10-Q 1 g82931e10vq.txt R & G FINANCIAL CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________. Commission file number: 000-21137 R&G FINANCIAL CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Puerto Rico 66-0532217 (State of incorporation (I.R.S. Employer or organization) Identification No.) 280 Jesus T. Pinero Avenue Hato Rey, San Juan, Puerto Rico 00918 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (787) 758-2424 (Registrant's telephone number, including area code) Indicate by checkmark whether Registrant (a) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report (s) and (b) has been subject to such filing requirements for at least 90 days. YES [X] NO [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No Number of shares of Class B Common Stock outstanding as of March 31, 2003: 19,486,665 (Does not include 14,553,056 Class A Shares of Common Stock which are exchangeable into Class B Shares of Common Stock at the option of the holder.) 1 R&G FINANCIAL CORPORATION INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements .................................................................. 3 Consolidated Statements of Financial Condition as of March 31, 2003 (Unaudited) and December 31, 2002.................................. 3 Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 (Unaudited)...................................4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002 (Unaudited)...................................5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited) ........................................ 6 Notes to Unaudited Consolidated Financial Statements ...................................... 7 ITEM 2. Management's Discussion and Analysis ..........................................................19 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..........................................29 ITEM 4. Controls and Procedures.............................................................................29 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ..................................................................................30 ITEM 2. Changes in Securities ............................................................................. 30 ITEM 3. Defaults upon Senior Securities ....................................................................30 ITEM 4. Submission of Matters ..............................................................................30 ITEM 5. Other Information ..................................................................................30 ITEM 6. Exhibits and Reports on Form 8-K ...................................................................30 Signatures .........................................................................................32 Certifications .....................................................................................33
2 PART 1-FINANCIAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003 December 31, 2002 -------------- ----------------- (Unaudited) (Dollars in thousands) ASSETS Cash and due from banks .................................................................... $ 101,132 $ 128,086 Money market investments: Securities purchased under agreements to resell ........................................ 12,297 -- Time deposits with other banks ......................................................... 37,303 65,401 Short-term investments ................................................................. 17,415 4,157 Mortgage loans held for sale, at lower of cost or market ................................... 279,120 258,738 Mortgage-backed and investment securities held for trading, at fair value .................. 45,825 48,651 Trading securities pledged on repurchase agreements, at fair value ......................... -- 26,106 Mortgage-backed and investment securities available for sale, at fair value ................ 2,180,319 1,819,257 Available for sale securities pledged on repurchase agreements, at fair value .............. 775,776 737,656 Mortgage-backed and investment securities held to maturity, at amortized cost (estimated market value: 2003 - $31,349; 2002 - $30,885) ................................... 31,025 30,660 Held to maturity securities pledged on repurchase agreements, at amortized cost (estimated market value: 2003 - $44,573; 2002 - $45,926) ................................... 43,209 44,930 Loans receivable, net ...................................................................... 3,005,891 2,759,689 Accounts receivable, including advances to investors, net .................................. 35,768 32,100 Accrued interest receivable ................................................................ 41,524 40,401 Servicing asset ............................................................................ 133,830 142,334 Premises and equipment ..................................................................... 40,603 38,665 Other assets ............................................................................... 109,098 100,415 ---------- ---------- $6,890,135 $6,277,246 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits .............................................................................. $3,001,934 $2,802,324 Securities sold under agreements to repurchase ........................................ 1,831,335 1,489,758 Notes payable ......................................................................... 218,052 194,607 Advances from FHLB .................................................................... 958,725 940,725 Other borrowings ...................................................................... 42,895 45,066 Accounts payable and accrued liabilities .............................................. 145,662 134,427 Other liabilities ..................................................................... 10,040 8,121 ---------- ---------- 6,208,643 5,615,028 ---------- ---------- Stockholders' equity: Preferred stock, $.01 par value, 20,000,000 shares authorized: Non-cumulative perpetual Monthly Income Preferred Stock, $25 liquidation value: 7.40% Series A, 2,000,000 shares authorized, issued and outstanding ............... 50,000 50,000 7.75% Series B, 1,000,000 shares authorized, issued and outstanding ............... 25,000 25,000 7.60% Series C, 2,760,000 shares authorized, issued and outstanding ............... 69,000 69,000 7.25% Series D, 2,760,000 shares authorized, issued and outstanding .............. 69,000 69,000 Common stock: Class A - $.01 par value, 40,000,000 shares authorized, 14,553,056 issued and outstanding .......................................................... 145 145 Class B - $.01 par value, 60,000,000 shares authorized, 19,486,665 issued and outstanding (2002-19,440,206) ....................................... 195 194 Additional paid-in capital ............................................................ 115,144 114,951 Retained earnings ..................................................................... 316,409 294,592 Capital reserves of the Bank .......................................................... 17,419 17,419 Accumulated other comprehensive income ................................................ 19,180 21,917 ---------- ---------- 681,492 662,218 ---------- ---------- $6,890,135 $6,277,246 ========== ==========
The accompanying notes are an integral part of these statements. 3 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Three month period ended March 31, ------------------------------------- 2003 2002 ------------ ------------ (Unaudited) (Dollars in thousands except per share data) Interest income: Loans $ 51,955 $ 38,503 Money market and other investments 8,618 9,039 Mortgage-backed securities 27,683 25,177 ------------ ------------ Total interest income 88,256 72,719 ------------ ------------ Interest expense: Deposits 21,693 20,826 Securities sold under agreements to repurchase 12,771 12,343 Notes payable 1,870 1,772 Other 9,701 5,773 ------------ ------------ Total interest expense 46,035 40,714 ------------ ------------ Net interest income 42,221 32,005 Provision for loan losses (4,220) (5,000) ------------ ------------ Net interest income after provision for loan losses 38,001 27,005 ------------ ------------ Other income: Net gain on origination and sale of loans and sales of securities available for sale 33,017 17,710 Loan administration and servicing fees 13,201 9,304 Service charges, fees and other 5,721 3,872 ------------ ------------ 51,939 30,886 ------------ ------------ Total revenues 89,940 57,891 ------------ ------------ Operating expenses: Employee compensation and benefits 15,147 10,008 Office occupancy and equipment 5,702 4,262 Other administrative and general 30,543 15,926 ------------ ------------ 51,392 30,196 ------------ ------------ Income before income taxes 38,548 27,695 ------------ ------------ Income tax expense: Current 5,940 5,496 Deferred 3,467 666 ------------ ------------ 9,407 6,162 ------------ ------------ Net income $ 29,141 $ 21,533 ============ ============ Earnings per common share - Basic $ 0.74 $ 0.59 ------------ ------------ - Diluted $ 0.74 $ 0.58 ------------ ------------ Weighted average number of shares outstanding - Basic 34,022,719 31,295,713 - Diluted 34,180,759 31,654,473
