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, 1999
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. [X]
As of March 28, 2000, the aggregate value of the 9,853,147 shares of Class B
Common Stock of the Registrant issued and outstanding on such date, which
excludes 365,304 shares held by all directors and officers of the Registrant as
a group, was approximately $91.1 million. This figure is based on the last known
trade price of $9.25 per share of the Registrant's Class B Common Stock on March
28, 2000.
Number of shares of Class B Common Stock outstanding as of March 28, 2000:
10,218,451
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, 1999 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.
<PAGE>
PART I
Item 1. Business
General
R&G Financial Corporation (the "Company" or "R&G Financial") is the
holding company for R&G Mortgage Corp., a Puerto Rico mortgage banking company
("R&G Mortgage") and R-G Premier Bank of Puerto Rico, a Puerto Rico-chartered
commercial bank (the "Bank"). The Company was organized under Puerto Rico law in
March 1996. R&G Mortgage was organized in 1972 and the predecessor of the Bank
was organized in 1983. In July 1996, the Company acquired the 88.1% ownership
interest in the common stock of the Bank and the 100% ownership interest in the
common stock of R&G Mortgage held by the Company's Chairman of the Board and
Chief Executive Officer, Mr. Victor J. Galan, in exchange for shares of Class A
common stock of the Company. In August 1996, the Company conducted an
underwritten public offering of Class B common stock. In December 1996, the
Company acquired the remaining 11.9% ownership interest in the common stock of
the Bank. At December 31, 1999, the Company had total consolidated assets of
$2.9 billion, total consolidated borrowings of $1.3 billion, total consolidated
deposits of $1.3 billion, and total consolidated stockholders' equity of $269.5
million.
In October 1999, the Company entered the United States market with the
acquisition by the Bank of Continental Capital Corp. ("Continental"), a Long
Island, New York-based mortgage banking company. With the acquisition of
Continental, the Company plans to expand its operations in the United States,
concentrating initially in New York and then into other markets to the extent
that the Company is presented with appropriate expansion opportunities. In
addition to considering other mortgage banking companies, the Company will also
seek to acquire a financial institution in the United States to take advantage
of the same synergies between its operations as it has experienced in Puerto
Rico.
R&G Financial competes for business in Puerto Rico by providing a wide
range of financial services to residents of all of Puerto Rico's major cities
through branch offices and mortgage banking facilities at 23 locations. The
operations of both R&G Mortgage and the Bank have expanded substantially during
the 1990's, due in large part to R&G Mortgage's emergence as a leading
originator of loans secured by single-family residential properties in Puerto
Rico. During the year ended December 31, 1999, R&G Mortgage originated
approximately 30% of all single-family residential loans originated in Puerto
Rico, which has resulted in significant growth in its servicing portfolio as
well as facilitated rapid expansion of the Bank's franchise and operations. R&G
Financial's servicing portfolio has increased 393.9% since December 31, 1991
and, at December 31, 1999, R&G Financial serviced approximately 107,302 accounts
with an aggregate loan balance of $6.2 billion. The Bank's asset size, which
amounted to $2.3 billion at December 31, 1999, has increased by $2.26 billion
since R&G Mortgage became affiliated with the Bank in February 1990, while the
branch office network had increased from two to 22 offices.
R&G Financial has generally sought to achieve long-term financial
strength and profitability by increasing the amount and stability of its net
interest income and non-interest income. R&G
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Financial has sought to implement this strategy by (i) establishing and
emphasizing the growth of its mortgage banking activities, including growing its
loan servicing operation; (ii) expanding its retail banking franchise in order
to achieve increased market presence and to increase core deposits; (iii)
enhancing R&G Financial's net interest income by increasing R&G Financial's
loans held for investment, particularly single-family residential loans; (iv)
developing new business relationships through an increased emphasis on
commercial real estate and commercial business lending; (v) diversifying R&G
Financial's retail products and services, including an increase in consumer loan
originations (such as credit cards); (vi) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services; and (vii) controlled growth and the pursuit of a variety of
acquisition opportunities when appropriate.
The Company is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") and is subject
to various reporting and other requirements of the Securities and Exchange
Commission ("SEC").
R&G Mortgage. R&G Mortgage is engaged primarily in the business of
originating first and second mortgage loans on single family residential
properties secured by real estate which are either insured by the Federal
Housing Administration ("FHA") or guaranteed by the Veterans Administration
("VA"). To a lesser extent, R&G Mortgage is also engaged in the origination of
subprime--credit quality--residential mortgage loans through a wholly owned
subsidiary ("Champion Mortgage Corporation") which commenced operations in
October 1997. Approximately 20% of loan originations made by Champion Mortgage
consist of subprime residential mortgage loans. Pursuant to agreements entered
into between R&G Mortgage and the Bank, non-conforming conventional
single-family residential loans and consumer loans secured by real estate are
also originated by R&G Mortgage for portfolio retention by the Bank. The Bank
retains the non-conforming conventional single-family residential loans because
these loans generally do not satisfy resale guidelines of purchasers in the
secondary mortgage market, primarily because of size or other underwriting
technicalities at the time of origination. Jumbo loans may be packaged into
collateralized mortgage obligations ("CMOs") and sold while loans with
underwriting technicalities may be cured through payment experience and
subsequently sold. During the years ended December 31, 1999, 1998 and 1997, R&G
Mortgage originated a total of $1.0 billion, $914.1 million and $598.2 million
of loans, respectively. These aggregate originations include loans originated by
R&G Mortgage directly for the Bank of $437.1 million, $450.6 million and $285.8
million during such respective periods, or 43.4%, 49.3% and 47.8%, respectively,
of total originations.
R&G Mortgage pools FHA/VA loans into mortgage-backed securities which
are guaranteed by the Government National Mortgage Association ("GNMA"), which
securities are sold to securities broker dealers and other investors.
Conventional loans may either be sold directly to agencies such as the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") or to private investors, or which may be pooled into FNMA-
or FHLMC-backed mortgage-backed securities which are generally sold to
investors. During the years ended December 31, 1999, 1998 and 1997, R&G Mortgage
sold $671.2 million, $493.0 million and
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$246.1 million of loans, respectively, which includes loans securitized and sold
but does not include loans originated for the Bank or loans securitized for
other institutions. R&G Mortgage generally retains the servicing function with
respect to the loans which have been securitized and sold. R&G Mortgage is
subject to regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, the
Department of Housing and Urban Development ("HUD") and the Office of the
Commissioner of Financial Institutions ("OCFI") of Puerto Rico.
R&G Premier Bank. The Bank's principal business consists of attracting
deposits from the general public and tax-advantaged funds from eligible Puerto
Rico corporations and using such deposits, together with funds obtained from
other sources, to originate (through R&G Mortgage) and purchase loans secured
primarily by residential real estate in Puerto Rico, and to purchase
mortgage-backed and other securities. To a lesser extent but with increasing
emphasis over the past few years, the Bank also originates consumer loans,
commercial business loans and loans secured by commercial real estate. Such
loans offer higher yields, are generally for shorter terms and facilitate the
Bank's provision of a full range of financial services to its customers. The
Bank also offers trust services through its Trust Department. Total loan
originations by the Bank during the years ended December 31, 1999, 1998 and 1997
amounted to $382.0 million, $129.1 million and $89.0 million, respectively. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is regulated and examined by the FDIC as its primary federal
regulatory agency as well as by the OCFI.
Mortgage Banking Activities
Loan Originations, Purchases and Sales. During the years ended December
31, 1999, 1998 and 1997, R&G Financial originated a total of $1.1 billion,
$914.1 million and $598.2 million of residential mortgage loans, respectively.
These aggregate originations include loans originated by R&G Mortgage directly
for the Bank of $437.1 million, $450.6 million and $285.8 million during the
years ended December 31, 1999, 1998 and 1997, respectively of such originations,
or 43%, 49% and 48%, 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, 1999, 1998 and 1997, R&G Financial originated $288.8 million,
$255.6 million and $280.1 million, respectively, of FHA/VA loans, which
represented 27.3%, 28.0% and 46.8%, 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, 1999, 1998 and 1997, R&G Financial originated $738.6 million,
$610.4 million and $265.9 million, respectively, of conventional single-family
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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 Champion Mortgage are held by Champion
Mortgage 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, 1999, 1998 and 1997,
non-conforming conventional loans represented approximately 38%, 44% and 39%,
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, 1999, 1998 and 1997, 86.6%, 85.5% and
77.5% of loans originated by R&G Mortgage on behalf of the Bank consisted of
single-family residential loans during such respective periods. R&G Mortgage
originates single-family residential, construction and commercial real estate
loans on behalf of the Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and the Bank. See "- Lending Activities of the
Bank - Origination, Purchase and Sale of Loans."
While R&G Financial makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all of such loans consist of
fixed-rate mortgages. The average loan size for FHA/VA mortgage loans and
conventional mortgage loans is approximately $87,000 and $68,000, respectively.
R&G Financial also offers second mortgage loans up to $125,000 with a
maximum term of 15 years. The maximum loan-to-appraised value ratio on second
mortgage loans permitted by R&G Financial is generally 75% (including the amount
of any first mortgage). In addition, R&G Financial also offers real estate
secured consumer loans up to $40,000 with a maximum term of 10 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. At December 31, 1999, R&G Mortgage employed 80
loan originators who are compensated in part on a commission basis. Loan
origination activities of the Company in the U.S. (through Continental) are
conducted primarily through loan solicitors.
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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.
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 $307.8 million,
$207.1 million and $158.5 million of loans from third parties during the years
ended December 31, 1999, 1998 and 1997, respectively.
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The following table sets forth loan originations, purchases and sales
from its mortgage banking business by R&G Financial for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans Originated For the Bank:
Conventional loans(1):
Number of loans.................................. 5,067 4,918 3,390
Volume of loans.................................. $404,886 $402,447 $233,488
FHA/VA loans:
Number of loans.................................. -- -- --
Volume of loans.................................. -- -- --
Consumer loans(2):
Number of loans.................................. 1,499 2,268 2,318
Volume of loans.................................. 32,219 $48,155 $52,287
Total loans:
Number of loans.................................. 6,566 7,186 5,708
Volume of loans.................................. $437,105 $450,602 $285,775
Percent of total volume.......................... 32% 40% 38%
For Third Parties:
Conventional loans(1):
Number of loans.................................. 4,882 2,989 444
Volume of loans.................................. $333,673 $207,937 $32,419
FHA/VA loans:
Number of loans.................................. 3,315 3,298 4,107
Volume of loans.................................. $288,752 $255,601 $280,053
Total loans:
Number of loans.................................. 8,197 6,287 4,551
Volume of loans.................................. $622,425 $463,538 $312,472
Percent of total volume.......................... 46% 41% 41%
---------- ----------- ---------
Total loan originations........................ $1,059,530 $914,140 $598,247
========= ======= =======
Loans Purchased For R&G Mortgage:
Number of loans...................................... 3,418 2,506 2,052
Volume of loans(3)................................. $307,819 $207,070 $158,456
Percent of total volume............................ 22% 19% 21%
Total loan originations and purchases............ $1,367,349 $1,121,210 $756,703
========= ========= =======
GNMA Pools Purchased for R&G Mortgage:
Volume of loans $22,487 $ -- $ 51,537
</TABLE>
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<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans.................................. 6,511 2,513 429
Volume of loans.................................. $470,443 $194,909 $39,495
FHA/VA loans:
Number of loans.................................. 4,255 4,413 2,775
Volume of loans.................................. $373,730 $298,108 $206,643
Total loans:
Number of loans.................................. 9,434 6,926 3,204
Volume of loans(3)............................... $844,173 $493,017 $246,138
Percent of total volume.......................... 62% 44% 33%
--------- ----------- --------
Adjustments:
Loans originated for the Bank...................... ($437,105) ($450,602) $(285,775)
Loans amortization................................. ( 38,863) (1,479) (5,086)
--------- ----------- --------
Increase in loans held for sale...................... $ 69,695 $ 176,112 $271,241
======== ======== =======
Average Initial Loan Origination Balance:
The Bank:
Conventional loans(1)............................ $80 $82 $ 69
FHA/VA loans..................................... -- -- --
Third Parties:
Conventional loans(1)............................ $68 $70 $ 73
FHA/VA loans..................................... 87 78 68
Total
Conventional loans(1)............................ $74 $77 $69
FHA/VA loans..................................... 87 78 68
Refinancings(5):
The Bank........................................... 72% 74% 70%
Third Parties...................................... 49% 44% 31%
</TABLE>
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(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes $123.2 million of loans purchased from another institution,
and securitized and sold to the same financial institution during 1999.
(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.
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All loan originations, regardless of whether originated through the
Company or purchased from third parties, must be underwritten in accordance with
R&G Financial's underwriting criteria, including loan-to-appraised value ratios,
borrower income qualifications, debt ratios and credit history, investor
requirements, necessary insurance and property appraisal requirements. R&G
Financial's underwriting standards also comply with the relevant guidelines set
forth by HUD, VA, FNMA, FHLMC, bank regulatory authorities, private mortgage
investment conduits and private mortgage insurers, as applicable. The Company's
underwriting personnel, while operating out of its loan offices, make
underwriting decisions independent of the Company's mortgage loan origination
personnel.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 7% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. The Company receives these fees on mortgage loans originated through its
retail branches. The Company may charge additional fees depending upon market
conditions and regulatory considerations as well as the Company's objectives
concerning mortgage loan origination volume and pricing. The Company incurs
certain costs in originating mortgage loans, including overhead, out-of-pocket
costs and, in some cases, where the mortgage loans are subject to a purchase
commitment from private investors, related commitment fees. The volume and type
of mortgage loans and of commitments made by investors vary with competitive and
economic conditions (such as the level of interest rates and the status of the
economy in general), resulting in fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
current expense. Direct origination costs and origination income must be
deferred and amortized using the interest method, until the repayment or sale of
the related mortgage loans. Historically, the value of servicing rights which
result from R&G Financial's origination activities has exceeded the net costs
attributable to such activities.
R&G Financial customarily sells most of the loans that it originates,
except for those originated on behalf of the Bank pursuant to the Master
Production Agreement with R&G Mortgage. See "-Lending Activities of the Bank -
Origination, Purchases and Sales of Loans." The loans originated by R&G Mortgage
(including FHA loans, VA loans and conventional loans) are secured by real
property located in Puerto Rico and constitute "eligible investments" which
results in favorable tax treatment under U.S. and Puerto Rico tax laws. See "-
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment." During the
years ended December 31, 1999, 1998 and 1997, R&G Financial sold $721.0 million,
$493.0 million and $246.1 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, $399.3 million or 55.4%, $298.1 million or 60.5% and $206.6
million or 83.9% 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 serial notes as described below) by R&G Mortgage. These securities
were sold primarily to securities broker-dealers and other investors in Puerto
Rico.
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Certain GNMA-guaranteed mortgage-backed securities sold by R&G Mortgage
are in the form of GNMA serial notes which permit the investor to receive
interest monthly and to select among several expected maturity dates of the
notes included in an issue, with each maturity having a specific yield. GNMA
serial notes are sold in pools of $2.5 million to $5 million. GNMA serial notes
are sold to securities broker-dealers in packages consisting of notes of
different yields and maturities, which range from one to 30 years and have an
average maturity of 12 years, taking into account historical experience with
prepayments of the underlying mortgages. The rates on the serial notes or GNMA
pools must be 1/2 of 1% less than the rates on the mortgages comprising the
pool. Upon completion of the necessary processing, the GNMA-guaranteed
mortgage-backed securities are either offered to the public directly through the
Bank's Trust Department or indirectly through securities broker-dealers. During
the years ended December 31, 1999, 1998 and 1997, R&G Mortgage issued GNMA
mortgage-backed securities totaling approximately $392.6 million, $371.1 million
and $397.2 million, respectively, including $174.0 million, $148.3 million and
$335.5 million GNMA serial notes, respectively.
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 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
loan-to-value ratios, etc.).
Each CMO normally consists of several classes of senior, subordinate
and residual certificates. The residual certificates evidence a right to receive
payments on the mortgage loans after payment of all required amounts on the
senior and subordinate certificates then due. Some form of credit enhancement,
such as an insurance policy, letter of credit or subordination, will generally
be used to increase the credit rating of the senior certificates and thereby
improve their marketability. R&G Mortgage and the Bank have made no sales of
CMOs in securitization transactions during 1997 through 1999. When such
transactions are made, either the Bank or R&G Mortgage generally retains the
residual certificates issued by the respective trusts as well as the subordinate
certificates issued in such transactions. As of December 31, 1999, R&G Mortgage
held residual certificates issued in CMO transactions involving R&G Mortgage and
the Bank with a fair value of $4.6 million. In addition, the Bank held CMO
subordinated certificates and residual certificates from one of its
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issues with a fair value of $9.3 million at December 31, 1999. See "- Investment
Activities." Currently a liquid secondary market for subordinate or residual
certificates does not exist in Puerto Rico. The value of residual certificates
is subject to substantial fluctuations as a result of changes in prevailing
interest rates. However, such residuals often exhibit elasticity and convexity
characteristics which R&G Financial can utilize to hedge other components of its
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation" incorporated by reference in Item 7 hereof.
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. Normally, the fair value of any retained recourse
is immaterial because R&G Mortgage's loss experience has been minimal. As of
December 31, 1999, R&G Financial had reserves for possible losses related to its
recourse obligations of $428,000. At December 31, 1999, R&G Mortgage had loans
in its servicing portfolio with provisions for recourse in the principal amount
of approximately $646.3 million, as compared to $507.4 million and $374.4
million as of December 31, 1998 and 1997, respectively. Of the recourse loans
existing at December 31, 1999, approximately $340.2 million in principal amount
consisted of loans sold to FNMA and FHLMC and converted into mortgage-backed
securities of such agencies, and approximately $306.1 million in principal
amount consisted of non-conforming loans sold to other private investors.
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 the securitization services rendered, the Bank pays a
securitization fee of 25 basis points. In addition, the Bank acts as the
custodial agent for R&G Mortgage of certain documentation related to the
issuance by R&G Mortgage of GNMA or FHLMC mortgage-backed certificates. In
consideration of these services, the Bank receives an annual fee of $5.0 for
each mortgage note included in a mortgage-backed certificate for which it acts
as custodian. See "- Regulation - R&G Financial - Limitations on Transactions
with Affiliates."
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
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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, 1999, R&G Financial's servicing portfolio
totaled $6.2 billion and consisted of a total of 107,302 loans. These amounts
include R&G Mortgage's servicing portfolio totaling $5.7 billion and
Continental's servicing portfolio totaling $486.2 million at December 31, 1999.
At December 31, 1999, R&G Financial's servicing portfolio included $1.1 billion
of loans serviced for the Bank or 17.3% of the total servicing portfolio.
Substantially all of the mortgage loans in R&G Financial's servicing portfolio
are secured by single (one-to-four) family residences. Most of R&G Financial's
mortgage servicing portfolio is comprised of mortgages secured by real estate
located in Puerto Rico.
The Bank sells to R&G Mortgage the servicing rights to all first and
second mortgage loans secured by residential properties which become part of the
Bank's loan portfolio. R&G Mortgage services all other loans held in the Bank's
loan portfolio (including single-family residential loans retained by the Bank
and certain commercial real estate loans), although R&G Mortgage does not
actually acquire such servicing rights. The Bank pays R&G Mortgage servicing
fees with respect to the loans serviced by R&G Mortgage on behalf of the Bank.
In addition, the Bank processes payments of all loans originated by R&G Mortgage
on behalf of the Bank. In connection therewith, R&G Mortgage pays the Bank a fee
equal to between $0.50 and $1.00 per loan. See "- Regulation - R&G Financial -
Limitations on Transactions with Affiliates."
R&G Financial's mortgage loan servicing portfolio is subject to
reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan
servicing rights from time to time.
11
<PAGE>
The following table sets forth certain information regarding the total
loan servicing portfolio of R&G Financial for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Composition of Servicing Portfolio at End of
Period:
Conventional and other mortgage loans(1)................. $3,095,920 $2,105,290 $ 1,148,739
FHA/VA loans............................................. 3,081,590 2,722,508 1,852,149
--------- --------- ---------
Total servicing portfolio(2)........................... $6,177,511 $4,827,798 $ 3,000,888
========= ========= =========
Activity in the Servicing Portfolio:
Beginning servicing portfolio............................ $4,827,798 $3,000,888 $ 2,550,169
Add: Loan originations and purchases..................... 1,610,945 1,237,415 762,496
Servicing of portfolio loans acquired(3).......... 552,235 1,109,825 5,301
Less: Sale of servicing rights(4)........................ 55,515 - -
Run-offs(5)....................................... 757,952 520,330 317,078
---------- ---------- ----------
Ending servicing portfolio............................... $6,177,511 $4,827,798 $ 3,000,888
========= ========= =========
Number of loans serviced(6).............................. 107,302 95,946 56,442
Average loan size(6)..................................... $ 58 $ 50 $ 53
Average servicing fee rate(6)............................ 0.530% 0.510% 0.532%
</TABLE>
- ---------------------
(1) Includes non-conforming loans.
(2) At the dates shown, included $1.1 billion, $754.6 million and $448.9
million of loans serviced for the Bank, respectively, which constituted
17.3%, 15.6% and 15.0% of the total servicing portfolio, respectively.
(3) Includes $496.5 million related to the servicing portfolio acquired as
part of the Company's acquisition of Continental in October 1999, and a
$1.1 billion servicing portfolio acquired from another financial
institution in Puerto Rico in November 1998 comprised of approximately
32,400 loans.
(4) Corresponds to loans sold, servicing released, by Continental.
(5) Run-off refers to regular amortization of loans, prepayments and
foreclosures. Includes transfers in 1998 and 1997 of $67.7 million and
$49.0 million, respectively, of mortgage loans to financial
institutions who acquired certain commercial banks whose loans were
being serviced by R&G Mortgage.
12
<PAGE>
(6) At December 31, 1999, R&G Mortgage was servicing 13,449 loans for the
Bank with an average loan size of approximately $79,000 and at an
average servicing rate of 0.225%. Amounts include late and other
miscellaneous charges.
The following table sets forth certain information at December 31, 1999
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.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------------------------------------
Loans Serviced Loans Serviced Total Loans
for the Bank for Third Parties Serviced
-------------------------------- ----------------------------------- -------------------------------
Number of Aggregate Number of Aggregate Number of Aggregate
Loans Principal Balance Loans Principal Balance Loans Principal Balance
----------- -------------------- -------------- -------------------- ------------ ------------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Interest Rate
Less than 7.00%............ 388 43,155 10,233 726,734 10,621 769,889
7.00% - 7.49%.............. 3,844 340,595 19,194 1,179,857 23,038 1,520,452
7.50% - 7.99%.............. 4,415 371,811 22,184 1,441,225 26,599 1,813,036
8.00% - 8.49%.............. 2,271 183,546 14,541 807,272 16,812 990,818
8.50% - 8.99%.............. 1,792 116,873 13,155 516,080 14,947 632,953
9.00% - 9.49%.............. 296 15,103 4,850 149,408 5,146 164,511
9.50% - 9.99%.............. 393 14,921 4,173 105,821 4,566 120,742
10.00% - 10.49%............ 124 4,067 1,700 49,008 1,824 53,075
10.50% - 10.99%............ 193 4,930 1,009 26,768 1,202 31,698
11.00% or more............. 179 5,296 2,368 75,041 2,547 80,337
------- --------- ------- ---------- ------- ---------
13,895 1,100,297 93,407 5,077,214 107,302 6,177,511
====== ========= ====== ========= ======= =========
</TABLE>
The amount of principal prepayments on mortgage loans serviced by R&G
Financial was $162.6 million, $96.5 million and $87.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively. This represented
approximately 2.6%, 2.6% and 2.9% 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, 1999, 1998 and 1997, the monthly average
<PAGE>
amount of funds advanced by R&G Financial under such servicing agreements was
$5.5 million, $2.3 million and $1.6 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.
13
<PAGE>
At December 31, 1999, R&G Financial held $109.2 million of such escrow funds,
$92.4 million of which were deposited in the Bank and $16.8 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 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, 1999, R&G
Financial was servicing mortgage loans with an aggregate principal amount of
$646.3 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.
R&G Financial's general strategy is to retain the servicing rights
related to the mortgage loans it originates and purchases. Nevertheless, there
is a market in Puerto Rico for servicing rights, which are generally valued in
relation to the present value of the expected income stream generated by the
servicing rights. Among the factors which influence the value of a servicing
portfolio are servicing fee rates, loan balances, loan types, loan interest
rates, the expected average life of the underlying loans (which may be reduced
through foreclosure or prepayment), the value of escrow balances, delinquency
and foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. Although the Company may on
occasion consider future sales of a portion of its servicing portfolio,
management does not anticipate sales of servicing rights to become a significant
part of its operations.
The market value of, and earnings from, R&G Financial's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, income generated from the Company's mortgage loan
servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of the Company's mortgage loan servicing portfolio
may be positively affected. See Note 1 to R&G Financial's Notes to Consolidated
Financial Statements for a discussion of SFAS No. 125 and the treatment of
servicing rights, incorporated by reference into Item 8 hereof.
14
<PAGE>
Mortgage Loan Delinquencies and Foreclosures. The following table shows
the delinquency statistics for R&G Mortgage's servicing portfolio at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
Percent of
Percent of Percent of Servicing
Number of Servicing Number of Servicing Number of Portfolio
Loans Portfolio Loans Portfolio Loans
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days.......................... 5,334 4.97% 6,276 6.54% 2,531 4.48%
60-89 days.......................... 1,559 1.45 1,545 1.61 572 1.01
90 days or more..................... 2,109 1.97 1,696 1.77 778 1.38
----- ---- ----- ---- ----- ----
Total delinquencies(1)............ 9,002 8.39% 9,517 9.92% 3,881 6.87%
===== ==== ===== ==== ===== ====
Foreclosures pending(2)............... 1,262 1.18% 993 1.03% 681 1.21%
----- ---- ====== ==== ===== ====
</TABLE>
- -------------------------
(1) Includes at December 31, 1999, an aggregate of $101.1 million of
delinquent loans serviced by R&G Mortgage for the Bank, or 1.64% of the
total servicing portfolio and $8.8 million of delinquent loans held in
R&G Mortgage's own portfolio.
(2) At December 31, 1999, the Bank had foreclosures pending on $22.8
million of loans being serviced by R&G Mortgage, which constituted
0.37% of the servicing portfolio. R&G Mortgage had foreclosures pending
on $3.9 million of loans it is servicing for its own portfolio at
December 31, 1999.
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, 1999, 1998 and 1997, R&G Mortgage held
REO with a book value of approximately $128,000, $128,000 and $165,000,
respectively. Sales of REO resulted in gains to R&G Mortgage of $209,000,
$26,000 and $145,000 for the years ended December 31, 1999, 1998 and 1997,
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, 1999. R&G Mortgage, however, incurs
about $3,000 per loan foreclosed in interest and legal charges during the time
<PAGE>
between payment by R&G Mortgage and FHA or VA reimbursement. For the years ended
December 31, 1999, 1998 and 1997, total expenses related to FHA or VA loans
foreclosed amounted to $35,000, $286,000 and $189,000, respectively. Although
FNMA and FHLMC are obligated to reimburse the Company for principal and interest
payments advanced by the Company as a servicer
15
<PAGE>
(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.
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, United States and Puerto Rico tax laws
provide an economic incentive for Puerto Rico residents and Section 936
Corporations (defined below) to invest in certain mortgage loans and
mortgage-backed securities originated in Puerto Rico, including FHA and VA loans
and GNMA certificates, thereby tending to increase the secondary market demand
for, and the resale value of, such mortgage loans and mortgage-backed
securities. These tax advantages also favorably affect R&G Financial's net
interest income by helping create a pool of lower-cost funds that R&G Financial
can access through financial intermediaries such as banks and broker-dealers and
use to fund mortgage loans and mortgage-backed securities pending sale.
Under various Puerto Rico industrial incentives acts (the "Industrial
Incentives Acts"), certain investment income earned by qualified manufacturing
entities or service enterprises that have grants of tax exemption issued
thereunder ("Exempt Companies"), is exempt from Puerto Rico income tax.
Investment income that qualifies for this exemption includes interest on certain
mortgage loans and interest on funds of Exempt Companies ("936 Funds") placed
with eligible institutions in Puerto Rico (primarily savings and loan
associations, commercial banks and registered broker-dealers), provided such
funds are invested in certain "eligible activities" in accordance with
regulations promulgated by the OCFI, including certain mortgage loans and
mortgage-backed securities. The Industrial Incentives Acts encourage investment
in Puerto Rico by allowing Exempt Companies subject to tax on dividend
distributions to reduce the otherwise applicable dividend withholding tax of 10%
(the "Tollgate Tax") on distributions to shareholders by investing their exempt
industrial development income ("IDI") in Puerto Rico for fixed periods of time,
generally from five years to ten years.
An Industrial Incentive Act was approved by the Government of Puerto
Rico effective January 1, 1998: the Tax Incentive Act of 1998 (the "1998 TIA").
Grants issued under the 1998 TIA provide for a flat rate of tax on the operating
income of Exempt Companies. The same types of investment income that qualified
for exemption under the Industrial Incentive Acts will continue to be exempt
under the 1998 TIA. Because grantees of tax exemption under the 1998 TIA will
not be subject to Tollgate Taxes, they will not have an incentive to invest
their IDI in qualifying investments in Puerto Rico, as grantees under the
Industrial Incentive Acts presently do in order to reduce their Tollgate Taxes.
It should be noted, however, that Exempt Companies currently operating pursuant
to grants issued under the Industrial Incentives Acts generally will not be
affected by the provisions of the 1998 TIA. Although such Exempt Companies may
renegotiate their grants under the 1998 TIA, an amount of IDI equal to the IDI
derived in the taxable year preceding the
16
<PAGE>
change to the 1998 TIA (or, if greater, the average annual IDI by taking the
three years, out of the previous five years, where the highest amount of IDI is
derived) will continue to be subject to the tax treatment, including Tollgate
Taxes, provided in the Industrial Incentive Act under which their grant was
originally issued.
Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936 of the Code. Corporations that meet certain
requirements and elect the benefits of Section 936 ("Section 936 Corporations")
are entitled to credit against their United States corporate income tax a
portion of such tax attributable to income derived from sources outside the
United States from the active conduct of a trade or business within Puerto Rico
or from the sale or exchange of substantially all assets used in the active
conduct of such trade or business ("Active Business Income").
The tax credit available under Section 936 (the "936 Credit") is
limited by the amount of credit allowed with respect to Active Business Income
under one of two alternatives to be selected at the option of the taxpayer.
Under the first alternative, the limit is equal to a fixed percentage of the
amount of tax credit allowable under prior law (the "Fixed Percentage Method").
This fixed percentage commenced at 60% for taxable years beginning in 1994 and
was reduced by 5% per year until 1998. For taxable years beginning on or after
January 1, 1998, such percentage is 40%. Under the second alternative (the
"Economic Activity Method"), which is based on the amount of economic activity
conducted by the taxpayer in Puerto Rico, the credit may not exceed the sum of
the following three components: (i) 60% of the qualified possession wages and
the allocable fringe benefits paid by the taxpayer, (ii) applicable percentages
of certain depreciation deductions claimed for regular tax purposes by the
taxpayer with respect to qualified tangible property and (iii) a portion of the
possession income taxes paid by the taxpayer except where the taxpayer uses the
profit-split method for determining its income.
The SBJPA repealed Section 936, but provided grandfather rules under
which a Section 936 Corporation that had elected the benefits of the Section 936
Credit and which was engaged in active trade or business within Puerto Rico on
October 13, 1995 (an "Existing Claimant") would be eligible to claim the 936
Credit attributable to Active Business Income during a transition period. A
corporation may also qualify as an Existing Claimant if it acquires all the
assets of a trade or business of a corporation that meets the active trade or
business requirement and the election requirement is satisfied.
The amount and computation method of the 936 Credit during the
transition period depends upon whether a Section 936 Corporation is using the
Economic Activity Method or the Fixed Percentage Method. A Section 936
Corporation that is an Existing Claimant and uses the Economic Activity Method
may continue to determine its 936 Credit attributable to Active Business Income
as under present law for taxable years beginning after December 31, 1995 and
before January 1, 2002. For taxable years beginning after December 31, 2001 and
before January 1, 2006, a Section 936 Corporation's Active Business Income
eligible for the 936 Credit is subject to a cap, described below. A Section 936
Corporation that is an Existing Claimant and is using the Fixed Percentage
Method may continue to determine its 936 Credit attributable to Active Business
Income under the existing rules for taxable years beginning after December 31,
1995 and before January 1, 1998. For taxable years beginning after December 31,
1997 and before January 1, 2006, the Section 936
17
<PAGE>
Corporation's Active Business Income that is eligible for the 936 Credit is also
subject to a cap. For taxable years beginning after December 31, 2005, the 936
Credit attributable to Active Business Income is scheduled to expire.
Under the cap rules for both the Economic Activity Method and the Fixed
Percentage Method, the income eligible for the 936 Credit is limited to the
"adjusted base period income" of the Section 936 Corporation. Computation of the
"adjusted base period income" involves three steps: (i) the Section 936
Corporation base period years are determined (which are, generally, three of the
Section 936 Corporation's five most recent years ending before October 14, 1995,
determined by disregarding the taxable years in which the Section 936
Corporation's Active Business Income was the highest and the lowest); (ii)
Active Business Income of the Section 936 Corporation in each of the base period
years is adjusted for inflation; and (iii) the income in the base period years,
as adjusted for inflation, is averaged.
In response to certain proposals put forth by the Government of Puerto
Rico (the "Puerto Rico Government Proposals"), the SBJPA added Section 30A to
the Code ("Section 30A"). The Puerto Rico Government Proposals included a
ten-year grandfather period for the existing 936 Credit and the creation of a
new tax credit for qualifying corporations that invest in "economically
developing jurisdictions." Section 30A incorporates in part the Puerto Rico
Government Proposals and provides for an income tax credit to domestic
corporations operating in Puerto Rico. This credit is determined under
guidelines similar to the Economic Activity Method.
In the absence of the 936 Credit and as a means of continuing to defer
U.S. income taxation, subsidiaries of multi-national companies operating under
Section 936 of the Code may transfer their operations to a corporation organized
under Puerto Rico law, or under the laws of foreign countries. Generally,
non-U.S. source earnings of a non-U.S. corporation are not subject to United
States income taxes until dividends are repatriated to a United States
shareholder. Under Section 954 of the Code, foreign subsidiaries of
multi-national companies whose parent corporation is incorporated in the U.S.
are not subject to federal income tax on profits on products which they
manufacture. Though a Puerto Rico corporation, or a foreign corporation
operating in Puerto Rico, is subject to local Puerto Rico taxes, the benefits
under the Industrial Incentives Acts and the 1998 TIA for companies that
manufacture or provide services in Puerto Rico, would continue to be available.
In addition, under Section 901 and 902 of the Code and subject to certain
limitations and exceptions, U.S. shareholders of a Puerto Rico or other non-U.S.
corporation would be allowed to claim a foreign tax credit with respect to
income tax paid in Puerto Rico. United States shareholders are also not required
to recognize income attributable to manufacturing operations of a Puerto Rico or
other non-U.S. corporation as a general rule under Subpart F of the Code.
However, under Section 367 of the Code, multi-national corporations may be
required to recognize income upon the transfer of operations to a Puerto Rico or
other non-U.S. corporation, depending upon the nature and value of the property
transferred. Several multi-national 936 Corporations have taken such steps since
the legislation with respect to Section 936 was first introduced in the U.S.
Congress.
