-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K5vZnHMXe0x/2wsXVaVf/h7baukAEkWQjv1fQrkJJ658ZKGHIon5rjKfRoXRGG4q PpcjjBpzeyjbw7l0RJv47w== 0000950144-02-003302.txt : 20020415 0000950144-02-003302.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-003302 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21137 FILM NUMBER: 02597554 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 1 g75102e10-k.txt R&G FINANCIAL CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2001 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. [ ] As of February 28, 2002, the aggregate value of the 14,325,461 shares of Class B Common Stock of the Registrant issued and outstanding on such date, which excludes 919,461 shares held by all directors and officers of the Registrant as a group, was approximately $300.8 million. This figure is based on the last known trade price of $21.00 per share of the Registrant's Class B Common Stock on February 28, 2002. Number of shares of Class B Common Stock outstanding as of February 28, 2002: 15,244,922. 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, 2001 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 is a Puerto Rico chartered, financial holding company that operates R&G Mortgage Corp., the second largest mortgage company in Puerto Rico, and R-G Premier Bank, a Puerto Rico commercial bank. Through R&G Mortgage, we also operate The Mortgage Store of Puerto Rico, Inc., a Puerto Rico mortgage company, and through R-G Premier Bank, the Company operates Continental Capital Corp., a Huntington Station, New York mortgage banking company. The Company operates Home & Property Insurance Corp., a Puerto Rico insurance agency, and R-G Investments Corporation, a licensed broker-dealer. In December 2001, R&G Financial, and its wholly owned subsidiary R&G Acquisition Holdings Corporation, a Florida corporation, entered into a definitive merger agreement pursuant to which the new subsidiary will acquire The Crown Group, Inc., a Florida corporation, and its wholly-owned savings bank subsidiary, Crown Bank, a Federal Savings Bank, hereinafter collectively referred to as "Crown." Crown, which had total assets of $638 million, total deposits of $404 million and stockholders' equity of $69 million as of December 31, 2001, operates in the Tampa-St. Petersburg-Clearwater and Orlando metropolitan areas through 14 full-service offices. The Orlando market is one of the fastest growing markets in Florida, both generally and for Hispanics in particular, and provides the Company with what management believes is a cost effective way to access the Hispanic markets in the United States, while providing a strong platform for further expansion in Florida. Crown's balance sheet is complimentary to that of the Company and is predominantly secured by real estate. In addition, the acquisition will allow the Company to access lower cost funding in Florida as compared to Puerto Rico. For the quarter ended September 30, 2001, Crown's cost of deposits was 4.26% as compared to the Company's cost of deposits of 4.75% as of such date. Under the terms of the merger agreement, holders of Crown common stock will receive an aggregate of $100.0 million in cash. The acquisition, which is expected to be accretive to the Company's earnings per share in 2002, is expected to close during the second quarter of 2002, pending the receipt of all requisite regulatory approvals and the approval of Crown's shareholders. The Company is currently in its 30th year of operations and operates its business through its subsidiaries. The Company is primarily engaged in a 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 and the purchase and sale of servicing rights associated with such mortgage loans. The Company is also engaged in providing a full range of banking services, including commercial banking services, corporate real estate and business lending, residential construction lending, consumer lending and credit cards, offering a diversified range of deposit products and, to a lesser extent, trust and investment services through its private banking department and its broker-dealer. The Company was organized in 1972 as R&G Mortgage Corp. and completed its initial public offering in 1996, following its reorganization as a bank holding company. As of December 31, 2001, the Company had total assets of $4.7 billion, total deposits of $2.1 billion and stockholders' equity of $459.1 million. At December 31, 2001, the Company operated 65 branch offices (36 mortgage offices in Puerto Rico, 4 mortgage offices in the United States and 25 bank branches, mainly located in the northeastern section of Puerto Rico). The Company 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. The Company has sought to implement this strategy by: (1) 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; (6) meeting the banking needs of its customers through, among other things, the offering of trust and investment services and insurance products; (7) expanding its operations in the United States; and, (8) emphasizing controlled growth, while pursuing a variety of acquisition opportunities when appropriate. The senior management of the Company is comprised of five executives with an average of over 27 years of experience in the financial services industry. Victor J. Galan is the Company's Chairman and Chief Executive Officer, positions he has held since the Company's incorporation in 1996. Mr. Galan is also the founder and Chairman of R&G Mortgage, a position he has held since 1972. During 2001, the Company promoted Ramon Prats, Company's Vice Chairman, to the office of President. Mr. Prats formerly was Executive Vice President of R&G Mortgage, a position he held since 1980. Joseph R. Sandoval has been the Company's Chief Financial Officer since 1997. Previously, Mr. Sandoval was an accountant with a predecessor to PriceWaterhouseCoopers LLP. Mario Ruiz has been with R&G Financial subsidiaries since 1990 and is presently Executive Vice President of R-G Premier Bank. Mr. Ruiz previously served in various capacities for R&G Mortgage and The Mortgage Store of Puerto Rico, Inc. Steven Velez has been with R&G Mortgage since 1989 and is presently Executive Vice President of R&G Mortgage. The Company's principal executive offices are located at 280 Jesus T. Pinero Avenue, San Juan, Puerto Rico 00918 and the Company's telephone number is (787) 758-2424. R&G MORTGAGE Originations. R&G Mortgage is primarily engaged in the business of originating first and second mortgage loans on single-family residential properties secured by real estate. R&G Mortgage also originates residential mortgage loans through The Mortgage Store of Puerto Rico, Inc., its wholly-owned subsidiary. Pursuant to agreements entered into between R&G Mortgage and R-G Premier 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 R-G Premier Bank. R-G Premier Bank retains the nonconforming 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 (in the case of "jumbo" loans) or other underwriting technicalities at the time of origination. Jumbo loans may be packaged and sold in the secondary market, while loans with underwriting technicalities may be cured through payment experience and subsequently sold. Management believes that these loans are essentially of the same credit quality as conforming loans. During the years ended December 31, 2001, 2000 and 1999, R&G Financial originated a total of $1.8 billion, $1.1 billion and $1.1 billion of residential mortgage loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for R-G Premier Bank of $664.8 million, $451.4 million and $437.1 million during the years ended December 31, 2001, 2000 and 1999, respectively, or 36%, 43% and 41%, respectively, of total originations. The loans originated by R&G Mortgage for R-G Premier Bank are comprised primarily of conventional residential loans and, to a lesser extent, residential construction loans and consumer loans secured by real estate. -2- Servicing. R&G Financial's servicing portfolio has grown significantly over the past several years. At December 31, 2001, R&G Financial's servicing portfolio totaled $7.2 billion and consisted of a total of 113,070 loans. These amounts include R&G Mortgage's servicing portfolio, totaling $6.7 billion, and Continental's servicing portfolio, totaling $485.0 million, at December 31, 2001. At December 31, 2001, R&G Financial's servicing portfolio included $1.0 billion of loans serviced for R-G Premier Bank, or 14.4% of the total servicing portfolio. Substantially all of the mortgage loans in R&G Financial's servicing portfolio are secured by single-family residences. R&G Mortgage generally retains the servicing function with respect to the loans which have been securitized and sold. Most of R&G Financial's mortgage servicing portfolio is comprised of mortgages secured by real estate located in Puerto Rico. Securitizations. R&G Mortgage pools Federal Housing Administration, the "FHA," and Veterans Administration, the "VA," loans into mortgage-backed securities which are guaranteed by the Government National Mortgage Association, the "GNMA." These securities are sold to securities broker-dealers and other investors in Puerto Rico. Conventional loans may either be sold directly to agencies such as the Federal National Mortgage Association, the "FNMA," and the Federal Home Loan Mortgage Corporation, the "FHLMC," or to private investors, or may be pooled into FNMA or FHLMC mortgage-backed securities, which are generally sold to investors. During the years ended December 31, 2001, 2000 and 1999, R&G Financial sold $1.1 billion, $637.8 million and $721.0 million of loans, respectively, as part of its mortgage banking activities, which includes loans securitized and sold, but does not include loans originated for R-G Premier Bank or loans securitized for other institutions. R-G PREMIER BANK General. R-G Premier Bank's principal business consists of holding deposits from the general public and tax-advantaged funds from eligible Puerto Rico corporations and using them, together with funds obtained from other sources, to originate and purchase loans secured primarily by residential real estate in Puerto Rico, and to purchase mortgage-backed and other securities. R-G Premier 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 (one-to-four family) in the States of New York, New Jersey, Connecticut, North Carolina and Florida, through its wholly-owned subsidiary, Continental Capital Corp. To a lesser extent, but with increasing emphasis over the past few years, R-G Premier Bank also originates construction loans and loans secured by commercial real estate, as well as consumer and personal loans and commercial business loans. Such loans offer higher yields, are generally for shorter terms and offer R-G Premier Bank an opportunity to provide a greater range of financial services to its customers, R-G Premier Bank also offers trust services through its trust department. Residential loans. At December 31, 2001, R&G Financial's loans receivable, net, totaled $1.8 billion, which represented 38.6% of R&G Financial's $4.7 billion of total assets. At such date, all but $665,000 of R&G Financial's loans receivable were held by R-G Premier Bank. R-G Premier Bank's loan portfolio has historically been concentrated in loans secured by first mortgage liens on existing single-family residences. At December 31, 2001, $1.0 billion, or 52.6% of R&G Financial's total loans held for investment, consisted of such loans, of which all but $1.2 million consisted of conventional loans. Construction loans. R-G Premier Bank has been active in originating loans to construct single-family residences. At December 31, 2001, retail construction loans amounted to $50.8 million, or 2.7% of R&G Financial's total loans held for investment, while commercial construction and land acquisition loans amounted to $221.5 million in the aggregate, or 11.6% of total loans held for investment. R-G Premier Bank intends to continue to increase its involvement in single-family residential construction lending. Such loans afford R-G Premier Bank the opportunity to increase the interest rate sensitivity of its loan portfolio. -3- Commercial loans. R-G Premier Bank also originates mortgage loans secured by commercial real estate, primarily office buildings, retail stores, warehouses and general purpose industrial space. At December 31, 2001, $327.9 million, or 17.1% of R&G Financial's total loans held for investment, consisted of such loans. As of such date, R-G Premier Bank's commercial real estate loan portfolio consisted of approximately 1,202 loans with an average principal balance of $273,000. Finally, R-G Premier Bank also offers commercial business loans, including working capital lines of credit, inventory and accounts receivable loans, equipment financing (including equipment leases), term loans, insurance premium loans and loans guaranteed by the Small Business Administration and various consumer loans. At December 31, 2001, consumer loans, which are primarily secured by real estate, amounted to $181.2 million, or 9.5% of total loans held for investment, and commercial business loans amounted to $92.2 million, or 4.8% of total loans held for investment. REGULATION We operate our businesses under a variety of federal, state and Puerto Rico laws and rules. As a financial holding company, we are subject to the rules of the Board of Governors of the Federal Reserve System and Office of the Puerto Rico Commissioner of Financial Institutions, the "OCFI" Among other things, we are required to meet minimum capital requirements, and our activities are limited to those that are determined to be financial in nature or incidental or complimentary to a financial activity. R&G Mortgage's mortgage banking business is subject to the rules of the FHA, VA, GNMA, FNMA, FHLMC, Department of Housing and Urban Development, OCFI and state regulatory authorities with respect to originating, processing, selling and servicing mortgage loans. Among other things, these rules prohibit discrimination, establish underwriting guidelines, require credit reports, fix maximum loan amounts and, in some cases, fix maximum interest rates. R-G Premier Bank is subject to the rules of the OCFI and the Federal Deposit Insurance Corporation, or "FDIC." Among other things, R-G Premier Bank is subject to requirements on the type and amount of credit it may extend to its affiliates, including a requirement that most of such credit be fully secured, and if there were any "liquidation or other resolution" of R-G Premier Bank, deposits and administrative expenses would be afforded a priority over general unsecured claims. In addition, the FDIC is required to take "prompt corrective action" if R-G Premier Bank does not meet minimum capital requirements. The FDIC has established five capital tiers to implement this requirement, from "well capitalized" to "critically undercapitalized." A bank's capital tier will depend on various capital measures and other qualitative factors and will subject it to specific requirements. As of December 31, 2001, R-G Premier Bank met the capital measures for being "well capitalized" under the FDIC's regulations. MORTGAGE BANKING ACTIVITIES Loan Originations, Purchases and Sales. During the years ended December 31, 2001, 2000 and 1999, R&G Financial originated a total of $1.8 billion, $1.1 billion and $1.1 billion of residential mortgage loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for the Bank of $664.8 million, $451.4 million and $437.1 million during the years ended December 31, 2001, 2000 and 1999, respectively of such originations, or 36%, 43% and 41% 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, 2001, 2000 and 1999, R&G Financial originated $482.7 million, $307.1 million and -4- $288.8 million, respectively, of FHA/VA loans, which represented 26.4%, 29.2% and 27.3% 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, 2001, 2000 and 1999, R&G Financial originated $1.3 billion, $699.7 million and $738.6 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 Mortgage Store are held by The Mortgage 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, 2001, 2000 and 1999, non-conforming conventional loans represented approximately 48%, 53% 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, 2001, 2000 and 1999, 94.1%, 83.8% and 86.6% 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. 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 75% (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 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. -5- 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 $29.3 million, $145.9 million and $307.8 million of loans from third parties during the years ended December 31, 2001, 2000 and 1999, respectively. -6- 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, ------------------------------------------ 2001 2000 1999 -------- -------- -------- (Dollars in Thousands) Loans Originated For the Bank: Conventional loans(1): Number of loans....................................... $ 6,355 4,929 5,067 Volume of loans....................................... $655,151 $407,461 $404,886 FHA/VA loans: Number of loans....................................... -- -- -- Volume of loans....................................... -- -- -- Consumer loans(2): Number of loans....................................... 485 1,807 1,499 Volume of loans....................................... $9,658 $43,943 $32,219 Total loans: Number of loans....................................... 6,840 6,736 6,566 Volume of loans....................................... $664,809 $451,404 $437,105 Percent of total volume............................... 36% 38% 32% Loans Originated For Third Parties: Conventional loans(1): Number of loans....................................... 6,791 3,377 4,882 Volume of loans....................................... $679,190 $292,283 $333,673 FHA/VA loans: Number of loans....................................... 4,823 3,241 3,315 Volume of loans....................................... $482,721 $307,128 $288,752 Total loans: Number of loans....................................... 11,614 6,618 8,197 Volume of loans....................................... $1,161,911 $599,411 $622,425 Percent of total volume............................... 63% 50% 46% ---------- -------- -------- Total loan originations $1,826,720 $1,050,815 $1,059,530 ========== ========== ========== Loans Purchased For R&G Mortgage: Number of loans (3)................................... 371 1,627 3,418 Volume of loans....................................... $29,342 $145,881 $307,819 Percent of total volume............................... 1% 12% 22% ---------- -------- -------- Total loan originations and purchases $1,856,062 $1,196,696 $1,367,349 ========== ========== ========== GNMA Pools Purchased for R&G Mortgage: Volume of loans -- -- $22,487
-7-
Year Ended December 31, ------------------------------------------------ 2001 2000 1999 ---------- -------- ---------- (Dollars in Thousands) Loans Sold To Third Parties(4): Conventional loans(1): Number of loans....................................... 6,124 3,937 6,511 Volume of loans....................................... $603,542 $332,930 $470,443 FHA/VA loans: Number of loans....................................... 3,365 4,167 4,255 Volume of loans....................................... $513,366 $367,868 $373,730 Total loans: Number of loans....................................... 9,489 8,104 9,434 Volume of loans....................................... $1,116,908 $700,798 $844,173(3) Percent of total volume............................... 61% 59% 62% ---------- -------- ---------- Adjustments: Loans originated for the Bank............................ $ (664,809) $(451,404) $(437,105) Loan amortization........................................ (31,802) (18,544) (38,863) ---------- -------- ---------- Increase in loans held for sale............................ $ 42,543 $ 25,950 $69,695 ========== ========= ========= Average Initial Loan Origination Balance: The Bank: Conventional loans(1)................................. $103 $83 $80 FHA/VA loans.......................................... -- -- -- Third Parties: Conventional loans(1)................................. $100 $87 $68 FHA/VA loans.......................................... 100 95 87 Total Conventional loans(1)................................. $102 $84 $74 FHA/VA loans.......................................... 100 95 87 Refinancings(5): The Bank................................................. 57% 56% 72% Third Parties............................................ 50% 29% 49%
- --------------------- (1) Includes non-conforming loans. (2) All of such loans were secured by real estate. (3) Includes $27.1 million, $63.0 million and $123.2 million of loans purchased from another institution, and securitized and sold to the same financial institution during 2001, 2000 and 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. -8- 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 a 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, 2001, 2000 and 1999, R&G Financial sold $1.1 billion, $637.8 million and $721.0 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, $375.1 million or 33.6%, $270.8 million or 42.5% and $271.9 million or 37.7% 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 time of origination of the loan (such as missing tax returns, slightly higher -9- 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 were made, either the Bank or R&G Mortgage retained the residual certificates issued by the respective trusts as well as the subordinate certificates issued in such transactions. As of December 31, 2001, R&G Mortgage held residual certificates issued in CMO transactions involving R&G Mortgage and the Bank with a fair value of $3.2 million. In addition, the Bank held CMO subordinated certificates and residual certificates from one of its issues with a fair value of $7.6 million at December 31, 2001. 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, 2001, R&G Financial had reserves for possible losses related to its recourse obligations of $1.3 million. At December 31, 2001, R&G Mortgage had loans in its servicing portfolio with provisions for recourse in the principal amount of approximately $552.4 million, as compared to $680.5 million and $646.3 million as of December 31, 2000 and 1999, respectively. Of the recourse loans existing at December 31, 2001, approximately $260.0 million in principal amount consisted of loans sold to FNMA and FHLMC and converted into mortgage-backed securities of such agencies, and approximately $292.4 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, 2001, R&G Financial's servicing portfolio totaled $7.2 billion and consisted of a total of 113,070 loans. These amounts include R&G Mortgage's servicing portfolio totaling $6.7 billion and Continental's servicing portfolio totaling $485.0 million at December 31, 2001. At December 31, 2001, R&G Financial's servicing portfolio included $1.0 billion of loans serviced for the Bank or 14.4% 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. R&G Mortgage services 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. Once loans are sold, the Bank retains the servicing rights to such loans; R&G Mortgage continues to service the loans on behalf of the Bank. 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 equal to between $0.50 and $1.00 per loan. See "- Regulation - R&G Financial - Limitations on Transactions with Affiliates." -10- 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. 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, ---------------------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (Dollars in Thousands) Composition of Servicing Portfolio at End of Period: Conventional and other mortgage loans(1)................. $4,070,074 $3,447,383 $3,095,920 FHA/VA loans............................................. 3,154,497 3,186,676 3,081,590 ---------- ---------- ---------- Total servicing portfolio(2).......................... $7,224,571 $6,634,059 $6,177,511 ========== ========== ========== Activity in the Servicing Portfolio: Beginning servicing portfolio............................ $6,634,059 $6,177,511 $4,827,798 Add: Loan originations and purchases.................... 1,887,582 1,280,898 1,610,945 Servicing of portfolio loans acquired (3).......... 4,936 31,404 552,235(3) Less: Sale of servicing rights(4)........................ (211,603) (213,959) (55,515) Run-offs(5)........................................ (1,090,403) (641,795) (757,952) ---------- ---------- ---------- Ending servicing portfolio............................... 7,224,571 $6,634,059 $6,177,511 ========== ========== ========== Number of loans serviced(6).............................. 113,070 110,874 107,302 Average loan size(6)..................................... $ 64 $ 60 $ 58 Average servicing fee rate(6)............................ 0.499 0.483% 0.530%
- ------------------- (1) Includes non-conforming loans. (2) At the dates shown, $1.0 billion, included $1.0 billion and $1.1 billion of loans serviced for the Bank, respectively, which constituted 14.4%, 15.6% and 17.3% 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. (4) Includes loans sold, servicing released, by Continental totaling $211.6 million, $172.9 million and $55.5 million in 2001, 2000 and 1999, respectively. (5) Run-off refers to regular amortization of loans, prepayments and foreclosures. (6) At December 31, 2001, R&G Mortgage was servicing 10,961 loans for the Bank with an average loan size of approximately $93,000 and at an average servicing rate of 0.20%. Amounts include late and other miscellaneous charges. -11- The following table sets forth certain information at December 31, 2001 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, 2001 -------------------------------------------------------------------------------------------------- Loans Serviced Loans Serviced Total Loans for the Bank for Third Parties Serviced --------------------------- --------------------------- --------------------------- Number of Aggregate Number of Aggregate Number of Aggregate Loans Principal Loans Principal Loans Principal Balance Balance Balance ---------- ----------- ---------- --------- --------- ---------- (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) Mortgage Interest Rate Less than 7.00% 1,078 $ 125,014 14,150 $1,032,507 15,228 $1,157,521 7.00% - 7.49% 3,835 405,236 21,049 1,505,293 24,884 1,910,529 7.50% - 7.99% 2,745 264,189 26,115 1,667,009 28,860 1,931,198 8.00% - 8.49% 1,180 115,293 14,321 847,886 15,501 963,179 8.50% - 8.99% 1,053 80,153 13,725 674,940 14,778 755,093 9.00% - 9.49% 391 22,318 4,660 195,512 5,051 217,830 9.50% - 9.99% 400 14,739 3,700 108,893 4,100 123,632 10.00% - 10.49% 111 4,605 1,293 45,029 1,404 49,634 10.50% - 10.99% 272 8,199 867 28,318 1,139 36,517 11.00% or more 117 3,577 2,008 75,861 2,125 79,438 ------ ---------- ------- ---------- ------- ---------- 11,182 $1,043,323 101,888 $6,181,248 113,070 $7,224,571 ====== ========== ======= ========== ======= ==========
The amount of principal prepayments on mortgage loans serviced by R&G Financial was $180.3 million, $176.3 million and $162.6 million for the years ended December 31, 2001, 2000 and 1999 respectively. This represented approximately 2.5%, 2.7% 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, 2001, 2000 and 1999, the monthly average amount of funds advanced by R&G Financial under such servicing agreements was $7.4 million, $5.8 million and $5.5 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, 2001, R&G Financial held $106.7 million of such escrow funds, $101.9 million of which were deposited in the Bank and $4.8 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 recourse servicing occur primarily when foreclosure sale -12- 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, 2001, R&G Financial was servicing mortgage loans with an aggregate principal amount of $552.4 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. 140 and the treatment of servicing rights, incorporated by reference into Item 8 hereof. -13- 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, ----------------------------------------------------------------------------- 2001 2000 1999 Percent of Percent of Percent of Number of- Servicing Number of Servicing Number of Servicing Loans Loans Loans Portfolio Loans Portfolio ---------- --------- --------- --------- --------- --------- Loans delinquent for: 30-59 days.................... 5,995 5.30% 5,336 4.81% 5,334 4.97% 60-89 days.................... 1,746 1.54 1,547 1.40 1,559 1.45 90 days or more............... 2,678 2.37 2,300 2.07 2,109 1.97 ---------- --------- -------- ------- -------- ------- Total delinquencies(1)...... 10,419 9.21% 9,183 8.28% 9,002 8.39% ========== ========= ======== ======= ======== ======= Foreclosures pending(2).......... 2,056 1.82% 1,845 1.66% 1,262 1.18% ========== ========= ======== ======= ======== =======
- -------------------- (1) Includes at December 31, 2001 an aggregate of $112.5 million of delinquent loans serviced by R&G Mortgage for the Bank, or 1.56% of the total servicing portfolio and $21.3 million of delinquent loans held in R&G Mortgage's own portfolio. (2) At December 31, 2001, the Bank had foreclosures pending on $28.1 million of loans being serviced by R&G Mortgage, which constituted 0.39% of the servicing portfolio. R&G Mortgage had foreclosures pending on $4.8 million of loans it is servicing for its own portfolio at December 31, 2001. 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, 2001, 2000 and 1999, R&G Mortgage held REO with a book value of approximately $2.8 million, $1.3 million and $128,000 respectively. Sales of REO resulted in losses to R&G Mortgage of $442,000 during the year ended December 31, 2001, and gains of $168,000 and $209,000 for the years ended December 31, 2000 and 1999, 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, 2001. 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, 2001, 2000 and 1999, total expenses related to FHA or VA loans foreclosed amounted to $337,000, $235,000 and $35,000, 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. -14- LENDING ACTIVITIES FROM BANKING OPERATIONS General. At December 31, 2001, R&G Financial's loans receivable, net totaled $1.8 billion, which represented 38.6% of R&G Financial's $4.7 billion of total assets. At December 31, 2001, all but $665,000 of R&G Financial's loans receivable 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, 2001, all but $1.2 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. -15- 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, --------------------------------------------------------------------- 2001 2000 1999 -------------------- ------------------- ------------------ Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Residential real estate - first mortgage............................... $ 1,006,073 52.59% $1,005,033 58.43% $1,099,843 68.47% Residential real estate - second mortgage............................... 33,321 1.74 27,419 1.59 13,029 0.81 Retail construction....................... 50,767 2.65 47,698 2.77 38,950 2.42 Commercial construction and land acquisition(2)......................... 221,537 11.58 137,640 8.00 61,037 3.80 Commercial real estate.................... 327,891 17.14 270,459 15.72 204,155 12.71 Commercial business....................... 92,157 4.82 59,120 3.44 54,231 3.38 Consumer loans: Loans secured by deposits.............. 26,176 1.37 26,926 1.57 20,539 1.28 Real estate secured consumer loans..... 83,509 4.37 100,357 5.83 76,944 4.79 Unsecured consumer loans............... 71,507 3.74 45,563 2.65 37,653 2.34 ----------- ----- ---------- ----- ---------- ----- Total loans receivable............... 1,912,938 100% 1,720,615 100% 1,606,381 100% ----------- ----- ---------- ----- ---------- ----- Less: Allowance for loan losses.............. (17,428) (11,600) (8,971) Loans in process....................... (92,935) (78,163) (33,526) Deferred loan fees..................... 20 909 (437) Unearned interest...................... (207) (85) (440) ----------- ---------- ---------- (110,550) (88,939) (43,374) ----------- ---------- ---------- Loans receivable, net(3)............... $ 1,802,388 $1,631,276 $1,563,007 =========== ========== =========- December 31, ------------------------------------ -------------------------------- 1998 1997 ----------------------------- -------------------------------- Amount Percent Amount Percent ------ ------- ------ ------- Residential real estate - first mortgage $ 735,795 66.87% $ 476,729(1) 61.25% Residential real estate - second mortgage 18,634 1.69 17,831 2.29 Retail construction 23,280 2.12 13,367 1.72 Commercial construction and land acquisition(2) 15,353 1.39 5,785 0.74 Commercial real estate 117,151 10.65 81,722 10.50 Commercial business 46,532 4.23 39,128 5.03 Consumer loans: Loans secured by deposits 17,225 1.56 12,472 1.60 Real estate secured consumer loans 85,055 7.73 81,252 10.44 Unsecured consumer loans 41,381 3.76 50,103 6.43 ----------- ------- --------- -------- Total loans receivable 1,100,406 100.00% 778,389 100.00% ----------- ------- --------- -------- Less: Allowance for loan losses (8,055) 6,772) Loans in process (18,170) (6,218) Deferred loan fees (166) 172 Unearned interest (347) (512) ----------- --------- (26,738) (13,330) ----------- --------- Loans receivable, net(3) $ 1,073,668 $ 765,059 =========== ==========
