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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-21137
R&G FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
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(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)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2002, the aggregate value of the 14,325,461 shares of Class B
Common Stock of the Registrant issued and outstanding on such date, which
excludes 919,461 shares held by all directors and
officers of the Registrant as a group, was approximately $300.8 million. This
figure is based on the last known trade price of $21.00 per share of the
Registrant's Class B Common Stock on February 28, 2002.
Number of shares of Class B Common Stock outstanding as of February 28, 2002:
15,244,922.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2001 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
PART I
ITEM 1: BUSINESS
GENERAL
THE COMPANY
R&G Financial is a Puerto Rico chartered, financial holding company
that operates R&G Mortgage Corp., the second largest mortgage company in Puerto
Rico, and R-G Premier Bank, a Puerto Rico commercial bank. Through R&G Mortgage,
we also operate The Mortgage Store of Puerto Rico, Inc., a Puerto Rico mortgage
company, and through R-G Premier Bank, the Company operates Continental Capital
Corp., a Huntington Station, New York mortgage banking company. The Company
operates Home & Property Insurance Corp., a Puerto Rico insurance agency, and
R-G Investments Corporation, a licensed broker-dealer.
In December 2001, R&G Financial, and its wholly owned subsidiary R&G
Acquisition Holdings Corporation, a Florida corporation, entered into a
definitive merger agreement pursuant to which the new subsidiary will acquire
The Crown Group, Inc., a Florida corporation, and its wholly-owned savings bank
subsidiary, Crown Bank, a Federal Savings Bank, hereinafter collectively
referred to as "Crown." Crown, which had total assets of $638 million, total
deposits of $404 million and stockholders' equity of $69 million as of December
31, 2001, operates in the Tampa-St. Petersburg-Clearwater and Orlando
metropolitan areas through 14 full-service offices.
The Orlando market is one of the fastest growing markets in Florida,
both generally and for Hispanics in particular, and provides the Company with
what management believes is a cost effective way to access the Hispanic markets
in the United States, while providing a strong platform for further expansion in
Florida. Crown's balance sheet is complimentary to that of the Company and is
predominantly secured by real estate. In addition, the acquisition will allow
the Company to access lower cost funding in Florida as compared to Puerto Rico.
For the quarter ended September 30, 2001, Crown's cost of deposits was 4.26% as
compared to the Company's cost of deposits of 4.75% as of such date.
Under the terms of the merger agreement, holders of Crown common stock
will receive an aggregate of $100.0 million in cash. The acquisition, which is
expected to be accretive to the Company's earnings per share in 2002, is
expected to close during the second quarter of 2002, pending the receipt of all
requisite regulatory approvals and the approval of Crown's shareholders.
The Company is currently in its 30th year of operations and operates
its business through its subsidiaries. The Company is primarily engaged in a
range of real estate secured lending activities, including the origination,
servicing, purchase and sale of mortgages on single-family residences, the
securitization and sale of various mortgage-backed and related securities and
the holding and financing of mortgage loans and mortgage-backed and related
securities for sale or investment and the purchase and sale of servicing rights
associated with such mortgage loans. The Company is also engaged in providing a
full range of banking services, including commercial banking services,
corporate real estate and business lending, residential construction lending,
consumer lending and credit cards, offering a diversified range of deposit
products and, to a lesser extent, trust and investment services through its
private banking department and its broker-dealer.
The Company was organized in 1972 as R&G Mortgage Corp. and completed
its initial public offering in 1996, following its reorganization as a bank
holding company. As of December 31, 2001, the Company had total assets of $4.7
billion, total deposits of $2.1 billion and stockholders' equity of $459.1
million. At December 31, 2001, the Company operated 65 branch offices (36
mortgage offices in Puerto
Rico, 4 mortgage offices in the United States and 25 bank branches, mainly
located in the northeastern section of Puerto Rico).
The Company has generally sought to achieve long-term financial
strength and profitability by increasing the amount and stability of its net
interest income and non-interest income. The Company has sought to implement
this strategy by: (1) emphasizing the growth of its mortgage banking activities,
including the origination and sale of mortgage loans, and growing its loan
servicing operation; (2) expanding its retail banking franchise in order to
achieve increased market presence and to increase core deposits; (3) enhancing
its net interest income by increasing its loans held for investment,
particularly single-family residential loans, and investment securities; (4)
developing new business relationships through an increased emphasis on
commercial real estate and commercial business lending; (5) diversifying its
retail products and services, including an increase in consumer loan
originations; (6) meeting the banking needs of its customers through, among
other things, the offering of trust and investment services and insurance
products; (7) expanding its operations in the United States; and, (8)
emphasizing controlled growth, while pursuing a variety of acquisition
opportunities when appropriate.
The senior management of the Company is comprised of five executives
with an average of over 27 years of experience in the financial services
industry. Victor J. Galan is the Company's Chairman and Chief Executive Officer,
positions he has held since the Company's incorporation in 1996. Mr. Galan is
also the founder and Chairman of R&G Mortgage, a position he has held since
1972. During 2001, the Company promoted Ramon Prats, Company's Vice Chairman, to
the office of President. Mr. Prats formerly was Executive Vice President of R&G
Mortgage, a position he held since 1980. Joseph R. Sandoval has been the
Company's Chief Financial Officer since 1997. Previously, Mr. Sandoval was an
accountant with a predecessor to PriceWaterhouseCoopers LLP. Mario Ruiz has been
with R&G Financial subsidiaries since 1990 and is presently Executive Vice
President of R-G Premier Bank. Mr. Ruiz previously served in various capacities
for R&G Mortgage and The Mortgage Store of Puerto Rico, Inc. Steven Velez has
been with R&G Mortgage since 1989 and is presently Executive Vice President of
R&G Mortgage.
The Company's principal executive offices are located at 280 Jesus T.
Pinero Avenue, San Juan, Puerto Rico 00918 and the Company's telephone number is
(787) 758-2424.
R&G MORTGAGE
Originations. R&G Mortgage is primarily engaged in the business of
originating first and second mortgage loans on single-family residential
properties secured by real estate. R&G Mortgage also originates residential
mortgage loans through The Mortgage Store of Puerto Rico, Inc., its wholly-owned
subsidiary. Pursuant to agreements entered into between R&G Mortgage and R-G
Premier Bank, non-conforming conventional single-family residential loans and
consumer loans secured by real estate are also originated by R&G Mortgage for
portfolio retention by R-G Premier Bank. R-G Premier Bank retains the
nonconforming conventional single-family residential loans because these loans
generally do not satisfy resale guidelines of purchasers in the secondary
mortgage market, primarily because of size (in the case of "jumbo" loans) or
other underwriting technicalities at the time of origination. Jumbo loans may be
packaged and sold in the secondary market, while loans with underwriting
technicalities may be cured through payment experience and subsequently sold.
Management believes that these loans are essentially of the same credit quality
as conforming loans. During the years ended December 31, 2001, 2000 and 1999,
R&G Financial originated a total of $1.8 billion, $1.1 billion and $1.1 billion
of residential mortgage loans, respectively. These aggregate originations
include loans originated by R&G Mortgage directly for R-G Premier Bank of $664.8
million, $451.4 million and $437.1 million during the years ended December 31,
2001, 2000 and 1999, respectively, or 36%, 43% and 41%, respectively, of total
originations. The loans originated by R&G Mortgage for R-G Premier Bank are
comprised primarily of conventional residential loans and, to a lesser extent,
residential construction loans and consumer loans secured by real estate.
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Servicing. R&G Financial's servicing portfolio has grown significantly
over the past several years. At December 31, 2001, R&G Financial's servicing
portfolio totaled $7.2 billion and consisted of a total of 113,070 loans. These
amounts include R&G Mortgage's servicing portfolio, totaling $6.7 billion, and
Continental's servicing portfolio, totaling $485.0 million, at December 31,
2001. At December 31, 2001, R&G Financial's servicing portfolio included $1.0
billion of loans serviced for R-G Premier Bank, or 14.4% of the total servicing
portfolio. Substantially all of the mortgage loans in R&G Financial's servicing
portfolio are secured by single-family residences. R&G Mortgage generally
retains the servicing function with respect to the loans which have been
securitized and sold. Most of R&G Financial's mortgage servicing portfolio is
comprised of mortgages secured by real estate located in Puerto Rico.
Securitizations. R&G Mortgage pools Federal Housing Administration, the
"FHA," and Veterans Administration, the "VA," loans into mortgage-backed
securities which are guaranteed by the Government National Mortgage Association,
the "GNMA." These securities are sold to securities broker-dealers and other
investors in Puerto Rico. Conventional loans may either be sold directly to
agencies such as the Federal National Mortgage Association, the "FNMA," and the
Federal Home Loan Mortgage Corporation, the "FHLMC," or to private investors, or
may be pooled into FNMA or FHLMC mortgage-backed securities, which are generally
sold to investors. During the years ended December 31, 2001, 2000 and 1999, R&G
Financial sold $1.1 billion, $637.8 million and $721.0 million of loans,
respectively, as part of its mortgage banking activities, which includes loans
securitized and sold, but does not include loans originated for R-G Premier Bank
or loans securitized for other institutions.
R-G PREMIER BANK
General. R-G Premier Bank's principal business consists of holding
deposits from the general public and tax-advantaged funds from eligible Puerto
Rico corporations and using them, together with funds obtained from other
sources, to originate and purchase loans secured primarily by residential real
estate in Puerto Rico, and to purchase mortgage-backed and other securities. R-G
Premier Bank also is engaged in the business of originating FHA insured, VA
guaranteed and privately insured first and second mortgage loans on residential
real estate (one-to-four family) in the States of New York, New Jersey,
Connecticut, North Carolina and Florida, through its wholly-owned subsidiary,
Continental Capital Corp. To a lesser extent, but with increasing emphasis over
the past few years, R-G Premier Bank also originates construction loans and
loans secured by commercial real estate, as well as consumer and personal loans
and commercial business loans. Such loans offer higher yields, are generally for
shorter terms and offer R-G Premier Bank an opportunity to provide a greater
range of financial services to its customers, R-G Premier Bank also offers trust
services through its trust department.
Residential loans. At December 31, 2001, R&G Financial's loans
receivable, net, totaled $1.8 billion, which represented 38.6% of R&G
Financial's $4.7 billion of total assets. At such date, all but $665,000 of R&G
Financial's loans receivable were held by R-G Premier Bank. R-G Premier Bank's
loan portfolio has historically been concentrated in loans secured by first
mortgage liens on existing single-family residences. At December 31, 2001, $1.0
billion, or 52.6% of R&G Financial's total loans held for investment, consisted
of such loans, of which all but $1.2 million consisted of conventional loans.
Construction loans. R-G Premier Bank has been active in originating
loans to construct single-family residences. At December 31, 2001, retail
construction loans amounted to $50.8 million, or 2.7% of R&G Financial's total
loans held for investment, while commercial construction and land acquisition
loans amounted to $221.5 million in the aggregate, or 11.6% of total loans held
for investment. R-G Premier Bank intends to continue to increase its involvement
in single-family residential construction lending. Such loans afford R-G Premier
Bank the opportunity to increase the interest rate sensitivity of its loan
portfolio.
-3-
Commercial loans. R-G Premier Bank also originates mortgage loans
secured by commercial real estate, primarily office buildings, retail stores,
warehouses and general purpose industrial space. At December 31, 2001, $327.9
million, or 17.1% of R&G Financial's total loans held for investment, consisted
of such loans. As of such date, R-G Premier Bank's commercial real estate loan
portfolio consisted of approximately 1,202 loans with an average principal
balance of $273,000. Finally, R-G Premier Bank also offers commercial business
loans, including working capital lines of credit, inventory and accounts
receivable loans, equipment financing (including equipment leases), term loans,
insurance premium loans and loans guaranteed by the Small Business
Administration and various consumer loans. At December 31, 2001, consumer loans,
which are primarily secured by real estate, amounted to $181.2 million, or 9.5%
of total loans held for investment, and commercial business loans amounted to
$92.2 million, or 4.8% of total loans held for investment.
REGULATION
We operate our businesses under a variety of federal, state and Puerto
Rico laws and rules. As a financial holding company, we are subject to the rules
of the Board of Governors of the Federal Reserve System and Office of the Puerto
Rico Commissioner of Financial Institutions, the "OCFI" Among other things, we
are required to meet minimum capital requirements, and our activities are
limited to those that are determined to be financial in nature or incidental or
complimentary to a financial activity.
R&G Mortgage's mortgage banking business is subject to the rules of the
FHA, VA, GNMA, FNMA, FHLMC, Department of Housing and Urban Development, OCFI
and state regulatory authorities with respect to originating, processing,
selling and servicing mortgage loans. Among other things, these rules prohibit
discrimination, establish underwriting guidelines, require credit reports, fix
maximum loan amounts and, in some cases, fix maximum interest rates.
R-G Premier Bank is subject to the rules of the OCFI and the Federal
Deposit Insurance Corporation, or "FDIC." Among other things, R-G Premier Bank
is subject to requirements on the type and amount of credit it may extend to its
affiliates, including a requirement that most of such credit be fully secured,
and if there were any "liquidation or other resolution" of R-G Premier Bank,
deposits and administrative expenses would be afforded a priority over general
unsecured claims. In addition, the FDIC is required to take "prompt corrective
action" if R-G Premier Bank does not meet minimum capital requirements. The FDIC
has established five capital tiers to implement this requirement, from "well
capitalized" to "critically undercapitalized." A bank's capital tier will depend
on various capital measures and other qualitative factors and will subject it to
specific requirements. As of December 31, 2001, R-G Premier Bank met the capital
measures for being "well capitalized" under the FDIC's regulations.
MORTGAGE BANKING ACTIVITIES
Loan Originations, Purchases and Sales. During the years ended December
31, 2001, 2000 and 1999, R&G Financial originated a total of $1.8 billion, $1.1
billion and $1.1 billion of residential mortgage loans, respectively. These
aggregate originations include loans originated by R&G Mortgage directly for the
Bank of $664.8 million, $451.4 million and $437.1 million during the years ended
December 31, 2001, 2000 and 1999, respectively of such originations, or 36%, 43%
and 41% respectively, of total originations. The loans originated by R&G
Mortgage for the Bank are comprised primarily of conventional residential loans
and, to a lesser extent, consumer loans secured by real estate.
