PROSPECTUS Filed pursuant to Rule 424(b)(1)
Registration No. 333-81214
February 28, 2002
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2,400,000 SHARES
(R&G FINANCIAL CORPORATION LOGO)
7.25% NONCUMULATIVE PERPETUAL MONTHLY INCOME PREFERRED STOCK, SERIES D
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R&G Financial Corporation is a Puerto Rico chartered, financial holding company
that operates R&G Mortgage Corp., the second largest mortgage company in Puerto
Rico, and R-G Premier Bank, a Puerto Rico commercial bank. R&G Financial is
offering to the public 2,400,000 shares of its 7.25% Noncumulative Perpetual
Monthly Income Preferred Stock, Series D. The Series D Preferred Stock has the
following characteristics:
- Annual dividends of $1.8125 per share, payable monthly, if declared by
the board of directors. Missed dividends never have to be paid.
- Redeemable at R&G Financial's option beginning on March 1, 2007.
- No mandatory redemption or stated maturity.
There is currently no public market for the Series D Preferred Stock. R&G
Financial has received approval to list the Series D Preferred Stock on the
Nasdaq Stock Market under the symbol "RGFCM." Trading of the Series D Preferred
Stock on the Nasdaq Stock Market is expected to commence not later than 30 days
after the initial delivery of the Series D Preferred Stock.
BEFORE BUYING ANY OF THESE SECURITIES, YOU SHOULD CAREFULLY CONSIDER THE RISK
FACTORS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR COMMONWEALTH OF
PUERTO RICO SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES
OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
PER SHARE TOTAL
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Public offering price $25.0000 $60,000,000
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Underwriting discounts and commissions $ 0.7875 $ 1,890,000
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Proceeds, before expenses, to R&G Financial $24.2125 $58,110,000
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R&G Financial has granted the underwriters a 30-day option to purchase up to an
additional 360,000 shares of the Series D Preferred Stock to cover
over-allotments at $25.00 per share, less the underwriting discounts and
commissions.
UBS PAINEWEBBER INCORPORATED OF PUERTO RICO
FRIEDMAN BILLINGS RAMSEY
KEEFE, BRUYETTE & WOODS, INC.
ORIENTAL FINANCIAL SERVICES
POPULAR SECURITIES
SANTANDER SECURITIES
2
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Prospective investors may rely only on the information incorporated by reference
or contained in this prospectus. Neither R&G Financial nor any underwriter has
authorized anyone to provide prospective investors with information different
from that incorporated by reference or contained in this prospectus. This
prospectus is not an offer to sell, nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information in this prospectus is complete and accurate only as of the date set
forth on the front cover, regardless of the time of delivery of this prospectus
or any sale of these securities. In this prospectus, the "Company," "we," "us"
and "our" refer to R&G Financial.
TABLE OF CONTENTS
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Prospectus summary.................... 3
Risk factors.......................... 12
Forward-looking statements............ 17
Use of proceeds....................... 17
Capitalization........................ 18
Selected consolidated financial and
other data.......................... 19
Summary of certain terms of the Series
D Preferred Stock................... 22
Description of capital stock.......... 29
Taxation.............................. 32
Underwriting.......................... 40
Incorporation of certain documents by
reference........................... 42
Where you can find more information... 42
Legal matters......................... 43
Experts............................... 43
3
Prospectus summary
This summary provides an overview of selected information contained elsewhere in
this prospectus 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 by reference into this prospectus and the "Risk factors" section
beginning on page 12.
Unless otherwise stated, all information in this prospectus assumes that the
underwriters will not exercise their over-allotment option to purchase any of
the 360,000 shares of Series D Preferred Stock subject to that option.
THE COMPANY
GENERAL
R&G Financial is a Puerto Rico chartered, financial holding company that
operates R&G Mortgage Corp., the second largest mortgage company in Puerto Rico,
and R-G Premier Bank, a Puerto Rico commercial bank. Through R&G Mortgage, we
also operate The Mortgage Store of Puerto Rico, Inc., a Puerto Rico mortgage
company, and through R-G Premier Bank, we operate Continental Capital Corp., a
Huntington Station, New York mortgage banking company. We also operate Home and
Property Insurance Corporation, a Puerto Rico insurance agency, and R&G
Investments Corporation, a licensed broker-dealer.
On December 19, 2001, we entered into a definitive merger agreement pursuant to
which we will acquire The Crown Group, Inc., a Florida corporation, and its
wholly-owned savings bank subsidiary, Crown Bank, a Federal Savings Bank,
hereinafter collectively referred to as "Crown." Crown, which had total assets
of $647 million, total deposits of $452 million and stockholders' equity of $78
million as of September 30, 2001, operates in the Tampa-St.
Petersburg-Clearwater and Orlando metropolitan areas through 14 full-service
offices.
The Orlando market is one of the fastest growing markets in Florida, both
generally and for Hispanics in particular, and provides us with what we believe
is a cost effective way to access the Hispanic markets in the United States,
while providing a strong platform for further expansion in Florida. Crown's
balance sheet is complimentary to ours and is predominantly secured by real
estate. In addition, the acquisition will allow us to access lower cost funding
in Florida as compared to Puerto Rico. For the quarter ended September 30, 2001,
Crown's cost of deposits was 4.26% as compared to our cost of deposits of 4.75%
as of such date.
Under the terms of the merger agreement, as amended on January 30, 2002 and
February 27, 2002, holders of Crown common stock will receive an aggregate of
$100.0 million in cash. The acquisition, which is expected to be accretive to
our earnings per share in 2002, is expected to close during the second quarter
of 2002, pending the receipt of all requisite regulatory approvals and the
approval of Crown's shareholders.
We are currently in our 30th year of operations and operate our business through
our subsidiaries. We are primarily engaged in a range of real estate secured
lending activities, including the origination, servicing, purchase and sale of
mortgages on single-family residences, the securitization and sale of various
mortgage-backed and related securities and the holding and financing of mortgage
loans and mortgage-backed and related securities for sale or investment and the
purchase and sale of servicing rights associated with such mortgage loans. We
are also engaged in providing a full range of banking services, including
commercial banking services, corporate real estate and business lending,
residential construction lending, consumer lending and credit cards, offering a
diversified range of deposit products and, to a lesser extent, trust and
investment services through our private banking department and our
broker-dealer.
We were organized in 1972 as R&G Mortgage Corp. and completed our initial public
offering in 1996, following our reorganization as a bank holding company. As of
September 30, 2001, we had total assets of $4.3 billion, total deposits of $1.9
billion and stockholders' equity of $453.5 million. At September 30,
4
2001, we operated 63 branch offices (34 mortgage offices in Puerto Rico, 4
mortgage offices in the United States and 25 bank branches, mainly located in
the northeastern section of Puerto Rico).
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)
emphasizing the growth of our mortgage banking activities, including the
origination and sale of mortgage loans, and 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, and investment securities; (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; (6) meeting the
banking needs of our customers through, among other things, the offering of
trust and investment services and insurance products; (7) expanding our
operations in the United States; and, (8) emphasizing controlled growth, while
pursuing a variety of acquisition opportunities when appropriate.
Our senior management is comprised of five executives with an average of over 27
years of experience in the financial services industry. Victor J. Galan is our
Chairman and Chief Executive Officer, positions he has held since our
incorporation in 1996. Mr. Galan is also the founder and Chairman of R&G
Mortgage, a position he has held since 1972. During 2001, we promoted Ramon
Prats, our Vice Chairman, to the office of President. Mr. Prats formerly was
Executive Vice President of R&G Mortgage, a position he held since 1980. Mario
Ruiz has been with R&G Financial subsidiaries since 1990 and is presently
Executive Vice President of R-G Premier Bank. Mr. Ruiz previously served in
various capacities for R&G Mortgage and The Mortgage Store of Puerto Rico, Inc.
Steven Velez has been with R&G Mortgage since 1989 and is presently Executive
Vice President of R&G Mortgage. Joseph R. Sandoval has served as our Chief
Financial Officer since 1997. Previously, Mr. Sandoval was an accountant with a
predecessor to PriceWaterhouseCoopers LLP.
Our principal executive offices are located at 280 Jesus T. Pinero Avenue, San
Juan, Puerto Rico 00918 and our telephone number is (787) 758-2424.
R&G MORTGAGE
ORIGINATIONS
R&G Mortgage is primarily engaged in the business of originating first and
second mortgage loans on single-family residential properties secured by real
estate. R&G Mortgage also originates residential mortgage loans through The
Mortgage Store of Puerto Rico, Inc., our wholly-owned subsidiary. Pursuant to
agreements entered into between R&G Mortgage and R-G Premier Bank,
non-conforming conventional single-family residential loans and consumer loans
secured by real estate are also originated by R&G Mortgage for portfolio
retention by R-G Premier Bank. R-G Premier Bank retains the non-conforming
conventional single-family residential loans because these loans generally do
not satisfy resale guidelines of purchasers in the secondary mortgage market,
primarily because of size (in the case of "jumbo" loans) or other underwriting
technicalities at the time of origination. Jumbo loans may be packaged and sold
in the secondary market, while loans with underwriting technicalities may be
cured through payment experience and subsequently sold. Management believes that
these loans are essentially of the same credit quality as conforming loans.
During the nine months ended September 30, 2001 and the years ended December 31,
2000, 1999 and 1998, R&G Financial originated a total of $1.3 billion, $1.1
billion, $1.1 billion and $914.1 million of residential mortgage loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for R-G Premier Bank of $493.7 million, $451.4 million, $437.1
million and $450.6 million during the nine months ended September 30, 2001 and
the years ended December 31, 2000, 1999 and 1998, respectively, or 37%, 43%, 41%
and 49%, respectively, of total originations. The loans originated by R&G
Mortgage for R-G Premier Bank are comprised primarily of conventional
residential loans and, to a lesser extent, residential construction loans and
consumer loans secured by real estate.
5
SERVICING
R&G Financial's servicing portfolio has grown significantly over the past
several years. At September 30, 2001, R&G Financial's servicing portfolio
totaled $7.1 billion and consisted of a total of 113,181 loans. These amounts
include R&G Mortgage's servicing portfolio, totaling $6.6 billion, and
Continental's servicing portfolio, totaling $481.3 million, at September 30,
2001. At September 30, 2001, R&G Financial's servicing portfolio included $1.0
billion of loans serviced for R-G Premier Bank, or 14.1% of the total servicing
portfolio. Substantially all of the mortgage loans in R&G Financial's servicing
portfolio are secured by single-family residences. R&G Mortgage generally
retains the servicing function with respect to the loans which have been
securitized and sold. Most of R&G Financial's mortgage servicing portfolio is
comprised of mortgages secured by real estate located in Puerto Rico.
SECURITIZATIONS
R&G Mortgage pools Federal Housing Administration, the "FHA," and Veterans
Administration, the "VA," loans into mortgage-backed securities which are
guaranteed by the Government National Mortgage Association, the "GNMA." These
securities are sold to securities broker-dealers and other investors in Puerto
Rico. Conventional loans may either be sold directly to agencies such as the
Federal National Mortgage Association, the "FNMA," and the Federal Home Loan
Mortgage Corporation, the "FHLMC," or to private investors, or may be pooled
into FNMA or FHLMC mortgage-backed securities, which are generally sold to
investors. During the nine months ended September 30, 2001 and the years ended
December 31, 2000, 1999 and 1998, R&G Financial sold $755.2 million, $637.8
million, $721.0 million and $493.0 million of loans, respectively, as part of
its mortgage banking activities, which includes loans securitized and sold, but
does not include loans originated for R-G Premier Bank or loans securitized for
other institutions.
R-G PREMIER BANK
GENERAL
R-G Premier Bank's principal business consists of holding deposits from the
general public and tax-advantaged funds from eligible Puerto Rico corporations
and using them, together with funds obtained from other sources, to originate
and purchase loans secured primarily by residential real estate in Puerto Rico,
and to purchase mortgage-backed and other securities. R-G Premier Bank also is
engaged in the business of originating FHA insured, VA guaranteed and privately
insured first and second mortgage loans on residential real estate (one-to-four
family) in the States of New York, New Jersey, Connecticut, North Carolina and
Florida, through its wholly-owned subsidiary, Continental Capital Corp. To a
lesser extent, but with increasing emphasis over the past few years, R-G Premier
Bank also originates construction loans and loans secured by commercial real
estate, as well as consumer and personal loans and commercial business loans.
Such loans offer higher yields, are generally for shorter terms and offer R-G
Premier Bank an opportunity to provide a greater range of financial services to
its customers. R-G Premier Bank also offers trust services through its trust
department.
RESIDENTIAL LOANS
At September 30, 2001, R&G Financial's loans receivable, net, totaled $1.7
billion, which represented 40.1% of R&G Financial's $4.3 billion of total
assets. At such date, all but $807,000 of R&G Financial's loans receivable, net,
were held by R-G Premier Bank. R-G Premier Bank's loan portfolio has
historically been concentrated in loans secured by first mortgage liens on
existing single-family residences. At September 30, 2001, $994.2 million, or
54.4% of R&G Financial's total loans held for investment, consisted of such
loans, of which all but $1.2 million consisted of conventional loans.
CONSTRUCTION LOANS
R-G Premier Bank has been active in originating loans to construct single-family
residences. At September 30, 2001, retail construction loans amounted to $46.8
million, or 2.6% of R&G Financial's total loans held for investment, while
commercial construction and land acquisition loans amounted to $143.6 million in
the aggregate, or 7.9% of total loans held for investment. R-G Premier Bank
intends to continue to increase its involvement in single-family residential
construction lending. Such loans afford R-G Premier Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
6
COMMERCIAL LOANS
R-G Premier Bank also originates mortgage loans secured by commercial real
estate, primarily office buildings, retail stores, warehouses and general
purpose industrial space. At September 30, 2001, $348.9 million, or 19.1% of R&G
Financial's total loans held for investment, consisted of such loans. As of such
date, R-G Premier Bank's commercial real estate loan portfolio consisted of
approximately 1,230 loans with an average principal balance of $284,000.
Finally, R-G Premier Bank also offers commercial business loans, including
working capital lines of credit, inventory and accounts receivable loans,
equipment financing (including equipment leases), term loans, insurance premium
loans and loans guaranteed by the Small Business Administration and various
consumer loans. At September 30, 2001, consumer loans, which are primarily
secured by real estate, amounted to $175.4 million, or 9.6% of total loans held
for investment, and commercial business loans amounted to $78.4 million, or 4.3%
of total loans held for investment.
