As filed with the Securities and Exchange Commission on May 1, 1998
Registration No. 333-_________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
R&G FINANCIAL CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
Puerto Rico 6712
(State or other jurisdiction of (Primary Standard
incorporation or organization) Industrial Classification Code Number)
Not Applicable
(I.R.S. Employer
Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
(787) 758-2424
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Victor J. Galan
Chairman of the Board and Chief Executive Officer
R&G Financial Corporation
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
(787) 758-2424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
Norman B. Antin, Esq.
Hugh T. Wilkinson, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
<PAGE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
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.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ].
<TABLE>
<CAPTION>
================================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered(1) Share or Unit(2) Price(2) Registration Fee(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $0.01
par value per share.... 200,000 shares $40.265 $8,125,000 $2,396.88
================================================================================================================================
</TABLE>
(1) This Registration Statement covers a number of common shares of the
Registrant which are assumed, solely for purposes of calculating the
registration fee, will be issued upon consummation of the acquisition of
Fajardo Federal Savings Bank by the Registrant. For purposes of this
calculation only, it is further assumed that all shares of Fajardo Federal
Savings Bank Common Stock are exchanged for shares of the Registrant's
class B Common Stock, and that the average market price of Registrant's
class B Common Stock has declined subsequent to the date hereof.
(2) Estimated solely for the purpose of calculation of the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933,
the registration fee is based on the average of the high and low prices of
the R&G Financial Corp. Common Stock as reported on The Nasdaq Stock
Market's National Market on April 27, 1998 ($40.625), and computed based on
an assumed number of shares (200,000) to be exchanged for the securities of
Fajardo Federal Savings Bank.
The Registrant hereby amends this Registration Statement on such date as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that the 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.
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<PAGE>
FAJARDO FEDERAL SAVINGS BANK
Celis Aquilera #161
Fajardo, Puerto Rico 00648
(787) ___-____
May ___, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Fajardo Federal Savings Bank ("Fajardo Federal") on ________, __________,
1998 at __:00 _.m., Atlantic Time, at the ______________ located at
__________________, Fajardo, Puerto Rico.
At the Special Meeting, stockholders will be asked to approve the
Agreement of Merger dated as of March 10, 1998 and a related Plan of Merger
(together, the "Merger Agreement"), whereby Fajardo Federal will be merged (the
"Merger") into R-G Premier Bank of Puerto Rico ("Premier"), a wholly-owned
subsidiary of R&G Financial Corp. ("RGFC"), with Premier as the surviving
entity. Upon consummation of the Merger, each share of common stock of Fajardo
Federal, par value $1.00 per share ("Fajardo Federal Common Stock"), outstanding
immediately prior to consummation of the Merger (other than shares as to which
dissenters' rights have been asserted and duly perfected in accordance with
applicable law and shares held by RGFC or Fajardo Federal) shall be converted
into and represent the right to receive: (i) $37.80 in cash; or (ii) a number of
shares, $0.01 par value per share, of the Class B common stock of RGFC (the
"RGFC Class B Common Stock"), as determined by applying a formula (the "Exchange
Ratio") set forth in the Merger Agreement and based on the average market price
of RGFC Class B Common Stock over the 10 trading day period ending five days
before the closing date of the Merger (the "RGFC Market Value"), subject to the
terms, conditions, limitations and procedures set forth in the Merger Agreement
(the "Merger Consideration"). The Merger Agreement provides that not more than
$1,182,633 of the aggregate of the Merger Consideration will consist of cash.
Thus, the actual consideration ultimately received by a stockholder for shares
of Fajardo Federal Common Stock will depend upon such stockholder's election,
the election of other stockholders, as well as the allocation and proration
procedure as described in the accompanying materials. Under certain
circumstances, a Fajardo Federal stockholder who has elected to receive all cash
may receive a combination of cash and shares of RGFC Class B Common Stock.
Approval by Fajardo Federal's stockholders of the Merger Agreement is a
condition to consummation of the Merger. The terms of the proposed Merger are
explained in detail in the accompanying Proxy Statement/Prospectus, which we
urge you to read carefully.
Each stockholder entitled to vote at the Special Meeting will have the
right to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Federal law. For a
summary of the rights of stockholders of Fajardo Federal to dissent, see "The
Merger - Dissenters' Rights" in the attached Proxy Statement/Prospectus and
Appendix B thereto.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR
OF THE PROPOSAL TO APPROVE THE MERGER, WHICH THE BOARD BELIEVES IS IN THE BEST
INTERESTS OF FAJARDO FEDERAL'S STOCKHOLDERS.
Enclosed is a Notice of Special Meeting of Stockholders, the Proxy
Statement/Prospectus and a proxy card. Your vote is important, regardless of the
number of shares you own. Please complete, sign and date the enclosed proxy card
and return it as soon as possible in the envelope provided. If you decide to
attend the meeting, you may vote your shares in person whether or not you have
previously submitted a proxy. On behalf of the Board, I thank you for your
attention to this important matter.
Very truly yours,
Jose E. Soler
Chairman of the Board
<PAGE>
FAJARDO FEDERAL SAVINGS BANK
Celis Aquilera #161
Fajardo, Puerto Rico 00648
(787) ___-____
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Fajardo Federal Savings Bank ("Fajardo Federal") will be held at the
____________________ located at __________________, Fajardo, Puerto Rico, on
________, __________, 1998 at __:00 _.m., Atlantic Time, for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon the Agreement and Plan of Merger dated as of
March 10, 1998 between R&G Financial Corporation ("RGFC"), R-G Premier
Bank of Puerto Rico ("Premier") and Fajardo Federal, and a related Plan
of Merger (together, the "Merger Agreement"), pursuant to which (i)
Fajardo Federal will be merged into Premier (the "Merger"), with
Premier as the surviving entity of the Merger and (ii) each share of
common stock of Fajardo Federal, par value $1.00 per share ("Fajardo
Federal Common Stock"), outstanding immediately prior to consummation
of the Merger (other than shares as to which dissenters' rights have
been asserted and duly perfected in accordance with applicable law and
shares held by RGFC or Fajardo Federal) shall be converted into and
represent the right to receive either: (i) $37.80 in cash; or (ii) a
number of shares, $0.01 par value per share, of the Class B common
stock of RGFC (the "RGFC Class B Common Stock"), as determined by
applying a formula (the "Exchange Ratio") set forth in the Merger
Agreement and based on the average market price of RGFC Class B Common
Stock over the 10 trading day period ending five days prior to the
closing date of the Merger (the "RGFC Market Value"), subject to the
terms, conditions, limitations and procedures set forth in the Merger
Agreement (the "Merger Consideration"), as described in the
accompanying Proxy Statement/Prospectus and the Merger Agreement which
is attached as Appendix A thereto. The Merger Agreement provides that
not more than $1,182,633 of the aggregate of the Merger Consideration
will consist of cash. Thus, the actual consideration ultimately
received by a stockholder for shares of Fajardo Federal Common Stock
will depend upon such stockholder's election, the election of other
stockholders, as well as the allocation and proration procedure as
described therein;
2. If necessary, to consider and vote upon a proposal to adjourn the
Special Meeting to solicit additional proxies; and
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only holders of record of the Fajardo Federal Common Stock at the close
of business on __________, 1998 are entitled to notice of and to vote at the
Special Meeting and any adjournments thereof.
Any stockholder entitled to vote at the Special Meeting will have the
right to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Federal law. For a
summary of the rights of stockholders of Fajardo Federal to dissent, see "The
Merger - Dissenters' Rights" in the attached Proxy Statement/Prospectus and
Appendix B thereto.
BY ORDER OF THE BOARD OF DIRECTORS
Secretary
Fajardo, Puerto Rico
__________, 1998
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YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL 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 THE 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.
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<PAGE>
PROXY STATEMENT
for
Special Meeting of Stockholders
of Fajardo Federal Savings Bank
to be held on __________, 1998
-------------------------------------------
R&G FINANCIAL CORPORATION
PROSPECTUS
for
up to __________ Shares of Class B Common Stock
of R&G Financial Corporation to be issued in connection
with the acquisition of Fajardo Federal Savings Bank
by R&G Financial Corporation
-------------------------------------------
This Proxy Statement/Prospectus is being furnished in connection with
the solicitation of proxies by the Board of Directors of Fajardo Federal Savings
Bank ("Fajardo Federal") to be used at a special meeting of its stockholders to
be held on ________, __________, 1998 (the "Special Meeting"). The purpose of
the Special Meeting is to consider and vote upon an Agreement and Plan of
Merger, dated as of March 10, 1998, between Fajardo Federal, R&G Financial
Corporation ("RGFC" or the "Company") and RGFC's wholly-owned subsidiary, R-G
Premier Bank of Puerto Rico ("Premier") and a related Plan of Merger between
Fajardo Federal and Premier (together, the "Merger Agreement"). A copy of the
Merger Agreement is attached as Appendix A to this Proxy Statement/Prospectus.
At the Special Meeting, stockholders may also be asked to consider a proposal to
adjourn the meeting to solicit additional proxies, if necessary.
In accordance with the terms of the Merger Agreement, upon approval of
the Merger Agreement by the stockholders of Fajardo Federal and receipt of all
requisite regulatory approvals and the satisfaction or waiver of all conditions,
Fajardo Federal shall be merged into Premier (the "Merger"), with Premier as the
surviving entity of the Merger operating under the name "R-G Premier Bank of
Puerto Rico." In connection with the Merger, each share of common stock of
Fajardo Federal, par value $1.00 per share (the "Fajardo Federal Common Stock"),
outstanding immediately prior to consummation of the Merger (other than shares
as to which dissenters' rights have been asserted and duly perfected in
accordance with Federal law and shares held by RGFC or Fajardo Federal) shall be
converted into and represent the right to receive, at the election of the holder
thereof, either: (i) $37.80 in cash, or (ii) a number of shares, par value $0.01
per share, of RGFC Class B common stock (the "RGFC Class B Common Stock"), as
determined by applying a formula (the "Exchange Ratio") set forth in the Merger
Agreement and based on the average market price of the RGFC Class B Common Stock
over the 10 trading day period ending five days prior to the closing date of the
Merger (the "RGFC Market Value"), subject to the terms, conditions, limitations
and procedures set forth in the Merger Agreement (the "Merger Consideration").
The Merger Agreement provides that not more than an aggregate amount of
$1,182,633 of the Merger Consideration will consist of cash. Thus, the actual
<PAGE>
consideration ultimately received by a stockholder for shares of Fajardo Federal
Common Stock will depend upon such stockholder's election, the election of other
stockholders, as well as the allocation and proration procedure described
herein. In certain circumstances, a stockholder who has elected to receive all
cash may receive a combination of cash and shares of RGFC Class B Common Stock
in exchange for his shares of Fajardo Federal Common Stock.
The outstanding shares of RGFC Class B Common Stock are, and the shares
of the RGFC Class B Common Stock included in the Merger Consideration will be,
included for quotation on The Nasdaq National Market. The closing price of the
RGFC Class B Common Stock on __________, 1998 was $_______ per share.
RGFC has filed a Registration Statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering up to
200,000 shares of RGFC Class B Common Stock. In addition to being the Proxy
Statement for the Special Meeting, this document constitutes a prospectus of
RGFC with respect to the shares of RGFC Class B Common Stock to be issued in
connection with the Merger.
Fajardo Federal stock certificates should not be returned to Fajardo
Federal with the enclosed proxy and should not be forwarded until after receipt
of a letter of transmittal, which will be provided to Fajardo Federal
stockholders promptly following consummation of the Merger.
This Proxy Statement/Prospectus does not cover resales of shares of
RGFC Class B Common Stock following consummation of the Merger, and no person
may make use of this Proxy Statement/Prospectus in connection with any such
resale.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Fajardo Federal on or about __________,
1998.
All information contained in this Proxy Statement/Prospectus relating
to RGFC and its subsidiaries has been supplied by RGFC, and all information
contained in this Proxy Statement/Prospectus relating to Fajardo Federal and its
subsidiaries has been supplied by Fajardo Federal.
-------------------------------------------
THE SHARES OF RGFC CLASS B COMMON STOCK TO BE ISSUED IN THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
("COMMISSION") OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF RGFC CLASS B COMMON STOCK OFFERED HEREBY ARE NOT
DEPOSITS, SAVINGS ACCOUNTS OR OTHER OBLIGATIONS OF ANY DEPOSITORY INSTITUTION
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
-------------------------------------------
The date of this Proxy Statement/Prospectus is __________, 1998.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION...........................................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................
SUMMARY.........................................................................
The Parties to the Merger...................................................
The Stockholder Meeting.....................................................
Merger Consideration and Election, Allocation
and Proration Procedures..................................................
Recommendation of the Board of Directors
of Fajardo Federal........................................................
Stockholders Agreement......................................................
Effective Time of the Merger; Termination
of the Merger Agreement...................................................
Conditions to the Merger....................................................
Dissenters' Rights..........................................................
Certain Income Tax Consequences.............................................
Accounting Treatment of the Merger..........................................
Interest of Certain Persons in the Merger...................................
Unaudited Pro Forma Condensed Combined Summary Financial Information........
COMPARATIVE PER SHARE DATA......................................................
R&G CLASS B COMMON STOCK MARKET PRICES..........................................
RGFC SELECTED CONSOLIDATED FINANCIAL INFORMATION................................
FAJARDO FEDERAL SELECTED FINANCIAL INFORMATION..................................
STOCKHOLDER MEETING.............................................................
Special Meeting of Fajardo Federal Stockholders.............................
Costs.......................................................................
THE MERGER......................................................................
General.....................................................................
Background of and Reasons for the Merger....................................
Merger Consideration and Election, Allocation and Proration.................
Conditions to the Merger....................................................
Procedures for Exchange of Fajardo Federal Stock Certificates...............
Regulatory Approvals........................................................
Business Pending the Merger.................................................
Acquisition Proposals.......................................................
Representations and Warranties..............................................
Effective Time of the Merger; Termination and Amendment.....................
Rights of Dissenting Stockholders...........................................
RGFC Option Agreement.......................................................
Stockholder Agreement.......................................................
Interests of Certain Persons in the Merger..................................
Resale Considerations With Respect to the Shares of
RGFC Class B Common Stock
Certain Income Tax Consequences ............................................
Accounting Treatment of the Merger..........................................
Dissenters' Rights..........................................................
Expenses of the Merger......................................................
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)...............
ADJOURNMENT OF SPECIAL MEETING..................................................
i
<PAGE>
OWNERSHIP OF FAJARDO FEDERAL COMMON STOCK BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF FAJARDO FEDERAL....................................
FAJARDO FEDERAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................
General.....................................................................
Changes in Financial Condition..............................................
Results of Operations.......................................................
Asset and Liability Management..............................................
Liquidity and Capital Resources.............................................
Recent Accounting Pronouncements............................................
Impact of Inflation and Changing Prices.....................................
BUSINESS OF FAJARDO FEDERAL.....................................................
General.....................................................................
Lending Activities..........................................................
Sources of Funds............................................................
Employees...................................................................
REGULATION OF FAJARDO FEDERAL...................................................
General.....................................................................
Regulation of Fajardo Federal Savings Bank..................................
Taxation....................................................................
DESCRIPTION OF RGFC CLASS B COMMON STOCK........................................
General.....................................................................
Voting Rights...............................................................
Nomination Procedures; Number of Directors; Classified Board of Directors;
Removal of Directors
Conversion Rights...........................................................
Pre-emptive Rights..........................................................
Dividend Rights.............................................................
Restrictions on Acquisition of RGFC.........................................
COMPARISON OF RIGHTS OF HOLDERS OF RGFC CLASS B COMMON STOCK
AND HOLDERS OF FAJARDO FEDERAL COMMON STOCK.................................
General.....................................................................
Authorized Capital Stock....................................................
Board of Directors..........................................................
Voting Rights...............................................................
Payment of Dividends........................................................
Special Meetings of Shareholders............................................
Shareholder Action Without a Meeting........................................
Pre-Emptive Rights..........................................................
Mergers and Consolidations..................................................
Other Corporate Transactions................................................
Amendment of RGFC Certificate and Fajardo Federal Charter...................
Restrictions on Acquisition of RGFC and Fajardo Federal.....................
Director and Officer Liability and Indemnification..........................
LEGAL OPINIONS..................................................................
EXPERTS.........................................................................
INDEX TO FAJARDO FEDERAL FINANCIAL STATEMENTS...................................
ii
<PAGE>
APPENDIX A: Agreement of Merger, dated as of March 10, 1998, between RGFC,
Premier and Fajardo Federal, including a related Plan of
Merger attached as Exhibit A thereto.................... A-1
APPENDIX B: Provisions of the Rules and Regulations of the Office of
Thrift Supervision regarding dissenters' rights of
appraisal................................................. B-1
________________________
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus in connection
with the solicitation of proxies or the offering of securities made hereby, and,
if given or made, any such information or representation should not be relied
upon as having been authorized by RGFC or Fajardo Federal or any other person.
This Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction in
which it is unlawful to make such an offer, solicitation of an offer or proxy
solicitation. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of the securities offered pursuant to this Proxy
Statement/Prospectus shall, under any circumstances, create any implication that
there has been no change in the information set forth herein or in the affairs
of RGFC or Fajardo Federal or any of their respective subsidiaries since the
date of this Proxy Statement/Prospectus.
iii
<PAGE>
AVAILABLE INFORMATION
RGFC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by RGFC
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 or from the Web Site maintained by the Commission at
"http://www.sec.gov." Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. Copies of such
reports, proxy statements and other information may also be inspected at the
National Association of Securities Dealers, Inc. (the "NASD"), located at 1735 K
Street, N.W., Washington, D.C. 20006.
RGFC has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the shares of RGFC Class B
Common Stock to be issued pursuant to the Merger. As permitted by the rules and
regulations of the Commission, this Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto. Such additional information may be obtained from the Commission's
principal office in Washington, D.C. by either of the means described above for
obtaining reports, proxy statements and other information filed pursuant to the
Exchange Act. Statements contained in this Proxy Statement/Prospectus or in any
document incorporated in this Proxy Statement/Prospectus by reference or
supplied herewith as to the contents of any contract or other document referred
to herein or therein are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document, each such
statement being qualified in all respects by such reference.
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by RGFC (File No.
0-21137) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. RGFC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. The description of the shares of RGFC Class B Common Stock
contained in the Registration Statement on Form 8-A filed by
RGFC on August 12, 1996.
1
<PAGE>
All documents subsequently filed by RGFC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
made hereby shall be deemed to be incorporated by reference into this Proxy
Statement/Prospectus and to be a part hereof.
The Merger Agreement is included herewith as Appendix A and is
incorporated by reference herein. Discussion of the terms and conditions of the
Merger Agreement is summary in nature, and reference is made to the Merger
Agreement for a more complete discussion of the terms and conditions of the
Merger, the Merger Agreement and related transactions.
Any statement contained herein, in any supplement hereto or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein, in any
supplement hereto or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus or any supplement hereto.
Also incorporated herein by reference is the material attached hereto
as Appendix B to this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates by reference documents
filed by RGFC with the Commission which are not presented herein or delivered
herewith. All of such documents with respect to RGFC are available, upon written
or oral request, from Sonia Colon, Administrative Assistant, R&G Financial
Corporation, R-G Plaza, 280 Jesus T. Pinero Avenue, Hato Rey, San Juan, Puerto
Rico 00918; telephone number (787) 758- 2424. Copies will be furnished (without
exhibits unless the exhibits have been specifically incorporated by reference)
free of charge. In order to ensure timely delivery of such documents, any
request should be made by ___________, 1998.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus and is not intended to be a complete
statement of the matters described herein. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information
contained, or incorporated by reference, in this Proxy Statement/Prospectus and
in the Appendices attached hereto. Stockholders are urged to read this Proxy
Statement/Prospectus and the Appendices hereto in their entirety.
The Parties to the Merger
RGFC. R&G Financial Corporation is the holding company for R&G Mortgage
Corp., a Puerto Rico mortgage banking company ("R&G Mortgage") and R-G Premier
Bank of Puerto Rico, a Puerto Rico-chartered commercial bank ("Premier"). The
Company was organized under Puerto Rico law in March 1996. In July 1996, the
Company acquired the 88.1% ownership interest in the common stock of Premier and
the 100% ownership interest in the common stock of R&G Mortgage held by the
Company's Chairman of the Board and Chief Executive Officer, Mr. Victor J.
Galan, in exchange for shares of Class A common stock of the Company. In August
1996, the Company conducted an underwritten public offering of Class B common
stock. In December 1996, the Company acquired the remaining 11.9% ownership
interest in the common stock of Premier. At December 31 1997, the Company had
total consolidated assets of $1.5 billion, total consolidated borrowings of
$627.9 million, total consolidated deposits of $722.4 million, and total
consolidated stockholders' equity of $138.1 million. After taking into
consideration an 80% stock dividend paid in 1997, as of December 31, 1997, the
Company had 9,220,278 Class A shares of common stock outstanding, all of which
were owned by Mr. Galan, and 4,924,474 publicly held shares of RGFC Class B
Common Stock outstanding.
Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer
and controlling shareholder of R&G Financial, originally organized R&G Mortgage
in 1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two
branch federal savings and loan association with total assets of $52.9 million,
which was re-named R&G Federal Savings Bank. Recognizing the complementary
operational aspects and cross selling opportunities that are inherent in
operating both a mortgage bank and banking institution, during 1990 Mr. Galan
integrated Premier's and R&G Mortgage's operations. Embarking on a retail branch
expansion strategy, Premier in 1993 acquired a two branch savings and loan
association with total assets of $78.6 million and, in June 1995, acquired from
a commercial bank $77.2 million in deposits and, after consolidation, six branch
offices. In November 1994, Premier converted to a Puerto Rico- chartered
commercial bank and took its present name.
RGFC competes for business in Puerto Rico by providing a wide range of
financial services to residents of all of Puerto Rico's major cities through
branch offices and mortgage banking facilities at 18 locations. The operations
of both R&G Mortgage and Premier have expanded substantially during the 1990's,
due in large part to R&G Mortgage's emergence as the second largest originator
of loans secured by single-family residential properties in Puerto Rico. During
the year ended December 31, 1997, R&G Mortgage originated approximately 28.4% of
3
<PAGE>
all single-family residential loans originated in Puerto Rico, which has
resulted in significant growth in its servicing portfolio as well as facilitated
rapid expansion of Premier's franchise and operations. R&G Mortgage's servicing
portfolio has increased by 91.3% since December 31, 1991 and, at December 31,
1997, R&G Mortgage serviced approximately 56,400 accounts with an aggregate loan
balance of $3.0 billion. Premier's asset size, which amounted to $996.3 million
at December 31, 1997, has increased by $943.4 million since February 1990, while
the branch office network had increased from two to 16 offices.
RGFC has generally sought to achieve long-term financial strength and
profitability by increasing the amount and stability of its net interest income
and non-interest income. RGFC has sought to implement this strategy by (i)
establishing and emphasizing the growth of its mortgage banking activities,
including growing its loan servicing operation; (ii) expanding its retail
banking franchise in order to achieve increased market presence and to increase
core deposits; (iii) enhancing RGFC's net interest income by increasing RGFC's
loans held for investment, particularly single-family residential loans; (iv)
developing new business relationships through an increased emphasis on
commercial real estate and commercial business lending; (v) diversifying RGFC's
retail products and services, including an increase in consumer loan
originations (such as credit cards); (vi) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services; and (vii) the pursuit of a variety of acquisition opportunities when
appropriate.
RGFC is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") and is subject
to various reporting and other requirements of the Securities and Exchange
Commission ("SEC").
R-G Premier Bank. Premier's principal business consists of attracting
deposits from the general public and tax-advantaged funds from eligible Puerto
Rico corporations and using such deposits, together with funds obtained from
other sources, to originate (through R&G Mortgage) and purchase loans secured
primarily by residential real estate in Puerto Rico, and to purchase
mortgage-backed and other securities. To a lesser extent but with increasing
emphasis over the past few years, Premier also originates consumer loans,
commercial business loans and loans secured by commercial real estate. Such
loans offer higher yields, are generally for shorter terms and facilitate
Premier's provision of a full range of financial services to its customers.
Premier also offers trust services through its Trust Department. Premier's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and
it is regulated and examined by the FDIC as its primary federal regulatory
agency as well as by the Office of the Commissioner of Financial Institutions
("OCFI").
RGFC's corporate offices are located at R-G Plaza, 280 Jesus T. Pinero
Avenue, Hato Rey, San Juan, Puerto Rico 00918 and its telephone number is (787)
758-2424.
For additional information concerning RGFC, its business, financial
condition and results of operations, see "Available Information," "Incorporation
of Certain Documents by Reference" and "RGFC Selected Consolidated Financial
Information."
4
<PAGE>
Fajardo Federal. Fajardo Federal conducts business from its executive
office and one full-service branch office, both of which are located in Fajardo,
Puerto Rico. Fajardo Federal is primarily engaged in attracting deposits from
the general public and using those funds to originate loans secured by
single-family residences located in Puerto Rico. To a lesser extent, Fajardo
Federal also makes consumer and other loans.
Fajardo Federal is subject to examination and comprehensive regulation
by the OTS, which is Fajardo Federal's chartering authority and primary
regulator. Fajardo Federal's deposits are insured by the Savings Association
Insurance Fund (the "SAIF") of the FDIC to the maximum extent permitted by law.
Fajardo Federal is also regulated by the FDIC, the administrator of the SAIF.
Fajardo Federal is also subject to certain reserve requirements established by
the Federal Reserve and is a member of the FHLB of New York, which is one of the
12 regional banks comprising the FHLB System.
Fajardo Federal's executive offices are located at Celis Aquilera
#161, Fajardo, Puerto Rico 00648, and its telephone number is (787) 863-3555. At
December 31, 1997, Fajardo Federal had total assets of $29.6 million, total
liabilities of $26.1 million, including deposits of $22.0 million, and
stockholders' equity of $3.5 million.
For additional information concerning Fajardo Federal, see "Fajardo
Federal Selected Financial Information," "Fajardo Federal Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business of Fajardo Federal," "Regulation and Supervision of Fajardo Federal"
and the Fajardo Federal Financial Statements contained elsewhere herein.
The Stockholder Meeting
The Special Meeting will be held at the ____________________ located at
___________, Fajardo, Puerto Rico, on ________ __, 1998 at __:00 _.m., Atlantic
Time. Only the holders of record of the outstanding shares of Fajardo Federal
Common Stock at the close of business on _______ __, 1998 (the "Record Date")
are entitled to notice of and to vote at the Special Meeting. At the Record
Date, [156,433] shares of Fajardo Federal Common Stock were outstanding and
entitled to vote. A majority of the outstanding shares of Fajardo Federal Common
Stock must be represented in person or by proxy at the Special Meeting in order
for a quorum to be present. Each share of Fajardo Federal Common Stock entitles
the holder thereof to one vote on each matter to be submitted to Fajardo
Federal's stockholders at the Special Meeting.
At the Special Meeting, Fajardo Federal's stockholders will be asked
to consider and vote upon (a) a proposal to approve the Merger Agreement, (b) a
proposal to adjourn the Special Meeting to solicit additional proxies, if
necessary, and (c) the transaction of such other business as may properly come
before the Special Meeting and any adjournment or adjournments thereof. The
proposal to approve the Merger Agreement will require the affirmative vote of
two-thirds of the total shares outstanding and eligible to be cast at the
Special Meeting. The proposal to adjourn the Special Meeting, if necessary, will
require the affirmative vote of a majority of the
5
<PAGE>
shares of Fajardo Federal Common Stock represented, in person or by proxy at the
Special Meeting. Shares as to which the "ABSTAIN" box have been marked on the
proxy and broker non-votes will be counted as present for determining if a
quorum is present; however, such abstentions and broker non-votes are not
considered votes cast and thus will not affect the number of votes required for
approval of the proposal to adjourn the Special Meeting, but, because of the
vote required, will have the same effect as a vote against the proposal to
approve the Merger Agreement. See "Stockholder Meeting - Special Meeting of
Fajardo Federal Stockholders."
The directors of Fajardo Federal have agreed and intend to vote or
cause to be voted all shares of Fajardo Federal Common Stock in which they have
the right to vote for approval and adoption of the Merger Agreement. At the
Record Date, directors of Fajardo Federal and their affiliates in the aggregate
beneficially owned [97,876] shares, or [62.6%], of the outstanding Fajardo
Federal Common Stock, excluding shares subject to options.
Revocability of Proxies. Holders of Fajardo Federal Common Stock may
revoke a proxy at any time prior to its exercise by filing with the Secretary of
Fajardo Federal, Fajardo Federal Savings Bank, Celis Aquilera #161, Fajardo,
Puerto Rico 00648) a written notice of revocation or a proxy bearing a later
date, or by voting in person at the Special Meeting. Attendance at the Special
Meeting will not of itself constitute revocation of a proxy. If your shares are
not registered in your own name, you will need additional documentation from
your recordholder in order to vote personally at the Special Meeting.
HOLDERS OF FAJARDO FEDERAL COMMON STOCK ARE REQUESTED TO COMPLETE,
DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE SPECIAL
MEETING. ALL PROPERLY EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE SPECIAL
MEETING WILL BE VOTED WITH RESPECT TO THE MATTERS IDENTIFIED ON THE PROXY CARDS
IN ACCORDANCE WITH ANY INSTRUCTIONS THEREON AND, IF NO INSTRUCTIONS ARE GIVEN,
WILL BE VOTED FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND, IF
APPLICABLE, FOR ADJOURNMENT OF THE SPECIAL MEETING.
Merger Consideration and Election, Allocation and Proration Procedures
General. In accordance with the terms of the Merger Agreement, Fajardo
Federal will be merged with and into Premier, with Premier as the surviving
corporation of the Merger. Upon consummation of the Merger, Premier will
continue to be operated as a direct, wholly-owned subsidiary of RGFC.
Merger Consideration. The Merger Agreement provides that at the
effective time of the Merger, each share of Fajardo Federal Common Stock
outstanding immediately prior to consummation of the Merger (other than shares
as to which dissenters' rights have been asserted and duly perfected in
accordance with the rules and regulation of the OTS ("Dissenting Shares") and
shares held by Fajardo Federal or RGFC) will be converted into and represent the
right to
6
<PAGE>
receive either (i) $37.80 in cash ("Per Share Cash Consideration"); or (ii) a
number of shares ("Per Share Stock Consideration") as determined by the Exchange
Ratio and based on the RGFC Average Market Value (defined as the average of the
mean between the closing high bid and low asked price per share as reported by
The Nasdaq National Market) of shares of RGFC Class B Common Stock over the 10
trading day period ending five days prior to the Closing Date of the Merger (the
"RGFC Market Value"). The Merger Agreement provides that the number of shares
RGFC comprising the Per Share Stock Consideration will be equal to: (A) if the
RGFC Market Value is equal to or less than $30.50 but equal to or greater than
$24.00, 1.40 shares; (B) if the RGFC Market Value is greater than $30.50, the
quotient determined by dividing (x) $42.70 by (y) the RGFC Market Value; or (C)
if the RGFC Market Value is less than $24.00 the quotient determined by dividing
(x) $32.91 by (y) the RGFC Market Value (the "Exchange Ratio"). The Merger
Agreement provides that the aggregate Cash Consideration to be paid in the
Merger shall not exceed $1,182,633 (the "Aggregate Cash Consideration"). In the
event that holders of Fajardo Federal Common Stock elect to receive Per Share
Cash Consideration in an amount which in the aggregate would exceed the
Aggregate Cash Consideration, an allocation procedure will be implemented such
that such stockholders shall receive shares of RGFC Class B Common Stock in
addition to cash. See "--Oversubscription for Aggregate Cash Consideration" and
"The Merger - The Merger Consideration."
The closing price of RGFC Class B Common Stock on April __, 1998 was
$______ per share. See "RGFC Class B Common Stock Market Prices." The disclosure
throughout this Proxy Statement/Prospectus, including the pro forma information,
assumes that the RGFC Market Value will be $42.70, which results in an Exchange
Ratio of 1.00. See "Pro Forma Condensed Consolidated Financial Statements
(Unaudited)."
Elections. Within three business days after the consummation of the
Merger, each record holder of Fajardo Federal Common Stock will be sent
materials asking such stockholder to make an election (an "Election") as to the
consideration to be received for his or her shares of Fajardo Federal Common
Stock. The Election procedure and the exchange of certificates representing
Fajardo Federal Common Stock for the Merger Consideration will be coordinated by
a bank or trust company selected by RGFC (the "Exchange Agent"). Such holders of
Fajardo Federal Common Stock may elect:
(i) the number of shares of RGFC Class B Common Stock, based
on the Exchange Ratio, for each share of Fajardo Federal Common Stock
(a "Stock Election");
(ii) $37.80 in cash, without interest, for each share of
Fajardo Federal Common Stock (a "Cash Election") (subject to the
limitation that the Aggregate Cash Consideration cannot exceed
$1,182,633); or
(iii) make no election (a "No-Election").
Notwithstanding the foregoing, in order to make a Stock Election, the
number of shares of Fajardo Federal Common Stock a holder must elect to convert
to shares of RGFC Class B Common Stock must equal or exceed 100 shares.
Therefore, any holder of Fajardo Federal
7
<PAGE>
Common Stock who owns less than 100 shares must elect the Cash Election or be
treated as having made a No-Election. A failure to properly make an election as
described herein will be treated as a No-Election. Any shares for which
dissenters' rights have been perfected will be deemed to have made a Cash
Election.
No Oversubscription. In the event that the amount of Cash Elections do
not exceed the $1,182,633 Aggregate Cash Consideration limit, then:
(i) all Cash Election shares shall be converted into the right
to receive $37.80 in cash, without interest, per share of Fajardo
Federal Common Stock; and
(ii) all No-Election shares and all shares as to which a Stock
Election has been made shall be converted into the right to receive
RGFC Class B Common Stock, as determined by the Exchange Ratio, per
share of Fajardo Federal Common Stock.
Oversubscription for Aggregate Cash Consideration. If the aggregate
number of shares as to which a Cash Election has been made exceeds the Aggregate
Cash Consideration ($1,182,633), then:
(i) all Stock Election Shares and No Election Shares will be
converted into the right to receive RGFC Class B Common Stock, as
determined by the Exchange Ratio, per share of Fajardo Federal Common
Stock;
(ii) the Exchange Agent will allocate among the holders of
Cash Election Shares (by the method of allocation described below), a
sufficient number of Cash Election Shares (excluding any Dissenting
Shares) ("Reallocated RGFC Shares") such that the number of remaining
Cash Election Shares (including Dissenting Shares) times the Cash
Consideration per share equals the Aggregate Cash Consideration, and
all Reallocated RGFC Shares shall be converted into the right to
receive RGFC Class B Common Stock, as determined by the Exchange
Ratio, per share of Fajardo Federal Common Stock; and
(iii) the Cash Election Shares (subject to certain exceptions
with respect to Dissenting Shares) which are not Reallocated RGFC
Shares will be converted into the right to receive cash. In the event
that the Exchange Agent is required to designate from among all
holders of Cash Election Shares the Reallocated RGFC Shares to receive
RGFC Class B Common Stock, each holder of Cash Election Shares shall
be allocated a pro rata portion of the total Reallocated RGFC Shares.
No Guarantee of Chosen Consideration or Equivalent Value. Because the
Merger Agreement provides that the amount of cash to be included in the Merger
Consideration will not exceed the Aggregate Cash Consideration ($1,182,633), no
guarantee can be given that the election to receive Cash Election Shares by any
given stockholder of Fajardo Federal will be fully honored. Rather, such
election by each stockholder will be subject to the election, allocation and
proration procedures described herein. Thus, stockholders who request Per Share
Cash
8
<PAGE>
Consideration in exchange for their shares of Fajardo Federal Common Stock may
not receive their requested form of consideration. In contrast, stockholders who
request to receive Stock Election Shares are guaranteed that they will receive
shares of RGFC Class B Common Stock upon consummation of the Merger (assuming
such stockholder is converting at least 100 shares of Fajardo Federal Common
Stock and except for cash in lieu of fractional shares).
Examples of Merger Consideration to be Received. The following table
sets forth examples of the value for the Merger Consideration to be received
based on assumed RGFC Market Values.
<TABLE>
<CAPTION>
Assumed RGFC Relevant Exchange Value of Per Share Value of Per Share
Market Value Ratio Stock Consideration Cash Consideration
- -------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
$16.00 2.0568 $32.91 $37.80
18.00 1.8283 32.91 37.80
20.00 1.6455 32.91 37.80
22.00 1.4959 32.91 37.80
24.00 1.400 33.60 37.80
26.00 1.400 36.40 37.80
28.00 1.400 39.20 37.80
30.00 1.400 42.00 37.80
32.00 1.3344 42.70 37.80
34.00 1.2559 42.70 37.80
36.00 1.1861 42.70 37.80
38.00 1.1237 42.70 37.80
40.00 1.0675 42.70 37.80
42.00 1.0167 42.70 37.80
44.00 0.9705 42.70 37.80
</TABLE>
Election Procedures. All Elections will be required to be made on a
Letter of Transmittal and Election Form. To make an effective Election with
respect to shares of Fajardo Federal Common Stock, the holder thereof must, in
accordance with the Letter of Transmittal and Election Form, (i) complete
properly and return the Letter of Transmittal and Election Form to the Exchange
Agent, (ii) deliver therewith his or her certificates representing shares of
Fajardo Federal Common Stock (the "Fajardo Federal Stock Certificates") with
respect to such shares (or an appropriate guarantee of delivery thereof), and
(iii) deliver therewith any other required documents, prior to 5:00 p.m. on the
10th business day following the mailing of the Letter of Transmittal and
Election Form (the "Election Deadline.").
Fajardo Federal Stock Certificates should not be returned with the
enclosed proxy and should not be forwarded to the Exchange Agent until a Fajardo
Federal stockholder has received the Letter of Transmittal and Election Form.
A holder of shares of Fajardo Federal Common Stock having a preference
as to the form of consideration to be received for his or her shares of Fajardo
Federal Common Stock should make an Election because shares as to which an
Election has been made will be given priority in allocating such consideration
over shares as to which an Election is not received. Neither
9
<PAGE>
Fajardo Federal nor the Fajardo Federal Board of Directors makes any
recommendation as to whether stockholders should elect to receive the Per Share
Cash Consideration or the Per Share Stock Consideration in the Merger. Each
holder of Fajardo Federal Common Stock must make his or her own decision with
respect to such election.
No fractional shares of RGFC Class B Common Stock will be issued in
the Merger to holders of Fajardo Federal Common Stock. Each holder of Fajardo
Federal Common Stock who otherwise would have been entitled to a fraction of a
share of RGFC Class B Common Stock will receive in lieu thereof, at the time of
surrender of the certificate or certificates representing such holder's shares
of Fajardo Federal Common Stock, an amount of cash (without interest) determined
by multiplying the fractional share interest to which such holder would
otherwise be entitled by the RGFC Market Value.
Recommendation of the Board of Directors of Fajardo Federal
The Board of Directors of Fajardo Federal has determined that the
Merger is in the best interests of the stockholders and, accordingly, has
unanimously approved the Merger. THE BOARD OF DIRECTORS OF FAJARDO FEDERAL
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT. SEE "THE MERGER - BACKGROUND OF AND REASONS FOR THE MERGER."
Stockholder Agreement
In conjunction with the Merger Agreement, RGFC has entered into a
Stockholder Agreement, dated as of March 9, 1998, with each of the directors of
Fajardo Federal ("Stockholder Agreement"). Pursuant to such Stockholder
Agreement, each such director of Fajardo Federal has agreed, among other things,
not to sell, pledge, transfer or otherwise dispose of his or her shares of
Fajardo Federal Common Stock and to vote such shares of Fajardo Federal Common
Stock in favor of the Merger Agreement. See "The Merger Stockholder Agreement."
Effective Time of the Merger; Termination of the Merger Agreement
The Merger shall become effective upon the occurrence of the filing of
the Plan of Merger (the "Plan of Merger") with the Secretary of State of the
Commonwealth of Puerto Rico pursuant to the Banking Law of Puerto Rico ("Banking
Law") (the "Effective Time"). Such filing will occur only after the receipt of
all requisite regulatory approvals, approval of the Merger Agreement by the
requisite vote of Fajardo Federal's stockholders, the expiration of all
applicable regulatory waiting periods and the satisfaction or waiver of all
other conditions to the Merger. See "The Merger - Effective Time of the Merger;
Termination and Amendment."
The Merger Agreement may be terminated by mutual consent of RGFC and
Fajardo Federal and by RGFC or Fajardo Federal if either (i) the Merger has not
been consummated on or prior to September 10, 1998; (ii) the stockholders of
Fajardo Federal do not approve the Merger Agreement; (iii) any required
regulatory applications are denied or are approved
10
<PAGE>
contingent upon the satisfaction of any condition or requirement which
materially impairs the value of Fajardo Federal to RGFC; or (iv) there is a
material breach of any representation, warranty, covenant or undertaking by the
other party which is not cured within the specified time period. For additional
reasons the parties may terminate the Merger Agreement, see "The Merger -
Effective Time of the Merger; Termination and Amendment."
Conditions to the Merger
Consummation of the Merger is subject to various conditions,
including, without limitation, obtaining the requisite approval of the Merger
Agreement by the stockholders of Fajardo Federal; receipt of all necessary
regulatory approvals pertaining to the Merger; and certain other closing
conditions. A merger application has been filed by RGFC with the Federal Deposit
Insurance Corporation and a notice has been submitted to OCFI and the Federal
Reserve with respect to the Merger. See "The Merger - Conditions to the Merger"
and "The Merger Regulatory Approvals." Substantially all of the conditions to
consummation of the Merger (except for required stockholder and regulatory
approvals) may be waived at any time by the party for whose benefit they were
created, and the Merger Agreement may be amended at any time by written
agreement of the parties, except that no waiver or amendment occurring after
approval of the Merger Agreement by Fajardo Federal's stockholders shall modify
either the amount or the form of the Merger Consideration.
Dissenters' Rights
Holders of shares of Fajardo Federal Common Stock who object to the
Merger and comply with the prescribed statutory procedures are entitled to have
the fair value of their shares determined in accordance with the Rules and
Regulations of the OTS and paid to them in cash in lieu of the RGFC Class B
Common Stock or cash they would otherwise be entitled to receive in the Merger.
A copy of the pertinent statutory provisions of the Rules and Regulations of the
OTS is attached to this Proxy Statement/Prospectus as Appendix B. Failure to
follow such provisions precisely may result in a loss of dissenters' rights. See
"The Merger - Dissenters' Rights."
Certain Income Tax Consequences
Consummation of the Merger is conditioned upon receipt of a legal
opinion delivered to both RGFC and Fajardo Federal to the effect that the Merger
will constitute a reorganization within the meaning of Section 1112(g) of the
Puerto Rico Tax Code (the "Code"), and that no taxable gain will be recognized
by RGFC or Fajardo Federal in connection with the Merger. The legal opinion is
summarized under "The Merger - Certain Income Tax Consequences" and is filed as
an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part. No gain or loss will be recognized by the
stockholders of Fajardo Federal upon the exchange of their shares of Fajardo
Federal Common Stock solely for RGFC Class B Common Stock, except for cash
received in lieu of fractional shares. A Fajardo Federal stockholder who
exchanges shares of Fajardo Federal Common Stock for cash, either as part of the
Merger Consideration or
11
<PAGE>
through the exercise of dissenters' rights, will recognize gain or loss, but not
in excess of the amount of cash received. See "The Merger - Certain Income Tax
Consequences."
Accounting Treatment of the Merger
It is anticipated that the Merger will be accounted for as a purchase
for accounting purposes. See "The Merger - Accounting Treatment of the Merger."
Interests of Certain Persons in the Merger
Certain persons have interests in teh merger other than as stockholders
of Fajardo Federal. See "The Merger - Interests of Certain Person in the
Merger."
RGFC Option Agreement
As an inducement and a condition to RGFC's entering into the Merger
Agreement, RGFC and Fajardo Federal also entered into an Option Agreement, dated
as of March 10, 1998 (the "RGFC Option Agreement"), pursuant to which Fajardo
Federal granted RGFC an option (the "RGFC Option"), exercisable upon the
occurrence of certain events (none of which has occurred as of the date hereof
to the best of the knowledge or RGFC and Fajardo Federal), to purchase up to
52,116 shares of Fajardo Federal Common Stock, representing 24.9% of the
outstanding shares of Fajardo Federal Common Stock on a pro forma basis, at a
price of $16.54 per share, subject to adjustment in certain circumstances and
termination within certain periods. The RGFC Option Agreement is intended to
increase the likelihood that the Merger will be consummated in accordance with
the terms of the Agreement and may have the effect of discouraging competing
offers to the Merger. A copy of the RGFC Option Agreement is included as Exhibit
B to the Merger Agreement attached as Appendix A to this Proxy
Statement/Prospectus.
Unaudited Pro Forma Condensed Combined Summary Financial Information
The unaudited pro forma condensed combined summary financial
information set forth below gives effect to the Merger under the purchase
accounting method. The pro forma condensed combined summary statements of income
treat the Merger as if it had been consummated at the beginning of the
respective periods, and the pro forma condensed combined summary balance sheet
treats the Merger as if it had been consummated on December 31, 1997. The pro
forma combined per share data gives effect to the assumed issuance of 128,736
shares of RGFC Class B Common Stock based on an Exchange Ratio of 1.00 assuming
the RGFC Market Value is $42.70. For a description of the basis for the pro
forma adjustments, including the basis for the number of shares of RGFC Class B
Common Stock which are assumed to be issued in the Merger, see "Pro Forma
Condensed Consolidated Financial Statements (Unaudited)."
12
<PAGE>
This pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
at the dates assumed herein, nor is it necessarily indicative of future
operating results or financial position. See "Pro Forma Condensed Consolidated
Financial Statements (Unaudited)."
<TABLE>
<CAPTION>
Summary of Unaudited Pro Forma Income Information
Year Ended December 31, 1997
--------------------------------------------------------------------------
Historical
-----------------------------
Fajardo Pro Forma Pro Forma
RGFC Federal Adjustments(1) Combined
-------------- ------------ ---------------- --------------
(In Thousands, except shares and per share data)
<S> <C> <C> <C> <C>
Interest income............................. $ 97,335 $ 2,659 $ (116) $ 99,878
Interest expense............................ 60,805 1,126 -- 61,931
Net interest income......................... 36,530 1,533 (116) 37,947
Income before income taxes.................. 32,229 539 (392) 32,376
Net income.................................. 23,497 435 (295) 23,637
Net income per share:
Primary................................... $ 1.66 $ 2.94 $ -- $ 1.66
Fully diluted............................. $ 1.62 $ 2.94 $ .01 $ 1.61
Weighted average shares and share
equivalents outstanding:
Primary................................... 14,144,752 147,760 128,736 14,273,488
Fully diluted............................. 14,521,252 147,760 128,736 14,649,988
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Summary of Unaudited Pro Forma Balance Sheet Information
Balance Sheet Data as of December 31, 1997
----------------------------------------------------------------
Historical
-----------------------------
Fajardo Pro Forma Pro Forma
RGFC Federal Adjustments(1) Combined
-------------- ------------ ---------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Loans receivable, net....................... $ 765,059 $24,252 $ 459 $ 789,770
Total assets................................ 1,510,746 29,612 2,184 1,542,542
Deposits.................................... 722,419 22,017 -- 744,436
Borrowed funds.............................. 596,837 3,800 -- 600,637
Total liabilities........................... 1,372,692 26,126 568 1,399,386
Retained earnings........................... 96,129 1,843 (2,138) 95,834
Total stockholders' equity.................. 138,054 3,486 1,616 143,156
</TABLE>
13
<PAGE>
(1) For a description of the basis for the pro forma adjustments,
including the basis for the number of shares of RGFC Class B Common
Stock which are assumed to be issued in the Merger, see "Pro Forma
Condensed Consolidated Financial Statements (Unaudited)."
14
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share, pro forma
combined per share and pro forma equivalent per share information with respect
to the RGFC Class B Common Stock and the Fajardo Federal Common Stock at the
dates and for the periods presented, giving effect to the Merger using the
purchase method of accounting, based on the Exchange Ratio (assuming that
128,736 shares of RGFC Class B Common Stock are issued in the Merger based upon
the assumptions described in the Notes to Pro Forma Condensed Consolidated
Financial Statements (Unaudited) included elsewhere herein). See "The Merger -
Accounting Treatment of the Merger" and "Pro Forma Condensed Consolidated
Financial Statements (Unaudited)."
