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File Pursuant to Rule 424(b)(4)
Registration No. 333-90463
PROSPECTUS
1,000,000 SHARES
[LOGO]
7.75% NONCUMULATIVE PERPETUAL MONTHLY INCOME
PREFERRED STOCK, SERIES B
PRICE TO PUBLIC: $25 PER SHARE
We are offering to the public 1,000,000 shares of our 7.75% Noncumulative
Perpetual Monthly Income Preferred Stock, Series B. The Series B Preferred Stock
has the following characteristics:
- Annual dividends of $1.9375 per share, payable monthly, if declared by the
board of directors. Missed dividends never have to be paid.
- Redeemable at our option beginning on January 1, 2005.
- No mandatory redemption or stated maturity.
There is currently no public market for the Series B Preferred Stock. The
Series B Preferred Stock has been approved for listing on the Nasdaq National
Market under the symbol "RGFCO." Trading of the Series B Preferred Stock on the
Nasdaq National Market is expected to commence approximately 30 days after the
initial delivery of the Series B Preferred Stock.
INVESTING IN THE SERIES B PREFERRED STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
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PER SHARE TOTAL
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Public Offering Price....................................... $ 25.00 $25,000,000
Underwriting Discounts...................................... $ 0.7875 $ 787,500
Proceeds to R&G Financial Corporation....................... $24.2125 $24,212,500
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We have granted the underwriters an over-allotment option to purchase up to
150,000 additional shares of Series B Preferred Stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OBLIGATIONS OF ANY
BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
SANTANDER SECURITIES MERRILL LYNCH & CO.
FRIEDMAN BILLINGS RAMSEY
The date of this prospectus is December 16, 1999
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[MAP]
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TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 5
Forward Looking Statements.................................. 12
Use of Proceeds............................................. 13
Capitalization.............................................. 13
Selected Consolidated Financial and Other Data.............. 14
Description of Series B Preferred Stock..................... 16
Description of Capital Stock................................ 22
Taxation.................................................... 25
Underwriting................................................ 33
Where You Can Find More Information......................... 35
Legal Matters............................................... 35
Independent Accountants..................................... 36
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PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION INCORPORATED BY
REFERENCE OR CONTAINED IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS
HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION.
THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THE
SERIES B PREFERRED STOCK IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THE DATE ON
THE FRONT COVER, BUT THE INFORMATION MAY HAVE CHANGED SINCE THAT DATE.
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SUMMARY
THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN
THIS PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND
DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. YOU SHOULD ALSO READ
THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS OR INCORPORATED HEREIN
BY REFERENCE. IN THIS PROSPECTUS, REFERENCES TO "WE" AND "OUR" ARE TO R&G
FINANCIAL CORPORATION.
THE OFFERING
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SECURITIES OFFERED........................... 1,000,000 shares of Series B Preferred Stock;
1,150,000 shares if the underwriters'
over-allotment option is exercised in full.
OFFERING PRICE............................... $25 per share.
UNDERWRITERS................................. Santander Securities Corporation of Puerto
Rico, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Friedman Billings Ramsey.
USE OF PROCEEDS.............................. We are raising funds in this offering
primarily to support further growth in the
business of R-G Premier Bank, one of our
principal operating subsidiaries. The net
proceeds contributed to the Bank will
increase the Bank's regulatory capital, which
will facilitate its ability to increase
deposits and borrowings to fund additional
investments.
DIVIDENDS.................................... For each share of Series B Preferred Stock
you own, you will be entitled to receive a
noncumulative preferential cash dividend when
and if declared by our board of directors.
This dividend will be payable monthly in
arrears commencing on January 1, 2000 and on
the first day of each calendar month
thereafter, at the fixed annual dividend rate
of 7.75% of the $25 liquidation preference
per share.
VOTING RIGHTS................................ As a holder of the Series B Preferred Stock,
except as required by applicable law or in
the limited circumstances described herein,
you will not have voting rights.
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LIQUIDATION PREFERENCE....................... In the event of our liquidation, you will be
entitled to receive for each share of
Series B Preferred Stock, a liquidation
preference of $25 plus any accrued and unpaid
dividends for the then current monthly
dividend period, subject to certain
limitations.
REDEMPTION................................... We may redeem the Series B Preferred Stock on
or after January 1, 2005, in whole or in part
from time to time, at our option, upon not
less than 30 nor more than 60 days' notice by
mail, at the redemption prices set forth
herein, plus any accrued and unpaid dividends
for the then current monthly dividend period
to the date fixed for redemption, subject to
our receiving any required prior regulatory
approvals. The Series B Preferred Stock is
not subject to any sinking fund or similar
obligation.
CONVERSION; EXCHANGE......................... The Series B Preferred Stock is not
convertible into or exchangeable for any of
our other securities.
PREEMPTIVE RIGHTS............................ As a holder of the Series B Preferred Stock,
you will have no preemptive rights to
purchase any of our securities.
LISTING ON THE NASDAQ NATIONAL MARKET........ The Series B Preferred Stock has been
approved for listing on the Nasdaq National
Market under the symbol "RGFCO." Trading of
the Series B Preferred Stock on the Nasdaq
National Market is expected to commence
approximately 30 days after the initial
delivery of the Series B Preferred Stock.
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R&G FINANCIAL CORPORATION
We are 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 (the "Bank"). We were organized under Puerto Rico
law in March 1996. R&G Mortgage was organized in 1972 and the predecessor of the
Bank was organized in 1983. In July 1996, we acquired the 88.1% ownership
interest in the common stock of the Bank and the 100% ownership interest in the
common stock of R&G Mortgage held by our Chairman of the Board and Chief
Executive Officer, Mr. Victor J. Galan, in exchange for shares of our Class A
common stock. In August 1996, we conducted an underwritten initial public
offering of our Class B common stock. In December 1996, we acquired the
remaining 11.9% ownership interest in the common stock of the Bank. At
September 30, 1999, we had total consolidated assets of $2.7 billion, total
consolidated borrowings of $1.1 billion, total consolidated deposits of
$1.3 billion, and total consolidated stockholders' equity of $245.4 million.
In October 1999, we entered the United States market with the acquisition by
the Bank of Continental Capital Corp. ("Continental"), a Long Island, New
York-based mortgage banking company. With our acquisition of Continental, we
plan to expand our operations in the United States, concentrating initially in
New York and then into other markets to the extent that we are presented with
appropriate expansion opportunities. In addition to considering other mortgage
banking companies, we will also seek to acquire a financial institution in the
United States to take advantage of the same synergies between our operations as
we have experienced in Puerto Rico.
We compete for business in Puerto Rico by providing a wide range of
financial services to residents of all of Puerto Rico's major cities through our
branch offices and mortgage banking facilities at 26 locations. The operations
of both R&G Mortgage and the Bank have expanded substantially during the 1990's,
due in large part to R&G Mortgage's emergence as a leading originator of loans
secured by single-family residential properties in Puerto Rico. During the year
ended December 31, 1998, R&G Mortgage originated approximately 27.9% of 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 the Bank's franchise and operations. R&G Mortgage's servicing
portfolio has increased by 246.5% since December 31, 1991 and, at September 30,
1999, R&G Mortgage serviced approximately 100,440 accounts with an aggregate
loan balance of $5.4 billion. The Bank's asset size, which amounted to
$2.1 billion at September 30, 1999, has increased by $2.0 billion since R&G
Mortgage became affiliated with the Bank in February 1990, while the branch
office network has increased from two to 21 offices. Total loan originations by
the Bank during the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996 amounted to $226.7 million, $129.1 million,
$89.0 million and $122.8 million, respectively.
We have generally sought to achieve long-term financial strength and
profitability by increasing the amount and stability of our net interest income
and non-interest income. We have sought to implement this strategy by
(1) establishing and emphasizing the growth of our mortgage banking activities,
including growing our loan servicing operation; (2) expanding our retail banking
franchise in order to achieve increased market presence and to increase core
deposits; (3) enhancing our net interest income by increasing our loans held for
investment, particularly single-family residential loans; (4) developing new
business relationships through an increased emphasis on commercial real estate
and commercial business lending; (5) diversifying our retail products and
services, including an increase in consumer loan originations (such as credit
cards); (6) meeting the banking needs of our customers through, among other
things, the offering of trust and investment services; and (7) controlled growth
and the pursuit of a variety of acquisition opportunities when appropriate.
We are subject to regulation and supervision by the Board of Governors of
the Federal Reserve System and are subject to various reporting and other
requirements of the SEC.
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SUMMARY FINANCIAL AND OPERATING DATA
You should read the summary financial information presented below together
with our consolidated financial statements and notes which are incorporated by
reference into this prospectus and with our historical financial information
included under "Selected Consolidated Financial and Other Data" beginning on
page 14 of this prospectus. At September 30, 1999, R&G Mortgage and the Bank had
total assets of $694.6 million and $2.1 billion, respectively, before
consolidation. Per share information takes into account prior stock splits and
dividends.
The return on average assets ratio is computed by dividing net income by
average total assets for the period. The return on average equity ratio is
computed by dividing net income by average stockholders' equity for the period.
Both ratios have been computed using month-end averages. The ratios for the
nine-month periods ended September 30, 1999 and 1998 are presented on an
annualized basis.
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NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA:
Net income........................... $ 33,077 $ 23,988 $ 34,034 $ 23,497 $ 13,200 $ 10,449 $ 5,452
Diluted earnings per common share.... $ 1.03 $ 0.82 $ 1.12 $ 0.81 $ 0.59 $ 0.56 $ 0.29
BALANCE SHEET DATA:
Total assets......................... $2,653,747 $1,830,030 $2,044,782 $1,510,746 $1,037,798 $ 853,206 $ 622,499
Stockholders' equity................. $ 245,419 $ 213,420 $ 221,162 $ 138,054 $ 115,633 $ 66,385 $ 55,970
OPERATING DATA:
Mortgage loans originated and
purchased.......................... $1,184,844 $ 887,280 $1,237,415 $ 758,486 $ 480,525 $ 327,107 $ 501,187
Loan servicing portfolio............. $5,434,588 $3,564,920 $4,827,798 $3,000,888 $2,550,169 $2,298,200 $2,114,743
SELECTED RATIOS:
Return on average assets............. 1.93% 1.92% 1.95% 1.85% 1.38% 1.47% 0.91%
Return on average common equity...... 22.01% 21.11% 21.32% 18.69% 15.54% 17.08% 10.34%
</TABLE>
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratios of earnings to fixed
charges and preferred stock dividends for the respective periods indicated.
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NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
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Earnings to fixed charges and preferred
stock dividends:
Including interest on deposits............ 1.51x 1.54x 1.53x 1.52x 1.42x 1.50x 1.23x
Excluding interest on deposits............ 2.01x 1.98x 2.00x 2.11x 2.06x 2.48x 1.58x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges and
preferred stock dividends, earnings represent income from continuing operations
before income taxes, extraordinary items and cumulative effect of a change in
accounting principle plus fixed charges. Fixed charges and preferred stock
dividends represent total interest expense, including and excluding interest on
deposits, as applicable, as well as the amount of pre-tax earnings required to
pay dividends on our Series A Preferred Stock, together with a reasonable
approximation of the interest component of rental expense. We issued our
Series A Preferred Stock in August 1998.
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RISK FACTORS
YOU SHOULD CAREFULLY READ THE FOLLOWING RISK FACTORS BEFORE YOU DECIDE TO
BUY ANY SERIES B PREFERRED STOCK. YOU SHOULD ALSO CONSIDER THE OTHER INFORMATION
IN THIS PROSPECTUS AND THE DOCUMENTS THAT ARE INCORPORATED BY REFERENCE.
WE ARE NOT OBLIGATED TO MAKE PAYMENTS ON THE SERIES B PREFERRED STOCK IF OUR
BOARD OF DIRECTORS FAILS TO DECLARE DIVIDENDS.
Dividends on the Series B Preferred Stock are payable when, as and if
declared by our Board of Directors, out of funds legally available therefor.
Dividends on the Series B Preferred Stock are noncumulative. To the extent that
funds are not legally available for the payment of dividends for any monthly
dividend period or that such dividends are not declared with respect to any
monthly dividend period, you will have no right to receive a dividend in respect
of such monthly dividend period. We intend to pay monthly dividends at the
stated annual rate if allowable under legal and regulatory guidelines. However,
we can give no assurances that we will be able to or will decide to declare and
pay such dividends. We may redeem the Series B Preferred Stock without a
dividend on such Series B Preferred Stock ever having been declared or paid.
PAYMENT OF DIVIDENDS ON THE SERIES B PREFERRED STOCK IS DEPENDENT ON OUR
SUBSIDIARIES MAKING PAYMENTS TO US AS WELL AS TO OUR COMPLIANCE WITH REGULATORY
REQUIREMENTS.
We are a holding company with no significant business operations of our own.