In July 1997, the Government of Puerto Rico amended the tax law that
provided Puerto Rico income tax exemption on interest income generated by FHA
and VA loans secured by real estate property located in Puerto Rico and
mortgage-backed securities secured by such mortgage loans ("GNMAs"). Under the
amended law, FHA and VA loans closed prior to August 1, 1997 will
18
<PAGE>
continue to be exempt. The interest income on FHA and VA mortgage loans
originated on or after August 1, 1997 for purposes other than to finance the
acquisition of new housing, and GNMAs secured by such loans, are no longer
exempt, and are taxable at a preferential 17% tax rate to individuals and
certain taxpayers other than corporations. FHA and VA loans to finance the
purchase of new housing, and GNMAs secured by such loans, continue to be exempt.
Individuals who are bona fide residents of Puerto Rico are also not subject to
United States federal income tax on income from Puerto Rico sources, including
interest income derived from mortgage loans originated in Puerto Rico whose
mortgagors are residents of Puerto Rico. The exemption for interest earned on
qualifying FHA loans, VA loans and GNMA certificates tends to increase the
demand for these products and the price R&G Financial may obtain upon their
sale. There can be no assurance that the tax exempt treatment of interest on FHA
and VA loans will not be further reviewed or modified in the future.
Any change in Puerto Rico's political status could result in the
elimination or modification of these tax benefits described above.
Lending Activities from Banking Operations
General. At December 31, 1999, R&G Financial's loans receivable, net
totaled $1.6 billion, which represented 53.7% of R&G Financial's $2.9 billion of
total assets. At December 31, 1999, all but $545,000 of R&G Financial's loans
receivable, net were held by the Bank. The principal category of loans in R&G
Financial's portfolio are conventional loans which are secured by first liens on
single-family residences. Conventional residential real estate loans are loans
which are neither insured by the FHA nor partially guaranteed by the VA. At
December 31, 1999, all but $800,000 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.
19
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ----------- --------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate - first
mortgage(1)............................ $1,099,843 67.75% $735,795 66.87% $476,729 61.25%
Residential real estate - second
mortgage............................... 13,029 0.80 18,634 1.69 17,831 2.29
Retail construction...................... 38,950 2.40 23,280 2.12 13,367 1.72
Commercial construction and land
acquisition............................ 78,133 4.81 15,353 1.39 5,785 0.74
Commercial real estate................... 204,155 12.57 117,151 10.65 81,722 10.50
Commercial business...................... 54,231 3.34 46,532 4.23 39,128 5.03
Consumer loans:
Loans secured by deposits.............. 20,539 1.27 17,225 1.56 12,472 1.60
Real estate secured consumer loans..... 76,944 4.74 85,055 7.73 81,252 10.44
Unsecured consumer loans............... 37,653 2.32 41,381 3.76 50,103 6.43
------ ------ ---- ------ --------
Total loans receivable............... 1,623,477 100.00% 1,100,406 100.00% 778,389 100.00%
--------- ------ --------- ------ ------- ------
Less:
Allowance for loan losses.............. ( 8,971) ( 8,055) ( 6,772)
Loans in process....................... (50,622) (18,170) ( 6,218)
Deferred loan fees..................... ( 437) ( 166) 172
Unearned interest...................... ( 440) ( 347) ( 512)
---------- ---------- ----------
(60,471) (26,738) (13,330)
-------- ------- -------
Loans receivable, net(2)............... $1,563,007 $1,073,668 $765,059
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995
---------------------- ---------------------------
Amount Percent Amount Percent
------------ -------- ------------ -------------
<S> <C> <C> <C>
Residential real estate - first $282,498
mortgage(1)............................ $370,876 60.75% 58.23%
Residential real estate - second
mortgage............................... 15,757 2.58 14,372 2.96
Retail construction...................... 5,351 0.88 15,046 3.10
Commercial construction and land
acquisition............................ 5,700 0.93 5,523 1.14
Commercial real estate................... 69,514 11.39 61,862 12.74
Commercial business...................... 31,063 5.09 27,816 5.74
Consumer loans:
Loans secured by deposits.............. 9,409 1.54 7,497 1.55
Real estate secured consumer loans..... 42,893 7.03 33,381 6.88
Unsecured consumer loans............... 59,864 9.81 37,180 7.66
------ -------- ------- ------
Total loans receivable............... 610,427 100.00% 485,175 100.00%
------- ------ ------- ------
Less:
Allowance for loan losses.............. (3,332) (3,510)
Loans in process....................... (2,430) (5,727)
Deferred loan fees..................... 41 (266)
Unearned interest...................... ( 955) (1,831)
--- -------
(6,676) (11,334)
----- -------
Loans receivable, net(2)............... $603,751 $473,841
======= =======
</TABLE>
(1) Includes $33.9 million and $49.7 million of residential real estate -
first mortgage loans which are held by R&G Mortgage at December 31,
1997 and 1996, respectively.
(2) Does not include mortgage loans held for sale of $77.3 million, $117.1
million, $46.9 million, $54.5 million and $21.3 million at December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
20
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1999 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.
<TABLE>
<CAPTION>
Due 1-5 years Due 5 or more
after years after
Due 1 year December 31, December 31,
or less 1999 1999 Total(1)
------- ---- ---- --------
(In Thousands)
<S> <C> <C> <C> <C>
Residential real estate ............ $ 57 $ 3,638 $1,109,177 $1,112,872
Retail construction ................ 38,950 -- -- 38,950
Commercial real estate(2) .......... 91,208 85,890 105,190 282,288
Commercial business ................ 24,428 28,504 1,298 54,231
Consumer:
Loans on savings ................. 12,627 7,195 717 20,539
Real estate secured consumer loans 787 5,986 70,171 76,944
Unsecured consumer loans ......... 9,187 21,604 6,862 37,653
---------- ---------- ---------- ----------
Total(3) ........................... $ 177,245 $ 152,817 $1,299,415 $1,623,477
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Amounts have not been reduced for the allowance for loan losses, loans
in process, deferred loan fees or unearned interest.
(2) Includes $78.1 million of commercial construction and land acquisition
loans.
(3) Does not include mortgage loans held for sale.
21
<PAGE>
The following table sets forth the dollar amount of total loans due
after one year from December 31, 1999, as shown in the preceding table, which
have fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed rate adjustable-rate Total
------------------ ----------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Residential real estate................... $1,112,872 $ -- $1,112,872
Retail Construction....................... 38,950 -- 38,950
Commercial real estate(1)................. 87,282 195,006 282,288
Commercial business....................... 37,280 16,951 54,231
Consumer:
Loans on savings........................ 20,539 -- 20,539
Real estate secured consumer loans...... 76,944 -- 76,944
Unsecured consumer loans................ 37,653 -- 37,653
---------- ---------- ----------
Total.................................. $1,411,520 $211,957 $1,623,477
========= ======= =========
</TABLE>
- ---------------
(1) Includes $78.1 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.
22
<PAGE>
Origination, Purchase and Sales of Loans. The following table sets
forth loan originations, purchases and sales from banking operations for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages................................ $ 378,740 $ 385,416 $221,451
Commercial mortgages................................. -- 265 555
Residential construction............................. 26,146 16,766 11,482
Consumer loans....................................... 32,219 48,155 52,287
Total loans originated by R&G Mortgage............. 437,105 450,602 285,775
Other loans originated:
Commercial real estate............................... 175,803 54,426 37,129
Commercial business.................................. 36,222 26,191 15,393
Construction and development......................... 54,070 11,365 --
Consumer loans:
Loans on deposit..................................... 34,758 27,172 19,711
Real estate secured consumer loans................... -- -- --
Unsecured consumer loans............................. 29,631 9,970 16,742
Total other loans originated....................... 330,484 129,124 88,975
Loans purchased...................................... 279,489 175,735 60,646
Total loans originated and purchased............... 1,047,078 755,461 435,396
Loans sold........................................... ( 133,731) (282,005) (118,234)
Loan principal reductions............................ ( 253,534) (142,560) (134,166)
Net increase before other items, net................. 659,813 330,896 182,996
Loans securitized and transferred to
mortgage-backed securities......................... ( 106,237) -- --
Net increase in loan portfolio....................... $ 553,576 $ 330,896 $182,996
</TABLE>
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,
23
<PAGE>
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, 1999, 1998 and 1997, R&G Mortgage received $7.5 million, $7.5
million and $5.2 million, respectively, of loan origination fees with respect to
loans originated by R&G Mortgage on behalf of the Bank. These fees are
eliminated in consolidation in R&G Financial's Consolidated Financial
Statements. See "- Regulation - R&G Financial - Limitations on Transactions with
Affiliates."
The Bank originates commercial real estate, commercial business and
consumer loans. Applications for commercial real estate, commercial business and
unsecured consumer loans are taken at all of the Bank's branch 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
$2.5 million, and the Executive Committee of the Board of Directors is
authorized to approve all loans exceeding $2.5 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, 1999, 1998 and 1997, the Bank purchased $279.5 million, $175.7
million and $60.6 million of loans, respectively.
During the years ended December 31, 1999, 1998 and 1997, loans sold
from banking operations were $133.7 million, $282.0 million and $118.2 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."
24
<PAGE>
At December 31,1999, R&G Financial's five largest loans-to-one borrower
and their related entities amounted to $17.2 million, $14.0 million, $12.7
million, $9.6 million and $9.0 million, all of which were performing.
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, 1999, $1.1
billion or 67.8% of R&G Financial's total loans held for investment consisted of
such loans, of which all but $800,000 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, 1999, $13.0 million or
0.8% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. The Bank offers such
second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-value ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).
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, 1999, retail construction
("spot") loans amounted to $39.0 million or 2.4% of R&G Financial's total loans
held for investment, while commercial construction and land acquisition loans
amounted to $78.1 million or 4.8% of total loans held for investment.
The Bank offers construction 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, 1999,
25
<PAGE>
the Bank's construction loan portfolio included 381 construction/permanent loans
with an aggregate principal balance of $39.0 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, 1999,
the Bank had 7 residential construction loans outstanding to develop
single-family residences with an aggregate principal balance of $15.3 million.
Commitments for future funding approximate $34.2 million. In addition, the Bank
had 9 loans to develop commercial properties with an aggregate principal balance
of $19.1 million. The loans are performing in accordance with their terms at
December 31, 1999.
In addition to the foregoing, at December 31, 1999, the Bank had 11
land acquisition loans with outstanding balances ranging from $26,000 to $3.0
million, and an aggregate balance of $9.5 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 does
not expect to be active in this business.
The Bank intends to continue to increase its involvement in
single-family residential construction lending. Such loans afford the Bank the
opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of risk
as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated costs (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. The Bank has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose stringent loan-to-value (80% with respect to single-family residential
real estate), debt service and other requirements for loans which are believed
to involve higher elements of credit risk and by working with builders with whom
it has established relationships or knowledge thereof. At December 31, 1999,
$478,000 of the Bank's construction loans were classified as non-performing.
Commercial Real Estate Loans. The Bank also originates mortgage loans
secured by commercial real estate. At December 31, 1999, $204.2 million or 12.6%
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 1,025 loans with an average principal balance of $199,000. At
December 31, 1999, $9.0 million of the Bank's commercial real estate loans were
classified as nonperforming.
26
<PAGE>
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 1.30 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, 1999, commercial business loans amounted to
$54.2 million or 3.3% of total loans held for investment. Although the Bank has
begun to increase its emphasis on commercial business lending, management does
not currently anticipate that its portfolio of commercial business loans will
grow significantly as a percentage of the total loan portfolio.
Consumer Loans. The Bank originates real estate secured consumer loans.
Such loans generally have shorter terms and higher interest rates than other
mortgage loans. At December 31, 1999, $135.1 million or 8.3% 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
27
<PAGE>
and other secured and unsecured consumer loans. Most of the Bank's consumer
loans are secured and have been primarily obtained through newspaper
advertising, although loans are also obtained from existing and walk-in
customers. Although the Bank has begun to increase its emphasis on
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 $20.5 million at December 31, 1999. 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, 1999, real estate secured consumer loans totaled
$76.9 million. At December 31, 1999, credit card receivables totaled $4.9
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, 1999, $802,000 of consumer loans were classified as
non-performing.
Asset Quality
General. 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
28
<PAGE>
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.
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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ------------- ------------ --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate(1)............ $47,413 $32,973 $21,619 $12,991 $7,921
Residential construction.............. 478 441 368 363 --
Commercial real estate................ 9,005 6,463 6,000 3,141 1,903
Commercial business................... 1,255 3,224 765 823 --
Consumer unsecured.................... 802 1,358 1,217 686 40
Other................................. 61 67 117 726 --
--------- -------- ------ ------ -----
Total(2)............................ 59,014 44,526 30,086 18,730 9,864
------ ------ ----- ------ -----
Accruing loans greater than 90 days
delinquent:
Residential real estate............... -- -- -- -- --
Residential construction.............. -- -- -- -- 611
Commercial real estate................ -- -- -- -- --
Commercial business................... 63 61 54 22 8
Consumer.............................. 274 357 172 134 94
------- ------- ------ ----- ------
Total accruing loans greater than
90 days delinquent................ 337 418 226 156 713
------- ------- ------- ------ -----
Total non-performing loans.......... 59,351 44,944 30,312 18,886 10,577
------ ------ ----- ------ ------
Real estate owned, net of reserves(3)... 5,852 4,041 1,715 834 654
Other repossessed assets................ 466 237 85 31 --
------ ------- -- -- --
6,318 4,278 1,800 1,800 865
------ -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total non-performing assets......... $65,669 $49,222 $32,112 $19,751 $11,231
------ ====== ====== ====== ======
Total non-performing loans as a
percentage of total loans......... 3.66% 4.08% 3.89% 3.09% 2.18%
===== ==== ==== ==== ====
Total non-performing assets as a
percentage of total assets........ 2.26% 2.41% 2.12% 1.90% 1.32%
===== ==== ==== ====== ====
</TABLE>
29
<PAGE>
- -------------------------
(1) Includes residential real estate loans secured by both first and second
mortgages held by the Bank, except for $5.9 million, $4.3 million and
$2.8 million held by R&G Mortgage at December 31, 1999, 1998 and 1997,
respectively. Also includes $6.1 million, $5.3 million, $2.6 million,
$1.1 million and $882,000 consumer loans held by the Bank secured by
first and second mortgages on residential real estate at December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
(2) As of December 31, 1999, comprised of 868 loans secured by residential
real estate, 66 loans secured by commercial real estate, 7 construction
loans, 86 commercial business loans and 114 consumer loans.
(3) Includes properties held by R&G Mortgage of $128,000, $128,000 and
$165,000 as of December 31, 1999, 1998 and 1997, respectively. As of
December 31, 1999, the Bank had 48 residential properties and 12
commercial properties aggregating $5.7 million.
While the level of total non-performing assets of R&G Financial has
increased on an absolute basis during the periods presented, from $11.2 million
at December 31, 1995 to $65.7 million at December 31, 1999, R&G Financial's net
loans receivable portfolio has increased by 230% during this period, from $473.8
million at December 31, 1995 to $1.6 billion at December 31, 1999. Thus, total
non-performing assets as a percent of total assets increased from 1.32% at
December 31, 1995 to 2.26% at December 31, 1999.
Non-performing residential loans increased by $14.4 million or 43.8%
from December 31, 1998 to December 31, 1999. The average loan balance on
non-performing mortgage loans amounted to $55,000 at December 31, 1999. As of
such date, 528 loans with an aggregate balance of $29.3 million (including 119
consumer loans secured by real estate with an aggregate balance of $2.6 million)
were in the process of foreclosure. The total delinquency ratio on residential
mortgages, including loans past due less than 90 days, increased from 5.49% in
1998 to 7.11% in 1999. The Company's loss experience on such portfolio has been
minimal over the last several years.
Non-performing commercial real estate loans increased by $2.5 million
or 39.3% from December 31, 1998 to December 31, 1999. The number of loans
delinquent over 90 days amounted to 74 loans at December 31, 1999, with an
average balance of $122,000. The largest non-performing commercial real estate
loan as of December 31, 1999 had a balance of $340,000.
Non-performing commercial business loans consist of 86 loans. Such
loans include 10 loans with an aggregate balance of $296,000 which are 90%
guaranteed by the Small Business Administration, 48 commercial leases amounting
to $615,000 and 28 other commercial business loans with an aggregate balance of
$344,000. These loans have a combined average loan size of $18,000. The majority
of loans in this portfolio were originated during 1995 and 1996. The largest
non-performing commercial business loan as of December 31, 1999 had a $110,000
balance.
30
<PAGE>
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, which is maintained on the Bank's
loan portfolio.
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ---------------- -------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $8,055 $6,772 $ 3,332 $3,510 $2,887
----- ----- ------ ----- -----
Charge-offs:
Residential real estate.............. 17 73 13 45 53
Construction......................... -- -- -- 50 --
Commercial real estate............... 353 -- 170 -- --
Commercial business.................. 1,548 1,485 480 110 91
Consumer............................. 2,518 4,455 3,953 1,922 365
Other................................ 4 -- 761 2,535 --
-------- -------------- ------ ----- ------
Total charge-offs.................. 4,440 6,013 5,377 4,662 509
-------- ----------- ------ ----- -----
Recoveries:
Residential real estate.............. -- -- 21 -- 1
Commercial real estate............... 69 -- 50 -- --
Commercial business.................. 332 20 32 31 85
Consumer............................. 429 312 344 195 96
Other................................ -- -- 2,000 -- --
--------- ------------- ----- -- --
Total recoveries................... 830 332 2,447 226 182
------- ----------- ------ ------ -----
Net charge-offs........................ 3,610 5,681 2,930 4,436 327
-------- ---------- ------ ------ -----
Allowance for loan losses acquired from
Fajardo Federal....................... -- 364 -- -- --
Provision for losses on loans.......... 4,525 6,600 6,370 4,258 950
-------- --------- ------ ------ -----
Balance at end of period............... 8,971 $ 8,055 $ 6,772 $ 3,332 $3,510
======== ======== ====== ====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Allowance for loan losses as a percent
of total loans outstanding........... 5% .74 .87% .55% 0.72%
======== ========== ====== ====== ====
Allowance for loan losses as a percent
of non-performing loans.............. 15.11% 17.92% 22.34% 17.64% 33.19%
======== ======== ====== ====== =====
Ratio of net charge-offs to average
loans outstanding.................... .25% .55% 0.40% 0.75% 0.08%
========== ========== ====== ======= ====
</TABLE>
31
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
------------------------- --------------------------- -----------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------- -------------- ------------ -------------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate..... $1,419 15.82% $1,272 15.79% $ 593 8.76%
Construction................ 186 2.07 46 0.57 7 0.10
Commercial real estate...... 3,258 36.32 2,655 32.96 1,386 20.47
Commercial business......... 1,063 11.85 1,033 12.82 806 11.90
Consumer.................... 3,045 33.94 3,049 37.86 3,980 58.77
----- ----- ----- ----- ------ ------
Total....................... $8,971 100.00% $8,055 100.00% $6,772 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1996 1995
-------------------------- -------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
--------- ------------- ---------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate..... $ 810 24.31% $2,094 59.66%
Construction................ 51 1.53 32 0.90
Commercial real estate...... 489 14.68 -- --
Commercial business......... 109 3.27 782 22.28
Consumer.................... 1,873 56.21 602 17.16
----- ----- ----- ------
Total....................... $3,332 100.00% $3,510 100.00%
===== ====== ===== ======
</TABLE>
32
<PAGE>
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, 1999, R&G Mortgage held GNMA mortgage-backed securities with a
fair value of $43.6 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, R&G Mortgage held GNMA mortgage-backed securities with a fair
value of $466.2 million which are classified as available for sale. At December
31, 1999, R&G Mortgage's interest-only residuals, which are classified as
available for sale, had an amortized cost of $11.1 million and a fair value of
$10.8 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, 1999, the Bank's securities portfolio consisted of
$28.7 million of securities held for investments, consisting of $12.8 million of
tax-free mortgage-backed securities, $10.4 million of other mortgage backed
securities, and $5.4 million of Puerto Rico Government obligations and other
Puerto Rico securities. In addition, at December 31, 1999, the Bank had a
securities portfolio classified as available for sale with a fair value of
$493.9 million, consisting of $97.3 million of tax-free mortgage-backed
securities, $126.4 million of other mortgage-backed securities, $32.8 million of
FHLB stock, $12.0 million of CMOs and interest-only securities and residuals,
$4.9 million U.S. Treasury securities and $220.4 million of U.S. Government
agency securities.
The Bank's Treasury Department from time to time conducts certain
trading activities mainly through investments in U.S. Treasury securities.
However, at December 31, 1999 no securities for trading were held by the Bank.
33
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1999 1998
--------------------------------------- -----------------------------------------
Weighted Weighted
Carrying Market Average Carrying Market Average
Value Value Yield Value Value Yield
----------- ----------- ----------- ------------ ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GMNA
Due within one year........... $ -- $ -- --% $ -- $ -- --%
Due from one-five years....... 15 16 10.00 27 29 10.00
Due from five-ten years....... 10,660 10,391 5.79 13,025 12,752 5.79
Due over ten years............ 2,133 2,074 6.17 2,360 2,306 6.17
FNMA
Due within one year............. -- -- -- -- -- --
Due from one-five years......... -- -- -- -- -- --
Due from five-ten years......... -- -- -- -- -- --
Due over ten years.............. 10,252 10,644 7.09 12,608 12,944 7.13
FHLMC
Due within one year............. -- -- -- -- -- --
Due from one-five years......... -- -- -- -- -- --
Due from five-ten years......... -- -- -- -- -- --
Due over ten years.............. 189 180 5.58 236 230 5.99
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 5,945 5,979 5.80
Due over ten years.............. -- -- -- -- -- --
U.S.Treasury and Government
Agency
Due within one year............. -- -- -- 399 400 5.40
Due from one-five years......... -- -- -- -- -- --
Due from five-ten years......... -- -- -- -- -- --
Due over ten years.............. -- -- -- -- -- --
Total Securities held for $28,687 $28,709 6.31% $34,600 $34,640 6.31%
investment..................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997
-----------------------------------------
Weighted
Carrying Market Average
Value Value Yield
------------ ------------ --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
GMNA
Due within one year........... $ -- $ -- --%
Due from one-five years....... 49 50 10.00
Due from five-ten years....... -- -- --
Due over ten years............ 18,321 17,705 6.05
FNMA
Due within one year............. -- -- --
Due from one-five years......... -- -- --
Due from five-ten years......... -- -- --
Due over ten years.............. 14,675 15,164 7.17
FHLMC
Due within one year............. -- -- --
Due from one-five years......... -- -- --
Due from five-ten years......... -- -- --
Due over ten years.............. 281 266 6.00
Investment Securities:
Puerto Rico Government
obligations
Due within one year............. 4,433 4,439 6.22
Due from one-five years......... -- -- --
Due from five-ten years......... 5,920 5,910 5.85
Due over ten years.............. 30 30 8.37
U.S.Treasury and Government
Agency
Due within one year............. 310 311 6.13
Due from one-five years......... -- -- --
Due from five-ten years......... -- -- --
Due over ten years.............. -- -- --
Total Securities held for
investment.................. $44,019 $43,875 6.42%
</TABLE>
34
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1999 1998
------------------------------------------ ---------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
------------- ---------- ---------- ------------ ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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 55,159 55,159 6.41
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 8,092 8,161 6.96
FHLMC mortgage-backed securities
Due within one year............................. -- -- -- -- -- --
Due from one-five years......................... 99 99 8.79 89 91 8.83
Due from five-ten years......................... 1,891 1,841 6.77 240 244 8.99
Due over ten years.............................. 14,586 14,036 6.87 21,369 21,724 6.86
CMO residuals and other mortgage-backed
securities (1)
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 7,845 9,661 8.125
Investment Securities Available for Sale(1)
U.S. Treasury
Due within one year............................. 4,998 4,945 4.50 -- -- --
Due from one-five years......................... -- -- -- 4,995 4,991 4.50
Due from five-ten years......................... -- -- -- -- -- --
Due over ten years.............................. -- -- -- -- -- --
U.S. Government & Agencies
Due within one year............................. -- -- -- -- -- --
Due from one-five years......................... 133,956 130,950 6.19 38,100 38,106 5.64
Due from five-ten years......................... 92,237 89,444 7.28 5,010 5,000 6.72
Due over ten years.............................. -- -- -- -- -- --
FHLB stock........................................ 32,825 32,825 6.75 11,405 11,405 7.21
-------- ------- ---- ------ ------ ----
$983,646 $970,869 6.75% $152,304 $154,542 6.41%
======= ======= ==== ======= ======= ====
Securities held for trading(2):
GNMA certificates................................. $ 43,303 $ 43,564 5.27% $427,915 $443,399 6.69%
CMO certificates.................................. -- -- -- -- -- --
CMO residuals(4).................................. -- -- -- 7,134 7,147 8.00
U.S. Treasury Bills............................... -- -- -- -- -- --
--------- ------------ ------- --------------- -------------- ------
$ 43,303 $ 43,564 5.27% $ 435,049 $450,546 6.71%
======== ======== ==== ======== ======= ====
</TABLE>
(Footnotes on following page)
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997
----------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
----------- ------------ ------------
<S> <C> <C> <C>
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.............................. -- -- --
FNMA mortgage-backed securities
Due within one year............................. -- -- --
Due from one-five years......................... -- -- --
Due from five-ten years......................... -- -- --
Due over ten years.............................. 9,468 9,670 7.00
FHLMC mortgage-backed securities
Due within one year............................. -- -- --
Due from one-five years......................... 71 70 9.00
Due from five-ten years......................... 360 368 9.38
Due over ten years.............................. 27,104 27,513 6.86
CMO residuals and other mortgage-backed
securities (1)
Due within one year............................. -- -- --
Due from one-five years......................... -- -- --
Due from five-ten years......................... -- -- --
Due over ten years.............................. 7,007 8,382 8.125
Investment Securities Available for Sale(1)
U.S. Treasury
Due within one year............................. 773 772 5.22
Due from one-five years......................... 30,010 30,100 5.85
Due from five-ten years......................... -- -- --
Due over ten years.............................. -- -- --
U.S. Government & Agencies
Due within one year............................. -- -- --
Due from one-five years......................... 35,145 35,105 6.06
Due from five-ten years......................... 5,023 4,981 6.73
Due over ten years.............................. -- -- --
FHLB stock........................................ 4,906 4,906 6.61
------- ------- ----
$119,867 $121,867 6.44%
======= ======= ====
Securities held for trading(2):
GNMA certificates................................. $367,177 $377,362 6.78%
CMO certificates.................................. 16,200 15,228 5.95
CMO residuals(4).................................. 7,630 7,868 8.00
U.S. Treasury Bills............................... 581 581 5.23
------- -------- ----
$391,588 $401,039 6.77%
======= ======= ====
</TABLE>
(Footnotes on following page)
35
<PAGE>
- ---------------
(1) Comprised of subordinated tranches and residuals from the Bank's 1992
Grantor Trust residuals purchased from the Bank in 1995 from its 1993
CMO Grantor Trust, residuals from R&G Mortgage's CMO Grantor Trusts,
and interest-only strips resulting from sales of loans by R&G Mortgage
and the Bank.
(2) Except for GNMA certificates with a fair value of $1.7 million as of
December 31, 1997, all of such securities are held in R&G Mortgage's
securities portfolio.
A substantial portion of R&G Financial's securities are held in
mortgage-backed securities. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal within one year. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for conventional mortgage loans. The FNMA guarantees the timely
payment of principal and interest on FNMA securities. FHLMC and FNMA securities
are not backed by the full faith and credit of the United States, but because
the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency within HUD which is
intended to help finance government-assisted housing programs. GNMA securities
are backed by FHA-insured and VA-guaranteed loans, and the timely payment of
principal and interest on GNMA securities are guaranteed by the GNMA and backed
by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA
and the GNMA were established to provide support for low- and middle-income
housing, there are limits to the maximum size of loans that qualify for these
programs. For example, the FNMA and the FHLMC currently limit their loans
secured by a single-family, owner-occupied residence to $252,700. 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
36
<PAGE>
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.
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.
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. At December 31, 1999, $128.3
million or 16.3% of R&G Financial's mortgage-backed securities was pledged to
secure various obligations of R&G Financial (excluding repurchase agreements).
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, 1999, the Bank's CMOs, and interest-only securities
and residuals, which had a fair value of $12.0 million, were designated as
"high-risk mortgage securities" and classified as available for sale.
37
<PAGE>
Sources of Funds
General. R&G Financial will consider various sources of funds to fund
its investment and lending activities and evaluates the available sources of
funds in order to reduce R&G Financial's overall funding costs. Deposits,
reverse repurchase agreements, warehouse lines of credit, notes payable, FHLB
advances, subordinated capital notes and sales, maturities and principal
repayments on loans and securities have been the major sources of funds for use
in R&G Financial's lending and investing activities and for other general
business purposes.
Deposits. Deposits are the major sources of the Bank's funds for
lending and other investment purposes. Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments, including passbook, NOW
and Super NOW, checking and commercial checking and certificates of deposit
ranging in terms from 7 days to 10 years. Included among these deposit products
are $531.7 million of certificates of deposit with balances of $100,000 or more,
which amounted to 40.0% of the Bank's total deposits at December 31, 1999.
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, 1999 it held $127.9 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.
38
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------ --------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------- ----------- ------------- ---------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook...................... $112,107 3.74% $88,754 3.75% $ 75,958 3.79%
NOW and Super NOW
accounts................... 126,300 3.95 99,336 3.93 86,843 3.84
Checking...................... 41,128 -- 39,052 -- 23,859 --
Commercial checking(1)........ 111,146 -- 77,329 -- 46,301 --
Certificates of deposit....... 762,856 5.83 522,016 5.98 435,743 6.02
------- ---- ------- ---- --------- ----
Total deposits.............. $1,153,537 4.65% $826,487 4.65% $668,704 4.85%
========= ==== ======= ==== ======= ====
</TABLE>
- ----------------
(1) Includes $92.4 million, $109.9 million and $50.2 million of escrow
funds of R&G Mortgage at December 31, 1999, 1998 and 1997,
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, 1999.
Amount
-----------------
(In Thousands)
Certificates of deposit maturing:
Three months or less........................... $117,047
Over three through six months.................. 111,089
Over six through twelve months................. 210,528
Over twelve months............................. 93,050
--------
Total........................................ $531,714
=======
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
<PAGE>
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
39
<PAGE>
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. 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, 1999, R&G
Financial had $731.3 million of reverse repurchase agreements outstanding,
$404.3 million of which represented borrowings of R&G Mortgage. At December 31,
1999, the weighted average interest rate on R&G Financial's reverse repurchase
agreements amounted to 5.92%.
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, 1999, R&G Financial was permitted to borrow
under such Warehouse Lines up to $223.4 million, $48.5 million of which was
drawn upon and outstanding as of such date. The Warehouse Lines are used by the
Company 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, 1999, 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, the Company 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 the Company for
principal and interest payments and related tax and insurance payments on loans
its services. At December 31, 1999, the weighted average interest rate being
paid by the Company under its Warehouse Lines amounted to 6.78%.
Although the Bank's primary source of funds is deposits, the Bank also
borrows funds on both a short and long-term basis. The Bank actively utilizes
936 Notes as a primary borrowing source. The 936 Notes have original terms to
maturity of between five and seven years and bear interest payable quarterly for
variable interest rate notes and semiannually for fixed interest rate notes. The
Bank is able to obtain such low cost funds by investing the proceeds in eligible
activities as proscribed under Puerto Rico law, which provide tax advantages
under Puerto Rico tax laws and under U.S. federal tax laws for U.S. corporations
which are operating in Puerto Rico pursuant to
40
<PAGE>
Section 936 of the Code. See " - Mortgage Banking Activities - Puerto Rico
Secondary Mortgage Market and Favorable Tax Treatment." At December 31, 1999,
$15.0 million of the 936 Notes were secured by marketable securities, while
$45.5 million were secured by standby letters of credit issued by the FHLB of
New York (which are, in turn, secured by first mortgage loans, securities and
cash deposits). The 936 Notes contain certain provisions which indemnify the
holders thereof from the federal tax liability which would be incurred, plus any
penalties and interest, if the Bank did not invest the proceeds as required in
eligible activities, and also provide for a "gross up" provision which permits
the Bank to continue the obligation at an adjusted interest rate based on LIBOR
in the event the interest on the 936 Notes is subject in whole or in part to
federal and/or Puerto Rico income tax. At December 31, 1999, the Bank had $60.5
million of 936 Notes outstanding, $25.0 million of which mature in 2000, and
$35.5 million of which mature in 2001.
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, 1999, the Bank had access to $645.8
million in advances from the FHLB of New York, and had 26 FHLB of New York
advances aggregating $384.0 million outstanding as of such date, which mature at
various dates commencing in January 3, 2000 through December 18, 2003 and have a
weighted average interest rate of 5.75%. In addition, at December 31, 1999, the
Bank maintained $47.1 million in standby letters of credit with the FHLB of New
York, which secured $45.5 million of outstanding 936 Notes payable. At December
31, 1999, the Bank had pledged specific collateral aggregating $504.9 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.
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The following table sets forth certain information regarding the
short-term borrowings of R&G Financial at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
----------------------------------------------------
1999 1998 1997
---------------- ------------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
R&G Mortgage:
Securities sold under agreements to repurchase:
Average balance outstanding....................... $365,177 $354,786 $187,682
Maximum amount outstanding at any month-end
during the period............................... 493,527 415,960 385,054
Balance outstanding at end of period.............. 493,527 415,960 385,054
Average interest rate during the period........... 5.52% 5.73% 6.03%
Average interest rate at end of period............ 6.15% 5.46% 5.85%
Notes Payable:
Average balance outstanding....................... $127,565 $102,047 $66,405
Maximum amount outstanding at any month-end
during the period............................... 154,922 152,060 93,523
Balance outstanding at end of period.............. 56,907 107,648 24,353
Average interest rate during the period........... 6.67% 7.07% 6.03%
Average interest rate at end of period............ 6.89% 6.43% 5.85%
The Bank:
FHLB of New York advances:
Average balance outstanding....................... $222,575 $94,025 $23,524
Maximum amount outstanding at any month-end
during the period............................... 384,000 160,100 42,200
Balance outstanding at end of period.............. 384,000 121,000 42,200
Average interest rate during the period........... 5.31% 5.55% 5.80%
Average interest rate at end of period............ 5.75% 5.25% 6.03%
Securities sold under agreements to repurchase:
Average balance outstanding....................... $187,857 $55,915 $39,090
Maximum amount outstanding at any month-end
during the period............................... 327,009 79,513 63,088
Balance outstanding at end of period.............. 327,009 75,222 48,080
Average interest rate during the period........... 5.77% 5.57% 5.55%
Average interest rate at end of period............ 5.73% 5.35% 5.56%
Notes Payable:
Average balance outstanding....................... $84,463 $84,100 $85,034
Maximum amount outstanding at any month-end
during the period............................... 84,100 84,100 86,500
Balance outstanding at end of period.............. 75,800 84,100 84,100
Average interest rate during the period........... 6.53% 6.45% 6.60%
Average interest rate at end of period............ 6.00% 5.74% 5.97%
</TABLE>
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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, 1999, the Bank's Trust
Department administered approximately 7,235 trust accounts, with aggregate
assets of $31.2 million as of such date. In addition, during the year ended
December 31, 1999, the Bank's Trust Department sold $45.8 million of GNMA
mortgage-backed securities. The Bank receives fees dependent upon the level and
type of service provided. The administration of the Bank's Trust Department is
performed by the Trust Committee of the Board of Directors of the Bank.
Personnel
As of December 31, 1999, R&G Financial (on a consolidated basis) had
1,293 full-time employees and 73 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, R&G Mortgage and the Bank 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 bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
became a bank holding company in July 1996 through its acquisition of Mr. Victor
Galan's 88.1% interest in the Bank (which excludes his required qualifying
shares as a director of the Bank) in exchange for R&G Financial's Class A Common
Stock. R&G Financial acquired the remaining interest in the Bank in December
1996. R&G Financial, as a bank 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
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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 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.
