-----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, S1+T6UU9Vx94pTAwoFkY7w78VC7aOoQbV+z1RhYX1b9ohJHTjtn7nf3fgKgI7LG3 /aqwfQVRDxObuic1HUE5LA== 0000950144-94-000775.txt : 19940701 0000950144-94-000775.hdr.sgml : 19940701 ACCESSION NUMBER: 0000950144-94-000775 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940330 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13818 FILM NUMBER: 94519258 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 8097659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 10-K 1 BANPONCE FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF - - - - - --- THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1993 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF - - - - - --- THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission File No. 0-13818 BANPONCE CORPORATION Incorporated in the Commonwealth of Puerto Rico IRS Employer Identification No. 66-0416582 Principal Executive Offices: 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telephone Number: (809) 765-9800 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock ($6.00 par value) Series A Participating Cumulative Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 11, 1994 the Corporation had 32,756,219 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $1,044,104,000 based upon the reported closing price of $31.875 on the NASDAQ National Market System, on that date. 1 2 DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Corporation's Annual Report to shareholders for the fiscal year ended December 31, 1993 are incorporated herein by reference in response to Item 1 of Part I, Items 5 through 8 of Part II and Item 14 of Part IV. (2) Portions of the Corporation's Proxy Statement relating to the 1994 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference to Items 10 through 13 of Part III.
10-K CROSS-REFERENCE INDEX DOCUMENT & PAGE NUMBER - - - - - -------------------------- ---------------------- PART I - - - - - ------ Form 10-K 3 - 11 Item 1 Business ........................Annual Report 25-27;31-42 Item 2 Properties ......................Form 10-K 11 - 12 Item 3 Legal Proceedings ...............Form 10-K 12 Item 4 Submission of Matters to a Vote of Security Holders .........................Form 10-K 12 PART II - - - - - ------- Item 5 Market for Registrant's Common Stock and Related Form 10-K 13 - 14 Stockholder Matters .............Annual Report(*) 19 - 20 Item 6 Selected Financial Data .........Annual Report(*) 4 - 5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Form 10-K 15 Operations ......................Annual Report(*) 2 - 26 Item 8 Financial Statements and Supplementary Data...............Annual Report(*) 27 - 47 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........Form 10-K 16 PART III - - - - - -------- 3 - 8;9 Item 10 Directors and Executive..........Proxy Statement 9 - 11 Officers of the Registrant Item 11 Executive Compensation ..........Proxy Statement 11-15; 16 Item 12 Security Ownership of Certain Beneficial Owners and Management ..................Proxy Statement 2;3 - 4 Item 13 Certain Relationships and Related Transactions ............Proxy Statement 11 PART IV - - - - - ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............Form 10-K 17 - 21
(*)Financial review section of the Corporation's Annual Report to Shareholders for the year ended December 31, 1993. 2 3 PART I ITEM 1 BUSINESS BANPONCE CORPORATION is a diversified, publicly owned bank holding company (NASDAQ symbol: BPOP), incorporated under the General Corporation Law of Puerto Rico in November 1984. It provides a wide variety of financial services through its principal subsidiaries: Banco Popular de Puerto Rico ("Banco Popular"), Vehicle Equipment Leasing Company, Inc. ("VELCO") and Popular International Bank, Inc. (PIB). BanPonce Corporation is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (the "BHC Act") and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. BANCO POPULAR DE PUERTO RICO is a member of the Federal Reserve System and is also subject to the supervision of the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico and the Superintendent of Banks of the State of New York. Deposits of Banco Popular are insured by the Federal Deposit Insurance Corporation. Banco Popular is the Corporation's full-service commercial banking subsidiary and Puerto Rico's largest banking institution, with $11.5 billion in assets, $8.5 billion in deposits, and a delivery system of 165 branches throughout Puerto Rico, 30 branches in New York City, one in Chicago, one in Los Angeles, 7 branches in the U.S. Virgin Islands and one in the British Virgin Islands. In addition, Banco Popular has two subsidiaries, POPULAR LEASING & RENTAL, INC., Puerto Rico's second largest vehicle leasing and daily rental company, and POPULAR CONSUMER SERVICES, INC., a small-loans company with 26 offices operating under the name of Best Finance. VELCO is a wholly owned subsidiary of BanPonce Corporation engaged in finance leasing and daily rental of motor vehicles to corporations and professionals. It is the leading leasing operation in Puerto Rico. PIB, incorporated under the Puerto Rico International Banking Center Act, owns all issued and outstanding stock of BANPONCE FINANCIAL CORP.("FINANCIAL"), a Delaware Corporation. SPRING FINANCIAL SERVICES, INC., also a Delaware Corporation and a wholly owned subsidiary of Financial, is a diversified consumer finance company engaged in the business of making personal and mortgage loans, and dealer finance through 58 offices located in 14 states. The Corporation took on its present form at the end of 1990 when Banco Popular, with assets of $5.9 billion, acquired the "old" BanPonce Corporation (including its main subsidiary bank, Banco de Ponce), with assets of $3.1 billion (the "Merger"). The name of BanPonce was used for the parent company, while the name of Banco Popular de Puerto Rico was used for the subsidiary bank. While Banco Popular had long been the leading bank in Puerto Rico, its acquisition of "old" BanPonce Corporation at year-end 1990 increased its assets by 50% and widened its market share as the Merger joined the institutions that held the first and third positions in many market segments. 3 4 The Corporation is a legal entity separate and distinct from its subsidiaries. There are various legal limitations governing the extent to which the Corporation's banking subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Corporation or certain of its other subsidiaries. The rights of the Corporation to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise are subject to the prior claims of creditors of that subsidiary, except to the extent that the Corporation may itself be a creditor of that subsidiary and its claims are recognized. Claims on the Corporation's subsidiaries by creditors other than the Corporation include long-term debt and substantial obligations with respect to deposit liabilities, federal funds purchased, securities sold under repurchase agreements and commercial paper, as well as various other liabilities. The Corporation's business is described on pages 25 through 27 and pages 31 through 42 of the Business Review Section of the Annual Report to shareholders for the fiscal year ended December 31, 1993, which information is incorporated herein by reference, and in the following paragraphs. REGULATION AND SUPERVISION 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. 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, including a bank, without the prior approval of the Federal Reserve Board. 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 of, 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. The Commonwealth of 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. 4 5 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 from December 31, 1990 to conform these activities to the requirements of the IBA and to obtain the necessary approvals of Illinois and California 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 Rican banking agencies, including the Federal Reserve Board. Banco Popular is insured by, and therefore subject to the regulations of, the Federal Deposit Insurance Corporation (the "FDIC"), and to the requirements and restrictions under federal, state and Puerto Rican 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 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 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. As a result of the enactment of the Financial Institutions Reform, Recovery and Enforcement Act on August 9, 1989, a depository institution 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 a commonly controlled depository institution in danger of default. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted on December 19, 1991. FDICIA substantially revises the depository institutions regulatory and funding provisions of the Federal Deposit Insurance Act 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 established five capital tiers: "well capitalized", "adequately capitalized," "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". 5 6 A depository institution is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject of any order or written directive to meet and maintain a specific capital level. An "adequately capitalized" depository institution is one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or, in the case of a bank with the highest examination rating, 3%). A depository institution is considered (A) "undercapitalized" if it does not meet any of the above definitions; (B) "significantly undercapitalized" if it has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% and (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized" if it has a ratio of tangible equity to total assets less than or equal to 2%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of the four rating categories. As of the date hereof, Banco Popular is considered "well-capitalized". FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of five percent of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient 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. Under FDICIA, a depository institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rates in its market. Under FDICIA, the FDIC is permitted to provide financial assistance to an insured bank before appointment of a conservator or 6 7 receiver only under limited circumstances. The FDIC's policy is that for such assistance to be provided, existing shareholders and debt holders must make substantial concessions. HOLDING COMPANY STRUCTURE Banco Popular is subject to restrictions under federal law that limit the transfer of funds by Banco Popular to the Corporation and its 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 nonbanking subsidiary of the Corporation are limited in amount to 10% of Banco Popular's capital and surplus and, with respect to the Corporation and all nonbanking subsidiaries, to an aggregate of 20% of Banco Popular's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under Federal Reserve Board policy, a bank holding company 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. Any capital loans by a bank holding company to any of its subsidiary banks are subordinated 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. Because the Corporation is a holding company, its 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 itself is a creditor with recognized claims against the subsidiary. DIVIDEND RESTRICTIONS Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. The principal source of cash flow for the Corporation is dividends from Banco Popular. As a member bank subject to the regulations of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the member bank in any calendar year would exceed the total of its net profits, as defined by the Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to 7 8 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, 1993, Banco Popular could have declared a dividend of approximately $123,794,000 without the approval of the Federal Reserve Board. 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 (which, 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 and the FDIC have issued policy statements that provide that insured bank 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. FDIC INSURANCE ASSESSMENTS Banco Popular is subject to FDIC deposit insurance assessments for the Bank Insurance Fund (the "BIF"). Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less that adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses which, if not corrected, would 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 BIF member institution is assigned an annual FDIC assessment rate varying between 0.23% and 0.31%. It remains possible that assessments may be raised to higher levels in the future. CAPITAL ADEQUACY The information in Table N, "Capital Adequacy Data", on page 19 of the Financial Review Section of the Corporation's Annual Report to shareholders for the year ended December 31, 1993, is incorporated 8 9 herein by reference. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the total capital is to be comprised of stockholders' common equity, retained earnings, non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock less goodwill ("Tier 1 Capital"). The remainder ("Tier 2 Capital") 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. In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" 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. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio applicable to it. Effective for the 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 regulations, however, 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. Banco Popular is subject to similar risk-based and leverage capital requirements adopted by the Federal Reserve Board. As of December 31, 1993, Banco Popular had a tier 1 capital ratio of 11.85%, a total capital ratio of 13.72% and a leverage ratio of 6.96%. 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. Bank regulators continue to indicate their desire to raise capital 9 10 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. The following table reflects the capital position of the Corporation as of December 31, 1993 and December 31, 1992.
December 31, Minimum Regulatory 1993 1992 Requirements - - - - - ------------------------------------------------------------------- Tier 1 Leverage Ratio 6.95% 7.26% 3.00% Risk-Based Capital Ratio(1) Tier 1 12.29% 12.88% 4.00% Total Capital 13.95% 14.85% 8.00%
The table below describes the components of the Corporations' Tier 1 and Tier 2 Capital.
December 31, (in millions) 1993 1992 ------ ------ Tier 1 Capital - - - - - --------------- Stockholders' Equity $845 $763 Less: Goodwill (58) (41) ------ ------ Tier 1 Capital $787 $722 ------ ------ Tier 2 Capital - - - - - --------------- Subordinated Notes $ 25 $ 40 Allowance for Loan Losses 81 71 ------ ------ Tier 2 Capital $106 $111 ------ ------ Total Capital $893 $833 ====== ======
Puerto Rico Regulation As a commercial bank organized under the laws of the Commonwealth of Puerto Rico (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 10 11 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 Board of Governors dated November 24, 1982, the Bank has been exempted from such reserve requirements with respect to deposits payable in Puerto Rico. 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 loans 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. Employees At December 31, 1993, the Corporation employed 7,439 persons. None of its employees are represented by a collective bargaining group. ITEM 2. PROPERTIES As of December 31, 1993, the Bank owned (and wholly or partially occupied) approximately 65 branches and other facilities throughout the Commonwealth, 15 branches in New York, and a branch in Los Angeles. In addition, as of such date, the Bank leased properties for branch operations in approximately 105 locations in Puerto Rico, 15 locations in New York, 7 locations in the U.S Virgin Islands, one location in British Virgin Islands and one location in Chicago . The Corporation's management believes that each of its facilities is well-maintained and suitable for its purpose. The principal properties owned by the Bank for banking operations and other services are described below: Popular Center, the metropolitan area headquarters building, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story 11 12 office building. Approximately 60% of the office space is leased to outside tenants. Hato Rey Center, a 23 story office structure located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. The office space is mostly rented to outside tenants. Cupey Center Complex, two buildings of three and two stories, respectively, located at Cupey, Rio Piedras, Puerto Rico. The computer center, operational and support services, and a recreational and training center for employees are some of the main activities conducted at these facilities. Stop 22 - Santurce building, a twelve story structure located in Santurce, Puerto Rico. A branch, the accounting department, the human resources division, the auditing department and the international division are the main activities conducted at this facility. San Juan building, a twelve story structure located at Old San Juan, Puerto Rico. The Bank occupies 50% of the basement, the entire ground floor, the mezzanine and the 10th floor. Most of the rest of the building is rented to outside tenants. Mortgage Loan Center, a seven story building located at 153 Ponce de Leon Avenue, Hato Rey, Puerto Rico, is fully occupied by the mortgage loans and mortgage servicing departments. Los Angeles building, a nine story structure located at 354 South Spring Street, Los Angeles, California in which office space is mostly rented to outside tenants. New York building, a nine story structure with two underground levels located at 7 West 51th Street, New York City, where approximately 54% of the office space is used for banking operations. The remaining space is rented or available for rent to outside tenants. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management is of the opinion that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect in the financial position of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained under Table 0, "Stock Performance", on page 20, and under the captions "Common Stock" and "Dividends", on page 19 of the Financial Review Section of the Corporation's Annual Report to shareholders for the year ended December 31, 1993, is incorporated herein by reference. Information concerning legal or regulatory restrictions on the payment of dividends by the Corporation and the Bank is contained under the caption "Regulation and Supervision" in Item 1 herein. In addition, the information contained in Notes 13 and 14 to the Consolidated Financial Statements describing various contractual restrictions on the payments of dividends by the Corporation and the Bank is incorporated herein by reference. The Corporation currently has outstanding Senior Notes due January 14, 1997 in the aggregate principal amount of $30,000,000 (the "1997 Senior Notes"). The 1997 Senior Notes contain various covenants, which, among others, restrict the payment of dividends. The 1997 Senior Notes prohibit the Corporation from paying dividends or making any other distributions with respect to the Corporation's Common Stock if such aggregate distribution exceeds $50,000,000 plus 50% of consolidated net income (or minus 100% of consolidated net loss), computed on a cumulative basis from January 1, 1992 to the date of payment of any such dividends or other distributions or if an event of default has occurred and is continuing. Banco Popular has outstanding $12,000,000 in subordinated notes due in June 28, 1996 (the "1996 Subordinated Notes") which contain certain restrictive covenants, including restrictions on the ability of Banco Popular to pay dividends to the Corporation. Pursuant to the covenants contained in the 1996 Subordinated Notes, Banco Popular may not pay dividends or other distribution on its common stock unless the sum of (i) 100% of its capital stock, (ii) its unimpaired reserve fund, and (iii) its undivided profits equals or exceeds the sum of (x) $80,000,000 and (y) the cumulative amount of all cash dividends or other distributions declared or paid after June 30, 1989. As of December 31, 1993, the sum of (i) the capital stock of Banco Popular, (ii) its unimpaired reserve fund, and (iii) its undivided profits was $759,260,753. Dividends and other distributions made with respect to the common stock since June 30, 1989 amounted to $82,937,419 for purposes of the 1996 Subordinated Notes. In addition, the 1996 Subordinated Notes provide that Banco Popular may not pay any dividend or other distributions on its common 13 14 stock except out of undivided profits and only if, after giving effect to such distribution, the following conditions are satisfied: (i) funded debt (as defined in the agreements governing the 1996 Subordinated Notes) of Banco Popular would not exceed the sum of (a) 100% of its capital stock and (b) 50% of its reserve fund; (ii) undivided profits of Banco Popular would not be less than $1,000,000; (iii) certain amounts are transferred as required for redemption of the Subordinated Notes at maturity; and (iv) certain amounts are transferred as required for the redemption of other funded debt at maturity. As of December 31, 1993, funded debt of Banco Popular was approximately $91.5 million, and the sum of 100% of its capital stock and 50% of its reserve fund is $264,233,274. As of March 11, 1994, the Corporation had 5,306 stockholders of record, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Corporation's Common Stock on such date, as quoted on the National Association of Securities Dealers Automated Quotation National Market System, was $31.875 per share. The Puerto Rico Income Tax Act of 1954, as amended, generally imposes a withholding tax on the amount of any dividends paid by corporations to individuals, whether residents of Puerto Rico or not, trusts, estates and special partnerships at a special 20% withholding tax rate. The rate of withholding is 25% if the recipient is a foreign corporation or partnership not engaged in trade or business within Puerto Rico. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the special 20% tax will not be withheld from such year's distributions. United States citizens who are non-residents of Puerto Rico may also make such an election, and will not be subject to Puerto Rico tax on dividends, if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married. U.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends. ITEM 6. SELECTED FINANCIAL DATA The information in Table C, "Selected Financial Data", for only the years 1993, 1992, 1991, 1990 and 1989, on pages 4 and 5 and the text under the caption "Earnings Analysis", on pages 3 and 6 of the Financial Review Section of the Annual Report to shareholders, is incorporated herein by reference, and in the following paragraphs. 14 15 The Corporation's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:
Year ended December 31, ----------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Excluding Interest on Deposits 3.0 2.9 2.1 3.6 2.4 Including Interest on Deposits 1.5 1.3 1.2 1.3 1.2
For purposes of computing these consolidated ratios, earnings represent income before income taxes, 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. The Corporation's long term senior debt and preferred stock on a consolidated basis for each of the last five years ended December 31, is as follows:
Year ended December 31, ----------------------- (In thousands) 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Long term obligation (excludes deposits) $283,855 $120,062 $103,752 $38,018 $2,245 Cumulative perpetual preferred stock of subsidiary bank $ 11,000 $ 11,000 $ 11,000 $11,000 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", on pages 2 through 26 of the Financial Review Section of the Annual Report to shareholders, is incorporated herein by reference. Table K, "Maturity Distribution of Earning Assets", on page 16 of the Financial Review Section of the Annual Report to shareholders, has been prepared on the basis of contractual maturities. The Corporation does not have a policy with respect to rolling over maturing loans but rolls over loans only on a case-by-case basis after review of such loans in accordance with the Corporation's lending criteria. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of the independent accountants, the Consolidated Financial Statements of the Corporation and its subsidiaries, together with the notes, on pages 27 through 47 of the Financial Review Section of the Annual Report to shareholders, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the captions "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation", and "Board of Directors and Committees" on pages 3 through 8 and "Nominees for Election as Directors" on page 9 of the Corporation's definitive proxy statement filed with the Securities and Exchange Commission on March 18, 1994 (the "Proxy Statement"), and under the caption "Executive Officers", on pages 9 through 11 of the Proxy Statement, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation Program", on pages 11 through 15 and under the caption "BanPonce Corporation Performance Graph" on page 16 of the Proxy Statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders", on page 2 and under "Shares Beneficially Owned by Directors, Nominees and Officers of the Corporation", on pages 3 and 4 of the Proxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other relationships and transactions", on page 11 of the Proxy Statement, is incorporated herein by reference. 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A.1 The following financial statements and reports included on pages 27 through 47 of the financial review section of the Corporation's Annual Report to Shareholders, have been incorporated herein by reference: Report of Independent Auditors. Consolidated Statements of Condition as of December 31, 1993 and 1992. Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1993. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1993. Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1993. Notes to Consolidated Financial Statements. A.2 Financial Statement Schedules: No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements described in A.1 above or in the notes thereto. A.3 Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Restated certificate of Incorporation and By-Laws of BanPonce Corporation (1) 4.1 Form of certificate for common stock (1a) 4.2 Certificates of Resolution of the Board of Directors of BanPonce Corporation dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between BanPonce Corporation and
17 18 Manufacturers Hanover Trust Company regarding the issuance of certain Rights to the Corporation's shareholders. (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture, dated as of October 1, 1991, among BanPonce Financial Corp., BanPonce Corporation and Citibank, N.A. relating to the debt securities of BanPonce Financial guaranteed by BanPonce Corporation. (2a) 4.5 Form of medium-term fixed rate note of BanPonce Financial Corp. guaranteed by BanPonce Corporation. (2b) 4.6 Form of medium-term floating rate note of BanPonce Financial Corp. guaranteed by BanPonce Corporation. (2c) 10.1 Certificate of Designation dated June 7, 1984 for Treasury Indexed Preferred Stock of Banco Popular de Puerto Rico. ("Banco Popular"), as successor of Banco de Ponce. (4) 10.2 Form of 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (5) 10.3 Senior Note Agreement dated as of January 15, 1992, between BanPonce Corporation and New York Life Insurance Company regarding the issuance by BanPonce Corporation of $30,000,000 Senior Notes due January 15, 1997. (12) 10.3.1 Amended and Restated Senior Notes Agreement dated June 11, 1993 by and among BanPonce Corporation, New York Life Insurance Company and New York Life Insurance Company and Annuity Company. 10.4 Reimbursement Agreement dated October 24, 1989 between BanPonce Corporation and Barclays Bank PLC; Underwriting Agreement dated October 20, 1989 by and between Vehicle Equipment Leasing Company Inc., BanPonce Corporation and the First Boston Corporation. (6) 10.5 Note Purchase Agreement dated June 28, 1989 relating to $12,000,000 principal amount of Capital Notes of Banco de Ponce; Letter of Credit and Reimbursement Agreement dated June 28, 1989 between Banco de Ponce and The Bank of Nova Scotia; Issuing Bank Fee Agreement dated June 28, 1989. (7) 10.6 Amended and Restated Agreement and Plan of Merger dated as of January 10, 1990 by and among BanPonce Corporation, Banco de Ponce, Banco Popular de P.R. and the Interim Corporation. (8) 10.7 Note Purchase Agreement dated March 15, 1989 for $50,000,000 of senior subordinated
18 19 Capital Notes, maturing on June 15, 1996 by and between Banco Popular de Puerto Rico and Chase Manhattan Capital Markets Corporation of Puerto Rico. (9) 10.8 Management Incentive Plan for certain Division Supervisors approved in January 1987. 10.9 Letter of Credit and Reimbursement Agreement dated November 22, 1991 between BanPonce Corporation and Barclays Bank PLC relating to Velco 1991-A Grantor Trust, Assets Backed Certificates; Underwriting Agreement dated November 21, 1991 by and between Vehicle Equipment Leasing Company, Inc., BanPonce Corporation and the First Boston Corporation. (11) 10.10 Revolving loan agreement executed by and between Vehicle Equipment Leasing and BanPonce Corporation as of January 15, 1992 in the aggregate principal amount of $30,000,000. (13) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merril Lynch, Pierce, Ferrer & Smith Incorporated, acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (14) 10.12 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing, Company, Inc. ("The Companies") and Citibank, N.A. for borrowing up to the principal amount of $35,000,000 dated as of May 22, 1992; Credit Agreement by and between the Companies and Barclays Bank PLC, acting through its Miami Agency for borrowings up to the principal amount $25,000,000 dated as of May 19, 1992; Credit Agreement by and between the Companies and The First National Bank of Chicago, acting individually and as agent, for borrowings up to the aggregate amount of $40,000,000 dated as of May 1, 1992. (15) 10.12.1 First and Second Amendments to Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing,Company,Inc. ("The Companies") and Citibank,N.A. for borrowings up to the principal amount of $50,000,000 dated as of April 8,
19 20 1993 and May 21, 1993, respectively. First and Second Amendments to Credit Agreement by and between the Companies and Barclays Bank PLC, acting through its Miami Agency for borrowings up to the principal amount of $45,000,000 both dated as of April 2, 1993. First and Second Amendments to Credit Agreement by and between the companies and the First National Bank of Chicago, acting individually and as agent, for borrowings up to $60,000,000 dated April 1, 1993 and June 1, 1993 respectively. 10.12.2 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing,Company,Inc. and Chemical Bank for borrowings up to the principal amount of $25,000,000 dated as of April 1, 1993 as amended on June 1, 1993. 12.0 Computation of ratio of earnings to fixed charges. 13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1993. 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 99.1 Registrant's Proxy Statement for the April 22, 1994 Annual Meeting of Stockholders
B. No report on Form 8-K was filed for the year ended December 31, 1993. (1) Incorporated by reference to Exhibit 4.1 of Registration Statement No. 33-39028. (1a)Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. 20 21 (5) Incorporated by reference to Exhibit 10.3 of the 1991 Form 10-K. (6) Incorporated by reference to Exhibit 10.8 of the 1991 Form 10-K. (7) Incorporated by reference to Exhibit 10.9 of the 1991 Form 10-K. (8) Incorporated by reference to Exhibit 10.10 of the 1991 Form 10-K. (9) Incorporated by reference to Exhibit 10.12 of the 1991 Form 10-K. (10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (11) Incorporated by reference to Exhibit 10.14 of the 1991 Form 10-K. (12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K. (14) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (15) Incorporated by reference to Exhibit 10.15 of the 1992 Form 10-K. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANPONCE CORPORATION (Registrant) By: /s/ Richard L. Carrion -------------------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ David H. Chafey, Jr. -------------------------------- David H. Chafey, Jr. Executive Vice President (Principal Executive Officer) By: /s/ Orlando Berges -------------------------------- Orlando Berges Treasurer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Titles Dates ---------- ------ ----- /s/ Richard L. Carrion Chairman of the Board, - - - - - -------------------------------- President and Chief Richard L. Carrion Executive Officer 3-10-94 -------- /s/ Alfonso F. Ballester Vice Chairman of - - - - - -------------------------------- the Board 3-10-94 Alfonso F. Ballester -------- /s/ Manuel L. Del Valle Vice Chairman of - - - - - -------------------------------- the Board 3-10-94 Manuel L. Del Valle -------- /s/ Antonio Luis Ferre Vice Chairman of - - - - - --------------------------------- the Board 3-10-94 Antonio Luis Ferre --------
22 23 /s/Juan J. Bermudez - - - - - ---------------------------------- Juan J. Bermudez Director 3-10-94 -------- /s/Sila M. Calderon - - - - - ---------------------------------- Sila M. Calderon Director 3-10-94 -------- /s/Francisco J. Carreras - - - - - ---------------------------------- Francisco J. Carreras Director 3-10-94 -------- /s/Waldemar Del Valle - - - - - ---------------------------------- Waldemar Del Valle Director 3-10-94 -------- /s/Luis E. Dubon, Jr. - - - - - ---------------------------------- Luis E. Dubon, Jr. Director 3-10-94 -------- /s/Roberto W. Esteves - - - - - ---------------------------------- Roberto W. Esteves Director 3-10-94 -------- /s/Hector R. Gonzalez - - - - - ---------------------------------- Hector R. Gonzalez Director 3-10-94 -------- /s/Franklin A. Mathias - - - - - ---------------------------------- Franklin A. Mathias Director 3-10-94 -------- /s/Hugh G. McComas - - - - - ---------------------------------- Hugh G. McComas Director 3-10-94 -------- /s/Manuel Morales, Jr. - - - - - ---------------------------------- Manuel Morales, Jr. Director 3-10-94 -------- /s/Alberto M. Paracchini - - - - - ---------------------------------- Alberto M. Paracchini Director 3-10-94 -------- - - - - - ---------------------------------- Francisco Perez, Jr. Director -------- /s/Francisco M. Rexach, Jr. - - - - - ---------------------------------- Francisco M. Rexach, Jr. Director 3-10-94 --------
23 24 /s/Felix J. Serralles, Jr. - - - - - ---------------------------------- Felix J. Serralles, Jr. Director 3-10-94 -------- /s/Emilio Jose Venegas - - - - - ----------------------------------- Emilio Jose Venegas Director 3-10-94 -------- /s/Julio E. Vizcarrondo, Jr. - - - - - ----------------------------------- Julio E. Vizcarrondo, Jr. Director 3-10-94 --------
24 25 EXHIBIT INDEX Exhibit No. DESCRIPTION 3.1 Restated certificate of Incorporation and By-Laws of BanPonce Corporation (1) 4.1 Form of certificate for common stock (1a) 4.2 Certificates of Resolution of the Board of Directors of BanPonce Corporation dated August 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series A Participating Cumulative Preferred Stock Purchase rights and the designation and amount of such series, the voting power preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof. Rights Agreement dated as of August 11, 1988 by and between BanPonce Corporation and Manufacturers Hanover Trust Company regarding the issuance of certain Rights to the Corporation's shareholders. (2) 4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3) 4.4 Indenture, dated as of October 1, 1991, among BanPonce Financial Corp., BanPonce Corporation and Citibank, N.A. relating to the debt securities of BanPonce Financial guaranteed by BanPonce Corporation. (2a) 4.5 Form of medium-term fixed rate note of BanPonce Financial Corp. guaranteed by BanPonce Corporation. (2b) 4.6 Form of medium-term floating rate note of BanPonce Financial Corp. guaranteed by BanPonce Corporation. (2c) 10.1 Certificate of Designation dated June 7, 1984 for Treasury Indexed Preferred Stock of Banco Popular de Puerto Rico. ("Banco Popular"), as successor of Banco de Ponce. (4) 10.2 Form of 8-A Filing filed in connection with the Series A Participating Cumulative Preferred Stock Purchase Rights. (5) 10.3 Senior Note Agreement dated as of January 15, 1992, between BanPonce Corporation and New York Life Insurance Company regarding the issuance by BanPonce Corporation of $30,000,000 Senior Notes due January 15, 1997. (12) 10.3.1 Amended and Restated Senior Notes Agreement dated June 11, 1993 by and among BanPonce Corporation, New York Life Insurance Company and New York Life
25 26 Insurance Company and Annuity Company. 10.4 Reimbursement Agreement dated October 24, 1989 between BanPonce Corporation and Barclays Bank PLC; Underwriting Agreement dated October 20, 1989 by and between Vehicle Equipment Leasing Company Inc., BanPonce Corporation and the First Boston Corporation. (6) 10.5 Note Purchase Agreement dated June 28, 1989 relating to $12,000,000 principal amount of Capital Notes of Banco de Ponce; Letter of Credit and Reimbursement Agreement dated June 28, 1989 between Banco de Ponce and The Bank of Nova Scotia; Issuing Bank Fee Agreement dated June 28, 1989. (7) 10.6 Amended and Restated Agreement and Plan of Merger dated as of January 10, 1990 by and among BanPonce Corporation, Banco de Ponce, Banco Popular de P.R. and the Interim Corporation. (8) 10.7 Note Purchase Agreement dated March 15, 1989 for $50,000,000 of senior subordinated Capital Notes, maturing on June 15, 1996 by and between Banco Popular de Puerto Rico and Chase Manhattan Capital Markets Corporation of Puerto Rico. (9) 10.8 Management Incentive Plan for certain Division Supervisors approved in January 1987. (10) 10.9 Letter of Credit and Reimbursement Agreement dated November 22, 1991 between BanPonce Corporation and Barclays Bank PLC relating to Velco 1991-A Grantor Trust, Assets Backed Certificates; Underwriting Agreement dated November 21, 1991 by and between Vehicle Equipment Leasing Company, Inc., BanPonce Corporation and the First Boston Corporation. (11) 10.10 Revolving loan agreement executed by and between Vehicle Equipment Leasing and BanPonce Corporation as of January 15, 1992 in the aggregate principal amount of $30,000,000. (13) 10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through Certificates, Class A, offering memorandum dated June 25, 1992. Underwriting Agreement by and between Merrill Lynch, Pierce, Ferrer & Smith Incorporated, acting through its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco Popular
26 27 de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central as Trustee dated June 25, 1992. (14) 10.12 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing, Company, Inc. ("The Companies") and Citibank, N.A. for borrowing up to the principal amount of $35,000,000 dated as of May 22, 1992; Credit Agreement by and between the Companies and Barclays Bank PLC, acting through its Miami Agency for borrowings up to the principal amount $25,000,000 dated as of May 19, 1992; Credit Agreement by and between the Companies and The First National Bank of Chicago, acting individually and as agent, for borrowings up to the aggregate amount of $40,000,000 dated as of May 1, 1992. (15) 10.12.1 First and Second Amendments to Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing,Company,Inc. ("The Companies") and Citibank,N.A. for borrowings up to the principal amount of $50,000,000 dated as of April 8, 1993 and May 21, 1993, respectively. First and Second Amendments to Credit Agreement by and between the Companies and Barclays Bank PLC, acting through its Miami Agency for borrowings up to the principal amount of $45,000,000 both dated as of April 2, 1993. First and Second Amendments to Credit Agreement by and between the companies and the First National Bank of Chicago, acting individually and as agent, for borrowings up to $60,000,000 dated April 1, 1993 and June 1, 1993 respectively. 10.12.2 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing,Company,Inc. and Chemical Bank for borrowings up to the principal amount of $25,000,000 dated as of April 1, 1993 as amended on June 1, 1993. 12.0 Computation of ratio of earnings to fixed charges. 13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1993. 21.1 Schedule of Subsidiaries 23.1 Consent of Independent Auditors 99.1 Registrant's Proxy Statement for the April 22, 1994 Annual Meeting of Stockholders - - - - - --------------------
(1) Incorporated by reference to Exhibit 4.1 of Registration Statement No. 33-39028. (1a)Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 Form 10-K"). 27 28 (2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028. (2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686. (2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991. (2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991. (3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028. (4) Incorporated by reference to Exhibit number 10.2 of Registration Statement No. 33-00497. (5) Incorporated by reference to Exhibit 10.3 of the 1991 Form 10-K. (6) Incorporated by reference to Exhibit 10.8 of the 1991 Form 10-K. (7) Incorporated by reference to Exhibit 10.9 of the 1991 Form 10-K. (8) Incorporated by reference to Exhibit 10.10 of the 1991 Form 10-K. (9) Incorporated by reference to Exhibit 10.12 of the 1991 Form 10-K. (10) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K. (11) Incorporated by reference to Exhibit 10.14 of the 1991 Form 10-K. (12) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K. (13) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K. (14) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K. (15) Incorporated by reference to Exhibit 10.15 of the 1992 Form 10-K. 28 EX-10.3.1 2 BANPONCE AMENDED & RESTATED SR. NOTES 1 10.3.1 BANPONCE CORPORATION Banco de Ponce Building 268 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 June 11, 1993 New York Life Insurance Company and Annuity Company 51 Madison Avenue New York, New York 10010 Gentlemen: With reference to the Note Agreement, dated as of January 15, 1992 (the "Note Agreement"), between you and BanPonce Corporation, a corporation organized under the laws of the Commonwealth of Puerto Rico (the "Company"), relating to $15,000,000 aggregate principal amount of the Company's 8.25% Senior Notes Due January 15, 1997, the Company agrees with you that Section 5.4(a)(3) of the Note Agreement be, and hereby is, amended and restated in its entirety as follows: "(3) (i) unsecured Funded Debt of the Company, (ii) unsecured Funded Debt consisting of debt securities issued by BanPonce Financial Corp., a Restricted Subsidiary ("Financial"), and guarantied by the Company having an aggregate initial offering price of up to $250,000,000 issued pursuant to the Registration Statement (No. 33- 41686) on Form S-3, filed by the Company and Financial with the Securities and Exchange Commission, as such may be amended from time to time in accordance with the Rules of such Commission, as such may be amended from time to time in accordance with the Rules of such Commission, (iii) unsecured Funded Debt consisting of debt securities issued either by Financial or by Popular International Bank, Inc., a Restricted Subsidiary ("PIB"), and guarantied by the Company, having an aggregate initial offering price of up to $400,000,000 issued pursuant to the Registration Statement (No. 33-57038) on Form S-3, filed by the Company, PIB and Financial with the Securities and Exchange Commission, as such may be amended from time to time in accordance with the Rules of such Commission, and (iv) Funded Debt of the Company and its Restricted Subsidiaries secured by liens permitted by Section 5.5(i), provided 2 that at the time of issuance of any Indebtedness referred to in clauses (i), (ii), (iii) or (iv) and after giving effect thereto and to the application of the proceeds thereof, Consolidated Funded Debt shall not exceed 50% of Consolidated Total Capitalization; and" The execution hereof by you shall constitute a contract between us, and this amendment agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. Except as specifically provided hereinabove, the terms and provisions of the Note Agreement and the Notes have not been amended, waived or modified. From and after the date hereof, any references in the Note Agreement to "the Agreement," "this Agreement", "hereunder," or "hereof" or similar references shall be deemed to include the foregoing amendment of Section 5.4 (a)(3). This amendment agreement shall be governed by and construed in accordance with the laws of the State of New York. BANPONCE CORPORATION By: Its: Accepted as of the date first above written. NEW YORK LIFE INSURANCE AND ANNUITY COMPANY By: Its: 3 EXHIBIT 10.3.1 BANPONCE CORPORATION Banco de Ponce Building 268 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 June 11, 1993 New York Life Insurance Company 51 Madison Avenue New York, New York 10010 Gentlemen: With reference to the Note Agreement, dated as of January 15, 1992 (the "Note Agreement"), between you and BanPonce Corporation, a corporation organized under the laws of the Commonwealth of Puerto Rico (the "Company"), relating to $15,000,000 aggregate principal amount of the Company's 8.25% Senior Notes Due January 15, 1997, the Company agrees with you that sec.5.4(a) (3) of the Note Agreement be, and hereby is, amended and restated in its entirety as follows: "(3) (i) unsecured Funded Debt of the Company, (ii) unsecured Funded Debt consisting of debt securities issued by BanPonce Financial Corp., a Restricted Subsidiary ("Financial"), and guarantied by the Company having an aggregate initial offering price of up to $250,000,000 issued pursuant to the Registration Statement (No. 33-41686) on Form S-3, filed by the Company and Financial with the Securities and Exchange Commission, as such may be amended from time to time in accordance with the Rules of such Commission, as such may be amended from time to time in accordance with the Rules of such Commission, (iii) unsecured Funded Debt consisting of debt securities issued either by Financial or by Popular International Bank, Inc., a Restricted Subsidiary ("PIB"), and guarantied by the Company, having an aggregate initial offering price of up to $400,000,000 issued pursuant to the Registration Statement (No. 33-57038) on Form S-3, filed by the Company, PIB and Financial with the Securities and Exchange Commission, as such may be amended from time to time in accordance with the Rules of such Commission, and (iv) Funded Debt of the Company and its Restricted Subsidiares secured by liens permitted by sec.5.5(i), provided that at the time of issuance of any Indebtedness referred to 4 in clauses (i), (ii), (iii) or (iv) and after giving effect thereto and to the application of the proceeds thereof, Consolidated Funded Debt shall not exceed 50% of Consolidated Total Capitalization; and" The execution hereof by you shall constitute a contract between us, and this amendment agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. Except as specifically provided hereinabove, the terms and provisions of the Note Agreement and the Notes have not been amended, waived or modified. From and after the date hereof, any references in the Note Agreement to "the Agreement," "this Agreement", "hereunder," or "hereof" or similar references shall be deemed to include the foregoing amendment of sec.5.4(a)(3). This amendment agreement shall be governed by and construed in accordance with the laws of the State of New York. BANPONCE CORPORATION By: Its: Accepted as of the date first above written. NEW YORK LIFE INSURANCE COMPANY By: Its: EX-10.12.1 3 BANPONCE 1ST AMEND TO CREDIT AGREEMENT 1 EXHIBIT 10.12.1 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (the "Amendment"), dated as of the 2nd day of April, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), Barclays Bank PLC, acting through its Miami Agency (the "Lender") and is to that certain Credit Agreement dated as of May 19, 1992 the ("Credit Agreement") among the Companies and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies and the Lender have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. Subject to the conditions precedent described in Section 2 hereby agrees as follows: 1.1 Section 1 of the Credit Agreement is hereby amended to and to delete the date "May 18, 1992" in the third line thereof and to replace therefor "April 1, 1994" and to delete the number "$25,000,000" in the sixth line thereof and to replace therefor the number "$45,000,000". 1.2 Section 3.4 of the Credit Agreement is hereby amended to delete the fraction "3/8 of 1%" and to substitute it for "7/20 of 1% (.35%)". This change is effective as of April 2, 1993, as provided in Section 4 of this Amendment. 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 2 Insofar as each representation and warranty set forth in the Credit Agreement specifically refers to December 31, 1991, the Companies hereby represent and warrant to the Lender that each such representation and warranty is equally true and correct as of December 31, 1992. 2.2 Each of the Companies hereby represent that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Credit Agreement as amended hereby amended, all of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any of the Lenders of the Agent, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Conditions Precedent. This Amendment shall be deemed effective as of April 2nd, 1993 (the "Amendment Closing Date") upon the satisfaction of the following conditions precedent: (a) The Lender shall have received the following documents in form and substance satisfactory to the Lender and its legal counsel: (i) Certified copies of: (A) all necessary legal authorizations required for the Companies to enter into this Amendment and to perform in full its obligations hereunder; (B) articles of incorporation and by-laws of the Corporation; and (C) evidence of the authority of each Person authorized to execute this Amendment and any other documents to be executed and delivered in behalf of the Companies in connection with this Amendment. (ii) A written opinion of Brunilda Santos de Alvarez, legal counsel to each of the Companies, addressed to the Lender in form and substantially similar to Exhibit 1; (iii) certified copies of any government authorizations, consents, approvals and licenses as may be required under any applicable law and regulations for the Companies to make and perform its obligations pursuant to this Amendment, if any; (iv) two (2) duly executed copies of this Amendment, in form and substance satisfactory to the Bank and its legal counsel; and 3 (v) a Note in the form of Exhibit 2 hereto made by the Companies in favor of the Lender in the principal amount of $45,000,000; (vi) the Guarantor's written ratification of the Guaranty in the form of Exhibit 3 hereto; and (vii) such other documents and certificates as the Bank or its legal counsel may reasonably request. 5. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. BANPONCE CORPORATION By: ________________________________ Title: Senior Vice President By: ________________________________ Title: Chairman of the Board BANPONCE FINANCIAL CORPORATION By: ________________________________ Title: Senior Vice President VEHICLE EQUIPMENT LEASING COMPANY, INC. By: ________________________________ Title: Chairman of the Board BARCLAYS BANK, PLC, ACTING THROUGH ITS MIAMI AGENCY By: ________________________________ Title: _____________________________ 4 EXHIBIT 1 April 12, 1993 Barclays Bank PLC (acting through its Miami Agency) 801 Brichell Avenue Miami, Florida 33131 Gentlemen: We are counsel for BanPonce Corporation ("BanPonce"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, BanPonce Financial Corp. ("BPFC"), a corporation organized and existing under the laws of the State of Delaware and Vehicle Equipment Leasing Company, Inc. ("VELCO"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, (the "Companies") and have represented the Companies in connection with its execution and delivery of the First Amendment (the "Amendment") dated as of April 2, 1993, providing for Loans in an aggregate principal amount not exceeding $45,000,000 at any one time outstanding and a Note and Ratification of Guaranty (the "Related Documents") to a certain Credit Agreement (the "Agreement") executed by and between the Companies and Barclays Bank PLC, (acting through its Miami Agency) (the "Lender"), dated as of May 19, 1992. All capitalized terms used in this opinion shall have the meanings attributed to them in the Agreement. We have examined the Companies' articles of incorporation, by-laws, resolutions, the Agreement and such other matters of fact and law which we deemed necessary in order to render this opinion. Based upon the foregoing, it is our opinion that: 1. The Companies are corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and have all requisite authority to conduct their business in each jurisdiction in which their business is conducted. 2. The execution and delivery of the Amendment and the Related Documents by BanPonce and BPFC and the performance by the said entities of their respective obligations have been duly authorized by all necessary corporate action and proceedings on the part of BanPonce and BPFC and will not: (a) require any consent of the Companies shareholders; (b) violate any applicable law, rule, regulation, order, writ, judgment, injunction, decree or award binding on BanPonce and BPFC or any subsidiary or the BanPonce and BPFC or any Subsidiary's article or incorporation of by-laws or any indenture, instrument or agreement binding upon BanPonce and BPFC or any Subsidiary; or 5 -2- (c) result in, or require, the creation or imposition of any lien pursuant to the provisions of any indenture, instrument or agreement binding upon BanPonce and BPFC or any Subsidiary. 3. The Amendment and Related Documents have been duly executed and delivered by BanPonce and BPFC and constitute the legal, valid and binding obligation of BanPonce and BPFC enforceable in accordance with their terms except to the extent the enforcement thereof may be limited by bankruptcy, insolvency, fraudulent transfer moratorium and similar laws of general applicability relating to or affecting the enforcement of creditors' rights and subject also to the availability of equitable remedies if equitable remedies are sought. 4. There is no litigation or proceeding against the Companies or any Subsidiary which, if adversely determined, would materially adversely affect the business or condition of the Companies or any Subsidiary. 5. No approval, authorization, consent adjudication or order of any governmental authority, which has not been obtained by the Companies or any Subsidiary, is required to be obtained by the Companies or any Subsidiary in connection with the execution and delivery of the Amendment or the Related Documents, the borrowings under the Amendment or in connection with the performance by the Companies of their respective Obligation(s) under the Amendment and Related Documents. VELCO has informed the Lender that it intends to submit for consideration and approval at the next meeting of the Board of Directors scheduled to be held on April 30th, 1993 a resolution approving the borrowings contemplated in the Amendment and Related Documents at which time the undersigned shall deliver an opinion as to matters covered in paragraph 2 and 3 of this opinion with regards to VELCO. The foregoing opinion is limited to the Federal laws of the United States and the laws of the Commonwealth of Puerto Rico and Delaware's corporate law with regards to the incorporation and existence of BanPonce Financial Corp. and I am expressing no opinion as to the effect of the laws of any other jurisdiction. Very truly yours, ______________________________ Brunilda Santos de Alvarez Legal Counsel 6 EXHIBIT 2 FORM OF NOTE $45,000,000 April 2, 1993 BanPonce Corporation, a Puerto Rico corporation, BanPonce Financial Corp., a Delaware corporation, and Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation (the "Companies"), promises to pay to the order of Barclays Bank PLC (acting through its Miami Agency) (the "Lender") the principal sum of US$45,000,000 or the aggregate unpaid principal amount of all Loans made by the Bank to the Company Pursuant to Section 1 of the Credit Agreement dated as of May 19, 1992, as amended, among the companies and Barclays Bank PLC, acting through its Miami Agency (the "Agreement"), whichever is less, in immediately available funds at the Miami Agency of the Lender, together with interest on the unpaid principal amount hereof. Interest and principal shall be payable at the rates and on the dates set forth in the Agreement free and clear of any set off, counterclaim, deduction or withholding for any reason whatsoever. The Company shall pay each Loan in full in accordance with the terms and provisions of the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment. This Note is issued pursuant to the provisions of the Agreement, to which Agreement, as it may be amended from time to time, reference is hereby made for the definitions of capitalized terms used herein which are not otherwise defined and for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. This Note is in substitution for, and represents a continuation of, the indebtedness incurred under a prior Note issued pursuant to the Agreement. Presentment, demand, protest and notice, other than as provided in Section 9.1 of the Agreement, are hereby waived. This Note is governed by the laws of the State of Florida. This Note was executed and delivered in San Juan, Puerto Rico. BANPONCE CORPORATION By: ________________________________ Title: Senior Vice President By: _________________________________ Title: Chairman of the Board 7 BANPONCE FINANCIAL CORP. By: _________________________________ Title: Senior Vice President VEHICLE EQUIPMENT LEASING COMPANY, INC. By: _________________________________ Title: Chairman of the Board 8 EXHIBIT 3 FORM OF GUARANTY RATIFICATION Barclays Bank PLC 801 Brickell Avenue Miami, Florida 33131 Re: Guaranty of BanPonce Corporation dated as of May 19, 1992 Dear Sirs: Reference is hereby made to that certain Guaranty dated as of May 19, 1992 (the "Guaranty") made and delivered by BanPonce Corporation, a Puerto Rico corporation ("BanPonce") to the Lender (as defined in the Guaranty). Capitalized terms used herein not otherwise defined shall have the meanings given to such terms in the Guaranty. Pursuant to the Guaranty, BanPonce guaranteed the obligations of BanPonce Financial Corp., a Delaware Corporation ("Financial") and/or Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO") arising under the Credit Agreement. BanPonce, Financial and VELCO have requested the Lenders to increase their Commitment (as defined in the Credit Agreement) pursuant to that certain First Amendment to Credit Agreement dated as of April 2, 1993 (the "Amendment") among BanPonce, Financial, VELCO, and the Lender. The Lender has agreed to do so provided BanPonce ratifies that such increase in their Commitment evidenced by the Amendment is guaranteed by BanPonce pursuant to the Guaranty. Thus, BanPonce hereby ratifies that the Guaranty remains in full force and effect with respect to the Credit Agreement as amended by the Amendment and that all terms, covenants and conditions of the Guaranty shall remain in full force and effect with respect to the Credit Agreement as amended by the Amendment. Without limiting the foregoing, the maximum aggregate principal amount extended under the Credit Agreement for which the undersigned shall be liable under the Guaranty is hereby increased to US$45,000,000. The execution, delivery and acceptance of this letter shall not act as a waiver of any right, power or remedy of the Lender, nor constitutes a waiver of any provision of the Guaranty, or any other documents, instruments and agreements executed and/or delivered in connection therewith. BANPONCE CORPORATION By: _________________________________ Name: Jose Luis Lopez Calderon Title: Senior Vice President By: _________________________________ Name: Alberto M. Paracchini Title: Chairman of the Board 9 EXHIBIT 10.12.1 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (the "Amendment"), dated as of the 2nd day of April, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), Barclays Bank PLC acting through its Miami Agency (the "Lender"), and is to a certain Credit Agreement dated May 19, 1992 as amended by First Amendment to Credit Agreement dated as of April 2, 1993 (the "Credit Agreement") among the Companies and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies and the Lender have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. 1.1 Section 2 of the Credit Agreement is hereby amended to include at the end of the tenth line of the definition of "Indebtedness" the following language "excluding liabilities of Banco Popular de Puerto Rico which are defined as deposits pursuant to Section 3(1) of the Federal Deposit Insurance Act, as amended, 12 U.S.C. Section 1813 (l), and to include at the end of the definition of "Long-Term Indebtedness" "for purposes of this definition current liabilities shall mean such Indebtedness with a maturity date of one year or less." 10 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 2.2 Each of the Companies hereby represent that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 2.3 No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default, but for the requirement that notice be given or time elapse or both. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof", or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby, and each reference in the other Loan Documents to "the Note", "thereunder", "thereof" or words of like import referring to the Note, shall mean and be a reference to the Note, as amended by the Allonge referred to below. All of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 5. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. 11 BANPONCE CORPORATION By: _________________________________ Title: ______________________________ By: _________________________________ Title: ______________________________ BANPONCE FINANCIAL CORPORATION By: _________________________________ Title: ______________________________ VEHICLE EQUIPMENT LEASING COMPANY, INC. By: _________________________________ Title: ______________________________ BARCLAYS BANK, PLC, ACTING THROUGH ITS MIAMI AGENCY By: _________________________________ Title: ______________________________ 12 EXHIBIT 10.12.1 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (the "Amendment"), dated as of the 8th day of April, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), Citibank, N.A. (the "Lender"), and is to a certain Credit Agreement dated May 22, 1992 the ("Credit Agreement") among the Companies and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies and the Lender have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. Subject to the conditions precedent described in Section 4, the Lender and each of the Companies hereby agree as follows: 1.1 Section 1 of the Credit Agreement is hereby amended to delete the number "$35,000,000" in the eighth line thereof and to replace therefor the number "$50,000,000". 