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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-21137
R&G FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
----------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (787) 758-2424
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock (par value $.01 per share)
--------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 27, 2001, the aggregate value of the 10,073,168 shares of Class B
Common Stock of the Registrant issued and outstanding on such date, which
excludes 167,661 shares held by all directors and officers of the Registrant as
a group, was approximately $170.0 million. This figure is based on the closing
price of $16.88 per share of the Registrant's Class B Common Stock on March 27,
2001.
Number of shares of Class B Common Stock outstanding as of March 27, 2001:
10,240,829.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by
reference and the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2000 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
PART I
ITEM 1: Business
General
The Company. R&G Financial Corporation ("R&G Financial") is a
Puerto Rico chartered financial holding company that operates R&G Mortgage Corp.
("R&G Mortgage"), the second largest mortgage company headquartered in Puerto
Rico, R-G Premier Bank of Puerto Rico (the "Bank"), a Puerto Rico commercial
bank, and Home and Property Insurance Corporation, which it recently acquired.
Through R&G Mortgage, R&G Financial also operates The Mortgage Store of Puerto
Rico, Inc., ("The Mortgage Store"), formerly Champion Mortgage Corporation, and
through the Bank it operates Continental Capital Corporation ("Continental"),
Huntington Station, New York, a mortgage banking company. With its acquisition
of Continental in late 1999, R&G Financial plans to expand its mortgage banking
operations in the United States, concentrating initially in New York and then
into other markets to the extent that it is presented with appropriate expansion
opportunities. During late 2000, Continental opened an office in Charlotte,
North Carolina. Continental presently originates loans in the states of New
York, Connecticut, New Jersey, North Carolina and Florida.
R&G Financial, through its subsidiaries, is primarily engaged
in a wide range of real estate secured lending activities, including the
origination, servicing, purchase and sale of mortgages on single-family
residences, the securitization and sale of various mortgage-backed and related
securities and the holding and financing of mortgage loans and mortgage-backed
and related securities for sale or investment. R&G Financial also originates for
its portfolio commercial real estate loans, residential construction loans,
commercial business loans and consumer loans. Finally, R&G Financial provides a
variety of trust and investment services to its customers.
R&G Financial has generally sought to achieve long-term
financial strength and profitability by increasing the amount and stability of
its net interest income and non-interest income. R&G Financial has sought to
implement this strategy by (1) establishing and emphasizing the growth of its
mortgage banking activities, including the origination and sale of mortgage
loans and growing its loan servicing operation; (2) expanding its retail banking
franchise in order to achieve increased market presence and to increase core
deposits; (3) enhancing its net interest income by increasing its loans held for
investment, particularly single-family residential loans and investment
securities; (4) developing new business relationships through an increased
emphasis on commercial real estate and commercial business lending; (5)
diversifying its retail products and services, including an increase in consumer
loan originations (such as credit cards); (6) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services and insurance products; and (7) controlled growth and the pursuit of a
variety of acquisition opportunities when appropriate.
R&G Financial recently promoted Ramon Prats, its Vice
Chairman, to the office of President. Mr. Prats formerly was Executive Vice
President of R&G Mortgage. Mr. Victor Galan continues to hold the positions of
R&G Financial's Chairman of the Board and Chief Executive Officer.
R&G Financial operates its business under the regulations of
the Federal Deposit Insurance Corporation ("FDIC") and the Office of the
Commissioner of Financial Institutions ("OCFI") of Puerto Rico. As of December
31, 2000, R&G Financial had consolidated total assets of approximately $3.5
billion, consolidated total deposits of approximately $1.7 billion and
consolidated stockholders' equity of approximately $308.8 million. R&G Financial
operated 58 mortgage banking and bank branch offices at that date.
R&G Mortgage. R&G Mortgage is engaged primarily in the
business of originating first and second mortgage loans on single family
residential properties secured by real estate which are either insured by the
Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). R&G Mortgage also operates The Mortgage Store, a mortgage
banking company, as a wholly-owned subsidiary. Pursuant to agreements entered
into between R&G Mortgage and the Bank, non-conforming conventional
single-family residential loans and consumer loans secured by real estate are
also originated by R&G Mortgage for portfolio retention by the Bank. The Bank
retains the non-conforming conventional single-family residential loans because
these loans generally do not satisfy resale guidelines of purchasers in the
secondary mortgage market, primarily because of size or other underwriting
technicalities at the time of origination. Jumbo loans may be packaged into
collateralized mortgage obligations ("CMOs") and sold while loans with
underwriting technicalities may be cured through payment experience and
subsequently sold.
R&G Mortgage pools FHA/VA loans into mortgage-backed
securities which are guaranteed by the Government National Mortgage Association
("GNMA"), which securities are sold to securities broker dealers and other
investors. Conventional loans may either be sold directly to agencies such as
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") or to private investors, or which may be pooled
into FNMA- or FHLMC-backed mortgage-backed securities which are generally sold
to investors. R&G Mortgage generally retains the servicing function with respect
to the loans which have been securitized and sold. R&G Mortgage is subject to
regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, the Department of
Housing and Urban Development ("HUD") and the Office of the Commissioner of
Financial Institutions ("OCFI") of Puerto Rico.
R&G Premier Bank. The Bank's principal business consists of
attracting deposits from the general public and tax-advantaged funds from
eligible Puerto Rico corporations and using such deposits, together with funds
obtained from other sources, to originate (through R&G Mortgage) and purchase
loans secured primarily by residential real estate in Puerto Rico, and to
purchase mortgage-backed and other securities. To a lesser extent but with
increasing emphasis over the past few years, the Bank also originates consumer
loans, commercial business loans and loans secured by commercial real estate.
Such loans offer higher yields, are generally for shorter terms and facilitate
the Bank's provision of a full range of financial services to its customers. The
Bank also offers trust services through its Trust Department. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and
it is regulated and examined by the FDIC as its primary federal regulatory
agency as well as by the OCFI. Continental operates as a subsidiary of the Bank.
Mortgage Banking Activities
Loan Originations, Purchases and Sales. During the years ended
December 31, 2000, 1999 and 1998, R&G Financial originated a total of $1.1
billion, $1.1 billion and $914.1 million of residential mortgage loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for the Bank of $451.4 million, $437.1 million and $450.6
million during the years ended December 31, 2000, 1999 and 1998, respectively of
such originations, or 43%, 41% and 49%, respectively, of total originations. The
loans originated by R&G Mortgage for the Bank are comprised primarily of
conventional residential loans and, to a lesser extent, consumer loans secured
by real estate.
R&G Financial is engaged to a significant extent in the
origination of FHA-insured and VA-guaranteed single-family residential loans
which are primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the years
ended December 31, 2000, 1999 and 1998, R&G Financial originated $307.1 million,
$288.8 million, and $255.6 million, respectively, of FHA/VA loans, which
2
represented 29.2%, 27.3% and 28.0% respectively, of total loans originated
during such respective periods.
R&G Financial also originates conventional single-family
residential loans which are either insured by private mortgage insurers or do
not exceed 80% of the appraised value of the mortgaged property. During the
years ended December 31, 2000, 1999 and 1998, R&G Financial originated $699.7
million, $738.6 million and $610.4 million, respectively, of conventional
single-family residential mortgage loans. Substantially all conforming
conventional single-family residential loans are securitized and sold in the
secondary market, while substantially all non-conforming conventional
single-family residential loans are originated by R&G Mortgage on behalf of the
Bank and either held by the Bank in its portfolio or subsequently securitized by
R&G Mortgage and sold in the secondary market. All non-conforming conventional
loans originated by R&G Mortgage through The Money Store are held by The Money
Store in its portfolio or subsequently sold in the secondary market.
Non-conforming loans generally consist of loans which,
primarily because of size or other underwriting technicalities which may be
cured through seasoning, do not satisfy the guidelines for resale of FNMA,
FHLMC, GNMA and other private secondary market investors at the time of
origination. Management believes that these loans are essentially of the same
credit quality as conforming loans. During the years ended December 31, 2000,
1999 and 1998, non-conforming conventional loans represented approximately 38%,
38% and 44%, respectively, of R&G Financial's total volume of mortgage loans
originated, substantially all of which were originated by R&G Mortgage on behalf
of the Bank. During the years ended December 31, 2000, 1999 and 1998, 83.8%,
86.6% and 85.5% of loans originated by R&G Mortgage on behalf of the Bank
consisted of single-family residential loans during such respective periods. R&G
Mortgage originates single-family residential, construction and commercial real
estate loans on behalf of the Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and the Bank. See "- Lending Activities of the
Bank - Origination, Purchase and Sale of Loans."
While R&G Financial makes available a wide variety of mortgage
products designed to respond to consumer needs and competitive conditions, it
currently emphasizes 15-year and 30-year conventional first mortgages and
15-year and 30-year FHA loans and VA loans. Substantially all of such loans
consist of fixed-rate mortgages. The average loan size for FHA/VA mortgage loans
and conventional mortgage loans is approximately $95,000 and $87,000,
respectively.
R&G Financial also offers second mortgage loans up to $125,000
with a maximum term of 15 years. The maximum loan-to-appraised value ratio on
second mortgage loans permitted by R&G Financial is generally 80% (including the
amount of any first mortgage). In addition, R&G Financial also offers real
estate secured consumer loans up to $60,000 with a maximum term of 15 years. The
maximum loan-to-appraised value ratio on real estate secured consumer loans
permitted by R&G Financial is generally 80%. R&G Financial will secure such
loans with either a first or second mortgage on the property.
The Company's loan origination activities in Puerto Rico are
conducted out of R&G Mortgage offices and mortgage banking centers. Residential
mortgage loan applications are attributable to walk-in customers, existing
customers and advertising and promotion, referrals from real estate brokers and
builders, loan solicitors and mortgage brokers.
Loan origination activities performed by the Company include
soliciting, completing and processing mortgage loan applications and preparing
and organizing the necessary loan documentation. Loan applications are examined
for compliance with underwriting criteria and, if all requirements are met, the
Company issues a commitment to the prospective borrower specifying the amount of
3
the loan and the loan origination fees, points and closing costs to be paid by
the borrower or seller and the date on which the commitment expires.
R&G Mortgage also purchases FHA loans and VA loans from other
mortgage bankers for resale to institutional investors and other investors in
the form of GNMA mortgage-backed securities. R&G Mortgage's strategy is to
increase its servicing portfolio primarily though internal originations through
its branch network and, to a lesser extent, purchases from third parties.
Purchases of loans from other mortgage bankers in the wholesale loan market is
generally limited to FHA loans and VA loans and such purchases provide R&G
Mortgage with a source of low cost production that allows R&G Mortgage to
continue to increase the size of its servicing portfolio. R&G Mortgage purchased
$145.9 million, $307.8 million and $207.1 million of loans from third parties
during the years ended December 31, 2000, 1999 and 1998, respectively.
4
The following table sets forth loan originations, purchases
and sales from its mortgage banking business by R&G Financial for the periods
indicated.
Year Ended December 31,
--------------------------------------------
2000 1999 1998
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(Dollars in Thousands)
Loans Originated For the Bank:
Conventional loans(1):
Number of loans 4,929 5,067 4,918
Volume of loans $ 407,461 $ 404,886 $ 402,447
FHA/VA loans:
Number of loans -- -- --
Volume of loans -- -- --
Consumer loans(2):
Number of loans 1,807 1,499 2,268
Volume of loans $ 43,943 $ 32,219 $ 48,155
Total loans:
Number of loans 6,736 6,566 7,186
Volume of loans $ 451,404 $ 437,105 $ 450,602
Percent of total volume 38% 32% 40%
Loans Originated For Third Parties:
Conventional loans(1):
Number of loans 3,377 4,882 2,989
Volume of loans $ 292,283 $ 333,673 $ 207,937
FHA/VA loans:
Number of loans 3,241 3,315 3,298
Volume of loans $ 307,128 $ 288,752 $ 255,601
Total loans:
Number of loans 6,618 8,197 6,287
Volume of loans $ 599,411 $ 622,425 $ 463,538
Percent of total volume 50% 46% 41%
---------- ---------- ----------
Total loan originations $1,050,815 $1,059,530 $ 914,140
========== ========== ==========
Loans Purchased For R&G Mortgage:
Number of loans (3) 1,627 3,418 2,506
Volume of loans $ 145,881 $ 307,819 $ 207,070
Percent of total volume 12% 22% 19%
Total loan originations and purchases $1,196,696 $1,367,349 $1,121,210
========== ========== ==========
GNMA Pools Purchased for R&G Mortgage:
Volume of loans -- $ 22,487 --
5
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans 3,937 6,511 2,513
Volume of loans $ 332,930 $ 470,443 $ 194,909
FHA/VA loans:
Number of loans 4,167 4,255 4,413
Volume of loans $ 367,868 $ 373,730 $ 298,108
Total loans:
Number of loans 8,104 9,434 6,926
Volume of loans $ 700,798 $ 844,173(3) $ 493,017
Percent of total volume 59% 62% 44%
--------- --------- ---------
Adjustments:
Loans originated for the Bank $(451,404) ($437,105) ($450,602)
Loan amortization (18,544) ( 38,863) (1,479)
--------- --------- ---------
Increase in loans held for sale $ 25,950 $ 69,695 $ 176,112
========= ========= =========
Average Initial Loan Origination Balance:
The Bank:
Conventional loans(1) $ 83 $ 80 $ 82
FHA/VA loans -- -- --
Third Parties:
Conventional loans(1) $ 87 $ 68 $ 70
FHA/VA loans 95 87 78
Total
Conventional loans(1) $ 84 $ 74 $ 77
FHA/VA loans 95 87 78
Refinancings(5):
The Bank 56% 72% 74%
Third Parties 29% 49% 44%
- ---------------
(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes $63.0 and $123.2 million of loans purchased from another
institution, and securitized and sold to the same financial institution 2000
and during 1999, respectively.
(4) Includes loans converted into mortgage-backed securities.
(5) As a percent of the total dollar volume of mortgage loans originated by R&G
Mortgage for the Bank (excluding consumer loans) or third parties, as the
case may be. In the case of the Bank, refinancings do not necessarily
represent refinancings of loans previously held by the Bank.