R&G Financial is engaged to a significant extent in the origination of
FHA-insured and VA-guaranteed single-family residential loans which are
primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the years
ended December 31, 2001, 2000 and 1999, R&G Financial originated $482.7 million,
$307.1 million and
-4-
$288.8 million, respectively, of FHA/VA loans, which represented 26.4%, 29.2%
and 27.3% respectively, of total loans originated during such respective
periods.
R&G Financial also originates conventional single-family residential
loans which are either insured by private mortgage insurers or do not exceed 80%
of the appraised value of the mortgaged property. During the years ended
December 31, 2001, 2000 and 1999, R&G Financial originated $1.3 billion, $699.7
million and $738.6 million, respectively, of conventional single-family
residential mortgage loans. Substantially all conforming conventional
single-family residential loans are securitized and sold in the secondary
market, while substantially all non-conforming conventional single-family
residential loans are originated by R&G Mortgage on behalf of the Bank and
either held by the Bank in its portfolio or subsequently securitized by R&G
Mortgage and sold in the secondary market. All non-conforming conventional loans
originated by R&G Mortgage through The Mortgage Store are held by The Mortgage
Store in its portfolio or subsequently sold in the secondary market.
Non-conforming loans generally consist of loans which, primarily
because of size or other underwriting technicalities which may be cured through
seasoning, do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and
other private secondary market investors at the time of origination. Management
believes that these loans are essentially of the same credit quality as
conforming loans. During the years ended December 31, 2001, 2000 and 1999,
non-conforming conventional loans represented approximately 48%, 53% and 52%,
respectively, of R&G Financial's total volume of mortgage loans originated,
substantially all of which were originated by R&G Mortgage on behalf of the
Bank. During the years ended December 31, 2001, 2000 and 1999, 94.1%, 83.8% and
86.6% of loans originated by R&G Mortgage on behalf of the Bank consisted of
single-family residential loans during such respective periods. R&G Mortgage
originates single-family residential, construction and commercial real estate
loans on behalf of the Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and the Bank. See "- Lending Activities of the
Bank - Origination, Purchase and Sale of Loans."
While R&G Financial makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all of such loans consist of
fixed-rate mortgages.
R&G Financial also offers second mortgage loans up to $125,000 with a
maximum term of 15 years. The maximum loan-to-appraised value ratio on second
mortgage loans permitted by R&G Financial is generally 75% (including the amount
of any first mortgage). In addition, R&G Financial also offers real estate
secured consumer loans up to $60,000 with a maximum term of 15 years. The
maximum loan-to-appraised value ratio on real estate secured consumer loans
permitted by R&G Financial is generally 80%. R&G Financial will secure such
loans with either a first or second mortgage on the property.
The Company's loan origination activities in Puerto Rico are conducted
out of R&G Mortgage offices and mortgage banking centers. Residential mortgage
loan applications are attributable to walk-in customers, existing customers and
advertising and promotion, referrals from real estate brokers and builders, loan
solicitors and mortgage brokers.
Loan origination activities performed by the Company include
soliciting, completing and processing mortgage loan applications and preparing
and organizing the necessary loan documentation. Loan applications are examined
for compliance with underwriting criteria and, if all requirements are met, the
Company issues a commitment to the prospective borrower specifying the amount of
the loan and the loan origination fees, points and closing costs to be paid by
the borrower or seller and the date on which the commitment expires.
-5-
R&G Mortgage also purchases FHA loans and VA loans from other mortgage
bankers for resale to institutional investors and other investors in the form of
GNMA mortgage-backed securities. R&G Mortgage's strategy is to increase its
servicing portfolio primarily though internal originations through its branch
network and, to a lesser extent, purchases from third parties. Purchases of
loans from other mortgage bankers in the wholesale loan market is generally
limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a
source of low cost production that allows R&G Mortgage to continue to increase
the size of its servicing portfolio. R&G Mortgage purchased $29.3 million,
$145.9 million and $307.8 million of loans from third parties during the years
ended December 31, 2001, 2000 and 1999, respectively.
-6-
The following table sets forth loan originations, purchases and sales
from its mortgage banking business by R&G Financial for the periods indicated.
Year Ended December 31,
------------------------------------------
2001 2000 1999
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(Dollars in Thousands)
Loans Originated For the Bank:
Conventional loans(1):
Number of loans....................................... $ 6,355 4,929 5,067
Volume of loans....................................... $655,151 $407,461 $404,886
FHA/VA loans:
Number of loans....................................... -- -- --
Volume of loans....................................... -- -- --
Consumer loans(2):
Number of loans....................................... 485 1,807 1,499
Volume of loans....................................... $9,658 $43,943 $32,219
Total loans:
Number of loans....................................... 6,840 6,736 6,566
Volume of loans....................................... $664,809 $451,404 $437,105
Percent of total volume............................... 36% 38% 32%
Loans Originated For Third Parties:
Conventional loans(1):
Number of loans....................................... 6,791 3,377 4,882
Volume of loans....................................... $679,190 $292,283 $333,673
FHA/VA loans:
Number of loans....................................... 4,823 3,241 3,315
Volume of loans....................................... $482,721 $307,128 $288,752
Total loans:
Number of loans....................................... 11,614 6,618 8,197
Volume of loans....................................... $1,161,911 $599,411 $622,425
Percent of total volume............................... 63% 50% 46%
---------- -------- --------
Total loan originations $1,826,720 $1,050,815 $1,059,530
========== ========== ==========
Loans Purchased For R&G Mortgage:
Number of loans (3)................................... 371 1,627 3,418
Volume of loans....................................... $29,342 $145,881 $307,819
Percent of total volume............................... 1% 12% 22%
---------- -------- --------
Total loan originations and purchases $1,856,062 $1,196,696 $1,367,349
========== ========== ==========
GNMA Pools Purchased for R&G Mortgage:
Volume of loans -- -- $22,487
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Year Ended December 31,
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2001 2000 1999
---------- -------- ----------
(Dollars in Thousands)
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans....................................... 6,124 3,937 6,511
Volume of loans....................................... $603,542 $332,930 $470,443
FHA/VA loans:
Number of loans....................................... 3,365 4,167 4,255
Volume of loans....................................... $513,366 $367,868 $373,730
Total loans:
Number of loans....................................... 9,489 8,104 9,434
Volume of loans....................................... $1,116,908 $700,798 $844,173(3)
Percent of total volume............................... 61% 59% 62%
---------- -------- ----------
Adjustments:
Loans originated for the Bank............................ $ (664,809) $(451,404) $(437,105)
Loan amortization........................................ (31,802) (18,544) (38,863)
---------- -------- ----------
Increase in loans held for sale............................ $ 42,543 $ 25,950 $69,695
========== ========= =========
Average Initial Loan Origination Balance:
The Bank:
Conventional loans(1)................................. $103 $83 $80
FHA/VA loans.......................................... -- -- --
Third Parties:
Conventional loans(1)................................. $100 $87 $68
FHA/VA loans.......................................... 100 95 87
Total
Conventional loans(1)................................. $102 $84 $74
FHA/VA loans.......................................... 100 95 87
Refinancings(5):
The Bank................................................. 57% 56% 72%
Third Parties............................................ 50% 29% 49%
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(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes $27.1 million, $63.0 million and $123.2 million of loans
purchased from another institution, and securitized and sold to the
same financial institution during 2001, 2000 and 1999, respectively.
(4) Includes loans converted into mortgage-backed securities.
(5) As a percent of the total dollar volume of mortgage loans originated by
R&G Mortgage for the Bank (excluding consumer loans) or third parties,
as the case may be. In the case of the Bank, refinancings do not
necessarily represent refinancings of loans previously held by the
Bank.
-8-
All loan originations, regardless of whether originated through the
Company or purchased from third parties, must be underwritten in accordance with
R&G Financial's underwriting criteria, including loan-to-appraised value ratios,
borrower income qualifications, debt ratios and credit history, investor
requirements, necessary insurance and property appraisal requirements. R&G
Financial's underwriting standards also comply with the relevant guidelines set
forth by HUD, VA, FNMA, FHLMC, bank regulatory authorities, private mortgage
investment conduits and private mortgage insurers, as applicable. The Company's
underwriting personnel, while operating out of its loan offices, make
underwriting decisions independent of the Company's mortgage loan origination
personnel.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 7% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. The Company receives these fees on mortgage loans originated through its
retail branches. The Company may charge additional fees depending upon market
conditions and regulatory considerations as well as the Company's objectives
concerning mortgage loan origination volume and pricing. The Company incurs
certain costs in originating mortgage loans, including overhead, out-of-pocket
costs and, in some cases, where the mortgage loans are subject to a purchase
commitment from private investors, related commitment fees. The volume and type
of mortgage loans and of commitments made by investors vary with competitive and
economic conditions (such as the level of interest rates and the status of the
economy in general), resulting in fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
current expense. Direct origination costs and origination income must be
deferred and amortized using the interest method, until the repayment or sale of
the related mortgage loans. Historically, the value of servicing rights which
result from R&G Financial's origination activities has exceeded the net costs
attributable to such activities.
R&G Financial customarily sells most of the loans that it originates,
except for those originated on behalf of the Bank pursuant to a Master
Production Agreement with R&G Mortgage. See "-Lending Activities of the Bank -
Origination, Purchases and Sales of Loans." The loans originated by R&G Mortgage
(including FHA loans, VA loans and conventional loans) are secured by real
property located in Puerto Rico. During the years ended December 31, 2001, 2000
and 1999, R&G Financial sold $1.1 billion, $637.8 million and $721.0 million of
loans, respectively, which includes loans securitized and sold but does not
include loans originated by R&G Mortgage on behalf of the Bank or loans
securitized for other institutions. With respect to such loan sales, $375.1
million or 33.6%, $270.8 million or 42.5% and $271.9 million or 37.7% consisted
of GNMA-guaranteed mortgage-backed securities of FHA loans or VA loans packaged
into pools of $1 million or more ($2.5 million to $5 million for GNMA serial
notes) by R&G Mortgage. These securities were sold through the Bank's Trust
Department or indirectly through securities broker-dealers.
Conforming conventional loans originated or purchased by the Company
are generally sold directly to FNMA, FHLMC or private investors for cash or are
grouped into pools of $1 million or more in aggregate principal balance and
exchanged for FNMA or FHLMC-issued mortgage-backed securities, which the Company
sells to securities broker-dealers. In connection with any such exchanges, the
Company pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed
securities provides R&G Financial with flexibility in selling the mortgages
which it originates or purchases and also provides income by increasing the
value and marketability of the loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called "non-conforming loans") are generally originated on behalf of the
Bank by R&G Mortgage and either retained in the Bank's portfolio, sold to
financial institutions or other private investors or securitized into "private
label" CMOs through grantor trusts or other mortgage conduits and sold through
securities broker-dealers. Non-conforming loans consist of jumbo loans or loans
that do not satisfy all requirements of FNMA, FHLMC and GNMA at the time of
origination of the loan (such as missing tax returns, slightly higher
-9-
loan-to-value ratios, etc.). R&G Mortgage and the Bank have made no sales of
CMOs in securitization transactions during the last three fiscal years. When
such transactions were made, either the Bank or R&G Mortgage retained the
residual certificates issued by the respective trusts as well as the subordinate
certificates issued in such transactions. As of December 31, 2001, R&G Mortgage
held residual certificates issued in CMO transactions involving R&G Mortgage and
the Bank with a fair value of $3.2 million. In addition, the Bank held CMO
subordinated certificates and residual certificates from one of its issues with
a fair value of $7.6 million at December 31, 2001. See "- Investment
Activities."
While R&G Financial's exchanges of mortgage loans into agency
securities and sales of mortgage loans are generally made on a non-recourse
basis, the Company also engages in the sale or exchange of mortgage loans on a
recourse basis. In the past, recourse sales often involved the sale of
non-conforming loans to FNMA, FHLMC and local financial institutions. R&G
Financial estimates the fair value of the retained recourse obligation at the
time mortgage loans are sold. As of December 31, 2001, R&G Financial had
reserves for possible losses related to its recourse obligations of $1.3
million. At December 31, 2001, R&G Mortgage had loans in its servicing portfolio
with provisions for recourse in the principal amount of approximately $552.4
million, as compared to $680.5 million and $646.3 million as of December 31,
2000 and 1999, respectively. Of the recourse loans existing at December 31,
2001, approximately $260.0 million in principal amount consisted of loans sold
to FNMA and FHLMC and converted into mortgage-backed securities of such
agencies, and approximately $292.4 million in principal amount consisted of
non-conforming loans sold to other private investors.
Loan Servicing. R&G Financial acquires servicing rights through its
mortgage loan originations (including originations on behalf of the Bank) and
purchases from third parties. The Company generally retains the rights to
service mortgage loans sold, which it has originated or purchased, and receives
the related servicing fees. Loan servicing includes collecting principal and
interest and remitting the same to the holders of the mortgage loans or
mortgage-backed securities to which such mortgage loan relates, holding escrow
funds for the payment of real estate taxes and insurance premiums, contacting
delinquent borrowers, supervising foreclosures in the event of unremedied
defaults and generally administering the loans. The Company receives annual loan
servicing fees ranging from 0.25% to 0.50% of the declining outstanding
principal balance of the loans serviced plus any late charges. In general, the
Company's servicing agreements are terminable by the investor for cause without
penalty or after payment of a termination fee ranging from 0.5% to 1.0% of the
outstanding principal balance of the loans being serviced.
R&G Financial's servicing portfolio has grown significantly over the
past several years. At December 31, 2001, R&G Financial's servicing portfolio
totaled $7.2 billion and consisted of a total of 113,070 loans. These amounts
include R&G Mortgage's servicing portfolio totaling $6.7 billion and
Continental's servicing portfolio totaling $485.0 million at December 31, 2001.
At December 31, 2001, R&G Financial's servicing portfolio included $1.0 billion
of loans serviced for the Bank or 14.4% of the total servicing portfolio.
Substantially all of the mortgage loans in R&G Financial's servicing portfolio
are secured by single (one-to-four) family residences. Most of R&G Financial's
mortgage servicing portfolio is comprised of mortgages secured by real estate
located in Puerto Rico.
R&G Mortgage services loans held in the Bank's loan portfolio
(including single-family residential loans retained by the Bank and certain
commercial real estate loans), although R&G Mortgage does not actually acquire
such servicing rights. Once loans are sold, the Bank retains the servicing
rights to such loans; R&G Mortgage continues to service the loans on behalf of
the Bank. The Bank pays R&G Mortgage servicing fees with respect to the loans
serviced by R&G Mortgage on behalf of the Bank. In addition, the Bank processes
payments of all loans originated by R&G Mortgage on behalf of the Bank. In
connection therewith, R&G Mortgage pays the Bank a fee equal to between $0.50
and $1.00 per loan. See "- Regulation - R&G Financial - Limitations on
Transactions with Affiliates."
