SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________.
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(787) 758-2424
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report (s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [X] NO [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No
Number of shares of Class B Common Stock outstanding as of March 31, 2003:
19,486,665 (Does not include 14,553,056 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
1
R&G FINANCIAL CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements .................................................................. 3
Consolidated Statements of Financial Condition as of
March 31, 2003 (Unaudited) and December 31, 2002.................................. 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2003 and 2002 (Unaudited)...................................4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2003 and 2002 (Unaudited)...................................5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited) ........................................ 6
Notes to Unaudited Consolidated Financial Statements ...................................... 7
ITEM 2. Management's Discussion and Analysis ..........................................................19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..........................................29
ITEM 4. Controls and Procedures.............................................................................29
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ..................................................................................30
ITEM 2. Changes in Securities ............................................................................. 30
ITEM 3. Defaults upon Senior Securities ....................................................................30
ITEM 4. Submission of Matters ..............................................................................30
ITEM 5. Other Information ..................................................................................30
ITEM 6. Exhibits and Reports on Form 8-K ...................................................................30
Signatures .........................................................................................32
Certifications .....................................................................................33
2
PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
(Dollars in thousands)
ASSETS
Cash and due from banks .................................................................... $ 101,132 $ 128,086
Money market investments:
Securities purchased under agreements to resell ........................................ 12,297 --
Time deposits with other banks ......................................................... 37,303 65,401
Short-term investments ................................................................. 17,415 4,157
Mortgage loans held for sale, at lower of cost or market ................................... 279,120 258,738
Mortgage-backed and investment securities held for trading, at fair value .................. 45,825 48,651
Trading securities pledged on repurchase agreements, at fair value ......................... -- 26,106
Mortgage-backed and investment securities available for sale, at fair value ................ 2,180,319 1,819,257
Available for sale securities pledged on repurchase agreements, at fair value .............. 775,776 737,656
Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2003 - $31,349; 2002 - $30,885) ................................... 31,025 30,660
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2003 - $44,573; 2002 - $45,926) ................................... 43,209 44,930
Loans receivable, net ...................................................................... 3,005,891 2,759,689
Accounts receivable, including advances to investors, net .................................. 35,768 32,100
Accrued interest receivable ................................................................ 41,524 40,401
Servicing asset ............................................................................ 133,830 142,334
Premises and equipment ..................................................................... 40,603 38,665
Other assets ............................................................................... 109,098 100,415
---------- ----------
$6,890,135 $6,277,246
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................................................. $3,001,934 $2,802,324
Securities sold under agreements to repurchase ........................................ 1,831,335 1,489,758
Notes payable ......................................................................... 218,052 194,607
Advances from FHLB .................................................................... 958,725 940,725
Other borrowings ...................................................................... 42,895 45,066
Accounts payable and accrued liabilities .............................................. 145,662 134,427
Other liabilities ..................................................................... 10,040 8,121
---------- ----------
6,208,643 5,615,028
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized:
Non-cumulative perpetual Monthly Income Preferred Stock, $25 liquidation value:
7.40% Series A, 2,000,000 shares authorized, issued and outstanding ............... 50,000 50,000
7.75% Series B, 1,000,000 shares authorized, issued and outstanding ............... 25,000 25,000
7.60% Series C, 2,760,000 shares authorized, issued and outstanding ............... 69,000 69,000
7.25% Series D, 2,760,000 shares authorized, issued and outstanding .............. 69,000 69,000
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 14,553,056
issued and outstanding .......................................................... 145 145
Class B - $.01 par value, 60,000,000 shares authorized, 19,486,665
issued and outstanding (2002-19,440,206) ....................................... 195 194
Additional paid-in capital ............................................................ 115,144 114,951
Retained earnings ..................................................................... 316,409 294,592
Capital reserves of the Bank .......................................................... 17,419 17,419
Accumulated other comprehensive income ................................................ 19,180 21,917
---------- ----------
681,492 662,218
---------- ----------
$6,890,135 $6,277,246
========== ==========
The accompanying notes are an integral part of these statements.
3
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
-------------------------------------
2003 2002
------------ ------------
(Unaudited)
(Dollars in thousands except per share data)
Interest income:
Loans $ 51,955 $ 38,503
Money market and other investments 8,618 9,039
Mortgage-backed securities 27,683 25,177
------------ ------------
Total interest income 88,256 72,719
------------ ------------
Interest expense:
Deposits 21,693 20,826
Securities sold under agreements to repurchase 12,771 12,343
Notes payable 1,870 1,772
Other 9,701 5,773
------------ ------------
Total interest expense 46,035 40,714
------------ ------------
Net interest income 42,221 32,005
Provision for loan losses (4,220) (5,000)
------------ ------------
Net interest income after provision for loan losses 38,001 27,005
------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 33,017 17,710
Loan administration and servicing fees 13,201 9,304
Service charges, fees and other 5,721 3,872
------------ ------------
51,939 30,886
------------ ------------
Total revenues 89,940 57,891
------------ ------------
Operating expenses:
Employee compensation and benefits 15,147 10,008
Office occupancy and equipment 5,702 4,262
Other administrative and general 30,543 15,926
------------ ------------
51,392 30,196
------------ ------------
Income before income taxes 38,548 27,695
------------ ------------
Income tax expense:
Current 5,940 5,496
Deferred 3,467 666
------------ ------------
9,407 6,162
------------ ------------
Net income $ 29,141 $ 21,533
============ ============
Earnings per common share - Basic $ 0.74 $ 0.59
------------ ------------
- Diluted $ 0.74 $ 0.58
------------ ------------
Weighted average number of shares outstanding - Basic 34,022,719 31,295,713
- Diluted 34,180,759 31,654,473
The accompanying notes are an integral part of these statements.
4
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three month period ended
March 31,
-----------------------------
2003 2002
-------- --------
(Unaudited)
(Dollars in thousands)
Net income $ 29,141 $ 21,533
-------- --------
Other comprehensive income, before tax:
Unrealized gains (losses):
Derivative instruments 340 1,996
-------- --------
Investment securities:
Arising during period (4,728) (14,083)
Less: Reclassification adjustments for gains included
in net income (106) (75)
-------- --------
(4,834) (14,158)
-------- --------
(4,494) (12,162)
Income tax benefit related to items of other comprehensive income 1,757 4,743
-------- --------
Other comprehensive loss, net of tax (2,737) (7,419)
-------- --------
Comprehensive income, net of tax $ 26,404 $ 14,114
======== ========
The accompanying notes are an integral part of these statements.