6
All loan originations, regardless of whether originated
through the Company or purchased from third parties, must be underwritten in
accordance with R&G Financial's underwriting criteria, including
loan-to-appraised value ratios, borrower income qualifications, debt ratios and
credit history, investor requirements, necessary insurance and property
appraisal requirements. R&G Financial's underwriting standards also comply with
the relevant guidelines set forth by HUD, VA, FNMA, FHLMC, bank regulatory
authorities, private mortgage investment conduits and private mortgage insurers,
as applicable. The Company's underwriting personnel, while operating out of its
loan offices, make underwriting decisions independent of the Company's mortgage
loan origination personnel.
Typically, when a mortgage loan is originated, the borrower
pays an origination fee. These fees are generally in the range of 0% to 7% of
the principal amount of the mortgage loan, and are payable at the closing of
such loan. The Company receives these fees on mortgage loans originated through
its retail branches. The Company may charge additional fees depending upon
market conditions and regulatory considerations as well as the Company's
objectives concerning mortgage loan origination volume and pricing. The Company
incurs certain costs in originating mortgage loans, including overhead,
out-of-pocket costs and, in some cases, where the mortgage loans are subject to
a purchase commitment from private investors, related commitment fees. The
volume and type of mortgage loans and of commitments made by investors vary with
competitive and economic conditions (such as the level of interest rates and the
status of the economy in general), resulting in fluctuations in revenues from
mortgage loan originations. Generally accepted accounting principles ("GAAP")
require that general operating expenses incurred in originating mortgage loans
be charged to current expense. Direct origination costs and origination income
must be deferred and amortized using the interest method, until the repayment or
sale of the related mortgage loans. Historically, the value of servicing rights
which result from R&G Financial's origination activities has exceeded the net
costs attributable to such activities.
R&G Financial customarily sells most of the loans that it
originates, except for those originated on behalf of the Bank pursuant to the
Master Production Agreement with R&G Mortgage. See "-Lending Activities of the
Bank - Origination, Purchases and Sales of Loans." The loans originated by R&G
Mortgage (including FHA loans, VA loans and conventional loans) are secured by
real property located in Puerto Rico. During the years ended December 31, 2000,
1999 and 1998, R&G Financial sold $637.8 million, $721.0 million and $493.0
million of loans, respectively, which includes loans securitized and sold but
does not include loans originated by R&G Mortgage on behalf of the Bank or loans
securitized for other institutions. With respect to such loan sales, $270.8
million or 42.5%, $271.9 million or 37.7%, and $298.1 million or 60.5% consisted
of GNMA-guaranteed mortgage-backed securities of FHA loans or VA loans packaged
into pools of $1 million or more ($2.5 million to $5 million for GNMA serial
notes) by R&G Mortgage. These securities were sold through the Bank's Trust
Department or indirectly through securities broker-dealers.
Conforming conventional loans originated or purchased by the
Company are generally sold directly to FNMA, FHLMC or private investors for cash
or are grouped into pools of $1 million or more in aggregate principal balance
and exchanged for FNMA or FHLMC-issued mortgage-backed securities, which the
Company sells to securities broker-dealers. In connection with any such
exchanges, the Company pays guarantee fees to FNMA and FHLMC. The issuance of
mortgage-backed securities provides R&G Financial with flexibility in selling
the mortgages which it originates or purchases and also provides income by
increasing the value and marketability of the loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC
requirements (so-called "non-conforming loans") are generally originated on
behalf of the Bank by R&G Mortgage and either retained in the Bank's portfolio,
sold to financial institutions or other private investors or securitized into
"private label" CMOs through grantor trusts or other mortgage conduits and sold
through securities broker-dealers. Non-conforming loans consist of jumbo loans
or loans that do not satisfy all requirements of FNMA, FHLMC and GNMA at the
7
time of origination of the loan (such as missing tax returns, slightly higher
loan-to-value ratios, etc.). R&G Mortgage and the Bank have made no sales of
CMOs in securitization transactions during the last three fiscal years. When
such transactions are made, either the Bank or R&G Mortgage generally retains
the residual certificates issued by the respective trusts as well as the
subordinate certificates issued in such transactions. As of December 31, 2000,
R&G Mortgage held residual certificates issued in CMO transactions involving R&G
Mortgage and the Bank with a fair value of $3.7 million. In addition, the Bank
held CMO subordinated certificates and residual certificates from one of its
issues with a fair value of $9.3 million at December 31, 2000. See "- Investment
Activities."
While R&G Financial's exchanges of mortgage loans into agency
securities and sales of mortgage loans are generally made on a non-recourse
basis, the Company also engages in the sale or exchange of mortgage loans on a
recourse basis. In the past, recourse sales often involved the sale of
non-conforming loans to FNMA, FHLMC and local financial institutions. R&G
Financial estimates the fair value of the retained recourse obligation at the
time mortgage loans are sold. As of December 31, 2000, R&G Financial had
reserves for possible losses related to its recourse obligations of $472,000. At
December 31, 2000, R&G Mortgage had loans in its servicing portfolio with
provisions for recourse in the principal amount of approximately $680.5 million,
as compared to $646.3 million and $507.4 million as of December 31, 1999 and
1998, respectively. Of the recourse loans existing at December 31, 2000,
approximately $398.0 million in principal amount consisted of loans sold to FNMA
and FHLMC and converted into mortgage-backed securities of such agencies, and
approximately $282.5 million in principal amount consisted of non-conforming
loans sold to other private investors.
Loan Servicing. R&G Financial acquires servicing rights
through its mortgage loan originations (including originations on behalf of the
Bank) and purchases from third parties. The Company generally retains the rights
to service mortgage loans sold, which it has originated or purchased, and
receives the related servicing fees. Loan servicing includes collecting
principal and interest and remitting the same to the holders of the mortgage
loans or mortgage-backed securities to which such mortgage loan relates, holding
escrow funds for the payment of real estate taxes and insurance premiums,
contacting delinquent borrowers, supervising foreclosures in the event of
unremedied defaults and generally administering the loans. The Company receives
annual loan servicing fees ranging from 0.25% to 0.50% of the declining
outstanding principal balance of the loans serviced plus any late charges. In
general, the Company's servicing agreements are terminable by the investor for
cause without penalty or after payment of a termination fee ranging from 0.5% to
1.0% of the outstanding principal balance of the loans being serviced.
R&G Financial's servicing portfolio has grown significantly
over the past several years. At December 31, 2000, R&G Financial's servicing
portfolio totaled $6.6 billion and consisted of a total of 110,874 loans. These
amounts include R&G Mortgage's servicing portfolio totaling $6.1 billion and
Continental's servicing portfolio totaling $463.0 million at December 31, 2000.
At December 31, 2000, R&G Financial's servicing portfolio included $1.1 billion
of loans serviced for the Bank or 16.0% of the total servicing portfolio.
Substantially all of the mortgage loans in R&G Financial's servicing portfolio
are secured by single (one-to-four) family residences. Most of R&G Financial's
mortgage servicing portfolio is comprised of mortgages secured by real estate
located in Puerto Rico.
The Bank sells to R&G Mortgage the servicing rights to all
first and second mortgage loans secured by residential properties which become
part of the Bank's loan portfolio. R&G Mortgage services all other loans held in
the Bank's loan portfolio (including single-family residential loans retained by
the Bank and certain commercial real estate loans), although R&G Mortgage does
not actually acquire such servicing rights. The Bank pays R&G Mortgage servicing
fees with respect to the loans serviced by R&G Mortgage on behalf of the Bank.
In addition, the Bank processes payments of all loans originated by R&G Mortgage
on behalf of the Bank. In connection therewith, R&G Mortgage pays the Bank a fee
8
equal to between $0.50 and $1.00 per loan. See "- Regulation - R&G Financial -
Limitations on Transactions with Affiliates."
R&G Financial's mortgage loan servicing portfolio is subject
to reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan
servicing rights from time to time.
9
The following table sets forth certain information regarding
the total loan servicing portfolio of R&G Financial for the periods indicated.
Year Ended December 31,
----------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Composition of Servicing Portfolio at End of
Period:
Conventional and other mortgage loans(1) $3,447,383 $3,095,920 $2,105,290
FHA/VA loans 3,186,676 3,081,590 2,722,508
---------- ---------- ----------
Total servicing portfolio(2) $6,634,059 $6,177,511 $4,827,798
========== ========== ==========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $6,177,511 $4,827,798 $3,000,888
---------- ---------- ----------
Add: Loan originations and purchases 1,280,898 1,610,945 1,237,415
Servicing of portfolio loans acquired(3) 31,404 552,235 1,109,825
Less: Sale of servicing rights(4) (213,959) (55,515) --
Run-offs(5) (641,795) (757,952) (520,330)
---------- ---------- ----------
Ending servicing portfolio $6,634,059 $6,177,511 $4,827,798
========== ========== ==========
Number of loans serviced(6) 110,874 107,302 95,946
Average loan size(6) $ 60 $ 58 $ 50
Average servicing fee rate(6) 0.483% 0.530% 0.510%
- ---------------
(1) Includes non-conforming loans.
(2) At the dates shown, included $1.1 billion, $1.1 billion and $754.6 million
of loans serviced for the Bank, respectively, which constituted 16.0%, 17.3%
and 15.6% of the total servicing portfolio, respectively.
(3) Includes $496.5 million related to the servicing portfolio acquired as part
of the Company's acquisition of Continental in October 1999, and a $1.1
billion servicing portfolio acquired from another Puerto Rico financial
institution in November 1998 comprised of approximately 32,400 loans.
(4) Includes loans sold, servicing released, by Continental totaling $172.9
million and $55.5 million in 2000 and 1999, respectively.
(5) Run-off refers to regular amortization of loans, prepayments and
foreclosures. Includes transfers in 1998 of $67.7 million of mortgage loans
to financial institutions who acquired certain banks whose loans were being
serviced by R&G Mortgage.
(6) At December 31, 2000, R&G Mortgage was servicing 12,411 loans for the Bank
with an average loan size of approximately $85,000 and at an average
servicing rate of 0.25%. Amounts include late and other miscellaneous
charges.
10
The following table sets forth certain information at December
31, 2000 regarding the number of, and aggregate principal balance of, the
mortgage loans serviced by R&G Financial for the Bank and for third parties at
various mortgage interest rates.
At December 31, 2000
---------------------------------------------------------------------------------------------
Loans Serviced Loans Serviced Total Loans
for the Bank for Third Parties Serviced
---------------------------- ---------------------------- -----------------------------
Number of Aggregate Number of Aggregate Number of Aggregate
Loans Principal Balance Loans Principal Balance Loans Principal Balance
----- ----------------- ----- ----------------- ----- -----------------
(Dollars in Thousands)
Mortgage Interest Rate
Less than 7.00% 277 $ 30,691 10,743 $ 746,085 11,020 $ 776,776
7.00% - 7.49% 2,352 213,427 20,190 1,285,279 22,542 1,498,706
7.50% - 7.99% 3,247 303,345 24,432 1,498,789 27,679 1,802,134
8.00% - 8.49% 2,275 230,669 14,749 850,621 17,024 1,081,290
8.50% - 8.99% 2,610 205,428 14,061 674,613 16,671 880,041
9.50% - 9.99% 620 38,174 5,145 216,909 5,765 255,083
10.00% - 10.49% 411 18,089 4,261 126,423 4,672 144,512
10.50% - 10.99% 160 6,780 1,557 52,900 1,717 59,680
11.00% or more 279 8,662 990 32,976 1,269 41,638
180 5,621 2,337 88,578 2,517 94,199
------ --------- ------ --------- ------- ---------
12,411 $1,060,886 98,465 $5,573,173 110,876 $6,334,059
====== ========= ====== ========= ======= =========
The amount of principal prepayments on mortgage loans serviced
by R&G Financial was $176.3 million, $162.6 million and $96.5 million for the
years ended December 31, 2000, 1999 and 1998 respectively. This represented
approximately 2.7%, 2.6% and 2.6% of the aggregate principal amount of mortgage
loans serviced during such periods. The primary means used by R&G Mortgage to
reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability
that has allowed R&G Financial to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed
securities programs of FNMA, FHLMC and GNMA, and certain other investors,
require R&G Financial to advance funds to make scheduled payments of principal,
interest, taxes and insurance, if such payments have not been received from the
borrowers. During the years ended December 31, 2000, 1999 and 1998, the monthly
average amount of funds advanced by R&G Financial under such servicing
agreements was $5.8 million, $5.5 million and $2.3 million , respectively. Funds
advanced by R&G Financial pursuant to these arrangements are generally recovered
by R&G Financial within 30 days.
In connection with its loan servicing activities, R&G
Financial holds escrow funds for the payment of real estate taxes and insurance
premiums with respect to the mortgage loans it services.
At December 31, 2000, R&G Financial held $104.4 million of
such escrow funds, $91.8 million of which were deposited in the Bank and $12.6
million of which were deposited with other financial institutions. The escrow
funds deposited with the Bank lower its overall cost of funds and is a means of
compensating it for processing mortgages checks received by R&G Mortgage, while
the escrow funds deposited with other financial institutions serve as part of
R&G Financial's compensating balances which permit the Company to borrow funds
from such institutions (pursuant to certain warehouse lines of credit) at rates
that are lower than would otherwise apply. See "- Sources of Funds -
Borrowings."
The degree of risk associated with a mortgage loan servicing
portfolio is largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on
11
recourse servicing occur primarily when foreclosure sale proceeds of the
property underlying a defaulted mortgage are less than the then outstanding
principal balance and accrued interest of such mortgage loan and the cost of
holding and disposing of such underlying property. At December 31, 2000, R&G
Financial was servicing mortgage loans with an aggregate principal amount of
$680.5 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.
R&G Financial's general strategy is to retain the servicing
rights related to the mortgage loans it originates and purchases. Nevertheless,
there is a market in Puerto Rico for servicing rights, which are generally
valued in relation to the present value of the expected income stream generated
by the servicing rights. Among the factors which influence the value of a
servicing portfolio are servicing fee rates, loan balances, loan types, loan
interest rates, the expected average life of the underlying loans (which may be
reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors and any recourse provisions. Although the Company
may on occasion consider future sales of a portion of its servicing portfolio,
management does not anticipate sales of servicing rights to become a significant
part of its operations.
The market value of, and earnings from, R&G Financial's
mortgage loan servicing portfolio may be adversely affected if mortgage interest
rates decline and mortgage loan prepayments increase. In a period of declining
interest rates and accelerated prepayments, income generated from the Company's
mortgage loan servicing portfolio may also decline. Conversely, as mortgage
interest rates increase, the market value of the Company's mortgage loan
servicing portfolio may be positively affected. See Note 1 to R&G Financial's
Notes to Consolidated Financial Statements for a discussion of SFAS No. 125 and
the treatment of servicing rights, incorporated by reference into Item 8 hereof.
