-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VW2LRcgpwQwTEAwEWEjZOBNPoLyeNn+Z3Wyp8nq6i12jXWwYPyYlmgvoTZBtYKML LKjRrrM0hWcXZNRbBe/Wcg== 0000912057-96-026102.txt : 19961115 0000912057-96-026102.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-026102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: R&G FINANCIAL CORP CENTRAL INDEX KEY: 0001016933 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 660532217 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21137 FILM NUMBER: 96662250 BUSINESS ADDRESS: STREET 1: 280 JESUS T. PINERO AVE CITY: HATO REY, SAN JUAN STATE: PR ZIP: 00918 MAIL ADDRESS: STREET 1: 280 JESUS T PINERO AVE CITY: HATO REY, SAN JUAN STATE: PR ZIP: 00918 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________. Commission file number: 000-21137 R&G FINANCIAL CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Puerto Rico 66-0532217 - ------------------------------------------------------------------------------- (State of incorporation (I.R.S. Employer or organization) Identification No.) 280 Jesus T. Pinero Avenue Hato Rey, San Juan, Puerto Rico 00918 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (787) 766-2424 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by checkmark whether Registrant (a) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s) and (b) has been subject to such filing requirements for at least 90 days. YES X NO ----- ---- Number of shares of Class B Common Stock outstanding as of September 30, 1996: 2,435,000. (Does not include 5,122,377 Class A Shares of Common Stock which are exchangeable into Class B Shares of Common Stock at the option of the holder.) R&G FINANCIAL CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Statement of Financial Condition as of September 30, 1996 (Unaudited) and December 31, 1995 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited) 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 (Unaudited) 5 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures PART I - FINANCIAL INFORMATION 2 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS. R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, December 31, 1996 1995 ------------- ------------ (Unaudited) ASSETS Cash and due from banks............................................................... $24,799,694 $32,559,429 Money market investments: Securities purchased under agreements to resell................................... 19,582,136 21,694,675 Time deposits with other banks.................................................... 59,735,976 44,930,015 Federal funds sold................................................................ -- 5,011,048 Mortgage loans held for sale, at lower of cost or market.............................. 64,460,238 21,318,340 Mortgage-backed securities held for trading, at fair value............................ 149,817,085 113,808,624 Mortgage-backed securities available for sale, at fair value.......................... 43,578,377 61,008,432 Mortgage-backed securities held to maturity, at amortized cost (estimated market value: 1996 -- $37,605,685; 1995 -- $40,784,831)................... 38,547,205 41,730,889 Investment securities held for trading, at fair value............................. 8,289,590 -- Investment securities available for sale, at fairvalue............................ 29,306,685 3,279,610 Investment securities held to maturity, at amortized cost (estimated market value: 1996 -- $8,683,597; 1995 -- $1,996,307...................... 8,715,406 2,046,046 Loans receivable, net............................................................. 563,208,118 473,840,637 Accounts receivable, including advances to investors, net......................... 6,056,128 5,578,965 Accrued interest receivable....................................................... 5,424,893 4,051,702 Mortgage servicing rights......................................................... 11,347,811 8,209,661 Excess servicing receivable....................................................... 789,790 847,938 Premises and equipment............................................................ 7,543,573 6,973,325 Other assets...................................................................... 11,270,285 6,316,826 -------------- ------------ $1,052,035,672 $853,206,162 ============== ============ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Deposits.......................................................................... $595,573,971 $518,186,563 Securities sold under agreements to repurchase.................................... 127,239,927 98,483,188 Notes payable..................................................................... 144,405,987 81,130,032 Advances from FHLB................................................................ 5,000,000 6,007,135 Long-term debt.................................................................... -- 5,323,899 Other secured borrowings.......................................................... 52,394,035 55,983,501 Accounts payable and accrued liabilities.......................................... 10,386,621 12,068,490 Other liabilities................................................................. 5,025,998 2,431,577 -------------- ------------ 940,026,539 779,614,385 -------------- ------------ Subordinated notes.................................................................... 