1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________
TO _______________ .
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
--------------------------------------------------------------------------------
(State of incorporation (I.R.S.Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 758-2424
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report (s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [X] NO [ ]
Number of shares of Class B Common Stock outstanding as of March 31, 2001:
10,237,675 (Does not include 18,440,556 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
1
2
R&G FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements ........................................................ 3
Consolidated Statements of Financial Condition as of
March 31, 2001 (Unaudited) and December 31, 2000........................ 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2001 and 2000 (Unaudited)........................ 4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2001 and 2000 (Unaudited)........................ 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000 (Unaudited) .............................. 6
Notes to Unaudited Consolidated Financial Statements ............................ 7
ITEM 2. Management's Discussion and Analysis ................................................ 17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................ 27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ........................................................................ 27
ITEM 2. Changes in Securities .................................................................... 27
ITEM 3. Defaults upon Senior Securities .......................................................... 27
ITEM 4. Submission of Matters .................................................................... 27
ITEM 5. Other Information ........................................................................ 27
ITEM 6. Exhibits and Reports on Form 8-K ......................................................... 27
Signatures ............................................................................... 28
2
3
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Cash and due from banks $ 35,869,136 $ 43,466,268
Money market investments:
Securities purchased under agreements to resell 30,171,630 --
Time deposits with other banks 4,475,179 25,623,696
Federal funds sold 15,037,059 --
Mortgage loans held for sale, at lower of cost or market 152,507,025 95,668,320
Mortgage-backed securities held for trading, at fair value 74,250,751 --
Trading securities pledged on repurchase agreements, at fair value 27,959,398 12,038,040
Mortgage-backed and investment securities available for sale, at fair value 901,750,075 1,044,164,433
Available for sale securities pledged on repurchase agreements, at fair value 548,508,193 474,206,504
Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2001 - $5,756,553; 2000 - $5,111,404) 5,803,973 5,121,108
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2001 - $16,908,060; 2000 - $18,265,000) 16,876,243 18,400,485
Loans receivable, net 1,662,507,772 1,631,276,069
Accounts receivable, including advances to investors, net 19,979,385 16,107,136
Accrued interest receivable 28,521,628 28,919,237
Servicing asset 97,451,393 95,078,530
Premises and equipment 20,404,034 20,144,726
Other assets 29,377,390 29,229,655
--------------- ---------------
$ 3,671,472,264 $ 3,539,444,207
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,740,003,881 $ 1,676,062,163
Fed funds purchased -- 25,000,000
Securities sold under agreements to repurchase 892,318,270 827,749,494
Notes payable 173,076,129 138,857,562
Advances from FHLB 408,625,000 505,000,000
Other borrowings 8,839,770 8,839,770
Accounts payable and accrued liabilities 52,576,267 43,614,238
Other liabilities 6,570,023 5,485,330
--------------- ---------------
3,282,009,340 3,230,608,557
--------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
Non-cumulative perpetual:
7.40% Monthly Income Preferred Stock, Series A, $25 liquidation value,
2,000,000 shares authorized, issued and outstanding 50,000,000 50,000,000
7.75% Monthly Income Preferred Stock, Series B, $25 liquidation value,
1,000,000 shares authorized, issued and outstanding 25,000,000 25,000,000
7.60% Monthly Income Preferred Stock, Series C, $25 liquidation value,
2,760,000 shares authorized, issued and outstanding 69,000,000 --
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 18,440,556
issued and outstanding 184,406 184,406
Class B - $.01 par value, 30,000,000 shares authorized, 10,237,675
issued and outstanding in 2001 (2000-10,230,029) 102,377 102,300
Additional paid-in capital 38,438,687 40,800,652
Retained earnings 195,555,113 186,028,611
Capital reserves of the Bank 7,444,108 7,444,108
Accumulated other comprehensive income (loss) 3,738,233 (724,427)
--------------- ---------------
389,462,924 308,835,650
--------------- ---------------
$ 3,671,472,264 $ 3,539,444,207
=============== ===============
The accompanying notes are an integral part of these statements.
3
4
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
-----------------------------------
2001 2000
------------- -------------
(Unaudited)
(Dollars in thousands except
for per share data)
Interest income:
Loans $ 37,428 $ 36,729
Money market and other investments 7,370 5,208
Mortgage-backed securities 18,071 11,346
------------- -------------
Total interest income 62,869 53,283
------------- -------------
Interest expense:
Deposits 23,076 17,027
Securities sold under agreements to repurchase 12,556 10,535
Notes payable 2,044 3,364
Other 7,026 5,597
------------- -------------
Total interest expense 44,702 36,523
------------- -------------
Net interest income 18,167 16,760
Provision for loan losses (2,000) (1,350)
------------- -------------
Net interest income after provision for loan losses 16,167 15,410
------------- -------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 15,038 7,324
Loan administration and servicing fees 8,023 7,611
Service charges, fees and other 2,525 1,489
------------- -------------
25,586 16,424
------------- -------------
Total revenues 41,753 31,834
------------- -------------
Operating expenses:
Employee compensation and benefits 7,550 7,228
Office occupancy and equipment 3,902 3,252
Other administrative and general 11,876 9,593
------------- -------------
23,328 20,073
------------- -------------
Income before income taxes and cumulative effect from
change in accounting principle 18,425 11,761
------------- -------------
Income tax expense:
Current 4,196 2,431
Deferred 900 (157)
------------- -------------
5,096 2,274
------------- -------------
Income before cumulative effect
from change in accounting principle 13,329 9,487
Cumulative effect from change in accounting principle,
net of income tax benefit of $206 (323) --
------------- -------------
Net income $ 13,006 $ 9,487
============= =============
Earnings per common share before cumulative
effect from change in accounting principle - Basic $ 0.40 $ 0.28
------------- -------------
Earnings per common share before cumulative
effect from change in accounting principle - Diluted $ 0.39 $ 0.28
------------- -------------
Earnings per common share - Basic $ 0.39 $ 0.28
------------- -------------
- Diluted $ 0.38 $ 0.28
------------- -------------
Weighted average number of shares outstanding - Basic 28,673,654 28,659,107
- Diluted 29,311,534 29,316,344
The accompanying notes are an integral part of these statements.