REGULATION
We operate our businesses under a variety of federal, state and Puerto Rico laws
and rules. As a financial holding company, we are subject to the rules of the
Board of Governors of the Federal Reserve System and Office of the Puerto Rico
Commissioner of Financial Institutions, the "OCFI." Among other things, we are
required to meet minimum capital requirements, and our activities are limited to
those that are determined to be financial in nature or incidental or
complimentary to a financial activity.
R&G Mortgage's mortgage banking business is subject to the rules of the FHA, VA,
GNMA, FNMA, FHLMC, Department of Housing and Urban Development, OCFI and state
regulatory authorities with respect to originating, processing, selling and
servicing mortgage loans. Among other things, these rules prohibit
discrimination, establish underwriting guidelines, require credit reports, fix
maximum loan amounts and, in some cases, fix maximum interest rates.
R-G Premier Bank is subject to the rules of the OCFI and the Federal Deposit
Insurance Corporation, or "FDIC." Among other things, R-G Premier Bank is
subject to requirements on the type and amount of credit it may extend to its
affiliates, including a requirement that most of such credit be fully secured,
and if there were any "liquidation or other resolution" of R-G Premier Bank,
deposits and administrative expenses would be afforded a priority over general
unsecured claims. In addition, the FDIC is required to take "prompt corrective
action" if R-G Premier Bank does not meet minimum capital requirements. The FDIC
has established five capital tiers to implement this requirement, from "well
capitalized" to "critically undercapitalized." A bank's capital tier will depend
on various capital measures and other qualitative factors and will subject it to
specific requirements. As of September 30, 2001, R-G Premier Bank met the
capital measures for being "well capitalized" under the FDIC's regulations.
7
THE OFFERING
Series D Preferred
Stock offered......... 2,400,000 shares; 2,760,000 shares if the
underwriters' over-allotment option is exercised in
full.
Offering price........ $25 per share.
Liquidation
preference............ If R&G Financial is liquidated or dissolved, you
will be entitled to receive $25 per share plus
accrued dividends for the current month from any
assets available for distribution. You will be paid
before any of R&G Financial's assets are
distributed to holders of common stock or any stock
ranking junior to the Series D Preferred Stock.
Dividends............. Dividends will be paid on the first day of each
month beginning on April 1, 2002. The board of
directors must approve each dividend payment and
any payment it does not approve never has to be
paid. The fixed annual dividend rate is equal to
7.25% of the liquidation preference per share.
No voting rights...... You will not have any voting rights, except as
described on page 25 of this prospectus.
Redemption at R&G
Financial's option.... Series D Preferred Stock may be redeemed in whole
or in part from time to time, beginning on March 1,
2007 at R&G Financial's option. Redemption prices
are discussed on page 23 of this prospectus.
No maturity date or
mandatory
redemption............ The Series D Preferred Stock does not have a
maturity date. R&G Financial is not required to
provide for the retirement of the Series D
Preferred Stock by mandatory redemption or sinking
fund payments.
Rank.................. The Series D Preferred Stock ranks senior to the
common stock of R&G Financial and on an equal basis
to R&G Financial's outstanding Series A Preferred
Stock, Series B Preferred Stock and Series C
Preferred Stock for purposes of dividend rights and
the distribution of assets upon liquidation. R&G
Financial may not issue preferred stock ranking
senior to the Series D Preferred Stock without the
approval of holders of at least two-thirds of the
Series D Preferred Stock.
Use of proceeds....... R&G Financial is raising funds in this offering
primarily to finance the acquisition of Crown and
maintain its well capitalized status. Pending
completion of the acquisition of Crown, the net
proceeds will be invested in short-term securities.
To the extent that the Crown transaction does not
receive regulatory approval or otherwise is not
consummated, the proceeds will be used to support
further growth in the business of R-G Premier Bank.
Nasdaq Stock Market
listing............... R&G Financial has received approval to list the
Series D Preferred Stock on the Nasdaq Stock Market
under the symbol "RGFCM." Trading of the Series D
Preferred Stock on the Nasdaq Stock Market is
expected to commence not later than 30 days after
the initial delivery of the Series D Preferred
Stock.
8
RECENT DEVELOPMENTS
The selected consolidated financial and other data set forth below as of
December 31, 2000 are derived from R&G Financial's audited consolidated
financial statements. The selected consolidated financial and other data for the
year ended December 31, 2001 is unaudited.
YEAR ENDED DECEMBER 31,
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2001 2000
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
Total assets................................................ $4,664,394 $3,539,444
Stockholders' equity........................................ 459,121 308,836
Common stockholders' equity per share....................... $ 10.07 $ 8.16
INCOME STATEMENT DATA
Net income.................................................. $ 65,971 $ 43,633
Diluted earnings per common share........................... $ 1.83 $ 1.30
OPERATING DATA
Loan production............................................. $2,473,168 $1,729,373
Loan servicing portfolio.................................... 7,224,571 6,634,059
PERFORMANCE RATIOS
Return on average assets.................................... 1.63% 1.34%
Return on average common equity............................. 20.77 18.00
Net interest margin......................................... 2.59 2.16
ASSET QUALITY RATIOS
Non-performing assets to total assets at end of period...... 1.78% 2.96%
Non-performing loans to total loans at end of period........ 3.79 5.52
Allowance for loan losses to total loans at end of period... 0.91 0.67
Allowance for loan losses to total non-performing loans at
end of period............................................. 24.05 12.21
Net charge-offs to average loans outstanding................ 0.32 0.17
RESULTS OF OPERATIONS
During the year ended December 31, 2001, R&G Financial reported net income
before cumulative effect of a change in accounting principle of $66.3 million or
$1.85 of earnings per diluted share. Net income increased by $22.7 million or
52.0% during the year ended December 31, 2001, as compared to 2000, due to a
$32.1 million or 49.3% increase in net interest income and a $21.3 million or
51.6% increase in net gain on origination and sale of loans, which was partially
offset by a $26.3 million or 32.5% increase in total operating expenses. The
increase in net interest income during 2001 was due primarily to increases in
R&G Financial's loan and securities portfolios (which increased in the aggregate
from $3.3 billion at December 31, 2000 to $4.3 billion at December 31, 2001), as
well as to an increase in R&G Financial's net interest margin (from 2.16% for
2000 to 2.59% for 2001). The increase in net gain on origination and sale of
loans during 2001 reflected record volumes of loan origination and sales, as
well as improved margins in connection with the sale of such loans. The increase
in total operating expenses during 2001 reflected the general growth in R&G
Financial's operations.
CHANGES IN FINANCIAL CONDITION
At December 31, 2001, R&G Financial's total assets amounted to $4.7 billion, as
compared to $3.5 billion at December 31, 2000. The $1.1 billion or 31.8%
increase in total assets during the year ended December 31, 2001 was primarily
the result of a $563.3 million or 37.0% increase in mortgage-backed and
investment securities available for sale, a $171.1 million or 10.5% increase in
net loans receivable, and a $81.9 million or 680.5% increase in mortgage-backed
securities held for trading.
At December 31, 2001, R&G Financial's allowance for loan losses totaled $17.4
million, which represented a $5.8 million or 50.2% increase from the level
maintained at December 31, 2000. The increase in the allowance for loan losses
reflected an increase in R&G Financial's commercial real estate and construction
loan portfolio. At December 31, 2001, R&G Financial's allowance represented
approxi-
9
mately 0.91% of the total loan portfolio and 24.05% of total non-performing
loans, as compared to 0.67% and 12.21% at December 31, 2000.
Non-performing loans amounted to $72.5 million at December 31, 2001, as compared
to $122.2 million at September 30, 2001 and $95.0 million at December 31, 2000.
The decrease in non-performing loans is due to the sale of approximately $67.8
million of non-performing residential mortgage loans to certain investors during
the fourth quarter of 2001. At December 31, 2001, $50.4 million or 69.5% of non-
performing loans consisted of residential mortgage loans. Because of the nature
of the collateral, R&G Financial has historically recognized a low level of loan
charge-offs. R&G Financial's aggregate charge-offs amounted to 0.32% during
2001, as compared to 0.17% during 2000. Although loan delinquencies have
historically been higher in Puerto Rico than in the United States, loan
charge-offs have historically been lower in Puerto Rico than in the United
States. While the ratio of non-performing loans to total loans decreased from
5.52% to 3.79% from December 31, 2000 to December 31, 2001, the ratio was
nevertheless larger than it would otherwise have been due to significant loan
securitizations during 2001 and 2000, which reduced the amount of loans
considered in the calculation of the ratio. Without giving effect to loan
securitizations, at December 31, 2001 and 2000, the ratio of non-performing
loans to total loans would have been 2.75% and 4.46%, respectively.
At December 31, 2001, R&G Financial's deposits totaled $2.1 billion, as compared
to $1.7 billion at December 31, 2000. In addition, at December 31, 2001, R&G
Financial had $2.1 billion of borrowings (consisting of securities sold under
agreements to repurchase, notes payable and FHLB advances), as compared to $1.5
billion at December 31, 2000. R&G Financial utilized deposits (primarily
certificates of deposits) and securities sold under agreements to repurchase to
fund its growth during 2001.
Stockholders' equity increased from $308.8 million at December 31, 2000 to
$459.1 million at December 31, 2001. The $150.3 million or 49.0% increase was
due both to net income recognized during the year as well as the sale by R&G
Financial of an aggregate of $69.0 million of Series C Preferred Stock in March
2001 and the sale by R&G Financial of an aggregate of $36.2 million of
additional Class B common stock in June 2001.
10
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the summary selected consolidated 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 19 of this prospectus. Per share information reflects
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 common equity ratio is
computed by dividing net income less preferred stock dividends by average
stockholders' equity for the period. Both ratios have been computed using
month-end averages.
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
Total assets........................... $4,298,044 $3,409,022 $3,539,444 $2,911,993 $2,044,782 $1,510,746 $1,037,798
Stockholders' equity................... 453,465 293,768 308,836 269,535 221,162 138,054 115,633
Common stockholders' equity per
share................................. $ 10.01 $ 7.63 $ 8.16 $ 6.79 $ 5.99 $ 4.88 $ 4.09
INCOME STATEMENT DATA
Income before cumulative effect from
change in accounting principle, net of
taxes(1).............................. $ 46,172 $ 31,557 $ 43,633 $ 41,335 $ 34,034 $ 23,497 $ 13,200
Diluted earnings per common share
before cumulative effect of change in
accounting principle.................. $ 1.29 $ 0.93 $ 1.30 $ 1.28 $ 1.12 $ 0.81 $ 0.59
OPERATING DATA
Loan production........................ $1,787,185 $1,263,119 $1,729,373 $1,977,322 $1,426,069 $ 906,324 $ 624,571
Loan servicing portfolio............... 7,104,777 6,530,986 6,634,059 6,177,511 4,827,798 3,000,888 2,550,169
PERFORMANCE RATIOS
Return on average assets............... 1.57% 1.32% 1.34% 1.72% 1.95% 1.85% 1.38%
Return on average common equity........ 19.95 17.75 18.00 20.23 21.32 18.69 15.54
Net interest margin.................... 2.49 2.24 2.16 2.60 2.72 3.12 3.24
ASSET QUALITY RATIOS
Non-performing assets to total assets
at end of period...................... 3.08% 2.69% 2.96% 2.26% 2.41% 2.12% 1.90%
Non-performing loans to total loans at
end of period......................... 6.68(2) 4.69 5.52(2) 3.69 4.08 3.89 3.09
Allowance for loan losses to total
loans at end of period(3)............. 0.83 0.62 0.67 0.56 0.74 0.87 0.55
Allowance for loan losses to total
non-performing loans at end of
period(3)............................. 12.41 13.24 12.21 15.11 17.92 22.34 17.64
Net charge-offs to average loans
outstanding........................... 0.33 0.16 0.17 0.25 0.55 0.40 0.75
---------------
(1) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement, as amended, requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. Upon the adoption of this Statement, R&G Financial recognized
a gain of approximately $1.9 million as other comprehensive income in
stockholders' equity related to derivative instruments that were
designated as cash flow hedges, and a loss of approximately $529,000 in
the income statement related to derivative instruments that did not
qualify for hedge accounting.
(2) The increase in the ratio during 2001 and 2000 was partially caused by
significant loan securitizations during such periods which reduced the
amount of loans held in portfolio that are considered in the calculation
of the ratio. Without giving effect to loan securitizations, as of
September 30, 2001 and December 31, 2000, the ratio of non-performing
loans to total loans would have been 4.87% and 4.46%, respectively.
(3) See "Recent developments" for a discussion of our historical charge-off
experience. Because of the nature of the collateral, our historical
charge-offs with respect to residential real estate loans have been low.
Excluding our residential loan portfolio, the allowance for loan losses
to total loans and to total non-performing loans at September 30, 2001
and December 31, 2000 would have been 1.89% and 71.0%, respectively, and
1.67% and 73.7%, respectively.
11
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth R&G Financial's consolidated ratios of earnings
to fixed charges and preferred stock dividends for the respective periods
indicated. R&G Financial issued its Series A Preferred Stock in August 1998, its
Series B Preferred Stock in December 1999 and its Series C Preferred Stock in
March 2001. The consolidated ratios of earnings to fixed charges and preferred
stock dividends were computed by dividing earnings by fixed charges and
preferred stock dividends.
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------------
2001 2000 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Earnings to fixed charges and preferred
stock dividends:
Including interest on deposits........ 1.46x 1.29x 1.29x 1.45x 1.53x 1.52x 1.42x
Excluding interest on deposits........ 1.94 1.52 1.54 1.86 2.00 2.11 2.06
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 the 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 R&G Financial's Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, together with a reasonable approximation of
the interest component of rental expense.
12
Risk factors
You should carefully read the following risk factors before you decide to buy
any Series D Preferred Stock. You should also consider the other information in
this prospectus and the documents that are incorporated by reference.
AN INVESTMENT IN THE SERIES D PREFERRED STOCK INVOLVES CERTAIN RISKS
DIVIDENDS WILL NOT BE PAID UNLESS DECLARED BY THE BOARD OF DIRECTORS
Monthly dividends will only be paid if declared by R&G Financial's Board of
Directors. The Board of Directors is not obligated or required to declare any
monthly dividends.
