-----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, NikxW42Qvu3oGHQtJAgGk4UpwQOVb/d40fo70X/kim4j/FECQhH2dW56pHs0OnZf XdDs48ILOel8XonRpQVBCw== 0000950144-97-002709.txt : 19970324 0000950144-97-002709.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950144-97-002709 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANPONCE CORP 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: 1934 Act SEC FILE NUMBER: 000-13818 FILM NUMBER: 97560460 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 8097659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 10-K 1 BANPONCE 10-K 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] For the Fiscal Year Ended December 31, 1996 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 BANPONCE CORPORATION -------------------- 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, 1997 the Corporation had 66,121,855 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $2,380,387,000 based upon the reported closing price of $36.00 on the NASDAQ National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated herein by reference in response to Item 1 of Part I. (2) Portions of the Corporation's Proxy Statement relating to the 1997 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference to Items 10 through 13 of Part III. 1 2 TABLE OF CONTENTS
Page ---- PART I - ------ Item 1 Business.................................................... 3 Item 2 Properties.................................................. 10 Item 3 Legal Proceedings........................................... 11 Item 4 Submission of Matters to a Vote of Security Holders......... 11 PART II - ------- Item 5 Market for Registrant's Common Stock and Related Stockholder Matters....................................... 11 Item 6 Selected Financial Data..................................... 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 Item 8 Financial Statements and Supplementary Data................. 13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 13 PART III - -------- Item 10 Directors and Executive Officers of the Registrant.......... 13 Item 11 Executive Compensation...................................... 13 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................ 13 Item 13 Certain Relationships and Related Transactions.............. 13 PART IV - ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 14
2 3 PART I ITEM 1. BUSINESS BANPONCE CORPORATION (the "Corporation") is a diversified, publicly owned bank holding company, incorporated under the General Corporation Law of Puerto Rico in November 1984. It provides a wide variety of financial services through its principal subsidiaries: Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), BP Capital Markets, Inc. ("BP Capital") and Popular International Bank, Inc. ("PIB"). The Corporation is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (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"). Banco Popular, the Corporation's principal banking subsidiary, was incorporated over 100 years ago in 1893 and is Puerto Rico's largest bank with total assets of $14.0 billion, deposits of $10.1 billion and stockholder's equity of $1.0 billion at December 31, 1996. The Bank accounted for 84% of the total consolidated assets of the Corporation at December 31, 1996. The Bank is a full-service commercial bank, and Puerto Rico's largest banking institution with a delivery system of 178 branches and 327 automated teller machines on the island. The Bank also has the largest trust operation in Puerto Rico and is the largest servicer of mortgage loans for investors. In addition, it operates the largest Hispanic bank branch network in the mainland United States with 29 branches in New York and an agency in Chicago. As of December 31, 1996, these branches had a total of approximately $1.5 billion in deposits. The Bank also operates seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. The Bank is a member of the Federal Reserve System and is also subject to the supervision of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and the Superintendent of Banks of the State of New York. Banco Popular's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). In addition, Banco Popular has three subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company, Popular Consumer Services, Inc., a small-loan and secondary mortgage company with 35 offices in Puerto Rico operating under the name of Best Finance, and Popular Mortgage, Inc., a mortgage loan company with four offices in Puerto Rico operating under the name of Puerto Rico Home Mortgage. BP Capital Markets, Inc. is a direct subsidiary of the Corporation engaged in the business of securities broker-dealer in Puerto Rico, with institutional brokerage, financial advisory, and investment and security brokerage operations. PIB, incorporated under the Puerto Rico International Banking Center Act ("IBC Act"), owns all issued and outstanding stock of BanPonce Financial Corp ("Financial"), a Delaware corporation. PIB is principally engaged in providing managerial services to its subsidiaries. Financial is the direct owner of all the issued and outstanding shares of Pioneer Bancorp, Inc., a corporation organized under the laws of Delaware and headquartered in Chicago, Illinois, and a registered bank holding company under the BHC Act of 1956, which through its wholly-owned subsidiary River Associates, Bancorp, Inc., a Delaware corporation, owns and operates Banco Popular, Illinois (formerly Pioneer Bank & Trust Company) a bank organized under the laws of the State of Illinois with five branches in that state. The deposits of Banco Popular, Illinois are insured by the FDIC. As of December 31, 1996 the assets of Banco Popular, Illinois were $467.4 million and its deposits were $375.3 million. Financial is also the direct owner of all the common stock of Banco Popular, FSB, a federal savings bank which acquired from the Resolution Trust Corporation ("RTC") certain assets and all of the deposits of four New Jersey branches of the former Carteret Federal Savings Bank, a federal savings bank under Resolution Trust Corporation conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC and it is subject to the supervision of the Office of Thrift Supervision. As a result of the ownership of Banco Popular, FSB, the Corporation has become a registered savings and loan holding company under the Home Owners' Loan Act. Banco Popular, FSB owns Equity One, Inc., a Delaware corporation (formerly Spring Financial Services, Inc.) ("Equity One"). Equity One is a diversified consumer finance company engaged in the business of granting personal and mortgage loans and providing dealer financing through 102 offices in 28 states with total assets of $1.1 billion as of December 31, 1996. Equity One had initially been acquired by Financial on September 30, 1991, prior to which time Financial had no significant business operations. On September 30, 1996, Financial acquired all of the common stock of CombanCorp, a corporation organized under the laws of California and headquartered in Los Angeles, and a registered bank holding company under the BHC Act. CombanCorp owns Banco Popular, National Association (California) ("Banco Popular, N.A. (California)"), a national bank with four branches in California. The deposits of Banco Popular, N.A. (California) are also insured by the FDIC and it is subject to the supervision of the Office of the Comptroller of the Currency. As of December 31, 1996, it had assets of $139.5 million and deposits of $100.9 million. 3 4 The Corporation is a legal entity separate and distinct from its subsidiaries. There are various legal limitations governing the extent to which the Corporation's banking and savings bank subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Corporation or certain of its other subsidiaries. The rights of the Corporation to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise, are subject to the prior claims of creditors of that subsidiary, except to the extent that the Corporation may itself be a creditor of that subsidiary and its claims are recognized. Claims on the Corporation's subsidiaries by creditors other than the Corporation may include long-term debt and substantial obligations with respect to deposit liabilities, federal funds purchased, securities sold under agreements to repurchase and commercial paper, as well as various other liabilities. The Corporation's business is described on pages 10 through 29 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 1996, information which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL The Corporation is a bank holding company subject to the supervision and regulation of the Federal Reserve Board under the BHC Act. As a bank holding company, the Corporation's activities and those of its banking and non-banking subsidiaries are limited to the business of banking and activities closely related to banking, and the Corporation may not 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 are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. 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 that a national bank with the same home state is permitted to do so as described under "Interstate Banking and Other Recent 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. In addition, some states have laws prohibiting or restricting foreign banks from acquiring banks located in such states and treat Puerto Rico's banks and bank holding companies as foreign banks for such purposes. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB 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 Banco Popular, Illinois, the FDIC and the Illinois Commissioner of Banks and Trust Companies, in the case of Banco Popular, N.A. (California), the Office of the Comptroller of the Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. F D I C I A Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations thereunder established 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 4 5 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, 1996, Banco Popular, Banco Popular, Illinois, and Banco Popular, FSB were well capitalized. At the same date Banco Popular, N.A. (California) was adequately capitalized. At the end of February 1997, after receiving an additional capital contribution of one million from Financial, Banco Popular, N.A. (California) was well capitalized. 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 five percent 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. HOLDING COMPANY STRUCTURE Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to restrictions under federal law that limit the transfer of funds between them and the Corporation, Financial, PIB and 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, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB, respectively, to the Corporation, Financial, or PIB, as the case may be, or to any one non-banking subsidiary, 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. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under the Federal Reserve Board policy, a bank holding company such as the Corporation, 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 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 bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are currently the only depository institution subsidiaries of the Corporation. Because the Corporation, PIB and Financial 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 depository institution subsidiaries) except to the extent that the Corporation, PIB or Financial, as the case may be, may itself be a creditor with recognized claims against the subsidiary. Under the Federal Deposit Insurance Act (FDIA), a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default". "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of 5 6 certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are all currently FDIC-insured depository institutions. 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 owned by a subsidiary bank to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions. DIVIDEND RESTRICTIONS The principal regular source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulations 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. However, it may net the sum of its bad debts as so 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, 1996, Banco Popular could have declared a dividend of approximately $197.1 million without the approval of the Federal Reserve Board. Illinois law contains similar limitations on the amount of dividends that Banco Popular, Illinois can pay and the National Bank Act contains similar limitations, on the amount of dividends Banco Popular, N.A. (California) can pay. In addition, OTS regulations limit the amount of capital distributions (whether by dividend or otherwise) that any savings association may make without prior OTS approval, based upon the savings association's regulatory capital levels. These limitations are applicable to Banco Popular, FSB. Also, in connection with the acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB and Financial an interim financial assistance. The assistance consisted of a 5-year term loan for $19.5 million, payable in the year 2000 in a single lump sum installment and accruing interest, payable quarterly, at a floating rate of 12.5 basis points over the rate payable on the 13-week U.S. Treasury Bill. The loan is secured with the issued and outstanding shares of common stock of Banco Popular, FSB. Pursuant to the term of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such promissory note) or make any distributions of its assets until payment in full of such promissory note. The payment of dividends by Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB 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. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA". See "Puerto Rico Regulation" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured 6 7 depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC reduced the insurance premiums it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium and, currently, premiums related to deposits assessed by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be assessed at a rate between 0 cents and 27 cents per $100.00 of deposits. DIFA also provides for a special one-time assessment imposed on deposits insured by the SAIF to recapitalize the SAIF to bring it up to statutory required levels. The Corporation accrued for the one-time assessment in the third quarter of 1996. DIFA also separates, effective January 1, 1997, 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 will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates for the first semiannual period of 1997 were set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first.) As of December 31, 1996, the Corporation had a BIF deposit assessment base of approximately $10.1 billion and a SAIF deposit assessment base of approximately $207 million. 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, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 1996 and for the four previous years is presented in Table I "Capital Adequacy Data", on page F-16 in the "Management Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) and is incorporated herein by reference. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying 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 unconsolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill, other disallowed intangibles and the disallowed portion of deferred tax 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"). The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights, purchased credit card relationships and include a "grandfather" provision permitting the continued inclusion of certain existing intangibles. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) 7 8 guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. 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 quarterly average assets less all intangibles. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio applicable to it. Banco Popular is subject to the risk-based and leverage capital requirements adopted by the Federal Reserve Board. As of December 31, 1996, Banco Popular had a tier 1 capital ratio of 11.31%, a total capital ratio of 12.57% and a leverage ratio of 6.65%. Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to similar capital requirements adopted by the FDIC, the OCC and the OTS, respectively. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See "FDICIA". The Federal Reserve Board established a limitation on the amount of certain deferred tax assets that may be included in Tier 1 capital for risk-based and leverage capital purposes. Under this rules deferred tax assets that can only be realized if an institution earns taxable income in the future and are limited for regulatory capital purposes to the amount that the institution expects to realize within one year of the quarter-end report date based on its projection of taxable income or 10 percent of Tier 1 capital, whichever is less. In addition, the Federal Reserve Board has decided to exclude from regulatory capital the amount of net unrealized gains and losses on securities available-for-sale, except the net unrealized losses of equity securities with readily determinable fair values. Bank regulators have from time to time indicated their desire to raise capital requirements applicable to banking organizations beyond current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what terms. Interstate Banking and Other Recent Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies, with Federal Reserve 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, commencing June 1, 1997, national and state banks with different home states will be permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passes legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States may "opt in" to permit insterstate branching by merger prior to June 1, 1997, and to permit de novo insterstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts 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. Various other legislation, inluding proposals to overhaul the bank regulatory system, expand bank and bank holding company powers and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. It is impossible to predict whether or in what form these proposals may be adopted in the future, and, if adopted, what their effect will be on the Corporation or its subsidiaries. 8 9 Puerto Rico Regulation General As a commercial bank organized under the laws of the Commonwealth of Puerto Rico (the "Commonwealth"), Banco Popular is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of the Commonwealth (the "Office of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law"). Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of Banco Popular be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to ten percent (10%) of the total deposits or the total paid-in capital, whichever is greater. 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 the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall 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 which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. However, if a bank becomes a member of the Federal Reserve System, the 20% legal reserve shall not be effective and the reserve requirements demanded by the Federal Reserve System shall be applicable. Pursuant to an order of the Board of Governors dated November 24, 1982, Banco Popular has been exempted from such reserve requirements with respect to deposits payable in Puerto Rico but is subject to Puerto Rico regulatory reserve requirements. Section 17 of the Banking Law permits Banco Popular 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, 1996, the legal lending limit for the Bank under this provision was approximately $90 million. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the Bank, plus its reserve fund. 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 the Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth. Section 14 of the Banking Law authorizes Banco Popular to conduct certain financial and related activities directly or through subsidiaries, including lease financing of personal property, operating small loans companies and mortgage loans activities. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Consumer Services, Inc. and Popular Mortgage, Inc., respectively, which are organized and operate solely 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 the Commonwealth. 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) is to be determined by free competition. The Finance Board also has authority to regulate the maximum finance charges on retail installment sales contracts, which are currently set at 21%, and for credit card purchases, which are currently set at 26%. There is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums. 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 9 10 are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the Company'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 monthly basis and its annual audited financial statement as of the end 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, 1996, the Corporation employed 7,996 persons. None of its employees are represented by a collective bargaining group. ITEM 2. PROPERTIES As of December 31, 1996, Banco Popular owned (and wholly or partially occupied) approximately 68 branch premises and other facilities throughout the Commonwealth and branches premises in New York. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 113 locations in Puerto Rico, 16 locations in New York, 7 locations in the U.S. Virgin Islands and one location in the British Virgin Islands. The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by Banco Popular for banking operations and other services are described below: Popular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building. Approximately 60% of the office space is leased to outside tenants. Cupey Center Complex, two buildings of three and two stories, respectively, located at 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. 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. San Juan building, a twelve story structure located at Old San Juan, Puerto Rico. Banco Popular occupies 50% of the basement, the entire ground floor, the mezzanine and the 10th floor. The rest of the building is rented to outside tenants. Mortgage Loan Center, a seven story building and a four story building, located at 153 and 167 Ponce de Leon Avenue, Hato Rey, Puerto Rico, respectively, are fully occupied by the mortgage loans and mortgage servicing departments. New York building, a nine story structure with two underground levels located at 7 West 51st. Street, New York City, where approximately 92% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants. At December 31, 1996 the Corporation owned a 23 story office structure located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. Banco Popular occupies approximately 15% of the rented space and the rest of the building is rented to outside tenants. At the same date, Banco Popular, N.A. (California) owned a nine story structure located at 354 South Spring Street, Los Angeles, 10 11 California in which office space is mostly rented to outside tenants. A full service branch of Banco Popular, N.A. (California) operates in 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 of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation (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 1996 and the previous four years, as well as cash dividends declared is contained under Table J, "Common Stock Performance", on page F-17 and under the caption "Stockholders' Equity" on page F-15 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. On April 26, 1996, the Corporation's Board of Directors authorized a stock split of one share for each share outstandings effected in the form of a dividend, on July 1, 1996. As a result of the split 33,000,590 shares were issued, and $198 million were transferred from retained earnings to common stock. As of February 28, 1997, the Corporation had 5,628 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 $36.00 per share. The Corporation currently has outstanding $125 million 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. The Puerto Rico Income Tax Act of 1954, 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 rate of withholding is 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. United States citizens who are non-residents 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. 11 12 ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in Table B, "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: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Excluding Interest on Deposits 2.0 2.0 2.6 3.0 2.9 Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 2.0 2.0 2.5 3.0 2.9 Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3
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 for each of the last five years ended December 31, is as follows:
Year ended December 31, ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands) Long-term obligations $1,111,713 $ 885,428 $ 489,524 $ 283,855 $ 120,062 Non-Cumulative preferred stock of the Corporation 100,000 100,000 100,000 -0- -0- Cumulative perpetual preferred stock of Banco Popular -0- -0- -0- 11,000 11,000
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-34 under the caption "MD&A" and is incorporated herein by reference. Table L, "Maturity Distribution of Earning Assets", on page F-20 in the MD&A, has been prepared on the basis of contractual 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. 12 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-35 through F-75, and on page F-32 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 filed with the Securities and Exchange Commission on or about March 20, 1997 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation Program", and under the caption "BanPonce Corporation Performance Graph" of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders", and under "Shares Beneficially Owned by Directors, Nominees and Officers of the Corporation" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other relationships and transactions" of the Proxy Statement, is incorporated herein by reference. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are part of this report and appear on the pages indicated. (1) Financial Statements: Report of Independent Auditors............................................... F-35 Consolidated Statements of Condition as of December 31, 1996 and 1995................................................................... F-36 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996.............................. F-37 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996........................... F-38 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1996.......................................................... F-39 Notes to Consolidated Financial Statements................................... F-40
(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 17 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, 1996. Dated: October 9, 1996 Items reported: Item 5 - Other Event Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits 14 15 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. BANPONCE CORPORATION (Registrant) By: S\RICHARD L. CARRION -------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer Dated: 02-13-97 (Principal Executive Officer) ---------- By: S\JORGE A. JUNQUERA ------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-13-97 (Principal Financial Officer) ---------- By: S\AMILCAR L. JORDAN ------------------- Amilcar L. Jordan Senior Vice President Dated: 02-13-97 (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 02-13-97 -------- S\ALFONSO F. BALLESTER Vice Chairman of - ---------------------- the Board 02-13-97 Alfonso F. Ballester -------- S\ANTONIO LUIS FERRE Vice Chairman of - -------------------- the Board 02-13-97 Antonio Luis Ferre -------- S\JUAN J. BERMUDEZ - ------------------ Juan J. Bermudez Director 02-13-97 -------- S\FRANCISCO J. CARRERAS - ----------------------- Francisco J. Carreras Director 02-13-97 -------- S\DAVID H. CHAFEY, JR. - ---------------------- David H. Chafey, Jr. Director 02-13-97 -------- S\LUIS E. DUBON, JR. - -------------------- Luis E. Dubon, Jr. Director 02-13-97 --------
15 16 S\HECTOR R. GONZALEZ - -------------------- Hector R. Gonzalez Director 02-13-97 -------- S\JORGE A. JUNQUERA - ------------------- Jorge A. Junquera Director 02-13-97 -------- S\MANUEL MORALES, JR. - --------------------- Manuel Morales, Jr. Director 02-13-97 -------- S\ALBERTO M. PARACCHINI - ----------------------- Alberto M. Paracchini Director 02-13-97 -------- - ----------------------- Francisco Perez, Jr. Director -------- S\FRANCISCO M. REXACH, JR. - -------------------------- Francisco M. Rexach, Jr. Director 02-13-97 -------- - -------------------------- Jose E. Rossi Director -------- S\FELIX J. SERRALLES, JR. - ------------------------- Felix J. Serralles, Jr. Director 02-13-97 -------- S\EMILIO JOSE VENEGAS - --------------------- Emilio Jose Venegas Director 02-13-97 -------- S\JULIO E. VIZCARRONDO, JR. - --------------------------- Julio E. Vizcarrondo, Jr. Director 02-13-97 --------
16 17 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION FOOTNOTE - -------------------------------------------------------------------------------------- 3.1 Restated certificate of Incorporation and By-Laws of BanPonce Corporation (1) 4.1 Form of certificate for common stock (1a) 4.2 Certificates of Resolution of the Board of Directors of BanPonce Corporation dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between BanPonce Corporation and Manufacturers Hanover Trust Company regarding the issuance of certain Rights to the Corporation's shareholders. (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture, dated as of October 1, 1991, among BanPonce Financial Corp, BanPonce Corporation and Citibank, N.A. relating to the debt securities of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2a) 4.5 Form of medium-term fixed rate note of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2b) 4.6 Form of medium-term floating rate note of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2c) 4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4) 4.8 Form S-3 filed in connection with the issuance of debt securities and preferred stock of BanPonce Corporation, Popular International Bank, Inc. and BanPonce Financial Corp and guaranteed by BanPonce Corporation in the aggregate amount of $1,000,000,000. (5) 4.9 Subordinated indenture of BanPonce Corporation, dated November 30, 1995, between BanPonce Corporation and the First National Bank of Chicago, as trustee, and related to 6 3/4% subordinated notes due December 15, 2005 in the aggregate amount of $125,000,000. (6) 4.10 Form of subordinated note of BanPonce Corporation. (7) 4.11 Indenture, dated as of February 15, 1995, between BanPonce Corporation and the First National Bank of Chicago, as trustee. (15) 4.12 Form of medium-term fixed rate note of BanPonce Corporation (16) 4.13 Form of medium-term floating rate note of BanPonce Corporation (17) 10.2 Form 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (8) 10.3 Senior Note Agreement dated as of January 15, 1992, between BanPonce Corporation and New York Life Insurance Company regarding the issuance by BanPonce Corporation of $30,000,000 Senior Notes due January 15, 1997. (9) 10.8 Management Incentive Plan for certain Division Supervisors approved in January, 1987. (10) 10.8.1 BanPonce Corporation Senior Executive Long-Term Incentive Plan dated October 6, 1994. (11) 10.9 Stock Deferment Plan for outside directors effective on August 15, 1996. 10.10 Revolving loan agreement executed by and between Vehicle Equipment Leasing and BanPonce Corporation as of January 15, 1992 in the aggregate principal amount of $30,000,000. (12) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merrill Lynch, Pierce, Fenner & Smith, Incorporated acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (13) 10.12.2 Revolving Credit and competitive advance facility and credit agreement by and between BanPonce Corporation and BanPonce Financial Corp and Chemical Bank, as agent bank, for borrowing up to the principal amount of $500,000,000 dated as of November 3, 1995. (14) 10.13 Banco Popular de Puerto Rico Bank's Note Program up to the aggregate amount of $600,000,000 executed on September 24, 1996 10.14 BanPonce Financial Corp, 6 3/4% Medium Term Notes, Series C, due August 9, 2001 in the aggregate principal amount of $75,000,000.
17 18 12.0 Computation of Ratio of Earnings to Fixed Charges 13.1 Registrants Annual Report to Shareholders for the year ended December 31, 1996 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 27.0 Financial Data Schedule (for SEC use only) 99.1 Registrant's Proxy Statement for the April 25, 1997 Annual Meeting of Stockholders
- ------------------------------ (1) Incorporated by reference to Exhibit 4.1 of Registration Statement No.33-39028. (1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686 and to Exhibit 4(a) on Form 8-K filed on February 28, 1995. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-K. (5) Incorporated by reference to Registration Statement No. 33-61601. (6) Incorporated by reference to Exhibit 4(e) on Form 8-K filed on December 13, 1995. (7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on December 13, 1995. (8) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. (9) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K. (10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (11) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K. (12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (14) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K. (15) Incorporated by reference to Exhibit 4(c) on Form 8-K filed on April 13, 1995. (16) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April 13, 1995. (17) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April 13, 1995. EX-10.9 2 STOCK DEFERMENT PLAN 1 EXHIBIT 10.9 STOCK DEFERMENT PLAN FOR DIRECTORS OF BANPONCE CORPORATION AND BANCO POPULAR DE PUERTO RICO EXECUTIVE SUMMARY 1. THE PLAN. Stock Deferment Plan would implement the purchase of BanPonce Shares by each outside director. Each director who wishes to participate would sign an individual agreement with the Bank or BanPonce, as applicable. 2. PURCHASE OF SHARES. Each director may defer the $12,000 Annual Retainer, plus the Additional Contribution of $0.25 per dollar, which amounts shall be applied to the purchase of Shares by an agent. 3. EFFECTIVE DATE. August 15, 1996 (directors may defer unused portion of this year's retainer). 4. DEFERRAL ELECTION. After this year, the decision to defer any part of the Annual Retainer must be made prior to April 30 (or the Stockholders' Meeting), and the annual election may not be revoked during the Plan Year. 5. VOTING RIGHTS; DIVIDENDS. Directors may vote and receive dividends payable on the Shares in the Plan. (The dividends may be reinvested under the Dividend Reinvestment Plan.) 6. TRANSFER RESTRICTIONS. The directors may not sell, transfer or pledge the Shares while they remain on the Board. The Shares will be held in custody by Banco Popular until the director is no longer on the Board, and thereafter transfer restrictions will not apply. 7. FORFEITURE. If a director is removed from office for cause by appropriate corporate action or under authority of law, he or she will forfeit all of the Shares acquired with the Additional Contribution, and must sell the Retainer Shares to BanPonce at the lower of cost or market value. 8. TAX TREATMENT: The Plan is intended to allow directors to defer recognition of income on amounts applied for the purchase of Shares, until the director receives the Shares without the transfer restrictions. The transfer restrictions (at paragraph 6) and the forfeiture provisions (at paragraph 7) are intended to strengthen the argument for deferral of income recognition. -1- 2 EXHIBIT 10.9 (CONT.) AGREEMENT (STOCK DEFERMENT PLAN) AGREEMENT made as of August 15, 1996 by and between BANCO POPULAR DE PUERTO RICO, a banking corporation organized under the laws of the Commonwealth of Puerto Rico (hereafter the "Corporation"), and JUAN A. ALBORS, a director of the Corporation (hereinafter the "Director"). WITNESSETH WHEREAS, the Director has served as a director of the Corporation and the Corporation has derived substantial benefits as a result of his work; WHEREAS, the Corporation has adopted a compensation program for its outside directors pursuant to which, among other things, its outside directors will be paid an annual retainer on a quarterly basis (the "Annual Retainer"), and the directors have the option on a yearly basis to elect to defer all or part of the Annual Retainer for the purchase of shares of common stock of BanPonce Corporation ("Shares"); WHEREAS, the Corporation has established the "Stock Deferment Plan" (the "Plan") in order to implement the stock deferment option under its compensation program; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereby agree as follows: ARTICLE I PARTICIPATION IN THE PLAN 1.1 The Director must execute and deliver an election statement (a "Statement") on a yearly basis to the Corporation, substantially in the form of Exhibit A hereto or in such form acceptable to the Corporation, pursuant to which the Director shall designate the amount of the Annual Retainer which shall be deferred for the purchase of Shares. Said Statement must be received by the Corporation no later than April 15 of each year (the "Election Deadline") and shall remain in effect until April 30 of the following year (each such period, a "Plan Year"); provided, however, that for the current Plan Year 1996-97, the Statement must be received by the Corporation on or prior to August 15, 1996, and will be applicable for the portion of the Annual Retainer which as of such date shall not have been paid or disbursed in favor of the Director. -2- 3 EXHIBIT 10.9 (CONT.) 1.2 The Statement made for any Plan Year may not revoked during such Plan Year, and shall also govern the deferral of all or any designated portion of the Annual Retainer during the following Plan Year unless the Director delivers a Statement to the Corporation before the Election Deadline for the next Plan Year. ARTICLE II PURCHASE OF COMMON SHARES AND CONDITIONS AFFECTING SUCH SHARES 2.1 On a quarterly basis the Corporation will apply the portion of the Annual Retainer that the Director has elected to have deferred under the Plan (the "Deferred Contribution") towards the purchase of Shares on behalf of the Director (the "Retainer Shares"). 2.2 On a quarterly basis the Corporation will also contribute and apply an additional amount equal to 25 cents for every dollar of the Deferred Contribution (the "Additional Contribution"), which shall also be applied towards the purchase of Shares on behalf of the Director (the "Additional Shares"). 2.3 (a) The Shares will be purchased in the open market or in negotiated transactions by an agent designated by the Corporation for all of the directors participating in the Plan (the "Agent"). Purchase of Shares in the open market by the Agent may be made in the over-the-counter market or on any securities exchange where the Shares may be traded. (b) Purchases of Shares on the open market or in negotiated transactions shall be made by the Agent during the period from and including the fifteenth day of the month until the last day of the month in which the funds are made available to the Agent in accordance with Sections 2.1 and 2.2 hereto (the "Investment Period"), subject to any applicable requirements of federal or state securities laws affecting the timing and manner of purchases of Shares under the Plan. (c) Subject to any limitations imposed by federal or state securities laws, the Agent will have full discretion as to all matters relating to open market purchases during each Investment Period, including the number of Shares, if any, to be purchased on any given day or at any time of day, the price paid for such Shares, the markets on which such Shares are to be purchased (including on any securities exchange, in the over-the-counter market or in negotiated transactions) and the persons (including other brokers and dealers) from or through whom such purchases are made. (d) The Director's account under the Plan will be credited on a quarterly basis with the number of Shares equal to the amount of the Deferred Contribution and Additional Contribution divided by the purchase price per Share. The "purchase price per Share" wi ll be the weighted average paid for all Shares purchased for all directors under the Plan during such Investment Period. -3- 4 EXHIBIT 10.9 (CONT.) 2.4 All certificates representing Shares purchased on behalf of the Director pursuant to the Plan (the "Certificates") shall be held in custody by the Corporation on behalf of the Director and will not be delivered to the Director until his participation in the Plan terminates as described in Section 3.1 hereto. 2.5 The Director will be entitled to receive all dividends payable with respect to Shares held on his behalf under the Plan, and will be entitled to all voting rights associated with Shares held on his behalf under the Plan. 2.6 The Director understands and agrees that until his participation in the Plan terminates as described in Section 3.1 hereto and the Certificates are delivered to the Director, the Director will not sell, transfer, assign, pledge or in any way encumber Shares held on his behalf under the Plan. 2.7 The Corporation will prepare and deliver to the Director periodic statements showing the number of Shares being held on the Director's behalf under the Plan. Such statements will separately itemize (i) the number of Retainer Shares purchased during the preceding reporting period and the aggregate number of Retainer Shares purchased to date and (ii) the number of Additional Shares purchased during the preceding reporting period and the aggregate number of Additional Shares purchased to date. ARTICLE III TERMINATION OF PARTICIPATION IN THE PLAN 3.1 The Director's participation in the Plan pursuant to this Agreement will terminate when his membership in the Board of Directors of the Corporation (and/or of BanPonce Corporation) terminates (for reasons other than removal from office for cause by appropriate corporate action or under authority of law). At such time, all of the Certificates representing Shares held in custody by the Corporation on behalf of the Director under the Plan will be delivered to the Director; provided, however, that Certificates representing Shares that have been held under the Plan for less than six months from their date of purchase will be delivered to the Director by the Corporation once the six-month holding period has been met. 3.2 It is agreed by the parties that once the Director's participation in the Plan terminates and the delivery of the Certificates to the Director has taken place, all restrictions under the Plandescribed in Section 2.6 hereto above relating to the non-transferability of such Shares will terminate. -4- 5 EXHIBIT 10.9 (CONT.) ARTICLE IV PENALTIES FOR REMOVAL FOR CAUSE 4.1 In the event that the Director is removed from office for cause by appropriate corporate action or under authority of law: (a) all Additional Shares held on behalf of the Director under the Plan will be forfeited to BanPonce Corporation at no cost; and (b) the Director must sell to BanPonce Corporation all of the Retainer Shares purchased in his name under the Plan at the lower of: (i) the purchase price per Share at the time each such Retainer Share was purchased on behalf of the Director, and (ii) the Average Market Price (as defined below) of the Shares as of the date the Director was removed from office for cause. The "Average Market Price" shall be equal to the average of the last reported sales price of Shares on the NASDAQ National Market System (or the principal exchange on which Shares may be listed) during the last twenty (20) reported trading days preceding the date of such removal from office. 4.2 In the event that BanPonce Corporation is not permitted, pursuant to applicable law, contract provisions or otherwise, to purchase the Retainer Shares on the date of removal from office as provided in Section 4.1(b) above, BanPonce Corporation shall be entitled to purchase the Retainer Shares within thirty (30) days after the lapse of such restrictions, in which case the "Average Market Price" shall be based upon the last twenty (20) reported trading days immediately preceding the date of such purchase. -5- 6 EXHIBIT 10.9 (CONT.) ARTICLE V MISCELLANEOUS 5.1 This Agreement shall be binding upon the heirs, administrators, executors and the successors and assigns of the Director, and the successors and assigns of the Corporation. This Agreement shall not be modified or amended except by an instrument in writing signed by both parties. 5.2 Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or impose any fiduciary duties on the Corporation in favor of the Director, his designated beneficiary(ies) or any other person. 5.3 All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. 5.4 If any provision of this Agreement shall be held invalid or unenforceable, such provision shall be deemed deleted from this Agreement and replaced by a valid and enforceable provision which, so far as possible, achieves the same economic and other benefits for the parties as the severed provision was intended to achieve, and the remaining provisions of the Agreement shall continue in full force and effect. 5.5 This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Puerto Rico. IN WITNESS WHEREOF, AND INTENDING TO BE LEGALLY BOUND, the parties hereto have each caused this Agreement to be executed in San Juan, Puerto Rico as of the date first above written. BANCO POPULAR DE PUERTO RICO DIRECTOR By: ----------------------------------- ------------------------------ Name: Title: -6- 7 EXHIBIT 10.9(CONT.) ELECTION STATEMENT This election statement is delivered pursuant to, is made a part of and is subject to all of the terms and conditions of the Agreement by and between the Corporation and the undersigned dated as of August 15, 1996 related to the Stock Deferment Plan (the "Agreement"). The undersigned hereby elects to defer the amount of $_________ from his annual retainer, which amount shall be used to purchase on the undersigned's behalf shares of common stock of BanPonce Corporation subject to the terms and conditions of the Agreement. In San Juan, Puerto Rico this __ day of ______________, 199_. -------------------------------- DIRECTOR Accepted: BANCO POPULAR DE PUERTO RICO - ---------------------------- Name: Title: -7- 8 EXHIBIT 10.9 (CONT.) AGREEMENT (STOCK DEFERMENT PLAN) AGREEMENT made as of August 15, 1996 by and between BANPONCE CORPORATION, a banking corporation organized under the laws of the Commonwealth of Puerto Rico (hereafter the "Corporation"), and FRANCISCO PEREZ, JR., a director of the Corporation (hereinafter the "Director"). WITNESSETH WHEREAS, the Director has served as a director of the Corporation and the Corporation has derived substantial benefits as a result of his work; WHEREAS, the Corporation has adopted a compensation program for its outside directors pursuant to which, among other things, its outside directors will be paid an annual retainer on a quarterly basis (the "Annual Retainer"), and the directors have the option on a yearly basis to elect to defer all or part of the Annual Retainer for the purchase of shares of common stock of BanPonce Corporation ("Shares"); WHEREAS, the Corporation has established the "Stock Deferment Plan" (the "Plan") in order to implement the stock deferment option under its compensation program; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereby agree as follows: ARTICLE I PARTICIPATION IN THE PLAN 1.1 The Director must execute and deliver an election statement (a "Statement") on a yearly basis to the Corporation, substantially in the form of Exhibit A hereto or in such form acceptable to the Corporation, pursuant to which the Director shall designate the amount of the Annual Retainer which shall be deferred for the purchase of Shares. Said Statement must be received by the Corporation no later than April 15 of each year (the "Election Deadline") and shall remain in effect until April 30 of the following year (each such period, a "Plan Year"); provided, however, that for the current Plan Year 1996-97, the Statement must be received by the Corporation on or prior to August 15, 1996, and will be applicable for the portion of the Annual Retainer which as of such date shall not have been paid or disbursed in favor of the Director. 1.2 The Statement made for any Plan Year may not revoked during such Plan Year, and shall also govern the deferral of all or any designated portion of the Annual Retainer during the following Plan Year unless the Director delivers a Statement to the Corporation before the Election Deadline for the next Plan Year. -8- 9 EXHIBIT 10.9 (CONT.) ARTICLE II PURCHASE OF COMMON SHARES AND CONDITIONS AFFECTING SUCH SHARES 2.1 On a quarterly basis the Corporation will apply the portion of the Annual Retainer that the Director has elected to have deferred under the Plan (the "Deferred Contribution") towards the purchase of Shares on behalf of the Director (the "Retainer Shares"). 2.2 On a quarterly basis the Corporation will also contribute and apply an additional amount equal to 25 cents for every dollar of the Deferred Contribution (the "Additional Contribution"), which shall also be applied towards the purchase of Shares on behalf of the Director (the "Additional Shares"). 2.3 (a) The Shares will be purchased in the open market or in negotiated transactions by an agent designated by the Corporation for all of the directors participating in the Plan (the "Agent"). Purchase of Shares in the open market by the Agent may be made in the over-the-counter market or on any securities exchange where the Shares may be traded. (b) Purchases of Shares on the open market or in negotiated transactions shall be made by the Agent during the period from and including the fifteenth day of the month until the last day of the month in which the funds are made available to the Agent in accordance with Sections 2.1 and 2.2 hereto (the "Investment Period"), subject to any applicable requirements of federal or state securities laws affecting the timing and manner of purchases of Shares under the Plan. (c) Subject to any limitations imposed by federal or state securities laws, the Agent will have full discretion as to all matters relating to open market purchases during each Investment Period, including the number of Shares, if any, to be purchased on any given day or at any time of day, the price paid for such Shares, the markets on which such Shares are to be purchased (including on any securities exchange, in the over-the-counter market or in negotiated transactions) and the persons (including other brokers and dealers) from or through whom such purchases are made. (d) The Director's account under the Plan will be credited on a quarterly basis with the number of Shares equal to the amount of the Deferred Contribution and Additional Contribution divided by the purchase price per Share. The "purchase price per Share" will be the weighted average paid for all Shares purchased for all directors under the Plan during such Investment Period. 2.4 All certificates representing Shares purchased on behalf of the Director pursuant to the Plan (the "Certificates") shall be held in custody by Banco Popular de Puerto Rico on behalf of the Director and will not be delivered to the Director until his participation in the Plan terminates as described in Section 3.1 hereto. 2.5 The Director will be entitled to receive all dividends payable with respect to Shares held on his behalf under the Plan, and will be entitled to all voting rights associated with Shares held on his behalf under the Plan. -9- 10 EXHIBIT 10.9 (CONT.) 2.6 The Director understands and agrees that until his participation in the Plan terminates as described in Section 3.1 hereto and the Certificates are delivered to the Director, the Director will not sell, transfer, assign, pledge or in any way encumber Shares held on his behalf under the Plan. 2.7 The Corporation will prepare and deliver to the Director periodic statements showing the number of Shares being held on the Director's behalf under the Plan. Such statements will separately itemize (i) the number of Retainer Shares purchased during the preceding reporting period and the aggregate number of Retainer Shares purchased to date and (ii) the number of Additional Shares purchased during the preceding reporting period and the aggregate number of Additional Shares purchased to date. ARTICLE III TERMINATION OF PARTICIPATION IN THE PLAN 3.1 The Director's participation in the Plan pursuant to this Agreement will terminate when his membership in the Board of Directors of the Corporation terminates (for reasons other than removal from office for cause by appropriate corporate action or under authority of law). At such time, all of the Certificates representing Shares held in custody by Banco Popular de Puerto Rico on behalf of the Director under the Plan will be delivered to the Director; provided, however, that Certificates representing Shares that have been held under the Plan for less than six months from their date of purchase will be delivered to the Director once the six-month holding period has been met. 3.2 It is agreed by the parties that once the Director's participation in the Plan terminates and the delivery of the Certificates to the Director has taken place, all restrictions under the Plan described in Section 2.6 hereto above relating to the non-transferability of such Shares will terminate. ARTICLE IV PENALTIES FOR REMOVAL FOR CAUSE 4.1 In the event that the Director is removed from office for cause by appropriate corporate action or under authority of law: (a) all Additional Shares held on behalf of the Director under the Plan will be forfeited to the Corporation at no cost; and (b) the Director must sell to the Corporation all of the Retainer Shares purchased in his name under the Plan at the lower of: (i) the purchase price per Share at the time each such Retainer Share was purchased on behalf of the Director, and -10- 11 EXHIBIT 10.9 (CONT.) (ii) the Average Market Price (as defined below) of the Shares as of the date the Director was removed from office for cause. The "Average Market Price" shall be equal to the average of the last reported sales price of Shares on the NASDAQ National Market System (or the principal exchange on which Shares may be listed) during the last twenty (20) reported trading days preceding the date of such removal from office. 4.2 In the event that the Corporation is not permitted, pursuant to applicable law, contract provisions or otherwise, to purchase the Retainer Shares on the date of removal from office as provided in Section 4.1(b) above, the Corporation shall be entitled to purchase the Retainer Shares within thirty (30) days after the lapse of such restrictions, in which case the "Average Market Price" shall be based upon the last twenty (20) reported trading days immediately preceding the date of such purchase. ARTICLE V MISCELLANEOUS 5.1 This Agreement shall be binding upon the heirs, administrators, executors and the successors and assigns of the Director, and the successors and assigns of the Corporation. This Agreement shall not be modified or Amended except by an instrument in writing signed by both parties. 5.2 Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or impose any fiduciary duties on the Corporation in favor of the Director, his designated beneficiary(ies) or any other person. 5.3 All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. 5.4 If any provision of this Agreement shall be held invalid or unenforceable, such provision shall be deemed deleted from this Agreement and replaced by a valid and enforceable provision which, so far as possible, achieves the same economic and other benefits for the parties as the severed provision was intended to achieve, and the remaining provisions of the Agreement shall continue in full force and effect. 5.5 This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Puerto Rico. IN WITNESS WHEREOF, AND INTENDING TO BE LEGALLY BOUND, the parties hereto have each caused this Agreement to be executed in San Juan, Puerto Rico as of the date first above written. BANPONCE CORPORATION DIRECTOR By: -------------------------------- --------------------------------- Name: Title: -11- 12 EXHIBIT 10.9 (CONT.) ELECTION STATEMENT This election statement is delivered pursuant to, is made a part of and is subject to all of the terms and conditions of the Agreement by and between the Corporation and the undersigned dated as of August 15, 1996 related to the Stock Deferment Plan (the "Agreement"). The undersigned hereby elects to defer the amount of $_________ from his annual retainer, which amount shall be used to purchase on the undersigned's behalf shares of common stock of BanPonce Corporation subject to the terms and conditions of the Agreement. In San Juan, Puerto Rico this __ day of ______________, 199_. -------------------------------- DIRECTOR Accepted: BANPONCE CORPORATION - -------------------- Name: Title: -12- EX-10.13 3 BANCO POPULAR NOTE PROGRAM 1 OFFERING CIRCULAR EXHIBIT 10.13 BANCO POPULAR DE PUERTO RICO $600,000,000 BANK NOTES DUE FROM 7 DAYS TO 15 YEARS FROM DATE OF ISSUE Banco Popular de Puerto Rico (the "Bank") may from time to time issue bank notes with maturities ranging from 7 days to one year from their respective dates of issue (the "Short-Term Bank Notes") and bank notes with maturities ranging from greater than one year to 15 years from their respective dates of issue (the "Medium-Term Bank Notes," and together with the Short-Term Bank Notes, the "Notes"). The aggregate principal amount of Notes will not exceed an aggregate maximum principal amount of $600,000,000 outstanding at any one time. Each Note will mature on such date (the "Stated Maturity Date") as selected by the initial purchaser and agreed to by the Bank. The Notes may be subject to redemption at the option of the Bank or repayment at the option of the holder thereof, in each case, in whole or in part, prior to their Stated Maturity Date, as set forth therein. See "Description of Notes." The Notes will be issued only in fully registered form in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. The Notes will be issued only in book-entry form and will be represented by one or more global Notes (each, a "Global Note" and collectively, the "Global Notes"), registered in the name of The Depository Trust Company, as depositary (the "Depositary," which term includes any successor thereof), or a nominee thereof. Ownership of beneficial interests in a Global Note will only be evidenced by, and transfers thereof will be effected only through, records maintained by the Depositary and its participants. Except as described under "Description of Notes -- Book-Entry Registration," beneficial owners of Notes issued in book-entry form will not be entitled to receive physical delivery of Notes in definitive form. Notes will be issued as either Fixed Rate Notes or Floating Rate Notes as described herein. See "Description of Notes." Unless otherwise specified in the applicable Note, interest on Fixed Rate Notes having maturities of greater than one year will be payable semi-annually on June 15 and December 15 of each year. Unless otherwise specified in the applicable Note, interest on Fixed Rate Notes with maturities of one year or less will be payable only at maturity or earlier redemption or repayment. Interest on Floating Rate Notes will be payable on the dates described under "Description of Notes -- Floating Rate Notes." Whenever this Offering Circular indicates that information may be set forth in a Note, such information may also be set forth in a Pricing Supplement to this Offering Circular. EACH NOTE ISSUED BY THE BANK WILL BE AN OBLIGATION SOLELY OF THE BANK AND WILL NOT BE AN OBLIGATION OF, OR OTHERWISE GUARANTEED BY, ANY OTHER BANK OR BANPONCE CORPORATION. THE NOTES DO NOT EVIDENCE DEPOSITS OF THE BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE OBLIGATIONS EVIDENCED BY THE NOTES RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITIES OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THE NOTES WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THE NOTES COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. SEE "DESCRIPTION OF NOTES" AND "SUPERVISION, REGULATION AND OTHER MATTERS." THE NOTES HAVE NOT BEEN, AND ARE NOT REQUIRED TO BE, REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR THE PUERTO RICO UNIFORM SECURITIES ACT. THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF THE COMMONWEALTH OF PUERTO RICO NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF THE COMMONWEALTH OF PUERTO RICO PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE NOTES WILL BE OFFERED ONLY TO INSTITUTIONAL INVESTORS THAT ARE "ACCREDITED INVESTORS" WITHIN THE MEANING OF RULE 501 UNDER THE 1933 ACT. EACH OWNER OF A BENEFICIAL INTEREST IN A GLOBAL NOTE IS REQUIRED TO HOLD A BENEFICIAL INTEREST IN $250,000 PRINCIPAL AMOUNT OR ANY INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF OF SUCH GLOBAL NOTE AT ALL TIMES. SEE "NOTICE TO INVESTORS."
============================================================================================================================ Agents' Discounts and Proceeds to the Price to Public(1)(4) Commissions(1)(2)(4) Bank(1)(3)(4) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Per Note . . . . . . . . . . . 100% .05% - .70% 99.95% - 99.30% - ---------------------------------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . $600,000,000 $300,000-$4,200,000 $599,700,000-$595,800,000 ============================================================================================================================
(1) The agents listed below (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 or, if so specified in the applicable Pricing Supplement, for resale at a fixed public offering price. Unless otherwise specified in the applicable Pricing Supplement, any Note sold to an Agent as principal will be purchased by such Agent at a price equal to 100% of the principal amount thereof less a percentage of the principal amount which shall be agreed upon by the Agent and the Bank. Such Agent may also utilize its reasonable efforts on an agency basis to solicit offers to purchase the Notes at 100% of the principal amount thereof, unless otherwise specified in the applicable Pricing Supplement. See "Plan of Distribution." The Bank will pay a commission to each Agent ranging from .05% to .70% of the principal amount of each Note, depending on stated maturity, sold by such Agent. The Bank also has reserved the right to sell Notes directly to investors on its own behalf. No commission will be payable nor will a discount be allowed on any direct sales by the Bank. (2) The Bank has agreed to indemnify the Agents against, and to provide contribution with respect to, certain liabilities, including liabilities under the federal securities laws. See "Plan of Distribution." (3) Before deducting expenses payable by the Bank. (4) Because the maximum amount of Notes is stated as an outstanding amount rather than an issuance amount, the actual amount of Notes issued may exceed $600,000,000 and, therefore, the price to the public, the agents' discounts and commissions and the proceeds to the Bank may exceed the dollar amounts for each stated above. The percentages per Note would remain as stated above, however, unless otherwise agreed to by the Bank and the Agents. -------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. CS FIRST BOSTON -------------- The date of this Offering Circular is September 24, 1996. 2 IN CONNECTION WITH THE OFFERING OF NOTES UNDERWRITTEN BY ONE OR MORE AGENTS AS PRINCIPAL, SUCH AGENTS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED THEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. UNLESS OTHERWISE SPECIFIED IN THE APPLICABLE PRICING SUPPLEMENT, THE NOTES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE AND THERE CAN BE NO ASSURANCE THAT THE NOTES OFFERED BY THIS OFFERING CIRCULAR WILL BE SOLD OR THAT THERE WILL BE A SECONDARY MARKET FOR THE NOTES. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE BANK AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE NOTES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Bank submits quarterly to its primary federal regulator certain reports called "Consolidated Reports of Condition and Income" (the "Call Reports") on Federal Financial Institutions Examination Council ("FFIEC") Form 031. Each Call Report consists of a Balance Sheet, Income Statement, Changes in Equity Capital and other supporting schedules as of the end of the period to which such Call Report relates. The Call Reports are prepared in accordance with regulatory instructions issued by the FFIEC. Because of the special supervisory, regulatory and economic policy needs served by the Call Reports, those regulatory instructions do not in all cases follow generally accepted accounting principles, including the opinions and statements of the Accounting Principles Board or the Financial Accounting Standards Board. While the Call Reports are supervisory and regulatory documents, not primarily accounting documents, and do not provide a complete range of financial disclosure about the Bank, the Call Reports nevertheless provide important information concerning the financial condition and results of operations of the Bank. The publicly available portions of each Call Report filed by the Bank and any amendment or supplement thereto, beginning with and including the Call Report for the period ended December 31, 1993, are incorporated herein by reference. The publicly available portions of any subsequent Call Report filed by the Bank with the Federal Reserve Board are incorporated herein by reference. The publicly available portions of the Call Reports with respect to the Bank are on file with, and publicly available upon written request to, the Federal Deposit Insurance Corporation (the "FDIC"), 550 17th Street, N.W., Washington, D.C. 20429, Attention: Disclosure Group, Room F-518. The Bank is a wholly owned subsidiary of BanPonce Corporation (the "Corporation"), a bank holding company organized in 1984 under the laws of the Commonwealth of Puerto Rico and registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). In addition to the Call Reports referred to above, the Bank also hereby incorporates by reference into this Offering Circular the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, the Corporation's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 and the Corporation's Current Report on Form 8-K dated July 9, 1996, as filed by the Corporation with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Each document filed by the Corporation pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act subsequent to the date of this Offering Circular and prior to the termination of the offering of the Notes shall be incorporated by reference into this Offering Circular and deemed to be a part hereof from the date of filing of such document. This filed material can be inspected and copied at the Commission's offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices in New York (7 World Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511), and copies of such materials can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet Web site that contains reports, proxy and information statements and other information regarding 2 3 registrants that file electronically with the Commission, including the Corporation. The address of such Internet Web site is http://www.sec.gov. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Offering Circular to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Offering Circular. The Bank and the Corporation will provide upon request and without charge to each person to whom a copy of this Offering Circular is delivered a copy of any or all of the foregoing documents incorporated herein by reference (other than exhibits to such documents which are not specifically incorporated therein by reference). All written requests or telephone inquiries should be directed to Amilcar L. Jordan (787-765-9800), BanPonce Corporation, 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918. 3 4 NOTICE TO INVESTORS The Notes have not been, and are not required to be, registered with the Commission under the 1933 Act or the Puerto Rico Uniform Securities Act. Qualification of an indenture under the Trust Indenture Act of 1939, as amended, is not required and no trust indenture has been entered into in connection with the Notes. The Notes will be offered and sold only to institutional investors that are "accredited investors" as defined in Rule 501 under the 1933 Act ("institutional accredited investors") and each beneficial owner of a Global Note will be required to hold a beneficial interest in $250,000 principal amount or any integral multiple of $1,000 in excess thereof at all times in such Global Note. EACH PURCHASER OF A NOTE, IN MAKING ITS PURCHASE, WILL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT IT IS SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, THAT IT IS PURCHASING SUCH NOTE FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ANOTHER INSTITUTIONAL ACCREDITED INVESTOR AND THAT FOLLOWING SUCH PURCHASE IT OR SUCH OTHER INSTITUTIONAL ACCREDITED INVESTOR HOLDING A BENEFICIAL INTEREST IN A GLOBAL NOTE WILL HOLD SUCH BENEFICIAL INTEREST IN A PRINCIPAL AMOUNT OF $250,000 OR AN INTEGRAL MULTIPLE OF $1,000 IN EXCESS THEREOF AT ALL TIMES. 4 5 BANCO POPULAR DE PUERTO RICO Banco Popular de Puerto Rico is a commercial bank chartered under the laws of the Commonwealth of Puerto Rico and Puerto Rico's largest banking institution based on assets. The Bank, which is the Corporation's principal banking subsidiary, offers a full range of commercial banking services and, in addition, offers small personal loans, vehicle and equipment leasing and mortgage services through its subsidiaries Popular Consumer Services, Inc., Popular Leasing and Rental, Inc., and Popular Mortgage, Inc. Based on its Call Reports, at June 30, 1996 the Bank had $13.6 billion in assets, $12.6 billion in total liabilities and $936.7 million in total equity capital. At June 30, 1996, the Bank operated through 170 branches throughout Puerto Rico, 29 branches in New York City, one branch in Los Angeles, California, seven branches in the U.S. Virgin Islands, one branch in the British Virgin Islands and a federal agency in Chicago. At June 30, 1996, the assets of the Bank constituted approximately 82.77% of the assets of the Corporation. The executive offices of the Bank are located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918, telephone number (787) 765-9800. 5 6 SELECTED UNAUDITED FINANCIAL INFORMATION OF THE BANK The following tables set forth selected unaudited consolidated financial information of the Bank and its subsidiaries, and are based on the Call Reports of the Bank which are incorporated by reference in this Offering Circular and should be read in conjunction therewith. The financial information presented is qualified in its entirety by the financial statements and information available in the Call Reports as described above under "Incorporation of Certain Documents by Reference." The Call Reports and the following selected unaudited consolidated financial information were prepared in accordance with regulatory accounting principles which differ, in certain cases, from generally accepted accounting principles used to prepare the consolidated financial statements of the Corporation.