4
5
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month period ended
March 31,
---------------------------
2001 2000
--------- ---------
(Unaudited)
(Dollars in thousands)
Net income $ 13,006 $ 9,487
--------- ---------
Other comprehensive income, before tax:
Unrealized gains (losses):
Cash flow hedges (1,991) --
--------- ---------
Investment securities:
Arising during period 8,868 (1,886)
Less: Reclassification adjustments for (gains) losses included
in net income (1,472) 80
--------- ---------
7,396 (1,806)
--------- ---------
5,405 (1,806)
Income tax (expense) benefit related to items of other comprehensive income (2,108) 704
--------- ---------
3,297 (1,102)
Cumulative effect from change in accounting principle,
net of income taxes of $745 1,166 --
--------- ---------
Other comprehensive income (loss), net of tax 4,463 (1,102)
--------- ---------
Comprehensive income, net of tax $ 17,469 $ 8,385
========= =========
The accompanying notes are an integral part of these statements.
5
6
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month period ended
March 31,
--------------------------
2001 2000
--------- ---------
(Unaudited)
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 13,006 $ 9,487
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,512 1,232
Amortization of premium on investments and mortgage-backed securities, net 80 62
Amortization of servicing rights 3,339 2,316
Provision for loan losses 2,000 1,350
Provision for bad debts in accounts receivable 225 150
(Gain) loss on sales of mortgage-backed and investment securities available for sale (1,472) 80
Unrealized loss on trading securities and derivative instruments 568 63
Increase in mortgage loans held for sale (76,947) (37,885)
Net (increase) decrease in mortgage-backed securities held for trading (13,728) 28,534
Increase in receivables (3,700) (1,225)
Increase in other assets (360) (5,999)
Increase (decrease) in notes payable and other borrowings 34,218 (18,997)
Increase in accounts payable and accrued liabilities 4,938 7,859
Increase in other liabilities 1,085 1,127
--------- ---------
Total adjustments (48,242) (21,333)
--------- ---------
Net cash used in operating activities (35,236) (11,846)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities available for sale (121,228) (58,791)
Proceeds from sales of securities available for sale 140,668 11,440
Principal repayments and redemption of investment securities 106,123 14,537
Proceeds from sales of loans 45,468 19,307
Net originations of loans (181,932) (172,450)
Purchases of FHLB stock, net (428) (4,562)
Acquisition of premises and equipment (1,554) (806)
Acquisition of servicing rights (5,712) (4,666)
--------- ---------
Net cash used in investing activities (18,595) (195,991)
--------- ---------
Cash flows from financing activities:
Increase in deposits - net 63,942 104,354
(Decrease) increase in federal funds purchased (25,000) 10,000
Increase in securities sold under agreements to repurchase - net 64,569 49,509
(Repayments) advances from FHLB, net (96,375) 51,000
Net proceeds from issuance of preferred stock 66,602 --
Proceeds from issuance of common stock 36 8
Cash dividends:
Common stock (1,721) (1,290)
Preferred stock (1,759) (1,409)
--------- ---------
Net cash provided by financing activities 70,294 212,172
--------- ---------
Net increase in cash and cash equivalents 16,463 4,335
Cash and cash equivalents at beginning of period 69,090 65,996
--------- ---------
Cash and cash equivalents at end of period $ 85,553 $ 70,331
========= =========
Cash and cash equivalents include:
Cash and due from banks $ 35,869 $ 34,819
Securities purchased under agreements to resell 30,172 7,017
Time deposits with other banks 4,475 28,495
Federal funds sold 15,037 --
--------- ---------
$ 85,553 $ 70,331
========= =========
The accompanying notes are an integral part of these statements.
6
7
R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION
REPORTING ENTITY
The accompanying unaudited consolidated financial statements include
the accounts of R&G Financial Corporation (the Company), a diversified financial
services company, and its wholly-owned subsidiaries, R&G Mortgage Corp. ("R&G
Mortgage"), a Puerto Rico corporation, R-G Premier Bank of Puerto Rico (the
"Bank"), a commercial bank chartered under the laws of the Commonwealth of
Puerto Rico, and Home & Property Insurance Corp., a Puerto Rico Corporation and
insurance agency.
The Company, currently in its 29th year of operations, operates R&G
Mortgage, which is engaged primarily in the business of originating FHA-insured,
VA- guaranteed, and privately insured first and second mortgage loans on
residential real estate. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.
