<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1996
REGISTRATION NO. 333-06245
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
R&G FINANCIAL CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
PUERTO RICO 6712 66-0532217
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
280 JESUS T. PINERO AVENUE
HATO REY, SAN JUAN, PUERTO RICO 00918
(787) 758-2424
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
VICTOR J. GALAN
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
R&G FINANCIAL CORPORATION
280 JESUS T. PINERO AVENUE
HATO REY, SAN JUAN, PUERTO RICO 00918
(787) 758-2424
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
WITH A COPY TO:
Norman B. Antin, Esq. David S. Katz, Esq.
Jeffrey D. Haas, Esq. Orrick, Herrington & Sutcliffe
Elias, Matz, Tiernan & Herrick L.L.P. and 1150 18th Street, N.W.
734 15th Street, N.W., 12th Floor 9th Floor
Washington, D.C. 20005 Washington, D.C. 20036
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE(1)
<S> <C> <C>
Common Stock, $.01 par value per
share.................................. $38,945,925 $13,430(2)
<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Previously paid.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS MAY
BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
R&G FINANCIAL CORPORATION
Cross Reference Sheet Showing Location in the Prospectus of Information
Required by Items of Form S-1
REGISTRATION STATEMENT ITEM AND CAPTION PROSPECTUS HEADINGS
- ---------------------------------------- -----------------------------------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Outside Front Cover Page; Cross
Reference Sheet
2. Inside Front and Outside Back Cover
Page of the Prospectus............ Inside Front and Outside Back Cover
Pages of the Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... Not applicable
8. Plan of Distribution............... Outside Front Cover Page of the
Prospectus; Prospectus Summary;
Bank Stockholder Exchange
Transaction; Underwriting
9. Description of Securities to be
Registered........................ Description of Capital Stock
10. Interests of Named Experts and
Counsel........................... Not applicable
11. Information with Respect to the
Registrant........................ Outside Front Cover Page; Selected
Consolidated Financial and Other
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business of the Company;
Regulation; Management;
Consolidated Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... Underwriting
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT IS
DECLARED EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST , 1996
PROSPECTUS
2,296,396 SHARES
R&G FINANCIAL CORPORATION
CLASS B COMMON STOCK
Of the 2,296,396 shares of Class B Common Stock, $.01 par value per share
(the "Class B Shares") covered by this Prospectus, 1,933,333 shares are being
offered by R&G Financial Corporation, a Puerto Rico corporation ("R&G Financial"
or the "Company"), and 66,667 shares are being offered by the Chairman of the
Board and Chief Executive Officer of the Company (the "Selling Stockholder")
(the "Offering"). R&G Financial is also issuing 296,396 additional Class B
Shares to all current stockholders of R-G Premier Bank of Puerto Rico (the
"Bank") (other than the Company), in exchange for and in satisfaction of their
approximately 11.9% interest in the Bank pursuant to an exchange offer which
shall be consummated immediately prior to the closing of the Offering (the "Bank
Stockholder Exchange Transaction.") See "Bank Stockholder Exchange Transaction."
Prior to the Offering, the Class B Shares have not been traded on any
exchange or actively traded in any established public trading market. See
"Dividends and Market for Class B Shares." It is currently estimated that the
initial public offering price for the Class B Shares will be between $13.00 and
$15.00. Both the Class B Shares of the Company and of the Selling Stockholder
are being offered hereby by the Underwriter at the same fixed price. See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price.
The Company has two classes of common stock outstanding: Class A Common
Stock, par value $0.01 per share (the "Class A Shares"), and the Class B Shares
(collectively, the "Common Stock"). Following consummation of the Offering and
the Bank Stockholder Exchange Transaction, there will be 5,122,377 Class A
Shares outstanding, all of which shall be unregistered and owned by Mr. Victor
J. Galan, the Company's Chairman of the Board and Chief Executive Officer, and
2,296,396 Class B Shares outstanding. The Class A Shares are entitled to two
votes per share and the Class B Shares are entitled to one vote per share.
Following the Offering and the Bank Stockholder Exchange Transaction, Mr. Victor
J. Galan will own 69.05% of the outstanding Common Stock of the Company and will
be entitled to exercise 81.69% of the voting rights outstanding (66.36% and
79.78%, respectively, assuming the over-allotment option described herein is
exercised in full). As a result, Mr. Galan will continue to have the power to
elect and remove all of the Company's Board of Directors and management and to
determine the outcome of substantially all other matters to be decided by a vote
of stockholders. See "Description of Capital Stock" and "Beneficial Ownership of
Securities."
R&G Financial has applied to have the Class B Shares approved for quotation
on the National Association of Securities Dealers Automated Quotation National
Market System (the "Nasdaq Stock Market") under the symbol "RGFC."
--------------------------
SEE "RISK FACTORS" ON PAGE 13 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
--------------------------
THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION
INSURANCE FUND OR THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
--------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO THE
UNDERWRITING PROCEEDS TO THE SELLING
PRICE TO PUBLIC DISCOUNT(1)(2) COMPANY(2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total (3)......................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $450,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
300,000 additional Class B Shares on the same terms and conditions as set
forth above, to cover over-allotments, if any. If all such Class B Shares
are purchased, the total Price to Public, Underwriting Discount, Proceeds to
the Company and Proceeds to the Selling Stockholder will be $ ,
$ , $ and $ , respectively. See
"Underwriting."
--------------------------
THE SHARES ARE OFFERED BY THE UNDERWRITER SUBJECT TO RECEIPT AND ACCEPTANCE
BY THEM, TO PRIOR SALE AND TO THE UNDERWRITER'S RIGHT TO REJECT ANY ORDER IN
WHOLE OR IN PART AND TO WITHDRAW, CANCEL OR MODIFY THE OFFER WITHOUT NOTICE. IT
IS EXPECTED THAT DELIVERY OF THE CERTIFICATES FOR THE CLASS B SHARES WILL BE
MADE AGAINST PAYMENT THEREFOR AT THE OFFICES OF FRIEDMAN, BILLINGS, RAMSEY &
CO., INC. IN ARLINGTON, VIRGINIA ON OR ABOUT , 1996.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS B SHARES
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE ACCOMPANYING
NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES HEREIN TO THE COMPANY INCLUDE THE BANK AND R&G
MORTGAGE, EACH AS DEFINED BELOW.
THE COMPANY
R&G FINANCIAL. R&G Financial, which had $868.3 million in assets at March
31, 1996, is the newly established holding company for R&G Mortgage Corporation,
a Puerto Rico mortgage banking company ("R&G Mortgage"), and R-G Premier Bank of
Puerto Rico, a Puerto Rico commercial bank (the "Bank"). The Company competes
for business in Puerto Rico by providing a wide range of financial services to
residents of all of Puerto Rico's major cities through branch offices and
mortgage banking facilities at 17 locations. Puerto Rico, the fourth largest of
the Caribbean Islands, is a commonwealth of the United States and is
approximately 100 miles long and 35 miles wide. The population of Puerto Rico as
of June 30, 1995 was estimated at approximately 3.7 million. The operations of
both R&G Mortgage and the Bank have expanded substantially during the 1990's,
due in large part to R&G Mortgage's emergence as the second largest originator
of loans secured by single-family residential properties in Puerto Rico. During
the two year period ended March 31, 1996, R&G Mortgage originated 20% of all
single-family residential loans originated in Puerto Rico, which has resulted in
significant growth in its servicing portfolio as well as facilitated rapid
expansion of the Bank's franchise and operations. R&G Mortgage's servicing
portfolio has increased by 50.3% since December 31, 1991 and, at March 31, 1996,
R&G Mortgage serviced approximately 49,000 accounts with an aggregate loan
balance of $2.4 billion. The Bank's asset size, which amounted to $653.9 million
at March 31, 1996, has increased 12 fold since R&G Mortgage became affiliated
with the Bank in February 1990, while the branch office network has increased
from two to 14 offices. Management estimates that at March 31, 1996, 23.3% of
R&G Mortgage's customers have established a banking relationship with the Bank.
R&G Financial on a consolidated basis had net income of $2.9 million and $10.4
million for the three months ended March 31, 1996 and the year ended December
31, 1995, respectively.
Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer and
controlling shareholder of the Company, originally organized R&G Mortgage in
1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two branch
federal savings and loan association with total assets of $52.9 million, which
was re-named R&G Federal Savings Bank. Recognizing the complementary operational
aspects and cross selling opportunities that are inherent in operating both a
mortgage bank and banking institution, during 1990 Mr. Galan successfully
integrated both the Bank's and R&G Mortgage's operations, which structure has
since been emulated in Puerto Rico. Embarking on a retail branch expansion
strategy, the Bank in 1993 acquired a two branch savings and loan association
with total assets of $78.6 million and, in June 1995, acquired from a commercial
bank $77.2 million in deposits and, after consolidation, six branch offices. In
November 1994, the Bank converted to a Puerto Rico-chartered commercial bank and
took its present name.
BUSINESS STRATEGY. The Company has generally sought to achieve long-term
financial strength and profitability by increasing the amount and stability of
its net interest income and non-interest income. The Company has sought to
implement this strategy by (i) establishing and emphasizing the growth of its
mortgage banking activities, including growing its loan servicing operation;
(ii) expanding its retail banking franchise in order to achieve increased market
presence and to increase core deposits; (iii) enhancing the Company's net
interest income by increasing the Company's loans held for investment,
particularly single-family residential loans; (iv) developing new business
relationships through an increased emphasis on commercial real estate and
commercial business lending; (v) diversifying the Company's retail products and
services, including an increase in
3
<PAGE>
consumer loan originations (such as credit cards); (vi) meeting the banking
needs of its customers through, among other things, the offering of trust and
investment services; and (vii) controlled growth and the pursuit of a variety of
acquisition opportunities when appropriate. The Company attempts to control its
overall operating expenses notwithstanding the Company's recent growth and
expansion activities.
R&G MORTGAGE. R&G Mortgage is engaged primarily in the business of
originating first mortgage loans secured by single-family residential properties
which are either insured by the Federal Housing Administration ("FHA") or
guaranteed by the Veterans' Administration ("VA") and originating second
mortgage loans which are neither secured nor guaranteed. R&G Mortgage also
originates conforming conventional single-family residential loans which are
neither insured by the FHA nor guaranteed by the VA. Pursuant to agreements
entered into between R&G Mortgage and the Bank, R&G Mortgage also originates for
the Bank for portfolio retention non-conforming single-family residential
conventional loans and consumer loans, most of which are secured by real estate.
The Bank retains the non-conforming conventional single-family residential loans
because these loans generally do not satisfy resale guidelines of purchasers in
the secondary mortgage market, primarily because of size or other underwriting
technicalities at the time of origination. Jumbo loans may be packaged into
collateralized mortgage obligations ("CMOs") and sold while loans with
underwriting technicalities may be cured through payment experience and
subsequently sold. During the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993, R&G Mortgage originated a total of
$100.2 million, $322.7 million, $488.1 million and $834.7 million of loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for the Bank of $56.9 million, $156.3 million, $142.6 million
and $180.8 million during such respective periods, or 56.8%, 48.4%, 29.2% and
21.7%, respectively, of total originations.
R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are
guaranteed by the Government National Mortgage Association ("GNMA"), which
securities are sold to securities broker dealers and other investors.
Conventional loans may either be sold directly to agencies such as the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") or to private investors, or may be pooled into FNMA- or
FHLMC-backed mortgage-backed securities which are generally sold to investors.
During the three months ended March 31, 1996 and the years ended December 31,
1995, 1994 and 1993, R&G Mortgage sold $37.6 million, $232.4 million, $368.1
million and $604.1 million of loans, respectively, which includes loans
securitized and sold but does not include loans originated for the Bank. R&G
Mortgage generally retains the servicing function with respect to the loans
which have been securitized and sold. R&G Mortgage is subject to regulation and
examination by the FHA, FNMA, FHLMC, GNMA, VA, Department of Housing and Urban
Development ("HUD") and the Puerto Rico Office of the Commissioner of Financial
Institutions ("OCFI"). For the three months ended March 31, 1996 and the year
ended December 31, 1995, R&G Mortgage on an unconsolidated basis (which does not
reflect certain items of revenue and expense which are eliminated upon
consolidation) had net income of $1.4 million and $6.7 million, respectively.
THE BANK. The Bank's principal business consists of attracting deposits
from the general public and tax-advantaged funds from eligible Puerto Rico
corporations and using such deposits, together with funds obtained from other
sources, to originate (through R&G Mortgage) and purchase loans secured
primarily by residential real estate in Puerto Rico, and to purchase
mortgage-backed and other securities. To a lesser extent but with increasing
emphasis over the past few years, the Bank also originates a variety of consumer
loans, commercial business loans and loans secured by commercial real estate.
The Bank offers trust services through its trust department ("Trust
Department"). Total loan originations by the Bank during the three months ended
March 31, 1996 and the years ended December 31, 1995, 1994 and 1993 amounted to
$30.2 million, $121.7 million, $57.6 million and $40.7 million, respectively.
The Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is regulated and examined by the FDIC as well as by the OCFI. At
March 31, 1996,
4
<PAGE>
there were a total of 20 financial institutions (commercial banks and savings
institutions) headquartered in Puerto Rico and the Bank had a total of $541.1
million or 2.35% of the total $23 billion of deposits in Puerto Rico. For the
three months ended March 31, 1996 and the year ended December 31, 1995, the Bank
on an unconsolidated basis (which does not reflect certain items of revenue and
expense which are eliminated upon consolidation) had net income of $1.5 million
and $6.2 million, respectively.
THE BANK STOCKHOLDER EXCHANGE TRANSACTION AND THE OFFERING
<TABLE>
<S> <C>
SHARES OFFERED IN THE BANK
STOCKHOLDER EXCHANGE TRANSACTION: 5,189,044 Class A Shares, all of which have been issued
to the Company's Chairman of the Board and Chief
Executive Officer in exchange for his 100% ownership of
the common stock of R&G Mortgage and approximately 88.1%
ownership of the common stock of the Bank. The
Chairman's exchange of Bank shares for his Class A
Shares was accomplished on July 19, 1996 and was not
dependent upon consummation of the Offering. In
addition, the Chairman, who is the Selling Stockholder,
in connection with the Offering will convert 66,667 of
his Class A Shares into an equal number of Class B
Shares, all of which Class B Shares will be sold in the
Offering.
296,396 Class B Shares shall be issued to stockholders
of the Bank (other than the Company) in exchange for
their aggregate ownership of approximately 11.9% of the
common stock of the Bank pursuant to the terms of an
Agreement and Plan of Merger entered into by the
Company, the Bank and an interim bank formed by the
Company solely to merge with and into the Bank in order
to facilitate the exchange transaction. The acquisition
of the remaining shares of common stock of the Bank in
this manner ensures the acquisition of 100% of the
remaining Bank common stock by the Company. The exchange
by the Bank's minority stockholders will take place
immediately prior to consummation of the Offering. See
"Bank Stockholder Exchange Transaction."
SHARES OFFERED BY THE COMPANY IN
THE OFFERING: 1,933,333 Class B Shares (2,233,333 Class B Shares,
assuming full exercise of the over-allotment option.)
See "Underwriting."
SHARES OFFERED BY THE SELLING
STOCKHOLDER IN THE OFFERING: 66,667 Class B Shares. See "Underwriting."
COMMON STOCK TO BE OUTSTANDING
AFTER THE BANK STOCKHOLDER
EXCHANGE TRANSACTION
AND THE OFFERING: 5,122,377 Class A Shares and 2,296,396 Class B Shares
(2,596,396 Class B Shares, assuming full exercise of the
over-allotment option).
USE OF PROCEEDS: Based upon the sale of the Class B Shares by the Company
at an assumed Price to Public of $15.00, approximately
$ of the net proceeds will be used to enhance the
capital base of
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
the Bank. The additional capital will support further
expansion of the Bank, including the acquisition of
branch offices or financial institutions in Puerto Rico,
when or if such opportunities arise in the future. There
can be no assurance that the Bank will be successful in
making any acquisitions in the future on terms favorable
to the Bank. The Company will use $10.0 million of net
proceeds to acquire from R&G Mortgage the $10.0 million
Series A Preferred Stock of the Bank presently held by
R&G Mortgage. The Company proposes to retain the
remaining $ of net proceeds for general corporate
purposes. The Company will not receive any of the pro-
ceeds from the sale of the Class B Shares offered by the
Selling Stockholder. See "Use of Proceeds."
DIVIDENDS: The Company expects to initiate a cash dividend policy
and to pay a dividend on the Common Stock beginning with
the first full quarter following the Offering. However,
no decision has been made as to the amount or timing of
such dividends, if any. Declarations of dividends by the
Board of Directors will depend upon a number of factors
including the ability to receive dividends from the Bank
and/or R&G Mortgage. See "Use of Proceeds" and
"Dividends and Market for Class B Shares."
NASDAQ SYMBOL: R&G Financial has applied to have the Class B Shares ap-
proved for quotation on the Nasdaq Stock Market under
the symbol "RGFC." See "Dividends and Market for Class B
Shares."
</TABLE>
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other data
of the Company for the three months ended March 31, 1996 and 1995, and for each
of the five years in the period ended December 31, 1995. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, including the accompanying Notes, presented
elsewhere herein. The financial information presented for the three months ended
March 31, 1996 and 1995 is unaudited. In the opinion of management, this
information reflects all adjustments, consisting only of normal recurring
accruals and adjustments, necessary for a fair presentation.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets(1).................. $868,293 $647,667 $853,206 $622,499 $538,069 $294,115 $185,397
Loans receivable, net............ 534,114 329,345 473,841 301,614 216,593 117,428 96,680
Mortgage loans held for sale..... 25,866 24,086 21,318 22,021 174,221 106,401 31,302
Mortgage-backed and investment
securities held for trading..... 116,711 136,220 113,809 124,522 -- -- --
Mortgage-backed securities
available for sale.............. 46,041 12,577 61,008 13,300 10,241 4,763 4,197
Mortgage-backed securities held
to maturity..................... 40,716 83,761 41,731 84,122 39,122 15,557 12,119
Investment securities, available
for sale........................ 23,254 3,280 3,280 1,878 -- -- --
Investment securities held to
maturity........................ 4,709 9,281 2,046 2,182 4,957 2,267 1,605
Cash and cash equivalents(2)..... 42,875 31,657 104,195 45,622 66,958 25,677 22,989
Deposits......................... 541,123 389,919 518,186 380,148 312,151 169,998 128,226
Securities sold under agreements
to repurchase................... 95,314 118,594 98,483 108,922 -- -- 1,800
Notes payable.................... 73,585 43,888 81,130 45,815 133,913 76,372 20,286
Other borrowings(3).............. 65,653 17,775 67,315 18,092 14,479 212 1,316
Subordinated notes(4)............ 3,250 3,250 3,250 3,250 3,071 3,010 2,978
Minority interest in the
Bank(5)......................... 4,141 3,327 3,957 3,204 2,703 1,889 1,276
Stockholder's equity............. 67,714 57,269 66,385 55,970 49,531 32,344 23,747
SELECTED INCOME STATEMENT DATA:
Revenues:
Net interest income after
provision for loan losses..... $ 6,094 $ 4,403 $ 20,323 $ 19,137 $ 14,253 $ 8,782 $ 4,910
Loan administration and
servicing fees................ 3,009 2,766 11,030 11,046 9,326 9,242 8,520
Net gain on sale of
investments................... 329 -- -- 594 -- --
Net gain on origination and
sale of loans and servicing
rights........................ 1,971 1,332 6,262 1,566 29,026 9,229 3,978
Unrealized gains (losses) on
trading securities............ (197) -- 2,122 (4,465) -- -- --
Other(6)....................... 1,331 333 4,028 1,667 1,179 1,040 468
-------- -------- -------- -------- -------- -------- --------
Total revenue................ 12,537 8,834 43,765 28,951 54,178 28,293 17,876
-------- -------- -------- -------- -------- -------- --------
Expenses:
Employee compensation and
benefits...................... 2,650 1,876 8,284 5,252 8,590 3,971 2,776
Office occupancy and
equipment..................... 1,413 1,007 4,711 4,488 3,395 1,425 1,063
Other administrative and
general....................... 3,326 3,205 13,731 13,269 14,561 8,424 6,929
-------- -------- -------- -------- -------- -------- --------
Total expenses............... 7,389 6,088 26,726 23,009 26,546 13,820 10,768
-------- -------- -------- -------- -------- -------- --------
Income before minority interest
in the Bank and income
taxes......................... 5,148 2,746 17,039 5,942 27,632 14,473 7,108
Minority interest in the Bank's
earnings(5)................... 185 124 743 500 812 613 325
Income taxes................... 2,035 1,025 5,847 856 9,633 5,262 1,624
Cumulative effect of change in
accounting principle.......... -- -- -- 867 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income..................... $ 2,928 $ 1,597 $ 10,449 $ 5,452 $ 17,187 $ 8,598 $ 5,159
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
SELECTED OPERATING DATA(7):
PERFORMANCE RATIOS AND OTHER DATA:
Mortgage loans originated(8)... $ 95,823 $ 57,959 $306,775 $488,071 $834,680 $387,312 $287,844
Loan servicing portfolio....... 2,356,225 2,135,908 2,298,200 2,114,743 2,000,530 1,770,246 1,568,307
Return on average assets....... 1.36% 1.01% 1.47% 0.91% 4.07% 3.53% 2.87%
Return on average equity....... 17.47 11.27 17.08 10.34 41.98 31.01 24.14
Equity to assets at end of
period........................ 7.80 8.84 7.78 8.94 9.21 11.00 12.81
Interest rate spread(9)........ 2.82 2.61 2.93 3.24 3.66 3.51 2.68
Net interest margin(9)......... 3.02 2.96 3.26 3.48 3.92 4.00 3.11
Average interest-earning assets
to average interest-bearing
liabilities................... 106.97 107.10 106.50 105.60 106.08 107.97 104.82
Total other expenses to average
total assets.................. 3.60 3.87 3.80 3.84 6.29 4.70 5.81
Full-service Bank offices...... 14 8 14 8 8 5 3
R&G Mortgage offices(10)....... 11 12 12 12 13 12 12
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
7
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSET QUALITY RATIOS(11):
Non-performing loans to total
loans at end of period.......... 2.23% 1.79% 2.18% 1.84% 2.24% 1.81% 1.47%
Non-performing assets to total
assets at end of period......... 1.49 0.97 1.32 1.04 1.07 0.80 0.84
Allowance for loan losses to
total loans at end of period.... 0.59 0.79 0.72 0.89 1.38 1.05 0.92
Allowance for loan losses to
total non-performing loans at
end of period................... 27.27 39.52 33.19 50.10 59.87 52.72 65.54
BANK REGULATORY CAPITAL RATIOS(12):
Tier 1 risk-based capital
ratio........................... 10.74% 10.15% 10.53% 11.03% N/A N/A N/A
Total risk-based capital ratio... 11.89 11.88 11.66 13.59 N/A N/A N/A
Tier 1 leverage capital ratio.... 6.54 5.77 6.25 5.95 N/A N/A N/A
</TABLE>
- ------------------------------
(1) At March 31, 1996, R&G Mortgage and the Bank had total assets of $174.9
million and $653.9 million, respectively, before consolidation.
(2) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold, all of
which had original maturities of 90 days or less.
(3) Comprised of long-term debt, advances from the Federal Home Loan Bank
("FHLB") of New York and other secured borrowings. See "Business of the
Company -- Sources of Funds -- Borrowings" and Notes 12 to 14 of the Notes
to Consolidated Financial Statements.
(4) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of the Company -- Sources of Funds -- Borrowings" and Note 15 of the Notes
to Consolidated Financial Statements.
(5) Represents the approximately 11.9% interest in the Bank and in its earnings
held by stockholders other than the Company. Immediately prior to the
closing of the Offering, the Company intends to issue 296,396 Class B Shares
to such stockholders of the Bank in exchange for and in satisfaction of all
of such outstanding shares of Bank common stock. See "Capitalization" and
"Bank Stockholder Exchange Transaction."
(6) Comprised of change in provision for cost in excess of market value of
loans available for sale, net gain on trading account, and other
miscellaneous revenue sources, including Bank service charges, fees and
other income.
(7) With the exception of end of period ratios, all ratios for R&G Mortgage are
based on the average of month end balances while all ratios for the Bank are
based on average daily balances. All ratios are annualized where
appropriate.
(8) Represents total originations by R&G Mortgage for the Bank as well as loans
originated and sold to third parties. See "Business of the Company --
Mortgage Banking Activities -- Loan Originations, Purchases and Sales."
(9) Interest rate spread represents the difference between the Company's
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(10) R&G Mortgage maintains a total of 11 offices that are separate from Bank
branch offices. A total of seven of these offices are located in the same
building or facility as the Bank branch. The table does not include an
additional five Mortgage Banking Centers which are located in the Bank's
offices. See "Business of the Company -- Offices and Other Material
Properties."
(11) Non-performing loans consist of the Company's non-accrual loans and
non-performing assets consist of the Company's non-performing loans and real
estate acquired by foreclosure or deed-in-lieu thereof. See "Business of the
Company -- Asset Quality."
(12) All of such ratios were in compliance with the applicable requirements of
the FDIC. Prior to 1994, the Bank operated as a savings and loan
association. As such, the Bank was subject to the capital ratios of the
Office of Thrift Supervision ("OTS") and not those of the FDIC and was at
all times in capital compliance therewith. For definitions and further
information relating to the regulatory capital requirements of the Company
and the Bank, see "Regulation -- The Company -- Capital Requirements" and
"-- The Bank -- Capital Requirements."
8
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following table presents selected consolidated financial and other data
of the Company for the three months ended June 30, 1996 and 1995, and for the
six months ended June 30, 1996 and 1995. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company, including the accompanying Notes, presented elsewhere herein. The
financial information presented for the three and six months ended June 30, 1996
and 1995 is unaudited. In the opinion of management, this information reflects
all adjustments, consisting only of normal recurring accruals and adjustments,
necessary for a fair presentation.
<TABLE>
<CAPTION>
AT AT AT
JUNE 30, MARCH 31, DECEMBER 31,
1996 1996 1995
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets........................................................... $ 965,552 $ 868,293 $ 853,206
Loans receivable, net.................................................. 598,182 534,114 473,841
Mortgage loans held for sale........................................... 18,320 25,866 21,318
Mortgage-backed and investment securities held for trading............. 137,566 116,711 113,809
Mortgage-backed securities available for sale.......................... 44,469 46,041 61,008
Mortgage-backed securities held to maturity............................ 39,473 40,716 41,731
Investment securities, available for sale.............................. 23,107 23,254 3,280
Investment securities held to maturity................................. 8,685 4,709 2,046
Cash and cash equivalents(1)........................................... 57,377 42,875 104,195
Deposits............................................................... 563,147 541,123 518,187
Securities sold under agreements to repurchase......................... 98,345 95,314 98,483
Notes payable.......................................................... 142,883 73,585 81,130
Other borrowings (2)................................................... 69,054 65,653 67,315
Subordinated notes (3)................................................. 3,250 3,250 3,250
Minority interest in the Bank (4)...................................... 4,365 4,141 3,957
Stockholder's equity................................................... 70,469 67,714 66,385
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE AT OR FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Revenues:
Net interest income after provision for loan losses................. $ 6,995 $ 4,761 $ 13,089 $ 9,164
Loan administration and servicing fees.............................. 3,487 2,469 6,496 5,235
Net gain on sale of investments..................................... -- -- 329 --
Net gain on origination and sale of loans........................... 2,021 878 3,992 2,210
Unrealized gains (losses) on trading securities..................... (424) 2,295 (621) 2,295
Other(5)............................................................ 1,076 988 2,407 1,321
--------- --------- --------- ---------
Total revenue..................................................... 13,155 11,391 25,692 20,225
--------- --------- --------- ---------
Expenses:
Employee compensation and benefits.................................. 3,305 1,487 5,955 3,363
Office occupancy and equipment...................................... 1,482 1,003 2,895 2,010
Other administrative and general.................................... 3,190 3,173 6,516 6,378
--------- --------- --------- ---------
Total expenses.................................................... 7,977 5,663 15,366 11,751
--------- --------- --------- ---------
Income before minority interest in the Bank and income taxes........ 5,178 5,728 10,326 8,474
Minority interest in the Bank's earnings (4)........................ 224 221 409 345
Income taxes........................................................ 1,787 1,849 3,822 2,874
--------- --------- --------- ---------
Net income.......................................................... $ 3,167 $ 3,658 $ 6,095 $ 5,255
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
9
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA (6):
PERFORMANCE RATIOS AND OTHER DATA:
Mortgage loans originated (7)..................... $ 120,270 $ 75,129 $ 216,093 $ 133,066
Loan servicing portfolio.......................... 2,451,115 2,205,343 2,451,115 2,205,343
Return on average assets.......................... 1.38% 2.16% 1.38% 1.62%
Return on average equity.......................... 18.34 25.84 17.82 18.12
Equity to assets at end of period................. 7.30 8.11 7.30 8.11
Interest rate spread (8).......................... 2.99 2.83 2.91 2.83
Net interest margin (8)........................... 3.31 3.06 3.19 3.05
Average interest-earning assets to average
interest-bearing liabilities..................... 106.38 104.36 105.67 104.32
Total other expenses to average total assets...... 3.58 3.35 3.61 3.62
ASSET QUALITY RATIOS(9):
Non-performing loans to total loans at end of
period........................................... 2.17% 2.12% 2.17% 2.12%
Non-performing assets to total assets at end of
period........................................... 1.47 1.26 1.47 1.26
Allowance for loan losses to total loans at end of
period........................................... 0.53 0.67 0.53 0.67
Allowance for loan losses to total non-performing
loans at end of period........................... 24.22 31.43 24.22 31.43
BANK REGULATORY CAPITAL RATIOS (10):
Tier 1 risk-based capital ratio................... 10.05% 10.53% 10.05% 10.53%
Total risk-based capital ratio.................... 11.02 12.03 11.05 12.03
Tier 1 leverage capital ratio..................... 6.09 5.82 6.09 5.82
</TABLE>
- ------------------------
(1)Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold, all of
which had original maturities of 90 days or less.
(2)Comprised of long-term debt, advances from the FHLB of New York and other
secured borrowings. See "Business of the Company -- Sources of Funds --
Borrowings" and Notes 12 to 14 of the Notes to Consolidated Financial
Statements.
(3)Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of the Company -- Sources of Funds -- Borrowings" and Note 15 of the Notes
to Consolidated Financial Statements.
(4)Represents the approximately 11.9% interest in the Bank and in its earnings
held by stockholders other than the Company. Immediately prior to the
closing of the Offering, the Company intends to issue 296,396 Class B Shares
to such stockholders of the Bank in exchange for and satisfaction of all of
such outstanding shares of Bank common stock. See "Capitalization" and "Bank
Stockholder Exchange Transaction."
(5)Comprised of change in provision for cost in excess of market value of loans
available for sale, net gain on trading account, and other miscellaneous
revenue sources, including Bank service charges, fees and other income.
(6)With the exception of end of period ratios, all ratios for R&G Mortgage are
based on the average of month end balances while all ratios for the Bank are
based on average daily balances. All ratios are annualized where
appropriate.
10
<PAGE>
(7)Represents total originations by R&G Mortgage for the Bank as well as loans
originated and sold to third parties. See "Business of the Company --
Mortgage Banking Activities -- Loan Originations, Purchases and Sales."
(8)Interest rate spread represents the difference between the Company's
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(9) Non-performing loans consist of the Company's non-accrual loans and
non-performing assets consist of the Company's non-performing loans and real
estate acquired by foreclosure or deed-in-lieu thereof. See "Business of the
Company -- Asset Quality."
(10) All of such ratios were in compliance with the applicable requirements of
the FDIC. For definitions and further information relating to the regulatory
capital requirements of the Company and the Bank, see "Regulation -- The
Company -- Capital Requirements" and "-- The Bank -- Capital Requirements."
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 $327.0 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 10.05% of adjusted total assets, compared to a
4.0% minimum requirement, and its total risk-based capital amounted to 11.05%
compared to an 8.0% minimum requirement.
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 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 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.
11
<PAGE>
The $1.8 million or 15.5% increase in total revenue 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. See Note 1
of the Company's Notes to Consolidated Financial Statements.
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.
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 also Note 29 of the Notes to
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 33.6% and 35.4% during the same respective periods in the prior year.
12
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS, SHOULD BE CONSIDERED BY INVESTORS IN DECIDING WHETHER TO PURCHASE
THE CLASS B SHARES OFFERED HEREBY.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES ON R&G MORTGAGE AND THE BANK
GENERAL. Changes in interest rates can have a variety of effects on the
Company's business. In particular, changes in interest rates affect the volume
of mortgage loan originations, the interest rate spread on loans held for sale,
the amount of gain on sale of loans, the value of R&G Mortgage's loan servicing
portfolio and the Bank's net interest income. A substantial increase in interest
rates could affect the volume of the Company's loan originations for both the
Bank and third parties by reducing the demand for mortgages for home purchases,
as well as the demand for refinancings of existing mortgages. A substantial
decrease in interest rates will generally increase the demand for mortgages. To
the extent that interest rates in future periods were to increase substantially,
the Company would expect overall originations to decline. A decrease in the
volume of the Company's mortgage originations could result in a decrease in the
amount of R&G Mortgage's mortgage origination income and portfolio generated net
interest income to the Bank. During the three months ended March 31, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage
originated an aggregate of $100.2 million, $60.7 million, $322.7 million, $488.1
million and $834.7 million of loans, respectively, which includes loans
originated for the Bank. The level of originations during these periods reflect
the sensitivity of the mortgage banking business to market interest rate cycles.
During 1993 and to a lesser extent in 1994, refinancings constituted a
significant portion of originations as market rates of interest declined within
Puerto Rico. With the subsequent increase in market rates of interest within
Puerto Rico, both the amount of refinancings and the level of originations
generally have decreased. See "Business of the Company -- Mortgage Banking
Activities -- Loan Originations, Purchases and Sales."
EFFECT ON MORTGAGE LOAN ORIGINATIONS. The profitability to R&G Mortgage of
its mortgage loan originations is in part a function of the difference between
long-term interest rates, which is the rate at which R&G Mortgage originates
mortgage loans for third parties, and short-term interest rates, which is the
rate at which R&G Mortgage finances such loans until they are sold. Generally,
short-term interest rates are lower than long-term interest rates and R&G
Mortgage benefits from the difference, or the spread, during the time the
mortgage loans are held by R&G Mortgage pending sale. A decrease in this spread
would have a negative effect on R&G Mortgage's net interest income and
profitability, and there can be no assurance that the spread will not decrease.
R&G Mortgage attempts to limit its exposure to this interest rate risk through
the sale of substantially all loans within 180 days of origination. During the
three months ended March 31, 1996 and the years ended December 31, 1995, 1994
and 1993, R&G Mortgage sold $37.6 million, $232.4 million, $368.1 million and
$604.1 million of loans, respectively, which includes loans securitized and sold
but does not include loans originated by R&G Mortgage on behalf of the Bank.
Loans which are originated by R&G Mortgage for the Bank's loan portfolio, in
contrast, are funded by the Bank through deposits and various longer-term
borrowing sources. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PIPELINE RISK. A mortgage-banking company is also exposed to interest rate
risk from the time the interest rate on the customer's mortgage loan application
is established through the time the mortgage loan closes, and until the time the
company commits to sell the mortgage loan. In order to limit the Company's
exposure to interest rate risk through the time the mortgage loan closes, the
Company generally does not permit the borrower to lock-in an interest rate until
the actual closing date or immediately prior to such date. Moreover, in order to
limit the Company's exposure to interest rate risk through the time the loan is
sold or committed to be sold, the Company may, depending upon market conditions,
enter into forward commitments to sell a portion of its mortgage loans to
investors for delivery at a future time. At March 31, 1996, the Company had
$24.7 million of pre-existing commitments by third-party investors to purchase
mortgage loans. To the extent that the Company
13
<PAGE>
originates or commits to originate loans without pre-existing commitments by
investors to purchase such loans or is not otherwise hedged against changes in
interest rates ("unhedged loans"), the Company will be subject to the risk of
gains or losses through adjustments to the carrying value of loans held for sale
or on the actual sale of such loans (the value of unhedged loans fluctuates
inversely with changes in interest rates).
EFFECT ON LOAN SERVICING PORTFOLIO. Furthermore, the market value of and
income from the Company's loan servicing portfolio may also be affected by
interest rate fluctuations. Specifically, a decrease in interest rates relative
to the average interest rate of mortgage loans in the Company's loan servicing
portfolio could cause an increase in the rate at which outstanding loans are
prepaid (through borrower refinancing or otherwise), reducing the period of time
during which the Company would earn servicing income with respect to such loans.
Prepayments generally decrease the amount of the Company's future loan servicing
income which, in turn, decreases the value of the Company's loan servicing
portfolio. Further, an increase in prepayment rates may accelerate the
amortization of any capitalized servicing or excess servicing carried on the
Company's balance sheet. Conversely, the market value of and income from the
Company's loan servicing portfolio may be positively affected as mortgage
interest rates increase. At March 31, 1996, the Company was servicing
approximately 48,946 loans which had an aggregate principal balance of $2.4
billion. At March 31, 1996, the Company had capitalized $8.7 million of mortgage
servicing rights and $829,000 of excess servicing fees. During the three months
ended March 31, 1996 and the year ended December 31, 1995, 1994 and 1993, the
Company recognized amortization adjustments (including any impairment
adjustments) of $291,000, $1.5 million, $869,000 and $2.6 million, respectively,
with respect to its capitalized mortgage servicing rights and $19,000, $131,000,
$30,000 and $93,000, respectively, with respect to its capitalized excess
servicing fees. Such amortization adjustments have and will continue to have a
significant effect on the results of operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business of the Company -- Mortgage Banking Activities -- Loan
Servicing" and Notes 6 and 7 of the Notes to Consolidated Financial Statements.
EFFECT ON NET INTEREST INCOME. The operations of the Company in general and
the Bank in particular are also substantially dependent on net interest income,
which is the difference between the interest income earned on interest-earning
assets and the interest expense paid on interest-bearing liabilities. Because
the Company's interest-earning assets have longer effective maturities than its
interest-bearing liabilities, the yield on the Company's interest-earning assets
generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result the Company's net interest income and the value of
its securities portfolio generally would be adversely affected by increases in
interest rates and positively affected by comparable declines in interest rates.
At March 31, 1996, the Company's interest-bearing liabilities which were
estimated to mature or reprice within one year exceeded the Company's
interest-earning assets with the same characteristics by $72.0 million or 8.29%
of total assets.
EFFECT ON INTEREST-EARNING ASSETS. In addition to affecting net interest
income, changes in interest rates also can affect the value of the Company's
interest-earning assets, which are comprised of fixed and adjustable-rate
instruments. Generally, the value of fixed-rate instruments declines when
interest rates rise and, conversely, increases when interest rates fall. At
March 31, 1996, $116.7 million or 50.4% of the Company's mortgage-backed and
investment securities were classified as held for trading (which consisted
solely of mortgage-backed and related securities), and are reported at fair
value, with unrealized gains and losses included in earnings. Accordingly,
declines in the value of the Company's securities held for trading could have a
negative impact on the Company's earnings regardless of whether any securities
were actually sold by the Company. In addition, as of such date, an additional
$69.3 million or 30.0% of the Company's mortgage-backed and investment
securities were classified as available for sale and are reported at fair value
in the Company's Consolidated Financial Statements, with unrealized gains and
losses excluded from earnings and reported net of taxes as a separate component
of stockholders' equity.
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ASSET AND LIABILITY MANAGEMENT. The Company has sought to reduce the
vulnerability of its operations to changes in interest rates by managing the
nature and composition of its rate sensitive assets and rate sensitive
liabilities. In general, the Company's goal in managing its interest rate risk
is to match, to the extent possible, the repricing or maturities of its
interest-earning assets to its interest-bearing liabilities. The Company
attempts to manage its exposure to interest rate risk internally through balance
sheet restructuring (generally either attracting longer-term funds such as
certificates of deposit or borrowings or holding mortgage-backed derivative
securities resulting from the Company's prior securitization activities) and
externally through the use of interest rate swaps, options and/or futures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset and Liability Management."
AVAILABILITY OF FUNDING SOURCES
The Company's business requires continuous access to various funding
sources. While the Bank is able to fund loans originated for it by R&G Mortgage
through deposits which are primarily generated through its network of 14 branch
offices as well as through longer-term borrowings from the FHLB of New York and
other alternative sources, R&G Mortgage's business is significantly dependent
upon short-term borrowings under warehouse lines of credit. At March 31, 1996,
R&G Mortgage was authorized to borrow under its warehouse lines of credit up to
an aggregate of $79.4 million. An aggregate of $19.6 million was outstanding
under such warehouse lines of credit as of such date. These borrowings, some of
which are guaranteed by Mr. Victor J. Galan, the Company's Chairman of the Board
and Chief Executive Officer, are collateralized by, among other things,
certificates of deposit, a general assignment of mortgage payments receivable,
an assignment of certain mortgage servicing rights and an assignment of key man
life insurance policies aggregating $1.8 million on Mr. Galan. Certain of these
warehousing lines of credit require R&G Mortgage to maintain minimum levels of
net worth and working capital and limit the amount of indebtedness and dividends
R&G Mortgage may declare.
In addition, at March 31, 1996, the Bank had access to $50.0 million in
advances from the FHLB of New York, of which $6.0 million was outstanding as of
such date. The FHLB has also issued $23.5 million in standby letters of credit
which secure outstanding notes payable. The Bank maintains qualifying collateral
(consisting of first mortgage loans, securities and cash), which amounted to
$91.9 million as of March 31, 1996, to secure repayment of its FHLB of New York
advances and letters of credit. The Bank maintains collateral with the FHLB of
New York in excess of applicable requirements in order to facilitate additional
future borrowings by the Bank. The Bank also actively utilizes as a low-cost
source of borrowing notes which are invested in eligible activities which are
prescribed under Puerto Rico law, which provides tax advantages under Puerto
Rico tax laws and under U.S. federal tax laws for U.S. corporations which are
operating in Puerto Rico pursuant to Section 936 of the Internal Revenue Code of
1986, as amended (the "Code") (the "936 Notes"). At March 31, 1996, the Bank had
$51.0 million of 936 Notes. See "-- Possible Repeal of Section 936." While the
Company expects to have continued access to credit from these sources, there can
be no assurance that such financing sources will continue to be available or
will be available on favorable terms. In the event that R&G Mortgage's
warehousing lines of credit were reduced or eliminated and R&G Mortgage were not
able to replace such lines on a cost-effective basis, R&G Mortgage would be
forced to curtail or cease its mortgage origination business, which would have a
material adverse effect on the Company's operations and financial condition. See
"Business of the Company -- Sources of Funds -- Borrowings." Although R&G
Mortgage could also potentially access borrowings from the Bank, any such
borrowings would be subject to and limited by provisions of Sections 23A and 23B
of the Federal Reserve Act, which sections impose restrictions on transactions
between the Bank and any affiliate thereof (which includes R&G Mortgage). For a
discussion of such limitations, see "Regulation -- The Company -- Limitations on
Transactions with Affiliates."
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DELINQUENCY, FORECLOSURE AND OTHER CREDIT RISKS
DEFAULT AND RECOURSE RISK TO R&G MORTGAGE. From the time that R&G Mortgage
funds the mortgage loans it originates for third parties to the time it sells
them (typically approximately 30 to 180 days), R&G Mortgage is generally at risk
for any mortgage loan defaults. Once R&G Mortgage sells the mortgage loans it
originates, the risk of loss from mortgage loan defaults and foreclosures passes
to the purchaser or insurer of the mortgage loans. However, in the ordinary
course of business, R&G Mortgage makes certain representations and warranties to
the purchasers and insurers of mortgage loans. If a mortgage loan defaults and
there has been a breach of these representations or warranties, R&G Mortgage may
become liable for the unpaid principal and interest on the defaulted mortgage
loan. In such a case, which would primarily arise as the result of fraudulent
misrepresentations made to R&G Mortgage in the loan origination process, R&G
Mortgage may be required to repurchase the mortgage loan and bear any subsequent
loss on the mortgage loan. In addition, with respect to the non-conventional
mortgage loans originated by R&G Mortgage for the Bank, which loans generally
are subsequently securitized by R&G Mortgage and sold on behalf of the Bank, R&G
Mortgage occasionally provides recourse in the event of mortgage loan defaults
and/or foreclosures or certain documentation deficiencies. At March 31, 1996,
there were $237.0 million of loans subject to such recourse provisions. During
the three months ended March 31, 1996 and the years ended December 31, 1995,
1994 and 1993, R&G Mortgage recognized charge-offs or losses amounting to
$72,000, $18,000, $16,000 and $3,000, respectively, with respect to loans sold
with recourse.
DEFAULT RISK TO THE BANK. In addition, the Bank is subject to the risk of
loss from mortgage loan defaults and foreclosures with respect to the loans
originated for its portfolio by R&G Mortgage. All of the loans originated for
the Bank's portfolio are based on its Board approved written underwriting policy
and procedures. Notwithstanding the care with which loans are originated,
industry experience indicates that a portion of the Bank's loans will become
delinquent and a portion of the loans will require partial or entire charge off.
Regardless of the underwriting criteria utilized by the Bank, losses may be
experienced as a result of various factors beyond the Bank's control, including,
among others, changes in market conditions affecting the value of security and
problems affecting the credit of the borrower. Due to the concentration of loans
in Puerto Rico, adverse economic conditions in Puerto Rico could result in a
decrease in the value of the Bank's collateral. Although loan delinquencies have
historically been higher in Puerto Rico than generally in the United States,
loan charge off's have historically been lower than in the United States. See
"-- Composition of the Bank's Loan Portfolio" and "Business of the Company --
Lending Activities of the Bank -- Asset Quality."
The Bank establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate by management based upon an assessment of prior loss
experience, the volume and type of lending being conducted by the Bank, industry
standards, past due loans, economic conditions in the Bank's market area
generally and other factors related to the collectibility of the Bank's loan
portfolio. The Bank's allowance for loan losses amounted to $3.3 million and
$3.5 million at March 31, 1996 and December 31, 1995, respectively, which
constituted 27.3% and 33.2% of the Bank's non-performing loans as of such
respective dates. Total charge-offs to the Bank's allowance for loan losses
amounted to $256,000 and $509,000 for the three months ended March 31, 1996 and
the year ended December 31, 1995, respectively. Although management utilizes its
best judgment in providing for loan losses, there can be no assurance that the
Bank will not have to increase its provisions for loan losses in the future as a
result of future increases in non-performing loans or for other reasons. Any
such increases in the Company's provisions for loan losses or any loan losses in
excess of the Company's provisions with respect thereto could have an adverse
affect on the Company's future financial condition and/or results of operations.
See "Business of the Company -- Lending Activities of the Bank -- Asset
Quality."
SERVICING RISK TO R&G MORTGAGE. R&G Mortgage is also affected by mortgage
loan delinquencies and defaults on mortgage loans that it services. Under
certain types of servicing contracts, the
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servicer must forward all or part of the scheduled payments to the owner of the
mortgage loan, even when mortgage loan payments are delinquent. Also, to protect
their liens on mortgaged properties, owners of mortgage loans usually require
the servicer to advance mortgage and hazard insurance and tax payments on
schedule even though sufficient escrow funds may not be available. The servicer
will ultimately be reimbursed by the mortgage owner or from liquidation proceeds
for payments advanced that the servicer is unable to recover from the mortgagor.
However, in the interim, the servicer must absorb the cost of funds advanced
during the time the advance is outstanding. Further, the servicer must bear the
increased costs of attempting to collect on delinquent and defaulted mortgage
loans. Although these increased costs are somewhat ameliorated through the
receipt of late fees and the reimbursement of certain direct expenses out of
foreclosure proceeds, management believes that increased delinquencies and
defaults generally increase the costs of the servicing function. In addition, if
a default is not cured, the mortgage loan will be repaid as a result of
foreclosure proceedings. As a consequence, R&G Mortgage is required to forego
servicing income from the time such loan becomes delinquent, and into the
future. During the three months ended March 31, 1996 and the years ended
December 31, 1995, 1994 and 1993, R&G Mortgage wrote-off $12,000, $230,000,
$290,000 and $288,000, respectively, of expenses which it was unable to recover
with respect to its loan servicing operations. See "Business of the Company --
Mortgage Banking Operations -- Mortgage Loan Delinquencies and Foreclosures."
COMPOSITION OF THE BANK'S LOAN PORTFOLIO
The loans in the Bank's loan portfolio are predominantly secured by real
estate, all of which is located in Puerto Rico. Therefore, conditions in the
Puerto Rico real estate market will strongly influence the level of the Bank's
non-performing loans and its results of operations. Real estate values are
affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, the availability of loans
to potential purchasers and acts of nature. Although the Bank's underwriting
standards are intended to protect the Bank against adverse real estate trends,
declines in the Puerto Rico real estate market could negatively impact the value
of the collateral securing the Bank's loans and its results of operations. See
"Business of the Company -- Lending Activities of the Bank -- Asset Quality.
PARTICIPATION IN FEDERAL PROGRAMS
R&G Mortgage's ability to generate funds by sales of mortgage loans or
mortgage-backed securities is largely dependent upon the continuation of
programs administered by FNMA, FHLMC and GNMA, which facilitate the issuance of
such securities, as well as R&G Mortgage's continued eligibility to participate
in such programs. In addition, part of R&G Mortgage's business is dependent upon
the continuation of various programs administered by the FHA, which insures
mortgage loans, and the VA, which partially guarantees mortgage loans and the
Farmers Home Administration, which guarantees mortgage loans.
Although R&G Mortgage is not aware of any such proposed actions,
discontinuation of, or significant reduction in, the operation of such programs
could have a material adverse effect on R&G Mortgage's operations. R&G Mortgage
expects that it will continue to remain eligible to participate in such programs
but any significant impairment of such eligibility could also materially
adversely affect its operations.
The U.S. Congress is currently considering several proposals which would in
effect privatize the FHLMC and FNMA. No assurance can be made whether such
proposals will in fact be adopted or the effect, if any, on the foregoing
programs.
The products offered under the foregoing programs may be changed from time
to time by the sponsor. The profitability of specific products may vary
depending on a number of factors, including administrative costs to R&G Mortgage
of originating such products.
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POSSIBLE REPEAL OF SECTION 936
The budget bills passed in October 1995 by the U.S. House of Representatives
and the Senate with respect to the 1996 U.S. federal budget contained provisions
for the repeal of Section 936 ("Section 936") of the Code. Section 936 provides
incentives for United States corporations to invest in Puerto Rico and helps
create a pool of lower cost funds in Puerto Rico. A repeal of the tax incentives
offered under Section 936 could have an adverse effect on the general economic
condition of Puerto Rico and the cost of funds and liquidity for mortgage loans
in Puerto Rico. The magnitude of the impact of any such changes on the financial
condition or profitability of the Company cannot be determined at this time.
While the proposal to repeal Section 936 was eliminated in the 1996 U.S. federal
budget bill enacted on April 26, 1996, both the U.S. House of Representatives
and the Senate have approved different bills which would, among other things,
phase-out Section 936. A conference committee of both houses of Congress has
reconciled the differences in the bills, which now must be approved by both
houses of Congress. Management cannot predict whether the bill approved by the
conference committee will be approved by the Congress, but it expects that it
will. The Company has taken steps to attempt to reduce any adverse impact of
such potential changes by diversifying its sources of funding and identifying
additional investors for its mortgage products. The Bank's 936 Notes include
provisions which permit the Bank to continue the obligation at an adjusted
interest rate in the event that interest on the notes become subject in whole or
in part to federal and/or Puerto Rico taxation as a result of changes in tax
laws. In addition, multi-national corporations operating in Puerto Rico are
considering other alternatives available which would continue to facilitate the
deferral of U.S. income taxation. See "Business of the Company -- Mortgage
Banking Activities -- Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment."
RECAPITALIZATION OF SAIF AND RELATED LEGISLATIVE PROPOSALS
The deposits of the Bank are currently insured by the Savings Association
Insurance Fund ("SAIF") of the FDIC. Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits. The Bank's deposits were required to continue to
be insured by the SAIF following its 1994 conversion from a federally chartered
savings bank to a Puerto Rico chartered commercial bank. The BIF has achieved a
fully funded status in contrast to the SAIF and, therefore, as discussed below,
the FDIC recently substantially reduced the average deposit insurance premium
paid by BIF-insured commercial banks to a level substantially below the average
premium paid by SAIF-insured institutions.
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as the Bank will be competitively
disadvantaged as compared to commercial banks by the resulting premium
differential. It is anticipated that, under present conditions, it will be at
least several years before the SAIF reaches a reserve ratio of 1.25% of insured
deposits.
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The proposed legislation would have
provided that all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate would have been sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on the
current level of reserves maintained by the SAIF, it was anticipated that the
amount of the special assessment required to recapitalize the SAIF would have
been approximately 80 to 85 basis points of the SAIF-assessable deposits. It was
anticipated that after the recapitalization of the SAIF, premiums paid by
SAIF-insured institutions would be reduced to match those
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currently being assessed BIF-insured commercial banks. The legislation also
provided for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.
The legislation discussed above had been, for some time, included as part of
a fiscal 1996 federal budget bill, but was eliminated prior to the bill being
enacted on April 26, 1996. In light of the legislation's elimination and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Bank.
In June 1995, the Bank acquired approximately $77.2 million of deposits from
a Puerto Rico commercial bank. While the Bank since the acquisition has paid
deposit insurance premiums at SAIF rates for these deposits, the Bank believes,
and has requested FDIC concurrence, that all of such deposits are BIF insured
and should be subject to deposit insurance assessments at BIF rates. If the
previously paid assessments were in error, the Bank's deposit insurance
assessment from the FDIC would be adjusted beginning with the quarter ended
September 30, 1996. At the current SAIF assessment rate, the adjustment on the
$77.2 million of deposits would amount to $44,375 per quarter. In addition to
the future quarterly adjustments, the Bank would receive a set-off from
insurance premiums for the September 1996 quarter of approximately $206,440
(plus interest). The amount of any such adjustment (less interest) would reflect
the difference between premiums paid on such deposits at SAIF assessment rates
and the premiums that were actually due at BIF rates. The FDIC would assess
future premiums for deposit insurance on the acquired deposits and adjusted
growth on such deposits calculated pursuant to applicable FDIC regulations at
BIF rates. BIF rates are currently at zero for healthy well-capitalized
institutions like the Bank as compared to comparable SAIF rates of 23 basis
points.
If legislation were to be enacted in the future which would assess a
one-time special assessment of 85 basis points on SAIF-insured institutions, the
Bank believes it would pay approximately $2.4 million, net of related tax
benefits, based upon its total SAIF deposits as of March 31, 1996. In addition,
the enactment of such legislation might have the effect of immediately reducing
the Bank's capital by such an amount. Nevertheless, management does not believe,
based upon the foregoing assumptions (including the proposed reduction in SAIF
premiums upon recapitalization of the SAIF), that a one-time assessment of this
nature would have a material adverse effect on the Company's consolidated
financial condition or cause non-compliance with the Bank's regulatory capital
requirements.
NO PRIOR MARKET
Prior to the Bank Stockholder Exchange Transaction and the Offering, there
has been no public market for the Company's Class B Shares. The Company has
applied to have the Class B Shares approved for quotation on the Nasdaq Stock
Market under the symbol "RGFC." However, there can be no assurance that an
established and liquid trading market for the Class B Shares will develop, that
it will continue if it does develop, or that after the completion of the Bank
Stockholder Exchange Transaction and the Offering, the Class B Shares will trade
at or above the Price to Public set forth on the cover of this Prospectus. In
addition, the substantial amount of Common Stock which is expected to be held by
the Chairman of the Board and Chief Executive Officer of the Company may
adversely affect the development of an active and liquid trading market. See
"-Concentration of Ownership" below. Friedman, Billings, Ramsey & Co., Inc. (the
"Underwriter") has advised the Company that it intends to make a market in the
Class B Shares as long as the volume of trading activity in the Class B Shares
and certain other market making considerations justify doing so. The Underwriter
is not obligated to make a market in such shares, and any such market making may
be discontinued at any time at the sole discretion of the Underwriter. The
Company and the Underwriter will seek to encourage and obtain at least one
additional market maker to make a market in the Class B Shares. See "Dividends
and Market for Common Stock."
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DILUTION
Upon completion of the Offering, there will be an immediate dilution of the
net tangible book value per Class B Share from the Price to Public. This
dilution primarily results from the sale by the Company of Class B Shares in the
Offering at a price above the current book value per share. Without taking into
account any changes in net tangible book value after March 31, 1996, other than
those resulting from (i) the sale by the Company of the Class B Shares offered
hereby (assuming no exercise of the over-allotment option and after deduction of
underwriting discounts and commissions and estimated offering expenses) and (ii)
the issuance of up to 296,396 Class B Shares in the Bank Stockholder Exchange
Transaction, the pro forma net tangible book value at March 31, 1996 would have
been $13.14 per share, representing an immediate dilution of $1.86 per share to
persons purchasing the Class B Shares offered hereby at an assumed Price to
Public of $15.00 per share. See "Dilution."
CONCENTRATION OF OWNERSHIP; DISPARATE VOTING RIGHTS
The Class A Shares are entitled to two votes per share and the Class B
Shares are entitled to one vote per share. Upon completion of the Bank
Stockholder Exchange Transaction and the Offering (taking into consideration the
sale of shares of Common Stock by the Selling Stockholder), Mr. Victor J. Galan,
the Chairman of the Board and Chief Executive Officer of the Company, will own
approximately 69.05% of the Company's outstanding Common Stock, or approximately
66.36% assuming full exercise of the Underwriter's over-allotment option with
respect to the Class B Shares in the Offering, and will be entitled to exercise
81.69% of the voting rights outstanding (79.78% assuming full exercise of the
Underwriter's over-allotment option). As a result, Mr. Galan will continue to
have the power to elect and remove all of the Company's Board of Directors and
management and to determine the outcome of substantially all other matters to be
decided by a vote of stockholders. See "Management," "Beneficial Ownership of
Securities" and "Description of Capital Stock -- Restrictions on Acquisition of
the Company."
DEPENDENCE ON KEY INDIVIDUAL
The success of R&G Mortgage and the Bank has been dependent on Victor J.
Galan, the co-founder and Chairman of the Board of R&G Mortgage and the Chairman
of the Board and Chief Executive Officer of the Bank. The Company's future
success will also depend, to a great extent, upon the services of Mr. Galan, the
Company's Chairman of the Board and Chief Executive Officer. The Company
believes that the prolonged unavailability or the unexpected loss of the
services of Mr. Galan could have a material adverse effect upon the Company, as
attracting a suitable replacement may involve significant time and/or expense.
Although the Company maintains key man life insurance policies aggregating $1.8
million on Mr. Galan, all of such policies have been assigned as collateral
pursuant to certain outstanding warehouse lines of credit. See "Business of the
Company -- Sources of Funds -- Borrowings."
REGULATION
The Company, as a bank holding company, the Bank, as a Puerto Rico chartered
and federally insured commercial bank, and R&G Mortgage, as a Puerto Rico
licensed mortgage banking company, are each subject to extensive governmental
supervision and regulation. The operations of R&G Mortgage are subject to
various laws and regulations that, among other things, establish licensing
requirements, regulate credit granting activities, establish maximum interest
rates and insurance coverages, require specific disclosures to customers, govern
secured transactions, and establish collection, repossession and claims handling
procedures and other trade practices. The Bank is subject to extensive federal
and Puerto Rico supervision and regulation, which is primarily for the
protection of depositors, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may granted and
the interest that may be charged thereon, and limitations on the types of other
investments that may be made and the types of services that may be offered. In
addition, federal and Puerto Rico regulatory authorities have the power in
certain circumstances to
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limit transactions between the Company and the Bank, to limit the Bank's growth,
to prohibit or limit the payment of dividends from the Bank to the Company and
to require the Bank to maintain capital ratios in accordance with regulatory
requirements. See "Regulation."
ANTI-TAKEOVER PROVISIONS
In addition to the amount of Common Stock controlled by the Company's
Chairman of the Board and Chief Executive Officer described under "--
Concentration of Ownership; Disparate Voting Rights," certain provisions of the
Company's Certificate of Incorporation and Bylaws could have the effect of
discouraging non-negotiated takeover attempts which certain stockholders might
deem to be in their interest and make it more difficult for stockholders of the
Company to remove members of its Board of Directors and management. In addition,
various federal laws and regulations could affect the ability of a person, firm
or entity to acquire the Company or shares of its Common Stock. See "Description
of Capital Stock -- Restrictions on Acquisition of the Company."
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THE COMPANY
R&G FINANCIAL. R&G Financial, which had $868.3 million in assets at March
31, 1996, is the newly established holding company for R&G Mortgage and the
Bank. The Company competes for business in Puerto Rico by providing a wide range
of financial services to residents of all of Puerto Rico's major cities through
branch offices and mortgage banking facilities at 17 locations. Puerto Rico, the
fourth largest of the Caribbean Islands, is a commonwealth of the United States
and is approximately 100 miles long and 35 miles wide. The population of Puerto
Rico as of June 30, 1995 was estimated at approximately 3.7 million. The
operations of both R&G Mortgage and the Bank have expanded substantially during
the 1990's, due in large part to R&G Mortgage's emergence as the second largest
originator of loans secured by single-family residential properties in Puerto
Rico. During the two year period ended March 31, 1996, R&G Mortgage originated
20% of all single-family residential loans originated in Puerto Rico, which has
resulted in significant growth in its servicing portfolio as well as facilitated
rapid expansion of the Bank's franchise and operations. R&G Mortgage's servicing
portfolio has increased by 50.3% since December 31, 1991 and, at March 31, 1996,
R&G Mortgage serviced approximately 49,000 accounts with an aggregate loan
balance of $2.4 billion. The Bank's asset size, which amounted to $653.9 million
at March 31, 1996, has increased 12 fold since R&G Mortgage became affiliated
with the Bank in February 1990, while the branch office network had increased
from two to 14 offices. Management estimates that at March 31, 1996, 23.3% of
R&G Mortgage's customers have established a banking relationship with the Bank.
R&G Financial on a consolidated basis had net income of $2.9 million and $10.4
million for the three months ended March 31, 1996 and the year ended December
31, 1995, respectively.
Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer and
controlling shareholder of the Company, originally organized R&G Mortgage in
1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two branch
federal savings and loan association with total assets of $52.9 million, which
was re-named R&G Federal Savings Bank. (The remaining common stock of the Bank,
which today amounts to approximately 11.9% of the outstanding common stock as a
result of subsequent capital infusions by R&G Mortgage, is being exchanged for
Class B Shares in the Bank Stockholder Exchange Transaction.) Recognizing the
complementary operational aspects and cross selling opportunities that are
inherent in operating both a mortgage bank and banking institution, during 1990
Mr. Galan successfully integrated both the Bank's and R&G Mortgage's operations,
which structure has since been emulated in Puerto Rico. Embarking on a retail
branch expansion strategy, the Bank in 1993 acquired a two branch savings and
loan association with total assets of $78.6 million and, in June 1995, acquired
from a commercial bank $77.2 million in deposits and, after consolidation, six
branch offices. In November 1994, the Bank converted to a Puerto Rico-chartered
commercial bank and took its present name.
