-----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, MdTfFYxqiXXxGhD/QpcK7/RH/tAwEoLc7fBTFpvxcy5Gp1iCfSWBNFW+vTN/CtWM jG0sMImWeWfBZK7tyrL1GQ== 0000912057-96-021750.txt : 19961002 0000912057-96-021750.hdr.sgml : 19961002 ACCESSION NUMBER: 0000912057-96-021750 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961001 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: 96638005 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 FORM 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 JUNE 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 NO X ------ ---- As of June 30, 1996, the Registrant was a newly organized private corporation. The Registrant completed an initial public offering on August 27, 1996. For additional information, see Note 1 to the Unaudited Consolidated Financial Statements included herein. Number of shares of Class B Common Stock outstanding as of September 25, 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 June 30, 1996 (Unaudited) and December 31, 1995 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1996 and 1995 (Unaudited) 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (Unaudited) 5 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis 15 PART II--OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 20 PART I--FINANCIAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS. R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ASSETS
June 30, December 31, 1996 1995 -------- ------------ (Unaudited) Cash and due from banks........................................... $21,520,637 $32,559,429 Money market investments: Securities purchased under agreements to resell................ 13,429,913 21,694,675 Time deposits with other banks................................. 22,426,693 44,930,015 Federal funds sold............................................. -- 5,011,048 Mortgage loans held for sale, at lower of cost or market.......... 18,319,736 21,318,340 Mortgage-backed securities held for trading, at fair value........ 136,575,958 113,808,624 Mortgage-backed securities available for sale, at fair value...... 44,468,857 61,008,432 Mortgage-backed securities held to maturity, at amortized cost (estimated market value: 1995 -- $40,784,831; 1994 -- $78,844,972)..................................................... 39,472,739 41,730,889 Investment securities held for trading, at fair value............. 989,826 -- Investment securities available for sale, at fair value........... 23,107,710 3,279,610 Investment securities held to maturity, at amortized cost (estimated market value: 1995 -- $1,996,307; 1994 -- $2,108,318)...................................................... 8,685,216 2,046,046 Loans receivable, net............................................. 598,182,075 473,840,637 Accounts receivable, including advances to investors, net......... 6,361,582 5,578,965 Accrued interest receivable....................................... 5,266,000 4,051,702 Mortgage servicing rights......................................... 9,810,060 8,209,661 Excess servicing receivable....................................... 809,173 847,938 Premises and equipment............................................ 6,856,119 6,973,325 Other assets...................................................... 9,269,411 6,316,826 ------------ ----------- $965,551,705 $853,206,162 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Deposits...................................................... $563,147,365 $518,186,563 Securities sold under agreements to repurchase................ 98,293,546 98,483,188 Notes payable................................................. 142,882,861 81,130,032 Advances from FHLB............................................ 11,000,000 6,007,135 Long-term debt................................................ 4,524,476 5,323,899 Other secured borrowings...................................... 53,531,846 55,983,501 Accounts payable and accrued liabilities...................... 11,586,794 12,068,490 Other liabilities............................................. 2,500,866 2,431,577 ------------ ------------ 887,467,754 779,614,385 ------------ ------------ Subordinated notes................................................ 3,250,000 3,250,000 ------------ ------------ Minority interest in the Bank..................................... 4,365,363 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, 5,189,044 shares issued and outstanding................. 51,890 51,890 Class B -- $.01 par value, 15,000,000 shares authorized, none issued and outstanding............................................. -- -- Additional paid-in capital.................................... 362,710 362,710 Retained earnings............................................. 69,592,059 64,351,564 Capital reserves of the Bank.................................. 1,021,166 666,767 Unrealized (loss) gains on securities available for sale...... (559,237) 952,249 ---------- ---------- 70,468,588 66,385,180 ---------- ---------- $965,551,705 $853,206,162 ============ ============