3,250,000 3,250,000 -------------- ------------ Minority interest in the Bank......................................................... 4,374,108 3,956,597 -------------- ------------ Stockholder's equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding................................................................. -- -- Common stock: Class A -- $.01 par value, 10,000,000 shares authorized, 5,122,377 shares issued and outstanding in 1996 and 5,189,044 in 1995...................... 51,223 51,890 Class B -- $.01 par value, 15,000,000 shares authorized, 2,435,000 issued and outstanding in 1996 (none in 1995)......................................... 24,350 -- Additional paid-in capital........................................................ 31,701,775 362,710 Retained earnings................................................................. 72,058,843 64,351,564 Capital reserves of the Bank...................................................... 1,021,166 666,767 Unrealized (loss) gains on securities available for sale.......................... (472,332) 952,249 -------------- ------------ 104,385,025 66,385,180 -------------- ------------ $1,052,035,672 $853,206,162 ============== ============
The accompanying notes are an integral part of this statement. 3 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Three month Nine month period ended period ended September 30, September 30, -------------------------- -------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Interest income: Loans....................................................... $17,009,004 $11,941,060 $46,581,093 $32,378,233 Money market and other investments.......................... 1,087,002 627,428 2,891,876 1,358,790 Mortgage-backed securities.................................. 1,362,890 1,447,946 4,331,435 4,617,170 ----------- ----------- ----------- ----------- Total interest income.................................. 19,458,896 14,016,434 53,804,404 38,354,193 ----------- ----------- ----------- ----------- Interest expense: Deposits.................................................... 7,008,851 6,143,453 20,053,430 15,912,545 Securities sold under agreements to repurchase.............. 1,362,801 1,516,920 3,946,440 5,041,829 Notes payable............................................... 1,823,107 507,142 4,785,077 1,995,292 Secured borrowings.......................................... 1,038,045 -- 3,178,077 -- Other....................................................... 456,543 194,627 626,009 636,431 ----------- ----------- ----------- ----------- Total interest expense................................. 11,689,347 8,362,142 32,589,033 23,586,097 ----------- ----------- ----------- ----------- Net interest income............................................. 7,769,549 5,654,292 21,215,371 14,768,095 Provision for loan losses....................................... (2,485,000) (500,000) (2,841,525) (450,000) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses............. 5,284,549 5,154,292 18,373,846 14,318,095 ----------- ----------- ----------- ----------- Other income: Net gain on sale of loans................................... 3,909,251 1,411,056 7,901,505 3,621,017 Unrealized gain (loss) on trading securities................ 674,805 (648,269) 53,464 1,646,442 Change in provision for cost in excess of market value of loans held for sale...................... -- 500,000 -- 570,000 Net gain (loss) on trading account.......................... (385,428) -- 201,344 -- Net gain on sales of investments............................ -- -- 329,225 -- Loan administration and servicing fees...................... 3,128,347 3,007,691 9,624,789 8,242,599 Service charges, fees and other............................. 1,112,701 536,401 2,931,707 1,787,871 ----------- ----------- ----------- ----------- 8,439,676 4,806,879 21,042,034 15,867,929 ----------- ----------- ----------- ----------- 13,724,225 9,961,171 39,415,880 30,186,025 ----------- ----------- ----------- ----------- Operating expenses: Employee compensation and benefits.......................... 3,115,337 2,323,967 9,070,089 5,687,391 Office occupancy and equipment.............................. 1,162,782 1,719,091 4,057,897 3,729,470 SAIF one-time assessment.................................... 2,508,380 -- 2,508,380 -- Other administrative and general............................ 3,232,674 2,592,066 9,748,815 8,970,222 ----------- ----------- ----------- ----------- 10,019,173 6,635,124 25,385,181 18,387,083 ----------- ----------- ----------- ----------- Income before minority interest and income taxes................ 3,705,052 3,326,047 14,030,699 11,798,942 ----------- ----------- ----------- ----------- Minority interest in the Bank................................... 8,745 171,229 417,511 516,207 ----------- ----------- ----------- ----------- Income before income taxes...................................... 3,696,307 3,154,818 13,613,188 11,282,735 ----------- ----------- ----------- ----------- Income tax expense (credit): Current..................................................... 1,615,572 (138,745) 6,389,460 2,152,250 Deferred.................................................... (386,050) 978,274 (1,337,951) 1,561,191 ----------- ----------- ----------- ----------- 1,229,522 839,529 5,051,509 3,713,441 ----------- ----------- ----------- ----------- Net income............................................. $ 2,466,785 $ 2,315,289 $ 8,561,679 $ 7,569,294 ----------- ----------- ----------- ----------- Earnings per common share....................................... $0.40 $0.45 $1.55 $1.37 ----- ----- ----- ----- ----- ----- ----- ----- Weighted average number of shares outstanding................... 6,218,754 5,189,044 5,534,786 5,189,044 The accompanying notes are an integral part of this statement.