The selected per share data set forth below should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of RGFC, including the related notes,
incorporated herein by reference and the historical financial statements of
Fajardo Federal and the pro forma condensed consolidated financial statements
(unaudited) appearing elsewhere herein. See "Available Information,"
"Incorporation of Certain Documents by Reference," the historical financial
statements of Fajardo Federal included elsewhere herein and "Pro Forma Condensed
Consolidated Financial Statements (Unaudited)." The pro forma information gives
effect to the Merger as if the transaction had been consummated at the beginning
of each period presented using the purchase method of accounting. The data set
forth below is not necessarily indicative of the results of the future
operations of RGFC upon consummation of the Merger or the actual results that
would have been achieved had the Merger been consummated prior to the periods
presented.
<TABLE>
<CAPTION>
RGFC Class B Common Stock Fajardo Federal Common Stock
---------------------------------- -----------------------------------
Pro Forma Pro Forma
Historical Combined(1)(2) Historical Equivalent (2)
------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Primary net income per share:
Year ended December 31, 1997.......... $ 1.66 $ 1.66 $ 2.94 $ 1.66
Dividends declared per share:
Year ended December 31, 1997.......... 0.1305 0.1293 -- 0.1293
Book value per share at:
December 31, 1997..................... 9.76 10.03 22.29 10.03
</TABLE>
- ------------------------------
(1) Reflects (i) estimated purchase accounting adjustments to be recorded
in connection with the Merger, consisting of mark-to-market valuation
adjustments for assets acquired and liabilities assumed and
establishment of intangible assets for the purchase price in excess of
the fair value of the net assets acquired, and the resultant
15
<PAGE>
amortization/accretion of all such adjustments over appropriate future
periods, and (ii) the assumed issuance of an aggregate of $1,182,633
in cash and 128,736 shares of RGFC Class B Common Stock in the Merger
based upon an Exchange Ratio of 1.00 assuming the RGFC Market Value
per share is $42.70.
(2) Represents the RGFC pro forma combined amounts multiplied by 1.00,
which is the assumed number of shares of RGFC Class B Common Stock to
be issued for each share of Fajardo Federal Common Stock outstanding.
16
<PAGE>
COMPARATIVE MARKET PRICES
The RGFC Class B Common Stock is included for quotation on The Nasdaq
National Market under the symbol "RGFC." The table below sets forth, for the
calendar quarters indicated, the reported high and low sales prices of RGFC
Class B Common Stock (as adjusted for the 80% stock split paid in 1997) and
based on published financial sources and cash dividends declared per share by
RGFC.
<TABLE>
<CAPTION>
RGFC Class B Common Stock(1)
--------------------------------------------------------------
Cash Dividends Paid
High Low Per Share
-------------- -------------- ------------------------
1996
- ------------------------------
<S> <C> <C> <C>
First Quarter(1)................. N/A N/A N/A
Second Quarter(1)................ N/A N/A N/A
Third Quarter(1)................. $10.42 $9.17 $ --
Fourth Quarter................... 14.31 9.86 .0347
1997
- ------------------------------
First Quarter.................... 15.55 12.64 .0382
Second Quarter................... 14.44 12.92 .0417
Third Quarter.................... 22.50 14.17 .0431
Fourth Quarter................... 22.00 18.875 .0457
1998
- ------------------------------
First Quarter.................... $34.75 $18.50 .05
Second Quarter...................
(through ________, 1998)
</TABLE>
- -------------
(1) RGFC Class B Common Stock commenced trading on the Nasdaq National
Market on August 22, 1996.
Since the market price of the RGFC Class B Common Stock is subject to
fluctuation, the market value of the RGFC Class B Common Stock that holders of
shares of Fajardo Federal Common Stock may receive in the Merger may increase or
decrease prior to and after the Merger.
17
<PAGE>
On March 9, 1998, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
closing sale prices per share of RGFC Class B Common Stock as reported in the
Wall Street Journal was $34.00. On _________, 1998, the most recent practicable
date prior to the printing of this Proxy Statement/Prospectus, the closing sales
prices per share of RGFC Class B Common Stock was $-----.
Shareholders are urged to obtain current market quotations for the
RGFC Class B Common Stock, to the extent possible, prior to the Special Meeting.
Fajardo Federal Common Stock is not traded on any exchange, organized
market or in the over-the-counter market. Sales and purchase of the shares of
Fajardo Federal Common Stock are infrequent and isolated and generally are
effected in private transactions between buyer and seller. Because of the
absence of any established trading market for Fajardo Federal Common Stock, no
current pricing information is provided in the Proxy Statement/Prospectus for
Fajardo Federal Common Stock. Fajardo Federal has never paid any dividends on
the Fajardo Federal Common Stock. As of the Record Date, Fajardo Federal had
approximately 28 stockholders of record.
18
<PAGE>
RGFC SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain consolidated financial and
other data of RGFC at the dates and for the periods indicated. For additional
financial information about RGFC, reference is made to the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of RGFC and related notes included in
RGFC's 1997 Annual Report to Stockholders incorporated by reference herein.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets(1) $ 1,510,746 $ 1,037,798 $ 853,206 $ 622,499 $ 538,069
Loans receivable, net 765,059 603,751 473,841 301,614 216,620
Mortgage loans held for sale 46,885 54,450 21,318 22,021 174,221
Mortgage-backed and investment
securities held for trading 401,039 110,267 113,809 124,522 --
Mortgage-backed securities available for sale . 46,004 50,841 61,008 13,300 10,241
Mortgage-backed securities held to
maturity 33,326 37,900 41,731 84,122 39,122
Investment securities, available for sale 75,863 30,973 3,280 1,878 --
Investment securities held to maturity 10,693 5,270 2,046 2,182 4,957
Cash and cash equivalents(2) 68,366 98,856 104,195 45,622 66,958
Deposits 722,418 645,567 518,187 380,148 312,151
Securities sold under agreements to
repurchase 382,283 97,444 98,483 108,922 --
Notes payable 159,304 126,842 81,130 45,815 133,913
Other borrowings(3) 76,359 65,463 67,315 18,092 14,479
Subordinated notes(4) 3,250 3,250 3,250 3,250 3,071
Stockholders' equity 138,054 115,633 66,385 55,970 49,531
Stockholders' equity per share $ 9.76 $ 8.17 $ 7.11 $ 5.99 $ 5.30
Selected Income Statement Data:
Revenues:
Net interest income after provision
for loan losses $ 30,160 $ 24,665 $ 20,323 $ 19,137 $ 14,253
Loan administration and servicing fees 13,214 13,029 11,030 11,046 9,326
Net gain on sale of investments available for
sale 107 642 -- -- 394
Net gain (loss) on sale of loans and
servicing 24,033 11,709 8,384 (2,899) 29,026
Other(5) 3,751 3,872 4,028 1,667 1,179
----------- ----------- ----------- ----------- -----------
Total revenue 71,265 53,917 43,765 28,951 54,178
----------- ----------- ----------- ----------- -----------
Expenses:
Compensation and benefits 13,653 10,793 8,284 5,252 8,590
Occupancy expenses 7,131 5,531 4,711 4,488 3,395
SAIF Special Assessment -- 2,508 -- -- --
General and administrative expenses 18,252 15,424 13,731 13,269 14,561
----------- ----------- ----------- ----------- -----------
Total expenses 39,036 34,257 26,726 23,009 26,546
----------- ----------- ----------- ----------- -----------
Income before minority interest in
the Bank and income taxes 32,229 19,660 17,039 5,942 27,632
Minority interest in the Bank's
earnings -- 538 743 500 812
Income taxes 8,732 5,922 5,847 856 9,633
Cumulative effect of change in
accounting principle -- -- -- 867 --
----------- ----------- ----------- ----------- -----------
Net income $ 23,497 $ 13,200 $ 10,449 $ 5,452 $ 17,187
=========== =========== =========== =========== ===========
Diluted earnings per share $ 1.62 $ 1.19 $ 1.12 $ 0.58 $ 1.84
=========== =========== =========== =========== ===========
Selected Operating Data(6):
Performance Ratios and Other Data:
Mortgage loans originated(7) $ 545,960 $ 426,874 $ 306,775 $ 488,071 $ 834,680
Loan servicing portfolio 3,000,888 2,550,169 2,298,200 2,114,743 2,000,530
Return on average assets 1.85% 1.38% 1.47% 0.91% 4.07%
Return on average equity 18.69 15.54 17.08 10.34 41.98
Equity to assets at end of period 9.13 11.14 7.78 8.94 9.21
Interest rate spread(8) 2.88 3.00 2.93 3.24 3.66
Net interest margin(8) 3.12 3.24 3.26 3.48 3.92
Average interest-earning assets to
average interest-bearing liabilities 104.61 104.60 106.50 105.60 106.08
Total other expenses to average total
assets 3.08 3.59 3.80 3.84 6.29
Full-service Bank offices 15 15 14 8 8
R&G Mortgage offices(9) 11 11 12 12 13
Cash dividends declared per share 0.13 0.14 -- -- --
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios(10):
Non-performing loans to total loans at
end of period 3.89% 3.09% 2.18% 1.84% 2.24%
Non-performing assets to total assets at
end of period 2.12 1.90 1.32 1.04 1.07
Allowance for loan losses to total loans
at end of period 0.87 0.55 0.72 0.92 1.34
Allowance for loan losses to total non-
performing loans at end of period 22.34 17.64 33.19 50.10 59.87
Bank Regulatory Capital Ratios(11):
Tier 1 risk-based capital ratio 13.10% 13.91% 10.53% 11.03% N/A
Total risk-based capital ratio 14.00 14.79 11.66 13.59 N/A
Tier 1 leverage capital ratio 7.34 8.45 6.25 5.95 N/A
</TABLE>
(1) At December 31, 1997, R&G Mortgage and Premier had total assets of
$489.3 million and $996.3 million, respectively, before consolidation.
(2) Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and federal funds
sold, all of which had original maturities of 90 days or less.
(3) Comprised of long-term debt, advances from the Federal Home Loan Bank
("FHLB") of New York and other secured borrowings.
(4) Represents a seven-year subordinated capital note of Premier issued in
1991, which is subject to an annual sinking fund requirement.
(5) Comprised of change in provision for cost in excess of market value of
loans available for sale, net gain on trading account, and other
miscellaneous revenue sources, including service charges, fees and
other income.
(6) With the exception of end of period ratios, all ratios for R&G Mortgage
are based on the average of month end balances while all ratios for
Premier are based on average daily balances.
(7) Represents total originations by R&G Mortgage for Premier as well as
loans originated and sold to third parties.
(8) Interest rate spread represents the difference between RGFC's weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets.
(9) R&G Mortgage maintains a total of 11 offices that are separate from
Premier branch offices. A total of seven of these offices are located
in the same building or facility as Premier branches. The table does
not include an additional seven Mortgage Banking Centers which are
located in Premier's offices.
(10) Non-performing loans consist of non-accrual loans and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
(11) All of such ratios were in compliance with the applicable requirements
of the FDIC. Prior to 1994, Premier operated as a savings and loan
association. As such, Premier was subject to the capital ratios of the
OTS and not those of the FDIC and was at all times in capital
compliance therewith.
20
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF FAJARDO FEDERAL
The following selected financial and other data of Fajardo Federal does
not purport to be complete and is qualified in its entirety by reference to the
more detailed financial information contained elsewhere herein. See "Index to
Fajardo Federal Financial Statements."
<TABLE>
<CAPTION>
At or For the Three
Months Ended
December 31, At or For the Year Ended September 30,
------------------ -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets $29,612 $29,302 $29,930 $28,842 $28,875 $28,994 $28,162
Loans receivable, net 24,252 26,718 24,009 26,178 26,107 26,046 25,768
Debt securities held to maturity -- -- -- 52 -- -- --
Investment in FHLB stock 287 287 287 287 310 355 450
Cash and cash equivalents(1) 4,162 1,403 4,687 1,445 1,439 1,636 1,267
Deposits 22,017 21,667 22,518 20,813 20,996 20,017 19,732
Advances from FHLB 3,800 4,300 3,800 4,900 5,200 6,200 6,200
Stockholders' equity 3,486 2,754 3,253 2,606 2,316 2,306 1,891
Stockholders' equity per share 22.28 19.68 21.57 19.39 17.98 17.90 14.68
Selected Income Statement Data:
Revenues:
Net interest income after provision for
loan losses 361 386 1,495 1,592 1,528 1,541 1,396
Loan administration and servicing fees . -- -- -- -- -- -- 162
Other income 42 39 169 148 172 194 203
------- ------- ------- ------- ------- ------- -------
Total revenue 403 425 1,664 1,740 1,700 1,735 1,761
------- ------- ------- ------- ------- ------- -------
Expenses:
Employee compensation and benefits 73 121 424 483 480 353 460
Office occupancy and equipment 39 78 252 313 312 259 159
SAIF special assessment -- -- -- 134 -- -- --
Other administrative and general 138 145 521 525 619 516 511
------- ------- ------- ------- ------- ------- -------
Total expenses 251 344 1,197 1,455 1,411 1,128 1,130
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
extraordinary item 152 81 467 285 289 607 631
Income taxes 20 33 117 95 146 192 136
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item 132 48 350 190 143 415 495
Extraordinary item - loss on early
extinguishment of debt, net of income
taxes -- -- -- -- 133 -- 232
------- ------- ------- ------- ------- ------- -------
Net income $ 132 $ 48 $ 350 $ 190(2) $ 10 $ 415 $ 263
======= ======= ======= ======= ======= ======= =======
Diluted earnings per share $ 0.87 $ 0.36 $ 2.45 $ 1.48 $ 0.07 $ 3.23 $ 2.04
======= ======= ======= ======= ======= ======= =======
Selected Operating Data(3)
Performance Ratios and Other Data:
Loans originated $ 1,899 $ 2,003 $ 6,147 $ 5,548 $ 6,495 $ 6,543 $ 5,570
Return on average assets(3) 1.77% 0.66% 1.18% 0.66% 0.03% 1.43% 0.88%
Return on average equity(3) 16.35 7.26 12.05 7.77 0.42 19.21 14.48
Equity to assets at end of period 11.77 9.40 10.87 9.04 8.02 7.95 6.71
Interest rate spread(4) 4.66 5.07 5.10 5.53 5.38 5.57 5.09
Net interest margin(4) 5.04 5.43 5.45 5.79 5.63 5.73 5.14
Average interest-earnings assets to average
interest-bearing liabilities 109.61 108.89 109.17 106.69 105.77 103.83 101.06
Total other expenses to average total
assets 3.37 4.70 4.04 5.08 4.87 3.90 3.80
Full service Bank offices 1 1 1 1 1 1 1
Cash dividends declared per share -- -- -- -- -- -- --
Asset Quality Ratios(5):
Non-performing loans to total loans at end
of period 7.94% 4.35% 4.43% 4.12% 4.72 5.93 7.09
Non-performing assets to total assets at
end of period 7.71 5.35 4.71 4.29 5.65 6.43 7.36
Allowance for loan losses to total loans at
end of period 1.39 1.30 1.40 1.23 1.48 1.41 1.54
Allowance for loan losses to total non-
performing loans at end of period 17.57 28.55 32.07 29.80 31.28 23.79 21.68
Bank Regulatory Capital Ratios(6):
Tangible capital ratio 11.74% 9.40% 10.87% 9.02% 8.02% 7.95% 6.71%
Risk-based capital ratio 18.24 14.14 15.61 13.84 12.93 12.66 11.01
Core capital ratio 11.74 9.40 10.87 9.02 8.02 7.95 6.71
</TABLE>
- ------------------------
(1) Comprised of cash and due from banks and time deposits with other banks
and federal funds sold, which had original maturities of 90 days or
less.
(2) Includes one time special Savings Association Insurance Fund ("SAIF")
assessments of $134,000 or $82,000 after tax ($0.64 per share on a
diluted basis) incurred in the September 1996 quarter to recapitalize
the SAIF of the Federal Deposit Insurance Corporation. Without giving
effect to this one-time special assessment, net income and diluted
earnings per share would have been $272,000 and $2.11, respectively,
and return on average assets and return on average equity would have
been 0.95% and 11.12%, respectively.
(3) All ratios for the Bank are based on average daily balances. All ratios
are annualized where appropriate.
(4) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of Fajardo Federal."
(5) Non-performing loans consist of the Bank's non-accrual loans and
non-performing assets consist of the Bank's non-performing loans and
real estate acquired by foreclosure or deed-in-lieu thereof.
(6) The Bank operates as a savings and loan association. As such, the Bank
is subject to the capital ratios of the OTS. All of such ratios were in
compliance with the applicable requirements of the OTS.
21
<PAGE>
STOCKHOLDER MEETING
This Proxy Statement/Prospectus is being furnished to Fajardo Federal
stockholders in connection with the solicitation of proxies by the Board of
Directors of Fajardo Federal for use at the Special Meeting to be held on
__________, 1998, and at any adjournment or adjournments thereof. This Proxy
Statement/Prospectus also serves as a prospectus of RGFC in connection with the
issuance of shares of RGFC Class B Common Stock to holders of Fajardo Federal
Common Stock upon consummation of the Merger.
FAJARDO FEDERAL STOCKHOLDERS SHOULD NOT FORWARD ANY FAJARDO FEDERAL
STOCK CERTIFICATES WITH THEIR PROXY CARDS.
This Proxy Statement/Prospectus, the Notice of Special Meeting of
Stockholders of Fajardo Federal and the accompanying proxy solicited by the
Board of Directors of Fajardo Federal, are first being mailed to the
stockholders of Fajardo Federal on or about _________, 1998.
Special Meeting of Fajardo Federal Stockholders
The Special Meeting will be held on __________, 1998, commencing at
__:00 _.m., Atlantic Time, at the ____________________ located at
__________________, Fajardo, Puerto Rico.
Purpose of Meeting. The purposes of the Special Meeting are to consider
and vote upon a proposal to approve the Merger Agreement, to consider and vote
upon a proposal to adjourn the Special Meeting to solicit additional proxies, if
necessary, and to transact such other business as may properly come before the
Special Meeting and any adjournment or adjournments thereof. It is not
anticipated that any matter other than the proposal to adopt and approve the
Merger Agreement and, if necessary, the adjournment proposal as aforesaid will
be brought before the Special Meeting. If any other matter is properly presented
at the Special Meeting for consideration, the persons named in the enclosed form
of proxy card and acting thereunder will have discretion to vote on such matter
in accordance with their best judgment.
Shares Outstanding and Entitled to Vote; Record Date. The close of
business on _________, 1998 has been fixed by the Board of Directors of Fajardo
Federal as the Record Date for the determination of holders of Fajardo Federal
Common Stock entitled to notice of and to vote at the Special Meeting and any
adjournment or adjournments thereof. At the close of business on the Record
Date, there were [156,433] shares outstanding and entitled to vote, held by
approximately 28 holders of record. Each share of Fajardo Federal Common Stock
entitles the holder thereof to one vote on each matter to be submitted to
Fajardo Federal stockholders at the Special Meeting.
Vote Required. A majority of the outstanding shares of Fajardo Federal
Common Stock must be represented in person or by proxy at the Special Meeting in
order for a quorum to be
22
<PAGE>
present. The affirmative vote of two-thirds of the outstanding shares of Fajardo
Federal entitled to vote thereon at the Special Meeting is required to approve
the Merger Agreement. The affirmative vote of a majority of the votes
represented, in person or by proxy, at the Special Meeting is required to
approve the proposal to adjourn the Special Meeting to solicit additional
proxies, if necessary. The votes may be made in person or by proxy. Shares as to
which the "ABSTAIN" box has been marked on the proxy and broker non-votes will
be counted as present for determining if a quorum is present; however, an
abstention or a broker non-vote is not a vote cast and thus will not affect the
number of votes required for approval of the proposal to adjourn the Special
Meeting, but because of the vote required, will have the same effect as a vote
against the proposal to approve the Merger Agreement.
As of the Record Date, the directors and executive officers of Fajardo
Federal and their affiliates in the aggregate beneficially owned and are
entitled to vote [97,876] shares or [62.6]% of the outstanding Fajardo Federal
Common Stock. The directors of Fajardo Federal have signed a Stockholders
Agreement which provides, among other things, that they will vote any shares of
Fajardo Federal Common Stock over which they have voting power in favor of the
Merger Agreement. The directors of Fajardo Federal who signed the Stockholder
Agreement beneficially owned [97,876] shares or [62.6]% of the Fajardo Federal
Common Stock outstanding on the Record Date.
Voting; Solicitation and Revocation of Proxies. A proxy for use at the
Special Meeting is being furnished to each Fajardo Federal stockholder together
with this Proxy Statement/Prospectus and is solicited by the Board of Directors
of Fajardo Federal. Any Fajardo Federal stockholder executing a proxy may revoke
it at any time before it is voted by filing with the Secretary of Fajardo
Federal, at the address of Fajardo Federal set forth on the Notice of Special
Meeting of Stockholders, written notice of such revocation; by executing a
later-dated proxy; or by attending the Special Meeting and giving notice of such
revocation in person. Attendance at the Special Meeting will not, in and of
itself, constitute revocation of a proxy. Each proxy returned to Fajardo Federal
(and not revoked) will be voted in accordance with the instructions thereon. IF
PROXIES ARE EXECUTED AND RETURNED BUT NO INSTRUCTIONS ARE INDICATED, THE PROXY
WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT.
Costs
Each of RGFC and Fajardo Federal will bear its own costs in the
transaction. Proxies will be solicited by mail and may be further solicited, for
no additional compensation by officers, directors or employees of Fajardo
Federal, by further mailing, by telephone or by personal contact. Fajardo
Federal will also pay the standard charges and expenses of brokerage houses,
voting trustees, banks, associations and other custodians, nominees and
fiduciaries, who are record holders of Fajardo Federal Common Stock, not
beneficially owned by them, for forwarding such materials to and obtaining
proxies from the beneficial owners of Fajardo Federal Common Stock entitled to
vote at the Special Meeting.
23
<PAGE>
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached to this Proxy Statement/Prospectus
as Appendix A. All stockholders of Fajardo Federal are urged to read such
document carefully.
General
The Boards of Directors of RGFC and Fajardo Federal have determined
that the acquisition of Fajardo Federal by RGFC is desirable and in the best
interests of RGFC' and Fajardo Federal's respective stockholders and have
unanimously approved the Merger. The Merger will be accomplished through the
Merger of Fajardo Federal with and into Premier, pursuant to the Merger
Agreement, with Premier being the surviving entity. THE BOARD OF DIRECTORS OF
FAJARDO FEDERAL UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Upon consummation of the
Merger, each share of Fajardo Federal Common Stock outstanding at the Effective
Time will be converted into and represent the right to receive the Merger
Consideration. See "The Merger - The Merger Consideration."
Background of and Reasons for the Merger
Background of the Merger. In early November 1997, a representative of
RGFC approached a director of Fajardo Federal, indicating that RGFC was
interested in meeting to discuss a possible transaction between the two
companies. Victor J. Galan, Chairman of the Board, President and Chief Executive
Officer, and Ramon Prats Vice Chairman of the Board of RGFC and Juan R.
Zalduondo, a director and majority stockholder of Fajardo Federal, met several
times and had several telephone conversations in order to discuss the respective
companies, the competitive challenges faced by each, consolidation within the
banking industry generally and the possible strategic benefits of a business
combination between RGFC and Fajardo Federal.
Additional telephone conversations between the parties continued over
the next few weeks, during which the parties continued to discuss the possible
strategic benefits of a business combination. On November 17, 1997, RGFC
provided Fajardo Federal with a non-binding letter of intent which provided for
the acquisition of Fajardo Federal by Premier. The letter of intent was never
signed, and negotiations on deal terms between the parties slowed and were
conducted sporadically during December, January and the early part of February.
During this period, Fajardo Federal pursued other merger opportunities with
other financial institutions in Puerto Rico. None of such discussions even
advanced beyond preliminary discussions.
On February 6, 1998, RGFC executed a confidentiality agreement with
Fajardo Federal which authorized RGFC to conduct due diligence. Subsequent to
execution of the confidentiality agreement, RGFC commenced its due diligence and
counsel for RGFC began working on the preparation of a definitive acquisition
agreement at such time. The RGFC Board of Directors met on February 27, 1997 to
consider in general terms a draft of the acquisition agreement which was
distributed to RGFC and Fajardo Federal. The RGFC Board met again on March 6,
1997 and approved the Merger Agreement and the agreements related thereto and
authorized the execution of the Merger Agreement, the Option Agreement and the
Stockholder Agreement.
<PAGE>
On March 9, 1998, at a meeting of the Board of Directors of Fajardo
Federal, the Fajardo Federal Board discussed the reasons for, and the potential
benefits of, the Merger, the Board of Directors of Fajardo Federal unanimously
approved the Merger Agreement and the transactions contemplated thereby and
authorized the execution of the Merger Agreement, the Option Agreement and the
Stockholder Agreement.
Reasons for the Merger. The terms of the Merger Agreement, including
the Merger Consideration to be paid to Fajardo Federal's stockholders, were the
result of arm's-length negotiations between the representatives of RGFC and
Fajardo Federal. Among the factors considered by the Board of Directos of RGFC
or Fajardo Federal, as appropriate, in deciding to approve and recommend the
terms of the Merger were (i) the Merger Consideration to be paid to Fajardo
Federal's stockholders in relation to the market value and book value of the
Fajardo Federal Common Stock; (ii) the ability to expand RGFC's presence in
Fajardo (given the intention of RGFC to open a branch office in Fajardo to
complement a previously existing R&G Mortgage branch office) and to enhance the
services available to the customers of both entities; (iii) information
concerning the financial condition, results of operations, capital levels, asset
quality and prospects of RGFC and Fajardo Federal; (iv) the short-term and
long-term impact the Merger will have on RGFC's consolidated results of
operations, including anticipated cost savings; (v) the general structure of the
transaction; (vi) the tax-free nature of the stock portion of the Merger
Consideration to the stockholders of Fajardo Federal; and (viii) the impact of
the Merger on the depositors, employees, customers and communities served by
RGFC and Fajardo Federal. In making their determination, the Boards of Directors
of RGFC and Fajardo Federal did not ascribe relative weights to the factors
which they considered.
The directors of Fajardo Federal believe that the Merger is in the best
interest of their organization and their stockholders. THE FAJARDO FEDERAL
DIRECTORS UNANIMOUSLY RECOMMEND THAT FAJARDO FEDERAL STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
Merger Consideration and Election, Allocation and Proration
Merger Consideration. The Merger Agreement provides that at the
effective time of the Merger, each share of Fajardo Federal Common Stock
outstanding immediately prior to consummation of the Merger (other than shares
as to which dissenters' rights have been asserted
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<PAGE>
and duly perfected in accordance with the rules and regulation of the OTS and
shares held by Fajardo Federal or RGFC) will be converted into and represent the
right to receive either (i) the Per Share Cash Consideration of $37.80; or (ii)
the Per Share Stock Consideration as determined by the Exchange Ratio and based
on the RGFC Market Value, which is the Average Market Value (defined as the
average of the mean between the closing high bid and low asked price per share
as reported by The Nasdaq National Market) of shares of RGFC Class B Common
Stock over the 10 trading day period ending five days prior to the Closing Date
of the Merger. The Merger Agreement provides that the number of shares RGFC
comprising the Per Share Stock Consideration will be equal to: (A) if the RGFC
Market Value is equal to or less than $30.50 but equal to or greater than
$24.00, 1.40 shares; (B) if the RGFC Market Value is greater than $30.50, the
quotient determined by dividing (x) $42.70 by (y) the RGFC Market Value; or (C)
if the RGFC Market Value is less than $24.00 the quotient determined by dividing
(x) $32.91 by (y) the RGFC Market Value. The Merger Agreement provides that the
Aggregate Cash Consideration to be paid in the Merger shall not exceed
$1,182,633. If the aggregate number of shares as to which a Cash Election has
been made exceeds the Aggregate Cash Consideration, holders of Cash Election
Shares (subject to certain exceptions with respect to Dissenting Shares) will
receive a number of Reallocated RGFC Shares as described below. See "-
Oversubscription for Cash."
The closing price of RGFC Class B Common Stock on __________, 1998 was
$______ per share. See "RGFC Class B Common Stock Market Prices." The disclosure
throughout this Proxy Statement/Prospectus, including the pro forma information,
assumes that the RGFC Market Value will be $42.70 which results in an Exchange
Ratio of 1.00. See "Pro Forma Condensed Consolidated Financial Statements
(Unaudited)."
If, between the date of this Proxy Statement/Prospectus and the
Effective Time, the shares of RGFC Class B Common Stock are changed into a
different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon is declared with a record date within said period, the
Merger Consideration as specified above shall be adjusted accordingly.
Elections. Within three business days after the consummation of the
Merger, each record holder of Fajardo Federal Common Stock will be sent
materials asking such stockholder to make an Election as to the consideration to
be received for his or her shares of Fajardo Federal Common Stock. Such holders
of Fajardo Federal Common Stock may elect:
(i) a Stock Election for the number of shares of RGFC Class B
Common Stock, based on the Exchange Ratio, for each share of Fajardo
Federal Common Stock;
(ii) a Cash Election for $37.80 in cash, without interest, for
each share of Fajardo Federal Common Stock (subject to the limitation
that the Aggregate Cash Consideration cannot exceed $1,182,633); or
(iii) make a No-Election.
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<PAGE>
Notwithstanding the foregoing, in order to make a Stock Election, the
number of shares of Fajardo Federal Common Stock a holder must elect to convert
must equal or exceed 100 shares. Therefore, any holder of Fajardo Federal Common
Stock who owns less than 100 shares must elect the Cash Election or be treated
as having made a No- Election. A failure to properly make an election as
described herein will be treated as a No- Election. Any shares for which
dissenters' rights have been perfected will be deemed to have made a Cash
Election.
No gain or loss will be recognized by the holders of Fajardo Federal
Common Stock who receive shares of RGFC Class B Common Stock as a result of the
Merger, except to the extent of any cash received in lieu of a fractional share
interest in Fajardo Federal Common Stock. Holders of Fajardo Federal Common
Stock who receive the Per Share Cash Consideration will recognize gain in an
amount per share equal to the difference between $37.80 and the basis for their
shares of Fajardo Federal Common Stock. See "The Merger The Merger
Consideration."
No Oversubscription. In the event that the amount of Cash Elections do
not exceed the $1,182,633 Aggregate Cash Consideration limit, then:
(i) all Cash Election shares shall be converted into the right
to receive $37.80 in cash, without interest, per share of Fajardo
Federal Common Stock; and
(ii) all No-Election shares and all shares as to which a Stock
Election has been made shall be converted into the right to receive
RGFC Class B Common Stock, as determined by the Exchange Ratio, per
share of Fajardo Federal Common Stock.
Oversubscription for Aggregate Cash Consideration. If the aggregate
number of shares as to which a Cash Election has been made exceeds the Aggregate
Cash Consideration ($1,182,633), then:
(i) all Stock Election Shares and No Election Shares will be
converted into the right to receive RGFC Class B Common Stock, as
determined by the Exchange Ratio, per share of Fajardo Federal Common
Stock;
(ii) the Exchange Agent will allocate among the holders of
Cash Election Shares (by the method of allocation described below), a
sufficient number of Cash Election Shares (excluding any Dissenting
Shares) ("Reallocated RGFC Shares") such that the number of remaining
Cash Election Shares (including Dissenting Shares) times the Cash
Consideration per share equals the Aggregate Cash Consideration, and
all Reallocated RGFC Shares shall be converted into the right to
receive RGFC Class B Common Stock, as determined by the Exchange Ratio,
per share of Fajardo Federal Common Stock; and
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<PAGE>
(iii) the Cash Election Shares (subject to certain exceptions
with respect to Dissenting Shares) which are not Reallocated RGFC
Shares will be converted into the right to receive cash. In the event
that the Exchange Agent is required to designate from among all holders
of Cash Election Shares the Reallocated RGFC Shares to receive RGFC
Class B Common Stock, each holder of Cash Election Shares shall be
allocated a pro rata portion of the total Reallocated RGFC Shares.
No Guarantee of Chosen Consideration or Equivalent Value. Because the
Merger Agreement provides that the amount of cash to be included in the Merger
Consideration will not exceed the Aggregate Cash Consideration ($1,182,633), no
guarantee can be given that the election to receive Cash Election Shares by any
given stockholder of Fajardo Federal to receive the Per Share Cash Consideration
will be fully honored. Rather, such election by each stockholder will be subject
to the election, allocation and proration procedures described herein. Thus,
stockholders who request Per Share Cash Consideration in exchange for their
shares of Fajardo Federal Common Stock may not receive their requested form of
consideration. In contrast, stockholders who request to receive Stock Election
Shares are guaranteed that they will receive shares of RGFC Class B Common Stock
upon consummation of the Merger (assuming such stockholder is converting at
least 100 shares of Fajardo Federal Common Stock and except for cash in lieu of
fractional shares).
Examples of Merger Consideration to be Received. The following table
sets forth examples of the value for the Merger Consideration to be received
based on assumed RGFC Market Value.
<TABLE>
<CAPTION>
Assumed RGFC Relevant Exchange Value of Per Share Value of Per Share
Market Value Ratio Stock Consideration Cash Consideration
- -------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
$16.00 2.0568 $32.91 $37.80
18.00 1.8283 32.91 37.80
20.00 1.6455 32.91 37.80
22.00 1.4959 32.91 37.80
24.00 1.400 33.60 37.80
26.00 1.400 36.40 37.80
28.00 1.400 39.20 37.80
30.00 1.400 42.00 37.80
32.00 1.3344 42.70 37.80
34.00 1.2559 42.70 37.80
36.00 1.1861 42.70 37.80
38.00 1.1237 42.70 37.80
40.00 1.0675 42.70 37.80
42.00 1.0167 42.70 37.80
44.00 0.9705 42.70 37.80
</TABLE>
Election Procedures. All Elections will be required to be made on a
Letter of Transmittal and Election Form. To make an effective Election with
respect to shares of Fajardo Federal Common Stock, the holder thereof must, in
accordance with the Letter of Transmittal and
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<PAGE>
Election Form, (i) complete properly and return the Letter of Transmittal and
Election Form to the Exchange Agent, (ii) deliver therewith his or her
certificates representing shares of Fajardo Federal Common Stock (the "Fajardo
Federal Stock Certificates") with respect to such shares (or an appropriate
guarantee of delivery thereof), and (iii) deliver therewith any other required
documents, prior to 5:00 p.m. on the Election Deadline, which will be the 10th
business day following the mailing of the Letter of Transmittal and Election
Form.
Fajardo Federal Stock Certificates should not be returned with the
enclosed proxy and should not be forwarded to the Exchange Agent until a Fajardo
Federal stockholder has received the Letter of Transmittal and Election Form.
A holder of shares of Fajardo Federal Common Stock having a preference
as to the form of consideration to be received for his or her shares of Fajardo
Federal Common Stock should make an Election. Neither Fajardo Federal nor the
Fajardo Federal Board of Directors makes any recommendation as to whether
stockholders should elect to receive the Per Share Cash Consideration or the Per
Share Stock Consideration in the Merger. Each holder of Fajardo Federal Common
Stock must make his or her own decision with respect to such election.
No fractional shares of RGFC Class B Common Stock will be issued in the
Merger to holders of Fajardo Federal Common Stock. Each holder of Fajardo
Federal Common Stock who otherwise would have been entitled to a fraction of a
share of RGFC Class B Common Stock will receive in lieu thereof, at the time of
surrender of the certificate or certificates representing such holder's shares
of Fajardo Federal Common Stock, an amount of cash (without interest) determined
by multiplying the fractional share interest to which such holder would
otherwise be entitled by the RGFC Market Value.
Conditions to the Merger
The Merger Agreement provides that consummation of the proposed
transaction is subject to the satisfaction of certain conditions, or the waiver
of such conditions by the party entitled to do so, at or before the Effective
Time. Each of the parties' obligations under the Merger Agreement is subject to
the following conditions, among others: (a) all corporate action necessary to
authorize the execution and delivery of the Merger Agreement and consummation of
the transactions contemplated thereby has been duly and validly taken by RGFC,
Premier and Fajardo Federal, including approval by the requisite vote of the
stockholders of Fajardo Federal of the Merger Agreement; (b) all approvals and
consents for the transactions contemplated by the Merger Agreement from the
Federal Reserve, the FDIC, the OCFI and any other governmental entity, the
approval or consent of which is required for the consummation of the Merger, and
the other transactions contemplated thereby have been received and all statutory
waiting periods in respect thereof shall have expired; (c) none of RGFC, its
subsidiaries or Fajardo Federal is subject to any statute, rule, regulation,
injunction or other order or decree which shall have been enacted, entered,
promulgated or enforced by any governmental or judicial authority which
prohibits, restricts or makes illegal consummation of the Merger or any of the
other transactions
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<PAGE>
contemplated thereby; (d) the Registration Statement has become effective under
the Securities Act, and RGFC shall have received all state securities laws or
"blue sky" permits and other authorizations or there shall be exemptions from
registration requirements necessary to issue the shares of RGFC Class B Common
Stock in connection with the Merger, and neither the Registration Statement nor
any such permit, authorization or exemption shall be subject to a stop order or
threatened stop order by the Commission or any state securities authority; (e)
the shares of RGFC Class B Common Stock to be issued in connection with the
Merger have been approved for listing on The Nasdaq National Market; and (f)
RGFC and Fajardo Federal have received an opinion issued by a law firm or
accounting firm designated by RGFC and reasonably acceptable to Fajardo Federal,
to the effect that, among other things: (i) the Merger will be treated for
Puerto Rico income tax purposes as part of one or more reorganizations within
the meaning of Section 1112(g) of the Code; (ii) no gain or loss will be
recognized by RGFC, Premier or Fajardo Federal as a result of the Merger; (iii)
no gain or loss will be recognized by the stockholders of Fajardo Federal who
exchange their Fajardo Federal Common Stock solely for shares of RGFC Class B
Common Stock pursuant to the Merger (except with respect to cash received in
lieu of a fractional share interest in shares of RGFC Class B Common Stock);
(iv) the tax basis of the shares of RGFC Class B Common Stock received by
stockholders who exchange all of their Fajardo Federal Common Stock solely for
shares of RGFC Class B Common Stock in the Merger will be the same as the tax
basis of the Fajardo Federal Common Stock surrendered in exchange therefor
(reduced by any amount allocable to a fractional share interest for which cash
is received); and (v) any stockholders of Fajardo Federal who receive cash in
exchange for their shares of Fajardo Federal Common Stock will recognize gain,
if any, equal to the lesser of (a) the excess of the amount of cash plus the
fair market value of any shares of RGFC Class B Common Stock received in the
Merger over the shareholder's adjusted tax basis in their Fajardo Federal Common
Stock, or (b) the amount of cash received. See "The Merger - Certain Income Tax
Consequences."
In addition to the foregoing conditions, RGFC's and Premier's
obligations under the Merger Agreement are conditioned upon, among others: (a)
the representations and warranties of Fajardo Federal set forth in the Merger
Agreement being true and correct as of March 10, 1998 and as of the Effective
Time (or on the date when made in the case of any representation and warranty
which specifically relates to an earlier date), provided, however, that
notwithstanding anything in the Merger Agreement to the contrary, this condition
will be deemed to be satisfied even if such representations or warranties are
not true and correct unless the failure of any of the representations or
warranties to be so true and correct would have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations or business of Fajardo Federal or on the ability of RGFC, Premier and
Fajardo Federal, as applicable, to consummate the Merger; (b) Fajardo Federal
shall have, as of the Closing, stockholders' equity of not less than $3,450,000;
(c) Fajardo Federal shall have performed in all material respects all
obligations and covenants required to be performed by it pursuant to the Merger
Agreement on or prior to the Effective Time; (d) Fajardo Federal shall have
delivered to RGFC a certificate of its Chairman and President and its Chief
Financial Officer as to certain matters; (e) none of the governmental approvals
or consents required for the consummation of the Merger shall include any
condition or requirement that, individually or in the aggregate,
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<PAGE>
would result in a material adverse effect on the financial condition, results of
operations or business of RGFC; (f) Fajardo Federal shall have furnished RGFC
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions as RGFC may reasonably request; (g)
holders of not more than 10% of the Fajardo Federal Common stock shall have
exercised dissenters' rights of appraisal; and (h) Fajardo Federal shall have
executed binding lease agreements with respect to its branch office and
executive office.
In addition to the conditions set forth above as applicable to both
parties, Fajardo Federal's obligations under the Merger Agreement are
conditioned upon, among others: (a) the representations and warranties of RGFC
as set forth in the Merger Agreement being true and correct as of March 10, 1998
and as of the Effective Time (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date),
provided, however, that notwithstanding anything in the Merger Agreement to the
contrary, this condition will be deemed to be satisfied even if such
representations or warranties are not true and correct unless the failure of any
of the representations or warranties to be so true and correct would have,
individually or in the aggregate, a material adverse effect on the financial
condition, results of operations or business of RGFC on a consolidated basis or
on the ability of RGFC and Fajardo Federal, as applicable, to consummate the
Merger; (b) RGFC shall have entered into an agreement to sell, as of the Closing
Date, (i) a designated parcel of real estate to an unaffiliated third-party
(pursuant to the designation of the Fajardo Federal Board of Directors) at a
price equal to the carrying value, (ii) an option to purchase and develop an
additional parcel of land for $25,000 (provided that the purchaser agrees that,
for the five-year period following the Closing Date, such property shall not be
used for the purposes of engaging in the business of banking or mortgage
banking) and RGFC shall have accepted, as of the Closing Date, payment of
$20,000 from Rudolph Kauffman, a director of Fajardo Federal, in full
satisfaction of an account receivable reflected on Fajardo Federal's books at
$22,000; (c) RGFC and Premier shall have performed in all material respects all
obligations and complied with all covenants required to be performed and
complied with by them pursuant to the Merger Agreement on or prior to the
Effective Time; (d) RGFC and Premier shall have delivered to Fajardo Federal a
certificate of its President and its Chief Financial Officer as to certain
matters and (e) RGFC and/or Premier shall have furnished Fajardo Federal with
such certificates of their respective officers or others and such other
documents to evidence fulfillment of the conditions as Fajardo Federal may
reasonably request.
Procedures for Exchange of Fajardo Federal Stock Certificates
Within three business days of the Effective Time, RGFC will deposit, or
will cause to be deposited, with the Exchange Agent, for the benefit of the
holders of shares of Fajardo Federal Common Stock, an estimated amount of cash
sufficient to pay the Aggregate Cash Consideration and the aggregate amount of
cash to be paid in lieu of fractional shares, and RGFC shall reserve for
issuance with its transfer agent and registrar the aggregate Stock Consideration
to be issued.
The Letter of Transmittal and Election Form to be mailed within three
business days after the Effective Time will specify that delivery will be
effected, and risk of loss and title to Fajardo
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<PAGE>
Federal Stock Certificates representing shares of RGFC Class B Common Stock
shall pass, only upon proper delivery of the Fajardo Federal Stock Certificates
to the Exchange Agent and shall include instructions for use in effecting the
surrender of the Fajardo Federal Stock Certificates in exchange for certificates
evidencing shares of RGFC Class B Common Stock or cash, as appropriate.
Upon the proper surrender to the Exchange Agent of a Fajardo Federal
Stock Certificate for cancellation, together with such Letter of Transmittal and
Election Form, duly executed and completed in accordance with the instructions
thereto, and such other documents as may be reasonably required pursuant to such
instructions, the holder of such Fajardo Federal Stock Certificate will be
entitled to receive in exchange therefor the appropriate Merger Consideration.
As soon as practicable after completion of the allocations of the Merger
Consideration and in no event later than ten business days after the Election
Deadline, the Exchange Agent will distribute shares of RGFC Class B Common Stock
and cash as provided in the Merger Agreement.
No dividends or other distributions declared or made after the
Effective Time with respect to shares of RGFC Class B Common Stock with a record
date after the Effective Time will be paid to the holder of any unsurrendered
Fajardo Federal Stock Certificate with respect to the shares of RGFC Class B
Common Stock represented thereby, and no cash payment in lieu of any fractional
shares will be paid to any such holder, until the holder of such Fajardo Federal
Stock Certificate surrenders such certificate. Subject to the effect of escheat,
tax or other applicable laws, following surrender of any such Certificate, the
holder of whole shares of RGFC Class B Common Stock issued in exchange therefor,
will be paid, without interest, (i) the amount of any cash payable with respect
to such whole shares of RGFC Class B Common Stock, and (ii) at the appropriate
payment date, the amount of dividends or other distributions, with a record date
after the Effective Time but prior to surrender and a payment date occurring
after surrender, payable with respect to such whole shares of RGFC Class B
Common Stock.
At the Effective Time, the stock transfer books of Fajardo Federal will
be closed and there will be no further registration of transfers of shares of
Fajardo Federal Common Stock thereafter on the records of Fajardo Federal. From
and after the Effective Time, the holders of certificates representing shares of
Fajardo Federal Common Stock outstanding immediately prior to the Effective Time
will cease to have any rights with respect to such shares of Fajardo Federal
Common Stock, except as otherwise provided in the Merger Agreement or by law.
Any portion of the aggregate Per Share Cash Consideration or the
proceeds of any investments thereof that remains unclaimed by the stockholders
of Fajardo Federal for six (6) months after the Effective Time will be repaid by
the Exchange Agent to RGFC upon the written request of RGFC. After such request
is made, any stockholder of Fajardo Federal will look only to RGFC for payment
and issuance of the Merger Consideration deliverable in respect of each share of
Fajardo Federal Common Stock such stockholder holds as determined pursuant to
the Merger Agreement without any interest thereon. If outstanding Fajardo
Federal Stock Certificates are not surrendered or the payment for such shares is
not claimed prior to the date on which such
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<PAGE>
payments would otherwise escheat to or become the property of any governmental
unit or agency, the unclaimed items will, to the extent permitted by abandoned
property and any other applicable law, become the property of RGFC (and to the
extent not in its possession shall be paid over to it), free and clear of all
claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, neither RGFC, the Exchange Agent nor any other
person will be liable to any former holder of Fajardo Federal Common Stock for
any amount delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
RGFC and the Exchange Agent will be entitled to rely upon Fajardo
Federal's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books will be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Fajardo Federal Stock Certificate, RGFC and the
Exchange Agent will be entitled to deposit any consideration represented thereby
in escrow with an independent third party and thereafter be relieved with
respect to any claims thereto.
In the event any Fajardo Federal Stock Certificate has been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Fajardo Federal Stock Certificate to be lost, stolen or destroyed
and, if required by the Exchange Agent, the posting by such person of a bond in
such amount as the Exchange Agent may direct as indemnity against any claim that
may be made against it with respect to such Fajardo Federal Stock Certificate,
the Merger Consideration deliverable in respect thereof pursuant to the Merger
Agreement will be paid to the stockholder.
Regulatory Approvals
Consummation of the Merger is subject to, among other things, prior
receipt of all requisite approvals from the FDIC and any other regulatory agency
of competent jurisdiction necessary to consummate the Merger and expiration of
all regulatory waiting periods applicable to the Merger. RGFC has [applied to]
the FDIC pursuant to the Federal Deposit Insurance Act. RGFC also has provided
notice to the Federal Reserve and has [applied to] the OCFI to acquire Fajardo
Federal. No other regulatory approval is necessary in connection with the
transactions contemplated by the Merger Agreement.