- ----------- (1) Includes $33.9 million of residential real estate - first mortgage loans which are held by R&G Mortgage at December 31, 1997. (2) Includes $665,000, $1.2 million, $545,000, $249,000 and $682,000 of construction loans held by R&G Mortgage at December 31, 2001, 2000, 1999, 1998 and 1997, respectively (3) Does not include mortgage loans held for sale of $236.4 million, $95.7 million, $77.3 million, $117.1 million and $46.9 million at December 31, 2001, 2000, 1999, 1998 and 1997, respectively, of R&G Mortgage, the Bank and/or Continental. -16- Contractual Principal Repayments and Interest Rates. The following table sets forth certain information at December 31, 2001 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 2001 2001 Total(1) ---------- ------------- --------------- ----------- (In Thousands) Residential real estate........................ $ 142 $ 3,261 $1,035,991 $1,039,394 Retail construction............................ 50,767 -- -- 50,767 Commercial real estate(2)...................... 166,117 267,596 115,715 549,428 Commercial business............................ 54,449 32,625 5,083 92,157 Consumer: Loans on savings............................ 15,564 10,169 443 26,176 Real estate secured consumer loans.......... 2,300 7,942 73,267 83,509 Unsecured consumer loans.................... 32,433 30,695 8,379 71,507 -------- -------- ---------- ---------- Total(3)....................................... $321,772 $352,288 $1,238,878 $1,912,938 ======== ======== ========== ==========
- ----------------------- (1) Amounts have not been reduced for the allowance for loan losses, loans in process, deferred loan fees or unearned interest. (2) Includes $221.5 million of commercial construction and land acquisition loans. (3) Does not include mortgage loans held for sale. -17- The following table sets forth the dollar amount of total loans due after one year from December 31, 2001, 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.................................... $1,039,394 $ -- $1,039,394 Retail construction........................................ 50,765 -- 50,767 Commercial real estate(1).................................. 94,476 454,952 549,428 Commercial business........................................ 34,976 57,181 92,157 Consumer: Loans on savings........................................ 26,176 -- 26,176 Real estate secured consumer loans...................... 83,509 -- 83,509 Unsecured consumer loans................................ 71,507 -- 71,507 ---------- ------------ ---------- Total...................................................... $1,400,805 $512,132 $1,912,938 ========== ============ ==========
- --------------------- (1) Includes $221.5 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. -18- 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, ----------------------------------------------- 2001 2000 1999 ------------ ----------- --------- (Dollars in Thousands) Loan originations: Loans originated by R&G Mortgage: Residential mortgages................................... $ 625,798 $ 378,398 $ 378,740 Commercial mortgages.................................... -- -- -- Residential construction................................ 29,353 29,063 26,146 Consumer loans.......................................... 9,658 43,943 32,219 ------------ ----------- --------- Total loans originated by R&G Mortgage................ 664,809 451,404 437,105 ------------ ----------- --------- Other loans originated: Commercial real estate.................................. 213,215 150,329 175,803 Commercial business..................................... 59,074 48,060 36,222 Construction and development............................ 171,026(1) 127,473 54,070 Consumer loans: Loans on deposit........................................ 48,730 45,474 34,758 Real estate secured consumer loans...................... -- -- -- Unsecured consumer loans................................ 63,702 32,517 29,631 ------------ ----------- --------- Total other loans originated.......................... 555,747 403,853 330,484 ------------ ----------- --------- Loans purchased......................................... 61,359 128,824 279,489 ------------ ----------- --------- Total loans originated and purchased.................. 1,281,915 984,081 1,047,078 ------------ ----------- --------- Loans sold.............................................. (130,716) (105,653) (133,731) Loan participations sold................................ (52,886) -- (19,200) Loan principal reductions............................... (474,162) (359,760) (234,334) ------------ ----------- --------- Net increase before other items, net.................... 624,151 518,668 659,813 ------------ ----------- --------- Loans securitized and transferred to mortgage-backed securities............................................ (421,645) (410,453) (106,237) ------------ ----------- --------- Net increase in loan portfolio.......................... $ 202,506 $ 108,215 $ 553,576 ============ =========== =========
(1) Includes $34.6 million originated by Continental. 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, 2001, 2000 and 1999, R&G Mortgage received $10.3 million, $8.1 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." -19- 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 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, 2001, 2000 and 1999, the Bank purchased $61.4 million, $128.8 million and $279.5 million of loans, respectively. During the years ended December 31, 2001, 2000 and 1999, loans sold from banking operations were $130.7 million, $105.7 million and $133.7 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, 2001, $1.0 billion or 52.6% of R&G Financial's total loans held for investment consisted of such loans, of which all but $1.2 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, 2001, $33.4 million or 1.7% 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- -20- value ratio of second mortgage loans generally is limited to 75% of the property's appraised value (including the first mortgage). 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, 2001, retail construction ("spot") loans amounted to $50.8 million or 2.7% of R&G Financial's total loans held for investment, while commercial construction and land acquisition loans amounted to $221.5 million or 11.6% 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, 2001, the Bank's construction loan portfolio included 441 construction/permanent loans with an aggregate principal balance of $50.8 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, 2001, the Bank had 20 residential construction loans outstanding to develop single-family residences with an aggregate principal balance of $145.2 million. Commitments for future funding approximate $61.3 million In addition, the Bank had 8 loans to develop commercial properties with an aggregate principal balance of $30.6 million. All loans are performing in accordance with their terms at December 31, 2001. In addition to the foregoing, at December 31, 2001, the Bank had 35 land acquisition loans with outstanding balances ranging from $81,000 to $10.7 million, and an aggregate balance of $35.7 million, which were made in connection with projects to construct single-family residences. The Bank and the financial institution which made the interim construction loan 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 million at December 31, 2001 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 -21- credit risk and by working with builders with whom it has established relationships or knowledge thereof. At December 31, 2001, $871,000 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. Commercial Real Estate Loans. The Bank also originates mortgage loans secured by commercial real estate. At December 31, 2001, $327.9 million or 17.1% 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 1,202 loans with an average principal balance of $273,000. At December 31, 2001, $16.9 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, 2001, commercial business loans amounted to $92.2 million or 4.8% 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, 2001, $181.2 million or 9.5% 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 -22- 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 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 $26.2 million at December 31, 2001. 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, 2001, real estate secured consumer loans totaled $83.5 million. At December 31, 2001, credit card receivables totaled $27.9 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, 2001, $6.1 million of consumer loans were classified as non-performing, of which $5.8 million were secured by real estate. 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. -23- 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, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (Dollars in Thousands) Non-accruing loans: Residential real estate(1)..................... $50,358 $79,234 $47,413 $32,973 $21,619 Residential construction....................... 871 487 478 441 368 Commercial real estate......................... 16,945 11,881 9,005 6,463 6,000 Commercial business............................ 3,105 1,414 1,255 3,224 765 Consumer unsecured............................. 303 1,186 802 1,358 1,217 Other.......................................... -- -- 61 67 117 ------- -------- ------- ------- ------- Total........................................ 71,582 94,202 59,014 44,526 30,086 ------- -------- ------- ------- ------- Accruing loans greater than 90 days delinquent: Residential real estate........................ -- -- -- -- -- Residential construction....................... -- -- -- -- -- Commercial real estate......................... -- -- -- -- -- Commercial business............................ 462 420 63 61 54 Consumer....................................... 428 360 274 357 172 ------- -------- ------- ------- ------- Total accruing loans greater than 90 days delinquent......................... 890 780 337 418 226 ------- -------- ------- ------- ------- Total non-performing loans................... 72,472 94,982 59,351 44,944 30,312 ------- -------- ------- ------- ------- Real estate owned, net of reserves................ 10,061 9,056 5,852 4,041 1,715 Other repossessed assets.......................... 362 583 466 237 85 ------- -------- ------- ------- ------- 10,423 9,639 6,318 4,278 1,800 ------- -------- ------- ------- ------- Total non-performing assets $82,895 $104,621 $65,669 $49,222 $32,112 ======= ======== ======= ======= ======= Total non-performing loans as a percentage of total loans (2) 3.79% 5.52% 3.66% 4.08% 3.89% ======= ======== ======= ======= ======= Total non-performing assets as a percentage of total assets 1.78% 2.96% 2.26% 2.41% 2.12% ======= ======== ======= ======= =======
- ---------------------- (1) Includes $5.8 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, 2001, 2000, 1999, 1998 and 1997, respectively. Also includes $7.3 million, $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, 2001, 2000, 1999, 1998 and 1997, respectively. (2) While the ratio of non-performing loans to total loans decreased from 5.52% to 3.79% from December 31, 2000 to December 31, 2001, the ratio was nevertheless larger than it would otherwise have been due to significant loan securitizations during 2001 and 2000, which reduced the amount of loans considered in the calculation of the ratio. Without giving effect to loan securitizations, at December 31, 2001 and 2000, the ratio of non-performing loans to total loans would have been 2.75% and 4.46%, respectively. Non-performing loans amounted to $72.5 million at December 31, 2001, as compared to $95 million at December 31, 2000. The decrease in non-performing loans during 2001 is due to the sale of approximately $67.8 million of non-performing residential mortgage loans to certain investors during the fourth quarter of 2001. An aggregate of $50.4 million or 69.5% of non-performing loans consisted of -24- 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 0.32% during 2001, as compared to 0.17% during 2000. 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 decreased by $28.9 million or 36.4% from December 31, 2000 to December 31, 2001. The average loan balance on non-performing mortgage loans amounted to $54,000 at December 31, 2001. As of such date, 572 loans with an aggregate balance of $35.7 million (including 133 consumer loans secured by real estate with an aggregate balance of $2.7 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, decreased from 8.55% in 2000 to 6.40% in 2001. The Company's loss experience on such portfolio has been minimal over the last several years. Non-performing commercial real estate loans increased by $5.0 million or 42.6% from $11.9 at December 31, 2000 to $16.9 million at December 31, 2001. The number of loans delinquent over 90 days amounted to 120 loans at December 31, 2001, with an average balance of $141,000. The largest non-performing commercial real estate loan as of December 31, 2001 had a balance of $758,000. Non-performing commercial business loans consist of 77 loans. Such loans include 11 loans with an aggregate balance of $322,000 which are 90% guaranteed by the Small Business Administration, 58 commercial leases amounting to $1.7 million and 8 other commercial business loans with an aggregate balance of $1.1 million. These loans have a combined average loan size of $40,000. The largest non-performing commercial business loan as of December 31, 2001 had a $517,000 balance. At December 31, 2001, R&G Financial's five largest loans-to-one borrower and their related entities had outstanding balances of $32.8 million, $24.9 million, $18.7 million, $16.7 million and $13.9 million. All of such loan concentrations were performing December 31, 2001. At December 31, 2001, R&G Financial's allowance for loan losses totaled $17.4 million, which represented a $5.8 million or 50.2% increase from the level maintained at December 31, 2000. At December 31, 2001, R&G Financial's allowance represented approximately 0.91% of the total loan portfolio and 24.05% of total non-performing loans, as compared to 0.67% and 12.21% at December 31, 2000. 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. The following table sets forth an analysis of R&G Financial's allowance for loan losses during the periods indicated, of which $16.1 million is maintained against the Bank's loan portfolio at December 31, 2001: -25-
At and For the Year Ended December 31, -------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------ ------ ------ ------- (Dollars in Thousands) Balance at beginning of period $11,600 $8,971 $8,055 $6,772 $ 3,332 ------- ------- ------- ------ ------- Charge-offs: Residential real estate................... 72 38 17 73 13 Construction.............................. -- -- -- -- -- Commercial real estate.................... 1,090 468 353 -- 170 Commercial business....................... 2,899 1,539 1,548 1,485 480 Consumer.................................. 2,566 1,940 2,518 4,455 3,953 Other..................................... -- -- 4 -- 761 ------- ------- ------- ------ ------- Total charge-offs....................... 6,627 3,985 4,440 6,013 5,377 ------- ------- ------- ------ ------- Recoveries: Residential real estate................... -- -- -- -- 21 Commercial real estate.................... 11 80 69 -- 50 Commercial business....................... 131 381 332 20 32 Consumer.................................. 382 402 429 312 344 Other..................................... -- -- -- -- 2,000 ------- ------- ------- ------ ------- Total recoveries........................ 524 863 830 332 2,447 ------- ------- ------- ------ ------- Net charge-offs.............................. 6,103 3,122 3,610 5,681 2,930 ------- ------- ------- ------ ------- Transferred reserves from R&G Mortgage....... 806 -- -- -- -- ------- ------- ------- ------ ------- Allowance or loan losses acquired in Fajardo Federal acquisition.......... -- -- -- 364 -- ------- ------- ------- ------ ------- Provision for losses on loans................ 11,125 5,751 4,525 6,600 6,370 ------- ------- ------- ------ ------- Balance at end of period..................... $17,428 $11,600 $ 8,971 $8,055 $ 6,772 ======= ======= ======= ====== ======= Allowance for loan losses as a percent of total loans outstanding......................... 0.91% 0.67% 0.55% .74% .87% ======= ======= ======= ====== ======= Allowance for loan losses as a percent of non-performing loans...................... 24.05% 12.21% 15.11% 17.92% 22.34% ======= ======= ======= ====== ======= Ratio of net charge-offs to average loans outstanding............................... 0.32% 0.17% .25% .55% 0.40% ======= ======= ======= ====== =======
-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, ------------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------- 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.......... $2,496 14.32% $ 1,278 11.02% $1,419 15.82% Construction..................... 800 4.59 432 3.72 186 2.07 Commercial real estate........... 7,371 42.29 4,880 42.07 3,258 36.32 Commercial business.............. 2,253 12.93 1,321 11.39 1,063 11.85 Consumer......................... 4,508 25.87 3,689 31.80 3,045 33.94 ------- ------ ---------- ------ ------ ------ Total............................ $17,428 100.00% $ 11,600 100.00% $8,971 100.00% ======= ====== ========== ====== ====== ====== December 31, ---------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------- Percent of Loans Percent of in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in Thousands) Residential real estate................... $1,272 15.79% $593 8.76% Construction.............................. 46 0.57 7 0.10 Commercial real estate.................... 2,655 32.96 1,386 20.47 Commercial business....................... 1,033 12.82 806 11.90 Consumer.................................. 3,049 37.86 3,980 58.77 ------ ------ ------ ------ Total..................................... $8,055 100.00% $6,772 100.00% ====== ====== ====== ======
-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, 2001, R&G Mortgage held GNMA and FHLMC mortgage-backed securities with a fair value of $31.1 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 mortgage-backed securities with a fair value of $389.6 million, which are classified as available for sale. At December 31, 2001, R&G Mortgage's CMO interest-only residuals and interest only strips, which are classified as available for sale, had an amortized cost of $9.0 million and a fair value of $8.3 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, 2001, the Bank's securities portfolio consisted of $39.5 million of securities held for investments, consisting of $8.1 million of tax-free mortgage-backed securities, $7.7 million of other mortgage backed securities, and $23.7 million of Puerto Rico Government obligations and other securities. In addition, at December 31, 2001, the Bank had a securities portfolio classified as available for sale with a fair value of $1.7 billion, consisting of $133.2 million of tax-free mortgage-backed securities, $709.9 million of FHLMC and FNMA mortgage-backed securities, $66.1 million of FHLB stock, $234.8 million of CMOs certificates, $7.1 million of CMO interest-only residuals and interest only strips, $54.5 million corporate debt obligations and $478.2 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 holds trading securities. At December 31, 2001, securities for trading held by the Bank totaled $62.9 million, consisting of FHLMC mortgage-backed securities. At December 31, 2001, $440.9 million or 20% 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, except as otherwise indicated in the footnotes below.
December 31, ---------------------------------------------------------------------------- 2001 2000 ----------------------------------- -------------------------------------- Weighted Weighted Carrying Average Carrying Average Value Market Value Yield Value Market Value Yield -------- ------------ --------- -------- ------------ -------- (Dollars in Thousands) Mortgage-backed securities: GNMA (1) Due within one year........... $ -- $ -- --% $ 2 $ 3 10.00% Due from one-five years....... -- -- -- -- -- -- Due from five-ten years....... 7,180 7,111 5.87 8,865 8,605 5.79 Due over ten years............ 37,043 37,092 6.27 1,845 1,766 6.17 FNMA Due within one year........... -- -- -- -- -- -- Due from one-five years....... -- -- -- -- -- -- Due from five-ten years....... -- -- -- -- -- -- Due over ten years............ 7,594 7,910 7.06 8,947 9,145 7.08 FHLMC Due within one year........... -- -- -- -- -- -- Due from one-five years....... -- -- -- -- -- -- Due from five-ten years....... -- -- -- -- -- -- Due over ten years............ 128 125 5.75 160 154 6.16 Investment securities: Puerto Rico Government obligations Due within one year......... -- -- -- -- -- -- Due from one-five years..... 12,691 12,731 4.99 1,948 1,948 5.88 Due from five-ten years..... 10,896 11,059 5.95 1,755 1,755 5.98 Due over ten years.......... -- -- -- -- -- -- Other Due within one year......... -- -- -- -- -- -- Due from one-five years..... 100 100 6.20 -- -- -- Due from five-ten years..... -- -- -- -- -- -- Due over ten years.......... -- -- -- -- -- -- -------- ------ ---- -------- ------- ---- Total securities held for investment................ $ 75,632 $76,128 6.05% $23,522 $ 23,376 6.34% ======== ======= ==== ======= ======== ====
(1) Includes $36.1 million held by R&G Financial at December 31, 2001. -29-
December 31, ---------------------------------------------------- 1999 ---------------------------------------------------- Weighted Carrying Value Market Value Average Yield -------------- ------------- --------------- (Dollars in Thousands) Mortgage-backed securities: GNMA Due within one year............................. $ -- $ -- --% Due from one-five years......................... 15 16 10.00 Due from five-ten years......................... 10,660 10,391 5.79 Due over ten years.............................. 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.............................. 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.............................. 189 180 5.58 Investment securities: Puerto Rico Government obligations Due within one year................................ -- -- -- Due from one-five years............................ 1,280 1,272 5.85 Due from five-ten years............................ 4,158 4,132 5.95 Due over ten years................................. -- -- -- Other Due within one year................................ -- -- -- Due from one-five years............................ -- -- -- Due from five-ten years............................ -- -- -- Due over ten years................................. -- -- -- Total securities held for investment.................................. ------------ ------------- -------- $28,687 $28,709 6.31% ============ ============= ========
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, ------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------------ Amortized Weighted Amortized Weighted Cost Fair Value Average Yield Cost Fair Value Average ---- ---------- ------------- -------- ---------- ------- (Dollars in Thousands) Mortgage-backed securities available for sale: GNMA Due within one year.................. $ -- $ -- --% $ -- $ -- --% Due from one-five years.............. 50 50 8.49 26 26 8.50 Due from five-ten years.............. 11,053 11,172 5.97 10,492 10,419 5.68 Due over ten years................... 513, 508 511,639 6.52 584,419 576,869 6.62 FNMA mortgage-backed securities Due within one year.................. -- -- -- -- -- -- Due from one-five years.............. -- -- -- -- -- -- Due from five-ten years.............. 538 549 6.50 634 634 6.50 Due over ten years................... 266,495 270,936 7.21 98,779 99,968 7.15 FHLMC mortgage-backed securities Due within one year.................. -- -- -- 13 13 9.00 Due from one-five years.............. 73 74 8.93 132 130 8.94 Due from five-ten years.............. 1,265 1,292 6.60 1,587 1,587 6.61 Due over ten years................... 435,662 437,026 6.74 434,865 437,227 7.26
-30- Collateralized mortgage obligations (CMO'S) Due within one year.................. -- -- -- -- -- --% Due from one-five years.............. -- -- -- -- -- -- Due from five-ten years.............. 9,497 9,562 6.00 -- -- -- Due over ten years................... 221,159 220,222 6.01 -- -- -- CMO residuals and other mortgage-backed securities Due within one year.................. -- -- -- -- -- -- Due from one-five years.............. 9,897 9,627 15.00 10,710 10,190 12.00 Due from five-ten years.............. 8,341 10,797 8.08 -- -- -- Due over ten years................... -- -- -- 10,688 13,037 8.08 Investment securities available for sale U.S. Treasury Due within one year.................. -- -- -- -- -- -- Due from one-five years.............. -- -- -- -- -- -- Due from five-ten years.............. -- -- -- -- -- -- Due over ten years................... -- -- -- -- -- -- U.S. Government & Agencies Due within one year.................. 9,600 9,807 5.78 8,500 8,446 5.48 Due from one-five years.............. 156,522 157,408 4.96 192,763 193,298 6.26 Due from five-ten years.............. 307,110 310,938 6.10 114,881 115,352 7.30 Due over ten years................... -- -- -- -- -- -- Corporate debt obligations Due within one year -- -- -- -- -- -- Due from one-five years 53,637 54,503 6.53 -- -- -- Due from five-ten years -- -- -- 5,097 5,202 6.80 Due over ten years -- -- -- -- -- -- FHLB stock............................. 66,077 66,077 5.20 45,973 45,973 7.30 ---------- ---------- ---- ---------- ---------- ---- $2,070,484 $2,081,679 6.42 $1,519,559 $1,518,371 6.96% ========== ========== ==== ========== ========== ==== Securities held for trading: GNMA certificates...................... $18,152 $18,152 5.80 $11,630 $12,038 7.28% FHLMC certificates..................... 73,687 75,796 7.08 -- -- -- ---------- ---------- ---- ---------- ---------- ---- $91,839 $93,948 6.84% $11,630 $12,038 7.28% ========== ========== ==== ========== ========== ====
-31-
December 31, ------------------------------------------------ 1999 ------------------------------------------------ Weighted Amortized Cost Fair Value Average Yield -------------- ---------- ------------- 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.................................... 570,749 563,533 6.62 FNMA mortgage-backed securities Due within one year................................... -- -- -- Due from one-five years............................... -- -- -- Due from five-ten years............................... 741 719 6.50 Due over ten years.................................... 110,855 109,705 7.15 FHLMC mortgage-backed securities Due within one year................................... -- -- -- Due from one-five years............................... 99 99 8.79 Due from five-ten years............................... 1,891 1,841 6.77 Due over ten years.................................... 14,586 14,036 6.87 CMO residuals and other mortgage-backed securities Due within one year................................... -- -- -- Due from one-five years............................... 8,886 8,886 12.00 Due from five-ten years............................... -- -- -- Due over ten years.................................... 11,823 13,886 8.07 Investment securities available for sale 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................................... -- -- -- Due from one-five years............................... 133,956 130,950 6.19 Due from five-ten years............................... 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............................... -- -- -- Due over ten years.................................... -- -- -- FHLB stock.............................................. 32,825 32,825 6.75 -------- -------- ----- $983,646 $970,869 6.75% ======== ======== ===== Securities held for trading: GNMA certificates....................................... $ 43,303 $ 43,564 5.27% FHLMC certificates...................................... -- -- -- -------- -------- ----- $ 43,303 $ 43,564 5.27% ======== ======== =====
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 -32- 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. 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 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, 2001, the Bank's CMOs, and interest-only securities and residuals, which had a fair value of $12.1 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 -33- 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 $874.5 million of certificates of deposit with balances of $100,000 or more, which amounted to 42.4% of the Bank's total deposits at December 31, 2001. 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, 2001 it held $154.2 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, ---------------------------------------------------------------------------------- 2001 2000 1999 Average Average Rate Average Average Rate Average Average Rate Balance Paid Balance Paid Balance Paid ------- ------------ ------- ------------ ------- ------------ (Dollars in Thousands) Passbook......................... $ 131,729 3.55% $ 113,660 3.73% $ 112,107 3.74% NOW and Super NOW accounts....... 188,545 3.75% 134,573 3.93 126,300 3.95 Checking......................... 43,621 -- 40,455 -- 41,128 -- Commercial checking(1)........... 165,541 -- 110,937 -- 111,146 -- Certificates of deposit.......... 1,289,193 5.98% 1,106,294 6.43 762,856 5.83 ---------- ---- ---------- ----- ---------- ------ Total deposits................ $1,818,629 4.89% $1,505,919 5.36% $ 1,153,537 4.65% ========== ==== ========== ===== =========== ======
- ------------------ (1) Includes $101.9 million, $91.8 million and $92.4 million of escrow funds of R&G Mortgage at December 31, 2001, 2000 and 1999, 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, 2001.