Our only significant asset is all of the common stock of R&G Mortgage and the
Bank. Our only source of cash to pay dividends on the Series B Preferred Stock
will consist of distributions from R&G Mortgage and the Bank. There can be no
assurance that the earnings from R&G Mortgage and the Bank will be sufficient to
make distributions to us to enable us to pay dividends on the Series B Preferred
Stock or, in the case of the Bank, that such distributions will be permitted by
applicable banking laws and regulations. The ability of the Bank to pay
dividends is restricted by the Puerto Rico Banking Act of 1933, as amended, by
the Federal Deposit Insurance Act and by Federal Deposit Insurance Corporation
("FDIC") regulation.
THERE MAY BE NO ACTIVE OR LIQUID MARKET FOR THE SERIES B PREFERRED STOCK.
Prior to this offering, there has been no public market for our Series B
Preferred Stock. The Series B Preferred Stock has been approved for listing on
the Nasdaq National Market under the symbol "RGFCO." However, there can be no
assurance that an established and liquid trading market for the Series B
Preferred Stock will develop, that it will continue if it does develop, or that
after the completion of this offering, the Series B Preferred Stock will trade
at or above the public offering price set forth on the cover of this prospectus.
Our Series A Preferred Stock issued by us in August 1998 are quoted on the
Nasdaq National Market under the symbol "RGFCP."
CHANGES IN INTEREST RATES COULD AFFECT OUR OVERALL PROFITABILITY.
Changes in interest rates can have a variety of effects on our business. In
particular, changes in interest rates affect the volume of mortgage loan
originations, the interest rate spread on loans held for sale, the amount of
gain on sale of loans, the value of R&G Mortgage's loan servicing portfolio and
the Bank's net interest income. A substantial increase in interest rates could
affect the volume of our loan originations for both the Bank and third parties
by reducing the demand for mortgages for home purchases, as well as the demand
for refinancings of existing mortgages. A substantial decrease in interest rates
will generally increase the demand for mortgages. To the extent that interest
rates in future periods were to increase substantially, we would expect overall
originations to decline. A decrease in the volume of our mortgage originations
could result in a decrease in the amount of R&G
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Mortgage's mortgage origination income and portfolio generated net interest
income to the Bank. During the nine months ended September 30, 1999 and the
years ended December 31, 1998, 1997 and 1996, R&G Mortgage originated an
aggregate of $792.7 million, $914.1 million, $598.2 million and $448.1 million
of loans, respectively, which includes loans originated for the Bank.
CHANGES IN INTEREST RATES COULD ALSO AFFECT THE PROFITABILITY OF MORTGAGE LOAN
ORIGINATIONS.
The profitability to R&G Mortgage of its mortgage loan originations is in
part a function of the difference between long-term interest rates, which is the
rate at which R&G Mortgage originates mortgage loans for third parties, and
short-term interest rates, which is the rate at which R&G Mortgage finances such
loans until they are sold. Generally, short-term interest rates are lower than
long-term interest rates and R&G Mortgage benefits from the difference, or the
spread, during the time the mortgage loans are held by R&G Mortgage pending
sale. A decrease in this spread would have a negative effect on R&G Mortgage's
net interest income and profitability. There can be no assurance that the spread
will not decrease. R&G Mortgage attempts to limit its exposure to this interest
rate risk through the sale of substantially all loans within 180 days of
origination. During the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, R&G Mortgage sold $544.4 million,
$493.0 million, $246.1 million and $244.8 million of loans, respectively, which
includes loans securitized and sold but does not include loans originated by R&G
Mortgage on behalf of the Bank. Loans which are originated by R&G Mortgage for
the Bank's loan portfolio, in contrast, are funded by the Bank through deposits
and various longer-term borrowing sources.
CHANGES IN INTEREST RATES AFFECT OUR GAIN ON SALE OF MORTGAGE LOANS.
R&G Mortgage is also exposed to interest rate risk from the time the
interest rate on the customer's mortgage loan application is established through
the time the mortgage loan closes, and until the time R&G Mortgage commits to
sell the mortgage loan. In order to limit our exposure to interest rate risk
through the time the mortgage loan closes, we generally do not permit the
borrower to lock-in an interest rate until the actual closing date or
immediately prior to such date. Moreover, in order to limit our exposure to
interest rate risk through the time the loan is sold or committed to be sold, we
may, depending upon market conditions, enter into forward commitments to sell a
portion of our mortgage loans to investors for delivery at a future time. At
September 30, 1999, we had $86.6 million of pre-existing commitments by
third-party investors to purchase mortgage loans. To the extent that we
originate or commit to originate loans without pre-existing commitments by
investors to purchase such loans or to the extent such loans are not otherwise
hedged against changes in interest rates ("unhedged loans"), we will be subject
to the risk of gains or losses through adjustments to the carrying value of
loans held for sale or on the actual sale of such loans (the value of unhedged
loans fluctuates inversely with changes in interest rates).
CHANGES IN INTEREST RATES COULD AFFECT THE SIZE AND PROFITABILITY OF OUR LOAN
SERVICING PORTFOLIO.
The market value of and income from our loan servicing portfolio may also be
affected by interest rate fluctuations. Specifically, a decrease in interest
rates relative to the average interest rate of mortgage loans in our loan
servicing portfolio could cause an increase in the rate at which outstanding
loans are prepaid, reducing the period of time during which we would earn
servicing income with respect to such loans. Prepayments generally decrease the
amount of our future loan servicing income which, in turn, decreases the value
of our loan servicing portfolio. Further, an increase in prepayment rates may
accelerate the amortization of any capitalized servicing or excess servicing
carried on our balance sheet. On the other hand, the market value of and income
from our loan servicing portfolio may be positively affected as mortgage
interest rates increase. At September 30, 1999, we were servicing approximately
100,440 loans which had an aggregate loan balance of $5.4 billion. At
September 30, 1999, we had capitalized $71.4 million of mortgage servicing
rights. During the nine
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months ended September 30, 1999 and the years ended December 31, 1998, 1997 and
1996, we recognized amortization adjustments (including any impairment
adjustments) of $5.2 million, $3.0 million, $1.8 million and $1.2 million,
respectively, with respect to our capitalized mortgage servicing rights. Such
amortization adjustments have and will continue to have a significant effect on
our results of operations.
CHANGES IN INTEREST RATES COULD AFFECT OUR NET INTEREST INCOME AND THE VALUE OF
OUR INTEREST-EARNING ASSETS.
Our operations in general and the Bank in particular are also substantially
dependent on net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense paid on
interest-bearing liabilities. Because our interest-earning assets have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly than the cost of our
interest-bearing liabilities. As a result, our net interest income and the value
of our securities portfolio generally would be adversely affected by increases
in interest rates and positively affected by comparable declines in interest
rates. At September 30, 1999, our interest-bearing liabilities which were
estimated to mature or reprice within one year exceeded our interest-earning
assets with the same characteristics by $443.9 million or 16.7% of total assets.
In addition to affecting net interest income, changes in interest rates also
can affect the value of our interest-earning assets, which are comprised of
fixed and adjustable-rate instruments. Generally, the value of fixed-rate
instruments declines when interest rates rise and increases when interest rates
fall. At September 30, 1999, $50.2 million or 5.1% of our mortgage-backed and
investment securities were classified as held for trading and $908.8 million or
91.9% of such mortgage-backed and investment securities were classified as
available for sale. Securities classified as held for trading are reported at
fair value, with unrealized gains and losses included in earnings, while
securities classified as available for sale are reported at fair value with
unrealized gains and losses excluded from earnings and reported net of taxes in
other comprehensive income, a separate component of stockholders' equity.
OUR ORIGINATION BUSINESS WOULD BE ADVERSELY AFFECTED IF WE CANNOT MAINTAIN
ACCESS TO STABLE FUNDING SOURCES.
Our business requires continuous access to various funding sources. While
the Bank is able to fund loans originated for it by R&G Mortgage through
deposits which are primarily generated through its network of branch offices as
well as through longer-term borrowings from the Federal Home Loan Bank ("FHLB")
of New York and other alternative sources, R&G Mortgage's business is
significantly dependent upon short-term borrowings under warehousing lines. At
September 30, 1999, R&G Mortgage was authorized to borrow under its warehousing
lines up to an aggregate of $180.0 million. An aggregate of $37.5 million was
outstanding under such warehousing lines as of such date. Certain of these
warehousing lines of credit require R&G Mortgage to maintain minimum levels of
net worth and debt service and limit the amount of indebtedness R&G Mortgage may
incur and the amount of dividends it may declare.
In addition, at September 30, 1999, the Bank had access to $677.7 million in
advances from the FHLB of New York, of which $273.5 million was outstanding as
of such date. The FHLB of New York has also issued $51.3 million in standby
letters of credit which secure outstanding notes payable and certain
certificates of deposit. The Bank maintains qualifying collateral (principally
in the form of first mortgage loans and securities) which amounted to
$445.5 million as of September 30, 1999, to secure repayment of its FHLB of New
York advances and letters of credit. The Bank maintains collateral with the FHLB
of New York in excess of applicable requirements in order to facilitate
additional future borrowings by the Bank.
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While we expect to have continued access to credit from the foregoing
sources of funds, there can be no assurance that such financing sources will
continue to be available or will be available on favorable terms. In the event
that R&G Mortgage's warehousing lines of credit were reduced or eliminated and
R&G Mortgage were not able to replace such lines on a cost-effective basis, R&G
Mortgage would be forced to curtail or cease its mortgage origination business,
which would have a material adverse effect on our operations and financial
condition. Although R&G Mortgage could also potentially access borrowings from
the Bank, any such borrowings would be subject to and limited by provisions of
Sections 23A and 23B of the Federal Reserve Act, which impose restrictions on
transactions between the Bank and its affiliates, including R&G Mortgage.
R&G MORTGAGE IS SUBJECT TO DEFAULT AND RECOURSE RISK IN CONNECTION WITH ITS LOAN
ORIGINATION PROCESS.
From the time that R&G Mortgage funds the mortgage loans it originates for
third parties to the time it sells them (typically approximately 30 to
180 days), R&G Mortgage is generally at risk for any mortgage loan defaults.
Once R&G Mortgage sells the mortgage loans it originates, the risk of loss from
mortgage loan defaults and foreclosures passes to the purchaser or insurer of
the mortgage loans. However, in the ordinary course of business, R&G Mortgage
makes certain representations and warranties to the purchasers and insurers of
mortgage loans. If a mortgage loan defaults and there has been a breach of these
representations or warranties, R&G Mortgage may become liable for the unpaid
principal and interest on the defaulted mortgage loan. In such a case, which
would primarily arise as the result of fraudulent misrepresentations made to R&G
Mortgage in the loan origination process, R&G Mortgage may be required to
repurchase the mortgage loan and bear any subsequent loss on the mortgage loan.
In addition, with respect to the non-conventional mortgage loans originated by
R&G Mortgage for the Bank, which generally are subsequently securitized by R&G
Mortgage and sold on behalf of the Bank, R&G Mortgage occasionally provides
recourse in the event of mortgage loan defaults and/or foreclosures or certain
documentation deficiencies. At September 30, 1999, there were $627.8 million of
loans subject to such recourse provisions. During the nine months ended
September 30, 1999, and the years ended December 31, 1998, 1997 and 1996, losses
incurred by R&G Mortgage with respect to such recourse provisions were
insignificant.
THE BANK IS SUBJECT TO DEFAULT RISK IN CONNECTION WITH ITS LOAN ORIGINATION
PROCESS.
The Bank is subject to the risk of loss from mortgage loan defaults and
foreclosures with respect to the loans originated for its portfolio by R&G
Mortgage. All of the loans originated for the Bank's portfolio are based on its
Board approved written underwriting policy and procedures. Notwithstanding the
care with which loans are originated, industry experience indicates that a
portion of the Bank's loans will become delinquent and a portion of the loans
will require partial or entire charge off. Regardless of the underwriting
criteria utilized by the Bank, losses may be experienced as a result of various
factors beyond the Bank's control, including, among others, changes in market
conditions affecting the value of collateral and problems affecting the credit
of the borrower. Due to the concentration of loans in Puerto Rico, adverse
economic conditions in Puerto Rico could result in a decrease in the value of
the Bank's collateral. Although loan delinquencies have historically been higher
in Puerto Rico than generally in the United States, loan charge-off's have
historically been lower than in the United States.
The Bank establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate by management based upon an assessment of prior loss
experience, the volume and type of lending being conducted by the Bank, industry
standards, past due loans, general economic conditions in the Bank's market area
and other factors related to the collectibility of the Bank's loan portfolio.
The Bank's allowance for loan losses amounted to $9.0 million and $8.1 million
at September 30, 1999 and December 31, 1998, respectively, which constituted
17.26% and 17.92% of the Bank's non-performing loans as of such
8
<PAGE>
respective dates. Total charge-offs to the Bank's allowance for loan losses
amounted to $3.0 million and $6.0 million for the nine months ended
September 30, 1999 and the year ended December 31, 1998, respectively. Although
our management utilizes its best judgment in providing for loan losses, there
can be no assurance that the Bank will not have to increase its provisions for
loan losses in the future as a result of future increases in non-performing
loans or for other reasons. Any such increases in the Bank's provisions for loan
losses or any loan losses in excess of the Bank's provisions with respect
thereto could have an adverse affect on our future financial condition and/or
results of operations.
