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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-21137
R&G FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
- ---------------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- ---------------------------------------- ---------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (787) 758-2424
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
Series A-D Noncumulative Perpetual Monthly Income Preferred Stock
(liquidation value $25 per share and par value $.01 per share)
--------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate value of the 18,482,423 shares of Class B Common Stock of the
Registrant issued and outstanding on such date, which excludes 1,003,863 shares
held by all directors and officers of the Registrant as a group, was
approximately $438.2 million. This figure is based on the last known trade price
of $23.71 per share of the Registrant's Class B Common Stock on June 28, 2002.
Number of shares of Class B Common Stock outstanding as of February 28, 2003:
19,486,286 (Does not include 14,553,056 shares of Class A Common Stock which are
exchangeable into shares of Class B Common Stock at the option of the holder.)
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 2002 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
A number of the presentations and disclosures in this Form 10-K,
including 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 Puerto
Rico and Florida;
- 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;
- 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;
- 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-K.
2
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.
ITEM 1: BUSINESS
GENERAL
THE COMPANY
R&G Financial Corporation ("R&G Financial" or the "Company") is a
Puerto Rico chartered, financial holding company that operates R&G Mortgage
Corp. ("R&G Mortgage"), the second largest mortgage company in Puerto Rico, R-G
Premier Bank of Puerto Rico ("Premier Bank"), a Puerto Rico commercial bank, and
Crown Bank, a Federal Savings Bank ("Crown Bank") (Premier Bank and Crown Bank
hereinafter collectively referred to as "banking subsidiaries" of R&G
Financial). Through R&G Mortgage, the Company also operates The Mortgage Store
of Puerto Rico, Inc. ("The Mortgage Store"), a Puerto Rico mortgage company, and
through Crown Bank, the Company operates Continental Capital Corp.
("Continental"), a mortgage banking company doing business in New York, New
Jersey, Connecticut, Florida and North Carolina. The Company also operates Home
& Property Insurance Corp., a Puerto Rico insurance agency, and R-G Investments
Corporation, a Puerto-Rico licensed broker-dealer registered with the National
Association of Securities Dealers ("NASD").
On June 7, 2002, R&G Financial, through its wholly-owned subsidiary R&G
Acquisition Holdings Corporation ("RAC"), a Florida corporation, acquired The
Crown Group, Inc., a Florida corporation, and its wholly-owned savings bank
subsidiary, Crown Bank, for an aggregate of $100.0 million in cash. Crown Bank,
operates in the Tampa-St. Petersburg-Clearwater and Orlando metropolitan areas
through 15 full-service offices.
The Orlando market is one of the fastest growing markets in Florida,
both generally and for Hispanics in particular (mainly Puerto Rican), and
provides the Company with what management believes is a cost effective way to
access the Hispanic markets in the United States, while providing a strong
platform for further expansion in Florida. Crown Bank's balance sheet is
complimentary to that of the Company and is predominantly secured by real
estate. In addition, the acquisition will allow the Company to access lower cost
funding in Florida as compared to Puerto Rico.
The Company is currently in its 31st year of operations and operates
its business through its subsidiaries. The Company is primarily engaged in
providing a full range of banking services, including commercial banking
services, corporate real estate and business lending, residential construction
lending, consumer lending and credit cards, offering a diversified range of
deposit products and, to a lesser extent, trust and investment services through
its private banking department and its broker-dealer. The Company is also
engaged in a range of real estate secured lending activities, including the
origination, servicing, purchase and sale of mortgages on single-family
residences, the securitization and sale of various mortgage-backed and related
securities and the holding and financing of mortgage loans and mortgage-backed
and related securities for sale or investment and the purchase and sale of
servicing rights associated with such mortgage loans.
The Company was organized in 1972 as R&G Mortgage Corp. and completed
its initial public offering in 1996, following its reorganization as a bank
holding company. As of December 31, 2002, the Company had total assets of $6.3
billion, total deposits of $2.8 billion and stockholders' equity of $662.2
3
million. At December 31, 2002, the Company operated 29 bank branches, mainly
located in the northeastern section of Puerto Rico, 15 bank branches in the
continental United States, located in Florida, 42 mortgage offices in Puerto
Rico and 5 mortgage offices in the United States, located in New York, North
Carolina and Florida.
The Company has generally sought to achieve long-term financial
strength and profitability by increasing the amount and stability of its net
interest income and non-interest income. The Company has sought to implement
this strategy by: (1) emphasizing the growth of its mortgage banking activities,
including the origination and sale of mortgage loans, and growing its loan
servicing operation; (2) expanding its retail banking franchise in order to
achieve increased market presence and to increase core deposits; (3) enhancing
its net interest income by increasing its loans held for investment,
particularly single-family residential loans, and investment securities; (4)
developing new business relationships through an increased emphasis on
commercial real estate and commercial business lending; (5) diversifying its
retail products and services, including an increase in consumer loan
originations; (6) meeting the banking needs of its customers through, among
other things, the offering of trust and investment services and insurance
products; (7) expanding its operations in the United States; and, (8)
emphasizing controlled growth, while pursuing a variety of acquisition
opportunities when appropriate.
The senior management of the Company is comprised of five executives
with an average of over 28 years of experience in the financial services
industry. Victor J. Galan is the Company's Chairman and Chief Executive Officer,
positions he has held since the Company's incorporation in 1996. Mr. Galan is
also the founder and Chairman of R&G Mortgage, a position he has held since
1972. Ramon Prats is the Company's President and Vice Chairman, positions he has
held since 2001 and 1996, respectively. Mr. Prats formerly was Executive Vice
President of R&G Mortgage, a position he held since 1980. Joseph Sandoval was
recently promoted to Executive Vice President and he has also been the Company's
Chief Financial Officer since 1997. Previously, Mr. Sandoval was an accountant
with a predecessor to PriceWaterhouseCoopers LLP. Mario Ruiz has been with R&G
Financial subsidiaries since 1990 and is presently Executive Vice President of
Premier Bank. Mr. Ruiz previously served in various capacities for R&G Mortgage
and The Mortgage Store. Steven Velez has been with R&G Mortgage since 1989 and
is presently Executive Vice President of R&G Mortgage.
During the past year, the Company participated in several financing
transactions. During March 2002, the Company issued 2,760,000 shares of the
Company's 7.25% Monthly Income Preferred Stock, Series D, for aggregate net
proceeds of $66.6 million. In April 2002 and December 2002, RAC formed R&G
Capital Trust I and R&G Capital Trust II, respectively, Delaware and Connecticut
business trusts, which issued $25.0 million and $10.0 million, respectively, of
trust preferred securities in private placements. Such securities are included
within notes payable in the Company's Consolidated Statements of Financial
Condition. The Company has guaranteed certain obligations of RAC to R&G Capital
Trust I related to the payment of interest by RAC on the trust preferred
securities and the eventual redemption of the trust preferred securities at
maturity.
In August 2002, the Company completed an offering of 4,025,000 shares
of its Class B Common Stock, comprised of 2,525,000 shares offered by the
Company and 1,500,000 shares offered by Victor J. Galan, the Company's Chairman
and Chief Executive Officer. The aggregate net proceeds to the Company from the
offering were $45.2 million. The Company did not receive any proceeds from the
sale of shares by Mr. Galan.
Effective July 12, 2002, the Company began trading its Class B Common
Stock on the New York Stock Exchange under the symbol "RGF." At such time, the
Company voluntarily delisted its Class B Common Stock from trading on The Nasdaq
National Market.
4
The Company's principal executive offices are located at 280 Jesus T.
Pinero Avenue, San Juan, Puerto Rico 00918 and its telephone number is (787)
758-2424.
BANKING OPERATIONS
General. The Company provides a full range of banking services through
its banking subsidiaries, including residential, commercial and personal loans
and a diversified range of deposit products. Premier Bank also provides private
banking, trust and other financial services to its customers.
R&G Financial's banking business consists principally of holding
deposits from the general public and using them, together with funds obtained
from other sources, to originate and purchase loans secured primarily by
residential real estate, and to purchase mortgage-backed and other securities.
To a lesser extent, but with increasing emphasis over the past few years, R&G
Financial also originates construction loans and loans secured by commercial
real estate, as well as consumer and personal loans and commercial business
loans. Such loans offer higher yields, are generally for shorter terms and offer
the Company an opportunity to provide a greater range of financial services to
its customers. Premier Bank also offers trust services through its trust
department. To date, Premier Bank has engaged in business solely in Puerto Rico.
Crown Bank conducts business from its Florida locations, and Continental
originates retail construction and commercial loans in New York, New Jersey,
Connecticut, North Carolina and Florida.
Residential Loans. At December 31, 2002, R&G Financial's loans
receivable, net, totaled $2.8 billion, which represented 44.0% of R&G
Financial's $6.3 billion of total assets. At such date, all but $250,000 of R&G
Financial's loans receivable were held by its banking subsidiaries. R&G
Financial's loan portfolio historically has had a substantial amount of loans
secured by first mortgage liens on existing single-family residences. At
December 31, 2002, $1.5 billion, or 52.0% of R&G Financial's total loans held
for investment, consisted of such loans, of which all but $3.1 million consisted
of conventional loans.