The accompanying notes are an integral part of this statement. 3 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Three month Six month period ended period ended June 30, June 30, ---------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) Interest income: Loans.............................................. $16,104,648 $10,892,241 $29,572,089 $20,437,173 Money market and other investments................. 926,424 380,918 1,804,874 731,362 Mortgage-backed securities......................... 1,323,593 1,538,615 2,968,545 3,169,224 ----------- ----------- ----------- ----------- Total interest income........................... 18,354,665 12,811,774 34,345,508 24,337,759 ----------- ----------- ----------- ----------- Interest expense: Deposits........................................... 6,661,513 5,057,298 13,044,579 9,769,092 Securities sold under agreements to repurchase..... 1,307,725 1,927,851 2,583,639 3,524,909 Notes payable...................................... 1,880,467 801,882 2,961,970 1,488,150 Secured borrowings................................. 1,056,923 -- 2,140,032 -- Other.............................................. 102,244 264,203 169,466 441,804 --------- -------- --------- --------- Total interest expense.......................... 11,008,872 8,051,234 20,899,686 15,223,955 ---------- --------- ---------- ---------- Net interest income................................ 7,345,793 4,760,540 13,445,822 9,113,804 (Provision) credit for loan losses................... (350,000) -- (356,525) 50,000 ---------- ---------- ---------- --------- Net interest income after provision for loan losses.. 6,995,793 4,760,540 13,089,297 9,163,804 --------- --------- ---------- --------- Other income: Net gain (loss) on sale of loans................... 2,021,210 877,914 3,992,254 2,209,961 Unrealized gain (loss) on trading securities....... (424,166) 2,294,711 (621,341) 2,294,711 Change in provision for cost in excess of market value of loans held for sale...................... -- 295,000 -- 70,000 Net gain on trading account........................ 450,722 -- 586,772 -- Net gain on sales of investments................... -- -- 329,225 -- Loan administration and servicing fees............. 3,487,687 2,469,247 6,496,442 5,234,908 Service charges, fees and other.................... 624,015 693,149 1,819,006 1,251,470 --------- ----------- ---------- ----------- 6,159,468 6,630,021 12,602,358 11,061,050 ---------- ---------- ---------- ---------- 13,155,261 11,390,561 25,691,655 20,224,854 ---------- ---------- ---------- ---------- Operating expenses: Employee compensation and benefits.................... 3,304,815 1,487,303 5,954,752 3,363,424 Office occupancy and equipment........................ 1,482,479 1,003,678 2,895,115 2,010,379 Other administrative and general...................... 3,109,100 3,173,063 6,516,141 6,378,156 ---------- ---------- ---------- ---------- 7,977,394 5,664,044 15,366,008 11,751,959 --------- --------- ---------- ---------- Income before minority interest and income taxes....... 5,177,867 5,726,517 10,325,647 8,472,895 --------- --------- ---------- ---------- Minority interest in the Bank.......................... 223,905 220,854 408,766 344,978 --------- --------- ---------- ---------- Income before income taxes............................. 4,953,962 5,505,663 9,916,881 8,127,917 --------- --------- --------- --------- Income taxes: Current.............................................. 2,731,529 1,749,043 4,773,888 2,942,308 Deferred............................................. (944,187) 100,019 (951,901) (68,396) --------- --------- --------- --------- 1,787,342 1,849,062 3,821,987 2,873,912 --------- --------- --------- --------- Net income........................................... $3,166,620 $3,656,601 $6,094,894 $5,254,005 ---------- ---------- ---------- ---------- Earnings per common share Income before cumulative effect of change in accounting principle................................. $0.62 $0.70 $1.17 $1.01 ==== ==== ==== ====
The accompanying notes are an integral part of this statement. 4 R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIOD ENDED JUNE 30, ------------------------- 1996 1995 ------- ------- (Unaudited) Cash flows from operating activities: Net income............................................ $6,094,894 $5,254,005 ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 990,294 700,326 Amortization of premium on investments and mortgage-backed securities, net................. 116,132 58,589 Amortization of deferred loan origination fees and accretion of discount on loans.............. (253,401) 24,944 Amortization of excess servicing receivable...... 38,765 65,534 Amortization of servicing rights................. 653,206 948,695 Change in provision for cost in excess of market value of loans held for sale..................... -- (70,000) Provision (credit) for loan losses................ 356,525 (50,000) Provision for bad debts in accounts receivable.... 150,000 150,000 Gain on sales of mortgage loans................... (95,096) (177,484) Gain on sale of investment securities............. (329,225) -- Unrealized loss (gain) on trading securities...... 621,341 (2,294,711) Minority interest in earnings of the Bank......... 408,766 344,978 (Increase) decrease in mortgage loans held for sale............................................. 2,998,604 (5,835,364) Net (increase) decrease in mortgage-backed securities held for trading................................. (23,467,171) (17,252,925) (Increase) decrease in receivables................ (2,146,915) 3,524,185 Decrease (increase) in other assets............... (2,389,083) (3,574,402) (Decrease) increase in notes payable.............. 11,752,829 (1,703,297) Increase (decrease) in accounts payable and accrued liabilities...................................... 1,633,389 2,003,189 (Decrease) increase in deferred taxes.............. (951,901) (68,396) Increase (decrease) in income taxes payable........ (75,236) 2,197,871 Increase (decrease) in other liabilities........... 69,289 137,776 ----------- ---------- Total adjustments.............................. (9,918,888) (20,870,492) ---------- ----------- Net cash used in operating activities.......... (3,823,994) (15,616,487) (CONTINUED)