R&G Mortgage is also engaged in the business of originating FHA
insured, VA guaranteed and privately insured first and second mortgage loans on
residential real estate (1 to 4 families), including B and C credit quality
loans, through its wholly-owned subsidiary, Mortgage Store of Puerto Rico.
The Company also operates the Bank, which provides a full range of
banking services, including residential, commercial and personal loans and a
diversified range of deposit products through twenty-four branches located
mainly in the northeastern part of the Commonwealth of Puerto Rico. The Bank
also provides private banking and trust and other financial services to its
customers. The Bank is subject to the regulations of certain federal and local
agencies, and undergoes periodic examinations by those regulatory agencies.
The 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 (1 to 4 families) in the States of New York, New Jersey,
Connecticut, North Carolina and Florida, through its wholly-owned subsidiary,
Continental Capital Corporation ("Continental Capital").
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal and recurring adjustments) necessary for a fair
presentation of the Company's financial condition as of March 31, 2001 and the
results of operations and changes in its cash flows for the three months ended
March 31, 2001 and 2000.
The results of operations for the three month periods ended March 31,
2001 are not necessarily indicative of the results to be expected for the year
ending December 31, 2001. The unaudited
7
8
consolidated financial statements and notes thereto should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 2000.
BASIS OF CONSOLIDATION
All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Upon the
adoption of this Statement, the Company 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.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND LIABILITIES.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Liabilities - A Replacement of SFAS 125." This Statement revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
provisions of SFAS 125 without reconsideration. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. Management believes that the adoption of the new standards
will not have a significant effect on the financial statements of the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 consolidated
statement of cash flows to conform with the 2001 financial statement
presentation.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income by
the weighted average number of shares of common stock outstanding. Outstanding
stock options granted in connection with the Company's Stock Option Plan are
included in the weighted average number of shares for purposes of the diluted
earnings per share computation.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value. Expected maturities of debt securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
8
9
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
GNMA certificates $ 27,959,398 $ 12,038,040
FHLMC certificates 74,250,751 --
------------- -------------
$ 102,210,149 $ 12,038,040
============= =============
9
10
March 31, 2001 December 31, 2000
-------------------------------- --------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- -------------- --------------
(Unaudited)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
CMO residuals (interest only), interest only strips (IO's)
and other mortgage-backed securities $ 21,360,052 $ 23,285,695 $ 21,398,077 $ 23,227,026
-------------- -------------- -------------- --------------
FNMA certificates:
Due from five to ten years 585,573 592,893 633,552 633,552
Due over ten years 201,790,782 203,856,070 98,779,069 99,968,168
-------------- -------------- -------------- --------------
202,376,355 204,448,963 99,412,621 100,601,720
-------------- -------------- -------------- --------------
FHLMC certificates:
Due within one year 10,160 10,160 13,395 13,395
Due from one to five years 120,718 120,305 131,526 129,956
Due from five to ten years 1,510,485 1,528,603 1,587,103 1,587,034
Due over ten years 247,693,447 250,485,187 434,864,554 437,226,389
-------------- -------------- -------------- --------------
249,334,810 252,144,255 436,596,578 438,956,774
-------------- -------------- -------------- --------------
GNMA certificates:
Due from one to five years 50,733 50,695 25,582 25,502
Due from five to ten years 9,986,301 9,957,394 10,491,790 10,419,318
Due over ten years 558,349,400 544,436,481 584,419,215 576,869,337
-------------- -------------- -------------- --------------
568,386,433 564,444,569 594,936,587 587,314,157
-------------- -------------- -------------- --------------
1,041,457,650 1,044,323,481 1,152,343,863 1,150,099,677
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Government and Agencies securities:
Due within one year 6,300,000 6,310,390 8,500,000 8,446,450
Due from one to five years 137,745,706 139,005,675 192,762,585 193,298,396
Due from five to ten years 198,836,533 200,653,134 114,881,388 115,351,548
-------------- -------------- -------------- --------------
342,882,239 345,969,199 316,143,973 317,096,394
-------------- -------------- -------------- --------------
Corporate debt obligations
Due from one to five years 13,308,927 13,564,121 5,097,519 5,201,699
-------------- -------------- -------------- --------------
FHLB stock 46,401,467 46,401,467 45,973,167 45,973,167
-------------- -------------- -------------- --------------
402,592,633 405,934,787 367,214,659 368,271,260
-------------- -------------- -------------- --------------
$1,444,050,283 $1,450,258,268 $1,519,558,522 $1,518,370,937
============== ============== ============== ==============
On January 1, 2001, the Company reclassified mortgage-backed securities available for sale with a fair value of
$75.9 million to hold for trading. Upon transfer, the Company recognized a gain of approximately $833,000.
