On the face of it, R&G Financial Corp.’s announcement Monday that chief executive Victor J. Galan would step down as president and chief executive of the San Juan, Puerto Rico, company seemed unsurprising.
At 73, Mr. Galan, R&G’s controlling shareholder, could well be contemplating retirement. However, R&G said in a press release Monday that Mr. Galan’s planned departure follows discussions with the board about the $13.4 billion-asset company’s accounting issues. According to the release, Mr. Galan might have ignored advice from a legal consultant R&G hired to advise it on how to view certain mortgage sales it reversed last year. The release said Mr. Galan denies ever discussing the loan sales with the lawyer.
On Monday, R&G said Mr. Galan would be succeeded by Rolando Rodriguez, 42, who joined the company in January as the head of its Florida thrift subsidiary, R-G Crown Bank. Mr. Galan will stay on as chairman until June 30. Both executives were unavailable for interviews Monday, a spokeswoman said. She declined to comment further.
However, analysts expressed concern about the legal ramifications of the boardroom disagreement and how the changes would affect R&G’s effort to get its financials in order.
“I am not surprised by the resignation,” given Mr. Galan’s age, said Bain Slack of Keefe, Bruyette & Woods Inc. “But I am very surprised by the circumstances.”
“This may just be step one” in a wider shakeup or restructuring of the company, Mr. Slack added.
Avi Barak of Sandler O’Neill & Partners said, “I don’t think anything is off the table,” even another CEO change.
Mr. Galan’s tone in the press release was gracious.
“I am very comfortable that Rolando will make a fine president and chief executive officer,” he said. “I wish everyone to know that I will continue to be every bit as committed to the success of R&G as I have been since founding R&G Mortgage.”
Mr. Galan owns 42.13% of the common stock and all preferred shares, which gives him 59.28% of shareholder votes, according to the company’s last proxy statement, in 2005.
In December 2003, Joseph Sandoval, then chief financial officer, asked Norberto Medina, then with Quilichini, Oliver & Medina, for his legal opinion about certain mortgage sales, according to R&G’s release.
Mr. Medina “did not believe that the transactions qualified as true sales” and told Mr. Galan of this belief in “a brief conversation,” the release said. There is billing information to prove it, R&G said. Mr. Galan “denied that any such conversation took place,” it added.
Mr. Galan hired Mr. Medina as R&G’s general counsel in May, though Mr. Medina reported to the board of directors rather than the CEO and chairman, which is unusual, observers said. Mr. Sandoval was fired in January.
“I am surprised how long it took the public to find out about these issues,” Mr. Slack said. “This disclosure is pretty damning” from Mr. Galan and R&G, he said.
R&G has struggled with accounting issues since early 2005 and still must restate earnings back to 2002. It has not reported any results for this year or last. Meanwhile, the holding company and R-G Crown continue to operate under separate cease-and-desist orders from bank regulators, and the Securities and Exchange Commission is investigating.
The issues are similar to the problems at Doral Financial Corp. and First Bancorp Inc., also in San Juan. The three were forced to change the way they value interest-only securities in 2005 and subsequently had to reverse mortgage sales with several Puerto Rican banking companies.
Though Doral has restated earnings back to 2000 and reported 2005 earnings and results for the first and second quarters of this year, R&G is still working through its issues. Doral and First Bancorp replaced their CEOs and chairmen, but Mr. Galan was able to hang on to his position not only because he holds a controlling stake but also because he probably retained the board’s trust, observers said.
Keefe Bruyette’s Mr. Slack said the restatements, which R&G said are likely to be done in the first quarter, could be delayed further. The CEO change could also cause R&G’s shares to be delisted from the New York Stock Exchange, Mr. Slack added. The exchange has given the company until April 3 to file its 2005 earnings report, which would come after the restatements.
Mr. Slack and Joe Gladue of Cohen & Co Inc. said regulators might have had a hand in the management reshuffling.
Alfredo Padilla, the commissioner of financial institutions of the Commonwealth of Puerto Rico, said Monday that the management change at R&G is positive. “That action proves that there is an independent board operating there, and that is a good fact,” he said.
Mr. Padillia said he could not comment further because of his agency’s involvement in the pending investigations and regulatory issues.
Mr. Gladue also saw Mr. Galan’s replacement as a step forward. “It was time,” he said, adding that Mr. Rodriquez “seems a perfect fit.”
But Mr. Slack and Mr. Barak, the Sandler O’Neill analyst, questioned the board’s choice. The Federal Deposit Insurance Corp. issued its cease-and-desist order against R-G Crown in Casselberry, Fla., under Mr. Rodriguez’s watch. “I would question whether he is the best choice,” Mr. Slack said.
Shares of R&G fell initially Monday but quickly rose as much as 3.4%, apparently because investors think Mr. Galan’s resignation could mean a fast sale of the company. But analysts warned that R&G has a long way to go before restating its financials and that no buyer would consider a move without examining R&G’s earnings statements. The stock closed up 1.4%.
