herein, therein and pursuant to any applicable Terms Agreement have been duly authorized by all necessary corporate action and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Significant Subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound or to which any of the property or assets of the Company or any such subsidiary is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any such subsidiary or any law, administrative regulation or administrative or court order or decree which breach, default, imposition or violation would, in each case, have a material adverse effect on the Company and its subsidiaries taken as a whole; and no consent, approval, authorization, order or decree of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Agreement, except such as have already been obtained or as may be required under the 1933 Act or the 1933 Act Regulations (which have been obtained), the 1939 Act or state securities or Blue Sky laws. 7 8 (x) Legal Proceedings; Contracts. Except as may be set forth in the Registration Statement, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened against or affecting, the Company or any of its subsidiaries, which might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, or might materially and adversely affect the consummation of this Agreement or any Terms Agreement; and there are no contracts or documents of the Company or any of its subsidiaries which are required to be filed or incorporated by reference as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed or incorporated by reference. (xi) Regulatory Certificates, Authorities and Permits. The Company and the Significant Subsidiaries possess adequate certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them except for such certificates, authorities or permits as are not material to the business, operations, financial condition or income of the Company or the Significant Subsidiaries; and neither the Company nor any of the Significant Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially adversely affect the conduct of the business, operations, financial condition or income of the Company and its subsidiaries considered as one enterprise. (b) Additional Certifications. Any certificate signed by any officer of the Company and delivered to the Agents or to counsel for the Agents in connection with an offering of Notes or the sale of Notes to an Agent as principal shall be deemed a representation and warranty by the Company to the Agents (or, in the case of a sale of Notes to an Agent as principal, to such Agent) as to the matters covered thereby on the date of such certificate. SECTION 3. Solicitations as Agent; Purchases as Principal. (a) Solicitations as Agent. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, each Agent agrees, as agent of the Company, to use its reasonable efforts to solicit offers to purchase the Notes upon the terms and conditions set forth herein and in the Prospectus. 8 9 The Company reserves the right, in its sole discretion, to suspend solicitation of purchases of the Notes through the Agents, as agents, commencing at any time for any period of time or permanently. Upon receipt of instructions from the Company, the Agents will forthwith suspend solicitation of purchases from the Company until such time as the Company has advised the Agents that such solicitation may be resumed. The Company agrees to pay each Agent a commission, in the form of a discount, equal to the applicable percentage of the principal amount of each Note sold by the Company as a result of a solicitation made by such Agent as set forth in Schedule A hereto. Each such Agent may reallow any portion of the commission payable pursuant hereto to dealers or purchasers in connection with the offer and sale of any Notes. The purchase price, interest rate, maturity date and other terms of the Notes shall be agreed upon by the Company and each Agent and set forth in a pricing supplement to the Prospectus to be prepared following each acceptance by the Company of an offer for the purchase of Notes. Except as may be otherwise provided in such supplement to the Prospectus, the Notes will be issued in denominations of $1,000 and integral multiples thereof. All Notes sold through any Agent as agent will be sold at 100% of their principal amount unless otherwise agreed to by the Company and such Agent. (b) Purchases as Principal. Each sale of Notes to an Agent as principal shall be made in accordance with the terms contained herein and (unless the Corporation and such Agent shall otherwise agree) pursuant to a separate agreement which will provide for the sale of such Notes to, and the purchase and reoffering thereof by, such Agent. Each such separate agreement (which may be an oral agreement confirmed in writing) between such Agent and the Company is herein referred to as a "Terms Agreement". Unless the context otherwise requires, each reference contained herein to "this Agreement" shall be deemed to include any applicable Terms Agreement between the Company and an Agent. Each such Terms Agreement, whether oral or in writing, shall be with respect to such information (as applicable) as is specified in Exhibit A hereto. Each Agent's commitment to purchase Notes as principal pursuant to any Terms Agreement or otherwise shall be deemed to have been made on the basis of the representations and warranties of the Company herein contained and shall be subject to the terms and conditions herein set forth. Each Terms Agreement shall specify the principal amount of Notes to be purchased by the Agent pursuant thereto, the price to be paid to the Company for such Notes (which, if not so specified in a Terms Agreement, shall be at a discount equivalent to the applicable commission set forth in Schedule A hereto), the time and place of delivery of and payment for such Notes and such other provisions (including further terms of the Notes) as may be mutually agreed upon. Each Agent may 9 10 utilize a selling or dealer group in connection with the resale of the Notes purchased. Unless expressly provided for in the Terms Agreement, no opinions, letters or certificates shall be delivered by the Company in connection with the sale of Notes to each Agent as principal. (c) Administrative Procedures. Administrative procedures with respect to the sale of Notes shall be agreed upon from time to time by the Agents and the Company (the "Procedures"). The Agents and the Company agree to perform the respective duties and obligations specifically provided to be performed by them in the Procedures. SECTION 4. Covenants of the Company. The Company covenants with each Agent as follows: (a) Notice of Certain Events. The Company will notify each Agent immediately (i) of the effectiveness of any amendment to the Registration Statement, (ii) of the filing of any supplement to the Prospectus relating to the Notes or any document to be filed pursuant to the 1934 Act which will be incorporated by reference in the Prospectus, (iii) of the receipt of any comments from the SEC with respect to the Registration Statement or the Prospectus, (iv) of any request by the SEC for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (v) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. The Company will use reasonable efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof. (b) Notice of Certain Proposed Filings. Except as otherwise provided in subsection (1) of this Section, the Company will give each Agent notice of its intention to file or prepare any additional registration statement with respect to the registration of additional Notes, any amendment to the Registration Statement or any amendment or supplement to the Prospectus (other than an amendment or supplement providing solely for a change in the interest rates of Notes and other than an amendment or supplement that relates to an offering of debt securities other than the Notes), whether by the filing of documents pursuant to the 1934 Act, the 1933 Act or otherwise, and will furnish each Agent with copies of any such amendment or supplement or other documents proposed to be filed or prepared a reasonable time in advance of such proposed filing or preparation, as the case may be, except for documents filed pursuant to the 1934 Act, which the Company shall furnish to each Agent immediately after the filing thereof, and will not file any such amendment or supplement other than a document filed pursuant to the 1934 Act in a form to which you or your counsel shall reasonably object. 10 11 (c) Copies of the Registration Statement and the Prospectus. The Company will deliver to each Agent as many signed and conformed copies of the Registration Statement (as originally filed) and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated by reference in the Prospectus) as such Agent may reasonably request. The Company will furnish each Agent with as many copies of the Prospectus (as amended or supplemented) as such Agent shall reasonably request so long as such Agent is required to deliver a Prospectus in connection with sales or solicitations of offers to purchase the Notes. (d) Preparation of Pricing Supplements. The Company will prepare, with respect to any Notes to be sold through the Agents pursuant to this Agreement, a Pricing Supplement with respect to such Notes and will file such Pricing Supplement pursuant to Rule 424(b)(3) under the 1933 Act not later than the close of business of the SEC on the fifth business day after the date on which such Pricing Supplement is first used. (e) Revisions of Prospectus -- Material Changes. Except as otherwise provided in subsection (l) of this Section, if at any time during the term of this Agreement any event shall occur or condition exist as a result of which it is necessary, to amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading or if it shall be necessary to amend or supplement the Registration Statement or the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, immediate notice shall be given, and confirmed in writing, to the Agents to cease the solicitation of offers to purchase the Notes in the Agents' capacity as agents and to cease sales of any Notes any Agent may then own as principal pursuant to a Terms Agreement, and the Company will promptly prepare and file with the SEC such amendment or supplement, whether by filing documents pursuant to the 1934 Act, the 1933 Act or otherwise, as may be necessary to correct such untrue statement or omission or to make the Registration Statement and Prospectus comply with such requirements. (f) Prospectus Revisions -- Periodic Financial Information. Except as otherwise provided in subsection (l) of this Section, on the date on which there shall be released to the general public interim consolidated financial statement information related to the Company with respect to each of the first three quarters of any fiscal year or preliminary financial statement information with respect to any fiscal year, the Company shall furnish such information to the Agents, confirmed in writing, and promptly thereafter shall cause the Registration Statement and the Prospectus to be amended or supplemented to include or incorporate 11 12 by reference capsule financial information with respect to the results of operations of the Company and its consolidated subsidiaries for such period. (g) Prospectus Revisions -- Audited Financial Information. Except as otherwise provided in subsection (l) of this Section, on the date on which there shall be released to the general public financial information included in the audited consolidated financial statements of the Company for the preceding fiscal year, the Company shall cause the Registration Statement and the Prospectus to be amended, whether by the filing of documents pursuant to the 1934 Act, the 1933 Act or otherwise, to include or incorporate by reference such audited financial statements and the report or reports, and consent or consents to such inclusion or incorporation by reference, of the independent accountants with respect thereto, as well as such other information and explanations as shall be necessary for an understanding of such financial statements or as shall be required by the 1933 Act or the 1933 Act Regulations. (h) Earnings Statements. The Company will make generally available to the security holders of the Company as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering each twelve month period beginning, in each case, not later than the first day of the Company's fiscal quarter next following the "effective date" (as defined in such Rule 158) of the Registration Statement with respect to each sale of Notes. (i) Blue Sky Qualifications. The Company will endeavor, in cooperation with the Agents, to qualify the Notes for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Agents and the Company shall agree and, unless the Company otherwise notifies the Agents, will maintain such qualifications in effect for as long as may be required for the distribution of the Notes; provided, however, that the Company shall not be required to submit to general service of process in any jurisdiction. The Company will promptly advise the Agents of their receipt of any notification with respect to the suspension of the qualification of the Notes for sale in any such state or jurisdiction or the initiating or threatening of any proceeding for such purpose. (j) 1934 Act Filings. The Company, during the period when the time that Prospectus is required to be delivered under the 1933 Act, will file promptly all documents required to be filed with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act. (k) Stand-Off Agreement. If required pursuant to the terms of a Terms Agreement between the Company and any Agent, between the date of any Terms Agreement and the Settlement Date with respect to 12 13 such Terms Agreement, the Company will not, without such Agent's prior consent, offer or sell, or enter into any agreement to sell, any debt securities of the Company (other than the Notes that are to be sold pursuant to such Terms Agreement and commercial paper). (l) Suspension of Certain Obligations. The Company shall not be required to comply with the provisions of subsections (b), (e), (f) or (g) of this Section during any period from the time (i) the Agents shall have suspended solicitation of purchases of the Notes in their capacity as agents pursuant to a request from the Company and (ii) no Agent shall then hold any Notes as principal purchased pursuant to a Terms Agreement, to the time the Company shall determine that solicitation of purchases of the Notes should be resumed or shall subsequently enter into a new Terms Agreement with such Agent. (m) Public Reports. The Company will furnish to the Agents, at the earliest time the Company makes the same available to others, copies of their annual reports and other financial reports furnished or made available to the public generally. SECTION 5. Conditions of Obligations. The obligations of each Agent to solicit offers to purchase the Notes as agent of the Company, the obligations of any purchasers of the Notes sold through such Agent as agent, and any obligation of an Agent to purchase Notes pursuant to a Terms Agreement or otherwise will be subject to the accuracy of the representations and warranties on the part of the Company contained herein and to the accuracy of the statements of the officers of the Company made in any certificate furnished pursuant to the provisions hereof, to the performance and observance by the Company of all their respective covenants and agreements herein contained and to the following additional conditions precedent: (a) Legal Opinions. On the date hereof, the Agents shall have received the following legal opinions, dated as of the date hereof and in form and substance satisfactory to the Agents: (1) Opinion of Counsel to the Company. The opinion of Sullivan & Cromwell, Counsel to the Company to the effect that: (i) The Company is duly registered as a bank holding company under the Bank Holding Act. (ii) The Indenture has been duly authorized, executed and delivered by the Company and duly qualified under the Trust Indenture Act of 1939 and constitutes a valid and legally binding obligation to the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, 13 14 reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (iii) The series of Notes has been duly authorized and established in conformity with the Indenture, and, when the terms of a particular Note and of its issuance and sale have been duly authorized and established by all necessary corporate action in conformity with the Indenture, such Note has been duly prepared, executed, authenticated and issued in accordance with the Indenture and delivered against payment in accordance with this Agreement, such Note will constitute a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (iv) All regulatory consents, authorizations, approvals and filings required to be obtained or made by the Company on or prior to the date hereof under the federal laws of the United States and the laws of the State of New York for the issuance, sale and delivery of the Notes by the Company to or through one or more Agents have been obtained or made; provided, however, that such counsel need express no opinion with respect to state securities laws. (v) This Agreement has been duly authorized, executed and delivered by the Company. (vi) The execution and delivery by the Company of the Indenture did not, and the execution and delivery by the Company of this Agreement do not, and the preparation, execution and issuance of each particular Note in accordance with the Indenture, the sale by the Company of such Note in accordance with this Agreement, and the performance by the Company of its obligations under the Indenture, this Agreement and the Notes will not (a) violate the articles of incorporation or by-laws of the Company as in effect on the date hereof, or (b) violate any existing federal law of the United States applicable to the Company; provided, however, that, for the purposes of this paragraph (xi), such counsel need express no opinion with respect to federal or state securities laws, other antifraud laws, fraudulent transfer laws, the Employee Retirement Income Security Act of 1974 and related laws, and laws that restrict transactions between United States persons and certain foreign countries; provided, further, that insofar as 14 15 performance by the Company of its obligations under the Indenture, this Agreement and the Notes is concerned, such counsel need express no opinion as to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights. (vii) The Registration Statement is effective under the 1933 Act and, to the best of such counsel's knowledge, (i) no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act and (ii) no proceedings therefor have been initiated or threatened by the SEC. (viii) As counsel to the Company such counsel has reviewed the Registration Statement and the Prospectus, participated in discussions with representatives of the Agents, the Company and their accountants, and advised the Company as to the requirements of the 1933 Act and the applicable rules and regulations thereunder, and on the basis of the information that such counsel gained in the course of the performance of their services considered in the light of their understanding of the applicable law, including the requirements of Form S-3 and the character of the prospectus contemplated thereby, and the experience they have gained through their practice under the 1933 Act, such counsel confirm that, in their opinion, each part of the Registration Statement, when such part became effective, and the Prospectus, as of the date of the prospectus supplement forming part thereof, appeared on their face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the Trust Indenture Act, and the applicable rules and regulations of the SEC thereunder; and that nothing has come to their attention in the course of their review that has caused them to believe that any part of the Registration Statement, when such part became effective or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, contains or contained any untrue statement of a material fact or omits or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or that the Prospectus, on the date of the Prospectus Supplement forming part thereof, or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, contains or contained any untrue statement of a material fact or omits or omitted to state a 15 16 material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel may say that the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus except (i) for those made under the captions "Description of Debt Securities and Guarantees" and "Plan of Distribution" and the appropriate sections in any Prospectus Supplement describing the securities offered thereby, insofar as they relate to provisions of documents therein described and (ii) the accuracy of the descriptions of the Federal laws of the United States contained in the Registration Statement and Prospectus under the captions "Certain Regulatory Matters" and "United States Taxation" and that they do not express any opinion or belief as to the financial statements or other financial data contained in the Registration Statement and the Prospectus, as to the statement of the eligibility and qualification of the Trustee under the Indenture; and that their letter is furnished as counsel for the Company to the Agents and is solely for the benefit of the Agents. Such counsel may base their opinions, as to certain questions of fact, on certificates of officers of the Company and may rely as to all matters relating to the laws of the Commonwealth of Puerto Rico upon the opinion of Brunilda Santos de Alvarez, delivered pursuant to Section 5(b)(2) hereof. (2) Opinion of Puerto Rico Counsel to the Company. The opinion of Brunilda Santos de Alvarez, Puerto Rico Counsel to the Company, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Puerto Rico. (ii) The Company has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement. (iii) The Company is not required to register as a foreign corporation in any jurisdiction in order to conduct the business presently conducted by it. (iv) Each Significant Subsidiary has been duly incorporated and is validly existing as a corporation or 16 17 a bank in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement, and, to the best of such counsel's knowledge and information, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which it owns or leases substantial properties or in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business; except where the failure to so qualify and be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued and is fully paid and non-assessable (subject to the provisions of Section 55 of Title 12 of the United States code in the case of Significant Subsidiaries which are national banking associations) and, except for directors' qualifying shares, is owned, directly or through such subsidiaries, by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (v) This Agreement has been duly authorized, executed and delivered by the Company. (vi) The Indenture has been duly and validly authorized, executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (vii) The series of Notes has been duly authorized and established in conformity with the Indenture, and, when the terms of a particular Note and of its issuance and sale have been duly authorized and established by all necessary corporate action in conformity with the Indenture, such Note has been duly prepared, executed, authenticated and issued in accordance with the Indenture and delivered against payment in accordance with this Agreement, such Note will constitute a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 17 18 (viii) All regulatory consents, authorizations, approvals and filings required to be obtained or made by the Company on or prior to the date hereof under the federal laws of the United States and the General Corporation Law of the Commonwealth of Puerto Rico for the issuance, sale and delivery of the Notes by the Company to or through one or more Agents have been obtained or made; provided, however, that such counsel need express no opinion with respect to state securities laws. (ix) To the best of such counsel's knowledge, neither the Company nor any of the Significant Subsidiaries is in violation of its charter or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note or lease known to such counsel to which it or any of them is a party or by which their properties may be bound; the execution and delivery by the Company of the Indenture and the Distribution Agreement and any Terms Agreement do not, and the preparation, execution and issuance of each particular Note in accordance with the Indenture, the sale by the Company of such Note in accordance with the Distribution Agreement, and the performance by the Company of its respective obligations under the Indenture, the Distribution Agreement, the Notes and any Terms Agreement will not (a) violate the articles of incorporation or by-laws of the Company, (b) violate any Federal law of the United States or any law of the Commonwealth of Puerto Rico existing on the date of such opinion or any administrative regulation or administrative or court decree applicable to the Company or any Significant Subsidiary or (c) conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Significant Subsidiaries pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument known to such counsel to which the Company or any of the Significant Subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or any of the Significant Subsidiaries is subject, which breach, default, imposition or violation would, in each case, have a material adverse effect on the Company and its subsidiaries taken as a whole; provided, however, that such counsel need express no opinion with respect to Federal securities laws, other antifraud laws, fraudulent transfer laws, the Employee Retirement Income Security Act of 1974 and related laws, and laws that restrict 18 19 transactions between United States persons and citizens or residents of certain foreign countries; provided, further, that insofar as performance by the Company of its obligations under the Indenture, the Distribution Agreement, any Terms Agreement and the Notes is concerned, such counsel need express no opinion as to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights. (x) To the best of such counsel's knowledge and information, there are no legal or governmental proceedings pending or threatened which are required to be disclosed in the Prospectus, other than those disclosed therein, and all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a party or to which any of its property or assets is subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business of the Company or any such subsidiary, are, considered in the aggregate, not material. (xi) To the best of such counsel's knowledge, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments or documents required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof or references thereto are correct in all material respects. (xii) The Registration Statement is effective under the 1933 Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or proceedings therefor initiated or threatened by the SEC. (xiii) At the time the Registration Statement became effective, the Registration Statement (other than the financial statements, schedules and other financial data included or incorporated by reference therein as to which no opinion need be rendered by such counsel) complied as to form in all material respects with the requirements of the 1933 Act, the 1939 Act and the regulations under each of those acts. (xiv) Each document filed pursuant to the 1934 Act and incorporated by reference in the Prospectus compiled 19 20 when filed as to form in all material respects with the 1934 Act and the 1934 Act Regulations thereunder. (xv) As counsel to the Company such counsel has reviewed the Registration Statement and the Prospectus, participated in discussions with representatives of the Agents, the Company and their accountants, and advised the Company as to the requirements of the 1933 Act and the applicable rules and regulations thereunder, and on the basis of the information that such counsel gained in the course of the performance of her services considered in the light of her understanding of the applicable law, including the requirements of Form S-3 and the character of the prospectus contemplated thereby, such counsel confirms that, in her opinion, each part of the Registration Statement, when such part became effective, and the Prospectus, as of the date of the prospectus supplement forming part thereof, appeared on their face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the Trust Indenture Act, and the applicable rules and regulations of the SEC thereunder; and that nothing has come to her attention in the course of her review that has caused her to believe that any part of the Registration Statement, when such part became effective (within the meaning of the 1933 Act) or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, contains or contained any untrue statement of a material fact or omits or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or that the Prospectus, on the date of the Prospectus Supplement forming part thereof, or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, contains or contained any untrue statement of a material fact or omits or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel may say that the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that she does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus except for those made under the captions "Certain Regulatory Matters", "Description of Debt Securities and Guarantees" and "Plan of Distribution" and the appropriate sections in any 20 21 Prospectus Supplement describing the securities offered thereby and under "Regulation and Supervision" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, insofar as they relate to provisions of documents therein described and that she does not express any opinion or belief as to the financial statements or other financial data contained in the Registration Statement and the Prospectus, as to the statement of the eligibility and qualification of the Trustee under the Indenture; and that her letter is furnished as counsel for the Company to the Agents and is solely for the benefit of the Agents. Such counsel may base her opinion, as to certain questions of fact, on certificates of officers of the Company and may rely as to all matters relating to the laws of the State of New York upon the opinion of Sullivan & Cromwell, delivered pursuant to Section 5(a)(1). (3) Opinion of Counsel to the Agents. The opinion of Brown & Wood, counsel to the Agents, covering the matters referred to in subparagraph (1) above under the subheadings (i), (v), (vi), (viii) and (x) and in subparagraph (2) above under the subheading (xi). (4) In giving its opinion required by subsection (a)(3) of this Section, Brown & Wood shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement (other than the financial statements, schedules and other financial data included or incorporated by reference therein as to which no opinion need be rendered by such counsel), at the time it became effective, and if an amendment to the Registration Statement or an Annual Report on Form 10-K has been filed by the Company with the SEC subsequent to the effectiveness of the Registration Statement, then at the time such amendment became effective or at the time of the most recent such filing, and at the date hereof, or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, contains or contained an untrue statement of a material fact or omits or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading or that the Prospectus (other than the financial statements, schedules and other financial data included or incorporated by reference therein as to which no opinion need be rendered by such counsel), as amended or supplemented at the date hereof, or (if such opinion is being delivered in connection with a Terms Agreement pursuant to Section 3(b) hereof) at the date of any Terms Agreement and at the Settlement Date with respect thereto, as the case may be, 21 22 contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Officer's Certificates. At the date hereof, the Agents shall have received certificates of the President or Vice President of the Company, dated as of the date hereof, to the effect that (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus or since the time that any applicable Terms Agreement was entered into, there has not been any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, (ii) the other representations and warranties of the Company contained in Section 2 hereof are true and correct with the same force and effect as though expressly made at and as of the date of such certificate, (iii) the Company has performed or complied with all agreements and satisfied all conditions on their respective parts to be performed or satisfied at or prior to the date of such certificate, and (iv) that no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the SEC. (c) Comfort Letter. The Agents on the date hereof (and any Agent who is party to a Terms Agreement, on the Settlement Date with respect to such Terms Agreement, if required by such Terms Agreement), shall receive a letter from Price Waterhouse LLP, the Company's independent public accountants, dated as of the date hereof or such Settlement Date, in form and substance reasonably satisfactory to the Agents containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters contemplated by Statement of Auditing Standards No. 72 with respect to the financial statements and certain financial information contained in or incorporated by reference in the Registration Statement and the Prospectus, and confirming that they are independent accountants within the meaning of the 1933 Act and the 1933 Act Rules. (d) Other Documents. On the date hereof and on each Settlement Date with respect to any applicable Terms Agreement, counsel to the Agents shall have been furnished with such documents as such counsel may reasonably require for the purpose of enabling such counsel to pass upon the issuance and sale of Notes as herein contemplated and related proceedings and all proceedings taken by the Company in connection with the issuance and sale of Notes as herein contemplated shall be satisfactory in form and substance to the Agents and to counsel to the Agents. 22 23 If any condition specified in this Section 5 shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Agents (or any applicable Terms Agreement may, at the option of the Agent who is party to such Terms Agreement, be terminated by such Agent) by notice to the Company at any time and any such termination shall be without liability of any party to any other party, except that the covenant regarding provision of an earnings statement set forth in Section 4(h) hereof, the provisions concerning payment of expenses under Section 10 hereof, the indemnity and contribution agreement set forth in Sections 8 and 9 hereof, the provisions of Section 11 hereof concerning the survival of representations, warranties and agreements following delivery hereof, the provisions set forth under "Parties" of Section 15 hereof and the provisions of Section 16 hereof shall remain in effect. SECTION 6. Delivery of and Payment for Notes Sold through the Agents. Delivery of Notes sold through the Agents as agents shall be made by the Company to the Agents for the account of any purchaser only against payment therefor in immediately available funds. In the event that a purchaser shall fail either to accept delivery of or to make payment for a Note on the date fixed for settlement, the Agents shall promptly notify the Company and deliver the Note to the Company, and, if the Agents have theretofore paid the Company for such Note, the Company will promptly return such funds to the Agents. If such failure occurred for any reason other than default by the Agents in the performance of their obligations hereunder, the Company will reimburse the Agents on an equitable basis for their loss of the use of the funds for the period such funds were credited to the Company's account. SECTION 7. Additional Covenants of the Company. The Company covenants with the Agents as follows: (a) Reaffirmation of Representations and Warranties. Each acceptance by it of an offer for the purchase of Notes, and each delivery of Notes to an Agent pursuant to a Terms Agreement, shall be deemed to be an affirmation that the representations and warranties of the Company contained in this Agreement and in any certificate theretofore delivered to the Agents or an Agent, as the case may be, pursuant hereto are true and correct at the time of such acceptance or sale, as the case may be, and an undertaking that such representations and warranties will be true and correct at the time of delivery to the purchaser or his agent, or to the Agents or an Agent, as the case may be, of the Note or Notes relating to such acceptance or sale, as the case may be, as though made at and as of each such time (and it is understood that such representations and warranties shall relate to the Registration 23 24 Statement and Prospectus as amended and supplemented to each such time). (b) Subsequent Delivery of Certificates. Each time that the Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of Notes or similar changes and other than by an amendment or supplement which relates exclusively to an offering of debt securities other than the Notes or an offering of preferred stock of the Company or its subsidiaries) or there is filed with the SEC any document incorporated by reference into the Prospectus (other than (i) any Current Report on Form 8-K relating exclusively to the issuance of debt securities or preferred stock under the Registration Statement or (ii) a document filed pursuant to Section 14 of the 1934 Act unless requested by the Agents) or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Company shall furnish or cause to be furnished to the Agents (or, in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent) forthwith certificates dated the date of filing with the SEC of such supplement or document, the date of effectiveness of such amendment, or the date of such sale, as the case may be, in form satisfactory to the Agents or such Agent, as the case may be, to the effect that the statements contained in the certificates referred to in Section 5(b) hereof which were last furnished to the Agents are true and correct at the time of such amendment, supplement, filing or sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Registration Statement and the Prospectus as amended and supplemented to such time) or, in lieu of such certificates, certificates of the same tenor as the certificates referred to in said Section 5(b), modified as necessary to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such certificates. (c) Subsequent Delivery of Legal Opinions. Each time that the Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of the Notes or similar changes or solely for the inclusion of additional financial information, and, unless the Agents shall otherwise specify, other than by an amendment or supplement which relates exclusively to an offering of debt securities other than the Notes or an offering of preferred stock of the Company or its subsidiaries) or there is filed with the SEC any document incorporated by reference into the Prospectus (other than (i) any Current Report on Form 8-K or (ii) a document filed pursuant to Section 14 of the 1934 Act, in each case, unless the Agents shall otherwise reasonably request), or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Company shall furnish or cause to be furnished forthwith to the Agents (or, 24 25 in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent), with a copy to counsel to the Agents, a written opinion or opinions of Puerto Rico Counsel to the Company satisfactory to the Agents or such Agent, as the case may be, dated the date of filing with the SEC of such supplement or document, the date of effectiveness of such amendment, or the date of such sale, as the case may be, in form and substance satisfactory to the Agents or such Agent, as the case may be, of the same tenor as the opinion referred to in Section 5(a)(2) hereof, but modified, as necessary, to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such opinion; or, in lieu of such opinion or opinions, counsel last furnishing such opinion to the Agents or such Agent, as the case may be, shall furnish the Agents or such Agent, as the case may be, with a letter to the effect that the Agents or such Agent, as the case may be, may rely on such last opinion to the same extent as though it was dated the date of such letter authorizing reliance (except that statements in such last opinion shall be deemed to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such letter authorizing reliance). (d) Subsequent Delivery of Comfort Letters. Each time that the Registration Statement or the Prospectus shall be amended or supplemented to include additional financial information or there is filed with the SEC any document incorporated by reference into the Prospectus which contains additional financial information (other than a Current Report on Form 8-K filed solely for the purpose of incorporating a press release relating to the Company's interim or annual financial statements or results of operations or filed in connection with the issuance of preferred stock by the Company or its subsidiaries pursuant to the Registration Statement) or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Company shall cause Price Waterhouse LLP forthwith to furnish the Agents (or, in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent) with a letter, dated the date of effectiveness of such amendment, supplement or document with the SEC, or the date of such sale, as the case may be, in form satisfactory to the Agents or such Agent, as the case may be, of the same tenor as the portions of the letter referred to in Section 5(c) hereof but modified to relate to the Registration Statement and Prospectus, as amended and supplemented to the date of such letter; provided, however, that if the Registration Statement or the Prospectus is amended or supplemented solely to include financial information as of and for a fiscal quarter, Price Waterhouse LLP may limit the scope of such letter to the unaudited financial statements included in such amendment or supplement unless any other information included therein of an accounting, financial or statistical nature is of such a nature that, in the reasonable judgment of the Agents or such Agent, as the case may be, such letter should cover such other information. 25 26 SECTION 8. Indemnification. (a) Indemnification of the Agents. The Company agrees to indemnify and hold harmless each Agent and each person, if any, who controls such Agent within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Agents expressly for use in the Registration Statement or the Prospectus; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Agents), reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above. The indemnity is subject to the condition that, insofar as it relates to any untrue statement or omission, or any alleged untrue statement or omission, made in the Prospectus but eliminated or remedied in an amended or supplemented Prospectus at the time of the sale of the related Note, it shall not inure to the benefit of any Agent (or to the benefit of any person who controls any such Agent) if a copy of the Prospectus as amended or supplemented at the time of the sale of such Note, excluding documents incorporated 26 27 therein by reference, was not sent or given to such person at or prior to the time required by the 1933 Act and the receipt of such Prospectus as amended or supplemented would have constituted a sufficient defense to the claim asserted by such person. (b) Indemnification of the Company. Each Agent agrees to indemnify and hold harmless the Company, its directors, the officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Agent expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto). (c) General. Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. SECTION 9. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in Section 8 hereof is for any reason held to be unavailable to or insufficient to hold harmless the indemnified parties although applicable in accordance with its terms, the Company and the Agents shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and the Agents, as incurred, in such proportions that each Agent is responsible for that portion represented by the percentage that the total commissions and underwriting discounts received by such Agent to the date of such liability bears to the total sales price received by the Company from the sale of Notes to the date of such liability, and the Company is responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution 27 28 from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Agent within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Agent, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company, as the case may be. SECTION 10. Payment of Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including: (i) The preparation and filing of the Registration Statement and all amendments thereto and the Prospectus and any amendments or supplements thereto; (ii) The preparation, filing and reproduction of this Agreement; (iii) The preparation, printing, issuance and delivery of the Notes, including any fees and expenses relating to the use of book-entry notes; (iv) The fees and disbursements of the Company's accountants and counsel, of the Trustee and its counsel, and of any calculation agent or exchange rate agent; (v) The reasonable fees and disbursements of counsel to the Agents incurred from time to time in connection with the transactions contemplated hereby; (vi) The qualification of the Notes under state securities laws in accordance with the provisions of Section 4(i) hereof, including filing fees and the reasonable fees and disbursements of legal counsel in connection therewith and in connection with the preparation of any Blue Sky Survey and any Legal Investment Survey; (vii) The printing and delivery to the Agents in quantities as hereinabove stated of copies of the Registration Statement and any amendments thereto, and of the Prospectus and any amendments or supplements thereto, and the delivery by the Agents of the Prospectus and any amendments or supplements thereto in connection with solicitations or confirmations of sales of the Notes; (viii) The preparation, printing, reproducing and delivery to the Agents of copies of each Indenture and all supplements and amendments thereto; 28 29 (ix) Any fees charged by rating agencies for the rating of the Notes; (x) Any advertising and other out-of-pocket expenses of the Agents incurred with the written approval of the Company; (xi) The cost of preparing and providing any CUSIP or other identification numbers for the Notes; and (xii) The fees and expenses of any Depositary (as defined in the Indentures) and any nominees thereof in connection with the Notes. SECTION 11. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto or thereto shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Agents or any controlling person of any Agent, or by or on behalf of the Company, and shall survive each delivery of and payment for any of the Notes. SECTION 12. Termination. (a) Termination of this Agreement. This Agreement (excluding any Terms Agreement) may be terminated for any reason, at any time by either the Company or an Agent upon the giving of one day's written notice of such termination to the other party hereto. (b) Termination of a Terms Agreement. Any Agent may terminate any Terms Agreement to which such Agent is a party, immediately upon notice to the Company, at any time prior to the Settlement Date relating thereto (i) if there has been, since the date of such Terms Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company or its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there shall have occurred any material adverse change in the financial markets in the United States or any outbreak or escalation of hostilities or other national or international calamity or crisis the effect of which is such as to make it, in the judgment of such Agent, impracticable to market the Notes or enforce contracts for the sale of the Notes, or (iii) if trading in any securities of the Company has been suspended by the SEC or a national securities exchange, or if trading generally on either the American Stock Exchange or the New York Stock Exchange shall have been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by 29 30 either of said exchanges or by order of the SEC or any other governmental authority, or if a banking moratorium shall have been declared by either Federal, New York or Puerto Rico authorities, or (iv) if the rating assigned by any nationally recognized securities rating agency to any debt securities of the Company as of the date of any applicable Terms Agreement shall have been lowered since that date or if any such rating agency shall have publicly announced since the time of the applicable Terms Agreement that it has placed any debt securities of the Company on what is commonly termed a "watch list" for possible downgrading. (c) General. In the event of any such termination, no party will have any liability to the other party hereto, except that (i) the Agents shall be entitled to any commission earned in accordance with the third paragraph of Section 3(a) hereof, (ii) if at the time of termination (a) any Agent shall own any Notes purchased pursuant to a Terms Agreement with the intention of reselling them or (b) an offer to purchase any of the Notes has been accepted by the Company but the time of delivery to the purchaser or his agent of the Note or Notes relating thereto has not occurred, the covenants set forth in Sections 4 and 7 hereof shall remain in effect until such Notes are so resold or delivered, as the case may be, and (iii) the covenant set forth in Section 4(h) hereof, the provisions of Section 5 hereof, the indemnity and contribution agreements set forth in Sections 8 and 9 hereof, and the provisions of Sections 11, 14 and 16 hereof shall remain in effect. SECTION 13. Notices. Unless otherwise provided herein, all notices required under the terms and provisions hereof shall be in writing, either delivered by hand, by mail or by telex, telecopier or telegram, and any such notice shall be effective when received at the address specified below. If to the Company: BanPonce Corporation 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Attention: David H. Chafey, Executive Vice President 30 31 If to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1310 10th Floor Attention: MTN Product Management Telephone: (212) 449-7476 Fax: (212) 449-2234 If to CS First Boston Corporation: CS First Boston Corporation 55 East 52nd Street New York, New York 10055 Attention: Short and Medium-Term Note Department Telephone: (212) 909-3842 Fax: (212) 318-1498 If to First Chicago Capital Markets, Inc.: First Chicago Capital Markets, Inc. One First National Plaza Mail Suite 0407 Chicago, Illinois 60670-0327 Attention: Chief Credit Officer Telephone: (312) 732-5294 Fax: (312) 732-4172 or at such other address as such party may designate from time to time by notice duly given in accordance with the terms of this Section 13. SECTION 14. Governing Law. This Agreement and all the rights and obligations of the parties shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in such State. Any suit, action or proceeding brought by the Company against one or more Agents in connection with or arising under this Agreement shall be brought solely in the state or federal court of appropriate jurisdiction located in the Borough of Manhattan, The City of New York. SECTION 15. Parties. This Agreement shall inure to the benefit of and be binding upon the Agents and the Company and their respective successors. 31 32 Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers and directors referred to in Sections 8 and 9 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and respective successors and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Notes shall be deemed to be a successor by reason merely of such purchase. SECTION 16. Consent to Jurisdiction; Appointment of Agent to Accept Service of Process. (a) The Company irrevocably consents and agrees, for the benefit of the holders from time to time of the Notes, the Agents and the other persons referred to in Section 15 that any legal action, suit or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with the Notes, this Agreement or any Terms Agreement may be brought in the courts of the State of New York or the courts of the United States of America located in The City of New York and, until all amounts due and to become due in respect of all the Notes have been paid, or until any such legal action, suit or proceeding commenced prior to such payment has been concluded, hereby irrevocably consent and submit to the non-exclusive jurisdiction of each such court in personam, generally and unconditionally with respect to any action, suit or proceeding for themselves and in respect of their properties, assets and revenues. (b) The Company hereby irrevocably designates, appoints, and empowers Orlando Berges, with offices currently at 7 West 51st Street, New York, New York, as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, service of any and all legal process, summons, notices and documents that may be served in any action, suit or proceeding brought against the Company in any such United States or State court with respect to their respective obligations, liabilities or any other matter arising out of or in connection with this Agreement or any Terms Agreement and that may be made on such designee, appointee and agent in accordance with legal procedures prescribed for such courts. If for any reason the Designated Agent shall cease to be available to act as such, the Company agrees to designate a new designee, appointee and agent in The City of New York on the terms and for the purposes of this Section 16 reasonably satisfactory to the Agents. The Company further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents in any such action, suit or proceeding against it by serving a copy thereof upon the relevant agent for 32 33 service of process referred to in this Section 16 (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) or by mailing copies thereof by the Company at its address specified in or designated pursuant to this Agreement. The Company agrees that the failure of any such designee, appointee and agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon. Nothing herein shall in any way be deemed to limit the ability of the holders of the Notes, the Agents and the other persons referred to in Section 15 to serve such legal process, summons, notices and documents in any other manner permitted by applicable law or to obtain jurisdiction over the Company or bring actions, suits or proceedings against the Company in such other jurisdictions, and in such manner, as may be permitted by applicable law. The Company hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any of the aforesaid actions, suits or proceedings arising out of or in connection with this Agreement brought in the United States federal courts located in The City of New York or the courts of the State of New York located in The City of New York and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. (c) The provisions of this Section 16 shall survive any termination of this Agreement, in whole or in part. 33 34 If the foregoing is in accordance with the Agents' understanding of our agreement, please sign and return to us a one or more counterparts hereof, whereupon this instrument along with all counterparts will become a binding agreement among the Agents and the Company in accordance with its terms. Very truly yours, BANPONCE CORPORATION By:/s/ David H. Chafey, Jr. ------------------------------- Name: David H. Chafey, Jr. Title: Executive Vice President Accepted: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By:/s/ Scott G. Primrose ---------------------------------------- Name: Scott G. Primrose Title: Authorized Signatory CS FIRST BOSTON CORPORATION By:/s/ Martha D. Bailey ---------------------------------------- Name: Martha D. Bailey Title: Vice President FIRST CHICAGO CAPITAL MARKETS, INC. By:/s/ Linda A. Dawson ---------------------------------------- Name: Linda A. Dawson Title: Managing Director 34 EX-10.26 14 g67461ex10-26.txt AMENDMENT NO.2 1 EXHIBIT 10.26 AMENDMENT NO. 2 TO DISTRIBUTION AGREEMENT October 6, 1995 WHEREAS, the parties hereto have previously entered into a Distribution Agreement, dated October 11, 1991, as amended by Amendment No. 1 thereto dated December 2, 1993 and as supplemented on June 16, 1993 and August 1, 1994 (the "Distribution Agreement"), among BanPonce Financial Corp. (the "Company"), BanPonce Corporation (the "Guarantor") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (each, an "Agent and collectively, the "Agents") relating to the issue and sale by the Company of its Medium-Term Notes; and WHEREAS, the Company, the Guarantor and each of the Agents wish to amend the Distribution Agreement (i) to amend the definition of a "Significant Subsidiary" contained in Section 2(a)(ii) thereof to include subsidiaries that may be incorporated as banks, (ii) to except from the requirements of Sections 7(b), 7(c) and 7(d) thereof sales by the Guarantor or its subsidiaries of preferred stock and (iii) to amend the requirements of Section 7(c) thereof to provide for the delivery of the legal opinions required thereby by Puerto Rico counsel to the Company and the Guarantor; NOW, THEREFORE, the Company, the Guarantor and each of the Agents hereby agree to amend said Distribution Agreement as follows: 1. Section 2(a)(ii) of the Distribution Agreement is hereby amended to read as follows: (ii) Subsidiaries. Each subsidiary of the Guarantor or the Company which is a significant subsidiary as defined in Rule 405 of Regulation C of the 1933 Act Regulations (each, a "Significant Subsidiary") has been duly incorporated and is validly existing as a corporation or a bank in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify and be in good standing would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business 2 prospects of the Guarantor and its subsidiaries considered as one enterprise; and all of the issued and outstanding capital stock of each such Significant Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable (subject to the provisions of Section 55 of Title 12 of the United States Code in the case of Significant Subsidiaries which are national banking associations) and, except as otherwise disclosed in the Prospectus and except for directors' qualifying shares, is owned by the Company or the Guarantor, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity or, if such is not the case, that any such security interest, mortgage pledge, lien, encumbrance, claim or equity, when exercised, enforced or otherwise asserted, will not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Guarantor and its subsidiaries considered as one enterprise. 2. Sections 7(b), 7(c) and 7(d) of the Distribution Agreement are hereby amended to read as follows: (b) Subsequent Delivery of Certificates. Each time that the Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of Notes or similar changes and other than by an amendment or supplement which relates exclusively to an offering of debt securities other than the Notes or an offering of preferred stock of the Guarantor or its subsidiaries) or there is filed with the SEC any document incorporated by reference into the Prospectus (other than (i) any Current Report on Form 8-K relating exclusively to the issuance of debt securities or preferred stock under the Registration Statement or (ii) a document filed pursuant to Section 14 of the 1934 Act unless requested by the Agents) or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Company shall furnish or cause to be furnished to the Agents (or, in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent) forthwith certificates dated the date of filing with the SEC of such supplement or document, the date of effectiveness of such amendment, or the date of such sale, as the case may be, in form satisfactory to the Agents or such Agent, as the case may be, to the effect that the statements contained in the certificates referred to in Section 5(b) hereof which were last furnished to the Agents are true and correct at the time of such amendment, supplement, filing or sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to 2 3 the Registration Statement and the Prospectus as amended and supplemented to such time) or, in lieu of such certificates, certificates of the same tenor as the certificates referred to in said Section 5(b), modified as necessary to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such certificates. (c) Subsequent Delivery of Legal Opinions. Each time that the Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for a change in the interest rates of the Notes or similar changes or solely for the inclusion of additional financial information, and, unless the Agents shall otherwise specify, other than by an amendment or supplement which relates exclusively to an offering of debt securities other than the Notes or an offering of preferred stock of the Guarantor or its subsidiaries) or there is filed with the SEC any document incorporated by reference into the Prospectus (other than (i) any Current Report on Form 8-K or (ii) a document filed pursuant to Section 14 of the 1934 Act, in each case, unless the Agents shall otherwise reasonably request), or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Company shall furnish or cause to be furnished forthwith to the Agents (or, in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent), with a copy to counsel to the Agents, a written opinion or opinions of Puerto Rico Counsel to the Company and the Guarantor satisfactory to the Agents or such Agent, as the case may be, dated the date of filing with the SEC of such supplement or document, the date of effectiveness of such amendment, or the date of such sale, as the case may be, in form and substance satisfactory to the Agents or such Agent, as the case may be, of the same tenor as the opinion referred to in Section 5(a)(2) hereof, but modified, as necessary, to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such opinion; or, in lieu of such opinion or opinions, counsel last furnishing such opinion to the Agents or such Agent, as the case may be, shall furnish the Agents or such Agent, as the case may be, with a letter to the effect that the Agents or such Agent, as the case may be, may rely on such last opinion to the same extent as though it was dated the date of such letter authorizing reliance (except that statements in such last opinion shall be deemed to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such letter authorizing reliance). (d) Subsequent Delivery of Comfort Letters. Each time that the Registration Statement or the Prospectus shall be 3 4 amended or supplemented to include additional financial information or there is filed with the SEC any document incorporated by reference into the Prospectus which contains additional financial information (other than a Current Report on Form 8-K filed solely for the purpose of incorporating a press release relating to the Guarantor's interim or annual financial statements or results of operations or filed in connection with the issuance of preferred stock by the Guarantor or its subsidiaries pursuant to the Registration Statement) or (if required pursuant to the terms of a Terms Agreement) the Company sells Notes to an Agent pursuant to a Terms Agreement, the Guarantor shall cause Price Waterhouse LLP forthwith to furnish the Agents (or, in the case of a sale of Notes to an Agent pursuant to a Terms Agreement, to such Agent) with a letter, dated the date of effectiveness of such amendment, supplement or document with the SEC, or the date of such sale, as the case may be, in form satisfactory to the Agents or such Agent, as the case may be, of the same tenor as the portions of the letter referred to in Section 5(c) hereof but modified to relate to the Registration Statement and Prospectus, as amended and supplemented to the date of such letter; provided, however, that if the Registration Statement or the Prospectus is amended or supplemented solely to include financial information as of and for a fiscal quarter, Price Waterhouse LLP may limit the scope of such letter to the unaudited financial statements included in such amendment or supplement unless any other information included therein of an accounting, financial or statistical nature is of such a nature that, in the reasonable judgment of the Agents or such Agent, as the case may be, such letter should cover such other information. Except as otherwise expressly provided herein, the Distribution Agreement is in all respects ratified and confirmed, and all the terms, provisions and conditions thereof shall be and remain in full force and effect. 4 5 IN WITNESS WHEREOF, the parties hereto have cause this Amendment No. 2 to the Distribution Agreement to be executed on their behalf as of the day and year first above written. BANPONCE FINANCIAL CORP. By: /s/ David H. Chafey, Jr. ------------------------------- Name: David H. Chafey, Jr. Title: President BANPONCE CORPORATION By: /s/ David H. Chafey, Jr. ------------------------------- Name: David H. Chafey, Jr. Title: Executive Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Scott G. Primrose ------------------------------- Name: Scott G. Primrose Title: Authorized Signatory CS FIRST BOSTON CORPORATION By: /s/ Martha D. Bailey ------------------------------- Name: Martha D. Bailey Title: Vice President FIRST CHICAGO CAPITAL MARKETS, INC. By: /s/ Linda A. Dawson ------------------------------- Name: Linda A. Dawson Title: Managing Director 5 EX-12.1 15 g67461ex12-1.txt 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, -------------------------------------------------------------- 2000 1999 1998 1997 1996 Income before income taxes 375,748 340,224 306,691 284,026 256,027 Fixed charges : Interest expense 1,167,396 897,932 778,692 707,348 591,540 Estimated interest component of net rental payments 13,110 10,970 8,817 7,779 7,065 Total fixed charges including interest on deposits 1,180,506 908,902 787,509 715,127 598,605 Less: Interest on deposits 529,373 452,215 411,492 366,528 350,221 Total fixed charges excluding interest on deposits 651,133 456,687 376,017 348,599 248,384 Income before income taxes and fixed charges(including interest on deposits) $1,556,254 $1,249,126 $1,094,200 $999,153 $854,632 Income before income taxes and fixed charges(excluding interest on deposits) $1,026,881 $ 796,911 $ 682,708 $632,625 $504,411 Preferred stock dividends 8,350 8,350 8,350 8,350 8,350 Ratio of earnings to fixed charges Including Interest on Deposits 1.3 1.4 1.4 1.4 1.4 Excluding Interest on Deposits 1.6 1.7 1.8 1.8 2.0 Ratio of earnings to fixed charges & Preferred Stock Dividends Including Interest on Deposits 1.3 1.4 1.4 1.4 1.4 Excluding Interest on Deposits 1.6 1.7 1.8 1.8 2.0
