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, 2002
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, 2002:
15,245,249 (Does not include 16,053,056 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
March 31, 2002 (Unaudited) and December 31, 2001................................... 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2002 and 2001 (Unaudited)....................................4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2002 and 2001 (Unaudited)....................................5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 (Unaudited) ......................................... 6
Notes to Unaudited Consolidated Financial Statements ....................................... 7
ITEM 2. Management's Discussion and Analysis.................................................................19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...........................................28
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ...................................................................................28
ITEM 2. Changes in Securities .............................................................................. 28
ITEM 3. Defaults upon Senior Securities .....................................................................28
ITEM 4. Submission of Matters ...............................................................................28
ITEM 5. Other Information ...................................................................................28
ITEM 6. Exhibits and Reports on Form 8-K ....................................................................28
Signatures ..........................................................................................29
2
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2002 2001
--------------- --------------
(Unaudited)
ASSETS
Cash and due from banks $ 54,233,265 $ 79,223,030
Money market investments:
Securities purchased under agreements to resell -- 15,023,590
Time deposits with other banks 32,697,722 63,477,978
Short-term investments 58,085,959 --
Mortgage loans held for sale, at lower of cost or market 256,926,782 236,434,204
Mortgage-backed securities held for trading, at fair value 57,963,937 75,796,172
Trading securities pledged on repurchase agreements, at fair value 20,001,751 18,151,659
Mortgage-backed and investment securities available for sale, at fair value 1,700,717,527 1,566,895,312
Available for sale securities pledged on repurchase agreements, at fair value 540,053,628 514,783,468
Mortgage backed and investment securities held to maturity, at amortized cost
(estimated market value: 2002 - $23,592,244; 2001 - $60,682,234) 24,317,655 60,425,371
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2002 - $50,355,795; 2001 - $15,445,319) 50,051,654 15,206,183
Loans receivable, net 1,807,860,111 1,802,388,064
Accounts receivable, including advances to investors, net 26,183,842 23,056,424
Accrued interest receivable 37,513,313 35,426,760
Servicing asset 104,815,469 105,146,902
Premises and equipment 22,481,620 22,401,045
Other assets 37,523,965 30,557,544
--------------- --------------
$ 4,831,428,200 $4,664,393,706
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 2,014,675,961 $2,061,223,825
Fed funds purchased -- --
Securities sold under agreements to repurchase 1,439,618,008 1,396,938,849
Notes payable 187,699,759 195,586,855
Advances from FHLB 527,125,000 464,125,000
Other borrowings 11,235,241 7,971,888
Accounts payable and accrued liabilities 110,177,407 71,867,012
Other liabilities 6,514,774 7,559,690
--------------- --------------
4,297,046,150 4,205,273,119
--------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
Non-Cumulative Perpetual Monthly Income Preferred Stock, $25 liquidation value:
7.40% Series A,
2,000,000 shares authorized, issued and outstanding 50,000,000 50,000,000
7.75% Series B,
1,000,000 shares authorized, issued and outstanding 25,000,000 25,000,000
7.60% Series C,
2,760,000 shares authorized, issued and outstanding 69,000,000 69,000,000
7.25% Series D,
2,760,000 shares authorized, issued and outstanding 69,000,000 --
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 16,053,056
issued and outstanding 160,531 160,531
Class B - $.01 par value, 40,000,000 shares authorized, 15,245,249
issued and outstanding in 2002 (2001-15,241,322) 152,427 152,413
Additional paid-in capital 68,891,191 71,254,084
Retained earnings 246,040,596 229,997,012
Capital reserves of the Bank 11,629,328 11,629,328
Accumulated other comprehensive (loss) income (5,492,023) 1,927,219
--------------- --------------
534,382,050 459,120,587
--------------- --------------
$ 4,831,428,200 $4,664,393,706
=============== ==============
The accompanying notes are an integral part of these statements.