BUSINESS STRATEGY. The Company has generally sought to achieve long-term
financial strength and profitability by increasing the amount and stability of
its net interest income and non-interest income. The Company has sought to
implement this strategy by (i) establishing and emphasizing the growth of its
mortgage banking activities, including growing its loan servicing operation;
(ii) expanding its retail banking franchise in order to achieve increased market
presence and to increase core deposits; (iii) enhancing the Company's net
interest income by increasing the Company's loans held for investment,
particularly single-family residential loans; (iv) developing new business
relationships through an increased emphasis on commercial real estate and
commercial business lending; (v) diversifying the Company's retail products and
services, including an increase in consumer loan originations (such as credit
cards); (vi) meeting the banking needs of its customers through, among other
things, the offering of trust and investment services; and (vii) controlled
growth and the pursuit of a variety of acquisition opportunities when
appropriate. The Company attempts to control its overall operating expenses,
notwithstanding the Company's recent growth and expansion activities.
The Company's principal executive offices are located at 280 Jesus T. Pinero
Avenue, Hato Rey, Puerto Rico, and its telephone number is (787) 758-2424.
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R&G MORTGAGE. R&G Mortgage is engaged primarily in the business of
originating first mortgage loans secured by single-family residential properties
which are either insured by the FHA or guaranteed by the VA and originating
second mortgage loans which are neither insured nor guaranteed. R&G Mortgage
also originates conforming conventional single-family residential loans which
are neither insured by the FHA nor guaranteed by the VA. Pursuant to agreements
entered into between R&G Mortgage and the Bank, non-conforming conventional
single-family residential loans and consumer loans, most of which are secured by
real estate, are also originated by R&G Mortgage for portfolio retention by the
Bank. The Bank retains the non-conforming conventional single-family residential
loans because these loans generally do not satisfy resale guidelines of
purchasers in the secondary mortgage market, primarily because of size or other
underwriting technicalities at the time of origination. Jumbo loans may be
packaged into CMOs and sold while loans with underwriting technicalities may be
cured through payment experience and subsequently sold. During the three months
ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G
Mortgage originated a total of $100.2 million, $322.7 million, $488.1 million
and $834.7 million of loans, respectively. These aggregate originations include
loans originated by R&G Mortgage directly for the Bank of $56.9 million, $156.3
million, $142.6 million and $180.8 million during such respective periods, or
56.8%, 48.4%, 29.2% and 21.7%, respectively, of total origination and purchases.
R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are
guaranteed by the GNMA, which securities are sold to securities broker dealers
and other investors. Conventional loans may either be sold directly to agencies
such as the FNMA and the FHLMC or to private investors, or may be pooled into
FNMA- or FHLMC-backed mortgage-backed securities which are generally sold to
investors. During the three months ended March 31, 1996 and the years ended
December 31, 1995, 1994 and 1993, R&G Mortgage sold $37.6 million, $232.4
million, $368.1 million and $604.1 million of loans, respectively, which
includes loans securitized and sold but does not include loans originated for
the Bank. R&G Mortgage generally retains the servicing function with respect to
the loans which have been securitized and sold. R&G Mortgage is subject to
regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, HUD and the OCFI.
For the three months ended March 31, 1996 and the year ended December 31, 1995,
R&G Mortgage on an unconsolidated basis (which does not reflect certain items of
revenue and expense which are eliminated upon consolidation) had net income of
$1.4 million and $6.7 million, respectively.
THE BANK. The Bank's principal business consists of attracting deposits
from the general public and tax-advantaged funds from eligible Puerto Rico
corporations and using such deposits, together with funds obtained from other
sources, to originate (through R&G Mortgage) and purchase loans secured
primarily by residential real estate in Puerto Rico, and to purchase
mortgage-backed and other securities. To a lesser extent but with increasing
emphasis over the past few years, the Bank also originates a variety of consumer
loans, commercial business loans and loans secured by commercial real estate.
The Bank offers trust services through its Trust Department. Total loan
originations by the Bank during the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993 amounted to $30.2 million, $121.7
million, $57.6 million and $40.7 million, respectively. The Bank's deposits are
insured by the FDIC and it is regulated and examined by the FDIC as well as by
the OCFI. At March 31, 1996, there were a total of 20 financial institutions
(commercial banks and savings institutions) headquartered in Puerto Rico and the
Bank had a total of $541.1 million or 2.35% of the total $23 billion of deposits
in Puerto Rico. For the three months ended March 31, 1996 and the year ended
December 31, 1995, the Bank on an unconsolidated basis (which does not reflect
certain items of revenue and expense which are eliminated upon consolidation)
had net income of $1.5 million and $6.2 million, respectively.
THE BANK STOCKHOLDER EXCHANGE TRANSACTION. Following its formation and the
receipt of all requisite approvals from the OCFI and the Board of Governors of
the Federal Reserve Board (the "Federal Reserve Board") to become a bank holding
company, the Company on July 19, 1996 acquired Mr. Galan's approximately 88.1%
ownership interest in the Bank as well as his 100% ownership interest in R&G
Mortgage. (R&G Mortgage's interest in the Bank had been transferred to Mr.
Galan, its sole stockholder, at the time of the conversion of the Bank to a
Puerto Rico commercial bank.) In
23
<PAGE>
consideration of the acquisition of Mr. Galan's interest in R&G Mortgage and the
Bank, the Company issued to Mr. Galan 5,189,044 shares of Class A Common Stock
(66,667 of which will be converted into Class B Shares and sold in the
Offering). The Company also intends to acquire the approximately 11.9% ownership
interest in the Bank held by the Minority Bank Stockholders in exchange for
Class B Shares. Following the receipt of all requisite regulatory approvals and
immediately prior to consummation of the Offering, all Minority Bank
Stockholders (other than those who perfect their right to seek appraisal of the
Bank common stock under Puerto Rico law) will receive, in exchange for their
aggregate interest of approximately 11.9% of the Bank common stock, an aggregate
of 296,396 shares of Class B Common Stock of the Company, as determined based on
an independent valuation of the Bank. See "Bank Stockholder Exchange
Transaction."
AFFILIATED TRANSACTIONS. As an integral part of R&G Mortgage's acquisition
of a controlling interest in the Bank in February 1990, R&G Mortgage and the
Bank entered into various agreements which address how the parties would conduct
themselves in specifically delineated affiliated transactions (the "Affiliated
Transaction Agreements"). Under federal law and regulations, certain
transactions between a federally insured financial institution and an affiliate,
such as the Bank and R&G Mortgage, are regulated. Generally, these provisions
regulate extensions of credit to directors, officers and principal shareholders
of the Bank, and establish standards for the terms of, limit the amount of, and
establish collateral requirements with respect to, various transactions between
federally insured financial institutions and its affiliates. See generally
"Regulation -- The Company -- Limitations on Transactions with Affiliates."
The Affiliated Transaction Agreements include a Master Purchase, Servicing
and Collections Agreement (the "Master Purchase Agreement"), a Master Custodian
Agreement, a Master Production Agreement, a Securitization Agreement and a Data
Processing Computer Service Agreement (the "Data Processing Agreement"). In
accordance with applicable regulations, the terms of these agreements were
negotiated at arm's length on the basis that they are substantially the same, or
at least as favorable to the Bank, as those prevailing for comparable
transactions with, or involving, other nonaffiliated companies.
Pursuant to the Master Production Agreement, the Bank, on a monthly basis,
determines its loan production targets and goals (the "Loan Production Goals")
and R&G Mortgage assists the Bank to reach its Loan Production Goals by, among
other things: (i) advertising, promoting and marketing to the general public;
(ii) interviewing prospective borrowers and initial processing of loan
applications, consistent with the Bank's underwriting guidelines and Loan
Production Goals previously established; and (iii) providing personnel and
facilities with respect to the execution of any loan agreement approved by the
Bank. In exchange for these services, the Bank remits to R&G Mortgage a
percentage of the processing or originating fees charged to the borrowers under
loan agreements, as set forth in the agreements. See "Business of the Company --
Lending Activities of the Bank -- Originations, Purchases and Sales of Loans."
The Master Purchase Agreement provides for the sale by the Bank to R&G
Mortgage of the servicing rights to all first and second mortgage loans secured
by residential properties which become part of the Bank's loan portfolio. The
Master Purchase Agreement further provides that R&G Mortgage will service all
other loans held in the Bank's loan portfolio (including single-family
residential loans retained by the Bank and certain commercial real estate
loans), although R&G Mortgage does not actually acquire such servicing rights.
The Master Purchase Agreement further provides that R&G Mortgage exclusively
will service such loans and that the Bank will process payments of such loans,
all according to a fee schedule. See "Business of the Company -- Mortgage
Banking Activities -- Loan Originations, Purchases and Sales of Loans."
Under the Securitization Agreement, R&G Mortgage renders securitization
services with respect to the pooling of some of the Bank's mortgage loans into
mortgage-backed securities. With respect to securitization services rendered,
the Bank pays a securitization fee of 25 basis points. The Master Custodian
Agreement provides that the Bank shall be the custodial agent for R&G Mortgage
of certain documentation related to the issuance by R&G Mortgage of GNMA, FNMA
or FHLMC mortgage-
24
<PAGE>
backed certificates. In consideration of these services, the Bank receives a fee
for each mortgage note included in a mortgage-backed certificate per year for
which it acts as custodian, as set forth in the agreement. See "Business of the
Company -- Mortgage Banking Activities -- Loan Originations, Purchases and Sales
of Loans." For additional information on affiliated transactions, see
"Management-Transactions with Certain Related Persons."
BANK STOCKHOLDER EXCHANGE TRANSACTION
In connection with the reorganization of R&G Mortgage and the Bank into the
bank holding company form of organization, the Company acquired the
approximately 88.1% ownership interest of the Bank held by Mr. Victor J. Galan,
its Chairman of the Board and Chief Executive Officer, and intends to acquire
the approximately 11.9% ownership interest in the Bank which, as of March 31,
1996, was held by 205 other stockholders (the "Minority Bank Stockholders"). In
consideration of the acquisition of such interests, the Company will provide
Bank stockholders with shares of its Common Stock, as described more fully
herein. Such exchange transactions, in which the Company would acquire 100%
ownership of the Bank (other than the 1000 shares of $1.00 par value stock that
the Puerto Rico Banking law requires each Bank director to hold as qualifying
shares) as well as R&G Mortgage are hereinafter referred to as the "Bank
Stockholder Exchange Transaction."
In order to accomplish these transactions, the Company intends to establish
R-G Interim Premier Bank ("Interim"), an interim bank organized under Puerto
Rico law as a commercial bank. In accordance with the terms of an Agreement and
Plan of Merger dated June 13, 1996, as amended, between the Company, the Bank
and Interim (the "Merger Agreement"), on July 19, 1996 the Company, following
the receipt of all requisite approvals from the Federal Reserve Board, acquired
Mr. Victor J. Galan's 100% ownership interest in the common stock of R&G
Mortgage and his approximately 88.1% interest in the common stock of the Bank
(other than required qualifying shares as a director). Mr. Galan received in
consideration therefore an aggregate of 5,189,044 Class A Shares of the Company,
66,667 of which will be converted into Class B Shares and sold in the Offering.
The Company's acquisition of Mr. Galan's ownership interest in R&G Mortgage and
the Bank was not dependent on whether the balance of the Bank Stockholder
Exchange Transaction with Minority Bank Stockholders and the Offering are
completed.
The Merger Agreement further provides that following the receipt of all
requisite approvals from the FDIC and the Puerto Rico Office of the Commissioner
of Financial Institutions ("OCFI") and immediately prior to consummation of the
Offering, Interim shall be merged with and into the Bank, with the Bank as the
surviving corporation (the "Merger"). The business of the Bank following the
Merger will in all respects be conducted in the same manner as the business of
the Bank prior to the Merger. Interim will not engage in any business, and is
being organized solely to facilitate the exchange of shares with the Bank's
present stockholders.
In connection with the Merger, all of the remaining outstanding shares of
the Bank not owned by the Company shall be exchanged, by operation of law, into
Class B Shares of the Company. All Minority Bank Stockholders (other than those
who perfect their right to seek appraisal of the Bank common stock under Puerto
Rico law) will receive, in exchange for their aggregate interest of
approximately 11.9% of the Bank common stock, an aggregate of 296,396 Class B
Shares of the Company (1.192 Class B Shares for each share of Bank common
stock), or $17.88 per share of Bank common stock held by Minority Bank
Stockholders, based upon a preliminary independent valuation of the Bank
described below and an assumed Price to Public for the Class B Shares of $15.00
per share. The acquisition of the remaining shares of common stock of the Bank
in this manner ensures the acquisition of 100% of the remaining Bank common
stock by the Company.
The Class A Shares are entitled to two votes per share and the Class B
Shares are entitled to one vote per share. As a result, following the Bank
Stockholder Exchange Transaction and the Offering, in which an aggregate of an
additional 2,000,000 Class B Shares of the Company are to be issued (without
giving effect to the over-allotment option granted to the Underwriter in the
Offering), the Company's Chairman of the Board and Chief Executive Officer will
continue to have the power to elect
25
<PAGE>
and remove all of the Company's Board of Directors and management and to
determine the outcome of substantially all other matters to be decided by a vote
of stockholders. See "Description of Capital Stock" and "Beneficial Ownership of
Securities."
Because of the lack of a public trading market for the Bank's common stock,
in order to effectuate the exchange of shares of Bank common stock for shares of
the Company's Common Stock, the Bank has obtained an independent preliminary
valuation of the interests of the Minority Bank Stockholders. At the request of
the Bank's Board of Directors, the valuation was prepared by Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), the Underwriter of the Offering, in reliance upon
information contained in this Prospectus, including the Consolidated Financial
Statements. FBR also considered the following factors, among others: the present
and projected operating results and financial condition of the Company, R&G
Mortgage and the Bank and the economic and demographic conditions in the
Company's existing market area; certain historical financial and other
information relating to the Company, R&G Mortgage and the Bank; a comparative
evaluation of the operating and financial statistics of the Company with those
of other similarly situated publicly-traded companies located in Puerto Rico and
other regions of the United States; the aggregate size of the offering of the
Class B Shares; the impact of the Offering on the Company's stockholder's equity
and earnings potential; and the trading market for securities of comparable
companies and general conditions in the market for such securities. In its
review of the reasonableness and adequacy of the FBR's valuation, the Board of
Directors of the Bank reviewed the methodologies and the appropriateness of the
assumptions used by FBR in addition to the factors enumerated above. As a result
of such review, a majority of the Board of Directors of the Bank has determined
the valuation to be acceptable. The Chairman of the Board and Chief Executive
Officer of the Company and the Bank did not participate in the discussion or
vote on the resolution to accept the valuation.
In preparing the valuation, which was based on financial information on the
Bank as of March 31, 1996, the Underwriter considered a number of factors. The
valuation used market and financial characteristics of similar companies to R&G
Mortgage and the Bank to determine the relative market values of each entity. In
addition, market and financial characteristics for banks and thrift institutions
of similar size as well as mortgage banks were considered. In determining
relative value for R&G Mortgage and the Bank, among other things, the
Underwriter took into account the minority nature of the position held by the
Minority Bank Stockholders as well as the non-public nature of both R&G Mortgage
and the Bank. Once the Underwriter determined the market values of each entity,
the value of the Minority Bank Stockholders' approximately 11.9% interest in the
Bank could be estimated and the percentage of the Company, using an estimated
Price to Public of $15.00, representing the same value was calculated. The
Underwriter intends to update the valuation as of a date immediately prior to
the consummation of the Bank Stockholder Exchange Transaction. Consequently, the
continued applicability of the preliminary valuation will necessarily depend on
there being no material changes in the Bank's or R&G Mortgage's financial
condition, results of operations or market conditions prior to the closing of
the Bank Stockholder Exchange Transaction. To the extent that the preliminary
valuation is revised upwards as a result of an increase in the value of the Bank
relative to R&G Mortgage, the resulting increase in value will be paid in cash
to the Minority Bank Stockholders on a pro rata basis. No adjustments will be
made to the number of Class B Shares to be issued to the Minority Bank
Stockholders in the event the preliminary valuation is revised downwards as a
result of a decrease in the value of the Bank relative to R&G Mortgage. In
addition, no adjustments will be made to the number of Class B Shares to be
issued to Minority Bank Stockholders in the event the Price to Public is other
than $15.00.
Pursuant to the terms of the Merger Agreement, the affirmative vote of the
holders of more than three-fourths of the issued and outstanding Bank common
stock and Bank preferred stock is required to approve the Merger Agreement. All
stockholders of record as of June 29, 1996 were given notice of a special
meeting of stockholders of the Bank to be held July 30, 1996 to consider and
vote upon the Merger Agreement and the transactions provided for thereunder. The
notice stated, among other things, the intention of Mr. Victor J. Galan, the
Company's Chairman of the Board and Chief Executive Officer, who was the
stockholder of record as of the voting record date, to vote his approximately
26
<PAGE>
88.1% of the Bank common stock, and of R&G Mortgage, which was the stockholder
of record as of the voting record date, to vote its 100% of the Bank's Series A
Preferred Stock, in favor of the Merger Agreement and the Bank Stockholder
Exchange Transaction.
Upon consummation of the Bank Stockholder Exchange Transaction, each stock
certificate for a share of Bank common stock may be exchanged for the
appropriate amount of the Company's Class A Shares (in the case of Mr. Galan) or
Class B Shares (in the case of all Minority Bank Stockholders other than those
who perfect their appraisal rights under Puerto Rico law) pursuant to written
procedures to be provided to all Bank stockholders. The Company's registrar and
transfer agent intends to provide all Bank stockholders with such instructions
promptly following consummation of the Offering. Until so exchanged, the Bank
common stock certificates shall solely represent the right to receive the
appropriate amount of shares of Common Stock of the Company into which the Bank
common stock may be exchanged, and payment of cash in lieu of fractional shares
or dividends or other distributions which may be made with respect to the shares
of Common Stock of the Company. As of the effective date of each portion of the
Bank Stockholder Exchange Transaction, the holders of Bank common stock shall
cease to have any rights with respect to the Bank common stock, and their sole
rights shall be with respect to the shares of Common Stock of the Company for
which their Bank common stock shall have been exchanged.
For information on the effect of the Bank Stockholder Exchange Transaction
on the consolidated capitalization of the Company, see "Capitalization."
USE OF PROCEEDS
Based upon the sale of the Class B Shares by the Company at an assumed Price
to Public of $15.00, approximately $ of the net proceeds will be used to
enhance the capital base of the Bank. Since the Bank's regulatory capital
requirement is in part a function of the amount of the Bank's asset base, the
additional capital will also support further expansion of the Bank, which may
include the acquisition of branch offices or financial institutions in Puerto
Rico. There can be no assurance that the Bank will be successful in making any
acquisitions in the future on terms favorable to the Bank. See "Regulation --
The Bank -- Capital Requirements" for a discussion of the Bank's regulatory
capital requirements. The Company will use $10.0 million of net proceeds to R&G
Mortgage to acquire the $10.0 million Series A Preferred Stock of the Bank
presently held by R&G Mortgage. The Company proposes to retain approximately
$ of the net proceeds from the Offering for general corporate purposes,
including the investment in investment securities and mortgage-backed
securities. The net proceeds for the Company will also be available for future
contributions, if any, to the Bank and R & G Mortgage. The Company will not
receive any of the proceeds from the sale of the Class B Shares offered by the
Selling Stockholder.
DIVIDENDS AND MARKET FOR CLASS B SHARES
As a newly formed company, R&G Financial has never paid a dividend on the
Common Stock. The Company expects to initiate a cash dividend policy on the
Common Stock during the first full quarter following the Offering. However, no
decision has been made as to the amount or timing of such dividends, if any. The
declaration and payment of dividends on the Common Stock will be subject to a
quarterly review by the Board of Directors of the Company. The timing and amount
of dividends, if any, will be dependent upon the Company's results of operations
and financial condition, on the ability of the Company to receive dividends from
its subsidiary companies, tax considerations and general economic conditions.
The Company's ability to receive dividends from R & G Mortgage is dependent upon
R & G Mortgage's results of operations and financial condition. The Company's
ability to receive dividends from the Bank is contingent upon the Bank's
compliance with its applicable regulatory capital requirements as well as its
compliance with applicable Puerto Rico law and regulations. See "Regulation --
The Bank -- Capital Requirements" and "Regulation -- The Bank -- Puerto Rico
Banking Law." Holders of Class A Shares and Class B Shares will be entitled to
share ratably, as a single class, in any dividends paid on the Common Stock
(except that if dividends are declared which
27
<PAGE>
are payable in Class A Shares or Class B Shares, dividends shall be declared
which are payable at the same rate in each such class of stock and the dividends
payable in Class A Shares shall be payable to the holders of that class of stock
and the dividends payable in Class B Shares shall be payable to the holders of
that class of stock).
Prior to the Bank Stockholder Exchange Transaction and the Offering, there
has been no established market for the Class B Shares. The Company expects that
following the Bank Stockholder Exchange Transaction and the Offering, the Class
B Shares will be traded in the over-the-counter market. The Company has applied
to have the Class B Shares quoted on the Nasdaq Stock Market under the symbol
"RGFC."
In order to be quoted on the Nasdaq Stock Market, among other criteria,
there must be at least two market makers for the Class B Shares. The Underwriter
has advised the Company that, upon completion of the Bank Stockholder Exchange
Transaction and the Offering, it intends to act as a market maker in the Class B
Shares depending upon the volume of trading and subject to compliance with
applicable laws and regulatory requirements. The Underwriter, however, is not
obligated to make a market in such shares, and any such market making may be
discontinued at any time at the sole discretion of the Underwriter. The
Underwriter will assist the Company in obtaining additional market makers.
However, making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. Additionally, the development of a liquid public market depends on
the existence of willing buyers and sellers, the presence of which is not within
the control of the Company or any market maker. Accordingly, there can be no
assurance that an active and liquid trading market for the Class B Shares will
develop or that, if developed, it will continue, nor is there any assurance that
persons purchasing Class B Shares will be able to sell them at or above the
Price to Public set forth on the cover page hereof.
28
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at March 31, 1996 and (ii) the consolidated capitalization of the
Company on an as adjusted basis to reflect: (a) the issuance of 5,189,044 Class
A Shares to the Company's Chairman of the Board and Chief Executive Officer,
which occurred on July 19, 1996 (and the conversion of 66,667 of the Class A
Shares to Class B Shares, which Class B Shares will be sold in the Offering),
and 296,396 Class B Shares immediately prior to the closing of the Offering to
Minority Bank Stockholders in exchange for all of the remaining outstanding
shares of Bank common stock; and (b) the issuance of 2,000,000 Class B Shares by
the Company pursuant to the Offering at an assumed Price to Public of $15.00 per
share and receipt by the Company of the net proceeds therefrom, as if the sale
of the Class B Shares had been consummated on March 31, 1996 and assuming that
the Underwriter's over-allotment option was not exercised. See "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------------
AS ADJUSTED FOR
AS ADJUSTED FOR BANK STOCKHOLDER
BANK STOCKHOLDER AS ADJUSTED EXCHANGE
EXCHANGE FOR TRANSACTION AND
ACTUAL TRANSACTION(3)(5) OFFERING OFFERING(5)(6)
----------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deposits............................................. $ 541,123 $ 541,123 $ 541,123 $ 541,123
Securities sold under agreements to repurchase....... 95,314 95,314 95,314 95,314
Notes payable........................................ 73,585 73,585 73,585 73,585
Other borrowings(1).................................. 65,653 65,653 65,653 65,653
Accounts payable and other liabilities............... 17,514 17,514 17,514 17,514
----------- ----------------- ----------- ----------------
Total liabilities.............................. $ 793,189 $ 793,189 $ 793,189 $ 793,189
----------- ----------------- ----------- ----------------
----------- ----------------- ----------- ----------------
Subordinated notes(2)................................ $ 3,250 $ 3,250 $ 3,250 $ 3,250
----------- ----------------- ----------- ----------------
----------- ----------------- ----------- ----------------
Minority interest in the Bank(3)..................... $ 4,141 -- -- --
----------- ----------------- ----------- ----------------
----------- ----------------- ----------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none outstanding...................... $ -- $ -- $ -- $ --
Common stock, $.01 par value: Class A Shares,
10,000,000 shares authorized, issued shares
adjusted as shown(3).............................. 52 52 51 51
Class B Shares, 15,000,000 shares authorized,
issued shares adjusted as shown(3)................ -- 3 20 23
Additional paid-in capital......................... 363 4,806 26,478 30,921
Retained earnings.................................. 66,426 66,426 66,426 66,426
Capital reserve(4)................................. 1,021 1,021 1,021 1,021
Unrealized (loss) on securities available for sale,
net............................................... (148) (148) (148) (148)
----------- ----------------- ----------- ----------------
Total stockholders' equity..................... 67,714 72,160 93,848 98,294
----------- ----------------- ----------- ----------------
Total capitalization............................. $ 868,294 $ 868,599 $ 890,287 $ 894,733
----------- ----------------- ----------- ----------------
----------- ----------------- ----------- ----------------
</TABLE>
- ------------------------
(1) Comprised of long-term debt, advances from the FHLB of New York and other
secured borrowings. See "Business of the Company -- Borrowings" and Notes 12
to 14 of the Notes to Consolidated Financial Statements.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
29
<PAGE>
(2) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of the Company -- Borrowings" and Note 15 of the Notes to Consolidated
Financial Statements.
(3) Represents the exchange by the Company's Chairman of the Board and Chief
Executive Officer of his approximately 88.1% interest in the Bank and 100%
ownership interest in R&G Mortgage in exchange for 5,189,044 Class A Shares
(66,667 of which will be converted into Class B Shares and sold in the
Offering) and the exchange by Minority Bank Stockholders of their
approximately 11.9% interest in the Bank for an aggregate of 296,396 Class B
Shares. See "Bank Stockholder Exchange Transaction" and "Selling
Stockholder."
(4) Under the Banking Act of the Commonwealth of Puerto Rico, the Bank must
transfer a minimum of 10% of its net income for the year to a capital
surplus account until such account equals the greater of 10% of total
deposits or paid-in capital. See "Regulation -- The Bank -- Puerto Rico
Banking Law."
(5) Does not reflect purchase accounting adjustments, if any, that may be
required in connection with the Bank Stockholder Exchange Transaction.
(6) Does not reflect the issuance by the Company of 20,000 additional Class B
Shares to an employee following the Offering, which shares are not being
registered in the Offering. See "Beneficial Ownership of Securities."
DILUTION
Upon completion of the Offering, there will be an immediate dilution of the
net tangible book value per Class B Share from the Price to Public. This
dilution primarily results from the sale by the Company of Class B Shares in the
Offering at a price above the current book value per share. As of March 31,
1996, the Company had a net tangible book value of $66.9 million or $12.90 per
share. "Net tangible book value per share" represents the tangible net worth of
the Company (total assets less goodwill and total liabilities), divided by the
number of shares of Common Stock deemed to be outstanding.
Without taking into account any changes in net tangible book value after
March 31, 1996, other than to give effect to: (i) the exchange by Minority Bank
Stockholders in the Bank Stockholder Exchange Transaction of the approximately
11.9% of Bank common stock not owned by the Company in exchange for 296,396
Class B Shares (not taking into account purchase accounting adjustments, if any,
that may be required in connection therewith), and (ii) the sale by the Company
of the 2,000,000 Class B Shares in the Offering (assuming no exercise of the
over-allotment option and after deduction of underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value at March 31, 1996 would have been $13.14 per share, representing an
immediate
30
<PAGE>
dilution of $1.86 per share to new investors purchasing the Class B Shares
offered hereby at an assumed Price to Public of $15.00 per share. See "Bank
Stockholder Exchange Transaction" and "Underwriting."
<TABLE>
<S> <C> <C>
Assumed Price to Public............................................ $ 15.00
Net tangible book value per share before Bank Stockholder Exchange
Transaction and Offering.......................................... $ 12.90
Increase per share attributable to new investors................... .24
---------
Pro forma net tangible book value per share after Bank Stockholder
Exchange Transaction and Offering(1).............................. 13.14
---------
Dilution per share to new investors after Bank Stockholder Exchange
Transaction and Offering(1)....................................... $ 1.86
---------
---------
</TABLE>
- ------------------------
(1) Does not reflect purchase accounting adjustments, if any, that may be
required in connection with the Bank Stockholder Exchange Transaction. In
addition, does not reflect the issuance by the Company of 20,000 additional
Class B Shares to an employee following the Offering, which shares are not
being registered in the Offering. See "Beneficial Ownership of Securities."
The following table compares on a pro forma basis at March 31, 1996, the
total number of shares of Common Stock purchased from the Company, the total
cash consideration paid and the average price per share paid by Victor J. Galan,
the Company's Chairman of the Board and Chief Executive Officer and its existing
stockholder, and both the new investors purchasing Class B Shares offered hereby
(assuming the sale of 2,000,000 Class B Shares at an assumed Price to Public of
$15.00 per share and before deduction of underwriting discounts and commissions
and estimated offering expenses) and the original stockholders of the Bank who
are receiving Class B Shares in the Bank Stockholder Exchange Transaction.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Existing stockholder(1)............................ 5,189,044 69.32% $ 9,685 23.15% $ 1.87
New investors(2)................................... 2,000,000 26.72 30,000 71.72 15.00
Bank Stockholder Exchange Transaction(3)........... 296,396 3.96 2,142 5.13 7.23
</TABLE>
- ------------------------
(1) Represents the aggregate investment of the Chairman of the Board and Chief
Executive Officer in acquiring his interest in R&G Mortgage and the Bank.
Does not give effect to the exchange of 66,667 of the Chairman's Class A
Shares into a like number of Class B Shares, which are to be sold in the
Offering. See "Selling Stockholder."
(2) Does not give effect to the Underwriter's over-allotment option. See
"Underwriting."
(3) "Shares Purchased" represents the aggregate number of Class B Shares
received by Minority Bank Stockholders in the Bank Stockholder Exchange
Transaction. The "Total Consideration" represents the consideration
originally paid by such stockholders for the Bank common stock. See "Bank
Stockholder Exchange Transaction."
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, through its subsidiaries, is primarily engaged in a wide range
of real estate secured lending activities, including the origination, servicing,
purchase and sale of mortgages on single-family residences, the securitization
and sale of various mortgage-backed and related securities and the holding and
financing of mortgage loans and mortgage-backed and related securities for sale
or investment. The Company also originates for its portfolio commercial real
estate loans, residential construction loans, commercial business loans and
consumer loans. Finally, the Company provides a variety of trust and investment
services to its customers.
The Company has generally sought to achieve long-term financial strength and
profitability by increasing the amount and stability of its net interest income
and other non-interest income. The Company has sought to implement this strategy
by (i) establishing and emphasizing the growth of its mortgage banking
activities, including growing its loan servicing operation; (ii) expanding its
retail banking franchise (the Bank has expanded its branch system from two
offices at February 1990 to 14 offices at March 31, 1996) and, without taking
into consideration possible branch acquisition opportunities, the Bank
anticipates opening approximately two branches per year during the next several
years, all in order to achieve increased market presence and to increase core
deposits; (iii) enhancing the Company's net interest income by increasing the
Company's loans held for investment, particularly single-family residential
loans; (iv) developing new business relationships through an increased emphasis
on commercial real estate and commercial business lending; (v) diversifying the
Company's retail products and services, including an increase in consumer loan
originations (such as credit cards); (vi) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services; and (vii) controlled growth and the pursuit of a variety of
acquisition opportunities when appropriate. The Company attempts to control its
overall operating expenses, notwithstanding the Company's recent growth and
expansion activities.
ASSET AND LIABILITY MANAGEMENT
GENERAL. Changes in interest rates can have a variety of effects on the
Company's business. In particular, changes in interest rates affect the volume
of mortgage loan originations, the interest rate spread on loans held for sale,
the amount of gain on the sale of loans, the value of R&G Mortgage's loan
servicing portfolio and the Bank's net interest income. A substantial increase
in interest rates could also affect the volume of R&G Mortgage's loan
originations for both the Bank and third parties by reducing the demand for
mortgages for home purchases, as well as the demand for refinancings of existing
mortgages. Conversely, a substantial decrease in interest rates will generally
increase the demand for mortgages. To the extent that interest rates in future
periods were to increase substantially, the Company would expect overall
originations to decline. A decrease in the volume of the Company's mortgage
originations could result in a decrease in the amount of R&G Mortgage's mortgage
origination income and portfolio generated net interest income to the Bank.
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent with Board approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest rates
and to manage the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within specified maturities or repricing dates.
The Bank's asset and liability management function is under the guidance of
the Interest Rate Risk, Budget and Investments Committee ("IRRBICO"), which is
chaired by the Chief Executive Officer and comprised principally of members of
the Bank's senior management and at least three members of the Board of
Directors. The IRRBICO meets once a month to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate changes, the
book and market values
32
<PAGE>
of assets and liabilities, unrealized gains and losses, purchase and sale
activity and maturities of investments and borrowings. In connection therewith,
the IRRBICO generally reviews the Bank's liquidity, cash flow needs, maturities
of investments, deposits and borrowings and current market conditions and
interest rates.
The Bank's primary IRRBICO monitoring tool is asset/liability simulation
models, which are prepared on a monthly basis and are designed to capture the
dynamics of balance sheet, rate and spread movements and to quantify variations
in net interest income under different interest rate environments. The Bank also
utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated by valuing the Bank's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact of
immediate and sustained interest-rate shifts of the current yield curve upon the
market value of the current balance sheet.
A more conventional but limited IRRBICO monitoring tool involves an analysis
of the extent to which assets and liabilities are "interest rate sensitive" and
measuring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. At March 31, 1996, the Company's interest-bearing liabilities which
mature or reprice within one year exceeded the Company's interest-earning assets
with similar characteristics by $72.0 million, or 8.29% of total assets. While a
conventional gap measure may be useful, it is limited in its ability to predict
trends in future earnings. It makes no presumptions about changes in prepayment
tendencies, deposit or loan maturity preferences or repricing time lags that may
occur in response to a change in the interest rate environment.
R&G MORTGAGE. The profitability to R&G Mortgage of its mortgage loan
originations is in part a function of the difference between long-term interest
rates, which is the rate at which R&G Mortgage originates mortgage loans for
third parties, and short-term interest rates, which is the rate at which R&G
Mortgage finances such loans until they are sold. Generally, short-term interest
rates are lower than long-term interest rates and R&G Mortgage benefits from the
difference, or the spread, during the time the mortgage loans are held by R&G
Mortgage pending sale. A decrease in this spread would have a negative effect on
R&G Mortgage's net interest income and profitability, and there can be no
assurance that the spread will not decrease. R&G Mortgage generally attempts to
reduce this risk by attempting to limit the amount of mortgage loans held
pending sale and, as market conditions permit, entering into forward commitments
with respect to a portion of its mortgage loan originations. As a general
matter, R&G Mortgage attempts to limit its exposure to this interest rate risk
through the sale of substantially all loans within 180 days of origination.
A mortgage-banking company is generally exposed to interest rate risk from
the time the interest rate on the customer's mortgage loan application is
established through the time the mortgage loan closes, and until the time the
company commits to sell the mortgage loan. In order to limit R&G Mortgage's
exposure to interest rate risk through the time the mortgage loan closes, R&G
Mortgage generally does not lock-in or guarantee the customer a specific
interest rate on such loans through the closing date but rather offers customers
an interest rate that will be based on a prevailing market rate that adjusts
weekly. Moreover, in order to limit R&G Mortgage's exposure to interest rate
risk through the time the loan is sold or committed to be sold, R&G Mortgage
may, depending upon market conditions, enter into forward commitments to sell a
portion of its mortgage loans to investors for
33
<PAGE>
delivery at a future time. At March 31, 1996, R&G Mortgage had $24.7 million of
pre-existing commitments by third-party investors to purchase mortgage loans. To
the extent that R&G Mortgage originates or commits to originate loans without
pre-existing commitments by investors to purchase such loans or is not otherwise
hedged against changes in interest rates ("unhedged loans"), R&G Mortgage will
be subject to the risk of gains or losses through adjustments to the carrying
value of loans held for sale or on the actual sale of such loans (the value of
unhedged loans fluctuates inversely with changes in interest rates).
Finally, R&G Mortgage carries an inventory of mortgage-backed and related
securities (primarily fixed-rate GNMA certificates). Generally, the value of
fixed-rate mortgage-backed securities declines when interest rates rise and,
conversely, increases when interest rates fall. At March 31, 1996, R&G Mortgage
held $114.5 million of mortgage-backed and related securities (all of which
carried fixed interest rates) which were classified as held for trading and
reported at fair value, with unrealized gains and losses included in earnings.
Accordingly, declines in the value of R&G Mortgage's securities held for trading
could have a negative impact on the Company's earnings regardless of whether any
securities were actually sold.
In order to hedge the interest rate risk with respect to R&G Mortgage's
mortgage-backed and related securities portfolio, R&G Mortgage may utilize a
variety of interest rate contracts such as interest rate swaps, collars, caps,
options or futures (primarily Eurodollar certificates of deposit and U.S.
Treasury note contracts). R&G Mortgage will use such hedging instruments based
upon market conditions as well as the level of market rates of interest. Since
April 1996, R&G Mortgage's hedging activities have been conducted through an
outside investment adviser who is compensated based upon the amount of its
portfolio being hedged. In determining the amount of its portfolio to hedge, R&G
Mortgage will consider the volatility of prices of its mortgage-backed and
related securities (Puerto Rican GNMAs are generally less volatile than their
U.S. counterparts). At March 31, 1996, R&G Mortgage was not a party to any
interest rate swaps, collars, caps, floors, options or futures.
THE BANK. The results of operations of the Bank are substantially dependent
on its net interest income, which is the difference between the interest income
earned on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. At March 31, 1996, the Bank's interest-earning
assets included a portfolio of loans receivable, net (not including mortgage
loans held for sale), of $478.7 million and a portfolio of investment securities
and mortgage-backed securities (both held to maturity, held for trading and
available for sale) of $127.3 million. Because the Bank's interest-earning
assets have longer effective maturities than its interest-bearing liabilities,
the yield on the Bank's interest-earning assets generally will adjust more
slowly than the cost of its interest-bearing liabilities and, as a result, the
Bank's net interest income generally would be adversely affected by increases in
interest rates and positively affected by comparable declines in interest rates.
In addition to affecting net interest income, changes in interest rates also can
affect the value of the Bank's interest-earning assets, which are comprised of
fixed and adjustable-rate instruments. At March 31, 1996, $2.2 million or 1.73%
of the Bank's mortgage-backed and investment securities were classified as held
for trading (which consisted solely of mortgage-backed and related securities),
and are reported at fair value, with unrealized gains and losses included in
earnings. Accordingly, declines in the value of the Bank's securities held for
trading could have a negative impact on the Company's earnings regardless of
whether any securities were actually sold by the Bank. In addition, at March 31,
1996, $69.3 million or 54.4% of the Bank's mortgage-backed and investment
securities were classified as available for sale and are reported at fair value,
with unrealized gains and losses excluded from earnings and reported net of
taxes as a separate component of stockholders' equity.
The Bank has sought to limit its exposure to interest rate risk both
internally through the management of the composition of its assets and
liabilities and externally through the use of a variety of hedging instruments.
Internal hedging through balance sheet restructuring generally involves the
attraction of longer-term funds (i.e., certificates of deposit, FHLB advances or
936 Notes, the origination of adjustable-rate and/or shorter-term loans (such as
commercial real estate, commercial business
34
<PAGE>
and consumer loans) or the investment in certain types of mortgage-backed
derivative securities such as CMOs and mortgage-backed residuals (which often
exhibit elasticity and convexity characteristics which the Bank can utilize to
hedge other components of its portfolio).
External hedging involves the use of interest rate swaps, collars, caps,
options and futures. The Bank utilizes the services of one outside investment
adviser who assists the Bank in the management of its investment and
mortgage-backed securities portfolio and who advises the Bank with respect to
the use of various financial instruments to reduce interest rate risk. Such
investment adviser, which has been engaged by the Bank to, among other things,
assist it in achieving the objectives established by the Bank's IRRBICO, is
compensated based upon both the total amount of assets under management as well
as the performance of the portfolio. At March 31, 1996, Bank assets with an
approximate fair value of $29.9 million ($19.9 million of which is being
utilized for hedging purposes and $10.0 million of which is being utilized for
trading purposes) were being managed by its independent investment adviser and
were invested in U.S. Government agency securities and money market instruments.
These assets are being hedged with financial futures contracts and Eurodollars.
Beginning with the quarter ended June 30, 1996, such firm will execute hedging
strategies on behalf of the Bank for all securities which are held for trading
or available for sale. At March 31, 1996, the Bank's securities held for trading
and available for sale had a fair value of $71.5 million. See "Business of the
Company -- Investment Activities."
The Bank generally uses interest rate swaps, collars, caps, options and
futures to effectively fix the cost of short-term funding sources which are used
to purchase interest-earning assets with longer effective maturities, such as
mortgage-backed securities and fixed-rate residential mortgage loans which do
not meet the criteria for sale to the FNMA or the FHLMC in the secondary market.
Such agreements thus reduce the impact of increases in interest rates by
preventing the Bank from having to replace funding sources at a higher cost
prior to the time that the interest-earning asset which was acquired with such
source matures or reprices and thus can be replaced with a higher-yielding
asset.
At March 31, 1996, the Bank was a party to five interest rate swap
agreements. An interest rate swap is an agreement where one party (generally the
Bank) agrees to pay a fixed-rate of interest on a notional principal amount to a
second party (generally a broker) in exchange for receiving from the second
party a variable-rate of interest on the same notional amount for a
predetermined period of time. No actual assets are exchanged in a swap of this
type and interest payments are generally netted. The Bank's existing interest
rate swap agreements have an aggregate notional amount of approximately $35.0
million and expire from August 1996 to October 2000. With respect to such
agreements, the Bank makes fixed interest payments ranging from 4.42% to 6.6%
and receives payments based upon the three-month London Interbank Offer Rate
("LIBOR"). The net expense (income) relating to the Bank's fixed-pay interest
rate swaps amounted to approximately $(1,100), $(187,000), $65,000 and $387,000
during the three months ended March 31, 1996 and the years ended December 31,
1995, 1994 and 1993, respectively. Such interest rate contracts have reduced the
imbalance between the Bank's interest-earning assets and interest-bearing
liabilities within shorter maturities, thus, reducing the Bank's exposure to
increases in interest rates that may occur in the future.
As discussed above, the Bank may also enter into interest rate collars,
caps, options and futures. However, at March 31, 1996 and December 31, 1995 and
1994, the Bank was not a party to any such interest rate contracts. An interest
rate cap consists of a guarantee given by one party, referred to as the issuer
(i.e., a broker), to another party, referred to as the purchaser (i.e., the
Bank), in exchange for the payment of a premium, that if interest rates rise
above a specified rate on a specified interest rate index, the issuer will pay
to the purchaser the difference between the then current market rate and the
specified rate on a notional principal amount for a predetermined period of
time. No funds are actually borrowed or repaid. Similarly, an interest rate
collar is a combination of a purchased cap and a written floor at different
rates. Accordingly, an interest rate collar requires no payments if interest
rates remain within a specified range, but will require the Bank to be paid if
interest rates rise above the cap rate or require the Bank to pay if interest
rates fall below the floor rate. Interest rate futures are commitments to either
purchase or sell designated instruments (such as Eurodollar certificates of
35
<PAGE>
deposit and U.S. Treasury note contracts) at a future date for a specified
price. Futures contracts are generally traded on an exchange, are marked to
market daily and subject to initial and maintenance margin requirements. Options
are contracts which grant the purchaser the right to buy or sell the underlying
asset by a certain date for a specified price.
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
March 31, 1996, based on the information and assumptions set forth in the notes
below.
<TABLE>
<CAPTION>
MORE THAN
FOUR TO MORE THAN THREE YEARS
WITHIN THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
------------ --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS(1):
Loans receivable:
Residential real estate loans............... $ 13,465 $ 37,101 $ 79,432 $ 57,740 $ 152,219 $ 339,957
Construction loans.......................... 2,066 7,221 -- -- -- 9,287
Commercial real estate loans................ 56,970 143 443 550 10,287 68,393
Consumer loans.............................. 12,359 25,640 34,013 11,969 1,339 85,320
Commercial business loans................... 21,027 8,683 -- -- -- 29,710
Mortgage loans held for sale.................. 6,449 20,856 5,722 4,345 13,739 51,111
Mortgage-backed securities(2)(3).............. 14,717 45,244 32,349 25,288 85,480 203,078
Investment securities(3)...................... 11,878 15,220 587 66 603 28,354
Other interest-earning assets(4).............. 19,932 -- -- -- -- 19,932
------------ --------- ----------- ----------- ----------- ---------
Total................................... $ 158,853 $ 160,108 $ 152,546 $ 99,958 $ 263,667 $ 835,142
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
INTEREST-BEARING LIABILITIES:
Deposits(5):
NOW and Super NOW accounts(6)............... $ 3,834 $ 10,736 $ 11,803 $ 9,561 $ 40,761 $ 76,695
Passbook savings accounts(6)................ 1,896 5,492 12,636 10,235 43,635 73,894
Checking and commercial checking(6)......... 2,349 6,575 7,225 5,852 28,918 50,919
Certificates of deposit..................... 89,306 166,857 37,668 39,683 4,672 338,186
FHLB advances................................. 1,000 5,002 -- -- -- 6,002
Reverse repurchase agreements................. 95,314 -- -- -- -- 95,314
Other borrowings(7)........................... 22,588 41 6,233 50,500 57,127 136,486
------------ --------- ----------- ----------- ----------- ---------
Total................................... 216,284 194,703 75,565 115,831 175,113 777,496
------------ --------- ----------- ----------- ----------- ---------
Effect of hedging instruments................. (35,000) 15,000 10,000 10,000 -- --
------------ --------- ----------- ----------- ----------- ---------
$ 181,284 $ 209,703 $ 85,565 $ 125,831 $ 175,113 $ 777,496
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities............ $ (22,421) $ (49,595) $ 66,981 $ (25,873) $ 88,554 $ 57,646
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities.................................. $ (22,421) $ (72,016) $ (5,035) $ (30,908) $ 57,646
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets..... (2.58)% (8.29)% (0.58)% (3.56)% 6.64%
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments based on forecasts used
by the OTS in their model for market value of portfolio equity ("MVPE")
discussed below.
(2) Reflects estimated prepayments in the current interest rate environment.
(3) Includes securities held for trading, available for sale and held for
investment.
(4) Includes securities purchased under agreement to resell and time deposits
with other banks.
(5) Does not include non-interest-bearing deposit accounts.
(6) Although the Bank's negotiable order of withdrawal ("NOW") and Super NOW
accounts, passbook savings accounts and checking accounts are subject to
immediate withdrawal, management considers a substantial amount of such
accounts to be core deposits having significantly longer effective
maturities based on the Bank's retention of such deposits in changing
interest rate environments. The above table assumes that funds will be
withdrawn from the Bank at annual rates for NOW accounts and for checking
and commercial checking accounts, ranging from 10% for 0-12 months, 19% for
1-5 years, 41% for 5-10 years, 65% for 10-20 years and 100% thereafter; and,
for passbook savings accounts, ranging from 5% for 0-12 months, 19% for 1-5
years, 40% for 5-10 years, 65% for 10-20 years and 100% thereafter.
(7) Comprised of warehousing lines and notes payable.
36
<PAGE>
Although "gap" analysis is a useful measurement device available to
management in determining the existence of interest rate exposure, its static
focus as of a particular date makes it necessary to utilize other techniques in
measuring exposure to changes in interest rates. For example, gap analysis is
limited in its ability to predict trends in future earnings and makes no
presumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in the
interest rate environment. As a result, the Company, through simulation models,
also analyzes on a monthly basis the estimated effects on net interest income
and equity under multiple rate scenarios, including increases and decreases in
interest rates amounting to 400, 300, 200 and 100 basis points. The IRRBICO
regularly review interest rate risk by forecasting the impact of alternative
interest rate scenarios on net interest income and on the Company's MVPE, which
is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments, and by evaluating such impact
against the maximum potential changes in net interest income and MVPE.
The following table sets forth at March 31, 1996 the estimated percentage
change in the Company's MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
MVPE(2)
CHANGE IN ----------------------------------------------------
INTEREST RATES CHANGE AS A
(IN BASIS PERCENTAGE PERCENTAGE OF
POINTS)(1) AMOUNT OF CHANGE CHANGE ASSETS
- ------------------- --------------------- ------------- --------------
<S> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
+400 $ (30,689) (39.4)% (3.7)%
+300 (24,064) (30.9) (2.9)
+200 (16,721) (21.5) (2.0)
+100 (8,695) (11.2) (1.1)
-- -- -- --
-100 13,805 17.7 1.7
-200 29,190 37.5 3.5
-300 49,530 63.6 6.0
-400 85,160 109.2 10.3
</TABLE>
- ------------------------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) Based on the Company's pre-tax MVPE of $77.9 million at March 31, 1996,
which is approximately $10.2 million in excess of the Company's
stockholder's equity calculated in accordance with generally accepted
accounting principles as of such date.
Management of the Company believes that all of the assumptions used in the
foregoing analysis to evaluate the vulnerability of its operations to changes in
interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of the Company's assets and liabilities
and the estimated effects of changes in interest rates on the Company's net
interest income and MVPE indicated in the above table could vary substantially
if different assumptions were used or if actual experience differs from the
projections on which they are based.
CHANGES IN FINANCIAL CONDITION
GENERAL. At March 31, 1996, the Company's total assets amounted to $868.3
million, as compared to $853.2 million and $622.5 million at December 31, 1995
and 1994, respectively. Total assets increased slightly during the three months
ended March 31, 1996, by $15.1 million or 1.7%. The $231.0 million or 37.1%
increase in total assets during 1995 was primarily due to the cash received in
connection with the Bank's acquisition in June 1995 of $77.2 million in deposits
and six branch offices (after closing and consolidating one branch office) from
another commercial bank and the deployment of such cash into interest-earning
assets. See "The Company." Following completion of the Offering, the Company
expects to continue its strategy of growing both the Bank's operations and R&G
Mortgage's servicing portfolio. See "Use of Proceeds."
37
<PAGE>
CASH AND MONEY MARKET INVESTMENTS. Cash and money market investments
(consisting of securities purchased under agreements to resell certificates of
deposit with other financial institutions and federal funds sold) amounted to
$42.9 million, $104.2 million and $45.6 million as of ended March 31, 1996 and
December 31, 1995 and 1994, respectively. The significant amount of cash and
money market investments at December 31, 1995 reflected the Bank's June 1995
branch acquisition and the $75.6 million in cash received in connection
therewith. By March 31, 1996, the Bank had deployed substantially all of such
cash into mortgage loans, a substantial portion of which were securitized and
subsequently sold. See "Management's Discussion and Analysis of Financial
Condition and Results of Resources -- Liquidity and Capital Resources" for a
discussion of the Company's liquidity.
LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE. At March 31, 1996, the
Company's loans receivable, net amounted to $534.1 million or 61.5% of total
assets, as compared to $473.8 million or 55.5% and $301.6 million or 48.5% as of
December 31, 1995 and 1994, respectively. The growth in the Company's loans
receivable, net reflects the Company's strategy of increasing its loans held for
investment, including residential mortgage, construction, commercial real
estate, commercial business and consumer loans. During the three months ended
March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, total loans
originated and purchased by the Bank (including loans originated by R&G Mortgage
on behalf of the Bank) amounted to $87.1 million, $278.5 million, $212.0 million
and $223.1 million.
At March 31, 1996, the Company's allowance for loan losses (all of which is
maintained in the Bank's loan portfolio) totalled $3.3 million, which
represented a $201,000 or 5.7% decrease and a $623,000 or 21.6% increase from
the levels maintained at December 31, 1995 and 1994, respectively. At March 31,
1996, the Company's allowance represented approximately 0.67% of the total loan
portfolio and 27.27% of total non-performing loans, as compared to 0.72% and
33.19% at December 31, 1995 and 0.92% and 50.10% at December 31, 1994. While the
Company's allowance for loan losses as a percentage of both total loans and
total non-performing loans has declined since 1994, management of the Company
believes that its allowance for loan losses at March 31, 1996 was adequate,
based upon, among other things, the significant level of single-family
residential loans within the Company's portfolio (as compared to commercial real
estate, commercial business and consumer loans, which are considered by
management to carry a higher degree of credit risk) and the low level of loan
charge-offs with respect to the Company's loan portfolio. However, there can be
no assurances that additions to such allowance will not be necessary in future
periods, which could adversely affect the Company's results of operations. See
"Risk Factors -- Composition of the Bank's Loan Portfolio;" "Business of the
Company -- Lending Activities of the Bank -- Originations, Purchases and Sales
of Loans" and Note 5 of the Notes to Consolidated Financial Statements.
At March 31, 1996 and December 31, 1995 and 1994, mortgage loans held for
sale amounted to $25.8 million, $21.3 million and $22.0 million, respectively.
Mortgage loans held for sale primarily reflects loans which are in the process
of being securitized and sold. See "Business of the Company -- Mortgage Banking
Activities" and Note 3 of the Notes to Consolidated Financial Statements. The
level of mortgage banking activities is highly dependent upon market and
economic factors. See "Risk Factors -- Potential Effects of Changes in Interest
Rates on R&G Mortgage and the Bank" and "Business of the Company -- Mortgage
Banking Activities -- Loan Originations, Purchases and Sales."
SECURITIES HELD FOR TRADING, AVAILABLE FOR SALE AND HELD FOR
INVESTMENT. The Company maintains a substantial portion of its assets in
mortgage-backed and investment securities which are classified as either held
for trading, available for sale or held to maturity in accordance with SFAS No.
115. At March 31, 1996, the Company's mortgage-backed and investment securities
totalled $231.4 million or 26.7% of total assets, as compared to $221.9 million
or 26.0% and $226.0 million or 36.3% at December 31, 1995 and 1994,
respectively.
Securities held for trading consist primarily of FHA and VA loans which have
been securitized and are being held for sale either to institutions in the
secondary market or private investors through
38
<PAGE>
the Bank's Trust Department. At March 31, 1996 and December 31, 1995 and 1994,
securities held for trading amounted to $116.7 million, $113.8 million and
$124.5 million. At March 31, 1996, all but $2.2 million of such securities were
held by R&G Mortgage. Pursuant to SFAS No. 115, securities held for trading are
reported at fair value with unrealized gains and losses included in earnings.
Securities available for sale consist of mortgage-backed and related
securities (FNMA and FHLMC certificates as well as CMOs and CMO residuals) and
U.S. Government agency securities, all of which were held by the Bank. At March
31, 1996 and December 31, 1995 and 1994, securities available for sale totalled
$69.3 million, $64.3 million and $15.2 million, respectively. Pursuant to SFAS
No. 115, securities available for sale are reported at fair value with
unrealized gains and losses excluded from earnings, and instead reported as a
separate component of stockholders' equity.
Securities held to maturity consist of mortgage-backed securities (GNMA,
FNMA and FHLMC certificates) Puerto Rico Government obligations and, at March
31, 1996, commercial paper, all of which were held by the Bank. At March 31,
1996 and December 31, 1995 and 1994, securities held to maturity totalled $45.4
million, $43.8 million and $86.3 million, respectively. Securities held to
maturity are accounted for at amortized cost. At March 31, 1996 and December 31,
1995 and 1994, the Company's securities held to maturity had a market value of
$44.0 million, $42.8 million and $81.0 million, respectively. See "Business of
the Company -- Investment Activities" and Note 4 of the Notes to Consolidated
Financial Statements.
MORTGAGE SERVICING RIGHTS. As of March 31, 1996 and December 31, 1995 and
1994, the Company reported $8.7 million, $8.2 million and $4.4 million of
mortgage servicing rights, respectively. Effective January 1, 1995, the Company
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," and, in
connection therewith, the Company is required to recognize both purchased and
originated mortgage servicing rights as assets in its Consolidated Financial
Statements. However, the Company is not permitted to recognize retroactively
mortgage servicing rights originated prior to the date of its adoption of SFAS
No. 122. SFAS No. 122 also requires the Company to assess the fair value of its
mortgage servicing rights on a quarterly basis and to determine any potential
impairment. Any future decline in interest rates which results in an
acceleration in mortgage loan prepayments could have an adverse effect on the
Company's mortgage servicing rights, the value of which is dependent upon the
cash flows from the underlying mortgage loans. See "Risk Factors -- Potential
Effects of Changes in Interest Rates on R&G Mortgage and the Bank," "Business of
the Company -- Mortgage Banking Activities -- Loan Servicing" and Note 6 of the
Notes to Consolidated Financial Statements.
DEPOSITS. At March 31, 1996, deposits totalled $541.1 million, as compared
to $518.2 million and $380.1 million at December 31, 1995 and 1994,
respectively. The $22.9 million or 4.4% increase in deposits during the three
months ended March 31, 1996 was primarily due to promotions in connection with
new accounts and competitive pricing, while the $138.0 million or 36.3% increase
in deposits during the year ended December 31, 1995 was primarily the result of
the Bank's acquisition in June 1995 of $77.2 million in deposits from a local
commercial bank. One of the Bank's strategies is to increase its core deposits,
which provide a source of fee income and the ability to cross-sell other
products and services. As a result, core deposits (consisting of passbook, NOW
and Super NOW and checking and commercial checking accounts) increased from
$143.3 million or 40.6% of total deposits at December 31, 1994 to $201.5 million
or 37.2% of total deposits at March 31, 1996. See "Business of the Company --
Sources of Funds -- Deposits" and Note 9 of the Notes to Consolidated Financial
Statements.
BORROWINGS. Other than deposits, the Company's primary sources of funds
consist of securities sold under agreements to repurchase (consisting of
agreements to purchase on a specified later date the same securities or
substantially identical securities) ("reverse repurchase agreements"). At March
31, 1996 and December 31, 1995 and 1994, reverse repurchase agreements totalled
$95.3 million, $98.5 million and $108.9 million, respectively. See "Business of
the Company -- Sources of Funds -- Borrowings" and Note 10 of the Notes to
Consolidated Financial Statements.
39
<PAGE>
Notes payable consist primarily of warehouse lines of credit (which are used
to fund loan commitments of R&G Mortgage) and Section 936 promissory notes
(which represents a low cost source of short and intermediate-term funds for the
Bank). At March 31, 1996, notes payable amounted to $73.6 million, as compared
to $81.1 million and $45.8 million at December 31, 1995 and 1994, respectively.
The $7.5 million or 9.3% decrease in notes payable during the three months ended
March 31, 1996 reflected $6.5 million of decreased warehouse lines and a $1.0
million reduction in working capital lines of credit, while the $35.3 million or
77.1% increase in notes payable during the year ended December 31, 1995 was due
to increases of $27.4 million of 936 Notes and $8.4 million of warehouse lines
of credit. See "Business of the Company -- Sources of Funds -- Borrowings" and
Note 11 of the Notes to Consolidated Financial Statements.
Advances from the FHLB of New York amounted to $6.0 million, $6.0 million
and $13.6 million at March 31, 1996 and December 31, 1995 and 1994,
respectively. At March 31, 1996, all $6.0 million of FHLB advances were
scheduled to mature in 1996, with an average interest rate of 6.74%, as compared
to 6.74% and 5.84% at December 31, 1995 and 1994, respectively. See "Business of
the Company -- Sources of Funds -- Borrowings" and Note 13 of the Notes to
Consolidated Financial Statements.
Long-term debt consists of long-term (greater than one-year) notes payable
and amounted to $4.9 million, $5.3 million and $4.5 million at March 31, 1996
and December 31, 1995 and 1994, respectively. At March 31, 1996, the average
rate paid on the Company's long-term debt amounted to 7.65%, as compared to
7.36% and 7.40% at December 31, 1995 and 1994, respectively. See "Business of
the Company -- Sources of Funds -- Borrowings" and Note 12 of the Notes to
Consolidated Financial Statements.
In December 1995, the Bank sold single-family residential mortgage loans
with an aggregate outstanding balance of approximately $55 million to two
commercial banks. In connection with these transactions and in consideration of
higher servicing fees, R&G Mortgage assumed certain recourse obligations. In
addition, the purchasers of the loans have the right, at their option, to
require R&G Mortgage to purchase the mortgage loans beginning on specified dates
in December 2000. Management has estimated its liability, if any, under the
foregoing recourse provisions to be immaterial as of March 31, 1996. In the
Company's Consolidated Financial Statements, the Company has recognized the
foregoing transaction as a transfer of loans with recourse. Accordingly, the
proceeds from such transaction (amounting to $54.7 million and $55.0 million at
March 31, 1996 and December 31, 1995, respectively) have been reported as other
secured borrowings in the Company's Consolidated Financial Statements. See
"Business of the Company -- Sources of Funds -- Borrowings" and Note 14 of the
Notes to Consolidated Financial Statements.
In June 1991, the Bank issued $3.3 million of subordinated capital notes
bearing interest at 8% payable on a quarterly basis. The subordinated notes are
guaranteed by R&G Mortgage and by the Chairman of the Board and Chief Executive
Officer of the Company, and are secured by an irrevocable standby letter of
credit issued by an unrelated commercial bank. Pursuant to the terms of the
subordinated notes, the Bank is required to deposit in an established sinking
fund in seven equal annual installments (the first of which was made in
September 1992 and the last of which is scheduled for June 1998, when the notes
mature) cash or other permitted investments in an amount sufficient to retire
one-seventh ($464,000) of the aggregate principal amount of the subordinated
notes. The standby letter of credit is reduced in equal proportion to the
deposits to such sinking fund. See "Business of the Company -- Sources of Funds
- -- Borrowings" and Note 16 of the Notes to Consolidated Financial Statements.
MINORITY INTEREST IN THE BANK. At March 31, 1996 and December 31, 1995 and
1994, the Company reflects on its books $4.2 million, $4.0 million and $3.2
million, which represented the interest of the Minority Bank Stockholders in the
Bank. The Minority Bank Stockholders will have their interests in the Bank
exchanged for Class B Shares of the Company in connection with the Bank
Stockholder Exchange Transaction. See "Bank Stockholder Exchange Transaction."
40
<PAGE>
STOCKHOLDER'S EQUITY. Stockholder's equity increased from $56.0 million at
December 31, 1994 to $66.4 million at December 31, 1995 and further increase to
$67.7 million at March 31, 1996. The $10.4 million or 18.6% increase in
stockholder's equity during 1995 was primarily due to the $10.4 million of net
income recognized during the year ended December 31, 1995. The $1.3 million or
2.0% increase in stockholder's equity during the three months ended March 31,
1996 was primarily due to $2.9 million of net income recognized during the
period, which was partially offset by a one-time $500,000 cash dividend paid by
R&G Mortgage during the period and a decline in unrealized gains on securities
available for sale from $952,000 at December 31, 1995 to an unrealized loss of
$148,000 at March 31, 1996.
RESULTS OF OPERATIONS
GENERAL. The Company's results of operations depend substantially on its
net interest income, which is the difference between interest income on
interest-earning assets, which consist primarily of loans, money market
investments and mortgage-backed and investment securities, and interest expense
on interest-bearing liabilities, which consist primarily of deposits and short
and long-term borrowings. The Company's results of operations are also
significantly affected by its provisions for loan losses, resulting from the
Company's assessment of the adequacy of its allowance for loan losses; the level
of its other income, including net gain (loss) on sale of loans, unrealized gain
(loss) on trading securities and loan administration and servicing fees; the
level of its operating expenses, such as employee compensation and benefits and
office occupancy and equipment expense; and income tax expense.