THE BANK'S EXPOSURE TO CREDIT RISK IS INCREASING AS A CONSEQUENCE OF THE
INCREASE IN ITS COMMERCIAL BANKING ACTIVITIES.
We have recently increased our emphasis on residential construction,
commercial real estate and commercial business lending. As we increase our focus
on commercial lending, an increase in our credit risk is likely to occur. We
generally charge higher interest rates on commercial and residential
construction loans than we do on permanent residential mortgage loans, because
we expect higher loan losses. Generally, commercial and construction loans are
considered to be riskier than permanent residential mortgage loans because they
have larger balances to a single borrower or group of related borrowers. In
addition, the borrower's ability to repay a commercial loan depends on the
successful operation of the business or the property securing the loan. If we
experience loan losses that are higher than our allowance for loan losses, our
profits and financial condition could be adversely affected.
R&G MORTGAGE IS SUBJECT TO RISKS IN SERVICING LOANS FOR OTHERS.
R&G Mortgage is also affected by mortgage loan delinquencies and defaults on
mortgage loans that it services. Under certain types of servicing contracts, the
servicer must forward all or part of the scheduled payments to the owner of the
mortgage loan, even when mortgage loan payments are delinquent. Also, to protect
their liens on mortgaged properties, owners of mortgage loans usually require
the servicer to advance mortgage and hazard insurance and tax payments on
schedule even though sufficient escrow funds may not be available. The servicer
will ultimately be reimbursed by the mortgage owner or from liquidation proceeds
for payments advanced that the servicer is unable to recover from the mortgagor.
However, in the interim, the servicer must absorb the cost of funds advanced
during the time the advance is outstanding. Further, the servicer must bear the
increased costs of attempting to collect on delinquent and defaulted mortgage
loans. Although these increased costs are somewhat ameliorated through the
receipt of late fees and the reimbursement of certain direct expenses out of
foreclosure proceeds, our management believes that increased delinquencies and
defaults generally increase the costs of the servicing function. In addition, if
a default is not cured, the mortgage loan will be repaid as a result of
foreclosure proceedings. As a consequence, R&G Mortgage is required to forego
servicing income from the time such loan becomes delinquent, and into the
future. During the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, R&G Mortgage wrote-off $35,000, $286,000,
$189,000 and $323,000, respectively, of expenses which it was unable to recover
with respect to its loan servicing operations.
R&G MORTGAGE'S BUSINESS IS DEPENDENT ON THE EXISTENCE OF, AND ITS PARTICIPATION
IN, FEDERAL PROGRAMS WHICH FACILITATE THE SALES OF MORTGAGE LOANS AND
MORTGAGE-BACKED SECURITIES.
R&G Mortgage's ability to generate funds by sales of mortgage loans or
mortgage-backed securities is largely dependent upon the continuation of
programs administered by FNMA, FHLMC and GNMA, which facilitate the issuance of
such securities, as well as R&G Mortgage's continued eligibility to participate
in such programs. In addition, part of R&G Mortgage's business is dependent upon
the continuation of various programs administered by the FHA, which insures
mortgage loans, and the VA, which partially guarantees mortgage loans and the
Farmers Home Administration, which guarantees mortgage loans. Although R&G
Mortgage is not aware of any such proposed actions,
9
<PAGE>
discontinuation of, or significant reduction in, the operation of such programs
could have a material adverse effect on R&G Mortgage's operations. R&G Mortgage
expects that it will continue to remain eligible to participate in such programs
but any significant impairment of such eligibility could also materially
adversely affect its operations. The products offered under the foregoing
programs may be changed from time to time by the sponsor. The profitability of
specific products may vary depending on a number of factors, including
administrative costs to R&G Mortgage of originating such products.
IF OUR COMPUTER SYSTEMS DO NOT PROPERLY WORK ON JANUARY 1, 2000, OUR BUSINESS
OPERATIONS COULD BE DISRUPTED.
The Year 2000 issue is the result of computer programs being able to use
only two digits rather than four to define the applicable year. Thus,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations,
causing disruptions of operations, including, among others, a temporary
inability to process deposit and loan transactions, effect financings or engage
in normal business activities. We have established programs to prepare our
computer systems and applications for the Year 2000 and we are utilizing both
internal and external resources to identify, correct and test our systems for
Year 2000 compliance.
We have completed the assessment of our computer hardware, software programs
and data processing applications, including those provided by third party
vendors. We have received revised programs from our third party vendors that
have been modified to address the Year 2000 issue for the principal applications
used in our mortgage banking and banking businesses. We completed the testing
and implementation of these revised programs and applications during the fourth
quarter of 1998, ascertaining that they adequately deal with the Year 2000
issue. Our main computer, used principally in banking and mortgage banking
operations, is Year 2000 compliant, meaning that it can properly process and
calculate date-related information after January 1, 2000. We are currently in
the process of replacing other equipment, primarily desktop computers that are
not Year 2000 compliant. We have also developed a "Business Resumption
Contingency Plan" in order to ensure continuity of daily operations after
December 31, 1999 in the event that a given application which has been duly
tested and implemented does not function adequately after such date.
We do not anticipate that the Year 2000 issue will have a material adverse
effect on our financial condition or result of operations. However, Year 2000
issues suffered by third party providers of basic services, such as telephone,
waste, sewer and electricity, could have an adverse impact on our daily
operations. We will attempt to deal with any disruption of such basic services
caused by Year 2000 issues with our existing business interruption contingency
plans. Under such contingency plans, most of our branch offices are presently
equipped with power plants and/or generators.
We estimate that the cost of addressing the Year 2000 issue will be
approximately $300,000, most of which has been incurred. Most of such costs are
directly related to the cost of replacing existing equipment, primarily desktop
computers, which have been fully depreciated on our financial statements.
CHANGES IN STATUTES AND REGULATIONS COULD ADVERSELY AFFECT US.
We, as a Puerto Rico chartered bank holding company, the Bank, as a Puerto
Rico chartered and federally insured commercial bank, and R&G Mortgage, as a
Puerto Rico licensed mortgage banking company, are each subject to extensive
federal and Puerto Rico governmental supervision and regulation. There are laws
and regulations which govern transactions between R&G Mortgage, the Bank and us.
The operations of R&G Mortgage are subject to various laws and regulations that,
among other things, establish licensing requirements, regulate credit granting
activities, establish maximum interest rates and insurance coverages, require
specific disclosures to customers, govern secured transactions, and establish
collection, repossession and claims handling procedures and other trade
practices. The Bank is subject to extensive federal and Puerto Rico supervision
and regulation, which is
10
<PAGE>
primarily for the protection of depositors. The Bank is required to maintain
reserves against deposits, and there are restrictions on the types and amounts
of loans that may be granted and the interest that may be charged thereon, and
limitations on the types of other investments that may be made and the types of
services that may be offered. In addition, federal and Puerto Rico regulatory
authorities have the power in certain circumstances to limit transactions
between us and our affiliates, to limit the Bank's growth, to prohibit or limit
the payment of dividends from the Bank to us and to require the Bank to maintain
capital ratios in accordance with regulatory requirements. Any change in such
regulation, whether by our regulators or as a result of legislation subsequently
enacted by the Congress of the United States or the Puerto Rico legislature,
could have a substantial impact on our operations.
We are a bank holding company subject to the supervision and regulation of
the Federal Reserve Board as a result of our ownership of the Bank. Under the
Federal Reserve Board policy, a bank holding company is expected to act as a
source of financial strength to any subsidiary bank and to commit resources to
support each such subsidiary bank. This support may be required at times when,
absent such policy, the bank holding company might not otherwise provide such
support. Moreover, because we are a holding company, our right to participate in
the assets of any subsidiary upon its liquidation or reorganization will be
subject to the prior claims of the subsidiary's creditors (including depositors
in the case of the Bank), except to the extent that we may ourselves be a
creditor with recognized claims against the subsidiary.
OUR BUSINESS IS CONCENTRATED IN PUERTO RICO, AND ADVERSE CONDITIONS IN PUERTO
RICO COULD NEGATIVELY IMPACT OUR OPERATIONS.
Our business activities and credit exposure are concentrated with customers
in Puerto Rico. Accordingly, our financial condition and results of operations
are dependent to a significant extent upon the economic conditions prevailing
from time to time in Puerto Rico. Any significant adverse economic developments
in Puerto Rico could result in a downturn in loan originations, an increase in
the level of nonperforming assets and a reduction in the value of our loans,
real estate owned and mortgage servicing portfolio.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.
We face substantial competition in originating loans and in attracting
deposits. This competition in originating loans comes principally from other
U.S., Puerto Rico and foreign banks, mortgage banking companies, consumer
finance companies, insurance companies and other institutional lenders and
purchasers of loans. In attracting deposits, we compete with insured depository
institutions such as banks, savings institutions and credit unions, as well as
institutions offering uninsured investment alternatives including money market
funds. These competitors may offer higher interest rates than we do, which could
result in either our attracting fewer deposits or in our being required to
increase our rates in order to attract deposits. Increased deposit competition
could increase our cost of funds and adversely affect our ability to generate
the funds necessary for our lending operations, thereby adversely affecting our
results of operations. A number of institutions with which we compete have
significantly greater assets, capital and other resources. In addition, many of
our competitors are not subject to the same extensive federal regulation that
governs our business. As a result, many of our competitors have advantages over
us in conducting certain businesses and providing certain services.
11
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains and incorporates by reference certain forward
looking statements regarding our financial condition, results of operations and
business. These statements are not historical facts and include statements about
our
- confidence,
- strategies about earnings,
- new and existing programs and products,
- relationships,
- opportunities,
- technology, and
- market conditions.
You may identify these statements by looking for
- forward-looking terminology, like "expect," "believe" or "anticipate;"
- expressions of confidence like "strong" or "on-going;" or
- similar statements or variations of those terms.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from the results the forward-looking
statements contemplate because of, among others, the following possibilities:
- competitive pressure in the banking and financial services industry
increases significantly;
- changes occur in the interest rate environment;
- our Year 2000 compliance program does not effectively address Year 2000
computer problems; and
- general economic conditions, particularly within Puerto Rico, are less
favorable than expected.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of Series B Preferred
Stock is expected to be $23,937,500 ($27,569,375 if the underwriters'
over-allotment option is exercised in full) after deducting the underwriting
discounts and our estimated offering expenses. See "Underwriting."
We are raising funds in this offering primarily to support further growth in
the business of the Bank. The net proceeds contributed to the Bank will increase
the Bank's regulatory capital, which will facilitate its ability to increase
deposits and borrowings to fund additional investments.
