0000914317-01-500373.txt : 20011009
0000914317-01-500373.hdr.sgml : 20011009
ACCESSION NUMBER: 0000914317-01-500373
CONFORMED SUBMISSION TYPE: 10-K/A
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20011002
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: R&G FINANCIAL CORP
CENTRAL INDEX KEY: 0001016933
STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022]
IRS NUMBER: 660532217
STATE OF INCORPORATION: PR
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-21137
FILM NUMBER: 1750461
BUSINESS ADDRESS:
STREET 1: 280 JESUS T. PINERO AVE
CITY: HATO REY, SAN JUAN
STATE: PR
ZIP: 00918
MAIL ADDRESS:
STREET 1: 280 JESUS T PINERO AVE
CITY: HATO REY, SAN JUAN
STATE: PR
ZIP: 00918
10-K/A
1
form10ka40894_928.txt
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-21137
R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
----------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
------------------------------------------ ----------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (787) 758-2424
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock (par value $.01 per share)
--------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) 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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 27, 2001, the aggregate value of the 10,073,168 shares of Class B
Common Stock of the Registrant issued and outstanding on such date, which
excludes 167,661 shares held by all directors and officers of the Registrant as
a group, was approximately $170.0 million. This figure is based on the closing
price of $16.88 per share of the Registrant's Class B Common Stock on March 27,
2001.
Number of shares of Class B Common Stock outstanding as of March 27, 2001:
10,240,829.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by
reference and the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2000 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
PART I
ITEM 1: Business
General
The Company. R&G Financial Corporation ("R&G Financial") is a
Puerto Rico chartered financial holding company that operates R&G Mortgage Corp.
("R&G Mortgage"), the second largest mortgage company headquartered in Puerto
Rico, R-G Premier Bank of Puerto Rico (the "Bank"), a Puerto Rico commercial
bank, and Home and Property Insurance Corporation, which it recently acquired.
Through R&G Mortgage, R&G Financial also operates The Mortgage Store of Puerto
Rico, Inc., ("The Mortgage Store"), formerly Champion Mortgage Corporation, and
through the Bank it operates Continental Capital Corporation ("Continental"),
Huntington Station, New York, a mortgage banking company. With its acquisition
of Continental in late 1999, R&G Financial plans to expand its mortgage banking
operations in the United States, concentrating initially in New York and then
into other markets to the extent that it is presented with appropriate expansion
opportunities. During late 2000, Continental opened an office in Charlotte,
North Carolina. Continental presently originates loans in the states of New
York, Connecticut, New Jersey, North Carolina and Florida.
R&G Financial, through its subsidiaries, is primarily engaged
in a wide range of real estate secured lending activities, including the
origination, servicing, purchase and sale of mortgages on single-family
residences, the securitization and sale of various mortgage-backed and related
securities and the holding and financing of mortgage loans and mortgage-backed
and related securities for sale or investment. R&G Financial also originates for
its portfolio commercial real estate loans, residential construction loans,
commercial business loans and consumer loans. Finally, R&G Financial provides a
variety of trust and investment services to its customers.
R&G Financial has generally sought to achieve long-term
financial strength and profitability by increasing the amount and stability of
its net interest income and non-interest income. R&G Financial has sought to
implement this strategy by (1) establishing and emphasizing the growth of its
mortgage banking activities, including the origination and sale of mortgage
loans and growing its loan servicing operation; (2) expanding its retail banking
franchise in order to achieve increased market presence and to increase core
deposits; (3) enhancing its net interest income by increasing its loans held for
investment, particularly single-family residential loans and investment
securities; (4) developing new business relationships through an increased
emphasis on commercial real estate and commercial business lending; (5)
diversifying its retail products and services, including an increase in consumer
loan originations (such as credit cards); (6) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services and insurance products; and (7) controlled growth and the pursuit of a
variety of acquisition opportunities when appropriate.
R&G Financial recently promoted Ramon Prats, its Vice
Chairman, to the office of President. Mr. Prats formerly was Executive Vice
President of R&G Mortgage. Mr. Victor Galan continues to hold the positions of
R&G Financial's Chairman of the Board and Chief Executive Officer.
R&G Financial operates its business under the regulations of
the Federal Deposit Insurance Corporation ("FDIC") and the Office of the
Commissioner of Financial Institutions ("OCFI") of Puerto Rico. As of December
31, 2000, R&G Financial had consolidated total assets of approximately $3.5
billion, consolidated total deposits of approximately $1.7 billion and
consolidated stockholders' equity of approximately $308.8 million. R&G Financial
operated 58 mortgage banking and bank branch offices at that date.
R&G Mortgage. R&G Mortgage is engaged primarily in the
business of originating first and second mortgage loans on single family
residential properties secured by real estate which are either insured by the
Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). R&G Mortgage also operates The Mortgage Store, a mortgage
banking company, as a wholly-owned subsidiary. Pursuant to agreements entered
into between R&G Mortgage and the Bank, non-conforming conventional
single-family residential loans and consumer loans secured by real estate are
also originated by R&G Mortgage for portfolio retention by the Bank. The Bank
retains the non-conforming conventional single-family residential loans because
these loans generally do not satisfy resale guidelines of purchasers in the
secondary mortgage market, primarily because of size or other underwriting
technicalities at the time of origination. Jumbo loans may be packaged into
collateralized mortgage obligations ("CMOs") and sold while loans with
underwriting technicalities may be cured through payment experience and
subsequently sold.
R&G Mortgage pools FHA/VA loans into mortgage-backed
securities which are guaranteed by the Government National Mortgage Association
("GNMA"), which securities are sold to securities broker dealers and other
investors. Conventional loans may either be sold directly to agencies such as
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") or to private investors, or which may be pooled
into FNMA- or FHLMC-backed mortgage-backed securities which are generally sold
to investors. R&G Mortgage generally retains the servicing function with respect
to the loans which have been securitized and sold. R&G Mortgage is subject to
regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, the Department of
Housing and Urban Development ("HUD") and the Office of the Commissioner of
Financial Institutions ("OCFI") of Puerto Rico.
R&G Premier Bank. The Bank's principal business consists of
attracting deposits from the general public and tax-advantaged funds from
eligible Puerto Rico corporations and using such deposits, together with funds
obtained from other sources, to originate (through R&G Mortgage) and purchase
loans secured primarily by residential real estate in Puerto Rico, and to
purchase mortgage-backed and other securities. To a lesser extent but with
increasing emphasis over the past few years, the Bank also originates consumer
loans, commercial business loans and loans secured by commercial real estate.
Such loans offer higher yields, are generally for shorter terms and facilitate
the Bank's provision of a full range of financial services to its customers. The
Bank also offers trust services through its Trust Department. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and
it is regulated and examined by the FDIC as its primary federal regulatory
agency as well as by the OCFI. Continental operates as a subsidiary of the Bank.
Mortgage Banking Activities
Loan Originations, Purchases and Sales. During the years ended
December 31, 2000, 1999 and 1998, R&G Financial originated a total of $1.1
billion, $1.1 billion and $914.1 million of residential mortgage loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for the Bank of $451.4 million, $437.1 million and $450.6
million during the years ended December 31, 2000, 1999 and 1998, respectively of
such originations, or 43%, 41% and 49%, respectively, of total originations. The
loans originated by R&G Mortgage for the Bank are comprised primarily of
conventional residential loans and, to a lesser extent, consumer loans secured
by real estate.
R&G Financial is engaged to a significant extent in the
origination of FHA-insured and VA-guaranteed single-family residential loans
which are primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the years
ended December 31, 2000, 1999 and 1998, R&G Financial originated $307.1 million,
$288.8 million, and $255.6 million, respectively, of FHA/VA loans, which
2
represented 29.2%, 27.3% and 28.0% respectively, of total loans originated
during such respective periods.
R&G Financial also originates conventional single-family
residential loans which are either insured by private mortgage insurers or do
not exceed 80% of the appraised value of the mortgaged property. During the
years ended December 31, 2000, 1999 and 1998, R&G Financial originated $699.7
million, $738.6 million and $610.4 million, respectively, of conventional
single-family residential mortgage loans. Substantially all conforming
conventional single-family residential loans are securitized and sold in the
secondary market, while substantially all non-conforming conventional
single-family residential loans are originated by R&G Mortgage on behalf of the
Bank and either held by the Bank in its portfolio or subsequently securitized by
R&G Mortgage and sold in the secondary market. All non-conforming conventional
loans originated by R&G Mortgage through The Money Store are held by The Money
Store in its portfolio or subsequently sold in the secondary market.
Non-conforming loans generally consist of loans which,
primarily because of size or other underwriting technicalities which may be
cured through seasoning, do not satisfy the guidelines for resale of FNMA,
FHLMC, GNMA and other private secondary market investors at the time of
origination. Management believes that these loans are essentially of the same
credit quality as conforming loans. During the years ended December 31, 2000,
1999 and 1998, non-conforming conventional loans represented approximately 53%,
52% and 52%, respectively, of R&G Financial's total volume of mortgage loans
originated, substantially all of which were originated by R&G Mortgage on behalf
of the Bank. During the years ended December 31, 2000, 1999 and 1998, 83.8%,
86.6% and 85.5% of loans originated by R&G Mortgage on behalf of the Bank
consisted of single-family residential loans during such respective periods. R&G
Mortgage originates single-family residential, construction and commercial real
estate loans on behalf of the Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and the Bank. See "- Lending Activities of the
Bank - Origination, Purchase and Sale of Loans."
While R&G Financial makes available a wide variety of mortgage
products designed to respond to consumer needs and competitive conditions, it
currently emphasizes 15-year and 30-year conventional first mortgages and
15-year and 30-year FHA loans and VA loans. Substantially all of such loans
consist of fixed-rate mortgages. The average loan size for FHA/VA mortgage loans
and conventional mortgage loans is approximately $95,000 and $87,000,
respectively.
R&G Financial also offers second mortgage loans up to $125,000
with a maximum term of 15 years. The maximum loan-to-appraised value ratio on
second mortgage loans permitted by R&G Financial is generally 80% (including the
amount of any first mortgage). In addition, R&G Financial also offers real
estate secured consumer loans up to $60,000 with a maximum term of 15 years. The
maximum loan-to-appraised value ratio on real estate secured consumer loans
permitted by R&G Financial is generally 80%. R&G Financial will secure such
loans with either a first or second mortgage on the property.
The Company's loan origination activities in Puerto Rico are
conducted out of R&G Mortgage offices and mortgage banking centers. Residential
mortgage loan applications are attributable to walk-in customers, existing
customers and advertising and promotion, referrals from real estate brokers and
builders, loan solicitors and mortgage brokers.
Loan origination activities performed by the Company include
soliciting, completing and processing mortgage loan applications and preparing
and organizing the necessary loan documentation. Loan applications are examined
for compliance with underwriting criteria and, if all requirements are met, the
Company issues a commitment to the prospective borrower specifying the amount of
3
the loan and the loan origination fees, points and closing costs to be paid by
the borrower or seller and the date on which the commitment expires.
R&G Mortgage also purchases FHA loans and VA loans from other
mortgage bankers for resale to institutional investors and other investors in
the form of GNMA mortgage-backed securities. R&G Mortgage's strategy is to
increase its servicing portfolio primarily though internal originations through
its branch network and, to a lesser extent, purchases from third parties.
Purchases of loans from other mortgage bankers in the wholesale loan market is
generally limited to FHA loans and VA loans and such purchases provide R&G
Mortgage with a source of low cost production that allows R&G Mortgage to
continue to increase the size of its servicing portfolio. R&G Mortgage purchased
$145.9 million, $307.8 million and $207.1 million of loans from third parties
during the years ended December 31, 2000, 1999 and 1998, respectively.
4
The following table sets forth loan originations, purchases
and sales from its mortgage banking business by R&G Financial for the periods
indicated.
Year Ended December 31,
--------------------------------------------
2000 1999 1998
----------- ---------- ---------
(Dollars in Thousands)
Loans Originated For the Bank:
Conventional loans(1):
Number of loans 4,929 5,067 4,918
Volume of loans $ 407,461 $ 404,886 $ 402,447
FHA/VA loans:
Number of loans -- -- --
Volume of loans -- -- --
Consumer loans(2):
Number of loans 1,807 1,499 2,268
Volume of loans $ 43,943 $ 32,219 $ 48,155
Total loans:
Number of loans 6,736 6,566 7,186
Volume of loans $ 451,404 $ 437,105 $ 450,602
Percent of total volume 38% 32% 40%
Loans Originated For Third Parties:
Conventional loans(1):
Number of loans 3,377 4,882 2,989
Volume of loans $ 292,283 $ 333,673 $ 207,937
FHA/VA loans:
Number of loans 3,241 3,315 3,298
Volume of loans $ 307,128 $ 288,752 $ 255,601
Total loans:
Number of loans 6,618 8,197 6,287
Volume of loans $ 599,411 $ 622,425 $ 463,538
Percent of total volume 50% 46% 41%
---------- ---------- ----------
Total loan originations $1,050,815 $1,059,530 $ 914,140
========== ========== ==========
Loans Purchased For R&G Mortgage:
Number of loans (3) 1,627 3,418 2,506
Volume of loans $ 145,881 $ 307,819 $ 207,070
Percent of total volume 12% 22% 19%
Total loan originations and purchases $1,196,696 $1,367,349 $1,121,210
========== ========== ==========
GNMA Pools Purchased for R&G Mortgage:
Volume of loans -- $ 22,487 --
5
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans 3,937 6,511 2,513
Volume of loans $ 332,930 $ 470,443 $ 194,909
FHA/VA loans:
Number of loans 4,167 4,255 4,413
Volume of loans $ 367,868 $ 373,730 $ 298,108
Total loans:
Number of loans 8,104 9,434 6,926
Volume of loans $ 700,798 $ 844,173(3) $ 493,017
Percent of total volume 59% 62% 44%
--------- --------- ---------
Adjustments:
Loans originated for the Bank $(451,404) ($437,105) ($450,602)
Loan amortization (18,544) ( 38,863) (1,479)
--------- --------- ---------
Increase in loans held for sale $ 25,950 $ 69,695 $ 176,112
========= ========= =========
Average Initial Loan Origination Balance:
The Bank:
Conventional loans(1) $ 83 $ 80 $ 82
FHA/VA loans -- -- --
Third Parties:
Conventional loans(1) $ 87 $ 68 $ 70
FHA/VA loans 95 87 78
Total
Conventional loans(1) $ 84 $ 74 $ 77
FHA/VA loans 95 87 78
Refinancings(5):
The Bank 56% 72% 74%
Third Parties 29% 49% 44%
---------------
(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes $63.0 and $123.2 million of loans purchased from another
institution, and securitized and sold to the same financial institution 2000
and during 1999, respectively.
(4) Includes loans converted into mortgage-backed securities.
(5) As a percent of the total dollar volume of mortgage loans originated by R&G
Mortgage for the Bank (excluding consumer loans) or third parties, as the
case may be. In the case of the Bank, refinancings do not necessarily
represent refinancings of loans previously held by the Bank.
6
All loan originations, regardless of whether originated
through the Company or purchased from third parties, must be underwritten in
accordance with R&G Financial's underwriting criteria, including
loan-to-appraised value ratios, borrower income qualifications, debt ratios and
credit history, investor requirements, necessary insurance and property
appraisal requirements. R&G Financial's underwriting standards also comply with
the relevant guidelines set forth by HUD, VA, FNMA, FHLMC, bank regulatory
authorities, private mortgage investment conduits and private mortgage insurers,
as applicable. The Company's underwriting personnel, while operating out of its
loan offices, make underwriting decisions independent of the Company's mortgage
loan origination personnel.
Typically, when a mortgage loan is originated, the borrower
pays an origination fee. These fees are generally in the range of 0% to 7% of
the principal amount of the mortgage loan, and are payable at the closing of
such loan. The Company receives these fees on mortgage loans originated through
its retail branches. The Company may charge additional fees depending upon
market conditions and regulatory considerations as well as the Company's
objectives concerning mortgage loan origination volume and pricing. The Company
incurs certain costs in originating mortgage loans, including overhead,
out-of-pocket costs and, in some cases, where the mortgage loans are subject to
a purchase commitment from private investors, related commitment fees. The
volume and type of mortgage loans and of commitments made by investors vary with
competitive and economic conditions (such as the level of interest rates and the
status of the economy in general), resulting in fluctuations in revenues from
mortgage loan originations. Generally accepted accounting principles ("GAAP")
require that general operating expenses incurred in originating mortgage loans
be charged to current expense. Direct origination costs and origination income
must be deferred and amortized using the interest method, until the repayment or
sale of the related mortgage loans. Historically, the value of servicing rights
which result from R&G Financial's origination activities has exceeded the net
costs attributable to such activities.
R&G Financial customarily sells most of the loans that it
originates, except for those originated on behalf of the Bank pursuant to the
Master Production Agreement with R&G Mortgage. See "-Lending Activities of the
Bank - Origination, Purchases and Sales of Loans." The loans originated by R&G
Mortgage (including FHA loans, VA loans and conventional loans) are secured by
real property located in Puerto Rico. During the years ended December 31, 2000,
1999 and 1998, R&G Financial sold $637.8 million, $721.0 million and $493.0
million of loans, respectively, which includes loans securitized and sold but
does not include loans originated by R&G Mortgage on behalf of the Bank or loans
securitized for other institutions. With respect to such loan sales, $270.8
million or 42.5%, $271.9 million or 37.7%, and $298.1 million or 60.5% consisted
of GNMA-guaranteed mortgage-backed securities of FHA loans or VA loans packaged
into pools of $1 million or more ($2.5 million to $5 million for GNMA serial
notes) by R&G Mortgage. These securities were sold through the Bank's Trust
Department or indirectly through securities broker-dealers.
Conforming conventional loans originated or purchased by the
Company are generally sold directly to FNMA, FHLMC or private investors for cash
or are grouped into pools of $1 million or more in aggregate principal balance
and exchanged for FNMA or FHLMC-issued mortgage-backed securities, which the
Company sells to securities broker-dealers. In connection with any such
exchanges, the Company pays guarantee fees to FNMA and FHLMC. The issuance of
mortgage-backed securities provides R&G Financial with flexibility in selling
the mortgages which it originates or purchases and also provides income by
increasing the value and marketability of the loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC
requirements (so-called "non-conforming loans") are generally originated on
behalf of the Bank by R&G Mortgage and either retained in the Bank's portfolio,
sold to financial institutions or other private investors or securitized into
"private label" CMOs through grantor trusts or other mortgage conduits and sold
through securities broker-dealers. Non-conforming loans consist of jumbo loans
or loans that do not satisfy all requirements of FNMA, FHLMC and GNMA at the
7
time of origination of the loan (such as missing tax returns, slightly higher
loan-to-value ratios, etc.). R&G Mortgage and the Bank have made no sales of
CMOs in securitization transactions during the last three fiscal years. When
such transactions are made, either the Bank or R&G Mortgage generally retains
the residual certificates issued by the respective trusts as well as the
subordinate certificates issued in such transactions. As of December 31, 2000,
R&G Mortgage held residual certificates issued in CMO transactions involving R&G
Mortgage and the Bank with a fair value of $3.7 million. In addition, the Bank
held CMO subordinated certificates and residual certificates from one of its
issues with a fair value of $9.3 million at December 31, 2000. See "- Investment
Activities."
While R&G Financial's exchanges of mortgage loans into agency
securities and sales of mortgage loans are generally made on a non-recourse
basis, the Company also engages in the sale or exchange of mortgage loans on a
recourse basis. In the past, recourse sales often involved the sale of
non-conforming loans to FNMA, FHLMC and local financial institutions. R&G
Financial estimates the fair value of the retained recourse obligation at the
time mortgage loans are sold. As of December 31, 2000, R&G Financial had
reserves for possible losses related to its recourse obligations of $472,000. At
December 31, 2000, R&G Mortgage had loans in its servicing portfolio with
provisions for recourse in the principal amount of approximately $680.5 million,
as compared to $646.3 million and $507.4 million as of December 31, 1999 and
1998, respectively. Of the recourse loans existing at December 31, 2000,
approximately $398.0 million in principal amount consisted of loans sold to FNMA
and FHLMC and converted into mortgage-backed securities of such agencies, and
approximately $282.5 million in principal amount consisted of non-conforming
loans sold to other private investors.
Loan Servicing. R&G Financial acquires servicing rights
through its mortgage loan originations (including originations on behalf of the
Bank) and purchases from third parties. The Company generally retains the rights
to service mortgage loans sold, which it has originated or purchased, and
receives the related servicing fees. Loan servicing includes collecting
principal and interest and remitting the same to the holders of the mortgage
loans or mortgage-backed securities to which such mortgage loan relates, holding
escrow funds for the payment of real estate taxes and insurance premiums,
contacting delinquent borrowers, supervising foreclosures in the event of
unremedied defaults and generally administering the loans. The Company receives
annual loan servicing fees ranging from 0.25% to 0.50% of the declining
outstanding principal balance of the loans serviced plus any late charges. In
general, the Company's servicing agreements are terminable by the investor for
cause without penalty or after payment of a termination fee ranging from 0.5% to
1.0% of the outstanding principal balance of the loans being serviced.
R&G Financial's servicing portfolio has grown significantly
over the past several years. At December 31, 2000, R&G Financial's servicing
portfolio totaled $6.6 billion and consisted of a total of 110,874 loans. These
amounts include R&G Mortgage's servicing portfolio totaling $6.1 billion and
Continental's servicing portfolio totaling $463.0 million at December 31, 2000.
At December 31, 2000, R&G Financial's servicing portfolio included $1.1 billion
of loans serviced for the Bank or 16.0% of the total servicing portfolio.
Substantially all of the mortgage loans in R&G Financial's servicing portfolio
are secured by single (one-to-four) family residences. Most of R&G Financial's
mortgage servicing portfolio is comprised of mortgages secured by real estate
located in Puerto Rico.
The Bank sells to R&G Mortgage the servicing rights to all
first and second mortgage loans secured by residential properties which become
part of the Bank's loan portfolio. R&G Mortgage services all other loans held in
the Bank's loan portfolio (including single-family residential loans retained by
the Bank and certain commercial real estate loans), although R&G Mortgage does
not actually acquire such servicing rights. The Bank pays R&G Mortgage servicing
fees with respect to the loans serviced by R&G Mortgage on behalf of the Bank.
In addition, the Bank processes payments of all loans originated by R&G Mortgage
on behalf of the Bank. In connection therewith, R&G Mortgage pays the Bank a fee
8
equal to between $0.50 and $1.00 per loan. See "- Regulation - R&G Financial -
Limitations on Transactions with Affiliates."
R&G Financial's mortgage loan servicing portfolio is subject
to reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan
servicing rights from time to time.
9
The following table sets forth certain information regarding
the total loan servicing portfolio of R&G Financial for the periods indicated.
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Composition of Servicing Portfolio at End of
Period:
Conventional and other mortgage loans(1) $3,447,383 $3,095,920 $2,105,290
FHA/VA loans 3,186,676 3,081,590 2,722,508
---------- ---------- ----------
Total servicing portfolio(2) $6,634,059 $6,177,511 $4,827,798
========== ========== ==========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $6,177,511 $4,827,798 $3,000,888
---------- ---------- ----------
Add: Loan originations and purchases 1,280,898 1,610,945 1,237,415
Servicing of portfolio loans acquired(3) 31,404 552,235 1,109,825
Less: Sale of servicing rights(4) (213,959) (55,515) --
Run-offs(5) (641,795) (757,952) (520,330)
---------- ---------- ----------
Ending servicing portfolio $6,634,059 $6,177,511 $4,827,798
========== ========== ==========
Number of loans serviced(6) 110,874 107,302 95,946
Average loan size(6) $ 60 $ 58 $ 50
Average servicing fee rate(6) 0.483% 0.530% 0.510%
---------------
(1) Includes non-conforming loans.
(2) At the dates shown, included $1.1 billion, $1.1 billion and $754.6 million
of loans serviced for the Bank, respectively, which constituted 16.0%, 17.3%
and 15.6% of the total servicing portfolio, respectively.
(3) Includes $496.5 million related to the servicing portfolio acquired as part
of the Company's acquisition of Continental in October 1999, and a $1.1
billion servicing portfolio acquired from another Puerto Rico financial
institution in November 1998 comprised of approximately 32,400 loans.
(4) Includes loans sold, servicing released, by Continental totaling $172.9
million and $55.5 million in 2000 and 1999, respectively.
(5) Run-off refers to regular amortization of loans, prepayments and
foreclosures. Includes transfers in 1998 of $67.7 million of mortgage loans
to financial institutions who acquired certain banks whose loans were being
serviced by R&G Mortgage.
(6) At December 31, 2000, R&G Mortgage was servicing 12,411 loans for the Bank
with an average loan size of approximately $85,000 and at an average
servicing rate of 0.25%. Amounts include late and other miscellaneous
charges.
10
The following table sets forth certain information at December
31, 2000 regarding the number of, and aggregate principal balance of, the
mortgage loans serviced by R&G Financial for the Bank and for third parties at
various mortgage interest rates.
At December 31, 2000
---------------------------------------------------------------------------------------------
Loans Serviced Loans Serviced Total Loans
for the Bank for Third Parties Serviced
---------------------------- ---------------------------- -----------------------------
Number of Aggregate Number of Aggregate Number of Aggregate
Loans Principal Balance Loans Principal Balance Loans Principal Balance
----- ----------------- ----- ----------------- ----- -----------------
(Dollars in Thousands)
Mortgage Interest Rate
Less than 7.00% 277 $ 30,691 10,743 $ 746,085 11,020 $ 776,776
7.00% - 7.49% 2,352 213,427 20,190 1,285,279 22,542 1,498,706
7.50% - 7.99% 3,247 303,345 24,432 1,498,789 27,679 1,802,134
8.00% - 8.49% 2,275 230,669 14,749 850,621 17,024 1,081,290
8.50% - 8.99% 2,610 205,428 14,061 674,613 16,671 880,041
9.50% - 9.99% 620 38,174 5,145 216,909 5,765 255,083
10.00% - 10.49% 411 18,089 4,261 126,423 4,672 144,512
10.50% - 10.99% 160 6,780 1,557 52,900 1,717 59,680
11.00% or more 279 8,662 990 32,976 1,269 41,638
180 5,621 2,337 88,578 2,517 94,199
------ --------- ------ --------- ------- ---------
12,411 $1,060,886 98,465 $5,573,173 110,876 $6,334,059
====== ========= ====== ========= ======= =========
The amount of principal prepayments on mortgage loans serviced
by R&G Financial was $176.3 million, $162.6 million and $96.5 million for the
years ended December 31, 2000, 1999 and 1998 respectively. This represented
approximately 2.7%, 2.6% and 2.6% of the aggregate principal amount of mortgage
loans serviced during such periods. The primary means used by R&G Mortgage to
reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability
that has allowed R&G Financial to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed
securities programs of FNMA, FHLMC and GNMA, and certain other investors,
require R&G Financial to advance funds to make scheduled payments of principal,
interest, taxes and insurance, if such payments have not been received from the
borrowers. During the years ended December 31, 2000, 1999 and 1998, the monthly
average amount of funds advanced by R&G Financial under such servicing
agreements was $5.8 million, $5.5 million and $2.3 million , respectively. Funds
advanced by R&G Financial pursuant to these arrangements are generally recovered
by R&G Financial within 30 days.
In connection with its loan servicing activities, R&G
Financial holds escrow funds for the payment of real estate taxes and insurance
premiums with respect to the mortgage loans it services.
At December 31, 2000, R&G Financial held $104.4 million of
such escrow funds, $91.8 million of which were deposited in the Bank and $12.6
million of which were deposited with other financial institutions. The escrow
funds deposited with the Bank lower its overall cost of funds and is a means of
compensating it for processing mortgages checks received by R&G Mortgage, while
the escrow funds deposited with other financial institutions serve as part of
R&G Financial's compensating balances which permit the Company to borrow funds
from such institutions (pursuant to certain warehouse lines of credit) at rates
that are lower than would otherwise apply. See "- Sources of Funds -
Borrowings."
The degree of risk associated with a mortgage loan servicing
portfolio is largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on
11
recourse servicing occur primarily when foreclosure sale proceeds of the
property underlying a defaulted mortgage are less than the then outstanding
principal balance and accrued interest of such mortgage loan and the cost of
holding and disposing of such underlying property. At December 31, 2000, R&G
Financial was servicing mortgage loans with an aggregate principal amount of
$680.5 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.
R&G Financial's general strategy is to retain the servicing
rights related to the mortgage loans it originates and purchases. Nevertheless,
there is a market in Puerto Rico for servicing rights, which are generally
valued in relation to the present value of the expected income stream generated
by the servicing rights. Among the factors which influence the value of a
servicing portfolio are servicing fee rates, loan balances, loan types, loan
interest rates, the expected average life of the underlying loans (which may be
reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors and any recourse provisions. Although the Company
may on occasion consider future sales of a portion of its servicing portfolio,
management does not anticipate sales of servicing rights to become a significant
part of its operations.
The market value of, and earnings from, R&G Financial's
mortgage loan servicing portfolio may be adversely affected if mortgage interest
rates decline and mortgage loan prepayments increase. In a period of declining
interest rates and accelerated prepayments, income generated from the Company's
mortgage loan servicing portfolio may also decline. Conversely, as mortgage
interest rates increase, the market value of the Company's mortgage loan
servicing portfolio may be positively affected. See Note 1 to R&G Financial's
Notes to Consolidated Financial Statements for a discussion of SFAS No. 125 and
the treatment of servicing rights, incorporated by reference into Item 8 hereof.
12
Mortgage Loan Delinquencies and Foreclosures. The following
table shows the delinquency statistics for R&G Mortgage's servicing portfolio at
the dates indicated.
Year Ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio
----- --------- ----- --------- ----- ---------
Loans delinquent for:
30-59 days 5,336 4.81% 5,334 4.97% 6,276 6.54%
60-89 days 1,547 1.40 1,559 1.45 1,545 1.61
90 days or more 2,300 2.07 2,109 1.97 1,696 1.77
-- ----- ----- ----- ----- ----- -----
Total delinquencies(1) 9,183 8.28% 9,002 8.39% 9,517 9.92%
===== ==== ===== ==== ===== ====
Foreclosures pending(2) 1,845 1.66% 1,262 1.18% 993 1.03%
===== ==== ===== ==== === ====
--------------------
(1) Includes at December 31, 2000, an aggregate of $122.2 million of delinquent
loans serviced by R&G Mortgage for the Bank, or 1.84% of the total servicing
portfolio and $11.2 million of delinquent loans held in R&G Mortgage's own
portfolio.
(2) At December 31, 2000, the Bank had foreclosures pending on $38.2 million of
loans being serviced by R&G Mortgage, which constituted 0.58% of the
servicing portfolio. R&G Mortgage had foreclosures pending on $12.0 million
of loans it is servicing for its own portfolio at December 31, 2000.
While delinquency rates in Puerto Rico are generally higher
than in the mainland United States, these rates are not necessarily indicative
of future foreclosure rates or losses on foreclosures. Real estate owned as a
result of foreclosures ("REO") related to R&G Mortgage's mortgage banking
business arise primarily through foreclosure on mortgage loans repurchased from
investors either because of breach of representations or warranties or pursuant
to recourse arrangements. As of December 31, 2000, 1999 and 1998, R&G Mortgage
held REO with a book value of approximately $1.3 million, $128,000 and $128,000,
respectively. Sales of REO resulted in gains to R&G Mortgage of $168,000,
$209,000 and $26,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. There is no liquid secondary market for the sale of R&G Mortgage's
REO.
With respect to mortgage loans securitized through GNMA
programs, the Company is fully insured as to principal by the FHA and VA against
foreclosure loans. As a result of these programs, foreclosure on these loans had
generated no loss of principal as of December 31, 2000. R&G Mortgage, however,
incurs about $3,000 per loan foreclosed in interest and legal charges during the
time between payment by R&G Mortgage and FHA or VA reimbursement. For the years
ended December 31, 2000, 1999 and 1998, total expenses related to FHA or VA
loans foreclosed amounted to $235,000, $35,000 and $286,000, respectively.
Although FNMA and FHLMC are obligated to reimburse the Company for principal and
interest payments advanced by the Company as a servicer (except for recourse
servicing), the funding of delinquent payments or the exercise of foreclosure
rights involves costs to the Company which may not be recouped. Such nonrecouped
expenses have to date been immaterial.
Any significant adverse economic developments in Puerto Rico
could result in an increase in defaults or delinquencies on mortgage loans that
are serviced by R&G Mortgage or held by R&G Mortgage pending sale in the
secondary mortgage market, thereby reducing the resale value of such mortgage
loans.
13
Lending Activities from Banking Operations
General. At December 31, 2000, R&G Financial's loans
receivable, net totaled $1.6 billion, which represented 46.1% of R&G Financial's
$3.5 billion of total assets. At December 31, 2000, all but $1.2 million of R&G
Financial's loans receivable, net were held by the Bank. The principal category
of loans in R&G Financial's portfolio are conventional loans which are secured
by first liens on single-family residences. Conventional residential real estate
loans are loans which are neither insured by the FHA nor partially guaranteed by
the VA. At December 31, 2000, all but $1.3 million of R&G Financial's first
mortgage single-family residential loans consisted of conventional loans. The
other principal categories of loans in R&G Financial's loans receivable, net
portfolio are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.
14
Loan Portfolio Composition. The following table sets forth the
composition of R&G Financial's loan portfolio by type of loan at the dates
indicated. Except as noted in the footnotes to the table, all of the loans are
held in the Bank's loan portfolio.
December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate - first
mortgage $ 1,005,033 58.43% $ 1,099,843 68.47% $ 735,795 66.87%
Residential real estate - second
mortgage 27,419 1.59 13,029 0.81 18,634 1.69
Retail construction 47,698 2.77 38,950 2.42 23,280 2.12
Commercial construction and land
acquisition 137,640 8.00 61,037 3.80 15,353 1.39
Commercial real estate 270,459 15.72 204,155 12.71 117,151 10.65
Commercial business 59,120 3.44 54,231 3.38 46,532 4.23
Consumer loans:
Loans secured by deposits 26,926 1.57 20,539 1.28 17,225 1.56
Real estate secured consumer loans 100,357 5.83 76,944 4.79 85,055 7.73
Unsecured consumer loans 45,563 2.65 37,653 2.34 41,381 3.76
----------- ----- ----------- ----- ----------- -----
Total loans receivable 1,720,215 100.00% 1,606,381 100.00% 1,100,406 100.00%
----------- ====== ----------- ====== ----------- ======
Less:
Allowance for loan losses (11,600) (8,971) (8,055)
Loans in process (78,163) (33,526) (18,170)
Deferred loan fees 909 (437) (166)
Unearned interest (85) (440) (347)
(88,939) (43,374) (26,738)
----------- ----------- -----------
Loans receivable, net(2) $ 1,631,276 $ 1,563,007 $ 1,073,668
=========== =========== ===========
December 31,
-----------------------------------------------------
1997 1996
-----------------------------------------------------
Amount Percent Amount Percent
Residential real estate - first
mortgage(1) $ 476,729 61.25% $ 370,876 60.75%
Residential real estate - second
mortgage(1) 17,831 2.29 15,757 2.58
Retail construction 13,367 1.72 5,351 0.88
Commercial construction and land
acquisition 5,785 0.74 5,700 0.93
Commercial real estate 81,722 10.50 69,514 11.39
Commercial business 39,128 5.03 31,063 5.09
Consumer loans:
Loans secured by deposits 12,472 1.60 9,409 1.54
Real estate secured consumer loans 81,252 10.44 42,893 7.03
Unsecured consumer loans 50,103 6.43 59,864 9.81
--------- ------ --------- ------
Total loans receivable 778,389 100.00% 610,427 100.00%
--------- ====== --------- ======
Less:
Allowance for loan losses (6,772) (3,332)
Loans in process (6,218) (2,430)
Deferred loan fees 172 41
Unearned interest (512) ( 955)
--------- ---------
(13,330) (6,676)
--------- ---------
Loans receivable, net(2) $ 765,059 $ 603,751
========= =========
---------------
(1) Includes $33.9 million and $49.7 million of residential real estate - first
mortgage loans which are held by R&G Mortgage at December 31, 1997 and 1996,
respectively.
