-----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, KLNzUWe9nIco7tg8LLDJtuOH/dWhbzBnwJiOOAYfXeSHeSNZ+kLd6Hs+BXH9RWCU 2vGRf4PTntNM+XS2OcytIA== 0000914317-98-000481.txt : 19980810 0000914317-98-000481.hdr.sgml : 19980810 ACCESSION NUMBER: 0000914317-98-000481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 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: SEC FILE NUMBER: 000-21137 FILM NUMBER: 98679359 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 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO _________________. Commission file number: 000-21137 R&G FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Puerto Rico 66-0532217 - -------------------------------------------------------------------------------- (State of incorporation (I.R.S. Employer or organization) Identification No.) 280 Jesus T. Pinero Avenue Hato Rey, San Juan, Puerto Rico 00918 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (787) 758-2424 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by checkmark whether Registrant (a) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s) and (b) has been subject to such filing requirements for at least 90 days. YES [ X ] NO [ ] Number of shares of Class B Common Stock outstanding as of June 30, 1998: 9,848,948. (Does not include 18,440,556 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 ................................ 3 Consolidated Statement of Financial Condition as of June 30, 1998 (Unaudited) and December 31, 1997.......... 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and 1997 (Unaudited).......... 4 Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 1998 and 1997 (Unaudited)...... 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 (Unaudited) ................ 6 Notes to Unaudited Consolidated Financial Statements ............. 7 Item 2 Management's Discussion and Analysis.............................. 14 Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 17 Part II - Other Information Item 1. Legal Proceedings ................................................ 17 Item 2. Changes in Securities ............................................ 18 Item 3. Defaults upon Senior Securities .................................. 18 Item 4. Submission of Matters to a Vote of security Holders............... 18 Item 5. Other Information ................................................ 19 Item 6. Exhibits and Reports on Form 8-K ................................. 19 Signatures ....................................................... 19 PART 1 - FINANCIAL INFORMATION Item 1:..Consolidated Financial Statements
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, December 31, 1998 1997 ---------- ---------- (Unaudited) (Dollars in thousands) ASSETS Cash and due from banks .................................................... $ 22,900 $ 32,607 Money market investments: Securities purchased under agreements to resell ........................ 8,000 16,000 Time deposits with other banks ......................................... 31,378 16,759 Federal funds sold ..................................................... -- 3,000 Mortgage loans held for sale, at lower of cost or market ................... 90,339 46,885 Mortgage-backed securities held for trading, at fair value ................. 445,126 400,457 Mortgage-backed securities available for sale, at fair value ............... 43,645 46,004 Mortgage-backed securities held to maturity, at amortized cost (estimated market value: 1998 - $ 30,905; 1997 - $33,186) .................. 31,124 33,326 Investment securities held for trading, at fair value ...................... 597 581 Investment securities available for sale, at fair value .................... 76,765 75,863 Investment securities held to maturity, at amortized cost .................. (estimated market value: 1998 - $6,229; 1997 - $10,656) .................... 6,264 10,693 Loans receivable, net ...................................................... 944,403 765,059 Accounts receivable, including advances to investors, net .................. 6,998 7,359 Accrued interest receivable ................................................ 12,090 10,346 Servicing asset ........................................................... 28,602 21,213 Premises and equipment ..................................................... 11,181 9,528 Other assets ............................................................... 15,523 15,065 ---------- ---------- $1,774,935 $1,510,745 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits .............................................................. $ 820,919 $ 722,418 Federal funds purchased ............................................... 15,000 10,000 Securities sold under agreements to repurchase ........................ 425,069 382,283 Notes payable ......................................................... 217,789 159,304 Advances from FHLB .................................................... 121,400 42,000 Other secured borrowings .............................................. -- 34,359 Accounts payable and accrued liabilities .............................. 18,868 15,872 Other liabilities ..................................................... 3,767 3,205 ---------- ---------- 1,622,812 1,369,442 ---------- ---------- Subordinated notes ........................................................ -- 3,250 ---------- ----------