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization at
September 30, 1999, and as adjusted to reflect the issuance of 1,000,000 shares
of Series B Preferred Stock offered by this prospectus and the application of
the net proceeds therefrom, as if the sale of the Series B Preferred Stock had
been consummated on September 30, 1999. The table does not give effect to any
exercise of the over-allotment option granted to the underwriters.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Borrowings (1).............................................. $1,097,011 $1,097,011
========== ==========
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized:
2,000,000 Series A Preferred Stock, actual................ $ 50,000 $ 50,000
1,000,000 Series B Preferred Stock, as adjusted........... -- 25,000
Common stock, $.01 par value:
Class A shares, 40,000,000 shares authorized; 18,440,556
shares issued and outstanding........................... 184 184
Class B Shares, 30,000,000 shares authorized, 10,217,731
shares issued and outstanding and as adjusted........... 102 102
Additional paid-in capital.................................. 41,833 40,770
Retained earnings........................................... 151,651 151,651
Capital reserves of the Bank................................ 3,548 3,548
Accumulated other comprehensive income...................... (1,899) (1,899)
---------- ----------
Total stockholders' equity................................ 245,419 269,356
---------- ----------
Total capitalization...................................... $1,342,430 $1,366,367
========== ==========
Common stockholders' equity per share....................... $ 6.82 $ 6.78
========== ==========
</TABLE>
- ------------------------
(1) Includes securities sold under agreements to repurchase, notes payable and
other borrowings.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial and other data below should be read in
connection with the financial information included in our Annual Report on
Form 10-K/A for the year ended December 31, 1998 and our Quarterly Report on
Form 10-Q for the nine months ended September 30, 1999. See "Where You Can Find
More Information." The consolidated financial information for the nine-month
periods ended September 30, 1999 and 1998 are derived from our unaudited
consolidated financial statements, which, in the opinion of our management,
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results for such periods. Results for the
nine-month period ended September 30, 1999 are not necessarily indicative of our
results for the full year.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets(1)........................ $2,653,747 $1,830,030 $2,044,782 $1,510,746 $1,037,798 $ 853,206 $ 622,499
Loans receivable, net.................. 1,370,661 926,799 1,073,668 765,059 603,751 473,841 301,614
Mortgage loans held for sale........... 71,600 163,536 117,126 46,885 54,450 21,318 22,021
Mortgage-backed and investment
securities held for trading.......... 50,232 468,770 450,546 401,039 110,267 113,809 124,522
Mortgage-backed securities available
for sale............................. 684,518 42,319 95,040 46,004 50,841 61,008 13,300
Mortgage-backed securities held to
maturity............................. 24,112 29,451 28,255 33,326 37,900 41,731 84,122
Investment securities available for
sale................................. 224,236 46,527 59,502 75,863 30,973 3,280 1,878
Investment securities held to
maturity............................. 5,939 6,340 6,344 10,693 5,270 2,046 2,182
Servicing asset........................ 71,419 32,989 58,221 21,213 12,595 8,210 4,418
Cash and cash equivalents(2)........... 76,117 62,280 103,728 68,366 98,856 104,195 45,622
Deposits............................... 1,270,212 875,492 1,007,297 722,418 615,567 518,187 380,148
Securities sold under agreements to
repurchase........................... 672,882 440,238 471,422 433,134 97,444 98,483 108,922
Notes payable.......................... 140,629 167,388 191,748 108,453 126,842 81,130 45,815
Other borrowings(3).................... 283,500 101,700 121,000 86,359 65,463 67,315 18,092
Subordinated notes..................... -- -- -- 3,250 3,250 3,250 3,250
Stockholders' equity................... 245,419 213,420 221,162 138,054 115,633 66,385 55,970
Stockholders' equity per common
share(4)............................. 6.82 5.72 5.99 4.88 4.09 3.55 3.00
SELECTED INCOME STATEMENT DATA:
Revenues:
Net interest income.................. $ 41,566 $ 32,534 $ 43,973 $ 36,530 $ 28,923 $ 21,273 $ 19,137
Provision for loan losses............ (3,400) (4,500) (6,600) (6,370) (4,258) (950) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................... 38,166 28,034 37,373 30,160 24,665 20,323 19,137
Loan administration and servicing
fees............................... 18,914 11,220 15,987 13,214 13,029 11,030 11,046
Net gain (loss) on sale of
loans (5).......................... 28,475 24,287 34,956 23,286 12,285 8,384 (2,899)
Other(6)............................. 5,009 4,059 5,527 4,605 3,938 4,028 1,667
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..................... 90,564 67,600 93,843 71,265 53,917 43,765 28,951
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Compensation and benefits............ 16,414 11,951 17,095 13,653 10,794 8,284 5,252
Occupancy expenses................... 7,994 6,200 8,987 7,131 5,531 4,711 4,488
SAIF special assessment.............. -- -- -- -- 2,508 -- --
General and administrative
expenses........................... 23,529 16,372 22,687 18,252 15,424 13,731 13,269
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..................... 47,937 34,523 48,769 39,036 34,257 26,726 23,009
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority interest in the
Bank and income taxes................ 42,627 33,077 45,074 32,229 19,660 17,039 5,942
Minority interest in the Bank's
earnings............................. -- -- -- -- 538 743 500
Income taxes........................... 9,550 9,089 11,040 8,732 5,922 5,847 856
Cumulative effect of change in
accounting principle................. -- -- -- -- -- -- 866
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................. 33,077 23,988 34,034 23,497 13,200 10,449 5,452
---------- ---------- ---------- ---------- ---------- ---------- ----------
Less: Dividends on preferred stock..... (2,775) (308) (1,233) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income available to common
stockholders......................... $ 30,302 $ 23,680 $ 32,801 $ 23,497 $ 13,200 $ 10,449 $ 5,452
========== ========== ========== ========== ========== ========== ==========
Basic earnings per common share(4)..... $ 1.06 $ 0.85 $ 1.15 $ 0.83 $ 0.60 $ 0.56 $ 0.29
========== ========== ========== ========== ========== ========== ==========
Diluted earnings per common share(4)... $ 1.03 $ 0.82 $ 1.12 $ 0.81 $ 0.59 $ 0.56 $ 0.29
========== ========== ========== ========== ========== ========== ==========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA(7):
PERFORMANCE RATIOS AND OTHER DATA:
Mortgage loans originated and
purchased............................ $1,184,844 $ 887,280 $1,237,415 $ 758,486 $ 480,525 $ 327,107 $ 501,187
Loan servicing portfolio............... 5,434,588 3,564,920 4,827,798 3,000,888 2,550,169 2,298,200 2,114,743
Return on average assets............... 1.93% 1.92% 1.95% 1.85% 1.38% 1.47% 0.91%
Return on average common equity........ 22.01 21.11 21.32 18.69 15.54 17.08 10.34
Equity to assets at end of period...... 9.25 11.66 10.82 9.13 11.14 7.78 8.94
Interest rate spread(8)................ 2.42 2.56 2.43 2.88 3.00 2.93 3.24
Net interest margin(8)................. 2.68 2.80 2.72 3.12 3.24 3.26 3.48
Average interest-earning assets to
average interest-bearing
liabilities.......................... 105.49 104.60 105.93 104.61 104.60 106.50 105.60
Total other expenses to average total
assets............................... 2.10 2.07 2.80 3.08 3.59 3.80 3.84
Full-service Bank offices (9).......... 21 18 20 15 15 14 8
R&G Mortgage offices(10)............... 26 21 23 19 16 13 13
Cash dividends declared per common
share(4)............................. .107 .081 .111 .065 .069 -- --
ASSET QUALITY RATIOS(11):
Non-performing loans to total loans at
end of period........................ 3.68% 4.47% 4.08% 3.89% 3.09% 2.18% 1.84%
Non-performing assets to total assets
at end of period..................... 2.13 2.52 2.41 2.12 1.90 1.32 1.04
Allowance for loan losses to total
loans at end of period............... 0.64 0.78 0.74 0.87 0.55 0.72 0.92
Allowance for loan losses to total non-
performing loans at end of period.... 17.26 17.48 17.92 22.34 17.64 33.19 50.10
Net charge-offs to average loans
outstanding.......................... 0.18 0.44 0.55 0.40 0.75 0.08 0.05
BANK REGULATORY CAPITAL RATIOS(12):
Tier 1 risk-based capital ratio........ 11.82% 15.47% 13.41% 13.10% 13.91% 10.53% 11.03%
Total risk-based capital ratio......... 12.67 16.60 14.46 14.00 14.79 11.66 13.59
Tier 1 leverage capital ratio.......... 6.66 9.01 8.04 7.34 8.45 6.25 5.95
</TABLE>
- ------------------------------
(1) At September 30, 1999, R&G Mortgage and the Bank had total assets of
$694.6 million and $2.1 billion, 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 of New
York, federal funds purchased and other secured borrowings.
(4) Per share information for all periods presented takes into consideration
prior stock splits and dividends.
(5) Includes a $2.9 million gain on the sale of servicing rights during 1994.
(6) Comprised of change in provision for cost in excess of market value of loans
available for sale and other miscellaneous revenue sources, including
service charges, fees and other income.
(7) 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 the Bank are
based on average daily balances.
(8) Interest rate spread represents the difference between our 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) Does not include a branch in San Juan which was opened in October 1999.
(10) As of September 30, 1999, includes 4 branches of Champion Mortgage. As of
such date, also includes 15 R&G Mortgage banking facilities which are
located within the Bank's offices.
(11) 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.
(12) All of such ratios were in compliance with the applicable requirements of
the FDIC.
15
<PAGE>
DESCRIPTION OF SERIES B PREFERRED STOCK
GENERAL
The following summary sets forth the material terms and provisions of the
Series B Preferred Stock and is qualified in its entirety by reference to the
terms and provisions of our Certificate of Incorporation, as amended by a
resolution of our Board of Directors which relates to and authorizes the
Series B Preferred Stock (the "Authorizing Resolution").
The Series B Preferred Stock constitutes an authorized series of our
preferred stock. We may issue preferred stock from time to time in one or more
series with such rights, preferences and limitations as are determined by our
Board of Directors. Our Board of Directors has authorized us to issue the
Series B Preferred Stock offered hereby, with the designations, dividend rights,
redemption and other provisions set forth in the Authorizing Resolution and as
described generally below.
When issued, the Series B Preferred Stock will be validly issued, fully paid
and non-assessable. You, as a holder of the Series B Preferred Stock, will have
no preemptive rights with respect to any shares of our capital stock or any of
our other securities which are convertible into or carrying rights or options to
purchase any such shares. The Series B Preferred Stock will not be subject to
any sinking fund and there exists no other obligation on our part for their
repurchase or retirement.
In August 1998, we issued $50,000,000 of 7.40% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A ($25 liquidation preference per share)
(the "Series A Preferred Stock"). The Series B Preferred Stock offered by this
prospectus ranks equal (or PARI PASSU) with the Series A Preferred Stock as to
payments of dividends and as to any preferences on our voluntary or involuntary
liquidation, dissolution or winding up.
DIVIDEND RIGHTS
As a holder of record of the Series B Preferred Stock, you shall be entitled
to receive, when, as and if declared by our Board of Directors, or a duly
authorized committee thereof, out of funds legally available therefor,
noncumulative cash dividends at the annual rate per share of 7.75% of the $25
liquidation preference per share, or $0.1615 per share per month, with each
aggregate payment made being rounded to the next lowest cent. Dividends on the
Series B Preferred Stock will accrue from their date of issuance and will be
payable monthly in arrears in United States dollars commencing on January 1,
2000, and for each monthly dividend period commencing on the first day of each
month thereafter, and ending on and including the day next preceding the first
day of the next Dividend Period (each, a "Dividend Period"). Such payments will
be made to the holders of record of the Series B Preferred Stock as they appear
on our books on the second Business Day (as defined below) immediately preceding
the relevant Dividend Payment Date (as defined below). Dividends so declared
will be payable on the first day of each month commencing on January 1, 2000,
(each, a "Dividend Payment Date"). When a Dividend Payment Date falls on a day
that is not a Business Day, the dividend will be paid on the next Business Day,
without any interest or accumulation on payment in respect of any such delay. A
"Business Day" is a day on which the Nasdaq National Market is open for trading
and which is not a Saturday, Sunday or other day on which the banks in the
Commonwealth of Puerto Rico or New York City are authorized or obligated by law
to close. The amount of dividends payable per share of Series B Preferred Stock
for each Dividend Period shall be computed on the basis of twelve 30-day months
and a 360-day year. The amount of dividends payable for any period shorter than
a full month dividend period will be computed on the basis of the actual number
of days elapsed in such period.
As a holder of Series B Preferred Stock, you will not participate in
dividends, if any, declared and paid on our Common Stock. Except as described
herein, as a holder of the Series B Preferred Stock, you will have no other
right to participate in our profits or to receive dividends.
16
<PAGE>
If our Board of Directors or an authorized committee thereof does not
declare a dividend on the Series B Preferred Stock for a Dividend Period, then
you will have no right to receive a dividend for that Dividend Period, and we
will have no obligations to pay the dividend accrued for that Dividend Period,
whether or not dividends are declared for any subsequent Dividend Period.
When dividends are not paid in full on the Series B Preferred Stock and on
any other shares of our preferred stock ranking on a parity as to the payment of
dividends with the Series B Preferred Stock, such as the Series A Preferred
Stock, all dividends declared upon the Series B Preferred Stock and any such
other shares of preferred stock, such as the Series A Preferred Stock, will be
declared PRO RATA, so that the amount of dividends declared per share on the
Series B Preferred Stock and any such other shares of preferred stock will in
all cases bear to each other the same ratio that the liquidation preference per
share of the Series B Preferred Stock and any such other preferred stock bear to
each other.
So long as any shares of the Series B Preferred Stock remain outstanding,
unless the full dividends on all outstanding shares of Series B Preferred Stock
have been declared and paid or set apart for payment for the current Dividend
Period and have been paid for all Dividend Periods for which dividends were
declared and not paid, (1) no dividend (other than a dividend in Common Stock or
in any other stock of our company ranking junior to the Series B Preferred Stock
as to dividends or distribution of assets upon liquidation, dissolution or
winding up) may be declared and paid, or set apart for payment, or other
distribution declared or made, on the Common Stock or on any other stock ranking
junior to or on a parity with the Series B Preferred Stock (such as the
Series A Preferred Stock) as to dividends or distribution of assets upon
liquidation, dissolution or winding up, and (2) no shares of Common Stock or
shares of any other stock of our company ranking junior to or on a parity with
Series B Preferred Stock (such as the Series A Preferred Stock) as to dividends
or distribution of assets upon liquidation, dissolution or winding up, will be
redeemed, purchased or otherwise acquired for any consideration by us or any of
our subsidiaries (nor may any moneys be paid to or made available for a sinking
or other fund for the redemption, purchase or other acquisition of any shares of
any such stock), other than by conversion into or exchange for Common Stock or
any other stock of our company ranking junior to or on a parity with the
Series B Preferred Stock as to dividends or distribution of assets upon
liquidation, dissolution or winding up.
CONVERSION; EXCHANGE
The Series B Preferred Stock will not be convertible into, or exchangeable
for any other securities of our company.
