<PAGE> 1
As filed with the Securities and Exchange Commission on March 26, 1997
Registration No. 333-23397
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
BANPONCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PUERTO RICO 6711 66-0416582
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
209 MUNOZ RIVERA AVENUE
HATO REY, PUERTO RICO 00918
(787) 765-9800
(Address, including zip code, and telephone number, including area code, or
registrant's principal executive offices)
BRUNILDA SANTOS DE ALVAREZ, ESQ.
BANPONCE CORPORATION
209 MUNOZ RIVERA AVENUE
HATO REY, PUERTO RICO 00918
(787) 753-1017
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------
COPIES TO:
DONALD J. TOUMEY JULIO PIETRANTONI
SULLIVAN & CROMWELL MCCONNELL VALDES
125 BROAD STREET 270 MUNOZ RIVERA AVENUE
NEW YORK, NEW YORK 10004 HATO REY, PUERTO RICO 00918
(212) 558-4000 (787) 250-5664
------------------
Approximate date of commencement of proposed sale to
the public: At the Effective Time as described in the attached
Prospectus/Proxy Statement.
------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
BANPONCE CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
PART I OF FORM S-4 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS/PROXY STATEMENT
------------------------------------------ --------------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus/Proxy
Statement
2. Inside Front and Outside Back Cover
Pages of Prospectus.............................. Available Information; Incorporation of
Certain Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information................... Summary
4. Terms of the Transaction........................... Summary; The Merger; Incorporation of Certain
Documents by Reference; Comparison of Rights
of Holders of RCB Common Stock and BanPonce
Common Stock; Description of BanPonce's
Capital Stock; Appendix A
5. Pro Forma Financial Information ...................... *
6. Material Contacts with the Company Being
Acquired............................................ The Merger
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters..................................... *
8. Interests of Named Experts and Counsel............. Validity of BanPonce Common Stock; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
10. Information with Respect to S-3 Registrants........ Available Information; Incorporation of
Certain Documents by Reference
11. Incorporation of Certain Information
by Reference..................................... Available Information; Incorporation of
Certain Documents by Reference; Description
of BanPonce's Capital Stock
12. Information with Respect to S-2 or S-3 Registrants. *
13. Incorporation of Certain Information
by Reference..................................... *
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrant....................... *
15. Information with Respect to S-3 Companies.......... *
16. Information with Respect to S-2 or
S-3 Companies.................................... *
17. Information with Respect to Companies Other
than S-2 or S-3 Companies........................ Summary; Certain Information Regarding RCB;
Appendix D
18. Information if Proxies, Consents or Authorization
are to be Solicited.............................. Outside Front Cover Page; Incorporation of
Certain Documents by Reference; Summary; The
Merger; Certain Information Regarding RCB;
Proposals of Shareholders; Other Proposals to
be Acted Upon at the Meeting; Appendix E
19. Information if Proxies, Consents or Authorization
are not to be Solicited or in an Exchange Offer.. *
</TABLE>
- -------
*Indicates that Item is not applicable or answer is in the negative.
<PAGE> 3
ROIG COMMERCIAL BANK
NOTICE OF ANNUAL MEETING
To Be Held on May 8, 1997
TO THE SHAREHOLDERS OF ROIG COMMERCIAL BANK:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Roig
Commercial Bank ("RCB") will be held at RCB's principal executive offices,
located at 63 Carreras Street, Humacao, Puerto Rico, on May 8, 1997
at 10:00 a.m. for the following purposes, all of which are more completely set
forth in the accompanying Prospectus/Proxy Statement:
(1) To consider a proposal to adopt the Agreement and Plan of Merger dated
as of December 30, 1996, by and among BanPonce Corporation, Banco
Popular de Puerto Rico and RCB, providing for the merger of RCB with
and into Banco Popular;
(2) To elect 12 directors to one-year terms expiring with the 1998 Annual
Meeting or until their successors have been elected and qualified;
(3) To ratify the appointment of Price Waterhouse as RCB's independent
auditors for the year ending December 31, 1997;
(4) To approve the execution of certain indemnification agreements entered
into between RCB and its directors; and
(5) To transact such other business as may properly come before the
meeting.
Information relating to the above matters is set forth in the attached
Prospectus/Proxy Statement. Shareholders of record at the close of business on
April 8, 1997 are entitled to notice of and to vote at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
J. Adalberto Roig, Jr.
Chairman
March __, 1997
Humacao, Puerto Rico
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THIS MEETING,
YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE
REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE
THEREOF.
<PAGE> 4
PROSPECTUS
OF
BANPONCE CORPORATION
For up to 1,960,800 shares of Common Stock
(par value $6.00 per share)
(including attached rights to purchase
Series A Participating Preferred Stock)
------------------
PROXY STATEMENT
OF
ROIG COMMERCIAL BANK
------------------
This Prospectus and Proxy Statement (hereinafter referred to as this
"Prospectus/Proxy Statement") is being furnished to the shareholders of Roig
Commercial Bank ("RCB"), a bank organized under the laws of the Commonwealth of
Puerto Rico ("Puerto Rico"), in connection with the solicitation of proxies by
the Board of Directors of RCB from its shareholders for use at the annual
meeting of shareholders of RCB (including any adjournments or postponements
thereof) to be held on May 8, 1997, at 10:00 a.m. at RCB's principal executive
offices, located at 63 Carreras St., Humacao, Puerto Rico (the "Meeting").
Holders of the common stock, par value $10.00 per share, of RCB ("RCB Common
Stock") are being asked to consider and vote upon a proposal to adopt the
Agreement and Plan of Merger (the "Merger Agreement") dated as of December 30,
1996, by and among BanPonce Corporation ("BanPonce"), a corporation organized
under the laws of Puerto Rico, Banco Popular de Puerto Rico ("Banco Popular"), a
bank organized under the laws of Puerto Rico and a wholly owned subsidiary of
BanPonce, and RCB, providing for the merger (the "Merger") of RCB with and into
Banco Popular, and to approve the transactions contemplated thereby, including
the Merger. A copy of the Merger Agreement is attached as Appendix A and is
incorporated herein by reference. All references to the "Merger Agreement"
include all amendments and restatements thereof. RCB shareholders are also being
asked to consider and vote upon the election of RCB directors, the ratification
of the appointment of Price Waterhouse as RCB's independent auditors and the
approval of certain indemnification agreements between RCB and its directors.
This Prospectus/Proxy Statement and form of proxy are first being mailed to
the shareholders of RCB on or about March __, 1997.
This Prospectus/Proxy Statement also constitutes a prospectus of BanPonce
with respect to the shares of common stock, par value $6.00 per share, including
attached rights to purchase Series A Participating Preferred Stock, of BanPonce
("BanPonce Common Stock"), which are issuable to certain of the shareholders of
RCB upon consummation of the merger of RCB with and into Banco Popular pursuant
to the terms of the Merger Agreement. Banco Popular is sometimes referred to in
this Prospectus/Proxy Statement as the "Surviving Bank".
At the effective time of the Merger (the "Effective Time"), each
outstanding share of RCB Common Stock, other than shares held in RCB's treasury
or directly or indirectly by BanPonce (except shares held by BanPonce in a
fiduciary capacity or in satisfaction of a debt previously contracted) will be
converted into the right to receive either BanPonce Common Stock or cash or a
combination of both, subject to the conversion, election and allocation
procedures and the other terms and conditions set forth in the Merger Agreement.
The BanPonce Common Stock is listed on the Nasdaq National Market (the
"NASDAQ"). The last reported sale price of BanPonce Common Stock (NASDAQ Symbol:
"BPOP") on the NASDAQ on March 25, 1997 was $35.50 per share. Based on such sale
price of the BanPonce Common Stock, the Exchange Ratio (as defined herein) would
result in an implied market value per share for the RCB Common Stock of $200.00.
THERE CAN BE NO ASSURANCE AS TO THE MARKET PRICE PER SHARE OF THE BANPONCE
COMMON STOCK AT ANY TIME PRIOR TO, AT OR AFTER THE EFFECTIVE TIME. Shareholders
are urged to obtain current market quotations.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), THE OFFICE OF
THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO (THE "OFFICE
OF THE COMMISSIONER") OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION, THE OFFICE OF THE COMMISSIONER OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY
<PAGE> 5
OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FDIC, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION FUND
OR ANY OTHER GOVERNMENTAL AGENCY.
The date of this Prospectus/Proxy Statement is March ____, 1997.
AVAILABLE INFORMATION
BanPonce is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by BanPonce with the Commission may be
inspected and copied at the Commission's public reference room located at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the public reference facilities in the Commission's regional offices located
at: 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661. Copies of
such material may be obtained at prescribed rates by writing to the Securities
and Exchange Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically, by
means of the Commission's home page on the Internet at http://www.sec.gov.
This Prospectus/Proxy Statement is included as part of a registration
statement on Form S-4 (together with all amendments and exhibits thereto,
including documents and information incorporated by reference, the "Registration
Statement") filed with the Commission by BanPonce, relating to the registration
under the Securities Act of 1933, as amended (the "Securities Act"), of the
shares of BanPonce Common Stock offered hereby. This Prospectus/Proxy Statement
does not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission, and to which portions reference is hereby made
for further information with respect to BanPonce and the BanPonce Common Stock
offered hereby. Statements contained herein concerning any documents are not
necessarily complete and, in each instance, reference is made to the copies of
such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in all respects by such reference.
AS INDICATED BELOW, THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS
RELATING TO BANPONCE, EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED
THEREIN, ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO AMILCAR
JORDAN, SENIOR VICE PRESIDENT, BANPONCE CORPORATION, 209 MUNOZ RIVERA AVENUE,
HATO REY, PUERTO RICO 00918, (787) 765-9800. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 1, 1997.
i
<PAGE> 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by BanPonce with the Commission are
incorporated into this Prospectus/Proxy Statement by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1996;
2. The description of Common Stock and Series A Participative
Cumulative Preferred Stock set forth in BanPonce's Registration Statements
filed pursuant to Section 12 of the Exchange Act and any amendment or report
filed for the purpose of updating those descriptions.
All documents filed by BanPonce pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof shall be deemed to be
incorporated herein by reference and to be part hereof from the date of such
filing. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part hereof.
RCB is not subject to periodic reporting requirements under the Exchange
Act, and, accordingly, no information or documents relating to RCB are
incorporated herein by reference. All information contained herein relating to
RCB and its business was provided by RCB specifically for inclusion herein and
has been included in reliance on RCB's representations as to the truth and
accuracy thereof.
ii
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION........................................................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................................. ii
SUMMARY......................................................................................................... 1
The Parties .............................................................................................. 1
The Meeting .............................................................................................. 2
Effects of the Merger...................................................................................... 2
Background of the Merger; Reasons for the Merger........................................................... 2
Recommendation of RCB's Board of Directors................................................................. 2
Opinion of RCB's Financial Advisor......................................................................... 3
The Merger Agreement....................................................................................... 3
Certain Tax Consequences of the Merger..................................................................... 9
Board of Directors, Management and Operations After the Merger............................................. 10
Interests of Certain Persons in the Merger; Effect on Certain Key Employees................................ 10
Appraisal Rights........................................................................................... 10
Accounting Treatment....................................................................................... 11
Description of BanPonce Capital Stock...................................................................... 11
Certain Differences in Shareholders' Rights................................................................ 11
Shareholder Agreements..................................................................................... 11
Resale of BanPonce Common Shares........................................................................... 11
Selected Historical Financial Information.................................................................. 13
Comparison of Certain Unaudited Per Share Data............................................................. 16
Historical Market Price and Dividends Declared............................................................. 18
INFORMATION ABOUT THE MEETING AND THE PROXIES................................................................... 19
THE MERGER...................................................................................................... 20
Effects of the Merger...................................................................................... 20
Effective Time; Effective Date............................................................................. 21
Background of the Merger; Reasons for the Merger........................................................... 21
Opinion of RCB's Financial Advisor......................................................................... 22
Conversion of RCB Common Stock............................................................................. 25
Election Procedures; Allocation Procedures................................................................. 28
Additional Exchange Procedures............................................................................. 29
Representations and Warranties............................................................................. 30
Conduct of Business Pending the Merger..................................................................... 31
No Solicitation of Other Offers............................................................................ 32
Conditions to the Consummation of the Merger............................................................... 32
Regulatory Approvals....................................................................................... 33
Termination of the Merger Agreement........................................................................ 35
Termination Fees........................................................................................... 36
Accounting Treatment....................................................................................... 36
Extension and Waiver....................................................................................... 36
Amendment of the Merger Agreement.......................................................................... 36
Board of Directors, Management and Operations After the Merger............................................. 36
Interests of Certain Persons in the Merger................................................................. 37
Effect on Certain Key Employees............................................................................ 37
Effect on Employee Benefits................................................................................ 37
Indemnification of Officers, Directors and Employees of RCB................................................ 37
Rights of Dissenting RCB Shareholders...................................................................... 38
Resale of BanPonce Common Shares........................................................................... 39
Certain Tax Consequences of the Merger..................................................................... 39
SHAREHOLDER AGREEMENTS.......................................................................................... 41
</TABLE>
iii
<PAGE> 8
<TABLE>
<S> <C>
CERTAIN INFORMATION REGARDING RCB............................................................................... 42
RCB Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 42
Ownership of RCB Common Stock.............................................................................. 53
Background of Directors and Executive Officers............................................................. 55
COMPARISON OF RIGHTS OF HOLDERS OF RCB COMMON STOCK
AND BANPONCE COMMON STOCK.................................................................................... 55
Issuance of Capital Stock.................................................................................. 55
Board of Directors......................................................................................... 55
Preemptive Rights.......................................................................................... 57
Arbitration .............................................................................................. 57
Payment of Dividends....................................................................................... 57
Indemnification of Directors and Officers.................................................................. 57
Qualification of Directors................................................................................. 58
Special Meetings of the Shareholders....................................................................... 58
Shareholder Approval of Mergers and Appraisal Rights....................................................... 58
Amendment of Certificate of Incorporation and By-laws...................................................... 58
DESCRIPTION OF BANPONCE'S CAPITAL STOCK......................................................................... 59
Common Stock .............................................................................................. 59
Shareholder Rights Plan.................................................................................... 60
Dividend Reinvestment Plan................................................................................. 60
Preferred Stock............................................................................................ 61
SUPERVISION AND REGULATION...................................................................................... 62
General .............................................................................................. 62
Holding Company Structure.................................................................................. 62
Capital Adequacy........................................................................................... 63
FDICIA .............................................................................................. 64
Interstate Banking Legislation............................................................................. 65
Dividend Restrictions...................................................................................... 65
FDIC Insurance Assessments................................................................................. 66
Brokered Deposits.......................................................................................... 67
Puerto Rico Regulation..................................................................................... 67
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS....................................................................... 68
EXPERTS......................................................................................................... 68
VALIDITY OF BANPONCE COMMON STOCK............................................................................... 68
PROPOSALS OF SHAREHOLDERS....................................................................................... 69
OTHER PROPOSALS TO BE ACTED UPON AT THE MEETING................................................................. 69
APPENDIX A: AGREEMENT AND PLAN OF MERGER
APPENDIX B: OPINION OF ALEX SHESHUNOFF & CO. INVESTMENT BANKING
APPENDIX C: RIGHTS OF DISSENTING SHAREHOLDERS OF RCB --
PUERTO RICO BANKING LAW -- SECTION 15(d)
APPENDIX D: CONSOLIDATED FINANCIAL STATEMENTS OF RCB
APPENDIX E: INDEMNIFICATION AGREEMENT OF RCB
</TABLE>
iv
<PAGE> 9
------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, BANPONCE COMMON STOCK OFFERED
BY THIS PROSPECTUS/PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY
STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF BANPONCE OR RCB SINCE THE DATE OF THIS PROSPECTUS/PROXY STATEMENT.
v
<PAGE> 10
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THE
PROSPECTUS/PROXY STATEMENT AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF THE MATTERS COVERED
IN THIS PROSPECTUS/PROXY STATEMENT AND IS SUBJECT TO AND QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, INCLUDING THE APPENDICES
HERETO AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE
URGED TO READ CAREFULLY THE ENTIRE PROSPECTUS/PROXY STATEMENT, INCLUDING THE
APPENDICES. AS USED IN THIS PROSPECTUS/PROXY STATEMENT, THE TERMS "BANPONCE",
"BANCO POPULAR" AND "RCB" REFER TO SUCH CORPORATIONS, RESPECTIVELY, AND, WHERE
THE CONTEXT REQUIRES, SUCH ENTITIES AND THEIR RESPECTIVE SUBSIDIARIES.
THE PARTIES
BANPONCE
BanPonce is a bank holding company registered under the Bank Holding
Company Act of 1956 and incorporated in 1984 under the laws of Puerto Rico.
BanPonce is the largest financial institution in Puerto Rico, with consolidated
assets of $16.8 billion, total deposits of $10.8 billion and shareholders'
equity of $1.3 billion as of December 31, 1996. Based on total assets at
September 30, 1996, BanPonce was the 42nd largest bank holding company in the
United States. BanPonce's principal executive offices are located at 209 Munoz
Rivera Avenue, Hato Rey, Puerto Rico 00918 and its telephone number is (787)
765-9800.
BanPonce's principal subsidiary, Banco Popular, was incorporated over 100
years ago in 1893 and is Puerto Rico's largest bank with total assets of $14.0
billion, deposits of $10.1 billion and shareholders' equity of $1.0 billion at
December 31, 1996. Banco Popular accounted for 84% of the total consolidated
assets of BanPonce at December 31, 1996. A consumer-oriented bank, Banco Popular
has the largest retail franchise in Puerto Rico, operating 178 branches and 327
automated teller machines on the island. Banco Popular also has the largest
trust operation in Puerto Rico and is a leader in the mortgage banking business.
In addition, it operates the largest Hispanic bank branch network in the
mainland United States with 29 branches in New York and an agency in Chicago. As
of December 31, 1996, these branches had a total of approximately $1.5 billion
in deposits. Banco Popular also operates seven branches in the U.S. Virgin
Islands and one branch in the British Virgin Islands. Banco Popular has three
subsidiaries: Popular Leasing & Rental Inc., Puerto Rico's largest vehicle
leasing and daily rental company, Popular Consumer Services, Inc., a small-loan
and secondary mortgage company with 35 offices in Puerto Rico operating under
the name of Best Finance, and Popular Mortgage, Inc., a mortgage loan company
with four offices in Puerto Rico operating under the name of Puerto Rico Home
Mortgage.
BanPonce has two other principal subsidiaries: BP Capital Markets and
Popular International Bank, Inc. ("PIB"), which in turn owns all of the
outstanding stock of BanPonce Financial Corp. BP Capital Markets is a direct
subsidiary of BanPonce and engages in the business of a securities broker-dealer
in Puerto Rico, with institutional brokerage, financial advisory, and investment
and security brokerage operations.
RCB
RCB is a full-service commercial bank which provides a wide range of
financial services principally in the eastern and San Juan metropolitan regions
of Puerto Rico. RCB was founded in 1922 and does business under the Puerto Rico
Banking Act of 1933, as amended (the "Banking Law"). As of December 31, 1996,
RCB had total assets of $888
1
<PAGE> 11
million, deposits of $656 million and shareholders' equity of $66 million. RCB's
principal executive offices are located at 63 Carreras Street, Humacao, Puerto
Rico 00979 and its telephone number is (787) 852-1010.
RCB operates 25 branches located in Humacao, San Juan, Bayamon, Caguas,
Carolina, Fajardo, Rio Piedras, Rio Grande, Yabucoa, Las Piedras, Loiza,
Luquillo, Maunabo, Naguabo, Juncos and Culebra. Its deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC") and it is subject to the
supervision of the FDIC and of the Office of the Commissioner of Financial
Institutions of Puerto Rico.
THE MEETING
The Meeting will be held on May 8, 1997 at 10:00 a.m. at 63 Carreras
Street, Humacao, Puerto Rico. Only holders of record of RCB Common Stock at the
close of business on April 8, 1997 (the "Record Date") will be entitled to vote
at the Meeting. At the close of business on the date hereof, 600,000 shares of
RCB Common Stock were issued and outstanding.
The following proposals are to be presented to shareholders of RCB for
approval at the Meeting: (i) the approval of the Merger Agreement and of the
transactions contemplated thereby, including the Merger; (ii) the election of
the directors who shall hold office until the next General Regular Meeting of
Shareholders; (iii) the ratification of the appointment of Price Waterhouse as
RCB's independent auditors for the year ending December 31, 1997; and (iv) the
approval of the execution of certain indemnification agreements entered into
between RCB and its directors. Each share of RCB Common Stock is entitled to one
vote on the proposal to adopt the Merger Agreement and to approve the
transactions contemplated thereby, including the Merger, and on the other
proposals to be acted upon at the Meeting.
EFFECTS OF THE MERGER
At the Effective Time (as hereinafter defined), RCB shall merge with and
into Banco Popular, and the separate existence of RCB shall cease. Banco
Popular shall be the surviving bank in the Merger, and the separate corporate
existence of Banco Popular, with all its rights, privileges and franchises,
shall continue unaffected by the Merger. The Merger shall be pursuant to and
have the effects specified in the Banking Law. The Charter and Bylaws of Banco
Popular, as in effect immediately prior to the Effective Date, shall be the
Charter and the Bylaws of the Surviving Bank until further amended as provided
therein.
BACKGROUND OF THE MERGER; REASONS FOR THE MERGER
For information concerning the background of the Merger and reasons for the
Merger, see "THE MERGER--Background of the Merger; Reasons for the Merger".
RECOMMENDATION OF RCB'S BOARD OF DIRECTORS
The Board of Directors of RCB has unanimously concluded that the terms of
the Merger are fair to the shareholders of RCB and the Board has further
concluded that consummation of the Merger would be in the best interests of RCB
and RCB's shareholders. The exchange rate of RCB Common Stock into BanPonce
Common Stock and/or cash was determined by the Boards of Directors of RCB and
BanPonce after consideration of the advice and recommendation of Alex Sheshunoff
& Co. Investment Banking ("Sheshunoff"), RCB's financial advisor. ACCORDINGLY,
THE BOARD OF DIRECTORS OF RCB UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF RCB
COMMON STOCK VOTE FOR THE MERGER. See "THE MERGER--Background of the Merger".
OPINION OF RCB'S FINANCIAL ADVISOR
2
<PAGE> 12
Sheshunoff has rendered its opinion to the Board of Directors of RCB that
the consideration per share of RCB Common Stock to be received pursuant to the
Merger is fair from a financial point of view to the holders of RCB Common
Stock. The full text of Sheshunoff's opinion, which describes the procedures
followed, assumptions made, limitations on the review undertaken and other
matters in connection with rendering the opinion, is set forth in Appendix B to
this Prospectus/Proxy Statement and should be read in its entirety by RCB
shareholders. See "THE MERGER--Opinion of RCB's Financial Advisor".
THE MERGER AGREEMENT
EFFECTIVE TIME; EFFECTIVE DATE
On a date selected by BanPonce, which shall be no later than the 30th day
following the satisfaction or waiver of the conditions set forth in Article 8 of
the Merger Agreement, the parties shall cause the Merger Agreement to be
properly filed in the office of the Secretary of State of Puerto Rico in
accordance with the Banking Law. The Merger shall become effective at the time
("Effective Time") the Merger Agreement is properly filed in accordance with the
Banking Law. The date on which the Effective Time shall occur is herein referred
to as the "Effective Date".
CONVERSION OF RCB COMMON STOCK
At the Effective Time, each share of RCB Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares held as
treasury stock of RCB and shares held directly or indirectly by BanPonce, except
shares ("Excluded Shares") held by BanPonce in a fiduciary capacity or in
satisfaction of a debt previously contracted) (the "Outstanding Shares") will be
converted into the right to receive, at the election of the holders thereof and
subject to the election and allocation procedures set forth below, either
(i) a number of shares of BanPonce Common Stock equal to the
sum of (a) one-half of the Exchange Ratio (as defined below) and (b) the
ratio of $100 to the BanPonce Average Stock Price (as defined below) (the
"Per Share Stock Consideration"), or
(ii) cash equal to the sum of (a) $100 and (b) the product of
(I) one-half of the Exchange Ratio and (II) the BanPonce Average Stock
Price (the "Per Share Cash Consideration");
provided, that if RCB declares an extraordinary dividend as described below
(the "Extraordinary Dividend") and/or if RCB's shareholders' equity (adjusted as
provided below) is less than $66,100,000 (less the amount of the Extraordinary
Dividend, if any) as of the close of business on the date that is 15 calendar
days preceding the Effective Date (the amount, if any, by which RCB's
shareholders' equity is less than $66,100,000 (less the amount of the
Extraordinary Dividend, if any), the "Equity Shortfall"), the Per Share Stock
Consideration and the Per Share Cash Consideration shall be reduced as follows:
(X) the Per Share Cash Consideration shall be reduced by an
amount equal to (I) the sum of the Extraordinary Dividend (if any) and the
Equity Shortfall (if any), divided by (II) the number of Outstanding Shares
(the "Per Share Cash Reduction"); and
(Y) the Per Share Stock Consideration shall be reduced by an
amount equal to the Per Share Cash Reduction divided by the BanPonce
Average Stock Price; and
provided, further, that 50% of the Outstanding Shares shall be converted into
the right to receive cash (the "Cash Number") and 50% of the Outstanding Shares
shall be converted into the right to receive BanPonce Common Stock (the "Stock
Number").
3
<PAGE> 13
The "Exchange Ratio" means $200 divided by the "BanPonce Average Stock
Price," subject to the Collar described below. The "BanPonce Average Stock
Price" is the average of the last sale price for BanPonce Common Stock quoted on
the Nasdaq National Market as reported in the Wall Street Journal (or, in the
absence thereof, as reported in such other source upon which BanPonce and RCB
shall agree) for each of the ten consecutive trading days on which BanPonce
Common Stock is traded on the Nasdaq National Market ending on, and including,
the trading day which is two Business Days prior to the Election Deadline (as
defined below).
In order to provide some protection to holders of shares of RCB Common
Stock against fluctuation in the price of BanPonce Common Stock, the Merger
Agreement provides that the Exchange Ratio will be $200 divided by the BanPonce
Average Stock Price so long as that price falls within a specified range. This
range is between $37.40 and $30.60 per share of BanPonce Common Stock, inclusive
(the "Collar"). If the BanPonce Average Stock Price is above the Collar, the
Exchange Ratio shall be 5.348. If the BanPonce Average Stock Price is below the
Collar, the Exchange Ratio shall be 6.536.
On or prior to the Effective Date, and subject to compliance with all laws,
regulations and regulatory policies, RCB may declare and pay an extraordinary
cash dividend not exceeding $20,000,000 (the "Extraordinary Dividend");
provided, however, that RCB shall not pay an Extraordinary Dividend unless RCB
shall have received a ruling from the Puerto Rico Treasury Department to the
effect that payment of such dividend in the amount proposed shall not disqualify
the Merger as a "reorganization" within the meaning of Section 1112(g)(1) of the
Puerto Rico Internal Revenue Code of 1994, as amended (the "Puerto Rico Code").
If any Extraordinary Dividend is paid, the Stock Number and the Cash Number
shall be adjusted upward and downward, respectively, by the same amount to the
extent necessary so that the sum of (i) the Extraordinary Dividend and (ii)
the product of the Cash Number and the Per Share Cash Consideration is not
greater than the product of (x) the Stock Number, (y) the BanPonce Average
Stock Price and (z) the Per Share Stock Consideration.
In computing RCB's shareholders' equity for purposes of calculating the
conversion ratio: (1) such equity shall be defined as the sum of RCB's common
stock, surplus and undivided profits, but excluding any unrealized gain or loss
on securities available for sale, (2) such equity shall reflect any adjustments
required as a result of the Price Waterhouse audit referred to in Section 1.4 of
the Merger Agreement, (3) computations shall be made in accordance with
Generally Accepted Accounting Principles as consistently applied and (4) any
dividend declared between the month end preceding the Election Deadline and the
Effective Date shall be deducted from such equity and any reduction in such
equity resulting from any reduction after December 30, 1996 in the value of
RCB's securities portfolio due to an increase in the general level of interest
rates shall be excluded; provided, however, that, to the extent gains are taken
on the sale of securities in RCB's securities portfolio after December 30, 1996,
RCB's shareholders' equity shall be reduced to reflect unrealized losses in its
securities portfolio that exceed the amount of such unrealized losses as of
December 30, 1996.
ADDITIONAL AUDIT
Pursuant to the Merger Agreement, Price Waterhouse will conduct an audit in
accordance with generally accepted auditing standards of the statement of
condition of RCB as of the month end immediately preceding the Election Deadline
that is at least 30 days prior to the Election Deadline. Any adjustment to
shareholders' equity as a result of this audit could affect the Per Share Stock
Consideration and Per Share Cash Consideration if shareholders' equity is less
than $66,100,000 (less the amount of any Extraordinary Dividend). See
"--Conversion of RCB Common Stock".
4
<PAGE> 14
ELECTION AND ALLOCATION OF RCB COMMON STOCK
Subject to the allocation procedures described below, each record holder of
RCB Common Stock immediately prior to the Effective Time will be entitled (i) to
elect to receive BanPonce Common Stock for all or some of the shares of RCB
Common Stock ("Stock Election Shares") held by such record holder, (ii) to elect
to receive cash for all or some of the shares of RCB Common Stock ("Cash
Election Shares") held by such record holder or (iii) to indicate that such
holder makes no such election for all or some of the shares of RCB Common Stock
held by such record holder ("No-Election Shares"). Each record holder's election
to receive BanPonce Common Stock shall be honored by the Exchange Agent, which
shall be Banco Popular, up to 50% of the RCB Common Stock owned by such record
holder (the "Protected Election Shares"). Protected Election Shares shall not be
subject to the allocation procedures set forth below, shall be deducted from the
Stock Number and shall not be deemed Stock Election Shares.
Any shares of RCB Common Stock with respect to which the record holder
thereof shall not, as of the Election Deadline, have properly submitted to the
Exchange Agent a properly completed Election Form shall be deemed to be
No-Election Shares. A record holder acting in different capacities shall be
entitled to submit an Election Form for each capacity in which such record
holder so acts with respect to each person for which it so acts.
Not later than the 10th day after the Election Deadline, BanPonce shall
cause the Exchange Agent to effect the allocation among the holders of RCB
Common Stock of rights to receive the Per Share Stock Consideration or the Per
Share Cash Consideration in the Merger as follows:
If the number of Stock Election Shares is less than the Stock Number, then
(i) all Stock Election Shares shall be converted into the right to receive the
Per Share Stock Consideration, and (ii) the Exchange Agent shall select (by
random selection or by lot) from among the No-Election Shares a sufficient
number of No-Election Shares such that the sum of such number and the number of
Stock Election Shares shall equal as closely as practicable the Stock Number,
and all such selected shares ("Stock-Selected No-Election Shares") shall be
converted into the right to receive the Per Share Stock Consideration, provided
that if the sum of all No-Election Shares and Stock Election Shares is less than
the Stock Number, all No-Election Shares shall be converted into the right to
receive the Per Share Stock Consideration and thereby become Stock-Selected
No-Election Shares.
If the sum of Stock Election Shares and No-Election Shares is less than the
Stock Number, the Exchange Agent shall convert (by the method of pro rata
conversion described below), a sufficient number of Cash Election Shares into
Stock Election Shares ("Converted Cash Election Shares") such that the sum of
Stock Election Shares, No-Election Shares and Converted Cash Election Shares
equals as closely as practicable the Stock Number, and all Converted Cash
Election Shares shall be converted into the right to receive the Per Share Stock
Consideration, and any No-Election Shares and the Cash Election Shares that are
not Stock-Selected No-Election Shares or Converted Cash Election Shares (as the
case may be) shall be converted into the right to receive the Per Share Cash
Consideration.
If the number of Stock Election Shares is greater than the Stock Number,
then all Cash Election Shares and No-Election Shares shall be converted into the
right to receive the Per Share Cash Consideration, and the Exchange Agent shall
convert (by the method of pro rata conversion described below) a sufficient
number of Stock Election Shares into Cash Election Shares ("Converted Stock
Election Shares") such that the remainder of Stock Election Shares (before such
conversion) less Converted Stock Election Shares equals as closely as
practicable the Stock Number, and all Converted Stock Election Shares shall be
converted into the right to receive the Per Share Cash Consideration, and the
Stock Election Shares which are not Converted Stock Election Shares shall be
converted into the right to receive the Per Share Stock Consideration.
5
<PAGE> 15
If the number of Stock Election Shares equals the Stock Number, then all
Stock Election Shares shall be converted into the right to receive the Per Share
Stock Consideration and all Cash Election Shares and No-Election Shares shall be
converted into the right to receive the Per Share Cash Consideration.
In the event the Exchange Agent is required to convert Cash Election Shares
into Stock Election Shares, the election by each holder of Cash Election Shares
shall be converted on a pro rata basis into Cash Election Shares and Stock
Election Shares, with the Stock Election Shares to be equal to the product of
(x) the number of such holder's Cash Election Shares before such conversion and
(y) the fraction in which the total number of Converted Cash Election Shares
comprises the numerator and the total number of Cash Election Shares before such
conversion comprises the denominator. In the event the Exchange Agent is
required to convert Stock Election Shares into Cash Election Shares, the
election by each holder of Stock Election Shares shall be converted on a pro
rata basis into Stock Election Shares and Cash Election Shares, with the Cash
Election Shares to be equal to the product of (x) the number of such holder's
Stock Election Shares before such conversion and (y) the fraction in which the
total number of Converted Stock Election Shares comprises the numerator and the
total number of Stock Election Shares before such conversion comprises the
denominator.
Notwithstanding the foregoing, a person who immediately prior to the
Effective Time, owned (for purposes of the Puerto Rico Code) 1% or more of the
outstanding shares of RCB Common Stock and who does not elect to receive Per
Share Cash Consideration for all his shares, shall deliver a written agreement,
in a form reasonably acceptable to BanPonce, containing customary
representations to the effect that such holder has no present intention to sell,
exchange or otherwise dispose of such shares of BanPonce Common Stock to be
received in exchange for such shares of RCB Common Stock, and if such holder
shall not deliver such written agreement, in a form reasonably acceptable to
BanPonce, at the election of BanPonce such person shall instead receive the Per
Share Cash Consideration with respect to such shares, regardless of the election
(or lack thereof) made by such person in its Election Form, and, if BanPonce
exercises such election, the Cash Number shall be reduced by the number of
shares of RCB Common Stock that were owned by such person immediately prior to
the Effective Time.
Not later than the 25th business day prior to the anticipated Effective
Date or such other date as the parties may agree in writing (the "Mailing
Date"), BanPonce shall mail an Election Form and a letter of transmittal to each
person that was a holder of record of RCB Common Stock immediately prior to the
Mailing Date. To be effective, an Election Form must be properly completed,
signed and actually received by the Exchange Agent not later than 5:00 p.m.,
Puerto Rico time, on the Effective Date (which will be not earlier than the 20th
day after the Mailing Date) or such later date as may be agreed by BanPonce and
RCB (the "Election Deadline") and accompanied by the certificates representing
all the section is being made (or an appropriate guarantee of delivery by an
eligible organization).
VOTE REQUIRED
RCB Vote Required. Under Puerto Rico law and pursuant to the terms of the
Merger Agreement, the affirmative vote of the holders of 75% of the outstanding
shares of RCB Common Stock is required to approve the Merger. Approval of the
Merger by the requisite vote of the holders of RCB Common Stock is a condition
to the consummation of the Merger. Pursuant to the Shareholder Agreements
described under the caption "SUMMARY--Shareholder Agreements", RCB shareholders
collectively owning 75% of RCB Common Stock have agreed to vote to adopt the
Merger Agreement and to approve the transactions contemplated thereby.
BanPonce Vote Not Required. Under Puerto Rico law, no affirmative vote of
the holders of BanPonce Common Stock is necessary in order for BanPonce to enter
into the Merger.
6
<PAGE> 16
BUSINESS PENDING CONSUMMATION OF THE MERGER
Each of BanPonce and RCB has made certain covenants in the Merger Agreement
relating to the conduct of its business pending consummation of the Merger.
BanPonce has agreed (except as otherwise permitted by the Merger Agreement) not
to take any action that would materially and adversely affect the ability of
BanPonce or RCB to obtain the Requisite Regulatory Approvals (as defined below)
for the transactions contemplated by the Merger Agreement, to perform its
covenants and agreements under the Merger Agreement in all material respects and
to consummate the Merger. Among other things, RCB has agreed (except as
otherwise permitted by the Merger Agreement) to conduct its business in the
ordinary course and on an arm's-length basis, to use all reasonable efforts to
preserve intact in all material respects its business organization as a whole
and the goodwill of RCB and to keep available the services of its officers and
employees as a group and to preserve intact material agreements.
In addition, pursuant to the Merger Agreement RCB has agreed (except as
otherwise permitted by the Merger Agreement) not to, among other things, (i)
issue or sell any of its equity securities, warrants, options or other rights
to acquire its equity securities, or any bonds or other securities, except
deposit and other bank obligations in the ordinary course of business; (ii)
redeem, purchase, acquire or offer to acquire, directly or indirectly, any
shares of capital stock of RCB or other securities of RCB; (iii) declare, set
aside or pay dividends except the (a) Extraordinary Dividend and (b) if the
Effective Date is on or before June 30, 1997, immediately prior to the
Effective Date RCB may pay a cash dividend on each share of RCB Common Stock
equal to the product of $1.625 and the ratio of the number of days between
December 31, 1996 and the Effective Date over 182, and if the Effective Date is
after June 30, 1997 and on or before December 31, 1997, on June 30, 1997, RCB
may pay a cash dividend of $1.625 on each share of RCB Common Stock and,
immediately prior to the Effective Date, RCB may pay a cash dividend on each
share of RCB Common Stock equal to the product of $1.625 and the ratio of the
number of days between June 30, 1997 and the Effective Date over 183; provided,
that such amounts do not exceed 30% of RCB's net income during the applicable
period; and (iv) modify any employment, severance or similar agreements or
grant any bonuses, wage, salary or compensation increases, or promote any
officer, employee, group of employees or consultant or hire any employee
with a title of Vice President or above, other than bonuses, increases,
promotions or new hires in the ordinary course and in a manner consistent with
past practice. See "THE MERGER--Conduct of Business Pending the Merger".
REGULATORY APPROVALS
Under the Merger Agreement, the obligations of each of BanPonce, Banco
Popular and RCB are conditioned upon, among other things, all regulatory
approvals required to consummate the Merger (the "Requisite Regulatory
Approvals") having been obtained, all statutory and regulatory waiting periods
having expired and no such approval having imposed any condition or restriction
that would so materially and adversely affect the economic or business benefits
to BanPonce of the transaction contemplated by the Merger Agreement that, had
such condition or requirement been known, BanPonce would not, in its reasonable
judgment, have entered into the Merger Agreement (the "Burdensome Condition").
See "THE MERGER--Conditions to the Consummation of the Merger".
Each of BanPonce, Banco Popular and RCB has agreed in the Merger Agreement
to use all reasonable efforts and to cooperate with the other parties in taking
any actions necessary to obtain the Requisite Regulatory Approvals, which
include approvals from the Office of the Commissioner of Financial Institutions
of Puerto Rico (the "Office of the Commissioner") and the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"). As described under
"THE MERGER--Regulatory Approvals", applications and notices seeking Requisite
Regulatory Approvals will be or have been filed.
7
<PAGE> 17
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Consummation of the Merger is subject, among other things, to (i) approval
of the Merger Agreement and the Merger by the affirmative vote of the holders of
75% of the outstanding RCB Common Stock, (ii) receipt of the Requisite
Regulatory Approvals without the imposition of any Burdensome Condition, (iii)
the Registration Statement having been declared effective by the Commission and
not subject to a stop order of the Commission, (iv) no law, statute, rule or
regulation, domestic or foreign, having been enacted or promulgated which would
prohibit the consummation of the transactions contemplated by the Merger
Agreement, (v) receipt by BanPonce, Banco Popular and RCB of a ruling from the
Puerto Rico Treasury Department or opinions of their respective counsel as to
the tax-free nature of the Merger for Puerto Rico income tax purposes, and (vi)
certain other closing conditions. There can be no assurance as to when or if
such conditions will be satisfied (or, where permissible, waived) or that the
Merger will be consummated. See "THE MERGER--Conditions to the Consummation of
the Merger" and "--Regulatory Approvals".
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Date by mutual consent of BanPonce and RCB. In addition, the Merger Agreement
may be terminated by either BanPonce or RCB acting individually if the Effective
Date is not on or before December 31, 1997 (unless the failure to consummate the
Merger by December 31, 1997 is due to the action or failure to act of the party
seeking to terminate the Merger Agreement in breach of such party's obligations
under the Merger Agreement) or if the Merger is not approved by the shareholders
of RCB at the meeting (or any adjournment thereof) duly called and held for that
purpose. The Merger Agreement may also be terminated by BanPonce: (a) if RCB
participates in negotiations with, provides nonpublic information to, or enters
into any agreement with another party regarding an Acquisition Proposal; (b) if
the RCB Board fails to recommend to shareholders of RCB approval (or withdraws
its recommendation of approval) of the Merger; (c) if the RCB Board modifies its
recommendation of approval of the Merger in a way adverse to the interests of
BanPonce; (d) if there shall have occurred any breach of either the covenant to
call the Meeting as promptly as practical or of the RCB Board to recommend
approval of the Merger Agreement and the Merger to the RCB shareholders and to
use its best efforts to obtain such shareholder approval or the covenant not to,
among other things, solicit, authorize, initiate or encourage the submission of
any proposal, offer, tender offer or exchange offer from any person or entity
relating to an Acquisition Proposal; or (e) if there shall have occurred any
breach of any representation, warranty, covenant or agreement of RCB contained
in the Merger Agreement that would result in the failure to satisfy the closing
condition set forth in Section 8.3(a) of the Merger Agreement and such breach
cannot be or has not been cured within 30 days after the giving of a written
notice to RCB of such breach. The Merger Agreement may also be terminated by RCB
if there shall have occurred any breach of any representation, warranty,
covenant or agreement of BanPonce contained in the Merger Agreement that would
result in the failure to satisfy the closing condition set forth in Section
8.2(a) of the Merger Agreement and such breach cannot be or has not been cured
within 30 days after the giving of a written notice to BanPonce of such breach.
See "THE MERGER -- Termination of the Merger Agreement".
TERMINATION FEES
Fee Payable to BanPonce. Provided that BanPonce has not breached any of its
representations, warranties, covenants and agreements contained in the Merger
Agreement that would result in the failure to satisfy the closing condition set
forth in Section 8.2(a) of the Merger Agreement, or, in the event of any such
breach, that such breach cannot be cured within 30 days after the giving of a
written notice to BanPonce of such breach, the Merger Agreement provides that
RCB shall pay to BanPonce, and BanPonce shall be entitled to payment of, a fee
of $6,000,000 if (a) RCB participates in negotiations with, provides nonpublic
information to, or enters into any agreement with another party regarding an
Acquisition Proposal, (b) RCB's Board of Directors fails to recommend to
shareholders of RCB
8
<PAGE> 18
approval (or withdraws its recommendation of approval) of the Merger or (c)
RCB's Board of Directors modifies its recommendation of approval of the Merger
in a way adverse to the interests of BanPonce.
Fee Payable to RCB. If RCB terminates the Merger Agreement because the
Effective Date has failed to occur on or before December 31, 1997 (and the
failure to consummate the Merger by December 31, 1997 is not due to its action
or failure to act in breach of its obligations under the Merger Agreement), and
the Requisite Regulatory Approvals have not then been obtained, or there is in
place an injunction prohibiting consummation of the Merger by a Commonwealth or
federal court of competent jurisdiction, BanPonce shall pay to RCB, and RCB
shall be entitled to, a payment of a fee of $3,000,000, provided that such
failure to obtain Requisite Regulatory Approvals or the injunction is not due in
substantial part to a breach by RCB of a covenant or representation in the
Merger Agreement, and that at the time BanPonce would not be entitled to
terminate the Merger Agreement because of a breach by RCB of any representation,
warranty, covenant or agreement in the Merger Agreement that would result in the
failure to satisfy the closing condition set forth in Section 8.3(a) of the
Merger Agreement or, in the event of any such breach, such breach cannot be or
has not been cured within 30 days after the giving of a written notice to RCB of
such breach.
If RCB seeks to receive a fee, it shall not be entitled to terminate the
Merger Agreement prior to June 30, 1998 if a denial or refusal to deliver a
Requisite Regulatory Approval or the imposition of an injunction is being
appealed in good faith prior to such date by BanPonce.
AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be amended, but only by an instrument in writing.
Prior to the Effective Time, however, BanPonce shall be entitled to revise the
structure of the Merger and related transactions; provided that each of the
transactions comprising such revised structure shall (a) not subject any of the
shareholders of RCB to adverse tax consequences or reduce the amount of
consideration to be received by any such shareholders and (b) not result in any
material delay of the consummation of the transactions contemplated by the
Merger Agreement.
CERTAIN TAX CONSEQUENCES OF THE MERGER
The summary set forth below of certain Puerto Rico and United States
Federal income tax consequences of the Merger is qualified in its entirety by
the complete discussion under "THE MERGER--Certain Tax Consequences of the
Merger". Because the tax consequences of the Merger may vary depending on an
individual taxpayer's particular situation, shareholders are urged to consult
their own tax advisors to determine the particular tax consequences to them of
these transactions.
PUERTO RICO
It is intended that, under the income tax laws of Puerto Rico, the Merger
will be, with respect to BanPonce, Banco Popular and RCB, a tax-free
reorganization, with the consequence that (i) shareholders of RCB that exchange
RCB Common Stock solely for BanPonce Common Stock will not recognize gain or
loss as a result of the exchange, (ii) shareholders of RCB that exchange RCB
Common Stock solely for cash will be required to recognize the total amount of
gain realized on the exchange and (iii) the gain realized by shareholders of RCB
that exchange RCB Common Stock for cash and BanPonce Common Stock will generally
be required to be recognized in an amount that does not exceed the cash
received. To confirm the Puerto Rico income tax consequences of these
transactions, a ruling request (the "Ruling Request") was filed on March 3, 1997
with the Puerto Rico Department of the Treasury. No assurance can be given that
the Ruling Request will be granted by the Puerto Rico Department of the
Treasury. For a complete description of the Ruling Request and the possible tax
effects if the Ruling Request is denied, see "THE MERGER--Certain Tax
Consequences of the Merger--Puerto Rico Income Tax Consequences".
9
<PAGE> 19
UNITED STATES
The conversion of RCB Common Stock pursuant to the Merger generally
will be a taxable transaction for United States Federal income tax purposes and
may also be taxable under applicable state, local and other tax laws. In
general, for United States Federal income tax purposes, a shareholder of RCB
that is a U.S. Holder, (other than certain bona fide residents of Puerto Rico)
as defined below under "Certain Tax Consequences of the Merger-United States
Federal Income Tax Consequences", that exchanges RCB Common Stock for BanPonce
Common Stock or cash will recognize gain or loss for United States Federal
income tax purposes in an amount equal to the difference between the sum of the
cash and fair market value of the shares of BanPonce Common Stock received and
the shareholder's basis in the shares of RCB Common Stock surrendered. See
"Certain Tax Consequences of the Merger -- United States Federal Income Tax
Consequences".
BOARD OF DIRECTORS, MANAGEMENT AND OPERATIONS AFTER THE MERGER
Upon consummation of the Merger, Mr. Richard L. Carrion, Chairman,
President and Chief Executive Officer of BanPonce and Banco Popular, will
continue to serve as Chairman, President and Chief Executive Officer of BanPonce
and Banco Popular. Mr. J. Adalberto Roig, Jr., President of RCB, shall become a
director of BanPonce and Banco Popular and Chairman of the Investment Committee
of Banco Popular. See "THE MERGER--Board of Directors, Management and Operations
After the Merger". But for the addition of Mr. Roig, the directors and officers
of BanPonce and Banco Popular immediately prior to the Effective Date shall be
the directors and officers of BanPonce and the Surviving Bank until their
successors are elected and qualify.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; EFFECT ON CERTAIN KEY EMPLOYEES
As of February 28, 1997, RCB's directors, executive officers and their
affiliates beneficially owned 302,955 shares of RCB Common Stock representing
50.5% of the outstanding shares of RCB Common Stock. It is expected that all of
the 302,955 shares of RCB Common Stock (excluding shares subject to stock
options) beneficially owned by directors and executive officers of RCB and their
affiliates at the close of business on the Record Date will be voted for
approval of the Merger. For information with respect to the benefits payable to
key employees of RCB as a result of the Merger, see "THE MERGER--Effect on
Certain Key Employees".
As of February 28, 1997, none of BanPonce's directors, executive officers
or their affiliates beneficially owned any shares of RCB Common Stock.
APPRAISAL RIGHTS
Each holder of RCB Common Stock who dissents from the Merger and has
neither effectively withdrawn nor lost his right to the appraisal of his shares
may be entitled to the appraisal rights of dissenting shareholders under Section
15(d) of the Banking Law. A copy of Section 15(d) of the Banking Law is attached
hereto as Appendix C, and a summary of such section is included under "THE
MERGER--Rights of Dissenting RCB Shareholders".
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting.
DESCRIPTION OF BANPONCE CAPITAL STOCK
The authorized capital stock of BanPonce consists of 90,000,000 shares of
BanPonce Common Stock, par value $6.00 per share, including attached rights to
purchase Series A Participating Cumulative Preferred Stock ("Series A
Participating Preferred Stock"), and 10,000,000 shares of Preferred Stock
("BanPonce Preferred Stock"), issuable in
10
<PAGE> 20
one or more series with such terms and at such times and for such consideration
as the BanPonce Board of Directors determines. As of February 28, 1997, there
were 66,121,855 shares of BanPonce Common Stock issued and outstanding and
4,000,000 of BanPonce Preferred Stock designated as 8.35% Non-Cumulative Monthly
Income Preferred Stock, 1994 Series A (Liquidation Preference $25 per share)
("8.35% Series A Preferred Stock") issued and outstanding. Rights to purchase
Series A Participating Preferred Stock are not currently separable from the
shares of BanPonce Common Stock and are not currently exercisable.
The holders of BanPonce Common Stock are entitled to one vote per share for
each share held. Subject to the rights of holders of any outstanding shares of
BanPonce Preferred Stock in the event of liquidation, dissolution or
distribution of assets of BanPonce, the holders of BanPonce Common Stock are
entitled to share ratably in the assets of BanPonce legally available for
distribution to shareholders.
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS
The rights of RCB shareholders are governed by the Banking Law whereas
their rights as shareholders of BanPonce will be governed by the Puerto Rico
General Corporation Law (the "Puerto Rico GCL"). This change in applicable law
will in itself cause some changes in RCB shareholders' rights. See "COMPARISON
OF RIGHTS OF HOLDERS OF RCB COMMON STOCK AND BANPONCE COMMON STOCK".
SHAREHOLDER AGREEMENTS
On December 30, 1996, certain RCB shareholders (the "Signatory
Shareholders") signed shareholder agreements (the "Shareholder Agreements") with
BanPonce, in which each Signatory Shareholder agreed, among other things, to
vote all shares of RCB Common Stock owned by him, or otherwise in his control,
in favor of the Merger and the other transactions contemplated by the Merger
Agreement. Furthermore, the Shareholder Agreements require each Signatory
Shareholder to take all reasonable actions and make all reasonable efforts to
consummate the Merger and other transactions contemplated by the Merger
Agreement, and not to exercise any dissenter's rights. The Signatory
Shareholders collectively own 75% of the outstanding shares of RCB Common Stock.
RESALE OF BANPONCE COMMON SHARES
The BanPonce Common Shares have been registered under the Securities Act,
thereby allowing such shares to be traded freely and without restriction by
those holders of RCB Common Stock who receive such shares following consummation
of the Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act) of RCB or BanPonce. It is a condition to consummation of the
Merger that each holder of RCB Common Stock who is deemed by RCB to be an
"affiliate" of RCB shall enter into an agreement with BanPonce (an "Affiliate's
Agreement") providing, among other things, that such affiliate will not transfer
any BanPonce Common Shares received by such affiliate in the Merger, except in
compliance with the Securities Act. This Prospectus/Proxy Statement does not
cover any resales of BanPonce Common Shares received by "affiliates" of RCB.