5
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month period ended March 31,
----------------------------------
2003 2002
--------- ---------
(Unaudited)
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 29,141 $ 21,533
--------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,134 1,514
Amortization of premium on investments and mortgage-backed securities, net 2,506 1,195
Amortization of servicing rights 12,306 5,487
Provision for (reversal of) impairment reserves 4,120 (459)
Provision for loan losses 4,220 5,000
Gain on sales of mortgage-backed and investment securities available for sale (106) (75)
Unrealized loss (gain) on trading securities and derivative instruments, net 803 (52)
Increase in mortgage loans held for sale (27,741) (43,215)
Net decrease in securities held for trading 28,243 15,702
Increase in receivables (4,792) (5,214)
Increase in other assets (8,940) (6,485)
Increase (decrease) increase in notes payable and other borrowings 21,274 (4,624)
Increase in accounts payable and accrued liabilities 13,218 45,382
Increase (decrease) in other liabilities 1,919 (1,045)
--------- ---------
Total adjustments 49,164 13,111
--------- ---------
Net cash provided by operating activities 78,305 34,644
--------- ---------
Cash flows from investing activities:
Purchases of investment securities (770,127) (298,201)
Proceeds from sales of securities available for sale 28,891 214,433
Principal repayments on mortgage-backed securities
and redemption of securities available for sale 358,155 124,794
Proceeds from sales of loans 24,488 --
Net originations of loans (274,910) (195,815)
Purchases of FHLB stock, net (14,619) (6,070)
Acquisition of premises and equipment (3,815) (1,456)
Acquisition of servicing rights (7,921) (5,316)
--------- ---------
Net cash used in investing activities (659,858) (167,631)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in deposits - net 199,610 (46,548)
Increase in securities sold under agreements to repurchase - net 341,577 42,679
Advances from FHLB, net 18,000 63,000
Net proceeds from issuance of preferred stock -- 66,616
Proceeds from issuance of common stock 194 21
Cash dividends:
Common stock (3,353) (2,394)
Preferred stock (3,971) (3,095)
--------- ---------
Net cash provided by financing activities 552,057 120,279
--------- ---------
Net decrease in cash and cash equivalents (29,496) (12,708)
Cash and cash equivalents at beginning of period 197,643 157,725
--------- ---------
Cash and cash equivalents at end of period $ 168,147 $ 145,017
========= =========
Cash and cash equivalents include:
Cash and due from banks $ 101,132 $ 54,233
Short-term investments 17,415 58,086
Securities purchased under agreements to resell 12,297 --
Time deposits with other banks 37,303 32,698
--------- ---------
$ 168,147 $ 145,017
========= =========
The accompanying notes are an integral part of these statements.
6
R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION
REPORTING ENTITY
The accompanying unaudited consolidated financial statements include
the accounts of R&G Financial Corporation (the "Company"), a diversified
financial services company, and its wholly-owned subsidiaries, R-G Premier Bank
of Puerto Rico (the "Premier Bank"), a Puerto Rico commercial bank, Crown Bank,
F.S.B. ("Crown Bank"), a Florida-based federal savings bank, R&G Mortgage Corp.
("R&G Mortgage"), Puerto Rico's second largest mortgage banker, R-G Investments
Corporation, a Puerto Rico licensed securities broker-dealer, and Home &
Property Insurance Corp., a Puerto Rico insurance agency. The Company, currently
in its 31st year of operations, operates as a financial holding company,
pursuant to the provisions of the Gramm-Leach-Biley Act of 1999, and is
primarily engaged in banking, mortgage banking, and securities and insurance
brokerage through its subsidiaries.
Premier Bank and Crown Bank provide a full range of banking services,
including residential, commercial and personal loans and a variety of deposit
products. Premier Bank operates through thirty branches located mainly in the
northeastern part of the Commonwealth of Puerto Rico. Crown Bank operates in the
Orlando and Tampa/St. Petersburg metropolitan areas through fifteen full service
branches and six commercial lending offices. Premier Bank also provides private
banking and trust and other financial services to its customers. Premier Bank
and Crown Bank are subject to the regulations of certain federal and local
agencies, and undergo periodic examinations by those regulatory agencies.
Crown Bank is also engaged in the origination of FHA insured, VA
guaranteed and privately insured first and second mortgage loans on residential
real estate (1 to 4 families) in the States of New York, New Jersey,
Connecticut, North Carolina and Florida, through its wholly-owned subsidiary,
Continental Capital Corporation ("Continental Capital").
R&G Mortgage is engaged primarily in the business of originating
FHA-insured, VA-guaranteed, and privately insured first and second mortgage
loans on residential real estate (1 to 4 families). R&G Mortgage pools FHA and
VA loans into GNMA mortgage-backed securities and collateralized mortgage
obligation certificates for sale to investors. After selling the loans, it
retains the service on the loans. R&G Mortgage is also a FNMA and FHLMC
Seller-Servicer of conventional loans.
R&G Mortgage also originates FHA insured, VA guaranteed and privately
insured first and second mortgage loans on residential real estate (1 to 4
families), through its wholly-owned subsidiary, Mortgage Store of Puerto Rico,
Inc.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements include all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of March 31, 2003 and the results of
operations and changes in its cash flows for the three months ended March 31,
2003 and 2002.
The results of operations for the three month period ended March 31,
2003 are not necessarily indicative of the results to be expected for the year
ending December 31, 2003. The unaudited consolidated financial statements and
notes thereto should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 2002.
7
BASIS OF CONSOLIDATION
All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many
of the fundamental provisions of that Statement. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, it retains
the requirement in Opinion No. 30 to report separately discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of by sale, abandonment, or in a distribution to owners or is
classified as held for sale. The adoption of this Statement did not have an
effect on the consolidated financial position or results of operations of the
Company.
On January 1, 2002 the Company adopted also SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over the respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144. The initial
adoption of this Statement on January 1, 2002 had no effect on the consolidated
financial position or results of operations of the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees of Indebtedness of Others (an
interpretation of FASB Statements No. 5, 57, 107 and rescission of FASB
Interpretation No. 34)" ("FIN No. 45"). FIN No. 45 clarifies the requirements of
FASB Statement No. 5, "Accounting for Contingencies," relating to a guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
FIN No. 45 requires a guarantor of certain guarantees to recognize at its
inception a liability for the fair value of the obligation undertaken when
issuing the guarantee, and also expands the related disclosures. The provisions
of initial recognition are effective for guarantees issued and modified after
December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have a
significant impact on the Company's consolidated financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 or
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivatives instruments embedded in other contracts, and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003. The adoption of this statement is not expected
to have a significant effect in the consolidated financial position or results
of operations of the Company.
8
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income
(less preferred stock dividends) by the weighted average number of shares of
common stock outstanding. The weighted average of outstanding stock options
granted in connection with the Company's Stock Option Plan (158,040 and 358,760
during the quarters ended March 31, 2003 and 2002, respectively), are included
in the weighted average number of shares for purposes of the diluted earnings
per share computation. No other adjustments are made to the computation of basic
earnings per share to arrive at diluted earnings per share.
Dividends per share on common stock declared and paid by the Company were as
follows:
Quarter ended March 31,
2003 2002
------- -------
(Unaudited)
$0.0980 $0.0765
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.