-10-
R&G Financial's mortgage loan servicing portfolio is subject to
reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan
servicing rights from time to time.
The following table sets forth certain information regarding the total
loan servicing portfolio of R&G Financial for the periods indicated.
Year Ended December 31,
----------------------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in Thousands)
Composition of Servicing Portfolio at End of
Period:
Conventional and other mortgage loans(1)................. $4,070,074 $3,447,383 $3,095,920
FHA/VA loans............................................. 3,154,497 3,186,676 3,081,590
---------- ---------- ----------
Total servicing portfolio(2).......................... $7,224,571 $6,634,059 $6,177,511
========== ========== ==========
Activity in the Servicing Portfolio:
Beginning servicing portfolio............................ $6,634,059 $6,177,511 $4,827,798
Add: Loan originations and purchases.................... 1,887,582 1,280,898 1,610,945
Servicing of portfolio loans acquired (3).......... 4,936 31,404 552,235(3)
Less: Sale of servicing rights(4)........................ (211,603) (213,959) (55,515)
Run-offs(5)........................................ (1,090,403) (641,795) (757,952)
---------- ---------- ----------
Ending servicing portfolio............................... 7,224,571 $6,634,059 $6,177,511
========== ========== ==========
Number of loans serviced(6).............................. 113,070 110,874 107,302
Average loan size(6)..................................... $ 64 $ 60 $ 58
Average servicing fee rate(6)............................ 0.499 0.483% 0.530%
- -------------------
(1) Includes non-conforming loans.
(2) At the dates shown, $1.0 billion, included $1.0 billion and $1.1
billion of loans serviced for the Bank, respectively, which constituted
14.4%, 15.6% and 17.3% of the total servicing portfolio, respectively.
(3) Includes $496.5 million related to the servicing portfolio acquired as
part of the Company's acquisition of Continental in October 1999.
(4) Includes loans sold, servicing released, by Continental totaling $211.6
million, $172.9 million and $55.5 million in 2001, 2000 and 1999,
respectively.
(5) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(6) At December 31, 2001, R&G Mortgage was servicing 10,961 loans for
the Bank with an average loan size of approximately $93,000 and at an
average servicing rate of 0.20%. Amounts include late and other
miscellaneous charges.
-11-
The following table sets forth certain information at December 31, 2001
regarding the number of, and aggregate principal balance of, the mortgage loans
serviced by R&G Financial for the Bank and for third parties at various mortgage
interest rates.
At December 31, 2001
--------------------------------------------------------------------------------------------------
Loans Serviced Loans Serviced Total Loans
for the Bank for Third Parties Serviced
--------------------------- --------------------------- ---------------------------
Number of Aggregate Number of Aggregate Number of Aggregate
Loans Principal Loans Principal Loans Principal
Balance Balance Balance
---------- ----------- ---------- --------- --------- ----------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Mortgage Interest
Rate
Less than 7.00% 1,078 $ 125,014 14,150 $1,032,507 15,228 $1,157,521
7.00% - 7.49% 3,835 405,236 21,049 1,505,293 24,884 1,910,529
7.50% - 7.99% 2,745 264,189 26,115 1,667,009 28,860 1,931,198
8.00% - 8.49% 1,180 115,293 14,321 847,886 15,501 963,179
8.50% - 8.99% 1,053 80,153 13,725 674,940 14,778 755,093
9.00% - 9.49% 391 22,318 4,660 195,512 5,051 217,830
9.50% - 9.99% 400 14,739 3,700 108,893 4,100 123,632
10.00% - 10.49% 111 4,605 1,293 45,029 1,404 49,634
10.50% - 10.99% 272 8,199 867 28,318 1,139 36,517
11.00% or more 117 3,577 2,008 75,861 2,125 79,438
------ ---------- ------- ---------- ------- ----------
11,182 $1,043,323 101,888 $6,181,248 113,070 $7,224,571
====== ========== ======= ========== ======= ==========
The amount of principal prepayments on mortgage loans serviced by R&G
Financial was $180.3 million, $176.3 million and $162.6 million for the years
ended December 31, 2001, 2000 and 1999 respectively. This represented
approximately 2.5%, 2.7% and 2.6% of the aggregate principal amount of mortgage
loans serviced during such periods. The primary means used by R&G Mortgage to
reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability
that has allowed R&G Financial to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed securities
programs of FNMA, FHLMC and GNMA, and certain other investors, require R&G
Financial to advance funds to make scheduled payments of principal, interest,
taxes and insurance, if such payments have not been received from the borrowers.
During the years ended December 31, 2001, 2000 and 1999, the monthly average
amount of funds advanced by R&G Financial under such servicing agreements was
$7.4 million, $5.8 million and $5.5 million, respectively. Funds advanced by R&G
Financial pursuant to these arrangements are generally recovered by R&G
Financial within 30 days.
In connection with its loan servicing activities, R&G Financial holds
escrow funds for the payment of real estate taxes and insurance premiums with
respect to the mortgage loans it services.
At December 31, 2001, R&G Financial held $106.7 million of such escrow
funds, $101.9 million of which were deposited in the Bank and $4.8 million of
which were deposited with other financial institutions. The escrow funds
deposited with the Bank lower its overall cost of funds and is a means of
compensating it for processing mortgages checks received by R&G Mortgage, while
the escrow funds deposited with other financial institutions serve as part of
R&G Financial's compensating balances which permit the Company to borrow funds
from such institutions (pursuant to certain warehouse lines of credit) at rates
that are lower than would otherwise apply. See "- Sources of Funds -
Borrowings."
The degree of risk associated with a mortgage loan servicing portfolio
is largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on
recourse servicing occur primarily when foreclosure sale
-12-
proceeds of the property underlying a defaulted mortgage are less than the then
outstanding principal balance and accrued interest of such mortgage loan and the
cost of holding and disposing of such underlying property. At December 31, 2001,
R&G Financial was servicing mortgage loans with an aggregate principal amount of
$552.4 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.
R&G Financial's general strategy is to retain the servicing rights
related to the mortgage loans it originates and purchases. Nevertheless, there
is a market in Puerto Rico for servicing rights, which are generally valued in
relation to the present value of the expected income stream generated by the
servicing rights. Among the factors which influence the value of a servicing
portfolio are servicing fee rates, loan balances, loan types, loan interest
rates, the expected average life of the underlying loans (which may be reduced
through foreclosure or prepayment), the value of escrow balances, delinquency
and foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. Although the Company may on
occasion consider future sales of a portion of its servicing portfolio,
management does not anticipate sales of servicing rights to become a significant
part of its operations.
The market value of, and earnings from, R&G Financial's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, income generated from the Company's mortgage loan
servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of the Company's mortgage loan servicing portfolio
may be positively affected. See Note 1 to R&G Financial's Notes to Consolidated
Financial Statements for a discussion of SFAS No. 140 and the treatment of
servicing rights, incorporated by reference into Item 8 hereof.
-13-
Mortgage Loan Delinquencies and Foreclosures. The following table shows
the delinquency statistics for R&G Mortgage's servicing portfolio at the dates
indicated.
Year Ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999
Percent of Percent of Percent of
Number of- Servicing Number of Servicing Number of Servicing
Loans Loans Loans Portfolio Loans Portfolio
---------- --------- --------- --------- --------- ---------
Loans delinquent for:
30-59 days.................... 5,995 5.30% 5,336 4.81% 5,334 4.97%
60-89 days.................... 1,746 1.54 1,547 1.40 1,559 1.45
90 days or more............... 2,678 2.37 2,300 2.07 2,109 1.97
---------- --------- -------- ------- -------- -------
Total delinquencies(1)...... 10,419 9.21% 9,183 8.28% 9,002 8.39%
========== ========= ======== ======= ======== =======
Foreclosures pending(2).......... 2,056 1.82% 1,845 1.66% 1,262 1.18%
========== ========= ======== ======= ======== =======
- --------------------
(1) Includes at December 31, 2001 an aggregate of $112.5 million of
delinquent loans serviced by R&G Mortgage for the Bank, or 1.56% of the
total servicing portfolio and $21.3 million of delinquent loans held in
R&G Mortgage's own portfolio.
(2) At December 31, 2001, the Bank had foreclosures pending on $28.1 million
of loans being serviced by R&G Mortgage, which constituted 0.39% of the
servicing portfolio. R&G Mortgage had foreclosures pending on $4.8
million of loans it is servicing for its own portfolio at December 31,
2001.
While delinquency rates in Puerto Rico are generally higher than in the
mainland United States, these rates are not necessarily indicative of future
foreclosure rates or losses on foreclosures. Real estate owned as a result of
foreclosures ("REO") related to R&G Mortgage's mortgage banking business arise
primarily through foreclosure on mortgage loans repurchased from investors
either because of breach of representations or warranties or pursuant to
recourse arrangements. As of December 31, 2001, 2000 and 1999, R&G Mortgage held
REO with a book value of approximately $2.8 million, $1.3 million and $128,000
respectively. Sales of REO resulted in losses to R&G Mortgage of $442,000 during
the year ended December 31, 2001, and gains of $168,000 and $209,000 for the
years ended December 31, 2000 and 1999, respectively. There is no liquid
secondary market for the sale of R&G Mortgage's REO.
With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA and VA against foreclosure
loans. As a result of these programs, foreclosure on these loans had generated
no loss of principal as of December 31, 2001. R&G Mortgage, however, incurs
about $3,000 per loan foreclosed in interest and legal charges during the time
between payment by R&G Mortgage and FHA or VA reimbursement. For the years ended
December 31, 2001, 2000 and 1999, total expenses related to FHA or VA loans
foreclosed amounted to $337,000, $235,000 and $35,000, respectively. Although
FNMA and FHLMC are obligated to reimburse the Company for principal and interest
payments advanced by the Company as a servicer (except for recourse servicing),
the funding of delinquent payments or the exercise of foreclosure rights
involves costs to the Company which may not be recouped. Such nonrecouped
expenses have to date been immaterial.
Any significant adverse economic developments in Puerto Rico could
result in an increase in defaults or delinquencies on mortgage loans that are
serviced by R&G Mortgage or held by R&G Mortgage pending sale in the secondary
mortgage market, thereby reducing the resale value of such mortgage loans.
-14-
LENDING ACTIVITIES FROM BANKING OPERATIONS
General. At December 31, 2001, R&G Financial's loans receivable, net
totaled $1.8 billion, which represented 38.6% of R&G Financial's $4.7 billion of
total assets. At December 31, 2001, all but $665,000 of R&G Financial's loans
receivable were held by the Bank. The principal category of loans in R&G
Financial's portfolio are conventional loans which are secured by first liens on
single-family residences. Conventional residential real estate loans are loans
which are neither insured by the FHA nor partially guaranteed by the VA. At
December 31, 2001, all but $1.2 million of R&G Financial's first mortgage
single-family residential loans consisted of conventional loans. The other
principal categories of loans in R&G Financial's loans receivable, net portfolio
are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.
-15-
Loan Portfolio Composition. The following table sets forth the
composition of R&G Financial's loan portfolio by type of loan at the dates
indicated. Except as noted in the footnotes to the table, all of the loans are
held in the Bank's loan portfolio.
December 31,
---------------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate - first
mortgage............................... $ 1,006,073 52.59% $1,005,033 58.43% $1,099,843 68.47%
Residential real estate - second
mortgage............................... 33,321 1.74 27,419 1.59 13,029 0.81
Retail construction....................... 50,767 2.65 47,698 2.77 38,950 2.42
Commercial construction and land
acquisition(2)......................... 221,537 11.58 137,640 8.00 61,037 3.80
Commercial real estate.................... 327,891 17.14 270,459 15.72 204,155 12.71
Commercial business....................... 92,157 4.82 59,120 3.44 54,231 3.38
Consumer loans:
Loans secured by deposits.............. 26,176 1.37 26,926 1.57 20,539 1.28
Real estate secured consumer loans..... 83,509 4.37 100,357 5.83 76,944 4.79
Unsecured consumer loans............... 71,507 3.74 45,563 2.65 37,653 2.34
----------- ----- ---------- ----- ---------- -----
Total loans receivable............... 1,912,938 100% 1,720,615 100% 1,606,381 100%
----------- ----- ---------- ----- ---------- -----
Less:
Allowance for loan losses.............. (17,428) (11,600) (8,971)
Loans in process....................... (92,935) (78,163) (33,526)
Deferred loan fees..................... 20 909 (437)
Unearned interest...................... (207) (85) (440)
----------- ---------- ----------
(110,550) (88,939) (43,374)
----------- ---------- ----------
Loans receivable, net(3)............... $ 1,802,388 $1,631,276 $1,563,007
=========== ========== =========-
December 31,
------------------------------------ --------------------------------
1998 1997
----------------------------- --------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Residential real estate - first
mortgage $ 735,795 66.87% $ 476,729(1) 61.25%
Residential real estate - second
mortgage 18,634 1.69 17,831 2.29
Retail construction 23,280 2.12 13,367 1.72
Commercial construction and land
acquisition(2) 15,353 1.39 5,785 0.74
Commercial real estate 117,151 10.65 81,722 10.50
Commercial business 46,532 4.23 39,128 5.03
Consumer loans:
Loans secured by deposits 17,225 1.56 12,472 1.60
Real estate secured consumer loans 85,055 7.73 81,252 10.44
Unsecured consumer loans 41,381 3.76 50,103 6.43
----------- ------- --------- --------
Total loans receivable 1,100,406 100.00% 778,389 100.00%
----------- ------- --------- --------
Less:
Allowance for loan losses (8,055) 6,772)
Loans in process (18,170) (6,218)
Deferred loan fees (166) 172
Unearned interest (347) (512)
----------- ---------
(26,738) (13,330)
----------- ---------
Loans receivable, net(3) $ 1,073,668 $ 765,059
=========== ==========
- -----------
(1) Includes $33.9 million of residential real estate - first mortgage
loans which are held by R&G Mortgage at December 31, 1997.
(2) Includes $665,000, $1.2 million, $545,000, $249,000 and $682,000 of
construction loans held by R&G Mortgage at December 31, 2001, 2000,
1999, 1998 and 1997, respectively
(3) Does not include mortgage loans held for sale of $236.4 million, $95.7
million, $77.3 million, $117.1 million and $46.9 million at December
31, 2001, 2000, 1999, 1998 and 1997, respectively, of R&G Mortgage, the
Bank and/or Continental.