Amount -------------- (In Thousands) Certificates of deposit maturing: Three months or less........................................... $237,098 Over three through six months.................................. 220,142 Over six through twelve months................................. 153,226 Over twelve months............................................. 264,029 -------- Total..................................................... $874,495 ========
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, 2001, R&G Financial had $1.4 billion of reverse repurchase agreements outstanding, $323.5 million of which represented borrowings of R&G Mortgage. At December 31, 2001, the weighted average interest rate on R&G Financial's reverse repurchase agreements amounted to 3.47%. 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, 2001, R&G Financial was permitted to borrow under such Warehouse Lines up to $253.4 million, $162.0 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, 2001, 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, 2001, the weighted average interest rate being paid by R&G Financial under its Warehouse Lines amounted to 2.98%. 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 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, 2001, the Bank had access to $1.2 billion in advances from the FHLB of New York, and had 14 FHLB of New York advances aggregating $464.1 million outstanding as of such date, which mature at various dates commencing in April 2, 2002 through March 2, 2011 and have a weighted average interest rate of 4.87%. At December 31, 2001, the Bank had pledged specific collateral aggregating $643.9 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. -36- 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, -------------------------------------------- 2001 2000 1999 ---------- -------- -------- (Dollars in Thousands) R&G Mortgage: Securities sold under agreements to repurchase: Average balance outstanding ....................................... $ 425,189 $450,443 $365,177 Maximum amount outstanding at any month-end during the period .......................................................... 472,782 499,626 493,527 Balance outstanding at end of period .............................. 402,835 494,353 493,527 Average interest rate during the period ........................... 5.24% 6.69% 5.52% Average interest rate at end of period ............................ 3.47% 6.92% 6.15% Notes Payable: Average balance outstanding ....................................... $ 181,767 $117,085 $127,565 Maximum amount outstanding at any month-end during the period .......................................................... 238,475 143,114 154,922 Balance outstanding at end of period .............................. 180,565 85,030 56,907 Average interest rate during the period ........................... 4.38% 6.41% 6.67% Average interest rate at end of period ............................ 3.03% 8.06% 6.89% The Bank: FHLB of New York advances: Average balance outstanding ....................................... $ 444,422 $438,276 $222,575 Maximum amount outstanding at any month-end during the period .......................................................... 523,000 510,500 384,000 Balance outstanding at end of period .............................. 464,125 505,000 384,000 Average interest rate during the period ........................... 5.36% 6.34% 5.31% Average interest rate at end of period ............................ 4.87% 6.42% 5.75% Securities sold under agreements to repurchase: Average balance outstanding ....................................... $ 714,922 $392,755 $187,857 Maximum amount outstanding at any month-end during the period .......................................................... 1,073,484 430,852 327,009 Balance outstanding at end of period .............................. 1,073,484 430,852 327,009 Average interest rate during the period ........................... 4.41% 6.47% 5.77% Average interest rate at end of period ............................ 3.50% 6.60% 5.73% Notes Payable: Average balance outstanding ....................................... $ 51,695 $ 69,663 $ 84,463 Maximum amount outstanding at any month-end during the period ............................................... 67,410 76,263 84,100 Balance outstanding at end of period .............................. 27,270 53,828 75,800 Average interest rate during the period ........................... 5.01% 6.03% 6.53% Average interest rate at end of period ............................ 3.11% 6.75% 6.00%
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, 2001, the Bank's Trust Department administered trust accounts with aggregate assets of $64.5 million as of such date. In -37- addition, during the year ended December 31, 2001, the Bank's Trust Department sold $104.5 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. BROKER-DEALER SERVICES Beginning in the first quarter of 2002, R&G Financial's wholly-owned licensed broker-dealer subsidiary, R-G Investments Corporation commenced operations. PERSONNEL As of December 31, 2001, R&G Financial (on a consolidated basis) had 1,522 full-time employees and 83 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. 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 -38- 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 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. -39- 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." Until January 1, 2001, the Master Purchase Agreement provided 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 were sold. Effective January 1, 2001, the Bank retains servicing rights on loans sold or securitized into mortgage backed securities. R&G Mortgage also 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 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 -40- 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. 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 -41- "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, 2001. 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. 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 -42- 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, 2001, 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 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. -43- 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, 2001, the Bank had credited $11.6 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, 2001, the legal lending limit for the Bank under these provisions was approximately $29.9 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. The legal lending limit for the Bank for loans secured by collateral with at least 25% more than the amount of the loan was approximately $65.9 million. The Bank's maximum extension of credit to any one borrower was $35.9 million at December 31, 2001, which is fully secured with collateral with a "loan to value" ratio of less than 80%. There are no restrictions on the amount of loans to subsidiaries of banks 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 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 -44- 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. 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 -45- 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. In 1996, the Financing Board eliminated the regulations that set forth the maximum interest rates that could be charged on non-federal government guaranteed loans. -46- ITEM 2: PROPERTIES The Company's principal executive office is located at 280 Jesus T. Pioero Avenue, Hato Ray, San Juan, Puerto Rico 00918. At December 31, 2001, we operated through our subsidiaries a total of 65 offices, mostly through leased facilities. All of our subsidiaries except Continental Capital Corp., conduct business in Puerto Rico. R-G Premier Bank of Puerto Rico operates from 25 offices, R&G Mortgage operates from 29 offices, The Mortgage Store of Puerto Rico, Inc. operates from 7 offices, Home & Property Insurance Corporation operates from 1 office, R-G Investments Corporation operates from 3 offices and Continental Capital Corp. operates from 4 offices located in the States of New York and North Carolina. 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 82 and 83 of the Registrant's 2001 Annual Report. ITEM 6: SELECTED FINANCIAL DATA. The information required herein is incorporated by reference from pages 31 to 32 of the Registrant's 2001 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 46 of the Registrant's 2001 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required herein is incorporated by reference from pages 40 to 44 of the Registrant's 2001 Annual Report. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required herein is incorporated by reference from pages 47 to 80 of the Registrant's 2001 Annual Report. -47- ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required herein is incorporated by reference from pages 2 to 5 and 6 of the Registrant's Proxy Statement dated March 31, 2002 ("Proxy Statement"). ITEM 11: EXECUTIVE COMPENSATION. The information required herein is incorporated by reference from pages 9 to 10 and 11 to 12 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 7 to 8 of the Registrant's Proxy Statement. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required herein is incorporated by reference from pages 12 to 13 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, 2001 and 2000. Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. -48- (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 2.1 Amended and Restated Agreement and Plan of Merger by and between R&G Financial Corporation, the Bank and R-G Interim Premiere Bank, dated as of September 27, 1996(1) 2.2 Agreement and Plan of Reorganization among R&G Financial Corporation , R&G Holdings Corporation, The Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of December 19, 2001(2) 3.1.0 Certificate of Incorporation of R&G Financial Corporation (3) 3.1.1 Certificate of Amendment to Certificate of Incorporation of R&G Financial Corporation (2) 3.1.2 Amended and Restated Certificate of Incorporation of R&G Financial Corporation (4) 3.1.3 Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (5) 3.1.4 Certificate of Resolutions designating the terms of the Series A Preferred Stock (6) 3.1.5 Certificate of Resolutions designating the terms of the Series B Preferred Stock (7) 3.1.6 Certificate of Resolutions designating the terms of the Series C Preferred Stock (12) 3.1.7 Certificate of Resolutions designating the terms of the Series D Preferred Stock (13) 3.2 Bylaws of R&G Financial Corporation (3) 4.0 Specimen of Stock Certificate of R&G Financial Corporation (3) 4.1 Form of Series A Preferred Stock Certificate of R&G Financial Corporation (9) 4.2 Form of Series B Preferred Stock Certificate of R&G Financial Corporation (10) 4.3 Form of Series C Preferred Stock Certificate of R&G Financial Corporation (11) 4.4 Form of Series D Preferred Stock Certificate of R&G Financial Corporation (14) 10.2 Master Custodian Agreement between R&G Mortgage and the Bank dated February 16, 1990, as amended on June 27, 1996(3) 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(3) 10.4 Data Processing Computer Service Agreement between R&G Mortgage and R-G Premier Bank dated December 1, 1994(3) 10.5 Securitization Agreement by and between R&G Mortgage and the Bank, dated as of July 1, 1995(3) 10.6 R&G Financial Corporation Stock Option Plan(3)(*) 13.0 2001 Annual Report to Stockholders 21.0 Subsidiaries of the Registrant - Reference is made to "Item 1 Business" for the required information (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 Registrant's Current Report of Form 8-K filed with the SEC on December 20, 2001. (3) 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. (4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on November 19, 1999. (5) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on June 12, 2001. -49- (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 on Form S-3 (File No. 333-55834), filed with the SEC on March 7, 2001. (9) 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. (10) 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. (11) Incorporated by reference from the Registrant's Registration Statement on Form S-3 (File No. 333-55834), filed with the SEC on February 16, 2001. (12) Incorporated by reference from the Registrants' Form 10-K filed with the SEC on April 14, 2001. (13) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on March 7, 2002. (14) Incorporated by reference from the Registrant's Registration Statement on Form S-3 (File No. 333-81214), filed with the SEC on January 22, 2002. (*) Management contract or compensatory plan or arrangement. (3)(b) Reports on Form 8-K. The Registrant filed a Form 8-K on December 19, 2001 with respect to its execution of an Agreement and Plan of Reorganization with The Crown Group, Inc. and its wholly owned subsidiary, Crown Bank, a Federal Savings Bank. -50- 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 March 28, 2002 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 March 28, 2002 - -------------------------------------------- Victor J. Galan Chairman of the Board and Chief Executive Officer (principal executive officer) /s/ Ramon Prats March 28, 2002 - -------------------------------------------- Ramon Prats President and Director /s/ Joseph R. Sandoval March 28, 2002 - -------------------------------------------- Joseph R. Sandoval Senior Vice President and Chief Financial Officer (principal financial and accounting officer) /s/ Ana M. Armendariz March 28, 2002 - -------------------------------------------- Ana M. Armendariz Director and Treasurer /s/ Enrique Umpierre-Suarez March 28, 2002 - -------------------------------------------- Enrique Umpierre-Suarez Director and Secretary /s/ Victor L. Galan Fundora March 28, 2002 - -------------------------------------------- Victor J. Galan Fundora Director -51- /s/ Pedro Ramirez March 28, 2002 - -------------------------------------------- Pedro Ramirez Director /s/ Laureno Carus Abarca March 28, 2002 - -------------------------------------------- Laureno Carus Abarca Director /s/ Eduardo McCormack March 28, 2002 - -------------------------------------------- Eduardo McCormack Director /s/ Gilberto Rivera-Arrega March 28, 2002 - -------------------------------------------- Gilberto Rivera-Arreaga Director /s/ Benigno R. Fernandez March 28, 2002 - -------------------------------------------- Benigno R. Fernandez Director /s/ Ileana M. Colon-Carlo March 28, 2002 - -------------------------------------------- Ileana M. Colon-Carlo Director /s/ Roberto Gorbea March 28, 2002 - -------------------------------------------- Roberto Gorbea Director -52- EX-13.0 3 g75102ex13-0.txt 2001 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.0 Service: Our greatest challenge, our biggest opportunity 2001 ANNUAL REP0RT TABLE OF CONTENTS Financial Highlights 1 Profile 3 Mission 4 Letter to Stockholders 5 Service is Results 9 Service is Products 12 Service is Technology 14 Service is Location 16 Service is People 19 Board of Directors 25 Affordable Housing 26 Service to Our Communities 27 Selected Consolidated Financial and other data of R-G Financial 31 Report of Independent Accountants 47 Stockholder Information 82
R-G Plaza 280 Jesus T Pinero Ave., San Juan, Puerto Rico 0091 8 Tel. (787) 758-2424 We dedicate this Annual Report to Service: Our biggest challenge, our greatest opportunity. For the past 29 years we have succeeded in many areas; financial performance, product innovation, sales success, return to stockholders and social responsibility, a fact that has proven to be good business and is made possible only by the people behind us. The quality of customer service is key to success, it is determined by the attitude, the know-how, the caring and commitment of over 1,500 people that are part of the R-G team. Service is the value-added component of our institution. FINANCIAL HIGHLIGHTS (Dollars in Thousands, except for per Share Data)
% increase (decrease) vs2000 2001 2000 1999 1998 Loan Production 43% 2,473,168 1,729,373 1,977,322 1,426,069 Gross Revenues 21 379,618 314,911 233,953 180,767 Net Earnings 51 65,971 43,633 41,335 34,034 Total Assets 32 4,664,394 3,539,444 2,911,993 2,044,781 Return on Assets 22 1.63% 1.34% 1.72% 1.95% Servicing Portfolio 9 7,224,571 6,634,059 6,177,511 4,827,798 Efficiency Ratio (7) 51.95% 55.99% 54.39% 48.55% Spread Income 49 97,045 64,987 56,578 43,973 Fee Income 37 109,047 79,310 70,811 56,470 Shareholders' Equity 49 459,121 308,836 269,535 221,162 Common Shareholders' Equity per Share 23 10.07 8.16 6.79 5.99 Return on Common Equity 15 20.77% 18.00% 20.23% 21.32% Diluted Earnings per Common Share 41 1.83 1.30 1.28 1.12 Cash Dividends Declared per Common Share 30 0.264 0.203 0.149 0.111 Market Value per Share 20 17.14 14.25 11.50 21.00
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 $4.7 billion in assets and operates 61 banking and mortgage banking branches in 36 locations in Puerto Rico and 4 locations in the United States. 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., Home Property Insurance Corp., and R-G Investments Corporation, all 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 on 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 $7.2 billion servicing portfolio, and is growing origination's 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, $600 million in its commercial real estate and construction portfolio, $92 million in commercial business loans and leases, and $181 million in personal loans and credit cards. Its $2.3 billion investment portfolio consists primarily of tax-exempt mortgage-backed securities and U.S. Government agency securities. Approximately 1,500 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," "RGFCN," and "RGFCM," respectively. MISSION 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. We will provide competitive prices, a variety of loan programs, and service which is prompt, courteous and responsive to the unique characteristics of every customer. LETTER TO STOCKHOLDERS For many reasons, 2001 was an outstanding year for R-G. The Company's recurrent earnings and dividend distribution reached record highs. Strategic initiatives added strength and depth to the Company. At the same time, we increased our loan portfolio, strengthened our balance sheet, and improved the efficiency of our operation, while increasing our total assets to close to the $5 billion mark. Our total dedication to service our clientele was also expanded across different channels of distribution in our organization. We expanded our branches, and introduced new financial and technological products that provided us with better tools to service our customers. During our continuous evaluation of the degree of service provided to our customers, our ratio of customer satisfaction rose to 99%, a figure that we consider representative of the quality service that we have targeted for our operation. This is the reason why we are dedicating this Annual Report to Service, the support of our operation. In addition, we will continue changing and improving our operation to continually meet the needs of our customers in the most efficient manner, maintaining the quality of our services through creativity and innovation. During 2001, we optimized the personal service provided to our clients by improving training, cross-selling, and the integration of all our services and products. We increased our investment in advertising and marketing with the purpose of improving our penetration in the different markets that we service. This additional investment strengthened our distribution channels. We also reintroduced real time Internet services combined with Imaging and Bill Payments, a real technological breakthrough in banking services. We also plan to diversify our operation through expansion to the Continental United States, via the impending acquisition of a Central Florida-based Crown Bank, F.S.B. The acquisition is subject to regularly approval. We expect to close this transaction during the second quarter of 2002. Upon closing, we plan to consolidate our mortgage banking operations in New York and North Carolina with our new Florida banking operations, emulating our successful strategy in Puerto Rico. This acquisition will increase our total assets by about $700 million, and our servicing portfolio by about $3 billion, with a total of 15 banking branches in Florida, and four financial centers located in California, Tennessee, Arizona and West Palm Beach. Crown Bank's servicing platform will allow us to continue expanding our servicing business in the U.S. while opening new mortgage banking offices across Florida and in other markets with existing financial centers. This U.S. banking operation opens a new channel for delivery of our services to the mainland, with the same quality service we provide to our clients in Puerto Rico. The integration of the new bank with our existing mortgage banking business will create a core operation that will support future additional expansion in the Eastern United States, penetrating markets with strong Hispanic populations and strong demand for residential construction. During the year, we had record volumes of residential mortgage loans and expanded commercial and construction lending, as well as consumer lending, primarily personal loans and credit cards. All signs indicate that 2002 will be a good year for developers, contractors, and construction companies in Puerto Rico. Billions in public and private sector construction investment is expected in 2002, helping the construction industry maintain its role as an important economic backbone and one of Puerto Rico's most dynamic sectors. We expect continued low interest rates, and high demand for housing. The newly installed Puerto Rico Government has announced a new expedited process for granting permits on new construction projects, providing additional support to new housing investments. According to a recent housing study conducted by the Puerto Rico Banking Association, housing demand stands at 20,640 units a year, of which 10,000 (46.6%) correspond to social interest housing, and 11,000 (53.4%) to medium and high-income housing, commonly referred to as "market" housing. The projected increases in new construction will result in additional future growth of the Puerto Rico mortgage market which during 2001 exceeded $7.5 billion. We continue striving for growth, profitability and enhancing stockholders' value by improving the fundamentals of our business. A large part of R-G's success can be attributed to the establishment of sound policies followed by effective controls. Our lines of businesses are strongly and effectively supported by a diverse group of tenured and dedicated professionals. Through their insight, our professionals are able to continuously provide independent evaluations of our total corporate objectives. The results are directly reflected in the quality of our assets and ultimately in earnings of the Company. There is no question that R-G is a strong franchise with a proven track record. Perhaps what you will find most interesting is the story behind the numbers, a glimpse at the details that drive R-G's success and a view of the executive team that makes our business model work. We have tried to provide you with an inside view of our operation with the rest of this Annual Report. I would like to leave you with one number to consider: 1,500. This is the number of dedicated R-G's employees who each and every day give their best to our company in order to guarantee its continued success. I want to thank each and every one of our employees, who are just as committed as the entire management team in ensuring that R-G remains a leader in financial services. 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. Thanks to our diverse business and talented team members, who are committed to achieve record results for 2002. All of us at R-G look forward to adding value to our investment as shareholders today and tomorrow. We are committed to improving returns for our stockholders as a direct result of the quality service provided to our customers and associates. We're about to enter our third decade of service. Thirty years of continued service with innovative products, advanced technology and outstanding people. That is what has made us grow and become the Company we are today. Victor Galan Chairman of the Board and CEO We're not in the money business. We're in the service business. That is key to superior financial performance. WHAT IS SERVICE: Service means different things to different people. It may be measured in time, efficiency, costs, relationships or delivery. These are some of the things we have heard. "IT'S THE TIME I SPEND IN THE BANK ..." "..THE RESPECT, THE FRIENDLINESS, THE WAY PEOPLE TREAT ME... THEIR GENUINE CONCERN WITH MY SITUATION." "..DEALING WITH KNOWLEDGEABLE PEOPLE. ASKING QUESTIONS AND GETTING ANSWERS." "HOW MUCH I CAN DO IN ONE PLACE. THAT SAVES ME TIME AND MONEY". " EXPERIENCE AND DILIGENCE. TAKING A HANDS-ON APPROACH TO MY PROBLEMS". SERVICE IS RESULTS Outstanding service leads to outstanding results. Thanks to the strategic combination of our diverse businesses and talented team members, we have achieved record results in 2001: - - $66.0 million net income - - 20.77% return on equity - - $4.7 billion in total assets - - 1.63% return on assets - - 40 loan production and banking offices located in Puerto Rico and the US - - Record internal residential mortgage loan production of $1.8 billion; total loan production of $2.5 billion - - $7.2 billion servicing portfolio Results in Earnings & Revenues - - Earnings for 2001 rose to a record $66.0 million, increasing 51% from 2000 earnings of $43.6 million. - - On a per share basis (diluted), R-G Financial earned $1.83 in 2001, compared to $1.30 in 2000. - - Total gross revenues amounted to $379.6 million, compared to $314.9 million for 2000. - - Net revenues after deducting cost of interest were $206.1 million, compared to $144.3 million in 2000. - - Net interest income, totaling $97.0 million for 2001, was up by 49% from the 2000 level. - - Other revenues, consisting primarily of fee income from the origination, sale and servicing of loans, banking and insurance services, grew 37% to $109.0 million in 2001 from $79.3 million in 2000. - - Servicing income increased to $ 33.9 million in 2000 from $30.8 million in 2001, a 10% increase. Results in Deposits & Assets - - Deposits increased by 23% to $2.1 billion, from $1.7 billion in 2000. - - Total assets grew to a record $4.7 billion and our servicing portfolio increased to a record $7.2 billion. As a result, total assets under administration, including our servicing portfolio, increased to a record $11.9 billion during 2001, rising 17% from the previous year. - - Average per branch deposit size increased 18% to $76.3 million in 2001 from $64.9 million in 2000. Our average per branch deposit size exceeds the average per branch deposits of institutions in Puerto Rico. - - Core deposits, primarily consisting of saving and direct deposit accounts, represented 57% of our total deposits (also above the average for the banking industry in Puerto Rico). Brokered deposits were only 7.5% of our total deposits. - - Liquid assets constituted 33.8% of our total assets at year-end, even though we closed new loans totaling $2.5 billion during the year. Growth & Dividends - - Compounded annual growth rate for the period 1981-2001 was 36.9%, and 32.6% 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 $178 million and increased assets by $3.6 billion, representing a total growth of 170% in capital and 343% in assets, while paying dividends to our common stockholders in the amount of $24 million. - - Assets grew by $1.1 billion or 32% during 2001 to a record $4.7 billion. This growth was financed by a $385 million increase in deposits, a $569 million increase in repurchase agreements, a $57 million increase in lines of credit with banks and $99 million capital raised during the year through preferred and common stock offerings. - - We increased dividends to $ 0.26 per share from $0.20 in 2000. For the quarter ended December 31, 2001, the dividend was increased to $0.0765 per share on an annual basis, a 25% annualized increase from the previous quarterly dividend. - - Shareholders' equity of $459.1 million as of December 31, 2001 was up 49% from $308.8 million in 2000. - - Core capital represented 9.81% of our total assets, and risk-based capital represented 18.Ol% (on a consolidated basis), in each case, substantially exceeding the minimums required by our regulators. - - We strengthened our credit loss reserves during the year, increasing the reserve for loan losses to $17.4 million, a 50% increase from $11.6 million the previous year. Reserves approximate 82% of total non-performing loans as of December 31, 2001, excluding our residential loan portfolio where losses have historically been minimal. - - Charge-offs to total average loans outstanding continued to be minimal in 2001, amounting to 0.32%. The provision for loan losses was 182% of net charge-offs for the year. - - At year-end, our unused lines of credit (including lines of credit with the Federal Home Loan Bank) totaled $852 million. Product Portfolio R-G's loan production includes the areas of residential and commercial mortgage lending, consumer and business lending. In 2001 we increased our portfolio of loans and our revenues in every one of these areas: - - Loan production reached $2.5 billion in 2001. - - Our residential, commercial and construction mortgage internal loan originations constituted approximately 20% of the market, based on an estimated total mortgage market of $7.8 billion in Puerto Rico last year. - - Our residential loan portfolio at the end of 2001 totaled $1.4 billion (which excludes certain significant loan securitizations during the year), a 39% increase from $1.0 billion in 2000. The average yield on the portfolio for 2001 was 6.75%. This portfolio included $1.4 billion of residential first mortgages and $33.3 million of second mortgages. - - Outstanding construction loans grew 83% to $134.3 million at year-end from $73.5 million in 2000. Commitments for future funding were $92.9 million at December 31, 2001. - - Our commercial loan portfolio, including commercial mortgages and leases, increased to $465.1 million at year-end, an increase of 28% from the previous year. 