-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, czzyQuzZosa3xVl+b3pecq8fWCIp4SMfSeGjnr2d4UrGoaQ3qtuG5yeYNAivqQb8 6+xEGHg6W6iFdRKKFDw8KQ== 0000950144-94-001214.txt : 19940620 0000950144-94-001214.hdr.sgml : 19940620 ACCESSION NUMBER: 0000950144-94-001214 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANPONCE CORP CENTRAL INDEX KEY: 0000763901 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 660416582 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57038 FILM NUMBER: 94534787 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 424B2 1 BANPONCE PROSPECTUS SUPPLEMENT 1 Filed pursuant to Rule 424(b)(2) Registration Number 033-57038 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED MAY 3, 1993) 3,600,000 SHARES BANPONCE CORPORATION 8.35% NON-CUMULATIVE MONTHLY INCOME PREFERRED STOCK, 1994 SERIES A (LIQUIDATION PREFERENCE $25 PER SHARE) ------------------------ This Prospectus Supplement relates to the issuance by BanPonce Corporation (the "Corporation"), a bank holding company registered under the Bank Holding Company Act of 1956 and incorporated under the laws of the Commonwealth of Puerto Rico, of its 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A (the "Series A Preferred Stock"). The Series A Preferred Stock will entitle the holders thereof to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefor, cash dividends at the annual rate per share of 8.35% of the liquidation preference of $25 per share, or $0.173958 per share per month, accruing from the date of original issuance and payable monthly in arrears in United States dollars commencing on July 31, 1994, and on the last day of each calendar month thereafter. Dividends on the Series A Preferred Stock are non-cumulative. To the extent that funds are not legally available for the payment of such dividends for any monthly dividend period or that such dividends are not declared with respect to any monthly dividend period, then the holders of the Series A Preferred Stock shall have no right to receive a dividend in respect of such monthly dividend period. The Corporation may not pay dividends on or acquire shares of common stock of the Corporation or other class of stock of the Corporation ranking junior to the Series A Preferred Stock unless all accrued and unpaid dividends on the Series A Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series A Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment. See "Summary of Certain Terms of the Series A Preferred Stock -- Dividends." The Series A Preferred Stock is redeemable on and after June 30, 1998, at the option of the Corporation, in whole or in part from time to time, at the redemption prices set forth herein plus accrued and unpaid dividends for the then current monthly dividend period to the date fixed for redemption. Under current regulations, the Corporation is not permitted to exercise any option to redeem shares of Series A Preferred Stock without the prior approval of the Federal Reserve Board. See "Summary of Certain Terms of the Series A Preferred Stock -- Redemption." The Series A Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation. Holders of shares of Series A Preferred Stock will have no right to require the Corporation to redeem or repurchase any such shares, and such shares are not subject to any sinking fund or similar obligation. In the event of the liquidation, dissolution or winding up of the Corporation, holders of the Series A Preferred Stock will be entitled to receive a liquidation preference of $25 for each share, plus accrued and unpaid dividends for the then current monthly dividend period to the date of payment. See "Summary of Certain Terms of the Series A Preferred Stock -- Liquidation Preference." The Corporation has filed an application to have the Series A Preferred Stock designated for trading through the National Association of Securities Dealers Automated Quotation System (NASDAQ). ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF THE COMMONWEALTH OF PUERTO RICO OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, SUCH OFFICE, OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS OR ANY SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1)(4) COMMISSION(2)(4) CORPORATION(1)(3)(4) ------------------------------------------------------ Per Share of Series A Preferred Stock.............. $25.00 $0.7875 $24.2125 Total.............................................. $90,000,000 $2,835,000 $87,165,000
------------------------ (1) Plus accrued dividends, if any, from date of issue. (2) The Corporation has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Corporation estimated to be $150,000. (4) The Corporation has granted to the Underwriter a 30-day option to purchase up to 400,000 additional shares of Series A Preferred Stock on the same terms to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public will be $100,000,000, the total Underwriting Commission will be $3,150,000 and the total Proceeds to Corporation will be $96,850,000. See "Underwriting." ------------------------ The Series A Preferred Stock is offered by the Underwriter when, as and if delivered and accepted by the Underwriter, subject to its right to reject orders in whole or in part and subject to certain other conditions. It is expected that the delivery of the Series A Preferred Stock will be made on or about June 27, 1994. ------------------------ PAINEWEBBER INCORPORATED OF PUERTO RICO ------------------------ THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 17, 1994 2 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A PREFERRED STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. --------------------- THE SECURITIES WILL NOT BE DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, OR ANY OTHER GOVERNMENTAL AGENCY. --------------------- BANPONCE CORPORATION The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956 and incorporated in 1984 under the laws of the Commonwealth of Puerto Rico. The Corporation is the largest financial institution in Puerto Rico, with consolidated assets of $12.0 billion, total deposits of $8.8 billion and stockholders' equity of $858.5 million as of March 31, 1994. The Corporation's principal subsidiary, Banco Popular de Puerto Rico ("Banco Popular"), is Puerto Rico's largest bank with total assets of $11.1 billion, deposits of $8.5 billion and stockholders' equity of $785.1 million as of March 31, 1994. The Corporation has two other principal subsidiaries: Vehicle Equipment Leasing Company, Inc. and Popular International Bank, Inc. ("PIB"). PIB's principal subsidiaries are BanPonce Financial Corp., Spring Financial Services, Inc. and Pioneer Bancorp, Inc. (the holding company of an Illinois bank that was acquired on March 31, 1994). See "BanPonce Corporation" in the accompanying Prospectus dated May 3, 1993 (the "Prospectus"). The Corporation's principal executive offices are located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918 and its telephone number is (809) 765-9800. RECENT DEVELOPMENTS The Corporation intends to file in the near future a registration statement under the Securities Act of 1933, as amended, that will permit it and certain of its subsidiaries to sell from time to time debt and preferred stock having an aggregate initial offering price of $500,000,000 or, in the case of debt securities, the equivalent thereof in one or more foreign currencies, including composite currencies. S-2 3 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain selected financial data for each of the years in the five-year period ended December 31, 1993, and for the three months ended March 31, 1994 and 1993. This financial data is derived from, should be read in conjunction with, and is qualified by reference to, the more detailed information contained in the Consolidated Financial Statements of the Corporation and Notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, and the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, each of which has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and incorporated by reference as an exhibit to the Registration Statement of which this Prospectus Supplement is a part. The consolidated financial data for the three months ended March 31, 1994 and 1993 is unaudited. The results for the three months ended March 31, 1994, are not necessarily indicative of the results that may be expected for the full year or any other interim period.
AS OF, OR FOR THE THREE MONTHS ENDED, AS OF, OR FOR THE MARCH 31,* YEAR ENDED, DECEMBER 31, ------------------------- ---------------------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Interest Income.................. $ 198,981 $ 184,427 $ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 Interest Expense................. 73,628 66,666 280,008 300,135 387,134 281,561 302,747 Net Interest Income.............. 125,353 117,761 492,128 440,219 407,809 284,246 255,526 Provision for Loan Losses........ 13,663 21,547 72,892 97,633 121,681 53,033 42,603 Fees and other Income............ 33,554 28,679 125,180 124,504 131,774 70,956 62,079 Operating Expenses............... 106,577 102,854 412,276 366,945 345,738 229,563 207,376 Net Income....................... 28,729 25,520 109,404 85,116 64,564 63,366 56,170 Dividends Declared (per share)... 0.25 0.20 0.90 0.80 0.80 0.80 0.80 BALANCE SHEET DATA Total Assets..................... $12,030,527 $10,210,087 $11,513,368 $10,002,327 $8,780,282 $8,983,624 $5,923,261 Earning Assets................... 11,160,889 9,386,880 10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 Net Loans........................ 6,815,396 5,357,039 6,346,922 5,252,053 5,195,557 5,365,917 3,276,389 Deposits......................... 8,821,174 7,951,608 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 Total Capital.................... 858,547 771,575 834,195 752,119 631,818 588,884 375,807 SELECTED RATIOS Net Interest Margin (taxable equivalent basis).............. 5.07% 5.62% 5.50% 6.11% 5.97% 6.30% 5.57% Return on Assets................. 1.00% 1.03% 1.02% 0.89% 0.72% 1.09% 0.99% Return on Equity................. 13.78% 13.60% 13.80% 12.72% 10.57% 15.55% 15.87% Total Capital to Risk Weighted Assets......................... 13.35% 14.90% 13.95% 14.85% 13.35% 12.74% 11.76%
- --------------- * Unaudited S-3 4 CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------------- MARCH 31, 1994 1993 1992 1991 1990 1989 --------------- ---- ---- ---- ---- ---- (UNAUDITED) Ratio of Earnings to Fixed Charges and Preferred Stock Dividends Excluding Interest on Deposits.................... 2.8 3.0 2.9 2.0 3.6 2.4 Including Interest on Deposits.................... 1.5 1.5 1.3 1.2 1.3 1.2
For purposes of computing these consolidated ratios, earnings represent income (loss) before income taxes, the cumulative effects of changes in accounting principles and equity in undistributed income of unconsolidated subsidiaries and affiliates, plus fixed charges excluding capitalized interest. 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, the amortization of debt issuance expense and capitalized interest. SUMMARY OF CERTAIN TERMS OF THE SERIES A PREFERRED STOCK The following summary of the particular terms of the Series A Preferred Stock supplements and, to the extent inconsistent therewith, replaces the description of the terms of the Corporation's Preferred Stock set forth under the heading "Description of Preferred Stock of the Corporation" in the accompanying Prospectus, to which reference is hereby made. The Series A Preferred Stock is a series of the Preferred Stock of the Corporation covered by and described in the Prospectus. The following description does not purport to be complete and is subject to and qualified in its entirety by reference to Article Fifth of the Certificate of Incorporation of the Corporation and to the Certificate of Resolution of the Series A Preferred Stock, copies of which are incorporated by reference in this Prospectus as exhibits to the Registration Statement of which this Prospectus is a part. GENERAL Under the Articles of Incorporation of the Corporation, the Board of Directors of the Corporation is authorized to provide for the issuance of up to 10,000,000 shares of preferred stock (of which 350,000 shares have been authorized and designated but not issued in connection with the Corporation's shareholders rights plan), in one or more series, with such designations of titles, dividend rights, redemption or purchase account provisions, conversion provisions and voting rights as shall be set forth in resolutions providing for the issuance thereof adopted by the Board of Directors of the Corporation. DIVIDENDS Holders of record of the Series A Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds of the Corporation legally available therefor, non-cumulative cash dividends at the annual rate per share of 8.35% of the liquidation preference of $25 per share, or $0.173958 per share per month, with each aggregate payment made to each record holder of the Series A Preferred Stock being rounded to the next lowest cent. Dividends on the Series A Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on July 31, 1994, and on the last day of each calendar month of each year thereafter to the holders of record of the Series A Preferred Stock as they appear on the books of the Corporation on the second Business Day (as defined below) immediately preceding the relevant date of payment. In the case of the dividend payable on July 31, 1994, such dividend shall cover the period from the date of issuance of the Series A Preferred Stock to July 31, 1994. In the event that any date on which dividends are payable is not a Business Day, then payment of the S-4 5 dividend payable on such date will be made on the next succeeding Business Day without any interest or other payment in respect of any such delay, except that, if such Business Day is in the next succeeding calendar year, such payment will be made on the Business Day immediately preceding the relevant date of payment, in each case with the same force and effect as if made on such date. A "Business Day" is a day other than a day on which banking institutions in San Juan, Puerto Rico or New York, New York are authorized or required by law to close. Dividends on the Series A Preferred Stock will be non-cumulative. The Corporation is not obligated or required to declare or pay dividends on the Series A Preferred Stock, even if it has funds available for the payment of such dividends. If the Board of Directors of the Corporation or an authorized committee thereof does not declare a dividend payable on a dividend payment date in respect of the Series A Preferred Stock, then the holders of such Series A Preferred Stock shall have no right to receive a dividend in respect of the monthly dividend period ending on such dividend payment date and the Corporation will have no obligation to pay the dividend accrued for such monthly dividend period or to pay any interest thereon, whether or not dividends on such Series A Preferred Stock are declared for any future monthly dividend period. The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period. Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder's address as it appears on the register for such Series A Preferred Stock. So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not declare, set apart or pay any dividend or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation) on, or redeem, purchase, set apart or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation), shares of common stock or of any other class of stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation, unless (i) all accrued and unpaid dividends on the Series A Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series A Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment and (ii) the Corporation has not defaulted in the payment of the redemption price of any shares of Series A Preferred Stock called for redemption. See "Redemption at the Option of the Corporation." When dividends are not paid in full on the Series A Preferred Stock and on any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the Series A Preferred Stock, all dividends declared upon the Series A Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the amount of dividends declared per share on the Series A Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the liquidation preference per share of the Series A Preferred Stock and any such other shares of stock bear to each other. The principal source of cash flow for the Corporation is dividends from its subsidiary Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. See "Certain Regulatory Matters -- Dividend Restrictions" in the accompanying Prospectus. In addition, the Corporation could enter into agreements that restrict the Corporation's ability to declare and pay dividends on the Series A Preferred Stock. See "Description of Preferred Stock of the Corporation -- Dividends" in the accompanying Prospectus for a discussion of certain other terms of the Series A Preferred Stock relating to the payment of dividends. Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies and member banks, Banco Popular was well capitalized at March 31, 1994, and at such date Banco Popular could have S-5 6 declared a dividend of approximately $128.6 million without having to obtain regulatory approval. See "Certain Regulatory Matters -- FDICIA" in the accompanying Prospectus. CONVERSION; EXCHANGE The Series A Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation. REDEMPTION AT THE OPTION OF THE CORPORATION The shares of the Series A Preferred Stock are not redeemable prior to June 30, 1998. On and after that date, the shares of the Series A Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, upon not less than 30 nor more than 60 days' notice by mail, at the redemption prices set forth below, during the twelve-month periods beginning on June 30 of the years set forth below, plus accrued and unpaid dividends for the then current monthly dividend period to the date fixed for redemption.
YEAR - ----- 1998........................................ $26.25 1999........................................ 26.00 2000........................................ 25.75 2001........................................ 25.50 2002 and thereafter......................... 25.00
In the event that less than all of the outstanding shares of the Series A Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable, including any method to conform to any rule or regulation of any national or regional stock exchange or automated quotation system upon which the shares of the Series A Preferred Stock may at the time be listed or eligible for quotation. Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of Series A Preferred Stock to be redeemed, at their address of record, not more than sixty nor less than thirty days prior to the redemption date. The notice of redemption to each holder of shares of Series A Preferred Stock shall specify the number of shares of Series A Preferred Stock to be redeemed, the redemption date and the redemption price payable to such holder upon redemption, and shall state that from and after said date dividends thereon will cease to accrue. If less than all the shares owned by a holder are then to be redeemed at the option of the Corporation, the notice shall also specify the number of shares of Series A Preferred Stock which are to be redeemed and the numbers of the certificates representing such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice, and failure duly to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series A Preferred Stock. Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the payment of the redemption price for any shares to be redeemed), all dividends on the shares of Series A Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares) shall cease on the redemption date, and such shares shall not after the redemption date be deemed to be outstanding. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued without cost to the holder thereof representing the unredeemed shares. At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed with a bank or trust company designated by the Corporation having its principal office in New York, New York, San Juan, S-6 7 Puerto Rico, or any other city in which the Corporation shall at that time maintain a transfer agent with respect to its capital stock, and having a combined capital surplus (as shown by its latest published statement) of at least $50,000,000 (hereinafter referred to as the "Depositary"), to be held in trust by the Depositary for payment to the holders of the shares of the Series A Preferred Stock to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the Series A Preferred Stock to be redeemed, the Corporaiton shall thereupon be released and discharged (subject to the provisions described in the next paragraph) from any obligation to make payment of the amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment. Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the Series A Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall belong to the Corporation and shall be paid to it from time to time on demand. Any shares of the Series A Preferred Stock which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors. See "Description of Preferred Stock of the Corporation -- Redemption" in the accompanying Prospectus for certain additional provisions and a discussion of certain regulatory restrictions and other issues relating to the redemption of the Series A Preferred Stock. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of Series A Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution is made to holders of common stock or any other equity securities of the Corporation ranking junior upon liquidation to the Series A Preferred Stock, distributions upon liquidation in the amount of $25 per share plus an amount equal to any accrued and unpaid dividends for the current monthly dividend period to the date of payment. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they are entitled, the holders of shares of Series A Preferred Stock will not be entitled to any further participation in any distribution of assets of the Corporation. In the Corporation's Certificate of Resolution it is provided that neither the consolidation or merger of the Corporation with any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation. VOTING RIGHTS Except as described below, or except as required by applicable law, holders of the Series A Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation. If the Corporation does not pay dividends in full on the Series A Preferred Stock for eighteen consecutive monthly dividend periods, the holders of outstanding shares of the Series A Preferred Stock, together with the holders of any other shares of stock of the Corporation having the right to vote for the election of directors S-7 8 solely in the event of any failure to pay dividends, acting as a single class without regard to series, will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for the purpose, to appoint two additional members of the Board of Directors of the Corporation, to remove any such member from office and to appoint another person in place of such member. Not later than 30 days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors or an authorized committee thereof will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such 30-day period, the holders of 10% of the outstanding shares of the Series A Preferred Stock and any such other stock will be entitled to convene such meeting. The provisions of the Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of dividends in full on the Series A Preferred Stock and each such other series of stock for twelve consecutive monthly dividend periods. The Certificate of Incorporation of the Corporation provides for a minimum of nine members of the Board of Directors and a maximum of twenty-five members. As of the date of this Prospectus Supplement, the Corporation's Board of Directors had nineteen members. Any variation or abrogation of the rights, preferences and privileges of the Series A Preferred Stock by way of amendment of the Corporation's Certificate of Incorporation or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series A Preferred Stock) shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the Series A Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up and dissolution, on a parity with or junior to the Series A Preferred Stock. No vote of the holders of the Series A Preferred Stock will be required for the Corporation to redeem or purchase and cancel the Series A Preferred Stock in accordance with the Certificate of Incorporation of the Corporation or the Certificate of Resolution for the Series A Preferred Stock. The Corporation will cause a notice of any meeting at which holders of the Series A Preferred Stock are entitled to vote to be mailed to each record holder of the Series A Preferred Stock. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution to be proposed for adoption at such meeting on which such holders are entitled to vote and (iii) instructions for deliveries of proxies. See "Description of Preferred Stock of the Corporation -- Voting Rights" in the accompanying Prospectus for a discussion of certain matters relating to voting rights. RANK The Series A Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Corporation, to the Corporation's Series A Participating Preferred Stock authorized in connection with the Corporation's shareholder rights plan, and to all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the Series A Preferred Stock (or to all series of the Preferred Stock in general); (ii) on a parity with all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the Series A Preferred Stock (or with all series of the Preferred Stock in general); and (iii) junior to all equity securities issued by the Corporation the terms of S-8 9 which specifically provide that such equity securities will rank senior to the Series A Preferred Stock (or to all series of the Preferred Stock in general). For this purpose, the term "equity securities" does not include debt securities convertible into or exchangeable for equity securities. The Corporation may not issue shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series A Preferred Stock except with the consent of the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock. See "Voting Rights" above. GLOBAL SECURITIES The Series A Preferred Stock may be issued in whole or in part in the form of one or more global securities (the "Global Securities") that will be deposited with, or on behalf of, the Depository Trust Company (the "Depository") and registered in the name of a nominee of the Depository. Unless and until it is exchanged in whole or in part for individual certificates representing shares of Series A Preferred Stock, a Global Security may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any nominee of the Depository to a successor depository or any nominee of such successor. Upon the issuance of a Global Security, the Depository for such Global Security or its nominee will credit on its book-entry registration and transfer system the respective number of shares of Series A Preferred Stock represented by such Global Security to the accounts of institutions that have accounts with such Depository ("Participants"). Such accounts shall be designated by the Underwriter. Owners of beneficial interests in a Global Security that are not Participants or persons that may hold through Participants but desire to sell or otherwise transfer ownership of such beneficial interests by book-entry on the records of the Depository may do so only through Participants and persons that may hold through Participants. Because the Depository can only act on behalf of Participants and persons that may hold through Participants, the ability of an owner of a beneficial interest in a Global Security to pledge such beneficial interests to persons or entities that do not participate in the book-entry and transfer system of the Depository, or otherwise take actions in respect of such beneficial interests, may be limited. The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limitations on the ownership of beneficial interests in a Global Security and such laws may impair the ability to transfer beneficial interests in a Global Security. So long as the Depository for a Global Security or its nominee is the registered owner of such Global Security, such Depository or such nominee, as the case may be, will be considered the sole owner or holder of the Series A Preferred Stock represented by such Global Security for all purposes. Payments of dividends on shares of Series A Preferred Stock represented by a Global Security registered in the name of the Depository or its nominee will be made to the Depository or its nominee, as the case may be, as the registered owner of the Global Security representing such Series A Preferred Stock. None of the Corporation, any dividend disbursing agent or registrar for such Series A Preferred Stock will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Global Security for such Series A Preferred Stock or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Corporation expects that the Depository or its nominee, upon receipt of any payment relating to shares of the Series A Preferred Stock in respect of a Global Security representing any of such shares of Series A Preferred Stock, immediately will credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in such Global Security as shown on the records of such Depository or its nominee. The Corporation also expects that payments by Participants to owners of beneficial interests in such Global Security held through such Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name." Such payments will be the responsibility of such Participants and not of the Corporation or the Depository. Owners of beneficial interests in Global Securities may experience some delay in the receipt of dividend payments since the Depository for such Global Securities will forward payments to S-9 10 its Participants, which in turn will forward them to persons that hold beneficial interests in such Global Securities through such Participants. If the Depository for the Series A Preferred Stock is at any time unwilling, unable or ineligible to continue as depository and a successor depository is not appointed by the Corporation within 90 days, the Corporation will issue individual share certificates of Series A Preferred Stock in exchange for the Global Security representing such shares of Series A Preferred Stock. In addition, the Corporation may at any time and in its sole discretion, subject to any limitations described in this Prospectus Supplement, determine not to have any Series A Preferred Stock represented by one or more Global Securities and, in such event, will issue individual share certificates of such Series A Preferred Stock in exchange for the Global Security or Securities representing such shares of Series A Preferred Stock. In either instance, the Corporation will issue share certificates of Series A Preferred Stock in such names and representing such number of shares as the Depository for such Global Securities shall request. TRANSFER AGENT; DIVIDEND DISBURSING AGENT; REGISTRAR Banco Popular will initially act as the transfer agent, dividend disbursing agent and registrar for the Series A Preferred Stock. Banco Popular's principal executive offices are located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918 and its telephone number is (809) 765-9800. The transfer of a share of Series A Preferred Stock may be registered upon the surrender of the certificate evidencing the share of Series A Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar. Registration of transfers of shares of Series A Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and registrar may require) in respect of any tax or other governmental charges which may be imposed in relation to it. The Corporation will not be required to register the transfer of a share of Series A Preferred Stock after such share has been called for redemption. REPLACEMENT OF LOST CERTIFICATES If any certificate for a share of Series A Preferred Stock is mutilated or alleged to have been lost, stolen or destroyed, a new certificate representing the same share may be issued to the holder upon request subject to delivery of the old certificate or, if alleged to have been lost, stolen or destroyed, compliance with such conditions as to evidence, indemnity and the payment of out-of-pocket expenses of the Corporation in connection with the request as the Corporation may determine. NO PREEMPTIVE RIGHTS Holders of the Series A Preferred Stock will have no preemptive rights to purchase any securities of the Corporation. NO REPURCHASE AT THE OPTION OF THE HOLDERS; MISCELLANEOUS Holders of the Series A Preferred Stock will have no right to require the Corporation to redeem or repurchase any shares of Series A Preferred Stock, and the shares of Series A Preferred Stock are not subject to any sinking fund or similar obligation. The Corporation may, at its option, purchase shares of the Series A Preferred Stock from holders thereof from time to time, by tender, in privately negotiated transactions or otherwise. RATINGS The Series A Preferred Stock has been rated BBB- by Standard & Poor's Corporation and Baa2 by Moody's Investors Service, Inc. The ratings reflect only the opinions of such rating agencies. Any explanation S-10 11 of the significance of the ratings must be obtained from the issuing rating agencies. There is no assurance that the ratings will continue for any given period of time or will not be revised downward or withdrawn entirely by such rating agency. A downward revision or withdrawal of a rating could have an adverse effect on the market price of the Series A Preferred Stock. USE OF PROCEEDS The Corporation intends to use the net proceeds from the sale of the Series A Preferred Stock for general corporate purposes, including investments in, or extensions of credit to, its existing and future subsidiaries, for the acquisition of other banking and financial institutions, and for the repayment of outstanding borrowings. CERTAIN PUERTO RICO TAX CONSIDERATIONS The following discussion summarizes certain Puerto Rico tax aspects of the acquisition of the Series A Preferred Stock. This discussion is based upon the Puerto Rico Income Tax Act of 1954, as amended (the "ITA"), the applicable regulations under the ITA (the "ITA Regulations"), the Puerto Rico Municipal Property Tax Act of 1991, as amended (the "MPTA"), the Municipal License Tax Act, as amended (the "MLTA"), the applicable regulations under the MLTA (the "MLTA Regulations"), the Estate and Gift Tax Act of Puerto Rico, as amended (the "EGTA"), the applicable regulations under the EGTA (the "EGTA Regulations") and judicial and administrative interpretations of the ITA, the ITA Regulations, the MPTA, the MLTA, the MLTA Regulations, the EGTA and the EGTA Regulations, all as in effect on the date of this Prospectus Supplement. Each investor should be aware that the ITA, the ITA Regulations, the MPTA, the MLTA, the MLTA Regulations, the EGTA and the EGTA Regulations and any interpretations thereof are subject to change and that any change could be applied retroactively. This discussion is limited to certain Puerto Rico tax considerations applicable to individuals who are bona fide residents of Puerto Rico, as defined in the ITA, and to corporations and partnerships (other than special partnerships under Supplement P of the ITA ("Special Partnerships")) organized under the laws of the Commonwealth of Puerto Rico; it does not deal with Puerto Rico tax considerations applicable to other types of investors. Furthermore, this discussion does not purport to deal with all aspects of Puerto Rico taxation that may be relevant to particular investors in light of their personal investment circumstances or to certain types of investors subject to special treatment under the ITA (for example, banks, life insurance companies or tax exempt organizations). EACH INVESTOR IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR AS TO ANY PUERTO RICO TAX CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE SERIES A PREFERRED STOCK. INCOME TAX Distributions on the Series A Preferred Stock. Distributions by the Corporation with respect to the Series A Preferred Stock will be treated as dividends for Puerto Rico income tax purposes and will be taxable in the manner described below to the extent the Corporation has either current or accumulated earnings and profits. To the extent that the amount of the distributions paid on the Series A Preferred Stock exceeds the holder's allocable share of the Corporation's current and accumulated earnings and profits for Puerto Rico income tax purposes, such distributions will be treated as a non-taxable return of capital (rather than as a dividend) and will be applied against and reduce the adjusted basis of the Series A Preferred Stock in the hands of the holder. The amount of any such distribution that exceeds the adjusted basis of the Series A Preferred Stock in the hands of the holder will be treated as a gain from the sale or exchange of such shares of stock, taxable in the manner described below. The following discussion regarding the Puerto Rico income taxation of dividends paid on the Series A Preferred Stock assumes that such dividends are from Puerto Rico sources. Generally, dividends paid by a corporation organized under the laws of Puerto Rico are considered to be from Puerto Rico sources unless the Puerto Rico corporation derives less than 20% of its gross income from Puerto Rico sources during the three taxable years preceding the year of declaration of the dividends (or such part of such period as the corporation S-11 12 has been in existence). For every year since its incorporation in 1984, the Corporation has derived more than 20% of its gross income from Puerto Rico sources. Puerto Rico Residents. The ITA imposes a 20% withholding tax on the total amount of any dividend to be paid by the Corporation on the Series A Preferred Stock to an individual resident of Puerto Rico, whether a United States citizen or an alien. 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 graduated rates, in which case no tax will be withheld from such year's distribution. The election must include the following information: (i) name and address of the electing shareholder, (ii) taxpayer identification number, (iii) statement authorizing the withholding agent not to withhold the 20% tax, (iv) name of the withholding agent, (v) date of the distribution(s) with respect to which the election is made, (vi) date on which the option is exercised, and (vii) signature of the shareholder. The election, once made, will be final and irrevocable in connection with the distribution(s) covered. In the absence of such an election, the withholding agent will withhold the 20% tax on any dividend on the Series A Preferred Stock paid to a shareholder who is an individual resident of Puerto Rico. Notwithstanding that the 20% tax has been withheld from any dividend, a shareholder who is an individual resident of Puerto Rico may opt, when filing his or her Puerto Rico income tax return, to include the amount of such dividend as ordinary income and be taxed thereon at the regular, graduated rates, in which case the 20% tax withheld will be allowed as a credit against the tax imposed by the ITA with respect to all income included in the return. Puerto Rico Corporations. No withholding tax is imposed on distributions of dividends to corporations organized under the laws of Puerto Rico. In computing its Puerto Rico income tax liability, a Puerto Rico corporation will be entitled to claim a dividend received deduction equal to 85% of the dividends received from the Corporation (the "Dividend Deduction"), provided that the Dividend Deduction may not exceed 85% of the corporate taxpayer's net taxable income for Puerto Rico income tax purposes. Based on the presently applicable maximum Puerto Rico income tax rate of 42%, the maximum effective tax rate on dividends to the corporate taxpayer would be 6.30% after the Dividend Deduction. Puerto Rico Partnerships. Under the ITA, partnerships (other than Special Partnerships) are taxed as corporations. Accordingly, the above discussion, as well as the discussion under "Sale or Exchange of Series A Preferred Stock" below with respect to corporations, is equally applicable to partnerships (other than Special Partnerships) organized under the laws of Puerto Rico. Redemption in Exchange for Cash. A redemption of shares of the Series A Preferred Stock for cash will be a taxable event. A redemption of shares of the Series A Preferred Stock for cash, including a redemption premium, if any, will be treated as a distribution taxable as a dividend to the extent of the Corporation's current or accumulated earnings and profits if it is essentially equivalent to a dividend. Principles similar to the ones applied under the United States Internal Revenue Code of 1986, as amended (the "Code") by the U.S. Internal Revenue Service (the "IRS") are usually applied by the Puerto Rico Treasury Department in determining whether a distribution is essentially equivalent to a dividend. See "Certain United States Income Tax Considerations - Redemption in Exchange for Cash." The Puerto Rico Treasury Department, however, is not bound by IRS determinations on this issue and is free to adopt a different rule. If a redemption of the Series A Preferred Stock is treated as a distribution that is taxable as a dividend, a shareholder will be taxed in the same manner described above. If the redemption is not treated as a dividend, the redemption of the Series A Preferred Stock for cash, including a redemption premium, if any, would result in a gain or loss equal to the difference between the amount of cash received, including a redemption premium, if any, and the stockholder's tax basis in the Series A Preferred Stock redeemed. Any such gain or loss will be taxable in the same manner that a gain or loss from the sale or exchange of the Series A Preferred Stock is taxed. See "Sale or Exchange of Series A Preferred Stock" below. This treatment would result if there is a complete redemption for cash of all the Series A Preferred Stock held by an investor so that the investor ceases to have an interest in the affairs of the Corporation. S-12 13 Sale or Exchange of Series A Preferred Stock. Gain or loss will be realized on the sale or exchange of shares of the Series A Preferred Stock equal to the difference between the amount realized on the sale or exchange and the tax basis of such shares. Such gain or loss will be a capital gain or loss if the Series A Preferred Stock is held as a capital asset and will be a long-term capital gain or loss if the holding period for the Series A Preferred Stock exceeds six months. If the shareholder is a Puerto Rico resident individual and the gain is a long-term capital gain, it will be taxable at a maximum rate of 20%. If the shareholder is a Puerto Rico corporation or partnership (other than a Special Partnership) and the gain is a long-term capital gain, it will be taxable at a maximum rate of 25%. PROPERTY TAX The Series A Preferred Stock is exempt from Puerto Rico property taxes pursuant to Section 5.01(d) of the MPTA. MUNICIPAL LICENSE TAX Puerto Rico Residents. Dividends derived by an individual resident of Puerto Rico on the Series A Preferred Stock are exempt from the Puerto Rico municipal license tax pursuant to Section 2(a)(7)(A) of the MLTA. Puerto Rico Corporations and Partnerships. Dividends on the Series A Preferred Stock derived by a corporation or partnership organized under the laws of Puerto Rico engaged in a business other than a financial business are subject to the Puerto Rico municipal license tax at a rate determined by the municipality in which it has an office or other establishment from which it conducts operations, which rate cannot exceed fifty hundredths (.50) of one percent (1%) pursuant to Section 5(b) of the MLTA. Dividends on the Series A Preferred Stock derived by a corporation or partnership organized under the laws of Puerto Rico engaged in a financial business are subject to the Puerto Rico municipal license tax at a rate determined by the municipality in which it has an office or other establishment from which it conducts operations, which rate cannot exceed one and one half percent (1.5%) pursuant to Section 5(a) of the MLTA. As provided in Section 2(a)(6) of the MLTA, the term "financial business" includes commercial banks, savings and loan associations, mutual or savings banks, financing companies, insurance companies, investment companies, brokerage houses, collection agencies and any other type of activity of a similar nature carried out by any industry or business. ESTATE AND GIFT TAX The transfer by gift or death of the shares of Series A Preferred Stock by a United States citizen who acquired citizenship by reason of birth or residence in Puerto Rico, and who is a resident of Puerto Rico at the time of the gift or death, is exempt from tax under the EGTA. CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS The following discussion summarizes certain federal income tax aspects of the acquisition of the Series A Preferred Stock. This discussion is based upon the Code, the applicable Treasury Regulations (the "Regulations") and judicial and administrative interpretations of the Code and Regulations, all as in effect on the date of this Prospectus Supplement. Each investor should be aware that the Code, the Regulations and any interpretations thereof are subject to change and that any change could be applied retroactively. This discussion is limited to certain federal income tax considerations applicable to individuals who are bona fide residents of Puerto Rico during the entire taxable year and to corporations organized under the laws of the Commonwealth of Puerto Rico; it does not deal with federal income tax considerations applicable to other types of investors. Furthermore, this discussion does not purport to deal with all aspects of federal income taxation that may be relevant to particular investors in light of their personal investment circumstances or to certain types of investors subject to special treatment under the Code (for example, banks, life insurance companies or tax exempt organizations). EACH INVESTOR IS STRONGLY URGED TO CONSULT ITS S-13 14 OWN TAX ADVISOR AS TO ANY FEDERAL, STATE, LOCAL OR OTHER TAX CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE SERIES A PREFERRED STOCK. DISTRIBUTIONS ON THE SERIES A PREFERRED STOCK The following discussion regarding the federal income taxation of dividends paid on the Series A Preferred Stock assumes that such dividends constitute Puerto Rico source income for purposes of the Code. Generally, dividends paid by a corporation organized under the laws of Puerto Rico are considered to be entirely from Puerto Rico sources for purposes of the Code unless 25% or more of the Puerto Rico corporation's gross income for the three taxable years preceding the year of declaration of the dividends (or such part of such period as the corporation has been in existence) is effectively connected (or, subject to certain exceptions, treated as effectively connected) with the conduct of a trade or business within the United States ("ECI-US"). If 25% or more of the Puerto Rico corporation's gross income for such three-year testing period is ECI-US, then the dividends will constitute U.S. source income in the same ratio as the Puerto Rico corporation's ECI-US for such three-year testing period bears to its total gross income for the same period. For every year since its incorporation in 1984, less than 25% of the Corporation's gross income has been ECI-US or treated as ECI-US. Puerto Rico Residents and Corporations. In general, distributions made on the Series A Preferred Stock to an individual who is a bona fide resident of Puerto Rico during the entire taxable year or to a corporation organized under the laws of Puerto Rico (a "Puerto Rico Shareholder") will not be includible in such shareholder's gross income and will be exempt from federal income taxation. A corporation organized under the laws of Puerto Rico that is engaged in trade or business in the United States ("ETB-US"), however, will be taxed on the dividends if they are ECI-US. The dividends will be ECI-US if the corporation has an office or other fixed place of business within the United States to which the dividends are attributable and the dividends are either (i) derived from the active conduct of a banking, financing, or similar business within the United States, or (ii) received by a corporation the principal business of which is trading in stock or securities for its own account. REDEMPTION IN EXCHANGE FOR CASH A redemption of shares of the Series A Preferred Stock for cash will be treated under Section 302 of the Code as a distribution that is taxable as a dividend, to the extent described above, unless the redemption (i) results in a "complete termination" of the stockholder's stock interest in the Corporation under Section 302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect to the stockholder under Section 302(b)(2) of the Code, or (iii) is "not essentially equivalent to a dividend" with respect to the stockholder under Section 302(b)(1) of the Code. In determining whether the redemption is to be treated as a dividend, stock considered to be owned by the stockholder by reason of certain constructive ownership rules set forth in Section 318 of the Code, as well as stock actually owned, must be taken into account. Generally, a distribution to a stockholder will be "not essentially equivalent to a dividend" if it results in a "meaningful reduction" in the stockholder's percentage interest in the Corporation. The IRS has indicated through published rulings and the Regulations that a redemption of preferred stock from a stockholder who exercises no control over company affairs (including ownership of common stock) will be treated as being "not essentially equivalent to a dividend." Puerto Rico Shareholder. A redemption of shares of the Series A Preferred Stock for cash, including a redemption premium, if any, would not be includible in a Puerto Rico Shareholder's gross income and will be exempt from federal income taxation thereon. No deduction or credit will be allowed for any loss realized from such redemption that is allocable to or chargeable against amounts excluded from gross income by reason of the preceding sentence. A corporation organized under the laws of Puerto Rico that is ETB-US, however, may be subject to federal income taxation if the gain or loss realized upon the redemptions is ECI-US. S-14 15 SALE OR EXCHANGE OF SERIES A PREFERRED STOCK Gain or loss will be realized on the sale or exchange of the Series A Preferred Stock equal to the difference between the amount realized upon the sale or exchange and the tax basis of such shares. Such gain or loss will be a capital gain or loss if the Series A Preferred Stock is held as a capital asset and will be a long-term capital gain or loss if the holding period for the Series A Preferred Stock exceeds one year. Puerto Rico Residents. Any gain on the sale or exchange of the Series A Preferred Stock by an individual who is a bona fide resident of Puerto Rico during the entire taxable year will not be includible in such individual's gross income and will be exempt from federal income taxation. Puerto Rico Corporations. In general, any gain on the sale or exchange of the Series A Preferred Stock by a Puerto Rico corporation will not be included in such corporation's gross income and will be exempt from federal income taxation, unless the Puerto Rico corporation maintains an office or other place of business in the United States to which the gain from the sale or exchange is attributable. PASSIVE FOREIGN INVESTMENT COMPANY STATUS The Code provides special rules regarding certain distributions received by United States persons (which term includes United States citizens who are residents of Puerto Rico but not Puerto Rico corporations) with respect to, and sales and other dispositions (including pledges) of, stock of a Passive Foreign Investment Company ("PFIC"). A non-United States corporation will be treated as a PFIC if 75% or more of its gross income is passive income or if the average percentage of its assets (by value) that produce, or are held for the production of, passive income is at least 50%. Special rules apply in the case of income derived from the active conduct of a banking business, and certain items of income received from affiliates, as well as with respect to corporations 25% or more of the value of the stock of which is owned by such non-United States corporation. The IRS has issued proposed regulations under the PFIC provisions pursuant to which individuals who have been full-year bona fide residents of Puerto Rico for all taxable years during which they have held the stock of a PFIC would not be subject to federal income taxes on any portion of the amount they would have otherwise been required to include in gross income under the PFIC rules. The Corporation has represented that it was not a PFIC for the taxable year ended December 31, 1993, and that it does not expect that it would meet the criteria to be considered a PFIC in the foreseeable future. UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement between the Corporation and PaineWebber Incorporated of Puerto Rico (the "Underwriter"), the Corporation has agreed to sell to the Underwriter and the Underwriter has agreed to purchase from the Corporation all the shares of Series A Preferred Stock offered hereby. The nature of the Underwriter's obligation with respect to such shares is such that it is committed to take and pay for all of such shares if any are taken. The Corporation has been advised by the Underwriter that it proposes initially to offer the Series A Preferred Stock to the public at the public offering price set forth on the cover page of this Prospectus Supplement, and to certain dealers at such price less a concession of $0.50 per share; and that the public offering price, concession, and commission, if any, may be changed by the Underwriter. The Corporation has granted the Underwriter an option, exercisable during the 30-day period after the date of this Prospectus Supplement, to purchase up to 400,000 additional shares of Series A Preferred Stock at the same price per share as the initial 3,600,000 shares of Series A Preferred Stock to be purchased by the Underwriter, with the Underwriting Commission set forth on the cover page of this Prospectus Supplement. The Underwriter may exercise such option only to cover over-allotments in the sale of the initial shares of Series A Preferred Stock to be purchased by the Underwriter. The Corporation has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments the Underwriter may be required to make in respect thereof. S-15 16 The shares of Series A Preferred Stock are a new issue of securities. There is no trading market for the Series A Preferred Stock at present and there is no assurance that there will be one in the future. The Underwriter has advised the Corporation that it intends to make a market in the Series A Preferred Stock, but it is not obligated to do so and may discontinue making a market at any time without notice. The Corporation has filed an application to have the Series A Preferred Stock designated for trading through the National Association of Securities