REDEMPTION AT OUR OPTION
The shares of the Series B Preferred Stock are not redeemable prior to
January 1, 2005. On or after that date, the shares of Series B Preferred Stock
will be redeemable in whole or in part from time to time at our option, upon not
less than 30 nor more than 60 days' notice by mail, at the redemption prices set
forth in the table below, during the twelve-month periods beginning on
January 1 of the years set forth below, subject to prior approval of the Federal
Reserve Board, if required by applicable law, plus accrued and unpaid dividends
for the then current monthly dividend period to the date fixed for redemption.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2005........................................................ $25.50
2006........................................................ 25.25
2007 and thereafter......................................... 25.00
</TABLE>
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In no event shall we redeem less than all the outstanding Series B Preferred
Stock, unless dividends for the then-current Dividend Period to the date fixed
for redemption for such series shall have been declared and paid or set apart
for payment on all outstanding Series B Preferred Stock, provided however, that
the foregoing provisions will not prevent, if otherwise permitted, the purchase
or acquisition by us of Series B Preferred Stock pursuant to a tender or
exchange offer made on the same terms to holders of all the outstanding
Series B Preferred Stock and mailed to the holders of record of all such
outstanding shares at such holders' address as the same appear on our books; and
provided, further, that if some, but less than all, of the Series B Preferred
Stock are to be purchased or otherwise acquired by us, the Series B Preferred
Stock so tendered will be purchased or otherwise acquired by us on a PRO RATA
basis (with adjustments to eliminate fractions) according to the number of such
shares tendered by each holder so tendering Series B Preferred Stock for such
purchase or exchange.
In the event that less than all of the outstanding shares of the Series B
Preferred Stock are to be redeemed in any redemption at our option, the total
number of shares to be redeemed in such redemption shall be determined by our
Board of Directors and the shares to be redeemed shall be allocated PRO RATA or
by lot as may be determined by our Board of Directors or by such other method as
our Board of Directors may approve and deem equitable, including any method to
conform to any rule or regulation of any national or regional stock exchange or
automated quotation system upon which the shares of the Series B Preferred Stock
may at the time be listed or eligible for quotation.
We may redeem the Series B Preferred Stock without ever having declared or
paid a dividend on such stock.
Notice of any proposed redemption shall be given by us by mailing a copy of
such notice to the holders of record of the shares of Series B Preferred Stock
to be redeemed, at their address of record, not more than 60 nor less than
30 days prior to the redemption date. The notice of redemption to each holder of
shares of Series B Preferred Stock shall specify the number of shares of
Series B Preferred Stock to be redeemed, the redemption date and the redemption
price payable to such holder upon redemption and shall state that from and after
said date dividends thereon will cease to accrue. If less than all the shares
owned by a holder are then to be redeemed at our option, the notice shall also
specify the number of shares of Series B Preferred Stock which are to be
redeemed and the numbers of the certificates representing such shares. Any
notice which is mailed as herein provided shall be conclusively presumed to have
been duly given, whether or not the stockholder receives such notice. Failure to
duly give such notice by mail, or any defect in such notice, to the holders of
any stock designated for redemption shall not affect the validity of the
proceedings for the redemption of any other shares of Series B Preferred Stock.
Notice having been mailed as aforesaid, from and after the redemption date
(unless default be made in the payment of the redemption price for any shares to
be redeemed), all dividends on the shares of Series B Preferred Stock called for
redemption shall cease to accrue and all rights of the holders of such shares as
our stockholders by reason of the ownership of such shares (except the right to
receive the redemption price, on presentation and surrender of the respective
certificates representing the redeemed shares) shall cease on the redemption
date, and such shares shall not after the redemption date be deemed to be
outstanding. In case less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued without cost to the
holder thereof representing the unredeemed shares, if requested by such
shareholder.
At our option, we may, on or prior to the redemption date, irrevocably
deposit with a paying agent (a "Paying Agent"), having surplus and undivided
profits aggregating at least $50 million, funds necessary for such redemption in
trust, with irrevocable instructions and authorization that such funds be
applied to the redemption of the shares of Series B Preferred Stock called for
redemption upon surrender of certificates for such shares (properly endorsed or
assigned for transfer). If notice of redemption shall have been mailed and such
deposit is made and the funds so deposited are made immediately available to the
holders of the shares of the Series B Preferred Stock to be redeemed, we
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<PAGE>
shall thereupon be released and discharged (subject to the provisions described
in the next paragraph) from any obligation to make payment of the amount payable
upon redemption of the shares of the Series B Preferred Stock to be redeemed.
Notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, the shares represented thereby shall no longer be
deemed to be outstanding. Thereupon, the holders of such shares shall look only
to the Paying Agent for such payment. Thereafter, all rights of the holders of
such shares as holders of Series B Preferred Stock (except the right to receive
the redemption price, but without interest) will cease.
Any funds remaining unclaimed at the end of two years from and after the
redemption date in respect of which such funds were deposited shall be returned
to us and thereafter the holders of shares of the Series B Preferred Stock
called for redemption with respect to which such funds were deposited shall look
only to us for the payment of the redemption price thereof. Any interest accrued
on any funds deposited with the Paying Agent shall belong to us and shall be
paid to us from time to time on demand.
Any shares of the Series B Preferred Stock which shall at any time have been
redeemed shall, after such redemption, have the status of authorized but
unissued shares of preferred stock, without designation as to series, until such
shares are once more designated as part of a particular series by our Board of
Directors.
VOTING RIGHTS
As a holder of the Series B Preferred Stock, you will not be entitled to
receive notice of or attend or vote at any meeting of our stockholders, except
as indicated herein, or except as required by applicable law.
If a Voting Event (as defined below) occurs, the holders of outstanding
shares of the Series B Preferred Stock, together with the holders of shares of
any one or more other series of preferred stock entitled to vote for the
election of directors in the event of any failure to pay dividends (such as the
Series A Preferred Stock), acting as a single class, will be entitled, by
written notice to us given by the holders of a majority in liquidation
preference of such shares or by ordinary resolution passed by the holders of a
majority in liquidation preference of such shares present in person or by proxy
at a separate special meeting of such holders convened for the purpose, to
appoint two additional members of our Board of Directors, to remove any such
member so appointed by them from office and to appoint another person in place
of such member. Not later than 30 days after a Voting Event occurs, if written
notice by a majority of the holders of such shares has not been given as
provided for in the preceding sentence, our Board of Directors or an authorized
committee thereof will convene a separate special meeting for the above purpose.
If our Board of Directors or such authorized committee fails to convene such
meeting within such 30-day period, the holders of 10% of the outstanding shares
of the Series B Preferred Stock and of any such other securities will be
entitled to convene such meeting. The provisions of our Certificate of
Incorporation and Bylaws relating to the convening and conduct of general
meetings of stockholders will apply with respect to any such separate special
meeting. Any member of our Board of Directors so appointed shall vacate office
if, following the event which gave rise to such appointment, we shall have
resumed the payment of dividends in full on the Series B Preferred Stock and
each such other series of stock for twelve consecutive monthly Dividend Periods.
Our Certificate of Incorporation provides for a minimum of 5 members of our
Board of Directors and a maximum of 15 members. As of the date of this
prospectus, our Board of Directors had 13 members.
A "Voting Event" will be deemed to have occurred in the event that dividends
payable on any share of Series B Preferred Stock shall not be declared and paid
at the stated rate for the equivalent of eighteen full monthly Dividend Periods
(whether or not consecutive). A Voting Event will be deemed to have been
terminated when dividends have been paid regularly for twelve consecutive
monthly Dividend Periods, subject always to the revesting of the right of
holders of the Series B Preferred Stock
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<PAGE>
voting as a class with the holders of any other preferred stock to elect two
directors as provided herein in the event of any future failure on our part to
pay dividends at the stated rate for any eighteen full monthly Dividend Periods
(whether or not consecutive).
Any variation or abrogation of the rights, preferences and privileges of the
Series B Preferred Stock by way of amendment of our Certificate of Incorporation
or otherwise (including, without limitation, the authorization or issuance of
any of our shares ranking, as to dividend rights or rights on liquidation,
winding up and dissolution, senior to the Series B Preferred Stock) shall not be
effective (unless otherwise required by applicable law) except with the consent
in writing of the holders of at least two-thirds of the outstanding shares of
the Series B Preferred Stock or with the sanction of a special resolution passed
at a separate special meeting by the holders of at least two-thirds of the
outstanding shares of the Series B Preferred Stock. Notwithstanding the
foregoing, we may, without the consent or sanction of the holders of Series B
Preferred Stock, authorize and issue shares of our stock ranking as to dividend
rights and rights on liquidation, winding up or dissolution, on a parity with or
junior to the Series B Preferred Stock. The Series B Preferred Stock constitutes
parity stock with respect to our Series A Preferred Stock.
No vote of the holders of the Series B Preferred Stock will be required for
us to redeem or purchase and cancel the Series B Preferred Stock in accordance
with our Certificate of Incorporation and the Authorizing Resolution.
We will cause a notice of any meeting at which holders of Series B Preferred
Stock are entitled to vote to be mailed to each record holder of the Series B
Preferred Stock. Each such notice will include a statement setting forth
(1) the date of such meeting, (2) a description of any resolution to be proposed
for adoption at such meeting on which such holders are entitled to vote and
(3) instructions for deliveries of proxies.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of our company, the holders of shares of Series B Preferred Stock
will be entitled to receive out of our assets available for distribution to
stockholders, before any distribution of such assets is made to the holders of
shares of our Common Stock or on any other class or series of our stock ranking
junior to the Series B Preferred Stock as to such a distribution, an amount
equal to $25 per share, plus an amount equal to dividends accrued and unpaid for
the then current Dividend Period (without accumulation of accrued and unpaid
dividends for prior Dividend Periods) to the date fixed for payment of such
distribution.
If, upon any voluntary or involuntary liquidation, dissolution or winding up
of our company, our assets are insufficient to make the full liquidation payment
on the Series B Preferred Stock and liquidating payments on any other class or
series of our stock ranking on a parity with the Series B Preferred Stock as to
any such distribution, including the Series A Preferred Stock, then such assets
will be distributed among the holders of the Series B Preferred Stock and such
other class or series of parity stock ratably in proportion to the respective
full preferential amounts to which they are entitled.
After any liquidating payments, the holders of the Series B Preferred Stock
will be entitled to no other payments. A consolidation or merger of our company
with or into any other corporation or corporations or the sale, lease or
conveyance, whether for cash, shares of stock, securities or properties, of all
or substantially all of our assets will not be regarded as a liquidation,
dissolution or winding up of our company.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Series B Preferred Stock is
American Stock Transfer & Trust Co., New York, New York, or any successor
thereto (the "Registrar and Transfer Agent").
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<PAGE>
The transfer of a share of Series B Preferred Stock may be registered upon
the surrender of the certificate evidencing the Series B Preferred Stock to be
transferred, together with the form of transfer endorsed on it duly completed
and executed, at the office of the Registrar and Transfer Agent.
Registration of transfers of Series B Preferred Stock will be effected
without charge by or on behalf of us, but upon payment (or the giving of such
indemnity as the Registrar and Transfer Agent may require) in respect of any tax
or other governmental charges which may be imposed in relation to it.
We will not be required to register the transfer of Series B Preferred Stock
after such Series B Preferred Stock has been called for redemption.
REPLACEMENT OF LOST CERTIFICATES
If any certificate for a Series B Preferred Stock is mutilated or alleged to
have been lost, stolen or destroyed, a new certificate representing the same
share may be issued to the holder upon request subject to delivery of the old
certificate or (if alleged to have been lost, stolen or destroyed) compliance
with such conditions as to evidence, indemnity and the payment of our
out-of-pocket expenses in connection with the request as our Board of Directors
may determine.
NO PREEMPTIVE RIGHTS
As a holder of the Series B Preferred Stock, you will have no preemptive
rights to purchase any securities of our company.
NO REPURCHASE AT THE OPTION OF THE HOLDERS
As a holder of the Series B Preferred Stock, you will have no right to
require us to redeem or repurchase any shares of Series B Preferred Stock, and
the shares of Series B Preferred Stock are not subject to any sinking fund or
similar obligation.
21
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 80,000,000 shares of capital stock, of which
70,000,000 are shares of Common Stock, par value $0.01 per share, and 10,000,000
are shares of preferred stock, par value $0.01 per share. Our Common Stock is
divided into 40,000,000 Class A Shares, of which as of September 30, 1999,
18,440,556 were owned by Mr. Victor J. Galan, our Chairman of the Board and
Chief Executive Officer, and 30,000,000 Class B Shares, of which as of such
date, 10,217,731 Class B Shares were outstanding and held by members of the
general public. Our Common Stock does not represent non-withdrawable capital, is
not an account of an insurable type, and is not insured by the FDIC.
COMMON STOCK
GENERAL. Our Common Stock has been duly authorized, validly issued, fully
paid and non-assessable. Our shares of Common Stock are not redeemable and the
holders thereof have no preemptive or subscription rights to purchase any
securities of our company. Upon our liquidation, dissolution or winding up, the
holders of our Common Stock are entitled to receive, pro rata, our assets which
are legally available for distribution, after payment of all debts and other
liabilities and liquidation distributions due to holders of our preferred stock.
There is no cumulative voting. Therefore, subject to the right of the holders of
our preferred stock to elect directors under certain circumstances, the holders
of shares representing a plurality of the votes present in person or represented
by proxy at the meeting and entitled to vote in an election of directors can
elect all of the directors of our company then standing for election.
VOTING RIGHTS. Subject to the rights of the holders of our preferred stock
to elect directors under certain circumstances and except to the extent required
by law, the holders of our Common Stock possess exclusive voting rights in our
company. They elect our Board of Directors and act on such other matters as are
required to be presented to them under Puerto Rico law or our Certificate of
Incorporation or as are otherwise presented to them by our Board of Directors.