3
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
--------------------------------
2002 2001
------------ ------------
(Unaudited)
(Dollars in thousands except per share data)
Interest income:
Loans $ 38,503 $ 37,428
Money market and other investments 9,039 7,370
Mortgage-backed securities 25,177 18,071
------------ ------------
Total interest income 72,719 62,869
------------ ------------
Interest expense:
Deposits 20,826 23,076
Securities sold under agreements to repurchase 12,343 12,556
Notes payable 1,772 2,044
Other 5,773 7,026
------------ ------------
Total interest expense 40,714 44,702
------------ ------------
Net interest income 32,005 18,167
Provision for loan losses (5,000) (2,000)
------------ ------------
Net interest income after provision for loan losses 27,005 16,167
------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 17,710 15,038
Loan administration and servicing fees 9,304 8,023
Service charges, fees and other 3,872 2,525
------------ ------------
30,886 25,586
------------ ------------
Total revenues 57,891 41,753
------------ ------------
Operating expenses:
Employee compensation and benefits 10,008 7,550
Office occupancy and equipment 4,262 3,902
Other administrative and general 15,926 11,876
------------ ------------
30,196 23,328
------------ ------------
Income before income taxes and cumulative effect from
change in accounting principle 27,695 18,425
------------ ------------
Income tax expense:
Current 5,496 4,196
Deferred 666 900
------------ ------------
6,162 5,096
------------ ------------
Income before cumulative effect
from change in accounting principle 21,533 13,329
Cumulative effect from change in accounting principle,
net of income tax benefit of $206 -- (323)
------------ ------------
Net income $ 21,533 $ 13,006
============ ============
Earnings per common share before cumulative
effect from change in accounting principle - Basic $ 0.59 $ 0.40
------------ ------------
Earnings per common share before cumulative
effect from change in accounting principle - Diluted $ 0.58 $ 0.39
------------ ------------
Earnings per common share - Basic $ 0.59 $ 0.39
------------ ------------
- Diluted $ 0.58 $ 0.38
------------ ------------
Weighted average number of shares outstanding - Basic 31,295,713 28,673,654
- Diluted 31,654,473 29,311,534
The accompanying notes are an integral part of these statements.
4
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month period ended
March 31,
------------------------
2002 2001
-------- --------
(Unaudited)
(Dollars in thousands)
Net income $ 21,533 $ 13,006
-------- --------
Other comprehensive income, before tax:
Unrealized gains (losses):
Derivative instruments 1,996 (1,991)
-------- --------
Investment securities:
Arising during period (14,083) 8,868
Less: Reclassification adjustments for gains included
in net income (75) (1,472)
-------- --------
(14,158) 7,396
-------- --------
(12,162) 5,405
Income tax benefit (expense) related to items of other comprehensive income 4,743 (2,108)
-------- --------
(7,419) 3,297
Cumulative effect from change in accounting principle,
net of income taxes of $745 -- 1,166
-------- --------
Other comprehensive (loss) income, net of tax (7,419) 4,463
-------- --------
Comprehensive income, net of tax $ 14,114 $ 17,469
======== ========
The accompanying notes are an integral part of these statements.
5
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month period ended
March 31,
----------------------
2002 2001
--------- ---------
(Unaudited)
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 21,533 $ 13,006
--------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,514 1,512
Amortization of premium on investments and mortgage-backed securities, net 1,195 80
Amortization of servicing rights 5,487 3,339
Reversal of impairment reserves (459) --
Provision for loan losses 5,000 2,000
Provision for bad debts in accounts receivable -- 225
Gain on sales of mortgage-backed and investment securities available for sale (75) (1,472)
Unrealized (gain) loss on trading securities and derivative instruments, net (52) 568
Increase in mortgage loans held for sale (43,215) (76,947)
Net decrease (increase) in mortgage-backed securities held for trading 15,702 (13,728)
Increase in receivables (5,214) (3,700)
Increase in other assets (6,485) (360)
(Decrease) increase in notes payable and other borrowings (4,624) 34,218
Increase in accounts payable and accrued liabilities 45,382 4,938
(Decrease) increase in other liabilities (1,045) 1,085
--------- ---------
Total adjustments 13,111 (48,242)
--------- ---------
Net cash provided by (used in) in operating activities 34,644 (35,236)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities (298,201) (121,228)
Proceeds from sales of securities available for sale 214,433 140,668
Principal repayments on mortgage-backed securities and redemption of securities available for sale 124,794 106,123
Proceeds from sales of loans -- 45,468
Net originations of loans (195,815) (181,932)
Purchases of FHLB stock, net (6,070) (428)
Acquisition of premises and equipment (1,456) (1,554)
Acquisition of servicing rights (5,316) (5,712)
--------- ---------
Net cash used in investing activities (167,631) (18,595)
--------- ---------
Cash flows from financing activities:
(Decrease) increase in deposits - net (46,548) 63,942
Decrease in federal funds purchased -- (25,000)
Increase in securities sold under agreements to repurchase - net 42,679 64,569
Advances (repayments) from FHLB, net 63,000 (96,375)
Net proceeds from issuance of preferred stock 66,616 66,602
Proceeds from issuance of common stock 21 36
Cash dividends:
Common stock (2,394) (1,721)
Preferred stock (3,095) (1,759)
--------- ---------
Net cash provided by financing activities 120,279 70,294
--------- ---------
Net (decrease) increase in cash and cash equivalents (12,708) 16,463
Cash and cash equivalents at beginning of period 157,725 69,090
--------- ---------
Cash and cash equivalents at end of period $ 145,017 $ 85,553
========= =========
Cash and cash equivalents include:
Cash and due from banks $ 54,233 $ 35,869
Short-term investments 58,086 --
Securities purchased under agreements to resell -- 30,172
Time deposits with other banks 32,698 4,475
Federal funds sold -- 15,037
--------- ---------
$ 145,017 $ 85,553
========= =========
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 Premier Bank
(the "Bank"), a Puerto Rico commercial bank, R&G Mortgage Corp. ("R&G
Mortgage"), Puerto Rico's second largest mortgage banker, R&G Investments
Corporation, a Puerto Rico licensed securities broker-dealer, and Home &
Property Insurance Corp., a Puerto Rico insurance agency. The Company,
currently in its 30th year of operations, operates as a financial holding
company, pursuant to the provisions of the Gramm-Leach-Bliley Act of 1999, and
is primarily engaged in banking, mortgage banking, and securities and insurance
brokerage through its subsidiaries.