The accompanying notes are an integral part of this statement. 5
SIX MONTH PERIOD ENDED JUNE 30, ------------------------ 1996 1995 ------ ------ (Unaudited) Cash flows from investing activities: Purchases of investment securities.................. $(30,531,762) $ -- Proceeds from sale and maturities of investment securities available for sale................................... 17,281,780 -- Principal repayments on mortgage-backed securities.................................... 4,576,531 4,226,800 Proceeds from sale of loans........................... 4,929,156 12,345,507 Net originations of loans.............................. (132,344,517) (82,808,291) (Purchases) redemptions of FHLB stock, net......................................... (795,600) (1,401,700) Acquisition of premises and equipment............................................ (1,051,423) (1,333,876) Proceeds from sales of premises and equipment....................................... 350,000 -- Net (increase) decrease in foreclosed real estate....................................... (735,167) (61,827) Acquisition of servicing rights......................... (564,287) (600,050) ----------- ---------- Net cash used by investing activities.................................... (138,885,289) (69,633,437) ------------ ----------- Cash flows from financing activities: Proceeds from issuance of notes payable........................................... 50,000,000 -- Payments of long-term debt.......................... (799,423) (600,003) Increase in deposits -- net......................... 44,832,079 103,817,079 (Decrease) increase in securities sold under agreements to repurchase -- net................................. (189,642) 15,613,561 Payments on secured borrowings...................... (2,451,655) -- Advances from FHLB................................... 6,000,000 -- Repayment of advances from FHLB...................... (1,000,000) -- Proceeds from issuance of common stock to minority shareholders........................................ -- 5,060 Cash dividends on common stock................... (500,000) -- ----------- ----------- Net cash provided by financing activities................................. 95,891,359 118,835,697 ----------- ----------- Net (decrease) increase in cash and cash equivalents................................... (46,817,924) 33,585,773 Cash and cash equivalents at beginning of period...................................... 104,195,167 45,622,362 ----------- ---------- Cash and cash equivalents at end of period.......................................... $57,377,243 $79,208,135 =========== =========== Cash and cash equivalents include: Cash and due from banks......................... $21,520,637 $26,735,482 Securities purchased under agreements to resell....................................... 13,429,913 22,531,517 Time deposits with other banks................. 22,426,693 29,941,136 ----------- ----------- $57,377,243 $79,208,135 =========== ===========
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 June 30, 1996 (unaudited), the related consolidated statements of income and retained earnings for the three and six months ended June 30, 1996 and 1995 (unaudited), and of cash flows for the six months ended June 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, a specified number of shares of the Company's Class B shares to be 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 with respect to this transaction on September 30, 1996. 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 7 (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 $35,017,500 in the transaction, which resulted in estimated net proceeds of $30,822,271 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 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. 8 BASIS OF PRESENTATION The accompanying unaudited 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 Statement on Form S-1. 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 June 30, 1996 and December 31, 1995 and the results of operations and changes in its cash flows for the three and six months ended June 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 9 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 estimated yet the effect, if any, of the adoption of this Statement on the Consolidated Financial Statements of the Company. NOTE 2 - EARNINGS PER SHARE Primary earnings per common share for the three and six months ended June 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 5,189,044 shares. 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.