12
Mortgage Loan Delinquencies and Foreclosures. The following
table shows the delinquency statistics for R&G Mortgage's servicing portfolio at
the dates indicated.
Year Ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
Percent of Percent of Percent of
Number of Servicing Number of Servicing Number of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio
----- --------- ----- --------- ----- ---------
Loans delinquent for:
30-59 days 5,336 4.81% 5,334 4.97% 6,276 6.54%
60-89 days 1,547 1.40 1,559 1.45 1,545 1.61
90 days or more 2,300 2.07 2,109 1.97 1,696 1.77
-- ----- ----- ----- ----- ----- -----
Total delinquencies(1) 9,183 8.28% 9,002 8.39% 9,517 9.92%
===== ==== ===== ==== ===== ====
Foreclosures pending(2) 1,845 1.66% 1,262 1.18% 993 1.03%
===== ==== ===== ==== === ====
- --------------------
(1) Includes at December 31, 2000, an aggregate of $122.2 million of delinquent
loans serviced by R&G Mortgage for the Bank, or 1.84% of the total servicing
portfolio and $11.2 million of delinquent loans held in R&G Mortgage's own
portfolio.
(2) At December 31, 2000, the Bank had foreclosures pending on $38.2 million of
loans being serviced by R&G Mortgage, which constituted 0.58% of the
servicing portfolio. R&G Mortgage had foreclosures pending on $12.0 million
of loans it is servicing for its own portfolio at December 31, 2000.
While delinquency rates in Puerto Rico are generally higher
than in the mainland United States, these rates are not necessarily indicative
of future foreclosure rates or losses on foreclosures. Real estate owned as a
result of foreclosures ("REO") related to R&G Mortgage's mortgage banking
business arise primarily through foreclosure on mortgage loans repurchased from
investors either because of breach of representations or warranties or pursuant
to recourse arrangements. As of December 31, 2000, 1999 and 1998, R&G Mortgage
held REO with a book value of approximately $1.3 million, $128,000 and $128,000,
respectively. Sales of REO resulted in gains to R&G Mortgage of $168,000,
$209,000 and $26,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. There is no liquid secondary market for the sale of R&G Mortgage's
REO.
With respect to mortgage loans securitized through GNMA
programs, the Company is fully insured as to principal by the FHA and VA against
foreclosure loans. As a result of these programs, foreclosure on these loans had
generated no loss of principal as of December 31, 2000. R&G Mortgage, however,
incurs about $3,000 per loan foreclosed in interest and legal charges during the
time between payment by R&G Mortgage and FHA or VA reimbursement. For the years
ended December 31, 2000, 1999 and 1998, total expenses related to FHA or VA
loans foreclosed amounted to $235,000, $35,000 and $286,000, respectively.
Although FNMA and FHLMC are obligated to reimburse the Company for principal and
interest payments advanced by the Company as a servicer (except for recourse
servicing), the funding of delinquent payments or the exercise of foreclosure
rights involves costs to the Company which may not be recouped. Such nonrecouped
expenses have to date been immaterial.
Any significant adverse economic developments in Puerto Rico
could result in an increase in defaults or delinquencies on mortgage loans that
are serviced by R&G Mortgage or held by R&G Mortgage pending sale in the
secondary mortgage market, thereby reducing the resale value of such mortgage
loans.
13
Lending Activities from Banking Operations
General. At December 31, 2000, R&G Financial's loans
receivable, net totaled $1.6 billion, which represented 46.1% of R&G Financial's
$3.5 billion of total assets. At December 31, 2000, all but $1.2 million of R&G
Financial's loans receivable, net were held by the Bank. The principal category
of loans in R&G Financial's portfolio are conventional loans which are secured
by first liens on single-family residences. Conventional residential real estate
loans are loans which are neither insured by the FHA nor partially guaranteed by
the VA. At December 31, 2000, all but $1.3 million of R&G Financial's first
mortgage single-family residential loans consisted of conventional loans. The
other principal categories of loans in R&G Financial's loans receivable, net
portfolio are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.
14
Loan Portfolio Composition. The following table sets forth the
composition of R&G Financial's loan portfolio by type of loan at the dates
indicated. Except as noted in the footnotes to the table, all of the loans are
held in the Bank's loan portfolio.
December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate - first
mortgage $ 1,005,371 56.87% $ 1,099,843 67.75% $ 735,795 66.87%
Residential real estate - second
mortgage 27,419 1.55 13,029 0.80 18,634 1.69
Retail construction 47,698 2.70 38,950 2.40 23,280 2.12
Commercial construction and land
acquisition 184,906 10.46 78,133 4.81 15,353 1.39
Commercial real estate 270,459 15.30 204,155 12.57 117,151 10.65
Commercial business 59,120 3.34 54,231 3.34 46,532 4.23
Consumer loans:
Loans secured by deposits 26,926 1.52 20,539 1.27 17,225 1.56
Real estate secured consumer loans 100,357 5.68 76,944 4.74 85,055 7.73
Unsecured consumer loans 45,563 2.58 37,653 2.32 41,381 3.76
----------- ----- ----------- ----- ----------- -----
Total loans receivable 1,767,819 100.00% 1,623,477 100.00% 1,100,406 100.00%
----------- ====== ----------- ====== ----------- ======
Less:
Allowance for loan losses (11,600) (8,971) (8,055)
Loans in process (125,429) (50,622) (18,170)
Deferred loan fees 909 (437) (166)
Unearned interest (423) (440) (347)
(136,543) (60,471) (26,738)
----------- ----------- -----------
Loans receivable, net(2) $ 1,631,276 $ 1,563,007 $ 1,073,668
=========== =========== ===========
December 31,
-----------------------------------------------------
1997 1996
-----------------------------------------------------
Amount Percent Amount Percent
Residential real estate - first
mortgage(1) $ 476,729 61.25% $ 370,876 60.75%
Residential real estate - second
mortgage(1) 17,831 2.29 15,757 2.58
Retail construction 13,367 1.72 5,351 0.88
Commercial construction and land
acquisition 5,785 0.74 5,700 0.93
Commercial real estate 81,722 10.50 69,514 11.39
Commercial business 39,128 5.03 31,063 5.09
Consumer loans:
Loans secured by deposits 12,472 1.60 9,409 1.54
Real estate secured consumer loans 81,252 10.44 42,893 7.03
Unsecured consumer loans 50,103 6.43 59,864 9.81
--------- ------ --------- ------
Total loans receivable 778,389 100.00% 610,427 100.00%
--------- ====== --------- ======
Less:
Allowance for loan losses (6,772) (3,332)
Loans in process (6,218) (2,430)
Deferred loan fees 172 41
Unearned interest (512) ( 955)
--------- ---------
(13,330) (6,676)
--------- ---------
Loans receivable, net(2) $ 765,059 $ 603,751
========= =========
- ---------------
(1) Includes $33.9 million and $49.7 million of residential real estate - first
mortgage loans which are held by R&G Mortgage at December 31, 1997 and 1996,
respectively.
(2) Does not include mortgage loans held for sale of $95.7 million, $77.3
million, $117.1 million, $46.9 million and $54.5 million at December 31,
2000, 1999, 1998, 1997 and 1996, respectively.
15
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at December 31, 2000 regarding
the dollar amount of loans maturing in R&G Financial's total loan portfolio
based on the contractual terms to maturity. Loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
Due 1-5 Due 5 or more
years after years after
Due 1 year December 31, December 31,
or less 2000 2000 Total(1)
---------- ---------- ---------- --------
(In Thousands)
Residential real estate $ 122 $ 3,078 $1,029,590 $1,032,790
Retail construction 47,698 -- -- 47,698
Commercial real estate(2) 100,187 235,946 119,232 455,365
Commercial business 33,130 24,378 1,612 59,120
Consumer:
Loans on savings 15,245 11,174 507 26,926
Real estate secured consumer loans 1,004 6,609 92,744 100,357
Unsecured consumer loans 20,765 17,366 7,432 45,563
---------- ---------- ---------- ----------
Total(3) $ 218,151 $ 298,551 $1,251,117 $1,767,819
========== ========== ========== ==========
- --------
- -----------------------
(1) Amounts have not been reduced for the allowance for loan losses, loans in
process, deferred loan fees or unearned interest.
(2) Includes $184.9 million of commercial construction and land acquisition
loans.
(3) Does not include mortgage loans held for sale.
16
The following table sets forth the dollar amount of total
loans due after one year from December 31, 2000, as shown in the preceding
table, which have fixed interest rates or which have floating or adjustable
interest rates.
Floating or
Fixed rate adjustable-rate Total
---------- --------------- -----
(In Thousands)
Residential real estate......................... $1,032,790 $ -- $1,032,790
Retail Construction............................. 47,698 -- 47,698
Commercial real estate(1)....................... 113,343 342,022 455,365
Commercial business............................. 34,605 24,515 59,120
Consumer:
Loans on savings........................... 26,926 -- 26,926
Real estate secured consumer loans......... 100,357 -- 100,357
Unsecured consumer loans................... 45,563 -- 45,563
---------- ------- ---------
Total........................................... $1,401,282 $366,537 $1,767,819
========== ======= =========
- ---------------------
(1) Includes $184.9 million of commercial construction and land acquisition
loans.
Scheduled contractual amortization of loans does not reflect
the expected term of R&G Financial's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and,
with respect to conventional loans originated for the Bank after February 1994,
due-on-sales clauses, which give R&G Financial the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
17
Origination, Purchase and Sales of Loans. The following table
sets forth loan originations, purchases and sales from banking operations for
the periods indicated.
Year Ended December 31,
--------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages................................................ $ 378,398 $ 378,740 $385,416
Commercial mortgages................................................. -- -- 265
Residential construction............................................. 29,063 26,146 16,766
Consumer loans....................................................... 43,943 32,219 48,155
Total loans originated by R&G Mortgage........................... 451,404 437,105 450,602
Other loans originated:
Commercial real estate............................................... 150,329 175,803 54,426
Commercial business.................................................. 48,060 36,222 26,191
Construction and development......................................... 127,473 54,070 11,365
Consumer loans:
Loans on deposit..................................................... 45,474 34,758 27,172
Real estate secured consumer loans................................... -- -- --
Unsecured consumer loans............................................. 32,517 29,631 9,970
Total other loans originated..................................... 403,853 330,484 129,124
Loans purchased...................................................... 128,824 279,489 175,735
Total loans originated and purchased............................. 984,081 1,047,078 755,461
Loans sold........................................................... (105,653) (133,731) (282,005)
Loan principal reductions............................................ (329,591) (253,534) (142,560)
Net increase before other items, net................................. 548,837 659,813 330,896
Loans securitized and transferred to mortgage-backed securities...... (410,453) (106,237) --
-------- --------- ---------
Net increase in loan portfolio....................................... $138,384 $ 553,576 $330,896
======== ========= ========
R&G Financial, through the Bank, originates for both
investment and sale mortgage loans secured by residential real estate (secured
by both first and second mortgage liens) as well as construction loans (for
residential real estate), commercial real estate loans, commercial business
loans and consumer loans.
R&G Mortgage assists the Bank in meeting its loan production
targets and goals by, among other things, (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and
conducting the initial processing of the requisite loan applications, consistent
with the Bank's underwriting guidelines; and (iii) providing personnel and
facilities with respect to the execution of loan agreements approved by the
Bank. R&G Mortgage performs the foregoing loan origination services on behalf of
the Bank with respect to residential mortgage loans, some commercial real estate
loans and construction loans. R&G Mortgage receives from the Bank 75% of the
applicable loan origination fee with respect to loans originated by R&G Mortgage
on behalf of the Bank. During the years ended December 31, 2000, 1999 and 1998,
R&G Mortgage received $8.1 million, $7.5 million and $7.5 million, respectively,
of loan origination fees with respect to loans originated by R&G Mortgage on
behalf of the Bank. These fees are eliminated in consolidation in R&G
Financial's Consolidated Financial Statements. See "- Regulation - R&G Financial
- - Limitations on Transactions with Affiliates."
The Bank originates commercial real estate, commercial
business and consumer loans. Applications for commercial real estate, commercial
business and unsecured consumer loans are taken at all of the Bank's branch
18
offices and may be approved by various lending officers of the Bank within
designated limits, which are established and modified from time to time to
reflect an individual's expertise and experience. All loans in excess of an
individual's designated limits are referred to an officer with the requisite
authority. In addition, the Management Credit Committee is authorized to approve
all loans not exceeding $5.0 million, and the Executive Committee of the Board
of Directors is authorized to approve all loans exceeding $5.0 million. All
loans originated or purchased by the Bank must be approved by one of the three
committees set forth above. Management of the Bank believes that its relatively
centralized approach to approving loan applications ensures strict adherence to
the Bank's underwriting guidelines while still allowing the Bank to approve loan
applications on a timely basis.
The Bank also purchases conventional loans secured by first
liens on single-family residential real estate from unrelated financial
institutions. Such loan purchases are underwritten by the Bank pursuant to the
same guidelines as direct loan originations. Loans purchased by the Bank are
from time to time securitized by R&G Mortgage and sold by the Bank. During the
years ended December 31, 2000, 1999 and 1998, the Bank purchased $128.8 million,
$279.5 million and $175.7 million of loans, respectively.
During the years ended December 31, 2000, 1999 and 1998, loans
sold from banking operations were $105.7 million, $133.7 million and $282.0
million. These loans, which were primarily nonconforming loans at the time of
origination, were generally sold in packages in privately negotiated
transactions with FNMA and FHLMC.
The Bank sells to R&G Mortgage the servicing rights to all
first and second mortgage loans secured by residential properties which are or
will become part of the Bank's loan portfolio once the Bank has a commitment to
sell the loans. R&G Mortgage services all other loans held in the Bank's
portfolio (including single-family residential loans retained by the Bank,
commercial real estate, commercial business and consumer loans (although R&G
Mortgage does not actually acquire such servicing rights)). In addition, the
Bank processes payments on all loans serviced by R&G Mortgage on behalf of the
Bank. Finally, R&G Mortgage renders securitization services with respect to the
pooling of some of the Bank's mortgage loans into mortgage-backed securities.
See "- Mortgage Banking Activities."