10
11
March 31, 2001 December 31, 2000
-------------------------------- --------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- -------------- --------------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
GNMA certificates:
Due within one year $ -- $ -- $ 2,435 $ 2,611
Due from one to five years -- --
Due from five to ten years 8,366,441 8,139,690 8,864,274 8,605,749
Due over ten years 1,823,260 1,758,991 1,844,978 1,765,812
-------------- -------------- -------------- --------------
10,189,701 9,898,681 10,711,687 10,374,172
-------------- -------------- -------------- --------------
FNMA certificates:
Due over ten years 8,693,152 8,950,676 8,946,973 9,145,168
-------------- -------------- -------------- --------------
FHLMC certificates:
Due over ten years 151,784 147,677 159,544 153,675
-------------- -------------- -------------- --------------
19,034,637 18,997,034 19,818,204 19,673,015
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES HELD TO MATURITY:
Puerto Rico Government and Agencies obligations:
Due from one to five years 1,928,000 1,928,000 1,948,000 1,948,000
Due from five to ten years 1,739,579 1,739,579 1,755,389 1,755,389
-------------- -------------- -------------- --------------
3,667,579 3,667,579 3,703,389 3,703,389
-------------- -------------- -------------- --------------
$ 22,702,216 $ 22,664,613 $ 23,521,593 $ 23,376,404
============== ============== ============== ==============
In addition to the investment and mortgage-backed securities pledged on
repurchase agreements and reported as pledged assets in the statement of
financial condition, at March 31, 2001 the Company had investment securities
pledged as collateral on repurchase agreements where the counterparties do not
have the right to sell or repledge the assets as follows:
Carrying Amount
---------------
Mortgage-backed and investment securities available for sale,
at fair value $322,740,716
Mortgage-backed securities held to maturity, at amortized
cost 1,983,930
-------------
$324,724,646
=============
11
12
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
March 31, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Real estate loans:
Residential - first mortgage $ 1,000,971,713 $ 999,321,698
Residential - second mortgage 30,003,535 27,419,145
Land 7,027,929 6,049,179
Construction 241,386,760 198,958,342
Commercial 311,071,210 304,104,485
--------------- ---------------
1,590,461,147 1,535,852,849
Undisbursed portion of loans in process (166,765,491) (125,428,976)
Net deferred loan costs 1,777,120 908,553
--------------- ---------------
1,425,472,776 1,411,332,426
--------------- ---------------
Other loans:
Commercial 76,399,868 59,120,394
Consumer:
Secured by deposits 28,764,256 26,925,836
Secured by real estate 100,039,368 100,357,019
Other 44,304,222 45,563,186
Unamortized discount (317,162) (338,103)
Unearned interest (85,725) (85,055)
--------------- ---------------
249,104,827 231,543,277
--------------- ---------------
Total loans 1,674,577,603 1,642,875,703
Allowance for loan losses (12,069,831) (11,599,643)
--------------- ---------------
$ 1,662,507,772 $ 1,631,276,069
=============== ===============
The changes in the allowance for loan losses follow:
Three months ended
March 31,
-------------------------
2001 2000
-------- --------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 11,600 $ 8,971
Provision for loan losses 2,000 1,350
Loans charged-off (1,641) (1,027)
Recoveries 111 226
-------- --------
Balance, end of period $ 12,070 $ 9,520
======== ========
12
13
The following table sets forth the amounts and categories of R&G
Financial's non-performing assets at the dates indicated.
March 31, December 31,
2001 2000
(Unaudited)
-------------------------------
(Dollars in thousands)
Non-accruing loans:
Residential real estate $ 87,532 $ 79,234
Residential construction 985 487
Commercial real estate 14,286 11,881
Commercial business 3,222 1,414
Consumer unsecured 444 1,185
-------------------------------
Total 106,469 94,202
-------------------------------
Accruing loans greater than 90 days delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 540 420
Consumer 242 360
-------------------------------
Total accruing loans greater than
90 days delinquent 782 780
-------------------------------
Total non-performing loans 107,251 94,982
-------------------------------
Real estate owned, net of reserves 9,463 9,056
Other repossessed assets 527 584
-------------------------------
9,990 9,640
-------------------------------
Total non-performing assets $ 117,241 $ 104,621
-------------------------------
Total non-performing loans as a
percentage of total loans(1) 5.83% 5.38%
-------------------------------
Total non-performing assets as a
percentage of total assets 3.19% 2.96%
-------------------------------
Allowance for loan losses as a percentage
of total non-performing loans(2) 11.25% 12.21%
-------------------------------
Allowance for loan losses as a percentage
of total loans outstanding(2) 0.66% 0.66%
-------------------------------
Net charge-offs to average loans
outstanding 0.35% 0.17%
-------------------------------
----------------------------
(1) The increase in the ratio was partially caused by significant loan
securitizations during the last two quarters of 2000 and the first quarter of
2001, which reduced the amount of loans held in portfolio which are considered
in the calculation at the ratio. Without giving effect to loan securitizations,
as of March 31, 2001 and December 31, 2000, the ratio of non-performing loans to
total loans would have been 4.60% and 4.37%, respectively.
(2) Because of the nature of the collateral, R&G Financial'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 March 31, 2001 and
December 31, 2000 would have been 1.49% and 61.2%, respectively, and 1.57% and
73.7%, respectively.
13
14
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
For the three month
period ended March 31,
2001 2000
------------ ------------
(Unaudited)
Balance at beginning of period $ 95,078,530 $ 84,252,506
Rights originated 5,278,107 2,275,134
Rights purchased 433,468 2,391,309
Scheduled amortization (2,663,712) (2,315,595)
Unscheduled amortization (675,000) --
------------ ------------
Balance at end of period $ 97,451,393 $ 86,603,354
============ ============
The portion of the Company's mortgage loans servicing portfolio
consisting of the servicing asset that was originated by the Company prior to
the adoption of SFAS No. 122 is not reflected as an asset on the Company's
Consolidated Financial Statements, and is not subject to amortization or
impairment.