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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.
R&G Mortgage and the Bank are parties to various agreements which
address how each would conduct itself in specifically delineated affiliated
transactions (the "Affiliated Transaction Agreements"). The Affiliated
Transaction Agreements include a Master Purchase, Servicing and Collections
Agreement (the "Master Purchase Agreement"), a Master Custodian Agreement, a
Master Production Agreement, a Securitization Agreement and a Data Processing
Computer Service Agreement. The terms of these agreements were negotiated at
arm's length on the basis that they are substantially the same, or at least as
favorable to the Bank, as those prevailing for comparable transactions with, or
involving, other nonaffiliated companies.
Pursuant to the Master Production Agreement, the Bank, on a monthly
basis, determines its loan production targets and goals (the "Loan Production
Goals") and R&G Mortgage assists the Bank to reach its Loan Production Goals by,
among other things: (i) advertising, promoting and marketing to the general
public; (ii) interviewing prospective borrowers and initial processing of loan
applications, consistent with the Bank's underwriting guidelines and Loan
Production Goals previously established; and (iii) providing personnel and
facilities with respect to the execution of any loan agreement approved by the
Bank. In exchange for these services, the Bank remits to R&G Mortgage a
percentage of the processing or originating fees charged to the borrowers under
loan agreements, as set forth in the agreements. See "-Lending Activities of the
Bank - Originations, Purchases and Sales of Loans."
The Master Purchase Agreement provides for the sale by the Bank to R&G
Mortgage of the servicing rights to all first and second mortgage loans secured
by residential properties which become part of the Bank's loan portfolio. R&G
Mortgage services all other loans held in the Bank's loan portfolio (including
single-family residential loans retained by the Bank and certain commercial real
estate loans), although R&G Mortgage does not actually acquire such servicing
rights. The Master Purchase Agreement further provides that R&G Mortgage
exclusively will service such loans and that the Bank will process payments of
such loans, all according to a fee schedule. See " - Mortgage Banking Activities
- - Loan Originations, Purchases and Sales of Loans."
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<PAGE>
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
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.
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<PAGE>
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. On November 12, 1999, the President signed the
Gramm-Leach-Bliley Financial Modernization Act of 1999 into law. The
Modernization Act will (i) allow bank holding companies meeting management,
capital and Community Reinvestment Act standards to engage in a substantially
broader range of nonbanking activities than currently is permissible, including
insurance underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a financial
holding company, it files a certification, effective in 30 days, and thereafter
may engage in certain financial activities without further approvals; (ii) allow
insurers and other financial services companies to acquire banks; (iii) remove
various restrictions that currently apply to bank holding company ownership of
securities firms and mutual fund advisory companies; and (iv) establish the
overall regulatory structure applicable to bank holding companies that also
engage in insurance and securities operations. This part of the Modernization
Act will become effective on March 13, 2000.
On January 19, 2000, the Federal Reserve Board adopted an interim rule
allowing bank holding companies to submit certifications by February 15 to
become financial holding companies on March 13, 2000. The Federal Reserve Board
also provided regulations on procedures which would be used against financial
holding companies which have depository institutions which fall out of
compliance with the management or capital criteria. Only financial holding
companies can own insurance companies and engage in merchant banking.
The Modernization Act also modifies other current financial laws,
including laws related to financial privacy and community reinvestment.
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
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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, 1999. An additional assessment is added to the
regular SAIF- assessment and the regular BIF-assessment, respectively, until
December 31, 1999, in order to cover Financing Corporation debt service
payments. Such additional assessments amount to 6.3 basis points and 1.3 basis
points for SAIF insured deposits and BIF insured deposits, respectively.
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 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
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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,
1999, 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
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insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Puerto Rico Banking Law. As a commercial bank organized under the laws
of the Commonwealth, the Bank is subject to supervision, examination and
regulation by the OCFI pursuant to the Puerto Rico Banking Law.
The Puerto Rico Banking Law requires that at least ten percent (10%) of
the yearly net income of the Bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
the sum of the Bank's paid-in common and preferred stock capital. As of December
31, 1999, the Bank had credited $5.1 million to such reserve fund.
The Puerto Rico Banking Law also provides that when the expenditures of
a bank are greater than the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the bank, and the balance,
if any, shall be charged against the reserve fund, as a reduction thereof. If
there is no reserve fund sufficient to cover such balance in whole or in part,
the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original
amount and the reserve fund to 20% of the original capital. In addition, every
bank is required by the Puerto Rico Banking Law to maintain a legal reserve
which shall not be less than 20% of its demand liabilities, except government
deposits (federal, state and municipal) which are secured by actual collateral.
The reserve is required to be made up of any of the following instruments or any
combination of them: (i) legal tender of the United States; (ii) checks on banks
or trust companies located in any part of Puerto Rico, to be presented for
collection during the day following that on which they are received; (iii) money
deposited in other banks provided said deposits are authorized by the
Commissioner, subject to immediate collection; and (iv) federal funds sold and
securities purchased under agreements to resell, provided such funds are repaid
on or prior to the close of the next business day.
Under the Puerto Rico Banking Law, the Bank is permitted to make loans
to any one person, firm, partnership or corporation, up to an aggregate amount
of fifteen percent (15%) of the paid-in capital and reserve fund of the Bank,
plus 15% of 50% of undistributed earnings for "well capitalized" institutions.
As of December 31, 1999, the legal lending limit for the Bank under these
provisions was approximately $20.0 million and its maximum extension of credit
to any one borrower was $17.2 million. If such loans are secured by collateral
worth at least twenty-five percent (25%) more than the amount of the loan, the
aggregate maximum amount may reach one-third of the paid-in capital of the Bank,
plus its reserve fund. There are no restrictions on the amount of loans to
subsidiaries of banks, or loans that are secured by mortgages by real estate, or
loans that are wholly secured by bonds, securities and other evidences of
indebtedness of the United States or the Commonwealth, or by current debt bonds,
not in default, of municipalities or instrumentalities of the Commonwealth.
Loans to non-banking affiliates of the Bank, are subject however to the lending
limitations set forth in Sections 23A and 23B of the Federal Reserve Act. The
Puerto Rico Banking Law also authorizes the Bank to conduct certain financial
and related activities directly or through subsidiaries. The Puerto Rico Banking
Law also prohibits Puerto Rico banks from making loans secured by their own
stock, and from purchasing their own stock, unless
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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 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.
R&G Mortgage
The mortgage banking business conducted by R&G Mortgage is 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. R&G Mortgage's affairs are
also subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and
VA at all times to assure compliance with the applicable regulations, policies
and procedures. Mortgage origination activities are subject to, among others,
the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder.
R&G Mortgage's 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
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certain credit transactions, including any refinance mortgage or junior mortgage
loan on a consumer's primary residence.
R&G Mortgage is 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 R&G Mortgage in any escrow account for the payment of taxes,
insurance premiums or other charges.
R&G Mortgage is 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 is licensed by the
OCFI as a mortgage banking institution in Puerto Rico. Such authorization to act
as a mortgage banking institution must be renewed as of January 1 of each year.
In the past, R&G Mortgage 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 R&G Mortgage 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
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.
52
<PAGE>
Effective April 1996, the Financing Board eliminated the regulations that set
forth the maximum interest rates that could be charged on non-federal government
guaranteed loans.
Item 2. Properties.
The Company's principal executive office is located at 280 Jesus T.
Pinero Avenue, Hato Ray, San Juan, Puerto Rico 00918. The following table sets
forth the net book value (including leasehold improvements and equipment) and
certain other information with respect to the offices and other properties of
R&G Financial at December 31, 1999, all of which properties are leased.
<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- ----------------------------------------------------------------------------------- -------------------
(In Thousands)
<S> <C> <C>
The Bank:
Hato Rey Branch(1)(2)(3) December 31, 2003 $1,548
280 Jesus T. Pinero Avenue One (1) five year option
Hato Rey, PR 00919
Los Jardines Branch September 4, 2000 114
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969
San Patricio Branch(4) June 30, 2013 1,392
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969
Bayamon Branch(2)(3) May 31, 2001 206
42-43 Betances Avenue One (1) ten year option
Hermanas Davila
Bayamon, PR 00959
Bayamon East Branch(4) January 10, 2001 363
Road #174, Lot 100 Two (2) five year options
Minillas Industrial Park
Bayamon, PR 00959
Arecibo Branch(3) December 31, 2001 144
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Branch(3) August 8, 2009 415
Plaza Puerta del Sol Four (4) five year options
PR Road No. 2, Km. 49.7
Manati, PR 00674
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- ----------------------------------------------------------------------------------- -------------------
<S> <C> <C>
Carolina Branch(4) July 31, 2003 248
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985
Trujillo Alto Branch(4) October 31, 2004 134
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
Santurce Branch(4) April 30, 2005 312
1077 Ponce de Leon Avenue Two (2) six year options
Santurce, PR 00917
Laguna Gardens Branch(4) April 30, 2004 113
Laguna Gardens Shopping Center
Isla Verde
Carolina, PR 00979
Plaza Carolina Branch(4) May 31, 2000 147
Plaza Carolina Mall
Carolina, PR 00985
Norte Shopping Branch(4) April 30, 2000 140
Norte Shopping Center Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907
Vega Baja Branch(4) May 31, 2003 321
Cabo Caribe Development One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693
Mayaguez Branch(3) April 30, 2002 600
McKinley Street Three (3) five year options
Corner Dr. Vady
Mayaguez, PR 00680
Fajardo I Branch(2)(4) March 15, 2003 354
Garrido Morales Street Two (2) five year options
Corner San Rafael
Fajardo, PR 00738
Martinez Nadal Branch(4) June 14, 2003 543
Paradise Mall Two (2) five year options
Corner Jesus T. Pinero Ave.
Rio Piedras, PR 00925
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- ----------------------------------------------------------------------------------- -------------------
(In Thousands)
<S> <C> <C>
Ponce Branch(4) March 31, 2005 281
Lifetime Building Lot 5 Two (2) five year options
Industrial San Rafael
Ponce, PR 00731
Fajardo II Branch(4) September 1, 2006 52
Celis Aguilera #161 One (1) seven year option
Fajardo, PR 00738
Plaza del Sol Branch(4) November 15, 2010 790
Plaza del Sol Mall Two (2) four year options
725 West Main Ave.
Bayamon, PR 00961
Operations Center(2) January 10, 2001 2,581
Road #174, Lote 100 Two (2) five year options
Minillas Industrial Park
Bayamon, PR 00959
Plaza Interamericana Branch September 30, 2002 1,253
Plaza Interamericana Mall Five (5) five year options
Sein Street and PR Road No. 177
San Juan, PR 00908
Plaza Las Americas Branch June 30, 2004 421
Plaza Las Americas Shopping Center
Hato Rey, PR 00918
Caguas Branch August 25, 2004 415
PR Road No. 1, Km 33.6 Three (3) five year options
Villa Blanca Industrial Area
Caguas, Puerto Rico 00725
Branch locations to be -- 268
opened in 2000 -------
13,155
-------
Continental Capital:
Huntington Office -- 950
1841 New York Avenue
Huntington Station, NY 11746
Bay Shore Office (month-to-month) 20
1555 Sunrise Hwy.
Bay Shore, NY 11706
Administrative Office October 2004 45
125 Bayless Rd. One (1) five year option
Melville, NY 11747
Office location to be opened in 2000 35
-------
1,050
-------
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- ----------------------------------------------------------------------------------- -------------------
(In Thousands)
<S> <C> <C>
Champion Mortgage:
Hato Rey Branch June 30, 2003 195
295 Jesus T. Pinero One (1) five year option
San Juan, PR 00918
Ponce Branch (month-to-month) 32
Las Americas Ave
Ext. Buena Vista #25
Ponce, PR 00731
Bayamon Branch March 31, 2004 107
Street No. 1, #44 Two (2) five year options
Hermanas Davila
Bayamon, Puerto Rico 00959
Aguadilla Branch May 2006 57
PR Road No. 2 One (1) five year option
Punto Oro Shopping Center
Aguadilla, Puerto Rico 00603
Caguas Branch October 2004 32
Pino Street, H22 Two (2) one year options
Villa Tarabo
Caguas, Puerto Rico 00725
Guayama Branch August 2000 --
Ashford Ave., #45 South Three (3) three year options
Guayama, Puerto Rico 00784
-------
423
-------
R&G Mortgage:
Caguas Office July 31, 2000 43
D-9 Degetau Street One (1) five year option
San Alfonso
Caguas, PR 00725
Los Jardines Office(5) August 1, 2006 16
Los Jardines de Guaynabo Shopping Center One (1) five year option
PR Road No. 20
Guaynabo, PR 00969
Hato Rey Office(2)(3) December 31, 2002 4,637
280 Jesus T. Pinero Avenue Two (2) five year options
Hato Rey, PR 00919
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- ----------------------------------------------------------------------------------- -------------------
(In Thousands)
<S> <C> <C>
Bayamon Office(2)(3) May 30, 2001 63
42-43 Betances Avenue One (1) ten year option
Hermanas Davila
Bayamon, PR 00959
Arecibo Office(3) January 1, 2002 6
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612
Manati Office(3)(6) October 30, 2003 40
Plaza Puerta del Sol One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674
Mayaguez Office(3)(6) October 30, 2003 26
McKinley Street One (1) five year option
---------
Corner Dr. Vady
Mayaguez, PR 00680
4,831
---------
19,459
=========
</TABLE>
(Footnotes on following page)
57
<PAGE>
(1) Also serves as the main office of R&G Financial.
(2) Leased from VIG Leasing, S.E., which is owned by the family of Victor
J. Galan, Chairman of the Board and Chief Executive Officer of R&G
Financial.
(3) The Bank and R&G Mortgage each maintain separate offices in the same
building.
(4) Facility includes an R&G Mortgage Banking Center.
(5) The Bank maintains an office at this location in a separate facility.
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
83 and 84 of the Registrant's 1999 Annual Report.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages
23 to 25 of the Registrant's 1999 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
26 to 44 of the Registrant's 1999 Annual Report.
58
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required herein is incorporated by reference from pages
26 to 31 of the Registrant's 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
45 to 82 of the Registrant's 1999 Annual Report.
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
three to eight and 11 of the Registrant's Proxy Statement dated April 4, 2000
("Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
12 to 16 and 19 to 22 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
nine to 11 of the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from pages
16 to 19 of the Registrant's Proxy Statement.
59
<PAGE>
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, 1999 and 1998.
Consolidated Statements of Income for the Years Ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(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.
60
<PAGE>
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Description
- ------------ ---------------------------------------------------------------
2.0 Amended and Restated Agreement and Plan of Merger by and
between R&G Financial Corporation, the Bank and R-G Interim
Premier Bank, dated as of September 27, 1996.(1)
3.1 Certificate of Incorporation of R&G Financial Corporation.(2)
3.2 Certificate of Amendment to Certificate of Incorporation of R&G
Financial Corporation.(2)
3.2.1 Amended and Restated Certificate of Incorporation of R&G
Financial Corporation(4)
3.3 Bylaws of R&G Financial Corporation.(2)
3.4 Certificate of Resolutions designating the terms of the
Series A Preferred Stock.(6)
3.5 Certificate of Resolutions designating the terms of the
Series B Preferred Stock.
4.0 Specimen of Stock Certificate of R&G Financial Corporation.(2)
4.1 Form of Series A Preferred Stock Certificate of R&G Financial
Corporation.(3)
4.2 Form of Series B Preferred Stock Certificate of R&G Financial
Corporation.(5)
10.1 Master Purchase, Servicing and Collection Agreement between R&G
Mortgage and the Bank dated February 16, 1990, as amended on
April 1, 1991, December 1, 1991, February 1, 1994 and July 1,
1994.(2)
10.2 Master Custodian Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on June 27, 1996.(2)
10.3 Master Production Agreement between R&G Mortgage and the Bank
dated February 16, 1990, as amended on August 30, 1991 and
March 31, 1995.(2)
10.4 Data Processing Computer Service Agreement between R&G Mortgage
and R-G Premier Bank dated December 1, 1994.(2)
10.5 Securitization Agreement by and between R&G Mortgage and the
Bank, dated as of July 1, 1995.(2)
10.6 R&G Financial Corporation Stock Option Plan.(2)(*)
13.0 1999 Annual Report to Stockholders.
21.0 Subsidiaries of the Registrant - Reference is made to "Item 1.
Business" for the required information.
27.0 Financial Data Schedule.
99.1 Valuation Report on Minority Interest of Bank Stockholders,
prepared by Friedman, Billings, Ramsey & Co., Inc., dated June
13, 1996.(2)
99.2 Update to Valuation on Minority Interest of Bank Stockholders,
prepared by Friedman, Billings, Ramsey & Co., Inc., dated
September 27, 1996.(1)
- -------------------------
(1) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 333-13199) filed by the Registrant with the
Securities and Exchange Commission ("SEC") on October 1, 1996.
61
<PAGE>
(2) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-06245) filed by the Registrant with the SEC on
June 18, 1996, as amended.
(3) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-60923), as amended, filed with the
SEC on August 7, 1998.
(4) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on November 19, 1999.
(5) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-90463), filed with the SEC on
November 5, 1999.
(6) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on August 31, 1998.
(*) Management contract or compensatory plan or arrangement.
(3)(b) Reports on Form 8-K.
Current Report on Form 8-K filed November 19, 1999 with
respect to Amended and Restated Certificate of Incorporation
of Registrant.
None.
62
<PAGE>
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
April 5, 2000 By: /s/ Victor J. Galan
-------------------
Victor J. Galan
Chairman of the Board, President 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 April 5, 2000
- --------------------------------------------
Victor J. Galan
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/ Joseph R. Sandoval April 5, 2000
- --------------------------------------------
Joseph R. Sandoval
Senior Vice President and Chief Financial
Officer (principal financial and
accounting officer)
/s/ Ana M. Armendariz April 5, 2000
- --------------------------------------------
Ana M. Armendariz
Director and Treasurer
/s/ Ramon Prats April 5, 2000
- --------------------------------------------
Ramon Prats
Executive Vice President and Director
<PAGE>
/s/ Enrique Umpierre-Suarez April 5, 2000
- -------------------------------------------
Enrique Umpierre-Suarez
Director and Secretary
/s/ Victor L. Galan Fundora April 5, 2000
- -------------------------------------------
Victor L. Galan Fundora
Director
/s/ Juan J. Diaz April 5, 2000
- -------------------------------------------
Juan J. Diaz
Director
/s/ Pedro Ramirez April 5, 2000
- -------------------------------------------
Pedro Ramirez
Director
/s/ Laureno Carus Abarca April 5, 2000
- -------------------------------------------
Laureno Carus Abarca
Director
/s/ Eduardo McCormack April 5, 2000
- -------------------------------------------
Eduardo McCormack
Director
/s/ Gilberto Rivera-Arrega April 5, 2000
- -------------------------------------------
Gilberto Rivera-Arreaga
Director
/s/ Benigno R. Fernandez April 5, 2000
- -------------------------------------------
Benigno R. Fernandez
Director
/s/ Ileana M. Colon-Carlo April 5, 2000
- -------------------------------------------
Ileana M. Colon-Carlo
Director
<PAGE>
/s/ Roberto Gorbea April 5, 2000
- -------------------------------------------
Roberto Gorbea
Director
EXHIBIT 3.5
Certificate of Resolution
Establishing and Designating the Series
and Fixing and Determining the
Relative Rights and Preferences of the
Noncumulative Perpetual Monthly Income
Preferred Stock, Series B
($25 Liquidation Preference Per Share) of
R&G Financial Corporation
I, Enrique Umpierre-Suarez, the duly appointed Secretary of R&G
Financial Corporation (the "Corporation"), a corporation organized and existing
under the laws of the Commonwealth of Puerto Rico, hereby certify that the
following resolutions were duly adopted by the Board of Directors of the
Corporation pursuant to authority conferred by the Corporation's Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), at a meeting
thereof duly held on October 28, 1999 and by the Pricing Committee of the Board
of Directors, pursuant to authority conferred by the Board of Directors, at a
meeting thereof duly held on December 16, 1999:
RESOLVED, that pursuant to the authority expressly vested in the Board
of Directors of the Corporation by Article IV of its Certificate of
Incorporation, the Board of Directors hereby authorizes the issuance of
up to 1,000,000 shares of its preferred stock, par value $0.01,
liquidation preference $25.00 per share to be designated as R&G
Financial Corporation Noncumulative Perpetual Monthly Income Preferred
Stock, Series B (the "Series B Preferred Stock").
The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of
the shares of the Series A Preferred Stock are as follows:
1. Dividend Rights
(a) Holders of record of Series B Preferred Stock shall be entitled to
receive noncumulative cash dividends payable monthly in arrears for
each month at the Dividend Rate (as hereinafter defined) as applicable,
when and as and if declared by the Board of Directors, or a duly
authorized committee thereof, out of funds legally available therefor.
Dividends on the Series B Preferred Stock will accrue from their date
of issuance and will be payable monthly in arrears in United States
dollars commencing on January 1, 2000, and for each monthly dividend
period commencing on the first day of each month thereafter, and ending
on and including the day next preceding the first day of the next
Dividend Period (each, a "Dividend Period") to the holder of record of
the Series B Preferred Stock as they
<PAGE>
appear on the books of the Corporation on the second business day (as
defined below), immediately preceding the relevant Dividend Payment
Date (as defined below). Dividends so declared will be payable on the
first day of each month commencing on January 1, 2000 (each, a
"Dividend Payment Date"). The amount of dividends payable per share of
Series A Preferred Stock for each Dividend Period shall be computed on
the basis of twelve 30-day months and a 360-day year. The amount of
dividends payable for any period shorter than a full month dividend
period will be computed on the basis of the actual number of days
elapsed in such period.
(b) Holders of Series B Preferred Stock will not participate in
dividends, if any, declared and paid on the common stock of the
Corporation (the "Common Stock"). Except as descried herein, holders of
the Series B Preferred Stock will have no other right to participate in
the profits of the Corporation or to receive dividends. The right of
holders of Series B Preferred Stock to receive dividends is
noncumulative.
(c) If the Board of Directors of the Corporation or an authorized
committee thereof does not declare a dividend on the Series B Preferred
Stock for a Dividend Period, then holders of the Series B Preferred
Stock will have no right to receive a dividend for that Dividend
Period, and the Corporation will have no obligations to pay the
dividend accrued for that Dividend Period, whether or not dividends are
declared for any subsequent Dividend Period.
(d) When dividends which are not paid in full on the Series B Preferred
Stock and on any other shares of preferred stock of the Corporation
ranking on a parity as to the payment of dividends with the Series B
Preferred Stock, including the 7.4% Noncumulative Perpetual Monthly
Income Preferred Stock, Series A, all dividends declared upon the
Series B Preferred Stock and any such other shares of preferred stock
will be declared pro rata so that the amount of dividends declared per
share on the Series B Preferred Stock and any such other shares of
preferred stock will in all cases bear to each other the same ratio
that the liquidation preference per share of the Series B Preferred
Stock and any such other preferred stock bear to each other.
(e) So long as any shares of the Series B Preferred Stock remain
outstanding, unless the full dividends on all outstanding shares of
Series B Preferred Stock have been declared and paid or set apart for
payment for the current Dividend Period and have been paid for all
Dividend Periods for which dividends were declared and not paid, (i) no
dividend (other than a dividend in Common Stock or in any other stock
of the Corporation ranking junior to the Series B Preferred Stock as to
dividends or distribution of assets upon liquidation, dissolution or
winding up) may be declared and paid, or set apart for payment, or
other
<PAGE>
distribution declared or made, on the Common Stock or on any other
stock ranking junior to or on a parity with the Series B Preferred
Stock as to dividends or distribution of assets upon liquidation,
dissolution or winding up and (ii) no shares of Common Stock or shares
of any other stock of the Corporation ranking junior to or on a parity
with the Series B Preferred Stock as to dividends or distribution of
assets upon liquidation, dissolution or winding up, will be redeemed,
purchased or otherwise acquired for any consideration by the
Corporation or any subsidiary of the Corporation (nor may any moneys be
paid to or made available for a sinking or other fund for the
redemption, purchase or other acquisition of any shares of any such
stock), other than by conversion into or exchange for Common Stock or
any other stock of the Corporation ranking junior to the Series B
Preferred Stock as to dividends or distribution of assets upon
liquidation, dissolution or winding up.
(f) When a Dividend Payment Date falls on a day that is not a Business
Day, the dividend will be paid on the next Business Day, without any
interest or accumulation on payment in respect of any such delay. A
"Business Day" is a day on which the Nasdaq National Market is open for
trading and which is not a Saturday, Sunday or other day on which the
banks in the Commonwealth of Puerto Rico or New York City are
authorized or obligated by law to close.
2. Dividend Rate
The annual dividend rate per share for the Series B Preferred Stock
shall be 7.75% of the $25 liquidation preference per share, or
$0.1614583 per share per month (the "Dividend Rate").
3. Conversion; Exchange
The Series B Preferred Stock will not be convertible into, or
exchangeable for any other securities of the Corporation.
4. Redemption at the Option of the Corporation
(a) The shares of the Series B Preferred Stock are not redeemable prior
to January 1, 2005. On or after such date, the shares of Series B
Preferred Stock will be redeemable in whole or in part from time to
time at the option of the Corporation, upon not less than 30 nor more
than 60 days' notice, by mail, at the redemption prices set forth in
the table below, during the twelve month periods beginning on January 1
of the years set forth below, subject to the prior approval of the
Board of Governors of the Federal Reserve System, if required by
applicable law, plus an amount equal to dividends declared and unpaid
for the then-current Dividend Period (without accumulation of accrued
and unpaid dividends for prior Dividend
<PAGE>
Periods and without interest) to the date fixed for redemption.
Redemption
Year Price
------------------- ---------------
2005 $25.50
2006 25.25
2007 and thereafter 25.00
(b) In no event shall the Corporation redeem less than all of the
outstanding Series B Preferred Stock, unless dividends for the
then-current Dividend Period to the date fixed for redemption for such
series shall have been declared and paid or set apart for payment on
all outstanding Series B Preferred Stock, provided however, that the
foregoing provisions will not prevent, if otherwise permitted, the
purchase or acquisition by the Corporation of Series B Preferred Stock
pursuant to a tender or exchange offer made on the same terms to
holders of all the outstanding Series B Preferred Stock and mailed to
the holders of record of all such outstanding shares at such holders'
address as the same appear on the books of the Corporation; and
provided, further, that if some, but less than all, of the Series B
Preferred Stock are to be purchased or otherwise acquired by the
Corporation, the Series B Preferred Stock so tendered will be purchased
or otherwise acquired by the Corporation on a pro rata basis (with
adjustments to eliminate fractions) according to the number of such
shares tendered by each holder so tendering Series B Preferred Stock
for such purchase or exchange.
(c) In the event that less than all of the outstanding shares of the
Series B Preferred Stock are to be redeemed in any redemption at the
option of the Corporation, the total number of shares to be redeemed in
such redemption shall be determined by the Board of Directors and the
shares to be redeemed shall be allocated pro rata or by lot as may be
determined by the Board of Directors or by such other method as the
Board of Directors may approve and deem equitable, including any method
to conform to any rule or regulation of any national or regional stock
exchange or automated quotation system upon which the shares of the
Series B Preferred Stock may at the time be listed or eligible for
quotation.
(d) The Corporation may redeem the Series B Preferred Stock without
ever having declared or paid a dividend on such stock.
(e) Notice of any proposed redemption shall be given by the Corporation
by mailing a copy of such notice to the holders of record of the shares
of Series B Preferred Stock to be redeemed, at their address of record,
not more than 60 days nor less than 30 days prior to the redemption
date. The notice of redemption to each holder of shares of Series B
Preferred Stock shall specify the number of
<PAGE>
shares of Series B Preferred Stock to be redeemed, the redemption date
and the redemption price payable to such holder upon redemption and
shall state that from and after said date dividends thereon will cease
to accrue. If less than all the shares owned by a holder are then to be
redeemed at the option of the Corporation, the notice shall also
specify the number of shares of Series B Preferred Stock which are to
be redeemed and the numbers of the certificates representing such
shares. Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the
stockholder receives such notice. Failure to duly give such notice by
mail, or any defect in such notice, to the holders of any stock
designated for redemption shall not affect the validity of the
proceedings for the redemption of any other shares of Series B
Preferred Stock. Notice having been mailed as aforesaid, from and after
the redemption date (unless default be made in the payment of the
redemption price for any shares to be redeemed), all dividends on the
shares of Series B Preferred Stock called for redemption shall cease to
accrue and all rights of the holders of such shares as stockholders of
the Corporation by reason of the ownership of such shares (except the
right to receive the redemption price, on presentation and surrender of
the respective certificates representing the redeemed shares) shall
cease on the redemption date, and such shares shall not after the
redemption date be deemed to be outstanding. In case less than all the
shares represented by any such certificate are redeemed, a new
certificate shall be issued without cost to the holder thereof
representing the unredeemed shares, if requested by such shareholder.
(f) At its option, the Corporation may, on or prior to the redemption
date, irrevocably deposit with a paying agent (a "Paying Agent"),
having surplus and undivided profits aggregating at least $50 million,
funds necessary for such redemption in trust, with irrevocable
instructions and authorization that such funds be applied to the
redemption of the shares of Series B Preferred Stock called for
redemption upon surrender of certificates for such shares (properly
endorsed or assigned for transfer). If notice of redemption shall have
been mailed and such deposit is made and the funds so deposited are
made immediately available to the holders of the shares of the Series B
Preferred Stock to be redeemed, the Corporation shall thereupon be
released and discharged (subject to the provisions described in the
next paragraph) from any obligation to make payment of the amount
payable upon redemption of the shares of the Series B Preferred Stock
to be redeemed. Notwithstanding that any certificates for such shares
shall not have been surrendered for cancellation, the shares
represented thereby shall no longer be deemed to be outstanding.
Thereupon, the holders of such shares shall look only to the Paying
Agent for such payment. Thereafter, all rights of the holders of such
shares as holders of Series B Preferred Stock (except the right to
receive the redemption price, but without interest) will cease.
<PAGE>
(g) Any funds remaining unclaimed at the end of two years from and
after the redemption date in respect of which such funds were deposited
shall be returned to the Corporation forthwith and thereafter the
holders of shares of the Series B Preferred Stock called for redemption
with respect to which such funds were deposited shall look only to the
Corporation for the payment of the redemption price thereof. Any
interest accrued on any funds deposited with the Paying Agent shall
belong to the Corporation and shall be paid to it from time to time on
demand.
(h) Any shares of the Series B Preferred Stock which shall at any time
have been redeemed shall, after such redemption, have the status of
authorized but unissued shares of preferred stock, without designation
as to series, until such shares are once more designated as part of a
particular series by the Board of Directors.
5. Voting Rights
(a) Except as indicated herein, or except as required by applicable
law, the holders of the Series B Preferred Stock will not be entitled
to receive notice of or attend or vote at any meeting of the
stockholders of the Corporation.
(b) If a Voting Event (as defined in the next paragraph) occurs, the
holders of outstanding shares of the Series B Preferred Stock, together
with the holders of shares of any one or more other series of preferred
stock entitled to vote for the election of directors in the event of
any failure to pay dividends, acting as a single class will be
entitled, by written notice to the Corporation given by the holders of
a majority in liquidation preference of such shares or by ordinary
resolution passed by the holders of a majority in liquidation
preference of such shares present in person or by proxy at a separate
special meeting of such holders convened for the purpose, to appoint
two additional members of the Board of Directors of the Corporation, to
remove any such member from office and to appoint another person in
place of such member. Not later than 30 days after a Voting Event
occurs, if written notice by a majority of the holders of such shares
has not been given as provided for in the preceding sentence, the Board
of Directors or an authorized committee thereof will convene a separate
special meeting for the above purpose. If the Board of Directors or
such authorized committee fails to convene such meeting within such
30-day period, the holders of 10% of the outstanding shares of the
Series B Preferred Stock and of any such other securities will be
entitled to convene such meeting. The provisions of the Certificate of
Incorporation and the By-Laws of the Corporation relating to the
convening and conduct of general meetings of stockholders will apply
with respect to any such separate special meeting. Any member of the
Board of Directors so appointed shall vacate office if, following the
event which gave rise to such appointment, the Corporation shall have
resumed the payment of
<PAGE>
dividends in full on the Series B Preferred Stock and each such other
series of stock for twelve consecutive monthly Dividend Periods.
(c) A "Voting Event" will be deemed to have occurred in the event that
dividends payable on any share or shares of Series B Preferred Shares
shall not be declared and paid at the stated rate for the equivalent of
eighteen full monthly Dividend Periods (whether or not consecutive). A
Voting Event will be deemed to have been terminated when dividends have
been paid regularly for twelve consecutive monthly Dividend Periods.
(d) Any variation or abrogation of the rights, preferences and
privileges of the Series B Preferred Stock by way of amendment of the
Certificate of Incorporation or otherwise (including, without
limitation, the authorization or issuance of any shares of the
Corporation ranking, as to dividend rights or rights on liquidation,
winding up and dissolution, senior to the Series B Preferred Stock)
shall not be effective (unless otherwise required by applicable law)
except with the consent in writing of the holders of at least
two-thirds of the outstanding shares of the Series B Preferred Stock or
with the sanction of a special resolution passed at a separate special
meeting by the holders of at least two-thirds of the outstanding shares
of the Series B Preferred Stock. Notwithstanding the foregoing, the
Corporation may, without the consent or sanction of the holders of
Series B Preferred Stock, authorize and issue shares of the Corporation
ranking as to dividend rights and rights on liquidation, winding up or
dissolution, on a parity with or junior to the Series B Preferred
Stock.
(e) No vote of the holders of the Series B Preferred Stock will be
required for the Corporation to redeem or purchase and cancel the
Series B Preferred Stock.
(f) The Corporation will cause a notice of any meeting at which holders
of Series B Preferred Stock are entitled to vote to be mailed to each
record holder of the Series B Preferred Stock. Each such notice will
include a statement setting forth (i) the date of such meeting, (ii) a
description of any resolution to be proposed for adoption at such
meeting on which such holders are entitled to vote and (iii)
instructions for deliveries of proxies.
5. Liquidation Preference
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
Series B Preferred Stock will be entitled to receive out of assets of
the Corporation available for distribution to stockholders, before any
distribution of the assets is made to the holders of shares of the
Common Stock or on any other class or series of stock of the
Corporation
<PAGE>
ranking junior to the Series B Preferred Stock as to such a
distribution, an amount equal to $25.00 per share, plus an amount equal
to dividends declared and unpaid for the then current Dividend Period
(without accumulation of accrued and unpaid dividends for prior
Dividends Periods) to the date fixed for payment of such distribution.
(b) If, upon any voluntary or involuntary liquidation, dissolution or
winding up the Corporation, the assets of the Corporation are
insufficient to make the full liquidation payment on the Series B
Preferred Stock and liquidating payments or any other class or series
of stock of the Corporation ranking on a parity with the Series B
Preferred Stock as to any such distribution, then such assets will be
distributed among the holders of the Series B Preferred Stock and such
other class or series of parity stock ratably in proportion to the
respective full preferential amounts to which they are entitled.
(c) After any liquidating payments, the holders of the Series B
Preferred Stock will be entitled to no other payments. A consolidation
or merger of the Corporation with or into any other corporation or
corporations or the sale, lease or conveyance, whether for cash, shares
of stock, securities or properties, of all or substantially all the
assets of the Corporation will not be regarded as a liquidation,
dissolution or winding up of the Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
the seal of the Corporation this 17th day of December, 1999.
