SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
----------------------- ----------------
(State of incorporation (I.R.S. Employer
or organization) Identification No. )
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 758-2424
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report (s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [ X ] NO [ ]
Number of shares of Class B Common Stock outstanding as of September 30, 2000:
10,225,696 (Does not include 18,440,556 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
1
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
Part I - Financial Information
Page
Item 1. Consolidated Financial Statements ................................ 3
Consolidated Statements of Financial Condition as of
September 30, 2000 (Unaudited) and December 31, 1999..... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited)...... 4
Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 2000 and 1999 (Unaudited).. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited) ............ 6
Notes to Unaudited Consolidated Financial Statements .......... 7
Item 2...Management's Discussion and Analysis ......................... 16
Item 3...Quantitative and Qualitative Disclosures about Market Risk......... 24
Part II - Other Information
Item 1. Legal Proceedings ................................................. 24
Item 2. Changes in Securities ............................................. 25
Item 3. Defaults upon Senior Securities ................................... 25
Item 4. Submission of Matters ............................................. 25
Item 5. Other Information ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25
Signatures .................................................... 25
2
<PAGE>
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
------- ---------------------------------
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,410,145 $ 42,251,508
Money market investments:
Securities purchased under agreements to resell 6,163,202 --
Time deposits with other banks 12,921,175 23,744,037
Federal funds sold -- --
Mortgage loans held for sale, at lower of cost or market 115,143,830 77,277,133
Mortgage-backed securities held for trading, at fair value 11,901,000 43,563,817
Mortgage-backed securities available for sale, at fair value 940,887,129 712,705,165
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 2000 - $20,350,936; 1999 - $23,305,029) 20,500,804 23,249,247
Investment securities available for sale, at fair value 375,847,059 258,163,657
Investment securities held to maturity, at amortized cost
(estimated market value: 2000- $ 5,391,549; 1999- $5,403,755) 5,432,199 5,437,630
Loans receivable, net 1,713,641,021 1,563,006,802
Accounts receivable, including advances to investors, net 17,253,643 16,230,457
Accrued interest receivable 27,257,950 22,386,746
Servicing asset 90,389,387 84,252,506
Premises and equipment 18,657,213 19,459,353
Other assets 25,616,169 20,264,778
--------------- ---------------
$ 3,409,021,926 $ 2,911,992,836
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,582,358,244 $ 1,330,506,368
Fed funds purchased 10,000,000 15,000,000
Securities sold under agreements to repurchase 838,201,620 731,341,340
Notes payable 161,533,053 132,707,001
Advances from FHLB 454,250,000 384,000,000
Other borrowings 9,133,795 9,842,894
Accounts payable and accrued liabilities 53,397,520 33,917,329
Other liabilities 6,380,079 5,142,627
--------------- ---------------
3,115,254,311 2,642,457,559
--------------- ---------------
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 authorized, issued and outstanding 50,000,000 50,000,000
7.75% Monthly Income Preferred Stock, Series B, $25 liquidation value,
1,000,000 shares authorized, issued and outstanding 25,000,000 25,000,000
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 18,440,556
issued and outstanding 184,406 184,406
Class B - $.01 par value, 30,000,000 shares authorized, 10,225,696
issued and outstanding in 2000 (1999-10,217,731) 102,257 102,177
Additional paid-in capital 40,793,970 40,753,856
Retained earnings 179,330,375 156,193,131
Capital reserves of the Bank 5,095,658 5,095,658
Accumulated other comprehensive loss (6,739,051) (7,793,951)
--------------- ---------------
293,767,615 269,535,277
--------------- ---------------
$ 3,409,021,926 $ 2,911,992,836
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three month Nine month
period ended period ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
------- ------- -------- -------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $42,337 $31,659 $119,115 $84,865
Money market and other investments 6,676 3,006 17,946 5,979
Mortgage-backed securities 11,888 9,281 34,834 24,924
------- ------- -------- -------
Total interest income 60,901 43,946 171,895 115,768
------- ------- -------- -------
Interest expense:
Deposits 21,439 14,114 57,496 38,273
Securities sold under agreements to repurchase 13,348 7,493 35,597 18,465
Notes payable 2,708 3,361 8,972 10,344
Other 7,528 3,174 20,459 7,120
------- ------- -------- -------
Total interest expense 45,023 28,142 122,524 74,202
------- ------- -------- -------
Net interest income 15,878 15,804 49,371 41,566
Provision for loan losses (1,500) (1,000) (4,350) (3,400)
------- ------- -------- -------
Net interest income after provision for loan losses 14,378 14,804 45,021 38,166
------- ------- -------- -------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 11,407 8,674 28,220 28,475
Loan administration and servicing fees 7,730 6,535 22,720 18,914
Service charges, fees and other 1,784 1,434 5,209 5,009
------- ------- -------- -------
20,921 16,643 56,149 52,398
------- ------- -------- -------
Total revenues 35,299 31,447 101,170 90,564
------- ------- -------- -------