Construction Loans. At December 31, 2002, retail construction loans
amounted to $104.1 million, or 3.6% of R&G Financial's total loans held for
investment, while commercial construction and land acquisition loans amounted to
$302.4 million in the aggregate, or 10.5% of total loans held for investment.
R&G Financial intends to continue to increase its involvement in single-family
residential construction lending. Such loans afford the Company the opportunity
to increase the interest rate sensitivity of its loan portfolio.
Commercial Loans. R&G Financial also originates mortgage loans secured
by commercial real estate, primarily office buildings, retail stores, warehouses
and general purpose industrial space. At December 31, 2002, $582.1 million, or
20.2% of R&G Financial's total loans held for investment, consisted of such
loans. Finally, R&G Financial also offers commercial business loans, including
working capital lines of credit, inventory and accounts receivable loans,
equipment financing (including equipment leases), term loans, insurance premium
loans and loans guaranteed by the Small Business Administration and various
consumer loans. At December 31, 2002, consumer loans, which are largely secured
by real estate and deposits, amounted to $200.9 million, or 7.0% of total loans
held for investment, and commercial business loans amounted to $152.7 million,
or 5.3% of total loans held for investment.
5
MORTGAGE BANKING
Originations. The Company is the second largest mortgage loans
originator and servicer of mortgage loans on single family residences in Puerto
Rico. R&G Mortgage is primarily engaged in the business of originating first and
second mortgage loans on single-family residential properties secured by real
estate. R&G Mortgage also originates residential mortgage loans through The
Mortgage Store, its wholly-owned subsidiary. Pursuant to agreements entered into
between R&G Mortgage and Premier Bank, non-conforming conventional single-family
residential loans and consumer loans secured by real estate are also originated
by R&G Mortgage for portfolio retention by Premier Bank. Premier Bank retains
most of the nonconforming conventional single-family residential loans because
these loans generally do not satisfy resale guidelines of purchasers in the
secondary mortgage market, primarily because of size (in the case of "jumbo"
loans) or other underwriting technicalities (mostly related to documentation
requirements) at the time of origination. Jumbo loans may be packaged and sold
in the secondary market, while loans with underwriting technicalities may be
cured through payment experience and subsequently sold. Management believes that
these loans are essentially of the same credit quality as conforming loans.
During the years ended December 31, 2002, 2001 and 2000, R&G Financial
originated a total of $2.0 billion, $1.8 billion and $1.1 billion of residential
mortgage loans, respectively. These aggregate originations include loans
originated by R&G Mortgage directly for Premier Bank of $811.8 million, $664.8
million and $451.4 million during the years ended December 31, 2002, 2001 and
2000, respectively, or 41%, 36% and 43%, respectively, of total originations.
The loans originated by R&G Mortgage for Premier Bank are comprised primarily of
conventional residential loans and, to a lesser extent, residential construction
loans and consumer loans secured by real estate.
Continental has historically originated residential FHA/VA as well as
conventional conforming mortgage loans from all its offices, and interim
construction loans to builders from its North Carolina office, retaining 5% and
selling the balance to a non-affiliated bank. As a subsidiary of Crown Bank,
Continental plans on continuing this business, as well as originating commercial
loans and retail construction loans in New York in fiscal 2003. Crown Bank
intends to retain the commercial and retail construction loans in its portfolio.
Servicing. R&G Financial's servicing portfolio has grown significantly
over the past several years. During the second quarter of 2002, the Company
acquired a servicing portfolio of $2.6 billion as part of its acquisition of
Crown Bank. At December 31, 2002, R&G Financial's servicing portfolio totaled
$11.0 billion and consisted of a total of 158,659 loans. These amounts include
R&G Mortgage's servicing portfolio, totaling $7.2 billion, Crown Bank's
servicing portfolio, totaling $3.3 billion, and Continental's servicing
portfolio, totaling $470.1 million, at December 31, 2002. At December 31, 2002,
R&G Financial's servicing portfolio included $1.1 billion of loans serviced for
Premier Bank and $100.9 million of loans serviced for Crown Bank, or 10.3% and
0.9%, respectively, of the total servicing portfolio. Substantially all of the
mortgage loans in R&G Financial's servicing portfolio are secured by
single-family residences. R&G Financial generally retains the servicing function
with respect to the loans which have been securitized and sold.
Securitizations. R&G Financial pools Federal Housing Administration,
the "FHA," and Veterans Administration, the "VA," loans into mortgage-backed
securities which are guaranteed by the Government National Mortgage Association,
the "GNMA." These securities are sold to securities broker-dealers and other
investors in Puerto Rico. Conventional loans may either be sold directly to
agencies such as the Federal National Mortgage Association, the "FNMA," and the
Federal Home Loan Mortgage Corporation, the "FHLMC," or to private investors, or
may be pooled into FNMA or FHLMC mortgage-backed securities, which are generally
sold to investors. During the years ended December 31, 2002, 2001 and 2000, R&G
Financial sold $1.2 billion, $1.1 billion and $637.8 million of loans,
respectively, as part
6
of its mortgage banking activities, which includes loans securitized and sold,
but does not include loans originated for Premier Bank or loans securitized for
other institutions.
REGULATION
The Company operates its businesses under a variety of federal, state
and Puerto Rico laws and rules. As a financial holding company, it is subject to
the rules of the Board of Governors of the Federal Reserve System and the Office
of the Puerto Rico Commissioner of Financial Institutions, the "OCFI." Among
other things, the Company is required to meet minimum capital requirements, and
its activities are limited to those that are determined to be financial in
nature or incidental or complimentary to a financial activity.
Premier Bank is subject to extensive regulation and examination by the
Federal Deposit Insurance Corporation, or "FDIC," and by the OCFI, and Crown
Bank is subject to extensive regulation and supervision by the Office of Thrift
Supervision, or "OTS." This regulation and supervision establishes a
comprehensive framework of activities in which the Company's banking
subsidiaries can engage. In addition, the FDIC and the OTS are required to take
"prompt corrective action" if a given bank does not meet its minimum capital
requirements. The FDIC and the OTS have established five capital tiers to
implement this requirement, from "well capitalized" to "critically
undercapitalized." A bank's capital tier will depend on various capital measures
and other qualitative factors and will subject it to specific requirements. As
of December 31, 2002, Premier Bank and Crown Bank met the capital measures for
being "well capitalized" under the regulations.
The Company's mortgage banking business is subject to the rules of the
FHA, VA, GNMA, FNMA, FHLMC and the Department of Housing and Urban Development
with respect to originating, processing, selling and servicing mortgage loans.
In addition to these rules, the Company's Puerto Rico mortgage banks are
subject to the rules of the OCFI and Continental is subject to the rules of the
OTS. Among other things, all of these rules prohibit discrimination, establish
underwriting guidelines, require credit reports, fix maximum loan amounts and,
in some cases, fix maximum interest rates.
LENDING ACTIVITIES FROM BANKING OPERATIONS
General. At December 31, 2002, R&G Financial's loans receivable, net
totaled $2.8 billion, which represented 44.0% of R&G Financial's $6.3 billion of
total assets. At December 31, 2002, all but $250,000 of R&G Financial's loans
receivable, net were held by its banking subsidiaries. The principal category of
loans in R&G Financial's portfolio are conventional loans which are secured by
first liens on single-family residences. Conventional residential real estate
loans are loans which are neither insured by the FHA nor partially guaranteed by
the VA. At December 31, 2002, all but $3.1 million of R&G Financial's first
mortgage single-family residential loans consisted of conventional loans. The
other principal categories of loans in R&G Financial's loans receivable, net
portfolio are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.
7
Loan Portfolio Composition. The following table sets forth the
composition of R&G Financial's loan portfolio by type of loan at the dates
indicated. Except as noted in the footnotes to the table, all of the loans are
held by banking subsidiaries of R&G Financial.