MISSED DIVIDENDS NEVER HAVE TO BE PAID
If R&G Financial's Board of Directors does not declare a dividend for a
particular month, those dividends never have to be paid.
BANKING REGULATIONS MAY RESTRICT R&G FINANCIAL'S ABILITY TO PAY DIVIDENDS
R&G Financial may not be able to pay dividends in the future if it does not earn
sufficient operating income. Federal Reserve Board policy states that a bank
holding company should pay dividends only out of its current operating earnings.
R&G Financial had net income from operations of $45.8 million for the nine
months ended September 30, 2001.
PAYMENT OF DIVIDENDS MAY BE RESTRICTED BY THE ABILITY OF R&G FINANCIAL'S
SUBSIDIARIES TO PAY DIVIDENDS TO R&G FINANCIAL
R&G Financial is a holding company with no significant business operations of
its own. R&G Financial's only significant source of cash to pay dividends on the
Series D Preferred Stock will consist of distributions from its subsidiaries.
There can be no assurance that the earnings from R&G Financial's subsidiaries
will be sufficient to make distributions to R&G Financial to enable payment of
dividends on the Series D Preferred Stock or, in the case of R-G Premier Bank,
that such distributions will be permitted by applicable banking laws and
regulations. The ability of R-G Premier Bank to pay dividends may, under certain
circumstances, be limited by Puerto Rico and federal banking laws and
regulations. R&G Mortgage is a party to certain indebtedness contracts that may
limit or prevent it from paying dividends to R&G Financial if it does not comply
with certain terms and conditions set forth in these contracts.
THERE MAY BE NO ACTIVE OR LIQUID MARKET FOR THE SERIES D PREFERRED STOCK
Prior to this offering, there has been no public market for the Series D
Preferred Stock. R&G Financial has received approval to list the Series D
Preferred Stock on the Nasdaq Stock Market under the symbol "RGFCM." However,
there can be no assurance that an established and liquid trading market for the
Series D Preferred Stock will develop, that it will continue if it does develop,
or that after the completion of this offering, the Series D Preferred Stock will
trade at or above the public offering price set forth on the cover of this
prospectus.
FLUCTUATIONS IN INTEREST RATES MAY IMPACT R&G FINANCIAL'S BUSINESS
Interest rate fluctuations are the primary market risks affecting R&G Financial.
Changes in interest rates affect the following areas of its business:
- the number of mortgage loans originated and purchased;
- the interest income earned on loans and securities;
- gain on sale of loans;
13
RISK FACTORS
- the value of securities holdings; and,
- the value of its servicing asset.
INCREASES IN INTEREST RATES REDUCE DEMAND FOR NEW MORTGAGE LOAN ORIGINATIONS AND
REFINANCINGS
Higher interest rates increase the cost of mortgage loans to consumers and
reduce demand for mortgage loans, which negatively impacts R&G Financial's
profits. Reduced demand for mortgage loans results in reduced loan originations
by R&G Financial, lower mortgage origination income and lower gain on sales of
loans. Demand for refinance loans is particularly sensitive to increases in
interest rates.
INCREASES IN INTEREST RATES REDUCE NET INTEREST INCOME
Increases in short-term interest rates reduce net interest income, which is an
important part of R&G Financial's earnings. Net interest income is the
difference between the interest received by R&G Financial on its assets and the
interest paid on its borrowings. Most of R&G Financial's assets, like its
mortgage loans and mortgage-backed securities are long-term assets. In contrast,
most of R&G Financial's borrowings are short-term. When interest rates rise, R&G
Financial must pay more in interest on its borrowings while interest earned on
its assets does not rise as quickly. This causes profits to decrease.
INCREASES IN INTEREST RATES MAY REDUCE OR ELIMINATE GAIN ON SALE OF MORTGAGE
LOANS
If long-term interest rates increase between the time R&G Financial commits to
or establishes an interest rate on a mortgage loan and the time it sells the
loan, R&G Financial may realize a reduced gain or a loss on such sale.
INCREASES IN INTEREST RATES MAY REDUCE THE VALUE OF MORTGAGE LOANS AND
SECURITIES' HOLDINGS
Increases in interest rates may reduce the value of R&G Financial's financial
assets and have an adverse impact on its earnings and financial condition. R&G
Financial owns a substantial portfolio of mortgages, mortgage-backed securities
and other debt securities, which have both fixed and adjustable interest rates.
The market value of an obligation with a fixed interest rate generally decreases
when prevailing interest rates rise, which may have an adverse effect on R&G
Financial's earnings and financial condition. In addition, the market value of
an obligation with an adjustable interest rate can be adversely affected when
interest rates increase due to a lag in the implementation of repricing terms as
well as caps, which may limit the amount of increase on the obligation's
interest rate.
DECREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF R&G FINANCIAL'S
SERVICING ASSET
Decreases in interest rates lead to increases in the prepayment of mortgages by
borrowers, which may reduce the value of R&G Financial's servicing asset. The
servicing asset is the estimated present value of the fees R&G Financial expects
to receive on the mortgages it services over their expected term. If prepayments
increase above expected levels, the value of the servicing asset decreases
because the amount of futures fees expected to be received by R&G Financial
decreases. R&G Financial may be required to recognize this decrease in value by
taking a charge against its earnings, which would cause its profits to decrease.
R&G FINANCIAL'S BUSINESS OPERATIONS INVOLVE CREDIT AND OTHER RISKS
R&G FINANCIAL IS SUBJECT TO DEFAULT AND RECOURSE RISK IN CONNECTION WITH ITS
LOAN ORIGINATIONS
From the time that R&G Financial funds the mortgage loans it originates for
third parties to the time it sells them, R&G Financial is generally at risk for
any mortgage loan defaults. Once R&G Financial sells the mortgage loans, 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 Financial 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 any of these representations or warranties, R&G Financial
may become liable for the unpaid principal and interest on the defaulted
mortgage loan and 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 Financial, which are
subsequently securitized and sold, from time-to-time R&G Financial provides
recourse in the event of mortgage
14
RISK FACTORS
loan defaults and/or foreclosures or certain documentation deficiencies. At
September 30, 2001, there were $581.0 million of loans subject to such recourse
provisions.
R&G FINANCIAL IS SUBJECT TO DEFAULT RISK IN CONNECTION WITH R-G PREMIER BANK'S
LOAN ORIGINATIONS
R-G Premier Bank is subject to the risk of loss from mortgage loan defaults and
foreclosures with respect to the loans originated for its portfolio.
Notwithstanding the care with which loans are originated, industry experience
indicates that a portion of R-G Premier Bank's loans will become delinquent and
a portion of the loans will require partial or entire charge-offs. Regardless of
the underwriting criteria utilized by R-G Premier Bank, losses may be
experienced as a result of various factors beyond R-G Premier 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 R-G Premier Bank's loan
portfolio and underlying collateral. Although loan delinquencies have
historically been higher in Puerto Rico than in the United States, loan
charge-offs have historically been lower than in the United States.
R-G Premier 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, industry standards,
past due loans, general economic conditions in its market area and other factors
related to the collectibility of the loan portfolio. Although R-G Premier Bank's
management utilizes its best judgment in providing for loan losses, there can be
no assurance that R-G Premier 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 beyond the control of R-G Premier Bank. Any such
increases in R-G Premier Bank's provisions for loan losses or any loan losses in
excess of its provisions with respect thereto would have a negative impact on
R&G Financial's future financial condition and/or results of operations.
R&G FINANCIAL'S EXPOSURE TO LARGER CREDIT RISK WILL INCREASE AS A CONSEQUENCE OF
THE INCREASE IN R-G PREMIER BANK'S CONSTRUCTION AND COMMERCIAL LENDING
ACTIVITIES
R-G Premier Bank has increased its emphasis on residential construction,
commercial real estate and commercial business lending, which is likely to
increase overall credit risk. R-G Premier Bank generally charges higher interest
rates on commercial and residential construction loans than on permanent
residential mortgage loans, because larger loan losses are expected in this
business line. 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 and, in the case of
a construction loan, on the successful completion and sale or operation of the
project. If R-G Premier Bank experiences loan losses that exceed its allowance
for loan losses, R&G Financial's profits and financial condition would be
adversely affected.
R&G FINANCIAL IS SUBJECT TO RISKS IN SERVICING LOANS FOR OTHERS
R&G Financial is also affected by mortgage loan delinquencies and defaults on
mortgage loans that it services for third parties. 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 generally recover its advances from the
mortgage owner or from liquidation proceeds when the mortgage loan is
foreclosed. 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. 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
Financial is required to forego servicing income from the time such loan becomes
delinquent, and into the future.
15
RISK FACTORS
R&G FINANCIAL'S BUSINESS IS CONCENTRATED IN PUERTO RICO, AND ADVERSE CONDITIONS
IN PUERTO RICO COULD NEGATIVELY IMPACT ITS OPERATIONS
R&G Financial's business activities and credit exposure are concentrated with
customers in Puerto Rico. Accordingly, its financial condition and results of
operations are dependent to a significant extent upon the economic conditions in
Puerto Rico, including the effect of such economic conditions on real estate
values. Any significant adverse economic developments in Puerto Rico, and, in
particular any decline in real estate values, could result in a decrease in loan
originations, an increase in the level of nonperforming assets and a reduction
in the value of R&G Financial's loans, real estate owned and mortgage servicing
portfolio.
R&G FINANCIAL'S ORIGINATION BUSINESS COULD BE ADVERSELY AFFECTED IF IT CANNOT
MAINTAIN ACCESS TO STABLE FUNDING SOURCES
R&G Financial's business requires continuous access to various funding sources.
While R-G Premier Bank is able to fund its operations through deposits as well
as through longer-term borrowings from the Federal Home Loan Bank of New York,
the "FHLB" and other alternative sources, the business of R&G Mortgage and
Continental is significantly dependent upon short-term borrowings under
warehousing lines. Certain of these warehousing lines of credit require the
maintenance of minimum levels of net worth and debt service and limit the amount
of indebtedness and dividends that may be declared.
While R&G Financial expects 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 the warehousing lines of credit of R&G Financial's
subsidiaries were reduced or eliminated and R&G Financial was not able to
replace such lines on a cost-effective basis, R&G Financial would be forced to
curtail or cease its mortgage origination business, which would have a material
adverse effect on R&G Financial's operations and financial condition. Although
R&G Financial's subsidiaries could also potentially access borrowings from R-G
Premier Bank, any such borrowings would be subject to and limited by certain
regulatory restrictions which apply to transactions between R-G Premier Bank and
its affiliates, including certain subsidiaries of R&G Financial.
RISK OF EXPANSION INTO NEW MARKET
The pending acquisition of Crown represents R&G Financial's first acquisition of
a bank within the United States. Management of R&G Financial does not have the
same depth of experience or knowledge with respect to the United States in
general or Florida in particular as it does with respect to Puerto Rico.
Consequently, R&G Financial will have to rely to a certain extent on the
expertise and experience of Crown's management. In addition, the Tampa/St.
Petersburg/Clearwater and Orlando metropolitan areas, which constitute Crown's
primary market, are subject to economic and political conditions which may
differ from the economic and political conditions existing within Puerto Rico.
Accordingly, some of the properties underlying Crown's loans may be located in
areas which are experiencing adverse economic conditions, including a general
softening of the local real estate markets, which could result in increased loan
delinquencies and loan losses.
RISKS RELATING TO R&G FINANCIAL'S DEPENDENCE ON KEY INDIVIDUALS
The success of R&G Financial has been largely dependent on Victor J. Galan,
Chairman of the Board and Chief Executive Officer, and Ramon Prats, Vice
Chairman of the Board and President. R&G Financial's future success will also
depend, to a great extent, upon the services of Mr. Galan and Mr. Prats. R&G
Financial believes that the prolonged unavailability or the unexpected loss of
the services of Mr. Galan and/or Mr. Prats could have a material adverse effect
upon R&G Financial, as attracting suitable replacements may involve significant
time and/or expense.
CHANGES IN STATUTES AND REGULATIONS COULD ADVERSELY AFFECT R&G FINANCIAL
R&G Financial, as a Puerto Rico chartered, financial holding company, and its
various subsidiaries, are each subject to extensive federal and local
governmental supervision and regulation. There are laws and regulations which
restrict transactions between R&G Financial and its various subsidiaries. Any
change in such regulations, whether by applicable regulators or as a result of
legislation subsequently enacted by the
16
RISK FACTORS
Congress of the United States or the applicable local legislatures, could have a
substantial impact on R&G Financial's operations.
COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT R&G
FINANCIAL'S PROFITABILITY
R&G Financial faces substantial competition in originating loans and in
attracting deposits. The competition in originating loans comes principally from
other United States, Puerto Rico and foreign banks, mortgage banking companies,
consumer finance companies, insurance companies and other institutional lenders
and purchasers of loans. R&G Financial will encounter greater competition as it
expands its operations in the United States. A number of institutions with which
R&G Financial competes have significantly greater assets, capital and other
resources. In addition, many of R&G Financial's competitors are not subject to
the same extensive federal regulation that governs R&G Financial's business. As
a result, many of R&G Financial's competitors have advantages in conducting
certain businesses and providing certain services. Increased competition could
require R&G Financial to increase its rates charged on deposits or lower the
rates offered on loans, which could adversely affect R&G Financial's
profitability.
17
Forward-looking statements
This prospectus contains and incorporates by reference certain forward-looking
statements regarding R&G Financial's financial condition, results of operations
and business. These statements are not historical facts and include statements
about R&G Financial's operations, performance and financial condition, including
its future economic performance, plans and objectives and the likelihood of
success in developing and expanding its business. These statements are based
upon a number of assumptions and estimates which are subject to significant
uncertainties, many of which are beyond the control of R&G Financial. The words
"may," "would," "could," "will," "expect," "anticipate," "believe," "intend,"
"plan," "estimate" and similar expressions are meant to identify these
forward-looking statements. Actual results may differ materially from those
expressed or implied by these forward-looking statements.
Use of proceeds
The net proceeds to R&G Financial from the sale of the shares of Series D
Preferred Stock is expected to be $57,877,375 ($66,593,875 if the underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discounts and estimated offering expenses. See "Underwriting."