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(continued) June 30, December 31, 1998 1997 ---------- ---------- (Unaudited) (Dollars in thousands) Stockholders'equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding ..................................................... -- -- Common stock: Class A - $.01 par value, 40,000,000 shares authorized; issued and outstanding - 18,440,556 shares in 1998 and 9,220,278 in 1997 184 92 Class B - $.01 par value, 20,000,000 shares authorized; issued and outstanding - 9,848,948 shares in 1998 and 4,924,474 in 1997 .... 99 49 Additional paid-in capital ............................................ 38,194 38,348 Retained earnings ..................................................... 110,113 96,129 Capital reserves of the Bank .......................................... 2,215 2,215 Accumulated other comprehensive income ................................ 1,318 1,220 ---------- ---------- 152,123 138,054 ---------- ---------- $1,774,935 $1,510,745 ========== ==========
The accompanying notes are an integral part of these statements. -3-
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three month Six month period ended period ended June 30, June 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Dollars in thousands except for per share data) Interest income: Loans ............................................. $ 21,487 $ 16,616 $ 40,144 $ 31,959 Money market and other investments ................ 1,538 1,186 2,966 2,729 Mortgage-backed securities ........................ 7,237 4,962 14,928 8,484 ------------ ------------ ------------ ------------ Total interest income ........................ 30,262 22,764 58,038 43,172 ------------ ------------ ------------ ------------ Interest expense: Deposits .......................................... 9,084 8,037 17,429 15,768 Securities sold under agreements to repurchase .... 6,162 2,505 11,855 3,818 Notes payable ..................................... 3,140 2,354 6,110 4,412 Secured borrowings ................................ -- 959 -- 1,933 Other ............................................. 1,064 318 1,846 597 ------------ ------------ ------------ ------------ Total interest expense ....................... 19,450 14,173 37,240 26,528 ------------ ------------ ------------ ------------ Net interest income .................................... 10,812 8,591 20,798 16,644 Provision for loan losses .............................. (1,500) (1,695) (3,000) (2,945) ------------ ------------ ------------ ------------ Net interest income after provision for loan losses .... 9,312 6,896 17,798 13,699 Other income: .......................................... ------------ ------------ ------------ ------------ Net gain on origination and sale of loans ......... 7,660 5,802 15,053 11,291 Net profit (loss) on trading account .............. -- (374) 15 (358) Net gain on sales of investments available for sale -- -- 149 25 Loan administration and servicing fees ............ 3,833 3,535 7,520 6,843 Service charges, fees and other ................... 1,472 1,357 2,656 2,210 ------------ ------------ ------------ ------------ 12,965 10,319 25,393 20,011 ------------ ------------ ------------ ------------ Total revenues ............................... 22,277 17,215 43,191 33,710 ------------ ------------ ------------ ------------
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME(continued) Three month Six month period ended period ended June 30, June 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Dollars in thousands except for per share data) Operating expenses: Employee compensation and benefits ................ 4,212 3,434 7,770 6,576 Office occupancy and equipment .................... 2,166 2,014 3,991 3,619 Other administrative and general .................. 5,906 4,231 10,700 8,329 ------------ ------------ ------------ ------------ 12,283 9,679 22,461 18,524 ------------ ------------ ------------ ------------ Income before income taxes ............................. 9,994 7,536 20,730 15,186 ------------ ------------ ------------ ------------ Income tax expense: Current ........................................... 747 1,119 2,607 2,826 Deferred .......................................... 1,276 1,039 2,672 1,947 ------------ ------------ ------------ ------------ 2,023 2,158 5,279 4,773 ------------ ------------ ------------ ------------ Net income .................................. $ 7,971 $ 5,378 $ 15,451 $ 10,413 ============ ============ ============ ============ Earnings per common share - Basic ...................... $ 0.28 $ 0.19 $ 0.55 $ 0.37 ------------ ------------ ------------ ------------ Diluted .................... $ 0.27 $ 0.18 $ 0.53 $ 0.36 ------------ ------------ ------------ ------------ Weighted average number of shares outstanding - Basic .. 28,289,504 28,289,504 28,289,504 28,289,504 - Diluted. 29,045,504 29,045,504 29,045,504 29,039,504
The accompanying notes are an integral part of these statements. -4-