The Bank provides a full range of banking services, including
residential, commercial and personal loans and a diversified range of deposit
products through twenty-six 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.
R&G Mortgage 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 originates 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 include all
adjustments (principally consisting of normal recurring accruals) necessary for
a fair presentation of the Company's financial condition as of March 31, 2002
and the results of operations and changes in its cash flows for the three
months ended March 31, 2002 and 2001.
The results of operations for the three month period ended March 31,
2002 are not necessarily indicative of the results to be expected for the year
ending December 31, 2002. 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, 2001.
7
BASIS OF CONSOLIDATION
All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited 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.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived 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. The adoption of this Statement did not have an
effect on the consolidated financial position or results of operations of the
Company.
On January 1, 2002 the Company adopted also SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires 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 also requires that intangible assets with definite useful lives be
amortized over the respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
During the first quarter of 2002, based on further evaluation of the adoption
effects of SFAS No. 142, management determined that the initial adoption of this
Statement on January 1, 2002 had no effect on the financial condition or results
of operations of the Company.
8
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income
(less preferred stock dividends) by the weighted average number of shares of
common stock outstanding. Outstanding stock options granted in connection with
the Company's Stock Option Plan (358,760 and 637,880 during the quarters ended
March 31, 2002 and 2001, respectively), are included in the weighted average
number of shares for purposes of the diluted earnings per share computation. No
other adjustments are 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:
Quarter Ended March 31,
2002 2001
---- ----
$0.0765 $0.06
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.
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
GNMA certificates $ 2,006,727 $18,151,659
FHLMC certificates 75,958,961 75,796,172
----------- -----------
$77,965,688 $93,947,831
----------- -----------
9
March 31, 2002 December 31, 2001
-----------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- -------------- --------------
(Unaudited)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Collateralized mortgage obligations (CMO),
CMO residuals (interest only), interest only strips
(IO's) and other mortgage-backed securities $ 298,141,163 $ 296,568,667 $ 248,894,118 $ 250,208,322
-------------- -------------- -------------- --------------
FNMA certificates:
Due from five to ten years 449,462 456,906 538,047 549,144
Due over ten years 247,102,225 251,548,303 266,495,176 270,935,878
-------------- -------------- -------------- --------------
247,551,687 252,005,209 267,033,223 271,485,022
-------------- -------------- -------------- --------------
FHLMC certificates:
Due from one to five years 63,008 64,207 73,195 74,382
Due from five to ten years 1,216,431 1,238,126 1,264,702 1,292,010
Due over ten years 567,027,868 564,636,402 435,662,149 437,026,277
-------------- -------------- -------------- --------------
568,307,307 565,938,735 437,000,046 438,392,669
-------------- -------------- -------------- --------------
GNMA certificates:
Due from one to five years 25,030 25,155 50,063 50,313
Due from five to ten years 10,187,149 10,288,508 11,053,286 11,172,001
Due over ten years 507,121,425 505,446,716 513,507,515 511,638,456
-------------- -------------- -------------- --------------
517,333,604 515,760,379 524,610,864 522,860,770
-------------- -------------- -------------- --------------
1,631,333,761 1,630,272,990 1,477,538,251 1,482,946,783
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Government and Agencies securities:
Due within one year 9,600,000 9,697,460 9,600,000 9,806,480
Due from one to five years 227,838,195 226,671,500 156,522,492 157,408,260
Due from five to ten years 249,219,498 248,062,768 307,109,665 310,937,946
-------------- -------------- -------------- --------------
486,657,693 484,431,728 473,232,157 478,152,686
-------------- -------------- -------------- --------------
Corporate debt obligations
Due from one to five years 53,627,036 53,919,670 53,636,583 54,502,744
-------------- -------------- -------------- --------------
FHLB stock 72,146,767 72,146,767 66,076,567 66,076,567
-------------- -------------- -------------- --------------
612,431,496 610,498,165 592,945,307 598,731,997
-------------- -------------- -------------- --------------
$2,243,765,257 $2,240,771,155 $2,070,483,558 $2,081,678,780
============== ============== ============== ==============
On January 1, 2001 the Company reclassified mortgage-backed securities
available for sale with a fair value of $75.9 million to held for trading. Upon
transfer, the Company recognized a gain of approximately $833,000.