The accompanying notes are an integral part of these statements. 4 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month period ended March 31, ----------------------------- 2003 2002 -------- -------- (Unaudited) (Dollars in thousands) Net income $ 29,141 $ 21,533 -------- -------- Other comprehensive income, before tax: Unrealized gains (losses): Derivative instruments 340 1,996 -------- -------- Investment securities: Arising during period (4,728) (14,083) Less: Reclassification adjustments for gains included in net income (106) (75) -------- -------- (4,834) (14,158) -------- -------- (4,494) (12,162) Income tax benefit related to items of other comprehensive income 1,757 4,743 -------- -------- Other comprehensive loss, net of tax (2,737) (7,419) -------- -------- Comprehensive income, net of tax $ 26,404 $ 14,114 ======== ========
The accompanying notes are an integral part of these statements. 5 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month period ended March 31, ---------------------------------- 2003 2002 --------- --------- (Unaudited) (Dollars in thousands) Cash flows from operating activities: Net income $ 29,141 $ 21,533 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,134 1,514 Amortization of premium on investments and mortgage-backed securities, net 2,506 1,195 Amortization of servicing rights 12,306 5,487 Provision for (reversal of) impairment reserves 4,120 (459) Provision for loan losses 4,220 5,000 Gain on sales of mortgage-backed and investment securities available for sale (106) (75) Unrealized loss (gain) on trading securities and derivative instruments, net 803 (52) Increase in mortgage loans held for sale (27,741) (43,215) Net decrease in securities held for trading 28,243 15,702 Increase in receivables (4,792) (5,214) Increase in other assets (8,940) (6,485) Increase (decrease) increase in notes payable and other borrowings 21,274 (4,624) Increase in accounts payable and accrued liabilities 13,218 45,382 Increase (decrease) in other liabilities 1,919 (1,045) --------- --------- Total adjustments 49,164 13,111 --------- --------- Net cash provided by operating activities 78,305 34,644 --------- --------- Cash flows from investing activities: Purchases of investment securities (770,127) (298,201) Proceeds from sales of securities available for sale 28,891 214,433 Principal repayments on mortgage-backed securities and redemption of securities available for sale 358,155 124,794 Proceeds from sales of loans 24,488 -- Net originations of loans (274,910) (195,815) Purchases of FHLB stock, net (14,619) (6,070) Acquisition of premises and equipment (3,815) (1,456) Acquisition of servicing rights (7,921) (5,316) --------- --------- Net cash used in investing activities (659,858) (167,631) --------- --------- Cash flows from financing activities: Increase (decrease) in deposits - net 199,610 (46,548) Increase in securities sold under agreements to repurchase - net 341,577 42,679 Advances from FHLB, net 18,000 63,000 Net proceeds from issuance of preferred stock -- 66,616 Proceeds from issuance of common stock 194 21 Cash dividends: Common stock (3,353) (2,394) Preferred stock (3,971) (3,095) --------- --------- Net cash provided by financing activities 552,057 120,279 --------- --------- Net decrease in cash and cash equivalents (29,496) (12,708) Cash and cash equivalents at beginning of period 197,643 157,725 --------- --------- Cash and cash equivalents at end of period $ 168,147 $ 145,017 ========= ========= Cash and cash equivalents include: Cash and due from banks $ 101,132 $ 54,233 Short-term investments 17,415 58,086 Securities purchased under agreements to resell 12,297 -- Time deposits with other banks 37,303 32,698 --------- --------- $ 168,147 $ 145,017 ========= =========
The accompanying notes are an integral part of these statements. 6 R&G FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION REPORTING ENTITY The accompanying unaudited consolidated financial statements include the accounts of R&G Financial Corporation (the "Company"), a diversified financial services company, and its wholly-owned subsidiaries, R-G Premier Bank of Puerto Rico (the "Premier Bank"), a Puerto Rico commercial bank, Crown Bank, F.S.B. ("Crown Bank"), a Florida-based federal savings bank, R&G Mortgage Corp. ("R&G Mortgage"), Puerto Rico's second largest mortgage banker, R-G Investments Corporation, a Puerto Rico licensed securities broker-dealer, and Home & Property Insurance Corp., a Puerto Rico insurance agency. The Company, currently in its 31st year of operations, operates as a financial holding company, pursuant to the provisions of the Gramm-Leach-Biley Act of 1999, and is primarily engaged in banking, mortgage banking, and securities and insurance brokerage through its subsidiaries. Premier Bank and Crown Bank provide a full range of banking services, including residential, commercial and personal loans and a variety of deposit products. Premier Bank operates through thirty branches located mainly in the northeastern part of the Commonwealth of Puerto Rico. Crown Bank operates in the Orlando and Tampa/St. Petersburg metropolitan areas through fifteen full service branches and six commercial lending offices. Premier Bank also provides private banking and trust and other financial services to its customers. Premier Bank and Crown Bank are subject to the regulations of certain federal and local agencies, and undergo periodic examinations by those regulatory agencies. Crown Bank is also engaged in the origination of FHA insured, VA guaranteed and privately insured first and second mortgage loans on residential real estate (1 to 4 families) in the States of New York, New Jersey, Connecticut, North Carolina and Florida, through its wholly-owned subsidiary, Continental Capital Corporation ("Continental Capital"). 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 GNMA mortgage-backed securities and collateralized mortgage obligation certificates for sale to investors. After selling the loans, it retains the service on the loans. R&G Mortgage is also a FNMA and 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. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. However, in the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (principally consisting of normal recurring accruals) necessary for a fair presentation of the Company's financial condition as of March 31, 2003 and the results of operations and changes in its cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2002. 7 BASIS OF CONSOLIDATION All significant intercompany balances and transactions have been eliminated in the accompanying unaudited financial statements. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonment, or in a distribution to owners or is classified as held for sale. The adoption of this Statement did not have an effect on the consolidated financial position or results of operations of the Company. On January 1, 2002 the Company adopted also SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over the respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. The initial adoption of this Statement on January 1, 2002 had no effect on the consolidated financial position or results of operations of the Company. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, 107 and rescission of FASB Interpretation No. 34)" ("FIN No. 45"). FIN No. 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires a guarantor of certain guarantees to recognize at its inception a liability for the fair value of the obligation undertaken when issuing the guarantee, and also expands the related disclosures. The provisions of initial recognition are effective for guarantees issued and modified after December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have a significant impact on the Company's consolidated financial statements. On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 or Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivatives instruments embedded in other contracts, and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this statement is not expected to have a significant effect in the consolidated financial position or results of operations of the Company. 8 NOTE 2 - EARNINGS PER SHARE Basic earnings per common share are computed by dividing net income (less preferred stock dividends) by the weighted average number of shares of common stock outstanding. The weighted average of outstanding stock options granted in connection with the Company's Stock Option Plan (158,040 and 358,760 during the quarters ended March 31, 2003 and 2002, respectively), are included in the weighted average number of shares for purposes of the diluted earnings per share computation. No other adjustments are made to the computation of basic earnings per share to arrive at diluted earnings per share. Dividends per share on common stock declared and paid by the Company were as follows:
Quarter ended March 31, 2003 2002 ------- ------- (Unaudited) $0.0980 $0.0765
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES The carrying value and estimated fair value of investment and mortgage-backed securities by category are shown below. The fair value of investment securities is based on quoted market prices and dealer quotes, except for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its redemption value.