R&G Financial is raising funds in this offering primarily to finance the
acquisition of Crown and maintain its well capitalized status. Pending
completion of the acquisition of Crown, the net proceeds will be invested in
short-term securities. To the extent that the Crown transaction does not receive
regulatory approval or otherwise is not consummated, the proceeds will be used
to support further growth in the business of R-G Premier Bank.
18
Capitalization
The following table sets forth R&G Financial's unaudited consolidated
capitalization at September 30, 2001, and as adjusted to reflect the issuance of
the shares of Series D Preferred Stock offered by this prospectus and the
application of the net proceeds therefrom to R&G Financial, as if the sale of
the Series D Preferred Stock had been consummated on September 30, 2001. In
addition to the indebtedness reflected below, R&G Financial had total deposits
of $1.9 billion at September 30, 2001. The table does not give effect to any
exercise of the over-allotment option granted to the underwriters and should be
read in conjunction with R&G Financial's consolidated financial statements and
related notes incorporated by reference into this prospectus.
SEPTEMBER 30, 2001
------------------------------
ACTUAL AS ADJUSTED
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Borrowings(1)............................................... $1,882,124 $1,882,124
---------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized:
2,000,000 shares of Series A Preferred Stock, actual... $ 50,000 $ 50,000
1,000,000 shares of Series B Preferred Stock, actual... 25,000 25,000
2,760,000 shares of Series C Preferred Stock, actual... 69,000 69,000
2,400,000 shares of Series D Preferred Stock, as
adjusted.............................................. -- 60,000
Common stock, $0.01 par value:
Class A Shares, 40,000,000 shares authorized;
16,233,056 shares issued and outstanding(2)........... 162 162
Class B Shares, 40,000,000 shares authorized;
14,693,700 shares issued and outstanding(2)........... 147 147
Additional paid-in capital................................ 69,771 67,648
Retained earnings......................................... 219,035 219,035
Capital reserves of R-G Premier Bank...................... 7,444 7,444
Accumulated other comprehensive income, net of tax........ 12,906 12,906
---------- ----------
Total stockholders' equity........................ $ 453,465 $ 511,342
========== ==========
Common stockholders' equity per share............. $ 10.01 $ 9.94
========== ==========
---------------
(1) Includes securities sold under agreements to repurchase, notes payable,
FHLB advances and other borrowings.
(2) On November 9, 2001, Ramon Prats, the President of R&G Financial,
exercised an option granted to him by Victor J. Galan, the Chairman and
Chief Executive Officer of R&G Financial, to acquire 180,000 shares of
Class B common stock. In addition, on November 15, 2001, Mr. Prats
exercised an option granted to him by R&G Financial to acquire 360,000
shares of Class B common stock. As a result and giving effect to
additional exercises by employees of options to acquire shares of Class
B common stock subsequent to September 30, 2001, as of November 15,
2001, the outstanding shares of Class A and Class B common stock was
16,053,056 and 15,240,900, respectively.
19
Selected consolidated financial and other data
The selected consolidated financial and other data below should be read in
connection with the consolidated financial information included in R&G
Financial's Annual Report on Form 10-K/A for the year ended December 31, 2000
and its Quarterly Report on Form 10-Q/A for the nine months ended September 30,
2001, which are incorporated by reference in this prospectus. The consolidated
financial information for the nine-month periods ended September 30, 2001 and
2000 are derived from R&G Financial's unaudited consolidated financial
statements, which, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair statement of
the results for such periods. Results for the nine-month period ended September
30, 2001 are not necessarily indicative of R&G Financial's results for the full
year.
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------------
2001 2000 2000 1999 1998
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED BALANCE SHEET DATA
Total assets(1)............ $ 4,298,044 $ 3,409,022 $ 3,539,444 $ 2,911,993 $ 2,044,782
Loans receivable, net...... 1,722,636 1,713,641 1,631,276 1,563,007 1,073,668
Mortgage loans held for
sale...................... 238,605 115,144 95,668 77,277 117,126
Mortgage-backed and
investment securities held
for trading............... 99,681 11,901 12,038 43,564 450,546
Mortgage-backed securities
available for sale........ 1,410,755 940,887 1,150,100 712,705 95,040
Mortgage-backed securities
held to maturity.......... 52,973 20,501 19,818 23,249 28,255
Investment securities
available for sale........ 460,054 375,847 368,271 258,164 59,502
Investment securities held
to maturity............... 13,692 5,432 3,703 5,438 6,344
Servicing asset............ 103,288 90,389 95,079 84,253 58,221
Cash and cash
equivalents(2)............ 87,009 46,494 69,090 65,996 103,728
Deposits................... 1,874,685 1,582,358 1,676,062 1,330,506 1,007,297
Securities sold under
agreements to
repurchase................ 1,184,651 838,202 827,749 731,341 471,422
Notes payable.............. 200,638 161,533 138,858 132,707 182,748
Other borrowings(3)........ 496,834 473,384 538,840 408,843 121,000
Total stockholders'
equity.................... 453,465 293,768 308,836 269,535 221,162
Common stockholders' equity
per share(4).............. $ 10.01 $ 7.63 $ 8.16 $ 6.79 $ 5.99
SELECTED INCOME STATEMENT
DATA
Revenues:
Net interest income....... $ 67,484 $ 49,371 $ 64,987 $ 56,578 $ 43,973
Provision for loan
losses.................. (7,325) (4,350) (5,751) (4,525) (6,600)
------------- ------------- ------------- ------------- -------------
Net interest income after
provision for loan
losses.................. 60,159 45,021 59,236 52,053 37,373
Loan administration and
servicing fees.......... 25,031 22,720 30,849 27,109 15,987
Net gain on sale of
loans................... 44,301 28,220 41,230 37,098 34,956
Other(5).................. 8,994 5,209 7,231 6,604 5,527
------------- ------------- ------------- ------------- -------------
Total revenues............ 138,485 101,170 138,546 122,864 93,843
------------- ------------- ------------- ------------- -------------
Expenses:
Compensation and
benefits................ 23,840 19,952 27,031 24,433 17,095
Occupancy expenses........ 12,291 9,952 13,436 11,289 8,987
SAIF special assessment... -- -- --
Other administrative and
general expenses........ 41,040 30,381 40,325 33,568 22,687
------------- ------------- ------------- ------------- -------------
Total expenses............ 77,171 60,285 80,792 69,290 48,769
------------- ------------- ------------- ------------- -------------
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1996
--------------------------- -----------------------------
(DOLLARS IN THOUSANDS,
EXCEPT
PER SHARE DATA)
SELECTED BALANCE SHEET DATA
Total assets(1)............ $ 1,510,746 $ 1,037,798
Loans receivable, net...... 765,059 603,751
Mortgage loans held for
sale...................... 46,885 54,450
Mortgage-backed and
investment securities held
for trading............... 401,039 110,267
Mortgage-backed securities
available for sale........ 46,004 50,841
Mortgage-backed securities
held to maturity.......... 33,326 37,900
Investment securities
available for sale........ 75,863 30,973
Investment securities held
to maturity............... 10,693 5,270
Servicing asset............ 21,213 12,595
Cash and cash
equivalents(2)............ 68,366 98,856
Deposits................... 722,418 615,567
Securities sold under
agreements to
repurchase................ 433,135 97,444
Notes payable.............. 103,453 126,842
Other borrowings(3)........ 86,359 65,463
Total stockholders'
equity.................... 138,054 115,633
Common stockholders' equity
per share(4).............. $ 4.88 $ 4.09
SELECTED INCOME STATEMENT
DATA
Revenues:
Net interest income....... $ 36,530 $ 28,923
Provision for loan
losses.................. (6,370) (4,258)
------------- -------------
Net interest income after
provision for loan
losses.................. 30,160 24,665
Loan administration and
servicing fees.......... 13,214 13,029
Net gain on sale of
loans................... 23,286 12,285
Other(5).................. 4,605 3,938
------------- -------------
Total revenues............ 71,265 53,917
------------- -------------
Expenses:
Compensation and
benefits................ 13,653 10,794
Occupancy expenses........ 7,131 5,531
SAIF special assessment... -- 2,508
Other administrative and
general expenses........ 18,252 15,424
------------- -------------
Total expenses............ 39,036 34,257
------------- -------------
20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------------
2001 2000 2000 1999 1998
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED INCOME STATEMENT
DATA (CONTINUED)
Income before minority
interest in R-G Premier
Bank, income taxes and
cumulative effect from
change in accounting
principle................. 61,314 40,885 57,754 53,574 45,074
Minority interest in R-G
Premier Bank's earnings... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Income before income taxes
and cumulative effect from
change in accounting
principle................. 61,314 40,885 57,754 53,574 45,074
Income taxes............... 15,142 9,328 14,121 12,239 11,040
------------- ------------- ------------- ------------- -------------
Income before cumulative
effect from change in
accounting principle...... 46,172 31,557 43,633 41,335 34,034
Cumulative effect from
change in accounting
principle, net of income
taxes..................... (323) -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income................. 45,849 31,557 43,633 41,335 34,034
Less: Dividends on
preferred stock........... (7,200) (4,228) (5,638) (3,754) (1,233)
------------- ------------- ------------- ------------- -------------
Net income available to
common stockholders....... $ 38,649 $ 27,329 $ 37,995 $ 37,581 $ 32,801
============= ============= ============= ============= =============
Basic earnings per common
share before cumulative
effect from change in
accounting principle(4)... $ 1.32 $ 0.95 $ 1.33 $ 1.31 $ 1.15
============= ============= ============= ============= =============
Diluted earnings per common
share before cumulative
effect from change in
accounting principle(4)... $ 1.29 $ 0.93 $ 1.30 $ 1.28 $ 1.12
============= ============= ============= ============= =============
Basic earnings per common
share(4).................. $ 1.31 $ 0.95 $ 1.33 $ 1.31 $ 1.15
============= ============= ============= ============= =============
Diluted earnings per common
share(4).................. $ 1.28 $ 0.93 $ 1.30 $ 1.28 $ 1.12
============= ============= ============= ============= =============
SELECTED OPERATING DATA(6)
Performance ratios and
other data:
Loan production............ $ 1,787,185 $ 1,263,119 $ 1,729,373 $ 1,977,322 $ 1,426,069
Mortgage servicing
portfolio................. 7,104,777 6,530,986 6,634,059 6,177,511 4,827,798
Return on average assets... 1.57% 1.32% 1.34% 1.72% 1.95%
Return on average common
equity.................... 19.95 17.75 18.00 20.23 21.32
Equity to assets at end of
period.................... 10.55 8.62 8.73 9.26 10.82
Interest rate spread(7).... 2.24 2.04 1.96 2.40 2.43
Net interest margin(7)..... 2.49 2.24 2.16 2.60 2.72
Average interest-earning
assets to average
interest-bearing
liabilities............... 105.33 103.64 103.54 104.21 105.93
Total non-interest expenses
to average total assets... 2.63 2.53 2.49 2.88 2.80
Cash dividends declared per
common share(4)........... $ 0.192 $ 0.146 $ 0.203 $ 0.149 $ 0.111
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1996
--------------------------- -----------------------------
(DOLLARS IN THOUSANDS,
EXCEPT
PER SHARE DATA)
SELECTED INCOME STATEMENT
DATA (CONTINUED)
Income before minority
interest in R-G Premier
Bank, income taxes and
cumulative effect from
change in accounting
principle................. 32,229 19,660
Minority interest in R-G
Premier Bank's earnings... -- 538
------------- -------------
Income before income taxes
and cumulative effect from
change in accounting
principle................. 32,229 19,122
Income taxes............... 8,732 5,922
------------- -------------
Income before cumulative
effect from change in
accounting principle...... 23,497 13,200
Cumulative effect from
change in accounting
principle, net of income
taxes..................... -- --
------------- -------------
Net income................. 23,497 13,200
Less: Dividends on
preferred stock........... -- --
------------- -------------
Net income available to
common stockholders....... $ 23,497 $ 13,200
============= =============
Basic earnings per common
share before cumulative
effect from change in
accounting principle(4)... $ 0.83 $ 0.60
============= =============
Diluted earnings per common
share before cumulative
effect from change in
accounting principle(4)... $ 0.81 $ 0.59
============= =============
Basic earnings per common
share(4).................. $ 0.83 $ 0.60
============= =============
Diluted earnings per common
share(4).................. $ 0.81 $ 0.59
============= =============
SELECTED OPERATING DATA(6)
Performance ratios and
other data:
Loan production............ $ 906,324 $ 624,571
Mortgage servicing
portfolio................. 3,000,888 2,550,169
Return on average assets... 1.85% 1.38%
Return on average common
equity.................... 18.69 15.54
Equity to assets at end of
period.................... 9.13 11.14
Interest rate spread(7).... 2.88 3.00
Net interest margin(7)..... 3.12 3.24
Average interest-earning
assets to average
interest-bearing
liabilities............... 104.61 104.60
Total non-interest expenses
to average total assets... 3.08 3.59
Cash dividends declared per
common share(4)........... $ 0.065 $ 0.069
21
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------------
2001 2000 2000 1999 1998
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSET QUALITY RATIOS(8)
Non-performing assets to
total assets at end of
period.................... 3.08% 2.69% 2.96% 2.26% 2.41%
Non-performing loans to
total loans at end of
period.................... 6.68(9) 4.69 5.52(9) 3.69 4.08
Allowance for loan losses
to total loans at end of
period(10)................ 0.83 0.62 0.67 0.56 0.74
Allowance for loan losses
to total non-performing
loans at end of
period(10)................ 12.41 13.24 12.21 15.11 17.92
Net charge-offs to average
loans outstanding......... 0.33 0.16 0.17 0.25 0.55
BANK REGULATORY CAPITAL
RATIOS(11)
Tier 1 risk-based capital
ratio..................... 12.00% 11.46% 11.46% 12.39% 13.41%
Total risk-based capital
ratio..................... 12.73 12.23 12.24 13.11 14.46
Tier 1 leverage capital
ratio..................... 6.67 6.19 6.04 7.07 8.04
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------
1997 1996
--------------------------- -----------------------------
(DOLLARS IN THOUSANDS,
EXCEPT
PER SHARE DATA)
ASSET QUALITY RATIOS(8)
Non-performing assets to
total assets at end of
period.................... 2.12% 1.90%
Non-performing loans to
total loans at end of
period.................... 3.89 3.09
Allowance for loan losses
to total loans at end of
period(10)................ 0.87 0.55
Allowance for loan losses
to total non-performing
loans at end of
period(10)................ 22.34 17.64
Net charge-offs to average
loans outstanding......... 0.40 0.75
BANK REGULATORY CAPITAL
RATIOS(11)
Tier 1 risk-based capital
ratio..................... 13.10% 13.91%
Total risk-based capital
ratio..................... 14.00 14.79
Tier 1 leverage capital
ratio..................... 7.34 8.45
---------------
(1) At September 30, 2001, R&G Mortgage and R-G Premier Bank had total
assets of $818.5 million and $3.6 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 advances from the Federal Home Loan Bank of New York,
federal funds purchased and other borrowings.
