SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 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
--------------------------------------------------------------------------------
(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 June 30, 2001:
14,237,884 (Does not include 16,440,556 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
1
R&G FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements .......................................................................3
Consolidated Statements of Financial Condition as of
June 30, 2001 (Unaudited) and December 31, 2000........................................3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2001 and 2000 (Unaudited)........................................4
Consolidated Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 2001 and 2000 (Unaudited)........................................5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000 (Unaudited) ..............................................6
Notes to Unaudited Consolidated Financial Statements ...........................................7
ITEM 2...Management's Discussion and Analysis ...................................................................16
ITEM 3...Quantitative and Qualitative Disclosures about Market Risk..............................................26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ......................................................................................26
ITEM 2. Changes in Securities ..................................................................................26
ITEM 3. Defaults upon Senior Securities ........................................................................26
ITEM 4. Submission of Matters ..................................................................................26
ITEM 5. Other Information ......................................................................................26
ITEM 6. Exhibits and Reports on Form 8-K .......................................................................27
Signatures .........................................................................................27
2
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2001 2000
---------------------------------------
(Unaudited)
ASSETS
Cash and due from banks $ 34,939,363 $ 43,466,268
Money market investments:
Securities purchased under agreements to resell 11,001,302 --
Time deposits with other banks 17,826,549 25,623,696
Federal funds sold -- --
Mortgage loans held for sale, at lower of cost or market 214,443,748 95,668,320
Mortgage-backed securities held for trading, at fair value 71,371,300 --
Trading securities pledged on repurchase agreements, at fair value 57,955,798 12,038,040
Mortgage-backed and investment securities available for sale, at fair value 1,140,757,220 1,044,164,433
Available for sale securities pledged on repurchase agreements 579,252,201 474,206,504
Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2001 - $41,610,100; 2000 - $5,111,404) 41,717,530 5,121,108
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2001 - $13,523,679; 2000 - $18,265,000) 13,342,552 18,400,485
Loans receivable, net 1,729,956,898 1,631,276,069
Accounts receivable, including advances to investors, net 23,529,649 16,107,136
Accrued interest receivable 33,610,085 28,919,237
Servicing asset 100,807,935 95,078,530
Premises and equipment 20,459,136 20,144,726
Other assets 36,919,707 29,229,655
-------------- --------------
$4,127,890,973 $3,539,444,207
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,839,450,930 $1,676,062,163
Federal funds purchased -- 25,000,000
Securities sold under agreements to repurchase 1,122,958,638 827,749,494
Notes payable 258,301,225 138,857,562
Advances from FHLB 408,625,000 505,000,000
Other borrowings 8,490,630 8,839,770
Accounts payable and accrued liabilities 56,124,127 43,614,238
Other liabilities 9,879,110 5,485,330
-------------- --------------
3,703,829,660 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, 16,440,556
issued and outstanding 164,406 184,406
Class B - $.01 par value, 40,000,000 shares authorized, 14,237884
issued and outstanding in 2001 (2000-10,230,029) 142,379 102,300
Additional paid-in capital 66,607,593 40,800,652
Retained earnings 206,444,727 186,028,611
Capital reserves of the Bank 7,444,108 7,444,108
Accumulated other comprehensive loss (741,900) (724,427)
-------------- --------------
424,061,313 308,835,650
-------------- --------------
$4,127,890,973 $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 Six month
period ended period ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
Interest income:
Loans $ 36,356 $ 40,049 $ 73,784 $ 76,778
Money market and other investments 8,238 6,063 15,608 11,270
Mortgage-backed securities 19,897 11,599 37,968 22,946
------------ ------------ ------------ ------------
Total interest income 64,491 57,711 127,360 110,994
------------ ------------ ------------ ------------
Interest expense:
Deposits 22,619 19,031 45,695 36,057
Securities sold under agreements to repurchase 11,960 11,714 24,516 22,249
Notes payable 2,978 2,899 5,022 6,264
Other 5,513 7,334 12,539 12,931
------------ ------------ ------------ ------------
Total interest expense 43,070 40,978 87,772 77,501
------------ ------------ ------------ ------------
Net interest income 21,421 16,733 39,588 33,493
Provision for loan losses (2,100) (1,500) (4,100) (2,850)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 19,321 15,233 35,488 30,643
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 11,948 9,489 26,986 16,813
Loan administration and servicing fees 8,670 7,379 16,693 14,990
Service charges, fees and other 3,380 1,936 5,905 3,425
------------ ------------ ------------ ------------
23,998 18,804 49,584 35,228
------------ ------------ ------------ ------------
Total revenues 43,319 34,037 85,072 65,871
------------ ------------ ------------ ------------
Operating expenses:
Employee compensation and benefits 7,299 5,977 14,849 13,204
Office occupancy and equipment 4,119 3,325 8,021 6,577
Other administrative and general 12,448 10,528 24,324 20,121
------------ ------------ ------------ ------------
23,866 19,830 47,194 39,902
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect from
change in accounting principle 19,453 14,207 37,878 25,969
------------ ------------ ------------ ------------
Income tax expense:
Current 3,015 4,913 7,211 7,345
Deferred 1,000 (1,414) 1,900 (1,571)
------------ ------------ ------------ ------------
4,015 3,499 9,111 5,774
------------ ------------ ------------ ------------
Income before cumulative effect
from change in accounting principle 15,438 10,708 28,767 20,195
Cumulative effect from change in accounting principle,
net of income tax benefit of $206 -- -- (323) --
------------ ------------ ------------ ------------
Net income $ 15,438 $ 10,708 $ 28,444 $ 20,195
============ ============ ============ ============
Earnings per common share before cumulative
effect from change in accounting principle - Basic $ 0.44 $ 0.32 $ 0.85 $ 0.60
------------ ------------ ------------ ------------
Earnings per common share before cumulative
effect from change in accounting principle - Diluted $ 0.43 $ 0.32 $ 0.82 $ 0.59
------------ ------------ ------------ ------------
Earnings per common share - Basic $ 0.44 $ 0.32 $ 0.83 $ 0.60
------------ ------------ ------------ ------------
- Diluted $ 0.43 $ 0.32 $ 0.81 $ 0.59
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic 28,766,054 28,659,775 28,719,992 28,659,441
- Diluted 29,483,654 29,314,283 29,439,720 29,315,314
The accompanying notes are an integral part of these statements.