(2) Does not include mortgage loans held for sale of $95.7 million, $77.3
million, $117.1 million, $46.9 million and $54.5 million at December 31,
2000, 1999, 1998, 1997 and 1996, respectively.
15
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at December 31, 2000 regarding
the dollar amount of loans maturing in R&G Financial's total loan portfolio
based on the contractual terms to maturity. Loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
Due 1-5 Due 5 or more
years after years after
Due 1 year December 31, December 31,
or less 2000 2000 Total(1)
---------- ---------- ---------- --------
(In Thousands)
Residential real estate $ 122 $ 3,078 $1,029,252 $1,032,452
Retail construction 47,698 -- -- 47,698
Commercial real estate(2) 98,878 189,989 119,232 408,099
Commercial business 33,130 24,378 1,612 59,120
Consumer:
Loans on savings 15,245 11,174 507 26,926
Real estate secured consumer loans 1,004 6,609 92,744 100,357
Unsecured consumer loans 20,765 17,366 7,432 45,563
---------- ---------- ---------- ----------
Total(3) $ 216,842 $ 252,594 $1,250,779 $1,720,215
========== ========== ========== ==========
--------------
(1) Amounts have not been reduced for the allowance for loan losses, loans in
process, deferred loan fees or unearned interest.
(2) Includes $184.9 million of commercial construction and land acquisition
loans.
(3) Does not include mortgage loans held for sale.
16
The following table sets forth the dollar amount of total
loans due after one year from December 31, 2000, as shown in the preceding
table, which have fixed interest rates or which have floating or adjustable
interest rates.
Floating or
Fixed rate adjustable-rate Total
---------- --------------- -----
(In Thousands)
Residential real estate......................... $1,032,452 $ -- $1,032,452
Retail Construction............................. 47,698 -- 47,698
Commercial real estate(1)....................... 113,343 294,756 408,099
Commercial business............................. 34,605 24,515 59,120
Consumer:
Loans on savings........................... 26,926 -- 26,926
Real estate secured consumer loans......... 100,357 -- 100,357
Unsecured consumer loans................... 45,563 -- 45,563
---------- ------- ---------
Total........................................... $1,400,944 $319,271 $1,720,215
========== ======== ==========
---------------------
(1) Includes $184.9 million of commercial construction and land acquisition
loans.
Scheduled contractual amortization of loans does not reflect
the expected term of R&G Financial's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and,
with respect to conventional loans originated for the Bank after February 1994,
due-on-sales clauses, which give R&G Financial the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
17
Origination, Purchase and Sales of Loans. The following table
sets forth loan originations, purchases and sales from banking operations for
the periods indicated.
Year Ended December 31,
--------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages................................................ $ 378,398 $ 378,740 $385,416
Commercial mortgages................................................. -- -- 265
Residential construction............................................. 29,063 26,146 16,766
Consumer loans....................................................... 43,943 32,219 48,155
Total loans originated by R&G Mortgage........................... 451,404 437,105 450,602
Other loans originated:
Commercial real estate............................................... 150,329 175,803 54,426
Commercial business.................................................. 48,060 36,222 26,191
Construction and development......................................... 127,473 54,070 11,365
Consumer loans:
Loans on deposit..................................................... 45,474 34,758 27,172
Real estate secured consumer loans................................... -- -- --
Unsecured consumer loans............................................. 32,517 29,631 9,970
Total other loans originated..................................... 403,853 330,484 129,124
Loans purchased...................................................... 128,824 279,489 175,735
Total loans originated and purchased............................. 984,081 1,047,078 755,461
Loans sold........................................................... (105,653) (133,731) (282,005)
Loan principal reductions............................................ (359,760) (253,534) (142,560)
Net increase before other items, net................................. 518,668 659,813 330,896
Loans securitized and transferred to mortgage-backed securities...... (410,453) (106,237) --
-------- --------- ---------
Net increase in loan portfolio....................................... $108,215 $ 553,576 $330,896
======== ========= ========
R&G Financial, through the Bank, originates for both
investment and sale mortgage loans secured by residential real estate (secured
by both first and second mortgage liens) as well as construction loans (for
residential real estate), commercial real estate loans, commercial business
loans and consumer loans.
R&G Mortgage assists the Bank in meeting its loan production
targets and goals by, among other things, (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and
conducting the initial processing of the requisite loan applications, consistent
with the Bank's underwriting guidelines; and (iii) providing personnel and
facilities with respect to the execution of loan agreements approved by the
Bank. R&G Mortgage performs the foregoing loan origination services on behalf of
the Bank with respect to residential mortgage loans, some commercial real estate
loans and construction loans. R&G Mortgage receives from the Bank 75% of the
applicable loan origination fee with respect to loans originated by R&G Mortgage
on behalf of the Bank. During the years ended December 31, 2000, 1999 and 1998,
R&G Mortgage received $8.1 million, $7.5 million and $7.5 million, respectively,
of loan origination fees with respect to loans originated by R&G Mortgage on
behalf of the Bank. These fees are eliminated in consolidation in R&G
Financial's Consolidated Financial Statements. See "- Regulation - R&G Financial
- Limitations on Transactions with Affiliates."
The Bank originates commercial real estate, commercial
business and consumer loans. Applications for commercial real estate, commercial
business and unsecured consumer loans are taken at all of the Bank's branch
18
offices and may be approved by various lending officers of the Bank within
designated limits, which are established and modified from time to time to
reflect an individual's expertise and experience. All loans in excess of an
individual's designated limits are referred to an officer with the requisite
authority. In addition, the Management Credit Committee is authorized to approve
all loans not exceeding $5.0 million, and the Executive Committee of the Board
of Directors is authorized to approve all loans exceeding $5.0 million. All
loans originated or purchased by the Bank must be approved by one of the three
committees set forth above. Management of the Bank believes that its relatively
centralized approach to approving loan applications ensures strict adherence to
the Bank's underwriting guidelines while still allowing the Bank to approve loan
applications on a timely basis.
The Bank also purchases conventional loans secured by first
liens on single-family residential real estate from unrelated financial
institutions. Such loan purchases are underwritten by the Bank pursuant to the
same guidelines as direct loan originations. Loans purchased by the Bank are
from time to time securitized by R&G Mortgage and sold by the Bank. During the
years ended December 31, 2000, 1999 and 1998, the Bank purchased $128.8 million,
$279.5 million and $175.7 million of loans, respectively.
During the years ended December 31, 2000, 1999 and 1998, loans
sold from banking operations were $105.7 million, $133.7 million and $282.0
million. These loans, which were primarily nonconforming loans at the time of
origination, were generally sold in packages in privately negotiated
transactions with FNMA and FHLMC.
The Bank sells to R&G Mortgage the servicing rights to all
first and second mortgage loans secured by residential properties which are or
will become part of the Bank's loan portfolio once the Bank has a commitment to
sell the loans. R&G Mortgage services all other loans held in the Bank's
portfolio (including single-family residential loans retained by the Bank,
commercial real estate, commercial business and consumer loans (although R&G
Mortgage does not actually acquire such servicing rights)). In addition, the
Bank processes payments on all loans serviced by R&G Mortgage on behalf of the
Bank. Finally, R&G Mortgage renders securitization services with respect to the
pooling of some of the Bank's mortgage loans into mortgage-backed securities.
See "- Mortgage Banking Activities."
Single-Family Residential Real Estate Loans. The Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences. At
December 31, 2000, $1.0 billion or 58.4% of R&G Financial's total loans held for
investment consisted of such loans, of which all but $1.3 million consisted of
conventional loans. The Bank's first mortgage single-family residential loans
consist exclusively of fixed-rate loans with terms of between 15 and 30 years.
As evidenced by this statistic, the Puerto Rico residential mortgage market has
not been receptive to long-term adjustable rate mortgage loans.
The Bank's first mortgage single-family residential loans
typically do not exceed 80% of the appraised value of the security property.
Pursuant to underwriting guidelines adopted by the Board of Directors, the Bank
can lend up to 95% of the appraised value of the property securing a first
mortgage single-family residential loan provided the Bank obtains private
mortgage insurance with respect to the top 25% of the loan.
The Bank also originates loans secured by second mortgages on
single-family residential properties. At December 31, 2000, $27.4 million or
1.6% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. The Bank offers such
second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-value ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).
19
Construction Loans. The Bank has been active in originating
loans to construct single-family residences. These construction lending
activities generally are conducted throughout Puerto Rico, although loans are
concentrated in areas contiguous to Bank branches. At December 31, 2000, retail
construction ("spot") loans amounted to $47.7 million or 2.8% of R&G Financial's
total loans held for investment, while commercial construction and land
acquisition loans amounted to $137.6 million or 8.0% of total loans held for
investment.
The Bank offers "spot" loans to individual borrowers for the
purpose of constructing single-family residences. Substantially all of the
Bank's construction lending to individuals is originated on a
construction/permanent mortgage loan basis. Construction/permanent loans are
made to individuals who hold a contract with a general contractor acceptable to
the Bank to construct their personal residence. The construction phase of the
loan provides for monthly payments on an interest only basis at a designated
fixed rate for the term of the construction period, which generally does not
exceed nine months. Thereafter, the permanent loan is made at then market rates,
provided that such rate shall not be more than 2% greater than the interim
construction rate. R&G Mortgage's construction loan department approves the
proposed contractors and administers the loan during the construction phase. The
Bank's construction/permanent loan program has been successful due to its
ability to offer borrowers a single closing and, consequently, reduced costs. At
December 31, 2000, the Bank's construction loan portfolio included 432
construction/permanent loans with an aggregate principal balance of $47.7
million.
The Bank also originates construction loans to developers to
develop single family residential properties. The Bank has organized a
Construction Loan Department to work primarily with real estate developers. At
December 31, 2000, the Bank had 13 residential construction loans outstanding to
develop single-family residences with an aggregate principal balance of $36.0
million; commitments for future funding approximate $50.1 million. In addition,
the Bank had 5 loans to develop commercial properties with an aggregate
principal balance of $6.8 million; commitments for future fnding approximates
$9.8 million. All loans are performing in accordance with their terms at
December 31, 2000.
In addition to the foregoing, at December 31, 2000, the Bank
had 31 land acquisition loans with outstanding balances ranging from $29,000 to
$4.4 million, and an aggregate balance of $24.9 million, the majority of which
were made in connection with projects to construct single-family residences. The
Bank and another financial institution, which makes the interim construction
loans, have entered into an agreement pursuant to which the Bank is to be paid a
percentage of the proceeds from each home as it is released upon construction
and sale. The Bank expects to make the permanent construction loan on some of
these projects. The Bank has also made a working capital/pre-development loan
with an outstanding principal balance of $10.0 million at December 31, 2000,
which is secured by land.
The Bank intends to continue to increase its involvement in
single-family residential construction lending. Such loans afford the Bank the
opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of risk
as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated costs (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. The Bank has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose stringent loan-to-value (80% with respect to single-family residential
real estate), debt service and other requirements for loans which are believed
to involve higher elements of credit risk and by working with builders with whom
it has established relationships or knowledge thereof. At December 31, 2000,
$487,000 of the Bank's retail construction loans were classified as
non-performing. As of such date, no commercial construction or land acquisition
loans were non-performing.
20
Commercial Real Estate Loans. The Bank also originates
mortgage loans secured by commercial real estate. At December 31, 2000, $270.5
million or 15.7% of R&G Financial's total loans held for investment consisted of
such loans. As of such date, the Bank's commercial real estate loan portfolio
consisted of approximately 1,084 loans with an average principal balance of
$250,000. At December 31, 2000, $11.9 million of the Bank's commercial real
estate loans were classified as nonperforming.
Commercial real estate loans originated by the Bank are
primarily secured by office buildings, retail stores, warehouses and general
purpose industrial space. Although terms vary, commercial real estate loans
generally are amortized over a period of 7-15 years and have maturity dates of
five to seven years. The Bank will originate these loans with interest rates
which adjust monthly in accordance with a designated prime rate plus a margin,
which generally is negotiated at the time of origination. Such loans will have a
floor but no ceiling on the amount by which the rate of interest may adjust over
the loan term. Loan-to-value ratios on the Bank's commercial real estate loans
are currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.20 or more. It is also the Bank's general policy to seek
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through mortgage insurance,
secondary collateral and/or personal guarantees from the principals of the
borrower.
Commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and because
the payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, warehouses or other commercial space. The Bank attempts to
minimize its risk exposure by limiting the extent of its commercial lending
generally. In addition, the Bank imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral. Although the Bank has begun
to increase its emphasis on commercial real estate lending, management does not
currently anticipate that its portfolio of commercial real estate loans will
grow significantly as a percentage of the total loan portfolio.
Commercial Business Loans. The Bank offers commercial business
loans, including working capital lines of credit, inventory and accounts
receivable loans, equipment financing (including equipment leases), term loans,
insurance premiums loans and loans guaranteed by the Small Business
Administration. Depending on the collateral pledged to secure the extension of
credit, maximum loan to value ratios are 75% or less, with exceptions permitted
to a maximum of 80%. Loan terms may vary from one to 15 years. The interest
rates on such loans are generally variable and are indexed to a designated prime
rate, plus a margin. The Bank also generally obtains personal guarantees from
the principals of the borrowers. At December 31, 2000, commercial business loans
amounted to $59.1 million or 3.4% of total loans held for investment. Although
the Bank has begun to increase its emphasis on commercial business lending,
management does not currently anticipate that its portfolio of commercial
business loans will grow significantly as a percentage of the total loan
portfolio.
Consumer Loans. The Bank originates real estate secured
consumer loans. Such loans generally have shorter terms and higher interest
rates than other mortgage loans. At December 31, 2000, $172.8 million or 10.0%
of the Bank's total loans held for investment consisted of consumer loans. This
amount is comprised mostly of real estate secured consumer loans (which are
originated by R&G Mortgage), but the Bank also offers loans secured by deposit
accounts, credit card loans and other secured and unsecured consumer loans. Most
of the Bank's consumer loans are secured and have been primarily obtained
through newspaper advertising, although loans are also obtained from existing
and walk-in customers. Although the Bank has begun to increase its emphasis on
21
collateralized consumer lending, management does not currently anticipate that
its portfolio of consumer loans will grow significantly as a percentage of the
total loan portfolio.
The Bank currently offers loans secured by deposit accounts,
which amounted to $26.9 million at December 31, 2000. Such loans are originated
generally for up to 90% of the account balance, with a hold placed on the
account restricting the withdrawal of the account balance. The Bank offers real
estate secured loans in amounts up to 75% of the appraised value of the
property, including the amount of any existing prior liens. Real estate secured
consumer loans have a maximum term of 10 years, which may be extended within the
sole discretion of the Bank, and an interest rate which is set at a fixed rate
based on market conditions. The Bank secures the loan with a first or second
mortgage on the property, including loans where another institution holds the
first mortgage. At December 31, 2000, real estate secured consumer loans totaled
$100.4 million. At December 31, 2000, credit card receivables totaled $13.8
million.
Consumer loans generally have shorter terms and higher
interest rates than mortgage loans but generally involve more credit risk than
mortgage loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely effected by job loss, divorce, illness and personal
bankruptcy. In many cases, any repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of improper repair and maintenance of the underlying security.
The remaining deficiency may not warrant further substantial collection efforts
against the borrower. At December 31, 2000, $1.2 million of consumer loans were
classified as non-performing.
Asset Quality. When a borrower fails to make a required
payment on a loan, R&G Financial attempts to cure the deficiency by contacting
the borrower and seeking payment. Contacts are generally made between the 10th
and 15th day after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency extends beyond 15 days, the loan and payment history
is reviewed and efforts are made to collect the loan. While R&G Financial
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent in the case of mortgage loans, R&G Financial
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss. In the case of consumer loans, the Bank refers the file for
collection action after 60 days.
Loans secured by real estate are placed on non-accrual status
when, in the judgment of management, the probability of collection of interest
is deemed to be insufficient to warrant further accrual. When such a loan is
placed on non-accrual status, previously accrued but unpaid interest is deducted
from interest income. As a matter of policy, the Bank does not accrue interest
on loans past due 90 days or more which are secured by real estate. The Bank
generally takes the same position in the case of consumer loans.
Real estate acquired by the Bank as a result of foreclosure or
by deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3"), which provides guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the balance
of the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Bank's
accounting for its real estate owned complies with the guidance set forth in SOP
92-3.
22
The following table sets forth the amounts and categories of
R&G Financial's non-performing assets at the dates indicated. R&G Financial did
not have any troubled debt restructurings at any of the periods presented.
Except as otherwise indicated in the footnotes to the table, the non-performing
assets are assets of the Bank.
December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)................... $79,234 $47,413 $32,973 $21,619 $12,991
Residential construction..................... 487 478 441 368 363
Commercial real estate....................... 11,881 9,005 6,463 6,000 3,141
Commercial business.......................... 1,414 1,255 3,224 765 823
Consumer unsecured........................... 1,186 802 1,358 1,217 686
Other........................................ -- 61 67 117 726
-------- ------- ------- ------- ----------
Total.................................... 94,202 59,014 44,526 30,086 18,730
-------- ------- ------- ------- ----------
Accruing loans greater than 90 days delinquent:
Residential real estate...................... -- -- -- -- --
Residential construction..................... -- -- -- -- --
Commercial real estate....................... -- -- -- -- --
Commercial business.......................... 420 63 61 54 22
Consumer..................................... 360 274 357 172 134
-------- ------- ------- ------- ----------
Total accruing loans greater than
90 days delinquent..................
780 337 418 226 156
-------- ------- ------- ------- ----------
Total non-performing loans............... 94,982 59,351 44,944 30,312 18,886
-------- ------- ------- ------- ----------
Real estate owned, net of reserves................ 9,056 5,852 4,041 1,715 834
Other repossessed assets.......................... 583 466 237 85 31
-------- ------- ------- ------- ----------
9,639 6,318 4,278 1,800 865
======== ======= ======= ======= =======
Total non-performing assets....................... $104,621 $65,669 $49,222 $32,112 $19,751
Total non-performing loans as a
percentage of total loans (2)....... 5.52% 3.69% 4.08% 3.89% 3.09%
======== ======= ======= ======= =======
Total non-performing assets as a
percentage of total assets.......... 2.96% 2.26% 2.41% 2.12% 1.90%
======== ======= ======= ======= =======
----------------------
(1) Includes $6.2 million, $6.1 million, $5.3 million, $2.6 million and $1.1
million consumer loans held by the Bank secured by first and second
mortgages on residential real estate at December 31, 2000, 1999, 1998, 1997
and 1996, respectively. Also includes $17.6 million, $5.9 million, $4.3
million and $2.8 million residential real estate loans secured by first
mortgages held by R&G Mortgage at December 31, 2000, 1999, 1998 and 1997,
respectively.
(2) 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, 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, which reduced
the amount of loans considered in the calculation of the ratio. Without
giving effect to loan securitizations, during the years ended December 31,
2000 and 1999, the ratio of non-performing loans to total loans would have
been 4.46% and 3.47%, respectively.
While the level of total non-performing assets of R&G
Financial has increased on an absolute basis during the periods presented, from
$19.8 million at December 31, 1996 to $104.6 million at December 31, 2000, R&G
Financial's net loans receivable portfolio has increased by 170% during this
period, from $603.8 million at December 31, 1996 to $1.6 billion at December 31,
2000.
23
While non-performing loans amounted to $95.0 million at
December 31, 2000, as compared to $59.4 million at December 31, 1999, $31.8
million or 89.3% of such increase consisted of residential mortgage loans.
Because of the nature of the collateral, R&G Financial has historically
recognized a low level of loan charge-offs. R&G Financial's aggregate
charge-offs amounted to 0.17% during 2000, as compared to 0.25% during 1999.
Although loan delinquencies have historically been higher in Puerto Rico than in
the United States, loan charge-offs have historically been lower than in the
United States.
Non-performing residential loans increased by $31.8 million or
67.1% from December 31, 1999 to December 31, 2000. The average loan balance on
non-performing mortgage loans amounted to $59,000 at December 31, 2000. As of
such date, 808 loans with an aggregate balance of $53.1 million (including 134
consumer loans secured by real estate with an aggregate balance of $2.9 million)
were in the process of foreclosure. The total delinquency ratio (including loans
past due less than 90 days) on residential mortgages of the Bank, excluding
consumer loans secured by real estate, increased from 5.72% in 1999 to 8.55% in
2000. The Company's loss experience on such portfolio has been minimal over the
last several years.
Non-performing commercial real estate loans increased by $2.9
million or 31.9% from $9.0 million at December 31, 1999 to $11.9 million at
December 31, 2000. The number of loans delinquent over 90 days amounted to 92
loans at December 31, 2000, with an average balance of $129,000. The largest
non-performing commercial real estate loan as of December 31, 2000 had a balance
of $564,000.
Non-performing commercial business loans consist of 65 loans.
Such loans include 12 loans with an aggregate balance of $451,000 which are 90%
guaranteed by the Small Business Administration, 47 commercial leases amounting
to $788,000 and 6 other commercial business loans with an aggregate balance of
$175,000. These loans have a combined average loan size of $22,000. The largest
non-performing commercial business loan as of December 31, 2000 had a $199,000
balance.
At December 31, 2000, R&G Financial's five largest
loans-to-one borrower and their related entities amounted to $21.7 million,
$19.5 million, $18.7 million, $17.5 million and $14.3 million. All of such loans
concentrations were performing at December 31, 2000.
24
At December 31, 2000, R&G Financial's allowance for loan
losses totaled $11.6 million, which represented a $2.6 million or 29.3% increase
from the level maintained at December 31, 1999. At December 31, 2000, R&G
Financial's allowance represented approximately 0.67% of the total loan
portfolio and 12.21% of total non-performing loans, as compared to 0.56% and
15.11% at December 31, 1999. The increase in the allowance for loan losses
reflected 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.
It is the policy of the Bank to maintain an allowance for
estimated losses on loans and to increase such allowance when, based on
management's evaluation, a loss becomes both probable and estimable (i.e., the
loss is likely to occur and can be reasonably estimated). Major loans and major
lending areas are reviewed periodically to determine potential problems at an
early date. Also, management's periodic evaluation considers factors such as
loss experience, current delinquency data, known and inherent risks in the
portfolio, identification of adverse situations which may affect the ability of
debtors to repay the loan, the estimated value of any underlying collateral and
assessment of current economic conditions. Additions to the allowance are
charged to income. Such provisions are based on management's estimated value of
any underlying collateral, as applicable, considering the current and
anticipated operating conditions of the borrower. Any recoveries are credited to
the allowance.
25
The following table sets forth an analysis of R&G Financial's
allowance for loan losses during the periods indicated, which is maintained on
the Bank's loan portfolio.
At and For the Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ...................................... $ 8,971 $ 8,055 $ 6,772 $ 3,332 $ 3,510
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ........................................ 38 17 73 13 45
Construction ................................................... -- -- -- -- 50
Commercial real estate ......................................... 468 353 -- 170 --
Commercial business ............................................ 1,539 1,548 1,485 480 110
Consumer ....................................................... 1,940 2,518 4,455 3,953 1,922
Other .......................................................... -- 4 -- 761 2,535
------- ------- ------- ------- -------
Total charge-offs .......................................... 3,985 4,440 6,013 5,377 4,662
------- ------- ------- ------- -------
Recoveries:
Residential real estate ........................................ -- -- -- 21 --
Commercial real estate ......................................... 80 69 -- 50 --
Commercial business ............................................ 381 332 20 32 31
Consumer ....................................................... 402 429 312 344 195
Other .......................................................... -- -- -- 2,000 --
------- ------- ------- ------- -------
Total recoveries ........................................... 863 830 332 2,447 226
------- ------- ------- ------- -------
Net charge-offs ..................................................... 3,122 3,610 5,681 2,930 4,436
------- ------- ------- ------- -------
Allowance for loan losses acquired
from Fajardo Federal............................................ -- -- 364 -- --
Provision for losses on loans ....................................... 5,751 4,525 6,600 6,370 4,258
------- ------- ------- ------- -------
Balance at end of period ............................................ $11,600 $ 8,971 $ 8,055 $ 6,772 $ 3,332
======= ======= ======= ======= =======
Allowance for loan losses as a percent of total loans outstanding ...
0.67% 0.56% 0.74% 0.87% 0.55%
======= ======= ======= ======= =======
Allowance for loan losses as a percent of non-
performing loans..................................................... 12.21% 15.11% 17.92% 22.34% 17.64%
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding..................................................... 0.17% .25% .55% 0.40% 0.75%
======= ======= ======= ======= =======
26
The following table sets forth information concerning the
allocation of R&G Financial's allowance for loan losses (which is maintained on
the Bank's loan portfolio) by loan category at the dates indicated.
December 31,
------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ---------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate....... $ 1,278 11.02% $ 1,419 15.82% $ 1,272 15.79%
Construction ................. 432 3.72 186 2.07 46 0.57
Commercial real estate........ 4,880 42.07 3,258 36.32 2,655 32.96
Commercial business .......... 1,321 11.39 1,063 11.85 1,033 12.82
Consumer ..................... 3,689 31.80 3,045 33.94 3,049 37.86
------- ------ ------- ------ ------- ------
Total ........................ $11,600 100.00% $ 8,971 100.00% $ 8,055 100.00%
======= ====== ======= ====== ======= ======
December 31,
------------------------------------------------------------
1997 1996
-------------------------- --------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate................. $593 8.76% $810 24.31%
Construction............................ 7 0.10 51 1.53
Commercial real estate.................. 1,386 20.47 489 14.68
Commercial business..................... 806 11.90 109 3.27
Consumer................................ 3,980 58.77 1,873 56.21
------ ------ ------ ------
Total................................... $6,772 100.00% $3,332 100.00%
====== ====== ====== ======
27
Investment Activities
General. R&G Financial's securities portfolio is managed by
investment officers in accordance with a comprehensive written investment policy
which addresses strategies, types and levels of allowable investments and which
is reviewed and approved annually by the respective Boards of Directors of the
Bank and R&G Mortgage. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Interest Rate Risk, Budget
and Investments Committee ("IRRBICO").
As discussed under "- Mortgage Banking Activities," R&G
Mortgage is primarily engaged in the origination of mortgage loans and the
securitization of such loans into mortgage-backed and related securities and the
subsequent sale of such securities to securities broker-dealers and other
investors in the secondary market. As a result of R&G Mortgage's securitization
activities, R&G Mortgage maintains a substantial portfolio of GNMA
mortgage-backed securities. At December 31, 2000, R&G Mortgage held GNMA
mortgage-backed securities with a fair value of $12.0 million which are
classified as held for trading. Such securities generally remain in R&G
Mortgage's portfolio for between 90 and 180 days. In addition, as of such date,
R&G Mortgage held GNMA and FHLMC mortgage-backed securities with a fair value of
$408.0 million and $11.7 million, respectively, which are classified as
available for sale. At December 31, 2000, R&G Mortgage's CMO interest-only
residuals and interest only strips, which are classified as available for sale,
had an amortized cost of $8.5 million and a fair value of $8.5 million.
The Bank's Investment Policy authorizes the Bank to invest in
U.S. Treasury obligations (with a maturity up to five years), U.S. Agency
obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade
municipal obligations (with a maturity of up to five years), bankers'
acceptances and Federal Home Loan Bank ("FHLB") notes (with a maturity of up to
five years), investment grade commercial paper (with a maturity of up to 9
months), federal funds (with a maturity of six months or less), certificates of
deposit in other financial institutions (including Eurodollar deposits),
repurchase agreements (with a maturity of six months or less), investment grade
corporate bonds (with a maturity of five years or less) and certain
mortgage-backed derivative securities (with a weighted average life of less than
ten years).
At December 31, 2000, the Bank's securities portfolio
consisted of $23.5 million of securities held for investments, consisting of
$10.7 million of tax-free mortgage-backed securities, $9.1 million of other
mortgage backed securities, and $3.7 million of Puerto Rico Government
obligations and other Puerto Rico securities. In addition, at December 31, 2000,
the Bank had a securities portfolio classified as available for sale with a fair
value of $1.0 billion, consisting of $90.9 million of tax-free mortgage-backed
securities, $527.9 million of FHLMC and FNMA mortgage-backed securities, $46.0
million of FHLB stock, $14.7 million of CMOs certificates, CMO interest-only
residuals and interest only strips, $5.2 million corporate debt obligations and
$317.1 million of U.S. Government agency securities, the interest on which is
tax-exempt to the Company.
The Bank's Treasury Department from time to time conducts
certain trading activities mainly through investments in U.S. Treasury
securities. However, at December 31, 2000 no securities for trading were held by
the Bank.
At December 31, 2000, $380.9 million or 24.5% of R&G
Financial's mortgage-backed and investment securities were pledged to secure
various obligations of R&G Financial (excluding repurchase agreements).
28
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's securities portfolio held
to maturity as of the dates indicated below. All of such securities are assets
of the Bank.
December 31,
----------------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Market Value Yield Value Market Value Yield
----------- ------------ ---------- ---------- ------------ --------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA
Due within one year....................... $ 2 $ 3 10.00% $ -- $ -- --%
Due from one-five years................... -- -- -- 15 16 10.00
Due from five-ten years................... 8,865 8,605 5.79 10,660 10,391 5.79
Due over ten years........................ 1,845 1,766 6.17 2,133 2,074 6.17
FNMA
Due within one year....................... -- -- -- -- -- --
Due from one-five years................... -- -- -- -- -- --
Due from five-ten years................... -- -- -- -- -- --
Due over ten years........................ 8,947 9,145 7.08 10,252 10,644 7.09
FHLMC
Due within one year....................... -- -- -- -- -- --
Due from one-five years................... -- -- -- -- -- --
Due from five-ten years................... -- -- -- -- -- --
Due over ten years........................ 160 154 6.16 189 180 5.58
Investment securities:
Puerto Rico Government
obligations
Due within one year................... -- -- -- -- -- --
Due from one-five years............... 1,948 1,948 5.88 1,280 1,272 5.85
Due from five-ten years............... 1,755 1,755 5.98 4,158 4,132 5.95
Due over ten years.................... -- -- -- -- -- --
U.S. Treasury and Government
Agency
Due within one year................... -- -- -- -- -- --
------- ------- ------- -------
Total securities held for
investment....................... $23,522 $23,376 6.33% $28,687 $28,709 6.31%
======= ======= ==== ======= ======= ====
29
December 31,
----------------------------------------
1998
----------------------------------------
Carrying Weighted
Value Market Value Average Yield
----- ------------ -------------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA
Due within one year .............. $ -- $ -- --%
Due from one-five years .......... 27 29 10.00
Due from five-ten years .......... 13,025 12,752 5.79
Due over ten years ............... 2,360 2,306 6.17
FNMA
Due within one year .............. -- -- --
Due from one-five years .......... -- -- --
Due from five-ten years .......... -- -- --
Due over ten years ............... 12,608 12,944 7.13
FHLMC
Due within one year .............. -- -- --
Due from one-five years .......... -- -- --
Due from five-ten years .......... -- -- --
Due over ten years ............... 236 230 5.99
Investment securities:
Puerto Rico Government obligations
Due within one year ........... -- -- --
Due from one-five years ....... -- -- --
Due from five-ten years ....... 5,945 5,979 5.80
Due over ten years ............ -- -- --
U.S. Treasury and Government
Agency
Due within one year ........... 399 400 5.40
Due from one-five years ....... -- -- --
Due from five-ten years ....... -- -- --
Due over ten years ............ -- -- --
-------- -------
Total securities held for
investment .............. $ 34,600 $34,640 6.31%
======== ======= ====
30
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's held for trading and
available for sale mortgage-backed and investment securities portfolio as of the
dates indicated below.
December 31,
--------------------------------------------------------------------
2000 2000
--------------------------------------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Fair Value Yield Cost Fair Value Yield
---- ---------- ----- ---- ---------- -----
(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA
Due within one year .............................. $ -- $ -- --% $ -- $ -- --%
Due from one-five years .......................... 26 26 8.50 -- -- --
Due from five-ten years .......................... 10,492 10,419 5.68 -- -- --
Due over ten years ............................... 584,419 576,869 6.62 570,749 563,533 6.62
FNMA mortgage-backed securities
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... 634 634 6.50 741 719 6.50
Due over ten years ............................... 98,779 99,968 7.15 110,855 109,705 7.15
FHLMC mortgage-backed securities
Due within one year .............................. 13 13 9.00 -- -- --
Due from one-five years .......................... 132 130 8.94 99 99 8.79
Due from five-ten years .......................... 1,587 1,587 6.61 1,891 1,841 6.77
Due over ten years ............................... 434,865 437,227 7.26 14,586 14,036 6.87
CMO residuals and other mortgage-backed securities (1)
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... 10,710 10,190 12.00 8,886 8,886 12.00
Due from five-ten years .......................... -- -- -- -- -- --
Due over ten years ............................... 10,688 13,037 8.08 11,823 13,886 8.07
Investment securities available for sale(1)
U.S. Treasury
Due within one year .............................. -- -- -- 4,998 4,945 4.50
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... -- -- -- -- -- --
Due over ten years ............................... -- -- -- -- -- --
U.S. Government & Agencies ........................... -- -- -- -- -- --
Due within one year .............................. 8,500 8,446 5.48 -- -- --
Due from one-five years .......................... 192,763 193,298 6.73 133,956 130,950 6.19
Due from five-ten years .......................... 114,881 115,352 7.30 92,237 89,444 7.28
Due over ten years ............................... -- -- -- -- -- --
Corporate debt obligations
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... 5,097 5,202 6.80 -- -- --
Due over ten years ............................... -- -- -- -- -- --
FHLB stock ........................................... 45,973 45,973 7.30 32,825 32,825 6.75
---------- ---------- -------- --------
$1,519,559 $1,518,371 6.96% $983,646 $970,869 6.75%
========== ========== ==== ======== ======== ====
Securities held for trading:
GNMA certificates .................................... $ 11,630 $ 12,038 7.28% $ 43,303 $ 43,564 5.27%
CMO certificates ..................................... -- -- -- -- -- --
CMO residuals ........................................ -- -- -- -- -- --
U.S. Treasury Bills .................................. -- -- -- -- -- --
---------- ---------- -------- --------
$ 11,630 $ 12,038 7.28% $ 43,303 $ 43,564 5.27%
========== ========== ==== ======== ======== ====
(Footnotes on following page)
31
December 31,
-------------------------------------
1998
-------------------------------------
Weighted
Amortized Average
Cost Fair Value Yield
---- ---------- -----
(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA
Due within one year ................. $ -- $ -- --%
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 55,159 55,159 6.41
FNMA mortgage-backed securities
Due within one year ................. -- -- --
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 8,092 8,161 6.96
FHLMC mortgage-backed securities
Due within one year ................. -- -- --
Due from one-five years ............. 89 91 8.83
Due from five-ten years ............. 240 244 8.99
Due over ten years .................. 21,369 21,724 6.86
CMO residuals and other mortgage-backed
securities (1)
Due within one year ................. -- -- --
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 7,845 9,661 8.125
Investment securities available for sale(1)
U.S. Treasury
Due within one year ................. -- -- --
Due from one-five years ............. 4,995 4,991 4.50
Due from five-ten years ............. -- -- --
Due over ten years .................. -- -- --
U.S. Government & Agencies
Due within one year ................. -- -- --
Due from one-five years ............. 38,100 38,106 5.64
Due from five-ten years ............. 5,010 5,000 6.72
Due over ten years .................. -- -- --
FHLB stock .............................. 11,405 11,405 7.21
-------- --------
$152,304 $154,542 6.41%
======== ======== ====
Securities held for trading:
GNMA certificates ....................... $427,915 $443,399 6.69%
CMO certificates ........................ -- -- --
CMO residuals ........................... 7,134 7,147 8.00
U.S. Treasury Bills ..................... -- -- --
-------- --------
$435,049 $450,546 6.71%
======== ======== ====
(Footnotes on following page)
32
--------------------
(1) Comprised of subordinated tranches and residuals from the Bank's 1992
Grantor Trust residuals purchased from the Bank in 1995 from its 1993 CMO
Grantor Trust, residuals from R&G Mortgage's CMO Grantor Trusts, and
interest-only strips resulting from sales of loans by R&G Mortgage and the
Bank.