March 31, December 31,
2003 2002
--------- ------------
(Unaudited)
(Dollars in thousands)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
GNMA certificates $ -- $ 9,741
FHLMC certificates 44,880 65,016
------- -------
44,880 74,757
------- -------
Investment securities held
for trading:
Corporate preferred stock 940 --
Other 5 --
------- -------
945 --
------- -------
$45,825 $93,948
======= =======
9
March 31, 2003 December 31, 2002
----------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
---------- ---------- ---------- ----------
(Unaudited)
(Dollars in thousands)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Collaterized mortgage obligations (CMO):
Due within one year $ -- $ -- $ 113 $ 113
Due from one to five years 15,400 15,630 17,178 17,288
Due from five to ten years 20,121 20,546 31,571 32,219
Due over ten years 657,392 662,528 404,981 409,830
---------- ---------- ---------- ----------
692,913 698,704 453,843 459,450
---------- ---------- ---------- ----------
CMO residuals (interest only), and interest only
strips (IO's) 45,649 49,255 30,964 32,759
---------- ---------- ---------- ----------
FNMA certificates:
Due from one to five years 25,397 25,523 -- --
Due from five to ten years 5,460 5,490 370 390
Due over ten years 319,785 327,854 258,805 269,367
---------- ---------- ---------- ----------
350,642 358,867 259,175 269,757
---------- ---------- ---------- ----------
FHLMC certificates:
Due within one year 4 5 2 2
Due from one to five years 10 10 20 21
Due from five to ten years 732 773 889 935
Due over ten years 692,963 707,432 738,041 756,228
---------- ---------- ---------- ----------
693,709 708,220 738,952 757,186
---------- ---------- ---------- ----------
GNMA certificates:
Due from one to five years 25 25 -- --
Due from five to ten years 15,633 16,004 16,515 16,759
Due over ten years 405,303 413,472 440,767 446,339
---------- ---------- ---------- ----------
420,961 429,501 457,282 463,098
---------- ---------- ---------- ----------
2,203,874 2,244,547 1,940,216 1,982,250
---------- ---------- ---------- ----------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Mortgage securities portfolio mutual fund -- -- 3,266 2,964
---------- ---------- ---------- ----------
U.S. Government and Agencies securities:
Due within one year 32,389 32,854
Due from one to five years 377,599 380,997 263,632 267,896
Due from five to ten years 118,819 123,463 137,756 143,695
---------- ---------- ---------- ----------
528,807 537,314 401,388 411,591
---------- ---------- ---------- ----------
Corporate debt obligations:
Due within one year 12,427 12,865 3,205 3,367
Due from one to five years 41,162 43,284 52,779 55,283
Due from five to ten years -- -- 2,979 2,385
Due over ten years 7,810 7,478 9,805 9,809
---------- ---------- ---------- ----------
61,399 63,627 68,768 70,843
---------- ---------- ---------- ----------
US Municipal debt obligations-
Due over ten years 11,869 11,651 4,884 4,879
---------- ---------- ---------- ----------
FHLB Stock 98,956 98,956 84,337 84,337
---------- ---------- ---------- ----------
Other -- -- 49 49
---------- ---------- ---------- ----------
701,031 711,548 562,692 574,663
---------- ---------- ---------- ----------
$2,904,905 $2,956,095 $2,502,908 $2,556,913
========== ========== ========== ==========
10
March 31, 2003 December 31, 2002
-----------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
--------- ------- --------- -------
(Unaudited)
(Dollars in thousands)
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
GNMA certificates:
Due from five to ten years $ 5,190 $ 5,243 $ 5,457 $ 5,513
Due over ten years 32,349 33,307 33,521 34,091
------- ------- ------- -------
37,539 38,550 38,978 39,604
------- ------- ------- -------
FNMA certificates:
Due over ten years 6,030 6,384 6,328 6,698
------- ------- ------- -------
FHLMC certificates:
Due over ten years 97 95 102 102
------- ------- ------- -------
43,666 45,029 45,408 46,404
------- ------- ------- -------
INVESTMENT SECURITIES HELD TO MATURITY:
United States Government and Agencies obligations:
Due within one year 2,882 2,882 997 997
Due from one to five years -- -- 1,500 1,500
------- ------- ------- -------
2,882 2,882 2,497 2,497
------- ------- ------- -------
Puerto Rico Government and Agencies obligations:
Due from one to five years 26,586 26,906 26,586 26,804
Due from five to ten years 1,000 1,005 1,000 1,005
------- ------- ------- -------
27,586 27,911 27,586 27,809
------- ------- ------- -------
Other:
Due from one to five years 100 100 100 100
------- ------- ------- -------
30,568 30,893 30,183 30,406
------- ------- ------- -------
$74,234 $75,922 $75,591 $76,810
======= ======= ======= =======
In addition to the investment and mortgage-backed securities pledged on
repurchase agreements and reported as pledged assets in the statement of
financial condition, at March 31, 2003 the Company had investment securities
pledged as collateral on repurchase agreements where the counterparties do not
have the right to sell or repledge the assets as follows:
Carrying Amount
---------------
(Unaudited)
(Dollars in thousands)
Mortgage-backed securities held for trading, at fair value $ 8,767
Mortgage-backed and investment securities available for sale,
at fair value 1,124,908
Mortgage-backed securities held to maturity, at amortized
cost 360
----------
$1,134,035
==========
11
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
(Dollars in thousands)
Real estate loans:
Residential - first mortgage $ 1,661,520 $ 1,473,051
Residential - second mortgage 37,953 40,429
Land 37,361 27,521
Construction 465,936 355,367
Commercial 661,473 633,233
----------- -----------
2,864,243 2,529,601
Undisbursed portion of loans in process (166,418) (90,432)
Net deferred loan costs (fees) 241 (45)
----------- -----------
2,698,066 2,439,124
----------- -----------
Other loans:
Commercial 141,651 152,743
Consumer:
Secured by deposits 28,326 28,070
Secured by real estate 64,354 68,156
Other 107,295 104,715
Unearned interest (459) (444)
----------- -----------
341,167 352,240
----------- -----------
Total loans 3,039,233 2,792,364
Allowance for loan losses (33,342) (32,675)
----------- -----------
$ 3,005,891 $ 2,759,689
=========== ===========
The changes in the allowance for loan losses follow:
Three months ended
March 31,
-----------------------------
2003 2002
-------- --------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 32,675 $ 17,428
Provision for loan losses 4,220 5,000
Loans charged-off (3,672) (3,989)
Recoveries 312 104
Transfers to loans held for sale (193) --
-------- --------
Balance, end of period $ 33,342 $ 18,543
-------- --------
12
The following table sets forth the amounts and categories of R&G
Financial's non-performing assets at the dates indicated.
March 31, December 31,
2003 2002
--------- ------------
(Unaudited)
(Dollars in thousands)
Non-accruing loans:
Residential real estate $49,215 $43,281
Residential construction 1,128 1,512
Commercial real estate 24,584 29,375
Commercial business 2,940 2,197
Consumer unsecured 562 802
------- -------
Total 78,429 77,167
------- -------
Accruing loans greater than 90 days delinquent:
Residential real estate 343 104
Residential construction -- --
Commercial real estate -- --
Commercial business 321 261
Consumer 554 667
------- -------
Total accruing loans greater than
90 days delinquent 1,218 1,032
------- -------
Total non-performing loans 79,647 78,199
------- -------
Real estate owned, net of reserves (1) 19,479 15,544
Other repossessed assets 212 292
------- -------
19,691 15,836
------- -------
Total non-performing assets $99,338 $94,035
------- -------
Total non-performing loans as a
percentage of total loans (2) 2.48% 2.71%
------- -------
Total non-performing assets as a
percentage of total assets 1.44% 1.50%
------- -------
Allowance for loan losses as a percentage
of total non-performing loans (3) 41.86% 41.79%
------- -------
Allowance for loan losses as a percentage
of total loans outstanding (3) 1.04% 1.13%
------- -------
Net charge-offs to average loans
outstanding 0.43% 0.41%
------- -------
13
(1) Consists primarily of residential real estate foreclosed by the
Company.