BANCO POPULAR DE PUERTO RICO (DOLLARS IN THOUSANDS) December 31, --------------------------------------- June 30, June 30, 1996(1) 1995(1) 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: ASSETS Cash and due from banks $ 505,304 $ 384,731 $ 437,223 $ 418,242 $ 363,866 Securities: Held to maturity 1,694,764 3,334,599 1,651,344 2,905,805 3,329,798 Available-for-sale 2,858,951 883,151 2,869,896 708,698 714,566 Federal funds sold and other money market investments 21,117 75,966 113,285 265,670 262,692 Trading securities 103,914 4,663 84,893 1,670 3,017 Loans and leases, net of unearned income 7,965,474 7,150,080 7,349,053 6,825,671 5,861,832 Allowance for loan and lease losses 157,345 141,431 149,304 138,614 124,920 ----------- ----------- ----------- ----------- ----------- Loans and leases, net of unearned income 7,808,129 7,008,649 7,199,749 6,687,057 5,736,912 Bank premises and equipment 280,801 261,376 266,225 303,916 285,999 Intangible assets 94,038 109,463 100,634 98,309 111,668 Other real estate owned 2,393 6,024 3,144 9,529 12,049 Other assets 240,852 194,038 205,036 160,434 166,634 ----------- ----------- ----------- ----------- ----------- Total assets $13,610,263 $12,262,660 $12,931,429 $11,559,330 $10,987,201 =========== =========== =========== =========== =========== LIABILITIES Deposits in domestic offices $10,021,588 $ 9,076,713 $ 9,300,713 $ 8,686,923 $ 8,505,580 Deposits in foreign offices 72,737 55,000 61,778 40,746 32,386 ----------- ----------- ----------- ----------- ----------- Total deposits 10,094,325 9,131,713 9,362,491 8,727,669 8,537,966 Federal funds purchased and securities sold under agreements to repurchase 1,608,008 1,344,715 2,037,900 1,415,188 951,733 Other short-term borrowings 270,204 670,675 180,731 328,583 496,814 Notes payable 492,138 73,795 203,790 59,600 29,692 Subordinated notes -- 50,000 50,000 50,000 62,000 Other liabilities 208,862 152,003 200,090 160,539 145,657 ----------- ----------- ----------- ----------- ----------- Total liabilities $12,673,537 $11,422,901 $12,035,002 $10,741,579 $10,223,862 =========== =========== =========== =========== =========== EQUITY CAPITAL Preferred Stock -- -- -- -- 11,000 Common Stock 7,710 7,710 7,710 7,710 7,710 Surplus 579,617 514,617 529,617 514,617 491,046 Undivided profits 358,222 274,407 300,080 269,459 211,012 Net unrealized holding gains (losses) on securities available for sale (8,823) 168 9,020 (16,892) -- Capital reserves -- 42,857 50,000 42,857 42,571 ----------- ----------- ----------- ----------- ----------- Total equity capital 936,726 839,759 896,427 817,751 763,339 ----------- ----------- ----------- ----------- ----------- Total liabilities and equity capital $13,610,263 $12,262,660 $12,931,429 $11,559,330 $10,987,201 =========== =========== =========== =========== ===========
_____________________ (1) Interim period financial data are not necessarily indicative of financial data for the year. 6 7 BANCO POPULAR DE PUERTO RICO (DOLLARS IN THOUSANDS)
Year to Date Years Ended ------------------------ ------------------------------------ June June 30, 1996(1) 30, 1995(1) 1995 1994 1993 ---------- ---------- -------- -------- -------- INCOME STATEMENT DATA Interest Income $509,058 $449,693 $935,415 $793,740 $718,358 Interest Expense 219,855 202,324 421,542 311,989 261,822 Net Interest Income 289,203 247,369 513,874 481,751 456,536 Provision for loan and lease losses 35,291 20,440 54,907 44,846 62,437 Net interest income after provision 253,912 226,930 458,967 436,905 394,099 Non interest income 89,771 69,385 150,025 131,233 118,393 Securities gains (losses) (1,846) (3) (872) 224 864 Non interest expense 236,079 219,998 438,285 413,540 389,823 Income before taxes 105,757 76,313 169,835 154,822 123,533 Applicable income taxes 27,616 12,765 40,470 39,944 22,406 Dividends on preferred stock of Banco Popular -- -- -- 385 770 Cumulative effect of accounting changes -- -- -- -- 5,185 Net Income $78,142 $63,548 $129,365 $114,493 $105,542 SELECTED RATIOS PERFORMANCE RATIOS Return on assets 1.18% 1.09% 1.07% 1.02% 1.03% Return on average equity 17.20% 15.18% 15.14% 14.42% 14.63% Overhead ratio 50.59% 60.89% 56.10% 58.60% 59.45% Non interest income as a % of total income 31.04% 28.05% 29.19% 27.24% 25.93% Earnings to fixed charges 2.65x 2.45x 2.45x 3.02x 3.76x ASSET QUALITY RATIOS Net charge-offs to average loans 0.76% 0.51% 0.62% 0.49% 0.84% Allowance for losses to period end loans 1.98% 1.98% 2.03% 2.03% 2.13% Allowance for losses to non performing assets 120.47% 106.32% 107.87% 142.34% 118.56% Non performing assets as a % of loans and 1.64% 1.86% 1.88% 1.42% 1.79% leases plus OREO CAPITAL RATIOS Tier 1 11.30% 10.94% 11.74% 11.87% 11.85% Total 12.56% 12.20% 13.01% 13.29% 13.72% Leverage Ratios 6.49% 6.47% 6.45% 6.99% 6.56% - ---------------------
(1) Interim period financial data are not necessarily indicative of financial data for the year. 7 8 BANPONCE CORPORATION BanPonce Corporation is a diversified, publicly owned bank holding company, incorporated under the General Corporation Law of Puerto Rico in November 1984. It provides a wide variety of financial services through four subsidiaries: the Bank, Vehicle Equipment Leasing Corporation ("VELCO"), BP Capital Markets, Inc. ("BP Capital") and Popular International Bank, Inc. ("PIB"). At June 30, 1996, the Corporation had $16.4 billion in assets, $15.2 billion in total liabilities and $1.2 billion in total equity capital. VELCO is a wholly-owned subsidiary of the Corporation engaged in finance leasing of motor vehicles to corporations and professionals. Effective April 30, 1995, BP Capital became a direct subsidiary of the Corporation. BP Capital is a broker-dealer engaged in financial advisory and securities brokerage, dealing and underwriting activities in Puerto Rico. PIB is an entity incorporated under the Puerto Rico International Banking Center Act, which allows for the establishment of banks in Puerto Rico to do business exclusively off island. BanPonce Financial Corporation ("Financial"), incorporated in Delaware, is PIB's sole subsidiary. The subsidiaries of Financial are Banco Popular, FSB ("FSB"), a federal savings bank, and Pioneer Bancorp, Inc., a corporation organized under the laws of Delaware and headquartered in Chicago, Illinois, which, through its wholly-owned subsidiary River Associates Bancorp, Inc., a Delaware corporation, owns and operates Pioneer Bank & Trust Company, a bank organized under the laws of the State of Illinois. Equity One, Inc., a Delaware corporation and a wholly-owned subsidiary of FSB, is a diversified consumer financial company engaged in the business of granting personal and mortgage loans and providing dealer financing. On August 26, 1996, the Federal Reserve Bank of New York approved the application of the Corporation to acquire COMBANCORP, a bank holding company located in Commerce, California, and thereby indirectly acquire its national bank subsidiary, Commerce National Bank. As of June 30, 1996, COMBANCORP had assets of approximately $71 million, total liabilities of approximately $65 million and total equity capital of approximately $6.0 million. The Corporation is subject to the provisions of the BHCA, and accordingly, is subject to the supervision of the Federal Reserve Board. As the indirect owner of FSB, the corporation is also subject to the provisions of the Savings and Loan Holding Company Act, as amended, and, accordingly, is subject to regulation by the Office of Thrift Supervision. EACH NOTE ISSUED BY THE BANK IS SOLELY THE OBLIGATION OF THE BANK AND IS NEITHER AN OBLIGATION OF, NOR GUARANTEED BY, THE CORPORATION. SUPERVISION, REGULATION AND OTHER MATTERS GENERAL As a commercial bank organized under the laws of the Commonwealth of Puerto Rico, the Bank is subject to supervision and regulation by the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the "Office of the Commissioner"). In addition, as a result of its New York branches, the Bank is subject to supervision and regulation by the Superintendent of Banks of the State of New York. As a member of the Federal Reserve System, the Bank is also subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). DEPOSITOR PREFERENCE Federal law accords the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution (including the FDIC, as the subrogee of such holders) priority over the claims of general unsecured creditors of such an institution, including the holders of obligations such as the Notes, in the event of a liquidation or other resolution of such institution. For information on the Bank's deposit liabilities outstanding at June 30, 1996, see the selected unaudited financial information of the Bank presented above. 8 9 POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION Pursuant to certain provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), an insured depository institution which is commonly controlled with another insured depository institution is generally liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution 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. Thus, the Bank could incur liability to the FDIC pursuant to this statutory provision in the event of the default of any other insured depository institution owned or controlled by the Corporation. Such liability is subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability (including the Notes), and any obligation subordinated to depositors or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions) and any obligations to shareholders in such capacity. The Corporation currently has two insured depository institution subsidiaries in addition to the Bank. In addition, if any insured depository institution becomes insolvent and the FDIC is appointed its conservator or receiver, the FDIC may, under FIRREA, disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. If the FDIC were to successfully contend that its power to repudiate "contracts" extends to obligations such as the Notes, the effect of any such repudiation should be to accelerate the maturity of the Notes. Such repudiation would result in a claim of the holder of the Notes against the receivership for principal and interest accrued through the date of the appointment of the conservator or receiver. The amount paid upon this claim would depend upon, among other factors, the amount of receivership assets available for the payment of unsecured claims and the priority of this claim relative to the priority of other unsecured creditors and depositors. See "--Depositor Preference" above. If the maturity of the Notes were so accelerated, and a claim relating to the Notes paid by the receivership, the holders of the Notes might not be able, depending upon economic conditions, to reinvest any amounts paid on the Notes at a rate of interest comparable to that paid on the Notes. In addition, although the Notes permit any holder of a Note to declare the principal amount of, accrued interest and premium, if any, on such Note due and payable in the event of the appointment of a conservator or receiver of the Bank, the FDIC as conservator or receiver may enforce most types of contracts, including the Notes, pursuant to their terms, notwithstanding any such provisions. The FDIC as conservator or receiver may also transfer to a new obligor any of the Bank's assets and liabilities, including the Notes, without the approval or consent of the Bank's creditors, including holders of the Notes. In its resolution of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to a deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000 per depositor) or creditors other than depositors (such as holders of the Notes). FDICIA (as defined below) authorized the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured bank by making a final settlement payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. The rate of such final settlement payment is to be a percentage rate determined by the FDIC reflecting an average of the FDIC's receivership recovery experience. As a result of the provisions described above, including those described under "--Depositor Preference," and whether or not the FDIC seeks to repudiate the Notes, in an insolvency of the Bank, holders of Notes would be treated differently from, and could receive, if anything, significantly less than, holders of deposit liabilities of the Bank. FDICIA In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law. In general, FDICIA subjects banks to significantly increased regulation and supervision. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements. FDICIA establishes five capital ratio levels: well capitalized, 9 10 adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, a bank is considered to be well capitalized if it maintains a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a Tier 1 leverage capital ratio of at least 5%, and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is considered to be adequately capitalized if it maintains a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a Tier 1 leverage capital ratio of at least 4% (3% for certain highly rated institutions), and does not otherwise meet the well capitalized definition. The three undercapitalized categories are based upon the amount by which the bank falls below the ratios applicable to adequately capitalized institutions. The capital categories are determined solely for the purposes of applying FDICIA's prompt corrective action ("PCA") provisions, as discussed below, and such capital categories may not constitute an accurate representation of the overall financial condition or prospects of the Bank. As of June 30, 1996, the Bank met the requirements of a "well capitalized" institution. The capital ratios for the Bank as of June 30, 1996 are shown in the selected unaudited financial information of the Bank presented above. Under FDICIA's PCA system, a bank in the undercapitalized category must submit a capital restoration plan guaranteed by its parent company. The liability of the parent company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount needed to comply with the plan. A bank in the undercapitalized category also is subject to limitations in numerous areas including, but not limited to, asset growth, acquisitions, branching, new business lines, acceptance of brokered deposits and borrowings from the Federal Reserve. Progressively more burdensome restrictions are applied to banks in the undercapitalized category that fail to submit or implement a capital plan and to banks that are in the significantly undercapitalized or critically undercapitalized categories. In addition, a bank's primary federal banking agency is authorized to downgrade the bank's capital category to the next lower category upon a determination that the bank is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. An unsafe or unsound practice can include receipt by the institution of a less than satisfactory rating on its most recent examination with respect to its asset quality, management, earnings or liquidity. The FDIC's deposit insurance assessments have moved under FDICIA from a flat-rate system to a risk-based system. The risk-based system places a bank in one of nine risk categories, principally on the basis of its capital level and an evaluation of the bank's risk to the BIF, and bases premiums on the probability of loss to the FDIC with respect to each individual bank. On November 11, 1995, the FDIC revised its premium scheduled to provide a range (effective January 1996) of 0% (subject to a $2,000 minimum) to .27%. The assessment rate schedule is subject to change by the FDIC and accordingly assessment rates could increase in the future. FDICIA and the regulations issued thereunder also have (i) limited the use of brokered deposits to well capitalized banks, and adequately capitalized banks that have received waivers from the FDIC; (ii) implemented uniform real estate lending rules; (iii) prescribed standards to limit the risks posed by credit exposure between banks; (iv) revised risk-based capital rules to include components for measuring the risk posed by interest rate changes; (v) amended various consumer banking laws; (vi) increased restrictions on loans to a bank's insiders; (vii) established standards in a number of areas to assure bank safety and soundness; and (viii) implemented additional requirements for institutions that have $500 million or more in total assets with respect to annual independent audits, audit committees and management reports related to financial statements, internal controls and compliance with designated laws and regulations. OTHER DEVELOPMENTS Notwithstanding state law to the contrary, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning September 29, 1995. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has "opted out" of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger and acquisitions transactions prior to June 1, 1997 ("opting in"). A bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo 10 11 branching. As a Puerto Rico bank, the Bank is treated as a foreign bank for interstate branching purposes and may branch interstate by merger or de novo to the same extent as a domestic bank in the Bank's home state in the United States, which is the State of New York. On September 29, 1995, the Office of the Commissioner issued a circular letter explaining that both interstate banking and interstate branching have been authorized in Puerto Rico since 1933. The circular letter also provides that it is intended to have the same force and effect of "opting in" under the IBBEA. Various bills have been introduced into the United States Congress that would repeal in some respects the provisions of the Glass-Steagall Act prohibiting certain banking organizations from engaging in certain securities activities and the provisions of the BHCA prohibiting affiliations between banking organizations and nonbanking organizations. The Bank cannot predict if and when any such legislation will be enacted or the effect thereof. PUERTO RICO REGULATION Section 27 of the Banking Law requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to 10% of the total deposits or the total paid-in capital, whichever is greater. At the end of its most recent fiscal year, the Bank 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 the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall 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 which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. However, if a bank becomes a member of the Federal Reserve System, the 20% legal reserve shall not be effective and the reserve requirements of the Federal Reserve System shall be applicable. Pursuant to an order of the Federal Reserve Board dated November 24, 1982, the Bank has been exempted from the reserve requirements of the Federal Reserve Board with respect to deposits payable in Puerto Rico but is subject to Puerto Rico regulatory reserve requirements with respect to such deposits. Section 17 of the Banking Law permits the Bank to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent of the paid-in capital and reserve fund of the Bank. As of June 30, 1996, the legal lending limit for the Bank under this provision was approximately $88.1 million. If such loans are secured by collateral worth at least 25 percent more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the Bank, plus its reserve fund. There are no restrictions under Section 17 on the amount of loans which are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States or the Commonwealth of Puerto Rico, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth. RECENT DEVELOPMENTS On August 20, 1996, the Small Business Job Protection Act of 1996 (the "SBJPA") was proposed. The SBJPA provides for the repeal of Section 936 of the Internal Revenue Code of 1986, as amended ("Section 936"). In general terms, Section 936 provides United States corporations operating in Puerto Rico ("936 corporations") with a tax credit against United States federal tax liability on income derived from business operations and certain investments in Puerto Rico. The SBJPA phases out the Section 936 tax credit for income derived from Puerto Rican business operations of a 936 corporation over a ten-year period and repeals, retroactively as of July 1, 1996, the credit against United States federal tax liability for investments ("936 funds") made by 936 corporations in Puerto Rico. This credit has created a local money market (the "936 funds market") in which funding is normally available at a cost below that prevailing in the United States mainland or the Eurodollar market. The volume of the 936 funds market could be reduced significantly during the Bank's current fiscal year as a result of the enactment of the SBJPA. As of June 30, 1996, the Bank was a recipient of and had a balance of $2.1 billion in 936 funds, representing 17.5% of 11 12 the Bank's total liabilities. The Bank anticipates that the main impact of the SBJPA would be a moderate net increase in the Bank's cost of funds. The anticipated rise in the cost of funds is expected to be partially offset by a decrease in the cost of complying with various investment requirements mandated by local regulations that are applicable to all recipients of 936 funds. The repeal of Section 936 could have an adverse effect on the general economic condition of Puerto Rico, the Bank's predominant service area. USE OF PROCEEDS The Bank intends to use the net proceeds from the sale of the Notes for general corporate purposes in the ordinary course of its business. DESCRIPTION OF NOTES The following summaries of certain provisions of the Notes do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Notes, including the definitions therein of certain terms. The terms and conditions set forth below will apply to each Note unless otherwise specified herein or in any amendment or supplement hereto, or in the applicable Note. The terms of the Notes described herein, including the maturities and interest rates, may differ from one Note to another. GENERAL The Bank may from time to time issue Short-Term Bank Notes and Medium-Term Bank Notes. The aggregate principal amount of Notes will not exceed an aggregate maximum principal amount of $600,000,000 outstanding at any one time. The Bank may issue promissory notes and other obligations evidencing indebtedness in addition to the Notes and deposit instruments in an unlimited principal amount. Unless previously redeemed or repaid, each Short-Term Bank Note will mature from 7 days to one year from its date of issue and each Medium-Term Bank Note will mature from greater than one year to 15 years from its date of issue, in each case as selected by the initial purchaser and agreed to by the Bank. Unless otherwise specified in an applicable Note, the Notes will be denominated in U.S. dollars and will be issued only in fully registered form in minimum denominations of $250,000 and integral multiples of $1,000 in excess thereof. EACH NOTE WILL BE A DIRECT, UNCONDITIONAL AND UNSECURED OBLIGATION OF THE BANK AND WILL NOT BE AN OBLIGATION OF, OR GUARANTEED BY, ANY OTHER BANK OR THE CORPORATION. IN EACH INSTANCE THE NOTES DO NOT EVIDENCE DEPOSITS OF THE BANK AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. THE NOTES RANK PARI PASSU WITH ALL OTHER SENIOR UNSECURED INDEBTEDNESS OF THE BANK, EXCEPT DEPOSIT LIABILITIES AND OTHER OBLIGATIONS THAT ARE SUBJECT TO ANY PRIORITY OR PREFERENCES. IN A LIQUIDATION OR OTHER RESOLUTION OF THE BANK, THE NOTES WOULD BE TREATED DIFFERENTLY FROM, AND HOLDERS OF THE NOTES COULD RECEIVE, IF ANYTHING, SIGNIFICANTLY LESS THAN HOLDERS OF, DEPOSIT LIABILITIES OF THE BANK. SEE "SUPERVISION, REGULATION AND OTHER MATTERS." The Notes issued by the Bank will be issued under 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"). The Issuing and Paying Agency Agreement provides that the Issuing and Paying Agent may resign at any time as such agent with respect to the Notes upon 90 days' written notice to the Bank or be removed as such agent with respect to the Notes not less than 30 days following receipt of a written instrument signed by a duly authorized officer of the Bank. The Issuing and Paying Agency Agreement provides that any successor Issuing and Paying Agent shall be a bank or trust company organized and doing business under the laws of the United States or any state thereof, authorized under such laws to exercise corporate trust powers, have a combined capital and surplus of at least $10,000,000 and be subject to supervision and examination by federal or state authority; provided, however, that the foregoing capital and surplus requirements shall not be applicable if the Bank or any affiliate thereof is appointed as successor Issuing and Paying Agent. The Issuing and Paying Agency Agreement provides that any corporation or bank resulting from any merger, conversion or consolidation to which the Issuing and Paying Agent is a party shall be the successor Issuing and Paying 12 13 Agent under the terms of the Issuing and Paying Agency Agreement without the execution or filing of any paper or any further act on the part of any party to the Issuing and Paying Agency Agreement. The Notes will not be issued pursuant to an indenture and, as such, the Issuing and Paying Agent will not be obligated to exercise certain responsibilities that may be exercised by an independent trustee or fiscal agent in connection with certain other debt offerings. Among the responsibilities that may be exercised by an independent trustee or fiscal agent in connection with certain other debt offerings that will not be exercised by the Issuing and Paying Agent are discretionary actions in connection with Events of Default. Each holder of a Note will therefore be responsible for acting independently with respect to certain matters affecting such holder's Note including, but not limited to, responding to requests for consents and waivers, giving written notice of default in the performance of any agreement contained in the Note and accelerating the maturity of such Note on the occurrence of an Event of Default. Except as described below, the Notes will be issued only in book-entry form and will be represented by one or more Global Notes registered in the name of the Depositary, or a nominee thereof (each beneficial interest in a Global Note, a "DTC Book-Entry Note" and collectively, the "DTC Book-Entry Notes"). See "Book-Entry Registration" below. Payments of principal of, premium, if any, and interest on, DTC Book-Entry Notes will be made as specified under "Book- Entry Registration" below. DTC Book-Entry Notes will be transferable or exchangeable only in the manner and to the extent set forth under "Book-Entry Registration" below. The Notes will be offered on a continuous basis. Unless otherwise specified in an applicable Note, interest- bearing Notes will either be Fixed Rate Notes or Floating Rate Notes as specified in the applicable Note. Notes may be issued at discounts from their principal amount payable at Maturity and some Notes may not bear interest. "Maturity" means the Stated Maturity Date of a Note or any prior date on which the principal, or an installment of principal, of a Note becomes due and payable, whether by the declaration of acceleration, call for redemption at the option of the Bank, repayment at the option of the holder or otherwise. The Notes provide that the Bank may consolidate with or merge into any other corporation, banking association or other legal entity or sell, convey, transfer or lease the property of the Bank as an entirety or substantially as an entirety if and only if: (i) immediately after such consolidation, merger, sale or conveyance the successor is not 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 successor is organized under the laws of the United States of America, any state thereunder, the Commonwealth of Puerto Rico or the District of Columbia and expressly assumes the due and punctual payment of the principal of, premium, if any, and interest on the Notes. No recourse shall be had for the payment of principal of, premium, if any, or interest on, any Note, for any claim based thereon, or otherwise in respect thereof, against any shareholder, employee, agent, officer or director, as such, past, present or future, of the Bank or of any successor thereof. The Notes will not contain any provision that would provide protection to the holders of the Notes against a sudden and dramatic decline in credit quality resulting from a merger, takeover, recapitalization or similar restructuring of the Bank or of the Corporation or any other event involving the Bank or the Corporation that may adversely affect the credit quality of the Bank. INTEREST Each Note will bear interest from and including its date of issue or from and including the most recent Interest Payment Date (as defined below) to which interest on such Note (or any predecessor Note) has been paid or duly provided for at the fixed interest rate per annum, or at the floating interest rate per annum determined by reference to the interest rate basis or bases specified in the applicable Note, until the principal thereof is paid or made available for payment. Interest will be payable in arrears on each Interest Payment Date and at Maturity. Interest will be paid generally to the person in whose name a Note (or any predecessor Note) is registered at the close of business on the Record Date next preceding the applicable Interest Payment Date; provided, however, that interest payable at Maturity will be payable to the person to whom principal shall be payable. The first payment of interest on any Note originally issued between a Record Date and the Interest Payment Date immediately following such Record Date will be made on the second Interest Payment Date following the Issue Date of such Note to the registered holder on the Record Date immediately preceding such second Interest Payment Date. 13 14 FIXED RATE NOTES The applicable Fixed Rate Note will designate a fixed interest rate per annum payable on such Fixed Rate Note. Unless otherwise specified in an applicable Note, the interest payment dates (the "Interest Payment Dates") for Fixed Rate Notes having maturities of greater than one year (the "Fixed Rate Medium-Term Bank Notes") will be June 15 and December 15 of each year, and the Record Dates (the "Record Dates") will be the June 1 and December 1, whether or not a Business Day, as the case may be, next preceding the applicable Interest Payment Date. Payments of interest on Fixed Rate Medium-Term Bank Notes will include interest accrued to but excluding the relevant Interest Payment Date or Maturity. Unless otherwise specified in an applicable Note, interest on Fixed Rate Medium-Term Bank Notes will be computed on the basis of a 360-day year of twelve 30-day months. Unless specified in a Fixed Rate Note, interest on Fixed Rate Notes with maturities of one year or less (the "Fixed Rate Short-Term Bank Notes") will be payable only at Maturity to the person to whom principal shall be payable. Payments of interest on Fixed Rate Short-Term Bank Notes will include interest accrued to but excluding Maturity. Unless otherwise specified in an applicable Note, interest on Fixed Rate Short-Term Bank Notes will be computed on the basis of the actual number of days in the year divided by 360. If any Interest Payment Date or Maturity of a Fixed Rate Note falls on a day which is not a Business Day, the related payment of principal, premium, if any, and interest will 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 will accrue on the amount so payable for the period from and after such Interest Payment Date or Maturity, as the case may be. FLOATING RATE NOTES Except as described below or as otherwise specified in an applicable Note, Floating Rate Notes will be issued as described below. Unless otherwise specified in an applicable Note, a "Record Date" shall be the fifteenth calendar day, whether or not a Business Day (as defined below), immediately preceding the related Interest Payment Date. Each Floating Rate Note will specify the "Interest Rate Basis" or "Interest Rate Bases" by reference to which interest will be determined, which may be one or more of (i) the "Commercial Paper Rate," in which case such Note will be a "Commercial Paper Rate Note," (ii) the "Eleventh District Cost of Funds Rate," in which case such Note will be an "Eleventh District Cost of Funds Rate Note," (iii) the "Federal Funds Rate," in which case such Note will be a "Federal Funds Rate Note," (iv) "LIBOR," in which case such Note will be a "LIBOR Note," (v) the "Prime Rate," in which case such Note will be a "Prime Rate Note," (vi) the "Treasury Rate," in which case such Note will be a "Treasury Rate Note," or (vii) such other Interest Rate Basis or interest rate formula as may be set forth in the applicable Note. Each applicable Floating Rate Note will also specify certain additional terms with respect to which such Floating Rate Note is being delivered, including: whether such Floating Rate Note is a "Regular Floating Rate Note," a "Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Initial Interest Rate, Interest Reset Dates, Record Dates, Interest Payment Dates, the Index Maturity, the Maximum Interest Rate and Minimum Interest Rate, if any, and the Spread and/or Spread Multiplier, if any, and if one or more of the specified Interest Rate Bases is LIBOR, the applicable LIBOR screen, as described below. The interest rate borne by a Floating Rate Note will be determined as follows: (i) Unless such Floating Rate Note is designated as a "Floating Rate/Fixed Rate Note," an "Inverse Floating Rate Note" or as having an "Addendum" attached, such Note will be designated a "Regular Floating Rate Note" and, except as described below or in such Note, will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on such Note shall be payable shall be reset as of each Interest Reset Date; 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. (ii) If such Floating Rate Note is designated as a "Floating Rate/Fixed Rate Note," then, except as described below or in such Note, such Note will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on such Note shall be 14 15 payable shall be reset as of each Interest Reset Date; provided, however, that (i) 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; and (ii) the interest rate in effect commencing on, and including, the Fixed Rate Commencement Date to Maturity shall be the Fixed Interest Rate, if such rate is specified in such Note, or if no Fixed Interest Rate is so specified, the interest rate in effect thereon on the Business Day immediately preceding the Fixed Rate Commencement Date. (iii) If such Floating Rate Note is designated as an "Inverse Floating Rate Note," then, except as described below or in such Note, such Note will bear interest equal to the Fixed Interest Rate specified in such Note minus the rate determined by reference to the Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any; provided, however, that, unless otherwise specified in such Note, the interest rate thereon will not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on such Note is payable shall be reset as of each Interest Reset Date; 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. Notwithstanding the foregoing, if such Floating Rate Note is designated as having an Addendum attached, such Floating Rate Note shall bear interest in accordance with the terms described in such Addendum and the applicable Note. The "Spread" is the number of basis points to be added to or subtracted from the related Interest Rate Basis or Bases applicable to such Floating Rate Note. The "Spread Multiplier" is the percentage by which the applicable Interest Rate Basis or Bases will be multiplied to determine the applicable interest rate on such Floating Rate Note. The "Index Maturity" is the period to maturity of the instrument or obligation with respect to which the Interest Rate Basis or Bases will be calculated. The Spread, Spread Multiplier, Index Maturity and other variable terms of the Floating Rate Notes are subject to change by the Bank from time to time, but no such change will affect any Floating Rate Note previously issued or as to which an offer has been accepted by the Bank. Each Floating Rate Note will specify whether the rate of interest thereon will be reset daily, weekly, monthly, quarterly, semiannually, annually or any other specified period (each, an "Interest Reset Period") and the dates on which such Interest Rate will be reset (each, an "Interest Reset Date"). Unless otherwise specified in the applicable Note, the Interest Reset Date will be, in the case of Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the Wednesday of each week (with the exception of weekly reset Floating Rate Notes as to which the Treasury Rate is an applicable Interest Rate Basis, which will reset the Tuesday of each week, except as specified below); (iii) monthly, the third Wednesday of each month (with the exception of monthly reset Floating Rate Notes as to which the Eleventh District Cost of Funds Rate is an applicable Interest Rate Basis, which will reset on the first calendar day of the month); (iv) quarterly, the third Wednesday of March, June, September and December of each year; (v) semiannually, the third Wednesday of the two months specified in the applicable Note; and (vi) annually, the third Wednesday of the month specified in the applicable Note; provided, however, that, with respect to Floating Rate/Fixed Rate Notes, the fixed rate of interest in effect for the period from the Fixed Rate Commencement Date until Maturity shall be the Fixed Interest Rate or the interest rate in effect on the Business Day immediately preceding the Fixed Rate Commencement Date, as specified in the applicable Note; and provided further that no Interest Reset Date will occur after the Fixed Rate Commencement Date. If any Interest Reset Date for any Floating Rate Note would otherwise be a day that is not a Business Day, such Interest Reset Date will be postponed to the next succeeding day that is a Business Day, except that in the case of a Floating Rate Note as to which LIBOR is an applicable Interest Rate Basis, if such Business Day falls in the next succeeding calendar month, such Interest Reset Date will be the immediately preceding Business Day. As used herein, "Business Day" means, unless otherwise specified in the applicable Note, 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 day which is a bank holiday in Puerto Rico or a day on which banking institutions are required by law, regulation or executive order to close and, with respect to Notes as to which LIBOR is an applicable Interest Rate Basis, is also a London Business Day. As used herein, "London Business Day" means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. The interest rate applicable to each day in an Interest Reset Period will be the rate determined as of the Interest Determination Date immediately preceding the Interest Reset Date on which such Interest Reset Period commenced. Unless otherwise specified in the applicable Note, the Interest Determination Date with respect to the 15 16 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 herein defined); and the Interest Determination Date with respect to LIBOR will be the second London Business Day immediately preceding each Interest Reset Date. With respect to the Treasury Rate, the Interest Determination Date 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 the 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 will be such preceding Friday; and provided further that if an auction falls on any Interest Reset Date, then the related Interest Reset Date will instead be the first Business Day following such auction. The Interest Determination Date pertaining to a Floating Rate Note the interest rate of which is determined with reference to two or more Interest Rate Bases will be the latest Business Day which is at least two Business Days prior to such Interest Reset Date for such Floating Rate Note on which each Interest Rate Basis is determinable. Each Interest Rate Basis will be determined on such date, and the applicable interest rate will take effect on the Interest Reset Date. Each Floating Rate Note will bear interest from the date of issue at the rates specified therein until the principal thereof is paid or otherwise made available for payment. Except as provided below or in an applicable Note, the Interest Payment Dates will be, in the case of Floating Rate Notes which reset: (i) daily, weekly or monthly, the third Wednesday of each month or the third Wednesday of March, June, September and December of each year, as specified in the applicable Note; (ii) quarterly, the third Wednesday of March, June, September and December of each year; (iii) semiannually, the third Wednesday of the two months of each year specified in the applicable Note; and (iv) annually, the third Wednesday of the month of each year specified in the applicable Note and, in each case, interest will be payable at Maturity. If any Interest Payment Date for any Floating Rate Note (other than an Interest Payment Date at Maturity) would otherwise be a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding day that is a Business Day except that in the case of a Floating Rate Note as to which LIBOR is an applicable Interest Rate Basis, if such Business Day falls in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. If the Maturity of a Floating Rate Note falls on a day that is not a Business Day, the payment of principal, premium, if any, and interest will be made on the next succeeding Business Day, and no interest on such payment will accrue for the period from and after such Maturity. A Floating Rate Note may also have either or both of the following: (i) a minimum numerical limitation, or floor, on the rate at which interest may accrue during any interest period (a "Minimum Interest Rate"); and (ii) a maximum numerical limitation, or ceiling, on the rate at which interest may accrue during any interest period (a "Maximum Interest Rate"). Notwithstanding the above provisions, the interest rate on Floating Rate Notes 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. Under present New York law, the maximum rate of interest, subject to certain exceptions, for any loan in an amount less than $250,000, is 16%, and for any loan in the amount of $250,000 or more but less than $2,500,000, is 25%, per annum on a simple interest basis. These limits do not apply to loans of $2,500,000 or more. Interest payments on Floating Rate Notes will equal 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, if no interest has been paid with respect to such Floating Rate Notes) to but excluding the related Interest Payment Date or Maturity, as the case may be. With respect to each Floating Rate Note, accrued interest is calculated by multiplying its face amount by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the period for which interest is being calculated. Unless otherwise specified in the applicable Note, the interest factor for each such day will be computed by dividing the interest rate applicable to such day by 360, in the case of Notes for which an applicable Interest Rate Basis is the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number of days in the year in the case of Notes for which an applicable Interest Rate Basis is the Treasury Rate. Unless otherwise specified in an applicable 16 17 Note, the interest factor for Notes for which the interest rate is calculated with reference to two or more Interest Rate Bases will be calculated in each period in the same manner as if only one of the applicable Interest Rate Bases applied as specified in the applicable Note. All percentages resulting from any calculation on Floating Rate Notes will be rounded to the nearest one hundred-thousandth of a percentage point, with five one millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation on Floating Rate Notes will be rounded to the nearest cent (with one-half cent being rounded upwards). Unless otherwise provided in the applicable Note, The Chase Manhattan Bank will be the "Calculation Agent." Upon request of the holder of any Floating Rate Note, the Calculation Agent will provide the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next Interest Reset Date with respect to such Floating Rate Note. Unless otherwise specified in the applicable Note, the "Calculation Date," if applicable, 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 or (ii) the Business Day immediately preceding the applicable Interest Payment Date or Maturity, as the case may be. The determination of any interest rate by the Calculation Agent will be final and binding absent manifest error. COMMERCIAL PAPER RATE. Commercial Paper Rate Notes will bear interest at the rates (calculated with reference to the Commercial Paper Rate and the Spread and/or Spread Multiplier, if any) specified in such Commercial Paper Rate Notes. Unless otherwise specified in the applicable Note, "Commercial Paper Rate" means, with respect to any Interest Determination Date relating to a Commercial Paper Rate Note or any Floating Rate Note for which the interest rate is determined with reference to the Commercial Paper Rate (a "Commercial Paper Rate Interest Determination Date"), the Money Market Yield (as defined below) on such date of the rate for commercial paper having the Index Maturity specified in the applicable Note 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 will be the Money Market Yield on such Commercial Paper Rate Interest Determination Date of the rate for commercial paper having the Index Maturity specified in the applicable Note 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 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, the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and will 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 (which may include one or more of the Agents or their respective affiliates) selected by the Calculation Agent for commercial paper having the Index Maturity designated in the applicable Note 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 Commercial Paper Rate in effect on such Commercial Paper Rate Interest Determination Date. "Money Market Yield" means 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) 17 18 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. ELEVENTH DISTRICT COST OF FUNDS RATE. Eleventh District Cost of Funds Rate Notes will bear interest at the rates (calculated with reference to the Eleventh District Cost of Funds Rate and the Spread and/or Spread Multiplier, if any) specified in such Eleventh District Cost of Funds Rate Notes. Unless otherwise specified in the applicable Note, "Eleventh District Cost of Funds Rate" means, with respect to any Interest Determination Date relating to an Eleventh District Cost of Funds Rate Note or any Floating Rate Note for which the interest rate is determined with reference to the Eleventh District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest Determination Date"), 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 defined below) 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 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). FEDERAL FUNDS RATE. Federal Funds Rate Notes will bear interest at the rates (calculated with reference to the Federal Funds Rate and the Spread and/or Spread Multiplier, if any) specified in such Federal Funds Rate Notes. Unless otherwise specified in the applicable Note, "Federal Funds Rate" means, with respect to any Interest Determination Date relating to a Federal Funds Rate Note or any Floating Rate Note for which the interest rate is determined with reference to the Federal Funds Rate (a "Federal Funds Rate Interest Determination Date"), 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 will be calculated by the Calculation Agent and will 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 (which may include one or more of the Agents or their respective affiliates) 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. LIBOR. LIBOR Notes will bear interest at the rates (calculated with reference to LIBOR and the Spread and/or Spread Multiplier, if any) specified in such LIBOR Notes. Unless otherwise specified in the applicable Note, "LIBOR" means the rate determined by the Calculation Agent in accordance with the following provisions: 18 19 (a) With respect to an Interest Determination Date relating to a LIBOR Note or any Floating Rate Note for which the interest rate is determined with reference to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be, as specified in the applicable Note, either: (i) the rate for deposits in U.S. dollars having the Index Maturity designated in the applicable Note, 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 in the applicable Note, 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 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 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 in the applicable Note, 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 in the applicable Note 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 in the applicable Note commencing on the second London Business Day 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 Determination Date will be the rate of LIBOR in effect on such date. PRIME RATE. Prime Rate Notes will bear interest at the rates (calculated with reference to the Prime Rate and the Spread and/or Spread Multiplier, if any) specified in such Prime Rate Notes. Unless otherwise specified in the applicable Note, "Prime Rate" means, with respect to any Interest Determination Date relating to a Prime Rate Note or any Floating Rate Note for which the interest rate is determined with reference to the Prime Rate (a "Prime Rate Interest Determination Date"), 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 USPRIME1 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 USPRIME1 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 19 20 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 (which may include affiliates of certain of the Agents) 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 USPRIME1" means the display designated as page "USPRIME1" on the Reuters Monitor Money Rates Service (or such other page as may replace the USPRIME1 page on that service for the purpose of displaying prime rates or base lending rates of major United States banks). TREASURY RATE. Treasury Rate Notes will bear interest at the rates (calculated with reference to the Treasury Rate and the Spread and/or Spread Multiplier, if any) specified in such Treasury Rate Notes. Unless otherwise specified in the applicable Note, "Treasury Rate" means, with respect to any Interest Determination Date relating to a Treasury Rate Note or any Floating Rate Note for which the interest rate is determined by reference to the Treasury Rate (a "Treasury Rate Interest Determination Date"), the rate applicable to the most recent auction of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified in the applicable Note, 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 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 designated in the applicable Note 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 will be calculated by the Calculation Agent and will 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 (which may include one or more of the Agents or their respective affiliates) selected by the Calculation Agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity designated in the applicable Note; 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. ORIGINAL ISSUE DISCOUNT NOTES Notes may be issued at a price less than their redemption price at Maturity ("Original Issue Discount Notes"). Such Original Issue Discount Notes may currently pay no interest or interest at a rate which at the time of issuance is below market rates. Certain additional considerations relating to any Original Issue Discount Notes may be described in the Note relating thereto. In addition, some Original Issue Discount Notes may be treated as if they were issued with original issue discount for Federal income tax purposes ("Discount Notes"). See "Certain United States Federal Income Tax Considerations" for a discussion of the federal income tax treatment of Discount Notes. FOREIGN CURRENCY NOTES Unless otherwise specified in an applicable Note, the Notes will be denominated in U.S. dollars and payments of principal of, premium, if any, and interest on, the Notes will be made in U.S. dollars. Notes may be denominated in a currency, including a composite currency, other than U.S. dollars ("Foreign Currency Notes"). Special 20 21 provisions relating to Foreign Currency Notes will be described in the applicable Note and the Pricing Supplement relating thereto. An investment in Foreign Currency Notes entails significant risks that are not associated with similar investments in debt securities that are denominated in U.S. dollars and the payments with respect to which are made in U.S. dollars. Foreign Currency Notes are not an appropriate investment for investors who are unsophisticated with respect to foreign currency transactions. Prospective investors should consult their own financial and legal advisors as to the risks entailed by an investment in Foreign Currency Notes and the suitability of Foreign Currency Notes in light of their particular circumstances. INDEXED NOTES The Notes may be issued with the amount of principal, premium, if any, or interest payable in respect thereof to be determined with reference to the price or prices of specified commodities or stocks or other securities, the exchange rate of one or more specified currencies (including a composite currency such as the ECU) relative to an indexed currency or such other price, exchange rate or interest index ("Indexed Notes"), as set forth in the applicable Note. In certain cases, holders of Indexed Notes may receive a principal amount at Maturity that is greater than or less than the face amount of the Notes depending upon the relative value at Maturity of the specified indexed item. Information as to the method for determining the amount of principal, premium, if any, or interest payable in respect of Indexed Notes, certain historical information with respect to the specified indexed item and tax considerations associated with investment in such Indexed Notes may be set forth in the applicable Pricing Supplement. An investment in Notes indexed, as to principal, premium, if any, or interest, to one or more values of currencies (including exchange rates between currencies), commodities, securities or interest rate indices entails significant risks that are not associated with similar investments in a conventional fixed-rate debt security. If the interest rate of an Indexed Note is so indexed, it may result in an interest rate that is less than that payable on a conventional fixed-rate debt security issued at the same time, including the possibility that no interest will be paid, and, if the principal of and/or premium, if any, on an Indexed Note is so indexed, the amount of principal payable in respect thereof may be less than the original purchase price of such Indexed Note if allowed pursuant to the terms thereof, including the possibility that no such amount will be paid. The secondary market for Indexed Notes will be affected by a number of factors, independent of the creditworthiness of the Bank and the value of the applicable currency, commodity, security or interest rate index, including the volatility of the applicable currency, commodity, security or interest rate index, the time remaining to the maturity of such Notes, the amount outstanding of such Notes and market interest rates. The value of the applicable currency, commodity or interest rate index depends on a number of interrelated factors, including economic, financial and political events, over which the Bank has no control. Additionally, if the formula used to determine the amount of principal, premium, if any, or interest payable with respect to Indexed Notes contains a multiple or leverage factor, the effect of any change in the applicable currency, commodity, security or interest rate index will be increased. The historical experience of the relevant currencies, commodities, securities or interest rate indices should not be taken as an indication of future performance of such currencies, commodities, securities or interest rate indices during the term of any Indexed Note. Any credit ratings assigned to the Bank's Bank Note Program are a reflection of the Bank's credit status and in no way are a reflection of the potential impact of the factors discussed above, or any other factors, on the market value of the Notes. Accordingly, prospective investors should consult their own financial and legal advisors as to the risks entailed by an investment in Indexed Notes and the suitability of Indexed Notes in light of their particular circumstances. REDEMPTION AT THE OPTION OF THE BANK The Notes will not be subject to any sinking fund. If so agreed upon by the Bank and the purchaser thereof, a Note will be redeemable on and after a date fixed at the time of sale and specified on the face of such Note (the "Initial Redemption Date") either in whole or in part, at the option of the Bank, on written notice given not more than 60 nor less than 30 calendar days prior to the date of redemption by the Bank to the registered holder thereof (unless otherwise specified in the applicable Note). On and after the Initial Redemption Date, if any, such Note will be redeemable in increments of $1,000 (provided that any remaining principal amount of such Note shall be at least $250,000) at the option of the Bank at the applicable Redemption Price, together with unpaid interest accrued thereon at the applicable rate borne by such Note to the date of redemption. The "Redemption Price" will initially be the 21 22 Initial Redemption Percentage (as specified on the face of a Note) of the principal amount of such Note to be redeemed and will decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction (as specified on the face of such Note), if any, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. 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. If no Initial Redemption Date is specified on the face of a Note, such Note will not be redeemable prior to its Stated Maturity Date. The Issuing and Paying Agent is not required to register the transfer of any Note that has been called for redemption during a period beginning at the opening of business 15 calendar days before the day of mailing of a notice of such redemption and ending at the close of business on the day of such mailing. REPAYMENT AT THE OPTION OF THE HOLDER The Notes may be subject to repayment at the option of the holders thereof in accordance with the terms of the Notes on their respective optional repayment dates, if any, as agreed upon by the Bank and the purchasers thereof at the time of sale and specified in the applicable Note (each, a "Holder's Optional Repayment Date"). If no Holder's Optional Repayment Date is specified in a Note, such Note will not be repayable at the option of the holder thereof prior to its Stated Maturity Date. On any Holder's Optional Repayment Date with respect to a Note, such Note will be repayable in whole or in part in increments of $1,000 (provided that any remaining principal amount of such Note will be at least $250,000) at the option of the holder thereof at a repayment price equal to 100% of the principal amount to be repaid, together with accrued and unpaid interest thereon payable to the date of repayment, on written notice given not more than 60 nor less than 30 calendar days prior to the Holder's Optional Repayment Date (unless otherwise specified in the applicable Note). OTHER PROVISIONS; ADDENDA Any provisions with respect to a Note, including the determination of an Interest Rate Basis, the specification of an Interest Rate Basis, calculation of the interest rate applicable to a Floating Rate Note, its Interest Payment Dates or any other matter relating thereto may be modified by the terms as specified under "Other Provisions" in the applicable Note or in an Addendum relating thereto, if so specified therein. BOOK-ENTRY REGISTRATION Upon issuance, all DTC Book-Entry Notes of like tenor and having the same Issue Date will be represented by one or more Global Notes. Each Global Note representing DTC Book-Entry Notes will be deposited with, or on behalf of, the Depositary, located in the Borough of Manhattan, The City of New York, and will be registered in the name of the Depositary or its nominee. Ownership of DTC Book-Entry Notes will be limited to institutions that have accounts with such Depositary or its nominee (each, a "participant" and collectively, the "participants") or persons that may hold interests through participants. In addition, ownership of DTC Book-Entry Notes by participants will only be evidenced by, and transfers of such ownership interest will be effected only through, records maintained by the Depositary or its nominee, and its participants. Ownership of DTC Book-Entry Notes by persons that hold through participants will only be evidenced by, and transfers of such ownership interest within such participants will be effected only through, records maintained by such participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of a holder to transfer DTC Book-Entry Notes. The Bank has been advised by the Depositary that upon the issuance of a Global Note or Global Notes representing DTC Book-Entry Notes, and the deposit of such Global Note or Global Notes with or on behalf of the Depositary, the Depositary will immediately credit, on its book-entry registration and transfer system, the respective principal amounts of the DTC Book-Entry Notes represented by such Global Note or Global Notes to the accounts 22 23 of participants. The accounts to be credited will be designated by the soliciting Agent, or by the Bank if the Notes are offered and sold directly by the Bank. Each owner of a beneficial interest in a Global Note must be an institutional accredited investor and is required to hold a beneficial interest in $250,000 principal amount or any integral multiple of $1,000 in excess thereof of such Global Note at all times. Payments of principal of, premium, if any, and interest on, DTC Book-Entry Notes represented by any Global Note or Global Notes registered in the name of or held by the Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner and holder of the Global Note or Global Notes representing such DTC Book-Entry Notes. Such payments to the Depositary or its nominee, as the case may be, will be made in immediately available funds by the Issuing and Paying Agent; provided that, in the case of payments of principal, premium, if any, and interest at Maturity, the Global Note or Global Notes are presented to the Issuing and Paying Agent in time for the Issuing and Paying Agent to make such payments in such funds in accordance with its normal procedures. Neither the Bank nor any agent of the Bank will have any responsibility or liability for any aspect of the Depositary's records or any participant's records relating to, or payments made on account of, DTC Book-Entry Notes or for maintaining, supervising or reviewing any of the Depositary's records or any participant's records relating to such DTC Book-Entry Notes. The Bank has been advised by the Depositary that upon receipt of any payment of principal of, premium, if any, or interest on, a Global Note, the Depositary will credit, on its book-entry registration and transfer system, in accordance with the Depositary's practice at the time, accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of the Depositary unless the Depositary has reason to believe that it will not receive payment on such date. Payments by participants (or by other persons that hold interests for customers through participants) to owners of DTC Book-Entry Notes held through such participants (or such other persons) will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in "street name," and will be the responsibility of such participants (or such other persons). No Global Note or Global Notes described above may be transferred except as a whole by the Depositary for such Global Note or Global Notes to a nominee of the Depositary or by a nominee of the Depositary to another nominee of the Depositary. 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, only if (x) the Depositary notifies the Bank that it is unwilling or unable to continue as Depositary for such Global Note or if at any time the Depositary ceases to be a clearing agency registered under the Exchange Act, and a successor depositary is not appointed by the Bank within 60 days, or (y) the Bank in its sole discretion determines not to have such DTC Book-Entry Notes represented by one or more Global Notes. Any Global Note representing DTC Book-Entry Notes 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. It is expected that such instructions may be based upon directions received by the Depositary from its participants with respect to ownership of DTC Book-Entry Notes. Except as provided above, owners of DTC Book-Entry Notes will not be entitled to receive physical delivery of Notes in definitive form and no Global Note representing DTC Book-Entry Notes shall be exchangeable, except for another Global Note of like denomination and tenor to be registered in the name of the Depositary or its nominee. Accordingly, each person owning a DTC Book-Entry Note must rely on the procedures of the Depositary and, if such person is not a participant, on the procedures of the participant through which such person owns its beneficial interest, to exercise any rights of a holder under the Notes. The Bank understands that, under existing industry practices, in the event that (i) the Bank requests any action of holders or (ii) an owner of a DTC Book-Entry Note desires to give or take any action which a holder is entitled to give or take under the Notes in accordance with the terms of the Notes and the Issuing and Paying Agency Agreement, the Depositary would authorize the participants owning the relevant DTC Book-Entry Notes to give or take such action, and such participants would authorize beneficial owners owning 23 24 through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. The Depositary has advised the Bank that the Depositary is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary holds securities that its participants deposit with the Depositary. The Depositary also facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book- entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates. Participants who maintain accounts directly with the Depositary include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("direct participants"). The Depositary is owned by a number of its direct participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the Depositary system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly. The rules applicable to the Depositary and its participants are on file with the Commission. EVENTS OF DEFAULT The following will be "Events of Default" with respect to a Note as the same are described with greater particularity in the Note: default in the payment of any interest with respect to any of the Notes when due, which continues for 30 calendar days; default in the payment of any principal of, or premium, if any, on, any of the Notes when due; and certain events of bankruptcy, insolvency, reorganization or the appointment of a conservator, receiver or liquidator of the Bank or substantially all of its property. Any holder of a Note may declare the principal amount of, accrued interest and premium, if any, on, such Note due and payable immediately by written notice to the Bank, if an Event of Default with respect to such Note shall have occurred and be continuing at the time of such declaration. 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 a Note may be waived by the holder of such Note. Although the Notes permit any holder of a Note to accelerate the Note in the event of the appointment of a conservator, receiver or liquidator of the Bank, the FDIC as conservator or receiver may enforce most types of contracts including the Notes, pursuant to their terms, notwithstanding any such acceleration provision. See "Supervision, Regulation and Other Matters." GOVERNING LAW The Notes will be governed by, and construed in accordance with, the laws of the State of New York and all applicable Federal laws and regulations. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following summary of certain United States Federal income tax consequences of the purchase, ownership and disposition of the Notes is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change (including changes in effective dates) or possible differing interpretations. It deals only with Notes held as capital assets and does not purport to deal with persons in special tax situations, such as financial institutions, insurance companies, regulated investment companies, dealers in securities or currencies, persons holding Notes as a hedge against currency risks or as a position in a "straddle" for tax purposes, or persons whose functional currency is not the U.S. dollar. It also does not deal with holders other than original purchasers (except where otherwise specifically noted). Persons considering the purchase of the Notes should consult their own tax advisors concerning the application of United States Federal income tax laws to their particular situations as well as any consequences of the purchase, ownership and disposition of the Notes arising under the laws of any other taxing jurisdiction. 24 25 As used herein, the term "U.S. Holder" means a beneficial owner of a Note that is for United States Federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate or trust the income of which is subject to United States Federal income taxation regardless of its source or (iv) any other person whose income or gain in respect of a Note is effectively connected with the conduct of a United States trade or business. As used herein, the term "non-U.S. Holder" means a beneficial owner of a Note that is not a U.S. Holder. U.S. HOLDERS PAYMENTS OF INTEREST. Payments of interest on a Note generally will be taxable to a U.S. Holder as ordinary interest income at the time such payments are accrued or are received (in accordance with the U.S. Holder's regular method of tax accounting). ORIGINAL ISSUE DISCOUNT. The following summary is a general discussion of the United States Federal income tax consequences to U.S. Holders of the purchase, ownership and disposition of Notes issued with original issue discount ("Discount Notes"). The following summary is based upon final Treasury regulations (the "OID Regulations") released by the Internal Revenue Service ("IRS") on January 27, 1994, as amended on June 11, 1996, under the original issue discount provisions of the Internal Revenue Code of 1986, as amended (the "Code"). For United States Federal income tax purposes, original issue discount is the excess of the stated redemption price at maturity of a Note over its issue price, if such excess equals or exceeds a de minimis amount (generally 1/4 of 1% of the Note's stated redemption price at maturity multiplied by the number of complete years to its maturity from its issue date or, in the case of a Note providing for the payment of any amount other than qualified stated interest (as defined below) prior to maturity, multiplied by the weighted average maturity of such Note). The issue price of each Note in an issue of Notes equals the first price at which a substantial amount of such Notes has been sold (ignoring sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The stated redemption price at maturity of a Note is the sum of all payments provided by the Note other than "qualified stated interest" payments. The term "qualified stated interest" generally means stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate. In addition, under the OID Regulations, if a Note bears interest for one or more accrual periods at a rate below the rate applicable for the remaining term of such Note (e.g., Notes with teaser rates or interest holidays), and if the greater of either the resulting foregone interest on such Note or any "true" discount on such Note (i.e., the excess of the Note's stated principal amount over its issue price) equals or exceeds a specified de minimis amount, then the stated interest on the Note would be treated as original issue discount rather than qualified stated interest. Payments of qualified stated interest on a Note are taxable to a U.S. Holder as ordinary interest income at the time such payments are accrued or are received (in accordance with the U.S. Holder's regular method of tax accounting). A U.S. Holder of a Discount Note must include original issue discount in income as ordinary interest for United States Federal income tax purposes as it accrues under a constant yield method in advance of receipt of the cash payments attributable to such income, regardless of such U.S. Holder's regular method of tax accounting. In general, the amount of original issue discount included in income by the initial U.S. Holder of a Discount Note is the sum of the daily portions of original issue discount with respect to such Discount Note for each day during the taxable year (or portion of the taxable year) on which such U.S. Holder held such Discount Note. The "daily portion" of original issue discount on any Discount Note is determined by allocating to each day in any accrual period a ratable portion of the original issue discount allocable to that accrual period. An "accrual period" may be of any length and the accrual periods may vary in length over the term of the Discount Note, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the final day of an accrual period or on the first day of an accrual period. The amount of original issue discount allocable to each accrual period is generally equal to the difference between (i) the product of the Discount Note's adjusted issue price at the beginning of such accrual period and its yield to maturity (determined on the basis of compounding at the close of each accrual period and appropriately adjusted to take into account the length of the particular accrual period) and (ii) the amount of any qualified stated interest payments allocable to such accrual period. The "adjusted issue price" of a Discount Note at the beginning of any accrual period is the sum of the issue price of the Discount Note plus the amount of 25 26 original issue discount allocable to all prior accrual periods minus the amount of any prior payments on the Discount Note that were not qualified stated interest payments. Under these rules, U.S. Holders generally will have to include in income increasingly greater amounts of original issue discount in successive accrual periods. A U.S. Holder who purchases a Discount Note for an amount that is greater than its adjusted issue price as of the purchase date and less than or equal to the sum of all amounts payable on the Discount Note after the purchase date other than payments of qualified stated interest, will be considered to have purchased the Discount Note at an "acquisition premium." Under the acquisition premium rules, the amount of original issue discount which such U.S. Holder must include in its gross income with respect to such Discount Note for any taxable year (or portion thereof in which the U.S. Holder holds the Discount Note) will be reduced (but not below zero) by the portion of the acquisition premium properly allocable to the period. Under the OID Regulations, Floating Rate Notes and Indexed Notes ("Variable Notes") are subject to special rules whereby a Variable Note will qualify as a "variable rate debt instrument" if (a) its issue price does not exceed the total noncontingent principal payments due under the Variable Note by more than a specified de minimis amount and (b) it provides for stated interest, paid or compounded at least annually, at current values of (i) one or more qualified floating rates, (ii) a single fixed rate and one or more qualified floating rates, (iii) a single objective rate, or (iv) a single fixed rate and a single objective rate that is a qualified inverse floating rate. A "qualified floating rate" is any variable rate where variations in the value of such rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the Variable Note is denominated. Although a multiple of a qualified floating rate will generally not itself constitute a qualified floating rate, a variable rate equal to the product of a qualified floating rate and a fixed multiple that is greater than .65 but not more than 1.35 will constitute a qualified floating rate. A variable rate equal to the product of a qualified floating rate and a fixed multiple that is greater than .65 but not more than 1.35, increased or decreased by a fixed rate, will also constitute a qualified floating rate. In addition, under the OID Regulations, two or more qualified floating rates that can reasonably be expected to have approximately the same values throughout the term of the Variable Note (e.g., two or more qualified floating rates with values within 25 basis points of each other as determined on the Variable Note's issue date) will be treated as a single qualified floating rate. Notwithstanding the foregoing, a variable rate that would otherwise constitute a qualified floating rate but which is subject to one or more restrictions such as a maximum numerical limitation (i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under certain circumstances, fail to be treated as a qualified floating rate under the OID Regulations unless such cap or floor is fixed throughout the term of the Note. An "objective rate" is a rate that is not itself a qualified floating rate but which is determined using a single fixed formula and that is based on objective financial or economic information. A rate will not qualify as an objective rate if it is based on information that is within the control of the issuer (or a related party) or that is unique to the circumstances of the issuer (or a related party) such as dividends, profits, or the value of the issuer's stock (although a rate does not fail to be an objective rate merely because it is based on the credit quality of the issuer). A "qualified inverse floating rate" is any objective rate which is equal to a fixed rate minus a qualified floating rate, as long as variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in the qualified floating rate. The OID Regulations also provide that if a Variable Note provides for stated interest at a fixed rate for an initial period of one year or less followed by a variable rate that is either a qualified floating rate or an objective rate and if the variable rate on the Variable Note's issue date is intended to approximate the fixed rate (e.g., the value of the variable rate on the issue date does not differ from the value of the fixed rate by more than 25 basis points), then the fixed rate and the variable rate together will constitute either a single qualified floating rate or objective rate, as the case may be. If a Variable Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof qualifies as a "variable rate debt instrument" under the OID Regulations, and if the interest on such Note is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually then all stated interest on such Note will constitute qualified stated interest and will be taxed accordingly. Thus, a Variable Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof and that qualifies as a "variable rate debt instrument" under the OID Regulations will generally not be treated as having been issued with original issue discount unless the Variable Note is issued at a "true" discount (i.e., at a price below the Note's stated principal amount) in excess of a specified de minimis amount. The amount of qualified stated interest and the amount of original issue discount, if any, that accrues during an accrual 26 27 period on such a Variable Note is determined under the rules applicable to fixed rate debt instruments by assuming that the variable rate is a fixed rate equal to (i) in the case of a qualified floating rate or qualified inverse floating rate, the value, as of the issue date, of the qualified floating rate or qualified inverse floating rate, or (ii) in the case of an objective rate (other than a qualified inverse floating rate), a fixed rate that reflects the yield that is reasonably expected for the Variable Note. The qualified stated interest allocable to an accrual period is increased (or decreased) if the interest actually paid during an accrual period exceeds (or is less than) the interest assumed to be paid during the accrual period pursuant to the foregoing rules. In general, any other Variable Note that qualifies as a "variable rate debt instrument" will be converted into an "equivalent" fixed rate debt instrument for purposes of determining the amount and accrual of original issue discount and qualified stated interest on the Variable Note. The OID Regulations generally require that such a Variable Note be converted into an "equivalent" fixed rate debt instrument by substituting any qualified floating rate or qualified inverse floating rate provided for under the terms of the Variable Note with a fixed rate equal to the value of the qualified floating rate or qualified inverse floating rate, as the case may be, as of the Variable Note's issue date. Any objective rate (other than a qualified inverse floating rate) provided for under the terms of the Variable Note is converted into a fixed rate that reflects the yield that is reasonably expected for the Variable Note. In the case of a Variable Note that qualifies as a "variable rate debt instrument" and provides for stated interest at a fixed rate in addition to either one or more qualified floating rates or a qualified inverse floating rate, the fixed rate is initially converted into a qualified floating rate (or a qualified inverse floating rate, if the Variable Note provides for a qualified inverse floating rate). Under such circumstances, the qualified floating rate or qualified inverse floating rate that replaces the fixed rate must be such that the fair market value of the Variable Note as of the Variable Note's issue date is approximately the same as the fair market value of an otherwise identical debt instrument that provides for either the qualified floating rate or qualified inverse floating rate rather than the fixed rate. Subsequent to converting the fixed rate into either a qualified floating rate or a qualified inverse floating rate, the Variable Note is then converted into an "equivalent" fixed rate debt instrument in the manner described above. Once the Variable Note is converted into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the amount of original issue discount and qualified stated interest, if any, are determined for the "equivalent" fixed rate debt instrument by applying the general original issue discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder of the Variable Note will account for such original issue discount and qualified stated interest as if the U.S. Holder held the "equivalent" fixed rate debt instrument. Each accrual period appropriate adjustments will be made to the amount of qualified stated interest or original issue discount assumed to have been accrued or paid with respect to the "equivalent" fixed rate debt instrument in the event that such amounts differ from the actual amount of interest accrued or paid on the Variable Note during the accrual period. If a Variable Note does not qualify as a "variable rate debt instrument" under the OID Regulations, then the Variable Note would be treated as a contingent payment debt obligation. U.S. Holders should be aware that on June 11, 1996, the Treasury Department issued final regulations (the "CPDI Regulations") concerning the proper United States Federal income tax treatment of contingent payment debt instruments. In general, the CPDI Regulations would cause the timing and character of income, gain or loss reported on a contingent payment debt instrument to substantially differ from the timing and character of income, gain or loss reported on a contingent payment debt instrument under general principles of current United States Federal income tax law. Specifically, the CPDI Regulations generally require a U.S. Holder of such an instrument to include future contingent and noncontingent interest payments in income as such interest accrues based upon a projected payment schedule. Moreover, in general, under the CPDI Regulations, any gain recognized by a U.S. Holder on the sale, exchange, or retirement of a contingent payment debt instrument will be treated as ordinary income and all or a portion of any loss realized could be treated as ordinary loss as opposed to capital loss (depending upon the circumstances). The CPDI Regulations apply to debt instruments issued on or after August 13, 1996. The proper United States Federal income tax treatment of Variable Notes that are treated as contingent payment debt obligations will be more fully described in the applicable Pricing Supplement. Furthermore, any other special United States Federal income tax considerations, not otherwise discussed herein, which are applicable to any particular issue of Notes will be discussed in the applicable Pricing Supplement. Certain of the Notes (i) may be redeemable at the option of the Bank prior to their stated maturity (a "call option") and/or (ii) may be repayable at the option of the holder prior to their stated maturity (a "put option"). Notes 27 28 containing such features may be subject to rules that differ from the general rules discussed above. Investors intending to purchase Notes with such features should consult their own tax advisors, since the original issue discount consequences will depend, in part, on the particular terms and features of the purchased Notes. U.S. Holders may generally, upon election, include in income all interest (including stated interest, acquisition discount, original issue discount, de minimis original issue discount, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium) that accrues on a debt instrument by using the constant yield method applicable to original issue discount, subject to certain limitations and exceptions. SHORT-TERM BANK NOTES. Notes that have a fixed maturity of one year or less will be treated as having been issued with original issue discount. In general, an individual or other cash method U.S. Holder is not required to accrue such original issue discount unless the U.S. Holder elects to do so. If such an election is not made, any gain recognized by the U.S. Holder on the sale, exchange or maturity of the Short-Term Bank Note will be ordinary income to the extent of the original issue discount accrued on a straight-line basis, or upon election under the constant yield method (based on daily compounding), through the date of sale or maturity, and a portion of the deductions otherwise allowable to the U.S. Holder for interest on borrowings allocable to the Short-Term Bank Note will be deferred until a corresponding amount of income is realized. U.S. Holders who report income for United States Federal income tax purposes under the accrual method, and certain other holders including banks and dealers in securities, are required to accrue original issue discount on a Short-Term Bank Note on a straight-line basis unless an election is made to accrue the original issue discount under a constant yield method (based on daily compounding). MARKET DISCOUNT. If a U.S. Holder purchases a Note, other than a Discount Note, for an amount that is less than its issue price (or, in the case of a subsequent purchaser, its stated redemption price at maturity) or, in the case of a Discount Note, for an amount that is less than its adjusted issue price as of the purchase date, such U.S. Holder will be treated as having purchased such Note at a "market discount," unless the amount of such market discount is less than a specified de minimis amount. Under the market discount rules, a U.S. Holder will be required to treat any partial principal payment (or, in the case of a Discount Note, any payment that does not constitute qualified stated interest) on, or any gain realized on the sale, exchange, retirement or other disposition of, a Note as ordinary income to the extent of the lesser of (i) the amount of such payment or realized gain or (ii) the market discount which has not previously been included in income and is treated as having accrued on such Note at the time of such payment or disposition. Market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the Note, unless the U.S. Holder elects to accrue market discount on the basis of semiannual compounding. A U.S. Holder may be required to defer the deduction of all or a portion of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry a Note with market discount until the maturity of the Note or certain earlier dispositions, because a current deduction is only allowed to the extent the interest expense exceeds an allocable portion of market discount. A U.S. Holder may elect to include market discount in income currently as it accrues (on either a ratable or semiannual compounding basis), in which case the rules described above regarding the treatment as ordinary income of gain upon the disposition of the Note and upon the receipt of certain cash payments and regarding the deferral of interest deductions will not apply. Generally, such currently included market discount is treated as ordinary interest for United States Federal income tax purposes. Such an election will apply to all debt instruments acquired by the U.S. Holder on or after the first day of the first taxable year to which such election applies and may be revoked only with the consent of the IRS. PREMIUM. If a U.S. Holder purchases a Note for an amount that is greater than the sum of all amounts payable on such Note after the purchase date other than payments of qualified stated interest, such U.S. Holder will be considered to have purchased the Note with "amortizable bond premium" equal in amount to such excess. A U.S. Holder may elect to amortize such premium using a constant yield method over the remaining term of the Note and may offset interest otherwise required to be included in respect of the Note during any taxable year by the amortized amount of such excess for the taxable year. However, if the Note may be optionally redeemed after the U.S. Holder acquires it at a price in excess of its stated redemption price at maturity, special rules would apply which could result in a deferral of the amortization of some bond premium until later in the term of the Note. Any election to amortize bond 28 29 premium applies to all taxable debt instruments acquired by the U.S. Holder on or after the first day of the first taxable year to which such election applies and may be revoked only with the consent of the IRS. DISPOSITION OF A NOTE. Except as discussed above, upon the sale, exchange or retirement of a Note, a U.S. Holder generally will recognize taxable gain or loss equal to the difference between the amount realized on the sale, exchange or retirement (other than amounts representing accrued and unpaid interest) and such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a Note generally will equal such U.S. Holder's initial investment in the Note increased by any original issue discount included in income (and accrued market discount, if any, if the U.S. Holder has included such market discount in income) and decreased by the amount of any payments, other than qualified stated interest payments, received and amortizable bond premium taken with respect to such Note. Such gain or loss generally will be long-term capital gain or loss if the Note were held for more than one year. FOREIGN CURRENCY NOTES Special tax provisions relating to Foreign Currency Notes will be set forth in the applicable Note and the Pricing Supplement relating thereto. NON-U.S. HOLDERS A non-U.S. Holder will not be subject to United States Federal income taxes on payments of principal, premium (if any) or interest (including original issue discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect 10% or greater shareholder of the Bank, a controlled foreign corporation related to the Bank or a bank receiving interest described in section 881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last United States payor in the chain of payment prior to payment to a non-U.S. Holder (the "Withholding Agent") must have received in the year in which a payment of interest or principal occurs, or in either of the two preceding calendar years, a statement that (i) is signed by the beneficial owner of the Note under penalties of perjury, (ii) certifies that such owner is not a U.S. Holder and (iii) provides the name and address of the beneficial owner. The statement may be made on an IRS Form W-8 or a substantially similar form, and the beneficial owner must inform the Withholding Agent of any change in the information on the statement within 30 days of such change. If a Note is held through a securities clearing organization or certain other financial institutions, the organization or institution may provide a signed statement to the Withholding Agent. However, in such case, the signed statement must be accompanied by a copy of the IRS Form W-8 or the substitute form provided by the beneficial owner to the organization or institution. The Treasury Department is considering implementation of further certification requirements aimed at determining whether the issuer of a debt obligation is related to holders thereof. Generally, a non-U.S. Holder will not be subject to Federal income taxes on any amount which constitutes capital gain upon retirement or disposition of a Note, provided the gain is not effectively connected with the conduct of a trade or business in the United States by the non-U.S. Holder. Certain other exceptions may be applicable, and a non-U.S. Holder should consult its tax advisor in this regard. The Notes will not be includible in the estate of a non-U.S. Holder unless the individual is a direct or indirect 10% or greater shareholder of the Bank or, at the time of such individual's death, payments in respect of the Notes would have been effectively connected with the conduct by such individual of a trade or business in the United States. BACKUP WITHHOLDING Backup withholding of United States Federal income tax at a rate of 31% may apply to payments made in respect of the Notes to registered owners who are not "exempt recipients" and who fail to provide certain identifying information (such as the registered owner's taxpayer identification number) in the required manner. Generally, individuals are not exempt recipients, whereas corporations and certain other entities generally are exempt recipients. Payments made in respect of the Notes to a U.S. Holder must be reported to the IRS, unless the U.S. Holder is an exempt recipient or establishes an exemption. Compliance with the identification procedures described in the preceding section would establish an exemption from backup withholding for those non-U.S. Holders who are not exempt recipients. 29 30 In addition, upon the sale of a Note to (or through) a broker, the broker must withhold 31% of the entire purchase price, unless either (i) the broker determines that the seller is a corporation or other exempt recipient or (ii) the seller provides, in the required manner, certain identifying information and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S. Holder (and certain other conditions are met). Such a sale must also be reported by the broker to the IRS, unless either (i) the broker determines that the seller is an exempt recipient or (ii) the seller certifies its non-U.S. status (and certain other conditions are met). Certification of the registered owner's non-U.S. status would be made normally on an IRS Form W-8 under penalties of perjury, although in certain cases it may be possible to submit other documentary evidence. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner would be allowed as a refund or a credit against such beneficial owner's United States Federal income tax provided the required information is furnished to the IRS. CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS The following summary of certain Puerto Rico income tax consequences of the purchase, ownership and disposition of the Notes is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change (including changes in effective dates) or possible differing interpretations. It does not purport to deal with all aspects of Puerto Rico taxation that may be relevant to particular investors, some of whom may be subject to special rules. Persons, including corporations or partnerships organized under the laws of Puerto Rico and foreign corporations engaged in trade or business in Puerto Rico, considering the purchase of the Notes should consult their own tax advisors concerning the Puerto Rico income tax consequences of the purchase, ownership and disposition of the Notes and the application of the income and withholding tax provisions described below. Under the Puerto Rico Internal Revenue Code of 1994, as amended, interest on Notes received by a Holder who is a foreign corporation or partnership (i.e., not organized under the laws of Puerto Rico) not engaged in a trade or business in Puerto Rico or a foreign trust (each, a "Non-resident Holder") will be exempt from Puerto Rico income and withholding tax, except in the case of any such Holder that may be regarded as a "related person" with respect to the Bank. For this purpose, a "related person" generally will be one that, directly or indirectly, owns 50% or more in value of the stock of the Bank. A Non-resident Holder who is a "related person" would be subject to a Puerto Rico withholding tax of 29%. Any gain realized by a Non-resident Holder from the sale or exchange of Notes outside Puerto Rico will not be subject to Puerto Rico income taxation. PLAN OF DISTRIBUTION The Notes are being offered on a continuous basis for sale by the Bank through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and CS First Boston Corporation, who 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 Note, for resale at a fixed public offering price. Unless otherwise specified in the applicable Note, any Note sold to an Agent as principal will be purchased by such Agent at a price equal to 100% of the principal amount thereof less a percentage of the principal amount which shall be agreed upon by the Agent and the Bank. 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, unless otherwise specified in the applicable Note. The Bank will pay a commission to each Agent, ranging from .05% to .70% of the principal amount of each Note, depending on its stated maturity, sold by such Agent. An Agent may sell Notes it has purchased from the Bank as principal to other dealers for resale to investors, and may allow any portion of the discount received in connection with such purchases from the Bank to such dealers. After the initial public offering of Notes, the public offering price (in the case of Notes to be resold on a fixed public offering price basis), the concession and the discount may be changed. 30 31 The Bank has reserved the right to sell Notes directly to investors on their own behalf in those jurisdictions where they are authorized to do so or to or through certain firms other than the Agents. No commission will be payable nor will a discount be allowed on any sales made directly by the Bank. The Bank will have the sole right to accept offers to purchase Notes and may reject any such offer in whole or in part. The Bank reserves the right to withdraw, cancel or modify the offer made hereby without notice and may reject orders in whole or in part whether placed directly with the Bank or through one of the Agents. The Agents will have the right, in their discretion reasonably exercised, to reject in whole or in part any offer to purchase Notes received by them on an agency basis. Unless otherwise specified in the applicable Note, payment of the purchase price of Notes will be required to be made in immediately available funds in The City of New York on the date of settlement. No Notes will have an established trading market when issued. The Notes will not be listed on any securities exchange. Each of the Agents may from time to time purchase and sell Notes in the secondary market, but no Agent is obligated to do so, and there can be no assurance that there will be a secondary market for the Notes or liquidity in the secondary market if one develops. From time to time, each of the Agents may make a market in the Notes, but no Agent is obligated to do so and an Agent may discontinue any market-making activity at any time. The Notes will be offered only to institutional investors that are "accredited investors" within the meaning of Rule 501 under the 1933 Act. Accordingly, each purchaser of a Note will be deemed to have represented and warranted that it is such an institutional accredited investor, that it is purchasing the Notes for its own account or for the account of such an institutional accredited investor and that following such purchase it or such other institutional accredited investor holding a beneficial interest in a Global Note will hold such beneficial interest in a principal amount of $250,000 or an integral multiple of $1,000 in excess thereof at all times. The Bank has agreed to indemnify the Agents against, and to provide contribution with respect to, certain liabilities, including liabilities under the federal securities laws. The Bank has agreed to reimburse each of the Agents for certain other expenses. Certain of the Agents and their affiliates may be customers of, including borrowers from, engage in transactions with, and perform services for, the Bank and the Corporation or their affiliates in the ordinary course of business. 31 32 VALIDITY OF NOTES The validity of the Notes offered hereby and other legal matters will be passed upon for the Bank and the Corporation by Brunilda Santos de Alvarez, Esq., Counsel of the Bank and the Corporation and for the Bank by Pietrantoni Mendez & Alvarez, Hato Rey, Puerto Rico. Certain legal matters will be passed upon for the Agents by Brown & Wood LLP, New York, New York. Brunilda Santos de Alvarez, Esq. and Pietrantoni Mendez & Alvarez will rely on the opinion of Brown & Wood LLP as to matters of New York law. 32 33 ================================================= ================================================= NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR, ANY PRICING $600,000,000 SUPPLEMENT HERETO OR THE DOCUMENTS REFERRED TO UNDER "INCORPORATION OF CERTAIN DOCUMENTS BY BANK NOTES REFERENCE" IN CONNECTION WITH THE OFFER CONTAINED IN THIS OFFERING CIRCULAR AND ANY PRICING SUPPLEMENT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE BANCO POPULAR DE PUERTO RICO RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK, THE CORPORATION OR THE AGENTS. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR, ANY PRICING SUPPLEMENT HERETO OR THE DOCUMENTS ---------------------------- REFERRED TO UNDER "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" NOR ANY SALE MADE OFFERING CIRCULAR HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN ---------------------------- THE AFFAIRS OF THE BANK OR THE CORPORATION SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS OFFERING CIRCULAR. THIS OFFERING CIRCULAR AND ANY PRICING SUPPLEMENT HERETO DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------------------- TABLE OF CONTENTS PAGE Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . 2 MERRILL LYNCH & CO. Notice to Investors . . . . . . . . . . . . . . 4 BEAR, STEARNS & CO. INC. Banco Popular de Puerto Rico . . . . . . . . . 5 CS FIRST BOSTON Selected Unaudited Financial Information of the Bank . . . . . . . . . . . . . . . . . 6 BanPonce Corporation . . . . . . . . . . . . . 8 Supervision, Regulation and Other Matters . . . 8 Use of Proceeds . . . . . . . . . . . . . . . 12 Description of Notes . . . . . . . . . . . . 12 SEPTEMBER 24, 1996 Certain United States Federal Income Tax Considerations . . . . . . . . . . . 25 Certain Puerto Rico Income Tax Considerations . . . . . . . . . . . . . 30 Plan of Distribution . . . . . . . . . . . . 31 Validity of Notes . . . . . . . . . . . . . . 32 ================================================= =================================================
34 EXHIBIT 10.13 (CONT.) 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 35 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 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 2 36 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 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 3 37 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. (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 4 38 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. 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 5 39 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 jurisdic-tion 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 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 corpora-tion 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. 6 40 (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 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 7 41 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 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 8 42 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 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 9 43 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. (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 10 44 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, 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 11 45 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 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 12 46 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 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 13 47 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) 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 14 48 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 Counsel to the Bank and the Parent, substantially in the form of Exhibit C-2 hereto. 15 49 (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 16 50 Sections 9 and 10 hereof, and the provisions of Sections 11, 14 and 15 hereof shall remain in effect. 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 17 51 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 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 supple- 18 52 mented 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. (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 19 53 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 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. 20 54 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 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. 21 55 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 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 22 56 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 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. 23 57 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 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. 24 58 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. 25 59 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. 26 60 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 61 EXHIBIT 10.13 (CONT.) 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: A-1 62 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) 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 63 EXHIBIT 10.13 (CONT.) 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 64 EXHIBIT 10.13 (CONT.) 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 Certifi-cate"), (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 C-1-1 65 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: (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 applic-able 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 C-1-2 66 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 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 Agree-ment, 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, insol-vency, 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 C-1-3 67 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. (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 68 EXHIBIT 10.13 (CONT.) 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 Certifi-cate"), (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 C-2-1 69 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: (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, liquida-tion, 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 C-2-2 70 (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 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)(11) 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 C-2-3 71 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-2-4 72 EXHIBIT 10.13 (CONT.) 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. 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-1 73 EXHIBIT 10.13 (CONT.) 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. IN WITNESS WHEREOF, we have hereunto signed our names and affixed the seal of the Parent the ___ day of _______, 19__. BANPONCE CORPORATION By: ______________________________ Name: Title: [SEAL] By: ______________________________ Name: Title: E-1 74 EXHIBIT 10.13 (CONT.) 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 24, 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"). F-1 75 (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 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 F-2 76 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 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: By: ______________________________ Name: Title: F-3 77 EXHIBIT 10.13 (CONT.) 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. G-1 78 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, 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/ Authentication: Each Note will be dated as of the date of 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 settle-ment 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. G-2 79 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 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 Interest: Unless otherwise specified therein and in 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, G-3 80 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 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 Rejection of Offers: When the Agent is soliciting offers to 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. G-4 81 Preparation of Pricing Supplement: If any offer to purchase a Note is accepted by the 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 Rates or Other Variable Terms: When the Agents are soliciting offers to purchase the Notes from the Bank and a 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 Solici- tation; Amendment or Supplement: While the Agents are soliciting offers to purchase Notes from the Bank, the Bank may 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 G-5 82 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 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 G-6 83 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, as in effect at the time of such suspension 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 Offering Circular: A copy of the most recent 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 Signatures: The Agents will have no obligations or 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 Incorpo- rated by Reference: The Bank shall supply the Agents with an adequate 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 G-7 84 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, 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 G-8 85 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. G-9 86 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 participants 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 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 G-10 87 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 exchange for any remaining principal amount of such exchanged Global Notes representing such Book-Entry Notes (see "Denominations" below). G-11 88 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 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 G-12 89 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 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 G-13 90 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 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 G-14 91 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 and Interest: Payments of Interest Only. Promptly after 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 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, G-15 92 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 the principal of, premium, if any, and interest due on, the Maturity Date or G-16 93 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 available for immediate use to the respective Participants in whose names Book-Entry Notes are recorded G-17 94 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 Dates for Fixed Rate Book-Entry Notes with G-18 95 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 offered "at the market"). 5. Trade Date. G-19 96 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 information set forth in Settlement Procedure A above, and will transmit the Pricing Supplement G-20 97 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 Participant Terminal System, a pending deposit message specifying the following settlement information: G-21 98 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 and the Agents. G-22 99 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 of the Participants maintained by DTC and (ii) to debit G-23 100 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 Timetable: For offers to purchase Book-Entry Notes 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. G-24 101 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-25 102 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-26 103 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-27 104 EXHIBIT 10.13 (CONT.) 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 105 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. 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. 2 106 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 certificate, the Issuing and Paying Agent shall be entitled to rely 3 107 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 4 108 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 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. 5 109 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 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. 6 110 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 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 7 111 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 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 8 112 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 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 9 113 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 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 10 114 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 cancelled as provided in this Section, except as expressly permitted by this Agreement. All cancelled 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 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 11 115 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 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. 12 116 (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 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 13 117 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 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 14 118 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 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 15 119 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 negligence, bad faith or willful misconduct of the Issuing and Paying Agent, upon receipt of such invoices as the Bank may 16 120 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 17 121 least $10,000,000 and subject to supervision and examination by 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 18 122 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 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 19 123 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. 20 124 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: Title: 21 125 EXHIBIT 10.13 CONT. 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-1-1 126 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 [ ] At Maturity only NOTES WITH MATURITIES OF [ ] May 15 and November 15 GREATER THAN 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 A-1-2 127 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 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 A-1-3 128 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. A-1-4 129 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-1-5 130 EXHIBIT 10.13 CONT. [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 A-1-6 131 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, 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 A-1-7 132 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. 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 A-1-8 133 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 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 A-1-9 134 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 corporation to which such sale or conveyance shall have been made, shall not be in default in the performance or observance of any of A-1-10 135 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. A-1-11 136 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 $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. A-1-12 137 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-1-13 138 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-1-14 139 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-1-15 140 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-1-16 141 EXHIBIT 10.13 CONT. 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-2-1 142 No. FLR-__________ CUSIP NO.:____________ REGISTERED 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 [ ] 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
A-2-2 143 ADDENDUM ATTACHED: Total Amount of OID: [ ] Yes Yield to Maturity: [ ] No Initial Accrual Period: OTHER PROVISIONS: DEFAULT RATE: _____%
A-2-3 144 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 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 A-2-4 145 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 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. A-2-5 146 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-2-6 147 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-2-7 148 [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 A-2-8 149 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-2-9 150 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 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 A-2-10 151 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 A-2-11 152 Interest Reset Date shall be the immediately preceding Business Day. 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) A-2-12 153 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 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). A-2-13 154 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 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 A-2-14 155 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 A-2-15 156 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 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 A-2-16 157 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 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 A-2-17 158 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 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 A-2-18 159 Reuters Screen USPRIME1 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 USPRIME1 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 USPRIME1 Page" means the display designated as page "USPRIME1" on the Reuters Monitor Money Rates Service (or such other page as may replace the USPRIME1 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 "Treasury 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 A-2-19 160 published in H.15(519) under the heading "Treasury Bills -- auction average (investment)" or, if not published by 3:00 P.M., New York 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 A-2-20 161 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 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 A-2-21 162 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 60 consecutive days; or (iv) the commencement by the Bank of a voluntary case or proceeding under any applicable United States A-2-22 163 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 A-2-23 164 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 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 A-2-24 165 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 $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 A-2-25 166 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-2-26 167 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-2-27 168 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-2-28 169 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-2-29 170 EXHIBIT 10.13 CONT. 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 171 Chase Manhattan Bank as Issuing and Paying Agent (the "Issuing and Paying Agent"); 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. 2 172 (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. (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 3 173 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, 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 4 174 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 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 5 175 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 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 6 176 address as a party hereto may have subsequently specified in writing: 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 7 177 any other case, circumstances or jurisdiction, or of rendering 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 8 178 engage or be interested in any financial or other transaction with the Bank as freely as if it were not the Calculation Agent. 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. 9 179 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: ----------------------------------- Name: Title: 10 EX-10.14 4 BANPONCE 6.75% MEDIUM TERM NOTES 1 EXHIBIT 10.14 BanPonce Financial Corp. (a Delaware Corporation) 6.75% Medium-Term Fixed Rate Notes, Series C due August 9, 2001 Unconditionally Guaranteed as to Payment of Principal, Premium, if any, and Interest by BanPonce Corporation TERMS AGREEMENT August 6, 1996 BanPonce Financial Corp., 521 Fellowship Road, Mt. Laurel, New Jersey 08045 BanPonce Corporation, 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918 Ladies and Gentlemen: We understand that BanPonce Financial Corp., a Delaware corporation (the "Company"), proposes to issue and sell $75,000,000 aggregate principal amount of its 6.75% Medium-Term Fixed Rate Notes, Series C due August 9, 2001 (the "Notes"), unconditionally guaranteed as to payment of principal, premium if any, and interest by BanPonce Corporation (the "Guarantees" and, together with the Notes, the "Underwritten Securities") which are part of a series of Medium-Term Notes of the Company. subject to the terms and conditions set forth herein or incorporated by reference herein, the underwriters named below (the "Underwriters") offer to purchase as principals pursuant to Section 3(b) of the Distribution Agreement, dated October 11, 1991, as amended on December 2, 1993 and on October 6, 1995 among the Company, BanPonce Corporation and the Agents listed therein (the "Distribution Agreement") severally and not jointly, the principal amount of Underwritten Securities set forth below opposite their respective names at 99.06% of the principal amount thereof, together with accured interest, if any, from August 9, 1996.