10
March 31, 2002 December 31, 2001
-----------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
GNMA certificates:
Due from five to ten years $ 6,631,506 $ 6,567,813 $ 7,180,376 $ 7,111,405
Due over ten years 36,689,411 35,866,276 37,042,861 37,091,537
----------- ----------- ----------- -----------
43,320,917 42,434,089 44,223,237 44,202,942
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years 7,239,209 7,534,740 7,593,982 7,909,958
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years 123,183 119,850 128,335 124,863
----------- ----------- ----------- -----------
50,683,309 50,088,679 51,945,554 52,237,763
----------- ----------- ----------- -----------
INVESTMENT SECURITIES HELD TO MATURITY:
Puerto Rico Government and Agencies obligations:
Due from one to five years 12,691,000 12,867,910 12,691,000 12,731,365
Due from five to ten years 10,895,000 10,991,450 10,895,000 11,058,425
----------- ----------- ----------- -----------
23,586,000 23,859,360 23,586,000 23,789,790
----------- ----------- ----------- -----------
Other:
Due from one to five years 100,000 100,000 100,000 100,000
----------- ----------- ----------- -----------
23,686,000 23,959,360 23,686,000 23,889,790
----------- ----------- ----------- -----------
$74,369,309 $73,948,039 $75,631,554 $76,127,553
=========== =========== =========== ===========
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, 2002 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
---------------
(Unaudited)
Mortgage-backed securities held for trading, at fair value $ 10,526,462
Mortgage-backed and investment securities available for sale,
at fair value 841,539,197
Mortgage-backed securities held to maturity, at amortized
cost 505,899
------------
$852,571,558
============
11
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
March 31, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Real estate loans:
Residential - first mortgage $ 924,838,068 $ 996,885,290
Residential - second mortgage 35,244,402 33,320,705
Land 9,569,311 9,187,516
Construction 273,564,166 227,271,477
Commercial 427,056,914 385,171,236
--------------- ---------------
1,670,272,861 1,651,836,224
Undisbursed portion of loans in process (101,793,190) (92,934,804)
Net deferred loan costs 161,768 20,307
--------------- ---------------
1,568,641,439 1,558,921,727
--------------- ---------------
Other loans:
Commercial 80,521,509 79,908,650
Consumer:
Secured by deposits 25,463,587 26,175,695
Secured by real estate 77,086,217 83,509,393
Other 74,950,431 71,506,951
Unearned interest (259,828) (206,654)
--------------- ---------------
257,761,916 260,894,035
--------------- ---------------
Total loans 1,826,403,355 1,819,815,762
Allowance for loan losses (18,543,244) (17,427,698)
--------------- ---------------
$ 1,807,860,111 $ 1,802,388,064
=============== ===============
The changes in the allowance for loan losses follow:
Three months ended
March 31,
---------------------------
2002 2001
-------- --------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 17,428 $ 11,600
Provision for loan losses 5,000 2,000
Loans charged-off (3,989) (1,641)
Recoveries 104 111
-------- --------
Balance, end of period $ 18,543 $ 12,070
======== ========
12
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,
2002 2001
--------- ------------
(Unaudited)
(Dollars in thousands)
Non-accruing loans:
Residential real estate $57,572 $50,358
Residential construction 927 871
Commercial real estate 16,853 16,945
Commercial business 3,275 3,105
Consumer unsecured 363 303
------- -------
Total 78,990 71,582
------- -------
Accruing loans greater than 90 days delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 308 462
Consumer 426 428
------- -------
Total accruing loans greater than
90 days delinquent 734 890
------- -------
Total non-performing loans 79,724 72,472
------- -------
Real estate owned, net of reserves 12,691 10,061
Other repossessed assets 69 362
------- -------
12,760 10,423
------- -------
Total non-performing assets $92,484 $82,895
------- -------
Total non-performing loans as a
percentage of total loans (1) 4.13% 3.79%
------- -------
Total non-performing assets as a
percentage of total assets 1.91% 1.78%
------- -------
Allowance for loan losses as a percentage
of total non-performing loans (2) 23.26% 24.05%
------- -------
Allowance for loan losses as a percentage
of total loans outstanding (2) 0.96% 0.91%
------- -------
Net charge-offs to average loans
outstanding 0.75% 0.32%
------- -------
(1) The increase in the ratio was partially caused by significant loan
securitizations during 2000, 2001 and the first quarter of 2002, 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 March 31, 2002 and December 31, 2001, the ratio
of non-performing loans to total loans would have been 2.85% and
2.75%, 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, 2002 and December 31, 2001 would have been 1.92%
and 83.7%, respectively, and 1.97% and 78.8%, respectively.