A substantial portion of R&G Financial's securities are held
in mortgage-backed securities. Mortgage-backed securities (which also are known
as mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S.
Government and owned by the 12 Federal Home Loan Banks and federally-insured
savings institutions. The FHLMC issues participation certificates backed
principally by conventional mortgage loans. The FHLMC guarantees the timely
payment of interest and the ultimate return of principal within one year. The
FNMA is a private corporation chartered by the U.S. Congress with a mandate to
establish a secondary market for conventional mortgage loans. The FNMA
guarantees the timely payment of principal and interest on FNMA securities.
FHLMC and FNMA securities are not backed by the full faith and credit of the
United States, but because the FHLMC and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
HUD which is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. For example, the FNMA and the FHLMC currently limit
their loans secured by a single-family, owner-occupied residence to $252,700
($275,000 effective January 1, 2001.) To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with interest rates that are within a range and have varying maturities.
The characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages. Mortgage-backed securities generally
increase the quality of R&G Financial's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of R&G Financial.
R&G Financial's securities portfolio includes CMOs. CMOs have
been developed in response to investor concerns regarding the uncertainty of
cash flows associated with the prepayment option of the underlying mortgagor and
are typically issued by government agencies, government sponsored enterprises
and special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
33
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
The FDIC has issued a statement of policy which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals) which possess average life or price volatility in excess of a
benchmark fixed rate 30-year mortgage-backed pass-through security are
"high-risk mortgage securities," are not suitable investments for depository
institutions, and if considered "high risk" at purchase must be carried in the
institution's trading account or as assets held for sale, and must be marked to
market on a regular basis. In addition, if a security was not considered "high
risk" at purchase but was later found to be "high risk" based on the tests, it
may remain in the held-to-maturity portfolio as long as the institution has
positive intent to hold the security to maturity and has a documented plan in
place to manage the high risk. At December 31, 2000, the Bank's CMOs, and
interest-only securities and residuals, which had a fair value of $14.7 million,
were designated as "high-risk mortgage securities" and classified as available
for sale.
Sources of Funds
General. R&G Financial will consider various sources of funds
to fund its investment and lending activities and evaluates the available
sources of funds in order to reduce R&G Financial's overall funding costs.
Deposits, reverse repurchase agreements, warehouse lines of credit, notes
payable, FHLB advances, subordinated capital notes and sales, maturities and
principal repayments on loans and securities have been the major sources of
funds for use in R&G Financial's lending and investing activities and for other
general business purposes.
Deposits. Deposits are the major sources of the Bank's funds
for lending and other investment purposes. Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments, including passbook, NOW
and Super NOW, checking and commercial checking and certificates of deposit
ranging in terms from 7 days to 10 years. Included among these deposit products
are $749.1 million of certificates of deposit with balances of $100,000 or more,
which amounted to 44.7%of the Bank's total deposits at December 31, 2000.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors.
The Bank attempts to price its deposits in order to promote
deposit growth. The Bank regularly evaluates the internal costs of funds,
surveys rates offered by competing institutions, reviews the Bank's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Bank does not obtain funds through brokers on a regular basis,
although at December 31, 2000 it held $184.3 million of deposits acquired from
money desks in the United States.
The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of services and accounts and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including advertising.
34
The following table presents the average balance of each
deposit type and the average rate paid one each deposit type of the Bank for the
periods indicated.
December 31,
------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------ ------------------------
Average Average Rate Average Average Rate Average Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Passbook ................. $ 113,660 3.73% $ 112,107 3.74% $ 88,754 3.75%
NOW and Super NOW accounts 134,573 3.93 126,300 3.95 99,336 3.93
Checking ................. 40,455 -- 41,128 -- 39,052 --
Commercial checking(1) ... 110,937 -- 111,146 -- 77,329 --
Certificates of deposit .. 1,106,294 6.43 762,856 5.83 522,016 5.98
---------- ---------- --------
Total deposits ...... $1,505,919 5.36% $1,153,537 4.65% $826,487 4.65%
========== ==== ========== ==== ======== ====
------------------
(1) Includes $91.8 million, $92.4 million and $109.9 million of escrow funds of
R&G Mortgage at December 31, 2000, 1999 and 1998, respectively, maintained
with the Bank.
The following table sets forth the maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 2000.
Amount
--------------
(In Thousands)
Certificates of deposit maturing:
Three months or less....................... $221,196
Over three through six months.............. 178,235
Over six through twelve months............. 180,384
Over twelve months......................... 169,266
-------
Total............................. $749,081
=======
Borrowings. R&G Financial's business requires continuous
access to various funding sources, both short and long-term. R&G Mortgage's
primary source of short-term funds is through sales of securities to investment
dealers under agreements to repurchase ("reverse repurchase agreements"). The
Bank also from time to time utilizes reverse repurchase agreements when they
represent a competitive short-term funding source.
In a reverse repurchase agreement transaction, R&G Financial
will generally sell a mortgage-backed security agreeing to repurchase either the
same or a substantially identical security on a specified later date (generally
not more than 90 days) at a price less than the original sales price. The
difference in the sale price and purchase price is the cost of the use of the
proceeds. The mortgage-backed securities underlying the agreements are delivered
to the dealers who arrange the transactions. For agreements in which R&G
Financial has agreed to repurchase substantially identical securities, the
dealers may sell, loan or otherwise dispose of R&G Financial's securities in the
normal course of their operations; however, such dealers or third party
custodians safe-keep the securities which are to be specifically repurchased by
R&G Financial. Reverse repurchase agreements represent a competitive cost
funding source for R&G Financial. Nevertheless, R&G Financial is subject to the
risk that the lender may default at maturity and not return the collateral. The
amount at risk is the value of the collateral which exceeds the balance of the
borrowing. In order to minimize this potential risk, R&G Financial only deals
with large, established investment brokerage firms when entering into these
transactions.
35
Reverse repurchase transactions are accounted for as financing
arrangements rather than as sales of such securities, and the obligations to
repurchase such securities is reflected as a liability in R&G Financial's
Consolidated Financial Statements. As of December 31, 2000, R&G Financial had
$827.7 million of reverse repurchase agreements outstanding, $396.9 million of
which represented borrowings of R&G Mortgage. At December 31, 2000, the weighted
average interest rate on R&G Financial's reverse repurchase agreements amounted
to 6.75%.
R&G Financial's loan originations are also funded by
borrowings under various warehouse lines of credit provided by various
commercial banks ("Warehouse Lines"). At December 31, 2000, R&G Financial was
permitted to borrow under such Warehouse Lines up to $243.4 million, $64.4
million of which was drawn upon and outstanding as of such date. The Warehouse
Lines are used by R&G Financial to fund loan commitments and must generally be
repaid within 180 days after the loan is closed or when payment from the sale of
the funded loan is received, whichever occurs first. Until such sale closes, the
Warehouse Lines provide that the funded loan is pledged to secure the
outstanding borrowings. The Warehouse Lines are also collateralized by a general
assignment of mortgage payments receivable and an assignment of certain mortgage
servicing rights. Certain of these warehousing lines of credit impose
restrictions with respect to the maintenance of minimum levels of net worth and
working capital and limitations on the amount of indebtedness and dividends
which may be declared. Management of R&G Financial believes that as of December
31, 2000, it was in compliance with all of such covenants and restrictions and
does not anticipate that such covenants and restrictions will limit its
operations.
The interest rate on funds borrowed pursuant to the Warehouse
Lines is based on Libor rates plus a negotiated amount. By maintaining
compensating balances, R&G Financial is able to borrow funds under the Warehouse
Lines at a lower interest rate than would otherwise apply. These compensating
balances are comprised of a portion of the escrow accounts maintained by R&G
Financial for principal and interest payments and related tax and insurance
payments on loans its services. At December 31, 2000, the weighted average
interest rate being paid by R&G Financial under its Warehouse Lines amounted to
7.85%.
Although the Bank's primary source of funds is deposits, the
Bank also borrows funds on both a short and long-term basis. The Bank actively
utilizes 936 Notes as a primary borrowing source. The 936 Notes have original
terms to maturity of between five and seven years and bear interest payable
quarterly for variable interest rate notes and semiannually for fixed interest
rate notes. The Bank is able to obtain such low cost funds by investing the
proceeds in eligible activities as proscribed under Puerto Rico law, which
provide tax advantages under Puerto Rico tax laws and under U.S. federal tax
laws for U.S. corporations which are operating in Puerto Rico pursuant to
Section 936 of the Code. At December 31, 2000, the Bank had $35.5 million of 936
Notes outstanding, all maturing in 2001. The 936 Notes contain certain
provisions which indemnify the holders thereof from the federal tax liability
which would be incurred, plus any penalties and interest, if the Bank did not
invest the proceeds as required in eligible activities, and also provide for a
"gross up" provision which permits the Bank to continue the obligation at an
adjusted interest rate based on LIBOR in the event the interest on the 936 Notes
is subject in whole or in part to federal and/or Puerto Rico income tax.
The Bank obtains both fixed-rate and variable-rate short-term
and long-term advances from the FHLB of New York upon the security of certain of
its residential first mortgage loans, securities and cash deposits, provided
certain standards related to the credit-worthiness of the Bank have been met.
FHLB of New York advances are available for general business purposes to expand
lending and investing activities. Advances from the FHLB of New York are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. At December 31, 2000, the Bank had access
36
to $634.2 million in advances from the FHLB of New York, and had 14 FHLB of New
York advances aggregating $505.0 million outstanding as of such date, which
mature at various dates commencing in January 2, 2001 through October 20, 2005
and have a weighted average interest rate of 6.42 %. In addition, at December
31, 2000, the Bank maintained $36.8 million in standby letters of credit with
the FHLB of New York, which secured $35.5 million of outstanding 936 Notes
payable. At December 31, 2000, the Bank had pledged specific collateral
aggregating $732.8 million to the FHLB of New York under its advances program
and to secure the letters of credit. The Bank maintains collateral with the FHLB
of New York in excess of applicable requirements in order to facilitate any
necessary additional borrowings by the Bank in the future.
37
The following table sets forth certain information regarding
the short-term borrowings of R&G Financial at or for the dates indicated.
At or For the Year Ended
December 31,
-------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
R&G Mortgage:
Securities sold under agreements to repurchase:
Average balance outstanding ................................. $450,443 $365,177 $354,786
Maximum amount outstanding at any month-end during the period 499,626 493,527 415,960
Balance outstanding at end of period ........................ 494,353 493,527 415,960
Average interest rate during the period ..................... 6.69% 5.52% 5.73%
Average interest rate at end of period ...................... 6.92% 6.15% 5.46%
Notes Payable:
Average balance outstanding ................................. $117,085 $127,565 $102,047
Maximum amount outstanding at any month-end during the period
143,114 154,922 152,060
Balance outstanding at end of period ........................ 85,030 56,907 107,648
Average interest rate during the period ..................... 6.41% 6.67% 7.07%
Average interest rate at end of period ...................... 8.06% 6.89% 6.43%
The Bank:
FHLB of New York advances:
Average balance outstanding ................................. $438,276 $222,575 $ 94,025
Maximum amount outstanding at any month-end during the period
510,500 384,000 160,100
Balance outstanding at end of period ........................ 505,000 384,000 121,000
Average interest rate during the period ..................... 6.34% 5.31% 5.55%
Average interest rate at end of period ...................... 6.42% 5.75% 5.25%
Securities sold under agreements to repurchase:
Average balance outstanding ................................. $392,755 $187,857 $ 55,915
Maximum amount outstanding at any month-end during the period 430,852 327,009 79,513
Balance outstanding at end of period ........................ 430,852 327,009 75,222
Average interest rate during the period ..................... 6.47% 5.77% 5.57%
Average interest rate at end of period ...................... 6.60% 5.73% 5.35%
Notes Payable:
Average balance outstanding ................................. $ 69,663 $ 84,463 $ 84,100
Maximum amount outstanding at any month-end
during the period ....................................... 76,263 84,100 84,100
Balance outstanding at end of period ........................ 53,828 75,800 84,100
Average interest rate during the period ..................... 6.03% 6.53% 6.45%
Average interest rate at end of period ...................... 6.75% 6.00% 5.74%
38
Trust and Investment Services
R&G Financial also provides trust and investment services
through the Bank's Trust Department. Services offered include custodial
services, the administration of IRA accounts and the sale to investors of
mortgage-backed securities guaranteed by GNMA. As of December 31, 2000, the
Bank's Trust Department administered trust accounts with aggregate assets of
$51.1 million as of such date. In addition, during the year ended December 31,
2000, the Bank's Trust Department sold $33.1 million of GNMA mortgage-backed
securities. The Bank receives fees dependent upon the level and type of service
provided. The administration of the Bank's Trust Department is performed by the
Trust Committee of the Board of Directors of the Bank.
Personnel
As of December 31, 2000, R&G Financial (on a consolidated
basis) had 1,295 full-time employees and 53 part-time employees. The employees
are not represented by a collective bargaining agreement and R&G Financial
believes that it has good relations with its employees.
Regulation
Set forth below is a brief description of certain laws and
regulations which, together with the descriptions of laws and regulations
contained elsewhere herein, are deemed material to an investor's understanding
of the extent to which R&G Financial and its subsidiary companies are regulated.
The description of these laws and regulations, as well as descriptions of laws
and regulations contained elsewhere herein, does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
R&G Financial
General. R&G Financial is a registered financial holding
company pursuant to the Bank Holding Company Act of 1956, as amended (the
"BHCA"). R&G Financial, as a financial holding company, is subject to regulation
and supervision by the Federal Reserve Board and the OCFI. R&G Financial is
required to file annually a report of its operations with, and is subject to
examination by, the Federal Reserve Board and the OCFI.
BHCA Activities and Other Limitations. The BHCA prohibits a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
39
The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking within the meaning of the
BHCA. These activities include operating a mortgage company, such a R&G
Mortgage, finance company, credit card company, factoring company, trust company
or savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial
advisor; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The Federal Reserve Board also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
Limitations on Transactions with Affiliates. Transactions
between financial institutions and any affiliate are governed by Sections 23A
and 23B of the Federal Reserve Act. An affiliate of a financial institution is
any company or entity which controls, is controlled by or is under common
control with the financial institution. In a holding company context, the parent
holding company of a financial institution (such as R&G Financial) and any
companies which are controlled by such parent holding company are affiliates of
the financial institution. Generally, Sections 23A and 23B (i) limit the extent
to which the financial institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions. In addition to the restrictions imposed by Sections
23A and 23B, no financial institution may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the financial institution.
The Gramm-Leach-Bliley Act, described under "- Recent
Legislation" below, amended several provisions of Sections 23A and 23B of the
Federal Reserve Act. The amendments provide that financial subsidiaries of banks
are treated as affiliates for purposes of Sections 23A and 23B of the Federal
Reserve Act, but that (i) the 10% capital limit on transactions between the bank
and such financial subsidiary as an affiliate is not applicable, and (ii) the
investment by the bank in the financial subsidiary does not include retained
earnings in the financial subsidiary. Certain anti-evasion provisions have been
included that relate to the relationship between any financial subsidiary of a
bank and sister companies of the bank: (1) any purchase of, or investment in,
the securities of a financial subsidiary by any affiliate of the bank is
considered a purchase or investment by the bank; or (2) if the Federal Reserve
Board determines that such treatment is necessary, any loan made by an affiliate
of the bank to the financial subsidiary is to be considered a loan made by the
bank.
In addition, Sections 22(h) and (g) of the Federal Reserve Act
places restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institutions. Section 22(h) also requires prior board approval for certain
40
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers.
R&G Mortgage and the Bank are parties to various agreements
which address how each would conduct itself in specifically delineated
affiliated transactions (the "Affiliated Transaction Agreements"). The
Affiliated Transaction Agreements include a Master Purchase, Servicing and
Collections Agreement (the "Master Purchase Agreement"), a Master Custodian
Agreement, a Master Production Agreement, a Securitization Agreement and a Data
Processing Computer Service Agreement. The terms of these agreements were
negotiated at arm's length on the basis that they are substantially the same, or
at least as favorable to the Bank, as those prevailing for comparable
transactions with, or involving, other nonaffiliated companies.
Pursuant to the Master Production Agreement, the Bank, on a
monthly basis, determines its loan production targets and goals (the "Loan
Production Goals") and R&G Mortgage assists the Bank to reach its Loan
Production Goals by, among other things: (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and
initial processing of loan applications, consistent with the Bank's underwriting
guidelines and Loan Production Goals previously established; and (iii) providing
personnel and facilities with respect to the execution of any loan agreement
approved by the Bank. In exchange for these services, the Bank remits to R&G
Mortgage a percentage of the processing or originating fees charged to the
borrowers under loan agreements, as set forth in the agreements. See "-Lending
Activities of the Bank - Originations, Purchases and Sales of Loans."
The Master Purchase Agreement provides for the sale by the
Bank to R&G Mortgage of the servicing rights to all first and second mortgage
loans secured by residential properties which become part of the Bank's loan
portfolio once the related loans are sold. R&G Mortgage services all other loans
held in the Bank's loan portfolio (including single-family residential loans
retained by the Bank and certain commercial real estate loans), although R&G
Mortgage does not actually acquire such servicing rights. The Master Purchase
Agreement further provides that R&G Mortgage exclusively will service such loans
and that the Bank will process payments of such loans, all according to a fee
schedule. See " - Mortgage Banking Activities - Loan Originations, Purchases and
Sales of Loans."
Under the Securitization Agreement, R&G Mortgage renders
securitization services with respect to the pooling of some of the Bank's
mortgage loans into mortgage-backed securities. With respect to securitization
services rendered, the Bank pays a securitization fee of 25 basis points. The
Master Custodian Agreement provides that the Bank shall be the custodial agent
for R&G Mortgage of certain documentation related to the issuance by R&G
Mortgage of GNMA, FNMA or FHLMC mortgage-backed certificates. In consideration
of these services, the Bank receives a fee for each mortgage note included in a
mortgage-backed certificate per year for which it acts as custodian, as set
forth in the agreement. See "- Mortgage Banking Activities - Loan Originations,
Purchases and Sales of Loans."
Capital Requirements. The Federal Reserve Board has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications to it under the BHCA. The Federal Reserve Board capital adequacy
guidelines generally require bank holding companies to maintain total capital
equal to 8% of total risk-adjusted assets, with at least one-half of that amount
consisting of Tier I or core capital and up to one-half of that amount
consisting of Tier II or supplementary capital. Tier I capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier I capital),
less goodwill and, with certain exceptions, intangibles. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
41
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the
Federal Reserve Board requires bank holding companies to maintain a minimum
leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets
for this purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from
Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies are expected to maintain Tier I leverage
capital ratios of at least 4.0% to 5.0% or more, depending on their overall
condition.
R&G Financial is in compliance with the above-described
Federal Reserve Board regulatory capital requirements.
Financial Support of Affiliated Institutions. Under Federal
Reserve Board policy, R&G Financial will be expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. In addition, any capital loans by a bank holding company to a
subsidiary bank is subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Recent Legislation. The Gramm-Leach-Bliley Act, signed into
law on November 12, 1999, revises and expands the existing provisions of the
BHCA by including a new section that permits a bank holding company to elect to
become a financial holding company, which may engage in a full range of
financial activities. The qualification requirements and the process for a bank
holding company that elects to be treated as a financial holding company
requires that all the subsidiary banks controlled by the bank holding company at
the time of election to become a financial holding company must be and remain at
all times well capitalized and well managed. R&G Financial applied for and
became a financial holding company in 2000.
Financial holding companies may engage, directly or
indirectly, in any activity that is determined to be (i) financial in nature,
(ii) incidental to such financial activity, or (iii) complementary to a
financial activity and which does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act specifically provides that the following activities have
been determined to be "financial in nature": (a) lending, trust and other
banking activities; (b) insurance activities; (c) financial or economic advice
or services; (d) pooled investments; (e) securities underwriting and dealing;
(f) existing bank holding company domestic activities; (g) existing bank holding
company foreign activities and (h) merchant banking activities.
42
In addition, the Gramm-Leach-Bliley Act specifically gives the
Federal Reserve Board the authority, by regulation or order, to expand the list
of "financial" or "incidental" activities, but requires consultation with the
U.S. Treasury, and gives the Federal Reserve Board authority to allow a
financial holding company to engage in any activity that is "complementary" to a
financial activity and does not "pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally."
The Bank
General. The Bank is incorporated under the Puerto Rico
Banking Act of 1933, as amended (the "Puerto Rico Banking Law") and is subject
to extensive regulation and examination by the OCFI, the FDIC and certain
requirements established by the Federal Reserve Board. The federal and Puerto
Rico laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans. There are periodic examinations by
the OCFI and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OCFI, the FDIC or the U.S. Congress or
Puerto Rico legislature could have a material adverse impact on R&G Financial,
R&G Mortgage, the Bank and their operations.
FDIC Insurance Premiums. The Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all Savings Association Insurance Fund ("SAIF") and
Bank Insurance Fund ("BIF") member institutions. Under applicable regulations,
institutions are assigned to one of three capital groups which is based solely
on the level on an institution's capital: "well capitalized," "adequately
capitalized" and "undercapitalized". These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .0% for well
capitalized, healthy institutions to .27% for undercapitalized institutions with
substantial supervisory concerns. The Bank was classified as a
"well-capitalized" institution as of December 31, 2000.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy regarding the capital adequacy of state-chartered
banks which, like the Bank, will not be members of the Federal Reserve System.
These requirements are substantially similar to those adopted by the Federal
Reserve Board regarding bank holding companies, as described above.
43
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 increases the
minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under the FDIC's regulation, 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 I 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 December 31, 2000, the Bank met each of its capital requirements.
The FDIC and the other federal banking agencies have published
a joint policy statement that describes the process the banking agencies will
use to measure and assess the exposure of a bank's net economic value to changes
in interest rates. The FDIC and other federal banking agencies have also adopted
a joint policy statement on interest rate risk policy. Because market
conditions, bank structure, and bank activities vary, the agencies concluded
that each bank needs to develop its own interest rate risk management program
tailored to its needs and circumstances. The policy statement describes prudent
principles and practices that are fundamental to sound interest rate risk
management, including appropriate board and senior management oversight and a
comprehensive risk management process that effectively identifies, measures,
monitors and controls risks.
Activities and Investments. The activities and equity
investments of FDIC-insured, state-chartered banks (which under the Federal
Deposit Insurance Act includes banking institutions incorporated under the laws
of Puerto Rico) are generally limited to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
In addition, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as "principal" in any activity that is not
44
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and
the bank is in compliance with applicable regulatory capital requirements. Any
insured state-chartered bank directly or indirectly engaged in any activity that
is not permitted for a national bank must cease the impermissible activity.
Puerto Rico Banking Law. As a commercial bank organized under
the laws of the Commonwealth, the Bank is subject to supervision, examination
and regulation by the OCFI pursuant to the Puerto Rico Banking Law.
The Puerto Rico Banking Law requires that at least ten percent
(10%) of the yearly net income of the Bank be credited annually to a reserve
fund. This apportionment shall be done every year until the reserve fund shall
be equal to the sum of the Bank's paid-in common and preferred stock capital. As
of December 31, 1999, the Bank had credited $5.1 million to such reserve fund.
The Puerto Rico Banking Law also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter shall be charged against the undistributed profits of the bank,
and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If there is no reserve fund sufficient to cover such balance
in whole or in part, the outstanding amount shall be charged against the capital
account and no dividend shall be declared until said capital has been restored
to its original amount and the reserve fund to 20% of the original capital. In
addition, every bank is required by the Puerto Rico Banking Law to maintain a
legal reserve which shall not be less than 20% of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be made up of any of the following
instruments or any combination of them: (i) legal tender of the United States;
(ii) checks on banks or trust companies located in any part of Puerto Rico, to
be presented for collection during the day following that on which they are
received; (iii) money deposited in other banks provided said deposits are
authorized by the Commissioner, subject to immediate collection; and (iv)
federal funds sold and securities purchased under agreements to resell, provided
such funds are repaid on or prior to the close of the next business day.
Under the Puerto Rico Banking Law, the Bank is permitted to
make loans to any one person, firm, partnership or corporation, up to an
aggregate amount of fifteen percent (15%) of the paid-in capital and reserve
fund of the Bank, plus 15% of 50% of undistributed earnings for "well
capitalized" institutions. As of December 31, 2000, the legal lending limit for
the Bank under these provisions was approximately $22.0 million and its maximum
extension of credit to any one borrower was $21.5 million. If such loans are
secured by collateral worth at least twenty-five percent (25%) more than the
amount of the loan, the aggregate maximum amount may reach one-third of the
paid-in capital of the Bank, plus its reserve fund. There are no restrictions on
the amount of loans to subsidiaries of banks, or loans that are secured by
mortgages by real estate, or loans that are wholly secured by bonds, securities
and other evidences of indebtedness of the United States or the Commonwealth, or
by current debt bonds, not in default, of municipalities or instrumentalities of
the Commonwealth. Loans to non-banking affiliates of the Bank, are subject
however to the lending limitations set forth in Sections 23A and 23B of the
Federal Reserve Act. The Puerto Rico Banking Law also authorizes the Bank to
conduct certain financial and related activities directly or through
subsidiaries. The Puerto Rico Banking Law also prohibits Puerto Rico banks from
making loans secured by their own stock, and from purchasing their own stock,
unless such purchase is necessary to prevent losses because of a debt previously
contracted in good faith. The stock so purchased by the bank must be sold in a
private or public sale within one year from the date of purchase. The Bank may
repurchase its own stock for the purpose of reducing its capital, subject to the
approval of the OCFI.
The rate of interest that the Bank may charge on mortgage and
other types of loans to individuals in Puerto Rico is subject to Puerto Rico's
usury laws. Such laws are administered by the Financing Board, which consists of
the Commissioner of Financial Institutions, the President of the Government
45
Development Bank, the Chairman of the Planning Board and the Puerto Rico
Secretaries of Commerce, Treasury and Consumer Affairs and three representatives
from the private sector. The Financing Board promulgates regulations which
specify maximum rates on various types of loans to individuals. The Financing
Board eliminated the regulations that set forth the maximum interest rates that
could be charged on consumer loans, mortgage loans and commercial loans. The
origination charges on residential mortgage loans may not exceed 6% of the loan
amount.
Regulatory Enforcement Authority. Applicable banking laws
include substantial enforcement powers available to federal and Puerto Rico
banking regulators. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Mortgage Banking Subsidiaries
The mortgage banking business conducted by R&G Mortgage, The
Mortgage Store and Continental are subject to the rules and regulations of FHA,
VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and
servicing mortgage loans and the issuance and sale of mortgage-backed
securities. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers
and fix maximum loan amounts and, with respect to VA loans, fix maximum interest
rates. Moreover, lenders are required annually to submit to FNMA, FHA, FHLMC,
GNMA and VA audited financial statements, and each regulatory entity has its own
financial requirements. The affairs of these subsidiaries are also subject to
supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all times
to assure compliance with the applicable regulations, policies and procedures.
Mortgage origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder.
Mortgage loan production activities are subject to the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder. The
Truth-in-Lending Act contains disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The Truth-in-Lending Act provides consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.
The mortgage subsidiaries are required to comply with the
Equal Credit Opportunity Act of 1974, as amended ("ECOA"), and Regulation B
promulgated thereunder, which prohibit creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, and restrict
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by lenders regarding consumer rights and
requires lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for loan
increases as a result of information obtained from a consumer credit agency,
another statute, The Fair Credit Reporting Act of 1970, as amended, requires the
lenders to supply the applicant with the name and address of the reporting
agency.
The Federal Real Estate Settlement Procedures Act ("RESPA")
imposes, among other things, limits on the amount of funds a borrower can be
required to deposit with the mortgage subsidiaries in any escrow account for the
payment of taxes, insurance premiums or other charges.
46
R&G Mortgage and The Mortgage Store are also subject to
regulation by the OCFI, with respect to, among other things, licensing
requirements and the record-keeping, examination and reporting requirements of
the Puerto Rico Mortgage Banking Institutions Law (the "Mortgage Banking Law").
R&G Mortgage and The Mortgage Store are licensed by the OCFI as a mortgage
banking institution in Puerto Rico. Such authorization to act as a mortgage
banking institution must be renewed as of January 1 of each year. In the past,
neither R&G Mortgage nor The Mortgage Store has not had any difficulty in
renewing its authorization to act as a mortgage banking institution, and
management is unaware of any existing practices, conditions or violations which
would result in either company being unable to receive such authorization in the
future.
The Mortgage Banking Law requires the prior approval of the
OCFI for the acquisition of control of any mortgage banking institution licensed
under the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the
term "control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to the
Mortgage Banking Law, upon receipt of notice of a proposed transaction that may
result in change of control, the OCFI is obligated to make such inquires as it
deems necessary to review the transaction. Under the Mortgage Banking Law, the
determination of the OCFI whether or not to authorize a proposed change of
control is final and non-appealable.
As is the case with the Bank, the rate of interest that R&G
Mortgage and The Mortgage Store may charge on mortgage loans to individuals is
subject to Puerto Rico's usury laws. Such laws are administered by the Financing
Board which promulgates regulations that specify maximum rates on various types
of loans to individuals. Regulation 26-A promulgated by the Financing Board
fixes the maximum rate (which is adjusted on a weekly basis) which may be
charged on residential first mortgage loans.
Effective April 1996, the Financing Board eliminated the
regulations that set forth the maximum interest rates that could be charged on
non-federal government guaranteed loans.
Continental is subject to regulation and licensing
requirements of the New York Banking Department, and is also subject to North
Carolina licensing requirements.
47
ITEM 2:
Properties
The Company's principal executive office is located at 280
Jesus T. Pinero Avenue, Hato Ray, San Juan, Puerto Rico 00918. The aggregate net
book value (including leasehold improvements and equipment) of the Company's
offices and other properties at December 31, 2000, amounted to $20.1 million .
Set forth below is a list of the Company's offices and other facilities all of
which properties are leased.
-------------------------------------------------------------------------------
Description/Address
-------------------------------------------------------------------------------
The Bank:
Hato Rey Branch(1)(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919
Los Jardines Branch
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969
San Patricio Branch(4)
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969
Bayamon Branch(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959
Bayamon East Branch (2)(4)
Road #174, Lot 100
Minillas Industrial Park
Bayamon, PR 00959
Arecibo Branch(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Branch(3)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674
48
--------------------------------------------------------------------------------
Description/Address
--------------------------------------------------------------------------------
Carolina Branch(4)
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985
Trujillo Alto Branch
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
Santurce Branch(4)
1077 Ponce de Leon Avenue
Santurce, PR 00917
Laguna Gardens Branch(4)
Laguna Gardens Shopping Center
Isla Verde
Carolina, PR 00979
Plaza Carolina Branch(4)
Plaza Carolina Mall
Carolina, PR 00985
Norte Shopping Branch(4)
Norte Shopping Center
Baldorioty de Castro Avenue
San Juan, PR 00907
Vega Baja Branch(3)
Cabo Caribe Development
PR Road No. 2, Marginal
Vega Baja, PR 00693
Mayaguez Branch(3)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680
Fajardo I Branch(2)(4)
Garrido Morales Street
Corner San Rafael
Fajardo, PR 00738
Martinez Nadal Branch(4)
Paradise Mall
Corner Jesus T. Pinero Ave.
Rio Piedras, PR 00925
49
--------------------------------------------------------------------------------
Description/Address
--------------------------------------------------------------------------------
Ponce Branch(4)
Lifetime Building Lot 5
Industrial San Rafael
Ponce, PR 00731
Fajardo II Branch(4)
Celis Aguilera #161
Fajardo, PR 00738
Plaza del Sol Branch(4)
Plaza del Sol Mall
725 West Main Ave.
Bayamon, PR 00961
Operations Center(2)
Road #174, Lote 100
Minillas Industrial Park
Bayamon, PR 00959
Plaza Interamericana Branch (2)(4)
Plaza Interamericana Mall
Sein Street and PR Road No. 177
San Juan, PR 00908
Plaza Las Americas Branch
Plaza Las Americas Shopping Center
Hato Rey, PR 00918
Caguas Branch (2)
PR Road No. 1, Km 33.6
Villa Blanca Industrial Area
Caguas, PR 00725
Aguadilla Branch (4)
Victoria Plaza Shopping Center
Road #2, KM.129.5
Aguadilla, PR 00603
Continental Capital:
Huntington Office
1841 New York Avenue
Huntington Station, NY 11746
Bay Shore Office
1555 Sunrise Hwy.
Bay Shore, NY 11706
Administrative Office
125 Bayless Rd.
Melville, NY 11747
Woodhaven Office
94-11 Jamaica Avenue
Woodhaven, NY 11421
North Carolina Office
4630 Highway 74 West
Monroe, NC 28110
50
--------------------------------------------------------------------------------
Description/Address
--------------------------------------------------------------------------------
The Mortgage Store:
Hato Rey Office
295 Jesus T. Pinero
San Juan, PR 00918
Ponce Office (8)
Las Americas Ave
Ext. Buena Vista #25
Ponce, PR 00731
Bayamon Office (7)
Street No. 1, #44
Hermanas Davila
Bayamon, PR 00959
Aguadilla Office
PR Road No. 2
Punto Oro Shopping Center
Aguadilla, PR 00603
Caguas Office
Pino Street, H22
Villa Tarabo
Caguas, PR 00725
Guayama Office
Ashford Ave., #45 South
Guayama, PR 00784
Rio Grande Office
BAA Street, Marginal #3
Alturas de Rio Grande, PR, 00745
R&G Mortgage:
Caguas Office
D-9 Degetau Street
San Alfonso
Caguas, PR 00725
Los Jardines Office(5)
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969
Hato Rey Office(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919
51
--------------------------------------------------------------------------------
Description/Address
--------------------------------------------------------------------------------
Bayamon Office(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959
Arecibo Office(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Office(3)(6)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674
Mayaguez Office(3)(6)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680
Vega Baja Office (3)
Cabo Caribe Development
PR Road No. 2., Marginal
Vega Baja, PR 00693
Trujillo Alto Office (5)
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
Plaza Las Americas Office (5)
Plaza Las Americas Shopping Mall
Office Tower Suite 805
Hato Rey, PR 00918
(Footnotes on following page)
52
(1) Also serves as the main office of R&G Financial.
(2) Leased from VIG Leasing, S.E., which is owned by the family of Victor J.
Galan, Chairman of the Board and Chief Executive Officer of R&G Financial.
(3) The Bank and R&G Mortgage each maintain separate offices in the same
building.
(4) Facility includes an R&G Mortgage Banking Center.
(5) The Bank maintains an office at this location in a separate facility.
(6) Office is subleased from the Bank.
(7) Office is leased from the Bank.
(8) Office is subleased form R&G Mortgage.
ITEM 3: Legal Proceedings.
The Company is not involved in any pending legal proceedings
other than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4: Submission of Matters to a Vote of Security-Holders.
Not applicable.
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference
from pages 87 and 88 of the Registrant's 2000 Annual Report.
ITEM 6: Selected Financial Data.
The information required herein is incorporated by reference
from pages 31 to 32 of the Registrant's 2000 Annual Report.
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference
from pages 33 to 48 of the Registrant's 2000 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference
from pages 37 to 38 of the Registrant's 2000 Annual Report.
ITEM 8: Financial Statements and Supplementary Data.
The information required herein is incorporated by reference
from pages 49 to 85 of the Registrant's 2000 Annual Report.
ITEM 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
53
PART III
ITEM 10: Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference
from pages 2 to 5, 6-7 and 9-10 of the Registrant's Proxy Statement dated April
6, 2001 ("Proxy Statement").
ITEM 11: Executive Compensation.
The information required herein is incorporated by reference
from pages 11 to 14 and 15 to 17 of the Registrant's Proxy Statement.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference
from pages 8 to 9 of the Registrant's Proxy Statement.
ITEM 13: Certain Relationships and Related Transactions.
The information required herein is incorporated by reference
from pages 14 to 15 of the Registrant's Proxy Statement.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of December 31, 2000 and
1999.