Single-Family Residential Real Estate Loans. The Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences. At
December 31, 2000, $1.0 billion or 57.9% of R&G Financial's total loans held for
investment consisted of such loans, of which all but $1.3 million consisted of
conventional loans. The Bank's first mortgage single-family residential loans
consist exclusively of fixed-rate loans with terms of between 15 and 30 years.
As evidenced by this statistic, the Puerto Rico residential mortgage market has
not been receptive to long-term adjustable rate mortgage loans.
The Bank's first mortgage single-family residential loans
typically do not exceed 80% of the appraised value of the security property.
Pursuant to underwriting guidelines adopted by the Board of Directors, the Bank
can lend up to 95% of the appraised value of the property securing a first
mortgage single-family residential loan provided the Bank obtains private
mortgage insurance with respect to the top 25% of the loan.
The Bank also originates loans secured by second mortgages on
single-family residential properties. At December 31, 2000, $27.4 million or
1.6% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. The Bank offers such
second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-value ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).
19
Construction Loans. The Bank has been active in originating
loans to construct single-family residences. These construction lending
activities generally are conducted throughout Puerto Rico, although loans are
concentrated in areas contiguous to Bank branches. At December 31, 2000, retail
construction ("spot") loans amounted to $47.7 million or 2.7% of R&G Financial's
total loans held for investment, while commercial construction and land
acquisition loans amounted to $184.9 million or 10.5% of total loans held for
investment.
The Bank offers "spot" loans to individual borrowers for the
purpose of constructing single-family residences. Substantially all of the
Bank's construction lending to individuals is originated on a
construction/permanent mortgage loan basis. Construction/permanent loans are
made to individuals who hold a contract with a general contractor acceptable to
the Bank to construct their personal residence. The construction phase of the
loan provides for monthly payments on an interest only basis at a designated
fixed rate for the term of the construction period, which generally does not
exceed nine months. Thereafter, the permanent loan is made at then market rates,
provided that such rate shall not be more than 2% greater than the interim
construction rate. R&G Mortgage's construction loan department approves the
proposed contractors and administers the loan during the construction phase. The
Bank's construction/permanent loan program has been successful due to its
ability to offer borrowers a single closing and, consequently, reduced costs. At
December 31, 2000, the Bank's construction loan portfolio included 432
construction/permanent loans with an aggregate principal balance of $47.7
million.
The Bank also originates construction loans to developers to
develop single family residential properties. The Bank has organized a
Construction Loan Department to work primarily with real estate developers. At
December 31, 2000, the Bank had 13 residential construction loans outstanding to
develop single-family residences with an aggregate principal balance of $36.0
million; commitments for future funding approximate $97.4 million. In addition,
the Bank had 5 loans to develop commercial properties with an aggregate
principal balance of $6.8 million; commitments for future fnding approximates
$9.8 million. All loans are performing in accordance with their terms at
December 31, 2000.
In addition to the foregoing, at December 31, 2000, the Bank
had 31 land acquisition loans with outstanding balances ranging from $29,000 to
$4.4 million, and an aggregate balance of $24.9 million, the majority of which
were made in connection with projects to construct single-family residences. The
Bank and another financial institution, which makes the interim construction
loans, have entered into an agreement pursuant to which the Bank is to be paid a
percentage of the proceeds from each home as it is released upon construction
and sale. The Bank expects to make the permanent construction loan on some of
these projects. The Bank has also made a working capital/pre-development loan
with an outstanding principal balance of $10.0 million at December 31, 2000,
which is secured by land.
The Bank intends to continue to increase its involvement in
single-family residential construction lending. Such loans afford the Bank the
opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of risk
as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated costs (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. The Bank has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose stringent loan-to-value (80% with respect to single-family residential
real estate), debt service and other requirements for loans which are believed
to involve higher elements of credit risk and by working with builders with whom
it has established relationships or knowledge thereof. At December 31, 2000,
$487,000 of the Bank's retail construction loans were classified as
non-performing. As of such date, no commercial construction or land acquisition
loans were non-performing.
20
Commercial Real Estate Loans. The Bank also originates
mortgage loans secured by commercial real estate. At December 31, 2000, $270.5
million or 15.3% of R&G Financial's total loans held for investment consisted of
such loans. As of such date, the Bank's commercial real estate loan portfolio
consisted of approximately 1,084 loans with an average principal balance of
$250,000. At December 31, 2000, $11.9 million of the Bank's commercial real
estate loans were classified as nonperforming.
Commercial real estate loans originated by the Bank are
primarily secured by office buildings, retail stores, warehouses and general
purpose industrial space. Although terms vary, commercial real estate loans
generally are amortized over a period of 7-15 years and have maturity dates of
five to seven years. The Bank will originate these loans with interest rates
which adjust monthly in accordance with a designated prime rate plus a margin,
which generally is negotiated at the time of origination. Such loans will have a
floor but no ceiling on the amount by which the rate of interest may adjust over
the loan term. Loan-to-value ratios on the Bank's commercial real estate loans
are currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.20 or more. It is also the Bank's general policy to seek
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through mortgage insurance,
secondary collateral and/or personal guarantees from the principals of the
borrower.
Commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and because
the payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, warehouses or other commercial space. The Bank attempts to
minimize its risk exposure by limiting the extent of its commercial lending
generally. In addition, the Bank imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral. Although the Bank has begun
to increase its emphasis on commercial real estate lending, management does not
currently anticipate that its portfolio of commercial real estate loans will
grow significantly as a percentage of the total loan portfolio.
Commercial Business Loans. The Bank offers commercial business
loans, including working capital lines of credit, inventory and accounts
receivable loans, equipment financing (including equipment leases), term loans,
insurance premiums loans and loans guaranteed by the Small Business
Administration. Depending on the collateral pledged to secure the extension of
credit, maximum loan to value ratios are 75% or less, with exceptions permitted
to a maximum of 80%. Loan terms may vary from one to 15 years. The interest
rates on such loans are generally variable and are indexed to a designated prime
rate, plus a margin. The Bank also generally obtains personal guarantees from
the principals of the borrowers. At December 31, 2000, commercial business loans
amounted to $59.1 million or 3.3% of total loans held for investment. Although
the Bank has begun to increase its emphasis on commercial business lending,
management does not currently anticipate that its portfolio of commercial
business loans will grow significantly as a percentage of the total loan
portfolio.
Consumer Loans. The Bank originates real estate secured
consumer loans. Such loans generally have shorter terms and higher interest
rates than other mortgage loans. At December 31, 2000, $172.8 million or 9.8% of
the Bank's total loans held for investment consisted of consumer loans. This
amount is comprised mostly of real estate secured consumer loans (which are
originated by R&G Mortgage), but the Bank also offers loans secured by deposit
accounts, credit card loans and other secured and unsecured consumer loans. Most
of the Bank's consumer loans are secured and have been primarily obtained
through newspaper advertising, although loans are also obtained from existing
and walk-in customers. Although the Bank has begun to increase its emphasis on
21
collateralized consumer lending, management does not currently anticipate that
its portfolio of consumer loans will grow significantly as a percentage of the
total loan portfolio.
The Bank currently offers loans secured by deposit accounts,
which amounted to $26.9 million at December 31, 2000. Such loans are originated
generally for up to 90% of the account balance, with a hold placed on the
account restricting the withdrawal of the account balance. The Bank offers real
estate secured loans in amounts up to 75% of the appraised value of the
property, including the amount of any existing prior liens. Real estate secured
consumer loans have a maximum term of 10 years, which may be extended within the
sole discretion of the Bank, and an interest rate which is set at a fixed rate
based on market conditions. The Bank secures the loan with a first or second
mortgage on the property, including loans where another institution holds the
first mortgage. At December 31, 2000, real estate secured consumer loans totaled
$100.4 million. At December 31, 2000, credit card receivables totaled $13.8
million.
Consumer loans generally have shorter terms and higher
interest rates than mortgage loans but generally involve more credit risk than
mortgage loans because of the type and nature of the collateral and, in certain
cases, the absence of collateral. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely effected by job loss, divorce, illness and personal
bankruptcy. In many cases, any repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of improper repair and maintenance of the underlying security.
The remaining deficiency may not warrant further substantial collection efforts
against the borrower. At December 31, 2000, $1.2 million of consumer loans were
classified as non-performing.
Asset Quality. When a borrower fails to make a required
payment on a loan, R&G Financial attempts to cure the deficiency by contacting
the borrower and seeking payment. Contacts are generally made between the 10th
and 15th day after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency extends beyond 15 days, the loan and payment history
is reviewed and efforts are made to collect the loan. While R&G Financial
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent in the case of mortgage loans, R&G Financial
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss. In the case of consumer loans, the Bank refers the file for
collection action after 60 days.
Loans secured by real estate are placed on non-accrual status
when, in the judgment of management, the probability of collection of interest
is deemed to be insufficient to warrant further accrual. When such a loan is
placed on non-accrual status, previously accrued but unpaid interest is deducted
from interest income. As a matter of policy, the Bank does not accrue interest
on loans past due 90 days or more which are secured by real estate. The Bank
generally takes the same position in the case of consumer loans.
Real estate acquired by the Bank as a result of foreclosure or
by deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3"), which provides guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the balance
of the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Bank's
accounting for its real estate owned complies with the guidance set forth in SOP
92-3.
22
The following table sets forth the amounts and categories of
R&G Financial's non-performing assets at the dates indicated. R&G Financial did
not have any troubled debt restructurings at any of the periods presented.
Except as otherwise indicated in the footnotes to the table, the non-performing
assets are assets of the Bank.
December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)................... $79,234 $47,413 $32,973 $21,619 $12,991
Residential construction..................... 487 478 441 368 363
Commercial real estate....................... 11,881 9,005 6,463 6,000 3,141
Commercial business.......................... 1,414 1,255 3,224 765 823
Consumer unsecured........................... 1,186 802 1,358 1,217 686
Other........................................ -- 61 67 117 726
-------- ------- ------- ------- ----------
Total.................................... 94,202 59,014 44,526 30,086 18,730
-------- ------- ------- ------- ----------
Accruing loans greater than 90 days delinquent:
Residential real estate...................... -- -- -- -- --
Residential construction..................... -- -- -- -- --
Commercial real estate....................... -- -- -- -- --
Commercial business.......................... 420 63 61 54 22
Consumer..................................... 360 274 357 172 134
-------- ------- ------- ------- ----------
Total accruing loans greater than
90 days delinquent..................
780 337 418 226 156
-------- ------- ------- ------- ----------
Total non-performing loans............... 94,982 59,351 44,944 30,312 18,886
-------- ------- ------- ------- ----------
Real estate owned, net of reserves................ 9,056 5,852 4,041 1,715 834
Other repossessed assets.......................... 583 466 237 85 31
-------- ------- ------- ------- ----------
9,639 6,318 4,278 1,800 865
======== ======= ======= ======= =======
Total non-performing assets....................... $104,621 $65,669 $49,222 $32,112 $19,751
Total non-performing loans as a
percentage of total loans (2)....... 5.38% 3.66% 4.08% 3.89% 3.09%
======== ======= ======= ======= =======
Total non-performing assets as a
percentage of total assets.......... 2.96% 2.26% 2.41% 2.12% 1.90%
======== ======= ======= ======= =======
- ----------------------
(1) Includes $6.2 million, $6.1 million, $5.3 million, $2.6 million and $1.1
million consumer loans held by the Bank secured by first and second
mortgages on residential real estate at December 31, 2000, 1999, 1998, 1997
and 1996, respectively. Also includes $17.6 million, $5.9 million, $4.3
million and $2.8 million residential real estate loans secured by first
mortgages held by R&G Mortgage at December 31, 2000, 1999, 1998 and 1997,
respectively.
(2) While the ratio of non-performing loans to total loans increased from 3.66%
to 5.38% from December 31, 1999 to December 31, 2000, the increase in the
ratio was made larger than it would otherwise have been due to significant
loan securitizations during the last two quarters of 2000, which reduced
the amount of loans considered in the calculation of the ratio. Without
giving effect to loan securitizations, during the years ended December 31,
2000 and 1999, the ratio of non-performing loans to total loans would have
been 4.37% and 3.44%, respectively.
While the level of total non-performing assets of R&G
Financial has increased on an absolute basis during the periods presented, from
$19.8 million at December 31, 1996 to $104.6 million at December 31, 2000, R&G
Financial's net loans receivable portfolio has increased by 170% during this
period, from $603.8 million at December 31, 1996 to $1.6 billion at December 31,
2000.
23
While non-performing loans amounted to $95.0 million at
December 31, 2000, as compared to $59.4 million at December 31, 1999, $31.8
million or 89.3% of such increase consisted of residential mortgage loans.
Because of the nature of the collateral, R&G Financial has historically
recognized a low level of loan charge-offs. R&G Financial's aggregate
charge-offs amounted to 0.17% during 2000, as compared to 0.25% during 1999.
Although loan delinquencies have historically been higher in Puerto Rico than in
the United States, loan charge-offs have historically been lower than in the
United States.
Non-performing residential loans increased by $31.8 million or
67.1% from December 31, 1999 to December 31, 2000. The average loan balance on
non-performing mortgage loans amounted to $59,000 at December 31, 2000. As of
such date, 808 loans with an aggregate balance of $53.1 million (including 134
consumer loans secured by real estate with an aggregate balance of $2.9 million)
were in the process of foreclosure. The total delinquency ratio (including loans
past due less than 90 days) on residential mortgages of the Bank, excluding
consumer loans secured by real estate, increased from 7.11% in 1999 to 8.55% in
2000. The Company's loss experience on such portfolio has been minimal over the
last several years.
Non-performing commercial real estate loans increased by $2.9
million or 31.9% from $9.0 at December 31, 1999 to $11.9 million at December 31,
2000. The number of loans delinquent over 90 days amounted to 92 loans at
December 31, 2000, with an average balance of $129,000. The largest
non-performing commercial real estate loan as of December 31, 2000 had a balance
of $564,000.
Non-performing commercial business loans consist of 65 loans.
Such loans include 12 loans with an aggregate balance of $451,000 which are 90%
guaranteed by the Small Business Administration, 47 commercial leases amounting
to $788,000 and 6 other commercial business loans with an aggregate balance of
$175,000. These loans have a combined average loan size of $22,000. The largest
non-performing commercial business loan as of December 31, 2000 had a $199,000
balance.