The Company's major business activities consist of: (i) the origination by
R&G Mortgage of real estate mortgage loans for sale and the servicing by R&G
Mortgage of real estate mortgage loans for the Bank and other third parties; and
(ii) attracting deposits from the general public and using such deposits,
together with other borrowings, for investment principally by the Bank in loans
(single-family residential mortgage loans, construction loans, commercial real
estate loans, commercial business loans and consumer loans), and in
mortgage-backed and investment securities. To a much more limited extent, the
Company also provides trust and investment services to the public through the
Bank's Trust Department.
41
<PAGE>
The following table reflects the principal revenue sources of the Bank and
R&G Mortgage and the percentage contribution of each component for the periods
presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------------- ------------------------------------------------------
1996 1995 1995 1994 1993
---------------- --------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
THE BANK:
Net interest income after provision
for loan losses.................... $ 5,347 42.66% $3,853 43.62% $17,944 41.00% $15,089 52.12% $10,636 19.63%
Net gain on sale of loans and
securities......................... 43 0.34 113 1.28 632 1.44 202 0.70 3,977 7.34
Unrealized gain (loss) on trading
securities......................... (287) (2.29) -- -- 618 1.41 (214) (0.74) -- --
Net gain on sale of investment
securities......................... 329 2.62 -- -- -- -- -- -- 394 0.73
Market valuation allowance on loans
held for sale...................... -- -- (225) (2.55) 856 1.96 (856) (2.96) -- --
Other income(1)..................... 1,287 10.27 512 5.79 2,368 5.41 1,737 6.00 848 1.56
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
6,719 53.60 4,253 48.14 22,418 51.22 15,958 55.12 15,855 29.26
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
R&G MORTGAGE:
Net interest income................. 746 5.95 550 6.23 2,379 5.44 4,048 13.98 3,617 6.68
Loan administration and servicing
fees............................... 3,009 24.00 2,766 31.31 11,030 25.20 11,046 38.15 9,327 17.22
Net gain (loss) on sale of loans and
securities......................... 1,928 15.37 1,219 13.80 5,630 12.86 (1,551) (5.35) 25,049 46.23
Net gain on sale of servicing
rights............................. -- -- -- -- -- -- 2,915 10.07 -- --
Unrealized gains (losses) on trading
securities......................... 90 0.72 -- -- 1,504 3.44 (4,251) (14.68) -- --
Other income(1)..................... 44 0.36 46 0.52 804 1.84 786 2.71 331 0.61
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
5,817 46.40 4,581 51.86 21,347 48.78 12,993 44.88 38,324 70.74
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
$12,536 100.0% $8,834 100.0% $43,765 100.0% $28,951 100.0% $54,179 100.0%
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------
(1) Comprised of service charges, fees and other for the Bank and other
miscellaneous revenue sources for the Bank and R&G Mortgage.
42
<PAGE>
The Company reported net income of $2.9 million, $1.6 million, $10.4
million, $5.5 million and $17.2 million during the three months ended March 31,
1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. Net income increased by $1.3 million or 81.3% during the three
months ended March 31, 1996, as compared to the same period in the prior year,
due to a $2.0 million increase in total other income and a $1.7 million increase
in net interest income, which were partially offset by a $1.7 million increase
in total operating expenses, a $660,000 increase in income tax expense and a
$57,000 increase in the provision for loan losses.
Net income increased by $5.0 million or 91.6% during 1995 due to a $13.6
million increase in total other income and a $2.1 million increase in net
interest income, which were partially offset by a $5.0 million increase in
income tax expense, a $3.7 million increase in total operating expenses, a
$950,000 increase in the provision for loan losses and the absence of $867,000
in income recognized during 1994 due to the cumulative effect of a change in
accounting principles.
Net income decreased by $11.7 million or 68.3% during 1994 due to a $30.1
million decrease in total other income, which was partially offset by an $8.8
million decrease in income tax expense, a $4.9 million increase in net interest
income, a $3.5 million decrease in total operating expenses and $867,000 of
income recognized during 1994 as a result of the cumulative effect of a change
in accounting principles.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Net interest income totalled $6.1 million, $4.4 million, $21.3 million,
$19.1 million and $14.3 million during the three months ended March 31, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993, respectively. Net
interest income increased by $1.7 million or 40.2% during the three months ended
March 31, 1996, as compared to the same period in the prior year, due to an
increase in the Company's interest rate spread from 2.61% for the three months
ended March 31, 1995 to 2.82% for the three months ended March 31, 1996, which
was partially offset by a decline in the ratio of average interest-earning
assets to average interest-bearing liabilities from 107.10% to 106.97%,
respectively. Net interest income increased by $2.1 million or 11.2% during 1995
due to an increase in the ratio of average interest-earning assets to average
interest-bearing liabilities from 105.60% for 1994 to 106.50% for 1995, which
was partially offset by a decline in the Company's interest rate-spread from
3.24% for 1994 to 2.93% for 1995. Net interest income increased by $4.9 million
or 34.3% during 1994 due to significant increases in the average balance of
interest-earning assets, which compensated for a decrease in the ratio of
average interest-earning assets to average interest-bearing liabilities from
106.08% for 1993 to 105.60% for 1994, as well as a decline in the Company's
interest rate spread from 3.66% for 1993 to 3.24% for 1994.
43
<PAGE>
The following table presents for the Company for the periods indicated the
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for R&G Mortgage and average daily
balances for the Bank, in each case during the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------- ---------------------------------
1996 1995 1995
--------------------------------- --------------------------------- ---------------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (1)(2) BALANCE INTEREST (1)(2) BALANCE INTEREST (1)(2)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Cash and cash
equivalents(3)........ $ 12,926 $ 177 5.48% $ 10,747 $ 168 6.25% $ 10,000 $ 605 6.05%
Investment securities
held for trading...... 6,867 74 4.31 -- -- -- -- -- --
Investment securities
available for sale.... 10,747 171 6.36 -- -- -- -- -- --
Investment securities
held to maturity...... 29,122 398 5.47 10,081 141 5.59 16,211 972 6.00
Mortgage-backed
securities held for
trading............... 122,373 1,999 6.53 135,584 2,083 6.15 130,184 8,595 6.60
Mortgage-backed
securities available
for sale.............. 49,793 907 7.29 16,781 302 7.20 16,006 1,193 7.45
Mortgage-backed
securities held to
maturity.............. 42,848 738 6.89 79,205 1,329 6.71 72,173 4,841 6.71
Loans receivable,
net(4)(5)............. 528,494 11,469 8.68 334,277 7,462 8.93 405,784 37,078 9.14
FHLB of New York
stock................. 3,568 58 6.50 2,049 41 8.00 2,976 227 7.63
--------- --------- --------- --------- --------- ---------
Total
interest-earning
assets.............. 806,738 $ 15,991 7.93% 588,724 $ 11,526 7.83% 653,334 $ 53,511 8.19%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-interest-earning
assets................ 52,159 39,840 50,365
--------- --------- ---------
Total assets......... $ 858,897 $ 628,564 $ 703,699
--------- --------- ---------
--------- --------- ---------
INTEREST-BEARING
LIABILITIES:
Deposits............... $ 509,942 $ 6,383 5.01% $ 372,772 $ 4,712 5.06 $ 431,833 $ 21,829 5.05
Securities sold under
agreements to
repurchase............ 93,694 1,276 5.45 113,154 1,597 5.65 107,026 6,437 6.01
Notes payable.......... 81,638 1,000 4.90 42,668 602 5.64 55,118 3,025 5.49
Subordinated debt(6)... 3,250 82 10.09 3,250 84 10.34 3,250 339 10.43
Other borrowings(7).... 65,651 1,150 7.01 17,854 178 3.99 16,201 609 3.76
--------- --------- --------- --------- --------- ---------
Total
interest-bearing
liabilities......... 754,175 $ 9,891 5.11% 549,698 $ 7,173 5.22% 613,428 $ 32,239 5.26%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-interest-bearing
liabilities........... 37,671 22,206 29,093
--------- --------- ---------
Total liabilities.... 791,846 571,904 642,521
Stockholder's equity... 67,051 56,660 61,178
--------- --------- ---------
Total liabilities and
stockholder's
equity.............. $ 858,897 $ 628,564 $ 703,699
--------- --------- ---------
--------- --------- ---------
Net interest income;
interest rate
spread(8)............. $ 6,100 2.82% $ 4,353 2.61% $ 21,272 2.93%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net interest
margin(8)............. 3.02% 2.96% 3.26%
--------- --------- ---------
--------- --------- ---------
Average
interest-earning
assets to average
interest-bearing
liabilities........... 106.97% 107.10% 106.50%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1994 1993
--------------------------------- ---------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (1)(2) BALANCE INTEREST (1)(2)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash and cash
equivalents(3)........ $ 9,235 $ 373 4.04% $ 11,094 $ 310 2.79%
Investment securities
held for trading...... -- -- -- -- -- --
Investment securities
available for sale.... -- -- -- -- -- --
Investment securities
held to maturity...... 9,274 429 4.63 4,029 182 4.52
Mortgage-backed
securities held for
trading............... 143,090 9,301 6.50 108,024 7,804 7.22
Mortgage-backed
securities available
for sale.............. 33,357 2,449 7.34 6,667 528 7.92
Mortgage-backed
securities held to
maturity.............. 34,791 2,206 6.34 20,234 1,579 7.80
Loans receivable,
net(4)(5)............. 318,155 27,465 8.63 211,242 19,283 9.13
FHLB of New York
stock................. 1,852 141 7.61 2,390 205 8.58
--------- --------- --------- ---------
Total
interest-earning
assets.............. 549,754 $ 42,364 7.71% 363,680 $ 29,891 8.22%
--------- --------- --------- ---------
--------- --------- --------- ---------
Non-interest-earning
assets................ 49,542 58,423
--------- ---------
Total assets......... $ 599,296 $ 422,103
--------- ---------
--------- ---------
INTEREST-BEARING
LIABILITIES:
Deposits............... $ 340,461 $ 14,461 4.25% $ 232,848 $ 10,365 4.45
Securities sold under
agreements to
repurchase............ 97,572 4,417 4.53 4,515 274 6.07
Notes payable.......... 63,350 3,439 5.43 92,918 4,276 4.60
Subordinated debt(6)... 3,250 331 10.18 3,250 355 10.92
Other borrowings(7).... 15,920 578 3.63 9,314 368 3.95
--------- --------- --------- ---------
Total
interest-bearing
liabilities......... 520,553 $ 23,226 4.46% 342,845 $ 15,638 4.56%
--------- --------- --------- ---------
--------- --------- --------- ---------
Non-interest-bearing
liabilities........... 25,992 38,320
--------- ---------
Total liabilities.... 546,545 381,165
Stockholder's equity... 52,751 40,938
--------- ---------
Total liabilities and
stockholder's
equity.............. $ 599,296 $ 422,103
--------- ---------
--------- ---------
Net interest income;
interest rate
spread(8)............. $ 19,138 3.24% $ 14,253 3.66%
--------- --------- --------- ---------
--------- --------- --------- ---------
Net interest
margin(8)............. 3.48% 3.92%
--------- ---------
--------- ---------
Average
interest-earning
assets to average
interest-bearing
liabilities........... 105.60% 106.08%
--------- ---------
--------- ---------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
44
<PAGE>
- ------------------------
(1) Yields and rates for the three months ended March 31, 1996 and 1995 have
been annualized.
(2) At March 31, 1996, the yields earned and rates paid were as follows: cash
and cash equivalents, 5.48%; investment securities held to maturity, 5.47%;
investment securities available for sale, 6.36%; mortgage-backed securities
held for trading, 6.53%; mortgage loans available for sale, 7.89%; loans
receivable, net, 8.72%; FHLB of New York stock, 6.50%; total
interest-earning assets, 8.05%; deposits, 5.01%; securities sold under
agreements to repurchase, 5.45%; notes payable, 4.90%; other borrowings,
7.01%; subordinated debt, 10.09%; total interest-bearing liabilities, 5.11%;
interest rate spread, 2.82%.
(3) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold.
(4) Includes mortgage loans held for sale and non-accrual loans.
(5) Loan fees amounted to $76,000, $64,000, $639,000, $472,000 and $211,000
during the three months ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, respectively or 0.56%, 0.67%, 1.37%, 1.28%
and 0.78% of interest income on loans during such respective periods.
(6) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of the Company -- Sources of Funds -- Borrowings" and Note 15 of the Notes
to Consolidated Financial Statements.
(7) Comprised of long-term debt, advances from the FHLB of New York and other
secured borrowings. See "Business of the Company -- Sources of Funds --
Borrowings" and Notes 12 to 14 of the Notes to Consolidated Financial
Statements.
(8) Interest rate spread represents the difference between the Company's
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets.
45
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Company's interest income and interest expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated in
proportion to the absolute dollar amounts of the changes due to rate and volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1996 VS. 1995
---------------------------------------
INCREASE (DECREASE)
DUE TO TOTAL
------------------------- INCREASE
RATE VOLUME (DECREASE)
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Cash and cash equivalents(1)..... $ (25) $ 34 $ 9
Investment securities held for
trading......................... -- 74 74
Investment securities available
for sale........................ -- 171 171
Investment securities held to
maturity........................ (9) 266 257
Mortgage-backed securities held
for trading..................... 119 (203) (84)
Mortgage-backed securities held
to maturity..................... 19 (610) (591)
Mortgage-backed securities
available for sale.............. 11 594 605
Loans receivable, net(4)......... (328) 4,335 4,007
FHLB of New York stock........... (13) 30 17
----------- ----------- -----------
Total interest-earning
assets........................ $ (226) $ 4,691 4,465
----------- ----------- -----------
----------- -----------
INTEREST-BEARING LIABILITIES:
Deposits......................... $ (40) $ 1,711 $ 1,671
Securities sold under agreements
to repurchase................... (46) (275) (321)
Notes payable.................... (152) 550 398
Subordinated debt(2)............. (2) -- (2)
Other borrowings(3).............. 495 477 972
----------- ----------- -----------
Total interest-bearing
liabilities................... $ 255 $ 2,463 2,718
----------- ----------- -----------
----------- -----------
Increase (decrease) in net interest
income............................ $ 1,747
-----------
-----------
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
--------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------------- INCREASE ------------------------- INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash and cash equivalents(1)..... $ 201 $ 31 $ 232 $ 115 $ (52) $ 63
Investment securities held for
trading......................... -- -- -- -- -- --
Investment securities available
for sale........................ -- -- -- -- -- --
Investment securities held to
maturity........................ 222 321 543 10 237 247
Mortgage-backed securities held
for trading..................... 133 (839) (706) (1,036) 2,533 1,497
Mortgage-backed securities held
to maturity..................... 265 2,370 2,635 299 1,136 627
Mortgage-backed securities
available for sale.............. 18 (1,274) (1,256) (193) 2,114 1,921
Loans receivable, net(4)......... 2,048 7,565 9,613 (1,577) 9,759 8,182
FHLB of New York stock........... -- 86 86 (18) (46) (64)
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning
assets........................ $ 2,887 $ 8,260 11,147 $ 2,998 $ 15,681 12,473
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Deposits......................... $ 3,487 $ 3,881 $ 7,368 $ (694) $ 4,790 $ 4,096
Securities sold under agreements
to repurchase................... 1,592 428 2,020 (1,504) 5,647 4,143
Notes payable.................... 33 (447) (414) 524 (1,361) (837)
Subordinated debt(2)............. 8 -- 8 (24) -- (24)
Other borrowings(3).............. 21 10 31 (51) 261 210
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities................... $ 5,141 $ 2,134 9,013 $ (1,749) $ 9,337 7,588
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Increase (decrease) in net interest
income............................ $ 2,235 $ 4,885
----------- -----------
----------- -----------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
46
<PAGE>
- ------------------------
(1) Comprised of cash and due from banks, securities purchased under agreements
to resell, time deposits with other banks and federal funds sold.
(2) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of the Company -- Sources of Funds -- Borrowings" and Note 15 of the Notes
to Consolidated Financial Statements.
(3) Comprised of long-term debt, advances from the FHLB of New York and other
secured borrowings. See "Business of the Company -- Sources of Funds --
Borrowings" and Notes 12 to 14 of the Notes to Consolidated Financial
Statements.
(4) Includes mortgage loans held for sale.
INTEREST INCOME. Total interest income increased by $4.5 million or 38.7%
during the three months ended March 31, 1996, as compared to the same period in
the prior year, and increased by $11.1 million or 26.3% and $12.5 million or
41.7% during the years ended December 31, 1995 and 1994, respectively. Interest
income on loans, the largest component of the Company's interest-earning assets,
increased by $4.0 million or 53.7% during the three months ended March 31, 1996,
as compared to the same period in the prior year, and increased by $9.6 million
or 35.0% and $8.2 million or 42.4% during 1995 and 1994, respectively. Such
increases were primarily the result of increases in the average balance of loans
receivable of $194.2 million, $87.6 million and $106.9 million during the three
months ended March 31, 1996 and the years ended December 31, 1995 and 1994,
respectively. One of the Company's strategies in recent years has been to grow
the Company's loans held for investment. See "Business -- Lending Activities of
the Bank."
Interest income on mortgage-backed and investment securities (which, for
purposes of this discussion, includes securities held for trading, available for
sale and held to maturity) increased by $432,000 or 11.21% during the three
months ended March 31, 1996, as compared to the same period in the prior year,
and increased by $1.2 million or 8.5% and $4.3 million or 42.5% during the years
ended December 31, 1995 and 1994, respectively. The increase in interest income
on mortgage-backed and investment securities during the three months ended March
31, 1996 was due primarily to an increase in the average balance of investment
securities of $36.7 million, which was partially offset by a $16.6 million
decrease in the average balance of mortgage-backed securities during the period.
The increase in investment securities reflects the purchase of tax-free short-
and medium-term securities, which were funded with the proceeds from the sale of
mortgage-backed securities. The increase in interest income on mortgage-backed
and investment securities during 1995 was primarily due to a $37.4 million
increase in the average balance of mortgage-backed securities held to maturity,
which was largely offset by decreases of $17.4 million and $12.9 million in the
average balance of mortgage-backed securities available for sale and held for
trading, which was attributable to sales in the secondary market in response to
favorable market conditions. The increase in interest income on mortgage-backed
and investment securities during 1994 was primarily due to a $76.3 million
increase in the average balance of mortgage-backed securities, which was
partially offset by a decrease in the average yield earned on mortgage-backed
securities.
Interest income on cash and cash equivalents (consisting of cash and due
from banks, securities purchased under agreements to resell, certificates of
deposit with other financial institutions and federal funds sold) increased by
$9,000 or 5.4% during the three months ended March 31, 1996, as compared to the
same period in the prior year, and increased by $232,000 or 62.2% and $63,000 or
20.3% during the years ended December 31, 1995 and 1994, respectively. The
increases during the three months ended March 31, 1996 reflected a $2.2 million
increase in the average balance of such investments, which was partially offset
by a 77 basis point decline in the average yield earned thereon. The increases
in interest earned on money market investments during 1995 and 1994 were due
primarily to increases in the average yield earned thereon of 201 basis points
and 125 basis points, respectively. The fluctuations in yields earned by the
Company on its money market investments reflect the general fluctuations in
short-term market rates of interest during the periods presented.
47
<PAGE>
INTEREST EXPENSE. Total interest expense increased by $2.7 million or 37.9%
during the three months ended March 31, 1996, as compared to the same period in
the prior year, and increased by $9.0 million or 38.8% and by $7.6 million or
48.5% during the years ended December 31, 1995 and 1994, respectively. Interest
expense on deposits, the largest component of the Company's interest-bearing
liabilities, increased by $1.7 million or 35.4% during the three months ended
March 31, 1996, as compared to the same period in the prior year, and increased
by $7.4 million or 51.0% and $4.1 million or 39.5% during the years ended
December 31, 1995 and 1994, respectively. The increases in interest expense on
deposits during the three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994 were primarily due to increases in the average
balance of deposits of $137.2 million, $91.4 million and $107.6 million during
such respective periods. In June 1995, the Bank acquired $77.2 million in
deposits from a commercial bank. In addition, in June 1993, the Bank acquired
$46.4 million in deposits in connection with its acquisition of a federally
chartered savings institution. During 1995, the average rate paid on deposits
increased by 80 basis points as a result of a general increase in market rates
of interest.
Interest expense on reverse repurchase agreements decreased by $321,000 or
20.1% during the three months ended March 31, 1996, as compared to the same
period in the prior year, and increased significantly by $2.0 million and $4.1
million during the years ended December 31, 1995 and 1994, respectively. The
decrease during the three months ended March 31, 1996, as compared to the same
period in the prior year was due to a $19.5 million decrease in the average
balance of reverse repurchase agreements outstanding coupled with a 20 basis
point decline in the average rate paid thereon. The increase in interest expense
on reverse repurchase agreements during 1995 was due primarily to an increase in
the average rate paid thereon of 148 basis points, while the increase in such
expense during 1994 was due primarily to a $93.1 million increase in the average
balance of such borrowings outstanding. The Company generally uses reverse
repurchase agreements to repay warehouse lines of credit which are used to fund
loan originations. The reverse repurchase agreements are collateralized by
mortgage-backed securities held for trading. The fluctuations in the average
balance of reverse repurchase agreements during the periods presented is
therefore a function both of the amount of originations by the Company as well
as the level of mortgage-backed securities held for trading which are available
to collateralize such agreements.
Interest expense on notes payable (consisting of warehouse lines of credit
and promissory notes) increased by $398,000 or 66.1% during the three months
ended March 31, 1996, as compared to the same period in the prior year,
decreased by $414,000 or 12.0% during the year ended December 31, 1995 and
decreased by $837,000 or 19.6% during the year ended December 31, 1994. The
increase during the three months ended March 31, 1996 was due to a $39.0 million
increase in the average balance of notes payable, as the Bank used 936 Notes to
fund increased consumer and commercial lending, while the decrease during the
year ended December 31, 1995 was primarily due to an $8.2 million decrease in
the average balance of the 936 Notes. The decrease in interest expense on notes
payable during 1994 was due to the $29.6 million decline in the average balance
of such borrowings, which reflected the general decline in mortgage loan
origination activity when compared to the levels experienced in 1993.
Interest expense on other borrowings (consisting of long-term notes payable,
subordinated notes, advances from the FHLB of New York and other secured
borrowings) increased by $972,000 or 546.1% during the three months ended March
31, 1996, as compared to the same period in the prior year, increased by $31,000
or 5.36% during the year ended December 31, 1995 and increased by $210,000 or
57.1% during the year ended December 31, 1994. The increase during the three
months ended March 31, 1996 was primarily due to a $47.8 million increase in the
average balance of such borrowings together with a 302 basis point increase in
the average rate paid thereon. The increase in interest expense on other
borrowings during 1995 was due primarily to an increase in the average rate paid
thereon, while the increase in such interest expense during 1994 primarily
reflected the $6.6 million increase in the average balance of other borrowings
(primarily FHLB advances).
48
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the total allowance to a level considered appropriate by
management based on the Company's loss experience, current delinquency data,
known and inherent risks in the portfolio, the estimated value of any underlying
collateral and an assessment of current economic conditions. While management
endeavors to use the best information available in making its evaluations,
future allowance adjustments may be necessary if economic conditions change
substantially from the assumptions used in making the initial evaluations.
The Company made provisions (reductions) to its allowance for loan losses of
$7,000, $(50,000) and $950,000 during the three months ended March 31, 1996 and
1995 and the year ended December 31, 1995. The Company did not establish any
provisions for loan losses during 1994 or 1993 due, in part, to the Bank's
acquisition of a federally chartered savings institution in June 1993 and, in
connection therewith, the acquisition of $1.7 million of reserves of such
institution. The $950,000 provision during 1995 reflected the Company's
increased consumer loan originations and an increase in loan charge-offs related
thereto. Although the Company's allowance for loan losses as a percentage of
total loans and total non-performing loans has declined since December 31, 1993,
management believes that its allowance for loan losses at March 31, 1996, was
adequate based upon, among other things, the significant level of single-family
residential loans within the Company's portfolio (as compared to commercial real
estate, commercial business and consumer loans, which are considered by
management to carry a higher degree of credit risk) and the low level of loan
charge-offs with respect to the Company's loan portfolio. Nevertheless, there
can be no assurances that additions to such allowance will not be necessary in
future periods, particularly if the growth in the Company's commercial real
estate, commercial business and consumer lending continues.
OTHER INCOME. The following table sets forth information regarding other
income for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net gain (loss) on sale of loans.......................... $ 1,971 1,332 $ 6,262 $ (1,349) $ 29,026
Unrealized gain (loss) on trading securities.............. (197) -- $ 2,122 (4,465) --
Change in provision for cost in excess of market value of
loans held for sale...................................... -- (225) 856 (856) --
Net gain on sale of investments........................... 329 -- -- -- 394
Net gain on trading account............................... 136 -- -- -- --
Loan administration and servicing fees.................... 3,009 2,766 11,030 11,046 9,327
Gain on sale of servicing rights.......................... -- -- -- 2,915 --
Service charges, fees and other........................... 1,195 558 3,172 2,522 1,179
--------- --------- --------- --------- ---------
Total other income.................................... $ 6,443 $ 4,431 $ 23,442 $ 9,813 $ 39,926
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Total other income increased by $2.0 million or 45.4% during the three
months ended March 31, 1996, as compared to the same period in the prior year,
increased by $13.6 million or 138.9% during the year ended December 31, 1995 and
decreased by $30.1 million or 75.4% during the year ended December 31, 1994. Net
gain (loss) on sale of loans amounted to $2.0 million, $1.3 million, $6.3
million, $(1.3) million and $29.0 million during the three months ended March
31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. Net gain (loss) on sale of loans reflects the income generated
from the Company's origination and purchase of single-family residential real
estate loans and the subsequent securitization and sale of such loans. During
the year ended December 31, 1995, the adoption of SFAS No. 122 had the effect of
increasing net gain on sales of loans by approximately $1.6 million. See Note 1
of the Notes to Consolidated Financial Statements. During the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
R&G Mortgage originated and purchased $98.7 million, $67.6 million, $362.4
million, $499.1 million
49
<PAGE>
and $851.9 million, respectively, and sold $37.6 million, $29.6 million, $232.4
million, $368.1 million and $604.1 million of loans, respectively. In addition,
the Bank sold $2.1 million, $8.4 million, $75.1 million, $26.8 million and $89.3
million of loans from its portfolio during such respective periods. The
significant level of loan originations and sales (by both parties) during 1993
reflected the low level of mortgage interest rates which prevailed during the
year and which stimulated demand for refinancing of existing mortgage loans. The
decrease in loan origination, purchase and sale activity during 1994 as compared
to 1993 was due to the rise in interest rates experienced during the second half
of 1994 and the resultant decline in refinancing activity. The continued
weakness in refinancing activity during 1995 and the first quarter of 1996
reflects the stabilization of interest rates following the unusually high
refinancing activity experienced during 1993. As the Company's results of
operations indicate, the Company's mortgage banking operations are highly
dependent upon market and economic conditions. See "Risk Factors -- Potential
Effects of Change in Interest Rates on R&G Mortgage and the Bank."
During the three months ended March 31, 1996 and 1995 and the years ended
December 31, 1995 and 1994, the Company recognized unrealized gains (losses)
with respect to securities held for trading of $(197,000), $0, $2.1 million and
$(4.5) million, respectively. Such gains and losses reflect fluctuations in the
market value of primarily FHA and VA loans which have been securitized into GNMA
mortgage-backed securities and are being held for sale either to institutions in
the secondary market or private investors through the Bank's Trust Department.
In addition, during the three months ended March 31, 1996, the Company
recognized $136,000 of net gains on trading activities and from hedge positions
on certain investment securities available for sale. See "Business of the
Company -- Investment Activities -- General." At March 31, 1996, securities held
for trading amounted to $116.7 million.
During the year ended December 31, 1994, the Company established an $856,000
provision to reflect a decline in the market value of loans held for sale as a
result of the increase in market rates of interest which occurred during the
second half of the year. During the first three months of 1995, market rates of
interest continued to increase and the Company established an additional
$225,000 provision to reflect the further decline in the market value of loans
held for sale. During the year ended December 31, 1995, market rates of interest
subsequently declined and the Company was able to sell such mortgage loans
without recognizing any losses. As a result, the Company reversed the prior
$856,000 provision during the year ended December 31, 1995.
During the three months ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, the Company recognized loan administration and
servicing fees (consisting of loan servicing fees) of $3.0 million, $2.8
million, $11.0 million, $11.0 million and $9.3 million, respectively. The
increase in loan administration and servicing fees since 1993 reflects the
increase in the Company's loan servicing portfolio from 42,041 loans with an
aggregate principal balance of $2.00 billion at December 31, 1993 to 48,946
loans with an aggregate principal balance of $2.36 billion at March 31, 1996.
Service charges, fees and other amounted to $1.3 million, $558,000, $3.2
million, $2.5 million and $1.2 million during the three months ended March 31,
1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. The $637,000 or 114.0% increase during the three months ended
March 31, 1996 over the prior comparable period was primarily attributable to
increased service charges from deposit accounts, primarily associated with the
1995 branch acquisition. The $650,000 or 25.8% increase during 1995 was
primarily due to increased service charges in the 1995 branch acquisition plus
other fee income from increases in the loan portfolio, while the $1.3 million or
114% increase during 1994 was primarily attributable to fees on deposits and
loans acquired in the 1993 thrift acquisition.
50
<PAGE>
OPERATING EXPENSES. The following table sets forth certain information
regarding operating expenses for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Employee compensation and benefits........................ $ 2,650 $ 1,876 $ 8,284 $ 5,251 $ 8,590
Office occupancy and equipment............................ 1,413 1,007 4,711 4,488 3,395
Other administrative and general.......................... 3,326 3,205 13,731 13,269 14,561
--------- --------- --------- --------- ---------
Total operating expenses.............................. $ 7,389 $ 6,088 $ 26,726 $ 23,009 $ 26,546
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Total operating expenses increased by $1.3 million or 21.4% during the three
months ended March 31, 1996, as compared to the same period in the prior year,
increased by $3.7 million or 16.2% during the year ended December 31, 1995 and
decreased by $3.5 million or 13.3% during the year ended December 31, 1994. The
increase in total operating expenses during the three months ended March 31,
1996 was primarily due to increases in each major category. The decrease in
total operating expenses during 1994 was primarily due to decreases in employee
compensation and benefits and other administrative and general expenses, which
were partially offset by an increase in office occupancy and equipment expense.
Employee compensation and benefits expense amounted to $2.7 million, $1.9
million, $8.3 million, $5.3 million and $8.6 million during the three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. The $774,000 or 41.2% increase in such expense during the
three months ended March 31, 1996 was due to an increase in employees as a
result of the Bank's June 1995 branch acquisition, while the $3.3 million or
38.9% decrease in such expense during the year ended December 31, 1994 was due
to reductions in employees as the result of the significant decrease in loan
production from the levels experienced in 1993.
Office occupancy and equipment expense amounted to $1.4 million, $1.0
million, $4.7 million, $4.5 million and $3.4 million during the three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. The $406,000 or 40.3% increase in such expense recognized by
the Company during the three months ended March 31, 1996 reflects the Bank's
acquisition in June 1995 of six branch offices (after closing and consolidating
one branch office) from a local commercial bank. The $1.1 million or 32.2%
increase in such expense during 1994 was due primarily to the Bank's acquisition
in June 1993 of an unrelated savings institution and, in connection therewith,
the acquisition of three branch offices.
Other administrative and general expenses, which consist primarily of
advertising, license and property taxes, amortization of servicing, insurance,
telephone, printing and supplies and other miscellaneous expenses, amounted to
$3.3 million, $3.2 million, $13.7 million, $13.3 million and $14.6 million
during the three months ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, respectively. The $121,000 or 3.8% increase in
such expense during the three months ended March 31, 1996 was primarily the
result of general growth in the operations of the Company and the addition of
new products and services offered, while the $1.3 million or 8.9% decrease in
such expense during 1994 was primarily due to decreases in promotional expenses
and amortization of servicing acquired, which reached its highest level in 1993
due to the volume of new loan originations and refinancings.
INCOME TAXES. The Company incurred income tax expense of $2.0 million, $1.0
million, $5.9 million, $856,000 and $9.6 million during the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. The Company's effective tax rate amounted to 39.5%, 37.3%, 34.3%,
14.3% and 34.9%, during such respective periods. The Company's low effective tax
rate during 1994 was due primarily to the recognition of a deferred tax benefit
of $1.7 million during the year.
51
<PAGE>
Effective January 1, 1994, the Company changed its method of accounting for
its mortgage-backed and investment securities pursuant to the terms of SFAS No.
115. The cumulative effect of this change in accounting principle resulted in
the recognition of $866,000 of unrealized gains with respect to the Company's
securities portfolio during the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the Company's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investments
such as securities purchased under agreements to resell, federal funds sold and
certificates of deposit in other financial institutions. If the Company requires
funds beyond its ability to generate them internally, various forms of both
short and long-term borrowings provide an additional source of funds. At March
31, 1996, the Company had $59.8 million in borrowing capacity under unused
warehouse lines of credit and $44.0 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 March 31, 1996, the Company had outstanding commitments (including unused
lines of credit) to originate and/or purchase mortgage and non-mortgage loans of
$356.8 million. Certificates of deposit which are scheduled to mature within one
year totalled $256.2 million at March 31, 1996, and borrowings that are
scheduled to mature within the same period amounted to $123.9 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
52
<PAGE>
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 March 31, 1996, the Bank met each of its capital requirements, with Tier I
leverage capital, Tier I risk-based capital and total risk-based capital ratios
of 6.54%, 10.74% and 11.89%, 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. For
additional information concerning the capital requirements of the Company and
Bank, see "Regulation -- The Company -- Capital Requirements" and "-- The Bank
- -- Capital Requirements."
INFLATION AND CHANGING PRICES
The 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Set forth below are recent accounting pronouncements which may have a future
effect on the Company's operations. These pronouncements should be read in
conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's Notes to Consolidated Financial
Statements.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial
accounting and reporting standards for stock-based employee compensation plans.
This Statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income, and if presented, earnings per
share, as if this Statement had been adopted. The accounting requirements of
this Statement are effective for transactions entered into during fiscal years
that begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. The Company adopted a Stock Option Plan in June 1996 and
intends to make awards thereunder in conjunction with the Offering. See
"Management -- Benefits -- Stock Option Plan."
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Pursuant to
SFAS No. 125, after a transfer of financial assets, an entity would be required
to recognize all financial assets and servicing it controls
53
<PAGE>
and liabilities it has incurred and, conversely, would not be required to
recognize financial assets when control has been surrendered and liabilities
when extinguished. SFAS No. 125 provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 will be effective with respect to the transfer and servicing of
financial assets and the extinguishment of liabilities occurring after December
31, 1996, with earlier application prohibited. The Company has not completed an
analysis of the potential effects of this Statement on the Company's financial
condition or results of operations.
BUSINESS OF THE COMPANY
GENERAL
R&G Mortgage and the Bank have historically been primarily engaged in a wide
range of real estate secured lending activities, including the origination,
servicing, purchase and sale of mortgages on single-family residences, the
issuance and sale of various mortgage-backed and related securities and the
holding and financing of mortgage loans and mortgage-backed and related
securities for sale or investment. The Bank also originates for its portfolio
commercial real estate loans, construction loans, commercial business loans and
consumer loans. Finally, the Bank provides trust and investment services. R&G
Mortgage and the Bank both compete for business in Puerto Rico primarily by
providing a wide range of financial services to its customers. With the
consummation of the Bank Stockholder Exchange Transaction, the Company, as the
holding company of R&G Mortgage and the Bank, will continue to direct its
business efforts toward meeting the complete banking and financial needs of the
customers of R&G Mortgage and the Bank.
R&G Mortgage is engaged primarily in the business of originating first and
second mortgage loans on single family residential properties secured by real
estate which are either insured by the FHA or guaranteed by the VA. R&G Mortgage
also originates conforming conventional single-family residential loans which
are neither insured by the FHA nor guaranteed by the VA. Non-conforming
conventional loans and consumer loans, primarily all of which are secured by
real estate, are also originated by R&G Mortgage for portfolio retention by the
Bank. R&G Mortgage has become one of the largest originators of loans secured by
single-family residential properties in Puerto Rico, second only to First
Financial Caribbean Corporation.
R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are
guaranteed by the GNMA, which securities are sold to securities broker dealers
and other investors. Conventional loans may either be sold directly to agencies
such as the FNMA and the FHLMC or to private investors, or which may be pooled
into FNMA- or FHLMC-backed mortgage-backed securities which are generally sold
to investors. R&G Mortgage generally retains the servicing function with respect
to the loans which have been securitized and sold. R&G Mortgage is subject to
regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, HUD and the OCFI.
The Bank's principal business consists of attracting deposits from the
general public and tax-advantaged funds from eligible Puerto Rico corporations
and using such deposits, together with funds obtained from other sources, to
originate (through R&G Mortgage) and purchase loans secured primarily by
residential real estate in Puerto Rico, and to purchase mortgage-backed and
other securities. To a lesser extent but with increasing emphasis over the past
few years, the Bank also originates consumer loans, commercial business loans
and loans secured by commercial real estate. Such loans offer higher yields, are
generally for shorter terms and facilitate the Bank's provision of a full range
of financial services to its customers. The Bank also offers trust services
through its Trust Department. The Bank's deposits are insured by the FDIC and it
is regulated and examined by the FDIC as its primary federal regulatory agency
as well as by the OCFI as its state chartering authority.
MORTGAGE BANKING ACTIVITIES
LOAN ORIGINATIONS, PURCHASES AND SALES. During the three months ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage
originated a total of $100.2 million, $322.0 million, $488.1 million and $834.7
million of loans, respectively. These aggregate originations
54
<PAGE>
include loans originated by R&G Mortgage directly for the Bank of $56.9 million,
$156.3 million, $142.6 million and $180.8 million during the three months ended
March 31, 1996 and the years ended December 31, 1995, 1994 and 1993,
respectively, or 55%, 41%, 29% and 21%, respectively, of total originations and
purchases. The loans originated by R&G Mortgage for the Bank are comprised
primarily of conventional residential loans and, to a lesser extent, consumer
loans, most of which are secured by real estate.
R&G Mortgage is engaged to a significant extent in the origination of
FHA-insured and VA-guaranteed single-family residential loans which are
primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the three
months ended March 31, 1996 and the years ended December 31, 1995, 1994 and
1993, R&G Mortgage originated $37.4 million, $154.9 million, $332.4 million and
$614.2 million, respectively, of FHA/VA loans, which represented 37.3%, 48.0%,
68.1% and 73.7%, respectively, of total loans originated during such respective
periods.
R&G Mortgage also originates conventional single-family residential loans
which are either insured by private mortgage insurers or do not exceed 80% of
the appraised value of the mortgaged property. During the three months ended
March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G
Mortgage originated $58.4 million, $151.9 million, $155.7 million and $220.5
million, respectively, of conventional single-family residential mortgage loans.
Substantially all conforming conventional single-family residential loans are
securitized and sold in the secondary market while substantially all
non-conforming conventional single-family residential loans are originated by
R&G Mortgage on behalf of the Bank and either held by the Bank in its portfolio
or subsequently securitized by R&G Mortgage and sold in the secondary market.
Non-conforming loans generally consist of loans which, primarily because of
size or other underwriting technicalities which may be cured through seasoning,
do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and other private
secondary market investors at the time of origination. Management believes that
these loans are essentially of the same credit quality as conforming loans.
During the three months ended March 31, 1996 and the years ended December 31,
1995, 1994 and 1993, non-conforming conventional loans represented approximately
53%, 43%, 29% and 21%, respectively, of R&G Mortgage's total volume of mortgage
loans originated, substantially all of which were originated by R&G Mortgage on
behalf of the Bank. During the three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993, 92.2%, 81.0%, 92.4% and 97.1% of loans
originated by R&G Mortgage on behalf of the Bank consisted of single-family
residential loans during such respective periods. R&G Mortgage originates
single-family residential, construction and commercial real estate loans on
behalf of the Bank pursuant to the terms of a Master Production Agreement
between R&G Mortgage and the Bank. See "-- Lending Activities of the Bank --
Origination, Purchase and Sale of Loans."
While R&G Mortgage makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all of such loans consist of
fixed-rate mortgages. The average loan size for FHA/VA mortgage loans and
conventional mortgage loans is approximately $72,900 and $74,100, respectively.
R&G Mortgage also offers second mortgage loans up to $125,000 with a maximum
term of 15 years. The maximum loan-to-appraised value ratio on second mortgage
loans permitted by R&G Mortgage is 75% (including the amount of any first
mortgage). In addition, R&G Mortgage also offers real estate secured consumer
loans up to $40,000 with a maximum term of 10 years. The maximum
loan-to-appraised value ratio on real estate secured consumer loans permitted by
R&G Mortgage is 80%. R&G Mortgage will secure such loans with either a first or
second mortgage on the property.
R&G Mortgage's loan origination activities are conducted out of its offices
and mortgage banking centers. See "-- Offices and Other Material Properties."
Residential mortgage loan applications are
55
<PAGE>
attributable to mortgage brokers, loan solicitors, walk-in customers, referrals
from real estate brokers and builders, existing customers and advertising and
promotion. At March 31, 1996, R&G Mortgage employed 43 loan originators who are
compensated in part on a commission basis.
Loan origination activities performed by R&G Mortgage include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, R&G
Mortgage issues a commitment to the prospective borrower specifying the amount
of the loan and the loan origination fees, points and closing costs to be paid
by the borrower or seller and the date on which the commitment expires.
R&G Mortgage also purchases FHA loans and VA loans from other mortgage
bankers for resale to institutional investors and other investors in the form of
GNMA mortgage-backed securities. R&G Mortgage's strategy is to increase its
servicing portfolio primarily though internal originations through its branch
network and, to a lesser extent, purchases from third parties. Purchases of
loans from other mortgage bankers in the wholesale loan market is generally
limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a
source of low cost production that allows R&G Mortgage to continue to increase
the size of its servicing portfolio. R&G Mortgage purchased approximately $2.9
million of loans from third parties during the three months ended March 31, 1996
and $55.6 million, $11.0 million and $17.2 million during the years ended
December 31, 1995, 1994 and 1993, respectively.
56
<PAGE>
The following table sets forth loan originations, purchases and sales by R&G
Mortgage for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
LOANS ORIGINATED FOR THE BANK:
Conventional loans(1):
Number of loans............................... 761 417 2,226 2,204 2,648
Volume of loans............................... $ 52,535 $ 23,745 $ 140,363 $ 142,572 $ 180,779
FHA/VA loans:
Number of loans............................... -- -- -- -- --
Volume of loans............................... $ -- $ -- $ -- $ -- $ --
Consumer loans(2):
Number of loans............................... 238 181 974 -- --
Volume of loans............................... $ 4,398 $ 2,773 $ 15,944 $ -- $ --
Total loans:
Number of loans............................... 999 598 3,200 2,204 2,648
Volume of loans............................... $ 56,933 $ 26,518 $ 156,307 $ 142,572 $ 180,779
Percent of total volume....................... 55% 38% 41% 29% 21%
FOR THIRD PARTIES:
Conventional loans(1):
Number of loans............................... 79 14 151 166 487
Volume of loans............................... $ 5,857 $ 849 $ 11,496 $ 13,122 $ 39,683
FHA/VA loans:
Number of loans............................... 514 508 2,313 6,030 11,206
Volume of loans............................... $ 37,431 $ 33,365 $ 154,916 $ 332,377 $ 614,218
Total loans:
Number of loans............................... 593 522 2,464 6,196 11,693
Volume of loans............................... $ 43,288 $ 34,214 $ 166,412 $ 345,499 $ 653,901
Percent of total volume....................... 42% 49% 44% 69% 77%
----------- ---------- ------------ ------------ ------------
Total loan originations..................... $ 100,221 $ 60,732 $ 322,719 $ 488,071 $ 834,680
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
LOANS PURCHASED FOR R&G MORTGAGE:
Number of loans................................. 21 203 1,017 188 314
Volume of loans................................. $ 2,866 $ 9,660 $ 55,630 $ 11,003 $ 17,234
Percent of total volume......................... 3% 14% 15% 2% 2%
----------- ---------- ------------ ------------ ------------
Total loan originations and purchases....... $ 103,087 $ 70,392 $ 378,349 $ 499,074 $ 851,914
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS SOLD TO THIRD PARTIES(3):
Conventional loans(1):
Number of loans............................... 47 14 151 272 355
Volume of loans............................... $ 3,253 $ 969 $ 11,999 $ 19,930 $ 39,760
FHA/VA loans:
Number of loans............................... 507 602 2,964 7,430 10,284
Volume of loans............................... $ 34,338 $ 28,619 $ 220,412 $ 348,179 $ 564,346
Total loans:
Number of loans............................... 554 616 3,115 7,702 10,639
Volume of loans............................... $ 37,591 $ 29,588 $ 232,411 $ 368,109 $ 604,106
Percent of total volume....................... 36% 42% 61% 74% 71%
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
ADJUSTMENTS:
Loans originated for the Bank................... $ (56,933) $ (26,518) $ (156,307) $ (142,572) $ (180,779)
Loans amortization.............................. (404) (315) (1,260) (1,577) (1,497)
----------- ---------- ------------ ------------ ------------
Increase (decrease) in loans held for sale........ $ 8,159 $ 13,971 $ (11,629) $ (13,184) $ 65,532
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
AVERAGE INITIAL LOAN ORIGINATION BALANCE:
The Bank:
Conventional loans(1)......................... $ 69 $ 57 $ 63 $ 65 $ 68
FHA/VA loans.................................. $ -- $ -- $ -- $ -- $ --
Third Parties:
Conventional loans(1) $ 74 $ 61 $ 76 $ 79 $ 81
FHA/VA loans.................................. $ 75 $ 61 $ 63 $ 55 $ 55
Total Average Initial Balance:
Conventional loans(1)......................... $ 70 $ 57 $ 64 $ 66 $ 70
FHA/VA loans.................................. $ 75 $ 61 $ 63 $ 55 $ 55
Refinancings(4):
The Bank........................................ 69% 70% 58% 46% 57%
Third Parties................................... 24% 30% 26% 38% 81%
</TABLE>
- ------------------------
(1) Includes non-conforming loans.
(2) All but $645,000, $710,000 and $3.3 million of such loans were secured by
real estate at March 31, 1996 and 1995 and December 31, 1995, respectively.
(3) Includes loans converted into mortgage-backed securities.
(4) As a percent of the total dollar volume of loans originated by R&G Mortgage
for the Bank or third parties, as the case may be. In the case of the Bank,
refinancings do not necessarily represent refinancings of loans previously
held by the Bank.
All loan originations, regardless of whether originated through R&G Mortgage
or purchased from third parties, must be underwritten in accordance with R&G
Mortgage's underwriting criteria, including loan-to-appraised value ratios,
borrower income qualifications, debt ratios and credit history, investor
requirements, necessary insurance and property appraisal requirements. The
Company's underwriting standards also comply with the relevant guidelines set
forth by HUD, VA, FNMA, FHLMC, bank regulatory authorities, private mortgage
investment conduits and private mortgage insurers, as applicable. R&G Mortgage's
underwriting personnel, while operating out of its loan offices, make
underwriting decisions independent of R&G Mortgage's mortgage loan origination
personnel.
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<PAGE>
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 7% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. R&G Mortgage receives these fees on mortgage loans originated through its
retail branches. R&G Mortgage may charge additional fees depending upon market
conditions and regulatory considerations as well as R&G Mortgage's objectives
concerning mortgage loan origination volume and pricing. R&G Mortgage incurs
certain costs in originating mortgage loans, including overhead, out-of-pocket
costs and, in some cases, where the mortgage loans are subject to a purchase
commitment from private investors, related commitment fees. The volume and type
of mortgage loans and of commitments made by investors vary with competitive and
economic conditions (such as the level of interest rates and the status of the
economy in general), resulting in fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
current expense. Direct origination costs and origination income must be
deferred and amortized using the interest method, until the repayment or sale of
the related mortgage loans. Historically, the value of servicing rights which
result from R&G Mortgage's origination activities has exceeded the net costs
attributable to such activities.
R&G Mortgage customarily sells most of the loans that it originates, except
for those originated on behalf of the Bank pursuant to the Master Production
Agreement. See "-- Lending Activities of the Bank -- Origination, Purchases and
Sales of Loans." The loans originated by R&G Mortgage (including FHA loans, VA
loans and conventional loans) are secured by real property located in Puerto
Rico and constitute "eligible investments" which results in favorable tax
treatment under U.S. and Puerto Rico tax laws. See "-- Puerto Rico Secondary
Mortgage Market and Favorable Tax Treatment." During the three months ended
March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G
Mortgage sold $37.6 million, $232.4 million, $368.1 million and $604.1 million
of loans, respectively, which includes loans securitized and sold but does not
include loans originated by R&G Mortgage on behalf of the Bank. With respect to
such loan sales, $34.3 million or 91.0%, $220.4 million or 94.0%, $348.1 million
or 94.0% and $564.3 million or 93.0% consisted of GNMA-guaranteed
mortgage-backed securities of FHA loans or VA loans packaged into pools of $1
million or more ($2.5 million to $5 million for serial notes as described
below). These securities were sold primarily to securities broker-dealers and
other investors in Puerto Rico.
Certain GNMA-guaranteed mortgage-backed securities sold by R&G Mortgage are
in the form of GNMA serial notes which permit the investor to receive interest
monthly and to select among several expected maturity dates of the notes
included in an issue, with each maturity having a specific yield. GNMA serial
notes are sold in pools of $2.5 million to $5 million. GNMA serial notes are
sold to securities broker-dealers in packages consisting of notes of different
yields and maturities, which range from one to 30 years and have an average
maturity of 12 years, taking into account historical experience with prepayments
of the underlying mortgages. The rates on the serial notes or GNMA pools must be
1/2 of 1% less than the rates on the mortgages comprising the pool. Upon
completion of the necessary processing, the GNMA-guaranteed mortgage-backed
securities are either offered to the public directly through the Bank's Trust
Department or indirectly through securities broker-dealers. During three months
ended March 31, 1996, and the years ended December 31, 1995, 1994 and 1993, R&G
Mortgage issued GNMA serial notes totalling approximately $40.2 million, $184.4
million, $228.8 million and $155.8 million, respectively.
Conforming conventional loans originated or purchased by R&G Mortgage are
generally sold directly to FNMA, FHLMC or private investors for cash or are
grouped into pools of $1 million or more in aggregate principal balance and
exchanged for FNMA or FHLMC-issued mortgage-backed securities, which R&G
Mortgage sells to securities broker-dealers. In connection with any such
exchanges, R&G Mortgage pays guarantee fees to FNMA and FHLMC. The issuance of
mortgage-backed securities provides R&G with flexibility in selling the
mortgages which it originates or purchases and also provides income by
increasing the value and marketability of the loans.
59
<PAGE>
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called "non-conforming loans") are generally originated on behalf of the
Bank and either retained in the Bank's portfolio, sold to financial institutions
or other private investors or securitized into "private label" collateralized
mortgage obligations ("CMOs") through grantor trusts or other mortgage conduits
and sold through securities broker-dealers. Non-conforming loans consist of
jumbo loans or loans that do not satisfy all requirements of FNMA, FHLMC and
GNMA at the time of origination of the loan (such as missing tax returns,
slightly higher loan-to-value ratios, etc.).
Each CMO normally consists of several classes of senior, subordinate and
residual certificates. The residual certificates evidence a right to receive
payments on the mortgage loans after payment of all required amounts on the
senior and subordinate certificates then due. Some form of credit enhancement,
such as an insurance policy, letter of credit or subordination, will generally
be used to increase the credit rating of the senior certificates and thereby
improve their marketability. During the three months ended March 31, 1996 and
the years ended December 31, 1995, 1994 and 1993, R&G Mortgage and the Bank
completed sales of approximately $0, $38.2 million, $201.5 million and $116.5
million, respectively, of CMOs in securitization transactions. In connection
with such transactions, either the Bank or R&G Mortgage generally retains the
residual certificates issued by the respective trusts as well as the subordinate
certificates issued in such transactions. As of March 31, 1996, R&G Mortgage
held CMOs (which were primarily issued by R&G Mortgage) with a fair value of
$15.4 million and residual certificates issued in CMO transactions involving R&G
Mortgage and the Bank with a fair value of $9.9 million. In addition, the Bank
held CMO subordinated certificates and residual certificates from one of its
issues with a fair value of $8.1 million at March 31, 1996. See "-- Investment
Activities." Currently a liquid secondary market for subordinate or residual
certificates does not exist in Puerto Rico. The value of residual certificates
is subject to substantial fluctuations as a result of changes in prevailing
interest rates. However, such residuals often exhibit elasticity and convexity
characteristics which the Company can utilize to hedge other components of its
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset and Liability Management."
While R&G Mortgage's exchanges of mortgage loans into agency securities and
sales of mortgage loans are generally made on a non-recourse basis, R&G Mortgage
also engages in the sale or exchange of mortgage loans on a recourse basis. In
the past, recourse sales often involved the sale of non-conforming loans to
FNMA, FHLMC and local financial institutions. The Company estimates the fair
value of the retained recourse obligation at the time mortgage loans are sold.
Normally, the fair value of any retained recourse is immaterial because R&G
Mortgage is able to resell repurchased loans for at least their carrying costs.
Accordingly, as of March 31, 1996, the Company did not deem it necessary to
establish reserves for possible losses related to its recourse obligations. At
March 31, 1996, R&G Mortgage had loans in its servicing portfolio with
provisions for recourse in the principal amount of approximately $237.0 million,
as compared to $238.2 million, $162.9 million and $118.7 million as of December
31, 1995, 1994 and 1993, respectively. Of the recourse loans existing at March
31, 1996, approximately $183.1 million in principal amount consisted of loans
sold to FNMA and FHLMC and converted into mortgage-backed securities of such
agencies, and approximately $53.9 million in principal amount consisted of
non-conforming loans sold to other private investors.
Pursuant to the terms of the Master Purchase Agreement, R&G Mortgage renders
securitization services with respect to the pooling of some of the Bank's
mortgage loans into mortgage-backed securities. With respect to the
securitization services rendered, the Bank pays a securitization fee of 25 basis
points. In addition, pursuant to the terms of a Master Custodian Agreement
entered into by R&G Mortgage and the Bank, the Bank acts as the custodial agent
for R&G Mortgage of certain documentation related to the issuance by R&G
Mortgage of GNMA or FHLMC mortgage-backed certificates. In consideration of
these services, the Bank receives an annual fee of $5.0 for each mortgage note
included in a mortgage-backed certificate for which it acts as custodian. See
also "The Company -- Affiliated Transactions" and "Regulation -- The Company --
Limitations on Transactions with Affiliates."
60
<PAGE>
LOAN SERVICING. R&G Mortgage acquires servicing rights through its mortgage
loan originations (including originations on behalf of the Bank) and purchases
from third parties. When R&G Mortgage sells the mortgage loans it has originated
or purchased, it generally retains the rights to service such loans and receives
the related servicing fees. Loan servicing includes collecting principal and
interest and remitting the same to the holders of the mortgage loans or
mortgage-backed securities to which such mortgage loan relates, holding escrow
funds for the payment of real estate taxes and insurance premiums, contacting
delinquent borrowers, supervising foreclosures in the event of unremedied
defaults and generally administering the loans. R&G Mortgage receives annual
loan servicing fees ranging from 0.25% to 0.50% of the declining outstanding
principal balance of the loans serviced plus any late charges. In general, R&G
Mortgage's servicing agreements are terminable by the investor for cause without
penalty or after payment of a termination fee ranging from 0.5% to 1.0% of the
outstanding principal balance of the loans being serviced.
R&G Mortgage's servicing portfolio has grown significantly over the past
three years. At March 31, 1996, R&G Mortgage's servicing portfolio totalled
$2.36 billion and consisted of a total of 48,946 loans, as compared to $2.00
billion and 42,041 loans at December 31, 1993. At March 31, 1996, R&G Mortgage
was servicing $265.5 million of loans for the Bank or 11.3% of the total
servicing portfolio, as compared to $290.8 million or 12.7%, $213.9 million or
10.1% and $159.5 million or 9.0% at December 31, 1995, 1994 and 1993,
respectively. Substantially all of the mortgage loans in R&G Mortgage's
servicing portfolio are secured by single (one-to-four) family residences. All
of R&G Mortgage's mortgage servicing portfolio is comprised of mortgages secured
by real estate located in Puerto Rico.
Pursuant to the terms of a Master Purchase Agreement, the Bank sells to R&G
Mortgage the servicing rights to all first and second mortgage loans secured by
residential properties which become part of the Bank's loan portfolio. The
Master Purchase Agreement further provides that R&G Mortgage will service all
other loans held in the Bank's loan portfolio (including single-family
residential loans retained by the Bank and certain commercial real estate
loans), although R&G Mortgage does not actually acquire such servicing rights.
The Bank pays R&G Mortgage servicing fees with respect to the loans serviced by
R&G Mortgage on behalf of the Bank. In addition, pursuant to the Master Purchase
Agreement, the Bank processes payments of all loans originated by R&G Mortgage
on behalf of the Bank. In connection therewith, R&G Mortgage pays the Bank a fee
equal to between $0.50 and $1.00 per loan. See also "The Company -- Affiliated
Transactions" and "Regulation -- The Company -- Limitations on Transactions with
Affiliates."
R&G Mortgage's mortgage loan servicing portfolio is subject to reduction by
reason of normal amortization, prepayments and foreclosure of outstanding
mortgage loans. Additionally, R&G Mortgage may sell mortgage loan servicing
rights from time to time.
61
<PAGE>
The following table sets forth certain information regarding the total loan
servicing portfolio of R&G Mortgage for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
COMPOSITION OF SERVICING PORTFOLIO
AT END OF PERIOD:
Conventional and other mortgage
loans(1)........................ $ 853,317 $ 639,967 $ 811,269 $ 634,944 $ 561,358
FHA/VA loans..................... 1,502,908 1,495,941 1,486,931 1,479,799 1,439,172
------------- ------------- ---------------- ------------- -------------
Total servicing portfolio(2)... $ 2,356,225 $ 2,135,908 $ 2,298,200 $ 2,114,743 $ 2,000,530
------------- ------------- ---------------- ------------- -------------
------------- ------------- ---------------- ------------- -------------
ACTIVITY IN THE SERVICING
PORTFOLIO:
Beginning servicing portfolio.... $ 2,298,200 $ 2,114,743 $ 2,114,743 $ 2,000,530 $ 1,740,975
Add: Loan originations......... 95,010 41,373 325,870 473,821 885,509
Servicing of portfolio loans
acquired........................ 12,403 5,918 239,414 27,726 43,472
Less: Sale of servicing
rights........................ -- -- 196,895(3) -- --
Run-offs(4)...................... 49,388 26,126 184,932 387,334 669,426
------------- ------------- ---------------- ------------- -------------
Ending servicing portfolio......... $ 2,356,225 $ 2,135,908 $ 2,298,200 $ 2,114,743 $ 2,000,530
------------- ------------- ---------------- ------------- -------------
------------- ------------- ---------------- ------------- -------------
Number of loans serviced(5)........ 48,946 43,942 48,240 43,572 42,041
Weighted average loan size(5)...... $ 48 $ 49 $ 48 $ 49 $ 48
Weighted average servicing fee
rate(5)........................... 0.546 0.518 0.505 0.558 0.486
</TABLE>
- ------------------------
(1) Includes non-conforming loans.
(2) At the dates shown, included $265.5 million, $218.9 million, $290.8 million,
$213.9 million and $159.5 million of loans serviced for the Bank,
respectively, which constituted 11.27%, 10.25%, 12.65%, 10.12% and 7.97% of
the total servicing portfolio, respectively.
(3) R&G Mortgage sold servicing rights during 1994 and recognized a gain of $2.9
million. Pursuant to a subservicing agreement with the purchaser of the
servicing rights, R&G Mortgage continued to service the loans subject to
such sale and they remained in R&G Mortgage's servicing portfolio until
1995.
(4) Run-off refers to regular amortizations of loans, prepayments and
foreclosures.
(5) At March 31, 1996, R&G Mortgage was servicing 4,310 loans for the Bank with
an average loan size of $62,000 and at a weighted average servicing rate of
0.225%.
62
<PAGE>
The following table sets forth certain information at March 31, 1996
regarding the number of, and aggregate principal balance of, the mortgage loans
serviced by R&G Mortgage for the Bank and for third parties at various mortgage
interest rates.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
---------------------------------------------------------------------------------------------
LOANS SERVICED LOANS SERVICED TOTAL LOANS
FOR THE BANK FOR THIRD PARTIES SERVICED
------------------------------- ----------------------------- -----------------------------
AGGREGATE AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
MORTGAGE INTEREST RATE LOANS BALANCE LOANS BALANCE LOANS BALANCE
- ------------------------------- ------------- ---------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS)
Less than 7.00%................ 76 $ 4,038 2,949 $ 150,887 3,025 $ 154,925
7.00% - 7.49%.................. 483 40,955 6,508 357,898 6,991 398,853
7.50% - 7.99%.................. 611 60,587 10,079 520,538 10,690 581,125
8.00% - 8.49%.................. 929 60,346 6,822 373,961 7,751 434,307
8.50% - 8.99%.................. 626 34,893 8,049 348,383 8,675 383,276
9.00% - 9.49%.................. 579 28,958 3,688 141,852 4,267 170,810
9.50% - 9.99%.................. 355 17,029 3,071 91,495 3,426 108,524
10.00% - 10.49%................ 188 6,696 1,184 44,015 1,372 50,711
10.50% - 10.99%................ 233 6,700 641 19,444 874 26,144
11.00% or more................. 230 5,311 1,645 42,239 1,875 47,550
----- ---------------- ----------- ---------------- ----------- ----------------
4,310 $ 265,513 44,636 $ 2,090,712 48,946 $ 2,356,225
----- ---------------- ----------- ---------------- ----------- ----------------
----- ---------------- ----------- ---------------- ----------- ----------------
</TABLE>
The amount of principal prepayments on mortgage loans serviced by R&G
Mortgage was $17.7 million for the first three months of 1996 and $68.2 million,
$62.2 million and $45.2 million for the years ended December 31, 1995, 1994 and
1993, respectively. This represented approximately 3.0%, 3.0%, 2.9% and 2.3% of
the aggregate principal amount of mortgage loans serviced during such periods.
Principal prepayments have declined since 1993 as a result of decreased
refinancing activity caused by the increase in interest rates experienced
following the refinance boom of 1993. The primary means used by R&G Mortgage to
reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability
that has allowed R&G Mortgage to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, and certain other investors, require R&G Mortgage to
advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. During
the three months ended March 31, 1996 and the years ended December 31, 1995,
1994 and 1993, the monthly average amount of funds advanced by R&G Mortgage
under such servicing agreements was $1.5 million, $4.4 million, $6.3 million and
$85,000, respectively. Funds advanced by R&G Mortgage pursuant to these
arrangements are generally recovered by R&G Mortgage within 30 days.