December 31,
-----------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ---------- -------
(Dollars in Thousands)
Residential real estate -
first mortgage ................ $ 1,500,572 52.05% $ 1,006,073 52.59% $1,005,033 58.43%
Residential real estate -
second mortgage ............... 40,429 1.40 33,321 1.74 27,419 1.59
Retail construction ............. 104,075 3.61 50,767 2.65 47,698 2.77
Commercial construction
and land acquisition(1) ....... 302,411 10.49 221,537 11.58 137,640 8.00
Commercial real estate .......... 582,114 20.19 340,139 17.78 270,459 15.72
Commercial business ............. 152,743 5.30 79,909 4.18 59,120 3.44
Consumer loans:
Loans secured by deposits ..... 28,070 0.97 26,176 1.37 26,926 1.57
Real estate secured
consumer loans .............. 68,156 2.36 83,509 4.37 100,357 5.83
Unsecured consumer loans ...... 104,715 3.63 71,507 3.74 45,563 2.65
----------- ----- ----------- ------ ---------- ------
Total loans receivable ...... 2,883,285 100.00% 1,912,938 100.00% 1,720,615 100.00%
----------- ------ ----------- ------ ---------- ------
Less:
Allowance for loan losses ..... (32,676) (17,428) (11,600)
Loans in process .............. (90,432) (92,935) (78,163)
Deferred loan fees ............ (45) 20 909
Unearned interest ............. (443) (207) (85)
----------- ----------- ----------
(123,596) (110,550) (88,939)
----------- ----------- ----------
Loans receivable, net(2) ...... $ 2,759,689 $ 1,802,388 $1,631,276
=========== =========== ==========
December 31,
-----------------------------------------------------
1999 1998
------------------------- -----------------------
Amount Percent Amount Percent
---------- ------- ------- -------
Residential real estate - first mortgage.......... $1,099,843 68.47% $735,795 66.87%
Residential real estate - second mortgage.......... 13,029 0.81 18,634 1.69
Retail construction................................ 38,950 2.42 23,280 2.12
Commercial construction and land acquisition(1).... 61,037 3.80 15,353 1.39
Commercial real estate............................. 204,155 12.71 117,151 10.65
Commercial business................................ 54,231 3.38 46,532 4.23
Consumer loans:
Loans secured by deposits....................... 20,539 1.28 17,225 1.56
Real estate secured consumer loans.............. 76,944 4.79 85,055 7.73
Unsecured consumer loans........................ 37,653 2.34 41,381 3.76
---------- ------ --------- ------
Total loans receivable........................ 1,606,381 100.00% 1,100,406 100.00%
---------- ------ --------- ------
Less:
Allowance for loan losses....................... (8,971) (8,055)
Loans in process................................ (33,526) (18,170)
Deferred loan fees.............................. (437) (166)
Unearned interest............................... (440) (347)
---------- ----------
(43,374) (26,738)
---------- ----------
Loans receivable, net(2)........................ $1,563,007 $1,073,668
========== ==========
- -----------------
(1) Includes $250,000, $665,000, $1.2 million, $545,000 and $249,000 of
loans held by R&G Mortgage at December 31, 2002, 2001, 2000, 1999 and
1998, respectively.
(2) Does not include mortgage loans held for sale of $258.7 million, $236.4
million, $95.7 million, $77.3 million and $117.1 million at December
31, 2002, 2001, 2000, 1999 and 1998, respectively, of R&G Mortgage.
8
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 2002 regarding the dollar
amount of loans maturing in R&G Financial's total loan portfolio based on the
contractual terms to maturity. Loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
Due 1-5 Due 5 or more
years after years after
Due 1 year December 31, December 31,
or less 2002 2002 Total(1)
---------- ------------ ------------- ------------
(In Thousands)
Residential real estate................... $ 117,341 $ 78,907 $ 1,344,753 $ 1,541,001
Retail construction....................... 103,141 460 474 104,075
Commercial real estate(2)................. 377,182 346,502 160,841 884,525
Commercial business....................... 81,068 47,623 24,052 152,743
Consumer:
Loans on savings....................... 16,043 11,779 248 28,070
Real estate secured consumer loans..... 8,413 11,975 47,768 68,156
Unsecured consumer loans............... 49,054 46,619 9,042 104,715
--------- ---------- ------------ -----------
Total(3).................................. $ 752,242 $ 543,865 $ 1,587,178 $ 2,883,285
========= ========== ============ ===========
- -----------------------
(1) Amounts have not been reduced for the allowance for loan losses, loans
in process, deferred loan fees or unearned interest.
(2) Includes $302.4 million of commercial construction and land acquisition
loans.
(3) Does not include mortgage loans held for sale.
The following table sets forth the dollar amount of total loans at
December 31, 2002 which have fixed interest rates or which have floating or
adjustable interest rates.
Floating or
Fixed rate adjustable-rate Total
---------- --------------- -----------
(In Thousands)
Residential real estate................... $1,527,896 $ 13,105 $ 1,541,001
Retail construction....................... 62,099 41,976 104,075
Commercial real estate(1)................. 252,805 631,720 884,525
Commercial business....................... 79,547 73,196 152,743
Consumer:
Loans on savings....................... 28,070 -- 28,070
Real estate secured consumer loans..... 61,680 6,476 68,156
Unsecured consumer loans............... 104,715 -- 104,715
---------- --------- -----------
Total..................................... $2,116,812 $ 766,473 $ 2,883,285
========== ========= ===========
- ---------------------
(1) Includes $302.4 million of commercial construction and land acquisition
loans.
Scheduled contractual amortization of loans does not reflect the
expected term of R&G Financial's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sales clauses, which give R&G Financial the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans
9
tends to increase when current mortgage loan rates are higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are lower than current mortgage loan rates (due to refinancing of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstance, the weighted average yield on loans decreases as higher-yielding
loans are repaid or refinanced at lower rates.
Origination, Purchases and Sales of Loans. The following table sets
forth loan originations, purchases and sales from banking operations for the
periods indicated.
Year Ended December 31,
------------------------------------------------
2002 2001 2000
------------------------------------------------
(Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages................................... $ 764,115 $625,798 $ 378,398
Commercial mortgages.................................... -- -- --
Residential construction................................ 45,026 29,353 29,063
Consumer loans.......................................... 2,632 9,658 43,943
------------- ---------- -----------
Total loans originated by R&G Mortgage................ 811,773 664,809 451,404
------------- ---------- -----------
Other loans originated:
Residential real estate (1)............................. 26,163 -- --
Commercial real estate.................................. 357,718 213,215 150,329
Commercial business..................................... 62,965 59,074 48,060
Construction and development (2)........................ 143,356 171,026 127,473
Consumer loans:
Loans on deposit........................................ 40,061 48,730 45,474
Real estate secured consumer loans...................... 4,191 -- --
Unsecured consumer loans................................ 90,431 63,702 32,517
------------- ---------- -----------
Total other loans originated.......................... 724,885 555,747 403,853
------------- ---------- -----------
Loans purchased......................................... 236,181 61,359 128,824
------------- ---------- -----------
Total loans originated and purchased.................. 1,772,839 1,281,915 984,081
------------- ---------- -----------
Loans sold.............................................. (35,311) (130,716) (105,653)
Loan participations sold................................ (43,301) (52,886) --
Loan principal reductions............................... (691,013) (486,410) (359,760)
------------- ---------- -----------
Net increase before other items, net.................... 1,003,214 611,903 518,668
Loans acquired in connection with acquisition of
Crown Bank.......................................... 486,958 -- --
Loans securitized and transferred to mortgage-backed
securities.......................................... (534,656) (421,645) (410,453)
------------- ---------- -----------
Net increase in loans................................... $ 955,516 $ 190,258 $ 108,215
============= ========== ===========
- ----------------------
(1) All of such loans were conventional loans.
(2) Includes $32.1 million and $34.6 million originated by Continental in
2002 and 2001, respectively.
R&G Financial, through its banking subsidiaries, originates for both
investment and sale mortgage loans secured by residential real estate (secured
by both first and second mortgage liens) as well as construction loans (for
residential real estate), commercial real estate loans, commercial business
loans and consumer loans.
R&G Mortgage assists Premier Bank in meeting its loan production
targets and goals by, among other things, (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and
conducting the initial processing of the requisite loan applications, consistent
with Premier Bank's underwriting guidelines; and (iii) providing personnel and
facilities with respect to the execution of loan agreements approved by Premier
Bank. R&G Mortgage performs the foregoing loan origination
10
services on behalf of Premier Bank with respect to residential mortgage loans,
some commercial real estate loans and construction loans. R&G Mortgage receives
from Premier Bank 75% of the applicable loan origination fee with respect to
loans originated by R&G Mortgage on behalf of Premier Bank. During the years
ended December 31, 2002, 2001 and 2000, R&G Mortgage received $11.6 million,
$10.3 million and $8.1 million, respectively, of loan origination fees with
respect to loans originated by R&G Mortgage on behalf of Premier Bank. These
fees are eliminated in consolidation in R&G Financial's Consolidated Financial
Statements. See "- Regulation - R&G Financial - Limitations on Transactions with
Affiliates."
R&G Financial originates commercial real estate, commercial business
and consumer loans. Applications for commercial real estate, commercial business
and unsecured consumer loans are taken at all branch offices of the Company's
banking subsidiaries, and may be approved by lending officers of each banking
subsidiary within designated limits which are established and modified from time
to time to reflect an individual's expertise and experience. All loans in excess
of an individual's designated limits are referred to an officer with the
requisite authority. In addition, Premier Bank's Management Credit Committee is
authorized to approve all loans not exceeding $5.0 million, and the Executive
Committee of the Board of Directors is authorized to approve all loans exceeding
$5.0 million. In the case of Crown Bank, all loans over $1 million require
approval by Crown Bank's Credit Committee and Board of Directors. Management of
R&G Financial believes that its relatively centralized approach to approving
loan applications ensures strict adherence to its underwriting guidelines, while
still allowing the Company to approve loan applications on a timely basis.
R&G Financial also purchases conventional loans secured by first liens
on single-family residential real estate from unrelated financial institutions.