(2) While the ratio of non-performing loans to total loans decreased from
2.71% to 2.48% from December 31, 2002 to March 31, 2003, the ratio was
nevertheless larger than it would otherwise have been due to loan
securitizations during 2000, 2001 and 2002 and the first three months
of 2003, which reduced the amount of loans held in portfolio
considered in the calculation of the ratio. Without giving effect to
loan securitizations, as of March 31, 2003 and December 31, 2002, the
ratio of non-performing loans to total loans would have been 1.89% and
1.98%, respectively.
(3) Because of the nature of the collateral, R&G Financial's historical
charge-offs with respect to residential real estate loans have been
low. Excluding R&G Financial's residential loan portfolio, the
allowance for loan losses to total loans and to total non-performing
loans at March 31, 2003 and December 31, 2002 would have been 2.21% and
109.6%, respectively, and 2.39% and 93.6%, respectively.
14
NOTE 5 - MORTGAGE LOAN SERVICING
The changes in the servicing asset of the Company follows:
For the three month period ended March 31,
2003 2002
--------- ---------
(Unaudited)
(Dollars in thousands)
Balance at beginning of period $ 142,334 $ 105,146
Rights originated 6,492 5,078
Rights purchased 1,429 238
Scheduled amortization (5,597) (3,513)
Unscheduled amortization (6,708) (1,973)
(Provision) reversal of impairment reserves (4,120) 459
Other adjustments -- (619)
--------- ---------
Balance at end of period $ 133,830 $ 104,816
========= =========
The portion of the Company's mortgage loans servicing portfolio
consisting of the servicing asset that was originated by the Company prior to
the adoption of SFAS No. 122 is not reflected as an asset on the Company's
consolidated financial statements, and is not subject to amortization or
impairment.
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
March 31, December 31,
2003 2002
---------- ------------
(Unaudited)
(Dollars in thousands)
Passbook savings $ 327,286 $ 329,489
---------- ----------
NOW accounts 109,953 100,031
Super NOW accounts 323,880 335,015
Regular checking accounts
(non-interest bearing) 131,489 107,586
Commercial checking accounts
(non-interest bearing) 288,276 282,769
---------- ----------
853,598 825,401
---------- ----------
Certificates of deposit:
Under $100,000 660,303 652,065
$100,000 and over 1,155,819 991,504
---------- ----------
1,816,122 1,643,569
---------- ----------
Accrued interest payable 4,928 3,865
---------- ----------
$3,001,934 $2,802,324
========== ==========
15
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of March 31, 2003, the Company had open commitments to issue GNMA
certificates of approximately $65.9 million.
COMMITMENTS TO SELL MORTGAGE LOANS
As of March 31, 2003 the Company had commitments to sell mortgage loans
to third party investors amounting to approximately $196.5 million.
LEASE COMMITMENTS
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
OTHER
At March 31, 2003, the Company is liable under limited recourse
provisions resulting from the sale of loans to several investors, principally
FHLMC. The principal balance of these loans, which are serviced by the Company,
amounts to approximately $868.7 million at March 31, 2003. At March 31, 2003,
the Company has an allowance for recourse provisions of $1.8 million. Historical
losses on recourse obligations have not been significant.
In April 2002, R&G Acquisition Holdings Corporation (a wholly-owned
subsidiary of R&G Financial) ("RAC"), a Florida corporation and savings and
loan holding company, formed R&G Capital Trust I ("R&G Capital Trust"), a
Delaware statutory business trust. R&G Capital Trust issued $25.0 million of
trust preferred securities in a private placement. The Company has guaranteed
certain obligations of RAC to R&G Capital Trust.
NOTE 8 - SUPPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other administrative and general expenses are shown
in the Consolidated Statements of Income net of direct loan origination costs.
Direct loan origination costs are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold, or amortized as a yield adjustment to interest income on loans
held for investment.
Total employee costs and other expenses before capitalization follows:
Three month period ended
March 31,
2003 2002
------- -------
(Unaudited)
(Dollars in thousands)
Employee costs $23,102 $16,243
------- -------
Other administrative and general expenses $32,707 $17,171
------- -------
16
NOTE 9 - INDUSTRY SEGMENTS
The following summarized information presents the results of the Company's
operations for its traditional banking and mortgage banking activities:
(Dollars in thousands)
Three month period ended March 31,
------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------- ---------------------------------------------
(Unaudited)
------------------------------------------------------------------------------------------------
Mortgage Segment Mortgage Segment
Banking Banking Other Totals Banking Banking Other Totals
------- -------- ------ ------- ------- -------- ------ -------
Revenues $41,425 $45,663 $3,269 $90,357 $32,509 $24,496 $1,619 $58,624
Non-interest expenses 23,375 27,607 1,198 52,180 14,668 16,003 725 31,396
------- ------- ------ ------- ------- ------- ------ -------
Income before income taxes $18,050 $18,056 $2,071 $38,177 $17,841 $ 8,493 $ 894 $27,228
======= ======= ====== ======= ======= ======= ====== =======
17
The following is a reconciliation of reportable segment revenues and income
before income taxes to the Company's consolidated amounts (unaudited):
Three month period ended March 31,
2003 2002
-------- --------
(Dollars in thousands)
Revenues:
Total revenues for reportable segments $ 90,357 $ 58,624
Elimination of intersegment revenues (904) (1,340)
Corporate revenues 487 607
-------- --------
Total consolidated revenues $ 89,940 $ 57,891
======== ========
Income before income taxes:
Total income before income taxes for reportable
segments $ 38,177 $ 27,228
Elimination of intersegment profits 102 (17)
Unallocated corporate income, net 269 484
-------- --------
Income before income taxes, consolidated $ 38,548 $ 27,695
======== ========
Total assets of the Company among its industry segments and a reconciliation of
reportable segment assets to the Company's consolidated total assets as of March
31, 2003 and December 31, 2002 follows:
March 31, December 31,
2003 2002
----------- ------------
(Unaudited)
(Dollars in thousands)
Assets:
Banking $ 6,055,740 $ 5,453,321
Mortgage Banking 898,095 908,660
Other 120,365 111,005
----------- -----------
Total assets for reportable segments 7,074,200 6,472,986
Parent company assets 62,364 62,971
Elimination of intersegment balances (246,429) (258,711)
----------- -----------
Consolidated total assets $ 6,890,135 $ 6,277,246
=========== ===========
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
A number of the presentations and disclosures in this Form 10-Q,
including, without limitation, statements regarding the level of allowance for
loan losses, the rate of delinquencies and amounts of charge-offs, and the rates
of loan growth, and any statements preceded by, followed by or which include the
words "may," "could," "should," "will," "would," "hope," "might," "believe,"
"expect," "anticipate," "estimate," "intend," "plan," "assume" or similar
expressions constitute forward-looking statements. These forward-looking
statements, implicitly and explicitly, include the assumptions underlying the
statements and other information with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, estimates, intentions, financial condition,
results of operations, future performance and business, including our
expectations and estimates with respect to our revenues, expenses, earnings,
return on equity, return on assets, efficiency ratio, asset quality and other
financial data and capital and performance ratios.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, these statements involve risks and
uncertainties that are subject to change based on various important factors
(some of which are beyond our control). The following factors, among others,
could cause our financial performance to differ materially from our goals,
plans, objectives, intentions, expectations and other forward-looking
statements:
- the strength of the United States economy in general and the
strength of the regional and local economies within our
markets;
- adverse changes in the local real estate market, as most of
the Company's loans are concentrated in Puerto Rico and
Florida and a substantial portion of these loans have real
estate as collateral;
- the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System;
- inflation, interest rate, market and monetary fluctuations;
- adverse changes in asset quality and the resulting credit
risk-related losses and expenses;
- our timely development of new products and services in a
changing environment, including the features, pricing and
quality of our products and services compared to the products
and services of our competitors;
- the willingness of users to substitute competitors' products
and services for our products and services; o the impact of
changes in financial services policies, laws and regulations,
including laws, regulations and policies concerning taxes,
banking, securities and insurance, and the application thereof
by regulatory bodies;
- technological changes;
- changes in consumer spending and savings habits; and
- regulatory or judicial proceedings.