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 loan portfolio, which includes collateralized consumer loans and credit cards, amounted to $181.2 million at the end of 2001. This portfolio generated an average yield of 11.23%, which improved the average return of our total portfolio and our spread income. - - We expanded our servicing portfolio to 113,070 loans with a total balance of $7.2 billion, an increase of $590.5 million or 9% from 2000. - - Our securities portfolio increased by 45% in 2001, growing to $2.3 billion from $1.6 billion in 2000. These investments represented 48% of total assets as of December 31, 2001, and with a yield of 6.32%, generated revenues of $113.7 million. Most of these securities are tax-free federally guaranteed bonds and GNMA's. SERVICE IS PRODUCTS The quality of our customer service is our single biggest challenge and our single biggest opportunity. As a diversified financial services company providing banking, mortgage, investment and insurance products, we offer the full gamut of financial services required by our customers in one stop when visiting any of our financial centers. We continue expanding the different financial products offered to our clients in the areas of bank accounts and certificate of deposits, as well as offering new alternatives in our mortgage and consumer products. Our Consumer Department offers personal loans, credit cards, and secured personal loans, as well as reserve accounts and electronic services in ATM machines and merchant accounts. The approval of consumer loans is done on an hourly basis using electronic scoring systems. Our clients receive personalized services through our Trust and Private Banking divisions. Our customers can now satisfy all their banking, investment and insurance needs under one umbrella as a result of our new securities broker-dealer subsidiary and our already existent insurance division. Our Insurance division offers life, credit life and property insurance. We provide electronic and banking services to our customers via telephone banking or Internet. When accessing our Internet, customers have, on one screen, all their banking relationships with R-G. This includes all their products with R-G, from their saving accounts activity, the maturity of their certificates of deposit, or the balance of their mortgage loan or credit card. Transfer of funds, ordering new checks and placing stop payments on any given check can be made via our Internet Banking Services. Our Telemarketing Department directs and orients our customers in fulfilling their need for financial products, primarily on new loan applications through the selection of the best mortgage product based on a thorough analysis of their personal requirements. We also provide electronic telemarketing services via phone or internet through a separate group of professionals. Our imaging system generates copies of monthly checks issued to all our clients, which are mailed with monthly statements of account and are also available via internet. We have introduced a new statement of account that centralizes our customers' banking relationships with us. The statement is also available to our clients via Internet. We also provide free Bill Payment services via Internet. Our Commercial Loan Department tends to all the different needs of our commercial clients, including development and construction loans, commercial mortgage and business loans, and direct lines of credit or working capital loans and equipment leases. This diversity of products and services, together with the physical location of our branches and the professional services provided by our associates, give us the competitive advantage to support the future growth of our operation by increasing our customer base while retaining satisfied clients. Our officers have all the necessary tools for the best quality service in banking. At the click of a button you get your total banking relationships with R-G. SERVICE IS TECHNOLOGY Total instant banking at the service of our customers via internet, phone or at all our physical locations. INTERNET BANKING All your banking relationships with R-G in one consolidated statement of account by internet. Apply for a residential mortgage loan. Make bill payments via internet, including your mortgage payments to R-G. Ask for Trust services and open your IRA accounts. Keep up with your investments. Print and see images of paid checks. SERVICE IS LOCATION Even though internet and on-line banking continue to grow, location still influences consumers decisions on where to do banking. During 2002, we have and will continue to increase branch availability, with strategic locations and state-of-the-art systems and technology. - - At the close of the year, we had 25 branches of R-G Premier Bank, 29 branches of R-G Mortgage, and 7 branches of Mortgage Store (a subsidiary of R-G Mortgage), each working in tandem in 36 different locations in Puerto Rico. - - We also had 4 offices of Continental Capital located in New York and North Carolina. - - We have a total of 1,085 employees assigned to branches, loan origination and processing, 61 to operations, 260 to loan administration, and the balance to general administrative and finance, which results in a total of 1,522 employees. - - A new banking branch opened in Aguadilla in January 2001, a second branch in Mayaguez in July 2001 and our Los Colobos branch in Rio Grande in March 2002, increasing our banking branches to 26. - - During 2001 we remodeled and expanded our existing location in our Betances Street branch in Bayamon. - - We now have three (Hato Rey, San Patricio and Colobos) full financial centers, in which we also offer securities and insurance products. - - We opened new branches in Aguadilla, Mayaguez, Rio Piedras, Humacao and Guayama increasing total Mortgage branches to 36 in Puerto Rico. - - We have already begun the construction of the expansion of our headquarters in Hato Rey, which will add a second office tower of 85,000 sq. ft. with parking capacity for 330 cars. - - Our expansion program calls for seven additional branches for 2002 and 2003 (of which two are in the process of construction) in Arecibo, Cayey, Plaza Las Americas, Plaza Carolina, Ponce, Hato Rey and Cupey, which will increase our total bank branches to 33 of which 9 will operate as full financial centers. Rendering of our new financial center in Los Colobos Shopping Mall. Similar centers are under construction or development for Arecibo, Cayey and Ponce, projected to be operating during 2002. Investment and banking center to he located in shopping centers, presently under construction in Plaza Carolina and Plaza Las Americas, with special walk-in teller machines to allow us to provide banking services during extended hours. PUERTO RICO [MAP OF PUERTO RICO] R-G PREMIER BANK Hato Rey* Aguadilla Altamira Arecibo Bayamon Bayamon Este Bayamon Plaza del Sol Caguas Carolina Fajardo 1 Fajardo 11 Guaynabo Laguna Gardens Manati Mayaguez 1 Mayaguez 11 Norte Shopping Center Plaza Carolina Plaza lnteramericana Plaza Las Americas Ponce San Patricio* Santurce Trujillo Alto Vega Baja R-G MORTGAGE Hato Rey Aguadilla Altamira Arecibo Bayamon Bayamon Este Bayamon Plaza del Sol Caguas 1 Caguas 11 Carolina Fajardo 1 Fajardo 11 Guayama Guaynabo Humacao Laguna Gardens Manati Mayaguez 1 Mayaguez 11 Norte Shopping Center Plaza Carolina Plaza lnteramericana Plaza Las Americas Ponce Rio Piedras San Patricio Santurce Trujillo Alto Vega Baja MORTGAGE STORE Hato Rey Aguadilla Bayamon Caguas Hatillo Ponce Rio Grande NEW BRANCHES FOR 2002 AND 2003 Los Colobos* Arecibo* Cayey* Cupey Plaza Carolina 11* Plaza Las Americas 11* Ponce* Hato Rey* *Full financial centers US. EXPANSION Continental Capital NEW YORK Bayshore Huntington Station Woodhaven NORTH CAROLINA Charlotte Crown Bank FLORIDA Altamonte Springs Bayonet Point Cape Coral Casselberry Clearwater Dunedin Englewood Holiday Lake Worth Ocoee Orlando Oviedo St. Petersburg Sarasota Winter Park Crown Bank acquisition announced in December 2001 (which is subject to regulatory approval) will add 15 bank branches in Florida and commercial offices in California, Tennessee, Arizona and West Palm Beach. "Throw in an acquisition that brings the first retail banking operation on the mainland US, and you're looking at R-G Financial Corp.'s recipe for growth," Investors Business Daily February 28, 2002 SERVICE IS PEOPLE Our commitment to outstanding service begins with our people. They are the vehicle of our vision and the core of our culture. Great service comes from great people. And great service happens when people take personal ownership in the business and service they deliver. When our employees become pro-active in solving customer's problems. When they feel pride in belonging. As powerful and valuable as our brand is, nothing defines it more than the people behind it. More than 1,500 people form the R-G Financial team, providing services to over 200,000 customers in R-G Premier Bank, R-G Mortgage, Mortgage Store and Continental Capital, in 40 locations combined. The quality of customer service has become key to every financial institutions' success. Becoming team players, working toward common goals with a clear vision are important factors we bear consistently in mind to continuously increase revenue and profitability. Ramon Prats President Even if we provide the branches, the products, the technology, the advertising and marketing support, it only works if our people deliver. Professionals at their best; conceiving how to improve and provide better service while increasing efficiency. Steven Velez, Mortgage Banking Ricardo Agudo, New Housing Ramon Perez, Loan Administration As powerful and valuable as our brand is, nothing defines it more than the people behind it. Joseph Sandoval, Chief Financial Officer Jean Francois Duniazet, Insurance Improving return for our shareholders as a direct result of providing quality service. Maria M. Rosales, Construction Lending Felipe Franco, Consumer Lending Peter Serralles, Securities Brokerage Mario Ruiz, Banking Hector Secola, Human Resources Victor Irizarry, Corporate and Chief Lending Officer BOARD OF DIRECTORS Top row from left to right: Gilberto Rivera Arreaga CPA/Esq., Executive Vice President of the National College of Business & Technology, post secondary institution with campuses in Bayamon and Arecibo, Puerto Rico. Laureano Carus Abarca Chairman of Alonso Carus Iron Works in Catano, Puerto Rico, manufacturers of metal products. Roberto Gorbea President & CEO of Lord Electric Company of Puerto Rico, Inc. Benigno R. Fernandez Senior Partner of Fernandez, Perez, Villariny & Co., CPA firm in Hato Rey, Puerto Rico Enrique Umpierre Suarez Secretary of the Board and Attorney in Private practice. Pedro Ramirez President & CEO of Empresas Nativas, Inc., a local real estate development firm. Second row from left to right: Ramon Prats Vice Chairman of the Board and President Ileana Colon Carlo Chief Administration and Financial Officer of McConnell & Valdes, legal counsels; Former Comptroller General of the Commonwealth of Puerto Rico. Eduardo McCormack President EMP Omega Corporation, fructose importers and distributors in P.R. Former Vice President Bacardi Corporation. Ana M. Armendariz Treasurer of the Board and Senior Vice President of Finance - R&G Mortgage Victor L. Galan Vice President Loan Production Marketing and Business Development - R&G Mortgage Standing: Victor J. Galan Chairman of the Board and Chief Executive Officer SERVING OUR SHAREHOLDERS WHILE CREATING STOCKHOLDER VALUE. AFFORDABLE HOUSING In accordance with the last study of Housing Demand in Puerto Rico it is estimated that of the 20,000 annual housing units demanded in our market, approximately 47% are considered "out of market demand." Any unit below a selling price of $70,000 is considered as "out of market" in the current guidepost for social interest demand. One of our most important commitments with Puerto Rico is our involvement with the assistance and promotion of the development of social interest projects, and our dedication and work with local non-profit institutions to provide a better quality of life, and enhance our culture and values in areas such as health, community work, sports and arts. - - Over 11 years as part of the Muscular Distrophy Association. - - Part of the Puerto Rico Community Foundation dedicated to sponsoring Social Interest Housing. - - Participating in the construction of more than 3,000 social housing units in the Affordable Housing Program of the Government of Puerto Rico, with approximately $200 million in subsidized interest cost. - - Providing construction financing for the development of social interest projects. - - Participating with the Caguas Municipal Government in the establishment of a revolving loan fund that provides technical assistance and financing in housing and economic development to low and moderate sectors in the Caguas region. - - Sponsoring of charitable institutions such as the "Ivan Rodriguez Foundation" to promote sports in our community. - -Supporting groups such as the Salvation Army. - - Working with the Federal Home Loan Bank of New York in the allocation of subsidies to assist low-income families in acquiring their own homes. - - Allocating a portion of our investment portfolio to the development of Affordable Housing. - - Working with mare than 40 non-profit organizations dedicated to social work. - - Sponsoring Community Development Services and Community Outreach. - - Constant support of artists who exhibit their work in our headquarters' in Hato Rey. VILLAS DE RIO BLANCO/NAGUABO, PUERTO RICO Affordable housing project for moderate income families with a maximum selling price of $70,000. - - Interim and permanent financing. - - 195 units with a $15.7 million sellout. BORINQUEN VALLEY/CAGUAS, PUERTO RICO Affordable housing project for moderate income families with a maximum selling price of $70,000. Interim and permanent financing. - - 500 units with a $36.7 million sellout. SERVICE TO OUR COMMUNITIES Conference "How to buy your home" in Ponce, Puerto Rico. Committed to the development of community based organizations, hosting the organization of a network of groups as part of the Community Reinvestment Act (CRA) Donation for the Salvation Army. Sponsoring art exhibitions in our corporate headquarters, R-G Plaza Building. Stockholder information Corporate Offices R-G Plaza 280 JT Pinero Ave. San Juan, P.R. 00918 (787) 758-2424 US Operations 290 Broad Hollow Rd. 2nd Floor Melville, New York 11747 (631) 549-8188 Annual Meeting April 30, 2002 10:00 a.m. Atlantic time Ritz Carlton San Juan Hotel & Casino Isla Verde, Puerto Rico Special Counsel Kelley, Drye & Warren, LLP Tysons Corner 8000 Towers Crescent Drive Suite 1200 Vienna, Virginia 22182 McConnell & Valdes 270 Munoz Rivera Ave. San Juan, P.R. 000918 Transfer Agent and Registrar American Stock Transfer & Trust Co. 6201 Fifteenth Avenue Brooklyn, N.Y. 11219 Independent Public Accountants PricewaterhouseCoopers, LLP BBV Tower-9th Floor San Juan, P.R. 00918 Market Makers UBS Warburg LLC 299 Park Avenue New York, N.Y. 10171-0026 Keefe, Bruyette & Woods, Inc. 787 Seventh Avenue 4th Floor New York, N.Y. 10019 Sandler O'Neill & Partners, L.P. 919 Third Avenue, 6th Floor New York, N.Y. 10022 Friedman, Billings, Ramsey & Co. Inc. 1001 Nineteenth Street North Arlington, VA 22209 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 lOK for its fiscal year ended December 31, 2001 with the Securities and Exchange Commission. Copies of its Annual Report and Quarterly Reports may be obtained without charge through our investors relations page in our website or by contacting our Investor Relations Department, Attention Ms. Damarys Quiles at (787)756-2801. Stock Listings Symbol: RGFC-NASDAQ RGFCP-NASDAQ RGFCO-NASDAQ RGFCN-NASDAQ RGFCM-NASDAQ At December 31, 2001, the Company had 200 stockholders of record, which does not take into consideration approximately 2,300 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 during each quarter of the last two fiscal years were as follows:
Mar 31 Jun 30 Sept 30 Dec 31 Mar 31 Jun 30 Sept 30 Dec 31 2001 2001 2001 2001 2000 2000 2000 2000 High 17.00 20.00 20.91 19.25 12.00 9.50 11.0 14.50 Low 12.62 14.12 15.70 14.93 7.68 6.50 7.87 8.625 Dividends Paid 0.06 0.06375 0.06775 0.06775 0.0720 0.045 0.0525 0.0565
This Annual Report has been designed by Adworks (c)2002 Photography: Tomas Gual FINANCIAL HIGHLIGHTS
% increase (Dollars in Thousands, except for per Share Data) (decrease) vs 2000 2001 2000 1999 1998 Loan Production 43% 2,473,168 1,729,373 1,977,322 1,426,069 - ---------------------------------------------------------------------------------------------------- Gross Revenues 21 379,618 314,911 233,953 180,767 Net Earnings 51 65,971 43,633 41,335 34,034 Total Assets 32 4,664,394 3,539,444 2,911,993 2,044,781 Return on Assets 22 1.63% 1.34% 1.72% 1.95% Servicing Portfolio 9 7,224,571 6,634,059 6,177,511 4,827,798 Efficiency Ratio (7) 51.95% 55.99% 54.39% 48.55% Spread Income 49 97,045 64,987 56,578 43,973 Fee Income 37 109,047 79,310 70,811 56,470 Shareholders' Equity 49 459,121 308,836 269,535 221,162 Common Shareholders' Equity per Share 23 10.07 8.16 6.79 5.99 Return on Common Equity 15 20.77% 18.00% 20.23% 21.32% Diluted Earnings per Common Share 41 1.83 1.30 1.28 1.12 Cash Dividends Declared per Common Share 30 0.264 0.203 0.149 0.111 Market Value per Share 20 17.14 14.25 11.50 21.00 - ----------------------------------------------------------------------------------------------------
STOCKHOLDERS EQUITY (000'S) [CHART] 1 [CHART] [CHART] 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 $4.7 billion in assets and operates 65 banking and mortgage banking branches in 36 locations in Puerto Rico and 4 locations in the United States. 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., Home Property Insurance Corp., and R-G Investments Corporation, all 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 on 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 $7.2 billion servicing portfolio, and is growing origination's 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, $600 million in its commercial real estate and construction portfolio, $92 million in commercial business loans and leases, and $181 million in personal loans and credit cards. Its $2.3 billion investment portfolio consists primarily of tax-exempt mortgage-backed securities and U.S. Government agency securities. Approximately 1,500 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," "RGFCN," and "RGFCM," respectively. [CHART] 3 [R-G LOGO] MISSION 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. We will provide competitive prices, a variety of loan programs, and service which is prompt, courteous and responsive to the unique characteristics of every customer. 4 [PHOTO] LETTER TO STOCKHOLDERS For many reasons, 2001 was an outstanding year for R-G. The Company's recurrent earnings and dividend distribution reached record highs. Strategic initiatives added strength and depth to the Company. At the same time, we increased our loan portfolio, strengthened our balance sheet, and improved the efficiency of our operation, while increasing our total assets to close to the $5 billion mark. Our total dedication to service our clientele was also expanded across different channels of distribution in our organization. We expanded our branches, and introduced new financial and technological products that provided us with better tools to service our customers. During our continuous evaluation of the degree of service provided to our customers, our ratio of customer satisfaction rose to 99%, a figure that we consider representative of the quality service that we have targeted for our operation. This is the reason why we are dedicating this Annual Report to SERVICE, the support of our operation. In addition, we will continue changing and improving our operation to continually meet the needs of our customers in the most efficient manner, maintaining the quality of our services through creativity and innovation. During 2001, we optimized the personal service provided to our clients by improving training, cross-selling, and the integration of all our services and products. We increased our investment in advertising and marketing with the purpose of improving our penetration in the different markets that we service. This additional investment strengthened our distribution channels. We also reintroduced real time Internet services combined with Imaging and Bill Payments, a real technological breakthrough in banking services. We also plan to diversify our operation through expansion to the Continental United States, via the impending acquisition of a Central Florida-based Crown Bank, F.S.B. The acquisition is subject to regulatory approval. We 5 expect to close this transaction during the second quarter of 2002. Upon closing, we plan to consolidate our mortgage banking operations in New York and North Carolina with our new Florida banking operations, emulating our successful strategy in Puerto Rico. This acquisition will increase our total assets by about $700 million, and our servicing portfolio by about $3 billion, with a total of 15 banking branches in Florida, and four financial centers located in California, Tennessee, Arizona and West Palm Beach. Crown Bank's servicing platform will allow us to continue expanding our servicing business in the U.S. while opening new mortgage banking offices across Florida and in other markets with existing financial centers. This U.S. banking operation opens a new channel for delivery of our services to the mainland, with the same quality service we provide to our clients in Puerto Rico. The integration of the new bank with our existing mortgage banking business will create a core operation that will support future additional expansion in the Eastern United States, penetrating markets with strong Hispanic populations and strong demand for residential construction. During the year, we had record volumes of residential mortgage loans and expanded commercial and construction lending, as well as consumer lending, primarily personal loans and credit cards. All signs indicate that 2002 will be a good year for developers, contractors, and construction companies in Puerto Rico. Billions in public and private sector construction investment is expected in 2002, helping the construction industry maintain its role as an important economic backbone and one of Puerto Rico's most dynamic sectors. We expect continued low interest rates, and high demand for housing. The newly installed Puerto Rico Government has announced a new expedited process for granting permits on new construction projects, providing additional support to new housing investments. According to a recent housing study conducted by the Puerto Rico Banking Association, housing demand stands at 20,640 units a year, of which 10,000 (46.6%) correspond to social interest housing, and 11,000 (53.4%) to medium and high-income housing, commonly referred to as "market" housing. The projected increases in new construction will result in additional future growth of the Puerto Rico mortgage market which during 2001 exceeded $7.5 billion. We continue striving for growth, profitability and enhancing stockholders' value by improving the fundamentals of our business. A large part of R-G's success can be attributed to the establishment of sound policies followed by effective controls. Our lines of businesses are strongly and effectively supported by a diverse group of tenured and dedicated professionals. Through their insight, our professionals are able to continuously provide independent evaluations of our total corporate objectives. The results are directly reflected in the quality of our assets and ultimately in earnings of the Company. There is no question that R-G is a strong franchise with a proven track record. Perhaps what you will find most interesting is the story behind the numbers, a glimpse at the details that drive R-G's success and a view of the executive team that makes our business model work. We have tried to provide you with an inside view of our operation with the rest of this Annual Report. We're not in the money business. We're in the service business. That is key to superior financial performance. 6 I would like to leave you with one number to consider: 1,500. This is the number of dedicated R-G's employees who each and every day give their best to our company in order to guarantee its continued success. I want to thank each and every one of our employees, who are just as committed as the entire management team in ensuring that R-G remains a leader in financial services. 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. Thanks to our diverse business and talented team members, who are committed to achieve record results for 2002. All of us at R-G look forward to adding value to our investment as shareholders today and tomorrow. We are committed to improving returns for our stockholders as a direct result of the quality service provided to our customers and associates. We're about to enter our third decade of service. Thirty years of continued service with innovative products, advanced technology and outstanding people. That is what has made us grow and become the Company we are today. /s/ VICTOR GALAN Victor Galan Chairman of the Board and CEO 7 WHAT IS SERVICE: Service means different things to different people. It may be measured in time, efficiency, costs, relationships or delivery. These are some of the things we have heard. [PHOTO] "IT'S THE TIME I SPEND IN THE BANK ..." "...THE RESPECT, THE FRIENDLINESS, THE WAY PEOPLE TREAT ME... THEIR GENUINE CONCERN WITH MY SITUATION." "...DEALING WITH KNOWLEDGEABLE PEOPLE. ASKING QUESTIONS AND GETTING ANSWERS." "HOW MUCH I CAN DO IN ONE PLACE. THAT SAVES ME TIME AND MONEY". "EXPERIENCE AND DILIGENCE. TAKING A HANDS-ON APPROACH TO MY PROBLEMS". 8 SERVICE IS RESULTS [PHOTO] Outstanding service leads to outstanding results. Thanks to the strategic combination of our diverse businesses and talented team members, we have achieved record results in 2001: - - $66.0 million net income - - 20.77% return on equity - - $4.7 billion in total assets - - 1.63% return on assets - - 40 loan production and banking offices located in Puerto Rico and the US - - Record internal residential mortgage loan production of $1.8 billion; total loan production of $2.5 billion - - $7.2 billion servicing portfolio RESULTS IN EARNINGS & REVENUES - - Earnings for 2001 rose to a record $66.0 million, increasing 51% from 2000 earnings of $43.6 million. - - On a per share basis (diluted), R-G Financial earned $1.83 in 2001, compared to $1.30 in 2000. - - Total gross revenues amounted to $379.6 million, compared to $314.9 million for 2000. - - Net revenues after deducting cost of interest were $206.1 million, compared to $144.3 million in 2000. - - Net interest income, totaling $97.0 million for 2001, was up by 49% from the 2000 level. - - Other revenues, consisting primarily of fee income from the origination, sale and servicing of loans, banking and insurance services, grew 37% to $109.0 million in 2001 from $79.3 million in 2000. - - Servicing income increased to $ 33.9 million in 2000 from $30.8 million in 2001, a 10% increase. RESULTS IN DEPOSITS & ASSETS - - Deposits increased by 23% to $2.1 billion, from $1.7 billion in 2000. - - Total assets grew to a record $4.7 billion and our servicing portfolio increased to a record $7.2 billion. As a result, total assets under administration, including our servicing portfolio, increased to a record $11.9 billion during 2001, rising 17% from the previous year. 9 - - Average per branch deposit size increased 18% to $76.3 million in 2001 from $64.9 million in 2000. Our average per branch deposit size exceeds the average per branch deposits of institutions in Puerto Rico. - - Core deposits, primarily consisting of saving and direct deposit accounts, represented 57% of our total deposits (also above the average for the banking industry in Puerto Rico). Brokered deposits were only 7.5% of our total deposits. - - Liquid assets constituted 33.8% of our total assets at year-end, even though we closed new loans totaling $2.5 billion during the year. GROWTH & DIVIDENDS - - Compounded annual growth rate for the period 1981-2001 was 36.9%, and 32.6% 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 $178 million and increased assets by $3.6 billion, representing a total growth of 170% in capital and 343% in assets, while paying dividends to our common stockholders in the amount of $24 million. - - Assets grew by $1.1 billion or 32% during 2001 to a record $4.7 billion. This growth was financed by a $385 million increase in deposits, a $569 million increase in repurchase agreements, a $57 million increase in lines of credit with banks and $99 million capital raised during the year through preferred and common stock offerings. - - We increased dividends to $ 0.26 per share from $0.20 in 2000. For the quarter ended December 31, 2001, the dividend was increased to $0.0765 per share on an annual basis, a 25% annualized increase from the previous quarterly dividend. - - Shareholders' equity of $459.1 million as of December 31, 2001 was up 49% from $308.8 million in 2000. - - Core capital represented 9.81% of our total assets, and risk-based capital represented 18.01% (on a consolidated basis), in each case, substantially exceeding the minimums required by our regulators. - - We strengthened our credit loss reserves during the year, increasing the reserve for loan losses to $17.4 million, a 50% increase from $11.6 million the previous year. Reserves approximate 82% of total non-performing loans as of December 31, 2001, excluding our residential loan portfolio where losses have historically been minimal. - - Charge-offs to total average loans outstanding continued to be minimal in 2001, amounting to 0.32%. The provision for loan losses was 182% of net charge-offs for the year. - - At year-end, our unused lines of credit (including lines of credit with the Federal Home Loan Bank) totaled $852 million. PRODUCT PORTFOLIO R-G's loan production includes the areas of residential and commercial mortgage lending, consumer and business lending. In 2001 we increased our portfolio of loans and our revenues in every one of these areas: - - Loan production reached $2.5 billion in 2001. - - Our residential, commercial and construction mortgage internal loan originations constituted approximately 20% of the market, based on an estimated total mortgage market of $7.8 billion in Puerto Rico last year. - - Our residential loan portfolio at the end of 2001 totaled $1.4 billion (which excludes certain significant loan securitizations during the year), a 39% increase from $1.0 billion in 2000. The average yield on the portfolio for 2001 was 6.75%. This portfolio included $1.4 billion of residential first mortgages and $33.3 million of second mortgages. - - Outstanding construction loans grew 83% to $134.3 million at year-end from $73.5 million in 2000. Commitments for future funding were $92.9 million at December 31, 2001. - - Our commercial loan portfolio, including commercial mortgages and leases, increased to $465.1 million at year-end, an increase of 28% from the previous year. 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 loan portfolio, which includes collateralized consumer loans and credit cards, amounted to $181.2 million at the end of 2001. This portfolio generated an average yield of 11.23%, which improved the average return of our total portfolio and our spread income. 10 - - We expanded our servicing portfolio to 113,070 loans with a total balance of $7.2 billion, an increase of $590.5 million or 9% from 2000. - - Our securities portfolio increased by 45% in 2001, growing to $2.3 billion from $1.6 billion in 2000. These investments represented 48% of total assets as of December 31, 2001, and with a yield of 6.32%, generated revenues of $113.7 million. Most of these securities are tax-free federally guaranteed bonds and GNMA's. [Chart] [Chart] 11 The quality of our customer service is our single biggest challenge and our single biggest opportunity. SERVICE IS PRODUCTS As a diversified financial services company providing banking, mortgage, investment and insurance products, we offer the full gamut of financial services required by our customers in one stop when visiting any of our financial centers. We continue expanding the different financial products offered to our clients in the areas of bank accounts and certificate of deposits, as well as offering new alternatives in our mortgage and consumer products. Our Consumer Department offers personal loans, credit cards, and secured personal loans, as well as reserve accounts and electronic services in ATM machines and merchant accounts. The approval of consumer loans is done on an hourly basis using electronic scoring systems. Our clients receive personalized services through our Trust and Private Banking divisions. Our customers can now satisfy all their banking, investment and insurance needs under one umbrella as a result of our new securities broker-dealer subsidiary and our already existent insurance division. Our Insurance division offers life, credit life and property insurance. We provide electronic and banking services to our customers via telephone banking or Internet. When accessing our Internet, customers have, on one screen, all their banking relationships with R-G. This includes all their products with RG, from their saving accounts activity, the maturity of their certificates of deposit, or the balance of their mortgage loan or credit card. Transfer of funds, ordering new checks and placing stop payments on any given check can be made via our Internet Banking Services. Our Telemarketing Department directs and orients our customers in fulfilling their need for financial products, primarily on new loan applications through the selection of the best mortgage product based on a thorough analysis of their personal requirements. We also provide 12 electronic telemarketing services via phone or internet through a separate group of professionals. Our Imaging system generates copies of monthly checks issued to all our clients, which are mailed with monthly statements of account and are also available via internet. We have introduced a new statement of account that centralizes our customers' banking relationships with us. The statement is also available to our clients via Internet. We also provide free Bill Payment services via Internet. Our Commercial Loan Department tends to all the different needs of our commercial clients, including development and construction loans, commercial mortgage and business loans, and direct lines of credit or working capital loans and equipment leases. This diversity of products and services, together with the physical location of our branches and the professional services provided by our associates, give us the competitive advantage to support the future growth of our operation by increasing our customer base while retaining satisfied clients. Our officers have all the necessary tools for the best quality service in banking. [PICTURE] At the click of a button you get your total banking relationships with R-G. 13 SERVICE IS TECHNOLOGY Total instant banking at the service of our customers via internet, phone or at all our physical locations. INTERNET [GRAPH] All your banking relationships with R-G in one consolidated statement of account by internet. [GRAPH] Apply for a residential mortgage loan. [GRAPH] Make bill payments via internet, including your mortgage payments to R-G. 14 BANKING [GRAPH] Ask for Trust services and open your IRA accounts. [GRAPH] Keep up with your investments. [GRAPH] Print and see images of paid checks. 