4 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month period ended September 30, ----------------------------- 1996 1995 ----------------------------- (Unaudited) Cash flows from operating activities: Net income....................................................................... $8,561,679 $7,569,294 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 1,500,316 1,056,690 Amortization of premium on investments and mortgage-backed securities, net....... 204,423 5,877 Amortization of deferred loan origination fees and accretion of discount on loans..................................................................... (388,833) (241,083) Amortization of excess servicing receivable...................................... 58,148 98,301 Amortization of servicing rights................................................. 908,418 1,233,495 Change in provision for cost in excess of market value of loans held for sale.... -- (570,000) Provision for loan losses........................................................ 2,841,525 450,000 Provision for bad debts in accounts receivable................................... 225,000 225,000 Gain on sales of mortgage loans.................................................. (856,408) (210,744) Gain on sale of investment securities............................................ (329,225) -- Unrealized gain on trading securities............................................ (53,464) (1,646,442) Minority interest in earnings of the Bank........................................ 417,511 516,207 Decrease (increase) in mortgage loans held for sale.............................. 4,319,333 (4,983,123) Net (increase) decrease in mortgage-backed securities held for trading........... (36,060,242) 16,348,767 (Increase) decrease in receivables............................................... (2,075,354) 1,429,848 Increase in other assets......................................................... (4,700,322) (1,394,401) Increase in notes payable........................................................ 2,775,955 9,611,388 Increase in accounts payable and accrued liabilities............................. 754,609 824,430 (Decrease) increase in deferred taxes............................................ (1,337,951) 1,561,991 Increase in other liabilities.................................................... 2,594,421 905,288 ----------- --------- Total adjustments............................................................. (29,202,140) 25,291,489 ---------- ---------- Net cash provided by (used in) operating activities........................... (20,640,461) 32,860,783
(CONTINUED) The accompanying notes are an integral part of this statement. 5
Nine month period ended September, 30, ----------------------------- 1996 1995 ----------- ------------- (Unaudited) Cash flows from investing activities: Purchases of investment securities .............................................. $(49,064,258) $ -- Proceeds from sale and maturities of investment securities available for sale.... 22,012,780 -- Proceeds from maturities of investment securities held to maturity............... 377,000 450,000 Proceeds from maturities of investment securities held for trading............... 400,000 -- Principal repayments on mortgage-backed and other securities..................... 6,151,774 6,011,821 Proceeds from sale of loans...................................................... 49,372,646 14,473,826 Net originations of loans........................................................ (184,012,539) (132,431,189) Purchases of FHLB stock, net..................................................... (967,700) (1,401,700) Acquisition of premises and equipment............................................ (2,163,066) (1,635,986) Proceeds from sales of premises and equipment.................................... 350,000 -- Net (increase) decrease in foreclosed real estate................................ (510,635) 53,488 Acquisition of servicing rights.................................................. (4,046,568) (2,461,082) ------------ ----------- Net cash used by investing activities......................................... (162,100,566) (166,940,822) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable.......................................... 60,500,000 12,400,000 Payments of long-term debt....................................................... (5,323,899) (900,003) Increase in deposits -- net...................................................... 77,192,544 107,554,145 (Decrease) increase in securities sold under agreements to repurchase -- net..... 28,756,739 (25,583,415) Payments on secured borrowings................................................... (3,589,466) -- Advances from FHLB............................................................... 6,000,000 -- Repayment of advances from FHLB.................................................. (7,000,000) (2,500,000) Proceeds from issuance of common stock in initial public offering................ 31,362,748 -- Proceeds from issuance of common stock to minority shareholders.................. -- 5,060 Cash dividends on common stock................................................... (500,000) -- ------------ -------- Net cash provided by financing activities..................................... 187,398,666 85,975,787 ------------ ---------- Net (decrease) increase in cash and cash equivalents............................. 4,657,639 1,895,748 Cash and cash equivalents at beginning of period................................. 104,195,167 45,622,362 ------------ ---------- Cash and cash equivalents at end of period....................................... $108,852,806 $47,518,110 ------------- ----------- ------------- ----------- Cash and cash equivalents include: Cash and due from banks.......................................................... $24,799,694 $28,442,080 Securities purchased under agreements to resell.................................. 19,582,136 14,516,849 Time deposits with other banks................................................... 64,470,976 4,559,181 ------------ ----------- $108,852,806 $47,518,110 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of this statement. 6 R&G FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--REPORTING ENTITY, PUBLIC OFFERING AND STOCK OPTIONS AND BASIS OF PRESENTATION REPORTING ENTITY The accompanying unaudited consolidated financial statements of R&G Financial Corporation (the "Company") include the accounts of R&G Mortgage Corp. ("R&G Mortgage"), a Puerto Rico corporation, and R-G Premier Bank of Puerto Rico (the "Bank"), a commercial bank chartered under the laws of the Commonwealth of Puerto Rico. The Company was formed in March 1996 for the sole purpose of becoming the parent corporation and sole stockholder of R&G Mortgage and the Bank. On July 19, 1996, the Company acquired the 88% ownership interest of the Bank and the 100% ownership interest of R&G Mortgage held by the Company's Chairman of the Board and Chief Executive Officer (CEO). In consideration of the acquisition of such interests, the Company issued the CEO 5,189,044 shares of its Class A $.01 par value newly issued common stock (the "Class A Shares"), in exchange for his 100% ownership interest in R&G Mortgage and 88% ownership interest in the Bank. As a result of this transaction, the accompanying unaudited consolidated financial statements have been restated to reflect the consolidated financial condition as of September 30, 1996 (unaudited), the related consolidated statements of income and retained earnings for the three and nine months ended September 30, 1996 and 1995 (unaudited), and of cash flows for the nine months ended September 30, 1996 and 1995 (unaudited) as