If one or more of the factors affecting our forward-looking information
and statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward-looking information and statements contained in this Form 10-Q.
Therefore, we caution you not to place undue reliance on our forward-looking
information and statements.
We do not intend to update our forward-looking information and
statements, whether written or oral, to reflect change. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
19
GENERAL
R&G Financial Corporation (the "Company") is a Puerto Rico chartered
diversified financial holding company that, through its wholly-owned
subsidiaries, is engaged in banking, mortgage banking, securities and insurance
brokerage activities. The Company, currently in its 31st year of operations,
operates 30 bank branches mainly located in the northeastern section of Puerto
Rico, 15 bank branches in the Orlando and Tampa/St. Petersburg Florida markets,
6 mortgage and 6 commercial lending offices in the continental United States,
and 43 mortgage offices in Puerto Rico, including 24 facilities located within
Premier Bank's branches.
The Company is engaged in providing a full range of banking services
through R-G Premier Bank of Puerto Rico ("Premier Bank"), a Puerto Rico
commercial bank, and Crown Bank, F.S.B. ("Crown Bank"), its Florida-based
federal savings bank acquired in June 2002. Banking activities include
commercial banking services, corporate and construction lending, consumer
lending and credit cards, offering a variety of deposit products and, to a
lesser extent, trust and investment services through private banking.
The Company is also engaged in mortgage banking activities. Mortgage
banking activities are conducted through R&G Mortgage Corp., a Puerto Rico
mortgage company, The Mortgage Store of Puerto Rico, Inc., also a Puerto Rico
mortgage company, and Continental Capital Corporation, a New York mortgage
banking subsidiary of Crown Bank with offices in New York, North Carolina and
Florida. Mortgage banking activities include the origination, purchase, sale and
servicing of mortgage loans on single-family residences, the issuance and sale
of various types of mortgage-backed securities, the holding of mortgage loans,
mortgage-backed securities and other investment securities for sale or
investment, and the purchase and sale of servicing rights associated with such
mortgage loans and, to a lesser extent, the origination of construction loans
and mortgage loans secured by income producing real estate and land (the
"mortgage banking business").
The Company is also engaged in insurance brokerage through Home &
Property Insurance Corp., a Puerto Rico insurance agency, and securities
brokerage through R-G Investments Corporation, a Puerto Rico licensed
broker-dealer.
The Company is the second largest mortgage loans originator and
servicer of mortgage loans on single family residences in Puerto Rico. R&G
Financial's mortgage servicing portfolio increased to approximately $10.9
billion as of March 31, 2003, from $7.3 billion as of the same date a year ago,
an increase of 48.8%. The Company's servicing portfolio at March 31, 2003
includes approximately $2.6 billion acquired through the acquisition of Crown
Bank in June 2002. R&G Financial's strategy is to increase the size of its
mortgage servicing portfolio by relying principally on internal loan
originations.
As part of its strategy to maximize net interest income, R&G Financial
maintains a substantial portfolio of mortgage-backed and investment securities.
At March 31, 2003, the Company held securities available for sale with a fair
market value of $3.0 billion, which included $2.2 billion of mortgage-backed
securities, of which $394.7 million consisted primarily of Puerto Rico GNMA
securities, the interest on which is tax-exempt to the Company. These securities
are generally held by the Company for longer periods prior to sale in order to
maximize the tax-exempt interest received thereon. R&G Financial's lower
effective tax rates compared to the maximum statutory rates reflect the
exemption under Puerto Rico law of the net interest income derived from such
securities. In addition, the Company invests in certain U.S. agency securities
that are exempt from Puerto Rico taxation and are not subject to federal income
taxation because the Company is entitled to rely on the portfolio interest
deduction. Finally, R&G Financial's international banking entities may invest in
various U.S. securities, the income on which is exempt from Puerto Rico income
taxation and is also not subject to federal income taxation on the basis of the
portfolio interest deduction.
20
A substantial portion of R&G Financial's total mortgage loan
originations has been comprised of refinance loans. R&G Financial's future
results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity. However, the Company believes
that refinancing activity is less sensitive to interest rate changes in Puerto
Rico than in the mainland United States because a significant amount of
refinance loans are made for debt consolidation purposes.
R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as loans
receivable.
FINANCIAL CONDITION
At March 31, 2003, total assets amounted to $6.9 billion, as compared
to $6.3 billion at December 31, 2002. The $612.9 million or 9.8% increase in
total assets between the comparable periods was primarily the result of a $399.2
million or 15.6% increase in mortgage-backed and investment securities available
for sale, and a $246.2 million or 8.9% increase in loans receivable, net, due to
record loan production during the quarter ended March 31, 2003.
At March 31, 2003, R&G Financial had $3.1 billion of borrowings
(consisting of securities sold under agreements to repurchase, notes payable,
FHLB advances and other borrowings), compared to $2.7 billion at December 31,
2002. R&G Financial utilized repurchase agreements and deposits to fund its
growth during the period; total deposits grew $7.1% from $2.8 billion at
December 31, 2002 to $3.0 billion at March 31, 2003, whereas repurchase
agreements increased by $341.6 million or 22.9%.
At March 31, 2003, R&G Financial's allowance for loan losses totaled
$33.3 million, which represented a $667,000 or 2.0% increase from the level
maintained at December 31, 2002. At March 31, 2003, R&G Financial's allowance
represented approximately 2.48% of the total loan portfolio and 41.86% of total
non-performing loans. However, excluding R&G Financial's residential loan
portfolio, which has minimal charge-off experience, the allowance for loan
losses to total loans and to total non-performing loans would have been 2.21%
and 109.56%, respectively, at March 31, 2003.