Business Pending the Merger
Under the terms of the Merger Agreement, Fajardo Federal has agreed not
to take certain actions prior to consummation of the Merger without the prior
written consent of RGFC, including, among other things, the following: (i)
change any provision of the Charter or Bylaws of Fajardo Federal; (ii) except
for the issuance of Fajardo Federal Common Stock pursuant to the terms of the
RGFC Stock Option, change the number of shares of its authorized or issued
capital stock or issue or grant any option, warrant, call, commitment,
subscription, award, right to purchase or agreement of any character relating to
the authorized or issued capital stock of Fajardo Federal, or split, combine or
reclassify any
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<PAGE>
shares of its capital stock, or redeem or otherwise acquire any shares of such
capital stock; (iii) declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of the capital stock of Fajardo Federal; (iv) increase the compensation
or benefits to its directors, officers or employees, or agree to pay any bonus
or severance to, or provide any new benefit or incentive to, any of its
directors, officers or employees, with certain exceptions, except, in the case
of employees who are not executive officers, such as are granted in the ordinary
course of business consistent with past practices; (v) subject to certain
exceptions, enter into or modify any employee benefit plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or employees; or make any contributions to any defined contribution
plan or any defined benefit pension or retirement plan other than in the
ordinary course of business consistent with past practice; (vi) purchase or
otherwise acquire, or sell otherwise dispose of, any assets or incur any
liabilities other than in the ordinary course of business consistent with past
practices; (vii) make any capital expenditures in excess of $2,000 individually
or $10,000 in the aggregate, other than expenditures necessary to maintain
existing assets in good repair; (viii) except for Fajardo Federal's pending
application to relocate its branch office, file any applications or make any
contract with respect to branching or site location or relocation; (ix) make any
change in its accounting methods or practices, other than changes required by
changes in laws or regulations or generally accepted accounting principles
concurred in by its and RGFC's independent certified public accountants, or
change any of its methods of reporting income and deductions for federal income
tax purposes, except as required by changes in laws or regulations; (x) change
its lending, investment, deposit or asset and liability management or other
banking policies in any material respect except as may be required by applicable
law; (xi) engage in any transaction with an "affiliate," as defined in the
Merger Agreement other than loans to directors, officers and employees in the
ordinary course of business consistent with past practice and in compliance with
all applicable laws and regulations; (xii) enter into any futures contract,
option or other agreement or take any other action for purposes of hedging the
exposure of its interest-earning assets and interest-bearing liabilities to
changes in market rates of interest; (xiii) take any action that would result in
any of its representations and warranties of Fajardo Federal contained in the
Merger Agreement not being true and correct in any material respect at the
Effective Time; (xiv) acquire in any manner whatsoever (other than to realize
upon collateral for a defaulted loans) any business or entity; (xv) discharge or
satisfy any lien or encumbrance or pay any material obligation or liability
(absolute or contingent) other than at scheduled maturity or in the ordinary
course of business; (xvi) enter or agree to enter into any agreement or
arrangement granting any preferential right to purchase any of its assets or
rights or requiring the consents of any party to the transfer and assignment of
any such assets or rights; (xvii) take or cause to be taken any action which
would disqualify the Merger as a tax free reorganization under Section 1112(g)
of the Code; (xviii) make any loan in excess of $125,000 (in the case of
residential mortgage loans) $150,000 (in the case of commercial mortgage loans)
or $5,000 (in the case of consumer loans); (xix) except as to the leases for
Fajardo Federal's branch office and executive office, enter into (w) any
agreement, arrangements or commitment not made in the ordinary course of
business, (x) any agreement, indenture or other instrument relating to the
borrowing of money by Fajardo Federal or guarantee by Fajardo Federal of any
such obligation, except for deposits and borrowings in the ordinary course of
business consistent with past practice, (y) with certain exceptions, any
agreement,
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<PAGE>
arrangement or commitment relating to the employment of, or severance of, an
employee, or amend any such existing agreement, arrangement or commitment, or
(z) any contract, agreement or understanding with a labor union; or (xx) agree
to do any of the foregoing.
Furthermore, each party has agreed to provide the other party and its
representatives with such financial data and other information with respect to
its business and properties as such party from time to time reasonably requests.
Each party will cause all non-public financial and business information obtained
by it from the other to be treated confidentially. If the Merger is not
consummated, each party will either return to the other all non-public financial
statements, documents and other materials previously furnished by such party or
destroy such information.
Acquisition Proposals
The Merger Agreement provides that Fajardo Federal will not solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, any
acquisition, lease or purchase of all or a substantial portion of the assets of,
or any equity interest in, Fajardo Federal provided, however, that the Board of
Directors of Fajardo Federal may furnish such information or participate in such
negotiations or discussions if such Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to do so would cause the members of such Board of Directors to breach
their fiduciary duties under applicable laws. Fajardo Federal has agreed that it
will promptly inform RGFC of any such request for information, or of any such
negotiations or discussions, and to instruct its directors, officers,
representatives not to solicit or encourage any such inquiries or proposals,
furnish any such information or participate in any such negotiations or
discussions.
Representations and Warranties
The Merger Agreement contains representations and warranties of RGFC
and Fajardo Federal which are customary in transactions of this type, including,
but not limited to, representations and warranties concerning: (a) the
organization and capitalization of RGFC and its subsidiaries and Fajardo
Federal; (b) the due authorization, execution, delivery and enforceability of
the Merger Agreement; (c) consents or approvals required, and the lack of
conflicts or violations under applicable certificate of incorporation, charter,
bylaws, instruments and laws, with respect to the transactions contemplated by
the Merger Agreement; (d) the documents to be filed by RGFC and Fajardo Federal
with the Commission and other regulatory agencies; (e) the conduct of business
in the ordinary course and absence of certain changes; (f) financial statements;
(g) compliance with laws; and (h) the allowance for loan losses, real estate
owned and other repossessed assets.
Effective Time of the Merger; Termination and Amendment
The Effective Time of the Merger will occur upon the filing of the Plan
of Merger (which is attached as Exhibit A to the Merger Agreement) with the
Secretary of State of the
34
<PAGE>
Commonwealth of Puerto Rico pursuant to the Banking Law. Such filing will occur
only after the receipt of all requisite regulatory approvals, approval of the
Merger Agreement by the requisite vote of Fajardo Federal's stockholders, the
expiration of all applicable regulatory waiting periods and the satisfaction or
waiver of all other conditions to the Merger.
A closing (the "Closing") will take place immediately prior to the
Effective Time at 10:00 a.m. on or before the fifth business day following the
receipt of all necessary regulatory or governmental approvals and consents and
the expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver (to the extent permitted) of all the conditions to
consummation of the Merger, or on such other date as the parties may mutually
agree upon.
The Merger Agreement may be terminated, either before or after approval
by the stockholders of Fajardo Federal, as follows: (a) by mutual written
consent of the parties; (b) by RGFC or Fajardo Federal (i) if the Effective Time
has not occurred on or prior to September 10, 1998 or (ii) if a vote of the
stockholders of Fajardo Federal is taken and such stockholders fail to approve
the Merger Agreement at the meeting of stockholders (or any adjournment
thereof); unless the failure of such occurrence is due to the failure of the
party seeking to terminate the Merger Agreement to perform or observe its
agreements set forth therein to be performed or observed by such party at or
before the Effective Time; (c) by RGFC or Fajardo Federal at any time after the
date upon which any application for a regulatory or governmental approval
necessary to consummate the Merger and the other transactions contemplated by
the Merger Agreement has been denied or any requisite approval does not satisfy
the requirements of the Merger Agreement, and the time periods for appeals and
requests for reconsideration was run; (d) by RGFC in writing if Fajardo Federal
has, or by Fajardo Federal in writing if RGFC has, breached (i) any material
covenant or undertaking contained in the Merger Agreement, or (ii) any
representation or warranty contained in the Merger Agreement, in any case if
such breach has not been cured by the earlier of 30 days after the date on which
written notice of such breach is given to the party committing such breach or
the Effective Time; (e) by either party in writing, provided such party is not
in default under the Merger Agreement, if any condition precedent to such
party's obligations under the Merger Agreement is or would be impossible to
satisfy, and such condition is not waived by the other party.
To the extent permitted under applicable law, at any time prior to the
consummation of the Merger, whether before or after approval thereof by the
stockholders of Fajardo Federal, the parties may by written agreement (a) amend
the Merger Agreement, (b) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (c) waive any
inaccuracies in the representations and warranties contained therein or in any
document delivered pursuant thereto, or (d) waive compliance with any of the
agreements or conditions contained therein. However, after any approval of the
Merger Agreement by the stockholders of Fajardo Federal, there may not be,
without further approval of such stockholders, any amendment or waiver of the
Merger Agreement which modifies either the amount or the form of the Merger
Consideration to be delivered to the stockholders of Fajardo Federal.
35
<PAGE>
Rights of Dissenting Stockholders
Section 552.14 of the OTS Rules and Regulations (12 C.F.R. Section
552.14) provides that, if the Merger is consummated, Dissenting Stockholders
shall have the right to receive payment of the fair or appraised value of their
shares of Fajardo Federal Common Stock (not including any element of value
arising from the consummation of the Merger). Section 552.14 is presented in
full as Appendix B and the following discussion is qualified in its entirety by
reference thereto. The following discussion and Appendix B shall constitute
notice to stockholders of Fajardo Federal as required by Section 552.14(c)(1).
Any stockholder of Fajardo Federal who is entitled to vote on the
Merger will have the right to receive payment of the fair or appraised value of
his or her shares as provided by Section 552.14 if such stockholder does not
vote in favor of the Merger and, before the vote of stockholders on the Merger,
identifies himself or herself and files with Fajardo Federal a writing stating
his or her intention to demand appraisal of and payment for his or her shares of
Fajardo Federal Common Stock ("Written Demand"). Such a Written Demand must be
addressed to Secretary, Fajardo Federal Savings Bank, Celis Aquilera #161,
Fajardo, Puerto Rico 00648 and must be in addition to and separate from any
proxy or vote against the Merger by the stockholder. A vote against the Merger
will not satisfy the requirement of filing a Written Demand. A vote against or
abstention from voting with respect to the Merger will not waive a stockholder's
right to payment if the stockholder has filed a Written Demand and has not voted
in favor of the Acquisition.
Within ten days after the Effective Date, RGFC will give written notice
by mail of such effectiveness to each Dissenting Stockholder who filed a Written
Demand. RGFC will make a written offer to each Dissenting Stockholder to pay for
such shares at a specified price deemed by RGFC to be the fair value thereof,
and inform them that, within 60 days of such date, certain requirements relating
to, among other things, the acceptance of such offer must be complied with, and
advise them further of the petition to be filed if the offer is not accepted,
and provide them also with certain financial information relating to RGFC.
If within 60 days of the Effective Date, a Dissenting Stockholder has
not agreed as to the fair value of his or her shares, such stockholder may file
a petition with the OTS, with a copy sent by registered or certified mail to
RGFC, demanding a determination of the fair market value of the Fajardo Federal
Common Stock of all such Dissenting Stockholders. A Dissenting Stockholder
entitled to file a petition under Section 552.14 who fails to file such petition
within 60 days of the Effective Date shall be deemed to have accepted the terms
of the Acquisition.
Within 60 days of the Effective Date, each stockholder demanding
appraisal and payment under Section 552.14 shall submit to RGFC, his or her
certificates of Common Stock for notation thereon that an appraisal and payment
have been demanded with respect to such stock and that appraisal proceedings are
pending. Such certificates will be returned promptly to the stockholder. Any
stockholder who fails to submit his or her stock certificates for such notation
shall no longer
36
<PAGE>
be entitled to appraisal rights under Section 552.14 and shall be deemed to
have accepted the terms of the Merger.
If within 60 days of the Effective Date, the fair value is agreed upon
between RGFC and any Dissenting Stockholder who has filed his or her Written
Demand and not voted in favor of the Merger, payment for his or her shares shall
be made within 90 days of the Effective Date.
Notwithstanding the foregoing, at any time within 60 days after the
Effective Date, any stockholder shall have the right to withdraw his or her
demand for appraisal and to accept the terms of the Merger.
The Director of the OTS shall, as he or she may elect, either appoint
one or more independent persons or direct appropriate staff of the OTS to
appraise the shares to determine their fair market value as of the Effective
Date, exclusive of any element of value arising from the accomplishment or
expectation of the Acquisition. The appropriate staff of the OTS shall review
and provide an opinion on appraisals prepared by independent persons as to the
suitability of the appraisal methodology and adequacy of the analysis and
supportive data. The Director after consideration of the appraisal report and
advice of the appropriate OTS staff shall, if he or she concurs in the value of
the Common Stock, direct payment of the appraised fair market value of the
shares, upon surrender of the certificates representing such stock. Payment
shall be made, together with interest from the Effective Date, at a rate deemed
equitable by the Director of the OTS.
The cost and expense of any proceeding under Section 552.14 may be
apportioned and assessed by the Director of the OTS as he or she may deem
equitable against all or some of the parties. In making this determination, the
Director shall consider whether any party has acted arbitrarily, vexatiously, or
not in good faith with respect to the rights provided by Section 552.14.
Any stockholder who has demanded appraisal rights as provided above
shall thereafter neither be entitled to vote such Common Stock for any purpose
nor be entitled to the payment of dividends or other distributions on the stock
(except dividends or other distributions payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to the Effective Date);
provided that if any stockholder becomes unentitled to appraisal and payment of
appraised value with respect to such stock and accepts or is deemed to have
accepted the terms offered upon the Acquisition, such stockholder shall
thereupon be entitled to vote and receive the distributions described above.
The receipt of cash for Dissenting Shares by stockholders may give rise
to taxable income. Stockholders are urged to consult their personal tax advisors
to determine the tax consequences of the exercise of dissenters' rights by them.
37
<PAGE>
RGFC Option Agreement
As an inducement and condition to RGFC's entering into the Merger
Agreement, RGFC and Fajardo Federal also entered into the RGFC Option Agreement,
pursuant to which Fajardo Federal, as issuer, granted RGFC, as grantee, the RGFC
Option. The RGFC Option provides that, upon the occurrence of certain events
(none of which has occurred as of the date hereof to the best knowledge of RGFC
and Fajardo Federal), RGFC will be entitled to purchase up to 52,116 shares of
Fajardo Federal Common Stock (the "Option Shares") representing 24.9% of the
outstanding shares of Fajardo Federal Common Stock on a pro forma basis, at a
price of $16.54 per share, subject to adjustment in certain circumstances and
termination within certain periods.
RGFC generally may exercise the RGFC Option, in whole at any time or in
part from time to time, upon the occurrence of a Purchase Event (as defined in
the RGFC Option Agreement) prior to the Termination Date (as defined in the RGFC
Option Agreement). The definitions referred to in this paragraph are
incorporated herein by reference to the copy of the RGFC Option Agreement
included as Exhibit B to the Merger Agreement attached as Appendix A to this
Proxy Statement/Prospectus.
The RGFC Option Agreement provides that, subject to limitations set
forth therein, RGFC may demand that Fajardo Federal promptly prepare, file and
keep current a registration statement under the Securities Act or any other
applicable securities regulation requirement covering the Option Shares and use
its reasonable efforts to cause such registration statement to become effective
and remain current in order to permit the disposition of the Option Shares by
RGFC.
The RGFC Option Agreement is intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement and may have the effect of discouraging competing offers to the
Merger.
Stockholder Agreement
In conjunction with the Merger Agreement, RGFC has also entered into a
Stockholder Agreement with each of the directors of Fajardo Federal. Pursuant to
such Stockholder Agreement, each of the directors of Fajardo Federal has agreed,
among other things, not to sell, pledge, transfer or otherwise dispose of his or
her shares of Fajardo Federal Common Stock prior to the Special Meeting and to
vote such shares of Fajardo Federal Common Stock in favor of the Merger
Agreement.
Interests of Certain Persons in the Merger
In considering the recommendation of the Fajardo Federal Board of
Directors, stockholders should be aware that members of Fajardo Federal's
management and the Fajardo Federal Board of Directors have interests in the
Merger that are in addition to the interests of stockholders generally. The
Fajardo Federal Board of Directors was aware of these interests and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
38
<PAGE>
Transferred Employees. All employees of Fajardo Federal or its
subsidiaries immediately prior to the Effective Time who are employed by RGFC or
Premier immediately following the Effective Time ("Transferred Employees") will
be covered by RGFC's employee benefit plans on substantially the same basis as
any employee of RGFC or Premier in a comparable position. Except as specially
provided in the Merger Agreement and as otherwise prohibited by law, Transferred
Employees' service with Fajardo Federal will be recognized as service with RGFC
for purposes of eligibility to participate and vesting, if applicable (but not
for purposes of benefit accrual) under RGFC's benefit plans. To the extent that
the employment of any Fajardo Federal employee is involuntarily terminated at or
during the one-year period following the Effective time as the result of
elimination of a job position, such former employee will be entitled to
severance benefits in accordance with and to the extent provided by Premier's
severance policies.
Indemnification; Insurance. The Merger Agreement provides that from and
after the Effective Time through the third anniversary of the Effective Time,
RGFC (the "Indemnifying Party") will indemnify and hold harmless and provide
directors and officers liability insurance to each present and former director
and officer of Fajardo Federal determined as of the Effective Time. From the
Effective Time and continuing thereafter, the current officers and directors of
Fajardo Federal will be indemnified and provided directors' and officers'
liability insurance by RGFC for their acts and omissions arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time to the full extent provided by
the Charter and Bylaws of Fajardo Federal as of the date of the Merger Agreement
and with the existing directors and officers' liability insurance policy as of
the date of the Merger Agreement.
Other than as set forth above, no director or executive officer of
Fajardo Federal or RGFC has any direct or indirect material interest in the
Merger, except in the case of Fajardo Federal directors and executive officers,
insofar as ownership of Fajardo Federal Common Stock might be deemed such an
interest.
Resale Considerations With Respect to the RGFC Common Shares
The shares of RGFC Class B Common Stock that will be issued if the
Merger is consummated have been registered under the Securities Act and listed
on The Nasdaq National Market and will be freely transferable, except for shares
of RGFC Class B Common Stock received by persons, including directors and
executive officers of Fajardo Federal, who may be deemed to be "affiliates" of
Fajardo Federal under Rule 145 promulgated under the Securities Act. Affiliates
may not sell their shares of RGFC Class B Common Stock acquired pursuant to the
Merger, except pursuant to an effective registration statement under the
Securities Act covering such shares of RGFC Class B Common Stock or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. Persons who may be deemed to be affiliates
of Fajardo Federal generally include individuals or entities that control, are
controlled by, or are under common control with, Fajardo Federal and may include
certain officers and directors of Fajardo Federal as well as any stockholders
who own more than 10% of the Fajardo Federal Common Stock.
39
<PAGE>
Certain Income Tax Consequences
RGFC and Fajardo Federal have received a legal opinion from McConnell
Valdes to the effect that the Merger will constitute a reorganization within the
meaning of Section 1112(g) of the Code, and that no gain or loss will be
recognized by RGFC or Fajardo Federal under the Code in connection with the
Merger. The legal opinion is filed as an exhibit to the Registration Statement
of which this Proxy Statement/Prospectus is a part. No gain or loss will be
recognized by the stockholders of Fajardo Federal under the Code upon the
exchange of their shares of Fajardo Federal Common Stock solely for RGFC Class B
Common Stock, except for cash received in lieu of fractional shares. Under the
Code, the tax basis of the shares of RGFC Class B Common Stock will be the same
as the tax basis of the Fajardo Federal Common Stock exchanged (reduced by any
amount of cash received in lieu of any fractional share interest). A Fajardo
Federal stockholder who exchanges shares of Fajardo Federal Common Stock for
cash, whether as part of the Merger Consideration or through the exercise of
dissenter's rights, will recognize gain or loss, but not in excess of the amount
of cash received.
The above is a summary description of certain income tax consequences
of the Merger under the Code. Income tax laws are complex and the tax
consequences of the Merger may vary depending on each stockholders individual
circumstances and tax status. Each Farjardo Federal stockholder is urged to
consult his or her own tax advisor concerning the income tax and other tax
consequences of the Merger applicable to such stockholder.
Accounting Treatment of the Merger
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, RGFC will record the acquisition of
Fajardo Federal at its cost at the Effective Time of the Merger, which cost
would include the cash paid in the Merger, the fair value of the shares of RGFC
Class B Common Stock issued in the Merger and all direct acquisition costs. The
purchase price will be allocated to the acquired assets and assumed liabilities
of Fajardo Federal based upon their estimated fair values at the Effective Time
of the Merger in accordance with generally accepted accounting principles. The
purchase price in excess of the fair values of the identifiable net assets
acquired will be recorded as an intangible asset and amortized over a period of
15 years for financial accounting purposes. The reported income of RGFC will
include the operations of Fajardo Federal after the Effective Time of the
Merger. See "Pro Forma Condensed Consolidated Financial Statements (Unaudited)."
Expenses of the Merger
The Merger Agreement provides that RGFC and Fajardo Federal will each
bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated by the Merger Agreement, including, without
limitation, legal, accounting, investment banking and printing expenses.
In order to increase the likelihood that the transactions contemplated
by the Merger Agreement will be consummated, the Merger Agreement provides that
if the Merger shall not have occurred within six months of March 10, 1998, for
any reason other than RGFC's failure to obtain any required regulatory approval,
then RGFC will pay Fajardo Federal a fee of $250,000 as a termination fee.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The pro forma condensed consolidated balance sheet as of December 31,
1997, and the related pro forma condensed consolidated statements of income for
the year ended December 31, 1997, give effect to the acquisition of 100% of the
outstanding Common Stock of Fajardo Federal by RGFC. The pro forma information
is derived from the historical consolidated financial statements, including the
notes thereto, of RGFC that are incorporated by reference into this Proxy
Statement/Prospectus (see "Incorporation of Certain Documents by Reference" and
"RGFC Selected Consolidated Financial Information") and the historical financial
statements of Fajardo Federal, including the notes thereto, included elsewhere
herein (see "Index to Fajardo Federal
40
<PAGE>
Financial Statements" and "Fajardo Federal Selected Financial Information").
The pro forma information set forth below gives effect to the Merger
under the purchase method of accounting. The pro forma condensed statement of
income gives effect to the Merger as if it had occurred at the beginning of each
period presented. The pro forma consolidated per share data gives effect to the
assumed issuance of 128,736 shares of RGFC Class B Common Stock, which assumes
that the Per Share Stock Consideration is $42.70 (based upon an Exchange Ratio
of 1.00, and an assumed RGFC Market Value of $42.70), resulting in 5,053,210
shares of RGFC Class B Common Stock outstanding following the Merger.
This pro forma information may not necessarily be indicative of the
operating results or financial position that would have actually occurred if the
Merger had been consummated at the beginning of each period presented, nor is it
necessarily indicative of future operating results or financial position.
41
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
As of December 31, 1997
--------------------------------------------------------------
Historical
-----------------------------
Pro Forma Pro Forma
RGFC Fajardo Federal Adjustments Combined
---------- --------------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 32,607 $ 1,162 $ (100) $ 33,669
Money market investments 35,759 3,000 (1,248) 37,511
Mortgage loans held for sale, at lower of
cost or market 46,885 -- -- 46,885
Mortgage-backed and investment securities
held for trading, at fair value 401,039 -- -- 401,039
Mortgage-backed securities available for
sale, at fair value 46,004 -- -- 46,004
Mortgage-backed securities held to
maturity, at amortized cost 33,326 -- -- 33,326
Investment securities available for sale, at
fair value 75,863 287 -- 76,150
Investment securities held to maturity, at
amortized cost 10,693 -- -- 10,693
Loans receivable, net 765,059 24,252 459 789,770
Servicing asset 21,213 -- -- 21,213
Premises and equipment 9,528 130 (123) 9,535
Other assets 32,770 781 3,196 36,747
---------- ---------- ---------- ----------
Total assets $1,510,746 $ 29,612 $ 2,184 $1,542,542
========== ========== ========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 722,419 $ 22,017 -- 744,436
Federal funds purchased 10,000 -- -- 10,000
Securities sold under agreements to
repurchase 382,283 -- -- 382,283
Notes payable 159,304 -- -- 159,304
Advances from FHLB 42,000 3,800 -- 45,800
Other borrowings 34,359 -- -- 34,359
Other liabilities 19,077 309 568 19,954
---------- ---------- ---------- ----------
Total liabilities 1,369,442 26,126 568 1,396,136
---------- ---------- ---------- ----------
Subordinated notes 3,250 -- -- 3,250
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred stock -- -- --
Common Stock 142 156 (27) 271
Additional paid-in capital 38,348 1,487 3,781 43,616
Retained earnings 96,129 1,843 (2,138) 95,834
Capital reserves 2,215 -- -- 2,215
Unrealized gain on securities
available for sale 1,220 -- -- 1,220
---------- ---------- ---------- ----------
Total stockholders' equity 138,054 3,486 1,616 143,156
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $1,510,746 $ 29,612 $ 2,184 $1,542,542
========== ========== ========== ==========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Statement of Income (Unaudited)
As of December 31, 1997
------------------------------------------------------------------
Historical
-------------------------------
Pro Forma Pro Forma
RGFC Fajardo Federal Adjustments Combined
----------- --------------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 68,514 $ 2,504 (51) $ 70,967
Other interest income 28,821 155 (65) 28,911
----------- ----------- ----------- -----------
Total interest income 97,335 2,659 (116) 99,878
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits 32,434 864 -- 33,298
Interest on short-term borrowings 18,849 262 -- 19,111
Interest on long-term borrowings 9,522 -- -- 9,522
----------- ----------- ----------- -----------
Total interest expense 60,805 1,126 -- 61,931
----------- ----------- ----------- -----------
Net interest income 36,530 1,533 (116) 37,947
Provision for loan losses 6,370 63 -- 6,433
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 30,160 1,470 (116) 31,514
Total other income 41,105 173 -- 41,278
Total other expenses 39,036 1,104 276 40,416
----------- ----------- ----------- -----------
Income before income taxes 32,229 539 (392) 32,376
Total income taxes 8,732 104 ( 97) 8,739
----------- ----------- ----------- -----------
Net income $ 23,497 $ 435 (295) $ 23,637
=========== =========== =========== ===========
Earnings per share:
Basic $ 1.66 $ 2.94 -- $ 1.66
Diluted $ 1.62 $ 2.94 -- $ 1.61
Weighted average number of shares outstanding: -- -- -- 14,273,488
Basic 14,144,752 147,760 -- 14,649,988
Diluted 14,521,252 147,760 -- --
</TABLE>
43
<PAGE>
R&G FINANCIAL CORPORATION
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
Pursuant to the Merger Agreement, RGFC will pay Fajardo Federal
stockholders a total consideration of approximately $6.7 million for the
purchase of 100% of the outstanding Fajardo Federal Common Stock, which assumes
a RGFC Market Value of $42.70. Related professional costs and expenses are
estimated to be approximately $100,000. The pro forma financial statements
assume the Merger Consideration will be structured as follows: $1,182,633 in
cash and 128,736 shares of RGFC Class B Common Stock. The pro forma statements
assume that the Merger will be accounted for under the purchase method of
accounting.
(a) Under purchase accounting, Fajardo Federal's assets and liabilities are
adjusted to their estimated fair values at the consummation date. The
estimated fair value adjustments have been determined by RGFC based
upon information set forth in the notes to Fajardo Federal's financial
statements included elsewhere in this Registration Statement and other
information available to RGFC' management. No assurance can be given
that such estimated fair values represent fair values that would
ultimately be determined at the effective date of the Merger. Following
are the pro forma adjustments made to reflect Fajardo Federal's
estimated fair values at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Net Assets
-----------------------------
Increase (Decrease)
<S> <C>
Net assets as reported by Fajardo Federal................. $3,486
Fair value adjustments:
Investments............................................ --
Loans.................................................. 510
Bank premises and equipment............................ (123)
Deposit base intangibles............................... 1,319
Deferred income tax liability.......................... (665)
Costs in excess of fair value of net assets acquired... 2,153
-----
$6,680
</TABLE>
44
<PAGE>
(b) For purposes of determining the pro forma effect of the Merger on RGFC'
consolidated statements of income for the year ended December 31, 1997,
the following pro forma adjustments have been made (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
---------------------
<S> <C>
(1) Amortization of adjustments to loans............................. 51
(2) Decrease in interest income resulting from the use of money
market investments, at an assumed interest rate of 5.50%..... 65
(3) Amortization of deposit base intangibles over the estimated
average lives of the deposit relationships on a straight-line
basis........................................................ 132
(4) Amortization of purchase price in excess of fair value of net
assets acquired over 15 years................................ 144
(5) Decrease in income tax provision associated with adjustments..... (97)
</TABLE>
ADJOURNMENT OF SPECIAL MEETING
Each proxy solicited hereby requests authority to vote for an adjournment
of the Special Meeting, if an adjournment is deemed to be necessary. Fajardo
Federal may seek an adjournment of the Special Meeting for not more than 30 days
in order to enable Fajardo Federal to solicit additional votes in favor of the
proposal to adopt the Merger Agreement in the event that such proposal has not
received the requisite vote of stockholders at the Special Meeting and such
proposal has not received the negative votes of the holders of a majority of the
Fajardo Federal Common Stock. If Fajardo Federal desires to adjourn the meeting
with respect to foregoing proposal, it will request a motion that the meeting be
adjourned for up to 30 days with respect to such proposal (and solely with
respect to such proposal, provided that a quorum is present at the Special
Meeting), and no vote will be taken on such proposal at the originally scheduled
Special Meeting. Each proxy solicited hereby, if properly signed and returned to
the Company and not revoked prior to its use, will be voted on any motion for
adjournment in accordance with the instructions contained therein. If no
contrary instructions are given, each proxy received will be voted in favor of
any motion to adjourn the meeting. Unless revoked prior to its use, any proxy
solicited for the Special Meeting will continue to be valid for any adjournment
of the Special Meeting, and will be voted in accordance with instructions
contained therein, and if no contrary instructions are given, for the proposal
in question.
Any adjournment will permit Fajardo Federal to solicit additional proxies
and will permit a greater expression of the stockholders' views with respect to
such proposal. Such an adjournment would be disadvantageous to stockholders who
are against the proposal, because an adjournment will give Fajardo Federal
additional time to solicit favorable votes and thus increase the chances of
passing such proposal.
45
<PAGE>
If a quorum is not present at the Special Meeting, no proposal will be
acted upon and the Board of Directors of Fajardo Federal will adjourn the
Special Meeting to a later date in order to solicit additional proxies on the
proposal being submitted to stockholders.
An adjournment for up to 30 days will not require either the setting of a
new record date or notice of the adjourned meeting as in the case of an original
meeting. Fajardo Federal has no reason to believe that an adjournment of the
Special Meeting will be necessary at this time.
Because the Fajardo Federal Board of Directors recommends that stockholders
vote FOR the proposal to approve the Merger Agreement, as discussed above, the
Fajardo Federal Board of Directors recommends that stockholders vote FOR the
possible adjournment of the Special Meeting. The holders of a majority of the
Fajardo Federal Common Stock present, in person or by proxy, at the Special
Meeting will be required to approve a motion to adjourn the Special Meeting.
46
<PAGE>
OWNERSHIP OF FAJARDO FEDERAL COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF FAJARDO FEDERAL
The following table includes, as of the Record Date, certain information as
to the Fajardo Federal Common Stock beneficially owned by (i) each person or
entity, including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended ("1934 Act"), who or which was known
by Fajardo Federal to be the beneficial owner of more than 5% of the issued and
outstanding Fajardo Federal Common Stock, (ii) the directors of Fajardo Federal,
and (iii) all directors and executive officers of Fajardo Federal as a group.
<TABLE>
<CAPTION>
Fajardo Federal Common Stock
Beneficially Owned as of
__________, 1998(1)
-----------------------------------------
Name of Beneficial Owner No. %
- ---------------------------------------------------------------- ---------------------- --------------
<S> <C> <C>
Robert P. Byrne.................................................... 18,880 12.1%
Box 279
Fajardo, PR 00738
Manuel Figueroa.................................................... 10,735 6.9
Box 345
Fajardo, PR 00738
Robert D. Tanner................................................... 12,500 8.0
117 Eleana Roosevelt, 2nd Floor
Hato Rey, PR 00918
Directors:
Jose E. Soler................................................. 16,401 10.5
Juan R. Zalduondo............................................. 54,084(2) 34.6
Cesar Montilla, Jr............................................ 656 *
Rudolph Kauffman.............................................. 100 *
Louis Negron.................................................. 378 *
Francisco Ferraiouli.......................................... 11,206(3) 7.2
Pedro Feliciano............................................... 14,951(4) 9.6
Rene Lavergne................................................. 100 *
All directors and executive officers of
Fajardo Federal as a group (9 persons)............................ 97,876 62.6%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Fajardo Federal Common Stock.
(1) For purposes of this table, pursuant to rules promulgated under the 1934
Act, an individual is considered to beneficially own shares of Fajardo
Federal Common Stock if he or she directly or indirectly has or shares (i)
voting power, which includes the power to vote or to direct the voting of
the shares; or (ii) investment power, which includes the power to dispose
or direct the disposition of the shares. Unless otherwise indicated, an
individual has sole voting power and sole investment power with respect to
the indicated shares.
(2) Includes 3,400 shares, 2,100 shares, 1,352 shares and 612 shares owned
respectively by Bereira, Inc., the Juan R. Zalduondo Profit Sharing Plan,
Juan R. Zalduondo Grier and Parsifal, Inc.
(3) Includes 2,830 shares, 2,223 shares and 878 shares owned respectively by
Solemar, S.E., Contech de Puerto Rico and Intertrade Caribe.
(4) Includes 11,428 shares owned by Camape, Inc.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FAJARDO FEDERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of Fajardo Federal. The following discussion and analysis
of financial condition and results of operations of Fajardo Federal should be
read in conjunction with Fajardo Federal's financial statements and the notes
thereto included elsewhere in this Proxy Statement/Prospectus.
General
Fajardo Federal's results of operations depend primarily on net
interest income, which is determined by (i) the difference between rates of
interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread"), and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's results of operations also are affected by (i) non-interest income,
which includes fees for customer services such as customer deposit account
service charges and loan servicing fee income and (ii) non-interest expense,
which includes compensation and employee benefits, federal deposit insurance
premiums, costs for professional services, occupancy and equipment costs and
advertising costs. Fajardo Federal's results of operations also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, all of which are beyond Fajardo Federal's control.
Since June 4, 1993, Fajardo Federal has been subject to the provisions
of a Cease and Desist Order (the "Order") issued by the OTS. The Order was
superseded by an Order to Cease and Desist for Affirmative Action which was
issued by the OTS on August 26, 1997 (the "New Order") pursuant to a written
stipulation and consent executed by Fajardo Federal. The terms of the New Order
require Fajardo Federal to cease and desist from engaging in any unsafe or
unsound practice or violating OTS regulations with respect to lending
limitations, records for lending transactions, asset classification, loans to
officers, directors and principal stockholders and conflicts of interest. See
Note 12 of the Fajardo Federal Notes to Financial Statements.
Asset/Liability Management
Fajardo Federal's assets and liabilities may be analyzed by examining
the extent to which its assets and liabilities are interest rate sensitive and
by evaluating the expected effects of interest rate changes on its net portfolio
value. The ability to maintain consistent net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities that either reprice or mature within a
given period of time.
Thus, an asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
the institution's assets mature or reprice more
48
<PAGE>
quickly or to a greater extent than its liabilities, the institution's net
portfolio value and net interest income would tend to increase during periods of
rising interest rates but decrease during periods of falling interest rates.
Conversely, if an institution's assets mature or reprice more slowly or to a
lesser extent than its liabilities, the institution's net portfolio value and
net interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates. The difference or
interest rate repricing "Gap" provides an indication of the extent to which an
institution's interest rate spread will be affected by changes in interest
rates. A Gap is considered positive when the amount of interest rate sensitive
assets maturing or repricing within a given period exceeds the amount of
interest rate sensitive liabilities maturing or repricing within such period. A
Gap is considered negative when the amount of interest-bearing liabilities
repricing or maturing within a given period exceeds the amount of interest rate
sensitive assets repricing or maturing within such period.
Fajardo Federal's lending activities historically have emphasized
long-term, fixed rate loans. At December 31, 1997, approximately 70% of all of
Fajardo Federal's loans had fixed-rates of interest and terms to maturity of
five years or more. Conversely, the Company's deposit accounts mature or are
subject to repricing within a relatively short period of time. These factors
historically have caused the income earned by Fajardo Federal on its loan
portfolio to adjust more slowly to changes in interest rates than the interest
Fajardo Federal pays on its deposits.
49
<PAGE>
The following table, often referred to as a "Gap Table," sets forth
asset and liability balances at December 31, 1997 which are expected to reprice
and mature in each of the future periods indicated. Loans with adjustable rates
are shown as being due in the next adjustment period. Passbook accounts, money
market deposit accounts and NOW accounts are not assumed to be subject to
immediate repricing and are placed in repricing periods based upon assumptions
prepared by management.
<TABLE>
<CAPTION>
More Than One More Than
Within Three Four to Twelve Year to Three Three Years to
Months Months Years Five Years
------------- --------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets(1):
Cash Equivalents..................... $3,000 $-- $-- $--
Loans receivable:
Residential real estate loans..... 340 41 547 533
Construction loans................ -- 57 -- --
Commercial real estate loans...... -- 338 233 168
Commercial business loans......... 2,712 190 182 172
Consumer loans:
Boat loans...................... 3 -- 165 120
Other........................... 847 108 752 646
------ ------ ------ ------
Total......................... $6,902 $ 734 $1,879 $1,639
====== ====== ====== ======
Interest-bearing liabilities:
Deposits(2):
NOW and super NOW accounts........ $68 $190 $209 $169
Passbook savings accounts......... 310 882 2,037 1,650
Commercial checking............... 16 45 50 40
Certificates of deposit........... 2,740 3,810 1,078 218
FHLB advances........................ 500 3,300 -- --
------ ------ --------- ---------
Total........................... $3,634 $8,227 $3,374 $2,077
===== ===== ===== =====
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
$3,268 $(7,493) $(1,495) $(438)
===== ====== ====== ====
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities...... $3,268 $(4,225) $(5,720) $(6,158)
===== ====== ====== ======
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets........... 11.04% (14.27)% (19.32)% (20.79)%
===== ====== ====== ======
<PAGE>
<CAPTION>
Over Five
Years Total
------------ ---------
<S> <C> <C>
Interest-earning assets(1):
Cash Equivalents..................... $-- $3,000
Loans receivable:
Residential real estate loans..... 10,074 11,535
Construction loans................ -- 57
Commercial real estate loans...... 2,657 3,396
Commercial business loans......... -- 3,256
Consumer loans:
Boat loans...................... 3,054 3,342
Other........................... 1,524 3,877
------- -------
Total......................... $17,309 $28,463
======= =======
Interest-bearing liabilities:
Deposits(2):
NOW and super NOW accounts........ $721 $1,251
Passbook savings accounts......... 7,035 11,914
Commercial checking............... 172 323
Certificates of deposit........... 577 8,423
FHLB advances........................ -- 3,800
-------- -------
Total........................... $8,505 $25,817
======== =======
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $8,804
======
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities...... $2,646
======
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets........... 8.93%
====
</TABLE>
- ---------------
(1) Adjustable-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which
they are due, and fixed-rate loans are included in the periods in which
they are scheduled to be repaid, based on scheduled amortization, in
each case as adjusted to take into account estimated prepayments based
on forecasts used by the OTS in their model for net portfolio value
("NPV") discussed below.
50
<PAGE>
(2) Although Fajardo Federal's negotiable order of withdrawal ("NOW") and
Super NOW accounts, passbook savings accounts and checking accounts are
subject to immediate- withdrawal, management considers a substantial
amount of such accounts to be core deposits having significantly longer
effective maturities based on Fajardo Federal's retention of such
deposits in changing interest rate environments. The above table
assumes that funds will be withdrawn at annual rates for NOW accounts
and for checking and commercial checking accounts ranging from 10% for
0-12 months, 19% for 1-5 years, 41% for 5-10 years, 65% for 10-20 years
and 100% thereafter, and, for passbook savings accounts, ranging from
5% for 0-12 months, 19% for 1-5 years, 40% for 5-10 years, 65% for
10-20 years and 100% thereafter.
Interest Rate Sensitivity Analysis
Fajardo Federal has measured its interest rate sensitivity by computing
the "Gap" between the assets and liabilities which were expected to mature or
reprice within certain time periods, based on assumptions regarding loan
prepayment and deposit repricing provided by the OTS and management. In order to
encourage savings associations such as Fajardo Federal to reduce interest rate
risk, however, the OTS added an interest rate risk component to its risk-based
capital rules. The OTS requires the computation of the net present value of an
institution's cash flow from assets, liabilities and off balance sheet items
(the institution's net portfolio value or "NPV") and measures the change in NPV
in the event of a range of assumed changes in market interest rates.
Qualitative Risk Analysis. The OTS measures an institution's interest
rate risk by the change in its NPV as a result of a hypothetical 200 basis point
("bp") change in market rates. A resulting change in NPV of more than 2% of the
estimated present value of total assets ("PV") will require Fajardo Federal to
add to its capital 50% of that excess change. The rules provide that the OTS
will calculate the IRR component quarterly for each institution such as Fajardo
Federal. The OTS has indefinitely delayed implementation of this regulation
regarding interest rate risk. Nevertheless, the following table estimates the
effect on Fajardo Federal's NPV from instantaneous and permanent 1% to 4% (100
to 400 basis points) increases and decreases in market interest rates. The
following table presents Fajardo Federal's NPV at December 31, 1997, which is
based upon quarterly information that Fajardo Federal provides to the OTS and
which is calculated for Fajardo Federal by the OTS.
NPV
Change in Interest Change as a
Rates Percentage
(in Basis Points)(1) Amount of Change Percentage Change of Assets
-------------------- ---------------- ----------------- ---------
(Dollars in Thousands)
+400 $685 12.3% 2.31%
+300 587 10.6 1.98
+200 447 8.1 1.51
+100 255 4.6 0.86
-- -- -- --
-100 (313) (5.6) (1.06)
-200 (726) (13.1) (2.45)
-300 (1,214) (21.9) (4.10)
-400 (556) (10.0) (1.88)
<PAGE>
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) Based on Fajardo Federal's pre-tax NPV of $5.6 million at December 31,
1997, which is approximately $2.1 million above Fajardo Federal's
stockholders' equity calculated in accordance with generally accepted
accounting principles as of such date.
Qualitative Risk Analysis. While Fajardo Federal cannot predict future
interest rates or their effects on its "Gap," NPV or net interest income,
Fajardo Federal does not expect current interest rates to have a material
adverse effect on its NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are
51
<PAGE>
inherent in such computations. Although certain assets and liabilities may have
similar maturity or periods of repricing, they may react at different times and
in different degrees to changes in the market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while rates on other types of assets and liabilities
may lag behind changes in market interest rates. Certain assets, such as
adjustable rate mortgages, generally have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making calculations set forth
above. Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Financial Condition
Fajardo Federal's total assets amounted to $29.6 million at December
31, 1997 compared to $29.9 million and $28.8 million at September 30, 1997 and
1996, respectively. Net loans receivable of Fajardo Federal were $24.2 million
at December 31, 1997 compared to $24.0 million and $26.2 million at September
30, 1997 and 1996, respectively. Total loan originations by Fajardo Federal
during the three months ended December 31, 1997 were $1.9 million compared to
$6.1 million and $5.5 million during the fiscal years ended September 30, 1997
and 1996, respectively. Fajardo Federal's cash and cash equivalents has
increased somewhat in recent periods and amounted to $4.2 million at December
31, 1997 and $4.7 million at September 30, 1997 compared to $1.4 million at
September 30, 1996. Deposits at Fajardo Federal amounted to $22.0 million at
December 31, 1997 compared to $22.5 million at September 30, 1997 and $20.8
million at September 30, 1996. During recent years, Fajardo Federal's borrowings
have consisted solely of advances from the FHLB of New York. The balance of
Fajardo Federal's FHLB advances at December 31, 1997 and September 30, 1997 was
$3.8 million compared to $4.9 million at September 30, 1996. Fajardo Federal's
stockholders' equity amounted to $3.5 million at December 31, 1997 compared to
$3.3 million and $2.6 million at September 30, 1997 and 1996, respectively. The
increases in stockholders' equity were due primarily to Fajardo Federal's net
income during the periods.
The following tables present an analysis of certain aspects of Fajardo
Federal's operations during the periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of Fajardo Federal's interest earning assets and interest-bearing
liabilities. Average balances are daily average balances. The yields and costs
include fees which are considered adjustments to yields.
52
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents........................ $ 4,082 $ 52 5.10% $ 1,315 $ 6 1.83%
Loans receivable, net............................ 24,267 586 9.66 26,615 654 9.82
FHLB of New York stock........................... 287 5 6.97 436 5 4.59
---- ----
Total interest-earning assets.................. 28,636 643 8.98% 28,366 665 9.37%
---- ----
Non-interest-earning assets...................... 1,194 935
------- --------
Total assets................................. $29,830 $29,301
====== ======
Interest-bearing liabilities:
Deposits......................................... $22,325 221 3.96% $21,141 203 3.84%
Securities sold under agreements to repurchase...
FHLB advances.................................... 3,800 61 6.42 4,908 77 6.28
------- ---- -------- ----
Total interest-bearing liabilities............. 26,125 282 4.32% 26,049 280 4.30%
---- ----
Non-interest-bearing liabilities................. 475 607
------- --------
Total liabilities.............................. 26,600 26,656
Stockholders' equity............................. 3,230 2,645
------- --------
Total liabilities and stockholders' equity..... $29,830 $29,301
====== ======
Net interest income; interest rate spread........ $361 4.66% $385 5.07%
=== ==== === ====
Net interest margin.............................. 5.04% 5.43%
==== ====
Average interest-earning assets to average
interest-bearing liabilities................... 109.61% 108.89%
====== ======
<PAGE>
<CAPTION>
Year Ended September 30,
------------------------------------- ------------------------------------
1997 1996
------------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents........................ $ 2,152 $ 90 4.18% $1,317 $ 53 4.02%
Loans receivable, net............................ 26,095 2,573 9.86 25,817 2,607 10.10
FHLB of New York stock........................... 328 19 5.79 331 20 6.04
------ ------
Total interest-earning assets.................. 28,575 2,682 9.39% 27,465 2,680 9.76%
------ ------
Non-interest-earning assets...................... 1,027 1,180
------- -------
Total assets................................. $29,602 $28,645
====== ======
Interest-bearing liabilities:
Deposits......................................... $21,886 847 3.87% $21,013 799 3.80%
Securities sold under agreements to repurchase...
FHLB advances.................................... 4,289 277 6.46 4,729 290 6.13
------- ------ ------- ------
Total interest-bearing liabilities............. 26,175 1,124 4.29% 25,742 1,089 4.23%
------ ------
Non-interest-bearing liabilities................. 523 457
------- -------
Total liabilities.............................. 26,698 26,199
Stockholders' equity............................. 2,904 2,446
------- -------
Total liabilities and stockholders' equity..... $29,602 $28,645
====== ======
Net interest income; interest rate spread........ $1,558 5.10% $1,591 5.53%
===== ==== ===== ====
Net interest margin.............................. 5.45% 5.79%
==== ====
Average interest-earning assets to average
interest-bearing liabilities................... 109.17% 106.69%
====== ======
<PAGE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1995
---------------------------------------
Average Yield/
Balance Interest Rate
------------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents........................ $ 968 $ 36 3.72%
Loans receivable, net............................ 26,285 2,657 10.11
FHLB of New York stock........................... 355 25 7.04
------
Total interest-earning assets.................. 27,608 2,718 9.84%
------
Non-interest-earning assets...................... 1,352
-------
Total assets................................. $28,960
======
Interest-bearing liabilities:
Deposits......................................... $19,819 734 3.70%
Securities sold under agreements to repurchase...
FHLB advances.................................... 6,282 430 6.84
------- ------
Total interest-bearing liabilities............. 26,101 1,164 4.46%
------
Non-interest-bearing liabilities................. 503
-------
Total liabilities.............................. 26,604
Stockholders' equity............................. 2,356
-------
Total liabilities and stockholders' equity..... $28,960
======
Net interest income; interest rate spread........ $1,554 5.38%
===== ====
Net interest margin.............................. 5.63%
====
Average interest-earning assets to average
interest-bearing liabilities................... 105.77%
======
</TABLE>
53
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
Fajardo Federal's interest income and interest expense for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by the old rate); (ii) changes in rate
(changes in rate multiplied by old volume); and (iii) total change in rate and
volume. The combined effects of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Three Month Period Ended
December 31, 1997 vs.
December 31, 1996
-------------------------------------------------
Increase (Decrease) Due to
-----------------------------
Total Increase
Rate Volume (Decrease)
------------ ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents...... $(5) $ 51 $46
Loans receivable, net.......... 47 (115) (68)
FHLB of New York stock......... 7 (7) 0
--- ---- ----
Total interest-earning
assets....................... $49 $(71) $(22)
== === ===
Interest-bearing liabilities:
Deposits....................... $(27) $45 $18
FHLB advances.................. 54 (70) (16)
---- ---- ----
Total interest-bearing
liabilities.................. $27 $(25) $ 2
== === ===
Increase (decrease) in net
interest income................ $(24)
===
<PAGE>
<CAPTION>
Year Ended September 30, 1997 vs.