Dealers Automated Quotation System (NASDAQ). . The Underwriter has from time to time been a customer of, engaged in transactions with and performed services for the Corporation and its subsidiaries in the ordinary course of business. The Underwriter may continue to do so in the future. VALIDITY OF THE SERIES A PREFERRED STOCK The validity of the Series A Preferred Stock will be passed upon for the Corporation by McConnell Valdes, San Juan, Puerto Rico, and for the Underwriter by Axtmayer Adsuar Muniz & Goyco, San Juan, Puerto Rico. Samuel T. Cespedes, Esq., a partner of McConnell Valdes, is the Secretary of the Board of Directors of the Corporation and of the boards of directors of several subsidiaries of the Corporation, including Banco Popular, a non-voting member of the board of directors of one of the Corporation's subsidiaries, and legal counsel to Banco Popular's Senior Management Council. As of the date of this Prospectus Supplement, Mr. Cespedes owned 2,640 shares of the Corporation's common stock. EXPERTS The financial statements incorporated in this Prospectus by reference from the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, have been so incorporated in reliance on the report of Price Waterhouse, independent public accountants, given upon the authority of said firm as experts in auditing and accounting. S-16 17 PROSPECTUS DEBT SECURITIES OF BANPONCE CORPORATION OR POPULAR INTERNATIONAL BANK INC. (UNCONDITIONALLY GUARANTEED BY BANPONCE CORPORATION) OR BANPONCE FINANCIAL CORP. (UNCONDITIONALLY GUARANTEED BY BANPONCE CORPORATION) PREFERRED STOCK OF BANPONCE CORPORATION OR POPULAR INTERNATIONAL BANK INC. (UNCONDITIONALLY GUARANTEED BY BANPONCE CORPORATION) --------------------- BanPonce Corporation (the "Corporation") intends to issue from time to time in one or more series its (i) unsecured debt securities, which may be either senior or subordinated, and (ii) shares of preferred stock. BanPonce Financial Corp. ("Financial") intends to issue from time to time in one or more series its unsecured debt securities. Popular International Bank Inc. ("PIB") intends to issue from time to time in one or more series its (i) unsecured debt securities, which may be either senior or subordinated, and (ii) shares of preferred stock. The foregoing debt securities and shares of preferred stock are collectively referred to herein as the "Securities". The Securities will be limited to an aggregate initial offering price not to exceed $400,000,000 or, in the case of debt securities, the equivalent thereof in one or more foreign currencies, including composite currencies. The Securities offered may be offered, separately or together, in separate series, in amounts, at prices and on terms to be determined at the time of sale and to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The subordinated debt securities when issued will be subordinated as described herein under "Description of Debt Securities and Guarantees." Unless otherwise indicated in the Prospectus Supplement, payment of the principal of the subordinated debt securities may be accelerated only in the case of certain events involving the bankruptcy, insolvency or reorganization of the Corporation or PIB, as the case may be. There is no right of acceleration of payment of subordinated debt securities in the case of a default in the performance of any covenant of the Corporation or PIB, including the payment of principal or interest. The specific terms of the Securities in respect of which this Prospectus is being delivered, including (i) in the case of debt securities, the issuer, the specific designation, aggregate principal amount, denominations, maturity, premium, if any, rate (which may be fixed or variable) and time of payment of interest, if any, terms for redemption at the option of the Corporation, Financial, PIB or the holder, if any, currency or currencies of denomination and payment, if other than U.S. dollars, and any other terms in connection with the offering and sale of the debt securities in respect of which this Prospectus is being delivered, as well as the initial public offering price, and the principal amounts, if any, to be purchased by underwriters and (ii) in the case of preferred stock, the issuer, the specific title and stated value, number of shares or fractional interests therein, any dividend, liquidation, redemption, voting and other rights, the terms, if any, for conversion into preferred stock or other debt securities, the securities exchanges, if any, on which the preferred stock is to be listed, the initial public offering price, and the number of shares, if any, to be purchased by the underwriters, will be as set forth in the accompanying Prospectus Supplement. All or a portion of the debt securities may be issued in permanent global form. The Securities may be sold to underwriters for public offering pursuant to terms of offering fixed at the time of sale. In addition, the Securities may be sold by the Corporation directly or through dealers or agents designated from time to time, which agents may be affiliates of the Corporation. The Prospectus Supplement will also set forth with respect to the sale of the Securities in respect of which this Prospectus is being delivered the names of the underwriters, dealers or agents, if any, together with the terms of offering, the compensation of such underwriters and the net proceeds to the Corporation. --------------------- THE SECURITIES WILL BE UNSECURED OBLIGATIONS OF THE CORPORATION AND WILL NOT BE SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NONBANK SUBSIDIARY OF THE CORPORATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE SECURITIES OFFICE OF THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF THE COMMONWEALTH OF PUERTO RICO OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, SUCH SECURITIES OFFICE, OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Prospectus is May 3, 1993 18 AVAILABLE INFORMATION The Corporation is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information concerning the Corporation can be inspected and copied at the Commission's office at 450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices in New York (7 World Trade Center, New York, New York 10048) and Chicago (Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661), and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. This Prospectus does not contain all of the information set forth in the Registration Statement which the Corporation has filed with the Commission under the Securities Act of 1933 (the "Act") and to which reference is hereby made. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Corporation hereby incorporates by reference into this Prospectus the following documents filed by the Corporation with the Commission: 1. The Corporation's Annual Report on Form 10-K for the year ended December 31, 1992; 2. The Corporation's Current Report on Form 8-K, dated April 27, 1993; and 3. The Corporation's Registration Statement on Form 8-A, dated August 18, 1988, filed pursuant to Section 12(g) of the Exchange Act, pursuant to which the Corporation registered its Series A Participating Cumulative Preferred Stock Purchase Rights. All documents filed by the Corporation subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act shall be deemed to be incorporated by reference into this Prospectus and to be a part thereof from the date of filing of such documents. 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 Prospectus 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 such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Any person receiving a copy of this Prospectus, including any beneficial owner, may obtain without charge, upon oral or written request, a copy of any of the documents incorporated by reference herein, except for the exhibits to such documents. Written requests should be mailed to Mr. Orlando Berges, Senior Vice President, BanPonce Corporation, P.O. Box 362708, San Juan, Puerto Rico 00936-2708. Telephone requests may be directed to (809) 765-9800. BANPONCE CORPORATION The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956 and incorporated in 1984 under the laws of the Commonwealth of Puerto Rico ("Puerto Rico"). The Corporation is the largest financial institution in Puerto Rico, with consolidated assets of $10 billion, total deposits of $8 billion and stockholders' equity of $752.1 million as of December 31, 1992. Based on both total assets and total deposits at December 31, 1992, the Corporation was the 55th largest bank holding company in the United States. The Corporation's principal executive offices are located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918 and its telephone number is (809) 765-9800. The Corporation's principal subsidiary, Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), was incorporated nearly 100 years ago in 1893 and is Puerto Rico's largest bank with total assets of $9.6 billion, deposits of $8.1 billion and stockholders' equity of $662.8 million at December 31, 1992. The Bank accounted for 96% of the total consolidated assets of the Corporation at December 31, 1992. A 2 19 consumer-oriented bank, Banco Popular has the largest retail franchise in Puerto Rico, operating 195 branches, 226 automated teller machines, and 47 consumer loan centers. The Bank also has the largest trust operation in Puerto Rico and is a leader in the mortgage banking business. In addition, it operates the largest Hispanic bank branch network in the mainland United States with 28 branches in New York, one branch in Chicago, and one branch in Los Angeles. As of December 31, 1992, these branches had a total of approximately $1.2 billion in deposits. The Bank also operates three branches in the U.S. Virgin Islands. The Corporation has two other principal subsidiaries: Vehicle Equipment Leasing Company, Inc. ("VELCO") and Financial. VELCO is engaged primarily in the finance leasing of passenger vehicles and is the largest leasing company in Puerto Rico. For additional information regarding Financial, see "BanPonce Financial Corp." BANPONCE FINANCIAL CORP. Financial, a wholly owned subsidiary of PIB and an indirect, wholly owned subsidiary of the Corporation, was organized in 1991 under the laws of the State of Delaware. Financial's principal executive office is located at 521 Fellowship Road, Mt. Laurel, New Jersey 08054. Financial acquired all of the common stock of Spring Financial Services, Inc. ("Spring") on September 30, 1991. Spring is engaged in the business of providing consumer and dealer finance loans and operates through forty branches in ten mid-Atlantic states. Summary consolidated financial statements of Financial are included in the notes to the Corporation's consolidated financial statements. Prior to the acquisition of Spring, Financial had no significant business operation. POPULAR INTERNATIONAL BANK INC. PIB is a wholly owned subsidiary of the Corporation organized in 1992 under the laws of the Commonwealth of Puerto Rico and operating as an "international banking entity" under the International Banking Center Regulatory Act of Puerto Rico (the "IBC Act"). PIB owns all of the outstanding capital stock of Financial. Summary consolidated financial statements of PIB are included in the Corporation's Current Report on Form 8-K, dated April 27, 1993. PIB's principal executive offices are located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico 00918 and its telephone number is (809) 765-9800. CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31, ---------------------------------------- 1992 1991 1990 1989 1988 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges: Excluding Interest on Deposits...................... 2.7 2.1 3.6 2.4 2.2 Including Interest on Deposits...................... 1.3 1.2 1.3 1.2 1.2 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends Excluding Interest on Deposits...................... 2.6 2.0 3.6 2.4 2.2 Including Interest on Deposits...................... 1.3 1.2 1.3 1.2 1.2
For purposes of computing these consolidated ratios, earnings represent income (loss) before income taxes, cumulative effect of a change in accounting principles and equity in undistributed income of unconsolidated subsidiaries and affiliates, plus fixed charges excluding capitalized interest. 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, the amortization of debt issuance expense and capitalized interest. 3 20 USE OF PROCEEDS The Corporation intends to use the net proceeds from the sale of the Securities for general corporate purposes, including investments in, or extensions of credit to, its existing and future subsidiaries, for the acquisition of other banking and financial institutions, and repayment of outstanding borrowings. The Corporation does not at present have any plans to use the proceeds from any offering for a material acquisition or to repay outstanding borrowings. All or a substantial portion of the proceeds from the sale of Securities issued by Financial will be lent by Financial to Spring or used by Financial for general corporate purposes. The net proceeds from the sale of Securities by PIB will be lent by PIB to its affiliates or used by PIB for general corporate purposes. The precise amounts and timing of the application of proceeds will depend on various factors existing at the time of offering of the Securities, including the Corporation's subsidiaries' funding requirements and the availability of other funds. Pending such use, the proceeds may be temporarily invested in short-term obligations. CERTAIN REGULATORY MATTERS GENERAL The Corporation is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956 (the "BHC Act"). As a bank holding company, the Corporation's activities and those of its banking and nonbanking subsidiaries are limited to the business of banking and activities closely related or incidental 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 nonbanking 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 and the BHC Act, the Corporation and Banco Popular are not permitted to operate a branch or agency, or acquire more than 5% of any class of the voting shares or substantially all the assets of, or control of an additional bank or bank holding company that is located outside of their "home state", except that (i) the Corporation may acquire control of a bank in a state if the laws of that state explicitly authorize a bank holding company from such bank holding company's home state to do so and (ii) Banco Popular may continue to operate a "grandfathered" branch or agency. 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 operates branches in Chicago and Los Angeles that are not grandfathered for purposes of the IBA. The Federal Reserve Board has required that Banco Popular conform their existence to the legal requirements set forth above. Banco Popular has petitioned the Federal Reserve Board for a period of four years, commencing January 1, 1991, to conform these activities to the requirements of the IBA and to obtain the necessary approvals of California and Illinois regulatory authorities to maintain these two facilities. There can be no assurance that the Federal Reserve Board will grant Banco Popular's request or that Banco Popular will be able to obtain the regulatory approvals of California and Illinois authorities necessary to maintain these two facilities. Banco Popular is subject to supervision and examination by applicable federal, state and Puerto Rico banking agencies, including the Federal Reserve Board. Banco Popular is a member of, and therefore subject to the regulations of, the Federal Deposit Insurance Corporation (the "FDIC"), and to requirements and restrictions under federal, state and Puerto Rico 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. In 4 21 addition to the impact of regulation, 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. HOLDING COMPANY STRUCTURE Banco Popular is subject to restrictions under federal law that limit the transfer of funds by Banco Popular to the Corporation, Financial, PIB and the Corporation's other nonbanking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Banco Popular to the Corporation or any one nonbanking subsidiary are limited in amount to 10% of Banco Popular's capital stock and surplus and, with respect to the Corporation and all nonbanking subsidiaries, to an aggregate of 20% of Banco Popular's capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. 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 bank 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 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 such subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. 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. Banco Popular currently is the only subsidiary bank of the Corporation. Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution (which term 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 after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular currently is the only controlled FDIC-insured depository institution of the Corporation. CAPITAL ADEQUACY Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies and member banks, when the guidelines became fully phased-in at the end of 1992, the minimum guidelines for the ratio of total capital ("Total capital") to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) became 8%. Until year-end 1992, the minimum ratio was 7.25%. At least half of the Total capital is to be comprised of common equity, retained earnings, minority interests in unconsolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and, after March 15, 1993, less certain other intangible assets discussed below ("Tier 1 capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments, and a limited amount of loan and lease loss reserves ("Tier 2 capital"). In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies and member banks. These guidelines provide for a minimum ratio of Tier 1 capital to total assets, less goodwill and, after March 15, 1993, less certain other intangible assets discussed below (the 5 22 "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 will be 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 will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 capital, less all intangibles, to total assets, less all intangibles. Under the Federal Reserve Board's requirements, utilizing the December 31, 1992 guidelines, the Corporation's and Banco Popular's capital ratios at December 31, 1992 are set forth below:
CORPORATION BANCO POPULAR ----------- ------------- Tier 1 capital............................................. 12.88% 11.49% Total capital.............................................. 14.85% 13.74% Leverage ratio............................................. 7.26% 6.56%
Effective for periods ending on or after March 15, 1993, the Federal Reserve Board adopted regulations with respect to risk-based and leverage capital ratios that would require most intangibles, including core deposit intangibles, to be deducted from Tier 1 capital. The proposal, however, would permit the inclusion of a limited amount of intangibles related to purchased mortgage servicing rights and purchased credit card relationships and includes a "grandfather" provision permitting the continued inclusion of certain existing intangibles. As of December 31, 1992, under the foregoing proposal, on a fully phased-in basis the Corporation would have had a ratio of Tier 1 capital to risk-weighted assets of 12.73%, a ratio of total capital to risk-weighted assets of 14.70% and a leverage ratio of 7.17%. 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, which are described below under "FDICIA". Bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their 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 schedule. FDICIA On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA substantially revises the depository institution regulatory and funding provisions of the FDIA and makes revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations thereunder establish five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". Under recently adopted regulations, a depository institution will be considered 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 will be 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 will be deemed undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless it is deemed significantly or critically undercapitalized). An institution will be deemed significantly undercapitalized if it has a leverage ratio of less than 3%, a risk-based Tier 1 ratio of less than 3% or a risk-based Total capital ratio of less than 6%. An institution will be deemed critically undercapitalized if it has tangible equity equal to 2% or less of total assets. 6 23 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 an unsatisfactory examination rating. 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 will be subject to restrictions on borrowing from the Federal Reserve System, effective December 19, 1993. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. At December 31, 1992, Banco Popular was well capitalized. Various other legislation, including proposals to revise the banking regulatory system and to limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. DIVIDEND RESTRICTIONS The principal source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulation of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the 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, 1992, Banco Popular could have declared a dividend of approximately $142.6 million without such approval. The payment of dividends by Banco Popular 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 bank 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 bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank 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 described under "FDICIA". See "Certain Regulatory Matters -- Puerto Rico Regulation" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. 7 24 FDIC INSURANCE ASSESSMENTS Banco Popular is subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted, effective January 1, 1993, a temporary risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution would also be 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 which, 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. Based on its capital and supervisory subgroups, each Bank Insurance Fund member institution is assigned an annual FDIC assessment rate varying between 0.23% and 0.31%. The FDIC is currently considering a permanent risk-based assessment system. It remains possible that assessments will be raised to higher levels in the future. Any such increase would have an adverse effect upon the net earnings of Banco Popular and, therefore, the Corporation. BROKERED DEPOSITS FDIC regulations adopted under FDICIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, rollover or renew brokered deposits (which term is defined 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. PUERTO RICO REGULATION General As a commercial bank organized under the laws of the Commonwealth, Banco Popular is subject to supervision, examination and regulation by 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 the Bank 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, the Bank had an adequate reserve fund established. 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 Federal Reserve Board dated November 24, 1982, the Bank has been exempted from such reserve requirements with respect to deposits payable in Puerto Rico. 8 25 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 (15%) of the paid-in capital and reserve fund of the Bank. As of December 31, 1992, the legal lending limit for the Bank under this provision was approximately $79.6 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 which are wholly secured by bonds, securities and other evidences 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. 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. In February 1992, the Finance Board approved Regulation 26-A, which provides 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. Prior to February 1992, the applicable interest rate ceilings for consumer loans were set at 130% of the average prime rate for the previous three months, and at rates ranging from the prime rate to 3% above the prime rate (plus certain additional finance charges) for loans to unincorporated businesses. The Finance Board also has authority to regulate the maximum finance charges on retail installment sales contracts (including credit card purchases), which are currently set at 21%. There is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances, and insurance premiums. Section 14 of the Banking Law authorizes the Bank to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property and operating a small loan company. Banco Popular engages in these activities through its wholly owned subsidiaries, Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc., respectively, both of which are organized and operate solely in Puerto Rico. IBC Act Under the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not amend its articles of incorporation or issue additional shares of capital stock or other securities convertible into additional shares of capital stock unless such shares are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the 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 at the close of its fiscal year. Under the IBC Act, PIB may not deal with domestic persons as such term is defined in the IBC Act. Also, it may only engage in those activities authorized in the IBC Act, the regulations adopted thereunder and its license. The IBC Act empowers the Office of the Commissioner to revoke or suspend, after a hearing, the license of an international banking entity if, among other things, it fails to comply with the IBC Act, regulations issued by the Office of the Commissioner, or the terms of its license or if the Office of the Commissioner finds that the business of the international banking entity is conducted in a manner not consistent with public interest. 