13
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
For the three month period ended March 31,
2002 2001
------------- ------------
(Unaudited)
Balance at beginning of period $ 105,146,902 $ 95,078,530
Rights originated 5,077,622 5,278,107
Rights purchased 238,188 433,468
Scheduled amortization (3,513,102) (2,663,712)
Unscheduled amortization (1,973,491) (675,000)
Reversal of impairment reserves 458,633 --
Other adjustments (619,283) --
------------- ------------
Balance at end of period $ 104,815,469 $ 97,451,393
============= ============
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.
14
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
March 31, December 31,
2002 2001
---------- -------------
(Unaudited)
(Dollars in Thousands)
Passbook savings $ 272,171 $ 199,756
---------- ----------
NOW accounts 72,296 68,412
Super NOW accounts 265,084 236,898
Regular checking accounts
(non-interest bearing) 71,576 78,213
Commercial checking accounts
(non-interest bearing) 105,287 167,781
---------- ----------
514,243 551,304
---------- ----------
Certificates of deposit:
Under $100,000 372,369 429,913
$100,000 and over 850,326 874,495
---------- ----------
1,222,695 1,304,408
---------- ----------
Accrued interest payable 5,567 5,756
---------- ----------
$2,014,676 $2,061,224
========== ==========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of March 31, 2002, the Company had open commitments to issue GNMA
certificates of approximately $30.2 million.
COMMITMENTS TO SELL MORTGAGE LOANS
As of March 31, 2002 the Company had commitments to sell mortgage
loans to third party investors amounting to approximately $281.5 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, 2002, 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 $559.2 million at March 31, 2002. Liability, if any,
under the recourse provisions at March 31, 2002 is estimated by management to
be insignificant.
15
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:
Three month period ended
March 31,
2002 2001
----------- -----------
(Unaudited)
Employee costs $16,242,933 $12,697,825
----------- -----------
Other administrative and general expenses $17,170,851 $12,715,609
----------- -----------
16
NOTE 9 - INDUSTRY SEGMENTS
The following summarized information presents the results of the Company's
operations for its traditional banking and mortgage banking activities:
(Dollars in thousands)
---------------------------------------------------------------------------------------
Three month period ended March 31,
---------------------------------------------------------------------------------------
2002 2001
----------------------------------------- -----------------------------------------
(Unaudited)
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
------- -------- ------ ------- ------- -------- ----- --------
Revenues $32,509 $24,492 $1,623 $58,624 $24,797 $17,824 $769 $43,390
Non-interest expenses 14,668 16,003 725 31,396 10,564 13,656 203 24,423
------- ------- ------ ------- ------- ------- ---- -------
Income before income taxes
(and cumulative effect from change
in accounting principle in 2001) $17,841 $ 8,489 $ 898 $27,228 $14,233 $ 4,168 $566 $18,967
======= ======= ====== ======= ======= ======= ==== =======
17
The following is a reconciliation of reportable segment revenues and income
before income taxes to the Company's consolidated amounts (unaudited):
Three month period Ended March 31,
2002 2001
-------- --------
(Dollars in thousands)
Revenues:
Total revenues for reportable segments $ 58,624 $ 43,390
Elimination of intersegment revenues (1,340) (1,637)
Corporate revenues 607 --
-------- --------
Total consolidated revenues $ 57,891 $ 41,753
======== ========
Income before income taxes:
Total income before income taxes for reportable
segments $ 27,228 $ 18,967
Elimination of intersegment profits (17) (479)
Unallocated corporate income (expenses), net 484 (63)
-------- --------
Income before income taxes, consolidated $ 27,695 $ 18,425
======== ========
Total assets of the Company among its industry segments and a reconciliation of
reportable segment assets to the Company's consolidated total assets as of
March 31, 2002 and December 31, 2001 follows:
March 31, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Assets:
Banking $ 3,963,615,379 $ 3,929,980,434
Mortgage Banking 872,016,298 843,249,867
Other 107,996,670 8,082,867
--------------- ---------------
Total assets for reportable segments 4,943,628,347 4,781,313,168
Parent company assets 139,794,015 81,643,383
Elimination of intersegment balances (251,994,162) (198,562,845)
--------------- ---------------
Consolidated total assets $ 4,831,428,200 $ 4,664,393,706
=============== ===============
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
R&G Financial Corporation (the "Company") is a Puerto Rico chartered
diversified financial holding company that, through its wholly-owned
subsidiaries, is engaged in banking, mortgage banking, securities brokerage and
insurance activities. The Company, currently in its 30th year of operations,
operated 68 branch offices (38 mortgage offices in Puerto Rico, 4 mortgage
offices in the United States, and 26 bank branches mainly located in the
northeastern section of Puerto Rico) as of March 31, 2002.
On December 19, 2001, the Company entered into a definitive merger
agreement pursuant to which it will acquire The Crown Group, Inc., a Florida
corporation, and its wholly-owned savings bank subsidiary, Crown Bank, a
Federal Savings Bank, hereinafter collectively referred to as "Crown." Crown,
which had total assets of $664 million, total deposits of $461 million and
stockholders' equity of $64 million as of March 31, 2002, operates in the
Tampa-St. Petersburg-Clearwater and Orlando metropolitan areas through 14
full-service offices.