if the above transaction had been consummated as of January 1, 1995. The transaction has been accounted for at historical cost in a manner similar to pooling of interests accounting. The Company intends to acquire as well the 12% minority ownership interest in the Bank which, as of July 19, 1996, was held by approximately 200 other stockholders (the "Minority Bank Stockholders") following the receipt of all required regulatory approvals through the issuance of Class B $.01 par value common stock (the "Class B Shares") of the Company. All Minority Bank Stockholders will receive, in exchange for their aggregate 12% interest in the Bank's common stock, an aggregate of 300,962 shares of the Company's Class B shares, which was determined based on an independent valuation of the Bank. Such transaction will be accounted for under the purchase method of accounting; based on presently available information, management of the Company does not believe that this transaction will have a material effect on the Company's Consolidated Financial Statements or earnings per share. The Company filed a Registration Statement with the Securities and Exchange Commission ("SEC") with respect to this transaction on September 30, 1996. The Registration Statement was declared effective on October 29, 1996 and the transaction is expected to close at the end of November 1996. 7 R&G Mortgage is engaged primarily in the business of originating FHA insured, VA guaranteed, and privately insured first and second mortgage loans on residential real estate (1 to 4 families). R&G Mortgage pools FHA and VA loans into GNMA (Government National Mortgage Association) mortgage-backed securities and collateralized mortgage obligation (CMO) certificates for sale to permanent investors. After selling the loans, it retains the servicing function. R&G Mortgage is also a Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) Seller-Servicer of conventional loans. R&G Mortgage is licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company and is duly authorized to do business in the Commonwealth of Puerto Rico. The Bank provides a full range of banking services through fourteen branches located mainly in the northern part of the Commonwealth of Puerto Rico. The Bank is subject to the regulations of certain federal and local agencies, and undergoes periodic examinations by those regulatory agencies. As of the close of business on November 30, 1994, the Bank was converted from a federally chartered savings bank to a commercial bank chartered under the laws of the Commonwealth of Puerto Rico. PUBLIC OFFERING AND STOCK OPTIONS On August 27, 1996, the Company sold 2,348,333 Class B Shares of its Common Stock to the general public in an underwritten offering. The Company's CEO also converted 66,667 of his Class A Shares into Class B Shares and sold such shares in the public offering. As a result of such transaction, an aggregate of 2,415,000 Class B Shares have publicly issued and are now traded on the NASDAQ Stock Market. The Company received gross proceeds of $35.0 million in the transaction, which resulted in estimated net proceeds of $31.4 million after payment of the underwriting discount and expenses. Immediately following the Company's initial public offering, the Company issued an additional 20,000 Class B Shares to the Company's Vice Chairman of the Board in consideration for his past and ongoing services, which shares were not registered in such offering. In connection with the public offering, R&G Financial adopted a Stock Option Plan, which is designed to attract and retain qualified personnel in key positions, provide officers and key employees of R&G Financial and its subsidiaries with a proprietary interest in R&G Financial as an incentive to contribute to the success of R&G Financial and reward key employees for outstanding performance and the attainment of targeted goals. The Stock Option Plan was approved by R&G Financial's stockholder in June 1996. An amount of Common Stock equal to 10% of the aggregate number of Class B Shares sold in R&G Financial's initial public offering (241,500 shares) were authorized under the Stock Option Plan, which may be filled by authorized but unissued shares, treasury shares or shares purchased by R&G Financial on the open market or from private sources. The Stock Option Plan provides for the grant of stock options and stock appreciation rights (collectively "Awards"). In connection with R&G Financial's initial public offering, R&G Financial 8 awarded options for 200,000 shares to 28 employees of R&G Mortgage and the Bank at the initial public offering price of $14.50 per share. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. Additional information regarding the Company's Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 1995 is included in the Company's Registration Statements which have been filed with the SEC. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (principally consisting of normal recurring accruals) necessary for a fair presentation of the Company's financial condition as of September 30, 1996 and December 31, 1995 and the results of operations and changes in its cash flows for the three and nine months ended September 30, 1996 and 1995. BASIS OF CONSOLIDATION All significant balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, and entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, and stops recognizing financial assets when control has been surrendered, and liabilities when extinguished. This Statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interest, if any, based on their relative fair values at the date of the transfer. Servicing assets and liabilities must be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair value. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and must be applied prospectively. Earlier or retroactive application is not permitted. Management has not 9 estimated yet the effect, if any, of the adoption of this Statement on the Consolidated Financial Statements of the Company. STOCK OPTION PLANS In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial accounting and reporting standards for stock-based employee compensation plans. This Statement encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net income, and if presented, earnings per share, as if this Statement had been adopted. The accounting requirements of this Statement are effective for transactions entered into during fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. The Company adopted a Stock Option Plan in June 1996 and made awards thereunder in conjuction with the Company's initial public offering. Management intends to utilize the intrinsic value based method of accounting for compensation cost. NOTE 2--EARNINGS PER SHARE Primary earnings per common share for the three and nine months ended September 30, 1996 and 1995 were computed by dividing net income for such periods by the weighted average number of shares of common stock outstanding during such periods, which was 6,218,754 and 5,534,786 shares for the three and nine month periods ended September 30, 1996 and 5,189,044 shares for the respective periods in 1995. Oustanding stock options granted in connection with the Company's initial public offering were excluded from the weighted average number of shares because their dilutive effect is not significant. 10 NOTE 3 -- INVESTMENT AND MORTGAGE-BACKED SECURITIES The carrying value and estimated fair value of investment and mortgage-backed securities by category are shown below. The fair value of investment securities is based on quoted market prices and dealer quotes, except for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its redemption value.