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 Class B Shares 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 Class B Shares
are entitled to one vote per share. A majority of the votes eligible to be cast,
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
votes present in person or by proxy at the meeting is the act of the
shareholders unless otherwise provided by law. Under Puerto Rico law, the
affirmative vote of the holders of a majority of the outstanding Class B Shares
would be required to approve, among other matters, an adverse change in the
powers, preferences or special rights of the Class B Shares.
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 the Class A Shares
held by such holder into Class B Shares at the rate of one Class B Share for
each Class A Share so converted. The Class B Shares shall not carry any
conversion rights and are otherwise not convertible into Class A Shares.
DIVIDENDS. We have paid regular quarterly cash dividends on the Common
Stock since the quarter ended December 1996. Declarations of dividends by our
Board of Directors depends upon a number of factors. The declaration and payment
of dividends on our Common Stock is subject to a quarterly review by our Board
of Directors. The timing and amount of dividends, if any, is dependent upon our
results of operations and financial condition and on our ability to receive
dividends from our subsidiary companies. Holders of Class A Shares and Class B
Shares are entitled to share ratably, as a single class, in dividends paid on
our Common Stock (except that if dividends are declared which are payable in
Class A Shares or Class B Shares, 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
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that class of stock and the dividends payable in Class B Shares shall be payable
to the holders of that class of stock).
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
R&G Mortgage and/or the Bank, we, as the sole holder of the capital stock of R&G
Mortgage and the Bank, would be entitled to receive, after payment or provision
for payment of all debts and liabilities of R&G Mortgage and/or the Bank
(including, in the case of the Bank, all deposit accounts and accrued interest
thereon), all assets of R&G Mortgage and/or the Bank available for distribution.
In the event of our liquidation, dissolution or winding up, the holders of our
Common Stock would be entitled to receive, after payment or provision for
payment of all our debts and liabilities and liquidation distributions due to
holders of our preferred stock, all of our assets available for distribution.
The Series A Preferred Stock and the Series B Preferred Stock will have a
priority over the holders of our Common Stock in the event of our liquidation or
dissolution. If other classes of preferred stock are issued in the future, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of our Common Stock are not entitled to
preemptive rights with respect to any shares which may be issued in the future.
Our Common Stock is not subject to redemption.
PREFERRED STOCK
Prior to this offering, we had issued 2,000,000 shares of our Series A
Preferred Stock, which stock ranks PARI PASSU with respect to the Series B
Preferred Stock. Except with respect to the dividend rate and redemption and
maturity dates, the Series A Preferred Stock has terms which are substantially
the same as the terms of the Series B Preferred Stock. We may issue other series
of preferred stock with such preferences and designations as our Board of
Directors may from time to time determine. Our Board of Directors can, without
stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights as it may deem appropriate under the circumstances.
RESTRICTIONS ON ACQUISITION OF OUR COMPANY
RESTRICTIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS. A number of
provisions of our Certificate of Incorporation and Bylaws deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of our Certificate of
Incorporation and Bylaws which might be deemed to have a potential
"anti-takeover" effect. Reference should be made in each case to such
Certificate of Incorporation and Bylaws. See "Where You Can Find More
Information."
BOARD OF DIRECTORS. Our Certificate of Incorporation contains provisions
relating to our Board of Directors and provides, among other things, that our
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 our 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 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 being replaced had been elected, and until his successor has been
elected and qualified.
Our Bylaws govern nominations for election to our 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, our principal executive offices not later than
ninety days prior to the anniversary date of the mailing of our proxy materials
in connection with the immediately preceding
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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.
LIMITATION OF LIABILITY. Our Certificate of Incorporation provides that the
personal liability of our directors and officers for monetary damages shall be
limited to the fullest extent permitted by the General Corporation Law of the
Commonwealth of Puerto Rico ("Puerto Rico Corporate Law").
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Our Bylaws
provide that we 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 of our company, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of our company, or is or was serving at our written
request as a director, officer, employee or agent of another corporation or
other enterprise, 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 we 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 our prior written consent or
any action, suit or proceeding initiated by any person seeking indemnification
without our prior written consent. Our Bylaws also provide that reasonable
expenses incurred by a director, officer, employee or agent of our company in
defending any civil, criminal, suit or proceeding described above may be paid by
us in advance of the final disposition of such action, suit or proceeding.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. Our Bylaws
provide that special meetings of our stockholders, 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 our Board of Directors then in office. Only such business
as shall have been properly brought before an annual meeting of stockholders
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 our Board of Directors or otherwise by a stockholder who has
given us timely notice thereof (along with specified information) in writing.
For stockholder proposals to be included in our proxy materials, the stockholder
must comply with all the timing and informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"). With respect to stockholder
proposals to be considered at the annual meeting of stockholders but not
included in our proxy materials, the stockholder's notice must be delivered to
or mailed and received at our principal executive offices not later than
90 days prior to the anniversary date of the mailing of our proxy materials in
connection with the immediately preceding annual meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Our Certificate of
Incorporation generally provides that any amendment of the Certificate must be
first approved by a majority of our Board of Directors and, to the extent
required by law, then by the holders of a majority of the votes eligible to be
cast in an election of directors, except that the approval of shares
representing 75% of the votes eligible to be cast in an election of directors,
as well as such additional vote of the preferred stock as may be required by the
provisions of any series thereof, is required for any amendment concerning our
directors, bylaws, limitation on liability of directors and officers and
amendments, unless any such proposed amendment is approved by a vote of
two-thirds of our Board of Directors then in office. Our 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 votes eligible to be
cast generally in an election of directors, except that the approval of shares
representing 75% of the votes eligible to be cast generally in an election of
directors is required for any amendment to the Bylaws which is inconsistent with
the provisions in our Certificate of Incorporation which address the foregoing
provisions and which are not approved by the affirmative vote of two-thirds of
our Board of Directors then in office.
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OTHER RESTRICTIONS ON ACQUISITION OF OUR COMPANY. 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 our
shares of Common Stock outstanding, unless the Federal Reserve Board finds that
the acquisition will not result in a change in control of our company. 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 the Bank and us, and the antitrust effects of the
acquisition. Under the Bank Holding Company Act, any company would be required
to obtain prior approval from the Federal Reserve Board before it may obtain
control of our company. Control generally is defined to mean the beneficial
ownership of 25% or more of any class of our voting securities. Under the Puerto
Rico Banking Act, a notice must be submitted to the Office of the Commissioner
of Financial Institutions ("OCFI") not less than 60 days prior to the
consummation of any transfer of our stock if, after such transfer, the
transferee (including any group acting in concert) will own more than 5% of our
outstanding voting stock. Such transfer will require the approval of the OCFI if
it will result in a change of control of our company. A transfer will be
presumed to result in a change of control if, as a result of such transfer, a
person or group that did not own more than 5% of our outstanding voting stock
prior to such transfer owns more than 5% of such stock. In acting upon any such
request for approval, the OCFI must take into consideration factors such as the
experience and moral and financial responsibility of the transferee, its impact
on the operations of the Bank, whether the change of control threatens the
interest of the Bank's depositors, creditors or shareholders and any public
interest considerations.
TAXATION
GENERAL
The following is a summary of the material Puerto Rico tax and United States
federal income tax considerations relating to the purchase, ownership and
disposition of the Series B Preferred Stock. This summary is not a comprehensive
description of all the tax considerations that may be relevant to a decision to
purchase the Series B Preferred Stock and does not describe any tax consequences
arising under the laws of any state, locality or taxing jurisdiction other than
Puerto Rico and the United States.
This summary is based on the tax laws of Puerto Rico and the United States
Internal Revenue Code of 1986, as amended (the "Code"), as in effect on the date
of this Prospectus, as well as regulations, including existing and proposed
regulations of the U.S. Department of the Treasury ("Treasury Regulations"),
administrative pronouncements and judicial decisions available on or before such
date and now in effect. All of the foregoing are subject to change, which change
could apply retroactively and could affect the continued validity of this
summary.
Prospective purchasers of the Series B Preferred Stock should consult their
own tax advisors as to the Puerto Rico, United States or other tax consequences
of the purchase, ownership and disposition of the Series B Preferred Stock,
including the application to their particular situations of the tax
considerations discussed below, such as life insurance companies, special
partnerships, Subchapter N corporations (under Puerto Rico law), registered
investment companies, certain pension trusts, tax-exempt entities, dealers in
securities, financial institutions, persons who hold Series B Preferred Stock as
part of an integrated investment (including a straddle) or to persons whose
functional currency is not the U.S. dollar or who own 10% or more of our voting
stock, as well as the application of any state, local, foreign or other tax.
PUERTO RICO TAXATION
The following is a summary of certain Puerto Rico tax considerations
relating to the purchase, ownership and disposition of Series B Preferred Stock.
For purposes of the discussion below, a "Puerto Rico corporation" is a
corporation organized under the laws of Puerto Rico and a "foreign corporation"
is a corporation organized under the laws of a jurisdiction other than Puerto
Rico.
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INCOME TAXATION
TAXATION OF DIVIDENDS. Distributions of cash or other property made by us
with respect to the Series B Preferred Stock will be treated as dividends to the
extent that we have current or accumulated earnings and profits. To the extent
that a distribution exceeds our current and accumulated earnings and profits,
the distribution will be treated as a return of capital and will be applied
against and reduce the adjusted tax basis of the Series B Preferred Stock in the
hands of the holder. The excess of any such distribution over such adjusted tax
basis will be treated as gain on the sale or exchange of such Series B Preferred
Stock and will be subject to income tax as described below.
This discussion regarding the income taxation of dividends on Series B
Preferred Stock assumes that such dividends will constitute income from sources
within Puerto Rico. Generally, a dividend declared by a Puerto Rico corporation
will constitute income from sources within Puerto Rico unless the corporation
derives less than 20% of its gross income from sources within Puerto Rico for
the three taxable years preceding the year of the declaration. We have
represented that we have derived more than 20% of our gross income from Puerto
Rico sources on an annual basis since our incorporation in 1996.
INDIVIDUAL RESIDENTS OF PUERTO RICO AND PUERTO RICO CORPORATIONS. In
general, individuals who are residents of Puerto Rico will be subject to a 10%
income tax on dividends paid with respect to Series B Preferred Stock. Puerto
Rico corporations will be subject to income tax on dividends paid with respect
to Series B Preferred Stock at the normal corporate income tax rates, subject to
the dividend received deduction discussed below.
In the case of an individual, 10% of the amount of the dividend is generally
required to be withheld by us. An individual may elect for such withholding not
to apply, and in such case he or she will be required to include the amount of
the dividend as ordinary income and will be subject to income tax thereon at the
normal income tax rates, which may be up to 33%.
In the case of a Puerto Rico corporation, no withholding will be imposed on
dividends paid with respect to Series B Preferred Stock. Such dividends will be
taxed at the normal corporate income tax rates, but such corporations will be
entitled to claim a dividend received deduction in computing their income tax
liability. The deduction will be equal to 85% of the dividend received, but the
deduction may not exceed 85% of the corporation's net taxable income. Based on
the applicable maximum Puerto Rico normal corporate income tax rate of 39%, the
maximum effective income tax rate on such dividends will be 5.85% after
accounting for the dividend received deduction.
As a practical matter, dividends with respect to Series B Preferred Stock
held in "street name" through foreign financial institutions or other securities
intermediaries not engaged in trade or business in Puerto Rico will generally be
subject to the 10% withholding tax imposed on foreign corporations or
partnerships. See "--Foreign Corporations." Accordingly, individuals resident of
Puerto Rico who desire to file an election out of the applicable 10% income tax
and applicable withholding tax should have their shares of Series B Preferred
Stock issued and registered in their own name. Similarly, Puerto Rico
corporations and partnerships that own any shares of Series B Preferred Stock
should have such shares issued and registered in their own name in order to
ensure that no withholding is made on dividends thereon.
UNITED STATES CITIZENS NOT RESIDENTS OF PUERTO RICO. Dividends paid with
respect to Series B Preferred Stock to a United States citizen who is not a
resident of Puerto Rico will be subject to a 10% income tax on the amount of the
dividend which will be withheld by us. Such an individual may elect for the 10%
income tax and withholding not to apply, and in that case he or she will be
required to include the dividends as ordinary income and pay income tax thereon
at the normal rates, which may be up to 33%. Notwithstanding the making of such
an election, a separate 10% withholding tax will be required on the amount of
the dividend unless the individual timely files with us a withholding
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<PAGE>
exemption certificate to the effect that such individual's gross income from
sources within Puerto Rico during the taxable year does not exceed $1,300 if
single or $3,000 if married. Withholding exemption certificates will only be
accepted from individuals who have the shares of Series B Preferred Stock
registered in their names. Individuals who hold shares of Series B Preferred
Stock in "street name" will not be eligible to file withholding exemption
certificates.
INDIVIDUALS NOT CITIZENS OF THE UNITED STATES AND NOT RESIDENTS OF PUERTO
RICO. Dividends paid with respect to Series B Preferred Stock to any individual
who is not a citizen of the United States and who is not a resident of Puerto
Rico will generally be subject to the 10% income tax and will be withheld by us.