March 31, December 31, 2003 2002 --------- ------------ (Unaudited) (Dollars in thousands) MORTGAGE-BACKED SECURITIES HELD FOR TRADING: GNMA certificates $ -- $ 9,741 FHLMC certificates 44,880 65,016 ------- ------- 44,880 74,757 ------- ------- Investment securities held for trading: Corporate preferred stock 940 -- Other 5 -- ------- ------- 945 -- ------- ------- $45,825 $93,948 ======= =======
9
March 31, 2003 December 31, 2002 ---------------------------------------------------------------------- Amortized Fair Amortized Fair cost value cost value ---------- ---------- ---------- ---------- (Unaudited) (Dollars in thousands) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE: Collaterized mortgage obligations (CMO): Due within one year $ -- $ -- $ 113 $ 113 Due from one to five years 15,400 15,630 17,178 17,288 Due from five to ten years 20,121 20,546 31,571 32,219 Due over ten years 657,392 662,528 404,981 409,830 ---------- ---------- ---------- ---------- 692,913 698,704 453,843 459,450 ---------- ---------- ---------- ---------- CMO residuals (interest only), and interest only strips (IO's) 45,649 49,255 30,964 32,759 ---------- ---------- ---------- ---------- FNMA certificates: Due from one to five years 25,397 25,523 -- -- Due from five to ten years 5,460 5,490 370 390 Due over ten years 319,785 327,854 258,805 269,367 ---------- ---------- ---------- ---------- 350,642 358,867 259,175 269,757 ---------- ---------- ---------- ---------- FHLMC certificates: Due within one year 4 5 2 2 Due from one to five years 10 10 20 21 Due from five to ten years 732 773 889 935 Due over ten years 692,963 707,432 738,041 756,228 ---------- ---------- ---------- ---------- 693,709 708,220 738,952 757,186 ---------- ---------- ---------- ---------- GNMA certificates: Due from one to five years 25 25 -- -- Due from five to ten years 15,633 16,004 16,515 16,759 Due over ten years 405,303 413,472 440,767 446,339 ---------- ---------- ---------- ---------- 420,961 429,501 457,282 463,098 ---------- ---------- ---------- ---------- 2,203,874 2,244,547 1,940,216 1,982,250 ---------- ---------- ---------- ---------- INVESTMENT SECURITIES AVAILABLE FOR SALE: Mortgage securities portfolio mutual fund -- -- 3,266 2,964 ---------- ---------- ---------- ---------- U.S. Government and Agencies securities: Due within one year 32,389 32,854 Due from one to five years 377,599 380,997 263,632 267,896 Due from five to ten years 118,819 123,463 137,756 143,695 ---------- ---------- ---------- ---------- 528,807 537,314 401,388 411,591 ---------- ---------- ---------- ---------- Corporate debt obligations: Due within one year 12,427 12,865 3,205 3,367 Due from one to five years 41,162 43,284 52,779 55,283 Due from five to ten years -- -- 2,979 2,385 Due over ten years 7,810 7,478 9,805 9,809 ---------- ---------- ---------- ---------- 61,399 63,627 68,768 70,843 ---------- ---------- ---------- ---------- US Municipal debt obligations- Due over ten years 11,869 11,651 4,884 4,879 ---------- ---------- ---------- ---------- FHLB Stock 98,956 98,956 84,337 84,337 ---------- ---------- ---------- ---------- Other -- -- 49 49 ---------- ---------- ---------- ---------- 701,031 711,548 562,692 574,663 ---------- ---------- ---------- ---------- $2,904,905 $2,956,095 $2,502,908 $2,556,913 ========== ========== ========== ==========
10
March 31, 2003 December 31, 2002 ----------------------------------------------------------- Amortized Fair Amortized Fair cost value cost value --------- ------- --------- ------- (Unaudited) (Dollars in thousands) MORTGAGE-BACKED SECURITIES HELD TO MATURITY: GNMA certificates: Due from five to ten years $ 5,190 $ 5,243 $ 5,457 $ 5,513 Due over ten years 32,349 33,307 33,521 34,091 ------- ------- ------- ------- 37,539 38,550 38,978 39,604 ------- ------- ------- ------- FNMA certificates: Due over ten years 6,030 6,384 6,328 6,698 ------- ------- ------- ------- FHLMC certificates: Due over ten years 97 95 102 102 ------- ------- ------- ------- 43,666 45,029 45,408 46,404 ------- ------- ------- ------- INVESTMENT SECURITIES HELD TO MATURITY: United States Government and Agencies obligations: Due within one year 2,882 2,882 997 997 Due from one to five years -- -- 1,500 1,500 ------- ------- ------- ------- 2,882 2,882 2,497 2,497 ------- ------- ------- ------- Puerto Rico Government and Agencies obligations: Due from one to five years 26,586 26,906 26,586 26,804 Due from five to ten years 1,000 1,005 1,000 1,005 ------- ------- ------- ------- 27,586 27,911 27,586 27,809 ------- ------- ------- ------- Other: Due from one to five years 100 100 100 100 ------- ------- ------- ------- 30,568 30,893 30,183 30,406 ------- ------- ------- ------- $74,234 $75,922 $75,591 $76,810 ======= ======= ======= =======
In addition to the investment and mortgage-backed securities pledged on repurchase agreements and reported as pledged assets in the statement of financial condition, at March 31, 2003 the Company had investment securities pledged as collateral on repurchase agreements where the counterparties do not have the right to sell or repledge the assets as follows:
Carrying Amount --------------- (Unaudited) (Dollars in thousands) Mortgage-backed securities held for trading, at fair value $ 8,767 Mortgage-backed and investment securities available for sale, at fair value 1,124,908 Mortgage-backed securities held to maturity, at amortized cost 360 ---------- $1,134,035 ==========
11 NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consist of the following:
March 31, December 31, 2003 2002 ----------- ----------- (Unaudited) (Dollars in thousands) Real estate loans: Residential - first mortgage $ 1,661,520 $ 1,473,051 Residential - second mortgage 37,953 40,429 Land 37,361 27,521 Construction 465,936 355,367 Commercial 661,473 633,233 ----------- ----------- 2,864,243 2,529,601 Undisbursed portion of loans in process (166,418) (90,432) Net deferred loan costs (fees) 241 (45) ----------- ----------- 2,698,066 2,439,124 ----------- ----------- Other loans: Commercial 141,651 152,743 Consumer: Secured by deposits 28,326 28,070 Secured by real estate 64,354 68,156 Other 107,295 104,715 Unearned interest (459) (444) ----------- ----------- 341,167 352,240 ----------- ----------- Total loans 3,039,233 2,792,364 Allowance for loan losses (33,342) (32,675) ----------- ----------- $ 3,005,891 $ 2,759,689 =========== ===========
The changes in the allowance for loan losses follow:
Three months ended March 31, ----------------------------- 2003 2002 -------- -------- (Unaudited) (Dollars in thousands) Balance, beginning of period $ 32,675 $ 17,428 Provision for loan losses 4,220 5,000 Loans charged-off (3,672) (3,989) Recoveries 312 104 Transfers to loans held for sale (193) -- -------- -------- Balance, end of period $ 33,342 $ 18,543 -------- --------
12 The following table sets forth the amounts and categories of R&G Financial's non-performing assets at the dates indicated.