R&G Financial Corporation Consolidated Statements of Comprehensive Income Three month Six month period ended period ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (Unaudited) (Unaudited) (Dollars in thousands) Net Income ........................................... $ 7,971 $ 5,378 $ 15,451 $ 10,413 -------- -------- -------- -------- Other comprehensive income, before tax: Unrealized gains (losses) on securities: Arising during period ........................... 549 1,262 309 (331) Less: Reclassification adjustments for gains included in net income .......................... -- -- (149) (25) -------- -------- -------- -------- 549 1,262 160 (356) Income tax (expense) benefit related to items of other comprehensive income ................................. (214) (492) (62) 139 -------- -------- -------- -------- Other comprehensive income, net of tax ............... 335 770 98 (217) -------- -------- -------- -------- Comprehensive income, net of tax ..................... $ 8,306 $ 6,148 $ 15,549 $ 10,196 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. -5-
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Six month Period ended June 30, ---------------------- 1998 1997 --------- --------- (Unaudited) (Dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: ....................................................... $ 15,451 $ 10,413 --------- --------- Depreciation and amortization ....................................... 1,347 1,324 Amortization of premium (accretion of discount) on investments and mortgage-backed securities, net ................................... (9) (202) Amortization of deferred loan origination fees and accretion of discount on loans, net ............................................ (109) (317) Amortization of servicing rights .................................... 1,323 813 Provision for loan losses ........................................... 3,000 2,945 Provision for bad debts in accounts receivable ..................... 150 150 Gain on sales of mortgage loans ..................................... (2,662) (125) Gain on sales of investment securities available for sale ........... (149) (25) Unrealized profit on trading securities ............................. (1,888) (5,604) (Increase) decrease in mortgage loans held for sale ................. (43,454) 23,204 Net increase in mortgage-backed and investment securities held for trading ........................................................... (42,797) (122,793) Increase in receivables ............................................. (1,534) (1,309) Decrease in other assets ............................................ 376 601 Increase in notes payable ........................................... 58,485 40,370 Increase (decrease) in accounts payable and accrued liabilities ..... 3,013 (139) Decrease in other liabilities ....................................... 562 (796) --------- --------- Total adjustments ............................................... (24,346) (61,903) --------- --------- Net cash used in operating activities ........................... (8,895) (51,490) --------- --------- Cash flows from investing activities: Purchases of investment securities ....................................... (31,501) (37,963) Proceeds from sales and maturities of securities available for sale ...... 33,933 9,820 Proceeds from maturities of securities held to maturity .................. 4,405 -- Principal repayments on mortgage-backed securities ....................... 5,730 3,912 Proceeds from sales of loans ............................................. 73,398 6,016 Net originations of loans ................................................ (287,329) (124,571) Purchases of FHLB stock, net ............................................ (4,160) (550) Acquisition of premises and equipment .................................... (2,764) (2,243) Net increase in foreclosed real estate .................................. (1,070) (62) Acquisition of servicing rights .......................................... (8,712) (3,380) --------- --------- Net cash used by investing activities ........................... (218,070) (149,021) --------- ---------
R&G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS(continued) Six month Period ended June 30, ---------------------- 1998 1997 --------- --------- (Unaudited) (Dollars in thousands) Cash flows from financing activities: Increase in deposits - net ................................................ 98,421 58,383 Increase in federal funds purchased ....................................... 5,000 11,850 Increase in securities sold under agreements to repurchase - net .......... 42,786 100,873 Payments on secured borrowings ............................................ -- (1,735) Advances from FHLB ........................................................ 79,400 35,000 Repayment of advances from FHLB ........................................... -- (20,000) Repayment of subordinated notes ........................................... (3,250) -- Payments on notes payable ................................................. -- (2,400) Capital contribution to subsidiary ........................................ (12) -- Cash dividends on common stock ............................................ (1,468) (1,130) --------- --------- Net cash provided by financing activities ....................... 220,877 180,841 --------- --------- Net decrease in cash and cash equivalents ...................................... (6,088) (19,670) Cash and cash equivalents at beginning of period ............................. 68,366 98,856 --------- --------- Cash and cash equivalents at end of period ..................................... $ 62,278 $ 79,186 ========= ========= Cash and cash equivalents include: Cash and due from banks ................................................... $ 22,900 $ 33,739 Securities purchased under agreements to resell ........................... 8,000 14,006 Time deposits with other banks............................................. 31,378 31,441 Federal funds sold ........................................................ -- -- --------- --------- $ 62,278 $ 79,186 ========= =========