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
54
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence
of conditions under which they are required or because the required
information is included in the consolidated financial statements and
related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
No. Description
-- -----------
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 Certificate of Amendment to Certificate of Incorporation of R&G Financial
Corporation(2)
3.2.1 Amended and Restated Certificate of Incorporation of R&G Financial
Corporation(4)
3.3 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
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
(9)
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)(*)
13.0 2000 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 1. Business"
for the required information
27.0 Financial Data Schedule
99.1 Valuation Report on Minority Interest of Bank Stockholders, prepared by
Friedman, Billings, Ramsey & Co., Inc., dated June 13, 1996(2)
99.2 Update to Valuation on Minority Interest of Bank Stockholders, prepared by
Friedman, Billings, Ramsey & Co., Inc., dated September 27, 1996(1)
---------------------
(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.
55
(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 Registrants' 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 of Form S-3 (File No. 333-55834),
filed with the SEC on March 7, 2001.
(*) Management contract or compensatory plan or arrangement.
(3)(b) Reports on Form 8-K.
None.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
October 2, 2001 By: /s/ Victor J. Galan
-------------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Victor J. Galan October 2, 2001
------------------------------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
/s/ Ramon Prats October 2, 2001
------------------------------------------
Ramon Prats
President and Director
/s/ Joseph R. Sandoval October 2, 2001
------------------------------------------
Joseph R. Sandoval
Senior Vice President and Chief Financial
Officer (principal financial and
accounting officer)
/s/ Ana M. Armendariz October 2, 2001
------------------------------------------
Ana M. Armendariz
Director and Treasurer
/s/ Enrique Umpierre-Suarez October 2, 2001
------------------------------------------
Enrique Umpierre-Suarez
Director and Secretary
/s/ Victor L. Galan Fundora October 2, 2001
------------------------------------------
Victor L. Galan Fundora
Director
57
/s/ Pedro Ramirez October 2, 2001
------------------------------------------
Pedro Ramirez
Director
/s/ Laureno Carus Abarca October 2, 2001
------------------------------------------
Laureno Carus Abarca
Director
/s/ Eduardo McCormack October 2, 2001
------------------------------------------
Eduardo McCormack
Director
/s/ Gilberto Rivera-Arrega October 2, 2001
------------------------------------------
Gilberto Rivera-Arreaga
Director
/s/ Benigno R. Fernandez October 2, 2001
------------------------------------------
Benigno R. Fernandez
Director
/s/ Ileana M. Colon-Carlo October 2, 2001
------------------------------------------
Ileana M. Colon-Carlo
Director
/s/ Roberto Gorbea October 2, 2001
------------------------------------------
Roberto Gorbea
Director
58
EX-13
3
ex-13.txt
R-G ANNUAL REPORT
[GRAPHIC - PHOTO]
mission statement
--------------------------------------------------------------------------------
We will strive for long-term financial strength and profitability by centering
our strategy on customer satisfaction, being our customers' first choice for
service and solutions.
Providing borrowers with competitive prices, a variety of loan programs, and
service which is prompt, courteous and responsive to the unique characteristics
of every customer.
We seek to be a high-performance financial organization that delivers one-stop
financial services to its clients; that is recognized as the best provider of
value-added, service oriented financial services; and that offers services of
unmatched quality in terms of accessibility, responsiveness and turnaround time.
The key to our success is effective execution, every day, everywhere. By
everyone.
We will achieve these goals by making available a growing number of services and
products within an environment that is both technologically advanced and
friendly, and by creating a work environment where all team members care and are
committed individually, and as a team, to do their best.
What makes us leaders is not what we say, but what we do and the way we do it.
1
2
financial highlights
--------------------------------------------------------------------------------
[GRAPHIC - FINANCIAL CHART]
[GRAPHIC - REVENUE CHART]
[GRAPHIC - NET INCOME CHART]
3
--------------------------------------------------------------------------------
[GRAPHIC - LOAN PORTFOLIO CHART]
[GRAPHIC - DEPOSITS CHART]
4
financial highlights
--------------------------------------------------------------------------------
[GRAPHIC - ASSETS CHART]
[GRAPHIC - STOCKHOLDERS' EQUITY CHART ]
5
[GRAPHIC - PHOTOS OF BANKS]
[GRAPHIC - MAP OF PUERTO RICO DEPICTING BANK LOCATIONS]
6
profile
--------------------------------------------------------------------------------
The Company was organized in 1972 as R-G Mortgage Corp. In 1996 we organized R-G
Financial as a bank holding company, and went public on August 22, 1996. R-G
Financial has $3.5 billion in assets and operates 58 banking and mortgage
banking branches in 31 locations in Puerto Rico and four locations in the United
States.
[GRAPHIC - PHOTO]
R-G Financial has the following financial services companies: R-G Premier Bank
of Puerto Rico, R-G Mortgage Corp., Mortgage Store of Puerto Rico Inc., and Home
& Property Insurance Corp. located in Puerto Rico, and Continental Capital Corp.
located in New York. R-G Mortgage is the second largest mortgage originator in
Puerto Rico, and R-G Premier Bank is one of the fastest growing commercial banks
in the island. R-G Financial as a holding company, is the fourth largest locally
owned financial institution in Puerto Rico. R-G Financial manages a $6.6 billion
servicing portfolio and is growing originations due to a strong housing market,
low interest rates, and state-of-the art technology. R-G Financial has a $1.0
billion residential portfolio, $503.1 million in a commercial real estate and
construction portfolio, $59.1 million in commercial business loans and leases,
and $45.6 in personal loans and credit cards. Its $1.6 billion investment
portfolio consists primarily of tax-exempt mortgage-backed securities and U.S.
Government agency securities. Approximately 1,300 professionals and a
sophisticated computer center support the activities of the operation. R-G
Financial common and preferred stocks are publicly traded on the Nasdaq Stock
Market under the symbols "RGFC," "RGFCP," "RGFCO" and "RGFCN," respectively.
7
8
letter to stockholders
--------------------------------------------------------------------------------
y e a r 2 0 0 0
Dear fellow stockholders:
I am pleased to report another excellent year for R-G Financial. During 2000 we
achieved record earnings and significantly enhanced the fundamentals of our
business. We increased our loan portfolio, strengthened our balance sheet, and
increased the efficiency of our operations. As significantly, we demonstrated
that we are poised to produce consistent results in any economic cycle,
including periods of high interest rates.
[GRAPHIC - PHOTO Victor J. Galan]
During 2000, we optimized the personal service provided to our clients by
improving training, cross-selling, and the integration of all our services and
products when attending our customers. There is only one sustainable competitive
advantage for a company that wants to be a consistent winner--"To be the
best"--in the financial services industry. For R-G Financial, this means, in
addition to having physical branches, ATM's, phone bank centers, and the
Internet, that people need to provide great sales and services. Only by having
the best people in our branches, the best people building our technology, and
the best people operating our computers, will we succeed. We know our people are
doing a good job when customers give us more of their business. Our goal is to
provide "more banking in less time," something our customers already perceive as
a reality.
9
"During 2000, we achieved record earinings and Significantly
--------------------------------------------------------------------------------
With the decline in market rates of interest currently being experienced, we
believe that 2001 will provide exceptional opportunities for R-G Financial. We
estimate Puerto Rico's total mortgage market will exceed $6 billion in 2001,
surpassing the record $5.2 billion established in 1998 and year 2000 mortgage
originations of $4.3 billion. Through the end of February in 2001, in R-G
Financial we have already experienced record levels of loan originations and
closings, surpassing our own expectations.
During 2000, the Company's recurring earnings and dividend distribution reached
new highs. Strategic initiatives added strength and depth to the Company,
including our expansion in commercial and construction lending and our entrance
to the mortgage banking business in the USA, our expansion in consumer lending,
focusing on personal mortgage loans, consumer loans, and credit cards, and the
entrance into the insurance business through the acquisition of an insurance
agency. In the future, the Company will continue supporting its growth by
continued expansion in banking, insurance, and later this year, with the opening
of a new securities company. Our growth will be supported by state-of-the-art
technology and the best personal service to all our customers across all
divisions.
A new banking branch was opened in Aguadilla in January 2001, and we have
commenced construction of a second branch location in Mayaguez. During 2000 we
remodeled and expanded our existing location in San Patricio and converted it
into a full service financial center, expanded service areas of our branches in
10
[GRAPHIC-PHOTO]
enhanced the fundamentals of our business."
--------------------------------------------------------------------------------
Vega Baja and Trujillo Alto, and began the expansion and remodeling work of our
Betances Street branch in Bayamon. This expansion should support additional
growth of deposits and loans in general. Each branch is seeking new banking
businesses and relationships, supported by mortgage, consumer and commercial
lending centers seeking new loans. Our Hato Rey branch also has been transformed
into a full financial center, in which we offer securities and insurance
products.
The Mortgage Store (formerly Champion Mortgage) was repositioned from a
specialty lender in sub-prime and alternate A loans into a full mortgage banking
operation covering a more diversified group of mortgage products. Our purpose is
to cover a larger segment of the market. We opened new branches of The Mortgage
Store in Rio Grande, Caguas, and Guayama, increasing total Mortgage Store
branches to seven.
We have commenced the planning work for the 2001 expansion of our headquarter
facilities in Hato Rey, in which we will add a second office tower of 85,000 sq.
ft. with parking capacity for 330 cars. This will increase the total space
available in our headquarters to 150,000 sq. ft. with 728 parking spaces. In
addition, during 2000 we opened a new branch in Charlotte, North Carolina, of
our New York based mortgage banking subsidiary, Continental Capital. With this
new branch, we have a total of four branches in the Unites States, including our
existing facilities in New York (Huntington Station, Woodhaven, and Queens).
11
[GRAPHIC - PHOTO]
--------------------------------------------------------------------------------
This strategic expansion will continue, with additional branches to be
concentrated initially in the Eastern part of the United States in areas with a
strong presence of potential new customers.
The 2000 results could be summarized as follows:
o $44 million net income
o 18.00% return on equity
o $3.5 billion in total assets
o 1.34% return on assets
o 58 loan production and banking offices located in Puerto Rico and the US
o Record internal residential mortgage loan production of $1.1 billion; total
loan production of $1.7 billion
o $6.6 billion servicing portfolio
We continue striving for growth, profitability and enhanced stockholders' value
by improving the fundamentals of our business. I am confident that with the
continued achievements of these objectives, our stock (recently priced at around
$15-16 per share) will once again reflect a higher valuation. Three major
analysts that follow our stock have each indicated that, in their opinion, our
stock price is poised for growth, based on their respective estimates of our
earnings and our actual stock valuation which is considered low compared to our
peers. While we as a matter of policy do not comment publicly on analysts
positions with respect to the Company, we note that each of these analysts have
extended favorable recommendations on our stock.
12
"The Company's strong position in the mortgage
sector and its expanding banking operation
will continue producing asset and earnings growth"
--------------------------------------------------------------------------------
Puerto Rico's economy appears poised for stable growth during the next years.
Puerto Rico achieved an unemployment rate of 8.9% at the end of the last quarter
in 2000, the lowest since data began being compiled, and local economists
continue projecting an expansion in our economy, supported by increases in
tourism, commerce, and construction, which will offset recent reductions in
manufacturing employment, mostly associated with the closing of "old economy"
operations affected by competition from low-labor cost countries. The
construction industry is expected to continue expanding during the next year,
particularly in homebuilding, resulting from demographic changes and the
expansion of Puerto Rico's infrastructure.
While we enter in a new economic cycle, we foresee inflation remaining under
control, declining interest rates and improved oil prices, allowing consumers to
have more disposable income due to reductions in the cost of utilities. This
will provide the economic support for another vigorous and profitable business
cycle, which will be beneficial to institutions like ours dedicated primarily to
real estate finance. With the recent reductions in interest rates, we expect a
more vigorous refinancing market, resulting in record levels of loan production.
We believe that the Company's strong position in the mortgage sector, combined
with its expanding banking operation and additional income from new insurance
and securities products, will continue producing asset and earnings growth in
the future.
13
[GRAPHIC - PHOTO]
--------------------------------------------------------------------------------
Record Financial Results
Earnings for 2000 rose to a record of $43.6 million, increasing 6% from 1999
earnings of $41.3 million, in spite of an unfavorable interest rate environment.
On a per share basis (diluted), R-G Financial earned $1.30 in 2000, compared to
$1.28 the previous year. Our compounded annual growth rate for the period
1980-2000 was 35.7%, and 32.8% for the period since August 22, 1996 when we
became a public company. Since our initial public offering, we have generated
additional capital for our shareholders of $129 million and increased assets by
$2.5 billion, representing a total growth of 124% in capital and 236% in assets,
while paying dividends to our common stockholders in the amount of $16.6
million.
Total gross revenues for 2000 amounted to $314.9 million, compared to $234.0
million for 1999. Net revenues after deducting our cost of interest were $144.3
million, compared to $127.4 million in 1999. A significant portion of our 2000
net revenues consisted of net interest income. Net interest income, totaling
$65.0 million for 2000, was up by 15% from the 1999 level. The balance of our
net revenues, amounting to $79.3 million, consisted of fees generated primarily
from the servicing of our mortgage portfolio, the origination and sale of loans,
and banking services.
We increased dividends to $0.20 per share from $0.15 in 1999. For the quarter
ended December 31, 2000, the dividend was increased to $0.06 per share on an
14
[GRAPHIC- Mortgage Servicing Portfolio Graph]
--------------------------------------------------------------------------------
annual basis, a 25% annualized increase from the prior quarterly dividend. This
was our 17th consecutive increase since the Company went public.
Shareholders' equity of $308.8 million as of December 31, 2000 was up 15% from
$269.5 million in 1999. Core capital represented 8.44% of our total assets, and
risk-based capital represented 16.01% (on a consolidated basis), in each case,
substantially exceeding the minimums required by our regulators. The Bank
continues to be "well-capitalized", according to FDIC standards.
New Products and Expansion Program
During the last two years, the opening of new banking offices increased
commercial and retail core deposits. These new branches generated incremental
deposits in the amount of $66 million, surpassing our own projections, repre-
senting 19% of our additional growth in deposits during the last year.
In our market, branch availability and location still influence consumers
decisions about which bank to do business with. Branches are also important to
many of our commercial customers who, to a large extent, still value and need
physical access. All our branches are strategically located, mostly in shopping
centers, and are designed to be platforms for cross-selling and relationship
building. We have created, in fact, a network of physical sites where we can
interact with our customers. The personal presence allows us to continue to grow
our franchise in banking, mortgage banking, investment banking and insurance.
15
[GRAPHIC- total loan production graph]
--------------------------------------------------------------------------------
At the close of the year, we had 23 branches of R-G Premier Bank, 24 branches of
R-G Mortgage, and 7 branches of The Mortgage Store (a subsidiary of R-G
Mortgage), each working in tandem in 31 different locations across the island of
Puerto Rico. In addition, we had 4 offices of Continental Capital located in New
York and North Carolina. As of such date, we had 897 employees assigned to
branches, loan origination and processing, 58 to operations, 108 to loan
administration, and the balance to general administrative and finance, which
results in a total of 1,295 employees.
We have introduced new products during the last few years, such as the "Mortgage
2000," a product providing 100% financing in a conforming loan, "Presta Rapido"
(Quick Loan), oriented to close a loan in 24 hours, "Facilito" (Easy Loan), a
consumer loan secured by real estate, and "RG Max" which provides 100% financing
on new housing loans. These products have resulted in significant new sources of
revenue for the Company.
Loan Production and Assets Growth
Loan production -- comprised of residential and commercial mortgage lending,
consumer and business lending -- reached $1.7 billion in 2000. Our residential,
commercial and construction mortgage internal loan originations constituted
approximately 22% of the market, based on an estimated total mortgage market of
$4.3 billion in Puerto Rico last year, compared to 20% in 1999. We achieved this
substantial growth through a very strong advertising effort using print and
16
"facilito"
"Mortgage 2000" [GRAPHIC - PHOTO]
"R-G Max"
"Presta Rapido"
--------------------------------------------------------------------------------
broadcast media, a substantial expansion in branches and increased
telemarketing.
The Mortgage Store, a subsidiary of R-G Mortgage, achieved excellent results,
producing a record volume of non-conforming, residential mortgage loan
originations. In view of the initial success of this operation, we expanded its
scope of business to include a full line of mortgage products. During 2000, we
opened three new Mortgage Store branches and we are presently evaluating five
other locations.
Our residential portfolio at the end of 2000 totaled $1.4 billion (which
excludes certain significant loan securitizations during the year), a 29%
increase from $1.1 billion in 1999. The average yield on the portfolio for 2000
was 7.78%. This portfolio included $1.4 billion of residential first mortgages
and $27.4 million of second mortgages.
During mid 1998, we expanded our services by organizing a Construction Loan
Department to work primarily with major real estate developers. Outstanding
construction loans grew 65% to $73.5 million at year-end from $44.6 million in
1999. Commitments for future funding were $78.2 million at December 31, 2000.
Our commercial loan portfolio, including commercial mortgages and leases,
increased to $363.2 million at year-end, an increase of 30% from the previous
year. This increase was due mostly to the continued use of customized
17
"Our target is to double the amount
of products with each of our clients."
--------------------------------------------------------------------------------
commercial loans structured to fit borrowers' needs. Most of this portfolio is
designed with interest rate floors and generates yields that adjust with
fluctuations in the Prime Rate or LIBOR.
Our consumer portfolio, which includes collateralized consumer loans and credit
cards, amounted to $172.8 million at the end of 2000. This portfolio generated
an average yield of 11.24%, which improved the average return of our total
portfolio and our spread income.
Our operations contain the full line of products necessary to compete
effectively, either in the asset or the liability side of our banking business.
We are able to provide clients with all of our products through cross-selling
programs. Our target is to double the amount of products with each of our
clients from our present average of two. We hope to achieve this through a
strong promotional campaign combined with direct cross-selling to our customers.
We expanded our servicing portfolio to 110,874 loans with a total balance of
$6.6 billion, an increase of $456.5 million from 1999. We estimate the total
value of our servicing portfolio at $127.4 million as of December 31, 2000, or
$32.4 million above the value reflected in our financial statements under
Statement of Financial Accounting Standards No. 125. This extra value is
primarily represented by that portion of the portfolio that is not capitalized.
Our servicing portfolio
18
[GRAPHIC - PHOTO]
--------------------------------------------------------------------------------
continues to be a strong source of revenue. Servicing income increased to $30.8
million in 2000 from $27.1 million in 1999.
We strengthened our credit loss reserves during the year, increasing the reserve
for loan losses to $11.6 million, a 29% increase from $9.0 million the previous
year. Reserves approximate 74% of total non-performing loans as of December 31,
2000, excluding our residential loan portfolio where losses have historically
been minimal. Charge-offs to total average loans outstanding decreased to 0.17%
during 2000 from 0.25% in 1999.
Our securities portfolio increased by 49% in 2000, growing to $1.6 billion from
$1.0 billion in 1999. These investments represented 44% of total assets as of
December 31, 2000, and with a yield of 6.52%, generated revenues of $72.0
million. Most of these securities are tax-free federally guaranteed bonds and
GNMA's.
Liquid assets constituted 22.7% of our total assets at year-end, even though we
closed new loans totaling $1.7 billion during the year. Assets grew by $627
million during 2000 to a record $3.5 billion. This growth was financed by a $346
million increase in deposits, a $96 million increase in repurchase agreements,
and a $136 million increase in lines of credit with banks and the Federal Home
Loan Bank of New York. The balance was financed through profits, loan payoffs
and sales. At year-end, our unused lines of credit (including lines of credit
with the Federal Home Loan Bank) totaled $342.9 million.
19
COMMERCIAL
PRODUCTS
--------------------------------------------------------------------------------
Record Bank Deposits
Deposits were at a record level at the end of 2000, increasing by 26% to $1.7
billion, from $1.3 billion in 1999. We supported this growth with a very strong
promotional campaign designed to generate core deposits and to expand our
Private Banking business, the opening of new branches, the expansion of our
existing locations and the conversion of some of our branches to Full Service
Financial Centers. New deposits with our Private Banking Group rose
substantially, and we project that these accounts will lead to additional
business in 2001 as the Private Banking Group provides other products and
services to these customers, such as sale of investments, mutual funds, and
savings and retirement products such as IRAs and Keogh plans.
We are in the process of converting our Private Banking Group into R-G
Investments, a separate investment banking company, with the purpose of
providing better and broader services to our clients. Many of our branches will
be converted to Financial Centers, where services will include the sale of
investment and mortgage products, consumer and commercial loans and insurance.
We presently have two Financial Centers in operation and have more projected for
the near future.
The average per branch deposit size increased 19% to $64.9 million in 2000 from
$54.7 million in 1999. Our average per branch deposit size exceeds the average
per branch deposits in Puerto Rico. Core deposits, primarily consisting of
saving
20
mortgage
products
consumer
products
--------------------------------------------------------------------------------
and direct deposit accounts, represented 54.8% of our total deposits (also above
the average for the banking industry in Puerto Rico). Brokered deposits were
only 11% of our total deposits. Our share of the total deposit market in Puerto
Rico, as well as our share of the primary markets we serve (northern Puerto Rico
from Fajardo to Arecibo, including San Juan, plus Caguas, Ponce, Aguadilla and
Mayaguez) increased again this year!
Money never disappears. It flows from investments to deposits and back. From
less borrowing to more borrowing. From asset accumulation to asset protection.
R-G has all the products and services available as customers make their choices.
Our goal is simple -- earn 100% of our creditworthy customers' financial service
business.
More Services and State of the Art Technology
To provide faster, more cost-effective service to our customers, practically
every computer system within R-G is being replaced. In other words, we are
building bigger and better computer capacity to store, send and retrieve
customer information. A new computer system was installed for community banking,
mortgage servicing, automated clearinghouse transactions (direct deposit),
commercial loans, mortgage loan origination and treasury management, plus the
direct processing of our point-of-sale products and automatic teller machines.
21
"We believe that 2001 will provide
exceptional opportunities for R-G Financial"
--------------------------------------------------------------------------------
During the year we expanded our telephone and our Telemarketing Department with
a new Marketing Center. This was due primarily to a substantial increase of
phone calls from customers. We also completed the installation in all our
branches of fiber optic cable, allowing faster service to our clients, and
transmission of images (including check and deposits) between branches and our
Operations Center. This now allows online information around our entire
operation, and enhances communications via intranet between the central offices
in Hato Rey, our Operations Center in Bayamon and all our branches.
These are significant investments. The design and implementation are very
challenging but we are doing it while reporting record earnings. The payoff:
better customer service and more earnings opportunities for the future.
Web-based banking provides us with the potential to increase revenues--by
attracting new clients while retaining our existing ones--and decrease operating
and transaction costs, thereby improving efficiencies while becoming another
channel of delivery to our customers in addition to our branching system. Please
be sure to visit us on the web at www.rgonline.com. We are offering our
customers the full range of technological services--electronic commerce, home
banking, Internet for mortgage and other loan applications as well as banking
transactions, and imaging, as well as our voice response system, ATM's and
platform branch automation. With a push of a button, click of a mouse or phone
call, our customers can access their accounts and receive images of checks paid
against their funds 24 hours a day, 7 days a week, through our voice-activated
22
[GRAPHIC - PHOTO]
--------------------------------------------------------------------------------
response system, a 24-hour toll-free telephone account information access,
through home banking, or through interactive Internet banking.
The Company will continue to emphasize strong capital ratios, good asset
quality, expense control, and increased spread and fee income as key financial
sources of future success while we continue expanding our operations in Puerto
Rico and the US. Our competitive advantage is a talented, motivated and highly
trained staff directed by an excellent management team that is compensated
through carefully designed incentive programs. We have devised monetary
incentives based on new loans or deposits for all the staff of our banking and
mortgage banking business. Our employees are committed to delivering exceptional
products and services to our customers. R-G Financial has become a widely
recognized financial brand with a significant franchise in the Puerto Rico
market.
We are pleased with the Company's results for 2000. Despite six increases in
interest rates by the Federal Reserve Board that represented reductions in gross
interest margins of more than $20 million, we achieved record results. Total
assets grew to a record $3.5 billion and our servicing portfolio increased to a
record $6.6 billion. As a result, total assets under administration, including
our servicing portfolio, increased to a record $10.2 billion during 2000, rising
12% from the prior year. We have devised future expansion plans for our Puerto
Rico operation and our mortgage banking business presence in the United States.
23
--------------------------------------------------------------------------------
We hope to double our size during the next five years, something we believe is
attainable.
Our appreciation to our valued customers for their patronage, to our great team
of people for being the very best at what they do, to our directors for their
exceptional dedication to the Company's success, and to our stockholders for
their confidence and support. We have great momentum for 2001. Thanks to our
diverse business and talented team members, we are committed to achieve record
results during 2001.
All of us at R-G Financial look forward to adding value to our investment as
shareholders today and tomorrow. We are committed to delivering improving
returns for our stockholders.
/s/ Victor J. Galan
-------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
R-G Financial Corporation
24
People
on the move
-------------------------------------------------------------------------------
Officers of R-G Financial Corporation
[PHOTO - Ramon Prats]
Management Team
R-G Financial
--------------------------------------------------------------------------------
[PHOTO OF MANAGEMENT TEAM]
1. Victor J. Galan, Chairman of the Board and Chief
Executive Officer
2. Ramon Prats, Vice Chairman of the Board and President
3. Jose Sandoval, Senior Vice President and Chief
Financial Officer
4. Mario Ruiz, Executive Vice President -- R-G Premier
5. Steven Velez, Executive Vice President -- R-G Mortgage
6. Hector Secola, Vice President -- Human Resourses
25
Management Team
R-G Mortgage
--------------------------------------------------------------------------------
[PHOTOS - Management Team, R-G Mortgage]
1. Steven Velez, Executive Vice President
2. Ramon Perez, Senior Vice President -- Loan Servicing
3. Ana M. Armendariz, Senior Vice President --Finance
4. Victor Galan Jr., Vice President -- Loan Production Marketing and Business
Development
5. Ismenia Isidor, Vice President -- Branch Administration and Loan Production
6. Rafael Delgado, Vice President -- Branch Administration and Loan Production
7. Ricardo Agudo, Vice President -- New Housing
8. Blanquita Rivera, Vice President Mortgage Store
9. William Martinez, Vice President -- Administration
10. Victor G. Feliciano, Vice President -- Secondary Market
11. Eileen Delgado, Vice President -- Operations
12. Renissa Gutierrez, Manager--Marketing
26
Management Team
R-G Premier
[PHOTO - Management Team, R-G Premier]
1. Mario Ruiz, Executive Vice President
2. Victor M. Irizarry, Senior Vice President
and Chief Lending Officer
3. Ivan Velez, Senior Vice President -- Operations
4. Dennis Tristani, Senior Vice President -- Credit Risk Management
5. Felipe Franco, Senior Vice President -- Consumer Lending
6. Jose Luis Ortiz, Vice President -- Finance (not pictured)
7. Jeannette Miro, Vice President -- Marketing
8. Edwin Reyes, Vice President -- Branch Administration
9. Sonia Vazquez, Vice President -- Internal Audit and Compliance
10. Luis Aldea, Second Vice President -- Treasurer
11. Juan Carrasquillo, Assistant Vice President -- Private Banking
(not pictured)
Management Team
Continental Capital
[PHOTO - Management Team, Continental Capital]
1. Mike McHugh, President of Continental Capital
2. Mike Wallace, Jr., CEO Continental Capital
27
Consumer Lending
Division
--------------------------------------------------------------------------------
[PHOTO - Consumer Lending Division]
1. Felipe Franco, Senior Vice President Consumer Lending
2. Marion Torres, Assistant Vice President, Loan Administration
3. Miriam George, Card Products
4. Michelle Perez, Marketing
5. Nancy Perez, Credit Approval
Commercial
Lending Division
--------------------------------------------------------------------------------
[PHOTO - Commercial Lending Division]
1. Victor M. Irizarry, Senior Vice President and Chief Lending Officer
2. Dennis Tristani, Senior Vice President -- Credit Risk Management
3. Maria M. Rosales, Vice President --Real Estate and Construction Lending
4. Rene A Lopez, Vice President -- Corporate Banking
5. Lourdes Gonzalez, Vice President -- Retail Construction Lending
6. Wilbert Reyes, Vice President -- Commercial Lending
28
board of
directors
--------------------------------------------------------------------------------
[PHOTO - BOARD OF DIRECTORS]
1. Victor J. Galan,
Chairman of the Board and
Chief Executive Officer
2. Ramon Prats,
Vice Chairman of the Board and
President
3. Gilberto Rivera Arreaga, CPA/Esq.,
Executive Vice President National
College of Business & Technology, post
secondary institution with campuses in
Bayamon and Arecibo, Puerto Rico.
4. Laureano Carus Abarca, Chairman
of Alonso Carus Iron Works in Catano,
Puerto Rico, manufacturers of metal
products
5. Pedro Ramirez, President & CEO
of Empresas Nativas, Inc.,
local real estate development firm
6. Eduardo McCormack, President EMP
Omega Corporation, frutose importers
and distributers in P.R. Former Vice
President Bacardi Corporation
7. Ileana Colon Carlo, Chief
Administration and financial Officer of
McConnell & Valdes, legal Counsels
Former Comptroller General of the
Commonwealth of Puerto Rico.
8. Benigno R. Fernandez, Senior
Partner of Fernandez, Perez, Villariny
& Co., CPA firm in Hato Rey, P.R.
9. Victor L. Galan, Vice President
Loan Production Marketing and Business
Development RGM
10. Roberto Gorbea,
President & CEO of
Lord Electric Company of Puerto
Rico, Inc.
11. Ana M. Armendariz, Treasurer of the
Board and Senior Vice President of
Finance RGM
12. Enrique Umpierre Suarez,
Secretary of the Board and
Attorney in private practice
29
teamwork
within our community
--------------------------------------------------------------------------------
One of our most important commitments with Puerto Rico is our involvement
with non-profit institutions that contribute to a better quality of life, and
enhance our culture and values in areas such as health, community, sports and
arts.
... over 10 years as part of the Muscular Dystrophy Association (MDA)
... with the Puerto Rico Community Foundation
... with the constant support of different artists who exhibit their work in our
Headquarters' Lobby in Hato Rey.
... sponsoring new institutions such as the Ivan Rodriquez Foundation to
promote sports in our community
... Supporting groups such as the Salvation Army.
[PHOTO - GROUP OF 3 PHOTOS]
30
selected consolidated financial and other data of R&G Financial
--------------------------------------------------------------------------------
The following table presents selected consolidated financial and other data of
R&G Financial for each of the five years in the period ended December 31, 2000.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of R&G Financial, including the accompanying
Notes, presented elsewhere herein. In the opinion of management, this
information reflects all adjustments, consisting only of normal and recurring
adjustments, necessary for a fair presentation.
At or For the Year Ended December 31, (Dollars in Thousands, except for per share data)
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
o Total assets(1) $ 3,539,444 $ 2,911,993 $ 2,044,782 $ 1,510,746 $ 1,037,798
o Loans receivable, net 1,631,276 1,563,007 1,073,668 765,059 603,751
o Mortgage loans held for sale 95,668 77,277 117,126 46,885 54,450
o Mortgage-backed and investment securities
held for trading 12,038 43,564 450,546 401,039 110,267
o Mortgage-backed securities available for sale 1,150,100 712,705 95,040 46,004 50,841
o Mortgage-backed securities held to maturity 19,818 23,249 28,255 33,326 37,900
o Investment securities available for sale 368,271 258,164 59,502 75,863 30,973
o Investment securities held to maturity 3,703 5,438 6,344 10,693 5,270
o Servicing asset 95,079 84,253 58,221 21,213 12,595
o Cash and cash equivalents(2) 69,090 65,996 103,728 68,366 98,856
o Deposits 1,676,062 1,330,506 1,007,297 722,418 615,567
o Securities sold under agreements to repurchase 827,749 731,341 471,422 433,135 97,444
o Notes payable 138,858 132,707 182,748 103,453 126,842
o Other borrowings(3) 538,840 408,843 130,000 91,359 65,463
o Stockholders' equity 308,836 269,535 221,162 138,054 115,633
----------- ----------- ----------- ----------- -----------
o Common Stockholders' equity per share(4) $ 8.16 $ 6.79 $ 5.99 $ 4.88 $ 4.09
----------- ----------- ----------- ----------- -----------
Selected Income Statement Data:
o Revenues:
Net interest income after provision for loan losses $ 59,236 $ 52,053 $ 37,373 $ 30,160 $ 24,665
Loan administration and servicing fees 30,849 27,109 15,987 13,214 13,029
Net gain on sale of loans 41,230 37,098 34,955 23,286 12,351
Other(5) 7,231 6,604 5,528 4,605 3,872
----------- ----------- ----------- ----------- -----------
Total revenue 138,546 122,864 93,843 71,265 53,917
----------- ----------- ----------- ----------- -----------
oExpenses:
Employee compensation and benefits 27,031 24,433 17,095 13,653 10,794
Office occupancy and equipment 13,436 11,289 8,987 7,131 5,531
SAIF special assessment -- -- -- -- 2,508
Other administrative and general 40,325 33,568 22,687 18,252 15,424
----------- ----------- ----------- ----------- -----------
Total expenses 80,792 69,290 48,769 39,036 34,257
----------- ----------- ----------- ----------- -----------
o Income before minority interest in the Bank and
income taxes 57,754 53,574 45,074 32,229 19,660
o Minority interest in the Bank's earnings -- -- -- -- 538
o Income taxes 14,121 12,239 11,040 8,732 5,922
----------- ----------- ----------- ----------- -----------
o Net income 43,633 41,335 34,034 23,497 13,200
----------- ----------- ----------- ----------- -----------
o Less: Dividends on preferred stock (5,638) (3,754) (1,234) -- --
o Net income available to common stockholders $ 37,995 $ 37,581 $ 32,800 $ 23,497 $ 13,200
----------- ----------- ----------- ----------- -----------
o Diluted earnings per share (4) $ 1.30 $ 1.28 $ 1.12 $ 0.81 $ 0.59
----------- ----------- ----------- ----------- -----------
31
At or For the Year Ended December 31, (Dollars in Thousands, except for per share data)
---------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data(6):
Performance Ratios and Other Data:
Loan production $ 1,729,373 $ 1,977,322 $1,426,069 $ 906,324 $ 624,571
Mortgage servicing portfolio 6,634,059 6,177,511 4,827,798 3,000,888 2,550,169
Return on average assets(6) 1.34% 1.72% 1.95% 1.85% 1.38%
Return on average common equity(6) 18.00 20.23 21.32 18.69 15.54
Equity to assets at end of period 8.73 9.26 10.82 9.13 11.14
Interest rate spread(7) 1.96 2.40 2.43 2.88 3.00
Net interest margin(7) 2.16 2.60 2.72 3.12 3.24
Average interest-earning assets to average
interest-bearing liabilities 103.54 104.21 105.93 104.61 104.60
Total non-interest expenses to average total assets 2.49 2.88 2.80 3.08 3.59
Full-service Bank offices 23 22 20 15 15
Mortgage offices (8) 35 31 23 19 16
Cash dividends declared per common share(4)(9) .203 .149 .111 .065 .069
Asset Quality Ratios(10):
Non-performing assets to total assets at end of period 2.96% 2.26% 2.41% 2.12% 1.90%
Non-performing loans to total loans at end of period 5.52(11) 3.69 4.08 3.89 3.09
Allowance for loan losses to total loans at end of period 0.67 0.56 0.74 0.87 0.55
Allowance for loan losses to total non-performing
loans at end of period 12.21 15.11 17.92 22.34 17.64
Net charge-offs to average loans outstanding 0.17 0.25 0.55 0.40 0.75
Bank Regulatory Capital Ratios(12):
Tier 1 risk-based capital ratio 11.46% 12.39% 13.41% 13.10% 13.91%
Total risk-based capital ratio 12.24 13.11 14.46 14.00 14.79
Tier 1 leverage capital ratio 6.04 7.07 8.04 7.34 8.45
--------------------------------------------------------------------------------
(1) At December 2000, R&G Mortgage and the Bank had total assets of $751.1
million and $2.9 billion, respectively, before consolidation.
(2) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold, all of which
had original maturities of 90 days or less.