March 31, December 31, 2003 2002 --------- ------------ (Unaudited) (Dollars in thousands) Non-accruing loans: Residential real estate $49,215 $43,281 Residential construction 1,128 1,512 Commercial real estate 24,584 29,375 Commercial business 2,940 2,197 Consumer unsecured 562 802 ------- ------- Total 78,429 77,167 ------- ------- Accruing loans greater than 90 days delinquent: Residential real estate 343 104 Residential construction -- -- Commercial real estate -- -- Commercial business 321 261 Consumer 554 667 ------- ------- Total accruing loans greater than 90 days delinquent 1,218 1,032 ------- ------- Total non-performing loans 79,647 78,199 ------- ------- Real estate owned, net of reserves (1) 19,479 15,544 Other repossessed assets 212 292 ------- ------- 19,691 15,836 ------- ------- Total non-performing assets $99,338 $94,035 ------- ------- Total non-performing loans as a percentage of total loans (2) 2.48% 2.71% ------- ------- Total non-performing assets as a percentage of total assets 1.44% 1.50% ------- ------- Allowance for loan losses as a percentage of total non-performing loans (3) 41.86% 41.79% ------- ------- Allowance for loan losses as a percentage of total loans outstanding (3) 1.04% 1.13% ------- ------- Net charge-offs to average loans outstanding 0.43% 0.41% ------- -------
13 (1) Consists primarily of residential real estate foreclosed by the Company. (2) While the ratio of non-performing loans to total loans decreased from 2.71% to 2.48% from December 31, 2002 to March 31, 2003, the ratio was nevertheless larger than it would otherwise have been due to loan securitizations during 2000, 2001 and 2002 and the first three months of 2003, which reduced the amount of loans held in portfolio considered in the calculation of the ratio. Without giving effect to loan securitizations, as of March 31, 2003 and December 31, 2002, the ratio of non-performing loans to total loans would have been 1.89% and 1.98%, respectively. (3) Because of the nature of the collateral, R&G Financial's historical charge-offs with respect to residential real estate loans have been low. Excluding R&G Financial's residential loan portfolio, the allowance for loan losses to total loans and to total non-performing loans at March 31, 2003 and December 31, 2002 would have been 2.21% and 109.6%, respectively, and 2.39% and 93.6%, respectively. 14 NOTE 5 - MORTGAGE LOAN SERVICING The changes in the servicing asset of the Company follows:
For the three month period ended March 31, 2003 2002 --------- --------- (Unaudited) (Dollars in thousands) Balance at beginning of period $ 142,334 $ 105,146 Rights originated 6,492 5,078 Rights purchased 1,429 238 Scheduled amortization (5,597) (3,513) Unscheduled amortization (6,708) (1,973) (Provision) reversal of impairment reserves (4,120) 459 Other adjustments -- (619) --------- --------- Balance at end of period $ 133,830 $ 104,816 ========= =========
The portion of the Company's mortgage loans servicing portfolio consisting of the servicing asset that was originated by the Company prior to the adoption of SFAS No. 122 is not reflected as an asset on the Company's consolidated financial statements, and is not subject to amortization or impairment. NOTE 6 - DEPOSITS Deposits are summarized as follows:
March 31, December 31, 2003 2002 ---------- ------------ (Unaudited) (Dollars in thousands) Passbook savings $ 327,286 $ 329,489 ---------- ---------- NOW accounts 109,953 100,031 Super NOW accounts 323,880 335,015 Regular checking accounts (non-interest bearing) 131,489 107,586 Commercial checking accounts (non-interest bearing) 288,276 282,769 ---------- ---------- 853,598 825,401 ---------- ---------- Certificates of deposit: Under $100,000 660,303 652,065 $100,000 and over 1,155,819 991,504 ---------- ---------- 1,816,122 1,643,569 ---------- ---------- Accrued interest payable 4,928 3,865 ---------- ---------- $3,001,934 $2,802,324 ========== ==========
15 NOTE 7 - COMMITMENTS AND CONTINGENCIES COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES As of March 31, 2003, the Company had open commitments to issue GNMA certificates of approximately $65.9 million. COMMITMENTS TO SELL MORTGAGE LOANS As of March 31, 2003 the Company had commitments to sell mortgage loans to third party investors amounting to approximately $196.5 million. LEASE COMMITMENTS The Company is obligated under several noncancellable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals. OTHER At March 31, 2003, the Company is liable under limited recourse provisions resulting from the sale of loans to several investors, principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $868.7 million at March 31, 2003. At March 31, 2003, the Company has an allowance for recourse provisions of $1.8 million. Historical losses on recourse obligations have not been significant. In April 2002, R&G Acquisition Holdings Corporation (a wholly-owned subsidiary of R&G Financial) ("RAC"), a Florida corporation and savings and loan holding company, formed R&G Capital Trust I ("R&G Capital Trust"), a Delaware statutory business trust. R&G Capital Trust issued $25.0 million of trust preferred securities in a private placement. The Company has guaranteed certain obligations of RAC to R&G Capital Trust. NOTE 8 - SUPPLEMENTAL INCOME STATEMENT INFORMATION Employee costs and other administrative and general expenses are shown in the Consolidated Statements of Income net of direct loan origination costs. Direct loan origination costs are capitalized as part of the carrying cost of mortgage loans and are offset against mortgage loan sales and fees when the loans are sold, or amortized as a yield adjustment to interest income on loans held for investment. Total employee costs and other expenses before capitalization follows:
Three month period ended March 31, 2003 2002 ------- ------- (Unaudited) (Dollars in thousands) Employee costs $23,102 $16,243 ------- ------- Other administrative and general expenses $32,707 $17,171 ------- -------
16 NOTE 9 - INDUSTRY SEGMENTS The following summarized information presents the results of the Company's operations for its traditional banking and mortgage banking activities:
(Dollars in thousands) Three month period ended March 31, ------------------------------------------------------------------------------------------------ 2003 2002 --------------------------------------------- --------------------------------------------- (Unaudited) ------------------------------------------------------------------------------------------------ Mortgage Segment Mortgage Segment Banking Banking Other Totals Banking Banking Other Totals ------- -------- ------ ------- ------- -------- ------ ------- Revenues $41,425 $45,663 $3,269 $90,357 $32,509 $24,496 $1,619 $58,624 Non-interest expenses 23,375 27,607 1,198 52,180 14,668 16,003 725 31,396 ------- ------- ------ ------- ------- ------- ------ ------- Income before income taxes $18,050 $18,056 $2,071 $38,177 $17,841 $ 8,493 $ 894 $27,228 ======= ======= ====== ======= ======= ======= ====== =======
17 The following is a reconciliation of reportable segment revenues and income before income taxes to the Company's consolidated amounts (unaudited):
Three month period ended March 31, 2003 2002 -------- -------- (Dollars in thousands) Revenues: Total revenues for reportable segments $ 90,357 $ 58,624 Elimination of intersegment revenues (904) (1,340) Corporate revenues 487 607 -------- -------- Total consolidated revenues $ 89,940 $ 57,891 ======== ======== Income before income taxes: Total income before income taxes for reportable segments $ 38,177 $ 27,228 Elimination of intersegment profits 102 (17) Unallocated corporate income, net 269 484 -------- -------- Income before income taxes, consolidated $ 38,548 $ 27,695 ======== ========
Total assets of the Company among its industry segments and a reconciliation of reportable segment assets to the Company's consolidated total assets as of March 31, 2003 and December 31, 2002 follows:
March 31, December 31, 2003 2002 ----------- ------------ (Unaudited) (Dollars in thousands) Assets: Banking $ 6,055,740 $ 5,453,321 Mortgage Banking 898,095 908,660 Other 120,365 111,005 ----------- ----------- Total assets for reportable segments 7,074,200 6,472,986 Parent company assets 62,364 62,971 Elimination of intersegment balances (246,429) (258,711) ----------- ----------- Consolidated total assets $ 6,890,135 $ 6,277,246 =========== ===========