EX-13.1 16 g67461ex13-1.txt REGISTRANT'S ANNUAL REPORT 1 EXHIBIT 13.1 [LOGO] [PHOTO] Serving Our Clients Solidifying Our Markets Securing Our Future 2000 Popular, Inc. Annual Report 2 SECURING OUR FUTURE Popular, Inc., a bank holding company with $28 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, insurance, 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 and experience in commercial banking as a competitive advantage on its Caribbean and Latin America expansion, and is exporting its 107 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. [GRAPH] 3 FINANCIAL HIGHLIGHTS 1 VALUES, OUR CREED, OUR PEOPLE 2 STRATEGIC OBJECTIVES 3 LETTER TO SHAREHOLDERS 4 OUR BUSINESS 6 OUR COMMUNITY 15 MANAGEMENT 18 BOARDS OF DIRECTORS 20 FINANCIAL INFORMATION F-1
4 Popular, Inc. 2000 Annual Report FINANCIAL HIGHLIGHTS NET INCOME TOTAL ASSETS dollars in millions dollars in millions [CHART] [CHART] ROA ROE percentage percentage [CHART] [CHART] MARKET CAPITALIZATION EARNINGS PER SHARE dollars in millions dollars [CHART] [CHART] 1 5 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 socioeconomic 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 is essential for our success. Innovation Constant innovation is a competitive advantage. We adopt new techniques in all business areas to anticipate the changing needs of our customers. Our People We believe that our working environment should be characterized by affection and discipline. We strive to attract, develop and retain the most qualified people. We recognize and reward the performance of excellence by the individual, the team and the Corporation. 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. 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. 2 6 HISTORICAL FINANCIAL SUMMARY (Dollars in millions, except per common share data)
1980 1981 1982 1983 1984 1985 1986 - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 130.0 $ 135.9 $ 151.7 $ 144.9 $ 156.8 $ 174.9 $ 184.2 Non-Interest Income 14.2 15.8 15.9 19.6 19.0 26.8 41.4 Operating Expenses 101.3 109.4 121.2 127.3 137.2 156.0 168.4 Net Income 23.5 24.3 27.3 26.8 29.8 32.9 38.3 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $2,630.1 $2,688.7 $2,727.0 $ 2,974.1 $ 3,526.7 $ 4,141.7 $ 4,531.8 Net Loans 988.4 1,007.6 976.8 1,075.7 1,373.9 1,715.7 2,271.0 Deposits 2,060.5 2,111.7 2,208.2 2,347.5 2,870.7 3,365.3 3,820.2 Total Stockholders' Equity 122.1 142.3 163.5 182.2 203.5 226.4 283.1 - ---------------------------------------------------------------------------------------------------------------------------------- Market Capitalization $ 45.0 $ 66.4 $ 99.0 $ 119.3 $ 159.8 $ 216.0 $ 304.0 ROA 0.92% 0.90% 0.96% 0.95% 0.94% 0.89% 0.88% ROE 19.96% 18.36% 17.99% 15.86% 15.83% 15.59% 15.12% - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE(1) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings $ 0.34 $ 0.34 $ 0.38 $ 0.37 $ 0.41 $ 0.46 $ 0.50 Dividends (Declared) 0.07 0.06 0.08 0.11 0.12 0.14 0.15 Book Value 1.66 1.93 2.22 2.47 2.76 3.07 3.46 Market Price 1.01 0.92 1.38 1.66 2.22 3.00 4.00 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS BY GEOGRAPHICAL AREA - ---------------------------------------------------------------------------------------------------------------------------------- Puerto Rico 95.53% 94.65% 94.63% 93.70% 91.31% 92.42% 91.67% United States 4.47% 5.14% 5.01% 5.23% 7.52% 6.47% 7.23% Other 0.00% 0.22% 0.36% 1.07% 1.17% 1.11% 1.10% - ---------------------------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - ---------------------------------------------------------------------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - ---------------------------------------------------------------------------------------------------------------------------------- Banking Branches Puerto Rico 110 110 110 112 113 115 124 Virgin Islands 1 2 3 3 3 3 United States 7 7 7 6 9 9 9 Dominican Republic - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal 117 118 119 121 125 127 136 - ---------------------------------------------------------------------------------------------------------------------------------- Non-Banking Offices Equity One Popular Cash Express Popular Finance Popular Leasing Popular Leasing, U.S.A. Popular Mortgage Popular Securities Levitt Mortgage GM Group - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal - ---------------------------------------------------------------------------------------------------------------------------------- Total 117 118 119 121 125 127 136 - ---------------------------------------------------------------------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - ---------------------------------------------------------------------------------------------------------------------------------- ATMs Owned Puerto Rico 30 78 94 113 Caribbean United States - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal 30 78 94 113 - ---------------------------------------------------------------------------------------------------------------------------------- Driven Puerto Rico 6 36 51 Caribbean - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal 6 36 51 - ---------------------------------------------------------------------------------------------------------------------------------- Total 30 84 130 164 - ---------------------------------------------------------------------------------------------------------------------------------- BPPR TRANSACTIONS (IN MILLIONS) - ---------------------------------------------------------------------------------------------------------------------------------- Electronic Transactions 0.6 4.4 7.0 8.3 Items Processed 94.8 96.9 98.5 102.1 110.3 123.8 134.0 - ---------------------------------------------------------------------------------------------------------------------------------- EMPLOYEES (FTEs) 3,838 3,891 3,816 3,832 4,110 4,314 4,400 - ---------------------------------------------------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 207.7 $ 232.5 $ 260.9 $ 284.2 $ 407.8 $ 440.2 Non-Interest Income 41.0 54.9 63.3 70.9 131.8 124.5 Operating Expenses 185.7 195.6 212.4 229.6 345.7 366.9 Net Income 38.3 47.4 56.3 63.4 64.6 85.1 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,389.6 $ 5,706.5 $ 5,972.7 $ 8,983.6 $ 8,780.3 $ 10,002.3 Net Loans 2,768.5 3,096.3 3,320.6 5,373.3 5,195.6 5,252.1 Deposits 4,491.6 4,715.8 4,926.3 7,422.7 7,207.1 8,038.7 Total Stockholders' Equity 308.2 341.9 383.0 588.9 631.8 752.1 - ----------------------------------------------------------------------------------------------------------------------------- Market Capitalization $ 260.0 $ 355.0 $ 430.1 $ 479.1 $ 579.0 $ 987.8 ROA 0.76% 0.85% 0.99% 1.09% 0.72% 0.89% ROE 13.09% 14.87% 15.87% 15.55% 10.57% 12.72% - ----------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE(1) - ----------------------------------------------------------------------------------------------------------------------------- Earnings $ 0.48 $ 0.59 $ 0.70 $ 0.79 $ 0.54 $ 0.70 Dividends (Declared) 0.17 0.17 0.20 0.20 0.20 0.20 Book Value 3.77 4.19 4.69 4.92 5.25 5.76 Market Price 3.34 4.44 5.38 4.00 4.81 7.56 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS BY GEOGRAPHICAL AREA - ----------------------------------------------------------------------------------------------------------------------------- Puerto Rico 94.22% 93.45% 92.18% 88.59% 86.67% 87.33% United States 5.01% 5.50% 6.28% 9.28% 10.92% 10.27% Other 0.77% 1.05% 1.54% 2.13% 2.41% 2.40% - ----------------------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - ----------------------------------------------------------------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - ----------------------------------------------------------------------------------------------------------------------------- Banking Branches Puerto Rico 126 126 128 173 161 162 Virgin Islands 3 3 3 3 3 3 United States 9 10 10 24 24 30 Dominican Republic - ----------------------------------------------------------------------------------------------------------------------------- Subtotal 138 139 141 200 188 195 - ----------------------------------------------------------------------------------------------------------------------------- Non-Banking Offices Equity One 27 41 Popular Cash Express Popular Finance 14 17 18 26 26 26 Popular Leasing 4 9 9 9 Popular Leasing, U.S.A. Popular Mortgage Popular Securities Levitt Mortgage GM Group - ----------------------------------------------------------------------------------------------------------------------------- Subtotal 14 17 22 35 62 76 - ----------------------------------------------------------------------------------------------------------------------------- Total 152 156 163 235 250 271 - ----------------------------------------------------------------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - ----------------------------------------------------------------------------------------------------------------------------- ATMs Owned Puerto Rico 139 156 151 211 206 211 Caribbean 3 3 3 3 United States 6 - ----------------------------------------------------------------------------------------------------------------------------- Subtotal 139 156 154 214 209 220 - ----------------------------------------------------------------------------------------------------------------------------- Driven Puerto Rico 55 68 65 54 73 81 Caribbean - ----------------------------------------------------------------------------------------------------------------------------- Subtotal 55 68 65 54 73 81 - ----------------------------------------------------------------------------------------------------------------------------- Total 194 224 219 268 282 301 - ----------------------------------------------------------------------------------------------------------------------------- BPPR TRANSACTIONS (IN MILLIONS) - ----------------------------------------------------------------------------------------------------------------------------- Electronic Transactions 12.7 14.9 16.1 18.0 23.9 28.6 Items Processed 139.1 159.8 161.9 164.0 166.1 170.4 - ----------------------------------------------------------------------------------------------------------------------------- EMPLOYEES (FTEs) 4,699 5,131 5,213 7,023 7,006 7,024 - ----------------------------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 492.1 $ 535.5 $ 584.2 $ 681.3 $ 784.0 $ 873.0 Non-Interest Income 125.2 141.3 173.3 205.5 247.6 291.2 Operating Expenses 412.3 447.8 486.8 541.9 636.9 720.4 Net Income 109.4 124.7 146.4 185.2 209.6 232.3 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 11,513.4 $ 12,778.4 $ 15,675.5 $ 16,764.1 $ 19,300.5 $ 23,160.4 Net Loans 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,077.8 Deposits 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 Total Stockholders' Equity 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 - -------------------------------------------------------------------------------------------------------------------------------- Market Capitalization $ 1,014.7 $ 923.7 $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,602.4 ROA 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% ROE 13.80% 13.80% 14.22% 16.15% 15.83% 15.41% - -------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE(1) - -------------------------------------------------------------------------------------------------------------------------------- Earnings $ 0.84 $ 0.92 $ 1.05 $ 1.34 $ 1.50 $ 1.65 Dividends (Declared) 0.23 0.25 0.29 0.35 0.40 0.50 Book Value 6.38 6.87 7.91 8.80 10.37 11.86 Market Price 7.75 7.03 9.69 16.88 24.75 34.00 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS BY GEOGRAPHICAL AREA - -------------------------------------------------------------------------------------------------------------------------------- Puerto Rico 79.42% 75.86% 75.49% 73.88% 74.10% 71.32% United States 16.03% 19.65% 20.76% 22.41% 23.34% 24.44% Other 4.55% 4.49% 3.75% 3.71% 2.56% 4.24% - -------------------------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - -------------------------------------------------------------------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - -------------------------------------------------------------------------------------------------------------------------------- Banking Branches Puerto Rico 165 166 166 178 201 194 Virgin Islands 8 8 8 8 8 8 United States 32 34 40 44 63 88 Dominican Republic 27 - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 205 208 214 230 272 317 - -------------------------------------------------------------------------------------------------------------------------------- Non-Banking Offices Equity One 58 73 91 102 117 132 Popular Cash Express 27 Popular Finance 26 28 31 39 44 48 Popular Leasing 8 10 9 8 10 10 Popular Leasing, U.S.A. 7 8 Popular Mortgage 3 3 3 11 Popular Securities 1 2 2 Levitt Mortgage GM Group - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 92 111 134 153 183 238 - -------------------------------------------------------------------------------------------------------------------------------- Total 297 319 348 383 455 555 - -------------------------------------------------------------------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - -------------------------------------------------------------------------------------------------------------------------------- ATMs Owned Puerto Rico 234 262 281 327 391 421 Caribbean 8 8 8 9 17 24 United States 11 26 38 53 71 94 - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 253 296 327 389 479 539 - -------------------------------------------------------------------------------------------------------------------------------- Driven Puerto Rico 86 88 120 162 170 187 Caribbean 97 192 265 - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 86 88 120 259 362 452 - -------------------------------------------------------------------------------------------------------------------------------- Total 339 384 447 648 841 991 - -------------------------------------------------------------------------------------------------------------------------------- BPPR TRANSACTIONS (IN MILLIONS) - -------------------------------------------------------------------------------------------------------------------------------- Electronic Transactions 33.2 43.0 56.6 78.0 111.2 130.5 Items Processed 171.8 174.5 175.0 173.7 171.9 170.9 - -------------------------------------------------------------------------------------------------------------------------------- EMPLOYEES (FTEs) 7,533 7,606 7,815 7,996 8,854 10,549 - -------------------------------------------------------------------------------------------------------------------------------- 1999 2000 - -------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - -------------------------------------------------------------------- Net Interest Income $ 953.7 $ 982.8 Non-Interest Income 372.9 465.1 Operating Expenses 837.5 877.5 Net Income 257.6 276.1 - -------------------------------------------------------------------- Total Assets $ 25,460.5 $ 28,057.1 Net Loans 14,907.8 16,057.1 Deposits 14,173.7 14,804.9 Total Stockholders' Equity 1,661.0 1,993.6 - -------------------------------------------------------------------- Market Capitalization $ 3,907.5 $ 3,578.1 ROA 1.08% 1.04% ROE 15.45% 15.00% - -------------------------------------------------------------------- PER COMMON SHARE(1) - -------------------------------------------------------------------- Earnings $ 1.84 $ 1.97 Dividends (Declared) 0.60 0.64 Book Value 11.51 13.92 Market Price 27.94 26.31 - -------------------------------------------------------------------- ASSETS BY GEOGRAPHICAL AREA - -------------------------------------------------------------------- Puerto Rico 70.95% 71.80% United States 25.17% 25.83% Other 3.88% 2.37% - -------------------------------------------------------------------- Total 100.00% 100.00% - -------------------------------------------------------------------- TRADITIONAL DELIVERY SYSTEM - -------------------------------------------------------------------- Banking Branches Puerto Rico 199 199 Virgin Islands 8 8 United States 91 95 Dominican Republic 31 -- - -------------------------------------------------------------------- Subtotal 329 302 - -------------------------------------------------------------------- Non-Banking Offices Equity One 138 136 Popular Cash Express 64 132 Popular Finance 51 61 Popular Leasing 12 12 Popular Leasing, U.S.A. 10 11 Popular Mortgage 13 21 Popular Securities 2 3 Levitt Mortgage 2 2 GM Group 4 4 - -------------------------------------------------------------------- Subtotal 296 382 - -------------------------------------------------------------------- Total 625 684 - -------------------------------------------------------------------- ELECTRONIC DELIVERY SYSTEM - -------------------------------------------------------------------- ATMs Owned Puerto Rico 442 478 Caribbean 65 37 United States 99 109 - -------------------------------------------------------------------- Subtotal 606 624 - -------------------------------------------------------------------- Driven Puerto Rico 102 118 Caribbean 851 920 - -------------------------------------------------------------------- Subtotal 953 1,038 - -------------------------------------------------------------------- Total 1,559 1,662 - -------------------------------------------------------------------- BPPR TRANSACTIONS (IN MILLIONS) - -------------------------------------------------------------------- Electronic Transactions 159.4 199.5 Items Processed 171.0 160.2 - -------------------------------------------------------------------- EMPLOYEES (FTEs) 11,501 10,651 - --------------------------------------------------------------------
(1) Per common share data adjusted for stock splits in 1981, 1985, 1989, 1996 and 1998. 7 Popular, Inc. 2000 Annual Report STRATEGIC OBJECTIVES FORTRESS PUERTO RICO STRENGTHEN OUR COMPETITIVE POSITION IN OUR PRINCIPAL MARKET, PUERTO RICO: - - Aligning our distribution systems with the different market segments; - - Using electronic means to bring financial services to the unbanked and to offer more services, in more places, with greater convenience at a lower cost, to our current and prospective customers. PANAMERICAN BANK EXPAND OUR BUSINESS FRANCHISE OUTSIDE PUERTO RICO THROUGH TWO INITIATIVES THAT COMPLEMENT AND SUPPORT EACH OTHER: - - In the United States, maintaining our growth in highly concentrated Hispanic areas, with emphasis on the small and middle commercial markets; - - In the Caribbean, using our competitive advantage in electronic banking to become the principal financial entity in the region. DIVERSIFICATION Continue diversifying our financial services to offer more alternatives to our customers. ORGANIZATIONAL QUALITY Strengthen our organization to achieve excellence in our results: - - Fully developing the capabilities of our employees; - - Aligning our organization with our business objectives; - - Continuously enhancing our processes. 3 8 [PHOTO] LETTER TO SHAREHOLDERS TOTAL RETURN INCLUDING DIVIDEND AND DIVIDEND REINVESTMENT [CHART] The year 2000 was a challenging one. The economy felt the impact of higher oil prices, an erosion in consumer confidence and several increases in interest rates with the concomitant downturn in the financial markets. This was reflected in the price of our stock, which closed at $26.31, a decline of 5.8% from December 31, 1999. Your company reported net income of $276.1 million in the year 2000, an increase of 7.2% over 1999. Earnings per common share (EPS) totaled $1.97, compared with $1.84 in 1999. Total assets amounted to $28 billion, 10% higher than in the previous year. These results translated into a return on assets (ROA) of 1.04% and a return on common equity (ROE) of 15.0%. These results are magnified by the various challenges, some unexpected, that we had to face. Our Y2K transition went smoothly, as a result of the thorough efforts undertaken in previous years. We also devoted much time and effort to excel in our compliance with all Bank Secrecy Act procedures and regulations, signing a formal Written Agreement with the Federal Reserve Bank of New York to that effect. In the Dominican Republic, we sold our participation in Banco Fiduciario to the larger Banco Hipotecario Dominicano and retained an option to acquire 20% of the resulting institution. Your company reported net income of $276.1 million in the year 2000, an increase of 7.2% over 1999. After an effort of nearly four years, we concluded that it made sense to sell our U.S. credit card portfolio and to enter into a strategic alliance with Metris in order to continue to offer this product to our current customers and to make further inroads in the U.S. Hispanic market. Likewise, we entered into an agreement with Cendant, which will allow us to increase our production of home mortgages and also better serve the U.S. Hispanic market. 4 9 Popular, Inc. 2000 Annual Report A STORY OF CONTINUOUS GROWTH All these efforts were accompanied with a sensible budget control of all the Corporation's expenses without curtailing our strategic investments. On a more positive note, we completed the consolidation of various processing activities formerly performed at Banco Popular into GM Group, the processing company acquired in 1999. We launched an important new subsidiary, Popular Insurance, and entered the market for the distribution of insurance products. We also acquired Centro Finance in Puerto Rico, a small finance company subsequently merged into Popular Finance, and Aurora National Bank in Illinois, which was merged into our Banco Popular North America operations. Mi Banco Popular, our Internet banking initiative, was introduced in May, and ended the year 2000 with nearly 60,000 subscribers, well in excess of our expectations. We will continue to build on the success of this product in the coming months. 10 YEARS OF GROWTH dollars in millions [CHART] Our achievements this year, and every year, come as a result of the efforts of Our People, more than 10,000 individuals who are committed to our values and our vision. We are guided by a Board of Directors that is equally committed to our future. At this year's Stockholders' Annual Meeting, Alfonso Ballester and Salustiano Alvarez will retire from the Board of Banco Popular de Puerto Rico upon reaching the mandatory retirement age. We are grateful for their many contributions throughout the years. Mr. Ballester has served on the Board of Banco Popular for 26 years and, until recently, was Vice Chairman of Popular, Inc. We were also saddened by the death of Don Julio Vizcarrondo Vivas, who served on the Banco Popular Board from 1975 to 1982 and on the Board of the Banco Popular Foundation from its inception until his death. The end of the year marked the tenth anniversary of the merger with BanPonce Corporation, an important turning point for our corporation. In 1990, our combined market capitalization was $510 million. Ten years later, we have a market capitalization of $3.6 billion, which translates into a compound annual growth rate of 22%. This transaction exemplifies our focus on long-term growth and profitability. It demonstrates that our horizon is longer than the next quarter, or even the next year. It is rather a story of continuous growth, as can be seen in the Historical Financial Summary. Inspired by our values and guided by our strategies, we look ahead with optimism to a new year of serving our clients, solidifying our markets and securing our future. /s/ Richard L. Carrion Richard L. Carrion Chairman President Chief Executive Officer 5 10 [PHOTO] DISTRIBUTION NETWORK Puerto Rico - - 199 branches - - 478 ATMs - - 25,000 point-of-sale terminals - - TeleBanco Popular - telephone banking - - Mi Banco Popular - online banking - - 9 Commercial Banking Centers United States - - 95 branches in 6 states - - 109 ATMs - - Popular Net Banking - online banking Caribbean - - 8 branches - - 12 ATMs - - 779 point-of-sale terminals - - Popular TeleBank - telephone banking Our Business RETAIL AND COMMERCIAL BANKING $15 BILLION IN DEPOSITS BANCO POPULAR DE PUERTO RICO, Popular, Inc.'s main subsidiary and the largest commercial bank in Puerto Rico, offers individuals and businesses a wide variety of financial products and services. With $10 billion in deposits and $8 billion in loans, it is the leader in both markets. Banco Popular has the most extensive and complete distribution network on the island, with 199 branches, 478 ATMs, a 24-hour call center and various alternative delivery channels. The year 2000 was marked by technological innovation and expansion for the Bank through new and diverse distribution channels, products and services. As part of its commitment to offer greater convenience to its clients, Banco Popular introduced its online banking service Mi Banco Popular, www.bppr.com, in May 2000. The new Internet site allows clients to access account information for checking and savings accounts, credit cards, IRAs, CDs, leases and loans. Clients can also transfer funds, pay their bills online, apply for loans and credit cards and open deposit accounts. By year end, Mi Banco Popular boasted more than 60,000 subscribers and figured among the top five local websites visited by Puerto Ricans. Constantly looking for new and attractive alternatives for its individual clients, Banco Popular, in an alliance with Celulares Telefonica, began offering clients the ability to purchase prepaid cellular minutes with their ATH (A Toda Hora) ATM card by telephone. Banco Popular de Puerto Rico also offers a complete line of products, services and value-added solutions to small and mid-sized businesses, corporations, government and not-for-profit organizations. It has nine Commercial Banking Centers (CBCs) located throughout the island to offer convenience and personal service to its commercial clients. Business clients also benefited from new products and services launched this year, such as TeleNomina, a service that allows clients to process their payroll using TelePago Popular, our telephone payment system. In addition, the Bank expanded its family-owned business program to include small and mid-sized businesses, offering four conferences during 2000. 6 11 Popular, Inc. 2000 Annual Report In the United States, BANCO POPULAR NORTH AMERICA (BPNA) is the largest Hispanic bank, offering individuals and businesses a wide variety of credit and deposit products. The Bank has 95 branches located in California (16), Florida (9), Illinois (21), New Jersey (12), New York (32), and Texas (5), states that are home to over 80% of all Hispanics in the United States. BPNA continued to expand its presence with the opening of three new branches and the acquisition of Aurora National Bank in Chicago, Illinois. During 2000, BPNA also introduced Popular Net Banking, an Internet banking service that allows customers to review their account balances and transaction history for the past 90 days, transfer money between specified Banco Popular accounts and pay their bills online. In the year 2000, BPNA created national line of 16 deposit products, both retail and commercial, to substitute more than 245 products that resulted from the Bank's acquisitions and rapid growth. The effort, led by a newly created and centralized Marketing and Product Development Division, focused on selecting the most attractive features from the vast number of existing products. The uniformity achieved will undoubtedly result in greater client satisfaction and operational efficiency. BPNA has traditionally focused significant efforts on Small Business Administration (SBA) and minority lending. In 2000, Banco Popular originated approximately $100 million in new loans, which placed the Bank among the top SBA lenders in the nation. $13 BILLION IN TOTAL LOANS [PHOTO] Popular, Inc. conducts its banking business in the Caribbean through BANCO POPULAR VIRGIN ISLANDS. Its network consists of eight branches in the U.S. and British Virgin Islands. With a team of more than 220 employees, Banco Popular has established itself as one of the leading institutions in the area. Deposits at year end totaled $722 million, an increase of 17% over the previous year. Offers a full range of banking products and services in Puerto Rico, the United States and the Caribbean. [PHOTO] 7 12 [PHOTO] MORTGAGE & CONSUMER LENDING $5.4 BILLION IN ORIGINATIONS POPULAR MORTGAGE, Banco Popular de Puerto Rico's mortgage subsidiary, has more than 60 years' experience and is the second mortgage origination business in Puerto Rico. It continued to expand and enhance its distribution network, opening seven new mortgage centers for a total of 21 located throughout the island. As part of its strategy to offer more choices to its clients, Popular Mortgage introduced several products and services during the year 2000: a personal loan with mortgage collateral, a mortgage that does not require income verification, a 100% loan-to-value mortgage loan with cash collateral and a loan for individuals with damaged credit. Popular Mortgage also introduced CasaFacil, a service that allows clients to process and originate mortgage and construction loans over the telephone. In the United States, BANCO POPULAR, NATIONAL ASSOCIATION and BANCO POPULAR NORTH AMERICA together originated approximately $150 million in new mortgages during the year 2000. It was also a year of important steps in the business, with the establishment of a marketing and processing alliance with Cendant Mortgage, a leading mortgage lender in the United States. In accordance with the partnership, Cendant processes and services loans on a private label basis. In addition, the Bank originates loans through Cendant's real estate brands, such as Century 21, Coldwell Banker and ERA. 8 13 Popular, Inc. 2000 Annual Report POPULAR FINANCE, ranked among the top consumer finance institutions in Puerto Rico, is engaged in small personal loans and second mortgages. Popular Finance acquired Centro Finance Corporation in May 2000, increasing its portfolio by 17% and adding seven branches to its network, for a total of 61. In 2000 the subsidiary saw a significant increase in the volume of mortgage loans, a result of a comprehensive sales training program for employees and an advertising campaign created for print media and television. In the United States, EQUITY ONE is engaged in the business of personal and mortgage loans and retail financing to merchants and dealers. With $2.0 billion in total loans and assets reaching $2.1 billion, Equity One operates through an extensive network of 136 offices located throughout 30 states. In the year 2000, Equity One relocated its Headquarters and Operations Center to a state-of-the-art facility. It enhanced its operational infrastructure through additional investments in areas such as marketing, technology and human resources. In addition, it undertook an initiative to enhance the quality of customer service, leading to an 8% increase in its customer base. Provides tailored financing alternatives to meet individual needs. [PHOTO] DISTRIBUTION NETWORK PUERTO RICO - - Popular Finance has 54 offices and 7 mortgages centers in 37 municipalities - - Popular Mortgage has 21 offices in 16 municipalities UNITED STATES - - Equity One has 136 offices in 30 states - - Banco Popular, National Association originates residential mortgages through Banco Popular North America, Cendant real estate brands and brokers throughout the continental U.S. 9 14 [PHOTO] Assets dollars in thousands [CHART] LEASING $120 MILLION IN REVENUES POPULAR LEASING is the leader in the leasing business in Puerto Rico. With a network of 12 offices and a team of 250 employees, Popular Leasing offers individual and commercial clients a wide variety of leasing alternatives. In addition to vehicle leasing, it offers medical, industrial, construction, telecommunications and computer equipment leasing in an alliance with El Camino Resources, a leading leasing company in the United States. Popular Leasing also has a fleet of over 1,100 passenger vehicles and commercial units for daily rental. During 2000, the company expanded by acquiring two local portfolios, thereby strengthening its leadership position in the market. It also introduced several products and services, such as a lease program with Dell computers for individuals and small and mid-sized businesses, and Starting Connection, a vehicle and equipment lease program for graduating college students. In the United States, the Corporation conducts its leasing business through POPULAR LEASING, U.S.A., a subsidiary of Banco Popular North America. The company offers small-ticket equipment leasing in 11 offices located in eight states. Its professional staff has years of experience in leasing, providing tailored solutions and quality services to its diverse client base. In addition, at Popular Leasing's website, www.popularleasingusa.com, clients can obtain information about the company and submit applications online. During the year 2000, Popular Leasing doubled its staff and established new executive offices in Ellisville, Missouri. Assets grew by over 40% from the previous year, totaling $105 million at year end. Delivers leasing solutions to individuals and businesses in Puerto Rico and the United States. 10 15 [PHOTO] Advises all customers, from starting investors to large corporations, on how to achieve their financial goals. Assets Under Management percentage [CHART] INVESTMENT $13 BILLION IN ASSETS UNDER MANAGEMENT POPULAR SECURITIES is the subsidiary dedicated to providing investment and financial advising services to individuals and institutions in Puerto Rico. In the retail business, Popular Securities offers the sale of securities, financial advising, and full investment services through 48 representatives available at more than 190 Banco Popular branches and three independent branches. In order to complement its brick-and-mortar distribution system and increase customer convenience, Popular Securities launched Online Investing in 2000. This new Internet service, accessible at www.popularsecurities.com, allows clients to buy and sell stock, bonds and mutual funds at a discount, and review market information and news. On the institutional side, Popular Securities handles bond issues for the Commonwealth of Puerto Rico and local corporations, and provides financial advisory services to a wide variety of public and private entities. During the year 2000, Popular Securities participated in 22 transactions totaling $4.9 billion. Two divisions of Banco Popular de Puerto Rico complement the investment services offered by Popular Securities. POPULAR ASSET MANAGEMENT, established in 1998, provides institutional investment management services, and reached $2.3 billion in assets under management by year end. The TRUST DIVISION, with a long-standing tradition of service, offers administration services for employee benefit plans, corporate and personal trusts, and supplies various services to local mutual funds. 11 16 [PHOTO] Serves more than 100 independent agents and brokers in Puerto Rico. INSURANCE Popular, Inc. further diversified its business during the year 2000 through both the acquisition of a local insurance agency and the creation of POPULAR INSURANCE, INC. As a subsidiary of Banco Popular, National Association, Popular Insurance is a general agency that offers insurance products in Puerto Rico. Representing various major insurance companies, both as a general agency and as a corporate agent, Popular Insurance serves more than 100 independent agents and brokers while seeking to become the principal service provider for this important industry group on the island. Popular Insurance presently provides insurance services to several affiliated companies. It operates two offices - one on the offshore island of Culebra and one in San Juan - and plans to add several sales offices throughout Puerto Rico during 2001. Currently, the staff is composed of 37 well-experienced employees, a number that will grow to serve the 2001 projected sales volume. At year end, Popular Insurance assets totaled $8.9 million. Popular Insurance's plans for the future include expanding the array of products and services it offers, as well as maximizing the use of technology to increase product accessibility in the marketplace while reducing processing and operating costs. 12 17 Popular, Inc. 2000 Annual Report PROCESSING $80 MILLION IN REVENUES In 2000, Popular, Inc. completed the integration into the Corporation of GM Group, the leading provider of information system (IS) services in the Caribbean Basin acquired in 1999. With offices in San Juan, Caracas, Santo Domingo and Miami, GM GROUP has a solid record of achievement in Puerto Rico and over 10 Latin American countries. Clients such as banks, public utilities, insurance companies, universities, government agencies, service companies, manufacturers and retailers have had their IS needs fulfilled by GM Group for the past three decades. In addition to data processing, GM Group's core business, it is also involved in software and hardware sales, systems design and implementation, consulting, business recovery services and systems education. As part of the integration process, RED ATH, the largest ATM network in Puerto Rico, was transferred to GM Group to capitalize on its resources and expertise. By year end, Red ATH connected over 850 ATMs and 35,700 point-of-sale (POS) terminals throughout the island. Popular, Inc.'s expertise and resources in electronic banking, now enhanced by GM Group, have provided a competitive advantage in Caribbean and Latin American markets. The ATM/POS networks developed in the Dominican Republic and Costa Rica have experienced remarkable growth recent years. ATH DOMINICANA is the largest ATM network in the Dominican Republic, connecting 818 ATMs and 9,711 POS terminals from 17 institutions. ATH COSTA RICA, the Corporation's ATM driving and administration business in Costa Rica, connects over 150 ATMs from 22 financial institutions and 5,000 POS terminals. In 2000, ATH Costa Rica purchased CreST, S.A., a local card processor and POS acquirer, greatly expanding its capabilities in the country. The company concentrated efforts in consolidating at the physical, operational and human resources levels to swiftly leverage the new opportunities brought about by the acquisition. Provides innovative solutions to clients, allowing them to stay in the forefront of technology. [PHOTO] ATH Network Transactions in millions [CHART] 13 18 CONSUMER SERVICES [PHOTO] DISTRIBUTION NETWORK [CHART] $2.7 MILLION CHECKS PROCESSED POPULAR CASH EXPRESS, Popular, Inc.'s subsidiary dedicated to the business of check cashing and money transfers, now ranks 7th among all check-cashing operations in the United States. Since over half of the 32 million Hispanics in the United States are unbanked, the Corporation recognized the need for an alternative approach to complement Banco Popular North America's efforts to become the principal financial services provider to Hispanics. In 1998, Popular, Inc. made the strategic decision of establishing Popular Cash Express as an effective tool to attract the unbanked population and to eventually draw it into the financial mainstream. Offers financial alternatives to the unbanked population in the United States. Since its creation, Popular Cash Express has quickly expanded, and now has operations in Arizona, California, Florida, New York, Texas and Washington, D.C., all of which have a very high concentration of Hispanics. It offers a wide variety of retail financial services, such as check cashing, wire transfers, utility payments and money orders. More recently, PCE has expanded on this format by offering additional services that have not generally been offered at traditional check-cashing locations, such as insurance, travel services and other value-added products. Locations are clean, spacious, well-lighted and manned with bilingual staff to service its large Spanish-speaking customer base. Popular Cash Express experienced dramatic growth/expansion in 2000. It opened 22 offices and added 8 mobile units, for a total of 86 and 46, respectively. Revenues increased by 45%. Given its strategic importance as a tool to attract the unbanked, the Corporation plans to continue Popular Cash Express' expansion and evolution. Closer links between check-cashing locations and Banco Popular North America traditional banking branches will be developed, hybrid locations will be established and intermediate products will be introduced. In that way, when consumers are ready to pursue more traditional banking services, Popular, Inc. will be ready to meet their future needs. 14 19 Popular, Inc. 2000 Annual Report 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 instilling in our youth a sense of accomplishment. Donations Granted by Banco Popular Foundation dollars in thousands [CHART] [PHOTO] OUR COMMUNITY Community involvement has been a mainstay of Banco Popular's 107-year history. The Bank was established in 1893 to provide financial services to those who needed it most, but its vision went beyond business and reached out to the community it served. Ever since its early stages, the institution's social responsiveness has been manifested in a twofold commitment: a strong donations and corporate sponsorship program, and employee participation in non-profit organizations. As the Bank continued to grow, its social responsibility strategy evolved. It was understood that its community involvement required a philanthropic structure that went beyond corporate sponsorship and assumed an enabling role in education and the development of our communities. This paved the way for the establishment of the Banco Popular Foundation in 1979. THE BANCO POPULAR FOUNDATION originated from the vision of Rafael Carrion Jr., who devoted his entire professional career - 59 years - to Banco Popular. As President of the Bank, Chairman of the Board and Chief Executive Officer, he promoted numerous initiatives that made him feel, as he used to say, responsible and proud that Banco Popular was ever present in promoting the island's progress and well-being. Two decades after its establishment, the Foundation's objective remains unaltered: to involve ourselves actively and effectively in the improvement of the quality of life in the communities we serve. Our focus is primarily on education, attention to the special needs of the most disadvantaged, support for opportunities for positively 15 20 [PHOTO] shaping our youth, promoting self-sufficiency projects for community development and sponsorship of the arts and our culture. The Foundation obtains its financial support from Banco Popular de Puerto Rico and the Bank's annual musical production. In addition, in a program established in 2000, employees voluntarily contributed more than $186,000 through paycheck deduction. Over the years, a large number of Popular, Inc. employees have demonstrated their commitment to working actively for the social, economic and educational well-being of Puerto Rico. In 2000, more than 1,200 employees expressed interest in being part of the Banco Popular Foundation Volunteer Program, which will be in operation in 2001. Our employees will work hand in hand with schools; homes for the elderly; shelters for victims of abuse; libraries and other projects that positively impact children and youths; heads of households and the elderly; people who are left behind, homeless, sick - in essence, those who search for a better life. During the year 2000, the Foundation awarded more than 36 new grants, ranging from helping to fund the Nueva Escuela Juan Ponce de Leon, the only public elementary Montessori school for children with special needs, to a voluntary service learning pilot for university students to get them involved in their communities while studying. Another major project included contributions to the Jane Stern Dorado Community Library. The 2000 musical production was titled Guitarra Mia: A Tribute to Jose Feliciano. In his honor, the Foundation is renovating a music room at the Instituto Loaiza Cordero, a school for visually impaired students. In the United States, funds will be donated to the Lighthouse International, an institution that Jose Feliciano attended in his youth. The Banco Popular Foundation also manages the Rafael Carrion Jr. Scholarship Fund, established in 1992 with the funds accumulated in Carrion Jr.'s profit sharing plan and in his savings account at the employee's cooperative. Over the 16 21 Popular, Inc. 2000 Annual Report STRENGTHENING OUR COMMUNITY STRATEGY past eight years, $995,300 have been awarded in 707 scholarships to children of employees and retirees of Popular, Inc. In addition, the Foundation also established the Rafael Carrion Jr. Scholarship with a contribution of $370,500 for Puerto Rican students studying at The Wharton School at the University of Pennsylvania. Eleven scholarships have been granted since the fund was begun in 1994. Another type of community involvement for the Foundation is its vigorous program of exhibitions at the Rafael Carrion Pacheco Exhibition Hall in the former Banco Popular headquarters in Old San Juan. In the last decade, 14 exhibitions have been presented that have enriched the cultural life of the island and deepened the debate on subjects of community interest. The most recent, Acanga, 100 Years of Puerto Rican Music, attracted more than 14,000 people in its first six months. BANCO POPULAR DE PUERTO RICO, the Corporation's main subsidiary, also continues with a strong donations and sponsorship program. During the year 2000, approximately $1.4 million were donated to more than 200 non-profit organizations. Of the donations, 82% were for civic and community activities. Among the most significant contributions are the sponsorship of the Raul Julia Theater at the new Puerto Rico Museum of Art; the renovation of Teatro Oliver in Arecibo; Neighborhood Revitalization Initiatives in Caguas, Ponce and San Juan; Sacred Heart University and the Federal Reserve Board's joint economics program for high school students; and the Puerto Rico Community Foundation. In the continental United States, several organizations in the communities we serve received financial contributions from Banco Popular North America. Through the Foundation and other programs, Popular, Inc. maintains its strong commitment to involve ourselves actively and effectively in the development of the community in which we operate to promote the highest values and a passion for excellence, focused mainly on our youth. The guiding spirit in awarding these and future grants is to promote excellence in our relationship with the community. We will seek the participation and commitment of others who also share our vision and passion for excellence in the coming years. [PHOTO] 17 22 SENIOR MANAGEMENT COUNCIL [PHOTO] [PHOTO] [PHOTO] RICHARD L. CARRION DAVID H. CHAFEY JR. JORGE A. JUNQUERA Chairman, President Senior Executive Vice President Senior Executive Vice President Chief Executive Officer Retail Banking Chief Financial Officer [PHOTO] [PHOTO] [PHOTO] [PHOTO] MARIA ISABEL BURCKHART ROBERTO R. HERENCIA LARRY B. KESLER TERE LOUBRIEL Executive Vice President Executive Vice President Executive Vice President Executive Vice President Administration North America Retail Credit Human Resources [PHOTO] [PHOTO] [PHOTO] [PHOTO] HUMBERTO MARTIN EMILIO E. PINERO FERRER, ESQ. BRUNILDA SANTOS DE ALVAREZ,ESQ. CARLOS J. VAZQUEZ Executive Vice President Executive Vice President Executive Vice President Executive Vice President Operations Commercial Banking Legal Risk Management
18 23 Popular, Inc. 2000 Annual Report MANAGEMENT GROUP POPULAR, INC. PUERTO RICO COMMERCIAL BANKING GROUP OPERATIONS GROUP UNITED STATES Emilio E. Pinero Ferrer, Esq. Humberto Martin BANCO POPULAR DE BANCO POPULAR PUERTO RICO Arnaldo Soto Couto Luis O. Abreu NORTH AMERICA, INC. Richard L. Carrion Construction Loans Operational Financial Richard L. Carrion Chairman Support Chairman President Cynthia Toro Chief Executive Officer Business Banking Segundo Bernier Operations Jorge A. Junquera RETAIL BANKING GROUP Ricardo Toro President David H. Chafey Jr. Corporate Banking Victor V. Echevarria Information Technology Roberto R. Herencia Jorge Biaggi FINANCIAL MANAGEMENT GROUP Chief Operating Officer Hato Rey Region Jorge A. Junquera Otto Rosario Transaction Processing Orlando Berges Francisco Cestero Richard Barrios Finance and Ponce Region Investments and Treasury Hector Torres Administration Security Felix Leon Luis R. Cintron, Esq. L. Gene Beube Eastern Region Trust RISK MANAGEMENT GROUP Risk Management Carlos J. Vazquez Carlos J. Mangual Amilcar L. Jordan, Esq. Manuel Chinea Caguas Region Comptroller Jesus Aldarondo Marketing and Product Operational Risk Development Wilbert Medina Ivan Pagan Management Arecibo/Manati Region Acquisitions and Corporate Victor Perez Investments Ana Carmen Alemany Operations Maritza Mendez Credit Risk Management Rio Piedras Region ADMINISTRATION GROUP Jose Riera Maria Isabel Burckhart Maria de Lourdes Jimenez Popular Cash Express Miguel Ripoll Corporate Compliance San Juan Region Ginoris Lopez-Lay Donald R. Simanoff Strategic Planning Jose A. Mendez Consumer Lending Carlos Rodriguez and Marketing General Auditor Western Region Vernon V. Aguirre Lourdes Perez Diaz Other Subsidiaries California Region Eli Sepulveda Jr. Public Relations and POPULAR MORTGAGE, INC. Bayamon Region Communications Silvio Lopez Mercedes F. McCall Florida Region Juan Guerrero Luz M. Tous de Torres POPULAR LEASING & RENTAL, INC. Financial and Investment Corporate Real Estate Andres Morrell William Sperling Services Illinois Region HUMAN RESOURCES GROUP POPULAR FINANCE, INC. Nestor O. Rivera Tere Loubriel Edgardo Novoa Jose A. Torres Retail Banking New York/New Jersey Tere Loubriel POPULAR SECURITIES, INC. Region Lizzie Rosso Human Resources Kenneth W. McGrath Alternative Delivery Javier Ubarri Channels LEGAL GROUP GM GROUP, INC. Texas Region Brunilda Santos de Alvarez, Julio J. Pascual RETAIL CREDIT GROUP Esq. Other Subsidiaries Larry B. Kesler ATH DOMINICANA BANCO POPULAR, Eduardo J. Negron, Esq. Miguel Gil-Mejia NATIONAL ASSOCIATION Linda C. Colon Legal Division Jorge A. Junquera Individual Lending ATH COSTA RICA Luis Diego Escalante EQUITY ONE, INC. Raul Colon C.E. (Bill) Williams Mortgage Servicing POPULAR INSURANCE, INC. Ramon D. Lloveras, Esq. POPULAR CASH EXPRESS, INC. Valentino I. McBean (Interim) Gary Gagerman Virgin Islands Region POPULAR LEASING, U.S.A. Bruce D. Horton
19 24 Popular, Inc. 2000 Annual Report BOARDS OF DIRECTORS POPULAR, INC. Samuel T. Cespedes, Esq. Maria Luisa Ferre BANCO POPULAR Richard L. Carrion Secretary Executive Vice President NORTH AMERICA Chairman of the Board Board of Directors Grupo Ferre Rangel Richard L. Carrion President Chairman of the Board Chief Executive Officer Brunilda Santos de Hector R. Gonzalez Alvarez, Esq. President Assistant Secretary Chief Executive Officer Jorge A. Junquera Antonio Luis Ferre Board of Directors Ventek Group, Inc. President Vice Chairman of the Board Banco Popular North America Chairman Eduardo J. Negron, Esq. Manuel Morales Jr. El Nuevo Dia Assistant Secretary President Roberto R. Herencia Board of Directors Parkview Realty, Inc. Chief Operating Officer Banco Popular North America Juan J. Bermudez Ernesto N. Mayoral, Esq. Alberto M. Paracchini Partner Assistant Secretary Private Investor Francisco M. Rexach Jr. Bermudez & Longo, S.E. Board of Directors President Francisco M. Rexach Jr. Capital Assets, Inc. Francisco J. Carreras President Educator BANCO POPULAR Capital Assets, Inc. Richard N. Speer Jr. Executive Director DE PUERTO RICO President Fundacion Angel Ramos, Inc. Richard L. Carrion J. Adalberto Roig Jr. Speer & Associates, Inc. Chairman of the Board Chairman David H. Chafey Jr. President Antonio Roig Sucesores, Inc. Alfonso F. Ballester Senior Executive Vice President Chief Executive Officer President Popular, Inc. Felix J. Serralles Jr. Ballester Hermanos, Inc. President Hector R. Gonzalez Alfonso F. Ballester Chief Executive Officer Felix J. Serralles Jr. President Vice Chairman of the Board Destileria Serralles, Inc. President Chief Executive Officer President Chief Executive Officer Ventek Group, Inc. Ballester Hermanos, Inc. Julio E. Vizcarrondo Jr. Destileria Serralles, Inc. President Jorge A. Junquera Chief Executive Officer Julio E. Vizcarrondo Jr. Senior Executive Vice President Juan A. Albors Hernandez Desarrollos Metropolitanos, S.E. President Popular, Inc. Chairman, President Chief Executive Officer Chief Executive Officer Samuel T. Cespedes, Esq. Desarrollos Metropolitanos, S.E. Manuel Morales Jr. Albors Development Corp. Secretary President Board of Directors Brunilda Santos de Alvarez, Esq. Parkview Realty, Inc. Salustiano Alvarez Mendez Secretary President Brunilda Santos de Alvarez, Esq. Board of Directors Alberto M. Paracchini Mendez & Company, Inc. Assistant Secretary Private Investor Board of Directors Eduardo J. Negron, Esq. Jose A. Bechara Bravo Assistant Secretary Francisco M. Rexach Jr. President Eduardo J. Negron, Esq. Board of Directors President Empresas Bechara Inc. Assistant Secretary Capital Assets, Inc. Board of Directors Juan J. Bermudez Felix J. Serralles Jr. Partner Ernesto N. Mayoral, Esq. President Bermudez & Longo, S.E. Assistant Secretary Chief Executive Officer Board of Directors Destileria Serralles, Inc. Francisco J. Carreras Educator Julio E. Vizcarrondo Jr. Executive Director President Fundacion Angel Ramos, Inc. Chief Executive Officer Desarrollos Metropolitanos, S.E. Jose B. Carrion Jr. Chairman and President (Retired) Barros & Carrion, Inc. David H. Chafey Jr. Senior Executive Vice President Banco Popular de Puerto Rico
20 25 STOCKHOLDERS' INFORMATION INDEPENDENT PUBLIC ACCOUNTANTS PricewaterhouseCoopers ANNUAL MEETING The 2001 Annual Stockholders' Meeting of Popular, Inc. will be held on Monday, April 23, at 10:30 a.m. at Centro Europa Building in San Juan, Puerto Rico. Telephone: (787) 765-9800 ext. 5637, 5527 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 PO Box 362708 San Juan, PR 00936-2708 Design: BD&E Inc., Pittsburgh, Pennsylvania Photography: Ric Evans Portrait Photography: Tony Vera Printing: Hoechstetter Printing Company Bowne of Atlanta, Inc. 26 P.O. BOX 362708 SAN JUAN PUERTO RICO 00936-2708 27 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, 2000 and 1999 F-30 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 F-31 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-32 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 F-33 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 F-34 Notes to Consolidated Financial Statements F-35
F-1 28 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), and Banco Popular, National Association (BP, NA) - 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 Corporation (d/b/a Levitt Mortgage) - Broker/Dealer - Popular Securities, Inc. - Processing and Information Technology Services and Products - GM Group, ATH Costa Rica and CreST, S.A. - Retail Financial Services - Popular Cash Express, Inc. - Insurance Agency - Popular Insurance, Inc. OVERVIEW During the second half of 2000, the U.S. economy has slowed dramatically. The effect of higher interest rates and energy prices lowered consumer spending by the end of the year. The NASDAQ reflected its worst performance since its inception in 1971 and the Dow Jones Industrial Average and the Standard & Poor's 500 showed declines. By the end of 2000, the Federal Reserve changed its bias to an easing one due to increasing recession risks, which resulted in lowering the fed funds rate by 100 basis points during January 2001 to 5.5%. The Corporation began 2000 with the acquisition of CreST, S.A., a card processor and point-of-sale (POS) provider in Costa Rica. On April 6, 2000, BPNA announced its strategic alliance with Cendant Mortgage, a division of Cendant Corporation, in order to expand the mortgage services to the Hispanic markets within the United States. Cendant Mortgage, a leader in the mortgage banking business in the U.S., is currently processing and servicing loans on a private label basis through BPNA's retail sales staff and telemarketing group. In addition, the alliance calls for the origination of loans by BPNA through Cendant Corporation's real estate brands: Century 21, Coldwell Banker, and ERA. During the second quarter of 2000, the Corporation continued its business expansion in Puerto Rico with the acquisition of Centro Finance, a small consumer loan company, with nine offices and a loan portfolio of approximately $23 million at date of acquisition. The operations of Centro Finance became part of Popular Finance. Also, Popular North America acquired Aurora National Bank, which operated two branches in Illinois with approximately $111 million in deposits and $81 million in loans at date of acquisition. This financial institution was later merged into BPNA. Continuing with the Corporation's objective of providing more services to our customers and participating in the competitive insurance business, on July 1, 2000, Popular, Inc. created Banco Popular, National Association, a national bank in Orlando, Florida that oversees the operations of Popular Insurance, Inc.; formerly R&B Insurance Agency. On August 24, 2000, as part of a merger agreement between Banco Fiduciario (BF) and another financial institution in the Dominican Republic, the Corporation sold its ownership in BF. The Corporation retained an option to acquire a minority interest in the resulting new financial institution. In addition, effective August 21, 2000, the Corporation sold its credit card operations in the United States to Metris Companies, Inc. The signed agreement enables the Corporation to continue offering credit cards, particularly in the Hispanic market. The Corporation earns a fee, while Metris retains the portfolio and any resulting credit risk. Table A Components of Net Income as a Percentage of Average Total Assets
For the Year ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Net interest income 3.70% 4.01% 4.27% 4.26% 4.18% Provision for loan losses (0.73) (0.63) (0.67) (0.60) (0.55) Securities and trading gains 0.05 -- 0.06 0.03 0.02 Other income 1.70 1.57 1.36 1.31 1.24 ---- ---- ---- ---- ---- 4.72 4.95 5.02 5.00 4.89 Operating expenses (3.30) (3.52) (3.52) (3.46) (3.32) ---- ---- ---- ---- ---- Net income before tax and minority interest 1.42 1.43 1.50 1.54 1.57 Income tax (0.38) (0.36) (0.36) (0.40) (0.43) Net loss of minority interest -- 0.01 -- -- -- ---- ---- ---- ---- ---- Net income 1.04% 1.08% 1.14% 1.14% 1.14% ==== ==== ==== ==== ====
F-2 29 Table B Changes in Net Income and Earnings per Common Share
2000 1999 1998 ------------------------------------------------------------------------------------ (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 $ 249,208 $ 1.84 $ 223,998 $1.65 $ 201,215 $1.50 Increase (decrease) from changes in: Other operating income 77,807 0.57 95,200 0.70 37,264 0.28 Net interest income 29,023 0.21 80,726 0.60 89,057 0.66 Gain on sale of investment securities 10,563 0.08 (8,295) (0.06) 6,665 0.05 Trading account profit (loss) 3,812 0.03 (5,235) (0.04) (281) -- Net loss of minority interest (1,302) (0.01) 2,126 0.02 328 -- Income tax (15,677) (0.12) (10,449) (0.08) (210) -- Operating expenses (39,989) (0.29) (117,128) (0.86) (83,434) (0.62) Provision for loan losses (45,692) (0.34) (11,735) (0.09) (26,606) (0.20) --------- ------ --------- ----- --------- ----- Subtotal 267,753 1.97 249,208 1.84 223,998 1.67 Change in average common shares(*) -- -- -- -- -- (0.02) --------- ------ --------- ----- --------- ----- Net income applicable to common stock $ 267,753 $ 1.97 $ 249,208 $1.84 $ 223,998 $1.65 ========= ====== ========= ===== ========= =====
(*) 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 135,907,476 for 2000, 135,585,634 for 1999, and 135,532,086 for 1998. The Corporation's net income for 2000 amounted to $276.1 million, an increase of $18.5 million or 7.2% over the net income of $257.6 million in 1999. Earnings per common share (EPS) for the year were $1.97 or 7.1% higher than the $1.84 in 1999. The Corporation's return on assets (ROA) for 2000 was 1.04% compared with 1.08% in 1999, while the return on common equity (ROE) was 15.0% in 2000 compared with 15.45% in 1999. Table A presents a five-year summary of the components of net income as a percentage of average assets. At December 31, 2000 the market value and book value per share of the Corporation's common stock was $26.31 and $13.92, respectively compared with $27.94 and $11.51 at the same date in 1999. 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.