The Orlando market is one of the fastest growing markets in Florida,
both generally and for Hispanics in particular, and provides the Company with
what it believes is a cost effective way to access the Hispanic markets in the
United States, while providing a strong platform for further expansion in
Florida. Crown's balance sheet is complementary to the Company's, and is
predominantly secured by real estate.
Under the terms of the merger agreement, as amended, holders of Crown
common stock will receive an aggregate of $100.0 million in cash. The
acquisition, which is expected to be accretive to our earnings per share in
2002, is expected to close during the second quarter of 2002, pending the
receipt of all requisite regulatory approvals and the approval of Crown's
shareholders.
The Company provides a full range of banking services through R-G
Premier Bank of Puerto Rico, a Puerto Rico commercial bank. Banking activities
include 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.
Mortgage banking activities are conducted through R&G Mortgage Corp.,
Puerto Rico's second largest mortgage banker, The Mortgage Store of Puerto
Rico, Inc., also a Puerto Rico mortgage company, and Continental Capital
Corporation, a New York mortgage banking company with offices in New York and
North Carolina. 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 began insurance operations in November 2000 through Home &
Property Insurance Corp., a Puerto Rico insurance agency, and securities
brokerage in early 2002 through R&G Investments Corporation, a Puerto Rico
licensed broker-dealer.
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
19
approximately $7.3 billion as of March 31, 2002, from $6.8 billion as of the
same date a year ago, an increase of 7.6%. 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, 2002, the Company held securities available for sale with a fair
market value of $2.2 billion, which included $1.6 billion of mortgage-backed
securities, of which $515.8 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 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, 2002, total assets amounted to $4.8 billion, as compared
to $4.7 billion at December 31, 2001. The $167.0 million or 3.6% increase in
total assets between the comparable periods was primarily the result of a $159.1
million or 7.6% increase in mortgage-backed and investment securities available
for sale.
At March 31, 2002, R&G Financial had $2.2 billion of borrowings
(consisting of securities sold under agreements to repurchase, notes payable,
FHLB advances and other borrowings), compared to $2.1 billion at December 31,
2001. R&G Financial utilized repurchase agreements and FHLB advances to fund its
growth during the period.
At March 31, 2002, R&G Financial's allowance for loan losses totaled
$18.5 million, which represented a $1.1 million or 6.4% increase from the level
maintained at December 31, 2001. At March 31, 2002, R&G Financial's allowance
represented approximately 0.96% of the total loan portfolio and 23.26% 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 1.92%
and 83.7%, respectively, at March 31, 2002. The increase in the allowance for
loan losses reflects the increase in R&G Financial's commercial real estate and
construction loan portfolio.
Non-performing loans amounted to $79.7 million at March 31, 2002, an
increase of $7.3 million when compared to $72.5 million at December 31, 2001. At
March 31, 2002, $57.6 million or 72.2% of non-performing loans consisted of
residential mortgage loans, which have 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 recognized
a low level of loan charge-offs. R&G Financial's aggregate charge-offs as a
percentage of average loans outstanding amounted to 0.32% during 2001 and 0.17%
during 2000. 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
20
increased from 3.79% to 4.13% from December 31, 2001 to March 31, 2002, the
increase in the ratio was made larger than it would otherwise have been due to
significant loan securitizations during 2000, 2001 and the first quarter of
2002, 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, 2002 and December 31, 2001, the ratio of non-performing loans
to total loans would have been 2.85% and 2.75%, respectively.
Stockholders' equity increased from $459.1 million at December 31, 2001
to $534.4 million at March 31, 2002. The $75.3 million or 16.4% increase was due
primarily to the issuance of 2,760,000 shares of the Company's 7.25%
Non-Cumulative Perpetual Monthly Income Preferred Stock, Series D, in March 2002
for aggregate net proceeds of $66.6 million, as well as the net income
recognized during the period.
RESULTS OF OPERATIONS
During the three months ended March 31, 2002, R&G Financial reported
net income of $21.5 million or $0.58 of earnings per diluted share, compared to
$13.3 million before the cumulative effect of a change in accounting principle,
or $0.39 of earnings per diluted share for the comparative three month period
ended March 31, 2001.
Net interest income increased by $13.8 million or 76.2% during the
comparable period to $32.0 million, primarily due to an increase in the average
balance of interest-earning assets, together with a 74 basis point increase in
the net interest margin, from 2.18% to 2.92%. The provision for loan losses
amounted to $5.0 million during the three months ended March 31, 2002, a 150%
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.
R&G Financial also experienced an increase in non-interest income
during the three months ended March 31, 2002 over the comparable period. Net
gain on sale of loans increased by $2.7 million or 17.8% over the prior
comparable period, which was due both to the volume of loans sold as well as
the increased profits made on loans sold. Loan administration and servicing
fees also increased by $1.3 million or 16.0% over the comparable periods, due
to the growth in the loan servicing portfolio.