18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS A number of the presentations and disclosures in this Form 10-Q, including, without limitation, statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, and any statements preceded by, followed by or which include the words "may," "could," "should," "will," "would," "hope," "might," "believe," "expect," "anticipate," "estimate," "intend," "plan," "assume" or similar expressions constitute forward-looking statements. These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, including our expectations and estimates with respect to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios. Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond our control). The following factors, among others, could cause our financial performance to differ materially from our goals, plans, objectives, intentions, expectations and other forward-looking statements: - the strength of the United States economy in general and the strength of the regional and local economies within our markets; - adverse changes in the local real estate market, as most of the Company's loans are concentrated in Puerto Rico and Florida and a substantial portion of these loans have real estate as collateral; - the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; - inflation, interest rate, market and monetary fluctuations; - adverse changes in asset quality and the resulting credit risk-related losses and expenses; - our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors; - the willingness of users to substitute competitors' products and services for our products and services; o the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; - technological changes; - changes in consumer spending and savings habits; and - regulatory or judicial proceedings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. 19 GENERAL R&G Financial Corporation (the "Company") is a Puerto Rico chartered diversified financial holding company that, through its wholly-owned subsidiaries, is engaged in banking, mortgage banking, securities and insurance brokerage activities. The Company, currently in its 31st year of operations, operates 30 bank branches mainly located in the northeastern section of Puerto Rico, 15 bank branches in the Orlando and Tampa/St. Petersburg Florida markets, 6 mortgage and 6 commercial lending offices in the continental United States, and 43 mortgage offices in Puerto Rico, including 24 facilities located within Premier Bank's branches. The Company is engaged in providing a full range of banking services through R-G Premier Bank of Puerto Rico ("Premier Bank"), a Puerto Rico commercial bank, and Crown Bank, F.S.B. ("Crown Bank"), its Florida-based federal savings bank acquired in June 2002. Banking activities include commercial banking services, corporate and construction lending, consumer lending and credit cards, offering a variety of deposit products and, to a lesser extent, trust and investment services through private banking. The Company is also engaged in mortgage banking activities. Mortgage banking activities are conducted through R&G Mortgage Corp., a Puerto Rico mortgage company, The Mortgage Store of Puerto Rico, Inc., also a Puerto Rico mortgage company, and Continental Capital Corporation, a New York mortgage banking subsidiary of Crown Bank with offices in New York, North Carolina and Florida. Mortgage banking activities include the origination, purchase, sale and servicing of mortgage loans on single-family residences, the issuance and sale of various types of mortgage-backed securities, the holding of mortgage loans, mortgage-backed securities and other investment securities for sale or investment, and the purchase and sale of servicing rights associated with such mortgage loans and, to a lesser extent, the origination of construction loans and mortgage loans secured by income producing real estate and land (the "mortgage banking business"). The Company is also engaged in insurance brokerage through Home & Property Insurance Corp., a Puerto Rico insurance agency, and securities brokerage through R-G Investments Corporation, a Puerto Rico licensed broker-dealer. The Company is the second largest mortgage loans originator and servicer of mortgage loans on single family residences in Puerto Rico. R&G Financial's mortgage servicing portfolio increased to approximately $10.9 billion as of March 31, 2003, from $7.3 billion as of the same date a year ago, an increase of 48.8%. The Company's servicing portfolio at March 31, 2003 includes approximately $2.6 billion acquired through the acquisition of Crown Bank in June 2002. R&G Financial's strategy is to increase the size of its mortgage servicing portfolio by relying principally on internal loan originations. As part of its strategy to maximize net interest income, R&G Financial maintains a substantial portfolio of mortgage-backed and investment securities. At March 31, 2003, the Company held securities available for sale with a fair market value of $3.0 billion, which included $2.2 billion of mortgage-backed securities, of which $394.7 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. R&G Financial's lower effective tax rates compared to the maximum statutory rates reflect the exemption under Puerto Rico law of the net interest income derived from such securities. In addition, the Company invests in certain U.S. agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because the Company is entitled to rely on the portfolio interest deduction. Finally, R&G Financial's international banking entities may invest in various U.S. securities, the income on which is exempt from Puerto Rico income taxation and is also not subject to federal income taxation on the basis of the portfolio interest deduction. 20 A substantial portion of R&G Financial's total mortgage loan originations has been comprised of refinance loans. R&G Financial's future results could be adversely affected by a significant increase in mortgage interest rates that reduces refinancing activity. However, the Company believes that refinancing activity is less sensitive to interest rate changes in Puerto Rico than in the mainland United States because a significant amount of refinance loans are made for debt consolidation purposes. R&G Financial customarily sells or securitizes into mortgage-backed securities substantially all the loans it originates, except for certain non-conforming conventional mortgage loans and certain consumer, construction, land, and commercial loans which are held for investment and classified as loans receivable. FINANCIAL CONDITION At March 31, 2003, total assets amounted to $6.9 billion, as compared to $6.3 billion at December 31, 2002. The $612.9 million or 9.8% increase in total assets between the comparable periods was primarily the result of a $399.2 million or 15.6% increase in mortgage-backed and investment securities available for sale, and a $246.2 million or 8.9% increase in loans receivable, net, due to record loan production during the quarter ended March 31, 2003. At March 31, 2003, R&G Financial had $3.1 billion of borrowings (consisting of securities sold under agreements to repurchase, notes payable, FHLB advances and other borrowings), compared to $2.7 billion at December 31, 2002. R&G Financial utilized repurchase agreements and deposits to fund its growth during the period; total deposits grew $7.1% from $2.8 billion at December 31, 2002 to $3.0 billion at March 31, 2003, whereas repurchase agreements increased by $341.6 million or 22.9%. At March 31, 2003, R&G Financial's allowance for loan losses totaled $33.3 million, which represented a $667,000 or 2.0% increase from the level maintained at December 31, 2002. At March 31, 2003, R&G Financial's allowance represented approximately 2.48% of the total loan portfolio and 41.86% of total non-performing loans. However, excluding R&G Financial's residential loan portfolio, which has minimal charge-off experience, the allowance for loan losses to total loans and to total non-performing loans would have been 2.21% and 109.56%, respectively, at March 31, 2003. Non-performing loans amounted to $79.6 million at March 31, 2003, an increase of $1.4 million when compared to $78.2 million at December 31, 2002. At March 31, 2003, $49.2 million or 61.8% of non-performing loans consisted of residential mortgage loans. Because of the nature of the real estate collateral, R&G Financial has historically recognized a low level of loan charge-offs. R&G