Cash-based earnings 2000 1999 Change % (Dollars in thousands) --------- --------- -------- Net income $ 276,103 $ 257,558 7.2% Add: Amortization of intangibles 34,558 31,788 8.7 Less: Tax effect (1,689) (1,537) 9.9 --------- --------- --- Cash-based earnings $ 308,972 $ 287,809 7.4% ========= ========= ===
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 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 is the main source of earnings of Popular, Inc. It represents the difference or spread between interest and fee income generated by the Corporation's earnings assets over the interest F-3 30 Table C Selected Financial Data
(In thousands, except per share data) 2000 1999 1998 ------------ ------------- ------------ CONDENSED INCOME STATEMENTS Interest income $ 2,150,157 $ 1,851,670 $ 1,651,703 Interest expense 1,167,396 897,932 778,691 ------------ ------------- ------------ Net interest income 982,761 953,738 873,012 ------------ ------------- ------------ Securities and trading gains (losses) 13,431 (944) 12,586 Operating income 451,667 373,860 278,660 Operating expenses 877,471 837,482 720,354 Provision for loan losses 194,640 148,948 137,213 Net loss of minority interest 1,152 2,454 328 Income tax 100,797 85,120 74,671 Dividends on preferred stock of BPPR -- -- -- Cumulative effect of accounting changes -- -- -- ------------ ------------- ------------ Net income $ 276,103 $ 257,558 $ 232,348 ============ ============= ============ Net income applicable to common stock $ 267,753 $ 249,208 $ 223,998 ============ ============= ============ PER COMMON SHARE DATA(*) Net income (basic and diluted) $ 1.97 $ 1.84 $ 1.65 Dividends declared 0.64 0.60 0.50 Book value 13.92 11.51 11.86 Market price 26.31 27.94 34.00 Outstanding shares: Average 135,907,476 135,585,634 135,532,086 End of period 135,998,617 135,654,292 135,637,327 AVERAGE BALANCES Net loans (**) $ 15,801,887 $ 13,901,290 $ 11,930,621 Earning assets 24,893,366 22,244,959 19,261,949 Total assets 26,569,755 23,806,372 20,432,382 Deposits 14,508,482 13,791,338 12,270,101 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 1,884,525 1,712,792 1,553,258 PERIOD END BALANCES Net loans (**) $ 16,057,085 $ 14,907,754 $ 13,078,795 Allowance for loan losses 290,653 292,010 267,249 Earning assets 26,339,431 23,754,620 21,591,950 Total assets 28,057,051 25,460,539 23,160,357 Deposits 14,804,907 14,173,715 13,672,214 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 1,993,644 1,660,986 1,709,113 SELECTED RATIOS Net interest yield (taxable equivalent basis) 4.23% 4.65% 4.91% Return on average total assets 1.04 1.08 1.14 Return on average common stockholders' equity 15.00 15.45 15.41 Dividend payout ratio to common stockholders 32.47 31.56 28.42 Efficiency ratio 61.57 63.08 62.55 Overhead ratio 41.96 48.71 49.15 Tier I capital to risk-adjusted assets 10.44 10.17 10.82 Total capital to risk-adjusted assets 12.37 12.29 13.14
(*) 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. (**) Includes loans held-for-sale F-4 31
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 - ------------ ------------- ------------- ------------ ------------ ------------- ------------- $ 1,491,303 $ 1,272,853 $ 1,105,807 $ 887,141 $ 772,136 $ 740,354 $ 794,943 707,348 591,540 521,624 351,633 280,008 300,135 387,134 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ 783,955 681,313 584,183 535,508 492,128 440,219 407,809 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ 6,202 3,202 7,153 451 1,418 625 19,376 241,396 202,270 166,185 140,852 123,762 123,879 112,398 636,920 541,919 486,833 447,846 412,276 366,945 345,738 110,607 88,839 64,558 53,788 72,892 97,633 121,681 74,461 70,877 59,769 50,043 28,151 14,259 6,793 -- -- -- 385 770 770 807 -- -- -- -- 6,185 -- -- - ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 209,565 $ 185,150 $ 146,361 $ 124,749 $ 109,404 $ 85,116 $ 64,564 ============ ============ ============ ============ ============ ============ ============ $ 201,215 $ 176,800 $ 138,011 $ 120,504 $ 109,404 $ 85,116 $ 64,564 ============ ============ ============ ============ ============ ============ ============ $ 1.50 $ 1.34 $ 1.05 $ 0.92 $ 0.84 $ 0.70 $ 0.54 0.40 0.35 0.29 0.25 0.23 0.20 0.20 10.37 8.80 7.91 6.87 6.38 5.76 5.25 24.75 16.88 9.69 7.04 7.75 7.57 4.82 134,036,964 132,044,624 131,632,600 131,192,972 130,804,944 121,845,976 120,142,404 135,365,408 132,177,012 131,794,544 131,352,512 130,929,692 130,619,456 120,375,408 $ 10,548,207 $ 9,210,964 $ 8,217,834 $ 7,107,746 $ 5,700,069 $ 5,150,328 $ 5,302,189 17,409,634 15,306,311 13,244,170 11,389,680 9,894,662 8,779,981 8,199,195 18,419,144 16,301,082 14,118,183 12,225,530 10,683,753 9,528,518 8,944,357 10,991,557 10,461,796 9,582,151 8,837,226 8,124,885 7,641,123 7,198,187 125,000 147,951 56,850 56,082 73,967 85,585 94,000 122,877 -- -- -- -- -- -- 1,370,984 1,193,506 1,070,482 924,869 793,001 668,990 610,641 $ 11,376,607 $ 9,779,028 $ 8,677,484 $ 7,781,329 $ 6,346,922 $ 5,252,053 $ 5,195,557 211,651 185,574 168,393 153,798 133,437 110,714 94,199 18,060,998 15,484,454 14,668,195 11,843,806 10,657,994 9,236,024 8,032,556 19,300,507 16,764,103 15,675,451 12,778,358 11,513,368 10,002,327 8,780,282 11,749,586 10,763,275 9,876,662 9,012,435 8,522,658 8,038,711 7,207,118 125,000 125,000 175,000 50,000 62,000 74,000 94,000 150,000 -- -- -- -- -- -- 1,503,092 1,262,532 1,141,697 1,002,423 834,195 752,119 631,818 4.84% 4.77% 4.74% 5.06% 5.50% 6.11% 5.97% 1.14 1.14 1.04 1.02 1.02 0.89 0.72 15.83 16.17 14.22 13.80 13.80 12.72 10.57 25.19 24.63 26.21 27.20 25.39 28.33 34.13 62.12 61.33 64.88 66.21 66.94 65.05 66.46 49.66 49.38 53.66 57.24 58.34 55.07 52.47 12.17 11.63 11.91 12.85 12.29 12.88 11.01 14.56 14.18 14.65 14.25 13.95 14.85 13.35
F-5 32 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 2000 1999 Variance 2000 1999 Variance 2000 1999 Variance Rate Volume - ------- ------- -------- ----- ----- -------- ---------- ---------- -------- -------- -------- $ 933 $ 681 $ 252 6.68% 4.91% 1.77% Money market investments $ 62,356 $ 33,434 $ 28,922 $ 14,565 $ 14,357 7,945 7,349 596 6.85 6.79 0.06 Investment securities 544,608 499,046 45,562 1,660 43,902 213 314 (101) 7.33 6.56 0.77 Trading 15,624 20,584 (4,960) 2,218 (7,178) - ------- ------- ------ ---- ---- ---- ---------- ---------- -------- -------- -------- 9,091 8,344 747 6.85 6.63 0.22 622,588 553,064 69,524 18,443 51,081 - ------- ------- ------ ---- ---- ---- ---------- ---------- -------- -------- -------- Loans: Commercial 7,216 6,378 838 9.66 9.13 0.53 and construction 696,903 582,148 114,755 35,149 79,606 770 690 80 11.80 12.56 (0.76) Leasing 90,906 86,714 4,192 (5,429) 9,621 4,405 3,605 800 8.27 8.04 0.23 Mortgage 364,269 289,757 74,512 9,287 65,225 3,411 3,228 183 13.05 13.06 (0.01) Consumer 445,038 421,711 23,327 1,785 21,542 - ------- ------- ------ ----- ----- ---- ---------- ---------- -------- -------- -------- 15,802 13,901 1,901 10.11 9.93 0.18 1,597,116 1,380,330 216,786 40,792 175,994 - ------- ------- ------ ----- ----- ---- ---------- ---------- -------- -------- -------- $24,893 $22,245 $2,648 8.92% 8.69% 0.23% TOTAL EARNING ASSETS $2,219,704 $1,933,394 $286,310 $ 59,235 $227,075 ======= ======= ====== ===== ===== ==== ========== ========== ======== ======== ======== Interest bearing deposits: $ 1,811 $ 1,746 $ 65 3.60% 3.08% 0.52% NOW and money market $ 65,195 $ 53,687 $ 11,508 $ 9,144 $ 2,364 4,113 4,132 (19) 2.89 2.91 (0.02) Savings 118,823 120,259 (1,436) (1,612) 176 5,549 4,874 675 6.22 5.71 0.51 Time deposits 345,355 278,269 67,086 20,224 46,862 - ------- ------- ------ ----- ----- ---- ---------- ---------- -------- -------- -------- 11,473 10,752 721 4.61 4.21 0.40 529,373 452,215 77,158 27,756 49,402 - ------- ------- ------ ----- ----- ---- ---------- ---------- -------- -------- -------- 7,781 5,993 1,788 6.53 5.30 1.23 Short-term borrowings 508,029 317,646 190,383 81,120 109,263 1,894 1,833 61 6.87 6.99 (0.12) Medium and long-term debt 129,994 128,071 1,923 (2,135) 4,058 - ------- ------- ------ ----- ----- ---- ---------- ---------- -------- -------- -------- TOTAL INTEREST BEARING 21,148 18,578 2,570 5.52 4.83 0.69 LIABILITIES 1,167,396 897,932 269,464 106,741 162,723 3,035 3,039 (4) Demand deposits 710 628 82 Other sources of funds - ------- ------- ------ ----- ----- ---- $24,893 $22,245 $2,648 4.69% 4.04% 0.65% ======= ======= ====== ===== ===== ==== 4.23% 4.65% (0.42%) NET INTEREST MARGIN AND ===== ===== ==== NET INTEREST INCOME 1,052,308 1,035,462 16,846 $(47,506) $64,352 ======== ======= 3.40% 3.86% (0.46%) NET INTEREST SPREAD ===== ===== ==== TAXABLE EQUIVALENT ADJUSTMENT 69,547 81,724 (12,177) ---------- ---------- ------- NET INTEREST INCOME $ 982,761 $ 953,738 $29,023 ========== ========== ======= 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.
expense paid on deposits and borrowed funds. It is normally impacted by fluctuations in the volumes and mix of earning assets and interest-bearing liabilities, changes in interest rates and by the repricing characteristics of these assets and liabilities. The average key index rates for the years 1998 through 2000, which impacted most financial instruments of the Corporation, were as follows:
2000 1999 1998 ---- ---- ---- Prime rate 9.23% 8.00% 8.35% Fed funds rate 6.26 4.95 5.35 3-month LIBOR 6.54 5.42 5.56 3-month Treasury 5.98 4.76 4.89 2-year Treasury 6.20 5.42 5.12 FNMA 30-year 8.14 7.66 7.11
As further discussed in the Risk Management section, the Corporation has a comprehensive set of policies and procedures that is utilized to monitor and control the risk associated with the F-6 33
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 investments $ 33,434 $ 36,781 $ (3,347) $ (985) $ (2,362) 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 (20,024) 68,938 - ------- ------- ------ ----- ----- ----- ---------- ---------- -------- -------- -------- Loans: Commercial 6,378 5,221 1,157 9.13 9.24 (0.11) and construction 582,148 482,234 99,914 (5,712) 105,626 690 628 62 12.56 12.73 (0.17) Leasing 86,714 79,929 6,785 (1,100) 7,885 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 (23,971) 185,452 - ------- ------- ------ ----- ----- ----- ---------- ---------- -------- -------- -------- $22,245 $19,262 $2,983 8.69% 8.95% (0.26)% TOTAL EARNING ASSETS $1,933,394 $1,722,999 $210,395 $(43,995) $254,390 ======= ======= ====== ===== ===== ===== ========== ========== ======== ======== ======== 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 (3,932) 69,854 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 (1,500) 120,741 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 $(42,495) $133,649 3.86% 4.06% (0.20)% NET INTEREST SPREAD ======== ======== ===== ===== ==== TAXABLE EQUIVALENT ADJUSTMENT 81,724 71,296 10,428 ---------- ---------- ------- $ 953,738 $ 873,012 $80,726 NET INTEREST INCOME ========== ========== =======
composition and repricing of its earning assets and interest-bearing liabilities and to assist management in maintaining stability in the net interest margin under varying interest rate environments. Net interest income for the year ended December 31, 2000 reached $982.8 million, an increase of $29.1 million or 3.0% when compared with $953.7 million reported in 1999. In 1998, net interest income amounted to $873.0 million. Table D presents the different components of net interest income segregated by its major categories. It is presented on a taxable equivalent basis, to facilitate the comparison among loans and investment securities whose income is exempt for income tax purposes. The conversion is done using the applicable statutory income tax rates. Non-accrual loans have been included in the respective average loan, and lease balances. Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. The taxable equivalent adjustment amounted to $69.5 million in the year 2000 compared with $81.7 million in 1999 and $71.3 million in 1998. The decline in the adjustment relates to an increase of 69 basis points in the average cost of interest bearing liabilities compared to an increase of six basis points in investment securities, thus increasing significantly the interest expense disallowance F-7 34 required by the Internal Revenue Code of Puerto Rico and reducing the benefit derived from the exempt interest income. The taxable equivalent adjustment rose from 1998 to 1999 mostly due to a higher average volume of exempt investments. The increase of $16.8 million in net interest income, on a taxable equivalent basis, was the effect of a favorable variance of $64.3 million due to a higher volume of average earning assets and a negative variance of $47.5 million due to a lower net interest margin. Average earning assets increased by $2.6 billion or 11.9% from $22.2 billion in 1999. This increase was primarily attributed to the growth of $1.9 billion or 13.7% in the average loan portfolio. Commercial and mortgage loans accounted for 86.2% of the increase in the average loan balance. The rise resulted from the Corporation's sustained business growth and to a continuous aggressive marketing campaign to attract mortgage loans. The yield on average loans increased by 18 basis points, mainly as a result of the Federal Reserve's tightening policy during mid-1999 and 2000, which affected positively the yield on commercial loans. Although other loan categories were also positively impacted by the hike in rates, due to the fact that approximately 50% of the commercial and construction loan portfolios have floating or adjustable rates, the increase in the yield of commercial loans accounted for almost 59% of the total increase in interest income associated to yields. As shown in Table D, the average volume of the investment portfolio and money markets increased by $596 million and $252 million, respectively, from 1999. The growth in investment securities was comprised principally of U.S. agency securities, which are tax exempt in Puerto Rico, partially offset by lower average levels of U.S. Treasury securities. This reduction was mostly attributable to management's focus on the replacement of lower-yielding assets to better position its investment portfolio due to the prevailing interest rate scenarios. The average yield on investment securities, on a taxable equivalent basis, increased to 6.85% from 6.79% reported in 1999, while the average yield on money market investments also increased to 6.68% from 4.91% in 1999, mostly as a result of higher market rates. As a result of the increase in the average yield on loans and investment securities, due to the higher interest rate scenario that prevailed during 2000, and the changes in the composition of these portfolios, the average yield on earning assets increased 23 basis points from 8.69% in 1999 to 8.92% in 2000. The higher volume of earnings assets was primarily funded by increases of $721 million in interest bearing deposits and $1.8 billion in borrowings. Non-interest-bearing deposits remained stable at $3.0 billion. The rise in interest bearing deposits was principally attributed to higher levels of time deposits. Table L presents a detail of average deposits by category. The average cost of interest bearing deposits increased by 40 basis points from 1999 due to a higher interest rate environment. Average short-term borrowings, comprised of Fed funds, repurchase agreements and commercial paper, rose $1.8 billion or 29.8% since 1999, whereas their average cost increased by 123 basis points reflecting the rise in market rates as stated above. Net interest margin is the difference between the average yield obtained on earning assets and the average rate paid for all liabilities used to fund those assets, including both interest and non-interest sources of funds. The net interest margin of the Corporation, on a taxable equivalent basis, declined 42 basis points from 4.65% in 1999 to 4.23% in 2000. This margin was highly impacted by the changes in interest rates imposed by the Federal Reserve during mid-1999 and 2000. Since the Corporation had a liability sensitive structure, its borrowings and deposits repriced at a faster pace than its earning assets, thus resulting in a decrease in the net interest margin in 2000. During the last months of 2000 market rates started to stabilize and in January 2001 the Federal Reserve decreased the federal funds rate and discount rate by 100 points to 5.5% and 5.0%, respectively. These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high-energy prices debilitating household and business purchasing power. In the event interest rates continue to decline in 2001, the Corporation could experience a slightly positive effect in its net interest margin, as the cost of funds should decrease at a more rapid pace than the yield on earning assets. As shown in Table D, net interest income, on a taxable equivalent basis, amounted to $1.0 billion in 1999, up $91.2 million, or 9.7%, compared to 1998. This increase was attributable to a higher level of average earning assets in 1999, partially offset by a lower net interest margin. Average earning assets were $22.2 billion, compared with $19.2 billion in 1998, an increase of $3.0 billion or 15.5%. Commercial and mortgage loans, as well as investment securities, were the primary areas of growth in earning assets in 1999. The net interest margin on a taxable equivalent basis for 1999 decreased by 26 basis points when compared to 1998. This variance was the result of a decrease in the yield on average earning assets, primarily due to an environment of lower interest rates as compared with 1998. Also, the cost of short-term financing in the money markets increased substantially during the last few months of 1999. This had an adverse effect on the Corporation's cost of funds primarily during the last quarter of 1999, as money market rates increased more than was expected as a result of a tightening policy by the Fed in November 1999. 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 was $194.6 million for the year ended December 31, 2000, an increase of $45.7 million, or 30.7%, from $148.9 million recorded in 1999. The provision for loan losses amounted to $137.2 million in 1998. The increase in the provision for loan losses was primarily the result of a rise in the level of charge-offs and non-performing assets, loan growth and the inherent risk in the loan portfolio. F-8 35 Table E Non-Interest Income
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------ Five-Year (Dollars in thousands) 2000 1999 1998 1997 1996 C.G.R. - ---------------------- ---- ---- ---- ---- ---- ------ Service charges on deposit accounts $125,519 $118,187 $103,732 $ 94,141 $ 85,846 9.81% -------- -------- -------- -------- -------- ----- Other service fees: Credit card fees and discounts 60,652 49,233 36,038 29,437 23,735 24.02 Debit card fees 30,513 22,785 17,702 15,768 10,430 41.26 Sale and administration of investment products 17,298 17,452 11,890 9,557 5,384 41.97 Check cashing fees 14,505 11,999 2,631 414 482 Mortgage servicing fees, net of amortization 12,561 11,300 9,131 9,129 7,534 16.10 Trust fees 9,481 9,928 8,873 6,799 6,174 10.13 Processing fees 28,528 8,312 Insurance fees 10,423 6,903 8,690 9,537 7,955 12.57 External payments 6,319 4,975 3,158 2,204 2,216 20.45 Other fees 26,754 26,840 18,462 15,805 13,161 9.43 -------- -------- -------- -------- -------- ----- Total other service fees 217,034 169,727 116,575 98,650 77,071 26.80 -------- -------- -------- -------- -------- ----- Other income 109,114 85,946 58,353 48,605 39,353 49.22 -------- -------- -------- -------- -------- ----- Total $451,667 $373,860 $278,660 $241,396 $202,270 21.77% ======== ======== ======== ======== ======== ===== Non-interest income to average assets 1.70% 1.57% 1.36% 1.31% 1.24% Non-interest income to operating expenses 51.47 44.64 38.68 37.90 37.32 ======== ======== ======== ======== ========
The Credit Risk Management and Loan Quality section includes a more detailed analysis of the allowance for loan losses, net charge-offs, and credit quality statistics. Non-Interest Income The Corporation through its business expansion strategies continues to emphasize growth in fee revenue with services beyond traditional lending and deposit activities. Non-interest income, excluding securities and trading gains, amounted to $451.7 million in 2000, compared with $373.9 million in 1999, representing an increase of $77.8 million, or 20.8%. This increase was almost twice the increase in operating expenses in 2000 driving the ratio of non-interest income to operating expenses to above 51% for the first time. In 1998, these revenues totaled $278.7 million. The increase during 2000 was driven by a rise of $47.3 million in other service fees, $23.2 million in other operating income and $7.3 million in service charges on deposit accounts. Non-interest income categories compared to the previous four years are presented in Table E. As a percentage of average assets, these revenues represented 1.70%, 1.57% and 1.36% for 2000, 1999 and 1998, respectively. The sustained increase in most categories has helped to consistently improve the ratio of non-interest income to operating expenses from 37.32% in 1996 to 51.47% in 2000. Service charges on deposits accounts totaled $125.5 million in 2000, an increase of 6.2% from the $118.2 million reported in 1999. The increase from 1999 was primarily the result of higher activity on commercial accounts, together with new account and transactional charges implemented in commercial and retail deposit accounts. Somewhat tempering the rise in service charges on deposit accounts were lower charges on demand deposit accounts and returned checks. In 1998, these revenues amounted to $103.7 million. Measured as a percentage of average deposits, service charges were 0.87% in 2000, 0.86% in 1999 and 0.85% in 1998. Other service fees were $217.0 million an increase of 27.9% from 1999. Most categories exhibited growth in 2000, with strong increases recorded in processing fees, credit card fees and discounts, and debit card fees. Higher processing fees, which rose $20.2 million from 1999, were primarily generated by GM Group, acquired in mid-1999. Credit card fees and discounts grew $11.4 million or 23.2% when compared with 1999. This overall increase was mostly attributed to the implementation in Puerto Rico, early this year, of late payment and cash advance fees on credit cards, and to an increase in customer activity. Debit card fees, consisting principally of interchange income and other fees from debit card and ATM usage, as well as rental income from point-of-sale (POS) terminals increased $7.7 million or 33.9% from the $22.8 million reported in 1999. F-9 36 Table F Operating Expenses
Year ended December 31, -------------------------------------------------------------------------------------- Five-Year (Dollars in thousands) 2000 1999 1998 1997 1996 C.G.R. -------- -------- -------- -------- -------- --------- Salaries $306,529 $289,995 $247,590 $211,741 $185,946 12.18% Pension and other benefits 68,734 72,820 67,743 69,468 64,609 3.61 Profit sharing 18,913 23,881 22,067 25,684 22,692 (0.09) -------- -------- -------- -------- -------- ----- Total personnel costs 394,176 386,696 337,400 306,893 273,247 9.62 -------- -------- -------- -------- -------- ----- Equipment expenses 98,022 88,334 75,302 66,446 57,186 15.42 Net occupancy expense 67,720 60,814 48,607 39,617 36,899 15.57 Professional fees 65,889 67,955 58,087 46,767 36,953 18.10 Business promotion 46,791 45,938 39,376 33,569 26,229 21.32 Communications 45,689 43,146 36,941 33,325 26,470 14.61 Amortization of intangibles 34,558 31,788 27,860 22,874 18,054 11.33 Other taxes 34,125 33,290 32,191 30,283 23,214 10.33 Printing and supplies 20,828 20,709 17,604 15,539 11,964 13.48 Other operating expenses: Transportation and travel 10,112 10,426 7,968 7,186 5,852 17.98 FDIC assessment 2,846 1,782 1,497 1,499 1,544 (22.62) All other 56,715 46,604 37,521 32,922 24,307 22.40 -------- -------- -------- -------- -------- ----- Subtotal 483,295 450,786 382,954 330,027 268,672 15.24 -------- -------- -------- -------- -------- ----- Total $877,471 $837,482 $720,354 $636,920 $541,919 12.50% ======== ======== ======== ======== ======== ===== Efficiency ratio 61.57% 63.08% 62.55% 62.12% 61.33% Personnel costs to average assets 1.48 1.62 1.65 1.67 1.68 Operating expenses to average assets 3.30 3.52 3.53 3.46 3.32 Assets per employee (in millions) $ 2.63 $ 2.21 $ 2.20 $ 2.18 $ 2.10 ======== ======== ======== ======== =========
Average debit card monthly transactions increased to 6,085,000 as of December 31, 2000, from 5,155,000 a year earlier. The number of POS terminals installed increased 16.4% to 25,788 in December 31, 2000. Insurance fees totaled $10.4 million for the year 2000, an increase of $3.5 million from 1999, most of which was related to commission income generated by Popular Insurance, incorporated in midyear 2000. Also contributing to the growth in other service fees from 1999 were higher check cashing fees by $2.5 million. This rise was mostly attributed to the expansion of the Corporation's retail financial services subsidiary in the United States, which added 30 new branches during the year to its existing network of stores and mobile units. Other income in 2000 amounted to $109.1 million, representing an increase of $23.2 million, or 27.0%, from 1999. Other income increased mostly as the result of higher gains in the sale of loans and loans held for sale by approximately $4.8 million and to other revenues derived by GM Group, mainly associated with consulting services for new technology, sale of equipment and other engineering services. Also, contributing to the rise were the $8.8 million pretax gain realized on the sale of the credit card operations in the U.S. mainland and the $0.5 million gain on the sale of the Corporation's ownership interest in BF. Also, included in other income are higher fees generated by the Corporation's investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) of $3.6 million. As shown in Table E, in 1999, non-interest income, excluding securities and trading gains, increased $95.2 million or 34.2% from the $278.7 million reported in 1998. Service charges on deposit accounts grew $14.5 million or 13.9% over the amount reported in 1998, mostly as a result of higher volume of deposits due to the Corporation's growth and expansion and the offering of new deposit accounts. Also, the growth was related to increases in the volume of transactions with commercial accounts and revisions to the fee structure. Other service fees increased $53.2 million or 45.6% from 1998. Higher credit card fees and discounts led the rise, reflecting a higher portfolio level, increased fees and higher customer activity. Also, contributing to the growth from 1998 were higher check cashing fees driven by the expansion of the Corporation's retail financial subsidiary in the United States, higher processing fees associated to fees generated by GM Group and higher debit card fees from electronic transactions. In addition, fees related to the sale and administration of investment products reflected growth mostly associated to the issuance of various mutual funds during the year. These rises were partially offset by lower credit life insurance fees. Other income, including gain F-10 37 on sale of loans and loans held for sale, rose $27.6 million or 47.3% from 1998, partly due to fees resulting from the Corporation's investment in TELPRI and the acquisition of GM Group in 1999, and higher gains on the sale of mortgage and SBA loans. Securities and Trading Gains/Losses During 2000, the Corporation sold $819 million in investment securities available-for-sale. Gain on sale of securities amounted to $11.2 million, an increase of $10.6 million, compared with $0.6 million at the end of 1999. A $13.4 million gain was recognized in 2000 when the Corporation exercised its conversion right to exchange its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity. This gain was partially offset by net losses generated upon the sale of low-yielding securities. In 1999, $168 million in the investment securities available-for- sale were sold for a net gain of $0.6 million, compared with $923 million and $8.9 million, respectively, in 1998. Trading account activities for the year ended December 31, 2000, resulted in profits of $2.2 million compared with losses of $1.6 million in 1999 and profits of $3.7 million in 1998. Operating Expenses The Corporation's operating expenses for 2000 totaled $877.5 million, an increase of $40.0 million or 4.8%, compared to 1999. As a percentage of average assets, operating expenses decreased to 3.30% in 2000, compared with 3.52% in 1999 and 3.53% in 1998. The Corporation's efficiency ratio declined from 63.08% in 1999 to 61.57% in 2000. The decrease reflects both improved expense management and increased revenues for the year. Table F presents a detail of operating expenses and various related ratios for the last five years. Personnel costs, the largest category of operating expenses, increased $7.5 million or 1.9%, over the amounts reported in prior year. The rise in personnel costs was led by a $16.5 million increase in salary expenses, which resulted mostly from annual merit increases and business expansion. Pension and other employee benefits, including profit sharing, amounted to $87.6 million for the year ended December 31, 2000, a decrease of $9.1 million or 9.4% from 1999. This decline was mostly attributed to lower pension and post-retirement benefit expenses and to a decrease in the profit sharing expense resulting from lower profitability ratios. There were 10,651 full-time equivalent employees (FTE's) at December 31, 2000, compared with 11,501 in 1999, representing a decrease of 850 employees. This reduction in headcount was mostly attributed to employees of Banco Fiduciario and the credit card operations in the U.S. These operations had approximately 766 and 121 FTE's, respectively, as of the end of 1999. The ratio of assets per employee rose to $2.63 million in 2000 from $2.21 million in 1999, while personnel costs as a percentage of average assets decreased to 1.48% from 1.62% in 1999. Operating expenses, excluding personnel costs, totaled $483.3 million for the year ended December 31, 2000, an increase of $32.5 million or 7.2%, when compared with $450.8 million in 1999. Equipment and communication expenses grew a combined $12.2 million or 9.3% in 2000. The increase is partly attributed to the acquisition of GM Group in the second half of 1999 and higher expenses related to the depreciation of new equipment acquired throughout 1999 as part of the Y2K plan. Also, the rise is associated with the enhancement of the Corporation's electronic delivery capabilities, including its ATM's and POS networks, and the launching in the Internet of a redesigned web site that includes online banking services. Net occupancy expenses rose $6.9 million or 11.4% from 1999, largely reflecting increased depreciation and operating costs associated with the Corporation's growth and continued business expansion. Other operating expenses, which consist primarily of sundry losses, travelling expenses, interchange and processing expenses related to debit and credit cards, and FDIC assessments, among others, increased $10.9 million or 18.5% from 1999. Higher sundry losses, FDIC assessments, expenses related to foreclosed properties and higher interchange and processing expenses on credit and debit cards were the principal factors for the increase in other operating expenses. The amortization of intangibles also reflected an increase of $2.8 million related to premiums paid on the operations acquired during 2000 and the latter part of 1999. Partially offsetting these increases were lower professional fees, which decreased by $2.1 million or 3.0% from 1999. In 1999, personnel costs amounted to $386.7 million. The increase of $49.3 million from 1998 to 1999, was mostly reflected in salaries, mainly due to increased employment levels, annual merit increases, incentive compensation and additional personnel hired for the Y2K project. Fringe benefits also rose mostly due to higher post-retirement health benefits, medical plan costs, and profit sharing expenses. These rises were partially offset by a decline in pension costs. Other operating expenses in 1999 were $450.8 million compared with $383.0 million in 1998. Almost all categories of operating expenses reflected rises. These increases were mostly to support the growth of the Corporation's business activity, geographical expansion and the impact of the operations acquired. These included occupancy expenses, equipment expenses, marketing efforts, consulting and technical support fees, and travelling costs, among others. Income Tax Expense Income tax expense for the year ended December 31,2000, was $100.8 million compared with $85.1 million in 1999. The increase in 2000 was primarily due to higher pretax earnings for the current year and lower benefits from net tax-exempt interest income. The effective tax rate increased to 26.8% in 2000, from 25.0% in 1999 and 24.3% in 1998, mostly as a result of higher taxable income at the U.S. banking operations, associated to the gain on the sale of the credit card operations. This income is subject to a higher tax rate, which includes federal and state taxes. In addition, the disallowance of interest expense attributed to tax-exempt investments in Puerto Rico increased due to the higher cost of F-11 38 funds. 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. In 1998, income tax expense was $74.7 million and rose $10.4 million or 14.0% in 1999. The increase in 1999 was primarily due to higher pretax earnings and a lower 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. Please refer to Note 25 to the consolidated financial statements for additional information on income taxes. Fourth Quarter Results Net income reached $75.5 million or $0.54 per common share for the quarter ended December 31, 2000, compared with $65.7 million or $0.47 per common share for the same quarter in 1999. The results for the fourth quarter of 2000 represented an annualized return on assets of 1.09% and a return on common equity of 15.72%, compared with 1.05% and 15.06%, respectively, for the same period in 1999. The Corporation's results of operations for the quarter ended December 31, 2000 reflected increases of $5.9 million in net interest income and $17.5 million in other revenues, when compared with the same quarter in 1999. Operating expenses reflected a reduction of $5.0 million compared with the same quarter in 1999. These favorable variances were partially offset by increases of $11.2 million in income taxes and $6.8 million in the provision for loan losses. The growth in net interest income over the fourth quarter of 1999 was primarily due to an increase of $2.9 billion in average earning assets driven principally by a $1.6 billion increase in the average loan portfolio, mainly commercial and mortgage loans. The increase in the volume of earning assets was funded mainly through a higher average volume of borrowings and interest-bearing deposits. The net interest yield on a taxable equivalent basis for the quarter ended December 31, 2000, was 4.06%, compared with 4.55% for the fourth quarter of 1999. The reduction in the net interest yield resulted from an increase of 60 basis points in the average cost of interest bearing liabilities, mostly as a result of a higher interest rate scenario and a higher proportion of short-term borrowings, partially offset by an increase of seven basis points in the average yield on earning assets. The provision for loan losses was $46.2 million, up $6.8 million or 17.2% from $39.4 million in the fourth quarter of 1999. The increase reflects the growth in the loan portfolio, and a rise in non-performing assets and net charge-offs. Net charge-offs were $50.9 million or 1.25% of average loans, compared with $36.0 million or 0.99% for the same period in 1999. The rise in net charge-offs was partially related to the adoption of the Revised Uniform Retail Credit Classification and Account Management Policy, which is further discussed in the Non-performing Assets section. Non-interest income, including securities and trading gains, grew $17.5 million or 17.1%, reaching $119.4 million for the fourth quarter of 2000, compared with $101.9 million for the same period in 1999. The growth in non-interest income was led by an increase of $8.3 million in other service fees, $9.1 million in other operating income and $1.6 million in service charges on deposit accounts, partially offset by higher losses on sale of securities of $2.4 million. Higher debit card fees, processing income and insurance commissions led the growth in other service fees. Other income for the fourth quarter of 2000 included a $6.4 million pre-tax gain recognized upon the $190 million loan securitization performed by Equity One in the quarter, as well as a $3.8 million gain triggered by the sale of approximately $293 million in mortgage loans by BPPR. Operating expenses for the fourth quarter of 2000 decreased $5.0 million or 2.3%, from $215.7 million in the fourth quarter of 1999. This decline was principally as a result of lower personnel costs by $4.3 million or 4.4% and professional fees by $3.1 million or 17.0%. Remaining combined categories of operating expenses rose $2.4 million or 2.4%, reflecting higher expenses largely in equipment, net occupancy and other general operating expense categories. STATEMENT OF CONDITION ANALYSIS The Corporation's total assets as of December 31, 2000 reached $28.1 billion, representing an increase of $2.6 billion, compared with $25.5 billion a year earlier. Total assets amounted to $23.2 billion in 1998. Despite the sale of BF and the credit card operations in the United States, the Corporation experienced a 10.2% increase in assets since December 31, 1999, mostly due to the Corporation's business growth, attributed principally to its banking operations in Puerto Rico. Total assets of BF and the U.S. credit card operations were $436 million and $153 million, respectively, at December 31, 1999. Earning Assets The Corporation's earning assets reached $26.3 billion at December 31, 2000, compared with $23.8 billion at December 31, 1999 and $21.6 billion at the same date in 1998. Money market investments, investment and trading securities amounted to $10.3 billion at December 31, 2000, representing an increase of $1.5 billion when compared with $8.8 billion at December 31, 1999. The increase was mainly reflected in investment securities, which totaled $9.1 billion at December 31, 2000, or $1.5 billion and 18.8% higher than the $7.6 billion at December 31, 1999. The growth was mostly attributed to investment opportunities undertaken during the year, mostly related to U.S. agency securities, which are tax-exempt in Puerto Rico. The Corporation continued to experience loan growth during 2000. Total loans increased $1.1 billion or 7.7% from amounts reported in 1999. As derived from Table G, mortgage and commercial loans, F-12 39 Table G Loans Ending Balances
As of December 31, ---------------------------------------------------------------------------------------- Five-Year (Dollars in thousands) 2000 1999 1998 1997 1996 C.G.R. ------------ ------------ ------------ ------------ ------------ --------- Commercial, industrial and agricultural $ 7,013,834 $ 6,656,411 $ 5,646,027 $ 4,637,409 $ 3,822,096 16.96% Construction 258,197 247,288 257,786 250,111 200,083 3.65 Lease financing 816,714 728,644 645,280 581,927 516,001 10.37 Mortgage(*) 4,643,646 3,933,663 3,351,748 2,833,896 2,576,887 14.08 Consumer(*) 3,324,694 3,341,748 3,177,954 3,073,264 2,663,961 7.15 ------------ ------------ ------------ ------------ ------------ ------ Total $ 16,057,085 $ 14,907,754 $ 13,078,795 $ 11,376,607 $ 9,779,028 13.10% ============ ============ ============ ============ ============ ======
(*)Includes loans held-for-sale. including construction loans, accounted for the largest increases in the portfolio, rising $710 million and $368 million, respectively from the amounts reported as of December 31, 1999. This growth was achieved despite various asset sale transactions, which took place during the year, including the sale of BF which had $290 million in loans at the end of 1999, and sale transactions involving mortgage loans, which are described below. The rise in the mortgage loan portfolio of $710 million or 18.0% since 1999 was the result of higher loan originations and aggressive marketing efforts. These loans increased even when the Corporation performed a mortgage loan securitization of $190 million at Equity One and a sale of mortgage loans of approximately $293 million at BPPR during last quarter of 2000. The commercial loan portfolio, including construction loans, was $7.3 billion at December 31, 2000, an increase of 5.3% compared to 1999. The 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. This increase was partially offset by the sale of BF, which had $236 million in commercial loans as of December 31, 1999. BPNA reflected a healthy growth, comprising 65.9% of the Corporation's total loan growth. The rise at this banking institution was mostly in the form of medallion, other SBA and franchise loans, among others. Consumer loans, which include personal, auto and boat, credit cards and reserve lines, decreased $17 million since December 31, 1999 mainly resulting from the sale of the U.S. credit card portfolio during the third quarter of 2000. The latter totaled $156 million at December 31, 1999. Personal loans, the largest category of consumer loans, represented 51.6% of the consumer loan portfolio, a slight increase of $15.7 million or 0.9% from the end of 1999. Credit card loans, which represented 22.8% of the consumer loan portfolio as of December 31, 2000, decreased $109 million, mainly due to the aforementioned sale of the U.S. credit card portfolio. In Puerto Rico, the credit card portfolio increased by $61.9 million mostly related to American Express. Auto and boat secured loans represented about 20.6% of the total consumer loan portfolio, while other revolving credit represented 5.0% at December 31, 2000. These two categories combined increased $76.5 million. This increase was mostly achieved through business expansion and marketing efforts both in Puerto Rico and the United States. The Corporation's lease financing portfolio increased $88.1 million or 12.1% from 1999. This rise was mostly associated to lease financing portfolios acquired during the year from a local financial institution in Puerto Rico of $66.8 million at date of acquisition. In addition, the Corporation's leasing subsidiary in the United States, engaged in equipment leasing, contributed with $7.6 million of the increase. Deposits, other interest bearing liabilities and minority interest Total deposits at December 31, 2000 amounted to $14.8 billion compared with $14.2 billion at December 31, 1999, an increase of $631 million or 4.5%. The moderate growth in deposits reflects increased competition for consumer deposits and heightened consumer sensitivity to interest rates. Interest bearing deposits increased $806 million or 7.4%, mostly in certificates of deposit. Non-interest bearing deposits decreased $175 million or 5.3% from 1999. The growth in deposits was partially affected by the sale of BF, which had $295 million in total deposits as of the end of 1999. 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 2000, included 67.4% in Puerto Rico, 27.7% in the United States and the remaining 4.9% in the Caribbean region, including deposits from BPPR's operations in the U.S. and British Virgin Islands. The increase in deposits was mainly reflected in brokered CD's and other time deposits, which rose $304 million or 197% and $289 million or 5.8%, respectively, from amounts reported in 1999. Brokered CD's consist of certificate of deposits purchased from a broker acting as an agent for depositors and usually have a higher interest rate than regular CD's. The increase in time deposits was mostly experienced in retail deposits, resulting from the F-13 40 Table H Capital Adequacy Data
As of December 31, ---------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 1997 1996 -------------- -------------- -------------- -------------- -------------- Risk-based capital: Tier I capital $ 1,741,004 $ 1,557,096 $ 1,450,187 $ 1,335,391 $ 1,121,128 Supplementary (Tier II) capital 321,627 324,519 310,091 263,115 246,350 -------------- -------------- -------------- -------------- -------------- Total capital $ 2,062,631 $ 1,881,615 $ 1,760,278 $ 1,598,506 $ 1,367,478 ============== ============== ============== ============== ============== Risk-weighted assets: Balance sheet items $ 16,173,005 $ 14,878,731 $ 12,955,995 $ 10,687,847 $ 9,368,420 Off-balance sheet items 496,735 428,780 443,926 287,822 275,397 -------------- -------------- -------------- -------------- -------------- Total risk-weighted assets $ 16,669,740 $ 15,307,511 $ 13,399,921 $ 10,975,669 $ 9,643,817 ============== ============== ============== ============== ============== Ratios: Tier I capital (minimum required - 4.00%) 10.44% 10.17% 10.82% 12.17% 11.63% Total capital (minimum required - 8.00%) 12.37 12.29 13.14 14.56 14.18 Leverage ratio (minimum required - 3.00%) 6.40 6.40 6.72 6.86 6.71 Equity to assets 7.09 7.19 7.60 7.44 7.33 Tangible equity to assets 6.06 6.09 6.50 6.52 6.55 Equity to loans 11.93 12.32 13.02 13.00 12.97 Internal capital generation rate 9.59 9.80 10.06 10.76 10.99 ============== ============== ============== ============== ==============
Corporation's marketing efforts. In addition, savings, NOW and money market accounts had an increase of $208 million or 3.6% from 1999. On the other hand, demand deposits had a decrease of $175 million or 5.3% compared with amounts reported as of December 31, 1999. This decrease is mostly attributable to a reduction in the funds held in trust for the benefit of third parties. During 2000, an increased reliance was placed on borrowed funds to support earning asset growth. Borrowed funds, including subordinated notes and capital securities, increased $1.6 billion or 17.8%, from $9.2 billion on December 31, 1999 to $10.8 billion at the end of 2000. Most of the increase in borrowed funds was obtained through short-term funding sources. The increase in funds was mostly in the form of federal funds and advances under revolving lines of credit. As part of the investment in subsidiaries, the Corporation recognized a minority interest, amounting to $0.9 million as of December 31, 2000, which mostly represented the beneficial interest of the minority investors of Levitt Mortgage. As of December 31, 1999, this minority interest totaled $23 million. The decrease from the end of 1999 was mainly attributed to the aforementioned sale of BF. Stockholders' Equity The Corporation's stockholder's equity at December 31, 2000 was $1.99 billion compared with $1.66 billion at the end of 1999. Besides the increase in retained earnings, stockholder's equity also rose as a result of an increase of $144 million in accumulated other comprehensive income. The latter included $4 million in unrealized gains on securities available-for-sale, net of deferred taxes, as of December 31, 2000, compared with $139 million in unrealized losses, net of deferred taxes, in prior year. During 2000 the Corporation repurchased a total of 104,878 shares of its common stock at a cost of $2.1 million. Dividends declared on common stock during 2000 totaled $87.0 million, compared with $81.4 million in 1999. Total dividends declared per common share for 2000 were $0.64 compared with $0.60 in 1999. The dividend payout ratio to common stockholders for the year was 32.47% compared with 31.56% in 1999. 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 2000, a total of 449,203 shares, equivalent to $9.8 million in additional capital, were issued under the plan. In 1999, 328,693 shares representing $9.4 million in additional capital were issued under this plan. The Corporation had 4 million shares of preferred stock outstanding at December 31, 2000. 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. Dividends declared on the Corporation's preferred stock amounted to $8.3 million in 2000 and 1999 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 the current and previous four years, the Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Further information is also presented in Note 19 to the consolidated financial statements. F-14 41 Table I Common Stock Performance
Cash Book Market Price Dividends Value Dividend Price/ Market/ ---------------------- Declared Per Payout Dividend Earnings Book High Low Per Share Share Ratio Yield (*) Ratio Ratio -------- -------- --------- ------ -------- --------- -------- ------- 2000 $13.92 32.47% 2.75% 13.36X 188.95% 4TH QUARTER $27 7/8 $23 1/2 $ 0.16 3RD QUARTER 27 1/16 19 5/8 0.16 2ND QUARTER 23 9/16 19 1/16 0.16 1ST QUARTER 26 7/8 18 5/8 0.16 1999 11.51 31.56 1.90 15.18 242.72 4th quarter $32 $25 7/16 $ 0.16 3rd quarter 31 25 13/16 0.16 2nd quarter 32 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
