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 SEPTEMBER 30, 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
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(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
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(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 September 30, 2001:
14,693,700 (Does not include 16,233,056 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
1
R&G FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Consolidated Financial Statements .......................................................................3
Consolidated Statements of Financial Condition as of
September 30, 2001 (Unaudited) and December 31, 2000............................................3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2001 and 2000 (Unaudited)............................................4
Consolidated Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 2001 and 2000 (Unaudited)............................................5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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 .......................................................................28
Signatures .............................................................................................28
2
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,382,343 $ 43,466,268
Money market investments:
Securities purchased under agreements to resell 81,627,002 --
Time deposits with other banks -- 25,623,696
Federal funds sold -- --
Mortgage loans held for sale, at lower of cost or market 238,605,309 95,668,320
Mortgage-backed securities held for trading, at fair value 68,322,228 --
Trading securities pledged on repurchase agreements, at fair value 31,358,317 12,038,040
Mortgage-backed and investment securities available for sale, at fair value 1,325,450,128 1,044,164,433
Available for sale securities pledged on repurchase agreements 545,359,308 474,206,504
Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2001 - $56,198,856; 2000 - $5,111,404) 55,994,364 5,121,108
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2001 - $10,624,347; 2000 - $18,265,000) 10,670,100 18,400,485
Loans receivable, net 1,722,636,490 1,631,276,069
Accounts receivable, including advances to investors, net 21,733,763 16,107,136
Accrued interest receivable 34,035,627 28,919,237
Servicing asset 103,288,924 95,078,530
Premises and equipment 21,773,282 20,144,726
Other assets 31,807,209 29,229,655
--------------- ---------------
$ 4,298,044,394 $ 3,539,444,207
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,874,685,401 $ 1,676,062,163
Federal funds purchased 10,000,000 25,000,000
Securities sold under agreements to repurchase 1,184,651,536 827,749,494
Notes payable 200,638,507 138,857,562
Advances from FHLB 478,625,000 505,000,000
Other borrowings 8,208,535 8,839,770
Accounts payable and accrued liabilities 78,644,198 43,614,238
Other liabilities 9,126,105 5,485,330
--------------- ---------------
3,844,579,282 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, 16,233,056
issued and outstanding in 2001 (2000-18,440,556) 162,331 184,406
Class B - $.01 par value, 40,000,000 shares authorized, 14,693,700
issued and outstanding in 2001 (2000-10,230,029) 146,937 102,300
Additional paid-in capital 69,771,033 40,800,652
Retained earnings 219,034,454 186,028,611
Capital reserves of the Bank 7,444,108 7,444,108
Accumulated other comprehensive income (loss) 12,906,249 (724,427)
--------------- ---------------
453,465,112 308,835,650
--------------- ---------------
$ 4,298,044,394 $ 3,539,444,207
=============== ===============
The accompanying notes are an integral part of these statements.
3
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Nine month
period ended period ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
Interest income:
Loans $ 40,509 42,337 114,292 $ 119,115
Money market and other investments 8,075 6,676 23,683 17,946
Mortgage-backed securities 22,792 11,888 60,761 34,834
------------ ------------ ------------ ------------
Total interest income 71,376 60,901 198,736 171,895
------------ ------------ ------------ ------------
Interest expense:
Deposits 22,242 21,439 67,937 57,496
Securities sold under agreements to repurchase 12,112 13,348 36,628 35,597
Notes payable 3,523 2,708 8,545 8,972
Other 5,603 7,528 18,142 20,459
------------ ------------ ------------ ------------
Total interest expense 43,480 45,023 131,252 122,524
------------ ------------ ------------ ------------
Net interest income 27,896 15,878 67,484 49,371
Provision for loan losses (3,225) (1,500) (7,325) (4,350)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 24,671 14,378 60,159 45,021
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 17,314 11,407 44,301 28,220
Loan administration and servicing fees 8,339 7,730 25,031 22,720
Service charges, fees and other 3,089 1,784 8,994 5,209
------------ ------------ ------------ ------------
28,742 20,921 78,326 56,149
------------ ------------ ------------ ------------
Total revenues 53,413 35,299 138,485 101,170
------------ ------------ ------------ ------------
Operating expenses:
Employee compensation and benefits 8,991 6,748 23,840 19,952
Office occupancy and equipment 4,270 3,375 12,291 9,952
Other administrative and general 16,716 10,260 41,040 30,381
------------ ------------ ------------ ------------
29,977 20,383 77,171 60,285
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect from
change in accounting principle 23,436 14,916 61,314 40,885
------------ ------------ ------------ ------------
Income tax expense:
Current 4,795 2,712 12,006 10,057
Deferred 1,236 842 3,136 (729)
------------ ------------ ------------ ------------
6,031 3,554 15,142 9,328
------------ ------------ ------------ ------------
Income before cumulative effect
from change in accounting principle 17,405 11,362 46,172 31,557
Cumulative effect from change in accounting principle,
net of income tax benefit of $206 -- -- (323) --
------------ ------------ ------------ ------------
Net income $ 17,405 11,362 $ 45,849 $ 31,557
============ ============ ============ ============
Earnings per common share before cumulative
effect from change in accounting principle - Basic $ 0.48 $ 0.35 $ 1.32 $ 0.95
------------ ------------ ------------ ------------
Earnings per common share before cumulative
effect from change in accounting principle - Diluted $ 0.46 $ 0.34 $ 1.29 $ 0.93
------------ ------------ ------------ ------------
Earnings per common share - Basic $ 0.48 $ 0.35 $ 1.31 $ 0.95
------------ ------------ ------------ ------------
- Diluted $ 0.46 $ 0.34 $ 1.28 $ 0.93
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic 30,895,298 28,663,526 29,453,062 28,660,813
- Diluted 31,639,707 29,314,874 30,181,107 29,314,830
The accompanying notes are an integral part of these statements.