11
<PAGE> 21
SELECTED HISTORICAL FINANCIAL INFORMATION
BANPONCE CORPORATION AND SUBSIDIARIES
The following table sets forth selected historical financial information for
BanPonce. This information should be read in conjunction with the historical
financial statements of BanPonce, including the notes thereto, incorporated
herein by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
(in thousands except per share
amounts)
Interest income $ 1,272,853 $ 1,105,807 $ 887,141 $ 772,136 $ 740,354
Interest expense 591,540 521,624 351,633 280,008 300,135
Net interest income 681,313 584,183 535,508 492,128 440,219
Provision for credit losses 88,839 64,558 53,788 72,892 97,633
Net interest income after
provision for credit losses 592,474 519,625 481,720 419,236 342,586
Noninterest income 205,472 173,338 141,303 125,180 124,504
Noninterest expense 541,919 486,833 448,231 413,046 367,715
Income before income taxes 256,027 206,130 174,792 131,370 99,375
Applicable income taxes 70,877 59,769 50,043 28,151 14,259
Cumulative effect of accounting
changes -- -- -- 6,185 --
Net income $ 185,150 $ 146,361 $ 124,749 $ 109,404 $ 85,116
Net income per common share(1) $ 2.68 $ 2.10 $ 1.84 $ 1.67 $ 1.40
Cash dividends per common
share(1) $ 0.69 $ 0.58 $ 0.50 $ 0.45 $ 0.40
ELECTED PERIOD-END BALANCES
(in thousands except per share
amounts)
Total assets $ 16,764,103 $ 15,675,451 $ 12,778,358 $ 11,513,368 $ 10,002,327
Total loans and loans held-for-sale 9,779,028 8,677,484 7,781,329 6,346,922 5,252,053
Investment and trading securities 4,905,150 5,191,992 3,796,807 4,048,380 3,698,850
Earning assets 15,484,454 14,668,195 11,843,806 10,657,994 9,236,024
Deposits 10,763,275 9,876,662 9,012,435 8,522,658 8,038,711
Term borrowings(2) 2,545,719 1,390,135 1,113,365 1,010,028 400,944
Shareholders' equity 1,262,532 1,141,697 1,002,423 834,195 752,119
Book value per share 17.39 15.81 13.74 12.75 11.52
SELECTED FINANCIAL RATIOS
Return on average common equity 16.15% 14.22% 13.80% 13.80% 12.72%
Return on average assets 1.14 1.04 1.02 1.02 0.89
Net interest margin(3) 4.77 4.74 5.06 5.50 6.11
Allowance for credit losses to
period-end loans and loans 1.90 1.94 1.98 2.10 2.11
held-for-sale
Nonperforming assets as a
percentage of period-end loans 1.58 1.79 1.38 1.75 2.52
and loans held-for-sale
</TABLE>
12
<PAGE> 22
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net charge-offs to average loans and
loans held-for-sale 0.78% 0.61% 0.52% 0.91% 1.58%
Average equity to average assets 7.33 7.58 7.57 7.42 7.02
Ratio of earnings to fixed charges
(excluding interest on deposits) 2.0 2.0 2.6 3.0 2.9
Ratio of earnings to fixed charges
(including interest on deposits) 1.4 1.4 1.5 1.5 1.3
</TABLE>
- ----------------------
(1) Adjusted to reflect the stock split effected in the form of a dividend on
July 1, 1996.
(2) Excludes Federal Funds that must be repaid in one day.
(3) On a taxable equivalent basis.
13
<PAGE> 23
ROIG COMMERCIAL BANK
The following table sets forth selected historical financial information for
RCB. This information should be read in conjunction with the historical
financial statements of RCB, including the notes thereto, appearing elsewhere in
this Prospectus/Proxy Statement. See Appendix D.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
(in thousands except per share amounts)
Interest income $ 66,962 $ 62,758 $ 55,681 $ 53,534 $ 55,656
Interest expense 32,675 31,009 24,148 22,458 25,910
Net interest income 34,287 31,749 31,533 31,076 29,746
Provision for credit losses 3,180 1,006 1,437 3,769 6,026
Net interest income after provision for credit
losses 31,107 30,743 30,096 27,307 23,720
Noninterest income 6,592 5,812 4,295 5,457 5,752
Noninterest expense 31,369 28,855 26,776 24,411 23,307
Income before income taxes 6,330 7,701 7,616 8,354 6,165
Income taxes (702) 426 359 1,150 1,094
Cumulative effect of accounting changes - - - 818 -
Net income (loss) 7,032 7,275 7,256 8,022 5,071
Net income per common share 11.72 12.12 12.09 13.37 8.45
Cash dividends per common share 3.50 3.25 3.10 3.20 2.40
SELECTED PERIOD-END BALANCES
(in thousands except per share
amounts)
Total assets $ 888,443 $ 814,522 $ 759,742 $ 716,468 $ 672,197
Total loans and loans held-for-sale 349,115 301,378 282,262 242,019 260,192
Investment and trading securities 459,076 453,031 418,587 402,315 333,089
Earning assets 841,401 764,619 709,649 676,384 629,581
Deposits 656,291 642,360 623,859 609,500 605,476
Term borrowings 156,850 97,000 78,926 52,000 18,000
Shareholders' equity 66,493 64,497 51,666 50,470 44,368
Book value per share 110.82 107.50 86.11 84.12 73.95
SELECTED FINANCIAL RATIOS
Return on average common equity 10.48% 12.46% 13.99% 15.07% 11.96%
Return on average assets 0.81 0.92 0.99 1.04 0.79
Net interest margin 3.92 3.97 4.29 4.51 4.53
Allowance for credit losses to period-end
loans and loans held-for-sale 1.62 1.70 2.05 2.04 1.47
Nonperforming assets as a percentage of
average assets 1.38 1.47 .87 1.35 1.44
Net charge-offs to average loans and leases 0.80 0.57 0.34 1.02 2.10
Average equity to average assets 7.67 7.31 7.07 6.93 6.46
Ratio of earnings to fixed charges (including
interest on deposits) 1.19 1.25 1.31 1.37 1.23
Ratio of earnings to fixed charges (excluding 1.80 2.49 3.43 7.58 6.48
interest on deposits)
Dividend payout 29.90 26.80 25.60 23.90 28.40
</TABLE>
14
<PAGE> 24
COMPARISON OF CERTAIN UNAUDITED PER SHARE DATA
The following unaudited information, adjusted for any stock dividends and
stock splits, reflects, where applicable, certain comparative per share data
related to book value, cash dividends paid, income and market value: (i) on a
historical basis for BanPonce and RCB; (ii) on a pro forma combined basis per
share of BanPonce Common Stock; and (iii) on an equivalent pro forma basis per
share of RCB Common Stock. Such pro forma information has been prepared assuming
(a) a 5.92593 Exchange Ratio for the book value per share, cash dividends per
share and net income per shares amounts; (b) a 5.92593 Exchange Ratio for the
market value per share amount on December 30, 1996, (c) a 5.63380 Exchange Ratio
for the market value per share amount on March 25, 1997 and (d) consummation of
the Merger on a purchase accounting basis as of January 1, 1996.
The 5.92593 Exchange Ratio used in the pro forma information for book value
per share, cash dividends per share and net income per share is based on $33.75,
the last reported sale price per share of BanPonce Common Stock on the Nasdaq
National Market on December 31, 1996. The 5.92593 Exchange Ratio used in the pro
forma information for market value per share on December 30, 1996 is based on
$33.75, the last reported sale price per share of BanPonce Common Stock on the
Nasdaq National Market on December 30, 1996, the date preceding the public
announcement of the Merger Agreement. The 5.63380 Exchange Ratio used in the pro
forma information for market value per share on March 25, 1997 is based on
$35.50, the last reported sale price per share of BanPonce Common Stock on the
Nasdaq National Market on March 25, 1997. The actual Exchange Ratio will depend
on the BanPonce Average Stock Price (which will not be known until shortly
before the Effective Date) and may be higher or lower than $33.75 or $35.50. The
pro forma information would be different if the BanPonce Average Stock Price
results in a different Exchange Ratio. Shareholders are urged to obtain current
quotations of the market price per share of BanPonce Common Stock.
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Merger, consummation of the Merger will
not affect BanPonce's historical results for the periods indicated. Pro forma
financial information is intended to show how the Merger might have affected
historical financial statements if the Merger had been consummated at an earlier
time. The pro forma financial information does not purport to be indicative of
the results that actually would have been realized had the Merger taken place at
the beginning of the applicable periods indicated, nor is it indicative of the
combined financial position or results of operations for any future periods.
The information shown below should be read in conjunction with the
historical financial statements of BanPonce and RCB, including the respective
notes thereto, and the documents incorporated herein by reference. See
"AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", and
Appendix D.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
BOOK VALUE PER SHARE:
Historical per share of:
BanPonce Common Stock....................................................... $ 17.59
RCB Common Stock............................................................ 110.82
Pro forma combined per share of BanPonce Common Stock (1)..................... 19.48
Equivalent pro forma per share of RCB Common Stock (2)........................ 115.44
</TABLE>
- ------------
(1) The pro forma combined book value per share of BanPonce Common Stock amount
represents the sum of the pro forma combined shareholders' equity amounts,
divided by pro forma combined period-end number of shares outstanding.
(2) The equivalent pro forma book value per share of RCB Common Stock amount
represents the pro forma combined book value per share of BanPonce Common
Stock amounts multiplied by a 5.92593 Exchange Ratio.
---------------------------
15
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
CASH DIVIDENDS PAID PER SHARE:
Historical per share of:
BanPonce Common Stock............................................... $ .69
RCB Common Stock.................................................... 3.50
Pro forma combined per share of BanPonce Common Stock (3)................. .70
Equivalent pro forma per share of RCB Common Stock (4).................... 4.15
</TABLE>
- ------------
(3) The pro forma combined cash dividends paid per share of BanPonce Common
Stock amount represents pro forma combined cash dividends paid on common
stock outstanding, divided by pro forma combined average number of common
shares outstanding, rounded to the nearest cent.
(4) The equivalent pro forma cash dividends paid per share of RCB Common Stock
amount represents pro forma combined per share of BanPonce Common Stock
amounts multiplied by a 5.92593 Exchange Ratio, rounded up to the nearest
cent. The current annualized dividend rate per share of BanPonce Common
Stock, based upon the most recent quarterly dividend rate of $.18 per share
payable on April 1, 1997, would be $.72. On an equivalent pro forma basis,
such current annualized BanPonce dividend per share of RCB Common Stock
would be $4.27, based on a 5.92593 Exchange Ratio, rounded to the nearest
cent. Any future BanPonce and RCB dividends are dependent upon their
respective earnings and financial conditions, government regulations and
policies and other factors.
---------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS:
Historical per share of:
BanPonce Common Stock........................................... $ 2.68
RCB Common Stock................................................ 11.72
Pro forma combined per share of BanPonce Common Stock (5)........... 2.75
Equivalent pro forma per share of RCB Common Stock (6).............. 16.30
</TABLE>
- ------------
(5) The pro forma combined income per share of BanPonce Common Stock amount
represents pro forma combined net income applicable to holders of BanPonce
Common Stock, divided by pro forma combined average number of shares of
BanPonce Common Stock outstanding.
(6) The equivalent pro forma income per share of RCB Common Stock amount
represents pro forma combined income per share of BanPonce Common Stock
amounts multiplied by a 5.92593 Exchange Ratio.
------------------
<TABLE>
<CAPTION>
MARKET VALUE PER SHARE(7): DECEMBER 30, 1996 MARCH 25, 1997
----------------- --------------
<S> <C> <C>
Historical per share of:
BanPonce Common Stock................................ $ 33.75 $ 35.50
Equivalent pro forma per share of RCB Common 200.00 200.00
Stock...............................................
</TABLE>
- ------------
(7) The equivalent pro forma market value per share of RCB Common Stock
December 30, 1996 represents the historical market value per share of
BanPonce Common Stock multiplied by a 5.92593 Exchange Ratio, rounded down
to the nearest one-eighth. The equivalent pro forma market value per share
of RCB Common Stock on March 25, 1997 represents the historical market
value per share of BanPonce Common Stock multiplied by a 5.63380
Exchange Ratio, rounded down to the nearest one-eighth. The BanPonce
historical market values per share represent the last reported sales price
per share of BanPonce Common Stock on the Nasdaq National Market: (i) on
December 30, 1996, the last business day preceding public announcement of
the execution of the Merger Agreement; and (ii) on March 25, 1997. There is
no established trading market for RCB Common Stock.
16
<PAGE> 26
Because the market price of BanPonce Common Stock is subject to
fluctuation, the market value of the BanPonce Common Shares that holders of RCB
Common Stock will receive upon consummation of the Merger may increase or
decrease prior to and after the receipt of such shares. RCB shareholders are
urged to obtain current market quotations for BanPonce Common Stock.
HISTORICAL MARKET PRICE AND DIVIDENDS DECLARED
ROIG COMMERCIAL BANK
On February 28, 1997, RCB had approximately 261 shareholders of record.
There is no established trading market for RCB Common Stock and it has been
subject to only limited trading. The shares are not listed on any exchange or
quoted on any automated quotation system and no institution makes a market in
the stock. The only sources of information available to RCB management relating
to sales of RCB Common Stock are (i) requests for registration of transfers of
shares of RCB Common Stock on the RCB stock register (which does not provide any
information as to the price at which the shares were sold); and (ii) statements
made by RCB shareholders to members of RCB's management (which by their nature
cannot be independently corroborated). During the period from January 1, 1995 to
February 28, 1997, there were 10 transfers of RCB Common Stock on the stock
registry books of RCB (other than transfers which RCB management knows to be the
result of gifts or inheritance), as follows:
<TABLE>
<CAPTION>
Number of
Date Shares Transferred
---- ------------------
<S> <C>
January 26, 1995 1,000
June 12, 1995 3,960
November 8, 1995 200
December 26, 1995 37
December 26, 1996 6,401
January 10, 1996 3
March 28, 1996 39
May 2, 1996 119
May 16, 1996 80
February 3, 1997 164
</TABLE>
This table may not reflect all trades. Based on statements made by RCB
shareholders to members of RCB management relating to some of these transfers,
RCB management believes that the price range at which some of these transfers
took place is between $45 and $60 per share. These prices are not necessarily
indicative of the fair market value of the stock of the time of the trade.
The Merger Agreement was publicly announced on December 31, 1996. The most
recent sale of RCB Common Stock prior to the announcement of the Merger
Agreement occurred on May 16, 1996 for 80 shares. Subsequent to the announcement
of the Merger Agreement, there was one sale of RCB Common Stock on February 3,
1997, wherein 164 shares were sold.
17
<PAGE> 27
RCB normally pays dividends on its common stock in June and December of
each year. The amount of the cash dividends paid during the two fiscal years
ended December 31, 1995 and 1996, was as follows:
<TABLE>
<CAPTION>
DIVIDEND AGGREGATE
DATE PER SHARE AMOUNT OF DIVIDEND
---- --------- ------------------
<S> <C> <C>
June 1995 $1.25 $ 750,000
December 1995 2.00 1,200,000
June 1996 1.25 750,000
December 1996 2.25 1,350,000
</TABLE>
18
<PAGE> 28
INFORMATION ABOUT THE MEETING AND THE PROXIES
GENERAL
This Prospectus/Proxy Statement is being furnished to holders of RCB Common
Stock in connection with the solicitation of proxies on behalf of the Board of
Directors of RCB, to be used at the Meeting to be held on May 8, 1997, at
10:00 a.m. at 63 Carreras Street, Humacao, Puerto Rico, and at any adjournment
thereof, to consider and take action upon the following proposals:
(i) the approval of the Merger Agreement and of the
transactions contemplated thereby, including the Merger;
(ii) the election of the directors who shall hold office
until the next General Regular Meeting of Shareholders;
(iii) the ratification of the appointment of Price Waterhouse
as RCB's independent auditors for the year ending December 31, 1997; and
(iv) the approval of the execution of certain indemnification
agreements entered into between RCB and its directors.
Each proxy solicited hereby, if properly signed and returned to RCB and not
revoked prior to its use, will be voted in accordance with the instructions
contained therein. If no contrary instructions are given, each proxy received
will be voted for the matters described below. Any shareholder giving a proxy
has the right to revoke it at any time before it is exercised by (i) filing with
the Secretary of the Board of Directors of RCB written notice thereof (Pedro
Rodriguez, 63 Carreras Street, Humacao, Puerto Rico 00979), (ii) submitting a
duly executed proxy bearing a later date, or (iii) by appearing in person at the
Meeting and giving the Secretary notice of his or her intention to vote in
person. Proxies solicited hereby may be exercised only at the Meeting and any
adjournment thereof and will not be used for any other meeting.
Each proxy solicited hereby also confers discretionary authority on the
Board of Directors of RCB to vote the proxy with respect to the approval of the
minutes of the last meeting of shareholders of RCB, the election of any person
as director if any nominee is unable to serve or for good cause will not serve,
matters incident to the conduct of the meeting, and such other matters as may
properly come before the Meeting. Management of RCB is not aware of any business
that may properly come before the Meeting other than those matters described
above in this Prospectus/Proxy Statement. However, if any other matters should
properly come before the Meeting, it is intended that proxies will be voted with
respect to those other matters in accordance with the judgment of the persons
voting the proxies.
The cost of solicitation of proxies will be borne by RCB. RCB will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy material to the beneficial
owners of shares of RCB Common Stock. In addition to solicitations by mail,
directors, officers and employees of RCB may solicit proxies personally or by
telephone without additional compensation.
19
<PAGE> 29
SHARES OF RCB COMMON STOCK OUTSTANDING AND VOTE REQUIRED FOR APPROVAL
Only holders of record of RCB Common Stock at the close of business on
April 8 (the "Record Date") may be permitted to vote at the Meeting. On the
Record Date, there were 600,000 shares of RCB Common Stock outstanding, and RCB
had no other class of equity securities outstanding.
The presence, either in person or by proxy, of at least a majority of the
issued and outstanding shares of RCB Common Stock 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 RCB as election judges for the Meeting. As
to the election of directors, the proxy card being provided by the Board of
Directors enables a shareholder 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 a 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 other nominee has expressly indicated in the
proxy that it does not have discretionary authority to vote on a particular
matter. Directors will be elected, the selection of the independent accountants
will be ratified and the indemnification agreements will be approved, by a
majority of the vote. There is no cumulative voting. Therefore, abstentions and
broker non-votes will not have an effect on the election of directors, the
ratification of the selection of the independent accountants of RCB or the
approval of the indemnification agreements.
Each share of RCB Common Stock is entitled to one vote on each of the
proposals to be considered at the Meeting. Action (other than action with
respect to the Merger Agreement) shall be taken by a majority vote of the total
votes present, either in person or by proxy. The affirmative vote of at least
three-quarters of the issued and outstanding shares of Common Stock is required
for approval of the Merger Agreement and the transactions contemplated
thereunder, including the Merger, pursuant to the Banking Law. The failure of a
holder of shares of RCB Common Stock to vote against the proposal to approve the
Merger Agreement will constitute a waiver of his appraisal rights. Each holder
of RCB Common Stock who dissents from the Merger by voting against the proposal
and has neither effectively withdrawn nor lost his right to the appraisal of his
shares may be entitled to the appraisal rights of dissenting shareholders under
Section 15(d) of the Banking Law. A copy of Section 15(d) of the Banking Law is
attached hereto as Appendix C, and a summary of such section is included under
"THE MERGER-Rights of Dissenting RCB Shareholders".
THE MERGER
The following information relating to the Merger is qualified in its
entirety by reference to the other information contained elsewhere in this
Prospectus/Proxy Statement, including the Appendices hereto, and the documents
incorporated herein by reference. A copy of the Merger Agreement (excluding the
exhibits and schedules thereto) is set forth in Appendix A to this
Prospectus/Proxy Statement and reference is made thereto for the complete terms
of the Merger. Shareholders are urged to read the Merger Agreement and each of
the other appendices hereto carefully.
EFFECTS OF THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time, RCB shall merge with and into Banco Popular, and the separate
existence of RCB shall cease. Banco Popular shall be the surviving bank in the
Merger (sometimes hereinafter referred to as the "Surviving Bank"), and the
separate corporate existence of Banco Popular, with all its rights, privileges
and franchises, shall continue unaffected by the Merger. The Merger shall be
pursuant to and have the effects specified in the Banking Law. The Charter and
Bylaws of Banco Popular, as in effect immediately prior to the Effective Date,
shall be the Charter and the Bylaws of the Surviving Bank until further amended
as provided therein.
20
<PAGE> 30
EFFECTIVE TIME; EFFECTIVE DATE
On a date selected by BanPonce, which shall be no later than the 30th day
following the satisfaction or waiver of the conditions set forth in Article 8 of
the Merger Agreement, the parties shall cause the Merger Agreement to be
properly filed in the office of the Secretary of State of Puerto Rico in
accordance with the Banking Law. The Merger shall become effective at the time
(the "Effective Time") the Merger Agreement is properly filed in accordance with
the Banking Law. The date on which the Effective Time shall occur is herein
referred to as the "Effective Date".
BACKGROUND OF THE MERGER; REASONS FOR THE MERGER
The Puerto Rico banking market is highly competitive, with some of the
largest United States and Canadian banks having significant presences. In
addition, in recent years, a number of Puerto Rican banks and other depository
institutions have been acquired by large banking organizations headquartered in
Spain. These outside organizations are many times larger than the Puerto
Rico-based depository institutions. As a consequence, such outside banking
organizations have become extremely influential in Puerto Rico and have exerted
significant competitive pressure in the banking industry. Moreover, several
years ago, most of the savings associations in Puerto Rico converted to banks.
In addition, a variety of economic, legislative and regulatory changes have
placed substantial pressure on operating margins in the banking industry
generally. Accordingly, in order to compete more effectively with these foreign
financial institutions and converted thrifts and to realize certain efficiencies
of scale, BanPonce and RCB recognized that there were potential benefits that
would result from a combination of Banco Popular, BanPonce's wholly owned
subsidiary, and RCB.
On a number of occasions in the past, BanPonce has indicated to RCB its
potential interest in merging with RCB. During 1996 BanPonce had informal
conversations with RCB regarding the possibility of a merger. Also during 1996,
RCB engaged in a substantial reorganization in order to improve earnings. To
assist RCB in the reorganization efforts, RCB engaged Alex Sheshunoff
Management Services as a consultant.
On November 4, 1996, BanPonce delivered a letter to Mr. J. Adalberto Roig,
Jr., the President of RCB, outlining a proposal for the merger of BanPonce and
RCB. The letter proposed a price of $166.66 per share of RCB, part in cash
and part in stock. The letter assumed RCB had 600,000 shares outstanding.
The proposal contemplated that all the employees of RCB would be retained by
Banco Popular, and that Mr. J. Adalberto Roig, Jr. would be elected to
BanPonce's and Banco Popular's Board of Directors, and would preside over
Banco Popular's Investment Committee.
Shortly after receipt of BanPonce's letter, RCB retained Alex Sheshunoff & Co.
Investment Banking ("Sheshunoff") in order to assist the Board of Directors of
RCB to evaluate BanPonce's proposal and RCB's strategic alternatives. RCB
also retained the law firm of McConnell Valdes in order to advise the Board of
Directors of RCB as to its fiduciary obligations to RCB's shareholders in the
context of the BanPonce proposal. On December 2, 1996, the Board of Directors
of RCB met to discuss BanPonce's proposal and the advice of its financial and
legal advisors. On December 3, 1996, RCB sent a letter to BanPonce indicating
that it was considering BanPonce's proposal.
On December 13, 1996, the RCB Board of Directors met again to continue its
consideration of BanPonce's proposal and the advice of its financial and legal
advisors. At such meeting, the RCB Board of Directors authorized Mr. J.
Adalberto Roig, Jr. and its financial and legal advisors to enter into
conversations with BanPonce with a view to reaching agreement as to a higher
price and certain terms of the proposed transaction. Several meetings and
telephone conferences were held between Mr. Roig and RCB's financial and legal
advisors and BanPonce's senior executives and legal advisors during the period
from December 13 to December 27, 1996.
The discussions led to approval of the terms of the Merger at meetings of
the Boards of Directors of BanPonce and Banco Popular and of the Board of
Directors of RCB, all on December 27, 1996. At such meeting, the RCB Board of
Directors authorized Mr. J. Adalberto Roig, Jr. to negotiate and execute on
behalf of RCB a merger agreement reflecting the terms of the Merger approved at
such meeting. Further negotiation of the Merger Agreement resulted in the
execution of the Merger Agreement on December 30, 1996, a copy of which is
attached as Appendix
21
<PAGE> 31
A to this Prospectus/Proxy Statement. On January 16, 1997, the Board
of Directors of RCB ratified the execution of the Merger Agreement by Mr. Roig.
Also on December 30, 1996, certain RCB shareholders (the "Signatory
Shareholders") signed shareholder agreements (the "Shareholder Agreements") with
BanPonce, in which each Signatory Shareholder agreed, among other things, to
vote all shares of RCB Common Stock owned by him, or otherwise in his control,
in favor of the Merger and the other transactions contemplated by the Merger
Agreement. Furthermore, the Shareholder Agreements require each Signatory
Shareholder to take all reasonable actions and make all reasonable efforts to
consummate the Merger and other transactions contemplated by the Merger
Agreement, and not to exercise any dissenter's rights. The Signatory
Shareholders collectively own 75% of the outstanding shares of RCB Common Stock.
The Boards of Directors of BanPonce and RCB have unanimously concluded that
the terms of the Merger are fair to the shareholders of their respective
companies and the Boards further concluded that consummation of the Merger would
be in the best interests of their respective companies and shareholders. The
exchange ratio of RCB Common Stock into BanPonce Common Stock and/or cash was
determined by the Boards of Directors of BanPonce, Banco Popular and RCB, and,
in the case of RCB, after consideration of the advice and recommendations of
Sheshunoff. All members of the Board of Directors of RCB have stated that they
intend to vote all shares of RCB Common Stock which they personally own in favor
of the Merger.
Numerous factors were considered by the Boards in approving and recommending
the terms of the Merger. These factors included information concerning the
financial structure, results of operations and prospects of Banco Popular and
RCB, the financial structure and prospects of the Surviving Bank, the
composition of the business of the two organizations, the outlook for both
organizations in the rapidly changing banking and financial services industry,
the historical and current market prices of BanPonce's common stock and such
data with respect to certain other financial institutions and certain other
companies whose securities are publicly traded, the relationship of the
consideration to be paid in the Merger to such market prices and the book value
and earnings per share of BanPonce and RCB, the financial terms of certain
other recent business combinations in the banking industry, the tax
consequences of the Merger to shareholders of RCB, and the views of their legal
advisors as to the likelihood of regulatory approval.
The Boards of Directors believe that the Merger will enable the Surviving
Bank to realize certain efficiencies of scale and to provide a wider and
improved array of financial services to customers. Additionally, the Boards of
Directors believe that the Merger will provide the Surviving Bank with the
market position and financial resources it needs to meet the competitive
challenges arising from recent and expected additional changes in the banking
and financial services industry.
THE BOARD OF DIRECTORS OF RCB UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT SHAREHOLDERS OF RCB VOTE FOR THE MERGER.
OPINION OF RCB'S FINANCIAL ADVISOR
GENERAL
RCB retained Sheshunoff based upon its qualifications, expertise and
reputation to provide its opinion of fairness of the consideration to be
received by RCB's shareholders in connection with the Merger. At the December
27, 1996 meeting of the Board of Directors of RCB, Sheshunoff rendered its oral
opinion to the Board that, as of such date, the consideration to be received
in the Merger Agreement was fair from a financial point of view to the holders
of RCB's common stock.
The full text of Sheshunoff's opinion, which sets forth, among other
things, assumptions made, procedures followed, matters considered, and
limitations on the review undertaken, is attached as Appendix B to this
Prospectus/Proxy Statement. RCB's shareholders are urged to read the Sheshunoff
opinion carefully and in its
22
<PAGE> 32
entirety. Sheshunoff's opinion is addressed to RCB's Board and does not
constitute a recommendation to any shareholder of RCB as to how such
shareholder should vote at the RCB Meeting.
In connection with rendering its written opinion dated as of the date of
this Prospectus/Proxy Statement, Sheshunoff, among other things: (1) analyzed
certain internal financial statements and other financial and operating data
concerning RCB prepared by the management of RCB; (ii) analyzed certain publicly
available financial statements, both audited and unaudited, of BanPonce and RCB,
including those included in their annual reports for the years ended December
31, 1996 and 1995, quarterly reports for the period ended September 30, 1996;
(iii) analyzed certain internal financial statements and other financial and
operating data concerning RCB prepared by the management of RCB; (iv) analyzed
certain financial projections of RCB prepared by Sheshunoff in coordination with
the management of RCB; (v) discussed certain aspects of the past and current
business operations, financial condition and future prospects of RCB with
certain members of its management; (vi) reviewed reported market prices and
historical trading activity of BanPonce's common stock; (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable
precedent transactions; (viii) reviewed the Merger Agreement; and (ix) performed
such other analyses as Sheshunoff deemed appropriate.
In connection with its review, Sheshunoff relied upon and assumed the
accuracy and completeness of all of the foregoing information provided to it or
made publicly available, and Sheshunoff has not assumed any responsibility for
independent verification of such information. With respect to the financial
projections, Sheshunoff assumed that they have been reasonably prepared on the
basis reflecting the best currently available estimates and judgments of the
future financial performance of RCB. However, the assumptions used to make
projections of future performance are not certain to become reality. If the
projections do not become reality, actual performance may vary substantially
from the projected results. Sheshunoff has not made any independent evaluation
or appraisal of the assets or liabilities of RCB, nor has Sheshunoff been
furnished with any such appraisals, and Sheshunoff has not examined any
individual loan files of RCB. Sheshunoff is not an expert in the evaluation of
loan portfolios for the purposes of assessing the adequacy of the allowance for
losses with respect thereto and has assumed that such allowances for each of the
companies are in the aggregate adequate to cover such losses. Sheshunoff's
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to Sheshunoff as of, the date of
the opinion.
In connection with rendering its opinion, Sheshunoff performed a variety of
financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Moreover, the evaluation of the fairness, from a
financial point of view, of the consideration to be received by the holders of
RCB based on the experience and judgment of Sheshunoff and not merely the result
of mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, Sheshunoff believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. The
ranges of valuations resulting from any particular analysis described below
should not be taken to be Sheshunoff's view of the actual value of RCB.
In performing its analyses, Sheshunoff made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of RCB. The analyses performed by
Sheshunoff are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. The analyses do not purport to be appraisals or to reflect the prices
at which a company might actually be sold. In addition, Sheshunoff's analyses
should not be viewed as determinative of RCB's Board of Directors' or
management's opinion with respect to the value of RCB.
The following is a summary of the analyses performed by Sheshunoff in
connection with its oral and written opinions:
23
<PAGE> 33
ANALYSIS OF SELECTED TRANSACTIONS
Sheshunoff performed an analysis of premiums paid in selected pending or
recently completed acquisitions of banking organizations in the nation which
sold for cash, a combination of cash and stock, or common stock with comparable
characteristics to the RCB and BanPonce transaction. Three sets of comparable
transactions were analyzed to ensure a thorough comparison.
The first set of guideline transactions specifically consisted of 11
mergers and acquisitions of banking organizations in the nation from January 1,
1996 to February 28, 1997 with the seller's total assets being less than $1.250
billion and greater than $750 million. The analysis yielded multiples of the
transactions' purchase price relative to: (i) book value ranging from 1.69 times
to 2.82 times with an average of 2.15 times and a median of 2.01 times (compared
with RCB's reported 1.91 times book value and 1.81 times book value at December
31, 1996); (ii) last 12 months earnings ranging from 12.7 times to 24.4 times
with an average of 17.3 times and a median of 16.6 times (compared with RCB's
reported 17.9 times earnings and 17.1 times earnings for the year ended December
31, 1996); and (iii) total assets ranging between 16.30% and 30.63% with an
average of 20.08% and a median of 17.82% (compared with RCB's reported 13.78% of
total assets).
The second set of guideline transactions specifically consisted of 80
mergers and acquisitions of banking organizations in the Southeast Region from
January 1, 1996 to February 28, 1997, without regard to asset size. The analysis
yielded multiples of the transactions' purchase price relative to: (i) book
value ranging from 1.01 times to 3.07 times with an average of 1.99 times and a
median of 1.98 times (compared with RCB's reported 1.91 times book value and
1.81 times book value at December 31, 1996); (ii) last 12 months earnings
ranging from 8.8 times to 24.8 times with an average of 17.3 times and a median
of 17.7 times (compared with RCB's reported of 17.9 times earnings and 17.1
times earnings for the year ended December 31, 1996); and (iii) total assets
ranging between 9.51% and 35.08% with an average of 19.47% and a median of
18.70% (compared with RCB's reported 13.78% of total assets.)
The third set of guideline transactions specifically consisted of 205
mergers and acquisitions of banking organizations in the nation from January 1,
1996 to February 28, 1997, without regard to asset size. The analysis yielded
multiples of the transactions' purchase price relative to: (i) book value
ranging from 1.14 times to 3.04 times with an average of 1.91 times and a median
of 1.89 times (compared with RCB's reported 1.91 times book value and 1.81 times
book value at December 31, 1996); (ii) last 12 months earnings ranging from 6.8
times to 24.8 times with an average of 16.2 times and a median of 16.2 times
(compared with RCB's reported 17.9 times earnings and 17.1 times earnings for
the year ended December 31, 1996); and (iii) total assets ranging between 7.32%
and 35.08% with an average of 18.03% and a median of 17.50% (compared with RCB's
reported 13.78% of total assets).
DISCOUNTED CASH FLOW ANALYSIS
Using discounted cash flow analysis, Sheshunoff estimated the present value
of the future stream of after-tax cash flows that RCB could produce through the
year 2001, under various circumstances, assuming that RCB performed in
accordance with the earnings/return projections of management. Sheshunoff
estimated the terminal value for RCB at the end of the period by applying
multiples of earnings ranging from 10 times to 14 times and then discounting the
cash flow streams, dividends paid to the shareholders (assuming all earnings in
excess of that required to maintain a tangible equity to tangible asset
percentage of 6.5% are paid out in dividends) and terminal value using discount
rates ranging from 12.0% to 16.0% chosen to reflect different assumptions
regarding the required rates of return of RCB and the inherent risk surrounding
the underlying projections. This discounted cash flow analysis indicated a range
of $153.58 per share to $213.11 per share.
Sheshunoff also performed a cash flow analysis using an estimated terminal
value for RCB at the end of the period by applying multiples of book value
ranging from 1.75 times to 2.00 times and then discounting the cash flow
streams, dividends paid to the shareholders (assuming all earnings in excess of
that required to maintain a tangible equity to tangible asset percentage of 6.5%
are paid out in dividends) and terminal value using discount rates ranging from
24
<PAGE> 34
12.0% to 16.0% chosen to reflect different assumptions regarding the required
rates of return of RCB and the inherent risk surrounding the underlying
projections. This discounted cash flow analysis indicated a range of $156.79
per share to $192.25 per share.
No company or transaction used in the comparable transaction analyses is
identical to RCB or the Merger. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of RCB and other factors
that could affect the public trading value of the companies to which they are
being compared. Mathematical analysis (such as determining the average or
median) is not in itself a meaningful method of using comparable transaction
data or comparable company data.
As part of its investment banking business, Sheshunoff is regularly engaged
in the valuation of securities in connection with mergers and acquisitions,
private placements, and valuations for estate, corporate and other purposes.
RCB's Board of Directors retained Sheshunoff based on its experience as a
financial advisor in mergers and acquisitions of financial institutions, and its
knowledge of financial institutions.
In addition, Sheshunoff was engaged by RCB on December 2, 1996 to serve as
RCB's exclusive financial advisor to undertake the following: (a) analyze the
value of RCB on a long term stand alone basis; (b) analyze the value of RCB in a
merger or acquisition transaction; (c) analyze strategies available to RCB to
enhance shareholder value under both stand alone and acquisition strategies; (d)
present to the Board of Directors of RCB its conclusions; (e) consult with the
Board of Directors during the course of this engagement with respect to the
strategies to enhance shareholder value of RCB; (f) assist in the structuring
and concluding of a sale of RCB; and (g) provide its opinion of the fairness,
from a financial point of view, of the consideration to be received in a
transaction. As compensation for its services in connection with the Merger, RCB
will pay Sheshunoff a retainer fee of $50,000 and a fee payable upon
consummation of the Merger determined as a percentage of the consideration
received by the RCB shareholders in excess of $100,000,000 as follows: (i) 2% of
any excess from $1 to $10,000,000, (ii) 3% of any excess from $10,000,001 to
$20,000,000 and (iii) 4% of any excess over $20,000,000. For example, in the
case of a $120,000,000 transaction, this fee would equal $500,000. RCB has also
agreed to reimburse Sheshunoff for its expenses.
In addition, since March 1995 Alex Sheshunoff Management Services has
provided professional services to RCB, including earnings assessments, product
profitability analysis, management change analysis, profit improvement analysis,
trust analysis and educational programs. For these services, from March 1995 to
November 1996, Alex Sheshunoff Management Services was paid total professional
fees of $1,555,868. Alex Sheshunoff Management Services is currently on a 3-year
retainer for $120,000 with RCB.
CONVERSION OF RCB COMMON STOCK
At the Effective Time, each share of RCB Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares held as
treasury stock of RCB and shares held directly or indirectly by BanPonce, except
shares ("Excluded Shares") held by BanPonce in a fiduciary capacity or in
satisfaction of a debt previously contracted) ("Outstanding Shares") shall
become and be converted into the right to receive, at the election of each
holder thereof, but subject to the election and allocation procedures described
below, either:
(A) a number of shares of BanPonce Common Stock equal to the
sum of (x) one-half of the Exchange Ratio (as defined below) and (y) the
ratio of $100 to the BanPonce Average Stock Price (as defined below) (the
"Per Share Stock Consideration"), or
(B) cash equal to the sum of (x) $100 and (y) the product of
(I) one-half of the Exchange Ratio and (II) the BanPonce Average Stock
Price (the "Per Share Cash Consideration" and, together with the Per Share
Stock Consideration, the "Consideration"),
25
<PAGE> 35
provided that if RCB declares an "Extraordinary Dividend" (as defined below)
and/or if RCB's shareholders' equity (adjusted as provided below) is less than
$66,100,000 (less the amount of the Extraordinary Dividend, if any) as of the
close of business on the date that is 15 calendar days preceding the Effective
Date (the amount, if any, by which RCB's shareholders' equity is less than
$66,100,000 (less the amount of the Extraordinary Dividend, if any), the "Equity
Shortfall"), the Per Share Stock Consideration and the Per Share Cash
Consideration shall be reduced as follows:
(X) the Per Share Cash Consideration shall be reduced by an
amount equal to (I) the sum of the Extraordinary Dividend (if any) and the
Equity Shortfall (if any), divided by (II) the number of Outstanding Shares
(the "Per Share Cash Reduction"); and
(Y) the Per Share Stock Consideration shall be reduced by an
amount equal to the Per Share Cash Reduction divided by the BanPonce
Average Stock Price.
All of the foregoing is subject to the proviso that (X) 50% of the
Outstanding Shares shall be converted into the right to receive the Per Share
Cash Consideration (such number of shares of RCB Common Stock, the "Cash
Number"); and (Y) 50% of the Outstanding Shares shall be converted into the
right to receive the Per Share Stock Consideration (such number of shares of RCB
Common Stock, the "Stock Number"). At the Effective Time, each share of RCB
Common Stock that, immediately prior to the Effective Time, is held as treasury
stock of RCB or held directly or indirectly by BanPonce, other than Excluded
Shares, shall by virtue of the Merger be canceled and retired and shall cease to
exist, and no exchange or payment shall be made therefor.
The term "Exchange Ratio" means $200 divided by the BanPonce Average Stock
Price provided that (x) if the BanPonce Average Stock Price is greater than
$37.40, the Exchange Ratio shall be 5.348 and (y) if the BanPonce Average Stock
Price is less than $30.60, the Exchange Ratio shall be 6.536. If BanPonce
effects a stock dividend, extraordinary dividend, reclassification,
recapitalization, split-up, combination, exchange of shares or similar
transaction, after the date hereof and before the Effective Time, the Exchange
Ratio shall be appropriately adjusted.
The term "BanPonce Average Stock Price" means the average of the last sale
price for BanPonce Common Stock quoted on the Nasdaq National Market as reported
in the Wall Street Journal (or, in the absence thereof, as reported in such
other source upon which BanPonce and RCB shall agree) for each of the ten
consecutive trading days on which BanPonce Common Stock is traded on the Nasdaq
National Market ending on, and including, the trading day which is two Business
Days prior to the Election Deadline (as defined below). The term "Business Day"
means any day on which depository institutions are generally open for business
in Puerto Rico and the Nasdaq National Market is generally open for business.
EXTRAORDINARY DIVIDEND
On or prior to the Effective Date, and subject to compliance with all laws,
regulations and regulatory policies, RCB may declare and pay an extraordinary
cash dividend not exceeding $20,000,000 (the "Extraordinary Dividend");
provided, however, that RCB shall not pay an Extraordinary Dividend unless RCB
shall have received a ruling from the Puerto Rico Treasury Department to the
effect that payment of such dividend in the amount proposed shall not disqualify
the Merger as a "reorganization" within the meaning of Section 1112(g)(1) of the
Puerto Rico Internal Revenue Code of 1944, as amended (the "Puerto Rico Code").
If any Extraordinary Dividend is paid, the Stock Number and the Cash Number
shall be adjusted upward and downward, respectively, by the same amount to the
extent necessary so that the sum of (i) the Extraordinary Dividend and (ii) the
product of the Cash Number and the Per Share Cash Consideration is not greater
than the product of (x) the Stock Number, (y) the BanPonce Average Stock Price
and (z) the Per Share Stock Consideration.
26
<PAGE> 36
SHAREHOLDERS' EQUITY
In computing RCB's shareholders' equity for purposes of conversion, (a)
RCB's shareholders' equity shall be defined as the sum of its common stock,
surplus and undivided profits, but excluding any unrealized gain or loss on
securities available for sale, (b) RCB's shareholders' equity shall reflect any
adjustments required as a result of the Price Waterhouse audit referred to in
Section 1.4 of the Merger Agreement, (c) computations shall be made in
accordance with Generally Accepted Accounting Principles as consistently
applied, (d) any dividend declared between the month end preceding the Election
Deadline and the Effective Date shall be deducted from RCB's shareholders'
equity and (e) any reduction in RCB's shareholders' equity resulting from any
reduction after December 30, 1996 in the value of RCB's securities portfolio
due to an increase in the general level of interest rates shall be excluded;
provided, however, that, to the extent that gains are taken on the sale of
securities in RCB's securities portfolio after December 30, 1996, RCB's
shareholders' equity shall be reduced to reflect unrealized losses in its
securities portfolio that exceed the amount of such unrealized losses as of
December 30, 1996.
ADDITIONAL AUDIT
Pursuant to the Merger Agreement, Price Waterhouse will conduct an audit in
accordance with generally accepted auditing standards of the statement of
condition of RCB as of the month end immediately preceding the Election Deadline
that is at least 30 days prior to the Election Deadline. Any adjustment to
shareholders' equity as a result of this audit could affect the Per Share Stock
Consideration and Per Share Cash Consideration if shareholders' equity is less
than $66,100,000 (less the amount of any Extraordinary Dividend). See
"--Conversion of RCB Common Stock".
FRACTIONAL SHARES
No fractional interests in shares of BanPonce Common Stock, and no
certificates representing such fractional interests, shall be issued upon the
surrender for exchange of certificates representing RCB Common Stock. In lieu of
any fractional share, BanPonce shall pay to each former holder of RCB Common
Stock who otherwise would be entitled to receive a fractional interest in a
share of BanPonce Common Stock an amount of cash (without interest) determined
by multiplying (i) the last sale price per share of BanPonce Common Stock on the
date of the Effective Time quoted on the Nasdaq National Market as reported in
the Wall Street Journal multiplied by (ii) the fractional interest to which such
holder would otherwise be entitled.
DISSENTING SHARES
If holders of shares of RCB Common Stock are entitled to demand appraisal
for their shares under the Banking Law, any shares of RCB Common Stock held by a
holder who has demanded appraisal of his shares and as of the Effective Date has
neither effectively withdrawn nor lost his right to such appraisal (the
"Dissenting Shares") shall not be converted in the manner set forth in
"--Conversion of RCB Common Stock", but the holder thereof shall only be
entitled to such rights as are granted by the Banking Law.
If after the Effective Date any holder of Dissenting Shares shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to appraisal, then 50% of such Dissenting Shares shall be converted into the Per
Share Stock Consideration and 50% of such Dissenting Shares shall be converted
into the Per Share Cash Consideration.
ELECTION PROCEDURES; ALLOCATION PROCEDURES
Subject to the allocation procedures described below, each record
holder of RCB Common Stock immediately prior to the Effective Time will be
entitled (i) to elect to receive BanPonce Common Stock for all or some of the
shares of RCB Common Stock ("Stock Election Shares") held by such record holder,
(ii) to elect to receive cash for all or some of the shares of RCB Common Stock
("Cash Election Shares") held by such record holder or (iii) to indicate that
such holder makes no such election for all or some of the shares of RCB Common
Stock ("No-Election
27
<PAGE> 37
Shares") held by such record holder; provided, that each record holder's
election to receive BanPonce Common Stock shall be honored by the Exchange
Agent, which shall be Banco Popular, up to 50% of the RCB Common Stock owned
by such record holder (such number of shares for which the election is so
honored are referred to as "Protected Election Shares"). Protected Election
Shares shall not be subject to the allocation procedures set forth below,
shall be deducted from the Stock Number and shall not be deemed Stock Election
Shares. All such elections (each, an "Election") shall be made on a form
designed for that purpose by BanPonce and reasonably acceptable to RCB (an
"Election Form"). Any shares of RCB Common Stock with respect to which the
record holder thereof shall not, as of the Election Deadline (as defined below),
have properly submitted to the Exchange Agent a properly completed Election Form
shall be deemed to be No-Election Shares. A record holder acting in different
capacities shall be entitled to submit an Election Form for each capacity in
which such record holder so acts with respect to each person for which it so
acts.
Not later than the 10th day after the Election Deadline, BanPonce shall
cause the Exchange Agent to effect the allocation among the holders of RCB
Common Stock of rights to receive the Per Share Stock Consideration or the Per
Share Cash Consideration in the Merger as follows:
If the number of Stock Election Shares is less than the Stock Number,
then (i) all Stock Election Shares shall be converted into the right to
receive the Per Share Stock Consideration, and (ii) the Exchange Agent
shall select (by random selection or by lot) from among the No-Election
Shares a sufficient number of No-Election Shares such that the sum of
such number and the number of Stock Election Shares shall equal as
closely as practicable the Stock Number, and all such selected shares
("Stock-Selected No-Election Shares") shall be converted into the right
to receive the Per Share Stock Consideration, provided that if the sum
of all No-Election Shares and Stock Election Shares is less than the
Stock Number, all No-Election Shares shall be converted into the right
to receive the Per Share Stock Consideration and thereby become
StockSelected No-Election Shares.
If the sum of Stock Election Shares and No-Election Shares is less than
the Stock Number, the Exchange Agent shall convert (by the method of
pro rata conversion described below), a sufficient number of Cash
Election Shares into Stock Election Shares ("Converted Cash Election
Shares") such that the sum of Stock Election Shares, No-Election Shares
and Converted Cash Election Shares equals as closely as practicable the
Stock Number, and all Converted Cash Election Shares shall be converted
into the right to receive the Per Share Stock Consideration, and any
No-Election Shares and the Cash Election Shares that are not
Stock-Selected No-Election Shares or Converted Cash Election Shares (as
the case may be) shall be converted into the right to receive the Per
Share Cash Consideration.
If the number of Stock Election Shares is greater than the Stock
Number, then all Cash Election Shares and No-Election Shares shall be
converted into the right to receive the Per Share Cash Consideration,
and the Exchange Agent shall convert (by the method of pro rata
conversion described below) a sufficient number of Stock Election
Shares into Cash Election Shares ("Converted Stock Election Shares")
such that the remainder of Stock Election Shares (before such
conversion) less Converted Stock Election Shares equals as closely as
practicable the Stock Number, and all Converted Stock Election Shares
shall be converted into the right to receive the Per Share Cash
Consideration, and the Stock Election Shares which are not Converted
Stock Election Shares shall be converted into the right to receive the
Per Share Stock Consideration.
If the number of Stock Election Shares equals the Stock Number, then
all Stock Election Shares shall be converted into the right to receive
the Per Share Stock Consideration and all Cash Election Shares and
No-Election Shares shall be converted into the right to receive the Per
Share Cash Consideration.
In the event the Exchange Agent is required to convert Cash Election
Shares into Stock Election Shares, the election by each holder of Cash
Election Shares shall be converted on a pro rata basis into Cash
Election Shares and Stock Election Shares, with the Stock Election
Shares to be equal to the product of (x) the number of such holder's
Cash Election Shares before such conversion and (y) the fraction in
which the total number
28
<PAGE> 38
of Converted Cash Election Shares comprises the numerator and the total
number of Cash Election Shares before such conversion comprises the
denominator. In the event the Exchange Agent is required to convert
Stock Election Shares into Cash Election Shares, the election by each
holder of Stock Election Shares shall be converted on a pro rata basis
into Stock Election Shares and Cash Election Shares, with the Cash
Election Shares to be equal to the product of (x) the number of such
holder's Stock Election Shares before such conversion and (y) the
fraction in which the total number of Converted Stock Election Shares
comprises the numerator and the total number of Stock Election Shares
before such conversion comprises the denominator.
Notwithstanding the foregoing, a person who immediately prior to
the Effective Time, owned (for purposes of the Puerto Rico Code), 1% or
more of the outstanding shares of RCB Common Stock and who does not
elect to receive Per Share Cash Consideration for all his shares, shall
deliver a written agreement, in a form reasonably acceptable to
BanPonce, containing customary representations to the effect that such
holder has no present intention to sell, exchange or otherwise dispose
of such shares of BanPonce Common Stock to be received in exchange for
such shares of RCB Common Stock, and if such holder shall not deliver
such a written agreement, in a form reasonably acceptable to BanPonce,
at the election of BanPonce such person shall instead receive the Per
Share Cash Consideration with respect to such shares, regardless of the
election (or lack thereof) made by such person in its Election Form,
and, if BanPonce exercises such election, the Cash Number shall be
reduced by the number of shares of RCB Common Stock that were owned by
such person immediately prior to the Effective Time.
Not later than the 25th business day prior to the anticipated Effective
Date or such other date as the parties may agree in writing (the "Mailing
Date"), BanPonce shall mail an Election Form and a letter of transmittal to each
person that was a holder of record of RCB Common Stock immediately prior to the
Mailing Date. To be effective, an Election Form must be properly completed,
signed and actually received by the Exchange Agent not later than 5:00 p.m.,
Commonwealth time, on the Effective Date (which will be not earlier than the
20th day after the Mailing Date) or such later date as may be agreed by BanPonce
and RCB (the "Election Deadline") and accompanied by the certificates formerly
representing all the shares of RCB Common Stock ("Old Certificates") as to which
the Election is being made (or an appropriate guarantee of delivery by an
eligible organization). BanPonce shall have reasonable discretion, which it may
delegate in whole or in part to the Exchange Agent, to determine whether
Election Forms have been properly completed, signed and timely submitted or to
disregard defects in Election Forms; such decisions of BanPonce (or of the
Exchange Agent) shall be conclusive and binding. Neither BanPonce nor the
Exchange Agent shall be under any obligation to notify any person of any defect
in an Election Form submitted to the Exchange Agent. The Exchange Agent and
BanPonce shall also make all conversion election and allocation computations.