Financial's aggregate charge-offs as a percentage of average loans outstanding amounted to 0.41% during 2002 and 0.32% during 2001. Although loan delinquencies have historically been higher in Puerto Rico than in the United States, actual foreclosures and any resulting loan charge-offs have historically been lower than in the United States. While the ratio of non-performing loans to total loans decreased from 2.71% to 2.48% from December 31, 2002 to March 31, 2003, the decrease in the ratio was nevertheless larger than it would otherwise have been due to significant loan securitizations during 2000, 2001 and 2002, which reduced the amount of loans held in portfolio considered in the calculation of the ratio. Without giving effect to loan securitizations, as of March 31, 2003 and December 31, 2002, the ratio of non-performing loans to total loans would have been 1.89% and 1.98%, respectively. Stockholders' equity increased from $662.2 million at December 31, 2002 to $681.5 million at March 31, 2003. The $19.3 million or 2.9% increase was due primarily to the net income recognized during the period, net of dividends paid. 21 RESULTS OF OPERATIONS During the three months ended March 31, 2003, R&G Financial reported net income of $29.1 million or $0.74 of earnings per diluted share, compared to $21.5 or $0.58 of earnings per diluted share for the comparative three month period ended March 31, 2002. Net interest income increased by $10.2 million or 31.9% during the comparable period to $42.2 million, primarily due to a $1.6 billion increase in the average balance of interest-earning assets, partially offset by a 9 basis point decrease in the net interest margin, from 2.92% to 2.81%. Included in earning assets of the Company at March 31, 2003 were the assets of Crown Bank, the Company's Florida-based banking subsidiary acquired during the second quarter of 2002. The provision for loan losses amounted to $4.2 million during the three months ended March 31, 2003, a 15.6% decrease compared to the prior comparable period, reflecting R&G Financial's level of non-performing loans of $79.6 million at March 31, 2003 compared to $78.2 million at December 31, 2002, respectively. R&G Financial also experienced an increase in non-interest income during the three months ended March 31, 2003 over the comparable period. Net gain on sale of loans increased by $15.3 million or 86.4% over the prior comparable period, as a result of record loan production and sales. Total loan production during the quarter ended March 31, 2003 amounted to $1.0 billion compared to $577.7 million during the prior comparable period. Loan administration and servicing fees also increased by $3.9 million or 41.9% over the comparable periods, due to the growth in the loan servicing portfolio from $7.3 billion as of March 31, 2002 to $10.9 billion at March 31, 2003, or an increase of $3.6 billion. Such increase includes $2.6 billion acquired in connection with the acquisition of Crown Bank. Other fee income also increased by $1.9 million or 47.8%. Such increase reflects the added contributions made by the Company's insurance agency and broker-dealer subsidiaries. Total expenses increased by $21.2 million or 70.2% during the three months ended March 31, 2003 over the comparable 2002 period, partially due to a $5.1 million or 51.3% increase in employee compensation and benefits associated with general growth in Company operations, including expenses associated with the operations of Crown Bank, as well as to increased commissions and bonus payments associated with increased loan production. The increase in total expenses was also due to a $14.6 million or 91.8% increase in other administrative and general expenses, which includes a $11.4 million increase in expenses associated with impairment charges (including unscheduled amortization) of the Company's servicing asset, as well as increased expenses related to the operations of Crown Bank. INTEREST RATE RISK MANAGEMENT The following table summarizes the anticipated maturities or repricing or R&G Financial's interest-earning assets and interest-bearing liabilities as of March 31, 2003, based on the information and assumptions set forth in the notes below. For purposes of this presentation, the interest earning components of loans held for sale and mortgage-backed securities held in connection with the Company's mortgage banking business as well as all securities held for trading, are assumed to mature within one year. In addition, investments held by the Company which have call features are presented according to their contractual maturity date. 22
Within Four to More Than More Than Three Twelve One Year to Three Years Over Five (Dollars in thousands) Months Months Three Years to Five Years Years Total ---------- ----------- ----------- ------------- ----------- ---------- Interest-earning assets(1): Loans receivable $1,194,847 $ 273,414 $ 424,681 $ 282,659 $ 861,031 $3,036,632 Mortgage loans held for sale 53,003 33,718 76,586 61,432 54,381 279,120 Mortgage-backed securities(2)(3) 155,697 432,437 424,119 289,266 1,031,575 2,333,094 Investment securities(3) 185,439 331,897 185,676 34,380 5,668 743,060 Other interest-earning assets(4) 67,014 -- -- -- -- 67,014 ---------- ----------- ----------- --------- ----------- ---------- Total $1,656,000 $ 1,071,466 $ 1,111,062 $ 667,737 $ 1,952,655 $6,458,920 ========== =========== =========== ========= =========== ========== Interest bearing liabilities: Deposits(5) NOW and Super NOW accounts $ 21,693 $ 60,737 $ 66,767 $ 54,081 $ 230,555 $ 433,833 Passbook savings accounts 8,181 23,727 59,075 47,260 189,043 327,286 Regular and commercial checking 20,988 58,766 64,602 52,328 223,081 419,765 Certificates of deposit 446,167 496,736 474,816 396,172 2,231 1,816,122 FHLB advances 208,000 109,125 295,100 206,500 140,000 958,725 Securities sold under agreements to repurchase(6) 868,234 336,193 248,708 240,000 138,200 1,831,335 Other borrowings(7) ---------- ----------- ----------- --------- ----------- ---------- Total 1,573,263 1,085,284 1,209,068 996,341 923,110 5,787,066 ---------- ----------- ----------- --------- ----------- ---------- Effect of hedging instruments 180,000 (10,000) -- (90,000) (80,000) -- ---------- ----------- ----------- --------- ----------- ---------- Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 262,737 ($ 23,818) ($ 98,006) ($418,604) $ 949,545 $ 671,854 ========== =========== =========== ========= =========== ========== Cummulative excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 262,737 $ 238,919 $ 140,913 ($277,691) $ 671,854 ========== =========== =========== ========= =========== ========== Cummulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets 3.81% 3.47% 2.05% (4.03)% 9.75% ========== =========== =========== ========= =========== ==========
(footnotes on following page) 23 --------------- (1) Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather that in the period in which they are due, and fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization, in each case as adjusted to take into account estimated prepayments. (2) Reflects estimated prepayments in the current interest rate environment. (3) Includes securities held for trading, available for sale and held to maturity. (4) Includes securities purchased under agreement to resell, time deposits with other banks and federal funds sold. (5) Does not include non-interest-bearing deposit accounts. (6) Includes federal funds purchased, if any (7) Comprised of warehousing lines, notes payable and other borrowings. --------------- As of March 31, 2003, the Company had a one year positive gap of approximately $238.9 million which constituted 3.5% of total assets at such date, compared to a positive gap of approximately $498.1 million or 7.9% of total assets at December 31, 2002. R&G Financial's positive gap within one year at March 31, 2003 and December 31, 2002 is due primarily to an increasing amount of adjustable rate loans resulting from greater emphasis in commercial and construction lending as well as to the extension during 2001 and 2002 of the maturity dates of certain borrowings of the Company into longer-term maturities at very attractive rates, taking advantage of consecutive reductions in interest rates during such years. The Company estimates that as of March 31, 2003, close to 43% of all borrowings of the Company had maturity dates longer than one year. While the above table presents the Company's loans receivable portfolio held for investment purposes according to its maturity date, from time to time the Company may negotiate special transactions with FHLMC and/or FNMA or other third party investors for the sale of such loans. There can be no assurance, however, that the Company will be successful in consummating any such transactions. The following table presents for the periods indicated R&G Financial's total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. All average balances are based on the average of month-end balances for non-banking subsidiaries and average daily balances for banking subsidiaries in each case during the periods presented. 24