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 2.2 Each of the Companies hereby represent that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 13 2.3 No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default, but for the requirement that notice be given or time elapse or both. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof", or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby, and each reference in the other Loan Documents to "the Note", "thereunder", "thereof" or words of like import referring to the Note, shall mean and be a reference to the Note, as amended by the Allonge referred to below. All of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Conditions Precedent. This Amendment shall be deemed effective as of April 8th, 1993 (the "Amendment Closing Date") upon the satisfaction of the following conditions precedent: (a) The Lender shall have received the following documents in form and substance satisfactory to the Lender and its legal counsel: (i) Certified copies of: (A) all necessary legal authorizations required for each of the Companies to enter into this Amendment and to perform in full its obligations hereunder; (B) articles of incorporation and by-laws of each of the Companies; and (C) evidence of the authority of each Person authorized to execute this Amendment and any other documents to be executed and delivered in behalf of each of the Companies in connection with this Amendment. (ii) A written opinion of Brunilda Santos de Alvarez, legal counsel to each of the Companies and the Guarantor, addressed to the Lender in form and substantially similar to Exhibit 1; (iii) certified copies of any government authorizations, consents, approvals and licenses as may be required under any applicable law and regulations for the Companies to make and perform its obligations pursuant to this Amendment, if any; (iv) two (2) duly executed copies of this Amendment, in form and substance satisfactory to the Bank and its legal counsel; and (v) an Allonge in the form of Exhibit 2 hereto made by each of the Companies in favor of the Lender in the principal amount of $50,000,000; 14 (vi) the Guarantor's written ratification of the Guaranty in the form of Exhibit 3 hereto; and (vii) such other documents and certificates as the Bank or its legal counsel may reasonably request. 5. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. 7. No Novation. This Amendment shall not affect any of the existing obligations of any of the Companies under the Credit Agreement, and it is not the intention of the parties that this Amendment constitute a novation of such obligations. IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. BANPONCE CORPORATION By: ____________________________________ Title: _________________________________ By: ____________________________________ Title: _________________________________ BANPONCE FINANCIAL CORPORATION By: ____________________________________ Title: _________________________________ 15 VEHICLE EQUIPMENT LEASING COMPANY, INC. By: ____________________________________ Title: __________________________________ CITIBANK, N.A. By: _____________________________________ Title: __________________________________ Affidavit No. __________ Acknowledged and subscribed to before me by Alberto M. Paracchini, of legal age, married, banker and resident of San Juan, Puerto Rico, in his capacity as Chairman of the Board of BanPonce Corporation, BanPonce Financial Corp. and Vehicle Equipment Leasing Company, Inc. and Jose Luis Lopez Calderon, of legal age, married, banker and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BanPonce Corporation, who are personally known to me. In San Juan, Puerto Rico, this 8th day of April 1993. _________________________________________ Notary Public Affidavit No. ___________ Acknowledged and subscribed to before me by Ricardo James, of legal age, married, banker and resident of Rio Piedras, Puerto Rico, in his capacity as Vice President of Citibank, N.A. In San Juan, Puerto Rico, this 8th day of April 1993. _________________________________________ Notary Public 16 EXHIBIT 1 April 8, 1993 Citibank, N.A. 252 Ponce de Leon Avenue 8th Floor Hato Rey, Puerto Rico 00918 Gentlemen: We are counsel for BanPonce Corporation ("BanPonce"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, BanPonce Financial Corp. ("BPFC"), a corporation organized and existing under the laws of the State of Delaware and Vehicle Equipment Leasing Company, Inc. ("VELCO"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, (the "Companies") and have represented the Companies in connection with its execution and delivery of the First Amendment (the "Amendment") dated as of April 2, providing for Loans in an aggregate principal amount not exceeding $50,000,000 at any one time outstanding and an Allonge and Ratification of Guaranty (collectively, the "Related Documents") to a certain Credit Agreement (the "Agreement") executed by and between the Companies and Citibank, N.A. (the "Lender"), dated as of May 22, 1992. All capitalized terms used in this opinion shall have the meanings attributed to them in the Agreement. We have examined the Companies' articles of incorporation, by-laws, resolutions, the Agreement and such other matters of fact and law which we deem necessary in order to render this opinion. Based upon the foregoing, it is our opinion that: 1. The Companies are corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and have all requisite authority to conduct their business in each jurisdiction in which their business is conducted. 2. BanPonce and BPFC have the corporate power and authority and legal right to execute and deliver the Amendment and the Related Documents to which each is a party and to perform their respective obligations thereunder. The execution and delivery of the Amendment and the Related Documents by BanPonce and BPFC and the performance by the said entities of their respective obligations have been duly authorized by all necessary corporate action and proceedings on the part of BanPonce and BPFC and will not: (a) require any consent of the Companies' shareholders; (b) violate any applicable law, rule, regulation, order, writ, judgment, injunction, decree or award binding on BanPonce and BPFC or any subsidiary or the BanPonce and BPFC or any 17 Subsidiary's articles of incorporation of by-laws or any indenture, instrument or agreement binding upon BanPonce and BPFC or any Subsidiary; or (c) result in, or require, the creation or imposition of any lien pursuant to the provisions of any indenture, instrument or agreement binding upon BanPonce and BPFC or any Subsidiary. 3. The Amendment and Related Documents have been duly executed and delivered by BanPonce and BPFC and constitute the legal, valid and binding obligation of BanPonce and BPFC enforceable against BanPonce and BPFC in accordance with their terms except to the extent the enforcement thereof may be limited by bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting the enforcement of creditors' rights and subject also to the availability of equitable remedies if equitable remedies are sought. 4. There is no litigation or proceeding against the Companies or any Subsidiary which, if adversely determined, would materially adversely affect the business or condition of the Companies or any Subsidiary. 5. No approval, authorization, consent, adjudication or order of any governmental authority, which has not been obtained by the Companies or any Subsidiary, is required to be obtained by the Companies or any Subsidiary in connection with the execution and delivery of the Amendment or the Related Documents, the borrowings under the Amendment or in connection with the payment by the Companies of the Obligations. VELCO has informed the Lender that it intends to submit for consideration and approval at the next meeting of the Board of Directors scheduled to be held on April 30th, 1993 a resolution approving the borrowings contemplated in the Amendment and Related Documents at which time the undersigned shall deliver an opinion as to matters covered in paragraph 2 and 3 of this opinion with regards to VELCO. The foregoing opinion is limited to the Federal laws of the United States and the laws of the Commonwealth of Puerto Rico and Delaware's corporate law with regards to the incorporation and existence of BanPonce Financial Corp. and I am expressing no opinion as to the effect of the laws of any other jurisdiction. Very truly yours, ______________________________ Brunilda Santos de Alvarez Legal Counsel 18 EXHIBIT 2 ALLONGE The terms of that certain Promissory Note (the "Note") in the maximum principal amount of $35,000,000 issued by BANPONCE CORPORATION, BANPONCE FINANCIAL CORPORATION and VEHICLE EQUIPMENT LEASING CORPORATION, INC. (collectively, the "Borrowers") to the order of CITIBANK, N.A. (the "Lender") dated May 22, 1992, under Affidavit Number 1,982 before Notary Brunilda Santos de Alvarez, are hereby amended as of April 8, 1993, as follows: 1. The maximum principal amount of the Note is hereby increased to FIFTY MILLION DOLLARS ($50,000,000). 2. The first paragraph of the Note is hereby deleted and substituted by the following paragraph: "FOR VALUE RECEIVED, the undersigned, BANPONCE CORPORATION, a Puerto Rico corporation ("BanPonce"), BANPONCE FINANCIAL CORPORATION, a Delaware corporation ("Financial"), and VEHICLE EQUIPMENT LEASING CORPORATION, INC., a Puerto Rico corporation ("Velco"; Velco, BanPonce and Financial each hereinafter referred to singly as a "Borrower"), each HEREBY PROMISES TO PAY to the order of CITIBANK, N.A., a national banking association (the "Lender"), the principal amount of FIFTY MILLION DOLLARS ($50,000,000) in lawful money of the United States of America, or, if less, the principal amount of each Loan (as defined below) made by the Lender to such Borrower pursuant to the Credit Agreement referred to below (the "Credit Agreement"). The principal amount of each Loan shall be payable in full on the last day of the Interest Period (as defined in the Credit Agreement) for such Loan. The liability of each Borrower hereunder shall be several and not joint and several (solidaria) as to each Loan made to such Borrower under this Promissory Note". 3. It is not the intention of the parties that this Allonge constitute a novation of the indebtedness evidenced by the Note. 19 4. Except as amended hereby, all terms and conditions of the Note shall remain in full force and effect. Executed in San Juan, Puerto Rico as of the 8th day of April, 1993. BANPONCE CORPORATION BANPONCE FINANCIAL CORPORATION By:__________________________ By:___________________________ By: _________________________ VEHICLE EQUIPMENT LEASING CORPORATION By: ___________________________ Affidavit No. _________ Acknowledged and subscribed to before me by Alberto M. Paracchini, of legal age, married, banker and resident of San Juan, Puerto Rico, in his capacity as Chairman of the Board of BanPonce Corporation, BanPonce Financial Corp. and Vehicle Equipment Leasing Company, Inc. and Jose Luis Lopez Calderon, of legal age, married, banker and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BanPonce Corporation, who are personally known to me. In San Juan, Puerto Rico, this 8th day of April 1993. _________________________________ Notary Public AGREED AND ACCEPTED: CITIBANK, N.A. By: 20 EXHIBIT 3 FORM OF GUARANTY RATIFICATION Citibank, N.A. 252 Ponce de Leon Avenue 8th Floor Hato Rey, PR 00918 Re: Guaranty of BanPonce Corporation dated as of May 22, 1992 Dear Sirs: Reference is hereby made to that certain Guaranty dated as of May 22, 1992 (the "Guaranty") made and delivered by BanPonce Corporation, a Puerto Rico corporation ("BanPonce") to the Lender (as defined in the Guaranty). Capitalized terms used herein not otherwise defined shall have the meanings given to such terms in the Guaranty. Pursuant to the Guaranty, BanPonce guaranteed the obligations of BanPonce Financial Corp., a Delaware corporation ("Financial") and/or Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO") arising under the Credit Agreement. BanPonce, Financial and VELCO have requested the Lender to increase the Aggregate Commitment (as defined in the Credit Agreement) pursuant to that certain First Amendment to Credit Agreement dated as of April 2, 1993 (the "Amendment") among BanPonce, Financial, VELCO, and the Lender. The Lender has agreed to do so provided BanPonce ratifies that such increase in the Aggregate Commitment evidenced by the Amendment is guaranteed by BanPonce pursuant to the Guaranty. Thus, BanPonce hereby ratifies that the Guaranty remains in full force and effect with respect to the Credit Agreement as amended by the Amendment and, therefore, that the limitation in the amount of the Guaranteed Debt set forth in the first paragraph of the Guaranty is hereby increased from $35,000,000 to $50,000,000 (provided, that such limitation shall not apply to interest or other non-principal amounts which may become due under the Credit Agreement). All terms, covenants and conditions of the Guaranty shall remain in full force and effect with respect to the Credit Agreement as amended by the Amendment. 21 -2- The execution, delivery and acceptance of this letter shall not act as a waiver of any right, power or remedy of the Lender, nor constitutes a waiver of any provision of the Guaranty, or any other documents, instruments and agreements executed and/or delivered in connection therewith. BANPONCE CORPORATION By:________________________________ Name: _____________________________ Title: ____________________________ By:________________________________ Name: _____________________________ Title: ____________________________ Affidavit No. __________ Acknowledged and subscribed to before me by Alberto M. Paracchini, of legal age, married, banker and resident of San Juan, Puerto Rico, in his capacity as Chairman of the Board of BanPonce Corporation, BanPonce Financial Corp. and Vehicle Equipment Leasing Company, Inc. and Jose Luis Lopez Calderon, of legal age, married, banker and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BanPonce Corporation, who are personally known to me. In San Juan, Puerto Rico, this 8th day of April 1993. ____________________________________ Notary Public 22 EXHIBIT 10.12.1 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (the "Second Amendment"), dated as of the 21st day of May, 1993 is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), Citibank, N.A. (the "Lender"), and is to a certain Credit Agreement dated May 22, 1992 the ("Credit Agreement") among the Companies and the Lender as amended by a First Amendment to Credit Agreement executed among the Companies and the Lender as of the 8th day of April 1993 (the "First Amendment"). Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement and the First Amendment, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement and the First Amendment; WHEREAS, the financing facilities made available to the Companies under the Credit Agreement, as amended by the First Amendment, expire as of May 21, 1993; WHEREAS, the Lender, after conducting a new credit evaluation of the Companies, has agreed to renew the financing facilities made under the Credit Agreement, as amended by the First Amendment, for a separate succesive period of 364 days expiring on May 20, 1994 under the same terms and conditions set forth in the Credit Agreement, as amended by the First Amendment; NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. Subject to the conditions precedent described in Section 4, the Lender and each of the Companies hereby agree as follows: 1.1 Section 1 of the Credit Agreement is hereby amended to read as follows: "Subject to the terms of this Agreement, the Lender agrees to make loans (the "Loans") to each of the Companies on any Business Day from the date hereof to and including May 20, 1994 (such date, or the earlier date of termination of the Aggregate Commitment pursuant to Section 8, being the "Termination Date"). Each Company may borrow, repay and reborrow Loans from time to time prior to the Termination Date, provided that the principal amount of all Loans outstanding shall not exceed $50,000,000 (the "Aggregate Commitment") at any time for all of the Companies in the aggregate. Each loan shall be in an amount of not less than $500,000 or an integral 23 multiple thereof, except that a Loan may be equal to the entire unused Aggregate Commitment. The Loans shall be evidenced by a note (the "Note") duly executed and delivered by each Company to the order of Lender in the form attached hereto as Exhibit "A". This Agreement, the Note and the Guaranty referred to below are herein called the "Loan Documents"." 1.2 Exhibit A of the Credit Agreement is hereby deleted and substituted by Exhibit 2 hereto. 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Second Amendment. 2.2 Each of the Companies hereby represent that this Second Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 2.3 No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default, but for the requirement that notice be given or time elapse or both. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof", or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by the First Amendment and as amended hereby, and each reference in the other Loan Documents to "the Note", "thereunder", "thereof" or words of like import referring to the Note, shall mean and be a reference to the Note referred to below. All of the terms, covenants and conditions of the Credit Agreement and the First Amendment shall remain in full force and effect. As amended and modified by this Second Amendment, the Credit Agreement and the First Amendment are hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Credit Agreement and the First Amendment, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Conditions Precedent. This Second Amendment shall be deemed effective as of May 21st, 1993 (the "Second Amendment Closing Date") upon the satisfaction of the following conditions precedent: (a) The Lender shall have received the following documents in form and substance satisfactory to the Lender and its legal counsel: 24 (i) Certified copies of: (A) all necessary legal authorizations required for each of the Companies to enter into this Second Amendment and to perform in full its obligations hereunder; (B) articles of incorporation and by-laws of each of the Companies; and (C) evidence of the authority of each Person authorized to execute this Second Amendment and any other documents to be executed and delivered in behalf of each of the Companies in connection with this Second Amendment. (ii) A written opinion of Brunilda Santos de Alvarez, legal counsel to each of the Companies and the Guarantor, addressed to the Lender in form and substantially similar to Exhibit 1; (iii) certified copies of any government authorizations, consents, approvals and licenses as may be required under any applicable law and regulations for the Companies to make and perform its obligations pursuant to this Amendment, if any; (iv) two (2) duly executed copies of this Second Amendment, in form and substance satisfactory to the Bank and its legal counsel; and (v) a promissory note (the "Note") in the form of Exhibit 2 hereto made by each of the Companies in favor of the Lender in the principal amount of $50,000,000, dated as of May 21st, 1993 and with a maturity date as of May 20, 1994. (vi) the Guarantor's written ratification of the Guaranty in the form of Exhibit 3 hereto; and (vii) such other documents and certificates as the Bank or its legal counsel may reasonably request. 5. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. 7. No Novation. This Amendment shall not affect any of the existing obligations of any of the Companies under the Credit Agreement and the First Amendment, and it is not the intention of the parties that this Amendment constitute a novation of such obligations. 25 IN WITNESS WHEREOF, this Second Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. BANPONCE CORPORATION By:________________________________ Title: ____________________________ By:________________________________ Title: ____________________________ BANPONCE FINANCIAL CORPORATION By:________________________________ Title: ____________________________ VEHICLE EQUIPMENT LEASING COMPANY, INC. By:________________________________ Title: ____________________________ CITIBANK, N.A. By:________________________________ Title: ____________________________ 26 Affidavit No. ___________ Acknowledged and subscribed to before me by __________________________________ Notary Public Affidavit No. ___________ Acknowledged and subscribed to before me by Ricardo James, of legal age, married, banker and resident of Rio Piedras, Puerto Rico, in his capacity as Vice President of Citibank, N.A. In San Juan, Puerto Rico, this ___ day of June 1993. __________________________________ Notary Public 27 May __, 1993 Citibank, N.A. 252 Ponce de Leon Avenue 8th Floor Hato Rey, Puerto Rico 00918 Gentlemen: We are counsel for BanPonce Corporation ("BanPonce"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, BanPonce Financial Corp. ("BPFC"), a corporation organized and existing under the laws of the State of Delaware and Vehicle Equipment Leasing Company, Inc. ("VELCO"), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, (the"Companies") and have represented the Companies in connection with its execution and delivery of the Second Amendment (the "Second Amendment") dated as of May 21st, 1993 to a certain Credit Agreement (the "Agreement") executed by and between the Companies and Citibank, N.A. (the "Lender"), dated as of May 22, 1992 and the Note and Ratification of Guaranty referred to therein (collectively, the "Related Documents"). All capitalized terms used in this opinion shall have the meanings attributed to them in the Agreement, as amended by the First Amendment and the Second Amendment. We have examined the Companies' articles of incorporation, by-laws, resolutions, the Agreement and such other matters of fact and law which we deem necessary in order to render this opinion. Based upon the foregoing, it is our opinion that: 1. The Companies are corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and have all requisite authority to conduct their business in each jurisdiction in which their business is conducted. 2. The Companies have the corporate power and authority and legal right to execute and deliver the Amendment and the Related Documents to which each is a party and to perform their respective obligations thereunder. The execution and delivery of the Second Amendment and the Related Documents by the Companies and the performance by the said entities of their respective obligations have been duly authorized by all necessary corporate action and proceedings on the part of the Companies and will not: (a) require any consent of the Companies' shareholders; (b) violate any applicable law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Companies or any subsidiary of the Companies or any Subsidiary's articles of incorporation of by-laws or any indenture, instrument or agreement binding upon the Companies or any Subsidiary; or 28 (c) result in, or require, the creation or imposition of any lien pursuant to the provisions of any indenture, instrument or agreement binding upon the Companies or any Subsidiary. 3. The Second Amendment and Related Documents have been duly executed and delivered by the Companies and constitute the legal, valid and binding obligation of the Companies enforceable against the Companies in accordance with their terms except to the extent the enforcement thereof may be limited by bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting the enforcement of creditors' rights and subject also to the availability of equitable remedies if equitable remedies are sought. 4. There is no litigation or proceeding against the Companies or any Subsidiary which, if adversely determined, would materially adversely affect the business or condition of the Companies or any Subsidiary. 5. No approval, authorization, consent, adjudication or order of any governmental authority, which has not been obtained by the Companies or any Subsidiary, is required to be obtained by the Companies or any Subsidiary in connection with the execution and delivery of the Amendment or the Related Documents, the borrowings under the Amendment or in connection with the payment by the Companies of the Obligations. The foregoing opinion is limited to the Federal laws of the United States and the laws of the Commonwealth of Puerto Rico and Delaware's corporate law with regards to the incorporation and existence of BanPonce Financial Corp. and I am expressing no opinion as to the effect of the laws of any other jurisdiction. Very truly yours, ______________________________ Brunilda Santos de Alvarez Legal Counsel 29 FORM OF GUARANTY RATIFICATION Citibank, N.A. 252 Ponce de Leon Avenue 8th Floor Hato Rey, PR 00918 Re: Guaranty of BanPonce Corporation dated as of May 22, 1992 Dear Sirs: Reference is hereby made to that certain Guaranty dated as of May 22, 1992, as amended on April 8, 1993 (the "Guaranty") made and delivered by BanPonce Corporation, a Puerto Rico corporation ("BanPonce") to the Lender (as defined in the Guaranty). Capitalized terms used herein not otherwise defined shall have the meanings given to such terms in the Guaranty. Pursuant to the Guaranty, BanPonce guaranteed the obligations of BanPonce Financial Corp., a Delaware corporation ("Financial") and Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO") arising under the Credit Agreement. BanPonce, Financial and VELCO and the Lender increased the Aggregate Commitment (as defined in the Credit Agreement) pursuant to that certain First Amendment to Credit Agreement dated as of April 8, 1993 to BanPonce, Financial, VELCO, and BanPonce ratified such increase in the Aggregate Commitment evidenced by the First Amendment. BanPonce, BanPonce Financial and VELCO have requested the Lender, and the Lender has agreed, to renew the credit facility made available to them under the Credit Agreement, as amended by the First Amendment, for a period of 364 days expiring on May 20, 1994, all pursuant to a Second Amendment to Credit Agreement dated as of May 21, 1993 (the "Second Amendment"). Thus, BanPonce hereby ratifies that the Guaranty remains in full force and effect with respect to the Credit Agreement as amended by the First Amendment and the Second Amendment (the "Amendments") and the Note issued by BanPonce, BanPonce Financial and VELCO pursuant to the Second Amendment. All terms, covenants and conditions of the Guaranty shall remain in full force and effect with respect to the Credit Agreement as amended by the Amendments. The execution, delivery and acceptance of this letter shall not act as a waiver of any right, power or remedy of the Lender, nor constitutes a waiver of any provision of the Guaranty, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 30 BANPONCE CORPORATION By:____________________________________ Name: _________________________________ Title: ________________________________ By:____________________________________ Name: _________________________________ Title: ________________________________ Affidavit Number _______________ Acknowledged and suscribed to before me by David H. Chafey, Jr. of legal age, married, banker and resident of San Juan, Puerto Rico as Executive Vice President of BanPonce Corporation and Director of Vehicle Equipment Leasing Company, Inc. and Jose Luis Lopez Calderon, or legal age, married and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BanPonce Corporation and BanPonce Financial Corp. and to me personally known in San Juan, Puerto Rico this 14th day of June, 1993. ___________________________________ Notary Public 31 PROMISSORY NOTE $50,000,000 Dated: May 21, 1993 FOR VALUE RECEIVED, the undersigned, BANPONCE CORPORATION, a Puerto Rico corporation ("BanPonce"), BANPONCE FINANCIAL CORPORATION, a Delaware corporation ("Financial"), and VEHICLE EQUIPMENT LEASING COMPANY, INC., a Puerto Rico corporation ("VELCO"); (BanPonce, Velco and Financial each hereinafter sometimes referred to singly as a "Borrower"), each HEREBY PROMISES TO PAY to the order of CITIBANK, N.A., a national banking association (the "Lender") the principal amount of each Loan (as defined below) made by the Lender to such Borrower on the last day of the Interest Period (as defined in the Credit Agreement referred to below) for such Loan. The liability of each Borrower hereunder shall be several and not joint and several (solidaria) as to each Loan made to such Borrower under this Promissory Note. Each Borrower promises to pay interest on the principal amount of each Loan made to it by the Lender from the date of such Loan until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement referred to below. Both principal and interest payable in lawful money of the United States of America to the Lender at 252 Ponce de Leon Avenue, Hato Rey, Puerto Rico (or at such other address as the Lender may designate in writing) in same day funds. Each Loan made by the Lender to a Borrower, the interest thereon and the maturity thereof, and all payments made on account of the principal amount thereof, shall be entered by the Lender in its records and prior to any transfer hereof, the amount and maturity of any outstanding Loans shall be endorsed on the grid attached hereto which is a part of this Promissory Note. This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Credit Agreement dated as of May 21, 1992 as amended by a First Amendment dated as of April 8, 1993 and a Second Amendment dated as of May 21, 1993 (the "Credit Agreement"), between Financial, VELCO, BanPonce Corporation and the Lender. The Credit Agreement, among other things, (i) provides for the making of advances (the "Loans") by the Lender to the Borrowers from time to time in an aggregate amount not to exceed at any time outstanding in the U.S. dollar amount first above mentioned, the indebtedness of the Borrowers resulting from each such Loan being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. 32 BANPONCE CORPORATION By: _________________________________ Title: ______________________________ By: _________________________________ Title: ______________________________ BANPONCE FINANCIAL CORPORATION By: _________________________________ Title: ______________________________ VEHICLE EQUIPMENT LEASING COMPANY, INC. By: _________________________________ Title: ______________________________ Affidavit Number _______________ Acknowledged and suscribed to before me by David H. Chafey, Jr. of legal age, married, banker and resident of San Juan, Puerto Rico as Executive Vice President of BanPonce Corporation and Director of Vehicle Equipment Leasing Company, Inc. and Jose Luis Lopez Calderon, or legal age, married and resident of Guaynabo, Puerto Rico, in his capacity as Senior Vice President of BanPonce Corporation and BanPonce Financial Corp. and to me personally known in San Juan, Puerto Rico this 14th day of June, 1993. _____________________________________ Notary Public 33 EXHIBIT 10.12.1 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (the "Amendment"), dated as of the 1st day of April, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO") (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), The First National Bank of Chicago and Societe Generale (collectively, the "Lenders", and individually, "Lender"), and The First National Bank of Chicago as agent for the Lenders (the "Agent") and is to that certain Credit Agreement dated as of May 1, 1992 the ("Credit Agreement") among the Companies, the Lender and the Agent. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies, the Lenders and the Agent have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. AMENDMENT TO CREDIT AGREEMENT. Subject to the conditions precedent described in Section 6 hereof, the Credit Agreement is hereby amended as follows: 1.1 Section 1 of the Loan agreement is hereby amended to delete the number "$40,000,000" in the sixth line thereof and to replace therefor the number "$60,000,000" and to delete the date "April 30, 1993" and to replace therefor March 31, 1994". 1.2 The amount of each Lender's Commitment referred to in Section 1 of the Agreement is modified to read as set forth opposite each Lender's signature to this Agreement. 2. REPRESENTATIONS AND WARRANTIES. 2.1 The Companies hereby represent and warrant to each Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 34 2 2.2 Each of the Companies hereby represents that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 3. COSTS AND EXPENSES. The Companies jointly and severally shall reimburse the Agent for all costs and expenses (including time charges of the Agent's attorneys who may be employees of the Agent) incurred by the Agent in the negotiation, preparation, execution and delivery of this Amendment and any other documents prepared in connection herewith. 4. REFERENCES TO AND EFFECT UPON THE CREDIT AGREEMENT. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. Except as specifically hereby amended, all of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the any of the Lenders of the Agent, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 5. GOVERNING LAW. This Amendment shall be deemed to have been made at Chicago, Illinois, U.S.A., and shall be governed by and construed in accordance with the other remaining terms of the Credit Agreement and the internal laws of the State of Illinois. 6. CONDITIONS PRECEDENT. This Amendment shall be deemed effective as of April 1, 1993 (the "Amendment Closing Date") upon the satisfaction of the following conditions precedent: (a) The Agent shall have received the following documents in form and substance satisfactory to the Agent and its legal counsel: (i) Certified copies of: (A) all necessary legal authorizations required for the Companies to enter into this Amendment and to perform in full its obligations hereunder; (B) articles of incorporation and by-laws of the Companies; and (C) evidence of the authority of each Person authorized to execute this Amendment and any other documents to be executed and delivered on behalf of the Companies in connection with this Amendment, each of which is to be certified by a duly authorized representative of the Companies within five (5) days prior to the Amendment Closing Date. 35 3 (ii) A written opinion of Brunilda Santos de Alvarez, legal counsel to each of the Companies, dated on or within five (5) days prior to the Amendment Closing Date addressed to the Lenders in form and substance satisfactory to the Agent; (iii) certified copies of any government authorizations, consents, approvals and licenses as may be required under any applicable law and regulations for the Companies to make and perform its obligations pursuant to this Amendment; (iv) Six (6) duly executed copies of this Amendment, in form and substance satisfactory to the Bank and its legal counsel; and (v) a Note in the form of Exhibit 1 hereto made by each of the Companies in favor of each of the Lenders in the principal amount of each Lender's Commitment; (vi) the Guarantor's written ratification of the Guaranty in the form of Exhibit 2 hereto; and (vii) such other documents and certificates as the Bank or its legal counsel may reasonably request. (b) Each of the Lenders shall have received a closing fee of $10,000 from BanPonce. 7. COUNTERPARTS. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 8. PARAGRAPH TITLES. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. 36 4 IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. BANPONCE CORPORATION By:______________________________ Title:______________________________ By:______________________________ Title:______________________________ BANPONCE FINANCIAL CORPORATION By:______________________________ Title:______________________________ THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:______________________________ Title:______________________________ THE FIRST NATIONAL BANK OF CHICAGO By:______________________________ Title:______________________________ 37 5 Commitment $35,000,000 $25,000,000 - - - - - ----------- $60,000,000 38 EXHIBIT 1 FORM OF NOTE [____________________] ____________________, 1993 ____________________, a ____________ corporation (the "Company"), promises to pay to the order of (the "Lender") the aggregate unpaid principal amount of all Loans made by the Lender to the Company pursuant to Section 1 of the Credit Agreement dated as of May 1, 1992, as amended, among BanPonce Corporation, a Puerto Rico corporation, BanPonce Financial Corp., a Delaware corporation, Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation, The First National Bank of Chicago and Societe Generale, and The First National Bank of Chicago, as Agent (the "Agreement"), whichever is less, in immediately available funds at the main office of the Agent in Chicago, Illinois, together with interest on the unpaid principal amount hereof. Interest and principal shall be payable at the rates and on the dates set forth in the Agreement. The Company shall pay each Loan in full in accordance with the terms and provisions of the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment. This Note is issued pursuant to, and is entitled to the benefits of, the Agreement, as it may be amended from time to time, to which Agreement reference is hereby made for a statement of the terms and conditions under which the Note may be prepaid or its maturity date accelerated. This Note is in substitution for, and represents a continuation of, the indebtedness incurred under a prior Note issued pursuant to the Agreement. Capitalized terms used herein and not otherwise defined herein have the meanings ascribed to such terms in the Agreement. This Note is governed by the internal law (and not the law of conflicts) of the State of Illinois. By:______________________________ Title:______________________________ 39 EXHIBIT 2 FORM OF GUARANTY RATIFICATION The First National Bank of Chicago, as Agent for the Lenders One First National Plaza Chicago, Illinois 60670 RE: GUARANTY OF BANPONCE CORPORATION DATED AS OF MAY 1, 1991 Dear Sirs: Reference is hereby made to that certain Guaranty dated as of May 1, 1992 (the "Guaranty") made and delivered by BanPonce Corporation, a Puerto Rico corporation ("BanPonce") to the Lenders (as defined in the Guaranty). Capitalized terms used herein not otherwise defined shall have the meanings given to such terms in the Guaranty. Pursuant to the Guaranty, BanPonce guaranteed the obligations of BanPonce Financial Corp., a Delaware corporation ("Financial") and/or Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO") arising under the Credit Agreement. BanPonce, Financial and VELCO have requested the Lenders to increase the Aggregate Commitment (as defined in the Credit Agreement) pursuant to that certain First Amendment to Credit Agreement dated as of April 1, 1993 (the "Amendment") among BanPonce, Financial, VELCO, the Lenders and the Agent. The Lenders have agreed to do so provided BanPonce ratifies that such increase in each Lender's Commitment evidenced by the Amendment is guaranteed by BanPonce pursuant to the Guaranty. Thus, BanPonce hereby ratifies that the Guaranty remains in full force and effect with respect to the Credit Agreement as amended by the Amendment and that all terms, covenants and conditions of the Guaranty shall remain in full force and effect with respect to the Credit Agreement as amended by the Amendment. The execution, delivery and acceptance of this letter shall not act as a waiver of any right, power or remedy of the Lenders or the Agent, nor constitute a waiver of any provision of the Guaranty, or any other documents, instruments and agreements executed and/or delivered in connection therewith. BANPONCE CORPORATION By:______________________________ Name:______________________________ Title:______________________________ By:______________________________ Name:______________________________ Title:______________________________ 40 2 Accepted this ____ day of April, 1993 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:______________________________ Name:______________________________ Title:______________________________ 41 FORM OF GUARANTY RATIFICATION The First National Bank of Chicago, as Agent for the Lenders One First National Plaza Chicago, Illinois 60670 RE: GUARANTY OF BANPONCE CORPORATION DATED AS OF MAY 1, 1991 Dear Sirs: Reference is hereby made to that certain Guaranty dated as of May 1, 1992 (the "Guaranty") made and delivered by BanPonce Corporation, a Puerto Rico corporation ("BanPonce") to the Lenders (as defined in the Guaranty). Capitalized terms used herein not otherwise defined shall have the meanings given to such terms in the Guaranty. Pursuant to the Guaranty, BanPonce guaranteed the obligations of BanPonce Financial Corp., a Delaware corporation ("Financial") and/or Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO") arising under the Credit Agreement. BanPonce, Financial and VELCO have requested the Lenders to increase the Aggregate Commitment (as defined in the Credit Agreement) pursuant to that certain First Amendment to Credit Agreement dated as of April 1, 1993 (the "Amendment") among BanPonce, Financial, VELCO, the Lenders and the Agent. The Lenders have agreed to do so provided BanPonce ratifies that such increase in each Lender's Commitment evidenced by the Amendment is guaranteed by BanPonce pursuant to the Guaranty. Thus, BanPonce hereby ratifies that the Guaranty remains in full force and effect with respect to the Credit Agreement as amended by the Amendment and that all terms, covenants and conditions of the Guaranty shall remain in full force and effect with respect to the Credit Agreement as amended by the Amendment. The execution, delivery and acceptance of this letter shall not act as a waiver of any right, power or remedy of the Lenders or the Agent, nor constitute a waiver of any provision of the Guaranty, or any other documents, instruments and agreements executed and/or delivered in connection therewith. BANPONCE CORPORATION By:______________________________ Name:______________________________ Title:______________________________ By:______________________________ Name:______________________________ Title:______________________________ 42 2 Accepted this ____ day of April, 1993 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:______________________________ Name:______________________________ Title:______________________________ 43 EXHIBIT 10.12.1 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement (the "Amendment"), dated as of the 1st day of June, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), The First National Bank of Chicago and Societe Generale (collectively referred as "the Lenders") and the First National Bank of Chicago acting Agent for the Lenders and is to a certain Credit Agreement dated May 19, 1992 as amended by First Amendment to Credit Agreement dated as of April 2, 1993 (the "Credit Agreement") among the Companies and the Lender, as amended by First Amendment to credit Agreement executed as of the 2nd day of April, 1993. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies and the Lender have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. 1.1 Section 2.1 of the Credit Agreement is hereby amended to include at the end of the tenth line of the definition of "Indebtedness" the following language "excluding liabilities of Banco Popular de Puerto Rico which are defined as deposits pursuant to Section 3(1) of the Federal Deposit Insurance Act, as amended, 12 U.S.C. Section 1813 (1), and to include at the end of the definition of "Long-Term Indebtedness" "for purposes of this definition current liabilities shall mean such Indebtedness with a maturity date of one year or less." 44 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 2.2 Each of the Companies hereby represent that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 2.3 No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default, but for the requirement that notice be given or time elapse or both. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof", or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. All of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 5. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. 45 SOCIETE GENERALE By: ___________________________________ Title:_________________________________ EX-10.12.2 4 BANPONCE CREDIT AGREEMENT BETWEEN BANPONCE 1 EXHIBIT 10.12.2 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (the "Amendment"), dated as of the st day of June, 1993, is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc. ("VELCO"), a Puerto Rico corporation, (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and individually as a "Company"), Chemical Bank (the "Lender"), and is to a certain Credit Agreement dated April 1st, 1993 (the "Credit Agreement") among the Companies and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Lender has agreed to provide certain financing to the Companies upon the terms and conditions set forth in the Credit Agreement; WHEREAS, the Companies and the Lender have agreed to an amendment of the terms and provisions of the Credit Agreement in the manner hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises, the following provisions and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Amendment to Credit Agreement. 1.1 Section 2 of the Credit Agreement is hereby amended to include at the end of the tenth line of the definition of "Indebtedness" the following language "excluding liabilities of Banco Popular de Puerto Rico which are defined as deposits pursuant to Section 3(1) of the Federal Deposit Insurance Act, as amended, 12 U.S.C. Section 1813 (1), and to include at the end of the definition of "Long-Term Indebtedness" "for purposes of this definition current liabilities shall mean such Indebtedness with a maturity date of one year or less." 2. Representations and Warranties. 2.1 The Companies hereby represent and warrant to the Lender that each representation and warranty as set forth in the Credit Agreement is true and correct as if made as of the date of this Amendment. 2 2.2 Each of the Companies hereby represent that this Amendment constitutes a legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. 2.3 No event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default, but for the requirement that notice be given or time elapse or both. 3. References to and Effect Upon the Credit Agreement. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Credit Agreement", "this Agreement", "hereunder", "hereof", "herein", or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof", or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby, and each reference in the other Loan Documents to "the Note", "thereunder", "thereof" or words of like import referring to the Note, shall mean and be a reference to the Note, as amended by the Allonge referred to below. All of the terms, covenants and conditions of the Credit Agreement shall remain in full force and effect. As amended and modified by this Amendment, the Credit Agreement is hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, nor constitute a waiver of any provision of the Credit Agreement, or any other documents, instruments and agreements executed and/or delivered in connection therewith. 4. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 5. Paragraph Titles. The paragraph titles contained in this Amendment are used for convenience only and shall be without substance, meaning or content of any kind whatsoever and are not a part of this agreement between the parties hereto. IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by proper and duly authorized officers of the respective party as of the date and year first above written. BANPONCE CORPORATION By: /s/ Jose L. Lopez Calderon -------------------------- Title: Senior Vice President 3 By: /s/ David H. Chafey, Jr. ---------------------------- Title: Executive Vice President BANPONCE FINANCIAL CORPORATION By: /s/ Jose L. Lopez Calderon -------------------------- Title: Senior Vice President VEHICLE EQUIPMENT LEASING COMPANY, INC. By: /s/ David H. Chafey, Jr. ---------------------------- Title: Executive Vice President CHEMICAL BANK By: /s/ Charles R. Le Febure ------------------------ Title: Vice President Affidavit No. __________ Acknowledged and subscribed to before me by ___________________________________ Notary Public 4 BANPONCE CORPORATION By: ________________________________ Title:______________________________ By: ________________________________ Title:______________________________ BANPONCE FINANCIAL CORPORATION By: _________________________________ Title:_______________________________ VEHICLE EQUIPMENT LEASING COMPANY, INC. By: __________________________________ Title:________________________________ THE FIRST NATIONAL BANK OF CHICAGO By: __________________________________ Title:________________________________ 5 EXHIBIT 10.12.2 CREDIT AGREEMENT This Credit Agreement, dated as of April 1, 1993 (the "Agreement"), is among BanPonce Corporation, a Puerto Rico corporation ("BanPonce"), BanPonce Financial Corp., a Delaware corporation ("Financial"), Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO"), (BanPonce, Financial and VELCO are sometimes collectively referred to herein as the "Companies" and, singly, as a "Company"), and Chemical Bank, acting through its New York head office (the "Lender"). 1. COMMITMENT Subject to the terms of this Agreement, the Lender agrees to make loans (the "Loans") to each of the Companies from the date hereof to and including March 31, 1994 (the "Termination Date"). Each Company may borrow, repay and reborrow from time to time prior to the Termination Date, provided that the principal amount of all Loans outstanding at any one time shall not exceed U.S. $25,000,000 (the "Aggregate Commitment") for all of the Companies. The Loans shall be evidenced by notes (each, a "Note") duly executed and delivered by each Company to the Lender in the form attached hereto as Exhibit "A." This Agreement, the Notes and the Guaranty (as defined below) are herein called the "Loan Documents." 2. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the meanings ascribed to them below: "BASE RATE" means the higher of (i) the rate designated by the Lender from time to time as its prime rate in the United States, and (ii) .50% (1/2%) plus the overnight federal funds rate as published by the Federal Reserve Bank of New York. The Base Rate is a variable rate which will change as and when such rates change. 6 2 "BUSINESS DAY" means a day other than a Saturday or Sunday on which commercial banks are open for the conduct of general banking business in New York and San Juan, Puerto Rico. "CONSOLIDATED TANGIBLE NEW WORTH" shall mean as at any date the sum of the capital stock and paid-in surplus, plus preferred stock plus retained earnings (or minus accumulated deficit) of BanPonce and its Subsidiaries (as defined in Section 6.1 below) on a consolidated basis minus intangible assets (including, without limitation, franchises, goodwill, trademarks, unamortized debt discount and expenses and all write-ups in book value of any asset). "INDEBTEDNESS" means each Company's and each Subsidiary's: (i) obligations for borrowed money; (ii) obligations representing the deferred purchase price of property other than accounts payable arising in connection with the purchase of inventory on terms customary in the trade; (iii) obligations, whether or not assumed, secured by liens or encumbrances on, or payable out of the proceeds or production from, property now or hereafter owned or acquired by the Companies or any Subsidiary; (iv) obligations which are evidenced by notes, acceptances, or other instruments; and (v) capitalized lease obligations. "LONG-TERM INDEBTEDNESS" as of any date shall mean all Indebtedness which is not a current liability as of such date. "MAXIMUM DOUBLE LEVERAGE" shall mean BanPonce's equity investments in its Subsidiaries plus intangibles divided by the difference between BanPonce's equity and goodwill. "NON-PERFORMING ASSETS" shall consist of the sum of: (i) loans which are ninety (90) days past due as to interest or principal; (ii) loans which have been placed on non-accrual status by the primary regulator of the relevant Company; (iii) loans that bear a rate of interest that has been reduced below market rates due to the deteriorating financial condition of the 7 3 borrower; and (iv) assets that either have been acquired in satisfaction of debt or have been classified as "in-substance foreclosures". "TOTAL CAPITALIZATION" shall mean the sum of BanPonce's total Equity Capital plus Long-Term Indebtedness. "TOTAL EQUITY CAPITAL" means BanPonce's total equity capital determined in a manner consistent with that used in preparing BanPonce's consolidated financial statements as of December 31, 1992 plus any other securities or forms of capital that is included as Tier 1 Capital of BanPonce on a consolidated basis. 3. INTEREST, PRINCIPAL AND FEES 3.1 Interest Rate. Loans with a scheduled maturity of 30 days or less will bear interest at a rate equal to the Base Rate plus 1/2% (.50%) per annum. Loans with a scheduled maturity of 31 days or more will bear interest at a rate equal to the Base Rate plus 1% per annum. 3.2 Principal and Interest Payment Dates. Any Loan made hereunder shall be made with maturities of up to ninety (90) days from the date when made or less, as notified to the Lender in writing by the borrowing Company at the time a Loan is made. Each Loan shall be payable in full on its scheduled maturity date. Interest on a Loan shall accrue daily and shall be calculated on the basis of a 360-day year and the actual number of days elapsed and shall be payable monthly on the last day of each month and on the date of maturity of such Loan. 3.3 Payments. All payments of principal of, and interest and fees on, the Loans hereunder shall be made at the New York Office of the Lender, free and clear of any set-offs, counterclaim, deduction or withholding for any reason whatsoever, in immediately available funds. If any payment of principal of or interest on a Loan shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day. Payments received under the Loan Documents shall be applied against principal, interest and 8 4 other amounts then due from a Company in the order determined by the Lender.. A borrowing Company may, at any time when no Default shall exist hereunder, upon not less than two (2) Business-Days' prior written notice to the Lender, prepay all or any portion of a Loan in a minimum amount of U.S. $2 million; provided, however, that any such prepayment must be accompanied by interest to date on the Loan being prepaid. 3.4 Facility Fee. The Companies, jointly and severally, agree to pay to the Lender a facility fee of 0.30% per annum on the daily unused portion of the Aggregate Commitment from the date hereof to the Termination Date. The facility fee shall be calculated on the basis of a year of 360 days and shall be payable in arrears on the last Business Day of June, September, December and March, and on the Termination Date. 3.5 Default Interest. From and after the occurrence of a default (as defined in Section 8 below), each Loan shall bear interest at the rate equal to the Base Rate plus 2% until such default shall be cured; provided, however, that after judgment, the Loan shall bear interest at the higher of such rate or the rate provided by applicable law. Interest on any Loan past due shall be payable on demand. 4. CHANGE IN CIRCUMSTANCES The Companies agree to pay to the Lender such amounts as will compensate the Lender for any increase in the cost to the Lender of making or maintaining any Loan hereunder or of maintaining its Commitment to make Loans hereunder, by reason of a change in any reserve, tax, capital guidelines, special deposits, or similar requirement with respect to assets of, deposits with or for the account of, or credit extended by, or commitments extended by, the Lender which are imposed on, or deemed applicable by, the Lender under any law, treaty, rule, regulation (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System), any interpretation thereof by any governmental fiscal, monetary or other authority charged with the administration thereof or having jurisdiction over such Loan or the 9 5 Lender, or any requirement imposed by any such authority, whether or not having the force of law. Such additional amounts shall be payable on demand. 5. CONDITIONS TO LENDING 5.1 The Initial Loan. The Lender's obligation to make the initial Loan hereunder shall be conditioned upon the receipt by it of copies, in form and substance satisfactory to the Lender and its counsel, of the following: (a) an opinion of counsel for each of the Companies in the form of Exhibit "B" hereto; (b) resolutions authorizing the borrowings hereunder of each of the Company's board of directors along with specimen signatures of each Company's authorized signatories certified by each Company's Secretary; (c) a Note made by each of the Companies in favor of Lender in the amount of the Aggregate Commitment; (d) a Guaranty and appropriate resolutions authorizing the guaranty by BanPonce of the obligations of Financial and VELCO hereunder, substantially in the form attached hereto as Exhibit "C" (the "Guaranty"), and (e) such other documents as the Lender shall reasonably request. 5.2 Each Loan. The Lender shall not be obligated to make hereunder unless: (a) there exists no Default or event which, with giving of notice, or lapse of time, or both, would be a Default hereunder; 10 6 (b) the representations and warranties set forth in Section 6 hereof are true and correct on the borrowing date; and (c) all legal matters incident to making such Loan shall be satisfactory to the Lender and its counsel. (d) the Lender shall be satisfied that no material adverse change has occurred since the execution of this Agreement in the financial condition, results of operations or prospects of BanPonce or the Companies. Each request for a Loan shall constitute a representation that the conditions set forth in Sections 5.2 (a) and (b) have been satisfied. 6. REPRESENTATIONS Each Company represents and warrants to the Lender that: 6.1 Corporate Existence and Standing. Such Company and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. As used in this Agreement, "Subsidiary" means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by the Company or by one or more of its Subsidiaries; or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. 6.2 Authorization and Validity. Such Company has the corporate power and authority and legal right to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by such Company of such Loan 11 7 Documents and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and such Loan Documents constitute legal, valid and binding obligations of such Company enforceable against such Company in accordance with their terms. 6.3 No Conflict; Government Consent. Neither the execution and delivery by such Company of the Loan Documents to which it is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Company or any of its Subsidiaries or such Company's or any Subsidiary's articles of incorporation or by-laws or the provisions of any indenture, instrument or agreement to which such Company or any of its Subsidiaries is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any lien or encumbrance on the property of such Company or a Subsidiary pursuant to the terms of any such indenture, instrument or agreement. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, such Loan Documents. 6.4 Financial Statements. The December 31, 1992 consolidated financial statements of such Company and its Subsidiaries heretofore delivered to the Lender were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of such Company and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 6.5 Material Adverse Change. Since December 31, 1992, there has been no material adverse change in the business, properties, condition, prospects (financial or otherwise) or results of operations of such Company and its Subsidiaries. 12 8 6.6 Litigation and Contingent Obligations. Except as set forth on Schedule "1" hereto, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting such Company or any Subsidiary which might have a material adverse effect. Other than any liability incident to such litigation, arbitration or proceedings,:such Company has no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 6.4. 6.7 Compliance with Laws. Such Company and its Subsidiaries have complied in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties. 6.8 Compliance with Agreements. Such Company and its Subsidiaries are in material compliance with all agreements, contracts and undertakings which are binding upon them and their respective properties. 6.9 Taxes. Such Company and its Subsidiaries have duly prepared and filed all tax returns applicable to them or their properties through December 31, 1992, and have paid on a timely basis all taxes, charges, levies and assessments shown thereon, except for such items as they may be contesting in good faith, adequate reserves having been set aside therefor. 6.10 Excise Duties. There are no excise or stamp taxes or duties applied in Puerto Rico in connection with the execution, delivery or enforcement of the Loan Documents. 7. COVENANTS During the term of this Agreement, unless the Lender shall otherwise consent in writing: 7.1 Financial Reporting. BanPonce will maintain, for itself and each of its Subsidiaries, proper books and financial records including a system of accounting established and administered 13 9 in accordance with generally accepted accounting principles consistently applied, and furnish to the Lender: (a) Within ninety (90) days after the close of each of its fiscal years, an unqualified audit report certified by independent certified public accountants, acceptable to the Lender, prepared in accordance with generally accepted accounting principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and the Subsidiaries (including Financial and VELCO), including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by any management letter prepared by such accountants; and (b) Within forty-five (45) days after the close of the first three (3) quarterly periods of each of its fiscal years, for itself and each of its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss and reconciliation of surplus statements for the period from the beginning of such fiscal year to the end of such quarter, including a comparison with the similar period of the previous fiscal year, all certified by its chief financial officer as true and correct. All financial statements provided by the Companies shall be prepared in accordance with generally accepted accounting principles applied consistently with the financial statements referred to in Section 6.4. 