Non-performing loans amounted to $79.6 million at March 31, 2003, an
increase of $1.4 million when compared to $78.2 million at December 31, 2002. At
March 31, 2003, $49.2 million or 61.8% of non-performing loans consisted of
residential mortgage loans. Because of the nature of the real estate collateral,
R&G Financial has historically recognized a low level of loan charge-offs. R&G
Financial's aggregate charge-offs as a percentage of average loans outstanding
amounted to 0.41% during 2002 and 0.32% during 2001. Although loan delinquencies
have historically been higher in Puerto Rico than in the United States, actual
foreclosures and any resulting loan charge-offs have historically been lower
than in the United States. While the ratio of non-performing loans to total
loans decreased from 2.71% to 2.48% from December 31, 2002 to March 31, 2003,
the decrease in the ratio was nevertheless larger than it would otherwise have
been due to significant loan securitizations during 2000, 2001 and 2002, which
reduced the amount of loans held in portfolio considered in the calculation of
the ratio. Without giving effect to loan securitizations, as of March 31, 2003
and December 31, 2002, the ratio of non-performing loans to total loans would
have been 1.89% and 1.98%, respectively.
Stockholders' equity increased from $662.2 million at December 31, 2002
to $681.5 million at March 31, 2003. The $19.3 million or 2.9% increase was due
primarily to the net income recognized during the period, net of dividends paid.
21
RESULTS OF OPERATIONS
During the three months ended March 31, 2003, R&G Financial reported
net income of $29.1 million or $0.74 of earnings per diluted share, compared to
$21.5 or $0.58 of earnings per diluted share for the comparative three month
period ended March 31, 2002.
Net interest income increased by $10.2 million or 31.9% during the
comparable period to $42.2 million, primarily due to a $1.6 billion increase in
the average balance of interest-earning assets, partially offset by a 9 basis
point decrease in the net interest margin, from 2.92% to 2.81%. Included in
earning assets of the Company at March 31, 2003 were the assets of Crown Bank,
the Company's Florida-based banking subsidiary acquired during the second
quarter of 2002. The provision for loan losses amounted to $4.2 million during
the three months ended March 31, 2003, a 15.6% decrease compared to the prior
comparable period, reflecting R&G Financial's level of non-performing loans of
$79.6 million at March 31, 2003 compared to $78.2 million at December 31, 2002,
respectively.
R&G Financial also experienced an increase in non-interest income
during the three months ended March 31, 2003 over the comparable period. Net
gain on sale of loans increased by $15.3 million or 86.4% over the prior
comparable period, as a result of record loan production and sales. Total loan
production during the quarter ended March 31, 2003 amounted to $1.0 billion
compared to $577.7 million during the prior comparable period. Loan
administration and servicing fees also increased by $3.9 million or 41.9% over
the comparable periods, due to the growth in the loan servicing portfolio from
$7.3 billion as of March 31, 2002 to $10.9 billion at March 31, 2003, or an
increase of $3.6 billion. Such increase includes $2.6 billion acquired in
connection with the acquisition of Crown Bank. Other fee income also increased
by $1.9 million or 47.8%. Such increase reflects the added contributions made by
the Company's insurance agency and broker-dealer subsidiaries.
Total expenses increased by $21.2 million or 70.2% during the three
months ended March 31, 2003 over the comparable 2002 period, partially due to a
$5.1 million or 51.3% increase in employee compensation and benefits associated
with general growth in Company operations, including expenses associated with
the operations of Crown Bank, as well as to increased commissions and bonus
payments associated with increased loan production. The increase in total
expenses was also due to a $14.6 million or 91.8% increase in other
administrative and general expenses, which includes a $11.4 million increase in
expenses associated with impairment charges (including unscheduled amortization)
of the Company's servicing asset, as well as increased expenses related to the
operations of Crown Bank.
INTEREST RATE RISK MANAGEMENT
The following table summarizes the anticipated maturities or repricing
or R&G Financial's interest-earning assets and interest-bearing liabilities as
of March 31, 2003, based on the information and assumptions set forth in the
notes below. For purposes of this presentation, the interest earning components
of loans held for sale and mortgage-backed securities held in connection with
the Company's mortgage banking business as well as all securities held for
trading, are assumed to mature within one year. In addition, investments held by
the Company which have call features are presented according to their
contractual maturity date.
22
Within Four to More Than More Than
Three Twelve One Year to Three Years Over Five
(Dollars in thousands) Months Months Three Years to Five Years Years Total
---------- ----------- ----------- ------------- ----------- ----------
Interest-earning assets(1):
Loans receivable $1,194,847 $ 273,414 $ 424,681 $ 282,659 $ 861,031 $3,036,632
Mortgage loans held for sale 53,003 33,718 76,586 61,432 54,381 279,120
Mortgage-backed securities(2)(3) 155,697 432,437 424,119 289,266 1,031,575 2,333,094
Investment securities(3) 185,439 331,897 185,676 34,380 5,668 743,060
Other interest-earning assets(4) 67,014 -- -- -- -- 67,014
---------- ----------- ----------- --------- ----------- ----------
Total $1,656,000 $ 1,071,466 $ 1,111,062 $ 667,737 $ 1,952,655 $6,458,920
========== =========== =========== ========= =========== ==========
Interest bearing liabilities:
Deposits(5)
NOW and Super NOW accounts $ 21,693 $ 60,737 $ 66,767 $ 54,081 $ 230,555 $ 433,833
Passbook savings accounts 8,181 23,727 59,075 47,260 189,043 327,286
Regular and commercial checking 20,988 58,766 64,602 52,328 223,081 419,765
Certificates of deposit 446,167 496,736 474,816 396,172 2,231 1,816,122
FHLB advances 208,000 109,125 295,100 206,500 140,000 958,725
Securities sold under agreements to
repurchase(6) 868,234 336,193 248,708 240,000 138,200 1,831,335
Other borrowings(7)
---------- ----------- ----------- --------- ----------- ----------
Total 1,573,263 1,085,284 1,209,068 996,341 923,110 5,787,066
---------- ----------- ----------- --------- ----------- ----------
Effect of hedging instruments 180,000 (10,000) -- (90,000) (80,000) --
---------- ----------- ----------- --------- ----------- ----------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 262,737 ($ 23,818) ($ 98,006) ($418,604) $ 949,545 $ 671,854
========== =========== =========== ========= =========== ==========
Cummulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 262,737 $ 238,919 $ 140,913 ($277,691) $ 671,854
========== =========== =========== ========= =========== ==========
Cummulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets 3.81% 3.47% 2.05% (4.03)% 9.75%
========== =========== =========== ========= =========== ==========
(footnotes on following page)
23
---------------
(1) Adjustable-rate loans are included in the period in which interest
rates are next scheduled to adjust rather that in the period in which
they are due, and fixed-rate loans are included in the periods in which
they are scheduled to be repaid, based on scheduled amortization, in
each case as adjusted to take into account estimated prepayments.
(2) Reflects estimated prepayments in the current interest rate
environment.
(3) Includes securities held for trading, available for sale and held to
maturity.
(4) Includes securities purchased under agreement to resell, time deposits
with other banks and federal funds sold.