Such loan purchases are underwritten pursuant to the same guidelines as direct
loan originations. During the years ended December 31, 2002, 2001 and 2000,
Premier Bank purchased $236.2 million, $61.4 million and $128.8 million of
loans, respectively. Crown Bank did not purchase any such loans during the years
ended December 31, 2002, 2001 and 2000.
During the years ended December 31, 2001 and 2000, loans sold from
banking operations were $130.7 million and $105.7 million, respectively. These
loans, which were primarily nonconforming loans at the time of origination, were
generally sold in packages in privately negotiated transactions with FNMA and
FHLMC or other private parties.
R&G Mortgage services all loans held in Premier Bank's portfolio
(including single-family residential loans retained by Premier Bank, commercial
real estate, commercial business and consumer loans (although R&G Mortgage does
not actually acquire such servicing rights)). In addition, Premier Bank
processes payments on all loans serviced by R&G Mortgage on behalf of Premier
Bank. Finally, R&G Mortgage renders securitization services with respect to the
pooling of some of Premier Bank's mortgage loans into mortgage-backed
securities. See "- Mortgage Banking Activities."
Single-Family Residential Real Estate Loans. R&G Financial historically
has had a substantial portion of its lending activities in the origination of
loans secured by first mortgage liens on existing single-family residences. At
December 31, 2002, $1.5 billion or 52.0% of R&G Financial's total loans held for
investment consisted of such loans, of which all but $3.1 million consisted of
conventional loans. Premier Bank's first mortgage single-family residential
loans consist exclusively of fixed-rate loans with terms of between 15 and 30
years. As evidenced by this statistic, the Puerto Rico residential mortgage
market has not been receptive to long-term adjustable rate mortgage loans.
11
R&G Financial's first mortgage single-family residential loans
typically do not exceed 80% of the appraised value of the security property.
Pursuant to underwriting guidelines adopted by its Board of Directors, R&G
Financial may lend up to 95% of the appraised value of the property securing a
first mortgage single-family residential loan provided it is with private
mortgage insurance with respect to the top 25% of the loan.
The Company also originates loans secured by second mortgages on
single-family residential properties. At December 31, 2002, $40.4 million or
1.4% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. R&G Financial offers
such second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-value ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).
Construction Loans. At December 31, 2002, retail construction ("spot")
loans amounted to $104.1 million or 3.6% of R&G Financial's total loans held for
investment, while commercial construction and land acquisition loans amounted to
$302.4 million or 10.5% of total loans held for investment.
Premier Bank and Crown Bank offer "spot" loans to individual borrowers
for the purpose of constructing single-family residences. Substantially all of
the Company's construction lending to individuals is originated on a
construction/permanent mortgage loan basis. Construction/permanent loans are
made to individuals who hold a contract with a general contractor acceptable to
the Company to construct their personal residence. The construction phase of the
loan provides for monthly payments on an interest only basis at a designated
fixed rate for the term of the construction period, which generally does not
exceed nine months. Thereafter, the permanent loan is made at then market rates,
provided that such rate shall not be more than 2% greater than the interim
construction rate. In the case of Premier Bank, R&G Mortgage's construction loan
department approves the proposed contractors and administers the loan during the
construction phase. The Company's construction/permanent loan program has been
successful due to its ability to offer borrowers a single closing and,
consequently, reduced costs.
R&G Financial also originates construction loans to developers to
develop single family residential properties. At December 31, 2002, R&G
Financial had residential construction loans to develop single-family residences
with an aggregate principal balance of $208.2 million. Commitments for future
funding included in such amount approximate $49.8 million. In addition, R&G
Financial had loans to develop commercial properties with an aggregate principal
balance of $42.8 million. All loans are performing in accordance with their
terms at December 31, 2002.
In addition to the foregoing, at December 31, 2002, R&G Financial had
land acquisition loans with an aggregate balance of $50.4 million, which were
made in connection with projects to construct single-family residences. R&G
Financial and the financial institution which made the interim construction loan
have entered into an agreement pursuant to which R&G Financial is to be paid a
percentage of the proceeds from each home as it is released upon construction
and sale. R&G Financial expects to make the permanent construction loan on some
of these projects. Premier Bank has also made a working capital/pre-development
loan with an outstanding principal balance of $1.0 million at December 31, 2002
which is secured by land.
R&G Financial intends to continue to increase their involvement in
single-family residential construction lending. Such loans afford the Company
the opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction lending is generally considered to involve a higher level of
12
risk as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated costs (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. The Company has taken steps to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. In addition, the Company has adopted underwriting guidelines which
impose stringent loan-to-value, debt service and other requirements for loans
which are believed to involve higher elements of credit risk and by working with
builders with whom it has established relationships or knowledge thereof. At
December 31, 2002, $1.5 million of R&G Financial's retail construction loans
were classified as non-performing. As of such date, no commercial construction
or land acquisition loans were non-performing.
Commercial Real Estate Loans. The Company also originates mortgage
loans secured by commercial real estate. At December 31, 2002, $582.1 million or
20.2% of R&G Financial's total loans held for investment consisted of such
loans. At December 31, 2002, $29.4 million of R&G Financial's commercial
real estate loans were classified as nonperforming.
Commercial real estate loans of the Company are primarily secured by
office buildings, retail stores, warehouses and general purpose industrial
space. Although terms vary, commercial real estate loans generally are amortized
over a period of 7 to 15 years in Premier Bank and 10 to 20 years in Crown Bank,
and have maturity dates of 5 to 7 years in Premier Bank and 3 to 10 years in
Crown Bank. R&G Financial generally originates these loans with interest rates
which adjust monthly in accordance with a designated prime rate plus a margin,
which generally is negotiated at the time of origination. Such loans will have a
floor but no ceiling on the amount by which the rate of interest may adjust over
the loan term. Loan-to-value ratios on the Company's commercial real estate
loans are currently limited to 80% or lower. As part of the criteria for
underwriting commercial real estate loans, R&G Financial generally requires a
debt coverage ratio (the ratio of net cash from operations before payment of
debt service to debt service) of 1.20 or more. It is also the Company's policy
to seek additional protection to mitigate any weaknesses identified in the
underwriting process. Additional coverage may be provided through mortgage
insurance, secondary collateral and/or personal guarantees from the principals
of the borrower.
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. R&G Financial attempts to
minimize its risk exposure by limiting the extent of its commercial lending
generally. In addition, the Company imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral. Although the Company has
begun to increase its emphasis on commercial real estate lending, management
does not currently anticipate that the commercial real estate loans portfolio
will grow significantly as a percentage of the total loan portfolio.
Commercial Business Loans. The Company offers commercial business
loans, including working capital lines of credit, inventory and accounts
receivable loans, equipment financing (including equipment leases), term loans,
insurance premiums loans and loans guaranteed by the Small Business
Administration. Depending on the collateral pledged to secure the extension of
credit, maximum loan to value ratios are 75% or less, with exceptions permitted
to a maximum of 80%. Loan terms may vary
13
from one to 15 years. The interest rates on such loans are generally variable
and are indexed to a designated prime rate, plus a margin. The Company also
generally obtains personal guarantees from the principals of the borrowers. At
December 31, 2002, commercial business loans amounted to $152.7 million or 5.3%
of total loans held for investment. Although the Company has begun to increase
its emphasis on commercial business lending, management does not currently
anticipate that its portfolio of commercial business loans will grow
significantly as a percentage of the total loan portfolio.
Consumer Loans. R&G Financial also originates real estate secured
consumer loans. Such loans generally have shorter terms and higher interest
rates than other mortgage loans. At December 31, 2002, $200.9 million or 7.0% of
R&G Financial's total loans held for investment consisted of consumer loans.
This amount is comprised mostly of real estate secured consumer loans (which in
the case of Premier Bank are originated by R&G Mortgage) and deposit accounts,
but the Company also offers credit cards and other unsecured consumer loans.
Most of the Company's consumer loans are secured and have been primarily
obtained through newspaper advertising, although loans are also obtained from
existing and walk-in customers. Although R&G Financial has begun to increase the
emphasis on consumer lending, management does not currently anticipate that its
portfolio of consumer loans will grow significantly as a percentage of the total
loan portfolio.
R&G Financial currently offers loans secured by deposit accounts, which
amounted to $28.1 million at December 31, 2002. Such loans are originated
generally for up to 90% of the account balance, with a hold placed on the
account restricting the withdrawal of the account balance. R&G Financial offers
real estate secured loans in amounts up to 75% of the appraised value of the
property, including the amount of any existing prior liens. Real estate secured
consumer loans generally have a maximum term of 10 years, which may be extended
at management's sole discretion in certain circumstances, and an interest rate
which is set at a fixed rate based on market conditions. The loans are secured
with a first or second mortgage on the property, including loans where another
institution holds the first mortgage. At December 31, 2002, real estate secured
consumer loans totaled $68.2 million. At December 31, 2002, credit card
receivables, all held by Premier Bank, totaled $43.3 million.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency may not warrant further substantial collection efforts against the
borrower. At December 31, 2002, $5.3 million of consumer loans were classified
as non-performing, of which $4.5 million were secured by real estate.