In connection with its loan servicing activities, R&G Mortgage holds escrow
funds for the payment of real estate taxes and insurance premiums with respect
to the mortgage loans it services. At March 31, 1996, R&G Mortgage held $38.0
million of such escrow funds, $13.1 million of which were deposited in the Bank
and $24.9 million of which were deposited with other financial institutions. The
escrow funds deposited with the Bank lower its overall cost of funds and is a
means of compensating it for processing mortgages checks received by R&G
Mortgage, while the escrow funds deposited with other financial institutions
serve as part of R&G Mortgage's compensating balances which permit R&G Mortgage
to borrow funds from such institutions (pursuant to certain warehouse lines of
credit) at rates that are lower than would otherwise apply. See "-- Sources of
Funds -- Borrowings."
The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is non-recourse
or recourse. In non-recourse servicing, the principal credit risk to the
servicer is the cost of temporary advances of funds. In recourse servicing, the
servicer agrees to share credit risk with the owner of the mortgage loans such
as FNMA or
63
<PAGE>
FHLMC or with an insurer or guarantor. Losses on recourse servicing occur
primarily when foreclosure sale proceeds of the property underlying a defaulted
mortgage are less than the then outstanding principal balance and accrued
interest of such mortgage loan and the cost of holding and disposing of such
underlying property. At March 31, 1996, R&G Mortgage was servicing mortgage
loans with an aggregate principal amount of $234.1 million on a recourse basis.
During the last three years, losses incurred due to recourse servicing have not
been significant.
R&G Mortgage's general strategy is to retain the servicing rights related to
the mortgage loans it originates and purchases. Nevertheless, there is a market
in Puerto Rico for servicing rights, which are generally valued in relation to
the present value of the expected income stream generated by the servicing
rights. Among the factors which influence the value of a servicing portfolio are
servicing fee rates, loan balances, loan types, loan interest rates, the
expected average life of the underlying loans (which may be reduced through
foreclosure or prepayment), the value of escrow balances, delinquency and
foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. During the year ended December
31, 1995, R&G Mortgage sold servicing rights on $196.9 million of mortgage
loans. Although R&G Mortgage may on occasion consider future sales of a portion
of its servicing portfolio, management does not anticipate sales of servicing
rights to become a significant part of its operations.
The market value of, and earnings from, R&G Mortgage's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, income generated from R&G Mortgage's mortgage loan
servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of R&G Mortgage's mortgage loan servicing portfolio
may be positively affected. See Note 7 to the Notes to Consolidated Financial
Statements for a discussion of SFAS No. 122 and the treatment of servicing
rights.
MORTGAGE LOAN DELINQUENCIES AND FORECLOSURES. The following table shows the
delinquency statistics for R&G Mortgage's servicing portfolio at the dates
indicated.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
---------------------------------------------------------
ENDED
MARCH 31, 1996 1995 1994 1993
----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
OF SERVICING OF SERVICING OF SERVICING OF SERVICING
LOANS PORTFOLIO LOANS PORTFOLIO LOANS PORTFOLIO LOANS PORTFOLIO
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days.................. 2,871 5.87% 3,366 6.98% 2,609 5.99% 2,436 5.92%
60-89 days.................. 685 1.40 906 1.88 543 1.25 504 1.22
90 days or more............. 975 1.99 988 2.05 716 1.64 757 1.84
------- --- ------- -------- ------- -------- ------- ---
Total
delinquencies(1)....... 4,531 9.26% 5,260 10.90% 3,868 8.88% 3,697 8.98%
------- --- ------- -------- ------- -------- ------- ---
------- --- ------- -------- ------- -------- ------- ---
Foreclosures pending(2)....... 648 1.32% 459 0.95% 401 0.92% 294 0.71%
------- --- ------- -------- ------- -------- ------- ---
------- --- ------- -------- ------- -------- ------- ---
</TABLE>
- ------------------------
(1) Includes at March 31, 1996, an aggregate of $27.2 million of delinquent
loans serviced for the Bank, or 1.15% of the total servicing portfolio and
$1.6 million of delinquent loans held in R&G Mortgage's own portfolio.
(2) At March 31, 1996, the Bank had foreclosures pending on $6.0 million of
loans being serviced by R&G Mortgage, which constituted 0.25% of the
servicing portfolio. R&G Mortgage had foreclosures pending on $312,000 of
loans it is servicing for its own portfolio at March 31, 1996.
While delinquency rates in Puerto Rico are generally higher than in the
mainland United States, these rates are not necessarily indicative of future
foreclosure rates or losses on foreclosures. Real estate owned as a result of
foreclosures ("REO") related to R&G Mortgage's mortgage banking business arise
primarily through foreclosure on mortgage loans repurchased from investors
either because of breach of representations or warranties or pursuant to
recourse arrangements. As of March 31, 1996 and December 31, 1995, 1994 and
1993, R&G Mortgage held REO with a book value of
64
<PAGE>
approximately $145,000, $0, $43,000 and $239,000 million, respectively. Sales of
REO resulted in net gains to R&G Mortgage of approximately $40,000 for the three
months ended March 31, 1996, $30,000 for the year ended December 31, 1995,
$12,000 for the year ended December 31, 1994 and $64,000 for the year ended
December 31, 1993. There is no liquid secondary market for the sale of R&G
Mortgage's REO.
With respect to mortgage loans securitized through GNMA programs, R&G
Mortgage is fully insured as to principal by the FHA against foreclosure loans,
while the VA guarantee is subject to a limitation which is generally equal to
25% to 50% of the principal amount of the loan, up to a maximum ranging from
$50,750 to $101,500, depending upon the amount of the loan. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
March 31, 1996. R&G Mortgage, however, incurs about $3,000 per loan foreclosed
in interest and legal charges during the time between payment by R&G Mortgage
and FHA or VA reimbursement. For the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993, total expenses related to FHA or
VA loans foreclosed amounted to $12,000, $230,000, $290,000 and $288,000,
respectively. Although FNMA and FHLMC are obligated to reimburse R&G Mortgage
for principal and interest payments advanced by R&G Mortgage as a servicer
(except for recourse servicing), the funding of delinquent payments or the
exercise of foreclosure rights involves costs to R&G Mortgage which may not be
recouped. Such nonrecouped expenses have to date been immaterial.
Any significant adverse economic developments in Puerto Rico could result in
an increase in defaults or delinquencies on mortgage loans that are serviced by
R&G Mortgage or held by R&G Mortgage pending sale in the secondary mortgage
market, thereby reducing the resale value of such mortgage loans.
PUERTO RICO SECONDARY MORTGAGE MARKET AND FAVORABLE TAX TREATMENT. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, United States and Puerto Rico tax laws
provide an economic incentive for Puerto Rico residents and Section 936
Corporations (defined below) to invest in certain mortgage loans and
mortgage-backed securities originated in Puerto Rico, including FHA and VA loans
and GNMA certificates, thereby tending to increase the secondary market demand
for, and the resale value of, such mortgage loans and mortgage-backed
securities. These tax advantages also favorably affect the Company's net
interest income by helping create a pool of lower-cost funds that the Company
can access through financial intermediaries such as banks and broker-dealers and
use to fund mortgage loans and mortgage-backed securities pending sale.
Under various Puerto Rico industrial incentives acts (the "Industrial
Incentives Acts"), certain investment income earned by qualified manufacturing
entities or service enterprises ("Exempt Companies") is exempt from Puerto Rico
income tax. Investment income that qualifies for this exemption includes
interest on certain mortgage loans and interest on funds of Exempt Companies
("936 Funds") placed with eligible institutions in Puerto Rico (primarily
savings and loan associations, commercial banks and registered broker-dealers),
provided such funds are invested in certain "eligible activities" in accordance
with regulations promulgated by the OCFI, including certain mortgage loans and
mortgage-backed securities. The Industrial Incentive Acts also encourage
investment in Puerto Rico by allowing Exempt Companies to reduce the otherwise
applicable 10% tax (the "Tollgate Tax") on distributions to shareholders by
investing their exempt industrial development income ("IDI") in Puerto Rico for
fixed periods of time, generally from five years to ten years.
Most Exempt Companies are United States corporations which operate in Puerto
Rico under Section 936 of the Code. Corporations that meet certain requirements
and elect the benefits of Section 936 ("Section 936 Corporations") are entitled
to credit against their United States corporate income tax a portion of such tax
attributable to (i) income derived from sources outside the United States from
the active conduct of a trade or business within Puerto Rico or from the sale or
exchange of substantially all assets used in the active conduct of such trade or
business ("Active Business Income") and
65
<PAGE>
(ii) qualified possession source investment income ("QPSII"). QPSII includes
interest derived from mortgage loans secured by real property located in Puerto
Rico and mortgage-backed securities consisting of such mortgage loans as well as
interest on deposits with financial institutions which in turn use such funds to
finance the origination of mortgage loans and other qualifying assets. The
credit provided for QPSII tends to increase the demand for Puerto Rico mortgage
loans and mortgage-backed securities as well as to reduce funding costs for
mortgage banking institutions.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions of
Section 936. The amendments (the "OBRA Amendments"), which are generally
effective for taxable years beginning after December 31, 1993, permit a taxpayer
to compute the tax credit available under Section 936 (the "936 Credit") as
under prior law but limit the amount of credit allowed with respect to Active
Business Income under one of two alternatives to be selected at the option of
the taxpayer. Under the first alternative, the limit is equal to a fixed
percentage of the amount of tax credit allowable under prior law (the "Fixed
Percentage Method"). This fixed percentage commenced at 60% for taxable years
beginning in 1994 and is reduced by 5% per year until 1998. For taxable years
beginning in 1998, such percentage would be 40%. Under the second alternative
(the "Economic Activity Method"), which is based on the amount of economic
activity conducted by the taxpayer in Puerto Rico, the credit may not exceed the
sum of the following three components: (i) 60% of the qualified possession wages
and the allocable fringe benefits paid by the taxpayer, (ii) applicable
percentages of certain depreciation deductions claimed for regular tax purposes
by the taxpayer with respect to qualified tangible property and (iii) a portion
of the possession income taxes paid by the taxpayer except where the taxpayer
uses the profit-split method for determining its income. The OBRA Amendments did
not limit the 100% credit available under Section 936 for QPSII, including
income received from investment in certain Puerto Rico mortgage loans and
mortgage-backed securities.
On November 20, 1995, the United States Congress passed the Budget Bill
which would have repealed Section 936. Although the Budget Bill was subsequently
vetoed by the President, there can be no assurance as to whether, or in what
form a new bill substantially similar to the Budget Bill will ever be enacted
into law or what other changes may be made to Section 936 as part of the budget
process. The Budget Bill would have generally repealed the 936 Credit for
taxable years beginning after December 31, 1995. 936 Corporations that were
engaged in the active conduct of a trade or business on October 13, 1995 and
that qualified for and elected the benefits of Section 936 for taxable years
beginning before December 31, 1995, would have had the benefit of a ten-year
grandfather rule. Under the grandfather rule, the amount of Active Business
Income eligible for the 936 Credit would have been subject to certain caps that
would vary depending upon whether the 936 Corporation computed its 936 Credit
under the Economic Activity Method or under the Fixed Percentage Method. The
credit available for QPSII would not have been subject to the grandfather rule
and would have been eliminated for taxable years beginning after December 31,
1995.
On May 22, 1996, the House of Representatives approved H.R. 3448, entitled
the Small Business Job Protection Act of 1996 (the "House SBJPA"). Similar to
the Budget Bill, this legislation would repeal Section 936 for taxable years
beginning after December 31, 1995. The House SBJPA provides a grandfather rule
with respect to those Section 936 Corporations which have an election in effect
and which are conducting an active trade or business in Puerto Rico as of
October 13, 1995 (the "Existing Claimants"). Under the grandfather rules, an
Existing Claimant will continue to be entitled to the 936 Credit until the
taxable year beginning before January 1, 2006 (the "Grandfather Period"). During
the Grandfather Period, the 936 Credit will be available, subject to certain
limitations preventing artificial increase of qualified income, only with
respect to income derived from sources without the United States and
attributable to the active conduct of a trade or business in Puerto Rico and
from the sale of substantially all the assets used in such trade or business.
Further, the credit limitations under the Fixed Percentage Method and the
Economic Activity Method will continue to apply during the Grandfather Period.
QPSII is not covered by the grandfather provisions, and would be eliminated
effective for taxable years beginning after December 31, 1995. On July 9, 1996,
the Senate approved a modified version of the House SBJPA (the "Senate SBJPA").
The Senate SBJPA modifies the 936
66
<PAGE>
Credit provisions of the House SBJPA in two material ways. First, the Senate
SBJPA extends the effective date for the elimination of QPSII from tax years
beginning after December 31, 1995 to amounts received or accrued on or before
July 1, 1995. Second, the Senate SBJPA allows a 40% 936 Credit for Existing
Claimants following the Grandfather Period and thus would indefinitely preserve
a reduced 936 Credit. On July 31, 1996, conferees from the House of
Representatives and the Senate reached an agreement on a compromise version of
the House SBJPA and the Senate SBJPA (the "Conference SBJPA"). The Conference
SBJPA provides for a 12-year phase-out of the 936 Credit for Existing Claimants
which would represent a 60% 936 credit for eight years, followed by two years at
a 40% 936 Credit, and then two years at a 35% 936 Credit. The Conference SBJPA
adopts the Senate SBJPA's approach for the elimination of QPSII by extending the
effective date of such elimination from tax years beginning after December 31,
1995 to amounts received or accrued on or before July 1, 1995. Prior to being
sent to the President to be signed into law, the Conference SBJPA must be passed
by the House of Representatives and the Senate. .
The Government of Puerto Rico has proposed an alternative (the "Puerto Rico
Government Proposal") to the Budget Bill. The Puerto Rico Government Proposal
basically adopts a ten-year grandfather period for the existing 936 Credit. In
addition, however, it provides for the creation of a new tax credit for
qualifying corporations that invest in "economically developing jurisdictions."
This new credit would not be subject to a ten-year phase-out. An "economically
developing jurisdiction" would be defined to include any state or territory of
the United States, including Puerto Rico, in which the prevailing per capita
income and rate of unemployment, among other indicators, are substantially below
the national average. The applicable credit would be similar to the 936 Credit
determined under the Economic Activity Method introduced by the OBRA Amendments.
The Puerto Rico Government Proposal was not part of the Budget Bill passed on
November 20, 1995, but the Conference SBJPA would incorporate in part the Puerto
Rico Government Proposal. Under proposed legislation, a new Section 30A of the
Code would be enacted, providing for an income tax credit to domestic
corporations operating in Puerto Rico. This new credit is provided under
guidelines similar to the Economic Activity Method.
The repeal or modification of Section 936 as proposed under the Conference
SBJPA or similar legislation could have an adverse effect on the general
economic condition of Puerto Rico, the Company's service area, by reducing
incentives for investment in Puerto Rico. Any such adverse effect on the general
economy of Puerto Rico could lead to an increase in mortgage delinquencies and a
reduction in the level of residential construction and demand for mortgage
loans. The elimination of Section 936, particularly the elimination of the
credit for QPSII, could also lead to a decrease in the amount of 936 Funds
invested in Puerto Rico financial assets by 936 Corporations, thereby increasing
funding costs and decreasing liquidity in the Puerto Rico financial market. The
magnitude of the impact of any such changes on the Company's profitability or
financial condition cannot be determined at this time. The Company has taken
steps to attempt to reduce the impact of any such adverse changes by
diversifying its sources of funding and identifying additional investors for its
mortgage products. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources." During
recent periods, the disparity between the cost of 936 Funds and other sources of
funding such as the Eurodollar market have decreased, thereby reducing the
adverse effect that the loss of such funding could have on the profitability of
the Company.
In the absence of the 936 Credit and as a means of continuing to defer U.S.
income taxation, subsidiaries of multi-national companies operating under
Section 936 of the Code may transfer their operations to a corporation organized
under Puerto Rico law. Generally, a Puerto Rico corporation is not subject to
United States income taxes to the extent it does not derive U.S. source income
and may be entitled to defer U.S. income taxation until dividends are
repatriated to the United States. Under Section 954 of the Code, foreign
subsidiaries of multi-national companies whose parent corporation is
incorporated in the U.S. are not subject to federal income tax on profits on
products which they manufacture. Though a Puerto Rico corporation is subject to
local Puerto Rico taxes, the benefits under the Incentives Act, which provide a
90 percent tax exemption on profits for companies that
67
<PAGE>
manufacture in Puerto Rico, would continue to be available. In addition, under
Section 901 and 902 of the Code and subject to certain limitations and
exceptions, U.S. shareholders of a Puerto Rico corporation would be allowed to
claim a foreign tax credit with respect to income tax paid in Puerto Rico. U.S.
shareholders are also not required to recognize income attributable to
manufacturing operations of a Puerto Rico corporation as a general rule under
Subpart F of the Code. However, under Section 367 of the Code, multi-national
corporations may be required to recognize income upon the transfer of operations
to a Puerto Rico corporation, depending upon the nature and value of the
property transferred. Several multi-national 936 Corporations have taken such
steps since the legislation with respect to Section 936 was first introduced in
the U.S. Congress.
In addition to the foregoing incentives, interest derived from FHA loans or
VA loans secured by real property in Puerto Rico originated after June 30, 1983
and, under certain circumstances, on or before February 15, 1973, and from GNMA
certificates consisting of such mortgages, is exempt from Puerto Rico income
tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift and estate
taxes. Individuals who are bona fide residents of Puerto Rico are also not
subject to United States federal income tax on income from Puerto Rico sources,
including interest income derived from mortgage loans originated in Puerto Rico
whose mortgagors are residents of Puerto Rico. The exemption for interest earned
on FHA loans, VA loans and GNMA certificates tends to increase the demand for
these products and the price the Company may obtain upon their sale. There can
be no assurance that the tax exempt treatment of interest on FHA and VA loans
will not be reviewed or modified in the future.
Any change in Puerto Rico's political status could result in the elimination
or modification of these tax benefits described above. See "The Commonwealth of
Puerto Rico -- Relationship of Puerto Rico with the United States."
LENDING ACTIVITIES OF THE BANK
GENERAL. At March 31, 1996, the Company's loans receivable, net totalled
$534.1 million, which represented 61.5% of the Company's $868.3 million of total
assets. At March 31, 1996, $478.7 million or 89.9% of the Company's loans
receivable, net were held by the Bank. The principal category of loans in the
Company's portfolio are conventional loans which are secured by first liens on
single-family residences. Conventional residential real estate loans are loans
which are neither insured by the FHA nor partially guaranteed by the VA. At
March 31, 1996, $326.5 million or 99.5% of the Company's first mortgage
single-family residential loans consisted of conventional loans. The other
principal categories of loans in the Company's loans receivable, net portfolio
are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.
68
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Company's loan portfolio by type of loan at the dates indicated. Except
as noted in the footnotes to the table, all of the loans are held in the Bank's
loan portfolio.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
AMOUNT PERCENT
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Residential real estate
-- first mortgage(1).... $ 328,028 60.39%
Residential real estate
-- second mortgage...... 14,407 2.65
Residential
construction............ 13,223 2.44
Commercial construction
and land acquisition.... 5,685 1.05
Commercial real
estate(2)............... 64,562 11.89
Commercial business...... 30,391 5.60
Consumer loans:
Loans secured by
deposits.............. 7,900 1.45
Real estate secured
consumer loans........ 34,479 6.34
Unsecured consumer
loans(3).............. 44,489 8.19
---------- ----------
Total loans
receivable.......... 543,164 100.00%
---------- ----------
Less:
Allowance for loan
losses................ (3,309)
Loans in process....... (3,901)
Deferred loan fees..... (178)
Unearned interest...... (1,662)
----------
(9,050)
----------
Loans receivable,
net(4)................ $ 534,114
----------
----------
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
-- first mortgage(1).... $282,498 58.23% $194,707 62.14% $137,396 60.95% $ 64,777 50.27% $ 62,078 57.89%
Residential real estate
-- second mortgage...... 14,372 2.96 13,298 4.24 11,135 4.94 7,945 6.17 8,318 7.76
Residential
construction............ 15,046 3.10 12,039 3.84 3,940 1.75 13,801 10.71 8,569 7.99
Commercial construction
and land acquisition.... 5,523 1.14 1,062 0.34 1,084 0.48 707 0.55 -- 0.00
Commercial real
estate(2)............... 61,862 12.74 43,029 13.72 30,290 13.44 21,246 16.49 13,011 12.13
Commercial business...... 27,816 5.74 14,102 4.51 15,417 6.84 4,574 3.55 2,776 2.59
Consumer loans:
Loans secured by
deposits.............. 7,497 1.55 5,829 1.86 3,815 1.69 1,900 1.47 1,060 0.99
Real estate secured
consumer loans........ 33,381 6.88 29,279* 9.34* 22,355* 9.92* 13,896* 10.78* 11,416* 10.65*
Unsecured consumer
loans(3).............. 37,180 7.66 * * * * * * * *
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans
receivable.......... 485,175 100.00% 313,347 100.00% 225,432 100.00% 128,846 100.00% 107,228 100.00%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less:
Allowance for loan
losses................ (3,510) (2,887) (3,029) (1,230) (892)
Loans in process....... (5,727) (5,945) (1,531) (5,776) (3,684)
Deferred loan fees..... (266) (424) (456) (452) (897)
Unearned interest...... (1,831) (2,475) (3,796) (3,960) (5,075)
-------- -------- -------- -------- --------
(11,334) (11,730) (8,812) (11,418) (10,548)
-------- -------- -------- -------- --------
Loans receivable,
net(4)................ $473,841 $301,614 $216,620 $117,428 $ 96,680
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ----------------------------------
(1) Includes $53.9 million and $55.2 million of residential real estate -- first
mortgage loans which are held by R&G Mortgage at March 31, 1996 and at
December 31, 1995, respectively.
(2) Includes a $1.4 million loan originated by R&G Mortgage in November 1995 to
VIG Leasing, S.E., an affiliated company, to acquire a warehouse and office
building which is currently leased to the Bank and serves as its Operations
Center. The loan was refinanced with an unaffiliated financial institution
in June 1996 and R&G Mortgage was repaid. See "Management -- Transactions
with Certain Related Persons."
(3) In each year includes a small amount of loans secured by collateral other
than real estate which, at March 31, 1996, includes $540,000 of other
secured consumer loans.
(4) Does not include mortgage loans held for sale of $25.9 million, $21.3
million, $22.9 million, $174.2 million, $106.4 million and $31.3 million at
March 31, 1996 and December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
* The Company is unable to distinguish these two sub-categories of consumer
loans during the years ended December 31, 1994, 1993, 1992 and 1991.
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<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at March 31, 1996 regarding the dollar amount of
loans maturing in the Company's total loan portfolio based on the contractual
terms to maturity. Loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE 1-5 YEARS DUE 5 OR MORE
DUE 1 YEAR AFTER MARCH YEARS AFTER
OR LESS 31, 1996 MARCH 31, 1996 TOTAL(1)
----------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Residential real estate...................... $ 102 $ 2,437 $ 339,896 $ 342,435
Residential construction..................... 13,223 -- -- 13,223
Commercial real estate(2).................... 17,927 9,034 43,286 70,247
Commercial business.......................... 15,576 12,032 2,783 30,391
Consumer:
Loans on savings........................... 3,300 4,405 195 7,900
Real estate secured consumer loans......... 471 11,395 22,613 34,479
Unsecured consumer loans................... 3,578 40,192 719 44,489
----------- -------------- -------------- -----------
Total(3)................................. $ 54,177 $ 79,495 $ 409,492 $ 543,164
----------- -------------- -------------- -----------
----------- -------------- -------------- -----------
</TABLE>
- ------------------------
(1) Amounts have not been reduced for the allowance for loan losses, loans in
process, deferred loan fees or unearned interest.
(2) Includes $5.7 million of commercial construction and land acquisition loans.
(3) Does not include mortgage loans held for sale.
The following table sets forth the dollar amount of total loans due after
one year from March 31, 1996, as shown in the preceding table, which have fixed
interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE-RATE TOTAL
----------- -------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Residential real estate....................................... $ 342,435 $ -- $ 342,435
Residential construction...................................... 13,223 -- 13,223
Commercial real estate(1)..................................... 15,237 55,010 70,247
Commercial business........................................... 20,087 10,304 30,391
Consumer:
Loans on savings............................................ 7,900 -- 7,900
Real estate secured consumer loans.......................... 34,479 -- 34,479
Unsecured consumer loans.................................... 44,489 -- 44,489
----------- -------------- -----------
Total..................................................... $ 477,850 $ 65,314 $ 543,164
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
- ------------------------
(1) Includes $5.7 million of commercial construction and land acquisition loans.
Scheduled contractual amortization of loans does not reflect the expected
term of the Company's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and, with respect to
conventional loans originated for the Bank after February 1994, due-on-sales
clauses, which give the Company the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to
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<PAGE>
refinancing of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
ORIGINATION, PURCHASE AND SALES OF LOANS. The following table sets forth
loan originations, purchases and sales by the Bank for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages........................ $ 52,477 $ 19,281 $ 126,599 $ 131,749 $ 175,452
Commercial mortgages......................... -- -- -- 123 1,293
Construction loans........................... 58 4,464 13,764 10,700 4,025
Consumer loans............................... 4,398 2,773 15,944 -- --
---------- ---------- ----------- ----------- -----------
Total loans originated by R&G Mortgage..... 56,933 26,518 156,307 142,572 180,770
---------- ---------- ----------- ----------- -----------
Other loans originated:
Commercial real estate....................... 12,978 9,492 48,497 21,921 15,577
Commercial business.......................... 4,928 5,560 21,556 13,391 10,875
Consumer loans:
Loans on deposit............................. 2,888 2,951 12,546 9,290 5,630
Real estate secured consumer loans........... -- 2,423 3,436 9,323 7,303
Unsecured consumer loans..................... 9,377 8,589 38,589 4,005 1,307
---------- ---------- ----------- ----------- -----------
Total other loans originated............... 30,171 29,015 124,624 57,930 40,692
---------- ---------- ----------- ----------- -----------
Loans purchased(1)............................... -- 673 807 11,840 1,590
---------- ---------- ----------- ----------- -----------
Total loans originated and purchased....... 87,104 56,206 281,738 212,342 223,052
Loans sold....................................... (2,148) (8,364) (75,093) (26,844) (89,301)
Loan principal reductions........................ (25,992) (20,982) (78,519) (62,170) (30,633)
---------- ---------- ----------- ----------- -----------
Net increase before other items, net............. 58,964 26,860 128,126 123,328 103,118
Loans securitized and transferred to
mortgage-backed securities...................... -- (1,008) (17,631) (51,492) --
Other increases (decreases)...................... 458 (347) 179 (1,522) (1,666)
---------- ---------- ----------- ----------- -----------
Net increase in loan portfolio................... $ 59,422 $ 25,505 $ 110,674 $ 70,314 $ 101,452
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Comprised of conventional loans purchased from other financial institutions
aggregating $404,000, $508,000, $8.5 million and $449,000 in the three
months ended March 31, 1995 and the years ended December 31, 1995, 1994 and
1993, and FHA and conventional loans purchased from R&G Mortgage aggregating
$4.3 million and $1.1 million during the years ended December 31, 1994 and
1993.
The Company, through the Bank, originates for both investment and sale
mortgage loans secured by residential real estate (secured by both first and
second mortgage liens) as well as construction loans (for residential real
estate), commercial real estate loans, commercial business loans and consumer
loans.
Pursuant to the Master Production Agreement, R&G Mortgage will assist the
Bank in meeting its loan production targets and goals by, among other things,
(i) advertising, promoting and marketing to the general public; (ii)
interviewing prospective borrowers and conducting the initial processing of the
71
<PAGE>
requisite loan applications, consistent with the Bank's underwriting guidelines;
and (iii) providing personnel and facilities with respect to the execution of
loan agreements approved by the Bank. R&G Mortgage performs the foregoing loan
origination services on behalf of the Bank with respect to residential mortgage
loans, some commercial real estate loans and construction loans. R&G Mortgage
receives from the Bank 75% of the applicable loan origination fee with respect
to loans originated by R&G Mortgage on behalf of the Bank pursuant to the terms
of the Master Production Agreement. During the three months ended March 31, 1996
and the year ended December 31, 1995, 1994 and 1993, R&G Mortgage received $1.2
million, $3.6 million, $3.2 million and $3.5 million, respectively, of loan
origination fees with respect to loans originated by R&G Mortgage on behalf of
the Bank pursuant to the terms of the Master Production Agreement. These fees
are eliminated in consolidation in the Company's Consolidated Financial
Statements. See also "The Company -- Affiliated Transactions" and "Regulation --
The Company -- Limitations on Transactions with Affiliates."
The Bank originates commercial real estate, commercial business and consumer
loans. Applications for commercial real estate, commercial business and
unsecured consumer loans are taken at all of the Bank's branch offices and may
be approved by various lending officers of the Bank within designated limits,
which are established and modified from time to time to reflect an individual's
expertise and experience. All loans in excess of an individual's designated
limits are referred to an officer with the requisite authority. In addition, the
Management Credit Committee is authorized to approve all loans not exceeding
$400,000, the Credit Committee of the Board of Directors is authorized to
approve real estate secured loans not exceeding $500,000, and the Executive
Committee of the Board of Directors is authorized to approve all loans exceeding
$500,000. All loans originated or purchased by the Bank must be approved by one
of the three committees set forth above. Management of the Bank believes that
its relatively centralized approach to approving loan applications ensures
strict adherence to the Bank's underwriting guidelines while still allowing the
Bank to approve loan applications on a timely basis.
The Bank also occasionally purchases loans secured by first liens on
single-family residential real estate. The Bank will occasionally purchase FHA
loans from R&G Mortgage and conventional loans from unrelated financial
institutions. Such loan purchases are underwritten by the Bank pursuant to the
same guidelines as direct loan originations. Loans purchased by the Bank are
generally securitized by R&G Mortgage and sold by the Bank. During the three
months ended March 31, 1995 and the years ended December 31, 1995, 1994 and
1993, the Bank purchased $404,000, $508,000, $11.8 million and $1.6 million of
loans, respectively. The Bank did not purchase any loans during the three months
ended March 31, 1996.
During the three months ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, the Bank sold $2.1 million, $8.2 million,
$75.1 million, $26.8 million and $89.3 million of loans. These loans, which were
primarily nonconforming loans at the time of origination, were generally sold in
packages in privately negotiated transactions with FNMA and FHLMC.
Pursuant to the Master Purchase Agreement, the Bank sells to R&G Mortgage
the servicing rights to all first and second mortgage loans secured by
residential properties which are or will become part of the Bank's loan
portfolio once the Bank has a commitment to sell the loans. The Master Purchase
Agreement further provides that R&G Mortgage will service all other loans held
in the Bank's portfolio (including single-family residential loans retained by
the Bank, commercial real estate, commercial business and consumer loans
(although R&G Mortgage does not actually acquire such servicing rights)). In
addition, pursuant to the Master Purchase Agreement, the Bank processes payments
on all loans serviced by R&G Mortgage on behalf of the Bank. Finally, under the
Master Purchase Agreement, R&G Mortgage renders securitization services with
respect to the pooling of some of the Bank's mortgage loans into mortgage-backed
securities. See "-- Mortgage Banking Activities."
At March 31, 1996, the Company's five largest loans-to-one borrower and
their related entities amounted to $2.3 million, $2.2 million, $2.1 million,
$1.4 million and $675,000. The largest loan
72
<PAGE>
concentration consists of a construction loan to develop a 58-unit residential
subdivision in Fajardo. The second largest loan concentration is primarily
comprised of a $2.2 million land loan to a developer of a new shopping center in
Carolina. Plans and permits are being developed for various fast food chains.
The third largest loan concentration is primarily comprised of a $2.2 million
loan to a developer for the interim financing of a $1.4 million project that
consists of 55 single family detached residential units at Humacao, with the
balance of the loan concentration comprised of other commercial loans. In both
construction projects, units have been sold and delivered and the projects are
proceeding as planned. The fourth largest loan consists of $1.4 million
financing of insurance premium contracts for a period of not more than 10
months. The fifth largest loan concentration consists of a commercial small
business administration loan. All of the Company's five largest loan
concentrations were performing in accordance with their terms as of March 31,
1996.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At March 31, 1996, $328.0
million or 60.4% of the Company's total loans held for investment consisted of
such loans, $326.5 million or 99.5% of which consisted of conventional loans.
The Bank's first mortgage single-family residential loans consist exclusively of
fixed-rate loans with terms of between 15 and 30 years. As evidenced by this
statistic, the Puerto Rico residential mortgage market has not been receptive to
long-term adjustable rate mortgage loans.
The Bank's first mortgage single-family residential loans typically do not
exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Board of Directors, the Bank can lend up
to 95% of the appraised value of the property securing a first mortgage
single-family residential loan provided the Bank obtains private mortgage
insurance with respect to the top 25% of the loan.
The Bank also originates loans secured by second mortgages on single-family
residential properties. At March 31, 1996, $14.4 million or 2.7% of the
Company's total loans held for investment consisted of second mortgage loans on
single-family residential properties. The Bank offers such second mortgage loans
in amounts up to $125,000 for a term not to exceed 15 years. The loan-to-value
ratio of second mortgage loans generally is limited to 75% of the property's
appraised value (including the first mortgage).
CONSTRUCTION LOANS. In recent years, the Bank has been active in
originating loans to construct single-family residences. These construction
lending activities generally are conducted throughout Puerto Rico, although
loans are concentrated in areas contiguous to Bank branches. At March 31, 1996,
residential construction loans amounted to $13.2 million or 2.4% of the
Company's total loans held for investment, while commercial construction and
land acquisition loans amounted to $5.7 million or 1.0% of total loans held for
investment.
The Bank primarily offers construction loans to individual borrowers for the
purpose of constructing single-family residences. Substantially all of the
Bank's construction lending to individuals is originated on a
construction/permanent mortgage loan basis. Construction/permanent loans are
made to individuals who hold a contract with a general contractor acceptable to
the Bank to construct their personal residence. The construction phase of the
loan provides for monthly payments on an interest only basis at a designated
fixed rate for the term of the construction period, which generally does not
exceed nine months. Thereafter, the permanent loan is made at then market rates,
provided that such rate shall not be more than 2% greater than the interim
construction rate. R&G Mortgage's construction loan department approves the
proposed contractors and administers the loan during the construction phase. The
Bank's construction/permanent loan program has been successful due to its
ability to offer borrowers a single closing and, consequently, reduced costs. At
March 31, 1996, the Bank's construction loan portfolio included 155
construction/permanent loans with an aggregate principal balance of $13.2
million.
The Bank has also originated construction loans to developers on a very
limited basis to develop single family residential properties. The Bank does not
intend to actively engage in this business and
73
<PAGE>
will primarily undertake such investments to accommodate a valued developer
client if the Bank determines that the project is worthy and the risk is
acceptable. At March 31, 1996, the Bank had two residential construction loans
outstanding to developers aggregating $3.2 million to develop single-family
subdivisions, each with 58 units, in Fajardo and Humaco. Both loans are
referenced in the discussion of the Bank's largest loan concentrations above.
The Humaco project, which involved a $2.3 million loan, had an outstanding
balance of $1.0 million as of March 31, 1996. As of such date, 11 residences
have closed, 15 residences had down payments given pending contract of sale and
35 residences were under construction. The Fajardo project, which involved a
$1.4 million loan, had an outstanding balance of $2.2 million at March 31, 1996.
As of such date, 9 residences have closed, 18 residences had down payments given
pending contract of sale and 31 residences were under construction. Each loan is
performing in accordance with its terms.
In addition to the foregoing, at March 31, 1996, the Bank had two land
acquisition loans amounting to $300,000 and $299,400 which were made in
connection with projects to construct single-family residences. The Bank and the
financial institution which made the interim construction loan have entered into
an agreement pursuant to which the Bank is to be paid a percentage of the
proceeds from each home as it is released upon construction and sale. The Bank
expects to make the permanent construction loan on one of these projects. The
Bank does not expect to be active in this business.
The Bank intends to continue to increase its involvement in single-family
residential construction lending. Such loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio. Construction
lending is generally considered to involve a higher level of risk as compared to
permanent single-family residential lending, due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developers and managers. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated costs (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. At
March 31, 1996, $804,000 of the Bank's construction loans were classified as
non-performing.
The Bank has taken steps to minimize the foregoing risks by, among other
things, limiting its construction lending primarily to residential properties.
In addition, the Bank has adopted underwriting guidelines which impose stringent
loan-to-value (80% with respect to single-family residential real estate), debt
service and other requirements for loans which are believed to involve higher
elements of credit risk and by working with builders with whom it has
established relationships or knowledge thereof.
COMMERCIAL REAL ESTATE LOANS. The Bank has also originated mortgage loans
secured by commercial real estate. At March 31, 1996, $63.1 million or 11.6% of
the Company's total loans held for investment consisted of such loans. As of
such date, the Bank's commercial real estate loan portfolio consisted of
approximately 564 loans with an average principal balance of $112,000. At March
31, 1996, $2.0 million of the Company's commercial real estate loans were
classified as nonperforming.
Commercial real estate loans originated by the Bank are primarily secured by
office buildings, retail stores, warehouses and general purpose industrial
space. Although terms vary, commercial real estate loans generally are amortized
over a period of 7-15 years and have maturity dates of five to seven years. The
Bank will originate these loans with interest rates which adjust monthly in
accordance with a designated prime rate plus a margin, which generally is
negotiated at the time of origination. Such loans will have a floor but no
ceiling on the amount by which the rate of interest may adjust over the loan
term. Loan-to-value ratios on the Bank's commercial real estate loans are
currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.30 or more. It is also the Bank's general policy to seek
74
<PAGE>
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through mortgage insurance,
secondary collateral and/or personal guarantees from the principals of the
borrower.
Commercial real estate lending entails different and significant risks when
compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial lending generally. In
addition, the Bank imposes stringent loan-to-value ratios, requires conservative
debt coverage ratios, and continually monitors the operation and physical
condition of the collateral. Although the Bank has begun to increase its
emphasis on commercial real estate lending, management does not currently
anticipate that its portfolio of commercial real estate loans will grow
significantly as a percentage of the total loan portfolio.
COMMERCIAL BUSINESS LOANS. Beginning in 1991, the Bank began emphasizing
commercial business loans, including working capital lines of credit, inventory
and accounts receivable loans, equipment financing (including equipment leases),
term loans, insurance premiums loans and loans guaranteed by the Small Business
Administration. Depending on the collateral pledged to secure the extension of
credit, maximum loan to value ratios are 75% or less, with exceptions permitted
to a maximum of 80%. Loan terms may vary from one to 15 years. The interest
rates on such loans are generally variable and are indexed to a designated prime
rate, plus a margin. The Bank also generally obtains personal guarantees from
the principals of the borrowers. At March 31, 1996, commercial business loans
amounted to $30.4 million or 5.6% of total loans held for investment. Although
the Bank has begun to increase its emphasis on commercial business lending,
management does not currently anticipate that its portfolio of commercial
business loans will grow significantly as a percentage of the total loan
portfolio.
CONSUMER LOANS. The Bank has recently begun to emphasize the origination of
consumer loans in order to provide a full range of financial services to its
customers and because such loans generally have shorter terms and higher
interest rates than mortgage loans. At March 31, 1996, $86.9 million or 16.0% of
the Company's total loans held for investment consisted of consumer loans. The
consumer loans offered by the Bank include real estate secured consumer loans
(which are originated by R&G Mortgage), loans secured by deposit accounts,
credit card loans and other secured and unsecured consumer loans. Most of the
Bank's consumer loans are secured and have been primarily obtained through
newspaper advertising, although loans are also obtained from existing and
walk-in customers. Although the Bank has begun to increase its emphasis on
consumer lending, management does not currently anticipate that its portfolio of
consumer loans will grow significantly as a percentage of the total loan
portfolio.
The Bank currently offers loans secured by deposit accounts, which amounted
to $7.9 million at March 31, 1996. Such loans are originated generally for up to
90% of the account balance, with a hold placed on the account restricting the
withdrawal of the account balance. The Bank offers real estate secured loans in
amounts up to 75% of the appraised value of the property, including the amount
of any existing prior liens. Real estate secured consumer loans have a maximum
term of 10 years, which may be extended within the sole discretion of the Bank,
and an interest rate which is set at a fixed rate based on market conditions.
The Bank secures the loan with a first or second mortgage on the property and
will originate the loan even if another institution holds the first mortgage. At
March 31, 1996, real estate secured consumer loans totalled $34.5 million. In
November 1995, the Bank began issuing credit cards in its own name. At March 31,
1996, credit card receivables totalled $424,000.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral
75
<PAGE>
and, in certain cases, the absence of collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely effected by job loss, divorce, illness and
personal bankruptcy. In many cases, any repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of improper repair and maintenance of the
underlying security. The remaining deficiency may not warrant further
substantial collection efforts against the borrower. At March 31, 1996, $146,000
of consumer loans were classified as non-performing.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made between the 10th and 15th day after a
payment is due. In most cases, deficiencies are cured promptly. If a delinquency
extends beyond 15 days, the loan and payment history is reviewed and efforts are
made to collect the loan. While the Company generally prefers to work with
borrowers to resolve such problems, when the account becomes 90 days delinquent
in the case of mortgage loans, the Company does institute foreclosure or other
proceedings, as necessary, to minimize any potential loss. In the case of
consumer loans, the Bank refers the file for collection action after 60 days.
Loans secured by real estate are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. When such a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due 90 days or more which are secured by real estate. The Bank
generally takes the same position in the case of consumer loans.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
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<PAGE>
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. The Company did not have any
troubled debt restructurings at any of the periods presented. Except as
otherwise indicated in the footnotes to the table, the non-performing assets are
assets of the Bank.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate(1).................. $ 9,176 $ 7,921 $ 4,045 $ 2,942 $ 1,939 $ 1,198
Construction................................ -- -- -- -- -- --
Commercial real estate...................... 2,006 1,903 789 1,311 141 215
Commercial business......................... -- -- -- -- -- --
Consumer.................................... 109 40 918 736 221 93
------------- --------- --------- --------- --------- ---------
Total..................................... 11,291(2) 9,864 5,752 4,989 2,301 1,506
------------- --------- --------- --------- --------- ---------
Accruing loans greater than 90 days
delinquent:
Residential real estate..................... -- -- -- -- -- --
Residential construction.................... 804 611 -- -- 28 69
Commercial real estate...................... -- -- -- -- -- --
Commercial business......................... 1 8 10 70 -- --
Consumer.................................... 37 94 -- -- 4 1
------------- --------- --------- --------- --------- ---------
Total accruing loans greater than 90 days
delinquent............................... 842 713 10 70 32 70
------------- --------- --------- --------- --------- ---------
Total non-performing loans................ 12,133 10,577 5,762 5,059 2,333 1,576
------------- --------- --------- --------- --------- ---------
Real estate owned, net of reserves(3)......... 846 654 722 699 21 193
------------- --------- --------- --------- --------- ---------
Total non-performing assets............... $ 12,979 $ 11,231 $ 6,484 $ 5,758 $ 2,354 $ 1,769
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Total non-performing loans as a percentage
of total loans........................... 2.23% 2.18% 1.84% 2.24% 1.81% 1.47%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Total non-performing assets as a
percentage of total assets............... 1.49% 1.32% 1.04% 1.07% 0.80% 0.84%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes residential real estate secured by both first and second mortgage
loans.
(2) As of March 31, 1996, comprised of 155 loans secured by residential real
estate, 21 loans secured by commercial real estate and 59 consumer loans.
(3) Includes properties held by R-G Mortgage of $145,000, $43,000, $239,000 and
$193,000 as of March 31, 1996 and December 31, 1994, 1993 and 1991. As of
March 31, 1996, the Bank had eight residential properties aggregating
$701,000 and R&G Mortgage had two residential properties aggregating
$145,000. As of December 31, 1995, the Bank had two residential properties
aggregating $654,000.
While the level of total non-performing assets of the Company has increased
on an absolute basis during the periods presented, from $1.6 million at December
31, 1991 to $13.0 million at March 31, 1996, the Company's net loans receivable
portfolio has increased by 556% during this period, from $96.7 million at
December 31, 1991 to $534.1 million at March 31, 1996. Thus, total
non-performing assets as a percent of total assets increased from 0.84% at
December 31, 1991 to 1.49% at March 31, 1996.
It is the policy of the Bank to maintain an allowance for estimated losses
on loans and to increase such allowance when, based on management's evaluation,
a loss becomes both probable and estimable
77
<PAGE>
(i.e., the loss is likely to occur and can be reasonably estimated). Major loans
and major lending areas are reviewed periodically to determine potential
problems at an early date. Also, management's periodic evaluation considers
factors such as loss experience, current delinquency data, known and inherent
risks in the portfolio, identification of adverse situations which may affect
the ability of debtors to repay the loan, the estimated value of any underlying
collateral and assessment of current economic conditions. Additions to the
allowance are charged to income. Such provisions are based on management's
estimated value of any underlying collateral, as applicable, considering the
current and anticipated operating conditions of the borrower. Any recoveries are
credited to the allowance.
The following table sets forth an analysis of the Company's allowance for
loan losses during the periods indicated, which is maintained on the Bank's loan
portfolio.
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED
MARCH 31, AT AND FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............... $ 3,510 $ 2,887 $ 2,887 $ 3,029 $ 1,230 $ 892 $ 604
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
Residential real estate.................... -- 53 53 -- -- 5 --
Construction............................... -- -- -- -- -- -- --
Commercial real estate..................... -- -- -- -- -- -- --
Commercial business........................ 23 3 91 3 56 105 3
Consumer................................... 233 18 365 139 90 11 91
-------- -------- -------- -------- -------- -------- --------
Total charge-offs........................ 256 74 509 142 146 121 94
-------- -------- -------- -------- -------- -------- --------
Recoveries:
Residential real estate.................... -- 1 1 -- -- -- --
Construction............................... -- -- -- -- -- -- --
Commercial real estate..................... -- -- -- -- -- -- --
Commercial business........................ 26 20 85 -- 20 2 --
Consumer................................... 22 25 96 -- 242 22 33
-------- -------- -------- -------- -------- -------- --------
Total recoveries......................... 48 46 182 -- 262 24 33
-------- -------- -------- -------- -------- -------- --------
Net charge-offs.............................. 208 28 327 142 (116) 97 61
-------- -------- -------- -------- -------- -------- --------
Allowance for loan losses acquired from
Caribbean Federal........................... -- -- -- -- 1,683 -- --
Provision for losses on loans................ 7 (50) 950(1) -- -- 435 349
-------- -------- -------- -------- -------- -------- --------
Balance at end of period..................... $ 3,309 $ 2,809 $ 3,510 $ 2,887 $ 3,029 $ 1,230 $ 892
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Allowance for loan losses as a percent of
total loans outstanding..................... 0.59% 0.79% 0.72% 0.89% 1.38% 1.05% 0.92%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Allowance for loan losses as a percent of
non-performing loans........................ 27.27% 39.52% 33.19% 50.10% 59.87% 52.72% 65.54%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Ratio of net charge-offs to average loans
outstanding................................. 0.05% 0.01% 0.08% 0.05% (0.06)% 0.07% 0.07%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------------
(1) Includes $500,000 transferred to the provision for loan losses which the
Company determined was excess valuation reserves on mortgage loans held for
sale.
78
<PAGE>
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses (which is maintained on the Bank's loan
portfolio) by loan category at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------
PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Residential real
estate.................. $2,020 61.05%
Construction............. 34 1.03
Commercial real estate... -- --
Commercial business...... 687 20.76
Consumer................. 568 17.16
------- --------
Total................ $3,309 100.00%
------- --------
------- --------
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate.................. $2,094 59.66% $1,962 67.95% $2,029 66.99% $ 913 74.23% $ 685 76.79%
Construction............. 32 0.90 -- -- -- -- -- -- -- --
Commercial real estate... -- -- -- -- -- -- -- -- -- --
Commercial business...... 782 22.28 403 13.96 576 19.02 154 12.60 104 11.66
Consumer................. 602 17.16 522 18.09 424 13.99 163 13.17 103 11.55
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
Total................ $3,510 100.00% $2,887 100.00% $3,029 100.00% $1,230 100.00% $ 892 100.00%
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
</TABLE>
79
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The Company's securities portfolio is managed by investment
officers in accordance with a comprehensive written investment policy which
addresses strategies, types and levels of allowable investments and which is
reviewed and approved annually by the respective Boards of Directors of the Bank
and R&G Mortgage. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's IRRBICO.
As discussed under "-- Mortgage Banking Activities," R&G Mortgage is
primarily engaged in the origination of mortgage loans and the securitization of
such loans into mortgage-backed and related securities and the subsequent sale
of such securities to securities broker-dealers and other investors in the
secondary market. As a result of R&G Mortgage's securitization activities, R&G
Mortgage maintains a substantial portfolio of GNMA mortgage-backed securities.
At March 31, 1996, R&G Mortgage held GNMA mortgage-backed securities with a fair
value of $88.6 million which are classified as held for trading. Such securities
generally remain in R&G Mortgage's portfolio for between 90 and 180 days. In
addition, during 1994 and 1995, R&G Mortgage sold through grantor trusts $201.4
million and $38.1 million, respectively, of CMOs and retained a portion of the
residual interests related thereto. In addition, in 1995, R&G Mortgage purchased
from the Bank $4.6 million of mortgage-backed residuals relating to the Bank's
1993 issuance of CMOs. At March 31, 1996, R&G Mortgage's CMOs and CMO residuals,
which are classified as held for trading, had an amortized cost of $25.9 million
and a fair value of $25.3 million.
The Bank's Investment Policy authorizes the Bank to invest in U.S. Treasury
obligations (with a maturity up to five years), U.S. Agency obligations, FNMA,
GNMA and FHLMC mortgage-backed certificates, investment grade municipal
obligations (with a maturity of up to five years), bankers' acceptances and FHLB
notes (with a maturity of up to five years), investment grade commercial paper
(with a maturity of up to 9 months), federal funds (with a maturity of six
months or less), certificates of deposit in other financial institutions
(including Eurodollar deposits), repurchase agreements (with a maturity of six
months or less), investment grade corporate bonds (with a maturity of five years
or less) and certain mortgage-backed derivative securities (with a weighted
average life of less than ten years).
At March 31, 1996, the Bank's securities portfolio consisted of $45.4
million of securities held for investments, consisting of $40.7 million of
tax-free mortgage-backed securities, $1.7 million of Puerto Rico Government
obligations and $3.0 million of commercial paper. In addition, at March 31,
1996, the Bank had a securities portfolio classified as available for sale with
a fair value of $69.3 million, consisting of $37.9 million of mortgage-backed
securities, $4.1 million of FHLB stock, $8.1 million of CMOs and CMO residuals
and $19.2 million of U.S. Government agency securities. Finally, at March 31,
1996, $2.2 million of the Bank's securities were classified as held for trading,
consisting of $1.8 million of GNMA certificates and $390,000 of U.S. Treasury
Bills.
In February 1996, the Bank entered into an agreement with an independent
investment management firm whereby such firm has been appointed as investment
advisor with respect to a portion of the Bank's securities portfolio. Pursuant
to such agreement, this investment advisory firm advises and recommends the
purchase and/or sale of otherwise eligible investments on behalf of the Bank as
well as the execution of various hedging strategies. Such firm, which has been
engaged by the Bank to, among other things, assist it in achieving the
objectives established by the Bank's IRRBICO, receives an annual management fee
of .15% of the average aggregate principal amount under management (payable
quarterly) together with a quarterly performance fee of 25% of the net trading
profits earned during each calendar quarter. At March 31, 1996, this investment
advisory firm was managing assets of the Bank with an approximate fair value of
$29.9 million ($19.9 million of which is being utilized for hedging purposes and
$10.0 million of which is being utilized for trading purposes), which were
invested in U.S. Government agency securities and money market instruments.
Beginning with the quarter ended June 30, 1996, such firm will execute hedging
strategies on behalf of the Bank for all securities which are held for trading
or available for sale. At March 31, 1996, the Bank's securities held for trading
and available for sale had a fair value of $71.5 million.
80
<PAGE>
The following table presents certain information regarding the composition
and period to maturity of the Company's securities portfolio held to maturity as
of the dates indicated below. All of such securities are assets of the Bank.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
GMNA
Due within one year............ $ -- $ -- --%
Due from one-five years........ 113 104 10.00
Due from five-ten years........ -- -- --
Due over ten years............. 23,804 22,373 6.02
FNMA
Due within one year............ -- -- --
Due from one-five years........ -- -- --
Due from five-ten years........ -- -- --
Due over ten years............. 16,440 16,509 7.18
FHLMC
Due within one year............ -- -- --
Due from one-five years........ -- -- --
Due from five-ten years........ -- -- --
Due over ten years............. 359 349 5.50
INVESTMENT SECURITIES:
Puerto Rico Government
obligations
Due within one year............ 60 60 2.68
Due from one-five years........ 1,040 1,040 6.25
Due from five-ten years........ -- -- --
Due over ten years............. 617 609 5.33
U.S. Government Agency
Due within one year............ -- -- --
Due within one-five years...... -- -- --
Due within five-ten years...... -- -- --
Due over ten years............. -- -- --
Commercial paper:
Due within one year............ 2,992 2,992 5.50
Due within one-five years...... -- -- --
Due within five-ten years...... -- -- --
Due over ten years............. -- -- --
------- ------- -------
Total Securities held for
investment.................. $45,425 $44,036 6.41%
------- ------- -------
------- ------- -------
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING MARKET AVERAGE CARRYING MARKET AVERAGE CARRYING MARKET AVERAGE
VALUE VALUE YIELD VALUE VALUE YIELD VALUE VALUE YIELD
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
GMNA
Due within one year............ $ -- $ -- --% $ -- $ -- --% $ -- $ -- --%
Due from one-five years........ -- -- 10.00 -- -- -- -- -- --
Due from five-ten years........ 118 108 -- 174 164 10.00 257 264 10.00
Due over ten years............. 24,617 23,681 6.03 26,619 24,224 5.98 29,563 29,418 6.27
FNMA
Due within one year............ -- -- -- -- -- -- -- -- --%
Due from one-five years........ -- -- -- -- -- -- -- -- --
Due from five-ten years........ -- -- -- -- -- -- -- -- --
Due over ten years............. 16,623 16,623 7.18 16,175 15,267 7.16 2,346 2,509 9.62
FHLMC
Due within one year............ -- -- -- -- -- -- -- -- --
Due from one-five years........ -- -- -- -- -- -- -- -- --
Due from five-ten years........ -- -- -- 659 678 9.16 753 804 9.20
Due over ten years............. 373 373 5.50 40,495 38,512 7.05 6,204 6,564 8.91
INVESTMENT SECURITIES:
Puerto Rico Government
obligations
Due within one year............ 377 377 2.69 460 460 3.49 -- -- --
Due from one-five years........ 1,042 1,000 6.25 1,046 982 6.25 1,455 1,460 6.52
Due from five-ten years........ -- -- -- -- -- -- -- -- --
Due over ten years............. 627 619 4.25 676 667 4.55 774 740 4.66
U.S. Government Agency
Due within one year............ -- -- -- -- -- -- -- -- --
Due within one-five years...... -- -- -- -- -- -- 1,006 1,000 5.50
Due within five-ten years...... -- -- -- -- -- -- -- -- --
Due over ten years............. -- -- -- -- -- -- -- -- --
Commercial paper:
Due within one year............ -- -- -- -- -- -- -- -- --
Due within one-five years...... -- -- -- -- -- -- -- -- --
Due within five-ten years...... -- -- -- -- -- -- -- -- --
Due over ten years............. -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Securities held for
investment.................. $43,777 $42,781 6.42% $86,304 $80,954 6.76% $42,358 $42,759 6.89%
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
81
<PAGE>
The following table presents certain information regarding the composition
and period to maturity of the Company's held for trading and available for sale
mortgage-backed and investment securities portfolio as of the dates indicated
below.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE(1):
FNMA mortgage-backed securities
Due within one year............ $ -- $ -- --%
Due from one-five years........ -- -- --
Due from five-ten years........ -- -- --
Due over ten years............. 14,451 14,089 7.10
FHLMC mortgage-backed securities
Due within one year............ -- -- --
Due from one-five years........ -- -- --
Due from five-ten years........ 742 736 9.22
Due over ten years............. 23,629 23,158 7.00
CMO residuals and other
mortgage-backed securities (2)
Due within one year............ -- -- NA
Due from one-five years........ -- -- NA
Due from five-ten years........ -- -- NA
Due over ten years............. 7,112 8,058 NA
INVESTMENT SECURITIES AVAILABLE FOR
SALE(1)
U.S. Government Agency
Due within one year............ -- -- --
Due from one-five years........ 14,500 14,326 5.92
Due from five-ten years........ 5,028 4,853 6.73
Due over ten years............. -- -- --
-------- -------- ---
FHLB stock....................... 4,075 4,075 6.47
-------- -------- ---
$69,537 $ 69,295 6.17%
-------- -------- ---
-------- -------- ---
SECURITIES HELD FOR TRADING(3):
GNMA certificates................ 90,395 91,030 6.59
CMO certificates................. 16,200 15,390 5.95
CMO residuals(4)................. 9,776 9,901 8.07
U.S. Treasury Bills.............. 390 390 4.90
-------- -------- ---
$116,761 $116,711 6.62%
-------- -------- ---
-------- -------- ---
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD COST VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE(1):
FNMA mortgage-backed securities
Due within one year............ $ -- $ -- --% $ -- $ -- --% $ -- $ -- --%
Due from one-five years........ -- -- -- -- -- -- -- -- --
Due from five-ten years........ -- -- -- -- -- -- -- -- --
Due over ten years............. 14,846 14,946 7.12 -- -- -- -- -- --
FHLMC mortgage-backed securities
Due within one year............ -- -- -- -- -- -- -- -- --
Due from one-five years........ -- -- -- -- -- -- -- -- --
Due from five-ten years........ 1,122 1,180 8.90 -- -- -- -- -- --
Due over ten years............. 36,353 36,759 6.94 -- -- -- -- -- --
CMO residuals and other
mortgage-backed securities (2)
Due within one year............ -- -- NA -- -- NA -- -- NA
Due from one-five years........ -- -- NA -- -- NA -- -- NA
Due from five-ten years........ -- -- NA -- -- NA -- -- NA
Due over ten years............. 7,126 8,123 NA 11,684 13,300 NA 10,241 10,241 NA
INVESTMENT SECURITIES AVAILABLE FOR
SALE(1)
U.S. Government Agency
Due within one year............ -- -- -- -- -- -- -- -- --
Due from one-five years........ -- -- -- -- -- -- -- -- --
Due from five-ten years........ -- -- -- -- -- -- -- -- --
Due over ten years............. -- -- -- -- -- -- -- -- --
-------- -------- --- -------- -------- --- -------- -------- --------
FHLB stock....................... 3,280 3,280 7.68 1,878 1,878 7.60 1,721 1,721 10.79
-------- -------- --- -------- -------- --- -------- -------- --------
$62,727 $ 64,288 6.42% $13,562 $ 15,178 5.01% $11,962 $ 11,962 6.76%
-------- -------- --- -------- -------- --- -------- -------- --------
-------- -------- --- -------- -------- --- -------- -------- --------
SECURITIES HELD FOR TRADING(3):
GNMA certificates................ 87,656 88,448 6.71 65,813 64,184 6.59 -- -- --
CMO certificates................. 16,200 15,570 5.95 54,350 50,241 5.76 -- -- --
CMO residuals(4)................. 10,248 9,791 8.07 9,500 10,097 8.00 -- -- --
U.S. Treasury Bills.............. -- -- -- -- -- -- -- -- --
-------- -------- --- -------- -------- --- -------- -------- --------
$114,104 $113,809 6.72% $129,663 $124,522 6.35% $ -- $ -- --%
-------- -------- --- -------- -------- --- -------- -------- --------
-------- -------- --- -------- -------- --- -------- -------- --------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
82
<PAGE>
- ------------------------
(1) All securities are held in the Bank's investment securities portfolio.
(2) Comprised of subordinated tranches and residuals from the Bank's 1992
Grantor Trust.
(3) Except for GNMA Certificates with a fair value of $1.8 million, $1.8 million
and $1.9 million during the three months ended March 31, 1996 and the years
ended December 31, 1995 and 1994 and U.S. Treasury Bills with a fair value
of $390,000 at March 31, 1996, all of such securities are held in R&G
Mortgage's securities portfolio.
(4) Represents residuals purchased from the Bank from its 1993 CMO Grantor Trust
and from R&G Mortgage's CMO Grantor Trust.
A substantial portion of the Company's securities are held in
mortgage-backed securities. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and owned
by the 12 Federal Home Loan Banks and federally-insured savings institutions.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal within one year. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within HUD which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low- and middle-income housing,
there are limits to the maximum size of loans that qualify for these programs.
For example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $207,000. To accommodate larger-sized
loans, and loans that, for other reasons, do not conform to the agency programs,
a number of private institutions have established their own home-loan
origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The Company's securities portfolio includes CMOs. CMOs have been developed
in response to investor concerns regarding the uncertainty of cash flows
associated with the prepayment option of the underlying mortgagor and are
typically issued by government agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
83
<PAGE>
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company. At March 31, 1996, $146.5 million or 72.1% of
the Company's mortgage-backed securities was pledged to secure various
obligations of the Company.
The FDIC has issued a statement of policy which states, among other things,
that mortgage derivative products (including CMOs and CMO residuals) which
possess average life or price volatility in excess of a benchmark fixed rate
30-year mortgage-backed pass-through security are "high-risk mortgage
securities," are not suitable investments for depository institutions, and if
considered "high risk" at purchase must be carried in the institution's trading
account or as assets held for sale, and must be marked to market on a regular
basis. In addition, if a security was not considered "high risk" at purchase but
was later found to be "high risk" based on the tests, it may remain in the
held-to-maturity portfolio as long as the institution has positive intent to
hold the security to maturity and has a documented plan in place to manage the
high risk. At March 31, 1996, the Bank's CMOs and CMO residuals, which had a
fair value of $8.1 million, were designated as "high-risk mortgage securities"
and classified as available for sale.
SOURCES OF FUNDS
GENERAL. The Company will consider various sources of funds to fund its
investment and lending activities and evaluates the available sources of funds
in order to reduce the Company's overall funding costs. Deposits, reverse
repurchase agreements, warehouse lines of credit, notes payable, FHLB advances,
subordinated capital notes and sales, maturities and principal repayments on
loans and securities have been the major sources of funds for use in the
Company's lending and investing activities and for other general business
purposes.
DEPOSITS. Deposits are the major sources of the Bank's funds for lending
and other investment purposes. Consumer and commercial deposits are attracted
principally from within the Bank's primary market area through the offering of a
broad selection of deposit instruments, including passbook, NOW and Super NOW,
checking and commercial checking and certificates of deposit ranging in terms
from 7 days to 10 years. Included among these deposit products are $137.0
million of certificates of deposit with balances of $100,000 or more, which
amounted to 25.3% of the Bank's total deposits at March 31, 1996. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors.
The Bank attempts to price its deposits in order to promote deposit growth.
The Bank regularly evaluates the internal costs of funds, surveys rates offered
by competing institutions, reviews the Bank's cash flow requirements for lending
and liquidity and executes rate changes when deemed appropriate. The Bank does
not currently obtain funds through brokers, although at March 31, 1996 it held
$4.2 million of deposits acquired from money desks in the United States.
The principal methods currently used by the Bank to attract deposit accounts
include offering a wide variety of services and accounts and competitive
interest rates. The Bank utilizes traditional marketing methods to attract new
customers and savings deposits, including advertising.