Total expenses increased by $6.9 million or 29.4% during the three
months ended March 31, 2002 over the comparable period, primarily due to a $2.5
million or 32.6% increase in employee compensation and benefits associated with
general growth in Company operations as well as to accommodate increased loan
production, and a $8.1 million or 67.8% increase in other administrative and
general expenses, primarily due to increased amortization on the Company's
servicing assets as well as increased advertising expenses related to increased
loan production and other marketing initiatives.
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, 2002, 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.
21
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 $ 215,384 $ 86,075 $ 194,720 $ 155,186 $ 318,287 $ 969,652
Construction loans 167,302 4,439 30 -- -- 171,771
Commercial real estate loans 427,056 -- -- -- -- 427,056
Consumer loans 57,816 35,560 51,143 21,802 11,179 177,500
Commercial business loans 63,386 7,103 8,109 1,555 369 80,522
Mortgage loans held for sale 32,436 224,491 -- -- -- 256,927
Mortgage-backed securities(2)(3) 176,838 398,899 244,052 194,568 744,565 1,758,922
Investment Securities(3) 122,273 82,394 213,567 188,519 27,431 634,184
Other interest-earning assets(4) 90,784 -- -- -- -- 90,784
----------- --------- --------- --------- ---------- ----------
Total $ 1,353,275 $ 838,961 $ 711,621 $ 561,630 $1,101,831 $4,567,318
Interest bearing liabilities:
Deposits(5)
NOW and Super NOW accounts $ 16,897 $ 47,231 $ 51,918 $ 42,054 $ 179,280 $ 337,380
Passbook saving accounts 6,804 19 732 49,127 39,302 157,206 272,171
Regular and commercial checking 8,841 24,759 27,220 22,048 93,995 176,863
Certificates of Deposit 401,261 354,664 174,129 289,654 2,987 1,222,695
FHLB Advances 221,000 -- 78,125 228,000 -- 527,125
Securities sold under agreements to
repurchase(6) 597,395 247,120 188,781 268,122 138,200 1,439,618
Other borrowings(7) 57,064 139,582 2,289 -- -- 198,935
----------- --------- --------- --------- ---------- ----------
Total 1,309,262 833,088 571,589 889,160 571,668 4,174,787
Effect of hedging instruments 355,000 (200,000) (10,000) (65,000) (80,000) --
----------- --------- --------- --------- ---------- ----------
Excess (deficiency) of interest-earnings
assets over interest-bearing liabilities $ 399,013 $ (194,127) $ 130,032 $(392,550) $ 450,163 $ 392,531
----------- --------- --------- --------- ---------- ----------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 399,013 $ 204,886 $ 334,918 $ (57,632) $ 392,531
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets 8.26% 4.24% 6.93% (1.19)% 8.12%
(footnotes on following page)
22
---------------
(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, if any.
(7) Comprised of warehousing lines, notes payable and other borrowings.
---------------
As of March 31, 2002, the Company had a one year positive gap of
approximately $204,886 million which constituted 4.24% of total assets at such
date, compared to a positive gap of approximately $462.6 million or 9.92% of
total assets at December 31, 2001. R&G Financial's positive gap within one year
at March 31, 2002 and December 31, 2001 is due primarily to an increasing amount
of adjustable rate loans resulting from greater emphasis in commercial and
construction lending as well as to the extension during 2001 of the maturity
dates of certain borrowings of the Company into longer-term maturities at very
attractive rates, taking advantage of reductions in interest rates during such
year. The Company estimates that as of March 31, 2002, close to 45% of all
borrowings of the Company have maturity dates longer than one year. In addition,
the Company has 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.