/s/ Enrique Umpierre-Suarez
---------------------------
Enrique Umpierre-Suarez
Secretary
EXHIBIT 13
R-G FINANCIAL CORPORATION
1999 ANNUAL REPORT
Strategic Expansion Into the XXI Century [GRAPHIC-LOGO FOR R&G FINANCIAL]
<PAGE>
Table of Contents
Financial Highlights 1
Profile 3
Letter to Stockholders 5
Strategic Growth 17
Board of Directors 20
Key People 22
Financials 23
Stockholder Information 83
<PAGE>
MISSION STATEMENT
WE WILL STRIVE FOR LONG-TERM FINANCIAL STRENGTH AND PROFITABILITY BY
CENTERING OUR STRATEGY ON CUSTOMER SATISFACTION, BEING OUR CUSTOMERS' FIRST
CHOICE FOR SERVICE AND SOLUTIONS.
Providing borrowers with competitive prices, a variety of loan programs, and
service which is prompt, courteous and responsive to the unique characteristics
of every customer.
We seek to be a high-performance financial organization that delivers one-stop
financial services to its clients; that is recognized as the best provider of
value-added, service oriented financial services; and that offers services of
unmatched quality in terms of accessibility, responsiveness and turnaround time.
The key to our success is effective execution, every day, everywhere. By
everyone.
We will achieve these goals by making available a growing number of services and
products within an environment that is both technologically advanced and
friendly, and by creating a work environment where all team members care and are
committed individually and as a team to do their best.
What makes us a leader is not what we say, but what we do and the way we do it.
<PAGE>
Financial Highlights
(Dollars in Thousands, except for per Share Data)
<TABLE>
<CAPTION>
Percent
Increase 1999 1998 1997
vs. 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan Production 39% 1,977,322 1,426,069 906,324
Gross Revenues 29 233,953 180,767 138,440
Net Earnings 21 41,335 34,034 23,497
Total Assets 42 2,911,993 2,044,781 1,510,745
Return on Assets (12) 1.72% 1.95% 1.85%
Servicing Portfolio 28 6,177,511 4,827,798 3,000,888
Efficiency Ratio (12) 54.39% 48.55% 50.28%
Spread Income 29 56,578 43,973 36,530
Fee Income 25 70,811 56,470 41,105
Shareholders Equity 22 269,535 221,162 138,054
Common Shareholders
Equity per Share 13 6.79 5.99 4.88
Return on Common Equity (5) 20.23% 21.32% 18.69%
Diluted Earnings
per Common Share 14 1.28 1.12 0.81
Cash Dividends Declared
per Common Share 34 0.149 0.111 0.065
Market Value per Share (45) 11.50 21.00 9.63
</TABLE>
[GRAPHIC- GRAPH DEPICTING REVENUES]
[GRAPHIC- GRAPH DEPICTING NET INCOME]
[GRAPHIC- GRAPH DEPICTING ASSETS]
1
<PAGE>
[GRAPHIC- GRAPH DEPICTING LOAN PORTFOLIO]
[GRAPHIC- GRAPH DEPICTING DEPOSITS]
[GRAPHIC- GRAPH DEPICTING STOCKHOLDERS EQUITY]
2
<PAGE>
Profile
The Company was organized in 1972 as R-G Mortgage Corp. In 1996 we
organized R-G Financial as a bank holding company, and went public on August 22,
1996. R-G Financial has $2.9 billion in assets and operates 53 banking and
mortgage banking branches in 29 locations in Puerto Rico and two locations in
New York.
R-G Financial has the following financial services companies: R-G Premier Bank
of Puerto Rico, R-G Mortgage Corp., and Champion Mortgage Corp. located in
Puerto Rico, and Continental Capital Corp. located in New York. R-G Mortgage is
the second largest mortgage originator in Puerto Rico, and R-G Premier Bank has
been one of the fastest growing commercial banks in the island during the last 5
years. R-G Financial as a holding company is the fourth largest locally owned
financial institution in Puerto Rico. R-G Financial manages a $6.2 billion
servicing portfolio and is growing originations due to a strong housing market,
low interest rates, and state-of-the art technology. R-G Financial has a $1.1
billion residential portfolio, $321.2 million in a commercial real estate and
construction portfolio, $54.2 million in commercial business loans and leases,
and $37.7 in personal loans and credit cards. Its $1.0 bi-llion investment
portfolio consists primarily of tax-exempt mortgage-backed securities and U.S.
Government agency securities. Approximately 1,300 professionals and a
sophisticated computer center support the activities of the operation. R-G
Financial common and preferred stocks are publicly traded on the Nasdaq Stock
Market under the symbols "RGFC", "RGFCP" and "RGFCO", respectively.
3
<PAGE>
[GRAPHIC-MAP OF PUERTO RICO DEPICTING COMPANY BRANCH LOCATIONS]
[GRAPHIC-MAP OF LONG ISAND, NEW YORK DEPICTING COMPANY BRANCH LOCATIONS]
4
<PAGE>
Letter to Stockholders
Executive Overview
Dear Fellow Stockholders:
I am pleased to report another year of accomplishments for R-G Financial. During
1999 we achieved record double-digit earnings growth and significantly enhanced
the fundamentals of our business. We increased our loan portfolio substantially,
strengthened our balance sheet, and increased the efficiency of our operations.
At the same time, we continued to deliver an exceptionally high level of service
through the Bank and our mortgage banking companies, both in Puerto Rico and the
mainland.
For several reasons 1999 was an outstanding year for R-G. The Company's
recurring earnings and dividend distribution reached record highs. Strategic
initiatives added strength and depth to the Company, like our expansion to the
United States through the acquisition of Continental Capital Corp. in Long
Island, New York. The importance of the Long Island banking market is
underscored by its sheer size. With a population of seven million (including
Brooklyn and Queens) Long Island is the equivalent to the 12th largest state in
the United States. Each of the four counties in Long Island is among the 25th
largest in the nation, with two of the four having median household income
higher than the U.S. average of $36,656, with effective total income of $51.4
billion. These are prosperous markets that we service with two branches located
in the Nassau and Suffolk counties and one additional branch opened in Queens in
January 2000. This operation will provide the necessary economic support for our
entrance to the U.S. market through an operation which has been profitable since
it was formed, supporting our pro-
[GRAPHIC- GRAPHIC PORTRAIT OF VICTOR J. GALAN, R-G FINANCIAL CORPORATION
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER]
5
<PAGE>
posed expansion to the Hispanic population in the US.
Above all, 1999 was a year in which we added a substantial number of new
customers and increased our assets, deposits and capital to record levels. New
banking branches were opened in Plaza del Sol Shopping Center in Bayamon, Plaza
Inter-americana in Rio Piedras, and Plaza Las Americas, the largest shopping
center in Puerto Rico with more than two million square feet of commercial and
office space, located in the center of the city of San Juan. We now have a total
of three branches in Bayamon with our latest branch opening in this city, to
better serve and fully satisfy the banking needs of our customers in this part
of the metro area. Also during 1999, we completed the construction of another
new branch in Caguas, one of the largest cities of Puerto Rico, that we already
opened in January 2000, and completed a major remodeling of our San Patricio
Shopping Center branch located in the Caparra section of the city of San Juan.
This expansion should support additional growth of deposits and loans in general
since each branch, in addition to the banking business, has mortgage and
consumer centers and a commercial lending section seeking new loans, in addition
to the standard drive-in facilities and automatic teller machines. Also during
this period, we opened new branches of Champion Mortgage in Bayamon, Caguas,
Aguadilla and Guayama, increasing the total number of Champion Mortgage branches
to six at the end of 1999 from two the prior year. The strategies underlying
these achievements are equally notable because they form the basis of our
business plan for future growth that we continue to successfully implement.
How good a year was it?
First, look at the recurring numbers:
o $41.3 million net income
o 21% earnings increase
o 14% earnings per share increase
o 20.23% return on equity
o $2.9 billion in total assets
o 1.72% return on assets
o 53 loan production and banking offices located in Puerto Rico and
the U.S.
o Record annual loan production of $2.0 billion.
1999 was a banner year for R-G. Our profits, volume of loan originations and
assets all reached new highs. In addition we increased our servicing portfolio
to $6.2 billion, a record
[GRAPHIC - CUSTOMER USING AN ATM]
6
<PAGE>
amount for the Company. We are currently servicing more than 200,000 customers
through our mortgage and commercial banking operation.
The stock market was not favorable for financial stocks during 1999,
particularly in Puerto Rico, and our stock price fell from a high of $21 to
$11.50, an approximate 50% reduction, bringing the stock price close to book
value. We believe our stock price is undervalued now, representing a real
purchase opportunity for investors.
The management team of the Company will continue striving for company growth,
profitability and stockholders' value. We believe the continued achivements of
these objectives will once again be reflected in a more appropiate valuation of
our stock.
As part of our strategy we have hedged for this increasing interest rate cycle
through the implementation of three main initiatives during recent years -
increasing amounts of recurring income to be generated by our loan and servicing
portfolio, which we increased to record levels at the end of 1999 ($1.6 billion
and $6.2 billion, respectively); increasing our commercial loan portfolio
(comprised primarily of adjustable rate loans), which we increased 67% to $280
million during 1999 as a result of our commercial banking expansion; and
establishing a low-cost structure in our mortgage banking business, permitting
it to be profitable even though we might experience a lower volume of new loan
originations. In addition we have introduced new products during the last few
years - such as corporate lending and sub prime and home equity loans - which
represent significant sources of revenue for R-G. This should maintain profit
growth in the future.
Puerto Rico's economy appears poised for sustained growth in the first decade of
the 21st century. The construction industry is expected to continue expanding
during the next years - particularly in homebuilding - mostly due to demographic
changes. Demand for additional housing is abundant - for families of new
formation, step up buyers seeking better housing and second homes, and empty
nesters looking for smaller units, mostly luxury apartments,
[GRAPHIC- QUOTE- We believe that the economy in Puerto Rico and the United
States will continue to perform strongly in 2000.]
7
<PAGE>
while they sell their existing larger homes - completing the cycle of family
growth and real estate needs. Investment in homebuilding, which reached an all
time high of $3.0 billion in fiscal 1999, exceeded investment in tourism,
manufacturing, industrial, and commercial development combined. An important
aspect of this investment is that practically all of it was done with capital of
local investors who are mostly financed by institutions like ours.
We believe that the economy of Puerto Rico and the United States will continue
to perform strongly during 2000, with inflation remaining under control,
permitting interest rates to eventually stabilize. This will provide the
economic support for another vigorous and profitable business cycle, which will
be beneficial to institutions like ours dedicated primarily to real estate
finance.
We believe that the Company's strong position in the mortgage sector, combined
with its rapidly expanding banking operation will continue producing asset and
earnings growth in the future. This should cause the value of our common stock
to increase.
The 1999 Year in Review
Record Financial Results
Earnings for 1999 rose to a record of $41.3 million, increasing 21% from 1998
earnings of $34.0 million. On a per share basis (diluted), R-G Financial earned
$1.28 in 1999, compared to $1.12 the previous year, an increase of 14%. Our
compounded annual growth rate for the period 1979-99 was 42.5%, and 36.4% for
the period since August 22, 1996 when we became a public company. Since our
initial public offering, we have generated additional capital for our
shareholders of $90 million and increased assets by $1.9 billion, representing a
total growth of 86% in capital and 177% in assets, while paying dividends to our
common stockholders in the amount of $10.8 million. We believe that this rapid
growth is attributable to three strategies in particular - our investment in
technology, promotional campaigns and advertising; geographical expansion
through the opening of new branches in Puerto Rico and in the United States; and
the development of a strong sales culture. This has resulted in improved market
share in mortgage, commercial and consumer lending, as well as banking deposits.
[GRAPHIC - CUSTOMER USING AN ATM]
8
<PAGE>
Total gross revenues for 1999 amounted to $234.0 million compared to $180.8
million for 1998. Net revenues after deducting our cost of interest were $127.4
million, compared to $100.4 million in 1998. A significant portion of our 1999
net revenues consisted of net interest income totaling $56.6 million. Net
interest income for 1999 was up by 29% from the 1998 level. The balance of our
net revenues, amounting to $70.8 million, consisted of fees generated primarily
from the servicing of our mortgage portfolio, the origination and sale of loans,
and banking services.
The level of fee income in 1999 was 25% higher than in 1998. The Company
achieved solid gains in virtually all categories - mortgage and banking
operations, electronic banking, trusts, commercial loans, and credit cards - as
a direct result of providing a unique line of banking products and personalized
services.
We increased dividends to $0.149 per share from $0.111 per share in 1998. For
the quarter ended December 31, 1999, the dividend was increased to $0.18 per
share on an annual basis, a 34% annualized increase from the prior quarterly
dividend. This was our 13th consecutive increase since the Company went public.
In addition, since January 2000 we offer a stock reinvestment plan to our
stockholders as a simple method of reinvesting cash dividends in common stock.
(Refer to our Prospectus on this plan)
Shareholders' equity of $269.5 million as of December 31, 1999 was up 22% from
$221.2 million in 1998. Core capital represented 9.35% of our total assets,
significantly above the average commercial bank, and risk-based capital
represented 16.47% (on a consolidated basis), substantially exceeding the
minimums required by our regulators.
[GRAPHIC - GRAPH OF MORTGAGE SERVICING PORTFOLIO]
9
<PAGE>
Branch Expansion Program
During 1999 we opened three successful banking offices with the goal of
increasing commercial and retail core deposits. During 1999, these new branches
generated deposits in the amount of $29 million, surpassing our own projections.
In our market, branch availability and location still influence consumers'
decisions about which bank to do business with. Branches are also important to
many of our commercial customers who, to a large extent, still value and need
physical access. All our branches are strategically located, mostly in shopping
centers, and are designed to be selling platforms for cross-selling and
relationship building. We have created, in fact, a network of physical sites
where we can interact with our customers. This personal presence allows us to
consolidate our franchise in banking and mortgage banking.
At the close of the year we had 22 branches of R-G Premier Bank, 23 branches of
R-G Mortgage and 6 branches of Champion Mortgage (a subsidiary of R-G Mortgage),
each working in tandem in 29 different locations across the island of Puerto
Rico. In addition we had two offices of Continental Capital Corp. in Long
Island, New York. About 884 employees were assigned to branches, loan
origination and processing, 59 to operations, 236 to loan administration, and
the balance to general administrative and finance, which results in a total of
1,293 employees.
[GRAPHIC - R-G ATM CARD]
[GRAPHIC - R-G PREMIER BANK OF PUERTO RICO BANNER]
[GRAPHIC - R-G PLAZA LOGO ON BUILDING]
10
<PAGE>
With this expansion, we have completed a substantial part of our proposed branch
distribution since the most important economic areas of Puerto Rico are covered.
Future growth of physical locations will be at a slower pace since we have some
other marketing alternatives available to cover the remaining territory of the
island in which we do not have physical locations.
Record Loan Production and
Assets Growth
Loan production - comprised of residential and commercial mortgage lending,
consumer and business lending - reached an all time high of $2.0 billion in
1999. This represented a 39% increase from the $1.4 billion of production in
1998. We achieved this substantial growth through a very strong advertising
effort using print and broadcast media, a substantial expansion in branches and
increased telemarketing.
Our residential, commercial and construction mortgage originations translated
into a market share of 30%, based on an estimated total mortgage market of $5.3
billion in Puerto Rico last year, increasing from 28% the prior year.
Significant opportunities remain for even greater market share in mortgage
lending.
Champion Mortgage, a subsidiary of R-G Mortgage, achieved excellent results,
producing a record volume of non-conforming, including sub-prime, residential
mortgage loan originations. In view of the initial success of this operation, we
expanded its scope of business to include a full line of mortgage products. Our
intention is to separate this part of our business in order to focus on the
requirements of this very special market niche. During 1999 we opened a new
Champion Mortgage branch in Bayamon, a new branch in Caguas, a new branch in
Aguadilla, and a new branch in Guayama. In addition, we are presently evaluating
five other locations.
[GRAPHIC - GRAPH OF TOTAL LOAN PRODUCTION]
11
<PAGE>
Our residential portfolio at the end of 1999 totaled $1.1 billion, a 48%
increase from $754 million in 1998. The average yield for 1999 was 7.42%. This
portfolio included $1.1 billion of residential first mortgages and $13.0 million
of second mortgages.
During 1998 we expanded our services by organizing a Construction Loan
Department to work primarily with real estate developers. Previously we had
focused exclusively on financing individual residential construction. As of
December 31, 1999, we had outstanding loans of $44.6 million, plus commitments
for future funding of $50.6 million.
Our commercial loan portfolio, including commercial mortgages and leases,
increased to $280.3 million at year-end, an increase of 67% from the prior year.
This increase was due mostly to the introduction of customized commercial loans
structured to fit borrowers' needs. Most of this portfolio is structured with
interest rate floors, and generates yields that adjust with fluctuations in the
Prime Rate or LIBOR. Our consumer portfolio, which includes collateralized
consumer loans and credit cards, amounted to $114.6 million at the end of 1999.
This portfolio generated an average yield of 11.24% which improved the average
return of our total portfolio and our spread income.
Other than auto lending, a business in which we are not involved for the moment,
during 1999 we completed the full line of products necessary to compete
effectively either in the asset or the liability side of our banking business.
We are able to provide our clients this line of products as part of our
cross-selling program.
We expanded our servicing portfolio to 107,000 loans with a total balance of
$6.2 billion, an increase of $1.3 billion, or 28% from 1998. We estimate the
total value of our servicing portfolio at $111.0 million as of December 31,
1999, or $26.8 million above the value reflected in our books under Statement of
Financial Accounting Standards No. 125. This extra value is primarily
represented by portfolio not capitalized in our books. Our servicing portfolio
continues to be a strong source of revenue. Servicing income increased to
[GRAPHIC - QUOTE- We are providing a unique line of banking products and
personalized services.]
12
<PAGE>
$27.1 million in 1999 from $16.0 million in 1998.
We strengthened our credit loss reserves during the year, increasing the reserve
for loan losses to $9.0 million, a 11% increase from $8.1 million the previous
year. Reserves approximate 75% of total non-performing loans as of December 31,
1999, excluding our residential loan portfolio, where losses have historically
been minimal.
Loans sold during 1999 were substantial, totaling $904.5 million. These sales
consisted of $287.9 million of residential FHA and VA mortgage loans securitized
and sold in GNMA Pools, and $616.6 million of residential conventional loans
mainly sold to the government sponsored agencies (Fannie Mae and Freddie Mac).
Our ability to sell conventional mortgage loans was made easier by the
installation of scoring systems directly connected with both entities. The
direct connection allows for faster response about loan approvals, shorter
processing time, and immediate delivery to the secondary market once the loans
are closed.
Our securities portfolio increased by 63% in 1999, growing to $1.0 billion from
$639.7 million in 1998. These investments represented 36% of total assets as of
December 31, 1999, and with a yield of 6.30%, generated revenues of $43.8
million. Most of these securities are tax-free federally guaranteed bonds and
GNMA's. This contributed to the Company's reduction in taxes for 1999 to an
effective tax rate of 23% from 24.5% in 1998.
Liquid assets constituted 13.28% of our total assets at year-end, even though we
closed new loans totaling $2.0 billion during the year. Assets grew by $867
million during 1999 to a record $2.9 billion. This growth was financed by a $323
million increase in deposits, a $260 million increase in repurchase agreements
and a $204 million increase in lines of credit with banks and the Federal Home
Loan Bank of New York. The balance was financed through profits, loan payoffs
and sales, and funds generated by our preferred stock issue of $25 million last
December. The proceeds of this issue, with a gross return to investors of 7.75%,
were allocated to increase the capital of the Bank. At year-end, our unused
lines of credit, (including lines of
13
<PAGE>
credit with the Federal Home Loan Bank), totaled $446.9 million. We had $429.4
million of excess collateral available to cover advances from these lines, with
the collateral primarily available from our residential mortgage portfolio,
providing us with additional liquidity to continue our fast growth.
Record Deposits
Deposits were at a record level at the end of 1999, increasing by 32% to $1.3
billion from $1.0 billion in 1998. This growth was mainly due to three
initiatives: a very strong promotional campaign designed to generate core
deposits and to expand our Private Banking business; the opening of new
branches; and the expansion of our existing locations. New deposits with our
Private Banking Group rose substantially, and these accounts will lead to
additional business in 2000 as the Private Banking Group provides other products
and services to these customers, such as sale of investments, mutual funds, and
savings and retirement products such as IRAs and Keogh plans.
We are providing a unique line of banking products and personalized services in
"niche" savings programs. These programs are designed for customers who seek
high yields, diversity of products and access to electronic banking services,
but who also want their accounts to be FDIC-insured. The average per branch
deposit size increased 20% to $60.5 million in 1999 from $50.3 million in 1998,
even though we opened three new branches during the year. Our average per branch
deposit size exceeds the average per branch deposits in Puerto Rico. Core
deposits, primarily consisting of saving and direct deposit accounts,
represented 59.7% of our total deposits (also above the average for the banking
industry in Puerto Rico). Brokered deposits were only 9.6% of our total
deposits. Our share of the total deposit market in Puerto Rico increased to
4.50% from 4.34% in 1998, while our share of the primary markets we serve
(northern Puerto Rico plus Caguas, Ponce, and Mayaguez) increased to 5.76% from
5.39%.
New Services and State
of the Art Technology
The introduction of Interactive Internet Banking as part of our strategy to
combine "bricks and web" has been a total success, and we continue
[GRAPHIC - QUOTE- The introduction of Interactive Internet Banking as part of
our strategy has been a total success.]
14
<PAGE>
to be one of the few banks in Puerto Rico providing Internet Banking (including
bill payments) while expanding physical locations. We are moving a step closer
to creating a true virtual bank. With a virtual bank, most transactions done at
any physical branch can instead be performed from one's home or office via
computer. Access to Internet has grown faster than anticipated. Statistics
indicate that there are over 450,000 persons currently connected to the Internet
in Puerto Rico. As a result of this widespread acceptance, online banking has
experienced steady growth. Web based banking provides us with the potential to
increase revenues - by attracting new clients while retaining our existing ones
- - and decrease operating and transaction costs, thereby improving efficiencies.
Please be sure to visit us on the web at www.rgonline.com. With this product, we
are offering our customers the full gamut of technological services - electronic
commerce, home banking, Internet for mortgage and other loan applications as
well as banking transactions, and imaging, as well as our voice response system,
ATM's and platform branch automation. With a push of a button, click of a mouse,
or phone call, our customers can access their accounts and Company information
24 hours a day, 7 days a week, either through our voice-activated response
system, offering a 24-hour toll-free telephone account information access,
through home banking, or through interactive Internet banking.
The transition into the new millennium was a safe, uneventful situation, with
complete absence of glitches. We want to congratulate all our staff for the easy
transition that never posed a serious disruption to our business, making the Y2K
transition a success. Also we want to thank our
[GRAPHIC - GRAPHIC OF R-G ONLINE WEB PAGE]
15
<PAGE>
customers for keeping their trust and money in the Bank.
We are pleased with the Company's results for 1999. We significantly increased
loan originations and, from our internal loan production, added to our inventory
$660 million of unsold loans in our balance sheet to expand our earning-assets
base. As a result, total assets grew to a record $2.9 billion, and our servicing
portfolio increased to a record $6.2 billion. Total assets under administration
(including our servicing portfolio) grew to $9.1 billion during 1999, rising
32% from the prior year. All of these accomplishments led to a strong
improvement in revenues and net income for 1999. We are optimistic that these
accomplishments will also translate into increased profitability in the future.
The Company will continue to emphasize strong capital ratios, good asset
quality, expense control, and increased spread and fee income as key financial
sources of future success. Our competitive advantage is a talented, motivated
and highly trained staff that is directed by an excellent management team that
is compensated through carefully designed incentive programs. Employees are
committed to delivering exceptional products and services to our customers. R-G
is already a widely recognized financial brand with a significant franchise in
the Puerto Rico market.
Our appreciation to our valued customers for their patronage, to our great team
of people for being the very best at what they do, to our directors for their
exceptional dedication to the Company's success, and to our stockholders for
their confidence and support.
All of us at R-G look forward to
adding value to our investment as shareholders today, tomorrow, as well as into
the new century. We thank you for your help, encouragement and support. We are
committed to delivering improving returns for our stockholders.
/s/ Victor J. Galan
- -------------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
R-G Financial Corporation
[GRAPHIC-PHOTO OF VICTOR J. GALAN, R-G FINANCIAL CORPORATION CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE OFFICER, AND RAMON PRATS, VICE CHAIRMAN OF THE BOARD
AND EXECUTIVE VICE PRESIDENT]
16
<PAGE>
Strategic Growth
At the beginning of a new millennium we face new challenges and opportunities.
As we open a new century, the banking industry sets its eyes on consolidation
and the enhancement of technology. Staying ahead is now pressed by the need to
be prepared. It is essential that R-G maintain its leadership in banking and
mortgage products, but also in technology and services. We must Keep pace with
technology if we are to provide the most complete and advanced services to our
customers and to provide the tools that our team needs to fulfill their
expectations.
In 2000 we will continue implementing our strategic plan that consists of the
following key elements:
1. Continue to expand the Company's branch network into desirable
locations in Puerto Rico and the United States in order to gain access
to additional retail funding sources and loan business.
2. Retain a portion of our residential, commercial and consumer loan
production volume and the associated servicing (thereby benefitting
from economies of scale);
3. Continue to utilize advanced technology and automated processes
throughout the Company's business to improve customer service, reduce
the cost of loan production and servicing, and increase efficiencies.
4. Cross-sell retail and private banking services to the Company's large
base of mort-
17
<PAGE>
gage customers, including the Hispanic market in the United States.
5. Expand to other sources of income as allowed by local regulations in
the immediate future, such as affiliation with insurance companies and
securities firms.
As time becomes a more valued commodity in daily life, customers will
increasingly demand faster, more convenient service. Only the latest
state-of-the-art technology will be able to satisfy these client expectations.
[GRAPHIC - COMPUTER WITH R-G WEB PAGE ON COMPUTER SCREEN]
18
<PAGE>
[GRAPHIC - CORPORATE STRUCTURE FLOW CHART]
19
<PAGE>
Corporate Information
BOARD OF DIRECTORS
Victor J. Galan
Chairman of the Board and Chief Executive Officer
Ramon Prats
Vice Chairman of the Board
and Executive Vice President
Enrique Umpierre Suarez
Secretary of the Board and
Attorney in private practice
Ana M. Armendariz
Treasurer of the Board and Senior Vice President of Finance RGM
Benigno R. Fernandez
Senior Partner of Fernandez, Perez, Villariny & Co.,
CPA firm in Hato Rey,
Puerto Rico.
Eduardo McCormack
Retired Businessman.
Previously worked for Bacardi Corp. in
various capacities.
Victor L. Galan
Vice President
Champion Mortgage
[GRAPHIC - PORTRAITS OF R-G BOARD OF DIRECTORS]
20
<PAGE>
Gilberto Rivera Arreaga, CPA/ESQ.
Executive Vice President National College
of Business & Technology,
post secondary institution with campuses in
Bayamon and Arecibo, Puerto Rico.
Laureano Carus Abarca
Chairman of Alonso Carus Iron Works
in Catano, Puerto Rico,
manufacturers of
metal products.
Juan J. Diaz
Retired businessman.
Former Senior Vice President
of Loan Administration of R-G.
Pedro Ramirez
President & CEO of Empresas Nativas, Inc.,
local real estate
development firm.
Roberto Gorbea
President & CEO
of Lord Electric Company
of Puerto Rico, Inc.
Ileana M. Colon Carlo
Chief Administration
and Financial Officer
of McConnell & Valdes, legal counsels.
Former Comptroller General of the Commonwealth of Puerto Rico.
[GRAPHIC - PORTRAITS OF R-G BOARD OF DIRECTORS]
21
<PAGE>
Key People
Officers of R-G Financial Corporation:
SENIOR MANAGEMENT TEAM
VICTOR J. GALAN, Chairman, President and CEO
RAMON PRATS, Executive Vice President
JOSEPH R. SANDOVAL, Senior Vice President and Chief Financial Officer
RAMON PEREZ, Senior Vice President Loan Administration RGM
MARIO RUIZ, Senior Vice President Secondary Market RGM
ANA M. ARMENDARIZ, Senior Vice President Finance RGM
IVAN VELEZ, Senior Vice President Operations RGPB
JOSE L. ORTIZ, Vice President Finance RGPB
WILLIAM MARTINEZ, Vice President Administration RGM
SONIA I. VAZQUEZ, Vice President and General Auditor
MIKE WALLACE, Jr. CEO, Continental Capital Corp.
PRODUCTION GROUP
DENNIS C. TRISTANI, Senior Vice President Commercial Lending RGPB
FELIPE FRANCO, Senior Vice President Consumer Lending RGPB
ROBERTO CORDOVA, Senior Vice President Loan Production RGM
STEVEN VELEZ, Senior Vice President Underwriting & Technology RGM
EDWIN REYES, Vice President Branch Administration RGPB
VICTOR L. GALAN, Vice President Champion Mortgage
RICARDO AGUDO, Vice President New Housing RGM
JEANNETE MIRO, Vice President Marketing RGPB
ISMENIA ISIDOR, Vice President Closings Department RGM
VICTOR IRIZARRY, Senior Vice President Construction and Corporate Banking
LOURDES GONZALEZ, Vice President Retail Construction Lending
MARY ROSALES, Vice President Interim Construction Lending
MIKE MCHUGH, President Continental Capital Corp.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF R&G FINANCIAL
The following table presents selected consolidated financial and other data of
R&G Financial for each of the five years in the period ended December 31, 1999.
The selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements of R&G Financial, including the accompanying
Notes, presented elsewhere herein. In the opinion of management, this
information reflects all adjustments, consisting only of normal recurring
accruals and adjustments, necessary for a fair presentation.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets(1) .............................. $2,911,993 $2,044,782 $1,510,746 $1,037,798 $ 853,206
Loans receivable, net ........................ 1,563,007 1,073,668 765,059 603,751 473,841
Mortgage loans held for sale ................. 77,277 117,126 46,885 54,450 21,318
Mortgage-backed and investment securities
held for trading ............................ 43,564 450,546 401,039 110,267 113,809
Mortgage-backed securities available for sale 712,705 95,040 46,004 50,841 61,008
Mortgage-backed securities held to maturity .. 23,249 28,255 33,326 37,900 41,731
Investment securities available for sale ..... 258,164 59,502 75,863 30,973 3,280
Investment securities held to maturity ....... 5,438 6,344 10,693 5,270 2,046
Servicing asset .............................. 84,253 58,221 21,213 12,595 8,210
Cash and cash equivalents(2) ................. 65,996 103,728 68,366 98,856 104,195
Deposits ..................................... 1,330,506 1,007,297 722,418 615,567 518,187
Securities sold under agreements to repurchase 731,341 471,422 433,135 97,444 98,483
Notes payable ................................ 132,707 182,748 103,453 126,842 77,130
Other borrowings(3) .......................... 408,843 130,000 91,359 65,463 71,315
Stockholders' equity ......................... 269,535 221,162 138,054 115,633 66,385
Common Stockholders' equity per share(4) ..... $ 6.79 $ 5.99 $ 4.88 $ 4.09 $ 3.55
Selected Income Statement Data:
Revenues:
Net interest income after provision for loan losses $ 52,053 $ 37,373 $ 30,160 $ 24,665 $ 20,323
Loan administration and servicing fees ............ 27,109 15,987 13,214 13,029 11,030
Net gain on sale of loans ......................... 37,098 34,955 23,286 12,351 8,384
Other(5) .......................................... 6,604 5,528 4,605 3,872 4,028
--------------------------------------------------------------
Total revenue ..................................... 122,864 93,843 71,265 53,917 43,765
--------------------------------------------------------------
Expenses:
Employee compensation and benefits ................ 24,433 17,095 13,653 10,794 8,284
Office occupancy and equipment .................... 11,289 8,987 7,131 5,531 4,711
SAIF special assessment ........................... -- -- 2,508
Other administrative and general .................. 33,568 22,687 18,252 15,424 13,731
--------------------------------------------------------------
Total expenses ............. 69,290 48,769 39,036 34,257 26,726
--------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Income before minority interest in the Bank and
Income taxes ....................................... 53,574 45,074 32,229 19,660 17,039
Minority interest in the Bank's earnings ........... -- -- 538 743
Income taxes ....................................... 12,239 11,040 8,732 5,922 5,847
--------------------------------------------------------------
Net income ......................................... 41,335 34,034 23,497 13,200 10,449
--------------------------------------------------------------
Less: Dividends on preferred stock ................. (3,754) (1,234) -- -- --
Net income available to common stockholders ........ $ 37,581 $ 32,800 $ 23,497 $ 13,200 $ 10,449
Diluted earnings per share (4) ..................... $ 1.28 $ 1.12 $ 0.81 $ 0.59 $ 0.56
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
(Dollars in Thousands, except for per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Operating Data(6):
<S> <C> <C> <C> <C> <C>
Performance Ratios and Other Data:
Mortgage loans originated and purchased .............. $ 1,610,945 $ 1,237,415 $ 758,486 $ 480,525 $ 327,107
Mortgage servicing portfolio ......................... 6,177,511 4,827,798 3,000,888 2,550,169 2,298,200
Return on average assets(6) .......................... 1.72% 1.95% 1.85% 1.38% 1.47%
Return on average common equity(6) ................... 20.23 21.32 18.69 15.54 17.08
Equity to assets at end of period .................... 9.26 10.82 9.13 11.14 7.78
Interest rate spread(7) .............................. 2.40 2.43 2.88 3.00 2.93
Net interest margin(7) ............................... 2.60 2.72 3.12 3.24 3.26
Average interest-earning assets to average
interest-bearing liabilities ....................... 104.16 105.93 104.61 104.60 106.50
Total non-interest expenses to average total assets .. 2.88 2.80 3.08 3.59 3.80
Full-service Bank offices ............................ 22 20 15 15 14
Mortgage offices (8) ................................. 31 23 19 16 13
Cash dividends declared per common share(4)(9) ....... .149 .111 .065 .069 --
Asset Quality Ratios(10):
Non-performing loans to total loans at end of period . 3.66% 4.08% 3.89% 3.09% 2.18%
Non-performing assets to total assets at end of period 2.26 2.41 2.12 1.90 1.32
Allowance for loan losses to total loans
at end of period ..................................... .55 0.74 0.87 0.55 0.72
Allowance for loan losses to total non-performing
loans at end of period ............................... 15.11 17.92 22.34 17.64 33.19
Net charge-offs to average loans outstanding ......... 0.25 0.55 0.40 0.75 0.08
Bank Regulatory Capital Ratios(11):
Tier 1 risk-based capital ratio ...................... 12.36% 13.41% 13.10% 13.91% 10.53%
Total risk-based capital ratio ....................... 13.08 14.46 14.00 14.79 11.66
Tier 1 leverage capital ratio ........................ 7.07 8.04 7.34 8.45 6.25
</TABLE>
(Footnotes on Following Page)
24
<PAGE>
(1) At December 1999, R&G Mortgage and the Bank had total assets of $715.7
million and $2.3 billion, respectively, before consolidation.
(2) Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and federal funds
sold, all of which had original maturities of 90 days or less.
(3) Comprised of long-term debt, advances from the Federal Home Loan Bank
("FHLB") of New York and other secured borrowings.
(4) Per share information for all periods presented takes into
consideration a 2 for 1 stock split paid in June 1998 and an 80% stock
dividend paid in September 1997.
(5) Comprised of change in provision for cost in excess of market value of
loans held for sale, net gain on trading account, and other
miscellaneous revenue sources, including Bank service charges, fees and
other income.
(6) With the exception of end of period ratios, all ratios for R&G Mortgage
are based on the average of month end balances while all ratios for the
Bank are based on average daily balances.