(*) 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. Intangible assets totaled $282 million at December 31, 2000, a decrease of $23 million from $305 million at December 31, 1999. This decrease is mainly due to the amortization of intangibles in the normal course of business and to the exclusion of the intangible assets of BF, which amounted to $10 million as of December 31, 1999. Total intangibles consisted of $194 million in goodwill, $46 million in core deposit intangibles, $39 million in mortgage servicing rights and $3 million in other intangibles. At the end of 1999 goodwill totaled $215 million, core deposit intangibles were $52 million, mortgage-servicing rights were $32 million and other intangibles were $6 million. The average tangible equity increased to $1.59 billion for the year ended December 31, 2000, from $1.43 billion a year before, an increase of $160 million or 11.1%. Total tangible equity at December 31, 2000 was $1.71 billion compared with $1.36 billion at December 31, 1999. The tangible equity to assets ratio for 2000 was 6.06% compared with 6.09 % in 1999. Book value per common share was $13.92 at December 31, 2000 compared with $11.51 at year-end 1999. The market value of the Corporation's common stock at the end of 2000 was $26.31 compared with $27.94 a year earlier. The total market capitalization was $3.6 billion as of December 31, 2000 compared with $3.8 billion as of the same date in the previous year. 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, 2000 and 1999 was $25.50 and $25.38 per share, respectively. As of February 28, 2001 the Corporation had 9,061 stockholders of record of its F-15 42 common stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. Risk Management A Risk Management Committee composed of members of the Board of Directors of the Corporation 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 with 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 is the main source of earnings of the Corporation, 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 Committee's primary goal 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 risks 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 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, 2000. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures. 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 scenarios 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, 2000, 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 a decrease of $1.1 million and an increase of $0.9 million, respectively, which represented changes of 0.1% and 0.08% 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, 2000, the estimated duration of the market value of equity of the Corporation was 6.25 years compared with 5.3 years as of the same date a year earlier. 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 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 F-16 43 Table J Interest Rate Sensitivity
As of December 31, 2000 ------------------------------------------------------------------------------------- By Repricing Dates ------------------------------------------------------------------------------------- After After After Within three months six months nine months 0-30 31-90 but within but within but within (Dollars in thousands) days days six months nine months one year ----------- ----------- ------------- ------------- ------------- Assets: Money market investments $ 137,244 $ 797,342 $ 133,100 Investment and trading securities 1,487,551 1,534,937 492,489 $ 230,855 $ 682,353 Loans 5,011,008 683,511 801,100 598,848 533,937 ----------- ----------- ----------- ----------- ----------- Other assets Total 6,635,803 3,015,790 1,426,689 829,703 1,216,290 ----------- ----------- ----------- ----------- ----------- Liabilities and stockholders' equity: Savings, NOW and money market accounts 675,362 Other time deposits 1,256,964 923,820 1,139,830 531,801 451,316 Federal funds purchased and securities sold under agreements to repurchase 3,357,716 1,294,830 191,569 Other short-term borrowings 1,675,164 1,514,897 391,668 439,490 347,993 Notes payable 50,000 210,000 Subordinated notes and capital securities Non-interest bearing deposits Other non-interest bearing liabilities Stockholders' equity ----------- ----------- ----------- ----------- ----------- Total $ 7,015,206 $ 3,943,547 $ 1,723,067 $ 971,291 $ 799,309 ----------- ----------- ----------- ----------- ----------- Off-balance sheet financial instruments 20,000 15,000 Interest rate sensitive gap (359,403) (927,757) (281,378) (141,588) (416,981) Cumulative interest rate sensitive gap (359,403) (1,287,160) (1,568,538) (1,710,126) (1,293,145) Cumulative sensitive gap to earning assets (1.36)% (4.89)% (5.96)% (6.49)% (4.91)% =========== =========== =========== =========== =========== Non-interest After one bearing year funds Total ----------- ----------- ----------- Assets: Money market investments $ 932 $ 1,068,618 Investment and trading securities 4,785,543 9,213,728 Loans 8,428,681 16,057,085 Other assets $1,717,620 $1,717,620 ------------ ----------- ----------- Total 13,215,156 1,717,620 28,057,051 ------------ ----------- ----------- Liabilities and stockholders' equity: Savings, NOW and money market accounts 5,277,530 5,952,892 Other time deposits 1,438,399 5,742,130 Federal funds purchased and securities sold under agreements to repurchase 120,000 4,964,115 Other short-term borrowings 4,369,212 Notes payable 916,912 1,176,912 Subordinated notes and capital securities 275,000 275,000 Non-interest bearing deposits 3,109,885 3,109,885 Other non-interest bearing liabilities 473,261 473,261 Stockholders' equity 1,993,644 1,993,644 ------------ ----------- ----------- Total $ 8,027,841 $5,576,790 $28,057,051 ------------ ----------- ----------- Off-balance sheet financial instruments (35,000) Interest rate sensitive gap 5,152,315 Cumulative interest rate sensitive gap 3,859,170 Cumulative sensitive gap to earning assets 14.65% ============ =========== ===========
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 included exchange-traded futures contracts and interest rate swaps. Financial futures are used primarily for hedging the cost of future debt issuance as well as protecting the value of assets from market risk. Interest rate swaps are used primarily to hedge the risk of certificates of deposits by the Corporation to retail customers, whose return is based on an equity index. Please refer to Note 28 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 securities issued by Puerto Rico-based entities for resale to retail customers and mortgage-backed securities in the process of being sold in the F-17 44 TABLE K Maturity Distribution of Earning Assets
As of December 31, 2000 -------------------------------------------------------------------------------------------- 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 $1,067,661 $ 932 $ 25 -- -- $ 1,068,618 Investment and trading securities 2,302,195 2,796,822 377,745 $2,702,224 $ 779,091 8,958,077 Loans: Commercial 2,281,076 1,710,977 738,588 1,300,020 983,173 7,013,834 Construction 36,502 11,051 5,513 14,948 190,183 258,197 Lease financing 228,134 577,465 -- 11,115 -- 816,714 Mortgage 1,023,039 1,703,416 242,536 1,367,546 307,109 4,643,646 Consumer 1,060,894 1,437,211 -- 826,589 -- 3,324,694 ---------- ---------- ---------- ---------- ---------- ----------- Total $7,999,501 $8,237,874 $1,364,407 $6,222,442 $2,259,556 $26,083,780 ========== ========== ========== ========== ========== ===========
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table. secondary markets. The Committee utilizes several approaches for measuring its risk, including duration and value at risk. As of December 31, 2000 the trading portfolio of the Corporation amounted to $153 million and represented 0.5% of total assets, compared with $237 million and 0.9% a year earlier. This portfolio was composed of the following as of December 31, 2000:
Weighted Amount Average Yield -------- ------------- (Dollars in thousands) Mortgage-backed securities $ 20,546 7.42% Commercial paper 104,375 6.80 U.S. Treasury and agencies 14,205 6.66 Puerto Rico Government obligations 4,588 6.85 Other 9,359 7.00 -------- ---- $153,073 6.88% ======== ====
As of December 31, 2000, the trading portfolio of the Corporation had an estimated duration of 1.05 years and a one-month value at risk of $0.6 million, assuming a confidence level of 95%. Foreign Exchange In the ordinary course of business, the Corporation occasionally enters into foreign exchange transactions. These transactions are executed as an intermediary primarily 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. The Corporation conducts business in the Latin American markets through several of its processing and information technology services and products subsidiaries. Although not significant, some of these businesses are conducted in the country's particular foreign currency. However, management does not expect future exchange volatility between the U.S. dollar and the particular foreign currency to affect significantly the value of the Corporation's investment in these subsidiaries. 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 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. This stability is enhanced by the Corporation's market share participation in its primary markets. The Corporation has also established borrowing relationships with the FHLB and other correspondent banks, which further support and enhance liquidity. Wholesale or institutional sources of funds comprise primarily other financial intermediaries such as commercial banks, securities F-18 45 Table L Average Total Deposits
For the Year ------------------------------------------------------------------------------------ Five-Year (Dollars in thousands) 2000 1999 1998 1997 1996 C.G.R. ----------- ---------- ----------- ----------- ----------- --------- Demand $ 3,030,307 $ 3,032,001 $ 2,607,525 $ 2,289,300 $2,047,845 10.50% Other non-interest bearing accounts 4,976 6,881 4,251 4,367 5,910 (3.62) ----------- ----------- ----------- ----------- ----------- ------ Non-interest bearing 3,035,283 3,038,882 2,611,776 2,293,667 2,053,755 10.46 ----------- ----------- ----------- ----------- ----------- ------ Savings accounts 4,113,338 4,132,397 3,761,160 3,393,279 3,095,898 7.14 NOW and money market accounts 1,811,352 1,745,579 1,459,972 1,281,298 1,148,727 10.44 ----------- ----------- ----------- ----------- ----------- ------ Savings deposits 5,924,690 5,877,976 5,221,132 4,674,577 4,244,625 8.09 ----------- ----------- ----------- ----------- ----------- ------ Certificates of deposit: Under $100,000 2,507,702 2,664,174 2,155,391 1,216,583 1,307,323 14.36 $100,000 and over 2,646,312 1,601,861 1,421,456 1,865,720 1,371,928 20.67 936 259,203 297,122 369,530 508,789 1,020,064 (23.65) ----------- ----------- ----------- ----------- ----------- ------ Certificates of deposit 5,413,217 4,563,157 3,946,377 3,591,092 3,699,315 10.30 ----------- ----------- ----------- ----------- ----------- ------ Other time deposits 135,292 311,323 490,816 432,221 464,101 (19.69) ----------- ----------- ----------- ----------- ----------- ------ Interest bearing 11,473,199 10,752,456 9,658,325 8,697,890 8,408,041 8.20 ----------- ----------- ----------- ----------- ----------- ------ Total $14,508,482 $13,791,338 $12,270,101 $10,991,557 $10,461,796 8.65% =========== =========== =========== =========== =========== ======
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 source. At December 31, 2000, the Corporation's core deposits amounted to $12.2 billion or 82.3% of total deposits, an increase of $400 million or 3.4% from the same date a year ago. Certificates of deposits with denominations of $100,000 and over as of December 31, 2000 totaled $2.6 billion, or 17.7% of total deposits. Their distribution by maturity was as follows:
(In thousands) 3 months or less $ 1,323,526 3 to 6 months 441,992 6 to 12 months 371,983 over 12 months 489,042 ----------- $ 2,626,543 ===========
For further detail on average deposits for the last five years, please refer to Table L. Wholesale or institutional sources of funding includes the repos, federal funds and Eurodollar markets, commercial paper, senior debentures and asset securitizations. Notes 10 through 16 to the consolidated financial statements present details of the Corporation's deposits and borrowings by type, as of December 31, 2000 and 1999. Another important liquidity source of the Corporation is its assets, particularly the investment portfolio. 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, 2000, the entire investment portfolio, excluding trading securities, totaled $9.1 billion, of which, $2.1 billion or 23.7% has an expected maturity of one year or less. Also, refer to Notes 4 and 5 to the consolidated financial statements for further information on the composition of the available-for-sale and held-to-maturity investment portfolios. The Corporation's loan portfolio is another important source of liquidity 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 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, 2000. As of that date $4.6 billion or 28.8% of the loan portfolio is expected to mature within one year. Credit Risk Management and Loan Quality In conducting business activities, the Corporation is exposed to the possibility that borrowers or counterparties may default on their credit obligations to the Corporation. The Corporation's credit exposure is centered in its loan portfolio, which at December 31, 2000 totaled $16.1 billion, or 61.0% of its earning assets. For other risks associated with off-balance sheet lending activities, please refer to Note 26 to the consolidated financial statements. F-19 46 Popular, Inc. manages credit risk by maintaining sound underwriting standards, monitoring and evaluating the quality of the loan portfolio, its trends and collectibility, assessing reserves and loan concentrations, recruiting qualified credit officers, implementing and monitoring lending policies and collateral requirements, and instituting procedures to ensure appropriate actions to comply with laws and regulations. Included in the policies, primarily determined by the amount and type of loan, are various approval levels. The Corporation receives collateral to support credit extensions and commitments, whenever it is considered necessary. Generally, such collateral is in the form of real and personal property, cash on deposit or other highly liquid instruments. The Corporation has a Credit Strategy Committee (CRESCO) that oversees all credit-related activities. This 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, the methodology for assessing the adequacy of the reserve for loan losses, problem loans, and establishes the provision for loan losses. Also, the Corporation has an independent Credit Risk Management Division (CRDM). 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 CRDM manages and controls the Corporation's credit risk utilizing various techniques through the different stages of the credit process. Specialized workout officers, independent from the originating unit, handle substantially all commercial loans which are past due over 90 days, have filed bankruptcy, or based on their risk profile are considered problem loans. A CRDM 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. The Corporation also has an independent Credit Process Review Group within the CRDM 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, its regulatory compliance and the adequacy of its staffing levels and competency. Furthermore, the Corporation continues emphasizing the development of the credit staff skills and knowledge and improving the processing technology. Also, in the minimization of credit risk, the Corporation strives to maintain a credit risk profile that is diverse in terms of product type, industry concentration, geographic distribution and borrower or counterparty concentration. 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 over 816,000 consumer loans and over 40,000 commercial lending relationships. Only 80 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 26.7% of total commercial and construction loans outstanding are secured by real estate or cash collateral. In addition, the secured consumer loan portfolio was $1.2 billion or 34.9% of the total consumer portfolio at December 31, 2000. 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. The Corporation also manages exposure to a single borrower, industry or product type through participations, loan sales and securitizations. Moreover, on a quarterly basis, the Corporation's CRMD, senior management and the Risk Management Committee evaluate possible industry risk concentrations. The Corporation does conduct business in a geographically concentrated area as its main market continues to be Puerto Rico. However, the Corporation continues its efforts to diversify its geographic risk as a result of its expansion strategy throughout various markets in the United States and the Caribbean. Puerto Rico's share of the total loan portfolio has decreased from 64.4% in 1997 to 58.4% in 2000. The Corporation's asset and revenue composition by geographical area and by business line segments is further presented in Note 30 to the consolidated financial statements. 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. Moreover, the Corporation is exposed to government risk. A total of $67 million of residential mortgages and $397 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2000. The Corporation continues to be one of the largest SBA lenders in the United States. Furthermore, there were $71 million of loans issued to or guaranteed by Puerto Rico Government and political subdivisions and $45 million of loans issued to or guaranteed by the U.S. Virgin Islands' Government. 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. A summary of non-performing assets by loan categories and related ratios are presented in Table M. 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. F-20 47 Table M Non-Performing Assets
As of December 31, ------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------- Commercial, industrial and agricultural $169,535 $163,968 $142,371 $106,982 $ 82,381 Construction 2,867 1,504 144 2,704 2,000 Lease financing 7,152 3,820 4,937 1,569 1,599 Mortgage 99,861 70,038 68,527 53,449 43,955 Consumer 43,814 57,515 46,626 30,840 16,320 Renegotiated accruing loans 578 3,308 Other real estate 23,518 29,268 32,693 18,012 6,076 -------- -------- -------- -------- -------- Total $346,747 $326,113 $295,876 $213,556 $155,639 ======== ======== ======== ======== ======== Accruing loans past-due 90 days or more $ 21,599 $ 28,731 $ 24,426 $ 20,967 $ 12,270 ======== ======== ======== ======== ======== Non-performing assets to loans 2.16% 2.19% 2.26% 1.88% 1.59% Non-performing loans to loans 2.01 1.99 2.01 1.72 1.50 Non-performing assets to assets 1.24 1.28 1.28 1.11 0.93 Interest lost $ 23,129 $ 20,428 $ 15,258 $ 11,868 $ 7,696 ======== ======== ======== ======== ========
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. Closed-end consumer loans are charged-off when payments are delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. 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. The policy, among other things, requires that unsecured retail loans to borrowers who declare bankruptcy 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 in the process of account re-aging, extension and deferral. Changes in the policies and practices were effective on December 31, 2000. Non-performing assets amounted to $346.7 million or 2.16% of loans as of December 31, 2000, compared with $326.1 million or 2.19% in 1999. The allowance for loan losses as a percentage of non-performing assets, as of December 31, 2000 and 1999, was 83.82% and 89.54%, respectively. Non-performing commercial loans, including construction loans, increased by $6.9 million since December 31, 1999. They represented 2.37% of the commercial and construction loan portfolio at December 31, 2000 compared with 2.40% in 1999. This rise resulted notwithstanding the impact of the sale of BF, whose non-performing commercial loans amounted to $45.5 million as of the end of 1999. The overall increase since December 31, 1999 corresponded principally to the growth in the Corporation's loan portfolio. Also, deteriorating economic conditions, resulting from a higher interest rate scenario and higher energy prices, negatively impacted some of the Corporation's customer margins and cash flows. Non-performing financing leases amounted to $7.2 million or 0.88% of leases at December 31, 2000, compared with $3.8 million or 0.52% in 1999. Moreover, non-performing mortgage loans reflected a rise of $29.8 million since December 31, 1999, mostly as a result of the growth in the mortgage loan portfolio and higher delinquency levels in this loan category. Non-performing mortgage loans were 2.15% of mortgage loans for 2000, compared with 1.78% in 1999. Non-performing consumer loans totaled $43.8 million or 1.32% of consumer loans at December 31, 2000, compared with $57.5 million or 1.72% of consumer loans at the same date in 1999. This monetary decline was mainly due to the sale of the Corporation's ownership interest in BF, which had $10.5 million in non-performing consumer loans as of the end of 1999. Also, the Corporation's banking operations reflected lower non-performing consumer loans mostly as a result of the acceleration of charge-offs to comply with F-21 48 the new policy dictated by the FFIEC, and to the current credit environment, which has prompted the Corporation to tighten its credit criteria for unsecured consumer borrowings and to set objective standards to price loans according to risk levels. The net increase in non-performing loans was partly offset by lower balances in other real estate assets, mostly attributed to the operations of BF, which had $9.4 million in other real estate as of December 31, 1999. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets at December 31, 2000, would have been $273 million or 1.70% of loans, and the allowance for loan losses would have been 106.49% of non-performing assets. At December 31, 1999 and 1998, adjusted non-performing assets would have been $247 million or 1.66% of loans and $227 million or 1.73% of loans, respectively. The allowance for loan losses as a percentage of non-performing assets as of December 31, 1999 and 1998, would have been 118.2% and 118.0%, respectively. 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 $23.1 million in 2000, compared with $20.4 million in 1999 and $15.3 million in 1998. Allowance for Loan Losses The allowance for loan losses is maintained at a level which is considered 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, the results of periodic credit reviews of individual loans, prevailing 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 7 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, 2000, the allowance for loan losses was $291 million or 1.81% of loans, compared with $292 million or 1.96% at the same date in 1999. At December 31, 1998, the allowance was $267 million or 2.04% of loans. The decrease in the allowance to loans ratio resulted mostly from the sale of Banco Fiduciario (BF), which had a higher ratio of allowance to total loans to cover potential losses. Moreover, the decrease in this ratio was attributed to the fact that most of the increase in the loan portfolio was realized in relatively low-risk portfolio like mortgages, whereas consumer loans, which are considered the higher-risk portfolio, had a modest decrease, due in part to the sale of the Corporation's U.S. credit card portfolio. Based on current 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 continues enjoying an adequate position in its allowance for loan losses. Broken down by major loan categories, the allowance for the last five years was as follows: ALLOWANCE FOR LOAN LOSSES AS OF DECEMBER 31,
(In millions) 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Commercial $ 120.6 $ 140.5 $ 130.2 $ 101.5 $ 91.8 Construction 8.1 8.7 11.6 10.6 10.5 Lease financing 18.6 9.2 8.3 5.9 3.4 Mortgage 12.0 14.6 14.0 10.9 10.3 Consumer 131.4 119.0 103.1 82.8 69.6 --------- --------- --------- --------- --------- $ 290.7 $ 292.0 $ 267.2 $ 211.7 $ 185.6 ========= ========= ========= ========= =========
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 the year totaled $180.1 million, an increase of $55.4 million or 44.4% from amounts reported in 1999. The rise primarily reflected higher net charge-offs in the consumer and commercial loan portfolio. Net charge-offs as a percentage of average loans increased during the year from 0.90% in 1999 to 1.14% in 2000. Commercial loans net charge-offs, including construction loans, amounted to $56.4 million in 2000, compared with $32.9 million a year earlier. As a percentage of average commercial loans, this figure increased from 0.52% in 1999 to 0.78% in 2000. The rise in commercial loans net charge-offs was mostly related to the growth of the commercial loan portfolio, as well as the deterioration of the credit quality of a limited number of commercial relationships. The allowance for commercial and construction loans decreased $19.9 million, mostly attributed to lower balances of impaired loans corresponding mainly to BF, partly offset by the impact of factors such as higher delinquencies and current economic conditions. Consumer loans net charge-offs totaled $104.4 million or 3.06% of average consumer loans for 2000, compared with $81.4 million or 2.52% of average consumer loans for 1999. The increase in consumer loans net charge-offs was principally due to the growth in the portfolio, higher delinquency levels, as well as the impact of accelerating certain charge-offs to comply with the new federal regulatory requirements dictated in the revised Uniform Retail Credit Classification and Account Management Policy, which was described previously. The impact of this adoption approximated $10.2 million in additional net charge-offs in the year 2000. F-22 49 Table N Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 2000 1999 1998 1997 1996 ------------ ----------- ------------ ----------- ---------- Balance at beginning of year $ 292,010 $ 267,249 $ 211,651 $ 185,574 $ 168,393 Allowances (sold) purchased (15,869) 515 31,296 13,237 402 Provision for loan losses 194,640 148,948 137,213 110,607 88,839 ------------ ----------- ------------ ----------- ---------- 470,781 416,712 380,160 309,418 257,634 ------------ ----------- ------------ ----------- ---------- Losses charged to the allowance: Commercial 73,585 51,011 45,643 55,734 38,017 Construction 145 651 190 600 2,369 Lease financing 32,256 23,009 23,484 23,085 22,129 Mortgage 5,615 3,977 2,718 2,612 2,189 Consumer 129,430 104,062 92,646 65,559 43,257 ------------ ----------- ------------ ----------- ---------- 241,031 182,710 164,681 147,590 107,961 ------------ ----------- ------------ ----------- ---------- Recoveries: Commercial 17,352 18,589 17,844 18,385 11,498 Construction 9 169 337 122 207 Lease financing 17,797 15,839 14,998 15,890 9,749 Mortgage 717 771 323 356 295 Consumer 25,028 22,640 18,268 15,070 14,152 ------------ ----------- ------------ ----------- ---------- 60,903 58,008 51,770 49,823 35,901 ------------ ----------- ------------ ----------- ---------- Net loans charged-off (recovered): Commercial 56,233 32,422 27,799 37,349 26,519 Construction 136 482 (147) 478 2,162 Lease financing 14,459 7,170 8,486 7,195 12,380 Mortgage 4,898 3,206 2,395 2,256 1,894 Consumer 104,402 81,422 74,378 50,489 29,105 ------------ ----------- ------------ ----------- ---------- 180,128 124,702 112,911 97,767 72,060 ------------ ----------- ------------ ----------- ---------- Balance at end of year $ 290,653 $ 292,010 $ 267,249 $ 211,651 $ 185,574 ============ =========== ============ =========== ========== Loans: Outstanding at year end $ 16,057,085 $14,907,754 $ 13,078,795 $11,376,607 $9,779,028 Average 15,801,887 13,901,290 11,930,621 10,548,207 9,210,964 Ratios: Allowance for loan losses to year end loans 1.81% 1.96% 2.04% 1.86% 1.90% Recoveries to charge-offs 25.27 31.75 31.44 33.76 33.25 Net charge-offs to average loans 1.14 0.90 0.95 0.93 0.78 Net charge-offs earnings coverage 3.17x 3.92x 3.93x 4.04x 4.79x Allowance for loan losses to net charge-offs 1.61 2.34 2.37 2.16 2.58 Provision for loan losses to: Net charge-offs 1.08 1.19 1.22 1.13 1.23 Average loans 1.23% 1.07% 1.15% 1.05% 0.96% Allowance to non-performing assets 83.82 89.54 90.32 99.11 119.23 ============ =========== ============ =========== ==========
Lease financing net charge-offs totaled $14.5 million or 1.88% of the average lease financing portfolio for the year ended December 31, 2000, compared with $7.2 million or 1.04% for the same period last year. This rise is in part due to a $3.1 million charge-off related to an external fraud scheme that was unveiled during the year in the Corporation's U.S. operations, and represented the balance not covered by insurance. Also, the rise was impacted by the rise in the portfolio and a higher level of delinquencies. These factors contributed to a higher allowance for lease financing losses when compared to prior years. Mortgage loans net charge-offs increased to $4.9 million in 2000 from $3.2 million in 1999, mostly as a result of the growth in the portfolio. The allowance for loan losses assigned to the mortgage loan portfolio has remained at low levels because these loans are adequately secured by real estate and the amounts due on the loans are generally recovered in foreclosure. F-23 50 Statistical Summary 1996-2000 Statements of Condition
As of December 31, (In thousands) 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ----------- ASSETS Cash and due from banks $ 726,051 $ 663,696 $ 667,707 $ 463,151 $ 492,368 ------------ ------------ ------------ ------------ ----------- Money market investments: Federal funds sold and securities purchased under agreements to resell 1,057,320 931,123 910,430 802,803 778,597 Time deposits with other banks 10,908 54,354 37,206 9,013 19,023 Bankers' acceptances 390 517 262 2,274 2,656 ------------ ------------ ------------ ------------ ----------- 1,068,618 985,994 947,898 814,090 800,276 ------------ ------------ ------------ ------------ ----------- Trading securities 153,073 236,610 318,727 222,303 292,150 Investment securities available-for-sale, at market value 8,704,478 7,324,950 7,020,396 5,239,005 3,415,934 Investment securities held-to-maturity, at amortized cost 356,177 299,312 226,134 408,993 1,197,066 Loans held-for-sale, at lower of cost or market 823,901 619,298 644,159 265,204 255,129 ------------ ------------ ------------ ------------ ----------- Loans 15,580,379 14,659,400 12,783,609 11,457,675 9,854,911 Less- Unearned income 347,195 370,944 348,973 346,272 331,012 Allowance for loan losses 290,653 292,010 267,249 211,651 185,574 ------------ ------------ ------------ ------------ ----------- 14,942,531 13,996,446 12,167,387 10,899,752 9,338,325 ------------ ------------ ------------ ------------ ----------- Premises and equipment 405,772 440,971 424,721 364,892 356,697 Other real estate 23,518 29,268 32,693 18,012 6,076 Customers' liabilities on acceptances 1,647 12,041 15,937 1,801 3,100 Accrued income receivable 202,540 175,746 156,314 118,677 95,487 Other assets 367,150 371,421 263,992 252,040 380,247 Intangible assets 281,595 304,786 274,292 232,587 131,248 ------------ ------------ ------------ ------------ ----------- $ 28,057,051 $ 25,460,539 $ 23,160,357 $ 19,300,507 $16,764,103 ============ ============ ============ ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,109,885 $ 3,284,949 $ 3,176,309 $ 2,546,836 $ 2,330,704 Interest bearing 11,695,022 10,888,766 10,495,905 9,202,750 8,432,571 ------------ ------------ ------------ ------------ ----------- 14,804,907 14,173,715 13,672,214 11,749,586 10,763,275 Federal funds purchased and securities sold under agreements to repurchase 4,964,115 4,414,480 4,076,500 2,723,329 1,875,465 Other short-term borrowings 4,369,212 2,612,389 1,639,082 1,287,435 1,404,006 Notes payable 1,176,912 1,852,599 1,307,160 1,403,696 986,713 Senior debentures 30,000 Acceptances outstanding 1,647 12,041 15,937 1,801 3,100 Other liabilities 470,687 436,718 437,760 356,568 314,012 ------------ ------------ ------------ ------------ ----------- 25,787,480 23,501,942 21,148,653 17,522,415 15,376,571 ------------ ------------ ------------ ------------ ----------- Subordinated notes 125,000 125,000 125,000 125,000 125,000 ------------ ------------ ------------ ------------ ----------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 150,000 150,000 -- ------------ ------------ ------------ ------------ ----------- Minority interest in consolidated subsidiaries 927 22,611 27,591 -- -- ------------ ------------ ------------ ------------ ----------- Stockholders' equity: Preferred stock 100,000 100,000 100,000 100,000 100,000 Common stock 830,356 827,662 825,690 412,029 396,531 Surplus 260,984 243,855 216,795 602,023 496,582 Retained earnings 865,082 694,301 530,481 395,253 267,719 Treasury stock - at cost (66,214) (64,123) (39,559) (39,559) Accumulated other comprehensive income (loss), net of taxes 3,436 (140,709) 75,706 33,346 1,700 ------------ ------------ ------------ ------------ ----------- 1,993,644 1,660,986 1,709,113 1,503,092 1,262,532 ------------ ------------ ------------ ------------ ----------- $ 28,057,051 $ 25,460,539 $ 23,160,357 $ 19,300,507 $16,764,103 ============ ============ ============ ============ ===========
F-24 51 Statistical Summary 1996-2000 Statements of Income
For the year ended December 31, ------------------------------------------------------------------------ (In thousands, except per common share information) 2000 1999 1998 1997 1996 ---------- ----------- ---------- ---------- ---------- INTEREST INCOME: Loans $1,586,832 $ 1,373,158 $1,211,850 $1,080,408 $ 924,076 Money market investments 62,356 33,434 36,781 33,923 46,697 Investment securities 486,198 425,907 385,473 358,736 280,610 Trading account securities 14,771 19,171 17,599 18,236 21,470 ---------- ----------- ---------- ---------- ---------- Total interest income 2,150,157 1,851,670 1,651,703 1,491,303 1,272,853 Less - Interest expense 1,167,396 897,932 778,691 707,348 591,540 ---------- ----------- ---------- ---------- ---------- Net interest income 982,761 953,738 873,012 783,955 681,313 Provision for loan losses 194,640 148,948 137,213 110,607 88,839 ---------- ----------- ---------- ---------- ---------- Net interest income after provision for loan losses 788,121 804,790 735,799 673,348 592,474 Gain on sale of investment securities 11,201 638 8,933 2,268 3,094 Trading account profit (loss) 2,230 (1,582) 3,653 3,934 108 All other operating income 451,667 373,860 278,660 241,396 202,270 ---------- ----------- ---------- ---------- ---------- 1,253,219 1,177,706 1,027,045 920,946 797,946 ---------- ----------- ---------- ---------- ---------- OPERATING EXPENSES: Personnel costs 394,176 386,696 337,400 306,893 273,247 All other operating expenses 483,295 450,786 382,954 330,027 268,672 ---------- ----------- ---------- ---------- ---------- 877,471 837,482 720,354 636,920 541,919 ---------- ----------- ---------- ---------- ---------- Income before tax and minority interest 375,748 340,224 306,691 284,026 256,027 Income tax 100,797 85,120 74,671 74,461 70,877 Net loss of minority interest 1,152 2,454 328 -- -- ---------- ----------- ---------- ---------- ---------- NET INCOME $ 276,103 $ 257,558 $ 232,348 $ 209,565 $ 185,150 ========== =========== ========== ========== ========== NET INCOME APPLICABLE TO COMMON STOCK $ 267,753 $ 249,208 $ 223,998 $ 201,215 $ 176,800 ========== =========== ========== ========== ========== NET INCOME PER COMMON SHARE (BASIC AND DILUTED)(*) $ 1.97 $ 1.84 $ 1.65 $ 1.50 $ 1.34 ========== =========== ========== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.64 $ 0.60 $ 0.50 $ 0.40 $ 0.35 ========== =========== ========== ========== ==========
(*) The average common shares used in the computation of earnings and cash dividend per common share were 135,907,476 for 2000; 135,585,634 for 1999; 135,532,086 for 1998; 134,036,964 for 1997; and 132,044,624 for 1996. F-25 52 Statistical Summary 1996-2000 Average Balance Sheet and Summary of Net Interest Income On a Taxable Equivalent Basis(*) (Dollars in thousands)
2000 1999 -------------------------------------- ------------------------------------ AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate ----------- ----------- ------- ----------- ---------- ------- ASSETS Interest earning assets: Federal funds sold and securities purchased under agreements to resell $ 914,604 $ 61,238 6.70% $ 536,905 $ 24,470 4.56% Time deposits with other banks 17,723 1,062 5.99 143,685 8,912 6.20 Bankers' acceptances 559 56 10.02 516 52 10.08 ----------- ----------- ----- ----------- ---------- ----- Total money market investments 932,886 62,356 6.68 681,106 33,434 4.91 ----------- ----------- ----- ----------- ---------- ----- U.S. Treasury securities 1,762,129 115,801 6.57 2,479,828 169,683 6.84 Obligations of other U.S. Government agencies and corporations 3,958,406 288,214 7.28 3,028,577 200,649 6.63 Obligations of Puerto Rico, States and political subdivisions 126,768 8,398 6.62 138,184 9,100 6.59 Collateralized mortgage obligations and mortgage-backed securities 1,838,016 107,959 5.87 1,246,582 92,960 7.46 Other 260,143 24,236 9.32 455,488 26,654 5.85 ----------- ----------- ----- ----------- ---------- ----- Total investment securities 7,945,462 544,608 6.85 7,348,659 499,046 6.79 ----------- ----------- ----- ----------- ---------- ----- Trading account securities 213,131 15,624 7.33 313,904 20,584 6.56 ----------- ----------- ----- ----------- ---------- ----- Loans (net of unearned income) 15,801,887 1,597,116 10.11 13,901,290 1,380,330 9.93 ----------- ----------- ----- ----------- ---------- ----- Total interest earning assets/ Interest income 24,893,366 $ 2,219,704 8.92% 22,244,959 $1,933,394 8.69% ----------- ----------- ----- ----------- ---------- ----- Total non-interest earning assets 1,676,389 1,561,413 ----------- ----------- TOTAL ASSETS $26,569,755 $23,806,372 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings and NOW accounts $ 5,924,690 $ 184,018 3.11% $ 5,877,976 $ 173,946 2.96% Other time deposits 5,548,509 345,355 6.22 4,874,480 278,269 5.71 Short-term borrowings 7,781,030 508,029 6.53 5,992,445 317,646 5.30 Mortgages and notes payable 1,618,517 108,572 6.71 1,558,410 106,639 6.84 Subordinated notes 125,000 8,545 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 12,877 8.58 ----------- ----------- ----- ----------- ---------- ----- Total interest bearing liabilities/ Interest expense 21,147,746 1,167,396 5.52 18,578,311 897,932 4.83 ----------- ----------- ----- ----------- ---------- ----- Total non-interest bearing liabilities 3,537,484 3,515,269 ----------- ----------- Total liabilities 24,685,230 22,093,580 ----------- ----------- Stockholders' equity 1,884,525 1,712,792 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,569,755 $23,806,372 =========== =========== Net interest income on a taxable equivalent basis $ 1,052,308 $1,035,462 ----------- ---------- Cost of funding earning assets 4.69% 4.04% ----- ----- Net interest yield 4.23% 4.65% ===== ===== Effect of the taxable equivalent adjustment 69,547 81,724 ----------- ---------- Net interest income per books $ 982,761 $ 953,738 =========== ==========
(*) 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 53
1998 1997 1996 - --------------------------------------- ------------------------------------- -------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------- ----------- ------- ----------- ---------- ------- ----------- ---------- ------- $ 670,072 $ 31,814 4.75% $ 595,715 $ 31,504 5.29% $ 878,138 $ 45,704 5.20% 82,935 4,889 5.89 34,271 2,181 6.36 12,562 770 6.13 778 78 10.03 2,463 238 9.66 2,202 223 10.13 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 753,785 36,781 4.88 632,449 33,923 5.36 892,902 46,697 5.23 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 3,227,375 231,837 7.18 3,553,347 249,739 7.03 3,198,912 222,520 6.96 1,477,168 111,332 7.54 967,973 69,709 7.20 531,711 34,725 6.53 136,824 9,272 6.78 141,625 9,716 6.86 231,363 11,224 4.85 1,318,097 81,970 6.22 1,150,214 72,245 6.28 772,278 46,434 6.01 130,861 14,015 10.71 114,201 7,718 6.76 95,985 5,483 5.71 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 6,290,325 448,426 7.13 5,927,360 409,127 6.90 4,830,249 320,386 6.63 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 287,218 18,943 6.60 301,618 19,770 6.55 372,196 23,004 6.18 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 11,930,621 1,218,849 10.22 10,548,207 1,087,466 10.31 9,210,964 930,891 10.11 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 19,261,949 $ 1,722,999 8.95% 17,409,634 $1,550,286 8.90% 15,306,311 $1,320,978 8.63% - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 1,170,433 1,009,510 994,771 - ----------- ----------- ----------- $20,432,382 $18,419,144 $16,301,082 =========== =========== =========== $ 5,221,132 $ 163,805 3.14% $ 4,674,577 $ 147,321 3.15% $ 4,244,625 $ 131,499 3.10% 4,437,193 247,687 5.58 4,023,313 219,207 5.45 4,163,416 218,722 5.25 4,622,549 251,724 5.45 4,280,900 237,738 5.55 3,464,892 184,682 5.33 1,371,372 93,846 6.84 1,345,650 83,936 6.24 757,604 46,417 6.13 125,000 8,555 6.84 125,000 8,558 6.85 147,951 10,220 6.91 150,000 13,074 8.72 122,877 10,588 8.62 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 15,927,246 778,691 4.89 14,572,317 707,348 4.85 12,778,488 591,540 4.63 - ----------- ----------- ----- ----------- ---------- ------ ----------- ---------- ----- 2,951,878 2,475,843 2,329,088 - ----------- ----------- ----------- 18,879,124 17,048,160 15,107,576 - ----------- ----------- ----------- 1,553,258 1,370,984 1,193,506 - ----------- ----------- ----------- $20,432,382 $18,419,144 $16,301,082 =========== =========== =========== $ 944,308 $ 842,938 $ 729,438 ----------- ---------- ---------- 4.04% 4.06% 3.86% ---- ---- ---- 4.91% 4.84% 4.77% ==== ==== ==== 71,296 58,983 48,125 ----------- ---------- ---------- $ 873,012 $ 783,955 $ 681,313 =========== ========== ==========
F-27 54 Statistical Summary 1999-2000 Quarterly Financial Data
2000 1999 -------------------------------------------- --------------------------------------------- (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 $558,408 $561,174 $524,774 $505,801 $485,542 $468,532 $453,401 $444,195 Interest expense 312,659 312,318 278,858 263,561 245,686 229,740 214,550 207,956 -------- -------- -------- -------- ------- -------- -------- -------- Net interest income 245,749 248,856 245,916 242,240 239,856 238,792 238,851 236,239 Provision for loan losses 46,242 49,666 48,719 50,013 39,466 37,080 36,631 35,771 Non-interest income 121,900 120,579 108,956 102,462 102,047 96,984 86,640 86,607 Gain (loss) on sale of investment securities (2,539) 147 329 13,264 (137) 39 286 450 Non-interest expense 210,691 220,904 219,372 226,504 215,670 214,704 205,217 201,891 -------- -------- -------- -------- ------- -------- -------- -------- Income before income tax and minority interest 108,177 99,012 87,110 81,449 86,630 84,031 83,929 85,634 Income tax 32,695 27,662 21,684 18,756 21,497 20,887 20,334 22,402 Net loss (gain) of minority interest 17 (58) (303) 1,496 574 1,066 382 432 -------- -------- -------- -------- ------- -------- -------- -------- Net income $ 75,499 $ 71,292 $ 65,123 $ 64,189 $65,707 $ 64,210 $ 63,977 $ 63,664 ======== ======== ======== ======== ======= ======== ======== ======== Net income applicable to common stock $ 73,410 $ 69,205 $ 63,036 $ 62,102 $63,618 $ 62,123 $ 61,890 $ 61,577 ======== ======== ======== ======== ======= ======== ======== ======== Net income per common share $ 0.54 $ 0.51 $ 0.46 $ 0.46 $ 0.47 $ 0.46 $ 0.46 $ 0.45 -------- -------- -------- -------- ------- -------- -------- -------- SELECTED AVERAGE BALANCES (In millions) Total assets $ 27,599 $ 27,271 $ 25,972 $ 25,467 $24,733 $ 24,115 $ 23,655 $ 22,696 Loans 16,223 16,309 15,681 15,028 14,573 14,132 13,681 13,201 Interest earning assets 25,953 25,553 24,337 23,757 23,060 22,546 22,092 21,258 Deposits 14,706 14,770 14,422 14,148 13,965 13,802 13,816 13,578 Interest bearing liabilities 22,108 21,821 20,565 20,100 19,388 18,889 18,397 17,589 -------- -------- -------- -------- ------- -------- -------- -------- SELECTED RATIOS Return on assets 1.09% 1.04% 1.01% 1.01% 1.05% 1.06% 1.08% 1.14% Return on equity 15.72 15.24 14.43 14.57 15.06 15.23 15.53 16.03
F-28 55 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 of cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 accor- dance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico February 19, 2001 Stamp 1678244 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. F-29 56 Consolidated Statements of Condition
December 31, ----------------------------- (In thousands, except per share information) 2000 1999 - -------------------------------------------- ------------ ------------ ASSETS Cash and due from banks $ 726,051 $ 663,696 ------------ ------------ Money market investments: Federal funds sold and securities purchased under agreements to resell 1,057,320 931,123 Time deposits with other banks 10,908 54,354 Bankers' acceptances 390 517 ------------ ------------ 1,068,618 985,994 ------------ ------------ Trading securities, at market value: Pledged securities with creditors' right to repledge 124,016 170,291 Other trading securities 29,057 66,319 Investment securities available-for-sale, at market value: Pledged securities with creditors' right to repledge 3,657,729 3,848,108 Other securities available-for-sale 5,046,749 3,476,842 Investment securities held-to-maturity, at amortized cost (market value $350,018; 1999 - $295,075) 356,177 299,312 Loans held-for-sale, at lower of cost or market 823,901 619,298 ------------ ------------ Loans 15,580,379 14,659,400 Less - Unearned income 347,195 370,944 Allowance for loan losses 290,653 292,010 ------------ ------------ 14,942,531 13,996,446 ------------ ------------ Premises and equipment 405,772 440,971 Other real estate 23,518 29,268 Customers' liabilities on acceptances 1,647 12,041 Accrued income receivable 202,540 175,746 Other assets 367,150 371,421 Intangible assets 281,595 304,786 ------------ ------------ $ 28,057,051 $ 25,460,539 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,109,885 $ 3,284,949 Interest bearing 11,695,022 10,888,766 ------------ ------------ 14,804,907 14,173,715 Federal funds purchased and securities sold under agreements to repurchase 4,964,115 4,414,480 Other short-term borrowings 4,369,212 2,612,389 Notes payable 1,176,912 1,852,599 Acceptances outstanding 1,647 12,041 Other liabilities 470,687 436,718 ------------ ------------ 25,787,480 23,501,942 ------------ ------------ 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 927 22,611 ------------ ------------ 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; 138,392,822 shares issued (1999 - 137,943,619) and 135,998,617 shares outstanding (1999 - 135,654,292) 830,356 827,662 Surplus 260,984 243,855 Retained earnings 865,082 694,301 Accumulated other comprehensive income (loss), net of tax of $1,683 (1999 - ($35,993)) 3,436 (140,709) Treasury stock - at cost, 2,394,205 shares (1999 - 2,289,327) (66,214) (64,123) ------------ ------------ 1,993,644 1,660,986 ------------ ------------ $ 28,057,051 $ 25,460,539 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-30 57 Consolidated Statements of Income
Year ended December 31, ------------------------------------------------ (In thousands, except per share information) 2000 1999 1998 ---------- ----------- ---------- INTEREST INCOME: Loans $1,586,832 $ 1,373,158 $1,211,850 Money market investments 62,356 33,434 36,781 Investment securities 486,198 425,907 385,473 Trading securities 14,771 19,171 17,599 ---------- ----------- ---------- 2,150,157 1,851,670 1,651,703 ---------- ----------- ---------- INTEREST EXPENSE: Deposits 529,373 452,215 411,492 Short-term borrowings 508,029 317,646 251,724 Long-term debt 129,994 128,071 115,475 ---------- ----------- ---------- 1,167,396 897,932 778,691 ---------- ----------- ---------- Net interest income 982,761 953,738 873,012 Provision for loan losses 194,640 148,948 137,213 ---------- ----------- ---------- Net interest income after provision for loan losses 788,121 804,790 735,799 Service charges on deposit accounts 125,519 118,187 103,732 Other service fees 217,034 169,727 116,575 Gain on sale of investment securities 11,201 638 8,933 Trading account profit (loss) 2,230 (1,582) 3,653 Other operating income 109,114 85,946 58,353 ---------- ----------- ---------- 1,253,219 1,177,706 1,027,045 ---------- ----------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 306,529 289,995 247,590 Profit sharing 18,913 23,881 22, 067 Pension and other benefits 68,734 72,820 67,743 ---------- ----------- ---------- 394,176 386,696 337,400 Net occupancy expenses 67,720 60,814 48,607 Equipment expenses 98,022 88,334 75,302 Other taxes 34,125 33,290 32,191 Professional fees 65,889 67,955 58,087 Communications 45,689 43,146 36,941 Business promotion 46,791 45,938 39,376 Printing and supplies 20,828 20,709 17,604 Other operating expenses 69,673 58,812 46,986 Amortization of intangibles 34,558 31,788 27,860 ---------- ----------- ---------- 877,471 837,482 720,354 ---------- ----------- ---------- Income before income tax and minority interest 375,748 340,224 306,691 Income tax 100,797 85,120 74,671 Net loss of minority interest 1,152 2,454 328 NET INCOME $ 276,103 $ 257,558 $ 232,348 ========== =========== ========== NET INCOME APPLICABLE TO COMMON STOCK $ 267,753 $ 249,208 $ 223,998 ========== =========== ========== NET INCOME PER COMMON SHARE (BASIC AND DILUTED) $ 1.97 $ 1.84 $ 1.65 ========== =========== ========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.64 $ 0.60 $ 0.50 ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-31 58 Consolidated Statements of Cash Flows