7.2 Each of the Companies will use the proceeds of the Loans solely to pay on a short term basis amounts then coming due in respect of commercial paper to be issued under certain private placements. Therefore, the Companies shall use this facility only as a short-term facility for commercial paper backup purposes. 7.3 Each of the Companies from time to time will provide the Lender with such information and documents with respect to its financial condition and business operations, and 14 10 that of its Subsidiaries, as the Lender may reasonably request, and will notify the Lender of the occurrence of any Default or any event which, with giving of notice, or lapse of time, or both,' would be a Default. 7.4 Each Company will, and will cause its Subsidiaries to, conduct their business in substantially the same fields and manner as it is presently conducted, and in material compliance with all applicable laws of any nature whatsoever. 7.5 Banponce shall maintain at all times a minimum Consolidated Tangible Net Worth equal to or greater than 5% of total assets. 7.6 BanPonce shall maintain at all times a ratio of its Long-Term Indebtedness to Total Capitalization equal to or less than 0.50 to 1.0. 7.7 Banponce shall not permit its aggregate Non-Performing Assets at the end of any fixed quarter or year to be more than 4.5% of its total (gross) loans, leases and other owned real estate at the end of such period, as such items are reported in its financial statements for the relevant period(s). 7.8 BanPonce will maintain at all times its Maximum Double Leverage at less than 115%. 7.9 All payments to the Lender hereunder shall be made free and clear of any deduction, withholding, stamp, or other tax applicable in Puerto Rico, all of which shall be for the account of the Company making such payment. In the event that any such deduction, withholding or other tax shall be applicable, the amount payable to the Lender shall be increased so that the Lender shall receive the same amount as if such deduction, withholding or other tax had not applied. In addition, to the extent that any deduction, withholding or other tax shall apply in Puerto Rico, the Company making a payment subject to such tax shall promptly obtain and remit to the Lender original tax receipts evidencing the payment of such tax. 15 11 8. DEFAULT The occurrence of any one or more of the following events shall constitute a Default: 8.1 Any Company shall fail to pay any principal, interest, tax, fee or other amount payable hereunder when due; 8.2 Any Company shall breach the terms of any covenant or provision hereof or any representation or warranty made in connection with this Agreement shall prove to have been false or misleading when made; 8.3 Any Company fails to pay any Indebtedness when due or a default shall occur under any agreement governing any Indebtedness of any Company which would permit the holder of such Indebtedness to accelerate the maturity thereof; 8.4 Any Company or Subsidiary shall: (i) have an order for relief entered with respect to it under the federal Bankruptcy Code; (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due; (iii) institute any proceeding seeking an order for relief under the federal Bankruptcy Code or take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 8.4; (iv) fail to contest in good faith any appointment or proceeding described in Section 8.5; or (v) become or be declared insolvent, however evidenced. 8.5 A receiver, trustee, examiner, liquidator or similar official shall be appointed for any Company or any Subsidiary, or any substantial part of any Company's or Subsidiary's property, or a proceeding described in Section 8.4(iii) shall be instituted against a Company or any Subsidiary and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of thirty (30) consecutive days. 9 ACCELERATION 16 12 9.1 Acceleration. If any Default under Section 8.4 or 8.5 occurs, the commitment of the Lender to make Loans hereunder shall automatically terminate and the principal of and interest on the Loans and all fees, expenses and other amounts payable under this Agreement (the "Obligations") shall immediately become due and payable without any election or action on the part of the Lender. If any other Default occurs, the Lender may, upon notice (as prescribed in Section 13 hereof) to BanPonce at any time during the continuation of such Default, terminate or suspend the commitment of the Lender to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any other kind, all of which each Company hereby expressly waives. 9.2 Amendments. Subject to the provisions of this Section 9.2, the Lender and the Companies may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lender or the Companies hereunder or waiving any Default hereunder. 9.3 Preservation of Rights. No delay or omission of the Lender to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of any Company to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. 10. GENERAL PROVISIONS 10.1 Governing Law. This Agreement and the Notes shall be governed by the law (and not the law of conflicts) of the State of New York, United States. For any action or proceeding relating to the Loan Documents, BanPonce and the Companies submit to the non-exclusive jurisdiction of the federal and state courts in New York, N.Y., waiving any claim that the same are an inconvenient forum. Process in any such action or proceeding may be served, in addition to any other manner permitted by applicable law, by mailing the summons and complaint in the 17 13 English language, by any form of registered or certified mail, to the party to be served at the address of such party set forth below its signature line on this Agreement, as such address may be changed by such party by written notice delivered to the other parties to this Agreement. Process served as provided above shall be effective 10 days after posting. The foregoing provisions shall not affect the right of the Lender to commence an action or proceeding in any other jurisdiction. In connection with any action or proceeding relating to the Loan Documents, the Lender and the Companies knowingly and voluntarily waive trial by jury. 10.2 Indemnification. The Companies, jointly and severally, shall reimburse the Lender for all reasonable out-of-pocket expenses, including without limitation, reasonable attorneys' fees and expenses in an amount not in excess of U.S. $3,000, paid or incurred by the Lender in connection with the preparation, review, execution and delivery of the Loan Documents. In addition to the foregoing, whether or not the transactions contemplated hereby shall be consummated, the Companies, jointly and severally, agree to indemnify and hold the Lender, and its officers, directors, employees and agents harmless, to the fullest extent permitted by applicable law, from and against, and to indemnify the Lender for, any and all claims, liabilities, losses, damages costs and expenses, including without limitation, reasonable attorneys' fees, arising out of or related to any litigation or proceeding (whether or not the Lender is a party thereto) in regard to the Loan Documents (including any such action to collect or enforce the Loans) or the actual or proposed use of the proceeds of Loans hereunder. The agreements contained in this Section shall survive the termination of this Agreement and the payment of the Notes. 10.3 Accounting. Compliance with Sections of this Agreement (including Sections 7.5, 7.6, 7.7 and 7.8 above) shall be determined on a consolidated basis for each Company and its Subsidiaries, in accordance with generally accepted accounting principles applied consistently with the financial statements referred to in Section 6.4 above. 11 SET-OFF 18 14 In addition to, and without limitation of, any rights of the Lender under applicable law, if any Company becomes insolvent, however evidenced, or any Default, or event which, with giving of notice, or lapse of time, or both, would be a Default, occurs, any indebtedness from the Lender to any Company (including any account balances, whether provisional or final, matured or unmatured) may, at any time while such circumstances shall continue, be offset and applied toward the payment of the Obligations owing to the Lender. The Lender will give BanPonce notice of any such offset promptly after effecting it. 12. BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Companies and the Lender and their respective successors and assigns, except that none of the Companies shall have the right to assign rights or obligations under the Loan Documents. 12.2 Participations; Permitted Participants; Effect. The Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in the Loans, the Aggregate Commitment or any other interest of the Lender under the Loan Documents. In the event of any such sale, the Lender's obligations under the Loan Documents shall remain unchanged, the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, the Lender shall remain the holder of the Notes for all purposes under the Loan Documents, all amounts payable by the Companies under this Agreement shall be determined as if the Lender had not sold such participating interest, and the Companies shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under the Loan Documents. In connection with a proposed sale of a participation, the Lender may disclose to any prospective purchaser any information concerning the Loans, the Companies and the Subsidiaries. 13. NOTICES 19 15 Any notice required or permitted to be given under this Agreement may be, and shall be deemed, given when deposited in the United States mail, postage prepaid, when sent by telecopier or by telex (with confirmed answer-back) to each Company or the Lender at the addresses and telecopier numbers indicated below their signatures to the Agreement. Notices relating to borrowings pursuant to Section 2.2 may be made orally, confirmed by telecopier. 14. COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Lender and the Companies and.transmitted to each other by telecopier, with original executed counterparts to be exchanged thereafter by mail. BANPONCE CORPORATION By:______________________________ Its:______________________________ By:______________________________ Its:______________________________ Address:______________________________ Telex No.:______________________________ Telecopier No.:______________________________ BANPONCE FINANCIAL CORPORATION By:______________________________ Its:______________________________ By:______________________________ Its:______________________________ Address:______________________________ Telex No.:______________________________ Telecopier No.:______________________________ 20 16 CHEMICAL BANK By:______________________________ Its:______________________________ By:______________________________ Its:______________________________ Address:______________________________ Telex No.:______________________________ Telecopier No.:______________________________ 21 EXHIBIT "A" NOTE U.S. $25,000,000 April 1, 1993 _____________________________, a ________________ corporation (the "Company"), promises to pay to the order of Chemical Bank (the "Lender") the principal sum of U.S. $25,000,000, or the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to Section l of the Credit Agreement dated as of April 1, 1993, among BanPonce Corporation, a Puerto Rico corporation, Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation, BanPonce Financial Corp., a Delaware corporation, and the Lender (the "Agreement"), whichever is less, in immediately available funds at the New York Office of the Lender, currently located at 270 Park Avenue, New York, New York 10017, together with interest on the unpaid principal amount hereof, free and clear of any set-off, counterclaim, deduction or withholding for any reason whatsoever. Interest and principal shall be payable at the rates and on the dates set forth in the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment. This Note is issued pursuant to the provisions of the Agreement, to which Agreement, as it may be amended from time to time, reference is hereby made for the definitions of capitalized terms used herein which are not otherwise defined and for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Presentment, demand, protest and notice, other than as provided in Section 9.1 of the Agreement, are hereby waived. This Note is governed by laws of the State of New York. [NAME OF COMPANY] By:______________________________ Title:______________________________ 22 SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE OF __________________________ DATED ________________, 1993 Principal Principal Amount of Amount Unpaid Date Loan Maturity Paid Balance 23 EXHIBIT "B" FORM OF COMPANY COUNSEL OPINION April 1, 1993 Gentlemen: We are counsel for each of BanPonce Corporation, a Puerto Rico corporation ("BanPonce"); BanPonce Financial Corp., a Delaware corporation ("Financial"); and Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation ("VELCO", each of BanPonce, Financial and VELCO, a "Company") and have represented the Companies in connection with their execution and delivery of a Credit Agreement (the "Agreement") between the Companies and Chemical Bank (the "Lender") providing for Loans in an aggregate principal amount not exceeding U.S. $25,000,000 at any one time outstanding and dated as of April 1, 1993. All capitalized terms used in this opinion shall have the meanings attributed to them in the Agreement. We have examined the Companies' articles of incorporation, by-laws, resolutions, the Agreement and such other matters of fact and law which we deemed necessary in order to render this opinion. Based upon the foregoing, it is our opinion that: 1. Each Company is a corporation duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 2. The execution and delivery of the Agreement and the Note by BanPonce, Financial and VELCO; the execution and delivery of the Guaranty by BanPonce; and the performance by each Company of its obligations under its Loan Documents to which it is a party, have been duly authorized by all necessary corporate action and proceedings on the part of such Company, and will not: (a) require any consent of the Company's shareholders; (b) violate any applicable law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Company, or any indenture, instrument or agreement binding upon such Company; or (c) result in, or require, the creation or imposition of any lien or encumbrance pursuant to the provisions of any indenture, instrument or agreement binding upon such Company. 24 2 3. Each of the Agreement, the Note and the Guaranty has been duly executed and delivered by the Companies which are parties thereto, and constitutes the legal, valid and binding obligation of such Company enforceable in accordance with its terms, except to the extent the enforcement thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject also to the availability of equitable remedies if equitable remedies are sought. 4. To the best of our knowledge after due inquiry, there is no litigation or proceeding against any Company or any Subsidiary which, if adversely determined, would materially adversely affect the business or condition of such Company or Subsidiary. 5. No approval, authorization, consent, adjudication, registration or order of any governmental authority which has not been obtained by the Companies, is required to be obtained by the Companies in connection with the execution and delivery of the Agreement, the Note and the Guaranty, the borrowings under the Agreement, or the performance by the Companies of their respective obligations under the Loan Documents. [6. Discussion of applicable taxes in Puerto Rico.] Very truly yours, __________________________ 25 EXHIBIT "C" GUARANTY The undersigned, BanPonce Corporation, a Puerto Rico corporation, hereby requests the Lender (as hereinafter defined) through any of its branches, offices, subsidiaries or affiliates, to extend credit or to permit credit to remain outstanding to BanPonce Financial Corp., a Delaware corporation, and/or Vehicle Equipment Leasing Company, a Puerto Rico corporation (each, a "Company" and, collectively, the "Companies"), as the Companies may desire and as the Lender may extend or permit from time to time in its sole discretion, whether to a Company alone, to the Companies collectively, or to either Company or the Companies and others, and, in consideration of any credit granted or continued, the undersigned hereby absolutely, unconditionally and irrevocably guarantees (as primary obligor and not as surety merely) prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of any and all existing and future indebtedness and liability of every kind, nature and character, direct or indirect, absolute or contingent (including all renewals, extensions and modifications thereof and all attorneys' fees incurred by the Lender in connection with the collection or enforcement hereof or thereof), of the Companies to the Lender, arising, evidenced or acquired pursuant to that certain Credit Agreement, as defined below (the "Guaranteed Debt"); provided, however, that the maximum aggregate principal amount extended under the Credit Agreement for which the undersigned shall be liable hereunder, is US$25,000,000; provided, furthermore, that the foregoing limitation shall not apply to interest or other non-principal amounts which may become due under the Credit Agreement. The undersigned waives notice of the acceptance of this Guaranty and of the extension or continuation of the Guaranteed Debt or any part thereof. The undersigned further waives presentment, protest, notice, the benefit of any statutes of limitations, demand or action or delinquency in respect of the Guaranteed Debt or any part thereof, including any right to require the Lender to sue the Company and any other guarantor or any person obligated with respect to the Guaranteed Debt or any part thereof, or otherwise to enforce payment thereof against any collateral securing the Guaranteed Debt or any part thereof. This Guaranty is a guaranty of payment and not of collection merely, and shall be a continuing guaranty and as such, shall remain operative and in full force and effect until all the Guaranteed Debt shall have been paid and actually received in full by the Lender. The validity and enforceability of this Guaranty shall not be impaired or affected by any of the following: (a) any extension, modification or renewal of, or indulgence with respect to, or substitutions for, the Guaranteed Debt or any part thereof or any agreement relating thereto at any time; (b) any failure or omission to enforce any right, power or remedy with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto, or any collateral securing the Guaranteed Debt or any part thereof; (c) any waiver of any right, power or remedy or of any default with respect to the Guaranteed Debt or any part thereof or any agreement relating thereto or with respect to any collateral securing the Guaranteed Debt or any part 26 2 thereof; (d) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Debt or any part thereof, any other guaranties with respect to the Guaranteed Debt or any part thereof, or any other obligation of any person or entity with respect to the Guaranteed Debt or any part thereof; (e) the enforceability or validity of the Guaranteed Debt or any part thereof or the genuineness, enforceability or validity or any agreement relating thereto or with respect to any collateral securing the Guaranteed Debt or any part thereof; (f) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Debt, any part thereof or amount which are not covered by this Guaranty even though the Lender might lawfully have elected to apply such payments to any part or all of the Guaranteed Debt or to amounts which are not covered by this Guaranty; (g) any change of ownership of either Company or the insolvency, bankruptcy or any other change in the legal status of either Company; (h) the change in or the imposition of any law, decree, regulation or other governmental act which does or might impair, delay or in any way affect the validity, enforceability or the payment when due of the Guaranteed Debt; (i) the failure of either Company or the undersigned to maintain in full force, validity or effect or to obtain or renew when required all governmental and other approvals, licenses or consents required in connection with the Guaranteed Debt or this Guaranty, or to take any other action required in connection with the performance of all obligations pursuant to the Guaranteed Debt or this Guaranty; or (j) the existence of any claim, set off or other rights which the undersigned may have at any time against either Company in connection herewith or an unrelated transaction, all whether or not the undersigned shall have had notice of knowledge of any act or omission referred to in the foregoing clauses (a) through (j) of this paragraph. It is agreed that the undersigned's liability hereunder is several and independent of any other guaranties or other obligations at any time in effect with respect to the Guaranteed Debt or any part thereof and that the undersigned's liability hereunder may be enforced regardless of the existence, validity, enforcement or non-enforcement of any such other guaranties or other obligations or any provisions of any applicable law or regulation purporting to prohibit payment by either Company of the Guaranteed Debt in the manner agreed upon between the Lender and the Companies. Credit may be granted or continued from time to time by the Lender to a Company without notice to or authorization from the undersigned regardless of such Company's financial or other condition at the time of any such grant or continuation. The Lender shall have no obligation to disclose or discuss with the undersigned its assessment of the financial condition of the Companies. Until the Guaranteed Debt is paid in full, the undersigned shall not exercise any right of subrogation with respect to payments made by the undersigned pursuant to this Guaranty. The undersigned hereby waives any claim, as that term is defined in the federal Bankruptcy Code, that the undersigned might now have or hereafter acquire against either Company that arises from the existence or performance of the undersigned's obligations under this Guaranty. In addition, the undersigned waives any benefit of the collateral, if any, which may, from time to time, secure the Guaranteed Debt or any part thereof and authorizes the Lender to take any action or exercise any remedy with respect thereto, which the Lender, in its sole discretion, shall 27 3 determine, without notice to the undersigned. In the event the Lender, in its sole discretion, elects to give notice of any action with respect to the collateral, if any, securing the Guaranteed Debt or any part thereof, ten (10) days' written notice mailed to the undersigned by ordinary mail at the address shown hereon shall be deemed reasonable notice of any matters contained in such notice. In the event that acceleration of the time for payment of any of the Guaranteed Debt is stayed, upon the insolvency, bankruptcy or reorganization of either Company, or otherwise, all such amounts shall nonetheless be payable by the undersigned forthwith upon demand by the Lender. In the event that any payment made under this Guaranty or the other Loan Documents shall subsequently be recovered by any trustee in bankruptcy, receiver or debtor in possession of a Company or of the undersigned, whether pursuant to litigation or by voluntary payment by the Lender, the amount so recovered shall become immediately due and payable under this Guaranty which, to the extent it may otherwise have terminated, shall be reinstated. No provision of this Guaranty may be amended, supplemented or modified, or any of the terms and provisions hereof waived, except by a written instrument executed by the Lender and the undersigned. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise or any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. The undersigned shall pay all reasonable costs, fees and expenses (including reasonable attorneys' fees and expenses) incurred by the Lender in collecting or enforcing the undersigned's obligations under this Guaranty. The provisions of this Guaranty are several, and in any action or proceeding involving any state corporate law, or any state or federal bankruptcy; insolvency reorganization or other law affecting the rights of creditors generally, if the obligations of the undersigned hereunder would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of the undersigned's liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the undersigned or the Lender be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. This Guaranty is a continuing guaranty and shall remain in full force and effect until the payment in full (on or after the Termination Date) of the Guaranteed Debt and all other amounts payable under this Guaranty. This Guaranty shall bind the undersigned and the successors and assigns of the undersigned. This Guaranty shall be binding upon the undersigned and shall inure to the benefit of and be enforceable by the Lender, its successors and assigns. All references herein shall be deemed to include its successors and assigns. Such successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Company or the undersigned, as the case may be. Without limiting the generality of the third sentence of this 28 4 paragraph, the Lender may assign or otherwise transfer any portion of the Guaranteed Debt to any other person or entity, and such other person or entity shall thereupon become vested with all the rights in respect thereof granted to the Lender herein or otherwise. This Guaranty shall be governed by the laws of the State of New York The provisions of the Credit Agreement pertaining to jurisdiction, service of process and payments pursuant to Section 7.9 thereof shall apply, mutatis mutandis, to this Guaranty. This Guaranty is delivered pursuant to the terms of that certain Credit Agreement dated as of April 1, 1993, (the "Credit Agreement") by and among BanPonce Corporation, a Rico corporation, BanPonce Financial Corp., a Delaware corporation, and Vehicle Equipment Leasing Company, Inc., a Puerto Rico corporation, and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Credit Agreement. BANPONCE CORPORATION By:______________________________ Title:______________________________ By:______________________________ Title:______________________________ April 1, 1993 29 SCHEDULE "1" LITIGATION [To Be Attached] EX-12 5 BANPONCE COMPUTATION OF RATIO EARNING 1 EXHIBIT 12.0 BANPONCE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
YEAR ENDED DECEMBER 31, 1993 1992 1991 1990 1989 1988 Income before income taxes $132,140 $100,145 $72,164 $72,606 $67,695 $55,717 Fixed charges : Interest expense 280,008 300,135 387,134 281,561 307,273 264,847 Estimated interest component of net rental payments 4,827 4,691 4,674 3,007 2,483 2,493 Total fixed charges including interest on deposits 284,835 304,826 391,808 284,568 309,756 267,340 Less: Interest on deposits 219,447 253,375 323,717 257,099 261,474 220,247 Total fixed charges excluding interest on deposits 65,388 51,451 68,091 27,469 48,282 47,093 Income before income taxes and fixed charges (including interest on deposits) $416,975 $404,971 $463,972 $357,174 $377,451 $323,057 Income before income taxes and fixed charges (excluding interest on deposits) $197,528 $151,596 $140,255 $100,075 $115,977 $102,810 Ratio of earnings to fixed charges Including Interest on Deposits 1.5 1.3 1.2 1.3 1.2 1.2 Excluding Interest on Deposits 3.0 2.9 2.1 3.6 2.4 2.2
120 EX-13.1 6 BANPONCE ANNUAL REPORT 1 EXHIBIT 13.1 BANPONCE CORPORATION 1993 ANNUAL REPORT - - - - - -------------------------------------------------------------------------------- BUSINESS REVIEW 2 CONSOLIDATED FINANCIAL HIGHLIGHTS _______________________________________________________________________________
----------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1993 1992 % Change ----------------------------------------------------------------------------------------------------------------- FOR THE YEAR: Net interest income $ 492,128 $ 440,219 11.79 Provision for loan losses 72,892 97,633 (25.34) Fees and other income 125,180 124,504 0.54 Operating expenses 440,427 381,204 15.54 Dividends on preferred stock of subsidiary Bank 770 770 0.00 Cumulative effect of accounting changes 6,185 Net income 109,404 85,116 28.54 Dividends declared on common stock 29,434 24,624 19.53 ----------------------------------------------------------------------------------------------------------------- PER SHARE DATA:* Net income before cumulative effect of accounting changes $ 3.16 $ 2.79 12.96 Net income 3.35 2.79 19.73 Dividends declared 0.90 0.80 12.50 Book value per share at year-end 25.49 23.03 10.65 Price of common stock at year-end 31.50 30.25 4.13 ----------------------------------------------------------------------------------------------------------------- AT YEAR-END: Total assets $11,513,368 $10,002,327 15.11 Earning assets 10,657,994 9,236,024 15.40 Net loans 6,346,922 5,252,053 20.85 Deposits 8,522,658 8,038,711 6.02 Total stockholders' equity 834,195 752,119 10.91 ----------------------------------------------------------------------------------------------------------------- SELECTED RATIOS: Return on assets 1.02% 0.89% 14.61 Return on equity 13.80 12.72 8.49 Tier I capital to risk-adjusted assets 12.29 12.88 (4.58) Total capital to risk-adjusted assets 13.95 14.85 (6.06) ----------------------------------------------------------------------------------------------------------------- SELECTED DATA: Common shares outstanding 32,732,423 32,654,864 0.24 Staff in full-time equivalents 7,439 6,965 6.81 Branches (banking operations) 205 195 5.13 Automated teller machines 253 226 11.95 Stockholders 5,306 5,399 (1.72)
* Per share data is based on the average number of shares outstanding during the periods. 3 CONTENTS PROFILE ________________________________________ ________________________________
Letters to Shareholders 4 - BANPONCE CORPORATION is a diversified, publicly owned bank holding com- pany (NASDAQ symbol: BPOP), incorporated under the General Corporation Tradition into the Future: Law of Puerto Rico. It provides a wide variety of financial services A Historical Perspective 10 through its principal subsidiaries: Banco Popular de Puerto Rico, VELCO and Popular International Bank, Inc. Prudent and Sound Business Practices 24 - BANCO POPULAR DE PUERTO RICO is the Corporation's full-service commercial banking subsidiary, and Puerto Rico's largest banking institution, with Leadership and Committed $10.8 billion in assets, $8.5 billion in deposits, and a delivery system of Employees 28 165 branches throughout Puerto Rico. The Bank operates 30 branches in New York City, one in Chicago, one in Los Angeles and eight in the Social Responsibility 30 British and U.S. Virgin Islands. In addition, Banco Popular has two subsid- iaries, POPULAR LEASING & RENTAL, INC., and POPULAR CONSUMER SERVICES, Innovation and Technology 36 INC., a small-loan company with 26 offices operating under the name of Best Finance. Board of Directors 43 Management 45 Banco Popular Branch Network 46 - VELCO (Vehicle Equipment Leasing Company, Inc.) is engaged in finance leasing and daily rental of motor vehicles. - POPULAR INTERNATIONAL BANK, INC. incorporated under the Puerto Rico International Banking Center Act, has BanPonce Financial Corp., incorpo- rated in Delaware, as its subsidiary. Spring Financial Services, Inc., of Mt. Laurel, N.J., a wholly owned subsidiary of BanPonce Financial Corp., is engaged in the business of making personal and mortgage loans in 58 offices throughout 14 states.
2 4 OUR CREED ________________________________________________________________________________ Banco Popular is a wholly local institution devoting its efforts to the enhancement of the social and economic welfare of Puerto Rico and inspired on the soundest fundamental principles of good banking practice. Banco Popular pledges its efforts and resources to the development of a banking service that, in meeting all requirements of the most progressive communities of the world, is fully equipped to handle efficiently such financial problems as may arise in the continued expansion of our island. These words, writen by don Rafael Carrion Pacheco, embody the philosophy of our Bank. Our people All the men and women who are part of our institution, from upper management to clerical personnel, take special pride in serving our customers and community in a very dedicated way. We all feel the same personal satisfaction of belonging to the "Banco Popular Family," which fosters affection and understanding, and which also holds us to the highest standards of behavior and moral ethics. These words by don Rafael Carrion Jr., commemoriating the Bank's 95th anniversary, reflect our beliefs in our personnel. 3 5 Photo (4) Richard L. Carrion Chairman, President and Chief Executive Officer 6 TO OUR SHAREHOLDERS ________________________________________________________________________________ This past year has been an extraordinary one. We commemorated our first century of service with solid growth and sound financial performance. Our financial results in 1993 were impressive with record earnings of $109.4 million, an increase of 28.5% over 1992 results, and significant improvements in most financial measures such as return on assets, return on equity and asset quality. Total assets grew over 15% as we continue to diversify our lines of business and geographic sources of revenue. Today we continue to have an enviable banking franchise in Puerto Rico and, above all, we have an outstanding group of officers and employees who are fully committed to our goals. On October 5, 1993, Banco Popular de Puerto Rico, the principal subsidiary of BanPonce Corporation, turned 100 years old. A yearlong centennial celebration, highlighting the theme "Tradition into the Future", was shared with our customers, employees, directors, shareholders and the communities we serve. A world-class fireworks display was featured in three different locations throughout the island as a gift to the people of Puerto Rico. A memorable television special, featuring our most precious traditional melodies interpreted by some of our most prominent artists and musicians, was broadcast simultaneously in Puerto Rico, New York and Chicago. Our Christmas Party, a wonderful day of festivities, was attended by more than 15,000 Banco Popular family members. The highlight of our celebration was the presentation of a special book on the history of the Bank entitled Tradition into the Future. The book was researched and written over a period of nearly four years by Guillermo A. Baralt, PhD. It vividly narrates the Bank's first century, as well as the economic, political and social history of Puerto Rico. On the morning of October 5, 1993, we inaugurated our in-house interactive television system that allows us to broadcast to all the Bank's branches and centralized departments. Following the first transmission each Banco Popular employee received a copy of the book. A condensed version of the Bank's history is included in this report. It is sometimes dangerous to dwell on the past, and one must be leery of diverting an excessive amount of resources toward celebrations of past achievements. However, we felt it was important to show our gratitude to the customers who have supported us throughout the years and to enhance the pride and loyalty of our employees. Additionally, as we focus on our next century, it is inspiring to see how far we have come. At the end of the 19th century, we were a tiny bank in a poor and rural island under the Spanish flag. At the end of 1993, BanPonce Corporation was by far the largest financial institution in Puerto Rico and ranked among the 55 largest bank holding companies in the United States, with consolidated assets of $11.5 billion, deposits of $8.5 billion, and equity of $834 million. Today, in addition to Banco Popular de Puerto Rico, the leading commercial and retail bank in Puerto Rico, our organization includes VELCO, the largest leasing company in Puerto Rico;/Spring Financial Services, our growing consumer finance subsidiary in the U.S., operating through 58 offices in 14 states; the largest retail banking organization in the Caribbean with seven branches in the U.S. Virgin Islands and one in the British Virgin Islands; and the largest Hispanic bank branch network in the mainland United States with 30 branches in New York, one in Chicago and another in Los Angeles. In 1993 we continued to build on our existing solid foundation for our next 100 years in an environment for banking that has grown more challenging with every passing year. Rapidly declining interest rates, slow economic growth, government budget reductions and excessive regulations are some of the challenges we face while doing business in an ex- 5 7 ________________________________________________________________________________ tremely competitive and consolidating industry. We at BanPonce have chosen to respond to these and other challenges by staying close to and growing businesses that we know and that complement each other. As we mentioned in last year's letter, our strategic plan focused on three main objectives: vigorously managing a transition from a paperbased to an electronic payment system, enhancing our customer service and expanding our New York presence. We took a number of steps to enhance the attractiveness of electronic payment services to our customers. Early in the year, Banco Popular launched a telephone bill payment service known under the marketing name of TelePago, providing our customers a convenient alternative to making payments by mail and reducing traffic in the branches. Direct debit of loan payments was also promoted, significantly increasing the number of new retail loans using this system. Direct deposit of payrolls was also emphasized throughout the year. A key effort during the year was the enhancement of the ATM network and a growing network of point-of-sale terminals that can accept our ATM card ("ATH") at various locations. While enhancing the value of the card, we introduced an annual fee for the first time. This initiative encountered some customer and regulatory resistance and our transaction volume was initially impacted. However, by year-end we began to see a return to increased usage. Also, a centralized telephone banking unit known as TeleBanco was established, integrating customer service and telemarketing functions. Technology has enhanced existing products, improving a cash management system known as Popular Access Line (PAL), which allows cash monitoring for commercial customers. We also pioneered in the use of imaging technology in our market with the introduction of CheckRegister, which features images of canceled checks in the monthly statement and eliminates the need to physically return these items. Toward the end of the year, we successfully launched our new Cuenta Popular. This account has access to all our electronic services, as well as checks. It is clearly the most value-laden product in the marketplace and consumers have responded accordingly. Perhaps the most significant event in the area of customer service was the full implementation of the concept of Total Quality Management (TQM). At year-end, approximately 43% of our employees had taken our introductory course to quality management, which is based on the Deming method. In addition, several Process Improvement Teams have been formed and are already producing encouraging results in various areas. We plan to continue to stress improving the quality of our service at all levels of the organization. Pursuant to our stated plans of increasing our presence in New York, we took a number of important steps. With respect to our banking business, we acquired four branches and approximately $130 million in deposits from Bank Leumi Trust Company and acquired one branch from Emigrant Savings Bank. We closed the year with 30 branches and deposits of $1.3 billion. More importantly, we were able to increase substantially the generation of quality loans, mostly in the area of residential mortgages. And for the third year in a row, Banco Popular was the largest lender of SBA-guaranteed loans among all commercial banks in the United States. In 1993, we also signed a purchase agreement for the acquisition of Pioneer Bank, a successful community bank with two branches and approximately $340 million in assets and over $300 million in deposits in the Chicago area. As of this writing, the transaction has received regulatory approval and we expect to complete the acquisition by the end of the first quarter of 1994. In addition, we ac- 6 8 ________________________________________________________________________________ quired five branches in the British and U.S. Virgin Islands with approximately $229 million in deposits and $125 million in loans from CoreStates Bank. Spring Financial, our growing and successful U.S. consumer finance subsidiary continued its expansion and closed the year with $391 million in assets throughout 58 offices in 14 states, compared with $189 million in assets and 41 offices in 10 states at the end of 1992. Overall, our planned growth in the U.S. and the Caribbean continued to provide us with superior asset growth and important geographic diversification. The Corporation's financial performance improved substantially in 1993. Net income amounted to $109.4 million, representing $3.35 per share, a 28.5% increase over the $85.1 million earned in 1992. Return on average assets and return on average equity also improved considerably, reaching 1.02% and 13.80%, respectively. The most significant factors in 1993 that affected us were the expansion of the operations in the mainland, increased profits of our non-banking subsidiaries, an increase in net interest income, a reduction in the provision for loan losses and an increase in operating expenses. The Corporation's net interest income increased $51.9 million, mostly due to the growth of $1.1 billion in average earning assets. Net interest margin declined modestly from 5.01% to 4.97% in 1993. Another contributing factor in the increase in earnings was the reduction of $24.7 million in the required provision for loan losses, from $97.6 million in 1992 to $72.9 million in 1993. This decrease in the provision is the result of a considerable reduction to net charge offs for the year, particularly in the retail loan portfolio. This is a reflection of improved credit underwriting and the benefits of a slowly recovering economy. It is important to note that even with the lower provision, we were able to increase the allowance for loan losses from $110.7 million in 1992 to $133.4 million in 1993. The allowance now stands at 2.10% of loans, compared with 2.11% a year ago. Non-performing assets, which include commercial loans 60 days past due and consumer installment loans, conventional mortgages and lease financing receivables 90 days past due, decreased significantly from 2.52% of loans as of December 31, 1992, to 1.75% at year-end 1993. The allowance coverage of these assets increased from 83.68% in 1992 to 120.04% in 1993. The Corporation's operating expenses for the year increased $45.3 million, including an increase of $27.7 million in personnel costs. The rise in personnel costs is related to a $5.2 million expense associated with postretirement health benefits for employees (SFAS #106) and the payment of a special bonus on Banco Popular's centennial. The increase is also related to the costs associated with recent branch acquisitions in the U.S. and the Caribbean. In August 1993, your Board of Directors approved an increase of 25% in the quarterly dividend of our common stock. The new quarterly dividend will be 25 cents per share. At year-end, the Corporation had more than $834 million in capital and a market value in excess of $1 billion. The Corporation remains very strongly capitalized, with Tier I capital of 12.29%, total capital to risk-adjusted assets of 13.95%, and a leverage ratio of 6.95%, all well in excess of regulatory requirements for well-capitalized institutions. This strong capital base allows us to pursue new opportunities and continue with our expansion plans. Our common stock price increased slightly during the year from $30.25 to $31.50. For the 10-year period from 1983, the compounded annual growth rate on our common stock price was 16.86% and the total return for the period, including dividends, was 21.78%. Our stock price has performed well during this period, surpassing the return of market 7 9 ___________________________________________________(Photo 8: Group that includes Mr. Carrion) indicators and the performance of our competitors. The economic climate that prevailed during 1993 was one of slow recovery. The low interest rate environment has permitted consumers and commercial borrowers to refinance, recapitalize and improve their financial condition. During the early part of 1993, Section 936 of the U.S. Internal Revenue Service Code came under attack. In August, Congress approved amendments to the Section that reduced the tax benefits derived by Section 936 companies in Puerto Rico. Even with a reduced tax benefit, we believe these companies will remain an important part of our economy, given the many other benefits offered, such as good infrastructure, geographic proximity to the U.S. mainland, no currency or political risk, and, most importantly, a skilled work force. In November, a non-binding referendum was held in Puerto Rico for voters to indicate their preferred political status -- commonwealth, statehood or independence. Commonwealth, the current status, received 48.6% of the vote, statehood 46.3% and independence 4.4%. A similar referendum was held in 1967. At that time, commonwealth received 60.4%, statehood 39.0% and independence 0.6%. Mr. Angel A. del Valle, who reached the mandatory retirement age, retired from the Boards of Directors of the Corporation and Banco Popular de Puerto Rico. After more than 22 years of dedication to the Bank, his thoughts and insight will be missed. For personal reasons, Mr. Danilo Ondina also retired from the Board of Directors of the Bank. For more than 25 years, he served as an executive of Banco de Ponce and BanPonce, where he completed his outstanding professional career. Mr. Noel Totti also reached the retirement age of the Corporation and will continue to serve on the Board of Banco Popular until April 1994 when he will retire. His active participation contributed to our success. To all of them we extend our appreciation and thanks for their contribution in attaining our goals and wish them many happy years of retirement. Mr. Alberto M. Paracchini stepped down from his position as 8 10 (Photo 9: __________________________________________ Group that includes Mrs. Burckhart) Banco Popular's Senior Management: from the left, David H. Chafey Jr., Larry Kesler, Richard L. Carrion, Humberto Martin, Samuel T. Cespedes (legal counsel) Jorge A. Junquera, Maria Isabel P. de Burckhart and Emilio E. Pinero Ferrer. Chairman in 1993, but remains on the Boards of the Corporation and the Bank. We will continue to benefit from his banking and financial experience in our quest to improve performance and build the strongest of institutions in a most competitive environment. We express our gratitude for his many years of dedication and leadership. As we look toward the future, our strategy remains essentially the same as we stated in last year's letter: to continue to enhance the quality of our customer service, to build and expand our banking and non-banking franchises outside Puerto Rico and to move aggressively from paper-based banking transactions to an electronic banking environment. We are convinced that the successful financial organizations will be those that control the quality of their assets, give value to their customers, control their cost base and continuously improve the skills of their human resources. In this centennial year, we evoke the memory of all those who came before us, in particular Rafael Carrion Pacheco and Rafael Carrion Jr. Their philosophy and principles, embodied in "Our Creed" and "Our People", have made us strong and will carry us into the future. The would be justly proud of what has been built on their foundation. It has been a privilege to follow in their footsteps. RICHARD L. CARRION Chairman, President and Chief Executive Officer 9 11 PARTIAL INFORMATION OF 1893 INCORPORATION'S DOCUMENT 12 This has been the story of a small bank that grew into a big bank, a San Juan bank that reached out into the farthest corners of the island, and an islandwide bank that reached out across the water into the mainland. This is the story of a Puerto Rican bank that has attained its hundredth anniversary -- an achievement that is not the result of chance but rather the product of historical circumstances consciously transformed by the vision and sustained effort of the bank's leaders, through the years, into the successful enterprise that can be seen today. 13 PAPER MONEY OVER A BLOW UP OF A $ BILL TRADITION INTO THE FUTURE ----------------------------------------------------- 14 ________________________________________________________________________________ (Photo 13a) Banco Popular de Economias y Prestamos was founded on October 5, 1893, with a limited capital of 5,000 silver pesos. (Photo 13b) Original logo used in 1893. (Photo 13c) 1902 Annual Report. A HISTORICAL PERSPECTIVE Over the years, as Banco Popular's founding principles of prudence, sound business practices and social responsibility guided its growth and saw the institution parallel the development of a modern Puerto Rico, its presidents believed the Bank's corporate history was a story worth telling. The celebration of the Bank's 100th anniversary in 1993 provided the ideal opportunity to make that desire a reality. The result was Tradition into the Future, a book researched and written by Guillermo A. Baralt. It is an inspiring success story of how the solid principles set forth by the Bank's founders have prevailed through the years, supported by a team of people dedicated to those ideals. These principles have guided the institution from its modest beginnings to the prominence it enjoys today. It is these same sound and timeless principles, no less enthusiastically endorsed by the institution's current leaders, that will guide Banco Popular successfully through its next century. A PEOPLE'S BANK The story begins on the evening of Thursday, October 5, 1893, as a group of friends -- some Puerto Rican, others Spaniards -- made their way through the cobblestoned streets of the old walled city of San Juan. Their destination was the Ateneo Puertorriqueno, on the Plaza Alfonso XII, today the Plaza de Armas. Their mission was to establish a savings and loan institution catering to the island's poor, so often the victims of usury. Within hours, the Sociedad Anonima de Economias y Prestamos: Banco Popular was born, with a capital of 5,000 silver pesos. This group of pioneers with a vision was headed by Manuel Fernandez Juncos, the founder, publisher and editor of the popular weekly newspaper El Buscapie. In his insightful, witty articles, Fernandez Juncos had long argued the need for a bank that would welcome the modest savings of the island's poor. He vehemently attacked usury, while trying to assuage a general pessimism in the wake of the failure of other banking efforts. 13 15 ________________________________________________________________________________ (Photo 14a) In 1924, Banco Popular pioneered educational loans in Puerto Rico. Coin bank for home deposits used to foster savings among customers (1912). (Photo 14b) In 1934, Banco Popular opened its first branch in Rio Piedras. Today the Bank has 205 branches in Puerto Rico, the Virgin Islands and the United States. The first personal installment loans were offered in 1928. The group also included such notable figures as Manuel F. Rossy; Jose Celso Barbosa; Manuel Munoz Barrios, the Bank's first managing director; and Jose B. Carrion. They had created the first truly Puerto Rican bank after almost a century of attempts to establish banks on the island had failed. At the time the only bank was Banco Espanol de Puerto Rico. FROM WAR TO PEACE The fledgling Puerto Rican bank was not destined to enjoy smooth sailing, however. Less than five years after that eventful October evening, the Spanish-American War broke out in April of 1898. Banco Popular's timid investors withdrew their funds with every new turn of events in the war, causing the bank to show no earnings for 1898. When the war ended and Spain ceded Puerto Rico to the United States, the island was plunged into a financial and monetary crisis. Business transactions that had been in progress before the war were stalled, and the directors of Banco Popular were obliged to steer a prudent and extremely conservative course. A new crisis struck in 1899, as Hurricane San Ciriaco swept across the island, leaving devastation in its wake. Banco Popular was not spared the storm's effects, since the Bank's holdings depended upon the welfare of the middle class. But even greater obstacles lay in store for the innovative young Puerto Rican bank. A new law, the Foraker Act, provided that as May 1900, the Puerto Rican provincial silver peso would be exchanged for dollars at a 40% devaluation. The 30,000 provincial pesos that constituted Banco Popular's capital funds were suddenly worth only $18,000. The change in sovereignty brought with it the establishment of U.S. and Canadian banks, as well as some institutions with local capital. AN EXTENSIVE BRANCH NETWORK The island's tribulations continued in the early part of the 20th century, as yet another hurricane struck in 1928. But calm did not follow the winds of San Felipe. What followed was the 14 16 ________________________________________________________________________________ (Photo 15a) The island's first FHA mortgage loan was granted in 1938. (Photo 15b) The first island bank merger took place in 1936 with Banco Popular and Banco de Puerto Rico. Banco Popular's Old San Juan building was inaugurated in 1939, the Caribbean's first skyscraper. Great Depression, and the collapse of thousands of banks around the world. In Puerto Rico, seven banks established with local capital closed their doors forever. There was a moment during those dark days when the Board of Directors of Banco Popular was forced to announce the Bank's imminent closure. Yet the Bank survived the crisis -- in fact, it emerged stronger than ever with the inauguration of its first branch offices in Rio Piedras, Santurce, Caguas and Aguadilla. Banco Popular was moving confidently into the future and making plans for the construction of its first headquarters building in San Juan, inaugurated in 1939. But the Bank never lost sight of its primary mission -- to encourage thrift and make banking services available to those whose scant incomes and geographic isolation had heretofore left them bereft of such facilities. During its hundred-year history, Banco Popular has covered the island with an extensive branch network, leaving indelible mark on the life of island towns. During the '50s, a revolutionary plan was conceived to bring a branch of Banco Popular to every town on the island lacking such services. "Banks on Wheels," a fleet of mobile banks, made a reality of Banco Popular's dream of bringing banking services to the most remote corners of the island. This new access helped revolutionize Puerto Rico's traditional saving habits. Local residents were convinced to take their cash out of its hiding places and entrust it to the newcomers. The Bank also began to look beyond the island. In 1961, Banco Popular opened its first branch outside Puerto Rico, in the heart of New York City, and within 10 years opened seven additional branches. As the Bank continued to grow, its heightened economic activity, increased personnel, centralization and greater use of technology prompted then-President Rafael Carrion Jr. to spearhead construction of new headquarters in 1965. Within a few years, the stretch of land in Hato Rey housing the Banco Popular building became the heart of the 15 17 ________________________________________________________________________________ (Photo 16a) A revolutionary system of mobile banks was established in 1957, providing full banking services to the farthest corners of the island. (Photo 16b) Three generations of bankers who led Banco Popular - Rafael Carrion Pacheco, Damian Monserrat and Rafael Carrion Jr. island's financial district, known as the "Golden Mile." In 1978, the Bank extended its network of branches into the eastern region of the island when it acquired a share in the operations of Banco Credito y Ahorro Ponceno. During the next 10 years, the Bank also expanded to the U.S. Virgin Islands. Then, in 1990 Banco Popular brought off the largest bank merger in the island's history, adding to its network 40 Banco de Ponce branches in Puerto Rico and another 14 in New York. At year-end 1993, Banco Popular had a total of 205 branches in Puerto Rico and overseas. INNOVATIVE ADVERTISING One of the natural consequences of this expansion was an increase in the number and types of services the Bank offered. Publicizing these new services through innovative advertising led to another chapter in the Banco Popular success story. Always eager to reach the public it was created to serve, the Bank sought ways to get its message out despite limited resources. In its early days, an employee would often be sent to walk the streets of San Juan, trumpeting the Bank's services through a megaphone. But in the 1950s, Banco Popular took to the radio airwaves, launching an extraordinarily successful advertising campaign based on the importance of giving every customer friendly, personal treatment. As it moved into print and the new television industry, the Bank became known for its catchy and highly effective slogans. The launching in 1973 of the innovative Ideal Account, which combined checking, savings and reserve services in a single monthly statement, gave rise to yet another successful advertising campaign that captured the public's imagination. VISIONARY BANKERS Throughout Banco Popular's 100 years of growth and innovation, one theme has remained constant -- its leadership. The institution's course has been guided continuously by prudent but visionary bankers faithful to the principles upon which the Bank was founded. 