September 30, 1996
-------------------------------------------------
Increase (Decrease) Due to
-----------------------------
Total Increase
Rate Volume (Decrease)
------------ ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents...... $29 $8 $37
Loans receivable, net.......... (36) 2 (34)
FHLB of New York stock......... (1) 0 (1)
--- --- ---
Total interest-earning
assets....................... $(8) $10 $ 2
== == ==
Interest-bearing liabilities:
Deposits....................... $40 $8 $48
FHLB advances.................. (6) (7) (13)
--- --- ---
Total interest-bearing
liabilities.................. $34 $ 1 $ 35
== === ===
Increase (decrease) in net
interest income................ $(33)
===
<PAGE>
<CAPTION>
Year Ended September 30, 1996 vs.
September 30, 1995
-------------------------------------------------
Increase (Decrease) Due to
-----------------------------
Total Increase
Rate Volume (Decrease)
------------ ----------- --------------
<S> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents...... $ 4 $ 13 $17
Loans receivable, net.......... (26) (24) (50)
FHLB of New York stock......... (3) (2) (5)
---- ---- ----
Total interest-earning
assets....................... $(25) $(13) $(38)
=== === ===
Interest-bearing liabilities:
Deposits....................... $ 21 $ 44 $ 65
FHLB advances.................. (32) (108) (140)
---- ---- ----
Total interest-bearing
liabilities.................. $(11) $(64) $(75)
=== === ===
Increase (decrease) in net
interest income................ $ 37
===
</TABLE>
54
<PAGE>
Results of Operations
Fajardo Federal reported net income of $132,000 and $48,000 for the
three months ended December 31, 1997 and 1996, respectively. Fajardo Federal's
net income was $350,000, $190,000 and $10,000 for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively. Fajardo Federal's net income
was adversely affected by a one-time special assessment of $134,000 to
recapitalize the SAIF fund in fiscal 1996 and, in fiscal 1995, by an
extraordinary item of $133,000 for early extinguishment of debt, net of taxes.
Fajardo Federal's earnings historically have depended upon its net
interest income, which is the difference between interest income earned on loans
and investments (the "interest-earning assets") and interest paid on deposits
and any borrowed funds (the "interest-bearing liabilities"). It is the single
largest component of Fajardo Federal's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on Fajardo
Federal's interest-earning assets and rates paid on its interest-bearing
liabilities (the "interest rate spread") and (ii) the relative amounts of
Fajardo Federal's interest-earning assets and interest-bearing liabilities.
For the three months ended December 31, 1997 and 1996, Fajardo
Federal's interest income was $642,000 and $665,000, respectively. Fajardo
Federal's interest income was $2.7 million for each of fiscal 1997, 1996 and
1995. Fajardo Federal's average yield on interest-earning assets was 8.98% and
9.37% for the three months ended December 31, 1997 and 1996, respectively. For
fiscal 1997, 1996 and 1995, Fajardo Federal's average yield on interest-earning
assets was 9.39%, 9.76% and 9.84%, respectively. The average balance of Fajardo
Federal's interest-earning assets was $28.6 million and $28.4 million for the
three months ended December 31, 1997 and 1996, respectively. The average balance
of Fajardo Federal's interest-earning assets in fiscal 1997, 1996 and 1995 was
$28.6 million, $27.5 million and $27.6 million, respectively.
Fajardo Federal's interest expense amounted to $282,000 and $280,000
for the three months ended December 31, 1997 and 1996, respectively. For fiscal
1997, 1996 and 1995, Fajardo Federal's interest expense was $1.1 million, $1.1
million and $1.2 million, respectively. The average rate paid by Fajardo Federal
on its interest-bearing liabilities was 4.32% and 4.30% for the three months
ended December 31, 1997 and 1996, respectively. For fiscal 1997, 1996 and 1995,
Fajardo Federal's average rate paid on interest-bearing liabilities was 4.29%,
4.23% and 4.46%, respectively. The average balance of Fajardo Federal's
interest-bearing liabilities was $26.1 million and $26.0 million for the three
months ended December 31, 1997 and 1996, respectively. For fiscal 1997, 1996 and
1995, the average balance of Fajardo Federal's interest-bearing liabilities was
$26.2 million, $25.7 million and $26.1 million, respectively.
Fajardo Federal's net interest income was $361,000 and $386,000 for the
three months ended December 31, 1997 and 1996, respectively. Net interest income
of Fajardo Federal amounted to $1.6 million for each of fiscal 1997, 1996 and
1995. Fajardo Federal's interest rate spread was 4.66% and 5.07% for the three
months ended December 31, 1997 and 1996, respectively. The net interest margin
of Fajardo Federal was 5.04% and 5.43% for the respective quarters. Fajardo
Federal's interest rate spread was 5.10%, 5.53% and 5.38% for fiscal 1997,
55
<PAGE>
1996 and 1995, respectively, while its net interest margin was 5.45%, 5.79% and
5.63% for such respective fiscal years.
Provision for Loan Losses. Fajardo Federal makes provisions for loan
losses which are charged to earnings to maintain the total allowance for loan
losses at a level considered adequate by Fajardo Federal. Fajardo Federal
management makes periodic evaluations of the adequacy of the allowance based on
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current and prospective economic conditions.
Fajardo Federal made provisions to loan losses of $63,000 in fiscal 1997 and
$26,000 in fiscal 1995. No provisions were deemed necessary in the first quarter
of either fiscal 1998 or fiscal 1997 or during fiscal 1996. Fajardo Federal's
net loan recoveries amounted to $2,000 and $20,000 during the first quarter of
fiscal 1998 and 1997, respectively, and net loan charge-offs were $48,000,
$76,000 and $8,000 during fiscal 1997, 1996 and 1995, respectively.
Other Income. Fajardo Federal's other income, which is derived from
miscellaneous fees and charges, has been relative nominal in recent periods and
amounted to $42,000 and $39,000 in the three months ended December 31, 1997 and
1996, respectively, and $169,000, $148,000 and $172,000 in fiscal 1997, 1996 and
1995, respectively.
Other Expenses. Fajardo Federal's other expenses consist primarily of
employee compensation and benefit expenses and a sundry of other expenses such
as data processing costs, printing, postage and advertising. Fajardo Federal's
other expenses were $251,000 and $344,000 in the three months ended December 31,
1997 and 1996, respectively, and $1.2 million, $1.5
56
<PAGE>
million (which includes the special SAIF assessment of $134,000) and $1.4
million in fiscal 1997, 1996 and 1995, respectively.
Liquidity and Capital Resources
Fajardo Federal is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the savings bank's deposits and short-term borrowings. Fajardo Federal has
consistently met the liquidity requirements during recent periods.
Fajardo Federal's primary sources of funds are deposits, repayment of
loans and maturities of interest-bearing deposits, funds provided from
operations and advances from the FHLB of New York. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predictable, other sources of funds, such as deposit flows and loan prepayments,
can be greatly influenced by the general level of interest rates, economic
conditions and competition. Fajardo Federal uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, and similar matters. Management of
Fajardo Federal monitors projected liquidity needs and determines the level
desirable, based in part on Fajardo Federal's commitments to make loans and
management's assessment of Fajardo Federal's ability to generate funds.
The Company and the Savings Bank are subject to federal regulations
that impose certain minimum capital requirements. "Regulation of Fajardo
Federal."
Impact of Inflation and Changing Prices
Fajardo Federal's financial statements and the accompanying notes
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
Fajardo Federal's operations. As a result, interest rates have a greater impact
on Fajardo Federal's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
57
<PAGE>
The Year 2000 Issue
Fajardo Federal is aware of the issues associated with the programming
code in existing computer systems as the Year 2000 approaches. The Year 2000
Issue is the result of computer programs being written using two digits rather
than four digits to define the applicable year. Computer programs that have
time-sensitive coding may recognize a date using "00" as the year 1900 rather
than the year 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
Fajardo Federal has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. The majority
of the Fajardo Federal's data processing is provided by a third party service
bureau. The service bureau is actively involved in resolving Year 2000 issues
and has provided Fajardo Federal with frequent updates regarding their progress.
The service bureau has advised Fajardo Federal that it expects to have the
majority of the Year 2000 issues resolved before the end of 1998 to allow
Fajardo Federal to test their system for Year 2000 compliance during the third
quarter of 1998. Fajardo Federal presently believes that, based on the progress
of Fajardo Federal's service bureau, the Year 2000 problem will not pose
significant operational problems for Fajardo Federal's computer system. Costs
are anticipated to be immaterial at this time.
BUSINESS OF FAJARDO FEDERAL
General
Fajardo Federal is a federally chartered savings bank operating out of
its headquarters and one branch office located in Fajardo, Puerto Rico. As of
December 31, 1997, Fajardo Federal had total assets of $29.6 million, total
deposits of $22.0 million and stockholders' equity of $3.5 million. The
principal business of Fajardo Federal consists of attracting deposits from the
general public and investing such deposits, together with funds obtained from
borrowings, in the origination of loans and in deposits at other financial
institutions. The loans originated by Fajardo Federal consist primarily of
long-term, fixed-rate real estate loans and, to a lesser extent, floating- and
adjustable-rate consumer loans, particularly boat loans.
Fajardo Federal is subject to examination and comprehensive regulation
by the OTS, which is the savings bank's chartering authority and primary federal
regulator. Fajardo Federal is also regulated by the FDIC, the administrator of
the SAIF. Fajardo Federal is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the FHLB of New York, which is one of the 12 regional banks
comprising the FHLB System.
Fajardo Federal's executive office of located at Celis Aquilera #161,
Fajardo, Puerto Rico 00648, and its telephone number is (787) 863-3555.
58
<PAGE>
On June 4, 1993, Fajardo executed a Stipulation and Consent to the
issuance of the Order by the OTS, which was superseded by the New Order which
was issued by the OTS pursuant to a Stipulation and Consent executed by Fajardo
Federal on August 26, 1997. Pursuant to the terms of the New Order, Fajardo
Federal shall cease and desist from any action for or toward causing, bringing
about, participating in, counseling aiding or abetting of any unsafe or unsound
practice or any violation of 12 C.F.R. Section 560.93 (regarding lending
limitations) 560.170 (regarding records for lending transactions), 560.160
(regarding asset classification), 563.43 (regarding loans to officers, directors
and principal shareholders), and 563.200 (regarding conflicts of interest).
Other provisions include: (1) maintenance of minutes fully describing
the discussions held and the business transacted during all regular and special
meetings of the Board, (2) amending loan administration procedures to require
the use of loan closing statements, insurance against loss for loans secured by
motor vehicles and boats, and procedures to monitor the expiration of insurance
on real and personal property securing loans, and (3) maintenance of adequate
valuation allowances, consistent with generally accepted accounting principles
and the practices of the federal banking agencies. See Note 12 of the Notes to
the Fajardo Federal Financial Statements included elsewhere herein.
Lending Activities
At December 31, 1997, Fajardo Federal's total loan portfolio amounted
to $24.2 million or 81.9% of the savings banks total assets. At such date, $10.9
million, or 42.8% of Fajardo Federal's total loan portfolio, consisted of
residential (one- to four-family) real estate loans secured by first mortgages,
$7.2 million, or 28.3% of the total loan portfolio, consisted of consumer loans
(including $3.3 million of boat loans), $3.4 million, or 13.3% of total loans,
consisted of loans secured by commercial real estate and $3.3 million, or 12.8%
of total loans, consisted of commercial business loans. Fajardo Federal's
lending activities are undertaken primarily in Fajardo, Puerto Rico and
neighboring areas. As of December 31, 1997, Fajardo Federal's total
non-performing loans amounted to $1.5 million or 6.0% of the total portfolio.
59
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of Fajardo Federal's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
December 31, September 30,
------------------------- ---------------------------------------------------------
1997 1997 1996
------------------------- -------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate - first mortgage.... $10,892 42.77% $11,158 44.14% $11,699 42.84%
Residential real estate - second mortgage... 643 2.52 655 2.59 519 1.90
Residential construction.................... 57 0.22 58 0.23 -- --
Commercial construction and land acquisition -- -- -- -- -- --
Commercial real estate...................... 3,396 13.33 3,382 13.38 3,906 14.30
Commercial business......................... 3,256 12.81 2,588 10.24 3,135 11.48
Consumer loans:
Loans secured by deposits................ 840 3.30 807 3.19 1,491 5.46
Real estate secured consumer loans....... 1,986 7.80 2,040 8.07 1,612 5.90
Boat loans............................... 3,342 13.12 3,454 13.67 3,737 13.69
Unsecured consumer loans................. 1,051 4.13 1,135 4.49 1,210 4.43
------ ------ ------ ------ ------ -----
Total loans receivable................ 25,463 100.00% 25,277 100.00% 27,309 100.00%
------- ------ ------ ------ ------ ------
Less:
Allowance for loan losses................ (343) (341) (326)
Loans in process......................... -- -- --
Deferred loan fees....................... 8 7 (74)
Unearned interest........................ (876) (934) (711)
------- ------- -------
(1,211) (1,268) (1,111)
------ ------ -------
Loans receivable, net.................... $24,252 $24,009 $26,198
====== ====== ======
</TABLE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1997 regarding the dollar
amount of loans maturing in Fajardo Federal's total loan portfolio based on the
contractual terms to maturity. Loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1-5 years Due 5 or more
Due 1 year after years after
or less December 31, 1997 December 31, 1997 Total(1)
------------ -------------------- -------------------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Residential real estate.................... $ 383 $1,078 $10,074 $11,535
Residential construction................... 57 -- -- 57
Commercial real estate..................... 338 401 2,657 3,396
Commercial business........................ 1,364 1,892 -- 3,256
Consumer:
Loans on savings........................ 840 -- -- 840
Real estate secured consumer loans...... 50 633 1,303 1,986
Boat loans.............................. 3 285 3,054 3,342
Unsecured consumer loans................ 59 770 222 1,051
------ ------ ------- -------
Total...................................... $3,094 $5,059 $17,310 $25,463
====== ====== ======= =======
</TABLE>
- ---------------
(1) Amounts have not been reduced for the allowance for loan losses, loans
in process, deferred loan fees or unearned interest.
60
<PAGE>
Scheduled contractual principal repayments of loans do not reflect
contractual terms because of prepayments. In addition, due on sale clauses on
loans generally give Fajardo Federal the right to declare loans immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage ad the loan is not repaid. The average life of
mortgage loans tend to increase, however, when the current mortgage loan market
rates are substantially higher than rates on exiting mortgage loans and,
conversely, decrease when rates on existing mortgages loans are substantially
higher than current mortgage loan market rates.
The following table sets forth the dollar amount of total loans due
after one year from December 31, 1997, as shown in the preceding table, which
have fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed rate adjustable-rate Total
-------------------- ----------------------- -----------------------
(In Thousands)
<S> <C> <C> <C>
Residential real estate..................... $11,152 $ -- $11,152
Residential construction.................... -- -- --
Commercial real estate(1)................... 3,058 -- 3,058
Commercial business......................... 602 1,290 1,892
Consumer:
Loans on savings......................... -- -- --
Real estate secured consumer loans....... 1,936 -- 1,936
Boat loans............................... -- 3,339 3,339
Unsecured consumer loans................. 992 -- 992
------- -------- -------
Total................................. $17,740 $4,629 $22,369
======= ====== =======
</TABLE>
61
<PAGE>
Origination, Purchase and Sales of Loans. The following table sets
forth loan originations, purchases and sales by Fajardo Federal for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
December 31, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Loan originations:
<S> <C> <C> <C> <C>
Residential mortgages............................... $ 164 $ 228 $ 521 $ 675
Commercial mortgages................................ 62 -- 240 585
Construction loans.................................. -- -- 57 --
Boat loans.......................................... -- 50 311 480
Other loans originated:
Commercial real estate.............................. 1,120 1,070 2,764 1,795
Commercial business................................. 148 142 434 359
Consumer loans:
Loans on deposit.................................. 327 149 618 710
Real estate secured consumer loans................ 78 156 610 547
Unsecured consumer loans.......................... -- 208 592 397
-------- ------ ------ ------
Total loans originated.......................... 1,899 2,003 6,147 5,548
Loans purchased..................................... -- -- -- --
-------- -------- -------- --------
Total loans originated and purchased............ 1,899 2,003 6,147 5,548
Loans sold........................................... -- -- (500) --
Loan principal reductions............................ (1,654) (1,464) (7,821) (5,533)
------ ------ ------ ------
Net increase (decrease) in loan portfolio............ $ 245 $ 539 $(2,174) $ 15
====== ====== ======= =======
</TABLE>
As a federal savings bank, Fajardo Federal is permitted to make loans
throughout the United States. However, Fajardo Federal's lending efforts have
been conducted primarily in Fajardo, Puerto Rico and surrounding areas. Fajardo
Federal's ability to originate loans is based on several factors. These include
the level of interest rates, the needs of its customers, its asset and liability
funding needs and the success of its marketing efforts.
The rate of interest that Fajardo Federal may charge on mortgage and
other types of loans to individuals in Puerto Rico is subject to Puerto Rico's
usury laws. Such laws are administered by the Interest Rate Board, which
consists of the President of the Government Development Bank, the President of
the Puerto Rico Housing Bank and the Puerto Rico Secretaries of Commerce,
Treasury and Consumer Affairs and three public interest representatives. The
Interest Rate Board promulgates regulations with respect to rates on various
types of loans to individuals.
One- to Four-Family Residential Loans. Fajardo Federal's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured by property located in its primary market area. Fajardo
Federal generally originates conforming one- to four- family owner occupied
residential mortgage loans in amounts up to 80% loan-to-value ratio, with
private mortgage insurance required on loans with a loan-to-value ratio in
excess of 80%. Due
62
<PAGE>
to historical consumer resistance to adjustable-rate mortgage ("ARM") loans in
Puerto Rico, Fajardo Federal primarily originates fixed-rate loans having terms
up to 30 years, with principal and interest payments calculated using up to a
30-year amortization period. At December 31, 1997, none of Fajardo Federal's
one- to four-family residential loans had adjustable rates of interest.
Consumer Loans. Fajardo Federal originates a variety of consumer loans
including loans secured by deposits, consumer loans secured by real estate, boat
loans and unsecured consumer loans.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency may not warrant further substantial collection efforts against the
borrower. At December 31, 1997, $82,000 of Fajardo Federal's consumer loans were
classified as non-performing.
Commercial Real Estate Loans. Fajardo Federal's commercial real estate
loans consist primarily of fixed-rate, permanent loans on income-producing
properties. Fajardo Federal's commercial real estate loans generally have
shorter terms to maturity than its single-family residential mortgage loans.
Generally, Fajardo Federal's commercial real estate loans have terms to maturity
of five years or less.
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouse or other commercial space.
Commercial Business Loans. Fajardo Federal offers commercial business
loans for a variety of purposes to local businesses. Such loans may be unsecured
or secured by security interests in inventory, accounts receivable or other
collateral. Fajardo Federal's commercial business loans generally have terms to
maturity not exceeding five years and may have fixed or adjustable or floating
rates of interest.
Commercial loans generally entail significantly greater risk than that
which is involved with more traditional real estate lending. Commercial loans
typically involve large loan balances to single borrowers or groups of related
borrowers, with the repayment of such loans typically dependent on the
successful operations and income stream of the borrower. Such risks can be
63
<PAGE>
significantly affected by economic conditions. In addition, commercial lending
generally requires substantially greater oversight efforts compared to real
estate lending.
Loans to One Borrower. Federal law requires that, in general, the
maximum amount of loans which Fajardo Federal may make to any one borrower may
not exceed the greater of $500,000 or 15% of its unimpaired capital and
unimpaired surplus. Higher limits apply to loans to develop domestic housing
units. Fajardo Federal may lend an additional 10% of its unimpaired capital and
unimpaired surplus if the loan is fully secured by readily marketable
collateral. Under federal law, Fajardo Federal's maximum loan-to-one borrower
limit was approximately $500,000 million at December 31, 1997. At December 31,
1997, the aggregate loans outstanding to Fajardo Federal's three largest
borrowers and related entities were $465,000, $320,000 and $285,000,
respectively. All of such loans were performing in accordance with their terms
at December 31, 1997.
64
<PAGE>
The following table sets forth the amounts and categories of Fajardo
Federal's non-performing assets at the dates indicated. Fajardo Federal did not
have any troubled debt restructurings at any of the periods presented.
<TABLE>
<CAPTION>
September 30,
At December 31, ---------------------------------
1997 1997 1996
-------------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate(1)............... $ 895 $ 670 $ 628
Residential construction................. -- -- --
Commercial real estate................... 269 207 112
Commercial business...................... 227 -- --
Consumer................................. 82 202 354
------ ------ ------
Total................................... 1,473 1,079 1,094
------ ------ ------
Accruing loans greater than 90 days delinquent:
Residential real estate................... -- -- --
Residential construction.................. -- -- --
Commercial real estate.................... -- -- --
Commercial business....................... -- -- --
Consumer.................................. -- -- --
-------- -------- --------
Total accruing loans greater than
90 days delinquent.................... -- -- --
-------- -------- --------
Total non-performing loans.............. 1,473 1,079 1,094
------ ------ ------
Real estate owned, net of reserves.......... 330 330 144
------ ------ ------
Total non-performing assets............. $1,803 $1,409 $1,238
===== ===== =====
Total non-performing loans as a
percentage of total loans............. 5.99% 4.43% 4.12%
==== ==== ====
Total non-performing assets as a
percentage of total assets............ 6.09% 4.71% 4.29%
==== ==== ====
</TABLE>
- -------------
(1) Includes residential real estate secured by both first and second mortgage
loans.
65
<PAGE>
The following table sets forth an analysis of Fajardo Federal's
allowance for loan losses during the periods indicated, which is maintained on
the Bank's loan portfolio.
<TABLE>
<CAPTION>
At and For the Three At and For the Year Ended
Months Ended December 31, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $341 $326 $326 $402
--- --- --- ---
Charge-offs:
Residential real estate......................... -- -- -- --
Construction.................................... -- -- -- --
Commercial real estate.......................... -- -- -- --
Commercial business............................. -- -- 25 --
Consumer........................................ -- -- 60 90
------ ------ ----- -----
Total charge-offs............................ -- -- 85 90
------ ------ ----- -----
Recoveries:
Residential real estate......................... -- -- -- --
Construction.................................... -- -- -- --
Commercial real estate.......................... -- -- -- --
Commercial business............................. -- -- -- --
Consumer........................................ 2 20 37 14
----- ----- ----- -----
Total recoveries............................. 2 20 37 14
----- ----- ----- -----
Net charge-offs.................................... (2) (20) 48 76
----- ----- ----- -----
Provision for losses on loans...................... -- -- 63 --
------ ------ ----- ------
Balance at end of period........................... $343 $346 $341 $326
=== === === ===
Allowance for loan losses as a percent
of total loans outstanding...................... 1.39% 1.30% 1.40% 1.23%
==== ==== ==== ====
Allowance for loan losses as a percent
of non-performing loans.......................... 17.57% 28.55% 32.07% 29.80%
===== ===== ===== =====
Ratio of net charge-offs to average
loans outstanding................................ (0.01)% (0.08)% 0.20% 0.29%
===== ===== ==== ====
</TABLE>
Fajardo Federal maintains an allowance for losses on loans and
increases such allowance when, based on management's evaluation, a loss becomes
both probable and estimable (i.e., the loss is likely to occur and can be
reasonably estimated). Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. Also management's
periodic evaluation considers factors such as loss experience, current
delinquency data, known and inherent risks in the portfolio, identification of
adverse situations which may affect the ability of debtors to repay the loan,
the estimated value of any underlying collateral and assessment of current
economic conditions. Additions to the allowance are charged to income. Such
provisions are based on management's estimated value of any underlying
collateral, as applicable, considering the current and anticipated operating
conditions of the borrower. Any recoveries are credited to the allowance.
66
<PAGE>
The following table sets forth information concerning the allocation of
Fajardo Federal allowance for loan losses (which is maintained on the Bank's
loan portfolio) by loan category at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
-------------------------- ---------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------------ ------------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate..... $ 70 45.51% $ 90 43.33%
Construction................ -- -- -- --
Commercial real estate...... 93 13.33 126 13.71
Commercial business......... 49 12.81 51 13.68
Consumer.................... 131 28.35 79 29.28
---- ------ ---- ------
Total....................... $343 100.00% $346 100.00%
=== ====== === ======
<PAGE>
<CAPTION>
September 30,
---------------------------------------------------------------
1997 1996
----------------------------- -------------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------------ -------------- ----------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate..... $ 68 46.96% $ 87 44.74%
Construction................ -- -- -- --
Commercial real estate...... 106 13.38 92 14.30
Commercial business......... 24 10.24 72 11.48
Consumer.................... 143 29.42 75 29.48
---- ------ ---- -----
Total....................... $341 100.00% $326 100.00%
=== ====== === ======
</TABLE>
67
<PAGE>
Sources of Funds
Deposits are the major source of funds for Fajardo Federal's lending
and investment activities. Fajardo Federal attracts deposits primarily from
customers within its Puerto Rico market area. Fajardo Federal's deposit
accounts include passbook accounts, NOW and Super NOW accounts, commercial
checking accounts and certificates of deposit.
The following table presents the average balance of each deposit type
and the average rate paid one each deposit type of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------------------------------
1997 1996
------------------------ --------------------------
Average Average Average Average
Balance Rate Paid Balance Rate Paid
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Passbook....................... $11,843 3.00% $11,623 2.99%
NOW and Super NOW accounts..... 1,422 2.81 1,213 3.05
Personal checking.............. -- -- -- --
Commercial checking............ 369 -- 343 --
Certificates of deposit........ 8,691 5.60 7,962 5.39
------- ---- ------- ----
Total deposits............... $22,325 3.96% $21,141 3.84%
======= ==== ======= ====
<PAGE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1997 1996
-------------------------- --------------------------
Average Average Average Average
Balance Rate Paid Balance Rate Paid
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Passbook....................... $11,677 2.96% $11,621 2.97%
NOW and Super NOW accounts..... 1,351 2.74 1,430 2.80
Personal checking.............. -- -- -- --
Commercial checking............ 337 -- 227 --
Certificates of deposit........ 8,521 5.43 7,735 5.35
------- ---- ------- ----
Total deposits............... $21,886 3.87% $21,013 3.80%
======= ==== ======= ====
</TABLE>
The following table sets forth the maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1997.
<TABLE>
<CAPTION>
Amount
----------------------
(In Thousands)
<S> <C>
Certificates of deposit maturing:
Three months or less.............................................. $1,070
Over three through six months..................................... 311
Over six through twelve months.................................... 491
Over twelve months................................................ --
------
Total........................................................... $1,872
======
</TABLE>
In addition to deposits, Fajardo Federal will consider utilizing
borrowings as a source of funds. In recent periods, Fajardo Federal's borrowings
has been comprised solely of advances from the FHLB of New York. At December 31,
1997, Fajardo Federal's FHLB advances amounted to $3.8 million.
68
<PAGE>
The following table sets forth certain information regarding the
short-term borrowings of Fajardo Federal at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Three Months Ended At or For the Year Ended
December 31, September 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB of New York advances:
Average balance outstanding....................... $3,800 $4,908 $4,289 $4,729
Maximum amount outstanding at any month-end
during the period............................... 3,800 5,000 4,300 5,000
Balance outstanding at end of period.............. 3,800 4,300 3,800 4,900
Average interest rate during the period........... 6.42% 6.28% 6.46% 6.13%
Average interest rate at end of period............ 6.35% 6.24% 6.35% 6.24%
</TABLE>
Employees
At December 31, 1997, Fajardo Federal had 17 full-time employees, and
no part-time employees. None of Fajardo Federal's employees are represented by a
collective bargaining group. Fajardo Federal believes that its relationship with
its employees is good.
REGULATION OF FAJARDO FEDERAL
General
Fajardo Federal is a federally chartered and insured savings bank
subject to extensive regulation and supervision by the OTS, as the primary
federal regulator of savings associations, and the FDIC, as the administrator of
the BIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on Fajardo Federal, is qualified in its
entirety by reference to the particular statutory or regulatory provisions or
proposals.
In recent years Fajardo Federal has entered into stipulations and
consents with respect to two cease and desist orders issued by the OTS. Fajardo
Federal currently is subject to the provisions of the New Order. See Note 12 of
the Notes to the Fajardo Federal Financial Statements included elsewhere herein.
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Regulation of Federal Savings Banks
Regulatory System. As a federally insured savings bank, lending
activities and other investments of Fajardo Federal must comply with various
statutory and regulatory requirements. Fajardo Federal is regularly examined by
the OTS and must file periodic reports concerning its activities and financial
condition.
Although the OTS is Fajardo Federal's primary regulator, the FDIC has
"backup enforcement authority" over Fajardo Federal. Fajardo Federal's eligible
deposit accounts are insured by the FDIC under the BIF, up to applicable limits.
Federal Home Loan Banks. Fajardo Federal is a member of the FHLB
System. Among other benefits, FHLB membership provides Fajardo Federal with a
central credit facility. Fajardo Federal is required to own capital stock in an
FHLB in an amount equal to the greater of: (i) 1% of its aggregate outstanding
principal amount of its residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each calendar year, (ii) .3% of total
assets, or (iii) 5% of its FHLB advances (borrowings).
Liquid Assets. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
5.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net withdrawable
accounts and short-term borrowings during the preceding calendar month. Fajardo
Federal maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require
savings banks to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
banks must meet each of these standards in order to be deemed in compliance with
OTS capital requirements. In addition, the OTS may require a savings association
to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized. See "- Prompt Corrective
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Action." A savings bank is also required to maintain tangible capital in an
amount at least equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings bank with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by the activities or condition of its
holding company, affiliates, subsidiaries or other persons or savings
associations with which it has significant business relationships. Fajardo
Federal is not subject to any such individual minimum regulatory capital
requirement.
Fajardo Federal's tangible capital ratio was 11.74%, its core capital
ratio was 11.74% and its total risk-based capital ratio was 18.24% at December
31, 1997.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
bank that falls within certain undercapitalized capital categories specified in
the regulation.
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The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. Fajardo Federal meets the capital requirements of a "well
capitalized" institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
FRB, (viii) requiring the institution to divest certain subsidiaries, or
requiring the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action that
the agency believes would better carry out the purposes of the prompt corrective
action provisions of FDICIA.
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Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The regulation
also makes mandatory for significantly undercapitalized institutions certain of
the supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth quarter
after the institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Conservatorship/Receivership. In addition to the grounds discussed
under "- Prompt Corrective Action," the OTS (and, under certain circumstances,
the FDIC) may appoint a conservator or receiver for a savings association if any
one or more of a number of circumstances exist, including, without limitation,
the following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to
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transact business, (iv) a willful violation of a final cease-and-desist order,
(v) the concealment of the institution's books, papers, records or assets or
refusal to submit such items for inspection to any examiner or lawful agent of
the appropriate federal banking agency or state bank or savings association
supervisor, (vi) the institution is likely to be unable to pay its obligations
or meet its depositors' demands in the normal course of business, (vii) the
institution has incurred, or is likely to incur, losses that will deplete all or
substantially all of its capital, and there is no reasonable prospect for the
institution to become adequately capitalized without federal assistance, (viii)
any violation of law or unsafe or unsound practice that is likely to cause
insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of the
institution's depositors or the federal deposit insurance fund, (ix) the
institution is undercapitalized and the institution has no reasonable prospect
of becoming adequately capitalized, fails to become adequately capitalized when
required to do so, fails to submit a timely and acceptable capital restoration
plan, or materially fails to implement an accepted capital restoration plan, (x)
the institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to, but without the approval of
the OTS, make capital distributions during a calendar year up to the higher of:
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not
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object to the distribution. A savings association that meets its regulatory
capital requirements both before and after a proposed distribution but does not
meet its fully phased-in capital requirement (a "Tier 2 association") is
authorized, after prior notice to the OTS but without OTS approval, to make
capital distributions in an amount up to 75% of its net income over the most
recent four-quarter period, taking into account all prior distributions during
the same period. Any distribution in excess of this amount must be approved in
advance by the OTS. A savings association that does not meet its current
regulatory capital requirements (a "Tier 3 association") cannot make any capital
distribution without prior approval from the OTS, unless the capital
distribution is consistent with the terms of a capital plan approved by the OTS.
Fajardo Federal qualifies as a [Tier 1] association for purposes of the
capital distribution rule. The OTS may prohibit a proposed capital distribution
that would otherwise be permitted if the OTS determines that the distribution
would constitute an unsafe or unsound practice. The requirements of the capital
distribution regulation supersede less stringent capital distribution
restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association."
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At December 31, 1997, Fajardo Federal
satisfied the QTL test of the OTS.
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FDIC Assessments. The deposits of Fajardo Federal are insured to the
maximum extent permitted by the BIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including Fajardo Federal, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management of Fajardo Federal is aware of no existing circumstances
which would result in termination of Fajardo Federal's deposit insurance.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF. The legislation also provided for the merger of the BIF and the SAIF, with
such merger being conditioned upon the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay approximately
1.3 basis points of their BIF-assessable deposits and 6.4 basis points of their
SAIF-assessable deposits to fund the Financing Corporation.
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Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as Fajardo Federal, to convert
their charters to national or state bank charters. Recent legislation required
the Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and commercial
banks; and, in the event that the thrift charter was eliminated by January 1,
1999, would require the merger of the BIF and the SAIF into a single Deposit
Insurance Fund on that date. Fajardo Federal cannot determine whether, or in
what form, such legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would not adversely affect
Fajardo Federal.
Community Reinvestment Act and the Fair Lending Laws. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
New Safety and Soundness Guidelines. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company
Act that acquire or own savings associations are no longer defined as savings
and loan holding companies under the HOLA and, therefore, are not generally
subject to supervision and regulation by the OTS. OTS approval is no longer
required for a bank holding company to acquire control of a
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savings association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
Taxation
As a federally chartered financial institution operating in Puerto
Rico, Fajardo Federal is subject to Puerto Rico and federal income taxes. See
Note 8 of the Notes to the Fajardo Federal Financial Statements included
elsewhere herein.
Although the Bank is subject to federal taxation, it has filed an
election under Section 936 of the U.S. Internal Revenue Code (the "IRC"),
whereby a possession tax credit is allowed for federal income taxes attributable
to income from operations in Puerto Rico. In order to continue receiving the tax
treatment afforded under Section 936, Fajardo Federal must continue meeting
specified minimum levels of gross income from (a) the active conduct of business
within Puerto Rico and (b) Puerto Rico sources. The portion of the credit for
U.S. tax on possession business income is subject to certain limitations.
For taxable years beginning after December 31, 1995, the Small Business
Job Protection Act (approved on August 20, 1996) imposes new limitations on the
Section 936 credit allowed to a U.S. Corporation for U.S. tax on income earned
in Puerto Rico. Under this new legislation, Fajardo Federal may continue to
claim the credit provided by Section 936 for the next ten years or up to years
beginning in 2005. Also, the credit for qualified investment possession source
income will no longer be allowed for subsequent taxable years. Management of
Fajardo Federal believes that those changes will not have significant effect on
the financial position of Fajardo Federal.
Fajardo Federal's position for income taxes consist of the following:
<TABLE>
<CAPTION>
Three Months Ended December 31, Year Ended September 30,
--------------------------------------- ---------------------------------------
1998 1997 1997 1996
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Current expense............... $20,200 $33,000 $200,489 $95,000
Deferred tax benefit.......... -- -- (83,390) --
------ ------ -------- --------
$20,200 $33,000 $117,099 $95,000
======= ======= ======== =======
</TABLE>
The difference between income taxes applying the Puerto Rico statutory
rates and reported income tax expense is caused mainly by amortization of
premium on loans, the provision for losses on loans and foreclosed real estate,
and profit/(loss) on foreclosed real estate, which are treated differently for
financial reporting and tax purposes.
During 1997, Fajardo Federal purchased $100,000 in solid waste
investment tax credit (the credits) provided by Article 21 of the Puerto Rico
Solid Waste Authority Act, as amended. These
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tax credits were acquired at a 15% discount rate resulting in a total discount
of $15,000. The discount was accreted as interest income as the tax credit were
fully utilized in the payment of taxes for 1997.
DESCRIPTION OF RGFC CLASS B COMMON STOCK
General
RGFC is authorized to issue 70,000,000 shares of capital stock, of
which 60,000,000 are shares of common stock, par value $0.01 per share ("Common
Stock"), and 10,000,000 are shares of preferred stock, par value $0.01 per share
("Preferred Stock"). RGFC's Common Stock is divided into 40,000,000 Class A
Shares ("Class A Shares") and 20,000,000 Class B Shares, of which 9,220,278
shares and 4,924,474 shares are issued and outstanding, respectively, as of
March 23, 1998. There are no shares of Preferred Stock issued and outstanding.
The RGFC Class B Common Stock are not savings accounts, deposits or other
obligations of any bank or non-bank subsidiary and are not insured by the FDIC
or any other government agency.
The shares of Common Stock are not redeemable and the holders thereof
have no preemptive or subscription rights to purchase any securities of RGFC.
Upon liquidation, dissolution or winding up of RGFC, the holders of Common Stock
are entitled to receive pro rata the assets of RGFC which are legally available
for distribution, after payment of all debts and other liabilities. There is no
cumulative voting and, therefore, the holders of a majority of the shares of
Common Stock voted in an election of directors can elect all of the directors
then standing for election.
Voting Rights
The holders of Common Stock possess exclusive voting rights in RGFC.
They elect RGFC's Board of Directors and act on such other matters as are
required to be presented to them under the General Corporation Law of Puerto
Rico ("Puerto Rico Corporate Law") or RGFC's Certificate of Incorporation, as
amended ("RGFC Certificate"), or as are otherwise presented to them by the Board
of Directors. Although there are no present plans to do so, if RGFC issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Except for matters where applicable law requires the approval of one or
both classes of Common Stock voting as separate classes, holders of Class A
Shares and RGFC Class B Common Stock generally vote as a single class on all
matters submitted to a vote of the shareholders, including the election of
directors. Holders of Class A Shares are entitled to two votes per share and
holders of RGFC Class B Common Stock are entitled to one vote per share. A
majority of the shares entitled to vote, represented in person or by proxy,
constitutes a quorum at a meeting of shareholders. If a quorum is present, the
affirmative vote of a majority of the shares entitled to vote on the matter is
the act of the shareholders unless otherwise provided by
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law, the RGFC Certificate or the Bylaws of RGFC ("RGFC Bylaws"). Directors of
RGFC are elected by a plurality of the votes present at a meeting of
shareholders and cumulative voting is not permitted. Amendment of the RGFC
Bylaws may be approved by the RGFC Board of Directors or RGFC shareholders,
subject to certain restrictions in the RGFC Certificate, and amendment of the
RGFC Certificate must be approved by the RGFC Board of Directors and,
thereafter, by the RGFC shareholders, subject to certain restrictions in the
RGFC Certificate. Article VIII of the RGFC Certificate provides that the
affirmative vote of at least 75% of the shares of RGFC entitled to vote
generally in an election of directors, voting together as a single class, shall
be required to amend, adopt, alter, change or repeal any provision of the RGFC
Bylaws which is inconsistent with Articles VII (directors), VIII (bylaws), IX
(liability of directors and officers) and X (amendment of the RGFC Certificate)
of the RGFC Certificate and which is not approved by the affirmative vote of
two-thirds of the Board of Directors. Similarly, Article X of the RGFC
Certificate provides that approval by at least 75% of the shares of RGFC
entitled to vote generally in an election of directors would be required to
amend, adopt, alter, change or repeal any provision of the RGFC Certificate
inconsistent with Articles VII, VIII, IX and X thereof and which is not approved
by the affirmative vote of two-thirds of the Board of Directors. Under Puerto
Rico Corporate Law, the affirmative vote of the holders of a majority of the
outstanding RGFC Class B Common Stock would be required to approve, among other
matters, an adverse change in the powers, preferences or special rights of the
RGFC Class B Common Stock.
Nomination Procedures; Number of Directors; Classified Board of Directors;
Removal of Directors
The RGFC Bylaws provide that shareholder nominations at a meeting for
election to the RGFC Board of Directors may be made only if written notice of
such intent has been given, either by personal delivery or by United States
mail, postage prepaid to the Secretary of RGFC not later than (i) ninety days
prior to the anniversary date of the mailing of proxy materials by RGFC in
connection with the immediately preceding annual meeting of RGFC shareholders,
and (ii) with respect to an election to be held at a special meeting of
shareholders for the election of directors, the close of business on the tenth
day following the date on which notice of such meeting is first given to RGFC
shareholders. Each such notice shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person(s) to be
nominated, (b) a representation that the shareholder is a holder of record of
Common Stock entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person(s) specified in the notice, (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any arrangements or understandings between the shareholder and
each nominee and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are able to be made by the shareholder, (d) such other
information regarding each nominee proposed by such shareholder as would be
required in a proxy statement filed pursuant to the Proxy Rules of the
Securities and Exchange Commission, and (e) the consent of each nominee to serve
as a director of RGFC if so elected. The presiding officer of the meeting may
refuse to acknowledge the nomination of any person not made in compliance with
RGFC Bylaws.
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Pursuant to the RGFC Bylaws, the number of RGFC directors is currently
fixed at five. The number of directors may be changed by a majority vote of the
RGFC Board of Directors, provided that no change may have the effect of
shortening the term of an incumbent director and provided further that the RGFC
Board may not increase the number of directors to more than fifteen nor reduce
the number to less than five. Any vacancy occurring on the RGFC Board may be
filled by a majority vote of the directors then in office, whether or not a
quorum is present, or by a sole remaining director, and any director so chosen
shall hold office for the remainder of the term to which the director has been
selected and until such director's successor shall have been elected and
qualified. When the number of directors is changed, the RGFC Board shall
determine the class(es) to which the increased or decreased number of directors
shall be apportioned; provided that no decrease shall shorten the term of any
incumbent director.
The RGFC Board of Directors is divided into three classes as nearly
equal in number as possible, with one class elected annually. Directors serve
for terms of three years and until their respective successors are duly elected
and qualified, or until their earlier resignation, removal from office or death.
As a result of the classification of the RGFC Board, a minimum of two annual
meetings of shareholders is necessary for a majority of the members of the RGFC
Board to stand for election.
Any RGFC director may be removed from office, with or without cause, by
an affirmative vote of not less than a majority of the votes eligible to be cast
by shareholders at a duly constituted meeting of shareholders called expressly
for such purpose.
Conversion Rights
Each record holder of Class A Shares shall be entitled at any time and
from time to time to convert any or all of its Class A Shares held by such
holder into Class B Shares at the rate of one (1) share of RGFC Class B Common
Stock for each Class A Share so converted. The RGFC Class B Common Stock shall
not carry any conversion rights and are otherwise not convertible into Class A
Shares.
Preemptive Rights
Holders of the Common Stock of RGFC are not be entitled to preemptive
rights with respect to any shares which may be issued in the future. The Common
Stock is not subject to redemption.
Dividend Rights
Holders of outstanding Common Stock are entitled to receive dividends
when and if declared by the Board of Directors of RGFC from funds legally
available therefor. Declarations of dividends by the Board of Directors depend
upon a number of factors. The declaration and payment of dividends on the Common
Stock will be subject to a quarterly review by the Board of Directors of RGFC.
The timing and amount of dividends, if any, are dependent upon RGFC's
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results of operations and financial condition and on the ability of RGFC to
receive dividends from its subsidiary companies, tax considerations and general
economic conditions. RGFC's ability to receive dividends from R&G Mortgage is
dependent upon R&G Mortgage's results of operations and financial condition.
RGFC's ability to receive dividends from Premier is contingent upon Premier's
compliance with its applicable regulatory capital requirements as well as
compliance with applicable Puerto Rico law and regulations.
Holders of Class A Shares and RGFC Class B Common Stock will be
entitled to share ratably, as a single class, in any dividends paid on the
Common Stock (except that if dividends are declared which are payable in Class A
Shares or RGFC Class B Common Stock, dividends shall be declared which are
payable at the same rate in each such class of stock and the dividends payable
in Class A Shares shall be payable to the holders of that class of stock and the
dividends payable in RGFC Class B Common Stock shall be payable to the holders
of that class of stock. If RGFC issues Preferred Stock, the holders thereof may
have a priority over the holders of the Common Stock with respect to dividends.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of R&G
Mortgage and/or Premier, RGFC, as the sole holder of the capital stock of R&G
Mortgage and Premier, would be entitled to receive, after payment or provision
for payment of all debts and liabilities of R&G Mortgage and/or Premier
(including, in the case of Premier, all deposit accounts and accrued interest
thereon), all assets of R&G Mortgage and/or Premier available for distribution.
In the event of any liquidation, dissolution or winding up of RGFC, the holders
of its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of RGFC available
for distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution.
Restrictions on Acquisition of RGFC
Restrictions in RGFC's Certificate and Bylaws. A number of provisions
of the RGFC Certificate and RGFC Bylaws deal with matters of corporate
governance and certain rights of stockholders. The following discussion is a
general summary of certain provisions of the RGFC Certificate and RGFC Bylaws
which might be deemed to have a potential "anti-takeover" effect. Reference
should be made in each case to such Certificate and Bylaws.
Board of Directors. The Certificate of RGFC contains provisions
relating to the RGFC Board of Directors and provide, among other things, that
the Board of Directors shall be divided into three classes as nearly equal in
number as possible with the term of office of one class expiring each year.
Cumulative voting in the election of directors is prohibited. Directors may be
removed with or without cause at a duly constituted meeting of stockholders
called expressly for that purpose. Any vacancy occurring in the Board of
Directors for any reason (including an increase in the number of authorized
directors) may be filled by the affirmative vote of a majority
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of the directors then in office, though less than a quorum of the Board, or by
the sole remaining director, and a director appointed to fill a vacancy shall
serve for the remainder of the term to which the director has been elected, and
until his successor has been elected and qualified.
The Bylaws govern nominations for election to the Board, and provide
that nominations for election to the Board of Directors may be made by the
nominating committee of the Board of Directors or by a stockholder eligible to
vote at an annual meeting of stockholders who has complied with specified notice
requirements. Written notice of a stockholder nomination must be delivered to,
or mailed to and received at, RGFC's principal executive offices not later than
ninety days prior to the anniversary date of the mailing of proxy materials by
RGFC in connection with the immediately preceding annual meeting and, with
respect to an election to be held at a special meeting of stockholders, no later
than the close of business on the tenth day following the date on which notice
of such meeting is first given to stockholders.
Special Meetings of Shareholders and Shareholder Proposals. RGFC's
Bylaws provide that special meetings of RGFC's shareholders, for any purpose or
purposes, may be called by the Chairman of the Board, the President or by the
affirmative vote of a majority of the Board of Directors then in office. Only
such business as shall have been properly brought before an annual meeting of
shareholders shall be conducted at the annual meeting. In order to be properly
brought before an annual meeting, business must either be brought before the
meeting by or at the direction of the Board of Directors or otherwise by a
shareholder who has given timely notice thereof (along with specified
information) in writing to RGFC. For shareholder proposals to be included in
RGFC's proxy materials, the shareholder must comply with all the timing and
informational requirements of Rule 14a-8 of the Exchange Act. With respect to
shareholder proposals to be considered at the annual meeting of shareholders but
not included in RGFC's proxy materials, the shareholder's notice must be
delivered to or mailed and received at the principal executive offices of RGFC
not later than 90 days prior to the anniversary date of the mailing of proxy
materials by RGFC in connection with the immediately preceding annual meeting.
Amendment of Certificate of Incorporation and Bylaws. The RGFC
Certificate generally provides that any amendment of the Certificate must be
first approved by a majority of the Board of Directors and then, to the extent
required by law, by the holders of a majority of the shares of RGFC entitled to
vote in an election of directors, except that the approval of 75% of the shares
of RGFC entitled to vote in an election of directors is required for any
amendment to Articles VII (directors), VIII (bylaws), IX (limitation on
liability of directors and officers) and X (amendment), unless any such proposed
amendment is approved by a vote of two-thirds of the Board of Directors then in
office. The RGFC Bylaws may be amended by the Board or by the stockholders. Such
action by the stockholders requires the affirmative vote of the holders of a
majority of the shares of RGFC entitled to vote generally in an election of
directors, except that the approval of 75% of the shares of RGFC entitled to
vote generally in an election of directors is required for any amendment to the
Bylaws which is inconsistent with Articles VII, VIII, IX and X of the
Certificate and which is not approved by the affirmative vote of two-thirds of
the Board of Directors then in office.