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
14
15
March 31, December 31,
2001 2000
----------- -----------
(Unaudited)
(Dollars in Thousands)
Passbook savings $ 120,259 $ 116,776
----------- -----------
NOW accounts 46,163 43,271
Super NOW accounts 105,528 97,172
Regular checking accounts
(non-interest bearing) 68,090 70,760
Commercial checking accounts
(non-interest bearing) 132,720 101,178
----------- -----------
352,501 312,381
----------- -----------
Certificates of deposit:
Under $100,000 520,399 489,221
$100,000 and over 738,288 749,081
----------- -----------
1,258,687 1,238,302
----------- -----------
Accrued interest payable 8,557 8,603
----------- -----------
$ 1,740,004 $ 1,676,062
=========== ===========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of March 31, 2001, the Company had open commitments to issue GNMA
certificates of approximately $77.6 million.
COMMITMENTS TO SELL MORTGAGE LOANS
As of March 31, 2001, the Company had commitments to sell mortgage
loans to third party investors amounting to approximately $19.1 million.
LEASE COMMITMENTS
The Company is obligated under several noncancellable leases for
office space and equipment rentals, all of which are accounted for as
operating leases. The leases expire at various dates with options for
renewals.
OTHER
At March 31, 2001, the Company is liable under limited recourse
provisions resulting from the sale of loans to several investors, principally
FHLMC. The principal balance of these loans, which are serviced by the Company,
amounts to approximately $567.8 million at March 31, 2001. Liability, if any,
under the recourse provisions at March 31, 2001 is estimated by management to
be insignificant.
15
16
NOTE 8 - SUPPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other administrative and general expenses are shown
in the Consolidated Statements of Income net of direct loan origination costs.
Direct loan origination costs are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold, or amortized as a yield adjustment to interest income on loans
held for investment.
Total employee costs and other expenses before capitalization follows:
(Unaudited)
Three month period ended
March 31,
2001 2000
------------ ------------
Employee costs $ 12,697,825 $ 11,110,703
============ ============
Other administrative and general expenses $ 12,715,609 $ 10,497,469
============ ============
16
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
R&G Financial Corporation (the "Company") is a diversified financial
holding company that, through its its wholly-owned subsidiaries, is engaged in
mortgage banking, banking and insurance activities. Its mortgage banking
activities include the origination, purchase, sale and servicing of mortgage
loans on single-family residences, the issuance and sale of various types of
mortgage-backed securities, the holding of mortgage loans, mortgage-backed
securities and other investment securities for sale or investment, and the
purchase and sale of servicing rights associated with such mortgage loans and,
to a lesser extent, the origination of construction loans and mortgage loans
secured by income producing real estate and land (the "mortgage banking
business").
The Company is also engaged in providing a full range of banking
services, including commercial banking services, corporate and construction
lending, consumer lending and credit cards, offering a diversified range of
deposit products and, to a lesser extent, trust and investment services through
its private banking department.
R&G Financial is currently in its 29th year of operations. The Company
is the second largest mortgage loans originator and servicer of mortgage loans
on single family residences in Puerto Rico. R&G Financial's mortgage servicing
portfolio increased to approximately $6.8 billion as of March 31, 2001, from
$6.3 billion as of the same date a year ago, an increase of 7.5%. R&G
Financial's strategy is to increase the size of its mortgage servicing portfolio
by relying principally on internal loan originations.
As part of its strategy to maximize net interest income, R&G Financial
maintains a substantial portfolio of mortgage-backed and investment securities.
At March 31, 2001, the Company held securities available for sale with a fair
market value of $1.45 billion, which included $1.0 billion of mortgage-backed
securities of which $564.4 million consisted primarily of Puerto Rico GNMA
securities, the interest on which is tax-exempt to the Company. These securities
are generally held by the Company for longer periods prior to sale in order to
maximize the tax-exempt interest received thereon.
A substantial portion of R&G Financial's total mortgage loan
originations has consistently been comprised of refinance loans. R&G Financial's
future results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity. However, the Company believes
that refinancing activity is less sensitive to interest rate changes in Puerto
Rico than in the mainland United States because a significant amount of
refinance loans are made for debt consolidation purposes.
R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as Loans
Receivable.
FINANCIAL CONDITION
At March 31, 2001, total assets amounted to $3.7 billion, as compared
to $3.1 billion at March 31, 2000. The $549.6 million or 17.6% increase in total
assets between the comparable periods was primarily the result of a $425.9
million or 41.6% increase in mortgage-backed and investment securities available
for sale, an $87.2 million or 582.9% increase in mortgage-backed securities held
for trading and a $54.5 million or 55.7% increase in mortgage loans held for
sale, which more than offset a $52.3 million or 3.0% decline in loans
receivable, net.
17
18
At March 31, 2001, total deposits totaled $1.7 billion, an increase of
$305.1 million or 21.3% when compared to March 31, 2000. In addition, at March
31, 2001, R&G Financial had $1.5 billion of borrowings (consisting of securities
sold under agreements to repurchase, notes payable, FHLB advances and other
borrowings), as compared to $1.4 billion at March 31, 2000. R&G Financial
utilized deposits (primarily certificates of deposits) and FHLB advances to fund
its growth during the period.