4
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month Six month
period ended period ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Dollars in thousands)
Net income $ 15,438 $ 10,708 $ 28,444 $ 20,195
-------- -------- -------- --------
Other comprehensive income, before tax:
Unrealized gains (losses):
Cash flow hedges (3,751) -- (5,742) --
-------- -------- -------- --------
Investment securities:
Arising during period (3,821) (498) 5,047 (2,384)
Less: Reclassification adjustments for (gains) losses included
in net income 228 73 (1,244) 153
-------- -------- -------- --------
(3,593) (425) 3,803 (2,231)
-------- -------- -------- --------
(7,344) (425) (1,939) (2,231)
Income tax benefit related to items of other comprehensive income 2,864 166 756 870
-------- -------- -------- --------
(4,480) (259) (1,183) (1,361)
Cumulative effect from change in accounting principle,
net of income taxes of $745 -- -- 1,166 --
-------- -------- -------- --------
Other comprehensive loss, net of tax (4,480) (259) (17) (1,361)
-------- -------- -------- --------
Comprehensive income, net of tax $ 10,958 $ 10,449 $ 28,427 $ 18,834
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
5
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month period ended
June 30,
--------------------------
2001 2000
(Unaudited)
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 28,444 $ 20,195
---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,180 2,557
Amortization of premium on investment securities, net 208 119
Amortization of servicing rights 6,621 4,740
Provision for loan losses 4,100 2,850
Provision for bad debts in accounts receivable 450 220
Gain on sales of loans (225) (207)
(Gain) loss on sales of securities available for sale (1,244) 153
Unrealized loss (profit) on trading securities and derivative instruments 725 (155)
Increase in mortgage loans held for sale (151,499) (73,547)
Net (increase) decrease in mortgage-backed securities held for trading (40,607) 29,996
Increase in receivables (11,757) (3,374)
Increase in other assets (8,856) (5,948)
Increase in notes payable and other borrowings 119,094 21,458
Increase in accounts payable and accrued liabilities 7,831 7,957
Increase in other liabilities 4,394 1,193
---------- ----------
Total adjustments (67,584) (11,988)
---------- ----------
Net cash (used in) provided by operating activities (39,140) 8,207
---------- ----------
Cash flows from investing activities:
Purchases of investment securities (412,389) (78,080)
Proceeds from sales of securities available for sale 158,041 20,625
Proceeds from maturities of securities held to maturity -- --
Principal repayments and redemptions of investment securities 208,783 19,816
Proceeds from sales of loans 63,676 30,993
Net originations of loans (386,181) (298,361)
Purchases of FHLB stock, net (6,833) (6,667)
Acquisition of premises and equipment (2,952) (1,503)
Acquisition of servicing rights (12,350) (8,348)
---------- ----------
Net cash used in investing activities (390,205) (321,525)
---------- ----------
Cash flows from financing activities:
Increase in deposits - net 163,389 193,096
Decrease in federal funds purchased (25,000) --
Increase in securities sold under agreements to repurchase - net 295,209 55,711
(Repayments) advances from FHLB, net (96,375) 67,000
Proceeds from issuance of preferred stock 66,602 --
Proceeds from issuance of common stock 28,225 13
Cash dividends:
Common stock (3,549) (2,687)
Preferred stock (4,479) (2,819)
---------- ----------
Net cash provided by financing activities 424,022 310,314
---------- ----------
Net decrease in cash and cash equivalents (5,323) (3,004)
Cash and cash equivalents at beginning of period 69,090 65,996
---------- ----------
Cash and cash equivalents at end of period $ 63,767 $ 62,992
========== ==========
Cash and cash equivalents include:
Cash and due from banks $ 34,939 $ 28,511
Securities purchased under agreements to resell 11,001 6,062
Time deposits with other banks 17,827 18,419
Federal funds sold -- 10,000
---------- ----------
$ 63,767 $ 62,992
========== ==========
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, and Home & Property Insurance Corp., a Puerto Rico corporation and
insurance agency.