(3) Comprised of long-term debt, advances from the Federal Home Loan Bank
("FHLB") of New York and other secured borrowings.
(4) Per share information for all periods presented takes into consideration a 2
for 1 stock split paid in June 1998 and an 80% stock dividend paid in September
1997.
(5) Comprised of change in provision for cost in excess of market value of loans
held for sale, and other miscellaneous revenue sources, including Bank service
charges, fees and other income.
(6) With the exception of end of period ratios, all ratios for R&G Mortgage are
based on the average of month end balances while all ratios for the Bank are
based on average daily balances.
(7) 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.
(8) Includes 7 branches of Champion Mortgage Corporation, R&G Mortgage's wholly
owned mortgage banking subsidiary, and 4 branches of Continental Capital Corp.,
the Bank's wholly owned mortgage banking subsidiary in New York. Also includes
17 R&G Mortgage facilities which are located within the Bank's offices.
(9) Amount is based on weighted average number of shares of Common Stock (Class
A and Class B) outstanding.
(10) Non-performing loans consist of R&G Financial's non-accrual loans and
non-performing assets consist of R&G Financial's non-performing loans and real
estate acquired by foreclosure or deed-in-lieu thereof.
(11) The increase in the ratio was partially caused by significant loan
securitizations during the last two quarters of 2000, which reduced the amount
of loans held in portfolio considered in the calculation of the ratio. Without
giving effect to loan securitizations, as of December 31, 2000 the ratio of
non-performing loans to total loans would have been 4.46%.
(12) All of such ratios were in compliance with the applicable requirements of
the FDIC.
32
General
R&G Financial Corporation (the "Company") is a 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, 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 investment services through its private
banking department.
R&G Financial has generally sought to achieve long-term financial strength and
profitability by increasing the amount and stability of its net interest income
and other non-interest income. R&G Financial has sought to implement this
strategy by (i) establishing and emphasizing the growth of its mortgage banking
activities, including growing its loan servicing operation; (ii) expanding its
retail banking franchise (the Bank has expanded its branch system from two
offices on February 1990 to 23 offices at December 31, 2000) through branch
acquisition opportunities that may arise or the opening of new branches, all in
order to achieve increased market presence and to increase core deposits; (iii)
enhancing R&G Financial's net interest income by increasing R&G Financial's
loans held for investment, particularly single-family residential loans; (iv)
developing new business relationships through an increased emphasis on
commercial real estate and commercial business lending; (v) diversifying retail
products and services, including an increase in consumer loan originations (such
as credit cards); (vi) meeting the banking needs of its customers through, among
other things, the offering of trust and investment services; and (vii)
controlled growth and the pursuit of a variety of acquisition opportunities,
when appropriate.
The Company began insurance operations in November 2000 with its acquisition of
Home and Property Insurance Corp., an insurance agency organized under the laws
of the Commonwealth in Puerto Rico.
R&G Financial just completed its 28th 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 $6.6 billion as of December 31, 2000, from
$6.2 billion as of the same date a year ago, an increase of 7.4%. 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 substancial portfolio of mortgage-backed and investment securities. At
December 31, 2000, the Company held securities available for sale with a fair
market value of $1.5 billion. Of this amount $1.15 billion consisted of
mortgage-backed securities, of which $587.3 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 substancial 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 believes that,
with the decline in market interest rates currently being experienced,
refinancing activity will increase.
R&G Financial customarily sells or securitizes into mortgage-backed securities
substancially 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.
Asset and Liability Management
general. Changes in interest rates can have a variety of effects on R&G
Financial's business. In particular, changes in interest rates affect the volume
of mortgage loan originations, the interest rate spread on loans held for sale,
the amount of gain on the sale of loans, the value of R&G Mortgage's loan
servicing portfolio and the Bank's net interest income. A substantial increase
in interest rates could also affect the volume of R&G Mortgage's loan
originations for both the Bank and third parties by reducing the demand for
mortgages for home purchases, as well as the demand for refinancings of existing
mortgages. Conversely, a substantial decrease in interest rates will generally
increase the demand for mortgages.
The principal objective of R&G Financial's asset and liability management
function is to evaluate the interest-rate risk included in certain balance sheet
accounts and off-balance sheet commitments, determine the appropriate level of
risk given R&G Financial's business focus, operating environment, capital and
liquidity requirements and performance objectives, establish prudent asset
concentration guidelines and manage the risk consistent with Board approved
guidelines. Through such management, R&G Financial seeks to reduce the
33
vulnerability of its operations to changes in interest rates and to manage the
ratio of interest rate sensitive assets to interest rate sensitive liabilities
within specified maturities or repricing dates.
The Bank's asset and liability management function is under the guidance of the
Interest Rate Risk, Budget and Investments Committee ("IRRBICO"), which is
chaired by the Chief Executive Officer and comprised principally of members of
the Bank's senior management and at least three members of the Board of
Directors. The IRRBICO meets once a month to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate changes, the
book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity and maturities of investments and borrowings. In
connection therewith, the IRRBICO generally reviews the Bank's liquidity, cash
flow needs, maturities of investments, deposits and borrowings and current
market conditions and interest rates.
The Bank's primary IRRBICO monitoring tool is asset/liability simulation models,
which are prepared on a monthly basis and are designed to capture the dynamics
of balance sheet, rate and spread movements and to quantify variations in net
interest income under different interest rate environments. The Bank also
utilizes market-value analysis, which addresses the change in equity value
resulting from movements in interest rates. The market value of equity is
estimated by valuing the Bank's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact of
immediate and sustained interest-rate shifts of the current yield curve upon the
market value of the current balance sheet.
A more conventional but limited IRRBICO monitoring tool involves an analysis of
the extent to which assets and liabilities are "interest rate sensitive" and
measuring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. At December 31, 2000, R&G Financial's interest-bearing liabilities
which mature or reprice within one year exceeded R&G Financial's
interest-earning assets with similar characteristics by $477.8 million, or
13.50% of total assets. R&G Financial's negative gap within one year 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 are not likely to be exercised by such
agencies due to the actual interest rate environment. While the Company measures
its gap by presenting its 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 succesful in consummating any such transactions.
While a conventional gap measure may be useful, it is limited in its ability to
predict trends in future earnings. It makes no presumptions about changes in
prepayment tendencies, deposit or loan maturity preferences or repricing time
lags that may occur in response to a change in the interest rate environment.
R&G Mortgage. The profitability to R&G Mortgage of its mortgage loan
originations is in part a function of the difference between long-term interest
rates, which is the rate at which R&G Mortgage originates mortgage loans for
third parties, and short-term interest rates, which is the rate at which R&G
Mortgage finances such loans until they are sold. Generally, short-term interest
rates are lower than long-term interest rates and R&G Mortgage benefits from the
difference, or the spread, during the time the mortgage loans are held by R&G
Mortgage pending sale. A decrease in this spread would have a negative effect on
R&G Mortgage's net interest income and profitability, and there can be no
assurance that the spread will not decrease. R&G Mortgage generally attempts to
reduce this risk by attempting to limit the amount of mortgage loans held
pending sale and, as market conditions permit and as discussed below, entering
into forward commitments with respect to a portion of its mortgage loan
originations. As a general matter, R&G Mortgage attempts to limit its exposure
to this interest rate risk through the sale of substantially all loans within
190 days of origination.
A mortgage-banking company is generally exposed to interest rate risk from the
time the interest rate on the customer's mortgage loan application is
established through the time the mortgage loan closes, and until the time the
company commits to sell the mortgage loan. In order to limit R&G Mortgage's
exposure to interest rate risk through the time the mortgage loan closes, R&G
Mortgage generally does not lock-in or guarantee the customer a specific
interest rate on such loans through the closing date but rather offers customers
an interest rate that will be based on a prevailing market rate that adjusts
weekly. Moreover, in order to limit R&G Mortgage's exposure to interest rate
risk through the time the loan is sold or committed to be sold, R&G Mortgage
may, depending upon market conditions, enter into forward commitments to sell a
portion of its mortgage loans to investors for delivery at a future time. At
December 31, 2000, R&G Mortgage had $13.1 million of pre-existing commitments by
third-party investors to purchase mortgage loans. To the extent that R&G
Mortgage originates or commits to originate loans without pre-existing
34
commitments by investors to purchase such loans or is not otherwise hedged
against changes in interest rates ("unhedged loans"), R&G Mortgage will be
subject to the risk of gains or losses through adjustments to the carrying value
of loans held for sale or on the actual sale of such loans (the value of
unhedged loans fluctuates inversely with changes in interest rates).
Finally, R&G Mortgage carries an inventory of mortgage-backed and related
securities (primarily fixed-rate GNMA certificates). Generally, the value of
fixed-rate mortgage-backed securities declines when interest rates rise and,
conversely, increases when interest rates fall. At December 31, 2000, R&G
Mortgage held $12.0 million of mortgage-backed and related securities (all of
which carried fixed interest rates) which were classified as held for trading
and reported at fair value, with unrealized gains and losses included in
earnings. Accordingly, declines in the value of R&G Mortgage's securities held
for trading could have a negative impact on R&G Financial's earnings regardless
of whether any securities were actually sold.
In order to hedge the interest rate risk with respect to R&G Mortgage's
mortgage-backed and related securities portfolio, R&G Mortgage may utilize a
variety of interest rate contracts such as interest rate swaps, collars, caps,
options or futures (primarily Eurodollar certificates of deposit and U.S.
Treasury note contracts). R&G Mortgage will use such hedging instruments based
upon market conditions as well as the level of market rates of interest. In
determining the amount of its portfolio to hedge, R&G Mortgage will consider the
volatility of prices of its mortgage-backed and related securities (Puerto Rican
tax-exempt GNMAs are generally less volatile than their U.S. counterparts). For
taxable GNMAs, R&G Mortgage enters into forward sales commitments for 30, 60 and
90 days to reduce its interest rate risk. R&G Mortgage may also use interest
rate swaps, caps, collars, options and futures to effectively fix the cost of
short-term funding sources which are used to originate and or purchase
interest-earning assets with longer effective maturities, such as mortgage-
backed securities and fixed rate residential mortgage loans held prior to sale
in the secondary market. Such agreements thus reduce the impact of increases in
interest rates by preventing R&G Mortagage from having to replace funding
sources at a higher cost prior to the time that the interest-earning asset which
was originated or purchased with such source matures, reprices or is sold, and
thus can be replaced with a higher-yielding asset.
At December 31, 2000 R&G Mortgage was a party to one interest rate swap
agreement. An interest rate swap is an agreement where one party (generally the
Company) agrees to pay a fixed-rate of interest on a notional principal amount
to a second party (generally a broker) in exchange for receiving from the second
party a variable-rate of interest on the same notional amount for a
predetermined period of time. No actual assets are exchanged in a swap of this
type and interest payments are generally netted. R&G Mortgage's existing
interest rate swap agreement has a notional amount of approximately $70.0
million and expires in December 2009. With respect to such agreement, R&G
Mortgage makes fixed interest payments of 5.60% and receives payments based upon
the three-month London Interbank Offer Rate ("Libor"). The net interest received
relating to R&G Mortgage's fixed-pay interest rate swap amounted to
approximately $563,000, $107,000 and $248,000 during the years ended December
31, 2000, 1999 and 1998, respectively. Such interest rate contract has reduced
the imbalance between R&G Mortgage's interest-earning assets and
interest-bearing liabilities within shorter maturities, thus reducing R&G
Mortgage's exposure to increases in interest rates that may occur in the future.
The Bank. The results of operations of the Bank are substantially dependent on
its net interest income, which is the difference between the interest income
earned on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. At December 31, 2000, the Bank's interest-earning
assets included a portfolio of loans receivable, net of $1.7 billion and a
portfolio of investment securities and mortgage-backed securities (including
held to maturity and available for sale) of $1.0 billion. Because the Bank's
interest-earning assets have longer effective maturities than its
interest-bearing liabilities, the yield on the Bank's interest-earning assets
generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result, the Bank's net interest income generally would be
adversely affected by increases in interest rates and positively affected by
comparable declines in interest rates. In addition to affecting net interest
income, changes in interest rates also can affect the value of the Bank's
interest-earning assets, which are comprised of fixed and adjustable-rate
instruments. At December 31, 2000, $996.4 million or 97.7% of the Bank's
mortgage-backed and investment securities were classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported net of taxes in other comprehensive income, a separate
component of stockholders' equity.
The Bank has sought to limit its exposure to interest rate risk both internally
through the management of the composition of its assets and liabilities and
externally through the use of a variety of hedging instruments. Internal hedging
through balance sheet restructuring generally involves the attraction of
longer-term funds (i.e., certificates of deposit, FHLB advances or 936 Notes),
the origination of adjustable-rate and/or shorter-term loans (such as commercial
real estate, commercial business and consumer loans) or the investment in
certain types of mortgage-backed derivative securities such as CMOs and
mortgage-backed residuals (which often exhibit elasticity and convexity
characteristics which the Bank can utilize to hedge other components of its
portfolio).
External hedging involves the use of interest rate swaps, collars, caps, options
35
and futures to reduce interest rate risk on all mortgage-backed securities
(excluding CMOs) which are available for sale. At December 31, 2000,
mortgage-backed securities available for sale had a fair value of $628.1
million.
The Bank generally uses interest rate swaps, collars, caps, options and futures
to effectively fix the cost of short-term funding sources which are used to
purchase interest-earning assets with longer effective maturities, such as
mortgage-backed securities and fixed-rate residential mortgage loans. Such
agreements reduce the impact of increases in interest rates by preventing the
Bank from having to replace funding sources at a higher cost prior to the time
that the interest-earning asset which was acquired with such source matures or
reprices and thus can be replaced with a higher-yielding asset.
At December 31, 2000, the Bank was a party to four interest rate swap
agreements. The Bank's existing interest rate swap agreements have an aggregate
notional amount of approximately $60.0 million and expire between January 2001
and December 2009. With respect to such agreements, the Bank makes fixed
interest payments ranging from 5.59% to 6.83% and receives payments based upon
the three-month Libor and Libid. The net interest received relating to the
Bank's fixed-pay interest rate swaps amounted to approximately $323,000 during
the year ended December 31, 2000; net interest paid amounted to approximately
$422,000 and $198,000 during the years ended December 31, 1999 and 1998,
respectively. Such interest rate contracts have reduced the imbalance between
the Bank's interest-earning assets and interest-bearing liabilities within
shorter maturities, thus, reducing the Bank's exposure to increases in interest
rates that may occur in the future.
At December 31, 2000 the Bank was also a party to two interest rate cap
agreements with an aggregate notional amount of $200.0 million, expiring in
August 2002. With respect to such agreements, the Bank would receive payments
based upon the three-month Libor if such rate goes beyond 7.00% (for $100
million) and 7.25% (for $100 million).
36
The following table summarizes the anticipated maturities or repricing of R&G
Financial's interest-earning assets and interest-bearing liabilities as of
December 31, 2000, 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 are assumed to mature within one year.
In addition, investments held by the Company which have call features are
presented according to their expected callable date or contractual maturity
date, as the case may be, based on the actual interest rate environment.
---------------------------------------------------------------------------
Four to More Than More Than
Within Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
-----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets(1):
o Loans receivable:
Residential real estate loans $ 35,258 $ 99,231 $ 222,411 $ 172,241 $ 503,311 $ 1,032,452
Construction loans 47,749 11,518 14,262 -- -- 73,529
Commercial real estate loans 304,104 -- -- -- -- 304,104
Consumer loans 39,966 37,015 54,411 26,371 15,083 172,846
Commercial business loans 37,777 9,079 10,279 1,927 58 59,120
o Mortgage loans held for sale 36,138 59,530 -- -- -- 95,668
o Mortgage-backed securities(2)(3) 30,899 578,270 124,719 102,030 346,038 1,181,956
o Investment securities(3) 112,569 130,752 114,598 10,929 3,127 371,975
o Other interest-earning assets(4) 25,324 300 -- -- -- 25,624
Total $ 669,784 $ 925,695 $ 540,680 $ 313,498 $ 867,955 $ 3,317,612
Interest-bearing liabilities:
o Deposits:
NOW and Super NOW accounts(5) $ 7,023 $ 19,663 $ 21,614 $ 17,507 $ 74,636 $ 140,443
Passbook savings accounts(5) 2,919 8,465 21,078 16,862 67,452 116,776
Regular and commercial checking(5) 8,595 24,069 26,461 21,434 91,379 171,938
Certificates of deposit 503,340 489,380 89,512 147,888 8,182 1,238,302
oFHLB advances 294,375 5,000 78,125 127,500 -- 505,000
o Securities sold under agreements to repurchase(6) 849,849 2,900 -- -- -- 852,749
o Other borrowings(7) 112,197 35,500 -- -- -- 147,697
Total 1,778,298 584,977 236,790 331,191 241,649 3,172,905
o Effect of hedging instruments (315,000) 25,000 210,000 -- 80,000 --
$ 1,463,298 $ 609,977 $ 446,790 $ 331,191 $ 321,649 $ 144,707
o Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (793,514) $ 315,718 $ 93,890 $ (17,693) $ 546,306
o Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (793,514) $(477,796) $(383,906) $(401,599) $ 144,707
o Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets (22.42)% (13.50)% (10.85)% (11.35)% 4.09%
(Footnotes on following page)
37
(1) Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than 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) Although the Bank's negotiable order of withdrawal ("NOW") and Super NOW
accounts, passbook savings accounts and checking accounts are subject to
immediate withdrawal, management considers a substantial amount of such
accounts to be core deposits having significantly longer effective
maturities based on the Bank's retention of such deposits in changing
interest rate environments. The table assumes that funds will be withdrawn
from the Bank at annual rates for NOW accounts and for regular and
commercial checking accounts, ranging from 10% for 0-12 months, 19% for 1-5
years, 41% for 5-10 years, 65% for 10-20 years and 100% thereafter; and, for
passbook savings accounts, ranging from 5% for 0-12 months, 20% for 1-5
years, 40% for 5-10 years, 65% for 10-20 years and 100% thereafter.
(6) Includes federal funds purchased.
(7) Comprised of warehousing lines, notes payable and other borrowings.
Although "gap" analysis is a useful measurement device available to management
in determining the existence of interest rate exposure, its static focus as of a
particular date makes it necessary to utilize other techniques in measuring
exposure to changes in interest rates. For example, gap analysis is limited in
its ability to predict trends in future earnings and makes no assumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the interest rate
environment. As a result, R&G Financial, through simulation models, also
analyzes on a monthly basis the estimated effects on net interest income under
multiple rate scenarios, including increases and decreases in interest rates
amounting to 200 and 100 basis points. The IRRBICO regularly reviews interest
rate risk by forecasting the impact of alternative interest rate scenarios on
net interest income and by evaluating such impact against the maximum potential
changes in net interest income.
The following table sets forth at December 31, 2000 the estimated percentage
change in R&G Financial's net interest income based on the indicated changes in
interest rates.
net interest income
--------------------------------------------------------------------
Change in Expected
Interest Rates Net Interest Amount Percentage
(in Basis Points)(1) Income(2) of Change Change
--------------------------------------------------------------------
(Dollars in Thousands)
+200 $ 52,106 $ 18,782 (26.50)%
+100 61,968 (8,920) (12.59)
Base Scenario 70,888 -- --
-100 78,334 7,446 10.51
-200 82,934 12,046 17.00
--------------------------------------------------------------------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) Net interest income amounts exclude amortization of deferred loan fees.
Management of R&G Financial believes that all of the assumptions used in the
foregoing analysis to evaluate the vulnerability of its operations to changes in
interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of R&G Financial's assets and liabilities
and the estimated effects of changes in interest rates on R&G Financial's net
interest income indicated in the above table could vary substantially if
different assumptions were used or if actual experience differs from the
projections on which they are based.
38
Changes in Financial Condition
general. At December 31, 2000, R&G Financial's total assets amounted to $3.5
billion, as compared to $2.9 billion at December 31, 1999. The $627.5 million or
21.5% increase in total assets during the year ended December 31, 2000 was
primarily the result of a $68.3 million or 4.4% increase in loans receivable,
net, a $437.4 million or 61.4% increase in mortgage-backed securities available
for sale, and a $110.1 million or 42.7% increase in investment securities
available for sale.
loans receivable and mortgage loans held for sale.
At December 31, 2000, R&G Financial's loans receivable, net amounted to $1.6
billion or 46.1% of total assets, as compared to $1.6 billion or 53.7% as of
December 31, 1999. During the third and fourth quarter of 2000, the Company made
significant loan securitizations (retained as mortgage-backed securities) which
reduced the amount of loans held in portfolio at December 31, 2000. Without such
securitizations, the loan portfolio at December 31, 2000 would have been $2.0
billion. The growth in R&G Financial's loans receivable, net reflects R&G
Financial's strategy of increasing its loans held for investment, concentrating
on residential mortgage, construction, commercial real estate and commercial
business loans. During the years ended December 31, 2000, 1999 and 1998, total
loans originated and purchased by the Bank amounted to $1.2 billion, $1.1
billion and $755.5 million, respectively.
At December 31, 2000, R&G Financial's allowance for loan losses (all of which is
maintained in the Bank's loan portfolio) totaled $11.6 million, which
represented a $2.6 million or 29.3% increase from the level maintained at
December 31, 1999. At December 31, 2000, R&G Financial's allowance represented
approximately 0.67% of the total loan portfolio and 12.21% of total
non-performing loans, as compared to 0.56% and 15.11% at December 31, 1999.
During 2000, the Company made provisions for loan losses of $5.8 million, which
exceeded net charge-offs of approximately $3.1 million. The increase in the
allowance for loan losses reflected the increase in R&G Financial's commercial
real estate and construction loan portfolio as well as the increase in R&G
Financial's non-performing loans during the year.
While non-performing loans amounted to $95.0 million at December 31, 2000, as
compared to $59.4 million at December 31, 1999, $31.8 million or 89.3% of such
increase consisted of residential mortgage loans. Because of the nature of the
collateral, R&G Financial has historically recognized a low level of loan
charge-offs. R&G Financial's aggregate charge-offs amounted to 0.17% during
2000, as compared to 0.25% during 1999. Although loan delinquencies have
historically been higher in Puerto Rico than in the United States, loan
charge-offs have historically been lower than in the United States. 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, the increase in the ratio was partially
caused by significant loan securitizations during the last two quarters of 2000,
which reduced the amount of loans held in portfolio considered in the
calculation of the ratio. Without giving effect to loan securitizations, as of
December 31, 2000 and 1999, the ratio of non-performing loans to total loans
would have been 4.46% and 3.47%, respectively.
Management of R&G Financial believes that its allowance for loan losses at
December 31, 2000 was adequate, based upon, among other things, the significant
level of single-family residential loans within R&G Financial's portfolio (as
compared to commercial real estate, commercial business and consumer loans,
which are considered by management to carry a higher degree of credit risk) and
the low level of loan charge-offs normally experienced by the Company with
respect to its loan portfolio. However, there can be no assurances that
additions to such allowance will not be necessary in future periods, which could
adversely affect R&G Financial's results of operations.
At December 31, 2000 and 1999, mortgage loans held for sale amounted to $95.7
million and $77.3 million, respectively. Mortgage loans held for sale primarily
reflects loans which are in the process of being securitized and sold. The level
of mortgage banking activities is highly dependent upon market and economic
factors.
securities held for trading, available for sale and held for investment.
R&G Financial maintains a substantial portion of its assets in mortgage-backed
and investment securities which are classified as either held for trading,
available for sale or held to maturity. At December 31, 2000, R&G Financial's
aggregate mortgage-backed and investment securities totaled $1.6 billion or
43.9% of total assets, as compared to $1.0 billion or 35.8% at December 31,
1999, respectively.
Securities held for trading consist primarily of FHA and VA loans which have
been securitized as GNMA pools and are being held for sale to institutions in
the secondary market. Securities held for trading are reported at fair value
with unrealized gains and losses included in earnings.
Securities available for sale consist of mortgage-backed and related securities
(tax exempt GNMA pools, FNMA and FHLMC certificates as well as CMOs and CMO
residuals) and U.S. Government agency securities. At December 31, 2000 and 1999,
securities available for sale totaled $1.5 billion and $970.9 million,
respectively. Securities available for sale are reported at fair value with
unrealized gains and losses excluded from earnings, and reported in other
comprehensive income, a separate component of stockholders' equity.
Securities held to maturity consist of mortgage-backed securities (GNMA, FNMA
and FHLMC certificates), Puerto Rico Government obligations and other Puerto
Rico securities. At December 31, 2000 and 1999, securities held to maturity
totaled $23.5 million and $28.7 million, respectively. Securities held to
maturity are accounted for at amortized cost.
39
At December 31, 2000 and 1999, securities held to maturity had a market value of
$23.4 million and $28.7 million, respectively.
mortgage servicing asset. As of December 31, 2000 and 1999, R&G Financial
reported servicing assets of $95.1 million and $84.3 million, respectively. R&G
Financial recognizes both purchased and originated mortgage servicing rights as
assets in its Consolidated Financial Statements. R&G Financial evaluates the
fair value of its servicing asset on a quarterly basis to determine any
potential impairment. Any future decline in interest rates which results in an
acceleration in mortgage loan prepayments could have an adverse effect on the
value of R&G Financial's mortgage servicing rights, which is dependent upon the
cash flows from the underlying mortgage loans.
deposits. At December 31, 2000, deposits totaled $1.7 billion, as compared to
$1.3 billion at December 31, 1999. The $345.6 million or 26.0% increase in
deposits during the year ended December 31, 2000 was primarily due to promotions
in connection with new accounts and competitive pricing. One of the Bank's
strategies is to increase its core deposits, which provide a source of fee
income and the ability to cross-sell other products and services. As a result,
core deposits (consisting of passbook, NOW and Super NOW, and regular and
commercial checking accounts as well as certificates of deposit under $100,000)
increased from $794.2 million or 59.7% of total deposits at December 31, 1999 to
$918.4 million or 54.8% of total deposits at December 31, 2000.
borrowings. Other than deposits, R&G Financial's primary sources of funds
consist of securities sold under agreements to repurchase (consisting of
agreements to purchase on a specified later date the same or substantially
identical securities) ("repurchase agreements"). At December 31, 2000 and 1999,
repurchase agreements totaled $827.7 million and $731.3 million, respectively.
Notes payable consist primarily of warehouse lines of credit (which are used to
fund loan commitments of R&G Mortgage) and Section 936 promissory notes (which
represents a low cost source of short and intermediate-term funds for the Bank).
At December 31, 2000, notes payable amounted to $138.9 million, as compared to
$132.7 million at December 31, 1999.
Advances from the FHLB of New York amounted to $505.0 million and $384.0 million
at December 31, 2000 and 1999, respectively. At December 31, 2000, FHLB advances
were scheduled to mature at various dates commencing on January 2, 2001 until
October 20, 2005, with an average interest rate of 6.42%.
stockholders' equity. Stockholders' equity increased from $269.5 million at
December 31, 1999 to $308.8 million at December 31, 2000. The $39.3 million or
14.6% increase in stockholders' equity during 2000 was primarily due to the
$43.6 million of net income for the year, together with a decrease in unrealized
losses on securities available for sale, from $7.8 million at December 31, 1999
to $724,000 at December 31, 2000. The increases in stockholders' equity were
slightly offset by dividends paid during the year of $11.4 million on common and
preferred stock.
Results of Operations
General. R&G Financial's results of operations depend substantially on its net
interest income, which is the difference between interest income on
interest-earning assets, which consist primarily of loans, money market
investments and mortgage-backed and investment securities, and interest expense
on interest-bearing liabilities, which consist primarily of deposits and short
and long-term borrowings. R&G Financial's results of operations are also
significantly affected by its provisions for loan losses, resulting from R&G
Financial's assessment of the adequacy of its allowance for loan losses; the
level of its non-interest income, including net gain (loss) on sale of loans,
unrealized gain (loss) on trading securities and loan administration and
servicing fees; the level of its non-interest expenses, such as employee
compensation and benefits and office occupancy and equipment expense; and income
tax expense.
40
The following table reflects the principal revenue sources of the Bank, R&G
Mortgage and Home & Property, and the percentage contribution of each component
for the periods presented.
Year Ended December 31, (Dollars in Thousands)
----------------------------------------------------------------------
2000 1999 1998
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------------------
The Bank:
o Net interest income after
provision for loan losses $ 55,967 40.40% $ 45,344 36.91% $ 31,193 33.24%
o Loan administration and servicing fees 1,979 1.43 476 0.39 -- --
o Net gain on sale of loans 18,090 13.06 9,559 7.78 12,191 12.99
o Net gain on sale of investment securities -- -- 19 0.01 278 0.30
o Other income(1) 6,338 4.57 5,380 4.38 4,780 5.09
---------------------------------------------------------------------
82,374 59.46 60,778 49.47 48,442 51.62
---------------------------------------------------------------------
R&G Mortgage:
o Net interest income 3,269 2.36 6,709 5.46 6,180 6.58
o Loan administration and servicing fees 28,870 20.84 26,633 21.68 15,987 17.04
o Net gain on origination and sale of loans 23,140 16.70 27,520 22.40 22,486 23.95
o Other income(1) 711 0.51 1,224 0.99 748 0.81
---------------------------------------------------------------------
55,990 40.41 62,086 50.53 45,401 48.38
---------------------------------------------------------------------
Home and Property - other income 182 0.13 -- -- -- --
---------------------------------------------------------------------
$138,546 100.00% $122,864 100.00% $ 93,843 100.00%
---------------------------------------------------------------------
(1) Comprised of service charges, fees and other for the Bank and other
miscellaneous revenue sources for the Bank and R&G Mortgage; for Home &
Property, consisted of insurance commissions.
R&G Financial reported net income of $43.6 million, $41.3 million and $34.0
million during the years ended December 31, 2000, 1999 and 1998, respectively.
Net income increased by $2.3 million or 5.6% during the year ended December 31,
2000, as compared to 1999, due to a $8.4 million increase in net interest income
and a $8.5 million increase in total other income, which were partially offset
by a $11.5 million increase in total operating expenses. Net income increased by
$7.3 million or 21.5% during the year ended December 31, 1999, as compared to
1998, due to a $12.6 million increase in net interest income and a $14.3 million
increase in total other income, which were partially offset by a $20.5 million
increase in total operating expenses.
Net Interest Income. Net interest income is determined by R&G Financial's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Net interest income totaled $65.0 million, $56.6 million and $43.9 million
during the years ended December 31, 2000, 1999 and 1998, respectively. Net
interest income increased by $8.4 million or 14.9% during the year ended
December 31, 2000, as compared to the year ended December 31, 1999 due to
significant increases in the average balance of interest-earning assets, which
compensated for a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities from 104.21% for 1999 to 103.54% in 2000,
together with a decline in interest rate-spread from 2.40% for 1999 to 1.96% for
2000. Net interest income increased by $12.6 million or 28.7% during the year
ended December 31, 1999, due to significant increases in the average balance of
interest-earning assets, which compensated for a decrease in the ratio of
average interest-earning assets to average interest-bearing liabilities from
105.93% in 1998 to 104.21% in 1999, as well as a decline in the Company's
interest rate spread from 2.43% in 1998 to 2.40% in 1999.
41
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.
Year Ended December 31, (Dollars in Thousands)
----------------------------------------------------------------------
2000 1999
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
----------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
o Cash and cash equivalents(2) $ 14,708 $ 969 6.59% $ 15,963 $ 840 5.26%
o Investment securities held for trading -- -- -- -- -- --
o Investment securities available for sale 298,480 20,914 7.01 124,559 7,834 6.29
o Investment securities held to maturity 5,330 307 5.76 6,271 330 5.26
o Mortgage-backed securities held for trading 18,801 1,370 7.29 33,245 1,871 5.63
o Mortgage-backed securities available for sale 761,166 47,986 6.30 502,176 31,989 6.37
o Mortgage-backed securities held to maturity 21,437 1,431 6.68 29,684 1,763 5.94
o Loans receivable, net(3)(4) 1,853,559 160,093 8.64 1,446,575 117,304 8.11
o FHLB of New York stock 38,432 2,531 6.59 17,777 1,210 6.81
----------------------------------------------------------------------
Total interest-earning assets 3,011,913 $ 235,601 7.82% 2,176,250 $163,141 7.50%
----------------------------------------------------------------------
o Non-interest-earning assets 238,722 228,253
----------------------------------------------------------------------
Total assets $3,250,635 $2,404,503
----------------------------------------------------------------------
Interest-Bearing Liabilities:
o Deposits $1,505,919 $ 80,659 5.36% $1,153,537 $ 53,643 4.65%
o Securities sold under agreements to repurchase(5) 768,582 50,542 6.58 491,230 27,474 5.59
o Notes payable 186,748 11,629 6.23 212,028 13,634 6.43
o Subordinated debt(6) -- -- -- -- -- --
o Other borrowings(7) 447,666 27,784 6.21 231,616 11,812 5.10
Total interest-bearing liabilities 2,908,915 $ 170,614 5.86% 2,088,411 $106,563 5.10%
----------------------------------------------------------------------
o Non-interest-bearing liabilities 55,671 75,291
----------------------------------------------------------------------
Total liabilities 2,964,586 2,163,702
o Stockholders' equity 286,049 240,801
----------------------------------------------------------------------
Total liabilities and stockholders' equity $3,250,635 $2,404,503
----------------------------------------------------------------------
o Net interest income; interest rate spread(8) $ 64,987 1.96% $ 56,578 2.40%
----------------------------------------------------------------------
o Net interest margin(8) 2.16% 2.60%
o Average interest-earning assets to average
----------------------------------------------------------------------
interest-bearing liabilities 103.54% 104.21%
----------------------------------------------------------------------
Year Ended December 31, (Dollars in Thousands)
------------------------------------
1998
Average Yield/
Balance Interest Rate (1)
-----------------------------------------------------------------------------------------
Interest-Earning Assets:
o Cash and cash equivalents(2) $ 25,731 $ 1,341 5.21%
o Investment securities held for trading 344 19 5.52
o Investment securities available for sale 57,042 3,337 5.85
o Investment securities held to maturity 9,485 544 5.74
o Mortgage-backed securities held for trading 406,123 24,876 6.13
o Mortgage-backed securities available for sale 38,608 2,645 6.85
o Mortgage-backed securities held to maturity 31,095 1,877 6.04
o Loans receivable, net(3)(4) 1,037,829 89,044 8.58
o FHLB of New York stock 8,517 614 7.21
------------------------------------
Total interest-earning assets 1,614,774 $124,297 7.70%
------------------------------------
o Non-interest-earning assets 129,498
------------------------------------
Total assets 1,744,272
------------------------------------
Interest-Bearing Liabilities:
o Deposits $ 826,487 $ 38,439 4.65%
o Securities sold under agreements to repurchase (5) 416,249 23,876 5.74
o Notes payable 186,147 12,641 6.79
o Subordinated debt(6) 1,469 148 10.07
o Other borrowings(7) 94,025 5,220 5.55
Total interest-bearing liabilities 1,524,377 $ 80,324 5.27%
------------------------------------
o Non-interest-bearing liabilities 46,025
------------------------------------
Total liabilities 1,570,402
o Stockholders' equity 173,870
------------------------------------
Total liabilities and stockholders' equity $1,744,272
------------------------------------
o Net interest income; interest rate spread(8) $ 43,973 2.43%
------------------------------------
o Net interest margin(8) 2.72%
o Average interest-earning assets to average
------------------------------------
interest-bearing liabilities 105.93%
------------------------------------
(1) At December 31, 2000, the yields earned and rates paid were as follows: cash
and cash equivalents, 3.05%; investment securities held to maturity, 5.92%;
investment securities available for sale, 6.93%; mortgage-backed securities
held for trading, 7.28%; mortgage-backed securities available for sale,
6.87%; mortgage loans held for sale, 8.45%; loans receivable, net, 8.65%;
FHLB of New York stock, 7.30%; total interest-earning assets, 7.80%;
deposits, 5.34%; securities sold under agreements to repurchase, 6.75%;
notes payable, 7.55%; other borrowings, 6.45%; total interest-bearing
liabilities, 6.00%; interest rate spread, 1.80%.
(2) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold.
(3) Includes mortgage loans held for sale and non-accrual loans.