Year ended December 31, ---------------------------------------------------- (In thousands) 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 276,103 $ 257,558 $ 232,348 ----------- ----------- ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 76,848 71,320 62,649 Provision for loan losses 194,640 148,948 137,213 Net amortization of intangibles 34,558 31,788 27,860 Net gain on sale of investment securities available-for-sale (11,201) (638) (8,933) Net loss on disposition of premises and equipment 210 365 167 Net gain on sale of loans (7,935) (2,717) (2,265) Net amortization of premiums and accretion of discounts on investments 920 6,878 2,945 Net (increase) decrease in loans held-for-sale (204,603) 26,818 (378,955) Net amortization of deferred loan origination fees and costs (5,265) (713) (2,399) Net decrease (increase) in trading securities 83,537 82,117 (96,424) Net increase in accrued income receivable (32,526) (19,414) (35,933) Net (increase) decrease in other assets (29,116) (38,201) 70,005 Net increase in interest payable 24,901 18,592 10,138 Net decrease in current and deferred taxes (11,234) (50,987) (10,546) Net increase in postretirement benefit obligation 3,844 9,708 9,254 Net increase in other liabilities 18,625 28,423 11,190 ----------- ----------- ------------ Total adjustments 136,203 312,287 (204,034) ----------- ----------- ------------ Net cash provided by operating activities 412,306 569,845 28,314 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in money market investments (113,403) (38,096) (26,726) Purchases of investment securities held-to-maturity (5,517,411) (6,070,728) (11,713,516) Maturities and redemptions of investment securities held-to-maturity 5,458,897 6,095,690 11,893,268 Purchases of investment securities available-for-sale (4,797,570) (6,305,513) (5,372,719) Maturities of investment securities available-for-sale 2,784,494 5,467,356 2,815,884 Proceeds from sales of investment securities available-for-sale 818,955 168,337 923,409 Net disbursements on loans (1,850,576) (2,943,301) (1,585,069) Proceeds from sale of loans 1,024,637 920,421 740,462 Acquisition of loan portfolios (589,178) (5,945) (62,247) Assets acquired, net of cash (8,453) (1,718) (17,168) Acquisition of premises and equipment (75,147) (108,428) (103,577) Proceeds from sale of premises and equipment 11,631 24,923 16,630 Cash transferred due to sale of investment in subsidiary (46,899) ----------- ----------- ------------ Net cash used in investing activities (2,900,023) (2,797,002) (2,491,369) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 926,171 501,501 1,189,771 Net deposits acquired 36,297 Net increase in federal funds purchased and securities sold under agreements to repurchase 549,635 337,980 1,353,171 Net increase in other short-term borrowings 1,794,575 972,474 295,281 Proceeds from issuance of notes payable 291,819 789,436 176,986 Payment of notes payable (924,563) (246,701) (319,307) Dividends paid (95,297) (87,012) (72,021) Proceeds from issuance of common stock 9,823 9,387 7,433 Treasury stock acquired (2,091) (53,919) ----------- ----------- ------------ Net cash provided by financing activities 2,550,072 2,223,146 2,667,611 ----------- ----------- ------------ Net increase (decrease) in cash and due from banks 62,355 (4,011) 204,556 Cash and due from banks at beginning of year 663,696 667,707 463,151 ----------- ----------- ------------ Cash and due from banks at end of year $ 726,051 $ 663,696 $ 667,707 =========== =========== ============
The accompanying notes are an integral part of the consolidated financial statements. F-32 59 Consolidated Statements of Changes in Stockholders' Equity
Year ended December 31, ------------------------------------------------- (In thousands) 2000 1999 1998 ---------- ----------- ---------- PREFERRED STOCK: Balance at beginning and end of year $ 100,000 $ 100,000 $ 100,000 ---------- ----------- ---------- COMMON STOCK: Balance at beginning of year 827,662 825,690 412,029 Transfer from surplus resulting from stock split 412,426 Common stock issued under Dividend Reinvestment Plan 2,694 1,972 1,235 ---------- ----------- ---------- Balance at end of year 830,356 827,662 825,690 ---------- ----------- ---------- SURPLUS: Balance at beginning of year 243,855 216,795 602,023 Common stock issued under Dividend Reinvestment Plan 7,129 7,415 6,198 Transfer to common stock resulting from stock split (412,426) Treasury stock issued for acquisition 15,645 Transfer from retained earnings 10,000 4,000 21,000 ---------- ----------- ---------- Balance at end of year 260,984 243,855 216,795 ---------- ----------- ---------- RETAINED EARNINGS: Balance at beginning of year 694,301 530,481 395,253 Net income 276,103 257,558 232,348 Cash dividends declared on common stock (86,972) (81,388) (67,770) Cash dividends declared on preferred stock (8,350) (8,350) (8,350) Transfer to surplus (10,000) (4,000) (21,000) ---------- ----------- ---------- Balance at end of year 865,082 694,301 530,481 ---------- ----------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance at beginning of year (140,709) 75,706 33,346 Other comprehensive income (loss), net of taxes 144,145 (216,415) 42,360 ---------- ----------- ---------- Balance at end of year 3,436 (140,709) 75,706 ---------- ----------- ---------- TREASURY STOCK - AT COST: Balance at beginning of year (64,123) (39,559) (39,559) Purchase of common stock (2,091) (53,919) Treasury stock issued in acquisitions 29,355 ---------- ----------- ---------- Balance at end of year (66,214) (64,123) (39,559) ---------- ----------- ---------- Total stockholders' equity $1,993,644 $ 1,660,986 $1,709,113 ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-33 60 Consolidated Statements of Comprehensive Income
Year ended December 31, ---------------------------------------------------- (In thousands) 2000 1999 1998 ----------- ----------- ------------ Net income $ 276,103 $ 257,558 $ 232,348 ----------- ----------- ------------ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (1,297) (1,050) (215) Less: reclassification adjustment for foreign currency translation loss realized upon the sale of investment in a foreign entity (1,678) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of tax of $40,042 (1999 - ($61,064); 1998 - $15,721) 153,280 (215,140) 49,826 Less: reclassification adjustment for gains or losses included in net income, net of tax of $2,366 (1999 - $106; 1998 - $1,727) 9,516 225 7,251 ----------- ----------- ------------ Total other comprehensive income (loss), net of tax 144,145 (216,415) 42,360 ----------- ----------- ------------ Comprehensive income $ 420,248 $ 41,143 $ 274,708 =========== =========== ============ Disclosure of accumulated other comprehensive income (loss): Year ended December 31, ---------------------------------------------------- (In thousands) 2000 1999 1998 ----------- ----------- ------------ Foreign currency translation adjustment $ (884) $ (1,265) $ (215) ----------- ----------- ------------ Unrealized gains (losses) on securities 4,320 (139,444) 75,921 ----------- ----------- ------------ Accumulated other comprehensive income (loss) $ 3,436 $ (140,709) $ 75,706 =========== =========== ============
The accompanying notes are an integral part of the consolidated financial statements. F-34 61 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 most 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 United States and the U.S. and British Virgin Islands. The Corporation is also engaged in mortgage and consumer finance, lease financing, investment banking and broker/dealer activities, retail financial services and information technology, ATM and data processing services through its non-banking subsidiaries in Puerto Rico, the United States and the Caribbean and Central America. Furthermore, effective July 1, 2000, the Corporation entered into the insurance business through the creation of Banco Popular, National Association and its subsidiary Popular Insurance, Inc. Note 30 to the consolidated financial statements presents further information about the Corporation's business segments. As part of a merger agreement between Banco Fiduciario (BF) and another local financial institution in the Dominican Republic, the Corporation sold its 57% ownership interest in BF on August 24, 2000. The Corporation retained an option to acquire a minority interest in the resulting new financial institution. Principles of consolidation The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 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 The Corporation utilizes financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, 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 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 (FHLB) 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 taxes in other comprehensive income. The amortization of premiums is deducted and the accretion of discounts is added to interest income based on a method which approximates the interest method over the outstanding period of the related securities. The cost of securities sold is determined by specific identification. 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. In 1999, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 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 No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 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 No. 134. Risk management instruments The Corporation occasionally uses derivative financial instruments, such as interest rate caps and swaps, in the management of its interest F-35 62 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 or discounts 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. 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. During 2000 the Corporation adopted the revised Uniform Retail Credit Classification and Account Management Policy issued by the Federal Financial Institutions Examination Council (FFIEC) in 1999. Based on the revised policy, unsecured retail loans to borrowers who declare bankruptcy are 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. The revised policy details criteria that must be met before the Corporation may consider a delinquent open-end loan current, such as the process of account re-aging, extension and deferral. The adoption of the revisions to this policy did not have a material effect on the consolidated financial statements of the Corporation. 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 SFAS No. 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. Revenue for other leases 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. This methodology includes the consideration of factors such as current 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 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. Larger balance commercial 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 is less than its carrying value requires 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, F-36 63 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 asset, 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 assets are originated or purchased. The total cost of loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing asset), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. In addition, the Corporation assesses capitalized servicing assets for impairment based on the fair value of those assets. To estimate the fair value of servicing assets the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense, including, discount rates, anticipated prepayment and credit loss rates. For purposes of evaluating and measuring impairment of capitalized servicing assets, the Corporation stratifies such assets 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 assets per stratum exceed its estimated fair value. Impairment is recognized through a valuation allowance with changes included in net income for the period in which the change occurs. Interest-only securities The Corporation periodically sells residential mortgage loans to a qualifying special-purpose entity (SPE), which in turn issue asset-based securities to investors. The Corporation retains an interest in the loans sold in the form of a residual or interest-only security and may also retain other subordinated interests in the receivables sold to the SPE. The residual or interest-only security represents the present value of future excess cash flows resulting from the difference between the finance charge income received from the obligors on the loans and the interest paid to the investors in the assets-backed securities, net of credit losses, servicing fees and other expenses. In the course of business the Corporation also acquires interest-only securities in the secondary market. The interest-only securities are classified as available-for-sale securities and are measured at fair value. Factors considered in the valuation model for calculating the fair value of these subordinated interests are market discount rates, anticipated prepayment and loss rates on the underlying assets. 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 15 years. Securities sold/purchased under agreements to repurchase/resell Repurchase and resell 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 resell agreements. However, the counterparties to such agreements maintain effective control over such securities, accordingly, they 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. F-37 64 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 statement 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 Banco Popular North America (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 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 common stock of the Corporation are granted if long-term corporate performance and objectives are met. SFAS No. 123, "Accounting for Stock-Based Compensation" established a fair value based method of accounting for stock-based compensation plans and encourages entities to adopt that method of accounting for their employee stock compensation plans. This pronouncement also allows an entity to continue to measure compensation cost for those plans based on APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and disclose the pro forma net income and net income per share as if the fair value method had been applied in measuring cost. Compensation cost is determined based on the market value of the stock as required by the variable accounting provisions of APB 25 and is recognized when probable, based on the best estimate of the outcome of the performance condition. For this compensation plan, the accounting under APB 25 and SFAS 123 is the same. Therefore, no additional disclosures are necessary as required by SFAS 123. Transfers and servicing of financial assets and extinguishment of liabilities 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. 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 is included in a separate statement of comprehensive income. 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, 2000, 1999 and 1998. Accordingly, there is no difference between basic and diluted earnings per share. 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 reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform with the 2000 presentation. F-38 65 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND REGULATIONS Accounting for derivative instruments and hedging activities In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" - an Amendment of FASB Statement No. 133." This statement addresses a limited number of issues causing implementation difficulties for numerous entities required to apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statements require recognition of all derivatives as either assets or liabilities in the statement of condition measured at fair value. They also establish unique accounting treatment for the following three different types of hedges: fair value hedges, cash 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 Corporation adopted these statements on January 1, 2001. In managing its market risk the Corporation enters, to a limited extent, into certain derivatives primarily interest rate swaps, interest rate swaptions and interest-rate caps and floors embedded in interest-bearing contracts. As of December 31, 2000, the Corporation had $50,000,000 in notional amount of interest rate swaps, which will be accounted for as hedged instruments under SFAS No. 133, as amended. In addition, there are $118,664,000 in notional amount of interest rate swaptions, which are related to certificates of deposit with returns linked to the Standard and Poor's 500 index through an embedded option which will be bifucarted in accordance with the pronouncement. The interest-rate caps and floors embedded in the interest bearing contracts are clearly and closely related to the economic characteristics of the contract and as stated in the pronouncement will not be bifurcated from the host contract. The initial impact of the adoption of SFAS No. 133 on net income and other comprehensive income was approximately $686,000 (net of tax) and $254,000 (net of tax), respectively. As permitted by SFAS No. 133, the Corporation also reclassified $29,526,000 of its held-to-maturity securities as available-for-sale securities. This reclassification resulted in its recording a net of tax cumulative-effect-type adjustment of $390,000 (gain) in other comprehensive income. Transfer and Servicing of Financial Assets and Liabilities The FASB recently issued SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125." This statement revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS 125 without reconsideration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This statement is also effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management believes that the full adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. Required disclosures for collateral and securitization transactions are incorporated in these financial statements. 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 required average reserve balances was approximately $439,609,000 at December 31, 2000 (1999 - $531,324,000). NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: The securities underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. Although the Corporation is permitted by contract or custom to repledge the securities, it has agreed to resell to the counterparties the same or substantially similar securities at the maturity of the agreements. The fair value of the collateral securities received by the Corporation on these transactions as of December 31, were as follows:
(In thousands) 2000 1999 -------- -------- Repledged $899,363 $727,570 Not repledged 57,465 47,504 -------- -------- Total $956,828 $775,074 ======== ========
The repledged securities were used as underlying securities for repurchase agreements transactions. NOTE 4 - 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, 2000 and 1999 (1998 - only market value is presented) were as follows: F-39 66
2000 ----------------------------------------------------------------------------- Gross Gross Weighted Amortized unrealized unrealized Market average cost gains losses value yield ----------------------------------------------------------------------------- (Dollars in thousands) U.S. Treasury securities (average maturity of 1 year and 1 month): Within 1 year $ 589,795 $ 174 $ 348 $ 589,621 5.49% After 1 to 5 years 550,749 6,374 557,123 5.94 ---------- ------- ---------- ---------- ---- 1,140,544 6,548 348 1,146,744 5.71 ---------- ------- ---------- ---------- ---- Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 9 months): Within 1 year 1,255,343 1,420 501 1,256,262 6.07 After 1 to 5 years 1,826,198 15,370 414 1,841,154 6.84 After 5 to 10 years 1,620,131 1,869 30,355 1,591,645 6.35 After 10 years 300,000 11,392 288,608 6.40 ---------- ------- ---------- ---------- ---- 5,001,672 18,659 42,662 4,977,669 6.46 ---------- ------- ---------- ---------- ---- Obligations of P.R., States and political subdivisions (average maturity of 10 years and 5 months): Within 1 year 2,895 1 16 2,880 5.44 After 1 to 5 years 9,054 55 35 9,074 5.99 After 5 to 10 years 23,206 354 120 23,440 6.20 After 10 years 35,523 1,197 836 35,884 5.56 ---------- ------- ---------- ---------- ---- 70,678 1,607 1,007 71,278 5.82 ---------- ------- ---------- ---------- ---- Collateralized mort- gage obligations (average maturity of 23 years and 5 months): After 1 to 5 years 28,975 10 28,965 7.05 After 5 to 10 years 80,547 779 126 81,200 6.61 After 10 years 1,443,022 4,859 4,761 1,443,120 7.03 ---------- ------- ---------- ---------- ---- 1,552,544 5,638 4,897 1,553,285 7.01 ---------- ------- ---------- ---------- ---- Mortgage-backed securities (average maturity of 23 years and 3 months): Within 1 year 14 14 6.38 After 1 to 5 years 19,587 1,026 18,561 5.58 After 5 to 10 years 20,806 67 135 20,738 6.77 After 10 years 660,437 3,048 6,811 656,674 6.70 ---------- ------- ---------- ---------- ---- 700,844 3,115 7,972 695,987 6.67 ---------- ------- ---------- ---------- ---- Equity securities (without contractual maturity) 138,101 27,101 997 164,205 0.71 ---------- ------- ---------- ---------- ---- Other (average maturity of 11 years and 9 months): Within 1 year 6,784 6,784 8.14 After 1 to 5 years 776 25 751 6.09 After 5 to 10 years 7,849 88 305 7,632 6.01 After 10 years 78,683 1,699 239 80,143 7.68 ---------- ------- ---------- ---------- ---- 94,092 1,787 569 95,310 7.56 ---------- ------- ---------- ---------- ---- $8,698,475 $64,455 $ 58,452 $8,704,478 6.39% ========== ======= ========== ========== ==== 1999 1998 ---------------------------------------------------------------------------------------- Gross Gross Weighted Amortized unrealized unrealized Market average Market cost gains losses value yield value ---------------------------------------------------------------------------------------- (Dollars in thousands) U.S. Treasury securities (average maturity of 1 year and 7 months): Within 1 year $ 621,487 $ 985 $ 620,502 5.34% $ 1,895,804 After 1 to 5 years 1,396,617 12,942 1,383,675 5.69 1,262,628 ---------- ---------- ---------- ---------- ---- ----------- 2,018,104 13,927 2,004,177 5.58 3,158,432 ---------- ---------- ---------- ---------- ---- ----------- 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 5.62 149,750 After 1 to 5 years 1,026,476 13,963 1,012,513 5.57 483,210 After 5 to 10 years 1,456,566 102,571 1,353,995 6.19 1,117,137 After 10 years 300,000 32,312 267,688 6.40 302,651 ---------- ---------- ---------- ---------- ---- ----------- 3,516,959 9 149,566 3,367,402 5.91 2,052,748 ---------- ---------- ---------- ---------- ---- ----------- Obligations of P.R., States and political subdivisions (average maturity of 10 years): Within 1 year 2,485 3 2,488 5.14 4,724 After 1 to 5 years 13,349 33 98 13,284 5.75 13,570 After 5 to 10 years 29,741 248 393 29,596 5.96 22,538 After 10 years 30,137 750 337 30,550 5.91 29,991 ---------- ---------- ---------- ---------- ---- ----------- 75,712 1,034 828 75,918 5.88 70,823 ---------- ---------- ---------- ---------- ---- ----------- Collateralized mort- gage obligations (average maturity of 23 years and 2 months): Within 1 year 6,878 3 6,881 6.83 7,838 After 1 to 5 years 35,492 29 35,463 6.80 28,921 After 5 to 10 years 91,848 61 1,397 90,512 6.36 186,036 After 10 years 1,089,877 243 26,914 1,063,206 6.65 985,626 ---------- ---------- ---------- ---------- ---- ----------- 1,224,095 307 28,340 1,196,062 6.63 1,208,421 ---------- ---------- ---------- ---------- ---- ----------- Mortgage-backed securities (average maturity of 24 years and 5 months): Within 1 year 36 36 9.80 80 After 1 to 5 years 23,447 704 22,743 5.54 27,830 After 5 to 10 years 28,935 190 444 28,681 6.81 22,910 After 10 years 431,622 7,888 1,809 437,701 6.71 295,030 ---------- ---------- ---------- ---------- ---- ----------- 484,040 8,078 2,957 489,161 6.66 345,850 ---------- ---------- ---------- ---------- ---- ----------- Equity securities (without contractual maturity) 126,430 15,405 54 141,781 0.58 63,929 ---------- ---------- ---------- ---------- ---- ----------- Other (average maturity of 10 years and 11 months): Within 1 year 894 894 14.00 94,696 After 1 to 5 years 9,901 2,186 7,715 3.01 2,463 After 5 to 10 years 5,131 183 4,948 6.35 5,024 After 10 years 39,121 1,050 3,279 36,892 4.64 18,010 ---------- ---------- ---------- ---------- ---- ----------- 55,047 1,050 5,648 50,449 4.66 120,193 ---------- ---------- ---------- ---------- ---- ----------- $7,500,387 $ 25,883 $ 201,320 $7,324,950 5.89% $ 7,020,396 ========== ========== ========== ========== ==== ===========
F-40 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 maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities differ 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, 2000, by contractual maturity are shown below:
(In thousands) Amortized cost Market value - -------------- -------------- ------------ Within 1 year $1,854,831 $1,855,561 After 1 to 5 years 2,435,339 2,455,628 After 5 to 10 years 1,752,539 1,724,655 After 10 years 2,517,665 2,504,429 ---------- ---------- Total 8,560,374 8,540,273 Without contractual maturity 138,101 164,205 ---------- ---------- Total investment securities available-for-sale $8,698,475 $8,704,478 ========== ==========
Proceeds from the sale of investment securities available-for-sale during 2000 were $818,955,000 (1999 - $168,337,000; 1998 - $923,409,000). Gross realized gains and losses on those sales during the year were $17,048,000 and $5,847,000, respectively (1999 - $978,000 and $340,000; 1998 - $9,190,000 and $257,000). NOTE 5 - 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, 2000 and 1999 (1998 - only amortized cost is presented) were as follows:
2000 -------------------------------------------------------------- Gross Gross Weighted Amortized unrealized unrealized Market average cost gains losses value yield --------- ---------- ---------- -------- -------- (Dollars in thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 1 month): Within 1 year $ 11,061 $ 48 $ 14 $ 11,095 6.37% -------- ------- ------- -------- ----- Obligations of P.R., States and political subdivisions (average maturity of 9 years and 3 months): Within 1 year 35,400 13 35,387 3.76 After 1 to 5 years 13,988 170 85 14,073 7.75 After 5 to 10 years 5,960 112 179 5,893 6.72 After 10 years 63,247 196 1,329 62,114 7.21 -------- ------- ------- -------- ----- 118,595 478 1,606 117,467 6.22 -------- ------- ------- -------- ----- Collateralized mortgage obligations (average maturity of 13 years and 6 months): After 1 to 5 years 5,011 6 5,017 7.52 After 10 years 7,358 17 164 7,211 6.68 -------- ------- ------- -------- ----- 12,369 23 164 12,228 7.02 -------- ------- ------- -------- ----- Mortgage-backed securities (average maturity of 9 years and 6 months): After 1 to 5 years 64 64 10.63 After 5 to 10 years 16,679 375 17,054 7.36 After 10 years 2,001 9 1,992 6.71 -------- ------- ------- -------- ----- 18,744 375 9 19,110 7.30 -------- ------- ------- -------- ----- Equity securities (without contractual maturity held for regulatory purposes) 91,446 91,446 6.16 -------- -------- ----- Other (average maturity of 3 years and 8 months): Within 1 year 13,276 208 13,068 5.17 After 1 to 5 years 63,357 3,116 60,241 5.22 After 5 to 10 years 27,329 1,966 25,363 5.47 -------- ------- -------- ----- 103,962 5,290 98,672 5.28 -------- ------- -------- ----- $356,177 $ 924 $ 7,083 $350,018 6.02% ======== ======= ======= ======== =====
F-41 68
1999 1998 ---------------------------------------------------------------- ---------- Gross Gross Weighted Amortized unrealized unrealized Market average Amortized cost gains losses value yield cost --------- ---------- ---------- -------- -------- ---------- (Dollars in thousands) Obligations of other U.S. Government agencies and corporations $ 4,943 -------- $ 4,943 -------- 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% 21,265 After 1 to 5 years 15,199 299 47 15,451 7.76 11,666 After 5 to 10 years 5,289 136 108 5,317 6.73 3,941 After 10 years 34,224 68 397 33,895 7.15 11,375 -------- ------- -------- -------- ---- -------- 58,779 506 563 58,722 7.21 48,247 -------- ------- -------- -------- ---- -------- Collateralized mortgage obligations (average maturity of 12 years and 4 months): After 1 to 5 years 9,586 45 9,631 7.27 13,932 After 5 to 10 years 2,868 After 10 years 9,344 19 70 9,293 7.04 13,301 -------- ------- -------- -------- ---- -------- 18,930 64 70 18,924 7.16 30,101 -------- ------- -------- -------- ---- -------- Mortgage-backed securities (average maturity of 9 years and 5 months): After 5 to 10 years 21,298 161 21,459 7.34 9,743 After 10 years 2,461 2,461 6.75 23,231 -------- -------- ---- -------- 23,759 161 23,920 7.28 32,974 -------- ------- -------- ---- -------- Equity securities (without contractual maturity held for regulatory purposes) 89,445 89,445 6.19 76,979 ------- -------- ---- -------- Other (average maturity of 4 years and 3 months): Within 1 year 6,008 15 5,993 5.67 9,045 After 1 to 5 years 58,518 1,820 56,698 5.13 7,972 After 5 to 10 years 43,873 2,500 41,373 5.41 4,656 After 10 years 11,217 -------- 108,399 4,335 104,064 5.27 32,890 -------- -------- -------- ---- -------- $299,312 $ 731 $ 4,968 $295,075 6.21% $226,134 ======== ======= ======== ======== ==== ========
The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities differ 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, 2000, by contractual maturity are shown below:
(In thousands) Amortized cost Market value - -------------- -------------- ------------ Within 1 year $ 59,737 $ 59,550 After 1 to 5 years 82,420 79,395 After 5 to 10 years 49,968 48,310 After 10 years 72,606 71,317 -------- -------- Total 264,731 258,572 Without contractual maturity 91,446 91,446 -------- -------- Total investment securities held-to-maturity $356,177 $350,018 ======== ========
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, 2000 and 1999, 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 6 - PLEDGED ASSETS: At December 31, 2000 and 1999, securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase and other borrowings. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge the collateral as of December 31, were as follows:
(In thousands) 2000 1999 - -------------- ---------- ---------- Investment securities available-for-sale $1,617,134 $1,559,881 Investment securities held-to-maturity 6,798 10,886 Loans 585,230 -- ---------- ---------- $2,209,162 $1,570,767 ========== ==========
Securities that the creditor has the right by custom or contract to repledge have been reclassified in the consolidated statements of condition. F-42 69 NOTE 7 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, was as follows:
(In thousands) 2000 1999 - -------------- ----------- ----------- Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies $ 67,057 $ 79,926 Guaranteed by the Commonwealth of Puerto Rico 71,225 49,135 Commercial loans secured by real estate 1,499,422 1,315,135 Residential conventional mortgages 3,701,143 3,199,873 Construction and land development 308,545 257,511 Consumer 372,790 391,597 ----------- ----------- 6,020,182 5,293,177 Financial institutions 68,879 74,017 Commercial, industrial and agricultural 5,263,682 5,070,801 Lease financing 988,787 882,362 Consumer for household, credit cards and other consumer expenditures 3,113,727 3,170,266 Other 125,122 168,777 ----------- ----------- $15,580,379 $14,659,400 =========== ===========
As of December 31, 2000, loans on which the accrual of interest income had been discontinued amounted to $319,188,000 (1999 - $294,847,000; 1998 - $262,604,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $23,129,000 (1999 - $20,428,000; 1998 - $15,258,000). In addition, there were $578,000 of renegotiated loans still accruing interest at December 31, 1998. Non-accruing loans as of December 31, 2000 include $43,814,000 (1999 - $57,515,000; 1998 - $46,626,000) in consumer loans. The recorded investment in loans that were considered impaired at December 31, and the related disclosures follow:
December 31, ------------------------ (In thousands) 2000 1999 - -------------- -------- -------- Impaired loans with a related allowance $112,503 $149,803 Impaired loans that do not require allowance 42,491 30,311 -------- -------- Total impaired loans $154,994 $180,114 ======== ======== Allowance for impaired loans $ 27,308 $ 51,252 ======== ======== Impaired loans measured based on fair value of collateral $ 55,062 $ 87,790 Impaired loans measured based on discounted cash flows 99,932 92,324 -------- -------- $154,994 $180,114 ======== ======== Average balance of impaired loans during the year $175,756 $175,459 ======== ======== Interest income recognized on impaired loans during the year $ 5,060 $ 9,747 ======== ========
The changes in the allowance for loan losses for the year ended December 31, were as follows:
(In thousands) 2000 1999 1998 - -------------- --------- --------- --------- Balance at beginning of year $ 292,010 $ 267,249 $ 211,651 Net reserves (sold) acquired (15,869) 515 31,296 Provision for loan losses 194,640 148,948 137,213 Recoveries 60,903 58,008 51,770 Loans charged-off (241,031) (182,710) (164,681) --------- --------- --------- Balance at end of year $ 290,653 $ 292,010 $ 267,249 ========= ========= =========
The components of the net financing leases receivable at December 31, were:
(In thousands) 2000 1999 - -------------- --------- --------- Total minimum lease payments $ 820,528 $ 727,380 Estimated residual value of leased property 162,403 150,799 Deferred origination costs 5,856 4,183 Less - Unearned financing income (172,073) (153,718) --------- --------- Net minimum lease payments 816,714 728,644 Less - Allowance for loan losses (18,549) (9,163) --------- --------- $ 798,165 $ 719,481 ========= =========
Estimated residual value is generally established at amounts expected to be sufficient to cover the Corporation's investment. At December 31, 2000, future minimum lease payments are expected to be received as follows:
(In thousands) - -------------- 2001 $297,583 2002 231,165 2003 160,735 2004 96,255 2005 and thereafter 34,790 -------- $820,528 ========
NOTE 8 - 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:
Executive (In thousands) Officers Directors Total - -------------- --------- --------- --------- 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 New loans 1,778 227,886 229,664 Payments (997) (260,576) (261,573) ------- --------- --------- Balance at December 31, 2000 $ 3,854 $ 166,820 $ 170,674 ======= ========= =========
F-43 70 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 9 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life (In thousands) in years 2000 1999 - -------------- ----------- -------- -------- Land $ 58,596 $ 61,265 -------- -------- Buildings 15-50 238,098 246,060 Equipment 2-10 443,816 424,341 Leasehold improvements Various 73,092 69,746 ------- -------- -------- 755,006 740,147 Less - Accumulated depreciation and amortization 418,057 380,788 -------- -------- 336,949 359,359 -------- -------- Construction in progress 10,227 20,347 -------- -------- $405,772 $440,971 ======== ========
Depreciation and amortization of premises and equipment for the year was $76,848,000 (1999 - $71,320,000; 1998 - $62,649,000) of which $13,805,000 (1999 - $13,285,000; 1998 - $10,478,000) was charged to occupancy expense and $63,043,000 (1999 - $58,035,000; 1998 - $52,171,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $9,878,000 (1999 - $9,937,000; 1998 - $9,187,000). NOTE 10 - DEPOSITS: Total interest bearing deposits as of December 31, consisted of:
(In thousands) 2000 1999 - --------------- ----------- ----------- Savings deposits: Savings accounts $ 4,075,563 $ 4,093,788 NOW and money market accounts 1,877,329 1,650,747 5,952,892 5,744,535 Certificates of deposit: Under $100,000 3,115,587 2,748,499 $100,000 and over 2,626,543 2,395,732 5,742,130 5,144,231 $11,695,022 $10,888,766
A summary of certificates of deposit by maturity as of December 31, 2000, follows:
(In thousands) - -------------- 2001 $4,303,731 2002 703,627 2003 166,453 2004 219,446 2005 243,793 2006 and thereafter 105,080 ---------- $5,742,130 ==========
At December 31, 2000, the Corporation had brokered certificates of deposit amounting to $458,235,000 (1999 - $154,151,000). NOTE 11 - 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:
(In thousands) 2000 1999 1998 - -------------- ---------- ---------- ---------- Federal funds purchased $ 687,914 $ 28,039 $ 918,555 Securities sold under agreements to repurchase 4,276,201 4,386,441 3,157,945 ---------- ---------- ---------- Total amount outstanding $4,964,115 $4,414,480 $4,076,500 ========== ========== ========== Maximum aggregate balance outstanding at any month-end $5,236,644 $4,414,480 $4,076,500 ========== ========== ========== Average monthly aggregate balance outstanding $4,585,945 $3,831,131 $3,166,436 ========== ========== ========== Weighted average interest rate: For the year 6.22% 5.02% 4.96% At December 31 6.74 5.75 4.50 ========== ========== ==========
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, 2000 and 1999. The information excludes repurchase agreement transactions which were collateralized with securities or other assets held for trading purposes or which have been obtained under resell agreements: F-44 71
2000 ------------------------------------------------------------------ Weighted Repurchase Amortized Cost Market Value average Liability of collateral of collateral interest rate ---------- -------------- ------------- ------------- (Dollars in thousands) U.S. Treasury securities Overnight $ 6,725 $ 7,065 $ 7,060 6.45% Within 30 days 675,160 673,655 677,361 6.46 After 90 days 258,063 267,309 268,755 6.36 ---------- ---------- ---------- ---- Total 939,948 948,029 953,176 6.43 ---------- ---------- ---------- ---- Obligations of other U.S. Government agencies and corporations Overnight 300 301 303 4.50 Within 30 days 862,583 843,568 846,280 6.14 After 30 to 90 days 778,467 813,154 808,168 7.59 After 90 days 220,241 225,122 228,160 6.60 ---------- ---------- ---------- ---- Total 1,861,591 1,882,145 1,882,911 6.82 ---------- ---------- ---------- ---- Mortgage - backed securities Overnight 1,500 1,510 1,499 3.62 Within 30 days 86,817 91,662 90,142 6.53 After 30 to 90 days 52,590 56,707 55,449 6.37 ---------- ---------- ---------- ---- Total 140,907 149,879 147,090 6.44 ---------- ---------- ---------- ---- Collateralized mortgage obligations Overnight 21,032 19,749 19,700 3.62 Within 30 days 246,520 258,102 258,857 6.61 After 30 to 90 days 76,954 82,426 83,115 6.57 After 90 days 41,890 45,494 45,452 6.85 ---------- ---------- ---------- ---- 386,396 405,771 407,124 6.47 ---------- ---------- ---------- ---- $3,328,842 $3,385,824 $3,390,301 6.65% ========== ========== ========== ====
1999 ------------------------------------------------------------------ Weighted Repurchase Amortized Cost Market Value average Liability of collateral of collateral interest rate ---------- -------------- ------------- ------------- (Dollars 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 ---------- ---------- ---------- ---- Total 415,928 466,825 458,209 5.62 ---------- ---------- ---------- ---- $3,542,957 $3,698,080 $3,614,420 5.66% ========== ========== ========== ====
F-45 72 NOTE 12 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consisted of:
(Dollars in thousands) 2000 1999 - ---------------------- ---------- ---------- Advances under revolving lines of credit - with fixed interest rates ranging from 6.65% to 7.11% at December 31, 2000 (1999 - 5.25% to 5.98%) $ 595,000 $ 420,500 - with floating interest rate of 0.10% under the 3-month LIBOR (3-month LIBOR rate at December 31, 2000 was 6.40%) 50,000 Commercial paper at rates ranging from 5.75% to 7.00% (1999 - 4.50% to 7.00%) 360,427 257,705 Term notes paying interest quarterly at floating interest rates of 0.10% (1999 - 0.05% to 0.46%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2000 was 6.40%; 1999 - 6.00%) 253,000 241,062 Term notes paying interest quarterly at floating interest rates of 94% to 100% of LIBID rate (LIBID rate at December 31, 2000 was 6.25%) 30,000 Term notes paying interest monthly at rates ranging from 6.25% to 6.77% (1999 - 6.25%) 134,527 32,828 Term notes paying interest semiannually at rates ranging from 5.63% to 7.38% (1999 - 5.50% to 7.72%) 857,197 343,659 Term funds purchased at rates ranging from 6.54% to 7.11% (1999 - 5.15% to 6.52%) 2,082,972 1,242,336 Others 6,089 74,299 ---------- ---------- $4,369,212 $2,612,389 ========== ==========
The weighted average interest rate of other short-term borrowings at December 31, 2000 was 6.74% (1999 - 5.75%; 1998 - 6.39%). The maximum aggregate balance outstanding at any month-end was approximately $4,369,212,000 (1999 - $2,714,549,000; 1998 - $1,908,541,000). The average aggregate balance outstanding during the year was approximately $3,346,151,000 (1999 - $2,197,118,000; 1998 - $1,675,568,000). The weighted average interest rate during the year was 6.65% (1999 - 5.69%; 1998 - 5.65%). At December 31, 2000, the Corporation had $1,200,000,000 in available lines of credit with the Federal Home Loan Bank (1999 - $1,000,000,000), of which $885,000,000 remained unused at the end of 2000 (1999 - $750,000,000). The FHLB advances are secured by securities and mortgage loans under a collateral agreement. The Corporation also had available $1,290,000,000 in other lines of credit (1999 - $965,000,000) of which $835,000,000 remained unused at the end of 2000 (1999 - $794,500,000). These lines included a warehouse line facility of $500,000,000 at December 31, 2000, which advances are secured by mortgage loans. NOTE 13 - NOTES PAYABLE: Notes payable outstanding at December 31, consisted of the following:
(Dollars in thousands) 2000 1999 - ---------------------- ---------- ---------- Advances under revolving lines of credit - maturing in 2002, paying interest monthly at a fixed rate of 6.88% $ 50,000 - maturing in 2002, paying interest quarterly at a floating interest rate of 0.10% under the 3-month LIBOR (3-month LIBOR rate at December 31, 2000 was 6.40%) 75,000 Term notes with maturities ranging from 2002 through 2008 paying interest semiannually at fixed rates ranging from 5.63% to 8.13% (1999 - 5.63% to 7.43%) 612,596 $1,466,820 Term notes maturing in 2002 paying interest quarterly at rates ranging from 0.24% to 0.25% over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2000 was 6.40%) 50,000 Term notes with maturities ranging from 2002 through 2030 paying interest monthly at fixed rates ranging from 5.01% to 7.62% 163,300 97,405 Promissory notes with maturities ranging from 2002 through 2005 with floating interest rates ranging from 85% to 92% of the 3-month LIBID rate (LIBID rate at December 31, 2000 was 6.25%; 1999 - 5.875%) 210,000 240,000 Promissory notes with maturities until 2003 paying interest at a fixed rate of 6.35% 8,400 8,400 Mortgage notes and other debt 7,616 39,974 ---------- ---------- $1,176,912 $1,852,599 ========== ==========
NOTE 14 - SUBORDINATED NOTES: Subordinated notes at December 31, 2000 and 1999, 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. F-46 73 NOTE 15 - 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 16 - 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) 2002 $ 499,613 $ 499,613 2003 201,945 201,945 2004 254,760 254,760 2005 165,953 $125,000 290,953 Later years 54,641 $150,000 204,641 ---------- -------- ---------- Total $1,176,912 $150,000 $125,000 $1,451,912 ========== ======== ======== ==========
NOTE 17 - 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, 2000, there are no such shares issued or outstanding. NOTE 18 - STOCKHOLDERS' EQUITY: The Corporation has 180,000,000 shares of authorized common stock with par value of $6 per share. At December 31, 2000, there were 138,392,822 (1999 - 137,943,619) shares issued and 135,998,617 shares outstanding (1999 - 135,654,292). As of December 31, 2000, the Corporation had 2,394,205 shares (1999 - 2,289,327) in treasury stock at a total cost of $66,214,000 (1999 - $64,123,000). 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 2000, shares totaling 449,203 (1999 - 328,693; 1998 - 271,918), equivalent to $9,823,000 (1999 - $9,387,000; 1998 - $7,433,000) 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 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 $25.75 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 135,907,476 (1999 - 135,585,634; 1998 - 135,532,086). During the year, cash dividends of $0.64 (1999 - - $0.60; 1998 - $0.50) per common share outstanding amounting to $86,972,000 (1999 - $81,388,000; 1998 - $67,770,000) were declared. In addition, dividends declared on preferred stock amounted to $8,350,000 (1999 - $8,350,000; 1998 - $8,350,000). NOTE 19 - 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, 2000, the Corporation exceeded all capital adequacy requirements to which it is subject. As of December 31, 2000, 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 1999 ratios of F-47 74 Tier I and total capital to risk-weighted assets, and of Tier I capital to average assets for BPNA were restated to reflect the merger of Banco Popular N.A. (Texas) into BPNA effected on January 1, 2000. 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:
(Dollars in thousands) Regulatory requirements - ---------------------- ---------------------------------------------------------------------------------- To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ----------------------- --------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- 2000 Total Capital (to Risk-Weighted Assets): Consolidated $2,062,631 12.37% $1,333,579 8% N/A BPPR 1,318,126 11.89 886,883 8 $1,108,604 10% BPNA 408,362 10.85 301,047 8 376,309 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $1,741,004 10.44% $ 666,790 4% N/A BPPR 1,178,736 10.63 443,442 4 $ 665,163 6% BPNA 361,115 9.60 150,524 4 225,785 6 Tier I Capital (to Average Assets): Consolidated $1,741,004 6.40% $ 816,030 3% N/A BPPR 1,178,736 6.34 557,405 3 $ 929,009 5% BPNA 361,115 7.35 147,440 3 245,734 5 ========== ===== ========== === ========== ===
(Dollars in thousands) Regulatory requirements - ---------------------- ---------------------------------------------------------------------------------- To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions ----------------------- --------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- 1999 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 356,748 10.39 274,622 8 343,277 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 313,664 9.14 137,311 4 205,966 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 313,664 7.01 134,266 3 223,777 5 ========== ===== ========== === ========== ===
NOTE 20 - SERVICING ASSETS: The changes in servicing assets for the years ended December 31, were as follows:
(In thousands) 2000 1999 1998 - -------------- -------- -------- -------- Balance at beginning of year $ 33,866 $ 29,678 $ 29,787 Rights originated 14,404 11,072 5,439 Rights purchased 697 632 1,069 Amortization (8,851) (7,516) (6,617) -------- -------- -------- Balance at end of year 40,116 33,866 29,678 Less: Valuation allowance 562 14 11 -------- -------- -------- Balance at end of year, net of valuation allowance $ 39,554 $ 33,852 $ 29,667 ======== ======== ========
Total loans serviced for others were $4,867,348,000 at December 31, 2000 (1999 - $4,007,345,000). The estimated fair value of capitalized servicing rights were $52,671,000 at December 31, 2000 (1999 - $44,466,000). The activity in the valuation allowance for impairment of recognized servicing assets for the years ended December 31, were as follows:
(In thousands) 2000 1999 1998 - -------------- ----- ---- ---- Balance at beginning of year $ 14 $11 $14 Additions charged to operations 548 3 Reductions credited to operations (3) --- Balance at end of year $ 562 $14 $11 ===== === ===
NOTE 21 - SALES OF RECEIVABLES: During the year ended December 31, 2000, the Corporation retained servicing responsibilities and other subordinated interests on various securitization transactions and whole loan sales of residential mortgage loans. The Corporation retained servicing responsibilities and other subordinated interests in the form of interest-only securities in a securitization transaction involving a qualifying SPE at the end of the year. The investors and the securitization trust have no recourse to the Corporation's other assets for failure of debtors to pay when due. The Corporation's retained interests are subordinated to the investors' interests. For the year 2000, the Corporation recognized pretax gains of $6,409,000 on this securitization transaction. Proceeds received from the SPE amounted to $190,107,000 on this new securitization. In the course of certain residential mortgage whole loan sales in 2000, the Corporation retained subordinated interests, including retained servicing responsibilities or interest only securities. The retained interests are subject to prepayment, credit and interest rate risks on the transferred financial assets. During 2000, the Corporation also retained servicing assets on residential mortgage loans securitized F-48 75 in the form of trading and investment securities. Pretax gains of $22,865,000 were realized on these securitization transactions and the whole loan sales involving retained interests, which took place in 2000. The Corporation receives average annual servicing fees based on a percentage of the outstanding loan balance. Those average fees are ranging from 0.35 to 0.50 percent for mortgage loans and 1.0 percent for loans guaranteed by Small Business Administration (SBA) loans. Valuation methodologies used in determining the fair value of the retained interests, including servicing assets and interest-only securities, are disclosed in Note 1 of the consolidated financial statements. Key economic assumptions used in measuring the retained interests at the date of the securitization and whole loan sales completed during the year ended December 31, 2000, were as follows:
Residential Mortgage Loans -------------------------- Prepayment speed 8.7 - 18.0% Weighted average life (in years) 13.6 - 18.1 Expected credit losses 0.0 - 0.40% Discount rate 11.0 - 14.0% ===========
At December 31, 2000, key economic assumptions and the sensitivity of the current value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for retained interests as of the end of the year are as follows:
Residential (Dollars in thousands) Mortgage Loans SBA Loans - ---------------------- -------------- ----------- Carrying amount of retained interests $ 65,100 $ 717 Fair value of retained interests 78,217 717 Weighted average life (in years) 14.1 - 14.5 10.7 Prepayment Speed Assumption (annual rate) 11.7 - 19.3% 21% Impact on fair value of 10% adverse change $ (2,506) $ (57) Impact on fair value of 20% adverse change (4,834) (109) Expected Credit Losses (annual rate) 0.0 - 0.34% -- Impact on fair value of 10% adverse change $ (478) -- Impact on fair value of 20% adverse change (953) -- Discount rate (annual rate) 11.0 - 12.9% 10.0% Impact on fair value of 10% adverse change $ (3,355) $ (15) Impact on fair value of 20% adverse change (7,363) (30) ========== ======
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. The expected credit losses for the residential mortgage loans securitized / sold during the year ended December 31, 2000, are estimated at rates ranging from 0.0% to 0.40% for 2001 and 2002. No credit losses are anticipated on the retained servicing assets derived from the sale of SBA loans which took place in 1999 since the participation sold is fully guaranteed by SBA. Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation for the year ended December 31, 2000, follows:
Total Principal Principal Amount Amount of Loans, 60 days of more Net Credit (In thousands) net of unearned past due Losses - -------------- --------------- ---------------- ---------- Loans (owned and managed): Commercial $ 7,303,525 $172,857 $ 56,369 Lease financing 816,714 18,036 14,459 Mortgage 6,054,471 213,155 5,162 Consumer 3,324,694 90,131 104,402 Less: Loans securitized / sold (1,442,319) Loans held-for-sale (823,901) ------------ Loans held in portfolio $ 15,233,184 $494,179 $180,392 ============ ======== ========