4
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month Nine month
period ended period ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
Net income $ 17,405 $ 11,362 $ 45,849 $ 31,557
--------- --------- --------- ---------
Other comprehensive income, before tax:
Unrealized gains (losses):
Cash flow hedges (5,216) -- (10,958) --
--------- --------- --------- ---------
Investment securities:
Arising during period 27,277 3,784 32,324 1,400
Less: Reclassification adjustments for (gains) losses
included in net income 312 176 (932) 329
--------- --------- --------- ---------
27,589 3,960 31,392 1,729
--------- --------- --------- ---------
22,373 3,960 20,434 1,729
Income tax expense related to items of other comprehensive
income (8,725) (1,544) (7,969) (674)
--------- --------- --------- ---------
13,648 2,416 12,465 1,055
Cumulative effect from change in accounting principle,
net of income taxes of $745 -- -- 1,166 --
--------- --------- --------- ---------
Other comprehensive income, net of tax 13,648 2,416 13,631 1,055
--------- --------- --------- ---------
Comprehensive income, net of tax $ 31,053 $ 13,778 $ 59,480 $ 32,612
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month period ended
September 30,
---------------------------------
2001 2000
----------- -----------
(Unaudited)
Cash flows from operating activities: (Dollars in thousands)
Net income $ 45,849 $ 31,557
----------- -----------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 4,897 3,792
Amortization of premium on investment securities, net 349 203
Amortization and provision for impairment of servicing rights 11,904 7,196
Provision for loan losses 7,325 4,350
Provision for bad debts in accounts receivable 450 370
Gain on sales of loans (793) (125)
(Gain) loss on sales of securities available for sale (932) 328
Unrealized profit on trading securities and derivative instruments, net (554) (6)
Increase in mortgage loans held for sale (200,990) (131,897)
Net (increase) decrease in mortgage-backed securities held for trading (8,968) 31,669
Increase in receivables (10,387) (6,264)
Increase in other assets (4,039) (6,051)
Increase in notes payable and other borrowings 96,650 33,117
Increase in accounts payable and accrued liabilities 15,698 18,806
Increase in other liabilities 3,641 1,237
----------- -----------
Total adjustments (85,749) (43,275)
----------- -----------
Net cash used in operating activities (39,900) (11,718)
----------- -----------
Cash flows from investing activities:
Purchases of investment securities (567,260) (107,865)
Proceeds from sales of securities available for sale 205,905 41,057
Principal repayments and redemptions of investment securities 336,375 26,977
Proceeds from sales of loans 91,631 26,469
Net originations of loans (532,983) (382,147)
Purchases of FHLB stock, net (13,847) (7,235)
Acquisition of premises and equipment (5,688) (2,290)
Acquisition of servicing rights (20,114) (13,332)
----------- -----------
Net cash used by investing activities (505,981) (418,366)
----------- -----------
Cash flows from financing activities:
Increase in deposits - net 198,623 251,852
Decrease in federal funds purchased (15,000) (5,000)
Increase in securities sold under agreements to repurchase - net 356,903 106,860
(Repayments) advances from FHLB, net (26,375) 70,250
Payments on term notes (35,500) (5,000)
Proceeds from issuance of preferred stock 66,602 --
Proceeds from issuance of common stock 31,391 40
Cash dividends:
Common stock (5,644) (4,192)
Preferred stock (7,200) (4,228)
----------- -----------
Net cash provided by financing activities 563,800 410,582
----------- -----------
Net increase (decrease) in cash and cash equivalents 17,919 (19,502)
Cash and cash equivalents at beginning of period 69,090 65,996
----------- -----------
Cash and cash equivalents at end of period $ 87,009 $ 46,494
=========== ===========
Cash and cash equivalents include:
Cash and due from banks $ 5,382 $ 27,410
Securities purchased under agreements to resell 81,627 6,163
Time deposits with other banks -- 12,921
Federal funds sold -- --
----------- -----------
$ 87,009 $ 46,494
=========== ===========
The accompanying notes are an integral part of these statements.
6
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, Home & Property Insurance Corp., a Puerto Rico corporation and
insurance agency, and R-G Investments Corporation, a Puerto Rico corporation and
broker-dealer.
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 also originates FHA insured, VA guaranteed and privately
insured first and second mortgage loans on residential real estate (1 to 4
families) 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-five 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 recurring accruals) necessary for a fair presentation of
the Company's financial condition as of September 30, 2001 and the results of
operations and changes in its cash flows for the three and nine months ended
September 30, 2001 and 2000.
The results of operations for the three and nine months periods ended
September 30, 2001 are not necessarily indicative of the results to be expected
for the year ending December 31, 2001. The unaudited 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 financial statements.
7
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial
accounting standards (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.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lives Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that statement. SFAS No. 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of by sale,
abandonment, or in a distribution to owners or is classified as held for sale.
This Statements is effective for fiscal years beginning after December 15, 2001.