15 [PHOTO] Rendering of our new financial center in Los Colobos Shopping Mall. Similar centers are under construction or development for Arecibo, Cayey and Ponce, projected to be operating during 2002. [PHOTO] Investment and banking center to be located in shopping centers, presently under construction in Plaza Carolinan and Plaza Las Americas, with special walk-in teller machines to allow us to provide banking services during extended hours. SERVICE IS LOCATION Even though internet and on-line banking continue to grow, location still influences consumers decisions on where to do banking. During 2002, we have and will continue to increase branch availability, with strategic locations and state-of the-art systems and technology. - - At the close of the year, we had 25 branches of R-G Premier Bank, 29 branches of R-G Mortgage, and 7 branches of Mortgage Store (a subsidiary of R-G Mortgage), each working in tandem in 36 different locations in Puerto Rico. - - We also had 4 offices of Continental Capital located in New York and North Carolina. - - We have a total of 1,085 employees assigned to branches, loan origination and processing, 61 to operations, 260 to loan administration, and the balance to general administrative and finance, which results in a total of 1,522 employees. - - A new banking branch opened in Aguadilla in January 2001, a second branch in Mayaquez in July 2001 and our Los Colobos branch in Rio Grande in March 2002, increasing our banking branches to 26. - - During 2001 we remodeled and expanded our existing location in our Betances Street branch in Bayamon. - - We now have three (Hato Rey, San Patricio and Colobos) full financial centers, in which we also offer securities and insurance products. - - We opened new branches in Aguadilla, Mayaguez, Rio Piedras, Humacao and Guayama increasing total Mortgage branches to 36 in Puerto Rico. - - We have already begun the construction of the expansion of our headquarters in Hato Rey, which will add a second office tower of 85,000 sq. ft. with parking capacity for 330 cars. - - Our expansion program calls for seven additional branches for 2002 and 2003 (of which two are in the process of construction) in Arecibo, Cayey, Plaza Las Americas, Plaza Carolina, Ponce, Hato Rey and Cupey, which will increase our total bank branches to 33 of which 9 will operate as full financial centers. 16 [MAP] PUERTO RICO R-G PREMIER BANK Hato Rey* Aguadilla Altamira Arecibo Bayamon Bayamon Este Bayamon Plaza del Sol Caguas Carolina Fajardo I Fajardo II Guaynabo Laguna Gardens Manati Mayaguez I Mayaguez II Norte Shopping Center Plaza Carolina Plaza Interamericana Plaza Las Americas Ponce San Patricio* Santurce Trujillo Alto Vega Baja R-G MORTGAGE Hato Rey Aguadilla Altamira Arecibo Bayamon Bayamon Este Bayamon Plaza del Sol Caguas I Caguas II Carolina Fajardo I Fajardo II Guayama Guaynabo Humacao Laguna Gardens Manati Mayaguez I Mayaguez II Norte Shopping Center Plaza Carolina Plaza Interamericana Plaza Las Americas Ponce Rio Piedras San Patricio Santurce Trujillo Alto Vega Baja MORTGAGE STORE Hato Rey Aguadilla Bayamon Caguas Hatillo Ponce Rio Grande NEW BRANCHES FOR 2002 AND 2003 Los Colobos* Arecibo* Cayey* Cupey Plaza Carolina II* Plaza Las Americas II* Ponce* Hato Rey* * Full financial centers 17 U.S. EXPANSION [MAP] [CONTINENTAL CAPITAL LOGO] NEW YORK Bayshore Huntington Station Woodhaven NORTH CAROLINA Charlotte [CROWN BANK LOGO] FLORIDA Altamonte Springs Bayonet Point Cape Coral Casselberry Clearwater Dunedin Englewood Holiday Lake Worth Ocoee Orlando Oviedo St. Petersburg Sarasota Winter Park Crown Bank acquisition announced in December 2001 (which is subject to regulatory approval) will add 15 bank branches in Florida and commercial offices in California, Tennessee, Arizona and West Palm Beach. "Throw in an acquisition that brings the first retail banking operation on the mainland U.S. and you're looking at R-G Financial Corp.'s recipe for growth." Investors Business Daily February 28, 2002 18 SERVICE IS PEOPLE [PHOTO] Our commitment to outstanding service begins with our people. They are the vehicle of our vision and the core of our culture. Great service comes from great people. And great service happens when people take personal ownership in the business and service they deliver. When our employees become pro-active in solving customer's problems. When they feel pride in belonging. As powerful and valuable as our brand is, nothing defines it more than the people behind it. More than 1,500 people form the R-G Financial team, providing services to over 200,000 customers in R-G Premier Bank, R-G Mortgage, Mortgage Store and Continental Capital, in 40 locations combined. The quality of customer service has become key to every financial institutions' success. Becoming team players, working toward common goals with a clear vision are important factors we bear consistently in mind to continuously increase revenue and profitability. /s/ Ramon Prats - ------------------------------- Ramon Prats President Even if we provide the branches, the products, the technology, the advertising and marketing support, it only works if our people deliver. 19 [PHOTO] [PHOTO] Professionals at their best: conceiving how to improve and provide better service while increasing efficiency. Steven Velez, Mortgage Banking Ricardo Agudo, New Housing Ramon Perez, Loan Administration 20 [PHOTO] [PHOTO] As powerful and valuable as our brand is, nothing defines it more than the people behind it. Joseph Sandoval, Chief Financial Officer Jean Francois Dumazet, Insurance 21 [PHOTO] [PHOTO] Improving return for our shareholders as a direct result of providing quality service Maria M. Rosales, Construction Lending Felipe Franco, Consumer Lending 22 [PHOTO] [PHOTO] [PHOTO] Peter Serralles, Securities Brokerage Mario Ruiz, Banking Hector Secola, Human Resources Victor Irizarry, Corporate and Chief Lending Officer 23 Top row from left to right: GILBERTO RIVERA ARREAGA CPA/Esq., Executive Vice President of the National College of Business & Technology, post secondary institution with campuses in Bayamon and Arecibo, Puerto Rico. LAUREANO CARUS ABARCA Chairman of Alonso Carus Iron Works in Catano, Puerto Rico, manufacturers of metal products. ROBERTO GORBEA President & CEO of Lord Electric Company of Puerto Rico, Inc. BENIGNO R. FERNANDEZ Senior Partner of Fernandez, Perez, Villariny & Co., CPA firm in Hato Rey, Puerto Rico ENRIQUE UMPIERRE SUAREZ Secretary of the Board and Attorney in Private practice. PEDRO RAMIREZ President & CEO of Empresas Nativas, Inc., a local real estate development firm. [GRAPH] SECOND ROW FROM LEFT TO RIGHT: RAMON PRATS Vice Chairman of the Board and President ILEANA COLON CARLO Chief Administration and Financial Officer of McConnell & Valdes, legal counsels. Former Comptroller General of the Commonwealth of Puerto Rico. EDUARDO MCCORMACK President EMP Omega Corporation, fructose importers and distributors in P.R. Former Vice President Bacardi Corporation. ANA M. ARMENDARIZ Treasurer of the Board and Senior Vice President of Finance - R&G Mortgage VICTOR L. GALAN Vice President Loan Production Marketing and Business Development - R&G Mortgage Standing: VICTOR J. GALAN Chairman of the Board and Chief Executive Officer 24 BOARD OF DIRECTORS [PHOTO] Serving our shareholders while creating stockholder value. 25 AFFORDABLE HOUSING [PHOTO] VILLAS DE RIO BLANCO/NAGUABO, PUERTO RICO Affordable housing project for moderate income families with a maximum selling price of $70,000. - - Interim and permanent financing. - - 195 units with a $15.7 million sellout. AFFORDABLE HOUSING In accordance with the last study of Housing Demand in Puerto Rico it is estimated that of the 20,000 annual housing units demanded in our market, approximately 47% are considered "out of market demand." Any unit below a selling price of $70,000 is considered as "out of market" in the current guidepost for social interest demand. One of our most important commitments with Puerto Rico is our involvement with the assistance and promotion of the development of social interest projects, and our dedication and work with local non-profit institutions to provide a better quality of life, and enhance our culture and values in areas such as health, community work, sports and arts. - - Over 11 years as part of the Muscular Distrophy Association. - - Part of the Puerto Rico Community Foundation dedicated to sponsoring Social Interest Housing. - - Participating in the construction of more than 3,000 social housing units in the Affordable Housing Program of the Government of Puerto Rico, with approximately $200 million in subsidized interest cost. - - Providing construction financing for the development of social interest projects. - - Participating with the Caguas Municipal Government in the establishment of a revolving loan fund that provides technical assistance and financing in housing and economic development to low and moderate sectors in the Caguas region. - - Sponsoring of charitable institutions such as the "Ivan Rodriguez Foundation" to promote sports in our community. 26 - - Supporting groups such as the Salvation Army. - - Working with the Federal Home Loan Bank of New York in the allocation of subsidies to assist low-income families in acquiring their own homes. - - Allocating a portion of our investment portfolio to the development of Affordable Housing. - - Working with more than 40 non-profit organizations dedicated to social work. - - Sponsoring Community Development Services and Community Outreach. - - Constant support of artists who exhibit their work in our headquarters' in Hato Rey. [PHOTO] BORINQUEN VALLEY/CAGUAS, PUERTO RICO Affordable housing project for moderate income families with a maximum selling price of $70,000. - - Interim and permanent financing. - - 500 units with a $36.7 million sellout. 27 SERVICE TO OUR COMMUNITIES [PHOTO] [PHOTO] [PHOTO] [PHOTO] Conference "How to buy your home" in Ponce, Puerto Rico. Committed to the development of community based organizations, hosting the organization of a network of groups as part of the Community Reinvestment Act (CRA) Donation for the Salvation Army. Sponsoring art exhibitions in our corporate headquarters, R-G Plaza Building. 28 Selected Consolidated Financial Data [GRAPH] Consolidated Financial Statements 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, 2001. 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 to a fair presentation. At or For the Year Ended December 31, (Dollars in Thousands, except for per share data)
2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- SELECTED BALANCE SHEET DATA: Total assets(1) $4,664,394 $3,539,444 $2,911,993 $2,044,782 $1,510,746 Loans receivable, net 1,802,388 1,631,276 1,563,007 1,073,668 765,059 Mortgage loans held for sale 236,434 95,668 77,277 117,126 46,885 Mortgage-backed and investment securities held for trading 93,948 12,038 43,564 450,546 401,039 Mortgage-backed securities available for sale 1,482,947 1,150,100 712,705 95,040 46,004 Mortgage-backed securities held to maturity 51,946 19,818 23,249 28,255 33,326 Investment securities available for sale 598,732 368,271 258,164 59,502 75,863 Investment securities held to maturity 23,686 3,703 5,438 6,344 10,693 Servicing asset 105,147 95,079 84,253 58,221 21,213 Cash and cash equivalents(2) 153,725 69,090 65,996 103,728 68,366 Deposits 2,061,224 1,676,062 1,330,506 1,007,297 722,418 Securities sold under agreements to repurchase 1,396,939 827,749 731,341 471,422 433,135 Notes payable 195,587 138,858 132,707 182,748 103,453 Other borrowings(3) 472,097 538,840 408,843 130,000 91,359 Stockholders' equity 459,121 308,836 269,535 221,162 138,054 Common stockholders' equity per share(4) $ 10.07 $ 8.16 $ 6.79 $ 5.99 $ 4.88 ---------- ---------- ---------- ---------- ---------- SELECTED INCOME STATEMENT DATA: Revenues: Net interest income after provision for loan losses $ 85,920 $ 59,236 $ 52,053 $ 37,373 $ 30,160 Loan administration and servicing fees 33,920 30,849 27,109 15,987 13,214 Net gain on sale of loans 62,512 41,230 37,098 34,955 23,286 Other(5) 12,615 7,231 6,604 5,528 4,605 Total revenue 194,967 138,546 122,864 93,843 71,265 ---------- ---------- ---------- ---------- ---------- Expenses: Employee compensation and benefits 33,290 27,031 24,433 17,095 13,653 Office occupancy and equipment 16,649 13,436 11,289 8,987 7,131 Other administrative and general 57,133 40,325 33,568 22,687 18,252 Total expenses 107,072 80,792 69,290 48,769 39,036 ---------- ---------- ---------- ---------- ---------- Income before income taxes and cumulative effect from change in accounting principle 87,895 57,754 53,574 45,074 32,229 Income taxes 21,601 14,121 12,239 11,040 8,732 Cumulative effect from change in accounting principle (323) -- -- -- -- Net income 65,971 43,633 41,335 34,034 23,497 ---------- ---------- ---------- ---------- ---------- Less: Dividends on preferred stock (9,920) (5,638) (3,754) (1,234) -- Net income available to common stockholders $ 56,051 $ 37,995 $ 37,581 $ 32,800 $ 23,497 Diluted earnings per share (4) $ 1.83 $ 1.30 $ 1.28 $ 1.12 $ 0.81 - ---------------------------------------------------------------------------------------------------------------------------------
31 At or For the Year Ended December 31, (Dollars in Thousands, except for per share data)
2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Selected Operating Data(6): Performance Ratios and Other Data: Loan production $2,473,168 $1,729,373 $1,977,322 $1,426,069 $ 906,324 Mortgage servicing portfolio 7,224,571 6,634,059 6,177,511 4,827,798 3,000,888 Return on average assets 1.63% 1.34% 1.72% 1.95% 1.85% Return on average common equity 20.77 18.00 20.23 21.32 18.69 Equity to assets at end of period 9.84 8.73 9.26 10.82 9.13 Interest rate spread(7) 2.33 1.96 2.40 2.43 2.88 Net interest margin(7) 2.59 2.16 2.60 2.72 3.12 Average interest-earning assets to average interest-bearing liabilities 105.56 103.54 104.21 105.93 104.61 Total non-interest expenses to average total assets 2.64 2.49 2.88 2.80 3.08 Full-service Bank offices 25 23 22 20 15 Mortgage offices(8) 40 35 31 23 19 Cash dividends declared per common share(4)(9) .264 .203 .149 .111 .065 Asset Quality Ratios(10): Non-performing assets to total assets at end of period 1.78% 2.96% 2.26% 2.41% 2.12% Non-performing loans to total loans at end of period 3.79(11) 5.52(11) 3.66 4.08 3.89 Allowance for loan losses to total loans at end of period 0.91 0.67 0.55 0.74 0.87 Allowance for loan losses to total non-performing loans at end of period 24.05 12.21 15.11 17.92 22.34 Net charge-offs to average loans outstanding 0.32 0.17 0.25 0.55 0.40 Bank Regulatory Capital Ratios(12): Tier 1 risk-based capital ratio 11.35% 11.37% 12.36% 13.41% 13.10% Total risk-based capital ratio 12.11 12.15 13.08 14.46 14.00 Tier 1 leverage capital ratio 6.44 6.04 7.07 8.04 7.34 - ---------------------------------------------------------------------------------------------------------------------------------
(1) At December 2001, R-G Mortgage and the Bank had total assets of $801.1 million and $4.0 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 32 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 Mortgage Store of Puerto Rico, Inc., 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 19 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 2001 and 2000, which reduced the amount of loans held in I, portfolio considered in the calculation of the ratio. Without giving effect to loan securitizations, as of December 31, 2001 and 2000 the ratio of non-performing loans to total loans would have been 2.75% and 4.46%, respectively. (12) All of such ratios were in compliance with the applicable requirements of the FDIC. 32 Management discussion and analysis of financial condition and results of operations of R-G Financial General R-G Financial Corporation (the "Company") is a financial holding company that, through its wholly-owned subsidiaries, is engaged in mortgage banking, banking, securities brokerage and insurance activities. The Company, currently in its 30th year of operations, was organized in 1972 as R-G Mortgage Corp., and completed its initial public offering in 1996, following its reorganization as a bank holding company. As of December 31, 2001, the Company had total assets of $4.7 billion, total deposits of $2.1 billion and stockholders' equity of $459.1 million. The Company operated 65 branch offices (36 mortgage offices in Puerto Rico, 4 mortgage offices in the United States, and 25 bank branches, mainly located in the northeastern section of Puerto Rico). Mortgage banking activities are conducted through R-G Mortgage Corp. ("R-G Mortgage"), Puerto Rico's second largest mortgage banker, and The Mortgage Store of Puerto Rico, Inc., also a Puerto Rico mortgage company. 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 through R-G Premier Bank of Puerto Rico (the "Bank"), a Puerto Rico commercial bank, who operates Continental Capital Corporation, a New York mortgage banking company. Banking activities include commercial banking services, corporate and construction lending, consumer lending and credit cards, offering a diversified range of deposit products and, to a lesser extent, trust investment services through its private banking department. The Company began insurance operations in November 2000 with its acquisition of Home & Property Insurance Corp., an insurance agency organized under the laws of the Commonwealth in Puerto Rico, and securities brokerage in early 2002 through its newly created subsidiary R-G Investments Corporation, a duly licensed broker-dealer also organized under the laws of the Commonwealth of Puerto Rico. 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 the origination and sale of loans and growing its loan servicing operation; (ii) expanding its retail banking franchise in order to achieve increased market presence and to increase core deposits; (iii) enhancing R-G Financial's net interest income by increasing loans held for investment, particularly single-family residential loans, and investment securities; (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 insurance products; (vii) expanding its operations in the United States; and (viii) emphasizing controlled growth, while pursuing a variety of acquisition opportunities, when appropriate. The Company is the second largest mortgage loan originator and servicer of mortgage loans on single family residences in Puerto Rico. R-G Financial's mortgage servicing portfolio increased to approximately $7.2 billion as of December 31, 2001, from $6.6 billion as of the same date a year ago, an increase of 8.9%. 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, 2001, the Company held securities available for sale with a fair market value of $2.1 billion. Of this amount $1.5 billion consisted of mortgage- backed securities, of which $524.6 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 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. Changes in Financial Condition General. At December 31, 2001, R-G Financial's total assets amounted to $4.7 billion, as compared to $3.5 billion at December 31, 2000. The $1.1 billion or 31.8% increase in total assets during the year ended December 31, 2001 was primarily the result of a $311.9 million or 18.1% increase in loans receivable, net and mortgage loans held for sale, a $332.8 million or 28.9% increase in mortgage backed securities available for sale, and a $230.5 million or 62.6% increase in investment securities available for sale. Loans receivable and mortgage loans held for sale. At December 31, 2001, R-G Financial's loans receivable, net amounted to $1.8 billion or 38.6% of total assets, as compared to $1.6 billion or 46.1% as of December 31, 2000. During the year ended December 31, 2001, the Company made significant loan securitizations (retained as mortgage-backed securities) which reduced the amount of loans held in portfolio at December 31, 2001. Without such securitizations, the loan portfolio at December 31, 2001 would have been $2.2 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, 2001, 2000 and 1999, total loans originated and purchased by the Bank amounted to $1.6 billion, $1.2 billion and $1.1 billion, respectively. At December 31, 2001, R-G Financial's allowance for loan losses totalled $17.4 million (of which $16.1 million is maintained as a reserve against the Bank's loan portfolio), which represented a $5.8 million or 50.2% increase from the level maintained at December 31, 2000. At December 31, 2001, R-G Financial's allowance represented approximately 0.91% of the total loan portfolio and 24.05% of total non-performing loans, as compared to 0.67% and 12.21% at December 31, 2000. During 2001, the Company made provisions for loan losses of $11.1 million, which exceeded net charge-offs of approximately $6.1 million. The increase in the allowance for loan losses reflected the increase in R-G Financial's commercial real estate and construction loan portfolio. 33 Non-performing loans amounted to $72.5 million at December 31, 2001, as compared to $95.0 million at December 31, 2000. The decrease in non-performing loans is due to the sale of approximately $67.8 million of non-performing residential mortgage loans during 2001. At December 31, 2001, $50.4 million or 69.5% of total non-performing loans 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 0.32% of average loans outstanding during 2001, as compared to 0.17% during 2000. 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. The ratio of non-performing loans to total loans decreased from 5.52% to 3.79% from December 31, 2000 to December 31, 2001, the ratio was nevertheless larger than it would otherwise have been due to significant loan securitizations during the last two quarters of 2000 and the year ended December 31, 2001, 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, 2001 and 2000, the ratio of non-performing loans to total loans would have been 2.75% and 4.46%, respectively. Management of R-G Financial believes that its allowance for loan losses at December 31, 2001 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, 2001 and 2000, mortgage loans held for sale amounted to $236.4 million and $95.7 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, 2001, R-G Financial's aggregate mortgage-backed and investment securities totaled $2.3 billion or 48.3% of total assets, as compared to $1.6 billion or 43.9% at December 31, 2000, respectively. Securities held for trading consist primarily of conventional and FHA and VA loans which have been securitized as FHLMC and GNMA pools, respectively, 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, 2001 and 2000, securities available for sale totalled $2.1 billion and $1.5 billion, 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, 2001 and 2000, securities held to maturity totaled $75.6 million and $23.5 million, respectively. Securities held to maturity are accounted for at amortized cost. At December 31, 2001 and 2000, securities held to maturity had a market value of $76.1 million and $23.4 million, respectively. Mortgage servicing asset. As of December 31, 2001 and 2000, R-G Financial reported servicing assets of $105.1 million and $95.1 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, 2001, deposits totaled $2.1 billion, as compared to $1.7 billion at December 31, 2000. The $385.2 million or 23.0% increase in deposits during the year ended December 31, 2001 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 $918.4 million or 54.8% of total deposits at December 31, 2000 to $1.2 billion or 57.3% of total deposits at December 31, 2001. 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, 2001 and 2000, repurchase agreements totalled $1.4 billion and $827.7 million, respectively. Notes payable consist primarily of warehouse lines of credit (which are used to fund loan commitments of R-G Mortgage and Continental Capital). At December 31, 2001, notes payable amounted to $195.6 million, as compared to $138.9 million at December 31, 2000. Advances from the FHLB of New York amounted to $464.1 million and $505.0 million at December 31, 2001 and 2000, respectively. At December 31, 2001, FHLB advances were scheduled to mature at various dates commencing on April 12, 2002 until March 2, 2011, with an average interest rate of 4.87%. Stockholders' equity. Stockholders' equity increased from $308.8 million at December 31, 2000 to $459.1 million at December 31, 2001. The $150.3 million or 48.7% increase in stockholders' equity during 2001 was primarily due to the issuance of 2,207,500 shares of Class B common stock in late June and early July 2001 for aggregate net proceeds of $31.1 million, the issuance of 2,760,000 shares of the Company's 7.60% Monthly Income Preferred Stock, Series C, in March 2001 for aggregate net proceeds of $66.6 million, and the $66.0 million net income, together with the $2.7 million other comprehensive income, recognized for the year. The increases in stockholders' equity were partially offset by dividends paid during the year of $17.8 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. 34 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)
2001 2000 1999 Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- The Bank: Net interest income after provision for loan losses $ 71,753 36.80% $ 55,967 40.40% $ 45,344 36.91% Loan administration and servicing fees 2,000 1.03 1,979 1.43 476 0.39 Net gain on origination and sale of loans 37,555 19.26 18,090 13.06 9,578 7.79 Other income(1) 7,286 3.74 6,338 4.57 5,380 4.38 118,594 60.83 82,374 59.46 60,778 49.47 R-G Mortgage: Net interest income 13,161 6.75 3,269 2.36 6,709 5.46 Loan administration and servicing fees 31,920 16.37 28,870 20.84 26,633 21.68 Net gain on origination and sale of loans 24,957 12.80 23,140 16.70 27,520 22.40 Other income(1) 509 0.26 711 0.51 1,224 0.99 70,547 36.18 55,990 40.41 62,086 50.53 Corporate revenues (2) 1,006 0.52 -- -- -- -- Other 4,820 2.47 182 0.13 -- -- $194,967 100.00% $138,546 100.00% $122,864 100.00%
(1) Comprised of service charges, fees and other for the Bank and other miscellaneous revenue sources for the Bank and R-G Mortgage. (2) Comprised of interest income earned on investment securities held by R-G R-G Financial reported net income of $66.0 million, $43.6 million and $41.3 million during the years ended December 31, 2001, 2000 and 1999, respectively. Net income increased by $22.3 million or 51.2% during the year ended December 31, 2001, as compared to 2000, due to a $32.1 million increase in net interest income and a $29.7 million increase in total other income, which were partially offset by a $26.3 million increase in total operating expenses. Net income increased by $2.3 million or 5.6010 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 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 $97.0 million, $65.0 million and $56.6 million during the years ended December 31, 2001, 2000 and 1999, respectively. Net interest income increased by $32.1 million or 49.3% during the year ended ~ December 31, 2001, as compared to the year ended December 31,2000 due to significant increases in the average balance of interest-earning assets, together with an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 103.54% for 2000 to 105.56% in 2001, as well as an increase in interest rate-spread from 1.96% for 2000 to 2.33% for 2001. Net interest income increased by $8.4 million or 14.9% during the year ended December 31, 2000, 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% in 1999 to 103.54% in 2000, as well as a decline in the Company's interest rate spread from 2.40% in 1999 to 1.96% in 2000. 35 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)
2001 2000 Average Yield/ Average YIELD/ Balance Interest Rate (1) Balance Interest Rate (1) Interest-Earning Assets: Cash and cash equivalents(2) $ 31,412 $ 1,627 5.18% $ 14,708 $ 969 6.59% Investment securities available for sale 409,553 26,826 6.55 298,480 20,914 7.01 Investment securities held to maturity 9,200 537 5.84 5,330 307 5.76 Mortgage-backed securities held for trading 105,526 6,581 6.24 18,801 1,370 7.29 Mortgage-backed securities available for sale 1,201,370 77,725 6.47 761,166 47,986 6.30 Mortgage-backed securities held to maturity 34,769 2,055 5.91 21,437 1,431 6.68 Loans receivable, net(3)(4) 1,894,837 152,251 8.04 1,853,559 160,093 8.64 FHLB of New York stock 53,108 2,969 5.59 38,432 2,531 6.59 Total interest-earning assets 3,739,775 $270,571 7.23 3,011,913 $235,601 7.82 Non-interest-earning assets 320,474 238,722 Total assets $4,060,249 $3,250,635 Interest-Bearing Liabilities: Deposits $1,818,629 $ 88,854 4.89% $1,505,919 $ 80,659 5.36% Securities sold under agreements to repurchase(5) 1,037,756 49,476 4.77 768,582 50,542 6.58 Notes payable 233,462 11,395 4.88 186,748 11,629 6.23 Other borrowings(6) 452,957 23,801 5.25 447,666 27,784 6.21 Total interest-bearing liabilities 3,542,804 173,526 4.90 2,908,915 170,614 5.86 Non-interest-bearing liabilities 115,844 55,671 Total liabilities 3,658,648 2,964,586 Stockholders' equity 401,601 286,049 Total liabilities and stockholders' equity $ 4,060,249 $ 3,250,635 Net interest income; interest rate spread(7) $ 97,045 2.33% $ 64,987 1.96% Net interest margin(7) 2.59% 2.16% Average interest-earning assets to average interest-bearing liabilities 105.56% 103.54% 1999 Average Yield/ Balance Interest Rate (1) Interest-Earning Assets: Cash and cash equivalents(2) $ 15,963 $ 840 5.26% Investment securities available for sale 124,559 7,834 6.29 Investment securities held to maturity 6,271 330 5.26 Mortgage-backed securities held for trading 33,245 1,871 5.63 Mortgage-backed securities available for sale 502,176 31,989 6.37 Mortgage-backed securities held to maturity 29,684 1,763 5.94 Loans receivable, net(3)(4) 1,446,575 117,304 8.11 FHLB of New York stock 17,777 1,210 6.81 Total interest-earning assets 2,176,250 $163,141 7.50% Non-interest-earning assets 228,253 Total assets $2,404,503 Interest-Bearing Liabilities: Deposits $1,153,537 $ 53,643 4.65% Securities sold under agreements to repurchase(5) 491,230 27,474 5.59 Notes payable 212,028 13,634 6.43 Other borrowings(6) 231,616 11,812 5.10 Total interest-bearing liabilities 2,088,411 $106,563 5.10% Non-interest-bearing liabilities 75,291 Total liabilities 2,163,702 Stockholders' equity 240,801 Total liabilities and stockholders' equity $ 2,404,503 Net interest income; interest rate spread(7) $ 56,578 2.40% Net interest margin(7) 2.60% Average interest-earning assets to average interest-bearing liabilities 104.21%
(1) At December 31, 2001, the yields earned and rates paid were as follows: cash and cash equivalents, 1.12%; investment securities held to maturity, 5.42%; investment securities available for sale, 5.75%; mortgage-backed securities held for trading, 6.84%; mortgage-backed securities available for sale, 6.59%; mortgage-backed securities held to maturity, 6.48%; mortgage loans held for sale, 7.16%; loans receivable, net, 7.63%; FHLB of New York stock 5.20%; total interest-earning assets, 6.86%; deposits, 4.01%; securities sold under agreements to repurchase, 3.47%; notes payable, 3.04%; other borrowings, 4.84%; total interest-bearing liabilities, 3.93%; interest rate spread 2.93%. (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 $297,000, $294,000 and $295,000 during the years ended December 31, 2001, 2000 and 1999, respectively, or .20%, .18% and .25% of interest income on loans during such respective periods. (5) Includes federal funds purchased. (6) Comprised of advances from the FHLB of New York and other borrowings. (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. 36 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, 2001 vs. 2000 2000 vs. 1999 INCREASE / DECREASE Total Increase / Decrease Total Due to Increase Due to Increase Rate Volume (Decrease) Rate Volume (DECREASE) --------- ------- ---------- ------- -------- ---------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Cash and cash equivalents(1) $ (443) $ 1,101 $ 658 $ 195 $ (66) $ 129 Investment securities available for sale (1,871) 7,783 5,912 2,141 10,939 13,080 Investment securities held to maturity 7 223 230 27 (50) (23) Mortgage-backed securities held for trading (1,109) 6,320 5,211 312 (813) (501) Mortgage-backed securities available for sale 1,987 27,752 29,739 (501) 16,498 15,997 Mortgage-backed securities held to maturity (266) 890 624 158 (490) (332) Loans receivable, net(2) (11,407) 3,565 (7,842) 9,786 33,003 42,789 FHLB of New York stock (529) 967 438 (85) 1,406 1,321 -------- ------- -------- -------- -------- -------- Total interest-earning assets $(13,631) $48,601 $ 34,970 $ 12,033 $ 60,427 $ 72,460 INTEREST-BEARING LIABILITIES: Deposits $ (8,554) $16,749 $ 8,195 $ 10,629 $ 16,387 $ 27,016 Securities sold under agreements to repurchase (18,767) 17,701 (1,066) 7,556 15,512 23,068 Notes payable (3,143) 2,909 (234) (379) (1,626) (2,005) Other borrowings(3) (4,311) 328 (3,983) 4,954 11,018 15,972 Total interest-bearing liabilities $(34,775) $37,687 $ 2,912 $ 22,760 $ 41,291 $ 64,051 -------- ------- -------- -------- -------- -------- Increase in net interest income $ 32,058 $ 8,409 ======== ========