84
<PAGE>
The following table presents the average balance of each deposit type and
the average rate paid one each deposit type of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
MARCH 31, 1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ------------------------
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID BALANCE PAID
--------- ------------- --------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook................... $ 73,446 3.75% $ 59,860 3.66% $ 45,220 3.60% $ 30,800 4.18%
NOW and Super NOW
accounts.................. 74,848 3.83 65,135 3.82 72,662 3.87 47,818 3.67
Checking................... 10,084 -- 6,050 -- 2,725 -- 1,423 --
Commercial checking(1)..... 26,868 -- 24,601 -- 22,819 -- 23,827 --
Certificates of deposit.... 324,695 6.16 276,187 6.25 197,035 5.20 128,980 5.37
--------- --------- --------- ---------
Total deposits......... $ 509,941 5.02% $ 431,833 5.08% $ 340,461 4.23% $ 232,848 4.28%
--------- --- --------- --- --------- --- --------- ---
--------- --- --------- --- --------- --- --------- ---
</TABLE>
- ------------------------------
(1) Includes $13.1 million, $9.7 million, $10.0 million and $13.3 million of
escrow funds of R&G Mortgage maintained with the Bank at March 31, 1996 and
at December 31, 1995, 1994 and 1993, respectively.
The following table sets forth the maturities of the Bank's certificates of
deposit having principal amounts of $100,000 or more at March 31, 1996.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Certificates of deposit maturing:
Three months or less.................................................................. $ 34,855
Over three through six months......................................................... 24,895
Over six through twelve months........................................................ 43,966
Over twelve months.................................................................... 33,284
--------------
Total............................................................................... $ 137,000
--------------
--------------
</TABLE>
BORROWINGS. The Company's business requires continuous access to various
funding sources, both short and long-term. R&G Mortgage's primary source of
short-term funds is through sales of securities to investment dealers under
agreements to repurchase ("reverse repurchase agreements"). The Bank also from
time to time utilizes reverse repurchase agreements when they represent a
competitive short-term funding source. In a reverse repurchase agreement
transaction, the Company will generally sell a mortgage-backed security agreeing
to repurchase either the same or a substantially identical security on a
specified later date (generally not more than 90 days) at a price less than the
original sales price. The difference in the sale price and purchase price is the
cost of the use of the proceeds. The mortgage-backed securities underlying the
agreements are delivered to the dealers who arrange the transactions. For
agreements in which the Company has agreed to repurchase substantially identical
securities, the dealers may sell, loan or otherwise dispose of the Company's
securities in the normal course of their operations; however, such dealers or
third party custodians safe-keep the securities which are to be specifically
repurchased by the Company. Reverse repurchase agreements represent a
competitive cost funding source for the Company. Nevertheless, the Company is
subject to the risk that the lender may default at maturity and not return the
collateral. The amount at risk is the value of the collateral which exceeds the
balance of the borrowing. In order to minimize this potential risk, the Company
only deals with large, established investment brokerage firms when entering into
these transactions. Reverse repurchase transactions are accounted for as
financing arrangements rather than as sales of such securities, and the
obligations to repurchase such securities is reflected as a liability in the
Company's Consolidated Financial Statements. As of March 31, 1996, the Company
had $95.3 million of reverse repurchase agreements outstanding, all of which
represented borrowings of R&G Mortgage. At March 31, 1996, the weighted average
interest rate on the Company's reverse repurchase agreements amounted to 4.83%.
See Note 10 of the Notes to Consolidated Financial Statements.
85
<PAGE>
R&G Mortgage's loan originations are also funded by borrowings under various
warehouse lines of credit provided by two unrelated commercial banks ("Warehouse
Lines"). At March 31, 1996, R&G Mortgage was permitted to borrow under such
Warehouse Lines up to $79.4 million, $19.6 million of which was drawn upon and
outstanding as of such date. The Warehouse Lines are used by R&G Mortgage to
fund loan commitments and must generally be repaid within 180 days after the
loan is closed or when R&G Mortgage receives payment from the sale of the funded
loan, whichever occurs first. Until such sale closes, the Warehouse Lines
provide that the funded loan is pledged to secure the outstanding borrowings.
The Warehouse Lines are also collateralized by certificates of deposit, a
general assignment of mortgage payments receivable, an assignment of certain
mortgage servicing rights and an assignment of key man life insurance policies
on Mr. Victor J. Galan, the Company's Chairman of the Board and Chief Executive
Officer. In addition, some of the Warehouse Lines are personally guaranteed by
Mr. Galan. Certain of these warehousing lines of credit impose restrictions on
R&G Mortgage with respect to the maintenance of minimum levels of net worth and
working capital and limitations on the amount of indebtedness and dividends
which may be declared.
The interest rate on funds borrowed pursuant to the Warehouse Lines is based
upon a specified prime rate less a negotiated amount or a designated Puerto Rico
Section 936 funds rate (which is lower than the prime rate) plus a negotiated
amount. By maintaining compensating balances, R&G Mortgage is able to borrow
funds under the Warehouse Lines at a lower interest rate than would otherwise
apply. These compensating balances are comprised of a portion of the escrow
accounts maintained by R&G Mortgage for principal and interest payments and
related tax and insurance payments on loans its services. At March 31, 1996, the
weighted average interest rate being paid by R&G Mortgage under its Warehouse
Lines amounted to 3.04%.
The Warehouse Lines include various covenants and restrictions on R&G
Mortgage's operations, including maintenance of minimum levels of net worth and
working capital, minimum levels and ratios with respect to outstanding
indebtedness and restrictions on the amount of dividends which can be declared
and paid by R&G Mortgage on its common stock (which is limited to 50% of R&G
Mortgage's net income for the preceding fiscal year). Management of the Company
believes that as of March 31, 1996, it was in compliance with all of such
covenants and restrictions and does not anticipate that such covenants and
restrictions will limit its operations. See Note 11 of the Notes to Consolidated
Financial Statements.
R&G Mortgage also obtains funds on a longer-term basis (greater than
one-year) through various notes payable. Long-term notes payable amounted to
$4.9 million as of March 31, 1996, $41,000 of which (with a weighted average
rate of 7.65%) matures in 1996, $1.25 million of which (with a fixed rate of
6.95%) matures in 1998, $1.73 million of which (with a weighted average rate of
7.4%) matures in 1999 and $1.9 million of which (with a fixed rate of 7.5%)
matures in 2000. These long-term notes payable are generally
cross-collateralized with certain of the assets and guarantees used as
collateral for the Warehouse Lines discussed above. See Note 12 of the Notes to
Consolidated Financial Statements.
Although the Bank's primary source of funds is deposits, the Bank also
borrows funds on both a short and long-term basis. The Bank actively utilizes
936 Notes as a primary borrowing source. The 936 Notes have original terms to
maturity of between five and eight years and are payable semiannually at either
a variable interest rate (84% of three-month LIBOR less .125%) or a fixed
interest rate (ranging from 5.50% to 7.15%). The Bank is able to obtain such low
cost funds by investing the proceeds in eligible activities as proscribed under
Puerto Rico law, which provide tax advantages under Puerto Rico tax laws and
under U.S. federal tax laws for U.S. corporations which are operating in Puerto
Rico pursuant to Section 936 of the Code. See "-- Mortgage Banking Activities --
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment." At March 31,
1996, $41.0 million of the 936 Notes were secured by marketable securities,
while $10.0 million were secured by standby letters of credit issued by the FHLB
of New York (which are, in turn, secured by first mortgage loans, securities and
cash deposits). The 936 Notes contain certain provisions which indemnify the
holders thereof from the federal tax liability which would be incurred, plus any
penalties and interest, if the
86
<PAGE>
Bank did not invest the proceeds as required in eligible activities, and also
provide for a "gross up" provision which permits the Bank to continue the
obligation at an adjusted interest rate based on LIBOR in the event the interest
on the 936 Notes is subject in whole or in part to federal and/or Puerto Rico
income tax. At March 31, 1996, the Bank had $51.0 million of 936 Notes
outstanding, $23.6 million of which matures in 1999, $25.0 million of which
matures in 2000 and $2.4 million of which matures in 2003. See Note 11 of the
Notes to Consolidated Financial Statements.
The Bank obtains both fixed-rate and variable-rate short-term and long-term
advances from the FHLB of New York upon the security of certain of its
residential first mortgage loans, securities and cash deposits, provided certain
standards related to the credit-worthiness of the Bank have been met. FHLB of
New York advances are available for general business purposes to expand lending
and investing activities. Advances from the FHLB of New York are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. At March 31, 1996, the Bank had access to $50.0 million
in advances from the FHLB of New York, and had two FHLB of New York advances
aggregating $6.0 million outstanding as of such date, which mature in 1996 and
have a weighted average interest rate of 6.74%. In addition, at March 31, 1996,
the Bank maintained $23.5 million in standby letters of credit with the FHLB of
New York, which secured $10.0 million of outstanding 936 Notes payable and $8.6
million of 936 certificates of deposit. At March 31, 1996, the Bank had pledged
specific collateral aggregating $91.9 million to the FHLB of New York under its
advances program and to secure the letters of credit. The Bank maintains
collateral with the FHLB of New York in excess of applicable requirements in
order to facilitate additional borrowings by the Bank in the future. See Note 13
of the Notes to Consolidated Financial Statements.
In June 1991, the Bank issued $3.3 million of subordinated capital notes
bearing interest at 8% payable on a quarterly basis. The subordinated notes are
guaranteed by R&G Mortgage and by the Chairman of the Board and Chief Executive
Officer of the Company, and are secured by an irrevocable standby letter of
credit issued by an unrelated commercial bank. Pursuant to the terms of the
subordinated notes, the Bank is required to deposit with an established sinking
fund in seven equal annual installments (the first of which began in September
1992 and the last of which is scheduled for June 1998, when the notes mature)
cash or other permitted investments in an amount sufficient to retire
one-seventh ($464,000) of the aggregate principal amount of the subordinated
notes. The standby letter of credit is reduced in equal proportion to the
deposits to such sinking fund. See Note 15 of the Notes to the Consolidated
Financial Statements.
In December 1995, the Bank sold single-family residential mortgage loans
with an aggregate outstanding balance of approximately $55 million to two
commercial banks. In connection with the foregoing, R&G Mortgage assumed certain
recourse provisions and guaranteed a specific yield to the purchasers of the
loans. In addition, the purchasers of the loans have the right, at their option,
to require R&G Mortgage to purchase the mortgage loans at any time after
December 2000. Management has estimated its liability, if any, under the
foregoing recourse provisions to be immaterial as of March 31, 1996. In the
Company's Consolidated Financial Statements, the Company has recognized the
foregoing transaction as a transfer of loans with recourse. Accordingly, the
proceeds from such transaction (amounting to $54.7 million at March 31, 1996)
have been reported as a secured borrowing in the Company's Consolidated
Financial Statements. Similarly, the aggregate outstanding principal balance of
the related loans (amounting to $53.9 million as of March 31, 1996) have been
reported as an asset in the Company's Consolidated Financial Statements. See
Note 14 of the Notes to the Consolidated Financial Statements.
87
<PAGE>
The following table sets forth certain information regarding the short-term
borrowings of the Company at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEAR ENDED DECEMBER
MARCH 31, 31,
--------------------- ---------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
R&G MORTGAGE:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Average balance outstanding................................ $ 90,340 $ 101,794 $ 99,145 $ 84,405 $ 2,273
Maximum amount outstanding at any month-end during the
period.................................................... 95,314 107,227 112,507 119,926 19,089
Balance outstanding at end of period....................... 95,314 107,227 87,958 97,355 --
Average interest rate during the period.................... 4.58% 5.65% 5.47% 4.20% 2.65%
Average interest rate at end of period..................... 4.45% 5.13% 5.16% 5.86% --%
NOTES PAYABLE:
Average balance outstanding................................ $ 30,638 $ 19,068 $ 24,521 $ 61,352 $ 79,263
Maximum amount outstanding at any month-end during the
period.................................................... 38,023 20,999 35,626 137,771 133,913
Balance outstanding at end of period....................... 22,585 20,288 30,130 22,215 133,913
Average interest rate during the period.................... 6.55% 7.43% 6.55% 8.09% 5.40%
Average interest rate at end of period..................... 6.55% 7.43% 6.55% 8.09% 5.60%
THE BANK:
FHLB OF NEW YORK ADVANCES:
Average balance outstanding................................ $ 6,005 $ 13,500 $ 11,796 $ 12,004 $ 9,314
Maximum amount outstanding at any month-end during the
period.................................................... 6,005 13,562 13,562 14,592 20,607
Balance outstanding at end of period....................... 6,002 13,551 6,007 13,568 11,688
Average interest rate during the period.................... 6.74% 5.84% 5.84% 6.13% 6.13%
Average interest rate at end of period..................... 6.74% 5.84% 6.74% 5.84% 6.13%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Average balance outstanding................................ $ 3,354 $ 11,360 $ 7,737 $ 9,724 $ 2,641
Maximum amount outstanding at any month-end during the
period.................................................... -- 11,367 14,673 22,272 11,575
Balance outstanding at end of period....................... -- 11,367 10,525 11,566 --
Average interest rate during the period.................... 5.11% 5.22% 5.16% 3.98% 2.65%
Average interest rate at end of period..................... --% 5.20% 5.11% 4.91% --%
NOTES PAYABLE:
Average balance outstanding................................ $ 51,000 $ 23,600 $ 30,597 $ 4,020 $ --
Maximum amount outstanding at any month-end during the
period.................................................... 51,000 23,600 51,000 23,600 --
Balance outstanding at end of period....................... 51,000 23,600 51,000 23,600 --
Average interest rate during the period.................... 5.93% 6.74% 6.42% 6.47% --
Average interest rate at end of period..................... 5.93% 6.74% 5.93% 6.74% --
</TABLE>
TRUST AND INVESTMENT SERVICES
The Company also provides trust and investment services through the Bank's
Trust Department. Services offered include custodial services, the
administration of IRA accounts and the sale to investors of mortgage-backed
securities guaranteed by GNMA. As of March 31, 1996, the Bank's Trust Department
administered approximately 5,249 trust accounts, with aggregate assets of $17.8
million as of such date. In addition, during the three months ended March 31,
1996, the Bank's Trust Department had sold $2.9 million of GNMA mortgage-backed
securities. The Bank receives fees dependent upon the level and type of service
provided. The administration of the Bank's Trust Department is performed by the
Trust Committee of the Board of Directors of the Bank.
88
<PAGE>
OFFICES AND OTHER MATERIAL PROPERTIES
The following table sets forth the net book value (including leasehold
improvements and equipment) and certain other information with respect to the
offices and other properties of the Company at March 31, 1996, all of which
properties are leased.
<TABLE>
<CAPTION>
DESCRIPTION/ADDRESS LEASE TERM EXPIRATION
- ------------------------------------------------------------ ------------------------------
NET BOOK VALUE
OF PROPERTY
--------------
(IN THOUSANDS)
<S> <C> <C>
THE BANK:
HATO REY BRANCH(1)(2)(3) November 30, 1998 $ 477
280 Jess T. Piero Avenue Two (2) five year options
Hato Rey, PR 00919
LOS JARDINES BRANCH September 4, 1999 168
Los Jardines de Guaynabo Shopping One (1) ten year option
Center
PR Road No. 20
Guaynabo, PR 00969
SAN PATRICIO BRANCH July 31, 2007 196
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969
BAYAMON BRANCH(2)(3) May 31, 2001 303
42-43 Betances Avenue One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959
BAYAMON EAST(4) January 10, 2001 --
Road #174, Lote 100
Urb. Ind. Minillas
Bayamon, PR 00959
ARECIBO BRANCH(3) December 31, 2001 145
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612
MANATI BRANCH(3) August 8, 2009 517
Plaza Puerta del Sol Four (4) five year options
PR Road No. 2, Km. 49.7
Manati, PR 00674
CAROLINA BRANCH(3) July 31, 2003 310
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985
TRUJILLO ALTO BRANCH(5) October 31, 2004 128
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976
SANTURCE BRANCH April 30, 1999 70
1077 Ponce de Leon Avenue Three (3) six year options
Santurce, PR 00917
LAGUNA GARDENS BRANCH(5) April 30, 1999 173
Laguna Gardens Shopping Center One (1) five year option
Isla Verde
Carolina, PR 00979
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION/ADDRESS LEASE TERM EXPIRATION
- ------------------------------------------------------------ ------------------------------
NET BOOK VALUE
OF PROPERTY
--------------
(IN THOUSANDS)
<S> <C> <C>
PLAZA CAROLINA BRANCH(5) May 31, 2000 $ 181
Plaza Carolina Mall
Carolina, PR 00985
NORTE SHOPPING BRANCH(5) April 30, 2000 91
Norte Shopping Center Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907
VEGA BAJA BRANCH(5) May 31, 2003 215
Cabo Caribe Development One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693
MAYAGUEZ BRANCH(3) April 30, 1997 690
McKinley Street Four (4) five year options
Corner Dr. Vady
Mayaguez, PR 00680
OPERATIONS CENTER(2) January 10, 2001 1,323
Road #174, Lote #100
Urb. Ind. Minillas
Bayamon, PR 00959
-------
4,987
-------
R&G MORTGAGE:
CAGUAS OFFICE July 31, 2000 18
D-9 Degetau Street One (1) five year option
Urb. San Alfonso
Caguas, PR 00725
PONCE OFFICE May 1, 1998 13
25 Las Americas Avenue
Ext. Buena Vista
Ponce, PR 00731
FAJARDO OFFICE May 16, 1999 11
51 Celis Aguilera Street One (1) five year option
Fajardo, PR 00738
LOS JARDINES OFFICE(6) August 1, 2006 40
Los Jardines de Guaynabo Shopping One (1) five year option
Center
PR Road No. 20
Guaynabo, PR 00969
SAN PATRICIO OFFICE(6) May 1, 1998 19
K-4 Ebano Street One (1) five year option
Ponderosa Building
San Patricio
Guaynabo, PR 00969
HATO REY OFFICE(2)(3) September 1, 1996 with monthly 2,020
280 Jesus T. Pinero Avenue renewal options
Hato Rey, PR 00919
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION/ADDRESS LEASE TERM EXPIRATION
- ------------------------------------------------------------ ------------------------------
NET BOOK VALUE
OF PROPERTY
--------------
(IN THOUSANDS)
<S> <C> <C>
BAYAMON OFFICE(2)(3) May 30, 2001 58
42-43 Betances Avenue One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959
ARECIBO OFFICE(3) January 1, 2002 34
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612
MANATI OFFICE(3)(7) October 30, 1998 27
Plaza Puerta del Sol One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674
CAROLINA OFFICE(3)(7) October 30, 1998 21
65th Infantry Avenue One (1) five year option
Corner San Marcos Street
Carolina, PR 00985
MAYAGUEZ OFFICE(3)(7) October 30, 1998 44
McKinley Street One (1) five year option
Corner Dr. Vady
Mayaguez, PR 00680
-------
2,305
-------
$7,292
-------
-------
</TABLE>
- ------------------------
(1) Also serves as the main office of the Company.
(2) Leased from VIG Leasing, S.E., which is owned by the family of Victor J.
Galan, Chairman of the Board and Chief Executive Officer of the Company. See
"Management -- Transactions with Certain Related Persons."
(3) The Bank and R&G Mortgage each maintain separate offices in the same
building.
(4) Application was approved by regulatory authorities in June 1996. The Bank
will operate a temporary trailer facility at the site beginning July 1, 1996
until improvements to the branch office are completed in late 1996.
(5) Facility includes an R&G Mortgage Banking Center. See "Management --
Transactions with Certain Related Persons."
(6) The Bank maintains an office at this location in a separate facility.
(7) Office is subleased from the Bank.
PERSONNEL
As of March 31, 1996, the Company (on a consolidated basis) had 630
full-time employees and 23 part-time employees. The employees are not
represented by a collective bargaining agreement and the Company believes that
it has good relations with its employees.
LEGAL PROCEEDINGS
The Company 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
Company.
91
<PAGE>
MANAGEMENT
DIRECTORS
The following table sets forth information with respect to the directors of
the Company, R&G Mortgage and the Bank. There are no arrangements or
understandings between the Company, R&G Mortgage and the Bank and any person
pursuant to which such person has been elected as a director. Except as set
forth in the notes to the table below, no director is related to any other
director or executive officer of the Company, R&G Mortgage or the Bank by blood,
marriage or adoption.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) SINCE EXPIRES
- -------------------------------------------------- ------- ---------- -------
<S> <C> <C> <C>
THE COMPANY:
Victor J. Galan................................... 62 1996 1998
Ana M. Armendariz................................. 63 1996 1997
Ramon Prats....................................... 46 1996 1998
Juan J. Diaz...................................... 50 1996 1996
Victor L. Galan(2)................................ 32 1996 1997
Enrique Umpierre-Suarez........................... 54 1996 1998
Benigno Fernandez................................. 55 1996 1997
Gilberto Rivera-Arreaga........................... 46 1996 1996
Eduardo McCormack................................. 68 1996 1998
Laureano Carus Abarca............................. 65 1996 1996
Pedro L. Ramirez.................................. 53 1996 1997
R&G MORTGAGE:
Victor J. Galan................................... 62 1972 1996
Ana M. Armendariz................................. 63 1977 1996
Nelida Galan(2)................................... 62 1972 1996
Ramon Prats....................................... 46 1985 1996
Juan J. Diaz...................................... 50 1996 1996
Victor L. Galan(2)................................ 32 1996 1996
Pedro L. Ramirez.................................. 53 1996 1996
Eduardo McCormack................................. 68 1996 1996
Gilberto Rivera-Arreaga........................... 46 1996 1996
Benigno Fernandez................................. 55 1996 1996
Laureano Carus Abarca............................. 65 1996 1996
THE BANK:
Victor J. Galan................................... 62 1990 1999
Ana M. Armendariz................................. 63 1990 1998
Ramon Prats....................................... 46 1990 1999
Juan J. Diaz...................................... 50 1990 1997
Victor L. Galan................................... 32 1995 1998
Pedro Ramirez..................................... 53 1990 1997
Martin J. Rovira Garcia........................... 52 1990 1998
Laureno Carus Abarca.............................. 65 1983(3) 1997
Jeanne Ubinas..................................... 67 1983(3) 1997
Eduardo McCormack................................. 68 1990 1999
Enrique Umpierre-Suarez........................... 54 1996 1999
Gilberto Rivera-Arreaga........................... 46 1996 1997
Benigno R. Fernandez.............................. 55 1996 1998
</TABLE>
- ------------------------
(1) As of December 31, 1995.
(2) Nelida Galan is the wife of Victor J. Galan, the Chairman of the Board and
Chief Executive Officer of the Company. Victor L. Galan is the son of Victor
J. Galan.
(3) Includes service as director of Guaynabo Federal Savings and Loan
Association, the predecessor to the Bank.
92
<PAGE>
BIOGRAPHICAL INFORMATION
THE COMPANY AND R&G MORTGAGE. Information concerning the principal
occupation of each director of the Company and R&G Mortgage during the past five
years is set forth below.
VICTOR J. GALAN. Mr. Galan is Chairman of the Board and Chief Executive
Officer of the Company, a position he has held since the Company's incorporation
in March 1996. Mr. Galan is the founder and Chairman of the Board of R&G
Mortgage, a position he has held since 1972. Mr. Galan served as Chief Executive
Officer of R&G Mortgage from its inception until November 1994. In connection
with the conversion of the Bank from a federal savings bank to a Puerto Rico
commercial bank, in accordance with requirements of the OCFI, Mr. Galan turned
over day to day responsibility for R&G Mortgage to Ramon Prats, Executive Vice
President. Mr. Galan is also the Chairman of the Board, President and Chief
Executive Officer of the Bank, a position he has held since the Bank was
acquired by R&G Mortgage in February 1990.
ANA M. ARMENDARIZ. Ms. Armendariz has been Controller and Treasurer of the
Company since April 1996 (its principal financial officer) and Senior Vice
President and Controller of R&G Mortgage since January 1984.
RAMON PRATS. Mr. Prats has been the Vice Chairman of the Board of Directors
of the Company since April 1996 and a director of R&G Mortgage since April 1985.
Mr. Prats has been Executive Vice President of R&G Mortgage since February 1980
and has held the same position with the Company since its inception. Mr. Prats
also currently serves as Vice Chairman of the Board of Directors of the Bank, a
position he has held since February 1990.
JUAN J. DIAZ. Mr. Diaz has been a director of the Company since April 1996,
a director of R&G Mortgage since June 1996 and a director of the Bank since
1990. Mr. Diaz has served as Senior Vice President, Servicing Department of R&G
Mortgage since April 1984.
ENRIQUE UMPIERRE-SUAREZ. Mr. Umpierre-Suarez has been a director of the
Company and its Secretary since April 1996 and a director of the Bank since
January 1996. Mr. Umpierre-Suarez has also served as the Acting Secretary of the
Bank since April 1996. Mr. Umpierre-Suarez is an attorney in private practice in
Hato Rey, Puerto Rico and is also engaged in the private practice of engineering
in Hato Rey, Puerto Rico.
VICTOR L. GALAN. Mr. Galan is the son of Victor J. Galan, the Chairman and
Chief Executive Officer of the Company. Mr. Galan has been a director of the
Company since April 1996, a director of R&G Mortgage since June 1996 and a
director of the Bank since 1995. Mr. Galan has been the Marketing Manager and
Vice President of R&G Mortgage since February 1996. Mr. Galan has been
associated with R&G Mortgage since 1982, having more recently served as Branch
Manager at various locations since 1992. Mr. Galan served as Marketing Officer
in charge of telemarketing in 1991 and his responsibilities prior thereto
included work in the Accounting, Data Processing and Closing Departments..
NELIDA GALAN. Ms. Galan is the wife of Victor J. Galan, the Chairman of the
Board and Chief Executive Officer of the Company. Ms. Galan has served as
Treasurer of R&G Mortgage since it was organized.
PEDRO RAMIREZ. Mr. Ramirez has been a director of the Company since April
1996, a director of R&G Mortgage since June 1996 and a director of the Bank
since 1990. Mr. Ramirez has been President and Chief Executive Officer of
Empresas Nativas, Inc., a real estate development company, in Hato Rey, Puerto
Rico, since 1983.
LAURENO CARUS ABARCA. Mr. Carus has been a director of the Company since
April 1996, a director of R&G Mortgage since June 1996 and a director of the
Bank (and its predecessor) since 1983. Mr. Carus has been the Chairman of the
Board of Alonso and Carus Iron Works, Inc., in Catano, Puerto Rico, which is
engaged in the production and fabrication of metal products and in the
construction of commercial buildings, since September 1977 and he has been with
the firm since 1960.
93
<PAGE>
EDUARDO MCCORMACK. Mr. McCormack has been a director of the Company since
April 1996, a director of R&G Mortgage since June 1996 and a director of the
Bank since 1990. Mr. McCormack is recently retired. During 1994 and 1995, he
served as a consultant to Bacardi Corporation, a rum manufacturer based in
Catano, Puerto Rico. Prior thereto, Mr. McCormack was a Vice President of
Bacardi Corporation from 1981 to 1993.
GILBERTO RIVERA-ARREAGA. Mr. Rivera-Arreaga has been a director of the
Company since April 1996 and a director of R&G Mortgage and the Bank since June
1996. Mr. Rivera-Arreaga has been Executive Director and Vice President of
Administration of the National College of Business & Technology, Inc., an
educational center in Bayamon, Puerto Rico, since 1993. Prior thereto, Mr.
Rivera-Arreaga engaged in the private practice of law in Bayamon, Puerto Rico.
BENIGNO R. FERNANDEZ. Mr. Fernandez has been a director of the Company
since April 1996 and a director of R&G Mortgage and the Bank since June 1996.
Mr. Fernandez is Senior Partner of Fernandez, Perez Villarini & Co., a certified
public accounting firm in Hato Rey, Puerto Rico. Mr. Fernandez has been a
certified public accountant since 1969.
THE BANK. Information concerning the principal occupation of each director
of the Bank (who does not also serve as a director of the Company and R&G
Mortgage) during the past five years is set forth below.
MARTIN J. ROVIRA GARCIA. Mr. Rovira is the Secretary of the Bank, a
position he has held since the 1990 acquisition of the Bank by R&G Mortgage.
Prior thereto, Mr. Rovira served as President and Chief Executive Officer of the
predecessor to the Bank. Since 1990, Mr. Rovira has also been engaged in the
private practice of law with the firm of Rovira & Pastor, in Condado, Puerto
Rico.
JEANNE UBINAS. Ms. Ubinas, a director of the Bank (and its predecessor)
since 1983, engages in the private practice of radio therapeutic medicine with
Radiation Oncology Center, Inc., in Hato Rey, Puerto Rico, and has been a
radiation therapist since 1963.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES OF THE COMPANY, R&G MORTGAGE AND THE
BANK
As a newly established corporation, the Company has not yet held regular
meetings of its Board of Directors. The Company intends to hold regular meetings
of the Board of Directors as is needed to adequately conduct the Company's
business. The Company has established an Audit Committee, comprised of Messrs.
Pedro L. Ramirez (Chairman), Gilberto Rivera-Arreaga and Eduardo McCormack. The
Audit Committee shall be responsible for reviewing the reports of the
independent auditors and internal auditors, and generally overseeing compliance
with internal policies and procedures. The Company may appoint an Executive
Committee, and the Board of Directors intends to act as its own nominating
committee with respect to nominating individuals to serve on its Board of
Directors.
Regular and special meetings of the Board of Directors of R&G Mortgage may
be called and held at any time as necessary. During the year ended December 31,
1995, the Board of Directors of R&G Mortgage held 10 meetings. No incumbent
director attended fewer than 75% of the aggregate of the total number of Board
meetings held during the period he served as a director. R&G Mortgage did not
operate any committees during the year ended December 31, 1995.
Regular meetings of the Board of Directors of the Bank are held monthly and
special meetings may be called at any time as necessary. During the year ended
December 31, 1995, the Board of Directors of the Bank held 13 meetings. No
incumbent director attended fewer than 75% of the aggregate of the total number
of Board meetings held during the period he or she served as a director and the
total number of meetings held by committees of the Board of Directors on which
he or she served in fiscal 1995 except Mr. Carus, Mr. Rovira and Mr. McCormack,
who each attended nine meetings or 69% of the 13 meetings held by the Board of
Directors, respectively, and Ms. Ubinas, who attended seven meetings or 54% of
the 13 meetings held by the Board of Directors.
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The Audit and Compliance Committee of the Bank's Board monitors the Bank's
internal operations and audit functions and met 12 times during fiscal 1995. The
Audit and Compliance Committee members are Messrs. Ramirez (Chairman),
Rivera-Arreaga and Ms. Ubinas.
The Ancillary Agreements Committee of the Bank examines all inter-company
transactions between the Company, R&G Mortgage and the Bank. The Ancillary
Agreement Committee was established in February 1990 in connection with R&G
Mortgage's acquisition of a controlling interest in the Bank, and is composed of
directors not affiliated with R&G Mortgage. The Committee is responsible for the
evaluation of the terms and conditions of any business transactions between R&G
Mortgage and the Bank, with a view to continued compliance with the provisions
of Sections 23A and 23B of the Federal Reserve Act, as well as applicable FDIC
regulations. The Committee conducts surveys and obtains opinions from
independent parties as part of its evaluations, and submits its recommendations
to the Board of Directors. This is done with the purpose of ascertaining that
the terms and conditions of such transactions are substantially the same, or at
least as favorable to the Bank, as those prevailing for comparable transactions
with or involving other nonaffiliated companies. The Ancillary Agreements
Committee met ten times during fiscal 1995 and is comprised of Messrs. McCormack
(Chairman), Fernandez and Carus. Mr. Rovira acts as legal advisor to the
Ancillary Agreements Committee. See "The Company -- Affiliated Transactions" and
"Regulation -- The Company -- Limitations on Transactions with Affiliates."
The Trust Committee of the Bank is responsible for overseeing and directing
the Trust Department of the Bank. The Trust Committee, which is comprised of
Messrs. Domenech (Chairman), Carus, Mr. Victor J. Galan and Ms. Ubinas, met 12
times during fiscal 1995.
The Interest Rate Risk and Budget Committee is responsible for monitoring
the effects of interest rate changes on the Bank's loan portfolio. The Interest
Rate Risk and Budget Committee, which is comprised of Mr. Victor J. Galan
(Chairman), Messrs. Ortiz, Prats, Mr. Luis F. Aldea and Ms. Armendariz, met 12
times during fiscal 1995.
In addition to the committees described above, the Bank has also established
other committees of the Board and senior management which meet as required.
These committees include, among others, the Executive Committee, the Internal
Loan Review Committee, the Credit Committee, the Management Compliance
Committee, the Electronic Data Processing Committee, the Operations Committee
and the Training and Education Committee.
BOARD OF DIRECTORS FEES
Directors of the Company do not currently receive fees for attendance at
meetings. Members of the Board of Directors of R&G Mortgage did not receive fees
for meetings attended during fiscal 1995. Executive officers of R&G Mortgage who
also serve on the Board of Directors are not compensated for serving on the
Board of Directors or Committees thereof. Effective August 1996, the members of
the Board of Directors of the Company and R&G Mortgage who are not also
executive officers will receive fees of $350 per Board meeting attended and $300
per Committee meeting attended.
During fiscal 1995, members of the Board of Directors of the Bank received
fees of $300 per meeting attended from January through June and $350 per meeting
attended from July to December. Executive officers of the Bank who also serve on
the Board of Directors are not compensated for their services on the Board of
Directors or committees thereof. Non-officer members of the Board of Directors
of the Bank serving on committees receive additional compensation in the amount
of $250 per meeting attended from January through June 1995 and $300 per
committee meeting attended from July to December 1995.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information concerning the two executive officers of the
Bank who do not serve on the Board of Directors of the Company, R&G Mortgage or
the Bank. There are no additional executive officers of R&G Mortgage who do not
serve on the Board of the Company, R&G Mortgage or the Bank. Each executive
officer is elected by the Board of Directors and serves until their successor is
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elected and qualified. No executive officer set forth below is related to any
director or other executive officer of the Company, R&G Mortgage or the Bank by
blood, marriage or adoption, and there are no arrangements or understandings
between a director of the Company, R&G Mortgage or the Bank and any other person
pursuant to which such person was elected an executive officer.
OSVALDO DOMENECH. Mr. Domenech has been Executive Vice President and Chief
Operating Officer of the Bank since February 1988.
JOSE L. ORTIZ. Mr. Ortiz has been Chief Financial Officer of the Bank since
September 1990. Prior thereto, Mr. Ortiz was Vice President -- Accounting
Department of Caguas Federal Savings Bank in Hato Rey, Puerto Rico from May 1985
to September 1990.
BENEFITS
STOCK OPTION PLAN. The Board of Directors of the Company recently adopted
the Stock Option Plan, which is designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and reward key employees for outstanding performance and the
attainment of targeted goals. The Stock Option Plan was approved by the
Company's stockholder in June 1996. An amount of Common Stock equal to 10% of
the aggregate number of Class B Shares sold in the Offering and issued in the
Bank Stockholder Exchange Transaction will be authorized under the Stock Option
Plan, which may be filled by authorized but unissued shares, treasury shares or
shares purchased by the Company 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"). Awards are available for grant to key employees
of the Company and any subsidiaries.
The Stock Option Plan will be administered and interpreted by a committee of
the Board of Directors ("Committee") which is "disinterested" pursuant to
applicable regulations under the federal securities laws. Unless sooner
terminated, the Stock Option Plan will be in effect for a period of ten years
from the earlier of adoption by the Board of Directors or approval by the
Company's stockholder.
Under the Stock Option Plan, the Committee will determine which officers and
key employees will be granted options, the number of shares subject to each
option, whether such options may be exercised by delivering other Class B Shares
and when such options become exercisable. The per share exercise price of all
stock options shall be required to be at least equal to the fair market value of
a Class B Share on the date the option is granted.
Stock options shall become vested and exercisable in the manner specified by
the Committee at the rate of 20% per year, beginning one year from the date of
grant. Each stock option or portion thereof shall be exercisable at any time on
or after it vests and is exercisable until ten years after its date of grant or
three months after the date on which the optionee's employment terminates,
unless extended by the Committee to a period not to exceed one year from such
termination. Stock options are non-transferable except by will or the laws of
descent and distribution.
Under the Stock Option Plan, the Committee will be authorized to grant
rights to optionees ("stock appreciation rights") under which an optionee may
surrender any exercisable incentive stock option or compensatory stock option or
part thereof in return for payment by the Company to the optionee of cash or
Class B Shares in an amount equal to the excess of the fair market value of the
Class B Shares subject to option at the time over the option price of such
shares, or a combination of cash and Class B Shares. Stock appreciation rights
may be granted concurrently with the stock options to which they relate or at
any time thereafter which is prior to the exercise or expiration of such
options.
All unvested options are accelerated in the event of retirement under the
Company's normal retirement policies or a change in control of the Company, as
defined in the Stock Option Plan. In addition, if an optionee dies or terminates
service due to disability, while serving as an employee or
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non-employee director, all unvested options are accelerated. Under such
circumstances, the optionee or, as the case may be, the optionee's executors,
administrators, legatees or distributees, shall have the right to exercise all
unexercised options during the twelve-month period following termination due to
disability, retirement or death, provided no option will be exercisable within
six months after the date of grant or more than ten years from the date it was
granted.
In the event of a stock split, reverse stock split or stock dividend, the
number of Class B Shares under the Stock Option Plan, the number of shares to
which any Award relates and the exercise price per share under any option or
stock appreciation right shall be adjusted to reflect such increase or decrease
in the total number of Class B Shares outstanding.
PROFIT SHARING PLAN. Effective January 1, 1993, R-G Mortgage and the Bank
adopted the R-G Mortgage Corporation and R-G Federal Savings Bank Profit Sharing
Plan (the "Plan"), which is intended to comply with the Code, the Employee
Retirement Income Security Act of 1974, and the Puerto Rico Income Tax Act of
1954. All employees of R&G Mortgage and the Bank are eligible to participate in
the Plan except, among others, for those employees who are non-resident aliens.
Eligible employees may enter the Plan on January 1, April 1, July 1, and October
1 following attaining age 21 and completing one year of service. Under the Plan,
a separate account is established for each participating employee and R&G
Mortgage and the Bank may make discretionary contributions to the Plan which are
allocated to employees' accounts. Employees may also contribute to the Plan by
making salary reductions up to 10% of annual compensation for the year. Such
contributions defer the employee's earning up to a maximum of $7,000 in each
plan year. In 1995, R&G Mortgage and the Bank each matched an employee's
contribution to the Plan up to 62.5% of the first 5% of an employee's
compensation as follows: 12.5% when an employee has 0 to 5 years of service, 25%
when an employee has 6 to 10 years of service, 39.5% when an employee has 11 to
15 years of service, 50% when an employee has 16 to 20 years of service, and
62.5% when an employee has 21 or more years of service. Employees' contributions
to the Plan are immediately vested, and employees become 100% vested in employer
contributions upon the completion of 5 years of service. All funds contributed
to the Plan are held in a trust fund. R&G Mortgage and the Bank direct the
investment of matching and discretionary contributions and employees direct the
investment of elective contributions and rollover contributions. Contributions
may be directed into four separate funds: a fixed income fund investing in
insurance annuity contracts, the Fidelity Growth Fund, the Fidelity Growth &
Income Fund, and the Fidelity S & P 500 Index Fund. Distributions from the Plan
are made upon termination of service, death, or disability in a lump sum or
installment payments. The normal retirement age under the Plan is age 65.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table includes individual
compensation information with respect to the Chairman of the Board and Chief
Executive Officer of the Company and the other most highly compensated officers
of the Company and its subsidiaries whose total compensation exceeded $100,000
for services rendered in all capacities during the fiscal year ended December
31, 1995. The compensation expense shown below was incurred by R&G Mortgage and
the Bank, as shown.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------ COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS AWARDS COMPENSATION(2)
- ------------------------------------------------------- ----------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Victor J. Galan, ...................................... $ 193,087 $ 200,000 -- $ 1,874
Chairman and Chief Executive Officer of the Company;
Chairman, R&G Mortgage; Chairman, President and Chief
Executive Officer the Bank(3)
Ramon Prats ........................................... $ 185,000 $ 300,000 -- $ 2,414
Executive Vice President, R&G Mortgage; Vice Chairman,
the Bank
Osvaldo Domenech, ..................................... $ 116,360 $ 50,000 -- $ 666
Executive Vice President and Chief Operating Officer
of the Bank
Juan J. Diaz, ......................................... $ 98,261 $ 127,975 -- $ 1,562
Senior Vice President, R&G Mortgage...................
Roberto Cordova, Vice President, ...................... $ 76,178 $ 45,000 -- $ 796
R&G Mortgage
</TABLE>
- ------------------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named officers. The costs to the Company of providing such benefits to
the named officers during the year ended December 31, 1995 did not exceed
the lesser of $50,000 or 10% of the total of annual salary and bonus
reported.
(2) Represents the employers' contribution on behalf of the employee to the
Profit Sharing Plan. See "-- Profit Sharing Plan."
(3) Mr. Galan was paid a salary of $42,562 and $150,525 from R&G Mortgage and
the Bank, respectively, and a bonus of $200,000 from R&G Mortgage.
Bonuses are paid by R&G Mortgage and the Bank based upon determinations by
senior management of each company, which determinations are influenced by the
profitability of the enterprise for the year in question. The bonuses of
managers of the mortgage banking branches are based in part on loan production
levels, while the bonuses for Bank branch managers are based in part on the
level of deposits, loan production and new accounts. The bonuses of Vice
Presidents and Department Managers are based in part on the final results of the
entity's operations and business generated during the year. The Board of
Directors determine the bonuses for the President and Executive Vice President,
which are based on profitability of the consolidated operations.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The operations of R&G Mortgage and the Bank are linked to a material extent
by a series of Ancillary Agreements which govern the significant affiliated
transactions between the two companies. These agreements have been prepared with
a view to compliance with Sections 23A and 23B of the Federal Reserve Act, which
requires that the terms and conditions of transactions between a financial
institution and an affiliate be on terms which are substantially the same, or at
least as favorable to the
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financial institution, as those prevailing for comparable transactions with or
involving other non-affiliated companies. See "The Company -- Affiliated
Transactions and "Regulation -- The Company -- Limitations on Transactions with
Affiliates."
In addition to the affiliated transactions described under "The Company --
Affiliated Transactions," R&G Mortgage and the Bank are also subject to a Data
Processing Agreement, pursuant to which the Bank provides data processing
services to R&G Mortgage with respect to the loan origination and loan
administration of its servicing portfolio. The Bank charges R&G Mortgage a
monthly fee for each R&G Mortgage computer that is linked to the Bank's main
frame computer. R&G Mortgage assumed all of the expenses associated with
modifying the Bank's existing computer programs, the design of the mortgage loan
processing system and for installation of telephone lines, communications
hardware and additional equipment.
R&G Mortgage presently subleases space at eight branch offices of the Bank
where it operates mortgage centers. The activities of the mortgage center
include interviewing prospective borrowers for loans secured by first mortgages
or second mortgages on residential real estate and home equity loans, processing
the initial application for such loans, referring such loan applications to R&G
Mortgage and/or the Bank, and accepting and processing the documentation
necessary to underwrite such mortgage loans. No other lending or banking
activity is conducted by R&G Mortgage on the premises of the Bank. R&G Mortgage
pays the Bank a monthly rental payment, which is based on a pro rata portion of
the main lease obligation. See "Business of the Company -- Offices and Other
Material Properties."
During the year ended December 31, 1995, VIG Leasing, S.E., a Puerto Rico
real estate partnership which is 95.8% owned by the family of Victor J. Galan,
the Company's Chairman of the Board and Chief Executive Officer, received lease
payments from R&G Mortgage and the Bank on properties owned of $656,000 and
$312,000, respectively. R&G Mortgage and the Bank believe that the lease terms
are on terms substantially the same as they would have negotiated with a
non-affiliated party. In addition, in November 1995, R&G Mortgage originated a
$1.4 million commercial real estate loan to VIG Leasing, S.E. to fund the
purchase of a warehouse and office building located in Bayamon. The loan was
guaranteed by the Company's Chairman of the Board and Chief Executive Officer.
The facility is leased to the Bank and serves as the Bank's Operations Center.
In June 1996, VIG Leasing, S.E. refinanced the property with an unaffiliated
financial institution and the loan with R&G Mortgage was repaid. See "Business
of the Company -- Offices and Other Material Properties."
Under applicable federal law, loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features.
The Bank's policy provides that all loans made by the Bank to its directors
and officers are made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. The Bank's policy provides
that such loans may not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1995, mortgage and
consumer loans to employees in excess of $60,000 aggregated $1.1 million or 1.7%
of the Company's consolidated stockholder's equity as of such date. All such
loans were made by the Bank in accordance with the aforementioned policy. In
addition, R&G Mortgage in July 1995 made a $900,000 construction loan to a real
estate development company owned by Pedro Ramirez, a director of the Company,
R&G Mortgage and the Bank. The loan, which had an outstanding balance of
$628,000 at March 31, 1996, has an interest rate of 2% over the prime rate. The
loan has been performing in accordance with its terms and matures in July 1996.
During the year ended December 31, 1995, Martin J. Rovira, the Secretary of
the Bank, provided certain legal services to the Bank and also provided legal
services to borrowers of the Bank in connection with the closing of consumer and
commercial loans. During the year ended December 31,
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1995, Mr. Rovira received $289,600 in fees for legal services, of which $4,600
was paid by the Bank for legal services provided to it and $285,000 was paid for
by customers of the Bank in connection with loan closings.
During the year ended December 31, 1995, R&G Mortgage referred customers
requiring hazard insurance in connection with their mortgage transactions to
Home and Property Insurance Company, which is owned by the wife of Pedro
Ramirez, a director of the Company, R&G Mortgage and the Bank. Each customer has
the ability to seek insurance coverage required from an alternative acceptable
insurance company of his choice. During the year ended December 31, 1995, Home
and Property Insurance Company wrote $1.0 million of hazard insurance policies
for the Bank's customers. In 1996, Mrs. Ramrez sold her 100% equity in Home and
Property Insurance Company, but remains as an employee of the Agency until the
purchase price is paid in full.
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THE COMMONWEALTH OF PUERTO RICO
GENERAL
Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,600 miles southeast of New York, New York and 1,000 miles
southeast of Miami, Florida. The island is approximately 100 miles long and 35
miles wide. The population of Puerto Rico for 1990, as determined by the United
States Census Bureau, was approximately 3.6 million as compared to 3.2 million
in 1980. As of June 30, 1995, the Puerto Rico Planning Board estimated that the
population of Puerto Rico had increased to 3.7 million.
RELATIONSHIP OF PUERTO RICO WITH THE UNITED STATES
Puerto Rico was discovered by Columbus in 1493, and the island was conquered
and settled by the Spaniards shortly thereafter. It remained a Spanish
possession for four centuries. Although the culture of Puerto Rico is primarily
Hispanic, a considerable intermingling of Hispanic and United States cultures
has occurred.
Puerto Rico came under United States sovereignty by the Treaty of Paris,
signed on December 10, 1898, terminating the Spanish-American War. Puerto Ricans
have been citizens of the United States since 1917. In July 1950, after a
lengthy period of evolution toward greater self-government for Puerto Rico, the
Congress of the United States enacted a law which authorized Puerto Rico to
draft and approve its own Constitution in the same manner as is required by the
United States Constitution for states.
The Constitution of Puerto Rico was drafted by a popularly elected
constitutional convention, overwhelmingly approved in a special referendum and
approved "as a compact" by the United States Congress and the President,
becoming effective upon proclamation of the Governor of Puerto Rico on July 25,
1952. Puerto Rico's constitutional status is that of a territory of the United
States and the ultimate source of power over Puerto Rico, pursuant to the
Territories Clause of the Federal Constitution, is the United States Congress.
Puerto Rico's relationship to the United States under the compact is referred to
herein as "Commonwealth status." The United States and Puerto Rico share a
common defense, market and currency.
The official languages of Puerto Rico are Spanish and English. The people of
Puerto Rico are citizens of the United States, but do not vote in national
elections and are represented in Congress by a Resident Commissioner who has a
voice in the House of Representatives but only limited voting rights. Most
federal taxes, except those such as social security taxes which are imposed by
mutual consent, are not levied in Puerto Rico. No federal income tax is
collected from Puerto Rico residents on ordinary income earned from sources
within Puerto Rico, except for Federal employees who are subject to taxes on
their salaries. Corporations organized under the laws of Puerto Rico are treated
as foreign corporations for federal income tax purposes. Income earned from
sources outside of Puerto Rico is, however, subject to federal income tax.
For many years there have been two major views in Puerto Rico with respect
to the island's relationship to the United States, one favoring statehood,
represented by the New Progressive Party, and the other essentially favoring the
existing Commonwealth status, represented by the Popular Democratic Party. In
the 1992 elections, control of the executive and legislative branches passed to
the New Progressive Party.
A plebiscite was held in Puerto Rico to allow eligible voters an opportunity
to express their preference between statehood, Commonwealth (with certain
changes) and independence for Puerto Rico in November 1993. The Commonwealth
status obtained the most votes, receiving 48.6% of the votes cast, and statehood
and independence received 46.3% and 4.4% of the votes casts, respectively.
A change in the political status of Puerto Rico could result in
modifications to or elimination of the Puerto Rico laws providing favorable tax
treatment for investment in Puerto Rico mortgages and of Section 936 and,
therefore, could adversely affect the Company's cost of borrowing, the liquidity
of the secondary mortgage market and the Company's overall financial
performance. See "Risk Factors -- Possible Repeal of Section 936" and "Business
of the Company -- Mortgage Banking Activities -- Puerto Rico Secondary Mortgage
Market and Favorable Tax Treatment."
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THE ECONOMY
Puerto Rico has established policies and programs directed at the
development of manufacturing and the expansion and modernization of the island's
infrastructure. The investment of funds by mainland United States, foreign and
local entities in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. The expansion of the
infrastructure and modernization within Puerto Rico have been to a large extent
financed by bonds and notes issued by the Commonwealth, its public corporations
and municipalities. Government investment in infrastructure is expected to
accelerate over the next several years, which is expect to positively impact the
economy. Among the major construction projects are the approximately $1.0
billion Urban Train, a public transportation project presently slated to link
Bayamon and Santurce by rail, and an approximately $300 million aqueduct from
the center of the island to metropolitan San Juan. Economic progress has been
aided by significant increases in the levels of education and occupational
skills of the island's population.
The economy of Puerto Rico is closely integrated with that of the mainland
United States. During the fiscal year ended June 30, 1995, approximately 89% of
Puerto Rico's exports went to the United States mainland, which was also the
source of approximately 65% of Puerto Rico's imports. For the fiscal year ended
June 30, 1995, Puerto Rico experienced a positive adjusted merchandise trade
balance of $4.6 billion. Puerto Rico in 1995 experienced its fourth consecutive
year of positive economic growth, as measured by an increasing gross product. As
a result of the integration of the two economies, market rates of interest
within Puerto Rico closely track market rates of interest within the mainland
United States. See "Risk Factors -- Potential Effects of Changes in Interest
Rates on R&G Mortgage and the Bank -- Effect on Mortgage Loan Originations."
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments, and certain high technology machinery and equipment.
The service sector, including finance, insurance and real estate, wholesale and
retail trade, and hotel and related services, also plays a major role in the
economy. It ranks second only to manufacturing in contribution to the gross
domestic product and leads all sectors in providing employment. In recent years,
the service sector has experienced significant growth in response to the
expansion of the manufacturing sector.
Management of the Company believes that the residential real estate market
within Puerto Rico remains strong. Market values are increasing and there exists
no significant inventory of new residential units pending sale. Consequently,
the Company anticipates that the real estate market within Puerto Rico will
continue to grow at a moderate pace.
Gross product increased from $22.8 billion for fiscal 1991 to $28.4 billion
for fiscal 1995, an increase of 24.4%. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In fiscal
1995, aggregate personal income was $27.0 billion and personal income per capita
was $7,296. Average employment increased from 977,000 in fiscal 1991 to
1,051,300 in fiscal 1995. Average unemployment decreased from 15.2% in fiscal
1991 to 13.8% in fiscal 1995.
Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollar and the level of
interest rates and changes to existing tax incentive legislation as discussed
below.
Legislation has been introduced in Congress to repeal Section 936. The
elimination of the benefits of Section 936, without the substitution of another
fiscal incentive to attract investment to Puerto Rico, could have an adverse
effect on the future growth of the Puerto Rico economy. At this point, the
Company cannot predict the impact of the repeal of Section 936 on the economy of
Puerto Rico or on the overall financial condition or prospects of the Company.
See "Risk Factors -- Possible Repeal of Section 936" and "Business of the
Company -- Mortgage Banking Activities -- Puerto Rico Secondary Mortgage Market
and Favorable Tax Treatment."
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REGULATION
SET FORTH BELOW IS A BRIEF DESCRIPTION OF CERTAIN LAWS AND REGULATIONS WHICH
TOGETHER WITH THE DESCRIPTIONS OF LAWS AND REGULATIONS CONTAINED ELSEWHERE
HEREIN, ARE DEEMED MATERIAL TO AN INVESTOR'S UNDERSTANDING OF THE EXTENT TO
WHICH THE COMPANY, R&G MORTGAGE AND THE BANK ARE REGULATED. THE DESCRIPTION OF
THESE LAWS AND REGULATIONS, AS WELL AS DESCRIPTIONS OF LAWS AND REGULATIONS
CONTAINED ELSEWHERE HEREIN, DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO APPLICABLE LAWS AND REGULATIONS.
THE COMPANY
GENERAL. R&G Financial has recently applied to and received approval from
the Federal Reserve Board to become a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended (the "BHCA"). Thus, R&G
Financial in July 1996 became a bank holding company in connection with the Bank
Stockholder Exchange Transaction through its acquisition of Mr. Victor Galan's
88.1% interest in the Bank (which excludes his required qualifying shares as a
director of the Bank) in exchange for the Company's Class A Shares. See "Bank
Stockholder Exchange Transaction." R&G Financial, as a bank holding company,
will be subject to regulation and supervision by the Federal Reserve Board and
the Commissioner. R&G Financial will be required to file annually a report of
its operations with, and will be subject to examination by, the Federal Reserve
Board and the Department.
BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board. No approval under the
BHCA is required, however, for a bank holding company already owning or
controlling 50% of the voting shares of a bank to acquire additional shares of
such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, such a R&G Mortgage, finance
company, credit card company, factoring company, trust company or savings
association; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
acting as an insurance agent for certain types of credit-related insurance;
leasing personal property on a full-payout, non-operating basis; providing tax
planning and preparation services; operating a collection agency; and providing
certain courier services. The Federal Reserve Board also has determined that
certain other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper incident
thereto.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between financial
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a financial institution is any company or
entity which controls, is controlled by or is under common control with the
financial institution. In a holding company context, the parent holding company
of a financial institution (such as R&G Financial) and any companies which are
controlled by such parent holding
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company are affiliates of the financial institution. Generally, Sections 23A and
23B (i) limit the extent to which the financial institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions. In addition to the restrictions imposed by Sections
23A and 23B, no financial institution may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the financial institution. See
generally "The Company -- Affiliated Transactions" for a discussion of the
affiliated transactions conducted by R&G Mortgage and the Bank.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a financial institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational
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weaknesses or deficiencies or those which are not experiencing or anticipating
significant growth. Other bank holding companies will be expected to maintain
Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on
their overall condition.
R&G Financial is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve Board
policy, R&G Financial will be expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The legality and precise scope of this
policy is unclear, however, in light of recent judicial precedent. In addition,
any capital loans by a bank holding company to a subsidiary bank is subordinate
in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
THE BANK
GENERAL. The Bank is incorporated under the Puerto Rico Banking Act of
1933, as amended (the "Banking Law") and is subject to extensive regulation and
examination by the Commissioner, the FDIC and certain requirements established
by the Federal Reserve Board. The federal and Puerto Rico laws and regulations
which are applicable to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. There are periodic examinations by the Commissioner and the FDIC
to test the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Commissioner, the FDIC or the U.S. Congress or Puerto Rico legislature could
have a material adverse impact on R&G Financial, R&G Mortgage, the Bank and
their operations.
FDIC INSURANCE PREMIUMS. The Bank currently pays deposit insurance premiums
to the FDIC based on a risk-based assessment system established by the FDIC for
all SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which is based solely on the level on an
institution's capital -- "well capitalized," "adequately capitalized" and
"undercapitalized". These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The Bank was classified as a "well-capitalized"
institution as of March 31, 1996.
For a discussion of alternatives to mitigate the effect of the BIF/SAIF
premium disparity, see "Risk Factors -- Recapitalization of SAIF and Effect of
Reduction in Bank Insurance Fund Premiums."
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the
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accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Bank's deposit insurance.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.
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 regulation, 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 March 31,
1996, the Bank met each of its capital requirements.
In August 1995, the FDIC and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the FDIC must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the FDIC and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the FDIC will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The FDIC intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
ACTIVITIES AND INVESTMENTS. The activities and equity investments of
FDIC-insured, state-chartered banks (which under the Federal Deposit Insurance
Act includes banking institutions incorporated under the laws of Puerto Rico)
are generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
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partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
PUERTO RICO BANKING LAW. As a commercial bank organized under the laws of
the Commonwealth, the Bank is subject to supervision, examination and regulation
by the Commissioner pursuant to the Banking Law.
The Banking Law requires that at least ten percent (10%) of the yearly net
income of the Bank be credited annually to a reserve fund. This apportionment
shall be done every year until the reserve fund shall be equal to ten percent
(10%) of the total deposits or the total paid-in capital, whichever is greater.
As of March 31, 1996, the Bank had credited $1.0 million to such reserve fund,
which was first established in late 1994 in connection with the Bank's
conversion from a federally chartered savings bank to a Puerto Rico commercial
bank.
The Banking Law also provides that when the expenditures of a bank are
greater than the receipts, the excess of the former over the latter shall be
charged against the undistributed profits of the bank, and the balance, if any,
shall be charged against the reserve fund, as a reduction thereof. If there is
no reserve fund sufficient to cover such balance in whole or in part, the
outstanding amount shall be charged against the capital account and no dividend
shall be declared until said capital has been restored to its original amount
and the reserve fund to 20% of the original capital. In addition, every bank is
required by the Banking Law to maintain a legal reserve which shall not be less
than 20% of its demand liabilities, except government deposits (federal, state
and municipal) which are secured by actual collateral. The reserve is required
to be made up of any of the following instruments or any combination of them:
(i) legal tender of the Untied States; (ii) checks on banks or trust companies
located in any part of Puerto Rico, to be presented for collection during the
day following that on which they are received, and (iii) money deposited in
other banks provided said deposits are authorized by the Commissioner, subject
to immediate collection.
Under the Banking Law, the Bank is permitted to make loans to any one
person, firm, partnership or corporation, up to an aggregate amount of fifteen
percent (15%) of the paid-in capital and reserve fund of the Bank. As of March
31, 1996, the legal lending limit for the Bank under this provision was
approximately $3.3 million and its maximum extension of credit to any one
borrower, including affiliates thereof, was $2.2 million. If such loans are
secured by collateral worth at least twenty-five percent (25%) more than the
amount of the loan, the aggregate maximum amount may reach one-third of the
paid-in capital of the Bank, plus its reserve fund. There are no restrictions on
the amount of loans that are wholly secured by bonds, securities and other
evidences of indebtedness of the United States or the Commonwealth, or by
current debt bonds, not in default, of municipalities or instrumentalities of
the Commonwealth. The Banking Law also authorizes the Bank to conduct certain
financial and related activities directly or through subsidiaries. The Banking
Law also prohibits Puerto Rico banks from making loans secured by their own
stock, and from purchasing their own stock, unless such purchase is necessary to
prevent losses because of a debt previously contracted in good faith. The stock
so purchased by the bank must be sold in a private or public sale within one
year from the date of purchase.
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The rate of interest that the Bank may charge on mortgage and other types of
loans to individuals in Puerto Rico is subject to Puerto Rico's usury laws. Such
laws are administered by the Interest Rate Board, which consists of the
President of the Government Development Bank, the President of the Puerto Rico
Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and Consumer
Affairs and three public interest representatives. The Interest Rate Board
promulgates regulations which specify maximum rates on various types of loans to
individuals. The Interest Rate Board has adopted a regulation, Regulation 26-A,
which fixes the maximum rate (which is adjusted on a weekly basis) which may be
charged on residential first mortgage loans. Effective April 1996, the Interest
Rate Board eliminated the regulations that set forth the maximum interest rates
that could be charged on non-federal government guaranteed loans. Interest rates
on consumer loans and commercial loans are not subject to any limitations by
Regulation 26-A.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
R&G MORTGAGE
The mortgage banking business conducted by R&G Mortgage is subject to the
rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to
originating, processing, selling and servicing mortgage loans and the issuance
and sale of mortgage-backed securities. Those rules and regulations, among other
things, prohibit discrimination and establish underwriting guidelines which
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts and, with respect to VA
loans, fix maximum interest rates. Moreover, lenders are required annually to
submit to FNMA, FHA, FHLMC, GNMA and VA audited financial statements, and each
regulatory entity has its own financial requirements. R&G Mortgage's affairs are
also subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and
VA at all times to assure compliance with the applicable regulations, policies
and procedures. Mortgage origination activities are subject to, among others,
the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder.
R&G Mortgage's mortgage loan production activities are subject to the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder. The
Truth-in-Lending Act contains disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The Truth-in-Lending Act provides consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.
R&G Mortgage is required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), and Regulation B promulgated thereunder, which
prohibit creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status, and restrict creditors from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by lenders regarding consumer rights and requires lenders to advise applicants
of the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loan increases as a result of information
obtained from a consumer credit agency, another statute, The Fair Credit
Reporting Act of 1970, as amended, requires the lenders to supply the applicant
with the name and address of the reporting agency.
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The Federal Real Estate Settlement Procedures Act ("RESPA") imposes, among
other things, limits on the amount of funds a borrower can be required to
deposit with R&G Mortgage in any escrow account for the payment of taxes,
insurance premiums or other charges.
R&G Mortgage is also subject to regulation by the Commissioner, with respect
to, among other things, licensing requirements and the record-keeping,
examination and reporting requirements of the Puerto Rico Mortgage Banking
Institutions Law (the "Mortgage Banking Law"). R&G Mortgage is licensed by the
Commissioner as a mortgage banking institution in Puerto Rico. Such
authorization to act as a mortgage banking institution must be renewed as of
January 1 of each year. In the past, R&G Mortgage has not had any difficulty in
renewing its authorization to act as a mortgage banking institution, and
management is unaware of any existing practices, conditions or violations which
would result in R&G Mortgage being unable to receive such authorization in the
future.
The Mortgage Banking Law requires the prior approval of the Commissioner for
the acquisition of control of any mortgage banking institution licensed under
the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term
"control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to the
Mortgage Banking Law, upon receipt of notice of a proposed transaction that may
result in change of control, the Commissioner is obligated to make such inquires
as he deems necessary to review the transaction. Under the Mortgage Banking Law,
the determination of the Commissioner whether or not to authorize a proposed
change of control is final and non-appealable.
As is the case with the Bank, the rate of interest that R&G Mortgage may
charge on mortgage loans to individuals is subject to Puerto Rico's usury laws.