NOTE 22 - INTEREST ON INVESTMENTS: Interest on investments for the year ended December 31, consisted of the following:
(In thousands) 2000 1999 1998 - -------------- -------- -------- -------- Money market investments: Federal funds sold and securities purchased under agreements to resell $ 61,238 $ 32,049 $ 34,505 Time deposits with other banks 1,062 1,380 2,199 Other 56 5 77 -------- -------- -------- $ 62,356 $ 33,434 $ 36,781 ======== ======== ======== Investment securities: U.S. Treasury securities $110,655 $146,014 $193,293 Obligations of other U.S. Government agencies and corporations 233,116 162,280 90,141 Obligations of Puerto Rico, States and political subdivisions 7,834 7,562 8,378 Collateralized mortgage obligations 90,847 70,891 47,321 Mortgage-backed securities 32,330 26,368 34,654 Other 11,416 12,792 11,686 -------- -------- -------- $486,198 $425,907 $385,473 ======== ======== ========
Interest income on investment securities for the year ended December 31, 2000, includes tax exempt interest of $353,920,000 (1999 - $330,411,000; 1998 - $301,364,000). Exempt interest relates mostly to obligations of the United States and Puerto Rico governments. F-49 76 NOTE 23 - 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, 2000, plan assets consisted primarily of U.S. Government obligations, high grade corporate bonds and listed stocks, including 5,672,860 shares (1999 - 5,672,860) of the Corporation with a market value of approximately $149,264,000 (1999 - $158,486,000). Dividends paid on shares of the Corporation held by the plan during 2000 amounted to $3,631,000 (1999 - $3,290,000). 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 ------------ ---------------- --------- 2000 ----------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of the year $ 306,244 $ 7,479 $ 313,723 Service cost 9,468 580 10,048 Interest cost 21,369 717 22,086 Plan amendment Actuarial (gain) loss (2,732) 2,597 (135) Benefits paid (14,800) (14) (14,814) --------- --------- --------- Benefit obligation at end of year 319,549 11,359 330,908 ========= ========= ========= Change in plan assets: Fair value of plan assets at beginning of the year 438,038 438,038 Actual return on plan assets 2,189 2,189 Employer contributions 1,505 1,505 Benefits paid (14,800) (14,800) --------- --------- Fair value of plan assets at end of year 426,932 426,932 ========= ========= Funded (unfunded) status 107,383 (11,359) 96,024 Unrecognized net asset (10,704) (10,704) Unrecognized net prior service cost 5,726 411 6,137 Unrecognized net actuarial (gain) loss (68,838) 5,133 (63,705) --------- --------- --------- Prepaid (accrued) pension cost 33,567 (5,815) 27,752 ========= ========= ========= Amount recognized in the statement of financial position consists of: Prepaid benefit cost 34,228 34,228 Accrued benefit liability (661) (6,226) (6,887) Intangible assets 411 411 --------- --------- --------- Net amount recognized $ 33,567 $ (5,815) $ 27,752 ========= ========= =========
Benefit Pension Plan Restoration Plan Total ------------ ---------------- --------- 1999 ----------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of 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 obligations at end of year 306,244 7,479 313,723 ========= ========= ========= Change in plan assets: Fair value of plan assets at beginning of 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 Weighted average Pension Plan Restoration Plan assumptions as of ------------------------------------------------------------------------------------ December 31: 2000 1999 1998 2000 1999 1998 - ----------------- ---- ---- ---- ---- ---- ---- Discount rate 7.25% 7.75% 6.50% 7.25% 7.75% 6.50% Expected return on plan assets 8.50% 9.00% 9.00% Rate of compensation increase 3.5 to 4.5 to 4.5 to 3.5 to 4.5 to 4.5 to 7.5% 8.5% 8.5% 7.5% 8.5% 8.5% ---- ---- ---- ---- ---- ----
F-50 77
Benefit Pension Plan Restoration Plan 2000 1999 1998 2000 1999 1998 -------- -------- -------- ------ ------ ------ (In thousands) Components of net periodic pension cost: Service cost $ 9,468 $ 13,633 $ 12,360 $ 580 $ 716 $ 438 Interest cost 21,369 21,084 19,926 717 510 330 Expected return on plan assets (36,646) (39,723) (32,618) Amortization of asset obligation (2,461) (2,461) (2,461) Amortization of prior service cost (benefit) 455 (239) (242) 53 53 53 Amortization of net (gain) loss (7,578) (4,848) (2,032) 323 391 209 -------- -------- -------- ------ ------ ------ Net periodic (benefit) cost $(15,393) $(12,554) $ (5,067) $1,673 $1,670 $1,030 ======== ======== ======== ====== ====== ======
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 Insurance, 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 2000 was $5,444,000 (1999 - $5,256,000; 1998 - $3,369,000). 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 $988,000 in 2000 (1999 - $1,005,000; 1998 - $1,105,000). The savings plan held 1,590,695 (1999 - 1,334,433; 1998 - 1,303,398) shares of common stock of the Corporation with a market value of approximately $41,855,000 at December 31, 2000 (1999 - $37,281,000; 1998 - $44,316,000). 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) 2000 1999 - -------------- ---------- ---------- Change in benefit obligation: Benefit obligation at beginning of the year $ 98,186 $ 101,286 Service cost 2,455 5,395 Interest cost 6,212 7,007 Plan amendment (12,530) (180) Benefits paid (4,127) (2,921) Actuarial loss (gain) 711 (12,401) ---------- ---------- Benefit obligation at end of year $ 90,907 $ 98,186 ========== ========== Change in plan assets: Unfunded status $ (90,907) $ (98,186) Unrecognized net prior service (benefit) cost (8,574) 3,260 Unrecognized net actuarial loss 5,590 4,879 ---------- ---------- Accrued benefit cost $ (93,891) $ (90,047) ========== ==========
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 2000 was 7.25% (1999 - 7.75%). The components of net periodic postretirement benefit cost for the year ended December 31, were as follows:
(In thousands) 2000 1999 1998 - -------------- -------- -------- -------- Service cost $ 2,455 $ 5,395 $ 4,731 Interest cost 6,212 7,007 6,016 Amortization of prior service (benefit) cost (696) 366 450 Amortization of net loss 1,270 206 -------- -------- -------- Net periodic benefit cost $ 7,971 $ 14,038 $ 11,403 ======== ======== ========
For measurement purposes, a 6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5% for 2001 and remain at that level thereafter. In February 2000, the Corporation adopted a plan amendment affecting only those employees retiring after February 1, 2001. The amendments provide that the Corporation's assumed cost will be capped to 3% of the annual health care cost increase. 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 $ 389,000 $ (326,000) Effect on postretirement benefit obligation $ 3,882,000 $ (3,354,000) ============ ============
F-51 78 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, amounted to $18,234,000 (1999 - $23,561,000; 1998 - $22,647,000). 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&P 500 Index, S&P Financial Index and the S&P Banks Index during the three-year period of the plan. The incentive is awarded in shares of the Corporation, which are purchased in the open market. For the year ended December 31, 2000, the Corporation recognized an expense of $96,000 (1999 - $168,000; 1998 - $626,000) related to this plan. NOTE 24 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 2000, 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) 2001 $ 29,701 $ 823 $ 28,878 2002 23,584 576 23,008 2003 20,082 361 19,721 2004 16,688 161 16,527 2005 13,132 149 12,983 Later years 68,046 256 67,790 -------- -------- -------- $171,233 $ 2,326 $168,907 ======== ======== ========
Total rental expense for the year ended December 31, 2000, was $39,331,000 (1999 - $32,909,000; 1998 - $26,451,000). NOTE 25 - 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 $2,490,000 in 2000 (1999 - $270,000; 1998 - $1,606,000), related to gains on securities transactions.
(In thousands) 2000 1999 1998 - -------------- ---------- ---------- ---------- Current income tax expense: Puerto Rico $ 93,352 $ 92,177 $ 94,913 Federal and States 17,622 9,399 8,914 ---------- ---------- ---------- Subtotal 110,974 101,576 103,827 Deferred income tax benefit: Puerto Rico (7,577) (14,378) (27,231) Federal and States (2,600) (2,078) (1,925) ---------- ---------- ---------- Subtotal (10,177) (16,456) (29,156) ---------- ---------- ---------- Total income tax expense $ 100,797 $ 85,120 $ 74,671 ========== ========== ==========
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:
2000 1999 1998 ----------------------- ----------------------- --------------------- %of %of %of pre-tax pre-tax pre-tax (Dollars in thousands) Amount Income Amount Income Amount Income - ---------------------- ---------- ------- ---------- ------- ---------- ------- Computed income tax at statutory rates $ 146,542 39% $ 132,687 39% $ 119,609 39% Benefits of net tax exempt interest income (46,164) (12) (54,405) (16) (47,432) (15) Federal, States taxes and other 419 6,838 2 2,494 ---------- ------- ---------- ------- ---------- ------- Income tax expense $ 100,797 27% $ 85,120 25% $ 74,671 24%
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 tax bases. Significant components of the Corporation's deferred tax assets and liabilities at December 31, were as follows:
(In thousands) 2000 1999 - -------------- ---------- ---------- Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits $ 16,034 $ 18,047 Net operating loss carryforward available 1,377 6,287 Postretirement and pension benefits 25,497 29,625 Allowance for loan losses 113,899 104,231 Unrealized loss on securities available-for-sale 35,993 Other temporary differences 15,970 31,857 ---------- ---------- Total gross deferred tax assets 172,777 226,040 ---------- ---------- Deferred tax liabilities: Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations 1,635 7,552 Unrealized gain on securities available-for-sale 1,683 Other temporary differences 14,066 11,511 ---------- ---------- Total gross deferred tax liabilities 17,384 19,063 ---------- ---------- Valuation allowance 713 713 ---------- ---------- Net deferred tax asset $ 154,680 $ 206,264 ========== ==========
F-52 79 At December 31, 2000, the Corporation had $16,034,000 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 2000, $3,748,877 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 2000 and 1999, 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, 2000. 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 2000 was $14,636,000 (1999 - $7,048,000; 1998 - $5,054,000). 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 26 - 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. 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) 2000 1999 - -------------- ---------- ---------- Commitments to extend credit: Credit card lines $1,787,601 $2,064,785 Commercial lines of credit 2,465,540 2,093,470 Other unused commitments 275,656 180,804 Commercial letters of credit 13,962 22,926 Standby letters of credit 103,705 62,022 Commitments to purchase mortgage loans 100,000 100,000 Commitments to originate mortgage loans 20,014 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. F-53 80 Other commitments In 2000, 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, 2002. The purchased mortgage loans will continue to be serviced by the originating institution. As of December 31, 2000, no loans have been purchased under this agreement. In 1999, 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 2000. In 1999, the Corporation had a remaining commitment with a third party to originate $20,014,000 in thirty-year mortgages at an unsubsidized fixed rate of 6.50%. The commitment expired during 2000. Geographic concentration A geographic concentration exists within the Corporation's loan portfolio since a significant portion of its business activity is with customers located in Puerto Rico. As of December 31, 2000, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. Note 30 provides further information on the asset composition of the Corporation by geographical area as of December 31, 2000 and 1999. Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $5.9 billion and $5.2 billion in 2000 and 1999, respectively. NOTE 27 - 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, and may vary significantly from amounts that could 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, 2000 and 1999, respectively. In different interest rate environments, fair value estimates 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, 2000 and 1999. 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 4, 5 and 28. 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 noninterest bearing demand deposits, savings, NOW and money market F-54 81 accounts is, for purpose of this disclosure, 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, 2000 and 1999, 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:
(In thousands) 2000 1999 - -------------- ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial Assets: Cash and short-term investments $ 1,794,669 $ 1,794,669 $ 1,649,690 $ 1,649,690 Trading securities 153,073 153,073 236,610 236,610 Investment securities available-for-sale 8,704,478 8,704,478 7,324,950 7,324,950 Investment securities held-to-maturity 356,177 350,018 299,312 295,076 Loans held-for sale 823,901 824,923 619,298 619,743 Loans, net 14,942,531 15,281,966 13,996,446 13,902,072 Financial Liabilities: Deposits $ 14,804,907 $ 14,318,131 $ 14,173,715 $ 14,135,259 Federal funds purchased 687,914 687,914 28,039 28,039 Securities sold under agreements to repurchase 4,276,201 4,276,201 4,386,441 4,386,441 Short-term borrowings 4,369,212 4,369,212 2,612,389 2,612,389 Notes payable 1,176,912 1,278,627 1,852,599 1,781,786 Subordinated notes 125,000 122,538 125,000 116,604 Capital securities 150,000 153,442 150,000 154,665 Commitments to extend credit and standby letters of credit: Commitments to extend credit $ 4,528,797 $ 7,275 $ 4,339,059 $ 8,391 Letters of credit 117,667 4,721 84,948 1,847 ============ ============ ============ ============
NOTE 28 - 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 26. 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:
(In thousands) 2000 1999 - -------------- ------------------------------------ ------------------------------------ Average Average Notional for the Fair Notional for the Fair amount year value amount year value -------- -------- -------- -------- -------- -------- Interest rate swaps: Pay floating/receive fixed $ 15,000 $ 15,000 $ (24) $ 15,000 $ 15,000 $ 20 Pay fixed/receive floating 35,000 35,000 (133) 35,000 100,792 (133) Interest rate swaptions 118,664 105,511 32,571 80,456 77,533 38,995 Interest rate options 17,891 19,561 451 21,416 23,631 1,882 Interest rate caps 2,363 2,494 16 2,713 2,713 57 Interest rate floors 2,363 2,494 (28) 2,713 2,713 (17) Forward contracts 15,000 1,250 (80) Foreign exchange contracts 919 3,991 1,930 2,485 Securities sold not yet purchased 486 413 ======== ======== ======== ======== ======== ========
Interest rate swaps Interest rate swap agreements generally involve the exchange of fixed and floating interest rate 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. F-55 82
(In thousands) 2000 1999 - -------------- ------------ ------------ Activity of interest rate swaps hedges for the year: Beginning balance $ 50,000 $ 205,000 Matured swaps (155,000) ------------ ------------ Ending balance $ 50,000 $ 50,000 ============ ============ Pay floating/receive fixed: Weighted average receive rate at December 31 6.42% 6.42% Weighted average pay rate at December 31 6.42 6.09 Pay fixed/receive floating: Weighted average receive rate at December 31 6.56% 5.38% Weighted average pay rate at December 31 6.75 6.75 ------------ ------------
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. 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 F-56 83 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 set by senior management, by buying or selling instruments or entering into offsetting positions. At December 31, 2000 the Corporation held no future contracts written for trading purposes. At December 31, 1999 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.
(In thousands) Fair Value - -------------- ----------------------------------------------------------- At December 31, 2000 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ------ ----------- ------ ----------- --------- Options $ 25 $ (25) $ 9 $ (9) $ 2 Forward contracts (127) 56 (92) (438) (In thousands) Fair Value - -------------- -------------------------------------------------------- At December 31, 1999 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) ------ ----------- ------ ----------- --------- Futures contracts $ (7) Forward contracts $ 50 $ 123 $1,476
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 29 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 2000, the Corporation paid interest and income taxes amounting to $1,142,495,000 and $117,920,000, respectively (1999 - $879,340,000 and $132,871,000; 1998 - $768,415,000 and $93,850,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 2000, amounted to $31,148,000 and $25,403,000, respectively (1999 - $29,290,000 and $24,959,000). In connection with the sale of the investment in BF, the Corporation received a note receivable (denominated in U.S. dollars) for $22,500,000, which earns interest at 9.5%. NOTE 30 - 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 304 branches throughout Puerto Rico, the U.S. and British Virgin Islands, and the United States. 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 84 offices in Puerto Rico while those of Equity One are provided in 136 offices throughout 30 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 11 offices of Popular Leasing, USA in 8 states. The "Other" category includes all holding companies and non-banking subsidiaries which provide insurance agency services, 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. As of December 31, 1998 and 1999, it also included the banking operations of BF in the Dominican Republic. The Corporation's ownership interest in BF was sold during 2000. 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 Elimina- (In thousands) banking lending financing Other tions Total - -------------- ------------ ------------ ---------- ------------ ------------ ------------ 2000 ---------------------------------------------------------------------------------------------------- Net interest income $ 845,575 $ 92,373 $ 43,546 $ 1,408 $ (141) $ 982,761 Provision for loan losses 137,774 29,250 21,761 5,855 194,640 Other income 253,112 50,119 21,620 148,891 (8,644) 465,098 Intangibles amortization 28,399 717 754 4,688 34,558 Depreciation expense 58,055 3,342 9,018 6,433 76,848 Other operating expenses 556,782 73,471 22,629 115,713 (2,530) 766,065 Net loss of minority interest 48 1,104 1,152 Income tax 81,314 12,201 4,181 4,641 (1,540) 100,797 ------------ ------------ ---------- ------------ ------------ ------------ Net income $ 236,363 $ 23,559 $ 6,823 $ 14,073 $ (4,715) $ 276,103 ============ ============ ========== ============ ============ ============ Segment assets $ 23,880,191 $ 2,848,464 $ 957,175 $ 6,240,372 $ (5,869,151) $ 28,057,051 ============ ============ ========== ============ ============ ============
F-57 84
Mortgage and Commercial consumer Lease Elimina- (In thousands) banking lending financing Other tions 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 ============ ============ ========== ============ ============ ============ Mortgage and Commercial consumer Lease Elimina- (In thousands) banking lending financing Other tions Total ------------ ------------ ---------- ------------ ------------ ------------ 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 ============ ============ ========== ============ ============ ============
GEOGRAPHIC INFORMATION
(In thousands) 2000 1999 1998 - -------------- ---------- ---------- ---------- Revenues(*): Puerto Rico $1,808,295 $1,548,804 $1,419,371 United States 694,192 561,307 462,582 Other 112,768 114,475 60,996 ---------- ---------- ---------- Total consolidated revenues $2,615,255 $2,224,586 $1,942,949 ========== ========== ==========
(*) Total revenues include interest income, service charges on deposit accounts, other service fees, gain on sale of securities, trading account profit, and other income.
(In thousands) 2000 1999 1998 - -------------- ------------ ------------ ------------ Selected Balance Sheet Information: Puerto Rico Total assets $ 20,146,184 $ 18,064,388 $ 16,517,161 Loans 9,370,627 8,767,843 7,895,689 Deposits 9,974,677 9,792,129 9,444,199 United States Total assets $ 7,246,259 $ 6,407,217 $ 5,660,628 Loans 6,264,014 5,460,696 4,556,060 Deposits 4,107,994 3,472,839 3,410,808 Other Total assets $ 664,608 $ 988,934 $ 982,568 Loans 422,444 679,215 627,046 Deposits 722,236 908,747 817,207 ============ ============ ============
NOTE 31 - 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 32 - 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31. The financial information related to the investment in subsidiaries, presented below, was restated to reflect the U.S. reorganization which took place in 1999. As part of this reorganization, the Banco Popular branches in New York were merged with and into BPNA. Statements of Condition
December 31, (In thousands) 2000 1999 - -------------- ---------- ---------- ASSETS Cash $ 283 $ 332 Money market investments 20,837 35,500 Investment securities available-for-sale, at market value 151,413 126,716 Investment in BPPR and subsidiaries, at equity 1,344,703 1,048,739 Investment in Popular International Bank and subsidiaries, at equity 573,375 540,866 Investment in other subsidiaries, at equity 87,696 76,069 Advances to subsidiaries 515,547 895,448 Loans to a former subsidiary 28,226 Other assets 23,136 10,057 ---------- ---------- Total assets $2,745,216 $2,733,727 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 51,987 $ 133,117 Other short-term borrowings 325,726 297,933 Notes payable 212,011 484,715 Accrued expenses and other liabilities 36,848 31,976 Subordinated notes 125,000 125,000 Stockholders' equity 1,993,644 1,660,986 ---------- ---------- Total liabilities and stockholders' equity $2,745,216 $2,733,727 ========== ==========
F-58 85 Statements of Income
Year ended December 31, (In thousands) 2000 1999 1998 - -------------- ---------- ---------- ---------- Income: Dividends from subsidiaries $ 88,000 $ 314,348 $ 70,925 Interest on money market and investment securities 2,718 3,696 5,052 Other operating income 10,818 7,232 346 Gain on sale of securities 12,001 4,303 Interest on advances to subsidiaries 49,295 57,219 49,564 Interest on loans to a former subsidiary 1,068 ---------- ---------- ---------- Total income 163,900 382,495 130,190 ---------- ---------- ---------- Expenses: Interest expense 59,690 64,739 58,747 Provision for loan losses 1,365 Operating expenses 2,454 2,155 1,108 ---------- ---------- ---------- Total expenses 63,509 66,894 59,855 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of subsidiaries 100,391 315,601 70,335 Income taxes 3,354 32 ---------- ---------- ---------- Income before equity in undistributed earnings of subsidiaries 97,037 315,601 70,303 Equity in undistributed earnings of subsidiaries (dividends in excess of annual net earnings of subsidiaries) 179,066 (58,043) 162,045 ---------- ---------- ---------- Net income $ 276,103 $ 257,558 $ 232,348 ========== ========== ==========
Statements of Cash Flows
Year ended December 31, (In thousands) 2000 1999 1998 - -------------- ----------- ---------- ---------- Cash flows from operating activities: Net income $ 276,103 $ 257,558 $ 232,348 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (dividends in excess of annual net earnings of subsidiaries) (179,066) 58,043 (162,045) Net gain on sale of investment securities available-for-sale (12,001) (4,303) Amortization of premiums and accretion of discounts on investments 17 25 Net increase in other assets (18,539) (5,494) (1,515) Net increase (decrease) in current and deferred taxes 6,826 (6,108) 367 Net (decrease) increase in interest payable (605) 1,557 2,376 Net increase in other liabilities 5,451 5,207 419 ---------- ---------- ---------- Total adjustments (197,934) 53,222 (164,676) ---------- ---------- ---------- Net cash provided by operating activities 78,169 310,780 67,672 ---------- ---------- ---------- Cash flows from investing activities: Net decrease (increase) in money market investments 14,663 (31,800) (3,700) Purchases of investment securities available-for-sale (37,318) (94,299) (7,362) Maturities of investment securities available-for-sale 13,503 50,000 5,000 Proceeds from sales of investment securities available-for-sale 19,950 3,308 7,700 Capital contribution to subsidiaries (25,747) (5,100) (119,941) Distribution from subsidiary 8,642 Net change in advances to subsidiaries 350,310 (126,042) (77,700) ---------- ---------- ---------- Net cash provided by (used in) investing activities 335,361 (195,291) (196,003) ---------- ---------- ---------- Cash flows from financing activities: Net decrease in securities sold under agreements to repurchase (51,438) (337) Net (decrease) increase in commercial paper (81,130) (31,398) 66,416 Net increase in other short-term borrowings 27,793 50,861 156,197 Net (decrease) increase in notes payable (272,704) 47,838 (29,211) Cash dividends paid (95,297) (87,012) (72,021) Proceeds from issuance of common stock 9,823 9,387 7,433 Treasury stock acquired (2,064) (53,919) ---------- ---------- ---------- Net cash (used in) provided by financing activities (413,579) (115,681) 128,477 ---------- ---------- ---------- Net (decrease) increase in cash (49) (192) 146 Cash at beginning of year 332 524 378 ---------- ---------- ---------- Cash at end of year $ 283 $ 332 $ 524 ========== ========== ==========
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 F-59 86 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 19. At December 31, 2000, BPPR could have declared a dividend of approximately $205,088,000 without the approval of the Federal Reserve Bank. NOTE 33 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS OF GUARANTEED SECURITIES REGISTERED: The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC), Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of December 31, 1999 and 2000, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2000. PIBI, PNA, and their wholly-owned subsidiaries, except BPNA and Banco Popular, National Association (BP,N.A.), have a fiscal year that ends on November 30. Accordingly, the consolidated financial information of PIBI and PNA as of November 30, 1998, 1999 and 2000, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of December 31, 1998, 1999, and 2000, respectively. PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the SEC that became effective on August 4, 1999. PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., and PNA. The ownership interest in BF, sold in 2000, was also part of PIBI during 1998 and 1999. PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA and BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc. PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA. As described in Note 32 of these financial statements, the principal source of cash flows for PIHC consists of dividends from BPPR. F-60 87 Statement of Condition
Year ended December 31, 2000 ------------------------------------------------------------------------------------ Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated - -------------- ------------- ------------ ----------- ------------ ----------- ------------ ASSETS Cash and due from banks $ 283 $ 18 $ 288 $ 822,672 $ (97,210) $ 726,051 Money market investments 20,837 326 60 1,944,366 (896,971) 1,068,618 Investment securities available-for-sale, at market value 151,413 12,577 6,342 8,534,146 8,704,478 Investment securities held-to-maturity, at amortized cost 510,817 (154,640) 356,177 Trading account securities, at market value 153,073 153,073 Investment in subsidiaries, at equity 2,005,774 542,158 741,505 139,053 (3,428,490) Loans held-for-sale, at lower of cost or market 823,901 823,901 ----------- ----------- ----------- ----------- ----------- ----------- Loans 543,773 22,500 1,842,515 15,629,152 (2,457,561) 15,580,379 Less - Unearned income 347,195 347,195 Allowance for loan losses 290,653 290,653 ----------- ----------- ----------- ----------- ----------- ----------- 543,773 22,500 1,842,515 14,991,304 (2,457,561) 14,942,531 ----------- ----------- ----------- ----------- ----------- ----------- Premises and equipment 405,772 405,772 Other real estate 23,518 23,518 Customers' liabilities on acceptances 1,647 1,647 Accrued income receivable 1,113 590 12,051 209,278 (20,492) 202,540 Other assets 22,023 895 4,937 340,614 (1,319) 367,150 Intangible assets 282,048 (453) 281,595 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,745,216 $ 579,064 $ 2,607,698 $29,182,209 $(7,057,136) $28,057,051 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,207,037 $ (97,152) $ 3,109,885 Interest bearing 11,738,916 (43,894) 11,695,022 ----------- ----------- ----------- 14,945,953 (141,046) 14,804,907 Federal funds purchased and securities sold under agreements to repurchase $ 68,700 5,033,117 (137,702) 4,964,115 Other short-term borrowings $ 377,713 $ 5,414 1,336,063 4,298,732 (1,648,710) 4,369,212 Notes payable 212,011 633,254 1,997,722 (1,666,075) 1,176,912 Acceptances outstanding 1,647 1,647 Other liabilities 36,848 275 37,267 421,807 (25,510) 470,687 ----------- ----------- ----------- ----------- ----------- ----------- 626,572 5,689 2,075,284 26,698,978 (3,619,043) 25,787,480 ----------- ----------- ----------- ----------- ----------- ----------- Subordinated notes 125,000 125,000 ----------- ----------- Preferred beneficial interests in Popular North America's Junior subordinated deferrable interest debentures Guaranteed by the Corporation 150,000 150,000 ----------- ----------- ----------- Minority interest in consolidated subsidiaries 105 822 927 ----------- ----------- ----------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 830,356 3,962 2 72,575 (76,539) 830,356 Surplus 260,984 485,676 439,964 1,328,053 (2,253,693) 260,984 Retained earnings 865,082 83,576 90,434 949,552 (1,123,562) 865,082 Treasury stock, at cost (66,214) (314) 314 (66,214) Accumulated other comprehensive income (loss), net of taxes 3,436 161 2,014 (16,740) 14,565 3,436 ----------- ----------- ----------- ----------- ----------- ----------- 1,993,644 573,375 532,414 2,333,126 (3,438,915) 1,993,644 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,745,216 $ 579,064 $ 2,607,698 $29,182,209 $(7,057,136) $28,057,051 =========== =========== =========== =========== =========== ===========
F-61 88 Statement of Condition
Year ended December 31, 1999 ---------------------------------------------------------------------------------------- Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated - -------------- ------------- ------------ ----------- ------------ ----------- ------------- ASSETS Cash and due from banks $ 332 $ 227 $ 664 $ 693,238 $ (30,765) $ 663,696 Money market investments 35,500 3,258 21,503 1,720,305 (794,572) 985,994 Investment securities available-for-sale, at market value 126,716 13,525 5,330 7,180,179 (800) 7,324,950 Investment securities held-to-maturity, at amortized cost 453,952 (154,640) 299,312 Trading account securities, at market value 236,610 236,610 Investment in subsidiaries, at equity 1,665,674 539,288 620,332 113,145 (2,938,439) Loans held-for-sale, at lower of cost or market 619,298 619,298 ------------ ------------ ------------ ------------ ----------- ------------ Loans 895,448 16,961 1,427,775 14,706,699 (2,387,483) 14,659,400 Less - Unearned income 370,944 370,944 Allowance for loan losses 292,010 292,010 ------------ ------------ ------------ ------------ ----------- ------------ 895,448 16,961 1,427,775 14,043,745 (2,387,483) 13,996,446 ------------ ------------ ------------ ------------ ----------- ------------ Premises and equipment 440,971 440,971 Other real estate 29,268 29,268 Customers' liabilities on acceptances 12,041 12,041 Accrued income receivable 122 196 672 187,232 (12,476) 175,746 Other assets 9,935 593 4,782 357,057 (946) 371,421 Intangible assets 305,373 (587) 304,786 ------------ ------------ ------------ ------------ ----------- ------------ $ 2,733,727 $ 574,048 $ 2,081,058 $ 26,392,414 $ (6,320,708) $ 25,460,539 ============ ============ ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,315,609 $ (30,660) $ 3,284,949 Interest bearing 11,510,011 (621,245) 10,888,766 ------------ ------------ ------------ 14,825,620 (651,905) 14,173,715 Federal funds purchased and securities sold under agreements to repurchase 4,521,700 (107,220) 4,414,480 Other short-term borrowings $ 431,050 $ 25,719 $ 324,657 2,950,906 (1,119,943) 2,612,389 Notes payable 484,715 7,007 1,201,412 1,622,821 (1,463,356) 1,852,599 Acceptances outstanding 12,041 12,041 Other liabilities 31,976 455 42,582 376,593 (14,888) 436,718 ------------ ------------ ------------ ------------ ----------- ------------ 947,741 33,181 1,568,651 24,309,681 (3,357,312) 23,501,942 ------------ ------------ ------------ ------------ ----------- ------------ Subordinated notes 125,000 125,000 ------------ ------------ Preferred beneficial interests in Popular North America's Junior subordinated deferrable interest debentures Guaranteed by the Corporation 150,000 150,000 ------------ ------------ Minority interest in consolidated subsidiaries 22,611 22,611 ----------- ------------ Stockholders' equity: Preferred stock 100,000 100,000 Common stock 827,662 3,962 2 62,445 (66,409) 827,662 Surplus 243,855 470,226 439,964 1,273,797 (2,183,987) 243,855 Retained earnings 694,301 69,529 74,005 750,111 (893,645) 694,301 Treasury stock, at cost (64,123) (287) 287 (64,123) Accumulated other comprehensive income (loss), net of taxes (140,709) (2,850) (1,564) (153,333) 157,747 (140,709) ------------ ------------ ------------ ------------ ----------- ------------ 1,660,986 540,867 512,407 1,932,733 (2,986,007) 1,660,986 ------------ ------------ ------------ ------------ ----------- ------------ $ 2,733,727 $ 574,048 $ 2,081,058 $ 26,392,414 $ (6,320,708) $ 25,460,539 ============ ============ ============ ============ ============ ============
F-62 89 Consolidated Statement of Income
Year ended December 31, 2000 ------------------------------------------------------------------------------------------ Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated - -------------- ------------- ----------- ------------ ------------ ------------ ------------- INTEREST INCOME: Loans $ 50,363 $ 876 $ 119,316 $ 1,589,626 $ (173,349) $1,586,832 Money market investments 855 81 189 118,585 (57,354) 62,356 Investment securities 1,863 2 715 496,603 (12,985) 486,198 Trading account securities 14,771 14,771 --------- --------- ----------- ----------- ----------- ---------- 53,081 959 120,220 2,219,585 (243,688) 2,150,157 --------- --------- ----------- ----------- ----------- ---------- INTEREST EXPENSE: Deposits 553,471 (24,098) 529,373 Short-term borrowings 30,354 552 54,030 522,091 (98,998) 508,029 Long-term debt 29,336 142 72,646 148,321 (120,451) 129,994 --------- --------- ----------- ----------- ----------- ---------- 59,690 694 126,676 1,223,883 (243,547) 1,167,396 --------- --------- ----------- ----------- ----------- ---------- Net interest (loss) income (6,609) 265 (6,456) 995,702 (141) 982,761 Provision for loan losses 1,365 193,275 194,640 --------- --------- ----------- ----------- ----------- ---------- Net interest (loss) income after provision for loan losses (7,974) 265 (6,456) 802,427 (141) 788,121 Service charges on deposit accounts 125,519 125,519 Other service fees 218,853 (1,819) 217,034 Gain (loss) on sale of securities 12,001 (800) 11,201 Trading account profit 2,230 2,230 Other operating income 10,818 1,279 103,842 (6,825) 109,114 --------- --------- ----------- ----------- ----------- ---------- 14,845 1,544 (6,456) 1,252,071 (8,785) 1,253,219 --------- --------- ----------- ----------- ----------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 280 306,249 306,529 Profit sharing 18,913 18,913 Pension and other benefits 46 68,688 68,734 --------- ----------- ----------- ---------- 326 393,850 394,176 Net occupancy expenses 12 67,724 (16) 67,720 Equipment expenses 1 98,021 98,022 Other taxes 1,350 32,775 34,125 Professional fees 473 9 228 67,126 (1,947) 65,889 Communications 19 45,670 45,689 Business promotion 46,791 46,791 Printing and supplies 2 20,826 20,828 Other operating expenses 609 50 421 69,160 (567) 69,673 Amortization of intangibles 34,558 34,558 --------- --------- ----------- ----------- ----------- ---------- 2,454 397 649 876,501 (2,530) 877,471 --------- --------- ----------- ----------- ----------- ---------- Income (losses) before income tax and equity in earnings (losses) of subsidiaries 12,391 1,147 (7,105) 375,570 (6,255) 375,748 Income tax 3,354 (2,590) 101,573 (1,540) 100,797 Net loss of minority interest 1,152 1,152 --------- --------- ----------- ----------- ----------- ---------- Income (losses) before equity in earnings (losses) of subsidiaries 9,037 1,147 (4,515) 275,149 (4,715) 276,103 Equity in earnings of subsidiaries 267,066 12,900 20,944 9,271 (310,181) --------- --------- ----------- ----------- ----------- ---------- NET INCOME $ 276,103 $ 14,047 $ 16,429 $ 284,420 $ (314,896) $ 276,103 ========= ========= =========== =========== =========== ==========
F-63 90 Consolidated Statement of Income
Year ended December 31, 1999 ------------------------------------------------------------------------------------------ Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated - -------------- ------------- ----------- ------------ ------------ ------------ ------------- INTEREST INCOME: Loans $ 57,219 $ 484 $ 80,093 $ 1,375,630 $ (140,268) $1,373,158 Money market investments 662 263 2,418 64,359 (34,268) 33,434 Investment securities 3,034 2 720 435,035 (12,884) 425,907 Trading account securities 19,171 19,171 --------- --------- ----------- ----------- ----------- ---------- 60,915 749 83,231 1,894,195 (187,420) 1,851,670 --------- --------- ----------- ----------- ----------- ---------- INTEREST EXPENSE: Deposits 460,358 (8,143) 452,215 Short-term borrowings 22,525 922 22,822 354,270 (82,893) 317,646 Long-term debt 42,214 100 66,445 115,629 (96,317) 128,071 --------- --------- ----------- ----------- ----------- ---------- 64,739 1,022 89,267 930,257 (187,353) 897,932 --------- --------- ----------- ----------- ----------- ---------- Net (loss) interest income (3,824) (273) (6,036) 963,938 (67) 953,738 Provision for loan losses 148,948 148,948 --------- --------- ----------- ----------- ----------- ---------- Net interest income (loss) after provision for loan losses (3,824) (273) (6,036) 814,990 (67) 804,790 Service charges on deposit accounts 118,187 118,187 Other service fees 171,025 (1,298) 169,727 Gain on sale of securities 216 422 638 Trading account loss (1,582) (1,582) Other operating income 7,232 608 4 83,147 (5,045) 85,946 --------- --------- ----------- ----------- ----------- ---------- 3,408 335 (5,816) 1,186,189 (6,410) 1,177,706 --------- --------- ----------- ----------- ----------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 235 289,760 289,995 Profit sharing 23,881 23,881 Pension and other benefits 43 72,777 72,820 --------- ----------- ---------- 278 386,418 386,696 Net occupancy expenses 12 60,802 60,814 Equipment expenses 1 88,346 (13) 88,334 Other taxes 835 32,455 33,290 Professional fees 1,307 11 699 67,807 (1,869) 67,955 Communications 2 43,144 43,146 Business promotion 45,938 45,938 Printing and supplies 10 20,699 20,709 Other operating expenses 42 9 58,815 (54) 58,812 Amortization of intangibles 31,788 31,788 --------- --------- ----------- ----------- ----------- ---------- 2,155 343 708 836,212 (1,936) 837,482 --------- --------- ----------- ----------- ----------- ---------- Income (losses) before income tax and equity in earnings (losses) of subsidiaries 1,253 (8) (6,524) 349,977 (4,474) 340,224 Income tax (2,277) 88,546 (1,149) 85,120 Net loss of minority interest 2,454 2,454 --------- --------- ----------- ----------- ----------- ---------- Income (losses) before equity in earnings (losses) of subsidiaries 1,253 (8) (4,247) 263,885 (3,325) 257,558 Equity in earnings of subsidiaries 256,305 4,858 13,199 13,180 (287,542) --------- --------- ----------- ----------- ----------- ---------- NET INCOME $ 257,558 $ 4,850 $ 8,952 $ 277,065 $ (290,867) $ 257,558 ========= ========= =========== =========== =========== ==========
F-64 91 Consolidated Statement of Income
Year ended December 31, 1998 ------------------------------------------------------------------------------------------ Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated - -------------- ------------- ----------- ------------ ------------ ------------ ------------- INTEREST INCOME: Loans $ 49,564 $ 69,401 $ 1,222,126 $ (129,241) $1,211,850 Money market investments 121 $ 351 2,337 49,632 (15,660) 36,781 Investment securities 4,931 1 386 393,032 (12,877) 385,473 Trading account securities 244 17,355 17,599 --------- --------- --------- ----------- ----------- ---------- 54,616 596 72,124 1,682,145 (157,778) 1,651,703 --------- --------- --------- ----------- ----------- ---------- INTEREST EXPENSE: Deposits 412,942 (1,450) 411,492 Short-term borrowings 25,800 678 24,175 268,056 (66,985) 251,724 Long-term debt 32,947 49,587 122,212 (89,271) 115,475 --------- --------- --------- ----------- ----------- ---------- 58,747 678 73,762 803,210 (157,706) 778,691 --------- --------- --------- ----------- ----------- ---------- Net interest (loss) income (4,131) (82) (1,638) 878,935 (72) 873,012 Provision for loan losses 137,213 137,213 --------- --------- --------- ----------- ----------- ---------- Net interest (loss) income after provision for loan losses (4,131) (82) (1,638) 741,722 (72) 735,799 Service charges on deposit accounts 103,732 103,732 Other service fees 116,406 169 116,575 Gain on sale of securities 4,303 1,971 2,659 8,933 Trading account loss (206) 3,859 3,653 Other operating income 346 468 1,672 57,499 (1,632) 58,353 --------- --------- --------- ----------- ----------- ---------- 518 180 2,005 1,025,877 (1,535) 1,027,045 --------- --------- --------- ----------- ----------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 218 247,372 247,590 Profit sharing 22,067 22,067 Pension and other benefits 38 67,705 67,743 --------- --------- --------- ----------- ----------- ---------- 256 337,144 337,400 Net occupancy expenses (25) 12 48,620 48,607 Equipment expenses 20 75,354 (72) 75,302 Other taxes 743 31,448 32,191 Professional fees 328 4 1,297 56,878 (420) 58,087 Communications 36,941 36,941 Business promotion 39,376 39,376 Printing and supplies 6 17,598 17,604 Other operating expenses 36 15 953 45,982 46,986 Amortization of intangibles 27,860 27,860 --------- --------- --------- ----------- ----------- ---------- 1,108 287 2,250 717,201 (492) 720,354 --------- --------- --------- ----------- ----------- ---------- Income (losses) before income tax and equity in earnings (losses) of subsidiaries (590) (107) (245) 308,676 (1,043) 306,691 Income tax 32 (1,000) 75,626 13 74,671 Net loss of minority interest 328 328 --------- --------- --------- ----------- ----------- ---------- Income (losses) before equity in earnings (losses) of subsidiaries (622) (107) 755 233,378 (1,056) 232,348 Equity in earnings of subsidiaries 232,970 9,305 9,708 13,891 (265,874) --------- --------- --------- ----------- ----------- ---------- NET INCOME $ 232,348 $ 9,198 $ 10,463 $ 247,269 $ (266,930) $ 232,348 ========= ========= ========= =========== =========== ==========
F-65 92 Statement of Cash Flow
Year ended December 31, 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated - -------------- ------------ ----------- ----------- ------------ ----------- ------------- Cash flows from operating activities: Net income $ 276,103 $ 14,047 $ 16,429 $ 284,420 $(314,896) $ 276,103 --------- --------- --------- ----------- --------- ----------- Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of subsidiaries (267,066) (12,900) (20,944) (9,271) 310,181 Depreciation and amortization of premises and equipment 76,848 76,848 Provision for loan losses 1,365 193,275 194,640 Amortization of intangibles 34,558 34,558 Net gain on sale of investment securities available-for-sale (12,001) 800 (11,201) Net loss on disposition of premises and equipment 210 210 Net gain on sale of loans (7,935) (7,935) Amortization of premiums and accretion of discounts on investments (430) 1,350 920 Increase in loans held-for-sale (204,603) (204,603) Amortization of deferred loan fees and costs (5,265) (5,265) Net decrease in trading securities 83,537 83,537 Net increase in interest receivable (991) (394) (11,379) (27,779) 8,017 (32,526) Net increase in other assets (18,913) (302) (155) (9,984) 238 (29,116) Net (decrease) increase in interest payable (605) (210) (3,585) 29,301 24,901 Net increase (decrease) in current and deferred taxes 6,826 (2,165) (17,268) 1,373 (11,234) Net increase in postretirement benefit obligation 3,844 3,844 Net increase in other liabilities 5,451 31 435 26,502 (13,794) 18,625 --------- --------- --------- ----------- --------- ----------- Total adjustments (285,934) (13,775) (38,223) 168,120 306,015 136,203 --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by operating activities (9,831) 272 (21,794) 452,540 (8,881) 412,306 --------- --------- --------- ----------- --------- ----------- Cash flows from investing activities: Net decrease (increase) in money market investment 14,663 2,931 21,443 (254,838) 102,398 (113,403) Purchases of investment securities held-to-maturity (5,517,411) (5,517,411) Maturities of investment securities held-to-maturity 5,458,897 5,458,897 Purchases of investment securities available-for-sale (37,318) (298) (4,759,954) (4,797,570) Maturities of investment securities available-for-sale 13,503 2,771,791 (800) 2,784,494 Proceeds from sales of investment securities available-for-sale 19,950 799,005 818,955 Net repayments (disbursements) on loans 350,310 16,392 (414,741) (1,872,615) 70,078 (1,850,576) Proceeds from sale of loans 1,024,637 1,024,637 Acquisition of loan portfolios (589,178) (589,178) Capital contribution to Subsidiary (25,747) (7,943) (97,390) (10,174) 141,254 Assets acquired, net of cash (8,453) (8,453) Acquisition of premises and equipment (75,147) (75,147) Proceeds from sale of premises and equipment 11,631 11,631 Cash transferred due to sale of investment in subsidiary (46,899) (46,899) Merger of Popular Holdings USA in PNA 455 (455) Dividends received from subsidiary 88,000 (88,000) --------- --------- --------- ----------- --------- ----------- Net cash provided by (used in) investing activities 423,361 11,380 (490,531) (3,068,708) 224,475 (2,900,023) --------- --------- --------- ----------- --------- ----------- Cash flows from financing activities: Net increase in deposits 413,493 512,678 926,171 Net increase in federal funds purchases and securities sold under agreements to repurchase 68,700 511,417 (30,482) 549,635 Net (decrease) increase in other short-term borrowings (53,337) (20,304) 1,011,407 1,385,576 (528,767) 1,794,575 Proceeds from issuance of notes payable 457,998 (166,179) 291,819 Payments of notes payable (272,704) (7,007) (568,158) (40,154) (36,540) (924,563) Dividends paid to parent company (88,000) 88,000 Dividends paid (95,297) (95,297) Proceeds from issuance of common stock 9,823 9,823 Treasury stock acquired (2,064) (27) (2,091) Capital contribution from parent 15,450 105,299 (120,749) --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by financing activities (413,579) (11,861) 511,949 2,745,602 (282,039) 2,550,072 --------- --------- --------- ----------- --------- ----------- Net (decrease) increase in cash and due from banks (49) (209) (376) 129,434 (66,445) 62,355 Cash and due from banks at beginning of year 332 227 664 693,238 (30,765) 663,696 --------- --------- --------- ----------- --------- ----------- Cash and due from banks at end of year $ 283 $ 18 $ 288 $ 822,672 $ (97,210) $ 726,051 ========= ========= ========= =========== ========= ===========
F-66 93 Statement of Cash Flow