(4) Interest income on loans include loan fees amounting to $ 294,000, $295,000
and $367,000 during the years ended December 31, 2000, 1999 and 1998,
respectively or .18%, .25% and .41% of interest income on loans during such
respective periods.
42
(5) Includes federal funds purchased.
(6) Represents a seven-year subordinated capital note of the Bank issued in
1991, which was subject to an annual sinking fund requirement and matured in
1998.
(7) Comprised of long-term debt, advances from the FHLB of New York and other
borrowings.
(8) 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.
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected R&G
Financial's interest income and interest expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated in
proportion to the absolute dollar amounts of the changes due to rate and volume.
Year Ended December 31, (Dollars in Thousands)
--------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
Increase / Decrease Total Increase / Decrease Total
Due to Increase Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
-------------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
o Cash and cash equivalents(1) $ 195 $ (66) $ 129 $ 8 $ (509) $ (501)
o Investment securities held for trading -- -- -- -- (19) (19)
o Investment securities available for sale 2,141 10,939 13,080 547 3,950 4,497
o Investment securities held to maturity 27 (50) (23) (30) (184) (214)
o Mortgage-backed securities held for trading 312 (813) (501) (165) (22,840) (23,005)
o Mortgage-backed securities available for sale (501) 16,498 15,997 (2,415) 31,759 29,344
o Mortgage-backed securities held to maturity 158 (490) (332) (29) (85) (114)
o Loans receivable, net(2) 9,786 33,003 42,789 (6,810) 35,070 28,260
o FHLB of New York stock (85) 1,406 1,321 (72) 668 596
---------------------------------------------------------------------------
Total interest-earning assets $ 12,033 $ 60,427 $ 72,460 $ (8,966) $ 47,810 $ 38,844
---------------------------------------------------------------------------
Interest-Bearing Liabilities:
o Deposits $ 10,629 $ 16,387 $ 27,016 $ (7) $ 15,211 $ 15,204
o Securities sold under agreements to repurchase 7,556 15,512 23,068 (703) 4,301 3,598
o Notes payable (379) (1,626) (2,005 (765) 1,758 993
o Subordinated debt(3) -- -- -- -- (148) (148)
o Other borrowings(4) 4,954 11,018 15,972 (1,047) 7,639 6,592
---------------------------------------------------------------------------
Total interest-bearing liabilities $ 22,760 $ 41,291 $ 64,051 $ (2,522) $ 28,761 $ 26,239
---------------------------------------------------------------------------
o Increase in net interest income $ 8,409 $ 12,605
---------------------------------------------------------------------------
(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.
(3) Represents a seven-year subordinated capital note of the Bank issued in
1991, which was subject to an annual sinking fund requirement and matured in
1998.
(4) Comprised of long-term debt, advances from the FHLB of New York and other
borrowings.
43
interest income. Total interest income increased by $72.5 million or 44.4%
during the year ended December 31, 2000 as compared to the year ended December
31, 1999, and increased by $38.8 million or 31.3% during the year ended December
31, 1999 over the year ended December 31, 1998. Interest income on loans, the
largest component of R&G Financial's interest-earning assets, increased by $42.8
million or 36.5% during the year ended December 31, 2000 as compared to the year
ended December 31, 1999, and increased by $28.3 million or 31.7% during 1999
over the year ended December 31, 1998. Such increases were primarily the result
of increases in the average balance of loans receivable of $ 407.0 million and
$408.7 million during the years ended December 31, 2000 and 1999, respectively.
One of R&G Financial's strategies in recent years has been to grow loans held
for investment.
Interest income on mortgage-backed and investment securities (which, for
purposes of this discussion, includes securities held for trading, available for
sale and held to maturity) increased by $ 28.2 million or 64.5% during the year
ended December 31, 2000 as compared to the year ended December 31, 1999, and
increased by $10.5 million or 31.5% during the year ended December 31, 1999 over
the year ended December 31, 1998. The increase during the year ended December
31, 2000 was primarily due to a $ 236.3 million increase in the average balance
of mortgage-backed securities, together with a $173.0 million increase in the
average balance of investment securities during the period. The increase during
1999 was due primarily to an increase in the average balance of mortgage-backed
securities of $89.3 million, together with a $64.0 million increase in the
average balance of investment securities. The increase in investment securities
during 2000 and 1999 reflects purchases of approximately $122.0 million and
$208.3 million, respectively, during such periods, net of maturities and sales.
Interest income on cash and cash equivalents increased by $129,000 or 15.4%
during the year ended December 31, 2000 as compared to the year ended December
31, 1999, and decreased by $501,000 or 37.4% during the year ended December 31,
1999. The increase in interest earned on money market investments during 2000
reflected an increase in the yield earned thereon from 5.26% to 6.59%. The
decrease during 1999 was due primarily to a decrease in the average balance of
cash and cash equivalents during the period of $9.8 million. The fluctuations in
yields earned on money market investments reflect the general fluctuations in
short-term market rates of interest during the periods presented.
interest expense. Total interest expense increased by $64.1 million or 60.1%
during the year ended December 31, 2000, as compared to the year ended December
31, 1999, and increased by $26.2 million or 32.7% during the year ended December
31, 1999. Interest expense on deposits, the largest component of R&G Financial's
interest-bearing liabilities, increased by $27.0 million or 50.4% during the
year ended December 31, 2000, as compared to the year ended December 31, 1999,
and increased by $15.2 million or 39.6% during the year ended December 31, 1999.
The increase during the year ended December 31, 2000, as compared to the year
ended December 31, 1999, was due primarily to an increase in the average balance
of deposits of $352.4 million, together with an increase in the average rate
paid thereon of 71 basis points. The increase during 1999 was due primarily to
an increase in the average balance of deposits of $327.1 million during such
period.
Interest expense on repurchase agreements increased by $23.1 million or 84.0%
during the year ended December 31, 2000, as compared to the year ended December
31, 1999, and increased by $3.6 million or 15.1% during the year ended December
31, 1999. The increase during 2000 was due primarily to an increase in the
average balance of repurchase agreements outstanding of $277.4 million, together
with an increase in the average rate paid thereon of 99 basis points. The
increase during 1999 was primarily due to an increase in the average balance of
repurchase agreements outstanding of $75.0 million, which was partially offset
by a decrease in the average rate paid thereon of 15 basis points. R&G Financial
generally uses repurchase agreements to repay warehouse lines of credit which
are used to fund loan originations. These repurchase agreements are mainly
collateralized by mortgage-backed securities held for trading and available for
sale. The fluctuations in the average balance of repurchase agreements during
the periods presented is therefore mainly a function both of the amount of
originations as well as the level of mortgage-backed securities held for trading
and available for sale which are available to collateralize such agreements.
Interest expense on notes payable (consisting of warehouse and other lines of
credit and promissory notes) decreased by $2.0 million or 14.7% during the year
ended December 31, 2000, as compared to the year ended December 31, 1999, and
increased by $993,000 or 7.9% during the year ended December 31, 1999. The
decrease during the year ended December 31, 2000, as compared to the year ended
December 31, 1999, was due primarily to a decrease in the average balance
outstanding of $25.3 million, caused principally by the maturity during 2000 of
promissory notes totalling $25 million. The increase during the year ended
December 31, 1999 was primarily due to increases in the average balance
outstanding of $25.9 million, as R&G Mortgage made increased use of lines of
credit due to increased mortgage loan originations in such year.
Interest expense on other borrowings (consisting principally of advances from
the FHLB of New York) increased by $16.0 million or 135.2% during the year ended
December 31, 2000, as compared to the year ended December 31, 1999, and
increased by $6.6 million or 126.3% during the year ended December 31, 1999. The
increase during 2000 and 1999 was due primarily to an increase in the average
balance of such borrowings due to an increased use of FHLB advances to fund loan
production in the Bank.
44
provision for loan losses. The provision for loan losses is charged to earnings
to bring the total allowance to a level considered appropriate by management
based on R&G Financial's loss experience, current delinquency data, known and
inherent risks in the portfolio, the estimated value of any underlying
collateral and an assessment of current economic conditions. While management
endeavors to use the best information available in making its evaluations,
future allowance adjustments may be necessary if economic conditions change
substantially from the assumptions used in making the initial evaluations.
R&G Financial made provisions to its allowance for loan losses of $5.8 million,
$4.5 million and $6.6 million during the years ended December 31, 2000, 1999 and
1998, respectively.
The increase in the provision for loan losses taken by the Company during 2000
was based primarily on the increase in the Company's commercial real estate and
construction loan portfolios, due to increased emphasis in the origination of
such loans by the Company, as well as the increase in non-performing loans
during the year.
The decrease in the provision for loan losses taken by the Company during 1999
was primarily due to a reduction in net charge-offs during the year. Net
charge-offs to average loans outstanding decreased to 0.25% during 1999 compared
to 0.55% during the year ended December 31, 1998. This reduction is associated
with the adoption in prior years of more stringent underwriting procedures to
address problems experienced generally in the market for personal loans in such
years, as well as an emphasis in collateralized lending instead of unsecured
personal loans.
Management believes that its allowance for loan losses at December 31, 2000, was
adequate based upon, among other things, the significant level of single-family
residential loans within R&G Financial's portfolio and the low level of loan
charge-offs normally experienced by the Company with respect to its loan
portfolio. Nevertheless, there can be no assurances that additions to such
allowance will not be necessary in future periods, particularly if the growth in
R&G Financial's real estate lending, including commercial lending, continues.
non-interest income. The following table sets forth information regarding
non-interest income for the periods shown.
Year Ended December 31, (Dollars in Thousands)
-----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
o Net gain on origination and sale of loans $41,230 $37,098 $34,955
o Loan administration and servicing fees 30,849 27,109 15,987
o Service charges, fees and other 7,231 6,604 5,528
Total other income $79,310 $70,811 $56,470
----------------------------------------------------------------------------------------------------------
Total non-interest income increased by $8.5 million or 12.0% during the year
ended December 31, 2000, as compared to the prior year and increased by $14.3
million or 25.4% during the year ended December 31, 1999. Net gain on sale of
loans amounted to $41.2 million, $37.1 million and $35.0 million during the
years ended December 31, 2000, 1999 and 1998, respectively. Net gain on sale of
loans reflects the income generated from the origination and purchase of
single-family residential real estate loans and the subsequent securitization
and sale of such loans. During the years ended December 31, 2000, 1999 and 1998,
R&G Financial originated and purchased $1.3 billion, $1.6 billion and $1.3
billion, respectively, including $274.0 million, $583.6 million and $371.4
million, respectively, of loan purchases, and sold $806.4 million, $977.9
million and $775.0 million (excluding loans securitized and retained as
mortgage-backed securities) of mortgage loans, respectively. During the year
ended December 31, 2000 management opted to emphasize internal loan originations
and reduce its dependence on loan purchases, as a means of achieving higher
volume of mortgage loan production through its branch network, and increase
profitability accross its product lines. As a result of this change in strategy,
loan purchases decreased from $583.6 million in 1999 to $274.0 million in 2000,
while its internal loan originations amounted to $1.1 billion in 1999 and 2000.
R&G Financial's mortgage banking operations are highly dependent upon market and
economic conditions.
During the years ended December 31, 2000, 1999 and 1998, R&G Financial
recognized net profit (loss) on trading securities of $147,000, ($21,000) and
$6.0 million, respectively, which are included in net gains on sale of loans.
Such gains and losses primarily reflect fluctuations in the market value of FHA
and VA loans which have been securitized into GNMA mortgage-backed securities
and are being held for trading. The decrease in net profits in trading
securities in 1999 is primarily related to a $407.0 million decrease in
mortgage-backed securities held for trading due
45
to the adoption of SFAS No.134 effective January 1, 1999. Pursuant to the
adoption of SFAS No. 134, on January 1, 1999 the Company reclassified
approximately $427.4 million of mortgage-backed securities from trading to
available for sale.
During the years ended December 31, 2000, 1999 and 1998, R&G Financial
recognized loan administration and servicing fees of $30.8 million, $27.1
million and $16.0 million, respectively. The increase in loan administration and
servicing fees over the periods reflects the increase in R&G Financial's loan
servicing portfolio from 56,442 loans with an aggregate principal balance of
$3.0 billion at January 1, 1998 to 110,874 loans with an aggregate principal
balance of $6.6 billion at December 31, 2000.
Service charges, fees and other amounted to $7.2 million, $6.6 million and $5.5
million during the years ended December 31, 2000, 1999 and 1998, respectively.
The $627,000 or 9.5% and the $1.1 million or 19.5% increases during 2000 and
1999, respectively, were primarily due to increased service charges associated
with new deposit products and an increasing deposit base, as well as increases
in the loan portfolio during such years.
non-interest expenses. The following table sets forth certain information
regarding non-interest expenses for the periods shown.
Year Ended December 31,
--------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
(In Thousands)
Employee compensation
and benefits $27,031 $24,433 $17,095
Office occupancy and
equipment 13,436 11,289 8,987
Other administrative
and general 40,325 33,568 22,687
Total non-interest
-----------------------------------
expenses $80,792 $69,290 $48,769
------------------------------------------------------------------------
Total non-interest expense increased by $11.5 million or 16.6% during the year
ended December 31, 2000, as compared to the year ended December 31, 1999, and
increased by $20.5 million or 42.1% during the year ended December 31, 1999 over
1998. The increase in total non-interest expense during the years ended December
31, 2000 and 1999 reflect general growth in the Company's operations, as well as
increased costs associated with the opening of new branch offices.
The operations of Continental Capital Corp., the Company's mortgage banking
subsidiary in Huntington Station, New York, which was acquired in October 1999,
was a significant reason for the increase in expenses during the year ended
December 31, 2000. Total operating expenses of Continental during 2000 were $8.3
million. In addition, the year ended December 31, 1999 represented the first
full year of operations of Fajardo Federal Savings Bank, F.S.B., which was
merged into the Bank upon acquisition in August 1998.
Employee compensation and benefits expense amounted to $27.0 million, $24.4
million and $17.1 million during the years ended December 31, 2000, 1999 and
1998, respectively. The $2.6 million or 10.6% increase in such expenses during
the year ended December 31, 2000 is primarily due to $4.1 million of employee
expenses related to the operations of Continental Capital, which were offset by
decreases in compensation due to loan originators resulting from decreased
origination of residential real estate loans in Puerto Rico during the year. The
$7.3 million or 42.9% increase in such expense during the year ended December
31, 1999 is primarily associated with an increase in the number of employees as
a result of new branch openings, and increased bonus payments associated with
increased loan production during 1999.
Office occupancy and equipment expense amounted to $13.4 million, $11.3 million
and $9.0 million during the years ended December 31, 2000, 1999 and 1998,
respectively. The $2.1 million or 19.0% increase in office occupancy and
equipment expenses during the year ended December 31, 2000 is primarily related
to the operation of three additional Bank branches completed during fiscal 1999
and the opening of one additional Bank branch in early 2000. The $2.3 million or
25.6% increase in office occupancy and equipment expenses during the year ended
December 31, 1999 is primarily related to the operation of five additional Bank
branches completed during fiscal 1998 and the opening of three additional Bank
branches during the year.
Other administrative and general expenses, which consist primarily of
advertising, license and property taxes, amortization of servicing asset,
insurance, telephone, printing and supplies and other miscellaneous expenses,
amounted to $40.3 million, $33.6 million and $22.7 million during the years
ended December 31, 2000, 1999 and 1998, respectively. The $6.8 million or 20.1%
and the $10.9 million or 48.0% increase in such expenses during the years ended
December 31, 2000 and 1999, respectively, is also primarily associated with
increased loan production and new additional branch offices during such years,
as well as the result of general growth in the operations of R&G Financial and
the addition of new products and services offered. In addition, the Company had
a $2.1 million and a $4.4 million increase in amortization expenses during 2000
and 1999, respectively, of the Company's servicing asset, primarily associated
with increases in the Company's servicing portfolio.
income taxes. R&G Financial's income tax provision amounted to $14.1 million
during the year ended December 31, 2000, as compared to income tax expense of
$12.2 million and $11.0 million during the years ended December 31, 1999 and
1998, respectively. R&G Financial's effective tax rate amounted to 24.5%, 22.8%
and 24.5% during the years ended December 31, 2000, 1999 and 1998, respectively.
The decrease in R&G Financial's effective tax rate during the year ended
December 31, 1999, as compared to the year ended December 31, 1998, is due
primarily to an increase in the Company's exempt interest
46
income and, to a lesser extent, the implementation of certain tax planning
strategies during such years.
liquidity and capital resources
liquidity. Liquidity refers to R&G Financial'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. R&G Financial
monitors its liquidity in accordance with guidelines established by R&G
Financial and applicable regulatory requirements. R&G Financial's need for
liquidity is affected by loan demand, net changes in deposit levels and the
scheduled maturities of its borrowings. R&G Financial can minimize the cash
required during 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 R&G Financial has limited
control. R&G Financial 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.
R&G Financial'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 R&G Financial
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
December 31, 2000, R&G Financial had $198.7 million in borrowing capacity under
unused warehouse and other lines of credit, $129.2 million in borrowing capacity
under unused lines of credit with the FHLB of New York and $15 million available
unused fed funds lines of credit. R&G Financial has generally not relied upon
brokered deposits as a source of liquidity, and does not anticipate a change in
this practice in the foreseeable future.
At December 31, 2000, R&G Financial had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $116.1 million. The Company also has agreements with developers to
facilitate the mortgage loans to qualified buyers of new housing units on
residential projects amounting to $747.4 million. All such agreements are
subject to prevailing market rates at time of closing with no market risk
exposure to the Company or with firm back-to-back commitments in favor of the
mortgagee. Finally, the Company had certificates of deposit which are scheduled
to mature within one year totaling $967.6 million at December 31, 2000, and
borrowings that are scheduled to mature within the same period amounting to $1.2
billion. R&G Financial 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 I 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 I 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 December 31,
2000, the Bank met each of its capital requirements, with Tier I leverage
capital, Tier I risk-based capital and total risk-based capital ratios of 6.04%,
11.46% and 12.24%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by the FDIC regarding state- chartered banks, as
47
described above. R&G Financial is currently in compliance with such regulatory
capital requirements.
inflation and changing prices. R&G Financial's Consolidated Financial Statements
and related data presented in this Annual Report have been prepared in
accordance with accounting principles generally accepted in the United States of
America, 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 R&G Financial are
monetary in nature. As a result, interest rates have a more significant impact
on R&G Financial'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.
recent accounting pronouncements.
Set forth below are recent accounting pronouncements which may have a future
effect on R&G Financial's operations. These pronouncements should be read in
conjunction with the significant accounting policies which R&G Financial has
adopted that are set forth in R&G Financial's Notes to Consolidated Financial
Statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No.140,
"Accounting for Transfers and Servicing of Financial Assets and Liabilities - A
Replacement of SFAS 125." This Statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
125 without reconsideration. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. It is effective for transfers and servicing of financial
assets and extinguishment of liabilities occuring after March 31, 2001.
Management believes that the adoption of the new standards will not have a
significant effect on the financial statements of the Company.
48
report of independent accountants
--------------------------------------------------------------------------------
[LOGO - PRICEWATERHOUSECOOPERS]
To the Board of Directors and Stockholders of R&G Financial Corporation
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, of comprehensive income, of
changes in stockholders' equity, and of cash flows present fairly, in all
material respects, the financial position of R&G Financial Corporation (the
Company) and its subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31,2000, in comformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers, LLP
-------------------------------
PricewaterhouseCoopers, LLP
San Juan, Puerto Rico
February 23, 2001
Certified Public Accountants (of Puerto Rico)
License No. 216 Expires on December 1, 2001
Stamp 1685044 of the P.R. Society of Certified
Public Accountants has been affixed to the file
copy of this report
49
R&G Financial Corporation
Consolidated Statements of Financial Condition
December 31, 2000 and 1999
--------------------------------------------------------------------------------
-------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------------------
Assets
o Cash and due from banks $ 43,466,268 $ 42,251,508
o Money market investments:
Time deposits with other banks 25,623,696 23,744,037
o Mortgage loans held for sale, at lower of cost or market 95,668,320 77,277,133
o Mortgage - backed securities held for trading, at fair value -- 16,846,793
o Trading securities pledged on repurchase agreements,
at fair value 12,038,040 26,717,024
o Mortgage - backed and investment securities available
for sale, at fair value 1,044,164,433 532,883,939
o Available for sale securities pledged on repurchase
agreements, at fair value 474,206,504 437,984,883
o Mortgage - backed and investment securities held to
maturity, at amortized cost (estimated market value:
2000 -$5,111,404; 1999 - $15,373,784) 5,121,108 15,429,991
o Held to maturity securities pledged on repurchase
agreements, at amortized cost (estimated market value:
2000 - $18,265,000; 1999 - $13,335,000) 18,400,485 13,256,886
o Loans receivable, net 1,631,276,069 1,563,006,802
o Accounts receivable, including advances to investors, net 16,107,136 16,230,457
o Accrued interest receivable 28,919,237 22,386,746
o Servicing asset 95,078,530 84,252,506
o Premises and equipment 20,144,726 19,459,353
o Other assets 29,229,655 20,264,778
-------------------------------------------
$ 3,539,444,207 $ 2,911,992,836
-------------------------------------------
Liabilities and Stockholders' Equity
o Liabilities:
Deposits $ 1,676,062,163 $ 1,330,506,368
Federal funds purchased 25,000,000 15,000,000
Securities sold under agreements to repurchase 827,749,494 731,341,340
Notes payable 138,857,562 132,707,001
Advances from FHLB 505,000,000 384,000,000
Other borrowings 8,839,770 9,842,894
Accounts payable and accrued liabilities 43,614,238 33,917,329
Other liabilities 5,485,330 5,142,627
-------------------------------------------
3,230,608,557 2,642,457,559
-------------------------------------------
o Commitments and contingencies
o Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
7.40% Monthly Income Preferred Stock, Series A,
$25 liquidation value, 2,000,000 shares issued
and outstanding 50,000,000 50,000,000
7.75% Monthly Income Preferred Stock, Series B,
$25 liquidation value, 1,000,000 shares issued
and outstanding 25,000,000 25,000,000
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized,
18,440,556 issued and outstanding in 2000 and 1999 184,406 184,406
Class B - $.01 par value, 30,000,000 shares authorized,
10,230,029 issued and outstanding in 2000
(1999 - 10,217,731) 102,300 102,177
Additional paid-in capital 40,800,652 40,753,856
Retained earnings 186,028,611 156,193,131
Capital reserves of the Bank 7,444,108 5,095,658
Accumulated other comprehensive loss, net of tax (724,427) (7,793,951)
-------------------------------------------
308,835,650 269,535,277
-------------------------------------------
$ 3,539,444,207 $ 2,911,992,836
-----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
50
R&G Financial Corporation
Consolidated Statements of Financial Condition
Years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
o Interest income:
Loans $ 160,092,642 $ 117,304,300 $ 89,043,798
Money market and other
investments 24,720,794 10,243,856 5,855,157
Mortgage-backed securities
50,787,415 35,593,191 29,397,985
-------------------------------------------------------
Total interest income 235,600,851 163,141,347 124,296,940
-------------------------------------------------------
o Less - interest expense:
Deposits 80,658,716 53,643,104 38,439,016
Securities sold under agreements to repurchase 50,542,190 27,474,602 23,875,744
Notes payable 11,628,438 13,633,767 12,641,438
Other 27,784,370 11,812,100 5,367,631
-------------------------------------------------------
170,613,714 106,563,573 80,323,829
-------------------------------------------------------
o Net interest income 64,987,137 56,577,774 43,973,111
o Provision for loan losses (5,751,325) (4,525,000) (6,600,000)
-------------------------------------------------------
o Net interest income after provision for loan losses 59,235,812 52,052,774 37,373,111
-------------------------------------------------------
o Non-interest income:
Net gain on origination and sale of loans 41,230,234 37,098,218 34,955,583
Loan administration and servicing fees 30,848,557 27,109,051 15,986,831
Service charges, fees and other 7,231,178 6,603,998 5,527,860
-------------------------------------------------------
79,309,969 70,811,267 56,470,274
-------------------------------------------------------
Total revenues 138,545,781 122,864,041 93,843,385
-------------------------------------------------------
o Non-interest expenses:
Employee compensation and benefits 27,031,340 24,432,771 17,094,783
Office occupancy and equipment 13,435,644 11,289,365 8,986,953
Other administrative and general 40,324,994 33,567,706 22,687,336
-------------------------------------------------------
80,791,978 69,289,842 48,769,072
-------------------------------------------------------
o Income before income taxes 57,753,803 53,574,199 45,074,313
-------------------------------------------------------
o Income tax expense:
Current 12,276,425 8,905,520 6,814,496
Deferred 1,844,583 3,333,687 4,226,020
-------------------------------------------------------
14,121,008 12,239,207 11,040,516
-------------------------------------------------------
Net income $ 43,632,795 $ 41,334,992 $ 34,033,797
-------------------------------------------------------
Less: Preferred stock dividends (5,637,500) (3,753,819) (1,233,819)
-------------------------------------------------------
Net income available to common stockholders $ 37,995,295 $ 37,581,173 $ 32,799,978
-------------------------------------------------------
o Earnings per common share:
-------------------------------------------------------
Basic $ 1.33 $ 1.31 $ 1.15
-------------------------------------------------------
Diluted $ 1.30 $ 1.28 $ 1.12
-------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
51
R&G Financial Corporation
Consolidated Statements of Comprehensive Income
Years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
----------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------
o Net income $ 43,632,795 $ 41,334,992 $ 34,033,797
----------------------------------------------------
o Other comprehensive income, before tax:
o Unrealized gains (losses) on securities:
Arising during period 11,012,938 (15,975,369) 516,061
Less: Reclassification adjustments for
losses (gains) included in net income 576,446 959,813 (278,028)
----------------------------------------------------
11,589,384 (15,015,556) 238,033
----------------------------------------------------
o Income tax (expense) benefit related to items
of other comprehensive income (4,519,860) 5,856,067 (92,833)
----------------------------------------------------
o Other comprehensive income (loss), net of tax 7,069,524 (9,159,489) 145,200
----------------------------------------------------
o Comprehensive income, net of tax $ 50,702,319 $ 32,175,503 $ 34,178,997
--------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
52
R&G Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
Preferred Stock Common Stock Common Stock
Class A Class B
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
o Balance at December 31, 1997 9,220,278 $ 92,203 4,924,474 $ 49,245
----------------------------------------------------------------------------------------
o Common stock split on June 25, 1998 9,220,278 92,203 4,924,474 49,245
o Issuance of common stock on
July 31,1998 to acquire Fajardo Federal 297,143 2,971
o Issuance of Series A Preferred Stock 2,000,000 $50,000,000
o Cash dividends declared:
Common stock
Preferred stock
o Net income
o Transfer to capital reserves
o Other comprehensive income, net of tax
----------------------------------------------------------------------------------------
o Balance at December 31, 1998 2,000,000 50,000,000 18,440,556 184,406 10,146,091 101,461
----------------------------------------------------------------------------------------
o Issuance of Series B Preferred Stock 1,000,000 25,000,000
o Issuance of Common Stock 71,640 716
o Cash dividends declared:
Common stock
Preferred stock
o Net income
o Transfer to capital reserves
o Other comprehensive loss, net of tax
----------------------------------------------------------------------------------------
o Balance at December 31, 1999 3,000,000 75,000,000 18,440,556 184,406 10,217,731 102,177
----------------------------------------------------------------------------------------
o Issuance of common stock 12,298 123
o Cash dividends declared:
Common stock
Preferred stock
o Net income
o Transfer to capital reserves
o Other comprehensive income, net of tax
----------------------------------------------------------------------------------------
o Balance at December 31, 2000 3,000,000 $75,000,000 18,440,556 $ 184,406 10,230,029 $ 102,300
----------------------------------------------------------------------------------------
Accumulated
Additional Capital other comprehensive Retained
Paid-in Capital reserves income (loss) earnings Total
-----------------------------------------------------------------------
o Balance at December 31, 1997 $ 38,347,818 $ 2,215,172 $ 1,220,338 $ 96,129,140 $138,053,916
-----------------------------------------------------------------------
o Common stock split on June 25, 1998 (141,448)
o Issuance of common stock on
July 31,1998 to acquire Fajardo Federal 5,258,874 5,261,845
o Issuance of Series A Preferred Stock (1,920,866) 48,079,134
o Cash dividends declared:
Common stock (3,178,214) (3,178,214)
Preferred stock (1,233,819) (1,233,819)
o Net income 34,033,797 34,033,797
o Transfer to capital reserves 1,332,626 (1,332,626)
o Other comprehensive income, net of tax 145,200 145,200
o Balance at December 31, 1998 41,544,378 3,547,798 1,365,538 124,418,278 221,161,859
o Issuance of Series B Preferred Stock (1,078,356) 23,921,644
o Issuance of Common Stock 287,834 288,550
o Cash dividends declared:
Common stock (4,258,460) (4,258,460)
Preferred stock (3,753,819) (3,753,819)
o Net income 41,334,992 41,334,992
o Transfer to capital reserves 1,547,860 (1,547,860)
o Other comprehensive loss, net of tax (9,159,489) (9,159,489)
-----------------------------------------------------------------------
o Balance at December 31, 1999 40,753,856 5,095,658 (7,793,951) 156,193,131 269,535,277
-----------------------------------------------------------------------
o Issuance of common stock 46,796 46,919
o Cash dividends declared:
Common stock (5,811,365) (5,811,365)
Preferred stock (5,637,500) (5,637,500)
o Net income 43,632,795 43,632,795
o Transfer to capital reserves 2,348,450 (2,348,450)
o Other comprehensive income, net of tax 7,069,524 7,069,524
-----------------------------------------------------------------------
o Balance at December 31, 2000 $ 40,800,652 $ 7,444,108 $ (724,427) $186,028,611 $308,835,650
-----------------------------------------------------------------------
53
R&G Financial Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
--------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------
o Cash flows from operating activities:
Net income $ 43,632,795 $ 41,334,992 $ 34,033,797
--------------------------------------------------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 5,055,761 3,912,603 3,059,742
Amortization of premium (accretion of
discount) on investments and
mortgage - backed securities, net 293,962 236,184 (86,761)
Amortization of servicing rights 9,524,077 7,382,649 2,994,307
Provision for loan losses 5,751,325 4,525,000 6,600,000
Provision for bad debts in accounts receivable 520,000 546,851 300,000
Gain on sale of mortgage loans (1,909,670) (4,935,775) (7,785,630)
Loss (gain) on sales of investment securities
available for sale 576,446 959,813 (278,028)
Increase in mortgage loans held for sale (148,713,248) (117,118,689) (70,240,717)
Net decrease (increase) in mortgage-backed
securities held for trading 31,525,777 (43,936,589) (105,247,419)
Net decrease in investment securities
held for trading -- -- 581,332
Increase in interest and accounts receivable (6,745,660) (16,176,210) (4,590,500)
(Increase) decrease in other assets (9,870,776) (4,570,159) 1,678,184
Increase (decrease) in notes payable and
other borrowings 30,147,437 (40,518,153) 83,295,337
Increase in accounts payable
and accrued liabilities 3,929,319 10,832,064 11,113,881
Increase in other liabilities 342,703 1,010,024 702,593
--------------------------------------------------------
Total adjustments (79,572,547) (197,850,387) (77,903,679)
--------------------------------------------------------
Net cash used in operating activities (35,939,752) (156,515,395) (43,869,882)
--------------------------------------------------------
o Cash flows from investing activities:
Purchases of investment securities available for
sale and held to maturity (121,965,820) (230,790,182) (72,532,667)
Proceeds from sales and redemptions of
investment securities available for sale 98,847,835 108,459,617 92,867,182
Proceeds from maturities of investment
securities held to maturity 1,727,000 409,000 4,715,420
Principal repayments on mortgage-backed
securities 43,696,049 40,875,059 13,955,086
Proceeds from sale of loans 107,563,097 135,632,084 254,011,245
Net originations of loans (590,126,877) (730,796,715) (573,657,277)
Purchases of FHLB stock, net (13,148,000) (21,420,300) (6,211,400)
Net assets acquired, net of cash received 958,428 (4,638,371) 4,287,492
Acquisition of premises and equipment (4,729,443) (8,694,453) (5,936,102)
Purchases of servicing rights (20,350,101) (23,979,840) (40,002,361)
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (497,527,832) (734,944,101) (328,503,382)
-------------------------------------------------------------------------------------------------------------
(continued)
54
R&G Financial Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
-----------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------------
o Cash flows from financing activities:
Payments on term notes $ (25,000,000) $ (23,600,000) $ --
Increase in deposits, net 345,555,795 323,209,064 263,743,668
Increase in securities sold under agreements
to repurchase, net 96,408,154 259,919,614 38,287,220
Increase (decrease) in federal funds purchased 10,000,000 15,000,000 (10,000,000)
Advances from FHLB, net 121,000,000 263,000,000 75,300,000
Repayment of subordinated notes -- -- (3,250,000)
Net proceeds from issuance of
preferred stock -- 23,921,644 48,079,134
Proceeds from issuance of common stock 46,919 288,550 --
Capital contribution to subsidiary -- -- (12,000)
Cash dividends - common stock (5,811,365) (4,258,460) (3,178,214)
preferred stock (5,637,500) (3,753,819) (1,233,819)
-----------------------------------------------------
Net cash provided by financing activities 536,562,003 853,726,593 407,735,989
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,094,419 (37,732,903) 35,362,725
Cash and cash equivalents at beginning of year 65,995,545 103,728,448 68,365,723
-----------------------------------------------------
Cash and cash equivalents at end of year $ 69,089,964 $ 65,995,545 $ 103,728,448
-----------------------------------------------------
o Cash and cash equivalents include:
Cash and due from banks $ 43,466,268 $ 42,251,508 $ 51,804,750
Securities purchased under agreements to resell -- -- 11,544,123
Time deposits with other banks 25,623,696 23,744,037 30,361,527
-----------------------------------------------------
Federal funds sold -- -- 10,018,048
----------------------------------------------------------------------------------------------------------------
$ 69, 089,964 $ 65,995,545 $103,728,448
-----------------------------------------------------
The accompanying notes are an Integral part of these financial statements.
55
R&G Financial Corporation
Notes to Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
1. reporting entity and significant
accounting policies
reporting entity
The accompanying consolidated financial statements of R&G Financial Corporation
(the "Company") include the accounts of 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 operates as a financial holding Company, pursuant to the provisions
of the Gramm-Leach-Bliley Act of 1999, and is primarily engaged in mortgage
banking, banking and insurance through its subsidiaries.
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 (1 to 4 families). R&G Mortgage pools FHA and VA loans into
Government National Mortgage Association (GNMA) mortgage-backed securities and
collateralized mortgage obligation (CMO) certificates for sale to permanent
investors. Upon selling the loans, it retains the rights to service the loans.
R&G Mortgage is also a Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) Seller-Servicer of conventional loans.
R&G Mortgage is also engaged in the business of originating FHA insured, VA
guaranteed, and privately insured first and second mortgage loans on residential
real estate (1 to 4 families), including B&C credit quality loans, through its
wholly-owned subsidiary Mortgage Store of Puerto Rico, Inc. (formerly Champion
Mortgage Corporation).
The Bank provides a full range of banking services through twenty three branches
located mainly in the northeastern part of the Commonwealth of Puerto Rico. As
discussed in Note 15 to the consolidated financial statements, 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 State of New York through its wholly-owned
subsidiary Continental Capital Corporation.
significant accounting policies
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States of America. The following is
a description of the significant accounting policies:
basis of consolidation
All significant intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.
use of estimates in the preparation
of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
securities purchased under
agreements to resell
The Company purchases securities under agreements to resell the same securities.
Amounts advanced under these agreements represent short-term loans and are
reflected as assets in the consolidated statement of financial condition. It is
the Company's policy to take possession over the securities that guarantee such
loans. However, the counterparties to these agreements retain effective control
over such collateral.
investment securities
Investments in debt and equity securities are classified at the time of purchase
into one of three categories and accounted for as follows:
Held to maturity - debt securities which the Company has a positive intent and
ability to hold to maturity. These securities are carried at amortized cost.
Trading - debt and equity securities that are bought by the Company and held
principally for the purpose of selling them in the near term. These securities
are carried at fair value, with unrealized gains and losses included in
earnings.