-16-
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 2001 regarding the dollar
amount of loans maturing in R&G Financial's total loan portfolio based on the
contractual terms to maturity. Loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
Due 1-5 Due 5 or more
years after years after
Due 1 year December 31, December 31,
or less 2001 2001 Total(1)
---------- ------------- --------------- -----------
(In Thousands)
Residential real estate........................ $ 142 $ 3,261 $1,035,991 $1,039,394
Retail construction............................ 50,767 -- -- 50,767
Commercial real estate(2)...................... 166,117 267,596 115,715 549,428
Commercial business............................ 54,449 32,625 5,083 92,157
Consumer:
Loans on savings............................ 15,564 10,169 443 26,176
Real estate secured consumer loans.......... 2,300 7,942 73,267 83,509
Unsecured consumer loans.................... 32,433 30,695 8,379 71,507
-------- -------- ---------- ----------
Total(3)....................................... $321,772 $352,288 $1,238,878 $1,912,938
======== ======== ========== ==========
- -----------------------
(1) Amounts have not been reduced for the allowance for loan losses, loans
in process, deferred loan fees or unearned interest.
(2) Includes $221.5 million of commercial construction and land acquisition
loans.
(3) Does not include mortgage loans held for sale.
-17-
The following table sets forth the dollar amount of total loans due
after one year from December 31, 2001, as shown in the preceding table, which
have fixed interest rates or which have floating or adjustable interest rates.
Floating or
Fixed rate adjustable-rate Total
---------- --------------- ---------
(In Thousands)
Residential real estate.................................... $1,039,394 $ -- $1,039,394
Retail construction........................................ 50,765 -- 50,767
Commercial real estate(1).................................. 94,476 454,952 549,428
Commercial business........................................ 34,976 57,181 92,157
Consumer:
Loans on savings........................................ 26,176 -- 26,176
Real estate secured consumer loans...................... 83,509 -- 83,509
Unsecured consumer loans................................ 71,507 -- 71,507
---------- ------------ ----------
Total...................................................... $1,400,805 $512,132 $1,912,938
========== ============ ==========
- ---------------------
(1) Includes $221.5 million of commercial construction and land acquisition
loans.
Scheduled contractual amortization of loans does not reflect the
expected term of R&G Financial's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and, with
respect to conventional loans originated for the Bank after February 1994,
due-on-sales clauses, which give R&G Financial the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
-18-
Origination, Purchase and Sales of Loans. The following table sets
forth loan originations, purchases and sales from banking operations for the
periods indicated.
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ----------- ---------
(Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages................................... $ 625,798 $ 378,398 $ 378,740
Commercial mortgages.................................... -- -- --
Residential construction................................ 29,353 29,063 26,146
Consumer loans.......................................... 9,658 43,943 32,219
------------ ----------- ---------
Total loans originated by R&G Mortgage................ 664,809 451,404 437,105
------------ ----------- ---------
Other loans originated:
Commercial real estate.................................. 213,215 150,329 175,803
Commercial business..................................... 59,074 48,060 36,222
Construction and development............................ 171,026(1) 127,473 54,070
Consumer loans:
Loans on deposit........................................ 48,730 45,474 34,758
Real estate secured consumer loans...................... -- -- --
Unsecured consumer loans................................ 63,702 32,517 29,631
------------ ----------- ---------
Total other loans originated.......................... 555,747 403,853 330,484
------------ ----------- ---------
Loans purchased......................................... 61,359 128,824 279,489
------------ ----------- ---------
Total loans originated and purchased.................. 1,281,915 984,081 1,047,078
------------ ----------- ---------
Loans sold.............................................. (130,716) (105,653) (133,731)
Loan participations sold................................ (52,886) -- (19,200)
Loan principal reductions............................... (474,162) (359,760) (234,334)
------------ ----------- ---------
Net increase before other items, net.................... 624,151 518,668 659,813
------------ ----------- ---------
Loans securitized and transferred to mortgage-backed
securities............................................ (421,645) (410,453) (106,237)
------------ ----------- ---------
Net increase in loan portfolio.......................... $ 202,506 $ 108,215 $ 553,576
============ =========== =========
(1) Includes $34.6 million originated by Continental.
R&G Financial, through the Bank, originates for both investment and
sale mortgage loans secured by residential real estate (secured by both first
and second mortgage liens) as well as construction loans (for residential real
estate), commercial real estate loans, commercial business loans and consumer
loans.
R&G Mortgage assists the Bank in meeting its loan production targets
and goals by, among other things, (i) advertising, promoting and marketing to
the general public; (ii) interviewing prospective borrowers and conducting the
initial processing of the requisite loan applications, consistent with the
Bank's underwriting guidelines; and (iii) providing personnel and facilities
with respect to the execution of loan agreements approved by the Bank. R&G
Mortgage performs the foregoing loan origination services on behalf of the Bank
with respect to residential mortgage loans, some commercial real estate loans
and construction loans. R&G Mortgage receives from the Bank 75% of the
applicable loan origination fee with respect to loans originated by R&G Mortgage
on behalf of the Bank. During the years ended December 31, 2001, 2000 and 1999,
R&G Mortgage received $10.3 million, $8.1 million and $7.5 million,
respectively, of loan origination fees with respect to loans originated by R&G
Mortgage on behalf of the Bank. These fees are eliminated in consolidation in
R&G Financial's Consolidated Financial Statements. See "- Regulation - R&G
Financial - Limitations on Transactions with Affiliates."
-19-
The Bank originates commercial real estate, commercial business and
consumer loans. Applications for commercial real estate, commercial business and
unsecured consumer loans are taken at all of the Bank's branch offices and may
be approved by various lending officers of the Bank within designated limits,
which are established and modified from time to time to reflect an individual's
expertise and experience. All loans in excess of an individual's designated
limits are referred to an officer with the requisite authority. In addition, the
Management Credit Committee is authorized to approve all loans not exceeding
$5.0 million, and the Executive Committee of the Board of Directors is
authorized to approve all loans exceeding $5.0 million. All loans originated or
purchased by the Bank must be approved by one of the three committees set forth
above. Management of the Bank believes that its relatively centralized approach
to approving loan applications ensures strict adherence to the Bank's
underwriting guidelines while still allowing the Bank to approve loan
applications on a timely basis.
The Bank also purchases conventional loans secured by first liens on
single-family residential real estate from unrelated financial institutions.
Such loan purchases are underwritten by the Bank pursuant to the same guidelines
as direct loan originations. Loans purchased by the Bank are from time to time
securitized by R&G Mortgage and sold by the Bank. During the years ended
December 31, 2001, 2000 and 1999, the Bank purchased $61.4 million, $128.8
million and $279.5 million of loans, respectively.
During the years ended December 31, 2001, 2000 and 1999, loans sold
from banking operations were $130.7 million, $105.7 million and $133.7 million.
These loans, which were primarily nonconforming loans at the time of
origination, were generally sold in packages in privately negotiated
transactions with FNMA and FHLMC.
The Bank sells to R&G Mortgage the servicing rights to all first and
second mortgage loans secured by residential properties which are or will become
part of the Bank's loan portfolio once the Bank has a commitment to sell the
loans. R&G Mortgage services all other loans held in the Bank's portfolio
(including single-family residential loans retained by the Bank, commercial real
estate, commercial business and consumer loans (although R&G Mortgage does not
actually acquire such servicing rights)). In addition, the Bank processes
payments on all loans serviced by R&G Mortgage on behalf of the Bank. Finally,
R&G Mortgage renders securitization services with respect to the pooling of some
of the Bank's mortgage loans into mortgage-backed securities. See "- Mortgage
Banking Activities."
Single-Family Residential Real Estate Loans. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At December 31, 2001, $1.0
billion or 52.6% of R&G Financial's total loans held for investment consisted of
such loans, of which all but $1.2 million consisted of conventional loans. The
Bank's first mortgage single-family residential loans consist exclusively of
fixed-rate loans with terms of between 15 and 30 years. As evidenced by this
statistic, the Puerto Rico residential mortgage market has not been receptive to
long-term adjustable rate mortgage loans.
The Bank's first mortgage single-family residential loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Board of Directors, the Bank can lend up
to 95% of the appraised value of the property securing a first mortgage
single-family residential loan provided the Bank obtains private mortgage
insurance with respect to the top 25% of the loan.
The Bank also originates loans secured by second mortgages on
single-family residential properties. At December 31, 2001, $33.4 million or
1.7% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. The Bank offers such
second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-
-20-
value ratio of second mortgage loans generally is limited to 75% of the
property's appraised value (including the first mortgage).
Construction Loans. The Bank has been active in originating loans to
construct single-family residences. These construction lending activities
generally are conducted throughout Puerto Rico, although loans are concentrated
in areas contiguous to Bank branches. At December 31, 2001, retail construction
("spot") loans amounted to $50.8 million or 2.7% of R&G Financial's total loans
held for investment, while commercial construction and land acquisition loans
amounted to $221.5 million or 11.6% of total loans held for investment.
The Bank offers "spot" loans to individual borrowers for the purpose of
constructing single-family residences. Substantially all of the Bank's
construction lending to individuals is originated on a construction/permanent
mortgage loan basis. Construction/permanent loans are made to individuals who
hold a contract with a general contractor acceptable to the Bank to construct
their personal residence. The construction phase of the loan provides for
monthly payments on an interest only basis at a designated fixed rate for the
term of the construction period, which generally does not exceed nine months.
Thereafter, the permanent loan is made at then market rates, provided that such
rate shall not be more than 2% greater than the interim construction rate. R&G
Mortgage's construction loan department approves the proposed contractors and
administers the loan during the construction phase. The Bank's
construction/permanent loan program has been successful due to its ability to
offer borrowers a single closing and, consequently, reduced costs. At December
31, 2001, the Bank's construction loan portfolio included 441
construction/permanent loans with an aggregate principal balance of $50.8
million.
The Bank also originates construction loans to developers to develop
single family residential properties. The Bank has organized a Construction Loan
Department to work primarily with real estate developers. At December 31, 2001,
the Bank had 20 residential construction loans outstanding to develop
single-family residences with an aggregate principal balance of $145.2 million.
Commitments for future funding approximate $61.3 million In addition, the Bank
had 8 loans to develop commercial properties with an aggregate principal balance
of $30.6 million. All loans are performing in accordance with their terms at
December 31, 2001.
In addition to the foregoing, at December 31, 2001, the Bank had 35
land acquisition loans with outstanding balances ranging from $81,000 to $10.7
million, and an aggregate balance of $35.7 million, which were made in
connection with projects to construct single-family residences. The Bank and the
financial institution which made the interim construction loan have entered into
an agreement pursuant to which the Bank is to be paid a percentage of the
proceeds from each home as it is released upon construction and sale. The Bank
expects to make the permanent construction loan on some of these projects. The
Bank has also made a working capital/pre-development loan with an outstanding
principal balance of $10 million at December 31, 2001 which is secured by land.
The Bank intends to continue to increase its involvement in
single-family residential construction lending. Such loans afford the Bank the
opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of risk
as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated costs (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. The Bank has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose stringent loan-to-value (80% with respect to single-family residential
real estate), debt service and other requirements for loans which are believed
to involve higher elements of
-21-
credit risk and by working with builders with whom it has established
relationships or knowledge thereof. At December 31, 2001, $871,000 of the Bank's
retail construction loans were classified as non-performing. As of such date, no
commercial construction or land acquisition loans were non-performing.
Commercial Real Estate Loans. The Bank also originates mortgage loans
secured by commercial real estate. At December 31, 2001, $327.9 million or 17.1%
of R&G Financial's total loans held for investment consisted of such loans. As
of such date, the Bank's commercial real estate loan portfolio consisted of
approximately 1,202 loans with an average principal balance of $273,000. At
December 31, 2001, $16.9 million of the Bank's commercial real estate loans were
classified as nonperforming.
Commercial real estate loans originated by the Bank are primarily
secured by office buildings, retail stores, warehouses and general purpose
industrial space. Although terms vary, commercial real estate loans generally
are amortized over a period of 7-15 years and have maturity dates of five to
seven years. The Bank will originate these loans with interest rates which
adjust monthly in accordance with a designated prime rate plus a margin, which
generally is negotiated at the time of origination. Such loans will have a floor
but no ceiling on the amount by which the rate of interest may adjust over the
loan term. Loan-to-value ratios on the Bank's commercial real estate loans are
currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.20 or more. It is also the Bank's general policy to seek
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through mortgage insurance,
secondary collateral and/or personal guarantees from the principals of the
borrower.
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial lending generally. In
addition, the Bank imposes stringent loan-to-value ratios, requires conservative
debt coverage ratios, and continually monitors the operation and physical
condition of the collateral. Although the Bank has begun to increase its
emphasis on commercial real estate lending, management does not currently
anticipate that its portfolio of commercial real estate loans will grow
significantly as a percentage of the total loan portfolio.
Commercial Business Loans. The Bank offers commercial business loans,
including working capital lines of credit, inventory and accounts receivable
loans, equipment financing (including equipment leases), term loans, insurance
premiums loans and loans guaranteed by the Small Business Administration.
Depending on the collateral pledged to secure the extension of credit, maximum
loan to value ratios are 75% or less, with exceptions permitted to a maximum of
80%. Loan terms may vary from one to 15 years. The interest rates on such loans
are generally variable and are indexed to a designated prime rate, plus a
margin. The Bank also generally obtains personal guarantees from the principals
of the borrowers. At December 31, 2001, commercial business loans amounted to
$92.2 million or 4.8% of total loans held for investment. Although the Bank has
begun to increase its emphasis on commercial business lending, management does
not currently anticipate that its portfolio of commercial business loans will
grow significantly as a percentage of the total loan portfolio.
Consumer Loans. The Bank originates real estate secured consumer loans.
Such loans generally have shorter terms and higher interest rates than other
mortgage loans. At December 31, 2001, $181.2 million or 9.5% of the Bank's total
loans held for investment consisted of consumer loans. This amount is comprised
mostly of real estate secured consumer loans (which are originated by R&G
Mortgage), but the Bank also offers loans secured by deposit accounts, credit
card loans and other secured and unsecured
-22-
consumer loans. Most of the Bank's consumer loans are secured and have been
primarily obtained through newspaper advertising, although loans are also
obtained from existing and walk-in customers. Although the Bank has begun to
increase its emphasis on collateralized consumer lending, management does not
currently anticipate that its portfolio of consumer loans will grow
significantly as a percentage of the total loan portfolio.