FOREIGN CORPORATIONS. The income taxation of dividends paid with respect to
the Series B Preferred Stock to a foreign corporation will depend on whether or
not the corporation is engaged in a trade or business in Puerto Rico in the
taxable year of its receipt of the dividends.
A foreign corporation that is engaged in a trade or business in Puerto Rico
will be subject to the normal corporate income tax rates applicable to Puerto
Rico corporations on their net income that is effectively connected with the
conduct of a trade or business in Puerto Rico. This income will include net
income from sources within Puerto Rico and certain items of net income from
sources outside Puerto Rico that are effectively connected with the conduct of a
trade or business in Puerto Rico. Net income from sources within Puerto Rico
will include dividends with respect to Series B Preferred Stock. A foreign
corporation that is engaged in a trade or business in Puerto Rico will be
entitled to claim the 85% dividend received deduction discussed above in
connection with Puerto Rico corporations.
In general, foreign corporations that are engaged in a trade or business in
Puerto Rico are also subject to a 10% branch profits tax. However, dividends
with respect to Series B Preferred Stock received by such corporations will be
excluded from the computation of the branch profits tax liability of such
corporations.
A foreign corporation that is not engaged in a trade or business in Puerto
Rico will be subject to a 10% withholding tax on dividends received on the
Series B Preferred Stock.
PARTNERSHIPS. Partnerships are generally taxed in the same manner as
corporations. Accordingly, the preceding discussion with respect to corporations
is equally applicable in the case of most partnerships.
TAXATION OF GAINS UPON SALES OR EXCHANGES (NOT INCLUDING REDEMPTIONS). The
sale or exchange of Series B Preferred Stock will give rise to gain or loss
equal to the difference between the amount realized on the sale or exchange and
the tax basis of the Series B Preferred Stock in the hands of the holder. Such
gain or loss will be capital gain or loss if the Series B Preferred Stock is
held as a capital asset by the holder and will be long-term capital gain or loss
if the stockholders' holding period with respect to the Series B Preferred Stock
exceeds six months.
INDIVIDUAL RESIDENTS OF PUERTO RICO AND PUERTO RICO CORPORATIONS. Gain on
the sale or exchange of Series B Preferred Stock by an individual resident of
Puerto Rico or a Puerto Rico corporation will generally be required to be
recognized as gross income and will be subject to income tax. If the stockholder
is an individual and the gain is a long-term capital gain, the gain will be
taxable at a maximum rate of 20%. If the stockholder is a Puerto Rico
corporation and the gain is a long-term capital gain, the gain will be taxable
at a maximum rate of 25%.
UNITED STATES CITIZENS NOT RESIDENTS OF PUERTO RICO. A United States citizen
who is not a resident of Puerto Rico will not be subject to income tax on the
sale or exchange of Series B Preferred Stock if the gain resulting therefrom
does not constitute income from sources within Puerto Rico. Generally, gain on
the sale or exchange of Series B Preferred Stock will be considered to be income
from sources
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<PAGE>
outside Puerto Rico if all rights, title and interest in or to the Series B
Preferred Stock are transferred outside Puerto Rico, and if the delivery or
surrender of the instruments that evidence the Series B Preferred Stock is made
to an office of a paying or exchange agent located outside Puerto Rico. If the
income resulting from any such sale or exchange constitutes income from sources
within Puerto Rico, an amount equal to 20% of the payments made as part of the
purchase price will be withheld at the source and may be credited against the
stockholder's Puerto Rico income tax liability; if such gain constitutes a long
term capital gain, it will be subject to a tax at a maximum rate of 20%.
INDIVIDUALS NOT CITIZENS OF THE UNITED STATES AND NOT RESIDENTS OF PUERTO
RICO. An individual who is not a citizen of the United States and who is not a
resident of Puerto Rico will be subject to the rules described under "--United
States Citizens Not Residents of Puerto Rico"; provided, however, that if the
income resulting from the sale or exchange of Series B Preferred Stock
constitutes income from sources within Puerto Rico, an amount equal to 25% of
the payments made as part of the purchase price will be withheld at the source
and may be credited against the stockholder's Puerto Rico income tax liability;
and provided further, that if the gain resulting from such sale or exchange
represents a net capital gain, the individual will be subject to tax on such
gain at a rate of 29%.
FOREIGN CORPORATIONS. A foreign corporation that is engaged in a trade or
business in Puerto Rico will generally be subject to a maximum corporate income
tax rate of 25% on any long-term capital gain realized on the sale or exchange
of Series B Preferred Stock if such gain is (i) from sources within Puerto Rico
or (ii) from sources outside Puerto Rico and effectively connected with a trade
or business in Puerto Rico.
In general, foreign corporations that are engaged in a trade or business in
Puerto Rico will also be subject to a 10% branch profits tax. In the computation
of this tax, any gain realized by such corporations on the sale or exchange of
Series B Preferred Stock will be taken into account. However, a deduction will
be allowed in such computation for any income tax paid on the gain realized on
such sale or exchange.
A foreign corporation that is not engaged in a trade or business in Puerto
Rico will generally be subject to a corporate income tax rate of 29% on any
capital gain realized on the sale or exchange of Series B Preferred Stock if
such gain is from sources within Puerto Rico. Gain on the sale or exchange of
Series B Preferred Stock will generally not be considered to be from sources
within Puerto Rico if all rights, title and interest in or to the Series B
Preferred Stock are transferred outside Puerto Rico, and if the delivery or
surrender of the instruments that evidence the Series B Preferred Stock is made
to an office of a paying or exchanged agent located outside Puerto Rico. If the
income resulting from any such sale or exchange constitutes income from sources
within Puerto Rico, an amount equal to 25% of the payments made as part of the
purchase price will be withheld at the source and may be credited against the
stockholder's Puerto Rico income tax liability. In the case of such foreign
corporation, no income tax will apply if the sale or exchange of Series B
Preferred Stock produces income from sources outside Puerto Rico.
PARTNERSHIPS. Partnerships are generally taxed as corporations.
Accordingly, the discussion with respect to corporations is equally applicable
to most partnerships.
TAXATION OF REDEMPTIONS. A redemption of shares of Series B Preferred Stock
for cash will be treated as a distribution taxable as a dividend to the extent
of our current or accumulated earnings and profits if the redemption is
essentially equivalent to a dividend. Under regulations issued by the Department
of the Treasury of Puerto Rico (a) a redemption of stock that completely
terminates a shareholder's interest in a corporation does not constitute a
dividend, and (b) certain pro rata redemptions among all the shareholder's will
be treated as a dividend. In situations not described by these regulations, the
Department of the Treasury of Puerto Rico will generally follow principles
applied by United States courts and the United States Internal Revenue Service
under the Code, as amended to date, in determining whether a distribution is
essentially equivalent to a dividend. The
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<PAGE>
Department of the Treasury of Puerto Rico, however, is not bound by such
principles and is free to adopt a different rule.
If the redemption of Series B Preferred Stock is not treated as a dividend,
it will generally generate gain or loss that will be measured as provided above
under "--Taxation of Gains upon Sales or Exchanges (Not Including Redemptions)"
for a sale or exchange of Series B Preferred Stock. Gain on the redemption of
Series B Preferred Stock will generally be recognized and will be subject to
income tax. If the stockholder of the Series B Preferred Stock is an individual
resident of Puerto Rico and the gain is a long-term capital gain, the gain will
be taxable at a maximum rate of 20%. If the stockholder is a Puerto Rico
corporation and the gain is a long-term capital gain, the gain will be taxable
at a maximum rate of 25%. This discussion assumes that any redemption of
Series B Preferred Stock will terminate all of the particular holder's interest
in our company.
If the stockholder of the Series B Preferred Stock is an individual who is
not a resident of Puerto Rico or a foreign corporation or a foreign partnership,
any gain realized by the holder on the redemption of the Series B Preferred
Stock that is not taxable as a dividend may be subject to Puerto Rico income tax
if the gain constitutes income from sources within Puerto Rico or is effectively
connected with a trade or business connected by the holder in Puerto Rico. The
Puerto Rico income tax law does not provide clear rules in this area. As a
result thereof, these prospective shareholders should be aware that gain
realized from a redemption of the Series B Preferred Stock may be treated as
income from sources within Puerto Rico or income effectively connected with a
trade or business in Puerto Rico and subject to income tax and withholding of
tax at the source accordingly.
ESTATE AND GIFT TAXATION
The transfer of Series B Preferred Stock by inheritance or gift by an
individual who is a resident of Puerto Rico at the time of his or her death or
at the time of the gift will not be subject to estate and gift tax if the
individual is a citizen of the United States who acquired his or her citizenship
solely by reason of birth or residence in Puerto Rico. Other individuals should
consult their own tax advisors in order to determine the appropriate treatment
for Puerto Rico estate and gift tax purposes of the transfer of the Series B
Preferred Stock by death or gift.
MUNICIPAL LICENSE TAXATION
Individuals and corporations that are not engaged in a trade or business in
Puerto Rico will not be subject to municipal license tax with respect to
dividends paid with respect to Series B Preferred Stock or with respect to any
gain realized on the sale, exchange or redemption of such stock.
A corporation or partnership that is engaged in a trade or business in
Puerto Rico will be subject to municipal license tax with respect to dividends
paid with respect to Series B Preferred Stock and with respect to gain realized
on the sale, exchange or redemption of such stock if such dividends or gain are
attributable to such trade or business. The municipal license tax is imposed on
the volume of business of the taxpayer, and the tax rates range from a maximum
of 1.5% for financial businesses to a maximum of 0.5% for other businesses.
PROPERTY TAXATION
The Series B Preferred Stock will not be subject to Puerto Rico property
tax.
UNITED STATES TAXATION
This summary deals only with Series B Preferred Stock held by initial
purchasers as capital assets within the meaning of Section 1221 of the Code. As
used herein, the term "U.S. Holder" means a beneficial owner of Series B
Preferred Stock that does not own 10% or more of our voting stock and
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<PAGE>
is, for United States federal income tax purposes, (i) a citizen or resident of
the United States, (ii) a corporation organized under the laws of the United
States, (iii) a corporation organized under the laws of the United States or of
any political subdivision thereof, or (iv) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source. The term "U.S. Holder" does not include individual Puerto Rico residents
who are not citizens or residents of the United States nor does it include
corporations organized under the laws of Puerto Rico. As used herein, the term
"Puerto Rico U.S. Holder" means an individual U.S. Holder who is a bona fide
resident of Puerto Rico during the entire taxable year (or, in certain cases, a
portion thereof).
OWNERSHIP AND DISPOSITION OF SERIES B PREFERRED STOCK
TAXATION OF DIVIDENDS. Under the source of income rules of the Code,
dividends on the Series B Preferred Stock will constitute gross income from
sources outside the United States if less than 25% of our gross income on an
ongoing basis is effectively connected with a trade or business in the United
States. We do not, nor do we expect in the future, to have 25% or more of our
gross income effectively connected with a trade or business in the United
States. Accordingly, dividends on the Series B Preferred Stock distributed by us
will constitute gross income from sources outside the United States so long as
we continue to meet the gross income tax described herein.
Subject to the discussion under "--Passive Foreign Investment Company Rules"
below, distributions made with respect to the Series B Preferred Stock,
including the amount of any Puerto Rico taxes withheld therefrom, will be
includable in the gross income of a U.S. Holder (other than a Puerto Rico U.S.
Holder) as foreign source dividend income to the extent such distributions are
paid out of our current or accumulated earnings and profits as determined for
United States federal income tax purposes. Such dividends will not be eligible
for the dividends received deduction generally allowed to U.S. Holders that are
corporations. To the extent, if any, that the amount of any distribution by us
exceeds our current and accumulated earnings and profits as determined under
United States federal income tax principles, it will be treated first as a
tax-free return of the U.S. Holder's tax basis in the Series B Preferred Stock
and thereafter as capital gain.
Subject to certain conditions and limitations, any Puerto Rico tax withheld
by us in accordance with Puerto Rico law will be eligible for credit against the
U.S. Holder's United States federal income tax liability. For purposes of
calculating a U.S. Holder's United States foreign tax credit limitation,
dividends distributed by us will generally constitute foreign source "passive
income" or, in the case of certain U.S. Holders (those predominantly engaged in
the active conduct of a banking, financing or similar business), foreign source
"financial services income."
In general, and subject to the discussion under "--Passive Foreign
Investment Company Rules" below, distributions made by us with respect to the
Series B Preferred Stock to a Puerto Rico U.S. Holder will not be includable in
such stockholder's gross income and will be exempt from United States federal
income taxation. In addition, for United States federal income tax purposes, no
deduction or credit will be allowed that is allocable to or chargeable against
amounts so excluded from such Puerto Rico U.S. Holder's gross income.
Generally, distributions of dividends made by us with respect to the
Series B Preferred Stock to a Puerto Rico corporation will not, in the hands of
the Puerto Rico corporation, be subject to United States income tax if the
dividends are not effectively connected with a United States trade or business
of the Puerto Rico corporation and the Puerto Rico corporation is not treated as
a United States corporation for purposes of Code. The Code provides special
rules for Puerto Rico corporations that are "controlled foreign corporation,"
"personal holding companies," "foreign personal holding companies" or "passive
foreign investment companies."