9 26 DESCRIPTION OF DEBT SECURITIES AND GUARANTEES The Corporation's senior debt securities (the "Senior Debt Securities") may be issued from time to time in one or more series under an Indenture (the "Senior Indenture") between the Corporation and the trustee named in the applicable Prospectus Supplement, as trustee (the "Senior Trustee"). The Corporation's subordinated debt securities (the "Subordinated Debt Securities") may be issued from time to time in one or more series under an Indenture (the "Subordinated Indenture") between the Corporation and the trustee named in the applicable Prospectus Supplement, as trustee (the "Subordinated Trustee"). PIB's senior debt securities (the "PIB Senior Debt Securities") may be issued from time to time in one or more series under an Indenture (the "PIB Senior Indenture") among the Corporation, PIB and the trustee named in the applicable Prospectus Supplement, as trustee (the "PIB Senior Trustee"). PIB's subordinated debt securities ("PIB Subordinated Debt Securities") may be issued from time to time in one or more series under an Indenture (the "PIB Subordinated Indenture") among the Corporation, PIB and the trustee named in the applicable Prospectus Supplement, as trustee (the "PIB Subordinated Trustee"). The senior debt securities issued by Financial (the "Guaranteed Securities") may be issued from time to time in one or more series under an Indenture (the "Guaranteed Indenture") among the Corporation, Financial and the trustee named in the applicable Prospectus Supplement, as trustee (the "Guaranteed Trustee"). The Senior Debt Securities, the Subordinated Debt Securities, the PIB Senior Debt Securities, the PIB Subordinated Debt Securities, and the Guaranteed Securities are sometimes referred to collectively as the "Debt Securities". The Senior Indenture, the Subordinated Indenture, the PIB Senior Indenture, the PIB Subordinated Indenture and the Guaranteed Indenture are sometimes referred to collectively as the "Indentures," and the Senior Trustee, the Subordinated Trustee, the PIB Senior Trustee, the PIB Subordinated Trustee and the Guaranteed Trustee are sometimes referred to collectively as the "Trustees." The statements under this caption are brief summaries of material provisions contained in the Indentures, do not purport to be complete and are qualified in their entirety by reference to the Indentures, including the definition therein of certain terms, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. GENERAL Each Indenture provides for the issuance of debt securities in one or more series, and does not limit the principal amount of debt securities which may be issued thereunder. Reference is made to the Prospectus Supplement for the following terms of the Debt Securities being offered hereby: (1) the specific title of the Debt Securities; (2) whether the Debt Securities are Senior Debt Securities, Subordinated Debt Securities, PIB Senior Debt Securities, PIB Subordinated Debt Securities or Guaranteed Securities; (3) the aggregate principal amount of the Debt Securities; (4) the percentage of their principal amount at which the Debt Securities will be issued; (5) the date or dates on which the Debt Securities will mature; (6) the rate or rates (which may be fixed or variable) per annum or the method for determining such rate or rates, if any, at which the Debt Securities will bear interest; (7) the times, if any, at which any such interest will be payable; (8) any provisions relating to optional or mandatory redemption of the Debt Securities; (9) the denominations in which the Debt Securities are authorized to be issued; (10) the extent to which Debt Securities will be issuable in global form and, if so, the identity of the Depositary for such global Debt Securities; (11) the currency or units of two or more currencies in which the Debt Securities are denominated, if other than United States dollars, and the currency in which interest is payable if other than the currency in which the Debt Securities are denominated; (12) the place or places at which the Corporation, PIB or Financial will make payments of principal (and premium, if any) and interest, if any, and the method of such payment; (13) the Person to whom any Debt Security of such series will be payable, if other than the Person in whose name that Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on the Regular Record Date for such interest; (14) whether the Debt Securities may be issued as Original Issue Discount Securities; (15) whether the amount of payment of principal of or any premium or interest on any Debt Security may be determined with reference to an index, formula or other method and the manner in which such amount shall be determined; (16) any additional covenants and Events of Default and the remedies with respect thereto not currently set forth in the respective Indenture; and (17) any other specific terms of Debt Securities. 10 27 One or more series of the Debt Securities may be issued as Discount Securities. A "Discount Security" is a debt security, including any zero-coupon security, which is issued at a price lower than the amount payable at the Stated Maturity thereof and which provides that upon redemption or acceleration of the Maturity thereof an amount less than the amount payable upon the Stated Maturity thereof and determined in accordance with the terms thereof shall become due and payable. Unless otherwise indicated in the applicable Prospectus Supplement, the covenants contained in the Indentures and the Debt Securities will not afford holders of the Debt Securities protection in the event of a sudden decline in credit rating that might result from a recapitalization, restructuring, or other highly leveraged transaction. FORM, EXCHANGE, REGISTRATION AND TRANSFER Debt Securities of a series may be issuable in certificated or global form. Debt Securities in certificated form may be presented for registration of transfer (with the form of transfer endorsed thereon duly executed), at the office of the Security Registrar or at the office of any transfer agent designated by the Corporation, PIB or Financial, as the case may be, for such purpose with respect to any series of Debt Securities and referred to in an applicable Prospectus Supplement, without service charge and upon payment of any taxes and other governmental charges as described in the relevant Indenture. Such transfer or exchange will be effected upon the Security Registrar being satisfied with the documents of title and identity of the Person making the request. The Security Registrar with respect to the Debt Securities will be designated in the applicable Prospectus Supplement. If a Prospectus Supplement refers to any transfer agents (in addition to the Security Registrar) initially designated by the Corporation, PIB or Financial with respect to any series of Debt Securities, the Corporation, PIB or Financial, as the case may be, may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Corporation, PIB or Financial, as the case may be, will be required to maintain a transfer agent in each Place of Payment for such series. The Corporation, PIB or Financial, as the case may be, may at any time designate additional transfer agents with respect to any series of Debt Securities. In the event of any redemption in part, the Corporation, PIB or Financial, as the case may be, shall not be required to (i) issue, register the transfer of or exchange any Debt Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Debt Securities of like tenor and of the series of which such Debt Security is a part and ending at the close of business on the day of such mailing and (ii) register the transfer of or exchange any Debt Security so selected for redemption, in whole or in part, except the unredeemed portion of any Debt Security being redeemed in part. PAYMENT AND PAYING AGENT Unless otherwise indicated in an applicable Prospectus Supplement, payment of principal of and premium (if any) on any Debt Security will be made only against surrender to the Paying Agent of such Debt Security. Unless otherwise indicated in an applicable Prospectus Supplement, principal of and any premium and interest on the Debt Securities will be payable, subject to any applicable laws and regulations, at the office of such Paying Agent or Paying Agents as the Corporation, PIB or Financial, as the case may be, may designate from time to time, except that at the option of the Corporation, PIB or Financial, as the case may be, payment of any interest may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register with respect to such Debt Securities. Unless otherwise indicated in an applicable Prospectus Supplement, payment of interest on a Debt Security on any Interest Payment Date will be made to the Person in whose name such Debt Security (or Predecessor Debt Security) is registered at the close of business on the Regular Record Date for such interest. The Paying Agent for payments with respect to Debt Securities of each series will be specified in the applicable Prospectus Supplement. The Corporation, PIB or Financial, as the case may be, may at any time designate additional Paying Agents or rescind the designation of any Paying Agent or approve a change in the office through which any Paying Agent acts, except that the Corporation, PIB or Financial, as the case may be, will be required to maintain a Paying Agent in each Place of Payment for each series of Debt Securities. 11 28 All moneys paid by the Corporation, PIB or Financial, as the case may be, to a Paying Agent for the payment of the principal of and any premium or interest on any Debt Security which remain unclaimed at the end of two years after such principal, premium or interest shall have become due and payable will be repaid to the Corporation, PIB or Financial, as the case may be, and the Holder of such Debt Security will thereafter look only to the Corporation, PIB or Financial, as the case may be, for payment thereof. CERTAIN COVENANTS Each of the Senior Indenture, PIB Senior Indenture and the Guaranteed Indenture provides that the Corporation, subject to the provisions described under "Consolidation, Merger, Sale or Conveyance," will not sell, assign, transfer, or otherwise dispose of, or permit Banco Popular to issue, sell, assign, transfer or otherwise dispose of any shares of, or securities convertible into or options to subscribe for, Voting Stock of Banco Popular unless Banco Popular remains a Controlled Subsidiary (as defined below) of the Corporation, and will not permit Banco Popular to merge or consolidate or convey, transfer, lease or sell its properties substantially as an entirety, unless the surviving corporation or transferee, as the case may be, is a Controlled Subsidiary of the Corporation. There is no similar restriction in the Subordinated Indenture or the PIB Subordinated Indenture. Each of the Senior Indenture, PIB Senior Indenture and the Guaranteed Indenture also provides that the Corporation will not, and it will not permit any Material Banking Subsidiary (as defined below) at any time directly or indirectly to, create, assume, incur or permit to exist any indebtedness for borrowed money secured by a pledge, lien or other encumbrance on the Voting Stock of any Material Banking Subsidiary without making effective provision whereby the Debt Securities and the Guarantees (and, if the Corporation so elects, any other indebtedness ranking on a parity with the Debt Securities and the Guarantees) shall be secured equally and ratably with such secured indebtedness so long as such other indebtedness shall be so secured; provided, however, that the foregoing covenant shall not be applicable to liens for taxes or assessments or governmental charges or levies not then due and delinquent or the validity of which is being contested in good faith or which are less than $10,000,000 in amount, liens created by or resulting from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings or which involve claims of less than $10,000,000, or deposits to secure (or in lieu of) surety, stay, appeal or customs bonds. There is no similar restriction in the Subordinated Indenture or the PIB Subordinated Indenture. For the purpose of the foregoing provisions, "Material Banking Subsidiary" means any Controlled Subsidiary chartered as a banking corporation under federal, state or Puerto Rican law which is a significant subsidiary of the Corporation as defined in Rule 1-02 of Regulation S-X of the Rules and Regulations of the Commission. "Controlled Subsidiary" means any corporation more than 80% of the outstanding Voting Stock of which is owned by the Corporation. REDEMPTION General If the Debt Securities of a series provide for mandatory redemption by the Corporation, PIB or Financial, as the case may be, or redemption at the election of the Corporation, PIB or Financial, as the case may be, unless otherwise provided in the applicable Prospectus Supplement, such redemption shall be on not less than 30 nor more than 60 days' notice and, in the event of redemption of Debt Securities of a series of like tenor in part, the Debt Securities to be redeemed will be selected by the Trustee in such usual manner as it shall deem fair and appropriate. Notice of such redemption will be mailed to Holders of Debt Securities of such series to their last addresses as they appear on the register of the Debt Securities of such series. For Taxation Should the Corporation or PIB, on the occasion of the next payment in respect of any series of the Debt Securities, be obliged to pay any Additional Amounts as are referenced in "Taxation by the Commonwealth of Puerto Rico" below, due to a change in law, regulation or interpretation, the Corporation, PIB or Financial, as the case may be, may, at its option, on the giving of not less than 30 nor more than 60 days' notice to the 12 29 Holders of the Debt Securities of each series, redeem such series of the Debt Securities as a whole at a redemption price of 100% of the principal amount thereof with the accrued interest to the date fixed for redemption or such other redemption price as set forth in the applicable Prospectus Supplement. Global Securities The Debt Securities may be issued in whole or in part in the form of one or more Global Securities that will be deposited with, or on behalf of, a depositary (the "Depositary") identified in the Prospectus Supplement relating to such Debt Securities. Unless and until it is exchangeable in whole or in part for Debt Securities in definitive form, a Global Security may not be transferred except as a whole by the Depositary for such Global Security to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor of such Depositary or a nominee of such successor. The specific terms of the depositary arrangement, if any, with respect to a series of Debt Securities will be described in the Prospectus Supplement relating to such series. The Corporation, PIB and Financial anticipate that the following provisions will apply to all depositary arrangements. Ownership of beneficial interests in a Global Security will be limited to persons that have accounts with the Depositary for such Global Security or its nominee ("Participant") or persons that may hold interests through Participants. Such accounts shall be designated by the underwriters or agents with respect to the Debt Securities underwritten or solicited by them or by the Corporation, PIB or Financial in the case of Debt Securities offered and sold directly by the Corporation, PIB or Financial, as the case may be. The Corporation, PIB or Financial, as the case may be, will obtain confirmation from the Depositary that upon the issuance of a Global Security the Depositary for such Global Security will credit, on its book-entry registration and transfer system, the Participants' accounts with the respective principal amounts of the Debt Securities represented by such Global Security. Ownership of beneficial interests in such Global Security will be shown on, and the transfer of such ownership interests will be effected only through, records maintained by the Depositary (with respect to interests of Participants) and on the records of Participants (with respect to interests of persons held through Participants). The laws of some states may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to own, transfer or pledge beneficial interests in a Global Security. So long as the Depositary for a Global Security, or its nominee, is the registered owner of such Global Security, such Depositary or such nominee, as the case may be, will be considered the sole owner or Holder of the Debt Securities represented by such Global Security for all purposes under the Indentures. Except as provided below, owners of beneficial interests in a Global Security will not be entitled to have the Debt Securities represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of the Debt Securities in definitive form and will not be considered the owners or Holders thereof under the Indentures. Accordingly, each person owning a beneficial interest in such a Global Security 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 interests, to exercise any rights of a Holder under the applicable Indenture. The Corporation, PIB and Financial understand that under existing industry practices, in the event that the Corporation, PIB or Financial, as the case may be, requests any action of Holders or that an owner of a beneficial interest in such a Global Security desires to give or take any action which a Holder is entitled to give or take under the applicable Indenture, the Depositary would authorize the Participants holding the relevant beneficial interests to give or take such action, and such Participants would authorize beneficial owners owning through such Participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. Payment of principal of, and premium and interest, if any, on Debt Securities registered in the name of a Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner of the Global Security representing such Debt Securities. None of the Corporation, Financial, the Trustee, any Paying Agent or any other agent of the Corporation, PIB, Financial or the Trustee will have any responsibility or liability for any aspect of the records relating to payments made on account of beneficial 13 30 ownership interests in the Global Security for such Debt Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Corporation, PIB or Financial, as the case may be, will obtain confirmation from the Depositary that upon receipt of any payment of principal of, or premium or interest on, a Global Security, the Depositary will immediately credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security as shown on the records of the Depositary. Payments by Participants to owners of beneficial interests in such Global Security held through such Participants will be the responsibility of such Participants, as is now the case with securities held for the accounts of customers registered in "street names." If the Depositary for any Debt Securities represented by a Global Security notifies the Corporation, PIB or Financial, as the case may be, that it is unwilling or unable to continue as Depositary or ceases to be a clearing agency registered under the Exchange Act and a successor Depositary is not appointed by the Corporation, PIB or Financial, as the case may be, then within ninety days after receiving such notice or becoming aware that Depositary is no longer so registered, the Corporation, PIB or Financial, as the case may be, will issue such Debt Securities in definitive form in exchange for such Global Security. In addition, if an event of default, or an event which with notice or the lapse of time or both would become an event of default, with respect to the Debt Securities of a series has occurred and is continuing or either the Corporation, PIB or Financial, as the case may be, at any time and in its sole discretion determines not to have the Debt Securities represented by one or more Global Securities, the Corporation, PIB or Financial, as the case may be, will issue Debt Securities in definitive form in exchange for all of the Global Securities representing such Debt Securities. TAXATION BY THE COMMONWEALTH OF PUERTO RICO All payments of, or in respect of, principal of, and any premium or interest on, the Debt Securities and all payments pursuant to the Guarantees will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Puerto Rico or by or with any district, municipality or other political subdivision thereof or authority therein having power to tax unless such taxes, duties, assessments or governmental charges are required by law to be withheld or deducted. In the event that the Corporation or PIB is required by law to deduct or withhold any amounts in respect of taxes, duties, assessments or governmental charges, the Corporation or PIB, as the case may be, will pay such additional amounts of, or in respect of, principal, premium and interest as will result (after deduction of the said taxes, duties, assessments or governmental charges) in the payment to the Holders of the Debt Securities, of the amounts which would otherwise have been payable in respect to the Debt Securities in the absence of such deduction or withholding ("Additional Amounts"), except that no such Additional Amounts shall be payable: (i) to any Holder of a Debt Security or any interest therein or rights in respect thereof where such deduction or withholding is required by reason of such Holder having some connection with Puerto Rico or any political subdivision or taxing authority thereof or therein other than the mere holding of and payment in respect of such Debt Security; (ii) in respect of any deduction or withholding that would not have been required but for the presentation by the Holder of a Debt Security for payment on a date more than 30 days after Maturity or the date on which payment thereof is duly provided for, whichever occurs later; or (iii) in respect of any deduction or withholding that would not have been required but for the failure to comply with any certification, identification or other reporting requirements concerning the nationality, residence, identity or connection with Puerto Rico, or any political subdivision or taxing authority thereof or therein, of the Holder of a Debt Security or any interest therein or rights in respect thereof, if compliance is required by Puerto Rico, or any political subdivision or taxing authority thereof or therein, as a precondition to exemption from such deduction or withholding. 14 31 GOVERNING LAW The Indentures, the Debt Securities and the Guarantees will be governed by, and construed in accordance with, the laws of the State of New York. TERMS APPLICABLE TO THE SENIOR DEBT SECURITIES OR SUBORDINATED DEBT SECURITIES MODIFICATION OF THE SENIOR AND SUBORDINATED INDENTURES The Senior and Subordinated Indentures contain provisions permitting the Corporation and the respective Trustees, with the consent of Holders of not less than a majority in principal amount of the Senior Debt Securities or Subordinated Debt Securities which are affected by the modification, to modify the particular Indenture or any supplemental indenture or the rights of the Holders of the Senior Debt Securities or Subordinated Debt Securities issued under such Indenture; provided that no such modification may, without the consent of the Holder of each Outstanding Senior Debt Security or Subordinated Debt Security affected thereby, (a) change the stated maturity date of the principal of, or any installment of principal of or interest, if any, on, any Senior Debt Security or Subordinated Debt Security, (b) reduce the principal amount of, or premium or rate of interest, if any, on, any Senior Debt Security or Subordinated Debt Security, (c) reduce the amount of principal of an Original Issue Discount Security payable upon acceleration of the maturity thereof, (d) change the place or coin or currency of payment of principal of, or premium or interest, if any, on, any Senior Debt Security or Subordinated Debt Security, (e) impair the right to institute suit for the enforcement of any payment on or with respect to any Senior Debt Security or Subordinated Debt Security, (f) reduce the percentage in principal amount of Outstanding Senior Debt Security or Subordinated Debt Securities of any series, the consent of whose Holders is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (g) modify (with certain exceptions) any provision of the Indenture which requires the consent of the Holder of each Outstanding Senior Debt Security or Subordinated Debt Security affected thereby or (h) with respect to the Subordinated Indenture, modify the subordination provisions in a manner adverse to Holders of Outstanding Subordinated Debt Securities. SUBORDINATION Unless otherwise indicated in the applicable Prospectus Supplement, the following provisions shall apply to the Subordinated Debt Securities. The payment of the principal of, premium, if any, and interest on the Subordinated Debt Securities will, to the extent set forth in the Subordinated Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined below) of the Corporation. In certain events of insolvency, the payment of the principal of, premium, if any, and interest on the Subordinated Debt Securities will, to the extent set forth in the Subordinated Indenture, also be effectively subordinated in right of payment to the prior payment in full of all Other Financial Obligations (as defined below) of the Corporation. As of December 31, 1992, $326.9 million aggregate principal amount of Senior Indebtedness and $727.1 million aggregate principal amount of Other Financial Obligations of the Corporation were outstanding. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshalling of assets or any bankruptcy, insolvency or similar proceedings of the Corporation, the holders of all Senior Indebtedness of the Corporation will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Subordinated Debt Securities will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the Subordinated Debt Securities. If, upon any such payment or distribution of assets to creditors, there remain, after giving effect to such subordination provisions in favor of the holders of Senior Indebtedness of the Corporation, any amounts of cash, property or securities available for payment or distribution in respect of Subordinated Debt Securities (as defined in the Subordinated Indenture, "Corporation Excess Proceeds") and if, at such time, any person entitled to payment pursuant to the terms of Other Financial Obligations of 15 32 the Corporation has not received payment in full of all amounts due or to become due on or in respect of such Other Financial Obligations of the Corporation, then such Corporation Excess Proceeds shall first be applied to pay or provide for the payment in full of such Other Financial Obligations of the Corporation before any payment or distribution may be made in respect of the Subordinated Debt Securities. In the event of the acceleration of the maturity of any Subordinated Debt Securities, the holders of all Senior Indebtedness of the Corporation will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Subordinated Debt Securities will be entitled to receive any payment of the principal of, premium, if any, or interest on the Subordinated Debt Securities. Accordingly, in case of such an acceleration, all Senior Indebtedness of the Corporation would have to be repaid before any payment could be made in respect of the Subordinated Debt Securities. No payments on account of principal, premium, if any, or interest in respect of the Subordinated Debt Securities may be made if there shall have occurred and be continuing a default in any payment with respect to any Senior Indebtedness of the Corporation, or an event of default with respect to any Senior Indebtedness of the Corporation permitting the holders thereof to accelerate the maturity thereof, or if any judicial proceeding shall be pending with respect to any such default. By reason of such subordination, in the event of the insolvency of the Corporation, creditors of the Corporation who are not are not holders of Senior Indebtedness of the Corporation or the Subordinated Debt Securities may recover less, ratably, than holders of Senior Indebtedness of the Corporation and may recover more, ratably, than Holders of the Subordinated Debt Securities. "Senior Indebtedness" of the Corporation is defined in the Subordinated Indenture to mean the principal of premium, if any, and interest on (i) all indebtedness of the Corporation for money borrowed (including indebtedness of others guaranteed by the Corporation) other than the Subordinated Debt Securities, whether outstanding on the date of the Subordinated Indenture or thereafter created, assumed or incurred and (ii) any amendments, renewals, extensions, modifications and refundings of any such indebtedness, unless in either case in the instrument creating or evidencing any such indebtedness or pursuant to which it is outstanding it is provided that such indebtedness is not superior in right of payment to the Subordinated Debt Securities. For the purposes of this definition," indebtedness for money borrowed" is defined as (i) any obligation of, or any obligation guaranteed by, the Corporation for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) any deferred payment obligation of, or any such obligation guaranteed by, the Corporation for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (iii) any obligation of, or any such obligation guaranteed by, the Corporation for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Corporation under generally accepted accounting principles. "Other Financial Obligations" of the Corporation is defined in the Subordinated Indenture to mean all obligations of the Corporation to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and currency and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange agreements, options, commodity futures contracts, commodity options contracts and (iii) similar financial instruments; provided that the term Other Financial Obligations shall not include (x) obligations on account of Senior Indebtedness of the Corporation and (y) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Subordinated Debt Securities. EVENTS OF DEFAULT Senior Indenture An Event of Default with respect to Senior Debt Securities of any series is defined in the Senior Indenture as being: default for 30 days in payment of any interest on Senior Debt Securities of such series; default in payment of principal of, or premium, if any, any Senior Debt Securities of such series; default in deposit of any mandatory sinking fund payment required by the Senior Debt Securities of such series; default for 60 days after notice, in performance or breach of any other covenant or warranty in the Senior Indenture 16 33 (except for a covenant expressly relating to a series of Senior Debt Securities other than that series of Senior Debt Securities) or in the Senior Debt Securities of such series; acceleration of the Senior Debt Securities of any other series or any other indebtedness for borrowed money of the Corporation or any Material Banking Subsidiary, in each case exceeding $10,000,000 in an aggregate principal amount, as a result of a default under the terms of the instrument or instruments under which such indebtedness is issued or secured, unless such acceleration is annulled within 30 days after written notice as provided in the Indenture, provided that if such default is remedied or cured by the Corporation or any Material Banking Subsidiary or waived by holders of such indebtedness, the Event of Default by reason thereof shall be deemed to have been thereupon remedied, cured or waived; certain events of bankruptcy, insolvency or reorganization with respect to the Corporation or any Material Banking Subsidiary; or any other Event of Default specified in the applicable Prospectus Supplement. In case an Event of Default with respect to Senior Debt Securities of any series shall occur and be continuing, the Senior Trustee or the Holders of not less than 25% in principal amount of the Senior Debt Securities of such series then outstanding may declare the principal of all such Senior Debt Securities of such series to be due and payable. The Corporation is required to furnish to the Senior Trustee annually a statement as to the performance by the Corporation of its obligations under the Senior Indenture and as to any default in such performance. Under certain circumstances any declaration of acceleration with respect to Senior Debt Securities of any series may be rescinded and past defaults (except a default in the payment of principal of or interest on the Senior Debt Securities) may be waived by the Holders of a majority in aggregate principal amount of the Senior Debt Securities of such series then outstanding. The Senior Indenture provides that the Senior Trustee may withhold notice to the Holders of Senior Debt Securities of any series of any continuing default (except in the payment of the principal of (or premium, if any) or interest on any Senior Debt Securities of such series) if such Senior Trustee considers it in the interest of Holders of such series of Senior Debt Securities to do so. Subordinated Indenture An Event of Default with respect to the Subordinated Debt Securities of any series is defined in the Subordinated Indenture as being certain events involving a bankruptcy, insolvency or reorganization of the Corporation. If an Event of Default with respect to Subordinated Debt Securities of any series shall have occurred and be continuing, either the Subordinated Trustee or the Holders of not less than 25% in aggregate principal amount of the Subordinated Debt Securities of such series then outstanding may declare the principal of the Subordinated Debt Securities of such series to be due and payable immediately. The Corporation is required to furnish to the Subordinated Trustee annually a statement as to the performance by the Corporation of its obligations under the Subordinated Indenture and as to any default in such performance. Under certain circumstances, any declaration of acceleration with respect to Subordinated Debt Securities of any series may be rescinded and past defaults (except a default in the payment of principal of or interest on the Subordinated Debt Securities) may be waived by the Holders of a majority in aggregate principal amount of the Subordinated Debt Securities of such series then outstanding. The Subordinated Indenture provides that the Subordinated Trustee may withhold notice to the Holders of the Subordinated Debt Securities of any series of any continuing default (except in the payment of the principal of (or premium, if any) or interest on any Subordinated Debt Securities of such series) if the Subordinated Trustee considers it in the interest of the Holders of such series of Subordinated Debt Securities to do so. The Subordinated Indenture does not provide for any right of acceleration of the payment of principal of a series of Subordinated Debt Securities upon a default in the payment of principal or interest or in the performance of any covenant or agreement in the Subordinated Debt Securities of the particular series or in the Subordinated Indenture. CONSOLIDATION, MERGER, SALE OR CONVEYANCE The Corporation has covenanted in the Senior and Subordinated Indentures that it will not merge or consolidate with any other corporation or sell, convey, transfer or lease all or substantially all of its assets to any person, firm or corporation unless the Corporation is the continuing corporation or the successor corporation expressly assumes the obligations under any outstanding Senior Debt Securities and Subordinated 17 34 Debt Securities and the respective Senior and Subordinated Indentures and the Corporation or such successor corporation is not, immediately after such merger, consolidation, sale or conveyance, in default in the performance of any of the covenants or conditions of the respective Indenture. The Indentures do not contain any other covenant which restricts the Corporation's ability to merge or consolidate with any other corporation, sell, convey, transfer or lease all or substantially all of its assets to any persons, firm or corporation or otherwise engage in restructuring transactions. TERMS APPLICABLE TO GUARANTEED SECURITIES MODIFICATION OF THE INDENTURE The Guaranteed Indenture contains provisions permitting Financial, the Corporation and the Guaranteed Trustee, with the consent of Holders of not less than a majority in principal amount of the Guaranteed Securities which are affected by the modification, to modify the Guaranteed Indenture or any supplemental indenture or the rights of the Holders of the Guaranteed Securities issued under such Indenture, provided that no such modification may, without the consent of the Holder of each Outstanding Guaranteed Security affected thereby, (a) change the stated maturity date of the principal of, or any installment of principal of or interest, if any, on, any Guaranteed Security, (b) reduce the principal amount of, or premium or rate of interest, if any, on, any Guaranteed Security, (c) reduce the amount of principal of an Original Issue Discount Guaranteed Security payable upon acceleration of the maturity thereof, (d) change the place or coin or currency of payment of principal of, or premium or interest, if any, on, any Guaranteed Security, (e) impair the right to institute suit for the enforcement of any payment on or with respect to any Guaranteed Security, (f) modify or affect in any manner adverse to Holders the terms and conditions of the obligations of the Guarantor in respect of the due and punctual payment of principal or any premium and interest, sinking fund payment or Additional Amounts in respect of the Guaranteed Securities, (g) reduce the percentage in principal amount of Outstanding Guaranteed Securities of any series the consent of whose Holders is required for modification or amendment of the Guaranteed Indenture or for waiver of compliance with certain provisions of the Guaranteed Indenture or for waiver of certain defaults, or (h) modify (with certain exceptions) any provisions of the Guaranteed Indenture which require the consent of the Holder of each Outstanding Guaranteed Security affected thereby. EVENTS OF DEFAULT An Event of Default with respect to Guaranteed Securities of any series is defined in the Guaranteed Indenture as being: default for 30 days in payment of any interest on Guaranteed Securities of such series; default in payment of principal of (or premium, if any) on any Guaranteed Security of such series; default in deposit of any mandatory sinking fund payment required by the Guaranteed Securities of such series; default for 60 days, after notice, in performance or breach of any other covenant or warranty in the Guaranteed Indenture (except for a covenant expressly relating to a series of Guaranteed Securities other than that series of Guaranteed Securities) or in the Guaranteed Securities of such series; acceleration of the Guaranteed Securities of any other series or any other indebtedness for borrowed money of the Corporation, Financial or any Material Banking Subsidiary, in each case exceeding $10,000,000 in an aggregate principal amount, as a result of a default under the terms of the instrument or instruments under which such indebtedness is issued or secured, unless such acceleration is annulled within 30 days after written notice as provided in the Indenture, provided that if such default is remedied or cured by the Corporation, Financial or any Material Banking Subsidiary or waived by the holders of such indebtedness, the Event of Default by reason thereof shall be deemed to have been thereupon remedied, cured or waived; certain events of bankruptcy, insolvency or reorganization of the Corporation, any Material Banking Subsidiary or Financial; or any other Event of Default specified in the applicable Prospectus Supplement. In case an Event of Default with respect to Guaranteed Securities of any series shall occur and be continuing, the Guaranteed Trustee or the Holders of not less than 25% in principal amount of the Guaranteed Securities of such series then outstanding may declare the principal of all the Guaranteed Securities of such series to be due and payable. Financial and the Corporation are required to furnish to the Guaranteed Trustee annually a statement or statements as to the 18 35 performance by Financial and the Corporation of their respective obligations under the Guaranteed Indenture of such series and as to any default in such performance. Under certain circumstances any declaration of acceleration with respect to Guaranteed Securities of any series may be rescinded and past defaults (except a default in the payment of principal of or interest on the Guaranteed Securities) may be waived by the Holders of a majority in aggregate principal amount of the Guaranteed Securities of such series then outstanding. The Guaranteed Indenture provides that the Guaranteed Trustee may withhold notice to the Holders of Guaranteed Securities of any series of any continuing default (except in the payment of the principal of (or premium, if any) or interest on any Guaranteed Securities of such series) if such Guaranteed Trustee considers it in the interest of Holders of such series of Guaranteed Securities to do so. CONSOLIDATION, MERGER, SALE OR CONVEYANCE Each of the Corporation and Financial has covenanted in the Guaranteed Indenture that it will not merge or consolidate with any other corporation or sell, convey, transfer or lease all or substantially all of its assets to any person, firm or corporation unless the Corporation or Financial, as the case may be, is the continuing corporation or the successor corporation expressly assumes, in the case of Financial, or guarantees, in the case of the Corporation, the obligations under the Guaranteed Securities and the Guaranteed Indenture and the Corporation or Financial, as the case may be, or such successor corporation is not, immediately after such merger, consolidation, sale or conveyance, in default in the performance of any of the covenants or conditions of the Guaranteed Indenture. The Guaranteed Indenture does not contain any other covenant which restricts the Corporation's or Financial's ability to merge or consolidate with any other corporation, sell, convey, transfer or lease all or substantially all of its assets to any person, firm or corporation or otherwise engage in restructuring transactions. GUARANTEE The Corporation will guarantee the punctual payment of the principal of, premium, if any, and interest on the Guaranteed Securities, when and as the same are due and payable. The guarantee is absolute and unconditional, irrespective of any circumstance that might otherwise constitute a legal or equitable discharge of a surety or guarantor. To evidence the guarantee, a Guarantee, executed by the Corporation, will be endorsed on each Guaranteed Security. Holders of the Guaranteed Securities may proceed directly against the Corporation in the event of default under the Guaranteed Securities without first proceeding against Financial. The Guarantees will rank pari passu with all other unsecured and unsubordinated obligations of the Corporation. TERMS APPLICABLE TO THE PIB SENIOR DEBT SECURITIES OR PIB SUBORDINATED DEBT SECURITIES MODIFICATION OF THE PIB SENIOR AND PIB SUBORDINATED INDENTURES The PIB Senior and PIB Subordinated Indentures contain provisions permitting the Corporation, PIB and the respective PIB Trustees, with the consent of Holders of not less than a majority in principal amount of the PIB Senior Debt Securities or PIB Subordinated Debt Securities which are affected by the modification, to modify the particular Indenture or any supplemental indenture or the rights of the Holders of the PIB Senior Debt Securities or PIB Subordinated Debt Securities issued under such Indenture; provided that no such modification may, without the consent of the Holder of each outstanding PIB Senior Debt Security or PIB Subordinated Debt Security affected thereby, (a) change the stated maturity date of the principal of, or any installment of principal of or interest, if any, on, any PIB Senior Debt Security or PIB Subordinated Debt Security, (b) reduce the principal amount of, or premium or rate of interest, if any, on, any PIB Senior Debt Security or PIB Subordinated Debt Security, (c) reduce the amount of principal of an Original Issue Discount Security payable upon acceleration of the maturity thereof, (d) change the place or coin or currency of payment of principal of, or premium or interest, if any, on, any PIB Senior Debt Security or PIB Subordinated Debt Security, (e) impair the right to institute suit for the enforcement of any payment on or with respect to any PIB Senior Debt Security or PIB Subordinated Debt Security, (f) reduce the percentage 19 36 in principal amount of Outstanding PIB Senior Debt Security or PIB Subordinated Debt Securities of any series, the consent of whose Holders is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (g) modify (with certain exceptions) any provision of the Indenture which requires the consent of Holders of each Outstanding PIB Senior Debt Security or PIB Subordinated Debt Security affected thereby or (h) with respect to the PIB Subordinated Indenture, modify the subordination provisions in a manner adverse to Holders of Outstanding PIB Subordinated Debt Securities. SUBORDINATION Unless otherwise indicated in the applicable Prospectus Supplement, the following provisions shall apply to the PIB Subordinated Debt Securities and the guarantee of them by the Corporation. The payment of the principal of, premium, if any, and interest on the PIB Subordinated Debt Securities and the Corporation's Guarantees thereof (the "Subordinated Guarantees") will, to the extent set forth in the PIB Subordinated Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined below) of PIB or the Corporation, as the case may be. In certain events of insolvency, the payment of the principal of, premium, if any, and interest on the PIB Subordinated Debt Securities and any payments with respect to the Subordinated Guarantees will, to the extent set forth in the PIB Subordinated Indenture, also be effectively subordinated in right of payment to the prior payment in full of all Other Financial Obligations (as defined below) of PIB or the Corporation, as the case may be. As of December 31, 1992, $166.5 million aggregate principal amount of Senior Indebtedness and no Other Financial Obligations of PIB were outstanding. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshalling of assets or any bankruptcy, insolvency or similar proceedings of PIB or the Corporation, the holders of all Senior Indebtedness thereof will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the PIB Subordinated Debt Securities or the Subordinated Guarantees will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the PIB Subordinated Debt Securities or the Subordinated Guarantees, as the case may be. If, upon any such payment or distribution of assets to creditors, there remain, after giving effect to such subordination provisions in favor of the holders of Senior Indebtedness of PIB and the Corporation, any amounts of cash, property or securities available for payment or distribution in respect of PIB Subordinated Debt Securities or the Subordinated Guarantees (as defined in the PIB Subordinated Indenture, "PIB Excess Proceeds") and if, at such time, any person entitled to payment pursuant to the terms of Other Financial Obligations of PIB or the Corporation (as defined in the PIB Subordinated Indenture, "PIB Entitled Person") has not received payment in full of all amounts due or to become due on or in respect of such Other Financial Obligations of PIB or the Corporation, then such PIB Excess Proceeds shall first be applied to pay or provide for the payment in full of such Other Financial Obligations of PIB or the Corporation, as the case may be, before any payment or distribution may be made in respect of the PIB Subordinated Debt Securities or the Subordinated Guarantees. In the event of the acceleration of the maturity of any PIB Subordinated Debt Securities, the holders of all Senior Indebtedness of PIB or the Corporation, as the case may be, will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the PIB Subordinated Debt Securities or the Subordinated Guarantees will be entitled to receive any payment of the principal of, premium, if any, or interest on the PIB Subordinated Debt Securities or the Subordinated Guarantees, as the case may be. Accordingly, in case of such an acceleration, all Senior Indebtedness of PIB or the Corporation would have to be repaid before any payment could be made in respect of the PIB Subordinated Debt Securities or the Subordinated Guarantees, as the case may be. No payments on account of principal, premium, if any, or interest in respect of the PIB Subordinated Debt Securities or the Subordinated Guarantees may be made if there shall have occurred and be continuing a default in any payment with respect to any Senior Indebtedness of PIB or the Corporation, an event of default with respect to any Senior Indebtedness of PIB or the Corporation permitting the holders thereof to accelerate the maturity thereof, or if any judicial proceeding shall be pending with respect to any such default. 20 37 By reason of such subordination, in the event of the insolvency of PIB or the Corporation, creditors of PIB or the Corporation who are not are not holders of Senior Indebtedness, the PIB Subordinated Debt Securities or the Subordinated Guarantees may recover less, ratably, than holders of Senior Indebtedness of PIB or the Corporation, as the case may be, and may recover more, ratably, than Holders of the PIB Subordinated Debt Securities or the Subordinated Guarantees. "Senior Indebtedness" of PIB is defined in the PIB Subordinated Indenture to mean the principal of, premium, if any, and interest on (i) all indebtedness of PIB for money borrowed (including indebtedness of others guaranteed by PIB) other than the PIB Subordinated Debt Securities, whether outstanding on the date of the PIB Subordinated Indenture or thereafter created, assumed or incurred and (ii) any amendments, renewals, extensions, modifications and refundings of any such indebtedness, unless in either case in the instrument creating or evidencing any such indebtedness or pursuant to which it is outstanding it is provided that such indebtedness is not superior in right of payment to the PIB Subordinated Debt Securities. For the purposes of this definition, "indebtedness for money borrowed" is defined as (i) any obligation of, or any obligation guaranteed by, PIB for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) any deferred payment obligation of, or any such obligation guaranteed by, PIB for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (iii) any obligation of, or any such obligation guaranteed by, PIB for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of PIB under generally accepted accounting principles. "Other Financial Obligations" of PIB is defined in the PIB Subordinated Indenture to mean all obligations of PIB to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and currency and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange agreements, options, commodity futures contracts, commodity options contracts and (iii) similar financial instruments; provided that the term Other Financial Obligations shall not include (x) obligations on account of Senior Indebtedness of PIB and (y) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the PIB Subordinated Debt Securities. "Senior Indebtedness" of the Corporation is defined in the PIB Subordinated Indenture to mean the principal of premium, if any, and interest on (i) all indebtedness of the Corporation for money borrowed (including indebtedness of others guaranteed by the Corporation other than the Subordinated Guarantees, whether outstanding on the date of the PIB Subordinated Indenture or thereafter created, assumed or incurred and (ii) any amendments, renewals, extensions, modifications and refundings of any such indebtedness, unless in either case in the instrument creating or evidencing any such indebtedness or pursuant to which it is outstanding it is provided that such indebtedness is not superior in right of payment to the Subordinated Guarantees. For the purposes of this definition, "indebtedness for money borrowed" is defined as (i) any obligation of, or any obligation guaranteed by, the Corporation for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) any deferred payment obligation of, or any such obligation guaranteed by, the Corporation for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (iii) any obligation of, or any such obligation guaranteed by, the Corporation for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Corporation under generally accepted accounting principles. "Other Financial Obligations" of the Corporation is defined in the PIB Subordinated Indenture to mean all obligations of the Corporation to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and currency and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange agreements, options, commodity futures contracts, commodity options contracts and (iii) similar financial instruments; provided that the term Other Financial Obligations shall not include (x) obligations on account of Senior Indebtedness 21 38 and (y) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Subordinated Guarantees. EVENTS OF DEFAULT PIB Senior Indenture An Event of Default with respect to PIB Senior Debt Securities of any series is defined in the PIB Senior Indenture as being: default for 30 days in payment of any interest on PIB Senior Debt Securities of such series; default in payment of principal of (or premium on, if any) any PIB Senior Debt Securities of such series; default in deposit of any mandatory sinking fund payment required by the PIB Senior Debt Securities of such series; default for 60 days, after notice, in performance or breach of any other covenant or warranty in the PIB Senior Indenture (except for a covenant expressly relating to a series of PIB Senior Debt Securities other than that series of PIB Senior Debt Securities) or in the PIB Senior Debt Securities of such series; acceleration of the PIB Senior Debt Securities of any other series or any other indebtedness for borrowed money, of the Corporation, PIB or any Material Banking Subsidiary, in each case in an aggregate principal amount exceeding $10,000,000, as a result of a default under the terms of the instrument or instruments under which such indebtedness is issued or secured, unless such acceleration is annulled within 30 days after written notice as provided in the Indenture, provided that if such default is remedied or cured by the Corporation, PIB or any Material Banking Subsidiary or waived by holders of such indebtedness, the Event of Default by reason thereof shall be deemed to have been thereupon remedied, cured or waived; certain events of bankruptcy, insolvency or reorganization with respect to the Corporation, PIB or any Material Banking Subsidiary; or any other Event of Default specified in the applicable Prospectus Supplement. In case an Event of Default with respect to PIB Senior Debt Securities of any series shall occur and be continuing, the PIB Senior Trustee or the Holders of not less than 25% in principal amount of the PIB Senior Debt Securities of such series then outstanding may declare the principal of all the PIB Senior Debt Securities of such series to be due and payable. The Corporation and PIB are required to furnish to the PIB Senior Trustee annually a statement as to the performance by the Corporation and PIB of their respective obligations under the PIB Senior Indenture and as to any default in such performance. Under certain circumstances any declaration of acceleration with respect to PIB Senior Debt Securities of any series may be rescinded and past defaults (except a default in the payment of principal of or interest on the PIB Senior Debt Securities) may be waived by the Holders of a majority in aggregate principal amount of the PIB Senior Debt Securities of such series then outstanding. The PIB Senior Indenture provides that the PIB Senior Trustee may withhold notice to the Holders of PIB Senior Debt Securities of any series of any continuing default (except in the payment of the principal of (or premium, if any) or interest on any PIB Senior Debt Securities of such series) if such PIB Senior Trustee considers it in the interest of Holders of such series of PIB Senior Debt Securities to do so. PIB Subordinated Indenture An Event of Default with respect to the PIB Subordinated Debt Securities of any series is defined in the PIB Subordinated Indenture as being certain events involving a bankruptcy, insolvency or reorganization of the Corporation or PIB. If an Event of Default with respect to PIB Subordinated Debt Securities of any series shall have occurred and be continuing, either the PIB Subordinated Trustee or the Holders of not less than 25% in aggregate principal amount of the PIB Subordinated Debt Securities of such series then outstanding may declare the principal of the PIB Subordinated