Operating expenses:
Employee compensation and benefits 6,748 6,182 19,952 16,414
Office occupancy and equipment 3,375 2,887 9,952 7,994
Other administrative and general 10,260 8,472 30,381 23,529
------- ------- -------- -------
20,383 17,541 60,285 47,937
------- ------- -------- -------
Income before income taxes 14,916 13,906 40,885 42,627
------- ------- -------- -------
Income tax expense:
Current 2,712 1,484 10,057 4,881
Deferred 842 2,305 (729) 4,669
------- ------- -------- -------
3,554 3,789 9,328 9,550
------- ------- -------- -------
Net income $11,362 $10,117 $31,557 $33,077
======= ======= ======= =======
Earnings per common share - Basic $0.35 $0.32 $0.95 $1.06
------ ------ ------ -----
- Diluted $0.34 $0.31 $0.93 $1.03
------ ------ ------ -----
Weighted average number of shares outstanding - Basic 28,663,526 28,639,528 28,660,813 28,623,892
- Diluted 29,314,874 29,342,647 29,314,830 29,342,647
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three month period ended Nine month period ended
September 30, September 30,
------------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 11,362 $ 10,117 $ 31,557 $ 33,077
-------- -------- -------- --------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period 3,784 (1,159) 1,400 (5,351)
Less: Reclassification adjustments for losses included
in net income 176 218 329 800
-------- -------- -------- --------
3,960 (941) 1,729 (4,551)
Income tax (expense) benefit related to items of other comprehensive income (1,544) 367 (674) 1,775
-------- -------- -------- --------
Other comprehensive income (loss), net of tax 2,416 (574) 1,055 (2,776)
-------- -------- -------- --------
Comprehensive income, net of tax $ 13,778 $ 9,543 $ 32,612 $ 30,301
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine month period ended
September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
(unaudited)
Cash flows from operating activities: (Dollars in thousands)
Net income $ 31,557 $ 33,077
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,792 2,803
Amortization of premium on investments and mortgage-backed securities, net 203 188
Amortization of servicing rights 7,196 5,158
Provision for loan losses 4,350 3,400
Provision for bad debts in accounts receivable 370 275
Gain on sales of loans (125) (7,472)
Loss on sales of mortgage-backed and investment securities available for sale 328 800
Unrealized (profit) loss on trading securities (6) 17
(Increase) decrease in mortgage loans held for sale (131,897) 45,526
Net decrease (increase) in mortgage-backed securities held for trading 31,669 (34,258)
Increase in receivables (6,264) (12,430)
Increase in other assets (6,051) (6,633)
Increase (decrease) in notes payable and other borrowings 33,117 (41,119)
Increase in accounts payable and accrued liabilities 18,806 7,764
Increase in other liabilities 1,237 6,362
--------- ---------
Total adjustments (43,275) (29,619)
--------- ---------
Net cash (used in) provided by operating activities (11,718) 3,458
--------- ---------
Cash flows from investing activities:
Purchases of investment securities (107,865) (198,291)
Proceeds from sales and maturities of securities available for sale 68,034 139,211
Proceeds from maturities of securities held to maturity -- 409
Proceeds from sales of loans 26,469 120,975
Net originations of loans (382,147) (665,053)
Purchases of FHLB stock, net (7,235) (11,619)
Acquisition of premises and equipment (2,290) (6,577)
Acquisition of servicing rights (13,332) (18,357)
--------- ---------
Net cash used by investing activities (418,366) (639,302)
--------- ---------
Cash flows from financing activities:
Increase in deposits - net 251,852 259,827
(Decrease) increase in federal funds purchased (5,000) 10,000
Increase in securities sold under agreements to repurchase - net 106,860 201,461
Advances from FHLB, net 70,250 152,500
Payments on term notes (5,000) (10,000)
Proceeds from issuance of common stock 40 289
Cash dividends:
Common stock (4,192) (3,069)
Preferred stock (4,228) (2,775)
--------- ---------
Net cash provided by financing activities 410,582 608,233
--------- ---------
Net decrease in cash and cash equivalents (19,502) (27,611)
Cash and cash equivalents at beginning of period 65,996 103,728
--------- ---------
Cash and cash equivalents at end of period $ 46,494 $ 76,117
========= =========
Cash and cash equivalents include:
Cash and due from banks $ 27,410 $ 38,024
Securities purchased under agreements to resell 6,163 12,600
Time deposits with other banks 12,921 25,493
Federal funds sold -- --
--------- ---------
$ 46,494 $ 76,117
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION
Reporting entity
The accompanying unaudited consolidated financial statements include
the accounts of R&G Financial Corporation (the Company) and its wholly-owned
subsidiaries, 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.
The Company, currently in its 28th year of operations, operates R&G
Mortgage, which is engaged primarily in the business of originating FHA-insured,
VA- guaranteed, and privately insured first and second mortgage loans on
residential real estate. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.
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 and C credit quality loans, through its wholly-owned
subsidiary, Champion Mortgage Corporation.
The Company also operates the Bank, which provides a full range of
banking services, including residential, commercial and personal loans and a
diversified range of deposit products through twenty-three branches located
mainly in the northeastern part of the Commonwealth of Puerto Rico. The Bank
also provides private banking and trust and other financial services to its
customers. 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 ("Continental Capital").