Management has determined the impact of this Statement will not have a material
effect on the consolidated financial position or the future results of
operations of the Company.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized but instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Asset
and for Long-Lived Assets to Be Disposed Of or SFAS No. 144 upon adoption.
The Company is required to adopt the provisions of SFAS No. 141
immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
No. 142.
Upon adoption on January 1, 2002, the Company expects to recognize a
gain as the cumulative effect of a change in accounting principle related to
negative goodwill currently existing from an acquisition in prior years of one
of the Company's subsidiaries accounted for under the purchase method of
accounting, however, the amounts involved are not material. The Company expects
to have unamortized goodwill in the amount of $4.6 million, which will be
subject to the transition provisions of SFAS Nos. 141 and 142. Amortization
expense related to goodwill (including that related to negative goodwill) was
$352,000 and $447,000 for the nine months ended September 30, 2001 and for the
year ended December 31, 2000, respectively. Because of the extensive effort
needed to comply with adopting Statement Nos. 141 and 142, it is not practicable
to reasonably estimate the impact, after initial adoption, of these
pronouncements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle
subsequent to January 1, 2002.
8
NOTE 2 - EARNINGS AND DIVIDENDS PER SHARE
Basic earnings per common share for the three and nine month periods
ended September 30, 2001 and 2000 are computed by dividing net income for such
periods by the weighted average number of shares of common stock outstanding
during such periods. The weighted average of 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 (744,409 and 651,348 during the three month periods ended September
30, 2001 and 2000, respectively, and 728,045 and 654,017 during the nine month
periods ended September 30, 2001 and 2000, respectively). No other adjustments
were made to the computation of basic earnings per share to arrive at diluted
earnings per share.
Dividends per share on common stock declared and paid by the Company were as
follows:
Three month Nine month
period ended period ended
September 30, September 30,
---------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- -----
$0.06775 $0.0565 $0.1915 $0.15025
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.
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
GNMA certificates $ 20,286,695 $ 12,038,040
FHLMC certificates 79,393,850 --
------------ ------------
$ 99,680,545 $ 12,038,040
============ ============
9
September 30, 2001 December 31, 2000
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- -------------- --------------
(Unaudited)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
CMO's, CMO residuals (interest only), interest only
strips (IO's) and other mortgage-backed securities $ 162,776,898 $ 168,857,299 $ 21,398,077 $ 23,227,026
-------------- -------------- -------------- --------------
FNMA certificates:
Due from five to ten years 554,178 570,457 633,552 633,552
Due over ten years 301,223,686 307,805,478 98,779,069 99,968,168
-------------- -------------- -------------- --------------
301,777,864 308,375,935 99,412,621 100,601,720
-------------- -------------- -------------- --------------
FHLMC certificates:
Due within one year 3,463 3,651 13,395 13,395
Due from one to five years 88,258 89,409 131,526 129,956
Due from five to ten years 1,417,265 1,459,435 1,587,103 1,587,034
Due over ten years 389,291,864 397,200,008 434,864,554 437,226,389
-------------- -------------- -------------- --------------
390,800,850 398,752,503 436,596,578 438,956,774
-------------- -------------- -------------- --------------
GNMA certificates:
Due from one to five years 50,071 50,321 25,582 25,502
Due from five to ten years 8,345,285 8,306,638 10,491,790 10,419,318
Due over ten years 527,931,498 526,412,587 584,419,215 576,869,337
-------------- -------------- -------------- --------------
536,326,854 534,769,546 594,936,587 587,314,157
-------------- -------------- -------------- --------------
1,391,682,466 1,410,755,283 1,152,343,863 1,150,099,677
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Government and Agencies securities:
Due within one year 9,600,000 9,863,140 8,500,000 8,446,450
Due from one to five years 54,959,086 56,217,540 192,762,585 193,298,396
Due from five to ten years 280,854,312 289,244,770 114,881,388 115,351,548
-------------- -------------- -------------- --------------
345,413,398 355,325,450 316,143,973 317,096,394
-------------- -------------- -------------- --------------
Corporate debt obligations -
Due from one to five years 43,688,842 44,908,636 5,097,519 5,201,699
-------------- -------------- -------------- --------------
FHLB stock 59,820,067 59,820,067 45,973,167 45,973,167
-------------- -------------- -------------- --------------
448,922,307 460,054,153 367,214,659 368,271,260
-------------- -------------- -------------- --------------
$1,840,604,773 $1,870,809,436 $1,519,558,522 $1,518,370,937
============== ============== ============== ==============
10
September 30, 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 five to ten years 7,146,854 7,031,160 8,864,274 8,605,749
Due over ten years 37,781,717 37,638,933 1,844,978 1,765,812
-------------- -------------- -------------- --------------
44,928,571 44,670,093 10,711,687 10,374,172
-------------- -------------- -------------- --------------
FNMA certificates:
Due over ten years 7,912,342 8,197,219 8,946,973 9,145,168
-------------- -------------- -------------- --------------
FHLMC certificates:
Due over ten years 131,948 128,378 159,544 153,675
-------------- -------------- -------------- --------------
52,972,861 52,995,690 19,818,204 19,673,015
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES HELD TO MATURITY:
Puerto Rico Government and Agencies obligations:
Due from one to five years 2,280,000 2,302,800 1,948,000 1,948,000
Due from five to ten years 11,311,603 11,424,713 1,755,389 1,755,389
-------------- -------------- -------------- --------------
13,591,603 13,727,513 3,703,389 3,703,389
Other 100,000 100,000 -- --
-------------- -------------- -------------- --------------
13,691,603 13,827,513 3,703,389 3,703,389
-------------- -------------- -------------- --------------
$ 66,664,464 $ 66,823,203 $ 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 September 30, 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 $ 620,353,862
Mortgage-backed securities held to maturity, at
amortized cost 36,809,267
-------------
$ 657,163,129
=============
11
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
September 30, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Real estate loans:
Residential - first mortgage $ 994,169,425 $ 998,983,595
Residential - second mortgage 33,825,716 27,419,145
Land 7,832,554 6,049,179
Construction 190,400,160 151,692,483
Commercial 348,861,972 304,104,485
--------------- ---------------
1,575,089,827 1,488,248,887
Undisbursed portion of loans in process (91,394,557) (78,163,117)
Net deferred loan costs 394,096 908,553
--------------- ---------------
1,484,089,366 1,410,994,323
--------------- ---------------
Other loans:
Commercial 78,446,047 59,120,394
Consumer:
Secured by deposits 29,091,247 26,925,836
Secured by real estate 89,428,442 100,357,019
Other 56,888,680 45,563,186
Unamortized interest (138,167) (85,055)
--------------- ---------------
253,716,249 231,881,380
--------------- ---------------
Total loans 1,737,805,615 1,642,875,703
Allowance for loan losses (15,169,125) (11,599,634)
--------------- ---------------
$ 1,722,636,490 $ 1,631,276,069
=============== ===============
The changes in the allowance for loan losses follow:
Nine months ended
September 30,
-----------------------------
2001 2000
--------- ---------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 11,600 $ 8,971
Provision for loan losses 7,325 4,350
Transferred reserves 806 --
Loans charged-off (4,961) (2,924)
Recoveries 399 660
--------- ---------
Balance, end of period $ 15,169 $ 11,057
========= =========
12
The following table sets forth the amounts and categories of R&G Financial's
non-performing assets at the dates indicated.
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
(Dollars in thousands)
Non-accruing loans:
Residential real estate $ 100,891 $ 79,234
Residential construction 832 487
Commercial real estate 15,647 11,881
Commercial business 3,534 1,414
Consumer unsecured 403 1,186
---------- ----------
Total 121,307 94,202
---------- ----------
Accruing loans greater than 90 days delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 391 420
Consumer 546 360
---------- ----------
Total accruing loans greater than
90 days delinquent 937 780
---------- ----------
Total non-performing loans 122,244 94,982
---------- ----------
Real estate owned, net of reserves 9,160 9,056
Other repossessed assets 883 583
---------- ----------
10,043 9,639
---------- ----------
Total non-performing assets $ 132,287 $ 104,621
---------- ----------
Total non-performing loans as a
percentage of total loans (1) 6.68% 5.52%
---------- ----------
Total non-performing assets as a
percentage of total assets 3.08% 2.96%
---------- ----------
Allowance for loan losses as a percentage
of total non-performing loans (2) 12.41% 12.21%
---------- ----------
Allowance for loan losses as a percentage
of total loans outstanding (2) 0.83% 0.67%
---------- ----------
Net charge-offs to average loans
outstanding 0.33% 0.17%
---------- ----------
---------------
(1) The increase in the ratio was mainly caused by loan securitizations
during the last two quarters of 2000 and the first three quarters of
2001, 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.
(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 September 30, 2001 and December 31, 2000 would have been 1.89%
and 71.0%, respectively, and 1.61% and 73.7%, respectively.
13
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
For the nine month period ended September 30,
2001 2000
-------------- -------------
(Unaudited)
Balance at beginning of period $ 95,078,530 $ 84,252,506
Rights originated 19,002,167 8,312,646
Rights purchased 1,112,264 5,019,821
Scheduled amortization (8,210,037) (7,195,586)
Unscheduled amortization (2,500,000) --
Reserves for impairment (1,194,000) --
-------------- -------------
Balance at end of period $ 103,288,924 $ 90,389,387
============== =============
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:
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
(Dollars in Thousands)
Passbook savings $ 133,052 $ 116,776
------------ ------------
NOW accounts 55,014 43,271
Super NOW accounts 150,858 97,172
Regular checking accounts
(non-interest bearing) 78,644 70,760
Commercial checking accounts
(non-interest bearing) 109,640 101,178
------------ ------------
394,156 312,381
------------ ------------
Certificates of deposit:
Under $100,000 510,203 489,221
$100,000 and over 831,621 749,081
------------ ------------
1,341,824 1,238,302
------------ ------------
Accrued interest payable 5,653 8,603
------------ ------------
$ 1,874,685 $ 1,676,062
============ ============
14
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of September 30, 2001, the Company had open commitments to issue
GNMA certificates of approximately $21.0 million.
COMMITMENTS TO SELL MORTGAGE LOANS
As of September 30, 2001 the Company had commitments to sell mortgage
loans to third party investors amounting to approximately $181.2 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 September 30, 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 $581.0 million at September 30, 2001. Liability, if
any, under the recourse provisions at September 30, 2001 is estimated by
management to be insignificant.