JUNE 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.................. 1,038,618 1,015,000 Due over ten years.................. 603,528 596,029 ---------- ---------- 1,642,146 1,611,029 Corporate securities -- Due within one year................... 3,719,547 3,719,547 Due from one to five years................ 3,323,524 3,323,524 ---------- ---------- 7,043,070 7,043,070 ---------- ---------- $8,685,216 $8,654,099 ========== ==========
10
JUNE 30, 1996 ---------------------------------- AMORTIZED COST FAIR VALUE -------------- ---------- (Unaudited) MORTGAGE-BACKED SECURITIES HELD TO MATURITY GNMA certificates: Due from one to five years........... $ 105,694 $ 108,117 Due over ten years................... 23,077,413 21,886,629 ------------ ----------- 23,183,107 21,994,746 ------------ ------------ Federal National Mortgage Association (FNMA) -- Due over ten years........ 15,941,568 16,139,570 ------------- ----------- Federal Home Loan Mortgage Corporation (FHLMC) participation certificates -- Due over ten years....... 348,066 338,648 ----------- ----------- 348,066 338,648 ----------- ----------- $39,472,739 $38,472,964 =========== =========== JUNE 30, 1996 ---------------------------------- AMORTIZED COST FAIR VALUE -------------- ---------- (Unaudited) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE: CMO residuals and other mortgage-backed securities.............. $7,091,610 $7,871,551 ----------- ----------- Federal National Mortgage Association (FNMA) -- Due over ten years................... 15,425,377 14,990,973 ----------- ----------- FHLMC participation certificates: Due from five to ten years............... 585,531 594,462 Due over ten years.............. 21,788,422 21,011,871 ----------- ----------- 22,373,953 21,606,333 ----------- ----------- $44,890,940 $44,468,857 =========== =========== INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. Government and agencies securities......... $19,527,199 $19,032,500 FHLB stock................ 4,075,210 4,075,210 ----------- ----------- $23,602,409 $23,107,710 =========== ===========
Mortgage backed securities available for sale include interest only securities with an amortized cost of $2,363,941 as of June 30, 1996, which are associated with the sale in prior years of collateralized mortgage obligations, and not the Company's mortgage banking activities. 11
JUNE 30, 1996 -------- (Unaudited) MORTGAGE-BACKED SECURITIES HELD FOR TRADING: CMO Certificates............................. $15,147,000 CMO Residuals (all interest only)............ 9,444,230 GNMA Certificates............................ 111,984,728 ------------ $136,575,958 ============
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 June 30, 1996, this investment advisory firm was managing Company assets with a market value of approximately $32.1 million of which $13.1 million was designated for trading. Such assets were invested as follows:
JUNE 30, 1996 ------------------------------------ AMORTIZED COST FAIR VALUE -------------- ---------- (Unaudited) Cash and due from banks............................ $1,934,179 $1,934,179 ----------- ----------- HELD-FOR-TRADING SECURITIES U.S. Treasury Bills.............. 989,826 989,826 Money market investments......... 10,136,693 10,136,693 ----------- ----------- 11,126,519 11,126,519 ----------- ----------- AVAILABLE-FOR-SALE SECURITIES U.S. Government and agencies securities...................... 19,527,199 19,032,500 ----------- ----------- $32,587,897 $32,093,198 =========== ===========
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 June 30, 1996 no such contracts were outstanding. 12 NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consists of the following:
JUNE 30, 1996 ------------- (Unaudited) Real estate loans: Residential -- first mortgage................. $378,271,815 Residential -- second mortgage................ 14,377,467 Construction.................................. 7,991,512 Commercial.................................... 71,778,065 ------------ 472,418,859 Undisbursed portion of loans in process......................................... (2,795,132) Net deferred loan fees........................... (96,864) ------------ 469,526,863 ------------ Other loans: Commercial................................... 33,289,651 Consumer: Loans secured by deposits................. 8,934,114 Other...................................... 91,038,251 Unamortized discount......................... (298,719) Unearned interest............................ (1,106,458) ------------ 131,856,839 ------------ Total loans.............................. 601,383,702 Allowance for loan losses........................ (3,201,627) ------------ $598,182,075
The changes in the allowance for loan losses follow:
SIX MONTHS ENDED JUNE 30, -------------------- 1996 1995 ---- ---- (Unaudited) Balance, beginning of year................... $3,510,251 $2,887,099 Provision (credit) for loan losses...................................... 356,525 (50,000) Allowance for acquired loans....................................... -- -- Loans charged-off............................ (770,808) (196,598) Recoveries................................... 105,659 107,318 Other........................................ -- -- ---------- ---------- Balance, end of year......................... $3,201,627 $2,747,819