Principal Underwriter Amount - ----------- ------ Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . . . . . . . . $ 52,500,000 CS First Boston Corporation . . . . . . . . . . . . . . . . . . . 22,500,000 ------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000,000 =============
1 2 EXHIBIT 10.14 (CONT.) The Underwritten Securities shall have the following terms: Title of Security: 6.75% Medium-Term Fixed Rate Notes, Series C due August 9, 2001. Principal Amount to be issued: $75,000,000 Interest rate: 6.75% Current ratings: Moody's Investors Service, Inc. A3; Standard & Poor's Ratings Services BBB+ Interest payable: June 15 and December 15 of each year and at maturity (each, an "Interest Payment Date"), commencing on December 15, 1996 to the holder of record on the fifteenth calendar day (whether or not a Business Day, as defined in the Prospectus Supplement, dated October 6, 1995, relating to the Company's Medium-Term Notes, Series C Due Nine Months or More From Date of Issue) immediately preceding such Interest Payment Date. Started Maturity Date: August 9, 2001 Purchase Price 99.06% ($74,295,000), plus accrued interest, if any, form August 9, 1996. Settlement Date, Time and Place: August 9, 1996, at 10:00 am New York City time at the offices of Brown & Wood, One World Trade Center, New York, NY 10048 Redemption provisions: None Repayment provisions: None Specified Currency: U.S. dollars Authorized Denominations: $1,000 and integral multiples thereof
2 3 EXHIBIT 10.14 (CONT.) Additional/Other Terms: None Unless inconsistent with this Terms Agreement, all provisions contained in the Distribution Agreement, which is attached hereto as Annex A, are hereby incorporated by reference in their entirety herein and shall be deemed to be a part of this Terms Agreement to the same extent as if such provisions had been set forth in full herein. Capitalized terms not defined herein shall have the meanings assigned to them in the Distribution Agreement. The following documents will be required on the Settlement Date: Officer's Certificate pursuant to Section 7(b) of the Distribution Agreement; and Legal Opinion pursuant to Section 7(c) of the Distribution Agreement. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ------------------------------------ Name: Title: CS FIRST BOSTON CORPORATION By: ------------------------------------ Name: Title: Accepted: BANPONCE FINANCIAL CORP. By: ---------------------------------------- Name: Title: BANPONCE CORPORATION By: ---------------------------------------- Name: Title: 3 4 EXHIBIT 10.14 (CONT.) Cross-Receipt Merrill Lynch, Pierce, Fenner & Smith Incorporated and CS First Boston Corporation, as the underwriters (the "Underwriters") named in the Terms Agreement, dated August 6, 1996 (the "Underwriting Agreement"), between BanPonce Financial Corp. (the "Company"), a Delaware corporation, BanPonce Corporation, a Puerto Rico corporation (the "Guarantor"), and the Underwriters, hereby acknowledge receipt of $75,000,000 aggregate principal amount of the Company's 6.75% Medium-Term Fixed Rate Notes, Series C due August 9, 2001 (the "Notes"), unconditionally guaranteed as to payment of principal, premium if any, and interest by the Guarantor, in the denominations and registered in the names requested. The Company hereby acknowledges from the Underwriters of a wire transfer of immediately available funds in the aggregate amount of $74,295,000, representing payment for the above-mentioned Notes at 99.06% of their principal amount. August 9, 1996 New York, New York MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ----------------------------------- Name: Title: CS FIRST BOSTON CORPORATION By: ----------------------------------- Name: Michael Martin Title: Managing Director BANPONCE FINANCIAL CORP. By: ------------------------------------ Name: Jose Luis Lopez-Calderon Title: Senior Vice President BANPONCE CORPORATION By: ------------------------------------ Name: Jose Luis Lopez-Calderon Title: Senior Vice President 4 5 EXHIBIT 10.14 (CONT.) BANPONCE CORPORATION BANPONCE FINANCIAL CORPORATION Officer's Certificate I, Jose Luis Lopez-Calderon, Senior Vice President of BanPonce Financial Corp., a Delaware corporation (the "Company"), and Senior Vice President of BanPonce Corporation, a Puerto Rico corporation (the "Corporation"), pursuant to the Terms Agreement, dated August 6, 1996, among the Company, the Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and CS First Boston Corporation, hereby certify that, to the best of my knowledge, after reasonable investigation: 1. The representations and warranties of the Company and the Corporation contained in Section 2 of the Distribution Agreement, dated October 11, 1991, as amended on December 2, 1993 and October 6, 1995 and as supplemented on June 16, 1993 and August 1, 1994 (as so amended and supplemented, the "Distribution Agreement"), among the Company, the Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. are true and correct as of the date hereof with the same force and effect as though made at and as of this date; 2. The Company and the Corporation have performed or complied with all agreements and satisfied all conditions on their respective parts to be performed or satisfied pursuant to the Distribution Agreement, as applicable, at or prior to the date hereof; 5 6 EXHIBIT 10.14 (CONT.) 3. No stop order suspending the effectiveness of the Registration Statement on Form S-3 (No. 33-61601) of the Company, the Corporation and Popular International Bank, Inc. (the "Registration Statement") under the Securities Act of 1933 has been issued and no proceedings for that purpose have been initiated or threatened by the Securities and Exchange Commission; and 4. Since the respective dates as of which information is given in each part of such Registration Statement and the prospectus contained therein, as supplemented by the prospectus supplement dated October 6, 1995 and the pricing supplement dated August 6, 1996 (as so supplemented, the "Prospectus"), 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 or the Corporation and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, other than as may have already been disclosed in the Registration Statement and the Prospectus. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: August 9, 1996 ----------------------------- Jose Luis Lopez-Calderon Senior Vice President BanPonce Financial Corp. ----------------------------- Jose Luis Lopez-Calderon Senior Vice President BanPonce Corporation 6 7 EXHIBIT 10.14 (CONT.) Pricing Supplement, dated August 6, 1996 to Prospectus dated September 27, 1995 and Prospectus Supplement dated October 6, 1995 BANPONCE FINANCIAL CORPORATION MEDIUM-TERM NOTES, SERIES C DUE FROM NINE MONTHS TO 30 YEARS FROM DATE OF ISSUE Unconditionally Guaranteed as to Payment of Principal, Premium, if any, and Interest by BANPONCE CORPORATION PRINCIPAL AMOUNT . . . . . . . . . . . . . . . . . . . . U.S. $75,000,000.00 ORIGINAL ISSUE DATE . . . . . . . . . . . . . . . . . . . August 9, 1996 MATURITY DATE . . . . . . . . . . . . . . . . . . . . . August 9, 2001 GLOBAL SECURITY . . . . . . . . . . . . . . . . . . . . . Yes INTEREST RATE PER ANNUM . . . . . . . . . . . . . . . . . 6.75% INTEREST RATE BASIS . . . . . . . . . . . . . . . . . . . Fixed INTEREST PAYMENT DATES . . . . . . . . . . . . . . . . . June 15 and December 15 of each year and at Maturity, commencing on December 15, 1996.
Price to Underwriting Proceeds Public (1) Discount (2) to Company (1)(3) ---------- ------------ ----------------- Per Note . . . . . . . . . . . . . . . . . . . . 99.56% 0.50% 99.06% Total . . . . . . . . . . . . . . . . . . . . $74,670,000 $375,000 $74,295,000 - ---------
(1) Plus accrued interest form August 9, 1996, if any. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (3) Before deducting expenses payable by the Company. ------------- The Notes offered hereby are offered by the several Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Notes will be ready for delivery in New York, New York on or about August 9, 1996, against payment therefor in immediately available funds. MERRILL LYNCH & CO. CS FIRST BOSTON 7 8 EXHIBIT 10.14 (CONT.) RECENT DEVELOPMENTS The U.S. Congress has approved legislation (the "Legislation") that would, among other things, repeal Section 936 of the U.S. Internal Revenue Code ("Section 936"). The Legislation has not yet been signed into law by the President of the United States. In general terms, Section 936 provides U.S. corporations operating in Puerto Rico ("936 Corporations") with a tax credit against U. S. federal tax liability on income derived from business operations and certain investments in Puerto Rico. The Legislation phases out the Section 936 tax credit for income derived from Puerto Rican business operations of a 936 Corporation over a 10-year period. The Legislation would repeal, retroactively as of July 1, 1996, the credit against U.S. federal tax liability for investments made by 936 Corporations in Puerto Rico ("936 Funds"). This credit has created a local money market (the "936 funds market") whose cost is usually below that of the U.S. mainland or the Eurodollar market. The volume of the 936 funds market could be reduced substantially during BanPonce Corporation's (the "Corporation") current fiscal year, if the Legislation becomes law. As of June 30, 1996, the Corporation was a recipient of and had a balance of $2.9 billion in 936 Funds. representing 19.15% of the Corporation's total liabilities. Management believes that the main impact of the Legislation, if signed into law, would be a moderate net increase in the Corporation's cost of funds. The anticipated rise in the cost of funds is expected to be partially offset by a decrease in the cost of complying with various investment requirements mandated by local regulations that are applicable to all recipients of 936 Funds. The repeal of Section 936 could have an adverse effect on the general economic condition of Puerto Rico, the Corporation's predominant service area. USE OF PROCEEDS The proceeds from the issuance of the Notes to which this Pricing Supplement relates will be used to finance the Corporation's subsidiaries. CERTAIN ADDITIONAL FEDERAL TAX CONSEQUENCES Recently proposed U.S. Treasury regulations (the "Proposed Regulations") would establish alternative methods for providing the certification that is required, as described in the Prospectus Supplement under the caption "United States Taxation--United States Alien Holders", for payments on the Notes to be free from United States withholding tax, information reporting requirements and backup withholding tax. The Proposed Regulations also would require, in the case of Notes held by foreign partnerships, that (x) the certification described above be provided by the partners rather than by the foreign partnership and (y) the partnership provide certain information, including a United States taxpayer identification number. A look-through rule would apply in the case of certain tiered partnerships. The Proposed Regulations are proposed to be effective for payments made after December 31, 1997. There can be no assurance that the Proposed Regulations will be adopted or as to the provisions that they will include if and when adopted in temporary or final form. 8 9 EXHIBIT 10.14 (CONT.) UNDERWRITING Subject to the terms and conditions set forth in a terms agreement (the "Terms Agreement") among BanPonce Financial Corporation (the "Company"), the Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CS First Boston Corporation (the "Underwriters"), the Company has agreed to sell to the Underwriters, and the Underwriters have severally agreed to purchase the respective principal amount of Notes set forth after their names below. The Terms Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the Notes if any are purchased.
Principal Underwriter Amount ----------- ------ Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . . . . . . $52,500,000 CS First Boston Corporation . . . . . . . . . . . 22,500,000 Total . . . . . . . . . . . . . . $75,000,000
The Underwriters have advised the Company that they propose initially to offer the Notes to the public at the public offering price set forth on the cover page of this Pricing Supplement, and to certain dealers at such price less a concession not in excess of .3% of the principal amount. The Underwriters may allow, and such dealers may reallow, a discount not in excess of .25% of the principal amount of the Notes to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. The Underwriters and certain of their affiliates and associates are customers of, including borrowers from, engage in transactions with, and/or perform services for, the Corporation and its subsidiaries, in the ordinary course of business. Also, in the ordinary course of their respective businesses, affiliates of the Underwriters engage, and may in the future engage, in commercial banking and investment banking transactions with the Corporation and its subsidiaries. The Underwriters have performed investment banking services for the Corporation in the last two years and have received fees in connection therewith. 9 10 EXHIBIT 10.14 (CONT.) August 9, 1996 Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center North Tower, 23rd Floor New York, NY 10281 CS First Boston Corporation 55 East 52nd Street New York, NY 10055 Dear Ladies and Gentlemen: In connection with the several purchases today by you pursuant to the Terms Agreement, dated August 6, 1996, among BanPonce Financial Corp., a Delaware corporation (the "Company"), BanPonce Corporation, a Puerto Rico corporation (the "Guarantor"), and you, of $75,000,000 principal amount of the Company's Medium-Term Notes, Series C, endorsed with the guarantees of the Guarantor, to be issued pursuant to the Indenture, dated as of October 1, 1991, as supplemented by the First Supplemental Indenture, dated as of February 28, 1995, among the Company, the Guarantor and The First National Bank of Chicago, as successor trustee to Citibank, N.A., I, as Counsel to the Company and the Guarantor, refer to my opinion of October 6, 1995, addressed to you and to First Chicago Capital Markets, Inc. (the "Opinion Letter"), relating to an offering, at an aggregate initial offering price not to exceed $1,000,000,000, of the Company's Medium-Term Notes, Series C, endorsed with the guarantees of the Guarantor. Capitalized terms not defined herein shall have the meanings assigned to them in the Opinion Letter. I reaffirm as of the date hereof (and as though made on the date hereof) all of the opinions made in the Opinion Letter except that, for purposes of this opinion letter, (i) all references to the Registration Statement shall be deemed to be a reference to each part of the Registration statement filed with the Commission through the date hereof, as of the date such part became effective, and (ii) all references to the Basic Prospectus shall be deemed to be a reference to the Basic Prospectus as the same has been amended and supplemented by the Prospectus Supplement and the pricing supplement, dated August 6, 1996 (the "Pricing Supplement"), as of the date of the Pricing Supplement. Very truly yours, Brunilda Santos de Alvarez Legal Counsel 10 EX-12.0 5 RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.0 BANPONCE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands)
---------- Year Ended December 31, ------------ 1996 1995 1994 1993 1992 Income before income taxes 256,028 206,130 175,177 132,140 100,145 Fixed charges : Interest expense 591,540 521,624 351,633 280,008 300,135 Estimated interest component of net rental payments 7,065 6,012 5,568 4,827 4,691 Total fixed charges including interest on deposits 598,605 527,636 357,201 284,835 304,826 Less: Interest on deposits 350,221 329,783 247,726 219,447 253,375 Total fixed charges excluding interest on deposits 248,384 197,853 109,475 65,388 51,451 Income before income taxes and fixed charges(including interest on deposits) $854,633 $733,766 $532,378 $416,975 $404,971 Income before income taxes and fixed charges(excluding interest on deposits) $504,412 $403,983 $284,652 $197,528 $151,596 Preferred stock dividends 8,350 8,350 $ 4,630 $ 770 $ 770 Ratio of earnings to fixed charges Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3 Excluding Interest on Deposits 2.0 2.0 2.6 3.0 2.9 Ratio of earnings to fixed charges & Preferred Stock Dividends Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3 Excluding Interest on Deposits 2.0 2.0 2.5 3.0 2.9
EX-13.1 6 BANPONCE ANNUAL REPORT 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] For the Fiscal Year Ended December 31, 1996 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 BANPONCE CORPORATION -------------------- 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, 1997 the Corporation had 66,121,855 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $2,380,387,000 based upon the reported closing price of $36.00 on the NASDAQ National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated herein by reference in response to Item 1 of Part I. (2) Portions of the Corporation's Proxy Statement relating to the 1997 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference to Items 10 through 13 of Part III. 1 2 TABLE OF CONTENTS
Page ---- PART I - ------ Item 1 Business.................................................... 3 Item 2 Properties.................................................. 10 Item 3 Legal Proceedings........................................... 11 Item 4 Submission of Matters to a Vote of Security Holders......... 11 PART II - ------- Item 5 Market for Registrant's Common Stock and Related Stockholder Matters....................................... 11 Item 6 Selected Financial Data..................................... 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 Item 8 Financial Statements and Supplementary Data................. 13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 13 PART III - -------- Item 10 Directors and Executive Officers of the Registrant.......... 13 Item 11 Executive Compensation...................................... 13 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................ 13 Item 13 Certain Relationships and Related Transactions.............. 13 PART IV - ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 14
2 3 PART I ITEM 1. BUSINESS BANPONCE CORPORATION (the "Corporation") is a diversified, publicly owned bank holding company, incorporated under the General Corporation Law of Puerto Rico in November 1984. It provides a wide variety of financial services through its principal subsidiaries: Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), BP Capital Markets, Inc. ("BP Capital") and Popular International Bank, Inc. ("PIB"). The Corporation is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (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"). Banco Popular, the Corporation's principal banking subsidiary, was incorporated over 100 years ago in 1893 and is Puerto Rico's largest bank with total assets of $14.0 billion, deposits of $10.1 billion and stockholder's equity of $1.0 billion at December 31, 1996. The Bank accounted for 84% of the total consolidated assets of the Corporation at December 31, 1996. The Bank is a full-service commercial bank, and Puerto Rico's largest banking institution with a delivery system of 178 branches and 327 automated teller machines on the island. The Bank also has the largest trust operation in Puerto Rico and is the largest servicer of mortgage loans for investors. In addition, it operates the largest Hispanic bank branch network in the mainland United States with 29 branches in New York and an agency in Chicago. As of December 31, 1996, these branches had a total of approximately $1.5 billion in deposits. The Bank also operates seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. The Bank is a member of the Federal Reserve System and is also subject to the supervision of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and the Superintendent of Banks of the State of New York. Banco Popular's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). In addition, Banco Popular has three subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company, Popular Consumer Services, Inc., a small-loan and secondary mortgage company with 35 offices in Puerto Rico operating under the name of Best Finance, and Popular Mortgage, Inc., a mortgage loan company with four offices in Puerto Rico operating under the name of Puerto Rico Home Mortgage. BP Capital Markets, Inc. is a direct subsidiary of the Corporation engaged in the business of securities broker-dealer in Puerto Rico, with institutional brokerage, financial advisory, and investment and security brokerage operations. PIB, incorporated under the Puerto Rico International Banking Center Act ("IBC Act"), owns all issued and outstanding stock of BanPonce Financial Corp ("Financial"), a Delaware corporation. PIB is principally engaged in providing managerial services to its subsidiaries. Financial is the direct owner of all the issued and outstanding shares of Pioneer Bancorp, Inc., a corporation organized under the laws of Delaware and headquartered in Chicago, Illinois, and a registered bank holding company under the BHC Act of 1956, which through its wholly-owned subsidiary River Associates, Bancorp, Inc., a Delaware corporation, owns and operates Banco Popular, Illinois (formerly Pioneer Bank & Trust Company) a bank organized under the laws of the State of Illinois with five branches in that state. The deposits of Banco Popular, Illinois are insured by the FDIC. As of December 31, 1996 the assets of Banco Popular, Illinois were $467.4 million and its deposits were $375.3 million. Financial is also the direct owner of all the common stock of Banco Popular, FSB, a federal savings bank which acquired from the Resolution Trust Corporation ("RTC") certain assets and all of the deposits of four New Jersey branches of the former Carteret Federal Savings Bank, a federal savings bank under Resolution Trust Corporation conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC and it is subject to the supervision of the Office of Thrift Supervision. As a result of the ownership of Banco Popular, FSB, the Corporation has become a registered savings and loan holding company under the Home Owners' Loan Act. Banco Popular, FSB owns Equity One, Inc., a Delaware corporation (formerly Spring Financial Services, Inc.) ("Equity One"). Equity One is a diversified consumer finance company engaged in the business of granting personal and mortgage loans and providing dealer financing through 102 offices in 28 states with total assets of $1.1 billion as of December 31, 1996. Equity One had initially been acquired by Financial on September 30, 1991, prior to which time Financial had no significant business operations. On September 30, 1996, Financial acquired all of the common stock of CombanCorp, a corporation organized under the laws of California and headquartered in Los Angeles, and a registered bank holding company under the BHC Act. CombanCorp owns Banco Popular, National Association (California) ("Banco Popular, N.A. (California)"), a national bank with four branches in California. The deposits of Banco Popular, N.A. (California) are also insured by the FDIC and it is subject to the supervision of the Office of the Comptroller of the Currency. As of December 31, 1996, it had assets of $139.5 million and deposits of $100.9 million. 3 4 The Corporation is a legal entity separate and distinct from its subsidiaries. There are various legal limitations governing the extent to which the Corporation's banking and savings bank subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Corporation or certain of its other subsidiaries. The rights of the Corporation to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise, are subject to the prior claims of creditors of that subsidiary, except to the extent that the Corporation may itself be a creditor of that subsidiary and its claims are recognized. Claims on the Corporation's subsidiaries by creditors other than the Corporation may include long-term debt and substantial obligations with respect to deposit liabilities, federal funds purchased, securities sold under agreements to repurchase and commercial paper, as well as various other liabilities. The Corporation's business is described on pages 10 through 29 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 1996, information which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL The Corporation is a bank holding company subject to the supervision and regulation of the Federal Reserve Board under the BHC Act. As a bank holding company, the Corporation's activities and those of its banking and non-banking subsidiaries are limited to the business of banking and activities closely related to banking, and the Corporation may not 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 are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. 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 that a national bank with the same home state is permitted to do so as described under "Interstate Banking and Other Recent 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. In addition, some states have laws prohibiting or restricting foreign banks from acquiring banks located in such states and treat Puerto Rico's banks and bank holding companies as foreign banks for such purposes. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB 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 Banco Popular, Illinois, the FDIC and the Illinois Commissioner of Banks and Trust Companies, in the case of Banco Popular, N.A. (California), the Office of the Comptroller of the Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. F D I C I A Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations thereunder established 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 4 5 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, 1996, Banco Popular, Banco Popular, Illinois, and Banco Popular, FSB were well capitalized. At the same date Banco Popular, N.A. (California) was adequately capitalized. At the end of February 1997, after receiving an additional capital contribution of one million from Financial, Banco Popular, N.A. (California) was well capitalized. 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 five percent 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. HOLDING COMPANY STRUCTURE Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to restrictions under federal law that limit the transfer of funds between them and the Corporation, Financial, PIB and 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, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB, respectively, to the Corporation, Financial, or PIB, as the case may be, or to any one non-banking subsidiary, 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. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under the Federal Reserve Board policy, a bank holding company such as the Corporation, 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 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 bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are currently the only depository institution subsidiaries of the Corporation. Because the Corporation, PIB and Financial 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 depository institution subsidiaries) except to the extent that the Corporation, PIB or Financial, as the case may be, may itself be a creditor with recognized claims against the subsidiary. Under the Federal Deposit Insurance Act (FDIA), a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default". "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of 5 6 certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are all currently FDIC-insured depository institutions. 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 owned by a subsidiary bank to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions. DIVIDEND RESTRICTIONS The principal regular source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulations 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. However, it may net the sum of its bad debts as so 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, 1996, Banco Popular could have declared a dividend of approximately $197.1 million without the approval of the Federal Reserve Board. Illinois law contains similar limitations on the amount of dividends that Banco Popular, Illinois can pay and the National Bank Act contains similar limitations, on the amount of dividends Banco Popular, N.A. (California) can pay. In addition, OTS regulations limit the amount of capital distributions (whether by dividend or otherwise) that any savings association may make without prior OTS approval, based upon the savings association's regulatory capital levels. These limitations are applicable to Banco Popular, FSB. Also, in connection with the acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB and Financial an interim financial assistance. The assistance consisted of a 5-year term loan for $19.5 million, payable in the year 2000 in a single lump sum installment and accruing interest, payable quarterly, at a floating rate of 12.5 basis points over the rate payable on the 13-week U.S. Treasury Bill. The loan is secured with the issued and outstanding shares of common stock of Banco Popular, FSB. Pursuant to the term of such financing, Banco Popular, FSB may not, among other things, declare or pay any dividends on its outstanding capital stock (unless such dividends are used exclusively for payment of principal of or interest on such promissory note) or make any distributions of its assets until payment in full of such promissory note. The payment of dividends by Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB 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. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA". See "Puerto Rico Regulation" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured 6 7 depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC reduced the insurance premiums it charges on bank deposits insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium and, currently, premiums related to deposits assessed by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be assessed at a rate between 0 cents and 27 cents per $100.00 of deposits. DIFA also provides for a special one-time assessment imposed on deposits insured by the SAIF to recapitalize the SAIF to bring it up to statutory required levels. The Corporation accrued for the one-time assessment in the third quarter of 1996. DIFA also separates, effective January 1, 1997, 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 will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates for the first semiannual period of 1997 were set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first.) As of December 31, 1996, the Corporation had a BIF deposit assessment base of approximately $10.1 billion and a SAIF deposit assessment base of approximately $207 million. 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, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco Popular, FSB. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 1996 and for the four previous years is presented in Table I "Capital Adequacy Data", on page F-16 in the "Management Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) and is incorporated herein by reference. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying 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 unconsolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill, other disallowed intangibles and the disallowed portion of deferred tax 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"). The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights, purchased credit card relationships and include a "grandfather" provision permitting the continued inclusion of certain existing intangibles. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) 7 8 guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. 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 quarterly average assets less all intangibles. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio applicable to it. Banco Popular is subject to the risk-based and leverage capital requirements adopted by the Federal Reserve Board. As of December 31, 1996, Banco Popular had a tier 1 capital ratio of 11.31%, a total capital ratio of 12.57% and a leverage ratio of 6.65%. Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco Popular, FSB are subject to similar capital requirements adopted by the FDIC, the OCC and the OTS, respectively. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See "FDICIA". The Federal Reserve Board established a limitation on the amount of certain deferred tax assets that may be included in Tier 1 capital for risk-based and leverage capital purposes. Under this rules deferred tax assets that can only be realized if an institution earns taxable income in the future and are limited for regulatory capital purposes to the amount that the institution expects to realize within one year of the quarter-end report date based on its projection of taxable income or 10 percent of Tier 1 capital, whichever is less. In addition, the Federal Reserve Board has decided to exclude from regulatory capital the amount of net unrealized gains and losses on securities available-for-sale, except the net unrealized losses of equity securities with readily determinable fair values. Bank regulators have from time to time indicated their desire to raise capital requirements applicable to banking organizations beyond current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what terms. Interstate Banking and Other Recent Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies, with Federal Reserve 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, commencing June 1, 1997, national and state banks with different home states will be permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passes legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States may "opt in" to permit insterstate branching by merger prior to June 1, 1997, and to permit de novo insterstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts 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. Various other legislation, inluding proposals to overhaul the bank regulatory system, expand bank and bank holding company powers and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. It is impossible to predict whether or in what form these proposals may be adopted in the future, and, if adopted, what their effect will be on the Corporation or its subsidiaries. 8 9 Puerto Rico Regulation General As a commercial bank organized under the laws of the Commonwealth of Puerto Rico (the "Commonwealth"), Banco Popular is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of the Commonwealth (the "Office of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law"). Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of Banco Popular be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to ten percent (10%) of the total deposits or the total paid-in capital, whichever is greater. 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 the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall 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 which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. However, if a bank becomes a member of the Federal Reserve System, the 20% legal reserve shall not be effective and the reserve requirements demanded by the Federal Reserve System shall be applicable. Pursuant to an order of the Board of Governors dated November 24, 1982, Banco Popular has been exempted from such reserve requirements with respect to deposits payable in Puerto Rico but is subject to Puerto Rico regulatory reserve requirements. Section 17 of the Banking Law permits Banco Popular 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, 1996, the legal lending limit for the Bank under this provision was approximately $90 million. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the Bank, plus its reserve fund. 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 the Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth. Section 14 of the Banking Law authorizes Banco Popular to conduct certain financial and related activities directly or through subsidiaries, including lease financing of personal property, operating small loans companies and mortgage loans activities. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Consumer Services, Inc. and Popular Mortgage, Inc., respectively, which are organized and operate solely 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 the Commonwealth. 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) is to be determined by free competition. The Finance Board also has authority to regulate the maximum finance charges on retail installment sales contracts, which are currently set at 21%, and for credit card purchases, which are currently set at 26%. There is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums. 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 9 10 are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the Company'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 monthly basis and its annual audited financial statement as of the end 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, 1996, the Corporation employed 7,996 persons. None of its employees are represented by a collective bargaining group. ITEM 2. PROPERTIES As of December 31, 1996, Banco Popular owned (and wholly or partially occupied) approximately 68 branch premises and other facilities throughout the Commonwealth and branches premises in New York. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 113 locations in Puerto Rico, 16 locations in New York, 7 locations in the U.S. Virgin Islands and one location in the British Virgin Islands. The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by Banco Popular for banking operations and other services are described below: Popular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building. Approximately 60% of the office space is leased to outside tenants. Cupey Center Complex, two buildings of three and two stories, respectively, located at 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. 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. San Juan building, a twelve story structure located at Old San Juan, Puerto Rico. Banco Popular occupies 50% of the basement, the entire ground floor, the mezzanine and the 10th floor. The rest of the building is rented to outside tenants. Mortgage Loan Center, a seven story building and a four story building, located at 153 and 167 Ponce de Leon Avenue, Hato Rey, Puerto Rico, respectively, are fully occupied by the mortgage loans and mortgage servicing departments. New York building, a nine story structure with two underground levels located at 7 West 51st. Street, New York City, where approximately 92% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants. At December 31, 1996 the Corporation owned a 23 story office structure located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. Banco Popular occupies approximately 15% of the rented space and the rest of the building is rented to outside tenants. At the same date, Banco Popular, N.A. (California) owned a nine story structure located at 354 South Spring Street, Los Angeles, 10 11 California in which office space is mostly rented to outside tenants. A full service branch of Banco Popular, N.A. (California) operates in 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 of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation (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 1996 and the previous four years, as well as cash dividends declared is contained under Table J, "Common Stock Performance", on page F-17 and under the caption "Stockholders' Equity" on page F-15 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. On April 26, 1996, the Corporation's Board of Directors authorized a stock split of one share for each share outstandings effected in the form of a dividend, on July 1, 1996. As a result of the split 33,000,590 shares were issued, and $198 million were transferred from retained earnings to common stock. As of February 28, 1997, the Corporation had 5,628 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 $36.00 per share. The Corporation currently has outstanding $125 million 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. The Puerto Rico Income Tax Act of 1954, 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 rate of withholding is 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. United States citizens who are non-residents 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. 11 12 ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in Table B, "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: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Excluding Interest on Deposits 2.0 2.0 2.6 3.0 2.9 Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 2.0 2.0 2.5 3.0 2.9 Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3
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 for each of the last five years ended December 31, is as follows:
Year ended December 31, ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands) Long-term obligations $1,111,713 $ 885,428 $ 489,524 $ 283,855 $ 120,062 Non-Cumulative preferred stock of the Corporation 100,000 100,000 100,000 -0- -0- Cumulative perpetual preferred stock of Banco Popular -0- -0- -0- 11,000 11,000
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-34 under the caption "MD&A" and is incorporated herein by reference. Table L, "Maturity Distribution of Earning Assets", on page F-20 in the MD&A, has been prepared on the basis of contractual 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. 12 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-35 through F-75, and on page F-32 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 filed with the Securities and Exchange Commission on or about March 20, 1997 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation Program", and under the caption "BanPonce Corporation Performance Graph" of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders", and under "Shares Beneficially Owned by Directors, Nominees and Officers of the Corporation" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other relationships and transactions" of the Proxy Statement, is incorporated herein by reference. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are part of this report and appear on the pages indicated. (1) Financial Statements: Report of Independent Auditors............................................... F-35 Consolidated Statements of Condition as of December 31, 1996 and 1995................................................................... F-36 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996.............................. F-37 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996........................... F-38 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1996.......................................................... F-39 Notes to Consolidated Financial Statements................................... F-40
(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 17 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, 1996. Dated: October 9, 1996 Items reported: Item 5 - Other Event Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits 14 15 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. BANPONCE CORPORATION (Registrant) By: S\RICHARD L. CARRION -------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer Dated: 02-13-97 (Principal Executive Officer) ---------- By: S\JORGE A. JUNQUERA ------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-13-97 (Principal Financial Officer) ---------- By: S\AMILCAR L. JORDAN ------------------- Amilcar L. Jordan Senior Vice President Dated: 02-13-97 (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 02-13-97 -------- S\ALFONSO F. BALLESTER Vice Chairman of - ---------------------- the Board 02-13-97 Alfonso F. Ballester -------- S\ANTONIO LUIS FERRE Vice Chairman of - -------------------- the Board 02-13-97 Antonio Luis Ferre -------- S\JUAN J. BERMUDEZ - ------------------ Juan J. Bermudez Director 02-13-97 -------- S\FRANCISCO J. CARRERAS - ----------------------- Francisco J. Carreras Director 02-13-97 -------- S\DAVID H. CHAFEY, JR. - ---------------------- David H. Chafey, Jr. Director 02-13-97 -------- S\LUIS E. DUBON, JR. - -------------------- Luis E. Dubon, Jr. Director 02-13-97 --------
15 16 S\HECTOR R. GONZALEZ - -------------------- Hector R. Gonzalez Director 02-13-97 -------- S\JORGE A. JUNQUERA - ------------------- Jorge A. Junquera Director 02-13-97 -------- S\MANUEL MORALES, JR. - --------------------- Manuel Morales, Jr. Director 02-13-97 -------- S\ALBERTO M. PARACCHINI - ----------------------- Alberto M. Paracchini Director 02-13-97 -------- - ----------------------- Francisco Perez, Jr. Director -------- S\FRANCISCO M. REXACH, JR. - -------------------------- Francisco M. Rexach, Jr. Director 02-13-97 -------- - -------------------------- Jose E. Rossi Director -------- S\FELIX J. SERRALLES, JR. - ------------------------- Felix J. Serralles, Jr. Director 02-13-97 -------- S\EMILIO JOSE VENEGAS - --------------------- Emilio Jose Venegas Director 02-13-97 -------- S\JULIO E. VIZCARRONDO, JR. - --------------------------- Julio E. Vizcarrondo, Jr. Director 02-13-97 --------
16 17 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION FOOTNOTE - -------------------------------------------------------------------------------------- 3.1 Restated certificate of Incorporation and By-Laws of BanPonce Corporation (1) 4.1 Form of certificate for common stock (1a) 4.2 Certificates of Resolution of the Board of Directors of BanPonce Corporation dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between BanPonce Corporation and Manufacturers Hanover Trust Company regarding the issuance of certain Rights to the Corporation's shareholders. (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture, dated as of October 1, 1991, among BanPonce Financial Corp, BanPonce Corporation and Citibank, N.A. relating to the debt securities of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2a) 4.5 Form of medium-term fixed rate note of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2b) 4.6 Form of medium-term floating rate note of BanPonce Financial Corp guaranteed by BanPonce Corporation. (2c) 4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4) 4.8 Form S-3 filed in connection with the issuance of debt securities and preferred stock of BanPonce Corporation, Popular International Bank, Inc. and BanPonce Financial Corp and guaranteed by BanPonce Corporation in the aggregate amount of $1,000,000,000. (5) 4.9 Subordinated indenture of BanPonce Corporation, dated November 30, 1995, between BanPonce Corporation and the First National Bank of Chicago, as trustee, and related to 6 3/4% subordinated notes due December 15, 2005 in the aggregate amount of $125,000,000. (6) 4.10 Form of subordinated note of BanPonce Corporation. (7) 4.11 Indenture, dated as of February 15, 1995, between BanPonce Corporation and the First National Bank of Chicago, as trustee. (15) 4.12 Form of medium-term fixed rate note of BanPonce Corporation (16) 4.13 Form of medium-term floating rate note of BanPonce Corporation (17) 10.2 Form 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (8) 10.3 Senior Note Agreement dated as of January 15, 1992, between BanPonce Corporation and New York Life Insurance Company regarding the issuance by BanPonce Corporation of $30,000,000 Senior Notes due January 15, 1997. (9) 10.8 Management Incentive Plan for certain Division Supervisors approved in January, 1987. (10) 10.8.1 BanPonce Corporation Senior Executive Long-Term Incentive Plan dated October 6, 1994. (11) 10.9 Stock Deferment Plan for outside directors effective on August 15, 1996. 10.10 Revolving loan agreement executed by and between Vehicle Equipment Leasing and BanPonce Corporation as of January 15, 1992 in the aggregate principal amount of $30,000,000. (12) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merrill Lynch, Pierce, Fenner & Smith, Incorporated acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (13) 10.12.2 Revolving Credit and competitive advance facility and credit agreement by and between BanPonce Corporation and BanPonce Financial Corp and Chemical Bank, as agent bank, for borrowing up to the principal amount of $500,000,000 dated as of November 3, 1995. (14) 10.13 Banco Popular de Puerto Rico Bank's Note Program up to the aggregate amount of $600,000,000 executed on September 24, 1996 10.14 BanPonce Financial Corp, 6 3/4% Medium Term Notes, Series C, due August 9, 2001 in the aggregate principal amount of $75,000,000.