At December 31, 2000, R&G Financial's five largest
loans-to-one borrower and their related entities amounted to $21.7 million,
$19.5 million, $18.7 million, $15.9 million and $14.3 million. All of such loans
concentrations were performing at December 31, 2000.
24
At December 31, 2000, R&G Financial's allowance for loan
losses totaled $11.6 million, which represented a $2.6 million or 29.3% increase
from the level maintained at December 31, 1999. At December 31, 2000, R&G
Financial's allowance represented approximately 0.66% of the total loan
portfolio and 12.21% of total non-performing loans, as compared to 0.55% and
15.11% at December 31, 1999. The increase in the allowance for loan losses
reflected the increase in R&G Financial's commercial real estate and
construction loan portfolio as well as the increase in R&G Financial
non-performing loans during the year.
It is the policy of the Bank to maintain an allowance for
estimated losses on loans and to increase such allowance when, based on
management's evaluation, a loss becomes both probable and estimable (i.e., the
loss is likely to occur and can be reasonably estimated). Major loans and major
lending areas are reviewed periodically to determine potential problems at an
early date. Also, management's periodic evaluation considers factors such as
loss experience, current delinquency data, known and inherent risks in the
portfolio, identification of adverse situations which may affect the ability of
debtors to repay the loan, the estimated value of any underlying collateral and
assessment of current economic conditions. Additions to the allowance are
charged to income. Such provisions are based on management's estimated value of
any underlying collateral, as applicable, considering the current and
anticipated operating conditions of the borrower. Any recoveries are credited to
the allowance.
25
The following table sets forth an analysis of R&G Financial's
allowance for loan losses during the periods indicated, which is maintained on
the Bank's loan portfolio.
At and For the Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ...................................... $ 8,971 $ 8,055 $ 6,772 $ 3,332 $ 3,510
------- ------- ------- ------- -------
Charge-offs:
Residential real estate ........................................ 38 17 73 13 45
Construction ................................................... -- -- -- -- 50
Commercial real estate ......................................... 468 353 -- 170 --
Commercial business ............................................ 1,539 1,548 1,485 480 110
Consumer ....................................................... 1,940 2,518 4,455 3,953 1,922
Other .......................................................... -- 4 -- 761 2,535
------- ------- ------- ------- -------
Total charge-offs .......................................... 3,985 4,440 6,013 5,377 4,662
------- ------- ------- ------- -------
Recoveries:
Residential real estate ........................................ -- -- -- 21 --
Commercial real estate ......................................... 80 69 -- 50 --
Commercial business ............................................ 381 332 20 32 31
Consumer ....................................................... 402 429 312 344 195
Other .......................................................... -- -- -- 2,000 --
------- ------- ------- ------- -------
Total recoveries ........................................... 863 830 332 2,447 226
------- ------- ------- ------- -------
Net charge-offs ..................................................... 3,122 3,610 5,681 2,930 4,436
------- ------- ------- ------- -------
Allowance for loan losses acquired
from Fajardo Federal............................................ -- -- 364 -- --
Provision for losses on loans ....................................... 5,751 4,525 6,600 6,370 4,258
------- ------- ------- ------- -------
Balance at end of period ............................................ $11,600 $ 8,971 $ 8,055 $ 6,772 $ 3,332
======= ======= ======= ======= =======
Allowance for loan losses as a percent of total loans outstanding ...
0.66% 0.55% .74% .87% .55%
======= ======= ======= ======= =======
Allowance for loan losses as a percent of non-
performing loans..................................................... 12.21% 15.11% 17.92% 22.34% 17.64%
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding..................................................... 0.17% .25% .55% 0.40% 0.75%
======= ======= ======= ======= =======
26
The following table sets forth information concerning the
allocation of R&G Financial's allowance for loan losses (which is maintained on
the Bank's loan portfolio) by loan category at the dates indicated.
December 31,
------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ---------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate....... $ 1,278 11.02% $ 1,419 15.82% $ 1,272 15.79%
Construction ................. 432 3.72 186 2.07 46 0.57
Commercial real estate........ 4,880 42.07 3,258 36.32 2,655 32.96
Commercial business .......... 1,321 11.39 1,063 11.85 1,033 12.82
Consumer ..................... 3,689 31.80 3,045 33.94 3,049 37.86
------- ------ ------- ------ ------- ------
Total ........................ $11,600 100.00% $ 8,971 100.00% $ 8,055 100.00%
======= ====== ======= ====== ======= ======
December 31,
------------------------------------------------------------
1997 1996
-------------------------- --------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate................. $593 8.76% $810 24.31%
Construction............................ 7 0.10 51 1.53
Commercial real estate.................. 1,386 20.47 489 14.68
Commercial business..................... 806 11.90 109 3.27
Consumer................................ 3,980 58.77 1,873 56.21
------ ------ ------ ------
Total................................... $6,772 100.00% $3,332 100.00%
====== ====== ====== ======
27
Investment Activities
General. R&G Financial's securities portfolio is managed by
investment officers in accordance with a comprehensive written investment policy
which addresses strategies, types and levels of allowable investments and which
is reviewed and approved annually by the respective Boards of Directors of the
Bank and R&G Mortgage. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Interest Rate Risk, Budget
and Investments Committee ("IRRBICO").
As discussed under "- Mortgage Banking Activities," R&G
Mortgage is primarily engaged in the origination of mortgage loans and the
securitization of such loans into mortgage-backed and related securities and the
subsequent sale of such securities to securities broker-dealers and other
investors in the secondary market. As a result of R&G Mortgage's securitization
activities, R&G Mortgage maintains a substantial portfolio of GNMA
mortgage-backed securities. At December 31, 2000, R&G Mortgage held GNMA
mortgage-backed securities with a fair value of $12.0 million which are
classified as held for trading. Such securities generally remain in R&G
Mortgage's portfolio for between 90 and 180 days. In addition, as of such date,
R&G Mortgage held GNMA and FHLMC mortgage-backed securities with a fair value of
$408.0 million and $11.7 million, respectively, which are classified as
available for sale. At December 31, 2000, R&G Mortgage's CMO interest-only
residuals and interest only strips, which are classified as available for sale,
had an amortized cost of $8.5 million and a fair value of $8.5 million.
The Bank's Investment Policy authorizes the Bank to invest in
U.S. Treasury obligations (with a maturity up to five years), U.S. Agency
obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade
municipal obligations (with a maturity of up to five years), bankers'
acceptances and Federal Home Loan Bank ("FHLB") notes (with a maturity of up to
five years), investment grade commercial paper (with a maturity of up to 9
months), federal funds (with a maturity of six months or less), certificates of
deposit in other financial institutions (including Eurodollar deposits),
repurchase agreements (with a maturity of six months or less), investment grade
corporate bonds (with a maturity of five years or less) and certain
mortgage-backed derivative securities (with a weighted average life of less than
ten years).
At December 31, 2000, the Bank's securities portfolio
consisted of $23.5 million of securities held for investments, consisting of
$10.7 million of tax-free mortgage-backed securities, $9.1 million of other
mortgage backed securities, and $1.0 million of Puerto Rico Government
obligations and other Puerto Rico securities. In addition, at December 31, 2000,
the Bank had a securities portfolio classified as available for sale with a fair
value of $1.0 billion, consisting of $90.9 million of tax-free mortgage-backed
securities, $527.9 million of FHLMC and FNMA mortgage-backed securities, $46.0
million of FHLB stock, $14.7 million of CMOs certificates, CMO interest-only
residuals and interest only strips, $5.2 million corporate debt obligations and
$317.1 million of U.S. Government agency securities, the interest on which is
tax-exempt to the Company.
The Bank's Treasury Department from time to time conducts
certain trading activities mainly through investments in U.S. Treasury
securities. However, at December 31, 2000 no securities for trading were held by
the Bank.
At December 31, 2000, $380.9 million or 24.5% of R&G
Financial's mortgage-backed and investment securities were pledged to secure
various obligations of R&G Financial (excluding repurchase agreements).
28
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's securities portfolio held
to maturity as of the dates indicated below. All of such securities are assets
of the Bank.
December 31,
----------------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Market Value Yield Value Market Value Yield
----------- ------------ ---------- ---------- ------------ --------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA
Due within one year....................... $ 2 $ 3 10.00% $ -- $ -- --%
Due from one-five years................... -- -- -- 15 16 10.00
Due from five-ten years................... 8,865 8,605 5.79 10,660 10,391 5.79
Due over ten years........................ 1,845 1,766 6.17 2,133 2,074 6.17
FNMA
Due within one year....................... -- -- -- -- -- --
Due from one-five years................... -- -- -- -- -- --
Due from five-ten years................... -- -- -- -- -- --
Due over ten years........................ 8,947 9,145 7.08 10,252 10,644 7.09
FHLMC
Due within one year....................... -- -- -- -- -- --
Due from one-five years................... -- -- -- -- -- --
Due from five-ten years................... -- -- -- -- -- --
Due over ten years........................ 160 154 6.57 189 180 5.58
Investment securities:
Puerto Rico Government
obligations
Due within one year................... -- -- -- -- -- --
Due from one-five years............... 1,948 1,948 5.88 1,280 1,272 5.85
Due from five-ten years............... 1,755 1,755 5.98 4,158 4,132 5.95
Due over ten years.................... -- -- -- -- -- --
U.S. Treasury and Government
Agency
Due within one year................... -- -- -- -- -- --
------- ------- ------- -------
Total securities held for
investment....................... $23,522 $23,376 6.34% $28,687 $28,709 6.31%
======= ======= ==== ======= ======= ====
29
December 31,
----------------------------------------
1998
----------------------------------------
Carrying Weighted
Value Market Value Average Yield
----- ------------ -------------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA
Due within one year .............. $ -- $ -- --%
Due from one-five years .......... 27 29 10.00
Due from five-ten years .......... 13,025 12,752 5.79
Due over ten years ............... 2,360 2,306 6.17
FNMA
Due within one year .............. -- -- --
Due from one-five years .......... -- -- --
Due from five-ten years .......... -- -- --
Due over ten years ............... 12,608 12,944 7.13
FHLMC
Due within one year .............. -- -- --
Due from one-five years .......... -- -- --
Due from five-ten years .......... -- -- --
Due over ten years ............... 236 230 5.99
Investment securities:
Puerto Rico Government obligations
Due within one year ........... -- -- --
Due from one-five years ....... -- -- --
Due from five-ten years ....... 5,945 5,979 5.80
Due over ten years ............ -- -- --
U.S. Treasury and Government
Agency
Due within one year ........... 399 400 5.40
Due from one-five years ....... -- -- --
Due from five-ten years ....... -- -- --
Due over ten years ............ -- -- --
-------- -------
Total securities held for
investment .............. $ 34,600 $34,640 6.31%
======== ======= ====
30
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's held for trading and
available for sale mortgage-backed and investment securities portfolio as of the
dates indicated below.
December 31,
--------------------------------------------------------------------
2000 2000
--------------------------------------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Fair Value Yield Cost Fair Value Yield
---- ---------- ----- ---- ---------- -----
(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA
Due within one year .............................. $ -- $ -- --% $ -- $ -- --%
Due from one-five years .......................... 26 26 8.50 -- -- --
Due from five-ten years .......................... 10,492 10,419 5.68 -- -- --
Due over ten years ............................... 584,419 576,869 6.62 570,749 563,533 6.62
FNMA mortgage-backed securities
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... 634 634 6.50 741 719 6.50
Due over ten years ............................... 98,779 99,968 7.15 110,855 109,705 7.15
FHLMC mortgage-backed securities
Due within one year .............................. 13 13 9.00 -- -- --
Due from one-five years .......................... 132 130 8.94 99 99 8.79
Due from five-ten years .......................... 1,587 1,587 6.61 1,891 1,841 6.77
Due over ten years ............................... 434,865 437,227 7.26 14,586 14,036 6.87
CMO residuals and other mortgage-backed securities (1)
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... 10,710 10,190 12.00 8,886 8,886 12.00
Due from five-ten years .......................... -- -- -- -- -- --
Due over ten years ............................... 10,688 13,037 8.08 11,823 13,886 8.07
Investment securities available for sale(1)
U.S. Treasury
Due within one year .............................. -- -- -- 4,998 4,945 4.50
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... -- -- -- -- -- --
Due over ten years ............................... -- -- -- -- -- --
U.S. Government & Agencies ........................... -- -- -- -- -- --
Due within one year .............................. 8,500 8,446 5.48 -- -- --
Due from one-five years .......................... 192,763 193,298 6.26 133,956 130,950 6.19
Due from five-ten years .......................... 114,881 115,352 7.30 92,237 89,444 7.28
Due over ten years ............................... -- -- -- -- -- --
Corporate debt obligations
Due within one year .............................. -- -- -- -- -- --
Due from one-five years .......................... -- -- -- -- -- --
Due from five-ten years .......................... 5,097 5,202 6.80 -- -- --
Due over ten years ............................... -- -- -- -- -- --
FHLB stock ........................................... 45,973 45,973 7.30 32,825 32,825 6.75
---------- ---------- -------- --------
$1,519,559 $1,518,371 6.90% $983,646 $970,869 6.75%
========== ========== ==== ======== ======== ====
Securities held for trading:
GNMA certificates .................................... $ 11,630 $ 12,038 7.28% $ 43,303 $ 43,564 5.27%
CMO certificates ..................................... -- -- -- -- -- --
CMO residuals ........................................ -- -- -- -- -- --
U.S. Treasury Bills .................................. -- -- -- -- -- --
---------- ---------- -------- --------
$ 11,630 $ 12,038 7.28% $ 43,303 $ 43,564 5.27%
========== ========== ==== ======== ======== ====
(Footnotes on following page)
31
December 31,
-------------------------------------
1998
-------------------------------------
Weighted
Amortized Average
Cost Fair Value Yield
---- ---------- -----
(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA
Due within one year ................. $ -- $ -- --%
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 55,159 55,159 6.41
FNMA mortgage-backed securities
Due within one year ................. -- -- --
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 8,092 8,161 6.96
FHLMC mortgage-backed securities
Due within one year ................. -- -- --
Due from one-five years ............. 89 91 8.83
Due from five-ten years ............. 240 244 8.99
Due over ten years .................. 21,369 21,724 6.86
CMO residuals and other mortgage-backed
securities (1)
Due within one year ................. -- -- --
Due from one-five years ............. -- -- --
Due from five-ten years ............. -- -- --
Due over ten years .................. 7,845 9,661 8.125
Investment securities available for sale(1)
U.S. Treasury
Due within one year ................. -- -- --
Due from one-five years ............. 4,995 4,991 4.50
Due from five-ten years ............. -- -- --
Due over ten years .................. -- -- --
U.S. Government & Agencies
Due within one year ................. -- -- --
Due from one-five years ............. 38,100 38,106 5.64
Due from five-ten years ............. 5,010 5,000 6.72
Due over ten years .................. -- -- --
FHLB stock .............................. 11,405 11,405 7.21
-------- --------
$152,304 $154,542 6.41%
======== ======== ====
Securities held for trading:
GNMA certificates ....................... $427,915 $443,399 6.69%
CMO certificates ........................ -- -- --
CMO residuals ........................... 7,134 7,147 8.00
U.S. Treasury Bills ..................... -- -- --
-------- --------
$435,049 $450,546 6.71%
======== ======== ====
(Footnotes on following page)
32
- --------------------
(1) Comprised of subordinated tranches and residuals from the Bank's 1992
Grantor Trust residuals purchased from the Bank in 1995 from its 1993 CMO
Grantor Trust, residuals from R&G Mortgage's CMO Grantor Trusts, and
interest-only strips resulting from sales of loans by R&G Mortgage and the
Bank.