The accompanying notes are an integral part of these statements. -6- R&G FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION Reporting entity The accompanying unaudited consolidated financial statements include the accounts of R&G Financial Corporation (the Company) and its wholly owned subsidiaries, 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. 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. R&G Mortgage pools loans into mortgage-backed securities and collateralized mortgage obligation certificates for sale to investors. After selling the loans, it retains the servicing function. R&G Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is licensed by the Commissioner of Financial Institutions 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, including residential, commercial and personal loans and a diversified range of deposit products through eighteen branches located mainly in the northern part of the Commonwealth of Puerto Rico. The Bank also provides private banking, trust and other financial services to its customers. The Bank is subject to the regulations of certain federal and local agencies, and undergoes periodic examinations by those regulatory agencies. Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. However, in the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company's financial condition as of June 30, 1998, and the results of operations and changes in its cash flows for the three and six months ended June 30, 1998 and 1997. The results of operations for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1997. Certain reclassifications (not affecting income before income taxes or net income) have been made to the consolidated statements of income for the three and six month periods ended June 30, 1997 to conform to the presentation for the 1998 respective periods. -7- Basis of consolidation All significant inter-company balances and transactions have been eliminated in the accompanying unaudited financial statements. Reporting Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130- "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in general-purpose financial statements. Comprehensive income is intended to report all changes in the equity of a business enterprise during a period from transactions and other events or circumstances, except those resulting from investments by or distribution to owners. The only item of comprehensive income reported by the Company is the unrealized gains on securities available for sale which, at January 1, 1998, amounted to $1.2 million net of tax. Accountings for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically accounted as a hedge. The accounting for changes in fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation, as follows: For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. -8- Management is evaluating its hedging strategy in light of this new pronouncement to establish the initial designation of its hedging activities and determine the effect and timing of adoption. However, due to the relatively limited extent to which the Company is using derivative instruments and the simple nature of the instruments used, management does not expect the impact of adoption to be significant. NOTE 2 - EARNINGS PER SHARE Basic earnings per common share for the three and six months ended June 30, 1998 and 1997 are computed by dividing net income for such periods by the weighted average number of shares of common stock outstanding during such periods, which was 28,289,504. Outstanding stock options granted in connection with the Company's Stock Option Plan are included in the weighted average number of shares for purposes of the diluted earnings per share computation. The Company's weighted average number of shares outstanding for purposes of diluted earnings per share was 29,045,504 for the three month periods ended June 30, 1998 and 1997, respectively, and 29,045,504 and 29,039,504 for the six month periods ended June 30, 1998 and 1997, respectively. On June 25, 1998 the Company effected a 2 for 1 stock split on the Company's common stock, in the form of a stock dividend of one additional share of common stock for each share of common stock held of record as of June 12, 1998. Following distribution of the additional shares, the Company had 28,289,504 common shares outstanding. Per share information for all periods presented take into consideration the stock splits paid by the Company in June 1998 and September 1997. 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, 1998 -------------- (Unaudited) Mortgage-backed securities held for trading: CMO residuals (all interest only)......................... $ 8,020,658 GNMA certificates......................................... 437,105,550 ----------- $445,126,208 ============ -9-