TAXATION OF CAPITAL GAINS. A U.S. Holder (other than a Puerto Rico U.S.
Holder) will recognize gain or loss on the sale or other disposition of
Series B Preferred Stock in an amount equal to the
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difference between the U.S. Holder's adjusted tax basis in the Series B
Preferred Stock and the U.S. dollar amount realized on the sale or other
disposition. Subject to the discussion under "--Passive Foreign Investment
Company Rules" below, such gain or loss will be capital gain or loss. U.S.
Holders should consult their own tax advisors concerning the treatment of
capital gains and losses.
Gain recognized by a U.S. Holder on the sale or other disposition of
Series B Preferred Stock generally will be treated as United States source
income.
In general, and subject to the discussion under "--Passive Foreign
Investment Company Rules" below, gain from the sale or exchange of the Series B
Preferred Stock, including redemptions treated as sales or exchanges of the
Series B Preferred Stock under the Code, by a Puerto Rico U.S. Holder will not
be includable in such stockholder's gross income and will be exempt from United
States federal income taxation and no deduction or credit will be allowed that
is allocable to or chargeable against amounts so excluded from such Puerto Rico
U.S. Holder's gross income. Redemptions of the Series B Preferred Stock that are
not treated as sales or exchanges under the Code will generally be subject to
income tax as dividends.
Generally, any gain derived by a Puerto Rico corporation from the sale or
exchange of the Series B Preferred Stock will not, in the hands of the Puerto
Rico corporation, be subject to United States income tax if the gain is not
effectively connected with a United States trade or business of the Puerto Rico
corporation and the Puerto Rico corporation is not treated as a United States
corporation for purposes of the Code. The Code provides special rules for Puerto
Rico corporations that are "controlled foreign corporations," "personal holding
companies," "foreign personal holding companies" or "passive foreign investment
companies." Redemptions of the Series B Preferred Stock that are not treated as
sales or exchanges under the Code will generally be subject to income tax under
the Code as dividends.
BACKUP WITHHOLDING. Certain noncorporate U.S. Holders may be subject to
backup withholding at the rate of 31% on dividends paid or the proceeds of a
sale, exchange or redemption of Series B Preferred Stock. Generally, backup
withholding applies only when the taxpayer fails to furnish or certify a proper
taxpayer identification number or when the payor is notified by the Internal
Revenue Service that the taxpayer has failed to report payments of interest and
dividends properly. U.S. Holders should consult their own tax advisors regarding
their qualification for exemption from backup withholding and the procedure for
obtaining any applicable exemption.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
The Code provides special rules regarding certain distributions received by
U.S. Holders with respect to, and sales and other dispositions (including
pledges) of, stock of a Passive Foreign Investment Company ("PFIC").
Based upon certain proposed United States Treasury Regulations under PFIC
provisions of the Code (the "Proposed Regulations"), we believe that we have not
been a PFIC for any of our prior taxable years and expect to conduct our affairs
in such a manner so that we will not meet the criteria to be considered a PFIC
in the foreseeable future. If, contrary to our expectation, the Series B
Preferred Stock were considered to be shares of a PFIC for any fiscal year, a
U.S. Holder would generally be subject to special rules (regardless of whether
we remain a PFIC) with respect to (a) any "excess distribution" by us to the
U.S. Holder (generally, any distributions received by the U.S. Holder on the
Series B Preferred Stock in a taxable year that are greater than 125% of the
average annual distributions received by the U.S. Holder in the three preceding
taxable years, or the U.S. Holder's holding period for the Series B Preferred
Stock if shorter) and (b) any gain realized on the sale, pledge or other
disposition of Series B Preferred Stock. Under these rules, (i) the excess
distribution or gain would be allocated ratably over the U.S. Holder's holding
period for the Series B Preferred Stock, (ii) the amount allocated to the
current taxable year and any taxable year prior to the first taxable year
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in which we are a PFIC would be taxed as ordinary income, and (iii) the amount
allocated to each of the other taxable years would be subject to tax at the
highest rate of tax in effect for the applicable class of taxpayer for that
year, and an interest charge for the deemed deferral benefit would be imposed
with respect to the resulting tax attributable to each such year. As an
alternative to these rules, if we were a PFIC and effective for taxable years
beginning after December 31, 1997, U.S. Holders may, in certain circumstances,
elect a mark-to-market treatment with respect to their Series B Preferred Stock,
provided that the Series B Preferred Stock will constitute "marketable stock"
for purposes of these rules. Guidance on what may constitute "marketable stock"
is not yet available from the United States Department of Treasury.
In general, the Proposed Regulations provide that an individual who is a
bona fide resident of Puerto Rico would be subject to the rule described in
(iii) above only to the extent that any excess distribution or gain is allocated
to a taxable year during which the individual was not a bona fide resident of
Puerto Rico during the entire taxable year (or, in certain cases, a portion
thereof).
Under current law, if we are a PFIC in any year, a U.S. Holder who
beneficially owns Series B Preferred Stock during such year must make an annual
return on IRS Form 8621 that describes any distributions received from us and
any gain realized on the disposition of Series B Preferred Stock.
ESTATE GIFT TAXATION
The transfers of Series B Preferred Stock by inheritance or gift by an
individual who is a resident of Puerto Rico at the time of his or her death or
at the time of gift will not be subject to United States federal estate gift tax
if the individual is a citizen of the United States who acquired his or her
citizenship solely by reason of birth or residence in Puerto Rico. Other
individuals should consult their own tax advisors in order to determine the
appropriate treatment for United States federal estate and gift tax purposes of
the transfer of the Series B Preferred Stock by death or gift.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), we have agreed to sell to each of the
underwriters named below, for which Santander Securities Corporation of Puerto
Rico ("Santander Securities"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Friedman Billings Ramsey ("FBR") are acting
as representatives, and each of such underwriters has severally agreed to
purchase from us, the respective number of shares of Series B Preferred Stock
set forth opposite its name below. The table does not include the 150,000 shares
of Series B Preferred Stock subject to the over-allotment option discussed
below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Santander Securities Corporation of Puerto Rico............. 650,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 200,000
Friedman Billings Ramsey.................................... 150,000
---------
Total..................................................... 1,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, we are
obligated to sell, and the underwriters are committed to take and pay for, all
of the shares of Series B Preferred Stock offered hereby, if any are purchased.
The underwriters propose to offer the Series B Preferred Stock to the public
at the public offering price set forth on the cover page of this prospectus, and
to certain selected securities dealers at the public offering price less a
concession not to exceed $0.4375 per share. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.4375 per share to certain
brokers and dealers. After the shares of Series B Preferred Stock are released
for sale to the public, the public offering price and other selling terms may
from time to time be changed by the underwriters.
We have granted the underwriters an option exercisable for 30 days from the
date of this prospectus to purchase up to an aggregate of 150,000 additional
shares of Series B Preferred Stock, solely to cover over-allotments, if any, at
the initial public offering price, less the underwriting discounts as set forth
on the cover page of this prospectus. If the underwriters exercise this option,
then each of the underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
underwriter's initial commitment as indicated in the table above. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Series B Preferred Stock offered
hereby.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us as well as the proceeds
received by us from the offering, before deducting expenses. The amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase up to an additional 150,000 shares.
<TABLE>
<CAPTION>
TOTAL, ASSUMING
FULL EXERCISE OF
OVER-ALLOTMENT
PER SHARE TOTAL OPTION
--------- ----------- ----------------
<S> <C> <C> <C>
Public Offering Price................................... $ 25.00 $25,000,000 $28,750,000
Underwriting Discount................................... $ 0.7875 $ 787,500 $ 905,625
Proceeds to R&G Financial Corporation................... $24.2125 $24,212,500 $27,844,375
</TABLE>
In connection with this offering, certain underwriters may engage in passive
market making transactions on the Nasdaq Stock Market's National Market System
immediately prior to the commencement of sales in this offering, in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying bids
on the Nasdaq Stock Market limited by the bid prices and effect in response to
order flow. Net purchases by a passive market maker on each day are limited to a
specified
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percentage of the passive market maker's average daily trading volume in the
Series B Preferred Stock during a specified period and must be discontinued when
that limit is reached. Passive market making may stabilize the market price of
the Series B Preferred Stock at a level above that which might otherwise prevail
and, if commenced, may be discontinued at any time.
Until the distribution of the Series B Preferred Stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for and purchase the Series B Preferred Stock. As an
exception to these rules, the underwriters may engage in certain transactions
that stabilize the price of the Series B Preferred Stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Series B Preferred Stock.
If the underwriters create a short position in the Series B Preferred Stock
in connection with the offering, I.E., if the underwriters sell more shares of
Series B Preferred Stock than are set forth on the cover page of this
prospectus, they may reduce that short position by purchasing shares of
Series B Preferred Stock in the open market. The underwriters may also elect to
reduce any short position by purchasing all or part of the over-allotment option
described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases.
We estimate that the total expense of this offering, excluding underwriting
discounts and commissions, will be $275,000.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities arising under the Securities Act, or to
contribute to payments that the underwriters may be required to make in respect
thereof.
Santander Securities, Merrill Lynch and FBR have provided from time to time,
and expect to provide in the future, investment banking services to us and our
affiliates for which Santander Securities, Merrill Lynch and FBR have received
or will receive customary fees and commissions.
The Series B Preferred Stock has been approved for listing on the Nasdaq
National Market under the symbol "RGFCO." Trading of the Series B Preferred
Stock is expected to commence approximately 30 days after the initial delivery
of the Series B Preferred Stock. We have been advised by the underwriters that
they intend to make a market in the Series B Preferred Stock. The underwriters
will have no obligation to make a market in the Series B Preferred Stock,
however, and may cease market making activities, if commenced, at any time.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any documents we file with the
SEC at its public reference facilities at 450 Fifth Street, NW, Washington, DC
20549, 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
can also obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, DC
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities. Our SEC filings are also available
at the office of the Nasdaq National Market. For further information on
obtaining copies of our public filings at the Nasdaq National Market, you should
call (212) 656-5060.
We have filed with the SEC a registration statement on Form S-3 (together
with all amendments thereto, the "registration statement"), of which this
prospectus is a part, under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Series B Preferred Stock, which is
discussed in this prospectus. This prospectus does not contain all of the
information set forth in the registration statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information with respect to us and the Series B Preferred Stock,
reference is made to the registration statement, including its exhibits. The
registration statement may be inspected without charge at the principal office
of the SEC in Washington, D.C., and copies of all or part of it may be obtained
from the SEC upon payment of the prescribed fees.
We "incorporate by reference" into this prospectus the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus and information that we file subsequently
with the SEC will automatically update this prospectus. We incorporate by
reference the documents listed below and any filings we make with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act, after the initial
filing of the registration statement that contains this prospectus and prior to
the time that we sell all the securities offered by this prospectus:
- Annual Report on Form 10-K for the year ended December 31, 1998, as
amended by Form 10-K/A dated November 5, 1999.
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999, as
amended by Form 10-Q/A dated November 5, 1999, June 30, 1999, as amended
by Form 10-Q/A dated November 5, 1999, and September 30, 1999.
- Current Report on Form 8-K dated November 19, 1999.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing to or telephoning us at the following address: 280 Jesus
T. Pinero Avenue, Hato Rey, San Juan, Puerto Rico 00918, Attention: Corporate
Secretary, telephone (787) 758-2424.
LEGAL MATTERS
The validity of the Series B Preferred Stock will be passed upon for us by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C. The validity of the
Series B Preferred Stock will be passed upon as to matters of Puerto Rico law
for us by McConnell Valdes, San Juan, Puerto Rico. Elias, Matz, Tiernan &
Herrick L.L.P will rely as to all matters of the laws of the Commonwealth of
Puerto Rico upon the opinion of McConnell Valdes. The discussion of Puerto Rico
and U.S. tax issues arising in connection with the Series B Preferred Stock has
been provided by McConnell Valdes, San Juan, Puerto Rico and by Elias, Matz,
Tiernan & Herrick L.L.P., Washington, D.C., respectively. As of the date of this
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prospectus, certain members of Elias, Matz, Tiernan & Herrick L.L.P. owned in
the aggregate approximately 22,543 Class B Shares of our Common Stock. Certain
legal matters will be passed upon for the underwriters by Pietrantoni Mendez &
Alvarez LLP, San Juan, Puerto Rico.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements incorporated in this prospectus by
reference from our Annual Report on Form 10-K/A for the year ended December 31,
1998, have been audited by PricewaterhouseCoopers LLP, independent accountants,
as stated in their report which is incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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1,000,000 SHARES
[LOGO]
7.75% NONCUMULATIVE PERPETUAL
MONTHLY INCOME
PREFERRED STOCK, SERIES B
($25 LIQUIDATION PREFERENCE PER SHARE)
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PROSPECTUS
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SANTANDER SECURITIES
MERRILL LYNCH & CO.
FRIEDMAN BILLINGS RAMSEY
December 16, 1999
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