(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) Comprised of long-term debt, advances from the FHLB of New York and other borrowings. Interest Income. Total interest income increased by $35.0 million or 14.8% during the year ended December 31, 2001 as compared to the year ended December 31, 2000, and increased by $72.5 million or 44.4% during the year ended December 31, 2000 over the year ended December 31, 1999. Interest income on loans, the largest component of R-G Financial's interest-earning assets, decreased by $7.8 million or 4.9% during the year ended December 31, 2001 as compared to the year ended December 31, 2000, and increased by $42.8 million or 36.5% during 2000 over the year ended December 31, 1999. The decrease in interest income on loans during the year ended December 31, 2001 was primarily caused by a decrease in the yield earned thereon from 8.64% in 2000 to 8.04% in 2001. The increase in 2000 was primarily the result of an increase in the average balance of loans receivable of $407.0 million during such year. 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 $41.7 million or 57.9% during the year ended December 31, 2001 as compared to the year ended December 31, 2000, and increased by $28.2 million or 64.5% during the year ended December 31, 2000 over the year ended December 31, 1999. The increase during the year ended December 31, 2001 was primarily due to a $540.3 million increase in the average balance of mortgage-backed securities, together with a $114.9 million increase in the average balance of investment securities during the period. The increase during 2000 was due primarily to an increase in the average balance of mortgage-backed securities of $236.3 million, together with a $173.0 million increase in the average balance of investment securities. The increase in investment securities during 2001 and 2000 reflects purchases of approximately $934.0 million and $122.0 million, respectively, during such periods, net of maturities and sales. 37 Interest income on cash and cash equivalents increased by $658,000 or 67.9% during the year ended December 31, 2001 as compared to the year ended December 31, 2000, and increased by $129,000 or 15.4010 during the year ended December 31, 2000. The increase in interest earned on money market investments during 2001 reflected an increase in their average balance of $16.7 million during the year. The increase during 2000 was due primarily to an increase in the yield earned thereon from 5.26% in 1999 to 6.59% in 2000. 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 $2.9 million or 1.7% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and increased by $64.1 million or 60.1% during the year ended December 31, 2000. Interest expense on deposits, the largest component of R-G Financial's interest-bearing liabilities, increased by $8.2 million or 10.2% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and increased by $27.0 million or 50.4% during the year ended December 31, 2000. The increase during the year ended December 31, 2001, as compared to the year ended December 31, 2000, was due primarily to an increase in the average balance of deposits of $312.7 million, partially offset by a decrease in the average rate paid thereon of 47 basis points. The increase during 2000 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 during such period. Interest expense on repurchase agreements decreased by $1.1 million or 2.1% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and increased by $23.1 million or 84.0% during the year ended December 31, 2000. The decrease during 2001 was due primarily to a decrease in the average rate paid thereon of 181 basis points partially offset by an increase in the average balance of repurchase agreements of $269.2 million. The increase during 2000 was primarily due 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. R-G Financial generally uses repurchase agreements to fund part of its investment securities portfolio and to repay warehouse lines of credit which are used to fund loan originations. These repurchase agreements are mainly collateralized by investment and mortgage-backed securities 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 investment and mortgage-backed securities 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 $234,000 or 2.0% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and decreased by $2.0 million or 14.7% during the year ended December 31, 2000. The decrease during the year ended December 31, 2001, as compared to the year ended December 31, 2000, was due primarily to a decrease in the average rate paid thereon of 135 basis points, partially offset by an increase in the average balance outstanding of $46.7 million, as R-G Mortgage made increased use of lines of credit due to increased mortgage loan originations during such period. The decrease during the year ended December 31, 2000 was primarily due to a decrease in the average balance outstanding of $25.3 million, mainly caused by the maturity in 2000 of promissory notes totaling $25 million. Interest expense on other borrowings (consisting principally of advances from the FHLB of New York) decreased by $4.0 million or 14.3% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and increased by $16.0 million or 135.2% during the year ended December 31, 2000. The decrease during the year ended December 31, 2001, as compared to the year ended December 31, 2000, was due primarily to a decrease in the average rate paid thereon of 96 basis points. The increase during 2000 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. 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 $11.1 million, $5.8 million and $4.5 million during the years ended December 31, 2001, 2000 and 1999, respectively. The increase in the provision for loan losses taken by the Company during 12001 and 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. Management believes that its allowance for loan losses at December 31, 2001, 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) 2001 2000 1999 ---- ---- ---- Net gain on origination and sale of loans $ 62,512 $ 41,230 $ 37,098 Loan administration and servicing fees 33,920 30,849 27,109 Service charges, fees and other 12,615 7,231 6,604 Total other income $ 109,047 $ 79,310 $ 70,811
38 Total non-interest income increased by $29.7 million or 37.5% during the year ended December 31, 2001, as compared to the prior year and increased by $8.5 million or 12.0% during the year ended December 31, 2000. Net gain on sale of loans amounted to $62.5 million, $41.2 million and $37.1 million during the years ended December 31, 2001, 2000 and 1999, 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, 2001, 2000 and 1999, R-G Financial originated and purchased $1.9 billion, $1.3 billion and $1.6 billion, respectively, including $90.1 million, $274.0 million and $583.6 million, respectively, of loan purchases, and sold $1.2 billion, $806.4 million and $977.9 million (excluding loans securitized and retained as mortgage-backed securities) of mortgage loans, respectively. During 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 across 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 and $90.1 million in 2001 while its internal loan originations amounted to $1.1 billion in 1999 and 2000 and $1.8 billion in 2001. R-G Financial's mortgage banking operations are highly dependent upon market and economic conditions. During the years ended December 31, 2001, 2000 and 1999, R-G Financial recognized net profit (loss) on trading securities of $2.0 million, $147,000 and ($21,000), respectively, which are included in net gains on sale of loans. Such gains and losses primarily reflect fluctuations in the market value of loans which have been securitized into mortgage-backed securities and are being held for trading. During the years ended December 31, 2001, 2000 and 1999, R-G Financial recognized loan administration and servicing fees of $33.9 million, $30.8 million and $27.1 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 95,946 loans with an aggregate principal balance of $4.8 billion at January 1, 1999 to 113,070 loans with an aggregate principal balance of $7.2 billion at December 31, 2001. Service charges, fees and other amounted to $12.6 million, $7.2 million and $6.5 million during the years ended December 31, 2001, 2000 and 1999, respectively. The $5.4 million or 74.4010 increase during the year ended December 31, 2001 was primarily due to the Company's fee-based insurance operations which commenced in late 2000, as well as increased fee income associated with new deposit products and an increasing deposit base. The $627,000 or 9.5% increase during 2000 was primarily due to increased fee income associated with new deposit products and an increasing deposit base i as well as increases in the Company's loan portfolio. NON-INTEREST EXPENSES. The following table sets forth certain information regarding non-interest expenses for the periods shown. Year Ended December 31, (In Thousands)
2001 2000 1999 ---- ---- ---- Employee compensation and benefits $ 33,290 $ 27,031 $ 24,433 Office occupancy and equipment 16,649 13,436 11,289 Other administrative and general 57,133 40,325 33,568 Total non-interest expenses $107,072 $ 80,792 $ 69,290
Total non-interest expense increased by $26.3 million or 32.5% during the year ended December 31, 2001, as compared to the year ended December 31, 2000, and increased by $11.5 million or 16.6% during the year ended December 31, 2000 over 1999. The increase in total non-interest expense during the years ended December 31, 2001 and 2000 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. Employee compensation and benefits expense amounted to $33.3 million, $27.0 million and $24.4 million during the years ended December 31, 2001, 2000 and 1999, respectively. The $6.3 million or 23.2% increase in such expenses during the year ended December 31, 2001 is primarily associated with an increase in the number of employees and increased bonus payments associated with increased loan production during the year. 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 such year. Office occupancy and equipment expense amounted to $16.6 million, $13.4 million and $11.3 million during the years ended December 31, 2001, 2000 and 1999, respectively. The $3.2 million or 23.9% increase in office occupancy and equipment expenses during the year ended December 31, 2001 is primarily related to the operation of additional Bank branches and additional office space to accommodate general growth in the operations of R-G Financial. 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. 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 $57.1 million, $40.3 million and $33.6 million during the years ended December 31, 2001, 2000 and 1999, respectively. The $16.8 million or 41.7% increase in other administrative and general expenses during the year ended December 31, 2001 was primarily due to a $7.1 million increase in expenses associated with the Company's servicing asset as well as additional expenses related to the operation of additional Bank branches and office space, and general growth in the operations of R-G Financial. The $6.8 million or 20.1% increase in such expenses during the year ended December 31 2000, is also primarily associated with new additional branch offices during such year, as well as the result of general growth in the operations of R-G Financial and the addition of new products and services offered. Income Taxes. R-G Financial's income tax provision amounted to $21.6 million during the year ended December 31, 2001, as compared to income tax expense of $14.1 million and $12.2 million during the years ended December 31, 2000 and 1999, respectively. R-G Financial's effective tax rate amounted to 24.6%, 24.5% and 22.8% during the years ended December 31, 2001, 2000 and 1999, respectively. 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 39 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, 2001, R-G Financial had $96.8 million in borrowing capacity under unused warehouse and other lines of credit, $724.9 million in borrowing capacity under unused lines of credit with the FHLB of New York and $25 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, 2001, R-G Financial had outstanding commitments (including unused lines of credit) to originate and/or purchase mortgage and non-mortgage loans of $165.9 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 $1.1 billion. 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 $943.6 million at December 31, 2001, and borrowings that are scheduled to mature within the same period amounting to $1.1 billion. R-G Financial anticipates that it will have sufficient funds available to meet its current loan commitments. In December 2001, the Company entered into a definite merger agreement, as amended, pursuant to which it will acquire The Crown Group, Inc., a Florida savings and loan holding company, and its wholly-owned savings bank subsidiary, Crown Bank, a Federal Savings Bank, hereinafter collectively referred to as "Crown". Crown, which had total assets of $638 million, total deposits of $404 million and stockholders' equity of $69 million as of December 31, 2001, operates in the Tampa - St. Petersburg - Clearwater and Orlando metropolitan areas through 14 full-service offices. The cost of the acquisition to R-G Financial is $100 million of cash. In March 2002, the Company completed the offering of its Series D Monthly Income Non-cumulative Perpetual Preferred Stock, with aggregate gross proceeds of $60.0 million. In April 2002, the Company expects to close on a $25.0 million issuance of pooled trust preferred securities through a major investment banking firm. The Company expects the balance of the funds for the Crown acquisition will come from its general working capital. CAPITAL RESOURCES. The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier 1 leverage ratio for such other banks from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier 1 capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At December 31, 2001, the Bank met each of its capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios of 6.44%, 11.35% and 12.11%, 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 described above. R-G Financial is currently in compliance with such regulatory capital requirements. 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 vulnerability of its operations to changes in interest rates and to manage the ratio 40 of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or reprising 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 flaw 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 reprise within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or reprising 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, 2001, R-G Financial's interest-earning assets which mature or reprise within one year exceeded R-G Financial's interest-bearing liabilities with similar characteristics. R-G Financial one year positive gap at December 31, 2001 was $462.6 million, or 9.92% of total assets, compared to a negative gap of approximately $477.8 million or 13.5% of total assets at December 31, 2000. R-G Financial's negative gap within one year at December 31, 2000 was due primarily to its large fixed-rate mortgage loans receivable portfolio held for investment and a portion of its portfolio of FHLB notes and other US agency securities which had call features but were not likely to be exercised by such agencies due to the interest rate environment at that time. During the year ended December 31, 2001, the Company extended the maturity dates of certain borrowings into longer-term maturities at lower rates to take advantage of reductions in interest rates during the year. In addition, the Company entered into certain derivative instruments and increased its portfolio of investment securities held for trading, eliminating its negative gap exposure. At December 31, 2001 $1.06 billion or 51% of borrowings of the Company mature after one year. While in computing its gap position the Company presents 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 successful 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 reprising 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 180 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, 2001, R-G Mortgage had $18.4 million of pre-existing commitments by third-party investor; to purchase mortgage loans. To the extent that R-G Mortgage originates or commits to originate loans without pre-existing 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) of $397.9 million or 50% of its total assets 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. Because such interest-earning assets have longer effective maturities than R-G Mortgage's interest bearing liabilities, the yield of such assets will adjust more slowly than the cost of its interest-bearing liabilities and, as a result, R-G Mortgage'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 R-G Mortgage's mortgage-backed and related securities. Generally, the value of fixed-rate mortgage-backed securities declines when interest rates rise and, conversely, increases when interest rates fall. At December 31, 2001, R-G Mortgage held $93.9 million of mortgage-backed and 41 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, collar, 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 Mortgage 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, 2001 R-G Mortgage was a party to two interest rate swap agreements. 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 i this type and interest payments are generally netted. R-G Mortgage's existing interest rate swap agreements have a notional amount of approximately $85.0 million and expire between February 2006 and December 2009. With respect to such agreements, R-G Mortgage makes fixed interest payments ranging, from 4.80% to 5.60%, and receives payments based upon the three-month London Interbank Offer Rate ("Libor"). The net interest paid relating to R-G Mortgage's fixed-pay interest rate swaps amounted to approximately $858,000 during the year ended December 31, 2001; net interest received amounted to $563,000 and $107,000 during the years ended December 31, 2000 and 1999, respectively. Such interest rate contracts have 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, 2001, the Bank's interest-earning assets included a portfolio of loans receivable, net of $1.9 billion and a portfolio of investment securities and mortgage-backed securities (including held to maturity, available for sale and held for trading) of $1.8 billion. Because the Bank's interest-bearing 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, 2001, $1.7 billion or 94.3% 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 or FHLB advances), 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 mortgagebacked 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 and futures to reduce interest rate risk on all mortgage-backed securities (excluding CMOs) which are available for sale. At December 31, 2001, mortgage-backed securities available for sale had a fair value of $1.1 billion. 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, 2001, the Bank was a party to three interest rate swap agreements. The Bank's existing interest rate swap agreements have an aggregate notional amount of approximately $70.0 million and expire between June 2003 and December 2009. With respect to such agreements, the Bank makes fixed interest payments ranging from 4.67% to 6.83% and receives payments based upon the three-month Libor. The net interest paid relating to the Bank's fixed-pay interest rate swaps amounted to approximately $868,000 and $422,000 during the years ended December 31, 2001 and 1999, respectively; net interest received totaled $323,000 during the year ended December 31, 2000. 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, 2001 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). 42 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, 2001, based on the information and assumptions set forth in the notes below. For purposes of this presentation, the interest earning components of loans held for sale and mortgage-backed securities held in connection with the Company's mortgage banking business 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): Loans receivable: Residential real estate loans $ 118,684 $ 280,744 $ 397,247 $ 151,420 $ 91,299 $1,039,394 Construction loans 126,111 8,226 -- -- -- 134,337 Commercial real estate loans 372,923 -- -- -- -- 372,923 Consumer loans 53,851 37,319 53,693 23,700 12,629 181,192 Commercial business loans 75,038 8,215 7,861 1,024 19 92,157 Mortgage loans held for sale 46,871 54,374 84,640 35,808 14,741 236,434 Mortgage-backed securities(2)(3) 285,371 586,368 436,773 185,972 134,357 1,628,841 Investment securities(3) 170,563 162,861 220,324 64,766 3,904 622,418 Other interest-earning assets(4) 78,502 -- -- -- -- 78,502 Total $1,327,914 $ 1,138,107 $ 1,200,538 $ 462,690 $ 256,949 $4,386,198 Interest-bearing liabilities: Deposits: NOW and Super NOW accounts(5) $ 15,443 $ 42,715 $ 46,958 $ 38,036 $ 162,158 $ 305,310 Passbook savings accounts(5) 4,995 14,483 36,056 28,845 115,377 199,756 Regular and commercial checking(5) 12,300 34,440 37,858 30,666 130,730 245,994 Certificates of deposit 362,172 585,816 107,866 243,725 4,829 1,304,408 FHLB advances 50,000 30,000 78,125 228,000 78,000 464,125 Securities sold under agreements to repurchase(6) 405,507 399,428 263,804 190,000 138,200 1,396,939 Other borrowings(7) 56,618 144,500 2,441 -- -- 203,559 Total 907,035 1,251,382 573,108 759,272 629,294 4,120,091 Effect of hedging instruments 355,000 (200,000) (10,000) (65,000) (80,000) -- Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 775,879 $ (313,275) $ 617,430 $(361,582) $(452,345) $ 266,107 Cumulative excess of interest-earning assets over interest-bearing liabilities $ 775,879 $ 462,604 $ 1,080,034 $ 718,452 $ 266,107 Cumulative excess of interest-earning assets over interest-bearing liabilities as a percent of total assets 16.63% 9.92% 23.15% 15.40% 5.71 %
(Footnotes on following page) 43 (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 100010 thereafter; and, for passbook savings accounts, ranging from 5% for 0-12 months, 20% for 1-5 years, 40010 for 5-10 years, 65010 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 reprising 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 IRRBIC0 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, 2001 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) lncome(2) of Change Change - -------------------- --------- --------- ------ (Dollars in Thousands) +200 $ 127,523 $1,095 0.09% +100 127,289 861 0.07 Base Scenario 126,428 -- -- -100 121,532 (4,896) (3.87) -200 113,437 (12,991) (10.28)
(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. 45 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 generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars (except with respect to securities which are carried at market value), without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of 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. Contractual Obligations and Commercial Commitments. The following tables present contractual cash obligations and commercial commitments of the Company as of December 31, 2001. See notes 9, 10 and 18 of the Notes to the Consolidated Financial Statements (dollars in thousands):
Payment due period Less than One to Four to After Contractual Cash Obligations Total One Year Three Years Five Years Five Years ----- --------- ----------- ---------- ---------- FHLB advances: $ 464,125 $ 80,000 $ 78,125 $ 228,000 $ 78,000 Lines of credit 195,587 192,587 3,000 - - Other borrowings 7,972 6,947 1,025 - - Repurchase agreements 1,396,939 804,935 263,804 190,000 138,200 Operating leases 36,128 5,209 10,511 6,151 14,257 ----------- ----------- ---------- ---------- ---------- Total contractual cash obligations $ 2,100,751 $ 1,089,678 $ 356,465 $ 424,151 $ 230,457 =========== =========== ========== ========== ========== Amount of Commitment Expiration Per Period ------------------------------------------ Unfunded Less than One to Four to After Commercial Commitments Commitments One Year Three Years Five Years Five Years ------------ ---------- ----------- ---------- ---------- Lines of credit $ 72,941 $ 69,444 $ 2,095 $ 1,248 $ 154 Standby letters of credit 7,525 25 -- 7,500 - Undisbursed portion of loans in process: 92,935 35,660 57,275 - - ----------- ----------- ---------- ---------- ---------- Total commercial commitments $ 173,401 $ 105,129 $ 59,370 $ 8,748 $ 154 =========== =========== ========== ========== ==========
As part of its loan servicing activities, the Company is committed to advance from its own funds any shortage of moneys required to complete timely payments to investors in the Company's GNMA, FNMA and FHLMC servicing portfolio, as well as certain private investors. See Note 5 of the Notes to the Consolidated Financial Statements for further information regarding the Company's commitments under various servicing agreements. The Company also considers, as critical to the sound operations of the Company, its policy for the measurement and periodic evaluation for impairment of its servicing asset and retained interests resulting from the sale or securitization of residential mortgage loans and/or financial asset transfers of mortgage loans accounted for as sales. As of December 31, 2001 the Company had a servicing asset of $105.1 million, and retained interests (CMO residuals and interest only strips) resulting from financial asset transfers accounted for as sales totaling $17.8 million. Such assets are initially recorded at their fair value at the time of sale or securitization. Once recorded, such assets are periodically evaluated and adjusted accordingly using discounted future cash flows techniques, via Company simulation models and through external consultants. Generally, the value of such assets decline with decreases in interest rates and conversely increases when interest rates increase. An impairment is recognized on the Company's servicing asset whenever the prepayment pattern of the underlying mortgage loans indicates that the fair value of such asset is lower than its carrying amount. ~i Retained interests are adjusted periodically to their estimated fair value, and are included within mortgage-backed securities available for sale on the consolidated statements of financial condition. See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for further information regarding the Company's servicing asset and retained interests policy. The Company also considers, as critical to the sound operations of the Company, its policy for the measurement and periodic evaluation for impairment of its servicing asset and retained interests resulting from the sale or securitization of residential mortgage loans and/or financial asset transfers of mortgage loans accounted for as sales. As of December 31, 2001 the Company had a servicing asset of $105.1 million, and retained interests (CMO residuals and interest only strips) resulting from financial asset transfers accounted for as sales totaling $17.8 million. Such assets are initially recorded at their fair value at the time of sale or securitization. Once recorded, such assets are periodically evaluated and adjusted accordingly using discounted future cash flows techniques, via Company simulation models and through external consultants. Generally, the value of such assets decline with decreases in interest rates and conversely increases when interest rates increase. An impairment is recognized on the Company's servicing asset whenever the prepayment pattern of the underlying mortgage loans indicates that the fair value of such asset is lower than its carrying amount. Retained interests are adjusted periodically to their estimated fair value, and are included within mortgage-backed securities available for sale on the consolidated statements of financial condition. See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for further information regarding the Company's servicing asset and retained interests policy. 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. Effective January 1, 2001 the Company adopted 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, the Company designated an 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 No. 133. Upon the adoption of this Statement, the Company recognized a gain of approximately $1.9 million as other comprehensive income in stockholders' equity related to derivative instruments that were designated as cash flow hedges, and a loss of approximately $529,000 in the income statement related to derivative instruments that did not qualify for hedge accounting. In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonment, or in a distribution to owners or is classified as held for sale. This Statement is effective for fiscal years beginning after December 15, 2001. Management has determined the adoption of this Statement will not have a material effect on the consolidated financial position or the future results of operations of the Company. In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over the respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Live Assets to Be Disposed Of" or SFAS No. 144 upon adoption. The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. Upon adoption on January 1, 2002, the Company will recognize a $619,000 gain as the cumulative effect of a change in accounting principle related to negative goodwill currently existing from an acquisition in prior years of one of the Company's subsidiaries accounted for under the purchase method of accounting. The Company will have unamortized goodwill in the amount of $4.6 million, which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill (including that related to negative goodwill) was $436,000 and $447,000 for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adopting Statement Nos. 141 and 142, it is not practicable to reasonably estimate the impact, after initial adoption, of these pronouncements on the Company's financial statements, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle subsequent to January 1, 2002. 46 Report of Independent Accountants [PricewaterhouseCoopers Logo] 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity 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. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2001 the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which effect was accounted for as a cumulative effect of a change in accounting principle. /s/ PricewaterhouseCoopers, LLP PricewaterhouseCoopers, LLP San Juan, Puerto Rico February 22, 2002 Certified Public Accountants (of Puerto Rico) License No. 216 expires on December 1, 2004 Stamp 1767241 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report 47 R-G Financial Corporation Consolidated Statements of Financial Condition December 31, 2001 and 2000
2001 2000 -------------- --------------- Assets Cash and due from banks $ 79,223,030 $ 43,466,268 Money market investments: Securities purchased under agreements to resell 15,023,590 -- Time deposits with other banks 63,477,978 25,623,696 Mortgage loans held for sale, at lower of cost or market 236,434,204 95,668,320 Mortgage - backed securities held for trading, at fair value 75,796,172 -- Trading securities pledged on repurchase agreements, at fair value 18,151,659 12,038,040 Mortgage - backed and investment securities available for sale, at fair value 1,566,895,312 1,044,164,433 Securities available for sale pledged on repurchase agreements, at fair value 514,783,468 474,206,504 Mortgage - backed and investment securities held to maturity, at amortized cost (estimated market value: 2001 -$60,682,234; 2000 - $5,111,404) 60,425,371 5,121,108 Securities held to maturity pledged on repurchase agreements, at amortized cost (estimated market value: 2001 - $15,445,319; 2000 - $18,265,000) 15,206,183 18,400,485 Loans receivable, net 1,802,388,064 1,631,276,069 Accounts receivable, including advances to investors, net 23,056,424 16,107,136 Accrued interest receivable 35,426,760 28,919,237 Servicing asset 105,146,902 95,078,530 Premises and equipment 22,401,045 20,144,726 Other assets 30,557,544 29,229,655 -------------- --------------- $4,664,393,706 $ 3,539,444,207 -------------- --------------- Liabilities and Stockholders' Equity Liabilities: Deposits $2,061,223,825 $ 1,676,062,163 Federal funds purchased -- 25,000,000 Securities sold under agreements to repurchase 1,396,938,849 827,749,494 Notes payable 195,586,855 138,857,562 Advances from FHLB 464,125,000 505,000,000 Other borrowings 7,971,888 8,839,770 Accounts payable and accrued liabilities 71,867,012 43,614,238 Other liabilities 7,559,690 5,485,330 -------------- --------------- 4,205,273,119 3,230,608,557 -------------- --------------- Commitments and contingencies 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 7.60% Monthly Income Preferred Stock, Series C, $25 liquidation value, 2,760,000 shares issued and outstanding 69,000,000 -- Common stock: Class A - $.01 par value, 40,000,000 shares authorized, 16,053,056 issued and outstanding in 2001 (2000 - 18,440,556) 160,531 184,406 Class B - $.01 par value, 40,000,000 shares authorized, 15,241,322 issued and outstanding in 2001 (2000 - 10,230,029) 152,413 102,300 Additional paid-in capital 71,254,084 40,800,652 Retained earnings 229,997,012 186,028,611 Capital reserves of the Bank 11,629,328 7,444,108 Accumulated other comprehensive income (loss), net of tax 1,927,219 (724,427) -------------- --------------- 459,120,587 308,835,650 -------------- --------------- $4,664,393,706 $ 3,539,444,207 -------------- ---------------