Available for sale - debt and equity securities not classified as either
held-to-maturity or trading. These securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported net of taxes in
other comprehensive income.
Premiums are amortized and discounts are accreted as an adjustment to interest
income over the life of the related securities using a method that approximates
the interest method. Realized gains or losses on securities classified as either
available for sale or held to maturity are reported in earnings. Cost of
securities sold is determined on the specific identification method.
56
loans and allowance for loan
losses
Loans are stated at their outstanding principal balance, less unearned interest,
deferred loan origination fees and allowance for loan losses. Loan origination
and commitment fees and costs incurred in the origination of new loans are
deferred and amortized over the term of the loans as an adjustment of interest
yield using the interest method. Unearned interest on installment loans is
recognized as income under a method which approximates the interest method.
Management believes that the allowance for loan losses is adequate. It is the
policy of the Bank to increase its allowance for estimated losses on loans when,
based on management's evaluation, a loss becomes both probable and estimable.
Major loans and major lending areas are reviewed periodically to determine
potential problems at an early date. Also, management's periodic evaluation
considers factors such as loss experience, current delinquency data, known and
inherent risks in the portfolio, identification of adverse situations which may
affect the ability of debtors to repay, the estimated value of any underlying
collateral and assessment of current economic conditions. Additions to
allowances are charged to income. Any recoveries are credited to the allowance.
The Company measures impairment of individual loans, except for loans that are
valued at fair value or at the lower of cost or fair value, based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or, as a practical method, at the observable market price of the loan, or
the fair value of the collateral if the loan is collateral dependent. The
Company considers loans over $500,000 for individual impairment evaluation. The
Company collectively performs impairment evaluations for large groups of small -
balance homogeneous loans. Loans are considered impaired when, based on
management's evaluation, a borrower will not be able to fulfill its obligation
under the original terms of the loan.
interest income
Interest on loans not made on a discounted basis is credited to income based on
the loan principal outstanding at stated interest rates. Recognition of interest
on mortgage, consumer and other loans is discontinued when loans are 90 days or
more in arrears on payment of principal or interest or earlier when other
factors indicate that collection of interest or principal is doubtful. Loans for
which the recognition of interest income has been discontinued are designated as
non-accruing. Such loans are not reinstated to accrual status until interest is
received currently and no other factors indicative of doubtful collection exist.
Discounts and premiums on purchased mortgage loans are accreted (amortized) to
income over the remaining term of the loans.
mortgage loans held for sale
Mortgage loans intended for sale in the secondary market are carried at the
lower of cost or estimated market, computed in the aggregate. The amount by
which cost exceeds market value is accounted for as a valuation allowance.
Changes in the valuation allowance are included in the determination of income
in the period in which the change occurs.
loan servicing fees
Loan servicing fees, which are based on a percentage of the principal balance of
the mortgage loans serviced, are credited to income as mortgage payments are
collected. Late charges and miscellaneous other fees collected from mortgagors
are credited to income when earned, adjusted for estimated amounts not expected
to be collected. Loan servicing costs are charged to expense when incurred.
allowance for doubtful accounts
The allowance for doubtful accounts is determined based on experience and
results mainly from expenses incurred in the foreclosure of property not
reimbursed by insurers on loans serviced for others.
servicing asset
The Company capitalizes servicing rights acquired through loan origination
activities by allocating a portion of the cost of originating mortgage loans to
the mortgage servicing right at the time of sale or securitization based on the
relative fair values at such date. To determine the fair value of the servicing
rights, the Company uses the market prices of comparable servicing sale
contracts.
Servicing assets and liabilities are subsequently adjusted by (a) amortization
in proportion to and over the period of estimated net servicing income or loss
and (b) assessment for asset impairment or increased obligation based on their
fair values.
Servicing rights are periodically evaluated for impairment. For purposes of
measuring impairment, mortgage servicing rights are stratified by loan on the
basis of certain risk characteristics, including loan type. An impairment is
recognized whenever the prepayment pattern of the mortgage loan indicates that
the fair value of the related mortgage servicing rights is less than its
carrying amount. An impairment is recognized by charging such excess to income.
The Company determined that no reserve for impairment was required as of
December 31, 2000 or 1999. As of December 31, 2000 and 1999, the fair value of
57
capitalized mortgage servicing rights was approximately $98,648,000 and
$90,553,000, respectively. In determining fair value, the Company considers the
fair value of servicing rights with similar risk characteristics.
accounting for transfers and
servicing of financial assets
and extinguishment of liabilities
The Company recognizes on its financial statements financial assets and
servicing assets controlled by the Company, and derecognizes financial assets
when control has been surrendered. The Company follows the specific criteria
established in SFAS No.125 - "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," to determine when control
has been surrendered in a transfer of financial assets. Liabilities are
derecognized when they are extinguished.
Liabilities and derivatives incurred or obtained by the Company as part of a
transfer of financial assets are initially measured at fair value, if
practicable. Servicing assets and other retained interests in the transferred
assets are measured by allocating the previous carrying amount between the
assets sold, if any, and retained interests, if any, based on their relative
fair values at the date of the transfer.
Mortgage loans held for sale securitized by the Company into mortgage backed
securities are accounted for as sales, with gains or losses recognized based on
readily available quoted market prices at the time of securitization. Normally,
a portion of the loans are transferred with recourse and the Company retains the
right to service the loans. In certain financial asset transfers, interest-only
strips are recognized which can be contractually prepaid or settled in such a
way that the Company may not recover substantially all of its recorded
investment.
Interest-only strips are initially, and subsequently periodically, measured
based on different valuation techniques, principally the present value of
estimated future cash flows. Such techniques incorporate reasonable and
supportable assumptions related to the financial assets transferred, including
future revenues and expenses, defaults, prepayment speeds and interest rates.
All available evidence is considered in developing estimates of expected future
cash flows.
Gains from the sale of financial assets in securitizations totalled
approximately $6.1 million during the year ended December 31, 2000; no
interest-only strips were recognized.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No.140, "Accounting for Transfers and Servicing of Financial Assets and
Liabilities - A Replacement of SFAS 125." This Statement revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
provisions of SFAS 125 without reconsideration. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It is effective for transfers
and servicing of financial assets and extinguishment of liabilities occuring
after March 31, 2001. Management believes that the adoption of the new standards
will not have a significant effect on the financial statements of the Company.
The recognition and reclassification of certain assets pledged as collateral on
borrowings meeting certain specific criteria, and the disclosures relating to
securitization and certain collateral transactions required by SFAS No.140 for
fiscal years ending after December 15, 2000 have been reflected in the
accompanying consolidated financial statements.
transfers of receivables with recourse
Transfers of receivables with recourse are recognized as a sale if the Company
surrenders control of the future economic benefits embodied in the receivables,
its obligation under the recourse provisions can be reasonably estimated and the
transferee cannot require the Company to repurchase the receivables except
pursuant to the recourse provisions. Any transfers of receivables with recourse
not meeting all of these conditions are recognized as a liability in the
consolidated financial statements.
Gains and losses realized on the sale of loans are recognized at the time of the
sale of the loans or pools to investors, based upon the difference between the
selling price and the carrying value of the related loans sold as adjusted for
any estimated liability under recourse provisions. In most sales, the right to
service the loans sold is retained by the Company.
sale of servicing rights
The sale of servicing rights is recognized upon executing the contract and title
and all risks and rewards have irrevocably passed to the buyer. Gains and losses
realized on such sales are recognized based upon the difference between the
selling price and the carrying value of the related servicing rights sold.
foreclosed real estate held for sale
Other real estate owned comprises properties acquired in settlement of loans and
recorded at fair value less estimated costs to sell at the date of acquisition.
Costs relating to the development and improvement of the property are
capitalized, whereas those relating to holding the property are expensed as
incurred.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its
58
estimated net realizable value. In providing allowances for losses, the cost of
holding real estate, including interest costs, are considered. Gains or losses
resulting from the sale of these properties are credited or charged to income.
premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful life of each type of asset. Major additions and
improvements which extend the life of the assets are capitalized, while repairs
and maintenance are charged to expense.
The Company evaluates for impairment long-lived assets and certain identifiable
intangibles held and used whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, an estimate of the future cash flows expected to
result from the use of the asset and its eventual disposition must be made. If
the sum of the future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized for
the difference, if any, between the discounted future cash flows and the
carrying value of the asset.
goodwill and other intangibles
On October 30, 2000, the Company acquired Home & Property Insurance Corp. (Home
& Property) at a cost of approximately $345,000. The acquisition was accounted
for under the purchase method of accounting resulting in the recognition of
goodwill of approximately $335,000. On October 7, 1999 the Company acquired
Continental Capital Corp. (Continental Capital) at a cost of approximately $5.3
million. The acquisition was accounted under the purchase method of accounting
resulting in the recognition of goodwill of approximately $2.9 million. Total
assets of Continental Capital at the time of acquisition were approximately
$21.2 million.
Goodwill also resulted from the acquisition of the Bank, a mortgage banking
institution and a savings institution in prior years.
Goodwill is amortized over a fifteen year period. Accumulated amortization
amounted to $3,023,000 and $2,271,000 as of December 31, 2000 and 1999,
respectively.
In addition, the Company has recorded as a deposit intangible the premium paid
by the Bank over the value of deposits acquired resulting from the purchase of
certain branches from a commercial bank in 1995. The premium paid is being
amortized over a 10 year period. Accumulated amortization amounted to
approximately $807,000 and $642,000 at December 31, 2000 and 1999, respectively.
securities sold under agreements
to repurchase
The Company sells securities under agreements to repurchase the same securities.
The Company retains effective control over the securities pledged as collateral
on these agreements. The securities underlying such agreements were delivered
to, and are being held by, the dealers with whom the securities sold under
agreement to repurchase were transacted. The dealers may have lent or otherwise
disposed of such securities to other parties in the normal course of their
operations, but have agreed to resell the Company the same securities at the
maturities of the agreements. Accordingly, amounts received under these
agreements represent short-term borrowings and the securities underlying the
agreements remain in the asset accounts as pledged assets.
interest rate risk management
The Company enters into interest rate caps, swaps, options and/or futures
contracts (primarily based on Eurodollar certificates of deposits and U.S.
Treasury Notes) to manage its interest rate exposure. Such instruments are
designated as hedges against future fluctuations in the interest rates of
specifically identified assets or liabilities. Options and futures are reported
at fair value within investments in the accompanying consolidated statement of
financial condition; related gains or losses are reported in the statement of
income. Interest rate swaps are not recognized in the consolidated statement of
financial condition and are not marked to market. Net interest settlements on
interest rate swaps are recorded as adjustments to interest income or expense.
employee benefits
The Company and its subsidiaries have no post retirement benefit plans for its
employees as of December 31, 2000.
income taxes
The Company follows an asset and liability approach to the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. A valuation allowance is recognized for any deferred tax asset
for which, based on management's evaluation, it is more likely than not (a
likelihood of more than 50%) that some portion or all of the deferred tax asset
will not be realized.
capital reserve
The Banking Act of the Commonwealth of Puerto Rico, as amended, requires that a
minimum of 10% of net income of the Bank
59
be transferred to capital surplus until such surplus equals the sum of the
Bank's paid-in common and preferred stock capital.
stock option plan
As discussed in Note 16 to the consolidated financial statements, the Company
adopted a Stock Option Plan in June 1996 and granted stock options thereunder to
certain employees in conjunction with the Company's initial public offering.
Compensation cost on employee stock option plans is measured and recognized for
any excess of the quoted market price of the Company's stock at the grant date
over the amount an employee must pay to acquire the stock (intrinsic value-based
method of accounting). Generally, stock options are granted with an exercise
price equal to the face value of the stock at the date of the grant and,
accordingly, no compensation cost is recognized. The Company complies with the
disclosure provisions of SFAS No. 123 - "Accounting for Stock-Based
Compensation."
fair value of financial instruments
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that will be realized in the future.
earnings per share
Basic earnings per common share are computed by dividing net income for the year
by the weighted average number of shares outstanding during the period.
Outstanding stock options granted under the Company's Stock Option Plan 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 to diluted earnings per share.
statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks and other highly liquid securities with an
original maturity of three months or less.
accounting for derivative instruments
and hedging activities
In June 1998, the FASB issued SFAS No.133 - "Accounting for Derivative
Instruments and Hedging Activities."
This Statement, as amended, requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically accounted as a hedge. The accounting for changes in fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation.
Upon adoption of this Statement effective January 1, 2001, the Company
designated certain interest rate SWAP agreement with a notional amount of $70
million which was tied against specifically identified liabilities as cash flow
hedges in accordance with the provisions of SFAS No.133. All other interest rate
SWAP agreements held by the Company at such date, with an aggregate notional
amount of $60 million, as well as certain interest rate cap agreements with an
aggregate notional amount of $200 million, did not qualify for hedge accounting
under the provisions of SFAS 133. Accordingly, 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 $527,000
in the income statement related to derivative instruments that did not qualify
for hedge accounting.
60
2. mortgage loans held for sale
Mortgage loans held for sale consist of:
December 31,
-----------------------------------------------
2000 1999
------------------------------------------------------------------------------
o Conventional loans $49,866,567 $54,853,175
o FHA/VA loans 45,801,753 22,423,958
------------------------------------------------
$95,668,320 $77,277,133
------------------------------------------------------------------------------
The aggregate amortized cost and approximate market value of loans held for sale
as of December 31, 2000 are as follows:
--------------------------------------------------------------------
Amortized Gross unrealized Gross unrealized Approximate
cost gains losses market value
--------------------------------------------------------------------------------
$ 95,668,320 $ 2,615,572 $ (81,104) $ 98,202,788
--------------------------------------------------------------------------------
Substantially all of the loans are pledged to secure various borrowings from
lenders under mortgage warehousing lines of credit (see Note 9).
The following table summarizes the components of gain on sale of mortgage loans
held for sale and mortgage-backed securities held for trading:
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------------
o Proceeds from sales of mortgage loans
and mortgage-backed securities $ 749,092,437 $ 855,471,398 $ 783,914,438
o Mortgage loans and mortgage-
backed securities sold (718,925,649) (832,057,042) (761,449,308)
------------------------------------------------------
o Gain on sale, net 30,166,788 23,414,356 22,465,130
------------------------------------------------------
o Deferred fees earned, net of loan origination costs
and commitment fees paid 10,916,338 13,685,619 6,207,098
------------------------------------------------------
41,083,126 37,099,975 28,672,228
------------------------------------------------------
o Net unrealized profit (loss) on
trading securities 147,108 (21,288) 6,005,327
------------------------------------------------------
o Net gain on origination and sale of mortgage loans 41,230,234 37,078,687 34,677,555
------------------------------------------------------
o Gains on sales of investment securities available
for sale from non-mortgage banking activities -- 19,531 278,028
$ 41,230,234 $ 37,098,218 $ 34,955,583
------------------------------------------------------------------------------------------------------------------
Total gross loan origination fees totaled approximately $25,779,000, $28,442,000
and $20,270,000 during the years ended December 31, 2000, 1999 and 1998,
respectively. Gross gains of $34,756,431, $32,261,508 and $25,445,179, and gross
losses of $4,589,643, $8,847,152 and $2,980,049 were realized on the above sales
during the years ended December 31, 2000, 1999 and 1998, respectively.
3. investment securities
December 31,
-------------------------------
2000 1999
--------------------------------------------------------------------------------
Mortgage-backed securities held for trading
o GNMA Certificates $ 12,038,040 $ 43,563,817
--------------------------------------------------------------------------------
$ 12,038,040 $ 43,563,817
--------------------------------------------------------------------------------
61
The carrying value and estimated fair value of investment securities available
for sale and held to maturity by category and contractual maturities are shown
below. The fair value of investment securities is based on quoted market prices
and dealer quotes except for the investment in Federal Home Loan Bank (FHLB)
stock which is valued at its redemption value. Expected maturities on debt
securities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
December 31,
-----------------------------------------------------------------------
2000 1999
Amortized Fair Amortized Fair
cost value cost value
----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale
-------------------------------------------------------------------------
o CMO residuals (interest only), interest only strips
(IO's) and other mortgage-backed securities $ 21,398,077 $ 23,227,026 $ 20,709,050 $ 22,772,039
-------------------------------------------------------------------------
o FNMA certificates:
Due from five to ten years 633,552 633,552 740,977 718,979
Due over ten years 98,779,069 99,968,168 110,854,889 109,705,450
-------------------------------------------------------------------------
99,412,621 100,601,720 111,595,866 110,424,429
-------------------------------------------------------------------------
o FHLMC certificates:
Due within one year 13,395 13,395 -- --
Due from one to five years 131,526 129,956 98,693 98,882
Due from five to ten years 1,587,103 1,587,034 1,891,072 1,840,979
Due over ten years 434,864,554 437,226,389 14,586,274 14,036,216
-------------------------------------------------------------------------
436,596,578 438,956,774 16,576,039 15,976,077
-------------------------------------------------------------------------
o GNMA certificates:
Due from one to five years 25,582 25,502 -- --
Due from five to ten years 10,491,790 10,419,318 -- --
Due over ten years 584,419,215 576,869,337 570,748,830 563,532,620
-------------------------------------------------------------------------
594,936,587 587,314,157 570,748,830 563,532,620
-------------------------------------------------------------------------
1,152,343,863 1,150,099,677 719,629,785 712,705,165
-------------------------------------------------------------------------
Investment securities available for sale
-------------------------------------------------------------------------
o U.S. Treasury securities -
Due within one year -- -- 4,998,011 4,944,500
-------------------------------------------------------------------------
o U.S. Government and Agencies securities:
Due within one year 8,500,000 8,446,450 -- --
Due from one to five years 192,762,585 193,298,396 133,955,940 130,950,440
Due from five to ten years 114,881,388 115,351,548 92,236,888 89,443,550
-------------------------------------------------------------------------
316,143,973 317,096,394 226,192,828 220,393,990
-------------------------------------------------------------------------
o Corporate debt obligations -
Due from one to five years 5,097,519 5,201,699 -- --
-------------------------------------------------------------------------
o FHLB stock 45,973,167 45,973,167 32,825,167 32,825,167
-------------------------------------------------------------------------
367,214,659 368,271,260 264,016,006 258,163,657
-------------------------------------------------------------------------
$1,519,558,522 $1,518,370,937 $ 983,645,791 $ 970,868,822
------------------------------------------------------------------------------------------------------------------------------------
62
Mortgage - backed securities available for sale include CMO residuals and
interest only strips (IO's) resulting from financial asset transfers in prior
years accounted for as sales. The key assumptions used in determining the fair
values of such securities as of December 31, 2000 and the sensitivity analysis
on the fair value of such retained interests as of such date follows:
At December 31, 2000
-----------------------------------------------------------------------------------------------
Effect on fair value
PSA increase Discount rate increase
(basis points) (basis points)
Assumptions Fair value 50 100 100 200
---------------------------------------------------------------------------------------------------------------------------
CMO Residuals
PSA 100 - 350 $ 8,614,000 $ (390,000) $ (761,000) $ (294,000) $(625,000)
Discount rate 8 - 10%
IO's Strips
PSA 200 - 400 10,190,000 (1,311,000) (2,004,000) (950,000) (1,184,000)
Discount rate 12%
----------------------------------------------------------------------------------------------
$ 18,804,000 $(1,701,000) $(2,765,000) $(1,244,000) $ (1,809,000)
---------------------------------------------------------------------------------------------------------------------------
Anticipated credit losses as of December 31, 2000, as well as credit losses, net
of recoveries, during 2000 were insignificant.
The fair values presented above were estimated based on a computer model used to
structure mortgage backed securities. The computer model estimates the present
value of the projected excess servicing fees net of normal servicing fees, and
projects scheduled and unscheduled principal payments, mortgage interest,
servicing fees and excess servicing fees for each mortgage loan on a monthly
basis. Values for the excess servicing cash flows are calculated under various
scenarios based on different prepayment and internal rate of the return
assumptions, depending on the type of loan of the underlying mortgages, the
coupon rate and seasoning (loan age). Prepayment speeds ("PSA") are based on
actual Public Securities Association Dealer Prepayment Estimates as published by
Bloomberg Financial News.
63
December 31,
-----------------------------------------------------------------
2000 1999
Amortized Fair Amortized Fair
cost value cost value
-----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity
o GNMA certificates:
Due within one year $ 2,435 $ 2,611 $ -- $ --
Due from one to five years -- -- 15,478 16,601
Due from five to ten years 8,864,274 8,605,749 10,659,910 10,390,712
Due over ten years 1,844,978 1,765,812 2,132,629 2,074,108
-----------------------------------------------------------------
10,711,687 10,374,172 12,808,017 12,481,421
-----------------------------------------------------------------
o FNMA certificates-
Due over ten years 8,946,973 9,145,168 10,252,615 10,643,767
-----------------------------------------------------------------
o FHLMC certificates-
Due over ten years 159,544 153,675 188,615 179,841
-----------------------------------------------------------------
19,818,204 19,673,015 23,249,247 23,305,029
-----------------------------------------------------------------
Investment securities held to maturity
o Puerto Rico Government and Agencies
obligations:
Due from one to five years 1,948,000 1,948,000 1,280,000 1,272,000
Due from five to ten years 1,755,389 1,755,389 4,157,630 4,131,755
-----------------------------------------------------------------
3,703,389 3,703,389 5,437,630 5,403,755
-----------------------------------------------------------------
$23,521,593 $23,376,404 $28,686,877 $28,708,784
-----------------------------------------------------------------------------------------------------------------------
64
Unrealized gains and losses on securities held to maturity and available for
sale follows:
December 31,
-----------------------------------------------------------------------
2000 1999
Gross unrealized Gross unrealized
Gains Losses Gains Loses
-------------------------------------------------------------------------------------------------------------------
o Securities held to maturity:
Puerto Rico Government obligations $ -- $ -- $ -- $ (33,875)
Mortgage-backed securities 198,372 (343,561) 392,274 (336,492)
-----------------------------------------------------------------------
$ 198,372 $ (343,561) $ 392,274 $ (370,367)
-----------------------------------------------------------------------
o Securities available for sale:
U.S. Government obligations $ 1,566,851 $ (614,430) $ 9,000 $ (5,861,349)
Corporate debt obligations 104,180 -- -- --
Mortgage-backed securities 6,613,572 (8,857,758) 2,570,658 (9,495,278)
-----------------------------------------------------------------------
$ 8,284,603 $ (9,472,188) $ 2,579,658 $(15,356,627)
-------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 2000, 1999 and 1998, proceeds from the sale
of securities available for sale totaled approximately $66,848,000, $88,760,000
and $45,917,000, respectively; gross gains realized on such sales totaled
approximately $1,392,000 and $278,000 during 1999 and 1998 respectively; no
gains were realized in 2000; gross losses realized in 2000 and 1999 were
approximately $576,000 and $2,352,000 respectively; no losses were realized in
1998.
During 1999, the Company reclassified $9,296,000 (1998- $55,159,000) securities
held for trading to available for sale.
As discussed in Notes 7, 8 and 10 to the consolidated financial statements, as
of December 31, 2000 the Company had investment and mortgage-backed securities
and mortgage loans amounting to approximately $1.2 billion pledged to secure
certain deposits, securities sold under agreements to repurchase, and advances
and irrevocable standby letters of credit issued by the FHLB.
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 December 31, 2000 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
------------------------------------------------------------------------------
o Mortgage-backed and investment
securities available for sale $358,850,865
o Mortgage-backed securities held
to maturity 1,253,038
============
$360,103,903
------------------------------------------------------------------------------
65
4. loans and allowances for loan losses
Loans consist of the following:
December 31,
---------------------------------------
2000 1999
-----------------------------------------------------------------------------------
o Real estate loans:
Residential - first mortgage $ 999,321,698 $ 1,097,891,436
Residential - second mortgage 27,419,145 13,028,816
Land 6,049,179 1,952,043
Construction 198,958,342 95,201,185
Commercial 304,104,485 226,036,358
----------------------------------------
1,535,852,849 1,434,109,838
----------------------------------------
o Undisbursed portion of loans in process (125,428,976) (50,622,579)
o Net deferred loan fees 908,553 (436,852)
----------------------------------------
1,411,332,426 1,383,050,407
----------------------------------------
o Other loans:
Commercial 59,120,394 54,230,506
Consumer:
Loans secured by deposits 26,925,836 20,538,734
Loans secured by real estate 100,357,019 76,944,484
Other 45,563,186 37,653,140
Unamortized discount (338,103) (356,142)
Unearned interest (85,055) (83,722)
----------------------------------------
231,543,277 188,927,000
----------------------------------------
Total loans 1,642,875,703 1,571,977,407
o Allowance for loan losses (11,599,634) (8,970,605)
----------------------------------------
$ 1,631,276,069 $ 1,563,006,802
------------------------------------------------------------------------------------
The changes in the allowance for loan losses follow:
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------
o Balance, beginning of year $ 8,970,605 $ 8,055,432 $ 6,771,702
------------------------------------------------
Provision for loan losses 5,751,325 4,525,000 6,600,000
Acquired reserves -- -- 364,064
Loans charged-off (3,985,445) (4,439,807) (6,012,792)
Recoveries 863,149 829,980 332,458
------------------------------------------------
o Balance, end of year $ 11,599,634 $ 8,970,605 $ 8,055,432
-------------------------------------------------------------------------------
As of December 31, 2000 and 1999 the Company had commercial loans classified as
impaired totaling $1,565,000 and $928,000, respectively. No reserves for
impairment were necessary as of such dates since the fair value of the
collateral securing such loans exceeded their outstanding balances.
As of December 31, 2000, 1999 and 1998, loans on which the accrual of interest
income had been discontinued amounted to approximately $94,982,000, $59,014,000
and $44,526,000, respectively. The additional interest income that would have
been recognized during 2000, 1999 and 1998 had these loans been accruing
interest amounted to approximately $2,664,000, $1,637,000 and $1,408,000,
respectively. The Company has no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 2000.
66
5. mortgage loan servicing
The Company's fees for servicing mortgage loans generally range from .25% to
.50% on the declining outstanding principal balances of the mortgage loans
serviced. Servicing fees are collected on a monthly basis out of payments from
mortgagors. The servicing agreements are terminable by permanent investors for
cause without penalty or after payment of a termination fee ranging from .5% to
1% of the outstanding principal balance of the loans. At December 31, 2000 and
1999, the mortgage loans servicing portfolio amounted to approximately
$6,634,059,000 and $6,177,511,000, respectively, including approximately
$1,060,886,000 and $1,069,100,000, respectively, serviced for the Bank, and
$462,975,000 and $486,109,000, respectively, under sub-servicing contracts.
The changes in the servicing asset of the Company follows:
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
o Balance at beginning of period $ 84,252,506 $ 58,221,052 $ 21,212,998
---------------------------------------------------
Rights originated 15,039,273 14,072,094 11,845,775
Rights purchased 5,310,828 19,342,009 28,156,586
Scheduled amortization (9,524,077) (7,382,649) (2,994,307)
---------------------------------------------------
o Balance at end of period $ 95,078,530 $ 84,252,506 $ 58,221,052
--------------------------------------------------------------------------------------------
Among the conditions established in its various servicing agreements, the
Company is committed to advance from its own funds any shortage of moneys
required to complete timely payments to investors in GNMA mortgage-backed
securities issued and in its FNMA and FHLMC portfolio. At December 31, 2000, the
mortgage loan portfolio serviced for GNMA, FNMA and FHLMC and subject to the
timely payment commitment amounted to approximately $3,022,394,000, $526,049,000
and $1,387,529,000, respectively (1999 - $2,880,069,000, $537,881,000, and
$981,168,000).
Total funds advanced as of December 31, 2000 in relation to such commitments
amount to $3,634,000, $5,213,000 and $1,791,000 for escrow advances, principal
and interest advances and foreclosure advances, respectively (1999 - $2,693,000,
$6,740,000 and $1,501,000).
In connection with mortgage servicing activities, the Company holds funds in
trust for investors representing amounts collected primarily for the payment of
principal, interest, real estate taxes and insurance premiums. Such funds are
deposited in separate custodial bank accounts, some of which are deposited in
the Bank. At December 31, 2000 and 1999, the related escrow funds include
approximately $91,826,000 and $92,361,000, respectively, deposited in the Bank;
these funds are included in the Company's consolidated financial statements.
Escrow funds also include approximately $12,622,000 and $16,826,000 at December
31, 2000 and 1999, respectively, deposited with other banks and excluded from
the Company's assets and liabilities.
6. premises and equipment
Premises and equipment consist of:
December 31,
------------------------------------------------------------
Estimated useful life
(years) 2000 1999
----------------------------------------------------------------------------------------------
Buildings 20 $ 1,901,439 $ 1,895,066
Furniture and fixtures 5 24,655,614 22,398,620
Leasehold improvements 10 13,927,201 11,952,402
Autos 5 607,853 544,355
------------------------------------------------------------
41,092,107 36,790,443
------------------------------------------------------------
Less - Accumulated
depreciation and amortization (20,947,381) (17,331,090)
------------------------------------------------------------
$ 20,144,726 $ 19,459,353
----------------------------------------------------------------------------------------------
67
7. deposits
Deposits are summarized as follows:
December 31,
------------------------------------
2000 1999
------------------------------------------------------------------------
o Passbook savings $ 116,776,127 $ 113,576,010
------------------------------------
o NOW accounts 43,270,559 38,764,771
o Super NOW accounts 97,172,275 93,912,535
o Regular checking accounts
(non-interest bearing) 70,760,209 54,020,104
o Commercial checking accounts
(non-interest bearing) 101,177,563 103,575,340
------------------------------------
312,380,606 290,272,750
------------------------------------
o Certificates of deposit:
Under $ 100,000 489,220,809 390,314,490
$100,000 and over 749,081,246 531,714,386
------------------------------------
1,238,302,055 922,028,876
------------------------------------
o Accrued interest payable 8,603,375 4,628,732
------------------------------------
$1,676,062,163 $1,330,506,368
------------------------------------------------------------------------
The weighted average stated interest rate on all deposits at December 31, 2000
and 1999 was 5.34% and 4.84%, respectively.
As of December 31, 2000, the Company had delivered investment securities held to
maturity with an amortized cost of approximately $3.7 million as collateral for
public funds' deposits.
At December 31, 2000 scheduled maturities of certificates of deposit are as
follows:
------------------------------------------------------------------------
2001 $967,557,909
2002 59,262,895
2003 46,898,635
2004 32,553,099
2005 122,442,094
Thereafter 9,587,423
------------------------------------
$1,238,302,055
------------------------------------------------------------------------
68
8. securities sold under agreements to repurchase
At December 31, 2000, repurchase agreements mature within ninety days, except
for repurchase agreements totaling $70,000,000 maturing in December 2009.
Information on these agreements follows:
December 31,
--------------------------------------------------------------------------
2000 1999
Approximate market Approximate market
Repurchase value of Repurchase value of
liability underlying securities liability underlying securities
------------------------------------------------------------------------------------------------------------------------
Type of security
U.S. Government and Agencies securities
available for sale $218,384,000 $221,079,000 $124,392,000 $123,548,392
GNMA:
Held for trading 11,601,830 12,038,040 25,915,513 26,717,024
Available for sale 540,028,922 571,276,450 538,031,843 556,172,901
Held to maturity 9,679,000 10,369,000 6,796,000 7,579,000
CMO Residuals available for sale 4,155,685 3,704,316 8,162,280 4,592,934
FHLMC available for sale 30,088,057 30,744,603 15,763,948 16,053,021
FNMA:
Available for sale 5,470,000 6,253,000 6,065,756 6,498,487
Held to maturity 8,342,000 9,145,000 6,214,000 7,201,000
----------------------------------------------------------------------------
$ 827,749,494 $ 864,509,409 $ 731,341,340 $ 748,362,759
------------------------------------------------------------------------------------------------------------------------
Maximum amount of borrowings outstanding at any month-end during 2000 and 1999
under the agreements to repurchase were $838,202,000 and $731,341,000,
respectively. The approximate average aggregate borrowings outstanding during
the periods were $756,351,000 and $482,335,000, respectively. The weighted
average interest rate of such agreements was 6.75% and 5.92% at December 31,
2000 and 1999, respectively; the weighted average rate during 2000 and 1999 was
6.57% and 5.59%, respectively.
Since repurchase agreements are short-term commitments to borrow funds, they can
be assumed to reprice at least quarterly. Therefore, the outstanding balance of
repurchase agreements is estimated to be its fair value.
69
9. notes payable
Notes payable consist of:
December 31,
----------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
o Warehousing lines, bearing interest at floating rates
ranging from 1.125% to 1.25% over the
applicable Libor rate (7.85% in 2000 and
6.78% in 1999) $ 64,357,562 $ 48,507,001
o Lines of credit with banks for an aggregate of $50 million
bearing interest at floating rates ranging from 1.375% to
1.75% over the applicable Libor rate (8.26% at December
31,2000 and 7.25% at December 31, 1999), collateralized by
mortgage servicing rights with a fair value of approximately
$53.0 million 39,000,000 23,700,000
o Promissory notes maturing in 2000 paying
semiannual interest at fixed annual rates ranging
from 5.60% to 6.30% -- 15,000,000
o Promissory note maturing in 2000 paying quarterly
interest at a floating rate of 84% of the three month
Libor rate less .125% (4.99% at December 31, 1999) -- 10,000,000
o Promissory note maturing in 2001 paying quarterly interest at
a floating rate of 96% of the three month Libid rate (6.12% at
December 31, 2000 and 5.81%
at December 31, 1999) 25,000,000 25,000,000
o Promissory note maturing in 2001 paying semiannual
interest at a fixed annual rate of 6.52% 10,500,000 10,500,000
----------------------------------------------------
$138,857,562 $132,707,001
------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2000, the Company had various credit line agreements
permitting the Company to borrow up to $243.4 million in warehousing lines with
banks; the unused portion of warehousing lines totaled approximately $179.0
million. Warehousing lines at December 31, 2000 are collateralized by
approximately $63.6 million in mortgage loans, mortgage servicing rights with a
fair value of $8 million, and a general assignment of mortgage payments
receivable. These borrowings bear interest at rates related to the respective
counterparty's cost of funds. Several credit line agreements impose certain
requirements on the Company of which the most important include maintaining net
worth and debt service over certain defined minimums, and limitations on
indebtedness and declaration of dividends. At December 31, 2000 the Company was
in compliance with the loan requirements.
70
The following information relates to borrowings of the Company under the credit
line agreements:
December 31,
------------------------------
2000 1999
------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
o Maximum aggregate borrowings
outstanding at any month-end $ 157,414 $ 233,100
o Approximate average aggregate borrowings
outstanding during the year $ 131,726 $ 140,548
o Weighted average interest rate during
the year computed on a monthly basis 6.37% 6.35%
o Weighted average interest rate
at end of year 8.00% 6.87%
-----------------------------------------------------------------------------
At December 31, 2000 floating rate notes in the aggregate amount of $25,000,000
and fixed rate notes of $10,500,000 are guaranteed by letters of credit issued
by the FHLB -NY.
10. advances from The Federal Home Loan Bank of New York
At December 31, 2000 advances from FHLB mature at various dates commencing on
January 2, 2001 until October 20, 2005, and bear interest at various rates
ranging from 5.67% to 6.72%. The weighted average stated interest rate on
advances from the FHLB was 6.42% and 5.75% at December 31, 2000 and 1999,
respectively.
The Bank receives advances from the FHLB under an Advances, Collateral Pledge
and Security Agreement (the "Agreement"), which allows the Company to borrow up
to $634.2 million as of December 31, 2000. The unused portion under such line of
credit was approximately $129.2 million. Under the Agreement, the Bank is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. In addition, the Bank
maintains standby letters of credit with the FHLB amounting to approximately
$36.8 million at December 31, 2000. At December 31, 2000 the Bank maintains
collateral (principally in the form of first mortgage notes) amounting to
approximately $732.8 million with the FHLB as part of the Agreement and to
secure standby letters of credit. At December 31, 2000, the market value of the
collateral indicated above was sufficient to comply with the collateral
requirements of the FHLB.