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Other Restrictions on Acquisition of the RGFC. Under the Change in Bank
Control Act ("CIBCA"), a notice must be submitted to the Federal Reserve Board
if any person, or group acting in concert, seeks to acquire 10% or more of
RGFC's shares of Common Stock outstanding, unless the Federal Reserve Board
finds that the acquisition will not result in a change in control of RGFC. Under
the CIBCA, the Federal Reserve Board has 60 days within which to act on such
notices, taking into consideration certain factors, including the financial and
managerial resources of the acquiror, the convenience and needs of the
communities served by RGFC and Premier, and the anti-trust effects of the
acquisition. Under the BHCA, any company would be required to obtain prior
approval from the Federal Reserve Board before it may obtain control of RGFC.
Control generally is defined to mean the beneficial ownership of 25 percent or
more of any class of voting securities of RGFC.
COMPARISON OF RIGHTS OF HOLDERS OF RGFC CLASS B COMMON STOCK
AND HOLDERS OF FAJARDO FEDERAL COMMON STOCK
General
The rights of holders of RGFC Class B Common Stock are governed by the
Puerto Rico Corporate Law and the RGFC Certificate and RGFC Bylaws, while the
rights of holders of Fajardo Federal Common Stock are governed by Fajardo
Federal's Federal Stock Charter ("Fajardo Federal Charter") and Fajardo
Federal's Bylaws ("Fajardo Federal Bylaws"), and laws with respect to
federally-chartered savings banks. Upon consummation of the Merger, stockholders
of Fajardo Federal will become shareholders of RGFC and their rights as
shareholders of RGFC will be governed by the RGFC Certificate, the RGFC Bylaws
and Puerto Rico Corporate Law.
The following summary is not intended to be a complete statement of the
differences affecting the rights of Fajardo Federal's stockholders, but rather
summarizes the more significant differences affecting the rights of such
stockholders and certain important similarities. The summary is qualified in its
entirety by reference to the RGFC Certificate and RGFC Bylaws, the Federal Stock
Charter and Bylaws of Fajardo Federal and applicable laws and regulations.
Authorized Capital Stock
RGFC's authorized capital stock consists of 70,000,000 shares, of which
60,000,000 shares are Common Stock and 10,000,000 shares are Preferred Stock.
RGFC's Common Stock is divided into 40,000,000 Class A Shares and 20,000,000
shares of RGFC Class B Common Stock, of which 9,220,278 shares and 4,924,474
shares were issued and outstanding, respectively, as of March 23, 1998. The RGFC
Class B Common Stock is quoted on The Nasdaq National Market.
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Fajardo Federal's authorized capital stock consists of 6,000,000
shares, of which 5,000,000 shares are common stock and 1,000,000 shares are
preferred stock. As of April __, 1998, 156,433 shares of Fajardo Federal Common
Stock were issued and outstanding and no shares of preferred stock of Fajardo
Federal were issued and outstanding. The shares of Fajardo Federal Common Stock
are not publicly traded.
Issuance of Capital Stock
Neither the RGFC Certificate nor the RGFC Bylaws contain a restriction
on the issuance of shares of capital stock to directors, officers or controlling
persons of RGFC. Thus, stock- related compensation plans may be adopted by RGFC
and capital stock of RGFC could be issued directly to RGFC directors, officers
or controlling persons without shareholder approval. The Rules of The Nasdaq
Stock Market, however, generally require corporations, such as RGFC, with
securities which are quoted on The Nasdaq National Market to obtain shareholder
approval of issuances resulting in a change in control of the corporation or in
connection with certain transactions involving issuances of shares representing
at least 20% of the voting power of the corporation and most stock compensation
plans for directors and officers of the corporation. Shareholder approval of
stock-related compensation plans also may be sought in certain instances in
order to qualify such plans for favorable federal income tax and/or securities
law treatment under current laws and regulations. The Preferred Stock is
issuable in series, each having such rights and preferences as the RGFC Board of
Directors may fix and determine. No shares of Preferred Stock are issued and
outstanding.
The Fajardo Federal Charter restricts the ability of Fajardo Federal to
issue directly or indirectly any shares of Fajardo Federal's capital stock
(including shares issuable upon conversion, exchange or exercise of other
securities) to officers, directors or controlling persons of Fajardo Federal,
other than as part of a general public offering or as qualifying shares to a
director of Fajardo Federal, unless the issuance or the plan under which they
would be issued has been approved by a majority of the total votes eligible to
be cast at a legal meeting. The shares of Fajardo Federal Common Stock are not
redeemable and the holders thereof have no preemptive or subscription rights to
purchase any securities of Fajardo Federal. Upon liquidation, dissolution or
winding up of Fajardo Federal, the holders of Fajardo Federal Common Stock are
entitled to receive pro rata the assets of Fajardo Federal which are legally
available for distribution, after payment of all debts and other liabilities.
Each holder of shares of Fajardo Federal Common Stock is entitled to one vote
for each share held by such holder, except as to the cumulation of votes for
the election of directors. The Fajardo Federal preferred stock is issuable in
series, each series having such rights and preferences as Fajardo Federal's
Board of Directors may fix and determine.
Board of Directors
General. The RGFC Bylaws provide for a classified Board of Directors
consisting of five directors, divided into three classes and elected for
three-year terms. The number of directors may be changed by the RGFC Board of
Directors by a majority vote thereof, provided that no
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change may have the effect of shortening the term of an incumbent director and
provided further that the RGFC Board may not increase the number of directors to
more than fifteen nor reduce the number to fewer than five.
The Fajardo Federal Bylaws provides for a classified Board of Directors
consisting of seven directors, divided into three classes, with one class
elected annually. The number of directors may be changed by the Fajardo Federal
Board by a majority vote thereof provided that the Fajardo Federal Board may not
reduce the number to fewer than seven nor more than fifteen, except when a
greater number is approved by the OTS.
Nominations. The RGFC Bylaws provide that shareholder nominations at a
meeting for election to the RGFC Board of Directors may be made only if written
notice of such intent has been given, either by personal delivery or by United
States mail, postage prepaid to the Secretary of RGFC not later than (i) ninety
days prior to the anniversary date of the mailing of proxy materials by RGFC in
connection with the immediately preceding annual meeting of RGFC shareholders,
and (ii) with respect to an election to be held at a special meeting of
shareholders for the election of directors, the close of business on the tenth
day following the date on which notice of such meeting is first given to RGFC
shareholders. Each such notice shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person(s) to be
nominated, (b) a representation that the shareholder is a holder of record of
Common Stock entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person(s) specified in the notice, (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any arrangements or understandings between the shareholder and
each nominee and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are able to be made by the shareholder, (d) such other
information regarding each nominee proposed by such shareholder as would be
required in a proxy statement filed pursuant to the Proxy Rules of the
Securities and Exchange Commission, and (e) the consent of each nominee to serve
as a director of RGFC if so elected. The presiding officer of the meeting may
refuse to acknowledge the nomination of any person not made in compliance with
RGFC Bylaws.
Article II, Section 14 of the Fajardo Federal Bylaws governs
nominations for election to the Fajardo Federal Board and provides that such
nominations for election may be made by the Fajardo Federal Board, acting as a
nominating committee, by a majority thereof at a meeting at which a quorum is
present or by unanimous written consent of the Board, or by a stockholder who
provides such nomination(s) to the Secretary of Fajardo Federal at least five
days prior to the date of the annual meeting. If the nominating committee fails
or refuses to act at least twenty days prior to the annual meeting, nominations
for directors may be made at the annual meeting by any stockholder entitled to
vote and shall be voted upon.
Qualification. The RGFC Certificate and RGFC Bylaws do not contain
specific qualifications for members of the RGFC Board of Directors.
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Article II, Section 4 of the Fajardo Federal Bylaws requires that each
Fajardo Federal director must at all times be the beneficial owner of not less
than 100 shares of Fajardo Federal Common Stock unless Fajardo Federal is a
wholly owned subsidiary of a holding company.
Removal and Filling of Vacancies. Any RGFC director may be removed from
office, with or without cause, by an affirmative vote of not less than a
majority of the votes eligible to be cast by shareholders at a duly constituted
meeting of shareholders called expressly for such purpose. Vacancies in the
Board of Directors of RGFC and any newly-created directorships resulting from an
increase in the number of RGFC directors may be filled by the RGFC Board, acting
by the vote of a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director. A director elected to the RGFC Board to
fill a vacancy will hold office for the unexpired portion of the term of the
director whose place has been filled. A director elected to the RGFC Board to
fill a newly-created directorship resulting from an increase in the number of
directors will hold office until the next election of the class for which the
director was elected.
Any director of Fajardo Federal may be removed only with cause at a
meeting of Fajardo Federal stockholders called expressly for that purpose upon
the vote of the holders of a majority of the shares then entitled to vote at an
election of directors. If less than the entire Board is to be removed, no one of
the directors may be removed if the votes cast against removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Any vacancy occurring in
the Fajardo Federal Board of Directors may be filled by the affirmative vote of
a majority of the remaining directors although less then a quorum of the Board
and such newly-elected director shall serve until the next election of directors
by the Fajardo Federal stockholders.
Voting Rights
Each share of RGFC Class B Common Stock entitles the holder thereof to
one vote per share and holders of RGFC's Class A Shares are entitled to two
votes per share. Except for matters where applicable law requires the approval
of one or both classes of RGFC Common Stock voting as separate classes, holders
of Class A Shares and RGFC Class B Common Stock generally vote as a single class
on all matters submitted to a vote of the shareholders, including the election
of directors.
Each holder of shares of Fajardo Federal Common Stock is entitled to
one vote for each share held by such holder, except as to the cumulation of
votes for the election of directors.
Payment of Dividends
Holders of RGFC Common Stock are entitled to receive dividends when and
if declared by the RGFC Board from funds legally available therefor. Holders of
Class A Shares and RGFC Class B Common Stock will be entitled to share ratably,
as a single class, in any dividends paid on the Common Stock (except that if
dividends are declared which are payable in Class A Shares or RGFC Class B
Common Stock, dividends shall be declared which are payable at the same rate
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in each such class of stock and the dividends payable in Class A Shares shall be
payable to the holders of that class of stock and the dividends payable in RGFC
Class B Common Stock shall be payable to the holders of that class of stock. The
Puerto Rico Corporate Law generally provides that RGFC may declare and pay
dividends to its shareholders, provided that the dividend does not exceed the
surplus of RGFC (defined generally as the excess of RGFC's total net assets over
its capital) and is not in violation of the rights of the holders of shares of
any other class. RGFC's ability to pay dividends also is subject to its ability
to receive dividends from its subsidiaries which are, in turn, subject to the
results and operations of such subsidiaries, Puerto Rico Corporate Law and
compliance with applicable regulatory requirements.
The ability of Fajardo Federal to pay dividends on its common stock is
restricted by OTS regulations and by tax considerations related to savings
associations. OTS regulations govern capital distributions by savings
institutions, which include cash dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account of a savings institution to make
capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, savings institutions that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 institutions, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit written notice to the OTS 30 days prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. Fajardo Federal currently is a [Tier 1] institution for purposes
of the regulation dealing with capital distributions.
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Special Meetings of Shareholders
The RGFC Bylaws provide that a special meeting of shareholders may be
called only by the Chairman of the Board of Directors of RGFC, by the President
of RGFC, or by the RGFC Board pursuant to a resolution approved by the
affirmative vote of the directors then in office.
Article II, Section 3 of the Fajardo Federal Bylaws provides that a
special meeting of shareholders may be called by the Chairman of the Board of
Fajardo Federal, the president of Fajardo Federal or a majority of the Fajardo
Federal Board, and upon the written request of the holders of not less than
one-tenth of all of the outstanding capital stock of Fajardo Federal entitled to
vote at the meeting. Such written request must state the purpose(s) of the
meeting and be delivered at the home office of Fajardo Federal addressed to the
Chairman of the Board, the president or the secretary.
Shareholder Action Without a Meeting
The RGFC Certificate and RGFC Bylaws do not specifically provide for
shareholder action without a meeting. Puerto Rico Corporate Law, however,
provides that whenever the vote of shareholders at a meeting thereof is required
or permitted to be taken in connection with any corporate action, the meeting
and vote of shareholders may be dispensed with, if all shareholders who would
have been entitled to vote upon the action if such meeting were held, consent in
writing to such corporate action being taken.
Article II, Section 16 of the Fajardo Federal Bylaws provide that any
action required to be taken at a meeting of the stockholder of Fajardo Federal,
or any other action which may be taken at a meeting of the stockholders, may be
taken without a meeting if consent in writing, setting forth the action so
taken, is given by all stockholders entitled to vote with respect to the subject
matter.
Pre-Emptive Rights
Neither the shareholders of RGFC nor the stockholders of Fajardo
Federal have pre-emptive rights.
Mergers and Consolidations
Under Puerto Rico Corporate Law, an agreement of merger or
consolidation must, among other things, be approved by the directors of each
constituent corporation and adopted by the shareholders of each constituent
Puerto Rico corporation holding at least two-thirds of the corporation's voting
power.
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A federal regulation requires the approval of the Board of Directors of
Fajardo Federal and the holders of two-thirds of the outstanding stock of
Fajardo Federal entitled to vote thereon for mergers and consolidations. Such
regulation permits Fajardo Federal to merge with another corporation without
obtaining the approval of its stockholders if: (1) it does not involve an
interim savings association; (ii) the Fajardo Federal Charter is not changed;
(iii) each share of Fajardo Federal's stock outstanding immediately prior to the
effective date of the transaction is to be an identical outstanding share or a
treasury share of Fajardo Federal after such effective date; and (iv) either:
(A) no shares of voting stock of Fajardo Federal and no securities convertible
into such stock are to be issued or delivered under the plan of combination or
(B) the authorized unissued shares or the treasury shares of voting stock of
Fajardo Federal to be issued or delivered under the plan of combination, plus
those initially issuable upon conversion of any securities to be issued or
delivered under such plan, do not exceed 15% of the total shares of voting stock
of Fajardo Federal outstanding immediately prior to the effective date of the
transaction.
Amendment of RGFC Certificate and Fajardo Federal Charter
Amendment of the RGFC Certificate must first be approved by a majority
of the RGFC Board then in office and thereafter approved by a majority of the
shares of RGFC entitled to vote generally in an election of directors, voting
together as a single class, subject to certain provisions of the RGFC
Certificate. Article X of the RGFC Certificate provides that approval by at
least 75% of the shares of RGFC entitled to vote generally in an election of
directors would be required to amend, adopt, alter, change or repeal any
provision of the RGFC Certificate inconsistent with Articles VII (directors),
VIII (bylaws), IX (liability of directors and officers) and X (amendment of the
RGFC Certificate) of the RGFC Certificate and which is not approved by the
affirmative vote of two-thirds of the Board of Directors. Under Puerto Rico
Corporate Law, the affirmative vote of the holders of a majority of the
outstanding RGFC Class B Common Stock would be required to approve, among other
matters, an adverse change in the powers, preferences or special rights of the
RGFC Class B Common Stock.
An amendment to the Fajardo Federal Charter requires the proposal of
the Fajardo Board, preliminary approval by the OTS, which preliminary approval
may be granted pursuant to regulations specifying preapproved charter
amendments, and thereafter approved by the Fajardo Federal stockholders by a
majority of the total votes eligible to be cast at a legal meeting.
Restrictions on Acquisition of RGFC and Fajardo Federal
Under the CIBCA, a notice must be submitted to the Federal Reserve
Board if any person, or group acting in concert, seeks to acquire 10% or more of
RGFC's shares of Common Stock outstanding, unless the Federal Reserve Board
finds that the acquisition will not result in a change in control of RGFC. Under
the CIBCA, the Federal Reserve Board has 60 days within which to act on such
notices, taking into consideration certain factors, including the financial and
managerial resources of the acquiror, the convenience and needs of the
communities served by RGFC and Premier, and the anti-trust effects of the
acquisition. Under the BHCA, any company
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would be required to obtain prior approval from the Federal Reserve Board before
it may obtain control of RGFC. Control generally is defined to mean the
beneficial ownership of 25 percent or more of any class of voting securities of
RGFC.
Federal laws and regulations generally require any person who intends
to acquire control of a savings association, such as Fajardo Federal, to give at
least 60 days prior written notice to the OTS. "Control" is defined as the
power, directly or indirectly, to direct the management or policies of an
insured institution or to vote 25% or more of any class of voting securities of
the insured institution. In addition to the foregoing restrictions, a company
must secure the approval of the OTS before it can acquire control of an insured
institution. Under federal regulations, a person (including business entities)
is deemed conclusively to have acquired control if, among other things, such
person acquires: (a) 25% or more of any class of voting stock of the insured
institution; (b) irrevocable proxies representing 25% or more of any class of
voting stock of the insured institution; (c) any combination of voting stock and
irrevocable proxies representing 25% or more of any class of such institution's
voting stock; or (d) control of the election of a majority of the directors of
the insured institution. In addition, a rebuttable presumption of control arises
in the event a person acquires more than 10% of any class of voting stock (or
more than 25% of any class of nonvoting stock) and is subject to one or more of
eight enumerated control factors. Such regulations also set forth rebuttable
presumptions of concerted action and the procedures to follow to rebut any such
presumptions. The OTS is specifically empowered to disapprove such an
acquisition of control if it finds, among other reasons, that (i) the
acquisition would substantially lessen competition; (ii) the financial condition
of the acquiring person might jeopardize the institution or its depositors;
(iii) the acquiring person might jeopardize the institution or its depositors;
or (iv) the competency, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors, the
institution or the public to permit the acquisition of control by such person.
Director and Officer Liability and Indemnification
The RGFC Certificate provides that the personal liability of directors
and officers of RGFC for monetary damages shall be limited to the fullest extent
permitted by the Puerto Rico Corporate Law.
The RGFC Bylaws provide that RGFC 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, except actions by or in right of RGFC,
whether civil criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of RGFC
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding to the fullest extent authorized by Puerto Rico
Corporate Law, provided that RGFC shall not be liable for any amounts which may
be due to any person in connection with a settlement of any action, suit or
proceeding effected without its prior consent or any action, suit or proceeding
initiated by any person seeking indemnification without its prior written
consent. The RGFC Certificate also provides that reasonable expenses incurred by
a director, officer,
91
<PAGE>
employee or agent of RGFC in defending any civil, criminal, suit or proceeding
described above may be paid by RGFC in advance of the final disposition of such
action, suit or proceeding.
Currently, federal law does not permit federally-chartered savings
banks such as Fajardo Federal to limit the personal liability of directors in
the manner set forth in the RGFC Certificate and as authorized by the laws of
many states.
The Fajardo Federal Charter and the Fajardo Federal Bylaws do not
contain any provisions relating to indemnification of directors and officers of
Fajardo Federal. Under present OTS regulations, however, Fajardo Federal shall
indemnify its directors, officers and employees for any costs incurred in
connection with any litigation involving any such person's activities as a
director, officer or employee if such person obtains a final judgment on the
merits in his or her favor. In addition, indemnification is permitted in the
case of a settlement, a final judgment against such person or final judgment
other than on the merits, if a majority of disinterested directors determine
that such person was acting in good faith within the scope of his or her
employment as he or she could reasonably have perceived it under the
circumstances and for a purpose he or she could reasonably have believed under
the circumstances was in the best interest of Fajardo Federal or its
stockholders. Fajardo Federal also is permitted to pay ongoing expenses incurred
by a director, officer or employee if a majority of disinterested directors
concludes that such person may ultimately be entitled to indemnification. Before
making any indemnification payment, Fajardo Federal is required to notify the
OTS of its intention and such payment cannot be made if the OTS objects thereto.
LEGAL OPINIONS
The legality of the shares of RGFC Class B Common stock to be issued in
the Merger and certain other legal matters relating to the Merger are being
passed upon by Elias, Matz, Tiernan & Herrick L.L.P., special counsel to RGFC.
McConnell Valdes has passed upon Puerto Rico tax matters with respect to the
Merger.
EXPERTS
The consolidated financial statements of RGFC at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
incorporated by reference in the Proxy Statement/Prospectus which is referred to
and made a part of this Proxy Statement/Prospectus and Registration Statement,
have been audited by Price Waterhouse, independent auditors, as set forth in
their report thereon incorporated by reference herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
92
<PAGE>
The financial statements of Fajardo Federal Savings Bank as of
September 30, 1997 and 1996, and for each of the three years in the period ended
September 30, 1997, have been included in this Proxy Statement/Prospectus in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
93
<PAGE>
INDEX TO FAJARDO FEDERAL FINANCIAL STATEMENTS
Page
Independent Auditors' Report.............................................. F-1
Statements of Financial Condition at December 31, 1997 (unaudited) and
September 30, 1997 and 1996............................................... F-2
Statements of Operations for the three months ended December 31, 1997
and 1996 (unaudited) and for the years ended September 30, 1997,
1996 and 1995........................................................ F-3
Statements of Changes in Stockholders' Equity for the three months
ended December 31, 1997 (unaudited) and for the years ended
September 30, 1997, 1996 and 1995.................................... F-4
Statements of Cash Flows for the three months ended December 31,
1997 and 1996 (unaudited) and for the years ended September 30,
1997, 1996 and 1995.................................................. F-5
Notes to Financial Statements............................................. F-6
94
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Report
The Board of Directors
Fajardo Federal Savings Bank
We have audited the accompanying statements of financial conditions of Fajardo
Federal Savings Bank as of September 30, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fajardo Federal Savings Bank as
of September 30, 1997 and 1996, and the results of operations and its cash flows
for each of the years in the three-year period ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
December 19, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
FAJARDO FEDERAL SAVINGS BANK
Statements of Financial Condition
December 31, September 30,
1997 1997 1996
------------ ---------- ----------
Assets (unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 1,161,939 2,186,999 1,444,994
Overnight deposit with the Federal Home Loan
Bank of New York 3,000,000 2,500,000 -
Investment in debt security (note 2) - - 52,360
Stock in Federal Home Loan Bank of New York,
at cost (note 6) 287,400 287,400 287,400
Loans receivable, net (notes 3 and 6) 24,252,192 24,009,419 26,198,393
Accrued interest receivable 195,035 194,211 276,163
Foreclosed real estate, net of allowance for losses of
$20,220 at December 31, 1997 and
at September 30, 1997 and 1996 329,698 329,698 144,455
Deferred income taxes (note 8) 83,390 83,390 -
Premises and equipment, net (notes 4 and 10) 129,710 123,021 119,558
Other assets 172,827 215,755 318,576
------------ ---------- ----------
$ 29,612,191 29,929,893 28,841,899
============ ========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 5) 22,017,134 22,517,956 20,812,606
Advances from Federal Home Loan Bank of New
York (note 6) 3,800,000 3,800,000 4,900,000
Advances from borrowers for taxes and insurance 73,658 93,448 93,203
Accrued interest payable 73,634 68,725 62,786
Accrued income taxes (note 8) 15,394 394 26,556
Accrued expenses and other liabilities 146,024 196,198 340,890
------------ ---------- ----------
Total liabilities 26,125,844 26,676,721 26,236,041
------------ ---------- ----------
Stockholders' equity (notes 7, 11, 12 and 13):
Common stock of $1.00 par value. Authorized
5,000,000 shares; issued and outstanding
156,433 shares at December 31, 1997
and 150,830 and 134,356 shares at
September 30, 1997 and 1996, respectively 156,433 150,830 134,356
Preferred Stock of no par value. Authorized
1,000,000 shares; issued and outstanding, none - - -
Additional paid-in capital 1,487,309 1,392,058 1,112,000
Retained earnings 1,842,605 1,710,284 1,359,502
------------ ---------- ----------
Total stockholders' equity 3,486,347 3,253,172 2,605,858
Commitments and contingencies (notes 10, 12, and 15)
------------ ---------- ----------
$ 29,612,191 29,929,893 28,841,899
============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
FAJARDO FEDERAL SAVINGS BANK
Statements of Operations
Three- month Year ended
Period ended December 31, September 30,
------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 585,618 654,296 2,572,649 2,606,553 2,657,473
Other (note 8) 57,031 11,164 109,083 73,692 60,465
---------- ---------- ---------- ---------- ----------
Total interest income 642,649 665,460 2,681,732 2,680,245 2,717,938
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits (note 5) 220,407 203,064 846,376 799,021 733,811
Advances from Federal Home Loan Bank of New York 61,385 76,762 277,353 289,546 429,947
---------- ---------- ---------- ---------- ----------
Total interest expense 281,792 279,826 1,123,729 1,088,567 1,163,758
---------- ---------- ---------- ---------- ----------
Net interest income 360,857 385,634 1,558,003 1,591,678 1,554,180
Provision for loan losses (note 3) 131 -- 62,922 -- 26,430
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 360,726 385,634 1,495,081 1,591,678 1,527,750
---------- ---------- ---------- ---------- ----------
Noninterest income:
Fees for customer services 42,363 39,151 169,420 147,511 172,020
(Gain/loss) on foreclosed real estate, net -- 624 (23,874) (42,993) (24,636)
---------- ---------- ---------- ---------- ----------
Total noninterest income - net 42,363 39,775 145,546 104,518 147,384
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FAJARDO FEDERAL SAVINGS BANK
Statements of Operations
Three- month Year ended
Period ended December 31, September 30,
------------------------- ----------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Noninterest expense:
Compensation and benefits 73,269 121,080 423,989 482,520 480,063
Occupancy and equipment 39,085 77,587 251,260 312,748 311,843
Insurance 24,012 30,344 88,464 255,185 114,696
Professional services 58,127 41,040 136,806 92,065 204,722
Advertising 2,547 8,468 22,402 18,873 40,518
Other 53,528 65,445 249,825 249,829 234,024
---------- ---------- ---------- ---------- ----------
Total noninterest expense 250,568 343,964 1,172,746 1,411,220 1,385,866
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary item 152,521 81,445 467,881 284,976 289,268
Income taxes (note 8) 20,200 33,000 117,099 95,000 146,052
---------- ---------- ---------- ---------- ----------
Income before extraordinary item 132,321 48,445 350,782 189,976 143,216
Extraordinary item - loss on early extinguishment of debt,
net of income tax benefit of $96,714 in 1995 (note 6) -- -- -- -- 133,482
---------- ---------- ---------- ---------- ----------
Net income (note 13) $ 132,321 48,445 350,782 189,976 9,734
========== ========== ========== ========== ==========
Earnings per share of common stock (note 1):
Before extraordinary item .87 .36 2.45 1.48 1.11
Extraordinary item -- -- -- -- (1.04)
---------- ---------- ---------- ---------- ----------
Net earnings per share (note 1) .87 .36 2.45 1.48 .07
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FAJARDO FEDERAL SAVINGS BANK
Statements of Stockholders' Equity
For the Three-month Period ended
December 31, 1997 (unaudited) and
years ended September 30, 1997, 1996 and 1995
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1994 128,800 $ 128,800 1,017,548 1,159,792 2,306,140
Net income -- -- -- 9,734 9,734
--------- --------- --------- --------- ---------
Balance at
September 30, 1995 128,800 $ 128,800 1,017,548 1,169,526 2,315,874
Common stock issued 5,556 5,556 94,452 -- 100,008
Net income -- -- -- 189,976 189,976
--------- --------- --------- --------- ---------
Balance at
September 30, 1996 134,356 $ 134,356 1,112,000 1,359,502 2,605,858
Common stock issued 16,474 16,474 280,058 -- 296,532
Net income -- -- -- 350,782 350,782
--------- --------- --------- --------- ---------
Balance at
September 30, 1997 150,830 $ 150,830 1,392,058 1,710,284 3,253,172
Common stock issued 5,603 5,603 95,251 -- 100,854
Net income for the
three month period ended
December 31, 1997 -- -- -- 132,321 132,321
--------- --------- --------- --------- ---------
Balance at December 31,
1997 156,433 $ 156,433 1,487,309 1,842,605 3,486,347
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FAJARDO FEDERAL SAVINGS BANK
Statements of Cash Flows
Three-month period
ended December 31, Year ended September 30,
------------------------ --------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 132,321 48,445 350,782 189,976 9,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premium on loans receivable 3,847 4,358 16,876 17,802 18,733
Accretion of discount on tax credits -- -- (15,000) -- --
Depreciation and amortization of premises and equipment -- 35,883 71,949 139,944 138,307
Loss on foreclosed real estate -- -- 23,874 42,993 24,636
Provision for loan losses 131 -- 62,922 -- 26,430
Decrease/(increase) in:
Accrued interest receivable (824) (13,643) 81,952 (67,358) (26,340)
Deferred income taxes -- -- (83,390) -- --
Other assets 42,928 40,980 102,821 (61,534) (39,666)
Increase/(decrease) in:
Advances from borrowers for taxes and insurance (19,790) 8,990 245 (7,638) (8,862)
Accrued interest payable 4,909 28,416 5,939 (10,739) 26,737
Accrued income taxes 15,000 25,500 73,838 26,556 (144,878)
Accrued expenses and other liabilities (50,174) (78,036) (144,692) 152,245 18,701
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 128,348 100,893 548,116 422,247 43,532
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Net increase in overnight deposit with the Federal Home
Loan Bank of New York (500,000) -- (2,500,000) -- --
Net decrease/(increase) in loans receivable (246,751) (480,038) 1,825,454 (37,667) (302,717)
Purchase of investment in debt security held-to-maturity -- -- -- (52,360) --
Proceeds from repayment of debt security held-to-maturity -- -- 52,360 -- --
Proceeds from sale of foreclosed real estate -- -- 74,605 87,000 79,000
Additions to premises and equipment (6,689) (16,679) (75,412) (52,923) (40,511)
Proceeds from sale of stock in Federal Home Loan Bank
of New York -- -- -- 22,600 45,000
Purchase of tax credits -- -- (85,000) -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities $ (753,440) (496,717) (707,993) (33,350) (219,228)
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
2
FAJARDO FEDERAL SAVINGS BANK
Statements of Cash Flows, Continued
Three-month period
ended December 31, Year ended September 30,
------------------------- ----------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase/(decrease) in deposits $ (500,822) 854,100 1,705,350 (183,343) 979,244
Proceeds from issuance of common stock 100,854 100,008 296,532 100,008 --
Net decrease in advances from Federal Home Loan Bank of
New York -- (600,000) (1,100,000) (300,000) (1,000,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by/(used in) financing activities (399,968) 354,108 901,882 (383,335) (20,756)
----------- ----------- ----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents (1,025,060) (41,716) 742,005 5,562 (196,452)
Cash and cash equivalents at beginning of year 2,186,999 1,444,994 1,444,994 1,439,432 1,635,884
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,161,939 1,403,278 2,186,999 1,444,994 1,439,432
=========== =========== =========== =========== ===========
Supplemental disclosures:
Cash paid for:
Interest on advances from Federal Home
Loan Bank of New York $ 55,152 44,362 274,407 306,456 408,146
=========== =========== =========== =========== ===========
Interest on deposits $ 221,731 207,048 818,985 800,321 731,949
=========== =========== =========== =========== ===========
Income taxes $ 5,200 7,500 126,650 66,998 194,217
=========== =========== =========== =========== ===========
Noncash transactions:
Transfers from loans receivable to foreclosed real estate $ -- 27,928 283,722 135,372 362,409
=========== =========== =========== =========== ===========
Loans receivable originated to facilitate the sale of
foreclosed real estate $ -- -- -- 206,500 166,665
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(1) Nature of Business and Summary of Significant Accounting Policies
Fajardo Federal Savings Bank (the Bank) provides a full range of banking
services to individual and corporate customers in the Fajardo area of
Puerto Rico. The Bank is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain
federal agencies, and undergoes periodic examinations by those regulatory
authorities.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles (GAAP) and general practices within the
thrift industry.
The accompanying financial statements reflect the accounts of the Bank.
The financial statement as of December 31, 1997 and for the three-month
periods ended December 31, 1997 and 1996 are unaudited; however, in the
opinion of management all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position at
December 31, 1997, and the results of operations, and cash flows for the
three-month periods ended December 31, 1997 and 1996, have been included.
Following is a description of the Bank's significant accounting policies:
(a) Cash Equivalents
For purpose of presentation in the statements of cash flows, cash
and cash equivalents are defined as those amounts included in the
statement of financial condition caption cash and due from banks.
(b) Investment Securities
The Bank classifies its debt security as held-to-maturity.
Held-to-maturity securities are those securities in which the
Bank has the ability and intent to hold the securities until
maturity.
Held-to-maturity securities are recorded at cost, adjusted for
the amortization or accretion of premiums or discounts. A decline
in the market value of any held-to-maturity security below cost
that is deemed other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of
the related held-to-maturity security as an adjustment to yield
using the effective interest method. Dividend and interest income
are recognized when earned.
(c) Loans Receivable
Loans receivable are stated at unpaid principal balances and
unamortized premium, less unearned interest, allowance for loan
losses, and net deferred loan origination
(Continued)
F-6
<PAGE>
2
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
fees. Unearned interest on consumer loans is recognized over the
life of the loans using the effective interest method. Loan
origination fees and certain direct loan origination costs are
deferred and the net amount is recognized as an adjustment to
interest income over the life of the related loans.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral,
and current and prospective economic conditions.
Unsecured consumer loans 120 days past due are fully reserved and
are generally written-off after management's evaluation of each
specific loan, except for loans which are under bankruptcy
procedures or have a revised repayment plan. Management believes
that the allowance for loan losses is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time
of their examination.
Accrued but uncollected interest on loans that are contractually
delinquent ninety days or more is reversed or an allowance is
established. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are
received, or until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is back
to normal, in which case the loan is returned to accrual status.
The Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan
as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosure. This
statement requires that impairment of certain loans be measured
by comparing the net carrying amount of the loan to the present
value of the expected cash flows discounted at the loan's
effective rate or the fair value of the collateral for
collateral-dependent loans. Management considers a loan to be
impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the
loans. A valuation allowance is established, if necessary, within
the overall allowance for credit losses.
(Continued)
F-7
<PAGE>
3
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(d) Foreclosed Real Estate
Real estate property acquired through loan foreclosures are
initially recorded at the carrying value of the related loan
which approximates the fair value of the property at date of
foreclosure. Costs relating to development and improvement of the
property are capitalized, whereas costs relating to holding the
property are expensed.
Valuations are periodically performed by management and an
allowance for losses is established by a charge to operations
when the carrying value of the property exceeds its estimated net
realizable value (fair value minus cost to sell).
(e) Premises and Equipment
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Furniture, fixtures, and equipment
are depreciated using the straight-line method over the estimated
useful life of the assets. Leasehold improvements are being
amortized using the straight-line method over the shorter of the
lease term or estimated useful life of the improvements.
(f) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(g) Stock in Federal Home Loan Bank of New York (FHLB)
The Bank is required to maintain, under the Financial Institution
Reform Recovery and Enforcement Act (FIRREA), a minimum level of
stock in the Federal Home Loan Bank of New York. The minimum
requirement is based on a formula that considers the Bank's
mortgage loans, the advances and advance commitments by the FHLB
and total assets. The Bank holds stock in excess of the minimum
requirement.
The Bank's investment in such stock is carried at cost.
(Continued)
F-8
<PAGE>
4
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(h) Net Earnings per Common Share
Net earnings per common share is based upon the weighted average
number shares of common stock outstanding during the three-month
periods ended December 31, 1997 and 1996, amounting to 152,884
shares and 134,356, respectively, and during the year, which
equals 143,128 shares for 1997 and 128,800 shares for 1996 and
1995.
(i) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosure
About Fair Value of Financial Instruments, defines the fair value
of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.
The fair value estimates of financial instruments are made at a
specific point in time based on relevant market information.
Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. Any changes in the assumptions
made could affect these estimates.
The following methods and assumptions were used by the Bank in
estimating fair values of each class of financial instruments for
which it is practicable to estimate that value:
Cash, accrued interest receivable, advances from borrowers for
taxes and insurance, and accrued interest payable The carrying
amounts of these financial instruments approximate their fair
value because of the short-term maturities of such
instruments.
Debt securities - Fair values are estimated based on bid
quotations received from securities dealers.
Loans - Fair values are estimated for portfolios of loans with
similar characteristics by type such as commercial, mortgage,
and installment. In the case of commercial loans, the
portfolio of commercial loans was segmented into fixed and
adjustable rate interest terms. The carrying value of
adjustable rate loans approximates fair value because the
interest rate of such loans reprices frequently at market
rates. Fair values for fixed rate commercial, mortgage and
installment loans were estimated using discounted cash flow
analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit
(Continued)
F-9
<PAGE>
5
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
quality. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values,
where applicable.
Deposits and Advances from Federal Home Loan Bank of New York
- The fair value of deposits with no stated maturity such as
noninterest bearing demand deposits, savings and NOW accounts
approximates the amount payable on demand. The fair value of
time deposits and advances from Federal Home Loan Bank of New
York are based on discounted value of contractual cash flows.
The discount rate is estimated using the rates currently
offered for instruments of similar terms including remaining
maturities. The fair value estimates do not include the
benefit that results from the low cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in
the market.
(j) Reclassifications
Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform with the 1997 presentation.
(k) Use of Estimates
Management of the Bank has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the
period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(2) Investment in Debt Security
Investment in debt security has been classified in the 1996 statement of
financial condition according to management's intent. The amortized cost,
gross unrealized holding gain, and fair value for the held-to-maturity
security at September 30, 1996 was as follows:
<TABLE>
<CAPTION>
Gross
Unrealized
Amortized Holding Fair
Cost Gain Value
-------- ----- ------
<S> <C> <C> <C>
Debt security held-to-maturity $ 52,360 7,522 59,882
======== ===== ======
</TABLE>
(Continued)
F-10
<PAGE>
6
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(3) Loans Receivable, Net
Loans receivable consist of:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997 1996
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Real estate mortgage loans:
Residential first mortgage loans $ 10,886,649 11,153,878 11,623,447
Second and commercial mortgage loans 4,038,736 4,037,425 4,424,908
Participation 24,510 24,899 26,403
------------ ------------ ------------
14,949,895 15,216,202 16,074,758
Undisbursed portion of mortgage and
construction loans 499 1,177 --
Unamortized premium 37,276 41,123 58,198
------------ ------------ ------------
Total real estate mortgage loans 14,987,670 15,258,502 16,132,956
------------ ------------ ------------
Commercial loans 3,255,666 2,582,548 3,126,871
------------ ------------ ------------
Consumer loans:
Personal loans 3,037,076 3,175,197 2,822,509
Boat loans 3,341,963 3,453,370 3,736,556
Loans on deposits 840,210 807,109 1,490,918
------------ ------------ ------------
7,219,249 7,435,676 8,049,983
Unearned interest income (876,117) (933,665) (711,041)
------------ ------------ ------------
Total consumer loans 6,343,132 6,502,011 7,338,942
------------ ------------ ------------
24,586,468 24,343,061 26,598,769
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Allowance for loan losses (342,526) (340,847) (326,090)
Net deferred loan origination costs/(fees) 8,250 7,205 (74,286)
------------ ------------ ------------
(334,276) (333,642) (400,376)
------------ ------------ ------------
Loans receivable, net $ 24,252,192 24,009,419 26,198,393
============ ============ ============
</TABLE>
(Continued)
F-12
<PAGE>
7
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
Activity in the allowance for loan losses for the years ended September
30, and for the three-month periods ended December 31, 1997 and 1996,
respectively, (unaudited) is summarized as follows:
<TABLE>
<CAPTION>
Three-month period ended Year ended
December 31, September 30,
------------------------------- ---------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $340,847 326,090 326,090 401,838 383,242
Provision charged to income 131 -- 62,922 -- 26,430
(charge-offs)/recoveries, net 1,548 19,506 (48,165) (75,748) (7,834)
-------- -------- -------- -------- --------
Balance at end of period $342,526 345,596 340,847 326,090 401,838
======== ======== ======== ======== ========
</TABLE>
Loans(mostly loans with relatively small individual balance) on which the
accrual of interest has been discontinued amounted to approximately
$1,473,000, $1,094,000, $1,079,000 and $1,285,000 at December 31, 1997
(unaudited), September 30, 1997, 1996 and 1995, respectively. The amount
of interest income on cash collections on these loans that was included in
net income for the three months ended December 31, 1997 (unaudited) and
years ended September 30, 1997, 1996 and 1995 was approximately $13,000,
$56,800, $49,000 and $60,000, respectively.
Loans to directors and officers granted under normal terms, outstanding at
September 30, 1997 and 1996 amounted to $246,050 and $699,022,
respectively, and the activity during the year ended September 30, 1997
was as follows:
<TABLE>
<CAPTION>
September 30,
------------
1997
---------
<S> <C>
Beginning balance $ 699,022
Loans granted during the year 285,000
Loan repayments (737,972)
---------
Ending balance $ 246,050
=========
</TABLE>
(Continued)
F-13
<PAGE>
8
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
Impairment of loans having a carrying value of $24,698 and $222,968 at
September 30, 1996 and 1995 (none at September 30, 1997 and December 31,
1997 (unaudited) has been recognized in conformity with SFAS No. 114. The
total allowance for credit losses related to these loans was $3,705 and
$24,705 at September 30, 1996 and 1995, respectively.
(4) Premises and Equipment
Premises and equipment consist of:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -----------------------
1997 1997 1996
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Construction in progress $ 123,021 123,021 47,609
Furniture, fixtures and equipment 491,894 485,205 485,205
Leasehold improvements 96,490 96,490 96,490
--------- --------- ---------
711,405 704,716 629,304
Less accumulated depreciation and amortization (581,695) (581,695) (509,746)
--------- --------- ---------
$ 129,710 123,021 119,558
========= ========= =========
</TABLE>
F-14
<PAGE>
(5) Deposits
Deposits consist of:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Rate at Rate at
December 31, December 31, 1997 September 30, September 30,
1997 (unaudited) 1997 ------------------------------------------------
----------- --------------------- ------------- 1997 1996
(unaudited) Amount Percent Amount Percent Amount Percent
----------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts
(3%) 3.00% $ 11,914,256 54.2 3.00% $ 11,769,009 52.3 $ 11,542,731 55.5
IRA accounts (5.50% -
7.00%) 5.75% 203,845 .9 5.75% 197,121 .9 223,705 1.1
NOW accounts (3%) 3.00% 1,679,657 7.7 3.00% 2,192,901 9.8 1,410,840 6.8
------------ ------------ ------ ----------- -----
13,797,758 14,159,031 63.0 13,177,276 63.4
------------ ------ ----------- -----
Certificates of deposit:
2.99% - 3.99% 6,337 .1 - - -
4.0% - 4.99% 1,946,189 8.8 2,411,662 10.7 3,341,211 16.0
5.0% - 5.99% 3,670,569 16.7 3,700,319 16.4 2,866,083 13.8
6.0% - 8.99% 2,562,688 11.5 2,213,635 9.8 1,396,945 6.7
9.0% - 10.99% 33,593 .1 33,309 .1 31,091 .1
------------ ------ ----------- -----
5.60% 8,219,376 37.2 5.53% 8,358,925 37.0 7,635,330 36.6
------------ ------ ----------- -----
Total $ 22,017,134 100.0 $ 22,517,956 100.0 $ 20,812,606 100.0
============= ===== ============ ===== ============= =====
</TABLE>
(Continued)
F-15
<PAGE>
9
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
The weighted average rate of interest on all deposits was 4.00%, 3.88%,
3.77% and 3.87% at December 31, 1997 (unaudited), September 30, 1997, 1996
and 1995, respectively.
Certificates of deposit in denominations of $100,000 or more amounted to
$1,871,690, $1,737,372, $1,377,283 and $1,427,417 at December 31, 1997
(unaudited), September 30, 1997, 1996 and 1995, respectively. Interest
expense on these certificates of deposit amounted to approximately
$17,000, $94,000, $66,000 and $71,000 during the three-month period ended
December 31, 1997 (unaudited) and the years ended September 30, 1997, 1996
and 1995, respectively.
Interest expense on deposits for the years ended September 30 and for the
three-month periods ended December 31, 1997 and 1996 (unaudited) follows:
<TABLE>
<CAPTION>
Three-month
period ended
December 31, September 30,
--------------------- -------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Passbook accounts $ 88,654 86,634 346,046 344,880 345,329
NOW accounts 9,961 9,155 35,675 40,442 40,684
IRA accounts 2,919 3,363 10,709 13,367 10,814
Certificates of deposit 118,873 103,912 453,946 400,332 336,984
-------- -------- -------- -------- --------
$220,407 203,064 846,376 799,021 733,811
======== ======== ======== ======== ========
</TABLE>
Certificates of deposit at September 30, 1997 mature as follows:
<TABLE>
<CAPTION>
Maturing on or before
<S> <C>
1998 7,365,647
1999 212,813
2000 258,520
2001 227,918
2002 and thereafter 294,027
----------
Total 8,358,925
==========
</TABLE>
(Continued)
F-16
<PAGE>
10
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(6) Advances from Federal Home Loan Bank
Pursuant to collateral agreements with the FHLB, advances are secured by
all stock in the FHLB and qualifying first mortgage loans, with unpaid
principal balance of $5,745,915, $5,070,561 and $6,858,562 at December 31,
1997 (unaudited), September 30, 1997 and 1996, respectively. Advances at
December 31, 1997 (unaudited) and September 30, 1997, bear interest rates
ranging from 5.85% to 6.60% and mature as follows: $500,000 on February 8,
1998; $800,000 on April 1, 1998; $2,500,000 on August 18, 1998. The
average interest rate paid on advances during the three-month period ended
December 31, 1997 (unaudited) and the year ended September 30, 1997 was
6.46% and 6.07%, respectively. At December 31, 1997 (unaudited) and
September 30, 1997, the Bank had an unused line of credit amounting to
$2,872,100.
During 1995, the Bank extinguished advances from the FHLB amounting to
$2,500,000 before their contractual maturity. The penalty imposed to the
Bank for early payment, amounting to $133,482 (net of income tax benefit
of $96,714), was recognized as an extraordinary item in the accompanying
statement of operations in 1995.
(7) Stock Compensation Program
The Bank adopted an employee stock compensation program for the benefit of
selected directors, officers and other key employees of the Bank. This
program is comprised of four parts designated as "Incentive Stock Option
Plan", "Compensatory Stock Plan", "Stock Appreciation Rights Plan" and
"Performance Shares Plan".
The administrators of the program have sole authority and absolute
discretion to make all decisions, determinations and interpretations
related to the Program, including determining the employees to whom
options, appreciation rights and performance shares shall be granted under
the program.
The maximum aggregate number of shares of common stock available pursuant
to the program shall be equal to the number of shares that represent 10%
of the Bank's initial issuance of common stock.
No options have been granted as of September 30, 1997.
(8) Income Taxes
As a federally chartered financial institution operating in Puerto Rico,
the Bank is subject to Puerto Rico and federal income taxes.
(Continued)
F-17
<PAGE>
11
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
Although the Bank is subject to federal taxation, it has filed an election
under Section 936 of the U.S. Internal Revenue Code (the Code), whereby a
possession tax credit is allowed for federal income taxes attributable to
income from operations in Puerto Rico. In order to continue receiving the
tax treatment afforded under Section 936, the Bank must continue meeting
specified minimum levels of gross income from (a) the active conduct of
business within Puerto Rico and (b) Puerto Rico sources. The portion of
the credit for U.S. tax on possession business income is subject to
certain limitations. Except for interest income earned from deposits in
the Federal Home Loan Bank of New York amounting to $57,031, $10,770,
$64,770, $55,375 and $54,818 in the three-month period ended December 31,
1997 and 1996 (unaudited), and the years ended September 30, 1997, 1996
and 1995, respectively, all of the Bank's income is derived from Puerto
Rico sources.
For taxable years beginning after December 31, 1995, the Small Business
Job Protection Act (approved on August 20, 1996) imposes new limitations
on the Section 936 credit allowed to a U.S. Corporation for U.S. tax on
income earned in Puerto Rico. Under this new legislation, the Company may
continue to claim the credit provided by Section 936 for the next ten
years or up to years beginning in 2005. Also, the credit for qualified
investment possession source income will no longer be allowed for
subsequent taxable years. Management believes that those changes would not
have a significant effect on the financial position of the Bank.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Three-month
period ended
December 31, September 30,
--------------------- -----------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current expense $ 20,200 33,000 200,489 95,000 146,052
Deferred tax benefit -- -- (83,390) -- --
-------- -------- -------- -------- --------
$ 20,200 33,000 117,099 95,000 146,052
======== ======== ======== ======== ========
</TABLE>
The difference between income taxes applying the Puerto Rico statutory
rates and reported income tax expense is caused mainly by amortization of
premium on loans, the provision for losses on loans and foreclosed real
estate, and profit/(loss) on foreclosed real estate, which are treated
differently for financial reporting and tax purposes.