At March 31, 2001, R&G Financial's allowance for loan losses totaled
$12.1 million, which represented a $470,000 or 4.1% increase from the level
maintained at December 31, 2000. At March 31, 2001, R&G Financial's allowance
represented approximately 0.66% of the total loan portfolio and 11.25% of total
non-performing loans. However, excluding R&G Financial's residential loan
portfolio, which has minimal charge-off experience, the allowance for loan
losses to total loans and to total non-performing loans would have been 1.49%
and 61.2%, respectively, at March 31, 2001. The increase in the allowance for
loan losses reflects the increase in R&G Financial's commercial real estate and
construction loan portfolio as well as the increase in R&G Financial
non-performing loans during the year.
Non-performing loans amounted to $107.3 million at March 31, 2001, an
increase of $47.9 million when compared to $59.4 million at December 31, 1999.
However, $40.1 million or 84% of such increase consisted of residential mortgage
loans, which resulted to a large extent from increased delays over the period in
the foreclosure process in Puerto Rico. Because of the nature of the real estate
collateral, R&G Financial has historically experienced a low level of loan
charge-offs. R&G Financial's aggregate charge-offs amounted to 0.35% during the
first quarter of 2001, 0.17% during 2000 and 0.25% during 1999. Although loan
delinquencies have historically been higher in Puerto Rico than in the United
States, actual foreclosures and any resulting loan charge-offs have historically
been lower than in the United States. While the ratio of non-performing loans to
total loans increased from 3.66% to 5.38% from December 31, 1999 to December 31,
2000 and to 5.83% at March 31, 2001, the increase in the ratio was made larger
than it would otherwise have been due to significant loan securitizations during
the last two quarters of 2000 and the first quarter of 2001, which reduced the
amount of loans considered in the calculation of the ratio. Without giving
effect to loan securitizations, during the three months ended March 31, 2001 and
the year ended December 31, 2000, the ratio of non-performing loans would have
been 4.60% and 4.37%, respectively.
Stockholders' equity increased from $308.8 million at December 31, 2000
to $389.5 million at March 31, 2001. The $80.6 million or 26.1% increase was due
primarily to net income recognized during the period.
RESULTS OF OPERATIONS
During the three months ended March 31, 2001, R&G Financial reported
net income before the cumulative effect of a change in accounting principle of
$13.3 million or $0.39 of earnings per diluted share, compared to $9.5 million
or $0.28 of earnings per diluted share for the comparative three month period
ended March 31, 2000.
Net interest income increased by $1.4 million or 8% during the
comparable periods to $18.2 million, primarily due to an increase in the average
balance of interest-earning assets, which was partially offset by a 25 basis
point decline in the net interest margin from 2.43% to 2.18%. With interest
rates currently declining, R&G Financial expects a gradual improvement in its
net interest margin, as evidenced by the two basis point improvement when
compared with the year ended December 31, 2000. The provision for loan losses
amounted to $2.0 million during the three months ended March 31, 2001, a 48%
increase over the prior comparable period, as R&G Financial increased it general
reserves to reflect the expected continued growth in commercial lending, which
involves greater credit risk than residential lending.
18
19
R&G Financial also experienced an increase in non-interest income
during the three months ended March 31, 2001 over the comparable period. Net
gain on sale of loans increased significantly, by $7.7 million or 105% over the
prior comparable period, which was due both to the volume of loans originated
and sold as well as the increased profits made on loans sold. Loan
administration and servicing fees also increased by $412,000 or 5% over the
comparable periods, due to the growth in the loan servicing portfolio.
Total expenses increased by $3.3 million or 16% during the three months
ended March 31, 2001 over the comparable period, primarily due to a $2.3 million
or 24% increase in other administrative and general expenses, primarily due to
rights, increased amortization of servicing and increased advertising expenses
associated with increased loan production.
INTEREST RATE RISK MANAGEMENT
The following table summarizes the anticipated maturities or repricing
or R&G Financial's interest-earning assets and interest-bearing liabilities as
of March 31, 2001, based on the information and assumptions set forth in the
notes below. For purposes of this presentation, the interest earning components
of loans held for sale and mortgage-backed securities held in connection with
the Company's mortgage banking business, as well as all securities held for
trading, are assumed to mature within one year. In addition, investments held
by the Company which have call features are presented according to their
contractual maturity date.