The Bank currently offers loans secured by deposit accounts, which
amounted to $26.2 million at December 31, 2001. Such loans are originated
generally for up to 90% of the account balance, with a hold placed on the
account restricting the withdrawal of the account balance. The Bank offers real
estate secured loans in amounts up to 75% of the appraised value of the
property, including the amount of any existing prior liens. Real estate secured
consumer loans have a maximum term of 10 years, which may be extended within the
sole discretion of the Bank, and an interest rate which is set at a fixed rate
based on market conditions. The Bank secures the loan with a first or second
mortgage on the property, including loans where another institution holds the
first mortgage. At December 31, 2001, real estate secured consumer loans totaled
$83.5 million. At December 31, 2001, credit card receivables totaled $27.9
million.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency may not warrant further substantial collection efforts against the
borrower. At December 31, 2001, $6.1 million of consumer loans were classified
as non-performing, of which $5.8 million were secured by real estate.
Asset Quality. When a borrower fails to make a required payment on a
loan, R&G Financial attempts to cure the deficiency by contacting the borrower
and seeking payment. Contacts are generally made between the 10th and 15th day
after a payment is due. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days, the loan and payment history is reviewed and
efforts are made to collect the loan. While R&G Financial generally prefers to
work with borrowers to resolve such problems, when the account becomes 90 days
delinquent in the case of mortgage loans, R&G Financial does institute
foreclosure or other proceedings, as necessary, to minimize any potential loss.
In the case of consumer loans, the Bank refers the file for collection action
after 60 days.
Loans secured by real estate are placed on non-accrual status when, in
the judgment of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. When such a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due 90 days or more which are secured by real estate. The Bank
generally takes the same position in the case of consumer loans.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3"), which provides guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the balance
of the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Bank's
accounting for its real estate owned complies with the guidance set forth in SOP
92-3.
-23-
The following table sets forth the amounts and categories of R&G
Financial's non-performing assets at the dates indicated. R&G Financial did not
have any troubled debt restructurings at any of the periods presented. Except as
otherwise indicated in the footnotes to the table, the non-performing assets are
assets of the Bank.
December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)..................... $50,358 $79,234 $47,413 $32,973 $21,619
Residential construction....................... 871 487 478 441 368
Commercial real estate......................... 16,945 11,881 9,005 6,463 6,000
Commercial business............................ 3,105 1,414 1,255 3,224 765
Consumer unsecured............................. 303 1,186 802 1,358 1,217
Other.......................................... -- -- 61 67 117
------- -------- ------- ------- -------
Total........................................ 71,582 94,202 59,014 44,526 30,086
------- -------- ------- ------- -------
Accruing loans greater than 90 days delinquent:
Residential real estate........................ -- -- -- -- --
Residential construction....................... -- -- -- -- --
Commercial real estate......................... -- -- -- -- --
Commercial business............................ 462 420 63 61 54
Consumer....................................... 428 360 274 357 172
------- -------- ------- ------- -------
Total accruing loans greater than
90 days delinquent......................... 890 780 337 418 226
------- -------- ------- ------- -------
Total non-performing loans................... 72,472 94,982 59,351 44,944 30,312
------- -------- ------- ------- -------
Real estate owned, net of reserves................ 10,061 9,056 5,852 4,041 1,715
Other repossessed assets.......................... 362 583 466 237 85
------- -------- ------- ------- -------
10,423 9,639 6,318 4,278 1,800
------- -------- ------- ------- -------
Total non-performing assets $82,895 $104,621 $65,669 $49,222 $32,112
======= ======== ======= ======= =======
Total non-performing loans as a
percentage of total loans (2) 3.79% 5.52% 3.66% 4.08% 3.89%
======= ======== ======= ======= =======
Total non-performing assets as a
percentage of total assets 1.78% 2.96% 2.26% 2.41% 2.12%
======= ======== ======= ======= =======
- ----------------------
(1) Includes $5.8 million, $6.1 million, $5.3 million, $2.6 million and $1.1
million consumer loans held by the Bank secured by first and second
mortgages on residential real estate at December 31, 2001, 2000, 1999,
1998 and 1997, respectively. Also includes $7.3 million, $17.6 million,
$5.9 million, $4.3 million and $2.8 million residential real estate loans
secured by first mortgages held by R&G Mortgage at December 31, 2001,
2000, 1999, 1998 and 1997, respectively.
(2) While the ratio of non-performing loans to total loans decreased from
5.52% to 3.79% from December 31, 2000 to December 31, 2001, the ratio was
nevertheless larger than it would otherwise have been due to significant
loan securitizations during 2001 and 2000, which reduced the amount of
loans considered in the calculation of the ratio. Without giving effect
to loan securitizations, at December 31, 2001 and 2000, the ratio of
non-performing loans to total loans would have been 2.75% and 4.46%,
respectively.
Non-performing loans amounted to $72.5 million at December 31, 2001, as
compared to $95 million at December 31, 2000. The decrease in non-performing
loans during 2001 is due to the sale of approximately $67.8 million of
non-performing residential mortgage loans to certain investors during the fourth
quarter of 2001. An aggregate of $50.4 million or 69.5% of non-performing loans
consisted of
-24-
residential mortgage loans. Because of the nature of the collateral, R&G
Financial has historically recognized a low level of loan charge-offs. R&G
Financial's aggregate charge-offs amounted to 0.32% during 2001, as compared to
0.17% during 2000. Although loan delinquencies have historically been higher in
Puerto Rico than in the United States, loan charge-offs have historically been
lower than in the United States.
Non-performing residential loans decreased by $28.9 million or 36.4%
from December 31, 2000 to December 31, 2001. The average loan balance on
non-performing mortgage loans amounted to $54,000 at December 31, 2001. As of
such date, 572 loans with an aggregate balance of $35.7 million (including 133
consumer loans secured by real estate with an aggregate balance of $2.7 million)
were in the process of foreclosure. The total delinquency ratio (including loans
past due less than 90 days) on residential mortgages of the Bank, excluding
consumer loans secured by real estate, decreased from 8.55% in 2000 to 6.40% in
2001. The Company's loss experience on such portfolio has been minimal over the
last several years.
Non-performing commercial real estate loans increased by $5.0 million
or 42.6% from $11.9 at December 31, 2000 to $16.9 million at December 31, 2001.
The number of loans delinquent over 90 days amounted to 120 loans at December
31, 2001, with an average balance of $141,000. The largest non-performing
commercial real estate loan as of December 31, 2001 had a balance of $758,000.
Non-performing commercial business loans consist of 77 loans. Such
loans include 11 loans with an aggregate balance of $322,000 which are 90%
guaranteed by the Small Business Administration, 58 commercial leases amounting
to $1.7 million and 8 other commercial business loans with an aggregate balance
of $1.1 million. These loans have a combined average loan size of $40,000. The
largest non-performing commercial business loan as of December 31, 2001 had a
$517,000 balance.
At December 31, 2001, R&G Financial's five largest loans-to-one
borrower and their related entities had outstanding balances of $32.8 million,
$24.9 million, $18.7 million, $16.7 million and $13.9 million. All of such loan
concentrations were performing December 31, 2001.
At December 31, 2001, R&G Financial's allowance for loan losses totaled
$17.4 million, which represented a $5.8 million or 50.2% increase from the level
maintained at December 31, 2000. At December 31, 2001, R&G Financial's allowance
represented approximately 0.91% of the total loan portfolio and 24.05% of total
non-performing loans, as compared to 0.67% and 12.21% at December 31, 2000. The
increase in the allowance for loan losses reflected the increase in R&G
Financial's commercial real estate and construction loan portfolio as well as
the increase in R&G Financial non-performing loans during the year.
It is the policy of the Bank to maintain an allowance for estimated
losses on loans and to increase such allowance when, based on management's
evaluation, a loss becomes both probable and estimable (i.e., the loss is likely
to occur and can be reasonably estimated). Major loans and major lending areas
are reviewed periodically to determine potential problems at an early date.
Also, management's periodic evaluation considers factors such as loss
experience, current delinquency data, known and inherent risks in the portfolio,
identification of adverse situations which may affect the ability of debtors to
repay the loan, the estimated value of any underlying collateral and assessment
of current economic conditions. Additions to the allowance are charged to
income. Such provisions are based on management's estimated value of any
underlying collateral, as applicable, considering the current and anticipated
operating conditions of the borrower. Any recoveries are credited to the
allowance.
The following table sets forth an analysis of R&G Financial's allowance
for loan losses during the periods indicated, of which $16.1 million is
maintained against the Bank's loan portfolio at December 31, 2001:
-25-
At and For the Year Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------ ------ ------ -------
(Dollars in Thousands)
Balance at beginning of period $11,600 $8,971 $8,055 $6,772 $ 3,332
------- ------- ------- ------ -------
Charge-offs:
Residential real estate................... 72 38 17 73 13
Construction.............................. -- -- -- -- --
Commercial real estate.................... 1,090 468 353 -- 170
Commercial business....................... 2,899 1,539 1,548 1,485 480
Consumer.................................. 2,566 1,940 2,518 4,455 3,953
Other..................................... -- -- 4 -- 761
------- ------- ------- ------ -------
Total charge-offs....................... 6,627 3,985 4,440 6,013 5,377
------- ------- ------- ------ -------
Recoveries:
Residential real estate................... -- -- -- -- 21
Commercial real estate.................... 11 80 69 -- 50
Commercial business....................... 131 381 332 20 32
Consumer.................................. 382 402 429 312 344
Other..................................... -- -- -- -- 2,000
------- ------- ------- ------ -------
Total recoveries........................ 524 863 830 332 2,447
------- ------- ------- ------ -------
Net charge-offs.............................. 6,103 3,122 3,610 5,681 2,930
------- ------- ------- ------ -------
Transferred reserves from R&G Mortgage....... 806 -- -- -- --
------- ------- ------- ------ -------
Allowance or loan losses acquired
in Fajardo Federal acquisition.......... -- -- -- 364 --
------- ------- ------- ------ -------
Provision for losses on loans................ 11,125 5,751 4,525 6,600 6,370
------- ------- ------- ------ -------
Balance at end of period..................... $17,428 $11,600 $ 8,971 $8,055 $ 6,772
======= ======= ======= ====== =======
Allowance for loan losses as a percent of total
loans outstanding......................... 0.91% 0.67% 0.55% .74% .87%
======= ======= ======= ====== =======
Allowance for loan losses as a percent of
non-performing loans...................... 24.05% 12.21% 15.11% 17.92% 22.34%
======= ======= ======= ====== =======
Ratio of net charge-offs to average loans
outstanding............................... 0.32% 0.17% .25% .55% 0.40%
======= ======= ======= ====== =======
-26-
The following table sets forth information concerning the allocation of
R&G Financial's allowance for loan losses (which is maintained on the Bank's
loan portfolio) by loan category at the dates indicated.
December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ----------- ------ -------------
(Dollars in Thousands)
Residential real estate.......... $2,496 14.32% $ 1,278 11.02% $1,419 15.82%
Construction..................... 800 4.59 432 3.72 186 2.07
Commercial real estate........... 7,371 42.29 4,880 42.07 3,258 36.32
Commercial business.............. 2,253 12.93 1,321 11.39 1,063 11.85
Consumer......................... 4,508 25.87 3,689 31.80 3,045 33.94
------- ------ ---------- ------ ------ ------
Total............................ $17,428 100.00% $ 11,600 100.00% $8,971 100.00%
======= ====== ========== ====== ====== ======
December 31,
----------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Percent of Loans Percent of
in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Residential real estate................... $1,272 15.79% $593 8.76%
Construction.............................. 46 0.57 7 0.10
Commercial real estate.................... 2,655 32.96 1,386 20.47
Commercial business....................... 1,033 12.82 806 11.90
Consumer.................................. 3,049 37.86 3,980 58.77
------ ------ ------ ------
Total..................................... $8,055 100.00% $6,772 100.00%
====== ====== ====== ======
-27-
INVESTMENT ACTIVITIES
General. R&G Financial's securities portfolio is managed by investment
officers in accordance with a comprehensive written investment policy which
addresses strategies, types and levels of allowable investments and which is
reviewed and approved annually by the respective Boards of Directors of the Bank
and R&G Mortgage. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Interest Rate Risk, Budget
and Investments Committee ("IRRBICO").
As discussed under "- Mortgage Banking Activities," R&G Mortgage is
primarily engaged in the origination of mortgage loans and the securitization of
such loans into mortgage-backed and related securities and the subsequent sale
of such securities to securities broker-dealers and other investors in the
secondary market. As a result of R&G Mortgage's securitization activities, R&G
Mortgage maintains a substantial portfolio of GNMA mortgage-backed securities.
At December 31, 2001, R&G Mortgage held GNMA and FHLMC mortgage-backed
securities with a fair value of $31.1 million which are classified as held for
trading. Such securities generally remain in R&G Mortgage's portfolio for
between 90 and 180 days. In addition, as of such date, R&G Mortgage held GNMA
mortgage-backed securities with a fair value of $389.6 million, which are
classified as available for sale. At December 31, 2001, R&G Mortgage's CMO
interest-only residuals and interest only strips, which are classified as
available for sale, had an amortized cost of $9.0 million and a fair value of
$8.3 million.
The Bank's Investment Policy authorizes the Bank to invest in U.S.
Treasury obligations (with a maturity up to five years), U.S. Agency
obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade
municipal obligations (with a maturity of up to five years), bankers'
acceptances and Federal Home Loan Bank ("FHLB") notes (with a maturity of up to
five years), investment grade commercial paper (with a maturity of up to 9
months), federal funds (with a maturity of six months or less), certificates of
deposit in other financial institutions (including Eurodollar deposits),
repurchase agreements (with a maturity of six months or less), investment grade
corporate bonds (with a maturity of five years or less) and certain
mortgage-backed derivative securities (with a weighted average life of less than
ten years).
At December 31, 2001, the Bank's securities portfolio consisted of
$39.5 million of securities held for investments, consisting of $8.1 million of
tax-free mortgage-backed securities, $7.7 million of other mortgage backed
securities, and $23.7 million of Puerto Rico Government obligations and other
securities. In addition, at December 31, 2001, the Bank had a securities
portfolio classified as available for sale with a fair value of $1.7 billion,
consisting of $133.2 million of tax-free mortgage-backed securities, $709.9
million of FHLMC and FNMA mortgage-backed securities, $66.1 million of FHLB
stock, $234.8 million of CMOs certificates, $7.1 million of CMO interest-only
residuals and interest only strips, $54.5 million corporate debt obligations and
$478.2 million of U.S. Government agency securities, the interest on which is
tax-exempt to the Company.