The accompanying notes are an integral part of these financial statements. 48 R-G Financial Corporation Consolidated Statements of Income Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------- ------------- ------------- Interest income: Loans $ 152,250,689 $ 160,092,642 $ 117,304,300 Money market and other investments 31,959,284 24,720,794 10,243,856 Mortgage-backed securities 86,361,159 50,787,415 35,593,191 ------------- ------------- ------------- Total interest income 270,571,132 235,600,851 163,141,347 ------------- ------------- ------------- Interest expense: Deposits 88,853,997 80,658,716 53,643,104 Securities sold under agreements to repurchase 49,476,045 50,542,190 27,474,602 Notes payable 11,395,214 11,628,438 13,633,767 Other 23,800,847 27,784,370 11,812,100 ------------- ------------- ------------- 173,526,103 170,613,714 106,563,573 ------------- ------------- ------------- Net interest income 97,045,029 64,987,137 56,577,774 Provision for loan losses (11,125,000) (5,751,325) (4,525,000) ------------- ------------- ------------- Net interest income after provision for loan losses 85,920,029 59,235,812 52,052,774 ------------- ------------- ------------- Non-interest income: Net gain on origination and sale of loans 62,511,929 41,230,234 37,098,218 Loan administration and servicing fees 33,920,016 30,848,557 27,109,051 Service charges, fees and other 12,615,157 7,231,178 6,603,998 ------------- ------------- ------------- 109,047,102 79,309,969 70,811,267 ------------- ------------- ------------- Total revenues 194,967,131 138,545,781 122,864,041 ------------- ------------- ------------- Non-interest expenses: Employee compensation and benefits 33,290,372 27,031,340 24,432,771 Office occupancy and equipment 16,648,510 13,435,644 11,289,365 Other administrative and general 57,133,173 40,324,994 33,567,706 ------------- ------------- ------------- 107,072,055 80,791,978 69,289,842 ------------- ------------- ------------- Income before income taxes and cumulative effect of change in accounting principle 87,895,076 57,753,803 53,574,199 ------------- ------------- ------------- Income tax expense: Current 20,465,327 12,276,425 8,905,520 Deferred 1,136,178 1,844,583 3,333,687 ------------- ------------- ------------- 21,601,505 14,121,008 12,239,207 ------------- ------------- ------------- Income before cumulative effect from change in accounting principle 66,293,571 43,632,795 41,334,992 Cumulative effect from change in accounting principle, net of income tax benefit of $206,334 (322,728) -- -- ------------- ------------- ------------- Net income $ 65,970,843 $ 43,632,795 $ 41,334,992 Less: Preferred stock dividends (9,920,100) (5,637,500) (3,753,819) ------------- ------------- ------------- Net income available to common stockholders $ 56,050,743 $ 37,995,295 $ 37,581,173 ------------- ------------- ------------- Earnings per common share before cumulative effect from change in accounting principle Basic $ 1.89 $ 1.33 $ 1.31 ------------- ------------- ------------- Diluted $ 1.85 $ 1.30 $ 1.28 ------------- ------------- ------------- Earnings per common share: Basic $ 1.88 $ 1.33 $ 1.31 ------------- ------------- ------------- Diluted $ 1.83 $ 1.30 $ 1.28 ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 49 R-G Financial Corporation Consolidated Statements of Comprehensive Income Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ Net income $ 65,970,843 $ 43,632,795 $ 41,334,992 ------------ ------------ ------------ Other comprehensive income, before tax: Unrealized gains (losses): Cash flow hedges (9,947,245) -- -- ------------ ------------ ------------ Investment securities: Arising during period 14,724,483 11,012,938 (15,975,369) Less: Reclassification adjustments for gains (losses) included in net income (2,341,676) 576,446 959,813 ------------ ------------ ------------ 12,382,807 11,589,384 (15,015,556) ------------ ------------ ------------ Other comprehensive income (loss) before income taxes and cumulative effect from change in accounting principle 2,435,562 11,589,384 (15,015,556) Income tax (expense) benefit related to items of other comprehensive income (949,869) (4,519,860) 5,856,067 ------------ ------------ ------------ Other comprehensive income (loss) before cumulative effect from change in accounting principle 1,485,693 7,069,524 (9,159,489) Cumulative effect from change in accounting principle, net of income taxes of $745,446 1,165,953 -- -- ------------ ------------ ------------ Other comprehensive income (loss), net of tax 2,651,646 7,069,524 (9,159,489) ------------ ------------ ------------ Comprehensive income, net of tax $ 68,622,489 $ 50,702,319 $ 32,175,503 ------------ ------------ ------------
Preferred Stock Common Stock Class A Shares Amount Shares Amount --------- ------------- ---------- -------- Balance at December 31, 1998 2,000,000 $ 50,000,000 18,440,556 $184,406 Issuance of Series B Preferred Stock 1,000,000 25,000,000 Issuance of Common Stock Cash dividends declared: Common stock Preferred stock Net income Transfer to capital reserves Other comprehensive loss, net of tax --------- ------------- ---------- -------- Balance at December 31, 1999 3,000,000 75,000,000 18,440,556 184,406 Issuance of common stock Cash dividends declared: Common stock Preferred stock Net income Transfer to capital reserves Other comprehensive income, net of tax --------- ------------- ---------- -------- Balance at December 31, 2000 3,000,000 75,000,000 18,440,556 184,406 Issuance of common stock: Secondary offering (2,207,500) (22,075) Other (180,000) (1,800) Issuance of Series C Preferred Stock 2,760,000 69,000,000 Cash dividends declared: Common stock Preferred stock Net income Transfer to capital reserves Other comprehensive income, net of tax --------- ------------- ---------- -------- Balance at December 31, 2001 5,760,000 $ 144,000,000 16,053,056 $160,531 --------- ------------- ---------- --------
The accompanying notes are an integral part of these financial statements. 50 R-G Financial Corporation Consolidated Statements of Changes in Stockholder's Equity for the Years ended December 31, 2001, 2000 and 1999
Common Stock Accumulated Class B Additional Capital other comprehensive Retained Shares Amount paid-in capital reserves income (loss) earnings Total ---------- ------------ ----------- ----------- ----------- ------------- ------------- 10,146,091 $ 101,461 $41,544,378 $ 3,547,798 $ 1,365,538 $ 124,418,278 $ 221,161,859 ---------- ------------ ----------- ----------- ----------- ------------- ------------- (1,078,356) 23,921,644 71,640 716 287,834 288,550 (4,258,460) (4,258,460) (3,753,819) (3,753,819) 41,334,992 41,334,992 1,547,860 (1,547,860) (9,159,489) (9,159,489) ---------- ------------ ----------- ----------- ----------- ------------- ------------- 10,217,731 102,177 40,753,856 5,095,658 (7,793,951) 156,193,131 269,535,277 12,298 123 46,796 46,919 (5,811,365) (5,811,365) (5,637,500) (5,637,500) 43,632,795 43,632,795 2,348,450 (2,348,450) 7,069,524 7,069,524 ---------- ------------ ----------- ----------- ----------- ------------- ------------- 10,230,029 102,300 40,800,652 7,444,108 (724,427) 186,028,611 308,835,650 4,415,000 44,150 31,053,535 31,075,610 596,293 5,963 1,797,972 1,802,135 (2,398,075) 66,601,925 (7,897,122) (7,897,122) (9,920,100) (9,920,100) 65,970,843 65,970,843 4,185,220 (4,185,220) 2,651,646 2,651,646 ---------- ------------ ----------- ----------- ----------- ------------- ------------- 15,241,322 $ 152,413 $71,254,084 $11,629,328 $ 1,927,219 $ 229,997,012 $ 459,120,587 ---------- ------------ ----------- ----------- ----------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 51 R-G Financial Corporation Consolidated Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 65,970,843 $ 43,632,795 $ 41,334,992 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 5,952,962 5,055,761 3,912,603 Amortization of premium on investments and mortgage - backed securities, net 628,832 293,962 236,184 Amortization of servicing asset 15,212,546 9,524,077 7,382,649 Provision for impairment on servicing asset 1,458,310 -- -- Provision for loan losses 11,125,000 5,751,325 4,525,000 Provision for bad debts in accounts receivable 450,000 520,000 546,851 Gain on sale of mortgage loans (792,384) (1,909,670) (4,935,775) (Gain) loss on sales of investment securities available for sale (2,341,676) 576,446 959,813 Unrealized loss (profit) on trading securities and derivative instruments 17,109 (147,108) 21,288 Increase in mortgage loans held for sale (216,392,433) (148,713,248) (117,118,689) Net (increase) decrease in mortgage-backed securities held for trading (3,969,362) 31,672,885 (43,957,877) Increase in interest and accounts receivable (13,100,635) (6,745,660) (16,176,210) Increase in other assets (2,504,983) (9,870,776) (4,570,159) Increase (decrease) in notes payable and other borrowings 91,361,411 30,147,437 (40,518,153) Increase in accounts payable and accrued liabilities 17,113,470 3,929,319 10,832,064 Increase in other liabilities 2,074,360 342,703 1,010,024 ------------- ------------- ------------- Total adjustments (93,707,473) (79,572,547) (197,850,387) ------------- ------------- ------------- Net cash used in operating activities (27,736,630) (35,939,752) (156,515,395) ------------- ------------- ------------- Cash flows from investing activities: Purchases of investment securities available for sale and held to maturity (933,955,383) (121,965,820) (230,790,182) Proceeds from sales and redemptions of investment securities available for sale 653,307,375 98,847,835 108,459,617 Proceeds from maturities of investment securities held to maturity -- 1,727,000 409,000 Principal repayments on mortgage-backed securities 120,775,229 43,696,049 40,875,059 Proceeds from sale of loans 131,508,175 107,563,097 135,632,084 Net originations of loans (735,404,345) (590,126,877) (730,796,715) Purchases of FHLB stock, net (20,103,400) (13,148,000) (21,420,300) Net assets acquired, net of cash received -- 958,428 (4,638,371) Acquisition of premises and equipment (7,655,624) (4,729,443) (8,694,453) Purchases of servicing rights (26,739,228) (20,350,101) (23,979,840) ------------- ------------- ------------- Net cash used in investing activities (818,267,201) (497,527,832) (734,944,101) ------------- ------------- -------------
(continued) 52 R-G Financial Corporation Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------- ------------- ------------- Cash flows from financing activities: Payments on term notes $ (35,500,000) $ (25,000,000) $ (23,600,000) Increase in deposits, net 385,161,662 345,555,795 323,209,064 Increase in securities sold under agreements to repurchase, net 569,189,355 96,408,154 259,919,614 (Decrease) increase in federal funds purchased (25,000,000) 10,000,000 15,000,000 (Repayments) advances from FHLB, net (40,875,000) 121,000,000 263,000,000 Net proceeds from issuance of preferred stock 66,601,925 -- 23,921,644 Net proceeds from issuance of common stock 32,877,745 46,919 288,550 Cash dividends - common stock (7,897,122) (5,811,365) (4,258,460) - preferred stock (9,920,100) (5,637,500) (3,753,819) ------------- ------------- ------------- Net cash provided by financing activities 934,638,465 536,562,003 853,726,593 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 88,634,634 3,094,419 (37,732,903) Cash and cash equivalents at beginning of year 69,089,964 65,995,545 103,728,448 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 157,724,598 $ 69,089,964 $ 65,995,545 ------------- ------------- ------------- Cash and cash equivalents include: Cash and due from banks $ 79,223,030 $ 43,466,268 $ 42,251,508 Securities purchased under agreements to resell 15,023,590 -- -- Time deposits with other banks 63,477,978 25,623,696 23,744,037 Federal funds sold -- -- -- ------------- ------------- ------------- $ 157,724,598 $ 69,089,964 $ 65,995,545 ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 53 R-G Financial Corporation Notes to Consolidated Fianancial Statements December 31, 2001, 2000 and 1999 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, R-G Investments Corporation, a Puerto Rico corporation and securities broker-dealer, 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 and securities brokerage 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 also originates FHA insured, VA guaranteed, and privately insured first and second mortgage loans on residential real estate (1 to 4 families), through its wholly-owned subsidiary Mortgage Store of Puerto Rico, Inc. The Bank provides a full range of banking services through twenty five 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-tomaturity 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. 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. 54 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 value, 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. 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, ranging from 1.50% to 2.00% depending on the type of loan. 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. 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. Until March 31, 2001, the Company followed 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 mortgagebacked 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 totaled approximately $14.1 million and $6.1 million during the years ended December 31, 2001 and 2000, respectively. In addition, interest only strips recognized in securitizations totaled $2,334,000 in 2001; no interest-only strips were recognized in 2000. On April 1, 2001 the Company adopted SFAS No.140, "Accounting for Transfers and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125.O 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. The adoption of the new standards had no 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 had already been reflected in the Company's consolidated financial statements for the year ended December 31, 2000. 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. 55 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 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 straightline 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 negative goodwill of approximately $1.0 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 $3,154,000 and $2,718,000 as of December 31, 2001 and 2000, 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 $972,000 and $807,000 at December 31, 2001 and 2000, 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 and swaps to manage its interest rate exposure. Generally interest rate swaps are designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities. 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, 2001. 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 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. Cash and cash equivalents 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. Cash and cash equivalents at December 31, 2001 include restricted cash of $4.5 million. Accounting for derivative instruments and hedging activities Effective January 1, 2001 the Company adopted SFAS No.133 - "Accounting for Derivative Instruments and Hedging Activities." 56 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, the Company designated an 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. Upon the adoption of this Statement, the Company recognized a gain of approximately $1.9 million as other comprehensive income in stockholders' equity related to derivative instruments that were designated as cash flow hedges, and a loss of approximately $529,000 in the income statement related to derivative instruments that did not qualify for hedge accounting. New accounting pronouncements In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonement, or in a distribution to owners or is classified as held for sale. This Statement is effective for fiscal years beginning after December 15, 2001. Management has determined the adoption of this Statement will not have a material effect on the consolidated financial position or the future results of operations of the Company. In July 2001, the FASB issued SFAS No. 141, OBusiness Combinations," and SFAS No. 142, OGoodwill and Other Intangible Assets.O SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets aquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over the respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Live Assets to Be Disposed OfO or SFAS No. 144 upon adoption. The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30 2001 will not be amortized, but will continue to be evaluated for impairment. Goodwill and intangible assets aquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. Upon adoption on January 1, 2002, the Company will recognize a $619,000 gain as the cumulative effect of a change in accounting principle related to negative goodwill currently existing from an aquisition in prior years of one of the Company's subsidiaries accounted for under the purchase method of accounting. The Company will have unamortized goodwill in the amount of $4.6 million, which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill (including that related to negative goodwill) was $436,000 and $447,000 for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adopting Statement Nos. 141 and 142, it is not practicable to reasonably estimate the impact, after initial adoption, of these pronouncements on the Company's financial statements, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle subsequent to January 1, 2002. 57 2. Mortgage loans held for sale Mortgage loans held for sale consist of:
December 31, 2001 2000 ------------ ----------- Conventional loans $133,837,961 $49,866,567 FHA/VA loans 102,596,243 45,801,753 ------------ ----------- $236,434,204 $95,668,320 ------------ -----------
The aggregate amortized cost and approximate market value of loans held for sale as of December 31, 2001 are as follows:
Amortized Gross unrealized Gross unrealized Approximate cost gains losses market value ------------- ----------- ---------- ------------- $ 236,434,204 $ 6,789,928 $ (157,217) $ 243,066,915 ------------- ----------- ---------- -------------
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, 2001 2000 1999 --------------- ------------- ------------- Proceeds from sales of mortgage loans and mortgage-backed securities $ 1,223,894,857 $ 749,092,437 $ 855,471,398 Mortgage loans and mortgagebacked securities sold (1,180,049,738) (718,925,649) (832,057,042) --------------- ------------- ------------- Gain on sale, net 43,845,119 30,166,788 23,414,356 Deferred fees earned, net of loan origination costs and commitment fees paid 14,868,692 10,916,338 13,685,619 --------------- ------------- ------------- 58,713,811 41,083,126 37,099,975 Net unrealized profit (loss) on trading securities 2,014,471 147,108 (21,288) Net loss on derivative instruments (1,502,518) -- -- --------------- ------------- ------------- Net gain on origination and sale of mortgage loans 59,225,764 41,230,234 37,078,687 Gains on sales of investment securities available for sale from non-mortgage banking activities 3,286,165 -- 19,531 --------------- ------------- ------------- $ 62,511,929 $ 41,230,234 $ 37,098,218 --------------- ------------- -------------
Total gross loan origination fees totaled approximately $41,476,000, $25,779,000 and $28,442,000 during the years ended December 31, 2001, 2000 and 1999, respectively. Gross gains of $51,918,362, $34,788,692 and $32,261,508, and gross losses of $8,073,243, $4,621,904 and $8,847,152 were realized on the above sales during the years ended December 31, 2001, 2000 and 1999, respectively. 58 3. Investment securities December 31,
December 31, 2001 2000 ----------- ----------- Mortgage-backed securities held for trading GNMA certificates $18,151,659 $12,038,040 FHLMC certificates 75,796,172 -- ----------- ----------- $93,947,831 $12,038,040 ----------- -----------
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, 2001 2000 Amortized Fair Amortized Fair cost value cost value -------------- -------------- -------------- -------------- Mortgage-backed securities available for sale Collaterialized mortgage obligations (CMO), CMO residuals (interest only), interest only strips (IO's) and other mortgage-backed securities $ 248,894,118 $ 250,208,322 $ 21,398,077 $ 23,227,026 -------------- -------------- -------------- -------------- FNMA certificates: Due from five to ten years 538,047 549,144 633,552 633,552 Due over ten years 266,495,176 270,935,878 98,779,069 99,968,168 -------------- -------------- -------------- -------------- 267,033,223 271,485,022 99,412,621 100,601,720 -------------- -------------- -------------- -------------- FHLMC certificates: Due within one year -- -- 13,395 13,395 Due from one to five years 73,195 74,382 131,526 129,956 Due from five to ten years 1,264,702 1,292,010 1,587,103 1,587,034 Due over ten years 435,662,149 437,026,277 434,864,554 437,226,389 -------------- -------------- -------------- -------------- 437,000,046 438,392,669 436,596,578 438,956,774 -------------- -------------- -------------- -------------- GNMA certificates: Due from one to five years 50,063 50,313 25,582 25,502 Due from five to ten years 11,053,286 11,172,001 10,491,790 10,419,318 Due over ten years 513,507,515 511,638,456 584,419,215 576,869,337 -------------- -------------- -------------- -------------- 524,610,864 522,860,770 594,936,587 587,314,157 -------------- -------------- -------------- -------------- 1,477,538,251 1,482,946,783 1,152,343,863 1,150,099,677 Investment securities available for sale U.S. Government and Agencies securities: Due within one year 9,600,000 9,806,480 8,500,000 8,446,450 Due from one to five years 156,522,492 157,408,260 192,762,585 193,298,396 Due from five to ten years 307,109,665 310,937,946 114,881,388 115,351,548 473,232,157 478,152,686 316,143,973 317,096,394 Corporate debt obligations - Due from one to five years 53,636,583 54,502,744 5,097,519 5,201,699 FHLB stock 66,076,567 66,076,567 45,973,167 45,973,167 -------------- -------------- -------------- -------------- 592,945,307 598,731,997 367,214,659 368,271,260 -------------- -------------- -------------- -------------- $2,070,483,558 $2,081,678,780 $1,519,558,522 $1,518,370,937 -------------- -------------- -------------- --------------
59
Effect on fair value PSA increase Discount rate increase (basis points) (basis points) Assumptions Fair value 50 133 100 200 ----------- ---------- -- --- --- --- CMO Residuals PSA 100-350 $ 8,199,000 $ (371,000) $ (724,000) $(280,000) $ (595,000) Discount rate 8-10% IO's Strips PSA 166-333 9,627,000 (812,000) (1,904,000) (273,000) (543,000) Discount rate 15% ------------ ----------- ----------- --------- ----------- $ 17,826,000 $(1,183,000) $(2,628,000) $(553,000) $(1,138,000) ------------ ----------- ----------- --------- -----------
Anticipated credit losses as of December 31, 2001, as well as credit losses, net of recoveries, during 2001 and 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 return assumptions, depending on the type of loan of the underlying mortgages, the coupon rate and seasoning (loan age). Prepayment speed assumptions (OPSAO) are based on actual Public Securities Association Dealer Prepayment Estimates as published by Bloomberg Financial News. 60 Mortgage-backed securities available for sale include CMO residuals and interest only strips (IO's) resulting from financial asset transfers accounted for as sales. The key assumptions used in determining the fair values of such securities as of December 31, 2001 and the sensitivity analysis on the fair value of such retained interests as of such date follows: December 31, 2001 Effect on fair value PSA increase Discount rate increase 60
December 31, 2001 2000 Amortized Fair Amortized Fair cost value cost value Mortgage-backed securities held to maturity GNMA certificates: Due within one year $ -- $ -- $ 2,435 $ 2,611 Due from five to ten years 7,180,376 7,111,405 8,864,274 8,605,749 Due over ten years 37,042,861 37,091,537 1,844,978 1,765,812 44,223,237 44,202,942 10,711,687 10,374,172 FNMA certificates- Due over ten years 7,593,982 7,909,958 8,946,973 9,145,168 FHLMC certificates- Due over ten years 128,335 124,863 159,544 153,675 ----------- ----------- ----------- ----------- 51,945,554 52,237,763 19,818,204 19,673,015 ----------- ----------- ----------- ----------- Investment securities held to maturity Puerto Rico Government and Agencies obligations: Due from one to five years 12,691,000 12,731,365 1,948,000 1,948,000 Due from five to ten years 10,895,000 11,058,425 1,755,389 1,755,389 ----------- ----------- ----------- ----------- 23,586,000 23,789,790 3,703,389 3,703,389 Other: Due from one to five years 100,000 100,000 -- -- ----------- ----------- ----------- ----------- 23,686,000 23,889,790 3,703,389 3,703,389 ----------- ----------- ----------- ----------- $75,631,554 $76,127,553 $23,521,593 $23,376,404 ----------- ----------- ----------- -----------
Unrealized gains and losses on securities held to maturity and available for sale follows:
2001 2000 Gross unrealized Gross unrealized Gains Losses Gains Losses ------------ ----------- ----------- ----------- Securities held to maturity: Puerto Rico Government obligations $ 203,790 $ -- $ -- $ -- Mortgage-backed securities 379,385 (87,176) 198,372 (343,561) ------------ ----------- ----------- ----------- $ 583,175 $ (87,176) $ 198,372 $ (343,561) ------------ ----------- ----------- ----------- Securities available for sale: U.S. Government obligations $ 6,259,643 $(1,339,114) $ 1,566,851 $ (614,430) Corporate debt obligations 1,009,959 (143,798) 104,180 -- Mortgage-backed securities 12,881,269 (7,472,737) 6,613,572 (8,857,758) ------------ ----------- ----------- ----------- $ 20,150,871 $(8,955,649) $ 8,284,603 $(9,472,188) ------------ ----------- ----------- -----------
December 31, During the years ended December 31, 2001, 2000 and 1999, proceeds from the sale of securities available for sale totaled approximately $372,615,000, $66,848,000 and $88,760,000, respectively; gross gains realized on such sales totaled approximately $3,538,000 and $1,392,000 during 2001 and 1999 respectively; no gains were realized in 2000; gross losses realized in 2001, 2000 and 1999 were approximately $1,196,000, $576,000 and $2,352,000 respectively. During 2001, the Company reclassified $75.9 million securities available for sale to held for trading, recognizing a gain of $833,000. During 1999, the Company reclassified $9,296,000 securities held for trading to available for sale. As discussed in Notes 7, 8, 9 and 10 to the consolidated financial statements, as of December 31, 2001 the Company had investment and mortgage-backed securities and mortgage loans amounting to approximately $2.3 billion pledged to secure certain deposits, securities sold under agreements to repurchase, and advances from the FHLB. 61 In addition to the investment and mortgage-backed securities pledged on repurchase agreements and reported as pledged assets in the statements of financial condition, at December 31, 2001 and 2000 the carrying amount of investment securities pledged as collateral on repurchase agreements where the counterparties do not have the right to sell or repledge the assets are as follows:
December 31, 2001 2000 ------------ ------------ Mortgage-backed and investment securities available for sale $854,380,882 $358,850,865 Mortgage-backed securities held to maturity 36,613,639 1,253,038 ------------ ------------ $890,994,521 $360,103,903
4. Loans and allowances for loan losses Loans consist of the following:
December 31, 2001 2000 -------------- -------------- Real estate loans: Residential - first mortgage $ 996,885,290 $ 998,983,595 Residential - second mortgage 33,320,705 27,419,145 Land 9,187,516 6,049,179 Construction 227,271,477 151,692,483 Commercial 372,923,231 304,104,485 -------------- -------------- 1,639,588,219 1,488,248,887 Undisbursed portion of loans in process (92,934,804) (78,163,117) Net deferred loan costs 20,307 908,553 -------------- -------------- 1,546,673,722 1,410,994,323 -------------- -------------- Other loans: Commercial 92,156,655 59,120,394 Consumer: Loans secured by deposits 26,175,695 26,925,836 Loans secured by real estate 83,509,393 100,357,019 Other 71,506,951 45,563,186 Unearned interest (206,654) (85,055) -------------- -------------- 273,142,040 231,881,380 -------------- -------------- Total loans 1,819,815,762 1,642,875,703 Allowance for loan losses (17,427,698) (11,599,634) -------------- -------------- $1,802,388,064 $1,631,276,069 ============== ==============
The changes in the allowance for loan losses follow:
Year Ended December 31, 2001 2000 1999 ----------- ----------- ----------- Balance, beginning of year $11,599,634 $ 8,970,605 $ 8,055,432 Provision for loan losses 11,125,000 5,751,325 4,525,000 Transferred reserves 806,176 -- -- Loans charged-off (6,627,063) (3,985,445) (4,439,807) Recoveries 523,951 863,149 829,980 ----------- ----------- ----------- Balance, end of year $17,427,698 $11,599,634 $ 8,970,605 =========== =========== ===========
62 As of December 31, 2001 and 2000 the Company had commercial loans classified as impaired totaling $4,994,000 and $1,565,000, 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, 2001, 2000 and 1999, loans on which the accrual of interest income had been discontinued amounted to approximately $71,582,000, $94,982,000 and $59,014,000, respectively. The additional interest income that would have been recognized during 2001, 2000 and 1999 had these loans been accruing interest amounted to approximately $3,254,000, $2,664,000 and $1,637,000, respectively. The Company has no material commitments to lend additional funds to borrowers whose loans were in non-accruing status at December 31, 2001. 5. SERVICING ASSET 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 cancelable 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, 2001 and 2000, the mortgage loans servicing portfolio amounted to approximately $7,224,571,000 and $6,634,059,000, respectively, including approximately $1,020,564,000 and $1,060,886,000, respectively, serviced for the Bank, and $484,961,000 and $462,975,000, respectively, under sub-servicing contracts. The changes in the servicing asset of the Company follows:
Year Ended December 31, 2001 2000 1999 ------------ ------------ ------------ Balance at beginning of period $ 95,078,530 $ 84,252,506 $ 58,221,052 Rights originated 25,088,857 15,039,273 14,072,094 Rights purchased 1,650,371 5,310,828 19,342,009 Scheduled amortization (11,303,856) (9,524,077) (7,382,649) Unscheduled amortization (3,908,690) -- -- Reserves for impairment (1,458,310) -- -- ------------ ------------ ------------ Balance at end of period $105,146,902 $ 95,078,530 $ 84,252,506 ============ ============ ============
As of December 31, 2001 and 2000, the fair value of capitalized mortgage servicing rights was approximately $107,119,000 and $98,648,000, respectively. The major assumptions for the estimated fair value at December 31, 2001 were discount rates ranging from 10% to 12% and a PSA of 122 to 600, depending on the type and coupon of the loan, with a weighted average life of 9.08 years. 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 mortgagebacked securities issued and in its FNMA and FHLMC portfolio, as well as certain private investors. At December 31, 2001, the mortgage loan portfolio serviced for GNMA, FNMA, FHLMC and private investors subject to the timely payment commitment amounted to approximately $2,955,997,000, $791,904,000, $1,572,511,000 and $66,141,000, respectively (2000- $3,022,394,000, $526,049,000, $1,387,529,000 and $0). Total funds advanced as of December 31, 2001 in relation to such commitments amount to $4,359,000, $9,089,000 and $1,789,000 for escrow advances, principal and interest advances and foreclosure advances, respectively (2000 - $3,634,000, $5,213,000 and $1,791,000). 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, 2001 and 2000, the related escrow funds include approximately $101,903,000 and $91,826,000, respectively, deposited in the Bank; these funds are included in the Company's consolidated financial statements. Escrow funds also include approximately $4,792,000 and $12,622,000 at December 31, 2001 and 2000, respectively, deposited with other banks and excluded from the Company's assets and liabilities. 63 6. Premises and equipment Premises and equipment consist of:
Estimated useful life December 31, (years) 2001 2000 --------------------- ------------ ------------ Buildings 20 $ 2,570,311 $ 1,901,439 Furniture, fixtures and equipment 5 28,522,503 24,655,614 Leasehold improvements 10 14,397,266 13,927,201 Autos 5 703,659 607,853 ------------ ------------ 46,193,739 41,092,107 Less - Accumulated depreciation and amortization (23,792,694) (20,947,381) ------------ ------------ $ 22,401,045 $ 20,144,726 ============ ============
7. DEPOSITS Deposits are summarized as follows:
December 31, 2001 2000 -------------- -------------- Passbook savings $ 199,756,208 $ 116,776,127 -------------- -------------- NOW accounts 68,411,356 43,270,559 Super NOW accounts 236,898,326 97,172,275 Regular checking accounts (non-interest bearing) 78,213,163 70,760,209 Commercial checking accounts (non-interest bearing) 167,780,668 101,177,563 -------------- -------------- 551,303,513 312,380,606 -------------- -------------- Certificates of deposit: Under $ 100,000 429,913,386 489,220,809 $100,000 and over 874,494,924 749,081,246 -------------- -------------- 1,304,408,310 1,238,302,055 -------------- -------------- Accrued interest payable 5,755,794 8,603,375 $2,061,223,825 $1,676,062,163 ============== ==============
The weighted average stated interest rate on all deposits at December 31, 2001 and 2000 was 4.01% and 5.34%, respectively. As of December 31, 2001, the Company had delivered investment securities held to maturity and available for sale with a carrying value of approximately $6.1 million as collateral for public funds' deposits. At December 31, 2001 scheduled maturities of certificates of deposit are as follows: 2002 $ 941,311,308 2003 61,665,344 2004 48,527,294 2005 126,293,572 2006 121,591,631 Thereafter 5,019,161 --------------- $ 1,304,408,310 ===============
64 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
December 31, 2001 2000 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 $ 292,107,000 $ 290,084,633 $218,384,000 $221,079,000 GNMA: Held for trading 17,607,109 18,151,659 11,601,830 12,038,040 Available for sale 518,860,230 537,548,442 540,028,922 571,276,450 Held to maturity 43,741,000 44,205,544 9,679,000 10,369,000 CMO and CMO residuals available for sale 25,332,510 29,336,121 4,155,685 3,704,316 FHLMC available for sale 387,076,000 405,669,425 30,088,057 30,744,603 FNMA: Available for sale 61,707,000 62,060,485 5,470,000 6,253,000 Held to maturity 8,166,000 7,909,958 8,342,000 9,145,000 Corporate debt obligations 42,342,000 44,465,244 -- -- -------------- -------------- ------------ ------------ $1,396,938,849 $1,439,431,511 $827,749,494 $864,609,409 ============== ============== ============ ============
At December 31, 2001, repurchase agreements mature within ninety days, except for repurchase agreements totaling $887,044,000 maturing in various dates commencing on April 2, 2002 until February 28, 2011. Expected maturities will differ from contractual maturities because counterparties to the agreements may have call options. At December 31, 2001 repurchase agreements amounting to $253.2 million had call options. Maximum amount of borrowings outstanding at any month-end during 2001 and 2000 under the agreements to repurchase were $1,396,939,000 and $838,202,000, respectively. The approximate average aggregate borrowings outstanding during 2001 and 2000 were $1,035,814,000 and $756,351,000, respectively. The weighted average interest rate of such agreements was 3.47% and 6.75% at December 31, 2001 and 2000, respectively; the weighted average rate during 2001 and 2000 was 4.77% and 6.57%, respectively. 65 9. Notes payable Notes payable consist of:
December 31, 2001 2000 ------------- ------------- Warehousing lines, bearing interest at floating rates ranging from 1.00% to 1.25% over the applicable Libor rate (2.98% in 2001 and 7.85% in 2000) $ 162,036,855 $ 64,357,562 Lines of credit with banks for an aggregate of $39 million bearing interest at floating rates ranging from 1.375% to 1.75% over the applicable Libor rate (3.34% at December 31,2001 and 8.26% at December 31, 2000), collateralized by mortgage servicing rights with a fair value of approximately $45.7 million in 2001 33,550,000 39,000,000 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) -- 25,000,000 Promissory note maturing in 2002 paying semiannual interest at a fixed annual rate of 6.52% -- 10,500,000 ------------- ------------- $ 195,586,855 $ 138,857,562 ============= =============
As of December 31, 2001, the Company had various credit line agreements permitting the Company to borrow up to $253.4 million in warehousing lines with banks; the unused portion of warehousing lines totaled approximately $91.8 million. Warehousing lines at December 31, 2001 are collateralized by approximately $180.7 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. The following information relates to borrowings of the Company under the credit line agreements:
December 31, (Dollars in thousands) 2001 2000 -------- -------- Maximum aggregate borrowings outstanding at any month-end $222,801 $157,414 Approximate average aggregate borrowings outstanding during the year $208,521 $131,726 Weighted average interest rate during the year computed on a monthly basis 4.37% 6.37% Weighted average interest rate at end of year 3.04% 8.00%
66 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF NEW YORK At December 31, 2001 advances from FHLB mature at various dates commencing on April 12, 2002 until March 2, 2011, and bear interest at various rates ranging from 2.42% to 5.81%. The weighted average stated interest rate on advances from the FHLB was 4.87% and 6.42% at December 31, 2001 and 2000, 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 $1.2 billion as of December 31, 2001. The unused portion under such line of credit was approximately $724.9 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. At December 31, 2001 the Bank maintains collateral (principally in the form of first mortgage notes and investment securities) amounting to approximately $643.9 million with the FHLB as part of the Agreement. At December 31, 2001, 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) consist of the following:
December 31, 2001 2000 ------------ ------------ DEFERRED TAX LIABILITIES: Unrealized gain on securities held for trading $ 897,307 $ 159,154 Deferred expenses 83,480 445,393 CMO residuals (IOs) 3,097,606 2,962,818 Net deferred loan origination costs -- 633,932 Servicing asset 16,194,122 15,363,003 Securitization gains on mortgage-backed securities 6,661,392 6,391,230 Unrealized gains on securities available for sale 4,366,136 -- ------------ ------------ 31,300,043 25,955,530 ------------ ------------ DEFERRED TAX ASSETS: Net deferred origination fees (133,033) -- Net operating loss carry forward (510,482) (82,184) Allowance for loan losses (6,796,802) (4,523,857) AMT credits (3,344,844) (2,819,702) Other foreclosed property reserve (94,748) (155,620) Reserve for bad debts -- (184,228) Unrealized losses on securities available for sale -- (463,159) Unrealized losses on cash flow hedges (3,133,980) -- Unrealized losses on derivative instruments held for trading (653,376) -- Deferred gains on sale of investment securities (211,228) (183,336) Other (370,500) -- ------------ ------------ (15,248,993) (8,412,086) ------------ ------------ Net deferred tax liability $ 16,051,050 $ 17,543,444 ============ ============
67 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, (Dollars in thousands) 2001 2000 1999 % OF PRETAX % OF PRETAX % OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME -------- ----------- ------- ----------- ------- ----------- Computed income tax at statutory rate $ 34,073 39% $22,524 39% $20,894 39% Effect on provision of: Tax-exempt interest (11,968) (14) (5,907) (11) (5,629) (10) Adjustment for tax differences expected to reverse at tax rates lower than the statutory rate (576) (1) (1,664) (3) (2,040) (4) Discount on tax credits purchased -- -- (1,133) (2) (506) (1) Other (non-taxable)/non-deductible items, net 73 1 301 1 (480) (1) -------- --- ------- --- ------- --- $ 21,602 25% $14,121 24% $12,239 23% ======== === ======= === ======= ===
12. STOCKHOLDERS' EQUITY The Company's average number of common shares outstanding used in the computation of basic earnings per common share was 29,871,972 in 2001 (2000-28,662,305; 1999-28,632,768); the weighted average number of shares outstanding for the computation of diluted earnings per share was 30,552,403 in 2001 (2000-29,314,712; 1999 -29,334,224) after giving effect to outstanding stock options granted under the Company's Stock Option Plan. During 2001, cash dividends were paid of $0.2635 (2000 -$0.20275; 1999 - $0.14875) per common share amounting to $7,897,122 (2000 -$5,811,365; 1999 -$4,258,460). 13. NON-INTEREST EXPENSES Non-interest expenses consist of the following:
Year Ended December 31, 2001 2000 1999 ----------- ----------- ----------- Stationery and supplies $ 2,304,214 $ 1,861,689 $ 2,018,569 Advertising and promotion 8,559,121 5,488,373 5,718,016 Telephone 1,767,115 1,745,117 1,585,587 License and other taxes 4,282,639 3,597,296 2,693,461 Deposit insurance 318,790 293,751 514,473 Other insurance 858,572 865,039 801,334 Legal and other professional services 2,527,347 2,213,678 2,254,510 Amortization and impairment of mortgage servicing asset 16,670,855 9,524,077 7,382,649 Goodwill amortization 435,626 446,960 514,293 Guaranty fees 3,218,576 2,536,248 2,060,884 Other 16,190,318 11,752,766 8,023,930 ----------- ----------- ----------- $57,133,173 $40,324,994 $33,567,706 =========== =========== ===========
14. RELATED PARTY TRANSACTIONS The Company leases some of its facilities from an affiliate, mostly on a monthto- month basis. The annual rentals under these agreements during 2001 were approximately $2,352,000 (2000 - $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, 2001 the aggregate amount of loans outstanding to officers, directors, and principal stockholders' of the Company and its subsidiaries were insignificant. 68 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 Officer 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 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, 2001, the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2001, 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, 2001 and 2000:
(Dollars in thousands) TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- ---------- ------- As of December 31, 2001 Total capital (to risk weighted assets): Consolidated $448,715 18.37% $195,442 8% N/A N/A R-G Premier Bank only $255,557 12.11% $168,828 8% $211,035 10% Tier I capital (to risk weighted assets): Consolidated $439,885 18.01% $ 97,721 4% N/A N/A R-G Premier Bank only $239,439 11.35% $ 84,414 4% $126,620 6% Tier I capital (to average assets): Consolidated $439,885 9.81% $179,325 4% N/A N/A R-G Premier Bank only $239,439 6.44% $148,620 4% $185,775 5% - ------------------------------------------------------------------------------------------------------------------------------ As of December 31, 2000 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% 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% 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%
69 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 available for grant to key employees of the Company and any subsidiaries. No options were issued prior to the public offering. 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. Stock options granted, cancelled and exercised during 1999, 2000 and 2001 were as follows:
WEIGHTED AVERAGE PRICE ------------- 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 - ----------------------------------------------------------------------------------- Outstanding stock options, December 31, 1999 755,160 $ 5.69 Exercised (9,720) $ 4.03 Cancelled (8,640) $ 4.03 - ----------------------------------------------------------------------------------- Outstanding stock options, December 31, 2000 736,800 $ 5.75 Granted 50,000 $15.00 Exercised (414,720) $ 4.22 Cancelled (12,000) $16.25 - ----------------------------------------------------------------------------------- Outstanding stock options, December 31, 2001 360,080 $ 8.46 ======== ======
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, 2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ----------- ----------- ----------- Net earnings - as reported $65,970,843 $43,632,795 $41,334,992 Net earnings - pro forma $65,816,329 $43,478,281 $41,180,478 Basic earnings per share - as reported $ 1.88 $ 1.33 $ 1.31 Basic earnings per share - pro forma $ 1.87 $ 1.32 $ 1.31 Diluted earnings per share - as reported $ 1.83 $ 1.30 $ 1.28 Diluted earnings per share - pro forma $ 1.83 $ 1.29 $ 1.28
70 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 - Closing price of the stock on the date the option is 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. 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, 2001, 2000 and 1999 amounted to approximately $257,000, $232,000 and $169,000, respectively. 18. COMMITMENTS AND CONTINGENCIES Commitments to buy and sell GNMA certificates As of December 31, 2001, the Company had open commitments to issue GNMA certificates in the amount of $108.6 million. Commitments to sell mortgage loans As of December 31, 2001, the Company had commitments to sell mortgage loans to third party investors amounting to $49.8 million. Lease commitments The Company is obligated under several noncancellable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals. As of December 31, 2001, minimum annual rental commitments under noncancellable operating leases for certain office space and equipment, including leases with an affiliate, were as follows:
YEAR AMOUNT - ---- ------ 2002 $ 5,208,668 2003 4,479,359 2004 3,948,187 2005 3,273,594 2006 2,877,783 Later years 14,257,251 ------------ $ 34,044,842 ============
Rent expense amounted to approximately $5,752,000 in 2001, $5,091,000 in 2000 and $4,081,000 in 1999. 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, 2001, the Company is liable under limited recourse provisions resulting from the sale of residential mortgage loans to several investors, principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $486.3 million at December 31, 2001. On certain sales, the Company is also contingently liable for any losses sustained in the disposition of any future repossessed properties that may result from such loans. The principal balance of these loans, which are also serviced by the Company, amount to $66.1 million at December 31, 2001. Liability, if any, under these provisions is estimated by management to be insignificant at December 31, 2001. In December 2001, the Company entered into a definite merger agreement, as amended, pursuant to which it will acquire The Crown Group, Inc., a Florida savings and loan holding company, and its wholly-owned savings bank subsidiary, Crown Bank, a Federal Savings Bank, which had total assets of $638 million, total deposits of $404 million and stockholders' equity of $69 million as of December 31, 2001. The cost of the acquisition to R-G Financial is $100 million of cash. 71 19. SUPPLEMENTAL DISCLOSURE ON THE STATEMENTS OF CASH FLOWS During 2001, 2000 and 1999, the Company paid interest amounting to approximately $177,254,000, $168,870,000 and $99,587,000, respectively, and income taxes of approximately $7,409,000, $18,142,000 and $8,241,000, respectively. During 2001, 2000 and 1999 the Company retained as investment securities approximately $421,645,000, $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, mostly loan commitments. 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. Unused lines of credit totaled $72.9 million as of December 31, 2001. 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. Contractual commitments to extend credit are legally binding agreements to lend money to customers 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. 21. INTEREST RATE RISK MANAGEMENT As part of its interest rate risk management, the Company enters into interest rate caps and swaps. 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. 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. A detail of interest rate swaps by contractual maturity at December 31, 2001 follows:
NOTIONAL PAY FIXED RECEIVE DESIGNATION/ HEDGED ITEM AMOUNT MATURITY RATE RATE FLOATING DESCRIPTION - ----------- ------ -------- ---- ------------- ----------- N/A $ 10,000,000 June 6, 2003 6.83% 3 month Libor Trading derivative Repurchase agreements 15,000,000 February 6, 2006 4.80% 3 month Libor Cash flow hedge FHLB Advance 50,000,000 February 6, 2006 4.67% 3 month Libor Cash flow hedge Repurchase agreements 70,000,000 December 8, 2009 5.60% 3 month Libor Cash flow hedge N/A 10,000,000 December 15, 2009 5.69% 3 month Libor Trading derivative - --- ---------- ----------------- ----- ------------- ------------------
The following table summarizes the changes in notional amounts of swaps outstanding during 2001: Beginning balance $ 130,000,000 New swaps 65,000,000 Maturities (40,000,000) ------------- Ending balance $ 155,000,000 -------------
72 As of December 31, 2001, interest rate swap maturities are as follows: 2003 $ 10,000,000 2006 65,000,000 2009 80,000,000 ------------- $ 155,000,000 -------------
Expected maturities will differ from contractual maturities because counterparties to the agreements may have the right to call the swaps. As of December 31, 2001, all swap agreements had call options. Net interest settlements on swap agreements are recorded as an adjustment to interest expense on notes payable and repurchase agreements. Net interest paid during 2001 and 1999 amounted to approximately $1,727,000 and $315,000, respectively; net interest received amounted to approximately $886,000 during 2000. A detail of interest rate cap agreements at December 31, 2001 follows:
NOTIONAL INTEREST RECEIVE AMOUNT MATURITY RATE CAP RATE FLOATING ------ -------- -------- ------------- $ 100,000,000 August 21, 2002 7.25% 3 month Libor 100,000,000 August 22, 2002 7.00% 3 month Libor
22. 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, ------------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Employee costs $ 56,181,507 $ 43,372,567 $ 39,738,671 ------------ ------------ ------------ Other administrative and general expenses $ 62,000,927 $ 44,155,321 $ 37,366,087 ------------ ------------ ------------
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, ---------------------------------------------- 2001 2000 1999 ----------- ----------- ---------- Offset against mortgage loan sales and fees $ 6,263,810 $ 3,665,396 $7,069,831 ----------- ----------- ---------- Offset against interest income on loans $ 4,243,213 $ 3,128,092 $3,210,847 ----------- ----------- ---------- Capitalized as part of loans held for sale and loans held for investment $17,251,866 $ 13,378,066 $8,823,603 ----------- ----------- ----------
73 23. 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) 2001 2000 ---------------------------- ---------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and due from banks $ 79,223 $ 79,223 $ 43,466 $ 43,466 Money market investments 63,478 63,478 25,624 25,624 Securities purchased under agreements to resell 15,024 15,024 -- -- Mortgage loans held for sale 236,434 243,067 95,668 98,203 Mortgage-backed securities held for trading 93,948 93,948 12,038 12,038 Investment and mortgage-backed securities available for sale 2,015,602 2,015,602 1,472,398 1,472,398 Investment in Federal Home Loan Bank stock 66,077 66,077 45,973 45,973 Investment and mortgage-backed securities held to maturity 75,632 76,128 23,522 23,376 Loans, net 1,802,388 1,884,611 1,631,276 1,695,231 Accounts receivable 58,483 58,483 45,026 45,026 FINANCIAL LIABILITIES Deposits: Non-interest bearing demand $ 245,994 $ 245,994 $ 171,938 $ 171,938 Savings and NOW accounts 505,066 505,228 257,219 252,368 Certificates of deposit 1,310,164 1,294,804 1,246,905 1,260,038 Securities sold under agreements to repurchase 1,396,939 1,390,762 827,749 827,749 Notes payable 195,587 195,587 138,858 138,924 Advances from FHLB 464,125 468,662 505,000 507,282 Other borrowings 7,972 7,972 8,840 8,840 Accounts payable and accrued liabilities 71,867 71,867 43,614 43,614 Trading derivative instruments 2,032 22,032 N/A N/A Derivative instruments accounted for as cash flow hedges 8,036 8,036 N/A N/A Off-balance sheet financial instruments - Interest rate swap agreements in a net receivable (payable) position* N/A N/A $ 89 $ 1,969 Interest rate cap agreements N/A N/A $ 623 $ 76 ---------- ---------
* The amount shown under "carrying value" in 2000 represents net accrual arising from those off-balance sheet financial instruments. 74 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, securities purchased under agreements to resell, accounts receivable, a portion of securities sold under agreements to repurchase, warehousing lines included in notes payable 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 non short-term securities sold under agreements to repurchase, and promissory notes included in notes payable, advances from FHLB and other borrowings, was determined using discounted cash flow analysis over the remaining term of the obligations using market rates for similar instruments. Interest rate swap and cap agreements The fair value of interest rate swap and cap agreements was determined taking into account the actual interest rates at December 31, 2001 and 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. 75 24. 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, 2001 and 2000 and the results of its operations and its cash flows for each of the three years ended on December 31, 2001:
December 31, ---------------------------------- STATEMENTS OF FINANCIAL CONDITION 2001 2000 ------------ ------------ ASSETS Cash $ 29,777,023 $ 227,702 Mortgage-backed securities held to maturity, at amortized cost (market value $36,150,901) 36,087,492 -- Investment in R-G Premier Bank, at equity 248,792,067 181,865,856 Investment in R-G Mortgage, at equity 156,755,609 141,283,756 Investment in Home & Property Insurance Corp., at equity 4,411,074 405,697 Investment in R-G Investment Corporation, at equity 1,367,703 -- Investment in R-G International Corp., at equity 500,000 -- Accrued interest receivable 296,708 -- Accounts receivable - subsidiaries 15,259,242 17,864 Other assets 222,918 165,787 Total assets $493,469,836 $323,966,662 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Advances from subsidiaries $ 34,177,000 $ 15,000,000 Other liabilities and accrued expenses 172,249 131,012 Stockholders' equity 459,120,587 308,835,650 Total liabilities and stockholders' equity $493,469,836 $323,966,662 ------------ ------------
Year Ended December 31, --------------------------------------------------- STATEMENTS OF INCOME 2001 2000 1999 ----------- --------- --------- Income: Interest income $ 1,006,040 $ -- $ -- Other 549,382 448,267 555,371 1,555,422 448,267 555,371 ----------- ----------- ----------- Operating expenses 503,496 383,539 505,183 ----------- ----------- ----------- Income before income taxes and equity earnings in unconsolidated subsidiaries 1,051,926 64,728 50,188 ----------- ----------- ----------- Income taxes 17,803 18,124 14,053 Income before equity earnings in unconsolidated subsidiaries 1,034,123 46,604 36,135 ----------- ----------- ----------- Equity earnings in unconsolidated subsidiaries 64,936,720 43,586,191 41,298,857 Net income $65,970,843 $43,632,795 $41,334,992 ----------- ----------- -----------
The Holding Company had no operations during the years ended December 31, 2001, 2000 and 1999. 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. 76
Year Ended December 31, ------------------------------------------------------- STATEMENTS OF CASH FLOWS 2001 2000 1999 ------------- ------------ ------------ Cash flows from operating activities: Net income $ 65,970,843 $ 43,632,795 $ 41,334,992 ------------- ------------ ------------ Adjustments to reconcile net income to cash (used in) provided by operating activities: Equity earnings in unconsolidated subsidiaries (64,936,720) (43,586,191) (41,298,857) Increase (decrease) in accounts receivable - subsidiaries (15,241,378) 121,292 (69,328) Increase in other assets (353,839) (49,345) (84,208) Increase (decrease) in other liabilities and accrued expenses 41,237 (62,148) 93,773 ------------- ------------ ------------ Total adjustments (80,490,700) (43,576,392) ------------- ------------ ------------ Net cash (used in) provided by operating activities (14,519,857) 56,403 (23,628) ------------- ------------ ------------ Cash flows from investing activities: Purchase of investment securities (36,382,555) -- -- Principal repayments on investment securities 295,063 -- -- Acquisition of Home & Property (1,500,000) (345,000) -- Investment in Bank common stock (35,000,000) -- (39,212,500) Investment in R-G Investment Corporation (1,500,000) -- -- Investment in R-G International Corp. (500,000) -- -- Dividends on common stock from subsidiaries 17,817,222 11,798,865 8,012,279 ------------- ------------ ------------ Cash (used in) provided by investing activities (56,770,270) 11,453,865 (31,200,221) ------------- ------------ ------------ Cash flows from financing activities: Issuance of common stock 32,877,745 46,919 288,550 Net proceeds from issuance of preferred stock 66,601,925 -- 23,921,644 Cash dividends (17,817,222) (11,448,865) (8,012,279) Net advances from subsidiaries 19,177,000 -- 15,000,000 ------------- ------------ ------------ Net cash provided by (used in) financing activities 100,839,448 (11,401,946) 31,197,915 ------------- ------------ ------------ Net increase (decrease) in cash 29,549,321 108,322 (25,934) Cash at beginning of year 227,702 119,380 145,314 ------------- ------------ ------------ Cash at end of year $ 29,777,023 $ 227,702 $ 119,380 ------------- ------------ ------------
77 25. INDUSTRY SEGMENTS The following summarized financial information presents the results of the Company's operations for each of the three years ended December 31, 2001 for its traditional banking and mortgage banking activities:
2001 ----------------------------------------------------------------------- MORTGAGE SEGMENT BANKING BANKING OTHER TOTALS ------------ ----------- ------------ ------------ REVENUES: Net interest income after provision for loan losses $ 71,695,814 $13,582,462 $ - $ 85,278,276 Non-interest income: Net gain on origination and sale of loans 27,391,951 35,119,978 -- 62,511,929 Loan administration and servicing fees -- 35,935,370 -- 35,935,370 Service charges, fees and other 7,879,251 2,655,998 4,820,519 15,355,768 106,967,016 87,293,808 4,820,519 199,081,343 ------------ ----------- ------------ ------------ NON-INTEREST EXPENSES: Employee compensation and benefits 16,514,946 16,071,621 703,805 33,290,372 Office occupancy and equipment 10,654,129 5,848,499 145,882 16,648,510 Other 20,516,364 39,540,600 600,601 60,657,565 47,685,439 61,460,720 1,450,288 110,596,447 ------------ ----------- ------------ ------------ Income before income taxes $ 59,281,577 $25,833,088 $ 3,370,231 $ 88,484,896 ------------ ----------- ------------ ------------
The following is a reconciliation of reportable segment revenues and income before income taxes to the Company's consolidated amounts:
Year Ended December 31, ------------------------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- REVENUES: Total revenues for reportable segments $ 199,081,343 $ 142,830,093 $ 126,216,411 Elimination of intersegment revenues (5,120,252) (4,284,312) (3,352,370) Corporate revenues 1,006,040 -- -- Total consolidated revenues $ 194,967,131 $ 138,545,781 $ 122,864,041 ------------- ------------- -------------
Year Ended December 31, ---------------------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES: Total income before income taxes for reportable segments $ 88,484,896 $ 58,905,775 $ 54,295,708 Elimination of intersegment profits (1,092,364) (768,433) (216,326) Unallocated corporate income (expenses), net 502,544 (383,539) (505,183) Income before income taxes, consolidated $ 87,895,076 $ 57,753,803 $ 53,574,199 ------------ ------------ ------------
78
2000 1999 - ------------------------------------------------------------------ -------------------------------------------------- MORTGAGE SEGMENT MORTGAGE SEGMENT BANKING BANKING OTHER TOTALS BANKING BANKING TOTALS - ----------- ----------- -------- ------------ ----------- ----------- ------------ $55,935,128 $ 3,300,684 $ -- $ 59,235,812 $45,326,068 $ 6,726,706 $ 52,052,774 15,170,465 26,059,769 -- 41,230,234 7,942,193 29,156,025 37,098,218 -- 33,324,040 -- 33,324,040 -- 29,037,883 29,037,883 7,044,593 1,813,356 182,058 9,040,007 6,135,232 1,892,304 8,027,536 78,150,186 64,497,849 182,058 142,830,093 59,403,493 66,812,918 126,216,411 - ----------- ----------- -------- ------------ ----------- ----------- ------------ 13,426,617 13,556,821 47,902 27,031,340 12,733,017 11,699,754 24,432,771 8,464,625 4,959,456 11,563 13,435,644 7,538,952 3,750,413 11,289,365 15,019,159 28,395,036 43,139 43,457,334 14,433,103 21,765,464 36,198,567 36,910,401 46,911,313 102,604 83,924,318 34,705,072 37,215,631 71,920,703 - ----------- ----------- -------- ------------ ----------- ----------- ------------ $41,239,785 $17,586,536 $ 79,454 $ 58,905,775 $24,698,421 $29,597,287 $ 54,295,708 - ----------- ----------- -------- ------------ ----------- ----------- ------------
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, 2001 and 2000 follows:
December 31, --------------------------------------- 2001 2000 --------------- --------------- ASSETS: Banking $ 3,929,980,434 $ 2,873,431,480 Mortgage Banking 843,249,867 788,886,024 Other 8,082,867 634,063 Total assets for reportable segments 4,781,313,168 3,662,951,567 Parent company assets 81,643,383 183,651 Elimination of intersegment balances (198,562,845) (123,691,011) Consolidated total assets $ 4,664,393,706 $ 3,539,444,207 --------------- ---------------
79 26. 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)
2001 ----------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- Interest income $ 62,869 $ 64,491 $ 71,376 $ 71,835 Interest expense (44,702) (43,070) (43,480) (42,274) Net interest income 18,167 21,421 27,896 29,561 Provision for loan losses (2,000) (2,100) (3,225) (3,800) Income before income taxes and cumulative effect from change in accounting principle 18,425 19,453 23,436 26,581 Income tax expense (5,096) (4,015) (6,031) (6,459) Income before cumulative effect from change in accounting principle 13,329 15,438 17,405 20,122 Cumulative effect from change in accounting principle (323) -- -- -- Net income 13,006 15,438 17,405 20,122 Earnings before cumulative effect from change in accounting principle - Basic $ .40 $ .44 $ .48 $ .57 - - Diluted $ .39 $ .43 $ .46 $ .56 Earnings per common share - Basic $ .39 $ .44 $ .48 $ .57 Earnings per common share - Diluted $ .38 $ .43 $ .46 $ .56 -------- -------- -------- --------
(dollars in thousands, except for per share data)
2000 ----------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- Interest income $ 53,283 $ 57,711 $ 60,901 $ 64,195 Interest expense (36,523) (40,978) (45,023) (48,579) Net interest income 16,760 16,733 15,878 15,616 Provision for loan losses (1,350) (1,500) (1,500) (1,401) Income before income taxes 11,761 14,207 14,917 16,869 Income tax expense (2,274) (3,499) (3,555) (4,793) Net income 9,487 10,708 11,362 12,076 Earnings per common share - Basic $ .28 $ .33 $ .35 $ .37 Earnings per common share - Diluted $ .28 $ .32 $ .34 $ .36 -------- -------- -------- --------
80 Stockholder information Corporate Offices R-G Plaza 280 JT Pinero Ave. San Juan, P.R. 00918 (787) 758-2424 US Operations 290 Broad Hollow Rd. 2nd Floor Melville, New York 11747 (631) 549-8188 Annual Meeting April 30, 2002 10:00 a.m. Atlantic time Ritz Carlton San Juan Hotel & Casino Isla Verde, Puerto Rico Special Counsel Kelley, Drye & Warren, LLP Tysons Corner 8000 Towers Crescent Drive Suite 1200 Vienna, Virginia 22182 McConnell & Valdes 270 Munoz Rivera Ave. San Juan, P.R. 000918 Transfer Agent and Registrar American Stock Transfer & Trust Co. 6201 Fifteenth Avenue Brooklyn, N.Y. 11219 Independent Public Accountants PricewaterhouseCoopers, LLP BBV Tower-9th Floor San Juan, P.R. 00918 Market Makers UBS Warburg LLC 299 Park Avenue New York, N.Y. 10171-0026 Keefe, Bruyette & Woods, Inc. 787 Seventh Avenue 4th Floor New York, N.Y. 10019 Sandler O'Neill & Partners, L.P. 919 Third Avenue, 6th Floor New York, N.Y. 10022 Friedman, Billings, Ramsey & Co. Inc. 1001 Nineteenth Street North Arlington, VA 22209 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, 2001 with the Securities and Exchange Commission. Copies of its Annual Report and Quarterly Reports may be obtained without charge through our investors relations page in our website or by contacting our Investor Relations Department, Attention Ms. Damarys Quiles at (787)756-2801. 82 -----END PRIVACY-ENHANCED MESSAGE-----