19
20
Within Four to More Than More Than
Three Twelve One Year to Three Years Over Five
(Dollars in Thousands) Months Months Three Years to Five Years Years Total
------------------------------------------------------------------------------------
Interest-earning assets(1):
Loans receivable:
Residential real estate loans $ 35,164 $ 99,035 $ 222,306 $ 172,392 $ 509,106 $1,038,003
Construction loans 48,876 11,498 14,247 -- -- 74,621
Commercial real estate loans 311,071 -- -- -- -- 311,071
Consumer loans 41,604 38,187 53,431 25,239 14,647 173,108
Commercial business loans 56,229 8,733 9,669 1,705 64 76,400
Mortgage loans held for sale 26,987 19,397 43,642 33,786 28,695 152,507
Mortgage-backed securities(2)(3) 57,747 604,815 109,910 89,628 304,098 1,166,198
Investment Securities(3) 156,765 160,680 82,026 7,007 3,124 409,602
Other interest-earning assets(4) 49,684 -- -- -- -- 49,684
------------------------------------------------------------------------------------
Total $ 784,127 $ 942,345 $ 535,231 $ 329,757 $ 859,734 $3,451,194
====================================================================================
Interest bearing liabilities:
Deposits(5)
NOW and Super NOW accounts $ 7,725 $ 21,216 $ 23,322 $ 18,891 $ 80,537 $ 151,691
Passbook savings accounts 3,006 8,718 21,707 17,365 69,463 120,259
Regular and commercial checking 10,038 28,110 30,904 25,033 106,725 200,810
Certificates of deposit 411,790 593,374 92,442 154,159 6,922 1,258,687
FHLB advances 70,000 83,000 78,125 177,500 -- 408,625
Securities sold under agreements to
repurchase(6) 518,615 35,503 -- 103,200 235,000 892,318
Other borrowings(7) 34,332 134,084 13,500 -- -- 181,916
------------------------------------------------------------------------------------
Total 1,055,506 904,005 260,000 496,148 498,647 3,214,306
------------------------------------------------------------------------------------
Effect of hedging instruments (380,000) 25,000 210,000 65,000 80,000 --
------------------------------------------------------------------------------------
$ 675,506 $ 929,005 $ 470,000 $ 561,148 $ 578,647 $236,888
====================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 108,621 $ 13,340 $ 65,231 $ (231,391) $ 281,087 $ 236,888
====================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 108,621 $ 121,961 $ 187,192 $ (44,199) $ 236,888
===================================================================================-
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets 2.96% 3.32% 5.10% (1.20)% 6.45%
====================================================================================
(footnotes on following page)
20
21
----------------------
(1) Adjustable-rate loans are included in the period in which interest
rates are next scheduled to adjust rather that in the period in which
they are due, and fixed-rate loans are included in the periods in which
they are scheduled to be repaid, based on scheduled amortization, in
each case as adjusted to take into account estimated prepayments.
(2) Reflects estimated prepayments in the current interest rate
environment.
(3) Includes securities held for trading, available for sale and held to
maturity.
(4) Includes securities purchased under agreement to resell, time deposits
with other banks and federal funds sold.
(5) Does not include non-interest-bearing deposit accounts.
(6) Includes federal funds purchased.
(7) Comprised of warehousing lines, notes payable and other borrowings.
----------------------
As of March 31, 2001, the Company had a one year positive gap of
approximately $122.0 million, which constituted 3.32% of total assets at such
date, compared to a negative gap of approximately $477.8 million or 13.5%, of
total assets at December 31, 2000. R&G Financial's negative gap within one year
at December 31, 2000 was due primarily to its large fixed-rate mortgage loans
receivable portfolio held for investment and a portion of its portfolio of FHLB
notes and other US agency securities which have call features but were not
likely to be exercised by such agencies due to the actual interest rate
environment. During the quarter ended March 31, 2001, the Company extended the
maturity dates of certain borrowings into longer-term maturities at lower rates
to take advantage of reductions in interest rates during the quarter. In
addition, the Company entered into certain derivative instruments and increased
its portfolio of investment securities held for trading, reducing its gap
exposure. While the above table presents the Company's loans receivable
portfolio held for investment purposes according to its maturity date, from time
to time the Company may negotiate special transactions with FHLMC and/or FNMA or
other third party investors for the sale of such loans. There can be no
assurance, however, that the Company will be successful in consummating any such
transactions.
The following table presents for the periods indicated R&G Financial's
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for R&G Mortgage and average daily
balances for the Bank in each case during the periods presented.
21
22
For the three month period ended March 31,
2001 2000
--------------------------------------------------------------------------------
Average Yield / Average Yield /
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------
Interest-Earning Assets:
Cash and cash equivalents(1) $ 44,287 609 5.50 $12,746 186 5.84
Investment securities available for sale 349,735 5,939 6.79 253,361 4,374 6.91
Investment securities held to maturity 3,687 53 5.75 5,437 79 5.81
Mortgage-backed securities held for trading 92,657 1,711 7.39 24,387 379 6.22
Mortgage-backed securities available for sale 1,019,067 16,064 6.31 694,432 10,624 6.12
Mortgage-backed securities held to maturity 19,440 295 6.07 22,822 344 6.03
Loans receivable, net (2) 1,759,195 37,428 8.51 1,714,664 36,729 8.57
FHLB of New York Stock 46,240 770 6.66 33,865 568 6.71
--------------------------------------------------------------------------------
Total interest-earning assets 3,334,308 $ 62,869 7.54% 2,761,714 $ 53,283 7.72%
--------------------------------------------------------------------------------
Non-interest-earning assets 271,150 255,200
--------------------------------------------------------------------------------
Total assets $3,605,458 $3,016,914
================================================================================
Interest-Bearing Liabilities:
Deposits $1,688,221 23,076 5.47 $1,375,733 17,026 4.95
Securities sold under agreements to
repurchase (3) 844,030 12,556 5.95 691,818 10,535 6.09
Notes payable 178,107 2,044 4.59 215,956 3,365 6.23
Other borrowings(4) 487,918 7,026 5.76 379,703 5,597 5.90
--------------------------------------------------------------------------------
Total interest-bearing liabilities 3,198,276 $ 44,702 5.59% 2,663,210 $ 36,523 5.49%
--------------------------------------------------------------------------------
Non-interest-bearing liabilities 58,033 81,322
--------------------------------------------------------------------------------
Total liabilities 3,256,309 2,744,532
--------------------------------------------------------------------------------
Stockholders' equity 349,149 272,382
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,605,458 $3,016,914
================================================================================
Net interest income; interest rate spread (5) $ 18,167 1.95% $ 16,760 2.23%
--------------------- --------------------
Net interest margin 2.18% 2.43%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 104.25% 103.70%
====== ======
22
(footnotes on page 23)
23
----------------------
(1) Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and federal funds
sold.