Debt Securities of such series to be due and payable immediately. The Corporation and PIB are required to furnish to the PIB Subordinated Trustee annually a statement as to the performance by the Corporation and PIB of their respective obligations under the PIB Subordinated Indenture and as to any default in such performance. Under certain circumstances, any declaration of acceleration with respect to PIB Subordinated Debt Securities of any series may be rescinded and past defaults (except a default in the payment of principal of or interest on the PIB Subordinated Debt Securities) may be waived by the Holders of a majority in aggregate principal amount of the PIB Subordinated Debt Securities of such series then outstanding. The PIB Subordinated Indenture provides that the PIB Subordinated Trustee may withhold notice to the Holders of the PIB Subordinated Debt Securities of any series of any continuing default (except in the payment of the principal of (or premium, if any) or interest 22 39 on any PIB Subordinated Debt Securities of such series) if the PIB Subordinated Trustee considers it in the interest of the Holders of such series of PIB Subordinated Debt Securities to do so. The PIB Subordinated Indenture does not provide for any right of acceleration of the payment of principal of a series of PIB Subordinated Debt Securities upon a default in the payment of principal or interest or in the performance of any covenant or agreement in the PIB Subordinated Debt Securities of the particular series, in the PIB Subordinated Indenture or in the Subordinated Guarantees. CONSOLIDATION, MERGER, SALE OR CONVEYANCE The Corporation and PIB have each covenanted in the PIB Senior and PIB Subordinated Indentures that it will not merge or consolidate with any other corporation or sell, convey, transfer or lease all or substantially all of its assets to any person, firm or corporation unless the Corporation or PIB, as the case may be, is the continuing corporation or the successor corporation expressly assumes the obligations under any outstanding PIB Senior Debt Securities and Subordinated Debt Securities and the Subordinated Guarantees and the respective PIB Senior and PIB Subordinated Indentures and the Corporation, or PIB, as the case may be, or such successor corporation is not, immediately after such merger, consolidation, sale or conveyance, in default in the performance of any of the covenants or conditions of the respective Indenture. The Indentures do not contain any other covenant which restricts the Corporation's or PIB's ability to merge or consolidate with any other corporation, sell, convey, transfer or lease all or substantially all of its assets to any persons, firm or corporation or otherwise engage in restructuring transactions. GUARANTEE PIB Senior Debt Securities. The Corporation will guarantee the punctual payment of the principal of, premium, if any, and interest on the PIB Senior Debt Securities, when and as the same are due and payable. The guarantee is absolute and unconditional, irrespective of any circumstance that might otherwise constitute a legal or equitable discharge of a surety or guarantor. To evidence the guarantee, a Guarantee, executed by the Corporation, will be endorsed on each PIB Senior Debt Security. Holders of the PIB Senior Debt Securities may proceed directly against the Corporation in the event of default under the PIB Senior Debt Securities without first proceeding against PIB. The Guarantees will rank pari passu with all other unsecured and unsubordinated obligations of the Corporation. PIB Subordinated Debt Securities. The Corporation will guarantee the punctual payment of the principal of, premium, if any, and interest on the PIB Subordinated Debt Securities, when and as the same are due and payable. The guarantee is absolute and unconditional, irrespective of any circumstance that might otherwise constitute a legal or equitable discharge of a surety or guarantor. To evidence the guarantee, a Guarantee, executed by the Corporation, will be endorsed on each PIB Subordinated Debt Security. Holders of the PIB Subordinated Debt Securities may proceed directly against the Corporation in the event of default under the PIB Subordinated Debt Securities without first proceeding against PIB. The Subordinated Guarantees will rank pari passu with all other unsecured and subordinated obligations of the Corporation. See "Subordination." DESCRIPTION OF PREFERRED STOCK OF THE CORPORATION The following summary contains a description of certain general terms of the Corporation's preferred stock (the "Preferred Stock") to which any Prospectus Supplement may relate. Certain terms of any series of the Preferred Stock offered by any Prospectus Supplement will be described in the Prospectus Supplement relating thereto. If so indicated in the Prospectus Supplement, the terms of any series may differ from the terms set forth below. The description of certain provisions of the Preferred Stock does not purport to be complete and is subject to and qualified in its entirety by reference to the provisions of the Corporation's Restated Certificate of Incorporation, as amended, the Certificate of Designation describing the Series A Participating Preferred Stock and the Certificate of Resolution (the "Certificate of Resolution") relating to each particular series of the Preferred Stock, each of which will be filed or incorporated by reference, as the 23 40 case may be, as an exhibit to the Registration Statement of which this Prospectus is a part at or prior to the time of the issuance of such Preferred Stock. GENERAL Under the Corporation's Restated Certificate of Incorporation, the Board of Directors of the Corporation is authorized, without further stockholder action, to provide for the issuance of up to 10,000,000 shares of preferred stock (of which 350,000 shares have been authorized and designated but not issued for the Series A Participating Preferred Stock), without par value, in one or more series, with such designations of titles; dividend rates; special or relative rights in the event of a liquidation, distribution or sale of assets or dissolution or winding up of the Corporation; sinking fund provisions; redemption or purchase account provisions; conversion provisions; and voting rights, as shall be set forth as and when established by the Board of Directors of the Corporation. The shares of any series of Preferred Stock will be, when issued, fully paid and non-assessable and holders thereof shall have no preemptive rights in connection therewith. The liquidation preference of any series of the Preferred Stock is not necessarily indicative of the price at which shares of such series of Preferred Stock will actually trade at or after the time of their issuance. The market price of any series of Preferred Stock can be expected to fluctuate with changes in market and economic conditions, the financial condition and prospects of the Corporation and other factors that generally influence the market prices of securities. RANK Any series of the Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution rank (i) senior to all classes of common stock of the Corporation and with all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the Preferred Stock (collectively referred to as the "Junior Securities"); (ii) on a parity with all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the Preferred Stock, (collectively referred to as the "Parity Securities"); and (iii) junior to all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank senior to the Preferred Stock. As used in any Certificate of Resolution for these purposes, the term "equity securities" will not include debt securities convertible into or exchangeable for equity securities. DIVIDENDS Holders of each series of Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation out of funds legally available therefor, cash dividends at such rates and on such dates as are set forth in the Prospectus Supplement relating to such series of the Preferred Stock. Dividends will be payable to holders of record of the Preferred Stock as they appear on the books of the Corporation on such record dates as shall be fixed by the Board of Directors. Dividends on any series of Preferred Stock may be cumulative or non-cumulative. The Corporation's ability to pay dividends on its Preferred Stock is subject to policies established by the Federal Reserve Board. See "Certain Regulatory Matters -- Dividend Restrictions." No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Securities unless dividends shall have been paid or set apart for such payment on the Preferred Stock. If full dividends are not so paid, the Preferred Stock shall share dividends pro rata with the Parity Securities. The holders of any series of shares of Preferred Stock at the close of business on a dividend payment record date will be entitled to receive the dividend payable on such shares (except that holders of shares called for redemption on a redemption date occurring between such record date and the dividend payment date shall not be entitled to receive such dividend on such dividend payment date but instead will receive accrued and unpaid dividends to such redemption date) on the corresponding dividend payment date notwithstanding the conversion thereof or the Corporation's default in payment of the dividend due. Except as provided above, the 24 41 Corporation will make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of preferred stock or issued upon conversion. CONVERSION The Prospectus Supplement for any series of the Preferred Stock will state the terms, if any, on which shares of that series are convertible into shares of another series of preferred stock of the Corporation. For any series of Preferred Stock which is convertible, the Corporation shall at all times reserve and keep available, out of the aggregate of its authorized but unissued preferred stock or preferred stock held in its treasury or both, for the purpose of effecting the conversion of the shares of such series of Preferred Stock, the full number of shares of preferred stock then deliverable upon the conversion of all outstanding shares of such series. No fractional shares or scrip representing fractional shares of preferred stock will be issued upon the conversion of shares of any series of convertible Preferred Stock. Each holder to whom fractional shares would otherwise be issued will instead be entitled to receive, at the Corporation's election, either (a) a cash payment equal to the current market price of such holder's fractional interest or (b) a cash payment equal to such holder's proportionate interest in the net proceeds (following the deduction of applicable transaction costs) from the sale promptly by an agent, on behalf of such holders, of shares of preferred stock representing the aggregate of such fractional shares. EXCHANGEABILITY If so determined by the Board of Directors of the Corporation, the holders of shares of Preferred Stock of any series may be obligated at any time or at maturity to exchange such shares for preferred stock or debt securities of the Corporation. The terms of any such exchange and any such preferred stock or debt securities will be described in the Prospectus Supplement relating to such series of Preferred Stock. REDEMPTION A series of Preferred Stock may be redeemable at any time, in whole or in part, at the option of the Corporation or the holder thereof upon terms and at the redemption prices set forth in the Prospectus Supplement relating to such series. In the event of partial redemptions of Preferred Stock, whether by mandatory or optional redemption, the shares to be redeemed will be determined by lot or pro rata, as may be determined by the Board of Directors of the Corporation or by any other method determined to be equitable by the Board of Directors. On or after a redemption date, unless the Corporation defaults in the payment of the redemption price, dividends will cease to accrue on shares of Preferred Stock called for redemption and all rights of holders of such shares will terminate except for the right to receive the redemption price. Under current regulations, bank holding companies may not exercise any option to redeem shares of preferred stock included as Tier 1 capital, or exchange such preferred stock for debt securities, without the prior approval of the Federal Reserve Board. Ordinarily, the Federal Reserve Board would not permit such a redemption unless (1) the shares are redeemed with the proceeds of a sale by the bank holding company of common stock or perpetual preferred stock or (2) the Federal Reserve Board determines that the bank holding company's condition and circumstances warrant the reduction of a source of permanent capital. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, holders of each series of Preferred Stock that ranks senior to the Junior Securities will be entitled to receive out of assets of the Corporation available for distribution to shareholders, before any distribution is made on any Junior Securities, including Common Stock, distributions upon liquidation in the amount set forth in the Prospectus Supplement relating to such series of Preferred Stock, plus an amount equal to any accrued and unpaid 25 42 dividends. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Preferred Stock of any series and any other Parity Securities are not paid in full, the holders of the Preferred Stock of such series and the Parity Securities will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they are entitled, the holders of such series of Preferred Stock will not be entitled to any further participation in any distribution of assets of the Corporation. VOTING RIGHTS Except as indicated in the Prospectus Supplement relating to a particular series of Preferred Stock, or except as expressly required by applicable law, the holders of the Preferred Stock will have no voting rights. Under regulations adopted by the Federal Reserve Board, if the holders of shares of any series of Preferred Stock of the Corporation became entitled to vote for the election of directors, such series may then be deemed a "class of voting securities" and a holder of 25% or more of such series (or a holder of 5% if it otherwise exercises a "controlling influence" over the Corporation) may then be subject to regulation as a bank holding company in accordance with the BHC Act. In addition, at such time as such series is deemed a class of voting securities, (i) any other bank holding company may be required to obtain the approval of the Federal Reserve Board to acquire or retain 5% or more of such series, and (ii) any person other than a bank holding company may be required to file with the Federal Reserve Board under the Change in Bank Control Act to acquire or retain 10% or more of such series. Section 12 of the Banking Law requires the prior approval of the Office of the Commissioner to obtain control of any bank organized under the Banking Law. The Banking Law requires that in any transfer of voting and outstanding capital stock of any bank organized under the laws of Puerto Rico to any person or entity that, upon consummation of the transfer, will become the owner, directly or indirectly, of more that 5% of the voting and outstanding capital stock of said bank, the parties to the transfer shall inform the Office of the Commissioner of the proposed transfer at least 60 days prior to the date such transfer is to be effected. The Banking Law does not contain any provision allowing for the extension of such 60-day time period. The transfer requires the approval of the Office of the Commissioner if it results in a change of control of the bank. For the purposes of Section 12 of the Banking Law, the term "control" means the power to, directly or indirectly, direct or influence decisively the administration or the norms of the bank. The Department of the Treasury (predecessor to the Office of the Commissioner) made a determination that the foregoing provisions of the Banking Law are applicable to a change in control of the Corporation in a letter dated April 9, 1985. Pursuant to Section 12(d) of the Banking Law, as soon as the Office of the Commissioner receives notice of a proposed transaction that may result in the control or in a change of control of a bank, the Office of the Commissioner shall have the duty to make the necessary investigations. The Office of the Commissioner shall issue authorization for the transfer of control of the bank if the results of his investigations are in his judgment satisfactory. The decision of the Office of the Commissioner is final and unreviewable. DESCRIPTION OF PREFERRED STOCK OF PIB The following summary contains a description of certain general terms of the PIB Preferred Stock to which any Prospectus Supplement may relate. Certain terms of any series of the Preferred Stock offered by any Prospectus Supplement will be described in the Prospectus Supplement relating thereto. If so indicated in the Prospectus Supplement, the terms of any series may differ from the terms set forth below. The description of certain provisions of the PIB Preferred Stock does not purport to be complete and is subject to and qualified in its entirety by reference to the provisions of the PIB's Certificate of Incorporation, as amended, and the Certificate of Amendment relating to each particular series of the PIB Preferred Stock, each of which will be filed or incorporated by reference, as the case may be, as an exhibit to the Registration Statement of which this Prospectus is a part at or prior to the time of the issuance of such PIB Preferred Stock. 26 43 The authorized capital stock of PIB consists of 1,000,000 shares of Common Stock, par value $5.00 per share, and 25,000,000 shares of preferred stock, par value $25.00 per share. The preferred stock is issuable in one or more series, with such terms, and at such times and for such consideration as the Board of Directors of PIB determines. As of the date of this Prospectus, there were issued and outstanding no shares of preferred stock. All of the common stock of PIB is owned by the Corporation. GENERAL Under the PIB's Certificate of Incorporation, the Board of Directors of the Corporation is authorized, without further stockholder action, to provide for the issuance of up to 25,000,000 shares of preferred stock, par value $25.00 per share, in one or more series, with such designations of titles; dividend rates; special or relative rights in the event of a liquidation, distribution or sale of assets or dissolution or winding up of PIB; sinking fund provisions; any redemption or purchase account provisions; conversion provisions; and voting rights, as shall be set forth as and when established by the Board of Directors of PIB. The shares of any series of PIB Preferred Stock will be, when issued, fully paid and nonassessable and holders thereof shall have no preemptive rights in connection therewith. The liquidation preference of any series of the PIB Preferred Stock is not necessarily indicative of the price at which shares of such series of PIB Preferred Stock will actually trade at or after the time of their issuance. The market price of any series of PIB Preferred Stock can be expected to fluctuate with changes in market and economic conditions, the financial condition and prospects of the Corporation and other factors that generally influence the market prices of securities. RANK Any series of PIB Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution rank (i) senior to all classes of common stock of PIB and with all equity securities issued by PIB the terms of which specifically provide that such equity securities will rank junior to the PIB Preferred Stock (collectively referred to as the "PIB Junior Securities"); (ii) on a parity with all equity securities issued by PIB, the terms of which specifically provide that such equity securities will rank on a parity with the PIB Preferred Stock, (collectively referred to as the "PIB Parity Securities"); and (iii) junior to all equity securities issued by PIB, the terms of which specifically provide that such equity securities will rank senior to the PIB Preferred Stock (collectively referred to as the "PIB Senior Securities"). As used in any Certificate of Amendment for these purposes, the term "equity securities" will not include debt securities convertible into or exchangeable for equity securities. DIVIDENDS Holders of each series of PIB Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of PIB out of funds legally available therefor, cash dividends at such rates and on such dates as are set forth in the Prospectus Supplement relating to such series of the PIB Preferred Stock. Dividends will be payable to holders of record of the PIB Preferred Stock as they appear on the books of PIB on such record dates as shall be fixed by the Board of Directors. Dividends on any series of PIB Preferred Stock may be cumulative or non-cumulative. PIB's ability to pay dividends on its Preferred Stock is subject to policies established by the Federal Reserve Board. See "Certain Regulatory Matters -- Dividend Restrictions." No full dividends may be declared or paid or funds set apart for the payment of dividends on any PIB Parity Securities unless dividends shall have been paid or set apart for such payment on the PIB Preferred Stock. If full dividends are not so paid, the PIB Preferred Stock shall share dividends pro rata with the PIB Parity Securities. The holders of any series of shares of PIB Preferred Stock at the close of business on a dividend payment record date will be entitled to receive the dividend payable on such shares (except that holders of shares called for redemption on a redemption date occurring between such record date and the dividend payment date shall not be entitled to receive such dividend on such dividend payment date but instead will receive accrued and 27 44 unpaid dividends to such redemption date) on the corresponding dividend payment date notwithstanding the conversion thereof or PIB's default in payment of the dividend due. Except as provided above, PIB will make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of preferred stock issued upon conversion. CONVERSION The Prospectus Supplement for any series of the PIB Preferred Stock will state the terms, if any, on which shares of that series are convertible into shares of another series of preferred stock of PIB. For any series of PIB Preferred Stock which is convertible, PIB shall at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued preferred stock or shares of preferred stock held in its treasury or both, for the purpose of effecting the conversion of the shares of such series of PIB Preferred Stock, the full number of shares of preferred stock then deliverable upon the conversion of all outstanding shares of such series. No fractional shares or scrip representing fractional shares of preferred stock will be issued upon the conversion of shares of any series of convertible PIB Preferred Stock. Each holder to whom fractional shares would otherwise be issued will instead be entitled to receive, at PIB's election, either (a) a cash payment equal to the current market price of such holder's fractional interest or (b) a cash payment equal to such holder's proportionate interest in the net proceeds (following the deduction of applicable transaction costs) from the sale promptly by an agent, on behalf of such holders, of shares of preferred stock representing the aggregate of such fractional shares. EXCHANGEABILITY If so determined by the Board of Directors of PIB, the holders of shares of PIB Preferred Stock of any series may be obligated at any time or at maturity to exchange such shares for preferred stock or debt securities of PIB. The terms of any such exchange and any such preferred stock or debt securities will be described in the Prospectus Supplement relating to such series of PIB Preferred Stock. REDEMPTION A series of PIB Preferred Stock may be redeemable at any time, in whole or in part, at the option of PIB or the holder thereof upon terms and at the redemption prices set forth in the Prospectus Supplement relating to such series. In the event of partial redemptions of PIB Preferred Stock, whether by mandatory or optional redemption, the shares to be redeemed will be determined by lot or pro rata, as may be determined by the Board of Directors of PIB or by any other method determined to be equitable by the Board of Directors. On or after a redemption date, unless PIB defaults in the payment of the redemption price, dividends will cease to accrue on shares of PIB Preferred Stock called for redemption and all rights of holders of such shares will terminate except for the right to receive the redemption price. Under current regulations, bank holding companies may not exercise any option to redeem shares of preferred stock included as Tier 1 capital, or exchange such preferred stock for debt securities, without the prior approval of the Federal Reserve Board. Ordinarily, the Federal Reserve Board would not permit such a redemption unless (1) the shares are redeemed with the proceeds of a sale by the bank holding company of common stock or perpetual preferred stock or (2) the Federal Reserve Board determines that the bank holding company's condition and circumstances warrant the reduction of a source of permanent capital. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of PIB, holders of each series of PIB Preferred Stock that ranks senior to the PIB Junior Securities will be entitled to receive out of assets of PIB available for distribution to shareholders, before any distribution is made on any PIB Junior Securities, 28 45 including common stock, distributions upon liquidation in the amount set forth in the Prospectus Supplement relating to such series of Preferred Stock, plus an amount equal to any accrued and unpaid dividends. If upon any voluntary or involuntary liquidation, dissolution or winding up of PIB the amounts payable with respect to the PIB Preferred Stock of any series and any other PIB Parity Securities are not paid in full, the holders of the PIB Preferred Stock of such series and the PIB Parity Securities will share ratably in any such distribution of assets of PIB in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they are entitled, the holders of such series of PIB Preferred Stock will not be entitled to any further participation in any distribution of assets of PIB. VOTING RIGHTS Except as indicated in the Prospectus Supplement relating to a particular series of PIB Preferred Stock, or except as expressly required by applicable law, the holders of the PIB Preferred Stock will have no voting rights. GUARANTEE Unless otherwise specified in the applicable Prospectus Supplement, the Corporation will guarantee the punctual payment of (i) any accrued and unpaid dividends, whether or not declared, on the PIB Preferred Stock of any series, (ii) the redemption price for any shares of PIB Preferred Stock called or redemption at the option of PIB or the holder thereof in accordance with the terms of such series of PIB Preferred Stock, (iii) the liquidation preference of PIB Preferred Stock and (iv) any additional amounts with respect to a series of PIB Preferred Stock. The Guarantee of the PIB Preferred Stock shall constitute an unsecured obligation of the Corporation and will rank junior to all liabilities of the Corporation. The Guarantee will rank senior to the Corporation's common stock and shall have such rank relative to the preferred stock of the Corporation as shall be specified in the applicable Prospectus Supplement. VALIDITY OF OFFERED SECURITIES The validity of the Preferred Stock and the PIB Preferred Stock will be passed upon for the Corporation and PIB by Ernesto N. Mayoral, Esq., Vice President and Counsel of the Corporation. The validity of the Senior Securities, the Subordinated Securities, the PIB Senior Debt Securities, the PIB Subordinated Debt Securities and the Guarantees will be passed upon for the Corporation and PIB by Mr. Mayoral as to matters of the laws of the Commonwealth of Puerto Rico and by Sullivan & Cromwell as to matters of New York law. The validity of the Guaranteed Securities will be passed upon for Financial by Sullivan & Cromwell. The validity of the Securities will be passed upon for any underwriters or agents by counsel named in the Prospectus Supplement. EXPERTS The financial statements incorporated in this Prospectus by reference from the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992, have been so incorporated in reliance on the report of Price Waterhouse, independent public accountants, given upon the authority of said firm as experts in auditing and accounting. PLAN OF DISTRIBUTION The Corporation, PIB or Financial, as the case may be, may sell Securities to or through underwriting syndicates represented by managing underwriters, or through one or more underwriters without a syndicate for public offering and sale by them or may sell Securities to investors directly or through agents. Any such underwriter or agent involved in the offer and sale of the Securities will be named in the Prospectus Supplement. 29 46 Underwriters may offer and sell the Securities at a fixed price or prices, which may be changed, or from time to time at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the sale of the Securities, underwriters may be deemed to have received compensation from the Corporation, PIB or Financial, as the case may be, in the form of underwriting discounts or commissions and may also receive commissions from purchasers of the Securities for whom they may act as agent. Underwriters may sell the Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any compensation paid by the Corporation, PIB or Financial, as the case may be, to underwriters or agents in connection with the offering of the Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, will be set forth in the Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Securities may be deemed to be underwriting discounts and commissions under the Securities Act of 1933. Underwriters, dealers and agents may be entitled, under agreements entered into with Corporation, PIB or Financial, as the case may be, to indemnification against certain civil liabilities, including liabilities under the Securities Act of 1933. All Securities will be a new issue of securities with no established trading market. Any underwriters to whom Securities are sold by the Corporation, PIB or Financial, as the case may be, for public offering and sale may make a market in such Securities, but such underwriters will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given as to the liquidity of the trading market for any Securities Certain of the underwriters and their associates may be customers of, engage in transactions with and perform services for the Corporation or its subsidiaries in the ordinary course of business. 30 47 EXHIBIT A BANPONCE CORPORATION INTERIM FINANCIAL INFORMATION