September 30, 1996 --------------------------- Amortized cost Fair value -------------- ---------- (Unaudited) INVESTMENT SECURITIES HELD TO MATURITY Puerto Rico Government obligations: Due within one year....................... $ -- $ -- Due from one to five years................ 1,119,009 1,094,790 Due over ten years........................ 500,000 492,500 ---------- ---------- 1,619,099 1,587,290 ---------- ---------- Corporate securities -- Due within one year....................... 3,759,132 3,759,132 Due from one to five years................ 3,337,175 3,337,175 ---------- ---------- 7,096,307 7,096,307 ---------- ---------- 8,715,406 8,683,597 ========== ==========
11
September 30, 1996 ---------------------------- Amortized cost Fair value -------------- ---------- (Unaudited) MORTGAGE-BACKED SECURITIES HELD TO MATURITY GNMA certificates: Due from one to five years....................... $ 101,254 $ 103,575 Due over ten years............................... 22,026,347 20,861,141 ----------- ----------- 22,127,601 20,964,716 ----------- ----------- Federal National Mortgage Association (FNMA) -- Due over ten years............................... 16,085,829 16,316,225 ----------- ----------- Federal Home Loan Mortgage Corporation (FHLMC) participation certificates -- Due over ten years............................... 333,775 324,744 ----------- ----------- 333,775 324,744 ----------- ----------- 38,547,205 37,605,685 =========== ===========
September 30, 1996 ---------------------------- Amortized cost Fair value -------------- ---------- (Unaudited) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE: CMO residuals and other mortgage-backed securities.... $ 7,081,610 $ 7,861,551 ----------- ----------- Federal National Mortgage Association (FNMA) -- Due over ten years.................................. 15,165,211 14,784,497 ----------- ----------- FHLMC participation certificates: Due from five to ten years.......................... 563,100 574,410 Due over ten years.................................. 21,073,402 20,357,919 ----------- ----------- 21,636,502 20,932,329 ----------- ----------- 43,883,323 43,578,377 =========== =========== INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. Government and agencies securities............... 25,528,744 25,059,375 FHLB stock............................................ 4,247,310 4,247,310 ----------- ----------- 29,776,054 29,306,685 =========== ===========
Mortgage backed securities available for sale include interest only securities with an amortized cost of $2,363,941 as of September 30, 1996, which are associated with the sale in prior years of collateralized mortgage obligations, which were not made in connection with the Company's mortgage banking activities. 12
September 30, 1996 ----------- (Unaudited) MORTGAGE-BACKED SECURITIES HELD FOR TRADING: CMO Certificates..................................... $15,147,000 CMO Residuals (all interest only).................... 9,199,566 GNMA Certificates.................................... 125,470,519 ------------ $149,817,085 ============
During 1996, the Company entered into various agreements with an unrelated investment management firm whereby such firm has been appointed as investment advisor with respect to a portion of the Company's securities portfolio. Pursuant to such agreements, this investment advisory firm advises and recommends management on the purchase and/or sale of otherwise eligible investments as well as the execution of various hedging strategies to reduce interest rate risk, mainly through the use of various financial instruments. At September 30, 1996, this investment advisory firm was managing Company assets with a market value of approximately $39.3 million of which $14.2 million was designated for trading. Such assets were invested as follows:
September 30, 1996 --------------------------- Amortized cost Fair value -------------- ---------- (Unaudited) Cash and due from banks.................................. $ -- $ -- ----------- ----------- HELD-FOR-TRADING SECURITIES U.S. Treasury Bills.................................. 8,289,590 8,289,590 Money market investments............................. 5,933,246 5,933,246 ----------- ----------- 14,222,836 14,222,836 ----------- ----------- AVAILABLE-FOR-SALE SECURITIES U.S. Government and agencies securities.............. 25,528,744 25,059,375 ----------- ----------- $39,751,580 $39,282,211 =========== ===========
The above available for sale securities are being hedged with financial futures contracts based on U.S. Treasury securities and Eurodollars which are settled on a quarterly basis. Such firm also executes hedging strategies on behalf of the Company for all mortgage-backed securities which are available for sale (excluding CMOs) or held for trading. At September 30, 1996, $93,750 of such contracts were outstanding with a fair value of $46,875. 13 NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consists of the following: September 30, 1996 ------------- (Unaudited) Real estate loans: Residential--first mortgage.............. $333,793,249 Residential--second mortgage............. 15,284,080 Construction............................. 6,304,277 Commercial............................... 74,482,414 ------------ 429,864,020 Undisbursed portion of loans in process..... (2,859,294) Net deferred loan fees...................... (425) ------------ 427,004,301 ------------ Other loans: Commercial............................... 33,937,706 Consumer: Loans secured by deposits............. 8,946,917 Other................................. 