Asset Quality. When a borrower fails to make a required payment on a
loan, R&G Financial attempts to cure the deficiency by contacting the borrower
and seeking payment. Contacts are generally made between the 10th and 15th day
after a payment is due. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days, the loan and payment history is reviewed and
efforts are made to collect the loan. While R&G Financial generally prefers to
work with borrowers to resolve such problems, when the account becomes 90 days
delinquent in the case of mortgage loans, R&G Financial does institute
foreclosure or other proceedings, as necessary, to minimize any potential loss.
In the case of consumer loans, the Company refers the file for collection action
after 60 days.
Loans secured by real estate are placed on non-accrual status when, in
the judgment of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. When such a loan is placed on
non-accrual status, previously accrued but unpaid interest is
14
deducted from interest income. As a matter of policy, R&G Financial does not
accrue interest on loans past due 90 days or more which are secured by real
estate. The Company generally takes the same position in the case of consumer
loans.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3"), which provides guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair
value minus estimated costs to sell the property, or cost (generally the balance
of the loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Company's
accounting for its real estate owned complies with the guidance set forth in
SOP 92-3.
15
The following table sets forth the amounts and categories of R&G
Financial's non-performing assets at the dates indicated. R&G Financial did not
have any troubled debt restructurings at any of the periods presented. Except as
otherwise indicated in the footnotes to the table, the non-performing assets are
assets of banking subsidiaries of the Company.
December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------ ------- -------
(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)..................... $43,281 $50,358 $79,234 $47,413 $32,973
Residential construction....................... 1,512 871 487 478 441
Commercial real estate......................... 29,375 16,945 11,881 9,005 6,463
Commercial business............................ 2,197 3,105 1,414 1,255 3,224
Consumer unsecured............................. 802 303 1,186 802 1,358
Other.......................................... -- -- -- 61 67
------- ------- ------- ------- --------
Total........................................ 77,167 71,582 94,202 59,014 44,526
------- ------- ------- ------- --------
Accruing loans greater than 90 days delinquent:
Residential real estate........................ 104 -- -- -- --
Residential construction....................... -- -- -- -- --
Commercial real estate......................... -- -- -- -- --
Commercial business............................ 261 462 420 63 61
Consumer....................................... 667 428 360 274 357
------- ------- ------- ------- --------
Total accruing loans greater than
90 days delinquent......................... 1,032 890 780 337 418
------- ------- ------- ------- --------
Total non-performing loans................... 78,199 72,472 94,982 59,351 44,944
------- ------- ------- ------- --------
Real estate owned, net of reserves................ 15,544(2) 10,061 9,056 5,852 4,041
Other repossessed assets.......................... 292 362 583 466 237
------- ------- ------- ------- --------
15,836 10,423 9,639 6,318 4,278
------- ------- ------- ------- --------
Total non-performing assets $94,035 $82,895 $104,621 $65,669 $49,222
======= ======= ======== ======= ========
Total non-performing loans as a
percentage of total loans(3) 2.71% 3.79% 5.52% 3.66% 4.08%
======= ======= ======== ======= ========
Total non-performing assets as a
percentage of total assets 1.50% 1.78% 2.96% 2.26% 2.41%
======= ======= ======== ======= ========
- ----------------------
(1) Includes $4.5 million, $5.8 million, $6.2 million, $6.1 million and $5.3
million consumer loans, respectively, held by Premier Bank secured by
first and second mortgages on residential real estate at December 31,
2002, 2001, 2000, 1999 and 1998, respectively. Also includes $6.5
million, $7.3 million, $17.6 million, $5.9 million and $4.3 million
residential real estate loans secured by first mortgages held by R&G
Mortgage at December 31, 2002, 2001, 2000, 1998 and 1998, respectively.
(2) Real estate owned, net of reserves, acquired in connection with the
acquisition of Crown Bank in 2002 amounted to $5.1 million.
(3) Non-performing loans at December 31, 2002 exclude $45.9 million
non-performing residential mortgage loans sold during 2002, and include
$13.2 million non-performing loans acquired in connection with the
acquisition of Crown Bank in June 2002. While the ratio of non-performing
loans to total loans decreased from 3.79% to 2.71% from December 31, 2001
to December 31, 2002, the ratio was nevertheless larger than it would
otherwise have been due to securitizations from the loan portfolio, which
reduced the amount of loans considered in the calculation of the ratio.
Without giving effect to loan securitizations, at December 31, 2002 and
2001, the ratio of non-performing loans to total loans would have been
1.98% and 2.75%, respectively.
16
Non-performing loans amounted to $78.2 million at December 31, 2002, as
compared to $72.5 million at December 31, 2001. The increase in the aggregate
amount of non-performing loans during 2002 is due primarily to $13.2 million of
non-performing loans (primarily commercial real estate) acquired in connection
with the acquisition of Crown Bank in June 2002. Non-performing loans at
December 31, 2002 exclude $45.9 million of residential mortgage loans sold
during 2002. An aggregate of $43.4 million or 55.5% of non-performing loans held
at December 31, 2002 consisted of residential mortgage loans. Because of the
nature of the collateral, R&G Financial has historically recognized a low level
of loan charge-offs. R&G Financial's aggregate charge-offs amounted to 0.41%
during 2002, as compared to 0.32% during 2001. Although loan delinquencies have
historically been higher in Puerto Rico than in the United States, loan
charge-offs have historically been lower than in the United States.
Non-performing residential loans decreased by $7.0 million or 13.8%
from December 31, 2001 to December 31, 2002. The average loan balance on
non-performing mortgage loans amounted to $58,000 at December 31, 2002. As of
such date, 391 loans with an aggregate balance of $25.0 million (including 135
consumer loans secured by real estate with an aggregate balance of $2.6 million)
were in the process of foreclosure. The total delinquency ratio (including loans
past due less than 90 days) on residential mortgages of banking subsidiaries,
excluding consumer loans secured by real estate, decreased from 6.40% in 2001 to
4.13% in 2002. The Company's loss experience on such portfolio has been minimal
over the last several years.
Non-performing commercial real estate loans increased by $12.4 million
or 73.4% from $16.9 million at December 31, 2001 to $29.4 million at December
31, 2002. A substantial amount of the increase in non-performing commercial real
estate loans is attributable to non-performing commercial real estate loans
acquired in connection with the acquisition of Crown Bank in 2002. The number of
loans delinquent over 90 days amounted to 145 loans at December 31, 2002, with
an average balance of $203,000. The largest non-performing commercial real
estate loan as of December 31, 2002 had a balance of $1.8 million.
Non-performing commercial business loans consist of 84 loans. Such
loans include 14 loans with an aggregate balance of $1.0 million which are 90%
guaranteed by the Small Business Administration, 38 commercial leases amounting
to $765,000 and 32 other commercial business loans with an aggregate balance of
$669,000. These loans have a combined average loan size of $29,000. The largest
non-performing commercial business loan as of December 31, 2002 had a $786,000
balance.
At December 31, 2002, R&G Financial's five largest loans-to-one
borrower and their related entities amounted to $30.9 million, $24.7 million,
$24.3 million, $23.7 million and $23.1 million. All of such loan concentrations
were performing at December 31, 2002.
At December 31, 2002, R&G Financial's allowance for loan losses totaled
$32.7 million, which represented a $15.2 million or 87.5% increase from the
level maintained at December 31, 2001. The allowance for loan losses at December
31, 2002 includes $7.5 million of acquired reserves in connection with the
acquisition of Crown Bank in June 2002. At December 31, 2002, R&G Financial's
allowance represented approximately 1.13% of the total loan portfolio and 41.79%
of total non-performing loans, as compared to 0.91% and 24.05% at December 31,
2001. The increase in the allowance for loan losses reflected the increase in
R&G Financial's commercial real estate and construction loan portfolio.
Allowance for Loan Losses. It is the policy of the Company to maintain
an allowance for estimated losses on loans based on a number of quantitative and
qualitative factors, including levels and trends of past due and nonaccrual
loans, levels and trends in asset classifications, change in volume and mix of
loans and collateral values. Quantitative factors used to assess the adequacy
of the allowance for loan losses are established based upon management's
assessment of the credit risk in the portfolio, historical loan loss experience
and our loan underwriting policies as well as management's judgment and
experience. Provisions for loan losses are provided on both a specific and
general basis. Specific and general valuation allowances are increased by
provisions charged to expense and decreased by charge-offs of loans, net of
recoveries. Specific allowances are provided for impaired loans for which the
expected loss is measurable. General valuation allowances are provided based on
a formula which incorporates the factors discussed above. R&G Financial
periodically reviews the assumptions and formula by which additions are made to
the specific and general valuation allowances for losses in an effort to refine
such allowances in light of the current status of the factors described above.
Although management believes that it uses the best information
available to make such determinations, future adjustments to the allowance may
be necessary, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations. Our amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates,
that may be beyond our control and future losses may exceed current estimates.
Premier Bank's and Crown Bank's Internal Asset Review Committee undertakes a
monthly evaluation of the adequacy of the allowance for loan losses, which is
reviewed and approved at least quarterly by the Board of Directors. We provide
an allowance to absorb losses that are both probable and reasonably quantifiable
as well as for those that are not specifically identified but can be reasonably
estimated.