(7) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-earning
assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of R&G Financial."
(8) Includes 6 branches of Champion Mortgage Corporation, R&G Mortgage's
wholly owned mortgage banking subsidiary, and 2 branches of Continental
Capital Corp., the Bank's wholly owned mortgage banking subsidiary in
New York. Also includes 16 R&G Mortgage facilities which are located
within the Bank's offices.
(9) Includes $500,000 or $0.025 per share paid on the Class A Common Stock
in March 1996 prior to the Company's initial public offering. Amount is
based on weighted average number of shares of Common Stock (Class A and
Class B) outstanding.
(10) Non-performing loans consist of R&G Financial's non-accrual loans and
non-performing assets consist of R&G Financial's non-performing loans
and real estate acquired by foreclosure or deed-in-lieu thereof.
(11) All of such ratios were in compliance with the applicable requirements
of the FDIC.
25
<PAGE>
General
R&G Financial, through its subsidiaries, is primarily engaged in a wide
range of real estate secured lending activities, including the origination,
servicing, purchase and sale of mortgages on single-family residences, the
securitization and sale of various mortgage-backed and related securities and
the holding and financing of mortgage loans and mortgage-backed and related
securities for sale or investment. R&G Financial also originates for its
portfolio commercial real estate loans, residential construction loans,
commercial business loans and consumer loans. Finally, R&G Financial provides a
variety of trust and investment services to its customers.
R&G Financial has generally sought to achieve long-term financial
strength and profitability by increasing the amount and stability of its net
interest income and other non-interest income. R&G Financial has sought to
implement this strategy by (i) establishing and emphasizing the growth of its
mortgage banking activities, including growing its loan servicing operation;
(ii) expanding its retail banking franchise (the Bank has expanded its branch
system from two offices at February 1990 to 22 offices at December 31, 1999)
through possible branch acquisition opportunities that may arise or the opening
of new branches, all in order to achieve increased market presence and to
increase core deposits; (iii) enhancing R&G Financial's net interest income by
increasing R&G Financial's loans held for investment, particularly single-family
residential loans; (iv) developing new business relationships through an
increased emphasis on commercial real estate and commercial business lending;
(v) diversifying R&G Financial's retail products and services, including an
increase in consumer loan originations (such as credit cards); (vi) meeting the
banking needs of its customers through, among other things, the offering of
trust and investment services; and (vii) controlled growth and the pursuit of a
variety of acquisition opportunities when appropriate. R&G Financial attempts to
control its overall operating expenses, notwithstanding R&G Financial's recent
growth and expansion activities.
Asset and Liability Management
General.
Changes in interest rates can have a variety of effects on R&G
Financial's business. In particular, changes in interest rates affect the volume
of mortgage loan originations, the interest rate spread on loans held for sale,
the amount of gain on the sale of loans, the value of R&G Mortgage's loan
servicing portfolio and the Bank's net interest income. A substantial increase
in interest rates could also affect the volume of R&G Mortgage's loan
originations for both the Bank and third parties by reducing the demand for
mortgages for home purchases, as well as the demand for refinancings of existing
mortgages. Conversely, a substantial decrease in interest rates will generally
increase the demand for mortgages. To the extent that interest rates in future
periods were to increase substantially, R&G Financial would expect overall
originations to decline. A decrease in the volume of R&G Financial's mortgage
originations could result in a decrease in the amount of R&G Mortgage's mortgage
origination income and portfolio generated net interest income to the Bank.
The principal objective of R&G Financial's asset and liability
management function is to evaluate the interest-rate risk included in certain
balance sheet accounts and off-balance sheet commitments, determine the
appropriate level of risk given R&G Financial's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board approved guidelines. Through such management, R&G Financial seeks to
reduce the vulnerability of its operations to changes in interest rates and to
manage the ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturities or repricing dates.
The Bank's asset and liability management function is under the guidance
of the Interest Rate Risk, Budget and Investments Committee ("IRRBICO"), which
is chaired by the Chief Executive Officer and comprised principally of members
of the Bank's senior management and at least three members of the Board of
Directors. The IRRBICO meets once a month to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate changes, the
book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity and maturities of investments and borrowings. In
connection therewith, the IRRBICO generally reviews the Bank's liquidity, cash
flow needs, maturities of investments, deposits and borrowings
26
<PAGE>
and current market conditions and interest rates.
The Bank's primary IRRBICO monitoring tool is asset/liability simulation
models, which are prepared on a monthly basis and are designed to capture the
dynamics of balance sheet, rate and spread movements and to quantify variations
in net interest income under different interest rate environments. The Bank also
utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated by valuing the Bank's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact of
immediate and sustained interest-rate shifts of the current yield curve upon the
market value of the current balance sheet.
A more conventional but limited IRRBICO monitoring tool involves an
analysis of the extent to which assets and liabilities are "interest rate
sensitive" and measuring an institution's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity "gap" is defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to affect
net interest income adversely. At December 31, 1999, R&G Financial's
interest-bearing liabilities which mature or reprice within one year exceeded
R&G Financial's interest-earning assets with similar characteristics by $691.8
million, or 23.76% of total assets. While a conventional gap measure may be
useful, it is limited in its ability to predict trends in future earnings. It
makes no presumptions about changes in prepayment tendencies, deposit or loan
maturity preferences or repricing time lags that may occur in response to a
change in the interest rate environment.
R&G Mortgage.
The profitability to R&G Mortgage of its mortgage loan originations is
in part a function of the difference between long-term interest rates, which is
the rate at which R&G Mortgage originates mortgage loans for third parties, and
short-term interest rates, which is the rate at which R&G Mortgage finances such
loans until they are sold. Generally, short-term interest rates are lower than
long-term interest rates and R&G Mortgage benefits from the difference, or the
spread, during the time the mortgage loans are held by R&G Mortgage pending
sale. A decrease in this spread would have a negative effect on R&G Mortgage's
net interest income and profitability, and there can be no assurance that the
spread will not decrease. R&G Mortgage generally attempts to reduce this risk by
attempting to limit the amount of mortgage loans held pending sale and, as
market conditions permit, entering into forward commitments with respect to a
portion of its mortgage loan originations. As a general matter, R&G Mortgage
attempts to limit its exposure to this interest rate risk through the sale of
substantially all loans within 180 days of origination.
A mortgage-banking company is generally exposed to interest rate risk
from the time the interest rate on the customer's mortgage loan application is
established through the time the mortgage loan closes, and until the time the
company commits to sell the mortgage loan. In order to limit R&G Mortgage's
exposure to interest rate risk through the time the mortgage loan closes, R&G
Mortgage generally does not lock-in or guarantee the customer a specific
interest rate on such loans through the closing date but rather offers customers
an interest rate that will be based on a prevailing market rate that adjusts
weekly. Moreover, in order to limit R&G Mortgage's exposure to interest rate
risk through the time the loan is sold or committed to be sold, R&G Mortgage
may, depending upon market conditions, enter into forward commitments to sell a
portion of its mortgage loans to investors for delivery at a future time. At
December 31, 1999, R&G Mortgage had $58.6 million of pre-existing commitments by
third-party investors to purchase mortgage loans. To
27
<PAGE>
the extent that R&G Mortgage originates or commits to originate loans without
pre-existing commitments by investors to purchase such loans or is not otherwise
hedged against changes in interest rates ("unhedged loans"), R&G Mortgage will
be subject to the risk of gains or losses through adjustments to the carrying
value of loans held for sale or on the actual sale of such loans (the value of
unhedged loans fluctuates inversely with changes in interest rates).
Finally, R&G Mortgage carries an inventory of mortgage-backed and
related securities (primarily fixed-rate GNMA certificates). Generally, the
value of fixed-rate mortgage-backed securities declines when interest rates rise
and, conversely, increases when interest rates fall. At December 31, 1999, R&G
Mortgage held $43.6 million of mortgage-backed and related securities (all of
which carried fixed interest rates) which were classified as held for trading
and reported at fair value, with unrealized gains and losses included in
earnings. Accordingly, declines in the value of R&G Mortgage's securities held
for trading could have a negative impact on R&G Financial's earnings regardless
of whether any securities were actually sold. On January 1,1999 R&G Mortgage
reclassified $427.4 million of mortgage-backed securities from trading to
available for sale upon adoption of a new accounting pronouncement. The adoption
of this Statement had no effect on the results of operations of the Company. See
Recent Accounting Pronouncements.
In order to hedge the interest rate risk with respect to R&G Mortgage's
mortgage-backed and related securities portfolio, R&G Mortgage may utilize a
variety of interest rate contracts such as interest rate swaps, collars, caps,
options or futures (primarily Eurodollar certificates of deposit and U.S.
Treasury note contracts). R&G Mortgage will use such hedging instruments based
upon market conditions as well as the level of market rates of interest. In
determining the amount of its portfolio to hedge, R&G Mortgage will consider the
volatility of prices of its mortgage-backed and related securities (Puerto Rican
tax-exempt GNMAs are generally less volatile than their U.S. counterparts). For
taxable GNMAs, R&G Mortgage enters into forward sales commitments for 30, 60 and
90 days to reduce its interest rate risk. R&G Mortgage may also use interest
rate swaps, caps, collars, options and futures to effectively fix the cost of
short-term funding sources which are used to originate and or purchase
interest-earning assets with longer effective maturities, such as mortgage-
backed securities and fixed rate residential mortgage loans held prior to sale
in the secondary market. Such agreements thus reduce the impact of increases in
interest rates by preventing R&G Mortagage from having to replace funding
sources at a higher cost prior to the time that the interest-earning asset which
was originated or purchased with such source matures, reprices or is sold, and
thus can be replaced with a higher-yielding asset.
At December 31, 1999 R&G Mortgage was a party to two interest rate swap
agreements. An interest rate swap is an agreement where one party (generally the
Company) agrees to pay a fixed-rate of interest on a notional principal amount
to a second party (generally a broker) in exchange for receiving from the second
party a variable-rate of interest on the same notional amount for a
predetermined period of time. No actual assets are exchanged in a swap of this
type and interest payments are generally netted. R&G Mortgage's existing
interest rate swap agreements have an aggregate notional amount of approximately
$70.0 million and expire in December 2009. With respect to such agreements, R&G
Mortgage makes fixed interest payments of 5.60% and receives payments based upon
the three-month London Interbank Offer Rate ("Libor"). The net interest received
relating to R&G Mortgage's fixed-pay interest rate swaps amounted to
approximately $107,000 and $248,000 during the years ended December 31, 1999 and
1998, respectively. Such interest rate contracts have reduced the imbalance
between R&G Mortgage's interest-earning assets and interest-bearing liabilities
within shorter maturities, thus reducing R&G Mortgage's exposure to increases in
interest rates that may occur in the future.
The Bank.
The results of operations of the Bank are substantially dependent on its
net interest income, which is the difference between the interest income earned
on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. At December 31, 1999, the Bank's interest-earning
assets included a portfolio of loans receivable, net of $1.7 billion and a
portfolio of investment securities and mortgage-backed securities
28
<PAGE>
(including held to maturity and available for sale) of $522.6 million. Because
the Bank's interest-earning assets have longer effective maturities than its
interest-bearing liabilities, the yield on the Bank's interest-earning assets
generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result, the Bank's net interest income generally would be
adversely affected by increases in interest rates and positively affected by
comparable declines in interest rates. In addition to affecting net interest
income, changes in interest rates also can affect the value of the Bank's
interest-earning assets, which are comprised of fixed and adjustable-rate
instruments. At December 31, 1999, $493.9 million or 94.5% of the Bank's
mortgage-backed and investment securities were classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported net of taxes in other comprehensive income, a separate
component of stockholders' equity.
The Bank has sought to limit its exposure to interest rate risk both
internally through the management of the composition of its assets and
liabilities and externally through the use of a variety of hedging instruments.
Internal hedging through balance sheet restructuring generally involves the
attraction of longer-term funds (i.e., certificates of deposit, FHLB advances or
936 Notes), the origination of adjustable-rate and/or shorter-term loans (such
as commercial real estate, commercial business and consumer loans) or the
investment in certain types of mortgage-backed derivative securities such as
CMOs and mortgage-backed residuals (which often exhibit elasticity and convexity
characteristics which the Bank can utilize to hedge other components of its
portfolio).
External hedging involves the use of interest rate swaps, collars, caps,
options and futures to reduce interest rate risk on all mortgage-backed
securities (excluding CMOs) which are available for sale. At December 31, 1999,
mortgage-backed securities available for sale had a fair value of $235.7
million.
The Bank generally uses interest rate swaps, collars, caps, options and
futures to effectively fix the cost of short-term funding sources which are used
to purchase interest-earning assets with longer effective maturities, such as
mortgage-backed securities and fixed-rate residential mortgage loans which do
not meet the criteria for sale to the FNMA or the FHLMC in the secondary market.
Such agreements reduce the impact of increases in interest rates by preventing
the Bank from having to replace funding sources at a higher cost prior to the
time that the interest-earning asset which was acquired with such source matures
or reprices and thus can be replaced with a higher-yielding asset.
At December 31, 1999, the Bank was a party to six interest rate swap
agreements. The Bank's existing interest rate swap agreements have an aggregate
notional amount of approximately $85.0 million and expire between October 2000
and December 2009. With respect to such agreements, the Bank makes fixed
interest payments ranging from 4.70% to 6.09% and receives payments based upon
the three-month Libor and Libid. The net expense related to the Bank's fixed-pay
interest rate swaps amounted to approximately $422,000, $198,000 and $293,000
during the years ended December 31,1999, 1998 and 1997, respectively. Such
interest rate contracts have reduced the imbalance between the Bank's
interest-earning assets and interest-bearing liabilities within shorter
maturities, thus, reducing the Bank's exposure to increases in interest rates
that may occur in the future.
As discussed above, the Bank may also enter into interest rate, collars,
caps, options and futures. However, at December 31,1999 the Bank was not a party
to any such interest rate contracts.
29
<PAGE>
The following table summarizes the anticipated maturities or repricing of R&G
Financial's interest-earning assets and interest-bearing liabilities as of
December 31, 1999, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
Four to More Than More Than
(Dollars in Thousands) Within Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable:
Residential real estate loans $ 36,328 $ 102,833 $ 233,868 $ 184,472 $ 555,371 $1,112,872
Construction loans 22,013 11,283 11,283 -- -- 44,579
Commercial real estate loans 222,656 633 1,246 693 808 226,036
Consumer loans 26,428 32,981 45,037 20,292 10,398 135,136
Commercial business loans 21,100 16,998 13,225 2,785 123 54,231
Mortgage loans held for sale 20,137 57,140 -- -- -- 77,277
Mortgage-backed securities(2)(3) 142,664 404,320 55,004 42,788 134,742 779,518
Investment securities(3) 56,476 49,944 113,735 39,459 3,987 263,601
Other interest-earning assets(4) 23,744 -- -- -- -- 23,744
----------------------------------------------------------------------------
Total $ 571,546 $ 676,132 $ 473,398 $ 290,489 $ 705,429 $2,716,994
----------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits(5):
NOW and Super NOW accounts(6) $ 6,624 $ 18,575 $ 20,421 $ 16,541 $ 70,516 $ 132,677
Passbook savings accounts(6) 2,842 8,232 20,500 16,400 65,602 113,576
Regular and commercial checking(6) 7,880 22,063 24,254 19,645 83,753 157,595
Certificates of deposit 223,955 536,948 77,900 71,252 11,974 922,029
FHLB advances 264,500 104,500 5,000 10,000 -- 384,000
Securities sold under agreements
to repurchase(7) 746,341 -- -- -- -- 746,341
Other borrowings(8) 82,050 25,000 35,500 -- -- 142,550
----------------------------------------------------------------------------
Total 1,334,192 715,318 183,575 133,838 231,845 2,598,768
----------------------------------------------------------------------------
Effect of hedging instruments (140,000) 30,000 30,000 -- 80,000 --
$1,194,192 $ 745,318 $ 213,575 $ 133,838 $ 311,845 $2,598,768
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $ (622,646) $ (69,186) $ 259,823 $ 156,651 $ 393,584 $ 118,226
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (622,646) $ (691,832) $ (432,009) $ (275,358) $ 118,226
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets (21.38)% (23.76)% (14.84)% (9.46)% 4.06%
</TABLE>
30
<PAGE>
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments.
(2) Reflects estimated prepayments in the current interest rate environment.
(3) Includes securities held for trading, available for sale and held to
maturity.
(4) Includes securities purchased under agreement to resell, time deposits with
other banks and federal funds sold.
(5) Does not include non-interest-bearing deposit accounts.
(6) Although the Bank's negotiable order of withdrawal ("NOW") and Super NOW
accounts, passbook savings accounts and checking accounts are subject to
immediate withdrawal, management considers a substantial amount of such
accounts to be core deposits having significantly longer effective
maturities based on the Bank's retention of such deposits in changing
interest rate environments. The table assumes that funds will be withdrawn
from the Bank at annual rates for NOW accounts and for regular and
commercial checking accounts, ranging from 10% for 0-12 months, 19% for 1-5
years, 41% for 5-10 years, 65% for 10-20 years and 100% thereafter; and,
for passbook savings accounts, ranging from 5% for 0-12 months, 20% for 1-5
years, 40% for 5-10 years, 65% for 10-20 years and 100% thereafter.
(7) Includes federal funds purchased.
(8) Comprised of warehousing lines, notes payable and other borrowings.
Although "gap" analysis is a useful measurement device available to
management in determining the existence of interest rate exposure, its static
focus as of a particular date makes it necessary to utilize other techniques in
measuring exposure to changes in interest rates. For example, gap analysis is
limited in its ability to predict trends in future earnings and makes no
assumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in the
interest rate environment. As a result, R&G Financial, through simulation
models, also analyzes on a monthly basis the estimated effects on net interest
income under multiple rate scenarios, including increases and decreases in
interest rates amounting to 200 and 100 basis points. The IRRBICO regularly
reviews interest rate risk by forecasting the impact of alternative interest
rate scenarios on net interest income and by evaluating such impact against the
maximum potential changes in net interest income. The following table sets forth
at December 31, 1999 the estimated percentage change in R&G Financial's net
interest income based on the indicated changes in interest rates.
NET INTEREST INCOME
-----------------------------------------------------------------
Change in Expected
Interest Rates Net Interest Amount Percentage
(in Basis Points)(1) Income(2) of Change Change
-----------------------------------------------------------------
(Dollars in Thousands)
+200 $ 46,282 $ (17,588) (27.54)%
+100 55,314 (8,556) (13.40)
Base Scenario 63,870 -- --
-100 71,028 7,158 11.21
-200 75,809 11,939 18.69
<PAGE>
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) Net interest income amounts exclude amortization of deferred loan fees.
Management of R&G Financial believes that all of the assumptions used in
the foregoing analysis to evaluate the vulnerability of its operations to
changes in interest rates approximate actual experience and considers them
reasonable; however, the interest rate sensitivity of R&G Financial's assets and
liabilities and the estimated effects of changes in interest rates on R&G
Financial's net interest income indicated in the above table could vary
substantially if different assumptions were used or if actual experience differs
from the projections on which they are based.
31
<PAGE>
Changes in Financial Condition
General.
At December 31, 1999, R&G Financial's total assets amounted to $2.9
billion, as compared to $2.0 billion at December 31, 1998. The $867.2 million or
42.4% increase in total assets during the year ended December 31, 1999 was
primarily the result of a $489.3 million or 45.6% increase in loans receivable,
net, a $210.7 million or 38.6% increase in mortgage-backed securities held for
trading and available for sale, and a $198.7 million or 333.9% increase in
investment securities available for sale.
Cash and Money Market Investments.
Cash and money market investments (consisting of cash and due from
banks, securities purchased under agreements to resell, time deposits with other
financial institutions and federal funds sold) amounted to $66.0 million and
$103.7 million as of December 31, 1999 and 1998, respectively.
Loans Receivable and Mortgage Loans Held for Sale.
At December 31, 1999, R&G Financial's loans receivable, net amounted to
$1.6 billion or 53.7% of total assets, as compared to $1.1 billion or 52.5% as
of December 31, 1998. The growth in R&G Financial's loans receivable, net
reflects R&G Financial's strategy of increasing its loans held for investment,
including residential mortgage, construction, commercial real estate and
commercial business loans. During the years ended December 31, 1999, 1998 and
1997, total loans originated and purchased by the Bank (including loans
originated by R&G Mortgage on behalf of the Bank) amounted to $1.1 billion,
$755.5 million and $435.4 million, respectively.
At December 31, 1999, R&G Financial's allowance for loan losses (all of
which is maintained in the Bank's loan portfolio) totaled $9.0 million, which
represented a $916,000 or 11.4% increase from the level maintained at December
31, 1998. At December 31, 1999, R&G Financial's allowance represented
approximately 0.55% of the total loan portfolio and 15.11% of total
non-performing loans, as compared to 0.74% and 17.92% at December 31, 1998. The
increase in the allowance for loan losses is attributable to the provision of
$4.5 million for loan losses during the year, which exceeded net charge-offs
amounting to approximately $3.6 million. During the year ended December 31,1999,
the Company experienced a reduction in net charge-offs of approximately $2.1
million compared to the year ended December 31,1998.
Management of R&G Financial believes that its allowance for loan losses
at December 31, 1999 was adequate, based upon, among other things, the
significant level of single-family residential loans within R&G Financial's
portfolio (as compared to commercial real estate, commercial business and
consumer loans, which are considered by management to carry a higher degree of
credit risk) and the low level of loan charge-offs normally experienced by the
Company with respect to its loan portfolio. However, there can be no assurances
that additions to such allowance will not be necessary in future periods, which
could adversely affect R&G Financial's results of operations.
At December 31, 1999 and 1998, mortgage loans held for sale amounted to
$77.3 million and $117.1 million, respectively. Mortgage loans held for sale
primarily reflects loans which are in the process of being securitized and sold.
The level of mortgage banking activities is highly dependent upon market and
economic factors.
Securities Held for Trading, Available for Sale and Held for Investment.
R&G Financial maintains a substantial portion of its assets in
mortgage-backed and investment securities which are classified as either held
for trading, available for sale or held to maturity. At December 31, 1999, R&G
Financial's aggregate mortgage-backed and investment securities totaled $1.0
billion or 35.8% of total assets, as compared to $639.7 million or 31.3% at
December 31, 1998, respectively.
Securities held for trading consist primarily of FHA and VA loans which
have been securitized as GNMA pools and are being held for sale to institutions
in the secondary market. At December 31, 1999 and 1998, all such securities were
held by R&G Mortgage. Securities held for trading are reported at fair value
with unrealized gains and losses included in earnings.
Securities available for sale consist of mortgage-backed and related
securities (tax exempt GNMA pools, FNMA and
32
<PAGE>
FHLMC certificates as well as CMOs and CMO residuals) and U.S. Government agency
securities, held by the Bank or R&G Mortgage. At December 31, 1999 and 1998,
securities available for sale totaled $970.9 million and $154.5 million,
respectively. Securities available for sale are reported at fair value with
unrealized gains and losses excluded from earnings, and reported in other
comprehensive income, a separate component of stockholders' equity.
Securities held to maturity consist of mortgage-backed securities (GNMA,
FNMA and FHLMC certificates), Puerto Rico Government obligations and other
Puerto Rico securities, all of which were held by the Bank. At December 31, 1999
and 1998, securities held to maturity totaled $28.6 million and $34.6 million,
respectively. Securities held to maturity are accounted for at amortized cost.
At December 31, 1999 and 1998, R&G Financial's securities held to maturity had a
market value of $28.7 million and $34.6 million, respectively.
Mortgage Servicing Asset.
As of December 31, 1999 and 1998, R&G Financial reported servicing
assets of $84.3 million and $58.2 million, respectively. R&G Financial
recognizes both purchased and originated mortgage servicing rights as assets in
its Consolidated Financial Statements. R&G Financial evaluates the fair value of
its servicing asset on a quarterly basis to determine any potential impairment.
Any future decline in interest rates which results in an acceleration in
mortgage loan prepayments could have an adverse effect on the value of R&G
Financial's mortgage servicing rights, which is dependent upon the cash flows
from the underlying mortgage loans.
Deposits.
At December 31, 1999, deposits totaled $1.3 billion, as compared to $1.0
billion at December 31, 1998. The $323.2 million or 32.1% increase in deposits
during the year ended December 31, 1999 was primarily due to promotions in
connection with new accounts and competitive pricing. One of the Bank's
strategies is to increase its core deposits, which provide a source of fee
income and the ability to cross-sell other products and services. As a result,
core deposits (consisting of passbook, NOW and Super NOW, and regular and
commercial checking accounts as well as certificates of deposit under $100,000)
increased from $711.0 million or 70.6% of total deposits at December 31, 1998 to
$794.2 million or 59.7% of total deposits at December 31, 1999.
Borrowings.
Other than deposits, R&G Financial's primary sources of funds consist of
securities sold under agreements to repurchase (consisting of agreements to
purchase on a specified later date the same or substantially identical
securities) ("repurchase agreements"). At December 31, 1999 and 1998, repurchase
agreements totaled $731.3 million and $471.4 million, respectively.
Notes payable consist primarily of warehouse lines of credit (which are
used to fund loan commitments of R&G Mortgage) and Section 936 promissory notes
(which represents a low cost source of short and intermediate-term funds for the
Bank). At December 31, 1999, notes payable amounted to $132.7 million, as
compared to $182.7 million at December 31, 1998. The $50.0 million or 27.4%
decrease in notes payable during the year ended December 31, 1999 reflected a
$50.1 million or 50.8% decrease in warehousing lines.
<PAGE>
Advances from the FHLB of New York amounted to $384.0 million and $121.0
million at December 31, 1999 and 1998, respectively. At December 31, 1999, FHLB
advances were scheduled to mature at various dates commencing on January 3, 2000
until December 18, 2003, with an average interest rate of 5.75%.
Stockholders' Equity.
Stockholders' equity increased from $221.2 million at December 31, 1998
to $269.5 million at December 31, 1999. The $48.4 million or 21.9% increase in
stockholders' equity during 1999 was primarily due to the issuance of $25
million of 7.75% non-cumulative, perpetual Monthly Income Preferred Stock,
Series B (the "Series B Preferred Stock"), and the $41.3 million of net income
for the year. The increases in stockholders' equity were slightly offset by
dividends paid during the year of $8.0 million on common and preferred stock,
and a decrease in unrealized gains on securities available for sale, from a $1.4
million gain at December 31, 1998 to a $7.8 million loss at December 31,1999.
33
<PAGE>
Results of Operations
General. R&G Financial's results of operations depend substantially on
its net interest income, which is the difference between interest income on
interest-earning assets, which consist primarily of loans, money market
investments and mortgage-backed and investment securities, and interest expense
on interest-bearing liabilities, which consist primarily of deposits and short
and long-term borrowings. R&G Financial's results of operations are also
significantly affected by its provisions for loan losses, resulting from R&G
Financial's assessment of the adequacy of its allowance for loan losses; the
level of its non-interest income, including net gain (loss) on sale of loans,
unrealized gain (loss) on trading securities and loan administration and
servicing fees; the level of its non-interest expenses, such as employee
compensation and benefits and office occupancy and equipment expense; and income
tax expense.
R&G Financial's major business activities consist of: (i) the
origination by R&G Mortgage of real estate mortgage loans for sale and the
servicing by R&G Mortgage of real estate mortgage loans for third parties; and
(ii) attracting deposits from the general public and using such deposits,
together with other borrowings, for investment principally by the Bank in loans
(single-family residential mortgage loans, construction loans, commercial real
estate loans, commercial business loans and consumer loans), and in
mortgage-backed and investment securities. To a much more limited extent, R&G
Financial also provides trust and investment services to the public through the
Bank's Trust Department.
The following table reflects the principal revenue sources of the Bank
and R&G Mortgage and the percentage contribution of each component for the
periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
The Bank:
Net interest income after
provision for loan losses $ 45,344 36.90% $ 31,193 33.24% $ 25,544 35.84%
Loan administration and servicing fees 476 0.39 -- -- -- --
Net gain on sale of loans 9,559 7.78 12,191 12.99 5,436 7.63
Net gain on sale of investment securities 20 0.02 278 0.30 107 0.15
Other income(1) 5,380 4.38 4,780 5.09 2,915 4.09
------------------------------------------------------------------
60,779 49.47 48,442 51.62 34,002 47.71
------------------------------------------------------------------
R&G Mortgage:
Net interest income 6,708 5.46 6,180 6.58 4,616 6.48
Loan administration and servicing fees 26,633 21.68 15,987 17.04 13,214 18.54
Net gain on origination and sale of loans 27,541 22.41 22,472 23.95 18,597 26.10
Other income(1) 1,203 0.98 762 0.81 836 1.17
------------------------------------------------------------------
62,085 50.53 45,401 48.38 37,263 52.29
------------------------------------------------------------------
$122,864 100.00% $ 93,843 100.00% $ 71,265 100.00%
------------------------------------------------------------------
</TABLE>
(1) Comprised of service charges, fees and other for the Bank and other
miscellaneous revenue sources for the Bank and R&G Mortgage.
34
<PAGE>
R&G Financial reported net income of $41.3 million, $34.0 million and
$23.5 million during the years ended December 31, 1999, 1998 and 1997,
respectively. Net income increased by $7.3 million or 21.5% during the year
ended December 31, 1999, as compared to 1998, due to a $12.6 million increase in
net interest income and a $14.3 million increase in total other income, which
were partially offset by a $20.5 million increase in total operating expenses.
Net income increased by $10.5 million or 44.8% during the year ended December
31, 1998, as compared to 1997, due to a $7.4 million increase in net interest
income and a $15.4 million increase in total other income, which were partially
offset by a $9.7 million increase in total operating expenses.
Net Interest Income. Net interest income is determined by R&G
Financial's interest rate spread (i.e., the difference between the yields earned
on its interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
Net interest income totaled $56.6 million, $43.9 million and $36.5
million during the years ended December 31, 1999, 1998 and 1997, respectively.
Net interest income increased by $12.6 million or 28.7% during the year ended
December 31, 1999, as compared to the year ended December 31, 1998, due to
significant increases in the average balance of interest-earning assets, which
compensated for a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities from 105.93% in 1998 to 104.16% in 1999, as
well as a decline in the Company's interest rate spread from 2.43% in 1998 to
2.40% in 1999. Net interest income increased by $7.4 million or 20.4% during the
year ended December 31, 1998, due to an increase in the ratio of average
interest-earning assets to average interest-bearing liabilities from 104.61% for
1997 to 105.93% for 1998, which was partially offset by a decrease in R&G
Financial's interest rate-spread from 2.88% for 1997 to 2.43% for 1998.
35
<PAGE>
The following table presents for the periods indicated R&G Financial's total
dollar amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. All average balances are based on the
average of month-end balances for R&G Mortgage and average daily balances for
the Bank in each case during the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(2) $ 15,963 $ 840 5.26% $ 25,731 $ 1,341 5.21%
Investment securities held for trading -- -- -- 344 19 5.52
Investment securities available for sale 124,559 7,834 6.29 57,042 3,337 5.85
Investment securities held to maturity 6,271 330 5.26 9,485 544 5.74
Mortgage-backed securities held for trading 33,245 1,871 5.63 406,123 24,876 6.13
Mortgage-backed securities available for sale 501,232 31,989 6.38 38,608 2,645 6.85
Mortgage-backed securities held to maturity 29,684 1,763 5.94 31,095 1,877 6.04
Loans receivable, net(3)(4) 1,446,575 117,304 8.11 1,037,829 89,044 8.58
FHLB of New York stock 17,777 1,210 6.81 8,517 614 7.21
---------------------------------------------------------------------
Total interest-earning assets 2,175,306 $163,141 7.50% 1,614,774 $ 124,297 7.70%
---------------------------------------------------------------------
Non-interest-earning assets 229,197 129,498
---------------------------------------------------------------------
Total assets $2,404,503 $ 1,744,272
=====================================================================
Interest-Bearing Liabilities:
Deposits $ 1,153,537 $ 53,643 4.65% $ 826,487 $ 38,439 4.65%
Securities sold under agreements to
repurchase(5) 491,184 27,474 5.59 416,249 23,876 5.74
Notes payable 212,028 13,634 6.43 186,147 12,641 6.79
Subordinated debt(6) - - - 1,469 148 10.07
Other borrowings(7) 231,616 11,812 5.10 94,025 5,220 5.55
Total interest-bearing liabilities 2,088,365 $ 106,563 5.10% 1,524,377 $ 80,324 5.27%
---------------------------------------------------------------------
Non-interest-bearing liabilities 75,337 46,025
---------------------------------------------------------------------
Total liabilities 2,163,702 1,570,402
Stockholders' equity 240,801 173,870
---------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 2,404,503 $ 1,744,272
=====================================================================
Net interest income; interest rate spread(8) $ 56,578 2.40% $ 43,973 2.43%
=====================================================================
Net interest margin(8) 2.60% 2.72%
=====================================================================
Average interest-earning assets to average
interest-bearing liabilities 104.16% 105.93%
=====================================================================
</TABLE>
(footnotes on following page)
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997
Average Yield/
Balance Interest Rate (1)
(Dollars in Thousands) ------- -------- --------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(2) $ 30,967 $ 1,674 5.41%
Investment securities held for trading 5,466 328 6.00
Investment securities available for sale 51,105 3,205 6.27
Investment securities held to maturity 15,095 777 5.15
Mortgage-backed securities held for trading 249,930 17,174 6.87
Mortgage-backed securities available for sale 44,693 3,200 7.16
Mortgage-backed securities held to maturity 35,642 2,152 6.04
Loans receivable, net(3)(4) 732,064 68,514 9.36
FHLB of New York stock 4,710 311 6.60
-----------------------------------
Total interest-earning assets 1,169,672 $ 97,335 8.32%
-----------------------------------
Non-interest-earning assets 98,880
-----------------------------------
Total assets $ 1,268,552
===================================
Interest-Bearing Liabilities:
Deposits $ 668,704 $ 32,434 4.85%
Securities sold under agreements to
repurchase(5) 226,771 13,483 5.95
Notes payable 151,440 9,616 6.35
Subordinated debt(6) 3,250 324 9.97
Other borrowings(7) 67,973 4,948 7.28
-----------------------------------
Total interest-bearing liabilities 1,118,138 $ 60,805 5.44%
-----------------------------------
Non-interest-bearing liabilities 24,680
Total liabilities 1,142,818
Stockholders' equity 125,734
-----------------------------------
Total liabilities and stockholders'
equity $ 1,268,552
===================================
Net interest income; interest rate spread(8) $ 36,530 2.88%
===================================
Net interest margin(8) 3.12%
===================================
Average interest-earning assets to average
interest-bearing liabilities 104.61%
===================================
</TABLE>
(footnotes on following page)
36
<PAGE>
(1) At December 31, 1999, the yields earned and rates paid were as follows:
cash and cash equivalents, 5.37%; investment securities held to
maturity, 5.91%; investment securities available for sale, 6.76%;
mortgage-backed securities held for trading, 6.41%; mortgage-backed
securities available for sale, 6.71%; mortgage loans held for sale,
6.99%; loans receivable, net, 8.36%; FHLB of New York stock, 6.75%;
total interest-earning assets, 7.68%; deposits, 4.84%; securities sold
under agreements to repurchase, 5.89%; notes payable, 6.58%; other
borrowings, 5.31%; total interest-bearing liabilities, 5.34%; interest
rate spread, 2.34%.
(2) Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and federal funds
sold.
(3) Includes mortgage loans held for sale and non-accrual loans.
(4) Interest income on loans include loan fees amounting to $295,000,
$367,000 and $366,000 during the years ended December 31, 1999, 1998
and 1997, respectively or .25%, .41% and .53% of interest income on
loans during such respective periods.
(5) Includes federal funds purchased.