17 18 12.0 Computation of Ratio of Earnings to Fixed Charges 13.1 Registrants Annual Report to Shareholders for the year ended December 31, 1996 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 27.0 Financial Data Schedule (for SEC use only) 99.1 Registrant's Proxy Statement for the April 25, 1997 Annual Meeting of Stockholders
- ------------------------------ (1) Incorporated by reference to Exhibit 4.1 of Registration Statement No.33-39028. (1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686 and to Exhibit 4(a) on Form 8-K filed on February 28, 1995. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-K. (5) Incorporated by reference to Registration Statement No. 33-61601. (6) Incorporated by reference to Exhibit 4(e) on Form 8-K filed on December 13, 1995. (7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on December 13, 1995. (8) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. (9) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K. (10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (11) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K. (12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (14) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K. (15) Incorporated by reference to Exhibit 4(c) on Form 8-K filed on April 13, 1995. (16) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April 13, 1995. (17) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April 13, 1995. 19 - -------------------------------------------------------------------------------- BANPONCE CORPORATION INDEX FINANCIAL DATA
PAGE FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION Managements Discussion and Analysis of Financial Condition and Results of Operations.......................................................... F-2 Statistical Summaries........................................................... F-28 Glossary of Terms............................................................... F-33 FINANCIAL STATEMENTS Report of Independent Accountants............................................... F-35 Consolidated Statements of Condition as of December 31, 1996 and 1995........... F-36 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996...................................... F-37 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996...................................... F-38 Consolidated Statements of Changes in Stockholders Equity for each of the years in the three-year period ended December 31, 1996.................. F-39 Notes to Consolidated Financial Statements...................................... F-40
F-1 20 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 BanPonce Corporation 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/Savings and Loans - Banco Popular de Puerto Rico (Banco Popular), Banco Popular, Illinois, Banco Popular, FSB, and Banco Popular, N.A. (California) - Lease Financing - Popular Leasing and Rental, Inc., and Vehicle Equipment Leasing Company, Inc. (VELCO) - Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a Puerto Rico Home Mortgage), Equity One, Inc. (Equity One) and Popular Consumer Services, Inc. (d/b/a Best Finance) - Investment Banking - BP Capital Markets, Inc. (BP Capital) OVERVIEW On April 26, 1996, the Corporation's Board of Directors authorized a common stock split in the form of a dividend of one share for each share outstanding. The new shares were distributed on July 1, 1996, to shareholders of record as of June 14, 1996. All common stock data included herein has been restated to reflect the stock split. BanPonce Corporation faced many challenges during 1996. Factors such as legislation and acquisitions in the local banking industry all played an important role. These factors did not hinder the strong results and strategic development obtained during the year, as the net income amounted to $185.2 million, showing a $38.8 million or 26.5% increase over the $146.4 million reported in 1995. The earnings performance reflected an increase in net interest income and improvements in non-interest income, tempered by increases in the provision for loan losses, operating expenses and income taxes. Earnings per common share (EPS) for 1996 were $2.68, based on 66,022,312 average shares outstanding, compared with $2.10 for 1995, based on 65,816,300 average shares outstanding. The Corporation's profitability ratios for 1996 represented returns of 1.14% on assets (ROA) and 16.15% on common stockholders' equity (ROE), compared with an ROA and ROE of 1.04% and 14.22%, respectively, in 1995. Table A presents a five-year summary of the components of net income as a percentage of average assets. In 1996, the Corporation continued experiencing balance sheet growth with total assets amounting to $16.8 billion compared with $15.7 billion a year earlier. BanPonce ranked 42nd in asset size among the U.S. banking companies as of the end of the third quarter of 1996. In addition, as a result of the Corporation's emphasis on building diverse and stable sources of funding to strengthen its operations and sustain future growth, total deposits increased to $10.8 billion from $9.9 billion a year ago. Borrowings rose $30 million, from $4.4 billion in 1995. In line with the emphasis regulatory agencies have placed on capital strength, stockholders' equity of the Corporation reached $1.26 billion at December 31, 1996, compared with $1.14 billion at December 31, 1995. The Corporation's regulatory capital ratios continued to exceed the well-capitalized guidelines with a Tier I ratio of 11.63%, a total capital ratio of 14.18% and a leverage ratio of 6.71% at December 31, 1996, compared with 11.91%, 14.65% and 6.66%, respectively, a year earlier. The Corporation's common stock appreciated 74.1% during 1996, from a market price of $19.38 at December 31, 1995, to $33.75 on the same date in 1996. Also, the Board of Directors approved a 20% increase in the quarterly cash dividend effective for the second quarter of 1996, to $0.18 per common share, from $0.15 per share paid in the previous quarters. As explained more thoroughly in the Net Interest Income and Liquidity Risk sections, during the third quarter of 1996 the U.S. Congress repealed Section 936 of the U.S. Internal Revenue Code. Section 936 provided certain U.S. corporations operating on the Island with a tax credit against its federal tax liability on income derived from business operations and investment activity in Puerto Rico. The bill approved repealed the Qualified Possession Source Investment Income (QPSII) effective July 1, 1996, for taxable years beginning after December 31, 1995, while the income and the wage credit provisions will be phased out in 10 years. As expected, the repeal of this section caused a reduction in the volume of 936 funds, but at a significantly lower pace than originally expected. In September 1996, President Clinton signed into law, as part of the Omnibus Budget Reconciliation Act, the "Deposit Insurance Funds Act of 1996" (the Act). The Act required the capitalization of the Savings Association Insurance Fund (SAIF) to its F-2 21
- --------------------------------------------------------------------------------------------------- TABLE A Components of Net Income as a Percentage of Average Total Assets For the Year - --------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------------------------------ Net interest income ................................. 4.18% 4.14% 4.38% 4.61% 4.62% Provision for loan losses ........................... (0.54) (0.46) (0.44) (0.68) (1.03) Security and trading gains .......................... 0.02 0.05 0.01 0.01 Other income ........................................ 1.24 1.18 1.15 1.16 1.30 ------------------------------------------ 4.90 4.91 5.09 5.10 4.90 Operating expenses .................................. (3.33) (3.45) (3.66) (3.86) (3.85) ------------------------------------------ Net income before tax, dividends on preferred stock of Banco Popular and cumulative effect of accounting changes ................................ 1.57 1.46 1.43 1.24 1.05 Provision for income tax ............................ (0.43) (0.42) (0.41) (0.26) (0.15) ------------------------------------------ Net income before dividends on preferred stock of Banco Popular and cumulative effect of accounting changes ................................ 1.14 1.04 1.02 0.98 0.90 Dividends on preferred stock of Banco Popular ....... (0.01) (0.01) Cumulative effect of accounting changes ............. 0.05 ------------------------------------------ Net income .......................................... 1.14% 1.04% 1.02% 1.02% 0.89% ==========================================
designated reserve level ratio of 1.25% of insured deposits in thrift institutions and gave the FDIC the legal authority to impose a special one-time assessment on all SAIF-insured institutions. During the last quarter of 1996, Banco Popular, FSB recognized $1.1 million in other operating expenses related to this one-time assessment. The Act also provides that the assessment base for the payment of interest on obligations issued by the Financing Corporation (FICO) for the resolution of failed thrifts will be expanded to include all FDIC-insured depository institutions. Excluding the effect of this one-time assessment, this legislation will result in an estimated $1.1 million higher deposit insurance expense for the Corporation during 1997. During 1996, the economy showed moderate growth and subdued inflationary pressures. The overall growth of the GDP in 1996 was 3.40%. The Federal Reserve eased interest rates early in the year, lowering the Federal Funds rate 25 basis points to 5.25%, without changing the monetary policy for the rest of the year. However, market rates rose as the financial markets started pricing with the increasing probability of a tighter monetary policy in the near-term future. The Riegle-Neal Interstate Banking and Branching Efficiency Act, which allows bank holding companies to expand into different states in the United States, will include the interstate branching provisions effective June 1997. Since the approval of this act in 1994, acquisitions have taken an even more active role within the banking industry. This is also the case at BanPonce Corporation, which continued its geographical expansion and development of new ways to provide technology and delivery systems outside Puerto Rico. During the first quarter of 1996, the Corporation purchased 20% of the common stock of Jamaica's fourth largest financial institution, Citizens Bank. The Corporation also acquired preferred stock of Citizens Bank, convertible into an additional 10% of common equity of said institution. Also, ATH-Dominicana, the first automated teller machine (ATM) network in the Dominican Republic, began operations on March 25, 1996. This network, provides customers of banks in the Dominican Republic access to ATMs in Puerto Rico and the United States. This joint venture of Banco Popular and certain financial institutions of the Dominican Republic, was the first opportunity to export Banco Popular's technological infrastructure and expertise outside Puerto Rico and the U.S. mainland. With the experience obtained from ATH-Dominicana, the Corporation is in the process of establishing ATH-Costa Rica, the first ATM network in that country. Banco Popular, with its shared network ATH (A Toda Hora) and sixteen banking institutions in Costa Rica, will join to add 70 machines to the 80 ATMs currently operating, while providing its customers with access to ATMs in Puerto Rico and the United States, and vice-versa. F-3 22
- -------------------------------------------------------------------------------------------------------- TABLE B Selected Financial Data Year ended December 31, --------------------------------------------- (Dollars in thousands, except per share data) 1996 1995 1994 --------------------------------------------- CONDENSED INCOME STATEMENTS Interest income ....................................... $ 1,272,853 $ 1,105,807 $ 887,141 Interest expense ...................................... 591,540 521,624 351,633 -------------------------------------------- Net interest income .................................. 681,313 584,183 535,508 Security and trading gains (losses) .................... 3,202 7,153 451 Operating income ....................................... 202,270 166,185 140,852 Operating expenses ..................................... 541,919 486,833 447,846 Provision for loan losses .............................. 88,839 64,558 53,788 Income tax ............................................. 70,877 59,769 50,043 Dividends on preferred stock of Banco Popular .......... 385 Cumulative effect of accounting changes ................ -------------------------------------------- Net income ......................................... $ 185,150 $ 146,361 $ 124,749 ============================================ Net income applicable to common stock .............. $ 176,800 $ 138,011 $ 120,504 ============================================ PER COMMON SHARE DATA* Net income ........................................... $ 2.68 $ 2.10 $ 1.84 Dividends declared ................................... 0.69 0.58 0.50 Book value ........................................... 17.59 15.81 13.74 Market price ......................................... 33.75 19.38 14.07 Outstanding shares: Average ............................................. 66,022,312 65,816,300 65,596,486 End of period ....................................... 66,088,506 65,897,272 65,676,256 AVERAGE BALANCES Net loans ............................................ $ 9,210,964 $ 8,217,834 $ 7,107,746 Earning assets ....................................... 15,306,311 13,244,170 11,389,680 Total assets ......................................... 16,301,082 14,118,183 12,225,530 Deposits ............................................. 10,461,796 9,582,151 8,837,226 Subordinated notes ................................... 147,951 56,850 56,082 Total stockholders' equity ........................... 1,194,511 1,070,482 924,869 PERIOD END BALANCES Net loans ............................................. $ 9,779,028 $ 8,677,484 $ 7,781,329 Allowance for loan losses ............................. 185,574 168,393 153,798 Earning assets ....................................... 15,484,454 14,668,195 11,843,806 Total assets .......................................... 16,764,103 15,675,451 12,778,358 Deposits .............................................. 10,763,275 9,876,662 9,012,435 Subordinated notes .................................... 125,000 175,000 50,000 Total stockholders' equity ............................ 1,262,532 1,141,697 1,002,423 SELECTED RATIOS Net interest yield (taxable equivalent basis) ........ 4.77% 4.74% 5.06% Return on average total assets ....................... 1.14 1.04 1.02 Return on average earning assets ..................... 1.21 1.11 1.10 Return on average common stockholders' equity ........ 16.15 14.22 13.80 Dividend payout ratio to common stockholders ......... 24.63 26.21 27.20 Average net loans/average total deposits ............. 88.04 85.76 80.43 Average earning assets/average total assets .......... 93.90 93.81 93.16 Average stockholders' equity/average net loans ....... 12.97 13.03 13.01 Average stockholders' equity/average assets .......... 7.33 7.58 7.57 Overhead ratio ....................................... 49.38 53.66 57.24 Tier I capital to risk-adjusted assets ............... 11.63 11.91 12.85 Total capital to risk-adjusted assets ................ 14.18 14.65 14.25 Effective tax rate ................................... 27.68 29.00 28.57
*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, 1996 and on April 3, 1989. F-4 23
- ---------------------------------------------------------------------------------------------------------------------- Year ended December 31, - ---------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 1988 1987 - ---------------------------------------------------------------------------------------------------------------------- $ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200 $ 410,605 280,008 300,135 387,134 281,561 302,747 261,316 206,778 - ---------------------------------------------------------------------------------------------------------------------- 492,128 440,219 407,809 284,246 255,526 226,884 203,827 1,418 625 19,376 91 2,529 689 (366) 123,762 123,879 112,398 70,865 59,550 53,025 40,623 412,276 366,945 345,738 229,563 207,376 190,862 182,593 72,892 97,633 121,681 53,033 42,603 34,750 18,000 28,151 14,259 6,793 9,240 11,456 7,844 5,956 770 770 807 6,185 - ---------------------------------------------------------------------------------------------------------------------- $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 ====================================================================================================================== $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 ====================================================================================================================== $ 1.67 $ 1.40 $ 1.07 $ 1.57 $ 1.40 $ 1.18 $ 0.94 0.45 0.40 0.40 0.40 0.40 0.34 0.33 12.75 11.52 10.50 9.83 9.38 8.38 7.54 15.50 15.13 9.63 8.00 10.75 8.88 6.69 65,402,472 60,922,988 60,071,202 40,233,940 40,028,026 40,000,000 40,000,000 65,464,846 65,309,728 60,187,704 59,884,812 40,074,792 40,000,000 40,000,000 $ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 $ 2,510,495 9,894,662 8,779,981 8,199,195 5,461,938 5,318,800 5,182,535 4,597,329 10,683,753 9,528,518 8,944,357 5,836,749 5,676,981 5,523,823 4,918,984 8,124,885 7,641,123 7,198,187 5,039,422 4,782,791 4,571,456 4,211,465 73,967 85,585 94,000 50,000 38,082 119 1,717 793,001 668,990 610,641 407,611 353,844 317,001 286,752 $ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 $ 2,737,271 133,437 110,714 94,199 89,335 40,896 33,244 28,423 10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 5,221,873 4,957,221 11,513,368 10,002,327 8,780,282 8,983,624 5,923,261 5,661,398 5,352,745 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 4,715,837 4,491,612 62,000 74,000 94,000 94,000 50,000 500 834,195 752,119 631,818 588,884 375,807 334,867 301,425 5.50% 6.11% 5.97% 6.30% 5.57% 5.10% 5.04% 1.02 0.89 0.72 1.09 0.99 0.85 0.76 1.11 0.97 0.79 1.16 1.06 0.91 0.82 13.80 12.72 10.57 15.55 15.87 14.87 13.09 25.39 28.33 34.13 25.33 28.14 28.00 35.17 70.16 67.40 73.66 67.02 65.49 62.78 59.61 92.61 92.14 91.67 93.58 93.69 93.82 93.46 13.91 12.99 11.52 12.07 11.30 11.05 11.42 7.42 7.02 6.83 6.98 6.23 .74 5.83 58.34 55.07 52.47 55.80 56.86 60.45 69.83 12.29 12.88 11.01 10.10 9.47 9.19 N/A 13.95 14.85 13.35 12.74 11.76 10.10 N/A 21.30 14.24 9.41 12.73 16.94 14.27 13.70
F-5 24
- --------------------------------------------------------------------------------------------------------------------------------- TABLE C Changes in Net Income and Earnings per Common Share 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- (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 .................................. $ 138,011 $ 2.10 $ 120,504 $ 1.84 $ 109,404 $ 1.67 Increase (decrease) from changes in: Net interest income ............................. 97,130 1.47 48,675 0.74 43,380 0.66 Other operating income .......................... 36,085 0.55 25,333 0.38 17,090 0.26 Trading account profit .......................... (1,678) (0.03) 1,558 0.02 (327) Gain on sale of investment securities ........... (2,273) (0.03) 5,144 0.08 (640) (0.01) Dividends on preferred stock of Banco Popular 385 0.01 385 0.01 Income tax ...................................... (11,108) (0.17) (9,726) (0.15) (21,892) (0.33) Provision for loan losses ....................... (24,281) (0.37) (10,770) (0.16) 19,104 0.29 Operating expenses .............................. (55,086) (0.84) (38,987) (0.59) (35,570) (0.54) --------------------------------------------------------------------- Subtotal ......................................... 176,800 2.68 142,116 2.17 130,934 2.01 Cumulative effect of accounting changes .......... (6,185) (0.09) Dividends declared on preferred stock ............ (4,105) (0.06) (4,245) (0.07) Change in average common shares* ................. (0.01) (0.01) --------------------------------------------------------------------- Net income applicable to common stock ............ $ 176,800 $ 2.68 $ 138,011 $ 2.10 $ 120,504 $ 1.84 =====================================================================
*Reflects the effect of the issuance of shares of common stock through the Dividend Reinvestment Plan in the years presented. The average common shares outstanding used in the above computation were 66,022,312 for 1996, 65,816,300 for 1995 and 65,596,486 for 1994, after restating for the stock split effected in the form of a dividend on July 1, 1996. - ------------------------------------------------------------------------------- In the third quarter of 1996, BanPonce completed the acquisition of CombanCorp, the parent company of Commerce National Bank, which added to the Corporation three branches in California, located in City of Commerce, Montebello and Downey, with $75 million in assets and $63 million in deposits. In Puerto Rico, Banco Popular opened nine branches in supermarkets as part of an in-store branch initiative and three branches within the premises of shopping centers in order to provide banking services at our customers' convenience. Banco Popular, FSB also opened one branch in 1996, further expanding its presence in New Jersey, for a total of six branches in that state. Moreover, during 1996 Banco Popular, Illinois, formerly Pioneer Bank, opened its fifth full-service branch in Chicago and Equity One opened 11 new offices in the mainland, giving Equity One a total of 102 offices in 28 states. During the last quarter of 1996, as part of a strategy to emphasize BanPonce's strong Hispanic ties, the Corporation's subsidary banks operating in California and Illinois, previously known as Commerce National Bank and Pioneer Bank & Trust Company, respectively, changed their names to Banco Popular, N.A. (California) and Banco Popular, Illinois, respectively. Moving toward 1997, the Corporation has announced the following acquisitions now awaiting the approval of regulatory agencies: - National Bancorp, the holding company of American Midwest Bank & Trust in Chicago, Illinois, with assets of approximately $175 million and deposits of $146 million at November 1996, operating two branches in Melrose Park. - CBC Bancorp and its two banking subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont, with assets of approximately $315 million and deposits of $280 million. - Roig Commercial Bank, which operates 25 branches mainly located in the eastern part of Puerto Rico, with assets of approximately $900 million and deposits of $650 million. - Seminole National Bank in Sanford, Florida, with assets of approximately $26 million and deposits of $22 million, operating three branches in Sanford and Orlando. Further discussion of operating results and the Corporation's financial condition is presented in the following narrative and tables. In addition, Table B provides selected financial data for the last 10 years. F-6 25
- ------------------------------------------------------------------------------------------------------------- TABLE D Net Interest Income - Taxable Equivalent Basis Year ended December 31, - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 --------------------------------------------------------------------------------- AVERAGE Average Average BALANCE RATE Balance Rate Balance Rate --------------------------------------------------------------------------------- Earning assets ........ $15,306,311 8.63% $13,244,170 8.68% $11,389,680 8.15% ================================================================================= Financed by: Interest 5 bearing funds...... $12,778,488 4.63% $10,991,569 4.75% $ 9,330,838 3.77% Non-interest bearing funds ...... 2,527,823 2,252,601 2,058,842 --------------------------------------------------------------------------------- Total ............ $15,306,311 3.86% $13,244,170 3.94% $11,389,680 3.09% ================================================================================= Net interest income.... $ 729,438 $ 628,233 $ 576,575 ================================================================================= Spread ................ 4.00% 3.93% 4.38% Net interest yield 4.77 4.74 5.06 - ------------------------------------------------------------------------------------------------------------
Year ended December 31, - ------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 --------------------------------------------------------- Average Average Balance Rate Balance Rate --------------------------------------------------------- Earning assets ........ $ 9,894,662 8.33% $ 8,779,981 9.53% ========================================================= Financed by: Interest 5 bearing funds ..... $ 8,097,004 3.46% $ 7,277,051 4.12% Non-interest bearing funds ...... 1,797,658 1,502,930 --------------------------------------------------------- Total ............ $ 9,894,662 2.83% $ 8,779,981 3.42% ========================================================= Net interest income.... $ 544,471 $ 536,485 ========================================================= Spread ................ 4.87% 5.41% Net interest yield .... 5.50 6.11 - -------------------------------------------------------------------------------------
EARNINGS ANALYSIS The Corporation's net earnings for 1996 amounted to $185.2 million, compared with $146.4 million a year before, for a rise of 26.5%. The net income applicable to common stock rose $38.8 million to $176.8 million in 1996, from $138.0 million in 1995. Table C shows variances, in dollar and per common share amounts, of the major captions of the Corporation's income statement for the past three years. The 1996 growth in the earnings applicable to common stock was principally related to: - A rise in net interest income due to the growth of $2.1 billion in the average volume of earning assets driven by a $1.1 billion increase in the investment portfolio and a $1.0 billion increase in average loans. - An increase in non-interest income of $36.1 million, led by a $15.5 million rise in other income, largely attributed to the Corporation's leasing and mortgage subsidaries. - Lower gains on sale of securities. - Increase in the income tax provision mainly due to a higher pre-tax income. - Increase in the provision for loan losses related to the growth in the loan portfolio and net charge-offs. - Rise in operating expenses reflecting the growth of the Corporation as well as increased spending on personnel, technology and corporate strategic initiatives aimed at enchancing future revenue growth. NET INTEREST INCOME Due to the significant impact the net interest income has in the Corporation's earnings, special emphasis is given to interest rate risk. The Corporation constantly monitors the composition and repricing of its assets and liabilities in order to maximize the net interest income, while maintaining the interest rate risk within an acceptable level, as further discussed in the Risk Management section. Net interest income increased $97.1 million for the year ended December 31, 1996, reaching the $681.3 million, compared with $584.2 million reported in 1995. In 1994, net interest income totaled $535.5 million. The income derived from certain loans and investments that the Corporation carries among its earning assets is exempt for income tax purposes. Therefore, in order to present all interest data on a comparable basis, the interest income earned on these assets has been converted to fully taxable equivalent using the applicable statutory tax rates. For the year ended December 31, 1996, net interest income, on a taxable equivalent basis, was $729.4 million, or 16.1% higher than the $628.2 million reported in 1995. This figure amounted to $576.6 million in 1994. A higher volume of earning assets, partially offset by a higher volume of interest-bearing liabilities together with a change in the mix of both, accounted for $71.8 million of the increase, while a higher net interest margin accounted for the remaining $29.4 million. Table D presents, a F-7 26
- --------------------------------------------------------------------------------------------------------------------- TABLE E Interest Variance Analysis - Taxable Equivalent Basis 1996 vs. 1995 1995 vs. 1994 - --------------------------------------------------------------------------------------------------------------------- (In thousands) INCREASE (DECREASE) DUE TO CHANGE IN: Increase (Decrease) Due to Change in: ---------------------------------------------------------------------------- VOLUME RATE TOTAL Volume Rate Total ---------------------------------------------------------------------------- Interest income: Federal funds sold and securities and mortgages purchased under agreements to resell .............. $ 25,661 $ (2,175) $ 23,486 $ 15,883 $ 2,082 $ 17,965 Time deposits with other banks ...... 122 12 134 (112) 38 (74) Investment securities ............... 26,217 (2,777) 23,440 19,471 27,795 47,266 Trading securities .................. 13,392 (219) 13,173 9,499 (35) 9,464 Loans ............................... 103,667 7,221 110,888 108,062 38,967 147,029 ---------------------------------------------------------------------------- Total interest income ............. 169,059 2,062 171,121 152,803 68,847 221,650 ---------------------------------------------------------------------------- Interest expense: Savings, NOW and money market accounts ......... 7,666 (2,715) 4,951 1,160 8,530 9,690 Other time deposits ................ 24,119 (8,632) 15,487 31,345 41,022 72,367 Short-term borrowings .............. 48,288 (5,128) 43,160 36,413 27,573 63,986 Long-term borrowings ............... 17,189 (10,871) 6,318 15,887 8,061 23,948 ---------------------------------------------------------------------------- Total interest expense ............ 97,262 (27,346) 69,916 84,805 85,186 169,991 ---------------------------------------------------------------------------- Net interest income ................ $ 71,797 $ 29,408 $ 101,205 $ 67,998 $ (16,339) $ 51,659 ============================================================================
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. - -------------------------------------------------------------------------------- comparative analysis of the net interest income and rates, on a taxable equivalent basis, for the past five years and Table E presents an analysis of the major categories of earning assets and interest-bearing liabilities and their impact on the net interest income due to changes in volume and rates. Average earning assets increased to $15.3 billion compared with $13.2 billion in 1995 and $11.4 billion in 1994. The increase in average earning assets for 1996, relates primarily to the rise of $1.1 billion in money market investments, investments and trading account securities and to the rise in average loans of $1.0 billion. Average loans, which comprised 60.2% of the average balance of earning assets, rose 12.1% reaching $9.2 billion. The rise relates to increases of $479 million in commercial loans, $259 million in mortgage loans and $258 million in consumer loans. Average leases grew $19 million, while construction loans averaged $22 million less than in 1995. Banco Popular, as a result of its business expansion in the United States and Puerto Rico, contributed $345 million or 72.0% to the increase in average commercial loans. The rise in mortgage loans was principally attributed to Equity One, reaching an average of $720 million in mortgage loans in 1996, compared with $573 million in 1995. Consumer loans at Banco Popular rose $168 million contributing 65.3% of the total increase mainly in the home equity, auto and credit card portfolios. The average yield on loans, on a taxable equivalent basis, for the year ended December 31, 1996, was 10.11% compared with 9.98% in 1995 and 9.47% in 1994. The principal contributor to the rise in the yield on loans was the consumer loan portfolio, with an increase of 51 basis points, reaching an average yield of 12.85% compared with 12.34% in 1995. Changes in the pricing structure of some consumer loan categories together with the implementation of a matched-maturity internal funds transfer pricing system in Banco Popular and aggressive marketing campaigns, helped to improve this yield. Also, the yield on lease financings increased 58 basis points and the yield on mortgage loans rose 10 basis points. On the other hand, the yield on commercial loans, including construction, decreased to 8.98% for the year ended December 31, 1996, compared with 9.11% in 1995, as a result of a decrease in the average prime rate in 1996 compared with 1995 and increased competition in the Puerto Rico market. Investment securities, the Corporation's second largest category of earning assets, averaged $4.8 billion in 1996, compared with $4.5 billion in 1995. This rise was mostly attained at Banco Popular principally in U.S. Treasury securities. The income F-8 27 - -------------------------------------------------------------------------------- derived from U.S. Treasuries is exempt for income tax purposes in Puerto Rico. The taxable equivalent yield of investment securities for 1996, averaged 6.63% compared with 6.65% in 1995. Average money market investments increased $490 million, reaching $893 million compared with $403 million in 1995. This increase relates mainly to BP Capital, acquired during the second quarter of 1995, whose average balance for 1996 increased 122.9% from $391 million in 1995 to $871 million in 1996. The average yield on these securities for 1996 was 5.23%, or 50 basis points lower than the 5.73% reported during 1995. The lower interest rate scenario that prevailed during 1996 as compared to 1995, caused the decrease in yield due to the short-term nature of these assets. BP Capital also contributed to the total increase in trading account securities, with an increase of $113 million to an average balance of $228 million versus $115 million reported in 1995. Furthermore, Puerto Rico Home Mortgage had an increase of $96 million in its average trading portfolio. The taxable equivalent yields on trading account securities for the years ended December 31, 1996 and 1995 were 6.18% and 6.32%, respectively. The proportionately higher increase in the average investment portfolio, which carries a lower yield than the loan portfolio, coupled with the decrease in the average yield on money market investments, resulted in a reduction of five basis points in the taxable equivalent yield on earning assets from 8.68% in 1995 to 8.63% in 1996. Interest-bearing liabilities increased $1.8 billion, averaging $12.8 billion compared with $11.0 billion during 1995. Of the total increase, 48.4% or $865 million is attributed to a rise in short-term borrowings, 37.6% to an increase in interest-bearing deposits and the remainder to an increase in medium and long-term debt. The rise in the average balance of short-term borrowings is mainly attributed to an increase of $579 million due to arbitrage activities at BP Capital and the issuance of commercial paper by BanPonce Financial, increasing $180 million on average. The interest cost of short-term borrowings decreased to 5.33% from 5.44% in 1995, mainly as a result of the market conditions that prevailed in 1996. Average interest-bearing deposits increased $672 million or 8.7%, from $7.7 billion reported in 1995 to $8.4 billion in 1996, while average demand deposits rose 11.3% to $2.1 billion. The Corporation had an increase in average time deposits of $443 million, while savings deposits rose $183 million and NOW and money market deposits rose $46 million. Most of the increases in the diverse categories of deposits relate to Banco Popular de Puerto Rico. The average cost of interest-bearing deposits decreased 10 basis points to 4.16%, compared with 4.26% reported in 1995 due to the lower interest rate environment. Time deposits had a lower cost in 1996, decreasing to 5.25% versus 5.46% in 1995. The average cost of NOW and money market deposits decreased 35 basis points, from 3.62% in 1995 to 3.27% in 1996. On the other hand, savings accounts increased 7 basis points to 3.04% from 2.97% in 1995. This increase is partially due to the shift of customers from some lower rate accounts to accounts paying interest based on tiers. These accounts, created primarily to provide greater customer convenience, although increase somewhat the cost of deposits, attracted new customers in order to maintain the Corporation's market share and strong deposit base. Average medium and long-term debt increased by $251 million to $906 million and its cost decreased from 7.68% reported in 1995 to 6.25% in 1996. The decrease in the average cost is principally due to debt issued during 1996 in a lower interest rate environment and debt with floating interest rates resetting semiannually or quarterly. The average cost of interest-bearing liabilities decreased 12 basis points, from 4.75% in 1995 to 4.63% in 1996, while the cost of funding earning assets decreased from 3.94% to 3.86% in 1996. In spite of the decrease of five basis points in the yield on earning assets, on a taxable equivalent basis, and the increase in the volume of relatively expensive funds, mainly as a result of arbitrage activities at BP Capital, the decline in the cost of interest-bearing liabilities had a greater impact on the net interest margin of the Corporation, which increased to 4.77%, on a taxable equivalent basis, 3 basis points higher than the 4.74% reported for 1995. Those margins were diluted by 33 basis points and 17 basis points in 1996 and 1995, respectively, as a result of the acquisition of BP Capital in 1995 and the increase in its average asset size in 1996. Due to its significant volume of arbitrage activities, this broker/dealer operation had taxable equivalent net interest yields of 48 and 54 basis points in 1996 and 1995, respectively. The average asset size of BP Capital is expected to decrease in 1997, as it did at the end of 1996, as a result of the reduction in the volume of 936 funds. F-9 28 - -------------------------------------------------------------------------------- As further discussed in the Liquidity Risk section, in August 1996, the U.S. Congress approved legislation that repealed Section 936 of the Internal Revenue Code. The bill approved repealed QPSII retroactively for taxable years beginning after December 31, 1995. As a result, the Corporation experienced a reduction in the volume of 936 funds during the fourth quarter of 1996, although at a slower pace than anticipated. These funds are being substituted with conventional, more expensive funds, which will cause the cost of funds to increase. However, some 936 corporations have chosen not to withdraw all of their funds from financial institutions and have, instead, invested those funds at a longer term to reduce the tollgate taxes applicable upon repatriating those funds. As a result, the cost of those funds have remained below that of the U.S. or Eurodollar market. The expected increase in the cost of funds should be partially offset by several mitigating factors which include a higher rate charged on commercial loans, whose price was previously indexed to a 936 market rate, and a lower level of investments required by local regulations to all recipients of 936 funds which have a yield substantially below market rates. At December 31, 1996, the Corporation had $2.2 billion in 936 funds, representing 14.3% of its liabilities, compared with $2.3 billion or 15.7% at the end of 1995. PROVISION FOR LOAN LOSSES The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to cover potential write-offs in the loan portfolio. The provision for loans losses was $88.8 million for 1996, compared with $64.6 million in 1995, an increase of $24.2 million or 37.6%. The provision for loan losses for 1994 was $53.8 million. The increase in the provision for 1996 was based primarily on the rise in the Corporation's loan portfolio, a rise in net charge-offs and current and expected economic conditions. Net charge-offs for the year totaled $72.1 million or 0.78% of average loans, compared with $50.0 million or 0.61% in 1995 and $36.9 million or 0.52% in 1994. Although all loan categories reflected increases in net charge-offs, the increase is primarily attributed to a rise in the net charge-offs of consumer loans which amounted to $29.1 million compared with $17.2 million a year earlier and lease financings, which rose $7.7 million in net charge-offs during 1996. Please refer to the Credit Risk Management and Loan Quality section for a more detailed analysis of the allowance for loan losses, net charge-offs, and credit quality statistics. NON-INTEREST INCOME Non-interest income, which consists primarily of service charges on deposit accounts, credit card fees, other fee-based services and other revenues, rose $36.1 million or 21.7% to $202.3 million in 1996, from $166.2 million in 1995. In 1994, these revenues totaled $140.9 million. This rise was driven by increases of $15.5 million in other income, $7.2 million in service charges on deposit accounts, $5.0 million in debit card fees, $3.1 million in credit card fees and discounts, $2.2 million in credit life insurance fees and $1.6 million in mortgage servicing fees, net of amortization. As shown in Table F, those increases helped to improve the ratio of non-interest income to average assets from 1.18% in 1995, to 1.24% in 1996. In 1994, this ratio was 1.15%. The ratio of non-interest income to operating expenses also increased from 34.14% in 1995 to 37.32% in 1996. Service charges on deposit accounts, grew to $85.8 million for the year ended December 31, 1996, from $78.6 million in 1995 and $71.7 million in 1994. Factors such as a higher volume of deposits and new deposit products, a broader variety of services offered to commercial accounts, together with revisions made to the fee structure, were mainly responsible for the increase in this revenue category. Measured as a percentage of average deposits, service charges were 0.82% in 1996 and 1995, and 0.81% in 1994. Other service fees, which represented 38.1% of non-interest income for the year, increased $13.3 million or 20.9%, from $63.7 million in 1995 to $77.1 million in 1996. Debit card fees, which consist primarily of rental income of point-of-sale (POS) terminals and interchange income, rose $5.0 million in Banco Popular. This increase is in line with the growth in the volume of transactions at POS terminals from a monthly average of approximately 990,000 in December 1995 to 2,048,000 a year later. The number of POS terminals, from which rental income is derived, increased 57.6% to 11,392 as of December 31, 1996, from 7,229 a year earlier. Credit card fees and discounts rose $3.1 million, reflecting a higher portfolio level and increased customer activity. In addition, included in other fees are an additional $2.4 million due to the expanded sale and administration of investment products such as mutual funds. F-10 29
- ------------------------------------------------------------------------------------------------------------------ TABLE F Other Operating Income Year ended December 31, - ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Five-Year 1996 1995 1994 1993 1992 C.G.R ----------------------------------------------------------------------- Service charges on deposit accounts $ 85,846 $ 78,607 $ 71,727 $ 68,246 $ 63,064 9.31% Other service fees: Credit card fees and discounts ... 23,735 20,676 18,620 16,818 16,795 9.21 Credit life insurance fees ....... 7,955 5,766 4,889 4,270 3,286 16.10 Debit card fees .................. 10,430 5,425 3,185 1,704 1,497 55.18 Mortgage servicing fees, net of amortization .................... 7,534 5,956 2,301 2,936 3,174 21.09 Trust fees ....................... 6,174 5,851 5,159 4,084 4,403 8.78 Other fees ....................... 21,242 20,051 17,086 13,135 13,336 11.84 Other income ...................... 39,354 23,853 17,885 12,569 18,324 16.85 --------------------------------------------------------------------------- Total ........................ $202,270 $166,185 $140,852 $123,762 $123,879 12.47% =========================================================================== Other operating income to average assets ............... 1.24% 1.18% 1.15% 1.16% 1.30% Other operating income to operating expenses ........... 37.32 34.14 31.45 30.02 33.76 - ------------------------------------------------------------------------------------------------------------------
The largest single category of non-interest income contributing to the increase in 1996 was other income, which increased $15.5 million or 65.0% and $21.5 million or 120% over 1995 and 1994, respectively. Other income of the Corporation's leasing subsidiaries increased $7.5 million, mainly as a result of higher daily rental income and gains on sales of daily rental units. Also, Puerto Rico Home Mortgage and Equity One both realized higher gains on sale of mortgage loans of $3.2 million and $1.4 million, respectively. Moreover, BP Capital contributed $2.5 million to the increase in other operating income, due to a higher volume of investment banking and underwriting services. SECURITY AND TRADING GAINS The Corporation sold $2.9 billion in investment securities available-for-sale during 1996, realizing a net gain of $3.1 million. BanPonce Financial recorded a gain on the sale of equity securities of $7.0 million, offset by a net loss of $3.9 million recorded in Banco Popular. In 1995, $286 million of the investment securities available-for-sale were sold for a net gain of $5.4 million, principally due to a gain on the sale of equity securities of $6.1 million recorded at BanPonce Financial, partially offset by a net loss of $0.9 million in Banco Popular. Trading account activities for the year ended December 31, 1996, resulted in profits of $108 thousand, compared with profits of $1.8 million in 1995. During 1995, profits were attained primarily in Puerto Rico Home Mortgage and BP Capital, with gains of $1.2 million each, offset by losses of $0.6 million in Banco Popular. OPERATING EXPENSES Total operating expenses were $541.9 million for the year ended December 31, 1996, compared with $486.8 million in 1995 and $447.8 million in 1994. As shown in Table G, the increase of $55.1 million or 11.3% resulted from a $24.1 million rise in personnel costs together with a $26.0 million increase in professional fees, business promotion and equipment expenses, tempered by a reduction in the FDIC assessment of $8.7 million. Total personnel costs, the Corporation's largest expense category, were $273.2 million in 1996, an increase of 9.7% compared with $249.1 million in 1995. Total personnel costs for 1994 amounted to $225.7 million. The growth in personnel costs was led by an increase of $13.4 million in salary expense, due largely to annual merit increases, greater use of incentive pay to compensate sales efforts and increased headcount as a result of the continuous expansion. Full-time equivalent employees (FTE) amounted to 7,996 at December 31, 1996, up 181 from 7,815 at the end of 1995. The increase in FTE results mainly from the addition of 90 employees at Equity One related with the opening of 11 offices during 1996, and increased staffing at Banco F-11 30
- ----------------------------------------------------------------------------------------------------------------------- TABLE G Operating Expenses Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1996 1995 1994 1993 1992 C.G.R --------------------------------------------------------------------------- Salaries ............................... $ 185,946 $ 172,504 $ 160,996 $ 151,432 $ 134,709 7.43% Pension and other benefits ............. 64,609 57,568 45,546 44,713 36,484 11.42 Profit sharing ......................... 22,692 19,003 19,205 19,766 17,041 11.65 --------------------------------------------------------------------------- Total personnel costs ................. 273,247 249,075 225,747 215,911 188,234 8.63 --------------------------------------------------------------------------- Equipment expenses ..................... 47,957 41,577 35,474 27,964 23,813 16.08 Professional fees ...................... 46,182 34,954 33,757 27,302 22,558 19.12 Net occupancy expense .................. 36,899 32,850 28,440 26,085 25,442 10.40 Communications ......................... 26,470 23,106 20,308 18,203 17,048 8.78 Business promotion ..................... 26,229 17,801 16,271 16,638 12,548 19.59 Other taxes ............................ 23,214 20,872 19,807 15,996 14,608 12.21 Amortization of intangibles ............ 18,054 20,204 18,003 16,176 14,888 5.69 Printing and supplies .................. 11,964 11,069 8,817 8,189 7,290 7.46 Other operating expenses: FDIC assessment ..................... 1,544 10,257 19,346 17,802 16,372 (36.54) Transportation and travel ........... 5,852 4,424 3,946 3,554 3,136 13.19 All other ........................... 24,307 20,644 17,930 18,456 21,008 4.77 --------------------------------------------------------------------------- Subtotal ........................... 268,672 237,758 222,099 196,365 178,711 10.23 --------------------------------------------------------------------------- Total .............................. $ 541,919 $ 486,833 $ 447,846 $ 412,276 $ 366,945 9.41% =========================================================================== Efficiency ratio ....................... 61.33% 64.88% 66.21% 66.94% 65.05% Personnel costs to average assets ...... 1.68 1.76 1.85 2.02 1.98 Operating expenses to average assets ... 3.32 3.45 3.66 3.86 3.85 Assets per employee (in millions) ...... $ 2.10 $ 2.01 $ 1.68 $ 1.53 $ 1.42 - -----------------------------------------------------------------------------------------------------------------------
Popular pertaining to the implementation of strategic initiatives. Also, the recently acquired operations of Banco Popular, N.A. (California) increased the headcount of the Corporation by 40 employees. The assets per employee ratio rose to $2.10 million in 1996 from $2.01 million in 1995. All FTE figures for 1992 through 1996 have been adjusted to include temporary employees. Employee benefits, including profit sharing, rose $10.7 million to $87.3 million in 1996, compared with $76.6 million in 1995. The rise in pension costs and other fringe benefits was primarily related to increases in medical plan costs and higher pension and postretirement benefit expenses. Also, an expense of $1.2 million was incurred by Banco Popular for staff uniforms in order to emphasize its corporate image at all branches. Furthermore, profit sharing expense rose $3.7 million, as a result of higher eligible salaries and stronger profitability ratios at Banco Popular. Other operating expenses, excluding personnel costs, totaled $268.7 million for the year ended December 31, 1996, compared with $237.8 million in 1995 and $222.1 million in 1994. Professional fees rose $11.2 million to $46.2 million in 1996, from $35.0 million in 1995, reflecting expenditures for purchased software associated with systems enhancements and for consulting services related to the Corporation's strategic initiatives. Also, business promotion rose $8.4 million as part of the ongoing campaign to promote the use of electronic services at Banco Popular and the launching of new products and services. Equipment expenses amounted to $48.0 million in 1996, compared with $41.6 million in 1995, an increase of $6.4 million or 15.3%. This increase was mostly attributed to the depreciation related with the continued enhancement of existing products, technological capabilities and delivery channels, such as the expansion of the electronic payment system and the network of POS terminals. The Corporation increased its automated banking machine network by 60 ATMs and installed 4,163 additional POS terminals. Also, operating expenses for the year were affected by a $1.1 million expense recorded by Banco Popular, FSB, as a result of the one-time assessment to capitalize the SAIF. Partially offsetting these increases, was a reduction in the FDIC assessment of $9.8 million, excluding the one-time assessment, as a result of the decrease in the assessment rate during the third quarter of 1995, when the Bank Insurance Fund (BIF) reached its statutory level. F-12 31 - -------------------------------------------------------------------------------- INCOME TAX EXPENSE On October 31, 1994, the Governor of Puerto Rico signed into law the Puerto Rico Tax Reform Act of 1994 (the Act). The Act made comprehensive important changes in several major areas of the tax law. In general, the provisions of the Act were effective for taxable years beginning after June 30, 1995. Accordingly, most changes of the reform were effective for the Corporation in 1996. The changes that most significantly affected the Corporation's income tax expense and liability for 1996, are summarized below: - Reduction in the higher marginal tax rate from 42% to 39%. - Repeal of the reserve method for determining losses on loans. Corporations are now required to use the direct charge-off method and recapture into income, for income tax purposes, the reserve balance at December 31, 1995 over a four-year period. - Increase to 100% the dividend received deduction on dividends received from domestic subsidiaries (previously 85%). Income tax expense for the year ended December 31, 1996, was $70.9 million compared with $59.8 million in 1995 and $50.0 million in 1994. The increase in 1996 is primarily due to higher pre-tax earnings by $49.9 million. The effective tax rate was 27.7% in 1996, 29.0% in 1995 and 28.6% in 1994. Part of the decrease is directly related to the reduction in Puerto Rico, the Corporation's principal place of business, of the maximum tax rate from 42% in 1995 to 39% in 1996. The difference between the effective tax rate and the maximum tax rate is primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of expenses attributable to the exempt income. For further information concerning the effective tax rate see Note 22 to the Consolidated Financial Statements. The Corporation uses an asset and liability approach in accounting for income taxes, as required by SFAS 109. At December 31, 1996, the Corporation's net deferred tax assets amounted to $64 million, compared with $32 million at December 31, 1995. Gross deferred tax assets rose from $67 million to $91 million mainly as a result of the recognition of a deferred tax asset of $19 million related with the repeal of the reserve method of accounting for losses on loans. Other components of gross deferred tax assets are alternative minimum tax and other credits, postretirement benefits obligations and other temporary differences mainly arising from the deferral of loan origination costs and commissions. When necessary, a valuation allowance is recorded for those deferred tax assets for which the Corporation cannot determine the likelihood of their realizability. At December 31,1996, the valuation allowance amounted to $0.6 million compared with $1.8 million at December 31, 1995. Gross deferred tax liabilities were $26 million at December 31, 1996, compared with $33 million at December 31, 1995. The major components of deferred tax liabilities are differences between assigned values and tax bases of assets and liabilities recognized in purchase business combinations and other temporary differences mainly related with unrealized gains on investment securities available-for-sale. STATEMENT OF CONDITION ANALYSIS The Corporation's total assets at December 31, 1996, reached $16.8 billion, reflecting an increase of $1.1 billion or 6.9% when compared with $15.7 billion at December 31, 1995. Total assets at the end of 1994 amounted to $12.8 billion. Most of the growth in total assets pertains to Banco Popular and Equity One, which increased $787 million, and $224 million, respectively. Average total assets for 1996 amounted to $16.3 billion compared with $14.1 billion in 1995 and $12.2 billion in 1994. EARNING ASSETS Earning assets at December 31, 1996, amounted to $15.5 billion, compared with $14.7 billion at December 31, 1995 and $11.8 billion at December 31, 1994. Money market, investment and trading securities totaled $5.7 billion at December 31, 1996, compared with $6.0 billion at the same date the previous year. The decrease of $285 million was mainly reflected in investment securities, which totaled $4.6 billion at the end of 1996, compared with $4.9 billion in 1995. Investment securities held-to-maturity decreased $454 million, from $1.7 billion in 1995 to $1.2 billion in 1996. Partially offsetting this reduction, was an increase of $206 million in the investment securities available-for-sale. F-13 32
- ---------------------------------------------------------------------------------------------------------------------- TABLE H Loans Ending Balances Year ended December 31, - ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Five-Year 1996 1995 1994 1993 1992 C.G.R -------------------------------------------------------------------------- Commercial, industrial and agricultural ........................... $3,822,096 $3,205,031 $2,893,534 $2,369,514 $2,133,357 13.88% Construction ............................ 200,083 215,835 161,265 153,436 172,411 0.54 Lease financing ......................... 516,001 498,750 448,236 375,693 314,905 15.35 Mortgage* ............................... 2,576,887 2,403,631 2,177,763 1,576,044 790,802 30.40 Consumer* ............................... 2,663,961 2,354,237 2,100,531 1,872,235 1,840,578 5.18 -------------------------------------------------------------------------- Total .................................. $9,779,028 $8,677,484 $7,781,329 $6,346,922 $5,252,053 13.48% ==========================================================================
*Includes loans held-for-sale. - -------------------------------------------------------------------------------- Money market investments totaled $800 million at December 31, 1996, compared with $799 million at the same date in 1995. Trading account securities totaled $292 million at December 31, 1996, compared with $331 million at December 31, 1995. Loans are the single largest category of the Corporation's earning assets and the most profitable. As shown in Table H, at December 31, 1996, total loans net of unearned income, were $9.8 billion compared with $8.7 billion at the end of 1995, for a 12.7% increase. At the same date in 1994 total loans were $7.8 billion. At the end of 1996, commercial loans represented 39.1% of the total portfolio, while construction loans were 2.0%, lease financing 5.3%, mortgage loans 26.4%, and consumer loans comprised 27.2%. This compares with 37.0%, 2.5%, 5.7%, 27.7% and 27.1% at the end of 1995 for the same categories, respectively. The commercial loan portfolio had the largest growth, rising $617 million or 56.0% of the total increase in loans, followed by consumer loans which increased $310 million and mortgage loans with $173 million for 28.1% and 15.7% of the total increase, respectively. The lease financing portfolio rose $17 million while the construction loan portfolio decreased $16 million. The commercial loan portfolio of Banco Popular had an increase of $489 million, reaching $3.7 billion at the end of 1996, compared with $3.2 billion reported at December 31, 1995. Through continuous marketing efforts both in Puerto Rico and in the mainland, the Corporation has increased its commercial portfolio both in the retail and middle market, while offering a wide variety of other services. In New York and New Jersey strong emphasis has been placed on Government guaranteed loans and the small and middle market sectors. Also, the interest rate scenario that prevailed during 1996 moved customers to borrow money at more attractive rates. These factors resulted in an increase of approximately $93 million in the Fortune 500 and corporate loans, $260 million in the middle market loan portfolio and $264 million in the retail loan portfolio. CombanCorp, acquired at the end of the third quarter of 1996, contributed $11 million to the total increase in commercial loans. Consumer loans, which include personal, auto and boat, credit cards and reserve lines grew $310 million, totaling $2.7 billion at December 31, 1996, compared with $2.4 billion at the end of 1995. The growth in this loan category was led by an increase of $213 million at Banco Popular, followed by Equity One with a $61 million increase and Best Finance with $25 million. At the same date in 1994, consumer loans totaled $2.1 billion. Of the total portfolio of consumer loans, 41.2% are secured loans of which 19.4% are secured by mortgages and 3.8% have cash collateral. At December 31, 1996, the personal loan portfolio amounted to $1.4 billion, or 52.2% of the total consumer portfolio. This amount compares with $1.2 billion or 51.9% reported in 1995 for an increase of $170 million or 13.9%. Specifically at Banco Popular, personal loans rose $99 million to $1.1 billion for 1996, primarily attributed to loans granted for home improvement purposes which increased $71 million, from $178 million in 1995 to $249 million in 1996. Auto loans, which represented 22.0% of the consumer loan portfolio as of December 31, 1996, rose $91 million to $587 million in 1996, while the credit card portfolio rose $49 million to $474 million. The growth in both portfolios was mainly attained at Banco Popular due to strong marketing efforts coupled with the launching of new products. F-14 33 - -------------------------------------------------------------------------------- The Corporation had $2.6 billion in mortgage loans, compared with $2.4 billion at the same date in 1995 and $2.2 billion in 1994. Equity One accounted for $149 million or 86.0% of the increase in mortgage loans. Banco Popular, FSB increased $41 million and Banco Popular, N.A. (California), acquired at the end of 1996, contributed $20 million to the increase. On the other hand, Banco Popular reported a decrease of $37 million for 1996, as a result of the securitization during the fourth quarter of 1996 of $209 million in conventional mortgage loans. At December 31, 1996, $201 million of these assets were classified as securities sold not yet delivered and included as other assets in the Corporation's Statement of Condition, since they were sold in December 1996, with settlement date of January 1997. The lease financing portfolio amounted to $516 million as of December 31, 1996, compared with $499 million and $448 million as of December 31, 1995 and 1994, respectively. The rise in truck and vehicle sales in Puerto Rico contributed to the growth in this category. Construction loans amounted to $200 million in 1996 from $216 million a year ago and $161 million in 1994. CombanCorp contributed $3 million to this loan category. DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES Total deposits at December 31, 1996, amounted to $10.8 billion compared with $9.9 billion at December 31, 1995, an increase of $887 million. Most of the increase was attained at Banco Popular, where total deposits increased $732 million, notwithstanding the decrease of $51 million in its 936 deposits. Also, CombanCorp contributed $63 million to the increase. Of the Corporation's total deposits at the end of 1996, 79.8% were in Puerto Rico and the Virgin Islands and the remaining 20.2% were in the U.S. mainland. Total deposits as of December 31, 1994, amounted to $9.0 billion. Core deposits reached $8.6 billion by the end of 1996, compared with $7.8 billion a year before. The growth of $775 million resulted from rises of $195 million in certificates of deposit under $100,000, $203 million in savings accounts, $309 million in demand deposits, and $68 million in NOW and money market accounts. Borrowings, excluding subordinated notes, increased $80 million, reaching $4.3 billion at December 31, 1996. Major fluctuations in this category include an increase of $1.2 billion in notes payable and short-term borrowings principally at Banco Popular of $846 million and $191 million at BanPonce Financial. Conversely, federal funds purchased and securities sold under agreements to repurchase decreased $1.1 billion from December 31, 1995, mainly due to declines in Banco Popular and BP Capital of $888 million and $318 million, respectively. Subordinated notes decreased $50 million to $125 million outstanding at December 31, 1996. The decrease resulted from the maturity, on June 15, 1996, of the subordinated notes issued by Banco Popular in 1989. The $125 million in subordinated notes outstanding were issued by the Corporation on December 12, 1995, with a 6.75% rate and a maturity date of December 15, 2005. The proceeds obtained from the issuance were utilized to finance the growth and expansion of the Corporation. STOCKHOLDERS' EQUITY At December 31, 1996, stockholders' equity amounted to $1.26 billion, an increase of $121 million or 10.6% compared with the balance of $1.14 billion at the end of 1995. This increase is mainly due to earnings retention. The Corporation's Dividend Reinvestment and Purchase Plan also contributed to the increase in stockholders' equity. As mentioned in the Overview section, on April 26, 1996, the Corporation's Board of Directors authorized a two-for-one stock split effected in the form of a dividend and as a result, $198 million were transferred from retained earnings to common stock. The Corporation had 4,000,000 shares of preferred stock outstanding at December 31, 1996. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. Dividends are non-cumulative and are payable monthly at an annual rate per share of 8.35% based on the liquidation preference value of $25 per share. F-15 34
- ---------------------------------------------------------------------------------------------------------------------- TABLE I Capital Adequacy Data As of December 31, - ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 1993 1992 ----------------------------------------------------------------------- Risk-based capital Tier I capital ............................. $ 1,121,128 $ 1,003,072 $ 953,266 $ 786,686 $ 722,082 Supplementary (Tier II) capital ............ 246,350 231,091 104,338 106,193 110,704 ----------------------------------------------------------------------- Total capital ........................... $ 1,367,478 $ 1,234,163 $ 1,057,604 $ 892,879 $ 832,786 ======================================================================= Risk-weighted assets Balance sheet items ....................... $ 9,368,420 $ 8,175,420 $ 7,219,906 $ 6,150,749 $ 5,430,534 Off-balance sheet items ................... 275,397 249,529 199,327 250,102 177,172 ----------------------------------------------------------------------- Total risk-weighted assets ............. $ 9,643,817 $ 8,424,949 $ 7,419,233 $ 6,400,851 $ 5,607,706 ======================================================================= Ratios: Tier I capital (minimum required - 4.00%) . 11.63% 11.91% 12.85% 12.29% 12.88% Total capital (minimum required - 8.00%) .. 14.18 14.65 14.25 13.95 14.85 Leverage ratio (minimum required - 3.00%) . 6.71 6.66 7.62 6.95 7.26 Equity to assets .......................... 7.33 7.58 7.57 7.42 7.02 Tangible equity to assets ................. 6.55 6.60 6.55 6.29 5.66 Equity to loans ........................... 12.97 13.03 13.01 13.91 12.99 Internal capital generation rate .......... 10.99 9.36 9.48 10.08 9.04 - ----------------------------------------------------------------------------------------------------------------------
Regulatory guidelines require a minimum Tier I capital of 4%, total capital to risk-weighted assets ratio of 8% and a leverage ratio of 3%. Banks and bank holding companies which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a leverage ratio of 5% are considered well-capitalized by regulatory standards. At December 31, 1996, the Corporation exceeds those regulatory risk-based capital requirements for well-capitalized institutions by wide margins, due to the high level of capital and the conservative nature of the Corporation's assets. Tier I capital to risk-adjusted assets and total capital ratios at December 31, 1996, were 11.63% and 14.18%, respectively, compared with 11.91% and 14.65% at the same date in 1995. The Corporation's leverage ratio was 6.71% at December 31, 1996, compared with 6.66% for the previous year. Table I shows capital adequacy information for the current and previous four years. Intangible assets were $131 million at December 31, 1996, compared with $143 million at the end of 1995. Total intangibles consisted of $55 million in core deposit intangibles, $46 million in goodwill, $26 million in mortgage servicing rights and $4 million in other intangibles. At the end of 1995, core deposit intangibles were $66 million, goodwill totaled $46 million, mortgage servicing rights were $24 million and other intangibles were $7 million. The average tangible equity increased to $1.06 billion for the year ended December 31, 1996, from $922 million a year before, an increase of $138 million or 15.0%. Total tangible equity at December 31, 1996, was $1.13 billion compared with $999 million at December 31, 1995. The tangible equity to assets ratio for 1996 was 6.55% compared with 6.60% in 1995. Book value per common share increased to $17.59 at December 31, 1996, compared with $15.81 at year-end 1995. The market value of the Corporation's common stock at the end of 1996, was $33.75 compared with $19.38 a year earlier. The total market capitalization was $2.23 billion, compared with $1.28 billion as of December 31, 1995. The Corporation's stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Table J 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, 1996 and 1995 was $26.25 and $27.25 per share, respectively. 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 1996, 191,235 shares, equivalent to $4.1 million in additional capital, were issued under the plan. A total of 1,542,463 shares have been issued under this plan since its inception in 1989, contributing $19.9 million in additional capital. Dividends declared on common stock during 1996 amounted to $46 million, compared with $38 million in 1995. The Corporation increased its quarterly dividend from $0.15 to $0.18 per common share, a 20% increase, effective on July 1, 1996. Total F-16 35
- ------------------------------------------------------------------------------------------------------------------------------- TABLE J 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 - ------------------------------------------------------------------------------------------------------------------------------- 1996 $17.59 24.63% 2.65% 12.59x 191.87% 1ST QUARTER........ $ 23 1/8 $ 19 3/8 $.15 2ND QUARTER........ 23 6/7 21 7/8 .18 3RD QUARTER........ 27 3/4 22 5/8 .18 4TH QUARTER........ 35 25 7/8 .18 1995 15.81 26.21 3.15 9.24 122.55 1st quarter........ $ 15 7/8 $ 14 1/16 $.13 2nd quarter........ 17 3/4 15 5/8 .15 3rd quarter........ 19 1/2 17 3/4 .15 4th quarter........ 19 15/16 19 1/16 .15 1994 13.74 27.20 3.18 7.66 102.37 1st quarter........ $ 16 1/4 $ 15 3/8 $.12 2nd quarter........ 16 3/8 15 1/2 .12 3rd quarter........ 16 5/8 15 3/4 .13 4th quarter........ 16 1/2 13 1/2 .13 1993 12.75 25.39 2.97 9.42 123.58 1st quarter........ $ 15 5/8 $ 13 1/4 $.10 2nd quarter........ 14 1/8 12 3/16 .10 3rd quarter........ 15 1/8 13 1/4 .12 4th quarter........ 16 1/8 14 7/8 .13 1992 11.52 28.33 3.12 10.83 131.35 1st quarter........ $ 12 3/4 $ 9 3/8 $.10 2nd quarter........ 13 7/8 12 .10 3rd quarter........ 13 7/8 12 1/4 .10 4th quarter........ 15 1/8 12 1/4 .10
*Based on the average high and low market price for the four quarters. Note: All per share data has been adjusted to reflect the stock split effected in the form of a dividend on July 1, 1996. - -------------------------------------------------------------------------------- dividends declared per common share for 1996 were $0.69 compared with $0.58 in 1995 and $0.50 in 1994. The dividend payout ratio to common stockholders for the year was 24.63% compared with 26.21% in 1995. Dividends declared on the preferred stock amounted to $8.4 million in 1996 and 1995. RISK MANAGEMENT The Corporation has established a combined approach in managing its balance sheet which includes management of interest rate, liquidity and credit risks. INTEREST RATE RISK The Corporation's net interest income is affected by a variety of factors including interest rate volatility, the spread between different market rates or basis risk, timing differences between the maturity and repricing of assets and liabilities, as well as the sensitivity of their rates to market interest rates. Interest rate risk refers to the probability of a reduction in earnings due to fluctuations in interest rates. It is a priority for the Corporation's management to monitor continuously the degree of interest rate risk assumed, and to ensure that it remains within an acceptable range. The Asset/Liability Management Committee (ALCO) is primarily responsible for implementing interest rate risk policies and strategies approved by the Board of Directors. The Board sets overall policies regarding the management of interest rate risk and oversees the implementation of those policies by the ALCO. The main strategic objective of the Corporation's interest rate risk management is to protect the level and stability of net interest income from interest rate volatility. Nevertheless, the ALCO may decide occasionally to position the Corporation in order to benefit from anticipated changes in interest rates. Such positions are F-17 36 - -------------------------------------------------------------------------------- maintained for relatively short periods and are structured so they can be unwound quickly in the case of adverse market movements. The ALCO is composed of senior officers of the Corporation and meets monthly. Interest rate risk is managed by the Corporation using various techniques including beta-adjusted gap analysis, simulations and duration analysis. Gap analysis presents the difference in repricing volumes between earning assets and interest-bearing liabilities during future time periods. The projected repricing balances of earning assets are adjusted for expected prepayments of securities and loans, while the repricing balances of deposits are adjusted for the sensitivity of their rates to market interest rates. The prepayment rates of securities and loans are estimated based upon historical experience and estimates prepared by major securities dealers. The elasticity of deposit rates is estimated based on the application of statistical techniques to the relationship between the deposit rates and LIBOR during a two-year period. The resulting beta factors are then used to restate the static gaps in terms of repricing dollars, all with a similar sensitivity to LIBOR. Tactical, short-term positions are measured by the gap positions within one year, while structural, longer term positions are expressed by the gap positions beyond one year. The magnitude of these positions is maintained within parameters approved by the ALCO, with the objective of protecting the net interest margin from market volatility. The results of the beta-adjusted gap analysis, together with risk management strategies, are validated using simulation analysis under various market scenarios. Simulation analysis also permits the ALCO to include in its assessment the effect of the Corporation's business plans on future interest rate risk. The ALCO uses an "earnings at risk" concept to monitor and help control the projected volatility of twelve-month projected earnings. The simulation runs incorporate anticipated balance sheet changes including asset and liability runoffs, reinvestments and various interest rate scenarios, including both rising and declining, to ensure that a wide array of possible market movements are tested. Duration analysis is an additional tool increasingly used to measure and monitor the longer term, structural interest rate risk being assumed by the Corporation. Duration analysis quantifies the sensitivity of the market value of the Corporation's earning assets and interest-bearing liabilities to changes in interest rates. The focus of this technique is on economic value, as opposed to gap analysis which is based upon the book value of assets and liabilities repricing in future periods, and simulation analysis which concentrates on the impact of interest rate volatility on earnings. Duration analysis is gaining acceptance among leading commercial banks, investors and regulators as one of the best methods of assessing longer term interest rate risk. By taking into consideration all projected future cash flows and adjusting them for their present value, it avoids a primary weakness of both gap and simulation analysis. The ALCO uses duration analysis as an additional tool for managing interest rate risk, together with gap analysis and simulation runs. These techniques have different strengths and weaknesses, and all three are used together in the process of managing interest rate risk in a complementary manner. Interest rates in general declined toward the end of 1995 and the beginning of 1996. However, in February rates started rising due to increasing evidence of a rebound in the U.S. economy, and continued an upward trajectory until mid-summer. The actual growth rate of gross domestic product for the first two quarters of the year did confirm that the economy was staging a rebound from the sluggish growth of late 1995. At the same time, market rates rose as the financial markets started pricing with the increasing probability of a tighter monetary policy in the near-term future. The Corporation positioned the balance sheet during the year to benefit slightly from a rising interest rate scenario. Even though the Federal Reserve did not tighten monetary policy in 1996, as the market at times expected, interest rates finished the year substantially higher than at the end of the previous year. The Corporation's net interest margin, on a taxable equivalent basis, benefitted from the general increase in rates during 1996, increasing by 3 basis points during the year. Table K presents the Corporation's gap position at the end of 1996. As of December 31, 1996, the Corporation had $1.0 billion in mortgage-backed securities, including collateralized mortgage obligations (CMOs). CMOs amounted to $593 million or 58.3% of the mortgage-backed securities portfolio at that date. The portfolio had an estimated average life of 9.1 years and an estimated average yield to maturity of 6.26%. The average life and yield to maturity of the mortgage-backed securities portfolio, is affected partially by the level of prepayments of the underlying mortgage loans. The portfolio includes securities which represent an interest in pools of mortgage loan as well as obligations (CMOs) collateralized by such securities. In most cases, the debtor of the underlying loan has the option of repaying the principal balance owed at any time. F-18 37 TABLE K Interest Rate Sensitivity
As of December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ By Repricing Dates ------------------------------------------------------------------------------------------ After After Within three months six months Non-interest 0-30 31-90 but within but within After one bearing (Dollars in thousands) days days six months one year year funds Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Federal funds sold and securities purchased under agreements to resell ................. $ 499,664 $ 278,933 $ 778,597 Short-term interest bearing deposits in other banks .............. 21,480 100 $ 99 21,679 Investment and trading securities ..... 978,909 247,891 688,963 $ 798,963 $2,190,424 4,905,150 Loans ................................. 2,619,548 362,956 347,537 674,191 5,774,796 9,779,028 Other assets .......................... 200,817 $1,078,832 1,279,649 ----------------------------------------------------------------------------------------- Total ........................... 4,320,418 889,880 1,036,599 1,473,154 7,965,220 1,078,832 16,764,103 ----------------------------------------------------------------------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts ............................ 619,417 3,755,486 4,374,903 Other time deposits ................... 1,622,966 734,970 573,031 404,590 722,111 4,057,668 Federal funds purchased and securities sold under agreements to repurchase . 1,404,225 230,240 30,000 211,000 1,875,465 Other short-term borrowings ........... 767,398 363,008 111,466 162,134 1,404,006 Notes payable ......................... 104,449 243,000 639,264 986,713 Senior debentures ..................... 30,000 30,000 Subordinated notes .................... 125,000 125,000 Non-interest bearing deposits ......... 2,330,704 2,330,704 Other non-interest bearing liabilities 317,112 317,112 Stockholders' equity .................. 1,262,532 1,262,532 ----------------------------------------------------------------------------------------- Total ............................ 4,548,455 1,571,218 714,497 566,724 5,452,861 $3,910,348 $16,764,103 ----------------------------------------------------------------------------------------- Off-balance sheet financial instruments 25,000 25,000 (20,000) (30,000) Interest rate sensitive gap ........... $ (203,037) $ (656,338) $ 302,102 $ 906,430 $2,482,359 Cumulative interest rate sensitivity gap ..................... $ (203,037) $ (859,375) $ (557,273) $ 349,157 $2,831,516 Cumulative sensitive gap to earning assets ...................... (1.29)% (5.48)% (3.55)% 2.23% 18.05%
A decrease in the general level of interest rates usually results in a higher level of prepayments of mortgage loans, while an increase would tend to reduce the level of prepayments. The yield to maturity (YTM) of mortgage-backed securities may also be affected by a change in prepayment rates. Mortgage-backed security portfolios with an aggregate unamortized premium may have a decrease in their yield to maturity in an environment of increasing prepayment speed, whereas the YTM may increase in an environment of decreasing prepayment speed. The opposite is true in the case of portfolios with aggregate discounts. The mortgage-backed securities portfolio of the Corporation had an aggregate premium of $2 million, as of December 31, 1996. The use of derivative products, such as interest rate swaps, is very limited but, they are also used by the Corporation as a tool to manage interest rate risk. At December 31, 1996, the notional amount of these off-balance sheet items was $162 million of which $140 million were interest rate swaps. These amounts compare with $136 million and $125 million, respectively, at the end of 1995. LIQUIDITY RISK Liquidity risk refers to the possibility of not being able to access the funds needed for the Corporation's business activities. The objective of the Corporation's liquidity management is to ensure sufficient cash flow to fund the origination and acquisition F-19 38 TABLE L Maturity Distribution of Earning Assets
As of December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- 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 ................. $ 800,276 $ 800,276 Investment and trading securities ............................ 2,280,709 $1,749,229 $ 268,642 $ 502,356 $ 30,163 4,831,099 Loans: Commercial ............................ 1,627,798 787,620 585,046 361,486 460,146 3,822,096 Construction .......................... 150,473 32,049 5,431 3,504 8,626 200,083 Lease financing ....................... 166,945 343,897 5,159 516,001 Consumer .............................. 949,218 1,513,515 201,228 2,663,961 Mortgage .............................. 283,148 601,480 2,132 1,683,683 6,444 2,576,887 ------------------------------------------------------------------------------ Total ................................. $6,258,567 $5,027,790 $ 861,251 $2,757,416 $ 505,379 $15,410,403 ==============================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table. of assets, the repayment of deposit withdrawals and wholesale borrowings maturities, and meet operating expenses. In general, there is an opportunity cost involved in maintaining excessive amounts of liquidity. Therefore, one objective of the Corporation's management is to ensure that adequate funds are available to meet all foreseeable obligations and at the same time provide a reasonable cushion for unexpected contingencies, while avoiding excessive liquidity. Liquidity is monitored and managed at both the parent company level and the subsidiaries level. The parent company depends primarily on the issuance of commercial paper, medium-term obligations and common and preferred stock for financing the operations of its non-banking subsidiaries, while the banking subsidiaries obtain most of their financing from retail deposits and wholesale borrowings. The Corporation's assets and liabilities represent a source of substantial liquidity. The investment portfolio has a relatively short duration and consists primarily of securities issued by the U.S. Treasury and Agencies, while the loan portfolio is relatively short-term. Funding sources include a large, stable base of retail deposits which is complemented by wholesale borrowings from various sources in the U.S. money markets. The investment portfolio is the major source of liquidity among the Corporation's assets. As of December 31, 1996, the investment securities portfolio totaled $4.6 billion, with an average maturity of 3.3 years. Cash and money market instruments amounted to $1.3 billion, while U.S. Treasury and Agency obligations totaled $3.3 billion, or 71.6% of the total portfolio with an average maturity of 1.5 years. Securities classified as available-for-sale amounted to $3.4 billion or 74.1% of the total portfolio, with a net unrealized gain of $3.2 million. This portfolio can be sold in the secondary markets with minimal transaction costs and can be financed in the money markets at competitive rates. The loan portfolio as of December 31, 1996, amounted to $9.8 billion, of which $3.2 billion or 32.5% mature within one year. The repayments of principal and interest from the portfolio provide a stable source of cash flow to the Corporation. Table L presents a maturity distribution of the Corporation's earning assets as of December 31, 1996. The operations of the Corporation are funded primarily by the deposit base of its banking subsidiaries. The sources of these deposits have become more diversified as the Corporation's banking operations in the continental United States have expanded. This source of funds is usually less volatile than institutional borrowings and its cost is less sensitive to changes in market rates. The deposit base includes consumer and commercial demand deposits, savings accounts and time deposits in denominations below $100,000. The Corporation's extensive retail network and leadership in electronic banking have resulted in a significant F-20 39 TABLE M Average Total Deposits
For the Year - ---------------------------------------------------------------------------------------------------------------------- Five-Year (In thousands) 1996 1995 1994 1993 1992 C.G.R. --------------------------------------------------------------------------- Private demand .......................... $ 1,726,596 $1,571,405 $1,515,158 $1,396,339 $1,265,230 7.43% Public demand ........................... 321,249 268,317 273,565 235,323 201,218 13.21 Other non-interest bearing accounts ..... 5,910 5,983 6,967 3,678 3,807 6.83 --------------------------------------------------------------------------- Non-interest bearing ................ 2,053,755 1,845,705 1,795,690 1,635,340 1,470,255 8.22 --------------------------------------------------------------------------- Savings accounts ........................ 3,095,898 2,913,380 2,839,300 2,492,845 2,044,037 13.69 NOW and money market accounts ........... 1,148,727 1,102,593 1,133,106 1,078,075 955,654 8.39 --------------------------------------------------------------------------- Savings deposits .................... 4,244,625 4,015,973 3,972,406 3,570,920 2,999,691 12.10 --------------------------------------------------------------------------- Certificates of deposit: Under $100,000 ........................ 1,307,323 1,281,873 1,160,063 1,143,624 1,171,242 1.65 $100,000 and over ..................... 1,371,928 1,034,195 590,305 498,093 511,585 16.73 936 ................................... 1,020,064 999,384 1,007,147 1,029,450 1,202,604 (4.14) --------------------------------------------------------------------------- Certificates of deposit ............. 3,699,315 3,315,452 2,757,515 2,671,167 2,885,431 3.61 --------------------------------------------------------------------------- Public time ............................. 238,377 175,706 177,534 124,629 155,715 5.66 Other time .............................. 225,724 229,315 134,081 122,829 130,031 10.37 --------------------------------------------------------------------------- Other time deposits ................. 464,101 405,021 311,615 247,458 285,746 7.80 --------------------------------------------------------------------------- Interest bearing .................... 8,408,041 7,736,446 7,041,536 6,489,545 6,170,868 7.65 --------------------------------------------------------------------------- Total ............................ $10,461,796 $9,582,151 $8,837,226 $8,124,885 $7,641,123 7.76% ===========================================================================
share of retail deposits in its principal markets. As of December 31, 1996, core deposits amounted to $8.6 billion or 79.8% of total deposits, an increase of $775 million or 9.9% from the previous year. As set forth in Table M, on average, total deposits increased $880 million while core deposits rose $462 million. The size of the Corporation's core deposits located in continental U.S. markets reached $1.9 billion as of December 31, 1996, compared with $1.6 billion at the end of 1995. Certificates of deposit with denominations of $100,000 and over as of December 31, 1996, totaled $2.2 billion, or 20.2% of total deposits. Their distribution by maturity was as follows:
(In thousands) 3 months or less ................ $1,641,485 3 to 6 months ................... 176,157 6 to 12 months .................. 109,154 over 12 months .................. 246,777 ---------- $2,173,573 ==========
The Corporation is continuously developing broader sources of financing for its operations. In addition to retail deposits, wholesale borrowings from institutional investors in the U.S. money markets represent an increasingly important source of financing. The latter have become more appealing due to the recent tax reform that repealed the withholding tax in Puerto Rico on interest paid to non-residents of the Island. Previously, payments made from Puerto Rico were subject to a 29% withholding tax. Other borrowings consist primarily of federal funds purchased, repurchase agreements and commercial paper sold. Federal funds purchased have maturities of 30 days or less while repurchase agreements generally mature within three months. Commercial paper is issued with maturities that do not exceed 270 days. As of December 31, 1996, federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings amounted to $3.3 billion, a decrease of $176 million when compared with the same date a year before. Intermediate and long-term debt is another source of liquidity. To obtain longer term financing for its operations, the Corporation issued $424 million in medium-term notes during 1996. For further information on the maturities of intermediate and long-term debt issued, please refer to notes 12 through 15 of the Consolidated Financial Statements. F-21 40 During 1996, the Corporation's main subsidiary, Banco Popular, began a Bank Note program permitting the issuance of a maximum of $600 million in senior debt securities with maturities of up to 15 years. This program expands the ability of the Corporation to raise long-term funding in the U.S. capital markets and further diversifies its sources of liquidity, at a time when 936 funds are expected to decrease more rapidly. The Corporation deposit base includes 936 deposits, which amounted to $874 million as of December 31, 1996, or 8.1% of total deposits. In addition, 936 borrowings including repurchase agreements were $1.3 billion, or 8.7% of total liabilities. The Corporation's total financing from 936 sources, including both deposits and borrowings, totaled $2.2 billion or 14.3% of total liabilities as of December 31, 1996. At the end of 1995 these funds totaled $2.3 billion or 15.7% of total liabilities. During 1996, the United States Congress approved legislation which increased the federal minimum wage and repealed Section 936 of the Internal Revenue Code. For the last 20 years, the 936 Section has granted U.S. Corporations operating in Puerto Rico (936 Corporations) a tax credit against its federal tax liability for the net revenues derived from both qualifying active business and certain passive investments held in Puerto Rico banks, known as Qualified Possession Source Investment Income (QPSII). The tax benefits of the Section applicable to actively earned income will be phased-out over a ten-year period, after which they will expire completely. However, the tax credit on passive earned income, which includes the interest earned by 936 Corporations on investments in financial assets issued in Puerto Rico, was repealed retroactively for fiscal years commencing after December 31, 1995. During the ten-year phase-out period, the tax benefits of actively earned income will be available only to existing operations in Puerto Rico, but they cannot be extended to new companies or new product lines by existing companies. Financial institutions and other eligible borrowers in Puerto Rico have benefitted from the low cost of these funds, although having to comply with certain investment requirements imposed by local regulations. The Corporation's management believes that the main effect of the repeal of Section 936 on the pool of 936 funds in Puerto Rico will be to reduce substantially the supply of funds within a short period of time. Therefore, it is expected that the Corporation's volume of 936 funds should decrease considerably in the near term. Management believes this should not have a material effect on the Corporation's liquidity. During some time before the actual repeal of the Section, the Corporation took actions to increase the sources and availability of financing in the U.S. money and capital markets. Substantial amounts of credit lines have been developed in the U.S. money markets which complement the $600 million Bank Note program and $400 million in credit lines available at the Federal Home Loan Bank of New York, of which the Corporation is a member. In addition, the Corporation has outstanding $218 million of a $1.0 billion shelf registration with the Securities and Exchange Commission, which permits the issuance of unsecured debt securities or shares of preferred stock. Management is confident that the Corporation has sufficient sources of liquidity to repay on short notice the entire balance of 936 funds maturing within one year, which amounted to $1.4 billion, or 61.1% of the total balance of 936 deposits and borrowings as of December 31, 1996. During 1996, over $440 million in short-term 936 funds were converted into long-term obligations with an average maturity of 6.7 years. In July 1996, Moody's Investors Service raised its rating of long-term unsecured debt issued by the Corporation and its second tier subsidiary, BanPonce Financial to A3. The rating of subordinated debt was upgraded to Baa1. BanPonce's certificate of deposit issuer rating by Thomson BankWatch is B. CREDIT RISK MANAGEMENT AND LOAN QUALITY One of the Corporation's primary risk exposure is its credit risk, which represents the possibility of loss from a borrower's failure to perform according to the terms of a transaction. The Corporation controls and monitors this risk with policies, procedures and various levels of managerial involvement. The strategies utilized to manage credit risk begin with the adherence to policies and procedures established for the initial underwriting of the credit portfolio, followed by the ongoing monitoring of the portfolio, including the early identification of potential problems and their resolution. Also, the Corporation continues emphasizing the skills and experience of the credit staff and improving the processing technology. Furthermore, the Corporation has an independent Credit Review and Audit Division, which performs ongoing independent reviews of specific loans for credit quality, proper documentation and risk management purposes. This division is centralized and independent of the lending function. It also 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. F-22 41 Credit extensions are approved by credit officers of the respective lending departments. The number and level of officers approval depend on the dollar amount and risk characteristics of the credit facility. The Corporation receives collateral to support credit extensions and commitments, whenever it is considered necessary. The amount of collateral obtained is based on the credit assessment of the customer, and may include real or personal property, accounts receivable, inventory and cash on deposit. The Corporation's credit risk at December 31, 1996, was concentrated in its $9.8 billion loan portfolio, which represented 63.2% of earning assets. The loan portfolio is well-balanced as the Corporation's credit policies and procedures emphasize diversification among geographical areas, business and industry groups, to minimize the adverse impact of any single event or set of occurrences. The 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 840,000 consumer loans and over 49,000 commercial lending relationships. Only 43 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 following risk concentration categories existed at year-end. Only those concentrations with portfolio totals in excess of the Corporation's stockholders' equity are presented. Geographic Risk - The asset composition of the Corporation by geographical area at December 31, 1996 and 1995, is presented in the following table.