Such laws are administered by the Interest Rate Board which promulgates
regulations that specify maximum rates on various types of loans to individuals.
Regulation 26-A promulgated by the Interest Rate Board fixes the maximum rate
(which is adjusted on a weekly basis) which may be charged on residential first
mortgage loans. Effective April 1996, the Interest Rate Board eliminated the
regulations that set forth the maximum interest rates that could be charged on
non-federal government guaranteed loans.
BENEFICIAL OWNERSHIP OF SECURITIES
The Company was organized in March 1996 in anticipation of becoming the
holding company for R&G Mortgage and the Bank. On July 19, 1996, following the
receipt of all requisite approvals from the Federal Reserve Board, Mr. Victor J.
Galan, the Company's Chairman of the Board and Chief Executive Officer,
contributed his 100% ownership of the common stock of R&G Mortgage and his
approximately 88.1% ownership of the common stock of the Bank (other than
qualifying director shares) to the Company in exchange for 5,189,044 Class A
Shares (66,667 of which will be converted into Class B Shares and sold in the
Offering). As discussed under "Bank Stockholder Exchange Transaction,"
immediately prior to consummation of the Offering, all Minority Bank
Stockholders will have their shares of Bank common stock exchanged for an
aggregate of 296,396 Class B Shares pursuant to the terms of the Merger
Agreement. See "Bank Stockholder Exchange Transaction."
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The following table sets forth the anticipated beneficial ownership
following consummation of the Bank Stockholder Exchange Transaction and the
Offering with respect to: (i) each director and executive officer of the
Company, R&G Mortgage and the Bank; and (ii) all directors and executive
officers of the Company, R&G Mortgage and the Bank as a group. Other than with
respect to Mr. Victor J. Galan, no stockholder of the Company is expected to own
more than 5% of the capital stock of the Company.
<TABLE>
<CAPTION>
EXPECTED OWNERSHIP AFTER
BANK STOCKHOLDER EXCHANGE
TRANSACTION AND THE
OFFERING(1)(2)
----------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT
- ------------------------------------------------------------------------------ --------------- -----------
<S> <C> <C>
THE COMPANY'S DIRECTORS AND OFFICERS
Victor J. Galan............................................................... 5,122,377(3) 69.05
Ana M. Armendariz............................................................. 1,192 .02
Ramon Prats(4)................................................................ 2,861 .03
Juan J. Diaz.................................................................. 1,192 .02
Victor L. Galan............................................................... 1,192 .02
Enrique Umpierre-Suarez....................................................... 1,790 .02
Pedro Ramirez................................................................. 8,988 .12
Laureno Caros Abarca.......................................................... 10,013 .13
Eduardo McCormack............................................................. 1,825 .02
Gilberto Rivera-Arreaga....................................................... 1,192 .02
Benigno R. Fernandez.......................................................... 1,264 .02
ADDITIONAL R&G MORTGAGE DIRECTORS AND OFFICERS
Nelida Galan.................................................................. -- --
ADDITIONAL BANK DIRECTORS AND OFFICERS
Martin J. Rovira Garcia....................................................... 1,192 .02
Jeanne Ubinas................................................................. 10,857 .14
Osvaldo Domenech.............................................................. 459 .01
Jose L. Ortiz................................................................. -- --
All Directors and Officers of the Company, R&G Mortgage and the Bank as a
group (16 persons)........................................................... 5,166,394(4) 69.64
</TABLE>
- ------------------------
(1) Based upon information furnished by the respective individuals. Under
regulations promulgated pursuant to the Securities Exchange Act of 1934, as
amended ("Exchange Act"), shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares (i) voting power,
which includes the power to vote or to direct the voting of the shares, or
(ii) investment power, which includes the power to dispose or to direct the
disposition of the shares. Unless otherwise indicated, the named beneficial
owners has sole voting and dispositive power with respect to the shares.
(2) Based on the issuance of 5,189,044 Class A Shares to Mr. Victor J. Galan
(66,667 of which will be converted into Class B Shares and sold in the
Offering) and 296,396 Class B Shares to all other Bank stockholders in the
Bank Stockholder Exchange Transaction and 2,000,000 Class B Shares in the
Offering. Assumes no exercise of the Underwriter's over-allotment option in
the Offering.
(3) Represents Class A Shares.
(4) Includes 5,122,377 Class A Shares owned by Victor J. Galan. All other shares
are Class B Shares. Does not include 20,000 Class B Shares to be issued
immediately following the closing of the Offering in consideration for Mr.
Prats' past and ongoing contributions to R&G Mortgage and the Bank, which
shares are not being registered in the Offering.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Bank Stockholder Exchange Transaction and the
Offering, R&G Financial will have outstanding 5,122,377 Class A Shares and
2,296,396 Class B Shares (taking into consideration the sale of shares of Common
Stock by the Selling Stockholder) (2,596,396 Class B Shares if the Underwriter's
over-allotment option with respect to the Offering is fully exercised). The
Class B Shares being offered in the Offering and the Class B Shares issued in
the Bank Stockholder Exchange Transaction will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Act"), except for shares purchased by "affiliates" of R&G Financial. The
5,122,377 Class A Shares issued by R&G Financial to Mr. Victor Galan (after
taking into consideration the 66,667 shares which will be converted into Class B
Shares and sold in the Offering), Chairman of the Board and Chief Executive
Officer of R&G Financial, are "restricted securities" and may not be resold
unless they are registered under the Act or sold pursuant to an applicable
exemption from registration. See "Bank Stockholder Exchange Transaction."
Under Rule 144 promulgated by the SEC under the Act, a shareholder (or
shareholders whose shares are aggregated) who is an affiliate of the issuer is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) one percent of the then outstanding shares or (ii) the
average weekly trading volume of the shares reported through the Nasdaq Stock
Market during the four calendar weeks preceding the date on which notice of the
sale is filed with the SEC. Sales under Rule 144 are subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about R&G Financial. A shareholder who is not deemed an affiliate of
R&G Financial at any time during the 90 days preceding a sale, and who has
beneficially owned his or her shares for a least three years, is entitled to
sell such shares under Rule 144 without regard to volume limitations, manner of
sale provisions, notice requirements or the availability of current public
information concerning R&G Financial.
DESCRIPTION OF CAPITAL STOCK
GENERAL
R&G Financial is authorized to issue 35,000,000 shares of capital stock, of
which 25,000,000 are shares of Common Stock, par value $0.01 per share, and
10,000,000 are shares of preferred stock, par value $0.01 per share. The
Company's Common Stock is divided into 10,000,000 Class A Shares, of which
5,189,044 were issued to Mr. Victor J. Galan, the Company's Chairman of the
Board and Chief Executive Officer (66,667 of which will be converted into Class
B Shares and sold in the Offering), and 15,000,000 Class B Shares, of which an
aggregate of 296,396 shares are being issued to all Minority Bank Stockholders
in the Bank Stockholder Exchange Transaction, and 2,000,000 Class B Shares are
being offered by the Company in the Offering (without giving effect to the
exercise of the Underwriter's over-allotment option). See "Bank Stockholder
Exchange Transaction."
Neither the Certificate of Incorporation, as amended ("Certificate") nor
Bylaws ("Bylaws") of R&G Financial contain a restriction on the issuance of
shares of capital stock to directors, officers or controlling persons of the
Company. Thus, stock-related compensation plans could be adopted by R&G
Financial without shareholder approval and shares of Company capital stock could
be issued directly to directors, officers or controlling persons without
shareholder approval. The Bylaws of the National Association of Securities
Dealers, Inc., however, generally require corporations with securities which are
quoted on the Nasdaq Stock Market to obtain shareholder approval of most stock
compensation plans for directors, officers and key employees of the corporation.
Moreover, although generally not required, shareholder approval of stock-related
compensation plans may be sought in certain instances in order to qualify such
plans for favorable federal securities law treatment under current laws and
regulations.
THE COMMON STOCK OF THE COMPANY DOES NOT REPRESENT NONWITHDRAWABLE CAPITAL,
IS NOT AN ACCOUNT OF AN INSURABLE TYPE, AND IS NOT INSURED BY THE FDIC.
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COMMON STOCK
GENERAL. The Class B Shares being offered hereby in the Offering will be,
upon payment therefor, and the Class B Shares issued to Minority Bank
Stockholders in the Bank Stockholder Exchange Transaction will be, duly
authorized, validly issued, fully paid and nonassessable. The shares of Common
Stock of the Company are not redeemable and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities. There is no cumulative voting. Therefore, the holders of a majority
of the shares of Common Stock voted in an election of directors can elect all of
the directors then standing for election.
VOTING RIGHTS. The holders of Common Stock of R&G Financial possess
exclusive voting rights in the Company. They elect R&G Financial's Board of
Directors and act on such other matters as are required to be presented to them
under Puerto Rico law or the Company's Certificate or as are otherwise presented
to them by the Board of Directors. Although there are no present plans to do so,
if the Company issues preferred stock, holders of the preferred stock may also
possess voting rights.
Except for matters where applicable law requires the approval of one or both
classes of Common Stock voting as separate classes, holders of Class A Shares
and Class B Shares generally vote as a single class on all matters submitted to
a vote of the shareholders, including the election of directors. Holders of
Class A Shares are entitled to two votes per share and holders of Class B Shares
are entitled to one vote per share. A majority of the shares entitled to vote,
represented in person or by proxy, constitutes a quorum at a meeting of
shareholders. If a quorum is present, the affirmative vote of a majority of the
shares entitled to vote on the matter is the act of the shareholders unless
otherwise provided by law. Under Puerto Rico law, the affirmative vote of the
holders of a majority of the outstanding Class B Shares would be required to
approve, among other matters, an adverse change in the powers, preferences or
special rights of the Class B Shares.
CONVERSION RIGHTS. Each record holder of Class A Shares shall be entitled
at any time and from time to time to convert any or all of its Class A Shares
held by such holder into Class B Shares at the rate of one (1) Class B Share for
each Class A Share so converted. The Class B Shares shall not carry any
conversion rights and are otherwise not convertible into Class A Shares.
DIVIDENDS. R&G Financial has never paid a dividend on the Common Stock. The
Company expects to initiate a cash dividend policy on the Common Stock during
the first full quarter following the Offering. However, no decision has been
made as to the amount or timing of such dividends, if any. Declarations of
dividends by the Board of Directors will depend upon a number of factors. The
declaration and payment of dividends on the Common Stock will be subject to a
quarterly review by the Board of Directors of the Company. The timing and amount
of dividends, if any, will be dependent upon the Company's results of operations
and financial condition and on the ability of the Company to receive dividends
from its subsidiary companies. See "Dividends and Market for Class B Shares."
Holders of Class A Shares and Class B Shares will be entitled to share ratably,
as a single class, in any dividends paid on the Common Stock (except that if
dividends are declared which are payable in Class A Shares or Class B Shares,
dividends shall be declared which are payable at the same rate in each such
class of stock and the dividends payable in Class A Shares shall be payable to
the holders of that class of stock and the dividends payable in Class B Shares
shall be payable to the holders of that class of stock. If R&G Financial issues
preferred stock, the holders thereof may have a priority over the holders of the
Common Stock with respect to dividends.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
R&G Mortgage and/or the Bank, the Company, as the sole holder of the capital
stock of R&G Mortgage and the Bank (following the Bank Stockholder Exchange
Transaction), would be entitled to receive, after payment or provision for
payment of all debts and liabilities of R&G Mortgage and/or the Bank (including,
in the case of the Bank, all deposit accounts and accrued interest thereon), all
assets of R&G Mortgage and/or the Bank available for distribution. In the event
of any liquidation, dissolution or winding up of
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<PAGE>
R&G Financial, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Company available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of R&G Financial will not be
entitled to preemptive rights with respect to any shares which may be issued in
the future. The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of R&G Financial's authorized preferred stock has been
issued. Such stock may be issued with such preferences and designations as the
Board of Directors may from time to time determine. The Board of Directors can,
without stockholder approval, issue preferred stock with voting, dividend,
liquidation and conversion rights as it may deem appropriate in the
circumstances.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
RESTRICTIONS IN THE COMPANY'S CERTIFICATE AND BYLAWS. A number of
provisions of R&G Financial's Certificate and Bylaws deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of R&G Financial's
Certificate and Bylaws which might be deemed to have a potential "anti-takeover"
effect. Reference should be made in each case to such Certificate and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
BOARD OF DIRECTORS. The Certificate of R&G Financial contain provisions
relating to the Board of Directors and provide, among other things, that the
Board of Directors shall be divided into three classes as nearly equal in number
as possible with the term of office of one class expiring each year. See
"Management." Cumulative voting in the election of directors is prohibited.
Directors may be removed with or without cause at a duly constituted meeting of
stockholders called expressly for that purpose. Any vacancy occurring in the
Board of Directors for any reason (including an increase in the number of
authorized directors) may be filled by the affirmative vote of a majority of the
Directors then in office, though less than a quorum of the Board, or by the sole
remaining director, and a director appointed to fill a vacancy shall serve for
the remainder of the term to which the director has been elected, and until his
successor has been elected and qualified.
The Bylaws govern nominations for election to the Board, and provide that
nominations for election to the Board of Directors may be made by the nominating
committee of the Board of Directors or by a stockholder eligible to vote at an
annual meeting of stockholders who has complied with specified notice
requirements. Written notice of a stockholder nomination must be delivered to,
or mailed to and received at, the Company's principal executive offices not
later than ninety days prior to the anniversary date of the mailing of proxy
materials by the Company in connection with the immediately preceding annual
meeting and, with respect to an election to be held at a special meeting of
stockholders, no later than the close of business on the tenth day following the
date on which notice of such meeting is first given to stockholders.
LIMITATION OF LIABILITY. R&G Financial's Certificate provide that the
personal liability of directors and officers of the Company for monetary damages
shall be limited to the fullest extent permitted by the General Corporation Law
of the Commonwealth of Puerto Rico ("Puerto Rico Corporate Law").
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. R&G
Financial's Certificate provides that the Company shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, except actions by or in right of R&G
Financial, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director, officer, employee or agent of
R&G Financial against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent
113
<PAGE>
authorized by Puerto Rico Corporate Law, provided that the Company shall not be
liable for any amounts which may be due to any person in connection with a
settlement of any action, suit or proceeding effected without its prior written
consent or any action, suit or proceeding initiated by any person seeking
indemnification without its prior written consent. The Company's Certificate
also provides that reasonable expenses incurred by a director, officer, employee
or agent of R&G Financial in defending any civil, criminal, suit or proceeding
described above may be paid by the Company in advance of the final disposition
of such action, suit or proceeding.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. R&G Financial's
Bylaws provide that special meetings of R&G Financial's stockholders, for any
purpose or purposes, may be called by the Chairman of the Board, the President
or by the affirmative vote of a majority of the Board of Directors then in
office. Only such business as shall have been properly brought before an annual
meeting of stockholders shall be conducted at the annual meeting. In order to be
properly brought before an annual meeting, business must either be brought
before the meeting by or at the direction of the Board of Directors or otherwise
by a stockholder who has given timely notice thereof (along with specified
information) in writing to the Company. For stockholder proposals to be included
in the Company's proxy materials, the stockholder must comply with all the
timing and informational requirements of Rule 14a-8 of the Exchange Act. With
respect to stockholder proposals to be considered at the annual meeting of
stockholders but not included in the Company's proxy materials, the
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of R&G Financial not later than 90 days prior to the
anniversary date of the mailing of proxy materials by the Company in connection
with the immediately preceding annual meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. R&G Financial's
Certificate generally provide that any amendment of the Certificate must be
first approved by a majority of the Board of Directors and, to the extent
required by law, then by the holders of a majority of the shares of R&G
Financial entitled to vote in an election of directors, except that the approval
of 75% of the shares of the Company entitled to vote in an election of directors
is required for any amendment to Articles VII (directors), VIII (bylaws), IX
(limitation on liability of directors and officers) and X (amendment), unless
any such proposed amendment is approved by a vote of 66 2/3rds of the Board of
Directors then in office. R&G Financial's Bylaws may be amended by the Board or
by the stockholders. Such action by the stockholders requires the affirmative
vote of the holders of a majority of the shares of the Company entitled to vote
generally in an election of directors, except that the approval of 75% of the
shares of the Company entitled to vote generally in an election of directors is
required for any amendment to the Bylaws which is inconsistent with Articles
VII, VIII, IX and X of the Certificate and which is not approved by the
affirmative vote of 66 2/3rds of the Board of Directors then in office.
OTHER RESTRICTIONS ON ACQUISITION OF THE COMPANY. Under the Change in Bank
Control Act ("CIBCA"), a notice must be submitted to the Federal Reserve Board
if any person, or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the Federal Reserve Board
finds that the acquisition will not result in a change in control of the
Company. Under the CIBCA, the Federal Reserve Board has 60 days within which to
act on such notices, taking into consideration certain factors, including the
financial and managerial resources of the acquiror, the convenience and needs of
the communities served by the Company and the Bank, and the anti-trust effects
of the acquisition. Under the BHCA, any company would be required to obtain
prior approval from the Federal Reserve Board before it may obtain control of
the Company. Control generally is defined to mean the beneficial ownership of 25
percent or more of any class of voting securities of the Company.
114
<PAGE>
SELLING STOCKHOLDER
Victor J. Galan, the Chairman of the Board and Chief Executive Officer of
the Company owns 5,189,044 Class A Shares. In connection with the Offering, Mr.
Galan intends to convert 66,667 of his Class A Shares into an equal number of
Class B Shares and to sell such Class B Shares in the Offering. Upon completion
of the Bank Stockholder Exchange Transaction and the Offering, Mr. Galan will
own 5,122,377 Class A Shares, which will represent 69.05% of the Company's
outstanding Common Stock.
UNDERWRITING
Friedman, Billings, Ramsey & Co., Inc., the Underwriter for the Offering,
has agreed, subject to the terms and conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, to purchase from R&G Financial and
the Selling Stockholder 2,000,000 Class B Shares at the Price to Public less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent, and that the Underwriter is committed
to purchase all of such Class B Shares, if any are purchased.
The Underwriter has advised R&G Financial that the Underwriter proposes
initially to offer the Class B Shares to the public on the terms set forth on
the cover page of this Prospectus. The Underwriter may allow to selected dealers
a concession of not more than $ per share, and the Underwriter may allow, and
such dealers may reallow, a concession of not more than $ to certain other
dealers. After the initial Offering, the offering price and other selling terms
may be changed by the Underwriter. No reduction in such terms shall change the
amount of proceeds to be received by R&G Financial and the Selling Stockholder
as set forth on the cover page of this Prospectus. The Class B Shares are
offered subject to receipt and acceptance by the Underwriter, and to certain
other conditions, including the right to reject an order in whole or in part.
R&G Financial has granted an option to the Underwriter, exercisable once
during the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 300,000 additional Class B Shares to cover over-allotments, if any,
at the same price per share as the initial 2,000,000 Class B Shares to be
purchased by the Underwriter. To the extent that the Underwriter exercises this
option, the Underwriter will be committed, subject to certain conditions, to
purchase such additional Class B Shares. The Underwriter may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that R&G Financial and the Selling
Stockholder will indemnify the Underwriter against certain liabilities,
including civil liabilities under the Act, or will contribute to the payments
the Underwriter may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Prior to the Offering, there has been no public market for the Class B
Shares. Consequently, the initial public offering price will be determined by
negotiations among R&G Financial and the Underwriter. Among the factors to be
considered in such negotiations will be the history of, and the prospects for,
R&G Financial and the industries in which it competes, an assessment of R&G
Financial's management, R&G Financial's past and present operations, its past
and present earnings and the trend of such earnings, the prospects for future
earnings of R&G Financial, the present state of R&G Financial's development, the
general condition of the securities markets at the time of the Offering and the
market prices of publicly traded common stocks of comparable companies in recent
periods.
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<PAGE>
The Underwriter intends to make a market in the Class B Shares on completion
of the Offering, as permitted by applicable laws and regulations. The
Underwriter, however, is not obligated to make a market in such shares, and any
such market making may be discontinued at any time at the sole discretion of the
Underwriter.
R&G Financial has applied to have the Class B Shares approved for quotation
on the NASDAQ Stock Market under the symbol "RGFC."
LEGAL MATTERS
The validity of the Class B Shares being offered hereby will be passed upon
for R&G Financial by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
Certain legal matters will be passed upon for the Underwriter by Orrick,
Herrington & Sutcliffe, Washington, D.C.
EXPERTS
The Consolidated Financial Statements of R&G Financial as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995, included in this Prospectus, have been audited by Price Waterhouse,
independent accountants, as stated in their report appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for R&G Financial's Class B Shares is
American Stock Transfer & Trust Co., New York, New York.
ADDITIONAL INFORMATION
R&G Financial has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement", which term shall encompass any amendments
thereto) under the Act with respect to the Class B Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto and reference is made to the
Registration Statement and exhibits and schedules filed therewith. Each
statement made in this Prospectus referring to a document filed as an exhibit to
the Registration Statement is qualified by reference to the exhibit for a
complete statement of its terms and conditions. Any interested party may inspect
the Registration Statement without charge at the offices of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission upon payment of the prescribed fee. The Commission maintains a World
Wide Web site on the Internet that contains reports, proxy and information
statements and other information regarding registrants such as the Company that
file electronically with the Commission. The address of such site is:
http://www.sec.gov.
R&G Financial has not previously been subject to the reporting requirements
of the Exchange Act. In connection with the sale of the Class B Shares
hereunder, R&G Financial has registered the Class B Shares with the Commission
under Section 12(g) of the Exchange Act and R&G Financial (and the holders of
its Class B Shares) has become subject to the proxy solicitation rules,
reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and certain other requirements of the Exchange Act. Reports, proxy
statements, and other information filed by R&G Financial under the Exchange Act
may be inspected and copied at prescribed rates at the public reference
facilities of the Commission at the addresses set forth above. In addition, such
reports, proxy statements and other information concerning R&G Financial will
also be available for inspection at the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. R&G Financial will
on an annual basis send to all stockholders of record annual audited financial
statements.
116
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................... F-2
Financial Statements:
Consolidated Statement of Financial Condition as of March 31, 1996
(Unaudited), December 31, 1995 and 1994................................. F-3
Consolidated Statements of Income for the three months ended March 31,
1996 and 1995 (Unaudited) and for the three years ended December 31,
1995.................................................................... F-4
Consolidated Statements of Cash Flows for the three months ended March
31, 1996 and 1995 (Unaudited) and for the three years ended December 31,
1995.................................................................... F-5
Consolidated Statements of Changes in Stockholder's Equity for the three
months ended March 31, 1996 (Unaudited) and for the three years ended
December 31, 1995....................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the consolidated financial
statements or in the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
R&G Financial Corporation and its Stockholder
In our opinion, the accompanying consolidated statement of financial
condition, and the related consolidated statements of income, of changes in
stockholder's equity and of cash flows present fairly, in all material respects,
the financial position of R&G Financial Corporation (the Company) and its
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
These consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 122 -- "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65." In addition, effective January 1, 1994 the Company
adopted SFAS No. 115 -- "Accounting for Certain Investments in Debt and Equity
Securities.
/s/ PRICE WATERHOUSE
Certified Public Accountants (of Puerto Rico)
License No. 10 expires Dec. 1, 1998
Stamp #1379293 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
San Juan, Puerto Rico
June 12, 1996, except for Note 1 to
the Consolidated Financial Statements
which is as of July 19, 1996.
F-2
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
MARCH 31, ------------- -------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks............................................. $ 22,943,443 $ 32,559,429 $ 21,158,101
Money market investments:
Securities purchased under agreements to resell................... 6,501,579 21,694,675 10,232,890
Time deposits with other banks.................................... 13,429,966 44,930,015 14,231,371
Federal funds sold................................................ -- 5,011,048 --
Mortgage loans held for sale, at lower of cost or market............ 25,865,859 21,318,340 22,020,566
Mortgage-backed securities held for trading, at fair value.......... 116,321,161 113,808,624 124,521,837
Mortgage-backed securities available for sale, at fair value........ 46,041,239 61,008,432 13,300,325
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1995 -- $40,784,831; 1994 --
$78,844,972)....................................................... 40,715,763 41,730,889 84,122,035
Investment securities held for trading, at fair value............... 390,428 -- --
Investment securities available for sale, at fair value............. 23,254,061 3,279,610 1,877,910
Investment securities held to maturity, at amortized cost
(estimated market value: 1995 -- $1,996,307; 1994 -- $2,108,318)... 4,709,434 2,046,046 2,182,176
Loans receivable, net............................................... 534,114,038 473,840,637 301,614,199
Accounts receivable, including advances to investors, net........... 6,367,165 5,578,965 8,480,309
Accrued interest receivable......................................... 4,199,302 4,051,702 2,870,559
Mortgage servicing rights........................................... 8,662,374 8,209,661 4,417,813
Excess servicing receivable......................................... 828,554 847,938 979,005
Premises and equipment.............................................. 7,291,598 6,973,325 5,621,007
Other assets........................................................ 6,657,936 6,316,826 4,868,671
-------------- ------------- -------------
$868,293,900 $ 853,206,162 $ 622,498,774
-------------- ------------- -------------
-------------- ------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits.......................................................... $541,122,787 $ 518,186,563 $ 380,148,414
Securities sold under agreements to repurchase.................... 95,314,369 98,483,188 108,921,552
Notes payable..................................................... 73,584,857 81,130,032 45,814,597
Advances from FHLB................................................ 6,001,782 6,007,135 13,567,834
Long-term debt.................................................... 4,923,898 5,323,899 4,524,173
Other secured borrowings.......................................... 54,727,453 55,983,501 --
Accounts payable and accrued liabilities.......................... 14,945,246 12,068,490 5,601,444
Other liabilities................................................. 2,568,432 2,431,577 1,497,012
-------------- ------------- -------------
793,188,824 779,614,385 560,075,026
-------------- ------------- -------------
Subordinated notes.................................................. 3,250,000 3,250,000 3,250,000
-------------- ------------- -------------
Minority interest in the Bank....................................... 4,141,458 3,956,597 3,203,749
-------------- ------------- -------------
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 51,890
Class B -- $.01 par value, 15,000,000 shares authorized, none
issued and outstanding......................................... -- -- --
Additional paid-in capital........................................ 362,710 362,710 362,710
Retained earnings................................................. 66,425,439 64,351,564 54,569,219
Capital reserves of the Bank...................................... 1,021,166 666,767 --
Unrealized (loss) gains on securities available for sale.......... (147,587) 952,249 986,180
-------------- ------------- -------------
67,713,618 66,385,180 55,969,999
-------------- ------------- -------------
$868,293,900 $ 853,206,162 $ 622,498,774
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans...................................... $13,467,441 $ 9,544,932 $45,673,241 $36,766,741 $27,087,896
Money market and other investments......... 878,450 350,444 1,805,345 941,677 695,848
Mortgage-backed securities................. 1,644,952 1,630,609 6,033,069 4,655,376 2,107,130
----------- ----------- ----------- ----------- -----------
Total interest income.................... 15,990,843 11,525,985 53,511,655 42,363,794 29,890,874
----------- ----------- ----------- ----------- -----------
Less -- interest expense:
Deposits................................... 6,383,066 4,711,794 21,829,433 14,460,943 10,364,694
Securities sold under agreements to
repurchase................................ 1,275,914 1,597,058 6,436,327 4,416,824 273,968
Notes payable.............................. 1,081,503 686,268 3,363,930 3,769,855 4,630,941
Secured borrowings......................... 1,083,109 -- -- -- --
Other...................................... 67,222 177,601 608,984 578,685 368,276
----------- ----------- ----------- ----------- -----------
9,890,814 7,172,721 32,238,674 23,226,307 15,637,879
----------- ----------- ----------- ----------- -----------
Net interest income.......................... 6,100,029 4,353,264 21,272,981 19,137,487 14,252,995
(Provision) credit for loan losses........... (6,525) 50,000 (950,000) -- --
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses...................................... 6,093,504 4,403,264 20,322,981 19,137,487 14,252,995
----------- ----------- ----------- ----------- -----------
Other income:
Net gain (loss) on sale of loans........... 1,971,044 1,332,047 6,262,460 (1,349,340) 29,026,142
Unrealized gain (loss) on trading
securities................................ (197,175) -- 2,121,611 (4,464,718) --
Change in provision for cost in excess of
market value of loans held for sale....... -- (225,000) 855,834 (855,834) --
Net gain on trading account................ 136,050 -- -- -- --
Net gain on sales of investments........... 329,225 -- -- -- 394,342
Loan administration and servicing fees..... 3,008,755 2,765,661 11,029,995 11,046,019 9,326,518
Gain on sale of servicing rights........... -- -- -- 2,914,850 --
Service charges, fees and other............ 1,194,991 558,321 3,171,949 2,522,394 1,178,561
----------- ----------- ----------- ----------- -----------
6,442,890 4,431,029 23,441,849 9,813,371 39,925,563
----------- ----------- ----------- ----------- -----------
12,536,394 8,834,293 43,764,830 28,950,858 54,178,558
----------- ----------- ----------- ----------- -----------
Operating expenses:
Employee compensation and benefits......... 2,649,937 1,876,121 8,283,809 5,251,435 8,590,181
Office occupancy and equipment............. 1,412,636 1,006,701 4,711,312 4,488,335 3,395,055
Other administrative and general........... 3,326,041 3,205,093 13,730,724 13,268,875 14,560,892
----------- ----------- ----------- ----------- -----------
7,388,614 6,087,915 26,725,845 23,008,645 26,546,128
----------- ----------- ----------- ----------- -----------
Income before minority interest, income taxes
and cumulative effect of change in
accounting principle........................ 5,147,780 2,746,378 17,038,985 5,942,213 27,632,430
----------- ----------- ----------- ----------- -----------
Minority interest in the Bank................ 184,861 124,124 742,527 499,928 812,427
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle.... 4,962,919 2,622,254 16,296,458 5,442,285 26,820,003
----------- ----------- ----------- ----------- -----------
Income taxes:
Current.................................... 2,042,359 1,193,265 3,555,868 2,517,465 9,486,814
Deferred................................... (7,714) (168,415) 2,291,478 (1,661,877) 146,437
----------- ----------- ----------- ----------- -----------
2,034,645 1,024,850 5,847,346 855,588 9,633,251
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of change in
accounting principle........................ 2,928,274 1,597,404 10,449,112 4,586,697 17,186,752
Cumulative effect of change in accounting
principle -- adoption of SFAS No. 115, net
of deferred income taxes of $627,210........ -- -- -- 866,147 --
----------- ----------- ----------- ----------- -----------
Net income............................... $ 2,928,274 $ 1,597,404 $10,449,112 $ 5,452,844 $17,186,752
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per common share:
Income before cumulative effect of change
in accounting principle................... $ .56 $ .31 $ 2.01 $ .88 $ 3.31
Cumulative effect of change in accounting
principle................................. -- -- -- .17 --
----------- ----------- ----------- ----------- -----------
Net income............................... $ .56 $ .31 $ 2.01 $ 1.05 $ 3.31
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 2,928,274 $ 1,597,404 $ 10,449,112 $ 5,452,844 $ 17,186,752
------------ ------------ ------------- ------------- -------------
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 478,599 335,285 1,794,454 1,335,505 1,323,638
Amortization of premium on investments and
mortgage-backed securities, net.......... 27,552 27,260 89,111 140,411 119,478
Amortization of deferred loan origination
fees and accretion of discount on loans
purchased................................ 46,175 4,305 23,942 159,817 (303,922)
Amortization of excess servicing
receivable............................... 19,384 32,767 131,067 29,828 92,596
Amortization of servicing rights.......... 291,375 714,876 1,497,803 869,201 2,627,695
Change in provision for cost in excess of
market value of loans held for sale...... -- 225,000 (855,834) 855,834 --
Provision (credit) for loan losses........ 6,525 (50,000) 950,000 -- --
Provision for bad debts in accounts
receivable............................... 75,000 75,000 572,092 358,442 528,635
Gain on sales of mortgage loans........... (42,652) (116,090) (264,953) (201,797) (3,973,935)
Gain on sale of investment securities..... (329,225) -- -- -- (394,342)
Unrealized loss (gain) on trading
securities............................... 197,175 -- (2,121,611) 4,464,718 --
Gain on sale of mortgage servicing
rights................................... -- -- -- (2,914,850) --
Cumulative effect of change in accounting
principle................................ -- -- -- (866,147) --
Minority interest in earnings of the
Bank..................................... 184,861 124,124 742,527 499,928 812,427
(Increase) decrease in mortgage loans held
for sale................................. (4,547,519) (2,290,701) 1,558,060 60,006,212 (66,495,738)
Net (increase) decrease in mortgage-backed
securities held for trading.............. (2,709,712) (11,698,282) 17,035,709 (36,782,335) --
(Increase) decrease in receivables........ (1,010,800) 3,776,811 1,148,109 (4,035,534) (2,736,002)
Decrease (increase) in other assets....... 26,335 (2,664,405) (1,812,808) 3,248,178 (886,033)
(Decrease) increase in notes payable...... (7,545,175) (1,926,145) 7,915,435 (111,698,229) 57,540,715
Increase (decrease) in accounts payable
and accrued liabilities.................. 2,470,748 5,818,317 2,572,200 (6,726,147) 929,910
(Decrease) increase in deferred taxes..... (7,714) (168,415) 2,291,477 (1,661,877) 1,407,585
Increase (decrease) in income taxes
payable.................................. 1,269,996 1,262,282 1,734,062 (6,185,086) 1,188,953
Increase (decrease) in other
liabilities.............................. 136,855 (176,862) 934,566 (693,187) (1,026,483)
------------ ------------ ------------- ------------- -------------
Total adjustments....................... (10,962,217) (6,694,873) 35,935,408 (99,797,115) (9,244,823)
------------ ------------ ------------- ------------- -------------
Net cash (used in) provided by operating
activities............................. (8,033,943) (5,097,469) 46,384,520 (94,344,271) 7,941,929
------------ ------------ ------------- ------------- -------------
Cash flows from investing activities:
Purchases of investment securities.......... (22,900,000) -- (377,000) (6,044,808) (50,259,340)
Proceeds from sale of investment securities
available for sale......................... 12,643,887 -- -- 3,691,493 28,179,364
</TABLE>
(CONTINUED)
F-5
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Principal repayments on mortgage-backed
securities................................. $ 2,504,429 $ 1,742,480 $ 8,481,269 $ 8,316,306 $ 6,053,722
Proceeds from sale of loans................. 2,058,869 8,331,179 20,201,648 27,201,541 147,950,784
Net originations of loans................... (62,342,318) (36,907,502) (210,767,796) (163,673,015) (200,456,251)
Proceeds from sales of mortgage servicing
rights..................................... -- -- -- 2,914,850 --
Acquisition of Caribbean Federal -- net of
cash acquired.............................. -- -- -- -- 11,254,879
(Purchases) redemptions of FHLB stock, net.. (795,600) (1,401,700) (1,401,700) (156,700) 1,399,500
Acquisition of premises and equipment....... (729,004) (196,495) (2,926,306) (2,087,651) (2,209,461)
Net (increase) decrease in foreclosed real
estate..................................... (440,667) 159,775 83,488 81,339 (301,747)
Acquisition of servicing rights............. (744,088) (148,385) (5,289,651) (1,000,166) (476,662)
------------ ------------ ------------- ------------- -------------
Net cash used by investing activities... (70,744,492) (28,420,648) (191,996,048) (130,756,811) (58,865,212)
------------ ------------ ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable..... -- -- 27,400,000 23,600,000 --
Proceeds from issuance long-term debt....... -- -- 2,000,000 1,732,956 2,578,817
Payments of long-term debt.................. (400,001) (300,001) (1,200,274) -- --
Increase in deposits -- net................. 22,783,124 9,770,750 137,928,057 67,680,706 98,544,357
(Decrease) increase in securities sold under
agreements to repurchase -- net............ (3,168,819) 9,672,150 (10,437,272) 108,750,639 --
Proceeds from secured borrowings............ -- -- 55,983,501 -- --
Payments on secured borrowings.............. (1,256,048) -- -- -- --
Advances from FHLB.......................... -- -- -- 5,000,000 --
Repayment of advances from FHLB............. -- -- (7,500,000) (3,000,000) (8,920,328)
Proceeds from issuance of common stock to
minority shareholders...................... -- -- 10,321 1,309 879
Cash dividends on common stock.............. (500,000) -- -- -- --
------------ ------------ ------------- ------------- -------------
Net cash provided by financing
activities............................. 17,458,256 19,142,899 204,184,333 203,765,610 92,203,725
------------ ------------ ------------- ------------- -------------
Net (decrease) increase in cash and cash
equivalents................................ (61,320,179) (14,375,218) 58,572,805 (21,335,472) 41,280,442
Cash and cash equivalents at beginning of
year....................................... 104,195,167 45,622,362 45,622,362 66,957,834 25,677,392
------------ ------------ ------------- ------------- -------------
Cash and cash equivalents at end of year.... $ 42,874,988 $ 31,247,144 $ 104,195,167 $ 45,622,362 $ 66,957,834
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Cash and cash equivalents include:
Cash and due from banks..................... $ 22,943,443 $ 20,421,999 $ 32,559,429 $ 21,158,101 $ 35,239,945
Securities purchased under agreements to
resell..................................... 6,501,579 7,574,105 21,694,675 10,232,890 4,301,320
Time deposits with other banks.............. 13,429,966 3,251,040 44,930,015 14,231,371 27,416,569
Federal funds sold.......................... -- -- 5,011,048 -- --
------------ ------------ ------------- ------------- -------------
$ 42,874,988 $ 31,247,144 $ 104,195,167 $ 45,622,362 $ 66,957,834
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
PREFERRED STOCK CLASS A CLASS B ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993........... $ 5,189,044 $ 51,890 $ $ 362,710
Effect of implementation of SFAS 115....
Net income -- 1994......................
Net change in unrealized gain on
securities available for sale, net of
tax....................................
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balances at December 31, 1994........... 5,189,044 51,890 362,710
Transfer to capital reserves............
Net income -- 1995......................
Net change in unrealized gain on
securities available for sale, net of
tax....................................
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balances at December 31, 1995........... 5,189,044 51,890 362,710
Transfer to capital reserves
(unaudited)............................
Cash dividend declared on common stock
(unaudited)............................
Net income -- March 31, 1996
(unaudited)............................
Net change in unrealized gain (loss) on
securities available for sale, net of
tax (unaudited)........................
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance at March 31, 1996 (unaudited)... $ 5,189,044 $ 51,890 $ $ 362,710
---------- ---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- ---------- -----------
<CAPTION>
UNREALIZED GAIN
LOSS FROM
SECURITIES
CAPITAL AVAILABLE RETAINED
RESERVES FOR SALE EARNINGS TOTAL
------------ ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993........... $ 49,116,375 $ 49,530,975
Effect of implementation of SFAS 115.... $ 62,473 62,473
Net income -- 1994...................... 5,452,844 5,452,844
Net change in unrealized gain on
securities available for sale, net of
tax.................................... 923,707 923,707
------------ ------------------ ------------- -------------
Balances at December 31, 1994........... 986,180 54,569,219 55,969,999
Transfer to capital reserves............ $ 666,767 (666,767)
Net income -- 1995...................... 10,449,112 10,449,112
Net change in unrealized gain on
securities available for sale, net of
tax.................................... (33,931) (33,931)
------------ ------------------ ------------- -------------
Balances at December 31, 1995........... 666,767 952,249 64,351,564 66,385,180
Transfer to capital reserves
(unaudited)............................ 354,399 (354,399)
Cash dividend declared on common stock
(unaudited)............................ (500,000) (500,000)
Net income -- March 31, 1996
(unaudited)............................ 2,928,274 2,928,274
Net change in unrealized gain (loss) on
securities available for sale, net of
tax (unaudited)........................ (1,099,836) (1,099,836)
------------ ------------------ ------------- -------------
Balance at March 31, 1996 (unaudited)... $ 1,021,166 $ (147,587) $ 66,425,439 $ 67,713,618
------------ ------------------ ------------- -------------
------------ ------------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
REPORTING ENTITY
The accompanying 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 consolidated financial
statements have been restated to reflect the consolidated financial condition as
of March 31, 1996 (unaudited) and December 31, 1995 and 1994, and the related
consolidated statements of income and retained earnings, and of cash flows for
the three months ended March 31, 1996 and 1995 (unaudited) and for each of the
three years in the period ended December 31, 1995 as if the above transaction
had been consummated as of January 1, 1993. 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 above exchange transactions, in which the
Company acquires 100% ownership of the Bank as well as R&G Mortgage, are
hereinafter referred to as the "Bank Stockholder Exchange Transaction".
R&G Mortgage is engaged primarily in the business of originating FHA
insured, VA guaranteed, and privately insured first and second mortgage loans on
residential real estate (1 to 4 families). R&G Mortgage pools FHA and VA loans
into GNMA (Government National Mortgage Association) mortgage-backed securities
and collateralized mortgage obligation (CMO) certificates for sale to permanent
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a Federal National Mortgage Association (FNMA) and Federal Home
Loan Mortgage Corporation (FHLMC) Seller-Servicer of conventional loans. R&G
Mortgage is licensed by the Secretary of the Treasury of Puerto Rico as a
mortgage company and is duly authorized to do business in the Commonwealth of
Puerto Rico.
The Bank provides a full range of banking services through fourteen branches
located mainly in the northern part of the Commonwealth of Puerto Rico. As
discussed in Note 19 to the consolidated financial statements, the Bank is
subject to the regulations of certain federal and local agencies, and
F-8
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
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.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles. The following is a description of the
significant accounting policies:
BASIS OF CONSOLIDATION
All significant balances and transactions have been eliminated in the
accompanying consolidated financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company enters into purchases of securities under agreements to resell
the same securities. Amounts advanced under these agreements represent
short-term loans and are reflected as assets in the consolidated statement of
financial condition.
INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities." This Statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Under SFAS No. 115,
investments in debt and equity securities must be classified at acquisition into
one of three categories:
-HELD TO MATURITY -- debt securities for which there is a positive intent
and ability to hold to maturity. These securities are carried at amortized
cost.
-TRADING -- debt and equity securities that are bought and held principally
for the purpose of selling them in the near term. These securities are
carried at fair value, with unrealized gains and losses included in
earnings. Mortgage-backed securities that are held for sale in conjunction
with mortgage banking activities are classified as trading securities.
-AVAILABLE FOR SALE -- debt and equity securities not classified as either
held-to-maturity or trading. These securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported net of
taxes in a separate component of stockholder's equity.
Upon adoption of SFAS No. 115 on January 1, 1994, the Bank classified as
securities held for trading $2,599,329 of debt securities, and R&G Mortgage
classified approximately $89,597,000 of mortgage-backed securities as trading
securities, recognizing in earnings unrealized gains on these securities
amounting to approximately $866,000 net of $627,000 in deferred income taxes.
These unrealized gains are shown in the consolidated statements of income and
retained earnings under the "cumulative effect of change in accounting principle
- -- adoption of SFAS No. 115."
On November 14, 1995, the Financial Accounting Standard Board staff issued a
special report, "A Guide for the Implementation of Statement 115 on Accounting
for Certain Investments in Debt and
F-9
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
Equity Securities" (the Report), as an aid in understanding and implementing
SFAS 115. Under the Report, an enterprise may conduct a one time reassessment of
the classifications of all securities held at that time from the issue date of
the report through December 31, 1995. Any reclassifications from the held to
maturity category made in conjunction with that reassessment will not call into
question an enterprise's intent to hold other debt securities to maturity in the
future. Pursuant to the Report, on December 29, 1995 the Company reclassified
mortgage-backed securities with an amortized cost of $52,448,077 from its held
to maturity to its available for sale portfolio. The unrealized gains of
securities reclassified as available for sale of $565,132 was reported net of
estimated income tax of $220,401 as a separate component of stockholder's equity
in the consolidated statement of financial condition.
At March 31, 1996 the net unrealized loss on securities available for sale
of $147,587 was reported net of estimated income tax benefit of $94,358 as a
separate component of stockholder's equity in the consolidated statement of
financial condition.
At December 31, 1995 and 1994, the net unrealized gains on securities
classified as available for sale of $1,561,064 and $1,616,689, respectively, was
reported net of estimated income tax of $608,815 and $630,509, respectively, as
a separate component of stockholder's equity in the consolidated statement of
financial condition in accordance with SFAS No. 115.
Premiums and discounts are amortized as an adjustment to interest income
over the life of the related securities using a method that approximates the
interest method. Realized gains or losses for securities classified as either
available for sale or held to maturity are reported in earnings. Cost of
securities is determined on the specific identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their outstanding principal balance, less unearned
interest and allowance for loan losses. Loan origination and commitment fees and
costs incurred in the origination of new loans are deferred and amortized using
the interest method over the life of the loans as an adjustment of interest
yield. Unearned interest on installment loans is recognized as income under a
method which approximates the interest method. Interest on loans not made on a
discounted basis is credited to income based on the loan principal outstanding
at stated interest rates.
Management believes that the allowance for loan losses is adequate. It is
the policy of the Bank to increase its valuation allowances for estimated losses
on loans when, based on management's evaluation, a loss becomes both probable
and estimable. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. Also, management's periodic
evaluation considers factors such as loss experience, current delinquency data,
known and inherent risks in the portfolio, identification of adverse situations
which may affect the ability of debtors to repay, the estimated value of any
underlying collateral and assessment of current economic conditions. Additions
to allowances are charged to income. Any recoveries are credited to the
allowance.
Effective January 1, 1995, the Company adopted SFAS No. 114 -- "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118 -- "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
No. 114, as amended by SFAS No. 118, requires a creditor to measure impairment
of a loan based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or, as a practical method, at the observable
market price of the loan, or the fair value of the collateral if the loan is
collateral dependent. This Statement is applicable
F-10
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
to all loans, except large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, leases and loans that are evaluated at
fair value or at the lower of cost or fair value. The Bank considers loans over
$500,000 for individual impairment evaluations. Loans are considered impaired
when, based on management's evaluation, a borrower will not be able to fulfill
its obligation under the original terms of the loan. SFAS No. 118 amends the
income recognition provisions that had been included in SFAS No. 114. The
adoption of SFAS No. 114 and SFAS No. 118 on January 1, 1995 had no effect on
the Company's financial condition or results of operations for 1995. No loans
were impaired as of March 31, 1996 or December 31, 1995.
INTEREST INCOME
Recognition of interest on mortgage, consumer and other loans is
discontinued when loans are 90 days or more in arrears on payment of principal
or interest or earlier when other factors indicate that collection of interest
or principal is doubtful. Loans for which the recognition of interest income has
been discontinued are designated as non-accruing. Such loans are not reinstated
to accrual status until interest is received currently or no other factors
indicative of doubtful collection exist.
Discounts and premiums on purchased mortgage loans are accreeted (amortized)
to income over the remaining life of the loans.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans intended for sale in the secondary market are carried at the
lower of cost or estimated market, computed on the aggregate method. The amount
by which cost exceeds market value is accounted for as a valuation allowance.
Changes in the valuation allowance are included in the determination of income
in the period in which the change occurs.
LOAN SERVICING FEES
Loan servicing fees, which are based on a percentage of the principal
balance of the mortgage loans serviced, are credited to income as mortgage
payments are collected. Late charges and miscellaneous other fees collected from
mortgagors are credited to income when earned, adjusted for estimated amounts
not expected to be collected. Loan servicing costs are charged to expense when
incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is determined based on experience and
results mainly from expenses incurred in the foreclosure of property not
reimbursed by insurers on loans serviced for others.
SERVICING RIGHTS
During 1995, the Company adopted SFAS No. 122 -- "Accounting for Mortgage
Servicing Rights -- an amendment of FASB Statement No. 65." Prior to
implementation of this Statement, the Company treated mortgage servicing rights
in accordance with SFAS No. 65, which did not allow the recognition of servicing
rights related to loans originated by an entity. SFAS No. 122 amends SFAS No. 65
to permit prospectively the capitalization of servicing rights acquired through
loan origination activities and requires that a portion of the cost of
originating a mortgage loan be allocated to the mortgage servicing right as a
whole. To determine the fair value of the servicing rights, the Company uses the
market prices of comparable servicing sale contracts.
F-11
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
SFAS 122 also requires that all mortgage servicing rights be evaluated for
impairment. In determining impairment, servicing rights were disaggregated into
their predominant risk characteristic, interest rate. For purposes of measuring
impairment, mortgage servicing rights are stratified by pool on the basis of
interest rates. An impairment is recognized whenever the prepayment pattern of
the mortgage pool indicates that the fair value of the related mortgage
servicing rights is less than its carrying amount. An impairment is recognized
by charging such excess to income. The Company determined that no reserve for
impairment was required as of March 31, 1996 or December 31, 1995. As of
December 31, 1995, the fair value of capitalized mortgage servicing rights was
approximately $10,420,000. In determining fair value, the Company considers the
fair value of servicing rights with similar risk characteristics.
The adoption of this Statement had the effect of increasing net gain on
sales of loans by approximately $1,553,000 and net income by approximately
$1,054,000 for the year ended December 31, 1995, and increasing capitalized
servicing rights at December 31, 1995 by approximately $2,285,000. SFAS 122
prohibits retroactive application, therefore, mortgage servicing rights related
to loans originated prior to the adoption of the Statement continue to be
unrecognized in the Company's consolidated financial statements.
The cost of acquiring the rights to service mortgage loans is capitalized
and amortized over the period of net servicing revenue. The cost of loan
servicing rights purchased and amortization thereon is periodically evaluated in
relation to estimated future net servicing revenue.
SALE OF SERVICING RIGHTS
The sale of servicing rights is recognized upon executing the contract and
title and all risks and rewards have irrevocably passed to the buyer. Gains and
losses realized on such sales are recognized based upon the difference between
the selling price and the carrying value of the related servicing rights sold.
EXCESS SERVICING FEES RECEIVABLE
Excess servicing fees receivable represents the present value of the
difference between the contractual interest rate of loans sold, adjusted for
normal servicing fees, and the agreed yield to investors over the estimated
remaining life of such loans. The receivable is realized through receipt of the
excess service fees over time. The cost of excess servicing and the amortization
thereon is periodically evaluated in relation to estimated future net servicing
revenue as a reduction of servicing income. Any impairment in the value of the
excess servicing fees receivable due to actual or anticipated prepayment
experience is recognized currently as a reduction of excess servicing fees
receivable. The resulting excess servicing fees receivable is amortized over the
estimated life using a method approximating the level-yield method as a
reduction of servicing income.
FORECLOSED REAL ESTATE HELD FOR SALE
Other real estate owned comprises properties acquired in settlement of loans
and initially recorded at fair value less estimated costs to sell at the date of
acquisition. Costs relating to the development and improvement of the property
are capitalized, whereas those relating to holding the property are expensed as
incurred.
F-12
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. In providing allowances for
losses, the cost of holding real estate, including interest costs, are
considered. Gains or losses resulting from the sale of these properties are
credited or charged to income.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful life of each type of asset. Major additions and
improvements which extend the life of the assets are capitalized, while repairs
and maintenance are charged to expense.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121 -- "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed." This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets, to be held and used. Under
such Statement, long-lived assets and certain identifiable intangibles to be
held and used must be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, an estimate of the
future cash flows expected to result from the use of the asset and its eventual
disposition must be made. If the sum of the future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized.
Application of this Statement is required for financial statements for
fiscal years beginning after December 15, 1995. Based on presently available
information, management believes the application of this Statement in future
years should not have a material adverse effect on the Company's financial
condition or results of operations.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
The cost in excess of fair value of net assets acquired results from the
acquisition of a mortgage banking institution and the Bank in prior years, which
is being amortized over a twelve year period. Accumulated amortization amounted
to $961,223, $930,059 and $805,408 as of March 31, 1996, December 31, 1995 and
1994, respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
the same or similar securities. Amounts received under these agreements
represent short-term borrowings and the securities underlying the agreements
remain in the asset accounts.
TRANSFERS OF RECEIVABLES WITH RECOURSE
Transfers of receivables with recourse are recognized as a sale if the
Company surrenders control of the future economic benefits embodied in the
receivables, its obligation under the recourse provisions can be reasonably
estimated and transferee cannot require the Company to repurchase the
receivables except pursuant to the recourse provisions. Any transfers of
receivables with recourse not meeting all of these conditions are recognized as
a liability in the consolidated financial statements.
F-13
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
Gains and losses realized on the sale of loans are recognized at the time of
the sale of the loans or pools to investors, based upon the difference between
the selling price and the carrying value of the related loans sold as adjusted
for any estimated liability under recourse provision. In most sales, the
servicing function for the loans sold is retained by the Company.
INTEREST RATE RISK MANAGEMENT
The Company enters into interest rate caps, swaps, options and/or futures
(primarily based on Eurodollar certificates of deposits and U.S. Treasury note
contracts) to manage its interest rate exposure. Such instruments are designated
as hedges against future fluctuations in the interest rates of specifically
identified assets or liabilities. Options and futures are reported at fair value
under investments in the accompanying Consolidated Statement of Financial
Condition, with related gains or losses reported in the Consolidated Statement
of Income. Interest rate caps and swaps are not recognized in the Consolidated
Statement of Financial Condition and are not marked to market. Net interest
settlements on interest rate caps and swaps are recorded as adjustments to
interest income or expense.
EMPLOYEE BENEFITS
The Company or its subsidiaries has no post retirement benefits plan for its
employees as of March 31, 1996 and December 31, 1995.
INCOME TAXES
The Company follows an asset and liability approach in the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. A valuation allowance is recognized for any deferred tax asset
for which, based on management's evaluation, it is more likely than not (a
likelihood of more than 50%) that some portion or all of the deferred tax asset
will not be realized.
CAPITAL RESERVE
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum
of 10% of net income of the Bank be transferred to capital surplus until such
surplus equals the greater of 10% of total deposits or paid-in capital.
STOCK OPTION PLANS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. This Statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income, and if presented, earnings per share, as if this Statement had been
adopted. The accounting requirements of this Statement are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. As discussed in
Note 20 to the accompanying consolidated financial statements, the Company
adopted a Stock Option Plan in
F-14
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
June 1996 and intends to make awards thereunder in conjunction with the
Company's initial public offering. Management intends to utilize the intrinsic
value based method of accounting for compensation cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that will be realized in the future.
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, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and stops recognizing financial assets when control has been
surrendered, and liabilities when extinguished.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values at the date of the
transfer. Servicing assets and liabilities must be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.
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.
EARNINGS PER SHARE
Primary earning per common share is computed by dividing net income for the
year by the weighted average number of shares outstanding during the period
(5,189,044 for all periods presented in the accompanying consolidated financial
statements).
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks and other highly liquid securities with an
original maturity of three months or less.
NOTE 2 -- ACQUISITION OF BRANCHES AND OTHER BANKING INSTITUTIONS:
On June 16, 1995, the Bank entered into a Purchase and Sale of Assets and
Assumption of Liabilities Agreement (the Agreement) with a commercial bank. As
provided by the Agreement, the
F-15
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 2 -- ACQUISITION OF BRANCHES AND OTHER BANKING INSTITUTIONS: (CONTINUED)
Bank purchased seven branches, including approximately $2,000,000 in assets
(which excludes cash from the deposits acquired) and approximately $77,340,000
in deposits, including $162,000 interest payable. The premium paid by the Bank
over the value of deposits acquired, which was determined based on negotiations
between the parties to the Agreement, approximated $1,351,000 which is being
amortized over a 10 year period. Accumulated amortization amounted to
approximately $102,000 and $68,000 at March 31, 1996 and December 31, 1995,
respectively.
Effective June 30, 1993, the Bank paid approximately $6,050,000, including
acquisition costs, for all outstanding shares of common stock of Caribbean
Federal Savings Bank (Caribbean Federal) at such date. The fair value of the
assets acquired and liabilities assumed was $79,668,000 and $73,647,000,
respectively. This transaction was accounted under the purchase method of
accounting. The consolidated statement of income and retained earnings for the
year ended December 31, 1993 includes the results of operations of Caribbean
Federal after June 30, 1993.
NOTE 3 -- MORTGAGE LOANS HELD FOR SALE:
Mortgage loans held for sale consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
MARCH 31, 1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Conventional loans..................................... $ 8,693,468 $ 11,573,273 $ 7,734,095
FHA/VA loans........................................... 16,545,425 9,329,694 15,142,305
Construction loans..................................... 626,966 415,373 --
-------------- -------------- --------------
25,865,859 21,318,340 22,876,400
Allowance for loans held for sale...................... -- -- (855,834)
-------------- -------------- --------------
$ 25,865,859 $ 21,318,340 $ 22,020,566
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The aggregate amortized cost and approximate market value of loans held for
sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED APPROXIMATE
AMORTIZED COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
December 31, 1995.................. $ 21,318,340 $ 324,261 $ (11,907) $ 21,630,694
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
March 31, 1996 (unaudited)......... $ 25,865,859 $ 441,525 $ (19,822) $ 26,287,562
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
</TABLE>
Substantially all of the loans are pledged to secure various borrowing from
lenders under mortgage warehousing lines of credit (see note 11).
F-16
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 3 -- MORTGAGE LOANS HELD FOR SALE: (CONTINUED)
The following table summarizes the components of gain on sale of mortgage
loans held-for-sale and mortgage-backed securities held-for-trading:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Proceeds from sales of mortgage loans and
mortgage-backed securities................... $ 36,935,502 $ 32,682,943 $ 176,280,086 $ 463,326,866 $ 783,957,656
Mortgage loans and mortgage-backed securities
sold......................................... (35,967,300) (32,633,761) (172,717,771) (458,772,184) (757,233,908)
------------ ------------ ------------- ------------- -------------
Gain (loss) on sales, net..................... 968,202 49,182 3,562,315 4,554,682 26,723,748
Deferred fees earned, net of loan origination
costs and commitment fees paid............... 1,002,842 1,282,865 2,700,154 (5,904,022) 2,302,394
------------ ------------ ------------- ------------- -------------
Net gain (loss) on sale of mortgage loans..... $ 1,971,044 $ 1,332,047 $ 6,262,460 $ (1,349,340) $ 29,026,142
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
Total gross fees on originated loans totalled approximately $2,679,000,
$9,488,000, $8,244,000 and $556,000 during the three month period ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively.
Gross gains of $1,068,776, $4,058,352 and $10,100,121, and gross losses of
$100,574, $496,037 and $5,545,439 were realized on the above sales during the
three month period ended March 31, 1996 and the years ended December 31, 1995
and 1994, respectively.
F-17
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 4 -- INVESTMENT SECURITIES:
The carrying value and estimated fair value of investment 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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
MARCH 31,
1996 1995 1994
------------------------ ------------------------ ------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
INVESTMENT SECURITIES HELD TO MATURITY
Puerto Rico Government obligations:
Due within one year.................... $ 60,000 $ 60,000 $ 377,000 $ 377,000 $ 460,000 $ 460,000
Due from one to five years............. 1,040,429 1,000,000 1,042,239 1,000,000 1,045,730 981,700
Due over ten years..................... 616,797 609,297 626,807 619,307 676,446 666,618
----------- ----------- ----------- ----------- ----------- -----------
1,717,226 1,669,297 2,046,046 1,996,307 2,182,176 2,108,318
Corporate securities -- Due within one
year.................................... 2,992,208 2,992,208 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 4,709,434 $ 4,661,505 $ 2,046,046 $ 1,996,307 $ 2,182,176 $ 2,108,318
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
MARCH 31,
1996 1995 1994
------------------------ ------------------------ ------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage backed securities:
GNMA certificates:
Due from five to ten years............. $ 113,270 $ 104,205 $ 118,268 $ 108,197 $ 173,796 $ 164,302
Due over ten years..................... 23,804,090 22,372,282 24,616,649 23,680,662 26,618,812 24,224,202
----------- ----------- ----------- ----------- ----------- -----------
23,917,360 22,476,487 24,734,917 23,788,859 26,792,608 24,388,504
----------- ----------- ----------- ----------- ----------- -----------
Federal National Mortgage Association
(FNMA) -- Due over ten years.............. 16,439,511 16,508,576 16,622,989 16,622,989 16,174,807 15,266,530
----------- ----------- ----------- ----------- ----------- -----------
Federal Home Loan Mortgage Corporation
(FHLMC) participation certificates --
Due from five to ten years............. -- -- -- -- 659,251 677,868
Due over ten years..................... 358,892 349,181 372,983 372,983 40,495,369 38,512,070
----------- ----------- ----------- ----------- ----------- -----------
358,892 349,181 372,983 372,983 41,154,620 39,189,938
----------- ----------- ----------- ----------- ----------- -----------
$40,715,763 $39,334,244 $41,730,889 $40,784,831 $84,122,035 $78,844,972
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-18
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 4 -- INVESTMENT SECURITIES: (CONTINUED)
Expected maturities on debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or repayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
MARCH 31,
1996 1995 1994
------------------------ ------------------------ ------------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
MORTGAGE-BACKED SECURITIES AVAILABLE FOR
SALE
CMO residuals and other mortgage-backed
securities................................ $ 7,111,609 $ 8,058,099 $ 7,126,609 $ 8,122,542 $11,683,636 $13,300,325
----------- ----------- ----------- ----------- ----------- -----------
Federal National Mortgage Association
(FNMA) -- Due over ten years.............. 14,450,932 14,089,302 14,845,760 14,946,338 -- --
----------- ----------- ----------- ----------- ----------- -----------
FHLMC participation certificates:
Due from five to ten years............... 741,714 736,016 1,122,434 1,180,194 -- --
Due over ten years....................... 23,627,794 23,157,822 36,352,565 36,759,358 -- --
----------- ----------- ----------- ----------- ----------- -----------
24,369,508 23,893,838 37,474,999 37,939,552 -- --
----------- ----------- ----------- ----------- ----------- -----------
$45,932,049 $46,041,239 $59,447,368 $61,008,432 $11,683,636 $13,300,325
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Government and agencies securities.... $19,529,985 $19,178,851 $ -- $ -- $ -- $ --
FHLB stock................................. 4,075,210 4,075,210 3,279,610 3,279,610 1,877,910 1,877,910
----------- ----------- ----------- ----------- ----------- -----------
$23,605,195 $23,254,061 $ 3,279,610 $ 3,279,610 $ 1,877,910 $ 1,877,910
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $2,363,941 as of March 31, 1996 and
December 31, 1995, and $6,920,968 as of December 31, 1994, which are associated
with the sale in prior years of collateralized mortgage obligations, and not the
Company's mortgage banking activities.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
CMO Certificates................................ $ 15,390,000 $ 15,570,414 $ 50,241,136
CMO Residuals (all interest only)............... 9,900,880 9,790,668 10,096,992
GNMA Certificates............................... 91,030,281 88,447,542 64,183,709
------------ ------------ ------------
$116,321,161 $113,808,624 $124,521,837
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In February 1996, the Bank entered into an agreement with an unrelated
investment management firm whereby such firm has been appointed as investment
advisor with respect to a portion of the Bank's securities portfolio. Pursuant
to such agreement, 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. Such firm receives an
annual management fee of .15% of the average aggregate principal amount under
management of the advisory firm (payable quarterly) together with a quarterly
performance fee of 25% of the net trading profits earned during each calendar
quarter. At
F-19
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 4 -- INVESTMENT SECURITIES: (CONTINUED)
March 31, 1996, this investment advisory firm was managing Bank assets with a
market value of approximately $29.9 million of which $10.8 million was
designated for trading. Such assets were invested as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
AMORTIZED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
(UNAUDITED)
HELD-FOR-TRADING SECURITIES
U.S. Treasury Bills.......................... $ 390,428 $ 390,428
Money market investments..................... 10,362,673 10,362,673
------------ ------------
10,753,101 10,753,101
------------ ------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agencies securities...... 19,529,985 19,178,851
------------ ------------
$ 30,283,086 $ 29,931,952
------------ ------------
------------ ------------
</TABLE>
The above available for sale securities are being hedged with financial
futures contracts based on U.S. Treasury securities and Eurodollars; at March
31, 1996 no such contracts were outstanding. Beginning with the quarter ended
June 30, 1996, such firm will execute hedging strategies on behalf of the Bank
for all securities which are held for trading or available for sale. At March
31, 1996, the Bank's securities held for trading and available for sale had a
fair value of approximately $71.5 million.