A substantial portion of R&G Financial's securities are held
in mortgage-backed securities. Mortgage-backed securities (which also are known
as mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S.
Government and owned by the 12 Federal Home Loan Banks and federally-insured
savings institutions. The FHLMC issues participation certificates backed
principally by conventional mortgage loans. The FHLMC guarantees the timely
payment of interest and the ultimate return of principal within one year. The
FNMA is a private corporation chartered by the U.S. Congress with a mandate to
establish a secondary market for conventional mortgage loans. The FNMA
guarantees the timely payment of principal and interest on FNMA securities.
FHLMC and FNMA securities are not backed by the full faith and credit of the
United States, but because the FHLMC and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
HUD which is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. For example, the FNMA and the FHLMC currently limit
their loans secured by a single-family, owner-occupied residence to $252,700
($275,000 effective January 1, 2001.) To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with interest rates that are within a range and have varying maturities.
The characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages. Mortgage-backed securities generally
increase the quality of R&G Financial's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of R&G Financial.
R&G Financial's securities portfolio includes CMOs. CMOs have
been developed in response to investor concerns regarding the uncertainty of
cash flows associated with the prepayment option of the underlying mortgagor and
are typically issued by government agencies, government sponsored enterprises
and special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
33
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
The FDIC has issued a statement of policy which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals) which possess average life or price volatility in excess of a
benchmark fixed rate 30-year mortgage-backed pass-through security are
"high-risk mortgage securities," are not suitable investments for depository
institutions, and if considered "high risk" at purchase must be carried in the
institution's trading account or as assets held for sale, and must be marked to
market on a regular basis. In addition, if a security was not considered "high
risk" at purchase but was later found to be "high risk" based on the tests, it
may remain in the held-to-maturity portfolio as long as the institution has
positive intent to hold the security to maturity and has a documented plan in
place to manage the high risk. At December 31, 2000, the Bank's CMOs, and
interest-only securities and residuals, which had a fair value of $14.7 million,
were designated as "high-risk mortgage securities" and classified as available
for sale.
Sources of Funds
General. R&G Financial will consider various sources of funds
to fund its investment and lending activities and evaluates the available
sources of funds in order to reduce R&G Financial's overall funding costs.
Deposits, reverse repurchase agreements, warehouse lines of credit, notes
payable, FHLB advances, subordinated capital notes and sales, maturities and
principal repayments on loans and securities have been the major sources of
funds for use in R&G Financial's lending and investing activities and for other
general business purposes.
Deposits. Deposits are the major sources of the Bank's funds
for lending and other investment purposes. Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments, including passbook, NOW
and Super NOW, checking and commercial checking and certificates of deposit
ranging in terms from 7 days to 10 years. Included among these deposit products
are $749.1 million of certificates of deposit with balances of $100,000 or more,
which amounted to 44.7%of the Bank's total deposits at December 31, 2000.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors.
The Bank attempts to price its deposits in order to promote
deposit growth. The Bank regularly evaluates the internal costs of funds,
surveys rates offered by competing institutions, reviews the Bank's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Bank does not obtain funds through brokers on a regular basis,
although at December 31, 2000 it held $184.3 million of deposits acquired from
money desks in the United States.
The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of services and accounts and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including advertising.
34
The following table presents the average balance of each
deposit type and the average rate paid one each deposit type of the Bank for the
periods indicated.
December 31,
------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------ ------------------------
Average Average Rate Average Average Rate Average Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Passbook ................. $ 113,660 3.73% $ 112,107 3.74% $ 88,754 3.75%
NOW and Super NOW accounts 134,573 3.93 126,300 3.95 99,336 3.93
Checking ................. 40,455 -- 41,128 -- 39,052 --
Commercial checking(1) ... 110,937 -- 111,146 -- 77,329 --
Certificates of deposit .. 1,106,294 6.43 762,856 5.83 522,016 5.98
---------- ---------- --------
Total deposits ...... $1,505,919 5.36% $1,153,537 4.65% $826,487 4.65%
========== ==== ========== ==== ======== ====
- ------------------
(1) Includes $91.8 million, $92.4 million and $109.9 million of escrow funds of
R&G Mortgage at December 31, 2000, 1999 and 1998, respectively, maintained
with the Bank.
The following table sets forth the maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 2000.
Amount
--------------
(In Thousands)
Certificates of deposit maturing:
Three months or less....................... $221,196
Over three through six months.............. 178,235
Over six through twelve months............. 180,384
Over twelve months......................... 169,266
-------
Total............................. $749,081
=======
Borrowings. R&G Financial's business requires continuous
access to various funding sources, both short and long-term. R&G Mortgage's
primary source of short-term funds is through sales of securities to investment
dealers under agreements to repurchase ("reverse repurchase agreements"). The
Bank also from time to time utilizes reverse repurchase agreements when they
represent a competitive short-term funding source.
In a reverse repurchase agreement transaction, R&G Financial
will generally sell a mortgage-backed security agreeing to repurchase either the
same or a substantially identical security on a specified later date (generally
not more than 90 days) at a price less than the original sales price. The
difference in the sale price and purchase price is the cost of the use of the
proceeds. The mortgage-backed securities underlying the agreements are delivered
to the dealers who arrange the transactions. For agreements in which R&G
Financial has agreed to repurchase substantially identical securities, the
dealers may sell, loan or otherwise dispose of R&G Financial's securities in the
normal course of their operations; however, such dealers or third party
custodians safe-keep the securities which are to be specifically repurchased by
R&G Financial. Reverse repurchase agreements represent a competitive cost
funding source for R&G Financial. Nevertheless, R&G Financial is subject to the
risk that the lender may default at maturity and not return the collateral. The
amount at risk is the value of the collateral which exceeds the balance of the
borrowing. In order to minimize this potential risk, R&G Financial only deals
with large, established investment brokerage firms when entering into these
transactions.
35
Reverse repurchase transactions are accounted for as financing
arrangements rather than as sales of such securities, and the obligations to
repurchase such securities is reflected as a liability in R&G Financial's
Consolidated Financial Statements. As of December 31, 2000, R&G Financial had
$827.7 million of reverse repurchase agreements outstanding, $396.9 million of
which represented borrowings of R&G Mortgage. At December 31, 2000, the weighted
average interest rate on R&G Financial's reverse repurchase agreements amounted
to 6.75%.
R&G Financial's loan originations are also funded by
borrowings under various warehouse lines of credit provided by various
commercial banks ("Warehouse Lines"). At December 31, 2000, R&G Financial was
permitted to borrow under such Warehouse Lines up to $243.4 million, $64.4
million of which was drawn upon and outstanding as of such date. The Warehouse
Lines are used by R&G Financial to fund loan commitments and must generally be
repaid within 180 days after the loan is closed or when payment from the sale of
the funded loan is received, whichever occurs first. Until such sale closes, the
Warehouse Lines provide that the funded loan is pledged to secure the
outstanding borrowings. The Warehouse Lines are also collateralized by a general
assignment of mortgage payments receivable and an assignment of certain mortgage
servicing rights. Certain of these warehousing lines of credit impose
restrictions with respect to the maintenance of minimum levels of net worth and
working capital and limitations on the amount of indebtedness and dividends
which may be declared. Management of R&G Financial believes that as of December
31, 2000, it was in compliance with all of such covenants and restrictions and
does not anticipate that such covenants and restrictions will limit its
operations.
The interest rate on funds borrowed pursuant to the Warehouse
Lines is based on Libor rates plus a negotiated amount. By maintaining
compensating balances, R&G Financial is able to borrow funds under the Warehouse
Lines at a lower interest rate than would otherwise apply. These compensating
balances are comprised of a portion of the escrow accounts maintained by R&G
Financial for principal and interest payments and related tax and insurance
payments on loans its services. At December 31, 2000, the weighted average
interest rate being paid by R&G Financial under its Warehouse Lines amounted to
7.85%.
Although the Bank's primary source of funds is deposits, the
Bank also borrows funds on both a short and long-term basis. The Bank actively
utilizes 936 Notes as a primary borrowing source. The 936 Notes have original
terms to maturity of between five and seven years and bear interest payable
quarterly for variable interest rate notes and semiannually for fixed interest
rate notes. The Bank is able to obtain such low cost funds by investing the
proceeds in eligible activities as proscribed under Puerto Rico law, which
provide tax advantages under Puerto Rico tax laws and under U.S. federal tax
laws for U.S. corporations which are operating in Puerto Rico pursuant to
Section 936 of the Code. At December 31, 2000, the Bank had $35.5 million of 936
Notes outstanding, all maturing in 2001. The 936 Notes contain certain
provisions which indemnify the holders thereof from the federal tax liability
which would be incurred, plus any penalties and interest, if the Bank did not
invest the proceeds as required in eligible activities, and also provide for a
"gross up" provision which permits the Bank to continue the obligation at an
adjusted interest rate based on LIBOR in the event the interest on the 936 Notes
is subject in whole or in part to federal and/or Puerto Rico income tax.
The Bank obtains both fixed-rate and variable-rate short-term
and long-term advances from the FHLB of New York upon the security of certain of
its residential first mortgage loans, securities and cash deposits, provided
certain standards related to the credit-worthiness of the Bank have been met.
FHLB of New York advances are available for general business purposes to expand
lending and investing activities. Advances from the FHLB of New York are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. At December 31, 2000, the Bank had access
36
to $634.2 million in advances from the FHLB of New York, and had 14 FHLB of New
York advances aggregating $505.0 million outstanding as of such date, which
mature at various dates commencing in January 2, 2001 through October 20, 2005
and have a weighted average interest rate of 6.42 %. In addition, at December
31, 2000, the Bank maintained $36.8 million in standby letters of credit with
the FHLB of New York, which secured $35.5 million of outstanding 936 Notes
payable. At December 31, 2000, the Bank had pledged specific collateral
aggregating $732.8 million to the FHLB of New York under its advances program
and to secure the letters of credit. The Bank maintains collateral with the FHLB
of New York in excess of applicable requirements in order to facilitate any
necessary additional borrowings by the Bank in the future.
37
The following table sets forth certain information regarding
the short-term borrowings of R&G Financial at or for the dates indicated.
At or For the Year Ended
December 31,
-------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
R&G Mortgage:
Securities sold under agreements to repurchase:
Average balance outstanding ................................. $450,443 $365,177 $354,786
Maximum amount outstanding at any month-end during the period 499,626 493,527 415,960
Balance outstanding at end of period ........................ 494,353 493,527 415,960
Average interest rate during the period ..................... 6.69% 5.52% 5.73%
Average interest rate at end of period ...................... 6.92% 6.15% 5.46%
Notes Payable:
Average balance outstanding ................................. $117,085 $127,565 $102,047
Maximum amount outstanding at any month-end during the period
143,114 154,922 152,060
Balance outstanding at end of period ........................ 85,030 56,907 107,648
Average interest rate during the period ..................... 6.41% 6.67% 7.07%
Average interest rate at end of period ...................... 8.06% 6.89% 6.43%
The Bank:
FHLB of New York advances:
Average balance outstanding ................................. $438,276 $222,575 $ 94,025
Maximum amount outstanding at any month-end during the period
510,500 384,000 160,100
Balance outstanding at end of period ........................ 505,000 384,000 121,000
Average interest rate during the period ..................... 6.34% 5.31% 5.55%
Average interest rate at end of period ...................... 6.42% 5.75% 5.25%
Securities sold under agreements to repurchase:
Average balance outstanding ................................. $392,755 $187,857 $ 55,915
Maximum amount outstanding at any month-end during the period 430,852 327,009 79,513
Balance outstanding at end of period ........................ 430,852 327,009 75,222
Average interest rate during the period ..................... 6.47% 5.77% 5.57%
Average interest rate at end of period ...................... 6.60% 5.73% 5.35%
Notes Payable:
Average balance outstanding ................................. $ 69,663 $ 84,463 $ 84,100
Maximum amount outstanding at any month-end
during the period ....................................... 76,263 84,100 84,100
Balance outstanding at end of period ........................ 53,828 75,800 84,100
Average interest rate during the period ..................... 6.03% 6.53% 6.45%
Average interest rate at end of period ...................... 6.75% 6.00% 5.74%
38
Trust and Investment Services
R&G Financial also provides trust and investment services
through the Bank's Trust Department. Services offered include custodial
services, the administration of IRA accounts and the sale to investors of
mortgage-backed securities guaranteed by GNMA. As of December 31, 2000, the
Bank's Trust Department administered trust accounts with aggregate assets of
$51.1 million as of such date. In addition, during the year ended December 31,
2000, the Bank's Trust Department sold $33.1 million of GNMA mortgage-backed
securities. The Bank receives fees dependent upon the level and type of service
provided. The administration of the Bank's Trust Department is performed by the
Trust Committee of the Board of Directors of the Bank.
Personnel
As of December 31, 2000, R&G Financial (on a consolidated
basis) had 1,295 full-time employees and 53 part-time employees. The employees
are not represented by a collective bargaining agreement and R&G Financial
believes that it has good relations with its employees.
Regulation
Set forth below is a brief description of certain laws and
regulations which, together with the descriptions of laws and regulations
contained elsewhere herein, are deemed material to an investor's understanding
of the extent to which R&G Financial and its subsidiary companies are regulated.