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 Nine month period ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Employee costs $ 14,811,263 $ 10,335,570 $ 40,857,976 $ 31,496,056
------------- ------------- ------------- -------------
Other administrative and general expenses $ 18,197,774 $ 11,337,002 $ 44,828,206 $ 33,289,473
------------- ------------- ------------- -------------
15
NOTE 9 - INDUSTRY SEGMENTS
The following summarized information presents the results of the Company's
operations for its traditional banking and mortgage banking activities:
---------------------------------------------------------------------------------------------
Three month period ended September 30,
---------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 30,343 $ 21,923 $ 1,419 $ 53,685 $ 21,558 $ 14,607 $ -- $ 36,165
Non-interest expenses 12,947 17,396 320 30,663 9,543 12,004 -- 21,547
---------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect from change
in accounting principle $ 17,396 $ 4,527 $ 1,099 $ 23,022 $ 12,015 $ 2,603 $ -- $ 14,618
=============================================================================================
Nine month period ended September 30,
---------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------------
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 77,793 $ 60,049 $ 3,561 $141,403 $ 55,562 $ 48,207 $ -- $103,769
Non-interest expenses 34,180 44,374 809 79,363 27,359 35,412 -- 62,771
---------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect from change
in accounting principle $ 43,613 $ 15,675 $ 2,752 $ 62,040 $ 28,203 $12,795 $ -- $ 40,998
=============================================================================================
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
R&G Financial Corporation (the "Company") is a diversified financial
holding company that, through its wholly-owned subsidiaries, is engaged in
mortgage banking, banking, broker-dealer 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 $7.1 billion as of September 30, 2001, from
$6.5 billion as of the same date a year ago, an increase of 8.8%. R&G
Financial's strategy is to increase the size of its mortgage servicing portfolio
by relying principally on internal loan originations. R&G Financial is
experiencing strong growth in originations due to a strong housing market in
Puerto Rico and continued branch expansion, together with low interest rates and
state-of-the art technology.
As part of its strategy to maximize net interest income, R&G Financial
maintains a loans portfolio of $1.7 billion, which consisted principally of
residential real estate loans backed by a very strong housing market, and a
substantial portfolio of mortgage-backed and investment securities. At September
30, 2001, the Company held securities available for sale with a fair market
value of $1.9 billion, which included $1.4 billion of mortgage-backed securities
of which $534.8 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. At September 30, 2001 R&G Financial maintained a very low credit
risk profile, as its loans receivable portfolio consisted principally of $1.1
billion in residential real estate.
At September 30, 2001 R&G Financial operated 25 banking and 34 mortgage
banking branches in Puerto Rico and four mortgage offices in the US, with about
1,500 professionals.
FINANCIAL CONDITION
At September 30, 2001, total assets amounted to $4.3 billion, as
compared to $3.5 billion at December 31, 2000. The $758.6 million or 21.4%
increase in total assets was primarily the result of a $352.4 million or 23.2%
increase in mortgage-backed and investment securities available for sale, a
$101.3 million or 841.8% increase in mortgage-backed securities held for
trading, a $43.1 million or 183.4% increase in mortgage-backed and investment
17
securities held to maturity, a $143.1 million or 149.6% increase in mortgage
loans held for sale and a $91.4 million or 5.6% increase in loans receivable,
net.
At September 30, 2001, deposits totaled $1.9 billion, an increase of
$198.6 million or 11.9% when compared to December 31, 2000. In addition, at
September 30, 2001, R&G Financial had $1.9 billion of borrowings (consisting of
securities sold under agreements to repurchase, notes payable, FHLB advances and
other borrowings), as compared to $1.5 billion at December 31, 2000. R&G
Financial mainly utilized deposits (primarily retail certificates of deposits)
and repurchase agreements to fund its growth in assets during the period.
At September 30, 2001, R&G Financial's allowance for loan losses
totaled $15.2 million, which represented a $3.6 million or 30.8% increase from
the level maintained at December 31, 2000. At September 30, 2001, R&G
Financial's allowance represented approximately 0.83% of the total loan
portfolio and 12.41% 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 1.89% and 71.0%, respectively, at September 30, 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 $122.2 million at September 30, 2001,
an increase of $62.9 million when compared to $59.4 million at December 31,
1999. However, $60.2 million or 96% 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. As noted above, because of the
nature of the real estate collateral, R&G Financial has historically recognized
a low level of loan charge-offs. R&G Financial's aggregate charge-offs amounted
to 0.33% during the first three quarters 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 5.52% at December
31, 2000 to 6.68% at September 30, 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 three quarters of 2001, which
reduced the amount of loans 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 would have been 4.87% and 4.46%,
respectively.
Stockholders' equity increased from $308.8 million at December 31, 2000
to $453.5 million at September 30, 2001. The $144.7 million or 46.8% increase
was due primarily to the issuance of 2,207,500 shares of Class B common stock in
late June and early July 2001 for aggregate net proceeds of $31.1 million, the
issuance of 2,760,000 shares of the Company's 7.60% Monthly Income Preferred
Stock, Series C, in March 2001 for aggregate net proceeds of $66.6 million and
the net income recognized, together with a $13.6 million increase in other
comprehensive income during the period.
RESULTS OF OPERATIONS
During the three and nine months ended September 30, 2001, R&G
Financial reported net income before the cumulative effect of a change in
accounting principle of $17.4 million and $46.2 million, or $0.46 and $1.29 of
earnings per diluted share, respectively, compared to $11.4 million and $31.6
million or $0.34 and $0.93 of earnings per diluted share for the respective
comparative periods in 2000.