Unrealized gains and losses of securities held to maturity and available for
sale follows: December 31,
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
MARCH 31,
1996 1995 1994
----------------------- --------------------- -------------------------
GROSS UNREALIZED GROSS UNREALIZED GROSS UNREALIZED
----------------------- --------------------- -------------------------
GAINS LOSSES GAINS LOSSES GAINS LOSSES
---------- ----------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
SECURITIES HELD TO MATURITY:
Puerto Rico and United States Government
obligations................................. $ -- $ (47,929) $ -- $ (49,739) $ -- $ (73,858)
Mortgage-backed securities................... $ 256,880 (1,638,399) -- (946,058) -- (5,277,063)
---------- ----------- ---------- --------- ----------- ------------
$ 256,880 $(1,686,328) $ -- $(995,797) $ -- $ (5,350,921)
---------- ----------- ---------- --------- ----------- ------------
---------- ----------- ---------- --------- ----------- ------------
SECURITIES AVAILABLE FOR SALE:
US Government Obligations.................... $ -- $ (351,134) $ -- $ -- $ -- $ --
Mortgage-backed securities................... 1,036,013 (926,823) 1,744,790 (183,726) 1,616,689 --
---------- ----------- ---------- --------- ----------- ------------
$1,036,013 $(1,277,957) $1,744,790 $(183,726) $ 1,616,689 $ --
---------- ----------- ---------- --------- ----------- ------------
---------- ----------- ---------- --------- ----------- ------------
</TABLE>
During the three month period ended March 31, 1996 proceeds from the sale of
securities available for sale totalled approximately $12,644,000; gains realized
in those sales totalled approximately $329,000. There were no sales of
securities held to maturity or available for sale during 1995. During 1994
proceeds from the sale of securities available for sale sold at their carrying
value amounted to approximately $3,691,000; there were no sales of securities
held to maturity. Proceeds from sales of securities and gains realized on those
sales during 1993 amounted to $28,179,488 and $489,267, respectively.
F-20
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 4 -- INVESTMENT SECURITIES: (CONTINUED)
During 1995, the Company reclassified investment securities from its
available for sale to its held for trading portfolio with a carrying value of
approximately $4,671,000 at the time of the transfer, resulting in an increase
in net income of $470,092 for 1995 at such time.
As discussed in notes 10, 11, 12, 13 and 15, investment securities, mortgage
loans, and deposits at interest with banks amounting to approximately
$239,712,000 and $212,307,000 were pledged to secure securities sold under
agreements to repurchase, advances from the FHLB, notes payable, long-term debt,
subordinated notes and irrevocable standby letters of credit issued by the FHLB
as of March 31, 1996 and December 31, 1995, respectively.
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Real estate loans:
Residential -- first mortgage........................ $328,027,824 $282,497,680 $194,707,115
Residential -- second mortgage....................... 14,407,325 14,371,526 13,298,580
Construction......................................... 13,222,763 15,045,844 12,038,774
Commercial........................................... 70,247,627 67,385,930 44,092,487
------------ ------------ ------------
425,905,539 379,300,980 264,136,956
Undisbursed portion of loans in process................ (3,901,347) (5,726,693) (5,945,295)
Net deferred loan fees................................. (177,826) (265,768) (424,377)
------------ ------------ ------------
421,826,366 373,308,519 257,767,284
------------ ------------ ------------
Other loans:
Commercial........................................... 30,391,466 27,816,427 14,102,191
Consumer:
Loans secured by deposits.......................... 7,900,094 7,496,575 5,828,564
Other.............................................. 78,967,504 70,560,722 29,278,496
Unamortized discount................................. (341,449) (383,216) (590,939)
Unearned interest.................................... (1,320,992) (1,448,139) (1,884,298)
------------ ------------ ------------
115,596,623 104,042,369 46,734,014
------------ ------------ ------------
Total loans...................................... 537,422,989 477,350,888 304,501,298
Allowance for loan losses.............................. (3,308,951) (3,510,251) (2,887,099)
------------ ------------ ------------
$534,114,038 $473,840,637 $301,614,199
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-21
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year......... $3,510,251 $2,887,099 $2,887,099 $3,028,541 $1,230,329
Provision (credit) for loan
losses............................ 6,525 (50,000) 950,000 -- --
Allowance for acquired loans....... -- -- -- -- 1,682,734
Loans charged-off.................. (255,851) (73,527) (508,946) (100,142) (118,004)
Recoveries......................... 48,026 45,625 182,098 -- 262,438
Other.............................. -- -- -- (41,300) (28,956)
---------- ---------- ---------- ---------- ----------
Balance, end of year............... $3,308,951 $2,809,197 $3,510,251 $2,887,099 $3,028,541
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
As of March 31, 1996, loans on which the accrual of interest income had been
discontinued amounted to approximately $11,291,160. The additional interest
income that would have been recognized during the three month period then ended
amounted to approximately $151,000.
As of December 31, 1995, 1994 and 1993, loans on which the accrual of
interest income had been discontinued amounted to approximately $10,032,000,
$6,002,000 and $5,538,000, respectively. The additional interest income that
would have been recognized during 1995, 1994 and 1993 had these loans been
accruing interest amounted to approximately $261,000, $121,000 and $245,000,
respectively. The Company has no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 1995.
NOTE 6 -- MORTGAGE LOAN SERVICING:
The Company's fees for servicing mortgage loans generally range from .25% to
.50% on the declining outstanding principal balances of the mortgage loans
serviced. Servicing fees are collected out of payments from mortgagors on a
monthly basis. The servicing agreements are terminable by permanent investors
for cause without penalty or after payment of a termination fee ranging from .5%
to 1% of the outstanding principal balance of the loans. At March 31, 1996, the
mortgage loans servicing portfolio amounted to $2,090,712,000, excluding
approximately $265,513,000 serviced for the Bank. At December 31, 1995 and 1994,
the mortgage loans servicing portfolio amounted to approximately $2,007,435,000
and $1,900,819,000, respectively, excluding approximately $290,765,000 and
$213,924,000, respectively, serviced for the Bank.
F-22
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 6 -- MORTGAGE LOAN SERVICING (CONTINUED)
The change in the mortgage servicing rights are as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period............................ $8,209,661 $4,417,813 $ 4,417,813 $4,286,848 $ 6,437,881
Capitalization of rights........... 474,125 2,285,331
Rights purchased................... 269,963 148,385 3,004,320 1,000,166 476,662
Amortization:
Scheduled........................ (291,375) (714,876) (1,497,803) (869,201) (827,695)
Unscheduled...................... -- -- -- -- (1,800,000)
---------- ---------- ----------- ---------- -----------
Balance at end of period........... $8,662,374 $3,851,322 $ 8,209,661 $4,417,813 $ 4,286,848
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
</TABLE>
In 1994, the Company sold the servicing rights for mortgage loans previously
originated by the Company and thus not recognized in financial statements, with
an outstanding principal balance of $220,990,000 at a gain of $2,914,850. There
were no sales of servicing rights during the three month period ended March 31,
1996 nor the years ended December 31, 1995 or 1993.
Among the conditions established in its various servicing agreements, the
Company is committed to advance from its own funds any shortage of monies
required to complete timely payments to investors in GNMA mortgage-backed
securities issued and in its FHLMC portfolio. At March 31, 1996, the mortgage
loan portfolio serviced for GNMA, FNMA and FHLMC and subject to the timely
payment commitment amounted to approximately $1,434,673,000, $62,056,000 and
$309,584,000, respectively. At December 31, 1995, the mortgage loan portfolio
serviced for GNMA, FNMA and FHLMC and subject to the timely payment commitment
amounted to approximately $1,427,203,000, $46,961,000 and $312,082,000 (1994 --
$1,409,991,000, $52,232,000, $301,195,000, respectively).
Total funds advanced as of March 31, 1996 in relation to such commitments
amount to $786,097, $80,927 and $940,769 for escrow advances, principal and
interest advances and foreclosure advances, respectively. Total funds advanced
as of December 31, 1995 in relation to such commitments amount to $1,119,900,
$95,784 and $522,757 for escrow advances, principal and interest advances and
foreclosure advances, respectively (1994 -- $148,264, $2,238,074 and $330,925,
respectively).
In connection with mortgage servicing activities, the Company holds funds in
trust for investors representing amounts collected primarily for the payment of
principal, interest, real estate taxes and insurance premiums. Such funds are
deposited in separate custodial bank accounts and are not commingled with the
Company's operating and other funds. At March 31, 1996, December 31, 1995 and
1994, the related escrow funds amounting to approximately $38,046,000,
$30,839,000 and $21,391,000, respectively, are excluded from the Company's
assets and liabilities. These funds include at March 31, 1996, December 31, 1995
and 1994, approximately $14,612,000, $13,948,000 and $10,039,000, respectively,
deposited in the Bank.
F-23
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 7 -- EXCESS SERVICING FEES RECEIVABLE:
The changes in excess servicing fees receivable are shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
-------- -------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $847,938 $979,005 $ 979,005 $198,920 $291,516
Additions.................................... 809,913
Amortization:
Scheduled.................................. (19,384) (32,767) (131,067) (29,828) (29,828)
Unscheduled................................ -- -- -- -- (62,768)
-------- -------- --------- -------- --------
Balance at end of period..................... $828,554 $946,238 $ 847,938 $979,005 $198,920
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
</TABLE>
NOTE 8 -- PREMISES AND EQUIPMENT:
Premises and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31,
ESTIMATED 1996
USEFUL ----------- DECEMBER 31,
LIVES ------------------------
(YEARS) (UNAUDITED) 1995 1994
---------- ----------- -----------
<S> <C> <C> <C> <C>
Land and building............................ 40 $ 350,000 $ -- $ --
Furniture and fixtures....................... 5 8,688,638 8,420,457 7,043,208
Leasehold improvements....................... 10 4,611,814 4,500,991 3,357,030
Autos........................................ 5 27,900 27,900 98,920
----------- ----------- -----------
13,678,352 12,949,348 10,499,158
Less -- Accumulated depreciation and
amortization.............................. (6,386,754) (5,976,023) (4,878,151)
----------- ----------- -----------
$ 7,291,598 $ 6,973,325 $ 5,621,007
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-24
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 9 -- DEPOSITS:
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Passbook savings................................................. $ 73,894,051 $ 73,471,042 $ 44,392,993
------------ ------------ ------------
NOW accounts..................................................... 21,755,526 21,233,410 16,600,752
Super NOW accounts............................................... 54,939,369 52,405,683 46,740,513
Regular checking accounts (non-interest bearing)................. 21,247,025 19,073,123 3,147,900
Commercial checking accounts (non-interest bearing).............. 29,672,367 33,925,790 32,408,079
------------ ------------ ------------
127,614,287 126,638,006 98,897,244
------------ ------------ ------------
Certificates of deposit:
Under $100,000................................................. 201,185,457 194,657,528 127,598,479
$100,000 and over.............................................. 137,000,331 122,144,426 108,094,229
------------ ------------ ------------
338,185,788 316,801,954 235,692,708
------------ ------------ ------------
Accrued interest payable......................................... 1,428,661 1,275,561 1,165,469
------------ ------------ ------------
$541,122,787 $518,186,563 $380,148,414
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
At March 31, 1996 the weighted average stated interest rate on all deposits
was 4.99%. The weighted average stated interest rate on all deposits at December
31, 1995 and 1994 was 5.03% and 4.85%, respectively.
NOTE 10 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
At December 31, 1995 and 1994, the Company had a liability of $98,483,188
and $108,921,552, respectively excluding interest payable amounting to $169,821
and $170,913 relating to such agreements with interest ranging from 1.75% to
7.5% in 1995 and 3.00% to 6.88% in 1994. These agreements mature in one to
thirty days.
Information on these agreements follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------------------------
APPROXIMATE
MARKET AND
CARRYING VALUE
REPURCHASE OF UNDERLYING
TYPE OF SECURITY LIABILITY SECURITIES
- ---------------------------------------- ------------- --------------
<S> <C> <C>
(UNAUDITED)
GNMA.................................... $ 71,719,001 $ 72,589,750
CMO Tranches............................ 13,576,384 15,390,000
CMO Residuals........................... 10,018,984 12,327,454
FHLMC................................... -- --
------------- --------------
$ 95,314,369 $ 100,307,204
------------- --------------
------------- --------------
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1994
------------------------------- --------------------------------
APPROXIMATE APPROXIMATE
MARKET AND MARKET AND
CARRYING VALUE CARRYING VALUE
REPURCHASE OF UNDERLYING REPURCHASE OF UNDERLYING
TYPE OF SECURITY LIABILITY SECURITIES LIABILITY SECURITIES
- ---------------------------------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
GNMA.................................... $ 64,448,500 $ 66,480,368 $ 54,159,001 $ 66,290,642
CMO Tranches............................ 13,576,384 15,570,414 45,300,688 41,191,824
CMO Residuals........................... 9,933,304 9,790,668 7,731,863 10,096,992
FHLMC................................... 10,525,000 10,872,213 1,730,000 1,775,621
------------- -------------- -------------- --------------
$ 98,483,188 $ 102,713,663 $ 108,921,552 $ 119,355,079
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
</TABLE>
F-25
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 10 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
Maximum amount of borrowings outstanding at any month-end during 1995 and
1994 under the agreements to repurchase were $127,094,000 and $142,198,000,
respectively. The approximate average aggregate balance outstanding during the
periods were $107,026,000 and $97,572,000, respectively. The weighted average
interest rate of such agreements was 5.33% and 5.76% at December 31, 1995 and
1994, respectively; the average rate during 1995 and 1994 was 5.30% and 4.17%,
respectively.
Since repurchase agreements are short-term commitments to borrow funds, they
can be assumed to reprice at least quarterly. Therefore, the outstanding balance
of repurchase agreements is estimated to be its fair value.
Securities sold under agreements to repurchase are classified by dealer as
follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
APPROXIMATE APPROXIMATE
MARKET VALUE MARKET VALUE
OF OF
BALANCE OF UNDERLYING BALANCE OF UNDERLYING
BORROWING SECURITIES BORROWING SECURITIES
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Citibank, N.A........................... $31,822,039 $ 34,287,412 $24,027,858 $ 25,800,678
Merrill Lynch........................... 10,310,000 10,781,634 16,685,000 17,145,249
Paine Webber, Inc of Puerto Rico........ 34,448,000 36,210,951 27,495,000 28,668,580
Lehman Brothers Puerto Rico, Inc........ 18,690,000 19,571,548
Banco Popular of Puerto Rico............ 7,615,000 7,841,524
BP Capital Markets...................... 7,149,000 7,415,605 7,615,000 7,841,524
Banco Santander of Puerto Rico.......... 3,970,330 3,770,078 3,970,330 3,686,084
----------- ------------ ----------- ------------
$95,314,369 $100,307,204 $98,483,188 $102,713,663
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The securities underlying such agreements were delivered to, and are being
held by, the dealers with whom the securities sold under agreements to
repurchase were transacted. The dealers may have sold, loaned, or otherwise
disposed of such securities to other parties in the normal course of their
operations, but have agreed to resell the Company the same or similar securities
at the maturities of the agreements. All agreements mature within thirty days.
F-26
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 11 -- NOTES PAYABLE:
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
MARCH 31, ------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Working capital loans, bearing interest averaging 8.88% in 1995 (1994
-- 5.55%)............................................................ $ 3,000,000 $ 4,000,000 $ 4,500,000
Warehousing lines, bearing interest at 3.0% in 1995 and 1994.......... 19,584,857 26,130,032 17,714,597
Promissory notes maturing in 1999 paying semiannual interests at fixed
annual rates ranging from 6.20% to 7.15%............................. 23,600,000 23,600,000 23,600,000
Promissory notes maturing in 2000 paying semiannual interests at fixed
annual rates ranging from 5.55% to 5.67%............................. 15,000,000 15,000,000 --
Promissory note maturing in 2000 paying quarterly interest at a
floating rate of 84% of the three month LIBID rate less .125% (4.88%
at December 31, 1995)................................................ 10,000,000 10,000,000 --
Promissory note maturing in 2003 paying semiannual interest at a fixed
annual rate of 5.50%................................................. 2,400,000 2,400,000 --
----------- ----------- -----------
$73,584,857 $81,130,032 $45,814,597
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
As of March 31, 1996 and December 31, 1995, the Company had various credit
line agreements permitting the Company to borrow up to $79,425,000 and
$108,425,000, respectively. These borrowings are collateralized by mortgage
loans held for sale, certificates of deposit, an assignment of key man insurance
policies on the Company's president and a general assignment of mortgage
payments receivable. These borrowings bear interest at rates related to the
respective bank's prime rate or the Puerto Rico 936 funds market. Some of these
borrowings are also guaranteed by the sole stockholder of the Company. Several
credit line agreements impose certain restrictions on the Company of which the
most important include maintaining net worth and working capital over certain
defined minimums and limitations on indebtedness and declaration of dividends.
Management believes that at December 31, 1995 the Company was in compliance with
the loan agreements.
The following information relates to borrowing of the Company under the
credit line agreements:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Maximum aggregate borrowing outstanding at any month end.... $31,625,917 $134,271,363
----------- ------------
----------- ------------
Approximate average aggregate borrowing outstanding during
the year................................................... $22,020,749 $ 55,725,728
----------- ------------
----------- ------------
Weighted average interest rate, during the year computed on
a monthly basis............................................ 5.79% 6.30%
----------- ------------
----------- ------------
Weighted average interest rate at end of year............... 3.00% 3.50%
----------- ------------
----------- ------------
</TABLE>
Certain promissory notes include pledge agreements where the Company has
pledged certain negotiable securities as a guarantee for payment of some of the
notes totalling $41,000,000 at December 31, 1995. The pledge agreements provide
that the value of the pledged securities must not fall
F-27
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 11 -- NOTES PAYABLE (CONTINUED)
below 105% of the principal balance of the promissory note plus accrued interest
on such amount. In the event that the securities' value falls below the stated
percentage, the Company must deliver additional negotiable securities. At March
31, 1996 securities pledged in compliance with this requirement consist of
mortgage backed securities with a carrying value of $45,054,000 and approximate
market value of $43,508,000. At December 31, 1995 securities pledged in
compliance with this requirement consist of mortgage backed securities with a
carrying value of approximately $44,866,000 and approximate market value of
$44,339,000. At March 31, 1996 and December 31, 1995 floating rate notes of
$10,000,000 are guaranteed by letters of credit issued by the FHLB -- NY.
NOTE 12 -- LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Notes payable bearing annual interest ranging from 7.46% to 10.50%,
due in quarterly installments of $41,683 and maturing in 1996........ $ 41,064 $ 82,748 $ 249,483
Note payable bearing annual interest at 6.95%, due in monthly
installments of $41,667 and maturing on September 1, 1998............ 1,249,990 1,374,991 1,874,995
Note payable bearing annual interest at 7.46% due in quarterly
installments of $133,316 beginning on September 1, 1994 through June
1, 1999.............................................................. 1,732,844 1,866,160 2,399,695
Note payable bearing annual interest at 7.50% due in quarterly
installments of $100,000 beginning on October 27, 1995 through
October 1, 2000...................................................... 1,900,000 2,000,000 --
---------- ---------- ----------
$4,923,898 $5,323,899 $4,524,173
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The scheduled aggregate annual maturities of these notes were approximately
as follows:
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
YEAR ENDING DECEMBER 31, 1996 1995
- -------------------------------------------------- ------------ ------------
<S> <C> <C>
(UNAUDITED)
1996.............................................. $ 1,116,015 $ 1,516,016
1997.............................................. 1,433,268 1,433,268
1998.............................................. 1,308,247 1,308,247
1999.............................................. 666,368 666,368
2000.............................................. 400,000 400,000
------------ ------------
$ 4,923,898 $ 5,323,899
------------ ------------
------------ ------------
</TABLE>
These notes are cross-collateralized with assets and guarantees used as
collateral for lines of credit (see Note 11).
F-28
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 13 -- ADVANCES FROM THE FEDERAL HOME LOAN BANK:
Advances from the FHLB -- NY are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
INTEREST MARCH 31, --------------------------
MATURITY RATE 1996 1995 1994
- --------------------------------------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
September 28, 1995........................... 4.68 $ -- $ -- $ 2,500,000
September 30, 1995........................... 4.70 -- -- 3,500,000
November 25, 1995............................ 6.79 -- -- 1,500,000
April 23, 1996............................... 7.21 1,000,000 1,000,000 1,000,000
August 15, 1996.............................. 6.65 5,000,000 5,000,000 5,000,000
Market value adjustment...................... 1,782 7,135 67,834
----------- ----------- ------------
$ 6,001,782 $ 6,007,135 $ 13,567,834
----------- ----------- ------------
----------- ----------- ------------
Weighted average stated interest rate........ 6.74% 6.74% 5.84%
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The Bank receives advances from the FHLB -- NY under an Advances, Collateral
Pledge and Security Agreement (the "Agreement"). Under the Agreement, the Bank
is required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. In addition, the Bank
maintains standby letters of credit with the FHLB -- NY amounting to
approximately $23,492,000 at March 31, 1996 ($17,492,000 at December 31, 1995).
At March 31, 1996 the specific collateral (in the form of first mortgages notes,
securities and cash deposits) amounting to approximately $91,859,000 were
pledged to the FHLB -- NY as part of the Agreement and to secure standby letters
of credit. (At December 31, 1995 -- $62,263,000). At March 31, 1996 and December
31, 1995, the market value of collateral indicated above was sufficient to
comply with the provisions of the Agreement. The market value adjustment to the
face value of the Advance from the FHLB -- NY represents an allocation of a
portion of the excess price paid to acquire another financial institution in
prior years.
NOTE 14 -- OTHER SECURED BORROWINGS:
In December 1995, the Bank sold mortgage loans with an approximate
outstanding balance of $55 million to two commercial banks (buyers). In
connection with this transaction, R&G Mortgage assumed certain recourse
provisions and guaranteed a specific yield of 7.75% to the buyers. In addition,
the buyers have the right (put option) at their option, to require R&G Mortgage
to purchase the mortgage loans in December 2000 or thereafter. Liability, if
any, under the recourse provisions at December 31, 1995 is estimated by
management to be insignificant. As part of the agreement, R&G Mortgage will have
the right to repurchase after December 1996 any group of loans sold. If this
option is exercised, R&G Mortgage will be obligated to pay the buyers 50 basis
points over the outstanding balance of the mortgage loans so repurchased.
The Company has recognized the transaction as a transfer of loans with
recourse not qualifying as a sale. Accordingly, the proceeds from the
transaction totalling approximately $55,984,000 have been reported as a secured
borrowing in the accompanying consolidated financial statements at December 31,
1995. The outstanding principal of the related loans totalling approximately
$53,959,000 and $55,156,000 have been included as assets at March 31, 1996 and
December 31, 1995, respectively.
F-29
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 15 -- SUBORDINATED NOTES:
On June 14, 1991 the Bank issued $3,250,000 in subordinated capital notes
bearing interest at 8% payable quarterly. These notes are guaranteed by R&G
Mortgage and by the Company's sole stockholder, and by an irrevocable
transferable letter of credit issued by a commercial bank. The Bank shall
deposit in seven equal annual installments (the first of which was made in
September 1992 and the last deposit is scheduled for June 1998) with a trustee
for credit to an established sinking fund, cash or a permitted investment in an
amount sufficient to retire one-seventh (1/7) or $464,286, of the aggregate
principal amount. Likewise, the letter of credit is reduced in equal proportion
to the deposits in such sinking fund.
At March 31, 1996 investments deposited in the trust in compliance with this
requirement consist of FHLMC Participation Certificates with a carrying value of
approximately $1,159,000 and approximate market value of $1,167,000, and
$1,332,829 in special deposit accounts. Investments deposited in the Trust as of
December 31, 1995 in compliance with this requirement consist of FHLMC
Participation Certificates with a carrying value of approximately $1,232,000 and
approximate market value of $1,294,000, and $1,232,000 in special deposit
accounts.
NOTE 16 -- INCOME TAXES:
Under the Puerto Rico tax law R&G Mortgage's and the Bank's tax liability
will be the greater of the tax computed under the regular tax system or the
alternative minimum tax (AMT) system. The AMT is imposed based on 22% on regular
taxable income after certain adjustments for preference items. An AMT credit may
be claimed for tax paid on an AMT basis in excess of the regular tax basis. R&G
Mortgage and the Bank are separate taxable entities under the Puerto Rico Income
Tax Law and are not entitled to file consolidated tax returns.
Prior to the conversion to a Puerto Rico chartered commercial bank on
November 30, 1994, the Bank as a corporation formerly organized under the laws
of the United States, was subject to United States income tax with respect to
all of its income including income from sources within Puerto Rico. For United
States income tax purposes the Bank elected to be treated as a possessions
corporation pursuant to Section 936 of the Internal Revenue Code of 1986 (the
"Code"). Section 936 of the Code allowed the Bank to claim a credit, (the
"Section 936 Credit"), subject to qualification of the source and nature of the
income and certain other limitations, for the United States income tax on income
derived from sources outside of the United States that was attributable to the
active conduct of a trade or business in Puerto Rico ("Qualifying Active
Income").
The credit granted under Section 936 was a full credit against the United
States income tax imposed on Qualifying Active Income. The Section 936 credit,
as described, has been claimed by the Bank for its taxable years beginning
before November 30, 1994 therefore resulting in no United States income taxation
on its Qualifying Active Income.
For Puerto Rico income tax purposes prior to the conversion, the Bank was
taxed as a foreign corporation engaged in a trade or business in Puerto Rico. As
such, the Bank was subject to Puerto Rico income tax on all of its income from
sources within Puerto Rico and income from sources outside Puerto Rico that was
effectively connected with its Puerto Rico business.
As a Puerto Rico chartered commercial bank, the Bank is subject to Puerto
Rico income tax on its income derived from all sources. The Bank is also subject
to United States income taxes on certain types of income from such source.
However, any United States income tax paid by the Bank is, subject to certain
conditions and limitations, creditable as a foreign tax credit against its
Puerto Rico income tax liability.
F-30
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 16 -- INCOME TAXES: (CONTINUED)
A portion of the Company's interest income arises from mortgage loans and
mortgage-backed securities which are exempt from Puerto Rico income tax
purposes. The elimination of such items from the determination of taxable income
results in a reduction of its consolidated income tax liability.
Deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
DEFERRED TAX LIABILITIES:
Deferred net loan origination costs....................... $ 236,967 $ 235,910 $ --
Collateralized mortgage obligation residuals.............. 1,291,068 1,310,350 958,501
Mortgage servicing rights................................. 592,473 462,783 --
Unrealized gain on securities held for trading............ 91,315 -- --
Unrealized gain on securities available for sale.......... -- 608,815 630,509
Excess servicing.......................................... 323,136 444,577 --
------------ ----------- ------------
2,534,959 3,062,435 1,589,010
------------ ----------- ------------
------------ ----------- ------------
DEFERRED TAX ASSETS:
Unrealized loss on securities available for sale.......... (94,358) -- --
Deferred net loan fees.................................... -- (65,836)
Unrealized loss on securities held for trading............ -- (87,711) (819,601)
Unrealized loss on loans held for sale.................... -- -- (333,775)
Other foreclosed property reserve......................... (28,842) (12,479) --
Deferred gains on sale of loans and investments securities
for book purposes........................................ (483,064) (322,663) --
------------ ----------- ------------
(606,264) (422,853) (1,219,212)
------------ ----------- ------------
Net deferred tax liability.................................. $ 1,928,695 $ 2,639,582 $ 369,798
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
As required by SFAS No. 115, the unrealized gains on securities available
for sale is presented net of the related deferred tax liability as a separate
component of stockholder's equity.
The provision for income taxes of the Company varies from amounts computed
by applying the applicable Puerto Rico statutory tax rate of 42% to income
before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed income tax at statutory rate........ $ 7,176 42% $ 2,515 42% $ 11,625 42%
Effect on provision of:
Tax-exempt interest........................ (2,910) (17) (3,548) (59) (3,705) (14)
Other non-taxable income................... (2,099) (12)
Non-deductible expenses.................... 1,458 9 3,584 60 1,430 5
Other...................................... (69) (1) (33) (1) 137 1
--------- --- --------- --- --------- ---
$ 3,556 21% $ 2,518 42% $ 9,487 34%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
F-31
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 16 -- INCOME TAXES: (CONTINUED)
The Puerto Rico Treasury Department is currently examining R&G Mortgage's
income tax returns for the years 1989 to 1992. As of December 31, 1995, R&G
Mortgage has not received notification of any deficiencies for the years under
investigation. Based on presently available information, management believes
that the eventual outcome of this matter should not have a material adverse
effect on the financial condition or results of operations of the Company.
In December 1995, R&G Mortgage was notified of Volume of Business tax
deficiencies of approximately $230,000, including surcharges and interest, for
the fiscal years 1991 to 1996. The notified deficiencies are related to the
allocation method of servicing fees income and other interest income to the
declared gross income used by R&G Mortgage. R&G Mortgage has not accepted these
deficiencies and is contending this matter vigorously.
In October 1994, a Puerto Rico Tax Reform Act (the Reform) was approved to
amend existing tax laws into the "1994 Puerto Rico Internal Revenue Code". The
Reform, among other changes, incorporates tax rate reductions for corporations
effective for taxable years beginning after June 30, 1995. The maximum tax rate
(normal and surtax) is reduced from 42% to 39%. In addition, the Reform
incorporates new accelerated methods of depreciation, repeals the reserve method
for bad debts deduction, and changes the rules for income tax withholdings at
source for certain payments. Managements believes, based on presently available
information, that the Reform will not have an adverse effect on the Company's
financial condition or results of operations.
NOTE 17 -- OTHER OPERATING EXPENSES:
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
THREE MONTH PERIOD YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Advertising....................... $ 470,464 $ 345,565 $ 1,586,351 $ 2,047,870 $ 2,450,882
Stationary and supplies........... 231,415 108,109 740,666 569,540 549,134
Telephone......................... 189,639 116,739 597,058 763,433 461,001
License and other taxes........... 278,017 232,875 1,104,564 758,598 503,632
SAIF insurance.................... 269,516 203,196 954,537 702,343 476,704
Other insurance................... 113,912 120,259 551,407 441,447 367,220
Professional services............. 221,766 220,619 890,992 929,906 1,019,406
Amortization of mortgage servicing
rights........................... 291,375 714,876 1,497,803 869,201 2,627,695
Other............................. 1,259,937 1,142,855 5,807,346 6,186,537 6,105,218
------------- ------------- -------------- -------------- --------------
$ 3,326,041 $ 3,205,093 $ 13,730,724 $ 13,268,875 $ 14,560,892
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
</TABLE>
NOTE 18 -- RELATED PARTY TRANSACTIONS:
During March 1996, the Company declared and paid $500,000 dividends to its
stockholder.
The Company leases its office facilities from an affiliate on a
month-to-month basis. The annual rental under this agreement is approximately
$968,000. R&G Mortgage guarantees the mortgage loans for the facilities being
used which principal balance amounts to approximately $4,797,937 as of December
31, 1995.
F-32
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 18 -- RELATED PARTY TRANSACTIONS: (CONTINUED)
HRU Data Center provided data processing services to R&G Mortgage pursuant
to a five year contract which expired in December 1994. HRU Data Center was a
service bureau controlled by R&G Mortgage and another mortgage banking company.
Each mortgage banking company had a 25% equity interest in HRU Data Center and
the remaining 50% is controlled by the individual who operates the service
bureau. R&G Mortgage discontinued the use of HRU Data center effective January
31, 1995 and is currently using the Bank's data center facility.
Loans to directors, officers and employees of the Company were made in the
ordinary course of business. Interest rates on such loans were substantially the
same as those prevailing at the time for comparable transactions with unrelated
parties and did not involve more than a normal risk of collectibility. In July
1995 R&G Mortgage granted a $900,000 construction loan to a real estate
development company owned by a director of the Company. In November 1995 R&G
Mortgage granted a mortgage loan to an affiliate amounting to $1,439,400 bearing
interest at 1% over prime value. The loan is guaranteed by the Company's
president and sole stockholder. At March 31, 1996 the aggregate amount of loans
outstanding to officers, directors, and principal stockholder's of the Company
and its subsidiaries was approximately $3,031,000. The aggregate amount of loans
outstanding to officers, directors and principal stockholders the Company and
its subsidiaries, including any associates of such persons, was approximately
$3,124,000 at December 31, 1995.
The activity of such loans was as follows:
<TABLE>
<S> <C>
Balance as of December 31, 1993................................ $1,352,539
Loan originations.............................................. 155,013
Loan repayments................................................ (631,107)
----------
Balance as of December 31, 1994................................ 876,445
Loan originations.............................................. 2,464,411
Loan repayments................................................ (216,496)
----------
Balance as of December 31, 1995................................ 3,124,360
Loan originations (Unaudited).................................. 351,800
Loan repayments (Unaudited).................................... (445,622)
----------
Balance as of March 31, 1996 (Unaudited)....................... $3,030,538
----------
----------
</TABLE>
NOTE 19 -- REGULATORY REQUIREMENTS:
The Company has recently received approval from the Board of Governors of
the Federal Reserve System (Federal Reserve Board) to become a registered bank
holding company pursuant to the Bank Holding Company Act of 1956, as amended.
The Company became a bank holding company in connection with its acquisition of
the 88.05% interest in the Bank held by the Company's Chairman of the Board and
Chief Executive Officer (which excludes his required qualifying shares as a
director of the Bank) in exchange for the Company's Class A Shares.
The Company, as a bank holding company, is subject to regulation and
supervision by the Federal Reserve Board and the Commissioner of the Office of
Financial Institutions of Puerto Rico (the Commissioner). The Federal Reserve
Board has established guidelines regarding the capital adequacy of bank holding
companies, such as the Company. These requirements are substantially similar to
those adopted by the FDIC for depository institutions, as set forth below.
F-33
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 19 -- REGULATORY REQUIREMENTS: (CONTINUED)
The Bank is incorporated under the Puerto Rico Banking Act of 1993, as
amended and is subject to extensive regulation and examination by the
Commissioner, the FDIC and certain requirements established by the Federal
Reserve Board.
The mortgage banking business conducted by R&G Mortgage is subject to the
rules and regulations of FHA, VA, FNMA, FHLMC, GNMA and the Commissioner with
respect to originating, processing, selling and servicing mortgage loans and the
issuance and sale of mortgage-backed securities. R&G Mortgage's affairs are also
subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at
all times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder.
The FDIC capital standards for state chartered commercial banks require that
banks must maintain a minimum leverage ratio of Tier 1 (or core) capital to
total assets of at least 3% for the most highly rated banks (i.e., those with a
composite CAMEL rating of 1 under the rating system established by the Federal
Financial Institutions Examination Council). The minimum leverage capital
requirement for all other state commercial banks shall be 3% plus an additional
cushion of at least 100 to 200 basis points and, therefore, shall consist of a
ratio of Tier 1 capital to total assets of not less than 4%. In addition to the
minimum leverage capital standards, state non-member banks generally are
required to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, with at least one-half of that total capital amount
consisting of Tier 1 capital. The total amount of risk-weighted assets is
computed by applying risk weighing factors to the Bank's assets, which vary from
0% to 100% depending on the nature of the assets.
Pursuant to provisions in the Federal Deposit Insurance Company Improvement
Act of 1991 (FDICIA), each federal banking agency was required to revise its
risk-based capital standards to take adequate amount of interest rate risk,
concentration of credit risk and the risk of non-traditional activities. No
final rule incorporating these risks has been promulgated by the FDIC. An FDIC
insured state chartered commercial bank is well capitalized if: (i) has a total
leverage ratio of 5.0% or greater; (ii) has a total risk-based capital ratio of
10.0% or greater; and (iii) has a Tier 1 risk-based capital ratio of 6.0% or
greater. Tier 1 risk-based capital ratio is defined as the ratio of Tier 1
capital to risk-weighted assets.
At March 31, 1996 the Bank's regulatory capital position was as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
% TO TOTAL % TO TOTAL TIER 1 % TO TOTAL
CORE ADJUSTED RISK BASED ADJUSTED RISK BASED WEIGHTED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
--------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Actual................................... $ 42,602 6.54 $ 47,163 11.89 $ 42,602 10.74
Regulatory requirement................... 32,578 5.00 39,655 10.00 23,793 6.00
--------- --- ----------- ----- ----------- -----
Excess................................... $ 10,024 1.54 $ 7,508 1.89 $ 18,809 4.74
--------- --- ----------- ----- ----------- -----
--------- --- ----------- ----- ----------- -----
</TABLE>
F-34
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 19 -- REGULATORY REQUIREMENTS: (CONTINUED)
At December 31, 1995, the Bank's regulatory capital position was as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
% TO TOTAL % TO TOTAL TIER 1 % TO TOTAL
CORE ADJUSTED RISK BASED ADJUSTED RISK BASED WEIGHTED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
--------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Actual................................... $ 39,835 6.25 $ 44,113 11.66 $ 39,835 10.53
Regulatory requirement................... 31,848 5.00 37,825 10.00 22,694 6.00
--------- --- ----------- ----- ----------- -----
Excess................................... $ 7,987 1.25 $ 6,288 1.66 $ 17,141 4.53
--------- --- ----------- ----- ----------- -----
--------- --- ----------- ----- ----------- -----
</TABLE>
The United States Congress Banking Committee has actively considered
legislation to recapitalize the SAIF administered by the FDIC. The proposed
legislation would require a one-time charge to SAIF-insured institutions such as
the Bank. In light of the general uncertainty of the legislative process,
management cannot predict whether legislation reducing SAIF premiums and/or
imposing a special one-time assessment will be adopted, or, if adopted, the
amount of the assessment, if any, that would be imposed on the Bank. If
legislation were to be enacted in the future which would assess a one-time
special assessment of 80 to 85 basis points on SAIF-insured institutions as
previously proposed, management believes, based upon its total SAIF deposits,
the Bank's share of any proposed assessment, if approved, will not have a
material adverse effect on the Company's financial condition or regulatory
capital position, although it may adversely affect results of operations in the
year of the assessment. Given the proposed legislation is intended to
recapitalize the SAIF, if adopted, any assessment is also expected to result in
lower insurance premium rates subsequent to the year of the one-time assessment,
if any.
NOTE 20 -- STOCK OPTION PLAN:
In June 1996 the Board of Directors of the Company adopted a Stock Option
Plan, which is designed to attract and retain qualified personnel in key
positions, provide officers and key employees with a proprietary interest in the
Company as an incentive to contribute to the success of the Company, and reward
key employees for outstanding performance and the attainment of targeted goals.
The Stock Option Plan was approved by the Company's sole stockholder in June
1996. An amount of Company common stock equal to 10% of the aggregate number of
Class B Shares sold in the Company's initial public offering and issued in the
Bank Stockholder Exchange Transaction will be authorized under the Stock Option
Plan, which may be filed by authorized but unissued shares, treasury shares or
shares purchased by the Company on the open market or from private sources. The
Stock Option Plan provides for the grant of stock options at an exercise price
equal to the fair market value of the Class B Shares. Stock Options are
available for grant to key employees of the Company and any subsidiaries. No
options are expected to be issued until the commencement of the public offering.
NOTE 21 -- PROFIT SHARING PLAN:
The Company established in 1993 a profit sharing plan which covers
substantially all regular employees. Annual contributions to this plan are based
on matching percentages based on the employee years of service and on
operational income, as defined by the plan, and are deposited in a trust.
Contributions to this plan during the three month period ended March 31, 1996
and the years ended December 31, 1995, 1994 and 1993 amounted to approximately
$11,000, $120,000, $108,000 and $161,000, respectively.
F-35
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 22 -- 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 $356,758,600 and
$337,641,500 at March 31, 1996 and December 31, 1995, respectively. 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 $59,914,000 and $58,806,000 at March 31, 1996 and December 31,
1995, respectively.
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of March 31, 1996 and December 31, 1995, the Company had open commitments
to issue GNMA certificates in the amount of $52,625,093 and $41,101,832,
respectively.
COMMITMENTS TO SELL MORTGAGE LOANS
As of March 31, 1996 the Company had commitments to sell mortgage loans to
third party investors amounting to $24.7 million ($30.0 million at December 31,
1995).
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.
Minimum annual rental commitments under noncancellable operating leases for
certain office space and equipment including a lease from an affiliate, were as
follows:
<TABLE>
<CAPTION>
AT
AT DECEMBER 31,
YEAR MARCH 31, 1996 1995
- ---------------------------------------------------------- -------------- --------------
<S> <C> <C>
(UNAUDITED)
1996...................................................... $ 1,356,581 $ 1,839,005
1997...................................................... 1,901,853 1,900,403
1998...................................................... 1,878,682 1,877,232
1999...................................................... 1,796,887 1,795,438
2000...................................................... 1,709,133 1,707,683
Later years............................................... 4,019,956 3,913,331
-------------- --------------
$ 12,663,092 $ 13,033,092
-------------- --------------
-------------- --------------
</TABLE>
Rent expense for the three months ended March 31, 1996 and 1995 was $535,970
and $379,269, respectively. Rent expenses amounted to approximately $1,914,000
in 1995, $1,810,000 in 1994 and $1,460,000 in 1993.
LITIGATION
The Company is a defendant in legal proceedings arising from normal business
activities. Management believes, based on the opinion of legal counsel, that the
final disposition of these matters will not have a material adverse effect on
the Company's financial position or result of operations.
F-36
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 22 -- COMMITMENTS AND CONTINGENCIES: (CONTINUED)
OTHERS
At December 31, 1995 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 at the time of sale, which are serviced by the
Company, amounts to approximately $180,170,401 at March 31, 1996 and December
31, 1995. Liability, if any, under the recourse provisions at March 31, 1996 and
December 31, 1995 is estimated by management to be insignificant.
NOTE 23 -- SUPPLEMENTAL DISCLOSURE ON THE STATEMENT OF CASH FLOWS:
During the three month period ended March 31, 1996 the Company paid interest
amounting to $8,823,000.
During 1995, 1994 and 1993, the Company paid interest amounting to
approximately $34,403,000, $24,179,000 and $15,055,000, respectively and income
taxes $1,820,000, $5,696,000 and $5,799,000, respectively.
During 1995 and 1994 the Company retained for investment approximately
$17,631,000 and $51,492,000, respectively loans securitized from its own
mortgage loan portfolio.
NOTE 24 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK:
In the normal course of business, the Company uses various off-balance sheet
financial instruments to satisfy the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments and interest rate exchange agreements
(swaps). These instruments involve, to varying degrees, elements of credit and
interest rate in excess of the amount recognized in the statement of financial
condition. The contract or notional amounts of these instruments, which are not
included in the statement of financial condition, are an indicator of the
Company's activities in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. For interest rate swap contracts, the contract or
notional amounts do not represent exposure to credit loss. Instead, the amount
potentially subject to credit loss is substantially less.
Contractual commitments to extend credit are legally binding agreements to
lend money to customers at predetermined interest rates for a specified period
of time. Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. To extend credit the Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counterparty. A geographic concentration exists within
the Company's mortgage loans portfolio since most of the Company's business
activity is with customers located in Puerto Rico.
Interest rate swap agreements involve the exchange of fixed and floating
rate interest payment obligations without the exchange of the underlying
principal. Entering into interest rate agreements involves the risk of dealing
with counterparties and their ability to meet the terms of the contracts, and
also the interest rate risk associated with unmatched positions.
F-37
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 24 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK: (CONTINUED)
The total amounts of financial instruments with off-balance sheet risk at
December 31, follows:
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent potential
credit risk:
Commitments to extend credit excluding the undisbursed portion of
loans in process:
Commitments to originate loans.................................... $12,037,063
-----------
-----------
Unused lines of credit............................................ $ 5,991,183
-----------
-----------
Financial instruments whose notional or contractual amounts exceed the
amount of potential credit risk:
Interest rate swap contracts........................................ $35,000,000
-----------
-----------
Interest rate caps.................................................. $ --
-----------
-----------
</TABLE>
A detail of interest rate swaps at December 31, 1995 follows:
<TABLE>
<CAPTION>
NOTIONAL PAY RECEIVE RATE
AMOUNT MATURITY FIXED RATE FLOATING
- -------------- ----------------------- ------------- ------------------
<C> <C> <C> <S>
$ 5,000,000 August 27, 1996 4.50% 3 months Libor
5,000,000 September 30, 1996 4.49% 3 months Libor
5,000,000 October 19, 1996 4.42% 3 months Libor
10,000,000 September 2, 1997 6.60% 3 months Libor
10,000,000 October 24, 2000 5.20% 3 months Libid
</TABLE>
The following table summarizes the changes in notional amounts of swaps
outstanding during 1995:
<TABLE>
<S> <C>
Beginning balance..................................... $25,000,000
New Swaps............................................. 10,000,000
Maturities............................................ --
-----------
Ending balance........................................ $35,000,000
-----------
-----------
</TABLE>
As of December 31, 1995, interest rate swap maturities are as follows:
<TABLE>
<S> <C>
1996.................................................. $15,000,000
1997.................................................. 10,000,000
2000.................................................. 10,000,000
-----------
$35,000,000
-----------
-----------
</TABLE>
Net interest settlements on SWAP requirements are recorded as an adjustment
to interest expense on deposits. Net interest receipts totalled approximately
$1,100 and $59,000 during the three months ended March 31, 1996 and 1995,
respectively. Net interest receipts amounted to approximately $187,000 during
1995; net payments amounted to approximately $65,000 and $387,000 during 1994
and 1993, respectively.
An interest cap is a guarantee given by one party to another party, in
exchange for a premium, to ensure that if interest rates rise above an agreed
upon protected rate (in the Bank's case, the LIBOR
F-38
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 24 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK: (CONTINUED)
rate) the issuer of the cap will pay to the purchaser the difference between the
market rate and the protected rate. The Bank had interest rate cap contracts
outstanding with notional principal amounts of $3,440,000 which expired during
1995. There are no interest rates cap contracts outstanding at December 31, 1995
or March 31, 1996.
NOTE 25 -- SUPPLEMENTAL INCOME STATEMENT INFORMATION:
Employee costs and other administrative and general expenses are shown in
the Consolidated Statement of Income net of direct loan origination costs.
Direct loan origination costs are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold or amortized as a yield adjustment to interest income on loans
held for investment. Total employee costs and other expenses before
capitalization follow:
<TABLE>
<CAPTION>
THREE MONTH YEAR ENDED
PERIOD ENDED MARCH 31, DECEMBER 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Employee costs........................ $ 3,967,442 $ 2,939,697 $ 13,248,475 $ 11,506,973 $ 12,695,537
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
Other administrative and general
expenses............................. $ 4,120,610 $ 3,828,286 $ 16,661,355 $ 17,174,157 $ 17,767,388
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
</TABLE>
Set forth below are the direct loan origination costs that were capitalized
as part of the carrying cost of mortgage loans inventory or offset against
mortgage loan sales and fees and interest income.
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Offset against mortgage loan sales and
interest income or capitalized as
part of loan inventory............... $ 2,112,074 $ 1,686,769 $ 7,895,297 $ 10,160,820 $ 7,311,852
------------- ------------- -------------- -------------- --------------
------------- ------------- -------------- -------------- --------------
</TABLE>
F-39
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and due from banks....................................... $ 32,559 $ 32,559 $ 21,158 $ 21,158
Money market investments...................................... 71,636 71,636 24,464 24,464
Mortgage loans held for sale.................................. 21,318 21,631 22,020 22,020
Mortgage-backed securities held for trading................... 113,809 113,809 124,522 124,522
Investment securities available for sale...................... 61,008 61,008 13,300 13,300
Investment in Federal Home Loan Bank stock.................... 3,280 3,280 1,878 1,878
Investment securities held to maturity........................ 43,777 42,781 86,304 80,953
Loans, net.................................................... 473,841 492,119 301,614 294,303
Accounts receivable........................................... 10,479 10,479 12,330 12,330
FINANCIAL LIABILITIES
Deposits:
Non interest bearing demand................................. $ 52,998 $ 52,998 $ 35,556 $ 35,556
Savings and NOW accounts.................................... 147,111 147,111 107,734 107,734
Certificates of deposit..................................... 316,802 321,609 235,693 233,686
Securities sold under agreements to repurchase................ 98,483 98,483 108,922 108,922
Notes payable................................................. 81,130 81,130 45,815 45,815
Advances from FHLB............................................ 6,007 6,051 13,568 13,681
Long-term debt................................................ 5,324 5,324 4,524 4,524
Other secured borrowings...................................... 55,984 55,984
Accounts payable and accrued liabilities...................... 14,500 14,500 7,098 7,098
Subordinated notes............................................ 3,250 3,741 3,250 3,331
Unrecognized financial instruments --
Interest rate swap agreements in a net receivable
position*.................................................. $ 14 $ 1,215 $ 10 $ 471
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
*The amount shown under "carrying amount" represents net accrual arising from
those unrecognized financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
SHORT-TERM FINANCIAL INSTRUMENTS
Short-term financial instruments, which include cash and due from banks,
money market investments, accounts receivables, securities sold under agreements
to repurchase, notes payables and accounts payable and accrued interest, have
been valued at their carrying amounts reflected in the Consolidated Statement of
Financial Condition as these are reasonable estimates of fair value given the
relatively short period of time between origination of the instruments and their
expected realization.
F-40
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
INVESTMENT SECURITIES
The fair value of investment securities is based on quoted market prices or
dealer quotes except for the investments in FHLB stock which is valued at its
redemption value.
LOANS
The fair value for loans has been estimated by discounting loans with
similar financial characteristics. Loans were classified by type such as
commercial, commercial real estate, residential mortgage, and consumer. These
asset categories were further segmented into various maturity groups, and by
accruing and non-accruing groups. The fair value of accruing loans was
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. Prepayment experienced in previous periods when
interest rates were at levels similar to current levels was assumed to occur for
mortgage loans, adjusted for any differences in the outlock of interest rates.
Other loans assume little or no prepayments.
Non-accruing loans were assumed to be repaid after one year. Presumably this
would occur either because loan is repaid or collateral has been sold to satisfy
the loan. The value of non-accruing loans was therefore discounted for one year
at the going rate for new loans.
Mortgage loans held for sale, except for loans from the Bank totalling
$9,329,694 in 1995 and $15,142,305 in 1994 have been valued based on market
quotations or commitments selling prices in the secondary market. Loans held for
sale from the Bank have been valued using the same methodology described in the
first paragraph above.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates of deposits do not include the fair value of core
deposits intangible.
LONG-TERM DEBT AND OTHER SECURED BORROWINGS
Long-term debt and other secured borrowings have been valued at their
carrying amounts reflected in the Consolidated Statement of Financial Condition
as these are reasonable estimates of fair value; most of the long-term debt
amounts are at floating market interest rates.
ADVANCES FROM FHLB AND SUBORDINATED NOTES
The fair value of the advances from FHLB and subordinated notes was
determined using discounted cash flow analysis over the remaining term of the
obligations using market rates for similar instruments.
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements was determined taking into
account the current interest rates at December 31, 1995. This value represents
the estimated amount the Bank would pay to terminate the contract or agreement
taking into account current interest rates and, when appropriate, the current
credit worthiness of the counterparts.
F-41
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
In addition, the fair values presented do not attempt to estimate the value
of the Company's fee generating businesses and anticipated future business
activities, that is, they do not represent the Company's value as a going
concern. Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized since, in the majority of cases, the
Company generally intends to hold these financial instruments to maturity and
realize the recorded values.
Reasonable comparability of fair values among financial institutions is not
likely due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a greater degree of subjectivity to
these derived or estimated fair values. Therefore, while disclosure of estimated
fair values of financial instruments is required, readers are cautioned in using
this data for purposes of evaluating the financial condition of the Company.
NOTE 27 -- R&G FINANCIAL CORPORATION (HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:
The following condensed financial information presents the financial
position of R&G Financial (the Holding Company) only as of March 31, 1996
(unaudited):
STATEMENT OF CONDITION
<TABLE>
<S> <C>
ASSETS
Investment in R-G Premier Bank, at equity................................... $26,119,915
Investment in R&G Mortgage, at equity....................................... 41,593,703
-----------
Total assets.............................................................. $67,713,618
-----------
-----------
STOCKHOLDER'S EQUITY.......................................................... $67,713,618
-----------
-----------
</TABLE>
The Holding Company had no operations during the three month period ended
March 31, 1996.
The payment of dividends by the Bank to the Holding Company may be affected
by certain regulatory requirements and policies, such as the maintenance of
certain minimum capital levels.
F-42
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 28 -- INDUSTRY SEGMENTS:
The following summarized financial information presents the results of the
Company's operations for the three month periods ended March 31, 1996 and 1995
and the three year period ended December 31, 1995 for its traditional banking
and mortgage banking activities:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
-----------------------------------------------------------------------
1996 1995
----------------------------------- ----------------------------------
BANK MORTGAGE TOTAL BANK MORTGAGE TOTAL
---------- ---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision of loan
losses......................................... $5,347,571 $ 745,933 $ 6,093,504 $3,852,916 $ 550,348 $4,403,264
Other income:
Net gain (loss) on sale of loans.............. 42,652 1,928,392 1,971,044 113,470 1,218,577 1,332,047
Unrealized gain (loss) on trading
securities................................... (286,842) 89,667 (197,175) -- -- --
Change in provision for cost in excess of
market value of loans held for sale.......... -- -- -- (225,000) -- (225,000)
Net gain on sales of investments.............. 329,225 -- 329,225 -- -- --
Loan administration and servicing fees........ -- 3,008,755 3,008,755 -- 2,765,661 2,765,661
Gain on sale of servicing rights.............. -- -- -- -- -- --
Service charges, fees and other............... 1,286,509 44,532 1,331,041 512,265 46,056 558,321
---------- ---------- ----------- ---------- ---------- ----------
6,719,115 5,817,279 12,536,394 4,253,651 4,580,642 8,834,293
---------- ---------- ----------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits................ 1,333,341 1,316,596 2,649,937 772,561 1,103,560 1,876,121
Office occupancy and equipment................ 942,672 469,964 1,412,636 573,154 433,547 1,006,701
Other administrative and general.............. 1,737,649 1,588,392 3,326,041 1,420,677 1,784,416 3,205,093
---------- ---------- ----------- ---------- ---------- ----------
4,013,662 3,374,952 7,388,614 2,766,392 3,321,523 6,087,915
---------- ---------- ----------- ---------- ---------- ----------
Income before income taxes and minority
interest....................................... $2,705,453 $2,442,327 $ 5,147,780 $1,487,259 $1,259,119 $2,746,378
---------- ---------- ----------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ----------
</TABLE>
F-43
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 28 -- INDUSTRY SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1994
------------------------------------- -------------------------------------
BANK MORTGAGE TOTAL BANK MORTGAGE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision of loan
losses.................................... $17,943,694 $ 2,379,287 $20,322,981 $15,089,132 $ 4,048,355 $19,137,487
Other income:
Net gain (loss) on sale of loans......... 631,824 5,630,636 6,262,460 201,797 (1,551,137) (1,349,340)
Unrealized gain (loss) on trading
securities.............................. 617,788 1,503,823 2,121,611 (214,166) (4,250,552) (4,464,718)
Change in provision for cost in excess of
market value of loans held for sale..... 855,834 -- 855,834 (855,834) -- (855,834)
Net gain on sales of investments......... -- -- -- -- -- --
Loan administration and servicing fees... -- 11,029,995 11,029,995 -- 11,046,019 11,046,019
Gain on sale of servicing rights......... -- -- -- -- 2,914,850 2,914,850
Service charges, fees and other.......... 2,368,128 803,821 3,171,949 1,736,656 785,738 2,522,394
----------- ----------- ----------- ----------- ----------- -----------
22,417,268 21,347,562 43,764,830 15,957,585 12,993,273 28,950,858
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and employee benefits........... 4,330,248 3,953,561 8,283,809 3,193,435 2,058,000 5,251,435
Office occupancy and equipment........... 2,860,176 1,851,136 4,711,312 2,315,668 2,172,667 4,488,335
Other administrative and general......... 6,406,237 7,324,487 13,730,724 4,516,158 8,752,717 13,268,875
----------- ----------- ----------- ----------- ----------- -----------
13,596,661 13,129,184 26,725,845 10,025,261 12,983,384 23,008,645
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes, minority
interest and cumulative effect of change
in accounting principle................... $ 8,820,607 $ 8,218,378 $17,038,985 $ 5,932,324 $ 9,889 $ 5,942,213
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-44
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
NOTE 28 -- INDUSTRY SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------------
BANK MORTGAGE TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Net interest income after provision of loan losses............... $ 10,635,898 $ 3,617,097 $ 14,252,995
Other income:
Net gain (loss) on sale of loans............................... 3,976,982 25,049,160 29,026,142
Unrealized gain (loss) on trading securities................... -- -- --
Change in provision for cost in excess of market value of loans
held for sale................................................. -- -- --
Net gain on sales of investments............................... 394,342 -- 394,342
Loan administration and servicing fees......................... -- 9,326,518 9,326,518
Service charges, fees and other................................ 847,360 331,201 1,178,561
-------------- -------------- --------------
15,854,582 38,323,976 54,178,558
-------------- -------------- --------------
Operating expenses:
Salaries and employee benefits................................. 1,904,885 6,685,296 8,590,181
Office occupancy and equipment................................. 1,448,416 1,946,639 3,395,055
Other administrative and general............................... 3,417,926 11,142,966 14,560,892
-------------- -------------- --------------
6,771,227 19,774,901 26,546,128
-------------- -------------- --------------
Income before income taxes, minority interest and cumulative
effect of change in accounting principle........................ $ 9,083,355 $ 18,549,075 $ 27,632,430
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
NOTE 29 -- SUBSEQUENT EVENT (UNAUDITED)
On June 29, 1996, the Company settled with the Puerto Rico Treasury
Department (PRTD) the income tax examination discussed in Note 16. While the
Company believes that it had valid defenses for its positions, management
believes that it was in the Company's best interest to settle the case rather
than entering into an expensive, protracted negotiation with the PRTD. The
settlement reached was for $1.6 million. The effect of this settlement was to
record additional income tax expense for the six months ended June 30, 1996 of
approximately $400,000. The remainder of the settlement was reserved for during
prior periods.
F-45
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Selected Consolidated Financial and Other Data............................ 7
Summary of Recent Developments............................................ 9
Risk Factors.............................................................. 13
The Company............................................................... 22
Bank Stockholder Exchange Transaction..................................... 25
Use of Proceeds........................................................... 27
Dividends and Market for Class B Shares................................... 27
Capitalization............................................................ 29
Dilution.................................................................. 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business of the Company................................................... 54
Management................................................................ 92
The Commonwealth of Puerto Rico........................................... 101
Regulation................................................................ 103
Beneficial Ownership of Securities........................................ 109
Shares Eligible For Future Sale........................................... 111
Description of Capital Stock.............................................. 111
Selling Stockholder....................................................... 115
Underwriting.............................................................. 115
Legal Matters............................................................. 116
Experts................................................................... 116
Transfer Agent and Registrar.............................................. 116
Additional Information.................................................... 116
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,296,396 SHARES
R&G FINANCIAL
CORPORATION
CLASS B
COMMON STOCK
--------------
PROSPECTUS
--------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following statement sets forth the estimated amount of expenses (other
than underwriting discounts and commissions) to be borne by the Registrant in
connection with the Offering.
<TABLE>
<S> <C>
SEC filing fees................................................. $ 13,430
NASD filing fees................................................ 3,950
Nasdaq filing fees.............................................. 17,982
Printing, postage and mailing................................... 60,000*
Legal fees and expenses......................................... 225,000*
Blue Sky fees and expenses...................................... 15,000*
Accounting fees and expenses.................................... 100,000*
Miscellaneous fees and expenses................................. 14,638*
----------
Total....................................................... $ 450,000*
----------
----------
</TABLE>
- ------------------------
*Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Registrant's Bylaws provide as follows:
6.1 INDEMNIFICATION.
(a) The Corporation shall indemnify, to the fullest extent authorized by the
General Corporation Law of the Commonwealth of Puerto Rico, any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee, or agent of
the Corporation, or is or was serving at the written request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a matter he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful,
provided that the Corporation shall not be liable for any amounts which may be
due to any person in connection with a settlement of any action, suit or
proceeding effected without its prior written consent or any action, suit or
proceeding initiated by any person seeking indemnification hereunder without its
prior written consent. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation and, with respect to any
criminal action or proceeding, that such person had reasonable cause to believe
that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the Corporation, or is or was serving at the written request of the Corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall
II-1
<PAGE>
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expense which such court shall deem proper.
(c) To the extent that a director, officer, employee, or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 6.1(a) or Section 6.1(b) of
this Article VI, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under Section 6.1(a) or Section 6.1(b) of this
Article VI (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth therein. Such determination
shall be made (a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (b) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders.
(e) The Corporation shall not be liable for any amounts which may be due to
any person in connection with a settlement of any action, suit or proceeding
initiated by any person seeking indemnification under this Article VI without
its prior written consent.
6.2 ADVANCEMENT OF EXPENSES. Reasonable expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit or proceeding
described in Section 6.1 may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case upon receipt of an undertaking by or on behalf of
the director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Article VI.
6.3 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to actions
in their official capacity and as to actions in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
6.4 INSURANCE. By action of its Board of Directors, notwithstanding any
interest of the directors in the action, the Corporation may purchase and
maintain insurance, in such amounts as the Board of Directors deems appropriate,
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the written request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power or would be required
to indemnify him against such liability under the provisions of this Article VI
or of the General Corporation Law of the Commonwealth of Puerto Rico, or of the
laws of any other State or political dependency of the United States or foreign
country as may be applicable.
6.5 MODIFICATION. The duties of the Corporation to indemnify and to
advance expenses to a director, officer, employee or agent provided in this
Article VI shall be in the nature of a contract between the Corporation and each
such person, and no amendment or repeal of any provision of this
II-2
<PAGE>
Article VI shall alter, to the detriment of such person, the right of such
person to the advance of expenses or indemnification related to a claim based on
an act or failure to act which took place prior to such amendment or repeal.
An unofficial english translation of Article 4.08 of the General Corporation
Law of 1996 of the Commonwealth of Puerto Rico provides:
A. A corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that said person was or is a director, officer employee, or agent of the
corporation, or was or is serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnification may include expenses
reasonably incurred, including attorneys' fees, awards or judgments, fines and
amounts paid in settlement of such action, suit or proceeding, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any legal action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith or in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, that the person did not have reasonable cause to believe that his
conduct was unlawful.