16 18 ________________________________________________________________________________ (Photo 17a) Popular Center headquarters was inaugurated in 1965 in Hato Rey. (Photo 17b) By 1975, total deposits reached $1 billion, placing the Bank among the top 100 financial institutions in the United States. An ingenious advertising campaign highlighted the Ideal Account. (1973) Spanish-born attorney Damian Monserrat, who was managing director and president of the Bank from 1904 to 1953, was the link between the founders of 1893 and the directors, employees and customers of the 20th century. True to the founders' principles, he preached the value of hard work and the virtue of saving to the poor and to the island's children. At Monserrat's side was another distinguished bank officer, Rafael Carrion Pacheco, executive vice president from 1927 to 1953, and president from 1953 to 1956. Carrion Pacheco -- farmer, businessman, housing contractor, banker and lover of poetry -- was Puerto Rico's 20th century entrepreneur par excellence. When Carrion Pacheco took the helm of Banco Popular in 1927, he forged strong ties with correspondent banks in New York. These ties allowed the Bank, even with relatively few resources, to finance some of Puerto Rico's major sugar cane-producing enterprises, including some financed with U.S. capital. During the years when sugar was the lifeblood of Puerto Rico, Banco Popular's largest loans were sugar related. In the 1950s, when Banco Popular began to emerge as the island's foremost financial institution, Rafael Carrion Jr. succeeded his father at the Bank's helm. His presidency, from 1956 to 1973, brought transformations in the Bank's organizational, operational, technological and service areas, as well as in its public image. Rafael Carrion Jr. also honored and believed in the ideals of 1893. In addition to promoting banking services for the island's poor, he committed Banco Popular to social interest projects in agriculture and public housing. Carrion Jr. always insisted that the Bank had an obligation to help the people, because the people were in large part responsible for the Bank's success. The great respect and friendship he inspired among Bank employees led them to adopt this philosophy as their own. Carrion Jr. believed Banco Popular's employees were its most valuable asset, the anonymous protagonists of its history. When Rafael Carrion Jr. stepped down from the presidency to become chairman of the Board of Directors 17 19 (Photo 18a) Cupey Center (color) The Cupey Center operations complex was inaugurated in 1976. ________________________________________________________________________________ Some of Banco Credito y Ahorro Ponceno's assets were acquired in 1978. (Photo 18b) The automatic teller machines ushered in the "era of electronic banking" in 1983. in 1973, his successor, Jose Luis Carrion, was selected from a large pool of talented men of proven loyalty to the institution. Jose Luis Carrion, who was president from 1973 to 1978, had been with the Bank since 1956. It was his initiative that moved Banco Popular to new frontiers beyond Puerto Rico. One of the greatest achievements of his presidency was construction of the operations complex known as Cupey Center, inaugurated in 1976. Jose Luis Carrion was followed by Hector Ledesma, who served as president of the Bank from 1978 to 1985. Ledesma had risen through the ranks from messenger to member of the board, and compiled an illustrious record of achievement in the Puerto Rican banking industry. Among his contributions as president, and the one that perhaps brought him the most recognition, was the creation of Banco Popular's International Division, geared toward encouraging and promoting Puerto Rican exports. In 1985, the Board of Directors entrusted the presidency of Banco Popular to Richard L. Carrion, who represented a new generation of bankers. As the Bank's comptroller, he had distinguished himself as "the numbers man," and played a central role in the acquisition of Banco Credito y Ahorro Ponceno. He also was largely responsible for leading Banco Popular into the new age of electronic banking, developing the automated teller machine system, known in Puerto Rico by the Spanish acronym ATH. Carrion envisioned a future bursting with new challenges, no less significant than those his predecessors had faced. The 1990 merger with BanPonce Corporation, the largest bank merger in Puerto Rico's history, was a major step toward that future. Banco Popular's growth and vitality have been fostered by the presence of capable, committed men and women of proven integrity on its Board of Directors. Initially drawn from the island's intelligentsia, the board members were businessmen and sugar growers during the second stage of the Bank's growth, giving way to a new generation of businessmen and women, manufacturers and professionals in the third. They con- 18 20 In 1990, Banco Popular merged with Banco de Ponce Banco Popular's assets surpassed $10 billion in 1992, which ranked it number 43 among U.S. banks in deposits. _______________________________________________________________________________ (Photo 19a) In 1991, Banco Popular became the largest Hispanic bank in the United States with 21 branches in New York, one in Chicago and another in Los Angeles, and about $700 million in deposits. The Bank became the main financial institution in the United States in granting SBA-guaranteed loans. sistently have brought to the Bank the knowledge, wisdom, meticulousness and abilities acquired through years of experience in their fields, and helped keep it on its steady course. OUR PEOPLE: KEY TO OUR SUCCESS While the executive officers established the direction the Bank would take, their goals would not have been reached without the support of the rank-and-file employees of Banco Popular. This loyal group of men and women has always been a crucial factor in the Bank's growth. With that in mind, the Bank has made efforts to reward the loyalty and dedication of its employees. In the mid-1940's, Banco Popular took the lead with an employee pension plan. That initiative was followed by such benefits as stock distribution for every employee in 1957, and the Profit-Sharing Plan in 1961. Banco Popular has encouraged the spirit of saving among the Puerto Rican people from its inception. This commitment brought the Bank many small accounts. Moreover, the Bank instituted education loans, and offered personal loans for the first time. Through the years, as competition between banks became more intense and the middle class grew, the Bank continued to offer new services. TECHNOLOGICAL ADVANCES In the 1970s when the Bank's operations had been fully automated and centralized, Banco Popular ushered in the "era of electronic banking," which allowed the Bank to expand its communications network and introduce new and better customer services. Among these services were the automated teller machines that the Bank began installing in 1983. By 1993, Banco Popular had 253 ATMs in operation, more than any other bank in Puerto Rico. Other electronic services offered were direct payments, direct deposits, automatic payment at the point of sale, and the telephone services known as TeleBanco and TelePago. COMMITMENT TO THE COMMUNITY Throughout its first hundred years, Banco Popular has worked to meet its primary commitment to the needs of individual customers, while fulfilling its social goal of supporting 19 21 In the 1990s electronic services such as direct payments, direct deposits and automatic payment POS were introduced together with telephone services known as TeleBanco and TelePago. The Bank purchased CoreStates First Pennsylvania Bank, making it the largest bank in the British and U.S. Virgin Islands (1993). _______________________________________________________________________________ (Photo 20a) A state-of-the art Corporate Development Center was inaugurated in 1992, providing staff training programs. In 1993 the Bank's net income climbed to $101.3 million, with assets of $10.8 billion. Puerto Rican agriculture, industry, business and housing construction. Small business, for example, continues to be a central element in the Bank's dealings. The fact that the Banco Popular of the '90s originates more Small Business Administration loans than any other institution underscores the Bank's commitment to the small-business sector. With the introduction of FHA loan programs, Banco Popular ushered in a new era of housing construction in Puerto Rico. The houses built with these loans redefined the urban landscape of major island cities and helped many Puerto Ricans attain the dream of home ownership. Indeed, examples of Banco Popular's social commitment date back to its very origins, when its founders clearly set forth the path to follow. At the urging of Rafael Carrion Jr., the officers of Banco Popular realized that the institution should not limit itself strictly to banking, but take part as well in any activity that contributed to the well-being of Puerto Rico -- that this civic commitment was, in fact, its duty. Throughout the years, Banco Popular has reaffirmed its identity as the people's bank and was recognized as the banking institution most committed to the people's welfare. UNDERLYING VALUES STILL PRESENT TODAY As the brief review of its history illustrates, Banco Popular's 100th anniversary is not the result of chance, but rather the product of historical circumstances combined with a set of values, transformed by the vision and sustained effort of the Bank's leaders into the successful enterprise of today. Those underlying values, still present today, are: 20 22 (Photo 21a Fireworks (color)) On October 5, 1993, the Bank's centennial, all branches in Puerto Rico, the Virgin Islands and New York were linked through an interactive television system. (Photo 21b) As a tribute to Puerto Rico's music, a television documentary Un Pueblo que Canta was broadcast simultaneously in Puerto Rico, New York and Chicago. ________________________________________________________________________________ Banco Popular's centennial commemoration included an impressive fireworks display in Aquadilla, Ponce and San Juan. Banco Popular published Tradition into the Future: The First Century of the Banco Popular de Puerto Rico 1893-1993 by Guillermo A. Baralt, Puerto Rico's first corporate history. - - - - - - the foundation upon which the Bank was established: to help the neediest. - - - - - - prudence and conservatism, but willingness to take risks, - - - - - - innovative spirit, - - - - - - stable senior management, - - - - - - the advice of banking experts and strong ties with correspondent banks, - - - - - - the presence of capable, committed men and women of proven integrity on the Board of Directors. - - - - - - the selection of its employees and their commitment, - - - - - - diversification of its services, - - - - - - acquisitions and mergers, - - - - - - ingenious advertising campaigns, - - - - - - the development of its broad network of branches, - - - - - - its investment portfolio, - - - - - - close links with the needs of the government of Puerto Rico, - - - - - - commitment to the welfare of the people and social responsibility. After a century of history, the words of Rafael Carrion Pacheco, words adopted as his own by Rafael Carrion Jr., echo with meaning: "Banco Popular's success is no longer the exclusive patrimony of a few men -- it has become the triumph of Puerto Rico." 21 23 (Photo BPPR Old San Juan) POPULAR CENTER HATO REY 24 ________________________________________________________________________________ BanPonce Corporation and Banco Popular enjoy a solid financial and competitive position and a strong corporate culture as a result of an effective leadership that has remained loyal to the corporate principles and values that contributed to past successes. These principles and values may be grouped into the following four broader categories: Prudent and Sound Business Practices; Leadership and Committed Employees; Social Responsibility; and Innovation and Expansion. Following is a review of the major accomplishments and projects of 1993, as well as the most important future initiatives classified under these four categories. 23 25 (Photo Meeting) COMPUTER SCREEN PRUDENT AND SOUND BUSINESS PRACTICES ----------------------------------------------------------- 26 "Graphics" Composition of Total Loan Portfolio BanPonce Corporation ________________________________________________________________________________ Prudence in lending and in all business endeavors has characterized BanPonce Corporation and Banco Popular through the years. Well-trained and experienced lending officers, together with effective credit monitoring mechanisms, a conservative credit policy, and sound portfolio diversification have contributed to controlling loan losses, even during periods of economic downturn. During 1993, BanPonce's loan portfolio increased by 21% from $5.3 billion on December 31, 1992, to $6.3 billion on December 31, 1993. The commercial loan portfolio, which comprises 45% of the total loan portfolio, is well-diversified by loan size, by industry and by geographical areas. Commercial loans were destined for commercial, industrial, agricultural, construction, land development, and lease financing purposes. Growth was mainly experienced in loans to the middle-sized market and for agricultural purposes. Retail loans -- distributed among credit cards, auto, mortgage and personal loans -- made up the remaining 55% of the total loan portfolio. Loan quality continued to improve during the year. The quality of the commercial loan portfolio improved through the expansion of secured lending, mainly commercial mortgages and SBA-guaranteed loans. In addition, commercial non-performing loans declined as a result of improved collection efforts of classified loans and the aggressive marketing program to dispose of other real estate assets in an orderly fashion. In the retail loan portfolio, quality improved through aggressive promotion of cash and mortgage-collateralized loans, credit training and effective collection efforts that include the use of a state-of-the-art collection system. To enhance credit quality and monitoring mechanisms, in February 1993 the commercial credit review and audit functions were centralized under one independent unit. The creation of the Commercial Credit Review and Audit Division has contributed to the evolution from a traditional loan review and documentation audit function into an expanded credit process review and portfolio performance monitoring. 25 27 (Photo 26b) ________________________________________________________________________________ (Photo 26a) (Photo 26c) 26-a Small Business, Seminars - SBA 26-b Department Stores - SBA 26-c Industry Plants - SBA These enhanced functions have improved the Bank's ability to assess current loan risk exposure and forecast non-performing assets and reserve adequacy. Another factor contributing to the improved asset quality was the array of credit courses offered on a regular basis to credit officers. In 1993, as part of the in-house credit training curriculum, a diagnostic test was administered to all commercial lending officers to assess capabilities and identify training needs. During 1994, tailored courses will be offered to address the identified needs and provide the advanced and innovative lending skills required to sustain BanPonce's expansion strategy. Branch employee specialization, a strategy first implemented in 1992 to enhance employee skills and improve retail credit quality and customer service, was continued during 1993. A total of 60 specialized Individual Credit Sections (ICS) were established at selected branches by year-end. Officers in these sections have been trained to serve the particular credit needs of retail customers. A performance evaluation of these specialized sections reveals that they produce a significantly higher volume of loans of better quality than branches with no specialized sections. Plans for 1994 include the establishment of additional ICS at selected branches and the appointment of a dedicated specialized individual credit officer in all of the remaining branches. In addition, the branch specialization strategy will be expanded in 1994 to include the creation of specialized Commercial Business Sections to better serve the credit and non-credit needs of branch commercial customers. Besides sound lending and specialization, Banco Popular has focused on building diverse and stable sources of funding to strengthen its operations and sustain future growth. With the creation of BanPonce Financial Corporation in the United States in 1992, BanPonce has been able to provide Spring Financial Services, a retail finance subsidiary with operations in the mainland, with short-and medium-term funding sources. In the near future, BanPonce Financial will expand its role to provide funding to most of BanPonce's 26 28 (Photo 27a) (Photo 27b) ________________________________________________________________________________ (Photo 27c) 27a Customer's Orientation on SBA Loans 27b Customer's Orientation on SBA Loans 27c U.S. Dollar Bill mainland operations. BanPonce has also created an effective funding mechanism for its subsidiaries in Puerto Rico to support current needs and future acquisitions. As part of the organizational development efforts, some functions and management processes have been formalized and enhanced. Credit review has been strengthened by the creation of an overseeing committee that includes most of senior management, as well as key lending and review officers. In addition, the Asset/Liability Management Committee (ALCO) brings together key senior managers with investment and treasury officers to make sound investment, funding and pricing decisions. Strategic planning, introduced as a formal management process in 1987 and enhanced during the past years, provides management with and integrated view of the organization and contributes significantly to sound decision-making. (Graphics) Titles: Net Losses by Loan Category as a Percentage of Average Loans Titles: Net Losses As Percentage of Average Loans 27 29 6 PRESIDENTS WITH BPPR LOGO IN THE BACKGROUND LEADERSHIP AND COMMITTED EMPLOYEES -------------------------------------------------- 30 ________________________________________________________________________________ Today, as throughout its centennial history, leaders of Banco Popular, BanPonce's banking subsidiary, remain true to the legacy of its founding fathers. Vision, experience and commitment to the guiding principles of prudence, social responsibility and service, creativity and innovation, still constitute the core attributes of employees, management and directors. BanPonce's and Banco Popular's boards of directors have been comprised throughout the years of some of the most successful business people in Puerto Rico. Their knowledge and experience, spanning many different disciplines and industries, have been key in guiding the institutions on their path of success. Currently, as in the past, management exhibits a balanced blend of vision and commitment to the traditional corporate values and principles, as well as the technical and managerial skills necessary to meet the challenges of today's financial services industry. Innovation and creativity, together with sound decision-making, are characteristic of the institution's management. Leaders at the helm of BanPonce and Banco Popular have not only preserved the traditional corporate values through their business decisions and other management processes, but also fostered them throughout the organization and instilled a true sense of commitment, loyalty and service among employees. It is through this unique brand of employee loyalty and commitment that the corporate mission is fulfilled year after year. Loyalty and commitment are evidenced through the employees' endeavors, active participation in special activities and events, and through their individual involvement in community work. A recent survey showed that over 90% of employees expressed deep loyalty and pride in working for the institution, while over 95% of employees surveyed enjoyed working at the Bank. To further this level of commitment and enhance the strong corporate culture, the Bank defined as one of its key strategic thrusts the establishment of a service culture based on Dr. W. Edward Deming's Total Quality Management philosophy. To implement this strategy, training was begun during the fourth quarter of 1992. Implementation efforts went into full gear during 1993 with an aggressive training plan that covered a substantial part of the organization and included training of 2,412 employees in Puerto Rico and 624 in New York. In addition, 19 process improvement teams were formed. Many of the teams' recommendations have already been implemented. For 1994 and beyond, the Bank reaffirms its commitment to the Total Quality Management philosphy. By 1994, almost all of the 7,000 employees will have participated in Total Quality Management seminars. 29 31 Photo (Children) HANDS REACHING SOCIAL RESPONSIBILITY ---------------------------------------------------------------- 32 ________________________________________________________________________________ Historically, Banco Popular has played a key role in promoting the development of the communities it serves. Today, social responsibility remains a fundamental force behind the Bank's strategic direction. The Bank's efforts have always been focused on finding better and more innovative ways of satisfying the communities' financial needs, as well as enhancing their social and economic welfare. The institution is committed to the constant search for alternatives to fully satisfy customers' changing needs. To provide customers with more convenient and efficient banking alternatives, the Bank has spearheaded efforts to transform the Puerto Rican payment system. Since Banco Popular processes approximately 50% of all payments in Puerto Rico, it has a unique opportunity to foster this transformation by offering electronic products and services such as telephone bill payment, telephone banking, direct debit of loan payments, direct deposit, ATM transactions, and point-of-sale data capture terminals and transactions. This key strategic effort should result in a gradual migration from paper-based transactions to electronic alternatives, which will be added convenience for customers, and will also make the payment system more efficient. The Bank's firm commitment to the social and economic welfare of the community is evidenced by its strong historical support of local entrepreneurs. The Bank provides not only loans to small businesses, but also assistance in improving their organization and establishing control systems. The Bank also sponsors numerous seminars to help entrepreneurs develop the necessary skills to manage their businesses and respond to their particular customers' needs. Currently, loans for under $25,000 each comprise over 60% of the commercial portfolio. In addition, the Bank is the leader in origination of SBA-guaranteed loans among all commercial banks in the United States, Puerto Rico and U.S. Virgin Islands. Throughout the years, the Bank has been the first and often the only institution capable or willing to serve specific market segments in Puerto Rico. As a result of the Bank's firm 31 33 _______________________________________________________________________________ Photo (32a) Photo (32b) Photo (32c) 32a Bear and Child on Christmas Activites 32b Christmas Tree 32c Social Activites Promoted by the Bank belief that the island's prosperity depends on the education of future generations, it remains the sole provider of student loans in Puerto Rico. In 1993, the Bank originated over 9,000 student loans for a total value in excess of $25 million. In addition, to serve the special needs of senior or retired customers, during 1993 Banco Popular pioneered reverse mortgages in Puerto Rico. Through this mortgage-collateralized product, the Bank provides, either in a lump sum or in monthly payments to the borrower, loans to people age 62 or over, which require no payments as long as the borrower lives in the home. Banco Popular's assistance to the government has been key in the economic development of Puerto Rico. However, the Bank's role has evolved from financing public projects to its current focus on offering services geared to improve the government's efficiency. To satisfy the needs of various government agencies, services are customized and distributed through the Bank's extensive network of branches and ATMs. Non-credit services provided include cash management and direct deposit and receipt of government payments through telephone banking and at branches. The Bank participates with the Economic Development Bank in providing loans to developing enterprises. In addition, Banco Popular maintains an office on the mainland dedicated exclusively to promoting Puerto Rico as a superior location for the establishment of new businesses and manufacturing operations. The Bank continues its involvement in projects to provide low-and moderate-income housing in the communities it serves. Community reinvestment efforts include assessment of the lower-income segment credit needs, outreach programs that create awareness of credit services provided, and creating the products and services required to satisfy the credit needs of these particular segments. The Bank's numerous community reinvestment efforts include support to island non-profit organizations such as Puerto Rico Community Foundation. Desarrolladora Nuestro Barrio Products Inc., Bayamon's 32 34 _______________________________________________________________________________ Photo (33a) Photo (33b) 33a - San Juan Waterfront Area 33b - Munoz Rivera Avenue Remodeling HOMEProgram, Cantera Peninsula Development Project, and CODEFIN-Vieques, among others. In addition, it offers seminars to merchants and communities on banking products and services, especially federal and local government-guaranteed business loan programs. During 1993, Banco Popular obtained membership in the Federal Home Loan Bank. Through its FHLB membership, the Bank will have access to lower cost funds and others programs for financing of specific housing and economic development initiatives. The composition of the Bank's loan portfolio is evidence of its involvement in local community development. As of December 31, 1993, close to 1,000 single-family dwellings under construction were being financed, amounting to approximately $16 million. These units meet criteria for FHA or VA loan guarantees or have an average price below $60,000, which is considered low-income housing. In addition, the Bank supported another major community development initiative, the rehabilitation of the San Juan Waterfront Area, through the financing of a $11.7 million condominium construction project. Also, the Bank's construction loan portfolio includes $1.3 million in financing for the renovation and management of public housing projects. Banco Popular's community reinvestment efforts in New York include an outreach program, The Good Neighbor Mortgage Program, involvement in the New York Mortgage Coalition and the New York City Small Business Reserve Fund. In New York, the Bank's strong community reinvestment efforts have earned the praise of government agencies. An "Officer Call and Ascertainment Program", requiring branch managers to make outreach calls to small business owners, non-profit organizations, real-estate brokers, local elected officials and various other community-based organizations in their respective service areas, has been implemented. In addition, the Bank is committed to an affordable mortgage financing program for lower-income families and individuals who wish to purchase a home in New York City. The Good Neighbor Mortgage Pro- 33 35 ________________________________________________________________________________ 34A - Centennial Activity (Photo 34B) (Photo R Carrion antorcha) gram provides fixed-rate financing based on non-traditional ratios and qualifying criteria, waiver of application fees, and home buyer education programs. Also, the Bank is a founding member of a coalition of 12 banks and 11 community organizations to promote home ownership among low- and moderate-income families. Furthermore, Banco Popular was selected as one of nine banks to participate in the $5 million New York City Small Business Cash Reserve Fund. This loan program funded with deposits from the New York City Economic Development Corporation, established a cash reserve that allows banks to grant loans with slightly higher risk than conventional loans. The Bank is a prime supporter of philanthropic initiatives in the communities served, particularly in Puerto Rico, not only through its generous donations and public relations programs, but also through the individual efforts of its officers and employees. Many of the bank's officers are actively involved in voluntary community service, and in many cases, they hold key management positions in community and professional organizations. As a result of a genuine concern for improving the quality of life on the island and providing children with a healthy environment in which to grow, the Bank has channeled its resources into supporting educational, sports, cultural and charitable activities. Most of the support to education is provided through the Banco Popular Foundation, a non-profit organization established in 1979 to provide financial backing to institutions dedicated to the education, development and welfare of children and young adults. In 1993, 29 students were endowed, including 18 new awards. In addition, as part of its centennial celebration, Banco Popular granted special awards to the top business school graduates from colleges and universities in Puerto Rico. The Bank also made important donations during the year to education-related programs, such as the planetarium at the Luis A. Ferre Science Park in Bayamon, and contributions to the Ponce Medical School and to Sacred Heart University, among others. 34 36 (Photo 35a) Fireworks Display on Centennial Activity (Photo 35b) Fireworks Display on Centennial Activity ________________________________________________________________________________ Share your Christmas is one of the numerous civic activities undertaken annually by Banco Popular employees. In its 10th consecutive year, the program distributed thousands of gifts and toys among needy children and senior citizens in Puerto Rico during the Christmas season. Moreover, a Christmas theme park was again set up at the Bank's headquarters. To foster community well-being, the Bank is continuously involved in the promotion of sports activities. In the 1993, the Bank sponsored the Recorrido del Fuego Centroamericano y del Caribe, an event in which 3,000 runners, including many of the Bank's employees, took the Olympic torch to the island's 78 municipalities. This run preceded the celebration of the Central American and Caribbean Games held in Puerto Rico in November. Cultural advancement is an important goal in the institutions's community initiatives. The Bank maintains an exhibition hall in its Old San Juan building where exhibits related to the economic and cultural development of Puerto Rico are housed. In 1993, Essence and Presence, Our Traditional Arts, and Tradition in the Future, a pictorial presentation of the Bank's corporate history and the role employees have played in the institution's success story, were displayed. The Bank also sponsors the annual Ponce Art Museum Gala, a fund-raising event to support the largest art museum in the Caribbean. This year, as part of the Bank's centennial presentation and as a special gift to the people of Puerto Rico, Lights of the First Century, a world-class fireworks display, was staged on successive nights in Aguadilla and Ponce, followed by a grand finale in San Juan. In addition, the first corporate book in Puerto Rico, Tradition into the Future: The First Century of the Banco Popular de Puerto Rico 1893-1993, was formally presented. Another centennial activity was the production of the television special, Un Pueblo que Canta, a tribute to 100 years of Puerto Rican music. Funds raised from the sales of videos, compact discs and cassettes of the program were donated to various charities including the AIDS Foundation, Centros Sor Isolina Ferre and the Cantera Peninsula Development Project. 35 37 (Photo BPPR in Hato Rey at dusk) WORLD GLOBE INNOVATION AND EXPANSION ------------------------------------------------------------- 38 ________________________________________________________________________________ The offering of innovative financial products and services has distinguished Banco Popular throughout its 100-year history. The Bank has successfully responded to the changing financial needs of its customers and, on numerous occasions, has anticipated them; in doing so, it has helped chart the course for community and economic development. Consistently, the Bank has been the first in Puerto Rico to implement new approaches and use of the latest technology to offer innovative banking products and services. At the turn of the century, to foster the habit of saving among the Puerto Rican people, the Bank developed the home savings program by which people saved money in cast-iron "piggy banks". Later on, it brought banking services to remote communities through the innovative use of mobile units. Through the years, the Bank has pioneered numerous products and services in Puerto Rico including loans for education, personal loans, FHA mortgage loans, and combined checking, savings and overdraft protection accounts, among others. In recent years, the Bank has brought Puerto Rico into the era of electronic banking by establishing the most extensive network of automated teller machines, known as ATH, and providing customers the convenience and benefits of electronic transactions. Today, one of the institution's corporate strategies is to drive the transformation of Puerto Rico's payment system through the migration from paper-based transactions to electronic alternatives. During 1993, six major initiatives were implemented to attain this objective. A telephone bill payment service was launched in February, under the marketing name of TelePago, to provide customers with a convenient alternative to making payments by mail or at branches. Utility and loan payments, as well as payments to major retail department stores, can easily be made through the use of this service. For 1994, additional merchants will be added to TelePago and its aggressive promotion continued. Direct debit of loan payments was also successfully promoted during 1993, and the percent- 37 39 (Photo 38a) ATM Networks facilities (Photo 38b) ATM Networks facilities (Photo 38c) ATM Networks facilities _______________________________________________________________________________ age of new retail loans making payments through this option increased to almost 50% of loans originated by year-end 1993. Direct deposit of payrolls and social security and VA benefits was also emphasized during the year, resulting in a 46% increase in this type of transaction. The enhancement of the ATM network and of the value of the Bank's own debit cards for usage at ATMs and at a growing network of point-of-sale electronic data capture terminals, was a key effort during the year. These initiatives will continue at a heightened pace during 1994. Both the number of ATMs and of point-of-sale terminals increased, with the latter spanning a substantial portion of leading supermarket chains and strategically selected gasoline and retail outlets. These initiatives provide customers with added payment alternatives to traditional branch transactions and for at-store payments. A centralized telephone banking unit was established, which integrates customer service and telemarketing functions. The unit utilizes advanced communication technology that includes a Voice Response Unit (VRU) that presently handles over half of all calls received. In addition to continuing with these initiatives, new payment system projects will be implemented in 1994 to continue promoting the migration of banking transactions to electronic alternatives. Technology has been utilized also in developing other new services and enhancing existing products. In 1993, the Bank developed and marketed its own cash-management system, Popular Access Line (PAL), a computer-based reporting and transaction system with innovative, comprehensive and flexible capabilities that allows commercial customers effective cash monitoring, seven days a week, 24 hours a day. Imaging technology was introduced in 1993 to reduce costs and improve efficiency, as well as to enhance existing products. Through the conversion of documents into digitalized electronic forms, imaging can be applied to check processing and document storage, among other processes. In 1993, the Bank introduced CheckRegister, a new service that provides customers the flexibil- 38 40 (Photo 39a) Telephone Bill Payment Services's Personnel (Photo 39b) Telephone Bill Payment Services's Personnel ________________________________________________________________________________ ity of substituting canceled checks with images, reproduced up to 10 checks per page. In 1994, the use of imaging technology will be expanded to include offering CheckRegister to most checking accounts and utilizing imaging in the processing and safekeeping of many other documents. The latest computer and communications technology has been intensely used at the Bank for decades to enhance processes and efficiency and to support growth. In 1993, several automated systems were developed to achieve these objectives and improve service quality at branches. A new automated teller system has been developed and will be installed at all branches by the first quarter 1995. In addition, an automated system for branch platform functions has been developed. It facilitates and expedites account openings and maintenance and, through its automated loan origination and disbursement features, will contribute to improve efficiency and customer service for retail loans at branches. The use of advanced communications technology made possible the development and launching of an innovative interactive television system, inaugurated as part of the Bank's centennial celebrations. The system, the first of its kind in Puerto Rico, allows for direct communication between the Bank's headquarters and all branches in Puerto Rico, New York and the U.S. Virgin Islands. Among its numerous applications, it has been used to communicate messages from the Bank's president to all employees, as well as an internal marketing and educational tool to introduce new products and services to employees. In 1994, its applications will be expanded to include training, conferences and meetings. 39 41 (Photo 40a) Bank Building Facilities (Photo 40b) Bank Building Facilities (Photo 40c) Bank Building Facilities ________________________________________________________________________________ Mergers, acquisitions and expansion into new markets and into new businesses have played a key role in BanPonce's growth and development through the years. During 1993, the Corporation continued pursuing its long-term expansion strategy outside Puerto Rico and its diversification into non-banking activities. In New York, the acquisition in 1993 by Banco Popular of several branches and deposits from Bank Leumi Trust Company of New York, Northside Savings Bank and Emigrant Bank increased deposits to almost $1.3 billion and the number of branches to 30. For 1994, expansion opportunities will be explored in the New York/New Jersey area and in selected areas of Florida. In Chicago, an agreement was signed, and subsequently approved by regulatory agencies, to acquire two branches with approximately $300 million in deposits and $185 million in loans from Pioneer Bank Corp. In the Caribbean, the acquisition of four branches in the U.S. Virgin Islands and one in Tortola from CoreStates Bank was completed in 1993. Today, the Bank operates eight branches in the Virgin Islands Region. Further expansion in the Caribbean is being considered and plans developed to explore opportunities. 40 42 (Photo 41a Velco's Van) ________________________________________________________________________________ (Photo 41b) Popular Leasing Building Facilities GROWTH INTO NEW MARKETS AND BUSINESSES Corporate expansion and diversification has also been attained through the incursion into new businesses. BanPonce's non-banking subsidiaries allowed it to become a diversified corporation with non-banking operations that include two leasing companies and a small personal loan company in Puerto Rico, and a consumer finance company that, as of December 31, 1993, operated offices in 14 states. Through its two leasing subsidiaries, BanPonce is the dominant player in Puerto Rico's leasing market. VELCO (Vehicle Equipment Leasing Company), a BanPonce Corporation subsidiary, is the island's largest vehicle leasing operation with an estimated market share of 44%. With over 30 years experience in the market, VELCO, acquired by BanPonce in 1986, provides vehicle and equipment leases to corporations and retail customers, maintenance services and daily rental through four conveniently located facilities at San Juan, Carolina, Caguas and Ponce. POPULAR LEASING AND RENTAL, INC., a subsidiary of Banco Popular, is the second largest vehicle leasing company in Puerto Rico, with an estimated 33% of the market. Established in 1989, Popular Leasing has grown at an accelerated rate, and today enjoys a strong image and position in the marketplace, as well as an experienced management team. During 1993, both companies improved their financial performance as a result of the implementation of cost control measures, enhancements to systems, improved credit quality and higher business volumes. 41 43 (Photo 42a) Spring Financial Building Facilities ________________________________________________________________________________ As part of its diversification and expansion plan, BanPonce has entered the consumer finance business through the acquisition of two subsidiaries. First, in 1987 Banco Popular acquired Popular Consumer Services, Inc., and in 1991 the Corporation purchased Spring Financial Services, Inc. POPULAR CONSUMER SERVICES grants small personal loans of up to the maximum regulatory limit of $2,000 per loan, through 26 offices located across Puerto Rico. Operating under the name of Best Finance, the company is the fifth largest small loan company on the island. SPRING FINANCIAL SERVICES, a wholly owned subsidiary of BanPonce Financial Corporation, originates and services first and second mortgages as its primary business. The company also provides retail dealer financing and loans throughout its branch network. It presently services over 41,000 customers as of year-end 1993, and has loans outstanding of $375 million. As of December 31, 1993, it operated 58 offices in 14 states in the mid-Atlantic and Midwest. The acquisition of Spring and its subsequent rapid growth has allowed BanPonce to enter numerous geographic markets and facilitated the implementation of its expansion strategy in the U.S. mainland. In 1994, expansion will continue into the Southern and Mid-western regions of the United States with the opening of 14 new offices in six additional states. 42 44 BOARD OF DIRECTORS, MANAGEMENT AND ________________________________________________________________________________ BANCO POPULAR BRANCH NETWORK 43 45 BOARD OF DIRECTORS BANPONCE CORPORATION ____________________________________________________________________________________________________________________________________ RICHARD L. CARRION JUAN J. BERMUDEZ ALBERTO M. PARACCHINI Chairman of the Board and President Partner Private Investor Bermudez & Logo, S.E. FRANCISCO PEREZ JR. ALFONSO F. BALLESTER SILA MARIA CALDERON Chairman of the Board and Vice Chairman of the Board President President President Commonwealth Investment Sucrs. Jose Lema & Co., Inc Ballester Hermanos, Inc. Company, Inc. FRANCISCO M. REXACH JR. MANUEL LUIS DEL VALLE FRANCISCO J. CARRERAS President Vice Chairman of the Board Educator Ready Mix Concrete, Inc. Chairman of the Board Executive Director FELIX J. SERRALLES NEVARES Bacardi Corporation Fundacion Angel Ramos, Inc. President and ANTONIO LUIS FERRE WALDEMAR DEL VALLE, ESQ. Chief Executive Officer Vice Chairman of the Board Partner Destileria Serralles, Inc. President Parra, DelValle, Frau & Limeres LUIS RODRIGUES DELGADO El Nuevo Dia LUIS E. DUBON JR., ESQ. President Partner Gitty's Toys, Inc. Dubon & Dubon EMILIO JOSE VENEGAS ROBERTO W. ESTEVES Secretary, Board of Directors President Venegas Construction Corp. Star Tours International, Inc. President Solstar Corp. d/b/a Travel network Sanson Corporation Caribe Theaters Corp. JULIO E. VIZCARRONDO JR. HECTOR R. GONZALEZ President and President and Chief Executive Officer Chief Executive Officer Desarrollos Metropolitanos, Inc. TPC Communications of PR, Inc., and Teleponce Cable TV, Inc. SAMUEL T. CESPEDES, ESQ. FRANKLIN A. MATHIAS Secretary Retired Executive Board of Directors HUGH G. MCCOMAS ERNESTO N. MAYORAL, ESQ. President and Assistant Secretary Chief Executive Officer Board of Directors MCO Industries, Inc. MANUEL MORALES JR. President West Indies & Grey Advertising, Inc.
44 46 BOARD OF DIRECTORS BANCO POPULAR ____________________________________________________________________________________________________________________________________ RICHARD L. CARRION JUAN A. ALBORS HERNANDEZ FRANKLIN A. MATHIAS Chairman of the Board Chairman and Retired Executive President Chief Executive Officer HUGH G. MCCOMAS Chief Executive Officer Albors Development Corp. President and SALUSTIANO ALVAREZ MENDEZ Chief Executive Officer ALFONSO F. BALLESTER President and Director MCO Industries, Inc. Vice Chairman of the Board Mendez & Company, Inc. MANUEL MORALES JR. President JOSE A. BECHARA BRAVO President Ballester Hermanos, Inc. President West Indies & Grey Advertising, Inc. MANUEL LUIS DEL VALLE Empresas Bechara, Inc. ALBERTO M. PARACCHINI Vice Chairman of the Board JUAN J. BERMUDEZ Private Investor Chairman of the Board Partner FRANCISCO M. REXACH JR. Bacardi Corporation Bermudez & Longo, S.E. President ANTONIO LUIS FERRE ESTEBAN D. BIRD Ready Mix Concrete, Inc. Vice Chairman of the Board President and LUIS RODRIGUEZ DELGADO President Chief Executive Officer President El Nuevo Dia Bird Construction Company, Inc. Gitty's Toys, Inc. GEORGE BLASINI JOSE E. ROSSI Investor Chairman of the Board of Directors SILA MARIA CALDERON Aireko Construction Corp. President FELIX J. SERRALLES NEVARES Commonwealth Investment President and Company, Inc. Chief Executive Officer FRANCISCO J. CARRERAS Destileria Serralles, Inc. Educator NOEL TOTTI JR. Executive Director Engineer Fundacion Angel Ramos, Inc. JULIO E. VIZCARRONDO JR. LUIS E. DUBON JR., ESQ. President and Partner Chief Executive Officer Dubon & Dubon Desarrollos Metropolitanos, Inc. ROBERTO W. ESTEVES President SAMUEL T. CESPEDES, ESQ. Star Tours International, Inc. Secretary Solstar Corp. d/b/a Travel Network Board of Directors Caribe Theaters Corp. ERNESTO N. MAYORAL, ESQ. JORGE A. JUNQUERA Assistant Secretary Executive Vice President Board of Directors Banco Popular de Puerto Rico
45 47 MANAGEMENT ____________________________________________________________________________________________________________________________________ BANPONCE CORPORATION ERNESTO N. MAYORAL, ESQ. CYNTHIA TORO MARITZA MENDEZ Vice President Senior Vice President Vice President RICHARD L. CARRION Legal Division Commercial Loans Strategic Planning Chairman and President RICARDO TORO RETAIL BANKING GROUP Senior Vice President OPERATIONS GROUP MARIA ISABEL P. DE BURCKHART JORGE A. JUNQUERA Corporate Banking HUMBERTO MARTIN Executive Vice President Executive Vice President KENNETH J. GROSS Executive Vice President DAVID H. CHAFEY JR. JORGE BIAGGI Vice President SEGUNDO BERNIER Executive Vice President Senior Vice President International Senior Vice President JORGE A. JUNQUERA Hato Rey Region Operations Executive Vice President FRANCISCO CESTERO FINANCIAL MANAGEMENT GROUP VICTOR V. ECHEVARRIA LARRY B. KESLER Senior Vice President DAVID H. CHAFEY JR. Senior Vice President Executive Vice President Caguas/Fajardo Region Executive Vice President Management Information Systems HUMBERTO MARTIN NORMAN IRIZARRY ORLANDO BERGES EDUARDO FIGUEROA* Executive Vice President Senior Vice President Senior Vice President Senior Vice President EMILIO E. PINERO FERRER, ESQ. Western Region Comptroller Electronic Banking Executive Vice President WILBERT MEDINA LUIS R. CINTRON Services Senior Vice President Senior Vice President *effective March 1994 ORLANDO BERGES Bayamon Region Trust PLINIO RODRIGUEZ Senior Vice President FERNANDO L. MONLLOR JUAN GUERRERO Senior Vice President TERE LOUBRIEL Senior Vice President Senior Vice President Security Senior Vice President Ponce Region Investments MARGARITA HERRERA, ESQ. ERNESTO N. MAYORAL, ESQ. MIGUEL RIPOLL ROBERTO R. HERENCIA Vice President Vice President Senior Vice President Senior Vice President Compliance Rio Piedras Region U.S. Credit Products BANCO POPULAR CARLOS ROM JR. JOSE L. LOPEZ CALDERON Senior Vice President Senior Vice President SUBSIDIARIES RICHARD L. CARRION San Juan Region Treasury Chairman ELI SEPULVEDA VEHICLE EQUIPMENT President Vice President U.S. OPERATIONS LEASING COMPANY, INC. Chief Executive Officer Arecibo/Manati Region PAUL E. CARR JR. ANDRES F. MORRELL Senior Vice President President SENIOR MANAGEMENT COUNCIL RETAIL CREDIT AREA New York RICHARD L. CARRION LARRY B. KESLER MANUEL J. REMON POPULAR LEASING AND President and Executive Vice President Vice President RENTAL, INC. Chief Executive Officer JORGE J. BESOSA Los Angeles CARLOS J. MANGUAL MARIA ISABEL P. DE BURCKHART Senior Vice President WILLIAM BRUIN President Executive Vice President Individual Lending Second Vice President DAVID H. CHAFEY JR. FELIPE FRANCO Chicago POPULAR CONSUMER Executive Vice President Senior Vice President SERVICES, INC. JORGE A. JUNQUERA Mortgage Loans ADMINISTRATION GROUP EDGARDO NOVOA Executive Vice President VALENTINO I. MCBEAN MARIA ISABEL P. DE BURCKHART President LARRY B. KESLER Senior Vice President Executive Vice President Executive Vice President Virgin Islands Region GUSTAVO DIAZ SPRING FINANCIAL HUMBERTO MARTIN ARIEL RODRIGUEZ Senior Vice President SERVICES, INC. Executive Vice President Vice President Marketing THOMAS J. FITZPATRICK EMILIO E. PINERO FERRER, ESQ. Electronic Services JORGE E. MARCHAND President Executive Vice President Senior Vice President COMMERCIAL BANKING GROUP Public Relations and TERE LOUBRIEL EMILIO E. PINERO FERRER, ESQ. Communications Senior Vice President Executive Vice President EDUARDO RODRIGUEZ Internal Auditor ARNALDO SOTO COUTO Senior Vice President DENNIS C. TRISTANI Senior Vice President Human Resources Senior Vice President Construction Loans LUZ M. TOUS DE TORRES Credit Review and Audit Senior Vice President Corporate Real Estate
46 48 BANCO POPULAR BRANCH NETWORK ____________________________________________________________________________________________________________________________________ SAN JUAN REGION TRUJILLO ALTO MAYAGUEZ SUAU U.S. MAINLAND BRANCHES AEROPUERTO UNIVERSIDAD DE PUERTO RICO MAYAGUEZ MALL SUR BARRIO OBRERO MAYAGUEZ MENDEZ VIGO NEW YORK DISTRICT BUCHANAN BAYAMON REGION SAN GERMAN MANHATTAN CALLE LOIZA BARRANQUITAS YAUCO LAS TORRES 7 WEST 51st ST. CENTRO MERCANTIL BAYAMON CENTER YAUCO PLAZA 164 EAST 116th ST. CONDADO BAYAMON OESTE 615 WEST 181st ST. EXPRESO CALLE LOIZA COMERIO PONCE REGION 4043 BROADWAY AVE. EXPRESO ISLA GRANDE COROZAL ADJUNTAS 3540 BROADWAY AVE. EXPRESO KENNEDY DORADO ARROYO 134 DELANCEY ST. EXPRESO MINILLAS EXPRESO BARRANQUITAS COAMO 799 AMSTERDAM AVE. EXPRESO PLAZOLETA ISLA VERDE EXPRESO BAYAMON PLAZA EXPRESO ALBERGUE OLIMPICO 441 2nd AVE. AT 25th ST. EXPRESO SAN JUAN EXPRESO TOA BAJA EXPRESO PONCE PLAZA 2852 BROADWAY AT 111th ST. ISLA VERDE LEVITTOWN GUAYAMA CALIMANO 231 WEST 125th ST. AT 8th AVE. METRO OFFICE PARK LOMAS VERDES GUAYAMA MALL 175 DYCKMAN ST. AT 200th ST. MIRAMAR NARANJITO GUAYANILLA BRONX PARADA 15 REXVILLE JAYUYA 2923 THIRD AVE. PARADA 17 RIO HONDO JUANA DIAZ 1046 SOUTHERN BLVD. PARADA 22 SANTA ROSA PATILLAS 752 EAST TREMONT AVE. PARADA 26 TOA ALTA PENUELAS 301 EAST FORDHAM RD. PLAZOLETA CONDADO VEGA ALTA PONCE BUENA VISTA QUEENS PUERTA DE TIERRA PONCE DARLINGTON 37-47 JUNCTION BLVD. SAN JUAN ARECIBO/MANATI REGION PONCE LOS CAOBOS 83-22 BAXTER AVE. ARECIBO DE DIEGO PONCE MALL 28-36 STEINWAY ST. LONG ISLAND HATO REY REGION ARECIBO HIGHWAY PONCE PLAYA CITY AVE. PINERO ARECIBO PLAZA PONCE PLAZA 56-38 MYRTLE AVE. RIDGEWOOD CAPARRA BARCELONETA PONCE RAMBLA BROOKLYN EXPRESO ALTAMIRA CIALES PONCE VILLA 5216 FIFTH AVE. EXPRESO CENTRO MEDICO CRUCE DAVILA SALINAS 15 GRAHAM AVE. EXPRESO GARDEN HILLS EXPRESO PLAZA DEL NORTE SANTA ISABEL 1620 PITKIN AVE. EXPRESO HATO REY PDA. 34 EXPRESO SAN LUIS VILLALBA 247 ROCKWAY PKWY. EXPRESO POPULAR CENTER EXPRESO VEGA BAJA XTRA 1117 EASTERN PKWY. GUAYNABO FLORIDA CAGUAS/FAJARDO REGION 166 LIVINGSTON AVE. GUAYNABO LOS JARDINES MANATI CAGUAS 539 EASTERN PKWY. AT HATO REY CENTER MOROVIS AGUAS BUENAS NOSTRAND AVE. HYDE PARK OROCOVIS AIBONITO 1619 SHEEPSHEAD BAY RD. AT POPULAR CENTER UTUADO CAGUAS PLAZA JEROME AVE. PUERTO NUEVO VEGA BAJA CAYEY 8020 FLATLANDS AVE. AT 81ST REPARTO METROPOLITANO CIDRA 2095 RALPH AVE. SAN FRANCISCO WESTERN REGION CONDADITO 3851 NOSTRAND AVE. SAN PATRICIO AGUADILLA EXPRESO CAGUAS MALL SANTA MARIA AGUADA EXPRESO CAYEY CENTRO CALIFORNIA DISTRICT AGUADILLA EXPRESO PLAZA DEL CARMEN LOS ANGELES RIO PIEDRAS REGION AGUADILLA SUR GURABO 354 SOUTH SPRING ST. AVE. 65 DE INFANTERIA CAMUY SAN ALFONSO BARBOSA EXPRESO AGUADILLA XTRA SAN LORENZO ILLINOIS DISTRICT CAMPO RICO HATILLO VILLA BLANCA CHICAGO CAROLINA HIGHWAY ISABELA FAJARDO 2525 NORTH KEDZIE AVE. CAROLINA PUEBLO LARES CANOVANAS CENTRO COMERICAL 65 DE MOCA CEIBA VIRGIN ISLANDS REGION INFANTERIA QUEBRADILLAS EXPRESO FAJARDO MALL CENTRO COMERCIAL TRUJILLO RAMEY FAJARDO ST. CROIX ALTO RINCON HUMACAO CHRISTIANSTED CUPEY SAN SEBASTIAN HUMACAO ESTE 17 CHURCH ST. EL SENORIAL MAYAGUEZ LUQUILLO SUNNY ISLE EXPRESO CAROLINA XTRA CABO ROJO RIO GRANDE EXPRESO EL SENORIAL EXPRESO CABO ROJO VIEQUES ST. THOMAS EXPRESO PLAZA PUERTO RICO EXPRESO MAYAGUEZ MALL YABUCOA CHARLOTTE AMALIE EXPRESO 65 DE INFANTERIA EXPRESO MAYAGUEZ PLAYA FORT MYLNER MUNOZ RIVERA EXPRESO SAN GERMAN VETERANS DRIVE PLAZA CAROLINA EXPRESO VISTA VERDE SUGAR ESTATE PLAZA DEL MERCADO HORMIGUEROS RED HOOK RIO PIEDRAS DE DIEGO LAS MARIAS SAN JOSE MARICAO TORTOLA ROAD TOWN
47 49 SHAREHOLDERS' INFORMATION - - - - - -------------------------------------------------------------------------------- INDEPENDENT PUBLIC ACCOUNTANTS Price Waterhouse ANNUAL MEETING The 1994 annual stockholders' meeting of BanPonce Corporation will be held on April 22 at 2:00 p.m. at Banco Popular Center in Hato Rey, Puerto Rico. TELEPHONE (809) 765-9800 FAX (809) 759-7803 ADDITIONAL INFORMATION Copies of the Annual Report to the Securities and Exchange Com- mission on Form 10-K and any other financial information may be obtained by writing to: Orlando Berges Senior Vice President and Comptroller Banco Popular de Puerto Rico PO Box 362708 San Juan, PR 00936-2708 48 50 EXHIBIT 13.1 BANPONCE CORPORATION 1993 ANNUAL REPORT - - - - - -------------------------------------------------------------------------------- FINANCIAL REVIEW 51 FINANCIAL REVIEW - - - - - ------------------------------------------------------------------------------ CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations 2 Statistical Summaries 21 Glossary of Terms 26 Report of Independent Accountants 27 Consolidated Financial Statements 28 Summary of Significant Accounting Policies 32 Notes to Consolidated Financial Statements 34 52 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - - - - -------------------------------------------------------------------------------- SUMMARY This year was a memorable one for the institution, celebrating the 100th anniversary of Banco Popular de Puerto Rico, the subsidiary Bank of BanPonce Corporation (the Corporation). The celebration gave us the opportunity to look back again to the traditions and values that created the solid foundation in which the institution's success is based. During 1993, the Corporation had a sound financial performance. Net income amounted to $109.4 million, increasing 28.5% from the net income of $85.1 million reported in 1992. Earnings per share (EPS) for 1993 were $3.35 compared with $2.79 for the previous year. The results for the year include $6.2 million in additional income resulting from the one-time cumulative effect of the adoption of two new accounting principles (SFAS 106 and 109) that will be further explained in this annual report. Excluding the effect of these adjustments, EPS for 1993 were $3.16. Average shares outstanding for 1993 and 1992 were 32,701,236 and 30,461,494, respectively. The rise in average shares reflects the effect of the issuance of 2,458,740 shares through a subscription offering in November of 1992 and the shares issued under the Dividend Reinvestment Plan of the Corporation. The Corporation's profitability ratios improved markedly with returns on assets (ROA) and on shareholders' equity (ROE) of 1.02% and 13.80%, respectively. ROA and ROE for 1992 were 0.89% and 12.72%, respectively. As presented in Table A, the Corporation was able to reduce its provision for loan losses while the net interest income and the operating expenses as a percentage of average assets remained stable. The Corporation has continued enhancing its presence in the mainland through acquisitions and growth. During the year, the Corporation acquired five branches and $172.8 million in deposits in New York. In addition, Spring Financial Services, Inc. (Spring), a diversified consumer financial services subsidiary in the mainland, opened 17 new branches in 1993 and experienced a growth of $194.7 million or 108.4% in its loan portfolio. Spring has now 58 branches operating throughout 14 different states. As a leading financial institution in the Caribbean, the Corporation also expanded its presence in the U.S. and British Virgin Islands (Virgin Islands) with the acquisition of five branches and $228.8 million in deposits on September 30, 1993. The Corporation will continue playing an active role in evaluating and undertaking acquisitions and growth strategies that are considered advantageous from a business and economic standpoint. The aforementioned acquisitions together with the business expansion led to an increase in the Corporation's total assets to $11,513 million, 15.1% higher than the $10,002 million reported for December 31, 1992. Average total assets for 1993 were $10,684 million compared with $9,529 million for 1992. Total loans amounted to $6,347 million at December 31, 1993, compared with $5,252 million a year before. This significant growth of 20.9% was mainly in mortgage loans which grew $785.2 million due to the acquisition of several portfolios in New York, an increase in loan originations and the growth in Spring's portfolio, as previously mentioned. Average loans for 1993 totaled $5,700 million compared with $5,150 million for 1992. As of September 30, 1993, the subsidiary Bank ranked first in market share of loans in Puerto Rico with approximately 28% of total loans in the market. The Corporation's credit quality statistics improved considerably in 1993. Non-performing assets (NPA) at year-end decreased $21.1 million or 16% and net charge-offs for the year decreased $29.4 million. The NPA to total assets ratio improved to 0.97% from 1.32%, (or to 0.70% from 1.05% assuming the standard industry practice). The allowance for loan losses reached $133.4 million at the end of 1993 and represented 2.10% of total loans at that date. Total deposits increased 6% to $8,523 million at December 31, 1993, from $8,039 million at year-end 1992. Non-interest bearing deposits grew $234.1 million and interest bearing deposits increased $249.9 million, mainly in savings accounts. This rise re- TABLE A COMPONENTS OF NET INCOME AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
For the Year - - - - - ---------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 -------------------------------------------- Net interest income 4.61% 4.62% 4.56% 4.87% 4.50% Provision for loan losses (0.68) (1.03) (1.36) (0.91) (0.75) Other income 1.17 1.31 1.47 1.21 1.09 -------------------------------------------- 5.10 4.90 4.67 5.17 4.84 Operating expenses (3.86) (3.85) (3.86) (3.93) (3.65) -------------------------------------------- Net income before tax, dividends on preferred stock of subsidiary Bank, and cumulative effect of accounting changes 1.24 1.05 0.81 1.24 1.19 Provision for income tax (0.26) (0.15) (0.08) (0.15) (0.20) -------------------------------------------- Net income before dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes 0.98 0.90 0.73 1.09 0.99 Dividends on preferred stock of subsidiary Bank (0.01) (0.01) (0.01) Cumulative effect of accounting changes 0.05 --------------------------------------------- Net income 1.02% 0.89% 0.72% 1.09% 0.99% =============================================
2 53
- - - - - ----------------------------------------------------------------------------------------------------------------------------------- TABLE B CHANGES IN NET INCOME AND EARNINGS PER SHARE 1993 1992 1991 - - - - - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share ---------------------------------------------------------------------------- Net income for prior year $ 85,116 $ 2.79 $ 64,564 $ 2.15 $ 63,366 $ 3.15 Increase (decrease) from changes in: Net interest income 51,909 1.70 32,411 1.08 123,563 6.14 Provision for loan losses 24,741 0.81 24,048 0.80 (68,647) (3.41) Gain on sale of securities 622 0.02 (18,376) (0.61) 18,554 0.92 Trading account profit 171 0.01 (376) (0.01) 732 0.04 Dividends on preferred stock of subsidiary Bank 37 (807) (0.4) Other operating income (117) 11,480 0.38 41,532 2.06 Income tax (13,892) (0.46) (7,465) (0.25) 2,446 0.12 Operating expenses (45,331) (1.49) (21,207) (0.71) (116,175) (5.77) ---------------------------------------------------------------------------- Subtotal 103,219 3.38 85,116 2.83 64,564 3.21 Cumulative effect of accounting changes 6,185 0.20 Change in average common shares* (0.23) (0.04) (1.06) ---------------------------------------------------------------------------- Net income for the year $ 109,404 $ 3.35 $ 85,116 $ 2.79 $ 64,564 $ 2.15 =============================================================================
*Used to reflect the effect of the issuance of 2,458,740 shares of common stock through a subscription offering in November 1992. Also reflects the effect of the issuance of shares of common stock through the Dividend Reinvestment Plan in the years presented, plus the additional shares issued on December 31, 1990, related to the merger transaction. The average common shares outstanding used in the above computation were 32,701,236 for 1993; 30,461,494 for 1992; and 30,035,601 for 1991. - - - - - -------------------------------------------------------------------------------- lates principally to the deposits acquired in New York and in the Virgin Islands. The Corporation's capital ratios continue well above the minimum regulatory capital requirements established for well capitalized institutions. The Tier I, total capital and leverage ratios of the Corporation at December 31, 1993 were 12.29%, 13.95% and 6.95%, respectively. At the same date in 1992 these ratios amounted to 12.88%, 14.85% and 7.26%, respectively. Stockholders' equity increased 10.9%, reaching $834.2 million at the end of 1993. The Corporation's market capitalization at December 31, 1993 was $1,031 million. During the third quarter of 1993, the Corporation increased its quarterly dividend by 25%, from $0.20 to $0.25 per share, effective for the dividend paid on October 1, 1993. This financial review contains an analysis of the performance of BanPonce Corporation and its subsidiaries, Banco Popular de Puerto Rico, including its wholly-owned subsidiaries Popular Leasing and Rental, Inc. and Popular Consumer Services, Inc., Vehicle Equipment Leasing Company, Inc. (VELCO), and Popular International Bank, Inc., including its wholly-owned subsidiaries, BanPonce Financial Corp. and Spring Financial Services, Inc., a second tier subsidiary. On December 31, 1990, Banco Popular de Puerto Rico and the former BanPonce Corporation merged. Due to the effective date of the merger, the financial information for 1990 and prior years included in this annual report will be presented as follows: - The statement of condition as of December 31, 1990, and all references to assets and liabilities as of the end of that period reflect the figures for the combined entity immediately after the merger. Average figures for 1990 are those of Banco Popular and its subsidiaries. - The statements of condition for the years before 1990 and all historical asset and liability information, including both averages and end of period information, are those of Banco Popular and its subsidiaries, Popular Leasing and Rental, Inc. (organized in mid-1989) and Popular Consumer Services, Inc. (acquired in December of 1989). - The results of operations for 1990 and prior years and all historical income and expense information are those of Banco Popular and its subsidiaries. Table C presents a ten year summary of selected financial information. EARNINGS ANALYSIS Table B shows the variances, in dollar and per share amounts, of the major captions of the Corporation's income statement for the last three years. The major components of the $24.3 million increase in net earnings for the year ended on December 31, 1993, are summarized as follows: - An increase in net interest income due to a growth of $1.1 billion in the average volume of earning assets, partially offset by a decrease of 61 basis points in the net interest yield, on a taxable equivalent basis, mainly due to the maturity of high-yielding tax exempt securities during the last quarter of 1992. - Lower provision for loan losses due to the improved credit quality of the loan portfolios which led to a reduced level of net charge-offs. - Higher gains on security and trading transactions partially offset by a decline in other revenues mainly due to an adjustment recorded during the year on the excess servicing recognized in 1992 upon the sale of mortgages through collateralized mortgage obligations (CMO) as a result of the increase in mortgage prepayments during 1993. 3 54