Net interest income increased by $18.1 million or 36.7% during the nine
month period ended September 30, 2001 to $67.5 million, primarily due to an
increase in the average balance of interest-earning assets, together with a 25
basis point increase in the net interest margin from 2.24% to 2.49%. With
interest rates currently declining, R&G Financial expects a gradual improvement
in its net interest margin, as evidenced by the improvement in its margin during
the three month period ended September 30, 2001 as discussed below. The
provision for loan losses amounted to $7.3 million during the nine months ended
September 30, 2001, a 68.4% increase over the prior comparable period, as R&G
Financial increased it general reserves reflecting the continued growth in
commercial lending, which involves greater credit risk than residential lending.
18
R&G Financial also experienced an increase in non-interest income
during the nine months ended September 30, 2001 over the prior comparable
period. Net gain on sale of loans increased significantly, by $16.1 million or
57.0% over the prior comparable period, which was due both to the volume of
loans originated and sold as well as increased profits made on loans sold. Loan
administration and servicing fees also increased by $2.3 million or 10.2% over
the comparable periods, due to the growth in the loan servicing portfolio, while
other miscellaneous revenue sources increased $3.8 million or 72.7%, primarily
as a result of the Company's fee-based insurance operations which began in late
2000.
Net interest income increased by $12.0 million or 75.7% to $27.9
million during the quarter ended September 30, 2001, due to an increase in the
average balance of interest-earning assets, together with a 82 basis points
increase in the net interest margin from 2.04% to 2.86%. Net gain on sale of
loans increased 51.8% to $17.3 million during the three month ended September
30, 2001.
Total expenses increased by $16.9 million or 28.0% during the nine
months ended September 30, 2001 over the prior comparable period, primarily due
to a $10.7 million or 35.1% increase in other administrative and general
expenses, primarily due to increased amortization of the Company's servicing
asset and increased advertising expenses, to increase loan production. Employee
compensation and benefits increased by $3.9 million or 19.5% associated with
employees hired to accommodate increased loan production. These increases were
accompanied by a $2.3 million or 23.5% increase in occupancy expenses.
Total expenses increased by $9.6 million or 47.1% during the three
month period ended September 30, 2001 over the prior comparable period, due to a
$6.5 million or 62.9% increase in other general and administrative expenses of
which $3.2 million or 50% of such increase is related to increased amortization
and reserves for impairment of the Company's servicing asset, a $2.2 million or
33.2% increase in employee compensation and benefits, and a $895,000 or 26.5%
increase in occupancy expenses.
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 September 30, 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
Within Four to More Than More Than
Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
----------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets(1):
Loans receivable:
Residential real estate loans $ 35,020 $ 98,695 $ 222,065 $172,724 $ 507,324 $1,035,828
Construction loans 76,250 22,756 -- -- -- 99,006
Commercial real estate loans 348,862 -- -- -- -- 348,862
Consumer loans 50,428 36,891 51,476 23,359 13,254 175,408
Commercial business loans 60,397 7,982 8,684 1,366 17 78,446
Mortgage loans held for sale 31,361 32,088 72,159 55,818 47,363 238,789
Mortgage-backed securities(2)(3) 157,946 419,535 217,389 169,068 599,471 1,563,409
Investment Securities(3) 101,916 191,793 135,424 40,562 4,051 473,746
Other interest-earning assets(4) 81,627 -- -- -- -- 81,627
----------------------------------------------------------------------------------
Total $ 943,807 $ 809,740 $ 707,197 $462,897 $1,171,480 $4,095,121
==================================================================================
Interest bearing liabilities:
Deposits (5)
NOW and Super NOW accounts $ 10,380 $ 28,810 $ 31,670 $ 25,652 $ 109,360 $ 205,872
Passbook savings accounts 3,327 9,647 24,016 19,213 76,849 133,052
Regular and commercial checking 9,414 26,360 28,977 23,471 100,062 188,284
Certificates of deposit 372,626 657,982 96,477 209,624 5,115 1,341,824
FHLB advances 120,000 10,000 78,125 192,500 78,000 478,625
Securities sold under agreements to
repurchase (6) 555,028 201,001 235,813 115,000 87,810 1,194,652
Other borrowings(7) 31,425 154,661 22,761 -- -- 208,847
----------------------------------------------------------------------------------
Total 1,102,200 1,088,461 517,839 585,460 457,196 3,751,156
----------------------------------------------------------------------------------
Effect of hedging instruments (355,000) -- 210,000 65,000 80,000 --
----------------------------------------------------------------------------------
$ 747,200 $1,088,461 $ 727,839 $650,460 $ 537,196 $3,751,156
==================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 196,607 $(278,721) $ (20,642) $(187,563) $ 634,284 $ 343,965
----------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 196,607 $ (82,114) $ (102,756) $(290,319) $ 343,965
----------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets -4.57% -1.91% -2.39% -6.75% 8.00%
----------------------------------------------------------------------------------
(footnotes on following page)
20
---------------
(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 September 30, 2001, the Company had a one year negative gap of
approximately $82.1 million which constituted 1.91% of total assets as 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 nine months ended September 30, 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 period.