The Company, currently in its 29th year of operations, operates R&G
Mortgage, which is engaged primarily in the business of originating FHA-insured,
VA- guaranteed, and privately insured first and second mortgage loans on
residential real estate. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.
R&G Mortgage 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-four branches located
mainly in the northeastern part of the Commonwealth of Puerto Rico. The Bank
also provides private banking and trust and other financial services to its
customers. The Bank is subject to the regulations of certain federal and local
agencies, and undergoes periodic examinations by those regulatory agencies.
The Bank also is engaged in the business of originating FHA insured, VA
guaranteed and privately insured first and second mortgage loans on residential
real estate (1 to 4 families) in the States of New York, New Jersey,
Connecticut, North Carolina and Florida, through its wholly-owned subsidiary,
Continental Capital Corporation ("Continental Capital").
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of June 30, 2001 and the results of
operations and changes in its cash flows for the three and six months ended June
30, 2001 and 2000.
The results of operations for the three and six months periods ended
June 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.
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.
NOTE 2 - EARNINGS AND DIVIDENDS PER SHARE
Basic earnings per common share for the three and six month periods
ended June 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 (717,600 and 654,508 during the three month periods ended June 30,
2001 and 2000, respectively, and 719,728 and 655,873 during the six month
periods ended June 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 Six month
period ended period ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
$0.06375 $0.04875 $0.12375 $0.09375
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.
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
GNMA certificates $ 13,830,035 $ 12,038,040
FHLMC certificates 115,497,063 --
------------ ------------
$129,327,098 $ 12,038,040
============ ============
8
June 30, 2001 December 31, 2000
Amortized Fair Amortized Fair
cost value cost value
-------------- ------------------------------------------------------
(Unaudited)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
CMO residuals (interest only), interest only strips (IO's)
and other mortgage-backed securities $ 67,810,249 $ 69,361,210 $ 21,398,077 $ 23,227,026
-------------- -------------- -------------- --------------
FNMA certificates:
Due from five to ten years 570,018 571,621 633,552 633,552
Due over ten years 309,829,665 310,234,146 98,779,069 99,968,168
-------------- -------------- -------------- --------------
310,399,683 310,805,767 99,412,621 100,601,720
-------------- -------------- -------------- --------------
FHLMC certificates:
Due within one year 6,850 6,964 13,395 13,395
Due from one to five years 110,208 111,114 131,526 129,956
Due from five to ten years 1,467,925 1,487,123 1,587,103 1,587,034
Due over ten years 280,427,453 281,730,562 434,864,554 437,226,389
-------------- -------------- -------------- --------------
282,012,436 283,335,763 436,596,578 438,956,774
-------------- -------------- -------------- --------------
GNMA certificates:
Due from one to five years 50,042 50,293 25,582 25,502
Due from five to ten years 8,977,908 8,946,947 10,491,790 10,419,318
Due over ten years 556,278,055 554,299,571 584,419,215 576,869,337
-------------- -------------- -------------- --------------
565,306,005 563,296,811 594,936,587 587,314,157
-------------- -------------- -------------- --------------
1,225,528,373 1,226,799,551 1,152,343,863 1,150,099,677
-------------- -------------- -------------- --------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Government and Agencies securities:
Due within one year 4,400,000 4,430,620 8,500,000 8,446,450
Due from one to five years 86,547,025 87,643,526 192,762,585 193,298,396
Due from five to ten years 304,411,879 304,191,232 114,881,388 115,351,548
-------------- -------------- -------------- --------------
395,358,904 396,265,378 316,143,973 317,096,394
-------------- -------------- -------------- --------------
Corporate debt obligations
Due from one to five years 43,700,525 44,138,025 5,097,519 5,201,699
-------------- -------------- -------------- --------------
FHLB stock 52,806,467 52,806,467 45,973,167 45,973,167
-------------- -------------- -------------- --------------
491,865,896 493,209,870 367,214,659 368,271,260
-------------- -------------- -------------- --------------
$1,717,394,269 $1,720,009,421 $1,519,558,522 $1,518,370,937
============== ============== ============== ==============
9
June 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 7,644,820 7,466,320 8,864,274 8,605,749
Due over ten years 25,156,999 25,112,593 1,844,978 1,765,812
------------ ------------ ------------ ------------
32,801,819 32,578,913 10,711,687 10,374,172
------------ ------------ ------------ ------------
FNMA certificates:
Due over ten years 8,387,953 8,688,412 8,946,973 9,145,168
------------ ------------ ------------ ------------
FHLMC certificates:
Due over ten years 142,542 138,686 159,544 153,675
------------ ------------ ------------ ------------
41,332,314 41,406,011 19,818,204 19,673,015
------------ ------------ ------------ ------------
INVESTMENT SECURITIES HELD TO MATURITY:
Puerto Rico Government and Agencies obligations:
Due from one to five years 2,298,000 2,298,000 1,948,000 1,948,000
Due from five to ten years 11,329,768 11,329,768 1,755,389 1,755,389
------------ ------------ ------------ ------------
13,627,768 13,627,768 3,703,389 3,703,389
Other 100,000 100,000 -- --
------------ ------------ ------------ ------------
13,727,768 13,727,768 3,703,389 3,703,389
------------ ------------ ------------ ------------
$ 55,060,082 $ 55,133,779 $ 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 June 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 $ 541,581,461
Mortgage -backed securities held to maturity, at
amortized cost 1,849,438
-------------
$ 543,430,899
=============
10
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
June 30, December 31,
2001 2000
-------------------------------------------
(Unaudited)
Real estate loans:
Residential - first mortgage $ 1,038,118,638 $ 998,983,595
Residential - second mortgage 34,307,820 27,419,145
Land 7,493,679 6,049,179
Construction 170,279,239 151,692,483
Commercial 331,495,499 304,104,485
---------------- ----------------
1,581,694,875 1,488,248,887
Undisbursed portion of loans in process (87,436,434) (78,163,117)
Net deferred loan costs 1,148,547 908,553
---------------- ----------------
1,495,406,988 1,410,994,323
---------------- ----------------
Other loans:
Commercial 75,119,727 59,120,394
Consumer:
Secured by deposits 30,846,315 26,925,836
Secured by real estate 94,198,316 100,357,019
Other 47,449,500 45,563,186
Unearned interest (88,237) (85,055)
---------------- ----------------
247,525,621 231,881,380
---------------- ----------------
Total loans 1,742,932,609 1,642,875,703
Allowance for loan losses (12,975,711) (11,599,634)
---------------- ----------------
$ 1,729,956,898 $ 1,631,276,069
================ ================
The changes in the allowance for loan losses follow:
Six months ended
June 30,
---------------------------
2001 2000
-------- --------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 11,600 $ 8,971
Provision for loan losses 4,100 2,850
Transferred reserves 806 --
Loans charged-off (3,819) (1,814)
Recoveries 289 424
-------- --------
Balance, end of period $ 12,976 $ 10,431
======== ========
11
The following table sets forth the amounts and categories of R&G Financial's
non-performing assets at the dates indicated.
June 30, December 31,
2001 2000
(Unaudited)
-----------------------------
(Dollars in thousands)
Non-accruing loans:
Residential real estate $ 93,844 $ 79,234
Residential construction 823 487
Commercial real estate 15,338 11,881
Commercial business 2,738 1,414
Consumer unsecured 290 1,186
-----------------------------
Total 113,033 94,202
-----------------------------
Accruing loans greater than 90 days delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 328 420
Consumer 609 360
-----------------------------
Total accruing loans greater than
90 days delinquent 937 780
-----------------------------
Total non-performing loans 113,970 94,982
-----------------------------
Real estate owned, net of reserves 10,552 9,056
Other repossessed assets 917 583
-----------------------------
11,469 9,639
-----------------------------
Total non-performing assets $125,439 $104,621
-----------------------------
Total non-performing loans as a
percentage of total loans(1) 6.23% 5.52%
-----------------------------
Total non-performing assets as a
percentage of total assets 3.04% 2.96%
-----------------------------
Allowance for loan losses as a percentage
of total non-performing loans(2) 11.39% 12.21%
-----------------------------
Allowance for loan losses as a percentage
of total loans outstanding(2) 0.71% 0.67%
-----------------------------
Net charge-offs to average loans
outstanding 0.39% 0.17%
-----------------------------
----------------------
(1) The increase in the ratio was partially caused by significant loan
securitizations during the last two quarters of 2000 and the first two
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 June 30, 2001 and December 31,
2000, the ratio of non-performing loans to total loans would have been
4.72% 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 June 30, 2001 and December 31, 2000 would have been 1.71% and
64.5%, respectively, and 1.67% and 73.7%, respectively.
12
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
For the six month period ended June 30,
2001 2000
------------ ------------
(Unaudited)
Balance at beginning of period $ 95,078,530 $ 84,252,506
Rights originated 11,535,484 3,982,151
Rights purchased 814,513 4,366,308
Scheduled amortization (5,270,592) (4,740,324)
Unscheduled amortization (1,350,000) --
------------ ------------
Balance at end of period $100,807,935 $ 87,860,641
============ ============
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:
June 30, December 31,
2001 2000
-------------------------------
(Unaudited)
(Dollars in Thousands)
Passbook savings $ 125,062 $ 116,776
---------- ----------
NOW accounts 49,839 43,271
Super NOW accounts 145,629 97,172
Regular checking accounts
(non-interest bearing) 82,305 70,760
Commercial checking accounts
(non-interest bearing) 132,038 101,178
---------- ----------
409,811 312,381
---------- ----------
Certificates of deposit:
Under $100,000 527,875 489,221
$100,000 and over 771,378 749,081
---------- ----------
1,299,253 1,238,302
---------- ----------
Accrued interest payable 5,325 8,603
---------- ----------
$1,839,451 $1,676,062
========== ==========
13
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of June 30, 2001, the Company had open commitments to issue GNMA
certificates of approximately $15.0 million.