- - - - - ---------------------------------------------------------------------------------------------------------- TABLE C SELECTED FINANCIAL DATA --------------------------------------------------- (Dollars in thousands, except per share data) 1993 1992 1991 --------------------------------------------------- CONDENSED INCOME STATEMENTS Interest income $ 772,136 $ 740,354 $ 794,943 Interest expense 280,008 300,135 387,134 --------------------------------------------------- Net interest income 492,128 440,219 407,809 Security and trading gains (losses) 1,418 625 19,376 Operating income 123,762 123,879 112,398 Operating expenses 412,276 366,945 345,738 Provision for loan losses 72,892 97,633 121,681 Income tax 28,151 14,259 6,793 Dividends on preferred stock of subsidiary Bank 770 770 807 Cumulative effect of accounting changes 6,185 ---------------------------------------------------- Net income $ 109,404 $ 85,116 $ 64,564 ==================================================== PER SHARE DATA * Net income $3.35 $ 2.79 $ 2.15 Dividends declared 0.90 0.80 0.80 Book value 25.49 23.03 21.00 Outstanding shares: Average 32,701,236 30,461,494 30,035,601 End of period 32,732,423 32,654,864 30,093,852 AVERAGE BALANCES Net loans $ 5,700,069 $ 5,150,328 $ 5,302,189 Earning assets 9,894,662 8,779,981 8,199,195 Total assets 10,683,753 9,528,518 8,944,357 Deposits 8,124,885 7,641,123 7,198,187 Subordinated notes 73,967 85,585 94,000 Total stockholders' equity 793,001 668,990 610,641 PERIOD END BALANCES Net loans $ 6,346,922 $ 5,252,053 $ 5,195,557 Allowance for loan losses 133,437 110,714 94,199 Earning assets 10,657,994 9,236,024 8,032,556 Total assets 11,513,368 10,002,327 8,780,282 Deposits 8,522,658 8,038,711 7,207,118 Subordinated notes 62,000 74,000 94,000 Total stockholders' equity 834,195 752,119 631,818 SELECTED RATIOS Net interest yield (taxable equivalent basis) 5.50% 6.11% 5.97% Net operating expense/average earning assets 2.92 2.77 2.85 Return on average total assets 1.02 0.89 0.72 Return on average earning assets 1.11 0.97 0.79 Return on average stockholders' equity 13.80 12.72 10.57 Dividend payout ratio 25.39 28.33 34.13 Average net loans/average total deposits 70.16 67.40 73.66 Average earning assets/average total assets 92.61 92.14 91.67 Average total stockholders' equity/average net loans 13.91 12.99 11.52 Average total stockholders' equity/average assets 7.42 7.02 6.83 Overhead ratio 58.34 55.07 52.47 Tier I capital to risk-adjusted assets 12.29 12.88 11.01 Total capital to risk-adjusted assets 13.95 14.85 13.35 Tax rate 21.30 14.24 9.41
* Per share data is based on the average number of shares outstanding during the periods, except for the book value which is based on total shares at the end of the periods. All per share data has been adjusted to reflect a stock split effected in the form of a dividend on April 3, 1989. 4 55
- - - - - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, - - - - - ------------------------------------------------------------------------------------------------------------------------------------ 1990 1989 1988 1987 1986 1985 1984 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $ 565,807 $ 558,273 $ 488,200 $ 410,605 $ 365,513 $ 352,691 $ 327,005 281,561 302,747 261,316 206,778 183,253 182,159 173,796 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ 284,246 255,526 226,884 203,827 182,260 170,532 153,209 91 2,529 689 (366) 7,253 1,604 (1,660) 70,865 59,550 53,025 40,623 33,204 27,670 22,680 229,563 207,376 190,862 182,593 166,982 154,777 136,140 53,033 42,603 34,750 18,000 11,500 7,050 3,900 9,240 11,456 7,844 5,956 6,778 5,468 4,765 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ $ 63,366 $ 56,170 $ 47,142 $ 37,535 $ 37,457 $ 32,511 $ 29,424 ==================================================================================================================================== $ 3.15 $ 2.81 $ 2.36 $ 1.88 $ 1.97 $ 1.81 $ 1.63 0.80 0.80 0.685 0.66 0.61 0.56 0.48 19.67 18.76 16.75 15.07 13.86 12.30 11.05 20,116,970 20,014,013 20,000,000 20,000,000 19,000,000 18,000,000 18,000,000 29,942,406 20,037,396 20,000,000 20,000,000 20,000,000 18,000,000 18,000,000 $ 3,377,463 $ 3,132,167 $ 2,869,829 $ 2,510,495 $ 1,974,648 $ 1,553,739 $ 1,217,844 5,461,938 5,318,800 5,182,535 4,597,329 3,949,899 3,392,972 2,885,819 5,836,749 5,676,981 5,523,823 4,918,984 4,257,327 3,666,180 3,123,191 5,039,422 4,782,791 4,571,456 4,211,465 3,655,492 3,084,367 2,555,828 50,000 38,082 119 1,717 8,178 14,706 16,721 407,611 353,844 317,001 286,752 247,679 208,598 185,911 $ 5,365,917 $ 3,276,389 $ 3,056,761 $ 2,737,271 $ 2,266,437 $ 1,713,602 $ 1,372,302 89,335 40,896 33,244 28,423 26,903 24,229 21,625 8,219,279 5,469,921 5,221,873 4,957,221 4,135,121 3,786,650 3,206,313 8,983,624 5,923,261 5,661,398 5,352,745 4,525,241 4,136,418 3,521,833 7,422,711 4,926,304 4,715,837 4,491,612 3,820,223 3,365,265 2,870,671 94,000 50,000 500 2,500 13,500 15,500 588,884 375,807 334,867 301,425 277,090 221,274 198,797 6.30% 5.57% 5.10% 5.04% 5.70% 6.25% 7.07% 2.91 2.78 2.66 3.09 3.39 3.75 3.93 1.09 0.99 0.85 0.76 0.88 0.89 0.94 1.16 1.06 0.91 0.82 0.95 0.96 1.02 15.55 15.87 14.87 13.09 15.12 15.59 15.83 25.33 28.14 28.00 35.17 31.08 30.87 27.53 67.02 65.49 62.78 59.61 54.02 50.37 47.65 93.58 93.69 93.82 93.46 92.78 92.55 92.40 12.07 11.30 11.05 11.42 12.54 13.43 15.27 6.98 6.23 5.74 5.83 5.82 5.69 5.95 55.80 56.86 60.45 69.83 69.42 73.59 75.14 10.10 9.47 9.19 N/A N/A N/A N/A 12.74 11.76 10.10 N/A N/A N/A N/A 12.73 16.94 14.27 13.70 15.32 14.40 13.94
5 56
- - - - - --------------------------------------------------------------------------------------------------------------------------------- TABLE D NET INTEREST INCOME - TAXABLE EQUIVALENT BASIS Year ended December 31, - - - - - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ------------------------------------------------------------------------------------------------------------ AVERAGE Average Average Average Average BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------------------------------------ Earning assets $9,894,662 8.33% $8,779,981 9.53% $8,199,195 10.69% $5,461,938 11.46% $5,318,800 11.26% ============================================================================================================ Financed by: Interest bearing funds $8,097,004 3.46% $7,277,051 4.12% $6,816,787 5.68% $4,325,229 6.51% $4,264,665 7.10% Non-interest bearing funds 1,797,658 1,502,930 1,382,408 1,136,709 1,054,135 ------------------------------------------------------------------------------------------------------------ Total $9,894,662 2.83% $8,779,981 3.42% $8,199,195 4.72% $5,461,938 5.16% $5,318,800 5.69% ============================================================================================================ Net interest income $ 544,471 $ 536,485 $ 489,541 $ 344,307 $ 296,116 ============================================================================================================ Spread 4.87% 5.41% 5.01% 4.95% 4.16% Net interest yield 5.50 6.11 5.97 6.30 5.57 - - - - - ----------------------------------------------------------------------------------------------------------------------------------
- Higher income tax expense due to a higher pre-tax income and the effect of the tax calculation required by SFAS 109 "Accounting for Income Taxes". - Higher other operating expenses, mainly personnel costs, due to the inclusion of the salaries of the acquired operations, a special bonus paid to the employees of the subsidiary Bank on its 100th anniversary and the accrual for postretirement health benefits for the year 1993 as required by SFAS 106 "Accounting for Postretirement Benefits Other than Pensions". In addition, the increased business activity of the Corporation together with the launching of new products and services led to increases in other expense categories. - The cumulative effect of accounting changes due to the implementation of SFAS 109 which resulted in a credit to income of $28.9 million, partially offset by the recognition of the full transition obligation for postretirement benefits required by SFAS 106 which amounted to $22.7 million, net of deferred taxes. The net effect of these changes was an increase of $6.2 million in net income. NET INTEREST INCOME Net interest income, the principal source of earnings for the Corporation, represents the excess of the interest earned on earning assets over the interest paid on rate-related liabilities. The net interest income is affected by the changes in the balance sheet structure of the Corporation, principally in the volume and composition of earning assets and interest bearing liabilities, the rates earned or paid on these assets and liabilities, and the maturity and repricing of these financial instruments. The latter is of particular significance in years such as 1993 when the interest rates declined to the lowest points in three decades. The Corporation constantly monitors and manages the composition and maturity structure of its assets and liabilities in order to minimize the impact of the above circumstances on its net interest income. For the year ended December 31, 1993, net interest income totaled $492.1 million compared with $440.2 million for the same period in 1992, an increase of $51.9 million. In 1991 the net interest income of the Corporation amounted to $407.8 million. On a taxable equivalent basis, the net interest income rose to $544.5 million for 1993, from $536.5 million in 1992 and $489.5 million in 1991. The rise resulted from an increase of $73.5 million due to the growth and change in the composition of average earning assets partially offset by a reduction of $65.5 million due to lower taxable equivalent yields. The net interest yield, on a taxable equivalent basis, was 5.50% for 1993 compared with 6.11% a year ago and 5.97% in 1991. In order to present all the interest data on a comparable basis, interest income on tax exempt assets has been converted to a taxable equivalent basis assuming an income tax rate of 42%. An analysis of net interest income is presented in Table D. Average earning assets for 1993 increased to $9,895 million, compared with $8,780 million in 1992 and $8,199 million in 1991. On a taxable equivalent basis, interest income amounted to $824.5 million compared with $836.6 million for the year before. The yield on earning assets, on a taxable equivalent basis, for 1993 was 8.33%, a decrease of 120 basis points from the taxable equivalent yield of 9.53% in 1992. In 1991 the taxable equivalent yield on earning assets was 10.69%. Average loans in 1993 amounted to $5,700 million and represented 57.6% of total average earning assets, a slight change from the 1992 ratio of 58.7%. Average loans for 1992 were $5,150 million. The rise of $549.7 million in average loans consists of increases of $405.7 million in mortgage loans, $144 million in commercial and construction loans and $65.4 million in lease financings. Average consumer loans, conversely, were $65.4 million lower than in 1992. The rise in average mortgage loans was mainly due to the acquisition of nearly $358 million in mortgage loan portfolios in the U.S., together with a significant mortgage origination and refinancing activity in Spring and in the subsidiary Bank, given the low interest rate environment. The latter also affected the volume of consumer loans due to the large amount of consumer debt refinanced through residential mortgage loans. Average loans in 1991 totaled $5,302 million. 6 57
- - - - - -------------------------------------------------------------------------------------------------------------------------------- TABLE E INTEREST VARIANCE ANALYSIS - TAXABLE EQUIVALENT BASIS 1993 vs. 1992 1992 vs. 1991 - - - - - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in: ----------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total ----------------------------------------------------------------------------------------------- Interest income: Federal funds sold and securities and mortgages purchased under agreements to resell ($ 736) ($ 410) ($ 1,146) $ 4,265 ($ 3,648) $ 617 Time deposits with other banks (6,094) (740) (6,834) (12,252) (7,541) (19,793) Investment securities 59,181 (92,257) (33,076) 83,525 (41,438) 42,087 Trading securities 98 48 146 (174) (173) (347) Loans 47,873 (19,122) 28,751 (16,986) (45,633) (62,619) ----------------------------------------------------------------------------------------------- Total interest income 100,322 (112,481) (12,159) 58,378 (98,433) (40,055) ----------------------------------------------------------------------------------------------- Interest expense: Savings and NOW accounts 18,812 (20,305) (1,493) 25,021 (29,240) (4,219) Other time deposits (10,669) (21,767) (32,436) (14,385) (51,738) (66,123) Short-term borrowings 13,998 (3,326) 10,672 1,763 (21,194) (19,431) Long-term borrowings 4,634 (1,515) 3,119 5,853 (3,079) 2,774 ----------------------------------------------------------------------------------------------- Total interest expense 26,775 (46,913) (20,138) 18,252 (105,251) (86,999) ----------------------------------------------------------------------------------------------- Net interest income $ 73,547 ($ 65,568) $ 7,979 $ 40,126 $ 6,818 $ 46,944 ===============================================================================================
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. - - - - - ---------------------------------------------------------------------------- The average yield on loans for 1993 was 9.75% on a taxable equivalent basis, representing a reduction of 48 basis points when compared with 1992. The most significant reduction was in the mortgage loans yield which decreased 106 basis points due to the origination and acquisition of a large portion of the portfolio during the current low interest rate scenario. The taxable equivalent yields on construction, commercial and consumer loans declined 41, 39 and 15 basis points, respectively, while the yield on lease financings rose five basis points. Average investment securities for 1993 totaled $4,010 million, an increase of $748.5 million from the average recorded in 1992. Most of this increase was in the U.S. Treasury securities portfolio, mainly due to the Corporation's strategy of moving funds to tax exempt assets whose yields were more attractive during the prevailing interest rate scenario. Other securities also rose, particularly as a result of the acquisition of several CMO during the year. Average investment securities for 1992 and 1991 were $3,262 million and $2,382 million, respectively. The taxable equivalent yield on investment securities decreased from 9.04% in 1992 to 6.53% in 1993. The decrease in yield resulted from the maturity, during the last quarter of 1992, of approximately $400 million in investment securities whose taxable equivalent yield exceeded 10%. These securities, acquired at the end of 1987, provided higher tax benefits to the Corporation since they were not subject to interest expense disallowance for regular income tax, based on the provisions of the Puerto Rico Income Tax Reform Act of 1987. In addition, the repricing and growth in the investment portfolio during a period of lower interest rates also led to the decline in yield. Average money market investment decreased $185.2 million in 1993, from $362 million in 1992 to $176.8 million. In 1991 these investments averaged $506.5 million. The yield on these securities also declined 34 basis points during the year. Average interest bearing liabilities were $8,097 million for 1993, an increase of 11.3% or $820 million from the average of $7,277 million for 1992. In 1991, these liabilities averaged $6,817 million. Total interest expense for 1993 decreased $20.1 million or 6.7% despite the increase in average interest bearing liabilities. Total deposits averaged $8,125 million in 1993, increasing $483.8 million or 6.3% from the 1992 average of $7,641 million. Average non-interest bearing deposits rose $165.1 million or 11.2%. Average interest bearing deposits grew $318.7 million or 5.2%. The increase in average deposits is principally related to the full-year effect of the acquisition of approximately $600 million in deposits from American Savings Bank of New York (American Savings) in June 1992, together with the acquisitions of deposits in New York and the Virgin Islands in 1993, as previously mentioned. Average deposits for 1991 were $7,198 million. The core deposit base of the Corporation increased substantially during the year. Average savings accounts grew $448.8 million or 22% and NOW, Super NOW and money market accounts rose $122.4 million or 12.8%. The average cost of these accounts decreased 58 and 71 basis points, respectively, as a result of revisions made to their pricing structure throughout 1993. Certificates of deposit decreased $258.8 million or 9.1%, particularly due to the shift of customers' funds from time deposits to savings and NOW accounts. The average cost of certificates of deposit declined 70 basis points from 4.50% in 1992 to 3.80% in 1993. Other time deposits remained stable during the year, showing an increase of only $6.2 million in their average balance, while their average cost declined 89 basis points to 4.13% in 1993. As a result of the 7 58
- - - - - --------------------------------------------------------------------------------------------------------------------------------- TABLE F OTHER OPERATING INCOME Year ended December 31, - - - - - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 68,246 $ 63,064 $ 55,000 $36,031 $33,074 Other service fees: Credit card fees and discounts 16,818 16,795 15,268 11,447 10,805 Other fees 27,054 25,696 24,066 17,336 12,230 Other income 11,644 18,324 18,064 6,051 3,441 ------------------------------------------------------------------------------------------ Total $ 123,762 $123,879 $112,398 $70,865 $59,550 ========================================================================================== Other operating income to average assets 1.16% 1.30% 1.26% 1.21% 1.05% Other operating income to operating expenses 30.02 33.76 32.51 30.87 28.72 - - - - - --------------------------------------------------------------------------------------------------------------------------------
above, the average cost of interest bearing deposits decreased 73 basis points, from 4.11% in 1992 to 3.38% in 1993. Average short-term borrowings increased $434.1 million. Most of this increase was in the subsidiary Bank due to higher balances of federal funds purchased and securities sold under agreements to repurchase. The rise in these borrowings resulted mainly from a higher volume of arbitrage activities. In addition, the average volume of commercial paper issued by the parent company rose $76.5 million. The average rate on short-term borrowings decreased 34 basis points, from 3.51% in 1992 to 3.17% in 1993. Long-term debt averaged $67.2 million more in 1993. The increase resulted from a higher amount of medium term notes issued to finance Spring's operations. The average cost of the long-term debt for 1993 was 6.74%, decreasing 70 basis points from the average cost of 7.44% for 1992. The average cost of funding earning assets decreased 59 basis points, reaching 2.83% compared with 3.42% in 1992 and 4.72% in 1991. SECURITY AND TRADING GAINS Beginning in the second quarter of 1992, the Corporation classifies investment securities which management believes may be sold prior to maturity for asset/liability management purposes, as securities available for sale. These securities are carried at the lower of cost or market value. At the end of 1993 these securities amounted to $714.6 million and the market value exceeded their cost by $19.2 million. Securities that are acquired to speculate with short-term price movements are carried in a separate trading account and are marked to market on a monthly basis. During 1993, the Corporation sold $83.2 million of the investment securities available for sale and $11.6 million of the investment securities for a gain of $0.9 million. During 1992, $43.1 million in investment securities were sold for a net gain of $0.2 million. Trading account activities for the year ended on December 31, 1993, resulted in profits of $0.6 million compared with profits of $0.4 million obtained in 1992. OTHER OPERATING INCOME Other operating income, which consists primarily of service charges on deposit accounts, credit card fees, other fee-based services and other revenues, decreased slightly from $123.9 million in 1992 to $123.8 million in 1993. In 1991, these revenues totaled $112.4 million. Service charges on deposit accounts, which represented 55% of the Corporation's other operating revenues, rose to $68.2 million for the year ended December 31, 1993, from $63.1 million in 1992 and $55 million in 1991. As a percentage of average deposits, service charges increased to 0.84% in 1993 from 0.83% in 1992 and 0.76% in 1991. The increase in service charges was primarily attributed to the implementation of a fee on automatic teller machines in the second quarter which contributed $2.5 million, an increase of $1.7 million in consumer checking accounts fees due to revisions made to their fee structure and to a higher customer base, and an increase of $0.6 million in service charges on commercial accounts. The increase in service charges on deposit accounts in 1992 was basically in commercial accounts as a result of the revisions made in their fee structure. Other service fees, which represented 35.4% of the total other operating income for the year, increased $1.4 million or 3.3%, from $42.5 million in 1992 to $43.9 million in 1993. This increase is mainly related to an increase of $1.0 million in credit life insurance fees due to a higher loan origination volume. The increase in other service fees in 1992 was mostly in credit cards, which grew $1.5 million, and in the fees realized by Spring. Other operating income for the period ended December 31, 1993, decreased $6.7 million from $18.3 million reported in 1992 to $11.6 million. During 1992, the Corporation realized a $4.4 million gain on the sale of $86 million on mortgage loans through a grantor trust. In addition, during 1993 the subsidiary Bank recorded adjustments totaling $2.6 million to reflect the reduction in the market value of the excess servicing recognized in 1992 upon the sale of mortgages previously mentioned. These adjustments resulted from higher than expected mortgage prepayments due to the declining interest rate scenario that prevailed in 1993. In 1991, other operating income was $18.1 million and included a gain of $3.1 million realized in the sale of leases through a grantor trust. As shown in Table F, this decrease had a direct effect on the ratio of other operating income to operating expenses which declined to 30.02% in 1993 from 33.76% in 1992. Also, the ratio of other operating income to average assets declined to 1.16% in 1993, compared with 1.30% in 1992 and 1.26% in 1991. 8 59
- - - - - ---------------------------------------------------------------------------------------------------------------------------- TABLE G OPERATING EXPENSES Year ended December 31, - - - - - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ------------------------------------------------------------------------------------- Salaries $151,432 $134,709 $129,928 $ 92,910 $ 86,654 Pension and other benefits 44,713 36,484 37,626 23,269 18,469 Profit sharing 19,766 17,041 13,080 15,143 12,309 ------------------------------------------------------------------------------------- Total personnel costs 215,911 188,234 180,634 131,322 117,432 ------------------------------------------------------------------------------------- Equipment expenses 27,964 23,813 22,755 16,524 15,763 Professional fees 27,302 22,558 19,254 16,114 13,763 Net occupancy expense 26,085 25,442 22,497 12,205 9,717 Communications 18,203 17,048 17,377 12,172 11,369 Business promotion 16,638 12,548 10,723 8,963 9,528 Amortization of intangibles 16,176 14,888 13,687 384 Other taxes 15,996 14,608 13,049 9,788 7,832 Printing and supplies 8,189 7,290 8,349 5,524 6,112 Other operating expenses: FDIC assessment 17,802 16,372 15,007 5,809 3,744 Transportation and travel 3,554 3,136 3,150 2,151 2,440 All other 18,456 21,008 19,256 8,607 9,676 ------------------------------------------------------------------------------------- Subtotal 196,365 178,711 165,104 98,241 89,944 ------------------------------------------------------------------------------------- Total $412,276 $366,945 $345,738 $229,563 $207,376 ===================================================================================== Personnel costs to average assets 2.02% 1.98% 2.02% 2.25% 2.07% Operating expenses to average assets 3.86 3.85 3.86 3.93 3.65 Assets per employee (in millions) $1.55 $1.44 $1.28 $1.29 $1.18 - - - - - ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES Total operating expenses for 1993 increased $45.3 million or 12.3%, reaching $412.2 million from $366.9 million in 1992. As a percentage of average assets, operating expenses have remained stable throughout the last three years, representing 3.86% in 1993, 3.85% in 1992 and 3.86% in 1991. Total operating expenses were $345.7 million during 1991. Table G presents a detail of operating expenses for the last five years. The increase of $45.3 million in total operating expenses is partially related to corporate growth and acquisitions, the recognition of the current year's expense for postretirement health benefits and the expenses related to the celebration of the subsidiary Bank's 100th anniversary. During the year, the operating expenses of Spring increased $3.4 million or 42%, primarily related to the opening of 17 branches. Also, the branches acquired from American Savings in June 1992 had additional expenses of approximately $2.8 million in 1993 and the expenses of the operations acquired during 1993 amounted to approximately $4 million. Personnel costs, which represent 52.4% of the total operating expenses for 1993, increased $27.7 million or 14.7%, compared with $188.2 million in 1992 and $180.6 million in 1991. The increase in personnel costs is mainly attributed to an increase of $16.7 million in salary expense. Salaries increased $4.1 million due to the aforementioned acquisitions and growth, $3.7 million due to the payment of a special bonus to employees on the subsidiary Bank's 100th anniversary and $3.1 million in incentive compensation. Also, annual merit increases contributed to the rise in salary expense. Full-time equivalent employees (FTE) amounted to 7,439 at December 31, 1993, up 474 from 6,965 at the end of 1992. The increase in FTE results mainly from 162 employees retained in the operations acquired in the Virgin Islands and an increase of 118 employees in the operations of Spring. Employee benefits, including profit sharing, rose $10.9 million to $64.4 million in 1993, compared with $53.5 million in 1992 and $50.7 million in 1991. This increase is primarily the result of an improvement in the subsidiary Bank's profitability ratios which led to a higher profit sharing expense by $2.7 million and to the recognition of the $5.2 million postretirement health benefit expense required by SFAS 106. Excluding the effect of SFAS 106, pension and other benefits increased $2.9 million which is related to a rise in social security tax due to the higher salary base, an increase in staff activities related to the subsidiary Bank's 100th anniversary, and an increase in staff trainings due to the Total Quality Management Program which began in late 1992. During the first quarter of 1993, the Corporation implemented the Statement of Financial Accounting Standard (SFAS) 106 "Employers Accounting for Postretirement Benefits other than Pensions". This new accounting standard requires that employers accrue the expected cost of retiree health care and other postretirement benefits, including the transition obligation which is the portion of future retiree benefit costs related to services already rendered by both active and retired employees up to the date of adoption of the statement. The Corporation elected to recognize the full transition obligation in 1993, as permitted by 9 60 - - - - - ------------------------------------------------------------------------------- SFAS 106, resulting in an expense of $22.7 million, net of taxes, which is presented in the financial statements as a cumulative effect of accounting changes. In addition, the Corporation recorded $5.2 million corresponding to the current portion of the expense related to the services rendered during 1993. All other operating expenses increased 9.9% to $196.4 million compared with $178.7 million during 1992. In 1991, these expenses totaled $165.1 million. The most significant increases were $4.2 million in equipment expenses, $4.7 million in professional fees and $4.1 million in business promotion. The increase in equipment expenses correspond to the additional investment in equipment, mostly electronic related, for the development of new products and services. During the year, the Corporation expanded significantly the installation of point of sales (POS) terminals throughout the island. Furthermore, an electronic payment service was introduced where customers can pay bills through the telephone. Business expansion and acquisitions also contributed to this increase. Professional fees also increased due to the above mentioned initiatives that resulted in higher legal fees, software costs and other consulting services. The increase in business promotion is due to the advertising campaigns initiated to support the new products being offered and the business expansion in New York, and to the expenses of the different activities associated with the celebration of the subsidiary Bank's 100th anniversary. Other captions showing increases were other taxes, mainly due to the increase in tax rates for property and municipal license tax in Puerto Rico, FDIC assessment, for the increase in deposit base, and amortization of intangibles, for the premiums paid on the acquired operations. INCOME TAX EXPENSE Effective January 1, 1993, the Corporation adopted SFAS 109. This standard requires an asset and liability approach to accounting for income taxes. The objective of SFAS 109 is to recognize the amount of taxes payable or refundable in the current year and to recognize deferred tax liabilities and/or assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of current and deferred tax liabilities or assets is based on the regular tax rates and provisions of the enacted tax laws. At the date of adoption of SFAS 109, the Corporation recorded a credit to income and a deferred tax asset of $28.9 million mainly due to alternative minimum tax credits and tax loss carryforwards that the Corporation had available. Prior to 1993, the Corporation determined its income tax provision under SFAS 96 whereby the income tax expense was basically the same as the Corporation's income tax liability. At December 31, 1993, the Corporation's net deferred tax asset amounted to $35.9 million. The Corporation recorded this deferred tax asset because, based on the available evidence, it is more likely than not that the asset will be realized. The income tax expense for the year ended December 31, 1993, amounted to $28.2 million compared with $14.3 million for the year before and $6.8 million in 1991. The effective tax rate rose to 21.30% from 14.24% in 1992. The increase of $13.9 million is directly related to a higher amount of pre-tax earnings and to the tax calculation methodology prescribed by SFAS 109, which is based on the regular tax rate. In 1991, the effective tax rate was 9.41% which was affected by tax losses realized on the sale of loans to less developed countries (LDC) acquired on the merger and by a higher amount of loan losses. The difference between the effective tax rates and the statutory rate, which in Puerto Rico is 42%, is primarily due to the interest income earned on certain investments and loans which is tax exempt, net of the related interest expense disallowance. Please refer to Note 21 of the Financial Statements for additional information on the deferred tax asset and the provision for income taxes. BALANCE SHEET COMMENTS Total assets at December 31, 1993, were $11,513 million, representing an increase of 15.1% over the 1992 level of $10,002 million. Total assets at December 31, 1991, amounted to $8,780 million. Average total assets for 1993 amounted to $10,684 million, compared with $9,529 million in 1992 and $8,944 million in 1991. Earning assets at December 31, 1993, amounted to $10,658 million compared with $9,236 million at December 31, 1992, and $8,033 million at December 31, 1991. Loans, which represented 59.6% of the total earning assets at year-end, amounted to $6,347 million compared with $5,252 million at the end of 1992 and $5,196 million at the same date of 1991. The increase in loans is principally due to a significant growth of $785.2 million or 99.3% in mortgage loans, as previously explained. Mortgage loans represented 24.8% of total loans as of December 31, 1993, compared with 15.1% in 1992. This rise should result in an improved credit quality on loans since, based on experience, the Corporation expects low levels of losses on its mortgage portfolio. Money market, investments and trading securities totaled $4,311 million at year-end compared with $3,984 million at the end of 1992, an increase of 8.2%. Investment securities totaled $4,045 million at the end of 1993 of which $714.6 million were carried at the lower of cost or market compared with $408.1 million at December 31, 1992. During the first quarter of 1994, SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" will be implemented. This statement supersedes SFAS 12 and specifically addresses the accounting and reporting for certain investments in debt and equity securities. It requires depository 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 estimates an increase in shareholders' equity of approximately $14.4 million, net of $4.8 million in deferred taxes. Other assets increased from $64.9 million at December 31, 1992, to $95.8 million at December 31, 1993, an increase of $30.9 million. As previously explained, during this year the Corporation adopted SFAS 109 which resulted in the recognition of a net deferred tax asset of $35.9 million as of December 31, 1993. 10 61
- - - - - ------------------------------------------------------------------------------------------------------------------------------------ TABLE H LOANS AVERAGE BALANCES For the Year - - - - - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 1993 1992 1991 1990 1989 -------------------------------------------------------------------------------------------------- Commercial, industrial and agricultural $2,203,304 $2,039,205 $2,037,960 $1,341,528 $1,191,335 Construction 160,539 180,652 205,816 89,289 78,506 Lease financing 339,309 273,882 286,388 36,333 19,143 Mortgage 1,169,881 764,175 649,564 340,156 278,560 Consumer 1,827,036 1,892,414 2,122,460 1,570,157 1,564,623 -------------------------------------------------------------------------------------------------- Total $5,700,069 $5,150,328 $5,302,188 $3,377,463 $3,132,167 ==================================================================================================
On the liability side, total deposits increased $483.9 million or 6%, from $8,039 million at December 31, 1992, to $8,523 million at the same date of 1993. Total deposits as of December 31, 1991, amounted to $7,207 million. Accounting for this year's increase in deposits were $126 million in deposits acquired in New York on July 30, 1993, and $228.8 million acquired in Virgin Islands on September 30, 1993. Core deposits continued to grow reaching $6,954 million at December 31, 1993, compared with $6,295 million a year before. This rise was principally due to an increase of $234.1 million in non-interest bearing deposits and $421.5 million in savings accounts. NOW and money market accounts rose $99.1 million, while certificates of deposit of less than $100,000 decreased $95.9 million. Certificates of deposit of $100,000 and over decreased $174.8 million. Borrowings increased $907.6 million as compared with prior year. This rise is mainly due to an increase of $631.5 million in the amount of federal funds purchased and securities sold under agreements to repurchase due to the existence of profitable arbitrage opportunities. Also, the issuance of an additional $176.4 million in medium-term notes by BanPonce Financial to finance Spring's operations and an increase of $31.1 million in commercial paper, contributed to the rise in borrowings. Subordinated notes decreased $12 million from the $74 million outstanding balance as of December 31, 1992, due to the prepayment in December of 1993 of a 7.95% note which matured in 1994. Other liabilities increased from $132.5 million at the end of 1992 to $182.4 million at the same date in 1993, an increase of $49.9 million or 37.6%. This increase is primarily attributed to the recognition of the obligation under SFAS 106, which amounted to $42.7 million at December 31, 1993. The analysis of the Corporation's balance sheet components will focus on three major topics: Credit Risk Analysis, Asset and Liability Management and Stockholders' Equity. CREDIT RISK ANALYSIS CREDIT MANAGEMENT The acceptance and management of credit risk is an integral part of the Corporation's business activities. The Corporation has established strict credit underwriting standards to monitor the loan granting process and the subsequent performance of the loan portfolio. The risk concentration is also closely monitored by the Corporation. The Corporation's Credit Review and Audit Division provides an independent and objective assessment of the loan portfolio's credit quality. This division also manages the credit rating system, the major credit risk monitoring tool, and tests the adequacy of the allowance for loan losses. During 1993, the commercial portfolio reflected a significant improvement in the level of delinquencies, charge-offs and recoveries. The Commercial Credit Administration Division closely monitors the compliance with the lending policies and procedures to assure the timely detection of problem loans and loss exposure risk. During 1994, a commercial credit training center will be established to continue enforcing the policies of maintaining a highly skilled and experienced staff and assuring the consistent application of sound credit standards. The emphasis of the Consumer Credit Area continues to be on credit quality. The delinquency and net credit losses on this portfolio have also improved considerably over the last two years. In addition, a shift in the consumer portfolio from an unsecured to a secured basis, primarily mortgage and cash-secured loans, has been achieved. For 1994, credit quality will continue to be emphasized through additional training and improved processing technology. The Corporation's credit risk is well balanced as its credit policies emphasize diversification among geographic areas, business and industry groups. The loan risk exposure is spread among individual consumers, small commercial loans and a diverse base of borrowers engaged in a wide variety of businesses. The Corporation has over 780,000 consumer loans and over 32,000 commercial lending relationships. Of these, only 21 relationships have loans outstanding over $10 million. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal and there are no LDC loans. The portfolio composition at the end of 1993 was as follows; 37% in commercial loans, 2% in construction loans, 30% in consumer loans, 25% in residential mortgage loans and 6% in lease financing as compared with 41%, 3%, 35%, 15%, and 6%, respectively, in 1992. The following risk concentration categories existed at year-end. Only those concentrations with portfolio totals in excess of the Corporation's stockholders'equity are presented. 11 62 - - - - - -------------------------------------------------------------------------------- Geographic Risk - The bulk of the Corporation's business activities and credit exposure is concentrated with customers in Puerto Rico. The Island's economic prospects are generally regarded as stable to improving and the Government of Puerto Rico and its instrumentalities are all investment-grade rated borrowers in the United States capital markets. However, the Corporation has been increasing its market outside of Puerto Rico, which now represents 18% of the Corporation's total assets. The Corporation operates the largest Hispanic bank branch network in the United States mainland with 30 branches in New York, one in Chicago and one in Los Angeles. It also operates eight branches in the U.S. and British Virgin Islands and continues to add geographic and business diversity through controlled acquisitions of other operations. Spring Financial, a consumer financial operation acquired in 1991, now has 58 branches in 14 states, primarily in the Mid-Atlantic Region. In addition, during 1993 the Corporation acquired several branches in New York and in the Virgin Islands. These acquisitions added $234 million in assets and $401.6 million in deposits to our operations outside of Puerto Rico. Furthermore, the Corporation has entered into a purchase agreement for the acquisition of Pioneer Bank in Chicago, with approximately $341 million in assets and $300 million in deposits. It has been the Corporation's philosophy of generally limiting its lending activities to projects and borrowers within its geographic regions. This has consistently resulted in acceptable credit quality. Consumer Credit Risk - Consumer credit risk arises from exposures to credit card receivables, home mortgages, personal loans, and other installment credit facilities. At year-end, consumer and residential mortgage loans amounted to $1,872 million and $1,576 million, respectively, with $645 million in unused credit card lines. The lower charge-off amount for consumer credit loans in 1993 reflects the consistent application of good credit standards, plus enhanced collection systems. In 1994, management will direct the efforts to continue increasing the secured portion of the portfolio. At December 31, 1993, the secured consumer loan portfolio was $702.6 million or 38% of the total portfolio compared with 34% at December 31, 1992. Industry Risk - Total commercial loans, including commercial real estate loans, amounted to $2,370 million at year-end. Commercial loans secured by real estate, consisting primarily of residential, owner-occupied and income producing properties, represented $894.2 million or 38% of the commercial portfolio. Construction loans amounted to $153.4 million at year end. During the last quarter of 1993 an uptick economic growth was confirmed. The real estate activity in the mainland reached impressive levels as compared with the economic environment of the last two years, when the slow economy seriously affected this market. The real estate in Puerto Rico has relative price stability and is expected to continue improving. The Corporation's objective for 1994 in this area is to continue to be highly selective in its underwriting of real estate-related credits. The non real estate-related portion of the commercial loan portfolio amounted to $1,476 million, with $1,140 million in unused commitments under lines of credit to commercial, industrial and agricultural concerns. Commercial and stand by letters of credit totalled $94.2 million at year-end. As mentioned previously, there are no significant concentrations in any one industry with a substantial portion of the customers having credit needs of less than $100,000. Furthermore, there is only a limited number of speculative and highly leveraged transactions in the commercial portfolio and no LDC loans. Government Risk - As of year-end, $3,543 million of the investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $82.1 million of residential mortgages and $142.1 million in commercial loans are insured or guaranteed by the U.S. Government or its agencies. Furthermore, there are $256.7 million of investment securities representing obligations of the Puerto Rico Government and political subdivisions thereof with another $126.9 million of loans issued to or guaranteed by these same entities. LOANS Loans at December 31, 1993 totaled $6,347 million, an increase of $1,095 million or 21% from prior year's total of $5,252 million. Total loans at December 31, 1991, amounted to $5,196 million. Most of the increase in loans is attributed to the mortgage loan portfolio which increased $785.2 million, from $790.8 million at December 31, 1992, to $1,576 million at the end of this year. Mortgage loans at December 31, 1991 totaled $683.5 million. Commercial, lease financing and consumer loan portfolios increased 11.1% or $236.2 million, 19.3% or $60.8 million and 1.7% or $31.7 million, respectively, as compared with the balances a year ago. However, the construction loans portfolio reflected a decline of $19 million or 11% as compared with the prior year. The increase in the mortgage loan portfolio was mainly due to the acquisition of approximately $358 million in mortgage loan portfolios in the New York operations and the high level of mortgage originations and refinancing activities in 1993 resulting from the low interest rate environment that has prevailed. 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. During 1993, a mortgage loan division was established in the subsidiary Bank's New York operations to continue pursuing the Corporation's strategy of increasing its share of mortgage-secured loans. The commercial loan portfolio consists primarily of commercial and industrial loans and commercial loans secured by real estate. At December 31, 1993, commercial loans, including commercial loans secured by real estate, amounted to $2,370 million, compared with $2,133 million a year ago and $1,996 million at the end of 1991. The rise in the commercial portfolio was primarily due to an improved economic environment that led to an increase of $104 million in the retail and middle market portfolio, and the strong marketing efforts directed to the origination of Government Guaranteed Loans. During 1993, these loans increased approximately $40 million, primarily loans guaranteed by the Small Business Administration (SBA). Also, $46.7 million in commercial loans were acquired in the purchased Virgin Island operations. Commercial loans to Fortune 500 and multinational corporations remained stable, totalling $652.3 million as of December 31, 1993, as compared with $647.3 million at the end of 1992. 12 63
- - - - - ---------------------------------------------------------------------------------------------------------------------------------- TABLE I NON-PERFORMING ASSETS As of December 31, - - - - - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 --------------------------------------------------------------------------------------- Commercial, industrial and agricultural $ 49,517 $ 62,662 $ 79,642 $ 61,328 $ 25,245 Construction 8,215 8,798 8,213 6,297 1,547 Lease financing 4,429 4,752 5,449 405 Mortgage 14,363 11,532 10,374 5,581 1,918 Consumer 16,290 20,597 25,049 Renegotiated accruing loans 5,643 8,380 520 Other real estate 12,699 15,582 7,012 6,666 1,460 --------------------------------------------------------------------------------------- Total $111,156 $132,303 $136,259 $ 80,277 $ 30,170 ======================================================================================= Accruing loans past-due 90 days or more $ 15,505 $ 23,957 $ 32,658 $ 57,355 $ 28,162 ======================================================================================= Non-performing assets to loans 1.75% 2.52% 2.62% 1.50% 0.92% Interest lost $ 4,992 $ 7,548 $ 10,983 $ 6,869 $ 3,771
Note: The Corporation's policy is to place commercial and construction loans on non-accrual status if payments of principal or interest are past-due 60 days or more. Lease financing receivables and conventional residential mortgage loans are placed on non-accrual status if payments are delinquent 90 days or more. Closed-end consumer loans are placed on non-accrual when they become 90 days or more past-due and are charged-off when they are 120 days past-due. Open-end consumer loans are not placed on non-accrual status and are charged-off when they are 180 days past-due. Prior to 1991, the Corporation continued to accrue interest on closed-end consumer loans until they were 120 days past-due, at which time they were sold for a percent of their balance and the difference charged-off. - - - - - -------------------------------------------------------------------------------- The lease financing portfolio amounted to $375.7 million as of December 31, 1993, compared with $314.9 million and $252.7 million as of December 31, 1992 and 1991, respectively. The rise in the truck and vehicle sales in Puerto Rico contributed to the growth in this loan category. It is expected that the commercial portfolio will continue to grow moderately during 1994 primarily in the following economic sectors: service industries, middle market and corporate loans, pre-export and export financing, and government guaranteed loans. Furthermore, increases in loan demand are expected in the agricultural and tourism sectors. Consumer loans outstanding, which include personal, auto and boats, credit cards, reserve lines and student loans, amounted to $1,872 million at December 31, 1993, compared with $1,841 million at year-end 1992 and $2,069 million as of December 31, 1991. This growth reflects the acquisition of $29.8 million in consumer loans in the Virgin Islands and reflects also the effects of a slowly improving economy and the strong marketing efforts during the year. As a percentage of the total loan portfolio, consumer loans represented 30% at the end of 1993 as compared with 35% and 40% as of December 31, 1992 and 1991, respectively. At the end of this year, the personal loan portfolio represented approximately 54% of the total consumer loan portfolio. The personal loan portfolio was comprised of about 22% in mortgage secured loans, 10% with cash collateral and the remainder was unsecured. Emphasis on secured personal loans during 1992 and 1993 increased the secured portion of the total personal loan portfolio to 32% at the end of 1993, from 20% in 1991. Auto and boat secured loans represent about 17% of the total consumer loan portfolio, and revolving credit (credit cards plus reserve lines of credit) are 24%. The remaining 5% is student loans and small dealer contracts. In 1994, credit quality will continue to be emphasized through additional training and improved processing technology. Sustained advertising and promotions should spur growth in the personal loan and revolving credit portfolios despite a continuously cautious consumer and a reduced, but still high, consumerindebtedness. Consumers have chosen to refinance home mortgages to cancel personal debts, also getting lower mortgage interest costs that are tax deductible. Auto loans are expected to grow due to continued marketing efforts and strong auto sales. NON-PERFORMING ASSETS Non-performing assets of the Corporation consist of past due loans on which no interest income is being accrued, renegotiated loans, other real estate and in-substance foreclosed assets. Non-performing assets at December 31, 1993, totaled $111.2 million or 1.75% of loans. This represents a drop of $21.1 million or 16% from a year earlier when comparable amounts were $132.3 million or 2.52% of loans. Non-performing loans at December 31, 1993, were $92.8 million or 1.46% of loans, down $15.5 million from $108.3 million or 2.06% a year earlier. The allowance for loan losses as a percentage of non-performing assets rose to 120.04% as of December 31, 1993, from 83.68% at the same date of 1992. The reduction in non-performing assets was reflected mainly in the commercial non-performing loans which decreased $13.1 million or 21% due to the improved collection efforts of classified loans. Other non-performing loan categories in which reductions were observed were consumer non-performing loans, with a decrease of $4.3 million, and construction and lease financing which 13 64 - - - - - -------------------------------------------------------------------------------- decreased $0.6 million and $0.3 million, respectively. On the other hand, non-performing mortgage loans increased $2.8 million mainly due to the rise in the mortgage loan portfolio. The Corporation was able to reduce other real estate owned by $2.9 million through the successful efforts in the disposition of these properties. Table I presents the composition of non-performing assets by category at the end of 1993 and the previous four years. The Corporation reports its non-performing assets on a more conservative basis than most U.S. banks. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Lease financing receivables and conventional mortgage loans are placed on non-accrual status if payments are 90 days past-due. Closed-end consumer loans are placed on non-accrual status if payments are delinquent 90 days, in order to comply with Puerto Rico statutory requirements, and 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. Assuming the standard industry practice of placing commercial loans on non-accrual status at 90 days past-due and not categorizing the aforementioned closed-end consumer loans as non-accruing, the Corporation's non-performing assets at December 31, 1993, would have been $80.9 million or 1.27% of loans, and the allowance for loan losses would be 165.03% of non-performing assets. At December 31, 1992, adjusted non-performing assets would have been $105.7 million or 2.01% of loans. Accruing loans that are contractually past-due 90 days or more as to principal or interest as of December 31, 1993, amounted to $15.5 million as compared with $24 million in 1992. Renegotiated loans at December 31, 1993, totaled $6.1 million of which $0.5 million were in non-accrual status. All renegotiated loans are classified as non-performing assets. Once a loan is placed on non-accrual status the interest previously accrued and uncollected is charged against current earnings and thereafter, income is recorded only to the extent of any interest collected. The interest income that would have been realized had these loans been performing in accordance with their original terms amounted to $5 million for 1993 compared with $7.5 million for 1992. PROVISION AND ALLOWANCE FOR LOAN LOSSES The Corporation maintains the allowance for possible credit losses at a level which is considered adequate to absorb the potential credit losses inherent in the portfolio. In determining the allowance for loan losses, management considers the risk characteristics of the loan portfolio, historical loan loss experience and the current and projected economic conditions. Based on this evalutation and the current level of net charge-offs, a provision for loans losses is recorded. The provision for loan losses for 1993 totaled $72.9 million, compared with $97.6 million in 1992 and $121.7 million in 1991. The reductions of $24.7 million or 25.3% as compared with prior year and $48.8 million or 40.1% as compared with 1991, were due to a reduced level of charge-offs in the portfolios as a result of the improvement in loan quality during the past two years. Net charge-offs for the year totaled $51.7 million or 0.91% of average loans, compared with $81.1 million or 1.58% in 1992 and $118.4 million or 2.23% in 1991. Net credit losses in the consumer portfolio reflected the major reduction. Consumer loans net charge-offs declined $19.4 million or 51.1%, from $37.9 million in 1992 to $18.5 million in 1993. In 1991, consumer loans net charge-offs amounted to $91.2 million. As a percentage of average consumer loans, net charge-offs amounted to 1.02% in 1993, compared with 2% in 1992 and 4.30% in 1991. Most of this decrease was experienced in the personal loan portfolio where net charge-offs decreased from $21.5 million or 2.28% of average loans in 1992 to only $5.7 million or 0.65% in 1993. In 1991 personal loans' net charge-offs were $54.4 million or 4.81% of loans. During 1993 delinquency and net losses on installment loans and credit cards continued declining considerably. This trend was the result of the consistent application of good credit standards through officer training and periodic lending reviews, plus enhanced collection systems. Commercial loan's net losses also reflected a reduction, decreasing $10.9 million or 31.9% during this year, from $34.1 million in 1992 to $23.2 million in 1993. This decrease was caused mainly by lower losses on the retail and middle market portfolios due to reduced bankruptcy levels and the implementation of improved collection systems. In 1993, commercial loans net charge-offs as a percentage of the average portfolio were 1.05% compared with 1.67% in 1992. In addition to the aforementioned reductions, lease financing net charge-offs decreased $0.9 million, while construction and mortgage net charge-offs rose $1.4 million and $0.4 million, respectively. The net charge-offs on the mortgage portfolio were recorded by Spring. Based on the improved loan quality and the expected improvement in the economic environment, it is expected that net loan losses for 1994 will continue decreasing. Notwithstanding the decrease in the provision for loan losses, the allowance for loan losses at December 31, 1993 totaled $133.4 million, representing 2.10% of total loans, compared with $110.7 million or 2.11% a year earlier and $94.2 million or 1.81% at year-end 1991. As a percentage of loans, the allowance remained basically the same as in 1992 due to the fact that the Corporation's loan quality has improved considerably and most of the increase in loans resulted in the mortgage sector where losses have historically been much lower. Broken down by major loan categories, the allowance for the last four years was as follows: ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, (In millions)
1993 1992 1991 1990 ---- ---- ---- ---- Commercial $ 64.0 $ 49.5 $34.4 $21.9 Construction 10.6 6.5 3.5 3.2 Lease financing 5.8 5.4 5.4 4.3 Consumer 52.0 49.3 50.9 59.9 Mortgage 1.0 ------------------------------------ $ 133.4 $ 110.7 $94.2 $89.3 ==================================== 14
65
- - - - - ------------------------------------------------------------------------------------------------------------- TABLE J ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS (Dollars in thousands) 1993 1992 1991 1990 1989 - - - - - ------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 110,714 $ 94,199 $ 89,335 $ 40,896 $ 33,244 Allowance of acquired Corporation 43,932 Other allowances purchased 1,580 1,556 1,786 Provision for loan losses 72,892 97,633 121,681 53,033 42,603 -------------------------------------------------------------- 185,186 191,832 212,572 139,647 75,847 -------------------------------------------------------------- Losses charged to the allowance Commercial 29,501 37,700 24,849 12,578 12,974 Construction 3,060 1,887 2,450 587 125 Lease financing 9,150 10,139 4,316 20 Mortgage 477 Consumer 35,239 52,454 97,700 40,486 32,377 -------------------------------------------------------------- 77,427 102,180 129,315 53,671 45,476 -------------------------------------------------------------- Recoveries Commercial 6,279 3,577 4,300 1,414 7,234 Construction 607 796 50 801 Lease financing 2,081 2,169 154 Mortgage 36 Consumer 16,675 14,520 6,488 1,895 2,490 -------------------------------------------------------------- 25,678 21,062 10,942 3,359 10,525 -------------------------------------------------------------- Net loans charged-off 51,749 81,118 118,373 50,312 34,951 -------------------------------------------------------------- Balance at end of year $ 133,437 $ 110,714 $ 94,199 $ 89,335 $ 40,896 ============================================================== Loans: Outstanding at year-end $ 6,346,922 $5,252,053 $5,195,557 $5,365,917 $3,276,389 Average 5,700,069 5,150,328 5,302,189 3,377,463 3,132,167 Ratios: Allowance for loan losses to year end loans 2.10% 2.11% 1.81% 1.66% 1.25% Recoveries to charge-offs 33.16 20.61 8.46 6.26 23.14 Net charge-offs to average loans 0.91 1.58 2.23 1.49 1.12 Net charge-offs earnings coverage 3.96x 2.44x 1.64x 2.50x 3.15x Allowance for loan losses to net charge-offs 2.58 1.36 0.80 1.78 1.17 Provision for loan losses to: Net charge-offs 1.41 1.20 1.03 1.05 1.22 Average loans 1.28% 1.90% 2.29% 1.57% 1.36% Allowance to non-performing assets 120.04 83.68 69.13 111.28 135.55 - - - - - -------------------------------------------------------------------------------------------------------------
Table J summarizes the movement in the allowance for loan losses and presents selected loan losses statistics for the past five years. As can be seen from Table J, the Corporation continued strengthening its allowance position during 1993, improving its ratios of allowance to net charge-offs and non performing assets to 258% and 120.04%, respectively, at December 31, 1993. On May 1993 the Financial Accounting Standards Board issued SFAS 114, "Accounting by Creditors for Impairment of a Loan". SFAS 114 addresses the accounting by creditors for impairment of a loan by specifying how the allowance for loan losses related to certain loans should be determined. Under this standard a loan loss may be based on the present value of the loan's expected future cash flows discounted at the loan's effective interest rate, the loan's market price or the fair value of the collateral. If the loss is measured using a discounted present value, the subsequent increase in present value due to the passage of time will be reflected in the income statement either as an adjustment to the provision for loan losses or as interest income. If collateral value or market price of the loan is used to measure the impairment, a subsequent change in value is treated as an adjustment to the provision for loan losses. SFAS 114 is effective for fiscal years beginning after December 15, 1994. At this time, management has not estimated the effect of the adoption of this standard on the financial statements of the Corporation. 15 66
- - - - - --------------------------------------------------------------------------------------------------------------------------- TABLE K MATURITY DISTRIBUTION OF EARNING ASSETS As of December 31, 1993 - - - - - --------------------------------------------------------------------------------------------------------------------------- Maturities --------------------------------------------------------------- After one year through five years After five years --------------------------------------------------------------- Fixed Variable Fixed Variable One year interest interest interest interest (In thousands) or less rates rates rates rates Total - - - - - --------------------------------------------------------------------------------------------------------------------------- Money market securities $ 262,692 $ 262,692 Investment and trading securities 2,218,270 $1,635,127 $ 194,983 4,048,380 Loans: Commercial 1,218,908 373,103 $365,019 342,439 $223,476 2,522,945 Lease financing 120,765 253,364 1,569 375,698 Consumer 611,395 1,113,012 147,828 1,872,235 Mortgage 142,804 514,184 919,056 1,576,044 ----------------------------------------------------------------------------------- Total $4,574,834 $3,888,790 $365,019 $1,605,875 $223,476 $10,657,994 ===================================================================================