(6) Represents a seven-year subordinated capital note of the Bank issued in
1991, which was subject to an annual sinking fund requirement and
matured in 1998.
(7) Comprised of long-term debt, advances from the FHLB of New York and
other borrowings.
(8) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-earning
assets.
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
R&G Financial's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated in proportion to the absolute dollar amounts of the changes due to
rate and volume.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
Increase / Decrease Total Increase / Decrease Total
Due to Increase Due to Increase
(Dollars in Thousands) Rate Volume (Decrease) Rate Volume (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(1) $ 8 $ (509) $ (501) $ ( 50 ) $ ( 283 ) $ ( 333 )
Investment securities held for trading -- (19) (19) ( 2 ) ( 307 ) ( 309 )
Investment securities available for sale 547 3,950 4,497 ( 239 ) 372 133
Investment securities held to maturity (30) (184) (214) 56 ( 289 ) ( 233 )
Mortgage-backed securities held for trading (165) (22,840) (23,005) ( 3,031) 10,733 7,702
Mortgage-backed securities available for sale (2,350) 31,694 29,344 ( 119 ) ( 436 ) ( 555 )
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
Increase / Decrease Total Increase / Decrease Total
Due to Increase Due to Increase
(Dollars in Thousands) Rate Volume (Decrease) Rate Volume (Decrease)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity (29) (85) (114) -- ( 275 ) ( 275 )
Loans receivable, net(2) (6,810) 35,070 28,260 ( 8,087 ) 28,617 20,530
FHLB of New York stock (72) 668 596 52 251 303
--------------------------------------------------------------------------------
Total interest-earning assets $ (8,901) $ 47,745 $ 38,844 $ ( 11,420 ) $ 38,383 $ 26,963
--------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $ (7) $ 15,211 $ 15,204 $ ( 1,648 ) $ 7,653 $ 6,005
Securities sold under agreements to repurchase (700) 4,298 3,598 ( 873 ) 11,266 10,393
Notes payable (765) 1,758 993 821 2,204 3,025
Subordinated debt(3) - (148) (148) 2 ( 178 ) ( 176 )
--------------------------------------------------------------------------------
Other borrowings(4) (1,047) 7,639 6,592 ( 1,624 ) 1,896 272
--------------------------------------------------------------------------------
Total interest-bearing liabilities $(2,519) $ 28,758 $ 26,239 $ ( 3,322 ) $ 22,841 $ 19,519
--------------------------------------------------------------------------------
Increase in net interest income $ 12,605 $ 7,444
--------------------------------------------------------------------------------
</TABLE>
(Footnotes on following page)
<PAGE>
(1) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold.
(2) Includes mortgage loans held for sale.
(3) Represents a seven-year subordinated capital note of the Bank issued in
1991, which was subject to an annual sinking fund requirement and matured
in 1998.
(4) Comprised of long-term debt, advances from the FHLB of New York and other
borrowings.
37
<PAGE>
Interest Income.
Total interest income increased by $38.8 million or 31.3% during the
year ended December 31, 1999 as compared to the year ended December 31, 1998,
and increased by $27.0 million or 27.7% during the year ended December 31, 1998
over the year ended December 31, 1997. Interest income on loans, the largest
component of R&G Financial's interest-earning assets, increased by $28.3 million
or 31.7% during the year ended December 31, 1999 as compared to the year ended
December 31, 1998, and increased by $20.5 million or 30.0% during 1998 over the
year ended December 31, 1997. Such increases were primarily the result of
increases in the average balance of loans receivable of $408.7 million and
$305.8 million during the years ended December 31, 1999 and 1998, respectively.
One of R&G Financial's strategies in recent years has been to grow R&G
Financial's loans held for investment.
Interest income on mortgage-backed and investment securities (which, for
purposes of this discussion, includes securities held for trading, available for
sale and held to maturity) increased by $10.5 million or 31.5% during the year
ended December 31, 1999 as compared to the year ended December 31, 1998, and
increased by $6.5 million or 24.1% during the year ended December 31, 1998 over
the year ended December 31, 1997. The increase in interest income on
mortgage-backed and investment securities during the year ended December 31,
1999 was primarily due to a $88.3 million increase in the average balance of
mortgage-backed securities, together with a $64.0 million increase in the
average balance of investment securities during the period. The increase in
investment securities reflects purchases of approximately $208.3 million during
1999, net of maturities and sales. The increase in interest income on
mortgage-backed and investment securities during 1998 was due primarily to an
increase in the average balance of mortgage-backed securities of $156.2 million.
Interest income on cash and cash equivalents (consisting of cash and due
from banks, securities purchased under agreements to resell, certificates of
deposit with other financial institutions and federal funds sold) decreased by
$501,000 or 37.4% during the year ended December 31, 1999 as compared to the
year ended December 31, 1998, and decreased by $333,000 or 19.9% during the year
ended December 31, 1998. The decrease during 1999 was due primarily to a
decrease in the average balance of cash and cash equivalents during the period
of $9.8 million. The decrease in interest earned on money market investments
during 1998 reflected a decrease in the average balance of $5.2 million,
together with a decrease in the yield from 5.41% to 5.21%. The fluctuations in
yields earned by R&G Financial on its money market investments reflect the
general fluctuations in short-term market rates of interest during the periods
presented.
Interest Expense.
Total interest expense increased by $26.2 million or 32.7% during the
year ended December 31, 1999, as compared to the year ended December 31, 1998,
and increased by $19.5 million or 32.1%
38
<PAGE>
during the year ended December 31, 1998. Interest expense on deposits, the
largest component of R&G Financial's interest-bearing liabilities, increased by
$15.2 million or 39.6% during the year ended December 31, 1999, as compared to
the year ended December 31, 1998, and increased by $6.0 million or 18.5% during
the year ended December 31, 1998. The increases in interest expense on deposits
during the years ended December 31, 1999 and 1998 were due primarily to
increases in the average balance of deposits of $327.1 million and $157.8
million during such respective periods.
Interest expense on repurchase agreements increased by $3.6 million or
15.1% during the year ended December 31, 1999, as compared to the year ended
December 31, 1998, and increased by $10.4 million or 77.1% during the year ended
December 31, 1998. The increase in interest expense on repurchase agreements
during 1999 was due primarily to an increase in the average balance of
repurchase agreements outstanding of $74.9 million, which was partially offset
by a decrease in the average rate paid thereon of 15 basis points. The increase
in interest expense on repurchase agreements during 1998 was primarily due to an
increase in the average balance of repurchase agreements outstanding of $189.5
million, which was partially offset by a decrease in the average rate paid
thereon of 21 basis points. R&G Financial generally uses repurchase agreements
to repay warehouse lines of credit which are used to fund loan originations.
These repurchase agreements are mainly collateralized by mortgage-backed
securities held for trading and available for sale. The fluctuations in the
average balance of repurchase agreements during the periods presented is
therefore mainly a function both of the amount of originations by R&G Financial
as well as the level of mortgage-backed securities held for trading and
available for sale which are available to collateralize such agreements.
Interest expense on notes payable (consisting of warehouse and other
lines of credit and promissory notes) increased by $993,000 or 7.9% during the
year ended December 31, 1999, as compared to the year ended December 31, 1998,
and increased by $3.0 million or 31.5% during the year ended December 31, 1998.
The increases during the years ended December 31, 1999 and 1998 were primarily
due to increases in the average balance of such lines of $25.9 million and $34.7
million, respectively, as R&G Mortgage made increased use of such lines due to
increased mortgage loan originations in such years.
Interest expense on other borrowings (consisting principally of advances
from the FHLB of New York) increased by $6.6 million or 126.3% during the year
ended December 31, 1999, as compared to the year ended December 31, 1998, and
increased by $96,000 or 1.8% during the year ended December 31, 1998. The
increase in interest expense on other borrowings during 1999 and 1998 was due
primarily to an increase in the average balance of such borrowings due to an
increased use of FHLB advances to fund increased loan production in the Bank.
Provision for Loan Losses.
The provision for loan losses is charged to earnings to bring the total
allowance to a level considered appropriate by management based on R&G
Financial's loss experience, current delinquency data, known and inherent risks
in the portfolio, the estimated value of any underlying collateral and an
assessment of current economic conditions. While management endeavors to use the
best information available in making its evaluations, future allowance
adjustments may be necessary if economic conditions change substantially from
the assumptions used in making the initial evaluations.
R&G Financial made provisions to its allowance for loan losses of $4.5
million, $6.6 million and $6.4 million during the years ended December 31, 1999,
1998 and 1997, respectively.
The decrease in the provision for loan losses taken by the Company
during 1999 was primarily due to a reduction in net charge-offs during the year.
Net charge-offs to average loans outstanding decreased to .25% during 1999
compared to .55% during the year ended December 31, 1998. This reduction is
associated with the adoption in prior years of more stringent underwriting
procedures to address problems experienced generally in the market for personal
loans in such years, as well as an emphasis in collateralized lending instead of
unsecured personal loans.
The provision for loan losses taken by the Company during 1998 was based
primarily on the increase in the
39
<PAGE>
Company's loan portfolio during the period as a result of a 40.3 % increase in
the Company's loan portfolio during 1998, as well as increased net charge-offs
associated primarily with consumer loans.
Management believes that its allowance for loan losses at December 31, 1999, was
adequate based upon, among other things, the significant level of single-family
residential loans within R&G Financial's portfolio (as compared to commercial
real estate, commercial business and consumer loans, which are considered by
management to carry a higher degree of credit risk) and the low level of loan
charge-offs normally experienced by the Company with respect to its loan
portfolio. Nevertheless, there can be no assurances that additions to such
allowance will not be necessary in future periods, particularly if the growth in
R&G Financial's real estate lending, including commercial lending, continues.
Non-Interest Income.
The following table sets forth information regarding non-interest income for the
periods shown.
Year Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Net gain on origination and sale of loans $37,098 $34,955 $23,286
Loan administration and servicing fees 27,109 15,987 13,214
Service charges, fees and other 6,604 5,528 4,605
---------------------------------
Total other income $70,811 $56,470 $41,105
---------------------------------
Total non-interest income increased by $14.3 million or 25.4% during the
year ended December 31, 1999, as compared to the prior year and increased by
$15.4 million or 37.4% during the year ended December 31, 1998. Net gain on sale
of loans amounted to $37.1 million, $35.0 million and $23.3 million during the
years ended December 31, 1999, 1998 and 1997, respectively. Net gain on sale of
loans reflects the income generated from R&G Financial's origination and
purchase of single-family residential real estate loans and the subsequent
securitization and sale of such loans. During the years ended December 31, 1999,
1998 and 1997, R&G Mortgage originated and purchased $878.8 million, $670.6
million and $470.9 million, respectively, and sold $671.2 million, $493.0
million and $246.1 million of mortgage loans, respectively. In addition, the
Bank sold $183.5 million, $282.0 million and $118.2 million of loans from its
portfolio during such respective periods. R&G Financial's mortgage banking
operations are highly dependent upon market and economic conditions.
During the years ended December 31, 1999, 1998 and 1997, R&G Financial
recognized net profit (loss) on trading securities of ($21,000), $6.0 million
and $9.7 million, respectively, which are included in net gains on sale of
loans. Such gains and losses primarily reflect fluctuations in the market value
of FHA and VA loans which have been securitized into GNMA mortgage-backed
securities and are being held for trading. The decrease in net profits in
trading securities in 1999 is primarily related to a $407.0 million decrease in
mortgage-backed securities held for trading due to the adoption of SFAS No.134
effective January 1, 1999. Pursuant to the adoption of SFAS No. 134, on January
1, 1999 the Company reclassified approximately $427.4 million of mortgage-backed
securities from trading to available for sale. The decrease in net profits in
trading securities in 1998 is primarily related to a decrease in the origination
and purchase of exempt FHA and VA loans in such year, which is primarily related
to the changes in the tax exemption on the interest generated by such loans
which went into effect on August 1,
40
<PAGE>
1997. As a result of changes in the tax
exemption of such loans, only loans granted for the purchase of new housing are
exempt under the current tax law. Previously, loans for refinancing purposes
were exempt as well.
During the years ended December 31, 1999, 1998 and 1997, R&G Financial
recognized loan administration and servicing fees of $27.1 million, $16.0
million and $13.2 million, respectively. The increase in loan administration and
servicing fees over the periods reflects the increase in R&G Financial's loan
servicing portfolio from 50,979 loans with an aggregate principal balance of
$2.6 billion at January 1, 1997 to 107,302 loans with an aggregate principal
balance of $6.2 billion at December 31, 1999, which includes the purchase in
November 1998 of a mortgage loan servicing portfolio from another financial
institution, comprised of approximately 33,000 loans with an aggregate principal
balance of $1.1 billion.
Service charges, fees and other amounted to $6.6 million, $5.5 million and $4.6
million during the years ended December 31, 1999, 1998 and 1997, respectively.
The $1.1 million or 19.5% and the $923,000 or 20.0% increases during 1999 and
1998, respectively, were primarily due to increased service charges associated
with new deposit products and an increasing deposit base, as well as increases
in the loan portfolio during such years.
Non-Interest Expenses.
The following table sets forth certain information regarding
non-interest expenses for the periods shown.
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Employee compensation
and benefits $24,433 $17,095 $13,653
Office occupancy and
equipment 11,289 8,987 7,131
Other administrative
and general 33,568 22,687 18,252
Total non-interest
expenses $69,290 $48,769 $39,036
Total non-interest expenses increased by $20.5 million or 42.1% during
the year ended December 31, 1999, as compared to the year ended December 31,
1998, and increased by $9.7 million or 24.9% during the year ended December 31,
1998 over 1997. The increase in total non-interest expenses during the years
ended December 31, 1999 and 1998 reflect general growth in the Company's
operations, increases in total loan production during such years as well as
increased costs associated with the opening of new branch offices and remodeling
work at six branch locations.
The year ended December 31, 1999 represents the first full year of
operations of Fajardo Federal Savings Bank, F.S.B., merged into the Bank upon
acquisition on August 31, 1998. In addition, operations of Continental Capital
Corp., the Company's newly acquired subsidiary in Huntington Station, New York
effective October 1, 1999, was also a significant reason for the increase in
expenses during the year ended December 31, 1999 when compared to the year ended
December 31, 1998.
<PAGE>
Employee compensation and benefits expense amounted to $24.4 million,
$17.1 million and $13.6 million during the years ended December 31, 1999, 1998
and 1997, respectively. The $7.3 million or 42.9% increase in such expense
during the year ended December 31, 1999 is primarily associated with an increase
in the number of employees as a result of new branch openings, and increased
bonus payments associated with increased loan production during 1999. The $3.4
million or 25.2% increase in such expense during the year ended December 31,
1998 is primarily associated with an increase in the number of employees to
accomodate higher loan production during the year, as well as to increased bonus
payments associated with the increased loan production during the year.
Office occupancy and equipment expense amounted to $11.3 million, $9.0
million and $7.1 million during the years ended December 31, 1999, 1998 and
1997, respectively. The $2.3 million or 25.6% increase in office occupancy and
equipment expenses during the year ended December 31, 1999 is primarily related
to the operation of five additional branches completed during fiscal 1998 and
the opening of three additional branches during the year. The $1.9 million or
26.0% increase in expenses during 1998 is related to the opening of
41
<PAGE>
and the completion in late 1997 of the remodeling work at the six branches
acquired in 1995.
Other administrative and general expenses, which consist primarily of
advertising, license and property taxes, amortization of servicing asset,
insurance, telephone, printing and supplies and other miscellaneous expenses,
amounted to $33.6 million, $22.7 million and $18.3 million during the years
ended December 31, 1999, 1998 and 1997, respectively. The $10.9 million or 48.0%
and the $4.4 million or 24.3% increase in such expenses during the years ended
December 31, 1999 and 1998, respectively, is also primarily associated with
increased loan production and new additional branch offices during such years,
as well as the result of general growth in the operations of R&G Financial and
the addition of new products and services offered. In addition, the Company had
a $4.4 million increase in amortization expenses during 1999 of the Company's
servicing asset, primarily associated with the purchase in late 1998 of a $1.1
billion servicing portfolio from another financial institution.
Income Taxes.
R&G Financial's income tax provision amounted to $12.2 million during
the year ended December 31, 1999, as compared to income tax expense of $11.0
million and $8.7 million during the years ended December 31, 1998 and 1997,
respectively. R&G Financial's effective tax rate amounted to 22.8%, 24.5% and
27.1% during the years ended December 31, 1999, 1998 and 1997, respectively. The
decrease in R&G Financial's effective tax rate is due primarily to an increase
in the Company's exempt interest income and, to a lesser extent, the
implementation of certain tax planning strategies during such years.
Liquidity and Capital Resources
Liquidity.
Liquidity refers to R&G Financial's ability to generate sufficient cash
to meet the funding needs of current loan demand, savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. It is management's policy to maintain greater liquidity
than required in order to be in a position to fund loan purchases and
originations, to meet withdrawals from deposit accounts, to make principal and
interest payments with respect to outstanding borrowings and to make investments
that take advantage of interest rate spreads. R&G Financial monitors its
liquidity in accordance with guidelines established by R&G Financial and
applicable regulatory requirements. R&G Financial's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. R&G Financial can minimize the cash required
during times of heavy loan demand by modifying its credit policies or reducing
its marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which R&G Financial has limited control. R&G
Financial derives its liquidity from both its assets and liabilities. Liquidity
is derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
R&G Financial's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If R&G
Financial requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At December 31, 1999, R&G Financial had $175.1 million in borrowing
capacity under unused warehouse and other lines of credit, $261.8 million in
borrowing capacity under unused lines of credit with the FHLB of New York and
$10 million available unused fed funds lines of credit. R&G Financial has
generally not relied upon brokered deposits as a source of liquidity, and does
not anticipate a change in this practice in the foreseeable future.
At December 31, 1999, R&G Financial had outstanding commitments
(including unused lines of credit) to originate and/or purchase mortgage and
non-mortgage loans of $79.6 million. The Company also has agreements with
developers to facilitate the mortgage loans to qualified buyers of new housing
42
<PAGE>
units on residential projects amounting to $546.8 million. All such agreements
are subject to prevailing market rates at time of closing with no market risk
exposure to the Company or with firm back-to-back commitments in favor of the
mortgagee. Finally, the Company had certificates of deposit which are scheduled
to mature within one year totaling $755.6 million at December 31, 1999, and
borrowings that are scheduled to mature within the same period amounting to $1.2
billion. R&G Financial anticipates that it will have sufficient funds available
to meet its current loan commitments.
Capital Resources.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks from 4.0% to 5.0% or more. Under the
FDIC's regulations, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier I capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At December 31,
1999, the Bank met each of its capital requirements, with Tier I leverage
capital, Tier I risk-based capital and total risk-based capital ratios of 7.07%,
12.36% and 13.08%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by the FDIC regarding state- chartered banks, as described above. R&G
Financial is currently in compliance with such regulatory capital requirements.
Inflation and Changing Prices
R&G Financial's Consolidated Financial Statements and related data
presented in this Annual Report have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars (except with
respect to securities which are carried at market value), without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of R&G Financial are monetary in nature. As a result, interest rates
have a more significant impact on R&G Financial's performance than the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
The Year 2000 Issue
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important
43
<PAGE>
customer information, provide convenient access to this information, or engage
in normal business operations. While lingering concern exists about certain
dates during Year 2000, the most significant date, January 1, 2000, has passed
without incident. As a result of its diligent efforts, the Company is pleased to
report no interruptions of business or financial losses resulting from Year 2000
Issues.
The costs of addressing the Year 2000 issue were approximately $300,000,
most of which were incurred during 1999. Most of such costs were directly
related to the costs of replacing existing equipment, primarily desktop
computers, which were already fully depreciated on the Company's financial
statements. Accordingly, the Company's Year 2000 costs expensed during 1999 were
insignificant.
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on R&G Financial's operations. These pronouncements should be read
in conjunction with the significant accounting policies which R&G Financial has
adopted that are set forth in R&G Financial's Notes to Consolidated Financial
Statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No.133- "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically accounted as a hedge . The accounting for changes in fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation.
This Statement was effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB voted to delay the
effective date of this Statement to all fiscal quarters of fiscal years
beginning after June 15, 2000. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this Statement.
Management is evaluating its hedging strategy in light of this new
pronouncement to establish the initial designation of its hedging activities and
determine the effect and timing of adoption. However, due to the relatively
limited extent to which the Company is using derivative instruments and the
simple nature of the instruments used, management does not expect the impact of
adoption to be significant.
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[PRICEWATERHOUSECOOPERS LOGO]
To the Board of Directors and Stockholders of R&G Financial Corporation
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, of comprehensive income, of
changes in stockholders equity and of cash flows present fairly, in all material
respects, the financial position of R&G Financial Corporation (the Company) and
its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in comformity with generally accepted accounting principles.
These financial statements are the responsability of the Companys management;
our responsability is to express an opinion on theses financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/PricewaterhouseCoopers, LLP
- ------------------------------
PricewaterhouseCoopers, LLP
San Juan, Puerto Rico
February 10, 2000
Certified Public Accountants
(of Puerto Rico)
License No. 216 Expires on December 1, 2001
Stamp 1603133 of the P.R. Society
of Certified Public Accountants has been affixed
to the file copy of this report
45
<PAGE>
R&G Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Assets
Cash and due from banks $ 42,251,508 $ 51,804,750
Money market investments:
Securities purchased under agreements to resell -- 11,544,123
Time deposits with other banks 23,744,037 30,361,527
Federal funds sold -- 10,018,048
Mortgage loans held for sale, at lower of cost or market 77,277,133 117,126,040
Mortgage - backed securities held for trading, at fair value 43,563,817 450,546,034
Mortgage - backed securities available for sale, at fair value 712,705,165 95,040,331
Mortgage - backed securities held to maturity, at amortized
cost (estimated market value: 1999 - $23,305,029;
1998 - $28,260,925) 23,249,247 28,255,518
Investment securities available for sale, at fair value 258,163,657 59,502,140
Investment securities held to maturity, at amortized cost
(estimated market value: 1999 - $5,403,755;
1998 - $6,378,634) 5,437,630 6,343,929
Loans receivable, net 1,563,006,802 1,073,668,278
Accounts receivable, including advances to investors, net 16,230,457 9,665,290
Accrued interest receivable 22,386,746 12,505,431
Servicing asset 84,252,506 58,221,052
Premises and equipment 19,459,353 12,962,435
Other assets 20,264,778 17,216,602
-------------- --------------
$2,911,992,836 $2,044,781,528
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $1,330,506,368 $1,007,297,304
Federal funds purchased 15,000,000 --
Securities sold under agreements to repurchase 731,341,340 471,421,726
Notes payable 132,707,001 182,747,956
Advances from FHLB 384,000,000 121,000,000
Other borrowings 9,842,894 9,000,000
Accounts payable and accrued liabilities 33,917,329 28,020,080
Other liabilities 5,142,627 4,132,603
-------------- --------------
2,642,457,559 1,823,619,669
-------------- --------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
7.40% Monthly Income Preferred Stock, Series A,
$25 liquidation value, 2,000,000 shares issued
and outstanding 50,000,000 50,000,000
7.75% Monthly Income Preferred Stock, Series B,
$25 liquidation value, 1,000,000 shares issued
and outstanding 25,000,000 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized,
18,440,556 issued and outstanding in 1999 and 1998 184,406 184,406
Class B - $.01 par value, 30,000,000 shares authorized,
10,217,731 issued and outstanding in 1999
(1998 - 10,146,091) 102,177 101,461
Additional paid-in capital 40,753,856 41,544,378
Retained earnings 156,193,131 124,418,278
Capital reserves of the Bank 5,095,658 3,547,798
Accumulated other comprehensive (loss) income (7,793,951) 1,365,538
----------------------------------
269,535,277 221,161,859
----------------------------------
$ 2,911,992,836 $ 2,044,781,528
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
R&G Financial Corporation
Consolidated Statements of Income
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
Interest income:
<S> <C> <C> <C>
Loans $ 117,304,300 $ 89,043,798 $ 68,513,571
Money market and other investments 10,243,856 5,855,157 6,295,443
Mortgage-backed securities 35,593,191 29,397,985 22,525,876
-----------------------------------------------------------
Total interest income 163,141,347 124,296,940 97,334,890
-----------------------------------------------------------
Less - interest expense:
Deposits 53,643,104 38,439,016 32,434,559
Securities sold under agreements to repurchase 27,474,602 23,875,744 13,483,500
Notes payable 13,633,767 12,641,438 9,615,560
Secured borrowings - - 3,583,471
Other 11,812,100 5,367,631 1,688,034
-----------------------------------------------------------
106,563,573 80,323,829 60,805,124
-----------------------------------------------------------
Net interest income 56,577,774 43,973,111 36,529,766
Provision for loan losses 4,525,000 6,600,000 6,370,000
-----------------------------------------------------------
Net interest income after provision for loan losses 52,052,774 37,373,111 30,159,766
-----------------------------------------------------------
Non-interest income:
Net gain on origination and sale of loans 37,098,218 34,955,583 23,286,444
Loan administration and servicing fees 27,109,051 15,986,831 13,213,948
Service charges, fees and other 6,603,998 5,527,860 4,604,670
-----------------------------------------------------------
70,811,267 56,470,274 41,105,062
-----------------------------------------------------------
Total revenues 122,864,041 93,843,385 71,264,828
-----------------------------------------------------------
Non-interest expenses:
Employee compensation and benefits 24,432,771 17,094,783 13,652,754
Office occupancy and equipment 11,289,365 8,986,953 7,131,497
Other administrative and general 33,567,706 22,687,336 18,251,497
-----------------------------------------------------------
69,289,842 48,769,072 39,035,748
-----------------------------------------------------------
Income before income taxes 53,574,199 45,074,313 32,229,080
-----------------------------------------------------------
Income tax expense:
Current 8,905,520 6,814,496 6,263,549
Deferred 3,333,687 4,226,020 2,468,319
-----------------------------------------------------------
12,239,207 11,040,516 8,731,868
-----------------------------------------------------------
Net income $ 41,334,992 $ 34,033,797 $ 23,497,212
-----------------------------------------------------------
Less: Preferred stock dividends (3,753,819) (1,233,819) -
-----------------------------------------------------------
Net income available to common stockholders $ 37,581,173 $ 32,799,978 $ 23,497,212
==================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Earnings per common share:
Basic $ 1.31 $ 1.15 $ .83
-------------------------------------------------------------
Diluted $ 1.28 $ 1.12 $ .81
-------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
R&G Financial Corporation
Consolidated Statements of Comprehensive Income
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income $ 41,334,992 $ 34,033,797 $ 23,497,212
------------------------------------------------------------------
Other comprehensive income, before tax:
Unrealized (losses) gains on securities:
Arising during period (15,975,369) 516,061 2,275,009
Less: Reclassification adjustments for
losses (gains) included in net income 959,813 (278,028) (107,430)
------------------------------------------------------------------
(15,015,556) 238,033 2,167,579
------------------------------------------------------------------
Income tax benefit (expense)related to items
of other comprehensive income 5,856,067 (92,833) (845,356)
------------------------------------------------------------------
Other comprehensive income (loss), net of tax (9,159,489) 145,200 1,322,223
------------------------------------------------------------------
Comprehensive income, net of tax $ 32,175,503 $ 34,178,997 $ 24,819,435
==================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
R&G Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Common Stock
Class A Class B
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 5,122,377 $ 51,223 2,735,839 $ 27,360
Transfer to capital reserves
Common stock split on September 25, 1997:
Stock split 4,097,901 40,980 2,188,635 21,885
Cash paid in lieu of fractional shares
Cash dividends declared on common stock
Net income
Other comprehensive income, net of tax
--------------------------------------------------------------------------------
Balance at December 31, 1997 9,220,278 92,203 4,924,474 49,245
--------------------------------------------------------------------------------
Transfer to capital reserves
Common stock split on June 25, 1998 9,220,278 92,203 4,924,474 49,245
Issuance of common stock on
July 31,1998 to acquire Fajardo Federal 297,143 2,971
Issuance of Series A Preferred Stock 2,000,000 $ 50,000,000
Cash dividends declared:
Common stock
Preferred stock
Net income
Other comprehensive income, net of tax
--------------------------------------------------------------------------------
Balance at December 31, 1998 2,000,000 50,000,000 18,440,556 184,406 10,146,091 101,461
--------------------------------------------------------------------------------
Issuance of Series B Preferred Stock 1,000,000 25,000,000
Issuance of Common Stock 71,640 716
Transfer to capital reserves
Cash dividends declared:
Common stock
Preferred stock
Net income
Other comprehensive loss, net of tax
--------------------------------------------------------------------------------
Balance at December 31, 1999 3,000,000 75,000,000 18,440,556 $184,406 10,217,731 $ 102,177
================================================================================
</TABLE>
<PAGE>
R&G Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Capital other comprehensive Retained
Paid-in Capital reserves income (loss) earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 38,410,683 $ 1,460,707 $ (101,885) $ 75,784,804 $ 115,632,892
Transfer to capital reserves 754,465 (754,465)
Common stock split on September 25, 1997:
Stock split (62,865)
Cash paid in lieu of fractional shares (12,659) (12,659)
Cash dividends declared on common stock (2,385,752) (2,385,752)
Net income 23,497,212 23,497,212
Other comprehensive income, net of tax 1,322,223 1,322,223
--------------------------------------------------------------------------------
Balance at December 31, 1997 38,347,818 2,215,172 1,220,338 96,129,140 138,053,916
--------------------------------------------------------------------------------
Transfer to capital reserves 1,332,626 (1,332,626)
Common stock split on June 25, 1998 (141,448)
Issuance of common stock on
July 31,1998 to acquire Fajardo Federal 5,258,874 5,261,845
Issuance of Series A Preferred Stock (1,920,866) 48,079,134
Cash dividends declared:
Common stock (3,178,214) (3,178,214)
Preferred stock (1,233,819) (1,233,819)
Net income 34,033,797 34,033,797
Other comprehensive income, net of tax 145,200 145,200
--------------------------------------------------------------------------------
Balance at December 31, 1998 41,544,378 3,547,798 1,365,538 124,418,278 221,161,859
--------------------------------------------------------------------------------
Issuance of Series B Preferred Stock (1,078,356) 23,921,644
Issuance of Common Stock 287,834 288,550
Transfer to capital reserves 1,547,860 (1,547,860)
Cash dividends declared:
Common stock (4,258,460) (4,258,460)
Preferred stock (3,753,819) (3,753,819)
Net income 41,334,992 41,334,992
Other comprehensive loss, net of tax (9,159,489) (9,159,489)
--------------------------------------------------------------------------------
Balance at December 31, 1999 $ 40,753,856 $ 5,095,658 $ (7,793,951) $ 156,193,131 $ 269,535,277
================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
R&G Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,334,992 $ 34,033,797 $ 23,497,212
----------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,912,603 3,059,742 2,659,888
Amortization of premium (accretion of
discount) on investments and
mortgage - backed securities, net 236,184 (86,761) (371,816)
Amortization of servicing rights 7,382,649 2,994,307 1,837,414
Provision for loan losses 4,525,000 6,600,000 6,370,000
Provision for bad debts in accounts receivable 546,851 300,000 300,000
Gain on sales of mortgage loans (4,935,775) (7,785,630) (2,721,154)
Loss (gain) on sales of investment securities
available for sale 959,813 (278,028) (107,430)
(Increase) decrease in mortgage loans held for sale (117,118,689) (70,240,717) 7,564,836
Net increase in mortgage-backed
securities held for trading (43,936,589) (105,247,419) (291,540,928)
Net decrease in investment securities
held for trading -- 581,332 769,495
Increase in interest and accounts receivable (16,176,210) (4,590,500) (5,607,804)
(Increase) decrease in other assets (4,570,159) 1,678,184 (2,840,360)
(Decrease) increase in notes payable and
other borrowings (40,518,153) 83,295,337 (15,989,480)
Increase in accounts payable
and accrued liabilities 10,832,064 11,113,881 5,027,646
Increase (decrease) in other liabilities 1,010,024 702,593 (394,179)
-----------------------------------------------------
Total adjustments (197,850,387) (77,903,679) (295,043,872)
-----------------------------------------------------
Net cash used in operating activities (156,515,395) (43,869,882) (271,546,660)
-----------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities available for
sale and held to maturity (230,790,182) (72,532,667) (83,021,527)
Proceeds from sales and redemptions of
investment securities available for sale 108,459,617 92,867,182 36,265,089
Proceeds from maturities of investment
securities held to maturity 409,000 4,715,420 --
Principal repayments on mortgage-backed
securities 40,875,059 13,955,086 9,475,202
Proceeds from sale of loans 135,632,084 254,011,245 120,955,837
Net originations of loans (730,796,715) (573,657,277) (286,229,017)
Purchases of FHLB stock, net (21,420,300) (6,211,400) (658,757)
Net assets acquired, net of cash received (4,638,371) 4,287,492 --
Acquisition of premises and equipment (8,694,453) (5,936,102) (3,914,192)
Acquisition of servicing rights (23,979,840) (40,002,361) (10,455,392)
-----------------------------------------------------
Net cash used in investing activities (734,944,101) (328,503,382) (217,582,757)
-----------------------------------------------------
</TABLE>
(Continued)
50
<PAGE>
R&G Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Continued) 1999 1998 1997
Cash flows from financing activities:
Payments on term notes $ (23,600,000) $ -- $ (2,400,000)
Increase in deposits, net 323,209,064 263,743,668 106,851,013
Increase in securities sold under agreements
to repurchase, net 259,919,614 38,287,220 335,690,058
Increase (decrease) in federal funds purchased 15,000,000 (10,000,000) 10,000,000
Payments on secured borrowings -- -- (16,103,451)
Advances from FHLB, net 263,000,000 75,300,000 27,000,000
Repayment of subordinated notes -- (3,250,000) --
Net proceeds from issuance of
Preferred Stock 23,921,644 48,079,134 --
Proceeds from issuance of common stock 288,550 -- --
Capital contribution to subsidiary -- (12,000) --
Cash dividends - common stock (4,258,460) (3,178,214) (2,385,752)
- preferred stock (3,753,819) (1,233,819) --
Payment of cash in lieu of fractional shares
on stock split -- -- (12,659)
-----------------------------------------------------
Net cash provided by financing activities 853,726,593 407,735,989 458,639,209
-----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (37,732,903) 35,362,725 (30,490,208)
Cash and cash equivalents at beginning of year 103,728,448 68,365,723 98,855,931
-----------------------------------------------------
Cash and cash equivalents at end of year $ 65,995,545 $ 103,728,448 $ 68,365,723
=====================================================
Cash and cash equivalents include:
Cash and due from banks $ 42,251,508 $ 51,804,750 $ 32,607,001
Securities purchased under agreements to resell -- 11,544,123 16,000,000
Time deposits with other banks 23,744,037 30,361,527 16,758,722
Federal funds sold -- 10,018,048 3,000,000
-----------------------------------------------------
$ 65,995,545 $ 103,728,448 $ 68,365,723
=====================================================
</TABLE>
The accompanying notes are an integral part of thes financial statements.
51
<PAGE>
R&G Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1999, 1998 and 1997
1. Reporting Entity and Significant Accounting Policies
Reporting entity
The accompanying consolidated financial statements of R&G Financial
Corporation (the Company) include the accounts of R&G Mortgage Corp. (R&G
Mortgage), a Puerto Rico corporation, and R-G Premier Bank of Puerto Rico (the
Bank), a commercial bank chartered under the laws of the Commonwealth of Puerto
Rico.
R&G Mortgage is engaged primarily in the business of originating FHA
insured, VA guaranteed, and privately insured first and second mortgage loans on
residential real estate (1 to 4 families). R&G Mortgage pools FHA and VA loans
into Government National Mortgage Association (GNMA) mortgage-backed securities
and collateralized mortgage obligation (CMO) certificates for sale to permanent
investors. Upon selling the loans, it retains the rights to service the loans.