The Bank's Treasury Department from time to time holds trading
securities. At December 31, 2001, securities for trading held by the Bank
totaled $62.9 million, consisting of FHLMC mortgage-backed securities.
At December 31, 2001, $440.9 million or 20% of R&G Financial's
mortgage-backed and investment securities were pledged to secure various
obligations of R&G Financial (excluding repurchase agreements).
-28-
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's securities portfolio held
to maturity as of the dates indicated below. All of such securities are assets
of the Bank, except as otherwise indicated in the footnotes below.
December 31,
----------------------------------------------------------------------------
2001 2000
----------------------------------- --------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Value Market Value Yield Value Market Value Yield
-------- ------------ --------- -------- ------------ --------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA (1)
Due within one year........... $ -- $ -- --% $ 2 $ 3 10.00%
Due from one-five years....... -- -- -- -- -- --
Due from five-ten years....... 7,180 7,111 5.87 8,865 8,605 5.79
Due over ten years............ 37,043 37,092 6.27 1,845 1,766 6.17
FNMA
Due within one year........... -- -- -- -- -- --
Due from one-five years....... -- -- -- -- -- --
Due from five-ten years....... -- -- -- -- -- --
Due over ten years............ 7,594 7,910 7.06 8,947 9,145 7.08
FHLMC
Due within one year........... -- -- -- -- -- --
Due from one-five years....... -- -- -- -- -- --
Due from five-ten years....... -- -- -- -- -- --
Due over ten years............ 128 125 5.75 160 154 6.16
Investment securities:
Puerto Rico Government
obligations
Due within one year......... -- -- -- -- -- --
Due from one-five years..... 12,691 12,731 4.99 1,948 1,948 5.88
Due from five-ten years..... 10,896 11,059 5.95 1,755 1,755 5.98
Due over ten years.......... -- -- -- -- -- --
Other
Due within one year......... -- -- -- -- -- --
Due from one-five years..... 100 100 6.20 -- -- --
Due from five-ten years..... -- -- -- -- -- --
Due over ten years.......... -- -- -- -- -- --
-------- ------ ---- -------- ------- ----
Total securities held for
investment................ $ 75,632 $76,128 6.05% $23,522 $ 23,376 6.34%
======== ======= ==== ======= ======== ====
(1) Includes $36.1 million held by R&G Financial at December 31, 2001.
-29-
December 31,
----------------------------------------------------
1999
----------------------------------------------------
Weighted
Carrying Value Market Value Average Yield
-------------- ------------- ---------------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA
Due within one year............................. $ -- $ -- --%
Due from one-five years......................... 15 16 10.00
Due from five-ten years......................... 10,660 10,391 5.79
Due over ten years.............................. 2,133 2,074 6.17
FNMA
Due within one year............................. -- -- --
Due from one-five years......................... -- -- --
Due from five-ten years......................... -- -- --
Due over ten years.............................. 10,252 10,644 7.09
FHLMC
Due within one year............................. -- -- --
Due from one-five years......................... -- -- --
Due from five-ten years......................... -- -- --
Due over ten years.............................. 189 180 5.58
Investment securities:
Puerto Rico Government obligations
Due within one year................................ -- -- --
Due from one-five years............................ 1,280 1,272 5.85
Due from five-ten years............................ 4,158 4,132 5.95
Due over ten years................................. -- -- --
Other
Due within one year................................ -- -- --
Due from one-five years............................ -- -- --
Due from five-ten years............................ -- -- --
Due over ten years................................. -- -- --
Total securities held for
investment.................................. ------------ ------------- --------
$28,687 $28,709 6.31%
============ ============= ========
The following table presents certain information regarding the
composition and period to maturity of R&G Financial's held for trading and
available for sale mortgage-backed and investment securities portfolio as of the
dates indicated below.
December 31,
------------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------------
Amortized Weighted Amortized Weighted
Cost Fair Value Average Yield Cost Fair Value Average
---- ---------- ------------- -------- ---------- -------
(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA
Due within one year.................. $ -- $ -- --% $ -- $ -- --%
Due from one-five years.............. 50 50 8.49 26 26 8.50
Due from five-ten years.............. 11,053 11,172 5.97 10,492 10,419 5.68
Due over ten years................... 513, 508 511,639 6.52 584,419 576,869 6.62
FNMA mortgage-backed securities
Due within one year.................. -- -- -- -- -- --
Due from one-five years.............. -- -- -- -- -- --
Due from five-ten years.............. 538 549 6.50 634 634 6.50
Due over ten years................... 266,495 270,936 7.21 98,779 99,968 7.15
FHLMC mortgage-backed securities
Due within one year.................. -- -- -- 13 13 9.00
Due from one-five years.............. 73 74 8.93 132 130 8.94
Due from five-ten years.............. 1,265 1,292 6.60 1,587 1,587 6.61
Due over ten years................... 435,662 437,026 6.74 434,865 437,227 7.26
-30-
Collateralized mortgage obligations
(CMO'S)
Due within one year.................. -- -- -- -- -- --%
Due from one-five years.............. -- -- -- -- -- --
Due from five-ten years.............. 9,497 9,562 6.00 -- -- --
Due over ten years................... 221,159 220,222 6.01 -- -- --
CMO residuals and other mortgage-backed
securities
Due within one year.................. -- -- -- -- -- --
Due from one-five years.............. 9,897 9,627 15.00 10,710 10,190 12.00
Due from five-ten years.............. 8,341 10,797 8.08 -- -- --
Due over ten years................... -- -- -- 10,688 13,037 8.08
Investment securities available for sale
U.S. Treasury
Due within one year.................. -- -- -- -- -- --
Due from one-five years.............. -- -- -- -- -- --
Due from five-ten years.............. -- -- -- -- -- --
Due over ten years................... -- -- -- -- -- --
U.S. Government & Agencies
Due within one year.................. 9,600 9,807 5.78 8,500 8,446 5.48
Due from one-five years.............. 156,522 157,408 4.96 192,763 193,298 6.26
Due from five-ten years.............. 307,110 310,938 6.10 114,881 115,352 7.30
Due over ten years................... -- -- -- -- -- --
Corporate debt obligations
Due within one year -- -- -- -- -- --
Due from one-five years 53,637 54,503 6.53 -- -- --
Due from five-ten years -- -- -- 5,097 5,202 6.80
Due over ten years -- -- -- -- -- --
FHLB stock............................. 66,077 66,077 5.20 45,973 45,973 7.30
---------- ---------- ---- ---------- ---------- ----
$2,070,484 $2,081,679 6.42 $1,519,559 $1,518,371 6.96%
========== ========== ==== ========== ========== ====
Securities held for trading:
GNMA certificates...................... $18,152 $18,152 5.80 $11,630 $12,038 7.28%
FHLMC certificates..................... 73,687 75,796 7.08 -- -- --
---------- ---------- ---- ---------- ---------- ----
$91,839 $93,948 6.84% $11,630 $12,038 7.28%
========== ========== ==== ========== ========== ====
-31-
December 31,
------------------------------------------------
1999
------------------------------------------------
Weighted
Amortized Cost Fair Value Average Yield
-------------- ---------- -------------
Mortgage-backed securities available for sale
GNMA
Due within one year................................... $ -- $ -- --%
Due from one-five years............................... -- -- --
Due from five-ten years............................... -- -- --
Due over ten years.................................... 570,749 563,533 6.62
FNMA mortgage-backed securities
Due within one year................................... -- -- --
Due from one-five years............................... -- -- --
Due from five-ten years............................... 741 719 6.50
Due over ten years.................................... 110,855 109,705 7.15
FHLMC mortgage-backed securities
Due within one year................................... -- -- --
Due from one-five years............................... 99 99 8.79
Due from five-ten years............................... 1,891 1,841 6.77
Due over ten years.................................... 14,586 14,036 6.87
CMO residuals and other mortgage-backed
securities
Due within one year................................... -- -- --
Due from one-five years............................... 8,886 8,886 12.00
Due from five-ten years............................... -- -- --
Due over ten years.................................... 11,823 13,886 8.07
Investment securities available for sale
U.S. Treasury
Due within one year................................... 4,998 4,945 4.50
Due from one-five years............................... -- -- --
Due from five-ten years............................... -- -- --
Due over ten years.................................... -- -- --
U.S. Government & Agencies
Due within one year................................... -- -- --
Due from one-five years............................... 133,956 130,950 6.19
Due from five-ten years............................... 92,237 89,444 7.28
Due over ten years.................................... -- -- --
Corporate debt obligations
Due within one year................................... -- -- --
Due from one-five years............................... -- -- --
Due from five-ten years............................... -- -- --
Due over ten years.................................... -- -- --
FHLB stock.............................................. 32,825 32,825 6.75
-------- -------- -----
$983,646 $970,869 6.75%
======== ======== =====
Securities held for trading:
GNMA certificates....................................... $ 43,303 $ 43,564 5.27%
FHLMC certificates...................................... -- -- --
-------- -------- -----
$ 43,303 $ 43,564 5.27%
======== ======== =====
A substantial portion of R&G Financial's securities are held in
mortgage-backed securities. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely
-32-
payment of interest and the ultimate return of principal within one year. The
FNMA is a private corporation chartered by the U.S. Congress with a mandate to
establish a secondary market for conventional mortgage loans. The FNMA
guarantees the timely payment of principal and interest on FNMA securities.
FHLMC and FNMA securities are not backed by the full faith and credit of the
United States, but because the FHLMC and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
HUD which is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. To accommodate larger-sized loans, and loans that,
for other reasons, do not conform to the agency programs, a number of private
institutions have established their own home-loan origination and securitization
programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages. Mortgage-backed securities generally
increase the quality of R&G Financial's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of R&G Financial.
R&G Financial's securities portfolio includes CMOs. CMOs have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by government agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
The FDIC has issued a statement of policy which states, among other
things, that mortgage derivative products (including CMOs and CMO residuals)
which possess average life or price volatility in excess of a benchmark fixed
rate 30-year mortgage-backed pass-through security are "high-risk mortgage
securities," are not suitable investments for depository institutions, and if
considered "high risk" at purchase must be carried in the institution's trading
account or as assets held for sale, and must be marked to market on a regular
basis. In addition, if a security was not considered "high risk" at purchase but
was later found to be "high risk" based on the tests, it may remain in the
held-to-maturity portfolio as long as the institution has positive intent to
hold the security to maturity and has a documented plan in place to manage the
high risk. At December 31, 2001, the Bank's CMOs, and interest-only securities
and residuals, which had a fair value of $12.1 million, were designated as
"high-risk mortgage securities" and classified as available for sale.
SOURCES OF FUNDS
General. R&G Financial will consider various sources of funds to fund
its investment and lending activities and evaluates the available sources of
funds in order to reduce R&G Financial's overall
-33-
funding costs. Deposits, reverse repurchase agreements, warehouse lines of
credit, notes payable, FHLB advances, subordinated capital notes and sales,
maturities and principal repayments on loans and securities have been the major
sources of funds for use in R&G Financial's lending and investing activities and
for other general business purposes.
Deposits. Deposits are the major sources of the Bank's funds for
lending and other investment purposes. Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments, including passbook, NOW
and Super NOW, checking and commercial checking and certificates of deposit
ranging in terms from 7 days to 10 years. Included among these deposit products
are $874.5 million of certificates of deposit with balances of $100,000 or more,
which amounted to 42.4% of the Bank's total deposits at December 31, 2001.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors.
The Bank attempts to price its deposits in order to promote deposit
growth. The Bank regularly evaluates the internal costs of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not obtain funds through brokers on a regular basis, although at
December 31, 2001 it held $154.2 million of deposits acquired from money desks
in the United States.
The principal methods currently used by the Bank to attract deposit
accounts include offering a wide variety of services and accounts and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including advertising.
-34-
The following table presents the average balance of each deposit type
and the average rate paid one each deposit type of the Bank for the periods
indicated.
December 31,
----------------------------------------------------------------------------------
2001 2000 1999
Average Average Rate Average Average Rate Average Average Rate
Balance Paid Balance Paid Balance Paid
------- ------------ ------- ------------ ------- ------------
(Dollars in Thousands)
Passbook......................... $ 131,729 3.55% $ 113,660 3.73% $ 112,107 3.74%
NOW and Super NOW accounts....... 188,545 3.75% 134,573 3.93 126,300 3.95
Checking......................... 43,621 -- 40,455 -- 41,128 --
Commercial checking(1)........... 165,541 -- 110,937 -- 111,146 --
Certificates of deposit.......... 1,289,193 5.98% 1,106,294 6.43 762,856 5.83
---------- ---- ---------- ----- ---------- ------
Total deposits................ $1,818,629 4.89% $1,505,919 5.36% $ 1,153,537 4.65%
========== ==== ========== ===== =========== ======
- ------------------
(1) Includes $101.9 million, $91.8 million and $92.4 million of escrow funds of
R&G Mortgage at December 31, 2001, 2000 and 1999, respectively, maintained
with the Bank.
The following table sets forth the maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 2001.
Amount
--------------
(In Thousands)
Certificates of deposit maturing:
Three months or less........................................... $237,098
Over three through six months.................................. 220,142
Over six through twelve months................................. 153,226
Over twelve months............................................. 264,029
--------
Total..................................................... $874,495
========
Borrowings. R&G Financial's business requires continuous access to
various funding sources, both short and long-term. R&G Mortgage's primary source
of short-term funds is through sales of securities to investment dealers under
agreements to repurchase ("reverse repurchase agreements"). The Bank also from
time to time utilizes reverse repurchase agreements when they represent a
competitive short-term funding source.
In a reverse repurchase agreement transaction, R&G Financial will
generally sell a mortgage-backed security agreeing to repurchase either the same
or a substantially identical security on a specified later date (generally not
more than 90 days) at a price less than the original sales price. The difference
in the sale price and purchase price is the cost of the use of the proceeds. The
mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which R&G Financial has
agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of R&G Financial's securities in the normal course of
their operations; however, such dealers or third party custodians safe-keep the
securities which are to be specifically repurchased by R&G Financial. Reverse
repurchase agreements represent a competitive cost funding source for R&G
Financial. Nevertheless, R&G Financial is subject to the risk that the lender
may default at maturity and not return the collateral. The amount at risk is the
value of the collateral which exceeds the balance of the borrowing. In order to
minimize this potential risk, R&G Financial only deals with large, established
investment brokerage firms when entering into these transactions.