(4) Per share information for all periods presented takes into consideration
prior stock splits and dividends.
(5) 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.
(6) With the exception of end of period ratios, all ratios for R&G Mortgage
are based on the average of month-end balances, while all ratios for R-G
Premier Bank are based on average daily balances, and all ratios are
annualized where appropriate.
(7) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(8) 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.
(9) The increase in the ratio was partially caused by significant loan
securitizations during such periods during 2001 and 2000, which reduced
the amount of loans held in portfolio which are considered in the
calculation of the ratio. Without giving effect to loan securitizations,
as of September 30, 2001 and December 31, 2000, the ratio of
non-performing loans to total loans would have been 4.87% and 4.46%,
respectively.
(10) See "Recent developments" for a discussion of R&G Financial's historical
charge-off experience. Because of the nature of the collateral, R&G
Financials's historical charge-offs with respect to residential real
estate loans have been low. Excluding R&G Financial's residential loan
portfolio, the allowance for loan losses to total loans and to total
non-performing loans at September 30, 2001 and December 31, 2000 would
have been 1.89% and 71.0%, respectively, and 1.67% and 73.7%,
respectively.
(11) All of such ratios were in compliance with the applicable requirements
of the FDIC.
22
Summary of certain terms of the Series D Preferred Stock
GENERAL
The following summary sets forth the material terms and provisions of the Series
D Preferred Stock. The summary is qualified in its entirety by reference to the
terms and provisions of R&G Financial's Certificate of Incorporation and to the
Certificate of Designation creating the Series D Preferred Stock (the
"Certificate of Designation"), copies of which are incorporated by reference as
exhibits to the registration statement of which this prospectus is a part.
The Series D Preferred Stock constitutes an authorized series of R&G Financial's
preferred stock. R&G Financial may issue preferred stock from time to time in
one or more series with such rights, preferences and limitations as are
determined by its Board of Directors. R&G Financial's Board of Directors has
authorized the issuance of the Series D Preferred Stock offered hereby, with the
designations, dividend rights, redemption and other provisions set forth in the
Certificate of Designation and as described generally below.
R&G Financial issued $50,000,000 of 7.40% Noncumulative Perpetual Monthly Income
Preferred Stock, Series A ($25 liquidation preference per share) in August 1998
(the "Series A Preferred Stock"), $25,000,000 of 7.75% Noncumulative Perpetual
Monthly Income Preferred Stock, Series B ($25 liquidation preference per share)
in December 1999 (the "Series B Preferred Stock") and $69,000,000 of 7.60%
Noncumulative Perpetual Monthly Income Preferred Stock, Series C ($25
liquidation preference per share) in March 2001 (the "Series C Preferred
Stock"). The Series D Preferred Stock offered by this prospectus ranks equal (or
"pari passu") with the Series A Preferred Stock, the Series B Preferred Stock
and the Series C Preferred Stock as to payments of dividends and as to any
preferences on the voluntary or involuntary liquidation, dissolution or winding
up of R&G Financial.
DIVIDENDS
If declared at the option of R&G Financial's Board of Directors or an authorized
committee, holders of record of the Series D Preferred Stock will be entitled to
receive cash dividends in the amount of $1.8125 per share each year, which is
equivalent to 7.25% of the liquidation preference of $25.00 per share. R&G
Financial is not required to declare or pay dividends on the Series D Preferred
Stock, even if it has funds available for the payment of such dividends.
Dividends may only be paid out of funds that are legally available for this
purpose.
Dividends on the Series D Preferred Stock will accrue from its date of original
issuance and will be payable on the first day of each month in United States
dollars beginning on April 1, 2002. In the case of the dividend payable on April
1, 2002, this dividend will cover the period from the date of issuance of the
Series D Preferred Stock to and including March 31, 2002. Thereafter, dividends
will accrue for each monthly dividend period commencing on the first day of each
month and ending on and including the date next preceding the first day of the
next month. Payment of dividends will be made to the holders of record of the
Series D Preferred Stock as they appear on the books of R&G Financial on the
fifteenth day of the month preceding the date on which the dividends are
payable. If any date on which dividends are payable is not a Business Day, then
payment of the dividend will be made on the next Business Day without any
interest or other payment in respect of the delay. A "Business Day" is a day
other than a Saturday or Sunday or a general banking holiday in San Juan, Puerto
Rico or New York, New York.
Dividends on the Series D Preferred Stock will be noncumulative. If the Board of
Directors does not declare a dividend for any monthly dividend period on the
Series D Preferred Stock, then the holders of Series D Preferred Stock will not
have a right to receive a dividend for that monthly dividend period, whether or
not dividends on the Series D Preferred Stock are declared for any future
monthly dividend period.
Dividends for any monthly dividend period will be paid in equal installments in
the amount of $0.15104167 per share. The aggregate payment made to each holder
will be rounded to the next lowest
23
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
cent. The amount of dividends payable for any period shorter than a full monthly
dividend period will be computed on the basis of the actual number of days
elapsed in that period.
Dividend payments will be mailed to the record holders of the Series D Preferred
Stock at their addresses appearing on the register for the Series D Preferred
Stock.
The terms of the Series D Preferred Stock do not permit R&G Financial to
declare, set apart or pay any dividend or make any other distribution of assets
on, or redeem, purchase, set apart or otherwise acquire shares of common stock
or of any other class of stock of R&G Financial ranking junior to the Series D
Preferred Stock as to the payment of dividends or as to the distribution of
assets upon liquidation, dissolution or winding up of R&G Financial, unless
certain conditions are met. Those conditions are (1) all accrued and unpaid
dividends on the Series D Preferred Stock for the twelve monthly dividend
periods ending on the immediately preceding dividend payment date shall have
been paid or are paid contemporaneously, (2) the full monthly dividend on the
Series D Preferred Stock for the then current month has been or is
contemporaneously declared and paid or declared and set apart for payment, and
(3) R&G Financial has not defaulted in the payment of the redemption price of
any shares of Series D Preferred Stock called for redemption. See "Redemption at
the option of R&G Financial." The above limitations do not apply to stock
dividends or other distributions made in stock of R&G Financial ranking junior
to the Series D Preferred Stock as to the payment of dividends and as to the
distribution of assets. The above limitations also do not apply to conversions
or exchanges for stock of R&G Financial ranking junior to the Series D Preferred
Stock as to the payment of dividends and as to the distribution of assets.
If R&G Financial is unable to pay in full the dividends on the Series D
Preferred Stock and on any other shares of stock of equal rank as to the payment
of dividends with the Series D Preferred Stock, all dividends declared upon the
Series D Preferred Stock and any such other shares of stock will be declared pro
rata. In this event, each share of Series D Preferred Stock and of the other
classes of stock of equal rank will receive dividends in the same proportion as
the $25.00 per share liquidation preference of the Series D Preferred Stock
bears to the per share liquidation preference of the other classes of equally
ranked stock.
For a discussion of the tax treatment of distributions to stockholders see
"Taxation -- Puerto Rico Taxation," and "-- United States Taxation," and for a
discussion of certain potential regulatory limitations on R&G Financial's
ability to pay dividends, see "Risk factors -- Banking regulations may restrict
R&G Financial's ability to pay dividends."
NO CONVERSION OR EXCHANGE RIGHTS
The Series D Preferred Stock will not be convertible into, or exchangeable for
any other securities of R&G Financial.
REDEMPTION AT THE OPTION OF R&G FINANCIAL
R&G Financial may not redeem the shares of the Series D Preferred Stock prior to
March 1, 2007. On and after that date, R&G Financial may redeem the Series D
Preferred Stock for cash, at its option, in whole or in part, at the redemption
prices shown below plus accrued and unpaid dividends for the then current
monthly dividend period to the redemption date. The redemption prices for the
twelve month periods beginning on March 1, 2007 are shown below.
YEAR REDEMPTION PRICE
------------------------------------------------------------------------------
2007........................................................ $25.50
2008........................................................ 25.25
2009 and thereafter......................................... 25.00
In the event that R&G Financial elects to redeem less than all of the
outstanding shares of the Series D Preferred Stock, the total number of shares
to be redeemed shall be allocated pro rata or by lot as may be determined by the
Board of Directors or by such other method as the Board of Directors may approve
and deem equitable, including any method to conform to any rule or regulation of
any national or regional
24
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
stock exchange or automated quotation system upon which the shares of the Series
D Preferred Stock may at the time be listed or eligible for quotation.
R&G Financial may redeem the Series D Preferred Stock without ever having
declared or paid a dividend on such stock.
Notice of any proposed redemption shall be given by R&G Financial by mailing a
copy of such notice to the holders of record of the shares of Series D Preferred
Stock to be redeemed, at their address of record, not less than 30 nor more than
60 days prior to the redemption date. The notice of redemption to each holder of
shares of Series D Preferred Stock shall specify the number of shares of Series
D Preferred Stock to be redeemed, the redemption date and the redemption price
payable to the holder upon redemption, and shall state that from and after the
redemption date dividends will cease to accrue. If R&G Financial redeems less
than all the shares owned by a holder, the notice shall also specify the number
of shares of Series D Preferred Stock of the holder which are to be redeemed and
the numbers of the certificates representing such shares. Any notice which is
mailed in accordance with these procedures shall be conclusively presumed to
have been properly given, whether or not the stockholder receives such notice.
The failure by R&G Financial to 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
D Preferred Stock.
If the redemption notice is properly mailed and R&G Financial pays the
redemption price, from and after the redemption date, all dividends on the
shares of Series D Preferred Stock called for redemption shall cease to accrue
and all rights of the holders of such shares being redeemed as R&G Financial
stockholders shall cease on the redemption date. Holders will retain the right
to receive the redemption price upon presentation of their stock certificates.
If R&G Financial redeems less than all the shares represented by any
certificate, a new certificate representing the unredeemed shares shall be
issued without cost to the holder.
At its option, R&G Financial may, on or prior to the redemption date,
irrevocably deposit the entire amount payable upon redemption of the shares of
the Series D Preferred Stock to be redeemed with a bank or trust company
designated by R&G Financial having its principal office in New York, New York,
San Juan, Puerto Rico, or any other city in which R&G Financial shall at that
time maintain a transfer agent with respect to its capital stock, and having a
combined capital and surplus of at least $50,000,000. The depositary will hold
this amount in trust for payment to the holders of the shares of the Series D
Preferred Stock to be redeemed. If the deposit is made and the funds deposited
are immediately available to the holders of the shares of the Series D Preferred
Stock to be redeemed, R&G Financial will no longer have any obligation to make
payment of the amount payable upon redemption of the shares of the Series D
Preferred Stock to be redeemed. Following the deposit, except as discussed in
the next paragraph, holders of these shares shall look only to the depositary
for payment.
Any funds remaining unclaimed at the end of two years after the redemption date
for which such funds were deposited shall be returned to R&G Financial and
thereafter, the holders of shares of the Series D Preferred Stock called for
redemption shall look only to R&G Financial for the payment of the redemption
price. Any interest accrued on any funds deposited with the depositary shall
belong to R&G Financial and shall be paid to it from time to time on demand.
After the redemption of any shares of Series D Preferred Stock, the redeemed
shares shall have the status of authorized but unissued shares of preferred
stock, without designation as to series, until such shares are once more
designated as part of a particular series by the Board of Directors.
CERTAIN REGULATORY CONSIDERATIONS AFFECTING REDEMPTIONS
Under current regulations, R&G Financial may not redeem the Series D Preferred
Stock without the prior approval of the Federal Reserve Board. Ordinarily, the
Federal Reserve Board will not permit a redemption unless (1) the shares are
redeemed with the proceeds of a sale of common stock or perpetual preferred
stock, or (2) the Federal Reserve Board determines that R&G Financial's
condition and circumstances warrant the reduction of a source of permanent
capital.
25
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
Also, under Puerto Rico law, R&G Financial may not redeem any shares of its
capital stock unless the assets remaining after the redemption are sufficient to
pay any debts for which payment has not otherwise been provided.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of R&G Financial, the
record holders of shares of Series D Preferred Stock will be entitled to receive
out of the assets of R&G Financial available for distribution to stockholders,
before any distribution is made to the holders of shares of common stock or on
any other class or series of stock of R&G Financial ranking junior to the Series
D 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 to the date fixed for payment of such distribution.
If R&G Financial is liquidated or dissolved and the amounts payable with respect
to the Series D Preferred Stock and any other shares of stock of equal rank upon
liquidation are not paid in full, the holders of the Series D Preferred Stock
and of the other shares will share ratably in any such distribution of assets in
proportion to the full liquidation preferences to which each would otherwise be
entitled. After payment of the full amount of the liquidation preference to
which they are entitled, the holders of shares of Series D Preferred Stock will
not be entitled to any further participation in any distribution of assets of
R&G Financial.
A consolidation or merger of R&G Financial 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 R&G Financial
assets will not be regarded as a liquidation, dissolution or winding up of R&G
Financial.
VOTING RIGHTS
As a holder of the Series D Preferred Stock, you will not be entitled to receive
notice of or attend or vote at any meeting of R&G Financial stockholders, except
as described below.
If R&G Financial does not declare and pay dividends in full on the Series D
Preferred Stock for eighteen monthly dividend periods, whether consecutive or
not, the holders of outstanding shares of the Series D 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, the Series B Preferred
Stock and the Series C Preferred Stock), acting as a single class, will be
entitled to appoint two additional members to R&G Financial's Board of Directors
or to remove any such member so appointed by them from office and to appoint
another person in place of such member. To make this appointment, the holders of
a majority in liquidation preference of these shares must send written notice to
R&G Financial of the appointment or pass a resolution adopted by a majority of
holders at a separate general meeting of those holders called for this purpose.