17
The following table sets forth an analysis of R&G Financial's allowance
for loan losses during the periods indicated, of which $32.4 million is
maintained against the loan portfolios of the banking subsidiaries at December
31, 2002:
At and For the Year Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Balance at beginning of period ................ $ 17,428 $ 11,600 $ 8,971 $ 8,056 $ 6,772
---------- ---------- ---------- ---------- ----------
Charge-offs:
Residential real estate .................... 959 72 38 17 73
Construction ............................... -- -- -- -- --
Commercial real estate ..................... 3,263 1,090 468 353 --
Commercial business ........................ 3,547 2,899 1,539 1,548 1,485
Consumer ................................... 3,924 2,566 1,940 2,518 4,455
Other ...................................... -- -- -- 4 --
---------- ---------- ---------- ---------- ----------
Total charge-offs ........................ 11,693 6,627 3,985 4,440 6,013
---------- ---------- ---------- ---------- ----------
Recoveries:
Residential real estate .................... 135 -- -- -- --
Commercial real estate ..................... 15 11 80 69 --
Commercial business ........................ 709 131 381 332 20
Consumer ................................... 599 382 402 429 313
Other ...................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total recoveries ......................... 1,458 524 863 830 333
---------- ---------- ---------- ---------- ----------
Net charge-offs ............................... 10,235 6,103 3,122 3,610 5,680
---------- ---------- ---------- ---------- ----------
Transferred reserves from R&G Mortgage ........ -- 806 -- -- --
---------- ---------- ---------- ---------- ----------
Allowance for loan losses acquired
in acquisitions(1) ......................... 7,463 -- -- -- 364
---------- ---------- ---------- ---------- ----------
Provision for losses on loans ................. 18,020 11,125 5,751 4,525 6,600
---------- ---------- ---------- ---------- ----------
Balance at end of period ...................... $ 32,675 $ 17,428 $ 11,600 $ 8,971 $ 8,056
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of total
loans outstanding .......................... 1.13% 0.91% 0.67% 0.55% 0.74%
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
non-performing loans ....................... 41.79% 24.05% 12.21% 15.11% 17.92%
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
outstanding ................................ 0.41% 0.32% 0.17% 0.25% 0.55%
========== ========== ========== ========== ==========
- ---------------------------------
(1) Relates to acquired reserves in connection with the acquisition of Crown
Bank in 2002 and Fajardo Federal in 1998.
18
The following table sets forth information concerning the allocation of
R&G Financial's allowance for loan losses by loan category at the dates
indicated.
December 31,
---------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------ ------- ------------- --------- -------------
(Dollars in Thousands)
Residential real estate........ 2,982 9.13% $2,496 14.32% $ 1,278 11.02%
Construction................... 1,522 4.66 800 4.59 432 3.72
Commercial real estate......... 17,114 52.37 7,371 42.29 4,880 42.07
Commercial business............ 4,104 12.56 2,253 12.93 1,321 11.39
Consumer....................... 6,954 21.28 4,508 25.87 3,689 31.80
------- ------ ------- ------ --------- ------
Total.......................... $32,676 100.00% $17,428 100.00% $ 11,600 100.00%
======= ====== ======= ====== ========= ======
December 31,
---------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------------- ----------- ------- ------------
(Dollars in Thousands)
Residential real estate................... $1,419 15.82% $1,272 15.79%
Construction.............................. 186 2.07 46 0.57
Commercial real estate.................... 3,258 36.32 2,655 32.96
Commercial business....................... 1,063 11.85 1,033 12.82
Consumer.................................. 3,045 33.94 3,049 37.86
------ ------ ------ ------
Total..................................... $8,971 100.00% $8,055 100.00%
====== ====== ====== ======
The allowance for loan losses reflects management's judgment of the
level of allowance adequate to absorb estimated credit losses inherent in R&G
Financial's loan portfolio. The Board of Directors of R&G Financial approved a
policy formulated by management for a systematic analysis of the adequacy of the
allowance. The major elements of the policy consist of: (1) a monthly analysis
of reserve amounts at Premier Bank (quarterly at Crown Bank); (2) approval by
the Board of Directors of each banking subsidiary of the periodic analysis; and
(3) division of the reserve into specific allocation and unspecified reserve
portions. The analysis is based on management's assessment of the historic rate
of losses in addition to concentration, segmentation, regional economic
conditions, non-performing loan and asset levels, past due status, composition
of the portfolio, and other factors.
Specific Allocations. All classified loans are evaluated for loss
portions or potential loss exposure. The evaluation occurs at the time the loan
is classified and on a regular basis (at least every 360 days) thereafter. This
evaluation is documented in the Internal Asset Review Report relating to a
specific loan. Specific allocation of reserves considers the value of
collateral, the financial condition of the borrower, and industry and current
economic trends.
General Allowances. Management realizes that an institution's past
loss history should be considered in evaluating the inherent loss potential of
the loan portfolio. Consequently, management has deemed it prudent to develop
and implement a migration analysis for the determination of inherent loss
potential for both its homogeneous and non-homogeneous loan portfolios.
Homogeneous loan categories consist of one-to-four family residential mortgages
and consumer loans. Commercial business and commercial real estate loans less
than $500,000 are also treated as homogeneous loans for asset review purposes.
Homogeneous loans are analyzed on a group or pool basis for evaluating credit
quality and impairment under FASB's SFAS No 5. Non-homogeneous loan categories
consist of all other commercial business and commercial real estate loans.
These assets are reviewed individually for the purpose of evaluating credit
quality and impairment under FASB's SFAS No. 114. The migration loss percentage
factors used for each risk class or grade for both homogeneous and
non-homogeneous loan categories are based on the results of a 3 year migration
analysis.
General allowances are derived for consumer lending utilizing
historical loss factors derived through migration analysis and adjusting for
current trends, economic conditions and portfolio behavioral characteristics.
Consumer lending poses more inherent risks than one-to-four family residential
lending and, consequently, the loss factors are higher. Because of the Company's
limited loss history for one-to-four family residential loans in Crown Bank,
general allowances for Crown Bank are derived utilizing historical industry loss
factors, also adjusted for management's assessment of the qualitative factors
presented above. Loss factors are applied based upon delinquency status with
higher loss factors applied as the number of days past due increases.
MORTGAGE BANKING ACTIVITIES
Loan Originations, Purchases and Sales. During the years ended December
31, 2002, 2001 and 2000, R&G Financial originated a total of $2.0 billion, $1.8
billion and $1.1 billion of residential mortgage loans, respectively. These
aggregate originations include loans originated by R&G Mortgage directly for
Premier Bank of $811.8 million, $664.8 million and $451.4 million during the
years ended December 31, 2002, 2001 and 2000, respectively, of such
originations, or 41%, 36% and 43%, respectively, of total originations. The
loans originated by R&G Mortgage for Premier Bank are comprised primarily of
conventional residential loans and, to a lesser extent, consumer loans secured
by real estate.
R&G Financial is engaged to a significant extent in the origination of
FHA-insured and VA-guaranteed single-family residential loans which are
primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the years
ended December 31, 2002, 2001 and 2000, R&G Financial originated $365.2 million,
$482.7 million and $307.1 million, respectively, of FHA/VA loans, which
represented 18.6%, 26.4% and 29.2%, respectively, of total loans originated
during such respective periods.
19
R&G Financial also originates conventional single-family residential
loans which are either insured by private mortgage insurers or do not exceed 80%
of the appraised value of the mortgaged property. During the years ended
December 31, 2002, 2001 and 2000, R&G Financial originated $1.6 billion, $1.3
billion and $699.7 million, respectively, of conventional single-family
residential mortgage loans. Substantially all conforming conventional
single-family residential loans are securitized and sold in the secondary
market, while a substantial portion of non-conforming conventional single-family
residential loans are originated by R&G Mortgage (either directly or through The
Mortgage Store) on behalf of Premier Bank and either held by Premier Bank in its
portfolio or subsequently securitized by R&G Mortgage and/or sold in the
secondary market from time to time.
Non-conforming loans generally consist of loans which, primarily
because of size or other underwriting technicalities (mostly related to
documentation requirements) which may be cured through seasoning, do not satisfy
the guidelines for resale of FNMA, FHLMC, GNMA and other private secondary
market investors at the time of origination. Management believes that these
loans are essentially of the same credit quality as conforming loans. In
connection with mortgage operations, during the years ended December 31, 2002,
2001 and 2000, non-conforming conventional loans represented approximately 54%,
48% and 53%, respectively, of R&G Financial's total volume of mortgage loans
originated, most of which were originated by R&G Mortgage on behalf of Premier
Bank. During the years ended December 31, 2002, 2001 and 2000, 94.1%, 94.1% and
83.8% of loans originated by R&G Mortgage on behalf of Premier Bank consisted of
single-family residential loans during such respective periods. R&G Mortgage
originates single-family residential, construction and commercial real estate
loans on behalf of Premier Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and Premier Bank. See "- Lending Activities from
Banking Operations - Origination, Purchase and Sale of Loans."