-35-
Reverse repurchase transactions are accounted for as financing
arrangements rather than as sales of such securities, and the obligations to
repurchase such securities is reflected as a liability in R&G Financial's
Consolidated Financial Statements. As of December 31, 2001, R&G Financial had
$1.4 billion of reverse repurchase agreements outstanding, $323.5 million of
which represented borrowings of R&G Mortgage. At December 31, 2001, the weighted
average interest rate on R&G Financial's reverse repurchase agreements amounted
to 3.47%.
R&G Financial's loan originations are also funded by borrowings under
various warehouse lines of credit provided by various commercial banks
("Warehouse Lines"). At December 31, 2001, R&G Financial was permitted to borrow
under such Warehouse Lines up to $253.4 million, $162.0 million of which was
drawn upon and outstanding as of such date. The Warehouse Lines are used by R&G
Financial to fund loan commitments and must generally be repaid within 180 days
after the loan is closed or when payment from the sale of the funded loan is
received, whichever occurs first. Until such sale closes, the Warehouse Lines
provide that the funded loan is pledged to secure the outstanding borrowings.
The Warehouse Lines are also collateralized by a general assignment of mortgage
payments receivable and an assignment of certain mortgage servicing rights.
Certain of these warehousing lines of credit impose restrictions with respect to
the maintenance of minimum levels of net worth and working capital and
limitations on the amount of indebtedness and dividends which may be declared.
Management of R&G Financial believes that as of December 31, 2001, it was in
compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will limit its operations.
The interest rate on funds borrowed pursuant to the Warehouse Lines is
based on Libor rates plus a negotiated amount. By maintaining compensating
balances, R&G Financial is able to borrow funds under the Warehouse Lines at a
lower interest rate than would otherwise apply. These compensating balances are
comprised of a portion of the escrow accounts maintained by R&G Financial for
principal and interest payments and related tax and insurance payments on loans
its services. At December 31, 2001, the weighted average interest rate being
paid by R&G Financial under its Warehouse Lines amounted to 2.98%.
Although the Bank's primary source of funds is deposits, the Bank also
borrows funds on both a short and long-term basis. The Bank obtains both
fixed-rate and variable-rate short-term and long-term advances from the FHLB of
New York upon the security of certain of its residential first mortgage loans,
securities and cash deposits, provided certain standards related to the
credit-worthiness of the Bank have been met. FHLB of New York advances are
available for general business purposes to expand lending and investing
activities. Advances from the FHLB of New York are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At December 31, 2001, the Bank had access to $1.2 billion in
advances from the FHLB of New York, and had 14 FHLB of New York advances
aggregating $464.1 million outstanding as of such date, which mature at various
dates commencing in April 2, 2002 through March 2, 2011 and have a weighted
average interest rate of 4.87%. At December 31, 2001, the Bank had pledged
specific collateral aggregating $643.9 million to the FHLB of New York under its
advances program and to secure the letters of credit. The Bank maintains
collateral with the FHLB of New York in excess of applicable requirements in
order to facilitate any necessary additional borrowings by the Bank in the
future.
-36-
The following table sets forth certain information regarding the
short-term borrowings of R&G Financial at or for the dates indicated.
At or For the Year Ended
December 31,
--------------------------------------------
2001 2000 1999
---------- -------- --------
(Dollars in Thousands)
R&G Mortgage:
Securities sold under agreements to repurchase:
Average balance outstanding ....................................... $ 425,189 $450,443 $365,177
Maximum amount outstanding at any month-end during the
period .......................................................... 472,782 499,626 493,527
Balance outstanding at end of period .............................. 402,835 494,353 493,527
Average interest rate during the period ........................... 5.24% 6.69% 5.52%
Average interest rate at end of period ............................ 3.47% 6.92% 6.15%
Notes Payable:
Average balance outstanding ....................................... $ 181,767 $117,085 $127,565
Maximum amount outstanding at any month-end during the
period .......................................................... 238,475 143,114 154,922
Balance outstanding at end of period .............................. 180,565 85,030 56,907
Average interest rate during the period ........................... 4.38% 6.41% 6.67%
Average interest rate at end of period ............................ 3.03% 8.06% 6.89%
The Bank:
FHLB of New York advances:
Average balance outstanding ....................................... $ 444,422 $438,276 $222,575
Maximum amount outstanding at any month-end during the
period .......................................................... 523,000 510,500 384,000
Balance outstanding at end of period .............................. 464,125 505,000 384,000
Average interest rate during the period ........................... 5.36% 6.34% 5.31%
Average interest rate at end of period ............................ 4.87% 6.42% 5.75%
Securities sold under agreements to repurchase:
Average balance outstanding ....................................... $ 714,922 $392,755 $187,857
Maximum amount outstanding at any month-end during the
period .......................................................... 1,073,484 430,852 327,009
Balance outstanding at end of period .............................. 1,073,484 430,852 327,009
Average interest rate during the period ........................... 4.41% 6.47% 5.77%
Average interest rate at end of period ............................ 3.50% 6.60% 5.73%
Notes Payable:
Average balance outstanding ....................................... $ 51,695 $ 69,663 $ 84,463
Maximum amount outstanding at any month-end
during the period ............................................... 67,410 76,263 84,100
Balance outstanding at end of period .............................. 27,270 53,828 75,800
Average interest rate during the period ........................... 5.01% 6.03% 6.53%
Average interest rate at end of period ............................ 3.11% 6.75% 6.00%
TRUST AND INVESTMENT SERVICES
R&G Financial also provides trust and investment services through the
Bank's Trust Department. Services offered include custodial services, the
administration of IRA accounts and the sale to investors of mortgage-backed
securities guaranteed by GNMA. As of December 31, 2001, the Bank's Trust
Department administered trust accounts with aggregate assets of $64.5 million as
of such date. In
-37-
addition, during the year ended December 31, 2001, the Bank's Trust Department
sold $104.5 million of GNMA mortgage-backed securities. The Bank receives fees
dependent upon the level and type of service provided. The administration of the
Bank's Trust Department is performed by the Trust Committee of the Board of
Directors of the Bank.
BROKER-DEALER SERVICES
Beginning in the first quarter of 2002, R&G Financial's wholly-owned
licensed broker-dealer subsidiary, R-G Investments Corporation commenced
operations.
PERSONNEL
As of December 31, 2001, R&G Financial (on a consolidated basis) had
1,522 full-time employees and 83 part-time employees. The employees are not
represented by a collective bargaining agreement and R&G Financial believes that
it has good relations with its employees.
REGULATION
Set forth below is a brief description of certain laws and regulations
which, together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which R&G Financial and its subsidiary companies are regulated. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.
R&G FINANCIAL
General. R&G Financial is a registered financial holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). R&G
Financial, as a financial holding company, is subject to regulation and
supervision by the Federal Reserve Board and the OCFI. R&G Financial is required
to file annually a report of its operations with, and is subject to examination
by, the Federal Reserve Board and the OCFI.
BHCA Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. No
approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, such a R&G Mortgage, finance
company, credit card company, factoring company, trust company or
-38-
savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial
advisor; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The Federal Reserve Board also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
Limitations on Transactions with Affiliates. Transactions between
financial institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a financial institution is any company
or entity which controls, is controlled by or is under common control with the
financial institution. In a holding company context, the parent holding company
of a financial institution (such as R&G Financial) and any companies which are
controlled by such parent holding company are affiliates of the financial
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
financial institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no financial
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the financial institution.
The Gramm-Leach-Bliley Act, described under "- Recent Legislation"
below, amended several provisions of Sections 23A and 23B of the Federal Reserve
Act. The amendments provide that financial subsidiaries of banks are treated as
affiliates for purposes of Sections 23A and 23B of the Federal Reserve Act, but
that (i) the 10% capital limit on transactions between the bank and such
financial subsidiary as an affiliate is not applicable, and (ii) the investment
by the bank in the financial subsidiary does not include retained earnings in
the financial subsidiary. Certain anti-evasion provisions have been included
that relate to the relationship between any financial subsidiary of a bank and
sister companies of the bank: (1) any purchase of, or investment in, the
securities of a financial subsidiary by any affiliate of the bank is considered
a purchase or investment by the bank; or (2) if the Federal Reserve Board
determines that such treatment is necessary, any loan made by an affiliate of
the bank to the financial subsidiary is to be considered a loan made by the
bank.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institutions. Section 22(h) also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers.
-39-
R&G Mortgage and the Bank are parties to various agreements which
address how each would conduct itself in specifically delineated affiliated
transactions (the "Affiliated Transaction Agreements"). The Affiliated
Transaction Agreements include a Master Purchase, Servicing and Collections
Agreement (the "Master Purchase Agreement"), a Master Custodian Agreement, a
Master Production Agreement, a Securitization Agreement and a Data Processing
Computer Service Agreement. The terms of these agreements were negotiated at
arm's length on the basis that they are substantially the same, or at least as
favorable to the Bank, as those prevailing for comparable transactions with, or
involving, other nonaffiliated companies.
Pursuant to the Master Production Agreement, the Bank, on a monthly
basis, determines its loan production targets and goals (the "Loan Production
Goals") and R&G Mortgage assists the Bank to reach its Loan Production Goals by,
among other things: (i) advertising, promoting and marketing to the general
public; (ii) interviewing prospective borrowers and initial processing of loan
applications, consistent with the Bank's underwriting guidelines and Loan
Production Goals previously established; and (iii) providing personnel and
facilities with respect to the execution of any loan agreement approved by the
Bank. In exchange for these services, the Bank remits to R&G Mortgage a
percentage of the processing or originating fees charged to the borrowers under
loan agreements, as set forth in the agreements. See "-Lending Activities of the
Bank - Originations, Purchases and Sales of Loans."
Until January 1, 2001, the Master Purchase Agreement provided for the
sale by the Bank to R&G Mortgage of the servicing rights to all first and second
mortgage loans secured by residential properties which become part of the Bank's
loan portfolio once the related loans were sold. Effective January 1, 2001, the
Bank retains servicing rights on loans sold or securitized into mortgage backed
securities. R&G Mortgage also services all other loans held in the Bank's loan
portfolio (including single-family residential loans retained by the Bank and
certain commercial real estate loans), although R&G Mortgage does not actually
acquire such servicing rights. The Master Purchase Agreement further provides
that R&G Mortgage exclusively will service such loans and that the Bank will
process payments of such loans, all according to a fee schedule. See " -
Mortgage Banking Activities - Loan Originations, Purchases and Sales of Loans."
Under the Securitization Agreement, R&G Mortgage renders securitization
services with respect to the pooling of some of the Bank's mortgage loans into
mortgage-backed securities. With respect to securitization services rendered,
the Bank pays a securitization fee of 25 basis points. The Master Custodian
Agreement provides that the Bank shall be the custodial agent for R&G Mortgage
of certain documentation related to the issuance by R&G Mortgage of GNMA, FNMA
or FHLMC mortgage-backed certificates. In consideration of these services, the
Bank receives a fee for each mortgage note included in a mortgage-backed
certificate per year for which it acts as custodian, as set forth in the
agreement. See "- Mortgage Banking Activities - Loan Originations, Purchases and
Sales of Loans."
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
-40-
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies are expected to maintain Tier I leverage capital ratios of at least
4.0% to 5.0% or more, depending on their overall condition.
R&G Financial is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
Financial Support of Affiliated Institutions. Under Federal Reserve
Board policy, R&G Financial will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. In addition, any capital loans by a bank holding company to a
subsidiary bank is subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Recent Legislation. The Gramm-Leach-Bliley Act, signed into law on
November 12, 1999, revises and expands the existing provisions of the BHCA by
including a new section that permits a bank holding company to elect to become a
financial holding company, which may engage in a full range of financial
activities. The qualification requirements and the process for a bank holding
company that elects to be treated as a financial holding company requires that
all the subsidiary banks controlled by the bank holding company at the time of
election to become a financial holding company must be and remain at all times
well capitalized and well managed. R&G Financial applied for and became a
financial holding company in 2000.
Financial holding companies may engage, directly or indirectly, in any
activity that is determined to be (i) financial in nature, (ii) incidental to
such financial activity, or (iii) complementary to a financial activity and
which does not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. The Gramm-Leach-Bliley Act
specifically provides that the following activities have been determined to be
"financial in nature": (a) lending, trust and other banking activities; (b)
insurance activities; (c) financial or economic advice or services; (d) pooled
investments; (e) securities underwriting and dealing; (f) existing bank holding
company domestic activities; (g) existing bank holding company foreign
activities and (h) merchant banking activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal
Reserve Board the authority, by regulation or order, to expand the list of
"financial" or "incidental" activities, but requires consultation with the U.S.
Treasury, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is "complementary" to a financial
activity and does not
-41-
"pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally."
THE BANK
General. The Bank is incorporated under the Puerto Rico Banking Act of
1933, as amended (the "Puerto Rico Banking Law") and is subject to extensive
regulation and examination by the OCFI, the FDIC and certain requirements
established by the Federal Reserve Board. The federal and Puerto Rico laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. There are periodic examinations by the OCFI and
the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OCFI, the FDIC or the U.S. Congress or Puerto Rico
legislature could have a material adverse impact on R&G Financial, R&G Mortgage,
the Bank and their operations.
FDIC Insurance Premiums. The Bank currently pays deposit insurance
premiums to the FDIC based on a risk-based assessment system established by the
FDIC for all Savings Association Insurance Fund ("SAIF") and Bank Insurance Fund
("BIF") member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which is based solely on the level on an
institution's capital: "well capitalized," "adequately capitalized" and
"undercapitalized". These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .0% for well capitalized, healthy
institutions to .27% for undercapitalized institutions with substantial
supervisory concerns. The Bank was classified as a "well-capitalized"
institution as of December 31, 2001.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively increases the minimum Tier
I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing
-42-
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier I capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At December 31,
2001, the Bank met each of its capital requirements.
The FDIC and the other federal banking agencies have published a joint
policy statement that describes the process the banking agencies will use to
measure and assess the exposure of a bank's net economic value to changes in
interest rates. The FDIC and other federal banking agencies have also adopted a
joint policy statement on interest rate risk policy. Because market conditions,
bank structure, and bank activities vary, the agencies concluded that each bank
needs to develop its own interest rate risk management program tailored to its
needs and circumstances. The policy statement describes prudent principles and
practices that are fundamental to sound interest rate risk management, including
appropriate board and senior management oversight and a comprehensive risk
management process that effectively identifies, measures, monitors and controls
risks.