The description of these laws and regulations, as well as descriptions of laws
and regulations contained elsewhere herein, does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
R&G Financial
General. R&G Financial is a registered financial holding
company pursuant to the Bank Holding Company Act of 1956, as amended (the
"BHCA"). R&G Financial, as a financial holding company, is subject to regulation
and supervision by the Federal Reserve Board and the OCFI. R&G Financial is
required to file annually a report of its operations with, and is subject to
examination by, the Federal Reserve Board and the OCFI.
BHCA Activities and Other Limitations. The BHCA prohibits a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
39
The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking within the meaning of the
BHCA. These activities include operating a mortgage company, such a R&G
Mortgage, finance company, credit card company, factoring company, trust company
or savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial
advisor; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The Federal Reserve Board also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
Limitations on Transactions with Affiliates. Transactions
between financial institutions and any affiliate are governed by Sections 23A
and 23B of the Federal Reserve Act. An affiliate of a financial institution is
any company or entity which controls, is controlled by or is under common
control with the financial institution. In a holding company context, the parent
holding company of a financial institution (such as R&G Financial) and any
companies which are controlled by such parent holding company are affiliates of
the financial institution. Generally, Sections 23A and 23B (i) limit the extent
to which the financial institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions. In addition to the restrictions imposed by Sections
23A and 23B, no financial institution may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the financial institution.
The Gramm-Leach-Bliley Act, described under "- Recent
Legislation" below, amended several provisions of Sections 23A and 23B of the
Federal Reserve Act. The amendments provide that financial subsidiaries of banks
are treated as affiliates for purposes of Sections 23A and 23B of the Federal
Reserve Act, but that (i) the 10% capital limit on transactions between the bank
and such financial subsidiary as an affiliate is not applicable, and (ii) the
investment by the bank in the financial subsidiary does not include retained
earnings in the financial subsidiary. Certain anti-evasion provisions have been
included that relate to the relationship between any financial subsidiary of a
bank and sister companies of the bank: (1) any purchase of, or investment in,
the securities of a financial subsidiary by any affiliate of the bank is
considered a purchase or investment by the bank; or (2) if the Federal Reserve
Board determines that such treatment is necessary, any loan made by an affiliate
of the bank to the financial subsidiary is to be considered a loan made by the
bank.
In addition, Sections 22(h) and (g) of the Federal Reserve Act
places restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institutions. Section 22(h) also requires prior board approval for certain
40
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers.
R&G Mortgage and the Bank are parties to various agreements
which address how each would conduct itself in specifically delineated
affiliated transactions (the "Affiliated Transaction Agreements"). The
Affiliated Transaction Agreements include a Master Purchase, Servicing and
Collections Agreement (the "Master Purchase Agreement"), a Master Custodian
Agreement, a Master Production Agreement, a Securitization Agreement and a Data
Processing Computer Service Agreement. The terms of these agreements were
negotiated at arm's length on the basis that they are substantially the same, or
at least as favorable to the Bank, as those prevailing for comparable
transactions with, or involving, other nonaffiliated companies.
Pursuant to the Master Production Agreement, the Bank, on a
monthly basis, determines its loan production targets and goals (the "Loan
Production Goals") and R&G Mortgage assists the Bank to reach its Loan
Production Goals by, among other things: (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and
initial processing of loan applications, consistent with the Bank's underwriting
guidelines and Loan Production Goals previously established; and (iii) providing
personnel and facilities with respect to the execution of any loan agreement
approved by the Bank. In exchange for these services, the Bank remits to R&G
Mortgage a percentage of the processing or originating fees charged to the
borrowers under loan agreements, as set forth in the agreements. See "-Lending
Activities of the Bank - Originations, Purchases and Sales of Loans."
The Master Purchase Agreement provides for the sale by the
Bank to R&G Mortgage of the servicing rights to all first and second mortgage
loans secured by residential properties which become part of the Bank's loan
portfolio once the related loans are sold. R&G Mortgage services all other loans
held in the Bank's loan portfolio (including single-family residential loans
retained by the Bank and certain commercial real estate loans), although R&G
Mortgage does not actually acquire such servicing rights. The Master Purchase
Agreement further provides that R&G Mortgage exclusively will service such loans
and that the Bank will process payments of such loans, all according to a fee
schedule. See " - Mortgage Banking Activities - Loan Originations, Purchases and
Sales of Loans."
Under the Securitization Agreement, R&G Mortgage renders
securitization services with respect to the pooling of some of the Bank's
mortgage loans into mortgage-backed securities. With respect to securitization
services rendered, the Bank pays a securitization fee of 25 basis points. The
Master Custodian Agreement provides that the Bank shall be the custodial agent
for R&G Mortgage of certain documentation related to the issuance by R&G
Mortgage of GNMA, FNMA or FHLMC mortgage-backed certificates. In consideration
of these services, the Bank receives a fee for each mortgage note included in a
mortgage-backed certificate per year for which it acts as custodian, as set
forth in the agreement. See "- Mortgage Banking Activities - Loan Originations,
Purchases and Sales of Loans."
Capital Requirements. The Federal Reserve Board has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications to it under the BHCA. The Federal Reserve Board capital adequacy
guidelines generally require bank holding companies to maintain total capital
equal to 8% of total risk-adjusted assets, with at least one-half of that amount
consisting of Tier I or core capital and up to one-half of that amount
consisting of Tier II or supplementary capital. Tier I capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier I capital),
less goodwill and, with certain exceptions, intangibles. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
41
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the
Federal Reserve Board requires bank holding companies to maintain a minimum
leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets
for this purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from
Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies are expected to maintain Tier I leverage
capital ratios of at least 4.0% to 5.0% or more, depending on their overall
condition.
R&G Financial is in compliance with the above-described
Federal Reserve Board regulatory capital requirements.
Financial Support of Affiliated Institutions. Under Federal
Reserve Board policy, R&G Financial will be expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. In addition, any capital loans by a bank holding company to a
subsidiary bank is subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Recent Legislation. The Gramm-Leach-Bliley Act, signed into
law on November 12, 1999, revises and expands the existing provisions of the
BHCA by including a new section that permits a bank holding company to elect to
become a financial holding company, which may engage in a full range of
financial activities. The qualification requirements and the process for a bank
holding company that elects to be treated as a financial holding company
requires that all the subsidiary banks controlled by the bank holding company at
the time of election to become a financial holding company must be and remain at
all times well capitalized and well managed. R&G Financial applied for and
became a financial holding company in 2000.
Financial holding companies may engage, directly or
indirectly, in any activity that is determined to be (i) financial in nature,
(ii) incidental to such financial activity, or (iii) complementary to a
financial activity and which does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act specifically provides that the following activities have
been determined to be "financial in nature": (a) lending, trust and other
banking activities; (b) insurance activities; (c) financial or economic advice
or services; (d) pooled investments; (e) securities underwriting and dealing;
(f) existing bank holding company domestic activities; (g) existing bank holding
company foreign activities and (h) merchant banking activities.
42
In addition, the Gramm-Leach-Bliley Act specifically gives the
Federal Reserve Board the authority, by regulation or order, to expand the list
of "financial" or "incidental" activities, but requires consultation with the
U.S. Treasury, and gives the Federal Reserve Board authority to allow a
financial holding company to engage in any activity that is "complementary" to a
financial activity and does not "pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally."
The Bank
General. The Bank is incorporated under the Puerto Rico
Banking Act of 1933, as amended (the "Puerto Rico Banking Law") and is subject
to extensive regulation and examination by the OCFI, the FDIC and certain
requirements established by the Federal Reserve Board. The federal and Puerto
Rico laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans. There are periodic examinations by
the OCFI and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the OCFI, the FDIC or the U.S. Congress or
Puerto Rico legislature could have a material adverse impact on R&G Financial,
R&G Mortgage, the Bank and their operations.
FDIC Insurance Premiums. The Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all Savings Association Insurance Fund ("SAIF") and
Bank Insurance Fund ("BIF") member institutions. Under applicable regulations,
institutions are assigned to one of three capital groups which is based solely
on the level on an institution's capital: "well capitalized," "adequately
capitalized" and "undercapitalized". These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .0% for well
capitalized, healthy institutions to .27% for undercapitalized institutions with
substantial supervisory concerns. The Bank was classified as a
"well-capitalized" institution as of December 31, 2000.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy regarding the capital adequacy of state-chartered
banks which, like the Bank, will not be members of the Federal Reserve System.
These requirements are substantially similar to those adopted by the Federal
Reserve Board regarding bank holding companies, as described above.
43
The FDIC's capital regulations establish a minimum 3.0% Tier I
leverage capital requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis points
for all other state-chartered, non-member banks, which effectively increases the
minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under the FDIC's regulation, the highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
The FDIC also requires that banks meet a risk-based capital
standard. The risk-based capital standard for banks requires the maintenance of
total capital (which is defined as Tier I capital and supplementary (Tier 2)
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item. The components of Tier I capital are
equivalent to those discussed above under the 3% leverage capital standard. The
components of supplementary capital include certain perpetual preferred stock,
certain mandatory convertible securities, certain subordinated debt and
intermediate preferred stock and general allowances for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At December 31, 2000, the Bank met each of its capital requirements.
The FDIC and the other federal banking agencies have published
a joint policy statement that describes the process the banking agencies will
use to measure and assess the exposure of a bank's net economic value to changes
in interest rates. The FDIC and other federal banking agencies have also adopted
a joint policy statement on interest rate risk policy. Because market
conditions, bank structure, and bank activities vary, the agencies concluded
that each bank needs to develop its own interest rate risk management program
tailored to its needs and circumstances. The policy statement describes prudent
principles and practices that are fundamental to sound interest rate risk
management, including appropriate board and senior management oversight and a
comprehensive risk management process that effectively identifies, measures,
monitors and controls risks.
Activities and Investments. The activities and equity
investments of FDIC-insured, state-chartered banks (which under the Federal
Deposit Insurance Act includes banking institutions incorporated under the laws
of Puerto Rico) are generally limited to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
In addition, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as "principal" in any activity that is not
44
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and
the bank is in compliance with applicable regulatory capital requirements. Any
insured state-chartered bank directly or indirectly engaged in any activity that
is not permitted for a national bank must cease the impermissible activity.
Puerto Rico Banking Law. As a commercial bank organized under
the laws of the Commonwealth, the Bank is subject to supervision, examination
and regulation by the OCFI pursuant to the Puerto Rico Banking Law.
The Puerto Rico Banking Law requires that at least ten percent
(10%) of the yearly net income of the Bank be credited annually to a reserve
fund. This apportionment shall be done every year until the reserve fund shall
be equal to the sum of the Bank's paid-in common and preferred stock capital. As
of December 31, 1999, the Bank had credited $5.1 million to such reserve fund.
The Puerto Rico Banking Law also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter shall be charged against the undistributed profits of the bank,
and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If there is no reserve fund sufficient to cover such balance
in whole or in part, the outstanding amount shall be charged against the capital
account and no dividend shall be declared until said capital has been restored
to its original amount and the reserve fund to 20% of the original capital. In
addition, every bank is required by the Puerto Rico Banking Law to maintain a
legal reserve which shall not be less than 20% of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be made up of any of the following
instruments or any combination of them: (i) legal tender of the United States;
(ii) checks on banks or trust companies located in any part of Puerto Rico, to
be presented for collection during the day following that on which they are
received; (iii) money deposited in other banks provided said deposits are
authorized by the Commissioner, subject to immediate collection; and (iv)
federal funds sold and securities purchased under agreements to resell, provided
such funds are repaid on or prior to the close of the next business day.
Under the Puerto Rico Banking Law, the Bank is permitted to
make loans to any one person, firm, partnership or corporation, up to an
aggregate amount of fifteen percent (15%) of the paid-in capital and reserve
fund of the Bank, plus 15% of 50% of undistributed earnings for "well
capitalized" institutions. As of December 31, 2000, the legal lending limit for
the Bank under these provisions was approximately $22.0 million and its maximum
extension of credit to any one borrower was $21.5 million. If such loans are
secured by collateral worth at least twenty-five percent (25%) more than the
amount of the loan, the aggregate maximum amount may reach one-third of the
paid-in capital of the Bank, plus its reserve fund. There are no restrictions on
the amount of loans to subsidiaries of banks, or loans that are secured by
mortgages by real estate, or loans that are wholly secured by bonds, securities
and other evidences of indebtedness of the United States or the Commonwealth, or
by current debt bonds, not in default, of municipalities or instrumentalities of
the Commonwealth. Loans to non-banking affiliates of the Bank, are subject
however to the lending limitations set forth in Sections 23A and 23B of the
Federal Reserve Act. The Puerto Rico Banking Law also authorizes the Bank to
conduct certain financial and related activities directly or through
subsidiaries. The Puerto Rico Banking Law also prohibits Puerto Rico banks from
making loans secured by their own stock, and from purchasing their own stock,
unless such purchase is necessary to prevent losses because of a debt previously
contracted in good faith. The stock so purchased by the bank must be sold in a
private or public sale within one year from the date of purchase. The Bank may
repurchase its own stock for the purpose of reducing its capital, subject to the
approval of the OCFI.
The rate of interest that the Bank may charge on mortgage and
other types of loans to individuals in Puerto Rico is subject to Puerto Rico's
usury laws. Such laws are administered by the Financing Board, which consists of
the Commissioner of Financial Institutions, the President of the Government
45
Development Bank, the Chairman of the Planning Board and the Puerto Rico
Secretaries of Commerce, Treasury and Consumer Affairs and three representatives
from the private sector. The Financing Board promulgates regulations which
specify maximum rates on various types of loans to individuals. The Financing
Board eliminated the regulations that set forth the maximum interest rates that
could be charged on consumer loans, mortgage loans and commercial loans. The
origination charges on residential mortgage loans may not exceed 6% of the loan
amount.
Regulatory Enforcement Authority. Applicable banking laws
include substantial enforcement powers available to federal and Puerto Rico
banking regulators. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Mortgage Banking Subsidiaries
The mortgage banking business conducted by R&G Mortgage, The
Mortgage Store and Continental are subject to the rules and regulations of FHA,
VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and
servicing mortgage loans and the issuance and sale of mortgage-backed
securities. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers
and fix maximum loan amounts and, with respect to VA loans, fix maximum interest
rates. Moreover, lenders are required annually to submit to FNMA, FHA, FHLMC,
GNMA and VA audited financial statements, and each regulatory entity has its own
financial requirements. The affairs of these subsidiaries are also subject to
supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all times
to assure compliance with the applicable regulations, policies and procedures.