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of September 30, 2000 and the results of
operations and changes in its cash flows for the three and nine months ended
September 30, 2000 and 1999.
The results of operations for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the year ending December 31, 2000. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1999.
7
<PAGE>
Basis of consolidation
All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133- "Accounting for Derivative
Instruments and Hedging Activities" and in June 2000 issued SFAS No. 138-
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
These Statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statements require 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 designated and accounted as a
hedge. The accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation.
The Company is required to adopt SFAS No. 133 effective January 1,
2001. As of September 30, 2000, the Company's derivative instruments consist of
interest rate swap agreements with aggregate notional amounts of $140 million
which are tied to specifically indentified liabilities which will qualify as
cash flow hedges under the provisions of SFAS No. 133, and certain caps
purchased during the third quarter of 2000, with aggregate notional amounts of
$200 million. Due to the relatively limited extent to which the Company is using
derivative instruments and the simple nature of the instruments used,
management, based on presently available information, does not expect the impact
of adoption to be significant.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three and nine month periods
ended September 30, 2000 and 1999 are computed by dividing net income for such
periods by the weighted average number of shares of common stock outstanding
during such periods. Outstanding stock options granted in connection with the
Company's Stock Option Plan are included in the weighted average number of
shares for purposes of the diluted earnings per share computation.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities held for trading:
GNMA certificates $11,901,000 $43,563,817
=========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------------- ------------------------------
Amortized Fair Amortized Fair
cost value cost value
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 22,187,166 $ 24,007,674 $ 20,709,050 $ 22,772,039
------------ ------------ ------------ ------------
FNMA certificates:
Due from five to ten years 649,319 636,942 740,977 718,979
Due over ten years 101,854,526 101,437,977 110,854,889 109,705,450
------------ ------------ ------------ ------------
102,503,845 102,074,919 111,595,866 110,424,429
------------ ------------ ------------ ------------
FHLMC certificates:
Due from one to five years 157,810 156,123 98,693 98,882
Due from five to ten years 1,641,586 1,611,460 1,891,072 1,840,979
Due over ten years 216,631,765 216,317,654 14,586,274 14,036,216
------------ ------------ ------------ ------------
218,431,161 218,085,237 16,576,039 15,976,077
------------ ------------ ------------ ------------
GNMA certificates:
Due from one to five years 25,587 25,440 -- --
Due from five to ten years 11,032,910 10,969,570 -- --
Due over ten years 594,444,560 585,724,289 570,748,830 563,532,620
------------ ------------ ------------ ------------
605,503,057 596,719,299 570,748,830 563,532,620
------------ ------------ ------------ ------------
$948,625,229 $940,887,129 $719,629,785 $712,705,165
============ ============ ============ ============
Investment securities available for sale:
U.S. Treasury securities:
Due within one year $ 5,000,000 $ 5,000,000 $ 4,998,011 $ 4,944,500
------------ ------------ ------------ ------------
U.S. Government and Agencies securities:
Due within one year 6,000,000 5,888,500 -- --
Due from one to five years 207,257,125 205,756,509 133,955,940 130,950,440
Due from five to ten years 120,839,492 119,142,083 92,236,888 89,443,550
------------ ------------ ------------ ------------
334,096,617 330,787,092 226,192,828 220,393,990
------------ ------------ ------------ ------------
FHLB stock 40,059,967 40,059,967 32,825,167 32,825,167
------------ ------------ ------------ ------------
$379,156,584 $375,847,059 $264,016,006 $258,163,657
============ ============ ============ ============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------------------- -------------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
GNMA certificates:
Due within one year $5,825 $6,247 $ - $ -
Due from one to five years - - 15,478 16,601
Due from five to ten years 9,237,668 8,967,766 10,659,910 10,390,712
Due over ten years 1,867,575 1,787,452 2,132,629 2,074,108
----------- ----------- ----------- -----------
11,111,068 10,761,465 12,808,017 12,481,421
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years 9,222,026 9,427,930 10,252,615 10,643,767
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years 167,710 161,541 188,615 179,841
----------- ----------- ----------- -----------
$20,500,804 $20,350,936 $23,249,247 $23,305,029
=========== =========== =========== ===========
Investment securities held to maturity:
Puerto Rico Government and Agencies obligations:
Due from one to five years $1,800,000 $1,786,500 $1,280,000 $1,272,000
Due from five to ten years 3,632,199 3,605,049 4,157,630 4,131,755
---------- ---------- ---------- ----------
$5,432,199 $5,391,549 $5,437,630 $5,403,755
========== ========== ========== ==========
</TABLE>
10
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage $ 1,130,951,987 $ 1,097,891,436
Residential - second mortgage 21,672,953 13,028,816
Land 4,606,068 1,952,043
Construction 161,389,554 95,201,185