Year ended December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated - -------------- ------------ ----------- ----------- ------------ ----------- ------------- Cash flows from operating activities: Net income $ 257,558 $ 4,850 $ 8,952 $ 277,065 $(290,867) $ 257,558 --------- --------- --------- ----------- --------- ----------- Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of subsidiaries (256,305) (4,858) (13,199) (13,180) 287,542 Depreciation and amortization of premises and equipment 71,320 71,320 Provision for loan losses 148,948 148,948 Amortization of intangibles 31,788 31,788 Net gain on sale of investment securities available-for-sale (216) (422) (638) Net loss on disposition of premises and equipment 365 365 Net gain on sale of loans (2,717) (2,717) Amortization of premiums and accretion of discounts on investments 17 6,861 6,878 Decrease in loans held-for-sale 26,818 26,818 Amortization of deferred loan fees and costs (713) (713) Net decrease in trading securities 82,117 82,117 Net decrease (increase) in interest receivable 1,063 (187) (356) (26,550) 6,616 (19,414) Net (increase) decrease in other assets (6,557) (177) (2,164) (28,502) (801) (38,201) Net increase (decrease) in interest payable 1,557 424 (16,395) 33,006 18,592 Net decrease in current and deferred taxes (6,108) (2,277) (37,458) (5,144) (50,987) Net increase in postretirement benefit obligation 9,708 9,708 Net increase (decrease) in other liabilities 5,207 (1) 31,695 (10,846) 2,368 28,423 --------- --------- --------- ----------- --------- ----------- Total adjustments (261,126) (4,799) (2,912) 290,543 290,581 312,287 --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by operating activities (3,568) 51 6,040 567,608 (286) 569,845 --------- --------- --------- ----------- --------- ----------- Cash flows from investing activities: Net (increase) decrease in money market investment (31,800) (1,793) 73,926 (529,179) 450,750 (38,096) Purchases of investment securities held-to-maturity (6,070,728) (6,070,728) Maturities of investment securities held-to-maturity 6,095,690 6,095,690 Purchases of investment securities available-for-sale (94,299) (8,515) (1,266) (6,201,587) 154 (6,305,513) Maturities of investment securities available-for-sale 50,000 5,417,356 5,467,356 Proceeds from sales of investment securities available-for-sale 3,308 165,029 168,337 Net disbursements on loans (126,042) (16,961) (323,166) (2,802,459) 325,327 (2,943,301) Proceeds from sale of loans 920,421 920,421 Acquisition of loan portfolios (5,945) (5,945) Capital contribution from (to) Subsidiary 3,542 (125,725) (36,486) (4,644) 163,313 Assets acquired, net of cash (2,925) 1,207 (1,718) Acquisition of premises and equipment (108,428) (108,428) Proceeds from sale of premises and equipment 24,923 24,923 Dividends received from subsidiary 314,348 (314,348) --------- --------- --------- ----------- --------- ----------- Net cash provided by (used in) investing activities 119,057 (152,994) (286,992) (3,102,476) 626,403 (2,797,002) --------- --------- --------- ----------- --------- ----------- Cash flows from financing activities: Net increase in deposits 1,134,197 (632,696) 501,501 Net (decrease) increase in federal funds purchases and securities sold under agreements to repurchase (51,438) (341,700) 677,276 53,842 337,980 Net increase (decrease) in other short-term borrowings 19,463 20,719 73,797 872,245 (13,750) 972,474 Proceeds from issuance of notes payable 47,838 7,007 703,100 125,808 (94,317) 789,436 Payments of notes payable (156,086) (12,558) (78,057) (246,701) Dividends paid to parent company (314,348) 314,348 Dividends paid (87,012) (87,012) Proceeds from issuance of common stock 9,387 9,387 Treasury stock acquired (53,919) (53,919) Capital contribution from parent 125,421 60,125 (185,546) --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by financing activities (115,681) 153,147 279,111 2,542,745 (636,176) 2,223,146 --------- --------- --------- ----------- --------- ----------- Net (decrease) increase in cash and due from banks (192) 204 (1,841) 7,877 (10,059) (4,011) Cash and due from banks at beginning of year 524 23 2,505 685,361 (20,706) 667,707 --------- --------- --------- ----------- --------- ----------- Cash and due from banks at end of year $ 332 $ 227 $ 664 $ 693,238 $ (30,765) $ 663,696 ========= ========= ========= =========== ========= ===========
F-67 94 Statement of Cash Flow
Year ended December 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated - -------------- ------------ ----------- ----------- ------------ ----------- ------------ Cash flows from operating activities: Net income $ 232,348 $ 9,198 $ 10,463 $ 247,269 $(266,930) $ 232,348 --------- --------- --------- ----------- --------- ----------- Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of subsidiaries (232,970) (9,305) (9,708) (13,891) 265,874 Depreciation and amortization of premises and equipment 62,649 62,649 Provision for loan losses 137,213 137,213 Amortization of intangibles 27,860 27,860 Net gain on sale of investment securities available-for-sale (4,303) (1,971) (2,659) (8,933) Net loss on disposition of premises and equipment 167 167 Net gain on sale of loans (2,265) (2,265) Amortization of premiums and accretion of discounts on investments 25 2,920 2,945 Increase in loans held-for-sale (378,955) (378,955) Amortization of deferred loan fees and costs (2,399) (2,399) Net increase in trading securities (96,424) (96,424) Net decrease (increase) in interest receivable 136 8 (186) (36,466) 575 (35,933) Net (increase) decrease in other assets (1,651) (47) (974) 76,612 (3,935) 70,005 Net increase (decrease) in interest payable 2,376 10 (314) 8,066 10,138 Net increase (decrease) in current and deferred taxes 367 4,181 (14,256) (838) (10,546) Net increase in postretirement benefit obligation 9,254 9,254 Net increase (decrease) in other liabilities 419 (8) 605 4,028 6,146 11,190 --------- --------- --------- ----------- --------- ----------- Total adjustments (235,601) (9,342) (8,367) (218,546) 267,822 (204,034) --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by operating activities (3,253) (144) 2,096 28,723 892 28,314 --------- --------- --------- ----------- --------- ----------- Cash flows from investing activities: Net (increase) decrease in money market investment (3,700) 7,769 (95,429) (335,853) 400,487 (26,726) Purchases of investment securities held-to-maturity (11,713,516) (11,713,516) Maturities of investment securities held-to-maturity 11,893,268 11,893,268 Purchases of investment securities available-for-sale (7,362) (5,006) (3,277) (5,357,074) (5,372,719) Maturities of investment securities available-for-sale 5,000 2,810,884 2,815,884 Proceeds from sales of investment securities available-for-sale 7,700 6,971 908,738 923,409 Net disbursements on loans (77,700) (134,200) (1,596,811) 223,642 (1,585,069) Proceeds from sale of loans 740,462 740,462 Acquisition of loan portfolios (62,247) (62,247) Capital contribution to Subsidiary (119,941) (91,071) (33,198) 244,210 Assets acquired, net of cash (29,501) (89,941) 102,274 (17,168) Acquisition of premises and equipment (103,577) (103,577) Proceeds from sale of premises and equipment 16,630 16,630 Dividends received from subsidiary 70,925 (70,925) --------- --------- --------- ----------- --------- ----------- Net cash (used in) provided by investing activities (125,078) (117,809) (349,074) (2,696,822) 797,414 (2,491,369) --------- --------- --------- ----------- --------- ----------- Cash flows from financing activities: Net increase in deposits 1,316,203 (126,432) 1,189,771 Net deposits acquired 36,297 36,297 Net (decrease) increase in federal funds purchases and securities sold under agreements to repurchase (337) (7,000) 341,700 1,096,236 (77,428) 1,353,171 Net increase (decrease) in other short-term borrowings 222,613 5,000 (5,373) 604,754 (531,713) 295,281 Proceeds from issuance of notes payable 115,000 17,893 44,093 176,986 Payments of notes payable (144,211) (78,627) (151,884) 55,415 (319,307) Dividends paid (72,021) (67,925) 67,925 (72,021) Proceeds from issuance of common stock 7,433 7,433 Capital contribution from parent 119,941 89,941 34,327 (244,209) --------- --------- --------- ----------- --------- ----------- Net cash provided by (used in) financing activities 128,477 117,941 347,641 2,885,901 (812,349) 2,667,611 --------- --------- --------- ----------- --------- ----------- Net increase in cash and due from banks 146 (12) 663 217,802 (14,043) 204,556 Cash and due from banks at beginning of year 378 35 1,842 467,559 (6,663) 463,151 --------- --------- --------- ----------- --------- ----------- Cash and due from banks at end of year $ 524 $ 23 $ 2,505 $ 685,361 $ (20,706) $ 667,707 ========= ========= ========= =========== ========= ===========
F-68 EX-21.1 17 g67461ex21-1.txt SCHEDULE OF SUBSIDIARIES 1 EXHIBIT 21.1 POPULAR, INC. ------------ AS OF DECEMBER 31, 2000 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 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. Crest, S.A. - a subsidiary of Popular International Bank, Inc., incorporated under the laws of Costa Rica in 1984. Popular North America, Inc. - A wholly-owned subsidiary of Popular International Bank, Inc., incorporated under the laws of Delaware in 1991. Equity One, Inc. - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1980. Banco Popular North America - A wholly-owned subsidiary of Popular North America, 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. BanPonce Trust I - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1997. Popular Cash Express, Inc. - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1997. Banco Popular, National Association - a wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Florida in 1999. 2 Popular Insurance, Inc. - a subsidiary of Banco Popular, N.A., incorporated under the laws of Puerto Rico 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 subsidiary incorporated under the laws of Puerto Rico in 1999. EX-23.1 18 g67461ex23-1.txt CONSENT OF INDEPENDENT AUDITORS 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 19, 2001 relating to the financial statements, which appears on page F-29 of the 2000 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, 2000. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------------ PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 16, 2001 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. 333-80169) of Popular, Inc. of our report dated February 19, 2001 relating to the financial statements, which appears on page F-29 of the 2000 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, 2000. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------------- PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 16, 2001 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. 333-80167) of Popular, Inc. of our report dated February 19, 2001 relating to the financial statements, which appears on page F-29 of the 2000 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, 2000. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------------- PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 16, 2001 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 19, 2001 relating to the financial statements, which appears on page F-29 of the 2000 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, 2000. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------------- PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 16, 2001 EX-99.1 19 g67461ex99-1.txt NOTICE & PROXY OF POPULAR, INC. 1 EXHIBIT 99.1 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 -------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MONDAY, APRIL 23, 2001 -------------------- To the Stockholders of Popular, Inc.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Popular, Inc. (the "Meeting") for the year 2001 will be held at 10:30 a.m. on Monday, April 23, 2001, 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; (2) To approve the Corporation's 2001 Stock Option Plan; and (3) 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 5, 2001, 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, 2001. By Order of the Board of Directors, SAMUEL T. CESPEDES Secretary 2 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 ---------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MONDAY, APRIL 23, 2001 ---------------- 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 Monday, April 23, 2001, 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, 2000, 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, 2001. 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 5, 2001 (the "Record Date"), will be entitled to vote at the Meeting and any adjournments thereof. On the Record Date there were 136,111,025 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 3 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. The affirmative vote of the majority of the votes present in person or by proxy by stockholders entitled to vote at the Annual Meeting is required to approve the 2001 Stock Option Plan. Therefore, abstentions shall have the effect of a vote against the proposal. Broker-non-votes will have no effect on the proposal. 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 the 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 (the "Profit Sharing Plan") 5,320,208 --------- 10,993,068(3) 8.0765 Common State Farm Mutual Automobile Insurance Company 8,764,924(4) 6.4395
- --------------- (1) As of February 28, 2001. (2) Based on 136,111,025 shares of common stock outstanding. (3) The Bank, as Trustee, of both Plans has sole voting and investment power over the Common Stock held by the Plan. The Bank, as Plan Administrator, administers the Plans through the Administrative Committee. (4) On February 14, 2001 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, 2000. 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 8,764,924 shares of the Corporation. 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 4 SHARES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF THE CORPORATION AND ITS SUBSIDIARIES Following is the information, as of February 28, 2001, 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 the 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) - ---- -------- ----------------------- ---------- Juan J. Bermudez ............................ Common 466,373(3) .3426 Francisco J. Carreras ....................... Common 16,236 .0119 Jose B. Carrion Jr. ......................... Common 1,014,276(4) .7452 Richard L. Carrion .......................... Common 1,116,023(5) .8199 David Chafey Jr. ............................ Common 91,926 .0675 Antonio Luis Ferre. ......................... Common 2,916,429(6) 2.1427 Hector R. Gonzalez .......................... Common 635,451(7) .4669 Jorge A. Junquera ........................... Common 70,370(8) .0517 Manuel Morales Jr. .......................... Common 630,056(9) .4629 Alberto M. Paracchini ....................... Common 124,224(10) .0913 Francisco M. Rexach Jr. ..................... Common 202,588(11) .1488 Felix J. Serralles Jr. ...................... Common 429,660(12) .3157 Julio E. Vizcarrondo Jr. .................... Common 1,402,458(13) 1.0304 Maria Isabel P. de Burckhart ................ Common 65,977(14) .0485 Larry B. Kesler ............................. Common 45,879 .0337 Humberto Martin ............................. Common 75,931 .0558 Carlos J. Vazquez ........................... Common 105,777(15) .0777 Guillermo L. Martinez ....................... Common 2,205,475(16) 1.6204 Kenneth McGrath ............................. Common 6,541 .0048 Cameron E. Williams ......................... Common 483 .0004 All Directors and Executive Officers of the Corporation and its subsidiaries as a group ................................. Common 11,622,133 8.5387
PREFERRED STOCK
Title Amount and Nature Percent of Name of Class of Beneficial Ownership Class (1) - ---- -------- ----------------------- --------- Alberto M. Paracchini ....................... Preferred 7,000 .1750 Carlos J. Vasquez ........................... Preferred 4,568(17) .1142 All Directors and Executive Officers of the Corporation as a group .............. Preferred 11,568 .2892
(1) Based on 136,111,025 shares of common stock outstanding. (2) Based on 4,000,000 shares of preferred stock outstanding. (3) Excludes 12,443 shares owned by his wife, as to which Mr. Bermudez disclaims beneficial ownership. (4) Mr. Carrion Jr. owns 708,384 shares, has voting power over 487 shares owned by his daughter and has voting and investment power over 292,606 shares owned by Collosa Corporation which he owns. Excludes 15,808 shares owned by his wife to which he disclaims beneficial ownership. Junior Investment Corporation owns 4,413,399 shares of the Corporation. Mr. Carrion, Jr. owns .29% of the shares of said corporation. 4 5 (5) Mr. Carrion owns 301,844 shares and also has indirect investment power over 24,622 shares owned by his children. Junior Investment Corporation owns 4,413,399 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 over 2,916,429 shares of the Corporation. Mr. Ferre owns 3,367 shares and has indirect investment and voting power over 3,200 shares owned by South Management, Inc. and 400 shares owned by his wife. Mr. Ferre owns 51% of Ferre Investment Fund, Inc., which owns 1,464,750 shares of the Corporation. Ferre Investment Fund, Inc. in turn owns 90% of El Dia, Inc., which owns 1,444,712 shares of the Corporation. (7) Mr. Gonzalez owns 606,099 shares and has voting and investment power over 29,352 shares of the Corporation owned by Ventek Group, Inc. of which he has control. (8) Mr. Junquera owns 67,395 shares and has indirect investment power over 218 shares owned by his wife and over 2,757 shares owned by his son and daughter. (9) Mr. Morales owns 215,056 shares and has voting power over 415,000 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 87,788 shares and has indirect voting power over 95,800 shares owned by his mother, as her attorney-in-fact, and over 19,000 shares held by Capital Assets, Inc. as President and shareholder. (12) 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 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. (13) Mr. Vizcarrondo owns 202,914 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 4,413,399 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. There are 120,000 shares belonging to the estate of Mr. Julio Vizcarrondo, Sr., over which Mr. Vizcarrondo, Jr. has investment power, but disclaims beneficial ownership, except for 80,000 shares which Mr. Vizcarrondo, Jr. will inherit once the estate is divided and distributed. (14) Mrs. Burckhart owns 62,224 shares and has indirect voting power over 3,753 held by her husband as custodian for her daughters. (15) Mr. Vazquez owns 12,047 shares and has investment authority over 93,730 shares held by various family members. (16) Mr. Martinez owns 1,136,250 shares and has investment and voting power over 1,069,225 shares owned by family members and various corporations. (17) 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 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 2000, all filing requirements applicable to its officers and directors were complied with except for one report, covering one transaction, filed late by Mr. Juan J. Bermudez, director of the Corporation. BOARD OF DIRECTORS AND COMMITTEES; PROPOSAL 1: 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. 5 6 At the Meeting, four (4) directors assigned to "Class 2" are to be elected to serve until the 2004 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The remaining nine directors of the Corporation will serve as directors, as follows: until the 2002 Annual Meeting of Stockholders of the Corporation, in the case of those five directors assigned to "Class 3", and until the 2003 Annual Meeting of Stockholders, in the case of those four directors assigned to "Class 1", or in each case until their successors are elected and qualified. 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 2 DIRECTORS (TERMS EXPIRING IN 2004) JOSE B. CARRION JR: (64 years), Nominee. President of Collosa Corporation. Member of the Board of Directors of Banco Popular de Puerto Rico since April 2000. President and Chief Executive Officer ("CEO") of Barros & Carrion from 1992 to 1999. HECTOR R. GONZALEZ: (67 years), Director of the Corporation since 1984. President and Chief Executive Officer of TPC Communications of PR, Inc., TPC Cable Media, Inc., TelePonce Cable TV, Inc. and Telecell Systems, Inc. owner and operator of cable television systems. General Partner of Ventek Group, Inc., and investor in broadband and telecommunications related businesses. Director of the Bank, Popular Finance, Inc., Popular Mortgage, Inc., Popular Leasing & Rental, Inc. and Popular Securities, Inc. MANUEL MORALES JR.: (55 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 National Advisory Council-United States Small Business Administration. Director of Casiano Communications, Inc., Rafael J. Nido, Inc. and Cortes Industrial Organization. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Audit Committee of the Corporation and the Bank. Director of the Bank. JULIO E. VIZCARRONDO JR.: (66 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, Institutional Builders, S.E., Omega-Vistamar, S.E. and MH Office Building Corp., 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. CLASS 1 DIRECTORS (TERMS EXPIRING IN 2003) JUAN J. BERMUDEZ: (63 years), Director of the Corporation since 1990. Electrical Engineer. Partner of Bermudez and Longo, S.E., Desemcor, 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., Desemcor Management, Inc., 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: (48 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, Popular Cash Express, Inc. and Banco Popular, National Association. Chairman of the 6 7 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., Popular Insurance, Inc. 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 Trustees of the Puerto Rico Committee for Economic Development. Member of the Board of Directors and Benefits & Human Resources Committee of Verizon Communications (a registered public company). Member of the Board of Director and Compensation and Benefits Committee of American Home Products Corporation (a registered public company). 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 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). JORGE A. JUNQUERA: (52 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 and Banco Popular, National Association. Director of Equity One, Inc., ATH Dominicana, S.A., New America Alliance (a registered public company), Virtual, Inc. (an internet company) and Popular Cash Express, Inc. Chairman of the Board of Popular Securities, Inc. Director of Popular Mortgage, Inc., Popular Finance, Inc. and Popular Leasing & Rental, Inc. until December 1998 and of Banco Popular de Puerto Rico until April 2000. President of Puerto Rico Tourism Company until February 1997 and Director until April, 2000. President of Hotel Development Co. until April, 2000. Director of YMCA until May, 2000 and of PRISMA: El Exploratorio, Inc. until April, 2000. FRANCISCO M. REXACH JR.: (63 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, Popular Cash Express, Inc. and Equity One, Inc. Chairman of the Human Resources and Compensation Committee of the Bank. CLASS 3 DIRECTORS (TERMS EXPIRING IN 2002) FRANCISCO J. CARRERAS: (68 years), Director of the Corporation since 1990. Former professor of the University of Puerto Rico. Former President of the Catholic University of PR. 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.: (47 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., Banco Popular, National Association, Popular Insurance, 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. President of the Puerto Rico Bankers Association. Director of Visa International for the Caribbean and Latin America. ANTONIO LUIS FERRE: (67 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. Chairman of the Board 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., an internet company. Director of Metropolitan Life Insurance Company (a registered company under the Investment Company Act of 1940) until December 1995. 7 8 ALBERTO M. PARACCHINI: (68 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., 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. Chairman of the Risk Management Committee of the Corporation. Director of the Bank. FELIX J. SERRALLES JR.: (66 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. The Board of Directors of the Corporation met on a monthly basis during 2000. All directors except Mr. Antonio Luis Ferre 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 and Risk Management 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. Nominations are made by the Board. AUDIT COMMITTEE The Audit Committee consists of the following members of the Corporation's Board of Directors: Juan J. Bermudez, Hector R. Gonzalez, Manuel Morales Jr., Alberto M. Paracchini, Francisco M. Rexach Jr. and Felix J. Serralles Jr. The Board of Directors, in its business judgment, has determined that each of the members of the Audit Committee is "independent" as required by applicable listing rules of the National Association of Securities Dealers. The Audit Committee held seven meetings during the fiscal year ended December 3l, 2000. AUDIT COMMITTEE REPORT The role of the Audit Committee is to assist the Board in its oversight of the Corporation's financial reporting process. The Committee operates pursuant to a Charter that was last amended and restated by the Board on March 7, 2001, a copy of which is attached to this Proxy Statement as Exhibit A. In the performance of its oversight function, the Committee has considered and discussed the audited financial statements of the Corporation for the fiscal year ended December 31, 2000 with management and the independent accountants. The Audit Committee has also discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as currently modified or supplemented. Finally, the Committee has received the written disclosures and the letter from PricewaterhouseCoopers LLP required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), as currently modified or supplemented, has considered whether the provision of non-audit-services by the independent accountants to the Corporation is compatible with maintaining the accountants' independence, and has discussed with the independent accountants the accountants' independence from the Corporation and its management. These considerations and discussions, however, are not designed to provide any assurance that the audit of the Corporation's financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that the Company's auditors are in fact "independent." 8 9 As set forth in the Charter, management of the Corporation is responsible for the preparation, presentation and integrity of the Corporation's financial statements, the Corporation's accounting and financial reporting principles, and internal controls designed to achieve compliance with accounting standards and applicable laws and regulations. PricewaterhouseCoopers LLP, the Corporation's independent public accountants, are responsible for auditing the Corporation's financial statements and expressing an opinion as to their conformity with generally accepted accounting principles. Also as required by the Charter, the members of the Audit Committee are not engaged professionally in the practice of auditing or accounting, are not experts in the fields of accounting or auditing, including matters relating to the determination of the independence of outside auditors, and are not full-time employees of the Corporation. The Corporation's management is responsible for its accounting, financial management and internal controls. Moreover, the Committee relies on and makes no independent verification of the facts presented to it or representations made by management or the independent accountants. Accordingly, the Audit Committee's oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles and policies, or internal controls and procedures, designed to achieve compliance with accounting standards and applicable laws and regulations. Based on the Audit Committee's consideration of the audited financial statements and the discussions referred to above with management and the independent accountants and subject to the limitations on the role and responsibilities of the Audit Committee set forth in the Charter and those discussed above, the Committee recommended to the Board that the Corporation's audited financial statements be included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000 for filing with the SEC. 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, 2000. The Committee members during 2000 were: Juan A. Albors, Francisco J. Carreras, Maria Luisa Ferre, 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 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. 9 10 RICHARD L. CARRION: (48 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: (52 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.: (47 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: (52 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 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: (41 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., Banco Popular, National Association 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: (63 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. Supervisor of the Consumer 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., Popular Mortgage, Inc. and Popular Insurance, Inc. Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. Director of Popular Finance, Inc. and Banco Popular, National Association. TERE LOUBRIEL: (48 years), Executive Vice President of the Corporation since February 2001. General Auditor of the Bank from December 1989 to 1995. Quality Office Manager of the Corporation from November 1995 to 1997. Year 2000 Office Manager of the Corporation from December 1997 to 2000. Director of Human Resources since April 2000. HUMBERTO MARTIN: (55 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: (52 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 Munoz Marin, Fundacion del Colegio de CPA de Puerto Rico and Jane Stern Community Library Foundation. BRUNILDA SANTOS DE ALVAREZ: (42 years), Executive Vice President of the Corporation since February 2001. General Counsel of the Corporation since 1997. Assistant Secretary of the Board of Directors of the Corporation and the Bank since May 1994. Secretary of the Board of Directors of Popular International Bank, Inc., Banco Popular North America, GM Group, Inc., Popular Cash Express, Inc., Banco Popular, National Association and Popular Insurance, Inc. Assistant Secretary of the Board of Directors of Equity One, Inc., Popular Leasing & Rental, Inc., Popular Finance, Inc., Popular Mortgage, Inc. and Popular North America, Inc. Secretary of the Board of Directors of Puerto Rico Investor 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, Inc. Senior Vice President from March 1996 until January 2001. 10 11 CARLOS J. VAZQUEZ: (42 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. Inc., 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: (64 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., 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. and first cousin of Mr. Jose B. Carrion Jr., nominee. OTHER RELATIONSHIPS, TRANSACTIONS AND EVENTS During 2000 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 firms' revenues for its last full fiscal year. The Corporation also engaged, in the ordinary course of business the legal services of Pietrantoni, Mendez & Alvarez, LLP of which Mr. Ignacio Alvarez and Mr. Antonio Santos, husband and brother, respectively, of Mrs. Brunilda Santos de Alvarez, Executive Officer of the Corporation since February 2001, are partners. 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 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. PROPOSAL 2: APPROVAL OF THE 2001 STOCK OPTION PLAN INTRODUCTION Effective March 7, 2001, the Board of Directors adopted, subject to shareholder approval, the 2001 Stock Option Plan (the "2001 Option Plan"). The principal features of the 2001 Option Plan are summarized below. The summary is qualified by the complete text of the 2001 Option Plan, a copy of which is attached as Exhibit B to this Proxy Statement. PURPOSE The 2001 Option Plan is intended to provide the Corporation and its subsidiaries with an effective means to attract and retain highly qualified personnel as well as to provide additional incentive to employees and directors who provide services to the Corporation and its subsidiaries. ADMINISTRATION OF PLAN The 2001 Option Plan provides that unless the Board of Directors appoints a committee to oversee the administration of the Plan (the "Committee"), the Board of Directors shall have general authority to administer the Plan, to grant options, make determinations under, interpretations of, and to take such steps in connection with the Plan and the options granted thereunder as it may deem necessary or advisable. If the Committee is appointed by the Board of Directors to administer the Plan, the Committee will consist of at least two directors appointed by the Board, each of whom is a "Non-Employee Director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934. The Board of Directors or the Committee will have general authority to administer the plan, including the authority to determine the form of the option agreements to be used under the plan, and the terms and conditions to be included in such option agreements, subject to the 11 12 ratification of the Board of Directors if such limitation is imposed by the Board of Directors. NUMBER OF AUTHORIZED SHARES Under the 2001 Option Plan, 5,000,000 shares of Common Stock, subject to adjustment for stock splits, recapitalizations and similar events, will be available for use. The shares are to be made available from authorized but unissued shares of Common Stock or treasury stock. Based upon the closing sale price of the Corporation's Common Stock on February 28, 2001, of $27.25 per share, the aggregate market value of the 5,000,000 shares to be reserved under the 2001 Option Plan is $136,250,000. Previously owned shares that are tendered by an employee or non-employee director to pay the exercise price of an option and shares used to pay withholding taxes will not be counted towards the maximum number of shares available for issuance under the 2001 Option Plan. ELIGIBILITY Any employee or director of the Corporation or of any of its subsidiaries, is eligible to participate in the 2001 Option Plan. The selection of individuals eligible to participate is within the discretion of the Board of Directors, or the Committee. As of December 31, 2000, the approximate number of directors and employees of the Corporation and its subsidiaries that are eligible to participate in the 2001 Option Plan is 80. Since the selection of participants and awards granted will be within the discretion of the Board of Directors or the Committee, it is not possible to state the number of directors and employees that will participate in the 2001 Option Plan or the amount and value of awards to be granted to such persons under the 2001 Option Plan. AWARDS UNDER PLAN The 2001 Option Plan provides for the grant of stock options that are intended to qualify as "qualified stock options" ("QSOs") under Section 1046 of the Puerto Rico Internal Revenue Code of 1994, as amended (the "Puerto Rico Code"), as "incentive stock options" ("ISOs") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or "non-statutory stock options" ("NSOs"). At the time of original grant of NSO, the Board of Directors or the Committee, may also authorize the grant of reload options, which shall be NSO's for such number of shares of Common Stock as were used by the Participant to pay the purchase price upon the exercise of previously granted options and the withholding taxes applicable to a NSO exercise, but are still subject to other terms set forth in the 2001 Option Plan. The exercise price with respect to options to be granted under the 2001 Option Plan will be determined by the Board of Directors or the Committee at the time of grant. Under the 2001 Option Plan, the option exercise price may not be less than 100% of the fair market value of the Common Stock on the date of grant. Fair market value is defined as the closing price of the Common Stock on the date of grant as reported on the NASDAQ National market system or, if no price is reported on such day, then on the next preceding day on which such price was reported. Payments for shares upon exercise of stock options may be made either by check, with the consent of the Board of Directors or the Committee, by exchanging shares of Common Stock which have been held for at least six months at their fair market value, if approved by the Board of Directors or the Committee, by authorizing the Corporation, Popular Securities, Inc. or any other broker-dealer approved by the Corporation to sell, on behalf of the optionee, the appropriate number of shares otherwise issuable to the optionee, upon exercise of an option, with the consent of the Board of Directors or the Committee, and at the election of the optionee, by withholding from those shares that would otherwise be obtained upon exercise of the option, or number of shares having a fair market value equal to the option price or a combination of these methods. The 2001 Option Plan does not permit the Board of Directors or the Committee to reprice any previously granted options. No person may receive an ISO if, at the time of grant, such person (a "10% Holder") owns directly or indirectly more than 10% of the total combined voting power of all classes of stock of the Corporation unless the option price is at least 110% of the fair market value of the Common Stock and such option is not exercisable more than five years after its date of grant. There is also a $100,000 limit on the value of stock determined at the time of grant of a QSO or an ISO that may become exercisable for the first time in any calendar year. 12 13 The maximum option term is ten years from the date of grant, except for 10% Holders in the case of ISOs, in which case the maximum term is five years. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year. No option may be granted more than 10 years after the effective date of the 2001 Option Plan, which shall be March 7, 2001. TERMINATION OF OPTIONS Unless earlier terminated in accordance with its terms, a vested option shall expire six months after any of the following: (i) voluntary termination of employment by the employee, with or without the consent of the Corporation or any Subsidiary for reasons other than disability or retirement under a retirement plan of the Corporation or any subsidiary, or (ii) termination of employment by the Corporation or any subsidiary, with or without cause, or (iii) termination of employment because the employing subsidiary ceased to be a subsidiary of the Corporation and the employee does not, prior thereto or contemporaneously therewith, become an employee of the Corporation or of another subsidiary. Notwithstanding the foregoing provisions, the Committee may, in its sole discretion, at the time of grant establish different terms and conditions pertaining to the effect of an optionee's termination of employment on the exercisability of options. Unless earlier terminated in accordance with its terms, all options, whether vested or not, awarded to an employee who terminates employment or is discharged due with cause by appropriate corporate action or under authority of law shall terminate immediately upon such termination of employment or discharge. Unless earlier expired in accordance with its terms, all options held by an employee shall become vested immediately upon the employee's termination of employment due to retirement under the terms of the retirement plan of the Corporation or the subsidiary employing the employee or due to the employee's disability. The employee so terminating employment due to retirement or disability shall have until the option expiration date to exercise the options awarded to him. If the holder of an option shall die during the term of an option, the option shall become immediately vested and the holder or the legal representatives shall be entitled to exercise the option in whole or in part, to the extent then unexercised, at any time within one year following the death of the optionee, but in no event after the option expiration date. If a nonemployee director shall terminate his service as a director for reasons other than removal for cause by appropriate Corporate action or under authority of law, all unexpired options held by the nonemployee director which have not vested shall become vested immediately. The nonemployee director so terminating his service as a director shall have until the option expiration date to exercise the options awarded to him. Unless earlier terminated in accordance with its terms, a vested option awarded to a nonemployee director who terminates his service as a director due to removal for cause by appropriate corporate action or under authority of law shall terminate immediately upon terminate of service as a director. CHANGE IN CONTROL Under the 2001 Option Plan, upon the occurrence of certain "change of control" transactions involving the Corporation, all options then outstanding under the 2001 Option Plan become immediately exercisable. AMENDMENTS AND TERMINATION The Corporation's Board of Directors may suspend, amend, modify or terminate the 2001 Option Plan, without shareholder approval except to the extent required by the Puerto Rico Code or the Code to permit the granting of QSOs or ISOs under the 2001 Option Plan or by the rules of any securities exchanges or automated quotation system on which the shares of Common Stock of the Corporation trade. If the Board of Directors voluntarily submits a proposed amendment, supplement, modification or termination for stockholder approval, such submission will not require any further amendments, supplements or terminations (whether or not relating to the same provision or subject matter) to be similarly submitted for stockholder approval. 13 14 Unless previously terminated, the 2001 Option Plan will terminate on March 7, 2011, the tenth anniversary of the effective date of the 2001 Option Plan. Options may not be granted under the 2001 Option Plan after such date. Awards granted prior to termination of the 2001 Option Plan shall continue in accordance with their terms following such termination. No amendment, suspension, modification or termination of the 2001 Option Plan shall adversely affect the rights of an employee in awards previously granted without such employee's consent. TAX WITHHOLDING AND TAX OFFSET PAYMENTS The Board of Directors or the Committee may require payment, or withhold payments made by the 2001 Option Plan, in order to satisfy applicable withholding tax requirements. The Board of Directors or the Committee may authorize tax offset payments to assist employees or directors in paying income taxes incurred as a result of their participation in the 2001 Option Plan. The amount of the tax offset payments shall be determined by multiplying a percentage (established by the Committee) by all or a portion of the taxable income recognized by an employee upon: (i) the exercise of a NSO or (ii) the disposition of shares received upon exercise of a QSO or an ISO. INCOME TAX CONSEQUENCES PUERTO RICO CODE. A recipient of a QSO does not recognize income at the time of the grant of an option. In addition, no income is recognized at the time a QSO is exercised. On a subsequent sale or exchange of the shares acquired pursuant to the exercise of a QSO, the optionee may have taxable long-term or short-term capital gain or loss, depending on whether the shares were held for more than six months, measured by the difference between the amount realized on the disposition of such shares and his or her tax basis in such shares. Tax basis will, in general, be the amount paid for the shares. The Corporation or the subsidiary employing the optionee will not be entitled to a business expense deduction in respect of the grant of the option, the exercise thereof or the disposition of the shares. With respect to a NSO, a recipient of a NSO does not recognize income at the time of grant of the NSO. The difference between the fair market value of the shares of stock on the date of exercise and the stock option exercise price generally will be treated as compensation income upon exercise, and the Corporation or the subsidiary employing the optionee will be entitled to a deduction in the amount of income so recognized by the optionee. Upon a subsequent disposition of the shares, the difference between the amount received by the optionee and the fair market value of the shares of stock on the option exercise date will be treated as long or short-term capital gain or loss, depending on whether the shares were held for more than six months. FEDERAL INCOME TAX CONSEQUENCES. The Corporation is organized under the laws of the Commonwealth of Puerto Rico and, at the present time, it is not engaged in any trade or business in the United States. Accordingly, it is subject generally to a flat 30% federal income tax on its fixed or determinable, annual or periodic income, if any, from sources within the United States. The Corporation would only be entitled to claim deductions in computing its U.S. income tax liability to the extent such deductions were directly related to any income effectively connected with the conduct of a trade or business in the United States. For purposes of the discussion below, some of the QSOs granted under the 2001 Option Plan may also be treated as ISOs for purposes of Sections 421 and 422 of the Code. RESIDENTS OF PUERTO RICO. Recipients of stock options who are residents of Puerto Rico during the entire taxable year and perform services for the Corporation or its subsidiaries in Puerto Rico, will not have any gross income for federal income tax purposes in respect of the grant or the exercise of stock options. NON-RESIDENTS OF PUERTO RICO AND RESIDENTS OF PUERTO RICO WHO PERFORM SERVICES OUTSIDE OF PUERTO RICO. In general, an optionee, who is a non-resident of Puerto Rico or a resident of Puerto Rico who performs services outside Puerto Rico, will not recognize taxable income upon grant or exercise of an ISO and the Corporation and its subsidiaries will not be entitled to any business expense deduction with respect to the grant or exercise of an ISO. However, upon the exercise of an ISO, the excess of the fair market value on the date of exercise of the shares received over the exercise price of the shares will be treated as an adjustment to alternative minimum taxable income. In order for the exercise of an ISO to qualify for the foregoing tax treatment, the optionee generally must be an employee or director of the Corporation or its subsidiaries (within the meaning of Section 422 of the Code) from the date the ISO is granted through the date three months before the date of exercise. 14 15 If the optionee has held the shares acquired upon exercise of an ISO for at least two years after the date of grant and for at least one year after the date of exercise, upon disposition of the shares by the optionee, the difference, if any, between the sales price of the shares and the exercise price of the option will be treated as long-term capital gain or loss. If the optionee does not satisfy these holding period requirements, the optionee will recognize ordinary income at the time of the disposition of the shares, generally in an amount equal to excess of the fair market value of the shares at the time the option was exercised over the exercise price of the option. The balance of the gain realized, if any, will be long-term or short-term capital gain, depending upon whether or not the shares were sold more than one year after the option was exercised. If the optionee sells the shares prior to the satisfaction of the holding period requirements but at a price below the fair market value of the shares at the time the option was exercised, the amount of ordinary income will be limited to the amount realized on the sale over the exercise price of the option. Subject to any limitations imposed by Section 162(m) of the Code for federal income tax purposes, the optionee including such compensation in income and certain reporting requirements, the Corporation and its subsidiaries will be allowed a business expense deduction to the extent the optionee recognized ordinary income. Upon any subsequent sale of the shares, the optionee will have taxable gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised). In general, an optionee, who is a non-resident of Puerto Rico or a resident of Puerto Rico who performs services outside of Puerto Rico, to whom an NSO is granted will recognize no income at the time of the grant of the option. Upon exercise of an NSO, an optionee will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price of the option (or, if the optionee is subject to restrictions imposed by Section 16(b) of the Securities Exchange Act of 1934, upon the lapse of those restrictions, unless the optionee makes a special election within 30 days after exercise to have income determined without regard to the restrictions). Subject to any limitations imposed Section 162(m) of the Code for federal income tax purpose, the director or employee including such compensation in income and certain reporting requirements, the Corporation or any of its subsidiaries will be entitled to a tax deduction in the same amount. Upon a subsequent sale of the shares, the optionee will have taxable gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised). Under the 2001 Option Plan, upon the occurrence of certain "change in control" transactions involving the Corporation, all options then outstanding under the 2001 Option Plan become immediately exercisable. Under certain circumstances, compensation payments attributable to such options may be treated as "parachute payments" under the Code, in which case a portion of such payments may be nondeductible to the Corporation or its subsidiaries for federal income tax purposes and the recipient, if a non-resident of Puerto Rico or a resident of Puerto Rico who performs services outside of Puerto Rico, may be subject to a 20% excise tax under the Code. The Board of Directors recommends that stockholders vote FOR the approval of the 2001 Stock Option Plan. EXECUTIVE COMPENSATION PROGRAM REPORT OF THE BANKS 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. 15 16 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. Beginning on 2001, the annual incentive program has been revised to consider only the net income target. Incentive bonus could represent 30% of base salary, if the net income target is met, and if the net income target is exceeded up to 105% it could reach 55%. An additional 4% bonus will be awarded for each percentage of the net income target achieved over 105%. For the year 2000 the financial results achieved represented 95% of the pre-established target. Based on this result, the Human Resources Committee recommended a discretionary incentive of 15% of Mr. Carrion's base salary. 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 eight 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. In 2001, two other officers were appointed Executive Vice President and Executive Officers of the Corporation. 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 2000, a bonus of 15% of base salary was awarded to each Executive Officer. As recommended by the Human Resources Committee, the bonus was based on the fact that the Corporation's net income was 95% of target net income. HUMAN RESOURCES AND COMPENSATION COMMITTEE Juan A. Albors Hector R. Gonzalez Francisco J. Carreras Alberto M. Paracchini Maria Luisa Ferre Francisco M. Rexach Jr. 16 17 EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Corporation or its subsidiaries to the highest paid Executive Officers of the Corporation and the most highly compensated principal officers of the Corporation's subsidiaries.