Not later than 30 days after the right of holders of Series D Preferred Stock to
elect directors arises, if written notice by a majority of the holders has not
been given in accordance with the preceding sentence, R&G Financial's Board of
Directors or an authorized committee is required to convene a separate special
meeting for the above purpose. If the Board of Directors or such authorized
committee fails to convene this meeting within the 30-day period, the holders of
10% of the outstanding shares of the Series D Preferred Stock and of any such
other securities will be entitled to convene the meeting.
The provisions of R&G Financial's Certificate of Incorporation and Bylaws
relating to the convening and conduct of general meetings of stockholders will
apply with respect to any separate special meeting. Any member of the Board of
Directors so appointed shall vacate office if, following the event which gave
rise to such appointment, R&G Financial resumes the payment of dividends in full
on the Series D Preferred Stock and each such other series of stock for twelve
consecutive monthly dividend periods, subject always to the revesting of the
right of holders of the Series D Preferred Stock, voting as a class with the
holders of any other series of stock having the right to vote for the election
of directors solely in the event of a failure to pay dividends, acting as a
single class, to elect two directors as provided herein in the event of any
subsequent failure on the part of R&G Financial to pay dividends at the stated
rate for any eighteen full
26
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
monthly dividend periods, whether or not consecutive. R&G Financial's
Certificate of Incorporation provides for a minimum of 5 board members and a
maximum of 15 members. As of the date of this prospectus, the Board of Directors
consisted of 12 members.
Any amendment, alteration or repeal of the terms of the Series D Preferred Stock
contained in R&G Financial's Certificate of Incorporation, which includes the
Certificate of Designation of the Series D Preferred Stock, which would
materially and adversely affect the powers, preferences, or special rights of
the Series D Preferred Stock will require the approval of holders of at least
two thirds of the outstanding aggregate liquidation preference of the Series D
Preferred Stock. This approval can be evidenced either by a consent in writing
or by a resolution passed at a meeting of the holders of the Series D Preferred
Stock. The authorization or issuance of any shares of R&G Financial ranking
senior to the Series D Preferred Stock as to dividend rights or rights on
liquidation or similar events, will be considered a change requiring the consent
of the Series D Preferred Stock. Conversely, the authorization or issuance of
shares ranking, as to dividend rights or rights on liquidation or similar
events, on a parity or junior to the Series D Preferred Stock, will not be
considered a change requiring the consent of the holders of the Series D
Preferred Stock. The approval of the holders is not required if, at or prior to
the act with respect to which such vote would otherwise be required, all
outstanding shares of Series D Preferred Stock shall have been redeemed or
called for redemption and sufficient funds deposited in trust to effect such
redemption.
No vote of the holders of the Series D Preferred Stock will be required for R&G
Financial to redeem or purchase and cancel the Series D Preferred Stock in
accordance with its Certificate of Incorporation and the Certificate of
Designation.
R&G Financial will cause a notice of any meeting at which holders of Series D
Preferred Stock are entitled to vote to be mailed to each record holder of the
Series D 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.
CERTAIN REGULATORY ISSUES RELATED TO VOTING RIGHTS
Under regulations adopted by the Federal Reserve Board, if the holders of shares
of Series D Preferred Stock become entitled to vote for the election of
directors as described above, the Series D Preferred Stock could be deemed a
"class of voting securities." In this instance, a holder, other than a natural
person, of 25% or more of the Series D Preferred Stock could then be subject to
regulation as a bank holding company in accordance with the Bank Holding Company
Act. A holder, other than a natural person, of 5% that otherwise exercises a
"controlling influence" over R&G Financial could also be subject to regulation
under the Bank Holding Company Act. In addition, at any time the Series D
Preferred Stock is deemed a class of voting securities, (1) any other bank
holding company may be required to obtain the approval of the Federal Reserve
Board to acquire or retain 5% or more of the outstanding shares of Series D
Preferred Stock, and (2) any person other than a bank holding company may be
required to file with the Federal Reserve Board under the Change in Bank Control
Act to acquire or retain 10% or more of such series.
Section 12 of the Puerto Rico Banking Law requires that the OCFI approve any
change of control involving a bank organized under the Banking Law. The Banking
Law requires that the OCFI be informed not less than 60 days prior to any
transfer of voting stock of a Puerto Rico bank that results in any person
owning, directly or indirectly, more than 5% of the outstanding voting stock of
the bank. For the purposes of Section 12 of the Banking Law, the term "control"
means the power to, directly or indirectly, direct or influence decisively the
administration of the bank. The OCFI has made an administrative determination
that these provisions of the Banking Law are applicable to R&G Financial.
Pursuant to the Banking Law, if the OCFI receives notice of a proposed
transaction that may result in a change of control of R&G Financial, the OCFI is
required to investigate and determine whether a change of control has occurred.
The OCFI will issue an authorization for the transfer of control of R&G
Financial if the results of its investigations are in its judgment satisfactory.
The decision of the OCFI is final and unreviewable.
27
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
RANK
The Series D Preferred Stock will, with respect to dividend rights and rights on
liquidation, winding up and dissolution, rank:
- senior to all classes of common stock of R&G Financial, and to all other
equity securities issued by R&G Financial the terms of which specifically
provide that those equity securities will rank junior to the Series D
Preferred Stock;
- on a parity with R&G Financial's outstanding Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock, and with all other equity
securities issued by R&G Financial the terms of which specifically provide
that those equity securities will rank equal to the Series D Preferred Stock;
and,
- junior to all equity securities issued by R&G Financial the terms of which
specifically provide that those equity securities will rank senior to the
Series D Preferred Stock.
For this purpose, the term "equity securities" does not include debt securities
convertible into or exchangeable for equity securities.
R&G Financial may not issue shares ranking, as to dividend rights or rights on
liquidation, winding up and dissolution, senior to the Series D Preferred Stock,
except with the consent of the holders of at least two-thirds of the outstanding
aggregate liquidation preference of the Series D Preferred Stock. See "-- Voting
Rights" above.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Series D Preferred Stock is American
Stock Transfer & Trust Co., New York, New York, or any successor thereto (the
"Registrar and Transfer Agent").
The transfer of a share of Series D Preferred Stock may be registered upon the
surrender of the certificate evidencing the Series D 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 D Preferred Stock will be effected without
charge by or on behalf of R&G Financial 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.
R&G Financial will not be required to register the transfer of Series D
Preferred Stock after such Series D Preferred Stock has been called for
redemption.
REPLACEMENT OF LOST CERTIFICATES
If any certificate for a Series D 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 any
out-of-pocket expenses in connection with the request as R&G Financial may
determine.
NO PREEMPTIVE OR PREFERENTIAL RIGHTS
As a holder of the Series D Preferred Stock, you will have no preemptive or
preferential rights to purchase any securities of R&G Financial.
NO REPURCHASE AT THE OPTION OF THE HOLDERS
As a holder of the Series D Preferred Stock, you will have no right to require
R&G Financial to redeem or repurchase any shares of Series D Preferred Stock.
28
SUMMARY OF CERTAIN TERMS OF THE SERIES D PREFERRED STOCK
NO MANDATORY REDEMPTION OR SINKING FUND OBLIGATION
The shares of Series D Preferred Stock are not subject to any mandatory
redemption, sinking fund or similar obligation.
PURCHASE OF SHARES BY R&G FINANCIAL
R&G Financial may, at its option, purchase shares of the Series D Preferred
Stock from holders thereof from time to time, by tender, in privately negotiated
transactions or otherwise.
29
Description of capital stock
GENERAL
R&G Financial is authorized to issue 90,000,000 shares of capital stock, of
which 80,000,000 are shares of common stock, and 10,000,000 are shares of
preferred stock, par value $0.01 per share. The following is a summary of
certain rights and privileges of R&G Financial's common stock and preferred
stock. Statements in this summary are qualified in their entirety by reference
to R&G Financial's Certificate of Incorporation and to the General Corporation
Law of 1995 of Puerto Rico.
COMMON STOCK
R&G Financial's common stock is divided into 40,000,000 Class A Shares, of which
as of September 30, 2001, 16,233,056 were owned by Mr. Victor J. Galan, Chairman
of the Board and Chief Executive Officer of R&G Financial, and 40,000,000 Class
B Shares, of which as of such date, 14,693,700 Class B Shares were outstanding
and held by members of the general public. R&G Financial's Class B shares are
listed on the Nasdaq Stock Market under the symbol "RGFC." R&G Financial's
common stock does not represent non-withdrawable capital, is not an account of
an insurable type, and is not insured by the FDIC.
Subject to the rights of the holders of preferred stock to elect directors under
certain circumstances, the holders of R&G Financial's common stock possess
exclusive voting rights in R&G Financial. They elect the Board of Directors and
act on such other matters as are required to be presented to them under Puerto
Rico law or R&G Financial's Certificate of Incorporation or as are otherwise
presented to them by the 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.
Each record holder of Class A Shares is entitled 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 do not carry any
conversion rights and are otherwise not convertible into Class A Shares.
Subject to any dividend preferences which may be established with respect to any
series of preferred stock, holders of Class A Shares and Class B Shares are
entitled to share ratably, as a single class, in dividends when and as declared
by the Board of Directors out of funds legally available for the payment of
dividends.
In the event of the liquidation, dissolution or distribution of assets of R&G
Financial, the holders of its common stock would be entitled to receive all of
its assets available for distribution, after payment or provision for payment of
all debts and liabilities and liquidation distributions due to holders of R&G
Financial's preferred stock. The Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock have, and the Series D
Preferred Stock will have, a priority over the holders of R&G Financial's common
stock in the event of a liquidation, dissolution or distribution of assets.
Holders of R&G Financial's common stock are not entitled to preemptive rights
with respect to any shares which may be issued in the future. R&G Financial's
common stock is not subject to redemption.
PREFERRED STOCK
Prior to this offering, R&G Financial had issued 2,000,000 shares of Series A
Preferred Stock, 1,000,000 shares of Series B Preferred Stock and 2,760,000
shares of Series C Preferred Stock, all of which rank pari passu with respect to
the Series D Preferred Stock. Except with respect to the dividend rate and
redemption and maturity dates, the Series A Preferred Stock, the Series B
Preferred Stock and Series C Preferred Stock each have terms which are
substantially the same as the terms of the Series D Preferred Stock. R&G
Financial may issue other series of preferred stock with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval,
30
DESCRIPTION OF CAPITAL STOCK
issue preferred stock with voting, dividend, liquidation and conversion rights
as it may deem appropriate under the circumstances.
RESTRICTIONS ON ACQUISITION OF R&G FINANCIAL
RESTRICTIONS IN THE CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of R&G Financial's 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 the 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, copies of which are
incorporated by reference as exhibits to the registration statement of which
this prospectus is a part.
BOARD OF DIRECTORS
R&G Financial's Certificate of Incorporation contains provisions relating to the
Board of Directors and provides, among other things, that the Board of Directors
shall be divided into three classes as nearly equal in number as possible with
the term of office of one class expiring each year. Cumulative voting in the
election of directors is prohibited. Directors may be removed with or without
cause at a duly constituted meeting of stockholders called expressly for that
purpose. Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be filled by
the affirmative vote of a majority 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.
R&G Financial's Bylaws govern nominations for election to the Board, and provide
that nominations for election to the Board of Directors may be made by the
nominating committee of the Board of Directors or by a stockholder eligible to
vote at an annual meeting of stockholders who has complied with specified notice
requirements. Written notice of a stockholder nomination must be delivered to,
or mailed to and received at, the principal executive offices not later than
ninety days prior to the anniversary date of the mailing of the proxy materials
in connection with the immediately preceding annual meeting and, with respect to
an election to be held at a special meeting of stockholders, no later than the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders.
LIMITATION OF LIABILITY
R&G Financial's Certificate of Incorporation provides that the personal
liability of the 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
R&G Financial's Bylaws provide that R&G Financial 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 R&G Financial, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, officer, employee or agent of R&G Financial, or is
or was serving at its 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.
Notwithstanding the foregoing, R&G Financial 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 the prior written consent of R&G Financial
or any action, suit or proceeding initiated by any person seeking
indemnification without the prior written consent of R&G Financial. R&G
Financial's Bylaws also provide that reasonable expenses incurred by a director,
officer, employee or agent of R&G Financial in defending any civil, criminal,
suit or proceeding may be paid by R&G Financial in advance of the final
disposition of such action, suit or proceeding.
31
DESCRIPTION OF CAPITAL STOCK
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS
R&G Financial's Bylaws provide that special meetings of 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 the 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 the Board of Directors or otherwise
by a stockholder who has given timely notice thereof (along with specified
information) in writing. For stockholder proposals to be included in R&G
Financial's proxy materials, the stockholder must comply with all the timing and
informational requirements of the Securities Exchange Act of 1934, as amended.
With respect to stockholder proposals to be considered at the annual meeting of
stockholders but not included in R&G Financial's proxy materials, the
stockholder's notice must be delivered to or mailed and received at R&G
Financial's principal executive offices not later than 90 days prior to the
anniversary date of the mailing of the proxy materials in connection with the
immediately preceding annual meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
R&G Financial's Certificate of Incorporation generally provides that any
amendment of the Certificate must be first approved by a majority of the 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 R&G Financial's 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 the Board of Directors then in office. R&G
Financial's 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 R&G Financial's Certificate
of Incorporation which address the foregoing provisions and which are not
approved by the affirmative vote of two-thirds of R&G Financial's Board of
Directors then in office.
OTHER RESTRICTIONS ON ACQUISITION OF R&G FINANCIAL
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 R&G Financial's shares of common stock outstanding,
unless the Federal Reserve Board finds that the acquisition will not result in a
change in control of R&G Financial. 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 R&G
Financial and R-G Premier Bank, 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
R&G Financial. Control generally is defined to mean the beneficial ownership of
25% or more of any class of R&G Financial's voting securities. Under the Puerto
Rico Banking Act, a notice must be submitted to the OCFI not less than 60 days
prior to the consummation of any transfer of R&G Financial stock if, after such
transfer, the transferee (including any group acting in concert) will own more
than 5% of R&G Financial's outstanding voting stock. Such transfer will require
the approval of the OCFI if it will result in a change of control of R&G
Financial. 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 R&G
Financial's 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 R-G Premier
Bank, whether the change of control threatens the interest of R-G Premier Bank's
depositors, creditors or shareholders and any public interest considerations.