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
For the three month period ended September 30,
2001 2000
--------------------------------------------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Cash and cash equivalents(1) $ 30,431 $ 324 4.26% $ 17,094 $ 291 6.81%
Investment securities available for sale 420,479 6,851 6.52 324,333 5,640 6.96
Investment securities held to maturity 13,706 200 5.84 5,493 79 5.75
Mortgage-backed securities held for trading 113,846 1,802 6.33 17,956 228 5.08
Mortgage-backed securities available for sale 1,208,431 20,255 6.70 715,493 11,288 6.31
Mortgage-backed securities held to maturity 48,868 735 6.02 21,222 372 7.01
Loans receivable, net (2) 2,011,547 40,509 8.06 1,972,807 42,337 8.58
FHLB of New York Stock 55,380 700 5.06 40,085 666 6.65
------------------------------------------------------------------
Total interest-earning assets 3,902,688 $ 71,376 7.32% 3,114,483 $60,901 7.82%
------------------------------------------------------------------
Non-interest-earning assets 310,280 225,467
------------------------------------------------------------------
Total assets $4,212,968 $3,339,950
------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $1,872,192 $ 22,242 4.75% $1,568,110 $21,439 5.47%
Securities sold under agreements to
repurchase (3) 1,098,472 12,135 4.42 800,996 13,348 6.67
Notes payable 280,165 3,523 5.03 187,950 2,708 5.76
Other borrowings(4) 433,739 5,580 5.15 459,902 7,528 6.55
------------------------------------------------------------------
Total interest-bearing liabilities 3,684,568 $ 43,480 4.72% 3,016,958 $45,023 5.97%
------------------------------------------------------------------
Non-interest-bearing liabilities 103,108 34,670
------------------------------------------------------------------
Total liabilities 3,787,676 3,051,628
------------------------------------------------------------------
Stockholders' equity 425,292 288,322
--------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,212,968 $3,339,950
====================================================================
Net interest income; interest rate spread (5) $ 27,896 2.60% $15,878 1.85%
------------------- ---------------
Net interest margin 2.86% 2.04%
------- -----
Average interest-earning assets to average
interest-bearing liabilities 105.92% 103.23%
------- ------
(footnotes on page 24)
22
For the nine month period ended September 30,
2001 2000
--------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Cash and cash equivalents(1) $ 37,109 $ 1,345 4.83% $ 15,001 $ 732 6.51%
Investment securities available for sale 394,164 19,770 6.69 289,265 15,174 6.99
Investment securities held to maturity 7,506 325 5.77 5,435 237 5.81
Mortgage-backed securities held for trading 108,557 5,117 6.28 20,706 891 5.74
Mortgage-backed securities available for sale 1,114,439 54,343 6.50 702,921 32,903 6.24
Mortgage-backed securities held to maturity 29,049 1,301 5.97 21,847 1,040 6.35
Loans receivable, net (2) 1,866,557 114,292 8.16 1,849,630 119,115 8.59
FHLB of New York Stock 49,933 2,243 5.99 37,287 1,803 6.45
--------------------------------------------------------------------------------
Total interest-earning assets 3,607,314 $ 198,736 7.35% 2,942,092 $171,895 7.79%
--------------------------------------------------------------------------------
Non-interest-earning assets 301,899 236,340
--------------------------------------------------------------------------------
Total assets $3,909,213 $3,178,432
================================================================================
Interest-Bearing Liabilities:
Deposits $1,773,775 $ 67,937 5.11% $1,465,850 $ 57,496 5.23%
Securities sold under agreements to
repurchase (3) 973,255 36,717 5.03 747,268 35,597 6.35
Notes payable 235,968 8,545 4.83 193,342 8,972 6.19
Other borrowings(4) 446,538 18,053 5.39 432,248 20,459 6.31
--------------------------------------------------------------------------------
Total interest-bearing liabilities 3,429,536 $ 131,252 5.10% 2,838,708 $122,524 5.75%
--------------------------------------------------------------------------------
Non-interest-bearing liabilities 92,456 59,372
--------------------------------------------------------------------------------
Total liabilities 3,521,992 2,898,080
--------------------------------------------------------------------------------
Stockholders' equity 387,221 280,352
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,909,213 $3,178,432
================================================================================
Net interest income; interest rate spread (5) $ 67,484 2.25% $ 49,371 2.04%
---------------------- --------------------
Net interest margin 2.49% 2.24%
--------- ------
Average interest-earning assets to average
interest-bearing liabilities 105.18% 103.64%
--------- -------
(footnotes on page 24)
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
September 30,
------------------------------------
2001 2000
------------ ------------
(Dollars in Thousands)
Composition of Servicing Portfolio at period end:
GNMA $ 2,958,985 $ 3,004,759
FNMA/FHLMC 2,337,570 1,715,331
Other mortgage loans (3) 1,808,222 1,810,896
------------ ------------
Total servicing portfolio (3) $ 7,104,777 $ 6,530,986
============ ============
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 6,634,059 $ 6,177,511
Add: Loan originations and purchases 1,415,853 937,852
Servicing of portfolio loans acquired 1,361 31,404
Less: Sale of servicing rights(1) (164,875) (171,578)
Run-offs(2) (781,621) (444,203)
------------ ------------
Ending servicing portfolio(3) $ 7,104,777 $ 6,530,986
============ ============
Number of loans serviced 113,181 110,192
Average loan size $ 63 $ 59
Average servicing fee rate 0.501% 0.507%
---------------
(1) Includes loans sold, servicing released, by Continental Capital,
totaling $164.9 million and $130.5 million in 2001 and 2000,
respectively.