13 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 $362,454,890 at June 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 $80,564,000 at June 30, 1996. COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES As of June 30, 1996, the Company had open commitments to issue GNMA certificates in the amount of $53,903,086. COMMITMENTS TO SELL MORTGAGE LOANS As of June 30, 1996, the Company had commitments to sell mortgage loans to third party investors amounting to $15.5 million. LEASE COMMITMENTS The Company is obligated under several noncancellable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals. OTHERS At June 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 $217,226,000 at June 30, 1996. Liability, if any, under the recourse provisions at June 30, 1996 is estimated by management to be insignificant. NOTE 6 -- SUBSEQUENT EVENTS 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, 14 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. 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. While the Bank's investigation is in its early stages, management is in the process of reviewing the collectibility of the loans in question and believes, based on information available to date, that its maximum loss exposure is $3.2 million, which does not take into consideration recovery efforts already initiated with existing obligors. While management presently is not able to estimate its actual loss exposure, management plans to continue to review its portfolio and to increase its reserve for loan losses during the third quarter. Furthermore, management believes that the claims which it will submit pursuant to its fidelity insurance policy will ultimately result in the recovery of a substantial portion of the amounts not recoverable from existing obligors. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS CHANGES IN FINANCIAL CONDITION At June 30, 1996, the Company's total assets amounted to $965.6 million, as compared to $868.3 million at March 31, 1996. The $97.3 million or 11.2% increase in total assets during the three months ended June 30, 1996 was primarily the result of a $64.1 million or 12.0% increase in loans receivable, net, which is attributable to the origination of $162.5 million of loans, primarily single-family residential loans, before reduction for repayments and sales, a $20.9 million or 17.9% increase in mortgage-backed and investment securities held for trading, which is the result of securitization of mortgage loans into mortgage-backed securities, net of sales, and a $14.5 million or 33.8% increase in cash and cash equivalents, which is primarily attributable to a $7.1 million or 20.2% increase in cash and due from banks and a $6.9 million or 106.6% increase in securities purchased under agreements to sell. These increases were partially offset by a $7.5 million or 29.2% decrease in mortgage loans held for sale. The increase in the Company's assets was funded primarily by a $69.3 million or 94.2% increase in notes payable, which is the result of a $50.0 million or 98.0% increase in term notes and a $19.3 million or 85.4% increase in warehousing lines of credit which funded increased loan production. In addition, deposits, primarily certificates of deposit, increased by $22.0 million or 4.1%, as the result of an active advertising campaign and the offering of competitive rates. At June 30, 1996, the Company's stockholder's equity amounted to $70.5 million, as compared to $67.7 million at March 31, 1996. The $2.8 million or 4.1% increase in stockholder's equity was attributable to the Company's net income of $3.2 million for the quarter ended June 30, 1996, which amount was reduced by $559,000 of unrealized loss on securities available for sale, net of income tax benefits. At June 30, 1996, the Bank's leverage and Tier 1 risk-based capital amounted to 6.09% and 10.04% of adjusted total assets, compared to a 4.0% minimum requirement, and its total risk-based capital amounted to 11.02% compared to an 8.0% minimum requirement. RESULTS OF OPERATIONS The Company reported net income of $3.2 million and $6.1 million during the three and six months ended June 30, 1996, as compared to $3.7 million and $5.3 million during the prior comparable periods. While net income for the three months ended June 30, 1996 15 increased by $239,000 or 8.2% over the immediately prior quarter ended March 31, 1996, the Company's net income decreased by $491,000 or 13.4% when compared to the prior comparable quarter in 1995. The decline was attributable to a $2.3 million or 40.9% increase in total expenses, primarily due to the effect of a full year of operating six branches acquired from a commercial bank in June 1995, which more than offset a $1.8 million or 15.5% increase in total revenue and a $62,000 or 3.4% reduction in income taxes. During the six months ended June 30, 1996, net income increased by $840,000 or 16.0% over the prior comparable period, as a $5.5 million or 27.0% increase in total revenue net of interest expense was significantly offset by a $3.6 million or 30.8% increase in total expenses, again principally attributable to the increased expenses associated with the 1995 branch acquisition. The $1.8 million or 15.5% increase in total revenue net of interest expense for the three months ended June 30, 1996 over the prior comparable quarter was primarily attributable to a $1.1 million increase in net gain on origination and sale of loans, a $2.2 million or 47.0% increase in net