(5) Does not include non-interest-bearing deposit accounts.
(6) Includes federal funds purchased, if any
(7) Comprised of warehousing lines, notes payable and other borrowings.
---------------
As of March 31, 2003, the Company had a one year positive gap of
approximately $238.9 million which constituted 3.5% of total assets at such
date, compared to a positive gap of approximately $498.1 million or 7.9% of
total assets at December 31, 2002. R&G Financial's positive gap within one year
at March 31, 2003 and December 31, 2002 is due primarily to an increasing amount
of adjustable rate loans resulting from greater emphasis in commercial and
construction lending as well as to the extension during 2001 and 2002 of the
maturity dates of certain borrowings of the Company into longer-term maturities
at very attractive rates, taking advantage of consecutive reductions in interest
rates during such years. The Company estimates that as of March 31, 2003, close
to 43% of all borrowings of the Company had maturity dates longer than one
year.
While the above table presents the Company's loans receivable portfolio
held for investment purposes according to its maturity date, from time to time
the Company may negotiate special transactions with FHLMC and/or FNMA or other
third party investors for the sale of such loans. There can be no assurance,
however, that the Company will be successful in consummating any such
transactions.
The following table presents for the periods indicated R&G Financial's
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for non-banking subsidiaries and
average daily balances for banking subsidiaries in each case during the periods
presented.
24
For the three month period ended March 31,
2003 2002
-----------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
Interest-Earning Assets:
Cash and cash equivalents(1) $ 77,931 $ 265 1.36% $ 40,204 $ 232 2.31%
Investment securities available for sale 588,445 6,128 4.17 542,083 7,754 5.72
Investment securities held to maturity 30,466 399 5.24 23,686 322 5.44
Mortgage-backed securities held for trading 112,665 974 3.46 93,042 1,261 5.42
Mortgage-backed securities available for sale 1,961,327 26,819 5.47 1,494,962 23,155 6.20
Mortgage-backed securities held to maturity 45,129 854 5.80 51,369 761 5.93
Loans receivable, net (2) 3,106,837 51,955 6.69 2,075,727 38,503 7.42
FHLB of New York Stock 92,117 1,062 4.61 67,377 731 4.34
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 6,014,917 $88,256 5.87% 4,388,450 $72,719 6.63%
---------- ------- ------ ---------- ------- ------
Non-interest-earning assets 568,773 359,461
---------- ------- ------ ---------- ------- ------
Total assets $6,583,690 $4,747,911
========== ======= ====== ========== ======= ======
Interest-Bearing Liabilities:
Deposits $2,844,890 $21,693 3.05% $2,062,033 $20,826 4.04%
Securities sold under agreements to
repurchase (3) 1,720,267 12,771 2.97 1,309,024 12,343 3.77
Notes payable 230,702 1,870 3.24 242,450 1,772 2.92
Other borrowings(4) 987,288 9,701 3.93 494,135 5,773 4.67
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 5,783,147 $46,035 3.18% 4,107,642 $40,714 3.96%
---------- ------- ------ ---------- ------- ------
Non-interest-bearing liabilities 128,688 143,518
---------- ----------
Total liabilities 5,911,835 4,251,160
---------- ----------
Stockholders' equity 671,855 496,751
---------- ----------
Total liabilities and stockholders' equity $6,583,690 $4,747,911
========== ======= ====== ========== ======= ======
Net interest income; interest rate spread(5) $42,221 2.69% $32,005 2.67%
======= ====== ======= ======
Net interest margin 2.81% 2.92%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 104.01% 106.84%
====== ======
(footnotes on page 25)
25
---------------
(1) Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and other short
term investments.
(2) Includes mortgage loans held for sale and non-accrual loans.
(3) Includes federal funds purchased, if any
(4) Comprised of long-term debt, advances from the FHLB and other
borrowings.
(5) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-earning
assets.
---------------
MORTGAGE LOAN SERVICING
The following table sets forth certain information regarding the
mortgage loan servicing portfolio of R&G Financial for the periods indicated.
At or for the three month
period ended March 31,
-------------------------------
2003 2002
------------ -----------
(Dollars in thousands)
Composition of Servicing Portfolio at period end:
GNMA $ 2,559,133 $ 2,873,566
FNMA/FHLMC 5,425,414 2,562,129
Other mortgage loans(3) 2,892,433 1,875,371
------------ -----------
Total servicing portfolio(3) $ 10,876,980 $ 7,311,066
============ ===========
Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 10,991,945 $ 7,224,571
Add: Loan originations and purchases 676,109 457,818
Servicing of portfolio loans acquired 165,851 1,798
Less: Sale of servicing rights(1) (71,531) (55,423)
Run-offs(2) (885,394) (317,698)
------------ -----------
Ending servicing portfolio(3) $ 10,876,980 $ 7,311,066
============ ===========
Number of loans serviced 155,824 113,456
Average loan size $ 70 $ 64
Average servicing fee rate 0.48% 0.52%
---------------
(1) Corresponds to loans sold, servicing released, by Continental Capital.
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
26
(3) At the dates shown, included $1.3 billion and $942.6 million serviced
for Premier Bank, respectively, which constituted 12.4% and 12.9% of
the total servicing portfolio, respectively. At March 31, 2003, the
servicing portfolio also includes $86.5 million serviced for Crown
Bank, which constituted 0.79% of the total servicing portfolio at such
date.
---------------
Substantially all of the mortgage loans in R&G Financial's servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At March 31, 2003, approximately 32% of the
Company's mortgage servicing portfolio was related to mortgages secured by real
property located outside Puerto Rico.
The Company reduces the sensitivity of its servicing income to
increases in prepayment rates through a strong retail origination network that
has increased or maintained the size of R&G Financial's servicing portfolio even
during periods of high prepayments. In addition, a substantial portion of the
Company's servicing portfolio consists of tax-exempt FHA/VA mortgage loans which
carry lower interest rates than those on conventional loans, which tends to
reduce risks related to R&G Financial's servicing portfolio. During the quarter
ended March 31, 2003 and 2002, the Company recognized $6,708,000 and $1,973,000,
respectively, of unscheduled amortization on mortgage servicing rights.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and Atlanta (the "FHLB") and other short and
long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At March 31, 2003, the Company had $91.5 million in borrowing capacity
under unused warehousing and other lines of credit, $880.2 million in borrowings
capacity under unused lines of credit with the FHLB and $25 million under unused
fed funds lines of credit. The Company has generally not relied upon brokered
deposits as a source of liquidity.
At March 31, 2003, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans of $531.4 million (including
unused lines of credit). Certificates of deposit which are scheduled to mature
within one year totaled $865.2 million at March 31, 2003, and borrowings that
are scheduled to mature within the same period amounted to $1.7 billion. The
Company anticipates that it will have sufficient funds available to meet its
current loan commitments.