1996 1995 (Dollars in thousands) ---------------------------------------------------------------- Puerto Rico $12,386,136 73.9% $11,833,155 75.5% United States 3,756,526 22.4 3,253,791 20.7 U.S. and British Virgin Islands and Latin America 621,441 3.7 588,505 3.8 --------------------------------------------------------------- $16,764,103 100.0% $15,675,451 100.0% ===============================================================
Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $2.9 billion and $3.4 billion in 1996 and 1995, respectively. Banco Popular, the Corporation's largest subsidiary, operates 178 branches in Puerto Rico, 29 in New York, seven in the U.S. Virgin Islands and one in the British Virgin Islands. Puerto Rico's economic outlook is generally similar to that of the mainland, and the Government of the Island and its instrumentalities are all investment-grade rated borrowers in the United States capital markets. As further discussed in the Liquidity Risk section of this financial review, in August 1996, the U.S. Congress approved legislation that repealed Section 936 of the Internal Revenue Code. The bill approved repealed the QPSII credit retroactively for taxable years beginning after December 31, 1995, while the income and wage credits will be phased-out over 10 years. No significant changes are anticipated on the general economic conditions of Puerto Rico, as a result of the enactment of this law. Meanwhile, the Corporation continues diversifying its geographical risk. During 1996, the Corporation acquired all the common stock of CombanCorp, the bank holding company of the former Commerce National Bank, located in California. This banking operation added to the Corporation three branches, $75 million in assets and $63 million in deposits. Other geographic expansions during 1996, include the first international investment made in March 1996, with the purchase of 20% of the common stock of Jamaica's fourth largest financial institution, Citizens Bank, and other investments in Costa Rica and the Dominican Republic to establish ATM networks in those countries. Equity One, the Corporation's mortgage and consumer finance operation in the mainland, had 102 branches in 28 states and $1.1 billion in total assets at December 31, 1996. F-23 42 The following table presents the net income for 1996 and total assets as of December 31, 1996, by subsidiary:
(Dollars in thousands) Net Income % Net Income Total Assets % Total Assets - ---------------------------------------------------------------------------------------------------- Banco Popular $ 150,366 81.21% $13,336,855 79.56% Equity One, Inc. 12,637 6.83 1,072,655 6.40 Popular Leasing 6,127 3.31 429,950 2.56 Banco Popular, Illinois 1,797 0.97 467,546 2.79 BP Capital Markets 3,349 1.81 693,219 4.14 VELCO 649 0.35 136,250 0.81 Popular Consumer 3,101 1.67 115,918 0.69 Banco Popular, FSB (107) (0.06) 317,084 1.89 Popular Mortgage 574 0.31 154,806 0.92 Banco Popular, N.A. (California) 292 0.16 139,504 0.83 Parent Company, other subsidiaries and eliminations 6,365 3.44 (99,684) (0.59) -------------------------------------------------------------- Total $ 185,150 100.00% $16,764,103 100.00% ==============================================================
Consumer Credit Risk - Consumer credit risk arises from exposures to credit card receivables, home mortgages, personal loans and other installment credit facilities. At December 31, 1996, consumer and residential mortgage loans amounted to $2.7 billion and $2.6 billion, respectively, with $916 million in unused credits card lines. At December 31, 1996, the secured consumer loan portfolio was $1.1 billion or 41.2% of the total consumer portfolio. Industry Risk - Total commercial loans, including commercial real estate and construction loans, amounted to $4.0 billion at year-end. The Corporation's strategy to emphasize the use of collateral has resulted in a secured commercial and construction loan portfolio comprised of approximately $1.2 billion, or 30.1% of the commercial and construction loan portfolios. These loans are secured by real estate, consisting primarily of residential, owner-occupied and income producing properties. Furthermore, commercial and construction loans secured by cash collateral totaled $94 million, or 2.4% of the commercial and construction portfolio at the end of 1996. Also, at year-end the Corporation had $1.4 billion in unused commitments under lines of credit to commercial, industrial and agricultural concerns. Commercial and standby letters of credit totaled $138 million at December 31, 1996. There are no significant concentrations in any one industry with a substantial portion of the customers having credit needs of less than $100,000. Government Risk - As of December 31, 1996, $3.3 billion of the investments securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $84 million of residential mortgages and $301 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies. The Corporation is one of the largest SBA lenders in the United States. Furthermore, there were $151 million of investment securities representing obligations of the Puerto Rico Government and political subdivisions thereof, $67 million of loans issued to or guaranteed by these same entities and $27 million of loans issued to or guaranteed by the U.S. Virgin Islands' Government. NON-PERFORMING ASSETS As of December 31, 1996, non-performing assets, which consist of past-due loans on which no interest income is being accrued, renegotiated loans and other real estate, amounted to $155 million or 1.58% of loans, compared with $155 million or 1.79% of total loans and $108 million or 1.38% of total loans at the end of 1995 and 1994, respectively. Non-performing loans at December 31, 1996, totaled $145 million or 1.49% of loans as compared with $144 million or 1.67% a year earlier. As of December 31, 1994, non-performing loans were $94 million or 1.21% of loans. As Table N presents, the slight decrease in non-performing assets is principally due to lower non-performing commercial including construction loans, and lease financings, tempered by a rise in non-performing mortgage and consumer loans. The reduction in non-performing commercial loans was primarily due to continued collection efforts and prudent management of the F-24 43 TABLE N Non-Performing Assets
As of December 31, - ------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 1993 1992 ----------------------------------------------------------- Commercial, industrial and agricultural ...................... $ 81,534 $ 87,250 $ 53,553 $ 49,517 $ 62,662 Construction ........................ 2,000 4,733 7,994 8,215 8,798 Lease financing ..................... 1,599 5,606 4,027 4,429 4,752 Mortgage ............................ 43,955 32,066 16,510 14,363 11,532 Consumer ............................ 16,320 14,827 12,179 16,290 20,597 Renegotiated accruing loans ......... 3,308 2,742 2,982 5,643 8,380 Other real estate ................... 6,076 7,807 10,390 12,699 15,582 ----------------------------------------------------------- Total ............................. $154,792 $155,031 $107,635 $111,156 $132,303 =========================================================== Accruing loans past-due 90 days or more ................... $ 12,270 $ 11,660 $ 15,012 $ 15,505 $ 23,957 =========================================================== Non-performing assets to loans ...... 1.58% 1.79% 1.38% 1.75% 2.52% Non-performing assets to assets ..... 0.92 0.99 0.84 0.97 1.32 Interest lost ....................... $ 7,696 $ 7,135 $ 5,441 $ 4,992 $ 7,548
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. Closed-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. non-performing portfolio. The more aggressive charge-off policy implemented in 1996 by the Corporation's leasing subsidiaries, caused a reduction in the amount of non-performing lease financings. Before 1996, charge-offs on the lease financing portfolio were recorded at the time the unit was repossessed based on the excess of the lease financing balance over the assessed value of the unit. Currently, charge-offs are recorded when the lease financing is 120 days past-due based on the full amount of the outstanding loan balance, and a recovery is recorded when the unit is repossessed. On the other hand, Equity One reflected an increase of $14.6 million in non-performing mortgage loans as a result of the record-breaking level of personal bankruptcies in the U.S. mainland and the growth in its portfolio. Partially offsetting this increase was a reduction of $3.0 million in non-performing mortgage loans at Banco Popular. The Corporation reports its non-performing assets on a more conservative basis than most U.S. banks. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the standard industry practice, closed-end consumer loans are charged-off when delinquent 120 days, but these consumer loans are not customarily placed on non-accrual status prior to being charged-off. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal or 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, 1996, would have been $117 million or 1.19% of loans, and the allowance for loan losses would have been 158.95% of non-performing assets. At December 31, 1995 and 1994, adjusted non-performing assets would have been $121 million or 1.39% of loans and $78 million or 1.01% of loans, respectively. The allowance for loan losses as a percentage of non-performing assets as of December 31, 1995 and 1994, would have been 139.60% and 196.63%, respectively. Accruing loans that are contractually past-due 90 days or more as to principal or interest, but are well-secured and in the process of collection as of December 31, 1996, amounted to $12 million as compared with $12 million in 1995 and $15 million in 1994. F-25 44 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 $7.7 million for 1996, compared with $7.1 million for 1995 and $5.4 million in 1994. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurement. At December 31, 1996, the allowance for loan losses was $186 million or 1.90% of loans, compared with $168 million or 1.94% at the same date in 1995. At December 31, 1994, the allowance was $154 million or 1.98% of loans. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation 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 AT DECEMBER 31, (IN MILLIONS) 1996 1995 1994 1993 1992 ---------------------------------------------------------- Commercial $ 91.8 $ 82.6 $ 73.8 $ 64.0 $ 49.5 Construction 10.5 11.0 10.8 10.6 6.5 Lease financing 3.4 6.4 6.5 5.8 5.4 Consumer 69.6 60.6 56.7 52.0 49.3 Mortgage 10.3 7.8 6.0 1.0 ---------------------------------------------------------- $ 185.6 $ 168.4 $ 153.8 $ 133.4 $ 110.7 ==========================================================
Effective January 1, 1995, the Corporation adopted the Statement of Financial Accounting Standards (SFAS) 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." This statement requires that a loan meeting the definition of impaired be measured at the present value of expected future cash flows using the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is 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. At December 31, 1996 and 1995, the portion of the allowance for loan losses related with impaired loans as defined by the above pronouncements was $18 million and $8 million, respectively. Please refer to Notes 1 and 6 to the Consolidated Financial Statements for further information related with SFAS 114 and 118. Table O 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 $72.1 million or 0.78% of average loans, an increase of $22.1 million or 44.2% from $50.0 million or 0.61% of average loans in 1995. The rise primarily reflected higher charge-offs in the consumer portfolio, particularly personal loans and credit cards, lease financing and commercial loan portfolios. Consumer loans net charge-offs totaled $29.1 million, or 1.18% of average consumer loans for 1996, compared with $17.2 million, or 0.78% of average consumer loans for 1995. Within this category, personal loans reflected an increase of $8.6 million, from $7.0 million or 0.57% of average personal loans in 1995 to $15.6 million or 1.20% in 1996. This increase is the result of the growth of $70 million in the average personal loan portfolio together with a rise in personal bankruptcies during 1996. In addition, credit cards net losses were $11.0 million or 2.49% of average credit card loans as compared with $9.2 million or 2.35% in 1995. F-26 45 TABLE O Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of year ......... $ 168,393 $ 153,798 $ 133,437 $ 110,714 $ 94,199 Allowances purchased ................. 402 -- 3,473 1,580 -- Provision for loan losses ............ 88,839 64,558 53,788 72,892 97,633 ----------------------------------------------------------------------- 257,634 218,356 190,698 185,186 191,832 ----------------------------------------------------------------------- Losses charged to the allowance Commercial .......................... 38,017 34,383 27,435 29,501 37,700 Construction ........................ 2,369 2,046 1,794 3,060 1,887 Lease financing ..................... 22,129 6,979 6,860 9,150 10,139 Mortgage ............................ 2,189 1,618 1,310 477 Consumer ............................ 43,257 33,681 29,545 35,239 52,454 ----------------------------------------------------------------------- 107,961 78,707 66,944 77,427 102,180 ----------------------------------------------------------------------- Recoveries Commercial .......................... 11,498 9,404 6,950 6,279 3,577 Construction ........................ 207 288 1,374 607 796 Lease financing ..................... 9,749 2,342 3,514 2,081 2,169 Mortgage ............................ 295 243 5 36 Consumer ............................ 14,152 16,467 18,201 16,675 14,520 ----------------------------------------------------------------------- 35,901 28,744 30,044 25,678 21,062 ----------------------------------------------------------------------- Net loans charged-off ................ 72,060 49,963 36,900 51,749 81,118 ----------------------------------------------------------------------- Balance at end of year ............... $ 185,574 $ 168,393 $ 153,798 $ 133,437 $ 110,714 ======================================================================= Loans: Outstanding at year end ........... $9,779,028 $8,677,484 $7,781,329 $6,346,922 $5,252,053 Average ........................... 9,210,964 8,217,834 7,107,746 5,700,069 5,150,328 Ratios: Allowance for loan losses to year end loans ......................... 1.90% 1.94% 1.98% 2.10% 2.11% Recoveries to charge-offs .......... 33.25 36.52 44.88 33.16 20.61 Net charge-offs to average loans ... 0.78 0.61 0.52 0.91 1.58 Net charge-offs earnings coverage .. 4.79x 5.42x 6.21x 3.96x 2.44x Allowance for loan losses to net charge-offs ........................ 2.58 3.37 4.17 2.58 1.36 Provision for loan losses to: Net charge-offs .................. 1.23 1.29 1.46 1.41 1.20 Average loans .................... 0.96% 0.79% 0.76% 1.28% 1.90% Allowance to non-performing assets ... 119.89 108.62 142.89 120.04 83.68 - -------------------------------------------------------------------------------------------------------------------
As previously mentioned, lease financings net charge-offs increased $7.8 million, from $4.6 million or 0.95% of average lease financings in 1995 to $12.4 million or 2.45% in 1996, as a result of the more aggressive charge-off policy implemented in 1996 by the Corporation's leasing subsidiaries. However, the level of charge-offs in the leasing portfolio should stabilize during 1997, while the level of recoveries is expected to increase. Commercial loans net charge-offs amounted to $26.5 million for 1996, compared with $25.0 million a year earlier. As a percentage of average commercial loans, this figure decreased slightly to 0.77% in 1996 from 0.83% in 1995. Net charge-offs in the mortgage portfolio totaled $1.9 million in 1996 compared with $1.4 million in 1995. F-27 46 STATISTICAL SUMMARY 1992-1996 BANPONCE CORPORATION STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------------------------------------------------- As of December 31, - --------------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 1993 1992 ------------------------------------------------------------------------ ASSETS Cash and due from banks ....................... $ 492,368 $ 458,173 $ 442,316 $ 368,837 $ 325,497 ------------------------------------------------------------------------ Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ....................... 778,597 796,417 265,000 247,333 234,163 Time deposits with other banks ............... 19,023 100 100 15,100 50,100 Bankers' acceptances.......................... 2,656 2,202 570 259 858 ------------------------------------------------------------------------ 800,276 798,719 265,670 262,692 285,121 ------------------------------------------------------------------------ Trading securities ............................ 292,150 330,674 1,670 3,017 283 ------------------------------------------------------------------------ Investment securities available-for-sale at market value and at lower of cost or market value before 1994 ..................... 3,415,934 3,209,974 839,226 715,565 408,127 ------------------------------------------------------------------------ Investment securities held-to-maturity, at cost 1,197,066 1,651,344 2,955,911 3,329,798 3,290,440 ------------------------------------------------------------------------ Loans held-for-sale ........................... 255,129 112,806 10,296 ------------------------------------------------------------------------ Loans ......................................... 9,854,911 8,883,963 8,066,954 6,655,072 5,614,724 Less-Unearned income ......................... 331,012 319,285 295,921 308,150 362,671 Allowance for loan losses ................ 185,574 168,393 153,798 133,437 110,714 ------------------------------------------------------------------------ 9,338,325 8,396,285 7,617,235 6,213,485 5,141,339 ------------------------------------------------------------------------ Premises and equipment ........................ 356,697 325,203 324,160 298,089 260,330 Other real estate ............................. 6,076 7,807 10,390 12,699 15,582 Customers' liabilities on acceptances.......... 3,100 2,208 902 1,392 1,830 Accrued income receivable ..................... 95,487 113,539 78,765 79,285 76,008 Other assets .................................. 380,247 125,742 103,088 95,763 64,890 Intangible assets ............................. 131,248 142,977 128,729 132,746 132,880 ------------------------------------------------------------------------ $16,764,103 $15,675,451 $12,778,358 $11,513,368 $10,002,327 ======================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing ........................ $ 2,330,704 $ 2,021,658 $ 1,949,244 $ 1,848,859 $ 1,614,806 Interest bearing ............................ 8,432,571 7,855,004 7,063,191 6,673,799 6,423,905 ------------------------------------------------------------------------ 10,763,275 9,876,662 9,012,435 8,522,658 8,038,711 Federal funds purchased and securities sold under agreements to repurchase ........ 1,875,465 3,000,878 1,438,038 951,733 665,222 Other short-term borrowings ................. 1,404,006 454,707 573,841 664,173 206,882 Notes payable ............................... 986,713 730,428 459,524 253,855 90,062 Senior debentures ........................... 30,000 30,000 30,000 30,000 30,000 Acceptances outstanding ..................... 3,100 2,208 902 1,392 1,830 Other liabilities ........................... 314,012 263,871 211,195 182,362 132,501 ------------------------------------------------------------------------ 15,376,571 14,358,754 11,725,935 10,606,173 9,165,208 ------------------------------------------------------------------------ Subordinated notes .......................... 125,000 175,000 50,000 62,000 74,000 ------------------------------------------------------------------------ Preferred stock of Banco Popular ............ 11,000 11,000 ------------------------------------------------------------------------ Stockholders' equity: Preferred stock ............................. 100,000 100,000 100,000 Common stock ................................ 396,531 197,692 197,029 196,395 195,929 Surplus ..................................... 496,582 427,282 409,445 386,622 361,982 Retained earnings ........................... 267,719 350,480 272,458 208,607 150,208 Unrealized gains (losses) on investment securities available-for-sale, net of deferred taxes ............................. 1,700 16,243 (19,366) Capital reserves ............................ 50,000 42,857 42,571 44,000 ------------------------------------------------------------------------ 1,262,532 1,141,697 1,002,423 834,195 752,119 ------------------------------------------------------------------------ $16,764,103 $15,675,451 $12,778,358 $11,513,368 $10,002,327 ========================================================================
F-28 47 STATISTICAL SUMMARY 1992-1996 BANPONCE CORPORATION STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share information) 1996 1995 1994 1993 1992 -------------------------------------------------------------------------- INTEREST INCOME: Loans .............................................. $ 924,076 $ 813,137 $ 667,047 $ 549,388 $ 518,074 Money market investments ........................... 46,697 23,077 5,186 6,434 14,414 Investment securities .............................. 280,610 259,941 214,611 215,944 207,642 Trading account securities ......................... 21,470 9,652 297 370 224 -------------------------------------------------------------------------- Total interest income ............................ 1,272,853 1,105,807 887,141 772,136 740,354 Less - Interest expense ............................ 591,540 521,624 351,633 280,008 300,135 -------------------------------------------------------------------------- Net interest income .............................. 681,313 584,183 535,508 492,128 440,219 Provision for loan losses .......................... 88,839 64,558 53,788 72,892 97,633 -------------------------------------------------------------------------- Net interest income after provision for loan losses ................................. 592,474 519,625 481,720 419,236 342,586 Gain on sale of investment securities .............. 3,094 5,368 224 864 242 Trading account profit ............................. 108 1,785 227 554 383 All other operating income ......................... 202,270 166,185 140,852 123,762 123,879 -------------------------------------------------------------------------- 797,946 692,963 623,023 544,416 467,090 -------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs .................................... 273,247 249,075 225,747 215,911 188,234 All other operating expenses ....................... 268,672 237,758 222,099 196,365 178,711 -------------------------------------------------------------------------- 541,919 486,833 447,846 412,276 366,945 -------------------------------------------------------------------------- Income before tax, dividends on preferred stock of Banco Popular and cumulative effect of accounting changes ..................... 256,027 206,130 175,177 132,140 100,145 Income tax ......................................... 70,877 59,769 50,043 28,151 14,259 -------------------------------------------------------------------------- Income before dividends on preferred stock of Banco Popular and cumulative effect of accounting changes ..................... 185,150 146,361 125,134 103,989 85,886 Dividends on preferred stock of Banco Popular .................................... 385 770 770 -------------------------------------------------------------------------- Income before cumulative effect of accounting changes ............................... 185,150 146,361 124,749 103,219 85,116 Cumulative effect of accounting changes ............ 6,185 -------------------------------------------------------------------------- NET INCOME ......................................... $ 185,150 $ 146,361 $ 124,749 $ 109,404 $ 85,116 ========================================================================== NET INCOME APPLICABLE TO COMMON STOCK .............. $ 176,800 $ 138,011 $ 120,504 $ 109,404 $ 85,116 ========================================================================== EARNINGS PER COMMON SHARE* Before effect of accounting changes .............. $ 2.68 $ 2.10 $ 1.84 $ 1.58 $ 1.40 ========================================================================== Net income ....................................... $ 2.68 $ 2.10 $ 1.84 $ 1.67 $ 1.40 ========================================================================== Dividends declared on common stock: Cash dividends per common share outstanding ........ $ 0.69 $ 0.58 $ 0.50 $ 0.45 $ 0.40 ==========================================================================
*The average common shares used in the computation of earnings and cash dividend per common share were 66,022,312 for 1996; 65,816,300 for 1995; 65,596,486 for 1994; 65,402,472 for 1993, and 60,922,988 for 1992. F-29 48 STATISTICAL SUMMARY 1992-1996 AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------------------------------- ON A TAXABLE EQUIVALENT BASIS* - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest earning assets: Federal funds sold and securities and mortgages purchased under agreements to resell ...................................... $ 878,138 $ 45,704 5.20% $ 399,413 $ 22,823 5.71% Time deposits with other banks ................. 12,562 770 6.13 2,661 165 6.20 Bankers' acceptances ........................... 2,202 223 10.13 941 89 9.46 ------------------------------------------------------------------------------ Total money market investments ............... 892,902 46,697 5.23 403,015 23,077 5.73 ------------------------------------------------------------------------------ U.S. Treasury securities ....................... 3,198,912 222,520 6.96 2,893,797 197,554 6.83 Obligations of other U.S. Government agencies and corporations .................... 750,287 49,042 6.54 575,024 40,493 7.04 Obligations of Puerto Rico, States and political subdivisions ....................... 231,363 11,224 4.85 247,176 14,798 5.99 Collateralized mortgage obligations and mortgage backed securities ............... 553,702 32,117 5.80 580,714 37,610 6.48 Other .......................................... 95,985 5,483 5.71 171,013 6,491 3.80 ------------------------------------------------------------------------------ Total investment securities ................ 4,830,249 320,386 6.63 4,467,724 296,946 6.65 ------------------------------------------------------------------------------ Trading account securities ....................... 372,196 23,004 6.18 155,597 9,831 6.32 ------------------------------------------------------------------------------ Loans (net of unearned income) ................... 9,210,964 930,891 10.11 8,217,834 820,003 9.98 ------------------------------------------------------------------------------ Total interest earning assets/ Interest income ........................... 15,306,311 $ 1,320,978 8.63% 13,244,170 $ 1,149,857 8.68% ------------------------------------------------------------------------------ Total non-interest earning assets .......... 994,771 874,013 ------------------------------------------------------------------------------ TOTAL ASSETS ............................... $16,301,082 $ 14,118,183 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings and NOW accounts ....................... $ 4,244,625 $ 131,499 3.10% $ 4,015,973 $ 126,548 3.15% Other time deposits ............................ 4,163,416 218,722 5.25 3,720,473 203,235 5.46 Short-term borrowings .......................... 3,464,892 184,682 5.33 2,600,246 141,522 5.44 Mortgages and notes payable .................... 757,604 46,417 6.13 598,027 46,149 7.72 Subordinated notes ............................. 147,951 10,220 6.91 56,850 4,170 7.34 ----------------------------------------------------------------------------- Total interest bearing liabilities/ Interest expense ......................... 12,778,488 591,540 4.63 10,991,569 521,624 4.75 ------------------------------------------------------------------------------ Total non-interest bearing liabilities ..... 2,328,083 2,056,132 ------------------------------------------------------------------------------ Total liabilities .......................... 15,106,571 13,047,701 ------------------------------------------------------------------------------ Preferred stock of Banco Popular ------------------------------------------------------------------------------ Stockholders' equity ............................. 1,194,511 1,070,482 ------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $16,301,082 $ 14,118,183 ============================================================================== Net interest income on a taxable equivalent basis ............................... $ 729,438 $ 628,233 ------------------------------------------------------------------------------ Cost of funding earning assets ................... 3.86% 3.94% ------------------------------------------------------------------------------ Net interest yield ............................... 4.77% 4.74% ============================================================================== Effect of the taxable equivalent adjustment 48,125 44,050 ------------------------------------------------------------------------------ Net interest income per books .................... $ 681,313 $ 584,183 ==============================================================================
* 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 Tax Reform Act enacted in 1987. 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-30 49 BANPONCE CORPORATION
---------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------------------------------- $ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51% $ 144,539 $ 5,209 3.60% 4,916 300 6.10 57,845 2,259 3.91 215,970 9,093 4.21 332 28 8.43 871 60 6.89 1,496 112 7.49 - -------------------------------------------------------------------------------------------------------------------- 119,463 5,186 4.34 175,811 6,434 3.66 362,005 14,414 3.98 - -------------------------------------------------------------------------------------------------------------------- 2,657,975 164,102 6.17 2,985,634 202,695 6.79 2,443,267 226,038 9.25 526,687 33,969 6.45 274,821 18,033 6.56 317,152 27,838 8.78 259,534 14,074 5.42 227,784 14,253 6.26 212,762 19,345 9.09 712,972 37,535 5.26 523,224 26,944 5.15 288,818 21,780 7.54 - -------------------------------------------------------------------------------------------------------------------- 4,157,168 249,680 6.01 4,011,463 261,925 6.53 3,261,999 295,001 9.04 - -------------------------------------------------------------------------------------------------------------------- 5,303 368 6.94 7,319 449 6.13 5,649 303 5.36 - -------------------------------------------------------------------------------------------------------------------- 7,107,746 672,974 9.47 5,700,069 555,671 9.75 5,150,328 526,902 10.23 - -------------------------------------------------------------------------------------------------------------------- 11,389,680 $928,208 8.15% 9,894,662 $824,479 8.33% 8,779,981 $836,620 9.53% - -------------------------------------------------------------------------------------------------------------------- 835,850 789,091 748,537 - -------------------------------------------------------------------------------------------------------------------- $12,225,530 $10,683,753 $9,528,518 ==================================================================================================================== $ 3,972,406 $116,858 2.94% $ 3,570,920 $107,454 3.01% $2,999,691 $108,945 3.63% 3,069,130 130,868 4.26 2,918,625 111,994 3.84 3,171,177 144,430 4.55 1,856,649 77,537 4.18 1,337,970 42,392 3.17 903,903 31,711 3.51 376,570 22,420 5.95 195,522 12,801 6.55 116,695 8,245 7.07 56,082 3,950 7.04 73,967 5,367 7.26 85,585 6,804 7.95 - -------------------------------------------------------------------------------------------------------------------- 9,330,837 351,633 3.77 8,097,004 280,008 3.46 7,277,051 300,135 4.12 - -------------------------------------------------------------------------------------------------------------------- 1,964,399 1,782,748 1,571,477 - -------------------------------------------------------------------------------------------------------------------- 11,295,236 9,879,752 8,848,528 - -------------------------------------------------------------------------------------------------------------------- 5,425 11,000 11,000 - -------------------------------------------------------------------------------------------------------------------- 924,869 793,001 668,990 - -------------------------------------------------------------------------------------------------------------------- $12,225,530 $10,683,753 $9,528,518 ==================================================================================================================== $576,575 $544,471 $536,485 - -------------------------------------------------------------------------------------------------------------------- 3.09% 2.83% 3.42% - -------------------------------------------------------------------------------------------------------------------- 5.06% 5.50% 6.11% ==================================================================================================================== 41,067 52,343 96,266 - -------------------------------------------------------------------------------------------------------------------- $535,508 $492,128 $440,219 ====================================================================================================================
F-31 50 STATISTICAL SUMMARY 1994-1996 BANPONCE CORPORATION QUARTERLY FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income .............. $ 332,854 $ 327,097 $ 309,975 $ 302,927 $ 298,311 $ 288,459 $ 268,818 $ 250,219 Net interest income .......... 178,409 172,236 168,208 162,460 156,120 148,415 142,120 137,528 Provision for loan losses ..................... 23,458 22,436 21,672 21,273 21,227 18,987 12,646 11,698 Non-interest income .......... 55,291 46,488 49,335 51,263 45,276 44,881 40,306 37,507 Gain (loss) on sale of investment securities ...... (2,525) 4,911 (20) 729 3,306 1,950 66 46 Non-interest expense ......... 143,923 135,453 131,844 130,699 124,197 119,596 124,722 118,318 Income before income tax, cumulative effect of accounting changes and dividends on preferred stock of Banco Popular .............. 63,794 65,746 64,007 62,480 59,278 56,663 45,124 45,065 Income taxes ................. 16,114 19,473 17,952 17,338 19,026 18,356 11,063 11,324 Dividends on preferred stock of Banco Popular ..... ---------------------------------------------------------------------------------------------- Net income ................... $ 47,680 $ 46,273 $ 46,055 $ 45,142 $ 40,252 $ 38,307 $ 34,061 $ 33,741 ============================================================================================== Net income applicable to common stock ............ $ 45,593 $ 44,186 $ 43,967 $ 43,005 $ 38,164 $ 36,220 $ 31,973 $ 31,654 ============================================================================================== Net income per common share ............... $ 0.69 $ 0.67 $ 0.67 $ 0.65 $ 0.58 $ 0.55 $ 0.49 $ 0.48 ---------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets ................. $ 16,852 $ 16,796 $ 15,988 $ 15,557 $ 15,183 $ 14,709 $ 13,616 $ 12,934 Loans ........................ 9,668 9,387 9,033 8,749 8,548 8,360 8,090 7,864 Interest earning assets ...... 15,794 15,769 15,020 14,631 14,276 13,788 12,815 12,068 Deposits ..................... 10,767 10,548 10,474 10,055 9,848 9,614 9,615 9,245 Interest bearing liabilities.. 13,145 13,285 12,464 12,210 11,912 11,596 10,552 9,871 ---------------------------------------------------------------------------------------------- SELECTED RATIOS Return on assets ............. 1.13% 1.10% 1.16% 1.17% 1.05% 1.03% 1.00% 1.06% Return on equity ............. 15.76 15.94 16.56 16.39 14.82 14.55 13.47 13.96 - ----------------------------------------------------------------------------- 1994 - ----------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per common share information) Interest income .............. $ 239,035 $ 228,695 $ 220,000 $ 199,411 Net interest income .......... 137,452 136,699 135,574 125,783 Provision for loan losses ..................... 12,544 13,544 14,037 13,663 Non-interest income .......... 37,807 36,013 34,407 32,852 Gain (loss) on sale of investment securities ...... 157 (205) 272 Non-interest expense ......... 114,266 114,551 112,452 106,577 Income before income tax, cumulative effect of accounting changes and dividends on preferred stock of Banco Popular .............. 48,606 44,412 43,492 38,667 Income taxes ................. 15,980 12,695 11,623 9,745 Dividends on preferred stock of Banco Popular ..... 192 193 ---------------------------------------------- Net income ................... $ 32,626 $ 31,717 $ 31,677 $ 28,729 ============================================== Net income applicable to common stock ............ $ 30,538 $ 29,560 $ 31,677 $ 28,729 ============================================== Net income per common share ............... $ 0.47 $ 0.45 $ 0.48 $ 0.44 ---------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets ................. $ 12,585 $ 12,385 $ 12,301 $ 11,618 Loans ........................ 7,645 7,356 6,958 6,456 Interest earning assets ...... 11,749 11,540 11,449 10,809 Deposits ..................... 8,960 8,841 9,000 8,543 Interest bearing liabilities.. 9,572 9,445 9,440 8,856 ---------------------------------------------- SELECTED RATIOS Return on assets ............. 1.03% 1.02% 1.03% 1.00% Return on equity ............. 13.54 13.26 14.59 13.78
F-32 51 GLOSSARY OF TERMS 936 CORPORATIONS - Subsidiaries of U.S. firms operating in Puerto Rico and other offshore areas under Section 936 of the U.S. Internal Revenue Code. Section 936 provides certain tax benefits on Puerto Rico source earnings from the active conduct of a trade or business or from qualified investments. In August 1996, the U.S. Congress repealed Section 936 with a phase-out period of 10 years on the credit from earnings from active conduct of trade or business. 936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form of time deposits. The restriction that these funds must be reinvested in eligible assets, if income derived from them is to be considered tax-exempt for U.S. and Puerto Ricos Industrial Incentive Act purposes, lowers the rate on these funds as compared to interest rates paid on similar deposits. In August 1996, the U.S. Congress approved legislation that repealed the exemption on these funds, effective July 1,1996, for taxable years beginning after December 31, 1995. BASIS POINT - Equals to one-hundredth of one percent. Used to express changes or differences in interest yields and rates. CORE DEPOSITS - A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000. These deposits are considered a stable source of funds. EARNING ASSETS - Assets that earn interest, such as loans, investment securities, money market investments and trading account securities. EARNINGS PER COMMON SHARE - Net income less dividends on preferred stock of the Corporation, divided by the average number of common shares outstanding during the periods presented. GAP - The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities. INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as saving deposits, certificates of deposit, other time deposits, borrowings and subordinated notes. INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning assets/interest-bearing liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements. LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the assessment of the capital adequacy of state member banks. This ratio is calculated by dividing Tier I capital by quarterly average assets. The quarterly average assets are reduced by goodwill, any other intangible asset deducted from Tier I capital and the disallowed portion of deferred tax assets. LIQUIDITY - A combination of assets that assures currently available supplies of funds necessary to meet deposit withdrawals, loan demands and repayment of borrowings as they become due. The need for liquid funds is normally satisfied from daily operations and the maturity management of money market investments and investment securities. NET CHARGE-OFFS - The amount of loans written off as uncollectible, net of the recovery of loans previously written off as uncollectible. NET INCOME APPLICABLE TO COMMON STOCK - Net income less dividends paid on the Corporation's preferred stock. NET INTEREST INCOME - The difference between interest income and fees on earning assets and interest expense on liabilities. NET INTEREST YIELD - A percentage computed by dividing net interest income by average earning assets. NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income has been discontinued due to default on interest and/or principal payments or other factors indicative of doubtful collection, renegotiated loans and foreclosed real estate properties. RETURN ON ASSETS - Net income as a percentage of average total assets. RETURN ON EQUITY - Net income applicable to common stock as a percentage of average common stockholders equity. RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital adequacy. These guidelines set forth how capital is to be measured and how total assets are to be risk adjusted. Total risk-adjusted assets include assets and off-balance sheet items adjusted by the appropriate credit risk category, based on the type of obligor or, where relevant, the guarantor, or the nature of the collateral. F-33 52 SPREAD - A percentage difference or margin between the yield on earning assets and the effective interest rate paid on interest-bearing liabilities. STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the stockholders ownership participation in the Corporation's financial resources. SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and qualifying term subordinated notes. TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets. TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets to an amount that would yield the same after-tax income had the income been subject to taxation. The result is to equate the true earnings value of tax-exempt and taxable income. TIER I CAPITAL - Consists of common stockholders' equity (including the related surplus, retained earnings and capital reserves), non-cumulative perpetual preferred stock less goodwill, other non-qualifying intangible assets and the disallowed portion of deferred tax assets. TRANSFER PRICING - A method by which costs are allocated to the various profit centers within an organization. YIELD - Percentage denoting actual return on earning assets. F-34 53 REPORT OF INDEPENDENT ACCOUNTANTS BANPONCE CORPORATION Price Waterhouse San Juan, Puerto Rico February 21, 1997 To the Board of Directors and Stockholders of BanPonce Corporation In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of BanPonce Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse Stamp 1392144 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. F-35 54 CONSOLIDATED STATEMENTS OF CONDITION BANPONCE CORPORATION
- --------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------ 1996 1995 - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share information) ASSETS Cash and due from banks ............................................................. $ 492,368 $ 458,173 ------------------------------ Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ............................................................ 778,597 796,417 Time deposits with other banks .................................................... 19,023 100 Bankers' acceptances .............................................................. 2,656 2,202 ------------------------------ 800,276 798,719 ------------------------------ Trading securities, at market value ................................................. 292,150 330,674 ------------------------------ Investment securities available-for-sale, at market value ........................... 3,415,934 3,209,974 ------------------------------ Investment securities held-to-maturity, at cost (market value $1,197,641; 1995 - $1,661,933) ................................................................ 1,197,066 1,651,344 ------------------------------ Loans held-for-sale ................................................................. 255,129 112,806 ------------------------------ Loans ............................................................................... 9,854,911 8,883,963 Less - Unearned income ............................................................ 331,012 319,285 Allowance for loan losses .................................................. 185,574 168,393 ------------------------------ 9,338,325 8,396,285 ------------------------------ Premises and equipment .............................................................. 356,697 325,203 Other real estate ................................................................... 6,076 7,807 Customers' liabilities on acceptances ............................................... 3,100 2,208 Accrued income receivable ........................................................... 95,487 113,539 Other assets ........................................................................ 380,247 125,742 Intangible assets ................................................................... 131,248 142,977 ------------------------------ $16,764,103 $15,675,451 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing .............................................................. $ 2,330,704 $ 2,021,658 Interest bearing .................................................................. 8,432,571 7,855,004 ------------------------------ 10,763,275 9,876,662 Federal funds purchased and securities sold under agreements to repurchase ........ 1,875,465 3,000,878 Other short-term borrowings ....................................................... 1,404,006 454,707 Notes payable ..................................................................... 986,713 730,428 Senior debentures ................................................................. 30,000 30,000 Acceptances outstanding ........................................................... 3,100 2,208 Other liabilities ................................................................. 314,012 263,871 ------------------------------ 15,376,571 14,358,754 ------------------------------ Subordinated notes ................................................................ 125,000 175,000 ------------------------------ 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; authorized 90,000,000 shares; issued and outstanding 66,088,506 (1995 - 65,897,272) ........................... 396,531 197,692 Surplus ........................................................................... 496,582 427,282 Retained earnings ................................................................. 267,719 350,480 Unrealized gains on investment securities available-for-sale, net of deferred taxes of $1,490 (1995 - $7,085) ................................................. 1,700 16,243 Capital reserves .................................................................. 50,000 ------------------------------ 1,262,532 1,141,697 ------------------------------ $16,764,103 $15,675,451 ==============================
The accompanying notes are an integral part of the consolidated financial statements. F-36 55 CONSOLIDATED STATEMENTS OF INCOME BANPONCE CORPORATION
- -------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share information) INTEREST INCOME: Loans ................................................................... $ 924,076 $ 813,137 $ 667,047 Money market investments ................................................ 46,697 23,077 5,186 Investment securities ................................................... 280,610 259,941 214,611 Trading securities ...................................................... 21,470 9,652 297 -------------------------------------------- 1,272,853 1,105,807 887,141 -------------------------------------------- INTEREST EXPENSE: Deposits ................................................................ 350,221 329,783 247,726 Short-term borrowings ................................................... 184,682 141,522 77,537 Long-term debt .......................................................... 56,637 50,319 26,370 -------------------------------------------- 591,540 521,624 351,633 -------------------------------------------- Net interest income ....................................................... 681,313 584,183 535,508 Provision for loan losses ............................................... 88,839 64,558 53,788 -------------------------------------------- Net interest income after provision for loan losses ....................... 592,474 519,625 481,720 Service charges on deposit accounts ..................................... 85,846 78,607 71,727 Other service fees ...................................................... 77,071 63,725 51,240 Gain on sale of investment securities ................................... 3,094 5,368 224 Trading account profit .................................................. 108 1,785 227 Other operating income .................................................. 39,353 23,853 17,885 -------------------------------------------- 797,946 692,963 623,023 -------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries ............................................................... 185,946 172,504 160,996 Profit sharing ......................................................... 22,692 19,003 19,205 Pension and other benefits ............................................. 64,609 57,568 45,546 -------------------------------------------- 273,247 249,075 225,747 Net occupancy expense ................................................... 36,899 32,850 28,440 Equipment expenses ...................................................... 47,957 41,577 35,474 Other taxes ............................................................. 23,214 20,872 19,807 Professional fees ....................................................... 46,182 34,954 33,757 Communications .......................................................... 26,470 23,106 20,308 Business promotion ...................................................... 26,229 17,801 16,271 Printing and supplies ................................................... 11,964 11,069 8,817 Other operating expenses ................................................ 31,703 35,325 41,222 Amortization of intangibles ............................................. 18,054 20,204 18,003 -------------------------------------------- 541,919 486,833 447,846 -------------------------------------------- Income before income tax and dividends on preferred stock of Banco Popular .................................................. 256,027 206,130 175,177 Income tax ................................................................ 70,877 59,769 50,043 -------------------------------------------- Income before dividends on preferred stock of Banco Popular ............... 185,150 146,361 125,134 Dividends on preferred stock of Banco Popular ............................. 385 -------------------------------------------- NET INCOME ................................................................ $ 185,150 $ 146,361 $ 124,749 ============================================ NET INCOME APPLICABLE TO COMMON STOCK ..................................... $ 176,800 $ 138,011 $ 120,504 ============================================ EARNINGS PER COMMON SHARE: NET INCOME .............................................................. $ 2.68 $ 2.10 $ 1.84 ============================================
The accompanying notes are an integral part of the consolidated financial statements. F-37 56 CONSOLIDATED STATEMENTS OF CASH FLOW BANPONCE CORPORATION
- ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, ---------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................... $ 185,150 $ 146,361 $ 124,749 ---------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment .......... 48,481 44,448 38,654 Provision for loan losses ........................................ 88,839 64,558 53,788 Amortization of intangibles ...................................... 18,054 20,204 18,003 Gain on sale of investment securities available-for-sale ......... (3,094) (5,368) (224) (Gain) loss on disposition of premises and equipment ............. (123) 150 (2,311) Gain on sale of loans ............................................ (11,060) (8,966) (4,454) Amortization of premiums and accretion of discounts on investments .................................................. 8,538 (2,325) 6,277 Amortization of deferred loan origination fees and costs ......... (3,096) 7,131 2,755 Net decrease (increase) in trading securities .................... 38,524 (97,973) 1,347 Increase in loans held-for-sale .................................. (142,323) (36,244) Net decrease (increase) in accrued income receivable ............. 18,665 (24,378) 2,613 Net increase in other assets ..................................... (221,070) (8,640) (14,519) Net increase in interest payable ................................. 11,765 2,077 6,226 Net (decrease) increase in current and deferred taxes ............ (19,979) 1,410 19,620 Net increase in postretirement benefit obligation ................ 7,977 6,979 5,818 Net increase in other liabilities ................................ 29,284 6,121 8,187 ---------------------------------------------- Total adjustments .............................................. (130,618) (30,816) 141,780 ---------------------------------------------- Net cash provided by operating activities ...................... 54,532 115,545 266,529 ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments ............................. 11,110 44,298 2,422 Purchases of investment securities held-to-maturity .................. (28,849,896) (11,665,837) (7,290,753) Maturities of investment securities held-to-maturity ................. 29,302,469 11,754,330 7,671,104 Sales of investment securities held-to-maturity ...................... 13,555 Purchases of investment securities available-for-sale ................ (5,396,828) (1,367,401) (385,963) Maturities of investment securities available-for-sale ............... 2,297,528 86,379 64,297 Sales of investment securities available-for-sale .................... 2,896,060 286,045 293,712 Net disbursements on loans ........................................... (1,501,808) (1,155,497) (1,435,677) Proceeds from sale of loans .......................................... 515,357 244,682 193,411 Acquisition of loan portfolios ....................................... (16,983) (66,922) (76,700) Assets acquired, net of cash ......................................... (7,164) (29,189) (17,557) Acquisition of premises and equipment ................................ (86,162) (51,318) (64,709) Proceeds from sale of premises and equipment ......................... 9,662 6,888 8,825 ---------------------------------------------- Net cash used in investing activities .......................... (826,655) (1,913,542) (1,024,033) ---------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ............................................. 823,907 680,847 197,072 Net deposits acquired ................................................ 163,504 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ...................... (1,125,413) 771,382 481,304 Net increase (decrease) in other short-term borrowings ............... 949,300 (144,028) (92,932) Proceeds from issuance of notes payable .............................. 423,670 258,181 205,679 Payment of notes payable ............................................. (167,385) (11) (10) Payment of subordinated notes ........................................ (50,000) (12,000) Proceeds from issuance of subordinated notes ......................... 125,000 Dividends paid ....................................................... (51,896) (44,521) (37,016) Proceeds from issuance of common stock ............................... 4,135 3,500 3,196 Proceeds from issuance of preferred stock ............................ 96,690 Redemption of preferred stock ........................................ (11,000) ---------------------------------------------- Net cash provided by financing activities ...................... 806,318 1,813,854 830,983 ---------------------------------------------- Net increase in cash and due from banks ............................... 34,195 15,857 73,479 Cash and due from banks at beginning of period ........................ 458,173 442,316 368,837 ---------------------------------------------- Cash and due from banks at end of period .............................. $ 492,368 $ 458,173 $ 442,316 ==============================================
The accompanying notes are an integral part of the consolidated financial statements. F-38 57 CONSOLIDATED STATEMENTS OF CHANGES BANPONCE CORPORATION IN STOCKHOLDERS' EQUITY
Year ended December 31, -------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) PREFERRED STOCK: Balance at beginning of year ............................................ $ 100,000 $ 100,000 Preferred stock issued .................................................. $ 100,000 -------------------------------------------- Balance at end of year ........................................... 100,000 100,000 100,000 -------------------------------------------- COMMON STOCK: Balance at beginning of year ............................................ 197,692 197,029 196,395 Transfer from retained earnings resulting from stock split .............. 198,004 Common stock issued under Dividend Reinvestment Plan .................... 835 663 634 -------------------------------------------- Balance at end of year ........................................... 396,531 197,692 197,029 -------------------------------------------- SURPLUS: Balance at beginning of year ............................................ 427,282 409,445 386,622 Issuance cost of preferred stock ........................................ (3,310) Proceeds from common stock issued under Dividend Reinvestment Plan ............................................ 3,300 2,837 2,562 Transfer from retained earnings ......................................... 16,000 15,000 15,000 Transfer from capital reserves .......................................... 50,000 8,571 -------------------------------------------- Balance at end of year ........................................... 496,582 427,282 409,445 -------------------------------------------- RETAINED EARNINGS: Balance at beginning of year ............................................ 350,480 272,458 208,607 Net income .............................................................. 185,150 146,361 124,749 Cash dividends declared on common stock ................................. (45,557) (37,846) (32,796) Cash dividends declared on preferred stock .............................. (8,350) (8,350) (4,245) Transfer to common stock resulting from stock split ..................... (198,004) Transfer to capital reserves ............................................ (7,143) (8,857) Transfer to surplus ..................................................... (16,000) (15,000) (15,000) -------------------------------------------- Balance at end of year ........................................... 267,719 350,480 272,458 -------------------------------------------- UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES: Balance at beginning of year ............................................ 16,243 (19,366) Unrealized holding gains on adoption of change in accounting for investment securities, net of deferred taxes ............ 17,104 Net change in the fair value of investment securities available-for-sale, net of deferred taxes .............................. (14,543) 35,609 (36,470) -------------------------------------------- Balance at end of year ........................................... 1,700 16,243 (19,366) -------------------------------------------- CAPITAL RESERVES: Balance at beginning of year ............................................ 50,000 42,857 42,571 Transfer from retained earnings ......................................... 7,143 8,857 Transfer to surplus ..................................................... (50,000) (8,571) -------------------------------------------- Balance at end of year ........................................... 50,000 42,857 -------------------------------------------- Total stockholders' equity ................................................ $ 1,262,532 $ 1,141,697 $ 1,002,423 ============================================
The accompanying notes are an integral part of the consolidated financial statements. F-39 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANPONCE CORPORATION _______________________________________________________________________________ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of BanPonce Corporation and its subsidiaries (the Corporation) conform with generally accepted accounting principles and with general practices within the banking industry. The following is a description of the more significant of these policies: CONSOLIDATION The consolidated financial statements include the accounts of BanPonce Corporation and its wholly-owned subsidiaries Vehicle Equipment Leasing Company, Inc. (Velco); BP Capital Markets, Inc.; Banco Popular de Puerto Rico (Banco Popular) and its wholly-owned subsidiaries Popular Leasing and Rental, Inc., Popular Consumer Services, Inc. and Popular Mortgage, Inc.; Popular International Bank, Inc. and its wholly-owned subsidiary BanPonce Financial Corp., including Banco Popular, FSB, Pioneer Bancorp, Inc. (Pioneer), CombanCorp (second tier subsidiaries) and Equity One, Inc. All intercompany accounts and transactions have been eliminated in consolidation. The preferred stock of Banco Popular, which was redeemed on June 30, 1994, and dividends related thereto have been treated as minority interest in the accompanying consolidated financial statements. NATURE OF OPERATIONS BanPonce Corporation is a bank holding company which provides a wide variety of financial services through its subsidiaries. Banco Popular, the Corporation's largest banking subsidiary, is a full-service commercial bank and Puerto Rico's largest banking institution, with a delivery system of 178 branches throughout Puerto Rico, 29 branches in New York, seven branches in the U.S. Virgin Islands and one branch in the British Virgin Islands. Banco Popular, Illinois, a banking subsidiary of Pioneer, operates five branches in the State of Illinois, while Banco Popular, N.A. (California), a banking subsidiary of CombanCorp, operates four branches in the State of California. In addition, Banco Popular, FSB, a federal savings bank, operates six branches in the State of New Jersey. Also, the Corporation offers consumer finance services through its subsidiaries, Equity One, Inc., Popular Mortgage, Inc. and Popular Consumer Services, Inc. Equity One, Inc. is a diversified mortgage and consumer finance company engaged in the business of granting personal and mortgage loans and providing dealer financing through 102 offices located in 28 states in the U.S. mainland. Popular Mortgage is a mortgage loan company with three offices in Puerto Rico operating under the name of Puerto Rico Home Mortgage, and Popular Consumer Services, Inc. is a small loan company with 35 offices in Puerto Rico operating under the name of Best Finance. The Corporation is also engaged in vehicle and equipment leasing, through eight offices in Puerto Rico operated by Popular Leasing and Rental, Inc. Moreover, the Corporation is engaged in investment banking and broker/dealer activities through its subsidiary BP Capital Markets, Inc. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRADING SECURITIES Financial instruments including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in dealing and other trading activities and are carried at market value. In conjunction with mortgage banking activities, the Corporation records the securitization of mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed security classified as a trading security, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 115. 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. F-40 59 _______________________________________________________________________________ INVESTMENT SECURITIES On January 1, 1994, the Corporation adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and all investments in debt securities. Those investments are classified in three categories and accounted for as follows: - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as securities held-to- maturity and reported at amortized cost. The Corporation may sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, only as a result of non-recurring, unusual events that could not have been reasonably anticipated. - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - Debt and equity securities not classified as either securities held-to-maturity or trading securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in a separate component of stockholders' equity. The initial adoption of this statement resulted in an increase in the Corporation's stockholders' equity of $17,104,000, net of deferred taxes, pertaining to the unrealized gains on securities available-for-sale. The amortization of premiums is deducted and the accretion of discounts is added to interest income based on the interest method over the outstanding period of the related securities. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale and held-to-maturity are reported separately in the statement of income. The Corporation anticipates prepayments of principal in the calculation of the effective yield and average maturity for collateralized mortgage obligations and mortgage-backed securities. RISK MANAGEMENT INSTRUMENTS The Corporation occasionally uses derivative financial instruments, such as interest rate caps and swaps, in the management of its interest rate exposure. These instruments are accounted for 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 in the statement of condition. Premiums on option contracts are amortized to interest income or interest expense over the life of such contracts. Income and expenses arising from the instruments are recorded in the category appropriate to the related asset or liability. Gains and losses related to contracts that are effective hedges are deferred and recognized in income in the same period as gains and losses on the hedged item. Amounts to be paid or received under interest rate swap agreements are recognized as interest income or expense in the periods in which they are realized. 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 lives. 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 of the period in which the change occurs. LOANS Loans are stated at the outstanding balance less unearned income and allowance for loan losses. Loan origination fees and costs incurred in the origination of new loans are deferred and amortized using the interest method over the life of the loan as an adjustment to interest yield. Unearned interest on lease financing and installment loans is recognized as income on a basis which results in approximate level rates of return over the term of the loans. Recognition of interest income on commercial and construction loans is discontinued when loans are 60 days or more in arrears on payments of principal or interest or when other factors indicate that collection of principal and interest is doubtful. Interest accrual for lease financing, conventional mortgage loans and close-end consumer loans, is ceased when loans are 90 days or more past due. 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 F-41 60 _______________________________________________________________________________ against the allowance for loan losses after becoming 120 days past due. Open-end (revolving credit) consumer loans are charged-off after becoming 180 days past due. Income is generally recognized on open-end loans until the loans are charged-off. LEASE FINANCING The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in SFAS 13, "Accounting for Leases," as amended. Aggregate rentals due over the term of the leases less unearned income, are included in finance lease contracts receivable. Unearned income is amortized using a method which results in level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to the yield. All other leases are accounted for under the operating method. Under this method, revenue is recognized as it becomes due under the terms of the agreement. ALLOWANCE FOR LOAN LOSSES The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio as well as in other credit-related balance sheet and off-balance sheet financial instruments. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, results of periodic credit reviews of individual loans and financial accounting standards. The provision for loan losses charged to current operations is based on an evaluation of the risk characteristics of the loan portfolio and the economic conditions. Loan losses are charged and recoveries are credited to the allowance for loan losses. On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS 114 addresses the accounting by creditors for impairment of certain loans. It is applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at lower of cost or fair value, leases and debt securities as defined in SFAS 115. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. SFAS 114 requires creditors to set up a valuation allowance, with a corresponding charge to the provision for loan losses for those loans considered to be impaired. The Corporation has defined impaired loans as all loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective rate, on the observable market price or, on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience. All other loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen it is consistently applied unless there is a significant change in the financial position of the borrower. Impaired loans for which the discounted cash flows, collateral value or market price equals or exceeds its carrying value do not require an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is then applied to principal. The adoption of this pronouncement had no impact on the net income for the years ended December 31, 1996 and 1995. MORTGAGE BANKING Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. Also, the Corporation is required to foreclose on loans in the event of default by the mortgagor, and to make full payment on foreclosed loans. No asset or liability is recorded by the Corporation for mortgages serviced, except for mortgage servicing rights, advances to investors and escrow balances. Mortgage servicing rights, an intangible asset, represents the cost of acquiring the contractual right to service loans for others. Mortgage loan servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected. F-42 61 _______________________________________________________________________________ On January 1, 1996, the Corporation adopted SFAS 122, "Accounting for Mortgage Servicing Rights." This statement requires that mortgage banking enterprises recognize as separate assets the rights to service mortgage loans for others, whether those servicing rights are originated or purchased. Pursuant to the provisions of SFAS 122, the total cost of mortgage loans to be sold with servicing rights retained is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights), based on their relative fair values. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. In addition, it requires mortgage banking enterprises to assess capitalized mortgage servicing rights for impairment based on the fair value of those rights. To estimate the fair value of mortgage servicing rights the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. For purposes of evaluating and measuring impairment of capitalized mortgage servicing rights, the Corporation stratifies such rights based on predominant risk characteristics of underlying loans, such as loan type, rate and term. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights per stratum exceed its estimated fair value. Impairment is recognized through a valuation allowance. Total loans serviced were $5,110,000,000 at December 31, 1996(1995-$4,610,000,000). The carrying value, estimated fair value and valuation allowance of capitalized mortgage servicing rights were $25,890,000, $32,691,000, and $65,000, respectively, at December 31, 1996. For the year ended December 31, 1996, the Corporation recognized additional income of $5,905,000 as a result of the adoption of this pronouncement. 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 the operations as realized or incurred, respectively. On January 1, 1996, the Corporation adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that 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 by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights and deferred tax assets. For the year ended December 31, 1996, the Corporation recorded an impairment loss of $700,000, as further explained in Note 8, based on the provisions of this pronouncement. 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 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 cost of disposal. Gains or losses on the sale of these properties are credited or charged to expense of operating other real estate. The costs of maintaining and operating such properties are expensed as incurred. INTANGIBLE ASSETS Intangible assets consist of goodwill and other identifiable intangible assets acquired, mainly core deposits and mortgage servicing rights. The values of core deposits, assembled work force and credit customer relationships are amortized using various methods over the periods benefitted, which range from 4 to 10 years. Goodwill represents the excess of the Corporation's cost of purchased operations over the fair value of the net assets acquired and is amortized on the straight-line basis over periods ranging from 7 to 15 years. SECURITIES SOLD/PURCHASED UNDER AGREEMENTS TO REPURCHASE/RESALE Repurchase and resale agreements are treated as financing transactions and are carried at the amounts at which the securities will be reacquired or resold as specified in the respective agreements. It is the Corporation's policy to take possession or control of securities purchased under resale agreements. 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-43 62 _______________________________________________________________________________ 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. EMPLOYEE'S RETIREMENT PLANS The Corporation has trusteed, non-contributory 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 funds 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. OTHER POSTRETIREMENT BENEFIT PLANS The Corporation 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 On January 1, 1996, the Corporation adopted SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes a fair value-based method of accounting for stock-based compensation plans. It encourages entities to adopt this method in lieu of the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. Banco Popular provides a stock-based compensation plan for its Senior Management. It is a three-year incentive plan under which shares of stock of the Corporation are granted if long-term corporate performance and objectives are met. For the year ended December 31, 1996, the Corporation recognized an expense of $837,000 related to this plan, determined on the estimated fair value of the stock. 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. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. RECLASSIFICATIONS Certain minor reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform with the 1996 presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on a consistent application of a financial components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial F-44 63 and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, except for certain provisions related with repurchase agreements, dollar-roll, securities lending, and similar transactions, which shall be effective for transfers of financial assets occurring after December 31, 1997. Management understands that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. NOTE 2 - CASH AND DUE FROM BANKS The Corporation's subsidiary banks are required by regulatory agencies to maintain average reserve balances. The amount of those reserve balances was approximately $335,676,000 at December 31, 1996 (1995 - $299,907,000). NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE: The amortized cost, gross unrealized gains and losses, approximate market value of investment securities available-for-sale (or fair value for certain investment securities where no market quotations are available), weighted average yield and related maturities as of December 31, 1996 and 1995 (1994 - only market value is present) were as follows:
1996 ---------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield ---------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 3 months): Within 1 year ............................................ $ 900,463 $2,325 $ 59 $ 902,729 5.88% After 1 to 5 years ....................................... 1,335,189 5,492 1,905 1,338,776 6.00 ---------------------------------------------------------------- 2,235,652 7,817 1,964 2,241,505 5.96 ---------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 8 months): Within 1 year ............................................ 75,256 120 46 75,330 6.39 After 1 to 5 years ....................................... 73,064 197 460 72,801 5.77 After 5 to 10 years ...................................... 155,231 113 155,344 6.84 ---------------------------------------------------------------- 303,551 430 506 303,475 6.47 ---------------------------------------------------------------- Obligations of Puerto Rico, States and political subdivisions (average maturity of 4 years and 6 months): Within 1 year ............................................ 6,832 6 8 6,830 4.64 After 1 to 5 years ....................................... 14,510 198 76 14,632 5.12 After 5 to 10 years ...................................... 12,695 93 90 12,698 5.36 After 10 years ........................................... 671 9 662 5.34 ---------------------------------------------------------------- 34,708 297 183 34,822 5.12 ---------------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 10 months): Within 1 year ............................................ 101,158 16 182 100,992 6.02 After 1 to 5 years ....................................... 304,987 37 645 304,379 6.11 After 5 to 10 years ...................................... 26,125 5 4 26,126 6.07 After 10 years ........................................... 4,593 4,593 6.43 ---------------------------------------------------------------- 436,863 58 831 436,090 6.09 ---------------------------------------------------------------- Mortgage-backed securities (average maturity of 21 years and 7 months): Within 1 year ............................................ 7,391 1 223 7,169 5.59 After 1 to 5 years ....................................... 43,695 21 1,017 42,699 5.75 After 5 to 10 years ...................................... 7,482 3 318 7,167 6.98 After 10 years ........................................... 312,901 247 1,064 312,084 6.63 ---------------------------------------------------------------- 371,469 272 2,622 369,119 6.51 ---------------------------------------------------------------- Equity securities (without contractual maturity) ............ 12,145 499 12,644 0.86 ---------------------------------------------------------------- Other (average maturity of 13 years and 2 months): Within 1 year ............................................ 203 1 204 8.19 After 5 to 10 years ...................................... 10,103 2 10,105 8.24 After 10 years ........................................... 8,050 80 7,970 6.90 ---------------------------------------------------------------- 18,356 3 80 18,279 7.65 ---------------------------------------------------------------- $3,412,744 $9,376 $6,186 $3,415,934 6.06% ----------------------------------------------------------------
F-45 64
1995 1994 ------------------------------------------------------------------ Weighted Amortized Unrealized Unrealized Market average Market cost gains losses value yield value ------------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 1 year): Within 1 year ............................................ $1,399,444 $ 5,996 $ 318 $1,405,122 6.16% $ 18,822 After 1 to 5 years ....................................... 1,038,016 11,437 494 1,048,959 5.74 530,299 ------------------------------------------------------------------ 2,437,460 17,433 812 2,454,081 5.98 549,121 ------------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 1 year and 11 months): Within 1 year ............................................ 62,496 201 20 62,677 6.62 72,748 After 1 to 5 years ....................................... 231,954 1,258 66 233,146 5.72 80,914 After 5 to 10 years ...................................... 1,239 7 1,232 6.23 After 10 years ........................................... 16,281 ------------------------------------------------------------------ 295,689 1,459 93 297,055 5.91 169,943 ------------------------------------------------------------------ Obligations of Puerto Rico, States and political subdivisions (average maturity of 2 years and 10 months): Within 1 year ............................................ 7,072 19 13 7,078 6.34 4,720 After 1 to 5 years ....................................... 16,194 238 127 16,305 5.19 16,202 After 5 to 10 years ...................................... 3,954 212 4,166 7.83 2,336 ------------------------------------------------------------------ 27,220 469 140 27,549 5.87 23,258 ------------------------------------------------------------------ Collateralized mortgage obligations (average maturity of 2 years and 5 months): Within 1 year ............................................ 35,526 33 166 35,393 6.07 4,280 After 1 to 5 years ....................................... 74,829 18 329 74,518 6.35 45,727 After 5 to 10 years ...................................... 2,337 2 2,339 6.43 481 After 10 years ........................................... 5,088 5,088 6.35 ------------------------------------------------------------------ 117,780 53 495 117,338 6.27 50,488 ------------------------------------------------------------------ Mortgage-backed securities (average maturity of 19 years and 5 months): Within 1 year ............................................ 11,747 4 159 11,592 5.64 1,324 After 1 to 5 years ....................................... 50,382 19 556 49,845 5.68 11,445 After 5 to 10 years ...................................... 7,503 147 7,356 5.89 5,917 After 10 years ........................................... 199,053 681 547 199,187 6.79 8,720 ------------------------------------------------------------------ 268,685 704 1,409 267,980 6.50 27,406 ------------------------------------------------------------------ Equity securities (without contractual maturity) ............ 21,759 6,159 27,918 2.16 15,228 ------------------------------------------------------------------ Other (average maturity of 8 years and 11 months): Within 1 year ............................................ 90 After 1 to 5 years ....................................... 3,608 After 5 to 10 years ...................................... 10,000 10,000 8.25 After 10 years ........................................... 8,053 8,053 6.90 84 ------------------------------------------------------------------ 18,053 18,053 7.65 3,782 ------------------------------------------------------------------ $3,186,646 $26,277 $2,949 $3,209,974 6.01% $839,226 ==================================================================
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 aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 1996, by contractual and estimated maturity, are shown below:
Amortized Cost Market Value ---------------------------- (In thousands) Within 1 year ............... $1,091,303 $1,093,254 After 1 to 5 years .......... 1,771,445 1,773,287 After 5 to 10 years ......... 211,636 211,440 After 10 years .............. 326,215 325,309 -------------------------- Total ............... 3,400,599 3,403,290 Without contractual maturity.................. 12,145 12,644 -------------------------- Total investments securities available-for-sale ....... $3,412,744 $3,415,934 ==========================
F-46 65 Proceeds from the sale of investment securities available-for-sale during 1996 were $2,896,060,000 (1995 - $286,045,000; 1994 - $293,712,000). Gross realized gains and losses on those sales during the year were $8,504,000 and $5,440,000, respectively (1995 - $6,284,000 and $916,000; 1994 - $1,159,000 and $887,000). The basis on which cost was determined in computing the realized gains and losses was the specific identification method. NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY: The amortized cost, gross unrealized gains and losses, approximate market value of investment securities held-to-maturity (or fair value for certain investment securities where no market quotations are available), weighted average yield and related maturities as of December 31, 1996 and 1995 (1994 - only amortized cost is presented) were as follows:
1996 ---------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield ---------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 6 months): Within 1 year ............................................ $ 618,934 $ 590 $ 183 $ 619,341 5.83% ---------------------------------------------------------------- 618,934 590 183 619,341 5.83 ---------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 5 months): Within 1 year ............................................ 119,701 107 119,594 6.17 After 1 to 5 years ....................................... 20,000 525 19,475 3.50 ---------------------------------------------------------------- 139,701 632 139,069 5.78 ---------------------------------------------------------------- Obligations of Puerto Rico, States and political subdivisions (average maturity of 2 years and 11 months): Within 1 year ............................................ 98,073 52 56 98,069 3.32 After 1 to 5 years ....................................... 23,993 704 63 24,634 7.33 After 5 to 10 years ...................................... 11,839 624 12,463 8.14 After 10 years ........................................... 17,397 447 17,844 8.95 ---------------------------------------------------------------- 151,302 1,827 119 153,010 4.98 ---------------------------------------------------------------- Collateralized mortgage obligations (average maturity of 1 year and 6 months): Within 1 year ............................................ 93,077 37 522 92,592 5.43 After 1 to 5 years ....................................... 59,607 259 364 59,502 6.13 After 5 to 10 years ...................................... 4,582 15 8 4,589 6.24 ---------------------------------------------------------------- 157,266 311 894 156,683 5.72 ---------------------------------------------------------------- Mortgage-backed securities (average maturity of 4 years and 3 months): Within 1 year ............................................ 9,181 1 37 9,145 7.53 After 1 to 5 years ....................................... 27,813 3 114 27,702 7.52 After 5 to 10 years ...................................... 16,004 2 71 15,935 7.51 After 10 years ........................................... 2,730 74 2,656 7.17 ---------------------------------------------------------------- 55,728 6 296 55,438 7.50 ---------------------------------------------------------------- Equity securities (without contractual maturity) .................................................. 61,407 61,407 6.06 ---------------------------------------------------------------- Other (average maturity of 5 years and 9 months): Within 1 year ............................................ 250 250 7.50 After 1 to 5 years ....................................... 6,145 5 6,150 2.78 After 5 to 10 years ...................................... 4,197 4,197 7.82 After 10 years ........................................... 2,136 40 2,096 5.31 ---------------------------------------------------------------- 12,728 5 40 12,693 4.97 ---------------------------------------------------------------- $1,197,066 $2,739 $2,164 $1,197,641 5.78% ================================================================
F-47 66
- ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 ----------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average Amortized cost gains losses value yield cost ----------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 4 months): Within 1 year ................................... $ 301,463 $ 3,093 $ 304,556 7.09% $ 875,346 After 1 to 5 years .............................. 623,703 5,289 628,992 6.26 866,363 ----------------------------------------------------------------------- 925,166 8,382 933,548 6.53 1,741,709 ----------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 1 year and 6 months): Within 1 year ................................... 111,655 After 1 to 5 years .............................. 122,978 27 $1,011 121,994 5.30 207,647 After 5 to 10 years ............................. 3,525 After 10 years .................................. 22,459 ----------------------------------------------------------------------- 122,978 27 1,011 121,994 5.30 345,286 ----------------------------------------------------------------------- Obligations of Puerto Rico, States and political subdivisions (average maturity of 3 years and 2 months): Within 1 year ................................... 125,983 80 24 126,039 3.67 144,588 After 1 to 5 years .............................. 34,578 1,222 56 35,744 7.56 37,417 After 5 to 10 years ............................. 12,179 982 13,161 8.51 15,764 After 10 years .................................. 22,455 813 23,268 9.17 21,695 ----------------------------------------------------------------------- 195,195 3,097 80 198,212 5.29 219,464 ----------------------------------------------------------------------- Collateralized mortgage obligations (average maturity of 3 years and 1 month): Within 1 year ................................... 150,960 85 1,023 150,022 5.11 141,492 After 1 to 5 years .............................. 120,345 316 1,080 119,581 5.57 278,942 After 5 to 10 years ............................. 14,058 153 26 14,185 6.57 40,348 After 10 years .................................. 109 1 110 6.35 1,000 ----------------------------------------------------------------------- 285,472 555 2,129 283,898 5.38 461,782 ----------------------------------------------------------------------- Mortgage-backed securities (average maturity of 4 years): Within 1 year ................................... 11,694 311 12,005 7.56 14,676 After 1 to 5 years .............................. 32,965 875 2 33,838 7.54 74,712 After 5 to 10 years ............................. 17,877 469 2 18,344 7.48 32,296 After 10 years .................................. 4,111 74 13 4,172 7.15 13,780 ----------------------------------------------------------------------- 66,647 1,729 17 68,359 7.50 135,464 ----------------------------------------------------------------------- Equity securities (without contractual maturity) ... 43,558 43,558 6.80 40,127 ----------------------------------------------------------------------- Other (average maturity of 11 years and 11 months): Within 1 year ................................... 250 After 1 to 5 years .............................. 6,145 17 6,162 2.80 6,145 After 5 to 10 years ............................. 4,027 4,027 7.90 3,527 After 10 years .................................. 2,156 19 2,175 5.58 2,157 ----------------------------------------------------------------------- 12,328 36 12,364 4.95 12,079 ----------------------------------------------------------------------- $1,651,344 $13,826 $3,237 $1,661,933 6.13% $2,955,911 =======================================================================
The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 1996, by contractual and estimated maturity, are shown below:
Amortized cost Market value ------------------------------- (In thousands) Within 1 year .............. $ 939,216 $ 938,991 After 1 to 5 years ......... 137,558 137,463 After 5 to 10 years ........ 36,622 37,184 After 10 years ............. 22,263 22,596 ---------------------------- Total .............. 1,135,659 1,136,234 Without contractual maturity ................. 61,407 61,407 ---------------------------- Total investment securities held-to-maturity ......... $1,197,066 $1,197,641 ============================
F-48 67 In November 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investment in Debt and Equity Securities." In conjunction with the issuance of this Special Report, the FASB provided a one-time "window" to reclassify securities from the held-to-maturity portfolio to available-for-sale or trading before January 1, 1996, without calling into question the intent to hold other debt securities to maturity. As a result of this window, in December 1995, the Corporation transferred $1,323,000,000 from securities held-to-maturity to available-for-sale. During 1996, investment securities held-to-maturity with an amortized cost of $13,603,000 were called by the issuer or sold due to a significant deterioration in the issuer's creditworthiness. Proceeds from the sale of those securities were $2,652,000 (1994 - $13,555,000). Gross realized gains and losses on those sales were $30,000 and $0 (1994 - $189,000 and $237,000), respectively. Investments in obligations that are payable from and secured by the same source of revenue or taxing authority and that exceeded 10 percent of stockholders' equity were as follows:
Percent of Amortized stockholders Market cost equity value --------------------------------- (Dollars in thousands) Issuer: Government of Puerto Rico, its agencies and instrumentalities: December 31, 1996 ............... $151,203 12% $152,933 December 31, 1995 ............... 195,065 17 198,082
NOTE 5 - PLEDGED ASSETS: At December 31, 1996, investment securities and loans amounting to $2,788,401,000 (1995 - $2,920,220,000; 1994 - $2,244,617,000) are pledged to secure public and trust deposits and securities and mortgages sold under agreements to repurchase. NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, was as follows:
1996 1995 ------------------------- (In thousands) Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies ............................... $ 83,864 $ 119,730 Guaranteed by the Commonwealth of Puerto Rico .... 67,497 72,853 Commercial loans secured by real estate .......... 1,030,383 910,673 Residential conventional mortgages ............... 2,295,723 2,156,388 Construction and land development ................ 181,433 146,430 Consumer ......................................... 536,527 448,561 ------------------------- 4,195,427 3,854,635 Financial institutions ........................... 90,345 97,694 Commercial, industrial and agricultural .......... 2,390,267 1,931,924 Lease financing .................................. 639,945 620,646 Consumer for household, credit cards and other consumer expenditures .................... 2,344,001 2,159,126 Other ............................................ 194,926 219,938 ------------------------- $9,854,911 $8,883,963 =========================
As of December 31, 1996, loans on which the accrual of interest income had been discontinued amounted to $145,408,000 (1995 - $144,482,000; 1994 - $94,263,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $7,696,000 (1995 - $7,135,000; 1994 - $5,441,000). In addition, there are $3,308,000 of renegotiated loans still accruing interest at December 31, 1996 (1995 - $2,742,000; 1994 - $2,982,000). Included in the non-accruing loans as of December 31, 1996, were $16,320,000 (1995 - $14,827,000; 1994 - $12,179,000) in consumer loans. F-49 68 At December 31, the recorded investment in loans that were considered impaired under SFAS 114 and the related disclosures are shown below:
December 31, 1996 1995 ------------------------ (In thousands) Impaired loans with a related allowance........................ $59,447 $38,476 Impaired loans that do not require allowance................... 36,700 47,837 ------------------------ Total impaired loans................................... $96,147 $86,313 ======================== Allowance for impaired loans................................... $17,777 $ 8,093 ======================== Impaired loans measured based on fair value of collateral...... $36,700 $43,095 Impaired loans measured based on discounted cash flows......... 59,447 43,218 ------------------------ $96,147 $86,313 ======================== Average balance of impaired loans during the year.............. $88,165 $90,284 ======================== Interest income recognized on impaired loans during the year... $ 3,526 $ 3,187 ========================
The changes in the allowance for loan losses for the year ended December 31, were as follows:
1996 1995 1994 ---------------------------------- (In thousands) Balance at beginning of year........... $ 168,393 $153,798 $133,437 Reserves acquired...................... 402 3,473 Provision for loan losses.............. 88,839 64,558 53,788 Recoveries............................. 35,901 28,744 30,044 Loans charged-off...................... (107,961) (78,707) (66,944) ---------------------------------- Balance at end of year................. $ 185,574 $168,393 $153,798 ==================================
The components of the net financing leases receivable at December 31, were:
1996 1995 --------------------------- (In thousands) Total minimum lease payments................... $ 495,820 $ 481,431 Estimated residual value of leased property.... 141,561 136,717 Deferred origination costs..................... 2,564 2,498 Less - Unearned financing income....... (123,944) (119,453) --------------------------- Net minimum lease payments..................... 516,001 501,193 Less - Allowance for loan losses....... (3,415) (6,252) --------------------------- $ 512,586 $ 494,941 ===========================
Estimated residual value is generally established at amounts expected to be sufficient to cover the Corporations investment. At December 31, 1996, future minimum lease payments are expected to be received as follows:
(In thousands) -------------- 1997........................... $178,878 1998........................... 139,657 1999........................... 97,852 2000........................... 55,932 2001 and thereafter............ 23,501 -------- $495,820 ========
F-50 69 NOTE 7 - RELATED PARTY TRANSACTIONS: The Corporation grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
Officers Directors Total ------------------------------- (In thousands) Balance at January 1, 1995............. $ 4,317 $ 131,339 $ 135,656 New loans.............................. 180 258,259 258,439 Payments............................... (2,150) (245,250) (247,400) ------------------------------- Balance at December 31, 1995........... 2,347 144,348 146,695 New loans.............................. 839 184,384 185,223 Payments............................... (211) (200,345) (200,556) ------------------------------- Balance at December 31, 1996........... $ 2,975 $ 128,387 $ 131,362 ===============================
These loans have been consummated on terms no more favorable than those that would have been obtained if the transaction had been with unrelated parties. NOTE 8 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life in years 1996 1995 ---------------------------------------- (In thousands) Land.................................................. $ 47,315 $ 47,196 --------------------------- Buildings............................................. 15-50 208,317 197,747 Equipment............................................. 3-10 280,945 238,547 Leasehold improvements................................ Various 53,169 50,423 --------------------------- 542,431 486,717 Less - Accumulated depreciation and amortization...... 252,393 224,543 --------------------------- 290,038 262,174 --------------------------- Construction in progress.............................. 19,344 15,833 --------------------------- $356,697 $325,203 ===========================
Depreciation and amortization of premises and equipment for the year was $48,481,000 (1995 - $44,448,000; 1994 - $38,654,000) of which $9,943,000 (1995 - $9,261,000; 1994 - $8,497,000) was charged to occupancy expense and $38,538,000 (1995 - $35,187,000; 1994 - $30,157,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $16,193,000 (1995 - $15,384,000; 1994 - $15,631,000). As a result of the adoption of SFAS 121, during 1996, the Corporation recorded an impairment loss on a building of approximately $700,000, based on its appraised value, which was included in other operating income in the consolidated statement of income. NOTE 9- DEPOSITS: Total interest bearing deposits as of December 31, consisted of:
1996 1995 --------------------------- (In thousands) Savings deposits: Savings accounts...................... $3,201,367 $2,998,529 NOW and money market accounts......... 1,173,496 1,105,467 --------------------------- 4,374,863 4,103,996 --------------------------- Certificates of deposit: Under $100,000........................ 1,884,135 1,688,717 $100,000 and over..................... 2,173,573 2,062,291 --------------------------- 4,057,708 3,751,008 --------------------------- $8,432,571 $7,855,004 ===========================
F-51 70 NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The following table summarizes certain information on federal funds purchased and securities sold under agreements to repurchase as of December 31:
1996 1995 1994 -------------------------------------------- (Dollars in thousands) Federal funds purchased........................ $ 158,336 $ 307,506 $ 332,700 Securities sold under agreements to repurchase. 1,717,129 2,693,372 1,105,338 -------------------------------------------- Total amount outstanding....................... $1,875,465 $3,000,878 $1,438,038 ============================================ Maximum aggregate balance outstanding at any month-end.............................. $2,922,611 $3,000,878 $1,444,148 ============================================ Average daily aggregate balance outstanding.... $2,521,929 $2,016,273 $1,120,762 ============================================ Weighted average interest rate: For the year................... 5.12% 5.43% 3.81% At December 31................. 5.16 5.61 5.27
NOTE 11 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consisted of:
1996 1995 ---------------------- (In thousands) Advances under revolving lines of credit amounting to $240,000,000 (1995 - $293,000,000) with fixed interest rates ranging from 5.55% to 6.88% at December 31, 1996 (1995 - 5.88% to 6.44%)....................................... $ 65,000 $ 34,400 Commercial paper with various maturities until June 1997 at rates ranging from 5.05% to 5.75% (1995 - 5.55% to 6.44%)........... 290,091 174,728 Term notes maturing in 1997, paying interest quarterly at floating interest rates ranging from 0.25% to 0.50% (1995 - 0.45%) over the 3-month LIBOR rate (LIBOR rate at December 31, 1996 was 5.56%; 1995 - 5.63%).................... 189,961 14,984 Term note maturing in 1997, paying interest quarterly at floating interest rate of 0.125% over the 6-month LIBOR rate (LIBOR rate at December 31, 1996 was 5.60%)................... 10,000 Term notes maturing in 1997, paying interest semiannually at rates ranging from 5.33% to 8.32%................................... 136,952 Term funds purchased with maturities until October 1997 at rates ranging from 5.29% to 5.79%................................... 652,000 Term notes maturing in 1996, paying interest quarterly at rates ranging from 0.10% to 0.125% over the 3-month LIBOR rate (LIBOR rate at December 31, 1995 was 5.63%)................... 85,000 Term notes due in 1996 paying interest semiannually at fixed rates ranging from 5.17% to 7.70%................................... 84,946 Advances under revolving lines of credit amounting to $214,000,000 with fixed interest rates ranging from 6.85% to 7.41% at December 31, 1995.......................................... 34,600 Securities sold not yet purchased..................................... 59,315 25,444 Others................................................................ 687 605 ---------------------- $1,404,006 $ 454,707 ======================
The weighted average interest rate of other short-term borrowings at December 31, 1996 was 5.75% (1995 - 5.53%; 1994 - 4.83%). The maximum aggregate balance outstanding at any month-end was approximately $1,404,006,000 (1995 - $773,366,000; 1994 - $869,505,000). The average aggregate balance outstanding during the year was approximately $883,739,000 (1995 - $529,111,000; 1994 - $738,005,000). The weighted average interest rate during the year was 6.27% (1995 - 6.05%; 1994 - 4.75%). F-52 71 NOTE 12 - NOTES PAYABLE: Notes payable outstanding at December 31, consisted of the following:
1996 1995 ------------------ (In thousands) Term notes with maturities ranging from 1998 through 2005 paying interest semiannually at fixed rates ranging from 5.40% to 8.41% (1995 - 5.33% to 8.41%).................... $575,360 $367,492 Term notes with maturities ranging from 1998 through 2000 paying interest quarterly at rates ranging from 0.125% to 0.75% (1995 - 0.125% to 0.75%) over the 3-month LIBOR rate and 3-month US Treasury Bill rate (LIBOR and US Treasury Bill rates at December 31, 1996 were 5.56% and 5.17%, respectively; 1995 - 5.63% and 5.08%, respectively).................................................. 117,356 254,146 Promissory notes with maturities ranging from 1998 through 2005 with fixed interest rates ranging from 4.51% to 6.35%................................................. 243,700 83,700 Term notes maturing in 1998 paying interest monthly at LIBOR less 3 basis points with a quarterly reset of the interest rate.............................................. 25,000 25,000 Term notes maturing in 1999 paying interest monthly at a fixed rate of 5.92%....................................... 25,000 Mortgage notes and other debt with fixed rates and terms............... 297 90 ------------------ $986,713 $730,428 ==================
NOTE 13 - SENIOR DEBENTURES: Senior debentures at December 31, 1996, consisted of a $30,000,000 obligation issued by the Corporation with interest at a fixed rate of 8.25%, which matured in January 1997. The senior debentures contained various covenants which, among others, restricted the payment of dividends. These debentures prohibited the Corporation from paying dividends or making any other distributions with respect to the Corporations common stock if such aggregate distribution exceeded $50,000,000 plus 50% of consolidated net income (or minus 100% of consolidated net loss), computed on a cumulative basis from January 1, 1992 to the date of payment of any such dividends or other distributions or if an event of default had occurred. NOTE 14 - SUBORDINATED NOTES: Subordinated notes at December 31, consisted of the following:
1996 1995 -------------------- (In thousands) Subordinated notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semiannually at 6.75%.......................... $125,000 $125,000 -------------------- Subordinated notes issued by Banco Popular on March 29, 1989, which matured on June 15, 1996, with interest payable quarterly and consisting of: 8.875% Fixed Rate Notes Series A....................... 15,000 8.6875% Fixed Rate Note Series B....................... 15,000 Floating Rate Notes Series A with interest payable at 88% of LIBID rate.............................. 19,000 Floating Rate Notes Series B with interest payable at 86% of LIBID rate.............................. 1,000 -------------------- 50,000 -------------------- $125,000 $175,000 ====================
F-53 72 At December 31, 1995 the LIBID rate was 5.50%. 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. The notes issued by Banco Popular were subordinated to the rights of Banco Popular's depositors and other creditors and required Banco Popular to set aside from retained earnings an amount equal to the principal payment on each note to be used solely to increase capital. The capital reserve account was established to comply with the requirements of the subordinated notes. Banco Popular transferred to capital reserves from the retained earnings account $7,143,000 and $8,857,000 during 1995 and 1994, respectively, as a result of this requirement. On June 15, 1996, at the notes repayment date, the $50,000,000 balance in capital reserves was transferred to the surplus account. In addition, during 1994, $8,571,000 were transferred from capital reserves to surplus upon prepayment of an 8.50% note originally maturing in 1996. NOTE 15 - LONG-TERM DEBT MATURITY REQUIREMENTS: The aggregate amounts of maturities of notes payable, senior debentures and subordinated notes were as follows:
Notes Senior Subordinated Year payable debentures notes Total ------------------------------------------------------------------------------- (In thousands) 1997................... $ 45 $30,000 $ 30,045 1998................... 218,969 218,969 1999................... 180,838 180,838 2000................... 209,667 209,667 2001................... 158,994 158,994 Later years............ 218,200 $125,000 343,200 ------------------------------------------------------- Total $986,713 $30,000 $125,000 $1,141,713 =======================================================
NOTE 16 - PREFERRED STOCK OF BANCO POPULAR: Banco Popular 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. On June 30, 1994, Banco Popular redeemed at par value the 110,000 shares of Treasury Indexed Preferred Stock Series A (TIPS) then outstanding. NOTE 17 - STOCKHOLDER'S EQUITY: On April 26, 1996, the Corporation's Board of Directors authorized a stock split effected in the form of a dividend of one share of stock for each share outstanding, effective July 1, 1996. As a result of the split, 33,000,590 shares were issued and $198,004,000 were transferred from retained earnings to common stock. All per share data included herein has been adjusted to reflect the stock split. On December 15, 1994, the Board of Directors of the Corporation approved a stock repurchase program which allows the Corporation to repurchase in the open market, at such times and prices as market conditions shall warrant, up to one million shares of its outstanding common stock. No stock has been repurchased under this program. 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 1996, 191,236 shares (1995 - 221,016; 1994 - 211,412), equivalent to $4,135,000 (1995 - $3,500,000; 1994 - $3,196,000) 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. One June 27, 1994, the Corporation issued 4,000,000 shares of Series A preferred stock. These shares are non-convertible and are redeemable at the option of the Corporation on or after June 30, 1998. The redemption price per share is $26.25 from June 30, 1998 through June 29, 1999, $26.00 from June 30, 1999 through June 29, 2000, $25.75 from June 30, 2000 through June 29, 2001, $25.50 from June 30, 2001 through June 29, 2002 and $25.00 from June 30, 2002 and thereafter. Dividends on the Series A preferred stock are non-cumulative and are payable monthly at the annual rate of 8.35% of the liquidation preference of $25.00 per share, or $0.173958 per share per month. F-54 73 The Corporation's average number of common shares outstanding used in the computation of net income per common share was 66,022,312 (1995 - 65,816,300; 1994 - 65,596,486). During the year, cash dividends of $0.69 (1995 - $0.58; 1994 - $0.50) per common share outstanding amounting to $45,557,000 (1995 - $37,846,000; 1994 - $32,796,000) were declared. In addition, dividends declared on preferred stock amounted to $8,350,000 (1995 - $8,350,000; 1994 - $4,245,000). NOTE 18 - REGULATORY CAPITAL REQUIREMENTS The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification 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, 1996, the Corporation exceeded all capital adequacy requirements to which it is subject. As of December 31, 1996, the Corporation was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. The Corporations actual and required ratios and amounts of total risk-based capital, Tier I risk-based capital and Tier I leverage, as of December 31, were as follows:
Regulatory requirements --------------------------------------- To be well capitalized under prompt Actual For capital corrective action adequacy purposes provisions ------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------ As of December 31, 1996: (In thousands) Total Capital (to Risk-Weighted Assets) Consolidated .................... $1,367,478 14.18% $771,505 8% $964,382 10% Banco Popular ................... 1,017,755 12.57 647,624 8 809,530 10 Banco Popular, FSB .............. 117,989 16.14 58,480 8 73,100 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .................... $1,121,128 11.63% $385,753 4% $578,629 6% Banco Popular ................... 915,825 11.31 323,812 4 485,718 6 Banco Popular, FSB .............. 108,751 14.88 29,240 4 43,860 6 Tier I Capital (to Average Assets): Consolidated .................... $1,121,128 6.71% $501,357 3% $835,595 5% Banco Popular ................... 915,825 6.65 412,944 3 688,239 5 Banco Popular, FSB .............. 108,751 8.99 36,300 3 60,500 5
F-55 74
Regulatory requirements --------------------------------------- To be well capitalized under prompt Actual For capital corrective action adequacy purposes provisions ------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------ As of December 31, 1995: (In thousands) Total Capital (to Risk-Weighted Assets): Consolidated .................... $1,234,163 14.65% $673,996 8% $842,495 10% Banco Popular ................... 899,085 13.01 553,041 8 691,302 10 Banco Popular, FSB .............. 84,388 15.48 43,615 8 54,518 10 Tier I Capital (to Risk-Weighted Assets): Consolidated .................... $1,003,072 11.91% $336,998 4% $505,497 6% Banco Popular ................... 811,895 11.74 276,521 4 414,781 6 Banco Popular, FSB .............. 77,502 14.22 21,807 4 32,711 6 Tier I Capital (to Average Assets): Consolidated .................... $1,003,072 6.66% $451,813 3% $753,022 5% Banco Popular ................... 811,895 6.45 377,457 3 629,094 5 Banco Popular, FSB .............. 77,502 7.90 29,413 3 49,022 5
NOTE 19 - INTEREST ON INVESTMENTS: Interest on investments consisted of the following:
1996 1995 1994 ---------------------------------- (In thousands) Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell ......... $ 45,697 $ 22,823 $ 4,858 Time deposits with other banks ............................... 776 165 300 Other ........................................................ 224 89 28 ---------------------------------- $ 46,697 $ 23,077 $ 5,186 ================================== Investment securities: U.S. Treasury securities ..................................... $189,300 $167,657 $136,178 Obligations of other U.S. Government agencies and corporations ................. 43,157 35,697 29,088 Obligations of Puerto Rico, States and political subdivisions ......................... 10,902 12,948 12,132 Collateralized mortgage obligations .......................... 26,265 26,435 24,525 Mortgage-backed securities ................................... 6,456 10,892 9,485 Other ........................................................ 4,530 6,312 3,203 ---------------------------------- $280,610 $259,941 $214,611 ==================================
Interest income on investment securities for the year ended December 31, 1996, includes tax exempt interest of $229,958,000 (1995 - $202,209,000; 1994 - $175,795,000). Exempt interest relates to obligations of the U.S., States and Puerto Rico governments. NOTE 20 - EMPLOYEE BENEFITS: Pension plan: All regular employees of Banco Popular are covered by a non-contributory 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, 1996, plan assets consisted primarily of U.S. Government obligations, high grade corporate bonds and listed F-56 75 stocks, including 2,836,430 shares (1995 - 2,836,430) of the Corporation with a market value of approximately $95,730,000 (1995 - $54,956,000). Dividends paid on shares of the Corporation held by the plan during 1996 amounted to $1,957,000 (1995 - $1,560,000). The following table sets forth the plans funded status and amounts recognized in the consolidated financial statements at December 31:
1996 1995 ------------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ............................... $(172,272) $(189,593) Non-vested benefits ........................... (38,117) (7,283) ------------------------- Accumulated benefit obligation ........................ (210,389) (196,876) Effect of projected future compensation levels ........ (32,773) (33,578) ------------------------- Projected benefit obligation .......................... (243,162) (230,454) Plan assets at fair market value ...................... 293,362 228,115 ------------------------- Plan assets in excess of (less than) projected benefit obligation ............................ 50,200 (2,339) Unrecognized net (gain) loss from past experience different from that assumed and effect of changes in assumptions .......... (27,101) 26,673 Unrecognized prior service cost ....................... (2,620) (2,866) Unrecognized initial net assets ....................... (20,547) (23,007) ------------------------- Accrued pension cost .................................. $ (68) $ (1,539) =========================
Net pension cost for the year ended December 31, included the following components:
1996 1995 1994 ------------------------------------ (In thousands) Service costs - benefits earned during the period ..... $ 9,860 $ 6,791 $ 8,359 Interest cost on projected benefit obligation ........ 16,645 14,798 13,627 Actual (return) loss on plan assets ................... (68,965) (48,665) 6,384 Net amortization and deferral ......................... 46,273 29,257 (27,066) ------------------------------------ Net pension costs ..................................... 3,813 2,181 1,304 Cost of early retirement window ....................... 3,851 ------------------------------------ Total pension cost ............................ $ 3,813 $ 6,032 $ 1,304 ====================================
At December 31, 1996, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.50% (1995 - 7.25%; 1994 - 8.75%). Rates of future compensation levels reflected a 4% inflation assumption plus a merit component ranging from 0.5% to 4.5% for 1996, 1995 and 1994. The expected long-term rate of return on assets used in the computation was 9% for 1996, 1995 and 1994. In 1995, Banco Popular implemented a voluntary early retirement plan ("window") for employees meeting certain eligibility requirements. The plan was available from January 1, 1995 until May 1, 1995, and had a total cost of $4,539,000, including pension and postretirement benefit costs. Retirement and savings plan: The Corporation also provides contributory retirement and savings plans pursuant to sections 165(e) of the Puerto Rico Internal Revenue Code and section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of BP Capital, Equity One, Pioneer, Popular Consumer, Popular Leasing, Popular Mortgage and Velco. Employer contributions are determined based on specific provisions of each plan. The cost of providing this benefit in 1996 was $2,163,000 (1995 - $1,247,000; 1994 - $558,000). The Corporation also established in 1995 a contributory savings plan available to employees of Banco Popular. 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 $863,000 in 1996 (1995 - $621,000). The savings plan held 368,117 (1995 - 140,970) shares of common stock of the Corporation with a market value of approximately $12,424,000 at December 31, 1996 (1995 $2,731,000). F-57 76 Postretirement health care benefits: In addition to providing pension benefits, Banco Popular provides certain health care benefits for retired employees. Substantially all of the employees of Banco Popular who are eligible to retire under the pension plan, and provided they reach retirement age while working for Banco Popular, may become eligible for these benefits. The actual disbursement for providing these benefits during 1996 amounted to approximately $2,556,000 (1995 - $2,152,000; 1994 - $2,072,000). The components of net postretirement benefit cost for the year ended December 31, were as follows:
1996 1995 1994 ----------------------------- (In thousands) Service cost-benefits attributable to service during the period ............................. $ 3,584 $2,658 $3,028 Interest cost on accumulated postretirement benefit obligation ........................... 5,719 5,435 4,277 Net amortization and deferral ......................... 1,230 597 585 ----------------------------- Net postretirement benefit cost ............... 10,533 8,690 7,890 Cost of early retirement window ....................... 688 ----------------------------- Total postretirement benefit cost ............. $10,533 $9,378 $7,890 =============================
The status of the Corporations unfunded postretirement benefit plan at December 31, was as follows:
1996 1995 ----------------------- (In thousands) Actuarial present value of expected postretirement benefit obligation: Retirees ................................................ $(26,929) $(23,419) Fully eligible active plan participants ................. (12,569) (16,507) Other active plan participants .......................... (44,470) (45,745) ----------------------- Accumulated postretirement benefit obligation ................... (83,968) (85,671) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions .................................. 14,981 24,226 Unrecognized prior service cost ................................. 5,376 5,811 ----------------------- Accrued postretirement benefit cost ............................. $(63,611) $(55,634) =======================
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1996 was 7.50% (1995 - 7.25%). The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation at December 31, 1995 was 11%, gradually decreasing to 5% by the year 2001 and remaining at that level thereafter. A one-percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $14,369,000 and the sum of the service and interest cost in 1996 by $1,864,000. Profit sharing plan: Banco Popular 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 amounted to $22,859,000 (1995 - $19,577,000; 1994 - $19,967,000). Long-term incentive plan: Banco Popular established in 1994 a long-term incentive plan for its senior management. Under this plan, each January 1st the Board of Directors awards senior management a specified number of shares of common stock of the Corporation contingent upon reaching some pre-defined performance measures over periods of three years. The dividends attributable to these shares are also part of the award. The final number of shares awarded is subject to a factor based on the level of attainment. Banco Popular applied APB Opinion 25 and related Interpretations in accounting for the plans in 1994 and 1995. Accordingly, compensation expense was recognized based on the prevailing stock price until measurement date. The measurement date is the date when the ultimate number of shares to be granted is known. F-58 77 The 1996 awards are being accounted for under the provisions of SFAS 123, therefore, compensation cost is determined based on the fair value of the stock at the grant date. The compensation expense related to each award is recognized when probable, based on the best estimate of the outcome of the performance condition, on a straight-line basis over the vesting period. The compensation cost recognized for the performance-based plan was $837,000 in 1996 (1995 - $284,000; 1994 - $135,000). Puerto Rico benefit restoration plan: Banco Popular also has a non-qualified unfunded supplementary pension and profit sharing plan for those employees whose compensation exceeds the limits established by ERISA. The following table sets forth the amounts recognized in the consolidated financial statements at December 31, for the benefit restoration plan:
1996 1995 --------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ............................... $ (324) $ (83) Non-vested benefits ........................... (1) --------------------- Accumulated benefit obligation ................ (324) (84) Effect of projected future compensation levels ........ (1,849) (1,130) --------------------- Projected benefit obligation .................. (2,173) (1,214) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions .......... 847 164 Unrecognized prior service cost ....................... 624 678 --------------------- Accrued supplementary pension cost .................... $ (702) $ (372) =====================
Net supplementary pension cost for the year ended December 31, included the following components:
1996 1995 1994 ----------------------- (In thousands) Service costs - benefits earned during the period ................... $172 $109 $ 62 Interest cost on projected benefit obligation .......................... 94 69 43 Net amortization and deferral ............... 64 53 36 ----------------------- Net supplementary pension cost .............. $330 $231 $141 =======================
F-59 78 NOTE 21 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 1996, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
Minimum Sublease Year payments rentals Net -------------------------------------------------------- (In thousands) 1997................ $11,857 $ 711 $11,146 1998................ 10,672 656 10,016 1999................ 9,606 354 9,252 2000................ 8,473 231 8,242 2001................ 7,062 195 6,867 Later years ........ 51,892 565 51,327 ------------------------------- $99,562 $ 2,712 $96,850 ===============================
Total rental expense for the year ended December 31, 1996, was $21,196,000 (1995 - $18,037,000; 1994 - $16,705,000). NOTE 22 - INCOME TAX: The components of income tax expense for the years ended December 31, are summarized below. Included in these amounts are income taxes related to the gain on securities transactions of $1,480,000 in 1996 (1995 - $1,981,000; 1994 - $64,000).
1996 1995 1994 ------------------------------------- (In thousands) Current income tax expense: Puerto Rico .............................. $ 84,668 $ 58,067 $ 31,461 Federal and States ....................... 18,192 9,624 6,235 ------------------------------------- Subtotal ......................... 102,860 67,691 37,696 ===================================== Deferred income tax expense (benefit): Puerto Rico .............................. (26,769) (9,501) 11,606 Federal and States ....................... (5,214) 1,006 (759) Adjustment for enacted changes in income tax laws ..................... 573 1,500 ------------------------------------- Subtotal ......................... (31,983) (7,922) 12,347 ===================================== Total income tax expense ......... $ 70,877 $ 59,769 $ 50,043 =====================================
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 were as follows:
1996 1995 1994 ------------------------------------------------------------------ % of pre-tax % of pre-tax % of pre-tax Amount Income Amount Income Amount Income ------------------------------------------------------------------ (Dollars in thousands) Computed income tax at statutory rate ..................... $ 99,851 39% $ 86,574 42% $ 73,574 42% Benefits of net tax exempt interest income .................... (29,118) (11) (24,604) (12) (25,297) (14) Federal and States taxes and other ......... 144 (2,201) (1) 1,766 1 ------------------------------------------------------------------ Income tax expense ......................... $ 70,877 28% $ 59,769 29% $ 50,043 29% ==================================================================
In October 1994, a Tax Reform Act was enacted in Puerto Rico. In general terms, the Tax Reform is effective for taxable years beginning after June 30, 1995. Among its provisions, the Act reduced the maximum tax rate for corporations from 42% to 39%. F-60 79 The deferred taxes of the Corporation were adjusted accordingly in 1994 and 1995, to reflect this tax rate reduction on those temporary differences and tax attributes that were expected to reverse or settle on or after January 1, 1996. The Act also repealed the reserve method of determining losses on loans and requires taxpayers to use the direct charge-off method and recapture the reserve balance at December 31, 1995 into income for tax purposes over a four-year period. As a result of this change, the Corporation is required to pay $14,640,000 annually from 1996 through 1999. A deferred tax asset is recorded accordingly, to recognize the difference between the tax and accounting bases of the allowance for loan losses. Under SFAS 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporations deferred tax assets and liabilities at December 31, were as follows:
1996 1995 ------------------- (In thousands) Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits ............................... $24,303 $26,613 Net operating loss carryforwards available ........................... 292 1,418 Postretirement benefit obligation (other than pensions) ........................................ 24,966 21,708 Allowance for loan losses ............................................ 18,670 Other temporary differences .......................................... 22,144 16,745 ------------------- Total gross deferred tax assets ...................................... 90,375 66,484 Deferred tax liabilities: Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations ............................ 17,735 19,477 Other temporary differences .......................................... 7,910 13,049 ------------------- Total gross deferred tax liabilities ................................. 25,645 32,526 ------------------- Valuation allowance .................................................. 577 1,788 ------------------- Net deferred tax asset ............................................... $64,153 $32,170 ===================
At December 31, 1996, the Corporation had $24,303,000 in alternative minimum tax credits and other credits expiring in annual installments through year 2014 that will reduce the regular income tax liability in future years. During 1996, the Corporation used alternative minimum tax (AMT) and other credits totaling $1,720,000 (1995 - $7,432,000) to reduce its regular tax liability. The Corporation had, at the end of 1996, $748,000 in net operating losses (NOL) available to carry over to offset taxable income in future years. These NOLs are available to carryforward until year 2000. During 1996, the Corporation used NOL carryforwards amounting to $2,645,000 to reduce its regular taxable income. Other temporary differences included as deferred assets are mainly due to the temporary differences arising from the deferral of loan origination costs and commissions. In accordance with SFAS 109, a deferred tax liability was created on differences between the assigned values and the tax bases of assets and liabilities related with purchase business combinations and for other temporary differences. A valuation allowance of $577,000 (1995 - $1,788,000) is reflected in 1996, related to deferred tax assets arising from NOL carryforwards and 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 as of December 31, 1996. Under the Puerto Rico Income Tax Law, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. Until December 31, 1995, dividends received by the Corporation from its subsidiaries (net of an 85% dividend received deduction allowed by the former Puerto Rico Income Tax Law) were subject to Puerto Rico income tax at the normal corporate tax rates. Technical amendments to the Puerto Rico Income Tax Reform provide a 100% dividend received deduction, effective on January 1, 1996. In previous years, the Corporation did not recognize a deferred tax liability on the unremitted earnings of domestic subsidiaries since the Puerto Rico Income Tax Law provided certain alternatives to remit those earnings to the Corporation on a tax-free basis. F-61 80 The Corporation's subsidiaries in the United States file a consolidated federal income tax return. The Corporation's federal income tax provision for 1996 was $12,281,000 (1995 - $9,265,000, 1994 - $4,297,000). The intercompany settlements of taxes paid is based on tax sharing agreements which generally allocates taxes to each entity based on a separate return basis. NOTE 23 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK: Off-balance sheet risk: The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to manage its own risk arising from movements in interest rates. These financial instruments include loan commitments, letters of credit, standby letters of credit, futures contracts, options on futures contracts, interest rate swaps and caps and foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. The contract or notional amount of these instruments, which are not included in the statement of condition, is an indicator of the Corporation's activities in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance 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 statement of condition. Financial instruments with off-balance sheet risk at December 31, whose contract amounts represent potential credit risk were as follows:
1996 1995 ------------------------- (In thousands) Commitments to extend credit: Credit card lines ................................... $ 915,589 $ 846,732 Commercial lines of credit .......................... 1,374,670 1,105,219 Other unused commitments ............................ 48,693 11,898 Commercial letters of credit ................................ 21,921 19,012 Standby letters of credit ................................... 115,681 119,983 Commitments to purchase mortgage and consumer loans ......... 2,203 69,539
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. The Corporation's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of the commitment to extend credit. 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-62 81 Other commitments: The Corporation entered into a commitment to purchase up to $100,000,000 of mortgage loans from another institution. This commitment expires on March 13, 1997. The purchased mortgage loans will continue to be serviced by the originating institution. As of December 31, 1996, loans purchased under this agreement totaled $97,797,000 and were classified as loans held-for-sale. Geographic concentration: A geographic concentration exists within the Corporation's loan portfolio since most of its business activity is with customers located in Puerto Rico. As of December 31, 1996, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. The asset composition of the Corporation by geographical area at December 31, was as follows:
1996 1995 ------------------------------------------------- (Dollars in thousands) Puerto Rico $12,386,136 73.9% $11,833,155 75.5% United States 3,756,526 22.4 3,253,791 20.7 U.S. and British Virgin Islands and Latin America 621,441 3.7 588,505 3.8 ------------------------------------------------- $16,764,103 100.0% $15,675,451 100.0% =================================================
Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $2.9 billion and $3.4 billion in 1996 and 1995, respectively. NOTE 24 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The information about the estimated fair values of financial instruments required by generally accepted accounting principles is presented hereunder including some items not recognized in the statement of condition. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms with the first entity. All nonfinancial instruments and certain other specific items are excluded from the fair value disclosure requirements For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques. These techniques are inherently subjective and are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and prepayment assumptions. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 1996 and 1995, respectively. In different interest rate environments, fair value results can differ significantly, specially 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 estimated fair values of the Corporation's financial instruments, their carrying value and the methodologies used to estimate fair values are presented below. Short-term financial instruments: Short-term financial instruments, both assets and liabilities, have been valued at their carrying amounts as reflected in the Corporation's Consolidated Statements of Condition. For these financial instruments, the carrying value may approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Included in this category are: cash and due from banks, federal funds sold and securities and mortgages purchased under agreements to resell, time deposits with other banks, bankers' acceptances, customers' liabilities on acceptances, accrued interest receivable, securities sold under agreements to repurchase, acceptances outstanding and accrued interest payable. F-63 82 Investment and trading securities: Investment and trading securities are financial instruments which trade regularly 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. The fair value of investment securities available-for-sale and trading securities equals their carrying value since they are marked-to-market for accounting purposes. These instruments are detailed in the Statements of Condition and in notes 3, 4 and 25. Loans held-for-sale: Estimated fair value of loans held-for-sale as of December 31, 1996, was $257,183,000 (1995 - $124,877,000) based on secondary market prices. Loans: Estimated fair values have been determined for groups of loans with similar financial characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on collateral, interest repricing and accrual vs. non-accrual status. For variable rate loans with frequent repricing terms and no significant change in credit risk, fair values were based on carrying values. Commercial loans with fixed rates were segregated into commercial real estate, cash collateral and other. Consumer loans were segregated by type such as personal, auto, boat, student, credit cards, reserve lines and home equity loans. Personal loans were further subdivided in mortgage-guaranteed, cash collateral and unsecured. The fair values of fixed-rate commercial, construction and consumer loans were estimated by discounting scheduled cash flows using prevailing market rates for those loans. For non-accruing loans, the estimated fair values were based on the discounted value of estimated cash flows. For these loans, principal-only cash flows were adjusted to reflect projected charge-offs. Interest cash flows were determined based on historical collection experience. Residential mortgage loans were valued using quoted market prices, where available, and market prices of traded loans with similar credit ratings, interest rates and maturity dates adjusted for estimated prepayments. Generally accepted accounting principles do not require, nor the Corporation has performed, a fair valuation of its lease financing portfolio. Therefore, for presentation purposes only, leases are shown below with fair value equal to its carrying value.
1996 1995 ---------------------------------------------------------- Estimated Estimated Carrying value fair value Carrying value fair value ---------------------------------------------------------- (In thousands) Commercial ................................ $3,822,096 $3,821,956 $3,205,031 $3,210,962 Construction .............................. 200,083 200,576 215,835 211,469 Lease financing ........................... 516,001 516,001 498,750 498,750 Mortgage .................................. 2,381,332 2,399,493 2,320,786 2,350,543 Consumer (including credit cards) ......... 2,604,387 2,656,156 2,324,276 2,264,492 Less: Allowance for loan losses .......... 185,574 168,393 ---------------------------------------------------------- $9,338,325 $9,594,182 $8,396,285 $8,536,216 ==========================================================
Deposits: As specified by SFAS 107, "Disclosures about Fair Value of Financial Instruments," the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts, which at December 31, 1996 and 1995, comprised 62% of the Corporation's total deposits, is equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates offered at December 31, 1996 and 1995, respectively, for deposits with similar remaining maturities. F-64 83
1996 1995 ------------------------------------------------------------ Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------ (In thousands) ----------------------------------------------------------- Non-interest bearing deposits ......... $ 2,330,704 $ 2,330,704 $2,021,658 $2,021,658 Savings accounts ...................... 3,201,367 3,201,367 2,998,529 2,998,529 NOW and money market accounts ...................... 1,173,496 1,173,496 1,105,467 1,105,467 Certificates of deposit ............... 4,057,708 4,060,727 3,751,008 3,795,430 ----------------------------------------------------------- $10,763,275 $10,766,294 $9,876,662 $9,921,084 ===========================================================
Borrowings and long-term debt: Borrowings and long-term debt, which include other short-term borrowings, notes payable, senior debentures and subordinated notes, were valued using quoted market rates for similar instruments at December 31, 1996 and 1995, respectively. Included within other short-term borrowings at December 31, 1996, were $290,091,000 (1995 - $174,728,000) in commercial paper issued by the Corporation which has been valued at its carrying amount because of the relatively short period of time between its origination and maturity.
1996 1995 ------------------------------------------------------------ Estimated Estimated Carrying value fair value Carrying value fair value ------------------------------------------------------------ (In thousands) ------------------------------------------------------------ Other short-term borrowings ....... $1,404,006 $1,404,744 $454,707 $454,738 Notes payable ..................... 986,713 989,970 730,428 737,662 Senior debentures ................. 30,000 30,000 30,000 29,686 Subordinated notes ................ 125,000 116,699 175,000 174,004
Commitments to extend credit and standby letters of credit: 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 by 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. At December 31, 1996, the Corporation had $2,338,952,000 and $137,602,000 in commitments to extend credit and letters of credit, respectively (1995 - $1,963,849,000 and $138,995,000). The estimated fair value of these financial instruments with no carrying value was $9,137,000 (1995 - $10,778,000). NOTE 25 - RISK MANAGEMENT AND TRADING ACTIVITIES The Corporation's exposure to market risk relates to changes in interest rates or in the fair value of the underlying financial instruments and, to a limited extent, to fluctuations in foreign currency exchange rates. The operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimizing net interest income, consistent with the Corporation's business strategies. Among the various methods used by the Corporation to measure the risks generated by assets and liabilities are beta-adjusted gap analysis, simulations and duration analysis. In managing its market risk the Corporation enters, to a limited extent, into certain derivative instruments that expose it to credit risk, which represent 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 trading and nontrading activities are presented in Note 23. The following table indicates the types of derivative financial instruments the Corporation held at December 31. The credit exposure is represented by the fair value of the instruments with a positive market value. The table should be read in conjunction with the descriptions of these products and the Corporation's objectives for holding them immediately following. F-65 84
1996 1995 ------------------------------------------------------------------------ Notional Average for the Fair Notional Average for the Fair amount year value amount year value ------------------------------------------------------------------------ (In thousands) Interest rate swaps: Pay floating/receive fixed ........ $ 25,000 $ 21,250 $ 98 $ 10,000 $10,000 $ 43 Pay fixed/receive floating ........ 115,000 115,000 (13) 115,000 53,300 (1,261) Interest rate caps ................ 13,250 Interest rate swaptions ........... 22,149 14,683 1,233 9,889 9,324 2,572 Foreign exchange contracts ........ 178 748 963 484
Interest rate swaps: Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. Net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense of the hedged item.
1996 1995 ------------------------------------------- (Dollars in thousands) Activity of interest rate swaps hedges for the year: Beginning balance .................. $ 125,000 $ 10,000 New swaps .......................... 15,000 115,000 ------------------------------------------- Ending balance ..................... $ 140,000 $ 125,000 =========================================== Average receive rate range ......... 5.50% to 6.72% 5.81% to 6.72% Average pay rate range ............. 5.81% to 7.89% 5.69% to 6.53%
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 which management deems to be immaterial. Interest rate caps: The Corporation uses protected interest rate agreements (CAPS) to reduce its vulnerability to adverse interest rate fluctuations. Interest rate caps are option-like contracts where the Corporation pays an up front premium for the right to receive the amount, if any, by which a specified market interest rate exceeds the fixed cap rate. The premium paid is amortized to income over the life of the agreement. 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. Future and forward contracts are recorded at market value. Securities sold not yet purchased: The Corporation enters in securities sold not yet purchased transactions for hedging strategies and for trading purposes. Various assets and liabilities, such as investment securities financed by borrowings, are usually hedged to lock-in spreads and reduce the risk of losses in value due to interest rate fluctuations. At December 31, 1996, securities sold short amounting to $59,315,000 (1995 - $25,444,000) were used to hedge $59,819,000 (1995 - $30,461,000) of auto loans held-for-sale. The securities sold short are recorded as other short-term borrowings on the statements of condition at market. Gains and losses are deferred until gains or losses on the related hedged item are recognized. At December 31, 1996, the Corporation had deferred gains and losses of $195,000 and $41,000, respectively, related to these activities. At December 31, 1995, there were no deferred gains and losses from these activities. Open positions on securities sold short for trading purposes are usually closed at each month-end. The volume of such transactions is not significant, as further discussed. F-66 85 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 relationships between instruments and markets, those activities are managed in concert 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. For example, fluctuations in market prices, interest rates or exchange rates change the market value of the instruments. As the instruments are recognized at market value, these changes directly affect reported income. Exposure to market risk is managed, in accordance with risk limits set by senior management, by buying or selling instruments or entering into offsetting positions. The contract amounts of futures and options written for trading purposes were $3,210,000 and $6,079,000, respectively, at December 31, 1996. For 1995, the contract amount of forwards, futures and options were $9,900,000, $16,416,000 and $11,692,000, respectively. The following tables indicates the fair value and net gains (losses) of derivatives financial instruments held for trading purposes.
Fair Value --------------------------------------------------------------- At December 31, 1996 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) --------------------------------------------------------------- (In thousands) Futures contracts ........ $0 $135 $140 $34 $(274) Options .................. 0 73 0 48 121
Fair Value --------------------------------------------------------------- At December 31, 1996 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) --------------------------------------------------------------- (In thousands) Forwards and futures contracts .............. $0 $680 $ 0 $349 $(2,429) Options .................. 0 45 68 139 2,393
The Corporation's credit exposure from off-balance sheet derivative financial instruments held or issued for trading purposes is represented by the fair value of the instruments with a positive fair value at that date. NOTE 26 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 1996, the Corporation paid interest and income taxes amounting to $579,733,000 and $76,324,000, respectively (1995 - $515,960,000 and $42,383,000; 1994 - $339,329,000 and $27,052,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 1996, amounted to $3,333,000 and $5,640,000, respectively (1995 - $5,404,000 and $3,792,000). In December 1995, the Corporation transferred $1,323,000,000 from securities held-to-maturity to securities available-for-sale. NOTE 27 - 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. F-67 86 NOTE 28 - BANPONCE CORPORATION (HOLDING COMPANY ONLY) FINANCIAL INFORMATION: The following condensed financial information presents the financial position of the Holding Company only as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996. STATEMENTS OF CONDITION
December 31, -------------------------- 1996 1995 -------------------------- (In thousands) ASSETS Cash .................................................... $ 191 $ 213 Money market investments ................................ 55,024 7,460 Investment securities available-for-sale, at market value............................................ 69,486 69,816 Investment in Banco Popular, at equity .................. 1,009,648 896,427 Investment in Pioneer Bancorp, at equity ................ 39,820 38,531 Investment in Banco Popular, FSB, at equity ............. 130,577 103,688 Investment in CombanCorp, at equity ..................... 12,566 Investment in other subsidaries, at equity .............. 47,365 46,703 Advances to subsidiaries ................................ 634,257 533,317 Premises and equipment .................................. 39,176 40,793 Other assets ............................................ 3,348 2,434 -------------------------- Total assets ............................ $2,041,458 $1,739,382 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Securities sold under agreements to repurchase .......... $ 52,084 $ 52,275 Commercial paper ........................................ 164,379 174,728 Other short-term borrowings ............................. 65,000 34,400 Notes payable ........................................... 320,539 162,500 Senior debentures ....................................... 30,000 30,000 Accrued expenses and other liabilities .................. 21,924 18,782 Subordinated notes ...................................... 125,000 125,000 Stockholders' equity .................................... 1,262,532 1,141,697 -------------------------- Total liabilities and stockholders' equity ................................. $2,041,458 $1,739,382 ==========================
STATEMENTS OF INCOME
Year ended December 31, ------------------------------------ 1996 1995 1994 ------------------------------------ (In thousands) Income: Dividends from subsidiaries .................................. $ 42,608 $ 76,600 $ 32,189 Interest on money market and investment securities ........... 4,828 3,897 1,606 Other operating income ....................................... 2,394 1,347 7 Interest on advances to subsidiaries ......................... 42,047 26,258 11,750 ------------------------------------ Total income ......................................... 91,877 108,102 45,552 ------------------------------------ Expenses: Interest expense ............................................. 42,761 25,824 8,530 Operating expenses ........................................... 1,698 671 424 ------------------------------------ Total expenses ....................................... 44,459 26,495 8,954 ------------------------------------ Income before income taxes and equity in undistributed earnings of subsidiaries ..................................... 47,418 81,607 36,598 Income taxes ......................................................... 1,109 6,787 3,484 ------------------------------------ Income before equity in undistributed earnings of subsidiaries ....... 46,309 74,820 33,114 Equity in undistributed earnings of subsidiaries ..................... 138,841 71,541 91,635 ------------------------------------ Net income ........................................... $185,150 $146,361 $124,749 ====================================
F-68 87 STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------ 1996 1995 1994 ------------------------------------ (In thousands) Cash flows from operating activities: Net income ......................................................... $185,150 $146,361 $124,749 ------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries ............... (138,841) (71,541) (91,635) Dividend in kind received from a subsidiary .................... (41,600) Depreciation of premises and equipment ......................... 1,621 829 Amortization of premiums and accretion of discounts on investments .................................................. 22 23 Net increase in other assets ................................... (914) (1,163) (1,087) Net decrease in current taxes .................................. (3,182) Net increase in other liabilities .............................. 4,554 5,363 157 ------------------------------------ Total adjustments ........................................ (136,740) (108,089) (92,565) ------------------------------------ Net cash provided by operating activities ................ 48,410 38,272 32,184 ------------------------------------ Cash flows from investing activities: Net (increase) decrease in money market investments ................ (47,564) 581 426 Purchases of investment securities held-to-maturity ................ (50,106) Purchases of investment securities available-for-sale .............. (1,538) (14,178) (2,768) Maturities of investment securities available-for-sale ............. 883 Capital contribution to subsidiaries ............................... (30,000) (16,130) (78,314) Distribution from subsidiary ....................................... 392 Advances to subsidiaries ........................................... (100,940) (374,047) (26,995) Acquisition of premises and equipment .............................. (3) (22) ------------------------------------ Net cash used in investing activities .................... (178,770) (403,796) (157,757) ------------------------------------ Cash flows from financing activities: Net (decrease) increase in securities sold under agreements to repurchase ......................................... (191) 42,425 9,850 Net (decrease) increase in commercial paper ........................ (10,349) 41,934 52,493 Net increase in other short-term borrowings ........................ 30,600 34,400 Net increase in notes payable ...................................... 158,039 162,500 Cash dividends paid ................................................ (51,896) (44,521) (37,016) Proceeds from issuance of subordinated notes ....................... 125,000 Proceeds from issuance of preferred stock .......................... 96,690 Proceeds from issuance of common stock ............................. 4,135 3,500 3,196 ------------------------------------ Net cash provided by financing activities ............... 130,338 365,238 125,213 ------------------------------------ Net decrease in cash ............................................... (22) (286) (360) Cash at beginning of period ........................................ 213 499 859 ------------------------------------ Cash at end of period .............................................. $ 191 $ 213 $ 499 ====================================
The principal source of income for the Holding Company consists of dividends from Banco Popular. As a member subject to the regulations 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 it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends by Banco Popular may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. NOTE 29 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular International Bank, Inc. and its subsidiaries as of November 30, 1996 and 1995, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1996. Popular International Bank, Inc. is the holding company of BanPonce Financial Corp., including Pioneer Bancorp Inc., CombanCorp and Banco Popular, FSB (second-tier subsidiaries) and its wholly-owned subsidiary Equity One, Inc. F-69 88 STATEMENTS OF CONDITION
November 30, --------------------------- 1996 1995 --------------------------- (In thousands) ASSETS Cash ......................................................... $ 31,171 $ 25,052 -------------------------- Money market investments ..................................... 49,184 20,840 -------------------------- Investment securities available-for-sale, at market value .... 205,249 270,262 -------------------------- Investment securities held-to-maturity ....................... 12,232 -------------------------- Loans held-for-sale .......................................... 48,068 23,555 -------------------------- Loans ........................................................ 1,545,262 1,158,513 Less: Unearned income ................................ 47,420 43,375 Allowance for loan losses ............................ 22,920 16,242 -------------------------- 1,474,922 1,098,896 -------------------------- Other assets ................................................. 50,672 35,488 Intangible assets ............................................ 31,232 30,340 Total assets ......................................... $1,902,730 $1,504,433 ========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ...................................... $ 94,297 $ 55,730 Interest bearing .......................................... 593,195 494,096 -------------------------- 687,492 549,826 -------------------------- Federal funds purchased and securities sold under agreements to repurchase ........................................ 5,075 4,035 Other short-term borrowings, consisting of $375,625 in term notes (1995 - $99,930), and a revolving credit facility with an affiliate of $35,000 (1995 - $40,000) ..................................... 410,625 139,930 Notes payable (Note 12) ...................................... 579,277 634,139 Other liabilities ............................................ 38,722 37,368 Stockholder's equity ......................................... 181,539 139,135 -------------------------- Total liabilities and stockholder's equity .......... $1,902,730 $1,504,433 ==========================
STATEMENTS OF INCOME
Year ended November 30, ------------------------------------ 1996 1995 1994 ------------------------------------ (In thousands) Interest and fees: Loans ........................................................ $136,824 $101,442 $ 66,487 Money market and investment securities ....................... 16,188 18,948 5,721 ------------------------------------ 153,012 120,390 72,208 ------------------------------------ Interest expense: Deposits ..................................................... 24,000 21,225 8,091 Short-term borrowings ........................................ 22,572 6,595 9,707 Long-term borrowings ......................................... 35,265 39,847 18,060 ------------------------------------ 81,837 67,667 35,858 ------------------------------------ Net interest income .................................................. 71,175 52,723 36,350 Provision for loan losses ............................................ 14,299 8,651 6,973 ------------------------------------ Net interest income after provision for loan losses .................. 56,876 44,072 29,377 Service charges on deposit accounts .................................. 2,735 1,844 768 Other service fees ................................................... 4,663 3,813 2,834 Gain on sale of securities ........................................... 7,026 6,239 Other operating income ............................................... 5,342 6,738 3,614 ------------------------------------ 76,642 62,706 36,593 ------------------------------------ Operating expenses ................................................... 46,509 35,782 23,149 ------------------------------------ Income before income tax ............................................. 30,133 26,924 13,444 Income tax ........................................................... 12,978 10,629 5,477 ------------------------------------ Net income ........................................................... $ 17,155 $ 16,295 $ 7,967 ====================================
F-70 89 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1996 1995 1994 -------------------------------------- (In thousands) Cash flows from operating activities: Net income ............................................................. $ 17,155 $ 16,295 $ 7,967 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ................ 1,833 1,136 719 Provision for loan losses .............................................. 14,299 8,651 6,973 Amortization of intangibles ............................................ 3,460 3,321 1,524 Amortization of deferred loan fees and costs ........................... (1,922) 6,467 4,701 Amortization of premiums and accretion of discounts on investments .......................................................... 267 446 Loans held-for-sale .................................................... (24,513) Gain on sale of investment securities available-for-sale ............... (7,026) (6,239) Gain on sale of loans .................................................. (8,049) (6,676) (3,574) Net increase in interest receivable .................................... (1,286) (5,375) (1,954) Net increase in other assets ........................................... (1,915) (5,046) (319) Net decrease in current and deferred taxes ............................. (1,942) Net increase in other liabilities ...................................... 5,392 7,509 8,111 -------------------------------------- Total adjustments ...................................... (21,402) 4,194 16,181 -------------------------------------- Net cash provided by operating activities .............. (4,247) 20,489 24,148 -------------------------------------- Cash flows from investing activities: Net (increase) decrease in money market investments .................... (15,676) 3,489 (14,980) Purchases of investment securities held-to-maturity .................... (6,214) Purchases of investment securities available-for-sale .................. (71,955) (358,811) (52,324) Sale of investment securities available-for-sale ....................... 61,205 183,091 36,833 Maturities of investment securities available-for-sale ................. 98,011 50,000 Net disbursements on loans ............................................. (574,754) (357,540) (392,454) Proceeds from sale of loans ............................................ 285,771 70,155 107,941 Acquisition of loan portfolios ......................................... (18,059) Assets acquired, net of cash ........................................... (2,656) (17,557) Acquisition of premises and equipment .................................. (4,794) (4,941) (1,964) -------------------------------------- Net cash used in investing activities .................. (231,062) (432,616) (334,505) -------------------------------------- Cash flows from financing activities: Net increase in deposits ............................................... 42,735 43,211 33,097 Net deposits acquired .................................................. 163,504 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase .................................. 1,040 (8,965) 8,000 Net increase (decrease) in other short-term borrowings ................. 222,514 (24,870) 38,523 Proceeds from issuance of notes payable ................................ 30,024 234,215 175,762 Payments of notes payable .............................................. (84,885) Proceeds from issuance of common stock ................................. 150 Capital contribution from Parent company ............................... 29,850 78,164 -------------------------------------- Net cash provided by financing activities .............. 241,428 407,095 333,546 -------------------------------------- Net increase (decrease) in cash and due from banks ............................. 6,119 (5,032) 23,189 Cash and due from banks at beginning of year ................................... 25,052 30,084 6,895 -------------------------------------- Cash and due from banks at end of year ......................................... $ 31,171 $ 25,052 $ 30,084 ======================================
F-71 90 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, -------------------------------------- 1996 1995 1994 -------------------------------------- (In thousands) Preferred Stock: Par value $25; authorized 25,000,000 shares, none issued Common Stock: Par value $5; authorized 1,000,000 shares, 700,000 shares issued and outstanding (1995 - 670,000; 1994 - 670,000) Balance at beginning of the period ..................................... $ 3,350 $ 3,350 $ 3,100 Issuance of common stock ............................................... 150 250 -------------------------------------- Balance at end of the period ........................................... 3,500 3,350 3,350 -------------------------------------- Additional paid-in capital: Balance at beginning of the period ..................................... 103,114 103,114 25,200 Issuance of common stock ............................................... 49,750 Capital contribution from Parent company ............................... 29,850 28,164 -------------------------------------- Balance at end of the period ........................................... 132,964 103,114 103,114 -------------------------------------- Retained earnings: Balance at beginning of the period ..................................... 27,234 10,939 2,972 Net income ............................................................. 17,155 16,295 7,967 -------------------------------------- Balance at end of the period ........................................... 44,389 27,234 10,939 -------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ..................................... 5,437 (2,473) Unrealized holding losses on adoption of change in accounting for investment securities, net of deferred taxes .... (736) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ...................... (4,751) 7,910 (1,737) -------------------------------------- Balance at end of period ............................................... 686 5,437 (2,473) -------------------------------------- Total stockholder's equity ..................................... $181,539 $139,135 $114,930 ======================================
NOTE 30 - BANPONCE FINANCIAL CORP. (A SECOND-TIER SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of BanPonce Financial Corp. and its subsidiaries CombanCorp, Banco Popular, FSB, including its wholly-owned subsidiary Equity One, Inc., and Pioneer Bancorp, Inc. (second tier subsidiaries) as of November 30, 1996 and 1995, and the results of their operations, cash flows and changes in stockholder's equity for each of the three years in the period ended November 30, 1996 (the financial information of Banco Popular, FSB is only included since its inception on January 23, 1995 and CombanCorp since its acquisition on September 30, 1996). F-72 91 STATEMENTS OF CONDITION
November 30, --------------------------- 1996 1995 --------------------------- (In thousands) ASSETS Cash and due from banks ........................................... $ 29,936 $ 25,012 --------------------------- Money market investments .......................................... 46,399 19,819 --------------------------- Investment securities available-for-sale, at market value ......... 205,181 267,026 --------------------------- Investment securities held-to-maturity ............................ 12,232 3,236 --------------------------- Loans held-for-sale ............................................... 48,068 23,555 --------------------------- Loans ............................................................. 1,545,262 1,158,513 Less: Unearned income ..................................... 47,420 43,375 Allowance for loan losses ................................ 22,920 16,242 --------------------------- 1,474,922 1,098,896 --------------------------- Other assets ...................................................... 50,525 35,370 Intangible assets ................................................. 31,232 30,340 --------------------------- Total assets ...................................... $1,898,495 $1,503,254 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing ...................................... $ 94,297 $ 55,730 Interest bearing .......................................... 593,195 494,096 --------------------------- 687,492 549,826 --------------------------- Federal funds purchased and securities sold under agreements to repurchase ............................................. 5,075 4,035 Other short-term borrowings, consisting of $375,625 term notes (1995 - $99,930) and a revolving credit facility with an affiliate of $35,000 (1995 - $40,000) .................... 410,625 139,930 Notes payable (Note 12) ........................................... 579,277 634,139 Other liabilities ................................................. 38,699 37,343 Stockholder's equity .............................................. 177,327 137,981 --------------------------- Total liabilities and stockholder's equity ................ $1,898,495 $1,503,254 ===========================
STATEMENTS OF INCOME
Year ended November 30, -------------------------------------- 1996 1995 1994 -------------------------------------- (In thousands) Interest and fees: Loans ........................................................ $136,824 $101,442 $ 66,486 Money market and investment securities ....................... 16,107 18,888 5,683 -------------------------------------- 152,931 120,330 72,169 -------------------------------------- Interest expense: Deposits ..................................................... 24,000 21,225 8,091 Short-term borrowings ........................................ 22,572 6,595 9,707 Long-term borrowings ......................................... 35,265 39,847 18,060 -------------------------------------- 81,837 67,667 35,858 -------------------------------------- Net interest income .................................................. 71,094 52,663 36,311 Provision for loan losses ............................................ 14,299 8,651 6,973 -------------------------------------- Net interest income after provision for loan losses .................. 56,795 44,012 29,338 Service charges on deposit accounts .................................. 2,735 1,844 768 Other service fees ................................................... 4,663 3,813 2,834 Gain on sale of securities ........................................... 7,026 6,239 Other operating income ............................................... 5,457 6,738 3,614 -------------------------------------- 76,676 62,646 36,554 -------------------------------------- Operating expenses ................................................... 46,600 35,778 23,144 ------------------------------------ Income before tax .................................................... 30,076 26,868 13,410 Income tax ........................................................... 12,978 10,629 5,477 -------------------------------------- Net income ........................................................... $ 17,098 $ 16,239 $ 7,933 ======================================
F-73 92 STATEMENTS OF CASH FLOWS
Year ended November 30, -------------------------------------- 1996 1995 1994 -------------------------------------- (In thousands) Cash flows from operating activities: Net income .................................................................. $ 17,098 $ 16,239 $ 7,933 -------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment ............. 1,833 1,136 719 Provision for loan losses ........................................... 14,299 8,651 6,973 Amortization of intangibles ......................................... 3,460 3,321 1,524 Amortization of deferred loan fees and costs ........................ (1,922) 6,467 4,701 Amortization of premiums and accretion of discounts on investments ...................................................... 267 446 Loan held-for-sale .................................................. (24,513) Gain on sale of investment securities available-for-sale ............ (7,026) (6,239) Gain on sale of loans ............................................... (8,049) (6,676) (3,574) Net increase in interest receivable ................................. (1,286) (5,368) (1,954) Net increase in other assets ........................................ (1,884) (4,940) (350) Net increase in current and deferred taxes .......................... (1,942) Net increase in other liabilities ................................... 5,392 7,483 8,111 -------------------------------------- Total adjustments ........................................... (21,371) 4,281 16,150 -------------------------------------- Net cash provided by operating activities ................... (4,273) 20,520 24,083 -------------------------------------- Cash flows from investing activities: Net (increase) decrease in money market investments ......................... (13,912) 3,476 (14,968) Purchases of investment securities held-to-maturity ......................... (6,214) Purchases of investment securities available-for-sale ....................... (71,888) (358,811) (52,324) Sale of investment securities available-for-sale ............................ 61,205 183,091 36,833 Maturities of investment securities available-for-sale ...................... 98,011 50,000 Net disbursements on loans .................................................. (574,754) (357,540) (392,454) Proceeds from sale of loans ................................................. 285,771 70,155 107,941 Acquisition of loan portfolios .............................................. (18,059) Assets acquired, net of cash ................................................ (2,656) (17,557) Acquisition of premises and equipment ....................................... (4,794) (4,941) (1,964) -------------------------------------- Net cash used in investing activities ....................... (229,231) (432,629) (334,493) -------------------------------------- Cash flows from financing activities: Net increase in deposits .................................................... 42,735 43,211 33,097 Net deposits acquired ....................................................... 163,504 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase ................................. 1,040 (8,965) 8,000 Net increase (decrease) in other short-term borrowings ...................... 222,514 (24,870) 38,523 Proceeds from issuance of notes payable ..................................... 30,024 234,215 175,762 Payments of note payable .................................................... (84,885) Capital contribution from Parent company .................................... 27,000 78,164 -------------------------------------- Net cash provided by financing activities ................... 238,428 407,095 333,546 -------------------------------------- Net increase (decrease) in cash and due from banks .................................. 4,924 (5,014) 23,136 Cash and due from banks at beginning of period ...................................... 25,012 30,026 6,890 -------------------------------------- Cash and due from banks at end of period ............................................ $ 29,936 $ 25,012 $ 30,026 ======================================
F-74 93 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, --------------------------------------- 1996 1995 1994 --------------------------------------- (In thousands) Preferred Stock: Par value $0.10; authorized 10,000,000 shares, none issued Common Stock: Par value $1; authorized 10,000 shares, 2,000 shares issued and outstanding Balance at beginning of the period ...................................... $ 2 $ 2 Issuance of common stock ................................................ $ 2 --------------------------------------- Balance at end of the period ............................................ 2 2 2 --------------------------------------- Additional paid-in capital: Balance at beginning of the period ...................................... 105,163 105,163 27,000 Issuance of common stock ................................................ 49,999 Capital contribution from parent company ........................ 27,000 28,164 --------------------------------------- Balance at end of the period ............................................ 132,163 105,163 105,163 --------------------------------------- Retained earnings: Balance at beginning of the period ...................................... 27,379 11,140 3,207 Net income .............................................................. 17,098 16,239 7,933 --------------------------------------- Balance at end of the period ............................................ 44,477 27,379 11,140 --------------------------------------- Unrealized holding gains (losses) on investment securities available-for-sale, net of deferred taxes: Balance at beginning of the period ...................................... 5,437 (2,473) Unrealized holding losses on adoption of change in accounting for investment securities, net of deferred taxes ..... (736) Net change in the fair value of investment securities available-for-sale, net of deferred taxes ....................... (4,752) 7,910 (1,737) --------------------------------------- Balance at end of period ................................................ 685 5,437 (2,473) --------------------------------------- Total stockholder's equity .............................. $177,327 $137,981 $113,832 =======================================
F-75 94 [BANPONCE CORPORATION LOGO] 95 EXHIBIT 13.1 BanPonce Corporation - 1996 Annual Report COMPUTERIZED ARTS GRAPHIC DESIGN: [BANPONCE CORPORATION LOGO] Extending a Tradition of Service Into the Future 96 CONTENTS Profile 1 Letter to Shareholders 5 Strengthening Our Main Market 10 Expanding Our Business Franchise 14 Diversifying Our Financial Services 18 Enhancing Our Commitment to a Quality Organization 22 Community Involvement 26 Line of Business 30 Board of Directors 31 Management 32 10-K Financial Summary 33
97 Profile BanPonce Corporation is a regional diversified, publicly owned bank holding company with $16.8 billion in assets. Its headquarters are located in San Juan, Puerto Rico. The Corporation has three subsidiaries: Banco Popular de Puerto Rico, Popular International Bank, Inc., and BP Capital Markets, Inc. Banco Popular de Puerto Rico, BanPonce's principal subsidiary, is a full-service commercial bank with $13.3 billion in assets. Through its own subsidiaries -- Popular Consumer Services, Inc., Popular Leasing and Rental, Inc., and Popular Mortgage, Inc. -- it offers small personal loans, vehicle and equipment leasing, and mortgage loans. Popular International Bank, Inc., is an entity incorporated under the Puerto Rico International Banking Center Act, which authorizes the establishment of banks in Puerto Rico to do business exclusively offshore. BanPonce Financial Corp., incorporated in Delaware, is Popular International's sole subsidiary. The subsidiaries of BanPonce Financial are BancoPopular, FSB, operating in New Jersey; Pioneer Bancorp, Inc., and its own subsidiary Banco Popular (Illinois); and CombanCorp, and its subsidiary Banco Popular N.A. (California). Equity One, Inc., a diversified consumer financial company, is, in turn, an operating subsidiary of Banco Popular, FSB. BP Capital Markets, Inc. a direct subsidiary of BanPonce is a securities broker-dealer in Puerto Rico, engaged in institutional brokerage, financial advisory, and investment and security brokerage operations. For more details about the subsidiaries, please refer to page 30. BanPonce is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. Banco Popular de Puerto Rico is a member of the Federal Reserve System and is also subject to the supervision of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and the Superintendent of Banks of the State of New York. Banco Popular (Illinois) is subject to the supervision of the Federal Deposit Insurance Corporation and the Illinois Commissioner of Banks and Trust Companies. Banco Popular, N.A. (California) is subject to the supervision of the Office of the Comptroller of the Currency. Banco Popular, FSB, and Equity One, Inc., are subject to the supervision of the Office of Thrift Supervision. BP Capital Markets is subject to the supervision of the National Association of Securities Dealers. 98 BanPonce Corporation - 1996 Annual Report 10-Year Summary BanPonce is an organization unique in the international financial services marketplace. BanPonce is best known for its banking subsidiary Banco Popular, which is built on a tradition of strong leadership and is Puerto Rico's premier banking institution. The Corporation possesses an unwavering commitment to the communities it serves, a dedication to Total Quality and a passion for making banking more convenient and accessible for all customers. BanPonce is also a diverse, multifaceted organization encompassing a broad range of financial services--including mortgage banking, leasing, consumer finance, investment banking and processing services. Through careful management and a vision for the future, BanPonce continues to be a respected and solid financial performer in the industry. While strengthening its competitive position at home, BanPonce is expanding its franchise into the United States and Caribbean region, with the strategic objective of becoming the dominant Hispanic financial services provider in every market in which it operates. BanPonce is bringing a tradition of service into the future of financial services. [GRAPH] Assets by Geographical Area (percentage) [GRAPH] Earnings Per Share [GRAPH] Banking Offices [GRAPH] ATMs Owned and Driven 99 10-Year Summary (1987~1996)
- ----------------------------------------------------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except per common share data) Selected Financial Information Net Interest Income $ 203.8 226.9 255.5 284.2 407.8 440.2 492.1 535.5 584.2 681.3 Non-Interest Income 40.3 53.7 62.1 71.0 131.8 124.5 125.2 141.3 173.3 205.5 Operating Expenses 182.6 190.9 207.4 229.6 345.7 366.9 412.3 447.8 486.8 541.9 Net Income 37.5 47.1 56.2 63.4 64.6 85.1 109.4 124.7 146.4 185.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $5,352.7 5,661.4 5,923.3 8,983.6 8,780.3 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1 Net Loans 2,737.2 3,056.8 3,276.4 5,365.9 5,195.6 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0 Deposits 4,491.6 4,715.8 4,926.3 7,422.7 7,207.1 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3 Total Stockholders' Equity 301.4 334.9 375.8 588.9 631.8 752.1 834.2 1,002.4 1,141.7 1,262.5 ROA 0.76% 0.85% 0.99% 1.09% 0.72% 0.89% 1.02% 1.02% 1.04% 1.14% ROE 13.09% 14.87% 15.87% 15.55% 10.57% 12.72% 13.80% 13.80% 14.22% 16.15% - ----------------------------------------------------------------------------------------------------------------------------------- Per CommonShare Earnings $ 0.94 1.18 1.40 1.57 1.07 1.40 1.67 1.84 2.10 2.68 Dividends (Declared) 0.33 0.34 0.40 0.40 0.40 0.40 0.45 0.50 0.58 0.69 Book Value 7.54 8.38 9.38 9.83 10.50 11.52 12.75 13.74 15.81 17.59 Market Price 6.69 8.88 10.75 8.00 9.63 15.13 15.50 14.07 19.38 33.75 - ----------------------------------------------------------------------------------------------------------------------------------- Assets by Geographical Area P.R. 94.22% 93.45% 92.18% 88.59% 86.67% 87.33% 79.42% 75.86% 75.49% 73.88% U.S. 5.01% 5.50% 6.28% 9.28% 10.92% 10.27% 16.03% 19.65% 20.76% 22.41% Caribbean 0.77% 1.05% 1.54% 2.13% 2.41% 2.40% 4.55% 4.49% 3.75% 3.71% - ----------------------------------------------------------------------------------------------------------------------------------- Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - ----------------------------------------------------------------------------------------------------------------------------------- Delivery System Banking Branches P.R. 126 126 128 173 161 162 165 166 166 178 Caribbean 3 3 3 3 3 3 8 8 8 8 U.S. 9 10 10 24 24 30 32 34 40 44 - ----------------------------------------------------------------------------------------------------------------------------------- Sub-total 138 139 141 200 188 195 205 208 214 230 - ----------------------------------------------------------------------------------------------------------------------------------- Popular Consumer Services 14 17 17 26 26 26 26 27 30 35 Popular Leasing 4 9 9 9 8 10 9 8 Equity One 27 41 58 73 91 102 Popular Mortgage 3 4 BP Capital 1 - ----------------------------------------------------------------------------------------------------------------------------------- Sub-total 14 17 21 35 62 76 92 110 133 150 - ----------------------------------------------------------------------------------------------------------------------------------- Total 152 156 162 235 250 271 297 318 347 380 - ----------------------------------------------------------------------------------------------------------------------------------- ATMs Owned P.R. 136 153 151 211 206 211 234 262 281 327 V.I. 3 3 3 3 3 3 8 8 8 9 U.S. 6 11 26 38 53 - ----------------------------------------------------------------------------------------------------------------------------------- Sub-total 139 156 154 214 209 220 253 296 327 389 - ----------------------------------------------------------------------------------------------------------------------------------- Driven P.R. 63 68 65 54 73 81 86 88 120 162 Caribbean 102 Sub-total 63 68 65 54 73 81 86 88 120 264 - ----------------------------------------------------------------------------------------------------------------------------------- Total 202 224 219 268 282 301 339 384 447 653 - ----------------------------------------------------------------------------------------------------------------------------------- Transactions (in millions) Electronic Transactions 12.4 14.9 16.1 18.0 23.9 28.6 33.2 43.0 56.6 78.0 Items Processed 137.7 139.3 137.9 137.0 166.1 170.4 171.8 174.5 175.0 173.7 - ----------------------------------------------------------------------------------------------------------------------------------- Employees (FTEs)* 4,699 5,131 5,213 7,023 7,006 7,024 7,533 7,606 7,815 7,996 - ----------------------------------------------------------------------------------------------------------------------------------- * For the years 1990-1996 seasonals are included converted FTEs.