Commercial 275,445,496 226,036,358
--------------- ---------------
1,594,066,058 1,434,109,838
Undisbursed portion of loans in process (91,210,756) (50,622,579)
Net deferred loan costs (fees) 1,629,635 (436,852)
--------------- ---------------
1,504,484,937 1,383,050,407
--------------- ---------------
Other loans:
Commercial 55,014,864 54,230,506
Consumer:
Secured by deposits 23,268,977 20,538,734
Secured by real estate 97,818,366 76,944,484
Other 44,558,041 37,653,140
Unamortized discount (374,533) (356,142)
Unearned interest (72,583) (83,722)
--------------- ---------------
220,213,132 188,927,000
--------------- ---------------
Total loans 1,724,698,069 1,571,977,407
Allowance for loan losses (11,057,048) (8,970,605)
--------------- ---------------
$ 1,713,641,021 $ 1,563,006,802
=============== ===============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
2000 1999
-------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance, beginning of period $ 8,971 $ 8,055
Provision for loan losses 4,350 3,400
Loans charged-off (2,924) (3,039)
Recoveries 660 594
-------- --------
Balance, end of period $ 11,057 $ 9,010
======== ========
</TABLE>
11
<PAGE>
The following table sets forth the amounts and categories of R&G
Financial's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------- -------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Non-accruing loans:
Residential real estate $69,632 $47,413
Residential construction 529 478
Commercial real estate 10,752 9,005
Commercial business 1,156 1,255
Consumer unsecured 843 802
Other 60 61
------- -------
Total 82,972 59,014
------- -------
Accruing loans greater than 90 days
delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 314 63
Consumer 236 274
------- -------
Total accruing loans greater than
90 days delinquent 550 337
------- -------
Total non-performing loans 83,522 59,351
------- -------
Real estate owned, net of reserves 7,753 5,852
Other repossessed assets 572 466
------- -------
8,325 6,318
------- -------
Total non-performing assets $91,847 $65,669
------- -------
Total non-performing loans as a
percentage of total loans 4.60% 3.66%
------- -------
Total non-performing assets as a
percentage of total assets 2.69% 2.26%
------- -------
Allowance for loan losses as a percentage
of total non-performing loans 13.24% 15.11%
------- -------
Allowance for loan losses as a percentage
of total loans outstanding 0.61% 0.55%
------- -------
Net charge-offs tgo average loans
outstanding 0.16% 0.25%
------- -------
</TABLE>
12
<PAGE>
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
<TABLE>
<CAPTION>
For the nine month period ended September 30,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Balance at beginning of period $84,252,506 $58,221,052
Rights originated 8,312,646 11,698,042
Rights purchased 5,019,821 6,658,717
Scheduled amortization (7,195,586) (5,158,357)
----------- -----------
Balance at end of period $90,389,387 $71,419,454
=========== ===========
</TABLE>
The portion of the Company's mortgage loans servicing portfolio
consisting of the servicing asset that was originated by the Company prior to
the adoption of SFAS No. 122 is not reflected as an asset on the Company's
Consolidated Financial Statements, and is not subject to amortization or
impairment.
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ----------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
Passbook savings $ 113,560 $ 113,576
---------- ----------
NOW accounts 38,894 38,765
Super NOW accounts 94,765 93,913
Regular checking accounts
(non-interest bearing) 60,260 54,020
Commercial checking accounts
(non-interest bearing) 73,149 103,575
---------- ----------
267,068 290,273
---------- ----------
Certificates of deposit:
Under $100,000 465,198 390,315
$100,000 and over 729,127 531,714
---------- ----------
1,194,325 922,029
---------- ----------
Accrued interest payable 7,405 4,628
---------- ----------
$1,582,358 $1,330,506
========== ==========
</TABLE>
13
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Commitments to buy and sell GNMA certificates
As of September 30, 2000, the Company had open commitments to issue
GNMA certificates of approximately $124.5 million.
Commitments to sell mortgage loans
As of September 30, 2000 the Company had commitments to sell mortgage
loans to third party investors amounting to approximately $14.4 million.
Lease commitments
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
Other
At September 30, 2000, 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 $630.1 million at September 30, 2000. Liability, if
any, under the recourse provisions at September 30, 2000 is estimated by
management to be insignificant.
NOTE 8 - SUPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other administrative and general expenses are shown
in the Consolidated Statements of Income net of direct loan origination costs.
Direct loan origination costs are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold, or amortized as a yield adjustment to interest income on loans
held for investment.
Total employee costs and other expenses before capitalization follows:
<TABLE>
<CAPTION>
(Unaudited)
Three month period ended Nine month period ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Employee costs $10,335,570 $10,282,044 $31,496,056 $28,117,822
----------- ----------- ----------- -----------
Other administrative and general expenses $11,337,002 $9,453,187 $33,289,473 $26,312,795
----------- ----------- ----------- -----------
</TABLE>
14
<PAGE>
Set forth below are the direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loan inventory or offset
against mortgage loan sales and fees and interest income.