99,865,138 Unamortized discount..................... (259,726) Unearned interest........................ (976,440) ------------ 141,513,595 ------------ Total loans........................ 568,517,896 Allowance for loan losses................ (5,309,778) ------------ $563,208,118 ------------ ------------ The changes in the allowance for loan losses follow: Nine months ended September 30, ------------------------ 1996 1995 -------- ------- (Unaudited) Balance, beginning of year.................. $ 3,510,251 $2,887,099 Provision for loan losses................... 2,841,525 450,000 Loans charged-off........................... (1,187,633) (274,250) Recoveries.................................. 145,635 155,377 ------------ --------- Balance, end of year..................... $5,309,778 $3,218,226 14 NOTE 5--COMMITMENTS AND CONTINGENCIES COMMITMENTS TO DEVELOPERS PROVIDING END LOANS The Company has outstanding commitments for various projects in the process of completion. Total commitments amounted to approximately $371,292,000 at September 30, 1996. All commitments are subject to prevailing market prices at time of closing with no market risk exposure against the Company or with firm back-to-back commitments extended in favor of the mortgagee. LOANS IN PROCESS Loans in process pending final approval and/or closing amounting to approximately $74,185,000 at September 30, 1996. COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES As of September 30, 1996, the Company had open commitments to issue GNMA certificates of approximately $64,254,000. LEASE COMMITMENTS The Company is obligated under several noncancellable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals. OTHERS At September 30, 1996, the Company is liable under limited recourse provisions resulting from the sale of loans to several investors principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $203,329,000 at September 30, 1996. Liability, if any, under the recourse provisions at September 30, 1996 is estimated by management to be insignificant. NOTE 6--STATEMENT OF CASH FLOWS: NON-CASH TRANSACTIONS During the third quarter of 1996, the Company reclassified $42,299,551 of conventional mortgage loans from its loan portfolio as held for sale. In October 1996, the Company securitized such loans into mortgage backed securities available for sale. The securitization is unrelated to the Company's mortgage banking activities. 15 NOTE 7--INCOME TAX SETTLEMENT On June 29, 1996, the Company settled with the Puerto Rico Treasury Department (PRTD) an income tax examination of R&G Mortgage's income tax returns for the years 1989 to 1992. While the Company believes that it had valid defenses for its positions, management believes that it was in the Company's best interest to settle the case rather than entering into an expensive, protracted negotiation with the PRTD. The settlement reached was for $1.6 million. The effect of this settlement was to record additional income tax expense for the six months ended June 30, 1996 of approximately $400,000. The remainder of the settlement was reserved for during prior periods. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION At September 30, 1996, the Company's total assets amounted to $1.1 billion, as compared to $965.6 million at June 30, 1996 and $853.2 million at December 31, 1995. The $86.5 million or 9.0% increase in total assets during the most recent three month period ended September 30, 1996 was attributable to a $46.7 million or 81.5% increase in cash and cash equivalents, due to the investment of proceeds from the Company's initial public offering and loans sold during the quarter, a $20.5 million or 14.9% increase in mortgage-backed and investment securities held for trading, a $6.0 million or .97% aggregate increase in loans receivable, net and mortgage loans held for sale, which reflects net originations following repayments and sales, and a $4.8 million or 54.7% increase in investment securities held to maturity. The increase in the Company's assets was funded primarily by increased deposits of $32.4 million or 5.8% and by a $28.9 million or 29.4% increase in securities sold under agreements to repurchase, which increases were partially offset by a $11.7 million or 16.9% decrease in other borrowings, primarily the repayment of $10.5 million of FHLB advances and long-term notes. At September 30, 1996, the Company's stockholders' equity amounted to $104.4 million, which is an increase of $33.9 million or 48.1% from the amount reported at June 30, 1996. The primary reason for the increase was the $31.7 million in net proceeds obtained by the Company in connection with its initial public offering, which was completed in August 1996. Stockholders' equity also increased by $2.5 million, reflecting the net income earned for the quarter, which was partially offset by $472,000 of unrealized loss on securities available for sale, net of income tax benefits. At September 30, 1996, the Bank's leverage and Tier 1 risk-based capital amounted to 8.04% and 13.77% of adjusted total assets, compared to a 4.0% minimum requirement, and its total risk-based capital amounted to 14.54%, compared to an 8.0% minimum requirement. 