(2) Includes mortgage loans held for sale and non-accrual loans.
(3) Includes federal funds purchased.
(4) Comprised of long-term debt, advances from the FHLB of New York and
other borrowings.
(5) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-earning
assets.
----------------------
MORTGAGE LOAN SERVICING
The following table sets forth certain information regarding the
mortgage loan servicing portfolio of R&G Financial for the periods indicated.
At or for the three months ended
March 31,
--------------------------------
2001 2000
----------- -----------
(Dollars in Thousands)
Composition of Servicing Portfolio at period end:
GNMA $ 3,018,637 $ 2,941,361
FNMA/FHLMC 2,075,226 1,512,169
Other mortgage loans(3) 1,697,698 1,866,477
----------- -----------
Total servicing portfolio(3) $ 6,791,561 $ 6,320,007
=========== ===========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 6,634,059 $ 6,177,511
Add: Loan originations and purchases 393,512 341,284
Servicing of portfolio loans acquired 1,361 --
Less: Sale of servicing rights(1) (41,249) (36,727)
Run-offs(2) (196,122) (162,061)
----------- -----------
Ending servicing portfolio(3) $ 6,791,561 $ 6,320,007
=========== ===========
Number of loans serviced 111,925 108,727
Average loan size $ 61 $ 58
Average servicing fee rate 0.50% 0.53%
--------------------
(1) Corresponds to loans sold, servicing released, by Continental Capital.
23
24
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) At the dates shown, included $986.2 million and $1.2 billion of loans
serviced for the Bank, respectively, which constituted 14.5% and 18.4%
of the total servicing portfolio, respectively.
--------------------
Substantially all of the mortgage loans in R&G Financial's servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At March 31, 2001 less than 7% of the Company's
mortgage servicing portfolio was related to mortgages secured by real property
located outside Puerto Rico.
The Company reduces the sensitivity of its servicing income to
increases in prepayment rates through a strong retail origination network that
has increased or maintained the size of R&G Financial's servicing portfolio even
during periods of high prepayments. In addition, a substantial portion of the
Company's servicing portfolio consists of tax-exempt FHA/VA mortgage loans which
carry lower interest rates than those on conventional loans, which tends to
reduce risks related to R&G Financial's servicing portfolio. During the quarter
ended March 31, 2001 the Company recognized $675,000 unscheduled amortization of
mortgage servicing rights.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At March 31, 2001, the Company had $157.0 million in borrowing capacity
under unused warehousing and other lines of credit, $230.7 million in borrowings
capacity under unused lines of credit with the FHLB of New York and $40 million
under unused fed funds lines of credit. The Company has generally not relied
upon brokered deposits as a source of liquidity.
At March 31, 2001, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans (including unused lines of
credit) of $213.8 million. Certificates of deposit which are scheduled to mature
within one year totaled $1.0 billion at March 31, 2001, and borrowings that are
scheduled to mature within the same period amounted to $831.5 million. The
Company anticipates that it will have sufficient funds available to meet its
current loan commitments.
24
25
CAPITAL RESOURCES - The FDIC's capital regulations establish a minimum
3.0 % Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier 1 leverage ratio for such other banks
from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At March 31,
2000, the Bank met each of its capital requirements, with Tier 1 leverage
capital, Tier 1 risk-based capital and total risk-based capital ratios of 7.05%,
13.13% and 13.88%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of government legislation and regulation (which changes
from time to time and over which the Company has no control), and other risks
detailed in this Form 10-Q and in the Company's other Securities and Exchange
Commission
25
26
("SEC") filings. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the SEC.
26
27
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risks at December
31, 2000 are presented in Item 7A of the Company's Annual report on Form 10-K.
Information at March 31, 2001 is presented on page 19 of this Report. Management
believes there have been no material changes in the Company's market risk since
December 31, 2000.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
ITEM 2: Changes in Securities
Not applicable
ITEM 3: Defaults Upon Senior Securities
Not applicable
ITEM 4: Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5: Other Information
Not applicable.
ITEM 6: Exhibits and Reports on Form 8-K
a) Exhibits
None
b) On February 16, 2001 the Company filed a Form 8-K
Report to make full disclosure of certain financial information and other data
included in a Form S-3 Registration Statement under the Securities Act of 1933
filed with the SEC on such date, pursuant to the offering by the Company of its
Non-cumulative Perpetual Monthly Income Preferred Stock, Series C (the "Series C
Preferred Stock"). Such Registration Statement contained certain financial
information and other data as of December 31, 2000 that had not been previously
disclosed to the public. The Company completed the offering of its Series C
Preferred Stock on March 8, 2001.
27
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: May 14, 2001 By: /s/ VICTOR J. GALAN
---------------------------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JOSEPH R. SANDOVAL
---------------------------------------
Joseph R. Sandoval
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28