ASSET/LIABILITY MANAGEMENT The Corporation manages its assets and liabilities to minimize the impact of volatile interest rates on net interest income. Changes in interest rates can affect the level and stability of earnings. Therefore, the structure of the balance sheet is monitored on a continuous basis to ensure that potential earnings volatility remains within predetermined guidelines established by the Board of Directors. The responsibility for protecting the level of the Corporation's earnings and maintaining potential variations within Board parameters resides with the Asset/Liability Committee (ALCO), which is comprised of senior officers. As specified in the Asset/Liability Management Policy, the ALCO's mandate is to maximize net interest income while maintaining risk within the guidelines detailed in the policy. A balanced position between rate sensitive assets and rate sensitive liabilities over the one year period is generally called for by the policy, although expected market opportunities occasionally occur and the ALCO may adjust the Corporation's asset/liability position to take advantage of them. Asset and liability mismatches are allowed only under policy guidelines and are monitored closely by the ALCO. In addition, positions assumed can be quickly adjusted if warranted by market conditions. The ALCO convenes monthly to review the Corporation's earnings, asset/liability position and current conditions in the financial markets, as well as to analyze and adopt strategies to accomplish the Committee's objectives. Monthly scenario analyses are run using a simulation model to measure the impact of changes in interest rates and proposed strategies on net interest income. The results from the monthly simulations help determine the optimum strategy to adopt. LIQUIDITY The objective of liquidity management is to ensure the Corporation's ability to fund the loan demands of customers, repay deposit withdrawals and maturities, and finance its operations. Since the cost of liquidity increases commensurately with its level, a main focus of liquidity management is maintaining adequate liquid assets and sources of funds at a reasonable cost. A substantial source of liquidity can be found in the Corporation's assets, enhanced by the quality of the investment portfolio and the Corporation's primary position in the local funds market. In addition, the Corporation has immediate access to the U.S. money and capital markets. The investment portfolio provides a significant source of liquidity to the Corporation. Liquid assets include those that can be readily converted into cash with minimal transaction costs or capital losses. The Corporation's securities available for sale, which totalled $714.6 million at December 31, 1993, represent a highly accessible source of liquidity since they can be sold in the secondary markets. In addition, the Corporation's investment securities portfolio at year-end totalled $3,331 million of which 75.5% represents high quality U.S. Treasury and Agency Securities, and 72% of these securities mature in one year or less. These securities can be financed easily in the money markets. The Corporation's loan portfolio is also an important source of liquidity as it generates a substantial amount of cash flows from payments of principal and interest. As of December 31, 1993, $2,094 million or 33% of the total loan portfolio was due within one year. A substantial core deposit base is one of the Corporation's most important sources of liquidity. These deposits include consumer and commercial demand deposits, savings deposits and time deposits under $100,000. Core deposits are more stable and reliable than institutional funds since they are not as sensitive to fluctuations in interest rates and market conditions. As of December 31, 1993, core deposits amounted to $6,954 million or 81.6% of total deposits, which represents an increase of 10.5% as compared with the balance at the end of year 1992. Certificates of deposit of 16 67
- - - - - ----------------------------------------------------------------------------------------------------------------------------- TABLE L AVERAGE TOTAL DEPOSITS For the Year - - - - - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) 1993 1992 1991 1990 1989 -------------------------------------------------------------------------------------- Private demand $1,396,339 $1,265,230 $1,206,443 $ 872,124 $ 826,064 Public demand 235,323 201,218 172,722 144,867 149,972 Other non-interest bearing accounts 3,678 3,807 4,247 4,383 5,913 -------------------------------------------------------------------------------------- Non-interest bearing 1,635,340 1,470,255 1,383,412 1,021,374 981,949 -------------------------------------------------------------------------------------- Savings accounts 2,492,845 2,044,037 1,629,806 1,055,410 994,163 NOW and money market accounts 1,078,075 955,654 767,984 433,989 367,750 -------------------------------------------------------------------------------------- Savings deposits 3,570,920 2,999,691 2,397,790 1,489,399 1,361,913 -------------------------------------------------------------------------------------- Certificates of deposit: Under $100,000 1,053,515 1,125,653 1,184,350 768,584 744,006 $100,000 and over 498,093 511,585 633,126 629,472 586,250 936 1,029,450 1,202,604 1,260,491 947,555 994,492 -------------------------------------------------------------------------------------- Certificates of deposit 2,581,058 2,839,842 3,077,967 2,345,611 2,324,748 -------------------------------------------------------------------------------------- Public time 124,629 155,715 181,019 132,128 81,531 Other time 212,938 175,620 157,999 50,910 32,650 -------------------------------------------------------------------------------------- Other time deposits 337,567 331,335 339,018 183,038 114,181 -------------------------------------------------------------------------------------- Interest bearing 6,489,545 6,170,868 5,814,775 4,018,048 3,800,842 -------------------------------------------------------------------------------------- Total $8,124,885 $7,641,123 $7,198,187 $5,039,422 $4,782,791 ======================================================================================
$100,000 and over amounted to 18.4% of total deposits and had the following maturity distribution at year-end: (In thousands) 3 months or less $1,206,188 3 to 6 months 144,475 6 to 12 months 113,190 over 12 months 104,847 ---------- $1,568,700 ==========
Section 936 deposits comprise part of the Corporation's total deposit base and amounted to $975.5 million or 11.4% of total deposits as of December 31, 1993. To avoid undue reliance on 936 funds, the Corporation has established internal limits on the maximum amount allowed. Total Section 936 funds, including deposits and repurchase agreements, amounted to $1,766 million as of December 31, 1993, representing a 16.7% of total liabilities. During the past year, the U.S. Internal Revenue Code was amended as part of President William Clinton's economic program. Federal budget deficit reduction is a primary objective of the program and Section 936 of the Code was revised toward that goal. The revision basically reduced the tax credit associated with the section throughout a period of several years. Eligible corporations electing the credit may choose between a wage-based or income-based benefit. Under the wage-based method, the tax credit is 65% of total wages and benefits paid by the 936 corporations to their employees. Under the income-based method, in 1994 the tax benefit will be 60% of the credit under the previous law. In the subsequent four years, the income-based tax credit will be reduced by 5% annually to 40% of the previous law's credit. The Corporation believes that the amendments to the Code will not unduly affect the economy of Puerto Rico considering its gradual implementation and still significant benefits. To complement its liquidity and funding sources, on May 3, 1993, the Corporation and some of its subsidiaries had ordered effective a "shelf" registration filed with the Securities and Exchange Commission. Under this registration these entities may issue unsecured debt securities, which may be either senior or subordinated, and shares of preferred stock. The aggregate initial offering under this registration may not exceed $400 million or, in the case of debt securities, the equivalent thereof in one or more foreign currencies, including composite currencies. The amounts, terms and timing of offerings will be determined in the future when and as the corporations decide to sell debt securities and/or shares of preferred stock under the registration. In addition, at the beginning of 1994 the Corporation's subsidiary Bank became member of the Federal Home Loan Bank of New York. Through this membership, the Corporation has access to an additional source of long-term funds at attractive rates. INTEREST RATE SENSITIVITY The level of net interest income of most financial institutions is sensitive to fluctuations in interest rates. Since net interest income is the primary source of income for most financial institutions, management monitors very closely developments in the financial markets and their potential impact on profitability. The effect of changes in interest rates on net interest income depends upon the maturity, duration and repricing characteristics of the Corporation's assets and liabilities as well as the direction of interest rate movements. An asset sensitive position occurs when a higher volume of assets than liabilities matures or reprices within a specific time period while, on the other hand, a liability sensitive 17 68
- - - - - ----------------------------------------------------------------------------------------------------------------------------------- TABLE M INTEREST RATE SENSITIVITY As of December 31, 1993 - - - - - ----------------------------------------------------------------------------------------------------------------------------------- By Repricing Dates -------------------------------------------------------------------------------------------- After After Within three months six months Non-interest 0-30 31-90 but within but within After one bearing (Dollars in thousands) days days six months one year year funds Total - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Federal funds sold and securities purchased under agreements to resell $ 247,333 $ 247,333 Short-term interest bearing deposits in other banks 10,259 $ 5,100 15,359 Investment and trading securities 603,867 456,167 $ 424,762 $ 791,120 $1,772,464 4,048,380 Loans 1,825,122 201,536 274,611 381,098 3,664,555 6,346,922 Other assets $ 855,374 855,374 -------------------------------------------------------------------------------------------- Total $ 2,686,581 662,803 699,373 1,172,218 5,437,019 855,374 11,513,368 -------------------------------------------------------------------------------------------- Liabilities and equity: Savings and NOW accounts* 1,122,097 2,761,906 3,884,003 Other time deposits 1,049,423 635,504 404,323 252,172 448,375 2,789,797 Short-term interest bearing liabilities 510,496 575,015 359,113 47,548 123,734 1,615,906 Long-term interest bearing liabilities 2 12,002 88 333,763 345,855 Non-interest bearing deposits 1,848,859 1,848,859 Other non-interest bearing liabilities 183,753 183,753 Preferred stock of subsidiary Bank and stockholders' equity 845,195 845,195 -------------------------------------------------------------------------------------------- Total 2,682,016 1,210,521 775,438 299,808 3,667,778 $2,877,807 $11,513,368 -------------------------------------------------------------------------------------------- Interest rate sensitive gap $ 4,565 $ (547,718) $ (76,065) $ 872,410 $1,769,241 Cumulative interest rate sensitivity gap $ 4,565 $ (543,153) $(619,218) $ 253,192 $2,022,433 Cumulative sensitive gap to earning assets 0.17% (16.22%) (15.29%) 4.85% 18.98% *Now accounts are presented as repricing within 0-30 days. Savings accounts are included as repricing after one year as they have proved to be stable sources of funds that have not been subject to withdrawal, notwithstanding the changes in interest rates. - - - - - -----------------------------------------------------------------------------------------------------------------------------------
position occurs when more liabilities than assets mature or reprice during a specific time period. When interest rates rise, an asset sensitive position will generally result in increased net interest income. In this environment, a greater amount of assets will reprice at a higher rate than liabilities, and therefore net interest income rises. Conversely, when rates decrease an asset sensitive position generally results in lower net interest income because a greater volume of assets will reprice at a lower rate than liabilities. A liability sensitive position is generally affected inversely by changes in interest rates. Rising rates increase the cost of funds more rapidly than interest income, while declining rates decrease the cost of funds more rapidly than interest income. The Corporation's interest rate risk position is detailed in Table M. As of December 31, 1993, the one-year cumulative gap was $253.2 million or 4.85% of earning assets as compared with a one-year cumulative negative gap of $511.9 million or 13.13% of earning assets in 1992. This change was due to an increase of $1,288 million in investment securities and $54.9 million in loans repricing within one year, partially offset by a rise of $656.1 million in short-term interest bearing liabilities also repricing within one year. STOCKHOLDERS' EQUITY The Corporation has a strong capital base which allows it to undertake new business initiatives and enhance its asset base. At December 31, 1993, stockholders' equity amounted to $834.2 million, an increase of $82.1 million or 10.9% from the balance of $752.1 million at December 31, 1992. The factors contributing to the growth in the capital position in 1993 were earnings' retention and the issuance of additional shares of common stock under the Dividend Reinvestment Plan which added $2.1 million to capital. The internal capital generation rate for this year was 10.08% as compared to 9.04% in 1992. The Corporation's capital for 1992 showed an increase in excess of the capital retention ratios because, in the last quarter of 1992, the Corporation offered subscription rights to stockholders 18 69
- - - - - ---------------------------------------------------------------------------------------------------------------------------- TABLE N CAPITAL ADEQUACY DATA As of December 31, - - - - - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 1990 1989 ------------------------------------------------------------------------------ Risk-based capital Tier I capital $ 786,686 $ 722,082 $ 598,034 $ 567,653 $ 375,807 Supplementary (Tier II) capital 106,193 110,704 127,181 148,085 90,897 ------------------------------------------------------------------------------ Total capital $ 892,879 $ 832,786 $ 725,215 $ 715,738 $ 466,704 ============================================================================== Risk-weighted assets Balance sheet items $6,150,749 $5,430,534 $5,240,345 $5,537,909 $3,897,743 Off-balance sheet items 250,102 177,172 191,927 82,205 70,523 ------------------------------------------------------------------------------ Total risk-weighted assets $6,400,851 $5,607,706 $5,432,272 $5,620,114 $3,968,266 ============================================================================== Ratios: Tier I capital (minimum required - 4.00%) 12.29% 12.88% 11.01% 10.10% 9.47% Total capital (minimum required - 8.00%) 13.95 14.85 13.35 12.74 11.76 Leverage ratio (minimum required - 3.00%) 6.95 7.26 6.64 6.34 6.34 Equity to assets 7.42 7.02 6.83 6.98 6.23 Tangible equity to assets 6.29 5.66 5.46 6.87 6.23 Equity to loans 13.91 12.99 11.52 12.07 11.30 Internal capital generation rate 10.08 9.04 6.64 11.60 11.35 - - - - - ----------------------------------------------------------------------------------------------------------------------------
for 2,321,317 shares of common stock. Shares unsubscribed for in the offering were expected to be sold to the public in an underwritten public offering. The subscription offering was oversubscribed by existing stockholders and the Corporation issued 2,458,740 shares which raised $57.6 million in additional capital. The Corporation exceeds the regulatory risk-based capital requirements for well capitalized institutions by wide margins, due to the high level of capital and the conservative nature of the Corporation's assets. Tier I capital to risk-adjusted assets ratio at December 31, 1993, was 12.29% while the total capital ratio was 13.95%, compared with 12.88% and 14.85%, respectively, at December 31, 1992. The Corporation's leverage ratio was 6.95% as of December 31, 1993, compared with 7.26% a year before. These ratios decreased slightly from prior year since assets grew at a faster pace than capital and the prepayment of subordinated notes during the year reduced the total capital. Table N shows capital adequacy information for the current and previous four years. The average tangible equity rose to $663.6 million as of December 31, 1993 from $531.8 million at December 31, 1992, an increase of $131.8 million or 24.8%. The tangible equity to assets ratio also increased from 5.66% for 1992 to 6.29% for 1993. At the end of 1993 total tangible equity rose to $701.4 million from $619.2 million a year ago. Book value per share at December 31, 1993, was $25.49, compared with $23.03 at the end of 1992. The market value of the Corporation's stock at the end of 1993 was $31.50 representing a market capitalization of $1,031 million compared with $987.8 million a year ago when the market value of the stock was $30.25. COMMON STOCK The Corporation's common stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Table O shows the range of market quotations and cash dividends declared for each quarter during the last five years. All the per share data presented has been adjusted to reflect a stock split effected in the form of a dividend on April 3, 1989, of one share for each share outstanding. The Corporation has a Dividend Reinvestment Plan for its stockholders. This plan offers the stockholders the opportunity to automatically reinvest their dividends in shares of common stock at a 5% discount from the average market price at the time of issuance. During 1993, 77,559 shares were issued under the Plan, adding $2.1 million to capital. A total of 459,400 shares have been issued under this plan since its inception in 1989, contributing with $9.1 million in additional capital. DIVIDENDS Dividends declared during 1993 amounted to $29.4 million compared with $24.6 million in 1992. This increase is mainly the result of a higher volume of average shares outstanding due to the shares issued on the subscription offering in November 1992, and the additional shares issued under the Dividend Reinvestment Plan. In addition, effective on October 1, 1993, and following its policy of maintaining a dividend payout ratio close to 30%, the Corporation increased its quarterly dividend from $0.20 to $0.25 per share. The dividend payout ratio for the year decreased to 25.39% as a result of the growth in net earnings of the Corporation. However, the dividend increase in the fourth quarter of 1993 raised the dividend payout ratio for the quarter to 28.97%. INFLATION ACCOUNTING The Statement of Financial Accounting Standards (SFAS) 89 makes optional the disclosure of supplementary information on the effects of inflation. 19 70
- - - - - ----------------------------------------------------------------------------------------------------------------------------------- TABLE O STOCK PERFORMANCE Cash Book * Market Price Dividends Value Dividend Price/ Market/ ------------------ Declared Per Payout Dividend Earnings Book High Low Per Share Share Ratio Yield Ratio Ratio - - - - - ---------------------------------------------------------------------------------------------------------------------------------- 1993 $25.49 25.39% 2.97% 9.42x 123.58% 1st quarter $ 31 1/4 $ 26 1/2 $.20 2nd quarter 28 1/4 24 3/8 .20 3rd quarter 30 1/4 26 1/2 .25 4th quarter 32 1/4 29 3/4 .25 1992 23.03 28.33 3.12 10.83 131.35 1st quarter $ 25 1/2 $ 18 3/4 $.20 2nd quarter 27 3/4 24 .20 3rd quarter 27 3/4 24 1/2 .20 4th quarter 30 1/4 24 1/2 .20 1991 21.00 34.13 4.18 8.96 91.67 1st quarter $ 17 1/2 $ 14 3/4 $.20 2nd quarter 19 7/8 16 3/4 .20 3rd quarter 18 1/2 16 1/2 .20 4th quarter 19 1/2 17 .20 1990 19.67 25.33 4.41 5.08 81.34 1st quarter $ 22 $ 19 $.20 2nd quarter 19 3/4 18 1/2 .20 3rd quarter 19 1/2 14 3/4 .20 4th quarter 16 7/8 14 1/4 .20 1989 18.76 28.14 3.83 7.66 114.61 1st quarter $ 19 3/8 17 3/4 $.20 2nd quarter 20 1/4 19 1/2 .20 3rd quarter 25 1/2 19 1/4 .20 4th quarter 25 1/2 17 3/4 .20 *Based on the average high and low market price for the four quarters. - - - - - ------------------------------------------------------------------------------------------------------------------------------------
The Corporation has decided not to prepare the supplementary data for the following reasons: - The impact of inflation on the banking industry differs significantly from that on industries that require a higher proportion of investment in fixed assets. Our asset and liability structure is composed mainly of monetary assets and liabilities. - Changes in interest rates that may significantly impact the Corporation's earnings do not necessarily move in the same direction or in the same magnitude as the prices of other goods and services. - Information included in this annual report such as Interest Variance Analysis, Interest Rate Sensitivity Table, Average Balance Sheet, Summary of Net Interest Income and the market value disclosures required by SFAS 107, provides more insight as to the effects on the Corporation of changes in interest rates than the supplementary data on inflation accounting. 20 71
- - - - - ---------------------------------------------------------------------------------------------------------------------------- STATISTICAL SUMMARY 1989-1993 STATEMENTS OF CONDITION BANPONCE CORPORATION - - - - - ---------------------------------------------------------------------------------------------------------------------------- As of December 31, - - - - - ---------------------------------------------------------------------------------------------------------------------------- (In thousands) 1993 1992 1991 1990 1989 ------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 368,837 $ 325,497 $ 311,384 $ 347,619 $ 272,194 ------------------------------------------------------------------------------ Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell 247,333 234,163 139,530 288,036 244,330 Time deposits with other banks 15,100 50,100 340,100 644,938 639,065 Bankers' acceptances 259 858 1,703 2,369 1,270 ------------------------------------------------------------------------------ 262,692 285,121 481,333 935,343 884,665 ------------------------------------------------------------------------------ Investment securities at cost 3,330,798 3,290,440 2,354,009 1,917,144 1,301,125 ------------------------------------------------------------------------------ Investment securities available for sale at lower of cost or market value 714,565 408,127 ------------------------------------------------------------------------------ Trading account securities 3,017 283 1,657 875 7,741 ------------------------------------------------------------------------------ Loans 6,655,072 5,614,724 5,575,976 5,798,072 3,536,446 Less- Unearned income 308,150 362,671 380,419 432,155 260,057 Allowance for loan losses 133,437 110,714 94,199 89,335 40,896 ------------------------------------------------------------------------------ 6,213,485 5,141,339 5,101,358 5,276,582 3,235,493 ------------------------------------------------------------------------------ Premises and equipment 298,089 260,330 253,054 235,830 122,001 Other real estate 12,699 15,582 7,012 6,748 1,460 Customers' liabilities on acceptances 1,392 1,830 1,691 3,059 2,829 Accrued income receivable 79,285 76,008 59,027 59,106 57,344 Other assets 95,763 64,890 71,026 68,267 38,409 Intangible assets 132,746 132,880 138,731 133,051 ------------------------------------------------------------------------------ $ 11,513,368 $ 10,002,327 $ 8,780,282 $ 8,983,624 $ 5,923,261 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 1,848,859 $ 1,614,806 $ 1,499,352 $ 1,455,785 $ 1,127,991 Interest bearing 6,673,799 6,423,905 5,707,766 5,966,926 3,798,313 ------------------------------------------------------------------------------ 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 Federal funds purchased and securities sold under agreements to repurchase 951,733 665,222 449,114 394,148 464,042 Other short-term borrowings 664,173 206,882 143,724 181,317 9,068 Notes payable 253,855 90,062 73,752 8,018 2,245 Senior debentures 30,000 30,000 30,000 30,000 Acceptances outstanding 1,392 1,830 1,691 3,059 2,829 Other liabilities 182,362 132,501 138,065 250,487 92,966 ------------------------------------------------------------------------------ 10,606,173 9,165,208 8,043,464 8,289,740 5,497,454 ------------------------------------------------------------------------------ Subordinated notes 62,000 74,000 94,000 94,000 50,000 ------------------------------------------------------------------------------ Preferred stock of subsidiary Bank 11,000 11,000 11,000 11,000 ------------------------------------------------------------------------------ Stockholders' equity Common stock 196,395 195,929 180,563 179,655 100,187 Surplus 386,622 361,982 287,539 276,049 210,594 Retained earnings 208,607 150,208 110,287 93,180 57,883 Capital reserves 42,571 44,000 53,429 40,000 7,143 ------------------------------------------------------------------------------ 834,195 752,119 631,818 588,884 375,807 ------------------------------------------------------------------------------ $ 11,513,368 $ 10,002,327 $ 8,780,282 $ 8,983,624 $ 5,923,261 ==============================================================================
21 72
- - - - - ----------------------------------------------------------------------------------------------------------------------------- STATISTICAL SUMMARY 1989-1993 STATEMENTS OF INCOME BANPONCE CORPORATION - - - - - ----------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, - - - - - ----------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share information) 1993 1992 1991 1990 1989 --------------------------------------------------------------------------- INTEREST INCOME: Loans $549,388 $518,074 $579,463 $395,797 $363,925 Money market investments 6,434 14,414 33,590 37,571 105,736 Investment securities 215,944 207,642 181,413 131,911 88,125 Trading account securities 370 224 477 528 487 --------------------------------------------------------------------------- Total interest income 772,136 740,354 794,943 565,807 558,273 Less - Interest expense 280,008 300,135 387,134 281,561 302,747 --------------------------------------------------------------------------- Net interest income 492,128 440,219 407,809 284,246 255,526 Provision for loan losses 72,892 97,633 121,681 53,033 42,603 --------------------------------------------------------------------------- Net interest income after provision for loan losses 419,236 342,586 286,128 231,213 212,923 Gain on sale of securities 864 242 18,617 64 1,969 Trading account profit 554 383 759 27 560 All other operating income 123,762 123,879 112,398 70,865 59,550 --------------------------------------------------------------------------- 544,416 467,090 417,902 302,169 275,002 --------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs 215,911 188,234 180,634 131,322 117,433 All other operating expenses 196,365 178,711 165,104 98,241 89,943 --------------------------------------------------------------------------- 412,276 366,945 345,738 229,563 207,376 --------------------------------------------------------------------------- Income before tax, dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes 132,140 100,145 72,164 72,606 67,626 Income tax 28,151 14,259 6,793 9,240 11,456 --------------------------------------------------------------------------- Income before dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes 103,989 85,886 65,371 63,366 56,170 Dividends on preferred stock of subsidiary Bank 770 770 807 --------------------------------------------------------------------------- Income before cumulative effect of accounting changes 103,219 85,116 64,564 63,366 56,170 Cumulative effect of accounting changes 6,185 --------------------------------------------------------------------------- NET INCOME $109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 =========================================================================== EARNINGS PER SHARE* Before effect of accounting changes $3.16 $2.79 $2.15 $3.15 $2.81 =========================================================================== Net income $3.35 $2.79 $2.15 $3.15 $2.81 =========================================================================== DIVIDENDS DECLARED: Cash dividends per share outstanding $0.90 $0.80 $0.80 $0.80 $0.80 ===========================================================================
*The average number of shares outstanding during each year was adjusted to reflect a stock split effected in the form of a stock dividend on April 3, 1989. Accordingly, the average shares used in the computation of earnings and cash dividend per share were 32,701,236 for 1993; 30,461,494 for 1992; 30,035,601 for 1991; 20,116,970 for 1990, and 20,014,013 for 1989. 22 73
- - - - - ------------------------------------------------------------------------------------------------------------------------------ STATISTICAL SUMMARY 1991-1993 BANPONCE CORPORATION QUARTERLY FINANCIAL DATA - - - - - ------------------------------------------------------------------------------------------------------------------------------ 1993 1992 - - - - - --------------------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - - - - - --------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per share information) Net interest income $126,490 $125,174 $122,703 $117,761 $115,514 $112,093 $107,912 $104,700 Provision for loan losses 14,737 17,442 19,166 21,547 23,043 24,333 26,237 24,020 Non-interest income 34,000 30,178 31,905 28,233 29,208 30,783 34,137 30,134 Gain (loss) on sale of securities 332 86 446 58 10 (36) 210 Non-interest expense 107,462 101,436 100,524 102,854 95,080 93,626 91,718 86,521 Income taxes 9,875 8,459 7,306 2,511 3,415 3,536 3,022 4,286 Dividends on preferred stock of subsidiary Bank 192 193 192 193 192 193 192 193 Cumulative effect of accounting changes 6,185 ------------------------------------------------------------------------------------- Net income $ 28,224 $ 28,154 $ 27,506 $ 25,520 $ 23,050 $ 21,198 $ 20,844 $ 20,024 ===================================================================================== Net income per share before cumulative effect of accounting changes $ 0.87 $ 0.86 $ 0.84 $ 0.59 $ 0.73 $ 0.71 $ 0.69 $ 0.66 ------------------------------------------------------------------------------------- Net income per share $ 0.87 $ 0.86 $ 0.84 $ 0.78 $ 0.73 $ 0.71 $ 0.69 $ 0.66 ------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets $ 11,374 $ 10,855 $ 10,472 $ 10,017 $ 9,991 $ 9,804 $ 9,172 $ 9,138 Loans 6,219 5,849 5,466 5,254 5,211 5,078 5,153 5,160 Interest earning assets 10,543 10,064 9,693 9,264 9,245 9,033 8,437 8,397 Deposits 8,426 8,074 8,005 7,992 7,940 7,844 7,446 7,330 Interest bearing liabilities 8,612 8,249 7,946 7,569 7,610 7,546 6,979 6,967 ------------------------------------------------------------------------------------- SELECTED RATIOS Return on assets 0.98% 1.03% 1.05% 1.03% 0.92% 0.86% 0.91% 0.88% Return on equity 13.59 13.90 14.09 13.60 12.85 12.60 12.83 12.60
1991 - - - - - -------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter - - - - - -------------------------------------------------------------------------- SUMMARY OF OPERATIONS (In thousands, except per share information) Net interest income $101,254 $103,292 $103,561 $99,702 Provision for loan losses 30,227 33,771 37,899 19,783 Non-interest income 33,806 28,814 25,968 24,568 Gain (loss) on sale of securities 12,001 5,818 553 246 Non-interest expense 95,235 83,779 82,062 84,663 Income taxes 1,540 3,129 (45) 2,169 Dividends on preferred stock of subsidiary Bank 192 192 197 226 Cumulative effect of accounting changes --------------------------------------------- Net income $ 19,867 $ 17,053 $ 9,969 $17,675 ============================================= Net income per share before cumulative effect of accounting changes $ 0.66 $ 0.57 $ 0.33 $ 0.59 --------------------------------------------- Net income per share $ 0.66 $ 0.57 $ 0.33 $ 0.59 --------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets $ 9,046 $ 8,820 $ 9,010 $ 8,900 Loans 5,305 5,333 5,266 5,304 Interest earning assets 8,256 8,078 8,269 8,194 Deposits 7,233 7,103 7,151 7,307 Interest bearing liabilities 6,848 6,686 6,924 6,809 -------------------------------------------- SELECTED RATIOS Return on assets 0.87% 0.77% 0.44% 0.81% Return on equity 12.64 10.99 6.60 12.04
23 74
STATISTICAL SUMMARY 1989-1993 AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME - - - - - ------------------------------------------------------------------------------------------------------------------------------------ ON A TAXABLE EQUIVALENT BASIS* - - - - - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1993 1992 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate - - - - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest earning assets: Federal funds sold and securities and mortgages purchased under agreements to resell $ 117,095 $ 4,115 3.51% $ 144,539 $ 5,209 3.60% Time deposits with other banks 58,853 2,259 3.84 215,970 9,093 4.21 Bankers' acceptances 871 60 6.89 1,496 112 7.49 ---------------------------------------------------------------------------- Total money market investments 176,819 6,434 3.64 362,005 4,414 3.98 ---------------------------------------------------------------------------- U.S. Treasury securities 2,985,634 202,695 6.79 2,443,267 226,038 9.25 Obligations of other U.S. Government agencies and corporations 274,821 18,033 6.56 317,152 27,838 8.78 Obligations of Puerto Rico, States and political subdivisions 227,784 14,253 6.26 212,762 19,345 9.09 Other 522,216 26,944 5.16 288,818 21,780 7.54 ---------------------------------------------------------------------------- Total investment securities 4,010,455 261,925 6.53 3,261,999 295,001 9.04 ---------------------------------------------------------------------------- Trading account securities 7,319 449 6.13 5,649 303 5.36 ---------------------------------------------------------------------------- Loans (net of unearned income) 5,700,069 555,671 9.75 5,150,328 526,902 10.23 ---------------------------------------------------------------------------- Total interest earning assets/ Interest income 9,894,662 $824,479 8.33% 8,779,981 $836,620 9.53% ---------------------------------------------------------------------------- Total non-interest earning assets 789,091 748,537 ---------------------------------------------------------------------------- TOTAL ASSETS $10,683,753 9,528,518 ============================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings and NOW accounts $ 3,570,920 $107,454 3.01% $2,999,691 $108,945 3.63% Other time deposits 2,918,625 111,994 3.84 3,171,177 144,430 4.55 Short-term borrowings 1,337,970 42,392 3.17 903,903 31,711 3.51 Mortgages and notes payable 195,522 12,801 6.55 116,695 8,245 7.07 Subordinated notes 73,967 5,367 7.26 85,585 6,804 7.95 ---------------------------------------------------------------------------- Total interest bearing liabilities/ Interest expense 8,097,004 280,008 3.46 7,277,051 300,135 4.12 ---------------------------------------------------------------------------- Total non-interest bearing liabilities 1,782,748 1,571,477 ---------------------------------------------------------------------------- Total liabilities 9,879,752 8,848,528 ---------------------------------------------------------------------------- Preferred stock of subsidiary Bank 11,000 11,000 ---------------------------------------------------------------------------- Stockholders' equity 793,001 668,990 ---------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,683,753 $9,528,518 ============================================================================ Net interest income on a taxable equivalent basis $544,471 $536,485 ---------------------------------------------------------------------------- Interest expense to earning assets 2.83% 3.42% ---------------------------------------------------------------------------- Net interest yield 5.50% 6.11% ============================================================================ Effect of the taxable equivalent adjustment 52,343 96,266 ---------------------------------------------------------------------------- Net interest income per books $492,128 $440,219 ============================================================================
*Shows the effect of the tax exempt status of some loans and investments on their yield. A 42% tax rate was used for 1993 through 1989. The computation considers the interest expense disallowance as required by the Tax Reform Act enacted in 1987. This adjustment is shown in order to compare the yields of the tax exempt, and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance Corporation's policy. 24 75
------------------------------------------------------------------------------------------------------------ BANPONCE CORPORATION ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ 1991 1990 1989 ------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - - - - - -------------------------------------------------------------------------------------------------------------------- $ 76,095 $ 4,448 5.85% $ 138,701 $ 11,476 8.27% $ 178,319 $ 16,732 9.38% 427,536 28,886 6.76 308,904 25,970 8.41 915,426 87,878 9.60 2,848 256 8.99 1,217 125 10.27 11,736 1,125 9.59 - - - - - -------------------------------------------------------------------------------------------------------------------- 506,479 33,590 6.63 448,822 37,571 8.37 1,105,481 105,735 9.56 - - - - - -------------------------------------------------------------------------------------------------------------------- 1,596,986 179,103 11.22 944,804 109,116 11.55 562,051 63,876 11.36 332,002 32,241 9.71 411,257 48,387 11.77 285,782 34,937 12.23 212,180 22,243 10.48 146,874 15,395 10.48 141,564 14,316 10.11 241,064 19,328 8.02 123,509 11,689 9.46 85,354 9,278 10.87 - - - - - -------------------------------------------------------------------------------------------------------------------- 2,382,232 252,915 10.62 1,626,444 184,587 11.35 1,074,751 122,407 11.39 - - - - - -------------------------------------------------------------------------------------------------------------------- 8,295 650 7.84 9,209 705 7.66 6,401 677 10.58 - - - - - -------------------------------------------------------------------------------------------------------------------- 5,302,189 589,520 11.12 3,377,463 403,005 11.93 3,132,167 370,044 11.81 - - - - - -------------------------------------------------------------------------------------------------------------------- 8,199,195 $876,675 10.69% 5,461,938 $625,868 11.46% 5,318,800 $598,863 11.26% - - - - - -------------------------------------------------------------------------------------------------------------------- 745,162 374,811 358,181 - - - - - -------------------------------------------------------------------------------------------------------------------- $8,944,357 $5,836,749 $5,676,981 ==================================================================================================================== $2,397,790 $113,165 4.72% $1,489,399 $ 71,848 4.82% $1,361,913 $ 65,089 4.78% 3,416,985 210,552 6.16 2,528,649 185,251 7.33 2,438,929 196,385 8.05 855,702 51,142 5.98 252,695 20,037 7.93 423,143 37,838 8.94 52,310 3,965 7.58 4,486 285 6.35 2,598 140 5.39 94,000 8,310 8.84 50,000 4,140 8.28 38,082 3,295 8.65 - - - - - -------------------------------------------------------------------------------------------------------------------- 6,816,787 387,134 5.68 4,325,229 281,561 6.51 4,264,665 302,747 7.10 - - - - - -------------------------------------------------------------------------------------------------------------------- 1,505,929 1,103,909 1,058,472 - - - - - -------------------------------------------------------------------------------------------------------------------- 8,322,716 5,429,138 5,323,137 - - - - - -------------------------------------------------------------------------------------------------------------------- 11,000 - - - - - -------------------------------------------------------------------------------------------------------------------- 610,641 407,611 353,844 - - - - - -------------------------------------------------------------------------------------------------------------------- $8,944,357 $5,836,749 $5,676,981 ==================================================================================================================== $489,541 $344,307 $296,116 4.72% 5.16% 5.69% - - - - - -------------------------------------------------------------------------------------------------------------------- 5.97% 6.30% 5.57% ==================================================================================================================== 81,732 60,061 40,590 - - - - - -------------------------------------------------------------------------------------------------------------------- $407,809 $284,246 $255,526 ====================================================================================================================
25 76 - - - - - -------------------------------------------------------------------------------- GLOSSARY OF TERMS - - - - - -------------------------------------------------------------------------------- 936 CORPORATIONS - Subsidiaries of U. S. firms operating in Puerto Rico and other offshore areas under Section 936 of the U.S. Internal Revenue Code. Section 936 provides certain tax benefits on Puerto Rico source earnings from the active conduct of a trade or business or from qualified investments. 936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form of time deposits. The restriction that these funds must be reinvested in eligible assets, if income derived from them is to be considered tax-exempt for U. S. and Puerto Rico's Industrial Incentive Act purposes, lowers the rate on these funds as compared to interest rates paid on similar deposits. BASIS POINT - Equal to one-hundredth of one percent. Used to express changes or differences in interest yields and rates. CORE DEPOSITS - A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000. These deposits are considered a stable source of funds. EARNING ASSETS - Assets that earn interest, such as loans, investment securities, money market investments and trading account securities. EARNINGS PER SHARE - The earnings per average share of common stock outstanding during the period presented. GAP - The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities. INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as saving deposits, certificates of deposit, other time deposits, borrowings and subordinated notes. INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning assets/interest-bearing liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements. LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the assessment of the capital adequacy of state member banks. This ratio is calculated by dividing Tier I capital by total assets reduced by goodwill and any other intangible asset deducted from Tier I capital. LIQUIDITY - A combination of assets that assures currently available supplies of funds necessary to meet deposit withdrawals, loan demands and repayment of borrowings as they become due. The need for liquid funds is normally satisfied from daily operations and the maturity management of money market investments and investment securities. NET INTEREST INCOME - The difference between interest income and fees on earning assets and interest expense on liabilities. NET INTEREST YIELD - A percentage computed by dividing net interest income by average earning assets. NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income has been discontinued due to default on interest and/or principal payments or other factors indicative of doubtful collection, renegotiated loans and foreclosed real estate properties, including in-substance foreclosures. RETURN ON ASSETS - Net income as a percentage of average total assets. RETURN ON EQUITY - Net income as a percentage of average stockholders' equity. RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital adequacy. These guidelines set forth how capital is to be measured and how total assets are to be risk adjusted. Total risk adjusted assets include assets and off-balance sheet items adjusted by the appropriate credit risk category, based on the type of obligor or, where relevant, the guarantor, or the nature of the collateral. SPREAD - A percentage difference or margin between the yield on earning assets and the effective interest rate paid on interest-bearing liabilities. STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the stockholders ownership participation in the Corporation's financial resources. SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and qualifying term subordinated notes. TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets. TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets to an amount that would yield the same after-tax income had the income been subject to taxation. The result is to equate the true earnings value of tax-exempt and taxable income. TIER I CAPITAL - Consists of common stockholders' equity (including the related surplus, retained earnings and capital reserves), cumulative perpetual preferred stock (BHCs only) less goodwill and any other non-qualifying intangible asset. YIELD - Percentage denoting actual return on earning assets. 26 77 - - - - - ------------------------------------------------------------------------------ REPORT OF INDEPENDENT ACCOUNTANTS BANPONCE CORPORATION - - - - - ------------------------------------------------------------------------------ PRICE WATERHOUSE (LOGO) San Juan, Puerto Rico January 28, 1994 To the Board of Directors and Stockholders of BanPonce Corporation In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of BanPonce Corporation and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the Consolidated Financial Statements, in 1993 the Corporation changed its method of accounting for postretirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106 and for income taxes to conform with Statement of Financial Accounting Standards No. 109. /s/ PRICE WATERHOUSE - - - - - --------------------- Price Waterhouse Stamp 1185699 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. 27 78
- - - - - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CONDITION BANPONCE CORPORATION - - - - - ------------------------------------------------------------------------------------------------------------------------------------ December 31, --------------------------------------------------------------- 1993 1992 --------------------------------------------------------------- (In thousands) ASSETS Cash and due from banks $ 368,837 $ 325,497 --------------------------------------------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell 247,333 234,163 Time deposits with other banks 15,100 50,100 Bankers' acceptances 259 858 --------------------------------------------------------------- 262,692 285,121 --------------------------------------------------------------- Investment securities, at cost (market value $3,358,216,000 (1992 - $3,338,993,000)) (Notes 3 and 5) 3,330,798 3,290,440 --------------------------------------------------------------- Investment securities available for sale, at lower of cost or market value (market value $733,729,000; (1992 - $424,034,000)) (Note 4) 714,565 408,127 --------------------------------------------------------------- Trading account securities, at market 3,017 283 --------------------------------------------------------------- Loans (Notes 5, 6 and 7) 6,655,072 5,614,724 Less - Unearned income 308,150 362,671 Allowance for loan losses 133,437 110,714 --------------------------------------------------------------- 6,213,485 5,141,339 --------------------------------------------------------------- Premises and equipment (Note 8) 298,089 260,330 Other real estate 12,699 15,582 Customers' liabilities on acceptances 1,392 1,830 Accrued income receivable 79,285 76,008 Other assets 95,763 64,890 Intangible assets 132,746 132,880 --------------------------------------------------------------- $11,513,368 $10,002,327 =============================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 9): Non-interest bearing $ 1,848,859 $ 1,614,806 Interest bearing 6,673,799 6,423,905 --------------------------------------------------------------- 8,522,658 8,038,711 Federal funds purchased and securities sold under agreements to repurchase (Note 10) 951,733 665,222 Other short-term borrowings (Note 11) 664,173 206,882 Notes payable (Notes 12 and 15) 253,855 90,062 Senior debentures (Notes 13 and 15) 30,000 30,000 Acceptances outstanding 1,392 1,830 Other liabilities 182,362 132,501 --------------------------------------------------------------- 10,606,173 9,165,208 --------------------------------------------------------------- Subordinated notes (Notes 14 and 15) 62,000 74,000 --------------------------------------------------------------- Preferred stock of subsidiary Bank (Note 16) 11,000 11,000 --------------------------------------------------------------- Stockholders' equity (Note 17): Common stock, $6 par value; authorized 90,000,000 shares; outstanding 32,732,423 in 1993 and 32,654,864 in 1992 196,395 195,929 Surplus 386,622 361,982 Retained earnings 208,607 150,208 Capital reserves (Note 14) 42,571 44,000 --------------------------------------------------------------- 834,195 752,119 --------------------------------------------------------------- $11,513,368 $10,002,327 ===============================================================
The accompanying notes are an integral part of the consolidated financial statements. 28 79
- - - - - ---------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME BANPONCE CORPORATION - - - - - ---------------------------------------------------------------------------------------------------------------------- Year ended December 31, ---------------------------------------------- 1993 1992 1991 - - - - - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share information) INTEREST INCOME: Loans $549,388 $518,074 $579,463 Money market investments (Note 18) 6,434 14,414 33,590 Investment securities (Note 18) 215,944 207,642 181,413 Trading account securities 370 224 477 -------------------------------------------- 772,136 740,354 794,943 -------------------------------------------- INTEREST EXPENSE: Deposits 219,448 253,375 323,717 Short-term borrowings 42,392 31,711 51,142 Long-term debt 18,168 15,049 12,275 -------------------------------------------- 280,008 300,135 387,134 -------------------------------------------- Net interest income 492,128 440,219 407,809 Provision for loan losses (Note 6) 72,892 97,633 121,681 -------------------------------------------- Net interest income after provision for loan losses 419,236 342,586 286,128 Service charges on deposit accounts 68,246 63,064 55,000 Other service fees 43,872 42,491 39,334 Gain on sale of securities 864 242 18,617 Trading account profit 554 383 759 Other operating income 11,644 18,324 18,064 -------------------------------------------- 544,416 467,090 417,902 -------------------------------------------- OPERATING EXPENSES: Personnel costs (Note 19): Salaries 151,432 134,709 129,928 Profit sharing 19,766 17,041 13,080 Pension and other benefits 44,713 36,484 37,626 -------------------------------------------- 215,911 188,234 180,634 Net occupancy expense (Notes 8 and 20) 26,085 25,442 22,497 Equipment expenses (Notes 8 and 20) 27,964 23,813 22,755 Other taxes 15,996 14,608 13,050 Professional fees 27,302 22,558 19,253 Communications 18,203 17,048 17,377 Business promotion 16,638 12,548 10,723 Printing and supplies 8,189 7,290 8,349 Other operating expenses 39,812 40,516 37,413 Amortization of intangibles 16,176 14,888 13,687 -------------------------------------------- 412,276 366,945 345,738 -------------------------------------------- Income before income tax, dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes 132,140 100,145 72,164 Income tax (Note 21) 28,151 14,259 6,793 -------------------------------------------- Income before dividends on preferred stock of subsidiary Bank and cumulative effect of accounting changes 103,989 85,886 65,371 Dividends on preferred stock of subsidiary Bank (Note 16) 770 770 807 -------------------------------------------- Income before cumulative effect of accounting changes 103,219 85,116 64,564 Cumulative effect of accounting changes (Note 2) 6,185 -------------------------------------------- NET INCOME $109,404 $85,116 $64,564 ============================================ EARNINGS PER SHARE (Note 17): Income before cumulative effect of accounting changes $ 3.16 $ 2.79 $ 2.15 Cumulative effect of accounting changes .19 -------------------------------------------- NET INCOME $ 3.35 $ 2.79 $ 2.15 ============================================
The accompanying notes are an integral part of the consolidated financial statements. 29 80
- - - - - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS BANPONCE CORPORATION - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, ----------------------------------------------------------------- 1993 1992 1991 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS OPERATING ACTIVITIES: Net income $ 109,404 $ 85,116 $ 64,564 ----------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 27,310 26,955 25,467 Provision for loan losses 72,892 97,633 121,681 Amortization of intangibles 16,176 14,888 13,687 Gain on sale of securities (864) (242) (18,617) Gain on sale of premises and equipment (604) (333) (1,129) Gain on sale of loans (262) (3,347) (3,092) Amortization of premiums and accretion of discounts on investments 14,708 2,694 (1,522) Amortization of deferred loan fees and costs 2,508 (353) 388 Postretirement benefit obligation 42,672 Net (increase) decrease in trading securities (2,734) 1,374 (781) Net (increase) decrease in interest receivable (2,528) (16,981) 560 Net decrease (increase) in other assets 12,860 5,561 (927) Net decrease in interest payable (2,167) (4,729) (5,330) Net (decrease) increase in deferred income taxes and income taxes payable (42,953) 9,815 2,042 Net increase (decrease) in other liabilities 14,336 (11,023) 6,390 ----------------------------------------------------------------- Total adjustments 151,350 121,912 138,817 ----------------------------------------------------------------- Net cash provided by operating activities 260,754 207,028 203,381 ----------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 22,429 196,212 454,010 Maturities of investment securities 3,887,806 3,297,635 4,661,648 Sales of investment securities 95,680 43,114 1,104,061 Purchases of investment securities (4,344,126) (4,679,275) (6,182,434) Net disbursements on loans (692,563) (278,275) (19,251) Proceeds from sale of LDC loans 17,836 Proceeds from sale of loans 22,997 118,707 72,197 Assets acquired, net of cash (13,275) Acquisition of mortgage loan portfolio (367,053) Acquisition of premises and equipment (73,711) (49,552) (53,332) Proceeds from sale of premises and equipment 12,017 15,653 11,601 ----------------------------------------------------------------- Net cash (used in) provided by investing activities (1,436,524) (1,335,781) 53,061 ----------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 112,095 257,752 (180,487) Net deposits acquired 237,096 573,842 58,189 Net deposits sold (55,187) Net increase in federal funds purchased and securities sold under agreements to repurchase 286,511 216,108 55,168 Net increase (decrease) in other short-term borrowings 457,291 63,157 (107,155) Proceeds from issuance of notes payable 163,801 16,310 83,995 Payment of notes payable (9) (6,265) Payment of subordinated notes (12,000) (20,000) Dividends paid (27,781) (24,112) (22,035) Proceeds from issuance of common stock 2,106 59,809 2,399 Disbursement for cash portion of merger (121,299) ---------------------------------------------------------------- Net cash provided by (used in) financing activities 1,219,110 1,142,866 (292,677) ---------------------------------------------------------------- Net increase (decrease) in cash and due from banks 43,340 14,113 (36,235) Cash and due from banks at beginning of period 325,497 311,384 347,619 ---------------------------------------------------------------- Cash and due from banks at end of period $ 368,837 $ 325,497 $ 311,384 ===============================================================
The accompanying notes are an integral part of the consolidated financial statements. 30 81
- - - - - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES BANPONCE CORPORATION IN STOCKHOLDERS' EQUITY - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, --------------------------------------------------------------- 1993 1992 1991 - - - - - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) COMMON STOCK: Balance at beginning of year $195,929 $180,563 $179,655 Common stock issued (Note 17) 14,752 Common stock issued under Dividend Reinvestment Plan 466 614 908 -------------------------------------------------------------- Balance at end of year 196,395 195,929 180,563 -------------------------------------------------------------- SURPLUS: Balance at beginning of year 361,982 287,539 276,050 Proceeds from common stock issued (Note 17) 42,848 Proceeds from common stock issued under Dividend Reinvestment Plan 1,640 1,595 1,489 Transfer from retained earnings 11,000 10,000 10,000 Transfer from capital reserves (Note 14) 12,000 20,000 -------------------------------------------------------------- Balance at end of year 386,622 361,982 287,539 -------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 150,208 110,287 93,180 Net income 109,404 85,116 64,564 Cash dividends declared (Note 17) (29,434) (24,624) (24,028) Transfer to capital reserves (Note 14) (10,571) (10,571) (13,429) Transfer to surplus (11,000) (10,000) (10,000) -------------------------------------------------------------- Balance at end of year 208,607 150,208 110,287 -------------------------------------------------------------- CAPITAL RESERVES: Balance at beginning of year 44,000 53,429 40,000 Transfer from retained earnings (Note 14) 10,571 10,571 13,429 Transfer to surplus (Note 14) (12,000) (20,000) -------------------------------------------------------------- Balance at end of year 42,571 44,000 53,429 -------------------------------------------------------------- Total stockholders' equity $834,195 $752,119 $631,818 ============================================================== The accompanying notes are an integral part of the consolidated financial statements. 31