June 30, 1998 ---------------------------- Amortized cost Fair value ----------- ----------- (Unaudited) Mortgage-backed securities available for sale: CMO residuals and other mortgage-backed securities $ 8,135,222 $ 9,784,843 ----------- ----------- FNMA certificates: Due over ten years .......................... 8,650,944 8,734,477 ----------- ----------- FHLMC certificates: Due from one to five years .................. 102,302 103,935 Due from five to ten years .................. 267,419 272,438 Due over ten years .......................... 24,348,684 24,749,005 ----------- ----------- 24,718,405 25,125,378 ----------- ----------- $41,504,571 $43,644,698 =========== =========== Investment securities available for sale: U.S. Treasury securities: Due within one year ......................... $ 796,165 $ 796,000 Due from one to five years .................. 30,514,345 30,543,368 ----------- ----------- 31,310,510 31,339,368 ----------- ----------- U.S. Government and agencies securities: Due within one year ......................... 5,000,000 4,998,830 Due from one to five years .................. 26,345,956 26,359,825 Due from five to ten years .................. 5,021,473 5,000,810 ----------- ----------- 36,367,429 36,359,465 ----------- ----------- FHLB stock ....................................... 9,066,367 9,066,367 ----------- ----------- $76,744,306 $76,765,200 =========== ===========
Mortgage backed securities available for sale include interest only securities with an amortized cost of $3,522,553 as of June 30, 1998, which are primarily associated with the sale by the Company in prior years of collaterized mortgage obligations. These sales were not made in connection with the Company's mortgage banking activities. -10-
June 30, 1998 ----------------------------- Amortized cost Fair value ----------- ----------- (Unaudited) Investment securities held to maturity: U.S. Treasury securities- Due within one year .................................. $ 309,977 $ 310,000 Puerto Rico Government obligations- Due from five to ten years ........................... 5,953,560 5,919,424 ----------- ----------- $ 6,263,537 $ 6,229,424 =========== =========== Mortgage-backed securities held to maturity: GNMA certificates: Due from one to five years ........................... $ 42,608 $ 43,282 Due over ten years ................................... 17,130,644 16,589,595 ----------- ----------- 17,173,252 16,632,877 ----------- ----------- Federal National Mortgage Association (FNMA) certificates - Due over ten years ................................... 13,689,027 14,017,261 ----------- ----------- Federal Home Loan Mortgage Corporation (FHLMC) certificates - Due over ten years ................................... 261,466 254,544 ----------- ----------- $31,123,745 $30,904,682 =========== ===========
-11- NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consists of the following:
June 30, December 31, 1998 1997 ------------- ------------- (Unaudited) Real estate loans: Residential - first mortgage ........ $ 649,101,374 $ 476,728,996 Residential - second mortgage ....... 18,453,562 17,831,079 Construction ........................ 17,409,652 13,367,513 Commercial .......................... 99,295,900 87,506,802 ------------- ------------- 784,260,488 595,434,390 Undisbursed portion of loans in process .. (8,524,465) (6,218,039) Net deferred loan fees ................... 90,267 172,019 ------------- ------------- 775,826,290 589,388,370 ------------- ------------- Other loans: Commercial .......................... 42,624,109 39,127,363 Consumer: Secured by deposits .............. 14,087,109 12,471,772 Secured by real estate ........... 76,186,607 81,251,989 Other ............................ 42,776,592 50,103,282 Unamortized discount ..................... (143,351) (151,460) Unearned interest ........................ (259,148) (360,195) ------------- ------------- 175,271,918 182,442,751 ------------- ------------- Total loans ...................... 951,098,208 771,831,121 Allowance for loan losses ........... (6,694,925) (6,771,702) ------------- ------------- $ 944,403,283 $ 765,059,419 ============= =============
The changes in the allowance for loan losses follow:
Six months ended June 30, -------------------------- 1998 1997 ------- ------- (Unaudited) (Dollars in thousands) Balance, beginning of period ............... $ 6,772 $ 3,332 Provision for loan losses .................. 3,000 2,945 Loans charged-off .......................... (3,212) (2,090) Recoveries................................. 135 224 ------- ------- Balance, end of period ..................... $ 6,695 $ 4,411 ======= =======
-12- 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 $407.4 million at June 30, 1998. 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 amounted to approximately $150.7 million at June 30, 1998. Commitments to buy and sell GNMA certificates As of June 30, 1998, the Company had open commitments to issue GNMA certificates of approximately $38.4 million. Lease commitments The Company is obligated under several noncancellable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals. Other At June 30, 1998, 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, amount to approximately $379.7 million at June 30, 1998. Liability, if any, under the recourse provisions at June 30, 1998 is estimated by management to be insignificant. -13- Item 2: Management's Discussion and Analysis Financial Condition At June 30, 1998, the Company's total assets amounted to $1.8 billion, as compared to $1.5 billion at December 31, 1997. The $264.2 million or 17.5% increase in total assets during the six month period ended June 30, 1998 was primarily attributable to a $179.3 million or 23.4% increase