100 BanPonce Corporation - 1996 Annual Report 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 requirements of the most progressive community in the world. These words, written by don Rafael Carrion Pacheco, Executive Vice President and President (1927-1956), embody the philosophy of Banco Popular. 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 moral and ethical standards of behavior. These words by don Rafael Carrion Jr., President and Chairman of the Board (1956-1991) evidencing our commitment to human resources, were written to commemorate Banco Popular's 95th anniversary. 101 Letter to Shareholders Mr. Richard L. Carrion (PHOTO) Chairman, President and Chief Executive Officer TO OUR SHAREHOLDERS The year 1996 was, in general, a great year for the banking industry; we were no exception. Steady economic growth, low inflation and relatively low interest rates allowed us to increase our earnings by 27%. BanPonce Corporation reported net income of $185.2 million for the year, an increase of $38.8 million from the results obtained in 1995. This represents a return on assets of 1.14% and a return on common equity of 16.15%, an improvement from the previous year's 1.04% and 14.22% respectively. Earnings per common share were $2.68 compared with $2.10 for 1995 after adjusting for the stock split effected on July 1, 1996. We took advantage of this favorable environment and of our financial performance to advance our strategic objectives. Over the past decade our fundamental strategy has gradually evolved. The main principles of this strategy are: - - Strengthening our competitive position in Puerto Rico, our main market. - - Expanding our business franchise in the Caribbean and the United States, particularly in areas with large Hispanic population. - - Continue diversifying our financial services in order to offer more alternatives to our customers. - - Enhancing our commitment to the quality of our organization and the services we provide our customers. In spite of our growing presence in the United States and the Caribbean, our core business continues to be in Puerto Rico. In order to enhance our already strong market position, it is necessary to align our distribution system with the different market segments we aspire to serve. To accomplish this, we will rely increasingly on technology to allow us to offer more services to more customers in more places. Increased convenience for our customers and ultimately lowering operating costs have been our two guiding forces. We continue to invest in electronic banking initiatives that will allow us to grow for many more years. The following are some of the advances we made during the year in this area: - - Late in the year, we offered teen-agers in Puerto Rico ATH POP, the first completely electronic savings account that also has access to the Bank's ATH network, (ATH is the Spanish acronym for at all hours, the name Banco Popular has given to its ATM network) and to more than 11,000 point-of-sale terminals throughout the island. In its first month, we opened more than 10,000 new accounts. ATH POP complements our Populoso account, a savings account designed for children. - - We reached an agreement with Cruz Azul, one of the largest medical insurance providers on the island, to electronically process payments to medical service providers. Nearly 3,000 terminals were installed of approximately 7,000 to be installed upon completion of the project. This system has considerably cut down on costs and has spawned substantial efficiencies for both service providers and Cruz Azul. 5 102 BanPonce Corporation - 1996 Annual Report - - We introduced our customers to automatic lending machines, known as Rapi-Prestamo. In doing so, we became one of the first banks in the hemisphere to provide its customers with automatic lending machines. - - We established an Internet Web site, http://www.banco popular.com, where customers and potential customers can obtain more information about our many products and services and the Corporation in general. - - We established a pilot program among our employees to do their banking through their personal computers. PC Banking will be offered to all our customers during 1997. - - We launched another telephone service called TelePrestamo, by which customers can apply for personal loans, credit cards and reserve credit lines and receive final approval on the first call. Our point-of-sale debit and credit card transactions and TelePago, our Pay-by-Phone service, all reflected healthy growth. In just six years, from 1990 to 1996, our electronic transactions in Puerto Rico have grown from 27% to 66% of all transactions. Enthused by this performance we continued to explore new ways of reaching our customers. After introducing financial services into retail stores in Puerto Rico during the 1980s with the establishment of "Expreso Popular" facilities, we took this concept a step further and opened nine in-store branches on the island's three main supermarket chains. These in-store branches provide customers the ability to perform transactions electronically and information on products and services. We increased our service hours in all branches. Moreover, in the case of our in-store and shopping center branches, we aligned our service hours with the store or shopping center so that our customers can have the convenience of doing their banking while they shop. We also opened six new modern branches and remodeled nine more. To provide complete financial services to high net worth customers, Private Financial Group, a division of Banco Popular specialized in serving this segment of the market, considerably expanded its services and reach by launching its Private Management Account. This product conveniently combines a tiered interest-bearing account with a preferred rate line of credit in a statement that consolidates all financial relation-ships. Our commercial customers also benefited from the relaunching of FlexiCuenta, our unique commercial account that provides customers with checking, line of credit, investment services and can be tailored to each business' specific needs. In our most significant expansion, as the year closed, we reached an agreement to purchase Roig Commercial Bank, established in 1922. The Roig bank has a significant banking franchise focused on the eastern part of Puerto Rico and approximately $900 million in assets. This acquisition will enhance the service provided to customers in this area of the island, where we expect continued economic growth, and further buttresses our competitive position in Puerto Rico. The solid financial climate of the past few years has given us the opportunity to pursue our geographical expansion. By year end, through acquisitions or letters of intent as well as the expansion of current businesses, our presence in the continental United States had grown to the following: - - 29 branches of Banco Popular de Puerto Rico in New York. - - Six branches of Banco Popular, FSB in New Jersey. - - Five branches of Banco Popular, Illinois (formerly Pioneer Bank) in Chicago. We have an agreement to purchase two bank holding companies awaiting regulatory approval, National Bancorp, Inc. with two branches and CBC Bancorp with three branches. - - Four in Los Angeles, now all under the name of Banco Popular, N.A. (California) after the acquisition of CombanCorp, which had three branches, and the addition of our existing Banco Popular branch in Los Angeles. [GRAPH Electronic Transactions (percentage)] 6 103 Letter to Shareholders "Our superior electronic banking capabilities and the quality of our infrastructure in Puerto Rico have allowed us to explore a promising new income-generating area..." - - During 1996 we reached an agreement to purchase Seminole National Bank in Florida, with three branches. This will mark our entry into this attractive market. - - Equity One, our U.S. mortgage and consumer finance subsidiary, expanded its operation to 102 offices in 28 states. Most of our business in the United States consists of recent acquisitions. Our objective is to create a wide base in markets with a sizable Hispanic population. We are building a nationwide network and brand that will offer us opportunities for growth for many years to come. In the Caribbean region, we also made headway during the year. By March we had completed the acquisition of 20% of Citizens Bank in Jamaica, the third largest banking institution in that country with 14 branches and $350 million in assets. In April, we inaugurated ATH Dominicana, an automatic teller machine network, in the Dominican Republic. By year end, we had connected 102 ATM machines to our ATH network consisting of seven participating banks at the moment. Electronic transactions in the Dominican Republic surged, reaching approximately 600,000 monthly transactions. During the year we also added POS capabilities. On the heels of this deal, we reached a similar agreement in Costa Rica. The ATH network in this country will be operational early 1997 and will connect 16 banks. Both networks will be operated from our facilities in Puerto Rico. Our superior electronic banking capabilities and the quality of our infrastructure in Puerto Rico have allowed us to explore a promising new income-generating area: banking services to other banking institutions in the region. We are actively pursuing opportunities for growth in this region. Our efforts to continue diversifying our service offerings continued. In conjunction with PaineWebber, we issued Puerto Rico Investors Tax-Free Fund IV and Puerto Rico Tax-Free Target Maturity Fund. At year end these funds had approximately $816 million in assets, which generated $2.4 million in management and administration fees. We also continued to expand our retail distribution network for investment products through the offices of Marketing One in selected branches. We are in the process of bringing these investment professionals in-house through our Popular Securities subsidiary. We remain alert to regulatory changes that may allow us to distribute insurance services to our customer base. Continuing with our commitment to quality in all aspects of our organization, last year we aggressively pursued several initiatives in this area. We invested a considerable amount in our personnel, offering them numerous seminars and workshops to provide them the tools to improve service to our customers. At the retail level we adopted a new corporate image program that included uniforms for our branch staff. More importantly, Total Quality measures produced savings in specific processes and areas. In January of 1996, we announced a significant management change designed to improve the capabilities of our two most senior officers as well as to send a message to the rest of the organization of the commitment and flexibility that will be increasingly required to succeed in the future. Jorge A. Junquera and David H. Chafey Jr., both Senior Executive Vice Presidents of BanPonce Corporation, exchanged their areas of responsibility. David now oversees our retail banking operation, alternative delivery systems and our private banking group while Jorge is now our Chief Financial Officer and is also responsible for our trust business, U.S. operations and Caribbean expansion. The results have been excellent. Both have augmented their managerial capacity with the change and each benefited the 7 104 BanPonce Corporation - 1996 Annual Report We will continue to adhere to Jacob Safra's dictum: "If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm." Bank by bringing new outlooks to their new areas of responsibility. We feel strongly that our managerial structure must mirror our strategic objectives. At the end of the year, we promoted Carlos Rom and Roberto R. Herencia to our Senior Management Council. Carlos and Roberto were directly responsible for our Caribbean and U.S. geographical expansions, respectively. We feel they will further reinforce our senior management to effectively oversee our growing geographical diversity. [GRAPH] Our accomplishments have always been a reflection of the quality of our Board of Directors. It was with great sorrow that we lost one of BanPonce's board members, Waldemar del Valle. Mr. Del Valle passed away during the year, after having served on the board for 21 years. Roberto Esteves, a member of Banco Popular's board, retired after serving for 6 years on the Banco Popular board. We are grateful for their many insights and their years of service. In 1996, we also faced the repeal of Section 936 of the U.S. Internal Revenue Code. This section of the U.S. Code allowed U.S. companies operating on the island to obtain a tax credit against the federal tax liability derived from business operations and investment income in Puerto Rico. The bill that was finally approved eliminated the benefits that applied to investment income immediately and will phase out the operation income and wage credit in 10 years. The immediate effect of this repeal was a slight rise in the cost of our funds as we began to replace 936 funds with higher-cost liabilities. We are convinced that the Puerto Rican economy can adjust successfully to the eradication of Section 936. We will continue to adhere to Jacob Safra's dictum: "If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm." We are on the right course. We continue to pledge our efforts to provide excellent service to our customers and superior returns to our shareholders. /s/ Richard L. Carrion - ------------------------ Richard L. Carrion Chairman President Chief Executive Officer 8 105 Letter to Shareholders (PHOTO Senior Management Group) SENIOR MANAGEMENT COUNCIL Seated in front: Richard L. Carrion Chairman President Chief Executive Officer From the left: Roberto R. Herencia Executive Vice President Humberto Martin Executive Vice President Emilio E. Pinero Ferrer, Esq. Executive Vice President David H. Chafey Jr. Senior Executive Vice President Larry B. Kesler Executive Vice President Maria Isabel P. de Burckhart Executive Vice President Carlos Rom Executive Vice President Jorge A. Junquera Senior Executive Vice President 9 106 BanPonce Corporation - 1996 Annual Report (PHOTO) Computerized Arts Graphic Design: STRENGTHENING OUR MAIN MARKET by providing more services to more customers in more places 10 107 Strengthening Our Main Market (PHOTO) Computerized Arts Grapic Design: Puerto Rico continues to be the Corporation's main market, representing 74% of assets and 82% of net income for 1996. In this market, Banco Popular de Puerto Rico holds the largest market share in both the commercial and retail businesses. The Bank also possesses the largest delivery franchise in Puerto Rico, with 178 points of customer contact and 327 automatic teller machines at year end. Parallel to the institution's expansion and diversification strategy, the Corporation has continued to strengthen and maintain its competitive position in this market by developing and carrying out strategies aimed at providing more services to more customers in more places. 11 108 BanPonce Corporation - 1996 Annual Report (PHOTO) New Branch Through the use of technology, Banco Popular has developed a new prototype of the branch of the future. Efforts throughout 1996 focused on aligning the delivery system with the different market segments to provide additional convenience and service to our customers. By year end, Banco Popular's traditional delivery system consisted of eight large financial service centers, 134 full-service branches, 27 Expreso Popular, and nine in-store branches. Banco Popular first introduced financial service facilities in retail stores with the Expreso Popular concept during the 1980s. The new in-store branch concept, introduced during 1996, builds on this initiative by providing customers with access to electronic transactions, account openings and other deposit and loan products. Conveniently located in Pueblo Xtra, Amigo and Grande supermarkets, three of the largest supermarket chains in Puerto Rico, these locations provide expanded hours of service by operating during store hours. In addition, during the year all full-service branches expanded service hours to 4 p.m. and 66 branches are also open on Saturdays and 11 on Sundays and holidays, providing customers with additional convenience to conduct their financial transactions. In line with Banco Popular's electronic initiatives, which focus on transforming paper-based transactions into electronic transactions, a new branch prototype was developed and constructed in the affluent Montehiedra community. This new concept emphasizes the changing role of the branch into a sales and service facility and away from traditional transactions. Seen as a preview of the branch of the future, the Montehiedra branch was outfitted with automatic teller machines, telephones and six auto lanes to perform transactions. It also provides customers with valuable product and service information through an interactive touch screen catalog that provides basic description and rate information for all products and services. Private Financial Group, a specialized unit to provide com-plete financial services to high net worth customers, considerably expanded its services and reach. This unit provides traditional banking products and services as well as investment products through the personalized service of a private banker. During 1996, Private Financial Group launched its Private Management Account (PMA). This product combines a scaled, interest-bearing checking account and a preferred rate line of credit in a statement that consolidates all Banco Popular relationships. By year end, Private Financial Group had more than doubled its client base and income by providing this segment with the most convenient financial services alternative. Through the development of alternative delivery systems, like PC Home Banking, Banco Popular is able to better serve upscale customers. Banking on the PC provides customers with direct access to their accounts and the ability to perform transactions. Currently being offered through an employee pilot program, PC Home Banking will be offered to all customers during the first quarter of 1997. This product complements our already existing 24-hour telephone service TeleBanco, a telephone information service, and TelePago, a telephone payment system. During 1996, hours of service for customer representatives for both TeleBanco and TelePago were expanded to 11 p.m. 12 109 Strengthening Our Main Market (PHOTO) Employee Offering Services to a Customer In addition, new merchants were added to TelePago and the service was extended to Banco Popular's customers in the U.S. Virgin Islands. By year end, TelePago was handling 268,000 monthly transactions and TeleBanco received approximately 947,000 monthly calls. This amounts to an increase of 66% and 27%, respectively, over 1995 figures. TelePrestamo was another telephone service launched in mid-year. Applicants for personal loans, credit cards and reserve credit lines can call, talk to a credit officer and have final approval on the first call, in less than 20 minutes. By December, 25% of all loans and credit cards booked were approved by TelePrestamo. To attract customers at an earlier age and be able to develop these contacts into lifelong relationships, during 1996 Banco Popular introduced ATH POP, an innovative product for the teen-age segment. This completely electronic savings account provides teen-agers with access to Banco Popular's ATM network, A Toda Hora (ATH), and to our more than 11,000 point-of-sale (POS) terminals throughout Puerto Rico. The Bank's POS network grew significantly during 1996 by adding 4,163 new terminals and 3,034 new merchants. By year end, approximately 3 million monthly transactions were being handled for a 100% increase compared with 1995. Banco Popular's Internet Web site, launched in July 1996 at http://www.bancopopular.com, provides information on products and services and special Bank programs. The site also allows customers to apply for loans, credit cards and register in TelePago in an electronically safe environment. In addition to these electronic alternatives, retail customers have responded very favorably to our credit product offerings. PREMIA a credit card product launched in December 1995 that offers cash back and prizes had more than 20,000 customers by year end. Our co-branded card with Pueblo Supermarkets, the largest food chain in Puerto Rico, increased its client base by 69% and its portfolio by 79% during 1996. Commercial customers in Puerto Rico also benefited from the implementation of strategies tailored to different market segments. In coordination with The Wharton School of the University of Pennsylvania, Banco Popular's corporate customers benefited from seminars on subjects such as hyper competition, family-owned businesses and succession planning. Banco Popular's small and middle market benefited from special programs such as "Banca del Ferretero" in which Banco Popular provides hardware stores specialized financing arrangements for their customers. Also, FlexiCuenta, our commercial account, was enhanced and re-launched during 1996. This product provides customers with checking, investment features and a line of credit, all in the same account and tailored to the individual needs of the commercial customer. These efforts contributed significantly to an increase in the commercial loan portfolio and commercial fee income of 14% and 10%, respectively, when compared to the previous year. These strategies and the plans that have been set in motion for the coming years have focused on developing new and innovative ways to profitably service all segments of the market. In December, BanPonce signed an agreement to purchase Roig Commercial Bank, a full-service, commercial bank with approximately $900 million in assets, $656 million in deposits and 25 branches. Roig Commercial Bank, established in 1922, has a long history of service and success in the Puerto Rican financial services market. The completion of this acquisition will strengthen the Corporation's retail and commercial delivery franchise throughout Puerto Rico and will help Banco Popular provide better service to customers in the eastern region where Roig branches are located. (PHOTO In-Store Branch) ABOVE: THE NEW BRANCHES FOCUS ON THE SALE OF PRODUCTS AND SERVICES INSTEAD OF TRADITIONAL TRANSACTIONS. Below: In-store branches offer more convenience and extended hours. Electronic Services Compounded Annual Growth Rate (since services establishment) (services) (percentage) ATM 23 POS 53 TeleBanco 187 TelePago 451 110 BanPonce Corporation - 1996 Annual Report (PHOTO) Computerized Arts Graphic Design EXPANDING OUR BUSINESS FRANCHISE in the Caribbean and the United States 14 111 Expanding Our Business Franchise (PHOTO) Computerized Arts Graphic Design BanPonce's coordinated expansion strategy in the continental United States market and in the Caribbean and Latin America is based on two of the Corporation's competitive advantages: its familiarity with the U.S. Hispanic market and BanPonce's expertise in electronic payment systems. 15 112 BanPonce Corporation - 1996 Annual Report The expansion in the United States has been mostly in areas with a high concentration of Hispanics. (PHOTO) Four Persons Poses as Hispanic Family By renaming banks acquired in the United States as Banco Popular and entering new markets, such as Florida, as well as Equity One's expansion, the Corporation is on its way to establish a national brand that will support BanPonce's expansion efforts in the United States and in the Caribbean and Latin America. Through strategic acquisitions in California and Illinois, BanPonce's deposits and loan portfolios in the United States have grown significantly to attain the efficiency and economies of scale necessary to enhance the profitability of these operations. In September, the acquisition of CombanCorp, a $70-million asset bank holding company in the Los Angeles County, was finalized. CombanCorp's three branches, formerly operating as Commerce National Bank, were renamed Banco Popular N.A. (California), increasing the Corporation's presence in the Los Angeles area to $140 million in assets and a total of four branches at year end. In Illinois, Pioneer Bank, which was acquired in 1994 with approximately $468 million in assets and five branches was renamed Banco Popular (Illinois). In addition, in 1996 BanPonce agreed to purchase AmericanMidwest Bank and Trust (National Bancorp Inc.) and Capitol Bank & Trust and Capitol Bank of Westmont (CBC Bancorp). These institutions will add five additional branches and $490 million in assets. During 1996, we also entered a new and important market by signing a definite agreement to acquire Seminole Bank in the city of Sanford, north of Orlando, Florida. This is a highly attractive market for Banco Popular, with a high 16 113 Expanding Our Business Franchise concentration of Hispanic population, much of which are Puerto Ricans who have moved into the area within the past 10 years. All of these acquisitions are currently awaiting the necessary regulatory approvals. Equity One, the Corporation's consumer finance subsidiary in the United States, reached $1.1 billion in assets and increased its presence by establishing 11 new branches, for a total of 102 branches located throughout 28 states. During 1996, Equity One expanded its loan products by offering FHA and VA mortgage loans. By renaming banks acquired in the United States as Banco Popular and entering new markets, such as Florida, as well as Equity One's expansion, the Corporation is on its way to establish a national brand that will support BanPonce's expansion efforts in the United States and in the Caribbean and Latin America. In addition to establishing electronic initiatives in the Dominican Republic and Costa Rica as part of the Corporation's diversification strategy, Banco Popular acquired a 20% equity stake of Citizens Bank in Jamaica in March 1996. Located in the city of Kingston, Citizens, with approximately $350 million in assets, has 14 branches throughout the island and is the third largest bank in terms of assets. This acquisition strengthens the Corporation's expansion in the Caribbean. (GRAPH) [Income from the U.S. and Caribbean Region (percentage of total income] Equity One now has 102 branches spread throughout 28 states. U.S. Expansion Chicago, IL New York, NY Los Angeles, CA Banking States - -------------- California 4 [PHOTO] Illinois 5 New Jersey 6 Chicago City New York 29 Florida* 3 New York City TOTAL OFFICES 47 Los Angeles City Non-Banking States - Equity One, Inc. - ------------------------------------- Alabama 1 Connecticut 1 Delaware 1 Florida 9 Georgia 2 Illinois 2 Indiana 2 Iowa 1 Kentucky 4 Maine 1 Maryland 2 Massachusetts 2 Michigan 2 Minnesota 1 Missouri 1 New Hampshire 1 New Jersey 6 New York 1 North Carolina 17 Ohio 1 Pennsylvania 5 Rhode Island 1 South Carolina 10 Tennessee 3 Utah 1 Virginia 21 West Virginia 2 Wisconsin 1 TOTAL OFFICES 102 *Pending completion of acquisition (GRAPH) U.S. Geographic Presence of BanPonce Corporation Subsidiary 17 114 BanPonce Corporation - 1996 Annual Report (PHOTO) Computerized Arts Graphic Design DIVERSIFYING OUR FINANCIAL SERVICES to offer more alternatives to our customers 18 115 Diversifying Our Financial Services (PHOTO) Computerized Arts Graphic Design During 1996, BanPonce continued to diversify its sources of income by providing our customers with more investment products and services, electronic payment alternatives, and by exporting the Corporation's technological expertise to the Dominican Republic and Costa Rica. In addition, BP Capital Markets, Popular Leasing, Popular Mortgage, Equity One and Best Finance, BanPonce's investment banking, leasing, mortgage and consumer finance subsidiaries, continued expanding their businesses to provide non-traditional banking products and services. At year end 14% of the Corporation's income derived from these non-traditional banking sources. 19 116 BanPonce Corporation - 1996 Annual Report (PHOTO) A group of employees giving support Banco Popular is capitalizing on its technological expertise to service other banks in the region. BanPonce's diversification efforts have also focused on providing innovative alternatives to electronically process payments. In February, in conjunction with PaineWebber (Puerto Rico) Inc., BanPonce structured and launched its fourth Puerto Rico Investors Tax-Free Fund. The Puerto Rico Tax-Free Target Maturity Fund, an additional investment fund, was also offered during the year. These funds are non-diversified closed-end management investment funds that provide local investors with a high-level of tax-exempt current income. At year end these funds had approximately $816 million, which generated $2.4 million in management and administration fees. BanPonce's diversification efforts have also focused on providing innovative alternatives to electronically process payments. During 1996, Banco Popular and Cruz Azul, the second largest medical insurance provider in Puerto Rico, established a partnership to electronically process payments from the insurer to doctors. This system eliminates paper-based transactions and facilitates processing by including all coverage information on the card, thus accelerating payments and reducing fraud and claims. By year end, terminals had been installed in almost 3,000 physicians' offices, generating 38,000 monthly transactions. The success in this area has prompted a bank in Chile and one in the Philippines to consult with Banco Popular on how to establish similar systems in their respective countries. Emerging markets abound in the Caribbean and Central American region and possibilities for profits and growth exist in these markets for those willing to search for opportunities and take the risk. Being in the region, Banco Popular is in a unique position to identify these opportunities and capitalize on our technological expertise, particularly in electronic networks and transaction processing. Thus, in April of 1996, Banco Popular began to operate ATH Dominicana, a joint venture with Codetel, the largest Dominican Republic telephone company, and Banco Popular Dominicano, the (PHOTO) a hand showing ATH Card 117 Diversifying Our Financial Services country's largest bank (no relation to BPPR), to provide ATM switching and driving services to banks, and establish the first ATM network in the country. By year end, ATH Dominicana connected seven banks and was operating a network of 102 machines. Building on this network, we are currently expanding our electronic services and establishing a point-of-sale network in that country. Similarly, in June 1996 the Corporation reached an agreement with 16 Costa Rican banks to provide ATM switching and driving services. This network should be in operation by the first quarter of 1997, and by year end should be composed of approximately 200 automatic teller machines. BanPonce's non-banking subsidiaries also expanded their reach and businesses during 1996. BP Capital Markets, the Corporation's investment banking subsidiary, managed 18 transactions totaling over $2.4 billion. Of these, 12 were completed in Puerto Rico and six in the United States. BP Capital Markets actively participated in the financing of tourism-related projects in Puerto Rico, such as the Westin Rio Mar Beach Resort & Country Club, The Ritz-Carlton San Juan Hotel & Casino, Hostal El Convento and Hampton Inn Hotel. Over the past three years, the hotel sector has been booming on the island and BP Capital's business has reflected this trend. Popular Leasing, Banco Popular's leasing subsidiary, completed the consolidation of operations with Velco, BanPonce's leasing subsidiary. It also opened a new location in Humacao for a total of eight locations throughout Puerto Rico. During the year, Popular Leasing expanded its products offering by providing insurance premium financing services. Popular Consumer Services, Inc. (d/b/a Best Finance), Banco Popular's consumer loan subsidiary, expanded from 30 to 35 offices in Puerto Rico, and had asset growth of over 19%. Best Finance also expanded significantly its new second mortgage business, which tripled during 1996. ATH Dominicana Number of Machines Number of Transactions - ------------------ ---------------------- 3/96 12/96 3/96 12/96 61 102 275,000 566,000 Banco Popular established ATM networks to provide switching and driving services in the Dominican Republic and Costa Rica. (GRAPH) Dominican Republic and Costa Rica geographic map 21 118 BanPonce Corporation - 1996 Annual Report (PHOTO) Computerized Arts Graphic Design: ENHANCING OUR COMMITMENT TO A QUALITY ORGANIZATION to better serve our customers 22 119 Enhancing Our Commitment to a Quality Organization (PHOTO) Computerized Arts Graphic Design Expanding on our established commitment with Total Quality and excellence in everything we do, this year we have taken additional steps with the clear objective of positioning the Corporation for the challenges of the new century. New businesses, in new geographical areas, and increased client sophistication and service expectations will require that the Corporation and its employees possess the ability to constantly innovate to maintain BanPonce's competitive edge and remain the financial service provider of choice at all times. 23 120 BanPonce Corporation ~ 1996 Annual Report (PHOTO) - Two employee on a Teamwork Above: Through coaching and training, teamwork was emphasized in 1996. Below: The Bank developed a new corporate image for branch employees in Puerto Rico. To accomplish this goal successfully, employees have to be provided with the necessary environment, skills and tools to meet the constantly changing requirements of the financial services industry. Throughout the year, several strategies were implemented to improve organizational effectiveness and strengthen the individual capacities of the employees. During 1996, we made considerable inroads as we introduced initiatives to optimize the effectiveness of the organizational system. We concentrated our efforts in aligning individual and collective efforts throughout the Corporation toward the achievement of high-priority issues. We made headway in facilitating the necessary discipline to accomplish objectives in a coordinated and synchronized fashion. Some of the initiatives put in place during the year included the complete revision of the strategic planning process, the introduction of service agreement contracts between areas of the Bank, team training for personnel in newly established branches and the implementation of re-engineering techniques to make processes more efficient and generate savings. The strategic planning process was refocused to facilitate coordination within units. The implementation of this new system has resulted in improved teamwork, coordination and prioritization. Similarly, the established service agreements between the Operations Group and the Retail Banking and Commercial Banking groups have achieved a more clear understanding of the needs of the involved parties with the main objective of working together to offer improved customer service. Re-engineering of the purchasing and platform processes have also resulted (PHOTO) - Two employee modeling the new uniforms for Branch personnel 24 121 Enhancing Our Commitment to a Quality Organization (PHOTO) - A group of Employees attending to a Workshop Above: Trainings have been instrumental in improving customer service. Below Left: Our branch facilities and well-trained personnel reflect an emphasis on a sales and service culture. Below Right: The Bank's training center disseminates the Total Quality philosophy across the Corporation. in substantial improvements in customer service and significant cost reductions. In addition to these initiatives, we continued our Total Quality efforts through the implementation of Process Improvement Teams in key businesses and departments. The effectiveness of the organizational system is only possible if the individual capabilities of the employees are also strengthened. During the year, a corporatewide survey was conducted in Puerto Rico to ensure that the initiatives that are being implemented were responding to the needs of the Corporation and employees. Individual initiatives to strengthen the capabilities of our employees included a new corporate image that comprises stylish new uniforms, attitude training and a new merchandising system. These individual initiatives are being supported by the implementation of a new evaluation system that promotes increased differentiation between high and low performers. Proud of the achievements in this area during 1996, we recognize that to accomplish the long-term goals of Total Quality will require that each employee begin each work day with a renewed commitment to do things right the first time and basing all decisions with the customer in mind. (PHOTO) - A employee attending a customer (PHOTO) - Exhibition At Training Center 122 BanPonce Corporation - 1996 Annual Report (PHOTO) - Computerized Arts Graphic Design: COMMUNITY INVOLVEMENT enhancing the social and economic conditions of the communities we serve 26 123 Community Involvement (PHOTO) - Computerized Arts Graphic Design: The economic welfare of a business is closely tied to the welfare of its surrounding community. Since 1893 Banco Popular and its employees have recognized these by actively participating and contributing to all aspects of community life. 27 124 BanPonce Corporation - 1996 Annual Report (PHOTO) - Children at Education Program ABOVE: THE BANCO POPULAR FOUNDATION SUPPORTS GROUPS PRIMARILY WORKING IN THREE AREAS: COMMUNITY DEVELOPMENT, EDUCATION AND HEALTH. BELOW: THE BANK RAISED FUNDS TO HELP NEEDY INSTITUTIONS AFFECTED BY THE HURRICANE. More importantly, over the years Banco Popular has readily responded in times of need. In 1996, Puerto Rico was hit by Hurricane Hortense. Banco Popular immediately reactivated its Reconstruction Fund with an initial donation of $100,000 and invited the public to contribute to the fund. Jointly with the Fondo Dotal Enrique Marti Coll and the Caimito Tree Nursery, Banco Popular promoted a tree sale to replace those destroyed by the hurricane and to help raise money for the Reconstruction Fund. The fund raised a total of $150,000, which was distributed among 13 institutions that suffered severe damages. In New York, Bank employees fully participated in a telethon and other activities to help raise funds for hurricane victims on the island. Similarly, in Costa Rica, where Banco Popular is establishing an ATH network, the Corporation donated $25,000 to help relief efforts after Hurricane Cesar hit the country. The most significant community work of the Corporation is done through the Banco Popular Foundation, a non-profit organization established in 1979 to support efforts dedicated to enhancing the quality of life of Puerto Ricans. Through the Foundation, grants and donations are channeled to organizations that have high community participation and which are primarily dedicated to promoting community development, education and health. The Banco Popular Foundation has quickly risen to the forefront of non-profit organizations on the island because of its generosity and the quality of the projects it has chosen to support. Last year, the Foundation undertook over 15 major projects. The highlight of the year was the project to expand the Jane Stern Dorado Community Library with the adoption of an innovative campaign, designed to promote local contributions. The Foundation made possible for them to match contributions for their expansion program. Additionally, the Foundation continued to invest in community development projects, housing development for disadvantaged communities, cultural organizations, AIDS support groups and organizations that work with the homeless. The well-being of a country rests primarily on the solid education of its leaders. The Rafael Carrion Jr. Scholarship awarded its second scholarship for a Puerto Rican student to attend The Wharton School of the University of Pennsylvania. This scholarship is designed to enhance the quality of the future business leaders of the island. FONDO DE RECONSTRUCCION BANCO POPULAR 1996 28 125 Community Involvement Aside from this scholarship, the Foundation has a strong college scholarship program for the sons and daughters of employees. In 1996, this program significantly grew, as the Foundation granted 82 scholarships, up from 64 in 1995. Banco Popular also administers a donations program independent of the Foundation. During the course of 1996, over 1,000 donations were made to support a wide range of activities, from the purchase of uniforms for Little League teams to partially funding drug prevention campaigns. Approximately 50% of the funds in 1996 were distributed to community civic organizations. The remaining funds were distributed among educational institutions or scholarships, cultural affairs and sport activities. The Bank contributed to Puerto Rico's international presence in sports by being a major sponsor of the World Gymnastic Championship held in San Juan. It also actively participated in activities related to the visit of the International Olympic Committee's evaluating commission to San Juan, as one of the cities bidding for the 2004 Games. Major support for cultural activities is also one of the Bank's strengths. Opera, theater, popular music and the annual Ponce Museum of Art fund-raising gala are some of the areas in which the Bank plays a major role in enriching community life. For the fourth consecutive year, the Bank produced a musical documentary with the participation of more than 20 local and international artists. The latest program, Al Compas de un Sentimiento, was a tribute to the great Puerto Rican composer Pedro Flores, who was also acclaimed in many Latin American countries. It was broadcast as a Christmas gift to the people of Puerto Rico and Hispanic populations in United States markets in which the Bank has a presence. During the year, the Bank continued to contribute to the enrichment of public discourse by organizing two major exhibits at the Rafael Carrion Pacheco Exhibition Hall in San Juan. Over 6,000 people visited The Disposable Island: The Garbage Problem in Puerto Rico, which had been inaugurated in the fourth quarter of 1995. Many more people visited the exhibit to listen to guest lecturers. In the last quarter, Banco Popular opened its 11th exhibition: Ready! Puerto Rico in International Sports (1930-2004). This exhibit drew record crowds in 1996. Over the years, sports have acted as a unifying element contributing to personal and collective advancement. Active community participation is not limited to the Corporation and Banco Popular. Many of the Bank's employees are active members in civic organizations throughout the island, contributing many hours to improving their surroundings. This proactive stance is not limited to Puerto Rico; many of the Bank employees in New York have been actively involved in events designed to raise funds for worthy causes such as the March of Dimes, AidsWalk and Making Strides. Whether through the Foundation, the Bank, or through its thousands of employees, the Corporation endeavors to enrich the quality of the communities it serves. Above: Sports-related activities are actively supported by the Bank. Below left: The Bank produced and broadcast its fourth musical documentary as a gift to the communities it serves. (PHOTO) - Athletes at Track & Field starting Line (PHOTO) - Mr. Richard L. Carrion presented a musical documentary Al Compas de un Sentimentio. (PHOTO) - Banco Popular Foundation Library 29 126 Lines of Business Lines of Business (by location) COMMERCIAL BANKING/ SAVINGS AND LOANS PUERTO RICO BANCO POPULAR - - Full-service commercial and retail banking subsidiary. - - Established in 1893. - - Total assets of $11.0 billion. - - Largest branch network in Puerto Rico with 178 branches. - - Most extensive ATM network "ATH" (at all times) with 327 ATMs. - - Leader in deposit market with $8.1 billion. - - Leader in loan market with $5.8 billion. - - Dominant player in electronic services. - - Banco Popular has at least one relationship with 66.6% of the banking consumer market in Puerto Rico. UNITED STATES BANCO POPULAR (NEW YORK, CALIFORNIA AND ILLINOIS) - - Banco Popular branch network operating in New York, California and Chicago. - - Opened first branch in 1961. - - Total assets of $2.4 billion, and $2 billion in deposits. - - Largest Hispanic branch network. - - Operates 29 branches in the New York City area, four in Los Angeles county, and five in Chicago. - - Focus on serving individual, small businesses, and mortgage lending. BANCO POPULAR, FSB (NEW JERSEY) - - Subsidiary of BanPonce Financial Corp.; a federal savings bank operating six branches in New Jersey. - - Total assets of $317 million, $212 million in total deposits and $142.6 million in total loans. - - Established through the acquisition of the former Carteret Federal Savings Bank. CARIBBEAN BANCO POPULAR (BRITISH AND U.S. VIRGIN ISLANDS) - - Banco Popular branch network in British and U.S. Virgin Islands. - - Entered the Virgin Islands market in 1981. - - Total assets of $620 million and $466 million deposits. - - Largest bank in the U.S. Virgin Islands with approximately 30% market share. - - Operates seven branches in the U.S. Virgin Islands and one in Tortola, British Virgin Islands; two consumer credit centers and two mortgage centers. MORTGAGE BANKING PUERTO RICO POPULAR MORTGAGE, INC. (D/B/A PUERTO RICO HOME MORTGAGE) - - BANCO POPULAR'S MORTGAGE BANKING SUBSIDIARY. - - Acquired in April 1995. - - Total assets of $155 million. - - Operates four offices located in the San Juan metropolitan area. LEASING BUSINESS PUERTO RICO POPULAR LEASING AND RENTAL, INC. - - Popular Leasing, established in 1989, is engaged in finance leasing, equipment leasing and daily motor and equipment rental in the Puerto Rico market. - - Total assets of $566 million. - - Operates five sales offices and eight daily rental outlets. UNITED STATES POPULAR LEASING USA - - Recently established subsidiary to offer small ticket equipment leasing. CONSUMER FINANCE PUERTO RICO POPULAR CONSUMER SERVICES, INC. (D/B/A BEST FINANCE) - - Small loan and secondary mortgage subsidiary. - - Established in 1970, acquired by BanPonce in 1987. - - Total assets of $116 million, with more than 54,000 accounts and $116 million in loans. - - Five new offices were opened in 1996 for a total of 35. UNITED STATES EQUITY ONE, INC. - - Banco Popular, FSB; subsidiary engaged in the business of personal and mortgage loans and retail financing. - - Established in 1989, acquired by BanPonce in 1991. - - Total assets of $1.1 billion. - - Increased number of offices from 91 to 102; opened operations in two new states for a total of 28 states. INVESTMENT BANKING PUERTO RICO BP CAPITAL MARKETS, INC. - - Securities broker-dealer in Puerto Rico, with brokerage, financial advisory, investment and security brokerage operations. - - Acquired from CS First Boston in April 1995. - - Executed a large variety of transactions that included public finance, corporate finance, asset finance, mortgage finance, real estate, investment funds, and merger and acquisition transactions. - - Provided underwriting and/or investment banking services in 18 financing transactions totaling approximately $2.4 billion. PROCESSING SERVICES CARIBBEAN ATH DOMINICANA - - Joint venture with Banco Popular Dominicano and Codetel to establish the ATH network. - - By year end seven banks were connected to the network, which operated 102 ATM machines. ATH COSTA RICA - - Reached an agreement with 16 Costa Rican banks to provide ATM switching and driving services. 30 127 BOARDS OF DIRECTORS BOARDS OF DIRECTORS BANPONCE CORPORATION RICHARD L. CARRION Chairman President Chief Executive Officer ALFONSO F. BALLESTER Vice Chairman of the Board President Ballester Hermanos, Inc. ANTONIO LUIS FERRE Vice Chairman of the Board President El Nuevo Dia JUAN J. BERMUDEZ Partner Bermudez & Longo, S.E. FRANCISCO J. CARRERAS Educator Executive Director Fundacion Angel Ramos, Inc. DAVID H. CHAFEY JR. Senior Executive Vice President BanPonce Corporation and Banco Popular de Puerto Rico LUIS E. DUBON JR., ESQ. Partner Dubon & Dubon HECTOR R. GONZALEZ President Chief Executive Officer TPC Communications of PR, Inc., and Teleponce Cable TV, Inc. JORGE A. JUNQUERA Senior Executive Vice President BanPonce Corporation and Banco Popular de Puerto Rico MANUEL MORALES JR. Principal Selarom Capital Group ALBERTO M. PARACCHINI Private Investor FRANCISCO PEREZ JR. Chairman of the Board President Sucrs. Jose Lema & Co., Inc. FRANCISCO M. REXACH JR. President Ready Mix Concrete, Inc. JOSE E. ROSSI President V & Q Management, Inc. FELIX J. SERRALLES NEVARES President Chief Executive Officer Destileria Serralles, Inc. EMILIO JOSE VENEGAS Secretary, Board of Directors Venegas Construction Corp. President Sanson Corporation JULIO E. VIZCARRONDO JR. President Chief Executive Officer Desarrollos Metropolitanos, Inc. SAMUEL T. CESPEDES, ESQ. Secretary Board of Directors ERNESTO N. MAYORAL, ESQ. Assistant Secretary Board of Directors BRUNILDA SANTOS DE ALVAREZ, ESQ. Assistant Secretary Board of Directors BANCO POPULAR DE PUERTO RICO RICHARD L. CARRION Chairman President Chief Executive Officer ALFONSO F. BALLESTER Vice Chairman of the Board President Ballester Hermanos, Inc. ANTONIO LUIS FERRE Vice Chairman of the Board President El Nuevo Dia JUAN A. ALBORS HERNANDEZ Chairman Chief Executive Officer Albors Development Corp. SALUSTIANO ALVAREZ MENDEZ President and Director Mendez & Company, Inc. JOSE A. BECHARA BRAVO President Empresas Bechara Inc. JUAN J. BERMUDEZ Partner Bermudez & Longo, S.E. ESTEBAN D. BIRD President Chief Executive Officer Bird Construction Company, Inc. FRANCISCO J. CARRERAS Educator Executive Director Fundacion Angel Ramos, Inc. DAVID H. CHAFEY JR. Senior Executive Vice President BanPonce Corporation and Banco Popular de Puerto Rico LUIS E. DUBON JR., ESQ. Partner Dubon & Dubon HECTOR R. GONZALEZ President Chief Executive Officer TPC Communications of PR, Inc., and Teleponce Cable TV, Inc. JORGE A. JUNQUERA Senior Executive Vice President BanPonce Corporation and Banco Popular de Puerto Rico FRANKLIN A. MATHIAS Retired Executive MANUEL MORALES JR. Principal Selarom Capital Corp. ALBERTO M. PARACCHINI Private Investor FRANCISCO M. REXACH JR. President Ready Mix Concrete, Inc. FELIX J. SERRALLES NEVARES President Chief Executive Officer Destileria Serralles, Inc. JULIO E. VIZCARRONDO JR. President Chief Executive Officer Desarrollos Metropolitanos, Inc. SAMUEL T. CESPEDES, ESQ. Secretary Board of Directors ERNESTO N. MAYORAL, ESQ. Assistant Secretary Board of Directors BRUNILDA SANTOS DE ALVAREZ, ESQ. Assistant Secretary Board of Directors 31 128 MANAGEMENT MANAGEMENT BANPONCE CORPORATION RICHARD L. CARRION Chairman President Chief Executive Officer DAVID H. CHAFEY JR. Senior Executive Vice President JORGE A. JUNQUERA Senior Executive Vice President MARIA ISABEL P. DE BURCKHART Executive Vice President ROBERTO R. HERENCIA Executive Vice President LARRY B. KESLER Executive Vice President HUMBERTO MARTIN Executive Vice President EMILIO E. PINERO FERRER, ESQ. Executive Vice President CARLOS ROM JR. Executive Vice President AMILCAR L. JORDAN, ESQ. Senior Vice President FELIX VILLAMIL Senior Vice President BANCO POPULAR RICHARD L. CARRION Chairman President Chief Executive Officer SENIOR MANAGEMENT COUNCIL RICHARD L. CARRION President Chief Executive Officer DAVID H. CHAFEY JR. Senior Executive Vice President JORGE A. JUNQUERA Senior Executive Vice President MARIA ISABEL P. DE BURCKHART Executive Vice President ROBERTO R. HERENCIA Executive Vice President LARRY B. KESLER Executive Vice President HUMBERTO MARTIN Executive Vice President EMILIO E. PINERO FERRER, ESQ. Executive Vice President CARLOS ROM JR. Executive Vice President OFFICE OF THE PRESIDENT TERE LOUBRIEL Senior Vice President Total Quality BRUNILDA SANTOS DE ALVAREZ, ESQ. Senior Vice President Legal Division FELIX VILLAMIL Senior Vice President Internal Auditor RETAIL BANKING GROUP DAVID H. CHAFEY JR. Senior Executive Vice President JORGE BIAGGI Senior Vice President Hato Rey Region FRANCISCO CESTERO Senior Vice President Caguas/Fajardo Region NORMAN IRIZARRY Senior Vice President Western Region CARLOS J. MANGUAL Senior Vice President Ponce Region WILBERT MEDINA Senior Vice President Bayamon Region MARITZA MENDEZ Senior Vice President San Juan Region MIGUEL RIPOLL Senior Vice President Rio Piedras Region ELI SEPULVEDA JR. Senior Vice President Arecibo/Manati Region JUAN GUERRERO Senior Vice President Financial and Investment Services NESTOR O. RIVERA Senior Vice President Retail Banking LIZZIE ROSSO Senior Vice President Alternative Delivery Channels RETAIL CREDIT GROUP LARRY B. KESLER Executive Vice President JORGE J. BESOSA Senior Vice President Individual Lending FELIPE FRANCO Senior Vice President Mortgage Loans VALENTINO I. MCBEAN Senior Vice President Virgin Islands Region COMMERCIAL BANKING GROUP EMILIO E. PINERO FERRER, ESQ. Executive Vice President ARNALDO SOTO COUTO Senior Vice President Construction Loans CYNTHIA TORO Senior Vice President Business Banking RICARDO TORO Senior Vice President Corporate Banking MARIA FUENTES Vice President Structured Finance FINANCIAL MANAGEMENT GROUP JORGE A. JUNQUERA Senior Executive Vice President ROBERTO R. HERENCIA Executive Vice President U.S. Expansion CARLOS ROM JR. Executive Vice President Caribbean and Latin America Expansion RICHARD BARRIOS Senior Vice President Investments and Treasury ORLANDO BERGES Senior Vice President New York/New Jersey Region LUIS R. CINTRON, ESQ. Senior Vice President Trust AMILCAR L. JORDAN, ESQ. Senior Vice President Comptroller IVAN PAGAN Vice President Mergers and Acquisitions ADMINISTRATION GROUP MARIA ISABEL P. DE BURCKHART Executive Vice President EDUARDO RODRIGUEZ Senior Vice President Human Resources LUIS F. RODRIGUEZ VILLAMIL Senior Vice President Marketing LUZ M. TOUS DE TORRES Senior Vice President Corporate Real Estate GINORIS LOPEZ-LAY Vice President Strategic Planning EVELYN VEGA SELLA Vice President Public Relations and Communications OPERATIONS GROUP HUMBERTO MARTIN Executive Vice President SEGUNDO BERNIER Senior Vice President Operations VICTOR V. ECHEVARRIA Senior Vice President Management Information Systems EDUARDO FIGUEROA Senior Vice President Electronic Banking Services PLINIO RODRIGUEZ Senior Vice President Security MARGARITA HERRERA, ESQ. Vice President Consumer Compliance RAFAEL LUGO SOTOMAYOR, ESQ. Vice President Financial Compliance MARTA RAMOS Vice President Community Reinvestment OTHER SUBSIDIARIES BP CAPITAL MARKETS, INC. KENNETH MCGRATH President BANCO POPULAR (ILLINOIS) S. MICHAEL POLANSKI President BANCO POPULAR, FSB RICHARD L. CARRION President BANCO POPULAR N.A. (CALIFORNIA) RICHARD F. DEMERJIAN President EQUITY ONE, INC. THOMAS J. FITZPATRICK President POPULAR CONSUMER SERVICES, INC. D/B/A BEST FINANCE Edgardo Novoa President POPULAR LEASING AND RENTAL, INC. ANDRES F. MORRELL President POPULAR LEASING USA BRUCE D. HORTON President POPULAR MORTGAGE, INC. D/B/A PUERTO RICO HOME MORTGAGE CHURCHILL CAREY President 32 129 10-K FINANCIAL SUMMARY 33 130 STOCKHOLDERS' INFORMATION INDEPENDENT PUBLIC ACCOUNTANTS Price Waterhouse ANNUAL MEETING The 1997 annual stockholders' meeting of BanPonce Corporation will be held on Friday, April 25, at 10:00 a.m. at Centro Europa Building in San Juan, Puerto Rico. Telephone (787) 765-9800 Fax (787) 759-7803 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 ILLUSTRATION: Raul Colon PHOTOGRAPHY: Mark Bolster PRINTING: Arthurs-Jones, Inc. EX-21.1 7 SCHEDULE OF SUBSIDIARIES 1 EXHIBIT 21.1 BANPONCE CORPORATION AS OF DECEMBER 31, 1996 Subsidiaries of the registrant a. Banco Popular de Puerto Rico (Banco Popular) - A wholly-owned subsidiary Bank, incorporated under the laws of Puerto Rico in 1917. Popular Leasing and Rental, Inc. (Popular Leasing) - A wholly owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Consumer Services, Inc. (Best Finance) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Mortgage Inc. (Puerto Rico Home Mortgage) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1995. b. Popular International Bank, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1992. BanPonce Financial Corp. - A wholly-owned subsidiary of Popular Intenational Bank, Inc., incorporated under the laws of Delaware in 1991. Banco Popular FSB, A wholly-owned subsidiary of BanPonce Financial Corp., chartered in New Jersey in 1995. Equity One, Inc. - A wholly-owned subsidiary, of Banco Popular, FSB, incorporated under the laws of Delaware in 1988. Pioneer Bancorp., Inc. - A wholly-owned subsidiary, of BanPonce Financial Corp., incorporated under the laws of Delaware in 1988. River Associates Bancorp, Inc. - A wholly-owned subsidiary, of Pioneer Bancorp, Inc., incorporated under the laws of Delaware in 1986. Combankcorp, Inc.- A wholly-owned subsidiary of BanPonce Financial Corp., incorporated under the laws California in 1982. Banco Popular, N.A. - California (Formerly Commerce National Bank) A wholly-owned subsidiary of Combancorp, Inc. incorporated under the laws of California in 1982. -1- 2 EXHIBIT 21.1 (CONT.) c. BP Capital Markets, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1995. d. Metropolitana de Prestamos, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1961. e. Popular Securities, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1994 (Inactive Corporation). f. Puerto Rico Parking Corp. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1963 (Inactive Corporation). -2- EX-23.1 8 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS February 21, 1997 To the Board of Directors BanPonce Corporation We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-61601 of BanPonce Corporation of our report dated February 21, 1997, appearing on page F-35 of the Annual Report to Shareholders of BanPonce Corporation which is incorporated by reference in this Annual Report on Form 10K. PRICE WATERHOUSE -1- EX-27.0 9 F.D.S.