32
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 D 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 D 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 D 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 D 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 D 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 R&G
Financial's voting stock, as well as the application of any state, local,
foreign or other tax.
PUERTO RICO TAXATION
For purposes of the discussion below, the term "Puerto Rico corporation" is used
to refer to a corporation organized under the laws of Puerto Rico and the term
"foreign corporation" is used to refer to a corporation organized under the laws
of a jurisdiction other than Puerto Rico.
OWNERSHIP AND DISPOSITION OF SERIES D PREFERRED STOCK
TAXATION OF DIVIDENDS
GENERAL
Distributions of cash or other property made by R&G Financial on the Series D
Preferred Stock will be treated as dividends to the extent that R&G Financial
has current or accumulated earnings and profits. To the extent that a
distribution exceeds R&G Financial's current and accumulated earnings and
profits, the distribution will be applied against and reduce the adjusted tax
basis of the Series D Preferred Stock in the hands of the holder. The excess of
any distribution of this type over the adjusted tax basis will be treated as
gain on the sale or exchange of the Series D Preferred Stock and will be subject
to income tax as described below.
The following discussion regarding the income taxation of dividends on Series D
Preferred Stock received by individuals not residents of Puerto Rico and foreign
corporations not engaged in a trade or business in Puerto Rico assumes that
dividends will constitute income from sources within Puerto Rico. Generally, a
dividend paid by a Puerto Rico corporation will constitute income from sources
within Puerto Rico unless the corporation has derived less than 20% of its gross
income from sources within Puerto Rico for the three taxable years preceding the
year of the declaration of the dividend or for such part of such period as the
corporation has been in existence. R&G Financial has represented that it has
derived more than 20% of its gross income from Puerto Rico sources on an annual
basis since its 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
special 10% income tax (the "10% Special Tax") on dividends paid on the Series D
Preferred Stock. This tax is generally required to be
33
TAXATION
withheld by R&G Financial. An individual may elect for this withholding not to
apply, and in that 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%.
Puerto Rico corporations will be subject to income tax on dividends paid on the
Series D Preferred Stock at the normal corporate income tax rates, subject to
the dividend received deduction discussed below. In the case of a Puerto Rico
corporation, no withholding will be imposed on dividends paid on the Series D
Preferred Stock. The dividend received 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 these dividends
will be 5.85% after accounting for the dividend received deduction.
As a practical matter, dividends on the Series D 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 a
separate 10% withholding tax imposed on foreign corporations. See "-- Foreign
corporations." Accordingly, individual residents of Puerto Rico who desire to be
subject to the 10% Special Tax or to file an election out of the applicable 10%
Special Tax and applicable withholding tax should have their shares of Series D
Preferred Stock issued and registered in their own names. Similarly, Puerto Rico
corporations that own shares of Series D Preferred Stock and wish to avoid the
withholding imposed on foreign corporations should have their shares issued and
registered in their own names in order to ensure that no withholding is made on
dividends.
UNITED STATES CITIZENS NOT RESIDENTS OF PUERTO RICO
Dividends paid on the Series D Preferred Stock to a United States citizen who is
not a resident of Puerto Rico will be subject to the 10% Special Tax which will
be withheld by R&G Financial. These individuals may elect for the with holding
not to apply, and in that 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 event such
individuals opt out of the 10% Special Tax, a separate 10% withholding tax will
be required on the amount of the dividend unless the individual timely files
with R&G Financial a withholding exemption certificate to the effect that the
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 by R&G Financial or its agent from
individuals who have the shares of Series D Preferred Stock registered in their
names. Individuals who hold shares of Series D Preferred Stock in street name
will not be eligible to file with R&G Financial or its agent withholding
exemption certificates.
INDIVIDUALS NOT CITIZENS OF THE UNITED STATES AND NOT RESIDENTS OF PUERTO RICO
Dividends paid on the Series D 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 a 10% tax which will be withheld at source by R&G
Financial.
FOREIGN CORPORATIONS
The income taxation of dividends paid on the Series D Preferred Stock to a
foreign corporation will depend on whether or not the corporation is engaged in
a trade or business in Puerto Rico.
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 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 trade or business in Puerto Rico. Net
income from sources within Puerto Rico will include dividends on the Series D
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 on
the Series D Preferred Stock received by these corporations will be excluded
from the computation of the branch profits tax liability of these corporations.
34
TAXATION
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 D
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 OTHER THAN REDEMPTIONS
GENERAL
The sale or exchange of Series D 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 D Preferred Stock in the hands of the holder. Any
gain or loss that is required to be recognized will be a capital gain or loss if
the Series D Preferred Stock is held as a capital asset by the holder and will
be a long-term capital gain or loss if the stockholder's holding period of the
Series D Preferred Stock exceeds six months.
INDIVIDUAL RESIDENTS OF PUERTO RICO AND PUERTO RICO CORPORATIONS
Gain on the sale or exchange of Series D 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 10%.
If the stockholder is a Puerto Rico corporation and the gain is a long-term
capital gain, the gain will qualify for an alternative tax rate of 12.5%.
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 Puerto Rico income tax on the sale or exchange of Series D Preferred Stock if
the gain resulting therefrom constitutes income from sources outside Puerto
Rico. Generally, gain on the sale or exchange of Series D Preferred Stock will
be considered to be income from sources outside Puerto Rico if all rights, title
and interest in or to the Series D Preferred Stock are transferred outside
Puerto Rico, and if the delivery or surrender of the instruments that evidence
the Series D Preferred Stock is made to an office of a paying or exchange agent
located outside Puerto Rico. If the gain resulting from the sale or exchange
constitutes income from sources within Puerto Rico, an amount equal to 10% of
the payments received will be withheld at the source; and if the gain
constitutes a long-term capital gain, it will be subject to a tax at a maximum
rate of 10%. The amount of tax withheld at source will be creditable against the
shareholder's Puerto Rico income tax liability.
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 above under
"-- United States Citizens Not Residents of Puerto Rico." However, if the gain
resulting from the sale or exchange of Series D Preferred Stock constitutes
income from sources within Puerto Rico, an amount equal to 25% of the payments
received will be withheld at the source; provided, that if the gain resulting
from the sale or exchange represents a capital gain from sources within Puerto
Rico, the individual will generally be subject to tax on this gain at a fixed
rate of 29%. The amount of tax withheld at source will be creditable against the
shareholder's Puerto Rico income tax liability.
FOREIGN CORPORATIONS
A foreign corporation that is engaged in a trade or business in Puerto Rico will
generally be subject to Puerto Rico corporate income tax on any gain realized on
the sale or exchange of Series D Preferred Stock if the gain is (1) from sources
within Puerto Rico or (2) from sources outside Puerto Rico and effectively
connected with a trade or business in Puerto Rico. Any such gain will qualify
for an alternative tax of 12.5% if it qualifies as a long-term capital gain.
35
TAXATION
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 these corporations on the sale or exchange of
Series D Preferred Stock and that is subject to Puerto Rico income tax will be
taken into account. However, a deduction will be allowed in the computation for
any income tax paid on the gain realized on the 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 D Preferred Stock if the gain is
from sources within Puerto Rico. Gain on the sale or exchange of Series D
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 D Preferred
Stock are transferred outside Puerto Rico, and if the delivery or surrender of
the instruments that evidence the Series D Preferred Stock is made to an office
of a paying or exchange agent located outside Puerto Rico. If the gain resulting
from the sale or exchange constitutes income from sources within Puerto Rico, an
amount equal to 25% of the payments received will be withheld at the source and
be creditable against the shareholder's Puerto Rico income tax liability. In the
case of such foreign corporation, no income tax will be imposed if the gain
constitutes 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 the Series D Preferred Stock for cash will be treated
as a distribution taxable as a dividend to the extent of R&G Financial's 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 (1) a redemption of stock that completely terminates a shareholder's
interest in a corporation does not constitute a dividend, and (2) certain pro
rata redemptions among all the shareholders 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, in determining
whether a distribution is essentially equivalent to a dividend. The 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 the Series D 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 Other Than Redemptions" for
a sale or exchange of Series D Preferred Stock. Gain on the redemption of Series
D Preferred Stock will generally be recognized and will be subject to income
tax. If the stockholder of the Series D 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 10%. If the stockholder is a Puerto Rico
corporation and the gain is a long-term capital gain, the gain will qualify for
the alternative tax rate of 12.5%.
If the stockholder of the Series D Preferred Stock is an individual who is not a
resident of Puerto Rico or a foreign corporation or foreign partnership, any
gain realized by the holder on the redemption of the Series D 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 conducted 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 D Preferred Stock may be treated as
income from sources within Puerto Rico or effectively connected income and
subject to income tax accordingly. If the gain is treated as income from sources
within Puerto Rico an amount equal to 10%, in the case of United States
citizens, or 25%, in all other cases, of the payments received would be withheld
at the source.
36
TAXATION
ESTATE AND GIFT TAXATION
The transfer of Series D 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 D
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 on dividends paid on
the Series D Preferred Stock or on any gain realized on the sale, exchange or
redemption of the Series D Preferred Stock.
A corporation or partnership, Puerto Rico or foreign, that is engaged in a trade
or business in Puerto Rico will generally be subject to municipal license tax on
dividends paid on the Series D Preferred Stock and on the gain realized on the
sale, exchange or redemption of the Series D Preferred Stock if the dividends or
gain are attributable to that 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 D Preferred Stock will not be subject to property tax.
UNITED STATES TAXATION
The following discussion is limited to the United States federal tax
consequences of the ownership and disposition of the Series D Preferred Stock by
U.S. Holders, as defined below, and corporations organized under the laws of
Puerto Rico ("PR Corporations"). This discussion is based on the Code, existing
and proposed regulations of the United States Department of the Treasury
promulgated thereunder, administrative pronouncements and judicial decisions,
all of which are subject to change, even with retroactive effect. This
discussion deals only with Series D Preferred Stock held by initial purchasers
as capital assets within the meaning of Section 1221 of the Code. It does not
discuss all of the tax consequences that may be relevant to a purchaser in light
of that person's particular circumstances or to purchasers subject to special
rules, such as, among others, entities that are taxed under the Code as
partnerships, Subchapter S corporations, life insurance companies, tax exempt
entities, dealers in securities, financial institutions, or to persons whose
functional currency is not the U.S. dollar.
As used herein, the term "U.S. Holder" means a beneficial owner of Series D
Preferred Stock that does not own directly, constructively or by attribution,
10% or more of the voting stock of the R&G Financial and is, for United States
federal income tax purposes: a citizen or resident of the United States, a
corporation organized under the laws of the United States or of any political
subdivision thereof (including the District of Columbia), an estate the income
of which is subject to United States federal income taxation regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over its administration and one or more United States
persons (as such term is defined in the Code) have authority to control all
substantial decisions of the trust. 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 PR Corporations. 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 for purposes of Section 933 of the
Code.
OWNERSHIP AND DISPOSITION OF SERIES D PREFERRED STOCK
TAXATION OF DIVIDENDS
GENERAL
Dividends on the Series D Preferred Stock will constitute gross income from
sources outside the United States if less than 25% of the gross income from all
sources of R&G Financial for the three-year period
37
TAXATION
ending with the close of the taxable year preceding the declaration of such
dividends (or for such part of such period as R&G Financial has been in
existence) was effectively connected with a trade or business within the United
States (the "ECI Test"). Since its incorporation in 1996, less than 25% of R&G
Financial's gross income has been effectively connected in the conduct of a
trade or business in the United States, and R&G Financial expects to satisfy the
ECI Test on an ongoing basis. Accordingly, dividends on the Series D Preferred
Stock distributed by R&G Financial will constitute gross income from sources
outside the United States so long as R&G Financial continues to meet the ECI
Test.
U.S. HOLDERS OTHER THAN PUERTO RICO U.S. HOLDERS
Subject to the discussion under "-- Passive Foreign Investment Company Rules"
below, distributions made with respect to the Series D Preferred Stock,
including the amount of any Puerto Rico taxes withheld on the distribution, will
be includable in the gross income of a U.S. Holder, other than a Puerto Rico
U.S. Holder, as foreign source gross income (so long as R&G Financial meets the
ECI Test) to the extent the distributions are paid out of current or accumulated
earnings and profits of R&G Financial as determined for United States federal
income tax purposes. These dividends will not be eligible for the dividends
received deduction generally allowed to U.S. Holders that are corporations. To
the extent, if at all, that the amount of any such distribution by R&G Financial
exceeds its current and accumulated earnings and profits as determined for
United States federal income tax purposes, the excess will be treated first as a
tax-free return of the U.S. Holder's tax basis in the Series D Preferred Stock
and thereafter as capital gain.
Subject to certain conditions and limitations contained in the Code, the Puerto
Rico income tax imposed on dividends distributed by R&G Financial in accordance
with Puerto Rico law will be eligible for a deduction or a credit against the
U.S. Holder's United States federal income tax liability. See "Puerto Rico
Taxation -- Ownership and Disposition of Series D Preferred Stock -- Taxation of
Dividends" above. For purposes of calculating a U.S. Holder's United States
foreign tax credit limitation, dividends distributed by R&G Financial 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."
PUERTO RICO U.S. HOLDERS
In general, and subject to the discussion under "-- Passive Foreign Investment
Company Rules" below, distributions of dividends made by R&G Financial on the
Series D Preferred Stock to a Puerto Rico U.S. Holder will constitute gross
income from sources within Puerto Rico (so long as R&G Financial meets the ECI
Test), will not be includable in the stockholder's gross income and will be
exempt from United States federal income taxation. 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 the Puerto Rico U.S. Holder's
gross income.
PR CORPORATIONS
In general, distributions of dividends made by R&G Financial on the Series D
Preferred Stock to a PR Corporation will not, in the hands of the PR
Corporation, be subject to United States federal income tax (so long as R&G
Financial meets the ECI Test) if the dividends are not effectively connected
with the conduct of a United States trade or business of the PR Corporation.