82 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BANPONCE CORPORATION - - - - - -------------------------------------------------------------------------------- The accounting and reporting policies of BanPonce Corporation (the Corporation) and subsidiaries conform with generally accepted accounting principles and with general practices within the banking industry. The following is a description of the more significant of these policies: CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries Vehicle Equipment Leasing Company, Inc. (Velco), Banco Popular de Puerto Rico (the subsidiary Bank) and its subsidiaries Popular Leasing and Rental, Inc. and Popular Consumer Services, Inc. and Popular International Bank and its subsidiaries BanPonce Financial Corp. and Spring Financial Services, Inc. (second tier subsidiary), after elimination of intercompany accounts and transactions. The preferred stock of the subsidiary Bank and dividends related thereto have been treated as minority interest in the accompanying consolidated financial statements. INVESTMENT SECURITIES During 1992, as a result of changing industry practice and management's evaluation of the investment securities portfolio, the Corporation segregated its investment securities portfolio into securities held to maturity and those available for sale. Investments in debt securities, for which management has both the ability and the positive intent to hold to maturity, are carried at amortized cost adjusted for amortization of premiums and accretion of discounts. Investments in debt securities which management believes may be sold prior to maturity, in connection with changes in interest rates, prepayment risk, changes in the Corporation's liquidity or other factors, are classified as available for sale and are carried at the lower of aggregate cost or market. The change in carrying basis had no effect on the Corporation's results of operations. The amortization of premiums are deducted and the accretion of discounts are added to interest income based on the interest method over the maturity period of the related securities. Interest on investment securities is reported as interest income. Net realized gains or losses on sales of investment securities and unrealized aggregate loss valuation adjustments, if any, on securities available for sale are reported separately in the statement of income. In 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 - "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: -Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. -Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. -Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. The adoption of this statement which is effective for companies with financial statements beginning after December 15, 1993 will result in an increase in the Corporation's stockholders' equity of approximately $14,373,000, net of $4,791,000 deferred taxes. TRADING ACCOUNT SECURITIES Trading account securities are carried at market value. Net gains and losses resulting from the sale of trading account securities and valuation adjustments to the carrying value are shown separately in the statement of income. INTEREST RATE FUTURES AND OPTIONS The Corporation enters into interest rate futures and options contracts as part of its portfolio management and trading activities. These contracts are carried at market value. Net gains and losses resulting from these transactions are recorded separately in the trading profit or loss account. INTEREST RATE CAPS AND SWAPS The Corporation enters into interest rate caps and swap transactions to manage its interest rate exposure. Net interest settlements on interest rate caps and swaps are recorded as adjustments to interest income or expense. LOANS Loans are stated at the outstanding balance, less unearned income and allowance for loan losses. Loan origination fees and costs incurred in the origination of new loans are deferred and amortized by the interest method over the life of the loans as an adjustment of interest yield. Unearned interest on installment loans is recognized as income on a basis which results in approximate level rates of return over the term of the loans. Recognition of interest on commercial and construction loans is discontinued when loans are 60 days or more in arrears on payments of principal or interest or when other factors indicate that collection of principal and interest is doubtful. For lease financing, conventional mortgage loans and closed-end consumer loans, interest accrual is ceased when loans are 90 days or more past-due. Such loans are designated as non-accruing and are not returned to an accrual status until interest is received on a current basis and those factors indicative of doubtful collection cease to exist. Closed-end consumer loans are charged-off against the allowance for loan losses after becoming 120 days past-due. Open-end (revolving credit) consumer loans are charged-off after becoming 180 days past due. Income is generally recognized on open-end loans until the loans are charged-off. ALLOWANCE FOR LOAN LOSSES The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio as well as in other credit-related balance sheet and off-balance sheet financial instruments. This methodology includes the consideration of such factors as economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews. The provision for loan losses charged to current operations is based on an evaluation of the risk characteristics of the loan portfolio and the economic conditions. Loan losses are charged and recoveries are credited to the allowance for loan losses. In 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114 - "Accounting by 32 83 - - - - - -------------------------------------------------------------------------------- Creditors for Impairment of a Loan." This statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The statement must be adopted for companies with financial statements beginning after December 15, 1994. The Corporation has not yet determined the impact of this statement. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the operations currently. OTHER REAL ESTATE Other real estate comprises properties acquired through both formal foreclosure proceedings and in-substance foreclosures. In-substance foreclosed properties are those properties where the borrower retains title but has little or no remaining equity in the property considering its fair value, where repayment can only be expected to come from the operation or sale of property, and where the borrower has effectively abandoned control of the property or it is doubtful that the borrower will be able to rebuild equity in the property. These properties are accounted for as if they were properties of the bank and carried at the lower of cost (outstanding loan balance) or estimated market value less estimated costs of disposal. Prior to foreclosure, the recorded amount of the loan, if required, is written-down to the appraised value of the real estate to be acquired by charging the allowance for loan losses. This practice has resulted in no significant differences from recording the property at market value at the time of foreclosure. Subsequent to foreclosure, gains or losses on the sale of these properties are credited or charged to expense of operating other real estate. The cost of maintaining and operating such properties are expensed as incurred. INTANGIBLE ASSETS Intangible assets consist of goodwill and other identifiable intangible assets acquired, mainly core deposits and credit cardholder relationships. The fair values of the latter were computed as the net present values of the estimated future income streams to be obtained from them. The values of core deposits, credit cardholder relationships and mortgage servicing rights, are amortized using various methods over the periods benefited ranging from 5 to 12 years. Goodwill represents the excess of the Corporation's cost of purchased operations over the fair value of the net assets acquired and is being amortized on the straight-line basis over 15 years. INCOME TAXES In January 1993, the Corporation adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax laws or rates. Previously, the Corporation used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. EMPLOYEES' RETIREMENT PLANS The Corporation and its subsidiaries have trusteed, non-contributory retirement and related plans covering substantially all full-time employees. Pension costs are computed on the basis of accepted actuarial methods. The related costs are charged to current operations and consist of several components of net pension cost based on various actuarial assumptions regarding future experience under the plan. Actuarial assumptions are evaluated periodically. The funding policy is to contribute funds to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. OTHER POSTRETIREMENT BENEFIT PLANS The Corporation provides certain health and life insurance benefits for eligible retirees and their dependents. The cost of postretirement benefits is accrued during the years that the employee renders the necessary service. Before 1993, the cost of providing these benefits was recognized as a charge to income in the period the benefits were paid. EARNINGS PER SHARE Earnings per share are computed on the basis of the weighted average number of shares of the Corporation outstanding during the year. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. RECLASSIFICATIONS Certain reclassifications have been made to the 1992 and 1991 consolidated financial statements to conform with the presentation of the 1993 consolidated financial statements. 33 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANPONCE CORPORATION - - - - - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting policies followed by the Corporation and its subsidiaries are disclosed in the preceding summary of significant accounting policies. NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES: Effective January 1, 1993, the Corporation implemented the Statement of Financial Accounting Standard No. 106 (SFAS 106) - "Employers Accounting for Postretirement Benefits other than Pensions" (OPEB). 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 in 1993, 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, rather than amortizing it over future periods. The cumulative effect of this accounting change resulted in a reduction in net income of $22,736,000, or $0.70 per share, net of $16,464,000 in deferred taxes. In addition, the accrual related to the current year obligation amounted to $5,217,000. Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standard No. 109 (SFAS 109) - "Accounting for Income Taxes" which superseded SFAS 96. Under SFAS 109, the Corporation recognizes to a greater degree the future tax benefits of expenses which have been recognized in the financial statements. The adjustments to the January 1, 1993 Statement of Condition and to the Statement of Income to adopt SFAS 109 netted to $28,921,000 or $0.89 per share. This amount is reflected in 1993 net income as part of the cumulative effect of a accounting changes. It primarily represents the impact of recognizing a deferred tax asset for the benefit of AMT credits and loss carryforwards that could not be recorded under SFAS 96. NOTE 3 - INVESTMENT SECURITIES: The carrying value, gross unrealized gains and losses and approximate market value of investment securities (or fair value for certain investment securities where no market quotations are available) and related maturities as of December 31, are as follows:
1993 ------------------------------------------------------------- Weighted Book Unrealized Unrealized Market average value gains losses value yield ------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 9 months): Within 1 year $1,597,481 $11,696 $ 1,609,177 5.34% After 1 to 5 years 627,670 7,041 $ 70 634,641 4.84 ------------------------------------------------------------- 2,225,151 18,737 70 2,243,818 5.20 ------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 7 months): Within 1 year 215,355 279 5 215,629 3.63 After 1 to 5 years 65,012 1,056 66,069 5.49 After 5 to 10 years 28 28 6.50 After 10 years 8,266 10 1 8,274 7.50 ------------------------------------------------------------- 288,661 1,345 6 290,000 4.17 ------------------------------------------------------------- Obligations of Puerto Rico, States and political sub- divisions (average maturity of 3 years and 8 months): Within 1 year 152,091 209 152,300 2.36 After 1 to 5 years 39,170 3,044 18 42,196 7.40 After 5 to 10 years 24,939 3,063 28,002 7.59 After 10 years 40,474 2,628 101 43,001 8.33 ------------------------------------------------------------- 256,674 8,944 119 265,499 4.56 ------------------------------------------------------------- Other (average maturity of 2 years and 1 months): Within 1 year 228,344 1,084 2,091 227,337 5.26 After 1 to 5 years 294,378 900 1,247 294,032 5.25 After 5 to 10 years 23,393 151 158 23,386 6.51 After 10 years 14,197 1 53 14,144 5.69 ------------------------------------------------------------- 560,312 2,136 3,549 558,899 5.31 ------------------------------------------------------------- $3,330,798 $31,162 $ 3,744 $ 3,358,216 5.08% =============================================================
1992 --------------------------------------------------------- Weighted Book Unrealized Unrealized Market average value gains losses value yield --------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 6 months): Within 1 year $ 671,809 $ 8,186 $ 5 $ 679,990 5.41% After 1 to 5 years 1,877,555 30,097 1,956 1,905,696 5.46 -------------------------------------------------------- 2,549,364 38,283 1,961 2,585,686 5.44 -------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 2 years and 6 months): Within 1 year 74,506 5 74,511 3.38 After 1 to 5 years 80,025 1,708 15 81,718 6.20 After 5 to 10 years 27 27 6.50 After 10 years 19,678 7 1 19,684 7.28 -------------------------------------------------------- 174,236 1,720 16 175,940 5.10 -------------------------------------------------------- Obligations of Puerto Rico, States and political sub- divisions (average maturity of 5 years and 6 months): Within 1 year 87,630 311 8 87,933 3.09 After 1 to 5 years 37,559 2,621 6 40,174 7.48 After 5 to 10 years 25,872 2,123 5 27,990 7.33 After 10 years 58,748 4,077 62,825 8.14 -------------------------------------------------------- 209,809 9,132 19 218,922 5.80 -------------------------------------------------------- Other (average maturity of 3 years and 1 months): Within 1 year 120,118 1,893 74 121,937 8.17 After 1 to 5 years 189,079 1,277 1,309 189,047 7.06 After 5 to 10 years 32,719 82 456 32,344 6.71 After 10 years 15,115 1 15,117 6.33 -------------------------------------------------------- 357,031 3,253 1,839 358,445 7.37 -------------------------------------------------------- $3,290,440 $ 52,388 $ 3,835 $ 3,338,993 5.66% ========================================================
34 85 - - - - - -------------------------------------------------------------------------------- The aggregate carrying value and approximate market value of investment securities at December 31, 1993, by contractual maturity, are shown below:
Book value Market value -------------------------- (In thousands) Within 1 year $ 2,193,271 $2,204,443 After 1 to 5 years 1,026,230 1,036,938 After 5 to 10 years 48,360 51,416 After 10 years 62,937 65,419 ---------------------------- $ 3,330,798 $3,358,216 ============================
Proceeds from sale of investment securities during 1993 were $12,059,000 (1992 - $43,114,000; 1991 - $1,104,061,000). Gross gains and gross losses realized on those sales during the year were $445,000 and $2,000, respectively (1992 - $245,000 and $3,000; 1991 - $19,645,000 and $1,028,000). Proceeds from sale of investment securities in 1991 include approximately $612,894,000 of securities sold immediately after a merger transaction to restructure the newly combined investment securities portfolio to conform to the Corporation's investment objectives and strategies. These sales resulted in a net gain of approximately $267,000. Investments in obligations that are payable from and secured by the same source of revenue or taxing authority and that exceeded 10 percent of stockholders' equity were as follows:
Percent of Book stockholders' Market value equity value ----------------------------------- (Dollars in thousands) Issuer: Government of Puerto Rico, its agencies and instrumentalities: December 31, 1993 $256,530 31% $265,370 December 31, 1992 209,632 28 218,745
NOTE 4 - INVESTMENT SECURITIES AVAILABLE FOR SALE: The carrying value, gross unrealized gains and losses and approximate market value of investment securities available for sale (or fair value for certain investment securities where no market quotations are available) and related maturities as of December 31, are as follows:
1993 ------------------------------------------------------------------------------ Weighted Book Unrealized Unrealized Market Average value gains losses value yield ------------------------------------------------------------------------------ (In thousands) U.S. Treasury securities (average maturity of 3 years and 2 months): After 1 to 5 years $550,021 $15,736 $2,749 $ 563,008 5.63% After 5 to 10 years 80,934 5,341 86,275 6.72 ------------------------------------------------------------------------------ 630,955 21,077 2,749 649,283 5.77 ------------------------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 2 years and 5 months): Within 1 year 25,000 25,000 5.50 After 1 to 5 years 50,126 836 50,962 6.71 ------------------------------------------------------------------------------ 75,126 836 75,962 6.30 ------------------------------------------------------------------------------ Other (average maturity of 3 years and 2 months): After 1 to 5 years 8,484 8,484 8.75 ------------------------------------------------------------------------------ $714,565 $21,913 $2,749 $733,729 5.86% ===============================================================================
1992 ---------------------------------------------------------------- Weighted Book Unrealized Unrealized Market Average value gains losses value yield ---------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 4 years and 2 months): After 1 to 5 years $223,360 $13,797 $56 $237,101 7.55% After 5 to 10 years 81,111 1,439 82,550 6.72 --------------------------------------------------------------- 304,471 15,236 56 319,651 7.34 --------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 3 years and 6 months): After 1 to 5 years 60,139 520 60,659 5.92 After 5 to 10 years 35,033 221 14 35,240 5.95 -------------------------------------------------------------- 95,172 741 14 95,899 5.93 -------------------------------------------------------------- Other (average maturity of 7 years and 6 months): After 5 to 10 years 8,484 8,484 8.75 -------------------------------------------------------------- 408,127 15,977 $70 $ 424,034 7.04% ==============================================================
The aggregate carrying value and approximate market value of investment securities available for sale at December 31, 1993, by contractual maturity, are shown below:
Book value Market value -------------------------- (In thousands) - - - - - -------------------------------------------------------------- Within 1 year $ 25,000 $ 25,000 After 1 to 5 years 600,147 613,970 After 5 to 10 years 80,934 86,275 After 10 years 8,484 8,484 -------------------------- $ 714,565 $ 733,729 ==========================
Proceeds from sale of investment securities available for sale during 1993 were $83,621,000. Gross gains realized on those sales during the year were $421,000; there were no losses. NOTE 5 - PLEDGED ASSETS: Investment securities and loans amounting to $1,917,840,000 are pledged to secure public and trust deposits and securities and mortgages sold under agreements to repurchase. 35 86
- - - - - -------------------------------------------------------------------------------- NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, is as follows: 1993 1992 ------------------------------ (In thousands) Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies $ 128,054 $ 93,110 Guaranteed by the Commonwealth of Puerto Rico 24,758 29,208 Commercial loans secured by real estate 894,181 688,139 Other 1,477,500 915,841 ------------------------------ 2,524,493 1,726,298 Financial institutions 36,445 38,469 Commercial, industrial and agricultural 1,115,703 1,109,326 Real estate (construction) 154,237 173,025 Lease financing 462,399 391,266 Individuals - For household, credit cards and other consumer expenditures 2,062,437 1,902,795 Other 299,358 273,545 ------------------------------ $6,655,072 $5,614,724 ==============================
As of December 31, 1993, loans on which the accrual of interest income had been discontinued amounted to $92,814,000 (1992 - $108,341,000; 1991 - $128,727,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $4,992,000 (1992 - $7,548,000; 1991 - $10,983,000). In addition, there are $5,643,000 of renegotiated loans still accruing interest at December 31, 1993 (1992 - $8,380,000). Included in the non-accruing loans as of December 31, 1993 are $16,290,000 (1992 - $21,440,000) in consumer loans. The changes in the allowance for loan losses were as follows:
1993 1992 1991 --------------------------------------- (In thousands) Balance at beginning of year $ 110,714 $ 94,199 $ 89,335 Reserve for acquired loans 1,580 1,556 Provision for loan losses 72,892 97,633 121,681 Recoveries 25,678 21,062 10,942 Loans charged-off (77,427) (102,180) (129,315) --------------------------------------- Balance at end of year $ 133,437 $ 110,714 $ 94,199 =======================================
NOTE 7 - RELATED PARTY TRANSACTIONS: The Corporation grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
Officers Directors Total -------------------------------------- (In thousands) Balance at January 1, 1992 $ 653 $ 51,995 $ 52,648 Additions 186 119,379 119,565 Reductions (106) (115,268) (115,374) ------------------------------------- Balance at December 31, 1992 733 56,106 56,839 Additions 1,938 137,809 139,747 Reductions (637) (102,431) (103,068) ------------------------------------- Balance at December 31, 1993 $2,034 $ 91,484 $ 93,518 =====================================
These loans have been consummated on terms no more favorable than those that would have been obtained if the transaction had been with unrelated parties. NOTE 8 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life in years 1993 1992 --------------------------------------- (In thousands) Land $ 33,070 $ 30,381 ----------------------- Buildings 30-50 207,707 198,219 Equipment 3-10 178,632 154,457 Leasehold improvements Various 44,730 40,701 ----------------------- 431,069 393,377 Less - Accumulated depreciation and amortization 187,243 172,378 ----------------------- 243,826 220,999 ----------------------- Construction in progress 21,193 8,950 ----------------------- $298,089 $260,330 =======================
Depreciation and amortization of premises and equipment for the year was $27,310,000 (1992 - $26,955,000; 1991 - $25,467,000) of which $6,421,000 (1992 - $7,515,000; 1991 - $7,355,000) was charged to occupancy expense and $20,889,000 (1992 - $19,440,000; 1991 - $18,112,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $14,097,000 (1992 - $13,067,000; 1991 - $12,743,000). NOTE 9 - DEPOSITS: Total interest bearing deposits as of December 31, consist of:
1993 1992 ------------------------------- (In thousands) Savings deposits: Savings accounts $2,737,037 $2,315,572 NOW and money market accounts 1,135,043 1,035,955 ------------------------------- 3,872,080 3,351,527 ------------------------------- Certificates of deposit: Under $100,000 1,233,019 1,328,873 $100,000 and over 1,568,700 1,743,505 ------------------------------- 2,801,719 3,072,378 ------------------------------- $6,673,799 $6,423,905 ===============================
36 87 - - - - - -------------------------------------------------------------------------------- NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The following table summarizes certain information on federal funds purchased and securities sold under agreements to repurchase as of December 31:
1993 1992 1991 -------------------------------------- (Dollars in thousands) Federal Funds purchased $ 9,100 Securities sold under agreements to repurchase 942,633 $ 665,222 $449,114 -------------------------------------- Total amount outstanding $ 951,733 $ 665,222 $449,114 ====================================== Maximum aggregate balance outstanding at any month-end $1,108,578 $ 920,272 $817,856 ====================================== Average aggregate balance outstanding $ 832,651 $1,628,620 $645,789 ====================================== Weighted average interest rate: For the year 2.77% 3.16% 5.40% At December 31 2.91 2.79 4.43
NOTE 11 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consist of:
1993 1992 --------------------- (In thousands) Advances under revolving lines of credit amounting to $195,000,000 (1992 - $200,000,000) with floating interest rates ranging from 2.66% to 3.55% (1992 - 3.28% and 3.44%). $109,025 $ 70,000 Term federal funds purchased with maturities until April 1994 at rates ranging from 3.31% to 3.50%. 345,000 Commercial paper (issued to institutional investors) with various maturities until May 1994 at rates ranging from 3.39% to 3.75% (1992 - 3.32% to 4.66%.) 119,112 87,982 Term notes maturing in 1994, paying quarterly interest at rates ranging from 0.44% to 0.94% (1992 - 0.25% to 1.15%) over the 3 month LIBOR rate (LIBOR rate at December 31, 1993 was 3.38%; 1992 - 3.44%). 44,986 42,963 Term notes due in 1994 paying semiannual interest at a fixed rate ranging from 3.81% to 7.88% (1992 - 7.27%). 44,961 4,998 Others 1,089 939 --------------------- $664,173 $206,882 =====================
The weighted average interest rate of other short-term borrowings at December 31, 1993 was 3.40% (1992 - 4.03%; 1991 - 6.07%). The maximum aggregate balance outstanding at any month-end was approximately $695,314,000 (1992 - $208,738,000; 1991 - $222,742,000). The average aggregate balance outstanding during the year was approximately $527,523,000 (1992 - $172,729,000; 1991 - $198,653,000). The weighted average interest rate during the year was 3.66% (1992 - 4.32%; 1991 - 6.69%). NOTE 12 - NOTES PAYABLE: Notes payable outstanding at December 31, consist of the following:
1993 1992 --------------------- (In thousands) Term notes with maturities ranging from 1995 through 2003 paying semiannual interest at fixed rates ranging from 5.17% to 7.85% (1992 - 4.47% to 7.85%). $179,301 $69,806 Term notes with maturities ranging from 1995 through 1998 paying quarterly interest at rates ranging from 0.19% to 0.58% (1992 - 0.65% to 1.13%) over the 3 month LIBOR rate (LIBOR rate at December 31, 1993 was 3.38%; 1992 - 3.44%). 44,861 19,972 Promissory notes maturing in 1998 with fixed interest rates ranging from 4.50% to 4.62%. 29,500 Mortgage notes and other debt with varying rates and terms. 193 284 --------------------- $253,855 $90,062 =====================
NOTE 13 - SENIOR DEBENTURES: Senior debentures at December 31, 1993 consist of a $30,000,000 obligation issued by the Corporation due in January 1997 with interest at 8.25%. The senior debentures contain various covenants which, among others, restrict the payment of dividends. These restrictions are less restrictive than those imposed by the subordinated notes agreements (see Note 14). NOTE 14 - SUBORDINATED NOTES OF THE SUBSIDIARY BANK: Subordinated notes at December 31, consist of the following: 1993 1992 ------------------- (In thousands) Subordinated notes issued by the subsidiary Bank on March 29, 1989 maturing on June 15, 1996, with interest payable quarterly and consisting of: 8.875% Fixed Rate Notes Series A $15,000 $15,000 8.6875% Fixed Rate Note Series B 15,000 15,000 Floating Rate Notes Series A with interest payable at 88% of LIBID rate 19,000 19,000 Floating Rate Notes Series B with interest payable at 86% of LIBID rate 1,000 1,000 -------------------- 50,000 50,000 -------------------- Subordinated fixed rate notes with interest payable quarterly consisting of the following: 7.95% notes due in 1994 (Prepaid during 1993) 12,000 8.50% notes due in 1996 12,000 12,000 -------------------- 12,000 24,000 -------------------- $62,000 $74,000 ==================== At December 31, 1993, the LIBID rate was 3.25% (1992 - 3.31%).
37 88 - - - - - -------------------------------------------------------------------------------- These notes are subordinated to the rights of the subsidiary Bank's depositors and other creditors and require the subsidiary Bank to set aside from retained earnings an amount equal to the principal payment on each note to be used solely to increase capital. The capital reserve account was established to comply with the requirements of the subordinated notes. At the notes repayment date the balance in capital reserves is transferred to the surplus account. The subsidiary Bank transferred to capital reserves from the retained earnings account $10,571,000, $10,571,000 and $13,429,000 during 1993, 1992 and 1991, respectively, following this requirement. In addition, during 1993 and 1992, $12 million and $20 million were transferred from capital reserves to surplus upon prepayment of the 7.95% and 10% notes originally maturing in 1994 and 1993, respectively. The $12 million subordinated notes agreements contain certain provisions which, among other things, restrict the payment of dividends. Under these restrictions, at December 31, 1993, undivided profits of the subsidiary Bank amounting to $1,000,000 are unavailable for future dividends. NOTE 15 - LONG-TERM DEBT MATURITY REQUIREMENTS: The aggregate amounts of maturities of notes payable, senior debentures and subordinated notes are as follows:
Notes Senior Subordinated Year payable debentures notes Total - - - - - ----------------------------------------------------------------------- (In thousands) 1994 $ 92 $ 92 1995 34,961 34,961 1996 54,843 $62,000 116,843 1997 34,889 $30,000 64,889 1998 104,167 104,167 Later years 24,903 24,903 ---------------------------------------------------- Total $253,855 $30,000 $62,000 $ 345,855 ====================================================
NOTE 16 - PREFERRED STOCK OF THE SUBSIDIARY BANK: The subsidiary Bank has 200,000 shares of authorized preferred stock with a par value of $100. This stock may be issued in series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The subsidiary Bank has issued 110,000 shares of Treasury Indexed Preferred Stock Series A (TIPS) at $100 per share for a total of $11,000,000. These shares are non-convertible and non-voting (except that if dividends are not paid on the preferred stock for six consecutive quarters their holders obtain a vote in the general election of directors of the subsidiary Bank), and are redeemable at the subsidiary Bank's option at a price of $103 per share through June 30, 1994 and at par ($100) thereafter. Dividends are payable quarterly at a rate of 115% of the six-month bond equivalent Treasury Bill rate, or 85% of the five-year Treasury Note constant maturity rate, whichever is higher, but the rate cannot be lower than 7.0% or higher than 15.5% per annum. NOTE 17 - STOCKHOLDERS' EQUITY: The Corporation has a dividend reinvestment plan under which stockholders may use their quarterly dividends to reinvest in shares of common stock at a 5% discount from the average market price at the time of issuance. During 1993, 77,559 shares (1992 - 102,272; 1991 - 151,446) equivalent to $2,106,000 (1992 - $2,209,000; 1991 - $2,397,000) in additional equity, were issued under the plan. On May 3, 1993, BanPonce Corporation filed, and had ordered effective, a "shelf" registration with the Securities and Exchange Commission which registered up to $400 million in unsecured debt securities and/or shares of preferred stock. The amounts, terms and timing of offerings will be determined in the future when and as the Corporation decides to sell securities under the registration. On November 6, 1992, the Corporation issued 2,458,740 shares of common stock, which generated $57,600,000 of new capital. All of the shares were purchased by existing shareholders who exercised their subscription rights. Net proceeds from the issuance have been and will be used for general corporate purposes, including investment in and advances to existing subsidiaries. The Corporation's average number of shares outstanding used in the computation of net income per share was 32,701,236 (1992 - 30,461,494; 1991 - 30,035,601). During the year cash dividends of $0.90 (1992 and 1991 - $0.80) per share outstanding amounting to $29,434,000 (1992 - $24,624,000; 1991 - $24,028,000) were declared. NOTE 18 - INTEREST ON INVESTMENTS: Interest on investments consisted of the following:
1993 1992 1991 -------------------------------- (In thousands) Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell $ 4,115 $ 5,209 $ 4,448 Time deposits with other banks 2,259 9,093 28,886 Other 60 112 256 -------------------------------- $ 6,434 $ 14,414 $ 33,590 ================================ Investment securities: U.S. Treasury securities $163,209 $154,210 $124,451 Obligations of other U.S. Government agencies and corporations 14,622 19,137 22,833 Obligations of Puerto Rico, States and political sub- divisions 11,605 13,235 15,575 Other 26,508 21,060 18,554 -------------------------------- $215,944 $207,642 $181,413 ================================
Interest income on investment securities for the year ended December 31, 1993 includes tax exempt interest of $189,438,000 (1992 - $187,923,000; 1991 $163,812,000). NOTE 19 - EMPLOYEE BENEFITS: Substantially all of the employees of the Corporation and its subsidiaries are covered by a non-contributory defined benefit pension plan. Pension benefits begin to vest after five years of service and are based on age, years of credited service and final average compensation, as defined. At December 31, 1993, plan assets primarily consist of U.S. Government obligations, high grade corporate bonds and listed stocks including 1,418,215 shares of the Corporation, which have a market value of approximately $43,965,000. The following table sets forth the plan's funded status and amounts recognized in the consolidated financial statements at December 31: 38 89
- - - - - ------------------------------------------------------------------------------- 1993 1992 ----------------------------- (In thousands) Actuarial present value of benefit obligations: Vested benefits ($123,826) ($103,365) Non-vested benefits (9,313) (8,401) ----------------------------- Accumulated benefit obligation (133,139) (111,766) Effect of projected future compensation levels (54,251) (41,487) ----------------------------- Projected benefit obligation (187,390) (153,253) Plan assets at fair market value consisting primarily of U.S. Government obligations, high grade corporate bonds and listed stocks 203,893 193,536 ----------------------------- Plan assets in excess of projected benefit obligation 16,503 40,283 Unrecognized net (gain) loss from past experience different from that assumed and effect of changes in assumptions 19,618 (1,463) Unrecognized prior service cost (2,395) (2,573) Unrecognized initial net assets (27,929) (30,389) ----------------------------- Prepaid pension cost $ 5,797 $ 5,858 ============================= Net pension cost for the year ended December 31, included the following components: 1993 1992 1991 ---------------------------- (In thousands) Service costs - benefits earned during period $ 7,563 $ 6,802 $ 5,818 Interest cost on projected benefit obligation 12,454 11,495 10,451 Actual return on plan assets (15,404) (24,290) (29,184) Net amortization and deferral (4,553) 6,025 12,922 ---------------------------- Net pension cost $ 60 $ 32 $ 7 ============================
At December 31, 1993, the discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% (1992 and 1991 - 8.25%) and the rate of increase in future compensation levels was 5.5% for the three years. The expected long-term rate of return on assets used in the computation was 9% for 1993, 1992 and 1991. In addition to providing pension benefits, the subsidiary Bank provides certain health care benefits for retired employees. Substantially all of the employees of the Bank who are eligible to retire under the pension plan and provided they reach retirement age while working for the Bank may become eligible for these benefits. The actual disbursements for these benefits for 1993 amounted to approximately $1,770,000 (1992 - $1,400,000; 1991 - $778,000). The components of net postretirement benefit expense under SFAS 106 for the year ended December 31, 1993 are as follows (in thousands): Service cost $ 2,054 Interest cost 3,163 -------- Net postretirement benefit expense $ 5,217 ======== The status of the Company's unfunded postretirement benefit plan at December 31, 1993 is as follows (in thousands):
Actuarial present value of expected postretirement benefit obligation: Retirees $21,676 Fully eligible active plan participants 2,937 Other active plan participants 22,985 Accumulated postretirement ------------ benefit obligation 47,598 Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions (4,926) ------------ Accrued postretirement benefit cost $42,672
============ The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1993 was 7.5%. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation at December 31, 1993 was 13%, decreasing by 1% every year until 5% is reached in the year 2001 and remaining at that level thereafter. A one-percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $7,406,000 and the sum of the service and interest cost in 1993 by $1,085,000. The Corporation also has a profit sharing plan covering substantially all regular employees. Annual contributions are based on operating income, as defined in the plan, and are deposited in trust. Profit sharing expense for the year amounted to $20,594,000 (1992 - $17,736,000; 1991 - $13,848,000). NOTE 20 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 1993, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
Minimum Sublease payments rentals Net - - - - - --------------------------------------------------------------- (In thousands) 1994 $10,428 $ 694 $ 9,734 1995 9,101 685 8,416 1996 8,127 683 7,444 1997 7,362 671 6,691 1998 7,047 589 6,458 Later years 41,243 2,466 38,777 ----------------------------- $83,308 $5,788 $77,520
============================= Total rental expense for the year ended December 31, 1993 was $14,480,000 (1992 - $14,074,000; 1991 - $14,022,000). NOTE 21 - INCOME TAX As discussed in Notes 1 and 2, the Corporation adopted SFAS 109 as of January 1, 1993, and the cumulative effect of this change is reported in the Consolidated Statement of Income for the year ended December 31, 1993. Prior year's financial statements have not been restated to apply the provisions of SFAS 109. This standard requires the recognition of deferred tax assets and liabilities 39 90 - - - - - -------------------------------------------------------------------------------- for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. The measurement of current and deferred tax liabilities or assets is based on the regular tax rates, which is 42% in Puerto Rico, and the provisions of enacted tax laws. A related deferred tax liability of $5,000,000 is recorded in the consolidated statement of condition at December 31, 1992, after reduction for other net deductible amounts, for the tax effect of the excess of the assigned values over the tax bases of net assets acquired. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1993 are as follows:
Amount --------------------- (In thousands) Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits available $ 54,581 Net operating loss carryforwards available 1,914 Postretirement benefits obligation (other than pensions) 17,682 Other temporary differences 7,296 -------------- Total gross deferred tax assets 81,473 -------------- Deferred tax liability: Differences between the assigned values and the tax bases of the assets and liabilities recognized in a purchase business combination 41,452 Other temporary differences 3,807 -------------- Total gross deferred tax liability 45,259 -------------- Deferred tax asset valuation allowance 296 -------------- Net deferred tax asset $ 35,918 ==============
At December 31, 1993, the Corporation had $21,854,000 in Alternative Minimum Tax (AMT) credits that can be carried forward indefinitely to reduce the regular income tax liability in future years. During 1993, the Corporation used AMT credits totalling $6,513,000 to reduce its regular tax liability. The Corporation also had, at the end of 1993, $4,557,000 in net operating losses (NOL) available to carry over to offset taxable income in future years. These NOL carryforwards expire in different amounts on years 1997 through 1999. During 1993, the Corporation used NOL carryforwards amounting to $2,690,000 to reduce its regular taxable income. The valuation allowance of $296,000 is related to a deferred tax asset arising from NOL carryforwards, for which the Corporation cannot determine the likelihood of its realizability in future years. Under the Puerto Rico Income Tax Law, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. Dividends received (net of an 85% dividend received deduction allowed by Puerto Rico Income Tax Law) by the Corporation from the subsidiaries are subject to Puerto Rico income tax at the normal corporate tax rates. Under the provisions of SFAS 109, the Corporation has not recognized a deferred tax liability on $90,313,000 of unremitted earnings of domestic subsidiaries arising after January 1, 1993, at the applicable dividend rate, since the P.R. income tax law provides certain alternatives to remit those earnings to the Corporation on a tax free basis. The aggregated income tax expense applicable to income before provision for income taxes differs from the amount computed by applying the statutory 42% rate as follows:
1993 1992 1991 --------------------------------------------------- % of % of % of pre-tax pre-tax pre-tax Amount income Amount income Amount income ----------------------------------------------------- (Dollars in thousands) Computed income tax at statutory rate $55,499 42% $42,061 42% $ 30,309 42% Benefits of net tax exempt interest income (30,852) (23) (29,135) (29) (30,057) (42) Others 3,504 2 1,109 1 2,981 4 Alternative minimum tax paid over regular income tax 224 3,560 5 ----------------------------------------------------- Income tax expense $28,151 21% $14,259 14% $ 6,793 9% =====================================================
The provision for income tax has been significantly reduced as a result of the elimination from the determination of taxable income of interest from exempt securities for Puerto Rico income tax purposes. The components of income tax expense for the year ended December 31, 1993, are as follows:
Amount --------------- (In thousands) Current tax expense $23,018 Deferred taxes 5,133 ----------- Total income tax expense $28,151
=========== Income tax provision includes $363,000, $53,000 and $4,096,000 in 1993, 1992 and 1991, respectively, related to the gain on sale of securities. The Corporation's federal income tax provision for 1993 and 1992 was $2,230,000 and $481,000, respectively. The Corporation's United States operations in 1991 resulted in a loss and accordingly, no federal tax provision was recorded. NOTE 22 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK: The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to interest rates. These financial instruments include loan commitments, letters of credit, standby letters of credit, future contracts, options on future contracts and interest rate swaps and caps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of condition. The contract or notional amounts of these instruments, which are not included in the statement of condition, are an indicator of the Corporation's activities in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional 40 91 - - - - - -------------------------------------------------------------------------------- amounts of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for the ones reflected on the balance sheet. For future contracts, options on future contracts and interest rate swaps and caps the contract or notional amounts do not represent exposure to credit loss. Instead, the amount potentially subject to credit loss is substantially less. The total amounts of financial instruments with off-balance sheet risk at December 31, are as follows: Financial instruments whose contract amounts represent potential credit risk:
1993 1992 ---------------------------- (In thousands) Commitments to extend credit: Credit card lines $ 644,977 $ 631,917 Commercial lines of credit 1,139,524 778,859 Commercial letters of credit 11,512 11,768 Standby letters of credit 82,642 65,736 The movement and balance of financial instruments whose notional or contractual amounts exceed the amount of potential credit risk is as follows: Foreign Interest Interest exchange rate rate rate contracts swaps caps ---------------------------------- (In thousands) Balance at January 1, 1992 $406 $30,000 New contracts 879 20,000 $20,000 Terminated and matured contracts 406 ---------------------------------- Balance at December 31, 1992 879 50,000 20,000 New Contracts 936 Terminated and matured contracts 879 30,000 ---------------------------------- Balance at December 31, 1993 $936 $20,000 $20,000
================================== Contractual commitments to extend credit are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. To extend credit the Corporation evaluates each customer's creditworthiness. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterpart. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and investment securities among others. In general, commercial letters of credit are short-term commitments used to finance commercial contracts for the shipment of goods. Standby letters of credit are also issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In most instances, cash items are held by the Corporation to collateralize these instruments. Financial future contracts are agreements to buy or sell a notional amount of a financial instrument at a given time in the future. Options on future contracts confer the right from seller to buyer to take a future position at a stated price. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in securities values and interest rates. The Corporation also enters into interest rate swap agreements in managing its interest rate exposure. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. At December 31, 1993, the Corporation had outstanding two interest rate swap agreements having a total notional amount of $20 million. Both of the agreements were done with commercial banks to change the Corporation's interest rate exposure, one of them consisting of a $10 million floating rate medium term note due in 1994 exchanged to a fixed 6.51%; the other swap agreement is for a notional principal amount of $10 million covering the Corporation's interest rate exposure on half of a $20 million fixed rate medium term note to a floating rate. These agreements end at the time the related obligations mature. Non-performance by any of the counter parties on these agreements will expose the Corporation to an interest rate risk which management deems to be immaterial. Interest rate caps are contractual agreements protecting the buyer against a rise in interest rates. As of December 31, 1993, the Corporation had outstanding two interest rate caps having a total notional amount of $20 million. These caps were acquired in order to minimize the interest rate risk associated with certain variable-rate securities and end at the time the related securities mature in 1995. Cap rates range from 5.5% to 7.5%. The risk which may arise from the inability of counter parties to meet the terms of their contracts is considered immaterial to management. The following table summarizes certain financial information on hedging activities as of December 31, 1993:
Interest rate swaps ------------------- Impact on 1993: - Net interest income ($264,000) - Net interest margin (2.97%) - Effect of 1% increase in interest rates on 1993 earnings $86,000
The gains and losses from hedging activities are amortized over the remaining life of the security being hedged. Currently, there are no deferred gains and losses from these activities. The expected weighted average interest rates to be received and paid on the interest rate swaps approximate 5.44% and 5.01%, respectively. A geographic concentration exists within the Corporation's loan portfolio since most of the Corporation's business activity is with customers located in Puerto Rico. However, as of December 31, 1993, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. NOTE 23 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The information about the estimated fair values of financial instruments, as required by the Statement of Financial Accounting Standards No. 107 (SFAS 107), is presented hereunder including some 41 92 - - - - - -------------------------------------------------------------------------------- items not recognized in the statement of financial position. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable terms with the first entity. SFAS 107 provides that for deposit liabilities with no defined maturities, such as demand deposit accounts, NOW, money market and savings accounts, which at December 31, 1993 and 1992, comprised 67.1% and 61.8%, respectively, of the Corporation's total deposits, the fair value to be disclosed is the amount payable on demand. All nonfinancial instruments are excluded from the disclosure requirements of SFAS 107. For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques. These techniques are inherently subjective and are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and prepayment assumptions. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 1993 and 1992, respectively. In different interest rate environments, fair value results can differ significantly, especially for certain fixed rate financial instruments and nonaccrual assets. In addition, the fair values presented do not attempt to estimate the value of the Corporation's fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation's value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The estimated fair values of the Corporation's financial instruments, their carrying value and the methodologies used to estimate fair values are presented below. Short-Term Financial Instruments: Short-term financial instruments, both assets and liabilities, have been valued at their carrying amounts as reflected in the Corporation's Statement of Condition. For these financial instruments, the carrying value may approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Included in this category are: cash and due from banks, federal funds sold and securities and mortgages purchased under agreements to resell, time deposits with other banks, bankers' acceptances, customers' liabilities on acceptances, accrued interest receivable, securities sold under agreements to repurchase, acceptances outstanding and accrued interest payable. Investment and Trading Securities: Investment and trading securities are financial instruments which trade regularly on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes where available, or quoted market prices of financial instruments with similar characteristics. The fair value of trading account securities equals its carrying value since they are marked-to-market for accounting purposes. These instruments are detailed in the statement of condition and in notes 3 and 4. Loans: Estimated fair values have been determined for loan portfolios with similar financial characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on collateral, interest repricing and accrual vs. non-accrual status. For variable rate loans with frequent repricing terms and no significant change in credit risk, fair values were based on carrying values. Commercial loans with fixed rates were segregated in commercial real estate, cash collateral and other. Consumer loans were segregated by type such as personal, auto, boat, student, reserve lines and home equity loans. Personal loans were further subdivided in mortgage-guaranteed, cash collateral and unsecured. The fair values of fixed-rate commercial, construction and consumer loans were estimated by discounting scheduled cash flows using prevailing market rates for those loans at the end of 1993 and 1992, respectively. The unfavorable fair valuation results for consumer loans were mainly due to the deregulation, during 1992, of the maximum rates that can be charged on consumer loans in Puerto Rico. Before this deregulation, the maximum rate chargeable in most consumer loans was limited to 130% of the average prime rate for the previous quarter. For non-accruing loans, the estimated fair values were based on the discounted value of estimated cash flows. For these loans, principal-only cash flows were adjusted to reflect projected charge-offs. Interest cash flows were determined based on historical collection experience. Residential mortgage loans were valued using quoted market prices, for those available, and market prices of similar traded loans with similar credit ratings, interest rates and maturity dates adjusted for estimated prepayments. For credit card loans, fair value estimates were determined by discounting the projected income stream of the portfolio, after deducting operating expenses and estimated credit losses. SFAS 107 does not require, nor has the Corporation performed, a fair valuation of its lease financing portfolio. However, for presentation purposes only, leases are shown below with fair value equal to carrying value.
1993 -------------------------------------------- Estimated Carrying value fair value -------------------------------------------- (In thousands) Commercial $2,369,514 $2,364,891 Construction 153,436 156,508 Lease financing 375,693 375,693 Mortgage 1,576,044 1,623,850 Consumer (including credit cards) 1,872,235 1,857,068 Less: Allowance for loan losses 133,437 -------------------------------------------- $6,213,485 $6,378,010 ============================================
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- - - - - ------------------------------------------------------------------------------------------------------------------------------------ 1992 ---------------------------------- Estimated Carrying value fair value ---------------------------------- (In thousands) Commercial $2,133,357 $2,122,509 Construction 172,411 175,387 Lease financing 314,905 314,905 Mortgage 790,802 815,542 Consumer (including credit cards) 1,840,578 1,786,641 Less: Allowance for loan losses 110,714 --------------------------------- $5,141,339 $5,214,984 =================================
Deposit Liabilities: Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand as of December 31, 1993 and 1992, respectively. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates offered at December 31, 1993 and 1992, respectively, for deposits with similar remaining maturities.
1993 ---------------------------------- Estimated Carrying value fair value ---------------------------------- (In thousands) Non interest bearing deposits $1,848,859 $1,848,859 Savings accounts 2,737,037 2,737,037 NOW and money market accounts 1,135,043 1,135,043 Certificates of deposit 2,801,719 2,831,589 ----------------------------------- $8,522,658 $8,552,528 ===================================
1992 ------------------------------------ Estimated Carrying value fair value ------------------------------------ (In thousands) Non interest bearing deposits $1,614,806 $1,614,806 Savings accounts 2,315,572 2,315,572 NOW and money market accounts 1,035,955 1,035,955 Certificates of deposit 3,072,378 3,116,444 ------------------------------------ $8,038,711 $8,082,777 ====================================
Borrowings and Long-Term Debt: Borrowings and Long-Term Debt, which include other short-term borrowings, notes payable, senior debentures and subordinated notes, were valued using quoted market rates for similar instruments at December 31, 1993 and 1992, respectively. Included within other short-term borrowings at December 31, 1993, there are $119 million (1992 - $88 million) in commercial paper issued by the Corporation which has been valued at its carrying amount because of the relatively short period of time between its origination and maturity.
1993 ----------------------------------- Estimated Carrying value fair value ----------------------------------- (In thousands) Other short-term borrowings $664,173 $665,226 Notes payable 253,855 255,649 Senior debentures 30,000 31,679 Subordinated notes 62,000 64,282
1992 ------------------------------------ Estimated Carrying value fair value ------------------------------------ (In thousands) Other short-term borrowings $206,882 $206,991 Notes payable 90,062 93,218 Senior debentures 30,000 30,232 Subordinated notes 74,000 75,854
Interest rate swaps and caps and foreign exchange contracts: The fair value of interest rate swap and cap agreements and foreign exchange contracts was determined taking into account the current interest rates and exchange rates, respectively. At December 31, 1993 and 1992, the fair value of interest rate swaps was $795,000 and ($289,000), respectively. The fair value of interest rate caps and foreign exchange contracts is the same as its carrying value as of December 31, 1993 and 1992. Commitments to Extend Credit and Standby Letters of Credit: Commitments to extend credit were fair valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements. At December 31, 1993, the Corporation had $1,784,501,000 and $94,154,000 in commitments to extend credit and letters of credit, respectively (1992 - $1,410,776,000 and $77,504,000). The estimated fair value of these financial instruments with no carrying value was $4,480,000 (1992 - $3,066,000). NOTE 24 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 1993, the Corporation and its subsidiaries paid interest and income taxes amounting to $279,618,000 and $26,690,000, respectively (1992 - $304,591,000 and $5,096,000; 1991 - $392,067,000 and $5,943,000). In addition, loans transferred to other real estate and other property as of December 31, 1993 amounted to $15,121,000 and $3,923,000, respectively (1992 - $7,799,000 and $5,084,000). During 1992 the Corporation retained $8.5 million of $94 million securitized mortgage loans. NOTE 25 - LEASE FINANCING RECEIVABLES SOLD: During 1991 Velco, a subsidiary, sold approximately $68,616,000 of lease financing receivables resulting in a gain of $3,092,000 net 43 94 - - - - - -------------------------------------------------------------------------------- of related expenses and estimated losses for uncollectible receivables. Under the servicing agreements, Velco retained the servicing of the portfolio sold and the subsidiary Bank was appointed trustee. At December 31, 1993, the Corporation and Velco are liable under limited recourse provisions on the leases sold which do not exceed $4,500,000. NOTE 26 - CONTINGENT LIABILITIES: The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. NOTE 27 - BANPONCE CORPORATION (HOLDING COMPANY ONLY) FINANCIAL INFORMATION: The following condensed financial information presents the financial position of the Holding Company only as of December 31, 1993 and 1992 and the results of its operations and its cash flows for the three years ended December 31, 1993.
STATEMENTS OF CONDITION December 31, ------------------------- 1993 1992 ------------------------- (In thousands) ASSETS Cash $ 859 $ 1,472 Money market investments 8,467 39,148 Investment securities 1,000 1,000 Investment in subsidiary Bank, at equity 752,339 662,797 Investment at equity in other subsidiaries 60,932 57,072 Advances to subsidiaries 132,275 67,767 Other assets 184 601 ------------------------- Total assets $ 956,056 $ 829,857 ========================= LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 80,300 $ 39,904 Senior debentures 30,000 30,000 Accrued expenses and other liabilities 11,561 7,834 Stockholders' equity 834,195 752,119 ------------------------- Total liablities and stockholders' equity $ 956,056 $ 829,857 =========================
STATEMENTS OF INCOME Year ended December 31, --------------------------- 1993 1992 1991 --------------------------- (In thousands) Income: Dividends from subsidiary Bank $ 16,000 $26,000 $25,850 Interest on money market and investment securities 269 210 173 Gain on sale of securities 145 Other operating income 20 Interest on advances to subsidiaries 10,091 3,530 2,125 ----------------------------- Total income 26,360 29,905 28,148 ----------------------------- Expenses: Interest expense 6,464 3,509 2,475 Operating expenses 349 205 127 ----------------------------- Total expenses 6,813 3,714 2,602 ----------------------------- Income before income taxes and equity in undistributed earnings of subsidiaries 19,547 26,191 25,546 Income taxes 3,546 1,411 1,626 ----------------------------- Income before equity in undistributed earnings of subsidiaries 16,001 24,780 23,920 Equity in undistributed earnings of subsidiaries 93,403 60,336 40,644 ----------------------------- Net income $109,404 $85,116 $64,564 =============================
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- - - - - ------------------------------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS Year ended December 31, ------------------------------------------- 1993 1992 1991 ------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 109,404 $ 85,116 $ 64,564 ------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (93,403) (60,336) (40,644) Gain on sale of investment securities (145) Net decrease (increase) in other assets 417 (525) (17) Net increase (decrease) in other liabilities 2,075 (1,028) 907 ------------------------------------------- Total adjustments (90,911) (62,034) (39,754) ------------------------------------------- Net cash provided by operating activities 18,493 23,082 24,810 ------------------------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments 30,681 (36,648) 6,999 Sales of investment securities 3,014 Purchase of investment securities (1,000) Investment securities received from liquidated subsidiaries (2,870) Capital contribution to subsidiaries (26,062) (7,989) Advances to subsidiaries (64,508) (42,767) ------------------------------------------- Net cash used in investing activities (33,827) (103,463) (3,860) ------------------------------------------- Cash flows from financing activities: Net increase in commercial paper 40,396 39,904 Cash dividends paid (27,781) (24,112) (18,009) Proceeds from issuance of common stock 2,106 59,809 2,399 ------------------------------------------- Net cash provided by (used in) financing activities 14,721 75,601 (15,610) ------------------------------------------- Net (decrease) increase in cash (613) (4,780) 5,340 Cash at beginning of period 1,472 6,252 912 ------------------------------------------- Cash at end of period $ 859 $ 1,472 $ 6,252 ===========================================
The principal source of income for the Corporation consists of dividends from the subsidiary Bank. As a member subject to the regulations of the Federal Reserve Board, the subsidiary Bank must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits, as defined by the Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. The payment of dividends by the subsidiary Bank may also be affected by other regulatory requirements and policies, such as the maintenance of minimum capital levels. NOTE 28 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular International Bank, Inc. and its subsidiaries as of November 30, 1993 and 1992, and the results of their operations, cash flows and changes in stockholder's equity for the year ended November 30, 1993. Popular International Bank Inc. was organized as the holding company of BanPonce Financial Corp. and Spring Financial Services, Inc. (a second tier subsidiary) effective November 30, 1992. STATEMENTS OF CONDITION NOVEMBER 30 1993 1992 -------------------------- (In thousands) ASSETS Cash $ 6,895 $ 1,675 -------------------------- Money market investments 3,949 12,596 -------------------------- Loans 390,157 189,694 Less: Unearned income 15,680 9,965 Allowance for loan losses 5,323 2,394 -------------------------- 369,154 177,335 -------------------------- Other assets, consisting principally of intangible assets, including goodwill 11,558 10,442 -------------------------- Total assets $391,556 $202,048 ========================== LIABILITIES AND STOCKHOLDER'S EQUITY Short-term borrowings, consisting of $89.9 million (1992 - $47.9 million) term notes (Note 11) and a revolving credit facility with an affiliate of $33.8 million (1992 - $28.8 million) $123,677 $ 76,737 Notes payable (Note 12) 224,162 89,778 Other liabilities 12,445 7,115 Stockholder's equity 31,272 28,418 -------------------------- Total liabilities and stockholder's equity $391,556 $202,048 ========================== STATEMENT OF INCOME FOR THE YEAR ENDED NOVEMBER 30,1993 (In thousands) Income: Interest and fees $33,923 Other service fees 1,945 ------- Total income 35,868 ------- Expenses: Interest expense 14,174 Provision for loan losses 4,574 Operating expenses 12,067 ------- Total expenses 30,815 ------- Income before income tax 5,053 Income tax 2,199 ------- Net income $ 2,854 ======= 45 96 - - - - - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30,1993 (In thousands) Cash flows from operating activities: Net income $ 2,854 Adjustments to reconcile net income to --------- cash provided by operating activities: Provision for loan losses 4,574 Depreciation and amortization of premises and equipment 151 Amortization of intangibles 1,037 Amortization of deferred loan fees and costs 2,072 Net increase in interest receivable (853) Net increase in other assets (1,167) Net increase in other liabilities 5,330 --------- Total adjustments 11,144 --------- Net cash provided by operating activities 13,998 Cash flows from investing activities: Net decrease in money market investments 8,647 Net disbursements on loans (198,466) Acquisition of premises and equipment (283) --------- Net cash used in investing activities (190,102) --------- Cash flows from financing activities: Net decrease in short-term borrowings 46,940 Issuance of notes payable 134,384 --------- Net cash provided by financing activities 181,324 --------- Net increase in cash 5,220 Cash at beginning of period 1,675 --------- Cash at end of period $ 6,895 ========= STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE YEAR ENDED NOVEMBER 30,1993 (In thousands) Preferred Stock: Par value $25; authorized 25,000,000 shares, none issued Common Stock: Par value $5; authorized 1,000,000 shares, issued and outstanding 620,000 shares Balance at beginning and end of the period $ 3,100 --------- Additional paid-in capital: Balance at beginning and end of the period 25,200 --------- Retained earnings: Balance at beginning of the period 118 Net income 2,854 --------- Balance at end of the period 2,972 --------- Total stockholder's equity $ 31,272 ========= NOTE 29 - BANPONCE FINANCIAL CORP. (A SECOND TIER SUBSIDIARY OF BANPONCE CORPORATION) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of BanPonce Financial Corp. and its subsidiary as of November 30, 1993 and 1992, and the results of their operations, cash flows and changes in stockholder's equity for the year ended November 30, 1993 and for the eleven-month period from inception date to November 30, 1992.