ADDITIONAL EXCHANGE PROCEDURES
An "Affiliate" of RCB (as that term is used in Rule 145 under the
Securities Act of 1933, as amended) shall not be entitled to receive any
Consideration until such Affiliate shall have duly executed and delivered an
appropriate agreement described in Section 7.10 of the Merger Agreement.
At and after the Effective Time, each Old Certificate, and each share
of RCB Common Stock represented thereby, shall represent for all purposes only
the right to receive Consideration as provided in the Merger Agreement, and
nothing else. If any Consideration is to be issued to a person other than the
registered holder of the shares of RCB Common Stock formerly represented by the
Old Certificate or Certificates surrendered with respect thereto, it shall be a
condition to such issuance that the Old Certificate or Certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such issuance shall pay to the Exchange
Agent any transfer or other taxes required as a result of such issuance to a
person other than the registered holder of such shares of RCB Common Stock or
shall establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not payable.
At and after the Effective Time, there shall be no further registration
or transfers of shares of RCB Common Stock, and the stock ledgers of RCB shall
be closed. After the Effective Time, Old Certificates presented to the
29
<PAGE> 39
Surviving Bank for transfer shall be canceled and exchanged for the
Consideration provided for, and in accordance with the procedures set forth,
in Article 1 of the Merger Agreement.
After the first anniversary of the date of the Effective Time, any
former holders of RCB Common Stock who have not delivered Old Certificates to
the Exchange Agent prior to that time shall thereafter look only to BanPonce for
the Consideration in respect of any shares of RCB Common Stock formerly
represented by such Old Certificates.
None of the Surviving Bank, BanPonce and the Exchange Agent shall be
liable to any former holder of RCB Common Stock for any securities delivered or
any cash paid to a public official pursuant to applicable escheat or abandoned
property laws or for any securities or cash retained by any of them as permitted
by any such law.
No dividends or other distributions with respect to Consideration shall
be paid to the holder of any unsurrendered Old Certificates until such Old
Certificates are surrendered. Upon such surrender, there shall be paid, without
interest, to the person in whose name any Per Share Stock Consideration is
registered, all dividends and other distributions payable in respect of such
securities on a date subsequent to, and in respect of a record date after, the
Effective Time. No interest will be paid or accrued on the Per Share Cash
Consideration or the cash paid in lieu of fractional shares.
In the event that any Old Certificate shall have been lost, stolen or
destroyed, the Exchange Agent shall pay in respect of such lost, stolen or
destroyed certificate, upon the making of an affidavit of that fact by the
holder thereof, the Consideration as may be provided pursuant to this Agreement;
provided, however, that BanPonce may, in its discretion and as a condition
precedent to the payment thereof, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such sum as it may direct as
indemnity against any claim that may be made against BanPonce, Banco Popular,
RCB, the Exchange Agent or any other party with respect to the certificate
alleged to have been lost, stolen or destroyed.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement each of BanPonce and RCB makes representations
and warranties to the other regarding, among other things, (i) its corporate
organization and existence; (ii) its capitalization; (iii) its corporate power
and authority to enter into, and its due authorization, execution and delivery
of, the Merger Agreement; (iv) the Merger Agreement not violating its charter
and bylaws, applicable law and any agreements; (v) required governmental
approvals; (vi) timely filing of required regulatory reports; (vii) its
financial statements; (viii) the absence of any event since September 30, 1996
having or reasonably likely to have a Material Adverse Effect; (ix) its
compliance with applicable law; and (x) the information relating to it contained
in this Prospectus/Proxy Statement. In the case of RCB only, it makes
representations and warranties to BanPonce regarding, among other things, (i)
absence of undisclosed liabilities; (ii) environmental matters; (iii) employee
benefit plans and related matters; and (iv) certain interest rate risk
management instruments.
Certain of the representations and warranties contained in the Merger
Agreement are subject to the condition that no party will be deemed to have
breached a representation or warranty as a consequence of the existence or
absence of any fact, condition, circumstance or event if such fact, condition,
circumstance or event (and/or the absence thereof), individually or taken
together with all other such facts, conditions, circumstances or events (and/or
the absence thereof), would not, or is not reasonably likely to, have a
"Material Adverse Effect". The term "Material Adverse Effect" means any fact,
condition, circumstance or event, the effect of which, individually or when
taken together with all other facts, conditions, circumstances or events (i) is
materially adverse to the business, financial condition, results of operations
or prospects of such party and its respective subsidiaries taken as a whole,
(ii) significantly and adversely affects the ability of either party to
consummate the transactions contemplated hereby or to perform its material
obligations hereunder, or (iii) enables any person to prevent the consummation
of the transactions contemplated hereby. Notwithstanding the above, no change in
the value of the investment portfolio of RCB caused by an increase in the
general level of interest rates or payments made pursuant to the terms of the
30
<PAGE> 40
severance agreements referred to in Section 7.19 of the Merger Agreement due to
death or incapacitation shall be deemed to be or to cause a Material Adverse
Effect.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, prior to the Effective Date, unless
BanPonce shall otherwise agree in writing or as otherwise expressly permitted by
the Merger Agreement, RCB has agreed, among other things, to (i) conduct its
business in the ordinary course on an arm's-length basis and in accordance, in
all material respects, with all applicable laws, rules and regulations and past
practices, (ii) use all reasonable efforts to preserve intact in all material
respects its business organization as a whole and the goodwill of RCB and to
keep available the services of its officers and employees as a group and
preserve intact material agreements, and (iii) confer on a regular and frequent
basis with representatives of BanPonce, as reasonably requested by BanPonce, to
report on operational matters and the general status of ongoing operations.
Pursuant to the Merger Agreement, prior to the Effective Date, unless RCB shall
otherwise agree in writing, or as otherwise expressly permitted by the Merger
Agreement, BanPonce has agreed to refrain from taking any action that would
materially and adversely affect the ability of either BanPonce or RCB to obtain
any Requisite Regulatory Approvals or to perform its covenants and agreements
under the Merger Agreement in all material respects and to consummate the
Merger.
In addition, prior to the Effective Date, unless BanPonce shall
otherwise agree in writing or as otherwise permitted by the Merger Agreement,
RCB has agreed in the Merger Agreement that it will not, among other things,
directly or indirectly (i) amend or propose to amend its Charter or Bylaws; (ii)
issue or sell any of its equity securities, Voting Debt, securities convertible
into or exchangeable for its equity securities, warrants, options or other
rights to acquire its equity securities, or any bonds or other securities,
except deposit and other bank obligations in the ordinary course of business;
(iii) redeem, purchase, acquire or offer to acquire any shares of capital stock
of RCB or other securities of RCB; (iv) split, combine or reclassify any
outstanding shares of capital stock of RCB, or declare, set aside or pay any
dividend or other distribution payable in cash, property or otherwise with
respect to shares of capital stock of RCB, except (A) the Extraordinary Dividend
and (B)(x) if the Effective Date is on or before June 30, 1997, immediately
prior to the Effective Date RCB may pay a cash dividend on each share of RCB
Common Stock equal to the product of $1.625 and the ratio of the number of days
between December 31, 1996 and the Effective Date over 182 and (y) if the
Effective Date is after June 30, 1997 and on or before December 31, 1997, on
June 30, 1997 RCB may pay a cash dividend of $1.625 on each share of RCB Common
Stock and, immediately prior to the Effective Date, RCB may pay a cash dividend
on each share of RCB Common Stock equal to the product of $1.625 and the ratio
of the number of days between June 30, 1997 and the Effective Date over 183;
provided that, such amounts shall not exceed 30% of RCB's net income during the
applicable period; (v) borrow any amount or incur or become subject to any
material liability, except borrowings and liabilities incurred in the ordinary
course of business, but in no event will RCB enter into any long-term borrowings
with a term greater than one year, without prior consultation with BanPonce;
(vi) discharge or satisfy any material lien or encumbrance on the properties or
assets of RCB or pay any material liability, except in the ordinary course of
business; (vii) sell, assign, transfer, mortgage, pledge or subject to or permit
to be subject to any lien or other encumbrance any of its assets with an
aggregate market value in excess of $50,000, except (x) in the ordinary course
of business, (y) liens and encumbrances for current property taxes not yet due
and payable and (z) liens and encumbrances which do not materially affect the
value of, or interfere with the past or future use or ability to convey, the
property subject thereto or affected thereby; (viii) cancel any material debt or
claims or waive any rights of material value, except in the ordinary course of
business; (ix) acquire (by merger, exchange, consolidation, acquisition of stock
or assets or otherwise) any corporation, partnership, joint venture or other
business organization or division or material assets or deposits thereof, or
assets or deposits, except in satisfaction of a debt previously contracted in
good faith; or (x) other than as set forth on Schedule 3.10 of the Merger
Agreement, make any single or group of related capital expenditures or
commitments therefor in excess of $50,000 or enter into any lease or group of
related leases with the same party which involves aggregate lease payments
payable of more than $50,000 for any individual lease or involves more than
$100,000 for any group of related leases in the aggregate.
31
<PAGE> 41
Pursuant to the Merger Agreement RCB has agreed that it will not,
directly or indirectly, enter into or modify any employment, severance or
similar agreements or arrangements with, or grant any bonuses, wage, salary or
compensation increases, or severance or termination pay to, or promote, any
director, officer, employee, group of employees or consultant or hire any
employee with a title of Vice President or above, other than bonuses, increases,
promotions or new hires in the ordinary course and in a manner consistent with
past practices. Furthermore, except as provided in Section 7.12 of the Merger
Agreement, RCB has agreed that it will not adopt or amend any bonus, profit
sharing, stock option, pension, retirement, deferred compensation or other
employee benefit plan, trust, fund, contract or arrangement for the benefit or
welfare of any employees, except as required by law and RCB will not grant any
stock options or restricted stock or similar equity awards.
Pursuant to the Merger Agreement RCB has agreed that it will not take
any action with respect to investment securities held or controlled by it
inconsistent with past practices, alter its investment portfolio duration or
practices as heretofore in effect or, without prior consultation with BanPonce,
take any action that (i) would be inconsistent with its past practices with
respect to purchasing or holding interest rate risk management instruments,
derivatives or other securities described in Section 3.19(a) of the Merger
Agreement or (ii) would have or could reasonably be expected to have a material
effect on RCB's asset/liability or interest sensitivity position.
NO SOLICITATION OF OTHER OFFERS
Pursuant to the Merger Agreement RCB has agreed that it will not, and
will cause its officers, directors, employees, representatives, agents and
affiliates not to solicit, authorize, initiate or encourage the submission of
any proposal, offer, tender offer or exchange offer from any person or entity
relating to any liquidation, dissolution, recapitalization, merger,
consolidation or acquisition or purchase of all or a material portion of the
assets or deposits of, or any equity interest in, RCB or other similar
transaction or business combination involving RCB (any of the foregoing, an
"Acquisition Proposal"), or, unless RCB shall have determined, after receipt of
a written opinion of counsel to RCB (a copy of which opinion shall be delivered
to BanPonce), that under the laws of Puerto Rico the Board of Directors of RCB
has a fiduciary duty to do so, (a) participate in any negotiations in connection
with or in furtherance of any of the foregoing or (b) permit any person other
than BanPonce and its representatives to have any access to the facilities of,
or furnish to any person other than BanPonce and its representatives any
non-public information with respect to, RCB in connection with or in furtherance
of any of the foregoing. RCB has agreed promptly to notify BanPonce if any
Acquisition Proposal, or any inquiry from or contact with any person with
respect thereto, is made, and to keep BanPonce informed on a timely basis as to
the status of such Acquisition Proposal, inquiry or contact.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Each party's obligation to effect the Merger is subject, among other
things, to the satisfaction, at or prior to the Effective Date of the following
conditions: (i) the Merger Agreement and the Merger shall have been approved by
the affirmative vote of the holders of 75% of the outstanding shares of RCB
Common Stock entitled to vote thereon; (ii) all regulatory approvals required to
consummate the transactions contemplated by the Merger Agreement shall have been
obtained and all statutory and regulatory waiting periods shall have expired
(all such approvals being referred to herein as the "Requisite Regulatory
Approvals"), and no Requisite Regulatory Approval shall have contained any
condition or restriction that would so materially and adversely affect the
economic or business benefits to BanPonce of the transactions contemplated by
the Merger Agreement that, had such condition or requirement been known,
BanPonce would not, in its reasonable judgment, have entered into the Merger
Agreement; (iii) no injunction or other order entered by a Commonwealth or
federal court of competent jurisdiction shall have been issued and remain in
effect which would prohibit the consummation of the transactions contemplated in
the Merger Agreement; (iv) there shall have been no law, statute, rule or
regulation, domestic or foreign, enacted or promulgated which would prohibit the
consummation of the transactions contemplated in the Merger Agreement; (v) the
Registration Statement shall have been declared effective and shall not be
subject to a stop order of the Commission, and, if the offer and sale of
BanPonce Common Stock in the Merger pursuant to the Merger Agreement is required
to be registered under
32
<PAGE> 42
any Commonwealth or state Blue Sky laws, the Registration Statement shall not
be subject to a stop order of a securities commission in any relevant
jurisdiction.
RCB's obligation to effect the Merger is also subject to the following
conditions: (i) the representations and warranties ofof the Merger Agreement
shall have been true and correct as of the date of the Merger Agreement, and
shall be true and correct as of the Effective Date as if made at and as of the
Effective Date, subject to Article 5 of the Merger Agreement; and BanPonce shall
in all material respects have performed each obligation and agreement and
complied with each covenant to be performed and complied with by it hereunder at
or prior to the Effective Time; (ii) BanPonce shall have furnished to RCB a
certificate of the Chief Executive Officer and Chief Financial Officer of
BanPonce, dated as of the Effective Date, certifying the truth and correctness
of BanPonce's representations and warranties set forth in Articles 2 and 4 of
the Merger Agreement; (iii) RCB shall have received either (a) a ruling from the
Puerto Rico Treasury Department or (b) the opinion of McConnell Valdes, dated
the Effective Date, to the effect that the Merger will be treated for Puerto
Rican income tax purposes as a reorganization within the meaning of Section
1112(g)(1) of the Puerto Rico Code, and that each of BanPonce, Banco Popular and
RCB will be a party to that reorganization within the meaning of Section
1112(g)(3) of the Puerto Rico Code; and (iv) RCB shall have received an opinion
letter, dated as of the Effective Date, addressed to RCB from counsel to
BanPonce, in customary form and subject to customary qualifications, as to the
validity of the BanPonce Common Stock being issued in the Merger.
The obligation of BanPonce and Banco Popular to effect the Merger is
also subject to the following conditions: (i) the representations and warranties
of RCB set forth in Articles 3 and 4 of the Merger Agreement shall have been
true and correct as of the date of the Merger Agreement, and such
representations and warranties shall be true and correct as of the Effective
Date as if made at and as of the Effective Date, subject to Article 5 of the
Merger Agreement, and RCB shall in all material respects have performed each
obligation and agreement and complied with each covenant to be performed and
complied with by it under the Merger Agreement at or prior to the Effective
Date; (ii) RCB shall have furnished to BanPonce a certificate of the Chief
Executive Officer and Chief Financial Officer of RCB, dated as of the Effective
Date, certifying the truth and correctness of RCB's representations and
warranties set forth in Articles 3 and 4 of the Merger Agreement; (iii) RCB
shall have furnished to BanPonce certain corporate documents as set forth in
Article 8.3(c) of the Merger Agreement; (iv) BanPonce shall have received an
opinion letter, dated as of the Effective Date, addressed to BanPonce from
McConnell Valdes, counsel to RCB, in customary form and subject to customary
qualifications, to the effect that, among other things, RCB has the corporate
power to consummate the transactions on its part contemplated by, and has taken
all requisite corporate action to authorize, the Merger Agreement; and (v)
BanPonce shall have received either (a) a ruling from the Puerto Rico Treasury
Department or (b) the opinion of Pietrantoni, Mendez & Alvarez, dated the
Effective Date, to the effect that the Merger will be treated for Puerto Rican
income tax purposes as a reorganization within the meaning of Section 1112(g)(1)
of the Puerto Rico Code, and that each of BanPonce, Banco Popular and RCB will
be a party to that reorganization within the meaning of Section 1112(g)(3) of
the Puerto Rico Code.
REGULATORY APPROVALS
Puerto Rico
Under the Banking Law, the Commissioner has all the supervisory powers
over commercial banks to carry out the policies contained in the Banking Law.
These powers include the issuance of rules and regulations, issuance of branch
and other permits, annual inspections and examinations, the levying and
collection of fines, the filing of certain reports by the banks and the approval
of certain actions and transactions.
1. Change of Control. Section 12 of the Banking Law requires the
prior approval of the Commissioner to obtain control of any bank organized
under the Banking Law.
In any transfer of voting and outstanding capital stock of any bank
organized under the laws of Puerto Rico to any person or entity that, upon
consummation of the transfer, will become the owner, directly or indirectly, of
more
33
<PAGE> 43
than 5% of the voting and outstanding capital stock of said bank, the
parties to the transfer shall inform the Commissioner of the details thereof at
least 60 days prior to the date said transfer is to be effected. The Banking Law
does not contain any provision allowing for the extension of such 60-day time
period. The transfer requires the approval of the Commissioner if it results
in a change of control of the bank. For the purposes of Section 12 of the
Banking Law, the term "control" means the power to, directly or indirectly,
direct or influence decisively the administration or the norms of the bank.
Pursuant to Section 12(d) of the Banking Law, as soon as the
Commissioner receives notice of a proposed transaction that may result in the
control or in a change of control of a bank, the Commissioner shall have the
duty to make the necessary investigations with respect to (1) the experience and
moral and financial responsibility of the person or entity that is acquiring the
control, (2) whether such experience and moral and financial responsibility
warrant the efficient functioning of the bank, and (3) whether the transfer of
the control of the bank jeopardizes the interests of the depositors, creditors
or shareholders of the bank.
The Commissioner shall issue authorization for the transfer of control
of the bank if the results of his investigations are in his judgment
satisfactory. The resolution of the Commissioner shall be final and
unreviewable.
2. Approval of the Merger. Section 15(b) of the Banking Law provides
that once the Merger Agreement is approved by seventy-five percent (75%) of the
shares of capital stock issued by each of the banking corporations to be merged,
the Merger Agreement shall be submitted to the Commissioner for approval or
disapproval. In making the determination, the Commissioner shall consider, among
other factors, the public interest.
The Commissioner shall serve notice of his determination by registered
mail within the term of 90 days from the date the Merger Agreement is submitted
to him for the appropriate determination if he disapproves the Merger. The
Banking Law does not contain any provision allowing for the extension of such
90-day time period. The Merger shall become effective upon filing the Merger
Agreement in accordance with the provisions of the Banking Law and the Puerto
Rico GCL. See "THE MERGER--The Effective Time".
BanPonce, Banco Popular and RCB will file an application with the
Commissioner under Sections 12 and 15(b) of the Banking Law for approval of the
Merger.
Federal Reserve
The Merger also requires the prior approval of the Federal Reserve
under Section 18(c) of the Federal Deposit Insurance Act, which is also known as
the Bank Merger Act (the "Bank Merger Act"). The Bank Merger Act requires that
the Federal Reserve take into consideration the financial and managerial
resources and future prospects of Banco Popular and RCB and the convenience and
needs of the communities to be served. The Bank Merger Act prohibits the Federal
Reserve from approving the Merger if such would result in a monopoly or would be
in furtherance of any combination or conspiracy to monopolize or to attempt to
monopolize the business of banking in any part of the United States, or if the
effect in any section of the country may be substantially to lessen competition
or to tend to create a monopoly, or if the Merger would in any other manner be
in restraint of trade, unless the Federal Reserve finds that the
anti-competitive effects of the Merger are clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience
and needs of the communities to be served. In addition, under the Community
Reinvestment Act of 1977, the Federal Reserve must take into account the record
of performance of Banco Popular in meeting the credit needs of the entire
community, including low- and moderate-income neighborhoods, served by Banco
Popular.
Under the Bank Merger Act, the Merger may not be consummated until the
30th calendar day following the date of Federal Reserve approval (during which
time the United States Department of Justice may challenge the Merger on
antitrust grounds), unless the Department of Justice agrees to a shorter period
of time, which in no event shall be less than 15 calendar days after the date of
Federal Reserve approval. The commencement of an antitrust
34
<PAGE> 44
action would stay the effectiveness of the Federal Reserve's approval unless a
court specifically orders otherwise. In any such action, the court would review
de novo the issues presented.
The Bank Merger Act provides for the publication of notice and public
comment on the application and interested parties may comment on or request a
hearing on the application. The granting of a hearing or the comments of third
parties could delay the Federal Reserve approval required for consummation of
the Merger. In addition, court challenges to the Federal Reserve approval could
delay consummation of the Merger.
On March 5, 1997, BanPonce filed an application with the Federal
Reserve pursuant to the Bank Merger Act. See "REGULATION AND SUPERVISION" for a
discussion of certain issues relating to the Federal Reserve application. There
can be no assurance that such regulatory agencies will approve the Merger, that
any such approvals will be received in a timely fashion or that such approvals
will not contain unacceptable conditions. There can also be no assurance that
the Department of Justice will not challenge the Merger, or if such a challenge
is made, as to the result thereof.
None of BanPonce, Banco Popular or RCB is aware of any other
governmental approvals or actions that are required for consummation of the
Merger (as currently structured), except as described above and except for the
tax ruling request filed with the Puerto Rico Department of the Treasury on
March 3, 1997. See "THE MERGER -- Certain Tax Consequences of the Merger". A
restructuring of the Merger could result in different approval requirements
being applicable. Should any other approval or action be required, it is
presently contemplated that such approval or action would be sought. There can
be no assurance that any such approval or action, if needed, could be obtained
and, if such approvals or actions are obtained, there can be no assurance as to
the timing thereof.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated by mutual agreement of BanPonce
and RCB. The Merger Agreement may also be terminated by either BanPonce or RCB:
(a) if the Effective Date is not on or before December 31, 1997 (unless the
failure to consummate the Merger by such date shall be due to the action or
failure to act of the party seeking to terminate the Merger Agreement in breach
of such party's obligations under the Merger Agreement) or (b) if the Merger
Agreement and the Merger are not duly approved by the shareholders of RCB at the
meeting (or any adjournment thereof) duly called and held for that purpose. The
Merger Agreement may also be terminated by BanPonce: (a) if RCB participates in
negotiations with, provides nonpublic information to, or enters into any
agreement with another party regarding an Acquisition Proposal; (b) if the RCB
Board of Directors fails to recommend to shareholders of RCB approval (or
withdraws its recommendation of approval) of the Merger; (c) if the RCB Board
modifies its recommendation of approval of the Merger in a way adverse to the
interests of BanPonce; (d) if there shall have occurred any breach of either the
covenant to call the Meeting as promptly as practicable or of the RCB Board to
recommend approval of the Merger Agreement and the Merger to the RCB
shareholders and to use its best efforts to obtain such shareholder approval or
the covenant not to, among other things, solicit, authorize, initiate or
encourage the submission of any proposal, offer, tender offer or exchange offer
from any person or entity relating to an Acquisition Proposal; or (e) if there
shall have occurred any breach of any representation, warranty, covenant or
agreement of RCB contained in the Merger Agreement that would result in the
failure to satisfy the closing condition set forth in Section 8.3(a) of the
Merger Agreement and such breach cannot be or has not been cured within 30 days
after the giving of a written notice to RCB of such breach. The Merger Agreement
may also be terminated by RCB if there shall have occurred any breach of any
representation, warranty, covenant or agreement of BanPonce contained in the
Merger Agreement that would result in the failure to satisfy the closing
condition set forth in Section 8.2(a) of the Merger Agreement and such breach
cannot be or has not been cured within 30 days after the giving of a written
notice to BanPonce of such breach.
TERMINATION FEES
Fee Payable to BanPonce. Provided that BanPonce has not breached any of
its representations, warranties, covenants and agreements contained in the
Merger Agreement that would result in the failure to satisfy the closing
35
<PAGE> 45
condition set forth in Section 8.2(a) of the Merger Agreement or, in the event
of any such breach, that such breach cannot be cured within 30 days after the
giving of a written notice to BanPonce of such breach, the Merger Agreement
provides that RCB shall pay to BanPonce, and BanPonce shall be entitled to
payment of, a fee of $6,000,000 if (a) RCB participates in negotiations with,
provides nonpublic information to, or enters into any agreement with another
party regarding an Acquisition Proposal, (b) RCB's Board fails to recommend to
shareholders of RCB approval (or withdraws its recommendation of approval) of
the Merger or (c) RCB's Board modifies its recommendation of approval of the
Merger in a way adverse to the interests of BanPonce.
Fee Payable to RCB. If RCB terminates the Merger Agreement because the
Effective Date has failed to occur on or before December 31, 1997 (and the
failure to consummate the Merger by December 31, 1997 is not due to its action
or failure to act in breach of its obligations under the Merger Agreement), and
the Requisite Regulatory Approvals have not then been obtained, or there is in
place an injunction prohibiting consummation of the Merger by a Commonwealth or
federal court of competent jurisdiction, BanPonce shall pay to RCB, and RCB
shall be entitled to, a payment of a fee of $3,000,000, provided that such
failure to obtain Requisite Regulatory Approvals or the injunction is not due in
substantial part to a breach by RCB of a covenant or representation in the
Merger Agreement, and that at the time BanPonce would not be entitled to
terminate the Merger Agreement because of a breach by RCB of any representation,
warranty, covenant or agreement in the Merger Agreement that would result in the
failure to satisfy the closing condition set forth in Section 8.3(a) of the
Merger Agreement or, in the event of any such breach, such breach cannot be or
has not been cured within 30 days after the giving of a written notice to RCB of
such breach.
If RCB seeks to receive a fee, it shall not be entitled to terminate
the Merger Agreement prior to June 30, 1998 if a denial or refusal to deliver a
Requisite Regulatory Approval or the imposition of an injunction is being
appealed in good faith prior to such date by BanPonce.
ACCOUNTING TREATMENT
Upon consummation of the Merger, BanPonce will account for the
acquisition of RCB using the purchase method of accounting.
EXTENSION AND WAIVER
At any time prior to the Effective Time and only by an instrument in
writing signed by it, any party to the Merger Agreement may extend the time for
the performance of any of the obligations or other acts of the other party or
waive compliance with any of the agreements of the other party or with any
conditions to its own obligations, in each case only to the extent such
obligations, agreements and conditions are intended for its benefit.
AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be amended, but only by an instrument in
writing. Prior to the Effective Time, however, BanPonce shall be entitled to
revise the structure of the Merger and related transactions; provided that each
of the transactions comprising such revised structure shall (a) not subject any
of the shareholders of RCB to adverse tax consequences or reduce the amount of
consideration to be received by any such shareholders and (b) not result in any
material delay of the consummation of the transactions contemplated by the
Merger Agreement.
BOARD OF DIRECTORS, MANAGEMENT AND OPERATIONS AFTER THE MERGER
Upon consummation of the Merger, Mr. Richard L. Carrion, Chairman,
President and Chief Executive Officer of BanPonce and Banco Popular, will
continue to serve as Chairman, President and Chief Executive Officer of BanPonce
and Banco Popular. Mr. J. Adalberto Roig, Jr., President of RCB, shall become a
director of BanPonce and Banco Popular and Chairman of the Investment Committee
of Banco Popular. But for the addition of Mr. Roig,
36
<PAGE> 46
the directors and officers of BanPonce and Banco Popular immediately prior to
the Effective Date shall be the directors and officers of BanPonce and the
Surviving Bank until their successors are elected and qualify.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of February 28, 1997, RCB's directors, executive officers and their
affiliates beneficially owned 302,955 shares of RCB Common Stock representing
50.5% of the outstanding shares of RCB Common Stock. It is expected that all of
the 302,955 shares of RCB Common Stock (excluding shares subject to stock
options) beneficially owned by directors and executive officers of RCB and their
affiliates at the close of business on the Record Date will be voted for
approval of the Merger.
As of February 28, 1997, none of BanPonce's directors, executive
officers or their affiliates beneficially owned any shares of RCB Common Stock.
EFFECT ON CERTAIN KEY EMPLOYEES
The Merger Agreement provides that with respect to certain key
employees identified in the Merger Agreement (the "Key Employees"), BanPonce
shall offer to enter into arrangements with the Key Employees to which, among
other things, (i) the Key Employees shall be employed by Banco Popular as
consultants with salaries consistent with their current salaries as set forth
in the Merger Agreement, pro rated for the number of months of service as
consultants, for the purpose of assisting with the integration of the business
of RCB following the Effective Date for such period of time as BanPonce deems
necessary or advisable up to a period of six months and (ii) such Key
Employees shall be entitled to a one-time severance payment as follows: Mr.
J. Adalberto Roig, Jr., $600,000; Mr. Julio Pietrantoni Blasini, $420,000; Mr.
Antonio Roig, $150,000; Mr. Eugenio Fontanes, $260,000; Mr. Felix Leon,
$360,000; and Mr. Miguel Morales, $93,000.
EFFECT ON EMPLOYEE BENEFITS
The Merger Agreement provides that as soon as is administratively
practicable after the Effective Date, BanPonce will take all reasonable action
so that employees of RCB will be generally eligible to participate in the
pension, medical, life insurance, severance, vacation, sick pay and similar
plans of Banco Popular on substantially the same terms and conditions as
employees of Banco Popular, and until such time, the applicable plans of RCB
shall remain in effect; provided, however, that for a period of two years from
the Effective Date, each employee of RCB will receive benefits under plans of
RCB or Banco Popular that in the aggregate are no less favorable than the
benefits currently provided to the employees of RCB. For the purpose of
determining eligibility to participate in such plans of Banco Popular, and the
vesting of benefits under such plans, but not for benefit accrual purposes,
Banco Popular shall cause such plans to give effect to years of service with
RCB, as if they were with Banco Popular.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES OF RCB
The Merger Agreement provides that from and after the Effective Date
BanPonce will indemnify, defend and hold harmless each person who is, or has
been or becomes prior to the Effective Date, an officer, director or employee of
RCB (the "Indemnified Parties") against all losses, claims, damages, costs,
expenses (including reasonable attorney's fees), liabilities or judgments or
amounts that are paid in settlement (which settlement shall require the prior
written consent of BanPonce, which consent shall not be unreasonably withheld)
of or in connection with any claim, action, suit, proceeding or investigation (a
"Claim") in which an Indemnified Party is, or is threatened to be made, a party
or a witness based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer or employee of RCB if
such Claim pertains to any matter or fact arising, existing or occurring prior
to the Effective Date (including, without limitation, the Merger and other
transactions contemplated by the Merger Agreement), regardless of whether such
Claim is asserted or claimed prior to, at or after the Effective Date (the
"Indemnified Liabilities") to the full extent permitted with respect to
officers, directors and employees of BanPonce under applicable Puerto Rico law
as of December 30, 1996 or as amended prior to the Effective Date and
37
<PAGE> 47
under RCB's Charter and Bylaws as in effect on December 30, 1996 (and BanPonce
shall pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted with respect
to officers, directors and employees of BanPonce under such law and under such
Charter or Bylaws, upon receipt of any undertaking required by such Charter,
Bylaws or applicable law). The obligations of BanPonce shall continue in full
force and effect, without any amendment thereto, for a period of five years from
the Effective Date; provided, however, that all rights to indemnification in
respect of any Claim asserted or made within such period shall continue until
the final disposition of such Claim.
From and after the Effective Date, the directors, officers and
employees of RCB who become directors, officers or employees of BanPonce or any
of its subsidiaries, except for the indemnification rights set forth above, will
have indemnification rights only with respect to events occurring after the
Effective Date and only to the extent that other directors, officers and
employees of BanPonce are entitled to indemnification for similar events under
the provisions of the Charter or similar governing documents of BanPonce and its
subsidiaries, as in effect from time to time after the Effective Date, as
applicable, and provisions of applicable law as in effect from time to time
after the Effective Date.
For a period of three years after the Effective Date, BanPonce will use
its best efforts to provide that portion of directors' and officers' liability
insurance that serves to reimburse officers and directors of RCB with respect
to claims against such officers and directors arising from facts or events which
occurred before the Effective Date of at least the same coverage and amounts,
and containing terms and conditions no less advantageous, as that coverage
currently provided by RCB; provided, however, that the annual premiums for such
coverage will not exceed 150% of the annual premiums currently paid by RCB for
such coverage; provided, further, that officers and directors of RCB may be
required to make application and provide customary representations and
warranties to BanPonce's insurance carrier for the purpose of obtaining such
insurance.
RIGHTS OF DISSENTING RCB SHAREHOLDERS
Pursuant to the Banking Law, holders of shares of RCB Common Stock may
demand payment from the Surviving Bank of the value of their shares instead of
receiving shares of BanPonce Common Stock. The appraisal rights of dissenting
shareholders are contained in Section 15(d) of the Banking Law, which is
attached hereto as Appendix C. A shareholder electing to make such a demand must
(i) not vote in favor of the Merger Agreement; (ii) record his opposition to the
Merger at the time of the Meeting or within twenty days thereafter; and (iii)
demand payment of the value of his shares. Such written objection or written
demand may be filed with the Secretary of RCB.
If the Merger is carried out, each dissenting shareholder of RCB will
be notified by mail of the Effective Date of the Merger Agreement. Such
shareholder shall within 60 days after the Effective Date and upon ten days'
written notice to RCB, petition the Superior Court of the Commonwealth of Puerto
Rico for the appointment of three appraisers who shall estimate and determine
the value of the shareholder's shares. Upon due appointment and the completion
of their valuation, the appraisers shall deliver to RCB and to such shareholder
if he demands it, a copy of their report. RCB shall pay the determined value and
the shareholder shall cease to be a shareholder of RCB, or to have any interest
therein. RCB will establish with its own funds an escrow account (the "Escrow
Account") with an amount sufficient to pay all claims of dissenting holders of
RCB Common Stock. Upon satisfaction of all claims of dissenting holders of RCB
Common Stock, any remaining amount held in escrow, together with any investment
income thereon and reduced by the amount of fees and expenses, if any, will be
transferred to the Surviving Bank. Expenses incurred in determining the value of
the shares of RCB Common Stock under these procedures will be paid from the
Escrow Account.
RESALE OF BANPONCE COMMON SHARES
The BanPonce Common Shares have been registered under the Securities
Act, thereby allowing such shares to be traded freely and without restriction by
those holders of RCB Common Stock who receive such shares following consummation
of the Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act) of RCB
38
<PAGE> 48
or BanPonce. It is a condition to consummation of the Merger that each holder
of RCB Common Stock who is deemed by RCB to be an "affiliate" of RCB shall
enter into an agreement with BanPonce (an "Affiliate's Agreement") providing,
among other things, that such affiliate will not transfer any BanPonce Common
Shares received by such affiliate in the Merger, except in compliance with the
Securities Act. This Prospectus/Proxy Statement does not cover any resales of
BanPonce Common Shares received by "affiliates" of RCB.
CERTAIN TAX CONSEQUENCES OF THE MERGER
The following is a general summary of certain Puerto Rico and United
States Federal income tax consequences of the Merger and does not discuss all
possible tax consequences that may be relevant to the shareholders of RCB in
light of each shareholder's particular circumstances and the special rules that
may be applicable to such shareholders. All shareholders should consult their
own tax advisors to determine the particular tax consequences to them of these
transactions.
In general (except as set forth below), individuals who are bona fide
residents of Puerto Rico during the entire taxable year in which the Merger
occurs and Puerto Rico corporations, partnerships, trusts and estates will not
be subject to U.S. Federal income tax on income or gain, if any, realized as a
result of the Merger and should therefore consult the discussion below under
"Puerto Rico Income Tax Consequences". Except as set forth in the next sentence,
U.S. citizens (other than bona fide residents of Puerto Rico during the entire
taxable year in which the Merger occurs) and U.S. corporations, partnerships,
trusts and estates generally will not be subject to Puerto Rico income tax on
income or gain, if any, realized as a result of the Merger and should therefore
consult the discussion below under "United States Federal Income Tax
Consequences". Aliens residing in Puerto Rico, as well as Puerto Rico
corporations, partnerships, trusts or estates, that hold shares of RCB in
connection with a U.S. trade or business should also consult the discussion
below under "United States Federal Income Tax Consequences", and aliens not
resident in Puerto Rico, U.S. corporations, partnerships, trusts or estates
engaged in a trade or business in Puerto Rico should also consult the discussion
below under "Puerto Rico Income Tax Consequences". All shareholders should
consult the discussions below under "U.S. Backup Withholding Requirements".
The discussion below is based, in the case of Puerto Rico income tax
consequences, on the Puerto Rico Internal Revenue Code of 1994, as amended (the
"Puerto Rico Code"), as interpreted by regulations and rulings issued by
the Puerto Rico Department of the Treasury and by judicial decisions, and, in
the case of United States Federal income tax consequences, on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal
Revenue Service rulings and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative
action. Any such changes may be retroactively applied in a manner that could
adversely affect holders of RCB Common Stock. The discussion may not be
applicable to RCB Common Stock acquired as compensation (including stock
acquired upon the exercise of options to acquire such stock). As discussed
under "Puerto Rico Income Tax Consequences" below, a ruling request was filed
on March 3, 1997 with the Puerto Rico Department of the Treasury relating to
the Puerto Rico income tax consequences of the Merger. With respect to the
discussion under "U.S. Federal Income Tax Consequences" below, shareholders
should note that this summary is not binding on the Internal Revenue Service
or the courts and that no ruling has been or will be sought from the Internal
Revenue Service as to the U.S. Federal income tax consequences of the Merger.
PUERTO RICO INCOME TAX CONSEQUENCES
It is intended that, under the income tax laws of Puerto Rico, the
Merger will be, with respect to BanPonce, Banco Popular and RCB, a tax-free
reorganization. To confirm the Puerto Rico income tax consequences of this
transaction, a ruling request was filed with the Puerto Rico Department of the
Treasury on March 3, 1997 (the "Ruling Request"). The Ruling Request requests a
ruling that BanPonce, Banco Popular and RCB will not recognize gain or loss as a
result of the Merger. With respect to the RCB shareholders that exchange RCB
Common Stock for BanPonce Common Stock and cash, the Ruling Request also
requests, among other things, rulings that:
39
<PAGE> 49
a. No gain or loss will be recognized by the RCB shareholders
upon the transfer of their shares of RCB Common Stock in
exchange for shares of BanPonce Common Stock.
b. Except as noted below, the RCB shareholders who receive cash
and BanPonce Common Stock in exchange for shares of RCB
Common Stock will recognize any gain realized in the exchange,
but not in excess of the amount of the cash received. Unless
the shares of RCB Common Stock were held primarily for sale to
customers in the ordinary course of the RCB shareholder's
trade or business, the gain recognized will constitute a
capital gain. In such case, if the shares of RCB Common Stock
were held by the RCB shareholder for more than six months
prior to the effective date of the Merger, the gain recognized
will be subject to a maximum tax of 20% in cases of RCB
shareholders who are individuals, estates or trusts, or of 25%
if the RCB shareholder is a corporation or partnership.
c. RCB shareholders who are individuals, estates or trusts, not
residents of Puerto Rico, or that are non-Puerto Rico
corporations or partnerships, will not be subject to Puerto
Rico taxes on any gain realized on the transfer of their
shares of RCB Common Stock provided they deliver their RCB
stock certificates to a New York office of Banco Popular,
unless the shareholder is an alien or a non-Puerto Rico
corporation or partnership and the gain is effectively
connected with the conduct of a Puerto Rico trade or business
by such shareholder.
d. The shares of BanPonce Common Stock received by the RCB
shareholders in connection with the Merger will have a tax
basis in the hands of each such shareholder equal to his or
her tax basis in the shares of RCB Common Stock exchanged
therefor, reduced by the amount of cash received and
increased by the amount of gain recognized in the exchange.
e. The holding period of the RCB shareholders in the shares of
BanPonce Common Stock received in connection with the Merger
will include the period during which they held their shares of
RCB Common Stock exchanged therefor.
Except as provided above, RCB shareholders that exchange RCB Common Stock solely
for cash will recognize the total amount of gain realized in the exchange.
No assurance can be given that the Ruling Request will be granted by
the Puerto Rico Department of the Treasury. If the Ruling Request is granted, it
will be subject to the fulfillment of various representations made, such as that
the shareholders of RCB receive RCB Common Stock representing in value at least
50% of the value of all the outstanding stock of RCB on the date the
reorganization takes place. If the Ruling Request were to be denied by the
Puerto Rico Department of the Treasury, among other consequences, the Merger may
fail to qualify as a tax-free reorganization under Puerto Rico income tax laws.
If the Merger fails to qualify as a tax-free reorganization, a shareholder of
RCB would recognize gain or loss for Puerto Rico tax purposes equal to the
difference between the sum of the cash and the fair market value of the shares
of BanPonce Common Stock received and the basis of the shares of RCB Common
Stock surrendered. Such gain or loss would be a capital gain or loss if the
shares of RCB Common Stock were held as a capital asset. In addition, if the
Merger fails to qualify as a tax-free reorganization, RCB would be subject to
Puerto Rico income tax on any appreciation in the value of its assets.
In addition to the above, the Puerto Rico Department of the Treasury
has the prerogative of granting the rulings sought in the Ruling Request
relating to the qualification of the transaction contemplated by the Merger
Agreement as a tax-free reorganization but denying other related rulings
requested in the Ruling Request.
40
<PAGE> 50
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States Federal income tax
consequences of the conversion of RCB Common Stock pursuant to the Merger. The
summary does not address the Federal income tax consequences of the Merger to
individuals who hold RCB Common Stock who are bona fide residents of Puerto
Rico during the entire taxable year in which the Merger occurs. Such holders
should consult the discussion above under "--Puerto Rico Income Tax
Consequences".
The conversion of RCB Common Stock pursuant to the Merger generally
will be a taxable transaction for United States Federal income tax purposes and
may also be taxable under applicable state, local and other tax laws. In
general, for United States Federal income tax purposes, a shareholder of RCB
that is a U.S. Holder, as defined below, that exchanges RCB Common Stock for
BanPonce Common Stock or cash or a combination thereof will recognize gain or
loss for United States Federal income tax purposes an amount equal to the
difference between the sum of the cash and fair market value of the shares of
BanPonce Common Stock received and the shareholder's basis in the shares of RCB
Common Stock surrendered. Generally such gain or loss will be long-term capital
gain or loss if the U.S. Holder's holding period for the shares of RCB Common
Stock surrendered exceeds one year and the U.S. Holder holds such shares as a
capital asset. For purposes of this discussion, a "U.S. Holder" is any
beneficial owner of RCB Common Stock that is (i) a citizen or resident of the
United States, (ii) a corporation organized under the laws of the United
States or any State or (iii) otherwise subject to United States Federal income
taxation on a net income basis in respect of a share of RCB Common Stock, and
a "Non-U.S. Holder" is any beneficial owner of RCB Common Stock that is not a
United States person for United States Federal income tax purposes.
A Non-U.S. Holder will generally not be subject to United States
Federal income tax in respect of gain recognized on the conversion of RCB Common
Stock pursuant to the Merger unless, in the case of a Non-U.S. Holder who is an
individual, such holder is present in the United States for 183 or more days in
the taxable year of the conversion and certain other conditions apply.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
The exchange of RCB Common Stock for BanPonce Common Stock or cash
pursuant to the Merger by a New York office of Banco Popular may be subject to
both United States backup withholding at a 31% rate and information reporting
unless the holder or beneficial owner certifies its non-United States status
under penalties of perjury, provides a taxpayer identification number in the
manner required by United States law and applicable regulations or otherwise
establishes an exemption. United States information reporting and backup
withholding generally will not apply to the exchange of RCB Common Stock for
BanPonce Common Stock or cash pursuant to the Merger outside the United States.
SHAREHOLDER AGREEMENTS
On December 30, 1996, certain RCB shareholders (the "Signatory
Shareholders") signed Shareholder Agreements with BanPonce, in which each
Signatory Shareholder agreed, among other things, to vote all shares of RCB
Common Stock owned by him, or otherwise in his control, in favor of the Merger
and the other transactions contemplated by the Merger Agreement. Furthermore,
the Shareholder Agreements require each Signatory Shareholder to take all
reasonable actions and make all reasonable efforts to consummate the Merger and
other transactions contemplated by the Merger Agreement, and not to exercise any
dissenter's rights. The Signatory Shareholders collectively own 75% of the
outstanding shares of RCB Common Stock.
41
<PAGE> 51
CERTAIN INFORMATION REGARDING RCB
RCB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
During 1996, the Federal Reserve Board maintained its monetary policy
of monitoring any sign of inflation. Economic indicators (jobless claims, gross
national product and the consumer price index) remained at reasonable levels and
the Federal Reserve Board's discount rate remained at 5.00% for most of 1996.
(The rate was 5.25% between February 1995 and January 1996.) RCB's prime
rate, which follows that of the fifty largest banks in the United States,
remained at 8.25% since February 1996, when it dropped from 8.50%.
In 1995 RCB adopted a five-year strategic plan. In accordance with this
plan, RCB was restructured in 1996 into six major areas: Commercial Lending,
Retail Banking, Operations, Finance, Human Resources and Credit Administration.
As part of the restructuring process, RCB offered its employees an early
retirement program in 1996, which had a cost of approximately $3.2 million, and
incurred technological and consulting expenses of approximately $700,000 during
the year.
The new structure permitted a more efficient response to customer
needs, resulting in an increase of $47.7 million, or 16%, in RCB's loan
portfolio during 1996. The loan categories that grew at the highest rates were
consumer loans, which increased by $25.5 million from $77.5 million in 1995 to
$103 million at December 31, 1996, and commercial loans, which increased by
$23.5 million from $143.5 million in 1995 to $167.0 million at December 31,
1996. This resulted in an increase in loan interest income of approximately $2.7
million in 1996.
Excess funds not lent to customers were mainly invested in U.S.
Government Agency Securities.
Net income for 1996 was $7.0 million. The provision for loan losses
increased from $1.0 million in 1995 to $3.2 million in 1996 as a result of a
larger loan portfolio and more charge-offs in a year where delinquency rates
registered record levels in Puerto Rico.
An income tax benefit of $702,000 was recorded in 1996. As a result of
changes in the Puerto Rico tax code, effective in 1996, RCB recognized a
deferred tax asset for the tax effect of the recapture of the allowance for loan
losses. The offsetting impact of the recapture on the current tax liability was
mitigated by a loss, for tax purposes, caused primarily by tax exempt income,
which resulted in a tax benefit for the year.
Total assets of RCB reached $888 million at December 31, 1996, an
increase of 9% over the 1995 level of $814 million. Most of the growth is
related to an increase in loans of $48 million and in money market investments
of $23 million.
Non-performing assets at December 31, 1996 increased to $12.1 million
from $11.7 million at December 31, 1995. On the other hand, the ratio of
non-performing assets to total assets declined from 1.44% at the end of 1995 to
1.36% at the end of 1996.
Net loan charge-offs during 1996 were $2.6 million, or 0.79% of average
loans, compared with $1.6 million, or 0.54% of average loans in 1995. As a
result of the growth in the loan portfolio and the increase in net charge-offs,
the provision for loan losses increased by $2.2 million, from $1.0 million in
1995 to $3.2 million in 1996. The allowance for loan losses also rose from
$5.2 million at December 31, 1995 to $5.7 million at December 31, 1996. The
allowance for loan losses represented 1.70% of loans and 44% of non-performing
assets at December 31, 1995, compared with 1.62% of loans and 47% of
non-performing assets, respectively, at December 31, 1996.
Total deposits were $656 million at December 31, 1996, compared with
$642 million at December 31, 1995. The most significant increase occurred in
non-interest bearing demand deposits, which increased by $14 million.
42
<PAGE> 52
At December 31, 1996, shareholders' equity of RCB was $66.5 million,
compared with $64.5 million at December 31, 1995. This growth was attributable
to the retention of earnings generated during the year. RCB's capital ratios
continue to exceed by a wide margin the regulatory guidelines for well
capitalized banks. At December 31, 1996, RCB's Tier 1 capital ratio was 14.89%,
compared with 16.64% at December 31, 1995. RCB's total risk-based capital ratio
was 16.14% in 1996, compared with 17.33% in 1995. RCB's leverage ratio was 7.61%
at December 31, 1996, compared with 7.94% at December 31, 1995.
RCB paid annual dividends of $3.50 per share on its common stock during
1996, compared with $3.25 in 1995 and $3.10 in 1994, respectively. The dividend
pay out ratio for 1996 was 29.9%, compared with 26.8% in 1995 and 25.6% in 1994.
The Federal Deposit Insurance Corporation ("FDIC") reduced the minimum
assessment rate in 1995 from 23 to 4 basis points when the Bank Insurance Fund
reached its statutory level. Effective on January 1, 1996, the FDIC assessment
rate was further reduced from 4 basis points to a minimum of $2,000 per year. On
the other hand, legislation in the U.S. Congress effective in January 1997 will
result in an additional insurance premium of approximately $100,000 for 1997.
See "SUPERVISION AND REGULATION -- FDIC Insurance Assessments".
In 1996, the U.S. Congress repealed Section 936 of the U.S. Internal
Revenue Code of 1986 ("Section 936"). Under Section 936, certain U.S. companies
operating in Puerto Rico were entitled to claim a credit against their federal
income taxes on account of interest income received from Puerto Rico banks,
including RCB, provided certain conditions were met. The terms of some of the
instruments pursuant to which Section 936 companies invest in RCB would permit
these Section 936 companies to request a prospective increase in the interest
rate of these instruments, in which case RCB would have the option to prepay the
instrument.
While the final impact of the repeal of Section 936 cannot be
determined at this time, the repeal could have an adverse effect on the general
economic condition of Puerto Rico. The repeal of Section 936 could also make it
necessary for RCB to consider using alternate sources of funding that, assuming
no change in general interest rate levels, would be more expensive than the
current cost of so-called "936 funds". RCB believes it would be able to replace
936 funds as a source of funds at an incremental cost, and that any such cost
would be unlikely to have a material adverse effect on its liquidity or the
results of its operations. In recent years, RCB has taken some steps to reduce
any potential adverse impact of the repeal of Section 936, such as obtaining
long-term Section 936 deposits and borrowings, diversifying its sources of
funding and increasing its available lines of credit with the Federal Home Loan
Bank and correspondent banks, as well as maintaining sufficient liquid assets
to cover potential prepayments of Section 936 deposits by RCB. RCB's total
financing from Section 936 sources, including both deposits and borrowings,
totaled $232 million, or 28% of total liabilities as of December 31, 1996.
EARNINGS ANALYSIS
RCB's net earnings for 1996 amounted to $7.0 million, compared with
$7.3 million in 1995 and $7.3 million in 1994. The reduction in net income in
1996 resulted from the following:
- RCB's reorganization cost of $3.9 million. This includes $3.2
million for the early retirement program and approximately
$700,000 in technological and consulting expenses.
- An increase in loan interest income of approximately $2.7
million as a result of a $48 million increase in loans.
- An increase in the loan loss provision of approximately $2.2
million due to the growth in the loan portfolio and an
increase in charge-offs. The latter was due to an increase in
bankruptcies and overall delinquency in Puerto Rico.
- An income tax benefit of $702,000 in 1996 compared to an
expense of $426,000 in 1995.
43
<PAGE> 53
- A revision of the service fee income structure in 1996 which
resulted in additional income of approximately $1.7 million.