COMMITMENTS TO SELL MORTGAGE LOANS
As of June 30, 2001 the Company had commitments to sell mortgage loans
to third party investors amounting to approximately $220.8 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 June 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 $539.8 million at June 30, 2001. Liability, if any,
under the recourse provisions at June 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 Six month period ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Employee costs $ 13,348,888 $ 10,049,783 $ 26,046,713 $ 21,160,486
------------ ------------ ------------ ------------
Other administrative and general expenses $ 13,914,823 $ 11,455,002 $ 26,630,432 $ 21,952,471
------------ ------------ ------------ ------------
14
NOTE 9 - INDUSTRY SEGMENTS
The following summarized information presents the results of the Company's
operations for its traditional banking and mortgage banking activities:
($ in thousands)
-----------------------------------------------------------------------------
Three month period ended June 30
-----------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
-----------------------------------------------------------------------------
Revenues $22,653 $20,302 $1,373 $44,328 $17,629 $17,283 $ -- $34,912
Non-interest expenses 10,669 13,322 286 24,277 8,631 11,814 -- 20,445
-----------------------------------------------------------------------------
Income before income taxes and cumulative
effect from change in accounting principle $11,984 $ 6,980 $1,087 $20,051 $ 8,998 $ 5,469 $ -- $14,467
=============================================================================
Six month period ended June 30
------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
------------------------------------------------------------------------------
Revenues $47,450 $38,126 $2,142 $87,718 $34,004 $33,600 $ -- $67,604
Non-interest expenses 21,233 26,978 489 48,700 17,816 23,408 -- 41,224
------------------------------------------------------------------------------
Income before income taxes and cumulative
effect from change in accounting principle $26,217 $11,148 $1,653 $39,018 $16,188 $10,192 $ -- $26,380
==============================================================================
15
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 and insurance activities. Its mortgage banking
activities include the origination, purchase, sale and servicing of mortgage
loans on single-family residences, the issuance and sale of various types of
mortgage-backed securities, the holding of mortgage loans, mortgage-backed
securities and other investment securities for sale or investment, and the
purchase and sale of servicing rights associated with such mortgage loans and,
to a lesser extent, the origination of construction loans and mortgage loans
secured by income producing real estate and land (the "mortgage banking
business").
The Company is also engaged in providing a full range of banking
services, including commercial banking services, corporate and construction
lending, consumer lending and credit cards, offering a diversified range of
deposit products and, to a lesser extent, trust and investment services through
its private banking department.
R&G Financial is currently in its 29th year of operations. The Company
is the second largest mortgage loans originator and servicer of mortgage loans
on single family residences in Puerto Rico. R&G Financial's mortgage servicing
portfolio increased to approximately $6.9 billion as of June 30, 2001, from $6.4
billion as of the same date a year ago, an increase of 8.2%. 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 June 30, 2001, the Company held securities available for sale with a fair
market value of $1.7 billion, which included $1.2 billion of mortgage-backed
securities of which $563.3 million consisted primarily of Puerto Rico GNMA
securities, the interest on which is tax-exempt to the Company. These securities
are generally held by the Company for longer periods prior to sale in order to
maximize the tax-exempt interest received thereon.
A substantial portion of R&G Financial's total mortgage loan
originations has consistently been comprised of refinance loans. R&G Financial's
future results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity. However, the Company believes
that refinancing activity is less sensitive to interest rate changes in Puerto
Rico than in the mainland United States because a significant amount of
refinance loans are made for debt consolidation purposes.
R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as loans
receivable.
FINANCIAL CONDITION
At June 30, 2001, total assets amounted to $4.1 billion, as compared to
$3.5 billion at December 31, 2000. The $588.4 million or 16.6% increase in total
assets since year-end was primarily the result of a $201.6 million or 13.3%
increase in mortgage-backed and investment securities available for sale, a
$117.3 million or 974.3% increase in mortgage-backed securities held for
trading, a $118.8 million or 124.2% increase in mortgage loans held for sale and
a $98.7 million or 6.0% increase in loans receivable, net.
At June 30, 2001, deposits totaled $1.8 billion, an increase of $163.4
million or 9.7% when compared to December 31, 2000. In addition, at June 30,
2001, R&G Financial had $1.8 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
utilized deposits (primarily certificates of deposits) and repurchase agreements
to fund its growth during the period.