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF BANPONCE CORPORATION FOR THE 12 MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 492,368 19,023 778,597 292,150 3,415,934 1,197,066 1,197,641 9,779,028 185,574 16,764,103 10,763,275 3,309,471 314,012 1,111,713 0 100,000 396,531 766,001 16,764,103 924,076 280,610 68,167 1,272,853 350,221 591,540 681,313 88,839 3,094 541,919 256,027 185,150 0 0 185,150 2.68 0 4.49 145,416 12,270 3,308 140,549 168,393 107,961 35,901 185,574 184,771 803 0
EX-99.1 10 BANPONCE N&PS 1 BANPONCE CORPORATION P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 --------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, APRIL 25, 1997 --------------- To the Stockholders of BanPonce Corporation: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of BanPonce Corporation (the "Meeting") for the year 1997 will be held at 10:00 a.m. on Friday, April 25, 1997, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, to consider and act upon the following matters: (1) To elect three (3) directors of BanPonce Corporation (the "Corporation") for a three-year term; (2) To amend Article First of the Restated Articles of Incorporation to change the name of the Corporation to Popular, Inc; (3) To amend Article Fifth of the Restated Articles of Incorporation to increase the authorized numbers of shares of common stock, par value $6, from 90,000,000 to 180,000,000 and; (4) 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 7, 1997, are entitled to notice of and 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 addressed to the Corporation is enclosed for your convenience. San Juan, Puerto Rico, March 20, 1997. By Order of the Board of Directors, SAMUEL T. CESPEDES Secretary 2 BANPONCE CORPORATION P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 --------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, APRIL 25, 1997 --------------- This Proxy statement is furnished in connection with the solicitation by the Board of Directors of BanPonce Corporation (the "Corporation") of Proxies to be voted at the Annual Meeting of Stockholders (the "Meeting") to be held at 10:00 a.m. on Friday, April 25, 1997, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, and any adjournments thereof. Enclosed with this Proxy Statement is the Annual Report, including Form 10-K and the financial statements for the year ended December 31, 1996, duly certified by Price Waterhouse as independent public accountants. This Proxy Statement, the enclosed Annual Report and Form 10-K, the Notice of Annual Meeting of Stockholders and the form of proxy are being sent to stockholders on or about March 20, 1997. Properly executed proxies received by the Secretary of the Corporation will be voted at the Meeting in accordance with the instructions that 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 those included in the Notice of Meeting. The Board of Directors at this time knows of no other matters that may come before the Meeting. However, if any new matters requiring the vote of the stockholders properly come before the Meeting, proxies may be voted with respect thereto in accordance with the best judgement 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. The grantor may revoke the proxy by claiming at the Meeting the right to vote by himself the shares of stock registered in his name or by notice of revocation in writing to the President or Secretary of BanPonce Corporation, 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, each share of which entitles the holder thereof to one vote. Only common stockholders of record at the close of business on March 7, 1997 (the "Record Date"), will be entitled to vote at the Meeting and any adjournments thereof. On the Record Date there were 66,121,855 shares of common stock of the Corporation outstanding. The shares covered by any such proxy that are properly executed and received by management before 10:00 a.m. on the day of the Meeting will be voted. 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 people appointed by the Corporation as members of the vote-counting committee for the Meeting. For purposes of determining quorum, the members of the vote-counting committee will treat abstentions and broker 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. 3 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. As to the proposals to amend the Restated Articles of Incorporation, abstentions and broker non-votes will have the same effect as a vote against the proposals to amend the Restated Articles of Incorporation to change the name of the Corporation and to increase the number of authorized common shares of the Corporation. PRINCIPAL STOCKHOLDERS Following is the information, to the extent known by the people 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 and Exchange Act of 1934, as amended) who is known to the Corporation to be the beneficial owner of more than 5 percent of the Corporation's voting securities.
AMOUNT AND NATURE PERCENT OF BENEFICIAL OF TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2) - -------------- ------------------------------------ ------------ -------- Common............ Banco Popular de Puerto Rico (the "Bank") As Trustee for Banco Popular de Puerto Rico Retirement Plan 2,836,430 The Bank as Trustee for the Profit Sharing Plan for the Employees of Banco Popular de Puerto Rico 2,660,696 --------- 5,497,126(3) 8.3136 Common............ State Farm Mutual Automobile Insurance Company 3,670,062(4) 5.5505
- ------------------ (1) As of February 28, 1997. (2) Based on 66,121,855 shares of common stock outstanding. (3) The Bank, as Trustee, administers both Plans through their Administrative Committees, with sole voting and investment power. (4) On January 3, 1997, 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 its holdings as of December 31, 1996. 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 3,670,062 shares of BanPonce 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". 2 4 SHARES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF THE CORPORATION Following is the information, as of February 28, 1997, as to equity securities of the Corporation beneficially owned by all current directors, nominees, the most highly compensated Executive Officers of the Corporation who are not directors and the total owned by directors, nominees and all Executive Officers of the Corporation as a group: COMMON STOCK
NAME TITLE OF AMOUNT AND NATURE PERCENT OF - ---- CLASS OF BENEFICIAL OWNERSHIP CLASS(1) ----- ----------------------- -------- Alfonso F. Ballester ....................... Common 689,104(3) 1.0422 Juan J. Bermudez ........................... Common 138,122(4) .2089 Francisco J. Carreras ...................... Common 5,474 .0083 Richard L. Carrion ......................... Common 511,698(5) .7739 David H. Chafey, Jr. ....................... Common 31,628 .0478 Luis E. Dubon, Jr. ......................... Common 885,594(6) 1.3393 Antonio Luis Ferre ......................... Common 1,424,340(7) 2.1541 Hector R. Gonzalez ......................... Common 262,263(8) .3966 Jorge A. Junquera .......................... Common 18,909(9) .0286 Manuel Morales, Jr. ........................ Common 348,982(10) .5278 Alberto M. Paracchini ...................... Common 55,812(11) .0844 Francisco Perez, Jr. ....................... Common 483 .0007 Francisco M. Rexach, Jr. ................... Common 60,521(12) .0915 Jose E. Rossi .............................. Common 44,756(13) .0677 Felix J. Serralles, Jr. .................... Common 179,830(14) .2720 Emilio Jose Venegas ........................ Common 163,868(15) .2478 Julio E. Vizcarrondo, Jr. .................. Common 556,939(16) .8423 Maria Isabel P. de Burckhart ............... Common 23,443(17) .0355 Roberto R. Herencia ........................ Common 36(18) .0001 Larry B. Kesler ............................ Common 17,816 .0269 Humberto Martin ............................ Common 29,490 .0446 Emilio E. Pinero ........................... Common 13,229 .0200 Carlos Rom, Jr. ............................ Common 5,800(19) .0088 All Directors and Executive Officers of the Corporation as a group ............ Common 5,468,137 8.2698
PREFERRED STOCK
NAME TITLE OF AMOUNT AND NATURE PERCENT OF - ---- CLASS OF BENEFICIAL OWNERSHIP CLASS(2) ----- ----------------------- -------- Luis E. Dubon, Jr. ......................... Preferred 7,375(20) .1844 Alberto M. Paracchini ...................... Preferred 7,000 .1750 All Directors and Executive Officers of the Corporation as a group ............ Preferred 14,375 .3594
- ---------- (1) Based on 66,121,855 shares of common stock outstanding. (2) Based on 4,000,000 shares of preferred stock outstanding. (3) Mr. Ballester owns 687,104 shares and has indirect investment power over 2,000 shares owned by his wife. Excludes 600,964 shares owned by his sister, Mrs. Griselda Ballester, as to all of which shares Mr. Ballester disclaims indirect voting power. 3 5 (4) Excludes 5,839 shares owned by his wife, as to which Mr. Bermudez disclaims indirect voting power. (5) Mr. Carrion owns 137,193 shares and also has indirect investment power over 11,961 shares owned by his children. Junior Investment Corporation owns 2,080,000 shares of the Corporation. Mr. Carrion owns 17.43% of the shares of said corporation. (6) Mr. Dubon owns 91,266 shares and has a power of attorney over 57,608 shares owned by his wife, Mrs. Myrta A. Dubon, over 35,829 shares held in trust for his children and 700,891 shares owned by various corporations and members of his family in which Mr. Dubon has direct or indirect ownership. (7) Mr. Ferre has indirect investment and voting power and claims beneficial ownership of 1,424,340 shares of the Corporation. Mr. Ferre owns 384 shares and has indirect investment and voting power over 249,600 shares owned by Alfra Investment Corp. and 200 shares owned by his wife. Mr. Ferre owns 87.18% of Ferre Investment Fund, Inc., which owns 455,800 shares of the Corporation. Mr. Ferre also owns 67.25% of the shares of El Dia, Inc., and has indirect voting power over Alfra Investment Corp., which owns 19.94% of El Dia, Inc., which owns in turn 718,356 shares of the Corporation. (8) Mr. Gonzalez owns 253,587 shares and has voting and investment power over 8,676 shares of the Corporation owned by TPC Financial Services, Inc. of which he is President and Chief Executive Officer. (9) Mr. Junquera owns 18,694 shares and has indirect investment power over 215 shares owned by his daughter. (10) Mr. Morales owns 158,928 shares and has voting power over 190,054 shares owned by his parents, as their attorney-in-fact. (11) Excludes 632 shares owned by his wife, as to which Mr. Paracchini disclaims beneficial ownership. (12) Mr. Rexach owns 35,521 shares and has voting power over 20,000 shares owned by his mother, as her attorney-in-fact, and over 5,000 shares held by Capital Assets, Inc. as President and shareholder. (13) Mr. Rossi owns 17,537 shares and has indirect investment power over 27,219 shares owned by his daugthers. (14) Mr. Serralles Nevares owns 113,376 shares, and has indirect voting power over 5,146 shares owned by his wife. Mr. Serralles owns 100% of the shares of each of Capitanejo, Inc. and Fao Investment, Inc., which own 58,510 and 2,798 shares, respectively, of the Corporation. (15) Mr. Venegas owns 15,384 shares, and also has indirect investment power over 15,000 shares owned by his wife. Mr. Venegas also has indirect voting and investment power over the 30,000 shares of the Corporation owned by Venegas Construction Corporation, of which he is stockholder and secretary and over 103,484 shares of the Corporation owned by Sanson Corporation, of which he is President and stockholder. (16) Mr. Vizcarrondo owns 99,440 shares and has indirect voting power over 89,131 shares owned by his wife. Mr. Vizcarrondo's wife owns 17.71% of the shares of Junior Investment Corporation, which owns 2,080,000 shares of the Corporation. Mr. Vizcarrondo has indirect voting and investment power over 300 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 62,523 shares owned by DMI Pension Trust, where he serves as trustee and member of the investment committee. Excluded also are 11,452 shares owned by Mr. Vizcarrondo as trustee of the Suarez Toro Trust, which owns said shares of the Corporation, of which he disclaims beneficial ownership. (17) Mrs. Burckhart owns 22,020 shares and has indirect voting power over 800 shares held by her husband and over 623 shares held by her husband as custodian for her daughters. (18) Mr. Herencia acquired 5,141 additional shares on March 3, 1997. (19) Mr. Rom owns 5,497 shares and has indirect voting power over 69 shares owned by his wife and 234 shares held by him as custodian for various members of his family. Mr. Rom acquired 4,476 additional shares on March 5, 1997. (20) Mr. Dubon owns 1,000 preferred shares, and has indirect beneficial ownership over 5,875 preferred shares held in trust by Mr. Luis E. Dubon, Jr. for several people. Mr. Dubon also has indirect ownership over 500 preferred shares owned by Fundacion Gogui, Inc. 4 6 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based on a review of Forms 3, 4 and 5 and amendments thereto furnished to the Corporation with respect to its 1996 fiscal year, pursuant to Section 16(a) of the Securiries Exchange Act of 1934, the following people, subject to Section 16(a), failed to file on a timely basis:
NAME NUMBER OF LATE REPORTS NUMBER OF TRANSACTIONS - ---- ---------------------- ---------------------- Juan J. Bermudez 1 2 Francisco J. Carreras 1 2 Antonio Luis Ferre 1 4 Franklin A. Mathias 2 2 Manuel Morales, Jr. 1 2 Francisco M. Rexach, Jr. 2 2 Jose E. Rossi 1 3 Felix J. Serralles, Jr. 1 1 Emilio Jose Venegas 1 5 Julio E. Vizcarrondo, Jr. 2 2 Maria Isabel P. de Burckhart 1 1
The Corporation has no knowledge of any additional failure to file a required Form. BOARD OF DIRECTORS AND COMMITTEES PROPOSAL 1: ELECTION OF DIRECTORS The Certificate of Incorporation and the By-laws 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. At the Meeting, three (3) directors assigned to "Class 1" are to be elected until the 2000 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The directors nominated for election are: Salustiano Alvarez Mendez, Alfonso F. Ballester and Jorge A. Junquera. All of the above will serve for three (3) years until the 2000 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The remaining 12 directors of the Corporation will serve as directors, as follows: until the 1998 Annual Meeting of Stockholders of the Corporation, in the case of those five directors assigned to "Class 2", and until the 1999 Annual Meeting of Stockholders, in the case of those seven directors assigned to "Class 3", or in each case until their successors are duly elected and qualified. The policy of the Board of Directors, as set forth in a resolution adopted on January 8, 1991, provides that no person shall be nominated for election or reelection as director of the Board if at the date of the Annual Meeting of Stockholders or during the term to be served such person attains seventy two (72) years of age. Messrs. Emilio Jose Venegas and Jose Rossi would attain seventy two (72) years of age during the term to be served. In accordance with Board policy, Messrs. Venegas and Rossi will not be nominated for reelection as directors. Mr. Francisco Perez, Jr. declined to be renominated for reelection. Mr. Perez's decision is not due to disagreement with the Corporation or with any matter relating to the Corporation's operations. 5 7 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 three nominees named before, 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. BOARD OF DIRECTORS NOMINEES FOR ELECTION AS DIRECTORS (TERMS EXPIRING IN 2000) CLASS 1 DIRECTORS
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Salustiano Alvarez Mendez...67 President and Director of Mendez & Company, Nominee Inc., food and liquor importers and distributors. Director of International Shipping Agency, Inc., shipping agents. Director of Menaco Corp., Guaynabo Realty S.E. and A. & D. Associates, Inc., ALECO Realty and Bamco Products Corp. until 1995. Director of Banco de Ponce from 1981 to 1990 and of the Bank from 1991 to April 1997. Alfonso F. Ballester.......67 Vice Chairman of the Board of the 1990 Corporation and the Bank. President of Ballester Hermanos, Inc. (Wholesale of provisions and liquors). Director of Popular International Bank, Inc., BanPonce Financial Corp, Equity One, Inc., and Popular Leasing & Rental, Inc. Chairman of the Commercial Credit Committee of the Bank. Director of the Bank since 1975. Jorge A. Junquera..........48 Supervisor of the Financial Management 1990 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. Executive Vice President of the Bank since 1980. President and Director of Popular International Bank, Inc. and BanPonce Financial Corp since January 1996. Director of Equity One, Inc., Popular Consumer Services, Inc., Popular Mortgage Inc., Pioneer Bancorp, Inc., Banco Popular, Illinois, CombanCorp, Banco Popular, N.A. (California), Citizens Bank Limited, Jamaica, and Popular Leasing & Rental, Inc. Chairman of the Board of BP Capital Markets, Inc. since January 1996, and of Puerto Rico Tourism Company and Hotel Development Co. since 1993. Director of YMCA since 1988. Director of the Bank since 1990.
6 8 OTHER DIRECTORS CLASS 2 DIRECTORS (TERMS EXPIRING IN 1998)
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Luis E. Dubon, Jr..........62 Attorney-at-Law and Investor. Partner of the 1984 law firm Dubon & Dubon. Director and stockholder of D Group Capital Corporation, D Group Corporation, Delta Maintenance Services Inc. Director and partner of D Group Equity Holding Associates, S. en C. por A., S.E., D Group Commercial Equities Associates S. en C. por A., S.E. Director of American Investment Corp., Fundacion Gogui, Inc., Carite Resorts Associates, S.en C. por A., S.E., Carite Resorts GP, Inc., Carolina Developers Associates, S.en C. por A., S.E., Contorno Developers Associates, S. en C. por A., S.E., Contorno Developers GP, Inc., D Group Commercial Equities GP, Inc., D Group Equities Management Services, Inc., D Group Equity Holding GP, Inc., D Group Realty Services, Inc., Delta Engineering Services, Inc., Delta Parking System Corporation, Dubon Corporation, Executive Habitats, Inc., Galeria del Condado Associates, S.en C. por A., S.E., Galeria del Condado GP, Inc., Imporexco, Inc., Lujoma Corporation, Marina Developers (Carolina) GP, Inc., Mercantil Caguax Associates, S. en C. por A., S.E., Mercantil Caguax GP, Inc., Mercantil Mayaguez Associates, S. en C. por A., S.E., Mercantil Mayaguez GP, Inc., Mercantil Pinero Associates, S. en C. por A., S.E., Mercantil Pinero GP, Inc., Mercantil San Patricio Associates, S. en C. por A., S.E., Mercantil San Patricio GP, Inc., Metro Center Associates, S. en C. por A., S.E., Metro Center GP Corporation, Plaza Bellas Artes GP, Inc., Plaza Bellas Artes Associates Uno S. en C. por A., S.E., Plaza Bellas Artes Associates Dos S. en C. por A., S.E., Plaza Bellas Artes Associates Tres S. en C. por A., S.E., Plaza Bellas Artes Associates IV, S. en C. por A., S.E., Plaza del Condado Associates, S. en C. por A., S.E., Plaza del Condado GP, Inc., Portilla Corporation, Puerta del Condado Associates, S. en C. por A., S.E., Puerta del Condado GP Inc., Resort Equities Developers GP, Inc., San Jose Building Associates, S. en C. por A., S.E., San Jose Building GP, Inc., Title & Corporate Services Corporation and San Jose Development, Inc. Director of Banco de Ponce from 1973 to 1990. Director of the Bank since 1990. Hector R. Gonzalez.........63 President and Chief Executive Officer of TPC 1984 Communications of PR, Inc. owner and operator of cable television systems. President and Chief Executive Officer of TPC Financial Services, Inc., TPC Cable Media, TelePonce Cable TV and Telecell Systems. Director of Damas Foundation, Inc. Director of Popular Consumer Services, Inc. and Popular Mortgage, Inc. Director of Banco de Ponce from 1973 to 1990. Director of the Bank since 1995.
7 9
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Manuel Morales, Jr.........51 President of Selarom Capital Group, Inc. 1990 President of Parkview Realty, Inc. President of the Atrium Office Center, Inc. Honorary General Consul of Japan in San Juan. Trustee of Sacred Heart University and Caribbean Environmental Development Institute. Member of the Board of Directors of Better Business Bureau. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Audit Committee of the Corporation. Director of the Bank since 1978. Francisco M. Rexach, Jr....59 President of Ready Mix Concrete, Inc. 1990 President of Capital Assets, Inc. since November 1995. Director of Popular Leasing & Rental, Inc. Chairman of the Human Resources and Compensation Committee of the Bank. Director of the Bank since 1984. Julio E. Vizcarrondo, Jr...62 Civil Engineer. President/Partner and Chief 1990 Executive Officer of Desarrollos Metropolitanos, S.E., VMV Enterprises Corp., Resort Builders, S.E., Metropolitan Builders, S.E., Institutional Builders, S.E., corporations engaged in the development and construction of residential, commercial, industrial and institutional projects in Puerto Rico. Director of the Bank since 1984. CLASS 3 DIRECTORS (TERMS EXPIRING IN 1999) Juan J. Bermudez...........59 Electrical Engineer. Partner of Bermudez and 1990 Longo, S.E., Decemcor, S.E., Unisouth, S.E., Unicenter, S.E., Unicourts, S.E., Unieast, S.E., Unigardens, S.E., Uninorth, S.E., Baldwin Development, S.E., Paseo Sereno, S.E. and PCME Commercial, S.E. Principal Stockholder and Director of BL Management, Corp., Paseomar Corp., PCME Development, Inc. Principal stockholder of G.S.P. Corp. and Unimanagement Corp. Chairman of the Fiduciary Committee of the Bank. Director of the Bank since 1985. Francisco J. Carreras......64 Former professor of the University of Puerto 1990 Rico. 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 since 1979. Richard L. Carrion.........44 Chairman, President and Chief Executive 1990 Officer ("CEO") of the Corporation, of the Bank and Banco Popular, FSB. Chairman of Popular International Bank, Inc. and BanPonce Financial Corp. Chairman of the Board of Trustees of Fundacion Banco Popular, Inc. Director of Equity One, Inc., Popular Consumer Services, Inc., Popular Leasing & Rental, Inc., Pioneer Bancorp, Inc., Popular Mortgage, Inc., CombanCorp and BP Capital Markets, Inc. Member of the Board of Trustees of the American Management Association. Member of Puerto Rico's Commission for the 2004 Olympiad. Member of the International Olympic Committee. Member of the Board of Directors and Compensation Committee of Pueblo Xtra International, Inc. until March 31, 1995. Chairman and President of Puerto Rico Investors Tax-Free Funds, Inc. I, II, III, IV and of Puerto Rico Tax-Free Target Maturity Fund, Inc. Member of the Board of
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DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Directors of the Company for the Development of the Cantera Peninsula and the Board of Trustees of the Puerto Rico Committee for Economic Development. Director of NYNEX Corporation (registered public company). Chairman of the Executive Committee of the Corporation. Director of the Bank since 1982. David H. Chafey, Jr........43 Supervisor of Bank's Retail Banking Group 1996 since January 1996. Supervisor of the Financial Management Group and U.S. Operations until December 1995. Senior Executive Vice President since October 1995. Executive Vice President of the Bank since January 1990. Chairman of BP Capital Markets, Inc. until January 1996. Executive Vice President and Director of Popular International Bank, Inc. and BanPonce Financial Corp. President of Popular International Bank, Inc. and BanPonce Financial Corp until December 1995. Director of Equity One, Inc., Popular Consumer Services, Inc., Popular Leasing & Rental, Inc., BP Capital Markets, Inc., Pioneer Bancorp, Inc. and Banco Popular, FSB. Chairman of the Puerto Rico Telephone Authority since 1993. Executive Vice President of Puerto Rico Investors Tax-Free Fund, Inc. I, II, III, IV and Puerto Rico Tax-Free Target Maturity Fund, Inc. Director of the Bank since 1994. Antonio Luis Ferre.........63 Vice Chairman of the Board of the Corporation 1984 and the Bank. Chairman of the Board of Puerto Rican Cement Co., Inc. (registered public company), manufacturers of cement and allied products. President and Editor of El Dia, Inc., a newspaper publishing company. Director of Metropolitan Life Insurance Company (registered company under the Investment Company Act of 1940). Member of the Director's Committee of Metropolitan Life Insurance Company since January 1, 1996. Director of Pueblo Xtra International, Inc. until March 1995. Director of Pueblo Xtra Supermarkets. Director of Banco de Ponce from 1959 to 1990. Director of the Bank since 1990. Alberto M. Paracchini......64 Former Chairman of the Board of the 1984 Corporation and the Bank. Former Chairman of BanPonce Financial Corp, Equity One, Inc., Popular Consumer Services, Inc. and Popular Leasing & Rental, Inc. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Board of Trustees, Sacred Heart University in San Juan, Puerto Rico. Director of Puerto Rican Cement Co., Inc. (registered public company). Director of HDA Management Corp. since 1993. Director of Equus Management Co. and Managing General Partner of Equus Gaming Co., L.P. (listed on the American Stock Exchange). Director of Venture Capital Fund, Inc. Executive Officer of the Corporation from 1984 to April 1993. Director of Banco de Ponce from 1959 to 1990. Chairman of the Investment Committee of the Bank. Director of the Bank since 1990.
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DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- --- ------------------------------------- ----- Felix J. Serralles, Jr.....62 President and Chief Executive Officer of 1984 Empresas Serralles, Inc. and of its subsidiary Destileria Serralles, Inc., manufacturers and distributors of distilled spirits, and of its affiliate Mercedita Leasing, Inc. Director of Banco de Ponce from 1966 to 1990. Director of the Bank since 1990.
STANDING COMMITTEES The Board of Directors of the Corporation met on a monthly basis during 1996. All directors, except Antonio Luis Ferre, Alberto M. Paracchini and Felix J. Serralles, Jr. attended 75% or more of the meetings of the Board of Directors and the committees of the Board of Directors on which such directors served. The Corporation's Board of Directors has a standing Audit and Executive Committee. The Board of Directors of the Bank, the principal subsidiary of the Corporation, has a standing Human Resources and Compensation Committee that may review compensation matters for the Corporation. There is no standing Nominating Committee but the Executive Committee charter provides that said Executive Committee may exercise the power to nominate directors. However, in the past the Executive Committee has not exercised such function and nominations have been made by the Board of Directors. Information regarding the Audit and Human Resources Committees follows: AUDIT COMMITTEE The functions of the Audit Committee include reviewing the accounting principles and practices employed by the Corporation, and compliance with applicable laws and regulations. The Committee meets with the Corporation's independent external auditors to review their audit procedures, the report on their examination of the Corporation's financial statements, and their comments on the system of internal controls. Also, the Committee oversees the internal audit function and reviews the reports prepared by the Auditing Division on their examinations of the operating and business units and for any other special examinations that may be required. The Committee held four meetings during the fiscal year ended December 31, 1996. The Committee members during 1996 were: Francisco J. Carreras, Luis E. Dubon, Jr., Hector R. Gonzalez, Manuel Morales, Jr. and Emilio Jose Venegas. None of the members of the committee are officers or employees of the Corporation or any of its subsidiaries. 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 one meeting during the fiscal year ended December 31, 1996. The Committee members during 1996 were: Salustiano Alvarez Mendez, Esteban D. Bird, Hector R. Gonzalez, Francisco M. Rexach, Jr. and Julio E. Vizcarrondo, 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 be reimbursed for certain expenses up to $12,000 annually. Effective August 15, 1996, the Board of Directors of the Corporation established a Stock Deferment Plan, pursuant to which each outside director of the Corporation will be 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 being applied toward the purchase in the open market of shares of the Corporation's common stock on 10 12 behalf of the director, with the certificates representing such shares to be retained by the Corporation until the director's membership in every Board terminates. In addition, each director shall have the right to vote and to receive any dividends payable on the shares held for said director under the Plan, but no such shares shall 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 removed for cause from office by appropriate corporate action or under authority of law, said director (1) shall be obligated 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 cost of the purchase 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 all of the shares purchased with any additional contribution. In addition, directors receive $750 for attending each Board of Directors' meeting, $1,000 for attending each Executive Committee's meeting and $500 for attending each of the other committee meetings. Directors who are employees do not receive fees for attending Board of Directors or committee meetings. EXECUTIVE OFFICERS The following table 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.
EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- ----- --- ------------------------------------- ----- Richard L. Carrion ........Chairman, President 44 See under "Board of Directors" 1990 and CEO Jorge A. Junquera .........Senior Executive 48 See under "Board of Directors" 1990 Vice President David H. Chafey, Jr. ......Senior Executive 43 See under "Board of Directors" 1990 Vice President Maria Isabel P. de Burckhart ...........Executive 47 Supervisor of the Administration Group. 1990 Vice President Executive Vice President of the Bank since January 1990. Executive Vice President of BanPonce Financial Corp. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Board of Directors of Fundacion Ana G. Mendez since 1992. Member of the Board of Directors of Puerto Rico Community Foundation since 1993. Member of the Board of Directors of Puerto Rico Convention Bureau since 1993. Roberto R. Herencia .......Executive 37 Head of the Corporation's U.S. business 1997 Vice President expansion. Executive Vice President since January 1997. Director of BanPonce Financial Corp, Banco Popular, FSB, Equity One, Inc., Pioneer Bancorp, Inc., Banco Popular, Illinois, Banco Popular, N.A. (California) and CombanCorp. Senior Vice President from December 1991 to December 1996. Vice President and U.S. Senior Credit Officer from April to December 1991.
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EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE ---- ----- --- ------------------------------------- ----- Larry B. Kesler ...........Executive 59 Supervisor of the Retail Credit and the 1990 Vice President Virgin Islands Region. Executive Vice President of the Bank since January, 1990. Executive Vice President of BanPonce Financial Corp. Chairman of the Board of Directors of Equity One, Inc., Popular Consumer Services, Inc. and Popular Mortgage, Inc. Humberto Martin ...........Executive 51 Supervisor of the Operations Group. 1986 Vice President Executive Vice President of the Bank since November 1986. Executive Vice President of BanPonce Financial Corp. Emilio E. Pinero ..........Executive 48 Supervisor of the Commercial Banking Group. 1990 Vice President Executive Vice President of the Bank since January 1990. Chairman of the Board of Popular Leasing & Rental, Inc. since April 1995. Director of Popular Mortgage, Inc. since January 1995. Member of the Board of Directors of Robert Morris Associates since 1995. Member of the Board of Trustees of Fundacion Felisa Rincon de Gautier and Fundacion Sor Isolina Ferre, since 1995. Member of the Board of Trustees of Inter American University of Puerto Rico since 1994. Executive Vice President of BanPonce Financial Corp. Carlos Rom, Jr. ...........Executive 40 Head of the Corporation's Caribbean and Latin 1997 Vice President America business expansion. Executive Vice President since January 1997. Director of Citizens Bank Limited, Jamaica since March 1996, and of ATH Dominicana, Inc. since December 1995. Chairman of the Board of Directors of ATH Costa Rica since June 25, 1996. Senior Vice President from September 1995 to December 1996. Samuel T. Cespedes ........Secretary of the 60 Attorney-at-Law. Proprietary partner of the 1991 Board of Directors law firm McConnell, Valdes. Secretary of the Board of Directors of the Bank since 1991. Secretary of the Board of Directors of BanPonce Financial Corp, Equity One, Inc., Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc.
12 14 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., Director. Mr. Alfonso F. Ballester, Director, is brother-in-law of Mr. Hector R. Gonzalez, Director. OTHER RELATIONSHIPS AND TRANSACTIONS During 1996 the Bank engaged the legal services of the law firm of Dubon & Dubon of which director Luis E. Dubon, Jr. is a partner, and 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 Dubon & Dubon by the Corporation and its subsidiaries during 1996 fiscal year was $248,045. The amount of fees paid to McConnell, Valdes did not exceed 5% of the law firm's revenues for its last full fiscal year. The Bank has had loan transactions with the Corporation's directors and officers, and with their associates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms as those prevailing for comparable loan transactions with other people and subject to the provisions of the Banking Act of the Commonwealth of Puerto Rico and the applicable federal laws and regulations. The extensions of credit have not involved nor presently involve more than normal risks of collectibility or other unfavorable features. EXECUTIVE COMPENSATION PROGRAM REPORT OF THE BANK'S HUMAN RESOURCES AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION OVERVIEW The Bank's Human Resources and Compensation Committee ("The Human Resources Committee") consists of five non-employee directors. The Committee endeavors to keep abreast of competitive compensation practices in regard to salaries, incentives compensation and supplemental programs, that will retain top-quality executive officers who will enhance shareholder value through sustained growth. The Human Resources Committee evaluates and recommends to the Board of Directors the Corporation's compensation policy for the Chairman, President and CEO, and 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 appraised of such competitive pay practices by an independent consultant who conducts a periodical 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 comparison purposes is reviewed in light of industry developments, and significant mergers/acquisitions, to ensure that it is consistent with the Corporation's size and focus. The Peer Group currently consists of eleven regional banking organizations with a retail banking emphasis. The Peer Group used for this purpose has no intentional relation to the companies included in the S&P 500 Index or the S&P Bank Composite Index against which the Corporation's shareholder return is compared in the Corporation's performance graph included on page 20. The Executive Compensation Program for principal officers of the Corporation's subsidiaries is set according to the industry and geographical area in which they operate, and is approved by the Board of Directors of each entity. CHAIRMAN OF THE BOARD, PRESIDENT AND CEO, MR. RICHARD L. CARRION Effective March 1996, Mr. Carrion's base salary was increased to $500,000 in order to align base compensation to Peer Group's levels, more specifically, to the corresponding performance quartile within the Peer Group. Commencing in 1996 and prospectively thereafter, the Corporation's Executive Committee requires Mr. Carrion to submit to the Committee a plan setting forth both quantitative and intangible goals applicable to each year. Evaluations will be made considering the goals set forth in the yearly plan. 13 15 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 and the weight assigned to each factor in determining compensation adjustments cannot be quantified. Mr. Carrion participates in an annual incentive program designed to enhance achievement of short-term financial goals and to increase shareholder value. The first incentive component could represent 15% of base salary if 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 financial target. The second component, designed to enhance an increase in shareholder value, could range from 5% to 30% of base salary, depending on the return on equity (ROE) obtained. Additionally, the bonus award may be increased by 25% when shareholder return exceeds 20% annually on 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 paid and dividend reinvestment. The maximum total incentive bonus that may be awarded could be 68.75% of basic salary if all components of the bonus program are achieved. In 1996, all pre-established financial goals were exceeded and a bonus of 68.75% was awarded. Net income after tax for the Corporation was 12% over budget, ROE achieved was 15 basis points over the predetermined target of 16%, and total shareholder return surpassed 20% annually for the three-year period ended December 31, 1996. EXECUTIVE OFFICERS The group of Executive Officers is composed of two Senior Executive Vice Presidents and six Executive Vice Presidents, all of whom participate in the Profit Sharing, Annual Incentive and Long-Term Incentive Plans. The President and CEO recommends to the Board of Directors of the Bank, for their approval, the salary increases and the bonuses to be awarded to the Executive Officers pursuant to the incentive plans. The salary increase program allows discretionary salary increases based on individual performance to be twice than that based on team increases. 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 1996 the pre-determined financial targets were achieved and a bonus of 68.75% was awarded to six of them. Since, two of them were recently promoted to Executive Vice Presidents in 1997, their incentive bonus for 1996 was equivalent to that of a Senior Vice President as their previous positions. Their 1996 bonus ranged from 36% to 37.5% of their base salary. HUMAN RESOURCES AND COMPENSATION COMMITTEE Salustiano Alvarez Mendez Francisco M. Rexach, Jr. Esteban D. Bird Julio E. Vizcarrondo, Jr. Hector R. Gonzalez 14 16 EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Corporation or its subsidiaries to the nine highest paid Executive Officers of the Corporation and the principal officers of the Corporation's or the Bank's subsidiaries for 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM FISCAL ------------------------------ ALL OTHER INCENTIVE PLAN YEAR SALARY(A) BONUS(B) OTHER(C) COMPENSATION(D) PAYOUTS(E) TOTAL ---- --------- -------- -------- --------------- -------------- ----- Richard L. Carrion .......................... 1996 $475,000 $399,889 -0- $ 56,558 $55,535 $986,982 Chairman, 1995 350,000 75,107 -0- 36,744 -0- 461,851 President and CEO 1994 330,000 39,712 -0- 37,556 -0- 407,268 Jorge A. Junquera ........................... 1996 291,351 240,468 -0- 35,305 36,449 603,573 Senior Executive Vice President 1995 245,042 53,096 -0- 25,690 -0- 323,828 of the Corporation 1994 227,222 26,927 -0- 25,859 -0- 280,008 David H. Chafey, Jr ......................... 1996 290,451 240,357 -0- 35,196 35,660 601,664 Senior Executive Vice President 1995 239,713 51,897 -0- 25,680 -0- 317,290 of the Corporation 1994 222,118 26,287 -0- 25,278 -0- 273,683 Larry B. Kesler ............................. 1996 207,488 168,163 -0- 25,143 29,023 429,817 Executive Vice President of the Corporation 1995 195,168 42,238 -0- 20,909 -0- 258,315 1994 180,975 21,396 -0- 20,596 -0- 222,967 Maria Isabel P. de Burckhart ................ 1996 201,285 162,919 -0- 24,391 28,377 416,972 Executive Vice President of the Corporation 1995 190,848 41,309 -0- 20,446 -0- 252,603 1994 177,100 20,938 -0- 20,155 -0- 218,193 Humberto Martin ............................. 1996 198,391 161,198 -0- 24,039 27,337 410,965 Executive Vice President of the Corporation 1995 183,695 39,732 -0- 19,679 -0- 243,106 1994 170,337 20,114 -0- 19,385 -0- 209,836 Emilio E. Pinero ............................ 1996 188,677 152,579 -0- 22,863 26,835 390,954 Executive Vice President of the Corporation 1995 180,337 39,118 -0- 18,733 -0- 238,188 1994 167,471 20,159 -0- 19,059 -0- 206,689 Roberto R. Herencia(f) ...................... 1996 180,000 88,366 -0- 21,782 -0- 290,148 Executive Vice President of the Corporation Carlos Rom, Jr. (f) ......................... 1996 155,100 74,562 -0- 18,794 -0- 248,456 Executive Vice President of the Corporation Thomas J. Fitzpatrick ....................... 1996 275,000 156,000 -0- 72,288 -0- 503,288 President of Equity One, Inc. (a wholly-owned 1995 260,000 690,048 153,700 54,934 -0- 1,158,682 subsidiary of Banco Popular, FSB) 1994 236,250 150,000 -0- 15,708 -0- 401,958 Michael Polanski ............................ 1996 152,000 176,962 -0- 3,032 -0- 331,994 President of Pioneer Bancorp, Inc. 1995 144,610 53,625 -0- 10,123 -0- 208,358 (a wholly-owned subsidiary of BanPonce 1994 145,000 10,109 -0- 7,000 -0- 162,109 Financial Corp.) Churchill Carey(f) .......................... 1996 150,000 6,000 -0- 3,750 -0- 159,750 President of Popular Mortgage, Inc. 1995 112,500 2,885 -0- 3,375 -0- 118,760 (a wholly-owned subsidiary of the Bank) Kenneth McGrath(f) .......................... 1996 150,000 188,200 -0- 65,750 -0- 403,950 President of BP Capital Markets, Inc. 1995 100,000 128,940 -0- 8,750 -0- 237,690 (a wholly-owned subsidiary of the Corporation) Andres F. Morrell ........................... 1996 132,000 45,100 -0- 3,750 -0- 180,850 President of Popular Leasing & Rental, 1995 130,998 5,300 -0- 12,638 -0- 148,936 Inc. (a wholly-owned subsidiary of the 1994 120,116 25,680 -0- -0- -0- 145,796 Bank) Edgardo Novoa ............................... 1996 128,858 39,692 -0- 3,742 -0- 172,292 President of Popular Consumer Services, Inc. 1995 118,000 22,736 -0- 1,975 -0- 142,711 (a wholly-owned subsidiary of the Bank) 1994 110,000 19,460 -0- -0- -0- 129,460
15 17
LONG-TERM FISCAL ANNUAL COMPENSATION ALL OTHER INCENTIVE PLAN YEAR SALARY(a) BONUS(b) OTHER(c) COMPENSATION(d) PAYOUTS(e) TOTAL ---- --------- -------- -------- --------------- ---------- ----- Richard F. Demerjian(f) ..................... 1996 37,876 -0- -0- -0- -0- 37,876 President and CEO of CombanCorp (a wholly-owned subsidiary of BanPonce Financial Corp)
- ---------- (a) Salaries before deductions. (b) For the Bank's Senior Management Committee (SMC) bonus amount includes 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, which is described on page 18. For Messrs. Morrell, Novoa and McGrath amount includes Christmas and performance bonus. For Mr. Fitzpatrick amount includes performance bonus. For Mr. Polanski, the bonus includes the second and last payment of a bonus established on his employment agreement signed at the time of the acquisition of Pioneer Bancorp, Inc. (c) Does not include the value of perquisites and other personal benefits because the aggregate amount of such benefits does not exceed the lesser of $50,000 or 10% of total amount of annual salary and bonus of any named individual. In the case of Mr. Fitzpatrick includes amounts payable to compensate him for certain taxes payable by him with respect to the bonus received in 1995 under his employment agreement. (d) For the Bank's SMC amount includes deferred portion awarded under the Profit Sharing Plan of the Bank, amounts accrued under the Benefit Restoration Plan, the amount from the Profit Sharing deferred and allocated to Stock Plan and Bank's matching contributions to Stock Plan, which are described on pages 18 through 20. For Messrs. Morrell, Novoa and Carey amount includes the employer matching contributions on tax-qualified plans under Section 1165(e) of Puerto Rico Internal Revenue Code of 1994. For Mr. McGrath, amount includes contribution to 1165(e) plans, Profit Sharing Deferred portion into this plan and a deferred portion of the performance bonus. For Mr. Thomas J. Fitzpatrick, these amounts represent the contribution of Equity One, Inc. pursuant to Section 401(k) of the Internal Revenue Code and deferred compensation under Supplementary Executive Retirement Plan. For Mr. Michael Polanski these amounts represent the contribution of Pioneer Bancorp, Inc. pursuant to Section 401(k) of the Internal Revenue Code and Profit Sharing Plan's deferred portion. (e) For the Plan Year ended December 31, 1996, the three year average ROE target was not achieved, nor the Peer Group three year average median ROE was exceeded. However, since BanPonce's average ROE represented an improvement of 57.08% over the base year ROE compared to Peer's median ROE, the Human Resources and Compensation Committee approved a discretionary bonus of 25% of the total stock awarded at the beginning of the Plan Year, including dividends and adjusted for the stock split. On March 12, 1997, 5,889 common shares were purchased in the open market at the price of $35.875 and 512 additional common shares were acquired in March 13 at $36. All Executive Officers selected to defer the incentive payment, except Mrs. Maria Isabel P. de Burckhart, Mr. Humberto Martin and Mr. Larry B. Kesler. (f) Information presented for 1996, 1995 and 1994, except for Messrs. Churchill Carey and Kenneth McGrath, who were appointed President of Popular Mortgage, Inc. and BP Capital Markets, Inc., respectively, during 1995, for Mr. Demerjian, who was appointed President and CEO of CombanCorp during 1996, and for Messrs. Roberto R. Herencia and Carlos Rom Jr., who were appointed Executive Officers in 1997. No disclosure is required with respect to these officers. LONG-TERM INCENTIVE PLAN The Board of Directors approved in 1994 a three-year incentive plan to encourage long-term corporate performance and objectives. A set percentage of base salary is used in determining the initial amount of the Incentive Payment at the beginning of each Plan Year. On March 12, 1997, the Committee approved the fourth Plan Year and amended such plan by increasing the percentage of base salary used in the calculation of the stock average to 50%, from 25% as originally stated. The target used is based on average ROE. The incentive payment shall be made in common stock of the Corporation. All common stock to be awarded under this program will be purchased in the open market. 16 18 The amount of the shares payout is determined by multiplying the participant's target shares by a factor determined based on his level of attainment expressed as a percentage. This Long-Term Incentive Plan defines the incentive payment as follows: 75% based on the attainment of a pre-established three-year average ROE objective for the performance period and 25% based on the achievement of an average ROE greater than the Peer Group's three-year average median ROE. In 1996, 1995 and 1994 awards of performance shares under the Long-Term Incentive Plan were established to the Executive Officers as set forth below: LONG-TERM INCENTIVE AWARDS
ESTIMATED FUTURE PAYOUTS NON-STOCK-PRICE BASED PLANS NUMBER PERFORMANCE NUMBER OF SHARES(A) OF PERIOD ---------------------------------- NAME YEAR SHARES(A) UNTIL PAYOUT THRESHOLD TARGET MAXIMUM ---- ---- --------- ------------ --------- ------ ------- Richard L. Carrion ..... 1997 7,695.60 1/1/97-12/31/99 -- 7,695.60 15,391.20 1996 6,317.28 1/1/96-12/31/98 -- 6,317.28 12,634.56 1995 5,985.98 1/1/95-12/31/97 -- 5,985.98 11,971.96 1994 5,630.98 1/1/94-12/31/96 -- 5,630.98 11,261.96 Jorge A. Junquera ...... 1997 5,540.85 1/1/97-12/31/99 -- 5,540.85 11,081.70 1996 3,790.37 1/1/96-12/31/98 -- 3,790.37 7,580.74 1995 4,243.29 1/1/95-12/31/97 -- 4,243.29 8,486.58 1994 3,695.96 1/1/94-12/31/96 -- 3,695.96 7,391.92 David H. Chafey, Jr..... 1997 5,540.85 1/1/97-12/31/99 -- 5,540.85 11,081.70 1996 3,790.37 1/1/96-12/31/98 -- 3,790.37 7,580.74 1995 4,151.00 1/1/95-12/31/97 -- 4,151.00 8,302.00 1994 3,615.58 1/1/94-12/31/96 -- 3,615.58 7,231.16 Roberto R. Herencia..... 1997 3,170.60 1/1/97-12/31/99 -- 3,170.60 6,341.20 Larry B. Kesler ........ 1997 3,707.52 1/1/97-12/31/99 -- 3,707.52 7,415.04 1996 2,646.49 1/1/96-12/31/98 -- 2,646.49 5,292.98 1995 3,379.65 1/1/95-12/31/97 -- 3,379.65 6,759.30 1994 2,943.72 1/1/94-12/31/96 -- 2,943.72 5,887.44 Maria Isabel P. ........ 1997 3,497.58 1/1/97-12/31/99 -- 3,497.58 6,995.16 de Burckhart 1996 2,563.50 1/1/96-12/31/98 -- 2,563.50 5,127.00 1995 3,304.84 1/1/95-12/31/97 -- 3,304.84 6,609.68 1994 2,878.56 1/1/94-12/31/96 -- 2,878.56 5,757.12 Humberto Martin ........ 1997 3,555.38 1/1/97-12/31/99 -- 3,555.38 7,110.76 1996 2,537.92 1/1/96-12/31/98 -- 2,537.92 5,075.84 1995 3,180.96 1/1/95-12/31/97 -- 3,180.96 6,361.92 1994 2,770.66 1/1/94-12/31/96 -- 2,770.66 5,541.32 Emilio E. Pinero ....... 1997 3,215.00 1/1/97-12/31/99 -- 3,215.00 6,430.00 1996 2,399.23 1/1/96-12/31/98 -- 2,399.23 4,798.46 1995 3,122.82 1/1/95-12/31/97 -- 3,122.82 6,245.64 1994 2,720.02 1/1/94-12/31/96 -- 2,720.02 5,440.04 Carlos Rom, Jr. ........ 1997 2,924.34 1/1/97-12/31/99 -- 2,924.34 5,848.68
(a) the number of shares for 1996, 1995 and 1994 were adjusted to reflect a stock split of one share for each share outstanding effected in a form of a dividend, on July 1, 1996. 17 19 The share awards shown above are payable at the end of each three-year performance period if objectives are attained. Dividends that would be payable on the shares of stock, if they were held by the Executive Officers, will be credited and become part of the Incentive Payment. At the option of the participant, a portion equal to the estimated tax due with respect to the incentive payments of the awards may be paid in cash. If the Corporation's target is met or exceeded, the share payments corresponding to the Corporation's and Peer Group's goals are increased separately by a leverage factor that cannot exceed two times the target share amounts. Even if the ROE for the Corporation does not equal or exceed the Peer three-year average median ROE, the Human Resources and Compensation Committee, at its own discretion, may recommend the distribution of 25% of the targeted bonus if the results attained for the Plan Year average represent an improvement of no less than 25% over the base year. For the Plan Year ended December 31, 1996, the three year average ROE target was not achieved, nor the Peer Group three year average median ROE was exceeded. However, since BanPonce's average ROE represented an improvement of 57.08% over the base year ROE compared to Peer's median ROE, the Human Resources and Compensation Committee approved a discretionary bonus of 25% of the total stock awarded at the beginning of the Plan Year, including dividends and adjusted for the stock split. On March 12, 1997, 5,889 common shares were purchased in the open market at the price of $35.875 and 512 additional common shares were acquired in March 13 at $36. All Executive Officers selected to defer the incentive payment, except Mrs. Maria Isabel P. de Burckhart, Mr. Humberto Martin and Mr. Larry Kesler. This alternative is an amendment to the original Plan that was approved by the Board of Directors in December 1996. OTHER INCENTIVE COMPENSATION PLANS The Bank has an Annual Management Incentive Plan for different management levels. Under this Plan, incentive bonuses are based on individual performance as well as the Corporation or Bank's performance, measured by net income and ROE. The weight assigned to the Corporation or the Bank's performance objectives varies according to management level, but the weight of individual performance applies equally to all managers participating. The Bank also has an Excellence in Performance Program in which all employees participate. This program rewards employees for extraordinary personal contributions that are non-recurring in nature, typically not recognizable through merit or promotional salary action, and clearly recognized as such by management and peers alike. Additionally, the Bank has several functional incentive programs that reward employee productivity in specific areas. PROFIT SHARING PLAN OF THE BANK All officers and regular monthly salaried employees of the Bank as of January 1, 1976, or hired after that date, are active participants in the Bank's Profit Sharing Plan, as of the first day of the calendar month following completion of one year of service. Under this plan the Bank's annual contribution is determined by the Board of Directors 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 1996 was $23,495,571, of which 50% was contributed to the Deferred Compensation Plan, 10% to the Stock Plan and the remainder was paid in cash. BENEFIT RESTORATION PLAN OF THE BANK Effective January 1, 1994, the Internal Revenue Service (IRS) set a limit of $150,000 as the amount of compensation that may be considered in calculating future retirement payments from qualified pension plans. This tax law applies to the Bank's Retirement, Profit Sharing and Stock Plan. The Board of Directors has approved a "Benefit Restoration Plan" for those officers whose annual compensation is higher than the established limit. This non-qualified plan will provide those benefits that cannot be accrued under the 18 20 Bank's Retirement and Profit Sharing Plan, which are qualified plans. Benefits under the Benefit Restoration Plan shall be equal to the account balance that would be provided under the Profit Sharing Plan and equal to the benefits that would have been accrued under the Retirement Plan. The Plan is unfunded. RETIREMENT PLAN OF THE BANK The Bank has a 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 the minimum funding standards under the Employee Retirement Income Security Act ("ERISA"). The basis for the Retirement Plan formula is Total Compensation, which includes, Christmas Bonus, incentives, overtime, differentials, Profit Sharing cash bonuses and any other compensation received by the employees. Benefits are paid on the basis of a straight life annuity plus supplemental death benefits and are not reduced for Social Security or other payments received by participants. Normal retirement age at the Bank is a combination of years of age and completed years of service totalling 75. Meanwhile, early retirement is at 55 years of age with 10 years of service. Employees with 30 years of service or more are provided with a retirement benefit of 40% of Total Compensation. Benefits are reduced only if the employee retires before age 55. Benefits are subject to the U.S. Internal Revenue Code limits on compensation and benefits. The following table sets forth the estimated annual benefits that would become payable under the Retirement Plan and the Benefit Restoration Plan based upon certain assumptions as to total compensation levels and years of service. The amounts payable 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, 1996, of a participant at age 65.
TOTAL COMPENSATION ESTIMATED ANNUAL BENEFITS / YEARS OF SERVICE ---------------------------------------------------------------------------- 15 20 25 30 35 -- -- -- -- -- $1,000,000 $183,000 $256,000 $328,000 $400,000 $400,000 900,000 165,000 230,000 295,000 360,000 360,000 800,000 146,000 204,000 262,000 320,000 320,000 700,000 128,000 179,000 230,000 280,000 280,000 600,000 110,000 153,000 197,000 240,000 240,000 500,000 92,000 128,000 164,000 200,000 200,000 400,000 73,000 102,000 131,000 160,000 160,000 300,000 55,000 77,000 98,000 120,000 120,000
The 1996 total compensation and estimated years of service at age 65 for the five highest paid key policy-making Executive Officers are as follows:
1996 ESTIMATED YEARS TOTAL OF SERVICE AT COMPENSATION AGE 65 ------------ ------ Richard L. Carrion ................... $987,000 41.5 Jorge A. Junquera .................... 604,000 42.3 David H. Chafey, Jr .................. 602,000 38.5 Larry B. Kesler ...................... 430,000 16.5 Maria Isabel P. de Burckhart ......... 417,000 35.3
STOCK PLAN OF THE BANK The Bank has adopted two Stock Plans, one covering employees of the Bank in Puerto Rico and another covering employees of the Bank in the U.S., and the British and U.S. Virgin Islands. All regular monthly salaried employees are eligible to participate in the Stock Plans following the completion of three-months of service. 19 21 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 of Directors. The Stock Plans also allow employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their pre-tax base compensation (after tax in the British Virgin Islands) up to a maximum amount as determined by the applicable tax laws. The Bank will match 50% of the amount contributed by a participant up to a maximum of 2% of the participant's annual base salary. All contributions to the Stock Plans are invested in shares of common stock of the Corporation, which are purchased in the open market. BANPONCE CORPORATION PERFORMANCE GRAPH The following Performance Graph compares the cumulative total shareholder return during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the S & P 500 Index and the S & P Bank Composite Index. The cumulative total shareholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment, since the measurement date, December 31, 1991 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, 1991 = 100) [GRAPH]
INDEXED RETURNS Base Years Ending Period Company/Index Dec91 Dec92 Dec93 Dec94 Dec95 Dec96 - ------------------------------------------------------------------------------------------ BANPONCE CORP. 100 161.95 171.15 160.36 228.06 407.92 BANKS COMPOSITE 100 131.87 145.37 137.92 219.78 311.09 S&P 500 INDEX 100 107.62 118.46 120.03 165.13 203.05
INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors intends to retain the services of Price Waterhouse as the independent auditors of the Corporation for the year 1997. This international firm of public accountants has served as independent auditors of the Bank since 1971 and of the Corporation since May 1991, when it was appointed by the Board of Directors. Representatives of Price Waterhouse will attend the Stockholders Meeting and will be available to answer any questions that may arise; they will also have the opportunity to make a statement if they so desire. 20 22 RESTATED ARTICLES OF INCORPORATION PROPOSAL 2: AMENDMENT TO ARTICLE FIRST OF RESTATED ARTICLES OF INCORPORATION The Board of Directors recommends the amendment of Article First of the Corporation's Restated Articles of Incorporation in the manner shown in Annex I hereto. The proposed amendment to Article First would change the name of the Corporation from BanPonce Corporation to Popular, Inc. The Board of Directors believes that the change of the Corporation's name is necessary to provide a cohesive identity throughout the organization in light of the geographic and business diversification strategies being currently pursued. The proposed name would capitalize on the strength and tradition of the Corporation's principal subsidiary Banco Popular, Puerto Rico's premier banking institution. At the same time, it recognizes that the Corporation is a diverse, multifaceted organization encompassing a broad range of financial services including: mortgage banking, lease financing, consumer finance, investment banking, and processing services operating in various geographic markets. The resolution attached to this Proxy Statement as Annex I will be submitted for adoption at the Annual Meeting. The affirmative vote of two thirds (2/3) of the outstanding shares of the Corporation's Common Stock, par value $6, is necessary for the adoption of the amendment to Article First. Proxies will be voted in favor of the resolutions unless otherwise instructed by the stockholders. Abstentions and shares not voted by brokers and other entities holding shares on behalf of the beneficial owners will have the same effect as votes cast against the Amendment. The Board has declared the desirability of its adoption and recommends a vote FOR the resolution. RESTATED ARTICLES OF INCORPORATION PROPOSAL 3: AMENDMENT TO ARTICLE FIFTH OF RESTATED ARTICLES OF INCORPORATION The Board of Directors recommends the amendment of Article Fifth of the Corporation's Restated Articles of Incorporation in the manner shown in Annex II hereto. The proposed Amendment to Article Fifth would change the number of authorized shares of the Corporation's Common Stock, par value $6, from ninety million (90,000,000) to one hundred and eighty million (180,000,000) shares. These changes would be effective upon the date of filing the Amendment to the Restated Articles with the Department of State in the Commonwealth of Puerto Rico. The Board of Directors believes that it is in the best interest of the Corporation and its stockholders that the Corporation has sufficient number of authorized but unissued common shares available for possible use in future acquisition and expansion opportunities that may arise, for general corporate needs such as future stock dividends or stock splits, and for other proper purposes within the limitations of the law, as determined by the Board of Directors. The Corporation has no current plans to use its authorized but unissued shares of Common Stock, par value $6, for any particular purpose, except for issuance of shares pursuant to the acquisiition of Roig Commercial Bank in Puerto Rico and National Bancorp, Inc., the parent company, of American Midwest in Illinois. The Corporation currently has sufficient common stock to issue for the acquisition of both of these entities without the approval of the proposed amendment to increase its outstanding shares of common stock. Such shares would be available for issuance without further action by the shareholders, except as otherwise limited by applicable law. If additional shares of Common Stock are issued by the Corporation, it may potentially have an anti-takeover effect by making it more difficult to obtain shareholders' approval of various actions, such as a merger. Also, the issuance of additional shares of Common Stock may have a dilutive effect on earnings per share and equity, and may have a dilutive effect on the voting power of existing shareholders if the preferential rights provided in Article Sixth are not applicable. The terms of any Common Stock issuance will be determined by the Corporation's Board of Directors, will depend upon the reason for the issuance and largely on market conditions and other factors existing at the time. The increase in authorized shares of Common Stock has not been proposed in connection with any anti-takeover related purpose and the Board of Directors and management have no knowledge of any current efforts by anyone to obtain control of the Corporation or to effect large accumulations of the Corporation's Common Stock. 21 23 The resolution attached to this proxy as Annex II will be submitted for adoption at the Annual Stockholders meeting. The affirmative vote of a majority of the holders of shares of Common Stock, par value $6, of the Corporation is necessary to adopt the proposed amendment in accordance with the terms of Article Fifth of the Restated Articles of Incorporation. Proxies will be voted for the resolutions unless otherwise instructed by the stockholders. Abstentions and shares not voted by brokers and other entities holding shares on behalf of beneficial owners will have the same effect as votes cast against the proposed Amendment. The Board of Directors has declared the desirability of the adoption of this amendment and recommends a vote FOR the resolution. INCORPORATION BY REFERENCE The Form 10K, audited financial statements, certain supplemental financial information and Management Discussion and Analysis of Financial Condition and Results of Operations included in the Corporation's Annual Report to Stockholders for the year ended December 31, 1996, which accompany this Proxy Statement and is hereby incorporated by reference herein. In addition, all documents filed by the Corporation pursuant to Section 13(a) of the Securities Exchange Act of 1934 subsequent to the date of this Proxy Statement and prior to the Annual Meeting shall be deemed to be incorporated by reference herein. PROPOSALS OF SECURITY HOLDERS TO BE PRESENTED AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS Stockholders' proposals intended to be presented at the 1998 Annual Meeting of Stockholders must be received by the Corporate Secretary, at its principal executive offices, Popular Center Building, San Juan, Puerto Rico, 00918, not later than November 25, 1997 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 1998 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 Management 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. San Juan, Puerto Rico, March 20, 1997 RICHARD L. CARRION SAMUEL T. CESPEDES Chairman of the Board, President Secretary and Chief Executive Officer 22 24 ANNEX I PROPOSED AMENDMENT TO ARTICLE FIRST OF RESTATED ARTICLES OF INCORPORATION RESOLVED, that Article First of the Restated Articles of Incorporation of BanPonce Corporation be, and it hereby is, amended in its entirety to read as follows: "FIRST: The name of the Corporation is Popular, Inc." RESOLVED, FURTHER, that the proper officers of the Corporation be, and hereby are, authorized and directed to take all actions, execute all instruments, and make all payments that are necessary or desirable, at their discretion, to make effective the foregoing amendment to the Restated Articles of Incorporation of the Corporation, including without limitation, filing a certificate of such amendment with the Secretary of State of the Commonwealth of Puerto Rico. ANNEX II PROPOSED AMENDMENT TO ARTICLE FIFTH OF RESTATED ARTICLES OF INCORPORATION RESOLVED, that Article Fifth of the Restated Articles of Incorporation of the Corporation be, and it hereby is, amended in its entirety to read as follows: "FIFTH: The minimum amount of capital with which the Corporation shall commence business shall be $1,000. The total number of shares of all classes of capital stock that the Corporation shall have authority to issue, upon resolutions approved by the Board of Directors from time to time, is one hundred ninety million shares (190,000,000), of which one hundred eighty million shares (180,000,000) shall be shares of Common Stock of the par value of $6, per shares (hereinafter called "Common Stock"), and ten million (10,000,000) shall be shares of Preferred Stock without par value (hereinafter called "Preferred Stock"). The amount of the authorized capital stock of any class or classes of stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the Preferred Stock shall be as follows: (1) The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, and with such voting powers, full or limited but not to exceed one vote per share, or without voting powers, and with such designations, preferences, and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors and as are not otherwise expressed in this Certificate of Incorporation or any amendment thereto, including (but without limiting the generality of the foregoing) the following: (a) the designation of such series; (b) the purchase price that the Corporation shall receive for each share of such series; (c) the dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the preference or relation that such dividends shall bear to the dividends payable on any other class or classes or on any other series of any class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or non-cumulative; 23 25 (d) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption; (e) the terms and amounts of any sinking fund provided for the purchase or redemption of the shares of such series; (f) whether the shares of such series shall be convertible into or exchangeable for shares of any other class of classes or of any other series of any class or classes of capital stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (g) the extent, if any, to which the holders of the shares of such series shall be entitled to vote as a class or otherwise with respect to the election of directors or otherwise; (h) the restrictions and conditions, if any, upon the reissue of any additional Preferred Stock ranking on a parity with or prior to such shares as to dividends or upon dissolution; (i) the rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Corporation, which rights may be different in the case of a voluntary dissolution than in the case of an involuntary dissolution. (2) Except as otherwise required by law and except for such voting powers with respect to the election of directors or other matters as may be stated in the resolutions of the Board of Directors creating any series of Preferred Stock, the holders of any such series shall have no voting power whatsoever. RESOLVED FURTHER, that the proper officers of the Corporation be, and hereby are, authorized and directed to take all actions, execute all instruments, and make all payments that are necessary or desirable, at their discretion, to make effective the foregoing amendment to the Restated Articles of Incorporation of the Corporation, including without limitation on filing a certificate of such amendment with the Secretary of State of the Commonwealth of Puerto Rico." 24 26 APPENDIX
PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. [BANPONCE CORPORATION LOGO] The undersigned hereby appoints Richard L. Carrion, Jorge A. Junquera and David H. Chafey Jr. as Proxies, each with the power to appoint his substitute, and P.O. Box 362708 authorizes them to represent and to vote as designated below all the shares of San Juan, Puerto Rico 00936-2708 common stock of BanPonce Corporation held on record by the undersigned on March 7, 1997, at the Annual Meeting of Shareholders to be held at the Centro Europa Building, 3rd Floor, San Juan, Puerto Rico, on April 25, 1997, at 10:00 a.m. or at any adjournments thereof, as follows: 1. ELECTION OF DIRECTORS - Nominees: SALUSTIANO ALVAREZ MENDEZ ALFONSO F. BALLESTER JORGE A. JUNQUERA [ ] VOTE GRANTED FOR all nominees [ ] VOTE WITHHELD FOR all nominees [ ] VOTE GRANTED, except for the following nominee(s) (insert in the space provided below the names of those nominees for whom you do not wish to vote) 2. TO AMEND ARTICLE FIRST of the Restated Articles of Incorporation to change the name of BanPonce Corporation to Popular, Inc. [ ] FOR [ ] AGAINST [ ] ABSTAIN [ ] VOTE WITHHELD 3. TO AMEND ARTICLE FIFTH of the Restated Articles of Incorporation to increase the authorized number of shares of common stock, par value $6, from 90,000,000 to 180,000,000. [ ] FOR [ ] AGAINST [ ] ABSTAIN [ ] VOTE WITHHELD 4. AT THEIR DISCRETION, the Proxies are authorized to vote upon such other business as may properly come before the Meeting. 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" ITEM 1, 2 and 3. Please refer to instructions below. ----------------------------------------- Signature ----------------------------------------- Signature ------------------- DATE (VEA AL DORSO TEXTO EN ESPANOL) PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. No Postage is required if mailed in the United States, Puerto Rico or the U.S. Virgin Islands. - ------------------------------------------------------------------------------------------------------------------------------------ - FOLD AND DETACH HERE - INSTRUCTIONS: - ------------------------------- Please sign exactly as your name appears above. When shares are held by joint ANNUAL MEETING tenants or by tenants in common, each holder should sign. When signing as OF attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, the president or other authorized officer should sign [BANPONCE CORPORATION LOGO] under the full corporate name and the position of such authorized officer should appear below the signature. If a partnership, please sign in partnership name by - ------------------------------- authorized person. Friday, April 25, 1997 [ROAD MAP] 10:00 a.m. Centro Europa Building San Juan, Puerto Rico
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