Mortgage origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder.
Mortgage loan production activities are subject to the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder. The
Truth-in-Lending Act contains disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The Truth-in-Lending Act provides consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.
The mortgage subsidiaries are required to comply with the
Equal Credit Opportunity Act of 1974, as amended ("ECOA"), and Regulation B
promulgated thereunder, which prohibit creditors from discriminating against
applicants on the basis of race, color, sex, age or marital status, and restrict
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by lenders regarding consumer rights and
requires lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for loan
increases as a result of information obtained from a consumer credit agency,
another statute, The Fair Credit Reporting Act of 1970, as amended, requires the
lenders to supply the applicant with the name and address of the reporting
agency.
The Federal Real Estate Settlement Procedures Act ("RESPA")
imposes, among other things, limits on the amount of funds a borrower can be
required to deposit with the mortgage subsidiaries in any escrow account for the
payment of taxes, insurance premiums or other charges.
46
R&G Mortgage and The Mortgage Store are also subject to
regulation by the OCFI, with respect to, among other things, licensing
requirements and the record-keeping, examination and reporting requirements of
the Puerto Rico Mortgage Banking Institutions Law (the "Mortgage Banking Law").
R&G Mortgage and The Mortgage Store are licensed by the OCFI as a mortgage
banking institution in Puerto Rico. Such authorization to act as a mortgage
banking institution must be renewed as of January 1 of each year. In the past,
neither R&G Mortgage nor The Mortgage Store has not had any difficulty in
renewing its authorization to act as a mortgage banking institution, and
management is unaware of any existing practices, conditions or violations which
would result in either company being unable to receive such authorization in the
future.
The Mortgage Banking Law requires the prior approval of the
OCFI for the acquisition of control of any mortgage banking institution licensed
under the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the
term "control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to the
Mortgage Banking Law, upon receipt of notice of a proposed transaction that may
result in change of control, the OCFI is obligated to make such inquires as it
deems necessary to review the transaction. Under the Mortgage Banking Law, the
determination of the OCFI whether or not to authorize a proposed change of
control is final and non-appealable.
As is the case with the Bank, the rate of interest that R&G
Mortgage and The Mortgage Store may charge on mortgage loans to individuals is
subject to Puerto Rico's usury laws. Such laws are administered by the Financing
Board which promulgates regulations that specify maximum rates on various types
of loans to individuals. Regulation 26-A promulgated by the Financing Board
fixes the maximum rate (which is adjusted on a weekly basis) which may be
charged on residential first mortgage loans.
Effective April 1996, the Financing Board eliminated the
regulations that set forth the maximum interest rates that could be charged on
non-federal government guaranteed loans.
Continental is subject to regulation and licensing
requirements of the New York Banking Department, and is also subject to North
Carolina licensing requirements.
47
ITEM 2:
Properties
The Company's principal executive office is located at 280
Jesus T. Pinero Avenue, Hato Ray, San Juan, Puerto Rico 00918. The aggregate net
book value (including leasehold improvements and equipment) of the Company's
offices and other properties at December 31, 2000, amounted to $20.1 million .
Set forth below is a list of the Company's offices and other facilities all of
which properties are leased.
- -------------------------------------------------------------------------------
Description/Address
- -------------------------------------------------------------------------------
The Bank:
Hato Rey Branch(1)(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919
Los Jardines Branch
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969
San Patricio Branch(4)
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969
Bayamon Branch(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959
Bayamon East Branch (2)(4)
Road #174, Lot 100
Minillas Industrial Park
Bayamon, PR 00959
Arecibo Branch(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Branch(3)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674
48
- --------------------------------------------------------------------------------
Description/Address
- --------------------------------------------------------------------------------
Carolina Branch(4)
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985
Trujillo Alto Branch
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
Santurce Branch(4)
1077 Ponce de Leon Avenue
Santurce, PR 00917
Laguna Gardens Branch(4)
Laguna Gardens Shopping Center
Isla Verde
Carolina, PR 00979
Plaza Carolina Branch(4)
Plaza Carolina Mall
Carolina, PR 00985
Norte Shopping Branch(4)
Norte Shopping Center
Baldorioty de Castro Avenue
San Juan, PR 00907
Vega Baja Branch(3)
Cabo Caribe Development
PR Road No. 2, Marginal
Vega Baja, PR 00693
Mayaguez Branch(3)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680
Fajardo I Branch(2)(4)
Garrido Morales Street
Corner San Rafael
Fajardo, PR 00738
Martinez Nadal Branch(4)
Paradise Mall
Corner Jesus T. Pinero Ave.
Rio Piedras, PR 00925
49
- --------------------------------------------------------------------------------
Description/Address
- --------------------------------------------------------------------------------
Ponce Branch(4)
Lifetime Building Lot 5
Industrial San Rafael
Ponce, PR 00731
Fajardo II Branch(4)
Celis Aguilera #161
Fajardo, PR 00738
Plaza del Sol Branch(4)
Plaza del Sol Mall
725 West Main Ave.
Bayamon, PR 00961
Operations Center(2)
Road #174, Lote 100
Minillas Industrial Park
Bayamon, PR 00959
Plaza Interamericana Branch (2)(4)
Plaza Interamericana Mall
Sein Street and PR Road No. 177
San Juan, PR 00908
Plaza Las Americas Branch
Plaza Las Americas Shopping Center
Hato Rey, PR 00918
Caguas Branch (2)
PR Road No. 1, Km 33.6
Villa Blanca Industrial Area
Caguas, PR 00725
Aguadilla Branch (4)
Victoria Plaza Shopping Center
Road #2, KM.129.5
Aguadilla, PR 00603
Continental Capital:
Huntington Office
1841 New York Avenue
Huntington Station, NY 11746
Bay Shore Office
1555 Sunrise Hwy.
Bay Shore, NY 11706
Administrative Office
125 Bayless Rd.
Melville, NY 11747
Woodhaven Office
94-11 Jamaica Avenue
Woodhaven, NY 11421
North Carolina Office
4630 Highway 74 West
Monroe, NC 28110
50
- --------------------------------------------------------------------------------
Description/Address
- --------------------------------------------------------------------------------
The Mortgage Store:
Hato Rey Office
295 Jesus T. Pinero
San Juan, PR 00918
Ponce Office (8)
Las Americas Ave
Ext. Buena Vista #25
Ponce, PR 00731
Bayamon Office (7)
Street No. 1, #44
Hermanas Davila
Bayamon, PR 00959
Aguadilla Office
PR Road No. 2
Punto Oro Shopping Center
Aguadilla, PR 00603
Caguas Office
Pino Street, H22
Villa Tarabo
Caguas, PR 00725
Guayama Office
Ashford Ave., #45 South
Guayama, PR 00784
Rio Grande Office
BAA Street, Marginal #3
Alturas de Rio Grande, PR, 00745
R&G Mortgage:
Caguas Office
D-9 Degetau Street
San Alfonso
Caguas, PR 00725
Los Jardines Office(5)
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969
Hato Rey Office(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919
51
- --------------------------------------------------------------------------------
Description/Address
- --------------------------------------------------------------------------------
Bayamon Office(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959
Arecibo Office(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Office(3)(6)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674
Mayaguez Office(3)(6)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680
Vega Baja Office (3)
Cabo Caribe Development
PR Road No. 2., Marginal
Vega Baja, PR 00693
Trujillo Alto Office (5)
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
Plaza Las Americas Office (5)
Plaza Las Americas Shopping Mall
Office Tower Suite 805
Hato Rey, PR 00918
(Footnotes on following page)
52
(1) Also serves as the main office of R&G Financial.
(2) Leased from VIG Leasing, S.E., which is owned by the family of Victor J.
Galan, Chairman of the Board and Chief Executive Officer of R&G Financial.
(3) The Bank and R&G Mortgage each maintain separate offices in the same
building.
(4) Facility includes an R&G Mortgage Banking Center.
(5) The Bank maintains an office at this location in a separate facility.
(6) Office is subleased from the Bank.
(7) Office is leased from the Bank.
(8) Office is subleased form R&G Mortgage.
ITEM 3: Legal Proceedings.
The Company is not involved in any pending legal proceedings
other than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4: Submission of Matters to a Vote of Security-Holders.
Not applicable.
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference
from pages 87 and 88 of the Registrant's 2000 Annual Report.
ITEM 6: Selected Financial Data.
The information required herein is incorporated by reference
from pages 31 to 32 of the Registrant's 2000 Annual Report.
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required herein is incorporated by reference
from pages 33 to 48 of the Registrant's 2000 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference
from pages 37 to 38 of the Registrant's 2000 Annual Report.
ITEM 8: Financial Statements and Supplementary Data.
The information required herein is incorporated by reference
from pages 49 to 85 of the Registrant's 2000 Annual Report.
ITEM 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
53
PART III
ITEM 10: Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference
from pages 2 to 5, 6-7 and 9-10 of the Registrant's Proxy Statement dated April
6, 2001 ("Proxy Statement").
ITEM 11: Executive Compensation.
The information required herein is incorporated by reference
from pages 11 to 14 and 15 to 17 of the Registrant's Proxy Statement.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference
from pages 8 to 9 of the Registrant's Proxy Statement.
ITEM 13: Certain Relationships and Related Transactions.
The information required herein is incorporated by reference
from pages 14 to 15 of the Registrant's Proxy Statement.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of December 31, 2000 and
1999.
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
54
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence
of conditions under which they are required or because the required
information is included in the consolidated financial statements and
related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
No. Description
- -- -----------
2.0 Amended and Restated Agreement and Plan of Merger by and between R&G
Financial Corporation, the Bank and R-G Interim Premier Bank, dated as of
September 27, 1996(1)
3.1 Certificate of Incorporation of R&G Financial Corporation(2)
3.2 Certificate of Amendment to Certificate of Incorporation of R&G Financial
Corporation(2)
3.2.1 Amended and Restated Certificate of Incorporation of R&G Financial
Corporation(4)
3.3 Bylaws of R&G Financial Corporation(2)
3.4 Certificate of Resolutions designating the terms of the Series A Preferred
Stock(6)
3.5 Certificate of Resolutions designating the terms of the Series B Preferred
Stock(7)
3.6 Certificate of Resolutions designating the terms of the Series C Preferred
Stock
4.0 Specimen of Stock Certificate of R&G Financial Corporation(2)
4.1 Form of Series A Preferred Stock Certificate of R&G Financial
Corporation(3)
4.2 Form of Series B Preferred Stock Certificate of R&G Financial
Corporation(5)
4.3 Form of Series C Preferred Stock Certificate of R&G Financial Corporation
(9)
10.1 Master Purchase, Servicing and Collection Agreement between R&G Mortgage
and the Bank dated February 16, 1990, as amended on April 1, 1991,
December 1, 1991, February 1, 1994 and July 1, 1994(2)
10.2 Master Custodian Agreement between R&G Mortgage and the Bank dated
February 16, 1990, as amended on June 27, 1996(2)
10.3 Master Production Agreement between R&G Mortgage and the Bank dated
February 16, 1990, as amended on August 30, 1991 and March 31, 1995(2)
10.4 Data Processing Computer Service Agreement between R&G Mortgage and R-G
Premier Bank dated December 1, 1994(2)
10.5 Securitization Agreement by and between R&G Mortgage and the Bank, dated
as of July 1, 1995(2)
10.6 R&G Financial Corporation Stock Option Plan(2)(*)
13.0 2000 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 1. Business"
for the required information
27.0 Financial Data Schedule
99.1 Valuation Report on Minority Interest of Bank Stockholders, prepared by
Friedman, Billings, Ramsey & Co., Inc., dated June 13, 1996(2)
99.2 Update to Valuation on Minority Interest of Bank Stockholders, prepared by
Friedman, Billings, Ramsey & Co., Inc., dated September 27, 1996(1)
- ---------------------
(1) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 333-13199) filed by the Registrant with the Securities
and Exchange Commission ("SEC") on October 1, 1996.
(2) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-06245) filed by the Registrant with the SEC on June
18, 1996, as amended.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Registration No. 333-60923), as amended, filed with the SEC on
August 7, 1998.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the SEC on November 19, 1999.
55
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Registration No. 333-90463), filed with the SEC on November 5,
1999.
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the SEC on August 31, 1998.
(7) Incorporated by reference from the Registrants' Form 10-K filed with the
SEC on April 13, 2000.
(8) Incorporated by reference from Pre-Effective Amendment No. 1. to the
Registrant's Registration Statement of Form S-3 (File No. 333-55834),
filed with the SEC on March 7, 2001.
(*) Management contract or compensatory plan or arrangement.
(3)(b) Reports on Form 8-K.
None.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
March 30, 2001 By: /s/ Victor J. Galan
-------------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Victor J. Galan March 30, 2001
- ------------------------------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
/s/ Ramon Prats March 30, 2001
- ------------------------------------------
Ramon Prats
President and Director
/s/ Joseph R. Sandoval March 30, 2001
- ------------------------------------------
Joseph R. Sandoval
Senior Vice President and Chief Financial
Officer (principal financial and
accounting officer)
/s/ Ana M. Armendariz March 30, 2001
- ------------------------------------------
Ana M. Armendariz
Director and Treasurer
/s/ Enrique Umpierre-Suarez March 30, 2001
- ------------------------------------------
Enrique Umpierre-Suarez
Director and Secretary
/s/ Victor L. Galan Fundora March 30, 2001
- ------------------------------------------
Victor L. Galan Fundora
Director
57
/s/ Pedro Ramirez March 30, 2001
- ------------------------------------------
Pedro Ramirez
Director
/s/ Laureno Carus Abarca March 30, 2001
- ------------------------------------------
Laureno Carus Abarca
Director
/s/ Eduardo McCormack March 30, 2001
- ------------------------------------------
Eduardo McCormack
Director
/s/ Gilberto Rivera-Arrega March 30, 2001
- ------------------------------------------
Gilberto Rivera-Arreaga
Director
/s/ Benigno R. Fernandez March 30, 2001
- ------------------------------------------
Benigno R. Fernandez
Director
/s/ Ileana M. Colon-Carlo March 30, 2001
- ------------------------------------------
Ileana M. Colon-Carlo
Director
/s/ Roberto Gorbea March 30, 2001
- ------------------------------------------
Roberto Gorbea
Director
58