While R&G Financial makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all of such loans consist of
fixed-rate mortgages. R&G Financial also offers second mortgage loans up to
$125,000 with a maximum term of 15 years. The maximum loan-to-appraised value
ratio on second mortgage loans permitted by R&G Financial is generally 75%
(including the amount of any first mortgage). In addition, R&G Financial also
offers real estate secured consumer loans up to $60,000 with a maximum term of
15 years. The maximum loan-to-appraised value ratio on real estate secured
consumer loans permitted by R&G Financial is generally 80%. R&G Financial will
secure such loans with either a first or second mortgage on the property.
The Company's loan origination activities in Puerto Rico are conducted
out of R&G Mortgage offices and mortgage banking centers, and in the continental
United States, mainly through loan officers and solicitors, out of Crown Bank's
branches and Continental's mortgage offices. Residential mortgage loan
applications are attributable to walk-in customers, existing customers and
advertising and promotion, referrals from real estate brokers and builders, loan
solicitors and mortgage brokers.
Loan origination activities performed by the Company include
soliciting, completing and processing mortgage loan applications and preparing
and organizing the necessary loan documentation. Loan applications are examined
for compliance with underwriting criteria and, if all requirements are met, the
Company issues a commitment to the prospective borrower specifying the amount of
the loan and the loan origination fees, points and closing costs to be paid by
the borrower or seller and the date on which the commitment expires.
R&G Mortgage also purchases FHA loans and VA loans from other mortgage
bankers for resale to institutional investors and other investors in the form of
GNMA mortgage-backed securities. R&G Mortgage's strategy is to increase its
servicing portfolio primarily though internal originations through its
20
branch network and, to a lesser extent, purchases from third parties. Purchases
of loans from other mortgage bankers in the wholesale loan market are generally
limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a
source of low cost production that allows R&G Mortgage to continue to increase
the size of its servicing portfolio. R&G Mortgage purchased $21.9 million, $29.3
million and $145.9 million of loans from third parties during the years ended
December 31, 2002, 2001 and 2000, respectively.
The following table sets forth loan originations, purchases and sales
from its mortgage banking business by R&G Financial for the periods indicated.
Year Ended December 31,
------------------------------------------------
2002 2001 2000
---------- ---------- ----------
(Dollars in Thousands)
Loans Originated For Premier Bank:
Conventional loans(1):
Number of loans ......................... 7,182 6,355 4,929
Volume of loans ......................... $ 809,141 $ 655,151 $ 407,461
FHA/VA loans:
Number of loans ......................... -- -- --
Volume of loans ......................... -- -- --
Consumer loans(2):
Number of loans ......................... 133 485 1,807
Volume of loans ......................... $ 2,632 $ 9,658 $ 43,943
Total loans:
Number of loans ......................... 7,315 6,840 6,736
Volume of loans ......................... $ 811,773 $ 664,809 $ 451,404
Percent of total volume ................. 41% 36% 38%
Loans Originated For Third Parties:
Conventional loans(1):
Number of loans ......................... 7,123 6,791 3,377
Volume of loans ......................... $ 782,782 $ 679,190 $ 292,283
FHA/VA loans:
Number of loans ......................... 3,537 4,823 3,241
Volume of loans ......................... $ 365,172 $ 482,721 $ 307,128
Total loans:
Number of loans ......................... 10,660 11,614 6,618
Volume of loans ......................... $1,147,954 $1,161,911 $ 599,411
Percent of total volume ................. 58% 63% 50%
---------- ---------- ----------
Total loan originations ............. $1,959,727 $1,826,720 $1,050,815
========== ========== ==========
Loans Purchased For R&G Mortgage:
Number of loans ......................... 283 371 1,627
Volume of loans(3) ...................... $ 21,890 $ 29,342 $ 145,881
Percent of total volume ................. 1% 1% 12%
---------- ---------- ----------
Total loan originations and purchases $1,981,617 $1,856,062 $1,196,696
========== ========== ==========
21
Year Ended December 31,
-----------------------------------------------------
2002 2001 2000
----------- ----------- ----------
(Dollars in Thousands)
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans ......................... 7,114 6,124 3,937
Volume of loans ......................... $ 794,869 $ 603,542 $ 332,930
FHA/VA loans:
Number of loans ......................... 2,668 3,365 4,167
Volume of loans ......................... $ 369,449 $ 513,366 $ 367,868
Total loans:
Number of loans ......................... 9,782 9,489 8,104
Volume of loans(3) ...................... $ 1,164,318 $ 1,116,908 $ 700,798
----------- ------------ -----------
Percent of total volume ................. 59% 60% 59%
Adjustments:
Loans originated for Premier Bank .......... $ (811,773) $ (664,809) $ (451,404)
Loan amortization .......................... (44,200) (31,802) (18,544)
----------- ----------- ------------
Net (decrease) increase in loans ............. $ (38,674) $ 42,543 $ 25,950
=========== ============ =========
Average Initial Loan Origination Balance:
Premier Bank:
Conventional loans(1) ................... $ 113 $ 103 $ 83
FHA/VA loans ............................ -- -- --
Third Parties:
Conventional loans(1) ................... $ 110 $ 100 $ 87
FHA/VA loans ............................ 103 100 95
Total
Conventional loans(1) ................... $ 111 $ 102 $ 84
FHA/VA loans ............................ 103 100 95
Refinancings(5):
Premier Bank ............................... 50% 57% 56%
Third Parties .............................. 56% 50% 29%
- -------------------
(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes $21.8 million, $27.1 million and $63.0 million of loans
purchased from another institution, and securitized and sold to the
same financial institution during 2002, 2001 and 2000, respectively.
(4) Includes loans converted into mortgage-backed securities.
(5) As a percent of the total dollar volume of mortgage loans originated by
R&G Mortgage for Premier Bank (excluding consumer loans) or third
parties, as the case may be. In the case of Premier Bank, refinancings
do not necessarily represent refinancings of loans previously held by
Premier Bank.
All loan originations, regardless of whether originated through the
Company or purchased from third parties, must be underwritten in accordance with
R&G Financial's underwriting criteria, including loan-to-appraised value ratios,
borrower income qualifications, debt ratios and credit history, investor
requirements, necessary insurance and property appraisal requirements. R&G
Financial's underwriting standards also comply with the relevant guidelines set
forth by HUD, VA, FNMA, FHLMC, bank regulatory authorities, private mortgage
investment conduits and private mortgage insurers, as applicable.
22
The Company's underwriting personnel, while operating out of its loan offices,
make underwriting decisions independent of the Company's mortgage loan
origination personnel.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 7% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. The Company receives these fees on mortgage loans originated through its
retail branches. The Company may charge additional fees depending upon market
conditions and regulatory considerations as well as the Company's objectives
concerning mortgage loan origination volume and pricing. The Company incurs
certain costs in originating mortgage loans, including overhead, out-of-pocket
costs and, in some cases, where the mortgage loans are subject to a purchase
commitment from private investors, related commitment fees. The volume and type
of mortgage loans and of commitments made by investors vary with competitive and
economic conditions (such as the level of interest rates and the status of the
economy in general), resulting in fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
current expense. Direct origination costs and origination income must be
deferred and amortized using the interest method, until the repayment or sale of
the related mortgage loans. Historically, the value of servicing rights which
result from R&G Financial's origination activities has exceeded the net costs
attributable to such activities.
R&G Financial customarily sells most of the loans that it originates,
except for those originated on behalf of Premier Bank pursuant to a Master
Production Agreement with R&G Mortgage. See "-Lending Activities from Banking
Operations - Origination, Purchases and Sales of Loans." During the years ended
December 31, 2002, 2001 and 2000, R&G Financial sold $1.2 billion, $1.1 billion
and $637.8 million of loans, respectively, which includes loans securitized and
sold but does not include loans originated by R&G Mortgage on behalf of Premier
Bank or loans securitized for other institutions. With respect to such loan
sales, $253.1 million or 21.7%, $375.1 million or 33.6% and $270.8 million or
42.5% consisted of GNMA-guaranteed mortgage-backed securities of FHA loans or VA
loans packaged into pools of $1 million or more ($2.5 million to $5 million for
GNMA serial notes) by R&G Mortgage. These securities were sold directly either
through R-G Investments Corporation, R&G Financial's broker-dealer, Premier
Bank's Trust Department, or indirectly through securities broker-dealers.
Conforming conventional loans originated or purchased by the Company
are generally sold directly to FNMA, FHLMC or private investors for cash or are
grouped into pools of $1 million or more in aggregate principal balance and
exchanged for FNMA or FHLMC-issued mortgage-backed securities, which the Company
sells to securities broker-dealers. In connection with any such exchanges, the
Company pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed
securities provides R&G Financial with flexibility in selling the mortgages
which it originates or purchases and also provides income by increasing the
value and marketability of the loans. Mortgage loans that do not conform to
GNMA, FNMA or FHLMC requirements (so-called "non-conforming loans") are
generally originated on behalf of Premier Bank by R&G Mortgage and either
retained in Premier Bank's portfolio, sold to financial institutions or other
private investors.