TABLE A
INTEREST INCOME / EXPENSE AND AVERAGE BALANCES
(IN THOUSANDS)
<TABLE>
<Capiton>
1996 1995 1994
---------------------------- ---------------------------- ------------------------------
Income / Average Income / Average Income / Average
Expense Balance Yield Expense Balance Yield Expense Balance Yield
--------- --------- --------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME :
Loans $ 36,385 $ 328,234 11.09% $ 33,732 $ 296,644 11.37% $ 30,264 $ 266,442 11.36%
Investment Securities 28,782 470,276 6.12% 27,562 439,890 6.27% 23,756 403,464 5.89%
Interest Bearing Deposits in Other
Banks 42 1,438 2.92% 207 3,055 6.78% 798 9,742 8.19%
Securities Purchased with
Agreements to Resell 1,692 32,532 5.20% 1,106 18,596 5.95% 728 17,845 4.08%
Trading Securities 61 984 6.20% 151 1,163 12.98% 135 1,129 11.96%
--------- --------- ------ --------- --------- ------- --------- --------- -----
TOTAL $ 66,962 $ 833,464 8.03% $ 62,758 $ 759,348 8.26% $ 55,681 $ 698,622 7.97%
--------- --------- ------ --------- --------- ------- --------- --------- -----
INTEREST EXPENSE :
Non-interest bearing deposits ----- $ 62,260 ----- ----- $ 56.765 ---- ---- $ 50,630 ----
Savings Deposits $ 10,722 316,353 3.39% $ 11,210 313,852 3.57% $ 10,756 324,838 3.31%
Time Deposits 14,410 271,253 5.31% 14,943 271,150 5.51% 10,664 241,194 4.42%
Repurchase Agreements 2,666 55,077 4.84% 1,087 20,165 5.39% 384 10,271 3.74%
Other Borrowings 4,877 94,628 5.15% 3,769 72,909 5.17% 2,344 51,030 4.59%
--------- --------- ------ --------- --------- ------ --------- --------- -----
TOTAL $ 32,675 $ 799,571 4.09% $ 31,009 $ 734,841 4.22% $ 24,148 $ 677,963 3.56%
--------- --------- ------ --------- --------- ------ -------- ------- -----
NET INTEREST SPREAD 3.94% 4.04% 4.41%
===== ==== ====
NET INTEREST INCOME $ 34,287 $ 31,749 $ 31,533
========= ========= =========
</TABLE>
NET INTEREST INCOME
Net interest income is the main source of earnings for RCB. Net
interest income results from the interaction of changes in the balance and rates
earned on earning assets and paid on interest bearing liabilities. As further
discussed in the Asset/Liability Management section below, RCB's Funds
Management Committee closely monitors and manages the mix and maturity structure
of its assets and liabilities in order to maximize net interest income and
minimize interest rate risk.
For the year ended December 31, 1996, net interest income reached $34.3
million, $2.5 million higher than the $31.7 million reported in 1995, as shown
in Table A. In 1994, net interest income totaled $31.5 million. The increase in
net interest income in 1996 was a result of an increase in the loan portfolio,
which was possible due to the adoption of more efficient means to attract and
process customer applications. Period-end total loans increased by $48 million
in 1996 and $19 million in 1995. Loans, which provide a better yield than that
of the investment portfolio, represented 39% of total assets in 1996 versus 37%
in 1995 and 1994.
Average loans for the year ended December 31, 1996 were $328 million,
compared with $297 million in 1995 and $266 million in 1994. The increase in
loans was mainly in the areas of consumer lending, which increased by $25.5
million in 1996, and commercial lending, which increased by $23.5 million in
1996.
The average yield on loans decreased to 11.09% for the year ended
December 31, 1996, compared with 11.37% in 1995 and 11.36% in 1994. This
decrease is mainly due to a decrease in the prime rate of 0.25% at the beginning
of 1996, a more competitive market and changes in the loan portfolio
composition. Motor vehicle loans,
44
<PAGE> 54
which have a yield of 12.5%, decreased by $6 million from 1995 to 1996, while
commercial loans, which have a lower yield, increased by $23.5 million.
Investment securities, the largest component of earning assets,
increased $6 million in 1996, reaching $459 million in 1996, compared to $453
million in 1995 and $419 million in 1994.
The average yield on investment securities during 1996 was 6.12%,
compared with 6.27% in 1995 and 5.89% in 1994. The decrease from 1995 in the
average yield relates primarily to the repayment at maturity during 1995 of
higher yielding investment securities, the proceeds of which were reinvested
during a lower interest rate scenario. Average money market investment
securities increased $12 million during 1996. The increase relates to RCB's
preparation for the possible effects of the repeal of Section 936 discussed
above.
The yield on interest bearing deposits with other banks decreased to
2.92% in 1996, from 6.78% in 1995 and 8.19% in 1994, a 3.86% reduction for 1996.
This is a result of the repayment at maturity during 1995 and 1994 of long-term
deposits with yields in excess of 9.00%.
TABLE B
INTEREST VARIANCE ANALYSIS
FOR THE YEARS 1994 TO 1996
<TABLE>
<CAPTION>
1996 Vs. 1995 1995 Vs. 1994
Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In:
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities purchased under agreements to resell $ 829 $ (244) $ 585 $ 31 $ 347 $ 378
Time deposits with other banks................... (110) (55) (165) (547) (43) (590)
Investment securities............................ 1,905 (685) 1,220 2,145 1,661 3,806
Trading securities............................... (23) (67) (90) 4 12 16
Loans............................................ 3,592 (939) 2,653 3,431 36 3,467
------- ------- ------ ------- ------- ------
TOTAL INTEREST INCOME......................... 6,193 (1,990) 4,203 5,064 2,013 7,077
------- ------- ------ ------ ------- ------
Interest Expenses:
Savings and Other interest-bearing deposits...... 89 (577) (488) (364) 818 454
Time deposits.................................... 6 (540) (534) 1,324 2,955 4,279
Repurchase agreements............................ 1,882 (302) 1,580 370 332 702
Notes payable.................................... 1,125 (17) 1,108 1,004 421 1,425
TOTAL INTEREST EXPENSES....................... 3,102 (1,436) 1,666 2,334 4,526 6,860
------- ------- ------ ------ ------- ------
NINTEREST INCOME................................... $ 3,091 $ (554) $2,537 $ 2,730 $ (2,513) $ 217
======= ======= ====== ======= ======== =======
</TABLE>
On the liability side, average interest bearing liabilities increased
$59 million to $737 million in 1996, from $678 million in 1995 and $627 million
in 1994. The increase was due to a higher volume of repurchase agreements and
notes payable.
Average deposits reached $650 million in 1996, compared with $642
million in 1995 and $617 million in 1994. The category that contributed the most
to the $8 million increase in 1996 was non-interest bearing deposits, which rose
$5.5 million, averaging $62 million for 1996 due to a restructuring of deposit
products and new services added to commercial accounts.
The average cost of time deposits decreased 20 basis points, from 5.51%
in 1995 to 5.31% in 1996. Also, the average cost of other interest bearing
deposits decreased from 3.57% in 1995 to 3.39% in 1996. As a result of
45
<PAGE> 55
the change in the deposit pricing structure, the average cost of interest
bearing deposits decreased 19 basis points to 4.28% in 1996, as compared with
4.47% in 1995 and 3.78% in 1994. The increase in 1995 was the result of
general increases in interest rates during the year. The Federal Reserve Bank's
discount rate was 5.25% during February to December 1995 compared to 3.00% to
4.75% in 1994.
Due to the better rates in the market in 1996, RCB increased its
repurchase agreements and notes payable by $60 million, to $157 million in 1996,
compared with $97 million in 1995 and $60 million in 1994. The cost of funds of
these liabilities was 4.84% and 5.15% in 1996, compared to 5.39% and 5.17%,
respectively, in 1995.
SECURITIES AND TRADING GAINS
During 1996, RCB sold $119 million in investment securities available
for sale for a net gain of $554,000. In 1995, investment securities available
for sale of $111 million were sold, with a net gain of $1.2 million. In 1994,
such sales amounted to $25 million on which a gain of $836,000 was recognized.
Trading account activities for the year ended December 31, 1996
resulted in profits of $153,000, compared with profits of $454,000 in 1995 and a
loss of $24,000 in 1994. The reduction in profits in 1996 in both trading
account activities and investment securities available for sale is mainly due to
a less volatile economic environment in 1996 than in 1995.
OTHER OPERATING REVENUES
Other operating revenues, which consist primarily of service charges on deposit
accounts, credit card fees, other fee-based services and other operating
income, grew to $5.9 million in 1996 from $4.2 million in 1995, a 40% increase.
Other operating revenues increased $700,000 from $3.5 million in 1994 to $4.2
million in 1995, a 20% increase. The increase in 1996 was a result of a
revision of the fee structure on RCB's deposit products, and of new services
provided to customers, while the increase from 1994 to 1995 was due to a larger
deposit base.
OPERATING EXPENSES
Operating expenses for 1996 increased $2.5 million, or 8.7%, reaching
$31.4 million, compared with $28.9 million in 1995 and $26.8 million in 1994.
However, as a percentage of average assets, operating expenses decreased to
3.58% in 1996 from 3.61% in 1995 and 3.65% in 1994. Operating expense
captions are detailed on the statement of income.
Personnel costs, which represented 53% of total operating expenses for
1996, increased $2.8 million, or 20.3%, reaching $16.6 million in 1996, compared
with $13.8 million in 1995 and $12.4 million in 1994.
Salaries, the principal component of personnel costs, remained at the
same level in 1996 as in 1995. The severance payment included in the early
retirement program was for a maximum amount equivalent to six months of salary.
Most of the early retirements occurred during the second quarter of 1996, and
the retiring employees received six months of working salary plus six months of
severance. As a result, total expense for the year remained at the same level.
As part of the early retirement program, RCB fully funded its
supplemental plan for key employees at an additional expense of $2.0 million. An
early retirement incentive for the health plan added $402,000 to the 1996
expense. Also, an incentive based on number of years of service increased other
employee benefits by approximately $195,000 in 1996.
All other operating expenses reflected an aggregate reduction of
$362,000 for 1996 ($14.7 million in 1996 versus $15.1 million in 1995, and
$14.4 million in 1994). This was mainly due to a reduction on the FDIC
insurance
46
<PAGE> 56
assessment for well capitalized banks in 1996, resulting in a $730,000 savings.
Net occupancy expenses, equipment rentals and taxes other than income taxes
remained at the same level as in the previous year.
BALANCE SHEET COMMENTS
RCB's total assets at December 31, 1996 reached $888 million,
reflecting an increase of 9% as compared with $814 million at December 31, 1995.
Total assets at the end of 1994 amounted to $760 million. Average total assets
for 1996 amounted to $875 million, compared with $799 million in 1995 and $734
million in 1994. Most of the growth in 1996 relates to an increase in loans of
$48 million and in money market investments of $23 million.
Earning assets at December 31, 1996 amounted to $841 million, compared
with $765 million at December 31, 1995 and $709 million at December 31, 1994.
Total loans reached $349 million at December 31, 1996, compared with $301
million at the end of 1995 and $282 million at the end of 1994. All loan
categories showed increases except for motor vehicle loans. Commercial loans
increased by $23 million, or 16%, to $167 million at December 31, 1996; the
consumer loan portfolio grew by $25 million, or 33%, to $103 million at December
31, 1996; mortgage loans increased by $2 million, or 4%, to $53 million at
December 31, 1996. On the other hand, motor vehicle loans decreased by $6
million, or 24%, since no significant effort was made during 1996 to attract
this type of business.
Money market investments totaled $33.2 million at December 31, 1996,
compared with $10.2 million at the same date last year. The increase of $23
million was part of RCB's strategy to remain highly liquid to cover possible
loss of 936 funds.
Total investments as of December 31, 1996 totaled $459 million,
compared with $453 million at December 31, 1995. During 1996, most maturing U.S.
Treasury obligations were reinvested at better yields in U.S. Government Agency
securities, principally Federal Home Loan Bank obligations.
Total deposits at December 31, 1996 amounted to $656 million, compared
with $642 million at December 31, 1995, an increase of $14 million. The
increase was attributable primarily to increases in non-interest bearing demand
deposits.
Borrowings increased $60 million, from $97 million at the end of 1995
to $157 million at December 31, 1996. The rise was mainly due to an increase of
$40 million in securities sold under agreements to repurchase. Meanwhile, notes
payable increased to $109 million at December 31, 1996, from $89 million at
December 31, 1995. The increase relates to a note with a Section 936 corporation
maturing in 2001.
LOANS
Net loans at December 31, 1996 amounted to $349 million, an increase of
$48 million, or 16%, over the $301 million reported at the end of 1995. Net
loans at December 31, 1994 were $282 million. As set forth in Table C, all loan
categories except motor vehicle loans showed increases in 1996. The commercial
loan portfolio accounted for $23.5 million of the total increase while the
consumer loan portfolio accounted for $25.5 million of the increase.
47
<PAGE> 57
TABLE C
LOANS BY CATEGORY (1)
<TABLE>
<CAPTION>
At Dec 31,
(In thousands)
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $167,025 $143,536 $130,353 $107,091 $102,440
Consumer 103,081 77,544 66,314 42,086 49,554
Mortgage 52,844 50,610 48,236 42,848 35,761
Construction 869 794 2,329 2,965 10,404
Motor vehicles 19,094 25,290 33,167 44,868 54,928
Others 11,944 8,807 7,757 7,199 10,988
-------- -------- -------- -------- --------
Total loans $354,857 $306,581 $288,156 $247,057 $264,075
======== ======== ======== ======== ========
Allowance for loan losses 5,742 5,203 5,894 5,038 3,883
-------- -------- -------- --------- --------
Net loans $349,115 $301,378 $282,262 $242,019 $260,192
======== ======== ======== ======== ========
</TABLE>
(1) Loans net of unearned income.
The commercial loan portfolio consists primarily of commercial and
industrial loans, including commercial loans secured by real estate. This
portfolio increased from $144 million at December 31, 1995 to $167 million at
the same date in 1996. Commercial loans totaled $130 million at December 31,
1994.
Consumer loans, which include personal loans, credit cards, overdraft
protection lines and student loans, amounted to $103 million at December 31,
1996, compared with $78 million at year-end 1995 and $66 million as of December
31, 1994.
During the latter part of 1996 RCB implemented a new organizational
structure for processing consumer loan credit applications which provides a
faster and more efficient service at potentially reduced costs. This new
structure reduced the time to process a loan, thus providing the opportunity for
new business.
TABLE D
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
At Dec 31,
(in thousands)
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans* $10,278 $ 9,075 $ 4,267 $ 6,600 $ 7,590
Other real estate 1,807 2,664 2,088 2,738 1,897
------- ------- ------- ------- -------
Total non-performing $12,085 $11,739 $ 6,355 $ 9,338 $ 9,487
======= ======= ======= ======= =======
Accruing loans past due 90 days and more $ 375 $ 102 $ 4,432 $ 5,520 $ 4,753
------- ------- ------- ------- -------
Interest lost $ 1,378 $ 958 $ 482 $ 595 $ 703
------- ------- ------- ------- -------
Non-performing assets to total loans 3.41% 3.83% 2.21% 3.78% 3.59%
------- ------- ------- ------- -------
Non-performing assets to total assets 1.36% 1.44% 0.84% 1.30% 1.41%
------- ------- ------- ------- -------
</TABLE>
* Prior to 1995, RCB accrued interest on Real Estate loans up to 365 days,
following the Banking Law. Since 1995, RCB has followed a policy of placing all
loans other than consumer loans on non-accrual status once interest is past due
for 90 days, unless the loan is well-secured and in the process of collection.
Non-performing Assets. As shown on Table D, as of December 31, 1996,
non-performing assets, which consist of past-due loans on which no interest
income is being accrued and other real estate, amounted to $12.1 million, or
3.41% of total loans, compared with $11.7 million, or 3.83% of total loans, and
$6.4 million, or 2.21% of total loans, at the end of 1995 and 1994,
respectively.
48
<PAGE> 58
RCB's policy is to place commercial loans on non-accrual status if
payments of principal or interest are delinquent 90 days, following the standard
industry practice. Conventional mortgages and close-end consumer loans are also
placed on non-accrual status if payments are delinquent 90 days. Close-end
consumer loans are charged-off against the allowance when delinquent for 120
days. Open-end (revolving credit) consumer loans are charged-off when 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.
Accruing loans that are contractually past-due 90 days or more as to
principal or interest but are well secured and in the process of collection as
of December 31, 1996, amounted to $375,000, as compared with $102,000 in 1995
and $4.4 million in 1994. Before January 1995, RCB's policy was to accrue
interest on past due loans up to 365 days, following the Banking Law. This
policy was changed to the standard industry practice described above in 1995.
The interest income that would have been realized had these loans been
performing in accordance with their original terms amounted to $1.4 million in
1996, compared with $958,000 in 1995 and $482,000 in 1994.
Provision and Allowance for Loan Losses. The allowance for loan losses
is maintained at a level sufficient to provide for estimated loan losses based
on the evaluation of known and inherent risks in the loan portfolio. RCB's
management evaluates the adequacy of the allowance for loan losses on a
quarterly basis. In determining the allowance, management considers the
portfolio risk characteristics, prior loss experience and prevailing and
projected economic conditions.
TABLE E
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $5,202,839 $5,893,519 $5,038,187 $3,882,689 $3,751,699
Allowance purchased ---- ---- 325,000 ---- ----
Provision for loan losses 3,180,000 1,006,000 1,437,306 3,769,000 6,026,000
---------- ---------- ---------- ---------- ----------
8,382,839 6,899,519 6,800,493 7,651,689 9,777,699
---------- ---------- ---------- ---------- ----------
Losses charged to the allowance
Commercial 75,026 187,519 445,773 1,062,000 1,001,777
Mortgage 396,563 423,497 66,880 91,000 90,827
Consumer 2,983,654 1,981,957 1,507,895 2,503,940 5,846,499
---------- ---------- ---------- ---------- ----------
3,455,243 2,592,973 2,020,485 3,656,940 6,939,103
---------- ---------- ---------- ---------- ----------
Recoveries
Commercial 187,986 137,069 144,805 135,000 30,225
Mortgage 14,375 13,000 753 ---- ----
Consumer 612,196 746,224 968,016 908,438 1,013,868
---------- ---------- ---------- ---------- ----------
814,557 896,293 1,113,574 1,043,483 1,044,093
---------- ---------- ---------- ---------- ----------
Net loans charged-off 2,640,686 1,696,680 906,974 2,613,502 5,895,010
---------- ---------- ---------- ---------- ----------
Balance at year end $5,742,153 $5,202,839 $5,893,519 $5,038,187 $3,882,689
========== ========== ========== ========== ==========
</TABLE>
The analysis of the allowance for loan losses set forth in Table E
reflects that the provision for loan losses was $3.2 million for 1996, compared
with $1.0 million in 1995, an increase of $2.2 million. The provision for loan
losses for 1994 was $1.4 million. The increase in the provision for 1996 is the
result of a rise in RCB's
49
<PAGE> 59
loan portfolio and increases in net charge-offs and non-performing loans. Net
charge-offs for the year 1996 totaled $2.6 million, or 0.79% of average loans,
compared with $1.7 million, or 0.57% of average loans, in 1995, and $907,000,
or 0.34% of average loans, in 1994.
The major component of the increase in net charge-offs for 1996 was
consumer loans, which increased by $1.1 million ($2.3 million in 1996 versus
$1.2 million in 1995). This category includes credit cards, student loans and
motor vehicle loans. These losses follow the increasing number of personal
bankruptcies in 1996 in Puerto Rico.
Given a potential slowdown in the economy, the uncertainty over the
impact of the repeal of Section 936 and the increased level of bankruptcies, RCB
expects the level of loan losses to increase moderately at the beginning of
1997.
Based on the general economic conditions described above, RCB does not
plan to market loans aggressively in early 1997.
At December 31, 1996, the allowance for loan losses was $5.7 million,
representing 1.62% of loans, as compared with $5.2 million, representing 1.70%
of loans for 1995. At December 31, 1994, the allowance was $5.9 million,
representing 2.05% of loans. Based on current and expected economic conditions,
the expected level of net loan losses and the methodology established to
evaluate the adequacy of the allowance for loan losses, management considers
that the allowance for loan losses is adequate.
ASSET/LIABILITY MANAGEMENT
RCB's net interest income is affected primarily by the impact of
interest rate volatility on the repricing of its assets and liabilities. Timing
differences between the repricing of assets and liabilities can change future
net interest income, depending on the size of the differences and the degree of
interest rate changes. Other factors which can influence RCB's net interest
income are the current yields and costs of earning assets and interest bearing
liabilities, the sensitivity of these to changes in market rates and the
correlation or spread between different interest rates.
RCB's Funds Management Committee is responsible for implementing
interest rate risk management policies and risk management strategies approved
by RCB's Board of Directors. The main objective of the Funds Management
Committee is to protect the stability of RCB's net interest income in changing
interest rate scenarios, although at times it may decide to position RCB for
anticipated changes in the interest rate cycle. Such positions are monitored
closely and are structured to be adjusted quickly in the case of adverse or
unexpected market movements. The Funds Management Committee is comprised of a
group of senior officers of RCB.
50
<PAGE> 60
TABLE F
MATURITY OF SECURITIES AND LOANS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
After one year through five years After five years
--------------------------------- ---------------------------
Fixed Variable Fixed Variable
One Year interest interest interest interest
or Less rate rates rate rates Total
---------------- ---------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Securities $ 33,200,000 $ 10,000 $ ---- $ ---- $ ---- $ 33,210,000
Investment and Trading(1) 120,119,081 287,853,833 ---- 48,632,788 ---- 456,605,702
------------- ------------- ------------ -------------
Total Securities $ 153,319,081 $ 287,863,833 ---- $ 48,632,788 ---- $ 489,815,702
------------- ------------- ------------ -------------
Consumer $ 9,510,986 $ 101,347,152 ---- $ 23,259,867 ---- $ 134,118,005
Commercial 27,561,148 12,502,820 ---- 976,789 ---- 41,040,757
Mortgage 51,112,039 100,127,595 ---- 28,458,733 ---- 179,698,367
Total Loans 88,184,173 213,977,567 ---- 52,695,389 ---- 354,857,129
------------- ------------- ------------ -------------
Grand Total $ 241,503,254 $ 501,841,400 $ ---- $101,328,177 $ ---- $ 844,672,831
============= ============= ======= ============ ======== =============
</TABLE>
(1) Excludes stock of Federal Home Loan Bank.
LIQUIDITY RISK
The financing of RCB's business activities gives rise to liquidity
risk. The objective of RCB's liquidity management is to ensure sufficient cash
flow to fund the origination and acquisition of assets, to repay deposit
withdrawals and wholesale borrowing maturities, to meet operating expenses and
to provide a cushion for reasonable unexpected contingencies.
Substantial liquidity is available in RCB's assets. The investment
portfolio consists primarily of securities issued by the U.S. Treasury and U.S.
Government Agencies, while the loan portfolio is relatively short-term. Funding
sources include a large, stable base of retail deposits.
The major source of liquidity among RCB's assets is the investment
portfolio. As of December 31, 1996, RCB's investment portfolio totaled $459
million and had an average maturity of 3 years. Cash and money market
instruments amounted to $52 million, while U.S. Treasury and U.S. Government
Agency obligations totaled $429 million, or 93% of the total portfolio, with an
average maturity of 2.82 years.
Securities classified as held-to-maturity amounted to $200 million, or
44% of the total portfolio as of December 31, 1996. Securities classified as
available-for-sale amounted to $259 million, or 56% of the total portfolio,
with an unrealized gain of $370,000. The investment portfolio can be sold in
the secondary market with minimal transaction costs and can be borrowed against
in the money markets at competitive rates.
The net loan portfolio as of December 31, 1996 amounted to $349
million, of which $87 million, or 25%, was due within one year. Repayments of
principal and interest from the portfolio provide a stable source of cash flow
to RCB.
The operations of RCB are funded primarily by the deposit base of its
retail branches. This source of funds is much less volatile than institutional
borrowings and its cost is less sensitive to changes in market rates. The core
deposit base includes consumer and commercial demand deposits, savings, NOW and
money market accounts and time deposits in denominations below $100,000. As of
December 31, 1996, RCB's core deposits
51
<PAGE> 61
amounted to $515 million, or 79% of total deposits, an increase of $34 million,
or 7.13%, from the previous year. Certificates of deposit with denominations
of $100,000 or more as of December 31, 1996 totaled $141 million, or 21% of
total deposits. Their distribution by maturity was as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
3 months or less.................... $ 79,586
3 to 12 months ..................... $ 24,314
1 to 5 years........................ $ 37,155
Total CDs over $100,000............. $141,055
</TABLE>
RCB also obtains financing through repurchase agreements and promissory
notes. These obligations are customarily issued with five year terms at a lower
rate than would otherwise be available.
RCB's deposit base includes Section 936 deposits, which amounted to $85
million as of December 31, 1996, or 13% of total deposits. Also, Section 936
borrowings, including repurchase agreements and promissory notes, were $147
million, or 18% of total liabilities, as of the same date. RCB's total financing
from Section 936 sources, including both deposits and borrowings, totaled $232
million, or 28% of total liabilities as of December 31, 1996.
Internal guidelines are used by RCB to limit the maximum exposure to
936 funds that may be assumed, thereby maintaining their volume within prudent
levels. An important objective of RCB's liquidity management is to ensure that
alternative sources of financing are readily available to replace 936 funds
completely in a cost efficient manner.
RCB's management is confident that sufficient liquidity is available in
the investment portfolio to repay on short notice the entire balance of 936
funds maturing within one year, which amounts to $88 million, or 38% of the
total balance of Section 936 borrowings and certificates of deposit at December
31, 1996. RCB has available a substantial amount of credit lines totaling $10
million. Furthermore, RCB has available approximately $25 million in additional
lines of credit from the Federal Home Loan Bank of New York.
SHAREHOLDERS' EQUITY
At December 31, 1996, shareholders' equity amounted to $66.4 million,
an increase of $2.0 million or 3% compared with the balance of $64.4 million at
year-end 1995. This increase is mainly due to earnings retention, offset by a $3
million reduction in unrealized gain on securities available for sale. RCB's
shareholders' equity at December 31, 1996 included an allowance of $370,000, net
of deferred taxes, in unrealized holding gains on securities available-for-sale,
compared with unrealized holding gains of $3.3 million a year ago.
RCB comfortably exceeds the regulatory risk-based capital requirements
for well-capitalized institutions, due to the high level of capital and the
large portion of low risk-rated assets. Tier 1 capital to risk-adjusted assets
and total capital ratios at December 31, 1996 were 14.89% and 16.14%, compared
with 16.64% and 17.33%, respectively, at year-end 1995. RCB's leverage ratio was
7.61% at December 31, 1996, compared with 7.94% for the previous year. Banks and
bank holding companies which meet or exceed a Tier 1 ratio of 6%, a total
capital ratio of 10% and a leverage ratio of 5% are considered well-capitalized
by regulatory standards. Note 17 to RCB's financial statements shows the
regulatory capital information for 1996 and 1995. See Appendix D.
DIVIDENDS
Dividends declared on common stock during 1996 totaled $2,100,000,
compared with $1,950,000 in 1995 and $1,860,000 in 1994. The annual dividend per
common share declared for 1996 was $3.50, compared with $3.25 in 1995 and $3.10
in 1994. The dividend pay out ratio to common shareholders for 1996 was 29.9%
compared with 26.8% in 1995 and 25.6% in 1994.
52
<PAGE> 62
OWNERSHIP OF RCB COMMON STOCK
RCB
The following table sets forth the equity securities of RCB
beneficially owned by all directors and nominees as of February 28, 1997, naming
them individually and directors and officers of RCB, as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME TITLE OF CLASS BENEFICIAL OWNERSHIP (1) OF CLASS(2)
- ---- -------------- ------------------------ -----------
<S> <C> <C> <C>
J. Adalberto Roig, Jr., Common 87,461 14.6%
President and Director
Antonio Roig Ferre. Common 56,725 9.5
Director
Agustin Cabrer, Jr. Common 129,849(3) 21.6
Director
Francisco J. Fernandez, Common 2,484 *
Director
Juan L. Balaguer, Common 204 *
Director
Jose D. Targa, Common 2,201 *
Director
Dinorah J. Colon, Common 979 *
Director
Andres R. Nevares Gonzalez, Common 1,846 *
Director
Saturnino Pena Flores, Common 248 *
Director
Julio Pietrantoni Blasini, Common 1,500 *
Executive Vice President and Director
Francisco M. Sueiro, Common 4,132 *
Director
Jesus E. Amaral, Common 290 *
Director
Felix M. Leon, Common 227 *
First Vice President
Fernando Pagan, Common 25 *
Senior Vice President
Eugenio M. Fontanes, Common 17 *
Vice President
All directors and executive officers Common 288,188(3) 48.0
as a group (15
persons)
</TABLE>
- ------------------------
*Less than 1%.
(1) Each director has, included in those listed above, 100 shares required
by the Banking Law to qualify as a director.
(2) Based on 600,000 shares outstanding as of February 28, 1997.
53
<PAGE> 63
(3) Includes 4,250 shares owned by Mr. Cabrer and 125,599 shares as to which
Mr. Cabrer has sole voting power pursuant to certain powers of attorney
granted to Mr. Cabrer by Gladys Roig Cabrer, Andres A. Nevares Cabrer,
Maria G. Nevares Cabrer, Anthony D. Duke, Jr., Olga Cabrer Duke,
Cristina H. King Cabrer, Spencer F. King Cabrer and Milena Duke Cabrer.
The following table presents the information indicated as of February
28, 1997, with respect to any person known to RCB to be the beneficial owner of
more than 5% of the equity securities of RCB.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS TITLE OF CLASS OWNERSHIP OF CLASS(1)
- ---------------- -------------- --------- -----------
<S> <C> <C> <C>
Gladys Roig Cabrer Common 117,040(2) 19.5%
PO Box 8569
Humacao, Puerto Rico 00792
Aileen Roig Ferre Common 95,134 15.9
PO Box 458
Humacao, Puerto Rico 00792
J. Adalberto Roig, Jr. Common 87,461 14.6
PO Box 457
Humacao, Puerto Rico 00792
Emma R. Roig Pietri Common 83,899(3) 13.2
42 Plymouth Road
Plandome, New York 11020
Antonio Roig Ferre Common 56,725 9.5
PO Box 458
Humacao, Puerto Rico 00792
Agustin Cabrer, Jr. Common 129,849(4) 21.6
Starlight Housing
Development Group
Caribe Building, Suite 1001
San Juan, Puerto Rico 00901
</TABLE>
- ----------------------
(1) Based on 600,000 shares outstanding as of February 28, 1997.
(2) Mr. Agustin Cabrer, Jr. has a power of attorney giving him the exclusive
right to vote the shares owned by Ms. Gladys Roig Cabrer, who is his
mother.
(3) Includes 4,617 shares owned by Ms. Roig Pietri and 79,282 shares of the
estate of Ms. Roig Pietri's mother, for which Ms. Roig Pietri acts as
executor.
(4) Includes 4,250 shares owned by Mr. Cabrer and 125,599 shares as to which
Mr. Cabrer has sole voting power pursuant to certain powers of attorney
granted to Mr. Cabrer by Gladys Roig Cabrer, Andres A. Nevares Cabrer,
Maria G. Nevares Cabrer, Anthony D. Duke, Jr., Olga Cabrer Duke,
Cristina H. King Cabrer, Spencer F. King Cabrer and Milena Duke Cabrer.
BANPONCE AND BANCO POPULAR
54
<PAGE> 64
As of February 28, 1997, none of BanPonce's directors, executive
officers or their affiliates beneficially owned any shares of RCB Common Stock.
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name of each director or executive
officer of RCB who will serve as a director or executive officer of BanPonce,
his age, a brief description of his recent business experience including present
occupation and employment, the year in which he first became a director of RCB
and the year in which his term as director of RCB expires and his remuneration.
<TABLE>
<CAPTION>
Name, Age, Principal Director Expiration of
Occupation, Business Experience for Five Years Since Current Term Remuneration
- ---------------------------------------------- ----- ------------ ------------
<S> <C> <C> <C>
J. Adalberto Roig, Jr. 1973 1997 $300,000
Age 65; President and Chief Executive
Officer of RCB since 1977. Mr. Roig
has been an employee of RCB since 1973.
</TABLE>
COMPARISON OF RIGHTS OF HOLDERS OF RCB COMMON
STOCK AND BANPONCE COMMON STOCK
As a result of the Merger, holders of RCB Common Stock, whose rights are
currently governed by the Banking Law and the Articles of Incorporation and
By-laws of RCB, will become shareholders of BanPonce. Accordingly, their rights
will be governed by the provisions of the Puerto Rico GCL and the Restated
Certificate of Incorporation and By-laws of BanPonce. Certain differences arise
from this change of governing law, as well as from distinctions between the
Articles of Incorporation and By-laws of RCB and the Restated Certificate of
Incorporation and By-laws of BanPonce. The following discussion is not intended
to be an exhaustive statement of the differences affecting the rights of RCB
shareholders, but summarizes certain significant differences.
ISSUANCE OF CAPITAL STOCK
Under the Articles of Incorporation of RCB, the authorized capital
stock of RCB is 2,500,000 shares of common stock, par value $10.00 per share.
Under the Restated Certificate of Incorporation of BanPonce, the authorized
capital stock of BanPonce is 90,000,000 shares of BanPonce Common Stock and
10,000,000 shares of BanPonce Preferred Stock. The par value of BanPonce Common
Stock is $6.00 per share.
BOARD OF DIRECTORS
1. Classified Board of Directors. The Certificate of Incorporation of
RCB provides that the Board of Directors shall consist of five members, or such
number as shall be established in the By-laws of RCB. The By-laws provide that
the Board of Directors of RCB shall be composed of thirteen directors, and that
each director shall serve for a term of one year and until his successor has
been elected and has been qualified.
The Restated Certificate of Incorporation and By-laws of BanPonce
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 shall serve for a term ending on the
date of the third annual meeting of shareholders following the annual meeting at
which such director was elected.
55
<PAGE> 65
The classification of directors has the effect of making it more
difficult for shareholders to change the composition of the BanPonce Board in a
relatively short period of time. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the BanPonce Board. Such a delay may help ensure that the BanPonce Board, if
confronted by a holder attempting to force a stock repurchase at a premium above
market prices, a proxy contest or an extraordinary corporate transaction, will
have sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what they believe are the best interests of the
shareholders.
The classified board provision could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of BanPonce, even though such an attempt might be beneficial to the company and
its shareholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions. In addition,
since the classified board provision is designed to discourage accumulations of
large blocks of BanPonce's stock by purchasers whose objective is to have such
stock repurchased by BanPonce at a premium, the classified board provision could
tend to reduce the temporary fluctuations in the market price of BanPonce's
stock that could be caused by accumulations of large blocks of such stock.
Accordingly, shareholders could be deprived of certain opportunities to sell
their stock at a temporarily higher market price.
2. Vacancies. The By-laws of RCB provide that any vacancy
occurring in the Board of Directors may be filled by the affirmative
vote of a majority of the remaining directors. A director so elected shall
serve for the unexpired term of his predecessor.
The By-laws of BanPonce provide that any vacancies in the Board of
Directors, by reason of an increase in the number of directors or otherwise,
will be filled solely by the Board of Directors, by majority vote of the
directors then in office, though less than a quorum, but any director so elected
shall hold office only until the next succeeding annual meeting of shareholders.
At such annual meeting, such director will be elected and qualified in the class
in which such director is assigned to hold office for the term or remainder of
the term of such class. Directors will continue in office until others are
chosen and qualified in their stead. When the number of directors is changed,
any newly created directorships or any decrease in directorships shall be so
assigned among the classes by a majority of the directors then in office, though
less than a quorum, so as to make all classes as nearly equal in number as
possible. To the extent of any inequality within the limits of the foregoing,
the class of directorships will be the class or classes then having the last
date or the later dates for the expiration of its or their terms. No decrease in
the number of directors shall shorten the term of any incumbent director.
3. Removal for Cause. The By-laws of RCB provide that any director may
be removed from office at any time with or without cause by the affirmative vote
of the holders of a majority of the issued and outstanding shares of RCB Common
Stock at any general or special meeting called for that purpose.
The Restated Certificate of Incorporation of BanPonce provides that any
director may be removed from office as a director, but only for cause, by the
affirmative vote of the holders of two-thirds of the combined voting power of
the then outstanding shares of stock of BanPonce entitled to vote generally in
the election of directors, voting together as a single class.
4. Action in Lieu of Meeting and by Communications Equipment. The
Banking Law does not expressly provide for the Board of Directors of RCB to take
action without a meeting. The Puerto Rico GCL provides that actions that may be
taken by the BanPonce Board of Directors can be taken without a meeting, if a
consent in writing, setting forth the action so taken, is signed by all of the
directors. In addition, the Puerto Rico GCL, in contrast to the Banking Law,
permits that any action that may be taken at a meeting of directors can be
undertaken by means of a telephone conference or similar communications
equipment pursuant to which all persons participating in the meeting can hear
each other at the same time.
5. Board Committees. The Banking Law and the By-laws of RCB provide
that the Board of Directors of RCB may, by resolution adopted by a majority of
the full Board, from time to time appoint any number of committees
56
<PAGE> 66
composed of not less than 3 directors. The Puerto Rico GCL provides that
the Board of Directors of a corporation (other than a bank) may, by resolution
adopted by the full Board, appoint any number of committees composed of one or
more directors. The By-laws of BanPonce provide that the Board of Directors of
BanPonce may, by resolution adopted by the full Board, appoint any number of
committees composed of two or more directors.
PREEMPTIVE RIGHTS
Holders of shares of Common Stock of RCB are not entitled to preemptive
rights with regard to additional issues of capital stock.
The Restated Certificate of Incorporation of BanPonce provides that the
common shareholders will have preference for the subscription for newly-issued
shares of common stock of BanPonce on a pro rata basis unless the Board of
Directors unanimously resolves otherwise, but the shareholders shall have no
preference to subscribe therefor in the event of new issues of shares of stock
which may be authorized pursuant to any Dividend Reinvestment and Stock Purchase
Plan of BanPonce or which may be authorized in order to exchange such new shares
of stock for property which the Board of Directors may consider convenient or
necessary for BanPonce to acquire, nor shall the shareholders have any right of
preference therefor in the event of new issues of stock in payment of services
rendered to BanPonce, or of shares of stock to be issued for sale to officers or
employees, on the basis of options, as an incentive either to commence or to
continue rendering services for BanPonce.
ARBITRATION
Neither the Certificate of Incorporation and By-laws of RCB nor the
Restated Certificate of Incorporation and By-laws of BanPonce provide for
arbitration.
PAYMENT OF DIVIDENDS
The ability of RCB to pay dividends on its common stock is restricted
by the Banking Law and by policies of the FDIC. BanPonce is not subject
to these restrictions on its ability to pay dividends, but is limited by certain
restrictions generally imposed on Puerto Rico corporations (i.e., dividends may
be paid only out of the corporation's net assets in excess of its capital) and
the policies of the Federal Reserve and any relevant contractual restrictions.
Moreover, BanPonce's principal source of income consists of dividends, if any,
from the Surviving Bank. The Surviving Bank will be subject to the restrictions
on dividends imposed by the Banking Law, the Federal Reserve Act and policies of
the Federal Reserve. See "REGULATION AND SUPERVISION".
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Banking Law, the Certificate of Incorporation and the By-laws of
RCB do not contain any provision relating to indemnification of directors and
officers of RCB.
The Banking Law exempts directors of a bank from personal liability for
their acts as directors of the bank, unless such acts were willful violations of
the laws or statutes of the bank or were willful infractions of any lawful
resolution adopted by the shareholders of the bank. Under the Puerto Rico GCL,
pursuant to which BanPonce is formed, directors and officers of BanPonce are
liable if they knowingly cause to be published or give out any written statement
or report of the condition of BanPonce that is false in any material respect.
The Restated Certificate of Incorporation of BanPonce requires BanPonce to
indemnify any director, officer, employee or agent of BanPonce for liability and
for the expenses incurred in defending against such liability arising from
actions taken in respect of his position if such actions were taken in good
faith in a manner that he reasonably believed to be in or not opposed to the
best interests of BanPonce, or with respect to a criminal proceeding, if he had
no reasonable cause to believe that his action was unlawful. Under certain
circumstances, BanPonce may advance to such person amounts to cover the expenses
of litigation.
57
<PAGE> 67
QUALIFICATION OF DIRECTORS
The Banking Law requires that each director of RCB must reside in
Puerto Rico and be registered in RCB's shareholders registry books on the date
of his election as the owner of shares of RCB Common Stock having an aggregate
par value of not less than $1,000. Each director of RCB must, prior to his
qualification for office, deliver to RCB the certificates of his qualifying
shares and take an oath that he will properly and faithfully discharge his
office and guard fulfillment of the Banking Law and other legislation applicable
to RCB. Neither the Puerto Rico GCL nor the Restated Certificate of
Incorporation of BanPonce imposes qualification requirements on directors of
BanPonce.
SPECIAL MEETINGS OF THE SHAREHOLDERS
Under RCB's By-laws, a special meeting of shareholders may
be called for any purpose at any time by the Chairman of the Board or
the President of RCB, or by the President of RCB at the written request of
shareholders representing not less than one-fifth of the outstanding shares of
Common Stock of RCB. The Banking Law does not expressly provide for shareholders
to take action in lieu of a meeting. The Puerto Rico GCL and the Restated
Certificate of Incorporation of BanPonce do not specify a procedure for calling
a special meeting of shareholders. The By-laws of BanPonce, however, provide
that a special meeting of shareholders may be called by the Board of Directors,
Chairman of the Board of Directors or the President of BanPonce and provides for
notice of such a meeting. The Puerto Rico GCL, in contrast to the Banking Law,
does permit shareholders to take action in lieu of a meeting if all shareholders
entitled to vote on the action consent in writing to the action.
SHAREHOLDER APPROVAL OF MERGERS AND APPRAISAL RIGHTS
Under the Banking Law, the approval of the holders of three-fourths of
RCB's capital stock is required for a merger or consolidation and the approval
of two-thirds of the voting stock is required for a voluntary dissolution of
RCB. Although under the Puerto Rico GCL, BanPonce can accomplish a merger or
consolidation with approval of the holders of two-thirds of its outstanding
stock or a transfer of all of its assets or a voluntary dissolution of BanPonce
with the approval of two-thirds of the voting stock issued and outstanding, the
Restated Certificate of Incorporation of BanPonce requires the approval of
seventy-five percent (75%) of BanPonce's capital stock (both common and
preferred voting as a class) for a merger, reorganization, consolidation,
transfer of substantially all the assets of BanPonce or the voluntary
dissolution of BanPonce. Under the Puerto Rico GCL, BanPonce shareholders who do
not approve a merger or consolidation would be entitled to appraisal rights in
such transactions.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
Under the Banking Law, RCB may amend its Certificate of Incorporation
if such amendment is approved by the votes of two-thirds of the entire capital
stock of RCB and if such amendment is approved by the Commissioner of Financial
Institutions and is filed with the Secretary of State of Puerto Rico. The
By-laws of RCB may be amended under the Banking Law by a majority vote of the
capital stock of RCB present at a general meeting of the shareholders of RCB if
more than one-half of the capital stock is present at such meeting.
Under the Restated Certificate of Incorporation of BanPonce, amendments
to the Restated Certificate of Incorporation of BanPonce require the
approval of not less than two-thirds of the total number of outstanding shares
of capital stock (both common and preferred voting as a class) of BanPonce and,
if such amendment concerns Article Tenth (which governs the approval of certain
business combinations and voluntary dissolution), the approval of not less than
seventy-five percent (75%) of the total number of outstanding shares of capital
stock of BanPonce. An absolute majority of the Board of Directors has the power
to adopt, amend or repeal the By-laws of BanPonce, provided that any By-laws
adopted, amended or repealed by the Board of Directors may be amended or
repealed, and any By-laws may be adopted, by a majority of the shareholders of
BanPonce.
58
<PAGE> 68
INSPECTION OF BOOKS AND RECORDS BY SHAREHOLDERS
The Banking Law does not contain any provision relating to the rights
of the shareholders of a Puerto Rico bank to inspect the books and records of
said bank. The Puerto Rico GCL provides that the shareholders of record of a
Puerto Rico corporation have the right, upon written demand under oath stating
the purpose thereof, during business hours to inspect for any proper purpose the
corporation's stock ledger, list of shareholders, and the corporation's other
books and records. The Puerto Rico GCL describes as a "proper purpose" a purpose
reasonably related to a person's interest as a shareholder.
DESCRIPTION OF BANPONCE'S CAPITAL STOCK
The authorized capital stock of BanPonce consists of 90,000,000 shares
of Common Stock, par value $6.00 per share, and 10,000,000 shares of Preferred
Stock. The Preferred Stock is issuable in one or more series, with such terms,
and at such times and for such consideration as the Board of Directors of
BanPonce determines. As of February 28, 1997, there were issued and outstanding
4,000,000 shares of 8.35% Series A Preferred Stock and 66,121,855 shares of
Common Stock. The Common Stock is traded in the over-the-counter market on the
Nasdaq National Market System.
The following description summarizes the material provisions of the
Common Stock. It does not purport to be complete and is subject in all respects
to the applicable provisions of the General Corporation Law of Puerto Rico of
Puerto Rico, BanPonce's Restated Certificate of Incorporation (the
"Certificate"), the Rights Agreement (defined below), the Certificate of
Designation describing the Series A Participating Preferred Stock and the
Dividend Reinvestment Plan (described below).
COMMON STOCK
Subject to the rights of holders of any Preferred Stock outstanding,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as the Board of Directors may in its discretion declare out of legally available
funds.
The holders of the Common Stock are entitled to one vote per share on
all matters brought before the shareholders. The holders of the Common Stock do
not have the right to cumulate their shares of Common Stock in the election of
directors. The Certificate provides that the approval of a merger,
reorganization, or consolidation of BanPonce or the sale of substantially all of
the assets of BanPonce or the approval or voluntary dissolution of BanPonce
requires the vote of the holders of 75% of the total number of outstanding
shares of BanPonce.
In the event of liquidation, holders of the Common Stock will be
entitled to receive pro rata any assets distributable to shareholders with
respect to the shares held by them, after payment of indebtedness and such
preferential amounts as may be required to be paid to the holders of any
Preferred Stock hereafter issued by BanPonce.
The Certificate provides that the members of the Board of Directors are
divided into three classes as nearly equal as possible. Each class is elected
for a three-year term. At each annual meeting of shareholders, one-third of the
members of the Board of Directors will be elected for a three-year term, and the
other directors will remain in office until their three-year terms expire.
Therefore, control of the Board of Directors cannot be changed in one year, and
at least two annual meetings must be held before a majority of the members of
the Board of Directors can be changed.
59
<PAGE> 69
The Certificate provides that a director, or the entire Board of
Directors, may be removed by the shareholders only for cause. The Certificate
and Bylaws of BanPonce also provide that the affirmative vote of the holders of
at least two-thirds of the combined voting power of the outstanding capital
stock entitled to vote for the election of directors is required to remove a
director or the entire Board of Directors from office. Certain portions of the
Certificate of BanPonce described in certain of the preceding paragraphs,
including those related to business combinations and the classified Board of
Directors, may be amended only by the affirmative vote of the holders of
two-thirds of the total number of outstanding shares of BanPonce.
Certain of the provisions contained in the Certificate have the effect
of making it more difficult to change the Board of Directors, and may
make the Board of Directors less responsive to shareholder control. These
provisions also may tend to discourage attempts by third parties to acquire
BanPonce because of the additional time and expense involved and a greater
possibility of failure, and, as a result, may adversely affect the price that a
potential purchaser would be willing to pay for the capital stock of BanPonce,
thereby reducing the amount a shareholder might realize in, for example, a
tender offer for the capital stock of BanPonce.
Pursuant to the Certificate, holders of the Common Stock and only the
Common Stock are entitled to preferential rights to purchase or subscribe for
newly issued shares of Common Stock on a pro rata basis unless, in approving the
issuance of Common Stock, or any transaction resulting in the issuance of any
Common Stock of BanPonce, the Board of Directors of BanPonce unanimously
resolves otherwise. The shareholders have no preference to subscribe therefor in
the event of new issues of shares of stock which may be authorized pursuant to
any dividend reinvestment and stock purchase plan of BanPonce or which may be
authorized in order to exchange such new shares of stock for property which the
Board of Directors may consider convenient or necessary for BanPonce to acquire,
nor shall the shareholders have any right of preference therefor in the event of
new issues of stock in payment of services rendered to BanPonce, or of shares of
stock to be issued to officers or employees, on the basis of options, as an
incentive either to commence or to continue rendering services for BanPonce.
There are no redemption or call provisions applicable to shares of Common Stock.
The outstanding shares of Common Stock are, and shares of Common Stock
offered hereby upon their due issuance, delivery and the receipt of payment
therefor will be fully paid and nonassessable.
The Registrar and Transfer Agent for the Common Stock of BanPonce is
Banco Popular de Puerto Rico.
SHAREHOLDER RIGHTS PLAN
Pursuant to a Rights Agreement, dated as of August 11, 1988, as amended
as of December 11, 1990 (the "Rights Agreement"), between BanPonce and
Chase Manhattan Bank, holders of shares of Common Stock outstanding at the
close of business on August 31, 1988 received the right (the "Preferred
Rights") to purchase one one-hundredth of a share of Series A Participating
Cumulative Preferred Stock of BanPonce ("Series A Participating Preferred
Stock") on the terms set forth in the Rights Agreement. There is one Preferred
Right attached to each share of Common Stock outstanding. In addition, as long
as the Preferred Rights are attached to the Common Stock, one Preferred Right
will be issued with each new share of Common Stock issued. At the time the
Preferred Rights become exercisable, separate certificates will be issued and
the Preferred Rights could begin to trade separately from the Common Stock.
Preferred Rights become exercisable (i) on the close of business on the tenth
business day after BanPonce or any person or group publicly announces that such
person or group has acquired 15% or more of the shares of the Common Stock then
outstanding, or (ii) on the close of business on the tenth business day after
the commencement of a tender or exchange offer which, if consummated, would
result in such person becoming the beneficial owner of 20% or more of the
Common Stock. The Preferred Rights may be deemed to have an anti-takeover
effect and generally may cause substantial dilution to a person or group that
attempts to acquire BanPonce under circumstances not approved by BanPonce's
Board of Directors.
60
<PAGE> 70
DIVIDEND REINVESTMENT PLAN
BanPonce maintains a dividend reinvestment plan providing for the
purchase of additional shares of Common Stock by reinvestment of cash dividends
paid on the outstanding capital stock and also by optional direct cash payments
by shareholders. Dividends reinvested are applied to the purchase of shares of
Common Stock at 95% of the market value at the time of purchase. Optional cash
purchases may be made at 100% of the market value of the Common Stock at the
time of purchase.
PREFERRED STOCK
The Board of Directors of BanPonce is authorized to provide for the
issuance of shares of BanPonce Preferred Stock in one or more series, with such
voting powers, full or limited, or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issuance
thereof to be adopted by the Board of Directors, except as otherwise provided in
the Restated Certificate of Incorporation or any amendment thereto. The issuance
of shares of BanPonce Preferred Stock could make it more difficult and more
expensive for another person or entity to obtain control of BanPonce in a
merger, tender offer, proxy fight or similar transaction. The ability of the
Board of Directors to issue shares of BanPonce Preferred Stock in such a
situation could have the effect of discouraging a potential acquiror and may
have an adverse effect on shareholders wishing to participate in a merger,
tender offer or proxy fight. BanPonce's management is not aware of any person or
entity currently seeking control of BanPonce.
The 8.35% Series A Preferred Stock entitle the holders thereof to
receive, when, as and if declared by the Board of Directors of the
Corporation, out of funds legally available therefor, cash dividends at the
annual rate per share of 8.35% of the liquidation preference of $25 per share,
or $0.173958 per share per month, accruing from the date of original issuance
and payable monthly in arrears in United States dollars on the last day of each
calendar month thereafter.
Dividends on the 8.35% Series A Preferred Stock are non-cumulative. To
the extent that funds are not legally available for the payment of such
dividends for any monthly dividend period or that such dividends are not
declared with respect to any monthly dividend period, then the holders of the
8.35% Series A Preferred St respect of such monthly dividend period. The
Corporation may not pay dividends on or acquire shares of common stock of the
Corporation or other class of stock of the Corporation ranking junior to the
8.35% Series A Preferred Stock unless all accrued and unpaid dividends on the
8.35% Series A Preferred Stock for the twelve monthly dividend periods ending on
the immediately preceding dividend payment date shall have been paid or are paid
contemporaneously and the full monthly dividend on the 8.35% Series A Preferred
Stock for the then current month has been or is contemporaneously declared and
paid or declared and set apart for payment.
The 8.35% Series A Preferred Stock is redeemable on and after June 30,
1998, at the option of the Corporation, in whole or in part from time to time.