R&G Mortgage is also a Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) Seller-Servicer of conventional loans.
R&G Mortgage is also engaged in the business of originating
non-conforming conventional first mortgage loans on residential real estate (1
to 4 families), including B&C credit quality loans, through its wholly-owned
subsidiary Champion Mortgage Corporation.
The Bank provides a full range of banking services through twenty two
branches located mainly in the northeastern part of the Commonwealth of Puerto
Rico. As discussed in Note 15 to the consolidated financial statements, the Bank
is subject to the regulations of certain federal and local agencies, and
undergoes periodic examinations by those regulatory agencies.
The Bank also is engaged in the business of originating FHA insured, VA
guaranteed and privately insured first and second mortgage loans on residential
real estate (1 to 4 families) in the State of New York through its wholly-owned
subsidiary Continental Capital Corporation.
Significant Accounting Policies
The accounting and reporting policies of the Company conform with
generally accepted accounting principles. The following is a description of the
significant accounting policies:
Basis of consolidation
All significant intercompany balances and transactions have been
eliminated in the accompanying consolidated financial statements.
Use of estimates in the preparation
of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
<PAGE>
R&G Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1999, 1998 and 1997
Securities purchased under agreements to resell
The Company purchases securities under agreements to resell the same securities.
Amounts advanced under these agreements represent short-term loans and are
reflected as assets in the consolidated statement of financial condition. It is
the Companys policy to take possession over the securities that guarantee such
loans. However, the counterparties to these agreements retain effective control
over such collateral.
Investment securities
Investments in debt and equity securities are classified at the time of
purchase into one of three categories and accounted for as follows:
Held to maturity - debt securities which the Company has a positive
intent and ability to hold to maturity. These securities are carried at
amortized cost.
Trading - debt and equity securities that are bought by the Company and
held principally for the purpose of selling them in the near term. These
securities are carried at fair value, with unrealized gains and losses included
in earnings.
Available for sale - debt and equity securities not classified as
either held-to-maturity or trading. These securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported net of
taxes in other comprehensive income.
Premiums are amortized and discounts are accreted as an adjustment to interest
income over the life of the related
52
<PAGE>
securities using a method that approximates
the interest method. Realized gains or losses on securities classified as either
available for sale or held to maturity are reported in earnings. Cost of
securities sold is determined on the specific identification method.
Mortgage-backed securities that are held for sale in conjunction with
mortgage banking activities were classified as trading securities until December
31, 1998 in accordance with SFAS No.65. On January 1, 1999, the Company
reclassified approximately $427.4 million of mortgage-backed securities from
trading to available for sale in connection with the adoption of SFAS No. 134
- -Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement
amended SFAS No. 65 to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interest based on its
ability and intent to sell or hold those investments, conforming the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. The adoption of this Statement had no effect on the results
of operations of the Company.
Loans and allowance for loan
losses
Loans are stated at their outstanding principal balance, less unearned
interest, deferred loan origination fees and allowance for loan losses. Loan
origination and commitment fees and costs incurred in the origination of new
loans are deferred and amortized over the life of the loans as an adjustment of
interest yield using the interest method. Unearned interest on installment loans
is recognized as income under a method which approximates the interest method.
Interest on loans not made on a discounted basis is credited to income based on
the loan principal outstanding at stated interest rates.
Management believes that the allowance for loan losses is adequate. It
is the policy of the Bank to increase its valuation allowances for estimated
losses on loans when, based on managements evaluation, a loss becomes both
probable and estimable. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. Also, managements
periodic evaluation considers factors such as loss experience, current
delinquency data, known and inherent risks in the portfolio, identification of
adverse situations which may affect the ability of debtors to repay, the
estimated value of any underlying collateral and assessment of current economic
conditions. Additions to allowances are charged to income. Any recoveries are
credited to the allowance.
The Company measures impairment of individual loans, except for loans
that are valued at fair value or at the lower of cost or fair value, based on
the present value of expected future cash flows discounted at the loans
effective interest rate, or, as a practical method, at the observable market
price of the loan, or the fair value of the collateral if the loan is collateral
dependent. The Company considers loans over $500,000 for individual impairment
evaluation. The Company collectively performs impairment evaluations for large
groups of small - balance homogeneous loans. Loans are considered impaired when,
based on managements evaluation, a borrower will not be able to fulfill its
obligation under the original terms of the loan.
<PAGE>
Interest income
Recognition of interest on mortgage, consumer and other loans is
discontinued when loans are 90 days or more in arrears on payment of principal
or interest or earlier when other factors indicate that collection of interest
or principal is doubtful. Loans for which the recognition of interest income has
been discontinued are designated as non-accruing. Such loans are not reinstated
to accrual status until interest is received currently and no other factors
indicative of doubtful collection exist.
Discounts and premiums on purchased mortgage loans are accreted
(amortized) to income over the remaining life of the loans.
Mortgage loans held for sale
Mortgage loans intended for sale in the secondary market are carried at
the lower of cost or estimated market, computed in the aggregate. The amount by
which cost exceeds market value is accounted for as a valuation allowance.
Changes in the valuation allowance are included in the determination of income
in the period in which the change occurs.
53
<PAGE>
Loan servicing fees
Loan servicing fees, which are based on a percentage of the principal
balance of the mortgage loans serviced, are credited to income as mortgage
payments are collected. Late charges and miscellaneous other fees collected from
mortgagors are credited to income when earned, adjusted for estimated amounts
not expected to be collected. Loan servicing costs are charged to expense when
incurred.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined based on experience
and results mainly from expenses incurred in the foreclosure of property not
reimbursed by insurers on loans serviced for others.
Servicing rights
The Company capitalizes servicing rights acquired through loan
origination activities by allocating a portion of the cost of originating
mortgage loans to the mortgage servicing right at the time of sale or
securitization based on the relative fair values at such date. To determine the
fair value of the servicing rights, the Company uses the market prices of
comparable servicing sale contracts.
Servicing assets and liabilities are subsequently adjusted by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.
For purposes of measuring impairment, mortgage servicing rights are
stratified by loan on the basis of interest rates. An impairment is recognized
whenever the prepayment pattern of the mortgage loan indicates that the fair
value of the related mortgage servicing rights is less than its carrying amount.
An impairment is recognized by charging such excess to income. The Company
determined that no reserve for impairment was required as of December 31, 1999
or 1998. As of December 31, 1999 and 1998, the fair value of capitalized
mortgage servicing rights was approximately $87,140,000 and $59,880,000,
respectively. In determining fair value, the Company considers the fair value of
servicing rights with similar risk characteristics.
Accounting for transfers and
servicing of financial assets and
extinguishment of liabilities
The Company recognizes on its financial statements financial assets and
servicing assets controlled by the Company, and derecognizes financial assets
when control has been surrendered. The Company follows the specific criteria
established in SFAS No. 125- Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, to determine when control has been
surrendered in a transfer of financial assets. Liabilities are derecognized when
they are extinguished.
Liabilities and derivatives incurred or obtained by the Company as part
of a transfer of financial assets are initially measured at fair value, if
practicable. Servicing assets and other retained interests in the transferred
assets are measured by allocating the previous carrying amount between the
assets sold, if any, and retained interests, if any, based on their relative
fair values at the date of the transfer.
<PAGE>
Transfers of receivables with
recourse
Transfers of receivables with recourse are recognized as a sale if the
Company surrenders control of the future economic benefits embodied in the
receivables, its obligation under the recourse provisions can be reasonably
estimated and the transferee cannot require the Company to repurchase the
receivables except pursuant to the recourse provisions. Any transfers of
receivables with recourse not meeting all of these conditions are recognized as
a liability in the consolidated financial statements.
Gains and losses realized on the sale of loans are recognized at the
time of the sale of the loans or pools to investors, based upon the difference
between the selling price and the carrying value of the related loans sold as
adjusted for any estimated liability under recourse provisions. In most sales,
the right to service the loans sold is retained by the Company.
Sale of servicing rights
The sale of servicing rights is recognized upon executing the contract
and title and all risks and rewards have irrevocably passed to the buyer. Gains
and losses realized on such sales are recognized based upon the difference
between the selling price and the carrying value of the related servicing rights
sold.
54
<PAGE>
Foreclosed real estate held for sale
Other real estate owned comprises properties acquired in settlement of
loans and recorded at fair value less estimated costs to sell at the date of
acquisition. Costs relating to the development and improvement of the property
are capitalized, whereas those relating to holding the property are expensed as
incurred.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. In providing allowances for
losses, the cost of holding real estate, including interest costs, are
considered. Gains or losses resulting from the sale of these properties are
credited or charged to income.
Premises and equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful life of each type of asset.
Major additions and improvements which extend the life of the assets are
capitalized, while repairs and maintenance are charged to expense.
The Company evaluates for impairment long-lived assets and certain
identifiable intangibles held and used whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, an estimate of the
future cash flows expected to result from the use of the asset and its eventual
disposition must be made. If the sum of the future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized for the difference, if any, between the discounted
future cash flows and the carrying value of the asset.
Goodwill and other intangibles
On October 7, 1999 the Company acquired Continental Capital Corp.
(Continental Capital) at a cost of approximately $5.3 million. The acquisition
was accounted under the purchase method of accounting resulting in the
recognition of negative goodwill of approximately $1.0 million. Total assets of
Continental Capital at the time of acquisition were approximately $21.2 million.
On July 31, 1998, the Company acquired Fajardo Federal Savings Bank,
F.S.B. (Fajardo Federal) at a cost of approximately $5.9 million. The
acquisition was accounted under the purchase method of accounting, resulting in
the recognition of goodwill of approximately $3.1 million. Total assets of
Fajardo Federal at the time of acquisition were approximately $28.9 million.
Goodwill also resulted from the acquisition of the Bank and a mortgage
banking institution in prior years.
Goodwill is amortized over a fifteen year period. Accumulated
amortization amounted to $2,271,000 and $1,757,000 as of December 31, 1999 and
1998, respectively.
In addition, the Company has recorded as a deposit intangible the
premium paid by the Bank over the value of deposits acquired resulting from the
purchase of certain branches from a commercial bank in 1995. The premium paid is
being amortized over a 10 year period. Accumulated amortization amounted to
approximately $642,000 and $477,000 at December 31, 1999 and 1998, respectively.
<PAGE>
Securities sold under agreements
to repurchase
The Company sells securities under agreements to repurchase the same or
similar securities. The Company retains effective control over the securities
pledged as collateral on these agreements. Accordingly, amounts received under
these agreements represent short-term borrowings and the securities underlying
the agreements remain in the asset accounts.
Interest rate risk management
The Company enters into interest rate caps, swaps, options and/or
futures contracts (primarily based on Eurodollar certificates of deposits and
U.S. Treasury Notes) to manage its interest rate exposure. Such instruments are
designated as hedges against future fluctuations in the interest rates of
specifically identified assets or liabilities. Options and futures are reported
at fair value within investments in the accompanying consolidated statement of
financial condition; related gains or losses are reported in the statement of
income.
55
<PAGE>
Interest rate swaps are not recognized in the consolidated statement of
financial condition and are not marked to market. Net interest settlements on
interest rate swaps are recorded as adjustments to interest income or expense.
Employee benefits
The Company and its subsidiaries have no post retirement benefit plans
for its employees as of December 31, 1999.
Income taxes
The Company follows an asset and liability approach to the recognition
of deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. A valuation allowance is recognized for any deferred tax
asset for which, based on managements evaluation, it is more likely than not (a
likelihood of more than 50%) that some portion or all of the deferred tax asset
will not be realized.
Capital reserve
The Banking Act of the Commonwealth of Puerto Rico, as amended,
requires that a minimum of 10% of net income of the Bank be transferred to
capital surplus until such surplus equals the sum of the Banks paid-in common
and preferred stock capital.
Stock option plan
As discussed in Note 16 to the consolidated financial statements, the
Company adopted a Stock Option Plan in June 1996 and granted stock options
thereunder to certain employees in conjunction with the Companys initial public
offering. Compensation cost on employee stock option plans is measured and
recognized for any excess of the quoted market price of the Companys stock at
the grant date over the amount an employee must pay to acquire the stock
(intrinsic value-based method of accounting). Generally, stock options are
granted with an exercise price equal to the face value of the stock at the date
of the grant and, accordingly, no compensation cost is recognized. The Company
complies with the disclosure provisions of SFAS No. 123 - Accounting for
Stock-Based Compensation.
Fair value of financial
instruments
The reported fair values of financial instruments are based on a
variety of factors. For a substantial portion of financial instruments, fair
values represent quoted market prices for identical or comparable instruments.
In a few other cases, fair values have been estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of risk. Accordingly, the fair values
may not represent actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future.
Earnings per share
Basic earnings per common share is computed by dividing net income for
the year by the weighted average number of shares outstanding during the period.
Outstanding stock options granted under the Companys Stock Option Plan are
included in the weighted average number of shares for purposes of the diluted
earnings per share computation.
<PAGE>
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks and other highly liquid securities with
an original maturity of three months or less.
Accounting for derivative
instruments and hedging
activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No.133-Accounting for Derivative Instruments and Hedging Activities.
This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically accounted as a hedge. The accounting for changes in fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation.
This Statement was effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB delayed the effective date
of this Statement to all fiscal quarters of fiscal years beginning after June
15, 2000.
Management is evaluating its hedging strategy in light of this new
pronouncement to establish the initial
56
<PAGE>
designation of its hedging activities and determine the effect and timing of
adoption. However, due to the relatively limited extent to which the Company is
using derivative instruments and the simple nature of the instruments used,
management does not expect the impact of adoption to be significant.
Adoption of new accounting
standards
On January 1,1998, the Company adopted SFAS No. 130- Reporting
Comprehensive Income. This Statement requires (1) the classification of items of
other comprehensive income by their nature in a financial statement; (2) the
display of the accumulated balance of other comprehensive income by their nature
in a financial statement; and (3) the display of the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
For the Company, unrealized gains and losses on certain investments in debt
securities was the only other comprehensive income item to be included in
comprehensive income, which is now reported with the statement of comprehensive
income. The adoption of this Statement affected only financial statement
presentation.
On January 1, 1998 the Company also adopted SFAS No. 131 - Disclosures
about Segments of an Enterprise and Related Information. This Statement requires
that a public business enterprise report financial and descriptive information
about its reportable segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The adoption of this Statement affected only financial statement
presentation and disclosure. The required disclosures are provided in Note 24 to
the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 financial statement presentation.
57
<PAGE>
2. Mortgage Loans Held for Sale
Mortgage loans held for sale consist of:
December 31,
1999 1998
Conventional loans $ 54,853,175 $ 93,021,032
FHA/VA loans 22,423,958 24,105,008
------------ ------------
$ 77,277,133 $117,126,040
============ =============
The aggregate amortized cost and approximate market value of loans held for sale
as of December 31, 1999 are as follows:
Amortized Gross unrealized Gross unrealized Approximate
cost holding gains holding losses market value
$77,277,133 $ 2,242,465 $ (803,495) $78,716,103
Substantially all of the loans are pledged to secure various borrowings from
lenders under mortgage warehousing lines of credit (see Note 9). The following
table summarizes the components of gain on sale of mortgage loans held for sale
and mortgage-backed securities held for trading:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Proceeds from sales of mortgage loans
and mortgage-backed securities $ 855,471,398 $ 783,914,438 $ 369,267,397
Mortgage loans and mortgage-
backed securities sold (832,057,042) (761,449,308) (359,001,427)
Gain on sales, net 23,414,356 22,465,130 10,265,970
Deferred fees earned, net of loan origination costs
and commitment fees paid 13,685,619 6,207,098 3,235,381
37,099,975 28,672,228 13,501,351
Net unrealized (loss) profit on
trading securities (21,288) 6,005,327 9,677,663
Net gain on origination and sale of
mortgage loans 37,078,687 34,677,555 23,179,014
Gains on sales of investment securities available
for sale from non-mortgage banking activities 19,531 278,028 107,430
---------------------------------------------------
$ 37,098,218 $ 34,955,583 $ 23,286,444
===================================================
</TABLE>
Total gross loan origination fees totaled approximately $ 28,442,000,
$20,270,000 and $13,683,000 during the years ended December 31, 1999, 1998 and
1997, respectively. Gross gains of $32,261,508, $25,445,179 and $11,532,566, and
gross losses of $8,847,152, $2,980,049 and $1,266,596 were realized on the above
sales during the years ended December 31, 1999, 1998 and 1997, respectively.
58
<PAGE>
3. Investment Securities
December 31,
1999 1998
Mortgage-backed securities held for trading
CMO Residuals (interest only) $ -- $ 7,146,762
GNMA Certificates 43,563,817 443,399,272
$ 43,563,817 $450,546,034
The carrying value and estimated fair value of investment securities available
for sale and held to maturity by category and contractual maturities are shown
below. The fair value of investment securities is based on quoted market prices
and dealer quotes except for the investment in Federal Home Loan Bank (FHLB)
stock which is valued at its redemption value. Expected maturities on debt
securities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
December 31,
1999 1998
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Mortgage-backed securities available for sale
CMO residuals (interest only) and other
mortgage-backed securities $ 20,709,050 $ 22,772,039 $ 7,845,382 $ 9,661,171
---------------------------------------------------------------
FNMA certificates:
Due from five to ten years 740,977 718,979 -- --
Due over ten years 110,854,889 109,705,450 8,091,335 8,161,704
---------------------------------------------------------------
111,595,866 110,424,429 8,091,335 8,161,704
FHLMC certificates:
Due from one to five years 98,693 98,882 89,209 90,765
Due from five to ten years 1,891,072 1,840,979 240,394 244,140
Due over ten years 14,586,274 14,036,216 21,368,689 21,723,711
16,576,039 15,976,077 21,698,292 22,058,616
GNMA certificates- ---------------------------------------------------------------
Due over ten years 570,748,830 563,532,620 55,158,840 55,158,840
$719,629,785 $712,705,165 $ 92,793,849 $ 95,040,331
===============================================================
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Investment securities available for sale
U.S. Treasury securities:
Due within one year $ 4,998,011 $ 4,944,500 $ -- $ --
Due from one to five years -- -- 4,995,028 4,990,625
4,998,011 4,944,500 4,995,028 4,990,625
U.S. Government and Agencies securities:
Due from one to five years 133,955,940 130,950,440 38,100,000 38,106,648
Due from five to ten years 92,236,888 89,443,550 5,010,140 5,000,000
226,192,828 220,393,990 43,110,140 43,106,648
---------------------------------------------------------------
FHLB stock 32,825,167 32,825,167 11,404,867 11,404,867
---------------------------------------------------------------
$264,016,006 $258,163,657 $ 59,510,035 $ 59,502,140
===============================================================
Mortgage-backed securities held to maturity
GNMA certificates:
Due from one to five years $ 15,478 $ 16,601 $ 27,227 $ 29,201
Due from five to ten years 10,659,910 10,390,712 13,024,960 12,751,640
Due over ten years 2,132,629 2,074,108 2,359,713 2,306,529
12,808,017 12,481,421 15,411,900 15,087,370
---------------------------------------------------------------
FNMA certificates-
Due over ten years 10,252,615 10,643,767 12,607,700 12,944,020
---------------------------------------------------------------
FHLMC certificates-
Due over ten years 188,615 179,841 235,918 229,535
---------------------------------------------------------------
$23,249,247 $23,305,029 $28,255,518 $28,260,925
===============================================================
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Investment securities held to maturity
U.S. Treasury securities-
Due within one year $ - $ - $ 194,892 $ 196,000
U.S. Government and Agencies securities-
Due within one year - - 204,167 204,167
Puerto Rico Government and Agencies
obligations:
Due from one to five years 1,280,000 1,272,000 - -
Due from five to ten years 4,157,630 4,131,755 5,944,870 5,978,467
5,437,630 5,403,755 5,944,870 5,978,467
---------------------------------------------------------------
$ 5,437,630 $ 5,403,755 $ 6,343,929 $ 6,378,634
===============================================================
</TABLE>
Unrealized gains and losses on securities held to maturity and available for
sale follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
Gross unrealized Gross unrealized
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
Securities held to maturity:
Puerto Rico and United States
Government obligations $ - $ (33,875) $ 39,705 $ (5,000)
Mortgage-backed securities 392,274 (336,492) 338,294 (332,887)
$ 392,274 $ (370,367) $ 377,999 $ (337,887)
---------------------------------------------------------------
Securities available for sale:
U.S. Government obligations $ 9,000 $ (5,861,349) $ 6,648 $ (14,543)
Mortgage-backed securities 2,570,658 (9,495,278) 2,276,566 (30,084)
---------------------------------------------------------------
$ 2,579,658 $(15,356,627) $ 2,283,214 $ (44,627)
===============================================================
</TABLE>
During 1997 the Company had proceeds from the sale of investment securities held
for trading of approximately $10,083,000; gains realized on such sales totaled
approximately $31,000; no losses were realized. There were no sales of
investment securities held for trading during 1999 and 1998. During the years
ended December 31, 1999, 1998 and 1997, proceeds from the sale of securities
available for sale totaled approximately $88,760,000, $45,917,000 and
$7,915,000, respectively; gross gains realized on such sales totaled
approximately $1,392,000, $278,000 and $107,000, respectively; gross losses
realized in 1999 were approximately $2,352,000; no losses were realized in 1998
and 1997.
<PAGE>
During 1999, the Company reclassified $9,296,000 (1998- $55,159,000) securities
held for trading to available for sale.
As discussed in Notes 7, 8, 9 and 10 to the consolidated financial statements,
as of December 31, 1999 the Company had investment securities, mortgage-backed
securities and mortgage loans amounting to approximately $1.3 billion pledged to
secure certain deposits, securities sold under agreements to repurchase,
advances from the FHLB, notes payable, and irrevocable standby letters of credit
issued by the FHLB.
61
<PAGE>
4. Loans and Allowance for Loan Losses
Loans consist of the following:
December 31,
1999 1998
---- ----
Real estate loans:
Residential - first mortgage $ 1,097,891,436 $ 735,457,756
Residential - second mortgage 13,028,816 18,633,916
Land 1,952,043 337,250
Construction 95,201,185 34,391,170
Commercial 226,036,358 121,393,030
1,434,109,838 910,213,122
----------------------------------------
Undisbursed portion of loans in process (50,622,579) (18,170,178)
Net deferred loan fees (436,852) (166,056)
1,383,050,407 891,876,888
----------------------------------------
Other loans:
Commercial 54,230,506 46,532,311
Consumer:
Loans secured by deposits 20,538,734 17,225,437
Loans secured by real estate 76,944,484 85,054,815
Other 37,653,140 41,381,304
Unamortized discount (356,142) (163,499)
Unearned interest (83,722) (183,546)
188,927,000 189,846,822
----------------------------------------
Total loans 1,571,977,407 1,081,723,710
----------------------------------------
Allowance for loan losses (8,970,605) (8,055,432)
$ 1,563,006,802 $ 1,073,668,278
========================================
The changes in the allowance for loan losses follow:
Year ended December 31,
1999 1998 1997
Balance, beginning of year $ 8,055,432 $ 6,771,702 $ 3,331,645
Provision for loan losses 4,525,000 6,600,000 6,370,000
Acquired reserves -- 364,064 --
Loans charged-off (4,439,807) (6,012,792) (5,376,573)
Recoveries 829,980 332,458 2,446,630
Balance, end of year $ 8,970,605 $ 8,055,432 $ 6,771,702
===============================================
Recoveries during the year ended December 31, 1997 include $2 million received
from the Companys fidelity insurance carrier as part of a settlement of a claim
filed by the Company in late 1996. The amount received was recorded as a
recovery of loans previously charged-off.
As of December 31, 1999 and 1998 the Company had commercial loans classified as
impaired totaling $928,000 and $1,021,000, respectively. No reserves for
impairment were necessary as of such dates since the fair value of the
collaterals securing such loans exceeded their outstanding balances.
<PAGE>
As of December 31, 1999, 1998 and 1997, loans on which the accrual of interest
income had been discontinued amounted to approximately $59,014,000, $44,526,000
and $30,086,000, respectively. The additional interest income that would have
been recognized during 1999, 1998 and 1997 had these loans been accruing
interest amounted to approximately $ 1,637,000, $1,408,000 and $1,095,000,
respectively. The Company has no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 1999.
62
<PAGE>
5. Mortgage Loan Servicing
The Companys fees for servicing mortgage loans generally range from .25% to .50%
on the declining outstanding principal balances of the mortgage loans serviced.
Servicing fees are collected on a monthly basis out of payments from mortgagors.
The servicing agreements are terminable by permanent investors for cause without
penalty or after payment of a termination fee ranging from .5% to 1% of the
outstanding principal balance of the loans. At December 31, 1999 and 1998, the
mortgage loans servicing portfolio amounted to approximately $6,177,511,000 and
$4,827,798,000, respectively, including approximately $1,069,100,000 and
$754,623,000, respectively, serviced for the Bank, and $486,199,000 under
sub-servicing contracts at December 31, 1999.
The changes in the servicing asset of the Company follows:
Year ended December 31,
1999 1998 1997
Balance at beginning of period $ 58,221,052 $ 21,212,998 $ 12,595,020
Rights originated 14,072,094 11,845,775 8,057,574
Rights purchased 19,342,009 28,156,586 2,397,818
Scheduled amortization (7,382,649) (2,994,307) (1,837,414)
Balance at end of period $ 84,252,506 $ 58,221,052 $ 21,212,998
=============================================
Among the conditions established in its various servicing agreements, the
Company is committed to advance from its own funds any shortage of moneys
required to complete timely payments to investors in GNMA mortgage-backed
securities issued and in its FNMA and FHLMC portfolio. At December 31, 1999, the
mortgage loan portfolio serviced for GNMA, FNMA and FHLMC and subject to the
timely payment commitment amounted to approximately $2,880,069,000, $537,881,000
and $981,168,000, respectively (1998 - $2,575,794,000, $219,178,000, and
$831,184,000).
Total funds advanced as of December 31, 1999 in relation to such commitments
amount to $2,693,000 , $6,740,000 and $1,501,000 for escrow advances, principal
and interest advances and foreclosure advances, respectively (1998 - $1,458,000,
$3,429,000 and $757,000).
In connection with mortgage servicing activities, the Company holds funds in
trust for investors representing amounts collected primarily for the payment of
principal, interest, real estate taxes and insurance premiums. Such funds are
deposited in separate custodial bank accounts, some of which are deposited in
the Bank. At December 31, 1999 and 1998, the related escrow funds include
approximately $92,361,000 and $109,857,000, respectively, deposited in the Bank;
these funds are included in the Companys consolidated financial statements.
Escrow funds also include approximately $16,826,000 and $6,732,000 at December
31, 1999 and 1998, respectively, deposited with other banks and excluded from
the Companys assets and liabilities.
<PAGE>
6. Premises and Equipment
Premises and equipment consist of:
Estimated
useful lives December 31,
(Years) 1999 1998
Buildings 20 $ 1,895,066 $ --
Furniture and fixtures 5 22,398,620 17,588,015
Leasehold improvements 10 11,952,402 7,966,402
Autos 5 544,355 487,562
36,790,443 26,041,979
-----------------------------
Less - Accumulated
depreciation and amortization (17,331,090) (13,079,544)
-----------------------------
$ 19,459,353 $ 12,962,435
=============================
63
<PAGE>
7. Deposits
Deposits are summarized as follows:
December 31,
1999 1998
Passbook savings $ 113,576,010 $ 106,389,879
NOW accounts 38,764,771 34,954,647
Super NOW accounts 93,912,535 81,511,705
Regular checking accounts
(non-interest bearing) 54,020,104 46,328,445
Commercial checking accounts
(non-interest bearing) 103,575,340 126,171,795
290,272,750 288,966,592
---------------------------------------
Certificates of deposit:
Under $ 100,000 390,314,490 315,641,230
$100,000 and over 531,714,386 294,270,322
922,028,876 609,911,552
---------------------------------------
Accrued interest payable 4,628,732 2,029,281
$ 1,330,506,368 $ 1,007,297,304
=======================================
The weighted average stated interest rate on all deposits at December 31, 1999
and 1998 was 4.84% and 4.50%, respectively.
As of December 31, 1999, the Company had delivered investment
securities held to maturity with an amortized cost of approximately $4.2 million
as collateral for public funds deposits.
At December 31, 1999 scheduled maturities of certificates of deposit are as
follows:
2000 $755,614,168
2001 46,841,853
2002 32,263,785
2003 31,574,142
2004 39,153,143
Thereafter 16,581,785
$922,028,876
============
64
<PAGE>
8. Securities Sold Under Agreements to Repurchase
At December 31, 1999, repurchase agreements mature within ninety days, except
for repurchase agreements totaling $70,000,000 maturing in December 2000.
Information on these agreements follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
Approximate market Approximate market
Repurchase and carrying value of Repurchase and carrying value of
liability underlying securities liability underlying securities
--------- --------------------- --------- ---------------------
<S> <C> <C> <C> <C>
Type of security
U.S. Government and Agencies securities $ 124,392,000 $ 123,548,392 $ 6,967,000 $ 7,151,947
GNMA 570,743,356 590,468,925 439,960,446 448,732,603
CMO Residuals 8,162,280 4,592,934 8,162,280 5,848,724
FHLMC 15,763,948 16,053,021 12,682,000 12,983,712
FNMA 12,279,756 13,699,487 3,650,000 3,216,694
---------------------------------------------------------------------------
$ 731,341,340 $ 748,362,759 $ 471,421,726 $ 477,933,680
===========================================================================
</TABLE>
Maximum amount of borrowings outstanding at any month-end during 1999 and 1998
under the agreements to repurchase were $643,352,000 and $471,422,000,
respectively. The approximate average aggregate borrowings outstanding during
the periods were $482,335,000 and $410,701,000, respectively. The weighted
average interest rate of such agreements was 5.92% and 5.42% at December 31,
1999 and 1998, respectively; the weighted average rate during 1999 and 1998 was
5.59% and 5.74%, respectively.
The securities underlying such agreements were delivered to, and are being held
by, the dealers with whom the securities sold under agreements to repurchase
were transacted. The dealers may have sold, lent, or otherwise disposed of such
securities to other parties in the normal course of their operations, but have
agreed to resell the Company the same or similar securities at the maturities of
the agreements.
Since repurchase agreements are short-term commitments to borrow funds, they can
be assumed to reprice at least quarterly. Therefore, the outstanding balance of
repurchase agreements is estimated to be its fair value.
65
<PAGE>
9. Notes Payable
Notes payable consist of:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Warehousing lines, bearing interest at floating rates
ranging from 1.125% to 1.25% over the counterpartys
cost of funds (6.78% in 1999 and 6.43% in 1998) $ 48,507,001 $ 98,647,956
Lines of credit with banks for an aggregate of $25
million bearing interest at floating rates ranging
from 1.375% to 1.75% over the counterpartys cost of funds
7.25% in 1999), collateralized by mortgage servicing
rights with a fair value of approximately $35,000,000 23,700,000 -
Promissory notes maturing in 1999 paying semiannual
interest at fixed annual rates ranging from 6.20% to 7.15% - 23,600,000
Promissory notes maturing in 2000 paying semiannual
interest at fixed annual rates ranging from 5.60% to 6.30% 15,000,000 15,000,000
Promissory note maturing in 2000 paying quarterly
interest at a floating rate of 84% of the three month
Libor rate less .125% (4.99% at December 31, 1999
and 4.36% at December 31, 1998) 10,000,000 10,000,000
Promissory note maturing in 2001 paying quarterly
interest at a floating rate of 96% of the three month
Libid rate (5.81% at December 31, 1999 and 4.95%
at December 31, 1998) 25,000,000 25,000,000
Promissory note maturing in 2001 paying semiannual
interest at a fixed annual rate of 6.52% 10,500,000 10,500,000
$ 132,707,001 $ 182,747,956
================================
</TABLE>
As of December 31, 1999, the Company had various credit line agreements
permitting the Company to borrow up to $223.4 million in warehousing lines with
banks; the unused portion of warehousing lines totaled approximately $174.9
million. Warehousing lines at December 31, 1999 are collateralized by
approximately $44.2 million in mortgage loans, mortgage servicing rights with a
fair value of $8 million, and a general assignment of mortgage payments
receivable. These borrowings bear interest at rates related to the respective
counterpartys cost of funds. Several credit line agreements impose certain
requirements on the Company of which the most important include maintaining net
worth and debt service over certain defined minimums, and limitations on
indebtedness and declaration of dividends. At December 31, 1999 the Company was
in compliance with the loan requirements.
66
<PAGE>
The following information relates to borrowings of the Company under the credit
line agreements:
December 31,
------------
(Dollars in Thousands) 1999 1998
---- ----
Maximum aggregate borrowings
outstanding at any month-end $ 233,100 $ 161,060
Approximate average aggregate borrowings
outstanding during the year $ 140,548 $ 102,047
Weighted average interest rate during
the year computed on a monthly basis 6.35% 7.07%
Weighted average interest rate at end of year 6.87% 6.43%
Certain promissory notes include pledge agreements where the Company has pledged
certain negotiable securities as a guarantee for payment of some of the notes.
The pledge agreements provide that the value of the pledged securities must not
fall below 105% of the principal balance of the promissory note plus accrued
interest on such amount. In the event that the securities value falls below the
stated percentage, the Company must deliver additional negotiable securities. At
December 31, 1999 securities pledged in relation to this requirement consist of
investment and mortgage-backed securities with an amortized cost of
approximately $14.3 million and approximate market value of $14.2 million. At
December 31, 1999 floating rate notes in the aggregate amount of $35,000,000 and
fixed rate notes of $10,500,000 are guaranteed by letters of credit issued by
the FHLB -NY.
Promissory notes by maturity as of December 31, 1999 follows:
2000 $25,000,000
2001 35,500,000
$60,500,000
====================
67
<PAGE>
10. Advances from The Federal Home Loan Bank of New York
Advances from the FHLB totaled $384 million and $121 million as of December 31,
1999 and 1998, respectively. At December 31, 1999 advances from FHLB mature at
various dates commencing on January 3, 2000 until December 18, 2003, and bear
interest at various rates ranging from 4.22% to 6.43%. The weighted average
stated interest rate on advances from the FHLB was 5.75% and 5.25% at December
31, 1999 and 1998, respectively.
The Bank receives advances from the FHLB under an Advances, Collateral Pledge
and Security Agreement (the Agreement), which allows the Company to borrow up to
$645.8 million as of December 31, 1999. The unused portion under such line of
credit was approximately $261.8 million. Under the Agreement, the Bank is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. In addition, the Bank
maintains standby letters of credit with the FHLB amounting to approximately
$47.1 million at December 31, 1999. At December 31, 1999 the specific collateral
(principally in the form of first mortgage notes) amounting to approximately
$504.9 million was pledged to the FHLB as part of the Agreement and to secure
standby letters of credit. At December 31, 1999, the market value of the
collateral indicated above was sufficient to comply with the provisions of the
Agreement.
11. Income Taxes
Under the Puerto Rico tax law a companys tax liability will be the greater of
the tax computed under the regular tax system or the alternative minimum tax
(AMT) system. The AMT is imposed based on 22% of regular taxable income after
certain adjustments for preference items. An AMT credit may be claimed in future
years for tax paid on an AMT basis in excess of the regular tax basis. Under the
Puerto Rico Income Tax Law entities are not entitled to file consolidated tax
returns.
The Bank is subject to Puerto Rico income tax on its income derived from all
sources within and outside Puerto Rico. The Bank is also subject to United
States income taxes on certain types of income from such source. However, any
United States income tax paid by the Bank is, subject to certain conditions and
limitations, creditable as a foreign tax credit against its Puerto Rico income
tax liability.