interest income after provision for loan losses, and an increase of $1.0 million or 41.2% in loan administration and servicing fees, which was offset by a change of $2.7 million in unrealized gains (losses) on trading securities. The increase in net gain on origination and sale of loans, which increased from $878,000 during the June 1995 quarter to $2.0 million, was primarily due to an increase in loan origination fees attributable to increased loan originations when compared to the prior period. In addition, the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 122 had the effect of increasing net gain on sales of loans. See Note 1 of the Notes to Consolidated Financial Statements. The increase in net interest income after provision for loan losses was primarily attributable to an increased average loan portfolio balance. The increase in loan administration and servicing fees was primarily due to an increase in the servicing portfolio, which amounted to $2.45 billion at June 30, 1996 compared to $2.36 billion at March 31, 1996. The change in unrealized gains (losses) on trading securities reflect the Company's adoption of SFAS No. 115, which requires that unrealized gains and losses with respect to trading securities be recognized in other income in the period in which such unrealized gains or losses occur. The $5.5 million or 27.0% increase in total revenue during the six months ended June 30, 1996 over the prior comparable period was primarily attributable to a $3.9 million or 42.8% increase in net interest income after provision for loan losses, a $1.8 million or 80.6% increase in net gain on origination and sale of loans and a $1.3 million or 24.1% increase in loan administration and servicing fees, which was offset by a $2.9 million change in unrealized gains (losses) on sale of trading securities. The increase in net interest income after provision for loan losses was primarily due to the increase in interest-earning assets. The increase in net gain on origination and sale of loans during the three month period ended June 30, 1996 was attributable to increased loan originations and increased net gains on sale of loans attributable to SFAS No. 122. The increase in loan administration and servicing fees was primarily due to the increased loan servicing portfolio. The changes in the recognition of unrealized gains (losses) on trading securities during the periods reflects the market adjustments required by SFAS 115. 16 Total expenses increased by $2.3 million or 40.9% during the three months ended June 30, 1996 and by $3.6 million or 30.8% during the six months ended June 30, 1996, in each case over the prior comparable periods. The increases during both the three and six month periods were due to increases of $1.8 million or 122.3% and $2.6 million or 77.1%, respectively, in compensation and benefits and, to a lesser extent, increases of $17,000 or 0.5% and $138,000 or 2.1%, respectively, in general and administrative expenses and $479,000 or 47.7% and $885,000 or 44.0%, respectively, in occupancy expenses. The 1995 branch acquisition was the primary reason for the increases in compensation and benefits and occupancy expenses during both the three and six month periods of 1996. The Company's income tax provision amounted to $1.8 million and $3.8 million during the three and six months ended June 30, 1996, as compared to $1.8 million and $2.9 million during the same respective periods in the prior year. On June 29, 1996, R&G Mortgage and the Puerto Rico Treasury Department settled all taxes due for the years 1989 through and including 1992 which were under audit. The settlement reached was for $1.6 million. The effect of this settlement was to record additional income tax expense during the three and six months ended June 30, 1996 of $50,000 and $400,000, respectively. The remainder of the settlement was reserved for during prior periods. See Note 6 of the Notes to Unaudited Consolidated Financial Statements. The Company's effective tax rate amounted to 34.5% and 37.0% during the three and six months ended June 30, 1996, as compared to 32.3% and 33.9% during the same respective periods in the prior year. 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 17 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 June 30, 1996, the Company had $39.5 million in borrowing capacity under unused warehouse lines of credit and $39.0 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 June 30, 1996, the Company had outstanding commitments (including unused lines of credit) to originate and/or purchase mortgage and non-mortgage loans of $374.0 million. Certificates of deposit which are scheduled to mature within one year totalled $273.1 million at June 30, 1996, and borrowings that are scheduled to mature within the same period amounted to $202.6 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 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 June 30, 1996, the Bank met each of its capital requirements, with Tier I leverage 18 capital, Tier I risk-based capital and total risk-based capital ratios of 6.09%, 10.04% and 11.02%, 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. 19 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. 20 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: October 1, 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 Accouting Officer) -----END PRIVACY-ENHANCED MESSAGE-----