16 RESULTS OF OPERATIONS The Company reported net income of $2.5 million and $8.6 million during the three and nine months ended September 30, 1996, as compared to $2.3 million and $7.6 million during the prior comparable periods. The increases in net income during the three and nine month periods in 1996 over the comparable 1995 periods of $153,000 or 6.6% and $993,000 or 13.1%, respectively, was achieved notwithstanding the Company taking a one-time SAIF assessment charge of $2.5 million ($1.5 million net of taxes) and a $2.0 million ($1.2 million net of taxes) increase in the provision for loan losses during the September 1996 quarter. The Company incurred a special assessment of $2.5 million as the result of federal legislation signed into law to recapitalize the federal deposit insurance fund. The legislation enacted by the U.S. Congress, which was signed by the President on September 30, 1996, will recapitalize the SAIF by a one-time charge of approximately $0.657 for every $100 of assessable deposits held at March 31, 1995. Future earnings will be enhanced due to lower insurance premiums. The Bank's insurance premiums, which has amounted to $0.23 for every $100 of deposits, will be reduced to $0.064 for every $100 of deposits beginning January 1, 1997. Based upon the $596.3 million of assessable deposits at September 30, 1996, the Bank would expect to pay $138,000 less in insurance premiums per quarter during 1997. The Company increased its provision for loans losses by $2.0 million and $2.4 million during the three and nine months ended September 30, 1996, over the prior comparable periods, which primarily reflects a $2.0 million provision which was taken during the third quarter of 1996. On August 29, 1996, as a result of a review of its loan portfolio, management of the Bank became aware of certain potential loan losses related to the operation of its insurance premiums financing business and began an intensive investigation. The Bank believes that there were irregularities with respect to the origination and administration of a number of loans in contravention of established Bank policies by the former loan officer in charge of the department and has also notified the appropriate regulatory enforcement authorities. Even though the Bank's investigation is not fully completed yet, management, based on a review of the collectibility of the loans in question, believes that the reserve established in the third quarter of 1996 is sufficient to cover estimated losses which will result from this matter. Notwithstanding the reserve established, management intends to submit and vigorously pursue a claim pursuant to its fidelity insurance policy with respect to the actual loan losses. The increase in net income during the nine months ended September 30, 1996 over the prior comparable period is also noteworthy due to the fact that the 1996 results reflect the increased expenses associated with operating an additional six branch offices acquired from a commercial bank at the end of June 1995. Total revenues amounted to $13.7 million during the three months ended September 30, 1996 compared to $10.0 million for the prior comparable period. The 37.0% increase was due to an increase in net gain on origination and sale of loans of $2.5 million 17 or 177.0% during the three months ended September 30, 1996 over the prior comparable period. Net interest income increased significantly, by $2.1 million or 37.4%, during the three months ended September 30, 1996 over the prior comparable period, primarily due to a $5.1 million or 42.4% increase in interest income on loans. However, the aforementioned increase in the provision for loan losses significantly offset the increase in net interest income. Contributing to the increase in revenues was a change of $1.3 million in unrealized gain (loss) on trading securities from a $675,000 unrealized gain during the September 1996 quarter, compared to a $648,000 loss during the prior comparable quarter. Service charges, fees and other increased by $576,000 or 107.4%, due to increased fees on non-mortgage loan originations, deposit accounts and new deposit products, while loan administration and servicing fees increased by $121,000 or 4.0% due to an increase in the loan servicing portfolio. Total revenues amounted to $39.4 million during the nine months ended September 30, 1996 compared to $30.2 million during the prior comparable period. The 30.5% increase again was primarily attributable to net gain on sale of loans, which increased $4.3 million or 118.2% over the prior comparable period. Although significantly offset by the increased provision for loan losses, net interest income increased by $6.4 million or 43.7%, primarily due to a $14.2 million or 43.9% increase in interest income on loans. A decrease of $1.6 million in unrealized gain on trading securities was more than offset by increases in loan administration and servicing fees of $1.4 million or 16.8%, service charges, fees and other of $1.1 million or 64.0% and net gains on trading account and sale of investments of $531,000 or 100%. Total expenses increased by $3.4 million or 51.0% and by $7.0 million or 38.1% during the three and nine months ended September 30, 1996 over the prior comparable periods, which takes into consideration the one-time $2.5 million SAIF assessment. Without the assessment, total expenses would have increased by $875,000 or 13.2% and by $4.5 million or 24.4% during the same respective periods. The increase during the nine month period in 1996 reflects the full period effect of the operation of six branch offices acquired in late June 1995 and the operation of a new data processing center, which opened in February 1996, compared to only one quarter during the 1995 nine month period. For the nine months ended September 30, 1996, employee compensation and benefits increased by $3.4 million or 59.5%, other administrative and general increased by $779,000 or 8.68%, and office occupancy and equipment increased by $329,000 or 8.8%. During the three months ended September 30, 1996, a $641,000 or 24.7% increase in other administrative and general expense and a $791,000 or 34.1% increase in employee compensation and benefits more than offset a $556,000 or 32.4% decrease in office occupancy and equipment. Total income tax expense increased by $390,000 or 46.5% and $1.3 million or 36.0% during the three and nine months ended September 30, 1996 over the prior comparable periods, due primarily to the settlement of a tax audit with the Puerto Rico Treasury Department covering prior years during the third quarter of 1996. See Note 29 of R&G Financials' Notes to Consolidated Financial Statements. 