16
At June 30, 2001, R&G Financial's allowance for loan losses totaled $13.0
million, which represented a $1.4 million or 11.9% increase from the level
maintained at December 31, 2000. At June 30, 2001, R&G Financial's allowance
represented approximately 0.71% of the total loan portfolio and 11.39% 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 1.71%
and 64.5%, respectively, at June 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 $114.0 million at June 30, 2001, an
increase of $54.6 million when compared to $59.4 million at December 31, 1999.
However, $46.4 million or 85% 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 0.39% during the first half of 2001, 0.17% during 2000 and 0.25% during 1999.
Although loan delinquencies have historically been higher in Puerto Rico than in
the United States, actual foreclosures and any resulting loan charge-offs have
historically been lower than in the United States. While the ratio of
non-performing loans to total loans increased from 3.69% to 5.52% from December
31, 1999 to December 31, 2000 and to 6.23% at June 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 half of 2001,
which reduced the amount of loans considered in the calculation of the ratio.
Without giving effect to loan securitizations, as of June 30, 2001 and December
31, 2000, the ratio of non-performing loans would have been 4.72% and 4.46%,
respectively.
Stockholders' equity increased from $308.8 million at December 31, 2000
to $424.1 million at June 30, 2001. The $115.2 million or 37.3% increase was due
primarily to the issuance of 2,000,000 shares of Class B common stock on June
27, 2001 for aggregate net proceeds of $28.2 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
during the period.
RESULTS OF OPERATIONS
During the three and six months ended June 30, 2001, R&G Financial
reported net income before the cumulative effect of a change in accounting
principle of $15.4 million and $28.8 million, or $0.43 and $0.82 of earnings per
diluted share, respectively, compared to $10.7 million and $20.2 million or
$0.32 and $0.59 of earnings per diluted share for the comparative periods in
2000.
Net interest income increased by $6.1 million or 18.2% during the six
month period ended June 30, 2001 to $39.6 million, primarily due to an increase
in the average balance of interest-earning assets, which was partially offset by
a 5 basis point decline in the net interest margin from 2.34% to 2.29%. With
interest rates currently declining, R&G Financial expects a gradual improvement
in its net interest margin, as evidenced by the 14 basis point improvement in
the three month period ended June 30, 2001 when compared with the three month
period ended June 30, 2000. The provision for loan losses amounted to $4.1
million during the six months ended June 30, 2001, a 44% increase over the prior
comparable period, as R&G Financial increased it general reserves to reflect the
expected continued growth in commercial lending, which involves greater credit
risk than residential lending.
R&G Financial also experienced an increase in non-interest income
during the six months ended June 30, 2001 over the prior comparable period. Net
gain on sale of loans increased significantly, by $10.2 million or 61% 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 $1.7 million or 11% over the comparable
periods, due to the growth in the loan servicing portfolio.
Net interest income increased by $4.7 million or 28% to $21.4 million
during the quarter ended June 30, 2001, due to an increase in the average
balance of interest-earning assets, together with a 14 basis points increase in
the net interest margin from 2.25% to 2.39%. Net gain on sale of loans increased
26% to $11.9 million during the three month ended June 30, 2001.
17
Total expenses increased by $7.3 million or 18% during the six months
ended June 30, 2001 over the prior comparable period, primarily due to a $4.2
million or 21% 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 $1.6 million or 12% associated with employees hired to
accommodate increased loan production. These increases were accompanied by a
$1.4 million or 22% increase in occupancy expenses.
Total expenses increased by $4.0 million or 20% during the three month
period ended June 30, 2001 over the prior comparable period, due to a $1.9
million or 18% increase in other general and administrative expenses, a $1.3
million or 22% increase in employee compensation and benefits, and a $794,000 or
24% increase in occupancy expenses.
The Company's effective tax rate decreased from 25% during the three
month period ended June 30, 2000 to 21% during the three month period ended June
30, 2001. The decrease in the Company's effective tax rate during the quarter
ended June 30, 2001 is primarily related to increases in the Company's
tax-exempt interest income as a result of growth of the Company's tax-exempt
securities portfolio.
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 June 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.