The redemption price per share is $26.25 from June 30, 1998 through June 29,
1999, $26.00 from June 30, 1999 through June 29, 2000, $25.75 from June 30, 2000
through June 29, 2001, $25.50 from June 30, 2001 through June 29, 2002 and
$25.00 from June 30, 2002 and thereafter, plus accrued and unpaid dividends for
the then current monthly dividend period to the date fixed for redemption. Under
current regulations, the Corporation is not permitted to exercise any option to
redeem shares of 8.35% Series A Preferred Stock without the prior approval of
the Federal Reserve Board.
The 8.35% Series A Preferred Stock is not convertible into or
exchangeable for any other securities of the Corporation. Holders of shares of
8.35% Series A Preferred Stock have no right to require the Corporation to
redeem or repurchase any such shares, and such shares are not subject to any
sinking fund or similar obligation.
61
<PAGE> 71
In the event of the liquidation, dissolution or winding up of the
Corporation, holders of the 8.35% Series A Preferred Stock will be entitled to
receive a liquidation preference of $25 for each share, plus accrued and unpaid
dividends for the then current monthly dividend period to the date of payment.
SUPERVISION AND REGULATION
GENERAL
BanPonce is a bank holding company subject to supervision and
regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). As a bank holding company, BanPonce'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 BanPonce
may not directly or indirectly acquire the ownership or control of more than 5%
of any class of voting shares or substantially all of the assets of any company
in the United States, including a bank, without the prior approval of the
Federal Reserve. In addition, bank holding companies are generally prohibited
under the BHC Act from engaging in nonbanking activities, subject to certain
exceptions.
Banco Popular is considered a foreign bank for purposes of the
International Banking Act of 1978, as amended (the "IBA"). Under the IBA, Banco
Popular is not permitted to operate a branch or agency that is located outside
of its "home state" except to the extent that a national bank with the same home
state is permitted to do so as described under "-- Interstate Banking
Legislation" below. Puerto Rico is not considered a state for purposes of these
geographic limitations. Banco Popular has designated the state of New York as
its home state. In addition, some states have laws prohibiting or restricting
foreign banks from acquiring banks located in such states and treat Puerto
Rico's banks and bank holding companies as foreign banks for such purposes.
Banco Popular, Banco Popular (Illinois), Banco Popular (California) and
Banco Popular, FSB are subject to supervision and examination by applicable
federal and state banking agencies including, in the case of Banco Popular, the
Federal Reserve and the Office of the Commissioner of Financial Institutions of
Puerto Rico, in the case of Banco Popular (Illinois), the Federal Deposit
Insurance Corporation (the "FDIC") and the Illinois Commissioner of Banks and
Trust Companies, in the case of Banco Popular (California), the Office of the
Comptroller of the Currency (the "OCC") and in the case of Banco Popular, FSB,
the Office of Thrift Supervision (the "OTS") and the FDIC. Banco Popular, Banco
Popular (Illinois), Banco Popular (California) and Banco Popular, FSB are
subject to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of other investments that may be made and
the types of services that may be offered. Various consumer laws and regulations
also affect the operations of Banco Popular, Banco Popular (Illinois), Banco
Popular (California) and Banco Popular, FSB. In addition to the impact
of regulation, commercial banks are affected significantly by the actions of the
Federal Reserve as it attempts to control the money supply and credit
availability in order to influence the economy.
HOLDING COMPANY STRUCTURE
Banco Popular, Banco Popular (Illinois), Banco Popular (California) and
Banco Popular, FSB are subject to restrictions under federal law that limit the
transfer of funds between them and BanPonce and its nonbanking subsidiaries,
whether in the form of loans, other extensions of credit, investments or asset
purchases. Such transfers by Banco Popular, Banco Popular (Illinois), Banco
Popular (California) and Banco Popular, FSB, respectively, to BanPonce or to any
one nonbanking subsidiary, are limited in amount to 10% of the transferring
institution's capital stock and surplus and, with respect to BanPonce and all of
its nonbanking subsidiaries, to an aggregate of 20% of the transferring
institution's capital stock and surplus. Furthermore, such loans and extensions
of credit are required to be secured in specified amounts.
62
<PAGE> 72
Under Federal Reserve policy, a bank holding company, such as BanPonce,
is expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each such subsidiary bank. This support
may be required at times when, absent such policy, the bank holding company
might not otherwise provide such support. In addition, any capital loans by a
bank holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary depository institution will be assumed by the bankruptcy trustee and
entitled to a priority of payment. Banco Popular, Banco Popular (Illinois),
Banco Popular (California) and Banco Popular, FSB are currently the only
subsidiary depository institutions of BanPonce.
Because BanPonce 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 depository institution subsidiaries) except to the extent that
BanPonce may itself be a creditor with recognized claims against the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which term includes both banks and savings associations),
the deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or a receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. Banco Popular, Banco Popular (Illinois), Banco Popular (California)
and Banco Popular, FSB are currently the only controlled FDIC-insured depository
institutions of BanPonce. In some circumstances (depending upon the amount of
the loss or anticipated loss suffered by the FDIC), cross-guarantee liability
may result in the ultimate failure or insolvency of one or more insured
depository institutions in a holding company structure. Any obligation or
liability owned by a subsidiary depository institution to its parent company is
subordinated to the subsidiary bank's cross-guarantee liability with respect to
commonly controlled insured depository institutions.
CAPITAL ADEQUACY
Under the Federal Reserve's risk-based capital guidelines for bank
holding companies and member banks, the minimum guidelines for the ratio of
qualifying total capital ("Total capital") to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least half of the Total capital is to be comprised of common equity, retained
earnings, minority interests in unconsolidated subsidiaries, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill and certain other intangible assets discussed below ("Tier
1 Capital"). The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves ("Tier 2 Capital").
The Federal Reserve has adopted regulations that require most
intangibles, including core deposit intangibles, to be deducted from Tier 1
Capital. The regulations, however, permit the inclusion of a limited amount of
intangibles related to purchased mortgage servicing rights and purchased credit
card relationships and include a "grandfather" provision permitting the
continued inclusion of certain existing intangibles.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies and member banks. These guidelines provide
for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain
other intangible assets discussed below (the "leverage ratio") of 3%
for bank holding companies and member banks that meet certain specified
criteria, including that they have the highest regulatory rating. All other bank
holding companies and member banks will be required to maintain a leverage ratio
of 3% plus an additional cushion of at least 100 to 200 basis points. The
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the
63
<PAGE> 73
minimum supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve will continue to
consider a "tangible Tier 1 leverage ratio" and other indicia of capital
strength in evaluating proposals for expansion or new activities.
The tangible Tier 1 leverage ratio is the ratio of a banking organization's
Tier 1 Capital, less all intangibles, to total assets, less all intangibles.
Under the Federal Reserve's requirements, BanPonce's and Banco
Popular's capital ratios at December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
BanPonce Banco Popular
-------- -------------
<S> <C> <C>
Tier 1 Capital ....................................................... 11.63% 11.31%
Total Capital......................................................... 14.18% 12.57%
Leverage ratio........................................................ 6.71% 6.65%
</TABLE>
Banco Popular (Illinois), Banco Popular (California) and Banco Popular,
FSB are subject to similar capital requirements adopted by the FDIC, the OCC and
the OTS, respectively.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "FDICIA" below.
Bank regulators have in the past indicated their desire to raise
capital requirements applicable to banking organizations beyond current levels.
However, management is unable to predict whether and when high capital
requirements would be imposed and, if so, at what levels or on what schedule.
FDICIA
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder establish five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository institution
is deemed well capitalized if it maintains a leverage ratio of at least 5%, a
risk-based Tier I capital ratio of at least 6% and a risk-based Total capital
ratio of at least 10% and is not subject to any written agreement or directive
to meet a specific capital level. A depository institution is deemed adequately
capitalized if it is not well capitalized but maintains a leverage ratio of at
least 4% (or at least 3% if given the highest regulatory rating and not
experiencing or anticipating significant growth), a risk-based Tier I capital
ratio of at least 4% and a risk-based Total capital ratio of at least 8%. A
depository institution is deemed undercapitalized if it fails to meet the
standards for adequately capitalized institutions (unless it is deemed
significantly or critically undercapitalized). An institution is deemed
significantly undercapitalized if it has a leverage ratio of less than 3%, a
risk-based Tier I capital ratio of less than 3% or a risk-based Total capital
ratio of less than 6%. An institution is deemed critically undercapitalized if
it has tangible equity equal to 2% or less of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
At February 28, 1997, Banco Popular, Banco Popular (Illinois), Banco
Popular (California) and Banco Popular, FSB were well capitalized. An
institution's capital category, as determined by applying the prompt corrective
action provisions of law, may not constitute an accurate representation of the
overall financial condition or prospects of BanPonce or its banking
subsidiaries, and should be considered in conjunction with other available
information regarding BanPonce's financial condition and results of operations.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
64
<PAGE> 74
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it were signigicantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions
such as the banking and savings association subsidiaries of BanPonce, but they
are not directly applicable to holding companies, such as BanPonce, which
control such institutions. However, federal banking agencies have indicated
that, in regulating holding companies, they may take appropriate action at the
holding company level based on their assessment of the effectiveness of
supervisory actions imposed upon subsidiary insured depository institutions
pursuant to such provisions and regulations.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve approval, to acquire banks
located in states other than the holding company's home state without regard to
whether the transaction is prohibited under state law. In addition, commencing
June 1, 1997, national and state banks with different home states will be
permitted to merge across state lines, with approval of the appropriate federal
banking agency, unless the home state of a participating bank passes legislation
prior to May 31, 1997 expressly prohibiting interstate mergers. States may "opt
in" to permit interstate branching by merger prior to June 1, 1997, and to
permit de novo interstate branching. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where any bank involved
in the interstate merger transaction could have established or acquired branches
under applicable federal or state law. A bank that has established a branch in a
state through de novo branching may establish and acquire additional branches in
such state in the same manner and to the same extent as a bank having a branch
in such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo. A foreign bank, like Banco Popular, may branch
interstate by merger or de novo to the same extent as domestic banks in the
foreign bank's home state, which, in the case of Banco Popular, is New York.
Various other legislation, including proposals to overhaul the bank
regulatory system, expand bank and bank holding company powers and limit the
investments that a depository institution may make with insured funds, is from
time to time introduced in Congress. BanPonce cannot determine the ultimate
effect that on, if enacted, or implementing regulations, would have upon their
financial condition or results of operations.
DIVIDEND RESTRICTIONS
The principal source of cash flow for BanPonce is dividends from Banco
Popular. Various statutory provisions limit the amount of dividends Banco
Popular can pay to BanPonce without regulatory approval. As a member bank
subject to the regulation of the Federal Reserve, Banco Popular must obtain the
approval of the Federal Reserve for any dividend if the total of all dividends
declared by the bank in any calendar year would exceed the total of its net
profits, as defined by the Federal Reserve, 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
65
<PAGE> 75
include the principal amount of loans that are in arrears with respect
to interest by six months or more unless such loans are fully secured and in the
process of collection. Moreover, for purposes of this limitation, a member bank
is not permitted to add the balance in its allowance for loan losses account to
its undivided profits then on hand. A member bank may, however, net the sum of
its bad debts as 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 amount. At December 31, 1996, Banco Popular could have declared a
dividend of approximately $197.1 million without the approval of the Federal
Reserve. Illinois law contains similar limitations on the amount of dividends
that Banco Popular (Illinois) can pay and the National Bank Act contains similar
limitations, on the amount of dividends that Banco Popular (California) can pay.
In addition, OTS regulations limit the amount of capital distributions (whether
by dividend or otherwise) that any savings association may make without prior
OTS approval, based upon the savings, association's regulatory capital levels.
These limitations are applicable to Banco Popular, FSB. Also, in connection with
the acquisition by Banco Popular, FSB from the RTC of four New Jersey branches
of the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB
and BanPonce interim financial assistance. Pursuant to the terms of such
financing, evidenced by a promissory note (which matures on January 20, 2000 but
is prepayable any time before then), Banco Popular, FSB may not, among other
things, declare or pay any dividends on its outstanding capital stock (unless
such dividends are used exclusively for payment of principal of or interest on
such promissory note) or make any distributions of its assets in full of such
promissory note.
The payment of dividends by Banco Popular, Banco Popular (Illinois),
Banco Popular (California) or Banco Popular, FSB may also be affected by other
regulatory requirements and policies, such as the maintenance of adequate
capital. If, in the opinion of the applicable regulatory authority, a depository
institution under its jurisdiction is engaged in, or is about to engage in, an
unsafe or unsound practice (that, depending on the financial condition of the
depository institution, could include the payment of dividends), such authority
may require, after notice and hearing, that such depository institution cease
and desist from such practice. The Federal Reserve has issued a policy stat
insured banks and bank holding companies should generally pay dividends only out
of current operating earnings. In addition, all insured depository institutions
are subject to the capitalbased limitations required by FDICIA. See "FDICIA."
See "Supervision and Regulation - Puerto Rico Regulation" for a
description of certain restrictions on Banco Popular's ability to pay dividends
under Puerto Rico law.
FDIC INSURANCE ASSESSMENTS
Banco Popular, Banco Popular (Illinois), Banco Popular (California)
and Banco Popular, FSB are subject to FDIC deposit insurance assessments.
Pursuant to FDICIA, the FDIC has adopted a risk-based assessment
system, under which the assessment rate for an insured depository institution
varies according to the level of risk incurred in its activities. An
institution's risk category is based partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of the following
"supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially
sound institutions with only a few minor weaknesses; group "B" institutions are
institutions that demonstrate weaknesses that, if not corrected, could result in
significant deterioration; and group "C" institutions are institutions for which
there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.
The FDIC reduced the insurance premiums it charges on bank deposits
insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00
for "well capitalized" banks, effective January 1, 1996. On September 30, 1996,
the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into
law. DIFA repealed the statutory minimum premium, and currently premiums related
to deposits assessed by both the BIF and the Savings Association Insurance Fund
("SAIF") are to be assessed at a rate of between 0 cents and 27 cents per
$100.00 of deposits. DIFA also provides for a special one-time assessment
imposed on deposits insured by the SAIF to
66
<PAGE> 76
recapitalize the SAIF to bring the SAIF up to statutory required levels.
BanPonce accrued for the one-time assessment in the third quarter of 1996.
DIFA also separates, effective January 1, 1997, the Financing
Corporation ("FICO") assessment to service the interest on its bond obligations
from the BIF and SAIF assessments. The amount assessed on individual
institutions by the FICO will be in addition to the amount, if any, paid for
deposit insurance according to the FDIC's risk-related assessment rate
schedules. FICO assessment rates for the first semiannual period of 1997 were
set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis
points annually for SAIF-assessable deposits. (These rates may be adjusted
quarterly to reflect changes in assessment bases for the BIF and the SAIF. By
law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the insurance funds are merged or until January
1, 2000, whichever occurs first.) As of December 31, 1996, BanPonce had a BIF
deposit assessment base of approximately $10.1 billion and a SAIF deposit
assessment base of approximately $207 million.
BROKERED DEPOSITS
FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it is
well capitalized, or (ii) it is adequately capitalized and receives a waiver
from the FDIC. A bank that is adequately capitalized may not pay an interest
rate on any deposits in excess of 75 basis points over certain prevailing market
rates specified by regulation. There are no such restrictions on a bank that is
well capitalized. BanPonce does not believe the brokered deposits regulation has
had or will have a material effect on the funding or liquidity of Banco Popular,
Banco Popular (Illinois), Banco Popular (California) or Banco Popular, FSB.
PUERTO RICO REGULATION
As a commercial bank organized under the laws of Puerto Rico, Banco
Popular is subject to supervision, examination and regulation by the Office of
the Commissioner of Financial Institutions of Puerto Rico (the "Office of the
Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended
(the "Banking Law").
Section 27 of the Banking Law requires that at least ten percent (10%)
of the yearly net income of a bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
ten percent (10%) of the total deposits or the total paid-in capital, whichever
is greater. At the end of its most recent fiscal year, Banco Popular 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. However, pursuant to
an order of the Federal Reserve dated November 24, 1982, the Bank has been
exempted from such reserve requirements with respect to deposits payable in
Puerto Rico. As to those deposits, the Section 16 reserve requirements are
applicable.
Section 17 of the Banking Law permits Banco Popular to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of Banco
67
<PAGE> 77
Popular. As of December 31, 1996, the legal lending limit for Banco
Popular under this provision was approximately $90 million. If such loans are
secured by collateral worth at least twenty-five percent (25%) more than the
amount of the loan, the aggregate maximum amount may reach one third of the
paid-in capital of Banco Popular, plus its reserve fund. There are no
restrictions under Section 17 on the amount of loans that are wholly secured by
bonds, securities and other evidences of indebtedness of the Government of the
United States or Puerto Rico, or by current debt bonds, not in default, of
municipalities or instrumentalities of Puerto Rico.
Section 14 of the Banking Law authorizes Banco Popular to conduct
certain financials and related activities directly or through subsidiaries,
including finance leasing of personal property, making and servicing mortgage
loans and operating a small-loan company. Banco Popular engages in these
activities through its wholly owned subsidiaries, Popular Leasing & Rental,
Inc., Popular Mortgage, Inc., and Popular Consumer Services, Inc., respectively,
all of which are organized and operate in Puerto Rico.
The Finance Board, which is a part of the Office of the Commissioner,
but also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico, has
the authority to regulate the maximum interest rates and finance charges that
may be charged on loans to individuals and unincorporated businesses in Puerto
Rico. The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses (including
real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties) is to be
determined by free competition. The Finance Board also has authority to regulate
the maximum finance charges on retail installment sales contracts, which are
currently set at 21%, and for credit card purchases, which are currently set at
26%. There is no maximum rate set for installment sales contracts involving
motor vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Boards of Directors of BanPonce and Banco Popular have appointed
the firm of Price Waterhouse, certified public accountants, as independent
accountants for BanPonce and Banco Popular for the year 1997. Price Waterhouse
has served as BanPonce and Banco Popular's independent accountants since 1991
and 1971, respectively.
The Board of Directors of RCB has appointed the firm of Price
Waterhouse, certified public accountants, as independent accountants for RCB for
the year 1997. Price Waterhouse has served as RCB's independent accountants
since 1971.
EXPERTS
The consolidated financial statements of BanPonce incorporated by
reference to the 1995 Form 10-K, which have been audited by Price Waterhouse,
independent accountants, to the extent and for the periods indicated in their
report thereon, have been so incorporated in reliance on the report of Price
Waterhouse, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of RCB included in this
Prospectus/Proxy Statement, which have been audited by Price Waterhouse,
independent accountants, to the extent and for the periods indicated in their
report thereon, have been so included in reliance on the report of Price
Waterhouse, given on the authority of said firm as experts in accounting and
auditing.
68
<PAGE> 78
VALIDITY OF BANPONCE COMMON STOCK
Brunilda Santos de Alvarez, Esq., Senior Vice President and Legal
Counsel to BanPonce, has delivered her opinion to the effect that the BanPonce
Common Stock to be issued in connection with the Merger, when issued as
contemplated in the Merger Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
PROPOSALS OF SHAREHOLDERS
Neither the Banking Law nor RCB's charter or by-laws give RCB
shareholders the right to require RCB to include any shareholder proposal in
RCB's proxy statement.
OTHER PROPOSALS TO BE ACTED UPON AT THE MEETING
ELECTION OF DIRECTORS
The Board of Directors is nominating the following persons for election
as directors of RCB for the period expiring on the 1998 Annual Meeting or until
their successors have been elected and qualified:
<TABLE>
<CAPTION>
Name Occupation
<S> <C>
J. Adalberto Roig, Jr. President and Chief Executive Office
Julio Pietrantoni Blasini Executive Vice President of RCB
Francisco M. Sueiro Vice President and General Manager
of Mendez Lumber and Trading Co.,
Inc.
Antonio Roig Ferre Public relations executive of RCB
Jesus E. Amaral Architect
Francisco J. Fernandez Orthodontist
Juan L. Balaguer Doctor
Dinorah J. Colon, A.P.M. Consultant
Andres R. Nevares Gonzalez Attorney at law
Saturnino Pena Flores Executive Director of Ryder
Memorial Hospital
Agustin Cabrer, Jr. President of Starlight Housing Development Group
Jose Targa Roig President, Condado Travel Inc.
</TABLE>
The nominees named above constitute the present Board of Directors of RCB.
The Board of Directors of RCB recommends that shareholders vote "FOR" the
election of the nominees named above.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of RCB has appointed Price Waterhouse as
independent auditors of RCB for the year ending December 31, 1997, and has
further directed that the selection of such auditors be submitted for
ratification by the shareholders at the Meeting. RCB has been advised by Price
Waterhouse that neither that firm nor any of its associates has any relationship
with RCB other than the usual relationship that exists between independent
certified public accountants and clients.
The Board of Directors of RCB recommends that the shareholders vote
"FOR" the ratification of Price Waterhouse as RCB's independent accountants.
69
<PAGE> 79
APPROVAL OF THE EXECUTION OF INDEMNIFICATION AGREEMENTS ENTERED
INTO BETWEEN RCB AND ITS DIRECTORS
On December 27, 1996, RCB entered into indemnification agreements (the
"Indemnification Agreements") with its directors which provide in essence that
RCB will indemnify its directors to the fullest extent permitted by law against
certain expenses incurred by the directors in connection with any threatened,
pending or contemplated action, suit or proceeding by reason of the fact that he
or she is or was a director, officer, employee or agent of RCB, provided the
director meets the applicable standard prescribed by law of good faith and
loyalty to RCB. RCB determined to enter into these agreements with its directors
in order to ensure that they acted in the best interests of all the RCB
shareholders in connection with their consideration of the Merger Agreement,
without fear of personal economic loss as long as they acted in accordance with
such standard of good faith and loyalty. A copy of a form of Indemnification
Agreement is attached to this Prospectus/Proxy Statement as Appendix E.
The Board of Directors of RCB recommends that shareholders vote "FOR"
the approval of the Indemnification Agreements mentioned above.
70
<PAGE> 80
Appendix A
Conformed Copy
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 30, 1996 AND AMENDED THROUGH MARCH 20, 1997
BY AND AMONG
BANPONCE CORPORATION,
BANCO POPULAR DE PUERTO RICO
AND
ROIG COMMERCIAL BANK
<PAGE> 81
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1
THE MERGER
1.1. The Merger.............................................................................................. 1
1.2. Effect of the Merger on Outstanding Shares of RCB Common Stock.......................................... 2
1.3. Extraordinary Dividend.................................................................................. 7
1.4. Additional Audit........................................................................................ 7
1.5. Capital Stock of Banco Popular.......................................................................... 8
1.6. Additional Exchange Procedures.......................................................................... 8
1.7. Adjustment to Consideration for Tax Purposes............................................................ 9
1.8. Dissenting Shares....................................................................................... 9
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BANPONCE
2.1. Organization and Qualification......................................................................... 10
2.2. Authority Relative to this Agreement; Non-Contravention................................................ 10
2.3. Validity of BanPonce Common Stock.......................................................................11
2.4. Capital Stock...........................................................................................11
2.5. Prospectus/Proxy Statement..............................................................................11
2.6. Litigation..............................................................................................11
2.7. Compliance with Laws....................................................................................11
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF RCB
3.1. Organization and Qualification..........................................................................12
3.2. Authority Relative to this Agreement; Non-Contravention.................................................12
3.3. Capitalization..........................................................................................12
3.4. Loans...................................................................................................13
3.5. Absence of Undisclosed Liabilities......................................................................13
3.6. Absence of Certain Developments.........................................................................14
3.7. Properties..............................................................................................14
3.8. Environmental Matters...................................................................................15
3.9. Tax Matters.............................................................................................16
</TABLE>
-i-
<PAGE> 82
<TABLE>
<S> <C> <C>
3.10. Contracts and Commitments...............................................................................17
3.11. Litigation..............................................................................................17
3.12. No Brokers or Finders...................................................................................17
3.13. Employees; Labor Matters................................................................................18
3.14. Employee Benefit Plans..................................................................................18
3.15. Insurance...............................................................................................20
3.16. Interest of Certain Persons.............................................................................20
3.17. Compliance with Laws; Permits...........................................................................20
3.18. Administration of Fiduciary Accounts....................................................................20
3.19. Interest Rate Risk Management Instruments; Derivatives; Certain Other Securities........................21
3.20. Prospectus/Proxy Statement..............................................................................21
3.21. Noncompete Provisions...................................................................................21
3.22. Equity Ownership........................................................................................22
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BANPONCE AND RCB
4.1. ........................................................................................................22
4.2. ........................................................................................................23
ARTICLE 5
MATERIAL ADVERSE EFFECT
5.1. Material Adverse Effect.................................................................................24
5.2. Representations and Warranties..........................................................................24
ARTICLE 6
CONDUCT OF BUSINESS PENDING THE MERGER
6.1. Conduct of Business of RCB..............................................................................25
6.2. Conduct of Business of BanPonce.........................................................................27
ARTICLE 7
ADDITIONAL COVENANTS AND AGREEMENTS
7.1. Filings and Approvals...................................................................................28
7.2. Certain Credit Matters..................................................................................28
</TABLE>
-ii-
<PAGE> 83
<TABLE>
<S> <C> <C>
7.3. Monthly Financial Statements............................................................................28
7.4. Expenses................................................................................................28
7.5. No Negotiations, Etc. ..................................................................................28
7.6. Notification of Certain Matters.........................................................................29
7.7. Access to Information; Confidentiality..................................................................29
7.8. Filing of Tax Returns and Adjustments...................................................................30
7.9. Registration Statement..................................................................................31
7.10. Affiliate Letters.......................................................................................32
7.11. Establishment of Accruals...............................................................................32
7.12. Employee Benefit Plans..................................................................................32
7.13. Additional Directors....................................................................................33
7.14. Indemnification and Insurance...........................................................................33
7.15. Reports.................................................................................................35
7.16. Stockholder Approval....................................................................................35
7.17. Efforts to Consummate...................................................................................35
7.18. Taxation................................................................................................35
7.19. Arrangements with Respect to Certain Officers of RCB....................................................35
7.20. Request for Tax Ruling..................................................................................35
ARTICLE 8
CONDITIONS
8.1. Conditions to Obligations of Each Party.................................................................36
8.2. Additional Conditions to Obligation of RCB..............................................................37
8.3. Additional Conditions to Obligation of BanPonce
and Banco Popular.......................................................................................37
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1. Termination.............................................................................................39
9.2. Effect of Termination...................................................................................40
9.3. Termination Fee.........................................................................................40
9.4. Amendment...............................................................................................40
9.5. Waiver..................................................................................................41
ARTICLE 10
GENERAL PROVISIONS
</TABLE>
-iii-
<PAGE> 84
<TABLE>
<S> <C> <C> <C>
10.1. Public Statements.......................................................................................41
10.2. Notices.................................................................................................41
10.3. Interpretation..........................................................................................42
10.4. Severable...............................................................................................42
10.5. Miscellaneous...........................................................................................43
10.6. Survival of Representations, Warranties and Covenants...................................................43
10.7. Schedules...............................................................................................43
SIGNATURES............................................................................................................44
</TABLE>
-iv-
<PAGE> 85
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Section in
Term which Defined
---- -------------
<S> <C>
9/30 Balance Sheet ............................................. 4.2(c)
9/30 Statements ................................................ 4.2(c)
1933 Act ....................................................... 2.2
1934 Act ....................................................... 2.2
Acquisition Proposal ........................................... 7.5
Affiliate ...................................................... 7.10
Agreement ...................................................... Preamble
Allowance ...................................................... 4.1(d)
Asset Classification ........................................... 3.4(b)
Banco Popular .................................................. Preamble
Banking Law .................................................... 1.1(a)
Bank Regulators ................................................ 3.17
BanPonce ....................................................... Preamble
BanPonce Average Stock Price ................................... 1.2(a)(ii)
BanPonce Common Stock .......................................... Recitals
BanPonce Preferred Stock ....................................... 2.4
BanPonce Reports ............................................... 4.1(a)
Benefit Plans .................................................. 3.14(a)
Blue Sky Laws .................................................. 2.2
Business Day ................................................... 1.2(a)(ii)
Cash Election Shares ........................................... 1.2(b)
Cash Number .................................................... 1.2(a)(i)
Claim .......................................................... 7.14(a)
Commonwealth ................................................... Preamble, 2.1
Commonwealth Authorities ....................................... 4.1(a)
Consideration .................................................. 1.2(a)(i)(B)
Converted Cash Election Shares ................................. 1.2(c)(A)(iii)
Converted Stock Election Shares ................................ 1.2(c)(B)(ii)
Dissenting Shares .............................................. 1.8(i)
Effective Date ................................................. 1.1(b)
Effective Time ................................................. 1.1(b)
Election ....................................................... 1.2(b)
Election Deadline .............................................. 1.2(d)
Election Form .................................................. 1.2(b)
Employees ...................................................... 3.14(a)
Environmental Law .............................................. 3.8(e)
</TABLE>
-v-
<PAGE> 86
<TABLE>
<S> <C>
Equity Shortfall ............................................... 1.2(a)(i)
ERISA .......................................................... 3.14(a)
ERISA Affiliate ................................................ 3.14(c)
Exchange Agent ................................................. 1.2(b)
Exchange Ratio ................................................. 1.2(a)(ii)
Excluded Shares ................................................ 1.2(a)(i)
Extraordinary Dividend ......................................... 1.2(a)(i)
FDIC ........................................................... 4.1(a)
FRB ............................................................ 4.1(a)
GAAP ........................................................... 4.1(c)
Hazardous Material ............................................. 3.8(e)
HSR Act ........................................................ 2.2
Indemnified Liabilities ........................................ 7.14(a)
Indemnified Parties ............................................ 7.14(a)
Latest Balance Sheet ........................................... 3.7(a)
Liabilities .................................................... 3.5
Loan/Fiduciary Property ........................................ 3.8(e)
Mailing Date ................................................... 1.2(d)
Material Adverse Effect ........................................ 5.1
Meeting ........................................................ 7.9(a)
Merger ......................................................... Recitals
No-Election Shares ............................................. 1.2(b)
Old Certificates ............................................... 1.2(d)
Outstanding Shares ............................................. 1.2(a)(i)
Participation Facility ......................................... 3.8(e)
PCBs ........................................................... 3.8(e)
Pension Plan ................................................... 3.14(b)
Per Share Cash Consideration ................................... 1.2(a)(i)(B)
Per Share Cash Reduction ....................................... 1.2(a)(i)
Per Share Stock Consideration .................................. 1.2(a)(i)(A)
Permissible Activities ......................................... 3.21
Plans .......................................................... 3.14(b)
previously disclosed ........................................... 10.3
prior consultation ............................................. 6.1
Prospectus/Proxy Statement ..................................... 7.9(a)
Protected Election Shares ...................................... 1.2(b)
Puerto Rico Code ............................................... 1.2(c)(E), 3.14(b)
Puerto Rico Tax Code ........................................... 3.14(b)
RCB ............................................................ Preamble
RCB Board ...................................................... 3.2
RCB Common Stock ............................................... Recitals
RCB Reports .................................................... 4.2(a)
</TABLE>
-vi-
<PAGE> 87
<TABLE>
<S> <C>
RCB Statements ................................................. 4.2(c)
Registration Statement ......................................... 7.9(a)
Requisite Approvals ............................................ 2.2
Rights ......................................................... 3.3(a)
Ruling Request ................................................. 7.20
SEC ............................................................ 3.7(b)
Stock Election Shares .......................................... 1.2(b)
Stock Number ................................................... 1.2(a)(i)
Stock-Selected No-Election Shares .............................. 1.2(c)(A)(ii)
Surviving Bank ................................................. 1.1(a)
Tax ............................................................ 3.9
Voting Debt .................................................... 3.3(b)
</TABLE>
-vii-
<PAGE> 88
AGREEMENT AND PLAN OF MERGER, dated as of December 30, 1996 and
amended through March 20, 1997 (this "Agreement"), by and among BanPonce
Corporation ("BanPonce"), a corporation organized under the laws of the
Commonwealth of Puerto Rico (the "Commonwealth"), Banco Popular de Puerto
Rico ("Banco Popular"), a bank organized under the laws of the Commonwealth,
and Roig Commercial Bank ("RCB"), a bank organized under the laws of the
Commonwealth.
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of BanPonce, Banco Popular
and RCB have determined that it is in the best interests of BanPonce, Banco
Popular and RCB and their respective stockholders to combine their respective
businesses through the merger (the "Merger") of RCB with and into Banco Popular,
a wholly-owned subsidiary of BanPonce, on the terms and conditions set forth in
this Agreement; and
WHEREAS, as a result of the Merger, all the outstanding Common Stock,
$10.00 par value, of RCB ("RCB Common Stock") will be converted into either (i)
Common Stock, $6.00 par value, of BanPonce ("BanPonce Common Stock") or (ii) the
right to receive cash, subject to the election and allocation procedures and the
other terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, promises and obligations contained herein, the parties hereto agree
as follows:
ARTICLE 1
THE MERGER
1.1. The Merger.
(a) At the Effective Time (as defined in Section 1.1(b)), RCB shall
merge with and into Banco Popular, and the separate existence of RCB shall
cease. Banco Popular shall be the surviving bank in the Merger (sometimes
hereinafter referred to as the "Surviving Bank"), and the separate corporate
existence of Banco Popular, with all its rights, privileges and franchises,
shall continue unaffected by the Merger. The Merger shall be pursuant to and
have the effects specified in the banking laws of the Commonwealth (the "Banking
Law"). The Charter and Bylaws of Banco Popular, as in effect immediately prior
to the Effective Date (as defined in Section 1.1(b)), shall be the Charter and
the Bylaws of the Surviving Bank until further amended as provided therein.
Subject to Section 7.13, the directors and officers of Banco Popular immediately
prior to the Effective Date shall be the directors and officers of the Surviving
Bank until their successors are elected and qualify.
<PAGE> 89
(b) Subject to Section 1.2(d), on a date selected by BanPonce, which
shall be no later than the 30th day following the satisfaction or waiver of the
conditions set forth in Article 8, the parties hereto shall cause this Agreement
to be properly filed in the office of the Secretary of State of the Commonwealth
in accordance with the Banking Law. The Merger shall become effective at the
time (the "Effective Time") this Agreement is properly filed in accordance with
the Banking Law. The date on which the Effective Time shall occur is herein
referred to as the "Effective Date".
1.2. Effect of the Merger on Outstanding Shares of RCB Common Stock.
Subject to the terms and conditions of this Agreement, to effectuate, and
automatically by virtue of, the Merger:
(a) (i) At the Effective Time, each share of RCB Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares held
as treasury stock of RCB and shares held directly or indirectly by BanPonce,
except shares ("Excluded Shares") held by BanPonce in a fiduciary capacity or in
satisfaction of a debt previously contracted) ("Outstanding Shares") shall
become and be converted into the right to receive, at the election of each
holder thereof, but subject to the election and allocation procedures of this
Section 1.2(a), Sections 1.2(b) and (c), the other provisions of this Section
1.2, Section 1.3(b) and Section 1.7, either:
(A) a number of shares of BanPonce Common Stock equal to the
sum of (x) one-half of the Exchange Ratio (as defined below) and (y)
the ratio of $100 to the BanPonce Average Stock Price (as defined
below) (the "Per Share Stock Consideration"), or
(B) cash equal to the sum of (x) $100 and (y) the product of
(I) one-half of the Exchange Ratio and (II) the BanPonce Average Stock
Price (the "Per Share Cash Consideration" and, together with the Per
Share Stock Consideration, the "Consideration");
provided, that: if RCB declares an extraordinary dividend pursuant to Section
1.3 (the "Extraordinary Dividend") and/or if RCB's shareholders' equity
(adjusted as provided in clause (ii)) is less than $66,100,000 (less the amount
of the Extraordinary Dividend, if any) as of the close of business on the date
that is 15 calendar days preceding the Effective Date (the amount, if any, by
which RCB's shareholders' equity is less than $66,100,000 (less the amount of
the Extraordinary Dividend, if any), the "Equity Shortfall"), the Per Share
Stock Consideration and the Per Share Cash Consideration shall be reduced as
follows:
(X) the Per Share Cash Consideration shall be reduced by an
amount equal to (I) the sum of the Extraordinary Dividend (if any) and
the Equity Shortfall (if any), divided by (II) the number of
Outstanding Shares (the "Per Share Cash Reduction"); and
-2-
<PAGE> 90
(Y) the Per Share Stock Consideration shall be reduced by an
amount equal to the Per Share Cash Reduction divided by the BanPonce
Average Stock Price;
provided, further that (subject to the proviso in Section 1.2(b)):
(X) 50% of the Outstanding Shares shall be converted into the
right to receive the Per Share Cash Consideration (such number of
shares of RCB Common Stock, the "Cash Number"); and
(Y) 50% of the Outstanding Shares shall be converted into the
right to receive the Per Share Stock Consideration (such number of
shares of RCB Common Stock, the "Stock Number");
(ii) The term "Exchange Ratio" means $200 divided by the
BanPonce Average Stock Price provided that (x) if the BanPonce Average Stock
Price exceeds $37.40, the Exchange Ratio shall be 5.348 and (y) if the BanPonce
Average Stock Price is less than $30.60, the Exchange Ratio shall be 6.536. The
term "BanPonce Average Stock Price" means the average of the last sale price for
BanPonce Common Stock quoted on the Nasdaq National Market as reported in the
Wall Street Journal (or, in the absence thereof, as reported in such other
source upon which BanPonce and RCB shall agree) for each of the ten consecutive
trading days on which BanPonce Common Stock is traded on the Nasdaq National
Market ending on, and including, the trading day which is two Business Days
prior to the Election Deadline (as defined in Section 1.2(d)). BanPonce shall
promptly calculate and make public disclosure of the BanPonce Average Stock
Price. The term "Business Day" shall mean any day on which depository
institutions are generally open for business in the Commonwealth and the Nasdaq
National Market is generally open for business. In computing RCB's shareholders'
equity for purposes of the first proviso to clause (i) of this Section 1.2(a),
(v) RCB's shareholders' equity shall be defined as the sum of its common stock,
surplus and undivided profits, but excluding any unrealized gain or loss on
securities available for sale, (w) RCB's shareholders' equity shall reflect any
adjustments required as a result of the Price Waterhouse audit referred to in
Section 1.4, (x) computations shall be made in accordance with GAAP as
consistently applied, (y) any dividend declared between the month end preceding
the Election Deadline and the Effective Date shall be deducted from RCB's
shareholders' equity and (z) any reduction in RCB's shareholders' equity
resulting from any reduction after the date hereof in the value of RCB's
securities portfolio due to an increase in the general level of interest rates
shall be excluded; provided, however, that, to the extent that gains are taken
on the sale of securities in RCB's securities portfolio after the date hereof,
RCB's shareholders' equity shall be reduced to reflect unrealized losses in its
securities portfolio that exceed the amount of such unrealized losses as of the
date hereof.
(iii) Notwithstanding any other provision hereof, if BanPonce
effects a stock dividend, extraordinary dividend, reclassification,
recapitalization, split-up, combination,
-3-
<PAGE> 91
exchange of shares or similar transaction, after the date hereof and before the
Effective Time, the Exchange Ratio shall be appropriately adjusted.
(iv) At the Effective Time, each share of RCB Common Stock
that, immediately prior to the Effective Time, is held as treasury stock of RCB
or held directly or indirectly by BanPonce, other than Excluded Shares, shall by
virtue of the Merger be cancelled and retired and shall cease to exist, and no
exchange or payment shall be made therefor.
(b) Subject to the allocation procedures set forth in Section 1.2(c),
each record holder of RCB Common Stock immediately prior to the Effective Time
will be entitled (i) to elect to receive BanPonce Common Stock for all or some
of the shares of RCB Common Stock ("Stock Election Shares") held by such record
holder, (ii) to elect to receive cash for all or some of the shares of RCB
Common Stock ("Cash Election Shares") held by such record holder or (iii) to
indicate that such holder makes no such election for all or some of the shares
of RCB Common Stock ("No-Election Shares") held by such record holder; provided,
that each record holder's election to receive BanPonce Common Stock shall be
honored by the Exchange Agent (as defined below) up to 50% of the RCB Common
Stock owned by such record holder (such number of shares for which the election
is so honored are referred to as "Protected Election Shares"). Protected
Election Shares shall not be subject to the allocation procedures set forth in
Section 1.2(c); shall be deducted from the Stock Number for purposes of Section
1.2(c); and shall not be deemed Stock Election Shares for purposes of the
calculation in Section 1.2(c). All such elections (each, an "Election") shall be
made on a form designed for that purpose by BanPonce and reasonably acceptable
to RCB (an "Election Form"). Any shares of RCB Common Stock with respect to
which the record holder thereof shall not, as of the Election Deadline (as
defined in Section 1.2(d)), have properly submitted to the Exchange Agent a
properly completed Election Form shall be deemed to be No-Election Shares. A
record holder acting in different capacities shall be entitled to submit an
Election Form for each capacity in which such record holder so acts with respect
to each person for which it so acts. The exchange agent (the "Exchange Agent")
shall be Banco Popular.
(c) Not later than the 10th day after the Election Deadline, BanPonce
shall cause the Exchange Agent to effect the allocation among the holders of RCB
Common Stock of rights to receive the Per Share Stock Consideration or the Per
Share Cash Consideration in the Merger as follows:
(A) Number of Stock Elections Less Than Stock Number.
Subject to clause (D) below, if the number of Stock Election Shares is
less than the Stock Number, then
(i) all Stock Election Shares shall be
converted into the right to receive the Per Share Stock
Consideration,
-4-
<PAGE> 92
(ii) the Exchange Agent shall select (by
random selection or by lot) from among the No-Election Shares
a sufficient number of No-Election Shares such that the sum of
such number and the number of Stock Election Shares shall
equal as closely as practicable the Stock Number, and all such
selected shares ("Stock-Selected No-Election Shares") shall be
converted into the right to receive the Per Share Stock
Consideration, provided that if the sum of all No-Election
Shares and Stock Election Shares is less than the Stock
Number, all No-Election Shares shall be converted into the
right to receive the Per Share Stock Consideration and thereby
become Stock- Selected No-Election Shares,
(iii) if the sum of Stock Election Shares
and No-Election Shares is less than the Stock Number, the
Exchange Agent shall convert (by the method of pro rata
conversion described below), a sufficient number of Cash
Election Shares into Stock Election Shares ("Converted Cash
Election Shares") such that the sum of Stock Election Shares,
No-Election Shares and Converted Cash Election Shares equals
as closely as practicable the Stock Number, and all Converted
Cash Election Shares shall be converted into the right to
receive the Per Share Stock Consideration, and
(iv) any No-Election Shares and the Cash
Election Shares that are not Stock-Selected No-Election Shares
or Converted Cash Election Shares (as the case may be) shall
be converted into the right to receive the Per Share Cash
Consideration; or
(B) Number of Stock Elections Greater Than Stock
Number. Subject to clause (D) below, if the number of Stock
Election Shares is greater than the Stock Number, then
(i) all Cash Election Shares and No-Election
Shares shall be converted into the right to receive
the Per Share Cash Consideration,
(ii) the Exchange Agent shall convert (by
the method of pro rata conversion described below) a
sufficient number of Stock Election Shares into Cash
Election Shares ("Converted Stock Election Shares")
such that the remainder of Stock Election Shares
(before such conversion) less Converted Stock
Election Shares equals as closely as practicable the
Stock Number, and all Converted Stock Election Shares
shall be converted into the right to receive the Per
Share Cash Consideration, and
(iii) the Stock Election Shares which are
not Converted Stock Election Shares shall be
converted into the right to receive the Per Share
Stock Consideration; or
-5-
<PAGE> 93
(C) Stock Elections Equal to Stock Number. If the
number of Stock Election Shares equals the Stock Number, then all Stock
Election Shares shall be converted into the right to receive the Per
Share Stock Consideration and all Cash Election Shares and No-Election
Shares shall be converted into the right to receive the Per Share Cash
Consideration.
(D) Pro Rata Conversion. In the event the Exchange
Agent is required pursuant to Section 1.2(c)(A)(iii) to convert Cash
Election Shares into Stock Election Shares, the election by each holder
of Cash Election Shares shall be converted on a pro rata basis into
Cash Election Shares and Stock Election Shares, with the Stock Election
Shares to be equal to the product of (x) the number of such holder's
Cash Election Shares before such conversion and (y) the fraction in
which the total number of Converted Cash Election Shares comprises the
numerator and the total number of Cash Election Shares before such
conversion comprises the denominator. In the event the Exchange Agent
is required pursuant to Section 1.2(c)(B)(ii) to convert Stock Election
Shares into Cash Election Shares, the election by each holder of Stock
Election Shares shall be converted on a pro rata basis into Stock
Election Shares and Cash Election Shares, with the Cash Election Shares
to be equal to the product of (x) the number of such holder's Stock
Election Shares before such conversion and (y) the fraction in which
the total number of Converted Stock Election Shares comprises the
numerator and the total number of Stock Election Shares before such
conversion comprises the denominator.
(E) Notwithstanding the foregoing, a person who
immediately prior to the Effective Time, owned (for purposes of the
Puerto Rico Internal Revenue Code of 1994, as amended (the "Puerto Rico
Code")) 1% or more of the outstanding shares of RCB Common Stock and
who does not elect to receive Per Share Cash Consideration for all his
shares, shall deliver a written agreement, in a form reasonably
acceptable to BanPonce, containing customary representations to the
effect that such holder has no present intention to sell, exchange or
otherwise dispose of such shares of BanPonce Common Stock to be
received in exchange for such shares of RCB Common Stock, and if such
holder shall not deliver such a written agreement, in a form reasonably
acceptable to BanPonce, at the election of BanPonce such person shall
instead receive the Per Share Cash Consideration with respect to such
shares, regardless of the election (or lack thereof) made by such
person in its Election Form, and, if BanPonce exercises such election,
the Cash Number shall be reduced by the number of shares of RCB Common
Stock that were owned by such person immediately prior to the Effective
Time.
(d) Not later than the 25th business day prior to the anticipated
Effective Date or such other date as the parties may agree in writing (the
"Mailing Date"), BanPonce shall mail an Election Form and a letter of
transmittal to each person that was a holder of record of RCB Common Stock
immediately prior to the Mailing Date. To be effective, an Election Form must be
properly completed, signed and actually received by the Exchange Agent not later
than 5:00
-6-
<PAGE> 94
p.m., Puerto Rico time, on the Effective Date (which will be not earlier than
the 20th day after the Mailing Date) or such later date as may be agreed by
BanPonce and RCB (the "Election Deadline") and accompanied by the certificates
formerly representing all the shares of RCB Common Stock ("Old Certificates") as
to which the Election is being made (or an appropriate guarantee of delivery by
an eligible organiza tion). BanPonce shall have reasonable discretion, which it
may delegate in whole or in part to the Exchange Agent, to determine whether
Election Forms have been properly completed, signed and timely submitted or to
disregard defects in Election Forms; such decisions of BanPonce (or of the
Exchange Agent) shall be conclusive and binding. Neither BanPonce nor the
Exchange Agent shall be under any obligation to notify any person of any defect
in an Election Form submitted to the Exchange Agent. The Exchange Agent and
BanPonce shall also make all computations contemplated by Sections 1.2 and 1.3
hereof.
(e) No fractional interests in shares of BanPonce Common Stock, and no
certificates representing such fractional interests, shall be issued upon the
surrender for exchange of certificates representing RCB Common Stock. In lieu of
any fractional share, BanPonce shall pay to each former holder of RCB Common
Stock who otherwise would be entitled to receive a fractional interest in a
share of BanPonce Common Stock an amount of cash (without interest) determined
by multiplying (i) the last sale price per share of BanPonce Common Stock on the
date of the Effective Time quoted on the Nasdaq National Market as reported in
the Wall Street Journal multiplied by (ii) the fractional interest to which such
holder would otherwise be entitled.
(f) For purposes hereof, all calculations of the BanPonce Average Stock
Price and the Exchange Ratio shall be rounded to the nearest one hundred
thousandth.
1.3. Extraordinary Dividend.
(a) On or prior to the Effective Date, and subject to the terms of this
Section 1.3 and compliance with all laws, regulations and regulatory policies,
RCB may declare and pay an extraordinary cash dividend not exceeding
$20,000,000; provided, however, that RCB shall not pay an extraordinary cash
dividend pursuant to this Section 1.3, unless RCB shall have received a ruling
from the Puerto Rico Treasury Department to the effect that payment of such
dividend in the amount proposed shall not disqualify the Merger as a
"reorganization" within the meaning of Section 1112(g)(1) of the Puerto Rico
Code.
(b) If any extraordinary dividend is paid pursuant to Section 1.3(a),
the Stock Number and the Cash Number shall be adjusted upward and downward,
respectively, by the same amount to the extent necessary so that the sum of (i)
the extraordinary dividend and (ii) the product of the Cash Number and the Per
Share Cash Consideration (as determined pursuant to Section 1.2(a)(i)) is not
greater than the product of (x) the Stock Number, (y) the BanPonce Average Stock
Price and (z) the Per Share Stock Consideration (as determined pursuant to
Section 1.2(a)(i)).
-7-
<PAGE> 95
1.4. Additional Audit. Price Waterhouse shall conduct an audit in
accordance with generally accepted auditing standards of the statement of
condition of RCB as of the month end immediately preceding the Election
Deadline that is at least 30 days prior to the Election Deadline.
1.5. Capital Stock of Banco Popular. At and after the Effective Time,
each share of Banco Popular common stock issued and outstanding immediately
prior to the Effective Date shall remain an issued and outstanding share of
common stock of the Surviving Bank and shall not be affected by the Merger.
1.6. Additional Exchange Procedures.
(a) An Affiliate (as defined in Section 7.10) shall not be entitled to
receive any Consideration until such Affiliate shall have duly executed and
delivered an appropriate agreement described in Section 7.10.
(b) At and after the Effective Time, each Old Certificate, and each
share of RCB Common Stock represented thereby, shall represent for all purposes
only the right to receive Consideration as provided herein, and nothing else.
(c) If any Consideration is to be issued to a person other than the
registered holder of the shares of RCB Common Stock formerly represented by the
Old Certificate or Certificates surrendered with respect thereto, it shall be a
condition to such issuance that the Old Certificate or Certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such issuance shall pay to the Exchange
Agent any transfer or other taxes required as a result of such issuance to a
person other than the registered holder of such shares of RCB Common Stock or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(d) At and after the Effective Time, there shall be no further
registration or transfers of shares of RCB Common Stock, and the stock ledgers
of RCB shall be closed. After the Effective Time, Old Certificates presented to
the Surviving Bank for transfer shall be cancelled
-8-
<PAGE> 96
and exchanged for the Consideration provided for, and in accordance with the
procedures set forth, in this Article 1.
(e) After the first anniversary of the date of the Effective Time, any
former holders of RCB Common Stock who have not delivered Old Certificates to
the Exchange Agent in accordance with this Section 1.6 prior to that time shall
thereafter look only to BanPonce for the Consideration in respect of any shares
of RCB Common Stock formerly represented by such Old Certificates.
(f) None of the Surviving Bank, BanPonce and the Exchange Agent shall
be liable to any former holder of RCB Common Stock for any securities delivered
or any cash paid to a public official pursuant to applicable escheat or
abandoned property laws or for any securities or cash retained by any of them as
permitted by any such law.
(g) No dividends or other distributions with respect to Consideration
shall be paid to the holder of any unsurrendered Old Certificates until such Old
Certificates are surrendered as provided in this Section. Upon such surrender,
there shall be paid, without interest, to the person in whose name any Per Share
Stock Consideration is registered, all dividends and other distributions payable
in respect of such securities on a date subsequent to, and in respect of a
record date after, the Effective Time. No interest will be paid or accrued on
the Per Share Cash Consideration or the cash paid in lieu of fractional shares.
(h) In the event that any Old Certificate shall have been lost, stolen
or destroyed, the Exchange Agent shall pay in respect of such lost, stolen or
destroyed certificate, upon the making of an affidavit of that fact by the
holder thereof, the Consideration as may be provided pursuant to this Agreement;
provided, however, that BanPonce may, in its discretion and as a condition
precedent to the payment thereof, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such sum as it may direct as
indemnity against any claim that may be made against BanPonce, Banco Popular,
RCB, the Exchange Agent or any other party with respect to the certificate
alleged to have been lost, stolen or destroyed.