11. income taxes
Under the Puerto Rico tax law a company's tax liability will be the greater of
the tax computed under the regular tax system or the alternative minimum tax
(AMT) system. The AMT is imposed based on 22% of regular taxable income after
certain adjustments for preference items. An AMT credit may be claimed in future
years for tax paid on an AMT basis in excess of the regular tax basis. Under the
Puerto Rico Income Tax Law entities are not entitled to file consolidated tax
returns.
The Company is subject to Puerto Rico income tax on its income derived from all
sources within and outside Puerto Rico. The Bank is also subject to United
States income taxes on certain types of income from such source. However, any
United States income tax paid by the Bank is, subject to certain conditions and
limitations, creditable as a foreign tax credit against its Puerto Rico income
tax liability.
A portion of the Company's interest income arises from mortgage loans and
mortgage-backed securities which are exempt for Puerto Rico income tax purposes.
The elimination of exempt income, net of related expenses, from the
determination of taxable income results in a reduction of its income tax
liability. Deferred tax liabilities (assets) are as follows:
71
December 31,
2000 1999
------------------------------------------------------------------------------------------------
o Deferred tax liabilities:
Unrealized gain on securities held for trading $ 159,154 $ 101,782
Deferred securitization fees 445,393 --
CMO residuals (IOs) 2,962,818 4,387,577
Net deferred loan origination costs, net 633,932 100,998
Servicing asset 15,363,003 12,034,191
Securitization gains on mortgage-backed securities 6,391,230 4,710,779
-----------------------------------
25,955,530 21,335,327
-----------------------------------
o Deferred tax assets:
Net operating loss carry forward (82,184) --
Allowance for loan losses (4,523,857) (3,498,536)
AMT credits (2,819,702) (1,191,200)
Other foreclosed property reserve (155,620) (38,571)
Reserve for bad debts (184,228) (261,664)
Unrealized losses on securities available for sale (463,159) (4,983,018)
Deferred gains on sale of investment securities (183,336) (183,336)
-----------------------------------
(8,412,086) (10,156,325)
-----------------------------------
Net deferred tax liability $ 17,543,444 $ 11,179,002
------------------------------------------------------------------------------------------------
The provision for income taxes of the Company varies from amounts computed by
applying the Puerto Rico statutory tax rate to income before taxes as follows:
Year Ended December 31,
---------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
% of pretax % of pretax % of pretax
amount income amount income amount income
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
o Computed income tax at statutory rate $ 22,524 39% $ 20,894 39% $ 17,579 39%
---------------------------------------------------------------------------
Effect on provision of:
Tax-exempt interest (5,907) (11) (5,629) (10) (7,084) (15)
Adjustment for tax differences expected to reverse
at tax rates lower than the statutory rate (1,664) (3) (2,040) (4) -- --
Discount on tax credits purchased (1,133) (2) (506) (1) (385) (1)
Other (non-taxable) / non-deductible items, net 301 1 (480) (1) 931 2
---------------------------------------------------------------------------
$ 14,121 24% $ 12,239 23% $ 11,041 25%
-----------------------------------------------------------------------------------------------------------------------------------
The Puerto Rico Treasury Department is presently conducting an income tax
examination of R&G Mortgage's and the Bank's income tax returns for the year
1995. Management believes that this examination should not result in any
significant adverse effect on the Company's financial condition or results of
operations.
72
12. stockholders' equity
On April 16, 1998 the Company's Board of Directors authorized a two-for-one
stock split of the Company's $.01 par value Class A and Class B common stock
(the "common stock"). The stock split was effected on June 25, 1998 in the form
of a stock dividend of one share for each share held of record on June 12, 1998.
Prior to the stock split, the Company had 14,144,752 shares of common stock
outstanding. As a result of the split, 14,144,752 shares were issued and
$141,448 was transferred from additional paid-in-capital to common stock. The
stock split did not dilute shareholders' voting rights or their proportionate
interest in the Company. All share and per share data included herein has been
adjusted to reflect the stock split.
The Company's average number of common shares outstanding used in the
computation of basic earnings per common share was 28,662,305 (1999-28,632,768;
1998-28,413,314); the weighted average number of shares outstanding for the
computation of diluted earnings per share was 29,314,712 (1999 -29,334,224; 1998
-29,169,314) after giving effect to outstanding stock options granted under the
Company's Stock Option Plan. During 2000, cash dividends of $0.20275 (1999
-$0.14875; 1998 -$0.111375) per common share amounting to $5,811,365 (1999
-$4,258,460; 1998 -$3,178,214) were paid.
13. non-interest expenses
Non-interest expenses consist of the following:
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
o Stationary and supplies $ 1,861,689 $ 2,018,569 $ 1,548,459
o Advertising and promotion 5,488,373 5,718,016 4,277,685
o Telephone 1,745,117 1,585,587 1,004,213
o License and other taxes 3,597,296 2,693,461 2,074,144
o Deposit insurance 293,751 514,473 401,933
o Other insurance 865,039 801,334 661,951
o Legal and other professional services 2,213,678 2,254,510 2,169,209
o Amortization of mortgage servicing asset 9,524,077 7,382,649 2,994,307
o Goodwill amortization 752,438 514,293 393,507
o Guaranty fees 2,536,248 2,060,884 1,366,296
o Other 11,447,288 8,023,930 5,795,632
-------------------------------------------------
$40,324,994 $33,567,706 $22,687,336
------------------------------------------------------------------------------------------------
14. related party transactions
The Company leases some of its facilities from an affiliate, mostly on a
month-to-month basis. The annual rentals under these agreements during 2000 were
approximately $2,179,000 (1999 - $ 1,736,000).
Loans to directors, officers and employees of the Company were made in the
ordinary course of business. Interest rates on such loans were substantially the
same as those prevailing at the time for comparable transactions with unrelated
parties and did not involve more than a normal risk of collectibility. At
December 31, 2000 the aggregate amount of loans outstanding to officers,
directors, and principal stockholders' of the Company and its subsidiaries were
insignificant.
15. regulatory requirements
The Company is approved by the Board of Governors of the Federal Reserve System
(Federal Reserve Board) as a registered bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended.
The Company, as a bank holding company, is subject to regulation and supervision
by the Federal Reserve Board. The Federal Reserve Board has established
guidelines regarding the capital adequacy of bank holding companies, such as the
Company. These requirements are substantially similar to those adopted by the
FDIC for depository institutions, as set forth below.
The Bank is organized under the Puerto Rico Banking Act, as amended, and is
subject to extensive regulation and examination by the Commissioner of the
Office of Financial Institutions of the Commonwealth of Puerto Rico, the FDIC
and certain requirements established by the Federal Reserve Board.
The mortgage banking business conducted by R&G Mortgage is subject to the rules
and regulations of FHA, VA, FNMA, FHLMC, GNMA and the Commissioner with respect
to originating, processing, selling and servicing mortgage loans and the
issuance and sale of mortgage-backed securities. R&G Mortgage's affairs are also
subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at
all times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder. R&G
Mortgage is a U.S. Department of Housing and
73
Urban Development (HUD) approved non-supervised mortgagee.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy requires the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as defined).
Failure to meet capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. As of December 31,
2000, the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 2000, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The following table reflects the Company's and the Bank's actual capital amounts
and ratios, and applicable regulatory capital requirements at December 31, 2000
and 1999:
(dollars in thousands)
---------------------------------------------------------------------
to be well capitalized
for capital under prompt corrective
actual adecuacy puposes action provisions
amount ratio amount ratio amount ratio
--------------------------------------------------------------------------------------------------------------------
As of December 31, 2000
o Total capital (to risk weighted assets):
Consolidated $303,217 16.65% $145,699 8% N/A N/A
R-G Premier Bank only $181,111 12.15% $119,290 8% $149,113 10%
o Tier I capital (to risk weighted assets):
Consolidated $291,617 16.01% $ 72,849 4% N/A N/A
R-G Premier Bank only $169,511 11.37% $ 59,645 4% $ 89,468 6%
o Tier I capital (to average assets):
Consolidated $291,617 8.44% $138,257 4% N/A N/A
R-G Premier Bank only $169,511 6.04% $112,210 4% $140,263 5%
As of December 31, 1999
o Total capital (to risk weighted assets):
Consolidated $271,716 16.47% $131,966 8% N/A N/A
R-G Premier Bank only $161,754 13.08% $ 98,921 8% $123,651 10%
o Tier I capital (to risk weighted assets):
Consolidated $262,746 15.93% $ 65,983 4% N/A N/A
R-G Premier Bank only $152,784 12.36% $ 49,460 4% $ 74,190 6%
o Tier I capital (to average assets):
Consolidated $262,746 9.35% $112,368 4% N/A N/A
R-G Premier Bank only $152,784 7.07% $ 86,453 4% $108,066 5%
--------------------------------------------------------------------------------------------------------------------
16. stock option plan
The Company has a Stock Option Plan, which is designed to attract and retain
qualified personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company, and reward key employees for outstanding performance and the
attainment of targeted goals. An amount of Company common stock equal to 10% of
the aggregate number of Class B Shares sold in the Company's initial public
offering (241,500 shares, equivalent to 869,400 shares after giving effect to
stock splits) were authorized under the Stock Option Plan, which may be filled
by authorized but unissued shares, treasury shares or shares purchased by the
Company on the open market or from private sources. The Stock Option Plan
provides for the grant of stock options at an exercise price equal to the fair
market value of the Class B shares at the date of the grant. Stock options are
74
available for grant to key employees of the Company and any subsidiaries. No
options were issued prior to the public offering. In connection with the
Company's initial offering on August 27,1996, the Company awarded options for
200,000 shares (720,000 shares as adjusted for stock splits) to 28 employees of
R&G Mortgage and the Bank at the initial public offering price of $14.50 per
share ($4.03 as adjusted for stock splits). In January 1997 the Company awarded
options for an additional 10,000 shares (36,000 shares as adjusted for stock
splits) to a certain employee. The maximum term of the options granted are ten
years. Under the provisions of the Stock Option Plan, options can be exercised
as follows: 20% after one year, 40% after two years, 60% after three years, 80%
after four years and 100% after five years. As of December 31, 1998 none of the
options granted had been exercised.
Stock options granted, cancelled and exercised during 1999 and 2000 were as
follows:
---------------------------------
weighted
average price
--------------------------------------------------------------------------------
o Outstanding stock options, January 1, 1999 756,000 $ 4.16
---------------------------------
Granted 96,000 $ 16.13
Exercised (71,640) $ 4.03
Cancelled (25,200) $ 4.03
---------------------------------
o Outstanding stock options, December 31, 1999 755,160 $ 5.69
---------------------------------
Exercised (9,720) $ 4.03
Cancelled (8,640) $ 4.03
---------------------------------
o Outstanding stock options, December 31, 2000 736,800 $ 5.75
--------------------------------------------------------------------------------
The Company adopted in 1996 the disclosure provisions of SFAS No. 123-
"Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no
compensation cost has been recognized for the Company's Stock Option Plan. Had
compensation cost for the Company's Stock Option Plan been determined based on
the fair value of the options at the grant date consistent with the provisions
of SFAS 123, the Company's net earnings and earnings per share for the years
ended December 31, 2000 and 1999 would have been reduced to the pro forma
amounts indicated below:
----------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------
o Net earnings - as reported $43,632,795 $41,334,992 $34,033,797
----------------------------------------------
o Net earnings - pro forma $43,478,281 $41,180,478 $33,879,283
----------------------------------------------
o Basic earnings per share - as reported $ 1.33 $ 1.31 $ 1.15
----------------------------------------------
o Basic earnings per share - pro forma $ 1.32 $ 1.31 $ 1.15
----------------------------------------------
o Diluted earnings per share - as reported $ 1.30 $ 1.28 $ 1.12
----------------------------------------------
o Diluted earnings per share - pro forma $ 1.29 $ 1.28 $ 1.12
---------------------------------------------------------------------------------------------
The fair value of the option grants were estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
Stock Price and Exercise Price - $14.50 for options granted based on the terms
of the awards.
Expected Option Term - 6 years.
Expected Volatility - 42.54% for options granted calculated using weekly closing
prices of three peer financial institutions given the Company's limited publicly
trading history.
Expected Dividend Yield - Calculated as the annualized quarterly dividend
closest to the grant date divided by the stock price on the grant date.
Risk-Free Interest Rate - 6.48% for options granted determined as the yield, on
the date of grant, on a U.S. Treasury zero coupon bond with a maturity equal to
the expected term of the option.
75
17. profit sharing plan
The Company has a profit sharing plan (the Plan) which covers substantially all
regular employees. Annual contributions to the Plan are based on matching
percentages up to 5% of employee salaries, based on the employee's years of
service and on operational income, as defined by the Plan, and are deposited in
a trust. Contributions to the Plan during the years ended December 31, 2000,
1999 and 1998 amounted to approximately $232,000, $169,000, and $103,000,
respectively.
18. commitments and contingencies
Commitments to buy and sell GNMA
certificates
As of December 31, 2000, the Company had open commitments to issue GNMA
certificates in the amount of $45.0 million.
Commitments to sell mortgage loans
As of December 31, 2000, the Company had commitments to sell mortgage loans to
third party investors amounting to $25.6 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.
As of December 31, 2000, minimum annual rental commitments under noncancellable
operating leases for certain office space and equipment, including leases with
an affiliate, were as follows:
---------------------------------------------------------
Year Amount
--------------------------------------------------------------------------------
2001 $ 3,765,232
2002 3,651,284
2003 3,258,147
2004 2,882,014
2005 2,278,280
Later years 12,683,746
--------------------------------------------------------------------------------
$28,518,703
--------------------------------------------------------------------------------
Rent expense amounted to approximately $5,091,000 in 2000, $4,081,000 in 1999
and $3,097,000 in 1998.
Litigation
The Company is a defendant in legal proceedings arising from normal business
activities. Management believes, based on the opinion of legal counsel, that the
final disposition of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
Others
At December 31, 2000, 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 $680.5 million at December 31, 2000. Liability, if any, under the
recourse provisions at December 31, 2000 is estimated by management to be
insignificant.
19. supplemental disclosure on the
statements of cash flows
During 2000, 1999 and 1998, the Company paid interest amounting to approximately
$168,870,000, $99,587,000 and $79,576,000, respectively, and income taxes of
approximately $18,142,000, $8,241,000 and $4,306,000, respectively.
During 2000 and 1999 the Company retained as investment securities approximately
$410,453,000, and $106,237,000, respectively, of loans securitized from its
mortgage loan portfolio.
20. financial instruments with off-balance
sheet risk and concentrations
of credit risk
In the normal course of business, the Company uses various off-balance sheet
financial instruments to satisfy the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments and interest rate exchange agreements
(swaps). These instruments involve, to varying degrees, elements of credit and
interest rate in excess of the amount recognized in the statements of financial
condition. The contract or notional amounts of these instruments, which are not
included in the statements of financial condition, are an indicator of the
Company's activities in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. For interest rate swaps, the contract or notional amounts do
not represent exposure to credit loss. Instead, the amount potentially subject
to credit loss is substantially less.
Contractual commitments to extend credit are legally binding agreements to lend
money to customers
76
at predetermined interest rates for a specified period of time. Since many of
the loan commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements.
To extend credit the Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the counterparty. A geographic concentration exists within the Company's
mortgage loans portfolio since most of the Company's business activity is with
customers located in Puerto Rico.
Interest rate swap agreements involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal.
Entering into interest rate agreements involves the risk of dealing with
counterparties and their ability to meet the terms of the contracts, and also
the interest rate risk associated with unmatched positions.
The total amounts of financial instruments with off-balance sheet risk at
December 31, 2000 follows:
o Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit excluding the undisbursed portion of loans in
process:
--------------------------------------------------------------------------------
Unused lines of credit $37,986,257
--------------------------------------------------------------------------------
o Financial instruments whose notional or contractual amounts exceed the amount
of potential credit risk:
--------------------------------------------------------------------------------
Interest rate swap contracts $130,000,000
----------------------------------------------
Interest rate cap agreements $200,000,000
--------------------------------------------------------------------------------
A detail of interest rate swaps by contractual maturity at December 31, 2000
follows:
-------------------------------------------------------------------------
notional pay fixed receive
amount maturity rate rate floating
--------------------------------------------------------------------------------
$ 25,000,000 September 10, 2001 6.09% 96% of 3 month Libid
15,000,000 January 26, 2001 5.59% 3 month Libor
10,000,000 June 6, 2003 6.83% 3 month Libor
70,000,000 December 8, 2009 5.60% 3 month Libor
10,000,000 December 15, 2009 5.69% 3 month Libor
--------------------------------------------------------------------------------
The following table summarizes the changes in notional amounts of swaps
outstanding during 2000:
--------------------------------------------------------------------------------
o Beginning balance $ 155,000,000
o New Swaps 10,000,000
o Maturities (35,000,000)
-------------------------------
o Ending balance $ 130,000,000
--------------------------------------------------------------------------------
77
As of December 31, 2000, interest rate swap maturities are as follows:
--------------------------------------------------------------------------------
2001 $ 40,000,000
2003 10,000,000
2009 80,000,000
----------------------------------------------
$130,000,000
--------------------------------------------------------------------------------
Expected maturities will differ from contractual maturities because
counterparties to the agreements may have the right to call the swaps. As of
December 31,2000 swap agreements with a notional amount of $90,000,000 had call
options at various dates commencing on January 2001 through June 2001.
Net interest settlements on swap agreements are recorded as an adjustment to
interest expense on notes payable and repurchase agreements. Net interest paid
during 1999 amounted to approximately $315,000; net interest received amounted
to approximately $886,000 and $50,000 during 2000 and 1998.
A detail of interest rate cap agreements at December 31, 2000 follows:
-----------------------------------------------------------------
notional interest receive
amount maturity rate cap rate floating
--------------------------------------------------------------------------------
$100,000,000 August 22, 2002 7.00% 3 month Libor
100,000,000 August 21, 2002 7.25% 3 month Libor
--------------------------------------------------------------------------------
21. 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 follow:
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------
o Employee costs $ 43,372,567 $ 39,738,671 $ 30,013,967
--------------------------------------------------
o Other administrative and general expenses $ 44,155,321 $ 37,366,087 $ 25,906,635
-------------------------------------------------------------------------------------------------
Set forth below are the direct loan origination costs that were capitalized as
part of the carrying cost of mortgage loans inventory or offset against mortgage
loan sales and fees and interest income.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------
o Offset against mortgage loan sales and fees $ 3,665,396 $ 7,069,831 $ 2,623,316
---------------------------------------------------------------------------------------------------
o Offset against interest income on loans $ 3,128,092 $ 3,210,847 $ 3,113,946
---------------------------------------------------------------------------------------------------
o Capitalized as part of loans held for sale and
loans held for investment $13,378,066 $ 8,823,603 $10,401,221
---------------------------------------------------------------------------------------------------
78
22. fair value of financial instruments
The estimated fair value of the Company's financial instruments as of December
31 are as follows:
(Dollars in thousands)
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
estimated estimated
carrying fair carrying fair
value value value value
--------------------------------------------------------------------------------------------------------------------
Financial Assets
o Cash and due from banks $ 43,466 $ 43,466 $ 42,252 $ 42,252
o Money market investments 25,624 25,624 23,744 23,744
o Mortgage loans held for sale 95,668 98,203 77,277 78,716
o Mortgage-backed securities held for trading 12,038 12,038 43,564 43,564
o Investment and mortgage-backed securities
available for sale 1,472,398 1,472,398 938,044 938,044
o Investment in Federal Home Loan Bank stock 45,973 45,973 32,825 32,825
o Investment and mortgage-backed securities
held to maturity 23,522 23,376 28,687 28,709
o Loans, net 1,631,276 1,695,231 1,563,007 1,548,143
o Accounts receivable 45,026 45,026 38,617 38,617
Financial Liabilities
o Deposits:
Non-interest bearing demand $ 171,938 $ 171,938 $ 157,595 $ 157,595
Savings and NOW accounts 257,219 252,368 246,253 232,283
Certificates of deposit 1,238,302 1,251,435 922,029 920,829
o Securities sold under agreements to repurchase 827,749 827,749 731,341 731,341
o Notes payable 138,858 138,924 132,707 132,278
o Advances from FHLB 505,000 507,282 384,000 383,850
o Other borrowings 8,840 8,840 9,843 9,843
o Accounts payable and accrued liabilities 43,614 43,614 33,917 33,917
o Unrecognized financial instruments -
Interest rate swap agreements in a net
receivable (payable) position* $ 89 $ 1,969 $ 65 $ 5,616
Interest rate cap agreements $ 623 $ 76 $ -- $ --
--------------------------------------------------------------------------------------------------------------------
* The amount shown under "carrying value" represents net accrual arising from
those unrecognized financial instruments.
79
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Short-term financial instruments
Short-term financial instruments, which include cash and due from banks, money
market investments, accounts receivable, securities sold under agreements to
repurchase, warehousing lines included in notes payable, other borrowings and
accounts payable and accrued interest, have been valued at their carrying
amounts reflected in the Consolidated Statements of Financial Condition as these
are reasonable estimates of fair value given the relatively short period of time
between origination of the instruments and their expected realization.
Investment securities
The fair value of investment securities is based on quoted market prices or
dealer quotes except for the investments in FHLB stock which is valued at its
redemption value.
Loans
The fair value for loans has been estimated for groups of loans with similar
financial characteristics. Loans were classified by type such as commercial,
commercial real estate, residential mortgage, and consumer. These asset
categories were further segmented into various maturity groups, and by accruing
and non-accruing groups. The fair value of accruing loans was calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. Prepayment experienced in previous periods when interest rates were at
levels similar to current levels was assumed to occur for mortgage loans,
adjusted for any differences in the outlook of interest rates. Other loans
assume little or no prepayments.
Non-accruing loans were assumed to be repaid after one year. Presumably this
would occur either because the loan is repaid or collateral has been sold to
satisfy the loan. The value of non-accruing loans was therefore discounted for
one year at the going rate for new loans.
Mortgage loans held for sale have been valued based on market quotations or
committed selling prices in the secondary market. Loans held for sale from the
Bank have been valued using the same methodology described in the first
paragraph above.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
checking accounts, is equal to the amount payable on demand. The fair value of
savings, money market and NOW accounts, as well as certificates of deposit, is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
The fair value estimates of deposits do not include the fair value of core
deposits intangible.
Borrowings
The fair value of promissory notes included in notes payable and advances from
FHLB, was determined using discounted cash flow analysis over the remaining term
of the obligations using market rates for similar instruments.
Interest rate swap agreements
The fair value of interest rate swap agreements was determined taking into
account the current interest rates at December 31, 2000. This value represents
the estimated amount the Company would pay to terminate the contract or
agreement taking into account current interest rates and, when appropriate, the
current credit worthiness of the counterparties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
In addition, the fair values presented do not attempt to estimate the value of
the Company's fee generating businesses and anticipated future business
activities, that is, they do not represent the Company's value as a going
concern. Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized since, in many cases, the Company generally
intends to hold these financial instruments to maturity and realize the recorded
values.
Reasonable comparability of fair values among financial institutions is not
likely due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a greater degree of subjectivity to
these derived or estimated fair values. Therefore, while disclosure of estimated
fair values of financial instruments is required, readers are cautioned in using
this data for purposes of evaluating the financial condition of the Company.
80
23. R&G Financial Corporation (holding company only)
financial information
The following condensed financial information presents the financial position of
R&G Financial Corporation (the "Holding Company") only as of December 31, 2000
and 1999 and the results of its operations and its cash flows for each of the
three years ended on December 31,2000:
Statements of Financial Condition December 31,
---------------------------------
2000 1999
---------------------------------------------------------------------------------------
Assets
o Cash $ 227,702 $ 119,380
o Investment in R-G Premier Bank, at equity 181,865,856 157,038,667
o Investment in R&G Mortgage, at equity 141,283,756 127,314,792
o Investment in Home and Property Insurance Corp.,
at equity 405,697 --
o Accounts receivable - subsidiaries 17,864 139,156
o Other assets 165,787 116,442
---------------------------------
Total assets $323,966,662 $284,728,437
---------------------------------
Liabilities and Stockholders' Equity
o Advances from subsidiaries $ 15,000,000 $ 15,000,000
o Other liabilities and accrued expenses 131,012 193,160
o Stockholders' equity 308,835,650 269,535,277
---------------------------------
Total liabilities and stockholders' equity $323,966,662 $284,728,437
---------------------------------------------------------------------------------------
Statements of Income Year Ended December 31,
-------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------
o Income:
Dividends from subsidaries $ -- $ -- $ 2,404,787
Other 448,267 555,371 384,638
-------------------------------------------------
448,267 555,371 2,789,425
-------------------------------------------------
o Operating expenses 383,539 505,183 349,669
-------------------------------------------------
o Income before income taxes and equity
in undistributed earnings of subsidiaries 64,728 50,188 2,439,756
-------------------------------------------------
o Income taxes 18,124 14,053 9,477
-------------------------------------------------
o Income before equity in undistributed earnings
of subsidiaries 46,604 36,135 2,430,279
-------------------------------------------------
o Equity in undistributed earnings of subsidiaries 43,586,191 41,298,857 31,603,518
-------------------------------------------------
o Net income $43,632,795 $41,334,992 $34,033,797
-------------------------------------------------------------------------------------------------------------
The Holding Company had no operations during the years ended December 31, 2000,
1999 and 1998.
The principal source of income for the Holding Company consists of dividends
from R-G Premier Bank of Puerto Rico and R&G Mortgage Corp. The payment of
dividends by the Bank to the Holding Company may be affected by certain
regulatory requirements and policies, such as the maintenance of certain minimum
capital levels.
81
Statements of Cash Flows Year Ended December 31,
-------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------
o Cash flows from operating activities:
-------------------------------------------------------
Net income $ 43,632,795 $ 41,334,992 $ 34,033,797
-------------------------------------------------------
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries (43,586,191) (41,298,857) (31,603,518)
Decrease (increase) in accounts
receivable - subsidiaries 121,292 (69,328) 353,350
Increase in other assets (49,345) (84,208) (32,234)
(Decrease) increase in other liabilities and
accrued expenses (62,148) 93,773 58,013
-------------------------------------------------------
Total adjustments (43,576,392) (41,358,620) (31,224,389)
-------------------------------------------------------
Net cash provided by (used in) operating activities 56,403 (23,628) 2,809,408
-------------------------------------------------------
o Cash flows from investing activities:
Acquisition of Home and Property (345,000) -- --
Cash investment in Bank
pursuant to acquisition of Fajardo Federal -- -- (639,322)
Investment in Bank common stock -- (39,212,500) (19,382,000)
Investment in R&G Mortgage common stock -- -- (29,055, 000)
Dividends on common stock from subsidiaries 11,798,865 8,012,279 2,122,649
-------------------------------------------------------
Cash provided by (used in) investing activities 11,453,865 (31,200,221) (46,953,673)
-------------------------------------------------------
o Cash flows from financing activities:
Issuance of common stock 46,919 288,550 --
Net proceeds from issuance of preferred stock -- 23,921,644 48,079,134
Cash dividends (11,448,865) (8,012,279) (4,412,033)
Net advances from subsidiaries -- 15,000,000 --
-------------------------------------------------------
Net cash (used in) provided by financing
activities (11,401,946) 31,197,915 43,667,101
-------------------------------------------------------
Net increase (decrease) in cash 108,322 (25,934) (477,164)
Cash at beginning of year 119,380 145,314 622,478
-------------------------------------------------------
Cash at end of year $ 227,702 $ 119,380 $ 145,314
---------------------------------------------------------------------------------------------------------------
82
24. industry segments
The following summarized financial information presents the results of the
Company's operations for each of the three years ended December 31, 2000 for its
traditional banking and mortgage banking activities:
2000
---------------------------------------------------------------------------------
Mortgage Segment
Insurance Banking Banking Totals Banking
----------------------------------------------------------------------------------------------------------------------------------
Revenues:
o Net interest income after provision for
loan losses $ -- $ 55,935,128 $ 3,300,684 $ 59,235,812 $ 45,326,068
o Non-interest income:
Net gain on origination and sale of loans -- 15,170,465 26,059,769 41,230,234 7,922,662
Net gain on sales of investment securities
available for sale -- -- -- -- 19,531
Loan administration and servicing fees -- -- 33,324,040 33,324,040 --
Service charges, fees and other 182,058 7,044,593 1,813,356 9,040,007 6,135,232
---------------------------------------------------------------------------------
182,058 78,150,186 64,497,849 142,830,093 59,403,493
---------------------------------------------------------------------------------
Non-interest expenses:
o Employee compensation and benefits 47,902 13,426,617 13,556,821 27,031,340 12,733,017
o Office occupancy and equipment 11,563 8,464,625 4,959,456 13,435,644 7,538,952
o Other 43,139 15,019,159 28,395,036 43,457,334 14,433,103
---------------------------------------------------------------------------------
102,604 36,910,401 46,911,313 83,924,318 34,705,072
---------------------------------------------------------------------------------
o Income before income taxes $ 79,454 $ 41,239,785 $ 17,586,536 $ 58,905,775 $ 24,698,421
----------------------------------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------
Mortgage Segment Mortgage Segment
Banking Totals Banking Banking Totals
---------------------------------------------------------------------------------------------------------------------------------
Revenues:
o Net interest income after provision for
loan losses $ 6,726,706 $ 52,052,774 $ 31,279,733 $ 6,093,378 $ 37,373,111
o Non-interest income:
Net gain on origination and sale of loans 29,156,025 37,078,687 12,542,960 22,120,015 34,662,975
Net gain on sales of investment securities
available for sale -- 19,531 278,028 -- 278,028
Loan administration and servicing fees 29,037,883 29,037,883 -- 17,340,415 17,340,415
Service charges, fees and other 1,892,304 8,027,536 5,433,556 1,383,042 6,816,598
---------------------------------------------------------------------------------
66,812,918 126,216,411 49,534,277 46,936,850 96,471,127
---------------------------------------------------------------------------------
Non-interest expenses:
o Employee compensation and benefits 11,699,754 24,432,771 9,169,292 7,925,491 17,094,783
o Office occupancy and equipment 3,750,413 11,289,365 5,917,063 3,069,890 8,986,953
o Other 21,765,464 36,198,567 11,232,822 13,420,625 24,653,447
---------------------------------------------------------------------------------
37,215,631 71,920,703 26,319,177 24,416,006 50,735,183
---------------------------------------------------------------------------------
o Income before income taxes $ 29,597,287 $ 54,295,708 $ 23,215,100 $ 22,520,844 $ 45,735,944
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The following is a reconciliation of reportable segment revenues and income
before income taxes to the Company's consolidated amounts:
Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Revenues:
o Total revenues for reportable segments $ 142,830,093 $ 126,216,411 $ 96,471,127
o Elimination of intersegment revenues (4,284,312) (3,352,370) (2,627,742)
--------------------------------------------------------------
o Total consolidated revenues $ 138,545,781 $ 122,864,041 $ 93,843,385
--------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Income before income taxes:
o Total income before income taxes for
reportable segments $ 58,905,775 $ 54,295,708 $ 45,735,944
o Elimination of intersegment profits (768,433) (216,326) (311,962)
o Unallocated corporate expenses (383,539) (505,183) (349,669)
--------------------------------------------------------------
o Income before income taxes, consolidated $ 57,753,803 $ 53,574,199 $ 45,074,313
---------------------------------------------------------------------------------------------------------------
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
December 31, 2000 and 1999 follows:
December 31,
--------------------------------------
2000 1999
--------------------------------------------------------------------------------
Assets:
o Banking $ 2,873,431,480 $ 2,285,371,757
o Mortgage Banking 788,886,024 741,260,519
o Insurance 634,063 --
o Total assets for reportable segments 3,662,951,567 3,026,632,276
o Parent company assets 183,651 116,442
o Elimination of intersegment balances (123,691,011) (114,755,882)
--------------------------------------
o Consolidated total assets $ 3,539,444,207 $ 2,911,992,836
--------------------------------------------------------------------------------
84
25. quarterly financial data (unaudited):
Following is a summary of selected financial information of the unaudited
quarterly results of operations. In the opinion of management, all adjustments
necessary for a fair presentation have been made.
(dollars in thousands, except for per share data)
-----------------------------------------------------
2000
March 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------------------------------------------------
o Interest income $ 53,283 $ 57,711 $ 60,901 $ 64,195
o Interest expense (36,523) (40,978) (45,023) (48,579)
o Net interest income 16,760 16,733 15,878 15,616
o Provision for loan losses (1,350) (1,500) (1,500) (1,401)
o Income before income taxes 11,761 14,207 14,917 16,869
o Income tax expense (2,274) (3,499) (3,555) (4,793)
o Net income 9,487 10,708 11,362 12,076
o Net income per common share - Basic $ .28 $ .33 $ .35 $ .37
o Net income per common share - Diluted $ .28 $ .32 $ .34 $ .36
------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share data)
------------------------------------------------------
1999
March 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------------------------------------------------
o Interest income $ 35,385 $ 36,437 $ 43,946 $ 47,373
o Interest expense (22,151) (23,909) (28,142) (32,361)
o Net interest income 13,234 12,528 15,804 15,012
o Provision for loan losses (1,300) (1,100) (1,000) (1,125)
o Income before income taxes 14,839 13,882 13,906 10,947
o Income tax expense (3,689) (2,072) (3,789) (2,689)
o Net income 11,150 11,810 10,117 8,258
o Net income per common share - Basic $ .36 $ .38 $ .32 $ .25
o Net income per common share - Diluted $ .35 $ .37 $ .31 $ .25
------------------------------------------------------------------------------------------------
85
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stockholder
information
--------------------------------------------------------------------------------
Corporate Office Transfer Agent and Registrar
R-G Plaza American Stock Transfer & Trust Co.
280 JT Pinero Ave. 40 Wall Street-46th floor
San Juan, P.R. 00918 New York, N.Y. 10005
(787) 758-2424
Independent Public Accountants
PricewaterhouseCoopers, LLP
US Operations BBV Tower-9th Floor
San Juan, P.R. 00918
1841 New York Avenue
Huntington Station, Market Makers
New York 11746 Friedman Billings Ramsey & Co.
(631) 549-8188 1001 19th Street
North Arlington, VA 22209
Annual Meeting PaineWebber Incorporated of PR
American International Plaza
April 25, 2001 Penthouse Floor 250
10:00 a.m. Atlantic time Munoz Rivera Ave.
Bankers Club San Juan, P.R. 00918
Hato Rey, Puerto Rico
Sandler O'Neill & Partners
Two World Trade Center
104th Floor
Special Counsel New York, N.Y. 10048
Kelley, Drye Warren, LLP Keefe, Bruyette & Woods Inc.
1200 19th St., N.W. Suite 500 Two World Trade Center
Washington, DC 20036 89th Floor
New York, N.Y. 10048
McConnell & Valdes
270 Munoz Rivera Ave.
San Juan, P.R. 00918
87
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Internet Website
http://www.rgonline.com
(in Spanish and English)
General Inquiries & Reports
R-G Financial is required to file an annual report on Form 10K for its fiscal
year ended December 31, 2000 with the Securities and Exchange Commission. Copies
of its Annual Report and quarterly reports may be obtained without charge by
contacting: Inves tor Relations Department, Attention Ms. Sophie Perez Tel.:
(787) 756-2801
Stock Listings
----------------------------------------------------------------------------------------------
Symbol: RGFC-NASDAQ
RGFCP-NASDAQ
RGFCO-NASDAQ
RGFCN-NASDAQ
At December 31, 2000, the Company had 221 stockholders of record, which does not
take into consideration investors who hold their stock through brokerage and
other firms. The high and low prices and dividends paid per share for the
Company's stock durin g each quarter during the last two fiscal years were as
follows.
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
2000 2000 2000 2000 1999 1999 1999 1999
High 12.00 9.50 11.00 14.50 21.50 19.375 18.1875 16
----------------------------------------------------------------------------------------------
Low. 7.688 6.50 7.875 8.625 17.75 14.25 12.1875 9.875
----------------------------------------------------------------------------------------------
Dividends Paid 0.045 0.04875 0.0525 0.0565 0.033 0.03575 0.0385 0.0415
----------------------------------------------------------------------------------------------
The 2000 Annual Report from R-G Financial Corporation was designed and produced
by Adworks, San Juan, Puerto Rico.
88