(Continued)
F-18
<PAGE>
12
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
During 1997, the Bank purchased $100,000 in solid waste investment tax
credits (the credits) provided by Article 21 of the Puerto Rico Solid
Waste Authority Act, as amended (the Act). These tax credits were acquired
at a 15% discount rate resulting in a total discount of $15,000. The
discount was accreted as interest income as the tax credits were fully
utilized in the payment of taxes for 1997.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 (unaudited) and September 30, 1997 (none at September
30, 1996), are presented below:
Deferred tax assets:
Real estate owned, due to gain recorded
for tax purposes $ 39,780
Allowance for losses on real estate owned 7,886
Allowance for loan losses 132,930
---------
Gross deferred tax assets 180,596
Deferred tax liabilities:
Premium on mortgage loans 16,038
Recapture of allowance for loan losses 78,358
Deferred loan origination costs 2,810
---------
Total gross deferred tax liabilities 97,206
Net deferred tax assets $ 83,390
==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected taxable income, and tax planning strategies in
making this assessment.
(9) Concentrations of Credit Risk
The Bank's business activities are with customers located in Puerto Rico.
The Bank's loan transactions are mainly directed toward the private sector
of the island's economy as well as originating consumer loans. The purpose
of the private sector loans is to provide economic support to small and
medium-size entities. The collateral held on the Bank's loans varies, but
usually includes real estate mortgages.
(Continued)
F-19
<PAGE>
13
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(10) Commitments and Contingencies
The Bank operates on leased premises under two noncancellable operating
leases which expired in January 1997 and May 1997. Rental expense for
leased premises amounted to approximately $19,000, $18,000, $74,000,
$68,000 and $63,000 for the three-month period ended December 31, 1997 and
1996 (unaudited), and the years ended September 30, 1997, 1996 and 1995,
respectively. The leases are currently on a month-by-month basis.
The Bank entered into an option agreement to acquire for $450,000 a parcel
of land and certain structures located in Fajardo, Puerto Rico, with the
intent of transferring its main offices to said property. Under the terms
of the agreement, the Bank advanced $50,000 which are included in
construction in progress in the accompanying statement of financial
condition. Other costs included in construction in progress are primarily
related to architectural designs and related fees for the remodelation of
the new facility.
(11) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision. Failure to meet minimum
capital requirements can initiate certain mandatory and, possibly,
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. The
regulations require the Bank to meet specified capital adequacy 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 classification is 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 tangible capital, core capital and risk-based capital (as
defined). To be considered adequately capitalized (as defined) under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum regulatory tangible capital equal to 1.5 percent of adjusted total
assets, a minimum 3 percent core capital ratio and an 8 percent risk
capital ratio. The Bank's actual capital amounts and regulatory capital
requirement at September 30, 1997 are presented in the following table.
(Continued)
F-20
<PAGE>
14
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
<TABLE>
<CAPTION>
Regulatory
-----------------------------------------
GAAP Tangible Core Risk-based
Capital Capital Capital Capital
<S> <C> <C> <C> <C>
GAAP capital $3,253,172 3,253,172 3,253,172 3,253,172
==========
Additional capital item -
general valuation allowance -- -- 327,504
Disallowed capital item -
deferred tax assets -- (83,390) --
---------- ---------- ----------
Regulatory capital computed 3,253,172 3,169,782 3,580,676
Minimum capital requirement 448,778 897,556 1,835,564
---------- ---------- ----------
Regulatory capital - excess $2,804,394 2,272,226 1,745,112
========== ========== ==========
</TABLE>
Management believes, as of September 30, 1997, that the Bank meets all
capital requirements to which it is subject.
(12) Cease and Desist Order with the Office of Thrift Supervision
The Bank had executed a Stipulation and Consent to the issuance of a Cease
and Desist Order (the Order) on June 4, 1993. On August 26, 1997, the Bank
executed a new Stipulation and Consent to the issuance of an Order to
Cease and Desist for Affirmative Relief (the New Order), which terminated
the June 4, 1993 order. According to the New Order, the Bank shall cease
and desist from any action for or toward causing, bringing about,
participating in, counseling, aiding or abetting of any unsafe or unsound
practice or any violation of 12 CFR Sections 560.93 (regarding lending
limitations), 560.170 (regarding records for lending transactions),
560.160 (regarding asset classification), 563.43 (regarding loans to
officers, directors and principal shareholders), and 563.200 (regarding
conflicts of interest).
Other provisions include: (1) maintenance of minutes fully describing the
discussions held and the business transacted during all regular and
special meetings of the Board; (2) amend loan administration procedures to
require the use of loan closing statements, insurance against loss for
loans secured by motor vehicles and boats, and procedures to monitor the
expiration of insurance on real and personal property securing the Bank
loans; (3) maintenance of adequate valuation allowances, consistent with
generally accepted accounting principles and the practices of the federal
banking agencies.
(Continued)
F-21
<PAGE>
15
FAJARDO FEDERAL SAVINGS BANK
Notes to Financial Statements
(Information as of December 31, 1997 and
for each of the three-month periods ended
December 31, 1997 and 1996 is unaudited)
(13) Reconciliation of Retained Earnings and Net Income
Certain adjustments are reflected in the accompanying financial statements
which are not reflected in the reports filed with the Office of Thrift
Supervision in Atlanta. The following reconciliation provides the net
amount of such adjustments (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
Retained Net Retained Net Retained Net
Earnings Income Earnings Income Earnings Income
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance shown in the Thrift
Financial Report $1,608 249 1,360 190 1,174 14
Post-closing adjustments:
Deferred loan origination
fees/costs 73 73 -- -- -- --
Income taxes 29 29 -- -- -- --
Other -- -- -- -- (4) (4)
------ ------ ------ ------ ------ ------
Balance shown in the accompanying
financial statements $1,710 351 1,360 190 1,170 10
====== ====== ====== ====== ====== ======
</TABLE>
Retained earnings and net income (unaudited) per the Thrift Financial
Report and the accompanying financial statements for the three months
ended December 31, 1997 and 1996 (unaudited) are the same.
F-22
<PAGE>
(14) Financial Instruments
The estimated fair value of the Bank's financial instruments as of
September 30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 2,186,999 2,186,999 $ 1,444,994 1,444,994
Debt securities held to maturity - - 52,360 59,882
Loans receivable, net 24,009,419 24,519,909 26,198,393 26,155,306
Accrued interest receivable 194,211 194,211 276,163 276,163
Financial liabilities:
Total deposits 22,517,956 22,519,993 20,812,606 20,806,118
Advances from Federal Home
Loan Bank of New York 3,800,000 3,811,345 4,900,000 4,940,937
Advances from borrowers for
taxes and insurance 93,448 93,448 93,203 93,203
Accrued interest payable 68,725 68,725 62,786 62,786
</TABLE>
(15) Subsequent Event
On March 10, 1998, the Bank entered into an Agreement and a Plan of Merger
with R&G Financial Corporation ("RGFC") and R-G Premier Bank of Puerto
Rico ("Premier"), a wholly-owned subsidiary of RGFC, whereby RGFC would
acquire all of the issued and outstanding common stock of the Bank in
exchange for cash and/or a number of shares of the common stock of RGFC,
and upon which the Bank would merge with and into Premier, with Premier as
the surviving entity. The acquisition is subject to approval from various
regulatory authorities and the Bank's shareholders. If approved, the
acquisition is anticipated to be consummated between the second and third
quarter of 1998.
F-23
<PAGE>
APPENDIX A
AGREEMENT OF MERGER
among
R&G FINANCIAL CORPORATION,
R-G PREMIER BANK OF PUERTO RICO
and
FAJARDO FEDERAL SAVINGS BANK
dated as of March 10, 1998
<PAGE>
AGREEMENT OF MERGER
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS........................................ 1
ARTICLE II THE MERGER......................................... 5
2.1 The Merger......................................... 5
2.2 Effective Time; Closing............................ 6
2.3 Conversion of Shares .............................. 6
2.4 Elections.......................................... 7
2.5 Allocation of Merger Consideration................. 8
2.6 Exchange Procedures................................ 9
2.7 No Fractional Shares............................... 11
2.8 Withholding Rights................................. 11
2.9 Dissenting Shares.................................. 11
2.10 Additional Actions................................. 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FAJARDO.......... 12
3.1 Capital Structure.................................. 12
3.2 Organization, Standing and Authority of Fajardo.... 13
3.3 No Fajardo Subsidiaries............................ 13
3.4 [Reserved]......................................... 13
3.5 Authorized and Effective Agreement................. 13
3.6 Documents and Regulatory Reports................... 14
3.7 Financial Statements............................... 15
3.8 Material Adverse Change............................ 15
3.9 Environmental Matters.............................. 16
3.10 Allowance for Loan Losses, Real Estate Owned
and Other Repossessed Assets....................... 16
3.11 Tax Matters........................................ 16
3.12 Legal Proceedings.................................. 17
3.13 Compliance with Laws............................... 18
3.14 Deposit Insurance and Other Regulatory Matters..... 18
3.15 Certain Information................................ 18
3.16 Employee Benefit Plans............................. 19
3.17 Certain Contracts.................................. 19
3.18 Brokers and Finders................................ 20
3.19 Insurance.......................................... 20
3.20 Properties......................................... 20
i
<PAGE>
3.21 Labor................................................. 21
3.22 Transactions with Affiliated Persons and Affiliates... 21
3.23 Required Vote......................................... 21
3.24 Disclosures........................................... 21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF RGFC
AND PREMIER......................................... 22
4.1 Capital Structure of RGFC............................. 22
4.2 Organization, Standing and Authority of RGFC.......... 22
4.3 Ownership of Premier
and Mortgage......................................... 22
4.4 Organization, Standing and Authority of the Bank and
Mortgage............................................. 23
4.5 Authorized and Effective Agreement.................... 23
4.6 Securities Documents and Regulatory Reports........... 24
4.7 Financial Statements.................................. 25
4.8 Material Adverse Change............................... 25
4.9 Environmental Matters................................. 26
4.10 Allowance for Loan Losses and Real Estate Owned....... 26
4.11 Tax Matters........................................... 27
4.12 Legal Proceedings..................................... 27
4.13 Compliance with Laws.................................. 28
4.14 Deposit Insurance and Other Regulatory Matters........ 28
4.15 Certain Information................................... 29
4.16 Employee Benefit Plans................................ 29
4.17 Certain Contracts..................................... 30
4.18 Brokers and Finders................................... 31
4.19 Insurance............................................. 31
4.20 Properties............................................ 31
4.21 Labor................................................. 32
4.22 Transactions with Affiliated Persons and Affiliates .. 32
4.23 Disclosures........................................... 32
ARTICLE V COVENANTS............................................. 32
5.1 Reasonable Best Efforts............................... 32
5.2 Shareholder Meeting................................... 33
5.3 Regulatory Matters.................................... 33
5.4 Investigation and Confidentiality..................... 34
5.5 Press Releases........................................ 35
5.6 Business of the Parties............................... 35
5.7 Current Information................................... 38
5.8 Indemnification; Insurance............................ 38
5.9 Directors, Officers and Employees..................... 39
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5.10 Certain Policies; Integration..........................40
5.11 Restrictions on Resale.................................41
5.12 Disclosure Supplements.................................41
5.13 Failure to Fulfill Conditions..........................41
ARTICLE VI CONDITIONS PRECEDENT...................................41
6.1 Conditions Precedent - RGFC, Premier
and Fajardo..........................................41
6.2 Conditions Precedent - Fajardo.........................43
6.3 Conditions Precedent - RGFC and Premier................44
ARTICLE VII TERMINATION, WAIVER AND AMENDMENT......................45
7.1 Termination............................................45
7.2 Effect of Termination..................................46
7.3 Survival of Representations, Warranties and Covenants..46
7.4 Waiver.................................................46
7.5 Amendment or Supplement................................47
ARTICLE VIII MISCELLANEOUS..................................................47
8.1 Expenses...............................................47
8.2 Entire Agreement.......................................47
8.3 No Assignment..........................................48
8.4 Notices................................................48
8.5 Alternative Structure..................................49
8.6 Interpretation.........................................49
8.7 Counterparts...........................................50
8.8 Governing Law..........................................50
8.9 Agreement with Respect to Infusion of Capital by
Fajardo's Directors..................................50
Exhibit A Form of Plan of Merger between R&G Premier Bank
of Puerto Rico and Fajardo
Exhibit B Form of Fajardo Stock Option Agreement
Exhibit C Form of Fajardo Stockholder Agreement
Exhibit D Form of Company Affiliate Letter
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AGREEMENT OF MERGER
Agreement of Merger (the "Agreement"), dated as of March 10, 1998, by
and among R&G Financial Corporation (the "RGFC"), a Puerto Rico corporation, R-G
Premier Bank of Puerto Rico ("Premier"), a Puerto Rico-chartered commercial bank
and wholly-owned subsidiary of RGFC, and Fajardo Federal Savings Bank
("Fajardo"), a federally-chartered savings bank.
W I T N E S S E T H:
WHEREAS, the Boards of Directors of RGFC, Premier and Fajardo have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the business combination transactions provided
for herein, including the merger of Fajardo with and into Premier, subject to
the terms and conditions set forth herein; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby; and
WHEREAS, as a condition and inducement to RGFC's willingness to enter
into the Agreement, (i) Fajardo intends to enter into the Option Agreement with
RGFC as of the date hereof (the "Fajardo Stock Option Agreement"), in
substantially the form attached hereto as Exhibit B, pursuant to which Fajardo
intends to grant to RGFC the option to purchase shares of Fajardo Common Stock
(as defined herein) under certain circumstances and (ii) certain stockholders of
Fajardo intend to enter into a Stockholder Agreement with RGFC (the "Fajardo
Stockholder Agreement"), in substantially the form attached hereto as Exhibit C,
pursuant to which, among other things, such stockholders will agree to vote
their shares of Fajardo Common Stock in favor of this Agreement and the
transactions contemplated hereby; and
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do hereby agree as
follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings ascribed to them for all
purposes of this Agreement.
"Bank Merger Agreement" shall have the meaning set forth in Section 2.1
hereof.
"Class A Shares" shall mean the class of RGFC Common Stock, all of
which is owned by the RGFC Chairman of the Board and Chief Executive Officer.
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"Class B Shares" shall mean the class of RGFC Common Stock which is
registered under the Exchange Act.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Commissioner" shall mean the Commissioner of Financial Institutions of
Puerto Rico or any successor thereto.
"Effective Time" shall mean the date and time specified pursuant to
Section 2.2 hereof as the effective time of the Merger.
"Environmental Claim" means any written notice from any Governmental
Entity or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any Governmental
Entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environment Concern.
The term Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss.9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss.6901, et seq; the Clean Air Act, as amended, 42 U.S.C. ss.7401, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss.1251, et
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. ss.9601, et seq;
the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.1101, et
seq; the Safe Drinking Water Act, 42 U.S.C. ss.300f, et seq; and all comparable
state and local laws, and (2) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Materials of Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fajardo Common Stock" shall mean the common stock, par value $1.00 per
share, of Fajardo.
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"Fajardo Dissenting Shares" shall have the meaning set forth in Section
2.9 hereof.
"Fajardo Financial Statements" shall mean (i) the audited statements of
financial condition (including related notes and schedules, if any) of Fajardo
as of September 30, 1997 and 1996 and the statements of income, stockholders'
equity and cash flows (including related notes and schedules, if any) of Fajardo
for each of the three years ended September 30, 1997, 1996 and 1995, and (ii)
the statements of financial condition of Fajardo (including related notes and
schedules, if any) and the statements of income, stockholders' equity and cash
flows (including related notes and schedules, if any) of Fajardo with respect to
the quarterly and annual periods ended subsequent to September 30, 1997.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
successor thereto.
"Form S-4" shall mean the registration statement on Form S-4 (or on any
successor or other appropriate form) to be filed by RGFC in connection with the
issuance of shares of RGFC Common Stock pursuant to the Merger, including the
Proxy Statement which forms a part thereof, as amended and supplemented.
"FRB" shall mean the Board of Governors of the Federal Reserve System.
"Governmental Entity" shall mean any federal, state or Puerto Rico
court, administrative agency or commission or other governmental authority or
instrumentality.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Merger" shall mean the merger of Fajardo with and into Premier
pursuant to the terms hereof.
"Merger Consideration" shall mean the consideration for the Fajardo
Common Stock, defined in Section 2.3(c).
"Mortgage" shall mean R&G Mortgage Corp., a wholly-owned mortgage
banking subsidiary of RGFC.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"OTS" shall mean the Office of Thrift Supervision of the U.S.
Department of the Treasury.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
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"Previously Disclosed" shall mean disclosed (i) in a letter dated the
date hereof delivered from the disclosing party to the other party specifically
referring to the appropriate section of this Agreement and describing in
reasonable detail the matters contained therein, or (ii) in a letter dated after
the date hereof from the disclosing party specifically referring to this
Agreement and describing in reasonable detail the matters contained therein and
delivered by the other party pursuant to Section 5.12 hereof.
"Proxy Statement" shall mean the joint prospectus/proxy statement
contained in the Form S-4, as amended or supplemented, and to be delivered to
shareholders of Fajardo in connection with the solicitation of their approval of
this Agreement and the transactions contemplated hereby.
"Puerto Rico Banking Law" means the Banking Act of the Commonwealth of
Puerto Rico.
"Puerto Rico Corporate Law" means the 1995 General Corporation Law of
the Commonwealth of Puerto Rico.
"Puerto Rico Tax Code" shall mean the Puerto Rico Internal Revenue Code
of 1994, as amended.
"RGFC Average Market Value" shall have the meaning set forth in Section
2.3.
"RGFC Common Stock" shall mean the common stock, par value $.01 per
share, of RGFC, which is comprised of Class A Shares and Class B Shares.
"RGFC Employee Plans" shall have the meaning set forth in Section
4.16(a) hereof.
"RGFC Employee Stock Benefit Plan" shall mean the 1996 Stock Option
Plan.
"RGFC Financial Statements" shall mean (i) the consolidated statements
of financial condition (including related notes and schedules, if any) of RGFC
as of December 31, 1997 and 1996 and the consolidated statements of earnings,
stockholders' equity and cash flows (including related notes and schedules, if
any) of RGFC for each of the three years ended December 31, 1996, 1995 and 1994
as filed by RGFC in its Securities Documents, and (ii) the consolidated
statements of financial condition of RGFC (including related notes and
schedules, if any) and the consolidated statements of earnings, stockholders'
equity and cash flows (including related notes and schedules, if any) of RGFC
included in the Securities Documents filed by RGFC with respect to the quarterly
and annual periods ended subsequent to December 31, 1996.
"RGFC Preferred Stock" shall mean the shares of preferred stock, par
value $.01 per share, of RGFC.
"Real Estate Owned" shall mean real estate acquired by foreclosure or
by deed-in-lieu of foreclosure, real estate in judgment and subject to
redemption and in-substance foreclosures under generally accepted accounting
principles.
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"Rights" shall mean warrants, options, rights, convertible securities
and other arrangements or commitments which obligate an entity to issue or
dispose of any of its capital stock or other ownership interests in the entity.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, offering circulars,
proxy statements, registration statements and all similar documents filed, or
required to be filed, pursuant to the Securities Laws.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940,
as amended; the Trust Indenture Act of 1939, as amended, and the rules and
regulations of the Commission promulgated pursuant to such laws.
"Subsidiary" shall mean any corporation, bank, savings association,
partnership, joint venture or other organization more than 10% of the stock or
ownership interest of which is owned, directly or indirectly, by an entity.
Other terms used herein are defined in the preamble and elsewhere in
this Agreement.
ARTICLE II
THE MERGER
2.1 The Merger
(a) Subject to the terms and conditions of this Agreement, at the
Effective Time (as defined in Section 2.2 hereof), Fajardo shall be merged with
and into Premier (the "Merger") in accordance with the Plan of Merger between
Premier and Fajardo, the form of which is attached as Exhibit A hereto (the
"Bank Merger Agreement") and applicable provisions of the Puerto Rico Banking
Law. Premier shall be the surviving corporation (hereinafter sometimes called
the "Surviving Corporation") of the Merger, and shall continue its corporate
existence under the laws of Commonwealth of Puerto Rico. The name of the
Surviving Corporation shall continue to be "R&G Premier Bank of Puerto Rico" and
the Surviving Corporation will continue to operate as a wholly-owned subsidiary
of RGFC. Upon consummation of the Merger, the separate corporate existence of
Fajardo shall terminate.
(b) From and after the Effective Time, the Merger shall have the
effects set forth in Section 15 of the Puerto Rico Banking Law.
(c) The Articles of Incorporation and Bylaws of Premier, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
and Bylaws of the Surviving
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Corporation, respectively, until altered, amended or repealed in accordance with
their terms and applicable law.
(d) Upon consummation of the Merger, (i) the directors of RGFC shall
consist of all of the directors of RGFC immediately prior to the Effective Time
and (ii) the executive officers of RGFC shall be the executive officers of RGFC
immediately prior to the Effective Time.
(e) Upon consummation of the Merger (i) the directors of Premier shall
consist of all of the directors of Premier immediately prior to the Effective
Time and (ii) the executive officers of Premier shall be the executive officers
of Premier immediately prior to the Effective Time. Directors and officers of
Premier shall serve for such terms as are specified in the Bank Merger Agreement
and the Articles of Incorporation and Bylaws of Premier.
2.2 Effective Time; Closing
The Merger shall become effective upon the occurrence of the filing of
the Bank Merger Agreement with the Secretary of State of the Commonwealth of
Puerto Rico pursuant to the Puerto Rico Banking Law, (the "Effective Time"). A
closing (the "Closing") shall take place immediately prior to the Effective Time
at 10:00 a.m., Eastern Time, on or before the fifth business day following the
satisfaction or waiver, to the extent permitted hereunder, of the conditions to
the consummation of the Merger specified in Article VI of this Agreement (other
than the delivery of certificates, opinions and other instruments and documents
to be delivered at the Closing), at the principal executive offices of RGFC in
San Juan, Puerto Rico, or at such other place, at such other time, or on such
other date as the parties may mutually agree upon. At the Closing, there shall
be delivered to RGFC and Fajardo the opinions, certificates and other documents
required to be delivered under Article VI hereof.
2.3 Conversion of Shares
At the Effective Time, by virtue of the Merger and without any action
on the part of a holder of shares of Fajardo Common Stock:
(a) Each share of RGFC Common Stock that is issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and
shall be unchanged by the Merger.
(b) All shares of Fajardo Common Stock owned by Fajardo (including
treasury shares) or RGFC shall be cancelled and retired and shall not represent
capital stock of the Surviving Corporation and shall not be exchanged for the
Merger Consideration.
(c) RGFC and Fajardo have agreed that to the extent the RGFC Average
Market Value (defined below) is equal to $27.00, RGFC will pay $5,914,000 in
consideration for all of the issued and outstanding shares of Fajardo Common
Stock. Consequently, subject to Sections 2.5, 2.7 and 2.9, each share of Fajardo
Common Stock issued and outstanding at the Effective Time
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(other than shares to be cancelled in accordance with Section 2.3(b)) shall, by
virtue of this Agreement and without any action on the part of the holder
thereof, be converted into the right to receive, at the election of the holder
thereof (i) $37.80 in cash (the "Cash Consideration") or (ii) the number of
shares of RGFC Class B Shares which is equal to (A) if the RGFC Average Market
Value is equal to or less than $30.50 but equal to or greater than $24.00, 1.40
shares, (B) if the RGFC Average Market Value is greater than $30.50, the
quotient determined by dividing (x) $42.70 by (y) such RGFC Average Market Value
or (C) if the RGFC Average Market Value is less than $24.00, the quotient
determined by dividing (x) $32.91 by (y) such RGFC Average Market Value (the
"Stock Consideration") (collectively, the "Merger Consideration").
(x) If, between the date of this Agreement and the Effective
Time, the outstanding shares of RGFC Class B Shares shall have been
changed into a different number of shares or into a different class, by
reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares (each, a
"Stock Adjustment"), the Stock Consideration shall be adjusted
correspondingly to the extent appropriate to reflect the Stock
Adjustment.
(y) As used in this Section 2.3, "RGFC Average Market Value"
shall be the average of the mean between the closing high bid and low
asked prices of a share of RGFC Class B Shares, as reported on the
Nasdaq Stock Market (the "Nasdaq"), for the 10 consecutive trading days
ending five days immediately preceding the Closing.
(d) Each share of common stock of Premier that is issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall be unchanged by the Merger.
2.4 Elections
(a) Subject to the allocation procedures set forth in Section 2.5, each
holder of Fajardo Common Stock will be entitled, with respect to the Merger
Consideration to be received for each share of Fajardo Common Stock held by such
holder, to (i) elect to receive the Stock Consideration (a "Stock Election")
with respect to such holder's Fajardo Common Stock ("Stock Election Shares"),
(ii) elect to receive the Cash Consideration (a "Cash Election") with respect to
such holder's Fajardo Common Stock ("Cash Election Shares") or (iii) make no
election (a "No-Election") with respect to such holder's Fajardo Common Stock
("No-Election Shares"). Any dissenting shares pursuant to Section 2.9 shall be
deemed to be Cash Election Shares. Notwithstanding the foregoing, in order to
make a Stock Election, the number of shares of Fajardo Common Stock a Fajardo
stockholder elects to convert must equal or exceed 100 shares.
(b) An election form and other appropriate transmittal materials (the
"Letter of Transmittal and Election Form") will be mailed within three business
days after the Closing to each holder of record of Fajardo Common Stock as of
the Effective Time permitting such holder (or in the case of nominee record
holders, the beneficial owner through proper instructions and documentation) to
make a (i) Stock Election, (ii) Cash Election or (iii) No-Election. Holders who
hold in a variety of capacities may make a separate election in each capacity.
Any election shall
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have been properly made only if a bank or trust company designated by RGFC (the
"Exchange Agent") shall have actually received a properly completed Letter of
Transmittal and Election Form by the Election Deadline, described below. A
Letter of Transmittal and Election Form will be properly completed only if
accompanied by certificates representing all shares of Fajardo Common Stock
covered thereby. Any shares of Fajardo Common Stock with respect to which the
holder thereof shall not, as of the Election Deadline, have made such an
election by submission to and receipt by the Exchange Agent of an effective,
properly completed Letter of Transmittal and Election Form shall be deemed to be
No-Election Shares. The Exchange Agent shall have reasonable discretion to
determine when any election, modification or revocation is received and whether
any such election, modification or revocation has been properly made.
(c) The Election Deadline shall be 5:00 p.m., Eastern Time, on the 10th
business day following but not including the date of mailing of the Letter of
Transmittal and Election Form or such other date as RGFC and Fajardo shall
mutually agree upon.
2.5 Allocation of Merger Consideration
(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate Cash Consideration to be paid in the Merger shall not exceed
$1,182,633 (the "Aggregate Cash Consideration").
(b) If the number of Cash Election Shares times the Cash Consideration
per share is equal to or less than the Aggregate Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 2.9 with
respect to Fajardo Common Stock) will be converted into the right to
receive cash; and
(2) the No Election Shares and the Stock Election Shares will
be converted into the right to receive RGFC Class B Shares.
(c) If the number of Cash Election Shares times the Cash Consideration
per share is greater than the Aggregate Cash Consideration, then:
(1) all Stock Election Shares and No Election Shares will be
converted into the right to receive RGFC Class B Shares;
(2) the Exchange Agent will allocate among the holders of Cash
Election Shares (by the method of allocation described below), a
sufficient number of Cash Election Shares (excluding any Fajardo
Dissenting Shares) ("Reallocated RGFC Shares") such that the number of
remaining Cash Election Shares (including Fajardo Dissenting Shares)
times the Cash Consideration per share equals the Aggregate Cash
Consideration, and all Reallocated RGFC Shares shall be converted into
the right to receive RGFC Class B Shares; and
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(3) the Cash Election Shares (subject to Section 2.9 with
respect to Fajardo Dissenting Shares) which are not Reallocated RGFC
Shares will be converted into the right to receive cash.
(d) In the event that the Exchange Agent is required pursuant to
Section 2.5(c)(2) to designate from among all holders of Cash Election Shares
the Reallocated RGFC Shares to receive RGFC Class B Shares, each holder of Cash
Election Shares shall be allocated a pro rata portion of the total Reallocated
RGFC Shares.
2.6 Exchange Procedures
(a) At and after the Effective Time, each certificate previously
representing shares of Fajardo Common Stock shall represent only the right to
receive the Merger Consideration (the "Fajardo Certificates"), except as
specifically set forth in Section 2.3.
(b) Within three business days of the Effective Time, Peoples shall
deposit, or shall cause to be deposited, with the Exchange Agent, for the
benefit of the holders of shares of Fajardo Common Stock, for exchange in
accordance with this Section 2.6, an estimated amount of cash sufficient to pay
the Aggregate Cash Consideration to be paid pursuant to Section 2.3 and the
aggregate amount of cash paid in lieu of fractional shares to be paid pursuant
to Section 2.7, and RGFC shall reserve for issuance with its Transfer Agent and
Registrar, the aggregate Stock Consideration to be issued.
(c) The Letter of Transmittal and Election Form to be mailed within
three business days of the Effective Date shall specify that delivery shall be
effected, and risk of loss and title to the Fajardo Certificates shall pass,
only upon delivery of Fajardo Certificates to the Exchange Agent, shall be in a
form and contain any other provisions as RGFC may reasonably determine and shall
include instructions for use in effecting the surrender of the Fajardo
Certificates in exchange for the Merger Consideration. Upon the proper surrender
of a Fajardo Certificate or Fajardo Certificates to the Exchange Agent, together
with a properly completed and duly executed Letter of Transmittal and Election
Form, the holder of such Fajardo Certificate or Fajardo Certificates shall be
entitled to receive in exchange therefor (i) a certificate representing that
number of whole shares of RGFC Class B Shares that such holder has the right to
receive pursuant to this Agreement and (ii) a check in the amount equal to the
cash, if any, which such holder has the right to receive pursuant to this
Agreement (including any cash in lieu of any fractional shares of RGFC Class B
Shares to which such holder is entitled to pursuant to Section 2.7 and any
dividend or other distributions to which such holder of RGFC Class B Shares is
entitled to pursuant to Section 2.6(d)). The Fajardo Certificate or Fajardo
Certificates so surrendered shall forthwith be cancelled. As soon as practicable
after completion of the allocations of the Merger Consideration and in no event
later than ten business days after the Election Deadline, the Exchange Agent
shall distribute RGFC Class B Shares and cash as provided herein. The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to the RGFC Class B Shares held by it from time to time hereunder. In
the event of a transfer of ownership of any shares of Fajardo Common Stock not
registered in
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the transfer records of Fajardo, the Cash Consideration shall be paid and the
Stock Consideration shall be issued to the transferee if the Fajardo Certificate
representing such Fajardo Common Stock is presented to the Exchange Agent,
accompanied by documents sufficient, in the reasonable judgment of RGFC and the
Exchange Agent, (x) to evidence and effect such transfer and (y) to evidence
that all applicable stock transfer taxes have been paid.
(d) No interest will be paid or accrued on the Cash Consideration. No
dividend or other distributions declared or made after the Effective Time with
respect to shares of RGFC Class B Shares shall be remitted to any person
entitled to receive shares of RGFC Class B Shares until such person surrenders
the Fajardo Certificate or Fajardo Certificates, at which time such dividends
shall be remitted to such persons, without interest.
(e) From and after the Effective Time, there shall be no transfers on
the stock transfer records of Fajardo of any shares of Fajardo Common Stock that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Fajardo Certificates are presented to RGFC, they shall be
cancelled and exchanged for the Merger Consideration, deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set forth
in this Section 2.6.
(f) Any portion of the aggregate Cash Consideration or the proceeds of
any investments thereof that remains unclaimed by the stockholders of Fajardo
for six (6) months after the Effective Time shall be repaid by the Exchange
Agent to RGFC upon the written request of RGFC. After such request is made, any
stockholders of Fajardo who have not theretofore complied with this Section 2.6
shall look only to RGFC for payment and issuance of their Merger Consideration
deliverable in respect of each share of Fajardo Common Stock such stockholder
holds as determined pursuant to this Agreement without any interest thereon. If
outstanding certificates for shares of Fajardo Common Stock are not surrendered
or the payment for them is not claimed prior to the date on which such payments
would otherwise escheat to or become the property of any governmental unit or
agency, the unclaimed items shall, to the extent permitted by abandoned property
and any other applicable law, become the property of RGFC (and to the extent not
in its possession shall be paid over to it), free and clear of all claims or
interest of any person previously entitled to such claims. Notwithstanding the
foregoing, none of RGFC, the Exchange Agent or any other person shall be liable
to any former holder of Fajardo Common Stock for any amount delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(g) RGFC and the Exchange Agent shall be entitled to rely upon
Fajardo's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Fajardo Certificate, RGFC and the Exchange Agent shall
be entitled to deposit any consideration represented thereby in escrow with an
independent third party and thereafter be relieved with respect to any claims
thereto.
(h) In the event any Fajardo Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Fajardo Certificate to be lost,
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stolen or destroyed and, if required by the Exchange Agent, the posting by such
person of a bond in such amount as the Exchange Agent may direct as indemnity
against any claim that may be made against it with respect to such Fajardo
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Fajardo Certificate the Merger Consideration deliverable in respect
thereof pursuant to this Agreement.
2.7 No Fractional Shares
Notwithstanding any other provision of this Agreement, neither
certificates nor scrip for fractional shares of RGFC Class B Shares shall be
issued in the Merger. Each holder who otherwise would have been entitled to a
fraction of a share of RGFC Class B Shares shall receive in lieu thereof cash
(without interest) in an amount determined by multiplying the fractional share
interest to which such holder would otherwise be entitled by $37.80. No such
holder shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share.
2.8 Withholding Rights
RGFC (through the Exchange Agent, if applicable) shall be entitled to
deduct and withhold from any amounts otherwise payable pursuant to this
Agreement to any holder of shares of Fajardo Common Stock such amounts as RGFC
is required under any provision of Commonwealth of Puerto Rico, local or foreign
tax law to deduct and withhold with respect to the making of such payment. Any
amounts so withheld shall be treated for all purposes of this Agreement as
having been paid to the holder of Fajardo Common Stock in respect of which such
deduction and withholding was made by RGFC.
2.9 Dissenting Shares
Each outstanding share of Fajardo Common Stock the holder of which has
perfected his right to dissent under applicable federal regulations and has not
effectively withdrawn or lost such right as of the Effective Time (the "Fajardo
Dissenting Shares") shall not be converted into or represent a right to receive
the Merger Consideration and the holder thereof shall be entitled only to such
rights as are granted by applicable federal regulations. Fajardo shall give RGFC
prompt notice upon receipt by Fajardo of any such written demands for payment of
the fair value of such shares of Fajardo Common Stock and of withdrawals of such
demands and any other instruments provided pursuant to the applicable federal
regulations (any shareholder duly making such demand being hereinafter called a
"Dissenting Fajardo Shareholder"). Any payments made in respect of Fajardo
Dissenting Shares shall be made by the Surviving Corporation. If any Fajardo
Dissenting Shareholder shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment at or prior to the Effective
Time, such holder's shares of Fajardo Common Stock shall be converted into a
right to receive the Merger Consideration in accordance with the applicable
provisions of this Agreement. If such holder shall effectively withdraw or lose
(through failure to perfect or otherwise) his right to such payment after the
Effective Time, each share of Fajardo Common Stock of such holder shall be
converted into the right to receive RGFC Common Stock pursuant to the terms
hereof.
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2.10 Additional Actions
If at any time after the Effective Time the Surviving Corporation shall
consider that any further assignments or assurances in law or any other acts are
necessary or desirable to (i) vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its rights, title or interest in, to or under any
of the rights, properties or assets of Fajardo acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger, or (ii)
otherwise carry out the purposes of this Agreement, Fajardo and its proper
officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
proper deeds, assignments and assurances in law and to do all acts necessary or
proper to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement; and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of Fajardo or otherwise
to take any and all such action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FAJARDO
Fajardo represents and warrants to RGFC as follows:
3.1 Capital Structure
The authorized capital stock of Fajardo consists of 5,000,000 shares of
Company Common Stock. There are no authorized or outstanding shares of preferred
stock of Fajardo. As of the date hereof, there are 156,433 shares of Fajardo
Common Stock issued and outstanding and no shares of Fajardo Common Stock are
directly held as treasury stock by Fajardo. All outstanding shares of Fajardo
Common Stock have been duly authorized and validly issued and are fully paid and
nonassessable, and none of the outstanding shares of Fajardo Common Stock has
been issued in violation of the preemptive rights of any person, firm or entity.
Except as Previously Disclosed, there are no stock options to acquire Fajardo
Common Stock outstanding of any kind whatsoever, except for shares of Fajardo
Common Stock issuable pursuant to the terms of the Fajardo Stock Option
Agreement, and there are no rights authorized, issued or outstanding with
respect to the capital stock of Fajardo.
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3.2 Organization, Standing and Authority of Fajardo
Fajardo is a savings bank duly organized, validly existing and in good
standing under the laws of the United States with full corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as now conducted and is duly licensed or qualified to do business and
is in good standing in each jurisdiction in which its ownership or leasing of
property or the conduct of its business requires such licensing or qualification
and where the failure to be so licensed, qualified or in good standing would
have a material adverse effect on the financial condition, results of operations
or business of Fajardo. Fajardo has heretofore delivered to RGFC true and
complete copies of the Federal Stock Charter and Bylaws of Fajardo as in effect
as of the date hereof.
3.3 No Fajardo Subsidiaries
Fajardo has no direct or indirect Subsidiaries. Except for capital
stock in the FHLB of New York and securities and other interests taken in
consideration of debts previously contracted, Fajardo does not own or have the
right to acquire, directly or indirectly, any outstanding capital stock or other
voting securities or ownership interests of any corporation, bank, savings
association, partnership, joint venture or other organization.
3.4 [Reserved].
3.5 Authorized and Effective Agreement
(a) Fajardo has all requisite corporate power and authority to enter
into this Agreement and (subject to receipt of all necessary governmental
approvals and the approval of Fajardo's shareholders of this Agreement) to
perform all of its obligations under this Agreement. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action in
respect thereof on the part of Fajardo, except for the approval of this
Agreement by Fajardo's shareholders. This Agreement has been duly and validly
executed and delivered by Fajardo and constitutes a legal, valid and binding
obligation of Fajardo which is enforceable against Fajardo in accordance with
its terms, subject, as to enforceability, to bankruptcy, insolvency and other
laws of general applicability relating to or affecting creditors' rights and to
general equity principles.
(b) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby (including the Merger), nor
compliance by Fajardo with any of the provisions hereof (i) does or will
conflict with or result in a breach of any provisions of the Federal Stock
Charter or Bylaws of Fajardo, (ii) except as Previously Disclosed, violate,
conflict with or result in a breach of any term, condition or provision of, or
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon any property or asset of Fajardo pursuant to,
any
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material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Fajardo is a party, or by
which any of its properties or assets may be bound or affected, or (iii) subject
to receipt of all required governmental and shareholder approvals, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Fajardo.
(c) Except for (i) the filing of applications and notices with, and the
consents and approvals of, as applicable, the FRB, the FDIC, the OTS and the
Commissioner, (ii) the filing and effectiveness of the Form S-4 with the
Commission, (iii) compliance with applicable state securities or "blue sky" laws
and the NASD Bylaws in connection with the issuance of RGFC Class B Shares
pursuant to this Agreement, (iv) the approval of this Agreement by the requisite
vote of the shareholders of Fajardo and (v) the filing of the Bank Merger
Agreement with the Secretary of State of the Commonwealth of Puerto Rico
pursuant to the Puerto Rico Banking Law in connection with the Merger, and
except for such filings, authorizations or approvals which are Previously
Disclosed, no consents or approvals of or filings or registrations with any
Governmental Entity or with any third party are necessary on the part of Fajardo
in connection with the execution and delivery by Fajardo of this Agreement and
the Bank Merger Agreement and the consummation by Fajardo of the transactions
contemplated hereby and thereby.
(d) As of the date hereof, Fajardo is not aware of any reasons relating
to Fajardo (including, without limitation, Community Reinvestment Act
compliance) why all consents and approvals shall not be procured from all
regulatory agencies having jurisdiction over the transactions contemplated by
this Agreement as shall be necessary for (i) consummation of the transactions
contemplated by this Agreement and the Bank Merger Agreement and (ii) the
continuation by RGFC after the Effective Time of the business of each of RGFC
and Fajardo as such business is carried on immediately prior to the Effective
Time, free of any conditions or requirements which, in the reasonable opinion of
Fajardo, could have a material adverse effect upon the financial condition,
results of operations or business of RGFC on a consolidated basis or Fajardo or
materially impair the value of Fajardo to RGFC.
3.6 Documents and Regulatory Reports
(a) Fajardo has previously delivered or made available to RGFC a
complete copy of all documents mailed by Fajardo to its shareholders as a class
since January 1, 1993. Such documents did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided that
information as of a later date shall be deemed to modify information as of an
earlier date.
(b) Since January 1, 1993, Fajardo has duly filed with the OTS and the
FDIC, as the case may be, in correct form the reports required to be filed under
applicable laws and regulations and such reports were in all material respects
complete and accurate and in compliance with the requirements of applicable laws
and regulations, provided that information as of a later date shall be deemed to
modify information as of an earlier date. In connection with the most recent
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examinations of Fajardo by the OTS and the FDIC, Fajardo was not required to
correct or change any action, procedure or proceeding which Fajardo believes has
not been corrected or changed as required.
3.7 Financial Statements
(a) Fajardo has previously delivered or made available to RGFC accurate
and complete copies of Fajardo Financial Statements which, in the case of the
statements of financial condition of Fajardo as of September 30, 1997 and 1996
and the statements of operations, changes in stockholders' equity and cash flows
for each of the three years ended September 30, 1997, 1996 and 1995, are
accompanied by the audit reports of KPMG Peat Marwick LLP, independent public
accountants with respect to Fajardo. The Fajardo Financial Statements referred
to herein, as well as the Fajardo Financial Statements to be delivered pursuant
to Section 5.7 hereof, fairly present or will fairly present, as the case may
be, the financial condition of Fajardo as of the respective dates set forth
therein, and the results of operations, changes in stockholders' equity and cash
flows of Fajardo for the respective periods or as of the respective dates set
forth therein in accordance with generally accepted accounting principles.
(b) Each of Fajardo Financial Statements referred to in Section 3.7(a)
has been or will be, as the case may be, prepared in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as stated therein. The audits of Fajardo have been conducted in all
material respects in accordance with generally accepted auditing standards. The
books and records of Fajardo are being maintained in material compliance with
applicable legal and accounting requirements.
(c) Except to the extent (i) reflected, disclosed or provided for in
the statement of financial condition of Fajardo as of September 30, 1997
(including related notes) and (ii) of liabilities incurred since September 30,
1997 in the ordinary course of business, Fajardo has not incurred any
liabilities, whether absolute, accrued, contingent or otherwise, material to the
financial condition, results of operations or business of Fajardo.
3.8 Material Adverse Change
(a) There has not been any material adverse change in the business,
operations, assets or financial condition of Fajardo since September 30, 1997
and, except as Previously Disclosed, no fact or condition exists which Fajardo
reasonably expects will cause or is reasonably likely to cause such a material
adverse change in the future.
(b) Except as Previously Disclosed, Fajardo has not taken or permitted
any of the actions set forth in Section 5.6(a) hereof between September 30, 1997
and the date hereof.
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3.9 Environmental Matters
(a) To the best of Fajardo's knowledge, Fajardo is in compliance with
all Environmental Laws, except for any violations of any Environmental Law which
would not, singly or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of Fajardo. Fajardo has
not received any written communication alleging that Fajardo is not in such
compliance and, to the best knowledge of Fajardo, there are no present
circumstances that would prevent or interfere with the continuation of such
compliance.
(b) To the best of Fajardo's knowledge, none of the properties owned,
leased or operated by Fajardo has been or is in violation of or liable under any
Environmental Law, except any such violations or liabilities which would not
singly or in the aggregate have a material adverse effect on the financial
condition, results of operations or business of Fajardo.
(c) To the best of Fajardo's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Law against Fajardo or against any person or
entity whose liability for any Environmental Claim Fajardo has or may have
retained or assumed either contractually or by operation of law, except such
which would not have a material adverse effect on the financial condition,
results of operations or business of Fajardo.
(d) Except as Previously Disclosed, Fajardo has not conducted any
environmental studies during the past five years with respect to any properties
owned by it as of the date hereof.
3.10 Allowance for Loan Losses, Real Estate Owned and Other Repossessed
Assets
The allowance for loan losses reflected on Fajardo's statements of
financial condition included in the September 30, 1997 Fajardo Financial
Statements is, or will be in the case of subsequently delivered Fajardo
Financial Statements, as the case may be, in the opinion of Fajardo's
management, adequate in all material respects as of their respective dates under
the requirements of generally accepted accounting principles to provide for
reasonably estimated losses on outstanding loans net of recoveries. The Real
Estate Owned and other repossessed assets reflected on the consolidated
statements of financial condition included in the September 30, 1997 Fajardo
Financial Statements is, or will be in the case of subsequently delivered
Company Financial Statements, as the case may be, carried at net realizable
value, as required by generally accepted accounting principles.
3.11 Tax Matters
(a) Fajardo has timely filed (taking into account permissible
extensions) all federal, Commonwealth of Puerto Rico and local (and, if
applicable, foreign) income, franchise, bank, excise, real property, personal
property and other tax returns required by applicable law to be
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filed by it (including, without limitation, estimated tax returns, income tax
returns, information returns and withholding and employment tax returns) and has
paid, or where payment is not required to have been made, has set up an adequate
reserve or accrual for the payment of, all taxes required to be paid in respect
of the periods covered by such returns and, as of the Effective Time, will have
paid, or where payment is not required to have been made, will have set up an
adequate reserve or accrual for the payment of, all taxes for any subsequent
periods ending on or prior to the Effective Time. Fajardo will not have any
material liability for any such taxes in excess of the amounts so paid or
reserves or accruals so established.
(b) All federal, Commonwealth of Puerto Rico and local (and, if
applicable, foreign) income, franchise, bank, excise, real property, personal
property and other tax returns filed by Fajardo are complete and accurate in all
material respects. Fajardo is not delinquent in the payment of any tax,
assessment or governmental charge, and none of them has requested any extension
of time within which to file any tax returns in respect of any fiscal year or
portion thereof which have not since been filed. Except as Previously Disclosed,
the federal, Commonwealth of Puerto Rico and local income tax returns of Fajardo
have been examined by the applicable tax authorities (or are closed to
examination due to the expiration of the applicable statute of limitations) and
no deficiencies for any tax, assessment or governmental charge have been
proposed, asserted or assessed (tentatively or otherwise) against Fajardo as a
result of such examinations or otherwise which have not been settled and paid.
There are currently no agreements in effect with respect to Fajardo to extend
the period of limitations for the assessment or collection of any tax. As of the
date hereof, no audit, examination or deficiency or refund litigation with
respect to such returns are pending or, to the best of Fajardo's knowledge,
threatened.
(c) Except as Previously Disclosed, Fajardo (i) is not a party to any
agreement providing for the allocation or sharing of taxes or (ii) is not
required to include in income any adjustment by reason of a voluntary change in
accounting method initiated by Fajardo (nor does Fajardo have any knowledge that
any taxing authority has proposed any such adjustment or change of accounting
method).
3.12 Legal Proceedings
Except as Previously Disclosed, there are no actions, suits, claims,
governmental investigations or proceedings instituted, pending or, to the best
knowledge of Fajardo, threatened against Fajardo or against any asset, interest
or right of Fajardo, or against any officer, director or employee of Fajardo
that in any such case, if decided adversely, would have a material adverse
effect on the financial condition, results of operations or business of Fajardo.
Fajardo is not a party to any order, judgment or decree which has or could
reasonably be expected to have a material adverse effect on the financial
condition, results of operations or business of Fajardo.
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3.13 Compliance with Laws
(a) Fajardo has all permits, licenses, certificates of authority,
orders and approvals of, and has made all filings, applications and
registrations with, federal, state, local and foreign governmental or regulatory
bodies that are required in order to permit it to carry on its business as it is
presently being conducted and the absence of which could reasonably be expected
to have a material adverse effect on the financial condition, results of
operations or business of Fajardo; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect; and to the best
knowledge of Fajardo, no suspension or cancellation of any of the same is
threatened.