1.7. Adjustment to Consideration for Tax Purposes. If no Tax Ruling has
been obtained and either Pietrantoni, Mendez & Alvarez or McConnell Valdes
determines, in its sole discretion, that it is unable to deliver the opinion
described in Sections 8.2(c) or 8.3(e) (as the case may be) by reason of the
percentage of the Consideration that is not BanPonce Common Stock (as determined
for Puerto Rican tax purposes), then BanPonce, at its sole discretion, may
provide that the Stock Number shall be increased and the Cash Number decreased
(in the same amount) to the minimum extent necessary to enable Pietrantoni,
Mendez & Alvarez or McConnell Valdes, as the case may be, to deliver such
opinion.
1.8. Dissenting Shares. Notwithstanding any provision of this Agreement
to the contrary, if holders of shares of RCB Common Stock are entitled to demand
appraisal for their shares under the Banking Law, the following shall apply:
-9-
<PAGE> 97
(i) Any shares of RCB Common Stock held by a holder who has
demanded appraisal of his shares and as of the Effective Date has
neither effectively withdrawn nor lost his right to such appraisal (the
"Dissenting Shares") shall not be converted in the manner set forth in
Section 1.2, but the holder thereof shall only be entitled to such
rights as are granted by the Banking Law.
(ii) If after the Effective Date any holder of Dissenting
Shares shall effectively withdraw or lose (through failure to perfect
or otherwise) his right to appraisal, then 50% of such Dissenting
Shares shall be converted into the Per Share Stock Consideration and
50% of such Dissenting Shares shall be converted into the Per Share
Cash Consideration.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BANPONCE
In addition to its representations and warranties in Article 4, and
subject to Article 5, BanPonce hereby represents and warrants to RCB as follows:
2.1. Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth (the "Commonwealth"), and each of it and Banco Popular has the
requisite corporate power to carry on its business as now conducted. Each of it
and Banco Popular is licensed or qualified to do business in every jurisdiction
in which the nature of its business or its ownership of property requires it to
be so licensed or qualified, except where the failure to be so licensed or
qualified would not have or would not reasonably be expected to have a Material
Adverse Effect (as defined in Section 5.1).
2.2. Authority Relative to this Agreement; Non-Contravention. Each of
BanPonce and Banco Popular has the requisite corporate power and authority to
enter into this Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery and
performance of this Agreement by each of BanPonce and Banco Popular and the
consummation by each of the transactions contemplated hereby have been duly
authorized by its Board of Directors, and no other corporate proceedings on its
part are necessary to authorize this Agreement and such transactions. This
Agreement has been duly executed and delivered by each of BanPonce and Banco
Popular and constitutes a valid and binding obligation of each, enforceable in
accordance with its terms. Each of BanPonce and Banco Popular is not subject to,
or obligated under, any provision of (a) its Charter or Bylaws, (b) any
agreement, arrangement or understanding, (c) any license, franchise or permit or
(d) subject to obtaining the approvals referred to in the next sentence, any
law, regulation, order, judgment or decree, which would be breached or violated,
or in respect of which a right of termination or acceleration or any encumbrance
on any of its or any of its subsidiaries' assets would be created, by its
execution, delivery and performance of this Agreement and the consummation by it
of the transactions
-10-
<PAGE> 98
contemplated hereby, except in the case of clauses (b) and (c) for any breach,
violation, right of acceleration or termination or encumbrance which would not
have a Material Adverse Effect. Other than the authorizations, consents or
approvals and filings required under or in connection with the Bank Merger Act
(12 U.S.C. ss. 1828(c)), the Banking Law, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of
1933, as amended, and the rules and regulations thereunder (the "1933 Act"), the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "1934 Act"), state and the Commonwealth securities or blue sky
laws, and the rules and regulations thereunder ("Blue Sky Laws") and the filing
of this Agreement in accordance with the Banking Law (collectively, the
"Requisite Approvals"), no authorization, consent or approval of, or filing
with, any public body, court or authority is necessary on its part for the
consummation by either BanPonce or Banco Popular of the transactions
contemplated by this Agreement.
2.3. Validity of BanPonce Common Stock. The shares of BanPonce Common
Stock to be issued as Per Share Stock Consideration will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights.
2.4. Capital Stock. The authorized capital stock of BanPonce consists
of 90,000,000 shares of BanPonce Common Stock, par value $6.00 per share and
10,000,000 shares of preferred stock, no par value (the "BanPonce Preferred
Stock"). As of September 30, 1996, (a) 66,088,506 shares of BanPonce Common
Stock were issued and outstanding, and (b) 4,000,000 shares of Preferred Stock,
no par value, were issued and outstanding. Except as set forth in Schedule 2.4,
there are no Rights (as defined in Section 3.3) in respect of BanPonce Common
Stock.
2.5. Prospectus/Proxy Statement. At the time the Registration Statement
(as defined in Section 7.9(a)) becomes effective and at the time the
Prospectus/Proxy Statement (as defined in Section 7.9(a)) is mailed to the
stockholders of RCB with respect to the meeting of stockholders referred to in
Section 7.9(a) and at all times subsequent to such mailing up to and including
the time of such meeting, the Registration Statement and the Prospectus/Proxy
Statement (including any amendments or supplements thereto), with respect to all
information set forth therein relating to it, the BanPonce Common Stock, this
Agreement and the Merger, will (a) comply as to form in all material respects
with applicable provisions of the 1933 Act and the 1934 Act and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
2.6. Litigation. Except as disclosed in the BanPonce Reports,
there are no actions, suits, proceedings, orders or investigations pending or,
to the best knowledge of BanPonce, threatened against BanPonce or any of its
subsidiaries.
2.7. Compliance with Laws. Each of BanPonce and its subsidiaries is in
compliance with applicable laws and regulations of the Commonwealth and foreign,
federal, state and local
-11-
<PAGE> 99
governments and all agencies thereof which affect the
business or any owned or leased properties of BanPonce or any of its
subsidiaries and to which BanPonce or any of its subsidiaries may be subject.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF RCB
In addition to its representations and warranties set forth in Article
4, and subject to Article 5, RCB hereby represents and warrants to BanPonce and
Banco Popular as follows:
3.1. Organization and Qualification. RCB is a bank duly organized,
validly existing and in good standing under the Banking Law and it has the
requisite corporate power and authority to carry on its business as now
conducted. The copies of the Charter and Bylaws of RCB which have been made
available to BanPonce on or prior to the date of this Agreement are correct and
complete and reflect all amendments made thereto through such date. RCB is
licensed or qualified to do business in every jurisdiction in which the nature
of its business or its ownership of property requires it to be so licensed or
qualified.
3.2. Authority Relative to this Agreement; Non-Contravention. RCB has
the requisite corporate power and authority to enter into this Agreement, to
carry out its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by RCB and the consummation by RCB of the transactions contemplated hereby have
been duly authorized by the Board of Directors of RCB (the "RCB Board") and,
except for approval of this Agreement and the Merger by the affirmative vote of
the holders of 75% of the outstanding shares of RCB Common Stock, no other
corporate proceedings on the part of RCB are necessary to authorize this
Agreement and such transactions. This Agreement has been duly executed and
delivered by RCB and constitutes a valid and binding obligation of RCB,
enforceable in accordance with its terms. RCB is not subject to, or obligated
under, any provision of (a) its Charter or Bylaws, (b) any agreement,
arrangement or understanding, (c) any license, franchise or permit or (d) any
law, regulation, order, judgment or decree, which would be breached or violated,
or in respect of which a right of termination or acceleration or any encumbrance
on any assets of RCB would be created, by the execution, delivery or performance
of this Agreement, or the consummation of the transactions contemplated hereby,
except in the case of clauses (b) and (c) for any breach, violation, right of
acceleration or termination or encumbrance which would not have a Material
Adverse Effect. Other than in connection with obtaining the Requisite Approvals,
no authorization, consent or approval of, or filing with, any public body, court
or authority is necessary on the part of RCB for the consummation by RCB of the
transactions contemplated by this Agreement.
-12-
<PAGE> 100
3.3. Capitalization.
(a) The authorized, issued and outstanding capital stock of RCB as of
the date hereof is as follows: of the 2,500,000 authorized shares of RCB Common
Stock, 600,000 are outstanding. The issued and outstanding shares of capital
stock of RCB are duly authorized, validly issued, fully paid and nonassessable
and have not been issued in violation of any preemptive or similar rights. There
are no options, warrants, conversion privileges, preemptive rights or other
rights, agreements, arrangements or commitments ("Rights") obligating RCB to
issue, sell, purchase or redeem any shares of its capital stock or securities or
obligations of any kind convertible into or exchangeable for any shares of its
capital stock, nor are there any stock appreciation, phantom or similar rights
outstanding based upon the book or market value or any other attribute of any of
the capital stock of RCB, or the earnings or other attributes of RCB.
(b) No bonds, debentures, notes or other indebtedness of RCB having the
right to vote on or approve any of the transactions contemplated hereby ("Voting
Debt") are issued or outstanding.
3.4. Loans.
(a) The documentation relating to the loans made by RCB and relating to
all security interests, mortgages and other liens with respect to all collateral
for such loans, taken as a whole, are adequate for the enforcement of the
material terms of such loans and of the related security interests, mortgages
and other liens. The terms of such loans and of the related security interests,
mortgages and other liens comply in all material respects with all applicable
laws, rules and regulations (including, without limitation, laws, rules and
regulations relating to the extension of credit).
(b) Schedule 3.4(b) sets forth a list, which is true, correct and
complete in all material respects, of the aggregate amounts of loans, extensions
of credit and other assets of RCB that have been criticized or classified as of
November 30, 1996 by RCB, separated by category of classification or criticism
(the "Asset Classification"); and no amounts of loans, extensions of credit or
other assets that have been classified or criticized as of the date hereof by
any representative of any governmental entity as "Other Loans Especially
Mentioned", "Substandard", "Doubtful", "Loss" or words of similar import are
excluded from the amounts disclosed in the Asset Classification, other than
amounts of loans, extensions of credit or other assets that were charged off by
RCB prior to the date hereof. Except as set forth on Schedule 3.4, as of
November 30, 1996, there are no loans, leases, other extensions of credit or
commitments to extend credit by RCB that have been or, to RCB's knowledge,
should have been classified as non-accrual, as restructured, as 90 days past
due, as still accruing and doubtful of collection or any comparable
classification.
-13-
<PAGE> 101
(c) As of November 30, 1996, there are no agreements or commitments
binding RCB to extend credit to any borrower or affiliated borrowers of $250,000
or more, except as set forth on Schedule 3.4(c).
3.5. Absence of Undisclosed Liabilities. All the obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, and regardless of when asserted), including Taxes
(as defined in Section 3.9) (collectively, "Liabilities"), required to be
reflected or reserved against in the balance sheets in the RCB Reports (as
hereinafter defined), or in the notes thereto, in accordance with generally
accepted accounting principles have been so reflected. RCB has no such
Liabilities, except: (a) as reflected in the RCB Reports, (b) Liabilities which
have arisen in the ordinary course of business after the date of the most recent
RCB balance sheet provided to BanPonce, provided that such Liabilities are
included in the next following RCB balance sheet provided to BanPonce, and (c)
as otherwise set forth on Schedule 3.5.
3.6. Absence of Certain Developments. Except as set forth on Schedule
3.6, RCB has not agreed, promised or committed to take any action that, if taken
or agreed, promised or committed to after the date hereof, would violate or
conflict with Section 6.1 hereof.
3.7. Properties.
(a) Except as disclosed in the RCB Reports (as defined in Section 4.1)
filed prior to the date hereof, RCB owns good and marketable title to all the
real property and all of the personal property, fixtures, furniture and
equipment reflected on the Latest Balance Sheet (as defined below) or acquired
since the date thereof (other than real property reflected on the Latest Balance
Sheet as REO), free and clear of all liens, pledges, security, interests,
encumbrances or charges of any kind, except for (i) mortgages on real property
set forth on Schedule 3.7(a), (ii) encumbrances which do not materially affect
the aggregate value of, or interfere with the past or future use or ability to
convey, the property subject thereto or affected thereby, (iii) liens for
current taxes and special assessments not yet due and payable, (iv) leasehold
estates with respect to multi-tenant buildings owned by RCB, which leases are
identified on Schedule 3.7(a), (v) property disposed of since the date of the
Latest Balance Sheet in the ordinary course of business, (vi) utility easements
and (vii) the interest of the lessor in properties leased by RCB. The term
"Latest Balance Sheet" shall mean the latest balance sheet in the most recent
RCB Report provided by RCB to BanPonce.
(b) Schedule 3.7(b) correctly sets forth a brief description, including
the term, of each lease for real or personal property to which RCB is a party as
lessee with respect to (i) each individual lease which involves a remaining
aggregate balance of lease payments payable of more than $50,000 or any group of
related leases which involves a remaining aggregate balance of lease payments
payable of more than $300,000, (ii) each lease which would be a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K promulgated by
the Securities and
-14-
<PAGE> 102
Exchange Commission (the "SEC") or (iii) each lease which was not entered into
in the ordinary course of business. RCB has delivered or made available to
BanPonce complete and accurate copies of each of the leases identified on
Schedules 3.7(a) and 3.7(b), and none of such leases has been modified in any
material respect, except to the extent that such modifications are disclosed by
the copies delivered to BanPonce. The leases identified on Schedules 3.7(a) and
3.7(b) are in full force and effect. With respect to the leases described on
Schedule 3.7(b), RCB is not in default and, to the best knowledge of RCB, no
circumstances exist which could result in such a default under any of such
leases.
(c) Except as set forth in Schedule 3.7(c), all the buildings,
fixtures, furniture and equipment necessary for the conduct of the business of
RCB are usable in the ordinary course of business. RCB owns, or leases under
leases that are in full force and effect, all buildings, fixtures, furniture,
personal property, land improvements and equipment necessary for the conduct of
its business as it is presently being conducted.
3.8. Environmental Matters. Except as set forth on Schedule 3.8:
(a) To the best knowledge of RCB based on currently available
information, each of RCB, the Participation Facilities and the Loan/Fiduciary
Properties (each as hereinafter defined) are, and have been, in material
compliance with all applicable laws, rules, regulations, standards and
requirements of all Environmental Laws (as hereinafter defined).
(b) To the best knowledge of RCB based on currently available
information, there is no suit, claim, action, proceeding, investigation or
notice pending or threatened (or past or present actions, activities,
circumstances, conditions, events or incidents that could reasonably form the
basis of any such suit, claim, action, proceeding, investigation or notice),
before any governmental entity or other forum in which RCB, any Participation
Facility or any Loan/Fiduciary Property (or person or entity whose liability for
any such suit, claim, action, proceeding, investigation or notice RCB,
Participation Facility or Loan/Fiduciary Property has or may have retained or
assumed either contractually or by operation of law), has been or, with respect
to threatened suits, claims, actions, proceedings, investigations or notices,
may be, named as a defendant (i) for alleged noncompliance (including by any
predecessor), with any Environmental Law or (ii) relating to the release or
threatened release into the environment of any Hazardous Material (as
hereinafter defined) whether or not occurring at or on a site owned, leased or
operated by RCB, any Participation Facility or any Loan/Fiduciary Property.
(c) To the best knowledge of RCB based on currently available
information, during the period of (i) RCB's ownership or operation of any of its
current properties, (ii) RCB's participation, if any, in the management of any
Participation Facility, or (iii) RCB's holding of a security or other interest
in a Loan/Fiduciary Property, there has been no release of or contamination by
Hazardous Material in, on, under or affecting any such property, Participation
Facility or Loan/Fiduciary Property. To the best knowledge of RCB based on
currently available
-15-
<PAGE> 103
information, prior to the period of (x) RCB's ownership or operation of any of
its respective currently or formerly owned or leased properties, (y) RCB's
participation in the management of any Participation Facility, or (z) RCB's
holding of a security or other interest in a Loan/Fiduciary Property, there was
no release of or contamination by Hazardous Material in, on, under or affecting
any such property, Participation Facility or Loan/Fiduciary Property.
(d) To the best knowledge of RCB, no part of any property currently
owned or leased by RCB, any Participation Facility or any Loan/Fiduciary
Property has been or is scheduled for investigation or monitoring pursuant to
any Environmental Law.
(e) The following definitions apply for purposes of this Section 3.9:
(i) "Environmental Law" means any Commonwealth, federal, state, local or foreign
law, regulation, agency authority, order, decree, judgment or judicial opinion
or any agreement with any governmental entity, presently in effect or
hereinafter adopted relating to (A) the manufacture, generation, transport, use,
treatment, storage, recycling, disposal, release, threatened release or presence
of Hazardous Material or (B) the preservation, restoration or protection of the
environment, natural resources or human health; (ii) "Loan/Fiduciary Property"
means any property owned or controlled by RCB or in which RCB holds a security
or other interest, and, where required by the context, said term means the owner
or operator of such property; (iii) "Participation Facility" means any facility
in which RCB participates in the management and, where required by the context,
said term means the owner or operator of such property; and (iv) "Hazardous
Material" means materials which are: (A) listed, classified or regulated
pursuant to any Environmental Law, (B) petroleum, any petroleum products or
by-products, asbestos containing material, polychlorinated biphenyls ("PCBs"),
radioactive materials or radon gas, or (C) any other matter to which exposure is
prohibited, limited or regulated by any governmental entity or Environmental
Law.
3.9. Tax Matters. RCB has filed or will file all material Tax (as
hereinafter defined) returns (including information returns) or reports required
to be filed (taking into account permissible extensions) by them on or prior to
the Effective Date, and have paid (or have accrued or will accrue, prior to the
Effective Date, amounts for the payment of) all Taxes relating to the time
periods covered by such returns and reports. The accrued taxes payable accounts
for Taxes and provision for deferred income taxes, specifically identified as
such, on the Latest Balance Sheet are sufficient for the payment of all unpaid
Taxes of RCB accrued for or applicable to all periods ended on or prior to the
date of the Latest Balance Sheet or which may subsequently be determined to be
owing with respect to any such period. Except as disclosed on Schedule 3.9, RCB
has not waived any statute of limitations with respect to Taxes or agreed to any
extension of time with respect to an assessment or deficiency for Taxes. RCB has
paid or will pay in a timely manner and as required by law all Taxes due and
payable by it or which it is obligated to withhold from amounts owing to any
employee or third party. All Taxes which will be due and payable, whether now or
hereafter, for any period ending on, prior to or including the Effective Date
shall have been paid by or on behalf of RCB or shall be reflected on the books
of RCB as an accrued
-16-
<PAGE> 104
Tax liability determined in a manner which is consistent with past practices and
the Latest Balance Sheet. No Tax returns of RCB have been audited by any
governmental authority other than as disclosed on Schedule 3.9; and, except as
set forth on Schedule 3.9, there are no unresolved questions, claims or disputes
asserted by any relevant taxing authority concerning the liability for Taxes of
RCB. RCB has not reached an agreement under Section 6006 of the Puerto Rico Code
for any taxable years not yet closed for statute of limitations purposes. No
demand or claim has been made, or could be made, against RCB with respect to any
Taxes arising out of membership or participation in any consolidated,
affiliated, combined or unitary group of which RCB was at any time a member. For
purposes of this Agreement, the term "Tax" shall mean any Commonwealth, U.S.
federal, state, local or foreign income, gross receipts, deposit, license,
payroll, employment, excise, severance, stamp, occupation, premium, property or
windfall profits tax, environmental tax, customs duty, capital stock, franchise,
employees' income withholding, foreign or domestic withholding (including
withholding on payments for services rendered), social security, unemployment,
disability, workers' compensation, employment-related insurance, real property,
personal property, sales, use, transfer, value added, alternative or add-on
minimum or other tax, assessment or governmental charge of any kind whatsoever,
including any interest, penalties or additions to, or additional amounts in
respect of, the foregoing.
3.10. Contracts and Commitments.
(a) Except as set forth on Schedule 3.10 and Schedule 3.14, RCB (i) is
not a party to any collective bargaining agreement or contract with any labor
union, (ii) is not a party to any written or oral contract for the employment of
any officer, individual employee or other person on a full-time or consulting
basis, or relating to severance pay for any such person, (iii) is not a party to
any written or oral agreement or understanding to repurchase assets previously
sold (or to indemnify or otherwise compensate the purchaser in respect of such
assets), except for securities sold under a repurchase agreement providing for a
repurchase date 30 days or less after the purchase date, (iv) is not a party to
any (A) contract or group of related contracts with the same person for the
purchase or sale of products or services, under which the undelivered balance of
such products and services has a purchase price in excess of $50,000 for any
individual contract or $100,000 for any group of related contracts in the
aggregate, (B) other contract which would be a "material contract" within the
meaning of Item 601(b)(10) of Regulation S-K promulgated by the SEC, or (C)
other agreement which was not entered into in the ordinary course of business
and which is not disclosed on Schedules 3.7(a) or 3.7(b), and (v) does not have
any commitments for capital expenditures in excess of $50,000.
(b) Except as disclosed on Schedule 3.10, (i) RCB has performed all
obligations required to be performed by it prior to the date hereof in
connection with the contracts or commitments set forth on Schedule 3.10, and RCB
is not in receipt of any claim of default under any contract or commitment set
forth on Schedule 3.10 and (ii) RCB does not have any present expectation or
intention of not fully performing any obligation pursuant to any contract or
commitment set forth on Schedule 3.10.
-17-
<PAGE> 105
3.11. Litigation. Except as set forth on Schedule 3.11 or in the RCB
Reports filed prior to the date hereof, there are no actions, suits,
proceedings, orders or investigations pending or, to the best knowledge of RCB,
threatened against RCB, at law or in equity, or before or by any Commonwealth,
federal, state or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, which would have or would
reasonably be expected to have a Material Adverse Effect.
3.12. No Brokers or Finders. Except as disclosed on Schedule 3.12 (as
to both identity and amount), there are no claims for brokerage commissions,
finders' fees, investment advisory fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any arrangement,
understanding, commitment or agreement made by or on behalf of RCB.
3.13. Employees; Labor Matters.
(a) RCB has complied in all material respects with all laws relating to
the employment of labor, including provisions thereof relating to wages, hours,
equal opportunity, collective bargaining, non-discrimination and the payment of
social security and other taxes, including social security taxes imposed upon
any of the Benefit Plans (as defined below).
(b) RCB is not a party to, and is not bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization, nor is RCB the subject of any material proceeding
asserting that RCB has committed an unfair labor practice or seeking to compel
RCB to bargain with any labor organization as to wages or conditions of
employment, nor is there any strike, work stoppage or work slowdown involving
RCB pending or, to the knowledge of RCB's executive officers, threatened, nor
are RCB's executive officers aware of any activity involving RCB's employees
seeking to certify a collective bargaining unit or engaging in any other
organizational activity.
3.14. Employee Benefit Plans.
(a) All benefit plans, contracts or arrangements covering current
employees or former employees of RCB (the "Employees"), including, but not
limited to, "employee benefit plans" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and plans
of deferred compensation (the "Benefit Plans"), are listed in Schedule 3.14(a).
True and complete copies of all Benefit Plans, including, but not limited to,
any trust instruments and insurance contracts forming a part of any Benefit
Plans, and all amendments thereto or a description in the case of any Benefit
Plan not reduced to writing have been provided or made available to BanPonce.
(b) Except as disclosed on Schedule 3.14 (as provided to BanPonce on
the date hereof) all employee benefit plans, other than "multiemployer plans"
within the meaning of Section 3(37)
-18-
<PAGE> 106
of ERISA, covering Employees (the "Plans"), to the extent subject to ERISA, are
in substantial compliance with ERISA. Each Plan which is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan") and
which is intended to be qualified under Section 165(a) of the Puerto Rico Income
Tax Act of 1954 or Section 165(a) of the Puerto Rico Code, both statutes as
amended (both statutes, collectively, the "Puerto Rico Tax Code"), has received
a favorable determination letter from the Puerto Rico Treasury Department, and
RCB is not aware of any circumstances likely to result in revocation of any such
favorable determination letter. There is no material pending or threatened
litigation relating to the Plans. Except as disclosed on Schedule 3.14 (as
provided to BanPonce on the date hereof), RCB has not engaged in a transaction
with respect to any Plan that, assuming the taxable period of such transaction
expired as of the date hereof, could subject RCB to a tax or penalty imposed
pursuant to the Puerto Rico Tax Code or Section 502(i) of ERISA in an amount
which would be material or could result in the revocation of the tax exemption
of any Pension Plan's trust under the Puerto Rico Tax Code.
(c) No liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by RCB with respect to any ongoing, frozen or
terminated "single-employer plan", within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by it, or the single- employer plan of
any entity which is considered one employer with RCB under Section 4001 of ERISA
(an "ERISA Affiliate"). RCB has not incurred and does not expect to incur any
withdrawal liability with respect to a multiemployer plan under Subtitle E of
Title IV of ERISA. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA, for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.
(d) Except as disclosed on Schedule 3.14(d) all contributions required
to be made under the terms of any Benefit Plan have been timely made or have
been reflected on the RCB financial statements. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 302 of ERISA
and no ERISA Affiliate has an outstanding funding waiver.
(e) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Plan's most recent actuarial valuation),
did not exceed the then current value of the assets of such Plan, and there has
been no material change in the financial condition of such Plan since the last
day of the most recent plan year. The withdrawal liability of RCB under each
Benefit Plan which is a multiemployer plan to which RCB or an ERISA Affiliate
has contributed during the preceding 12 months, determined as if a "complete
withdrawal", within the meaning of Section 4203 of ERISA, had occurred as of the
date hereof, does not exceed $100,000.
-19-
<PAGE> 107
(f) RCB does not have any obligations for retiree health and life
benefits under any Benefit Plan, except as set forth on Schedule 3.14. Except as
disclosed in Schedule 3.14 (as provided to BanPonce on the date hereof), RCB may
amend or terminate any such Benefit Plan at any time without incurring any
liability thereunder.
(g) Except as disclosed in Schedule 3.14 (as provided to BanPonce on
the date hereof), neither the execution of this Agreement nor the consummation
of the transactions contemplated hereby will, whether under a Plan or any other
arrangement or agreement, be a factor in causing payments to be made by
BanPonce, Banco Popular or RCB that are not deductible (in whole or in part)
under the Puerto Rico Tax Code or (i) result in any payment (including, without
limitation, severance, unemployment compensation, golden parachute or otherwise)
becoming due to any director or any employee of RCB under any Plan or otherwise
from RCB, (ii) increase any benefits otherwise payable under any Plan, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefit.
3.15. Insurance. Schedule 3.15 hereto lists each insurance policy
maintained by RCB with respect to its properties and assets. RCB hereby
covenants that it shall deliver or make available to BanPonce complete and
accurate copies of each of such insurance policies within ten business days of
the date hereof.
3.16. Interest of Certain Persons. Except as disclosed in RCB's Proxy
Statement for its 1996 Annual Meeting of Shareholders or as set forth on
Schedule 3.16, there are no loans from RCB to any officer or director of RCB or
any of their affiliates and no officer or director of RCB has any material
interest in any material contract or property (real or personal), tangible or
intangible, used in or pertaining to the business of RCB.
3.17. Compliance with Laws; Permits. RCB has complied in all material
respects with all applicable laws and regulations of the Commonwealth, foreign,
federal, state and local governments and all agencies thereof which affect or
relate to the business and operations or any owned or leased properties of RCB
or to which RCB may be subject (including, without limitation, to the extent
applicable, the Occupational Safety and Health Act of 1970, the Real Estate
Settlement Procedures Act, the Home Mortgage Disclosure Act of 1975, the Fair
Housing Act, the Equal Credit Opportunity Act, the Banking Law, the Community
Reinvestment Act of 1977, the Bank Holding Company Act of 1956, the Federal
Deposit Insurance Act and the Federal Reserve Act, each as amended); and no
claims have been filed by any such governments or agencies against RCB alleging
such a material violation of any such law or regulation which have not been
resolved to the satisfaction of such governments or agencies. RCB holds all of
the permits, licenses, certificates and other authorizations of the
Commonwealth, foreign, federal, state and local governmental agencies required
for the conduct of its business. Except as disclosed in Schedule 3.17, RCB is
not subject to any cease and desist order, written agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any supervisory letter from, or
-20-
<PAGE> 108
has adopted any board resolutions at the request of, the Commonwealth or federal
governmental authorities charged with the supervision or regulation of banks or
engaged in the insurance of bank deposits (collectively, the "Bank Regulators"),
nor has RCB been advised by any Bank Regulator that it is contemplating issuing
or requesting (or is considering the appropriateness of issuing or requesting)
any such order, directive, written agreement, memorandum of understanding,
supervisory letter, commitment letter, board resolutions or similar undertaking.
RCB is not subject to Section 32 of the Federal Deposit Insurance Act.
3.18. Administration of Fiduciary Accounts. RCB has properly
administered in all material respects all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable Commonwealth, state and federal law and regulation and common law.
None of RCB or any director, officer or employee of RCB has committed any breach
of trust with respect to any such fiduciary account, and the accountings for
each such fiduciary account are true and correct and accurately reflect the
assets of such fiduciary account.
3.19. Interest Rate Risk Management Instruments; Derivatives; Certain
Other Securities.
(a) Schedule 3.19 sets forth a true, correct and complete list of all
interest rate swaps, caps, floors, option agreements and other interest rate
risk management arrangements and other instruments generally known as
"derivatives" to which RCB is a party or to which any of its properties or
assets may be subject. Schedule 3.19A sets forth a true, correct and complete
list of all securities owned by RCB that are generally known as "structured
notes", "high risk mortgage derivatives", "capped floating rate notes" or
"capped floating rate mortgage derivatives".
(b) All interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements and other derivatives to which
RCB is a party or to which any of its properties or assets may be subject were
entered into in the ordinary course of business and, to RCB's knowledge, in
accordance with prudent banking practice and applicable rules, regulations and
policies of the Bank Regulators and with counterparties believed to be
financially responsible at the time and are in full force and effect. RCB has
duly performed in all material respects all of its obligations thereunder.
3.20. Prospectus/Proxy Statement. At the time the Prospectus/Proxy
Statement is mailed to the stockholders of RCB and at all times subsequent to
such mailing up to and including the Effective Time, such Prospectus/Proxy
Statement (including any supplements thereto), with respect to all information
set forth therein relating to RCB and its stockholders, RCB Common Stock, this
Agreement, the Merger and all other transactions contemplated hereby, will (a)
comply as to form in all material respects with applicable provisions of the
1933 Act and the 1934 Act and (b) not contain any untrue statement of a material
fact or omit to state a material fact required to
-21-
<PAGE> 109
be stated therein or necessary to make the statements contained therein, in
light of the circumstances under which they are made, not misleading.
3.21. Noncompete Provisions. Except as set forth on Schedule 3.21, RCB
is not are subject to, or obligated under, any agreement, arrangement or
understanding that restricts its ability to engage in any and all activities
permissible for banks under applicable laws and regulations ("Permissible
Activities"). None of the agreements, arrangements or understandings set forth
on Schedule 3.21, nor any other agreement, arrangement or understanding, would
materially limit or restrict the ability of BanPonce or its subsidiaries
(including Banco Popular after the Merger) to engage in any and all Permissible
Activities upon consummation of the transactions contemplated hereby.
3.22. Equity Ownership. RCB does not own any stock, partnership
interest, joint venture interest or any other equity or similar security issued
by any other corporation, organization or entity other than in a bona fide
fiduciary capacity.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BANPONCE AND RCB
4.1. Subject to Article 5, BanPonce hereby represents and warrants to
RCB:
(a) With respect to periods since December 31, 1992, each of it and its
subsidiaries has timely filed all reports and statements, and any amendments
required to be made with respect thereto, that it was required to file with the
banking and other regulatory authorities of the Commonwealth (the "Commonwealth
Authorities"), the SEC, the Board of Governors of the Federal Reserve System
(the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC") or any other
applicable federal or state banking, insurance, securities, or other regulatory
authorities, and, as of their respective dates (and, in the case of reports or
statements filed prior to the date hereof, without giving effect to any
amendments or modifications filed after the date hereof), each such report or
statement, including the financial statements and exhibits thereto, complied (or
will comply, in the case of reports or statements filed after the date hereof)
in all material respects with all applicable statutes, rules and regulations.
Such reports, statements and amendments filed by BanPonce with the SEC are
hereinafter referred to as the "BanPonce Reports."
(b) As of their respective dates (and without giving effect to any
amendments or modifications filed after the date hereof), each of the BanPonce
Reports, including the financial statements, exhibits and schedules thereto,
filed, used or circulated prior to the date hereof complied (and each of the
BanPonce Reports filed, used or circulated after the date hereof, will comply)
in all material respects with the applicable laws and did not (or in the case of
BanPonce
-22-
<PAGE> 110
Reports filed, used or circulated after the date hereof, will not) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading.
(c) Each of its consolidated balance sheets included in or incorporated
by reference into the BanPonce Reports, including the related notes and
schedules, fairly presents (or, in the case of the BanPonce Reports filed, used
or circulated after the date hereof, will fairly present) the consolidated
financial position of it and its subsidiaries as of the date of such balance
sheet and each of the consolidated statements of income, cash flows and
stockholders' equity included in or incorporated by reference into the BanPonce
Reports, including any related notes and schedules, fairly presents (or, in the
case of the BanPonce Reports filed, used or circulated after the date hereof,
will fairly present) in all material respects the consolidated results of
operations, retained earnings and cash flows, as the case may be, of it and its
subsidiaries at the dates and for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end audit adjustments that are not
expected to be material in amount), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein ("GAAP").
(d) The allowance for loan and lease losses (the "Allowance") shown in
its consolidated balance sheet dated September 30, 1996 was, and the Allowance
shown in the BanPonce Reports filed, used or circulated after the date hereof
will be, in each case as of the date thereof, adequate to provide for estimable
and probable losses, net of recoveries relating to loans previously charged off,
inherent in its loan portfolio.
(e) Since September 30, 1996, there has been no change, event,
occurrence or development in the businesses conducted by it that has had or
would reasonably be expected to have a Material Adverse Effect.
4.2. Subject to Article 5, RCB hereby represents and warrants to
BanPonce and Banco Popular:
(a) With respect to periods since December 31, 1992, it has timely
filed all reports and statements, and any amendments required to be made with
respect thereto, that it was required to file with Commonwealth Authorities, the
FDIC or any other applicable federal or state banking, insurance, securities, or
other regulatory authorities, and, as of their respective dates (and, in the
case of reports or statements filed prior to the date hereof, without giving
effect to any amendments or modifications filed after the date hereof), each
such report or statement, including the financial statements and exhibits
thereto, complied (or will comply, in the case of reports or statements filed
after the date hereof) in all material respects with all applicable statutes,
rules and regulations. Such reports, statements and amendments, together with
RCB's Annual Report for 1995, previously delivered to BanPonce, are referred to
herein as the "RCB Reports".
-23-
<PAGE> 111
(b) As of their respective dates (and without giving effect to any
amendments or modifications filed after the date hereof), each of the RCB
Reports, including the financial statements, exhibits and schedules thereto,
filed, used or circulated prior to the date hereof complied (and each of the RCB
Reports filed, used or circulated after the date hereof, will comply) in all
material respects with the applicable laws and did not (or in the case of the
RCB Reports filed, used or circulated after the date hereof, will not) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
(c) Its balance sheets as of September 30, 1996, including the related
notes and schedules (the "9/30 Balance Sheet"), fairly presents (or, in the case
of RCB Reports filed, used or circulated after the date hereof, will fairly
present) its financial position as of the date of such balance sheet and each of
the statements of income, cash flows and stockholders' equity for the period
then ended (collectively, the "9/30 Statements"), including any related notes
and schedules, fairly presents (or, in the case of financial statements
delivered pursuant to Section 7.3 or otherwise (together with the 9/30
Statements, the "RCB Statements") filed, used or circulated after the date
hereof, will fairly present) its results of operations, retained earnings and
cash flows, as the case may be, at the dates and for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments that are not expected to be material in amount), in each case in
accordance with GAAP.
(d) The Allowance shown in its consolidated balance sheet dated
September 30, 1996 was, and the Allowance shown in the RCB Statements filed,
used or circulated after the date hereof will be, in each case as of the date
thereof, adequate to provide for estimable and probable losses, net of
recoveries relating to loans previously charged off, inherent in its loan
portfolio.
(e) Since September 30, 1996, there has been no change, event,
occurrence or development in the businesses directly or indirectly conducted by
it that has had or would reasonably be expected to have a Material Adverse
Effect.
ARTICLE 5
MATERIAL ADVERSE EFFECT
5.1. Material Adverse Effect. The term "Material Adverse Effect" means
any fact, condition, circumstance or event, the effect of which, individually or
when taken together with all other facts, conditions, circumstances or events
(regardless of whether such facts, conditions, circumstances, or events are
described in more than one paragraph of Article 2, 3 or 4 hereof or otherwise),
(i) is materially adverse to the business, financial condition, results of
operations or prospects of such party and its respective subsidiaries taken as a
whole, (ii) significantly and
-24-
<PAGE> 112
adversely affects the ability of either party to consummate the transactions
contemplated hereby or to perform its material obligations hereunder, or (iii)
enables any person to prevent the consummation of the transactions contemplated
hereby. Notwithstanding the above, no change in the value of the investment
portfolio of RCB caused by an increase in the general level of interest rates or
payments made pursuant to the terms of the severance agreements referred to in
Section 7.19 due to death or incapacitation shall be deemed to be or to cause a
Material Adverse Effect.
5.2. Representations and Warranties. No representation or warranty of
BanPonce or RCB contained in Article 2, 3 or 4 (other than the first four
sentences of Sections 2.2 and 3.2, Section 2.4, Section 3.3, Section 4.1 (other
than paragraph (d)) and Section 4.2 (other than paragraph (d)), each of which
shall be true and correct except for inaccuracies which are de minimis in amount
or effect) shall be deemed untrue or incorrect, and no party hereto shall be
deemed to have breached a representation or warranty, as a consequence of the
existence or absence of any fact, condition, circumstance or event if such fact,
circumstance or event (and/or the absence thereof), individually or taken
together with all other such facts, conditions, circumstances or events (and/or
the absence thereof), would not, or is not reasonably likely to, have a Material
Adverse Effect.
ARTICLE 6
CONDUCT OF BUSINESS PENDING THE MERGER
6.1. Conduct of Business of RCB. From the date of this Agreement to the
Effective Date, unless BanPonce shall otherwise agree in writing or as otherwise
expressly permitted by other provisions of this Agreement, including this
Section 6.1:
(a) The business of RCB will be conducted only in, and RCB
shall not take any action except in, the ordinary course, on an
arms-length basis and in accordance, in all material respects, with all
applicable laws, rules and regulations and past practices;
(b) RCB will not, directly or indirectly, (i) amend or propose
to amend its Charter or Bylaws; (ii) issue or sell any of its equity
securities, Voting Debt, securities convertible into or exchangeable
for its equity securities, warrants, options or other rights to acquire
its equity securities, or any bonds or other securities, except deposit
and other bank obligations in the ordinary course of business; (iii)
redeem, purchase, acquire or offer to acquire, directly or indirectly,
any shares of capital stock of RCB or other securities of RCB; (iv)
split, combine or reclassify any outstanding shares of capital stock of
RCB, or declare, set aside or pay any dividend or other distribution
payable in cash, property or otherwise with respect to shares of
capital stock of RCB, except (A) an extraordinary cash dividend
permitted by Section 1.3 and (B)(i) if the Effective Date is on or
before June 30, 1997, immediately prior to the Effective Date RCB may
pay a cash dividend on each share
-25-
<PAGE> 113
of RCB Common Stock equal to the product of $1.625 and the ratio of the
number of days between December 31, 1996 and the Effective Date over
182 and (ii) if the Effective Date is after June 30, 1997 and on or
before December 31, 1997, on June 30, 1997 RCB may pay a cash dividend
of $1.625 on each share of RCB Common Stock and, immediately prior to
the Effective Date, RCB may pay a cash dividend on each share of RCB
Common Stock equal to the product of $1.625 and the ratio of the number
of days between June 30, 1997 and the Effective Date over 183; provided
that, such amounts shall not exceed 30% of RCB's net income during the
applicable period; (v) borrow any amount or incur or become subject to
any material liability, except borrowings and liabilities incurred in
the ordinary course of business, but in no event will RCB enter into
any long-term borrowings with a term greater than one year, without
prior consultation with BanPonce; (vi) discharge or satisfy any
material lien or encumbrance on the properties or assets of RCB or pay
any material liability, except in the ordinary course of business;
(vii) sell, assign, transfer, mortgage, pledge or subject to or permit
to be subject to any lien or other encumbrance any of its assets with
an aggregate market value in excess of $50,000, except (x) in the
ordinary course of business, (y) liens and encumbrances for current
property taxes not yet due and payable and (z) liens and encumbrances
which do not materially affect the value of, or interfere with the past
or future use or ability to convey, the property subject thereto or
affected thereby; (viii) cancel any material debt or claims or waive
any rights of material value, except in the ordinary course of
business; (ix) acquire (by merger, exchange, consolidation, acquisition
of stock or assets or otherwise) any corporation, partnership, joint
venture or other business organization or division or material assets
or deposits thereof, or assets or deposits, except in satisfaction of a
debt previously contracted in good faith; (x) other than as set forth
on Schedule 3.10, make any single or group of related capital
expenditures or commitments therefor in excess of $50,000 or enter into
any lease or group of related leases with the same party which involves
aggregate lease payments payable of more than $50,000 for any
individual lease or involves more than $100,000 for any group of
related leases in the aggregate; or (xi) enter into or propose to enter
into, or modify or propose to modify, any agreement, arrangement or
understanding with respect to any of the matters set forth in this
Section 6.1(b);
(c) RCB will not, directly or indirectly, enter into or modify
any employment, severance or similar agreements or arrangements with,
or grant any bonuses, wage, salary or compensation increases, or
severance or termination pay to, or promote, any director, officer,
employee, group of employees or consultant or hire any employee with a
title of Vice President or above, other than bonuses, increases,
promotions or new hires in the ordinary course and in a manner
consistent with past practices;
(d) Except as provided in Section 7.12, RCB will not adopt or
amend any bonus, profit sharing, stock option, pension, retirement,
deferred compensation or other employee benefit plan, trust, fund,
contract or arrangement for the benefit or welfare of
-26-
<PAGE> 114
any employees, except as required by law and RCB will not grant any
stock options or restricted stock or similar equity awards;
(e) RCB will use reasonable efforts to cause its current
insurance policies not to be cancelled or terminated or any of the
coverage thereunder to lapse, unless simultaneously with such
termination, cancellation or lapse, replacement policies providing
coverage substantially equal to the coverage under the cancelled,
terminated or lapsed policies are in full force and effect;
(f) RCB will not enter into any settlement or similar
agreement with respect to, or take any other significant action with
respect to the conduct of, any action, suit, proceeding, order or
investigation which is set forth on Schedule 3.11 or to which RCB
becomes a party after the date of this Agreement, without prior
consultation with BanPonce;
(g) RCB will use all reasonable efforts to preserve intact in
all material respects the business organization as a whole and the
goodwill of RCB and to keep available the services of its officers and
employees as a group and preserve intact material agreements, and RCB
will confer on a regular and frequent basis with representatives of
BanPonce, as reasonably requested by BanPonce, to report on operational
matters and the general status of ongoing operations;
(h) RCB will not take any action with respect to investment
securities held or controlled by it inconsistent with past practices,
alter its investment portfolio duration or practices as heretofore in
effect or, without prior consultation with BanPonce, take any action
that (i) would be inconsistent with its past practices with respect to
purchasing or holding interest rate risk management instruments,
derivatives or other securities described in Section 3.19(a) or (ii)
would have or could reasonably be expected to have a material effect on
RCB's asset/liability or interest sensitivity position;
(i) RCB will not make any agreements or commitments binding it
to extend credit to any one borrower or affiliated borrowers in excess
of $250,000; provided, that RCB may renew (but not increase) existing
extensions of credit;
(j) With respect to properties leased by RCB, RCB will not
renew, exercise an option to extend, cancel or surrender any lease of
real property or allow any such lease to lapse, without prior
consultation with BanPonce; and
(k) RCB will not agree or commit to do any of the foregoing.
The term "prior consultation" means, with respect to any action, advance notice
of such proposed action and a reasonable opportunity to discuss such action in
good faith prior to taking such action.
-27-
<PAGE> 115
6.2. Conduct of Business of BanPonce. From the date of this Agreement
to the Effective Date, unless RCB shall otherwise agree in writing, or as
otherwise expressly permitted by other provisions of this Agreement, BanPonce
shall take no action which would materially and adversely affect the ability of
BanPonce or RCB (i) to obtain the Requisite Approvals for the transactions
contemplated hereby or (ii) to perform its covenants and agreements under this
Agreement in all material respects and to consummate the Merger.
ARTICLE 7
ADDITIONAL COVENANTS AND AGREEMENTS
7.1. Filings and Approvals. Each party will use all reasonable efforts
and will cooperate with the other party in the preparation and filing, as soon
as practicable, of all applications, registration statements or other documents
required to obtain regulatory approvals and consents from the FRB and
Commonwealth Authorities, filings under the HSR Act and any other applicable
regulatory authorities and provide copies of such applications, filings and
related correspondence to the other party. Prior to filing each application,
registration statement or other document with the applicable regulatory
authority, each party will provide the other party with an opportunity to review
and comment on the nonconfidential portions of each such application,
registration statement or other document. Each party will use all reasonable
efforts and cooperate with the other party in taking any other actions necessary
to obtain such regulatory or other approvals and consents, including
participating in any required hearings or proceedings.
7.2. Certain Credit Matters. RCB will furnish to BanPonce a complete
and accurate list (on a consolidated basis) as of the end of each calendar month
ending after the date hereof, not later than the 30th day after the end of each
such calendar month, of (a) all periodic internal credit quality reports
prepared during such calendar month (which reports will be prepared in a manner
consistent with past practices), (b) all loans classified as non-accrual, as
restructured, as 90 days past due, as still accruing and doubtful of collection
or any comparable classification, (c) all REO, including in-substance
foreclosures and real estate in judgment, (d) any current repurchase obligations
with respect to any loans, loan participations or state or municipal obligations
or revenue bonds and (e) any standby letters of credit.
7.3. Monthly Financial Statements. RCB shall furnish BanPonce with
RCB's balance sheets as of the end of each calendar month ending after the date
hereof and the related statements of income, not later than the 30th day after
the end of each such calendar month. Such financial statements shall be prepared
on a basis consistent with the latest RCB Statements prior to the date hereof
and on a consistent basis during the periods involved and shall fairly present
the financial positions of RCB as of the dates thereof and the results of
operations of RCB for the periods then ended (prepared in accordance with GAAP
(except for the absence of footnotes)).
-28-
<PAGE> 116
7.4. Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
7.5. No Negotiations, Etc. RCB will not, and will cause its officers,
directors, employees, representatives, agents and affiliates not to, directly or
indirectly, solicit, authorize, initiate or encourage the submission of any
proposal, offer, tender offer or exchange offer from any person or entity
relating to any liquidation, dissolution, recapitalization, merger,
consolidation or acquisition or purchase of all or a material portion of the
assets or deposits of, or any equity interest in, RCB or other similar
transaction or business combination involving RCB (any of the foregoing, an
"Acquisition Proposal"), or, unless RCB shall have determined, after receipt of
a written opinion of counsel to RCB (a copy of which opinion shall be delivered
to BanPonce), that under the laws of the Commonwealth the Board of Directors of
RCB has a fiduciary duty to do so, (a) participate in any negotiations in
connection with or in furtherance of any of the foregoing or (b) permit any
person other than BanPonce and its representatives to have any access to the
facilities of, or furnish to any person other than BanPonce and its
representatives any non-public information with respect to, RCB in connection
with or in furtherance of any of the foregoing. RCB shall promptly notify
BanPonce if any Acquisition Proposal, or any inquiry from or contact with any
person with respect thereto, is made, and shall keep BanPonce informed on a
timely basis as to the status of such Acquisition Proposal, inquiry or contact.
7.6. Notification of Certain Matters. Each party shall give prompt
notice to the other party of (a) the occurrence or failure to occur of any event
or the discovery of any information, which occurrence, failure, discovery or
information would result in or would reasonably be expected to result in any
representation or warranty on its part contained in this Agreement to be untrue
or inaccurate when made, at the Effective Date or at any time prior to the
Effective Date and (b) any material failure of such party to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder.
7.7. Access to Information; Confidentiality.
(a) RCB shall permit BanPonce full access on reasonable notice and at
reasonable hours to its properties and shall disclose and make available
(together with the right to copy, unless RCB has a reasonable objection to
BanPonce's making copies) to BanPonce and to the internal auditors, loan review
officers, employees, attorneys, accountants and other representatives of
BanPonce all books, papers and records relating to the assets, stock,
properties, operations, obligations and liabilities of RCB, including, without
limitation, all books of account (including, without limitation, the general
ledger), tax records, minute books of directors' and stockholders' meetings,
organizational documents, bylaws, contracts and agreements, filings with any
regulatory authority, accountants' work papers, litigation files (including,
without limitation, legal research memoranda), documents relating to assets and
title thereto (including, without limitation, abstracts, title insurance
policies, surveys, environmental reports, opinions of title and other
information relating to the real and personal property), plans affecting
employees, securities transfer records
-29-
<PAGE> 117
and stockholder lists, and any books, papers and records relating to other
assets, business activities or prospects in which BanPonce may have a reasonable
interest, including, without limitation, its interest in planning for
integration and transition with respect to the business of RCB; provided,
however, that the foregoing rights granted to BanPonce shall, whether or not and
regardless of the extent to which such rights may be exercised, in no way affect
the nature or scope of the representations, warranties and covenants of RCB set
forth herein.
(b) BanPonce shall permit reasonable access to its properties and shall
disclose and make available (together with the right to copy, unless BanPonce
has a reasonable objection to RCB's making copies) to RCB and to its
representatives BanPonce's financial books and records, minute books of
directors' and stockholders' meetings, organizational documents, bylaws, and
filings with any regulatory authority for the purpose of assisting RCB in
confirming the accuracy of the representations and warranties of BanPonce
contained herein; provided, however, that the foregoing rights granted to RCB
shall, whether or not and regardless of the extent to which such rights may be
exercised, in no way affect the nature or scope of the representations,
warranties and covenants of BanPonce set forth herein.
(c) All information furnished by RCB or BanPonce pursuant hereto shall
be treated as the sole property of the party furnishing the information until
the Effective Date, and, if the Effective Date shall not occur, the receiving
party shall, at the option of the party that furnished the information, return
to the party which furnished such information, or destroy, all documents or
other materials (including copies thereof) containing, reflecting or referring
to such information. In addition, the receiving party shall keep confidential
all such information and shall not directly or indirectly use such information
for any competitive or other commercial purpose. In the event that this
Agreement shall terminate, neither party shall disclose, except as required by
law or pursuant to the request of an administrative agency or other regulatory
body, the basis or reason for such termination, without the consent of the other
party. The obligation to keep such information confidential shall not apply to
(i) any information which (A) was already in the receiving party's possession
prior to the disclosure thereof to the receiving party by the party furnishing
the information, (B) was then generally known to the public, (C) became known to
the public through no fault of the receiving party or its representatives or (D)
was disclosed to the receiving party by a third party not bound by an obligation
of confidentiality or (ii) disclosures required by law or governmental or
regulatory authority.
7.8. Filing of Tax Returns and Adjustments.
(a) RCB will file (or cause to be filed) at its own expense, on or
prior to the due date, all Tax returns for all Tax periods ending on or before
the Effective Date where the due date for such returns or reports (taking into
account valid extensions of the respective due dates) falls on or before the
Effective Date; provided, however, that RCB shall not file any such Tax returns,
or other returns, elections or information statements with respect to any
liabilities for Taxes (other than federal, state or local sales, use,
withholding or employment tax returns or statements), or
-30-
<PAGE> 118
consent to any adjustment or otherwise compromise or settle any matters with
respect to Taxes, without prior consultation with BanPonce; provided, further,
that RCB shall not make any election or take any other discretionary position
with respect to Taxes, in a manner inconsistent with past practices, without the
prior written approval of BanPonce. RCB will provide BanPonce with a copy of
appropriate workpapers, schedules, drafts and final copies of each federal and
state income Tax return or election of RCB (including returns of all Plans) at
least seven days before filing such return or election and shall reasonably
cooperate with any request by BanPonce in connection therewith.