18
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 $ 36,266 $ 102,168 $ 229,629 $ 178,342 $ 533,515 $1,079,920
Construction loans 55,621 12,173 15,049 -- -- 82,843
Commercial real estate loans 331,495 -- -- -- -- 331,495
Consumer loans 46,368 37,207 50,820 23,219 14,880 172,494
Commercial business loans 56,328 8,326 9,027 1,430 9 75,120
Mortgage loans held for sale 35,453 178,991 -- -- -- 214,444
Mortgage-backed securities(2)(3) 164,022 465,330 171,689 136,365 460,053 1,397,459
Investment Securities(3) 147,836 156,963 140,586 57,493 4,060 506,938
Other interest-earning assets(4) 28,528 300 -- -- -- 28,828
--------------------------------------------------------------------------------------
Total $ 901,917 $ 961,458 $ 616,800 $ 396,849 $1,012,517 $3,889,541
======================================================================================
Interest bearing liabilities:
Deposits(5)
NOW and Super NOW accounts $ 9,774 $ 27,366 $ 30,083 $ 24,367 $ 103,878 $ 195,468
Passbook savings accounts 3,126 9,066 22,574 18,059 72,237 125,062
Regular and commercial checking 10,737 30,065 33,049 26,770 114,125 214,746
Certificates of deposit 357,809 686,048 88,402 161,294 5,700 1,299,253
FHLB advances 55,000 88,000 78,125 187,500 -- 408,625
Securities sold under agreements to
repurchase(6) 677,755 130,756 95,724 10,524 208,200 1,122,959
Other borrowings(7) 72,718 170,074 24,000 -- -- 266,792
--------------------------------------------------------------------------------------
Total 1,186,919 1,141,375 371,957 428,514 504,140 3,632,905
--------------------------------------------------------------------------------------
Effect of hedging instruments (355,000) -- 210,000 65,000 80,000 --
--------------------------------------------------------------------------------------
$ 831,919 $ 1,141,375 $ 581,957 $ 493,514 $ 584,140 $3,632,905
======================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 69,998 $ (179,917) $ 34,843 $ (96,665) $ 428,377 $ 256,636
--------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 69,998 $ (109,919) $ (75,076) $(171,741) $ 256,636
--------------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets 1.70% (2.66)% (1.82)% (4.16)% 6.22%
--------------------------------------------------------------------------------------
(footnotes on following page)
19
----------------------
(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 June 30, 2001, the Company had a one year negative gap of
approximately $109.9 million which constituted 2.7% 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 is
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 six months
ended June 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 quarter. In addition, the Company
entered into certain derivative instruments and increased its portfolio of
investment securities held for trading, reducing its gap exposure. While the
above table presents the Company's loans receivable portfolio held for
investment purposes according to its maturity date, from time to time the
Company may negotiate special transactions with FHLMC and/or FNMA or other third
party investors for the sale of such loans. There can be no assurance, however,
that the Company will be successful in consummating any such transactions.
The following table presents for the periods indicated R&G Financial's
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for R&G Mortgage and average daily
balances for the Bank in each case during the periods presented.
20
For the three month period ended June 30,
2001 2000
------------------------------------------------------------------------------
Average Yield / Average Yield /
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------
Interest-Earning Assets:
Cash and cash equivalents(1) $ 36,761 $ 412 4.48% $ 15,303 $ 255 6.67%
Investment securities available for sale 411,499 6,981 6.79 292,883 5,160 7.05
Investment securities held to maturity 5,013 72 5.75 5,435 80 5.81
Mortgage-backed securities held for trading 118,935 1,603 5.39 20,043 285 5.69
Mortgage-backed securities available for sale 1,113,737 18,023 6.47 699,111 10,990 6.29
Mortgage-backed securities held to maturity 18,517 271 5.85 21,747 324 5.96
Loans receivable, net(2) 1,826,157 36,356 7.96 1,880,260 40,049 8.52
FHLB of New York Stock 48,079 773 6.43 38,282 568 5.95
------------------------------------------------------------------------------
Total interest-earning assets 3,578,698 $64,491 7.21% 2,973,064 $57,711 7.76%
------------------------------------------------------------------------------
Non-interest-earning assets 320,984 223,406
------------------------------------------------------------------------------
Total assets $3,899,682 $3,196,470
=============================================================================
Interest-Bearing Liabilities:
Deposits $1,758,890 $22,619 5.14% $1,468,826 $19,031 5.18%
Securities sold under agreements to
repurchase(3) 974,468 11,960 4.91 756,593 11,714 6.19
Notes payable 248,511 2,978 4.79 178,484 2,899 6.50
Other borrowings(4) 418,551 5,513 5.27 451,430 7,334 6.50
------------------------------------------------------------------------------
Total interest-bearing liabilities 3,400,420 $43,070 5.07% 2,855,333 $40,978 5.74%
------------------------------------------------------------------------------
Non-interest-bearing liabilities 105,971 61,226
------------------------------------------------------------------------------
Total liabilities 3,506,391 2,916,559
------------------------------------------------------------------------------
Stockholders' equity 393,291 279,911
------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,899,682 $3,196,470
=============================================================================
Net interest income; interest rate spread(5) $21,421 2.14% $16,733 2.02%
------------------- -------------------
Net interest margin 2.39% 2.25%
------ ------
Average interest-earning assets to average
interest-bearing liabilities 105.24% 104.12%
------ ------
(footnotes on page 23)
21
For the six month period ended June 30,
2001 2000
------------------------------------------------------------------------------
Average Yield / Average Yield /
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------
Interest-Earning Assets:
Cash and cash equivalents(1) $ 40,503 $ 1,021 5.04% $ 14,031 $ 441 6.29%
Investment securities available for sale 380,788 12,919 6.79 273,231 9,534 6.98