Activities and Investments. The activities and equity investments of
FDIC-insured, state-chartered banks (which under the Federal Deposit Insurance
Act includes banking institutions incorporated under the laws of Puerto Rico)
are generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
-43-
Puerto Rico Banking Law. As a commercial bank organized under the laws
of the Commonwealth, the Bank is subject to supervision, examination and
regulation by the OCFI pursuant to the Puerto Rico Banking Law.
The Puerto Rico Banking Law requires that at least ten percent (10%) of
the yearly net income of the Bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
the sum of the Bank's paid-in common and preferred stock capital. As of December
31, 2001, the Bank had credited $11.6 million to such reserve fund.
The Puerto Rico Banking Law also provides that when the expenditures of
a bank are greater than the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the bank, and the balance,
if any, shall be charged against the reserve fund, as a reduction thereof. If
there is no reserve fund sufficient to cover such balance in whole or in part,
the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original
amount and the reserve fund to 20% of the original capital. In addition, every
bank is required by the Puerto Rico Banking Law to maintain a legal reserve
which shall not be less than 20% of its demand liabilities, except government
deposits (federal, state and municipal) which are secured by actual collateral.
The reserve is required to be made up of any of the following instruments or any
combination of them: (i) legal tender of the United States; (ii) checks on banks
or trust companies located in any part of Puerto Rico, to be presented for
collection during the day following that on which they are received; (iii) money
deposited in other banks provided said deposits are authorized by the
Commissioner, subject to immediate collection; and (iv) federal funds sold and
securities purchased under agreements to resell, provided such funds are repaid
on or prior to the close of the next business day.
Under the Puerto Rico Banking Law, the Bank is permitted to make loans
to any one person, firm, partnership or corporation, up to an aggregate amount
of fifteen percent (15%) of the paid-in capital and reserve fund of the Bank,
plus 15% of 50% of undistributed earnings for "well capitalized" institutions.
As of December 31, 2001, the legal lending limit for the Bank under these
provisions was approximately $29.9 million. If such loans are secured by
collateral worth at least twenty-five percent (25%) more than the amount of the
loan, the aggregate maximum amount may reach one-third of the paid-in capital of
the Bank, plus its reserve fund. The legal lending limit for the Bank for loans
secured by collateral with at least 25% more than the amount of the loan was
approximately $65.9 million. The Bank's maximum extension of credit to any one
borrower was $35.9 million at December 31, 2001, which is fully secured with
collateral with a "loan to value" ratio of less than 80%. There are no
restrictions on the amount of loans to subsidiaries of banks or loans that are
wholly secured by bonds, securities and other evidences of indebtedness of the
United States or the Commonwealth, or by current debt bonds, not in default, of
municipalities or instrumentalities of the Commonwealth. Loans to non-banking
affiliates of the Bank, are subject however to the lending limitations set forth
in Sections 23A and 23B of the Federal Reserve Act. The Puerto Rico Banking Law
also authorizes the Bank to conduct certain financial and related activities
directly or through subsidiaries. The Puerto Rico Banking Law also prohibits
Puerto Rico banks from making loans secured by their own stock, and from
purchasing their own stock, unless such purchase is necessary to prevent losses
because of a debt previously contracted in good faith. The stock so purchased by
the bank must be sold in a private or public sale within one year from the date
of purchase. The Bank may repurchase its own stock for the purpose of reducing
its capital, subject to the approval of the OCFI.
The rate of interest that the Bank may charge on mortgage and other
types of loans to individuals in Puerto Rico is subject to Puerto Rico's usury
laws. Such laws are administered by the Financing Board, which consists of the
Commissioner of Financial Institutions, the President of the Government
Development Bank, the Chairman of the Planning Board and the Puerto Rico
Secretaries of Commerce, Treasury and Consumer Affairs and three representatives
from the private sector. The Financing Board promulgates regulations which
specify maximum rates on various types of loans to individuals. The Financing
Board eliminated the regulations that set forth the maximum interest rates that
could be
-44-
charged on consumer loans, mortgage loans and commercial loans. The origination
charges on residential mortgage loans may not exceed 6% of the loan amount.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal and Puerto Rico banking
regulators. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders and
to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
MORTGAGE BANKING SUBSIDIARIES
The mortgage banking business conducted by R&G Mortgage, The Mortgage
Store and Continental are subject to the rules and regulations of FHA, VA, FNMA,
FHLMC and GNMA with respect to originating, processing, selling and servicing
mortgage loans and the issuance and sale of mortgage-backed securities. Those
rules and regulations, among other things, prohibit discrimination and establish
underwriting guidelines which include provisions for inspections and appraisals,
require credit reports on prospective borrowers and fix maximum loan amounts
and, with respect to VA loans, fix maximum interest rates. Moreover, lenders are
required annually to submit to FNMA, FHA, FHLMC, GNMA and VA audited financial
statements, and each regulatory entity has its own financial requirements. The
affairs of these subsidiaries are also subject to supervision and examination by
FNMA, FHA, FHLMC, GNMA, HUD and VA at all times to assure compliance with the
applicable regulations, policies and procedures. Mortgage origination activities
are subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder.
Mortgage loan production activities are subject to the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder. The
Truth-in-Lending Act contains disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The Truth-in-Lending Act provides consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.
The mortgage subsidiaries are required to comply with the Equal Credit
Opportunity Act of 1974, as amended ("ECOA"), and Regulation B promulgated
thereunder, which prohibit creditors from discriminating against applicants on
the basis of race, color, sex, age or marital status, and restrict creditors
from obtaining certain types of information from loan applicants. It also
requires certain disclosures by lenders regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In instances
where the applicant is denied credit or the rate or charge for loan increases as
a result of information obtained from a consumer credit agency, another statute,
The Fair Credit Reporting Act of 1970, as amended, requires the lenders to
supply the applicant with the name and address of the reporting agency.
The Federal Real Estate Settlement Procedures Act ("RESPA") imposes,
among other things, limits on the amount of funds a borrower can be required to
deposit with the mortgage subsidiaries in any escrow account for the payment of
taxes, insurance premiums or other charges.
R&G Mortgage and The Mortgage Store are also subject to regulation by
the OCFI, with respect to, among other things, licensing requirements and the
record-keeping, examination and reporting requirements of the Puerto Rico
Mortgage Banking Institutions Law (the "Mortgage Banking Law"). R&G Mortgage and
The Mortgage Store are licensed by the OCFI as a mortgage banking institution in
-45-
Puerto Rico. Such authorization to act as a mortgage banking institution must be
renewed as of January 1 of each year. In the past, neither R&G Mortgage nor The
Mortgage Store has not had any difficulty in renewing its authorization to act
as a mortgage banking institution, and management is unaware of any existing
practices, conditions or violations which would result in either company being
unable to receive such authorization in the future.
The Mortgage Banking Law requires the prior approval of the OCFI for
the acquisition of control of any mortgage banking institution licensed under
the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term
"control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to the
Mortgage Banking Law, upon receipt of notice of a proposed transaction that may
result in change of control, the OCFI is obligated to make such inquires as it
deems necessary to review the transaction. Under the Mortgage Banking Law, the
determination of the OCFI whether or not to authorize a proposed change of
control is final and non-appealable.
As is the case with the Bank, the rate of interest that R&G Mortgage
and The Mortgage Store may charge on mortgage loans to individuals is subject to
Puerto Rico's usury laws. Such laws are administered by the Financing Board
which promulgates regulations that specify maximum rates on various types of
loans to individuals. Regulation 26-A promulgated by the Financing Board fixes
the maximum rate (which is adjusted on a weekly basis) which may be charged on
residential first mortgage loans.
In 1996, the Financing Board eliminated the regulations that set
forth the maximum interest rates that could be charged on non-federal
government guaranteed loans.
-46-
ITEM 2:
PROPERTIES
The Company's principal executive office is located at 280 Jesus T.
Pioero Avenue, Hato Ray, San Juan, Puerto Rico 00918. At December 31, 2001, we
operated through our subsidiaries a total of 65 offices, mostly through leased
facilities. All of our subsidiaries except Continental Capital Corp., conduct
business in Puerto Rico. R-G Premier Bank of Puerto Rico operates from 25
offices, R&G Mortgage operates from 29 offices, The Mortgage Store of Puerto
Rico, Inc. operates from 7 offices, Home & Property Insurance Corporation
operates from 1 office, R-G Investments Corporation operates from 3 offices and
Continental Capital Corp. operates from 4 offices located in the States of New
York and North Carolina.
ITEM 3: LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages
82 and 83 of the Registrant's 2001 Annual Report.
ITEM 6: SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
31 to 32 of the Registrant's 2001 Annual Report.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
33 to 46 of the Registrant's 2001 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
40 to 44 of the Registrant's 2001 Annual Report.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
47 to 80 of the Registrant's 2001 Annual Report.
-47-
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
2 to 5 and 6 of the Registrant's Proxy Statement dated March 31, 2002 ("Proxy
Statement").
ITEM 11: EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
9 to 10 and 11 to 12 of the Registrant's Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
7 to 8 of the Registrant's Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from pages
12 to 13 of the Registrant's Proxy Statement.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of December
31, 2001 and 2000.
Consolidated Statements of Income for the Years Ended December
31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
-48-
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
No. Description
2.1 Amended and Restated Agreement and Plan of Merger by and
between R&G Financial Corporation, the Bank and R-G Interim
Premiere Bank, dated as of September 27, 1996(1)
2.2 Agreement and Plan of Reorganization among R&G Financial
Corporation , R&G Holdings Corporation, The Crown Group, Inc.
and Crown Bank, a Federal Savings Bank dated as of
December 19, 2001(2)
3.1.0 Certificate of Incorporation of R&G Financial Corporation (3)
3.1.1 Certificate of Amendment to Certificate of Incorporation of
R&G Financial Corporation (2)
3.1.2 Amended and Restated Certificate of Incorporation of R&G
Financial Corporation (4)
3.1.3 Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (5)
3.1.4 Certificate of Resolutions designating the terms of the
Series A Preferred Stock (6)
3.1.5 Certificate of Resolutions designating the terms of the
Series B Preferred Stock (7)
3.1.6 Certificate of Resolutions designating the terms of the
Series C Preferred Stock (12)
3.1.7 Certificate of Resolutions designating the terms of the
Series D Preferred Stock (13)
3.2 Bylaws of R&G Financial Corporation (3)
4.0 Specimen of Stock Certificate of R&G Financial Corporation (3)
4.1 Form of Series A Preferred Stock Certificate of R&G Financial
Corporation (9)
4.2 Form of Series B Preferred Stock Certificate of R&G Financial
Corporation (10)
4.3 Form of Series C Preferred Stock Certificate of R&G Financial
Corporation (11)
4.4 Form of Series D Preferred Stock Certificate of R&G Financial
Corporation (14)
10.2 Master Custodian Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on June 27, 1996(3)
10.3 Master Production Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on August 30, 1991 and
March 31, 1995(3)
10.4 Data Processing Computer Service Agreement between R&G
Mortgage and R-G Premier Bank dated December 1, 1994(3)
10.5 Securitization Agreement by and between R&G Mortgage and the
Bank, dated as of July 1, 1995(3)
10.6 R&G Financial Corporation Stock Option Plan(3)(*)
13.0 2001 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 1
Business" for the required information
(1) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 333-13199) filed by the Registrant with the
Securities and Exchange Commission ("SEC") on October 1, 1996.
(2) Incorporated by reference from the Registrant's Current Report of
Form 8-K filed with the SEC on December 20, 2001.
(3) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-06245) filed by the Registrant with the SEC on
June 18, 1996, as amended.
(4) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on November 19, 1999.
(5) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on June 12, 2001.
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(6) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on August 31, 1998
(7) Incorporated by reference from the Registrants' Form 10-K filed with
the SEC on April 13, 2000.
(8) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No. 333-55834),
filed with the SEC on March 7, 2001.
(9) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-60923), as amended, filed with the
SEC on August 7, 1998.
(10) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-90463), filed with the SEC on
November 5, 1999.
(11) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-55834), filed with the SEC on February 16,
2001.
(12) Incorporated by reference from the Registrants' Form 10-K filed with
the SEC on April 14, 2001.
(13) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on March 7, 2002.
(14) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-81214), filed with the SEC on January 22,
2002.
(*) Management contract or compensatory plan or arrangement.
(3)(b) Reports on Form 8-K.
The Registrant filed a Form 8-K on December 19, 2001 with
respect to its execution of an Agreement and Plan of
Reorganization with The Crown Group, Inc. and its wholly owned
subsidiary, Crown Bank, a Federal Savings Bank.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
March 28, 2002 By: /s/ Victor J. Galan
--------------------------------------------
Victor J. Galan
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Victor J. Galan March 28, 2002
- --------------------------------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
/s/ Ramon Prats March 28, 2002
- --------------------------------------------
Ramon Prats
President and Director
/s/ Joseph R. Sandoval March 28, 2002
- --------------------------------------------
Joseph R. Sandoval
Senior Vice President and Chief Financial
Officer (principal financial and
accounting officer)
/s/ Ana M. Armendariz March 28, 2002
- --------------------------------------------
Ana M. Armendariz
Director and Treasurer
/s/ Enrique Umpierre-Suarez March 28, 2002
- --------------------------------------------
Enrique Umpierre-Suarez
Director and Secretary
/s/ Victor L. Galan Fundora March 28, 2002
- --------------------------------------------
Victor J. Galan Fundora
Director
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/s/ Pedro Ramirez March 28, 2002
- --------------------------------------------
Pedro Ramirez
Director
/s/ Laureno Carus Abarca March 28, 2002
- --------------------------------------------
Laureno Carus Abarca
Director
/s/ Eduardo McCormack March 28, 2002
- --------------------------------------------
Eduardo McCormack
Director
/s/ Gilberto Rivera-Arrega March 28, 2002
- --------------------------------------------
Gilberto Rivera-Arreaga
Director
/s/ Benigno R. Fernandez March 28, 2002
- --------------------------------------------
Benigno R. Fernandez
Director
/s/ Ileana M. Colon-Carlo March 28, 2002
- --------------------------------------------
Ileana M. Colon-Carlo
Director
/s/ Roberto Gorbea March 28, 2002
- --------------------------------------------
Roberto Gorbea
Director
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