<TABLE>
<CAPTION>
Three month period ended Nine month period ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Offset against mortgage loan sales and fees $ 763,202 $ 2,795,943 $ 1,436,152 $ 4,545,270
----------- ----------- ----------- -----------
Offset against interest income on loans $ 608,022 $ 776,065 $ 2,192,003 $ 2,382,354
----------- ----------- ----------- -----------
Capitalized as part of loans held for sale and
loans held for investment $ 3,294,554 $ 1,509,523 $10,825,107 $ 7,559,990
----------- ----------- ----------- -----------
<PAGE>
</TABLE>
15
<PAGE>
Item 2: Management's Discussion and Analysis
---------------------------------------------
General
R&G Financial Corporation (the "Company") is a financial holding
company that, together with its wholly-owned subsidiaries, is engaged in
mortgage banking and banking activities. Its mortgage banking activities include
the origination, purchase, sale and servicing of mortgage loans on single-family
residences, the issuance and sale of various types of mortgage-backed
securities, the holding of mortgage loans, mortgage-backed securities and other
investment securities for sale or investment, the purchase and sale of servicing
rights associated with such mortgage loans (the "mortgage banking business").
The Company is also engaged in providing a full range of banking
services, including commercial banking services, corporate and construction
lending, consumer lending and credit cards, and trust and investment services,
offering a diversified range of deposit products and private banking services.
R&G Financial is currently in its 28th year of operations. The Company
is the second largest mortgage loans originator and servicer of mortgage loans
on single family residences in Puerto Rico. R&G Financial's mortgage servicing
portfolio increased to approximately $6.5 billion as of September 30, 2000, from
$5.5 billion as of the same date a year ago, an increase of 19.5%. R&G
Financial's strategy is to increase the size of its mortgage servicing portfolio
by relying principally on internal loan originations.
As part of its strategy to maximize net interest income, R&G Financial
maintains a substancial portfolio of mortgage-backed and investment securities.
At September 30, 2000, the Company held securities available for sale with a
fair market value of $1.3 billion, which included $940.9 million of
mortgage-backed securities of which $596.7 million consisted primarily of Puerto
Rico GNMA securities the interest on which is tax-exempt to the Company. These
securities are generally held by the Company for longer periods prior to sale in
order to maximize the tax-exempt interest received thereon.
A substantial portion of R&G Financial's total mortgage loan
originations has consistently been comprised of refinance loans. R&G Financial's
future results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity. However, the Company believes
that refinancing activity is less sensitive to interest rate changes in Puerto
Rico than in the mainland United States because a significant amount of
refinance loans are made for debt consolidation purposes.
R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for substantially
all non-conforming conventional mortgage loans and certain consumer,
construction, land, and commercial loans which are held for investment and
classified as Loans Receivable.
Financial Condition
At September 30, 2000, the Company's total assets amounted to $3.4
billion, as compared to $2.9 billion at December 31, 1999. The $497.0 million or
17.1% increase in total assets during the nine month period ended September 30,
2000 was attributable to a $378.8 million or 17.0% increase in loans receivable,
net, and mortgage-backed securities available for sale, which reflects net
originations following repayments and sales, and the eventual securitization of
these loans into mortgage-backed securities, and a $117.7 million or 45.6%
increase in investment securities available for sale, which is primarily the
result of the purchase of $107.9 million of such securities during the period.
The increase in the Company's assets were primarily funded by increased
deposits of $251.9 million or 18.9%, increased repurchase agreements of $106.9
million or 14.6% and by a $70.3 million or 18.3% increase in FHLB advances
during the nine month period ended September 30, 2000.
At September 30, 2000, the Company's stockholders' equity amounted to
$293.8 million, which is an increase of $24.2 million or 9.0% from the amount
reported at December 31, 1999. The primary reason for the increase was the net
income earned for the period, together with a $1.1 million decrease in
unrealized losses on securities available for sale, net of income tax benefits,
which was partially offset by $8.4 million in dividends paid during the period.
At September 30, 2000, the Bank's leverage and Tier 1 risk-based capital
amounted to 6.19% and 11.40% of adjusted total assets, respectively, compared to
a 4.0% minimum requirement, and its total risk-based capital amounted to 12.17%,
compared to an 8.0% minimum requirement.
Results of Operations
The Company reported net income of $11.4 million and $31.6 million
during the three and nine months period ended September 30, 2000, as compared to
$10.1 million and $33.1 million during the prior comparable periods.
Total revenues for the nine month period ended September 30, 2000
amounted to $101.2 million compared to $90.6 million for the prior comparable
period. The 11.7% increase was due to an increase in net interest income of $7.8
million or 18.8% during the nine months ended September 30, 2000 over the prior
comparable period, primarily due to a $34.3 million or 40.4% increase in
interest income on loans, primarily associated with an increase in the average
balance of the outstanding loan portfolio.
Contributing to the 11.7% increase in revenues during the nine month
period ended September 30, 2000 was a $3.8 million or 20.1% increase in loan
administration and servicing fees due to an increase in the Company's loan
servicing portfolio.
Total revenues for the quarter ended September 30, 2000 amounted to
$35.3 million, a $3.9 million or 12.2% increase over the comparable quarter in
1999. The increase in total revenues during the 2000 quarter was primarily
attributable to a $2.7 million or 31.5% increase in net gain on origination and
sale of loans, which reflects improved margins on the sale of loans to third
party investors as a result of less volatility in interest rates for mortgage
loans during the 2000 quarter, and a $1.2 million or 18.3% increase in loan
administration and servicing fees.