A portion of the Companys interest income arises from mortgage loans and
mortgage-backed securities which are exempt for Puerto Rico income tax purposes.
The elimination of exempt income, net of related expenses, from the
determination of taxable income results in a reduction of its income tax
liability.
Deferred tax liabilities (assets) are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on securities held for trading $ 101,782 $ 6,038,762
Reserve for bad debts -- 19,371
CMO residuals (IOs) 4,387,577 1,778,693
Servicing asset 8,260,486 4,839,238
Securitization gains on mortgage -backed securities 4,710,779 --
Unrealized gain on securities available for sale -- 873,049
17,460,624 13,549,113
-------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Deferred tax assets:
Deferred loan origination income, net (1,974) (313,111)
Allowance for loan losses (3,498,536) (2,799,369)
Contingency reserve -- (234,000)
AMT credits (1,191,200) (124,937)
Other foreclosed property reserve (38,571) --
Recourse contingency -- (61,653)
Reserve for bad debts (253,664) --
Unrealized losses on securities available for sale (4,983,018) --
Deferred gains on sale of investment securities (183,336) (183,336)
(10,150,299) (3,716,406)
-------------------------------
Net deferred tax liability $ 7,310,325 $ 9,832,707
===============================
</TABLE>
68
<PAGE>
The provision for income taxes of the Company varies from amounts computed by
applying the Puerto Rico statutory tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed income tax at statutory rate $ 20,894 39% $ 17,579 39% $ 12,569 39%
Effect on provision of:
Tax-exempt interest (5,629) (10) (7,084) (15) (2,947) (9)
Adjustment for tax differences expected to reverse
at tax rates lower than the statutory rate (2,040) (4) -- -- -- --
Discount on tax credits purchased (506) (1) (385) (1) (1,006) (3)
Other (non-taxable) / non-deductible
items, net (480) (1) 931 2 116 --
-------------------------------------------------------------------------
$ 12,239 23% $ 11,041 25% $ 8,732 27%
=========================================================================
</TABLE>
In early February 1998, the Puerto Rico Treasury Department began an
income tax examination of R&G Mortgages and the Bank's income tax
returns for the year 1995. Management believes that this examination
should not result in any significant adverse effect on the Company's
financial condition or results of operations.
12. Stockholders' Equity
On April 16, 1998 the Company's Board of Directors authorized a
two-for-one stock split of the Company's $.01 par value Class A and Class B
common stock (the common stock). The stock split was effected, on June 25, 1998
in the form of a stock dividend of one share for each share held of record on
June 12, 1998. Prior to the declaration of the stock split, the Company had
14,144,752 shares of common stock outstanding. As a result of the split,
14,144,752 shares were issued and $141,448 were transferred from additional
paid-in-capital to common stock. On July 15, 1997 the Company's Board of
Directors authorized a nine-for-five stock split of the Company's common stock.
The stock split was effected on September 25, 1997 in the form of a stock
dividend of four shares of common stock for each five shares held of record on
September 15, 1997. Prior to the declaration of the stock split, the Company had
7,858,216 shares of common stock outstanding. As a result of the split,
6,286,536 shares were issued and $62,865 were transferred from additional
paid-in-capital to common stock. The stock splits did not dilute shareholders'
voting rights or their proportionate interest in the Company. All per share data
included herein has been adjusted to reflect the stock splits.
The Company's average number of common shares outstanding used in the
computation of basic earnings per common share was 28,632,768 (1998-28,413,314;
1997-28,289,504); the weighted average number of shares outstanding for the
computation of diluted earnings per share was 29,334,224 (1998 -29,169,314; 1997
- -29,042,504) after giving effect to outstanding stock options granted under the
Company's Stock Option Plan. During 1999, cash dividends of $.14875 (1998
- -$0.111375; 1997 -$0.084375) per common share amounting to $4,258,460 (1998
- -$3,178,214; 1997 -$2,385,752) were paid.
69
<PAGE>
13. Non-interest Expenses
Non-interest expenses consist of the following:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Stationary and supplies $ 2,018,569 $ 1,548,459 1,640,131
Advertising and promotion 5,718,016 4,277,685 3,154,189
Telephone 1,585,587 1,004,213 871,029
License and other taxes 2,693,461 2,074,144 1,595,276
Deposit insurance 514,473 401,933 346,625
Other insurance 801,334 661,951 590,066
Legal and other professional services 2,254,510 2,169,209 2,193,687
Amortization of mortgage servicing asset 7,382,649 2,994,307 1,837,414
Goodwill amortization 514,293 393,507 307,233
Guaranty fees 2,060,884 1,366,296 1,246,300
Other 8,023,930 5,795,632 4,469,547
$33,567,706 $22,687,336 $18,251,497
</TABLE>
14. Related Party Transactions
The Company leases some of its facilities from an affiliate, mostly on a
month-to-month basis. The annual rentals under these agreements during 1999 were
approximately $1,736,000 (1998- $ 1,566,000).
Loans to directors, officers and employees of the Company were made in the
ordinary course of business. Interest rates on such loans were substantially the
same as those prevailing at the time for comparable transactions with unrelated
parties and did not involve more than a normal risk of collectibility. At
December 31, 1999 the aggregate amount of loans outstanding to officers,
directors, and principal stockholders of the Company and its subsidiaries were
insignificant.
15. Regulatory Requirements
The Company is approved by the Board of Governors of the Federal Reserve System
(Federal Reserve Board) as a registered bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended.
The Company, as a bank holding company, is subject to regulation and supervision
by the Federal Reserve Board. The Federal Reserve Board has established
guidelines regarding the capital adequacy of bank holding companies, such as the
Company. These requirements are substantially similar to those adopted by the
FDIC for depository institutions, as set forth below.
The Bank is incorporated under the Puerto Rico Banking Act, as amended, and is
subject to extensive regulation and examination by the Commissioner of the
Officer of Financial Institutions of the Commonwealth of Puerto Rico, the FDIC
and certain requirements established by the Federal Reserve Board.
The mortgage banking business conducted by R&G Mortgage is subject to the rules
and regulations of FHA, VA, FNMA, FHLMC, GNMA and the Commissioner with respect
to originating, processing, selling and servicing mortgage loans and the
issuance and sale of mortgage-backed securities. R&G Mortgages affairs are also
<PAGE>
subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at
all times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder. R&G
Mortgage is a U.S. Department of Housing and Urban Development (HUD) approved
non-supervised mortgagee.
70
<PAGE>
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Companys
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Companys capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy requires the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as defined).
Failure to meet capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Companys financial statements. As of December 31,
1999, the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Banks category.
The following table reflects the Companys and the Banks actual capital amounts
and ratios, and applicable regulatory capital requirements at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital (to risk weighted assets):
Consolidated $271,716 16.47% $131,966 8% N/A N/A
R-G Premier Bank only $161,754 13.08% $ 98,921 8% $123,651 10%
Tier I capital (to risk weighted assets):
Consolidated $262,746 15.93% $ 65,983 4% N/A N/A
R-G Premier Bank only $152,784 12.36% $ 49,460 4% $ 74,190 6%
Tier I capital (to average assets):
Consolidated $262,746 9.35% $112,368 4% N/A N/A
R-G Premier Bank only $152,784 7.07% $ 86,453 4% $108,066 5%
As of December 31, 1998
Total capital (to risk weighted assets):
Consolidated $215,287 14.28% $120,638 8% N/A N/A
R-G Premier Bank only $110,501 14.46% $ 61,124 8% $ 76,405 10%
Tier I capital (to risk weighted assets):
Consolidated $207,232 13.74% $ 60,319 4% N/A N/A
R-G Premier Bank only $102,446 13.41% $ 30,562 4% $ 45,843 6%
Tier I capital (to average assets):
Consolidated $207,232 10.88% $ 76,172 4% N/A N/A
R-G Premier Bank only $102,446 8.04% $ 50,993 4% $ 63,741 5%
</TABLE>
71
<PAGE>
16. Stock Option Plan
The Company has a Stock Option Plan, which is designed to attract and retain
qualified personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company, and reward key employees for outstanding performance and the
attainment of targeted goals. An amount of Company common stock equal to 10% of
the aggregate number of Class B Shares sold in the Companys initial public
offering (241,500 shares, equivalent to 869,400 shares after giving effect to
stock splits) were authorized under the Stock Option Plan, which may be filled
by authorized but unissued shares, treasury shares or shares purchased by the
Company on the open market or from private sources. The Stock Option Plan
provides for the grant of stock options at an exercise price equal to the fair
market value of the Class B shares at the date of the grant. Stock options are
available for grant to key employees of the Company and any subsidiaries. No
options were issued prior to the public offering. In connection with the
Companys initial offering on August 27,1996, the Company awarded options for
200,000 shares (720,000 shares as adjusted for stock splits) to 28 employees of
R&G Mortgage and the Bank at the initial public offering price of $14.50 per
share. In January 1997 the Company awarded options for an additional 10,000
shares (36,000 shares as adjusted for stock splits) to a certain employee. The
maximum term of the options granted are ten years. Under the provisions of the
Stock Option Plan, options can be exercised as follows: 20% after one year, 40%
after two years, 60% after three years, 80% after four years and 100% after five
years. As of December 31, 1998 none of the options granted have been exercised.
Stock options granted, cancelled and exercised during 1999 were as
follows:
Weighted
Average Price
Outstanding stock options, January 1, 1999 756,000 $ 4.1568
Granted 96,000 $ 16.1250
Exercised (71,640) $ 4.0278
Cancelled (25,200) $ 4.0278
Outstanding stock options, December 31, 1999 755,160 $ 5.6948
The Company adopted in 1996 the disclosure provisions of SFAS No. 123-
Accounting for Stock-Based Compensation (SFAS 123). Accordingly, no compensation
cost has been recognized for the Companys Stock Option Plan. Had compensation
cost for the Companys Stock Option Plan been determined based on the fair value
of the options at the grant date consistent with the provisions of SFAS 123, the
Companys net earnings and earnings per share for the years ended December 31,
1999 and 1998 would have been reduced to the pro forma amounts indicated below:
1999 1998
Net earnings - as reported $ 41,334,992 $ 34,033,797
Net earnings - pro forma $ 41,180,478 $ 33,879,283
Basic earnings per share - as reported $ 1.31 $ 1.15
Basic earnings per share - pro forma $ 1.31 $ 1.15
<PAGE>
1999 1998
Diluted earnings per share - as reported $ 1.28 $ 1.12
Diluted earnings per share - pro forma $ 1.28 $ 1.12
The fair value of the option grants were estimated on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
Stock Price and Exercise Price - $14.50 for options granted based on the terms
of the awards.
Expected Option Term - 6 years.
Expected Volatility - 42.54% for options granted calculated using weekly closing
prices of three peer financial institutions given the Companys limited publicly
trading history.
Expected Dividend Yield - Calculated as the annualized quarterly dividend
closest to the grant date divided by the stock price on the grant date.
Risk-Free Interest Rate - 6.48% for options granted determined as the yield, on
the date of grant, on a U.S. Treasury zero coupon bond with a maturity equal to
the expected term of the option.
72
<PAGE>
17. Profit Sharing Plan
The Company has a profit sharing plan (the Plan) which covers substantially all
regular employees. Annual contributions to the Plan are based on matching
percentages up to 5% of employee salaries, based on the employees years of
service and on operational income, as defined by the Plan, and are deposited in
a trust. Contributions to the Plan during the years ended December 31, 1999,
1998 and 1997 amounted to approximately $120,000, $103,000, and $79,000,
respectively.
18. Commitments and Contingencies
Commitments to buy and sell GNMA certificates
As of December 31, 1999, the Company had open commitments to issue GNMA
certificates in the amount of $52.0 million.
Commitments to sell mortgage loans
As of December 31, 1999 the Company had commitments to sell mortgage loans to
third party investors amounting to $64.8 million.
Lease commitments
The Company is obligated under several noncancellable leases for office space
and equipment rentals, all of which are accounted for as operating leases. The
leases expire at various dates with options for renewals.
As of December 31, 1999, minimum annual rental commitments under noncancellable
operating leases for certain office space and equipment, including leases with
an affiliate, were as follows:
Year Amount
2000 $ 3,444,327
2001 3,265,865
2002 3,137,709
2003 2,793,145
2004 2,538,732
Later years 13,525,469
$ 28,705,247
Rent expense amounted to approximately $4,081,000 in 1999, $3,097,000 in
1998 and $2,483,000 in 1997.
Litigation
The Company is a defendant in legal proceedings arising from normal business
activities. Management believes, based on the opinion of legal counsel, that the
final disposition of these matters will not have a material adverse effect on
the Companys financial position or results of operations.
Others
At December 31, 1999 the Company is liable under limited recourse provisions
resulting from the sale of loans to several investors principally FHLMC. The
principal balance of these loans, which are serviced by the Company, amounts to
approximately $646.3 million at December 31, 1999. Liability, if any, under the
recourse provisions at December 31, 1999 is estimated by management to be
insignificant.
<PAGE>
19. Supplemental Disclosure on the Statements of Cash Flows
During 1999, 1998 and 1997, the Company paid interest amounting to approximately
$99,587,000, $79,576,000 and $60,846,000, respectively, and income taxes of
approximately $8,241,000, $4,306,000 and $9,699,000, respectively.
During 1999, 1998 and 1997 the Company retained as investment securities
approximately $106,237,000, $0 and $11,346,000, respectively, of loans
securitized from its mortgage loan portfolio.
73
<PAGE>
20. Financial Instruments with Off-Balance Sheet
Risk and Concentrations of Credit Risk
In the normal course of business, the Company uses various off-balance sheet
financial instruments to satisfy the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments and interest rate exchange agreements
(swaps). These instruments involve, to varying degrees, elements of credit and
interest rate in excess of the amount recognized in the statements of financial
condition. The contract or notional amounts of these instruments, which are not
included in the statements of financial condition, are an indicator of the
Companys activities in particular classes of financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. For interest rate swaps, the contract or notional amounts do
not represent exposure to credit loss. Instead, the amount potentially subject
to credit loss is substantially less.
Contractual commitments to extend credit are legally binding agreements to lend
money to customers at predetermined interest rates for a specified period of
time. Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements.
To extend credit the Company evaluates each customers credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on managements credit evaluation
of the counterparty. A geographic concentration exists within the Companys
mortgage loans portfolio since most of the Companys business activity is with
customers located in Puerto Rico.
Interest rate swap agreements involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal.
Entering into interest rate agreements involves the risk of dealing with
counterparties and their ability to meet the terms of the contracts, and also
the interest rate risk associated with unmatched positions.
The total amounts of financial instruments with off-balance sheet risk at
December 31, 1999 follows:
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit excluding the undisbursed portion of loans
in process:
Unused lines of credit $ 29,016,736
- --------------------------------------------------------------------------------
Financial instruments whose notional or contractual
amounts exceed the amount of potential credit risk:
Interest rate swap contracts $ 155,000,000
- --------------------------------------------------------------------------------
A detail of interest rate swaps by contractual maturity at December 31, 1999
follows:
<PAGE>
National Pay Fixed Receive
Amount Maturity Rate Rate Floating
------ -------- ---- -------------
$ 10,000,000 October 24, 2000 5.20% 84% of 3 month Libid
25,000,000 September 10, 2001 6.09% 96% of 3 month Libid
15,000,000 January 26, 2001 5.59% 3 month Libor
15,000,000 September 17, 2002 5.79% 3 month Libid
10,000,000 September 15, 2003 4.70% 3 month Libor
70,000,000 December 8, 2009 5.60% 3 month Libor
10,000,000 December 15, 2009 5.69% 3 month Libor
74
<PAGE>
The following table summarizes the changes in notional amounts of swaps
outstanding during 1999:
Beginning balance $ 205,000,000
New Swaps 80,000,000
Maturities (130,000,000)
--------------
Ending balance $ 155,000,000
==============
As of December 31, 1999, interest rate swap maturities are as follows:
2000 $ 10,000,000
2001 40,000,000
2002 15,000,000
2003 10,000,000
2009 80,000,000
---------------------
$ 155,000,000
=====================
Expected maturities will differ from contracted maturities because
counterparties to the agreements may have the right to call the swaps. As of
December 31,1999 swap agreements with a notional amount of $105,000,000 had call
options at various dates commencing on September 2000 through December 2000.
Net interest settlements on swap agreements are recorded as an adjustment to
interest expense on notes payable and repurchase agreements. Net interest paid
during 1999 and 1997 amounted to approximately $315,000 and $293,000,
respectively; net interest received amounted to approximately $50,000 during
1998.
21. Supplemental Income Statement Information
Employee costs and other administrative and general expenses are shown in the
Consolidated Statements of Income net of direct loan origination costs. Direct
loan origination costs are capitalized as part of the carrying cost of mortgage
loans and are offset against mortgage loan sales and fees when the loans are
sold, or amortized as a yield adjustment to interest income on loans held for
investment.
Total employee costs and other expenses before capitalization follow:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Employee costs $39,738,671 $30,013,967 $21,368,723
Other administrative and general expenses $37,366,087 $25,906,635 $22,662,971
</TABLE>
Set forth below are the direct loan origination costs that were capitalized as
part of the carrying cost of mortgage loans inventory or offset against mortgage
loan sales and fees and interest income.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Offset against mortgage loan sales and fees $ 7,069,831 $ 2,623,316 $ 2,931,394
Offset against interest income on loans $ 3,210,847 $ 3,113,946 $ 2,122,727
Capitalized as part of loans held for sale and
loans held for investment $ 8,823,603 $10,401,221 $ 7,073,322
</TABLE>
75
<PAGE>
22. Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments as of December
31 are as follows:
<TABLE>
<CAPTION>
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 42,252 $ 42,252 $ 51,805 $ 51,805
Money market investments 23,744 23,744 51,924 51,924
Mortgage loans held for sale 77,277 78,716 117,126 118,455
Mortgage-backed securities held for trading 43,564 43,564 450,546 450,546
Investment and mortgage-backed securities
available for sale 938,044 938,044 143,137 143,137
Investment in Federal Home Loan Bank stock 32,825 32,825 11,405 11,405
Investment and mortgage-backed securities
held to maturity 28,687 28,687 34,599 34,640
Loans, net 1,563,007 1,549,772 1,073,668 1,108,684
Accounts receivable 38,617 38,617 22,171 22,171
Financial Liabilities
Deposits:
Non-interest bearing demand $ 157,595 $ 157,595 $ 172,500 $ 172,500
Savings and NOW accounts 246,253 232,283 222,856 212,797
Certificates of deposit 922,029 920,829 609,912 620,383
Securities sold under agreements to repurchase 731,341 731,341 471,422 471,422
Notes payable 132,707 132,278 182,748 182,191
Advances from FHLB 384,000 383,850 121,000 118,856
Other borrowings 9,843 9,843 9,000 9,000
Accounts payable and accrued liabilities 33,917 33,917 28,020 28,020
Unrecognized financial instruments -
Interest rate swap agreements in a net
receivable (payable) position* $ 65 $ 5,616 $ (111) $ 1,855
</TABLE>
* The amount shown under "carrying amount" represents net accrual arising from
those unrecognized financial instruments.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Short-term financial instruments
Short-term financial instruments, which include cash and due from banks, money
market investments, accounts receivable, securities sold under agreements to
repurchase, warehousing lines included in notes payable and accounts payable and
accrued interest, have been valued at their carrying amounts reflected in the
Consolidated Statements of Financial Condition as these are reasonable estimates
of fair value given the relatively short period of time between origination of
the instruments and their expected realization.
<PAGE>
Investment securities
The fair value of investment securities is based on quoted market prices or
dealer quotes except for the investments in FHLB stock which is valued at its
redemption value.
76
<PAGE>
Loans
The fair value for loans has been estimated for groups of loans with similar
financial characteristics. Loans were classified by type such as commercial,
commercial real estate, residential mortgage, and consumer. These asset
categories were further segmented into various maturity groups, and by accruing
and non-accruing groups. The fair value of accruing loans was calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. Prepayment experienced in previous periods when interest rates were at
levels similar to current levels was assumed to occur for mortgage loans,
adjusted for any differences in the outlook of interest rates. Other loans
assume little or no prepayments.
Non-accruing loans were assumed to be repaid after one year. Presumably this
would occur either because the loan is repaid or collateral has been sold to
satisfy the loan. The value of non-accruing loans was therefore discounted for
one year at the going rate for new loans.
Mortgage loans held for sale have been valued based on market quotations or
committed selling prices in the secondary market. Loans held for sale from the
Bank have been valued using the same methodology described in the first
paragraph above.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, and NOW accounts, and money market and checking
accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates of deposits do not include the fair value of core
deposits intangible.
Borrowings
The fair value of promissory notes included in notes payable, advances from
FHLB, subordinated notes and other secured borrowings was determined using
discounted cash flow analysis over the remaining term of the obligations using
market rates for similar instruments.
Interest rate swap agreements
The fair value of interest rate swap agreements was determined taking into
account the current interest rates at December 31, 1999. This value represents
the estimated amount the Company would pay to terminate the contract or
agreement taking into account current interest rates and, when appropriate, the
current credit worthiness of the counterparties.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
<PAGE>
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
In addition, the fair values presented do not attempt to estimate the value of
the Company's fee generating businesses and anticipated future business
activities, that is, they do not represent the Company's value as a going
concern. Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized since, in many cases, the Company generally
intends to hold these financial instruments to maturity and realize the recorded
values.
Reasonable comparability of fair values among financial institutions is not
likely due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a greater degree of subjectivity to
these derived or estimated fair values. Therefore, while disclosure of estimated
fair values of financial instruments is required, readers are cautioned in using
this data for purposes of evaluating the financial condition of the Company.
77
<PAGE>
23. R&G Financial Corporation (Holding Company Only)
Financial Information
The following condensed financial information presents the financial position of
R&G Financial Corporation (the Holding Company) only as of December 31, 1999 and
1998 and the results of its operations and its cash flows for each of the three
years ended on December 31,1999:
Statements of Financial Conditions
December 31,
1999 1998
Assets
Cash $ 119,380 $ 145,314
Investment in R-G Premier Bank, at equity 157,038,667 114,706,236
Investment in R&G Mortgage, at equity 127,314,792 106,307,634
Accounts receivable - subsidiaries 139,156 69,828
Other assets 116,442 32,234
-----------------------------
Total assets $284,728,437 $221,261,246
=============================
Liabilities and Stockholders Equity
Advances from subsidiaries $ 15,000,000 $ --
Other liabilities and accrued expenses 193,160 99,387
Stockholders equity 269,535,277 221,161,859
-----------------------------
Total liabilities and stockholders equity $284,728,437 $221,261,246
=============================
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Income:
Dividends from subsidaries $ -- $ 2,404,787 $ 2,953,225
Management fees 555,371 384,638 423,178
-------------------------------------------
555,371 2,789,425 3,376,403
-------------------------------------------
Operating expenses 505,183 349,669 384,707
-------------------------------------------
Income before income taxes and equity
in undistributed earnings of subsidiaries 50,188 2,439,756 2,991,696
-------------------------------------------
Income taxes 14,053 9,477 8,079
-------------------------------------------
Income before equity in undistributed earnings
of subsidiaries 36,135 2,430,279 2,983,617
-------------------------------------------
Equity in undistributed earnings of subsidiaries 41,298,857 31,603,518 20,513,595
-------------------------------------------
Net income $41,334,992 $34,033,797 $23,497,212
===========================================
</TABLE>
The Holding Company had no operations during the years ended December
31, 1999, 1998 and 1997.
<PAGE>
The principal source of income for the Holding Company consists of dividends
from R-G Premier Bank of Puerto Rico and R&G Mortgage Corp. The payment of
dividends by the Bank to the Holding Company may be affected by certain
regulatory requirements and policies, such as the maintenance of certain minimum
capital levels.
78
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
Statements of Cash Flows 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,334,992 $ 34,033,797 $ 23,497,212
-------------------------------------------------
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries (41,298,857) (31,603,518) (20,513,595)
(Increase) decrease in accounts
receivable - subsidiaries (69,328) 353,350 (423,178)
Increase in other assets (84,208) (32,234) --
Increase in other liabilities and
accrued expenses 93,773 58,013 26,505
-------------------------------------------------
Total adjustments (41,358,620) (31,224,389) (20,910,268)
-------------------------------------------------
Net cash (used in) provided by operating activities (23,628) 2,809,408 2,586,944
-------------------------------------------------
Cash flows from investing activities:
Capital contribution to subsidiary -- (12,000) --
Cash investment in R-G Premier Bank
pursuant to acquisition of Fajardo Federal -- (639,322) --
Investment in Bank common stock (39,212,500) (19,370,000) --
Investment in R-G Mortgage common stock -- (29,055, 000) --
Collections of advances to subsidiaries -- -- 290,000
Dividends on common stock from subsidiaries 8,012,279 2,122,649 --
-------------------------------------------------
Cash (used in) provided by investing activities (31,200,221) (46,953,673) 290,000
-------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 288,550 -- --
Net proceeds from issuance of preferred stock 23,921,644 48,079,134 --
Cash dividends (8,012,279) (4,412,033) (2,385,752)
Net advances from subsidiaries 15,000,000 -- --
Repayment of advances from subsidiaries -- -- (666,975)
Payment of cash in lieu of fractional shares
on stock split -- -- (12,659)
Net cash provided by (used in) financing
-------------------------------------------------
activities 31,197,915 43,667,101 (3,065,386)
-------------------------------------------------
Net decrease in cash (25,934) (477,164) (188,442)
Cash at beginning of year 145,314 622,478 810,920
-------------------------------------------------
Cash at end of year $ 119,380 $ 145,314 $ 622,478
=================================================
</TABLE>
79
<PAGE>
24. Industry Segments
The following summarized financial information presents the results of the
Companys operations for the three year period ended December 31,1999 for its
traditional banking and mortgage banking activities:
<TABLE>
<CAPTION>
1999 1998
Segment Segment
Bank Mortgage Totals Bank Mortgage Totals
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net interest income after provision for
loan losses $ 45,326,068 $ 6,726,706 $ 52,052,774 $ 31,279,733 $ 6,093,378 $ 37,373,111
Non-interest income:
Net gain on origination and sale of loans 7,922,662 29,156,025 37,078,687 12,542,960 22,120,015 34,662,975
Net gain on sales of investment securities
available for sale 19,531 -- 19,531 278,028 -- 278,028
Loan administration and servicing fees -- 29,037,883 29,037,883 -- 17,340,415 17,340,415
Service charges, fees and other 6,135,232 1,892,304 8,027,536 5,433,556 1,383,042 6,816,598
------------------------------------------------------------------------------------
59,403,493 66,812,918 126,216,411 49,534,277 46,936,850 96,471,127
------------------------------------------------------------------------------------
Non-interest expenses:
Salaries and employee benefits 12,733,017 11,699,754 24,432,771 9,169,292 7,925,491 17,094,783
Office occupancy and equipment 7,538,952 3,750,413 11,289,365 5,917,063 3,069,890 8,986,953
Other 14,433,103 21,765,464 36,198,567 11,232,822 13,420,625 24,653,447
------------------------------------------------------------------------------------
34,705,072 37,215,631 71,920,703 26,319,177 24,416,006 50,735,183
------------------------------------------------------------------------------------
Income before income taxes
$ 24,698,421 $ 29,597,287 $ 54,295,708 $ 23,215,100 $ 22,520,844 $ 45,735,944
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
Segment
Bank Mortgage Totals
<S> <C> <C> <C>
Revenues:
Net interest income after provision for
loan losses $ 25,543,992 $ 4,615,774 $ 30,159,766
Non-interest income:
Net gain on origination and sale of loans 5,436,030 18,596,684 24,032,714
Net gain on sales of investment securities
available for sale 107,430 -- 107,430
Loan administration and servicing fees -- 14,079,644 14,079,644
Service charges, fees and other 3,431,241 1,142,014 4,573,255
----------------------------------------
34,518,693 38,434,116 72,952,809
----------------------------------------
Non-interest expenses:
Salaries and employee benefits 7,654,668 5,998,086 13,652,754
Office occupancy and equipment 4,660,583 2,470,914 7,131,497
Other 9,564,598 9,799,853 19,364,451
----------------------------------------
21,879,849 18,268,853 40,148,702
----------------------------------------
Income before income taxes
$ 12,638,844 $ 20,165,263 $ 32,804,107
========================================
</TABLE>
<PAGE>
The following is a reconciliation of reportable segment revenues and income
before income taxes to the Companys consolidated amounts:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Total revenues for reportable segments $126,216,411 $ 96,471,127 $ 72,952,809
Elimination of intersegment revenues (3,352,370) (2,627,742) (1,687,981)
--------------------------------------------
Total consolidated revenues $122,864,041 $ 93,843,385 $ 71,264,828
============================================
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Income before income taxes:
Total income before income taxes for reportable segments $ 54,295,708 $ 45,735,944 $ 32,804,107
Elimination of intersegment profits (216,326) (311,962) (190,320)
Unallocated corporate expenses (505,183) (349,669) (384,707)
-------------------------------------------------
Income before income taxes, consolidated $ 53,574,199 $ 45,074,313 $ 32,229,080
=================================================
</TABLE>
Total assets of the Company among its industry segments and a reconciliation of
reportable segment assets to the Companys consolidated total assets as of
December 31, 1999 and 1998 follows:
December 31,
1999 1998
Assets:
Bank $ 2,285,371,757 $ 1,413,439,195
Mortgage 741,260,519 656,598,961
------------------------------------
Total assets for reportable segments 3,026,632,276 2,070,038,156
Parent company assets 116,442 32,234
Elimination of intersegment balances (114,755,882) (25,288,862)
------------------------------------
Consolidated total assets $ 2,911,992,836 $ 2,044,781,528
====================================
25. Quarterly Financial Data (Unaudited):
Following is a summary of selected financial information of the unaudited
quarterly results of operations. In the opinion of management, all adjustments
necessary for a fair presentation have been made.
(Dollars in Thousands, Except for per share data)
<TABLE>
<CAPTION>
1999
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income $ 35,385 $ 36,437 $ 43,946 $ 47,373
Interest expense 22,151 23,909 28,142 32,361
Net interest income 13,234 12,528 15,804 15,012
Provision for loan losses (1,300) (1,100) (1,000) (1,125)
Income before income taxes 14,839 13,882 13,906 10,947
Income tax expense (3,689) (2,072) (3,789) (2,689)
Net income 11,150 11,810 10,117 8,258
Net income per common share - Basic $ .36 $ .38 $ .32 $ .25
Net income per common share - Diluted $ .35 $ .37 $ .31 $ .25
</TABLE>
(Continued)
81
<PAGE>
(Dollars in Thousands, Except for per share data)
<TABLE>
<CAPTION>
1998
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Interest income $ 27,776 $ 29,946 $ 33,179 $ 33,395
Interest expense (17,790) (19,134) (21,443) (21,956)
Net interest income 9,986 10,812 11,736 11,439
Provision for loan losses (1,500) (1,500) (1,500) (2,100)
Income before income taxes 10,736 9,994 12,347 11,997
Income tax expense (3,256) (2,023) (3,810) (1,951)
Net income 7,480 7,971 8,537 10,046
Net income per common share - Basic $ .26 $ .28 $ .29 $ .32
Net income per common share - Diluted $ .26 $ .27 $ .28 $ .31
</TABLE>
82
<PAGE>
Stockholder Information
Corporate Office
R-G Plaza
280 JT Pinero Ave.
San Juan,
Puerto Rico 00918
tel. (787) 758-2424
US Operations
1841 New York Avenue
Huntington Station
New York 11746
(631) 549-8188
Annual Meeting
April 26, 2000
10:00 a.m. Atlantic time
Bankers Club
Hato Rey, Puerto Rico
Special Counsel
Elias, Matz, Tiernan &
Herrick L.L.P.
734 15th Street N.W. -
12th Floor
Washington, DC 20005
McConnell & Valdes
270 Munoz Rivera Ave.
San Juan,
Puerto Rico 00918
Transfer Agent and Registrar
American Stock Transfer
& Trust Co.
40 Wall Street-46th floor
New York,
New York 10005
Independent Public Accountants
PricewaterhouseCoopers, LLP
BBV Tower-9th Floor
San Juan,
Puerto Rico 00918
Market Makers
Friedman Billings Ramsey & Co.
1001 19th Street
North Arlington,
VA 22209
PaineWebber Incorporated of PR
American International Plaza
Penthouse Floor
250 Munoz Rivera Ave.
San Juan, Puerto Rico 00918
<PAGE>
Sandler O'Neill & Partners
2 World Trade Center
104th Floor
New York, N.Y. 10048
General Inquiries & Reports
R-G Financial is required to file an annual report on Form 10K for its fiscal
year ended December 31, 1999 with the Securities and Exchange Commision. Copies
of its Annual Report and quarterly reports may be obtained without charge by
contacting: Investor Relations Department, Attention Ms. Luz Damarys Quiles
Tel.: (787) 756-2801
Internet Website
http://www.rgonline.com (in Spanish and English)
The 1999 Annual Report from R-G Financial Corporation was designed and produced
by Adworks, San Juan, Puerto Rico.
83
<PAGE>
Stock Listings
Symbol: RGFC-NASDAQ
RGFCP-NASDAQ
RGFCO-NASDAQ
At December 31, 1999, the Company had 227 stockholders of record, which does not
take into consideration investors who hold their stock through brokerage and
other firms. The high and low prices and dividends paid per share (as adjusted
for stock splits paid in 1998) for the Company's stock during each quarter
during the last two fiscal years were as follows.
<TABLE>
<CAPTION>
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
1998 1998 1998 1998 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 17.25 21.50 21.25 21.50 21.50 19.375 18.1875 16
Low 9.625 16.407 15.0625 12.25 17.75 14.25 12.1875 9.875
Dividends Paid 0.02500 0.02687 0.02875 0.03075 0.033 0.03575 0.0385 0.0415
</TABLE>
84
<PAGE>
R&G Plaza
280 Jesus T. Pinero Ave.
San Juan, Puerto Rico 00918
Tel. (787) 758-2424
[GRAPHIC - R-G COMPANY LOGO]
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 42,251,508
<INT-BEARING-DEPOSITS> 23,744,037
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 43,563,817
<INVESTMENTS-HELD-FOR-SALE> 970,868,822
<INVESTMENTS-CARRYING> 28,686,877
<INVESTMENTS-MARKET> 28,708,784
<LOANS> 1,563,006,802
<ALLOWANCE> 8,970,605
<TOTAL-ASSETS> 2,911,992,836
<DEPOSITS> 1,330,506,368
<SHORT-TERM> 1,272,891,235
<LIABILITIES-OTHER> 39,059,956
<LONG-TERM> 0
0
75,000,000
<COMMON> 41,040,439
<OTHER-SE> 153,494,838
<TOTAL-LIABILITIES-AND-EQUITY> 269,535,277
<INTEREST-LOAN> 117,304,300
<INTEREST-INVEST> 35,593,191
<INTEREST-OTHER> 10,243,856
<INTEREST-TOTAL> 163,141,347
<INTEREST-DEPOSIT> 53,643,104
<INTEREST-EXPENSE> 106,563,573
<INTEREST-INCOME-NET> 56,577,774
<LOAN-LOSSES> 4,525,000
<SECURITIES-GAINS> (981,101)
<EXPENSE-OTHER> 69,289,842
<INCOME-PRETAX> 53,574,199
<INCOME-PRE-EXTRAORDINARY> 53,574,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,334,992
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 7.50
<LOANS-NON> 59,013,827
<LOANS-PAST> 337,341
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 61,160,068
<ALLOWANCE-OPEN> 8,055,432
<CHARGE-OFFS> 4,439,807
<RECOVERIES> 829,980
<ALLOWANCE-CLOSE> 8,970,605
<ALLOWANCE-DOMESTIC> 8,970,605
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