STATEMENTS OF CONDITION NOVEMBER 30 1993 1992 ------------------------------ (In thousands) ASSETS Cash $ 6,890 $ 1,675 --------------------------- Money market investments 2,926 11,296 --------------------------- Loans 390,157 189,694 Less: Unearned income 15,680 9,965 Allowance for loan losses 5,323 2,394 --------------------------- 369,154 177,335 --------------------------- Other assets, consisting principally of intangible assets, including goodwill 11,531 10,424 --------------------------- Total assets $ 390,501 $ 200,730 =========================== LIABILITIES AND STOCKHOLDER'S EQUITY Short-term borrowings, consisting of $89.9 million (1992 - $47.9 million) term notes (Note 11) and a revolving credit facility with an affiliate of $33.8 million (1992 - $28.8 million) $ 123,677 $ 76,737 Notes payable (Note 12) 224,162 89,778 Other liabilities 12,455 7,098 Stockholder's equity 30,207 27,117 --------------------------- Total liabilities and stockholder's equity $ 390,501 $ 200,730 ===========================
STATEMENTS OF INCOME Eleven-month Year ended period ended November 30, November 30, 1993 1992 ------------------------------ (In thousands) Income: Interest and fees $ 33,889 $ 17,695 Other service fees 1,945 1,921 --------------------------- Total income 35,834 19,616 --------------------------- Expenses: Interest expense 14,174 8,151 Provision for loan losses 4,574 2,322 Operating expenses 11,797 8,243 --------------------------- Total expenses 30,545 18,716 --------------------------- Income before income tax 5,289 900 Income tax 2,199 481 --------------------------- Net income $ 3,090 $ 419 ===========================
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- - - - - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS Eleven-month Year ended period ended November 30, November 30, 1993 1992 -------------------------- (In thousands) Cash flows from operating activities: Net income $ 3,090 $ 419 -------------------------- Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 4,574 2,322 Depreciation and amortization of premises and equipment 151 94 Amortization of intangibles 1,037 976 Amortization of deferred loan fees and costs 2,072 333 Net increase in interest receivable (853) (842) Net increase in other assets (1,159) (880) Net increase in other liabilities 5,357 3,929 -------------------------- Total adjustments 11,179 5,932 -------------------------- Net cash provided by operating activities 14,269 6,351 -------------------------- Cash flows from investing activities: Net decrease (increase) in money market investments 8,370 (11,629) Net disbursements on loans (198,465) (90,485) Acquisition of premises and equipment (283) (190) -------------------------- Net cash used in investing activities (190,378) (102,304) -------------------------- Cash flows from financing activities: Net increase in short-term borrowings 46,940 50,737 Issuance of notes payable 134,384 19,779 Capital contribution from Parent Company 25,000 -------------------------- Net cash provided by financing activities 181,324 95,516 -------------------------- Net increase (decrease) in cash 5,215 (437) Cash at beginning of period 1,675 2,112 -------------------------- Cash at end of period $ 6,890 $ 1,675 ==========================
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY Eleven-month Year ended period ended November 30, November 30, 1993 1992 -------------------------- (In thousands) Common Stock: Par value $0.01; authorized 100 shares, all issued and outstanding Balance at beginning and end of the $ --- $ --- period -------------------------- Additional paid-in capital: Balance at beginning of the period 27,000 2,000 Capital contribution from Parent Company 25,000 -------------------------- Balance at end of the period 27,000 27,000 -------------------------- Retained earnings: Balance at beginning of the period 117 (302) Net income 3,090 419 -------------------------- Balance at end of the period 3,207 117 -------------------------- Total stockholder's equity $30,207 $27,117 ==========================
NOTE 30 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Unaudited financial data showing the results for each 1993 and 1992 quarters are presented below. In the opinion of management all adjustments necessary for a fair presentation have been included.
1993 1992 - - - - - -------------------------------------------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First quarter quarter quarter quarter quarter quarter quarter quarter - - - - - -------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Interest income $199,780 $196,709 $191,220 $184,427 $187,284 $188,328 $183,168 $181,574 Net interest income 126,490 125,174 122,703 117,761 115,514 112,093 107,912 104,700 Provision for loan losses 14,737 17,442 19,166 21,547 23,043 24,333 26,237 24,020 Income before income tax, cumulative effect of accounting changes and dividends on preferred stock of subsidiary Bank 38,291 36,806 35,005 22,038 26,657 24,927 24,058 24,503 Cumulative effect of accounting changes 6,185 Net income 28,224 28,154 27,506 25,520 23,050 21,198 20,844 20,024 Per share .87 .86 .84 .78 .73 .71 .69 .66
47 98 STOCKHOLDERS' INFORMATION - - - - - -------------------------------------------------------------------------------- INDEPENDENT PUBLIC ACCOUNTANTS Price Waterhouse ANNUAL MEETING The 1994 annual stockholders' meeting of BanPonce Corporation will be held on April 22 at 2:00 p.m. at Banco Popular Center Building in Hato Rey, Puerto Rico. TELEPHONE (809) 765-9800 FAX (809) 759-7803 ADDITIONAL INFORMATION Copies of the Annual Report to the Securities and Exchange Commission on Form 10-K and any other financial information may be obtained by writing to: Orlando Berges Senior Vice President and Comptroller Banco Popular de Puerto Rico PO Box 362708 San Juan, PR 00936-2708 48 EX-21.1 7 BANPONCE SCHEDULE OF SUBSIDIARIES 1 EXHIBIT 21.1 BANPONCE CORPORATION AS OF DECEMBER 31, 1993 Subsidiaries of the registrant a. Banco Popular de Puerto Rico (Banco Popular) - A wholly- owned subsidiary Bank, incorporated under the laws of Puerto Rico in 1917. Popular Leasing and Rental, Inc. (Popular Leasing) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Consumer Services, Inc. (Best Finance) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. b. Vehicle Equipment Leasing Company, Inc. (VELCO) - A wholly- owned subsidiary, incorporated under the laws of Puerto Rico in 1986. c. Popular International Bank, Inc. - A wholly-owned subsidiary, Incorporated under the laws of Puerto Rico in 1992. BanPonce Financial Corp. - A wholly-owned subsidiary, incorporated under the laws of Delaware in 1991. Spring Financial Services, Inc. - A wholly-owned subsidiary of BanPonce Financial Corp., incorporated under the laws of Delaware in 1988. d. Metropolitana de Prestamos, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1961. e. Puerto Rico Parking Corp. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1963. EX-23.1 8 BANPONCE CONSENT OF INDEP. AUDITORS 1 EXHIBIT 23.1 PRICE WATERHOUSE CONSENT OF INDEPENDENT ACCOUNTANTS March 28, 1994 To the Board of Directors BanPonce Corporation We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 No. 33-57038 of BanPonce Corporation of our report dated January 28, 1994 appearing on page 27 of the Financial Review of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. S/PRICE WATERHOUSE - - - - - ------------------ PRICE WATERHOUSE EX-99.1 9 BANPONCE NOTICE AND PROXY 1994 1 EXHIBIT 99.1 BANPONCE CORPORATION P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 ------------------------ NOTICE OF MEETING AND PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, APRIL 22, 1994 ------------------------ To the Stockholders of BanPonce Corporation: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of BanPonce Corporation (the "Meeting") for the year 1994 will be held at 2:00 p.m. on Friday, April 22, 1994, on the seventh floor of the Popular Center Building, Hato Rey, Puerto Rico. NOTICE IS ALSO GIVEN that the Meeting to be held on the date above set forth will consider and act upon: (1) The election of six (6) directors to hold office until the 1997 annual meeting of stockholders or until their respective successors shall have been elected and qualified. (2) To transact any and all other business as may be properly brought before the Meeting or any adjournments thereof. Management at present knows of no other business to be brought before the Meeting. The Board of Directors has set March 11, 1994, as the record date to determine the stockholders entitled to notice of, and vote at, the Meeting. Enclosed is the Form of Proxy and the Proxy Statement. San Juan, Puerto Rico, March 18, 1994. SAMUEL T. CESPEDES Secretary 2 BANPONCE CORPORATION P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 --------------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, APRIL 22, 1994 --------------------- This Proxy statement is furnished in connection with the solicitation by the Board of Directors of BanPonce Corporation (the "Corporation") of proxies to be used at the Annual Meeting of Stockholders (the "Meeting") to be held at 2:00 p.m. on Friday, April 22, 1994, on the seventh floor of the Popular Center Building, Hato Rey, Puerto Rico, and any adjournments thereof. Properly executed Proxies received by the Secretary of the Corporation will be voted at the Meeting in accordance with the instructions which appear therein and for the purposes indicated on the Notice of Meeting. The Board of Directors does not intend to present any business at the Meeting other than those included in the Notice of Meeting. The Board of Directors at this time knows of no other matters which may come before the Meeting. However, if any new matters requiring the vote of the Stockholders properly come before the Meeting, Proxies may be voted with respect thereto in accordance with the best judgement of Proxyholders, under the discretionary power granted by stockholders to their Proxies in connection with general matters. MAILING DATE Enclosed with this Proxy Statement is the Annual Report covering the financial results for the year ended December 31, 1993, duly certified by Price Waterhouse as independent public accountants. This Proxy Statement, the enclosed Annual Report, the Notice of Annual Meeting of Stockholders and the form of Proxy are being sent to stockholders on or about March 18, 1994. SOLICITATION OF PROXIES The enclosed Proxy is solicited by and on behalf of the Board of Directors of the Corporation. In addition to solicitation by mail, management may participate in the solicitation of Proxies by telephone, personal interviews or otherwise. The Board of Directors has engaged the firm of Georgeson & Company Inc. to aid in the solicitation of Proxies. The cost of solicitation will be borne by the Corporation and is estimated at $6,500.00. REVOCABILITY OF PROXY Any stockholder giving a proxy has the power to revoke it before the proxy is exercised. The grantor may revoke the proxy by claiming at the Meeting the right to vote by himself the shares of stock registered in his name or by notice of revocation in writing to the President or Secretary of BanPonce Corporation, P.O. Box 362708, San Juan, Puerto Rico 00936-2708, delivered before the proxy is exercised. VOTING SECURITIES The only outstanding voting securities of the Corporation are its shares of common stock, each share of which entitles the holder thereof to one vote. Only common stockholders of record at the close of business on March 11, 1994 (the "Record Date"), will be entitled to vote at the Annual Meeting and any adjournments thereof. On Record Date there were 32,756,219 shares of common stock of BanPonce Corporation 3 outstanding. The shares covered by any such proxy that are properly executed and received by management before 2:00 p.m. on the day of the Meeting will be voted. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock of the Corporation is necessary to constitute a quorum at the Meeting. Votes cast by proxy or in person at the Meeting will be counted by the persons appointed by the corporation as election judges for the Meeting. As to the election of Directors, the proxy card being provided by the Board of Directors enables a stockholder to vote for the election of the nominee proposed by the Board, or to withhold authority to vote for one of the nominees being proposed. For purposes of determining quorum, the election judges will treat "broker non-votes" as shares that are present and entitled to vote. A "broker non-vote" results when a broker or nominee has expressly indicated in the proxy that it does not have discretionary authority to vote on a particular matter. Directors will be elected by a majority of the vote. Therefore, abstentions and broker non-votes will not have an effect on the election of directors of the Corporation. PRINCIPAL STOCKHOLDERS Following is the information, to the extent known by the persons on whose behalf this solicitation is made, with respect to any person (including any "group" as that term is used in Section 13(d)(3) of the Securities and Exchange Act of 1934, as amended) who is known to BanPonce Corporation to be the beneficial owner of more than five percent of the Corporation's voting securities.
AMOUNT AND NATURE PERCENT OF BENEFICIAL OF TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2) - - - - - ----------------- ------------------------------------- ------------------ --------- Common Banco Popular de Puerto Rico (the "Bank") As Trustee for Banco Popular de Puerto Rico Retirement Plan. 1,418,215 As Trustee for the Deferred Compensation Plan (Profit Sharing) for the Employees of Banco Popular de Puerto Rico 1,330,348 ------------------ 2,748,563(3) 8.3910 Common State Farm Mutual Automobile Insurance Company 2,355,531(4) 7.1911
- - - - - --------------- (1) As of February 28, 1994. (2) Based on 32,756,219 shares outstanding. (3) The Bank, as Trustee, administers both Plans through their Administrative Committees, with sole voting and investment power. (4) On January 28, 1994, State Farm Mutual Automobile Insurance Company ("State Farm") and affiliated entities filed a joint statement on Schedule 13-G with the Securities and Exchange Commission. According to said statement, State Farm and its affiliates might be deemed to constitute a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934. State Farm and its affiliates could also be deemed to be the beneficial owners of 2,355,531 common shares of BanPonce Corporation. However, State Farm and each such affiliate disclaim beneficial ownership as to all shares as to which each such person has no right to receive the proceeds of sale of the shares, and also disclaim that they constitute a "group". 2 4 SHARES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF THE CORPORATION Following is the information, as of February 28, 1994, as to equity securities of the Corporation beneficially owned by all current directors, nominees, the five most highly compensated Executive Officers of the Corporation and the total owned by directors, nominees and all Executive Officers of the Corporation as a group:
TITLE OF AMOUNT AND NATURE PERCENT OF NAME CLASS OF BENEFICIAL OWNERSHIP CLASS(1) - - - - - -------------------------------------- ------- ------------------------ ---------- Alfonso F. Ballester Common 344,360(2) 1.0513 Juan J. Bermudez Common 22,046(3) .0673 Sila M. Calderon Common 6,008(4) .0183 Francisco J. Carreras Common 1,478 .0045 Richard L. Carrion Common 228,232(5) .6968 Manuel Luis Del Valle Common 48,500 .1481 Waldemar Del Valle Common 14,208(6) .0434 Luis E. Dubon, Jr. Common 435,208(7) 1.3286 Roberto W. Esteves Common 810,761(8) 2.4751 Antonio Luis Ferre Common 576,298(9) 1.7594 Hector R. Gonzalez Common 41,016 .1252 Jorge A. Junquera Common 409(10) .0012 Franklin A. Mathias Common 20,775 .0634 Hugh G. McComas Common 1,019 .0031 Manuel Morales, Jr. Common 180,049(11) .5497 Alberto M. Paracchini Common 39,173(12) .1196 Francisco Perez, Jr. Common 222 .0007 Francisco M. Rexach, Jr. Common 9,900 .0302 Felix J. Serralles, Jr. Common 91,915(13) .2806 Emilio Jose Venegas Common 86,000(14) .2625 Julio E. Vizcarrondo, Jr. Common 262,805(15) .8023 Maria Isabel P. de Burckhart Common 3,961(16) .0121 David H. Chafey, Jr. Common 5,321 .0162 Larry B. Kesler Common 1,398 .0043 All Directors and Executive Officers of the Corporation as a group Common 3,240,659(17) 9.8933
- - - - - --------------- (1) Based on 32,756,219 shares outstanding. (2) Mr. Ballester owns 343,360 shares and has indirect investment power over 1,000 shares owned by his wife. Excludes 300,482 shares owned by his sister Mrs. Griselda Ballester, as to all of which Mr. Ballester disclaims indirect voting power. Mr. Ballester filed late one report which disclosed one transaction required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. (3) Excludes 1,935 shares owned by his wife, to which Mr. Bermudez disclaims indirect voting power. (4) Mrs. Calderon filed late one report which disclosed one transaction required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to her beneficial ownership of shares during the last fiscal year. (5) Mr. Carrion owns 54,271 shares and also has indirect investment power over 5,776 shares owned by his children. Junior Investment Corporation owns 1,015,000 shares of the Corporation. Mr. Carrion owns 16.57% of the shares of said corporation. (6) Excludes 401 shares owned by his daughter, Maria M. Del Valle, to which Mr. Del Valle disclaims beneficial ownership. Mr. Del Valle filed late one report which disclosed one transaction required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. 3 5 (7) Mr. Dubon owns 45,441 shares and has a power of attorney over 22,804 shares owned by Mrs. Myrta A. Dubon, wife, and 17,036 shares held in trust by Mr. Dubon for his children, Luis E. Dubon, III, Myrta I. Dubon, Jose R. Dubon and Maria A. Dubon, and over 349,927 shares owned by various corporations and members of his family in which Mr. Dubon has direct or indirect ownership. Mr. Dubon filed late one report which disclosed two transactions required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. (8) Mr. Esteves owns 4,000 shares, and, as guardian of Roberto Esteves, Jr., has indirect voting and investment power over 53,861 shares of the Corporation. Northwestern Realty Corp., of which Mr. Esteves owns 100% of the shares, owns 752,900 shares of the Corporation. (9) Mr. Ferre has indirect investment and voting power over 114,300 shares owned by Alfra Investment Corp. and 720 shares owned by his wife and children. Mr. Ferre owns 85.12% of Ferre Investment Fund, Inc., which owns 210,300 shares of the Corporation. Mr. Ferre also owns 65.25% of the shares of El Dia, Inc., and has indirect voting power over Alfra Investment Corp., which owns 19.35% of El Dia, Inc., which owns 250,978 shares of the Corporation. Mr. Ferre claims beneficial ownership over the 576,298 shares. Mr. Ferre filed late two reports which disclosed two transactions each required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. (10) Mr. Junquera, Executive Vice President of the Corporation, filed late two reports which disclosed one and two transactions, respectively, required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. (11) Mr. Morales owns 89,272 shares and has voting power over 90,777 shares owned by his parents. (12) Excludes 316 shares owned by his wife, to which Mr. Paracchini disclaims beneficial ownership. (13) Mr. Serralles owns 54,688 shares, and has indirect voting power over 1,573 shares owned by his wife. Mr. Serralles owns 100% of the shares of each of Capitanejo, Inc. and Fao Investments, Inc., which own 34,255 and 1,399 shares, respectively, of the Corporation. (14) Mr. Venegas owns 9,000 shares and also has indirect investment power over 6,000 shares owned by his wife. Mr. Venegas also has indirect voting and investment power over the 40,000 shares of the Corporation owned by Venegas Construction Corporation, of which he is stockholder and secretary, and over the 31,000 shares of the Corporation owned by Sanson Corporation, of which he is President and stockholder. Mr. Venegas filed late one report which disclosed four transactions required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. (15) Mr. Vizcarrondo owns 47,766 shares and has indirect voting power over 44,113 shares owned by his wife and children. Mr. Vizcarrondo's wife owns 16.84% of the shares of Junior Investment Corporation, which owns 1,015,000 shares of the Corporation. Excludes 29,100 shares owned by Mr. Vizcarrondo as trustee and member of the Investment Committee of the DMI Pension Trust, which owns said shares of the Corporation, of which he disclaims beneficial ownership. Excluded also are 5,000 shares owned by Mr. Vizcarrondo as trustee of the Suarez Toro Trust, which owns said shares of the Corporation, of which he disclaims beneficial ownership. (16) Mrs. Burckhart, Executive Vice President of the Corporation, filed late one report which disclosed three transactions required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to her beneficial ownership of shares during the last fiscal year. (17) Mr. Emilio E. Pinero, Executive Vice President of the Corporation, filed late one report which disclosed one transaction required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 with respect to his beneficial ownership of shares during the last fiscal year. 4 6 BOARD OF DIRECTORS AND COMMITTEES The Board of Directors of the Corporation met on a monthly basis during 1993. All directors, except Mr. Antonio Luis Ferre and Mr. Franklin A. Mathias, attended 75% or more of the meetings of the Board of Directors and the committees of the Board of Directors on which each such director served. The following table indicates the business experience of the current Board of Directors of the Corporation and nominees:
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - ----------------------- --- --------------------------------------------------- --------------- Alfonso F. Ballester 64 Vice Chairman of the Board of Directors of the 1990 Corporation and the Bank. President of Ballester Hermanos, Inc. (wholesale of provisions and liquors). Director of Popular Leasing and Rental, Inc. and Vehicle Equipment Leasing Company, Inc. Director of the Bank since 1975. Juan J. Bermudez 56 Electrical Engineer. Partner of Bermudez and Longo, 1990 S.E., Ornamental Poles, S.E., Decemcor, S.E., Unifirst S.E., Unisouth, S.E., Uniestates, S.E., Unicourts, S.E., Unieast, S.E. and PCME Commercial, S.E. Principal Stockholder and Director of Power Poles, Inc. Director of the Bank since 1985. Sila M. Calderon 51 Secretary of the Governorship from 1986 to 1989. 1990 Secretary of State of the Commonwealth of Puerto Rico from 1988 to 1989. Director of Pueblo Xtra International, Inc. since 1990. Chairman of the Board of Directors of the Puerto Rico Public Broadcasting Corporation from 1991 to 1992. President of Commonwealth Investment Company, Inc. and member of the Board of Trustees of Fundacion Banco Popular, Inc. since 1990. Chairman of the board of Directors of Proyecto Peninsula de Cantera since 1992. Director of the Bank since 1990. Francisco J. Carreras 61 Professor of the University of Puerto Rico. Member 1990 of the Board of Trustees of Fundacion Banco Popular, Inc. Executive Director of Fundacion Angel Ramos, Inc. Director of the Bank since 1979. Richard L. Carrion 41 Chairman of the Board, President and Chief 1990 Executive Officer ("CEO") of the Corporation and the Bank. Chairman of the Boards of Popular International Bank, Inc., BanPonce Financial Corp., Vehicle Equipment Leasing Company, Inc., Spring Financial Services, Inc., Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc. Chairman of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Latin America Regional Board of Directors of Visa International. Member of the Board of Trustees of the American Management Association. President of Puerto Rico's Commission for the 2004 Olympiad. Member of the International Olympic Committee. Member of the Board of Directors and Compensation Committee of Pueblo Xtra International, Inc. Director of the Bank since 1982.
5 7
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - ----------------------- --- --------------------------------------------------- --------------- Manuel Luis Del Valle 69 Vice Chairman of the Board of Directors of the 1990 Corporation and the Bank. Chairman of the Board and Director of Manuel Del Valle, Inc. (manufacturer and wholesaler of chemical products). Chairman of the Board and Director of Bacardi Corporation. Director of Bacardi Limited. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Board of Trustees of Fundacion Angel Ramos. Member of the Board of Directors of the Committee for the Economic Development of Puerto Rico. Director of Popular International Bank, Inc., Spring Financial Services, Inc. and of BanPonce Financial Corp. Director of the Bank since 1968. Waldemar Del Valle 67 Attorney at Law at the law firm Parra, Del Valle, 1984 Frau & Limeres. Director of Damas Foundation, Inc. Director of Banco de Ponce from 1975 to 1990. Luis E. Dubon, Jr. 59 Attorney at Law and Investor. Partner of the law 1984 firm Dubon & Dubon. Director, American Investment Corp., Fundacion Gogui, Inc. and San Jose Development, Inc. Director of the Bank since 1973. Roberto W. Esteves 69 President of Travel Network Travel Agencies. 1991 President of Star Tours International, tour wholesalers. President of Caribe Theaters Corp., theater operators. President of Northwestern Realty Corp., investments in Real Estate. Director of the Bank since 1991. Antonio Luis Ferre 60 Vice Chairman of the Board of Directors of the 1984 Corporation and the Bank. Vice Chairman of the Board of Puerto Rican Cement Co., Inc. (registered public company), manufacturers of cement and allied products. President and Editor of El Nuevo Dia, Inc. Director of AMR Corp. (registered public company). Director, of Metropolitan Life Insurance Company (registered company under the Investment Company Act of 1940). Director of Pueblo Xtra International, Inc. Director of the Bank since 1959. Hector R. Gonzalez 60 President and Chief Executive Officer of TPC 1984 Communications of PR, Inc. and Teleponce Cable TV, Inc., owners and operators of cable television systems. Director, Damas Foundation, Inc. Director of Popular Consumer Services, Inc. Director of the Bank since 1973. Franklin A. Mathias 68 Investor. Chairman of the Board of Directors of 1990 Molinos de Puerto Rico, Inc. until January, 1988. Director of the Bank since 1988. Hugh G. McComas 70 President and Chief Executive Officer of MCO 1990 Industries, Inc. Director of the Bank since 1980. Manuel Morales, Jr. 48 Principal Stockholder of Selarom Capital Group, 1990 Inc. President of Parkview Realty, Inc. Trustee of Universidad Sagrado Corazon and Caribbean/Latin America Action. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Director of the Bank since 1978.
6 8
DIRECTOR OF PRINCIPAL OCCUPATION AND BUSINESS THE CORPORATION NAME AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - ----------------------- --- --------------------------------------------------- --------------- Alberto M. Paracchini 61 Former Chairman of the Board of Directors of the 1984 Corporation and the Bank. Former Chairman of the Board of Vehicle Equipment Leasing Company, Inc., BanPonce Financial Corp., Spring Financial Services, Inc., Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc. Member of the Board of Trustees of Fundacion Banco Popular. He served in several executive positions in the Bank since he commenced working in the Bank in 1956. Director of Puerto Rican Cement Co., Inc. (regis- tered public company). Director of HDA Management Corp. since 1993. Director of the Bank since 1969. Francisco Perez, Jr. 57 Chairman of the Board and President of Sucrs. Jose 1984 Lema and Co., Inc. (La Favorita), shoe store chain. President of 201 Realty Corporation, engaged in the real estate business. Director of Banco de Ponce from 1976 to 1990. Francisco M. Rexach, Jr. 56 President of Ready Mix Concrete, Inc. President of 1990 Puerto Rico Oil Company, Inc. Director of Vehicle Equipment Leasing Company, Inc. and Popular Leasing & Rental, Inc. Director of the Bank since 1983. Felix J. Serralles, Jr. 59 President and Chief Executive Officer of Empresas 1984 Serralles, Inc. and of its subsidiary Destileria Serralles, Inc., manufacturers and distributors of distilled spirits, and of its affiliate Mercedita Leasing, Inc. Director of the Bank since 1966. Emilio Jose Venegas 66 President of Sanson Corporation. Secretary of 1984 Venegas Construction Corp. Director of Puerto Rican Cement Co., Inc. (registered public company). Director of Damas Foundation, Inc. Director of Banco de Ponce from 1973 to 1990. Julio E. Vizcarrondo 59 Civil Engineer. President/Partner and Chief 1990 Executive Officer of Desarrollos Metropolitanos, S. E., VMW Enterprises Corp. and Resort Builders S.E., corporations engaged in the development and construction of residential, commercial and institutional projects in Puerto Rico. Director of the Bank since 1984.
The Corporation's Board of Directors has a standing Audit Committee. The Board of Directors of the Bank, the principal subsidiary of the Corporation, has a standing Human Resources Committee that may review compensation matters for the Corporation. There is no standing Nominating Committee. Information regarding the Audit and Human Resources Committees follows: AUDIT COMMITTEE The functions of the Audit Committee include reviewing the accounting principles and practices employed by the Corporation, and its compliance with the laws and regulations. The committee meets with the Corporation's independent external auditors to review their audit procedures, the report on their examination of the Corporation's financial statements, and their comments on the system of internal controls. Also, the Committee oversees the internal audit function and reviews the reports prepared by the Auditing Division for their examinations of the operating and business units and for any other special examinations that may be required. The Committee held four meetings during the fiscal year ended December 31, 1993. 7 9 The committee members during 1993 were: Manuel Luis Del Valle, Luis E. Dubon, Jr., Franklin A. Mathias, Manuel Morales, Jr. and Felix J. Serralles, Jr. HUMAN RESOURCES COMMITTEE The functions of the Human Resources Committee include reviewing the compensation and benefits of management and employees, reviewing the policies related to the performance and compensation of management and employees, and reviewing the long-range planning for executive development and succession. The Committee held two meetings during the fiscal year ended December 31, 1993. The Committee members during 1993 were: Salustiano Alvarez Mendez, Juan J. Bermudez, Francisco J. Carreras, Manuel Luis Del Valle and Julio E. Vizcarrondo, Jr. Messrs. Bermudez, Carreras, Del Valle and Vizcarrondo, Jr. are also directors of the Corporation. None of the members of the Committee are officers or employees of the Corporation or any of its subsidiaries. COMPENSATION OF DIRECTORS Directors who are not employees of the Corporation and its subsidiaries were entitled to be reimbursed for certain expenses up to $8,000.00 annually. Commencing in May 1994 directors will be entitled to be reimbursed for certain expenses up to $10,000.00. In addition, during 1993 and up to April 1994 directors received $300.00 for attending each directors' and committee meeting. Commencing in May 1994 directors will receive $500.00 for attending each directors' and committee meeting. Directors who are employees do not receive fees for attending directors' and committee meetings. ELECTION OF DIRECTORS The Certificate of Incorporation and the By-laws of the Corporation establish a classified Board of Directors pursuant to which the Board of Directors is divided into three classes as nearly equal in number as possible, with each class having at least three members and with the term of office of one class expiring each year. Each director serves for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected. The policy of the Board of Directors, as set forth in a resolution adopted on January 8, 1991, provides that no person shall be nominated for election or reelection as director of the Board if at the date of the Annual Meeting of Stockholders or during the term to be served such person attains seventy two (72) years of age. Mr. Roberto W. Esteves and Mr. Hugh G. McComas would attain seventy two (72) years of age during the term to be served. In accordance with Board policy neither will be nominated for reelection as director. Mr. Luis Rodriguez-Delgado resigned as director of the Corporation effective January 31, 1994. Mr. Rodriguez-Delgado's resignation is not due to a disagreement with the Corporation or with any matter relating to the Corporation's operation. The number of directors in "Class 1" and "Class 2" has been reduced by the Board of Directors to six directors each, since only one of the two vacancies in "Class 1" will be filled and the vacancy in "Class 2" resulting from Mr. Rodriguez-Delgado's resignation will not be filled, thus reducing the total number of directors to nineteen (19), which is in accordance with Article Eighth of the Corporation's Certificate of Incorporation. At the Meeting, six directors assigned to "Class 1" are to be elected until the 1997 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The remaining 13 directors of the Corporation will serve as directors, as follows: until the 1995 Annual Meeting of Stockholders of the Corporation, in the case of those six directors assigned to "Class 2", and until the 1996 Annual Meeting of Stockholders, in the case of those seven directors assigned to "Class 3", or in each case until their successors are duly elected and qualified. The persons named as proxies in the accompanying Form of Proxy have advised the Corporation that, unless otherwise instructed, they intend to vote at the meeting the shares covered by the proxies FOR the election of the six nominees named in the following table, and that if any one or more of such nominees should 8 10 become unavailable for election they intend to vote such shares FOR the election of such substitute nominees as management may propose. The Corporation has no knowledge that any nominee will become unavailable for election. NOMINEES FOR ELECTION AS DIRECTORS The following table sets forth the name of the persons nominated by the Board of Directors of the Corporation for election as a director, including their age, principal occupation and business experience during the past five (5) years (including positions held with the Corporation or the Bank), and the period during which each nominee has served as a director of the Corporation. All directors nominated will serve for three (3) years until the 1997 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified.
PRINCIPLE OCCUPATION AND BUSINESS DIRECTOR OF THE EXPERIENCE DURING THE PAST FIVE CORPORATION NAME AGE YEARS SINCE - - - - - --------------------- --- ---------------------------------- ---------------- Alfonso F. Ballester 64 See under "Board of Directors" 1990 Sila M. Calderon 51 See under "Board of Directors" 1990 Waldemar Del Valle 67 See under "Board of Directors" 1984 Jorge A. Junquera 45 See under "Executive Officers" -- Francisco Perez, Jr. 50 See under "Board of Directors" 1984 Emilio Jose Venegas 66 See under "Board of Directors" 1984
EXECUTIVE OFFICERS The following table sets forth the names of the executive officers ("the Executive Officers") of the Corporation including their age, business experience during the past five (5) years and the period during which each such person has served as Executive Officer of the Corporation or the Bank.
EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - --------------------- -------------------- --- ------------------------------------- ------------ Richard L. Carrion President, Chairman 41 See under "Board of Directors" 1990 of the Board and CEO Jorge A. Junquera Executive Vice 45 Supervisor of the Bank's Retail 1990 President Banking Group. Director of the Bank since 1990. Director of Popular International Bank, Inc. Executive Vice President and Director of BanPonce Financial Corp., Director of Spring Financial Services, Inc., Vehicle Equipment Leasing Company, Inc., Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc. Chairman of the Board of Puerto Rico Tourism Company since 1993. Executive Vice President of the Bank since 1980.
9 11
EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - --------------------- -------------------- --- ------------------------------------- ------------ Maria Isabel P. Executive Vice 45 Supervisor of the Administration 1990 de Burckhart President Group. Executive Vice President of the Bank since January, 1990. Senior Vice President of the Bank from August, 1986 to January, 1990. Executive Vice President of BanPonce Financial Corp. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Board of Directors of Fundacion Ana G. Mendez since 1992. Member of the Board of Directors of Puerto Rico Community Foundation since 1993. Member of the Board of Directors of Puerto Rico Convention Bureau since 1993. David H. Chafey, Jr. Executive Vice 40 Supervisor of the Finance Group and 1990 President U.S. Operations. Executive Vice President of the Bank since January, 1990. Executive Vice President and Director of Popular International Bank, Inc., and BanPonce Financial Corp. Director of Vehicle Equipment Leasing Co., Inc., of Spring Financial Services, Inc., of Popular Leasing & Rental, Inc., and of Popular Consumer Services,Inc. Chairman of the Board of Puerto Rico Telephone Authority since 1993. Larry B. Kesler Executive Vice 56 Supervisor of Individual Credit and 1990 President Virgin Islands Operations. Executive Vice President of the Bank since January, 1990. Senior Vice President of the Bank from August, 1986 to January, 1990. Executive Vice President and Director of BanPonce Financial Corp. Director of Spring Financial Services, Inc. and of Popular Con- sumer Services, Inc. Humberto Martin Executive Vice 48 Supervisor of the Operations Group. 1986 President Executive Vice President of the Bank since November, 1986. Executive Vice President of BanPonce Financial Corp. Emilio E. Pinero Executive Vice 45 Supervisor of the Commercial Banking 1990 President Group. Executive Vice President of the Bank since January, 1990. Director of Vehicle Equipment Leasing Company, Inc. and Popular Leasing and Rental, Inc. Executive Vice President of BanPonce Financial Corp.
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EXECUTIVE OFFICER OF THE PRINCIPAL OCCUPATION AND BUSINESS CORPORATION NAME TITLE AGE EXPERIENCE DURING THE PAST FIVE YEARS SINCE - - - - - --------------------- -------------------- --- ------------------------------------- ------------ Orlando Berges Senior Vice Presi- 36 Senior Vice President of the Bank 1990 dent and Comp- since December, 1990. Comptroller troller of the Bank since July, 1989. Senior Vice President and Treasurer of BanPonce Financial Corp. Samuel T. Cespedes Secretary of the 57 Attorney at Law. Proprietary partner 1991 Board of Direc- of the law firm McConnell, Valdes. tors Secretary of the Board of Directors of the Bank since 1991. Secretary of the Board of Directors of Vehicle Equipment Leasing Company, Inc., BanPonce Financial Corp., Spring Financial Services, Inc., Popular Leasing & Rental, Inc. and Popular Consumer Services, Inc.
FAMILY RELATIONSHIPS Mr. Richard L. Carrion, Chairman of the Board, President and CEO of the Corporation and the Bank, is brother-in-law of Mr. Julio E. Vizcarrondo, Jr., Director. Mr. Alfonso F. Ballester, Director, is brother-in-law of Mr. Hector R. Gonzalez, Director. OTHER RELATIONSHIPS AND TRANSACTIONS Director Waldemar Del Valle is an attorney at the law firm Parra, Del Valle, Frau & Limeres, retained by the Bank to perform general legal services, for which $38,803 were paid during 1993. Director Luis E. Dubon, Jr. is a partner of the law firm Dubon & Dubon, retained by the Bank to perform general legal services, for which $44,472 were paid during 1993. Mr. Samuel T. Cespedes, Secretary of the Board of Directors, is a proprietary partner of the law firm McConnell, Valdes, retained by the bank to perform general legal services, for which $694,343 were paid during 1993. The Bank has had loan transactions with BanPonce directors and officers, and with their associates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms as those prevailing for comparable loan transactions with other persons and subject to the provisions of the Banking Act of the Commonwealth of Puerto Rico and the applicable federal laws and regulations. The extensions of credit have not involved nor presently involve more than normal risks of collectibility or other unfavorable features. EXECUTIVE COMPENSATION PROGRAM REPORT OF THE BANK'S HUMAN RESOURCES COMMITTEE ON EXECUTIVE COMPENSATION OVERVIEW The Compensation Program for Executive Officers is established and administered by Mr. Richard L. Carrion, Chairman of the Board, President and CEO for each of the Corporation and the Bank. This compensation program, in turn, is reviewed by the Bank's Human Resources Committee and approved every year by the Board of Directors. The compensation of Mr. Carrion is revised periodically by the Board of Directors. 11 13 The Bank's Compensation Program for Executive Officers follows the same philosophy and principles used for all Bank employees and includes the following components: -- Base salary and fringe benefits -- Individual incentives -- Deferred Compensation Plan (Profit Sharing) One of the objectives of this Program is to achieve a ratio of salary levels where the highest level is not greater than 25 times the lowest level in the salary structure of the Bank. In addition, as a component of total compensation, the variable portion of compensation, which includes individual incentives and Profit Sharing Plan, should gradually increase over time as a percentage of total compensation. All cash compensation paid to Mr. Carrion and to the Executive Officers is paid by the Bank. The Corporation does not currently pay cash compensation to Executive Officers. The Executive Compensation Program for the Corporation's non-banking subsidiaries is set according to the industry and geographical area in which they operate and is approved by the Board of Directors of each such entity. EXECUTIVE OFFICERS The group of executive officers is composed of six Executive Vice Presidents, all of whom participate in an annual salary and incentive bonus program recommended by Mr. Carrion and approved by the Board of Directors of the Bank. In 1993, salary increases were based 50% on individual performance in accordance with established parameters and 50% on team performance. Such individual and team performance are evaluated by Mr. Carrion. The percentage of salary increases for each pool was established according to the Bank's performance, measured by net income after tax. Incentive bonuses for 1993 were also established based on the Bank's income after tax. A bonus of 10% of the Executive Officers' base salary was set for achieving a target which is established at the beginning of each year, and could reach 20% if results exceeded the target. Under the Incentive Bonus Program, the bonuses for 1993 amounted to $149,264, representing 13.78% of each participant's base salary. Salaries are increased annually and incentive bonuses are paid in one yearly lump sum payment. Both compensation components are distributed in cash only. Beginning in 1994, salary increases and incentive bonuses will be measured by the Corporation's performance, measured on an after-tax basis, instead of the Bank's performance. CHAIRMAN OF THE BOARD, PRESIDENT AND CEO The compensation for the Corporation's and the Bank's Chairman of the Board, President and CEO, Mr. Richard L. Carrion, has remained the same since February 1989. No incentive bonus was awarded for 1993. Currently, the Human Resources Committee is in the process of revising Mr. Carrion's compensation for 1994 to bring it to a competitive level with comparable institutions. Among other matters the Human Resources Committee is considering the possible adoption of a long-term incentive program for Mr. Carrion and the Executive Officers. HUMAN RESOURCES COMMITTEE Salustiano Alvarez Mendez Juan J. Bermudez Manuel Luis Del Valle Francisco J. Carreras Julio E. Vizcarrondo, Jr.
12 14 EMPLOYMENT CONTRACT OF MR. ALBERTO M. PARACCHINI Mr. Paracchini served as Chairman of the Board of the Corporation and the Bank until April 29, 1993. Pursuant to the terms of an employment agreement dated October 19, 1989 between the Corporation and Mr. Paracchini (the "Employment Agreement"), Mr. Paracchini was employed by the Corporation for a two year period commencing on December 31, 1990 and ending on December 31, 1992 ( the "Employment Term"). The Employment Term was extended until April 29, 1993. The employment Agreement provided that unless Mr. Paracchini otherwise notified the Corporation prior to the end of the Employment Term, Mr. Paracchini would become a consultant to the Corporation and the Bank for a 36-month period, during which he would have been entitled to receive an annual retainer of not less than sixty percent of his total compensation received during the last year of the Employment Term (the "Retainer"). The Employment Agreement was terminated as of July 31, 1993, and in lieu of the Retainer to be received by Mr. Paracchini throughout the three-year period in which he was going to serve as a consultant, Mr. Paracchini received a lump-sum payment of $730,355 on August 16, 1993. EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Corporation or its subsidiaries to the eight highest paid Executive Officers of the Corporation and the principal officers of the Corporation's or the Bank's subsidiaries for 1993. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION FISCAL -------------------- ALL OTHER YEAR SALARY(A) BONUS(B) COMPENSATION(C) TOTAL ------ --------- -------- --------------- -------- Richard L. Carrion 1993 $230,000 $36,814 $ 26,343(d) $293,157 Chairman of the Board, 1992 230,000 83,191 24,086(d) 337,277 President and CEO 1991 260,077 22,246 18,882(d) 301,205 Jorge A. Junquera 1993 210,582 63,667 24,119(d) 298,368 Executive Vice President of the Corporation 1992 183,640 58,843 19,231(d) 261,714 1991 171,695 14,736 12,464(d) 198,895 David H. Chafey, Jr. 1993 205,044 61,950 23,485(d) 290,479 Executive Vice President of the Corporation 1992 176,347 57,081 18,467(d) 251,895 1991 148,241 12,881 10,924(d) 172,046 Larry B. Kesler 1993 167,500 50,638 19,185(d) 237,323 Executive Vice President of the Corporation 1992 145,129 46,412 15,198(d) 206,739 1991 134,326 11,667 9,915(d) 155,908 Maria Isabel P. de Burckhart 1993 165,000 49,789 18,898(d) 233,687 Executive Vice President of the Corporation 1992 145,226 46,424 15,208(d) 206,858 1991 132,922 11,728 9,963(d) 154,613 Humberto Martin 1993 158,290 47,687 18,130(d) 224,107 Executive Vice President of the Corporation 1992 143,333 45,054 15,010(d) 203,397 1991 140,523 13,014 11,083(d) 164,620 Emilio E. Pinero Ferrer 1993 157,080 47,379 17,983(d) 222,442 Executive Vice President of the Corporation 1992 141,151 45,006 14,782(d) 200,939 1991 136,057 11,856 10,008(d) 157,921 Alberto M. Paracchini 1993 122,482 -0- 730,355(e) 852,837 Director and former Chairman of the Board of Directors of 1992 319,297 188,706 31,845(d) 539,848 the Corporation 1991 344,874 12,671 24,964(d) 382,509 Thomas J. Fitzpatrick(f) 1993 236,250 141,750 13,491(d) 391,491 President of Spring Financial Services, Inc. (a 1992 236,250 141,750 8,728(d) 386,728 wholly-owned subsidiary of BanPonce Financial Corp.) Andres F. Morrell(f) 1993 120,000 38,640 -0- 158,640 President of Vehicle Equipment Leasing Company, Inc. (a 1992 108,460 32,400 -0- 140,860 wholly-owned Subsidiary of the Corporation)
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ANNUAL COMPENSATION FISCAL -------------------- ALL OTHER YEAR SALARY(A) BONUS(B) COMPENSATION(C) TOTAL ------ --------- -------- --------------- -------- Edgardo Novoa(f) 1993 90,924 11,458 -0- 102,382 President of Popular Consumer Services, Inc. (a wholly-owned subsidiary of the Bank) Carlos Mangual(f) 1993 90,004 33,065 10,309(d) 133,378 President of Popular Leasing and Rental, Inc. (a 1992 74,756 22,899 7,829(d) 105,484 wholly-owned subsidiary of the Bank)
- - - - - --------------- (a) Salaries before deductions. For 1991 includes the cash value of unused vacations paid which is not a recurring payment. (b) Includes Christmas bonus, a special bonus for the Bank's 100th Anniversary, the Incentive Compensation Plan and the cash portion under the Profit Sharing Plan of the Bank which are described on this page. (c) Does not include the value of perquisites and other personal benefits because the aggregate amount of such benefits does not exceed the lesser of $50,000 or 10% of total amount of annual salary and bonus of any named individual. (d) Deferred portion under the Profit Sharing Plan which is described on this page. For Mr. Thomas Fitzpatrick, these amounts represents the contribution of Spring Financial Services, Inc., during 1993 and 1992 pursuant to Section 401(k) of the Internal Revenue Code. (e) Please refer to Section entitled "Employment Contract of Mr. Alberto M. Paracchini" on page 13. (f) Information presented for 1993 and 1992 except for Mr. Edgardo Novoa which was appointed President of Popular Consumer Services, Inc. during 1993. No disclosure is required with respect to these officers. OTHER INCENTIVE COMPENSATION PLANS The Bank has an Annual Management Incentive Plan for different management levels. Under this Plan, incentive bonuses are based on individual performance as well as Bank's performance, measured by net income after tax. The weight assigned to each component varies according to the level of management. These bonuses can reach 20% of salaries if results exceed the target amount. The Bank also has an Excellence in Performance Incentive Program covering all employees not included in the other incentive plans. This program rewards employees for extraordinary personal contributions that are non-recurring in nature, typically not recognizable through merit or promotional salary action, and clearly recognized as such by management and peers alike. In addition, the Bank has several functional incentive programs which reward employees' productivity in specific areas. DEFERRED COMPENSATION PLAN (PROFIT SHARING) OF THE BANK All officers and regular employees who were in the service of the Bank as of January 1, 1976, or hired after that date, are active participants in the Bank's operating earnings under the yearly Profit Sharing Plan, as of the first day of the calendar month following completion of one year of service. The Bank's contribution for each year is computed in accordance with a formula based on the return on average assets or the return on average equity, whichever results in a higher contribution. The amount allocated to each officer or employee is based on his or her basic compensation for the year. The total amount contributed for the year 1993 was $20,593,840, of which 40% was distributed in cash among the Plan's participants, as approved by the Bank's Board of Directors in the month of January, 1994. PENSION PLAN The Bank has a noncontributory, defined benefit pension plan (the "Pension Plan") covering substantially all employees. Full time employees are eligible to participate in the Pension Plan following the 14 16 completion of three months of service. Pension costs are funded in accordance with the minimum funding standards under the Employee Retirement Income Security Act ("ERISA"). Benefits are paid on the basis of a straight life annuity plus supplemental death benefits and are not reduced for social security or other payments received by participants. Benefits are paid to participants upon normal retirement, which is 65 years of age, or early retirement, which requires 50 years of age and 25 years of service. Benefits are reduced for early retirement. The following table sets forth the estimated annual benefits that would become payable under the Plan based upon certain assumptions as to covered compensation levels and years of service. The amounts set forth in this table are not necessarily representative of amounts which are or may actually become payable under the Plan. The amounts represent the benefit payable upon retirement on December 31, 1993, of a participant at age 65:
ESTIMATED ANNUAL BENEFITS YEARS OF SERVICE(2) COVERED -------------------------------------------------------------------- COMPENSATION(1) 15 20 25 30 35 - - - - - --------------- -------- -------- -------- -------- -------- $ 400,000 $120,000 $160,000 $200,000 $220,000 $240,000 300,000 90,000 120,000 150,000 165,000 180,000 200,000 60,000 80,000 100,000 110,000 120,000 100,000 30,000 40,000 50,000 55,000 60,000
- - - - - --------------- (1) Covered compensation includes only the participant's base salary. Benefits exclude adjustments for IRS maximum benefit limitations. (2) 1993 covered compensation and estimated years of service at age 65 are as follows for the five highest paid key policy making executive officers:
1993 ESTIMATED YEARS COVERED OF SERVICE AT COMPENSATION AGE 65 ------------ --------------- Richard L. Carrion........................ $230,000 41.5 Jorge A. Junquera......................... 211,000 42.3 David H. Chafey, Jr....................... 205,000 38.5 Larry B. Kesler........................... 168,000 16.5 Maria Isabel P. de Burckhart.............. 165,000 35.3
15 17 BANPONCE CORPORATION PERFORMANCE GRAPH The following Performance Graph compares the cumulative total shareholder return during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the S & P 500 Index and the S & P Bank Composite Index. The cumulative total shareholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment, since the measurement point, December 31, 1988 plus (ii) the change in the per share price since the measurement point, by the share price at the measurement point. COMPARISON OF FIVE YEAR CUMULATIVE RETURN TOTAL RETURN AS OF DECEMBER 31 (DECEMBER 31, 1988 = 100)
MEASUREMENT PERIOD S&P 500 IN- BANKS COMPOS- (FISCAL YEAR COVERED) BANPONCE DEX ITE 1988 100 100 100 1989 126 132 123 1990 98 128 87 1991 123 166 142 1992 200 179 188 1993 211 197 207
INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors intends to retain the services of Price Waterhouse as the independent auditors of the Corporation for the year 1994. This firm of international public accountants has served as independent auditors of the Bank since 1971 and of the Corporation since May 1991, when it was appointed by the Board of Directors. Representatives of Price Waterhouse will attend the Stockholders Meeting and will be available to answer any questions that may arise; they will also have the opportunity to make a statement if they so desire. NOMINATIONS OTHER THAN BY THE BOARD OF DIRECTORS Nominations for Directors, other than those made by or on behalf of the existing Board of Directors of the Corporation, shall be made in writing and shall be delivered or mailed to the President or the Secretary of the Corporation not less than fifteen (15) days prior to April 22, 1994. The notice of such nominations shall contain the following information to the extent known to the notifying stockholder: (a) name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of common stock of the Corporation that will be voted for each proposed nominee; (d) the name and residence address of the notifying stockholder; and (e) the number of shares of common stock of the Corporation owned by the notifying stockholder. Nominations not made in accordance with the above may, in his discretion, be disregarded by the Chairman of the Meeting and, upon his instructions, the judges of the election may disregard all votes cast for each such nominee. 16 18 PROPOSALS OF SECURITY HOLDERS TO BE PRESENTED AT THE 1995 ANNUAL MEETING OF STOCKHOLDERS Stockholders' proposals intended to be presented at the 1995 Annual Meeting of Stockholders must be received by the Corporate Secretary, at its principal executive offices, Popular Center Building, San Juan, Puerto Rico, 00918, not later than December 30, 1994, for inclusion in the Bank's Proxy Statement and Form of Proxy relating to the 1995 Annual Meeting of Stockholders. OTHER MATTERS Management does not know of any other matters to be brought before the Meeting other than those described previously. Proxies in the accompanying form will confer discretionary authority to Management with respect to any such other matters presented at the meeting. To avoid delays in ballot taking and counting, and in order to assure that your Proxy is voted in accordance with your wishes, compliance with the following instructions is respectfully requested: upon signing a Proxy as attorney, executor, administrator, trustee, guardian, authorized officer of a corporation, or on behalf of a minor, please give full title. If shares are in the name of more than one recordholder, all should sign. Whether or not you plan to attend the Meeting, it is very important that your shares be represented and voted in the Meeting. Accordingly, you are urged to properly complete, sign, date and return your Proxy Card in the enclosed self-addressed envelope which needs no postage. San Juan, Puerto Rico, March 18, 1994. RICHARD L. CARRION SAMUEL T. CESPEDES Chairman of the Board, President and Chief Secretary Executive Officer
ANNUAL REPORT -- U.S. SECURITIES AND EXCHANGE COMMISSION, FORM 10-K Management will provide without charge, upon written request, a copy of the U.S. Securities and Exchange Commission's Form 10-K filed by the Corporation for 1993, including the financial statements and the schedules thereto required to be filed under the Regulations of the Securities and Exchange Act of 1934. Each written request must set forth a good faith representation that, as of the record date for the 1994 annual meeting of the stockholders of BanPonce Corporation, the person making the request was a beneficial owner of securities entitled to vote at such meeting. Such written request may be directed to: Mr. Orlando Berges Senior Vice President and Comptroller Banco Popular de Puerto Rico P.O. Box 362708 San Juan, Puerto Rico 00936-2708 17 19 PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. BANPONCE CORPORATION THE UNDERSIGNED HEREBY APPOINTS RICHARD L. CARRION, JORGE A. JUNQUERA AND P.O. BOX 362708 ERNESTO N. MAYORAL AS PROXIES, EACH WITH THE POWER TO APPOINT HIS SUBSTITUTE, SAN JUAN, PUERTO RICO AND HEREBY AUTHORIZES THEM TO REPRESENT AND TO VOTE AS DESIGNATED BELOW ALL 00936-2708 THE SHARES OF COMMON STOCK OF BANPONCE CORPORATION HELD ON RECORD BY THE UNDERSIGNED ON MARCH 11, 1994 AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AT POPULAR CENTER BUILDING, SEVENTH FLOOR, SAN JUAN, PUERTO RICO, ON APRIL 22, 1994 AT 2:00 P.M. OR AT ANY ADJOURNMENTS THEREOF, AS FOLLOWS: 1. ELECTION OF DIRECTORS Nominees: Alfonso F. Ballester Waldemar Del Valle Francisco Perez, Jr. Sila M. Calderon Jorge A. Junquera Emilio Jose Venegas
/ / VOTE GRANTED FOR all nominees / / VOTE WITHHELD FOR all nominees / / Vote granted, except for the following nominee(s) (insert the names of those nominees for whom you do not wish to vote in the space provided below) 2. IN THEIR DISCRETION, the Proxies are authorized to vote upon such other business as may properly come before the Meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ITEM 1.
Please sign exactly as name appears below. When shares are held by joint tenants or by tenants in ---------------- ------------------- ------------------ common, each holder should sign. When signing as Proxy Number Account Number Shares attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer and the position of such authorized officer should appear below the signature. If a partnership, please sign in partnership name by authorized person. DATED , 1994 ------------------------------------- ------------------------------------------------- Signature ------------------------------------------------- Signature
(VEA AL DORSO TEXTO EN ESPANOL) PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. No Postage is required if mailed in the United States, Puerto Rico or the U.S. Virgin Islands. -----END PRIVACY-ENHANCED MESSAGE-----