Total expenses increased by $12.3 million or 25.8% during the nine
months ended September 30, 2000 over the prior comparable period. The nine month
period ended September 30, 2000 includes expenses associated with the operations
of Continental Capital, the Bank's mortgage banking subsidiary in Long Island,
New York, acquired in late 1999, which was a significant reason for the increase
in expenses during the period. Excluding expenses associated with Continental
Capital, expenses during the period increased by $5.9 million or 12.4%, due
primarily to a $4.0 million or 17.1% increase in other miscellaneous expenses,
mainly as a result of a $2.0 million increase in amortization expenses of the
Company's servicing asset. In addition, occupancy expenses increased by $1.6
million or 19.4%, related to the operation of six additional branches completed
during the latter part of 1999 and an additional branch completed in early 2000,
while employee compensation and benefits increased by a mere $355,000 or 2.2% in
spite of the hiring of additional employees for new branch openings and the
Company's commercial loan department expansion, in both instances after June of
last year
Total expenses increased by $2.8 million or 16.2% during the three
month period ended September 30, 2000, including expenses associated with
Continental Capital. Total expenses for the quarter ended September 30, 2000,
excluding Continental Capital operations, increased by $761,000 or 9.0% as
compared to the prior comparable period. The increase was due to a $343,000 or
11.9% increase in occupancy expenses, and a $917,000 or 10.8% increase in other
miscellaneous expenses, which was partially offset by a $499,000 or 8.1%
decrease in employee compensation and benefits, which decrease was achieved
notwithstanding the hiring of new employees for new branch openings and
expansion of the Company's commercial loan department after June 1999.
Total income tax expense decreased by $235,000 or 6.2%, and $222.000 or
2.3% during the three and nine month period ended September 30, 2000,
respectively over the prior comparable periods. The Company's effective tax rate
amounted to 24.0% and 22.9%, respectively, during the three and nine months
periods ended September 30, 2000 compared to 27.2% and 22.4% in the 1999
comparable periods. The decrease in the Company's effective tax rate during the
quarter ended September 30, 2000 is primarily related to certain tax credits
recorded in the third quarter of 2000 related to the implementation of certain
tax strategies of the Company in such period.
16
<PAGE>
Interest Rate Risk Management
The following table summarizes the anticipated maturities or repricing
or R&G Financial's interest-earning assets and interest-bearing liabilities as
of September 30, 2000, based on the information and assumptions set forth in the
notes below. For purposes of this presentation, the interest earning components
of loans held for sale and mortgage-backed securities held in connection with
the Company's mortgage banking business are assumed to mature within one year.
In addition, investments held by the Company which have call features are
presented according to their contractual maturity date.
<TABLE>
<CAPTION>
Within Four to More Than More Than
Three Twelve One Year to Three Years Over Five
(Dollars in Thousands) Months Months Three Years to Five Years Years Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable:
Residential real estate loans $39,781 $110,557 $248,372 $193,570 $564,951 $1,157,231
Construction loans 45,118 11,218 13,843 -- -- 70,179
Commercial real estate loans 271,299 918 983 1,011 1,234 275,445
Consumer loans 36,889 36,513 52,671 25,271 14,301 165,645
Commercial business loans 32,863 9,337 11,064 1,741 10 55,015
Mortgage loans held for sale 17,927 48,922 48,295 -- -- 115,144
Mortgage-backed securities(2)(3) 90,575 484,575 94,579 76,177 227,383 973,289
Investment Securities(3) 65,134 121,548 144,283 31,685 18,629 381,279
Other interest-earning assets(4) 19,084 -- -- -- -- 19,084
-------------------------------------------------------------------------------------------
Total $618,670 $823,588 $614,090 $329,455 $826,508 $3,212,311
===========================================================================================
Interest bearing liabilities:
Deposits (5)
NOW and Super NOW accounts $6,132 $18,793 $20,659 $16,734 $71,341 $133,659
Passbook savings accounts 2,838 8,232 20,498 16,398 65,594 113,560
Regular and commercial checking 7,222 18,599 20,442 16,559 70,587 133,409
Certificates of deposit 303,332 645,230 92,040 144,440 9,283 1,194,325
FHLB advances 359,250 5,000 -- 90,000 -- 454,250
Securities sold under agreements to
repurchase (6) 848,202 -- -- -- -- 848,202
Other borrowings(7) 135,167 25,000 10,500 -- -- 170,667
-------------------------------------------------------------------------------------------
Total 1,662,143 720,854 164,139 284,131 216,805 3,048,072
-------------------------------------------------------------------------------------------
Effect of hedging instruments (330,000) 40,000 210,000 -- 80,000 --
-------------------------------------------------------------------------------------------
$1,332,143 $760,854 $374,139 $284,131 $296,805 $3,048,072
===========================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities ($713,473) $62,734 $239,951 $45,324 $529,703 $164,239
-------------------------------------------------------------------------------------------
Cummulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ($713,473) ($650,739) ($410,788) ($365,464) $164,239
-------------------------------------------------------------------------------------------
Cummulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets (20.92)% (19.08)% (12.05)% (10.72)% 4.81%
-------------------------------------------------------------------------------------------
</TABLE>
(footnotes on following page)
17
<PAGE>
----------------------
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather that in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments.