27
CAPITAL RESOURCES - The FDIC's capital regulations establish a minimum
3.0 % Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier 1 leverage ratio for such other banks
from 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At March 31,
2003, Premier Bank met each of its capital requirements, with Tier 1 leverage
capital, Tier 1 risk-based capital and total risk-based capital ratios of 6.61%,
11.90% and 12.89%, respectively. At March 31, 2003 Crown Bank also met each of
its capital requirements, with Tier 1 leverage capital, Tier 1 risk-based
capital and total risk-based capital ratios of 8.23%, 12.26% and 13.30%,
respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. R&G
Financial is currently in compliance with such regulatory capital requirements,
with Tier 1 leverage capital, Tier 1 risk-based capital and total risk based
capital ratios of 9.60%, 17.37% and 18.29%, respectively, as of March 31, 2003.
Effective December 31, 2002, the federal banking regulatory agencies
imposed a new dollar for dollar capital requirement on residual interests
retained in sale or securitization transactions and a 25% limit on Tier 1
capital that may consist of credit enhancing IO's. The capital ratios set forth
above include the impact of this new capital rule.
INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
28
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risks at December
31, 2002 are presented in Item 7A of the Company's Annual report on Form 10-K.
Information at March 31, 2003 is presented on page 21 of this Report. Management
believes there have been no material changes in the Company's market risk since
December 31, 2002.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon
that evaluation, the Company's Chief Executive Officer along with the Company's
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities and Exchange Commission ("SEC")
filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect these controls
subsequent to the date the Company carried out its evaluation.
Disclosure controls and procedures are Company controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
29
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
The Registrant is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed
by management to be immaterial to the financial condition and results
of operations of the Registrant.
ITEM 2: Changes in Securities
Not applicable.
ITEM 3: Defaults Upon Senior Securities
Not applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5: Other Information
Not applicable.
ITEM 6: Exhibits and Reports on Form 8-K.
(a) Item 601 Exhibits.
No. Description
--- -----------
2.1 Amended and Restated Agreement and Plan of Merger by and between R&G
Financial Corporation, R-G Premier Bank of Puerto Rico and R-G Interim
Premier Bank, dated as of September 27, 1996 (1)
2.2.0 Agreement and Plan of Reorganization among R&G Financial Corporation,
R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown
Bank, a Federal Savings Bank dated as of December 19, 2001 (2)
2.2.1 Amendment No. 2 to Agreement and Plan of Reorganization among R&G
Financial Corporation, R&G Acquisition Holdings Corporation, The Crown
Group, Inc. and Crown Bank, a Federal Savings Bank dated as of February
27, 2002 (3)
3.1.0 Certificate of Incorporation of R&G Financial Corporation (4)
3.1.1 Certificate of Amendment to Certificate of Incorporation of R&G
Financial Corporation (4) 3.1.2 Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (5) 3.1.3 Certificate of
Amendment to Amended and Restated Certificate of Incorporation of R&G
Financial Corporation (6)
3.1.4 Second Certificate of Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (15)
3.1.5 Certificate of Resolution designating the terms of the Series A
Preferred Stock (7)
3.1.6 Certificate of Resolution designating the terms of the Series B
Preferred Stock (8)
3.1.7 Certificate of Designation for Series C Preferred Stock (12)
3.1.8 Certificate of Designation for Series D Preferred Stock (13)
3.2 Bylaws of R&G Financial Corporation (4)
4.0 Form of Stock Certificate of R&G Financial Corporation (4)
4.1 Form of Series A Preferred Stock Certificate of R&G Financial
Corporation (9)
4.2 Form of Series B Preferred Stock Certificate of R&G Financial
Corporation (10)
4.3 Form of Series C Preferred Stock Certificate of R&G Financial
Corporation (11)
30
4.4 Form of Series D Preferred Stock Certificate of R&G Financial
Corporation (14)
10.1 Master Purchase, Servicing and Collection Agreement between R&G
Mortgage Corporation and R-G Premier Bank of Puerto Rico dated February
16, 1990, as amended on April 1, 1991, December 1, 1991, February 1,
1994 and July 1, 1994 (4)
10.2 Master Custodian Agreement between R&G Mortgage Corporation and R-G
Premier Bank of Puerto Rico dated February 16, 1990, as amended on June
27, 1996 (4)
10.3 Master Production Agreement between R&G Mortgage and R-G Premier Bank
of Puerto Rico dated February 16, 1990, as amended on August 30, 1991
and March 31, 1995 (4)
10.4 Data Processing Computer Service Agreement between R&G Mortgage and R-G
Premier Bank of Puerto Rico dated December 1, 1994 (4)
10.5 Securitization Agreement by and between R&G Mortgage and R-G Premier
Bank of Puerto Rico, dated as of July 1, 1995 (4)
10.6 R&G Financial Corporation Stock Option Plan (4)(*)
10.7 Guarantee Agreement between R&G Financial Corporation, R&G Acquisition
Holdings Corporation and Wilmington Trust as Guarantee Trustee with
respect to the Capital Securities issued by R&G Capital Trust I, dated
as of April 10, 2002 (16)
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
---------------
(1) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 333-13199) filed by the Registrant with the
Securities and Exchange Commission ("SEC") on October 1, 1996.
(2) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on December 20, 2001.
(3) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on February 28, 2002.
(4) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-06245) filed by the Registrant with the SEC on
June 18, 1996, as amended.
(5) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on November 19, 1999.
(6) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on June 12, 2001.
(7) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on August 31, 1998.
(8) Incorporated by reference from the Registrant's Form 10-K filed with
the SEC on April 13, 2000.
(9) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-60923) filed with the SEC on August
7, 1998.
(10) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-90463) filed with the SEC on November
5, 1999.
(11) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-55834) filed with the SEC on February 16,
2001.
(12) Incorporated by reference from the Registrant's Form 10-K filed with
the SEC on April 2, 2001.
(13) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on March 7, 2002.
(14) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (File No. 333-81214) filed with the SEC on January 22,
2002.
(15) Incorporated by reference from the Registrant's Current Report on Form
8-K filed with the SEC on June 18, 2002.
(16) Incorporated by reference from the Registrant's Form 10-Q filed with
the SEC on November 14, 2002.
(*) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Registrant filed the following Reports on Form 8-K during the
quarter ended March 31, 2003:
(1) Form 8-K filed on January 22, 2003 with an attached press release
announcing the Registrant's earnings for the fourth quarter and year ended
December 31, 2002.
(2) Form 8-K filed on March 31, 2003 in conjunction with the filing of the
Registrant's Form 10-K for the year ended December 31, 2002, containing the
certification required pursuant to Section 906 of the Sarbanes-Oxley Act.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: May 15, 2003 By: /S/ VICTOR J. GALAN
--------------------------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JOSEPH R. SANDOVAL
--------------------------------------
Joseph R. Sandoval
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
32
CERTIFICATIONS
I, Victor J. Galan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of R&G
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the periodic
report is being prepared;
(b) Evaluated the effectiveness of the registrant 's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and to the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Victor J. Galan
-----------------------------------------
Victor J. Galan
Chairman of the Board and Chief
Executive Officer
33
I, Joseph R. Sandoval, certify that:
1. I have reviewed this quarterly report on Form 10-Q of R&G
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the periodic
report is being prepared;
(b) Evaluated the effectiveness of the registrant 's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and to the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls;
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Joseph R. Sandoval
-----------------------------------------
Joseph R. Sandoval
Executive Vice President and Chief
Financial Officer
34