(b) Fajardo is not in violation of its Federal Stock Charter or Bylaws,
or of any applicable federal, Commonwealth of Puerto Rico or local law or
ordinance or any order, rule or regulation of any federal, commonwealth, local
or other governmental agency or body (including, without limitation, all banking
(including, without limitation, all regulatory capital requirements),
securities, municipal securities, safety, health, environmental, zoning,
anti-discrimination, antitrust, and wage and hour laws, ordinances, orders,
rules and regulations), or in default with respect to any order, writ,
injunction or decree of any court, or in default under any order, license,
regulation or demand of any governmental agency, any of which violations or
defaults could reasonably be expected to have a material adverse effect on the
financial condition, results of operations or business of Fajardo; and Fajardo
has not received any written notice or communication from any federal,
Commonwealth of Puerto Rico or local governmental authority asserting that
Fajardo is not in violation of any of the foregoing which could reasonably be
expected to have a material adverse effect on the financial condition, results
of operations or business of Fajardo. Except as Previously Disclosed, Fajardo is
not subject to any regulatory or supervisory cease and desist order, agreement,
written directive, memorandum of understanding or written commitment (other than
those of general applicability to all commercial banks issued by governmental
authorities), and Fajardo has not received any written communication requesting
that it enter into any of the foregoing.
3.14 Deposit Insurance and Other Regulatory Matters
(a) The deposit accounts of Fajardo are insured to the maximum extent
permitted by the FDIA, and Fajardo has paid all premiums and assessments
required by the FDIA and the regulations thereunder.
(b) Fajardo is a member in good standing of the FHLB of New York and
owns the requisite amount of stock in the FHLB of New York.
3.15 Certain Information
None of the information relating to Fajardo supplied or to be supplied
for inclusion or incorporation by reference in (i) the Form S-4 will, at the
time the Form S-4 and any amendment thereto becomes effective under the
Securities Act, contain any untrue statement of a material fact
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or omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and (ii)
the Proxy Statement, as of the date(s) such Proxy Statement is mailed to
shareholders of Fajardo and up to and including the date(s) of the meeting of
Fajardo shareholders to which such Proxy Statement relates, will contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, provided that information as of a later date shall be
deemed to modify information as of an earlier date. The Proxy Statement mailed
by Fajardo to its shareholders in connection with the meeting of shareholders at
which this Agreement will be considered by such shareholders will comply as to
form in all material respects with the information required to be included by it
the rules and regulations for Form S-4.
3.16 Employee Benefit Plans
(a) Fajardo has Previously Disclosed its stock option plans and has no
other employee stock purchase and stock bonus plans, qualified pension or
profit-sharing plans, any fringe benefit, incentive, deferred compensation,
consultant, bonus or group insurance contract, plan or arrangement, or any other
welfare plan (as defined under Section 3(1) of ERISA), employee pension benefit
plan (as defined under Section 3(2) of ERISA) or agreement maintained for the
benefit of employees or former employees of Fajardo (the "Fajardo Employee
Plans").
(b) Fajardo does not participate in nor has it incurred any liability
under Section 4201 of ERISA for a complete or partial withdrawal from a
multi-employer plan (as such term is defined in ERISA).
3.17 Certain Contracts
(a) Except as Previously Disclosed, Fajardo is not a party to, is not
bound or affected by, does not receive, or is not obligated to pay, benefits
under (i) any agreement, arrangement or commitment, including without limitation
any agreement, indenture or other instrument, relating to the borrowing of money
by Fajardo or the guarantee by Fajardo of any obligation, (ii) any agreement,
arrangement or commitment relating to the employment of a consultant or the
employment, election or retention in office of any present or former director,
officer or employee of Fajardo, (iii) any agreement, arrangement or
understanding pursuant to which any payment (whether of severance pay or
otherwise) became or may become due to any director, officer or employee of
Fajardo upon execution of this Agreement or upon or following consummation of
the transactions contemplated by this Agreement (either alone or in connection
with the occurrence of any additional acts or events), (iv) any agreement,
arrangement or understanding pursuant to which Fajardo is obligated to indemnify
any director, officer, employee or agent of Fajardo, (v) any agreement,
arrangement or understanding to which Fajardo is a party or by which any of the
same is bound which limits the freedom of Fajardo to compete in any line of
business or with any person, or (vi) except as Previously Disclosed in Schedule
3.13(b), any assistance agreement, supervisory agreement, memorandum of
understanding, consent order, cease
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and desist order or condition of any regulatory order or decree with or by the
OTS, the FDIC or any other regulatory agency.
(b) Fajardo is not in default or in non-compliance, which default or
non-compliance could reasonably be expected to have a material adverse effect on
the financial condition, results of operations or business of Fajardo or the
transactions contemplated hereby, under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a party
or by which its assets, business or operations may be bound or affected, whether
entered into in the ordinary course of business or otherwise and whether written
or oral, and there has not occurred any event that with the lapse of time or the
giving of notice, or both, would constitute such a default or non-compliance.
3.18 Brokers and Finders
Except as Previously Disclosed, neither Fajardo nor any of its
respective directors, officers or employees, has employed any broker or finder
or incurred any liability for any broker or finder fees or commissions in
connection with the transactions contemplated hereby.
3.19 Insurance
Fajardo is insured for reasonable amounts with financially sound and
reputable insurance companies against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured and has maintained all insurance required by applicable laws and
regulations. Fajardo has not received any notice of cancellation or notice of a
material amendment of any such insurance policy or bond or is in default under
such policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion.
3.20 Properties
All real and personal property owned by Fajardo or presently used by
Fajardo in its business is in an adequate condition (ordinary wear and tear
excepted) and is sufficient to carry on the business of Fajardo in the ordinary
course of business consistent with past practices. Fajardo has good and
marketable title free and clear of all liens, encumbrances, charges, defaults or
equities (other than equities of redemption under applicable foreclosure laws)
to all of the material properties and assets, real and personal, reflected on
the statement of financial condition of Fajardo as of September 30, 1997
included in the Fajardo Financial Statements or acquired after such date, except
(i) liens for current taxes not yet due or payable, (ii) pledges to secure
deposits and other liens incurred in the ordinary course of its banking
business, (iii) such imperfections of title, easements and encumbrances, if any,
as are not material in character, amount or extent and (iv) as reflected on the
statement of financial condition of Fajardo as of September 30, 1997 included in
the Fajardo Financial Statements. All real and personal property which is
material to Fajardo's business and leased or licensed by Fajardo is held
pursuant to leases or licenses which are valid and enforceable in accordance
with their respective terms and
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such leases will not terminate or lapse prior to the Effective Time. Fajardo has
Previously Disclosed an accurate listing of each such lease or license referred
to in the immediately preceding sentence pursuant to which Fajardo acts as
lessor (other than month-to-month leases) or lessee, including the expiration
date and the terms of any renewal options which relate to the same, as well as a
listing of each material real property owned by Fajardo and used in the conduct
of its business.
3.21 Labor
No work stoppage involving Fajardo is pending or, to the best knowledge
of Fajardo, threatened. Fajardo is not involved in, or threatened with or
affected by, any labor dispute, arbitration, lawsuit or administrative
proceeding involving the employees of Fajardo which could have a material
adverse effect on the financial condition, results of operations or business of
Fajardo. Employees of Fajardo are not represented by any labor union nor are any
collective bargaining agreements otherwise in effect with respect to such
employees, and to the best of Fajardo's knowledge, there have been no efforts to
unionize or organize any employees of Fajardo during the past five years.
3.22 Transactions with Affiliated Persons and Affiliates
Except as Previously Disclosed, (i) no "affiliate" of Fajardo, as
defined in 12 U.S.C. Section 1828(j)(1)(B), has engaged in any transaction with
Fajardo since January 1, 1993 which was not in compliance with applicable laws
and regulations and (ii) as of the date hereof there is no loan or extension of
credit outstanding to any of the same which is not in compliance with applicable
laws and regulations.
3.23 Required Vote
(a) The affirmative vote of the holders of a sixty-six and two-thirds
percent (66 2/3%) of the issued and outstanding shares of Fajardo Common Stock
is necessary to approve this Agreement and the transactions contemplated hereby
on behalf of Fajardo.
3.24 Disclosures
None of the representations and warranties of Fajardo or any of the
written information or documents furnished or to be furnished by Fajardo to RGFC
in connection with or pursuant to this Agreement or the consummation of the
transactions contemplated hereby, when considered as a whole, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact required to be stated or necessary to make any such
information or document, in light of the circumstances, under which it was made,
not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RGFC
AND PREMIER
RGFC and Premier represent and warrant to Fajardo as follows:
4.1 Capital Structure of RGFC
The authorized capital stock of RGFC consists of 25,000,000 shares of
RGFC Common Stock (10,000,000 of which are authorized Class A Shares and
15,000,000 of which are authorized Class B Shares) and 10,000,000 shares of RGFC
Preferred Stock. As of the date hereof, there are 9,220,278 and 4,924,474 Class
A Shares, and Class B Shares, respectively, of RGFC Common Stock issued and
outstanding, no shares of RGFC Common Stock are directly or indirectly held as
treasury stock by RGFC and there are no shares of RGFC Preferred Stock issued
and outstanding. All outstanding shares of RGFC Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable, and none of
the outstanding shares of RGFC Common Stock have been issued in violation of the
preemptive rights of any person, firm or entity. Except for shares of RGFC
Common Stock issuable pursuant to the RGFC Stock Option Plan, now or hereafter,
there are no rights authorized, issued or outstanding with respect to the
capital stock of RGFC.
4.2 Organization, Standing and Authority of RGFC
RGFC is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Puerto Rico with full corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as now conducted and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which its ownership or
leasing of property or the conduct of its business requires such licensing or
qualification and where the failure to be so licensed, qualified or in good
standing would have a material adverse effect on the financial condition,
results of operations or business of RGFC on a consolidated basis. RGFC is duly
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended. RGFC has heretofore delivered to Fajardo true and complete copies of
the Certificate of Incorporation and Bylaws of RGFC as in effect as of the date
hereof.
4.3 Ownership of Premier and Mortgage
The only direct or indirect subsidiaries of RGFC are Premier and
Mortgage. Except as Previously Disclosed and except for capital stock of Premier
and Mortgage, stock in the FHLB of New York, securities and other interests
taken in consideration of debts previously contracted, RGFC does not own or have
the right to acquire, directly or indirectly, any outstanding capital stock or
other voting securities or ownership interests of any corporation, bank, savings
association, partnership, joint venture or other organization. The outstanding
shares of capital stock of Premier and Mortgage have been duly authorized and
validly issued, are fully paid and
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nonassessable, and are directly or indirectly owned by RGFC free and clear of
all liens, claims, encumbrances, charges, pledges, restrictions or rights of
third parties of any kind whatsoever. No rights are authorized, issued or
outstanding with respect to the capital stock or other ownership interests of
Premier and Mortgage and there are no agreements, understandings or commitments
relating to the right of RGFC to vote or to dispose of said shares or other
ownership interests.
4.4 Organization, Standing and Authority of Premier and Mortgage
Premier is a commercial bank and Mortgage is a mortgage banking
corporation, in each case, duly organized, validly existing and in good standing
under the laws of the Commonwealth of Puerto Rico. Premier and Mortgage (i) have
full power and authority to own or lease all of their properties and assets and
to carry on their business as now conducted, and (ii) are duly licensed or
qualified to do business and are in good standing in each jurisdiction in which
their ownership or leasing of property or the conduct of their business requires
such qualification and where the failure to be so licensed, qualified or in good
standing would have a material adverse effect on the financial condition,
results of operations or business of RGFC on a consolidated basis. RGFC has
heretofore delivered to Fajardo true and complete copies of the Articles of
Incorporation and Bylaws of Premier and Mortgage as in effect as of the date
hereof.
4.5 Authorized and Effective Agreement
(a) Each of RGFC and Premier has all requisite corporate power and
authority to enter into this Agreement and (subject to receipt of all necessary
governmental approvals and the approval of RGFC's shareholders of this
Agreement) to perform all of its obligations under this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of RGFC and Premier, except for
the approval of this Agreement by RGFC as sole shareholder of Premier. This
Agreement has been duly and validly executed and delivered by each of RGFC and
Premier and constitutes a legal, valid and binding obligation of RGFC and
Premier which is enforceable against RGFC and Premier in accordance with its
terms, subject, as to enforceability, to bankruptcy, insolvency and other laws
of general applicability relating to or affecting creditors' rights and to
general equity principles.
(b) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby (including the Merger), nor
compliance by RGFC or Premier with any of the provisions hereof (i) does or will
conflict with or result in a breach of any provisions of the Certificate of
Incorporation, Articles of Incorporation or Bylaws of RGFC, Premier or Mortgage,
(ii) except as Previously Disclosed, violate, conflict with or result in a
breach of any term, condition or provision of, or constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a default)
under, or give rise to any right of termination, cancellation or acceleration
with respect to, or result in the creation of any lien, charge or encumbrance
upon any property or asset of RGFC, Premier or Mortgage pursuant to, any
material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other
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instrument or obligation to which RGFC, Premier or Mortgage is a party, or by
which any of their respective properties or assets may be bound or affected, or
(iii) subject to receipt of all required governmental and shareholder approvals,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to RGFC, Premier or Mortgage.
(c) Except for (i) the filing of applications and notices with, and the
consents and approvals of, as applicable, the FRB, the FDIC, the OTS and the
Commissioner, (ii) the filing and effectiveness of the Form S-4 with the
Commission, (iii) compliance with applicable state securities or "blue sky" laws
and the NASD Bylaws in connection with the issuance of RGFC Common Stock
pursuant to this Agreement, (iv) the approval of this Agreement by the requisite
vote of the shareholders of Fajardo and by RGFC as sole shareholder of Premier
and (v) the filing of the Bank Merger Agreement with the Secretary of State of
the Commonwealth of Puerto Rico pursuant to the Puerto Rico Banking Law in
connection with the Merger, and except for such filings, authorizations or
approvals as are Previously Disclosed, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
on the part of RGFC or Premier in connection with (i) the execution and delivery
by RGFC and Premier of this Agreement and the Bank Merger Agreement and the
consummation by RGFC and Premier of the transactions contemplated hereby and
thereby.
(d) As of the date hereof, none of RGFC or Premier is aware of any
reasons relating to RGFC or Premier (including, without limitation, Community
Reinvestment Act compliance) why all consents and approvals shall not be
procured from all regulatory agencies having jurisdiction over the transactions
contemplated by this Agreement as shall be necessary for (i) consummation of the
transactions contemplated by this Agreement and the Bank Merger Agreement and
(ii) the continuation by RGFC and Premier after the Effective Time of the
business of each of RGFC, Premier and Fajardo as such business is carried on
immediately prior to the Effective Time, free of any conditions or requirements
which, in the reasonable opinion of RGFC, could have a material adverse effect
upon the financial condition, results of operations or business of RGFC on a
consolidated basis or materially impair the value of Fajardo to RGFC.
4.6 Securities Documents and Regulatory Reports
(a) RGFC has previously delivered or made available to Fajardo a
complete copy of all Securities Documents filed by RGFC pursuant to the
Securities Laws or mailed by RGFC or Premier to its respective shareholders as a
class since January 1, 1993. RGFC has timely filed with the Commission all
Securities Documents required by the Securities Laws and such Securities
Documents complied in all material respect with the Securities Laws and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, provided that information as of a later date shall be deemed to
modify information as of an earlier date.
(b) Since January 1, 1993, each of RGFC and Premier has duly filed with
the FDIC, the Commissioner and the OTS, as the case may be, in correct form the
reports required to be
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filed under applicable laws and regulations and such reports were in all
material respects complete and accurate and in compliance with the requirements
of applicable laws and regulations, provided that information as of a later date
shall be deemed to modify information as of an earlier date; and RGFC has
previously delivered or made available to Fajardo accurate and complete copies
of all such reports. In connection with the most recent examinations of RGFC and
Premier by the Commissioner and the FDIC, neither RGFC nor Premier was required
to correct or change any action, procedure or proceeding which RGFC or Premier
believes has not been corrected or changed as required.
4.7 Financial Statements
(a) RGFC has previously delivered or made available to Fajardo accurate
and complete copies of RGFC Financial Statements which, in the case of the
statements of financial condition as of December 31, 1996 and 1995 and the
statements of income, stockholders' equity and cash flows for each of the three
years ended December 31, 1996, 1995 and 1994, are accompanied by the audit
reports of Price Waterhouse, independent public accountants with respect to RGFC
and Premier. The RGFC Financial Statements referred to herein, as well as the
RGFC Financial Statements to be delivered pursuant to Section 5.7 hereof, fairly
present or will fairly present, as the case may be, the consolidated financial
condition of RGFC as of the respective dates set forth therein, and the
consolidated results of operations, stockholders' equity and cash flows of RGFC
for the respective periods or as of the respective dates set forth therein.
(b) Each of RGFC Financial Statements referred to in Section 4.7(a) has
been or will be, as the case may be, prepared in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as stated therein. The audits of RGFC, Premier and Mortgage have been
conducted in all material respects in accordance with generally accepted
auditing standards. The books and records of RGFC, Premier and Mortgage are
being maintained in material compliance with applicable legal and accounting
requirements, and all such books and records accurately reflect in all material
respects all dealings and transactions in respect of the business, assets,
liabilities and affairs of RGFC, Premier and Mortgage.
(c) Except to the extent (i) reflected, disclosed or provided for in
the consolidated statement of financial condition of RGFC as of September 30,
1997 (including related notes) and (ii) of liabilities incurred since September
30, 1997 in the ordinary course of business, none of RGFC, Premier or Mortgage
has any liabilities, whether absolute, accrued, contingent or otherwise,
material to the financial condition, results of operations or business of RGFC
on a consolidated basis.
4.8 Material Adverse Change
There has not been any material adverse change in the business,
operations, prospects, assets or financial condition of RGFC on a consolidated
basis since June 30, 1997 and or is reasonably likely to cause no fact or
condition exists which RGFC believes will cause such a material adverse change
in the future.
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4.9 Environmental Matters
(a) To the best of RGFC's knowledge, RGFC, Premier and Mortgage are in
compliance with all Environmental Laws, except for any violations of any
Environmental Law which would not, singly or in the aggregate, have a material
adverse effect on the financial condition, results of operations or business of
RGFC on a consolidated basis. None of RGFC, Premier or Mortgage has received any
written communication alleging that RGFC, Premier or Mortgage is not in such
compliance and, to the best knowledge of RGFC, there are no present
circumstances that would prevent or interfere with the continuation of such
compliance.
(b) To the best of RGFC's knowledge, none of the properties owned,
leased or operated by RGFC, Premier or Mortgage has been or is in violation of
or liable under any Environmental Law, except any such violations or liabilities
which would not singly or in the aggregate have a material adverse effect on the
financial condition, results of operations or business of RGFC on a consolidated
basis.
(c) To the best of RGFC's knowledge and except as Previously Disclosed,
there are no past or present actions, activities, circumstances, conditions,
events or incidents that could reasonably form the basis of any Environmental
Claim or other claim or action or governmental investigation that could result
in the imposition of any liability arising under any Environmental Law against
RGFC, Premier or Mortgage or against any person or entity whose liability for
any Environmental Claim RGFC, Premier or Mortgage has or may have retained or
assumed either contractually or by operation of law, except such which would not
have a material adverse effect on the financial condition, results of operations
or business of RGFC on a consolidated basis.
(d) Except as Previously Disclosed, RGFC has not conducted any
environmental studies during the past five years with respect to any properties
owned by it, Premier or Mortgage as of the date hereof.
4.10 Allowance for Loan Losses and Real Estate Owned
The allowance for loan losses reflected on RGFC's statements of
financial condition included in the September 30, 1997 RGFC Financial Statements
is, or will be in the case of subsequently delivered RGFC Financial Statements,
as the case may be, in the opinion of RGFC's management adequate in all material
respects as of their respective dates under the requirements of generally
accepted accounting principles to provide for reasonably anticipated losses on
outstanding loans net of recoveries. The Real Estate Owned reflected on the
statements of financial condition included in the September 30, 1997 RGFC
Financial Statements is, or will be in the case of subsequently delivered RGFC
Financial Statements, as the case may be, carried at the lower of cost or fair
value, less estimated costs to sell, as required by generally accepted
accounting principles.
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4.11 Tax Matters
(a) RGFC, Premier and Mortgage, and each of their predecessors, have
timely filed all federal, Commonwealth of Puerto Rico and local (and, if
applicable, foreign) income, franchise, bank, excise, real property, personal
property and other tax returns required by applicable law to be filed by them
(including, without limitation, estimated tax returns, income tax returns,
information returns and withholding and employment tax returns) and have paid,
or where payment is not required to have been made, have set up an adequate
reserve or accrual for the payment of, all taxes required to be paid in respect
of the periods covered by such returns and, as of the Effective Time, will have
paid, or where payment is not required to have been made, will have set up an
adequate reserve or accrual for the payment of, all taxes for any subsequent
periods ending on or prior to the Effective Time. None of RGFC, Premier or
Mortgage will have any material liability for any such taxes in excess of the
amounts so paid or reserves or accruals so established.
(b) All federal, Commonwealth of Puerto Rico and local (and, if
applicable, foreign) income, franchise, bank, excise, real property, personal
property and other tax returns filed by RGFC, Premier and Mortgage are complete
and accurate in all material respects. None of RGFC, Premier or Mortgage is
delinquent in the payment of any tax, assessment or governmental charge, and
neither of them has requested any extension of time within which to file any tax
returns in respect of any fiscal year or portion thereof which have not since
been filed. Except as Previously Disclosed, the federal, Commonwealth of Puerto
Rico and local income tax returns of RGFC, Premier and Mortgage have been
examined by the applicable tax authorities (or are closed to examination due to
the expiration of the applicable statute of limitations) and no deficiencies for
any tax, assessment or governmental charge have been proposed, asserted or
assessed (tentatively or otherwise) against RGFC, Premier or Mortgage as a
result of such examinations or otherwise which have not been settled and paid.
There are currently no agreements in effect with respect to RGFC, Premier or
Mortgage to extend the period of limitations for the assessment or collection of
any tax. As of the date hereof, no audit, examination or deficiency or refund
litigation with respect to such return is pending or, to the best of RGFC's
knowledge, threatened.
(c) Except as Previously Disclosed, none of RGFC, Premier or Mortgage
(i) is a party to any agreement providing for the allocation or sharing of
taxes, (ii) is required to include in income any adjustment by reason of a
voluntary change in accounting method initiated by RGFC, Premier or Mortgage
(nor does RGFC have any knowledge that any taxing authority has proposed any
such adjustment or change of accounting method).
4.12 Legal Proceedings
Except as Previously Disclosed, there are no actions, suits, claims,
governmental investigations or proceedings instituted, pending or, to the best
knowledge of RGFC, threatened against RGFC, Premier or Mortgage or against any
asset, interest or right of RGFC, Premier or Mortgage, or against any officer,
director or employee of any of them that in any such case, if
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decided adversely, would have a material adverse effect on the financial
condition, results of operations or business of RGFC on a consolidated basis.
None of RGFC, Premier or Mortgage is a party to any order, judgment or decree
which has or could reasonably be expected to have a material adverse effect on
the financial condition, results of operations or business of RGFC on a
consolidated basis.
4.13 Compliance with Laws
(a) Each of RGFC, Premier and Mortgage has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could reasonably be expected to have a material adverse effect on the
financial condition, results of operations or business of RGFC on a consolidated
basis; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect; and to the best knowledge of RGFC, no
suspension or cancellation of any of the same is threatened.
(b) None of RGFC, Premier or Mortgage is in violation of its respective
Certificate of Incorporation, Articles of Incorporation or Bylaws, or of any
applicable federal, Commonwealth of Puerto Rico or local law or ordinance or any
order, rule or regulation of any federal, Commonwealth of Puerto Rico, local or
other governmental agency or body (including, without limitation, all banking
(including, without limitation, all regulatory capital requirements),
securities, municipal securities, safety, health, environmental, zoning,
anti-discrimination, antitrust, and wage and hour laws, ordinances, orders,
rules and regulations), or in default with respect to any order, writ,
injunction or decree of any court, or in default under any order, license,
regulation or demand of any governmental agency, any of which violations or
defaults could reasonably be expected to have a material adverse effect on the
financial condition, results of operations or business of RGFC on a consolidated
basis; and none of RGFC, Premier or Mortgage has received any written notice or
communication from any federal, state or local governmental authority asserting
that RGFC, Premier or Mortgage is in violation of any of the foregoing which
could reasonably be expected to have a material adverse effect on the financial
condition, results of operations or business of RGFC on a consolidated basis.
None of RGFC, Premier or Mortgage is subject to any regulatory or supervisory
cease and desist order, agreement, written directive, memorandum of
understanding or written commitment (other than those of general applicability
to all savings institutions or holding companies thereof issued by governmental
authorities), and none of them has received any written communication requesting
that it enter into any of the foregoing.
4.14 Deposit Insurance and Other Regulatory Matters
(a) The deposit accounts of Premier are insured to the maximum extent
permitted by the FDIA, and Premier has paid all premiums and assessments
required by the FDIA and the regulations thereunder.
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(b) Premier is a member in good standing of the FHLB of New York and
owns the requisite amount of stock in the FHLB of New York.
4.15 Certain Information
None of the information relating to RGFC, Premier and Mortgage to be
included or incorporated by reference in (i) the Form S-4 will, at the time the
Form S-4 and any amendment thereto becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.16 Employee Benefit Plans
(a) RGFC has Previously Disclosed all stock option, employee stock
purchase and stock bonus plans, qualified pension or profit-sharing plans, any
fringe benefit, incentive, deferred compensation, consultant, bonus or group
insurance contract, plan or arrangement, or any other welfare plan (as defined
in Section 3(1) of ERISA), employee pension benefit plan (as defined under
Section 3(2) of ERISA) or agreement maintained for the benefit of employees or
former employees of RGFC, Premier or Mortgage (the "RGFC Employee Plans"), and
RGFC has previously furnished or made available to Fajardo accurate and complete
copies of the same together with (i) the most recent actuarial and financial
reports prepared with respect to any qualified plans, (ii) the most recent
annual reports filed with any governmental agency, and (iii) all rulings and
determination letters and any open requests for rulings or letters that pertain
to any qualified plan.
(b) Except as Previously Disclosed, none of RGFC, Premier, Mortgage,
any pension plan maintained by either of them and qualified under Section 401 of
the Code and/or Section 1165 of the Puerto Rico Tax Code or, to the best of
RGFC's knowledge, any fiduciary of such plan has incurred any material liability
to the PBGC or the United States Internal Revenue Service with respect to any
employees of RGFC, Premier or Mortgage. Except as Previously Disclosed, to the
best of RGFC's knowledge, no reportable event under Section 4043(b) of ERISA has
occurred with respect to any such pension plan.
(c) None of RGFC, Premier or Mortgage participates in or has incurred
any liability under Section 4201 of ERISA for a complete or partial withdrawal
from a multi-employer plan (as such term is defined in ERISA).
(d) Full payment has been made (or proper accruals have been
established) of all contributions which are required for periods prior to the
date hereof, and full payment will be so made (or proper accruals will be so
established) of all contributions which are required for periods after the date
hereof and prior to the Effective Time, under the terms of each RGFC Employee
Plan or ERISA; no accumulated funding deficiency (as defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, exists with respect to
any RGFC
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Pension Plan, and there is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any RGFC Pension Plan.
(e) RGFC Employee Plans have been operated in compliance in all
material respects with the applicable provisions of ERISA, the Code, the Puerto
Rico Tax Code, all regulations, rulings and announcements promulgated or issued
thereunder and all other applicable governmental laws and regulations.
(f) There are no pending or, to the best knowledge of RGFC, threatened
claims (other than routine claims for benefits) by, on behalf of or against any
of RGFC Employee Plans or any trust related thereto or any fiduciary thereof.
4.17 Certain Contracts
(a) Except as Previously Disclosed, none of RGFC, Premier or Mortgage
is a party to, is bound or affected by, receives, or is obligated to pay,
benefits under (i) any agreement, arrangement or commitment, including without
limitation any agreement, indenture or other instrument, relating to the
borrowing of money by RGFC, Premier or Mortgage or the guarantee by RGFC,
Premier or Mortgage of any obligation, (ii) any agreement, arrangement or
commitment relating to the employment of a consultant or the employment,
election or retention in office of any present or former director, officer or
employee of RGFC, Premier or Mortgage, (iii) any agreement, arrangement or
understanding pursuant to which any payment (whether of severance pay or
otherwise) became or may become due to any director, officer or employee of
RGFC, Premier or Mortgage upon execution of this Agreement or upon or following
consummation of the transactions contemplated by this Agreement (either alone or
in connection with the occurrence of any additional acts or events), (iv) any
agreement, arrangement or understanding pursuant to which RGFC, Premier or
Mortgage is obligated to indemnify any director, officer, employee or agent of
RGFC, Premier or Mortgage, (v) any agreement, arrangement or understanding to
which RGFC, Premier or Mortgage is a party or by which any of the same is bound
which limits the freedom of RGFC, Premier or Mortgage to compete in any line of
business or with any person, and (vi) any assistance agreement, supervisory
agreement, memorandum of understanding, consent order, cease and desist order or
condition of any regulatory order or decree with or by the Commissioner or the
FDIC or any other regulatory agency.
(b) None of RGFC, Premier or Mortgage is in default or in
non-compliance, which default or non-compliance could reasonably be expected to
have a material adverse effect on the financial condition, results of operations
or business of RGFC on a consolidated basis or the transactions contemplated
hereby, under any contract, agreement, commitment, arrangement, lease, insurance
policy or other instrument to which it is a party or by which its assets,
business or operations may be bound or affected, whether entered into in the
ordinary course of business or otherwise and whether written or oral, and there
has not occurred any event that with the lapse of time or the giving of notice,
or both, would constitute such a default or non-compliance.
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4.18 Brokers and Finders
Except as Previously Disclosed, none of RGFC, Premier or Mortgage, nor
any of their respective directors, officers or employees, has employed any
broker or finder or incurred any liability for any broker or finder fees or
commissions in connection with the transactions contemplated hereby.
4.19 Insurance
RGFC and Premier are insured for reasonable amounts with financially
sound and reputable insurance companies against such risks as companies engaged
in a similar business would, in accordance with good business practice,
customarily be insured and has maintained all insurance required by applicable
laws and regulations. Neither RGFC nor Premier has received any notice of
cancellation or notice of a material amendment of any such insurance policy or
bond or is in default under such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a timely fashion.
4.20 Properties
All real and personal property owned by RGFC, Premier or Mortgage or
presently used by any of them in its respective business is in an adequate
condition (ordinary wear and tear excepted) and is sufficient to carry on its
business in the ordinary course of business consistent with their past
practices. RGFC, Premier and Mortgage have good and marketable title free and
clear of all liens, encumbrances, charges, defaults or equities (other than
equities of redemption under applicable foreclosure laws) to all of the material
properties and assets, real and personal, reflected on the statement of
financial condition of RGFC as of September 30, 1997 included in RGFC Financial
Statements or acquired after such date, except (i) liens for current taxes not
yet due or payable, (ii) pledges to secure deposits and other liens incurred in
the ordinary course of its banking business, (iii) such imperfections of title,
easements and encumbrances, if any, as are not material in character, amount or
extent and (iv) as reflected on the statement of financial condition of RGFC as
of September 30, 1997 included in RGFC Financial Statements. All real and
personal property which is material to RGFC's business on a consolidated basis
and leased or licensed by RGFC, Premier or Mortgage is held pursuant to leases
or licenses which are valid and enforceable in accordance with their respective
terms and such leases will not terminate or lapse prior to the Effective Time.
RGFC has Previously Disclosed an accurate listing of each such lease or license
referred to in the immediately preceding sentence pursuant to which RGFC,
Premier or Mortgage acts as lessor (other than month-to-month leases) or lessee,
including the expiration date and the terms of any renewal options which relate
to the same, as well as a listing of each material real property owned by RGFC,
Premier or Mortgage and used in the conduct of its business.
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4.21 Labor
No work stoppage involving RGFC, Premier or Mortgage is pending or, to
the best knowledge of RGFC, threatened. None of RGFC, Premier or Mortgage is
involved in, or threatened with or affected by, any labor dispute, arbitration,
lawsuit or administrative proceeding involving its employees which could have a
material adverse effect on the financial condition, results of operations or
business of RGFC on a consolidated basis. Employees of RGFC, Premier and
Mortgage are not represented by any labor union nor are any collective
bargaining agreements otherwise in effect with respect to such employees, and to
the best of RGFC's knowledge, there have been no efforts to unionize or organize
any employees of RGFC, Premier or Mortgage during the past five years.
4.22 Transactions with Affiliated Persons and Affiliates
Except as Previously Disclosed, (i) no "affiliate" of Premier, as
defined in 12 U.S.C. Section 1828(j)(1)(B), has engaged in any transaction with
Mortgage since January 1, 1993 which was not in compliance with applicable laws
and regulations and (ii) as of the date hereof there is no loan or extension of
credit outstanding to any of the same which is not in compliance with applicable
laws and regulations.
4.23 Disclosures
None of the representations and warranties of RGFC or any of the
written information or documents furnished or to be furnished by RGFC to Fajardo
in connection with or pursuant to this Agreement or the consummation of the
transactions contemplated hereby, when considered as a whole, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact required to be stated or necessary to make any such
information or document, in light of the circumstances, not misleading.
ARTICLE V
COVENANTS
5.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, each of Fajardo,
RGFC and Premier shall use its reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary or advisable under applicable laws and regulations so as to permit
consummation of the Merger as promptly as reasonably practicable and to
otherwise enable consummation of the transactions contemplated hereby, and shall
cooperate fully with the other party or parties hereto to that end.
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5.2 Shareholder Meeting
Fajardo shall take all action necessary to properly call and convene a
meeting of its shareholders as soon as practicable after the date hereof to
consider and vote upon this Agreement and the transactions contemplated hereby.
The Board of Directors of Fajardo will recommend that the shareholders of
Fajardo approve this Agreement and the transactions contemplated hereby,
provided that the Board of Directors of Fajardo may fail to make such
recommendation, or withdraw, modify or change any such recommendation, if such
Board of Directors, after having consulted with and considered the advice of
outside counsel, has determined that the making of such recommendation, or the
failure to withdraw, modify or change such recommendation, would constitute a
breach of the fiduciary duties of such directors under applicable law.
5.3 Regulatory Matters
(a) The parties hereto shall promptly cooperate with each other in the
preparation and filing of the Form S-4, including the Proxy Statement, with the
Commission. RGFC shall use its reasonable best efforts to have the Form S-4
declared effective under the Securities Act by the Commission, as promptly as
practicable after such filing or submission, and Fajardo each shall thereafter
promptly mail the Proxy Statement to its shareholders. RGFC also shall use its
reasonable best efforts to obtain all necessary state securities law or "blue
sky" permits and approvals required to carry out the issuance of RGFC Common
Stock pursuant to the Merger and all other transactions contemplated by this
Agreement, and Fajardo shall furnish all information concerning Fajardo and the
holders of Fajardo Common Stock as may be reasonably requested in connection
with any such action.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to prepare and file within 30 days of the date of this
Agreement all necessary documentation, to effect all applications, notices,
petitions and filings, and to obtain as promptly as practicable all permits,
consents, approvals and authorizations of all Governmental Entities and third
parties which are necessary or advisable to consummate the transactions
contemplated by this Agreement (including without limitation the Merger). RGFC
and Fajardo shall have the right to review in advance, and to the extent
practicable each will consult with the other on, in each case subject to
applicable laws relating to the exchange of information, all the information
which appears in any filing made with or written materials submitted to any
third party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
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(c) RGFC and Fajardo shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries (in the case of RGFC),
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with the Proxy Statement, the Form S-4 or
any other statement, filing, notice or application made by or on behalf of RGFC,
any of its Subsidiaries or Fajardo, to any Governmental Entity in connection
with the Merger and the other transactions contemplated hereby.
(d) RGFC and Fajardo shall promptly furnish each other with copies of
written communications received by RGFC, any of its Subsidiaries or Fajardo, as
the case may be, from, or delivered by any of the foregoing to, any Governmental
Entity in respect of the transactions contemplated hereby.
5.4 Investigation and Confidentiality
(a) Upon reasonable notice, each of the parties hereto shall afford the
officers, employees, counsel, accountants and other authorized representatives
of each of the other parties hereto reasonable access, during normal business
hours throughout the period prior to the Closing, to its properties, books,
contracts and records and, during such period for the purpose of verifying the
representations and warranties contained in this Agreement, shall furnish
promptly to each of the other parties hereto all information concerning its
business, properties and personnel as such party may reasonably request,
provided that no investigation pursuant to this Section 5.4(a) shall affect or
be deemed to modify any representation or warranty made by any party hereto or
the conditions to the obligations of any such party to consummate the Merger.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the transactions contemplated hereby and, if such transactions shall not
occur, the party receiving the information shall return to the party which
furnished such information all documents or other materials containing,
reflecting or referring to such information, shall use its best efforts to keep
confidential all such information, and shall not directly or indirectly use such
information for any competitive or other commercial purposes. The obligation to
keep such information confidential shall continue for five years from the date
the proposed transactions are abandoned but shall not apply to (i) any
information which (x) the party receiving the information can establish by
convincing evidence was already in its possession prior to the disclosure
thereof by the party furnishing the information; (y) was then generally known to
the public; or (z) became known to the public through no fault of the party
receiving the information; or (ii) disclosures pursuant to a legal requirement
or in accordance with an order of a court of competent jurisdiction, provided
that the party which is the subject of any such legal requirement or order shall
use its best efforts to give the other party at least ten business days prior
notice thereof.
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5.5 Press Releases
RGFC and Fajardo shall agree with each other as to the form and
substance of any press release related to this Agreement or the transactions
contemplated hereby, and consult with each other as to the form and substance of
other public disclosures which may relate to the transactions contemplated by
this Agreement, provided, however, that nothing contained herein shall prohibit
either party, following notification to the other party, from making any
disclosure which is required by law or regulation.
5.6 Business of the Parties
(a) During the period from the date of this Agreement and continuing
until the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of RGFC, Fajardo shall carry on its
businesses in the ordinary course consistent with past practice. Fajardo will
use all reasonable efforts to (x) preserve its business organization intact, (y)
keep available to itself and RGFC the present services of the employees of
Fajardo and (z) preserve for itself and RGFC the goodwill of the customers of
Fajardo and others with whom business relationships exist. Without limiting the
generality of the foregoing, except with the prior written consent of RGFC or as
expressly contemplated hereby, between the date hereof and the Effective Time,
Fajardo shall not:
(i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of Fajardo Common Stock;
(ii) issue any shares of its capital stock, other than
pursuant to the Fajardo Stock Option Agreement, or issue, grant, modify
or authorize any rights, other than the Fajardo Stock Option Agreement;
purchase any shares of Fajardo Common Stock or RGFC Common Stock; or
effect any recapitalization, reclassification, stock dividend, stock
split or like change in capitalization;
(iii) amend its Federal Stock Charter or Bylaws;
(iv) increase the rate of compensation of any of its
directors, officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new employee benefit or incentive
to, any of its directors, officers or employees, except as Previously
Disclosed and (ii) in the case of employees who are not executive
officers, such as may be granted in the ordinary course of business
consistent with past practice;
(v) except as Previously Disclosed, enter into or, except as
may be required by law, modify any pension, retirement, stock option,
stock purchase, stock appreciation right, savings, profit sharing,
deferred compensation, supplemental retirement, consulting, bonus,
group insurance or other employee benefit, incentive or welfare
contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors,
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officers or employees; or make any contributions to any defined benefit
or defined contribution plan not in the ordinary course of business
consistent with past practice;
(vi) except as to the leases for Fajardo's branch office and
executive office, enter into (w) any agreement, arrangement or
commitment not made in the ordinary course of business, (x) any
agreement, indenture or other instrument relating to the borrowing of
money by Fajardo or guarantee by Fajardo of any such obligation, except
for deposits and borrowings in the ordinary course of business
consistent with past practice, (y) any agreement, arrangement or
commitment relating to the employment of, or severance of, an employee,
or amend any such existing agreement, arrangement or commitment,
provided that Fajardo may employ an employee if necessary to operate
the business of Fajardo in the ordinary course of business consistent
with past practice and if the employment of such employee is terminable
by Fajardo and any successor at will without liability, other than as
required by law; or (z) any contract, agreement or understanding with a
labor union;
(vii) change its method of accounting in effect for the year
ended September 30, 1997, except as required by changes in laws or
regulations or generally accepted accounting principles concurred in by
its and RGFC's independent certified public accountants, or change any
of its methods of reporting income and deductions for federal income
tax purposes from those employed in the preparation of its federal
income tax return for the year ended December 31, 1996, except as
required by changes in laws or regulations;
(viii) purchase or otherwise acquire, or sell or otherwise
dispose of, any assets or incur any liabilities other than in the
ordinary course of business consistent with past practice and policies;
(ix) make any capital expenditures in excess of $2,000
individually or $10,000 in the aggregate, other than pursuant to
binding commitments existing on the date hereof and other than
expenditures necessary to maintain existing assets in good repair;
(x) except as to the application to relocate Fajardo's branch
office filed with the OTS, file any applications or make any contract
with respect to branching or site location or relocation;
(xi) acquire in any manner whatsoever (other than to realize
upon collateral for a defaulted loan) any business or entity;
(xii) engage in any transaction with an "affiliate," as
defined in Section 3.22 hereof, other than loans to directors, officers
and employees in the ordinary course of business consistent with past
practice and which are in compliance with the requirements of
applicable laws and regulations;
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(xiii) discharge or satisfy any lien or encumbrance or pay any
material obligation or liability (absolute or contingent) other than at
scheduled maturity or in the ordinary course of business;
(xiv) change its lending, investment, deposit or asset and
liability management or other banking policies in any material respect
except as may be required by applicable law;
(xv) enter into any futures contract, option contract,
interest rate cap, interest rate floor, interest rate exchange
agreement or other agreement for purposes of hedging the exposure of
its interest-earning assets and interest-bearing liabilities to changes
in market rates of interest;
(xvi) enter or agree to enter into any agreement or
arrangement granting any preferential right to purchase any of its
assets or rights or requiring the consent of any party to the transfer
and assignment of any such assets or rights;
(xvii) take any action that would result in any of the
representations and warranties of Fajardo contained in this Agreement
not to be true and correct in any material respect at the Effective
Time;
(xviii) take or cause to be taken any action which would
disqualify the Merger as a tax free reorganization under Section 1112(g) of the
Puerto Rico Tax Code;
(xix) make any loan in excess of $125,000 (in the case of
residential mortgage loans) $150,000 (in the case of commercial mortgage loans)
or $5,000 (in the case of consumer loans); or
(xx) agree to do any of the foregoing.
(b) During the period from the date of this Agreement and continuing
until the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of Fajardo, RGFC, Premier and
Mortgage shall carry on their respective businesses in the ordinary course
consistent with past practice and use all reasonable efforts to preserve intact
their present business organizations and relationships.
(c) Fajardo shall not solicit or encourage inquiries or proposals with
respect to, furnish any information relating to, or participate in any
negotiations or discussions concerning, any acquisition, lease or purchase of
all or a substantial portion of the assets of, or any equity interest in,
Fajardo provided, however, that the Board of Directors of Fajardo may furnish
such information or participate in such negotiations or discussions if such
Board of Directors, after having consulted with and considered the advice of
outside counsel, has determined that the failure to do the same would cause the
members of such Board of Directors to breach their fiduciary duties under
applicable laws. Fajardo will promptly inform RGFC of any such request
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for information or of any such negotiations or discussions, as well as instruct
its directors, officers, representatives and agents to refrain from taking any
action prohibited by this Section 5.6(c).
5.7 Current Information
During the period from the date of this Agreement to the Effective
Time, each party shall, upon the request of the other party, cause one or more
of its designated representatives to confer on a monthly or more frequent basis
with representatives of the other party regarding its financial condition,
operations and business and matters relating to the completion of the
transactions contemplated hereby. As soon as reasonably available, but in no
event more than 45 days after the end of each calendar quarter ending after the
date of this Agreement (other than the last quarter of each fiscal year),
Fajardo and RGFC will deliver to the other party its consolidated financial
statements. In the case of the last quarter of each fiscal year, such financial
statements shall be delivered not less than 90 days after the end of the
calendar quarter. RGFC shall provide Fajardo with copies of its quarterly and
annual reports on Forms 10-Q and 10-K, respectively, when filed with the
Commission. Within 25 days after the end of each month, Fajardo and RGFC will
deliver to the other party a consolidated statement of financial condition and a
consolidated statement of income, without related notes, for such month prepared
in accordance with generally accepted accounting principles.
5.8 Indemnification; Insurance
(a) From and after the Effective Time through the third anniversary of
the Effective Time, RGFC (the "Indemnifying Party") shall indemnify and hold
harmless each present and former director, officer and employee of Fajardo
determined as of the Effective Time (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent to which
such Indemnified Parties were entitled under the Articles of Incorporation and
Bylaws of Fajardo as in effect on the date hereof.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.8(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not materially prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties
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advises that there are issues which raise conflicts of interest between the
Indemnifying Party and the Indemnified Parties, the Indemnified Parties may
retain counsel which is reasonably satisfactory to the Indemnifying Party, and
the Indemnifying Party shall pay, promptly as statements therefor are received,
the reasonable fees and expenses of such counsel for the Indemnified Parties
(which may not exceed one firm in any jurisdiction unless the use of one counsel
for such Indemnified Parties would present such counsel with a conflict of
interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter, (iii) the Indemnifying Party shall not be liable for any settlement
effected without its prior written consent, and (iv) the Indemnifying Party
shall have no obligation hereunder in the event a federal or Commonwealth of
Puerto Rico banking agency or a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and nonappealable,
that indemnification of an Indemnified Party in the manner contemplated hereby
is prohibited by applicable law.
(c) In the event that RGFC or any of its respective successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 5.8, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
(d) For a period of three years after the Effective Time, Premier shall
cause to be maintained in effect a policy of directors' and officers' liability
insurance for at least the same coverage and amounts, containing terms and
conditions which are no less advantageous to such directors and officers with
respect to claims arising from facts or events which occurred before the
Effective Time. If the Surviving Corporation or any of their successors or
assigns (i) shall consolidate with or merge into any other corporation or entity
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) shall transfer all or substantially all of its
properties and assets to any individual, corporation or other entity, then in
such case, proper provision shall be made so that the successors or assigns of
Premier shall assume the obligations set forth in this section.
5.9 Directors, Officers and Employees
(a) Effective as of the Effective Time, the directors of RGFC shall
continue to be those directors of RGFC on the date of this Agreement.
(b) Effective as of the Effective Time, the directors of Premier shall
continue to e the directors as of the date of this Agreement.
(c) Premier shall have the right, but not the obligation, to offer
employment, as officers and employees of Premier, immediately following the
Effective Time, to any other persons who are officers and employees of Fajardo
immediately before the Effective Time. To the extent that the employment of any
employee of Fajardo is involuntarily terminated at or
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during the one-year period following the Effective Time as a result of the
elimination of a job position, such employee will be entitled to receive
severance benefits in accordance with and to the extent the severance benefits
that an employee of Premier with similar years of service would be entitled to
in the event of termination. For purposes of determining severance benefits,
each employee whose employment is terminated will be credited with his or her
years of service with Fajardo prior to the Effective Time.
(d) RGFC will provide the employees of Fajardo who continue as
employees of Premier after the Effective Time with benefits under RGFC's or
Premier's employee benefit plans.
(e) Each current employee of Fajardo who remains an employee of RGFC
and/or Premier following the Effective Time shall be entitled to participate in
all RGFC Employee Plans on the same terms and to the same extent as similarly
situated employees of RGFC and Premier. Employees of Fajardo shall receive
credit for their years of service with Fajardo for purposes of determining
eligibility and vesting, but not benefit accrual, in all RGFC Employee Plans.