Investment securities held to maturity 4,354 125 5.74 5,436 158 5.81
Mortgage-backed securities held for trading 105,868 3,315 6.26 22,203 663 5.97
Mortgage-backed securities available for sale 1,066,664 34,087 6.39 696,785 21,615 6.20
Mortgage-backed securities held to maturity 18,976 566 5.97 22,282 668 6.00
Loans receivable, net(2) 1,792,861 73,784 8.23 1,797,919 76,778 8.54
FHLB of New York Stock 47,165 1,543 6.54 36,086 1,137 6.30
-------------------------------------------------------------------------------
Total interest-earning assets 3,457,179 $ 127,360 7.37% 2,867,973 $110,994 7.74%
-------------------------------------------------------------------------------
Non-interest-earning assets 322,423 233,671
-------------------------------------------------------------------------------
Total assets $3,779,602 $3,101,644
===============================================================================
Interest-Bearing Liabilities:
Deposits $1,723,751 $ 45,695 5.30% $1,422,537 $ 36,057 5.07%
Securities sold under agreements to
repurchase(3) 909,610 24,582 5.40 724,384 22,249 6.14
Notes payable 213,504 5,022 4.70 197,121 6,264 6.36
Other borrowings(4) 453,043 12,473 5.51 420,733 12,931 6.15
-------------------------------------------------------------------------------
Total interest-bearing liabilities 3,299,908 $ 87,772 5.32% 2,764,775 $ 77,501 5.61%
-------------------------------------------------------------------------------
Non-interest-bearing liabilities 114,555 60,417
-------------------------------------------------------------------------------
Total liabilities 3,414,463 2,825,192
-------------------------------------------------------------------------------
Stockholders' equity 365,139 276,452
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,779,602 $3,101,644
===============================================================================
Net interest income; interest rate spread(5) $ 39,588 2.05% $ 33,493 2.13%
---------- ------ -------- ------
Net interest margin 2.29% 2.34%
------ ------
Average interest-earning assets to average
interest-bearing liabilities 104.77% 103.73%
------ ------
(footnotes on following page)
22
----------------------
(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.
June 30,
------------------------------------
2001 2000
------------------------------------
(Dollars in Thousands)
Composition of Servicing Portfolio at period end:
GNMA $ 2,974,223 $ 2,984,115
FNMA/FHLMC 2,175,019 1,493,886
Other mortgage loans(3) 1,778,375 1,926,893
------------ ------------
Total servicing portfolio(3) $ 6,927,617 $ 6,404,894
============ ============
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 6,634,059 $ 6,177,511
Add: Loan originations and purchases 936,008 671,287
Servicing of portfolio loans acquired 1,736 1,779
Less: Sale of servicing rights(1) (103,746) (128,095)
Run-offs(2) (540,440) (317,588)
------------ ------------
Ending servicing portfolio(3) $ 6,927,617 $ 6,404,894
============ ============
Number of loans serviced 112,098 109,015
Average loan size $ 62 $ 59
Average servicing fee rate 0.507% 0.485%
--------------------
(1) Includes loans sold, servicing released, by Continental Capital,
totaling $103.8 million and $87.0 million in 2001 and 2000,
respectively.
23
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) At the dates shown, included $995.0 million and $1.3 billion of loans
serviced for the Bank, respectively, which constituted 14.4% and 19.8%
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 June 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 six
month ended June 30, 2001 the Company recognized $1,350,000 of unscheduled
amortization of mortgage servicing rights.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At June 30, 2001, the Company had $72.1 million in borrowings capacity
under unused warehousing and other lines of credit, $583.4 million in borrowings
capacity under unused lines of credit with the FHLB of New York and $40 million
under unused federal funds lines of credit. The Company has generally not relied
upon brokered deposits as a source of liquidity.
At June 30, 2001, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans of $145.0 (including unused
lines of credit) million. Certificates of deposit which are scheduled to mature
within one year totaled $1.0 billion at June 30, 2001, and borrowings that are
scheduled to mature within the same period amounted to $1.1 billion. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments.
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,
24
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 June 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 7.05%,
12.50% and 13.20%, 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 quarter ended March 31, 2001 filed with the Securities and Exchange
Commission.
25
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 June 30, 2001 is presented on page 18 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
The Company's Annual Meeting of Stockholders was held on April 25, 2001.
1. With respect to the election of four directors to serve
three-year terms expiring at the Annual Meeting of
Stockholders to be held in the year 2004 or until their
respective successors are elected and qualified, the following
were the number of shares voted for each nominee:
Ana M. Armendariz Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 2,002,962 Withheld 0 Against 297,620
Victor L. Galan Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 1,932,980 Withheld 0 Against 367,602
Benigno Fernandez Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 2,140,102 Withheld 0 Against 160,480
Pedro L. Ramirez Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 2,145,062 Withheld 0 Against 155,520
2. With respect to the ratification of the appointment of
PricewaterhouseCoopers, LLP as the Company's independent
auditors for the fiscal year ending December 31, 2001, the
following are the number of shares voted:
Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 2,300,042 Withheld 540 Against 0
ITEM 5: Other Information
Not applicable.
26
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) A Form 8-K report was filed on June 12, 2001 with
respect to the amendment of the Company's Certificate
of Incorporation.
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: February 6, 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)
27