18 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Liquidity refers to the Company's ability to generate sufficient cash to meet the funding needs of current loan demand, savings deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. It is management's policy to maintain greater liquidity than required in order to be in a position to fund loan purchases and originations, to meet withdrawals from deposit accounts, to make principal and interest payments with respect to outstanding borrowings and to make investments that take advantage of interest rate spreads. The Company monitors its liquidity in accordance with guidelines established by the Company and applicable regulatory requirements. The Company's need for liquidity is affected by loan demand, net changes in deposit levels and the scheduled maturities of its borrowings. The Company can minimize the cash required during the times of heavy loan demand by modifying its credit policies or reducing its marketing efforts. Liquidity demand caused by net reductions in deposits are usually caused by factors over which the Company has limited control. The Company derives its liquidity from both its assets and liabilities. Liquidity is derived from assets by receipt of interest and principal payments and prepayments, by the ability to sell assets at market prices and by utilizing unpledged assets as collateral for borrowings. Liquidity is derived from liabilities by maintaining a variety of funding sources, including deposits, advances from the FHLB of New York and other short and long-term borrowings. The Company's liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in short-term investments such as securities purchased under agreements to resell, federal funds sold and certificates of deposit in other financial institutions. If the Company requires funds beyond its ability to generate them internally, various forms of both short and long-term borrowings provide an additional source of funds. At September 30, 1996, the Company had $34.1 million in borrowing capacity under unused warehouse lines of credit and $45 million in borrowing capacity under a line of credit with the FHLB of New York. The Company has generally not relied upon brokered deposits as a source of liquidity, and does not anticipate a change in this practice in the foreseeable future. At September 30, 1996, the Company had outstanding commitments (including unused lines of credit) to originate and/or purchase mortgage and non-mortgage loans of $384.1 million. Certificates of deposit which are scheduled to mature within one year totalled $287.0 million at September 30, 1996, and borrowings that are scheduled to mature within the same period amounted to $215.1 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. CAPITAL RESOURCES. The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated 19 banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At September 30, 1996, the Bank met each of its capital requirements, with Tier I leverage capital, Tier I risk-based capital and total risk-based capital ratios of 8.04%, 13.77% and 14.54%, respectively. In addition, the Federal Reserve Board has promulgated capital adequacy guidelines for bank holding companies which are substantially similar to those adopted by FDIC regarding state-chartered banks, as described above. The Company is currently in compliance with such regulatory capital requirements. INFLATION AND CHANGING PRICES The unaudited consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars (except with respect to securities which are carried at market value), without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. 20 PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The Registrant is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Registrant. ITEM 2: CHANGES IN SECURITIES Not applicable ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5: OTHER INFORMATION Not applicable ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a) Not applicable b) No Form 8-K reports were filed during the quarter. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. R&G FINANCIAL CORPORATION Date: November 13, 1996 By: /S/ VICTOR J. GALAN ----------------------------- Victor J. Galan, Chairman and Chief Executive Officer (Principal Executive Officer) By: /S/ ANA M. ARMENDARIZ ----------------------------- Ana M. Armendariz Controller and Treasurer (Principal Accounting Officer) 22 EX-27 2 EXH 27
9 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 24,799,694 64,460,238 19,582,136 158,106,675 72,885,062 47,262,611 46,289,282 627,816,454 (5,309,778) 1,052,035,672 595,573,971 332,289,949 19,786,727 0 0 0 75,573 104,309,452 1,052,035,672 46,581,093 7,223,311 0 53,804,404 20,053,430 32,589,033 21,215,371 2,841,525 254,808 25,385,181 13,613,188 8,561,679 0 0 8,561,679 1.55 1.55 8.370 20,369,185 252,022 0 20,621,207 3,510,051 1,187,633 145,635 5,309,778 5,309,778 0 0
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