(b) BanPonce, in its sole and absolute discretion, will file (or cause
to be filed) all Tax returns of RCB due after the Effective Date. After the
Effective Date, BanPonce, in its sole and absolute discretion and to the extent
permitted by law, shall have the right to amend, modify or otherwise change all
Tax returns of RCB for all Tax periods.
7.9. Registration Statement.
(a) For the purposes (i) of holding the meeting of the stockholders of
RCB to approve this Agreement and the Merger (the "Meeting") and (ii) of
registering with the SEC and with applicable Commonwealth Authorities and state
securities authorities the BanPonce Common Stock to be issued as consideration
in connection with the Merger, the parties hereto will cooperate in the
preparation of an appropriate registration statement (such registration
statement, together with all and any amendments and supplements thereto, being
herein referred to as the "Registration Statement"), which shall include a
prospectus and information or proxy statement satisfying all applicable
requirements of the 1933 Act, the 1934 Act, applicable Commonwealth and state
securities laws and the rules and regulations thereunder (such prospectus and
information or proxy statement, together with any and all amendments or
supplements (including any supplement relating to the election and allocation
procedures set forth in Article 1) thereto being herein referred to as the
"Prospectus/Proxy Statement").
(b) BanPonce will furnish RCB with such information concerning BanPonce
and the BanPonce Subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to BanPonce and the BanPonce
Subsidiaries, to be prepared in accordance with Section 7.9(a). BanPonce agrees
promptly to advise RCB if at any time prior to the Meeting any information
provided by BanPonce in the Prospectus/Proxy Statement becomes incorrect or
incomplete in any material respect, and to provide the information needed to
correct such inaccuracy or omission.
(c) RCB will furnish BanPonce with such information concerning RCB as
is necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to RCB, to be prepared in accordance with Section 7.9(a). RCB authorizes
BanPonce to utilize in the Registration Statement the information concerning RCB
so provided to BanPonce. RCB agrees promptly to advise BanPonce if at any time
prior to the Meeting any information provided by RCB in the Prospectus/
-31-
<PAGE> 119
Proxy Statement becomes incorrect or incomplete in any material respect, and to
provide BanPonce with the information needed to correct such inaccuracy or
omission.
(d) BanPonce will promptly file the Registration Statement with the SEC
and applicable Commonwealth and state securities agencies. BanPonce shall use
reasonable efforts to cause the Registration Statement to become effective under
the 1933 Act and applicable Commonwealth and state securities laws at the
earliest practicable date. RCB shall have the right to review and comment on the
form of proxy statement included in the Registration Statement. BanPonce will
advise RCB promptly when the Registration Statement has become effective and of
any supplements or amendments thereto, and BanPonce shall furnish RCB with
copies of all such documents.
(e) BanPonce will deliver to RCB letters relating to the Registration
Statement from Price Waterhouse & Co., BanPonce's independent auditors, one
dated a date within two business days before the date on which the Registration
Statement shall become effective and the other dated a date within two business
days before the Effective Date, each addressed to RCB, in form and substance
reasonably satisfactory to RCB and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
(f) RCB will deliver to BanPonce letters relating to the Registration
Statement from Price Waterhouse & Co., RCB's independent auditors, one dated a
date within two business days before the date on which the Registration
Statement shall become effective and the other dated a date within two business
days before the Effective Date, each addressed to BanPonce, in form and
substance reasonably satisfactory to BanPonce and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement.
7.10. Affiliate Letters. RCB will use all reasonable efforts to obtain
and deliver to BanPonce as promptly as practicable after the Meeting, and in no
event later than the tenth day prior to the Effective Date, a signed agreement
substantially in the form of Exhibit A hereto from each stockholder of RCB who
may reasonably be deemed an "affiliate" of RCB within the meaning of such term
as used in Rule 145 under the 1933 Act (each, an "Affiliate"). BanPonce may
place appropriate legends on the certificates representing BanPonce Common Stock
issued to Affiliates as Consideration.
7.11. Establishment of Accruals. If requested by BanPonce prior to the
business day immediately prior to the Effective Date, RCB will, consistent with
generally accepted accounting principles, establish such additional accruals and
reserves as may be necessary to conform RCB's accounting and credit loss reserve
practices and methods to those of BanPonce and reflect BanPonce's plans with
respect to the conduct of RCB's business following the Merger and to provide for
the costs and expenses relating to the consummation by RCB of the transactions
-32-
<PAGE> 120
contemplated by this Agreement. Notwithstanding anything to the contrary
contained in this Agreement, no accrual or reserve made by RCB pursuant to this
Section 7.11 or any other effect on RCB resulting from RCB's compliance with
this Section 7.11 shall constitute or be deemed to be a breach, violation of or
failure to satisfy any representation, warranty, covenant, condition or other
provision of this Agreement or otherwise be considered in determining whether
any such breach, violation or failure to satisfy shall have occurred.
7.12. Employee Benefit Plans. As soon as administratively practicable
after the Effective Date, BanPonce shall take all reasonable action so that
employees of RCB shall be generally eligible to participate in the pension,
medical, life insurance, severance, vacation, sick pay and similar plans of
Banco Popular on substantially the same terms and conditions as employees of
Banco Popular, and until such time, the applicable plans of RCB shall remain in
effect; provided, however, that for a period of two years from the Effective
Date employees of RCB will receive benefits under plans of RCB or Banco Popular
that in the aggregate are no less favorable than the benefits currently provided
to the employees of RCB. For the purpose of determining eligibility to
participate in such plans of Banco Popular, and the vesting of benefits under
such plans, but not for benefit accrual purposes, Banco Popular shall cause such
plans to give effect to years of service with RCB, as if they were with Banco
Popular.
Prior to the Effective Time, RCB shall terminate the RCB
Supplementary Plan described in Schedule 3.14 and the RCB Discontinued Plan
described in Schedule 3.14 by taking the following actions: (i) distributing the
assets of the RCB Supplementary Plan (other than those funding the medical plans
in which the beneficiaries of such plan participate) to its beneficiaries by
using such assets either to make lump-sum payments to the beneficiaries or to
purchase annuities or similar instruments on their behalf; and (ii) purchasing
annuities or similar instruments for the benefit of the beneficiaries of the RCB
Discontinued Plan. In addition, RCB shall purchase annuities or similar
instruments for the benefit of beneficiaries receiving benefits under the RCB
Early Retirement Plan.
As soon as administratively practicable after the Effective
Time, Banco Popular shall cause the assets of the RCB Profit Sharing Plan to be
transferred to the corresponding plan of Banco Popular in which the employees of
RCB shall participate. RCB will provide that all unvested benefits under the RCB
Profit Sharing Plan shall be vested upon or prior to the Merger.
This Section 7.12 is an agreement solely between RCB, BanPonce
and Banco Popular. Nothing in this Agreement, whether express or implied,
confers upon any employee of RCB, or any other person, any rights or remedies.
7.13. Additional Directors. Following the Merger, Mr. J. Adalberto
Roig, Jr. shall become a director of BanPonce and Banco Popular and Chairman of
the Investment Committee of Banco Popular.
-33-
<PAGE> 121
7.14. Indemnification and Insurance.
(a) From and after the Effective Date, BanPonce will indemnify, defend
and hold harmless each person who is now, or has been at any time prior to the
date hereof or who becomes prior to the Effective Date, an officer, director or
employee of RCB (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses (including reasonable attorney's fees), liabilities or judgments
or amounts that are paid in settlement (which settlement shall require the prior
written consent of BanPonce, which consent shall not be unreasonably withheld)
of or in connection with any claim, action, suit, proceeding or investigation (a
"Claim") in which an Indemnified Party is, or is threatened to be made, a party
or a witness based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer or employee of RCB if
such Claim pertains to any matter or fact arising, existing or occurring prior
to the Effective Date (including, without limitation, the Merger and other
transactions contemplated by this Agreement), regardless of whether such Claim
is asserted or claimed prior to, at or after the Effective Date (the
"Indemnified Liabilities") to the full extent permitted with respect to
officers, directors and employees of BanPonce under applicable Commonwealth law
as of the date hereof or as amended prior to the Effective Date and under RCB's
Charter and Bylaws as in effect on the date hereof (and BanPonce shall pay
expenses in advance of the final disposition of any such action or proceeding to
each Indemnified Party to the full extent permitted with respect to officers,
directors and employees of BanPonce under such law and under such Charter or
Bylaws, upon receipt of any undertaking required by such Charter, Bylaws or
applicable law). Any Indemnified Party wishing to claim indemnification under
this Section 7.14(a), upon learning of any Claim, shall notify BanPonce (but the
failure so to notify BanPonce shall not relieve it from any liability which
BanPonce may have under this Section 7.14(a) except to the extent such failure
prejudices BanPonce) and shall deliver to BanPonce any undertaking required by
such Charter, Bylaws or applicable law. The obligations of BanPonce described in
this Section 7.14(a) shall continue in full force and effect, without any
amendment thereto, for a period of five years from the Effective Date; provided,
however, that all rights to indemnification in respect of any Claim asserted or
made within such period shall continue until the final disposition of such
Claim.
(b) From and after the Effective Date, the directors, officers and
employees of RCB who become directors, officers or employees of BanPonce or any
of its subsidiaries, except for the indemnification rights set forth in Section
7.14(a), will have indemnification rights only with respect to events occurring
after the Effective Date and only to the extent that other directors, officers
and employees of BanPonce are entitled to indemnification for similar events
under the provisions of the Charter or similar governing documents of BanPonce
and its subsidiaries, as in effect from time to time after the Effective Date,
as applicable, and provisions of applicable law as in effect from time to time
after the Effective Date.
(c) The obligations of BanPonce provided under Sections 7.14(a) and
7.14(b) will be binding on all respective successors of BanPonce.
-34-
<PAGE> 122
(d) For a period of three years after the Effective Date, BanPonce will
use its best efforts to provide that portion of directors' and officers'
liability insurance that serves to reimburse officers and directors of RCB with
respect to claims against such officers and directors arising from facts or
events which occurred before the Effective Date of at least the same coverage
and amounts, and containing terms and conditions no less advantageous, as that
coverage currently provided by RCB; provided, however, that the annual premiums
for such coverage will not exceed 150% of the annual premiums currently paid by
RCB for such coverage; provided, further, that officers and directors of RCB may
be required to make application and provide customary representations and
warranties to BanPonce's insurance carrier for the purpose of obtaining such
insurance.
(e) The provisions of this Section 7.14 are for the benefit of, and
shall be enforceable by, the Indemnified Parties, including without limitation
all current and former directors, officers and employees of RCB.
7.15. Reports. RCB will provide to BanPonce copies of all quarterly
financial reports filed by it with the FDIC, and BanPonce will provide to RCB
copies of all Forms 10-K, 10-Q, and 8-K filed with the SEC by it, between the
date hereof and the Effective Date, within five days after the date such reports
are so filed.
7.16. Stockholder Approval. RCB will call the Meeting as promptly as
practicable after the date hereof. The RCB Board will recommend approval of this
Agreement and the Merger, and use its best efforts (including, without
limitation, soliciting proxies for such approvals) to obtain such shareholder
approval, unless the RCB Board determines, after receipt of a written opinion of
counsel to RCB (a copy of which shall be delivered to BanPonce), that
recommending such approval or using its best efforts to obtain such shareholder
approval would result in a breach of its fiduciary duties established under the
laws of the Commonwealth.
7.17. Efforts to Consummate. Subject to the terms and conditions of
this Agreement, each of BanPonce and RCB agrees to use reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective, as soon
as practicable after the date of this Agreement, the transactions contemplated
hereby.
7.18. Taxation. Subject to Section 7.5, neither BanPonce nor RCB shall
take or cause to be taken any action, whether before or after the Effective
Time, that would disqualify the Merger as a "reorganization" within the meaning
of Section 1112(g)(1) of the Puerto Rico Code.
-35-
<PAGE> 123
7.19. Arrangements with Respect to Certain Officers of RCB. Prior to
the Effective Time, BanPonce shall offer to enter into arrangements with the
officers of RCB identified on Schedule 7.19 hereof pursuant to which (i) such
officers shall be employed by Banco Popular as consultants with salaries
consistent with such employees' current salaries as set forth on Schedule 7.19,
pro rated for the number of months of service as consultants, for the purpose of
assisting with the integration of the business of RCB following the Effective
Date for such period of time as BanPonce deems necessary or advisable up to a
period of six months and (ii) such officers shall be entitled to the one time
severance payment in the respective amounts set forth on Schedule 7.19 as set
forth in Schedule 7.19.
7.20. Request for Tax Ruling. RCB and BanPonce agree that they will
jointly prepare and file with the Puerto Rico Department of Treasury a request
for a ruling (the "Ruling Request") to the effect that the Merger will be
treated for Puerto Rican income tax purposes as a reorganization within the
meaning of Section 1112(g)(1) of the Puerto Rico Code, and that each of
BanPonce, Banco Popular and RCB will be a party to that reorganization within
the meaning of Section 1112(g)(3) of the Puerto Rico Code, including jointly
preparing and submitting all subsequent correspondence submitted in connection
therewith. Representatives of each of RCB and BanPonce shall be present at any
meetings with representatives of the Department of Treasury at which the Ruling
Request is to be discussed.
ARTICLE 8
CONDITIONS
8.1. Conditions to Obligations of Each Party. The respective
obligations of each party to effect the transactions contemplated hereby shall
be subject to the satisfaction at or prior to the Effective Date of the
following conditions:
(a) Regulatory Approvals. Regulatory approvals for the
consummation of the transactions contemplated hereby shall have been
obtained from the Commonwealth Authorities, the FRB and each other
governmental authority from which approval is required, and all
statutory and regulatory waiting periods shall have expired. None of
such approvals shall contain any condition or restriction that would so
materially and adversely impact the economic or business benefits to
BanPonce of the transactions contemplated by this Agreement that, had
such condition or requirement been known, BanPonce would not, in its
reasonable judgment, have entered into this Agreement.
(b) No Injunction. No injunction or other order entered by a
Commonwealth or federal court of competent jurisdiction shall have been
issued and remain in effect which would prohibit the consummation of
the transactions contemplated hereby.
-36-
<PAGE> 124
(c) No Prohibitive Change of Law. There shall have been no
law, statute, rule or regulation, domestic or foreign, enacted or
promulgated which would prohibit the consummation of the transactions
contemplated hereby.
(d) Registration Statement. The Registration Statement shall
have been declared effective and shall not be subject to a stop order
of the SEC, and, if the offer and sale of BanPonce Common Stock in the
Merger pursuant to this Agreement is required to be registered under
any Commonwealth or state Blue Sky laws, the Registration Statement
shall not be subject to a stop order of a securities commission in any
relevant jurisdiction.
(e) Stockholder Approval. This Agreement and the Merger shall
have been approved by the affirmative vote of the holders of 75% of the
outstanding shares of RCB Common Stock, being the portion of RCB
capital stock required for such approval under the provisions of RCB's
Charter and Bylaws and the laws of the Commonwealth.
8.2. Additional Conditions to Obligation of RCB. The obligation of RCB
to consummate the transactions contemplated hereby in accordance with the terms
of this Agreement is also subject to the following conditions:
(a) Representations and Compliance. The representations and
warranties of BanPonce set forth in Articles 2 and 4 shall have been
true and correct as of the date hereof, and shall be true and correct
as of the Effective Date as if made at and as of the Effective Date,
subject to Article 5; and BanPonce shall in all material respects have
performed each obligation and agreement and complied with each covenant
to be performed and complied with by it hereunder at or prior to the
Effective Time.
(b) Officers' Certificate. BanPonce shall have furnished to
RCB a certificate of the Chief Executive Officer and Chief Financial
Officer of BanPonce, dated as of the Effective Date, to the effect set
forth in Section 8.2(a).
(c) Tax Ruling or Opinion. RCB shall have received either (i)
a ruling from the Puerto Rico Treasury Department or (ii) the opinion
of McConnell Valdes, dated the Effective Date, to the effect that the
Merger will be treated for Puerto Rican income tax purposes as a
reorganization within the meaning of Section 1112(g)(1) of the Puerto
Rico Code, and that each of BanPonce, Banco Popular and RCB will be a
party to that reorganization within the meaning of Section 1112(g)(3)
of the Puerto Rico Code.
(d) Opinion of Counsel to BanPonce. RCB shall have received an
opinion letter, dated as of the Effective Date, addressed to RCB from
counsel to BanPonce, in customary form and subject to customary
qualifications, as to the matters set forth in Section 2.3.
-37-
<PAGE> 125
8.3. Additional Conditions to Obligation of BanPonce and Banco Popular.
The obligation of BanPonce and Banco Popular to consummate the transactions
contemplated hereby in accordance with the terms of this Agreement are also
subject to the following conditions:
(a) Representations and Compliance. The representations and
warranties of RCB set forth in Articles 3 and 4 of this Agreement shall
have been true and correct as of the date hereof, and such
representations and warranties shall be true and correct as of the
Effective Date as if made at and as of the Effective Date, subject to
Article 5; and RCB shall in all material respects have performed each
obligation and agreement and complied with each covenant to be
performed and complied with by it hereunder at or prior to the
Effective Date.
(b) Officers' Certificate. RCB shall have furnished to
BanPonce a certificate of the Chief Executive Officer and Chief
Financial Officer of RCB, dated as of the Effective Date, to the effect
set forth in Section 8.3(a).
(c) Secretary's Certificates. RCB shall have furnished to
BanPonce (i) copies of the text of the resolutions by which the
corporate action on the part of RCB necessary to approve this Agreement
and the transactions contemplated hereby were taken, (ii) certificates,
dated as of the Effective Date, executed on behalf of RCB by its
corporate secretary or one of its assistant corporate secretaries,
certifying to BanPonce that such copies are true, correct and complete
copies of such resolutions and that such resolutions were duly adopted
and have not been amended or rescinded and (iii) an incumbency
certificate, dated as of the Effective Date, executed on behalf of RCB
by its corporate secretary or one of its assistant corporate
secretaries, certifying the signature and office of each officer
executing this Agreement or any other agreement, certificate or other
instrument executed pursuant hereto.
(d) Opinion of Counsel to RCB. BanPonce shall have received an
opinion letter, dated as of the Effective Date, addressed to BanPonce
from McConnell Valdes, counsel to RCB, in customary form and subject to
customary qualifications, to the effect that:
(i) RCB is a corporation duly incorporated, validly
existing and in good standing under the laws of the
Commonwealth.
(ii) RCB has the requisite corporate and other power
and authority (including all licenses, permits and
authorizations) to own and operate its properties and to carry
on its business as now conducted. RCB is licensed or qualified
to do business in Puerto Rico which, given the nature of its
business and its ownership of property, is the only
jurisdiction where RCB is required to be licensed or
-38-
<PAGE> 126
qualified, except where the failure to be so licensed or
qualified would not have or would not be reasonably expected
to have a Material Adverse Effect.
(iii) The execution and delivery of this Agreement by
RCB and the consummation of the transactions contemplated
hereby and thereby will not constitute a breach, default or
violation under the respective Charter or Bylaws of RCB or, to
such counsel's knowledge, (A) any material agreement,
arrangement or understanding to which RCB is a party, (B) any
material license, franchise or permit or (C) any law,
regulation, order, judgment or decree.
(iv) The authorized capital of RCB consists of
2,500,000 shares of RCB Common Stock, 600,000 of which are
outstanding; all of the issued and outstanding shares of the
capital stock of RCB are duly authorized.
(v) RCB has the corporate power to consummate the
transactions on its part contemplated by this Agreement. RCB
has duly taken all requisite corporate action to authorize
this Agreement and this Agreement has been duly executed and
delivered by RCB and constitutes the valid and binding
obligation of RCB enforceable in accordance with its terms,
subject as to the enforcement of remedies to applicable
bankruptcy, insolvency, moratorium and other laws affecting
the rights of creditors generally and to judicial limitations
on the enforcement of the remedy of specific performance.
(e) Tax Ruling or Opinion. BanPonce shall have received either
(i) a ruling from the Puerto Rico Treasury Department or (ii) the
opinion of Pietrantoni, Mendez & Alvarez, dated the Effective Date, to
the effect that the Merger will be treated for Puerto Rican income tax
purposes as a reorganization within the meaning of Section 1112(g)(1)
of the Puerto Rico Code, and that each of BanPonce, Banco Popular and
RCB will be a party to that reorganization within the meaning of
Section 1112(g)(3) of the Puerto Rico Code.
ARTICLE 9
TERMINATION, AMENDMENT AND WAIVER
9.1. Termination. This Agreement may be terminated prior to the
Effective Date:
(a) by mutual consent of BanPonce and RCB;
-39-
<PAGE> 127
(b) by either BanPonce or RCB, if this Agreement and the
Merger are not duly approved by the stockholders of RCB at the meeting
of stockholders (or any adjournment thereof) duly called and held for
such purpose;
(c) by either BanPonce or RCB, if the Effective Date is not on
or before December 31, 1997 (unless the failure to consummate the
Merger by such date shall be due to the action or failure to act of the
party seeking to terminate this Agreement in breach of such party's
obligations under this Agreement);
(d) by BanPonce, (i) if RCB participates in negotiations with,
provides nonpublic information to, or enters into any agreement with
another party regarding an Acquisition Proposal, or (ii) if the RCB
Board fails to recommend to shareholders of RCB approval (or withdraws
its recommendation of approval) of the Merger, or (iii) if the RCB
Board modifies its recommendation of approval of the Merger in a way
adverse to the interests of BanPonce, or (iv) if there shall have
occurred any breach of either Section 7.5 or Section 7.16;
(e) by BanPonce, if there shall have occurred any breach of
any representation, warranty, covenant or agreement of RCB contained
herein that would result in the failure to satisfy the closing
condition set forth in Section 8.3(a) and such breach cannot be or has
not been cured within 30 days after the giving of a written notice to
RCB of such breach; or
(f) by RCB, if there shall have occurred any breach of any
representation, warranty, covenant or agreement of BanPonce contained
herein that would result in the failure to satisfy the closing
condition set forth in Section 8.2(a) and such breach cannot be or has
not been cured within 30 days after the giving of a written notice to
BanPonce of such breach.
Any party desiring to terminate this Agreement shall give written
notice of such termination and the reasons therefor to the other party.
9.2. Effect of Termination. If this Agreement is terminated as
permitted by Section 9.1, such termination shall be without liability or
obligation of any party to the other party to this Agreement, except (a) as
provided in Sections 9.3 and 10.6 and (b) that termination shall not relieve any
party from liability for any breach of this Agreement.
9.3. Termination Fee. (a) RCB hereby agrees to pay to BanPonce, and
BanPonce shall be entitled to payment of, a fee of $6,000,000 if, by reason of
(x) any action by RCB described in clause (i) of Section 9.1(d), (y) a failure
to recommend by the RCB Board described in clause (ii) of Section 9.1(d) or (z)
a modification by the RCB Board described in clause (iii) of Section 9.1(d),
BanPonce would have the right to terminate this Agreement pursuant to clause
(i),
-40-
<PAGE> 128
(ii) or (iii) of Section 9.1(d) at a time when RCB would not be entitled to
terminate this Agreement pursuant to Section 9.1(f).
(b) If RCB terminates this Agreement pursuant to Section 9.1(c)
and the regulatory approvals referred to in Section 8.1(a) have not then been
obtained, or there is in place an injunction referred to in Section 8.1(b),
BanPonce hereby agrees to pay to RCB, and RCB shall be entitled to, a payment
of a fee of $3,000,000, provided that such failure to obtain regulatory
approvals or the injunction is not due in substantial part to a breach by RCB
of a covenant or representation in this Agreement, and that at the time
BanPonce would not be entitled to terminate this Agreement pursuant to Section
9.1(e) and provided further that if RCB seeks to receive a fee pursuant to this
Section 9.3(b), it shall not be entitled to terminate this Agreement prior to
June 30, 1998 if a denial or refusal to deliver a regulatory approval or the
imposition of an injunction is being appealed in good faith prior to such date
by BanPonce.
9.4. Amendment. This Agreement may be amended, but only by an
instrument in writing approved by the parties to this Agreement and signed on
behalf of each of the parties hereto. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, BanPonce shall (A) be
entitled to revise the structure of the Merger and related transactions;
provided that each of the transactions comprising such revised structure shall
(i) not subject any of the stockholders of RCB to adverse tax consequences or
reduce the amount of consideration to be received by any such stockholders and
(ii) not result in any material delay of the consummation of the transactions
contemplated hereby. This Agreement and any related documents shall be
appropriately amended in order to reflect any such revised structure.
9.5. Waiver. At any time prior to the Effective Date, either party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto or (b) waive compliance with any of the
agreements of the other party or with any conditions to its own obligations, in
each case only to the extent such obligations, agreements and conditions are
intended for its benefit. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE 10
GENERAL PROVISIONS
10.1. Public Statements. Neither RCB nor BanPonce shall make any public
announcement or statement with respect to the Merger, this Agreement or any
related transactions without the approval of the other party; provided, however,
that either BanPonce or RCB may,
-41-
<PAGE> 129
upon reasonable notice to the other party, make any public announcement or
statement that it believes is required by law. To the extent practicable, each
of BanPonce and RCB will consult with the other with respect to any such public
announcement or statement.
10.2. Notices. All notices and other communications hereunder shall be
in writing and shall be sufficiently given if made by hand delivery, by
telecopier, by overnight delivery service, or by registered or certified mail
(postage prepaid and return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by it by
like notice):
if to BanPonce or Banco Popular:
Banco Popular de Puerto Rico
P.O. Box 362708
San Juan, Puerto Rico 00936-2708
Attention: Brunilda Santos de Alvarez
Telecopy: (787) 756-0277
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Donald J. Toumey
Telecopy: (212) 558-3588
if to RCB:
Roig Commercial Bank
P.O. Box 457
Humacao, Puerto Rico
Attention: J. Adalberto Roig, Jr.
Telecopy: (787) 850-5555
with a copy to:
McConnell Valdes
270 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Attention: Julio Pietrantoni
Telecopy: (787) 759-8282
-42-
<PAGE> 130
All such notices and other communications shall be deemed to have been duly
given as follows: when delivered by hand, if personally delivered; on the fifth
business day after being deposited in the mail, postage prepaid, if delivered by
mail; when receipt acknowledged, if telecopied; and the next day after being
delivered to an overnight delivery service.
10.3. Interpretation. When a reference is made in this Agreement to
"previously disclosed", it means disclosed in writing to the other party hereto,
which writing refers to the relevant Section of this Agreement. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. References to
Sections and Articles refer to Sections and Articles of this Agreement unless
otherwise stated. Words such as "herein", "hereinafter", "hereof", "hereto",
"hereby" and "hereunder", and words of like import, unless the context requires
otherwise, refer to this Agreement (including the Exhibits and Schedules
hereto). As used in this Agreement, the masculine, feminine and neuter genders
shall be deemed to include the others if the context requires.
10.4. Severable. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties shall negotiate
in good faith to modify this Agreement and to preserve each party's anticipated
benefits under this Agreement.
10.5. Miscellaneous. This Agreement (a) is not intended to, and shall
not, confer upon any person other than each party hereto any rights or remedies
hereunder, except as provided in Section 7.14(e); (b) shall be governed in all
respects, including validity, interpretation and effect, by the internal laws of
the Commonwealth applicable to agreements made and wholly to be performed in the
Commonwealth; and (c) shall not be assigned by operation of law or otherwise
(and any purported assignment shall be null and void). This Agreement may be
executed in two or more counterparts which together shall constitute a single
agreement.
10.6. Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants (other than Sections 1.2, 1.6, 7.12,
7.13, 7.14, 7.18 and 7.19) of the parties set forth herein shall not survive the
consummation of the Merger. In addition, if this Agreement is terminated
pursuant to Section 9.1, the covenants contained in Sections 7.4 and 7.7(c)
shall survive such termination.
10.7. Schedules. The Schedules referred to in this Agreement shall be
delivered as of the date hereof under cover of a letter from the Chief Executive
Officer or Chief Financial Officer of BanPonce or RCB (as the case may be).
Notwithstanding anything to the contrary contained herein, any Schedule
referenced in this Agreement shall be deemed to be have been delivered as of the
date hereof if (a) it is delivered or amended within ten business days of the
date hereof and (b) any matter or item contained in the Schedule or amendment to
the Schedule not disclosed to
-43-
<PAGE> 131
BanPonce prior to or on the date hereof does not either alone or in combination
with all other matters and items in the Schedule, result in any representation,
without giving effect to the Schedule or amendment to the Schedule, being
materially incorrect.
IN WITNESS WHEREOF, BanPonce, Banco Popular and RCB have caused this
Agreement to be executed on the date first written above by their respective
officers.
BANPONCE CORPORATION
By /s/ Richard L. Carrion
------------------------------------------------------------
Name: Richard L. Carrion
Title: President and Chief Executive Officer
BANCO POPULAR DE PUERTO RICO
By /s/ Richard L. Carrion
------------------------------------------------------------
Name: Richard L. Carrion
Title: President and Chief Executive Officer
ROIG COMMERCIAL BANK
By /s/ J. Adalberto Roig, Jr.
------------------------------------------------------------
Name: J. Adalberto Roig, Jr.
Title: President
-44-
<PAGE> 132
EXHIBIT A
____________ , 199
BanPonce Corporation
209 Munoz Rivera Avenue, 3rd Floor
Hato Rey, Puerto Rico 00918
Attention: Legal Department
Ladies and Gentlemen:
1. I have been advised that I might be considered to be an "affiliate",
as that term is defined for purposes of paragraphs (c) and (d) of Rule 145
("Rule 145") promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), of Roig Commercial Bank, a Commonwealth bank ("RCB").
2. Pursuant to an Agreement and Plan of Merger, dated as of December
29, 1996 (the "Agreement"), by and among BanPonce Corporation, a Commonwealth
corporation ("BanPonce"), Banco Popular de Puerto Rico, a Commonwealth bank
("Banco Popular") and RCB, it is contemplated that RCB will merge with and into
Banco Popular (the "Merger") and that, among other things, all of the
outstanding common stock, par value $10.00 per share, of RCB ("RCB Common
Stock") will be converted into common stock, par value $6.00 per share, of
BanPonce ("BanPonce Common Stock") or cash as set forth in the Agreement. In
connection with the Merger, I may receive BanPonce Common Stock upon
distribution of the BanPonce Common Stock to the holders of RCB Common Stock.
3. I will not offer to sell, transfer or otherwise dispose of any of
the shares of BanPonce Common Stock distributed to me pursuant to the Merger
(the "Stock"), except (i) in compliance with the applicable provisions of Rule
145, (ii) in a transaction that is otherwise exempt from the registration
requirements of the Securities Act, or (iii) in an offering registered under the
Securities Act.
4. I consent to the endorsement of the Stock issued to me pursuant to
the Merger with a restrictive legend which will read substantially as follows:
<PAGE> 133
"The shares represented by this certificate were
issued in a transaction to which Rule 145 promulgated under
the Securities Act of 1933, as amended (the "Act"), applies,
and may be sold or otherwise transferred only in compliance
with the limitations of such Rule 145, or upon receipt by
BanPonce Corporation of an opinion of counsel reasonably
satisfactory to it that some other exemption from registration
under the Act is available, or pursuant to a registration
statement under the Act."
BanPonce's transfer agent shall be given an appropriate stop transfer
order and shall not be required to register any attempted transfer of the shares
of the Stock, unless the transfer has been effected in compliance with the terms
of this letter agreement.
5. It is understood and agreed that this letter agreement shall
terminate and be of no further force and effect and the legend set forth in
paragraph 4 above shall be removed by delivery of substitute certificates
without such legend, and the related stop transfer restrictions shall be lifted
forthwith, if (a) (i) any such shares of Stock shall have been registered under
the Securities Act for sale, transfer or other disposition by me or on my behalf
and are sold, transferred or otherwise disposed of, or (ii) any such shares of
Stock are sold in accordance with the provisions of paragraphs (c), (e), (f) and
(g) of Rule 144 promulgated under the Securities Act, or (iii) I am not at the
time an affiliate of BanPonce and have been the beneficial owner of the Stock
for at least two years (or such other period as may be prescribed by the
Securities Act and the rules and regulations promulgated thereunder) and
BanPonce has filed with the Commission all of the reports it is required to file
under the Securities Exchange Act of 1934, as amended, during the preceding 12
months, or (iv) I am not and have not been for at least three months an
affiliate of BanPonce and have been the beneficial owner of the Stock for at
least three years (or such other period as may be prescribed by the Securities
Act and the rules and regulations promulgated thereunder), or (v) BanPonce shall
have received a letter from the staff of the Commission, or an opinion of
counsel reasonably acceptable to BanPonce, to the effect that the stock transfer
restrictions and the legend are not required, and (b) financial results covering
at least 30 days of post-Merger combined operations have been published.
-2-
<PAGE> 134
6. I have carefully read this letter agreement and the Agreement and
have discussed their requirements and other applicable limitations upon my
ability to offer to sell, transfer or otherwise dispose of shares of the Stock,
to the extent I felt necessary, with my counsel or counsel for RCB.
Sincerely,
-----------------------------------------------------
Name
Agreed and accepted this ____
day of ___________, 199_, by
BanPonce Corporation
By
------------------------------------
Its
--------------------------------
-3-
<PAGE> 135
Appendix B
March 26, 1997
Board of Directors
Roig Commercial Bank
Calle Carreras Esquina Georgetti
Humacao, Puerto Rico 00661-0457
Members of the Board:
We understand that Roig Commercial Bank, Humacao, Puerto Rico ("RCB") and
BanPonce Corporation, San Juan, Puerto Rico ("BanPonce") entered into an
Agreement and Plan of Merger (the "Agreement"), which provides, among other
things, for the merger (the "Merger") of RCB with and into Banco Popular de
Puerto Rico ("Banco Popular"), a wholly-owned subsidiary of BanPonce.
Pursuant to the Agreement at the Effective Time (as defined in the "Agreement"),
each share of RCB Common Stock issued and outstanding immediately prior to the
Effective Time, other than shares held as treasury stock of RCB and shares held
directly or indirectly by BanPonce, except shares held by BanPonce in a
fiduciary capacity or in satisfaction of debt previously contracted, shall be
converted into the right to receive, at the election of each holder thereof,
subject to the election and allocation procedures as set forth in the Agreement,
either: (a) a number of shares of BanPonce Common Stock ("Stock") equal to the
sum of (x) one-half of the Exchange Ratio and (y) the ratio of $100 to the
BanPonce Average Stock Price (as defined in the "Agreement"), or (b) cash
("Cash") equal to the Sum of (x) $100 and (y) the product of (i) one-half of the
Exchange Ratio and (ii) the BanPonce Average Stock Price. The Exchange Ratio (as
defined in the Agreement) equals $200 divided by the BanPonce Average Stock
Price, provided that (x) if the BanPonce Average Stock Price exceeds $37.40, the
Exchange Ratio shall be 5.348 and (y) if the BanPonce Average Stock Price is
less than $30.60, the Exchange Ratio shall be 6.536. Holders of RCB shares will
be permitted to elect to receive either Cash, Stock or a combination thereof.
The BanPonce Average Stock Price is calculated as the average of the last sales
price for each of the ten consecutive trading days ending on and including the
trading day which is two Business Days prior to the election Deadline. Such
elections will be subject to pro-ration as necessary to ensure that 50% of the
RCB shares are converted into BanPonce Common Stock.
<PAGE> 136
Board of Directors
Roig Commercial Bank
March 26, 1997
Page 2
You have requested our opinion, as an independent financial advisor, as to
whether the consideration to be received by RCB's Common Shareholders is fair
from a financial point of view to the holders of RCB's Common Stock as of the
date hereof.
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") is regularly engaged in
the business of the valuation of financial institutions and their securities in
connection with mergers and acquisitions, estate tax, corporate, ESOP and other
purposes.
In connection with our opinion, we have: (i) reviewed a copy of the Agreement
and exhibits thereto; (ii) a draft of the Prospectus/Proxy Statement; (iii)
reviewed certain publicly available financial statements including audited
financial statements as of December 31, 1996 and 1995, and unaudited interim
financial statements as filed with the Securities Exchange Commission and the
Federal Deposit Insurance Corporation for BanPonce and RCB, respectively; (iv)
reviewed certain unaudited internal financial statements and other financial and
operating data concerning RCB; (v) analyzed certain financial projections of RCB
prepared by the management of RCB; (vi) discussed the past and current
operations and financial condition and the prospects with senior executives of
RCB; (vii) compared BanPonce and RCB from a financial point of view with certain
other companies which we deemed to be relevant; (viii) compared the trading
prices and activity of RCB's and BanPonce's common stock with that of other
publicly traded companies and their securities; (ix) reviewed the financial
terms, to the extent publicly available, of certain comparable merger
transactions; (x) reviewed the market prices and historical trading activity of
BanPonce; and (xi) performed such other analyses and examinations as we have
deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of all of the information, analysis and other information
reviewed by us and discussed with us, for the purposes of this opinion. We have
not made an independent evaluation or appraisal of the assets or liabilities of
RCB or BanPonce, nor have we been furnished with any such appraisals. In
addition, we have not assessed the adequacy of the allowance for losses with
respect thereto and have assumed that such allowances for each of the companies
are in the aggregate adequate to cover such losses. With respect to financial
forecasts, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgments of management of RCB as to
the future financial performance of RCB, and we have assumed such forecasts and
projections will be realized in the amounts and at the times contemplated
thereby. With respect to BanPonce, we relied solely upon publicly available data
and we conducted discussions with BanPonce's management regarding BanPonce's
financial condition, performance and prospects. We have also assumed that there
has been no material
<PAGE> 137
Board of Directors
Roig Commercial Bank
March 26, 1997
Page 3
change in BanPonce or RCB's assets, financial condition, results of operations
or business prospects since the date of the last financial statements made
available to us.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as the date hereof. Events
occurring after the date hereof could materially affect the assumptions used in
preparing this opinion.
In addition, Alex Sheshunoff Management Services previously provided
professional services to RCB including earnings assessments, product
profitability analysis, management change analysis, profit improvement analysis,
trust analysis and educational programs.
Our opinion is limited to the fairness, from a financial point of view, to the
holders of RCB's Common Stock of the consideration to be received by RCB's
shareholders and does not address RCB's underlying business decision to
undertake the Merger. Moreover, it is understood that this letter is for the
information of the Board of Directors of RCB and the opinion expressed herein,
does not constitute a recommendation to RCB shareholders as to how they should
vote at the shareholders' meeting in connection with the Agreement. We hereby
consent, however, to the inclusion of this opinion as an exhibit to any proxy or
registration statement distributed in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the consideration to be received by RCB's shareholders is fair from
a financial point of view to the holders of such shares.
Very truly yours,
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
<PAGE> 138
Appendix C
Section 15(d) of the Banking Law
If any stockholder not voting in favor of said merger or consolidation
agreement records his opposition to such merger or consolidation at the time of
the meeting, or within twenty days thereafter, and demands payment of his
shares, and if such merger or consolidation is carried out, in such case said
stockholder may, within sixty days after the merger or consolidation, upon
written ten-day notice on said corporation, petition the Superior Court to
appoint three appraisers to estimate and determine the value of his shares, and
the court shall make such appointment. It shall also designate the date and
place where the appraisers shall first meet, and shall give them such
instructions as to such procedure to be followed as the court may deem
pertinent. The court shall also specify the date and manner in which the value
of said shares shall be paid to the aforesaid stockholder. The appraisers shall
meet on the date and at the place designated, and after taking oath, shall
proceed to perform the duties imposed on them by the court and to estimate and
determine the value of the aforesaid shares. They shall deliver a copy of their
report to the corporation and another to the stockholder, if he demands it. All
expenses incurred in determining the value of said shares shall be for account
of the corporation. When the corporation has paid the value of the aforesaid
shares, as the same may have been fixed by the appraisers, said shares shall be
canceled and the stockholder shall cease to be a stockholder of the corporation
or to have any interest therein, and the corporation may dispose of such shares
of stock for its own benefit. In case of emergency, when necessary for a better
protection of the interests of the depositors and of the bank, if the merger or
consolidation is approved by the votes of the stockholders of three-fourths of
the shares, such merger or consolidation agreement having been submitted to the
consideration of the Secretary of the Treasury and thereby approved, the
stockholders who may not have agreed to said merger shall in all respects be
subject to, and be bound by, such merger or consolidation. The Secretary of the
Treasury shall, in these cases, certify that the merger was made on account of
an emergency, and that, in his opinion, the same will be beneficial to the
public interest. Should the Secretary of the Treasury disapprove the merger or
consolidation agreement made by reasons of emergency, he shall, within the term
of ninety days, serve notice of his determination by registered mail on the
banks interested in the agreement. The finding of the Secretary disapproving a
merger or consolidation agreement made for reasons of emergency shall be
conclusive and not reviewable.
<PAGE> 139
Appendix D
ROIG COMMERCIAL BANK
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE> 140
[Price Waterhouse Logo]
REPORT OF INDEPENDENT ACCOUNTANTS
January 31, 1997
To the Board of Directors and
Stockholders of
Roig Commercial Bank
In our opinion, the accompanying statement of condition and the related
statements of income, of changes in capital, and of cash flows present fairly,
in all material respects, the financial position of Roig Commercial Bank at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Bank's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial 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.
/s/ Price Waterhouse
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 10 Expires Dec. 1, 1998
Stamp 1392159 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
<PAGE> 141
ROIG COMMERCIAL BANK
STATEMENT OF CONDITION
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 18,652,734 $ 18,282,700
------------ ------------
Money market investments:
Securities purchased under agreements to resell 31,700,000 9,300,000
Time deposits with other banks 1,510,000 910,000
------------ ------------
33,210,000 10,210,000
------------ ------------
Investment securities available-for-sale, at market value:
U.S. Treasury securities 120,192,969 152,947,659
Obligations of U.S. Government agencies and instrumentalities 121,790,761 76,150,517
Other securities 14,090,942 14,353,290
------------ ------------
256,074,672 243,451,466
------------ ------------
Investment securities held-to-maturity, at amortized cost:
U.S. Treasury securities 40,003,271 40,006,390
Obligations of U.S. Government and political subdivisions 142,875,816 144,475,665
Obligations of Puerto Rico Government agencies and instrumentalities 8,919,672 9,702,188
Mortgage-backed securities 1,206,661 1,483,035
Other securities 7,525,610 13,912,297
------------ ------------
200,531,030 209,579,575
------------ ------------
Investment in Federal Home Loan Bank stock, at redemption value 2,470,400 -
------------ ------------
Loans 393,322,796 340,535,810
Less:
-----
Unearned income 38,465,667 33,955,115
Allowance for loan losses 5,742,153 5,202,839
------------ ------------
349,114,976 301,377,856
------------ ------------
Bank premises and equipment 12,033,057 11,298,991
Customers' liability on letters of credit and guarantee 133,396 4,133,021
Accrued interest receivable 6,687,448 7,574,433
Other assets 9,535,645 8,613,611
------------ ------------
$888,443,358 $814,521,653
============ ============
LIABILITIES AND CAPITAL
-----------------------
Liabilities:
Deposits $656,291,063 $642,359,615
Securities sold under agreements to repurchase 47,850,000 8,000,000
Notes payable 109,000,000 89,000,000
Letters of credit and guarantee outstanding 133,396 4,133,021
Accrued interest payable 3,348,914 3,477,657
Other accrued expenses 3,976,965 1,854,455
Dividends payable 1,350,000 1,200,000
------------ ------------
821,950,338 750,024,748
------------ ------------
Commitments and Contingencies (Notes 2 and 19)
------------ ------------
Capital:
Common stock, authorized 2,500,000 shares, issued
and outstanding 600,000 shares 6,000,000 6,000,000
Surplus 40,000,000 35,000,000
Undivided profits 20,123,216 20,190,777
Net unrealized gain on securities available for sale 369,804 3,306,128
------------ ------------
66,493,020 64,496,905
------------ ------------
$888,443,358 $814,521,653
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 142
ROIG COMMERCIAL BANK
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $36,384,930 $33,731,567 $30,264,368
Interest on money market investments 1,733,689 1,313,103 1,525,631
Interest on U.S. Treasury securities 10,606,587 12,665,115 12,169,089
Interest on obligations of U.S. Government
agencies and instrumentalities 15,640,727 12,210,803 8,918,253
Interest on obligations of Puerto Rico
Government and political subdivisions 702,005 745,198 538,396
Interest on trading securities 61,200 151,294 135,156
Interest on other securities 1,832,555 1,941,011 2,129,963
----------- ----------- -----------
66,961,693 62,758,091 55,680,856
Less - Interest expense:
- ----
Deposits 25,132,047 26,153,327 21,420,371
Securities sold under agreements to repurchase 2,666,447 1,086,588 384,123
Notes payable 4,876,599 3,768,913 2,343,562
----------- ----------- -----------
32,675,093 31,008,828 24,148,056
----------- ----------- -----------
Net interest income 34,286,600 31,749,263 31,532,800
Provision for loan losses 3,180,000 1,006,000 1,437,306
----------- ----------- -----------
Net interest income after provision for
loan losses 31,106,600 30,743,263 30,095,494
Service charges on deposit accounts 4,066,248 3,116,318 2,203,898
Gain on sale of securities available-for-sale 553,509 1,129,353 836,237
Trading account profit (loss) 152,950 453,553 (23,856)
Other operating income 1,820,192 1,113,423 1,279,040
----------- ----------- -----------
37,699,499 36,555,910 34,390,813
----------- ----------- -----------
Operating expenses:
Personnel costs:
Salaries 10,257,961 10,227,029 9,144,379
Payroll taxes 930,032 963,581 861,980
Other employee benefits 5,456,458 2,577,490 2,383,153
Net occupancy expenses 2,876,494 2,804,797 2,538,555
Equipment rentals and other expenses 2,421,123 2,445,027 2,241,772
Taxes other than on income 1,155,943 1,120,710 1,070,699
FDIC insurance 2,000 731,246 1,392,237
Professional fees 1,537,847 1,323,806 741,614
Advertising and promotion 1,413,003 1,331,109 1,134,207
Communication 1,212,134 1,145,853 1,063,780
Other operating expenses 4,106,423 4,184,307 4,203,496
----------- ----------- -----------
31,369,418 28,854,955 26,775,872
----------- ----------- -----------
Income before income tax 6,330,081 7,700,955 7,614,941
Income tax (benefit) provision (702,358) 425,987 359,023
----------- ----------- -----------
Net income $ 7,032,439 $ 7,274,968 $ 7,255,918
=========== =========== ===========
Net income per share of common stock $ 11.72 $ 12.12 $ 12.09
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 143
ROIG COMMERCIAL BANK
STATEMENT OF CHANGES IN CAPITAL
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common stock - Balance at beginning
and end of year $ 6,000,000 $ 6,000,000 $ 6,000,000
----------- ----------- -----------
Surplus:
Balance at beginning of year 35,000,000 30,000,000 27,000,000
Transfer from undivided profits 5,000,000 5,000,000 3,000,000
----------- ----------- -----------
Balance at end of year 40,000,000 35,000,000 30,000,000
----------- ----------- -----------
Undivided profits:
Balance at beginning of year 20,190,777 19,865,809 17,469,891
Net income 7,032,439 7,274,968 7,255,918
Cash dividends - $3.50 per share
(1995 - $3.25 and 1994 - $3.10) (2,100,000) (1,950,000) (1,860,000)
Transfer to surplus (5,000,000) (5,000,000) (3,000,000)
----------- ----------- -----------
Balance at end of year 20,123,216 20,190,777 19,865,809
----------- ----------- -----------
Net unrealized gain (loss) on securities
available-for-sale:
Balance at beginning of year 3,306,128 (4,199,419) 5,775,082
Net change during the year,
net of taxes (2,936,324) 7,505,547 (9,974,501)
----------- ----------- -----------
Balance at end of year 369,804 3,306,128 (4,199,419)
----------- ----------- -----------
Total capital $66,493,020 $64,496,905 $51,666,390
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 144
ROIG COMMERCIAL BANK
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,032,439 $ 7,274,968 $ 7,255,918
------------- ------------- -------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,059,309 2,165,798 1,949,102
Provision for loan losses 3,180,000 1,006,000 1,437,306
(Benefit) provision for deferred income taxes (672,655) 136,047 (208,025)
Gain on sale of securities available for sale (553,509) (1,129,353) (836,237)
Amortization of deferred loan fees and costs (195,844) (184,952) (409,250)
Amortization of premiums and discounts
on securities 437,978 459,766 639,902
Decrease (increase) in interest receivable 886,985 (276,684) (2,254,226)
Decrease in other assets 729,397 992,420 1,580,580
Increase in other liabilities 1,993,767 1,696,906 376,164
------------- ------------- -------------
Total adjustments 7,865,428 4,865,948 2,275,316
------------- ------------- -------------
Net cash provided by operating activities 14,897,867 12,140,916 9,531,234
------------- ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in money market investments (23,000,000) (1,410,000) 23,250,000
Proceeds from sales of investment securities available-
for-sale 118,590,705 111,350,419 25,037,032
Proceeds from maturity and redemption of
investment securities available-for-sale 95,365,993 10,000,000 -
Purchase of investment securities available-for-sale (229,296,351) (46,834,531) -
Proceeds from maturity and redemption of
investment securities held-to-maturity 152,423,408 138,687,087 186,514,732
Purchase of investment securities held-to-maturity (144,457,985) (239,018,789) (233,225,807)
Purchase of FHLB stock (2,470,400)
Net increase in loans (50,721,276) (19,936,500) (25,085,285)
Acquisition of bank premises and equipment (2,793,375) (2,612,466) (1,540,230)
Cash received for liabilities assumed over assets
acquired in acquisition of branches - - 17,845,494
------------- ------------- -------------
Net cash used in investing activities (86,359,281) (49,774,780) (7,204,064)
------------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits 24,488,050 (12,788,283) 3,635,218
Net (decrease) increase in time deposits (10,556,602) 31,289,304 (25,631,436)
Increase in notes payable 20,000,000 29,000,000 16,000,000
Increase (decrease) in securities sold under
agreements to repurchase 39,850,000 (10,926,250) 10,926,250
Dividends paid (1,950,000) (1,950,000) (1,860,000)
------------- ------------- -------------
Net cash provided by financing activities 71,831,448 34,624,771 3,070,032
------------- ------------- -------------
Net increase (decrease) in cash and due from banks 370,034 (3,009,093) 5,397,202
Cash and due from banks at beginning of year 18,282,700 21,291,793 15,894,591
------------- ------------- -------------
Cash and due from banks at end of year $ 18,652,734 $ 18,282,700 $ 21,291,793
============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 145
ROIG COMMERCIAL BANK
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Roig Commercial Bank conform to
generally accepted accounting principles (GAAP). The following is a
description of the more significant of these policies.
Investment securities
Investments in equity securities that have readily determinable fair values and
all investments in debt securities are classified in three categories and
accounted for as follows:
- Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as 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 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, net of taxes, as a separate component of
shareholders' equity.
Investments in securities that have no readily determinable fair value, such as
stock of the Federal Home Loan Bank, is carried at the lower of amortized cost
or realizable value.
Premiums and discounts are amortized as an adjustment to interest income over
the life of the related securities using a method that approximates the
interest method. Realized gains or losses on securities classified as either
available-for-sale or held-to-maturity are reported in earnings for the period.
When computing realized gains or losses, the cost of securities is determined
on the specific identification method.
There were no trading securities at December 31, 1996, 1995, and 1994. The
Bank is not engaged in transactions with off-balance sheet derivatives.
Securities purchased or sold under agreements to resell or repurchase
Resale and repurchase agreements are treated as financing transactions and are
carried at the amounts at which the securities will be settled as specified in
the respective agreements. It is the Bank's policy to take control of
securities purchased under resale agreements.