For the three month period ended March 31, 2003 2002 ----------------------------------------------------------------------------- Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate ---------- -------- ------ ---------- -------- ------ Interest-Earning Assets: Cash and cash equivalents(1) $ 77,931 $ 265 1.36% $ 40,204 $ 232 2.31% Investment securities available for sale 588,445 6,128 4.17 542,083 7,754 5.72 Investment securities held to maturity 30,466 399 5.24 23,686 322 5.44 Mortgage-backed securities held for trading 112,665 974 3.46 93,042 1,261 5.42 Mortgage-backed securities available for sale 1,961,327 26,819 5.47 1,494,962 23,155 6.20 Mortgage-backed securities held to maturity 45,129 854 5.80 51,369 761 5.93 Loans receivable, net (2) 3,106,837 51,955 6.69 2,075,727 38,503 7.42 FHLB of New York Stock 92,117 1,062 4.61 67,377 731 4.34 ---------- ------- ------ ---------- ------- ------ Total interest-earning assets 6,014,917 $88,256 5.87% 4,388,450 $72,719 6.63% ---------- ------- ------ ---------- ------- ------ Non-interest-earning assets 568,773 359,461 ---------- ------- ------ ---------- ------- ------ Total assets $6,583,690 $4,747,911 ========== ======= ====== ========== ======= ====== Interest-Bearing Liabilities: Deposits $2,844,890 $21,693 3.05% $2,062,033 $20,826 4.04% Securities sold under agreements to repurchase (3) 1,720,267 12,771 2.97 1,309,024 12,343 3.77 Notes payable 230,702 1,870 3.24 242,450 1,772 2.92 Other borrowings(4) 987,288 9,701 3.93 494,135 5,773 4.67 ---------- ------- ------ ---------- ------- ------ Total interest-bearing liabilities 5,783,147 $46,035 3.18% 4,107,642 $40,714 3.96% ---------- ------- ------ ---------- ------- ------ Non-interest-bearing liabilities 128,688 143,518 ---------- ---------- Total liabilities 5,911,835 4,251,160 ---------- ---------- Stockholders' equity 671,855 496,751 ---------- ---------- Total liabilities and stockholders' equity $6,583,690 $4,747,911 ========== ======= ====== ========== ======= ====== Net interest income; interest rate spread(5) $42,221 2.69% $32,005 2.67% ======= ====== ======= ====== Net interest margin 2.81% 2.92% ====== ====== Average interest-earning assets to average interest-bearing liabilities 104.01% 106.84% ====== ======
(footnotes on page 25) 25 --------------- (1) Comprised of cash and due from banks, securities purchased under agreements to resell, time deposits with other banks and other short term investments. (2) Includes mortgage loans held for sale and non-accrual loans. (3) Includes federal funds purchased, if any (4) Comprised of long-term debt, advances from the FHLB and other borrowings. (5) Interest rate spread represents the difference between R&G Financial's weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percent of average interest-earning assets. --------------- MORTGAGE LOAN SERVICING The following table sets forth certain information regarding the mortgage loan servicing portfolio of R&G Financial for the periods indicated.
At or for the three month period ended March 31, ------------------------------- 2003 2002 ------------ ----------- (Dollars in thousands) Composition of Servicing Portfolio at period end: GNMA $ 2,559,133 $ 2,873,566 FNMA/FHLMC 5,425,414 2,562,129 Other mortgage loans(3) 2,892,433 1,875,371 ------------ ----------- Total servicing portfolio(3) $ 10,876,980 $ 7,311,066 ============ =========== Activity in the Servicing Portfolio: Beginning servicing portfolio $ 10,991,945 $ 7,224,571 Add: Loan originations and purchases 676,109 457,818 Servicing of portfolio loans acquired 165,851 1,798 Less: Sale of servicing rights(1) (71,531) (55,423) Run-offs(2) (885,394) (317,698) ------------ ----------- Ending servicing portfolio(3) $ 10,876,980 $ 7,311,066 ============ =========== Number of loans serviced 155,824 113,456 Average loan size $ 70 $ 64 Average servicing fee rate 0.48% 0.52%
--------------- (1) Corresponds to loans sold, servicing released, by Continental Capital. (2) Run-off refers to regular amortization of loans, prepayments and foreclosures. 26 (3) At the dates shown, included $1.3 billion and $942.6 million serviced for Premier Bank, respectively, which constituted 12.4% and 12.9% of the total servicing portfolio, respectively. At March 31, 2003, the servicing portfolio also includes $86.5 million serviced for Crown Bank, which constituted 0.79% of the total servicing portfolio at such date. --------------- Substantially all of the mortgage loans in R&G Financial's servicing portfolio are secured by single (one-to-four) family residences secured by real estate located in Puerto Rico. At March 31, 2003, approximately 32% of the Company's mortgage servicing portfolio was related to mortgages secured by real property located outside Puerto Rico. The Company reduces the sensitivity of its servicing income to increases in prepayment rates through a strong retail origination network that has increased or maintained the size of R&G Financial's servicing portfolio even during periods of high prepayments. In addition, a substantial portion of the Company's servicing portfolio consists of tax-exempt FHA/VA mortgage loans which carry lower interest rates than those on conventional loans, which tends to reduce risks related to R&G Financial's servicing portfolio. During the quarter ended March 31, 2003 and 2002, the Company recognized $6,708,000 and $1,973,000, respectively, of unscheduled amortization on mortgage servicing rights. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY - Liquidity refers to the Company's ability to generate sufficient cash to meet the funding needs of current loan demand, savings deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. It is management's policy to maintain greater liquidity than required in order to be in a position to fund loan purchases and originations, to meet withdrawals from deposit accounts, to make principal and interest payments with respect to outstanding borrowings and to make investments that take advantage of interest rate spreads. The Company monitors its liquidity in accordance with guidelines established by the Company and applicable regulatory requirements. The Company's need for liquidity is affected by loan demand, net changes in deposit levels and the scheduled maturities of its borrowings. The Company can minimize the cash required during the times of heavy loan demand by modifying its credit policies or reducing its marketing efforts. Liquidity demand caused by net reductions in deposits are usually caused by factors over which the Company has limited control. The Company derives its liquidity from both its assets and liabilities. Liquidity is derived from assets by receipt of interest and principal payments and prepayments, by the ability to sell assets at market prices and by utilizing unpledged assets as collateral for borrowings. Liquidity is derived from liabilities by maintaining a variety of funding sources, including deposits, advances from the FHLB of New York and Atlanta (the "FHLB") and other short and long-term borrowings. The Company's liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in short-term investments such as securities purchased under agreements to resell, federal funds sold and certificates of deposit in other financial institutions. If the Company requires funds beyond its ability to generate them internally, various forms of both short and long-term borrowings provide an additional source of funds. At March 31, 2003, the Company had $91.5 million in borrowing capacity under unused warehousing and other lines of credit, $880.2 million in borrowings capacity under unused lines of credit with the FHLB and $25 million under unused fed funds lines of credit. The Company has generally not relied upon brokered deposits as a source of liquidity. At March 31, 2003, the Company had outstanding commitments to originate and/or purchase mortgage and non-mortgage loans of $531.4 million (including unused lines of credit). Certificates of deposit which are scheduled to mature within one year totaled $865.2 million at March 31, 2003, and borrowings that are scheduled to mature within the same period amounted to $1.7 billion. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. 27 CAPITAL RESOURCES - The FDIC's capital regulations establish a minimum 3.0 % Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier 1 leverage ratio for such other banks from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier 1 capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At March 31, 2003, Premier Bank met each of its capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios of 6.61%, 11.90% and 12.89%, respectively. At March 31, 2003 Crown Bank also met each of its capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios of 8.23%, 12.26% and 13.30%, respectively. In addition, the Federal Reserve Board has promulgated capital adequacy guidelines for bank holding companies which are substantially similar to those adopted by FDIC regarding state-chartered banks, as described above. R&G Financial is currently in compliance with such regulatory capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital and total risk based capital ratios of 9.60%, 17.37% and 18.29%, respectively, as of March 31, 2003. Effective December 31, 2002, the federal banking regulatory agencies imposed a new dollar for dollar capital requirement on residual interests retained in sale or securitization transactions and a 25% limit on Tier 1 capital that may consist of credit enhancing IO's. The capital ratios set forth above include the impact of this new capital rule. INFLATION AND CHANGING PRICES The unaudited consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars (except with respect to securities which are carried at market value), without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. 28 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risks at December 31, 2002 are presented in Item 7A of the Company's Annual report on Form 10-K. Information at March 31, 2003 is presented on page 21 of this Report. Management believes there have been no material changes in the Company's market risk since December 31, 2002. ITEM 4: CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission ("SEC") filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect these controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 29 PART II - OTHER INFORMATION ITEM 1: Legal Proceedings The Registrant is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Registrant. ITEM 2: Changes in Securities Not applicable. ITEM 3: Defaults Upon Senior Securities Not applicable. ITEM 4: Submission of Matters to a Vote of Security Holders Not applicable. ITEM 5: Other Information Not applicable. ITEM 6: Exhibits and Reports on Form 8-K. (a) Item 601 Exhibits.
No. Description --- ----------- 2.1 Amended and Restated Agreement and Plan of Merger by and between R&G Financial Corporation, R-G Premier Bank of Puerto Rico and R-G Interim Premier Bank, dated as of September 27, 1996 (1) 2.2.0 Agreement and Plan of Reorganization among R&G Financial Corporation, R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of December 19, 2001 (2) 2.2.1 Amendment No. 2 to Agreement and Plan of Reorganization among R&G Financial Corporation, R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of February 27, 2002 (3) 3.1.0 Certificate of Incorporation of R&G Financial Corporation (4) 3.1.1 Certificate of Amendment to Certificate of Incorporation of R&G Financial Corporation (4) 3.1.2 Amended and Restated Certificate of Incorporation of R&G Financial Corporation (5) 3.1.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (6) 3.1.4 Second Certificate of Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (15) 3.1.5 Certificate of Resolution designating the terms of the Series A Preferred Stock (7) 3.1.6 Certificate of Resolution designating the terms of the Series B Preferred Stock (8) 3.1.7 Certificate of Designation for Series C Preferred Stock (12) 3.1.8 Certificate of Designation for Series D Preferred Stock (13) 3.2 Bylaws of R&G Financial Corporation (4) 4.0 Form of Stock Certificate of R&G Financial Corporation (4) 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)
30 4.4 Form of Series D Preferred Stock Certificate of R&G Financial Corporation (14) 10.1 Master Purchase, Servicing and Collection Agreement between R&G Mortgage Corporation and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on April 1, 1991, December 1, 1991, February 1, 1994 and July 1, 1994 (4) 10.2 Master Custodian Agreement between R&G Mortgage Corporation and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on June 27, 1996 (4) 10.3 Master Production Agreement between R&G Mortgage and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on August 30, 1991 and March 31, 1995 (4) 10.4 Data Processing Computer Service Agreement between R&G Mortgage and R-G Premier Bank of Puerto Rico dated December 1, 1994 (4) 10.5 Securitization Agreement by and between R&G Mortgage and R-G Premier Bank of Puerto Rico, dated as of July 1, 1995 (4) 10.6 R&G Financial Corporation Stock Option Plan (4)(*) 10.7 Guarantee Agreement between R&G Financial Corporation, R&G Acquisition Holdings Corporation and Wilmington Trust as Guarantee Trustee with respect to the Capital Securities issued by R&G Capital Trust I, dated as of April 10, 2002 (16) 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
--------------- (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 on Form 8-K filed with the SEC on December 20, 2001. (3) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on February 28, 2002. (4) 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. (5) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on November 19, 1999. (6) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on June 12, 2001. (7) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on August 31, 1998. (8) Incorporated by reference from the Registrant's Form 10-K filed with the SEC on April 13, 2000. (9) Incorporated by reference from the Registrant's Registration Statement on Form S-3 (Registration No. 333-60923) 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 Registrant's Form 10-K filed with the SEC on April 2, 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. (15) Incorporated by reference from the Registrant's Current Report on Form 8-K filed with the SEC on June 18, 2002. (16) Incorporated by reference from the Registrant's Form 10-Q filed with the SEC on November 14, 2002. (*) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. The Registrant filed the following Reports on Form 8-K during the quarter ended March 31, 2003: (1) Form 8-K filed on January 22, 2003 with an attached press release announcing the Registrant's earnings for the fourth quarter and year ended December 31, 2002. (2) Form 8-K filed on March 31, 2003 in conjunction with the filing of the Registrant's Form 10-K for the year ended December 31, 2002, containing the certification required pursuant to Section 906 of the Sarbanes-Oxley Act. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. R&G FINANCIAL CORPORATION Date: May 15, 2003 By: /S/ VICTOR J. GALAN -------------------------------------- Victor J. Galan, Chairman and Chief Executive Officer (Principal Executive Officer) By: /S/ JOSEPH R. SANDOVAL -------------------------------------- Joseph R. Sandoval Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 32 CERTIFICATIONS I, Victor J. Galan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of R&G Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the periodic report is being prepared; (b) Evaluated the effectiveness of the registrant 's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Victor J. Galan ----------------------------------------- Victor J. Galan Chairman of the Board and Chief Executive Officer 33 I, Joseph R. Sandoval, certify that: 1. I have reviewed this quarterly report on Form 10-Q of R&G Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the periodic report is being prepared; (b) Evaluated the effectiveness of the registrant 's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Joseph R. Sandoval ----------------------------------------- Joseph R. Sandoval Executive Vice President and Chief Financial Officer 34