5.10 Certain Policies; Integration
(a) If requested by RGFC, on the business day immediately prior to the
Effective Time, Fajardo shall, consistent with generally accepted accounting
principles, establish such additional accruals and reserves as may be necessary
to conform Fajardo's accounting and credit loss reserve practices and methods to
those of RGFC (as such practices and methods are to be applied to Fajardo from
and after the Effective Time) and reflect RGFC's plans with respect to the
conduct of Fajardo's business following the Merger and to provide for the costs
and expenses relating to the consummation by Fajardo of the transactions
contemplated by this Agreement; provided, however, that Fajardo shall not be
required to take such action (i) if such action is prohibited by applicable law
or by generally accepted accounting principles, (ii) if such action would have a
material adverse effect on the financial condition, results of operations or
business of RGFC on a consolidated basis following consummation of the Merger or
(iii) unless RGFC informs Fajardo that all conditions to RGFC's obligations to
consummate the transactions contemplated by this Agreement set forth in Article
VI hereof have been satisfied or waived. The establishment of such accruals and
reserves shall not, in and of itself, constitute a breach of any representation
or warranty of Fajardo contained in this Agreement.
(b) During the period from the date of this Agreement to the Effective
Time, RGFC and Fajardo shall cooperate with and assist each other in formulating
a plan of integration for RGFC, Premier and Fajardo.
5.11 Restrictions on Resale
(a) Fajardo has Previously Disclosed to RGFC a schedule of each person
that, to the best of its knowledge, is deemed to be an "affiliate" of Fajardo
(each an "Affiliate"), as that term is used in Rule 405 under the Securities
Act.
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(b) Fajardo shall use its reasonable best efforts to cause each person
who may be deemed to be an Affiliate of Fajardo to execute and deliver to RGFC
an agreement in the form attached hereto as Exhibit D.
5.12 Disclosure Supplements
From time to time prior to the Effective Time, each party shall
promptly supplement or amend any materials Previously Disclosed and delivered to
the other party pursuant hereto with respect to any matter hereafter arising
which, if existing, occurring or known at the date of this Agreement, would have
been required to be set forth or described in materials Previously Disclosed to
the other party or which is necessary to correct any information in such
materials which has been rendered materially inaccurate thereby; no such
supplement or amendment to such materials shall be deemed to have modified the
representations, warranties and covenants of the parties for the purpose of
determining whether the conditions set forth in Article VI hereof have been
satisfied.
5.13 Failure to Fulfill Conditions
In the event that either of the parties hereto determines that a
condition to its respective obligations to consummate the transactions
contemplated hereby cannot be fulfilled on or prior to the termination of this
Agreement, it will promptly notify the other party or parties. Each party will
promptly inform the other party or parties of any facts applicable to it that
would be likely to prevent or materially delay approval of the Merger by any
Governmental Entity or third party or which would otherwise prevent or
materially delay completion of the Merger.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent - RGFC, Premier and Fajardo
The respective obligations of RGFC, Premier and Fajardo to effect the
transactions contemplated by this Agreement shall be subject to satisfaction of
the following conditions at or prior to the Effective Time.
(a) All corporate action necessary to authorize the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby shall have been duly and validly taken by RGFC, Premier and Fajardo,
including approval by the requisite vote of the shareholders of Fajardo of this
Agreement, and all corporate and shareholder action necessary to authorize the
execution and delivery of the Bank Merger Agreement and consummation of the
transactions contemplated thereby shall have been duly and validly taken by
Premier and Fajardo.
(b) All approvals and consents for the transactions contemplated hereby
and by the Bank Merger Agreement from the FRB, the FDIC, the Commissioner and
any other
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Governmental Entity the approval or consent of which is required for the
consummation of the Merger and the other transactions contemplated hereby shall
have been received and all statutory waiting periods in respect thereof shall
have expired; and RGFC and Fajardo shall have procured all other approvals,
consents and waivers of each person (other than the Governmental Entities
referred to above) whose approval, consent or waiver is necessary to the
consummation of the Merger and the other transactions contemplated hereby.
(c) None of RGFC, its Subsidiaries or Fajardo shall be subject to any
statute, rule, regulation, injunction or other order or decree which shall have
been enacted, entered, promulgated or enforced by any governmental or judicial
authority which prohibits, restricts or makes illegal consummation of the Merger
or any of the other transactions contemplated hereby.
(d) The Form S-4 shall have become effective under the Securities Act,
and RGFC shall have received all state securities laws or "blue sky" permits and
other authorizations or there shall be exemptions from registration requirements
necessary to issue RGFC Common Stock in connection with the Merger, and neither
the Form S-4 nor any such permit, authorization or exemption shall be subject to
a stop order or threatened stop order by the Commission or any state securities
authority.
(e) The shares of RGFC Common Stock to be issued in connection with the
Merger shall have been approved for listing on the Nasdaq Stock Market's
National Market.
(f) The parties shall have received an opinion addressed to both RGFC
and Fajardo and issued by either a law firm or accounting firm designated by
RGFC and reasonably acceptable to Fajardo, which opinion shall be reasonably
acceptable to the parties and to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for Puerto Rico income tax purposes as part of one or more
reorganizations within the meaning of Section 1112(g) of the Puerto Rico Tax
Code, and that accordingly:
(i) no gain or loss will be recognized by RGFC, Premier or
Fajardo as a result of the Merger;
(ii) no gain or loss will be recognized by the shareholders of
Fajardo through the exchange of their Fajardo Common Stock solely for
RGFC Class B Shares pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in RGFC Class B
Shares);
(iii) the tax basis of RGFC Class B Shares received by
shareholders who exchange all of their Fajardo Common Stock solely for
RGFC Class B Shares in the Merger will be the same as the tax basis of
Fajardo Common Stock surrendered in exchange therefor (reduced by any
amount allocable to a fractional share interest for which cash is
received); and
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(iv) any shareholder of Fajardo who receives cash in exchange
for their shares of Fajardo Common Stock will recognize gain, if any,
equal to the lesser of (i) the excess of the amount of cash plus the
fair market value of any RGFC Class B Shares received in the Merger
over the shareholder's adjusted basis in their Fajardo Common Stock, or
(ii) the amount of cash received.
In rendering such opinion, such law firm or accounting firm will
require and rely upon representations contained in certificates of officers of
RGFC and Premier and upon rulings (if requested and obtained) from the Puerto
Rico Treasury Department.
6.2 Conditions Precedent - Fajardo
The obligations of Fajardo to effect the transactions contemplated by
this Agreement shall be subject to satisfaction of the following conditions at
or prior to the Effective Time unless waived by Fajardo pursuant to Section 7.4
hereof.
(a) The representations and warranties of RGFC and Premier as set forth
in Article IV hereof shall be true and correct as of the date of this Agreement
and as of the Effective Time as though made on and as of the Effective Time (or
on the date when made in the case of any representation and warranty which
specifically relates to an earlier date), provided, however, that
notwithstanding anything herein to the contrary, this Section 6.2(a) shall be
deemed to have been satisfied even if such representations or warranties are not
true and correct unless the failure of any of the representations or warranties
to be so true and correct would have, individually or in the aggregate, a
material adverse effect on the financial condition, results of operations or
business of RGFC on a consolidated basis or on the ability of RGFC, Premier and
Fajardo, as applicable, to consummate the Merger.
(b) RGFC shall have entered into an agreement to sell, as of the date
of Closing: (i) for $198,214 to a person or entity designated in writing by the
Fajardo Board of Directors prior to Fajardo's distribution of its proxy
statement required by Section 5.3(a), that certain real estate owned property
carried on Fajardo's book at $198,214, provided that such transaction shall have
been prominently described in Fajardo's proxy statement to stockholders required
by Section 5.3(a) hereof and (ii) for $25,000 to a person or entity designed in
writing by the Fajardo Board of Directors prior to Fajardo's distribution of the
proxy statement required by Section 5.3(a), that certain option on Fajardo's
books to purchase land for construction of an office building (including
blueprints associated therewith), provided that such person or entity shall have
delivered to RGFC as of the Closing an agreement in writing that for five years
from the date of Closing, neither such person or entity nor any company,
partnership, trust or entity of any kind whatsoever as to which he or it is
directly or indirectly affiliated (or any company, partnership, trust or entity
of any kind whatsoever to which he may sell such option or such property) may
use such property for engaging in the business of banking or mortgage banking,
and provided further that such transaction shall have been prominently disclosed
in Fajardo's proxy statement required by Section 5.3(a) hereof. In addition,
RGFC shall have accepted, as of the date of Closing, from Rudolph Kauffmann
payment of $20,000 in full satisfaction of an account
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receivable reflected on Fajardo's books at $22,000, provided that such
transaction shall have been prominently disclosed in Fajardo's proxy statement
required by Section 5.3(a) hereof.
(c) RGFC and Premier shall have performed in all material respects all
obligations and complied with all covenants required to be performed and
complied with by them pursuant to this Agreement on or prior to the Effective
Time.
(d) Each of RGFC and Premier shall have delivered to Fajardo a
certificate, dated the date of the Closing and signed by its President and by
its Chief Financial Officer, to the effect that the conditions set forth in
Sections 6.2(a), 6.2(b) and 6.2(c) have been satisfied.
(e) RGFC and/or Premier shall have furnished Fajardo with such
certificates of its respective officers or others and such other documents to
evidence fulfillment of the conditions set forth in Sections 6.1 and 6.2 as such
conditions relate to RGFC or Premier as Fajardo may reasonably request.
6.3 Conditions Precedent - RGFC and Premier
The obligations of RGFC and Premier to effect the transactions
contemplated by this Agreement shall be subject to satisfaction of the following
conditions at or prior to the Effective Time unless waived by RGFC or Premier
pursuant to Section 7.4 hereof.
(a) The representations and warranties of Fajardo set forth in Article
III hereof shall be true and correct as of the date of this Agreement and as of
the Effective Time as though made on and as of the Effective Time (or on the
date when made in the case of any representation and warranty which specifically
relates to an earlier date), provided, however, that notwithstanding anything
herein to the contrary, this Section 6.3(a) shall be deemed to have been
satisfied even if such representations or warranties are not true and correct
unless the failure of any of the representations or warranties to be so true and
correct would have, individually or in the aggregate, a material adverse effect
on the financial condition, results of operations or business of Fajardo or on
the ability of RGFC, Premier and Fajardo, as applicable, to consummate the
Merger.
(b) Fajardo shall have, as of the date of Closing, stockholders' equity
of not less than $3,450,000.
(c) Fajardo shall have performed in all material respects all
obligations and covenants required to be performed by it pursuant to this
Agreement on or prior to the Effective Time.
(d) Fajardo shall have delivered to RGFC a certificate, dated the date
of the Closing and signed by its Chairman and President and by its Chief
Financial Officer, to the effect that the conditions set forth in Sections
6.3(a), 6.3(b) and 6.3(c) have been satisfied.
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(e) No approval or consent referred to in Section 6.1(b) hereof shall
include any condition or requirement that, individually or in the aggregate,
would result in a material adverse effect on the financial condition, results of
operations or business of RGFC on a consolidated basis.
(f) Fajardo shall have furnished RGFC with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 6.1 and 6.3 as such conditions relate to
Fajardo as RGFC may reasonably request.
(g) Holders of not more than 10% of the outstanding Fajardo Common
Stock shall have elected to exercise dissenters' or appraisal rights under 12
C.F.R. Section 552.14.
(h) Fajardo shall have executed a binding lease agreement with respect
to its branch office for a term of 18 months and shall have executed a binding
lease agreement with respect to its executive office for a term of one year.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1 Termination
This Agreement may be terminated:
(a) at any time on or prior to the Effective Time, by the mutual
consent in writing of the parties hereto;
(b) at any time on or prior to the Effective Time, by RGFC in writing
if Fajardo has, or by Fajardo in writing if RGFC or Premier has, in any material
respect, breached (i) any material covenant or undertaking contained herein or
(ii) any representation or warranty contained herein, in any case if such breach
has not been cured by the earlier of 30 days after the date on which written
notice of such breach is given to the party committing such breach or the
Effective Time;
(c) at any time, by any party hereto in writing, if any of the
applications for prior approval referred to in Section 5.3 hereof are denied or
are approved in a manner which does not satisfy the requirements of Section
6.1(b) hereof, and the time period for appeals and requests for reconsideration
has run;
(d) at any time, by any party hereto in writing, if the shareholders of
Fajardo do not approve this Agreement after a vote taken thereon at a meeting
duly called for such purpose (or at any adjournment thereof), unless the failure
of such occurrence shall be due to the failure of the party seeking to terminate
to perform or observe in any material respect its agreements set forth herein to
be performed or observed by such party at or before the Effective Time;
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(e) by either Fajardo or RGFC in writing if the Effective Time has not
occurred by the close of business on the sixth month anniversary of the date
hereof, provided that this right to terminate shall not be available to any
party whose failure to perform an obligation in breach of such party's
obligations under this Agreement has been the cause of, or resulted in, the
failure of the Merger and the other transactions contemplated hereby to be
consummated by such date;
(f) at any time by any party hereto in writing if such party is not in
default hereunder and such party determines in good faith that any condition
precedent to such party's obligations to consummate the Merger and the other
transactions contemplated hereby is or would be impossible to satisfy, and such
condition is not waived by the other party.
7.2 Effect of Termination
In the event that this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no effect, except that (i) the
provisions relating to confidentiality and expenses set forth in Section 5.4 and
Section 8.1, respectively, and this Section 7.2 shall survive any such
termination and (ii) a termination pursuant to Section 7.1(b), (d), (e) and (f)
shall not relieve the breaching party from liability for willful breach of any
covenant, undertaking, representation or warranty giving rise to such
termination.
7.3 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement or in
any instrument delivered pursuant hereto or thereto shall expire on, and be
terminated and extinguished at, the Effective Time other than covenants that by
their terms are to be performed after the Effective Time (including without
limitation the covenants set forth in Sections 5.8), provided that no such
representations, warranties or covenants shall be deemed to be terminated or
extinguished so as to deprive RGFC, Premier or Fajardo (or any director, officer
or controlling person thereof) of any defense at law or in equity which
otherwise would be available against the claims of any person, including,
without limitation, any shareholder or former shareholder of either RGFC or
Fajardo.
7.4 Waiver
Each party hereto by written instrument signed by an executive officer
of such party, may at any time (whether before or after approval of this
Agreement by the shareholders of RGFC, Premier and Fajardo) extend the time for
the performance of any of the obligations or other acts of the other party
hereto and may waive (i) any inaccuracies of the other party in the
representations or warranties contained in this Agreement or any document
delivered pursuant hereto, (ii) compliance with any of the covenants,
undertakings or agreements of the other party, (iii) to the extent permitted by
law, satisfaction of any of the conditions precedent to its obligations
contained herein or (iv) the performance by the other party of any of its
obligations set forth herein, provided that any such waiver granted, or any
amendment or supplement pursuant to Section 7.5 hereof executed after
shareholders of RGFC, Premier or Fajardo have
46
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approved this Agreement shall not modify either the amount or form of the
consideration to be provided hereby to the holders of Fajardo Common Stock upon
consummation of the Merger or otherwise materially adversely affect such
shareholders without the approval of the shareholders who would be so affected.
7.5 Amendment or Supplement
This Agreement may be amended or supplemented at any time by mutual
agreement of RGFC, Premier and Fajardo, subject to the proviso to Section 7.4
hereof. Any such amendment or supplement must be in writing and authorized by
their respective Boards of Directors.
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses
(a) Each party hereto shall bear and pay all costs and expenses
incurred by it in connection with the transactions contemplated by this
Agreement, including fees and expenses of its own financial consultants,
accountants and counsel.
(b) Notwithstanding any provision in this Agreement to the contrary, in
the event that any of the parties shall default in its obligations hereunder,
each of the non-defaulting parties may pursue any remedy available at law or in
equity to enforce its rights and shall be paid by the defaulting party for all
damages, costs and expenses, including without limitation legal, accounting,
investment banking and printing expenses, incurred or suffered by such
non-defaulting party in connection herewith or in the enforcement of its rights
hereunder.
(c) If the Merger shall not have occurred within six months from the
date of this Agreement for any reason other than the failure of RGFC to secure
required regulatory approvals, then in consideration of Fajardo's costs and
expenses in connection with this Agreement, RGFC shall pay Two Hundred Fifty
Thousand Dollars ($250,000) to Fajardo as an agreed-upon termination fee, in
immediately available funds, within two business days after the occurrence of
the last of such events. If RGFC timely satisfies its obligations pursuant to
this Section 8.1(c), it shall have no further liability to Fajardo whatsoever
under this Agreement.
8.2 Entire Agreement
This Agreement contains the entire agreement among the parties with
respect to the transactions contemplated hereby and supersedes all prior
arrangements or understandings with respect thereto, written or oral, other than
documents referred to herein and therein. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and thereto and their respective successors. Nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, and their respective
47
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successors, any rights, remedies, obligations or liabilities other than as set
forth in Sections 5.8 and 5.9 hereof.
8.3 No Assignment
None of the parties hereto may assign any of its rights or obligations
under this Agreement to any other person.
8.4 Notices
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally, telecopied
(with confirmation) or sent by overnight mail service or by registered or
certified mail (return receipt requested), postage prepaid, addressed as
follows:
If to RGFC or Premier:
R&G Financial Corporation
R&G Plaza
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
Attn: Victor J. Galan
President and Chief Executive Officer
Fax: 787-766-8175
With a required copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Norman B. Antin, Esq.
Fax: 202-347-2172
48
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If to Fajardo:
Fajardo Federal Savings Bank
Celis Aquilera #161
Fajardo, Puerto Rico 00648
Attn: Jose E. Soler
Chairman of the Board
and
Juan R. Zalduondo, Esq.
Midtown Building
Suite 101
421 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
With a required copy to:
Fiddler Gonzalez & Rodriquez
P.O. Box 363507
San Juan, Puerto Rico 00936-3507
Attn: Antonio Sifre, Esq.
Fax: (787) 759-3123
8.5 Alternative Structure
Notwithstanding any provision of this Agreement to the contrary, RGFC
may, with the written consent of Fajardo, which shall not be unreasonably
withheld, elect, subject to the filing of all necessary applications and the
receipt of all required regulatory approvals, to modify the structure of the
acquisition of Fajardo set forth herein provided that (i) the income tax
consequences of any transactions created by such modification shall not be other
than those set forth in Section 6.1(f) hereof, (ii) the consideration to be paid
to the holders of Fajardo Common Stock is not thereby changed in kind or reduced
in amount as a result of such modification and (iii) such modification will not
materially delay or jeopardize receipt of any required regulatory approvals or
any other condition to the obligations of RGFC set forth in Sections 6.1 and 6.3
hereof.
8.6 Interpretation
The captions contained in this Agreement are for reference purposes
only and are not part of this Agreement.
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8.7 Counterparts
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.8 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Puerto Rico applicable to agreements made and
entirely to be performed within such jurisdiction.
8.9 Agreement with Respect to Infusion of Capital by Fajardo's Directors.
By letter dated June 26, 1996, the directors of Fajardo agreed to
purchase additional Fajardo Common Stock on a quarterly basis in the amount of
5,555 shares at a fixed price of $18.00 per share (or an aggregate of $99,990).
As of the date of this Agreement, the Fajardo directors had not made the
purchase of Fajardo Common Stock indicated in such letter for the quarters ended
December 31, 1997, March 31, 1998 or June 30, 1998. If the OTS requires such
payment to be made, Fajardo, after written notification to RGFC, shall be
permitted to issue such shares to those Fajardo directors specified in said
notice to RGFC as per the terms of such June 26, 1996 letter. If additional
capital is required for any other reason other than the one stated above, the
directors of Fajardo, subject to the prior approval of RGFC may purchase
additional Fajardo Common Stock. The parties hereto agree that under such
circumstances, such shares of Fajardo Common Stock may be issued notwithstanding
Section 5.6 (a)(ii) hereof. The parties further agree that upon the Closing, (i)
Section 2.3 shall not apply to such shares and such shares of Fajardo Common
Stock shall not be entitled to the Merger Consideration; and (ii) the holders of
such shares shall be repaid the $18.00 fixed price per share paid, plus interest
on the aggregate amount paid for such shares of Fajardo Common Stock at an
annualized rate of 6%. Such shares of Fajardo Common Stock shall be cancelled by
RGFC upon consummation of the Merger.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and attested by their
officers thereunto duly authorized, all as of the day and year first above
written.
R&G FINANCIAL CORPORATION
Attest:
/s/ Roman Prats By: /s/ Victor J. Galan
- --------------- --------------------
Name: Roman Prats Name: Victor J. Galan
Title: Vice Chairman Title: President and Chief
Executive Officer
R-G PREMIER BANK OF PUERTO RICO
Attest:
/s/ Roman Prats By: /s/ Victor J. Galan
- --------------- -------------------
Name: Roman Prats Name: Victor J. Galan
Title: Vice Chairman Title: President and Chief
Executive Officer
FAJARDO FEDERAL SAVINGS BANK
Attest:
/s/ Rene A. Lavergne By: /s/ Jose E. Soler
- -------------------- -----------------
Name: Rene A. Lavergne Name: Jose E. Soler
Title: President Title: Chairman of the Board
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EXHIBIT A
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan"), dated this 10th day of March, 1998,
is by and among R-G Premier Bank of Puerto Rico, a Puerto Rico-chartered
commercial bank ("Premier") and a wholly-owned subsidiary of R&G Financial
Corporation ("RGFC"), and Fajardo Federal Savings Bank, a federally-chartered
savings bank ("Fajardo").
W I T N E S S E T H:
WHEREAS, RGFC, Premier and Fajardo have entered into an Agreement of
Merger (the "Agreement") dated March 10, 1998, pursuant to which Fajardo will
merge with and into Premier (the "Merger"); and
WHEREAS, Premier and Fajardo desire to merge on the terms and
conditions herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto, intending to be
legally bound hereby, agree as follows:
Section 1. The Merger
Subject to the terms and conditions of the Plan, at the Effective Time
(as defined in Section 2 below), Fajardo shall merge with and into Premier in
accordance with the applicable provisions of the Puerto Rico Banking Law.
Premier shall be the surviving corporation (the "Surviving Corporation") and
shall operate under the name "R-G Premier Bank of Puerto Rico." Upon
consummation of the Merger, the separate corporate existence of Fajardo shall
cease.
Section 2. Effective Time
The Merger shall become effective upon the occurrence of the filing of
this Plan with the Secretary of State of the Commonwealth of Puerto Rico
pursuant to the Banking Law of Puerto Rico (the "Effective Time").
Section 3. Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of Premier in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
and Bylaws of the Surviving Corporation.
<PAGE>
Section 4. Effects of the Merger
From and after the Effective Time, the Merger shall have the effects
set forth in Section 15 of the Puerto Rico Banking Law.
Section 5. Directors and Executive Officers
Upon consummation of the Merger:
(i) The directors of the Surviving Corporation shall consist of
twelve (12) persons, the names of which are set forth as
Appendix A to this Plan and incorporated by reference herein;
(ii) The executive officers of the Surviving Corporation shall be as
set forth in Appendix B to this Plan and incorporated herein by
reference.
Section 6. Effect on Shares of Fajardo Common Stock
At the Effective Time:
(i) Each share of common stock of Fajardo, par value, $1.00 per
share, issued and outstanding will be converted to a right to
receive the Merger Consideration from the Surviving Corporation
in accordance with Section 2.3 of the Agreement; and
(ii) Each share of Premier capital stock issued and outstanding
shall remain issued and outstanding.
Section 7. Additional Actions
If at any time after the Effective Time, the Surviving Corporation
shall consider that any further assignments or assurances in law or any other
acts are necessary or desirable to:
(i) Vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its rights, title or interest in, to or
under any of the rights, properties or assets of Fajardo
acquired, or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or
(ii) otherwise carry out the purposes of the Agreement and the Plan
of Merger,
Fajardo and its proper directors and officers shall be deemed to have granted to
the Surviving Corporation an irrevocable power of attorney to execute and
deliver all such proper deeds, assignments and assurances in law and to do all
acts necessary or proper to vest, perfect or confirm title to and possession of
such rights, properties or assets in the Surviving Corporation
A-2
<PAGE>
and otherwise to carry out the purposes of the Agreement and the Plan of Merger;
and the proper directors and officers of the Surviving Corporation are fully
authorized in the name of Fajardo or otherwise to take any and all such action.
Section 8. Counterpart
This Plan may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
agreement.
Section 9. Governing Law
(i) This Plan shall be governed in all respects, including but not
limited to, validity, interpretation, effect and performance,
by the laws of the Commonwealth of Puerto Rico.
(ii) Section headings are not to be considered part of this Plan,
are solely for convenience of reference, and shall not affect
the meaning or interpretation of this Plan or any of its
provisions.
Section 10. Amendment
Subject to applicable law and Section 7.5 of the Agreement, this Plan
may be amended, modified or supplemented only by written agreement of Premier
and Fajardo at any time prior to the Effective Time.
Section 11. Waiver
Subject to Section 7.4 of the Agreement, any of the terms of conditions
of this Plan may be waived at any time by whichever of the parties hereto is
entitled to the benefit thereof by action taken by the Board of Directors of
such waiving party.
Section 12. Assignment; Termination
This Plan may not be assigned by any party hereto without the prior
written consent of the other party. This Plan shall terminate upon the
termination of the Agreement in accordance with its terms.
A-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Plan as
of the day and year first above written:
Attest: R-G PREMIER BANK OF PUERTO RICO
/s/ Ramon Prats By: /s/ Victor J. Galan
- --------------- -------------------
Ramon Prats Victor J. Galan, President and
Vice Chairman of the Board Chief Executive Officer
FAJARDO FEDERAL SAVINGS BANK
/s/ Rene A. Lavergne By: /s/ Jose A. Soler
- -------------------- ------------------
Rene A. Lavergne Jose A. Soler, Chairman of
President the Board
A-4
<PAGE>
Plan of Merger
Appendix A
R-G Premier Bank of Puerto Rico Directors
DIRECTORS
1. Victor J. Galan
2. Ana M. Armendariz
3. Laureano Carus
4. Benigno R. Fernandez
5. Victor L. Galan
6. Eduardo McCormack
7. Ramon Prats
8. Pedro L. Ramirez
9. Gilberto Rivera-Arreaga
10. Enrique Umpierre
11. Jeanne Ubinas
12. Juan J. Diaz
A-5
<PAGE>
Plan of Merger
Appendix B
EXECUTIVE OFFICERS OF R&G PREMIER BANK OF PUERTO RICO
Victor J. Galan (Chairman of the Board, President and Chief Executive Officer)
Ramon Prats - Vice Chairman of the Board
Jose L. Ortez - Chief Financial Officer of the Bank
A-6
<PAGE>
Appendix B
ss. 552.14 Dissenter and appraisal rights
(a) Right to demand payment of fair or appraised value. Except as provided in
paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with ss.552.13 of this part shall have
the right to demand payment of the fair or appraised value of his stock:
Provided, That such stockholder has not voted in favor of the combination
and complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified consideration
for his or her stock shall have the right under this section to demand
payment of the stock's fair or appraised value, if such stock was listed on
a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of
the meeting at which the combination was acted upon or stockholder action
is not required for a combination made pursuant to ss552.13(h)(2) of this
part. "Qualified consideration" means cash, shares of stock or any
association or corporation which at the effective date of the combination
will be listed on a national securities exchange or quoted on NASDAQ or any
combination of such shares of stock and cash.
(c) Procedure.
(1) NOTICE. Each constituent Federal stock association shall notify all
stockholders entitled to rights under this section, not less than twenty days
prior to the meeting at which the combination agreement is to be submitted for
stockholder approval, of the right to demand payment of appraised value of
shares, and shall include in such notice a copy of this section. Such written
notice shall be mailed to stockholders of record and may be part of the
management's proxy solicitation for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to make a
demand under this section shall deliver to the Federal stock association, before
voting on the combination, a writing identifying himself or herself and stating
his or her intention thereby to demand appraisal of and payment for his or her
shares from any proxy or vote against the combination by the stockholder.
(3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten days after
the effective date of the combination, the resulting association shall:
(i) Give written notice by mail to stockholders of constituent Federal
Stock associations who have complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the combination, of the effective
date of the combination:
(ii) Make a written offer to each stockholder to pay for dissenting shares
at a specified price deemed by the resulting association to be fair value
thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (6) of this section (set out in the
notice) must be satisfied. The notice and offer shall be accompanied by a
balance sheet and statement of income of the association the shares of which the
dissenting stockholder holds, for a fiscal year ending not more than sixteen
months before the date of notice and offer, together with the latest available
interim financial statements.
<PAGE>
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective date of the
comb ination the fair value is agreed upon between the resulting association and
any stockholder who has complied with the provision of paragraph (c)(2) of this
section, payment therefor shall be made within ninety days of the effective date
of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty days of the
effective date of the combination the resulting association and any stockholder
who has complied with the provisions of paragraph (c) (2) of this section do not
agree as to the fair value, then any such stockholder may file a petition with
the Office, with a copy by registered or certified mail to the resulting
association, demanding a determination of the fair market value of the stock of
all such stockholders. A stockholder entitled to file a petition under this
section who fails to file such petition within sixty days of the effective date
of the combination shall be deemed to have accepted the terms offered under the
combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the effective date
of the combination, each stockholder demanding appraisal and payment under this
section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his stock certificates for such notation shall no longer be
entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any time within
sixty days after the effective date of the combination, any stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff of
the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the shares, direct payment by the resulting
association of the appraised fair market value of the shares, upon surrender of
the certificates representing such stock. Payment shall be made, together with
interest from the effective date of the combination, at a rate deemed equitable
by the Director.
<PAGE>
OTS REGULATIONS
(9)COSTS AND EXPENSES. The costs and expenses of any proceeding under this
section may be apportioned and assessed under this section may be apportioned
and assessed by the Director as he or she may deem equitable against all or some
of the parties. In making this determination the Director shall consider whether
any party has acted arbitrarily, vexatiously, or not in good faith in respect to
the rights provided by this section.
(10)VOTING AND DISTRIBUTION. Any stockholder who has demanded appraisal
rights as provided in paragraph (c)(2) of this section shall thereafter neither
be entitled to vote such stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distribution payable to, or a vote to be taken by stockholders of record at a
date which is on or prior to, the effective date of the combination): Provided,
That if any stockholder become unentitled to appraisal and payment of appraised
value with respect to such stock and accepts or is deemed to have accepted the
terms offered upon the combination, such stockholder shall thereupon be entitled
to vote and receive the distributions described above.
(11)STATUS. Shares of the resulting association into which shares of the
stockholders demanding appraisal rights would have been converted or exchanged,
had they assented to the combination, shall have the status of authorized and
unissued shares of the resulting association.
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Article VI of the Registrant's Bylaws provide as follows:
6.1 Indemnification.
(a) The Corporation shall indemnify, to the fullest extent authorized by
the General Corporation Law of the Commonwealth of Puerto Rico, 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, employer 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 matter 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,
provided that the Corporation shall not be liable for any amounts which may be
due to any person in connection with a settlement of any action, suit or
proceeding effected without its prior written consent or any action, suit or
proceeding initiated by any person seeking indemnification hereunder without its
prior written consent. 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 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, that such person had reasonable cause to believe
that his conduct was unlawful.
(b) 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
<PAGE>
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 expense which such court shall deem proper.
(c) 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 Section 6.1(a) or Section 6.1(b) of
this Article VI, 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 Section 6.1(a) or Section 6.1(b) of this
Article VI (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 stockholders.
(e) The Corporation shall not be liable for any amounts which may be due
to any person in connection with a settlement of any action, suit or proceeding
initiated by any person seeking indemnification under this Article VI without
its prior written consent.
6.2 Advancement of Expenses. Reasonable expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit or proceeding
described in Section 6.1 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 or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Article VI.
6.3 Other Rights and Remedies. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to actions
in their official capacity and as to actions 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.
6.4 Insurance. 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
<PAGE>
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 VI or of the General
Corporation Law of the Commonwealth of Puerto Rico, or of the laws of any other
State or political dependency of the United States or foreign country as may be
applicable.
6.5 Modification. The duties of the Corporation to indemnify and to
advance expenses to a director, officer, employee or agent provided in this
Article VI shall be in the nature of a contract between the Corporation and each
such person, and no amendment or repeal of any provision of this Article VI
shall alter, to the detriment of such person, the right of such person to the
advance of expenses or indemnification related to a claim based on an act or
failure to act which took place prior to such amendment or repeal.
An unofficial english translation of Article 4.08 of the General
Corporation Law of 1996 of the Commonwealth of Puerto Rico provides:
A. A corporation may indemnify any person who is or was 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 said person was or is a director, officer employee, or agent of the
corporation, or was or is serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnification may include expenses
reasonably incurred, including attorneys' fees, awards or judgments, fines and
amounts paid in settlement of 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 legal 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 person did not act in good
faith or 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, that the person did not have reasonable cause to believe that his
conduct was unlawful.
B. A corporation may indemnify any person who is or was 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 protect the interests 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 request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
<PAGE>
enterprise. The indemnification may include expenses reasonably incurred,
including attorneys' fees, 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, and not opposed to, the best interests of the corporation. No
indemnification shall be made in respect of any claim, matter or issue as to
which such person shall have been adjudged to be liable to the corporation
unless, upon application therefor, the court in which such action or suit was
brought shall determine that, despite the adjudication of liability and in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to be indemnified for such expenses which such court shall deem proper,
and only to the extent to which said court shall determine.
C. 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 subsections A and B or in defense of
any claim, matter or issue related thereto, he shall be indemnified against
expenses reasonably incurred by him (including attorneys' fees) by reason of
such action, suit or proceeding.
D. Any indemnification under subsections A and B (except that 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 in subsections A and B of this article.
Such determination shall be made:
1. 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, even if said directors constitute less than a quorum; or
2. if there shall not be any such directors, or if such directors
shall so determine by an independent legal counsel in a written opinion
to such effect; or
3. by the stockholders.
E. Prior to the final disposition of such action, suit or proceeding,
the corporation may pay in advance expenses incurred by an officer or director
defending a civil or criminal action, suit or proceeding. Upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to such
indemnification by the corporation, as authorized in this Article. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems convenient.
F. The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement (of expenses) may be entitled under any by-law,
agreement, vote of
<PAGE>
stockholders or disinterested directors or otherwise, both as to actions in
their official capacity and as to actions in another capacity while holding such
office.
G. Every corporation shall have power to purchase and maintain insurance
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 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 or
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
H. For purposes of this Article, "the corporation" shall be deemed to
include, in addition to the resulting corporations, any corporation which is a
party to any consolidation or merger that is absorbed in a consolidation or
merger which, if its separate legal existence had continued, would have had the
power and authority to indemnify its directors, officers, and employees or
agents. So that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer or employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate legal existence had continued.
I. For purposes of this Article, the term "other enterprises" shall
include employee benefit plans. The term "fines" shall include any taxes
assessed on a person with respect to any benefit or employee plan. The term
"serving at the request of the corporation" shall include any service as a
director, officer, employee, or agent of the corporation which imposes duties
on, or involves services by, such director, officer, employee, or agent with
respect to an employee pension plan, its participants, or beneficiaries. A
person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee pension plan
shall further be deemed to have acted in a manner "not opposed to the best
interests of the corporation" as referred to in this Article.
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
Exhibit No. Exhibit
----------- -------
2.0* Agreement of Merger among R&G Financial Corporation, R-G
Premier Bank of Puerto Rico and Fajardo Federal Savings Bank,
dated as of March 10, 1998
3.1** Certificate of Incorporation
3.2** Certificate of Amendment to Certificate of Incorporation of
R&G Financial Corporation
3.3** Bylaws of R&G Financial Corporation
4.0** Form of Stock Certificate of R&G Financial Corporation
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
8.0 Opinion of McConnell Valdes re: certain Puerto Rico income tax
consequences
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in
Exhibit 5.0)
23.2 Consent of Price Waterhouse
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of McConnell Valdes (included in Exhibit 8.0)
24.0 Power of Attorney (included in Signature Page of this
Registration Statement)
27.0 Financial Data Schedule of Fajardo Federal Savings Bank
- ---------------
* Included as Appendix A to the Proxy Statement/Prospectus included in
this Registration Statement.
** Incorporated by reference to the Form S-1 Registration Statement (Reg.
No. 333-06245), filed by R&G Financial Corporation with the Commission
on June 18, 1996, as amended.
(b) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes:
(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;
<PAGE>
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the 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 20 percent
change in the maximum aggregate offering
price set forth in the "Calculation of
Registration Fee" table in the effective
registration statement;
(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.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment 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.
(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.
(4) That, for 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 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the 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."
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the
<PAGE>
Registrant pursuant to the foregoing provisions, 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 Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification 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 Securities Act of 1933
and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 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.
(c) The undersigned Registrant hereby undertakes 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 the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this 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 30th day of April, 1998.
R&G FINANCIAL CORPORATION
By: /s/ Victor J. Galan
-------------------
Victor J. Galan
Chairman of the Board, President and
Chief Executive Officer
----------------------
POWER OF ATTORNEY
Each of the directors and/or officers of R&G Financial Corporation
whose signature appears below hereby appoints Victor J. Galan, as his or her
attorney-in-fact to sign in his or her name and behalf, in any and all
capacities stated below and to file with the Securities and Exchange Commission
any and all amendments, including post-effective amendments, to this
Registration Statement on Form S-4, making such changes in the Registration
Statement as appropriate, and generally to do all such things in their behalf in
their capacities as directors and/or officers to enable R&G Financial
Corporation to comply with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Victor J. Galan Chairman of the Board, President and April 30, 1998
- ------------------- Chief Executive Officer
Victor J. Galan (principal executive officer)
/s/ Ana M. Armendariz Director and Treasurer April 30, 1998
- --------------------- (principal accounting officer)
Ana M. Armendariz
<PAGE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Ramon Prats Executive Vice President and Director April 30, 1998
- ---------------
Ramon Prats
/s/ Enrique Umpierre-Suarez Director and Secretary April 30, 1998
- ---------------------------
Enrique Umpierre-Suarez
/s/ Victor L. Galan Fundora Director April 30, 1998
- ---------------------------
Victor L. Galan Fundora
/s/ Juan J. Diaz Director April 30, 1998
- ----------------
Juan J. Diaz
/s/ Pedro Ramirez Director April 30, 1998
- -----------------
Pedro Ramirez
/s/ Laureno Carus Abarca Director April 30, 1998
- ------------------------
Laureno Carus Abarca
/s/ Eduardo McCormack Director April 30, 1998
- ---------------------
Eduardo McCormack
/s/ Gilberto Rivera-Arreaga Director April 30, 1998
- ---------------------------
Gilberto Rivera-Arreaga
/s/ Benigno R. Fernandez Director April 30, 1998
- ------------------------
Benigno R. Fernandez
/s/ Joseph R. Sandoval Vice President and Chief Financial April 30, 1998
- ---------------------- Officer
Joseph R. Sandoval
</TABLE>
EXHIBIT 5.0
[Letterhead of Elias, Matz, Tiernan & Herrick L.L.P.]
April 30, 1998
Board of Directors
R&G Financial Corporation
280 Jesus T. Pinero Avenue
San Juan, Puerto Rico 00918
Re: Registration Statement on Form S-4
200,000 Shares of Common Stock
Ladies and Gentlemen:
We are special counsel to R&G Financial Corporation (the "Company"), in
connection with the preparation and filing with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, of the
registration statement on Form S-4 (the "Registration Statement"), relating to
the issuance of up to 200,000 shares of the Company's common stock, par value
$0.01 per share (the "Shares"), in connection with the proposed merger of
Fajardo Federal Savings Bank with and into the Company's wholly owned
subsidiary, R-G Premier Bank, all as described in the Registration Statement. As
such counsel, we have made such legal and factual examinations and inquiries as
we deemed advisable for the purpose of rendering this opinion.
Based upon the foregoing, it is our opinion that the Shares, when
issued, delivered and sold in the manner described in the Registration
Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement, and we consent to the use of our name under
the heading "Legal Opinions" in the Proxy Statement/Prospectus constituting a
part thereof.
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Norman B. Antin
-------------------
Norman B. Antin, a Partner
Exhibit 8.0
[Letterhead of McConnell Valdes]
April 29, 1998
R&G Financial Corporation
R&G Plaza
280 Jesus T. Pinero Avenue
San Juan, Puerto Rico 00918
Fajardo Federal Savings Bank
161 Celis Aguilera Street
Fajardo, Puerto Rico 00648
Re: Merger of Fajardo Federal Savings Bank with
and into R-G Premier Bank of Puerto Rico
Dear Sirs:
You have requested our opinion in connection with the Puerto Rico
income tax treatment of the merger of Fajardo Federal Savings Bank ("Fajardo")
with and into R-G Premier Bank of Puerto Rico ("Premier") (the "Merger").
Capitalized terms used but not otherwise defined herein shall have the meaning
assigned to such terms in the Agreement of Merger (the "Merger Agreement") dated
as of March 10, 1998, by and among R&G Financial Corporation ("RGFC"), Premier
and Fajardo.
For purposes of this opinion, we have examined copies of the following
documents: (i) the Merger Agreement; (ii) the Plan of Merger dated March 10,
1998 by and among Premier, RGFC and Fajardo; (iii) the Option Agreement dated as
of March 10, 1998 by and among RGFC, Premier and Fajardo; (iv) the Stockholder
Agreement dated as of March 9, 1998 by and among RGFC and certain stockholders
of Fajardo (collectively, the "Agreements"). We have assumed that: (i) the
Merger will become effective upon the filing of the Plan of Merger with the
<PAGE>
R&G Financial Corporation
Page 2
April 29, 1998
Secretary of State of the Commonwealth of Puerto Rico pursuant to the Banking
Law of Puerto Rico, (ii) at the Effective Time, each share of common stock of
Fajardo issued and outstanding will be converted into the right to receive, at
the election of the respective stockholders of Fajardo (collectively the
"Stockholders"), either the Cash Consideration or the Stock Consideration, (iii)
the Aggregate Cash Consideration to be paid in the Merger will not exceed
$1,182,633 (which shall be less than fifty percent of the total Merger
Consideration); (iv) upon consummation of the Merger, Premier will continue its
existence and will operate its business and the business formerly conducted by
Fajardo; (v) upon consummation of the Merger, Premier will acquire all the
assets of Fajardo; (vi) no stock of Premier will be transferred in connection
with the Merger; (vii) to the knowledge of RGFC, the Stockholders who receive
Class B RGFC stock in exchange for their Fajardo common stock do not plan to
enter and have not entered into any agreement to dispose of the Class B RGFC
shares; and (viii) the Merger will take place for valid business reasons.
In addition, we have assumed that: (i) the Agreements constitute legal,
valid and binding obligations of the parties thereof, enforceable against them
in accordance with their terms; (ii) any and all authorizations, approvals,
consents, licenses, exemptions, filings, registrations and orders of
governmental, judicial and public bodies and authorities required to be obtained
have been obtained or made and are in full force and effect on the date hereof)
and (iii) the execution and performance of the Agreements will not result in a
breach or violation of, or constitute a default under, any indenture, mortgage,
deed of trust or other agreement or instrument to which RGFC, Premier, Fajardo
or the Stockholders are parties or by which they are bound, or any applicable
statute, rule or regulation, or their internal regulations or any material
decree, judgment or order of any court or governmental agency or body having
jurisdiction over them or over their properties or funds over which they
exercise control.
As to questions of fact material to our opinion, we have relied upon
the documents mentioned above without undertaking to verify the same by
independent investigation. In
<PAGE>
R&G Financial Corporation
Page 3
April 29, 1998
addition, for purposes of this opinion, we have assumed the genuineness of all
signatures, and the conformity to original documents of all documents submitted
to us as copies.
Based on the foregoing assumptions and subject to the qualifications
set forth herein, we are of the opinion that, under existing law:
1. The Merger will constitute a reorganization within the meaning of
Section 1112(g) of the Puerto Rico Internal Revenue Code of 1994 (the "Puerto
Rico Tax Code").
2. No gain or loss will be recognized for Puerto Rico income tax
purposes by RGFC, Premier or Fajardo as a result of the Merger, in accordance
with Sections 1112(b)(4), 1112(o), 1112(p), and 1112(q)(3) of the Puerto Rico
Tax Code.
3. No gain or loss will be recognized for Puerto Rico income tax
purposes by Stockholders who transfer all of their Fajardo Common Stock solely
in exchange for RGFC Class B Shares pursuant to the Merger (except with respect
to any cash received in lieu of a fractional share interest in AGFC Class B
Shares), pursuant to Section 1112(b)(3) of the Puerto Rico Tax Code.
4. The tax basis for Puerto Rico income tax purposes of the RGFC Class
B Shares received by Stockholders who exchange all of their Fajardo Common Stock
solely for RGFC Class B Shares in the Merger will be the same as the tax basis
of the Fajardo Common Stock surrendered in exchange therefor (reduced by any
amount allocable to a fractional share interest for which cash is received),
pursuant to Section 1114(a)(6) of the Puerto Rico Tax Code.
5. Any Stockholder who receives cash in exchange for his shares of
Fajardo Common Stock will recognize gain, if any, for Puerto Rico income tax
purposes equal to the lesser of (i) the excess of the amount of cash plus the
fair market value of any RGFC Class B Shares received
<PAGE>
R&G Financial Corporation
Page 4
April 29, 1998
in the Merger over the Stockholder's adjusted basis in the Fajardo Common Stock;
or (ii) the amount of cash received.
We are members of the bar of the Commonwealth of Puerto Rico and do not herein
intend to express any opinion as to any matters governed by any laws other than
the tax laws of Puerto Rico. This opinion does not address and is not intended
to address the treatment of the Merger for United States federal income tax
purposes. Our opinion is based on the Puerto Rico Tax Code, Puerto Rico Treasury
Regulations, case law, and administrative rulings as they now exist. These
authorities are all subject to change and such change may be made with
retroactive effect. We can give no assurance that after any such change, our
opinion would not be different. Moreover, our opinion will not be binding on the
Puerto Rico Treasury Department or the courts.
We undertake no responsibility to update or supplement our opinion.
We hereby consent to the filing with the Securities and Exchange Commission of
this opinion as an exhibit to the Form S-4 and to the reference to our firm
under the heading "THE MERGER - Certain Puerto Rico Income Tax Consequences"
contained therein. In giving such consent, we do not thereby admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/McConnell Valdes
-------------------
McConnell Valdes
Exhibit 23.2
Price Waterhouse
CONSENT OF PRICE WATERHOUSE
April 28, 1998
To the Board of Directors of
R&G Financial Corporation
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of R&G Financial
Corporation of our report dated February 2, 1998, which appears on Page 41 of
R&G Financial Corporation's 1997 Annual Report to Shareholders, which is
incorporated by reference in its Annual Report on Form 10-K for the year ended
December 31, 1997. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ PRICE WATERHOUSE
- --------------------
PRICE WATERHOUSE
San Juan, Puerto Rico
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
The Board of Directors
Fajardo Federal Savings Bank:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the proxy statement/prospectus.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
San Juan, Puerto Rico
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-END> SEP-30-1997 DEC-31-1997
<CASH> 2,186,999 1,161,939
<INT-BEARING-DEPOSITS> 2,500,000 3,000,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 287,400 287,400
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 24,009,419 24,252,192
<ALLOWANCE> 340,847 342,526
<TOTAL-ASSETS> 29,929,893 29,612,191
<DEPOSITS> 22,517,956 22,017,134
<SHORT-TERM> 3,800,000 3,800,000
<LIABILITIES-OTHER> 358,765 308,710
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 1,542,888 1,643,742
<OTHER-SE> 1,710,284 1,842,605
<TOTAL-LIABILITIES-AND-EQUITY> 29,929,893 29,612,191
<INTEREST-LOAN> 2,572,649 85,618
<INTEREST-INVEST> 0 0
<INTEREST-OTHER> 109,083 57,031
<INTEREST-TOTAL> 2,681,732 642,649
<INTEREST-DEPOSIT> 846,376 220,407
<INTEREST-EXPENSE> 1,123,729 61,385
<INTEREST-INCOME-NET> 1,558,003 360,857
<LOAN-LOSSES> 62,922 131
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,196,620 250,568
<INCOME-PRETAX> 467,881 152,521
<INCOME-PRE-EXTRAORDINARY> 467,881 152,251
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 350,782 132,321
<EPS-PRIMARY> 2.45 0.87
<EPS-DILUTED> 2.45 0.87
<YIELD-ACTUAL> 5.45 5.79
<LOANS-NON> 1,473,000 1,473,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 333,000 333,000
<LOANS-PROBLEM> 1,806,000 1,806,000
<ALLOWANCE-OPEN> 326,090 340,847
<CHARGE-OFFS> 85,000 0
<RECOVERIES> 37,000 1,548
<ALLOWANCE-CLOSE> 340,847 342,526
<ALLOWANCE-DOMESTIC> 340,847 342,526
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