<PAGE> 146
Page 2
Loans
Loans are stated at the principal amount outstanding, less unearned interest,
deferred origination fees and costs, and the allowance for loan losses.
Unearned interest on installment loans is recognized as income using a method
that approximates the interest method. Interest on demand commercial loans is
recorded monthly based on the interest rate of each loan.
The Bank's general policy is to discontinue recording interest on loans when
they are three months in arrears on payment of interest or principal. These
non-accrued interests are recognized as income only in the period collected and
no additional accruals are made until interest and principal are collected on a
current basis. Loan origination fees and costs are deferred and amortized as
an adjustment to the yield.
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" as
amended be SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures." This Statement requires a creditor
to measure impairment of a loan based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as practical
method at the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. This Statement is applicable to
all loans, except large groups of smaller - balance, homogeneous loans that are
collectively evaluated for impairment, leases and loans that are evaluated at
fair value or at the lower of cost or fair value. The implementation of this
statement had no significant effect on the Bank's financial statements.
Allowance for loan losses
Management believes that the allowance for loan losses is adequate. The
provision for loan losses charged to current operations is based on an
evaluation of the risk characteristics of individual loans considering such
factors as collateral, re-payment history and financial condition of the
borrower and on the evaluation of the loan portfolio as a whole considering
loss experience, economic conditions and other pertinent factors. Loan losses
are charged and recoveries are credited to the allowance for loan losses.
Bank premises and equipment
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on the
straight-line basis over the estimated useful lives of each type of asset, or
the term of the lease, whichever is shorter. When assets are disposed of, the
cost of the asset and related accumulated depreciation are removed from the
accounts, and any gain or loss is reflected in earnings for the period.
Maintenance and repair costs which do not improve or extend the life of the
respective assets are expensed as incurred. Costs of renewals and betterments
are capitalized.
<PAGE> 147
Page 3
Effective January 1, 1996, the Bank adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." As
required by this Statement, long-lived assets and certain identifiable
intangibles held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, an estimate of
the future cash flows expected to result from the use of the asset and its
eventual disposition is made. If the sum of the future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment is recognized based on the present value of such cash
flows. The implementation of this Statement had no significant effect on the
Bank's financial statements.
Employees' retirement plans
The Bank has a profit sharing plan covering all of its regular employees. In
addition, the Bank has a supplemental retirement plan which provides additional
compensation to those employees who will not be able to accumulate sufficient
benefits under the profit sharing plan before retirement. The costs of these
plans are charged to current operations under the accrual method.
Other real estate owned
Other real estate owned is composed of properties that have been repossessed by
the Bank. These properties are recorded at fair value at the time of
repossession and are subsequently carried at the lower of this new basis or
fair value less estimated cost of disposal.
Income tax
The Bank uses 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 its financial statements or tax returns.
In estimating future tax consequences, all expected future events other than
enactments of changes in the tax law or rates are considered. All significant
income and expense items are recognized in the same period for financial
reporting and tax purposes.
Earnings per share
Earnings per share have been computed on the basis of the weighted average
number of common shares outstanding during each year.
Accounting for transfers and servicing of financial assets
and extinguishment of liabilities
In June 1996, the Financial Accounting Standards Board (FASB) issued its SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement establishes new consistent
criteria for determining whether a transfer of financial assets in exchange for
cash or other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing.
<PAGE> 148
Page 4
SFAS No. 125 was issued to be effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996. In December 1996, the FASB issued SFAS No. 127 to postpone the effective
date of certain of the requirements of SFAS No. 125 to December 31, 1997.
Management believes that the adoption of this Statement will not have a
significant impact on the Bank's financial position and results of operations.
Statement of cash flows
For purposes of the statement of cash flows, cash and due from banks are
considered cash equivalents.
Disclosures about fair value of financial instruments
Most of the Bank's assets, liabilities and off-balance sheet products are
considered financial instruments. For certain financial instruments,
principally loans and deposits, fair values are not readily available since
there are no available trading markets as characterized by current exchanges
between willing parties. Accordingly, fair values can only be derived or
estimated using various valuation techniques, such as present valuing estimated
cash flows using discount rates reflecting current interest rates for
instruments of similar maturity and risk characteristics. However, the
determination of estimated future cash flows is inherently subjective and
imprecise, especially with respect to non-accrual assets. In addition,
prepayment assumptions are incorporated into the valuation techniques for
certain financial instruments. It should be noted that minor changes in
assumptions or estimation methodologies can have a material effect on the
derived or estimated fair values.
The estimated fair value disclosed in the notes to the financial statements are
indicative of the interest rate environment as of December 31, 1996 and 1995
and do not take into consideration the effects of interest rate fluctuations.
In different interest rate environments, fair value results can differ
significantly, especially for certain fixed-rate financial instruments and
non-accrual assets. In addition, the fair value presented does not attempt to
estimate the value of the Bank's fee generating business and anticipated future
business activities, that is, they do not represent the Bank's value as a going
concern.
<PAGE> 149
Page 5
The estimated fair values determined and the carrying values at December 31,
1996 and 1995 are set forth in Note 24. The methodologies used to estimate fair
value follow:
SHORT-TERM FINANCIAL INSTRUMENTS - Valued at their carrying amounts reflected
in the statement of condition as these are reasonable estimates of fair value
given the relatively short period of time between origination of the
instruments and their expected realization. These instruments include the
following:
Financial assets Financial liabilities
Cash and due from banks Letters of credit and guarantee
Securities purchased outstanding
under resale agreements Accrued interest payable
Customers' liability under
letters of credit and
guarantee
Accrued interest receivable
INVESTMENT SECURITIES - Financial instruments that are primarily traded in
secondary markets, which include investments securities, were valued using
either market prices or dealer quotes where available or quoted market prices
of financial instruments with similar characteristics, except for the
investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.
Financial instruments that are not generally traded were fair valued, for the
most part, by present valuing estimated future cash flows using appropriate
discount rates. Loans and interest-bearing deposits were also valued using
this methodology.
DEPOSITS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS - The fair value of
deposits with no defined maturities, such as non-interest-bearing deposits,
money market and savings accounts, is reported as the amounts payable on
demand. Interest-bearing time deposits were fair valued using rates effective
at December 31, 1996 and 1995, respectively, representing the Bank's cost of
raising funds of similar remaining maturities.
For securities sold under agreements to repurchase, notes payable and deposit
liabilities with fixed stated maturities, fair values were estimated using a
discounted cash flow model also based on rates representing the Bank's cost of
raising funds or similar remaining maturities.
<PAGE> 150
Page 6
LOANS - Loans were segregated by categories and were valued using discounted
cash flow methodologies at discount rates commensurate with the interest rate
and credit risks involved for each loan category. For floating rate loans,
contractual spreads earned were compared to market spreads in estimating future
cash flows. For commercial real estate loans, estimated future cash flow was
discounted using rates similar to those used for the performing commercial
loans plus incremental spreads to account for liquidity and future uncertainty
surrounding the commercial real estate market.
In determining the fair value of loans, estimated future receipts of both
principal and interest were considered. In contrast, in determining the
adequacy of the allowance for possible credit losses for historical cost
financial statements, only expected principal losses on an undiscounted basis
are considered. Although inherently subjective, the estimated future cash
flows for non-accrual loans was determined by applying expected default rates,
net of recoveries, based on past experience.
Reclassifications
Certain amounts in the 1995 and 1994 the financial statements have been
reclassified to conform with the 1996 presentation.
<PAGE> 151
ROIG COMMERCIAL BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES:
The accounting policies followed by Roig Commercial Bank are disclosed in the
preceding summary of significant accounting policies.
Nature of Operations
The Bank operates twenty-five branches exclusively within Puerto Rico. Its
primary source of revenue is providing loans to customers, who are predominantly
small and middle-market businesses, and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - MERGER AGREEMENT:
On December 30, 1996, the Bank signed a merger agreement with BanPonce
Corporation, the holding company of Banco Popular de Puerto Rico. This
transaction is subject to the approval of the Bank's shareholders and of the
federal and local regulatory agencies and is expected to be completed during the
second quarter of 1997. On the effective date of the merger, the Bank will merge
with and into Banco Popular, and its separate existence will terminate. The
merger agreement also provides for a contingent fee, related to services
performed by a consultant firm, which will be based on the final price of the
sale transaction, but is expected to be approximately $500,000.
NOTE 3 - CASH AND DUE FROM BANKS:
The Bank is required to maintain reserve balances with certain correspondents
banks and to comply with regulatory requirements. The amount of those reserve
balances was approximately $942,000 at December 31, 1996.
<PAGE> 152
Page 2
NOTE 4- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell (reverse repos) which
could be sold, loaned, or otherwise disposed of to other parties in the normal
course of the operations. The Bank has agreed to resell to the counterparty
substantially identical securities at the maturity of the agreement. The
agreements outstanding at December 31, 1996 mature in January 1997.
The following table summarizes certain information on securities purchased under
agreements to resell as of December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance outstanding $31,700,000 $ 9,300,000
=========== ===========
Weighted average interest rate at year-end 6.08% 6.00%
=========== ===========
Average balance during the year $32,545,576 $18,596,145
=========== ===========
Weighted average interest rate for the period 5.20% 5.95%
=========== ===========
Maximum aggregate balance at any month-end $66,800,000 $43,400,000
=========== ===========
</TABLE>
NOTE 5 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, unrealized gains and losses and the estimated market value
of investment securities available-for-sale, carried at market value, and
related scheduled maturities, (for 1994 only the carrying value is presented),
are as follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------------
Weighted average Amortized Unrealized Unrealized Market
yield cost gains losses value
----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year 6.12% $55,115,934 $ 87,191 - $ 55,203,125
After 1 to 5 years 6.01% 64,992,924 444,227 $(447,307) 64,989,844
------------ ---------- --------- ------------
120,108,858 531,418 (447,307) 120,192,969
------------ ---------- --------- ------------
Obligations of U.S. Government
agencies and instrumentalities:
Within one year 5.23% 49,945,025 - (15,025) 49,930,000
After 1 to 5 years 6.72% 59,981,253 160 (122,710) 59,858,703
After 5 to 10 years 7.12% 12,084,833 30,869 (113,644) 12,002,058
------------ ---------- --------- ------------
122,011,111 31,029 (251,379) 121,790,761
------------ ---------- --------- ------------
Other securities:
After 1 to 5 years 7.87% 1,118,535 - (13,730) 1,104,805
After 10 years 8.25% 12,343,097 670,570 (27,530) 12,986,137
------------ ---------- --------- ------------
13,461,632 670,570 (41,260) 14,090,942
------------ ---------- --------- ------------
Total $255,581,601 $1,233,017 $(739,946) $256,074,672
============ ========== ========= ============
</TABLE>
<PAGE> 153
Page 3
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
--------------------------------------------------------------- -----------------
Amortized Unrealized Unrealized Market Market
cost gains losses value value
---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 15,021,053 $ 150,041 -- $ 15,171,094 $ 19,962,500
After 1 to 5 years 135,440,117 2,336,448 -- 137,776,565 139,875,001
------------- ------------- -------- ------------- -------------
150,461,170 2,486,489 -- 152,947,659 159,837,501
------------- ------------- -------- ------------- -------------
Obligations of U.S. Government
agencies and instrumentalities:
Within one year 9,930,744 -- $ (6,658) 9,924,087
After 1 to 5 years 14,966,540 325,180 -- 15,291,720 --
After 5 to 10 years 40,170,799 695,161 -- 40,865,960
After 10 years 10,000,000 68,750 -- 10,068,750
------------- ------------- -------- ------------- -------------
75,068,084 1,089,091 (6,658) 76,150,517
------------- ------------- -------- ------------- -------------
Other securities:
After 1 to 5 years 2,658,214 -- (24,940) 2,633,274 5,502,495
After 10 years 10,855,826 864,190 -- 11,720,016 10,507,527
------------- ------------- -------- ------------- -------------
13,514,040 864,190 (24,940) 14,353,290 16,010,022
------------- ------------- -------- ------------- -------------
$ 239,043,294 $ 4,439,770 $(31,598) $ 243,451,466 $ 175,847,523
============= ============= ======== ============= =============
</TABLE>
Other securities consist of mortgage-backed securities of which $10,735,543
(1995 - $9,885,407) were guaranteed by instrumentalities of the U.S. Government.
Proceeds from sales of investment securities available-for-sale during 1996 and
1995 were $118,590,705 and $111,350,419, respectively. Gross realized gains and
losses during the year were $553,609 (1995 - $1,152,821) and $100 (1995 -
$23,468), respectively.
The Bank's capital at December 31, 1996 and 1995 includes unrealized holding
gains on securities available-for-sale of $369,804, and $3,306,128, net of
deferred taxes, respectively. As permitted by the FASB Special Report, "A Guide
for the Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities", the Bank reclassified approximately $91,000,000
from securities held-to-maturity to available-for-sale in December 1995.
Interest income on securities of the U.S. Treasury, and other U.S. Government
agencies and instrumentalities and of the Government of Puerto Rico and
instrumentalities thereof, is exempt from Puerto Rico income taxes. Interest
income on mortgage-backed securities and collateralized mortgage obligations,
which are guaranteed by U.S. Government agencies, is also tax-exempt.
<PAGE> 154
Page 4
NOTE 6 - INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, unrealized gains and losses, and the estimated market value
of investment securities held-to-maturity, which are carried at amortized cost,
and related scheduled maturities (for 1994 only the carrying value is
presented), are as follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------------
Weighted average Amortized Unrealized Unrealized Market
yield cost gains losses value
----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
After 1 to 5 years 4.97% $ 40,003,271 -- $ (611,083) $ 39,392,188
------------ -------- ----------- -------------
Obligations of U.S. Government
agencies and instrumentalities:
After 1 to 5 years 5.72% 11,232,926 (254,665) 10,978,261
After 5 to 10 years 6.31% 121,642,890 41,069 (1,560,033) 120,123,926
After 10 years 8.01% 10,000,000 9,450 10,009,450
------------ -------- ----------- -------------
142,875,816 50,519 (1,814,698) 141,111,637
------------ -------- ----------- -------------
Obligations of Puerto Rico Government
and political subdivisions:
After 1 to 5 years 7.85% 1,999,603 87,217 -- 2,086,820
After 5 to 10 years 8.72% 4,865,099 62,073 (225,317) 4,701,855
After 10 years 8.70% 2,054,970 231,050 -- 2,286,020
------------ -------- ----------- -------------
8,919,672 380,340 (225,317) 9,074,695
------------ -------- ----------- -------------
Mortgage-backed securities:
After 1 to 5 years 8.30% 1,206,661 32,440 -- 1,239,101
------------ -------- ----------- -------------
Other securities:
After 1 to 5 years 5.88% 7,525,610 -- (262,156) 7,263,454
------------ -------- ----------- -------------
$200,531,030 $463,299 $(2,913,254) $ 198,081,075
============ ======== =========== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------------------------------------------- -----------------
Amortized Unrealized Unrealized Market Amortized
cost gains losses value cost
------------ -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities
After 1 to 5 years $ 40,006,390 $ -- $ (303,264) $ 39,703,126 $ 65,074,279
------------ -------- ----------- ------------ ------------
Obligations of U.S. Government
agencies and instrumentalities:
Within one year 42,309,799 35,994 (21,713) 42,324,080 20,298,831
After 1 to 5 years 77,368,133 290,711 (558,086) 77,100,758 58,906,665
After 5 to 10 years 20,762,725 52,455 (287,336) 20,527,844 65,148,739
After 10 years 4,035,008 -- (92,183) 3,942,825 8,040,072
------------ -------- ----------- ------------ ------------
144,475,665 379,160 (959,318) 143,895,507 152,394,307
------------ -------- ----------- ------------ ------------
Obligations of Puerto Rico Government
and political subdivisions:
After 1 to 5 years 1,999,336 110,338 -- 2,109,674 1,999,071
After 5 to 10 years 5,643,091 79,875 (207,457) 5,515,509 5,448,875
After 10 years 2,059,761 324,371 -- 2,384,132 2,064,539
------------ -------- ----------- ------------ ------------
9,702,188 514,584 (207,457) 10,009,315 9,482,485
------------ -------- ----------- ------------ ------------
Mortgage-backed securities:
After 1 to 5 years 1,483,035 49,192 -- 1,532,227 1,801,590
------------ -------- ----------- ------------ ------------
Other securities:
After 1 to 5 years 13,912,297 -- (377,931) 13,534,366 13,986,356
------------ -------- ----------- ------------ ------------
Total $209,579,575 $942,936 $(1,847,970) $208,674,541 $242,739,017
============ ======== =========== ============ ============
</TABLE>
<PAGE> 155
Page 5
Other securities consist of collateralized mortgage obligations and
mortgage-backed securities. The mortgage-backed securities and the assets
underlying the collateralized mortgage obligations are guaranteed by U.S.
Government agencies.
There were no sales of securities held-to-maturity during 1996, 1995 and 1994.
NOTE 7 - PLEDGED ASSETS:
Investment securities and mortgage loans totaling approximately $71 million are
pledged to secure public and trust deposits and securities sold under repurchase
agreements. The Bank has also pledged investment securities and time deposits
totaling approximately $91 million to guarantee letters of credit with other
banks.
NOTE 8 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The composition of the loan portfolio at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial and agricultural:
Real estate collateral $125,984,585 $107,155,313
Other 41,040,757 36,381,198
Home improvements 38,083,547 33,131,076
Individuals for household, credit card
and other consumer expenditures 97,130,239 73,944,117
Motor vehicles 19,094,163 25,290,413
Mortgage loans 59,177,409 55,034,270
Real estate (construction) 869,383 794,384
Student loans 105,837 71,961
All others 11,836,876 8,733,078
------------ ------------
393,322,796 340,535,810
Less:
----
Unearned income 38,465,667 33,955,115
Allowance for loan losses 5,742,153 5,202,839
------------ ------------
$349,114,976 $301,377,856
============ ============
</TABLE>
The changes in the allowance for loan losses at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $5,202,839 $5,893,519 $5,038,187
Recoveries 814,557 896,293 1,113,574
Provision for loan losses 3,180,000 1,006,000 1,437,306
Provision for losses on loans acquired 325,000
Loans charged-off (3,455,243) (2,592,973) (2,020,548)
---------- ---------- ----------
Balance at end of year $5,742,153 $5,202,839 $5,893,519
========== ========== ==========
</TABLE>
Mortgage loans for approximately $1,512,000 (1995 - $1,771,000) are insured by
the Federal Housing Administration (FHA), the Veterans Administration or Banco
de la Vivienda de Puerto Rico.
<PAGE> 156
Page 6
At December 31, 1996, the Bank had approximately $10,278,000 (1995 - $9,075,000;
1994 - $4,267,000) in loans for which the accrual of interest income had been
discontinued. If these loans had been accruing interest, the additional interest
income would have been approximately $1,378,000 (1995- $958,000; 1994 -
$482,000).
As of December 31, 1996, the recorded investment in loans that are considered to
be impaired amounted to $5,352,000 (1995 - $4,038,000) which have a related
allowance for loan losses of $867,000 (1995 - $1,071,000). Average impaired
loans for the year ended December 31, 1996 were $4,695,000 (1995 - $3,958,000).
The Bank recognized interest income of $225,000 (1995 - $84,000) on impaired
loans during the year. Impaired loans were measured based on the fair value of
the collateral.
NOTE 9 - BANK PREMISES AND EQUIPMENT:
Bank premises and equipment consist of:
<TABLE>
<CAPTION>
Useful life
(years) 1996 1995
------- ---- ----
<S> <C> <C> <C>
Buildings 30 $ 6,306,463 $ 6,306,463
Equipment 3 - 15 12,603,998 10,954,677
Leasehold improvements 5 - 10 3,992,878 3,537,725
----------- -----------
22,903,339 20,798,865
Less - Accumulated depreciation
and amortization 13,586,591 11,813,404
----------- -----------
9,316,748 8,985,461
Land 2,170,971 2,170,971
Construction in progress 545,338 142,559
----------- -----------
$12,033,057 $11,298,991
=========== ===========
</TABLE>
Depreciation and amortization for the year was approximately $2,059,000 (1995 -
$2,166,000; 1994 - $1,949,000), of which $714,000 (1995 - $725,000; 1994 -
$613,000), was charged to occupancy expenses and $1,345,000 (1995 - $1,441,000;
1994 - $1,336,000), was charged to rental and other equipment expenses.
<PAGE> 157
Page 7
NOTE 10 - OTHER ASSETS:
The composition of other assets at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Other real estate owned $1,806,862 $2,663,582
Prepaid expenses 917,704 1,489,806
Deferred tax asset 2,149,304 497,873
Prepaid income taxes 662,261 662,261
Other 3,999,514 3,300,089
---------- ----------
$9,535,645 $8,613,611
========== ==========
</TABLE>
NOTE 11 - DEPOSITS:
The composition of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Non-interest bearing $ 72,370,383 $ 58,194,789
Savings and other interest bearing 319,972,919 309,660,463
Time 263,947,761 274,504,363
------------ ------------
$656,291,063 $642,359,615
============ ============
</TABLE>
The Bank has time deposits amounting to approximately $141,055,000 (1995 -
$161,382,000) in denominations of $100,000 or higher.
The average deposits and weighted average interest rates for each year were as
follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
Average Average Average Average
amount rate amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non-interest bearing $ 62,260,415 - $ 56,764,904 -
Saving and other interest bearing 316,353,049 3.39% 313,852,199 3.57%
Time 271,252,766 5.31% 271,150,055 5.51%
------------ ------------
$649,866,230 $641,767,158
============ ============
</TABLE>
The breakdown of maturities of time deposits at December 31, 1996 is
approximately as follows:
<TABLE>
<S> <C>
Three months or less $131,990,000
Over three to twelve months 60,020,000
Over one through five years 42,226,000
Over five years 29,712,000
------------
$263,948,000
============
</TABLE>
<PAGE> 158
Page 8
NOTE 12 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Securities sold under repurchase agreements are generally delivered to the
counterparties who arranged the transactions. The counterparties may have sold,
loaned, or otherwise disposed of such securities to other parties in the normal
course of the operations, and has agreed to resell to the Bank substantially
identical securities at the maturity of the agreement. The agreements amounting
to $27,850,000 and $20,000,000 are due in 1997 and 2001, respectively.
The following table summarizes certain information on securities sold under
agreements to repurchase as of December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance outstanding $47,850,000 $ 8,000,000
=========== ===========
Weighted average interest rate at year-end 5.21% 4.88%
=========== ===========
Average balance during the year $55,076,639 $20,165,271
=========== ===========
Weighted average interest rate for the period 4.84% 5.39%
=========== ===========
Maximum aggregate balance at any month-end $81,220,000 $33,036,500
=========== ===========
</TABLE>
NOTE 13 - NOTES PAYABLE:
Notes payable outstanding at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Notes payable placed with 936 companies,
bearing interest rates from 85% to 94% of
the three-month LIBID ranging (LIBID rate at
December 31, 1996 was 5.37%). Guaranteed by
FHLB Bonds with a market value of
$44,130,895. Notes amounting to $10,000,000,
$10,000,000 and $20,000,000 are due in 1997,
2000 and 2001, respectively. $ 40,000,000 $20,000,000
Note payable placed with a 936 company
bearing interest at fixed rate of 5.50%.
Guaranteed by FHLB Bonds with a market value
of $5,482,235. Due in 2000. 5,000,000
Notes payable placed with 936 companies,
bearing interest at fixed rates between
4.33% and 6.29%. Guaranteed by U.S. Treasury
securities with a market value of
$71,870,057. Notes amounting to $29,000,000,
$16,000,000 and $19,000,000 are due in 1998,
1999 and 2000, respectively. 64,000,000 69,000,000
------------ -----------
$109,000,000 $89,000,000
============ ===========
</TABLE>
<PAGE> 159
Page 9
NOTE 14 - INTEREST EXPENSE:
Interest expense consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deposits:
Savings and other $10,721,678 $11,209,547 $10,755,957
Time 14,410,369 14,943,780 10,664,414
Securities sold under
agreements to repurchase 2,666,447 1,086,588 384,123
Notes payable 4,876,599 3,768,913 2,343,562
----------- ----------- -----------
$32,675,093 $31,008,828 $24,148,056
=========== =========== ===========
</TABLE>
NOTE 15 - INCOME TAXES:
A substantial portion of the Bank's income arises from securities which are
exempt from Puerto Rico income tax. The income tax law requires that interest
and other expenses be allocated to exempt interest income. An adjustment was
made for these items in the determination of taxable income which resulted in a
substantial reduction of its income tax liability. The law also imposes an
alternative minimum tax (AMT) of 22% on regular taxable income after adjustments
for certain items provided for by the law. The income tax liability will be the
greater of the tax computed under the regular tax system or the AMT system. An
AMT credit may be claimed in future years for taxes paid on an AMT basis in
excess of the regular tax basis. AMT credits have no expiration date.
The Puerto Rico Internal Revenue Code ("Code") enacted in 1994 reduced the
maximum corporate income tax rate from 42% to 39% for calendar year 1996 and
thereafter. The Code also repealed the reserve method for determining the
deduction for loan losses and requires recapture of the existing allowance over
a four year period. This provision, effective in 1996, will increase taxable
income by approximately $1,300,000 ratably over four years. However, management
does not expect the impact on cash flow to be significant in the near term
because of the availability of AMT credits.
The income tax (benefit) provision is composed of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ (29,703) $289,940 $567,048
Deferred (672,655) 136,047 (208,025)
--------- -------- --------
$(702,358) $425,987 $359,023
========= ======== ========
</TABLE>
<PAGE> 160
Page 10
The reasons for the difference between the income tax expense applicable to
income before provision for income taxes and the amount computed by applying the
statutory rate were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
% of pre-tax % of pre-tax % of pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed income tax at
statutory rate $2,468,731 39% $3,234,401 42% $3,198,275 42%
Benefits of net tax exempt
interest income (2,878,648) (46) (2,483,752) (32) (2,634,814) (35)
Benefits of capital gain rate (77,491) (1) (191,990) (2) (161,760) (2)
Others (214,950) (3) (132,672) (2) (42,678) --
---------- --- ---------- --- ---------- ---
Income tax (benefit)
provision $ (702,358) (11)% $ 425,987 6% $ 359,023 5%
========== === ========== === ========== ===
</TABLE>
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
AMT credits $1,029,390 $1,118,051
Temporary differences, related mainly to:
Deferred compensation 811,079 660,630
Deferred loan origination fees and costs (285,507) (178,766)
Allowance for loan losses 717,608
Unrealized gain on securities
available-for-sale (123,266) (1,102,042)
---------- ----------
$2,149,304 $ 497,873
========== ==========
</TABLE>
The (benefit) provision for income tax was the result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
AMT credits available to carryforward $ 88,661 $617,911 $208,025
Temporary differences related to:
Deferred compensation (150,429) (660,630) -
Deferred loan origination fees and cost 106,721 178,786
Allowance for loan losses (717,608)
--------- -------- --------
$(672,655) $136,047 $208,025
========= ======== ========
</TABLE>
<PAGE> 161
Page 11
Management believes that the deferred tax asset will be fully realized in future
years, and accordingly, a valuation allowance has not been provided.
NOTE 16 - CAPITAL:
Common stock consists of 2,500,000 shares authorized of $10 par value per share
of which 600,000 shares were issued and outstanding at December 31, 1996 and
1995. The weighted average number of shares outstanding during each year used in
the computation of earnings per share was 600,000.
The Banking Law of the Commonwealth of Puerto Rico provides that no dividends
may be paid if the surplus is less than 20% of the Bank's capital. Moreover, a
minimum of 10% of the current earnings must be transferred to the surplus
account as long as it is less than 10% of total Bank deposits. The Bank has
complied with these provisions and, therefore, there are no restrictions on
undivided profits.
NOTE 17 - REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet the minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from FDIC examiners
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk- based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
<PAGE> 162
Page 12
The Bank's regulatory capital position at December 31, 1996 and 1995 is
presented in the table. To determine regulatory capital, approximately
$1,775,000 related to intangible assets was deducted from capital and $5,405,000
related to the allowance for loan losses was added for purposes of the total
capital ratio only.
<TABLE>
<CAPTION>
To be well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
- ------------------------
Total Capital (to Risk
Weighted Assets) $69,753 16.14% $34,565 8.00% $43,206 10.00%
Tier I Capital (to Risk
Weighted Assets) 64,348 14.89% 17,282 4.00% 25,924 6.00%
Tier I Capital (to Average
Assets) 64,348 7.61% 33,804 4.00% 44,757 5.00%
As of December 31, 1995:
- ------------------------
Total Capital (to Risk
Weighted Assets) $66,018 17.33% $30,482 8.00% $31,102 10.00%
Tier I Capital (to Risk
Weighted Assets) 63,396 16.64% 15,241 4.00% 22,861 6.00%
Tier I Capital (to Average
Assets) 63,396 7.94% 31,953 4.00% 39,941 5.00%
</TABLE>
NOTE 18 - RELATED PARTY TRANSACTIONS:
The Bank paid approximately $50,000 annually to a related party for the rental
of one of its branch facilities.
The Bank also grants loans to its directors, officers and to certain related
individuals or organizations in the ordinary course of business. The movement
and balance of these loans were as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995 $4,736,000
New loans 614,000
Payments (486,000)
----------
Balance at December 31, 1996 $4,864,000
==========
</TABLE>
<PAGE> 163
Page 13
NOTE 19 - COMMITMENTS AND CONTINGENCIES:
At December 31, 1996, the Bank was obligated under a number of non-cancelable
leases for buildings used for banking purposes requiring minimum rentals as
follows:
<TABLE>
<CAPTION>
Year Minimum rentals
---- ---------------
<S> <C>
1997 $ 998,215
1998 859,113
1999 589,807
2000 404,843
2001 and thereafter 55,712
----------
$2,907,690
==========
</TABLE>
Total rent expense for the year was approximately $1,286,000 (1995 - $1,223,000;
1994 - $1,230,000).
The Bank 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 Bank's financial position or results of operations.
NOTE 20 - UNUSED LINE OF CREDIT:
The Bank maintains an unsecured stand-by line of credit with another bank. At
December 31, 1996 and 1995, the Bank's total unused line of credit amounted to
approximately $10,000,000. In addition, as of December 31, 1996, the Bank has an
available line of credit with the FHLB in the amount of $25,000,000. No fees are
paid for these credit facilities.
NOTE 21 - EMPLOYEE BENEFITS:
The Bank made contributions to a profit-sharing plan covering substantially all
of its regular employees amounting to $626,000, $710,000 and $600,000 in 1996,
1995 and 1994, respectively.
In addition to the profit-sharing plan, the Bank maintains a deferred
compensation plan for certain employees which at retirement age would not have
accumulated sufficient benefits under the profit-sharing plan. Deferred
compensation expense related to this plan amounted to $310,000, $310,000 and
$300,000 in 1996, 1995 and 1994, respectively.
During the year the Bank offered a voluntary early-out program under which
approximately one hundred and ten employees retired. The total retirement and
severance expense related to these employees amounted to approximately
$2,984,000.
<PAGE> 164
Page 14
NOTE 22 - SUPPLEMENTAL CASH FLOW INFORMATION:
The required supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Interest $32,803,836 $29,793,847 $23,434,944
Income tax - - 900,000
</TABLE>
NOTE 23 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, the Bank uses various off-balance sheet
financial instruments to satisfy the financing needs of its costumers. These
financial instruments include loan commitments, letters of credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit in excess of the amount recognized in the 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 Bank's activities in particular
classes of financial instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. The total amounts of financial instruments whose contract amounts
represent potential credit risk at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit:
Lines of credit $13,712,000 $22,848,000
Credit cards 22,281,000 21,806,000
Standby letters of credit 133,000 4,133,000
</TABLE>
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 amounts do not necessarily represent future cash
requirements. To extend credit, the Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and investment securities, among
others.
In general, letters of credit are short-term commitments used to finance
commercial contracts such as for the shipment of goods. Standby letters of
credit are also issued by the Bank 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.
Management believes that it is not practical to estimate the fair value of these
commitments.
The Bank did not hold or issue off-balance sheet derivative financial
instruments during the years ended December 31, 1996, 1995 and 1994.
<PAGE> 165
Page 15
NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary table of estimated fair values and carrying values of financial
instruments at December 31, follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Assets:
Money market investments $ 33,210,000 $ 33,210,000 $ 10,210,000 $ 10,210,000
Investment securities 456,626,150 459,076,102 452,126,007 453,031,041
Loans - net 392,200,544 349,114,976 336,346,000 301,377,856
Accrued interest receivable 6,687,448 6,687,448 7,574,433 7,574,433
Liabilities:
Deposits 658,577,666 656,291,063 $644,724,000 $642,359,615
Securities sold under
agreements to repurchase 47,716,358 47,850,000 8,002,000 8,000,000
Notes payable 107,735,730 109,000,000 89,940,000 89,000,000
Accrued interest payable 3,348,914 3,348,914 3,477,657 3,477,657
</TABLE>
NOTE 25 - CONCENTRATION OF CREDIT RISK:
A geographic concentration exists within the Bank's loan portfolio since
substantially all of the Bank's business is with customers located in Puerto
Rico. As of December 31, 1996, the Bank had no significant concentration of
credit risk to individual customers or industries and no significant exposure of
highly leverage transactions in their loan portfolio . The collateral held on
the Bank's loans varies, but usually includes chattel and real estate mortgages.
The concentration of credit by type of loan is set forth on Note 8.
The carrying value of investments that exceed 10% of shareholder's equity, other
than securities of U.S. Government, is as follows:
<TABLE>
<CAPTION>
Book Percentage of Market Percentage of
Value shareholder's equity Value shareholder's equity
----- -------------------- ----- --------------------
<S> <C> <C> <C> <C>
Puerto Rico Government
and political subdivisions $8,919,672 13% $9,074,695 14%
</TABLE>
<PAGE> 166
Page 16
NOTE 26 - BRANCH ACQUISITION:
On August 4, 1994, the Bank acquired four retail branches from Banco Central
Hispano, in Puerto Rico. In the transaction, the Bank assumed liabilities for
approximately $36 million (mainly deposits) and acquired assets for
approximately $18 million (mainly loans). As a result of the transaction, the
Bank received $18 million in cash for the excess of the liabilities over the
assets acquired. This transaction did not have a significant impact on the
results of operations for the year ended December 31, 1994.
<PAGE> 167
Appendix E
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT dated December 27, 1996 between Roig
Commercial Bank (hereinafter referred to as the "Bank"), a commercial bank
organized and existing under the laws of the Commonwealth of Puerto Rico, and
the person identified on the signature page below, in his capacity as director
of the Bank (hereinafter referred to as the "Director").
WHEREAS, the Director is a member of the Board of Directors of the
Bank, and in that capacity is performing a valuable service for the Bank;
WHEREAS, the Banking Law of the Commonwealth of Puerto Rico
(hereinafter referred to as the "Banking Law"), as amended, provides that banks
shall have all the general and incidental powers conferred upon corporations
organized under the laws of the Commonwealth of Puerto Rico;
WHEREAS, the General Corporation Law of the Commonwealth of Puerto Rico
(hereinafter referred to as the "General Corporation Law"), as amended,
specifically provides that contractual agreements may be entered into between a
corporation and the members of its board of directors with the purpose of
providing indemnification to the directors;
WHEREAS, the Bank wishes to hold harmless and indemnify the Director to
the full extent permitted by the provisions of the General Corporation Law, or
by any amendment of it or other statutory provisions authorizing or permitting
such indemnification which is adopted after the date of this Agreement;
NOW THEREFORE, in consideration of the Director's continued service as
a Director of the Bank, the parties agree as follows:
1. Indemnification of Director.
a) The Bank shall indemnify the Director against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Director in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Bank) by reason
of the fact that he is or was a director, officer, employee or agent of the
Bank, or is or was serving at the request of the Bank as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Bank, and with
respect to any criminal
<PAGE> 168
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the Director did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Bank, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
b) The Bank shall indemnify the Director against expenses (including
attorneys' fees) actually and reasonably incurred by the Director in connection
with the defense or settlement of any threatened, pending or completed action or
suit by or in the right of the Bank to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the
Bank, or is or was serving at the request of the Bank as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Bank. No
indemnification shall be made in respect of any claim, issue or matter as to
which the Director shall have been adjudged to be liable to the Bank unless and
only to the extent that the court in which such action or suit was brought
determines upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the Director is fairly and reasonably
entitled to indemnity for such expenses which the court deems proper.
c) To the extent that the Director has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) hereof, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
d) Any indemnification under subsections (a) and (b) hereof, unless
ordered by a court, shall be made by the Bank only as authorized in the specific
case upon determination that indemnification of the Director is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) hereof. Such determination shall be made (i) by the
board of directors, by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum; or (ii) if
there are no such directors, or if such directors so direct, by an independent
legal counsel in a written opinion; or (iii) by the stockholders.
e) Expenses incurred by the Director in defending a civil or criminal
action, suit or proceeding may be paid by the Bank in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the Director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Bank.
<PAGE> 169
f) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Agreement shall not be deemed exclusive of any other
rights to which the Director may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office.
2. Limitations on Indemnification. No indemnification pursuant to Section 1
hereof shall be paid by the Bank (i) in respect of the amount of such losses for
which the Director is actually indemnified pursuant to any directors' and
officers' liability insurance purchased and maintained by the Bank; or (ii) if a
final decision by a court of law having jurisdiction in the matter determines
that such indemnification is not lawful.
3. Continuation of Indemnification. All agreements and obligations of the Bank
contained herein shall continue during the period the Director is a director,
officer, employee or agent of the Bank, or is or was serving at the request of
the Bank as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, and shall continue
thereafter so long as the Director is subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that the
Director was a director of the Bank or was serving in any other capacity
referred to herein.
4. Notification and Defense of Claim. Promptly after receipt by the Director of
notice of the commencement of any action, suit or proceeding, the Director shall
notify the Bank of such commencement, but the omission to notify the Bank shall
not relieve it from any liability or obligation which it may have to the
Director under this Agreement.
5. Repayment of Expenses. The Director agrees that he shall reimburse the Bank
for all expenses paid by the Bank in defending any action, suit or proceeding,
whether civil, criminal, administrative or investigative, against the Director
in the event and only to the extent that it shall be ultimately judicially
determined that the Director is not entitled to be indemnified by the Bank for
such expenses under applicable law.
6. Enforcement. In the event the Director is required to bring any action to
enforce rights or to collect monies due under this Agreement and is successful
in such action, the Bank shall reimburse the Director for all of his reasonable
fees and expenses in bringing and pursuing such action.
7. Separability. Each of the provisions of this Agreement is a separate and
distinct agreement and independent of the others, so that if any provision is
held to be invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions.
8. Governing Law, Binding Effect. Amendment and Termination.
<PAGE> 170
a) This Agreement shall be interpreted and enforced in accordance
with the laws of the Commonwealth of Puerto Rico.
b) This Agreement shall be binding on the Director and on the
Bank, its successors and assigns, and shall inure to the
benefit of the Director, his heirs, successors, executors,
administrators, estate and personal representatives, and to
the benefit of the Bank, its successors and assigns.
c) No amendment, modification, termination or cancellation of
this Agreement shall be effective unless in writing signed by
both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement
on and as of the date first above written.
ROIG COMMERCIAL BANK
By:
-------------------------------------
Name:
Title:
DIRECTOR:
----------------------------------------
<PAGE> 171
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
BanPonce is a Puerto Rico corporation.
Article ELEVENTH of the Restated Certificate of
Incorporation of BanPonce provides the following:
(1) The Corporation shall indemnify any
person who was or is a party or is threatened to be
made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action
by or in the right of the Corporation) by reason of
the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was
serving at the written request of the Corporation as
a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or
other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best
interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a
plea of nolo contendre or its equivalent, shall not,
of itself, create a presumption that the person did
not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect
to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(2) The Corporation shall indemnify any
person who was or is a party or is threatened to be
made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation
to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee
or agent of the Corporation, or
is or was serving at the written request of the
Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture,
trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or
settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the
Corporation, except that no indemnification shall be
made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be
liable for negligence or misconduct in the
performance of his duty to the Corporation unless and
only to the extent that the court in which such
action or suit was brought shall determine upon
application that, despite the adjudication of
liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled
to indemnity for such expenses which such court shall
deem proper.
(3) To the extent that a director, officer,
employee or agent of the Corporation has been
successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in
paragraph 1 or 2 of this Article ELEVENTH, or in
defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by
him in connection therewith.
II-1
<PAGE> 172
(4) Any indemnification under paragraph 1 or
2 of this Article ELEVENTH (unless ordered by a
court) shall be made by the Corporation only as
authorized in the specific case upon a determination
that indemnification of the director, officer,
employee or agent is proper in the circumstances
because he has met the applicable standard of conduct
set forth therein. Such determination shall be made
(a) by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties
to such action, suit or proceeding, or (b) if such a
quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or
(c) by the shareholders.
(5) Expenses incurred in defending a civil
or criminal action, suit or proceeding may be paid by
the Corporation in advance of the final disposition
of such action, suit or proceeding as authorized by
the Board of Directors in the specific case upon
receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such
amount unless it shall untimely be determined that
he is entitled to be indemnified by the Corporation
as authorized in this Article ELEVENTH.
(6) The indemnification provided by this
Article ELEVENTH shall not be deemed exclusive of any
other rights to which those seeking indemnification
may be entitled under any statute, by-law, agreement,
vote of shareholders or disinterested directors or
otherwise, both as to action in his official capacity
and as to action in another capacity while holding
such office, and shall continue as to a person who
has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(7) By action of its Board of Directors,
notwithstanding any interest of the directors in the
action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors
deems appropriate, on behalf of any person who is or
was a director, officer, employee or agent of the
Corporation, or is or was serving at the written
request of the Corporation as a director, officer,
employee or agent of another corporation,
partnership, joint venture, trust or other
enterprise, against any liability asserted against
him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the
Corporation would have the power or would be required
to indemnify him against such liability under the
provisions of this Article ELEVENTH or of the General
Corporation Law of the Commonwealth of Puerto Rico or
of any other state of the United States or foreign
country as may be applicable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(2) --Agreement and Plan of Merger. (attached as Appendix A
to the Prospectus/Proxy Statement included in this
Registration Statement)
(3)(i) --Articles of Incorporation of BanPonce.
(incorporated by reference to Exhibit 4.1 of Registration
Statement No. 33-39028)
(3)(ii) --By-laws of BanPonce. (incorporated by reference to
Exhibit 4.1 of Registration Statement No. 33-39028)
(4)(a) --Form of certificate for common stock. (incorporated by
reference to Exhibit 4.1 of BanPonce's Annual Report on
Form 10-K for the year ended December 31, 1990 (the "1990
Form 10-K"))
(4)(b) --Certificates of Resolutions of the Board of Directors of
BanPonce dated August 11, 1988 creating a series of
Preferred Stock of BanPonce 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 and Manufacturers Hanover Trust
Company regarding the issuance of certain Rights to
BanPonce's shareholders. (incorporated by reference to
Exhibit 4.3 of Registration Statement No. 33-39028)
(4)(c) --Amendment to Rights Agreement dated as of December 11,
1990. (incorporated by reference to Exhibit 4.4 of
Registration Statement No. 33-39028)
(4)(d) --Indenture, dated as of October 1, 1991, as amended, among
BanPonce Financial Corp., BanPonce and The First National
Bank of Chicago, relating to the debt securities of
BanPonce Financial Corp. guaranteed by BanPonce.
(incorporated by reference to Exhibit 4(c) to Registration
Statement No. 33-41686 and to Exhibit 4(a) on Form 8-K
filed on February 28, 1995)
(4)(e) --Form of medium-term fixed rate note of BanPonce Financial
Corp. guaranteed by BanPonce. (incorporated by reference to
Exhibit 2 on Form 8-K filed on October 8, 1991)
(4)(f) --Form of medium-term floating rate note of BanPonce
Financial Corp. guaranteed by BanPonce. (incorporated by
reference to Exhibit 3 on Form 8-K filed on October 8, 1991)
(4)(g) --Form of Certificate of 8.35% Non-cumulative Monthly Income
Preferred Stock, 1994 Series A (Liquidation Preference
$25.00 per share). (incorporated by reference to Exhibit
4.7 of the 1997 Form 10-K)
(4)(h) --Subordinated indenture of BanPonce, dated November 30,
1995, between BanPonce and the First National Bank of
Chicago, as trustee. (incorporated by reference to Exhibit
4(e) on Form 8-K filed on December 13, 1995)
(4)(i) --Form of subordinated note of BanPonce. (incorporated by
reference to Exhibit 4(p) on Form 8-K filed on December 13,
1995)
(4)(j) --Indenture, dated as of February 15, 1995, between BanPonce
and the First National Bank of Chicago, as trustee.
(incorporated by reference to Exhibit 4(c) on Form 8-K
filed on April 13, 1995)
(4)(k) --Form of medium-term fixed rate note of BanPonce.
(incorporated by reference to Exhibit 4(a) on Form 8-K
filed on April 13, 1995)
(4)(l) --Form of medium-term floating rate note of BanPonce.
(incorporated by reference to Exhibit 4(b) on Form 8-K
filed on April 13, 1995)
(5) --Opinion of Brunilda Santos de Alvarez, Esq.*
(8)(a) --Opinion of McConnell Valdes as to certain Puerto
Rico income tax matters.*
(8)(b) --Opinion of Sullivan & Cromwell as to certain U.S. income
tax matters.*
(10) --Shareholder Agreement.*
(23)(a) --Consent of Price Waterhouse.
II-2
<PAGE> 173
(23)(b) --Consent of Price Waterhouse.*
(23)(c) --Consent of Brunilda Santos de Alvarez, Esq. (included in
Exhibit (5))
(23)(d) --Consent of McConnell Valdes. (included in Exhibit(8)(a))
(23)(e) --Consent of Sullivan & Cromwell. (included in Exhibit (8)(b))
(23)(f) --Consent of Alex Sheshunoff & Co. Investment Banking
(24) --Powers of Attorney.*
(27) --Financial Data Schedule.(for SEC use only)*
(99)(a) --Opinion of Alex Sheshunoff & Co. Investment Banking
(attached as Appendix B to the Prospectus/Proxy Statement
included in this Registration Statement)
(99)(b) --Form of Proxy for RCB Common Stock
*Previously filed
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereto) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrants pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and then offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) That, for the purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 174
(c) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(d) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 20 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification by the Registrant against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Juan, Commonwealth of Puerto Rico, on the 26TH day of March, 1997.
BANPONCE CORPORATION
(Registrant)
By: /s/ Richard L. Carrion
------------------------------
Name: Richard L. Carrion
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Richard L. Carrion Chairman, March 26, 1997
------------------------------ President and Chief
Richard L. Carrion Executive Officer
(Chief Executive Officer)
* Director
- ----------------------------------------
Alfonso F. Ballester
* Director
- ----------------------------------------
Juan J. Bermudez
* Director
- ----------------------------------------
Francisco J. Carreras
</TABLE>
II-5
<PAGE> 176
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Senior Executive Vice President
- --------------------------------------- and Director
David H. Chafey, Jr.
* Director
- ---------------------------------------
Luis E. Dubon, Jr.
* Director
- ---------------------------------------
Antonio Luis Ferre
* Director
- ---------------------------------------
Hector R. Gonzalez
* Senior
- --------------------------------------- Executive Vice President
Jorge A. Junquera (Chief Financial Officer)
* Director
- --------------------------------------
Jose E. Rossi
* Director
- --------------------------------------
Manuel Morales, Jr.
* Director
- --------------------------------------
Alberto M. Paracchini
* Director
- --------------------------------------
Francisco Perez, Jr.
* Director
- --------------------------------------
Francisco M. Rexach, Jr.
* Director
- --------------------------------------
Felix J. Serralles Nevares
</TABLE>
II-6
<PAGE> 177
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director
- -------------------------------------------------
Emilio Jose Venegas
* Director
- -------------------------------------------------
Julio E. Vizcarrondo, Jr.
* Senior
- ------------------------------------------------- Vice President
Amilcar Jordan (Principal Accounting Officer)
</TABLE>
* Richard L. Carrion
-----------------------------, as Attorney-in-Fact March 26, 1997
/s/ Richard L. Carrion
-----------------------------
II-7
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
March 26, 1997
To the Board of Directors
BanPonce Corporation
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Amendment No. 1 to the Registration Statement on Form
S-4 No. 333-23397 of BanPonce Corporation for our report dated February 21,
1997, appearing on page F-35 of BanPonce Corporation Annual Report on Form
10-K for the year ended December 31, 1996. We also consent to the references to
us under headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse has not prepared or certified
such "Selected Financial Data."
PRICE WATERHOUSE
<PAGE> 1
EXHIBIT (23)(f)
CONSENT OF FINANCIAL ADVISOR
March 26, 1997
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form S-4 of our letter to the Board of Directors of Roig
Commercial Bank included as Appendix B to the Prospectus/Proxy statement
forming a part of this Amendment No. 1 to the Registration Statement on Form
S-4 and to all references to our firm in such Prospectus/Proxy Statement. In
giving such consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
<PAGE> 1
EXHIBIT (99)(b)
ROIG COMMERCIAL BANK REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ROIG
COMMERCIAL BANK FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 8, 1997 AND ANY ADJOURNMENT THEREOF.
The undersigned, being a stockholder of Roig Commercial Bank (the
"Bank"), hereby authorizes the Board of Directors or any successors in their
respective positions, as proxies with full powers of substitution, to represent
the undersigned at the Annual Meeting of Stockholders of the Bank to be held at
the Bank's principal executive offices, located at 63 Carreras Street, Humacao,
Puerto Rico, on Thursday, May 8, 1997 at 10:00 a.m., Puerto Rico time, and at
any adjournment of said meeting, and thereat to act with respect to all votes
that the undersigned would be entitled to cast, if then personally present, as
follows:
1. PROPOSAL to approve and adopt the Agreement and Plan of Merger dated as
of December 30, 1996, by and among BanPonce Corporation, Banco Popular de
Puerto Rico and Roig Commercial Bank, providing for the merger of Roig
Commercial Bank with and into Banco Popular.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. ELECTION OF DIRECTORS
Nominees:
J. Adalberto Roig, Jr.
Antonio Roig Ferre
Julio Pietrantoni, Esq.
Agustin Cabrer Roig
Dr. Francisco J. Fernandez
Jesus E. Amaral
Dr. Juan L Balaguer
Andres R. Nevares, Esq.
Jose D. Targa Roig
Dinorah J. Colon
Francisco M. Sueiro
Saturnino Pena Flores
[ ] VOTE FOR all nominees listed [ ] WITHHOLD AUTHORITY
above (above (except as marked to vote for all nominees
to the contrary below) listed above
VOTE FOR ALL nominees listed above, except for the following nominee(s)
(insert in the space provided below the name of the nominee(a) for whom you do
not wish to vote):
--------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
-2-
<TABLE>
<S> <C>
3. PROPOSAL to rally the appointment of Price Waterhouse as the Bank's independent auditors for the year ending
December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
4. PROPOSAL to approve the execution of certain indemnification agreements entered into between Roig Commercial Bank and its
directors.
/ / FOR / / AGAINST / / ABSTAIN
This proxy may be revoked at any time before it is exercised.
In their discretion, the proxies are authorized to vote upon such other business as may properly come before the
meeting.
Shares of Common Stock of the Bank will be voted as specified. If no specification is made above, shares will be voted
FOR Proposal 1, FOR the election of the nominees in Proposal 2, and FOR Proposals 3 and 4. This proxy cannot be voted for any
person who is not a nominee of the Board of Directors of the Bank.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders of Roig Commercial Bank called
for May 8, 1997 and a Prospectus/Proxy Statement for the Annual Meeting prior to the signing of this proxy.
</TABLE>
Dated: , 1997
-------------- --------------------------------------------
Number of shares:
--------- --------------------------------------------
Signatures
Please sign exactly as your name(s)
appear(s) on this proxy. When signing in a
representative capacity, please give title.
PLEASE MARK, SIGN, DATE AND PROMPTLY
RETURN THIS PROXY CARD USING THE
ENCLOSED ENVELOPE.