in loans receivable, net, which reflects net originations following repayments and sales, a $44.7 million or 11.1% increase in mortgage-backed securities held for trading, and a $43.4 million or 92.6% increase in mortgage loans held for sale, respectively. The increase in the Company's assets was funded primarily by increased deposits of $98.5 million or 13.6%, a $79.4 million or 189.0% increase in FHLB advances, a $58.5 million or 36.7% increase in notes payable, and a $42.8 million or 11.2% increase in securities sold under agreements to repurchase. At June 30, 1998, the Company's stockholders' equity amounted to $152.1 million, which is an increase of $14.1 million or 10.2% from the amount reported at December 31, 1997. The primary reason for the increase was the net income earned during the six month period ended June 30, 1998, which was partially offset by $1.5 million of dividends paid during such period. At June 30, 1998, the Bank's leverage and Tier 1 risk-based capital amounted to 6.83% and 11.42% of adjusted total assets, respectively, compared to a 4.0% minimum requirement, and its total risk-based capital amounted to 12.44%, compared to an 8.0% minimum requirement. Results of Operations The Company reported net income of $8.0 million and $15.5 million during the three and six month periods ended June 30, 1998, respectively, as compared to $5.4 million and $10.4 million during the prior comparable periods, or an increase during such periods of $2.6 million or 48.2% and $5.0 million or 48.4%, respectively. Total revenues for the six month period ended June 30, 1998 amounted to $43.2 million, a $9.5 million or 28.1% increase over the comparable 1997 period. The increase in revenues during the six month period ended June 30, 1998 was primarily attributable to a $4.1 million or 25.0% increase in net interest income and a $3.8 million or 33.3% increase in net gain on origination and sale of loans. The increase in net interest income is primarily due to an $8.2 million or 25.6% increase in interest income on loans, which is primarily associated with an increase in the average balance of the outstanding loan portfolio, and to a $6.4 million or 75.9% increase in interest income on mortgage - backed securities due to an increase in securities held for trading in the 1998 period. The increase in net gain on origination and sale of loans reflects an increase in mortgage loan originations during the 1998 period. The volume of loan originations increased 63% to approximately $684.1 million during such period. Contributing also to the increase in revenues during the six month period ended June 30, 1998 was a $677,000 or 9.9% increase in loan administration and servicing fees, as the Company's servicing portfolio expanded by 13.1% over the prior year to $3.4 billion, and a $446,000 or 20.2% increase in service charges, fees and other miscellaneous revenue sources, due mainly to an increase in banking fees associated with an increased number of deposit accounts during the 1998 period. -14- Total revenues for the quarter ended June 30, 1998 amounted to $22.3 million, a $5.1 million or 29% increase over the comparable quarter in 1997. The increase in total revenues during the 1998 quarter was primarily attributable to a $2.2 million or 25.8% increase in net interest income, a $1.8 million or 32.0% increase in net gain on origination and sale of loans and a $298,000 or 8.4% increase in loan administration and servicing fees. In addition, an increase in trading revenue resulted from the absence of a $374,000 loss in the 1997 quarter. Total expenses increased by $3.9 million or 21.2% during the six months ended June 30, 1998, over the prior comparable periods. The increase during the six month period ended June 30, 1998 was due primarily to a $1.2 million or 18.2% increase in employee compensation and benefits associated with an increase in the number of employees to accomodate a higher loan production during the 1998 period, and a $372,000 or 10.3% increase in occupancy expenses related to the completion in late 1997 of the remodeling work of six branches acquired in 1995 from another financial institution. Other miscellaneous expenses increased by $2.4 million or 28.5% mainly as a result of a $450,000 increase in advertising costs associated with an increase in loan production and a $515,000 increase in amortization expenses of the Company's servicing asset. Total operating expenses increased by $2.6 million or 26.9% during the three month period ended June 30, 1998. The increase was due to a $778,000 or 22.6% increase in employee compensation and benefits, a $152,000 or 7.5% increase in occupancy expenses, and a $1.7 million or 39.6% increase in other miscellaneous expenses. These expenses increased during such three month period for the reasons noted above. Total income tax expense decreased by $135,000 or 6.3% and increased by $506,000 or 10.6% during the three and six month periods ended June 30, 1998, respectively, over the prior comparable periods. The decrease during the three month period ended June 30, 1998 is primarily associated with the purchase, at a discount, of certain investment tax credits during the period. The increase during the six month period ended June 30, 1998 is due primarily to a $5.5 million or 36.5% increase in income before taxes during such period. The Company's effective tax rate amounted to 20.2% and 25.5% during the three and six month periods ended June 30, 1998, compared to 28.6% and 31.4% in the 1997 comparable periods. The decrease in 1998 of the Company's effective tax rate is primarily associated with an increase in the Company's exempt interest income from GNMA mortgage backed securities . 