PAGE ---- Unaudited consolidated statements of condition as of March 31, 1994 and December 31, 1993............................................................................... A-2 Unaudited consolidated statements of income for the quarters ended March 31, 1994 and 1993............................................................................... A-3 Unaudited consolidated statements of cash flow for the quarters ended March 31, 1994 and 1993........................................................................... A-5 Notes to unaudited consolidated financial statements................................. A-6 Management's discussion and analysis of financial condition and results of operation.......................................................................... A-12
A-1 48 BANPONCE CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
MARCH 31, DECEMBER 31, 1994 1993 ----------- ------------ (IN THOUSANDS) ASSETS Cash and due from banks.................................................. $ 364,961 $ 368,837 Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell................................................. 152,000 247,333 Time deposits with other banks......................................... 10,500 15,100 Banker's acceptances................................................... 341 259 ----------- ------------ 162,841 262,692 ----------- ------------ Investment securities held to maturity, at cost (Notes 3 and 4).......... 3,450,827 3,330,798 Investment securities available for sale, at market (Notes 3 and 4)...... 719,178 714,565 Trading account securities, at market.................................... 12,647 3,017 Loans (Note 4)........................................................... 7,120,742 6,655,072 Less -- Unearned income................................................ 305,346 308,150 Allowance for loan losses............................................ 140,949 133,437 ----------- ------------ 6,674,447 6,213,485 ----------- ------------ Premises and equipment................................................... 310,319 298,089 Other real estate........................................................ 11,899 12,699 Customer's liabilities on acceptances.................................... 1,378 1,392 Accrued income receivable................................................ 77,037 79,285 Other assets............................................................. 104,840 95,763 Intangible assets........................................................ 140,153 132,746 ----------- ------------ $12,030,527 $ 11,513,368 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits Non-interest bearing................................................. $ 1,799,641 $ 1,848,859 Interest bearing..................................................... 7,021,533 6,673,799 ----------- ------------ 8,821,174 8,522,658 Federal funds purchased and securities sold under agreements to repurchase (Note 4).................................................... 1,026,458 951,733 Other short-term borrowings.............................................. 773,487 664,173 Notes payable............................................................ 268,786 253,855 Senior debentures........................................................ 30,000 30,000 Acceptances outstanding.................................................. 1,378 1,392 Other liabilities........................................................ 177,697 182,362 ----------- ------------ 11,098,980 10,606,173 ----------- ------------ Subordinated notes (Note 6).............................................. 62,000 62,000 ----------- ------------ Preferred stock of subsidiary Bank (Note 7).............................. 11,000 11,000 ----------- ------------ Stockholders' equity (Note 8): Common stock........................................................... 196,537 196,395 Surplus................................................................ 387,177 386,622 Retained earnings...................................................... 229,148 208,607 Unrealized gains on securities available for sale (Note 2)............. 3,114 -0- Capital reserves....................................................... 42,571 42,571 ----------- ------------ 858,547 834,195 ----------- ------------ $12,030,527 $ 11,513,368 =========== ============
The accompanying notes are an integral part of these unaudited financial statements A-2 49 BANPONCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTER ENDED MARCH 31, ----------------------- 1994 1993 -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) INTEREST INCOME: Loans.............................................................. $147,373 $129,018 Money market investments........................................... 2,140 1,477 Investment securities.............................................. 49,459 53,893 Trading account securities......................................... 9 39 -------- -------- 198,981 184,427 -------- -------- INTEREST EXPENSE: Deposits........................................................... 54,179 55,837 Short-term borrowings.............................................. 14,018 7,338 Long-term debt..................................................... 5,431 3,491 -------- -------- 73,628 66,666 -------- -------- Net interest income.................................................. 125,353 117,761 Provision for loan losses............................................ 13,663 21,547 -------- -------- Net interest income after provision for loan losses.................. 111,690 96,214 Service charges on deposit accounts.................................. 17,175 15,476 Other service fees................................................... 11,895 10,372 Gain on sale of securities........................................... 272 446 Trading account profit............................................... 170 60 Other operating income............................................... 4,042 2,325 -------- -------- 145,244 124,893 -------- -------- OPERATING EXPENSES: Personnel costs: Salaries........................................................... 39,042 36,443 Profit sharing..................................................... 4,991 4,928 Pension and other benefits......................................... 11,286 15,668 -------- -------- 55,319 57,039 Net occupancy expense................................................ 6,903 6,275 Equipment expenses................................................... 8,203 6,333 Other taxes.......................................................... 4,432 3,689 Professional fees.................................................... 6,850 6,158 Communications....................................................... 4,904 4,768 Business promotion................................................... 3,690 3,592 Printing and supplies................................................ 2,101 1,881 Other operating expenses............................................. 9,814 9,259 Amortization of intangibles.......................................... 4,361 3,860 -------- -------- 106,577 102,854 -------- -------- Income before tax, dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes........................ 38,667 22,039 Income tax (Note 9).................................................. 9,745 2,511 -------- -------- Income before dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes............................ 28,922 19,528 Dividends on preferred stock of subsidiary Bank...................... 193 193 -------- --------
A-3 50 BANPONCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (UNAUDITED)
QUARTER ENDED MARCH 31, ----------------------- 1994 1993 -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Income before cumulative effect of accounting changes................ 28,729 19,335 Cumulative effect of accounting changes (Note 2)..................... 6,185 -------- -------- NET INCOME........................................................... $ 28,729 $ 25,520 ======== ======== EARNINGS PER SHARE (NOTE 10): Income before cumulative effect of accounting changes................ $ 0.88 $ 0.59 Cumulative effect of accounting changes (Note 2)..................... 0.19 -------- -------- Net Income........................................................... $ 0.88 $ 0.78 ======== ========
The accompanying notes are an integral part of these unaudited financial statements. A-4 51 BANPONCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, ------------------------- 1994 1993 ----------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 28,729 $ 25,520 ----------- -------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment................ 8,309 6,464 Provision for loan losses.............................................. 13,663 21,547 Amortization of intangibles............................................ 4,361 3,860 Gain on sale of investment securities and other........................ (272) (446) Gain on sale of premises and equipment................................. (487) (323) Gain on sale of loans.................................................. (300) Amortization of premiums and accretion of discounts on investments..... 4,296 1,665 Amortization of deferred loan fees and costs........................... 77 1,164 Postretirement benefit obligation...................................... 1,019 43,602 Net increase in trading securities..................................... (9,630) (9,985) Net decrease in interest receivable.................................... 4,339 8,036 Net increase in other assets........................................... (5,431) (7,200) Net decrease in interest payable....................................... (4,199) (4,568) Net increase (decrease) in current and deferred taxes.................. 5,677 (42,388) Net decrease in other liabilities...................................... (11,731) (8,430) ----------- -------- Total adjustments........................................................ 9,991 12,698 ----------- -------- Net cash provided by operating activities................................ 38,720 38,218 ----------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments............................... 105,251 159,104 Purchases of investment securities held to maturity.................... (2,126,928) (904,945) Maturities of investment securities held to maturity................... 2,002,656 682,450 Sales of investment securities held to maturity........................ 1,759 Sales of investment securities available for sale...................... 281,524 83,225 Purchases of investment securities available for sale.................. (168,024) (58,696) Net disbursements on loans............................................. (218,994) (48,910) Proceeds from sale of loans............................................ 25,780 Acquisition of mortgage loan portfolios................................ (76,700) (101,100) Assets acquire, net of cash............................................ (17,557) Acquisition of premises and equipment.................................. (21,771) (19,256) Proceeds from sale of premises and equipment........................... 8,249 2,957 ----------- -------- Net cash used in investing activities.................................... (232,294) (177,632) ----------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits.................................... 5,811 (87,103) Net increase in federal funds purchased and securities sold under agreements to repurchase............................................. 69,725 164,535 Net increase in other short-term borrowings............................ 106,714 72,558 Proceeds from issuance of notes payable................................ 14,934 9,980 Payments of notes payable.............................................. (2) (21) Dividends paid......................................................... (8,183) (6,531) Proceeds from issuance of common stock................................. 699 470 ----------- -------- Net cash provided by financing activities................................ 189,698 153,888 ----------- -------- Net (decrease) increase in cash and due from banks....................... (3,876) 14,474 Cash and due from banks at beginning of period........................... 368,837 325,497 ----------- -------- Cash and due from banks at end of period................................. $ 364,961 $339,971 ============ =========
The accompanying notes are an integral part of these unaudited financial statements. A-5 52 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) NOTE 1 -- CONSOLIDATION The consolidated financial statements of BanPonce Corporation include the balance sheet of the Corporation and its wholly-owned subsidiaries, Velco, Popular International Bank, Inc. and its wholly-owned subsidiaries BanPonce Financial Corp., Spring Financial Services, Inc. and Pioneer Bancorp, Inc. (second tier subsidiaries), and Banco Popular de Puerto Rico and its wholly-owned subsidiaries, Popular Leasing and Rental, Inc. and Popular Consumer Services, Inc., as of March 31, 1994 and December 31, 1993, and their related statements of income and cash flows for the quarters ended March 31, 1994 and 1993. These statements are, in the opinion of management, a fair statement of the results of the periods presented. These results are unaudited, but include all necessary adjustments for a fair presentation of such results. NOTE 2 -- ACCOUNTING CHANGES During the first quarter of 1994 the Corporation adopted SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires financial institutions to divide their securities holdings among three categories: held-to-maturity, available-for-sale and trading securities. Those securities which management has the positive intent and ability to hold to maturity will be classified as held-to-maturity and will be carried at cost. Those that are bought and held principally for the purpose of selling them in the near term, will be classified as trading and will continue to be reported at fair value with unrealized gains and losses included in earnings. All other securities will be classified as available-for-sale and will be reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. As a result of the adoption of this statement, the Corporation's stockholders' equity at March 31, 1994 includes $3.1 million, net of taxes, in unrealized holding gains on securities available for sale. Effective January 1, 1993, the Corporation implemented the Statement of Financial Accounting Standards (SFAS) 106, "Employers Accounting for Postretirement Benefits other than Pensions", and SFAS 109, "Accounting for Income Taxes". Under SFAS 106 the cost of retiree health care and other postretirement benefits is accrued during employees' service periods. The Corporation elected to recognize the full transition obligation, which is the portion of future retiree benefit costs related to service already rendered by both active and retired employees up to the date of adoption, in the first quarter of 1993 rather than amortize it over future periods. The cumulative effect, net of taxes, of this accounting change amounted to $22.7 million, or $0.70 per share. The SFAS 109 established accounting and reporting standards for the recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The cumulative effect of this change resulted in a credit to income of $28.9 million, or $0.89 per share. This amount is net of a valuation allowance of approximately $2.1 million related to a deferred tax asset arising from net operating loss carryforwards for which the Corporation cannot determine the likelihood that they will be realized. A-6 53 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) NOTE 3 -- INVESTMENT SECURITIES The maturities as of March 31, 1994 and market value for the following investment securities are: Investment securities held to maturity:
MARCH 31, ----------------------------------------------------- 1994 1993 ------------------------- ------------------------- BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE ---------- ------------ ---------- ------------ U.S. Treasury (average maturity of 11.5 months).... $2,206,380 $2,203,787 $2,628,862 $2,677,195 Obligations of other U.S. Government agencies and corporations (average maturity of 6.9 months)..... 412,145 411,469 150,468 152,985 Obligations of Puerto Rico, States and political subdivisions (average maturity of 4 years and 3 months)..................... 210,054 215,930 220,440 230,195 Others (average maturity of 3 years and 2.7 months)..... 622,248 611,208 485,581 486,786 ---------- ------------ ---------- ------------ $3,450,827 $3,442,394 $3,485,351 $3,547,161 ========= ========== ========= ==========
Investment securities available for sale:
1994 1993 ------------------------- ------------------------- BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE ---------- ------------ ---------- ------------ U.S. Treasury (average maturity of 3 years and 2.3 months).... $558,700 $562,572 $304,557 $328,408 Obligations of other U.S. Government agencies and corporations (average maturity of 3 years and 1.5 months).... 116,621 116,901 95,163 96,734 Obligations of Puerto Rico, States and political subdivisions (average maturity of 2 years and 10.8 months)... 27,135 27,135 Others (average maturity of 2 years and 7.2 months)......... 12,570 12,570 8,484 8,484 ---------- ------------ ---------- ------------ $715,026 $719,178 $408,204 $433,626 ======== ========== ======== ==========
NOTE 4 -- PLEDGED ASSETS Securities and insured mortgage loans of the Corporation of $1,921,301 (1993 -- $1,574,978) are pledged to secure public and trust deposits and securities and mortgages sold under repurchase agreements. NOTE 5 -- COMMITMENTS In the normal course of business there are letters of credit outstanding and stand-by letters of credit which at March 31, 1994 amounted to $15,257 and $80,455, respectively. There are also outstanding other A-7 54 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying financial statements. No losses are anticipated as a result of these transactions. NOTE 6 -- SUBORDINATED NOTES Subordinated notes consist of the following: 8.50% Fixed Rate Notes, due in 1996............................. $12,000 8.875% Fixed Rate Notes series A, due in 1996................... 15,000 8.6875% Fixed Rate Notes series B, due in 1996.................. 15,000 Floating Rate Notes series A with interest payable at 88% of LIBID rate, due in 1996....................................... 19,000 Floating Rate Notes series B with interest payable at 86% of LIBID rate, due in 1996....................................... 1,000 ------- $62,000 =======
NOTE 7 -- PREFERRED STOCK OF SUBSIDIARY BANK As of March 31, 1994, the subsidiary Bank has 200,000 shares of authorized preferred stock with a par value of $100, of which 110,000 are issued and outstanding. NOTE 8 -- STOCKHOLDERS' EQUITY Authorized common stock is 90,000,000 shares with a par value of $6 per share of which 32,756,219 are issued and outstanding at March 31, 1994. NOTE 9 -- INCOME TAX The income tax expense includes a tax provision of $68 and $187 in 1994 and 1993, respectively, related with the gains on sale of securities. NOTE 10 -- EARNINGS PER SHARE BASIS Earnings per share are based on 32,756,219 average shares outstanding during 1994 and 32,672,126 during 1993. NOTE 11 -- SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the quarter ended March 31, 1994 the Corporation paid interest and income taxes amounting to $81,843 and $152, respectively (1993 -- $70,997 and $604). In addition, the loans receivable transferred to other real estate and other property as of March 31, 1994, amounted to $254 and $620, respectively (1993 -- $8,537 and $1,598). The Corporation's stockholders' equity at March 31, 1994 includes $4.2 million, in unrealized holding gains on securities available for sale. A-8 55 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) NOTE 12 -- POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the unaudited consolidated financial position of Popular International, Inc. and its wholly-owned subsidiaries BanPonce Financial Corp., Spring Financial Services, Inc. and Pioneer Bancorp, Inc. (second tier subsidiaries) as of March 31, 1994 and 1993, and the results of their operations for the quarters then ended. POPULAR INTERNATIONAL BANK, INC. STATEMENT OF CONDITION (IN THOUSANDS)
MARCH 31, ------------------- 1994 1993 -------- -------- Assets: Cash..................................................................... $ 12,632 $ 1,539 Money market investments................................................. 8,036 11,572 Investment securities.................................................... 113,742 -0- -------- -------- Loans.................................................................... 640,373 218,903 Less: Unearned income.................................................... 25,008 10,846 Allowance for loan losses.............................................. 9,566 2,857 -------- -------- 605,799 205,200 Other assets, consisting principally of intangible assets, including goodwill, net.......................................................... 35,956 10,341 -------- -------- Total assets................................................... $776,165 $228,652 ======== ======== Liabilities and Stockholder's Equity: Deposits................................................................. $292,705 $ -0- Short-term borrowings.................................................... 163,110 93,740 Notes payable............................................................ 239,117 99,762 Other liabilities........................................................ 20,433 6,327 Stockholder's equity..................................................... 60,800 28,823 -------- -------- Total liabilities and stockholder's equity..................... $776,165 $228,652 ======== ========
A-9 56 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) POPULAR INTERNATIONAL BANK, INC. STATEMENT OF INCOME (IN THOUSANDS)
QUARTER ENDED MARCH 31, ------------------ 1994 1993 ------- ------ Income: Interest and fees......................................................... $10,859 $6,730 Other service fees........................................................ 1,395 430 ------- ------ Total income.................................................... 12,254 7,160 ------- ------ Expenses: Interest expense.......................................................... 5,281 2,731 Provision for loan losses................................................. 1,371 880 Operating expenses........................................................ 3,259 2,820 ------- ------ Total expenses.................................................. 9,911 6,431 ------- ------ Income before income tax.................................................. 2,343 729 Income tax................................................................ 979 323 ------- ------ Net income...................................................... $ 1,364 $ 406 ======= ======
NOTE 13 -- BANPONCE FINANCIAL CORP. (A SECOND TIER SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the unaudited consolidated financial position of BanPonce Financial Corp. and its wholly-owned subsidiaries Spring Financial Services, Inc. and Pioneer Bancorp Inc., as of March 31, 1994 and 1993, and the results of their operations for the quarters then ended. BANPONCE FINANCIAL CORP. STATEMENT OF CONDITION (IN THOUSANDS)
MARCH 31, --------------------- 1994 1993 -------- -------- Assets: Cash................................................................... $ 12,612 $ 1,514 Money market investments............................................... 7,041 10,395 Investment securities.................................................. 113,742 -0- -------- -------- Loans.................................................................. 640,373 218,903 Less: Unearned income.................................................. 25,008 10,846 Allowance for loan losses......................................... 9,566 2,857 -------- -------- 605,799 205,200 Other assets, consisting principally of intangible assets, including goodwill, net........................................................ 35,931 10,328 -------- -------- Total assets................................................. $775,125 $227,437 ======== ========
A-10 57 BANPONCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