(2) Reflects estimated prepayments in the current interest rate environment.
(3) Includes securities held for trading, available for sale and held to
maturity.
(4) Includes securities purchased under agreement to resell, time deposits with
other banks and federal funds sold.
(5) Does not include non-interest-bearing deposit accounts.
(6) Includes federal funds purchased.
(7) Comprised of warehousing lines, notes payable and other borrowings.
----------------------
As of September 30, 2000 and December 31, 1999, the Company had a one
year negative gap of approximately $650.7 million and $691.8 million,
respectively. R&G Financial's negative gap within one year is due primarily to
its large fixed-rate mortgage loans receivable portfolio held for investment and
its portfolio of FHLB notes and other US agency securities which have call
features but are not likely to be exercised by such agencies due to the actual
interest rate environment. While the above table presents the Company's loans
receivable portfolio held for investment purposes according to its maturity
date, from time to time the Company may negotiate special transactions with
FHLMC and/or FNMA or other third party investors for the sale of such loans.
There can be no assurance, however, that the Company will be successful in
consummating any such transactions.
The following table presents for the periods indicated R&G Financial's
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for R&G Mortgage and average daily
balances for the Bank in each case during the periods presented.
18
<PAGE>
<TABLE>
<CAPTION>
For the three month period ended September 30,
2000 1999
-----------------------------------------------------------------------------
Average Yield / Average Yield /
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(1) $17,094 $291 6.81% $12,901 $170 5.27%
Investment securities available for sale 324,333 5,640 6.96 151,147 2,426 6.42
Investment securities held to maturity 5,493 79 5.75 5,547 81 5.84
Mortgage-backed securities held for trading 17,956 228 5.08 48,035 732 6.10
Mortgage-backed securities available for sale 715,493 11,288 6.31 543,140 8,173 6.02
Mortgage-backed securities held to maturity 21,222 372 7.01 24,860 376 6.05
Loans receivable, net (2) 1,972,807 42,337 8.58 1,484,526 31,659 8.53
FHLB of New York Stock 40,085 666 6.65 18,628 329 7.06
-----------------------------------------------------------------------------
Total interest-earning assets 3,114,483 $60,901 7.82% 2,288,784 $43,946 7.68%
-----------------------------------------------------------------------------
Non-interest-earning assets 225,467 192,812
-----------------------------------------------------------------------------
Total assets $3,339,950 $2,481,596
=============================================================================
Interest-Bearing Liabilities:
Deposits $1,568,110 $21,439 5.47% $1,198,326 $14,114 4.71%
Securities sold under agreements to
repurchase (3) 800,996 13,348 6.67 546,961 7,493 5.48
Notes payable 187,950 2,708 5.76 193,686 3,361 6.94
Other borrowings(4) 459,902 7,528 6.55 257,973 3,174 4.92
-----------------------------------------------------------------------------
Total interest-bearing liabilities 3,016,958 $45,023 5.97% 2,196,946 $28,142 5.12%
-----------------------------------------------------------------------------
Non-interest-bearing liabilities 34,670 42,972
-----------------------------------------------------------------------------
Total liabilites 3,051,628 2,239,918
-----------------------------------------------------------------------------
Stockholders' equity 288,322 241,678
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,339,950 $2,481,596
=============================================================================
Net interest income; interest rate spread (5) $15,878 1.85% $15,804 2.56%
==================== ====================
Net interest margin 2.04% 2.76%
===== =====
Average interest-earning assets to average
interest-bearing liabilities 103.23% 104.18%
======= =======
</TABLE>
(footnotes on page 21)
19
<PAGE>
<TABLE>
<CAPTION>
For the nine month period ended September 30,
2000 1999
--------------------------------------------------------------------------------
Average Yield / Average Yield /
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents (1) $15,001 $732 6.50% $17,461 $681 5.20%
Investment securities available for sale 289,265 15,174 6.99 95,161 4,305 6.03
Investment securities held to maturity 5,435 237 5.81 6,403 271 5.64
Mortgage-backed securities held for trading 20,706 891 5.74 30,203 1,274 5.62
Mortgage-backed securities available for sale 702,921 32,903 6.24 515,587 22,440 5.80
Mortgage-backed securities held to maturity 21,847 1,040 6.35 26,735 1,210 6.03
Loans receivable, net (2) 1,849,630 119,115 8.58 1,347,355 84,865 8.40
FHLB of New York Stock 37,287 1,803 6.45 14,111 722 6.82
--------------------------------------------------------------------------------
Total interest-earning assets 2,942,092 $171,895 7.79% 2,053,016 $115,768 7.52%
--------------------------------------------------------------------------------
Non-interest-earning assets 236,340 224,614
--------------------------------------------------------------------------------
Total assets $3,178,432 $2,277,630
================================================================================
Interest-Bearing Liabilities:
Deposits $1,465,850 $57,496 5.23% $1,113,609 $38,273 4.58%
Securities sold under agreements to
repurchase (3) 747,268 35,597 6.35 445,274 18,465 5.53
Notes payable 193,342 8,972 6.19 204,932 10,344 6.73
Other borrowings(4) 432,248 20,459 6.31 194,758 7,120 4.87
--------------------------------------------------------------------------------
Total interest-bearing liabilities 2,838,708 $122,524 5.75% 1,958,573 $74,202 5.05%
--------------------------------------------------------------------------------
Non-interest-bearing liabilities 59,372 85,439
--------------------------------------------------------------------------------
Total liabilites 2,898,080 2,044,012
--------------------------------------------------------------------------------
Stockholders' equity 280,352 233,618
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,178,432 $2,277,630
================================================================================
Net interest income; interest rate spread (5) $49,371 2.04% $41,566 2.47%
==================== ====================
Net interest margin 2.24% 2.70%
===== =====
Average interest-earning assets to average
interest-bearing liabilities 103.64% 104.82%
======= =======
</TABLE>
(footnotes on following page)
20
<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 and non-accrual loans.