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 -15- 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 June 30, 1998, the Company had $141.0 million in borrowing capacity under warehousing lines of credit, $441.2 million in borrowings capacity under a line of credit with the FHLB of New York and $ 15 million of borrowing capacity under federal funds lines of credit. 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, 1998, the Company had outstanding commitments to originate non-mortgage loans of $19.1 million. Certificates of deposit which are scheduled to mature within one year totaled $397.0 million at June 30, 1998, and borrowings that are scheduled to mature within the same period amounted to $695.2 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 1 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 1 capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At June 30, 1998, the Bank met each of its capital requirements, with Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital ratios of 6.83%, 11.42% and 12.44%, respectively. -16- 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. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In addition to historical information, forward-looking statements are contained herein that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause future results to vary from current expectations, include, but are not limited to, the impact of economic conditions (both generally and more specifically in the markets in which the Company operates), the impact of government legislation and regulation (which changes from time to time and over which the Company has no control), and other risks detailed in this Form 10-Q and in the Company's other Securities and Exchange Commission ("SEC") filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC. Item 3. Quantitative and Qualitative Disclosures about Market Risk Quantitative and qualitative disclosures about market risk are presented at December 31, 1997 in Item 7A of the Company's Annual report on Form 10-K. Management believes there have been no material changes in the Company's market risk since December 31, 1997. 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. -17- 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 The Company's Annual Meeting of Stockholders was held on April 23, 1998. 1. With respect to the election of four directors to serve three-year terms expiring at the Annual Meeting of Stockholders to be held in the year 2001 or until their respective successors are elected and qualified, the following were the number of shares voted for each nominee: Ana M. Armendariz Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,647,250 Withheld 0 Against 9,100 Victor L. Galan Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,647,250 Withheld 0 Against 9,100 Benigno Fernandez Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,647,250 Withheld 0 Against 9,100 Pedro L. Ramirez Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,647,250 Withheld 0 Against 9,100 2. With respect to the amendment of the Company's certificate of Incorporation to increase the authorized number of shares of Common Stock from 25,000,000 to 60,000,000, the following are the number of shares voted: Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,648,410 Withheld 180 Against 9,210 3. With respect to the ratification of the appointment of Price Waterhouse as the Company's independent auditors for the fiscal year ending December 31, 1998, the following are the number of shares voted: Class A - For 18,440,556 Withheld 0 Against 0 Class B - For 3,657,800 Withheld 0 Against 0 -18- Item 5. Other Information Deadlines for Shareholder Proposals Pursuant to Rule 14a-5(e) under the Securities Exchange Act of 1934, as amended, effective June 29, 1998: (1) The deadline for submitting shareholder proposals for inclusion in the Company's proxy statement and form of proxy for the Company's 1999 Annual Meeting of Stockholders pursuant to Rule 14a-8 is December 1, 1998. (2) The date after which notice of a shareholder proposal submitted outside the processes of Rule 14a-8 is considered untimely is December 31, 1998. Item 6: Exhibits and Reports on Form 8-K a) Exhibits No. --- 27 Financial Data Schedule E-1 b) No Form 8-K reports were filed during the quarter. 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: July 31, 1998 By: /S/ VICTOR J. GALAN ------------------- Victor J. Galan, Chairman and Chief Executive Officer (Principal Executive Officer) By: /S/ JOSEPH R. SANDOVAL Joseph R. Sandoval Vice President and Chief Financial Officer -19- EX-27 2
9 6-MOS DEC-31-1998 JUN-30-1998 22,900,597 31,377,612 0 445,126,208 120,409,898 37,387,282 37,134,106 944,403,283 6,694,925 1,774,935,549 820,918,765 764,273,811 22,634,712 0 0 0 38,477,266 113,645,995 1,774,935,549 40,143,964 14,928,345 2,965,745 58,038,054 17,429,025 37,239,848 20,798,206 3,000,000 2,052,229 22,460,917 20,730,293 20,730,293 0 0 15,450,978 0.55 0.53 7.93 33,428,098 288,097 0 36,720,716 6,771,698 3,211,655 134,882 6,694,925 6,694,925 0 0
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