TAXATION OF SALES OR OTHER DISPOSITIONS
U.S. HOLDERS OTHER THAN PUERTO RICO U.S. HOLDERS
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 D, including redemptions treated as
sales or exchanges of the Series D Preferred Stock under Section 302 of the
Code, in an amount equal to the difference between the U.S. Holder's adjusted
tax basis in the Series D Preferred Stock and the amount realized on the sale or
other disposition. Subject to the discussion under "-- Passive Foreign
Investment Company Rules" below, the gain or loss will be a capital gain or
loss, and will be long-term capital gain or loss if the U.S. Holder's holding
period for the Series D Preferred Stock exceeds one year. Long-term capital
gains are subject to a maximum United States federal tax rate of 20%.
Redemptions of the Series D Preferred Stock that are not treated as sales or
38
TAXATION
exchanges under Section 302 of the Code will generally be subject to income tax
under the Code as dividends (to the extent of current and accumulated earnings
and profits of R&G Financial).
Gain recognized by a U.S. Holder on the sale or other disposition of Series D
Preferred Stock generally will be treated as United States source income.
PUERTO RICO U.S. HOLDERS
In general, and subject to the discussion under "-- Passive Foreign Investment
Company Rules" below, gain from the sale or exchange of the Series D Preferred
Stock, including redemptions treated as sales or exchanges of the Series D
Preferred Stock under Section 302 of the Code, by a Puerto Rico U.S. Holder that
is not a United States resident as determined under Section 865(g) of the Code
(1) will constitute income from sources within Puerto Rico, (2) will not be
includable in the stockholder's gross income and (3) will be exempt from United
States federal income taxation. Puerto Rico U.S. Holders should consult their
tax advisors with respect to whether they are United States residents under
Section 865(g) of the Code. Also, no deduction or credit will be allowed that is
allocable to or chargeable against amounts so excluded from the Puerto Rico U.S.
Holder's gross income. Redemptions of the Series D Preferred Stock that are not
treated as sales or exchanges under Section 302 of the Code will generally
constitute dividends (to the extent of current and accumulated earnings and
profits of R&G Financial) and will constitute gross income from sources in
Puerto Rico (so long as R&G Financial meets the ECI Test), will not be
includable in the stockholder's gross income and will be exempt from United
States federal income taxation. Also, no deduction or credit will be allowed
that is allocable to or chargeable against amounts so excluded from the Puerto
Rico U.S. Holder's gross income.
PR CORPORATIONS
In general, any gain derived by a PR Corporation from the sale or exchange of
the Series D Preferred Stock will not, in the hands of the PR Corporation, be
subject to United States income tax if the gain is not effectively connected
with the conduct of a United States trade or business of the PR Corporation.
Redemptions of the Series D Preferred Stock that are not treated as sales or
exchanges under Section 302 of the Code will generally constitute dividends (to
the extent of current and accumulated earnings of R&G Financial) but will not be
subject to United States federal income tax (so long as R&G Financial meets the
ECI Test) if the dividends are not effectively connected with the conduct of a
United States trade or business of the PR Corporation.
BACKUP WITHHOLDING
Certain noncorporate U.S. Holders may be subject to backup withholding at the
fourth lowest rate of tax applicable under section 1(c) of the Code, on
dividends paid or the proceeds of a sale, exchange or redemption of Series D
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 IRS 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 for distributions received by U.S. Holders on
stock of a passive foreign investment company ("PFIC"), as well as amounts
received from the sale or other disposition of PFIC stock. In general, a PFIC is
a foreign corporation if, for any taxable year, 75% or more of its gross income
for the taxable year is passive income or 50% or more of its assets produce or
are held for the production of passive income as determined for United States
federal income tax purposes. For purposes of applying these rules, a foreign
corporation is deemed to receive its pro rata share of the income and to hold
its pro rata share of the assets, of any corporation in which it directly or
indirectly owns 25% or more of the stock measured by value.
Based upon certain proposed Treasury Regulations under the PFIC provisions of
the Code (the "Proposed Regulations"), R&G Financial believes that it has not
been a PFIC for any of its prior taxable years and expects to conduct its
affairs in a manner so that it will not meet the criteria to be considered a
PFIC in the
39
TAXATION
foreseeable future. If, contrary to R&G Financial's expectation, the Series D
Preferred Stock were considered to be shares of a PFIC for any fiscal year, a
U.S. Holder would, except as noted in the next paragraph, generally be subject
to special rules, regardless of whether R&G Financial remains a PFIC, with
respect to (1) any "excess distribution" by R&G Financial to the U.S. Holder and
(2) any gain realized on the sale, pledge or other direct or indirect
disposition of Series D Preferred Stock. An "excess distribution" is generally
any distribution received by the U.S. Holder on the Series D Preferred Stock in
a taxable year that is 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 D Preferred Stock if shorter. Under these
rules, (1) the excess distribution or gain would be allocated ratably over the
U.S. Holder's holding period for the Series D Preferred Stock, (2) the amount
allocated to the current taxable year and any taxable year prior to the first
taxable year in which R&G Financial is a PFIC would be taxed as ordinary income,
and (3) 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 on the resulting tax attributable to each such year.
As an alternative to the rules described above, if R&G Financial were a PFIC,
U.S. Holders may, in certain circumstances, make a mark-to-market election with
respect to their Series D Preferred Stock, provided that the Series D Preferred
Stock will constitute "marketable stock" for purposes of these rules. The
alternative rules applicable to a qualifying electing fund (a "QEF") will not be
available to U.S. Holders because R&G Financial does not intend, if it were a
PFIC, to comply with the specified reporting requirements necessary for a U.S.
Holder to make a QEF election. In general, if a shareholder makes a QEF election
with respect to shares it owns in a PFIC, the shareholder will be currently
taxable on its pro rata share of ordinary earnings and net capital gain of the
PFIC for each taxable year in which the foreign corporation qualifies as a PFIC
and certain other rules will apply.
Proposed Treasury Regulations under the PFIC provisions of the Code provide that
Puerto Rico U.S. Holders would be subject to the rule described in (3) above
only to the extent that any excess distribution or gain is allocated to a
taxable year during which the individual held the Series D Preferred Stock and
was not a bona fide resident of Puerto Rico during the entire taxable year or,
in certain cases, a portion thereof.
If R&G Financial is a PFIC in any year, a U.S. Holder who beneficially owns
Series D Preferred Stock during that year must make an annual return on IRS Form
8621 that describes any distributions received from R&G Financial and any gain
realized on the disposition of Series D Preferred Stock.
ESTATE AND GIFT TAXATION
The transfer of Series D 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 U.S. federal 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 U.S. federal estate and gift tax purposes of the transfer of the Series D
Preferred Stock by death or gift.
40
Underwriting
Subject to the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement"), R&G Financial has agreed to sell to each of the
underwriters named below, and each of such underwriters has severally agreed to
purchase from R&G Financial, the aggregate number of shares of Series D
Preferred Stock set forth opposite its name below. The table does not include
the 360,000 shares of Series D Preferred Stock subject to the over-allotment
option discussed below.
NUMBER OF
UNDERWRITERS SHARES
-----------------------------------------------------------------------
UBS PaineWebber Incorporated of Puerto Rico................. 1,680,000
Popular Securities, Inc. ................................... 240,000
Oriental Financial Services Corp. .......................... 200,000
Santander Securities Corporation............................ 200,000
Friedman, Billings, Ramsey & Co., Inc. ..................... 40,000
Keefe, Bruyette & Woods, Inc. .............................. 40,000
---------
Total.................................................. 2,400,000
=========
Under the terms and conditions of the Underwriting Agreement, R&G Financial is
obligated to sell, and the underwriters are obligated to purchase, all of the
shares of Series D Preferred Stock shown on the table above, if any are
purchased.
The underwriters propose to offer the shares of Series D Preferred Stock to the
public initially at the public offering price set forth on the cover page of
this prospectus, and to certain selected dealers at the public offering price
less a concession not to exceed $0.375 per share. After the shares of Series D
Preferred Stock are released to the public, the public offering price and other
selling terms may be changed by the underwriters.
R&G Financial has granted the underwriters an option exercisable for 30 days
from the date of this prospectus, to purchase up to 360,000 additional shares of
Series D Preferred Stock to cover over-allotments, if any, at the initial public
offering price, less the underwriting discounts, as shown 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
contained in the Underwriting Agreement, to purchase a number of option shares
proportionate to the underwriter's initial commitment as indicated in the table
above. The underwriters may exercise this option only to cover over-allotments
made in connection with the sale of the shares of Series D Preferred Stock
offered hereby.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by R&G Financial as well as the
proceeds received by R&G Financial 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 360,000 shares.
TOTAL,
ASSUMING
FULL EXERCISE OF
OVER-ALLOTMENT
PER SHARE TOTAL OPTION
---------------------------------------------------------------------------------------------------
Public offering price.................................. $25.0000 $60,000,000 $69,000,000
Underwriting discount.................................. 0.7875 1,890,000 2,173,500
Proceeds to R&G Financial.............................. 24.2125 58,110,000 66,826,500
In connection with this offering, certain underwriters may engage in passive
market making transactions on the Nasdaq Stock Market 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
percentage of the passive market maker's average daily trading volume in the
Series D Preferred Stock during a specified period and must be
41
UNDERWRITING
discontinued when that limit is reached. Passive market making may stabilize the
market price of the Series D 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 D 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 D Preferred Stock. As an exception to these
rules, the underwriters may engage in certain transactions that stabilize the
price of the Series D Preferred Stock. These transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Series D Preferred Stock.
If the underwriters create a short position in the Series D Preferred Stock in
connection with the offering, i.e., if the underwriters sell more shares of
Series D Preferred Stock than are set forth on the cover page of this
prospectus, they may reduce that short position by purchasing shares of Series D
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.
R&G Financial estimates that the total expense of this offering, excluding
underwriting discounts and commissions, will be $232,625.
R&G Financial has agreed to indemnify the several underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended, or to contribute to payments that the underwriters may be required to
make in respect thereof.
Several of the underwriters have from time to time been customers of, engaged in
transactions with, or performed services for, R&G Financial and its subsidiaries
in the ordinary course of business. Such transactions and services are expected
to continue in the future.
UBS Warburg LLC, an affiliate of UBS PaineWebber Incorporated of Puerto Rico, is
acting as financial advisor to R&G Financial in connection with the pending
acquisition of Crown. Such financial advisory services are being provided
pursuant to a letter agreement dated September 14, 2001 between UBS Warburg LLC
and R&G Financial. The letter agreement provides that in the event that R&G
Financial requires financing in connection with the pending acquisition of
Crown, UBS Warburg LLC shall have a right of first refusal to act as lead
manager in such financing. In accordance with applicable NASD rules, such right
of first refusal is valued at 1% of the offering proceeds in connection with
this offering.
R&G Financial has received approval to list of the Series D Preferred Stock on
the Nasdaq Stock Market under the symbol "RGFCM." Trading of the Series D
Preferred Stock is expected to commence not later than 30 days after initial
delivery of the Series D Preferred Stock. R&G Financial has been advised by the
underwriters that they intend to make a market in the Series D Preferred Stock
prior to the commencement of trading. The underwriters will have no obligation
to make a market in the Series D Preferred Stock, however, and may cease market
making activities, if commenced, at any time.
42
Incorporation of certain documents by reference
The Securities and Exchange Commission allows R&G Financial to "incorporate by
reference" the information it files with them, which means R&G Financial can
disclose important information to you by referring to these documents. The
information included in the following documents is incorporated by reference and
is considered a part of this prospectus. The most recent information that R&G
Financial files with the Securities Exchange Commission automatically updates
and supersedes previously filed information. R&G Financial has previously filed
the following documents with the Securities Exchange Commission and is
incorporating them by reference into this prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2000, as amended;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, as
amended;
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, as amended;
- Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, as
amended;
- Current Report on Form 8-K dated as of February 16, 2001;
- Current Report on Form 8-K dated as of June 12, 2001;
- Current Report on Form 8-K dated as of December 20, 2001; and,
- Current Report on Form 8-K dated as of February 27, 2002.
R&G Financial also incorporates by reference all documents filed by it pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
after the date of this prospectus and until all the shares being offered by this
prospectus are sold.
R&G Financial will provide, at no cost, to each person, including a beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any or all of the documents incorporated herein by reference, other than
exhibits to these documents unless such exhibits are specifically incorporated
by reference into such documents. Requests for copies should be directed to R&G
Financial, Attention: Enrique Umpierre-Suarez, Secretary, 280 Jesus T. Pinero
Avenue, San Juan, Puerto Rico 00918; telephone number: (787) 729-8200.
Where you can find more information
R&G Financial files annual, quarterly and current reports, proxy statements and
other information with the Securities Exchange Commission. R&G Financial has
also filed with the Securities Exchange Commission a Registration Statement on
Form S-3, to register the Series D Preferred Stock being offered in this
prospectus. This prospectus, which forms part of the Registration Statement,
does not contain all of the information included in the Registration Statement.
For further information about R&G Financial and the shares of Series D Preferred
Stock offered in this prospectus, you should refer to the Registration Statement
and its exhibits.
You may read and copy any document filed by R&G Financial with the Securities
Exchange Commission at the Securities Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Securities Exchange Commission at 1-800-SEC-0330 for further information on the
operation of the Public Reference Room. R&G Financial files its Securities
Exchange Commission materials electronically with the Securities Exchange
Commission, so you can also review R&G Financial's filings by accessing the web
site maintained by the Securities Exchange Commission at http://www.sec.gov.
This site contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Securities
Exchange Commission.
43
Legal matters
The validity of the Series D Preferred Stock will be passed upon for R&G
Financial by Kelley Drye & Warren LLP, Vienna, Virginia. The validity of the
Series D Preferred Stock will be passed upon as to matters of Puerto Rico law
for R&G Financial by McConnell Valdes, San Juan, Puerto Rico. Kelley Drye &
Warren LLP 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 D Preferred Stock has been
provided by McConnell Valdes, San Juan, Puerto Rico, and by Kelley Drye & Warren
LLP, Vienna, Virginia, respectively. As of the date of this prospectus, certain
members of Kelley Drye & Warren LLP owned in the aggregate approximately 12,623
Class B Shares of R&G Financial's common stock. Certain legal matters will be
passed upon for the underwriters by Fiddler Gonzalez & Rodriguez, LLP, San Juan,
Puerto Rico.
Experts
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K/A of R&G Financial Corporation for
the year ended December 31, 2000, have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
(R&G FINANCIAL CORPORATION LOGO)