MARCH 31, --------------------- 1994 1993 -------- -------- Liabilities and Stockholder's Equity: Deposits............................................................... $292,705 $ -0- Federal funds purchased and securities sold under agreements to repurchase........................................................... 5,000 -0- Other short-term borrowings............................................ 163,111 93,740 Notes payable.......................................................... 239,117 99,762 Other liabilities...................................................... 20,433 6,327 Stockholder's equity................................................... 59,759 27,608 -------- -------- Total liabilities and stockholder's equity................... $775,125 $227,437 ======== ========
BANPONCE FINANCIAL CORP. STATEMENT OF INCOME (IN THOUSANDS)
QUARTER ENDED MARCH 31, ------------------------ 1994 1993 ------- ------ Income: Interest and fees................................................... $10,851 $6,720 Other service fees.................................................. 1,394 430 ------- ------ Total income.............................................. 12,245 7,150 ------- ------ Expenses: Interest expense.................................................... 5,281 2,731 Provision for loan losses........................................... 1,371 880 Operating expenses.................................................. 3,226 2,725 ------- ------ Total expenses............................................ 9,878 6,336 ------- ------ Income before income tax............................................ 2,367 814 Income tax.......................................................... 979 323 ------- ------ Net income................................................ $ 1,388 $ 491 ======= ======
A-11 58 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review contains an analysis of the performance of BanPonce Corporation (the Corporation) and its subsidiaries Banco Popular de Puerto Rico (Banco Popular), including its wholly-owned subsidiaries Popular Leasing and Rental, Inc. (Popular Leasing) and Popular Consumer Services, Inc., Vehicle Equipment Leasing Company, Inc. (VELCO), Popular International Bank, Inc., and its wholly-owned subsidiaries BanPonce Financial Corp., Spring Financial Services, Inc. (Spring) and Pioneer Bancorp, Inc. (Pioneer), second tier subsidiaries. Pioneer was acquired on March 31, 1994. This financial review should be read in conjunction with the unaudited consolidated financial statements, supplemental financial data and tables contained herein. NET INCOME Net income for the first quarter of 1994 was $28.7 million, compared with $25.5 million for the same period in 1993, a 12.6% increase. Net income for 1993 includes the effect of the adoption of two new accounting principles, which resulted in $6.2 million in additional revenues for the Corporation. On a per share basis, net earnings for the quarter were $0.88 per share, based on 32,756,219 average shares outstanding, as compared with $0.78 per share for the first quarter of 1993 based on 32,672,126 average shares outstanding. The Corporation's return on assets (ROA) and return on equity (ROE) for the first quarter of 1994 were 1.0% and 13.78%, respectively, compared with 1.03% and 13.60%, for the first quarter of 1993. For the last quarter of 1993 these ratios were 0.98% and 13.59%. NET INTEREST INCOME Net interest income for the quarter ended March 31, 1994, reached $125.4 million, a 6.5% percent increase when compared with $117.8 million reported during the same quarter in 1993. On a taxable equivalent basis, net interest income rose to $136.9 million for the first three months of 1994 from $130.1 million for the same period in 1993. This rise is the net effect of a $19.2 million increase due to the growth and change in the composition of average earning assets and a $12.4 million decrease due to lower taxable equivalent yields. For analytical purposes, the interest earned on tax exempt assets is adjusted to a "taxable equivalent" basis assuming the statutory income tax rate of 42%. Average earning assets increased $1,546 million, reaching $10,809 million for the first quarter of 1994 compared with $9,263 million for the same quarter in 1993. The increase is principally related to a higher volume of average mortgage loans by $858 million, principally related to several purchases of mortgages realized during 1993 and to a higher origination activity in Banco Popular and Spring. During the first quarter of 1994 the Federal Reserve raised the federal funds rate in response to a recovering economy and anticipating inflationary pressures. This increase in rates is expected to result in a slow-down in the mortgage loans' refinancing activity during 1994. The increase in average loans also reflects a 12% increase in commercial loans which rose $286 million. Average investment securities increased to $4,113 million from $3,822 million in 1993. The increase in investment securities is principally related to the acquisition of several CMO's by Banco Popular during 1993 and to a higher level of tax exempt securities, mainly U.S. Treasury securities. The average yield on earning assets on a taxable equivalent basis decreased 71 basis points to 7.79% compared with 8.50% in the first quarter of 1993 due to the significant growth in assets during 1993 when interest rates reached their lowest levels in three decades. The average yield on loans, on a taxable equivalent basis, decreased from 9.95% reported during the first quarter of 1993 to 9.21% for the first quarter of 1994. The yield on mortgage loans decreased 176 basis points, principally due to the significant volume of refinancings, originations and purchases of loans realized during the low interest rate environment that prevailed in 1993. These loans, however, provided higher returns than most other investment alternatives available with limited interest rate risk being assumed given the deposits acquired during 1993. Personal loans yield decreased 68 basis points due to competitive factors in the Puerto Rico financial industry. In addition, the Corporation is A-12 59 placing more emphasis in the origination of secured personal loans, such as home equity and cash collateral loans, that carry a lower yield. The yield on investment securities also showed a reduction, decreasing 96 basis points from 6.76% to 5.80% during the first quarter of 1994. During 1993 approximately $660 million in U.S. Treasury securities matured with an average yield of approximately 6.99%. These securities were substituted, in part with U.S. Treasury securities yielding approximately 4.78%. TABLE A NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
1994 AVERAGE 1993 AVERAGE -------------- -------------- BALANCE RATE BALANCE RATE ------- ---- ------- ---- (IN MILLIONS) Earning assets................................................. $10,809 7.79% $ 9,263 8.50% ======= ====== Financed by: Interest bearing funds....................................... $ 8,856 3.33% $ 7,569 3.52% Non-interest bearing funds..................................... 1,953 1,694 ------- ------- TOTAL................................................ $10,809 2.72% $ 9,263 2.88% ======= ====== Net interest income per books.................................. $ 125.4 $ 117.8 Taxable equivalent adjustment.................................. 11.5 12.3 ------- ------- Net interest income on a taxable equivalent basis.............. $ 136.9 $ 130.1 ======= ====== Spread......................................................... 4.46% 4.98% Net interest yield............................................. 5.07% 5.62%
Average interest bearing liabilities for the quarter ended March 31, 1994 were $8,856 million, compared with $7,569 million during the first quarter of 1993, a 17% increase. This rise relates principally to a higher level of short-term borrowings by $767 million, particularly fed funds purchased and securities sold under agreements to repurchase in response to arbitrage activities. The increase in the average interest bearing liabilities is also due to a higher volume of commercial paper issued by the parent company to finance its subsidiaries' operations. Average interest bearing deposits increased $355.6 million, principally in savings, NOW and money market accounts. The average volume of non-interest bearing deposits rose $196.5 million when compared with the first quarter of 1993, reaching $1,757 million. The average cost of interest bearing liabilities decreased to 3.33%, or 19 basis points, when compared with 3.52% for the first quarter of 1993. The average cost of interest bearing deposits for the first quarter of 1994 was 3.19% compared with 3.47% for the same quarter in 1993, a decrease of 28 basis points, mostly in saving accounts which decreased 34 basis points. During 1993 the pricing structure of these accounts was modified in accordance with the prevailing low interest rates. Also the average cost of certificates of deposits decreased 28 basis points. On the other hand, the average cost of short-term borrowings increased 17 basis points as a result of the increase in short-term rates during the first quarter. The average cost of funding earning assets decreased to 2.72% from 2.88%. The Corporation's net interest yield, on a taxable equivalent basis, was 5.07% compared with 5.62% for the same quarter in 1993. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses was $13.7 million for the first quarter of 1994, a decline of $7.8 million or 36.6% from $21.5 million provided in the same period of 1993. The provision is also $1.0 million lower than the preceding quarter. This decline results from a reduction in net charge-offs and an improvement in the loan quality. Notwithstanding the reduction in the provision for loan losses, the Corporation continues maintaining the allowance for loan losses at a level which is considered adequate to absorb the potential credit losses inherent in the portfolio. A-13 60 As presented in table B, net charge-offs for the first quarter of 1994 totaled $9.6 million or 0.60% of average loans, representing a decline of $6.8 million or 41.3% as compared with a year ago when the net charge-offs were $16.4 million or 1.25% of average loans. Net charge-offs for the last quarter of 1993 amounted to $11.9 million or 0.77% of average loans. TABLE B
PROVISION FOR NET ALLOWANCE FOR QUARTER ENDED LOAN LOSSES CHARGE-OFFS LOAN LOSSES - ----------------------------------------------------------- -------------- ----------- ------------- March 31, 1994............................................. $ 13.7 $ 9.6 $ 140.9 December 31, 1993.......................................... 14.7 11.9 133.4 September 30, 1993......................................... 17.4 9.6 130.6 June 30, 1993.............................................. 19.2 13.8 121.4 March 31, 1993............................................. 21.5 16.4 115.9
Commercial loans net charge-offs reflected a reduction of $2.7 million or 35.4% as compared with the same period in 1993, decreasing from $7.7 million to $5.0 million. Consumer loans net charge-offs were $3.6 million for the first quarter of 1994 as compared with $6.1 million a year ago, a decrease of 41.1%. Construction and lease financing net charge-offs also decreased $1.4 million and $0.3 million, respectively, partially offset by an increase of $0.1 million in mortgage loans net charge-offs. At March 31, 1994, the allowance for loan losses was $140.9 million, representing 2.07% of loans, and included Pioneer's allowance of $3.4 million. These figures compare with $115.9 million or 2.16% at March 31, 1993 and $133.4 million and 2.10% at December 31, 1993. A-14 61 Table C presents the movement in the allowance for loan losses and shows selected loan loss statistics for the quarters ended on March 31, 1994 and 1993. TABLE C ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
FIRST QUARTER -------------------- 1994 1993 -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period.......................................... $133,437 $110,714 Allowances purchased.................................................... 3,473 Provision for loan losses............................................... 13,663 21,547 -------- -------- 150,573 132,261 -------- -------- Losses charged to the allowance Commercial............................................................ 6,126 9,226 Construction.......................................................... 100 1,473 Lease financing....................................................... 1,627 1,879 Mortgage.............................................................. 111 -0- Consumer.............................................................. 7,559 10,000 -------- -------- 15,523 22,578 -------- -------- Recoveries Commercial............................................................ 1,171 1,559 Construction.......................................................... 190 194 Lease financing....................................................... 559 493 Mortgage.............................................................. -0- -0- Consumer.............................................................. 3,979 3,927 -------- -------- 5,899 6,173 -------- -------- Net loans charged-off................................................... 9,624 16,405 -------- -------- Balance at end of period................................................ $140,949 $115,856 ======== ======== Ratios: Allowance for losses to loans......................................... 2.07% 2.16% Allowance to non-performing assets.................................... 120.18 81.25 Allowance to non-performing loans..................................... 145.53 102.28 Non-performing assets to loans........................................ 1.72 2.66 Non-performing assets to total assets................................. 0.97 1.40 Net charge-offs to average loans...................................... 0.60 1.25 Provision to net charge-offs.......................................... 1.42X 1.31X Net charge-offs earnings coverage..................................... 5.44 2.66
CREDIT QUALITY The Corporation reports its non-performing assets on a more conservative basis than most other 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 nonaccrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off against the allowance when 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 A-15 62 practice, closed-end consumer loans are charged-off if delinquent 120 days, but these consumer loans are not customarily placed on non-accrual status prior to being charged-off. As of March 31, 1994, non-performing assets ("NPA") which consist of past due loans on which no interest income is being accrued, renegotiated loans, other real estate and in-substance foreclosed assets, amounted to $117.3 million or 1.72% of loans. NPA were $142.6 million or 2.66% of loans a year earlier and $111.2 million or 1.75% at December 31, 1993. Non-performing loans decreased $16.5 million or 14.6% when compared with the same quarter of 1993, of which $9.4 million were in non-performing commercial and construction loans due to improved collection efforts of classified loans, $7.6 million were in non-performing consumer loans and $1.2 million in lease financing. Partially offsetting this reduction was an increase of $1.7 million in non-performing mortgage loans, mainly due to the rise in the mortgage loan portfolio. The Corporation was able to reduce the other real estate owned by $9.5 million or 44.3% through successful efforts in the disposition of these properties. As compared with December 31, 1993, non-performing assets increased $6.1 million, of which $5.8 million represented non-performing assets of Pioneer, acquired on March 31, 1994. Table D presents NPA for the current and previous four quarters. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments are past due 90 days or more and excluding the closed-end consumer loans from non-accruing loans, non-performing assets as of March 31, 1994, amounted to $88.9 million or 1.31% of total loans. At that date, the allowance for loan losses as a percent of adjusted non-performing assets was 158.5%. These two ratios compare with 1.92% and 112.7% as of March 31, 1993, and 1.27% and 165.0% at December 31, 1993. TABLE D
NPA ALLOWANCE AS A % AS A % DATE NPA OF LOANS OF NPA - ------------------------------------------------------------------- ------ -------- --------- (IN MILLIONS) March 31, 1994..................................................... $117.3 1.72% 120.2% December 31, 1993.................................................. 111.2 1.75 120.0 September 30, 1993................................................. 137.5 2.24 95.0 June 30, 1993...................................................... 139.7 2.42 86.9 March 31, 1993..................................................... 142.6 2.66 81.3
Accruing loans which are contractually past due 90 days or more as to principal or interest amounted to $14.3 million at March 31, 1994, compared with $16.0 million at March 31, 1993, and $15.5 million at December 31, 1993. Renegotiated loans at the end of this period amounted to $9.1 million of which $0.5 million are in non-accrual status. All renegotiated loans are classified as nonperforming assets. OTHER OPERATING INCOME Other operating income, including securities and trading gains, increased to $33.6 million for the first quarter of 1994 compared with $28.7 million for the same quarter in 1993. Service charges on deposit accounts totaled $17.2 million for the first quarter of 1994, an 11% increase from the $15.5 million recorded for the same quarter in 1993. The increase relates primarily to the implementation of an automatic teller machine (ATM) fee on April of 1993, an increase in commercial accounts fees and fees related to the operations acquired during 1993. Other service fees rose $1.5 million, from $10.4 million reported for the first three months of 1993 to $11.9 million for the same period of 1994. Most of this increase was attained at Spring through mortgage loans sales and servicing activities. Other operating income increased $1.7 million reaching $4.0 million for the first quarter of 1994. The increase is principally the result of an adjustment of $1.4 million recorded by Banco Popular during the first A-16 63 quarter of 1993 to reduce the market value of the excess mortgage servicing recorded upon the sale of mortgages in 1992 due to higher than expected mortgage prepayments. This amount compares with an adjustment of only $0.5 million during the first quarter of 1994. The Corporation realized gains on securities and trading activities during the first three months of 1994 of $0.4 million compared with $0.5 million for the same period in 1993. OPERATING EXPENSES Operating expenses for the first quarter of 1994 reached $106.6 million compared with $102.9 million for the same quarter in 1993. Personnel costs decreased $1.7 million from the $57 million reported in the first three months of 1993. This decrease is mainly related to a reduction of $4.4 million in pension and other benefits expense due to the recognition during the first quarter of 1993 of the full year expense under SFAS 106 which amounted to $5.2 million. During the first quarter of 1994, the SFAS 106 expense amounted to $1.5 million. On the other hand, salaries increased 7.1% to $39 million due to the salaries of the operations acquired in New York and the Virgin Islands during the latter part of 1993, annual merit increases and Spring's expansion in the mainland. These increases are partially offset by the accrual of $1.2 million recognized during the first quarter of 1993 for a special bonus paid to the employees of Banco Popular on its 100th Anniversary. Other operating expenses, excluding personnel costs, totaled $51.3 million, an 11.9% rise from the $45.8 million reported during the first quarter of 1993. The major increase was in equipment expenses, basically depreciation, which is related to the growth in the Corporation's business activity and the development of new products and services, especially the electronic payment system and the establishment of point of sales terminals in food stores and other locations. Through these, the Corporation is moving from a paper-based operation to an electronic one. Other increases were in other taxes, professional fees and net occupancy expenses. These increases are part of the costs of the growth that the Corporation is aiming to attain in the mainland, Puerto Rico and the Caribbean. Income tax expense increased significantly, from $2.5 million for the first quarter of 1993 to $9.7 million for the first quarter of 1994. The increase relates principally to a higher operating income for the quarter by $16.6 million and a lower amount of exempt income from securities mainly due to the repricing of securities, as previously mentioned. BALANCE SHEET COMMENTS At March 31, 1994, the Corporation's total assets reached $12 billion, reflecting an increase of 17.8% as compared with $10.2 billion at March 31, 1993. Total assets at the end of 1993 were $11.5 billion. Average total assets for the first quarter of 1994 were $11.6 billion compared with $10.0 billion for the same period of 1993. Average total assets for 1993 amounted to $10.7 billion. On March 31, 1994, BanPonce Financial Corp., a subsidiary of BanPonce Corporation, acquired Pioneer Bancorp, Inc., a full-service banking operation in Chicago, operating two branches, with $333.7 million in assets and $292.7 million in deposits. Earning assets at March 31, 1994, amounted to $11.2 billion compared with $9.4 billion at March 31, 1993 and $10.7 billion at December 31, 1993. Loans amounted to $6.8 billion at March 31, 1994 compared with $5.4 billion at the same date of prior year and $6.3 billion at the end of 1993. Most of the increase in loans was in the mortgage loan portfolio, which grew $827 million, from $949 million at March 31, 1993 to $1.8 billion at March 31, 1994. This increase results mainly from the purchase of approximately $435 million in mortgage loans in the U.S. since April 1993 and a significant mortgage loan origination and refinancing activity during 1993 in Banco Popular and Spring. Spring's mortgage loan portfolio increased $206.8 million since March 31, 1993. Furthermore, mortgage loan figures include $54.8 million in loans acquired on September 30, 1993, as part of the operations acquired in the Virgin Islands from CoreStates Bank, N.A. (CoreStates). Commercial and construction loans rose $431 million, which included $46.7 million acquired A-17 64 from CoreStates and $115.7 million acquired in the Pioneer transaction. The growth in the consumer loan portfolio of $123 million was mainly due to $86 million in portfolios of the aforementioned acquisitions. Lease financing receivables increased $77.3 million as compared with March 31, 1993. During the first quarter of 1994 the Corporation adopted SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 requires financial institutions to divide their securities holdings among three categories: held-to-maturity, available-for-sale and trading securities. Those securities which management has the positive intent and ability to hold to maturity will be classified as held-to-maturity and will be carried at cost. Those that are bought and held principally for the purpose of selling them in the near term, will be classified as trading and will continue to be reported at fair value with unrealized gains and losses included in earnings. All other securities will be classified as available-for-sale and will be reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. As a result of the adoption of this statement, the Corporation's stockholders' equity at March 31, 1994 includes $3.1 million, net of taxes, in unrealized holding gains on securities available for sale. Total deposits at March 31, 1994, amounted to $8.8 billion compared with $8.0 billion at March 31, 1993, an increase of $800 million. At December 31, 1993 total deposits amounted to $8.5 billion. Deposits at the end of this quarter include $228.8 million acquired in Virgin Islands and $172.8 million acquired in New York during the latter part of 1993, in addition to $292.7 million in Pioneer's deposits. Borrowings increased $859.5 million as compared with prior year. This rise is mainly due to an increase of $196.7 million in federal funds purchased and securities sold under agreements to repurchase and $494 million in other short-term borrowings. Also, the issuance of an additional $255 million in medium-term notes by BanPonce Financial to finance Spring's operations and an increase of $69.2 million in commercial paper, contributed to the increase in borrowings. Subordinated notes decreased $12 million from the $74 million outstanding balance as of March 31, 1993, due to the prepayment in December of 1993 of a 7.95% note. Stockholders' equity at March 31, 1994, amounted to $858.5 million compared with $771.6 million a year ago. This increase is related to earnings' retention, the issuance of common stock through the Dividend Reinvestment Plan and the adjustment recognized on the Corporation's stockholders' equity due to the implementation of SFAS 115 during the first quarter of 1994, as previously explained. Book value per share increased to $26.21 as of March 31, 1994, compared with $23.62 as of the same date last year. The market value of the Corporation's common stock at March 31, 1994 was $31.50, compared with $29.25 at March 31, 1993. At the end of the quarter, the Corporation had a total market capitalization of $1.03 billion. The Corporation Tier I, total capital and leverage ratio at March 31, 1994, were 11.72%, 13.35% and 6.90%, respectively, as compared with 12.93%, 14.90 and 7.35%, at March 31, 1993. A-18 65 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE 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 ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT BanPonce Corporation....................... S-2 Selected Consolidated Financial Data....... S-3 Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.... S-4 Summary of Certain Terms of the Series A Preferred Stock.......................... S-4 Use of Proceeds............................ S-11 Certain Puerto Rico Tax Considerations..... S-11 Certain United States Income Tax Considerations........................... S-13 Underwriting............................... S-15 Validity of the Series A Preferred Stock... S-16 Experts.................................... S-16 PROSPECTUS Available Information...................... 2 Incorporation of Certain Documents by Reference................................ 2 BanPonce Corporation....................... 2 BanPonce Financial Corp.................... 3 Popular International Bank Inc............. 3 Consolidated Ratios of Earnings to Fixed Charges.................................. 3 Use of Proceeds............................ 4 Certain Regulatory Matters................. 4 Description of Debt Securities and Guarantees............................... 10 Terms Applicable to the Senior Debt Securities or Subordinated Debt Securities............................... 15 Terms Applicable to Guaranteed Securities............................... 18 Terms Applicable to the PIB Senior Debt Securities or PIB Subordinated Debt Securities............................... 19 Description of Preferred Stock of the Corporation.............................. 23 Description of Preferred Stock of PIB...... 26 Validity of Offered Securities............. 29 Experts.................................... 29 Plan of Distribution....................... 29 EXHIBITS Exhibit A -- Interim Financial Information
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,600,000 SHARES BANPONCE CORPORATION 8.35% NON-CUMULATIVE MONTHLY INCOME PREFERRED STOCK, 1994 SERIES A (LIQUIDATION PREFERENCE $25 PER SHARE) ---------------------------------------------------- PROSPECTUS SUPPLEMENT ---------------------------------------------------- PAINEWEBBER INCORPORATED OF PUERTO RICO JUNE 17, 1994 - ------------------------------------------------------ - ------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----