While R&G Financial's exchanges of mortgage loans into agency
securities and sales of mortgage loans are generally made on a non-recourse
basis, the Company also engages in the sale or exchange of mortgage loans on a
recourse basis. In the past, recourse sales often involved the sale of
non-conforming loans to FNMA, FHLMC and local financial institutions. R&G
Financial estimates the fair value of the retained recourse obligation at the
time mortgage loans are sold. At December 31, 2002, R&G Financial had loans in
its servicing portfolio with provisions for recourse in the principal amount of
approximately $762.3 million, as compared to $552.4 million and $680.5 million
as of December 31, 2001 and 2000, respectively. Of the recourse loans existing
at December 31, 2002,
23
approximately $378.1 million in principal amount consisted of loans sold to FNMA
and FHLMC and converted into mortgage-backed securities of such agencies, and
approximately $384.2 million in principal amount consisted of non-conforming
loans sold to other financial institutions and/or private investors. As of
December 31, 2002, R&G Financial had reserves for possible losses related to its
recourse obligations of $1.8 million. Historical losses on recourse obligations
have not been significant.
Loan Servicing. R&G Financial acquires servicing rights through its
mortgage loan originations (including originations on behalf of Premier Bank)
and purchases from third parties. The Company generally retains the rights to
service mortgage loans sold, which it has originated or purchased, and receives
the related servicing fees. Loan servicing includes collecting principal and
interest and remitting the same to the holders of the mortgage loans or
mortgage-backed securities to which such mortgage loan relates, holding escrow
funds for the payment of real estate taxes and insurance premiums, contacting
delinquent borrowers, supervising foreclosures in the event of unremedied
defaults and generally administering the loans. The Company receives annual loan
servicing fees ranging from 0.25% to 0.50% of the declining outstanding
principal balance of the loans serviced plus any late charges. In general, the
Company's servicing agreements are terminable by the investor for cause without
penalty or after payment of a termination fee ranging from 0.5% to 1.0% of the
outstanding principal balance of the loans being serviced.
R&G Financial's servicing portfolio has grown significantly over the
past several years. During the second quarter of 2002, the Company acquired a
servicing portfolio of $2.6 billion as part of its acquisition of Crown Bank. At
December 31, 2002, R&G Financial's servicing portfolio totaled $11.0 billion and
consisted of a total of 158,659 loans. These amounts include R&G Mortgage's
servicing portfolio totaling $7.2 billion, Crown Bank's servicing portfolio
totaling $3.3 billion and Continental's servicing portfolio totaling $470.1
million at December 31, 2002. At December 31, 2002, R&G Financial's servicing
portfolio included $1.1 billion of loans serviced for Premier Bank and $100.9
million of loans serviced for Crown Bank, or 10.3% and 0.9%, respectively, of
the total servicing portfolio. Substantially all of the mortgage loans in R&G
Financial's servicing portfolio are secured by single (one-to-four) family
residences. At December 31, 2002, approximately 65.4% of R&G Financial's
mortgage servicing portfolio is comprised of mortgages secured by real estate
located in Puerto Rico.
R&G Mortgage services all loans held in Premier Bank's loan portfolio
(including single-family residential loans retained by Premier Bank and certain
commercial real estate loans), although R&G Mortgage does not actually acquire
such servicing rights. Once loans are sold, Premier Bank retains the servicing
rights to such loans; R&G Mortgage continues to service the loans on behalf of
Premier Bank. Premier Bank pays R&G Mortgage servicing fees with respect to the
loans serviced by R&G Mortgage on behalf of Premier Bank. In addition, Premier
Bank processes payments of all loans originated by R&G Mortgage on behalf of
Premier Bank. In connection therewith, R&G Mortgage pays Premier Bank a fee
equal to between $0.50 and $1.00 per loan. See "- Regulation - R&G Financial -
Limitations on Transactions with Affiliates."
R&G Financial's mortgage loan servicing portfolio is subject to
reduction by reason of normal amortization, prepayments and foreclosure of
outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan
servicing rights from time to time.
24
The following table sets forth certain information regarding the total
loan servicing portfolio of R&G Financial for the periods indicated.
Year Ended December 31,
---------------------------------------------------------
2002 2001 2000
------------ ----------- ------------
(Dollars in Thousands)
Composition of Servicing Portfolio at End of
Period:
Conventional and other mortgage loans(1) ... $ 8,035,208 $ 4,070,074 $ 3,447,383
FHA/VA loans ............................... 2,956,736 3,154,497 3,186,676
------------ ------------ ------------
Total servicing portfolio ................ $ 10,991,944 $ 7,224,571 $ 6,634,059
============ ============ ============
Activity in the Servicing Portfolio:
Beginning servicing portfolio .............. $ 7,224,571 $ 6,634,059 $ 6,177,511
Add: Loan originations and purchases ...... 2,204,275 1,887,582 1,280,898
Servicing of portfolio loans acquired(2) 4,325,499 4,936 31,404
Less: Sale of servicing rights(3) .......... (229,587) (211,603) (213,959)
Run-offs(4) .......................... (2,532,814) (1,090,403) (641,795)
------------ ------------ ------------
Ending servicing portfolio ................. $ 10,991,944 $ 7,224,571 $ 6,634,059
============ ============ ============
Number of loans serviced ................... 158,659 113,070 110,874
Average loan size .......................... $ 69 $ 64 $ 60
Average servicing fee rate ................. 0.508% 0.499% 0.483%
- -------------------
(1) Includes non-conforming loans.
(2) Includes $2.6 billion acquired in connection with the acquisition of
Crown Bank in June 2002.
(3) Includes loans sold, servicing released, by Continental totaling $229.6
million, $211.6 million and $172.9 million in 2002, 2001 and 2000,
respectively.
(4) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
The following table sets forth certain information at December 31, 2002
regarding the number of, and aggregate principal balance of, the mortgage loans
serviced by R&G Financial for its loan portfolio and for third parties at
various mortgage interest rates.
At December 31, 2002
-----------------------------------------------------------------------------------------------
Portfolio Loans Serviced Total Loans
Loans Serviced or Third Parties Serviced
------------------------------------------------------------------------------------------------
Aggregate Aggregate Aggregate
Number of Principal Number of Principal Number of Principal
Loans Balance Loans Balance Loans Balance
--------- ------------ --------- ---------- --------- -----------
(Dollars in Thousands)
Mortgage Interest Rate
Less than 7.00% 4,470 556,425 37,285 3,187,295 41,755 3,743,720
7.00% - 7.49% 2,970 352,258 32,128 2,451,576 35,098 2,803,834
7.50% - 7.99% 1,691 158,507 31,574 2,011,642 33,265 2,170,149
8.00% - 8.49% 769 63,841 15,317 878,645 16,086 942,486
8.50% - 8.99% 867 50,385 14,438 692,413 15,305 742,798
9.00% - 9.49% 334 17,859 5,272 219,128 5,606 236,987
9.50% - 9.99% 398 14,744 4,187 133,528 4,585 148,272
10.00% - 10.49% 113 5,830 1,626 57,187 1,739 63,017
10.50% - 10.99% 259 7,473 1,231 41,212 1,490 48,685
11.00% or more 122 3,286 3,608 88,710 3,730 91,996
------ ---------- ------- ---------- ------- -----------
11,993 $1,230,608 146,666 $9,761,336 158,659 $10,991,944
====== ========== ======= ========== ======= ===========
25
The amount of principal prepayments on mortgage loans serviced by R&G
Financial was $287.2, $180.3 million and $176.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively. This represented approximately
3.1%, 2.5% and 2.7% of the aggregate principal amount of mortgage loans serviced
during such periods. The primary means used by R&G Mortgage to reduce the
sensitivity of its servicing fee income to changes in interest and prepayment
rates is the development of a strong internal origination capability that has
allowed R&G Financial to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed securities
programs of FNMA, FHLMC and GNMA, and certain other investors, require R&G
Financial to advance funds to make scheduled payments of principal, interest,
taxes and insurance, if such payments have not been received from the borrowers.
During the years ended December 31, 2002, 2001 and 2000, the monthly average
amount of funds advanced by R&G Financial under such servicing agreements was
$24.4 million, $7.4 million and $5.8 million, respectively. Funds advanced by
R&G Financial pursuant to these arrangements are generally recovered by R&G
Financial within 30 days.
In connection with its loan servicing activities, R&G Financial holds
escrow funds for the payment of real estate taxes and insurance premiums with
respect to the mortgage loans it services. At December 31, 2002, R&G Financial
held $224.4 million of such escrow funds, $116.3 million of which were deposited
in Premier Bank, $103.8 million of which were deposited in Crown Bank and $4.3
million of which were deposited with other financial institutions. The escrow
funds lower the overall cost of funds, while the escrow funds deposited with
other financial institutions serve as part of R&G Financial's compensating
balances which permit the Company to borrow funds from such institutions
(pursuant to certain warehouse lines of credit) at rates that are lower than
would otherwise apply. See "- Sources of Funds - Borrowings."
The degree of risk associated with a mortgage loan servicing portfolio
is largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share credit risk with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on
recours