23
For the three month period ended March 31,
2002 2001
---------------------------------- -----------------------------------
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Interest-Earning Assets:
Cash and cash equivalents(1) $ 40,204 $ 232 2.31% $ 44,287 $ 609 5.50%
Investment securities available for sale 542,083 7,754 5.72 349,735 5,939 6.79
Investment securities held to maturity 23,686 322 5.44 3,687 53 5.75
Mortgage-backed securities held for trading 93,042 1,261 5.42 92,657 1,711 7.39
Mortgage-backed securities available for sale 1,494,962 23,155 6.20 1,019,067 16,064 6.31
Mortgage-backed securities held to maturity 51,369 761 5.93 19,440 295 6.07
Loans receivable, net(2) 2,075,727 38,503 7.42 1,759,195 37,428 8.51
FHLB of New York Stock 67,377 731 4.34 46,240 770 6.66
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 4,388,450 $72,719 6.63% 3,334,308 $62,869 7.54%
---------- ------- ------ ---------- ------- ------
Non-interest-earning assets 359,461 271,150
---------- ------- ------ ---------- ------- ------
Total assets $4,747,911 $3,605,458
========== ======= ====== ========== ======= ======
Interest-Bearing Liabilities:
Deposits $2,062,033 $20,826 4.04% $1,688,221 $23,076 5.47%
Securities sold under agreements to
repurchase(3) 1,309,024 12,343 3.77 844,030 12,556 5.95
Notes payable 257,008 1,772 2.76 178,107 2,044 4.59
Other borrowings(4) 494,135 5,773 4.67 487,918 7,026 5.76
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 4,122,200 $40,714 3.95% 3,198,276 $44,702 5.59%
---------- ------- ------ ---------- ------- ------
Non-interest-bearing liabilities 128,960 58,033
---------- ------- ------ ---------- ------- ------
Total liabilities 4,251,160 3,256,309
---------- ------- ------ ---------- ------- ------
Stockholders' equity 496,751 349,149
---------- ------- ------ ---------- ------- ------
Total liabilities and stockholders' equity $4,747,911 $3,605,458
========== ======= ====== ========== ======= ======
Net interest income; interest rate spread(5) $32,005 2.68% $18,167 1.95%
======= ====== ======= ======
Net interest margin 2.92% 2.18%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 106.46% 104.25%
====== ======
(footnotes on page 25)
24
---------------
(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, if any.
(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,
---------------------------------
2002 2001
----------- ----------
(Dollars in Thousands)
Composition of Servicing Portfolio at period end:
GNMA $ 2,873,566 $3,018,637
FNMA/FHLMC 2,562,129 2,075,226
Other mortgage loans (3) 1,875,371 1,697,698
----------- ----------
Total servicing portfolio (3) $ 7,311,066 $6,791,561
=========== ==========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 7,224,591 $6,634,059
Add: Loan originations and purchases 457,818 393,512
Servicing of portfolio loans acquired 1,798 1,361
Less: Sale of servicing rights(1) (55,423) (41,249)
Run-offs(2) (317,718) (196,122)
----------- ----------
Ending servicing portfolio(3) $ 7,311,066 $6,791,561
=========== ==========
Number of loans serviced 113,456 111,925
Average loan size $ 64 $ 61
Average servicing fee rate 0.52% 0.50%
---------------
(1) Corresponds to loans sold, servicing released, by Continental Capital.
25
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) At the dates shown, included $942.6 million and $986.2 million of
loans serviced for the Bank, respectively, which constituted 12.9% and
14.5% 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, 2002 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, 2002 and 2001, the Company recognized $1,973,000 and
$675,000, respectively, of unscheduled amortization on 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, 2002, the Company had $105.5 million in borrowing
capacity under unused warehousing and other lines of credit, $670.9 million in
borrowings capacity under unused lines of credit with the FHLB of New York and
$25 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, 2002, the Company had outstanding commitments to
originate and/or purchase mortgage and non-mortgage loans of $176.2 million
(including unused lines of credit). Certificates of deposit which are scheduled
to mature within one year totaled $1.0 billion at March 31, 2002, and
borrowings that are scheduled to mature within the same period amounted to $1.2
billion. The Company anticipates that it will have sufficient funds available
to meet its current loan commitments.
26
In December 2001, the Company entered into a definite merger
agreement, as amended, pursuant to which it will acquire The Crown Group, Inc.,
a Florida savings and loan holding company, and its wholly-owned savings bank
subsidiary, Crown Bank, a Federal Savings Bank, hereinafter collectively
referred to as "Crown". The cost of the acquisition to R-G Financial is $100
million of cash.
In March 2002, the Company completed the public offering of its Series
D Non-Cumulative Perpetual Monthly Income Preferred Stock, with aggregate gross
proceeds of $69.0 million. In April 2002, the Company completed the private
issuance of $25.0 million pooled trust preferred securities. Both of these
transactions facilitate the funding for the Crown acquisition. The Company
expects the balance of the funds for the Crown acquisition will come from its
general working capital.
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, 2002, 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 6.62%, 12.04% and 12.86%, 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.
27
"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 ("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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risks at
December 31, 2001 are presented in Item 7A of the Company's Annual report on
Form 10-K. Information at March 31, 2002 is presented on page 21 of this
Report. Management believes there have been no material changes in the
Company's market risk since December 31, 2001.
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
28
None
b) The Registrant filed a report on Form 8-K on February 28,
2002, announcing that it had entered into a Second Amendment
to the Agreement and Plan of Reorganization between the
Registrant, its Florida subsidiary, R&G Acquisition Holdings
Corporation and The Crown Group, Inc. and its wholly-owned
subsidiary Crown Bank, a Federal Savings Bank.
The Registrant filed a report on Form 8-K on March 7, 2002
announcing the filing of the definitive Certificate of
Designation for its 7.25% Non-Cumulative Perpetual Monthly
Income Preferred Stock, Series D, the offering for which
closed on March 5, 2002.
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 15, 2002 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)
29