24
(2) Run-offs refers to regular amortization of loans, prepayments and
foreclosures.
(3) At the dates shown, included $1.0 billion and $1.1 billion of loans
serviced for the Bank, respectively, which constituted 14.1% and 17.4%
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 September 30, 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 nine
months ended September 30, 2001 the Company recognized $2.5 million of
unscheduled amortization of mortgage servicing rights and made provisions for
impairment of mortgage servicing rights of approximately $1.2 million. These
amounts include $475,000 and $594,000 of unscheduled amortization and provisions
for impairment, respectively, attributable to Continental Capital, the Company's
wholly-owned mortgage banking subsidiary in the State of New York.
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 September 30, 2001, the Company had $104.5 million in borrowings
capacity under unused warehousing and other lines of credit, $560.5 million in
borrowings capacity under unused lines of credit with the FHLB of New York and
$15 million under unused federal funds lines of credit. The Company has
generally not relied upon brokered deposits as a source of liquidity.
At September 30, 2001, the Company had outstanding commitments to
originate and/or purchase mortgage and non-mortgage loans of $154.0 million
(including unused lines of credit). Certificates of deposit which are scheduled
to mature within one year totaled $1.0 billion at September 30, 2001, and
borrowings that are scheduled to mature within the same period amounted to $1.0
billion. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments.
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 September
30, 2001, 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 6.67%,
12.00% and 12.73%, 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
Statements made in this Form 10-Q that relate to future events are made
pursuant to the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based upon current expectations and R&G Financial
assumes no obligation to update this information. Because actual results may
differ materially from expectations, R&G Financial cautions readers not to place
undue reliance on these statements. A number of factors, including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition, could cause actual results to differ
materially from historical results and those presently anticipated or projected.
For a detailed discussion of the important factors affecting R&G Financial,
please see the Company's Form 10-K for the year ended December 31, 2000 and Form
10-Q for the quarters ended March 31 and June 30, 2001 filed with the Securities
and Exchange Commission.
26
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 September 30, 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
27
ITEM 6: Exhibits and Reports on Form 8-K
a) Exhibits
EXHIBIT NO. EXHIBIT
----------- -------
2.0 Amended and Restated Agreement and Plan of Merger by and
between R&G Financial Corporation, the Bank and R-G Interim
Premier Bank, dated as of September 27, 1996(1)
3.1 Certificate of Incorporation of R&G Financial Corporation(2)
3.2.1 Amended and Restated Certificate of Incorporation of R&G
Financial Corporation(4)
3.2.2 Certificate of Amendment to Amended and Restated Certificate
of R&G Financial Corporation(9)
3.3 Bylaws of R&G Financial Corporation(2)
3.4 Certificate of Resolutions designating the terms of the
Series A Preferred Stock(6)
3.5 Certificate of Resolutions designating the terms of the
Series B Preferred Stock(7)
3.6 Certificate of Resolutions designating the terms of the
Series C Preferred Stock(8)
4.0 Specimen of Stock Certificate of R&G Financial Corporation(2)
4.1 Form of Series A Preferred Stock Certificate of R&G Financial
Corporation(3)
4.2 Form of Series B Preferred Stock Certificate of R&G Financial
Corporation(5)
4.3 Form of Series C Preferred Stock Certificate of R&G Financial
Corporation(8)
10.1 Master Purchase, Servicing and Collection Agreement between
R&G Mortgage and the Bank dated February 16, 1990, as amended
on April 1, 1991, December 1, 1991, February 1, 1994 and
July 1, 1994(2)
10.2 Master Custodian Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on June 27, 1996(2)
10.3 Master Production Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on August 30, 1991 and
March 31, 1995(2)
10.4 Data Processing Computer Service Agreement between R&G
Mortgage and R-G Premier Bank dated December 1, 1994(2)
10.5 Securitization Agreement by and between R&G Mortgage and the
Bank, dated as of July 1, 1995(2)
10.6 R&G Financial Corporation Stock Option Plan(2)(*)
-----------------
(1) Incorporated by reference from the
Registration Statement on Form S-4
Registration No. 333-13199) filed by the
Registrant with the Securities and Exchange
Commission ("SEC") on October 1, 1996.
(2) Incorporated by reference from the
Registration Statement on Form S-1
(Registration No. 333-06245) filed by the
Registrant with the SEC on June 18, 1996, as
amended.
(3) Incorporated by reference from the
Registrant's Registration Statement on Form
S-3 (Registration No. 333-60923), as
amended, filed with the SEC on August 7,
1998.
(4) Incorporated by reference from the
Registrant's Current Report on Form 8-K
filed with the SEC on November 19, 1999.
(5) Incorporated by reference from the
Registrant's Registration Statement on Form
S-3 (Registration No. 333-90463), filed with
the SEC on November 5, 1999.
(6) Incorporated by reference from the
Registrant's Current Report on Form 8-K
filed with the SEC on August 31, 1998.
(7) Incorporated by reference from the
Registrant's Form 10-K filed with the SEC on
April 13, 2000.
(8) Incorporated by reference from Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (File No.
333-55834), filed with the SEC on March 7,
2001.
(*) Management contract or compensatory plan or
arrangement.
(9) Incorporated by reference from the
Registrant's Current Report on Form 8-K
filed with the SEC on June 12, 2001.
b) Form 8-K
None
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: November 9, 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