(3) Includes federal funds purchased.
(4) Comprised of long-term debt, advances from the FHLB of New York and other
borrowings.
(5) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets.
----------------------
Mortgage Loan Servicing
The following table sets forth certain information regarding the
mortgage loan servicing portfolio of R&G Financial for the periods indicated.
<TABLE>
<CAPTION>
At or for the nine months ended
September 30,
2000 1999
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Composition of Servicing Portfolio at period end:
GNMA $ 3,004,759 $ 2,630,922
FNMA/FHLMC 1,715,331 1,307,124
Other mortgage loans (3) 1,810,896 1,529,119
----------- -----------
Total servicing portfolio (3) $ 6,530,986 $ 5,467,165
=========== ===========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 6,177,511 $ 4,827,798
Add: Loan originations and purchases 937,852 1,184,844
Servicing of portfolio loans acquired 31,404 288
Less: Sale of servicing rights(1) (171,578) ( -- )
Run-offs(2) (444,203) (545,765)
----------- -----------
Ending servicing portfolio(3) $ 6,530,986 $ 5,467,165
=========== ===========
Number of loans serviced 110,192 101,796
Average loan size $ 59 $ 54
Average servicing fee rate 0.507% 0.533%
</TABLE>
--------------------
(1) Includes loans sold, servicing released, by Continental Capital totaling
$130.5 million.
21
<PAGE>
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) At the dates shown, included $1.1 billion and $913.0 million of loans
serviced for the Bank, respectively, which constituted 17.4% and 16.7% of
the total servicing portfolio, respectively.
--------------------
Substantially all of the mortgage loans in R&G Financial's servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At September 30, 2000 less than 8% of the
Company's mortgage servicing portfolio was related to mortgages secured by real
property located outside Puerto Rico.
The Company reduces the sensitivity of its servicing income to
increases in prepayment rates through a strong retail origination network that
has increased or maintained the size of R&G Financial's servicing portfolio even
during periods of high prepayments. In addition, a substantial portion of the
Company's servicing portfolio consists of tax-exempt FHA/VA mortgage loans which
carry lower interest rates than those on conventional loans, which tends to
reduce risks related to R&G Financial's servicing portfolio.
22
<PAGE>
Liquidity and Capital Resources
Liquidity - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At September 30, 2000, the Company had $283.4 million in borrowing
capacity under warehousing and other lines of credit, $718.3 million in
borrowings capacity under a line of credit with the FHLB of New York and $25
million under federal funds lines of credit. The Company has generally not
relied upon brokered deposits as a source of liquidity.
At September 30, 2000, the Company had outstanding commitments to
extend credit totaling $68.3 million (excluding the undisbursed portion of loans
in process). Certificates of deposit which are scheduled to mature within one
year totaled $937.4 million at September 30, 2000, and borrowings that are
scheduled to mature within the same period amounted to $1.4 billion. The Company
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 1 leverage ratio for such other banks
from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders'equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances
23
<PAGE>
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 September 30, 2000, the Bank met each of its
capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital
and total risk-based capital ratios of 6.19%, 11.40% and 12.17%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
Inflation and Changing Prices
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of government legislation and regulation (which changes
from time to time and over which the Company has no control), and other risks
detailed in this Form 10-Q and in the Company's other Securities and Exchange
Commission ("SEC") filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the SEC.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
Quantitative and qualitative disclosures about market risks at December
31, 1999 are presented in Item 7A of the Company's Annual report on Form 10-K.
Information at September 30, 2000 is presented on page 17 of this Report.
Management believes there have been no material changes in the Company's market
risk since December 31, 1999.
PART II - OTHER INFORMATION
---------------------------
Item 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
24
<PAGE>
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Not applicable.
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
---
27 Financial Data Schedule E-1
b) No Form 8-K reports were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: November 10, 2000 By:/S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JOSEPH R. SANDOVAL
----------------------
Joseph R. Sandoval
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