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 ...................... 2000 $540,000 $ 60,912 $42,069 -0- $ 642,981 Chairman, 1999 540,000 72,164 53,327 -0- 665,491 President and CEO 1998 526,667 262,552 46,134 $470,142 1,305,495 David H. Chafey Jr ...................... 2000 466,999 121,631 37,021 -0- 625,651 Senior Executive Vice President 1999 412,920 209,480 41,638 -0- 664,038 of the Corporation 1998 393,000 194,560 35,356 281,995 904,911 Jorge A. Junquera ....................... 2000 430,790 111,293 34,548 -0- 576,631 Senior Executive Vice President 1999 401,760 203,866 40,752 -0- 646,378 of the Corporation 1998 384,000 189,479 34,722 281,995 890,196 Carlos J. Vazquez ....................... 2000 342,514 88,833 27,713 N/A 459,060 Executive Vice President 1999 309,742 157,075 31,418 N/A 498,235 of the Corporation 1998 293,645 140,254 21,017 N/A 454,916 Larry B. Kesler ......................... 2000 304,575 79,239 24,643 -0- 408,457 Executive Vice President 1999 271,317 137,646 27,521 -0- 436,484 of the Corporation 1998 258,952 127,899 23,415 196,911 607,177 Maria Isabel P. de Burckhart ............ 2000 283,035 73,469 22,901 -0- 379,405 Executive Vice President 1999 255,954 129,860 25,963 -0- 411,777 of the Corporation 1998 244,288 120,664 22,089 190,731 577,772 Humberto Martin ......................... 2000 282,433 73,283 22,852 -0- 378,568 Executive Vice President 1999 255,409 129,554 25,907 -0- 410,870 of the Corporation 1998 244,633 120,448 22,120 188,811 576,012 Guillermo L. Martinez(e) ................ 2000 425,770 242,714 33,872 N/A 702,356 President of the Board of Directors and Chief Executive Officer of GM Group, Inc. (a wholly-owned subsidiary of the Corporation) Cameron E. Williams(e) .................. 2000 272,983 165,000 22,000 N/A 459,983 President of Equity One, Inc. 1999 250,000 150,000 62,000 N/A 462,000 (a wholly-owned subsidiary of Popular North America, Inc.) Kenneth McGrath ......................... 2000 188,333 140,200 81,815 N/A 410,348 President of Popular Securities, Inc. 1999 180,000 224,200 75,000 N/A 479,200 (a wholly-owned subsidiary 1998 175,000 165,200 59,000 N/A 399,200 of the Corporation)
- ------------- (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 the subsidiaries' presidents the amount includes Christmas Bonus, (if any) and performance bonus. (c) For the Bank's Executive Officers 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 17 18 to Stock Plan and the Bank's matching contribution to Stock Plan, which are described on pages 19 through 21. 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. For Mr. Martinez, amount includes matching contribution to an 1165(e) plan and deferred compensation under Supplementary Executive Retirement Plan. Amounts reported do 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 1998-2000 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, the S&P Financials Index and the S&P Banks 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 2000, 1999 and 1998, except for Mr. Cameron E. Williams who was appointed President of Equity One, Inc. in 1999 and for Mr. Guillermo L. Martinez, President of the Board of Directors and Chief Executive Officer of GM Group, Inc. a wholly-owned subsidiary acquired by the Corporation during 1999. 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 pre-established three-year average return on equity ("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 to be based on the performance of the S&P 500 Index and the S&P Financial Index. Beginning in 2000 the S&P Banks Index was also included in the calculation of the Long-Term Incentive Plan. Therefore, the incentive is determined based on the market performance of the Corporation's common stock as compared to the combined performance of the S&P 500 Index, the S&P Financial Index and the S&P Banks Index during the three-year period of the plan. The range to determine the percentage of base salaries was also adjusted 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, the S&P Financials Index and the S&P Banks Index. If the Corporation's target is met or exceeded, the share payments corresponding to the Corporation's and Peer Group's goals may amount up to 110% of the base salary of the participant at the end of the Plan year. The three-year period for the 1999-2001 and 2000-2002 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. 18 19 The Plan's 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. For the 1998-2000 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, the S&P Financials Index and S&P Bank Index. In addition, the three-year average ROE target was not achieved, nor was the Peer Group three-year average median ROE exceeded. Also, the Corporation'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. If the proposed 2001 Stock Option Plan is approved, the Corporation intends to terminate the 1998-2000 Long-Term Incentive and make no further awards under this plan as well as to terminate any outstanding awards. 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. Beginning in 2001 participation starts after three months of service. Under this plan, the Board of Directors of the Bank 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 2000 was $18,538,982. Of the total awarded 40% is contributed to the Profit Sharing Plan, 10% to the Savings & 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 Savings & Stock Plan up to 15%; as a result of this election 39% was contributed to the Profit Sharing Plan and 11% to the Savings & Stock Plan. Beginning on 2001 the vesting requirements for this plan were changed providing participants with a 100% of vesting rights after five years, instead of the seven years required before. BENEFIT RESTORATION PLAN OF THE BANK The Internal Revenue Service (IRS) set a limit of $170,000 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 and Profit Sharing. The Board of Directors has approved an unfunded nonqualified "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 qualified Retirement and Profit Sharing Plans because of said compensation limit. The Corporation intends to establish during 2001 one or two qualified and funded retirement plans to provide the benefits currently provided by the Benefit Restoration Plan to its employees who are residents of Puerto Rico. RETIREMENT PLAN OF THE BANK Banco Popular de Puerto Rico has a non-contributory, 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 minimum funding standards under the Employee Retirement Income Security Act ("ERISA"). The Retirement Plan formula is based on years of service and total cash compensation received by the employee. Benefits are paid on the basis of a straight life annuity plus supplemental death benefits and are not reduced (offset) for Social Security or other payments received by the participants. Normal retirement age at the Bank is the latter of (a) the participant's 65(th) birthday or (b) the completion of five years of service. Participants can enjoy unadjusted early retirement benefits at age 55 with 10 years of service. Participants can also enjoy actuarially adjusted early retirement benefits after age 50, whenever the combination of age plus service is equal or 19 20 more than 75. Maximum retirement benefit obtainable under this plan is 40% of participant's final average compensation as defined by the plan. This plan is qualified under section 401(a) of the Internal Revenue Code and Section 1165(e) of the Puerto Rico Internal Revenue Code. 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, 2000, of a participant at age 65.
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 2000 total compensation and estimated years of service at age 65 for the highest paid key policy-making Executive Officers of the Corporation are as follows.
ESTIMATED 2000 YEARS OF TOTAL SERVICE COMPENSATION AT AGE 65 ------------ --------- Richard L. Carrion ................... $ 643,000 41.6 David H. Chafey Jr ................... 626,000 39.8 Jorge A. Junquera .................... 577,000 41.5 Carlos J. Vazquez .................... 459,000 26.4 Larry B. Kesler ...................... 408,000 16.5 Maria Isabel P. de Burckhart ......... 379,000 33.7 Humberto Martin ...................... 379,000 40.1
BANCO POPULAR DE PUERTO RICO SAVINGS & STOCK PLAN The Bank has adopted a Savings & Stock Plan covering employees of the Bank in Puerto Rico. All regular salaried employees of the Bank are eligible to participate in the Savings & Stock Plan following the completion of three months of service. 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 Savings & Stock Plan allows employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their pre-tax total compensation. Beginning in 2001 the Savings & Stock Plan also allows employees to voluntarily elect to contribute a predetermined 20 21 percentage not to exceed 10% of their after-tax total cash compensation. Both contribution levels are subject to maximum contribution limits as determined by applicable laws. In addition, employees will be (i) fully vested after five years of service, (ii) allowed to make after-tax contributions and (iii) provided with new investment alternatives. The Bank will match 50% of the pre-tax amount contributed by the participant and invested in the Corporation's common stock, up to a maximum participant contribution determined by the Board each year. For the year 2000, the maximum participant's contribution subject to employer match was 2% of participant's annual base salary. POPULAR, INC. RETIREMENT SAVINGS PLAN FOR PUERTO RICO SUBSIDIARIES The Corporation adopted this Plan effective 1/1/2001 for the benefit of all regular monthly salaried employees of the following subsidiaries of the Corporation: Popular Securities, Inc. Popular Mortgage, Inc. Popular Leasing & Rental, Inc. Popular Finance, Inc. GM Group, Inc. Popular Insurance, Inc. The aforementioned subsidiaries of the Corporation adopted this plan as of 1/1/2001. All regular monthly salaried employees are eligible to participate in the plan following the completion of one year of service and attainment of 21 years of age. The Plan allows employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their compensation. The Plan also allows employees to voluntarily elect to contribute a predetermined percentage not to exceed 10% of their after-tax compensation. Both contribution levels are subject to maximum contribution limits as determined by applicable laws. The corresponding subsidiaries match certain percentage of the pre-tax amounts contributed by a participant up to a maximum as defined by each subsidiary. Participants are allowed to receive in-service distributions based only on economic hardship safe harbor rules. 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. 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. 21 22 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, 1995 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, 1995=100)
BASE COMPANY/INDEX PERIOD 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 POPULAR, INC.** 9.6875 100.00 174.19 255.48 350.97 288.39 271.61 NASDAQ BANKS COMPOSITE 357.923 100.00 132.04 221.06 219.64 211.14 241.08 NASDAQ STOCK MARKET 345.574 100.00 123.04 150.69 212.51 394.92 237.62 - ---------------------------------------------------------------------------------------------------------
INDEPENDENT PUBLIC ACCOUNTANTS AUDIT FEES The aggregate fees billed by PricewaterhouseCoopers LLP, the Corporation's independent public accountants for the year ended December 31, 2000, for professional services rendered for the audit of the Corporation's annual financial statements for that fiscal year and for the reviews of the financial statements included in the Corporation's quarterly reports on Form 10-Q for that fiscal year were $941,652. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES There were no fees billed to the Corporation for the year ended December 31, 2000 by PricewaterhouseCoopers LLP for professional services rendered for information technology services relating to financial information systems design and implementation. ALL OTHER FEES The aggregate fees billed for services rendered to the Corporation by PricewaterhouseCoopers LLP, other than the services described above under "Audit Fees" and "Financial Information Systems Design and Implementation Fees," for the year ended December 31, 2000 were $689,743. 22 23 RETENTION OF INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR 2001 The Board intends to retain the services of PricewaterhouseCoopers LLP as the independent public accountants of the Corporation for the year 2001. PricewaterhouseCoopers LLP (former Price Waterhouse) served as independent public accountants 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 respond to 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 2002 ANNUAL MEETING OF STOCKHOLDERS Stockholders' proposals intended to be presented at the 2002 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 23, 2001 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 2002 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, 2001 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. 23 24 EXHIBIT A POPULAR, INC. AUDIT COMMITTEE CHARTER ARTICLE 1 - ORGANIZATION The Board of Directors (the "Board") of Popular, Inc. (the "Corporation") has established an Audit Committee to undertake the responsibilities and perform the tasks set forth in this Charter. ARTICLE 2 - COMPOSITION The Audit Committee shall be comprised of at least three directors, each of whom shall not be an officer or employee of the Corporation or its subsidiaries, shall not have any relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and shall otherwise satisfy the applicable membership requirements under the rules of the National Association of Securities Dealers, Inc., as such requirements are interpreted by the Board in its business judgment. The members of the Audit Committee shall be designated by the Board. The Board shall designate as president of the Audit Committee one of its members, who shall preside over the meetings of the Committee and shall inform the Board of the actions taken by the Committee. In the event of a vacancy or an absence in the Audit Committee, the Board may designate any member of the Board as substitute, provided such person complies with the requisites established herein. ARTICLE 3 - PURPOSE The purpose of the Audit Committee is to assist the Board: 1. in its oversight of the Corporation's accounting and financial reporting principles and policies, and internal audit controls and procedures; 2. in its oversight of the Corporation's financial statements and the independent audit thereof; 3. in nominating the outside auditors to be proposed for shareholder approval in any proxy statement, evaluating and, where deemed appropriate, replacing the outside auditors; and 4. in evaluating the independence of the outside auditors. In fulfilling their responsibilities hereunder, it is recognized that members of the Audit Committee are not employees of the Corporation and are not, and do not represent themselves to be, accountants or auditors by profession or experts in the fields of accounting or auditing, including matters relating to the determination of the independence of the outside auditors. 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 or to set auditor independence standards, and each member of the Audit Committee shall be entitled to rely on (i) the integrity of those persons and organizations within and outside the Corporation from which it receives information, (ii) the accuracy of the financial and other information provided to the Audit Committee by such persons or organizations absent actual knowledge to the contrary (which shall be promptly reported to the Board) and (iii) representations made by management as to any information technology, internal audit and other non-audit services provided by the auditors to the Corporation. The function of the Audit Committee is to act in an oversight capacity. The management of the Corporation is responsible for the preparation, presentation and integrity of the Corporation's financial statements. Furthermore, management is responsible for maintaining appropriate accounting and financial reporting principles and policies, and internal 24 25 controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The Internal Audit Division is responsible for examining and evaluating the adequacy and effectiveness of the systems of internal control of the Corporation and its subsidiaries to ensure (i) the reliability and integrity of information; (ii) compliance with the Corporation's policies, plans and procedures, as well as laws and regulations; (iii) the safekeeping of assets; and (iv) the economical and efficient use of resources. The outside auditors are responsible for planning and carrying out a proper audit of the Corporation's annual financial statements, reviews of the Corporation's quarterly financial statements prior to the filing of each quarterly report on Form 10-Q, and other procedures. The internal and outside auditors for the Corporation are ultimately accountable to the Board (as assisted by the Audit Committee). The Board, with the assistance of the Audit Committee, has the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the outside auditors or to nominate the outside auditors to be proposed for shareholder approval in the proxy statement. The outside auditors shall annually submit to the Corporation a formal written statement delineating all relationships between the outside auditors and the Corporation ("Statement as to Independence"), addressing each non-audit service provided to the Corporation and the matters set forth in Independence Standards Board Standard No. 1. The outside auditors shall annually submit to the Corporation a formal written statement of the fees billed for each of the following categories of services rendered by the outside auditors: (i) the audit of the Corporation's annual financial statements for the most recent fiscal year and the reviews of the financial statements included in the Corporation's Quarterly Reports on Form 10-Q for that fiscal year; (ii) information technology consulting services for the most recent fiscal year, in the aggregate and by each service (and separately identifying fees for such services relating to financial information systems design and implementation); and (iii) all other services rendered by the outside auditors for the most recent fiscal year, in the aggregate and by each service. ARTICLE 4 - DUTIES AND POWERS To carry out its purposes, the Audit Committee shall have the following duties and powers: 1. With respect to the outside auditor: (i) to provide advice to the Board in selecting, evaluating or replacing outside auditors; (ii) to review the fees charged by the outside auditors for audit and non-audit services; (iii) to ensure that the outside auditors prepare and deliver annually a Statement as to Independence (it being understood that the outside auditors are responsible for the accuracy and completeness of this Statement), to discuss with the outside auditors any relationships or services disclosed in this Statement that may affect the objectivity and independence of the Corporation's outside auditors and to recommend that the Board take appropriate action in response to this Statement to satisfy itself of the outside auditors' independence; (iv) if applicable, to consider whether the outside auditors' provision of (a) information technology consulting services relating to financial information systems design and implementation and (b) other non-audit services to the Corporation is compatible with maintaining the independence of the outside auditors; and (v) to instruct the outside auditors that they are ultimately accountable to the Board (as assisted by the Audit Committee). 2. With respect to the Internal Audit Division: (i) to review the appointment and replacement of the General Auditor; 25 26 (ii) to review and ratify the annual evaluation and salary recommendation of the General Auditor as recommended by the Head of Risk Management; (iii) to advise the General Auditor that he or she is expected to provide to the Audit Committee summaries of and, as appropriate, the significant reports to management prepared by the Internal Audit Division and management's responses thereto; and (iv) to instruct the internal auditors that they (in conjunction with the outside auditors) are ultimately accountable to the Board (as assisted by the Audit Committee). 3. With respect to financial reporting principles and policies, and internal audit controls and procedures: (i) to advise management, the Internal Audit Division and the outside auditors that they are expected to provide to the Audit Committee a timely analysis of significant financial reporting issues and practices; (ii) to consider any reports or communications (and management's and/or the Internal Audit Division's responses thereto) submitted to the Audit Committee by the outside auditors required by or referred to in SAS 61 (as codified by AU Section 380), as may be modified or supplemented, including reports and communications related to: - deficiencies noted in the audit in the design or operation of internal controls; - consideration of fraud in a financial statement audit; - detection of illegal acts; - the outside auditor's responsibility under generally accepted auditing standards; - significant accounting policies; - management judgments and accounting estimates and assumptions; - adjustments arising from the audit; - the responsibility of the outside auditor for other information in documents containing audited financial statements; - disagreements with management; - consultation by management with other accountants; - major issues discussed with management prior to retention of the outside auditor; - difficulties encountered with management in performing the audit; - the outside auditor's judgments about the quality of the entity's accounting principles; and - reviews of interim financial information conducted by the outside auditor; (iii) to meet with management, the General Auditor and/or the outside auditors: 26 27 - to discuss the scope of the annual audit; - to discuss the audited financial statements; - to discuss any significant matters arising from any audit, report or communication referred to in Article 4, items 2(iii) or 3(ii) of this charter, whether raised by management, the Internal Audit Division or the outside auditors, relating to the Corporation's financial statements; - to review the form of opinion the outside auditors propose to render to the Board and shareholders; - to discuss significant changes to the Corporation's auditing and accounting principles, policies, controls, procedures and practices proposed or contemplated by the outside auditors, the Internal Audit Division or management; and - to inquire about significant risks and exposures, if any, and the steps taken to monitor and minimize such risks; (iv) to obtain from the outside auditors assurance that the audit was conducted in a manner consistent with Section 10A of the Securities Exchange Act of 1934, as amended, which sets forth certain procedures to be followed in any audit of financial statements required under the Securities Exchange Act of 1934; and (v) to discuss with the Corporation's General Counsel any significant legal matters that may have a material effect on the financial statements and the Corporation's compliance policies, including material notices to or inquiries received from governmental agencies. 4. With respect to reporting and recommendations: (i) to prepare any report or other disclosures, including any recommendation of the Audit Committee, required by the rules of the Securities and Exchange Commission to be included in the Corporation's annual proxy statement; (ii) to review this Charter at least annually and recommend any changes to the Board; and (iii) to report its activities to the Board on a regular basis and to make such recommendations with respect to the above and other matters as the Audit Committee may deem necessary or appropriate. ARTICLE 5 - RESOURCES AND AUTHORITY OF THE AUDIT COMMITTEE The Audit Committee shall have the resources and authority appropriate to discharge its responsibilities, including the authority to engage outside auditors for special audits, reviews and other procedures and to retain special counsel and other experts or consultants. ARTICLE 6 - TERM IN OFFICE The members of the Committee shall hold office from the time of designation until the next annual meeting of stockholders of the Corporation. The Board may, however, extend such period for one or all designated members. 27 28 ARTICLE 7 - MEETINGS The Committee will meet at least one (1) time every three (3) months, or more frequently if circumstances dictate, to discuss the matters set forth in Article 4. In addition to such meetings, the Audit Committee should meet separately at least annually with management, the General Auditor and the outside auditors to discuss any matters that the Audit Committee or any of these persons or firms believe should be discussed privately, including the annual audited financial statements. The Audit Committee may request any officer or employee of the Corporation or the Corporation's outside counsel or outside auditors to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. Members of the Audit Committee may participate in a meeting of the Audit Committee by means of a conference call or similar communications equipment by means of which all persons participating in the meeting can hear each other. ARTICLE 8 - SECRETARY The Committee will designate a Secretary among its members. The Secretary may delegate his (her) functions to any officer of the Corporation designated by the Secretary. The Secretary, or the person so designated, will notify the members of the Committee of the place, date, and time of the meetings of the Committee on a timely basis, as well as prepare and submit the agenda, reports and documents required for each meeting of the Committee. ARTICLE 9 - MINUTES OF THE MEETINGS The Secretary or his (her) designee will prepare accurate minutes of each meeting of the Committee, indicating which members of the Committee were present, and summarizing the decisions, recommendations and agreements reached. The President of the Committee will submit the minutes and the attachments considered necessary to the Board at their next meeting for their review and ratification. ARTICLE 10 - QUORUM AND COMMITTEE DECISIONS A quorum shall consist of the majority of the members of the Committee. The decisions of the Committee shall be adopted by an affirmative vote of the majority of the members present at the meeting in which the decision is considered. In the event of a tie, the decision will be submitted to the Board in their next meeting and no action will be taken until the Board makes a decision. ARTICLE 11 - AMENDMENTS This Charter can be amended by means of an express resolution of the Board. ARTICLE 12 - EFFECTIVE DATE This Charter will be effective immediately after its approval by the Board. The Secretary of the Board will certify it with his (her) signature and the Corporate seal, indicating the date it was approved. CERTIFICATE OF RESOLUTION The undersigned, as Secretary of the Board of Popular, Inc., does hereby certify that this Audit Committee Charter was duly adopted at a meeting of the Board of the Corporation held on March 7, 2001, at which a quorum was present and acting throughout. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Corporation in San Juan, Puerto Rico this 7(th) day of March, 2001. Juan J. Bermudez Alberto M. Paracchini Hector R. Gonzalez Francisco M. Rexach Jr. Manuel Morales Jr. Felix J. Serralles Jr. 28 29 EXHIBIT B POPULAR, INC. 2001 STOCK OPTION PLAN EFFECTIVE MARCH 7, 2001 SECTION 1. INTRODUCTION 1.1 PURPOSE The purpose of the Popular, Inc. 2001 Stock Option Plan (the "Plan") is to provide Popular, Inc. (the "Corporation") and its subsidiaries (the "Subsidiary") with an effective means to attract and retain highly qualified personnel as well as to provide additional incentive to employees and directors who provide services to the Corporation and the Subsidiary. The Plan is expected to contribute to the attainment of these objectives by offering selected employees and directors the opportunity to acquire stock ownership interests in the Corporation. 1.2 CONSIDERATION TO CORPORATION FOR ISSUANCE OF OPTIONS: AGREEMENTS BY EMPLOYEES. Each Employee by signing and accepting an Option Contract will, if the Committee so requires, agree to remain employed by the Corporation or a Subsidiary for a specified period of time, and the consideration to the Corporation for the issuance of Options will be any such employment agreements as well as the benefits to the Corporation or the Subsidiary from the added incentive to the Employee of increased proprietorship in the Corporation. Nothing in the Plan or in any Option Contract shall confer on any individual any right to continue employed by the Corporation or any Subsidiary or limit the right of the Corporation or of any Subsidiary to terminate Employment of an Employee at any time, with or without cause. 1.3 PLAN SUBJECT TO RATIFICATION BY SHAREHOLDERS. The Plan shall become effective upon adoption by the Board of Directors, provided that the Plan is approved, within one year following its adoption by the Board of Directors, by a vote of the holders of a majority of the shares of Common Stock entitled to vote and present in person or by proxy at a duly held shareholders' meeting. No Option under the Plan may be granted more than 10 years after the earlier of the date the Plan is adopted or the date the Plan is approved by the shareholders of the Corporation, without further approval by the shareholders of the Corporation. 1.4 LIMITATIONS ON NUMBER OF SHARES ISSUABLE UNDER THE PLAN. Subject to the following provisions of this Section 1.4, the aggregate number of shares of Common Stock which may be issued under the Plan shall be limited to 5,000,000 shares. The shares of Common Stock for which Options may be granted may consist of either authorized but unissued shares of Common Stock or shares of Common Stock which have been issued and which shall have been heretofore or hereafter reacquired by the Corporation. The total number of shares subject to Options authorized under the Plan shall be subject to increase or decrease in order to give effect to the adjustment provisions of Section 3.2 hereof or any amendment adopted as provided in Section 4.2 hereof. If any Option granted under the Plan is forfeited or otherwise expires, terminates or is cancelled for any reason without having been exercised in full, shares of Common Stock are surrendered or withheld from any Option to satisfy an Optionee's income tax withholding obligations, or shares of Common Stock owned by an Optionee are tendered to pay the exercise price of an Option, then the shares covered by such forfeited, expired, terminated or cancelled Option or which are equal to the number of shares surrendered, withheld or tendered, shall again become available for purposes of the Plan. 1.5 DEFINITIONS. The following terms shall have the meanings set forth below: (a) Board or Board of Directors. The Board of Directors of the Corporation. 29 30 (b) Committee. The compensation committee or such other committee or committees as may be appointed by the Board of Directors to administer the Plan pursuant to the provisions of Section 4.2 hereof. At any time the Plan is being administered by the Board of Directors pursuant to Section 4.1, any reference to the Committee shall be deemed to refer to the Board of Directors. (c) Common Stock. The Corporation's presently authorized common stock, par value $6.00 per share, except as this definition may be modified pursuant to the provisions of Section 3.2 hereof. (d) Disability. Complete and permanent inability by reason of illness or accident to perform the duties of the occupation of the Employee or Nonemployee Director for the Corporation or a Subsidiary when such disability commenced. (e) Employee. Any salaried officer or common law employee of the Corporation or any Subsidiary, or both, including any salaried officer or employee who is a member of the Board of Directors of the Corporation. (f) Employment. The rendering of services by an Employee for the Corporation, for any Subsidiary, or both. Whether military, government or public service shall constitute termination of employment for purposes of this Plan or any Option granted hereunder shall be determined in each case by the Committee in its sole discretion. (g) Fair Market Value. The closing price of the Common Stock reported on the NASDAQ National Market system on the date as of which such value is being determined or, if no price is reported on such day, then on the next preceding day on which such price was reported, or, if at any time the Common Stock shall not be reported on the NASDAQ National Market system, the Committee shall determine the fair market value on the basis of available prices for such Common Stock or in such manner as may be authorized by applicable regulations under the PRC and the IRC. (h) Incentive Stock Option. An option to purchase Common Stock granted by the Committee under the Plan which satisfies the requirements of Section 422 of the IRC. (i) IRC. The United States Internal Revenue Code of 1986, as amended. (j) Nonemployee Director. Any director of the Corporation or a Subsidiary who is not an Employee of the Corporation or any Subsidiary. (k) Nonstatutory Stock Option. An option to purchase Common Stock granted by the Committee under the Plan which does not satisfy the requirements of Section 1046 of the PRC or Section 422 of the IRC. (l) Option. A Qualified Stock Option, an Incentive Stock Option or a Nonstatutory Stock Option. (m) Optionee. A person to whom an Option has been granted under the Plan. (n) Option Expiration Date. The date on which an Option becomes unexercisable by reason of the lapse of time or when a Nonstatutory Stock Option otherwise becomes unexercisable. (o) PRC. The Puerto Rico Internal Revenue Code of 1994, as amended. (p) Qualified Stock Option. An option to purchase Common Stock granted by the Committee under the Plan which satisfies the requirements of Section 1046 of the PRC. (q) Reload Option. An option to purchase Common Stock granted by the Committee under the Plan pursuant to Section 2.4. (r) Subsidiary. Any corporation in an unbroken chain of corporations beginning with the Corporation if, at the time an Option is granted, each of the corporations other than the Corporation owns stock possessing 50% or more of the total combined voting power of all classes of stock of one of the other corporations in such chain. The use of the singular shall also include within its meaning the plural or vice versa. 30 31 SECTION 2. STOCK OPTIONS 2.1 GRANT AND EXERCISE OF OPTIONS. (a) Grant of Options to Employees. The Board of Directors or the Committee on behalf of the Corporation may grant Options to purchase Common Stock to Employees or Nonemployee Directors selected by it in its discretion. (b) Option Contracts. Options shall be evidenced by agreements ("Option Contracts") in such form as the Board of Directors or Committee shall approve (the Board of Directors in the case of Director Options) containing such terms and conditions, including the period of their exercise, whether in installments or otherwise, as shall be contained therein, which need not be the same for all Options. (c) Option Price. The purchase price per share of Common Stock under each Option granted to an Employee or Nonemployee Director shall be not less than 100 percent of the Fair Market Value per share of such Common Stock on the date the Option is granted, as determined by the Committee. The purchase price may be subject to adjustment in accordance with the provisions of Section 3.2 hereof. (d) Term of Option. The term during which each Option granted to an Employee or Nonemployee Directors under the Plan may be exercised shall not exceed a period of ten years from the date of its grant. (e) Exercise of Options. Unless an Option Contract provides otherwise or as provided in Section 3.1 below, each Option shall become exercisable, on a cumulative basis, with respect to 20% of the shares of Common Stock covered thereby on the first anniversary of the date of its grant and with respect to an additional 20% of the shares covered thereby on each subsequent anniversary. Any part of an Option that has become exercisable shall remain exercisable until it has been exercised in full or it terminates or expires pursuant to the terms of the Plan or the applicable Option Contract. Subsequent to the grant of an Option which is not immediately exercisable in full, the Board of Directors or the Committee, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part. (f) Options Nontransferable. Options granted under the Plan shall by their terms be nontransferable otherwise than by will or the laws of descent and distribution, and, during the lifetime of the Optionee, shall be exercisable only by the Optionee. No transfer of an Option by an Optionee by will or by the laws of descent and distribution shall be effective to bind the Corporation unless the Corporation shall have been furnished with written notice thereof and a copy of the will and/or such other evidence as the Board of Directors or Committee may determine necessary to establish the validity of the transfer. (g) Payment of Exercise Price. Each Option shall be exercised by delivery of a written notice to the Corporation stating the number of whole shares of Common Stock as to which the Option is being exercised and accompanied by payment therefor. No shares shall be issued on the exercise of an Option unless paid for in full at the time of purchase. Payment for shares purchased upon the exercise of an Option shall be made (i) by check payable to the Corporation, (ii) with the approval of the Board of Directors or the Committee, in Common Stock which has been held by the Optionee for at least six months valued at the then Fair Market Value thereof as determined by the Board of Directors or Committee, (iii) with the approval of the Board Directors or the Committee, by authorizing the Corporation, Popular Securities, Inc. or a broker-dealer approved by the Corporation, to sell, on behalf of Optionee, the appropriate number of shares otherwise issuable to the Optionee upon exercise of an Option, (iv) with the approval of the Board of Directors or the Committee and at the election of the Participant, by withholding from those shares that would otherwise be obtained upon exercise of the Option a number of shares having a Fair Market Value equal to the Option Price, (v) by any combination of (i), (ii), (iii), or (iv) above, or (vi) by other means that the Board of Directors or the Committee deems appropriate. Neither the Corporation nor any Subsidiary may directly or indirectly lend money to any individual for the purpose of assisting such individual to acquire or to carry shares issued upon the exercise of Options granted under the Plan. No Optionee shall have any rights as a shareholder with respect to any share of Common Stock covered by an Option unless and until such individual shall have become the holder of record of such share, and except as otherwise permitted by Section 3.2 hereof, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property or distributions or other rights) in respect of such share for which the record date is prior to the date on which such individual shall have become the holder of record thereof. 31 32 (h) Investment Purpose. At the time of any exercise of any Option, the Corporation may, if it shall deem it necessary or desirable for any reason, require the holder of the Option to represent in writing to the Corporation that it is the intention of such holder to acquire the shares of Common Stock for investment only and not with a view to the distribution thereof. In such event no shares of Common Stock shall be issued to such holder unless and until the Corporation is satisfied with the correctness of such representation. 2.2 QUALIFIED STOCK OPTIONS AND INCENTIVE STOCK OPTIONS. In addition to meeting the requirements of Section 2.1, each Qualified Stock Option shall be subject to the requirements of (a) and each Incentive Stock Option shall be subject to the requirements of (a), (b) and (c) of this Section 2.2. (a) Annual Limitation of Options Which May Be Considered Qualified Stock Options and/or Incentive Stock Options. Anything else in the Plan notwithstanding, if and to the extent that the provisions of Section 1046 of the PRC and/or Section 422 of the IRC shall so require, the aggregate Fair Market Value (determined as of the time the Option is granted) of the shares with respect to which Qualified Stock Options and/or Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under the Plan and any other plans of the Corporation and its Subsidiaries) shall not exceed $100,000. (b) Incentive Stock Options Granted to Ten Percent Shareholders. Notwithstanding anything to the contrary contained in this Plan, an Incentive Stock Option may not be granted to an Optionee who owns, directly or indirectly, stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Corporation or any Subsidiary unless, at the time such Incentive Stock Option is granted, the exercise price of such Incentive Stock Option is at least 110 percent of the Fair Market Value of the Common Stock subject to the Incentive Stock Option, and such Incentive Stock Option, by its terms, is not exercisable after the expiration of five (5) years from the date of grant of such Incentive Stock Option. (c) Notice. An Optionee shall give prompt (no more than 30 days) notice to the Corporation of any disposition of shares acquired upon exercise of an Incentive Stock Option if such disposition occurs within either two years after grant or one year after the receipt of such shares by the Optionee. 2.3 VOLUNTARY SURRENDER AND CANCELLATION OF NONSTATUTORY STOCK OPTIONS. The Committee may grant to one or more holders of Nonstatutory Stock Options, in exchange for the voluntary surrender and cancellation of such Nonstatutory Stock Options, new Options having different Option prices than the Nonstatutory Stock Option prices provided in the Nonstatutory Stock Options so surrendered and cancelled and containing such other terms and conditions as the Committee may deem appropriate. 2.4 RELOAD OPTIONS. At the time a Nonstatutory Stock Option (the "Original Option") is granted, the Committee may also authorize the grant of a Reload Option subject to the following terms: (a) The number of shares of Common Stock subject to the Reload Option shall be the number of shares, if any, used by the Optionee to pay the purchase price upon exercise of the Original Option, plus the number of shares, if any, delivered by the Optionee to satisfy the tax withholding requirement relating to such exercise. (b) The Reload Option shall be a Nonstatutory Stock Option. (c) The grant of the Reload Option shall be effective upon the date of exercise of the Original Option, and the term of the Reload Option shall be the period, if any, remaining from that date to the date upon which the Original Option would have expired. 32 33 (d) The grant of the Reload Option shall not be effective if, on the date of exercise of the Original Option, the Optionee is not employed by the Corporation or a Subsidiary. (e) The Reload Option shall have such other terms and conditions as the Committee may, in its sole discretion consistent with this Section, determine. SECTION 3. PROVISIONS RELATING TO PLAN PARTICIPATION 3.1 TERMINATION OF EMPLOYMENT OR SERVICE AS A DIRECTOR (a) Termination of Employment or Discharge. Unless earlier terminated in accordance with its terms, an Option shall terminate six months after any of the following: (i) voluntary termination of Employment by the Employee, with or without the consent of the Corporation or any Subsidiary for reasons other than Disability or retirement under a retirement plan of the Corporation or any Subsidiary, or (ii) termination of Employment by the Corporation or any Subsidiary, without cause, or (iii) termination of Employment because the employing Subsidiary ceased to be a Subsidiary of the Corporation and the Employee does not, prior thereto or contemporaneously therewith, become an Employee of the Corporation or of another Subsidiary. Notwithstanding the foregoing provision, the Committee may, in its sole discretion, at the time of grant establish different terms and conditions pertaining to the effect of an Optionee's termination of employment on the exercisability of Options. (b) Termination of Employment or Discharge With Cause. Unless earlier terminated in accordance with its terms, all Options, whether vested or not, awarded to an Employee who terminates Employment or is discharged due with cause by appropriate corporate action or under authority of law shall terminate immediately upon such termination of Employment or discharge. (c) Termination of Employment Upon Retirement or Disability. Unless earlier expired in accordance with its terms, all Options held by an Employee shall become vested immediately upon the Employee's termination of Employment due to retirement under the terms of the retirement plan of the Corporation or the Subsidiary employing the Employee or due to the Employee's Disability. The Employee so terminating Employment due to retirement or disability shall have until the Option Expiration Date to exercise the Options awarded to him. (d) Vesting and Exercise of Options After Death. If the holder of an Option shall die during the term of an Option, the Option shall become immediately vested and the holder or the legal representatives shall be entitled to exercise the Option in whole or in part, to the extent then unexercised, at any time within one year following the death of the Optionee, but in no event after the Option Expiration Date. (e) Termination of Service as a Director. If a Nonemployee Director shall terminate his service as a director for reasons other than removal for cause by appropriate Corporate action or under authority of law, all unexpired Options held by the Nonemployee Director which have not vested shall become vested immediately. The nonemployee Director so terminating his service as a director shall have until the Option Expiration Date to exercise the Options awarded to him. Unless earlier terminated in accordance with its terms, a vested Option awarded to a Nonemployee Director who terminates his service as a director due to removal for cause by appropriate corporate action or under authority of law shall terminate immediately upon such termination of service as a director. 33 34 3.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CHANGE OF CONTROL; DISSOLUTION. (a) Subject to any required action by the shareholders of the Corporation, each of (i) the number of shares of Common Stock covered by each outstanding Option, (ii) the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, (iii) the price per share of Common Stock covered by each such outstanding Option, and (iv) the maximum number of shares with respect to which Options may be granted to any Optionee, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend with respect to the Common Stock or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Corporation; provided, however, that (a) each such adjustment with respect to an Incentive Stock Option or Qualified Stock Option shall comply with the rules of Section 424(a) of the IRC (or any successor provision) and an applicable provision of the PRC, respectively, and (b) in no event shall any adjustment be made which would render any Qualified Stock Option granted hereunder other than a "qualified option" under Section 1046 of the PRC or any Incentive Stock Options granted hereunder other than an "incentive stock option" as defined in Section 422 of the IRC; and provided further, however, that conversion of any convertible securities of the Corporation shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) If: (1) any person (as defined for purposes of Section 13(d) and 14(d) of the Exchange Act, but excluding the Corporation and any of its wholly-owned subsidiaries) acquires direct or indirect ownership of 50% or more of the combined voting power of the then outstanding securities of the Corporation as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise; or (2) the shareholders of the Corporation approve (A) any consolidation or merger of the Corporation in which the Corporation is not the surviving corporation (other than a merger of the Corporation in which the holders of Common Stock immediately prior to the merger have the same or substantially the same proportionate ownership of the surviving corporation immediately after the merger), or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Corporation to an entity which is not a wholly-owned subsidiary of the Corporation, then the exercisability of each Option outstanding under the Plan shall be automatically accelerated so that each Option shall, immediately prior to the specified effective date of any of the foregoing transactions, become fully exercisable with respect to the total number of shares subject to such Option and may be exercisable for all or any portion of such shares. Upon the consummation of any of such transactions, all outstanding Options under the Plan shall, to the extent not previously exercised, terminate and cease to be outstanding. (c) In the event of the proposed dissolution or liquidation of the Corporation, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. SECTION 4. ADMINISTRATION 4.1 BOARD OF DIRECTORS TO ADMINISTER THE PLAN. (a) Unless the Board of Directors appoints a Committee pursuant to Section 4.2, the Board of Directors shall have, subject to the express provisions of the Plan, general authority to administer the Plan to Grant Options thereunder and to make determinations under, interpretations of, and to take such other steps in connection with the Plan and the Options granted thereunder as it may deem necessary or advisable. 34 35 4.2 INDEPENDENT COMMITTEE TO ADMINISTER THE PLAN. (a) Composition and Functions of the Committee. A Committee consisting of at least two directors (who shall be Nonemployee Directors as defined in Rule 16b-3 of the Securities and Exchange Commission) may be appointed by the Board of Directors and will have, subject to the express provisions of the Plan, general authority to administer the Plan, to grant Options thereunder, subject to the ratification of the Board of Directors if such limitation is imposed by the Board of Directors, and to perform such other functions as may be assigned to it by the Board of Directors in connection with the Plan, including, among other things, determining the form of Option Contracts to be issued under the Plan and the terms and conditions to be included in such Option Contracts and adopting from time to time such rules and regulations as it may deem appropriate for the proper administration of the Plan. The Committee may also make such determinations under, and such interpretations of, and take such steps in connection with, the Plan, the rules and regulations or Options granted thereunder as it may deem necessary or advisable. The Committee may, in its discretion or in accordance with a direction from the Board of Directors, waive any provisions of any Option Contract, provided such waiver is not inconsistent with the terms of the Plan as then in effect. (b) Authorization of Actions Taken by the Committee and Board of Directors. Vacancies in the Committee shall be filled by the Board of Directors. The Committee may act by a majority of its members either at a meeting or in writing without a meeting. All questions arising under the Plan or under any rules and regulations adopted by the Board of Directors or the Committee or under the Option Contracts, whether such questions involve interpretation thereof or otherwise, shall be determined by the Committee and its determination, unless disapproved by the Board of Directors, shall be conclusive and binding in all cases. To the extent that any such action would not adversely affect the status of Qualified Stock Options and Incentive Stock Options under the PRC and IRC, respectively, all matters provided in the Plan, in the Option Contracts, or in such rules and regulations to be determined or performed by the Committee may be determined or performed by the entire Board of Directors. No member of the Board of Directors or of the Committee shall be liable for any action taken or any determination made in good faith with respect to the Plan or any Option Contract. (c) Findings of the Board of Directors and Committee Are Conclusive. Each determination, interpretation, or other action made or taken pursuant to the provisions of this Plan by the Board of Directors or the Committee shall be final and shall be binding and conclusive for all purposes and upon all persons, including, without limitation thereto, the Corporation, the shareholders, the Committee and each of the members thereof, and all Optionees, and their respective successors in interest. 4.3 AMENDMENT AND DISCONTINUANCE OF THE PLAN. The Board of Directors may at any time amend, modify, suspend or terminate the Plan, without shareholder approval, except to the extent required by the PRC or the IRC to permit the granting of Qualified Stock Options or Incentive Stock Options, or by the rules of any securities exchange or automated quotation system on which the shares of Common Stock of the Corporation trade at such time, provided, that no change shall be made which will have a material adverse effect upon any Option previously granted unless the consent of the affected Optionee is obtained. 4.4 COMPLIANCE WITH LAW AND OTHER CONDITIONS. (a) Options. Any exercise by an Optionee of an Option shall be made only in compliance with any applicable rule or regulation of the Securities and Exchange Commission exempting such exercise from the operation of Section 16(b) of the Securities Exchange Act of 1934 and any other applicable law, rule, regulation or other provision that may hereafter relate to the exercise and cash settlement rights of Options under the Federal securities laws. (b) Generally. No shares of Common Stock shall be issued pursuant to the exercise of any Option granted under the Plan prior to the compliance by the Corporation, to the satisfaction of its counsel, with any applicable laws and with any applicable regulations of any securities exchange on which such shares are listed. 35 36 4.5 WITHHOLDING TAXES. Whenever shares of Common Stock are to be issued pursuant to the Plan, the Corporation shall have the right to require that there be remitted to the Corporation an amount sufficient to satisfy all applicable federal, state, commonwealth and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. The Corporation reserves the right to satisfy the applicable federal, state, commonwealth and local withholding tax requirements through the retention of shares of Common Stock otherwise transferable upon exercise of an Option. Such withheld amounts shall meet the Federal securities laws requirements set forth in Section 4.3(a), hereof. Whenever payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy federal, state and local withholding tax requirements and authorized deductions. 4.6 TAX OFFSET PAYMENTS. The Committee shall have the authority at the time of any award under this Plan or anytime thereafter to make Tax Offset Payments to assist Optionees in paying income taxes incurred as a result of their participation in this Plan. The Tax Offset Payments shall be determined by multiplying a percentage established by the Committee by all or a portion (as the Board of Directors or the Committee shall determine) of the taxable income recognized by an Optionee upon (i) the exercise of a Nonstatutory Stock Option, or (ii) the disposition of shares received upon exercise of a Qualified Stock Option or Incentive Stock Option. The percentage shall be established, from time to time, by the Committee at that rate which the Committee, in its sole discretion, determines to be appropriate and in the best interests of the Corporation to assist Optionees in paying income taxes incurred as a result of the events described in the preceding sentence. Tax Offset Payments shall be subject to the restrictions on transferability applicable to Options set forth in Section 2.1 4.7 USE OF PROCEEDS AND FUNDING. (a) Use of Proceeds. The proceeds from the sale of Common Stock pursuant to Options granted under the Plan shall constitute general funds of the Corporation and may be used for its corporate purposes as the Corporation may determine. (b) Funding. No provision of the Plan shall require or permit the Corporation, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Corporation maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Employees shall have no rights under the Plan other than as unsecured general creditors of the Corporation, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. This Subsection shall not prevent the Corporation from purchasing its Common Stock for the purpose of meeting its requirements to issue Common Stock pursuant to the Plan. 4.8 OTHER. To the extent applicable, this Plan is intended to permit the issuance of Qualified Stock Options in accordance with the provisions of Section 1046 of the PRC and Incentive Stock Options in accordance with Section 422 of the IRC. This Plan may be modified or amended at any time, both prospectively and retroactively, and in such manner as to affect Qualified Stock Options or Incentive Stock Options previously granted, if such amendment or modification is necessary for this Plan and the Qualified Stock Options or Incentive Stock Options granted hereunder to qualify under said provisions of the PRC and the IRC. 36 37 [POPULAR LOGO] IF YOU WISH TO VOTE BY TELEPHONE, INTERNET OR MAIL, PLEASE READ THE INSTRUCTIONS BELOW. c/o BANCO POPULAR de PUERTO RICO TRUST DIVISION Popular, Inc. encourages you to take advantage of the PO BOX 362708 convenient ways to vote your shares for matters to be SAN JUAN PR 00936-2708 covered at the 2001 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 below, 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 below, 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 prepaid 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: POPULA KEEP THIS PORTION FOR YOUR RECORDS - -------------------------------------------------------------------------------------------------------------------------------- DETACH AND RETURN THIS PORTION ONLY - -------------------------------------------------------------------------------------------------------------------------------- [POPULAR LOGO] PROXY The Board recommends a vote for: FOR WITHHOLD FOR ALL To withhold authority to vote, mark "For All Except" 1. ELECTION OF THE FOLLOWING NOMINEES: ALL ALL EXCEPT and write the nominee's number on the line below. 1) JOSE B. CARRION 2) HECTOR R. GONZALEZ [ ] [ ] [ ] ----------------------------------------------------- 3) MANUEL MORALES JR. 4) JULIO E. VIZCARRONDO JR. FOR AGAINST ABSTAIN 2. APPROVAL OF THE 2001 STOCK OPTION PLAN [ ] [ ] [ ] 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 5, 2001, 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 23, 2001, 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" ITEMS 1 AND 2 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 - --------------------------------------------------------------------------------------------------------------------------------
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