B. A corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to protect the interests of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnification may include expenses reasonably incurred,
including attorneys' fees, in connection with the defense or settlement of such
aciton or suit if he acted in good faith and in a manner he reasonably believed
to be in, and not opposed to, the best interests of the corporation. No
indemnification shall be made in respect of any claim, matter or issue as to
which such person shall have been adjudged to be liable to the corporation
unless, upon application therefor, the court in which such action or suit was
brought shall determine that, despite the adjudication of liability and in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to be indemnified for such expenses which such court shall deem proper,
and only to the extent to which said court shall determine.
C. To the extent that a director, officer, employee, or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections A and B or in defense of
any claim, matter or issue related thereto, he shall be indemnified against
expenses reasonably incurred by him (including attorneys' fees) by reason of
such action, suit or proceeding.
D. Any indemnification under subsections A and B (except that ordered by a
court) shall be made by the corporation, only as authorized in the specific
case, upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections A and B of this article.
Such determination shall be made:
1. by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, even
if said directors constitute less than a quorum; or
II-3
<PAGE>
2. if there shall not be any such directors, or if such directors shall
so determine by an independent legal counsel in a written opinion to such
effect; or
3. by the stockholders.
E. Prior to the final disposition of such action, suit or proceeding, the
corporation may pay in advance expenses incurred by an officer or director
defending a civil or criminal action, suit or proceeding. Upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to such
indemnification by the corporation, as authorized in this Article. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems convenient.
F. The indemnification and advancement of expenses provided by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement (of expenses) may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to actions in their official capacity and as to actions in another capacity
while holding such office.
G. Every corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
H. For purposes of this Article, "the corporation" shall be deemed to
include, in addition to the resulting corporations, any corporation which is a
party to any consolidation or merger that is absorbed in a consolidation or
merger which, if its separate legal existence had continued, would have had the
power and authority to indemnify its directors, officers, and employees or
agents. So that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer or employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate legal existence had continued.
I. For purposes of this Article, the term "other enterprises" shall include
employee benefit plans. The term "fines" shall include any taxes assessed on a
person with respect to any benefit or employee plan. The term "serving at the
request of the corporation" shall include any service as a director, officer,
employee, or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee pension plan, its participants, or beneficiaries. A person who acted in
good faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee pension plan shall further be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Article.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On July 19, 1996, the Company became a registered bank holding company in
connection with the issuance of 5,189,044 Class A Shares of its Common Stock to
Mr. Victor J. Galan, in consideration for Mr. Galan's contribution to the
Company of 100% of the outstanding common stock of R&G Mortgage (3,150,000
shares) and 1,840,982 shares, or approximately 88.1%, of the outstanding common
stock of the Bank. No underwriters were involved in the transaction and no fees
were paid. The transaction is exempt from the registration requirements of the
Securities Act of 1933 by virtue of Section 4(2) thereof.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules are filed as a part of this
Registration Statement are as follows:
(a) LIST OF EXHIBITS
<TABLE>
<C> <S>
1.0* Engagement Letter dated May 6, 1996 with Friedman, Billings, Ramsey & Co., Inc.
1.1 Form of Underwriting Agreement
2.0* Amended and Restated Agreement and Plan of Merger by and between R&G Financial
Corporation, the Bank and R-G Interim Premier Bank, dated as of June 13, 1996
3.1* Certificate of Incorporation of R&G Financial Corporation
3.2* Certificate of Amendment to Certificate of Incorporation of R&G Financial
Corporation
3.3* Bylaws of R&G Financial Corporation
4.0 Form of Stock Certificate of R&G Financial Corporation
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
10.1 Master Purchase, Servicing and Collection Agreement between R&G Mortgage and the
Bank dated February 16, 1990, as amended on April 1, 1991, December 1, 1991,
February 1, 1994 and July 1, 1994
10.2 Master Custodian Agreement between R&G Mortgage and the Bank dated February 16,
1990, as amended on June 27, 1996.
10.3 Master Production Agreement between R&G Mortgage and the Bank dated February 16,
1990, as amended on August 30, 1991 and March 31, 1995
10.4 Data Processing Computer Service Agreement between R&G Mortgage and R-G Premier Bank
dated December 1, 1994
10.5 Securitization Agreement by and between R&G Mortgage and the Bank, dated as of July
1, 1995
10.6* R&G Financial Corporation Stock Option Plan
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibit 5.0)
23.2 Consent of Price Waterhouse
23.3* Consent of Friedman, Billings, Ramsey & Co., Inc.
24.0 Power of Attorney (included in Signature Page of this Registration Statement)
27.0* Financial Data Schedule
99.1* Valuation Report on Minority Interest of Bank Stockholders, prepared by Friedman,
Billings, Ramsey & Co., Inc., dated June 13, 1996.
</TABLE>
- ------------------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-5
<PAGE>
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Form S-1 Registration Statement to signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Juan, Puerto Rico on July 31, 1996.
R&G FINANCIAL CORPORATION
By: /s/ VICTOR J. GALAN
-----------------------------------
Victor J. Galan
CHAIRMAN OF THE BOARD, PRESIDENT
AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------------------------- ------------------------- ----------------
<C> <S> <C>
Chairman of the Board and
/S/ VICTOR J. GALAN Chief Executive Officer
------------------------------------------- (principal executive July 31, 1996
Victor J. Galan officer)
Director, Controller and
/s/ ANA M. ARMENDARIZ* Treasurer (principal
------------------------------------------- financial and accounting July 31, 1996
Ana M. Armendariz officer)
/s/ RAMON PRATS*
------------------------------------------- Executive Vice President July 31, 1996
Ramon Prats and Director
/s/ ENRIQUE UMPIERRE-SUAREZ*
------------------------------------------- Director and Secretary July 31, 1996
Enrique Umpierre-Suarez
/s/ VICTOR L. GALAN FUNDORA*
------------------------------------------- Director July 31, 1996
Victor L. Galan Fundora
/s/ JUAN J. DIAZ*
------------------------------------------- Director July 31, 1996
Juan J. Diaz
/s/ PEDRO RAMIREZ*
------------------------------------------- Director July 31, 1996
Pedro Ramirez
/s/ LAURENO CARUS ABARCA*
------------------------------------------- Director July 31, 1996
Laureno Carus Abarca
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------------------------- ------------------------- ----------------
<C> <S> <C>
------------------------------------------- Director
Eduardo McCormack
/s/ GILBERTO RIVERA-ARREAGA*
------------------------------------------- Director July 31, 1996
Gilberto Rivera-Arreaga
/s/ BENIGNO R. FERNANDEZ*
------------------------------------------- Director July 31, 1996
Benigno R. Fernandez
</TABLE>
- ------------------------
*By Victor J. Galan pursuant to Power of Attorney.
II-8
<PAGE>
DRAFT
07/30/96
R&G Financial Corporation
2,000,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
August __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
R&G Financial Corporation, a Puerto Rico corporation (the "COMPANY")
and Mr. Victor Galan (the "SELLING STOCKHOLDER") hereby confirm their agreement
with you (the "UNDERWRITER") as set forth below.
1. SECURITIES. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the Underwriters named
in Schedule 1 hereto (the "UNDERWRITERS"), for whom you have been duly
authorized to act as representative (in such capacity, the "REPRESENTATIVE")
1,933,333 shares of the Company's Class B Common Stock $.01 par value per
share (the "COMMON STOCK") and the Selling Stockholder proposes to sell to
the Underwriters 66,667 shares of Class B Common Stock. The aggregate of
2,000,000 shares are herein called the "FIRM SECURITIES."(2) The Company
also proposes to issue and sell to the Underwriters not more than 300,000
additional shares of Common Stock if requested by the Representative as
provided in Section 4 of this Agreement. Any and all shares of Common Stock
to be purchased by the Underwriter pursuant to such option are referred to
herein as the "OPTION SECURITIES." The Firm
- ------------------
(1) Plus an option to purchase from R&G Financial Corporation up to 300,000
additional shares to cover over-allotments.
(2) R&G Financial is also issuing 296,396 additional Class B Shares in
connection with the Bank Stockholder Exchange Transaction, as defined in
the Prospectus. Such shares are not being issued and sold hereunder to the
several Underwriters.
<PAGE>
Securities and any Option Securities are collectively referred to herein as the
"SECURITIES."
The Representative has advised the Company that it proposes to
make a public offering of the Securities on the effective date of the
registration statement hereinafter referred to, or as soon thereafter as in its
judgment is advisable (the "OFFERING").
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-06245)
with respect to the Securities, including a prospectus subject to
completion, has been prepared by the Company in material compliance with
the requirements of the Securities Act of 1933, as amended (the "ACT") and
the rules and regulations of the Securities and Exchange Commission (the
"COMMISSION") thereunder and has been filed by the Company with the
Commission under the Act and one or more amendments to such registration
statement may have been so filed. The Company will next file with the
Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of
final prospectus, or (ii) a final prospectus in accordance with Rules 430A
and 424(b) of the Rules and Regulations. As filed, such amendment and form
of final prospectus, or such final prospectus, shall include all Rule 430A
Information, as hereinafter defined, and, except to the extent that the
Underwriter shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to the Underwriter prior to the
date and time that this Agreement was executed and delivered by the parties
hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond
that contained in the latest Preliminary Prospectus) as the Company shall
have previously advised the Underwriter in writing would be included or
made therein.
As used in this Agreement, the term "REGISTRATION STATEMENT"
means the registration statement filed relating to the Securities, as
amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "PRELIMINARY PROSPECTUS"
means each prospectus subject to completion filed with such registration
statement or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any amendment
thereto at the time it was or is declared effective); the term "PROSPECTUS"
means the prospectus first
<PAGE>
filed with the Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the form of final prospectus included in the Registration Statement at the
time such Registration Statement becomes effective; and the term "RULE 430A
INFORMATION" means information with respect to the Securities and the
offering thereof permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A of the Rules and
Regulations.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus was filed with the Commission it (A) contained all statements
required to be stated therein in material compliance with, and complied in
all material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment
thereto was or is declared effective, and at all times subsequent thereto
up to and including the Firm Closing Date and any Option Closing Date, as
the case may be, each as hereinafter defined, it (A) contained or will
contain all statements required to be stated therein in material compliance
with, and complied or will comply in all material respects with the
requirements of the Act and the Rules and Regulations and (B) did not or
will not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading.
When the Prospectus or any amendment or supplement to the Prospectus is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or
any part thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared
effective) and at all times subsequent thereto up to and including the Firm
Closing Date and any Option Closing Date, as the case may be, the
Prospectus, as amended or supplemented at any such time, (A) contained or
will contain all statements required to be stated therein in material
compliance with, and complied or will comply in all material respects with
the requirements of, the Act and the Rules and Regulations and (B) did not
or will not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (ii) do not apply
to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written
<PAGE>
information furnished to the Company by the Underwriter specifically for
use therein.
(iii) The Company has been approved as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA"); the
Company has been duly incorporated and is validly existing and in good
standing as a corporation under the laws of its jurisdiction of
organization, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and Prospectus; and the Company is duly qualified to
do business and in good standing as a foreign corporation in all other
jurisdictions where its ownership or leasing of properties or the conduct
of its business requires such qualification, except where the failure to so
qualify would result in a material adverse change in the condition
(financial or otherwise), earnings, business, properties, or results of
operations of the Company and its Subsidiaries (as hereinafter defined)
taken as a whole (hereinafter, a "MATERIAL ADVERSE EFFECT")
(iv) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than its wholly owned
subsidiaries, R-G Premier Bank of Puerto Rico, a Puerto Rico commercial
bank, (the "BANK") and R&G Mortgage Corporation, a Puerto Rico mortgage
banking company ("R&G MORTGAGE") (the Bank and R&G Mortgage are
collectively referred to herein as the "SUBSIDIARIES"). Neither the
Company nor the Subsidiaries own any equity interests in any firm or
partnership, association or other entity except as disclosed in the
Prospectus.
(v) R&G Mortgage has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Puerto Rico,
with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and the Prospectus; all of the issued and outstanding shares of
capital stock of the Bank and R&G Mortgage have been duly authorized and
are validly issued, are fully paid and nonassessable, and are directly
owned by the Company free and clear of any security interest, claim, lien,
charge and encumbrance; each of the Company and the Subsidiaries are in
possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders necessary for the
conduct of their respective businesses, all of which are valid and in full
force and effect (except where the failure to hold any such authorization,
license, permit, consent, certificate or order would not have a Material
Adverse Effect) and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such certificate,
<PAGE>
authorization or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus); R&G Mortgage is duly qualified to do business and is in good
standing as foreign corporation in each jurisdiction in which the ownership
or leasing of properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect, and R&G Mortgage is not aware of any proceeding
that has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification. The Company has full corporate power and
authority to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it.
(vi) The Bank has been duly organized and is validly existing as
a commercial bank in good standing under the laws of Puerto Rico, with full
power and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and the Prospectus; the Bank is duly qualified to do business and
in good standing as a foreign corporation in each jurisdiction in which the
ownership or leasing of properties or the conduct of its business requires
such qualification, except where the failure to be so qualified would not
have a Material Adverse Effect, and the Bank is not aware of any proceeding
that has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification.
(vii) The Company has, and upon consummation of the Offering,
will have, an authorized, issued and outstanding capitalization as set
forth in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus). All of the issued shares of Class A
Common Stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights to be granted and exercised thereunder, set forth
in the Prospectus, accurately and fairly presents the information required
to be shown with respect to such plans, arrangements, options and rights.
(viii) The Common Stock to be sold by the Company hereunder has
been duly authorized and, when issued, delivered and paid for in the manner
set forth in this Agreement, will be validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. Good title to the Common Stock will be transferred from the
Company to the purchasers
<PAGE>
thereof against payment therefor, subject to such claims as may be asserted
against the purchasers thereof by third-party claimants. No preemptive
rights or other rights to subscribe for or purchase exist with respect to
sale of the Common Stock by the Company pursuant to this Agreement. The
certificates used to evidence shares of Common Stock are in due and proper
form. The Common Stock of the Company conforms to the description thereof
contained in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(ix) The Bank is a member in good standing of the Federal Home
Loan Bank of New York, the Bank is an insured depository institution within
the meaning of the Federal Deposit Insurance Act, as amended, and the
deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to legally applicable limits; no proceedings
for the termination or revocation of such insurance are pending or, to the
best knowledge of the Company or the Bank, threatened and no approvals by
or filings with the FDIC or the Puerto Rico Office of the Commissioner of
Financial Institutions ("OCFI"), except such as have been obtained, are
necessary to consummate the Offering.
(x) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or the
Subsidiaries convertible into or exchangeable for any common stock of the
Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any such
common stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary to
issue any shares of common stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(xi) The consolidated financial statements and schedules of the
Company included in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present the financial position of the Company and the Subsidiaries
and the results of operations and changes in financial condition as of the
dates and periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise noted therein) as certified by the independent
accountants named in subsection (xii). The selected financial data set
forth under the caption "Selected Consolidated Financial and Other Data" in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on
<PAGE>
the basis stated in the Prospectus (or such Preliminary Prospectus), the
information included therein. No other financial statements or schedules
are required to be included in the Registration Statement.
(xii) Price Waterhouse, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered
their opinion with respect to the audited consolidated financial statements
and schedules included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by the Act and
the applicable rules and regulations thereunder.
(xiii) The Company has full legal right, power and authority to
enter into this Agreement and to perform the transactions contemplated
hereby. This Agreement has been duly and validly authorized by the Company
and upon due execution and delivery by the Company and the other parties
thereto will constitute the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that (A) enforceability may be subject to bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, receivership,
conservatorship, or other similar laws, regulations or procedures of
general applicability now or hereafter in effect relating to or affecting
creditors' or other obligees' rights generally, (B) the remedy of specific
performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought and (C) the rights to
indemnity and contribution under this Agreement may be limited by state or
federal securities laws or the policies underlying such laws. The making
and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
certificate of incorporation or bylaws, or other organizational documents
of the Company or the Subsidiaries and will not conflict with, result in
the breach or violation of, or constitute, either by itself or upon notice
or the passage of time or both, a default under any agreement, mortgage,
deed or trust, lease, franchise, license, indenture, permit or other
instrument to which the Company or any of the Subsidiaries is a party or by
which the Company or the Subsidiaries or any of their respective properties
may be bound or affected, any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company
or any of the Subsidiaries or any of their respective properties, except
where any violation, conflict, breach or default, whether individually or
in the aggregate, would not have a Material Adverse Effect. No consent,
approval,
<PAGE>
authorization or other order of any court, regulatory body, administrative
agency or other governmental body or any other third party is required for
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for compliance with the Act, the
blue sky laws applicable to the public offering of the Securities by the
Underwriter, the clearance of such offering with the National Association
of Securities Dealers, Inc. (the "NASD"), and the listing of the Common
Stock to be sold by the Company on the Nasdaq Stock Market.
(xiv) No contract or other document is required to be described
in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement that is not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus)
or filed as required. The contracts so described in the Prospectus are in
full force and effect on the date hereof; the descriptions thereof or
references thereto are correct in all material respects, and neither the
Company nor any of the Subsidiaries, nor, to the knowledge of the Company,
any other party, is in breach of or default under any of such contracts.
(xv) Other than routine legal proceedings in the ordinary course
of business, no legal or governmental proceedings are pending to which the
Company or the Subsidiaries is a party or to which the property of the
Company or the Subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and no such proceedings have been, to the knowledge of the
Company, threatened against the Company or the Subsidiaries or with respect
to any of their respective properties. Except as disclosed in the
Registration Statement, no enforcement proceedings, whether formal or
informal, have been commenced against the Company or any of the
Subsidiaries by the FDIC, the Federal Reserve Board, the OCFI or, to the
Company's and the Subsidiaries' knowledge, any other governmental
authority, nor have any such proceedings been instituted nor, to the
knowledge of the Company, threatened or recommended. Except as disclosed
in the Prospectus, neither the Company nor any of the Subsidiaries, or any
of their respective officers, employees or directors is a party or subject
to the provisions of any regulatory action, injunction, judgment, decree or
order of any court, regulatory body, administrative agency or other
governmental body affecting the business of the Company or any of the
Subsidiaries and, except as disclosed in the Prospectus, there is no
charge, action, suit, proceeding, or to the knowledge of the Company,
investigation before or by any court or regulatory, administrative or
governmental agency or body pending or threatened which might affect the
performance of this Agreement.
<PAGE>
(xvi) No further approval, consent or authority of the
stockholders of the Company or the Board of Directors of the Company will
be required for the issuance and sale of the Common Stock to be sold by the
Company as contemplated herein, except such as have been obtained. The
Bank Stockholder Exchange Transaction, as defined in the Prospectus, will
be consummated prior to the Firm Closing Date.
(xvii) Since the respective dates as of which information is
given in the Registration Statement and Prospectus and except as described
in or specifically contemplated by the Prospectus: (i) the Company and the
Subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction whether or not arising in the
ordinary course of business or which could result in a material reduction
in the future earnings of the Company and the Subsidiaries (taken as a
whole); (ii) there has not been any material increase in the long-term debt
of the Company and the Subsidiaries (taken as a whole) or in the aggregate
dollar or principal amount of the assets of the Company and the
Subsidiaries (taken as a whole) which are classified as substandard,
doubtful or loss or loans which are 90 days or more past due or real estate
acquired by foreclosure; (iv) there has not been any material adverse
change in the aggregate dollar amount of the deposits or the consolidated
net worth of the Company and the Subsidiaries (taken as a whole); (v) there
has been no material adverse change in the Company's and the Subsidiaries'
relationship with its insurance carriers, including, without limitation,
cancellation or other termination of the Company's or the Subsidiaries'
fidelity bond or any other type of insurance coverage; (vi) there has been
no material change in management of the Company or the Subsidiaries; (vii)
the Company and the Subsidiaries have not sustained any material loss or
interference with their respective business or properties from fire, flood,
windstorm, earthquake, accident or other calamity, whether or not covered
by insurance; (viii) the Company has not paid or declared any dividends or
other distributions with respect to its capital stock and the Company and
the Subsidiaries are not in default in the payment of principal or interest
on any outstanding debt obligations; (ix) there has not been any change in
the common stock (other than in connection with the Bank Stockholder
Exchange Transaction and upon the sale of the Common Stock hereunder); and
(x) there has not been any Material Adverse Effect, other than changes
resulting from changes in the economy or the Company's and the
Subsidiaries' industry generally.
(xviii) Neither the Company nor the Subsidiaries is in violation
of any directive from the Commission, the FRB, the FDIC, the OCFI or any
other regulatory,
<PAGE>
administrative or governmental agency or body regarding the method of
conducting its business; the Company and the Subsidiaries have conducted
and are conducting their business in a manner so as to comply in all
material respects with all applicable Federal and Puerto Rico statutes and
regulations that regulate or are concerned with its business, including
without limitation, the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), the Federal Deposit Insurance Act (the
"FDIA"), the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the BHCA and all regulations, decisions, directives and orders
of the Commission, the FRB, the FDIC and the OCFI; and the Company and the
Bank are in material compliance with the applicable financial recordkeeping
and reporting requirements of the Currency and Foreign Transactions
Reporting Act of 1970, as amended, the rules and regulations thereunder and
any related rules and regulations of the OCFI.
(xix) The Company is not an investment company under the
Investment Company Act of 1940, as amended, and this transaction will not
cause the Company to become an investment company subject to registration
under such Act.
(xx) The Company and the Subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure so to
file would not have a Material Adverse Effect) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently being
contested in good faith or as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxi) The Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (A) actions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (C)
access to assets is permitted only in accordance with management's general
or specific authorization; and (D) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxii) Except as described in the Registration Statement and the
Prospectus, no default exists, and no event has occurred which, with notice
or lapse of time or both would constitute a default under indenture,
mortgage,
<PAGE>
deed of trust, lease or other agreement or instrument to which the Company
or the Subsidiaries is a party or by which the Company or the Subsidiaries
or any of their respective properties is bound or may be affected, where
any such default would have a Materially Adverse Effect.
(xxiii) The Company has not distributed and, prior to the later
of (A) the Firm Closing Date or the Option Closing Date, as the case may
be, and (B) the completion of the distribution of the Common Stock, will
not distribute any offering material in connection with the offering and
sale of the Common Stock other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or other materials, if any, permitted by
the Act.
(xxiv) No labor dispute with the employees of the Company or the
Subsidiaries exists or, to the Company's knowledge, is threatened or
imminent that could result in a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxv) The Company and each of the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any such subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a Material
Adverse Effect, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxvi) None of the Company, the Subsidiaries or, to the knowledge
of the Company, any employee of the Company or the Subsidiaries have,
directly or indirectly, at any time during the last five years, made any
payment of funds of the Company or any subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be described in
the Prospectus.
(xxvii) All material transactions between the Company and the
Subsidiaries and the officers, directors and major stockholders of the
Company that are required to be disclosed under the Act and the Rules and
Regulations have been accurately disclosed in the Prospectus.
<PAGE>
(xxviii) Except as disclosed in the Registration Statement,
neither the Company nor the Subsidiaries has: (i) placed any securities
within the last 18 months (except for notes to evidence other bank loans
and reverse repurchase agreements); (ii) had any material dealings with any
member of the NASD or any person related to or associated with such member,
other than discussions and meetings relating to the proposed Offering and
routine purchases and sales of U.S. Government and agency securities and
other assets; (iii) entered into a financial or management consulting
agreement except as contemplated hereunder and except for the engagement
letter with Friedman, Billings, Ramsey & Co., Inc., dated May 6, 1996; or
(iv) engaged any intermediary between the Underwriter and the Company in
connection with the Offering, and no person is being compensated in any
manner for such service.
(xxix) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Stock.
(xxx) The Company has not relied and will not rely upon the
Representative or legal counsel for the Representative for any legal, tax
or accounting advice in connection with the Offering (except with respect
to the qualification of the Securities for offering and sale under the
securities laws of certain states).
Any certificate signed by an officer of the Company and delivered to you or
to your counsel shall be deemed a representation and warranty by the Company to
you as to the matters covered thereby. Any certificate delivered by the Company
to its counsel for purposes of enabling such counsel to render the opinions
referred to in Section 9(c)(i) will also be furnished to the Representative and
its counsel and shall be deemed to be additional representations and warranties
by the Company (as appropriate) to the several Underwriters as to the matters
covered thereby and the Underwriters and their counsel are entitled to rely
thereon.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
Selling Stockholder represents and warrants to, and agrees with, the several
Underwriters as follows:
(a) The Selling Stockholder has full right, power and authority, and
the legal capacity necessary, to enter into this Agreement, and the Custody
Agreement, as defined below and perform such Selling Stockholder's obligations
hereunder and thereunder. This Agreement has been duly and validly executed and
delivered by the Selling Stockholder, and is enforceable against the Selling
Stockholder in accordance with its terms, subject to limitations imposed by
general principles of equity
<PAGE>
(regardless of whether such enforceability is considered in a proceeding at law
or in equity); the execution, delivery and performance of this Agreement and the
Custody Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound or to which
any of the property or assets of the Selling Stockholder is subject, nor will
such actions result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Selling Stockholder or the property or assets of the Selling Stockholder;
and, except for the registration of the Securities under the Act and such
consents, approvals, authorizations, registrations or qualifications or may be
required under applicable state securities laws in connection with the purchase
and distribution of the Securities by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement or the Custody Agreement by the Selling
Stockholder and the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby; and the sale of the Common Stock by the Selling
Stockholder is not subject, under any law, contract or understanding, to the
preemptive or preferential purchase rights of any entity or person except
pursuant to this Agreement.
(b) To the knowledge of the Selling Stockholder, except as disclosed
in the Prospectus, there are no legal or governmental actions, suits or
proceedings pending or threatened to which the Company is or may be a party or
of which property owned or leased by the Company is or may be the subject, which
actions, suits or proceedings might prevent or adversely affect the transactions
contemplated by this Agreement or are likely to have a Material Adverse Effect;
to the knowledge of the Selling Stockholder no enforcement proceedings, whether
formal or informal, has been commenced against the Company by any governmental
authority, nor have any such proceedings been instituted, threatened or
recommended. To the knowledge of the Selling Stockholder, except as disclosed
in the Prospectus, the Company is not a party or subject to the provisions of
any material injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body.
(c) The Selling Stockholder has and at the Firm Closing Date will
have good and marketable title to the shares of Common Stock to be sold by the
Selling Stockholder hereunder, free and clear of any pledge, lien, security
interest, encumbrance or claim or equity other than pursuant to this Agreement;
and upon delivery of the Selling Stockholder's Firm Securities and payment for
the purchase price therefore as herein
<PAGE>
contemplated, the several Underwriters will receive good and marketable title to
the Common Stock purchased from the Selling Stockholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equity.
(d) The Selling Stockholder is not aware that any of the
representations and warranties of the Company contained in Section 2 hereof are
untrue or incorrect in any material respects. The information pertaining to
such Selling Stockholder under the caption "Selling Stockholder" in the
Prospectus is complete and accurate in all material respects. The Selling
Stockholder has no knowledge of any material fact, condition or information not
disclosed in the Preliminary Prospectus which has adversely affected or may have
a Material Adverse Effect.
[(e) The Selling Stockholder has placed in custody under a custody
agreement (the "CUSTODY AGREEMENT") with American Stock Transfer and Trust
Company, as custodian (the "CUSTODIAN"), for delivery under this Agreement, a
certificate in negotiable form representing the shares of Common Stock to be
sold by the Selling Stockholder hereunder; the certificate representing the
Common Stock so held in custody for such Selling Stockholder is subject to the
interests hereunder of the Underwriters; the arrangements for custody and
delivery of such certificates, made by such Selling Stockholder hereunder and
under the Custody Agreement, are not subject to termination by any acts of such
Selling Stockholder, or by operation of law (including death or incapacity of
such Selling Stockholder), or by the occurrence of any other event; and if any
such event (including death or incapacity) shall occur before the delivery of
the Common Stock hereunder, certificates for the Common Stock will be delivered
by the Custodian in accordance with the terms and conditions of this Agreement
and the Custody Agreement as if such event (including death or incapacity) has
not occurred, regardless of whether or not the Custodian shall have received
notice of such event (including death or incapacity).]
Any Certificate signed by the Selling Stockholder and delivered to the
Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by the Selling Stockholder to the several
Underwriters as to the matters covered thereby. Any certificate delivered by
the Selling Stockholder to its counsel for purposes of enabling such counsel to
render the opinions referred to in Section 9(c)(ii) will also be furnished to
the Representative and counsel for the Underwriters and shall be deemed to be
additional representations and warranties by the Selling Stockholder (as
appropriate) to the several Underwriters as to the matters covered thereby and
the Underwriters and their counsel are entitled to rely thereon.
The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus, when
the become effective or are filed with the Commission, as the case may be, do
not and will not, as of the applicable effective date (as to the Registration
Statement
<PAGE>
and any amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment thereto) and as of the applicable filing date (as
to the Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
PROVIDED that no representation or warranty is made as to information contained
in or omitted from the Registration Statement or the Prospectus in reliance upon
and in conformity with written information furnished to the Company through the
Representative by or on behalf of any Underwriter specifically for inclusion
therein.
4. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company and the Selling Stockholder agree to sell to the several
Underwriters, and the Underwriters agree to purchase from the Company and
Selling Stockholder, at a purchase price of $______ per share, the number of
Firm Securities set forth opposite the name of each Underwriter in SCHEDULE 1
hereto. One or more certificates in definitive form for the Firm Securities
that each Underwriter has agreed to purchase hereunder, and in such denomination
or denominations and registered in such name or names as the Representative
requests upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and the Selling
Stockholder to the Representative for the account of each such Underwriter,
against payment by or on behalf of the Underwriters of the aggregate purchase
price therefor by certified or official bank check or checks payable in New York
Clearing House or similar next day funds, to the order of the Company, for the
purchase price of the portion of the Firm Securities being sold by the Company,
and to the order of the Selling Stockholder, for the purchase price of the
portion of the Firm Securities being sold by the Selling Stockholder. Such
delivery of and payment for the Firm Securities shall be made at the offices of
Friedman, Billings, Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street
North, Arlington, Virginia 22209 at 9:30 A.M., Washington D.C. time, on
__________, 1996, or at such other place, time or date as the Representative and
the Company may agree upon or as the Representative may determine, pursuant to
Section 11 hereof, such time and date of delivery against payment being herein
referred to as the "FIRM CLOSING DATE." The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representative at the offices in New York of the Company's transfer agent or
registrar at least 24 hours prior to the Firm Closing Date. Time shall be of
the essence, and delivery at the time and place specified in the Agreement is a
further condition to the obligations of the Underwriters.
<PAGE>
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, severally and not jointly, an
option to purchase the Option Securities. The purchase price to be paid for any
Option Securities shall be the same price per share as the price per share for
the Firm Securities set forth above in paragraph (a) of this Section 4. The
option granted hereby may be exercised as to all or any part of the Option
Securities once at any time within thirty days after the date of the Prospectus
(or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading).
The Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Underwriters may exercise
the option granted hereby by notice from the Representative in writing or by
telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Securities as to which the Underwriters are exercising the
option and the date and time for delivery of and payment for such Option
Securities. Such date of delivery shall be determined by the Representative but
shall not be earlier than two business days or later than five business days
after such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or such
other time on such other date as the Representative and the Company may agree
upon or as the Representative may determine pursuant to Section 11 hereof, is
herein called the "OPTION CLOSING DATE" with respect to such Option Securities.
If the option is exercised as to all or any portion of the Option Securities,
one or more certificates in definitive form for such Option Securities, and
payment therefor, shall be delivered on the related Option Closing Date in the
manner, and upon the terms and conditions, set forth in paragraph (a) of this
Section 4, except that reference therein to the Firm Securities and the Firm
Closing Date shall be deemed, for purposes of this paragraph 4(b), to refer to
such Option Securities and Option Closing Date, respectively.
5. OFFERING BY THE UNDERWRITER. Upon the authorization by the
Representative of the release of the Firm Securities, the several Underwriters
propose to offer the Firm Securities for sale to the public upon the terms and
conditions set forth in the Prospectus.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant
<PAGE>
to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is
otherwise required under rule 424(b) of the Rules and Regulations, the Company
will file the Prospectus, properly completed, pursuant to the applicable
paragraph of Rule 424(b) of the Rules and Regulations within the time period
prescribed and will provide evidence satisfactory to the Underwriter of such
timely filing. The Company will promptly advise the Underwriter in writing (i)
of the receipt of any comments of the Commission, (ii) of any request of the
Commission for amendment of or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus or for additional information, (iii) when the Registration Statement
shall have become effective and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
institution of any proceedings for the purpose. If the Commission shall enter
any such stop order at any time, the Company will use its best efforts to obtain
the lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus of
which the Representative has not been furnished with a copy a reasonable time
prior to such filing or to which the Underwriter reasonably objects or which is
not in compliance with the Act and Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the Representative's request, any amendments or supplements to the
Registration Statement or the Prospectus which in the Representative's
reasonable judgment may be necessary or advisable to enable the Underwriters to
continue the distribution of the Common Stock and will use its best efforts to
cause the same to become effective as promptly as possible. The Company will
comply in all material respects with the provisions of Rule 430A of the Rules
and Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) The Company shall cooperate with the Representative and counsel
to the Underwriters in order to qualify or register the Common Stock for sale
under (or obtain exemptions from the application of) the blue sky laws of such
jurisdictions as you designate, will comply with such laws and will continue
such qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Stock. The Company shall
not be required to qualify as a foreign corporation or to file a general consent
to service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to taxation as a foreign corporation.
The Company will advise you promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Stock for
offering, sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or
<PAGE>
exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the Rules and
Regulations thereunder, the Company will promptly notify the Representative
thereof and, subject to Section 6(a) hereof, will prepare and file with the
Commission, at the Company's expense, an amendment to the Registration Statement
or an amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a signed copy of the
Registration Statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and (ii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Underwriter may reasonably request;
without limiting the application of clause (ii) of this sentence, the Company,
not later than 10:00 A.M., Washington, D.C. time, on the business day following
the date of determination of the public offering price, will deliver to the
Representative, without charge, as many copies of the Prospectus and any
amendment or supplement thereto as the Underwriter may reasonably request for
purposes of confirming orders that are expected to settle on the Firm Closing
Date.
(f) The Company shall promptly prepare and file with the Commission
from time to time, such reports as may be required to be filed by the Act and
the Securities Exchange Act of 1934, as amended, including, without limitation,
reports with respect to the sale of the Securities and the application of the
proceeds thereof as may be required in accordance with Rule 463 under the Act.
The Company will provide or cause to be provided to the Representative, a copy
of each report on Form SR filed by the Company as required by Rule 463 under the
Act.
(g) The Company, as soon as practicable, but not later than 45 days
after the end of the first quarter ending after one year following the
"effective date of the Registration Statement" (as defined in Rule 158(c) of the
Rules and Regulations), will make generally available to its securityholders and
to the Representative a consolidated earnings statement of the Company
<PAGE>
and the Subsidiaries that satisfies the provisions of Section 11 (a) of the Act
and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of the
Securities to be sold by the Company as set forth under "Use of Proceeds" in the
Prospectus.
(i) The Company will not, directly or indirectly, without the
Representative's prior written consent, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock for a period of 180 days after the date hereof, except pursuant
to this Agreement or as otherwise set forth in the Prospectus and except for the
grant of options under the Company's employee stock option plan.
(j) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii)(A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in the Representative's opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from the Representative
advising the Company to the effect set forth above, forthwith prepare, consult
with the Representative concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representative, counsel of the Representative and counsel to the Company
responding to or commenting on such rumor, publication or event.
(l) The Company will cause the Common Stock to be duly included for
quotation on the Nasdaq National Market prior to the Firm Closing Date. The
Company will use its best efforts to ensure that the Securities remain included
for quotation on the Nasdaq National Market following the Firm Closing Date.
(m) During the period of five years hereafter, the Company will
furnish to the Representative: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the
consolidated balance
<PAGE>
sheet of the Company and Subsidiaries as of the close of such fiscal year and
consolidated statements of income, stockholders' equity and cash flows for the
year then ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after filing thereof, copies of each
proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Report on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of its Common
Stock; (iv) as soon as practicable after the filing thereof, of each
non-confidential report or other statement or document filed by the Company with
the Commission, or with any national securities exchange or quotation system on
which any securities of the Company may be listed or quoted; and (v) from time
to time, such other non-confidential information concerning the Company as the
Underwriter may reasonably request.
(n) To the extent required by law, or applicable rules and
regulations, the Company will promptly take all steps necessary to register its
class of Common Stock under Section 12(g) of the Exchange Act.
(o) The Company shall continue to maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary in order to permit
preparation of financial statements in accordance to generally accepted
accounting principles and to maintain accountability for assets; and (iii)
access to material assets is permitted only in accordance with management's
general and specific authorization.
(p) The Bank shall continue to maintain a system of internal
accounting controls as required under FDICIA.
The Representative may, in its sole discretion, waive in writing the
performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
7. COVENANTS OF THE SELLING STOCKHOLDER. The Selling Stockholder
covenants and agrees with the several Underwriters that:
(a) The Selling Stockholder will not, directly or indirectly, without
the Representative's prior written consent, offer, sell, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock for a period of 180 days after the date hereof, except pursuant
to this Agreement and except for issuances pursuant to the exercise of employee
stock options outstanding on the date hereof.
<PAGE>
(b) The Selling Stockholder will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (B) pay or agree
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
The Representative may, in its sole discretion, waive in writing the
performance by the Selling Stockholder of any one or more of the foregoing
covenants.
8. EXPENSES. The Company will pay all costs and expenses incident
to the authorization, issuance, sale and delivery of the Securities and the
performance of its obligations under this Agreement, and any taxes payable in
that connection, whether or not the actions contemplated herein are consummated
or this Agreement is terminated pursuant to Section 14 hereof, including all
costs and expenses incident to (i) the printing or other production of documents
with respect to the transactions contemplated by this Agreement, including any
costs of printing the Registration Statement originally filed with respect to
the Securities and any amendment thereto, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Representative of copies of the foregoing documents, (iii) the costs of
distributing the terms of agreement relating to the organization of the
underwriting syndicate and selling group to the members thereof by mail, telex
or other means of communication, (iv) the fees and disbursements of the counsel,
the accountants and any other experts or advisors retained by the Company, (v)
preparation, issuance and delivery to the Representative of any certificates
evidencing the Common Stock, including transfer agent's and registrar's fees,
(vi) the qualification of the Common Stock under state securities and blue sky
laws, including filing fees and fees and disbursements of counsel for the
Underwriters relating thereto, (vii) the filing fees of the Commission and the
National Association of Securities Dealers, Inc. relating to the Common Stock,
(viii) any quotation of the Securities on the Nasdaq National Market, (ix) any
meetings with prospective investors in the Common Stock including travel and
out-of-pocket expenses of the Company's personnel (other than as shall have been
specifically approved by the Representative to be paid for by the
Representative), (x) advertising relating to the offering of the Common Stock
(other than as shall have been specifically approved by the Representative to be
paid for by the Representative), (xi) the cost of preparing bound volumes of the
documents relating to the offering for the Representative and counsel for the
Underwriters, and (xii) the Representative's actual out-of-pocket expenses,
including the reasonable fees and disbursements of the counsel for the
Underwriters, provided, however that the total amount of
<PAGE>
reimbursement under this subsection (xii) shall not exceed $100,000. If the
sale of the Common Stock provided for herein is not consummated because any
condition to the obligations of the several Underwriters set forth in Section 8
hereof is not satisfied, because this Agreement is terminated pursuant to
Section 11 hereof or because of any failure, refusal or inability on the part of
the Company to perform all obligations and satisfy all conditions on its part to
be performed or satisfied hereunder other than by reason of a default by the
Underwriters, the Company will reimburse the Underwriters upon demand for all
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by the Representative in connection with the proposed
purchase and sale of the Common Stock, subject to the limitation set forth in
subsection (xii) above. The Company shall not in any event be liable to the
Representative for the loss of anticipated profits from the transactions covered
by this Agreement.
9. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters to purchase and pay for the Firm Securities shall be subject,
in the Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company and the Selling Stockholder contained herein as of the
date hereof and as of the Firm Closing Date, as if made on and as of the Firm
Closing Date, to the accuracy of the statements of the Company's officers and
the Selling Stockholder made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholder of their respective
covenants and agreements hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Washington, D.C. time, on the date of this Agreement, or at such
later time as shall have been consented to by the Representative; if the filing
of the Prospectus, or any supplement thereto, is required pursuant to Rule
424(b) of the Rules and Regulations, the Prospectus shall have been filed in the
manner and within the time period required by Rule 424(b) of the Rules and
Regulations; and prior to the Firm Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or,
to the knowledge of the Company or the Representative, shall be contemplated by
the Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to the Representative's reasonable satisfaction.
(b) The Representative shall be reasonably satisfied that since the
respective dates as of which information is given in the Registration Statement
and Prospectus, (i) there shall not have been any change in the common stock of
the Company or any material change in the indebtedness (other than in the course
of business) of the Company, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no
<PAGE>
material verbal or written agreement or other transaction shall have been
entered into by the Company, which is not in the ordinary course of business and
which could result in a material reduction in the future earnings of the
Company, (iii) no loss or damage (whether or not insured) to the property of the
Company shall have been sustained which has a Material Adverse Effect, (iv) no
legal or governmental action, suit or proceeding affecting the Company which is
material to the Company or which affects or may affect the transactions
contemplated by this Agreement shall have been instituted or threatened, (v) no
enforcement proceeding, whether formal or informal, shall have been commenced
against the Company, the Subsidiaries or the Selling Stockholder by the FDIC,
the Commission, the FRB, the OCFI or any other governmental agency nor shall any
such proceeding have been instituted, threatened or recommended, and (vi) there
shall not have been any Material Adverse Effect which makes it impractical or
inadvisable in the judgment of the Representative to proceed with the public
offering or purchase the Common Stock as contemplated hereby.
(c) There shall have been furnished to the Representative in form and
substance reasonably satisfactory to counsel for the Underwriters:
(i) An opinion of Elias, Matz, Tiernan & Herrick, L.L.P., counsel
for the Company, addressed to the Underwriters and dated the Firm Closing
Date, or the Option Closing Date, as the case may be, in the form of
Exhibit A to this Agreement which may be relied upon by counsel for the
Underwriters in giving their opinion.
(ii) An opinion of Elias, Matz, Tiernan & Herrick, L.L.P.,
counsel to the Selling Stockholder, addressed to the Underwriters and dated
the Firm Closing Date, or the Option Closing Date, as the case may be, in
the form of Exhibit B to this Agreement which may be relied upon by counsel
for the Underwriters in giving their opinion.
(iii) Such opinion or opinions of Orrick, Herrington & Sutcliffe,
counsel for the Underwriters, dated the Firm Closing Date or the Option
Closing Date, as the case may be, with respect to the incorporation of the
Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common Stock, the
Registration Statement and the Prospectus and other related matters as the
Representative may reasonably require, and such counsel shall have received
such documents and shall have exhibited to them such papers and records as
they may reasonably request for the purpose of enabling them to pass upon
such matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and governmental
officials.
<PAGE>
(iv) Certificate of the Company executed by the Chairman of the
Board or President and the Chief Financial or Accounting Officer, dated the
Firm Closing Date or the Option Closing Date, as the case may be, to the
effect that:
(1) The representations and warranties of the Company set forth
in Section 2 of this Agreement are true and correct in all material
respects as of the date of this Agreement and as of the Firm Closing
Date or the Option Closing Date, as the case may be, and the Company
has complied in all material respects with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
on or prior to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus
filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that purpose
have been instituted or are pending or contemplated under the Act;
(3) Neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be
stated therein, or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(4) Since the initial date on which the Registration Statement
was filed with the Commission, no agreement, written or oral,
transaction or event has occurred which should have been set forth in
an amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus and except as
disclosed in or contemplated by the Prospectus, the Company and the
Subsidiaries have not sustained a material loss or damage by strike,
fire, flood, windstorm, accident or other calamity (whether or not
insured).
(v) Certificate of the Selling Stockholder, dated the Firm
Closing Date or the Option Closing Date, as the case may be, to the effect
that the representations and warranties of the Selling Stockholder set
forth in Section 3 of this Agreement are true and correct as of the date of
<PAGE>
this Agreement and as of the Firm Closing Date or the Option Closing Date,
as the case my be;
(vi) On the date before this Agreement is executed and also on
the Firm Closing Date and the Option Closing Date, if applicable, a letter
addressed to the Underwriter, from Price Waterhouse, independent
accountants, the first one to be dated the day before the date of this
Agreement, the second one to be dated the Firm Closing Date and the third
one to be dated the Option Closing Date, if applicable, in form and
substance reasonably satisfactory to the Representative.
(vii) On or before the Firm Closing Date, a letter from the
Selling Stockholder in form and substance satisfactory to the
Representative, confirming that for a period of 180 days after the first
date that any of the Common Stock is released by the Representative for
sale to the public, such person will not directly or indirectly sell, offer
to sell, contract to sell or otherwise dispose of any common stock or any
right to acquire such shares without the prior written consent of the
Representative, which consent may be withheld at the sole discretion of the
Representative.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to the Representative and to Orrick, Herrington & Sutcliffe, counsel for the
Underwriters. The Company shall furnish the Representative with such manually
signed or conformed copies of such opinions, certificates, letters and documents
as the Representative reasonably request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the Firm Closing Date is not so satisfied, this
Agreement at the Representative's election will terminate upon written
notification by the Representative to the Company without liability on the part
of any Underwriter or the Company, except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 8 and 10 hereof and except to the
extent provided in Section 14 hereof.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Stockholder jointly and severally
agree to indemnify and hold harmless each Underwriter and each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
<PAGE>
(i) any untrue statement or alleged untrue statement made by the
Company or the Selling Stockholder in Sections 2 and 3, respectively, of
this Agreement;
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or Selling
Stockholder or based upon written information furnished by or on behalf of
the Company or Selling Stockholder filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities
exchange (each an "APPLICATION");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(iv) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to,
the Securities or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) above;
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by each Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company and the Selling
Stockholder will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by the Representative specifically for use therein; and
PROVIDED, FURTHER, that neither the Company nor the Selling Stockholder will be
liable to the Underwriters or any person controlling an Underwriter with respect
to any such untrue statement or omission made in any Preliminary Prospectus that
is corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Common
Stock from an Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) at or prior to the
<PAGE>
written confirmation of the sale of such Common Stock to such person in any case
where such delivery of the Prospectus (as amended or supplemented) is required
by the Act, unless such failure to deliver the Prospectus (as amended or
supplemented) was a result of noncompliance by the Company with Section 6(d) and
(e) of this Agreement. This indemnity agreement will be in addition to any
liability which the Company and Selling Stockholder may otherwise have. Neither
the Company nor the Selling Stockholder will, without the prior written consent
of the Underwriters settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Stockholder and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer of the Company, Selling Stockholder or
controlling person of the Company or Selling Stockholder may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by the Representative specifically for use therein;
and, subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person or the Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any
<PAGE>
action, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 10, notify the indemnifying
party of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 10 except to the extent
it was unaware of such action and has been prejudiced in any material respect by
such failure or otherwise forfeits substantive rights or defenses by reason of
such failure or from any liability which it may have to any indemnified party
otherwise than under Section 10 hereof. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After such notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and approval by such indemnified party
of counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 10 for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in any
one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Underwriter in the case of paragraph (a) of this Section 10,
representing the indemnified parties under such paragraph (a) who are parties to
such action or actions) or (ii) the indemnifying party does not promptly retain
counsel satisfactory to the indemnified party or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. After such notice from the indemnifying
party to such indemnified party, the indemnifying party will not be liable for
the costs and expenses of any settlement of such action effected by such
indemnified party without the consent of the indemnifying party.
<PAGE>
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 10 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Common Stock or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and Selling
Stockholder on the one hand and the Underwriter on the other shall be deemed to
be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company and Selling Stockholder bear to the
total underwriting discounts and commissions received by the Underwriter. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue, or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to information
supplied by the Company, Selling Stockholder or the Underwriter, the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company, Selling Stockholder and the
Underwriter agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (d). For the purposes of
this paragraph 10(d), each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company or Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company or Selling Stockholder, as
the case may be.
11. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less
<PAGE>
of the aggregate number of Firm Securities or Option Securities to be purchased
by all of the Underwriters at such time hereunder, then the other Underwriters
may make arrangements satisfactory to the Representative for the purchase of
such Common Stock by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representative), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally in
proportion to their respective commitments hereunder to purchase the Firm
Securities or Option Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase. If one or more Underwriters so default with
respect to an aggregate number of shares of Common Stock that is more than ten
percent of the aggregate number of Firm Securities or Option Securities, as the
case may be, to be purchased by all of the Underwriters at such time hereunder,
and within 36 hours after such default by any Underwriter, the Representative
does not arrange for the purchase of such Securities, then the Company shall be
entitled to a further period of 36 hours within which to procure another party
or other parties reasonably satisfactory to the Representative to purchase such
Securities. In the event that, within the respective prescribed periods, the
Representative notifies the Company that the Representative has so arranged for
the purchase of such Securities or the Company notifies the Representative that
it has so arranged for the purchase of such Securities, the Representative or
the Company shall have the right to postpone the Firm Closing Date or the Option
Closing Date, as the case may be, for a period of not more than seven days in
order that any necessary changes may be made in the arrangements or documents
for the purchase and delivery of the Firm Securities or Option Securities, as
the case may be. If arrangements satisfactory to the Representative are not
made within 36 hours after such default for the purchase by other persons (who
may include one or more of the non-defaulting Underwriters, including the
Representative) of the Common Stock with respect to which such default occurs,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company except for the expenses to be paid by
the Company pursuant to Section 8 hereof and except to the extent provided in
Section 10 hereof. As used in this Agreement, the term "UNDERWRITER" includes
any person substituted for an Underwriter under this Section 11. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
12. SURVIVAL. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Stockholder and the Underwriter set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of any investigation
made by or on behalf of the Company, any of its officers or directors, the
Selling Stockholder, the Underwriter or any
<PAGE>
controlling person, as the case may be, and will survive delivery of and payment
for the Common Stock sold hereunder and any termination of the Agreement.
13. EFFECTIVE DATE. This Agreement shall become effective at 11:00
A.M., New York City time, on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the
Registration Statement becomes effective as the Representative shall release the
Firm Stock for initial public offering. The Representative shall notify the
Company immediately after it has taken any action which causes this Agreement to
become effective. Until this Agreement is effective, it may be terminated by
the Company by notice to the Representative or by the Representative by notice
to the Company. For purposes of this Agreement, the release of the initial
public offering of the Common Stock shall be deemed to have been made when the
Representative releases, by telegram or otherwise, firm offers of the Common
Stock to securities dealers or releases for publication a newspaper
advertisement relating to the Common Stock, whichever occurs first.
14. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company or the Selling
Stockholder by notice to you or by you by notice to the Company and the Selling
Stockholder at any time prior to the time this Agreement shall become effective
as to all its provisions, and any such termination shall be without liability on
the part of the Company to any Underwriter (except for the expenses to be paid
or reimbursed by the Company pursuant to Section 8 hereof and except to the
extent provided in Section 10 hereof) or of any Underwriter to the Company
(except to the extent provided in Section 10 hereof).
(b) This Agreement may also be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Representative
by notice to the Company and the Selling Stockholder given prior to the Firm
Closing Date or the related Option Closing Date, respectively, in the event that
the Company or the Selling Stockholder shall have failed, refused or been unable
to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Firm Closing Date or, with respect to the Company, such Option Closing Date,
respectively,
(i) the Company or the Subsidiaries shall have, in the sole
judgment of the Representative, sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding or there shall
have been any change, or development which has or prospectively could have
a
<PAGE>
Material Adverse Effect, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or supplement
thereto);
(ii) a banking moratorium shall have been declared by Puerto Rico
or United States authorities; or
(iii) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representative, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Common Stock as contemplated by
the Registration Statement, as amended as of the date hereof.
15. INFORMATION SUPPLIED BY THE UNDERWRITER. The statements set
forth in the Prospectus (i) on the cover page with respect to price,
underwriting discounts and commissions and terms of the Offering, (ii) under the
heading "Underwriting" in any Preliminary Prospectus or the Prospectus and (iii)
on the inside cover page in any Preliminary Prospectus or the Prospectus
pertaining to stabilization (to the extent such statements relate to the
Underwriters) constitute the only information furnished by and on behalf of the
Underwriters to the Company for use in connection with the preparation of the
Registration Statement and the Prospectus. The Representative confirms that
such statements (to such extent) are correct in all material respects.
16. NOTICES. All communications hereunder shall be in writing and,
if sent to the Underwriter, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey &
Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: _______________ with a copy to Orrick, Herrington &
Sutcliffe, 1150 18th Street, N.W., 9th Floor, Washington, D.C. 20036,
Attention: David S. Katz; if sent to the Company, shall be delivered or sent by
mail, telex confirmed in writing to the Company at 280 Jesus T. Pinero Avenue,
Hato Rey, San Juan, Puerto Rico 00918, Attention: Chief Executive Officer with
a copy to Elias, Matz, Tiernan & Herrick, L.L.P., 734 15th Street, N.W., 12th
Floor, Washington, D.C. 20005, Attention: Norman B. Antin; and if sent to the
Selling Stockholder, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to Mr. Victor Galan at 280 Jesus T. Pinero
Avenue, Hato Rey, San Juan, Puerto Rico 00918, with a copy to Elias, Matz,
Tiernan & Herrick, L.L.P., 734 15th Street, N.W., 12th Floor, Washington, D.C.
20005, Attention: Norman B. Antin.
17. SUCCESSORS. This Agreement shall inure to the benefit of and
shall be binding upon the Underwriter, the
<PAGE>
Company, the Selling Stockholder and their respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company and the Selling Stockholder contained in Section 10 of this Agreement
shall also be for the benefit of any person or persons who control the
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriter contained in Section 10
of this Agreement shall also be for the benefit of the directors of the Company,
the officers of the Company who have signed the Registration Statement, the
Selling Stockholder and any person or persons who control the Company or the
Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.
18. APPLICABLE LAW. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of Virginia, without giving effect to
any provisions relating to conflicts of laws.
19. GENERAL. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not effect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by writing signed by the Company and the Representative.
<PAGE>
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the spare provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and the
Representative.
Very truly yours,
R&G FINANCIAL CORPORATION
By:
------------------------------
Victor J. Galan
President and CEO
Selling Stockholder
By:
----------------------------
Victor J. Galan
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
-------------------------------
Name:
Title:
As Representative of the several
Underwriters named in Schedule
1 hereto
<PAGE>
Schedule 1
UNDERWRITER
Number of Firm Securities
Underwriters to be Purchased
- ------------- -------------------------
Friedman, Billings, Ramsey & Co., Inc.
Total . . . . . . . . . . . . . . . . . . . .-------------------------
-------------------------
<PAGE>
EXHIBIT 4.0
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
CLASS B COMMON STOCK CUSIP 749136 10 7
See reverse for
certain definitions
R&G FINANCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF PUERTO RICO
This certifies that ___________________________________ is the registered
holder of _________________ fully paid and non-assessable shares of the Class B
Common Stock, par value $.01 per share, of R&G Financial Corporation, Hato Rey,
San Juan, Puerto Rico (the "Corporation"), incorporated under the laws of the
Commonwealth of Puerto Rico.
The shares evidenced by this Certificate are transferable only on the books
of the Corporation by the holder hereof, in person or by a duly authorized
attorney or legal representative, upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are subject to all
the provisions of the Certificate of Incorporation and Bylaws of the Corporation
and any and all amendments thereto. THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused its facsimile seal to be affixed hereto.
Dated:
(SEAL)
- ------------------------------ ---------------------------------
Enrique Umpierre-Suarez Victor J. Galan
Corporate Secretary President and Chief Executive
Officer
<PAGE>
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The Corporation is authorized to issue more than one class of stock,
including a class of preferred stock which may be issued in one or more series.
The Corporation will furnish to any stockholder, upon written request and
without charge, a full statement of the designations, preferences, limitations
and relative rights of the shares of each class authorized to be issued and,
with respect to the issuance of any preferred stock to be issued in series, the
relative rights, preferences and limitations between the shares of each series
so far as the rights, preferences and limitations have been fixed and determined
and the authority of the Board of Directors to fix and determine the relative
rights, preferences and limitations of subsequent series.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT - _______________________Custodian _____________________under
(Cust) (Minor)
Uniform Gifts to Minors Act ____________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
For value received, ___________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- ---------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
________________ shares of Class B Common Stock represented by this Certificate,
and do hereby irrevocably constitute and appoint ______________ as Attorney, to
transfer the said shares on the books of the within named Corporation, with full
power of substitution.
Dated __________________, ____
---------------------------------------------
Signature
---------------------------------------------
Signature
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of this Certificate in every particular, without
alteration or enlargement, or any change whatever. The signature(s) should be
guaranteed by an eligible guarantor institution (bank, stockbroker, savings and
loan association or credit union) with membership in an approved signature
medallion program, pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 5.0
Law Offices
Elias, Matz, Tiernan & Herrick L.L.P.
12th Floor
734 15th Street, N.W.
Washington, DC 20005
Telephone 202-347-0300
Facsimile 202-347-2172
July 31, 1996
Board of Directors
R&G Financial Corporation
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
Gentlemen:
We have acted as special counsel to R&G Financial Corporation (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, of the
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the issuance of shares of the Company's Class B common stock, par value $0.01
per share (the "Class B Shares"), with a proposed maximum aggregate offering
price of up to $39,945,925. In this regard, we have examined the Certificate of
Incorporation, as amended, and Bylaws of the Company, resolutions of the Board
of Directors of the Company and such other documents and matters of law as we
deemed appropriate for the purposes of this opinion.
Based upon the foregoing, we are of the opinion as of the date hereof that
the Class B Shares have been duly and validly authorized, and when issued in
accordance with the terms of the Prospectus contained in the Registration
Statement and upon the receipt of the consideration required thereby, will be
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement and to the references to this firm under the
heading "Legal Matters" in the Prospectus contained in the Registration
Statement.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Norman B. Antin
------------------------------------
Norman B. Antin, a Partner
<PAGE>
EXHIBIT 10.1
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
BETWEEN
R&G MORTGAGE CORP.
AND
GUAYNABO FEDERAL SAVINGS BANK
DATED FEBRUARY 16, 1990
<PAGE>
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
MASTER PURCHASE, SERVICING AND COLLECTION AGREEMENT, dated as of February
16, 1990 by and between Guaynabo Federal Savings Bank, a federally-chartered
stock savings bank (the "Bank") and R&G Mortgage Corp., a mortgage banking firm
organized under the laws of the Commonwealth of Puerto Rico ("R&G").
WITNESSETH
WHEREAS, the Bank and R&G have entered into a Stock Purchase Agreement
dated August 8, 1989, as amended (the "Stock Purchase Agreement");
WHEREAS, it is a condition precedent to the consummation of the
transactions contemplated by the Stock Purchase Agreement that the Bank and R&G,
subject to and conditioned upon all required regulatory approvals, enter into
this Agreement;
WHEREAS, R&G desires to purchase and the Bank desires to sell to R&G the
right to service, pursuant to the terms of this Agreement, all first or second
mortgage loans secured by residential properties, all loans secured by
commercial real estate, all commercial business loans, all consumer and any
other loans which are now or hereinafter included in the Bank's loan portfolio
(such loans are hereinafter referred to as the "Loan(s)" and such rights are
hereinafter referred to as the "Servicing Rights");
WHEREAS, R&G desires that the Bank receive, process and make the
collections of payments under the Loans so purchased and any additional other
loans, and at such locations as, from time to time the parties may agree,
subject to the terms hereof (the "Mortgage and Loan Payments"), and the Bank is
desirous of receiving, processing and making said collections of Mortgage and
Loan Payments.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1.0 PURCHASE PRICE OF THE SERVICING RIGHTS.
(a) The Bank, upon the first "Transfer Date" and each subsequent "Transfer
Date," as such term is defined in section 1.0(c), below, does hereby sell,
transfer, assign, set over and convey to R&G, without recourse, but subject to
the terms of this Agreement, all the right, title and interest of the Bank in
and to the Servicing Rights with respect to the Loans.
(b) The purchase price of the Servicing Rights with respect to the Loans
shall be a percentage of the outstanding principal of such Loans (the "Purchase
Price"), and shall depend on the length of the time to maturity as follows:
(i) For loans secured by first mortgages on residential real estate,
with outstanding principal of $50,000, or below:
2
<PAGE>
TIME TO MATURITY PURCHASE PRICE
30 years or less, but
more than 15 years 1.00%
15 years or less, but more
than 10 years 0.50%
10 years or less 0.25%
(ii) For loans secured by first mortgages on residential real
estate, with outstanding principal above $50,000:
TIME TO MATURITY PURCHASE PRICE
30 years or less, but
more than 15 years 1.25%
15 years or less, but more
than 10 years 0.625%
10 years or less 0.30%
(iii) For loans secured by second mortgages on residential real
estate, with outstanding principal of $10,000 or less:
TIME TO MATURITY PURCHASE PRICE
10 years or less 0.00%
15 years or less, but
more than 10 years 0.125%
20 years or less, but
more than 15 years 0.25%
(iv) For loans secured by second mortgages on residential real
estate, with outstanding principal greater than $10,000 but less than
$15,000:
TIME TO MATURITY PURCHASE PRICE
10 years or less 0.00%
15 years or less, but
more than 10 years 0.25%
20 years or less 0.375%
3
<PAGE>
(v) For loans secured by second mortgages on residential real
estate, with outstanding principal of $15,000 or more:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.25%
15 years or less, but
more than 10 years 0.50%
20 years or less, but
more than 15 years 0.625%
(vi) For loans secured by commercial real estate, commercial
business, consumer and other loans, with outstanding principal of less than
$50,000:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.1875%
15 years or less, but
more than 10 years 0.375%
20 years or less, but
more than 15 years 0.50%
(vii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with outstanding principal of $50,000
or above but not more than $100,000:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.375%
15 years or less, but
more than 10 years 1.00%
20 years or less, but
more than 15 years 1.25%
4
<PAGE>
(viii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with outstanding principal above
$100,000:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.75%
15 years or less, but
more than 10 years 1.25%
20 years or less, but
more than 15 years 1.25%
(ix) For purposes of clauses (iii), (iv) and (v) the Purchase Price
of second mortgages with a maturity of more than 20 years and an
outstanding principal of $50,000 or less, shall be 1.00%; if the second
mortgage has an outstanding principal of more than $50,000 and a maturity
of more than 20 years, the Purchase Price shall be 1.25%
(c) The Purchase Price shall be paid in immediately available funds to an
account designated by the Bank on each "Transfer Date" with respect to Loans
acquired hereunder. For all purposes of this Agreement, the term "Transfer
Date" shall mean the date on which the Bank transfers Servicing Rights to R&G
for the Purchase Price pursuant to the terms of this Agreement and shall be the
first business day of the month immediately subsequent to the date of this
Agreement and the first business day of each month subsequent thereto.
2.0 CONVEYANCE OF DOCUMENTS AND INFORMATION.
2.1 MORTGAGE SCHEDULE. As to each Loan as to which the Servicing Rights
are conveyed by the Bank to R&G pursuant to this Agreement, the Bank shall
identify and provide to R&G the following information ("Mortgage Loan
Schedule"):
(a) address of the mortgaged property and the name of the mortgagor
thereunder;
(b) the principal balance as of the close of business on the Transfer
Date;
(c) loan number;
(d) original principal amount;
(e) appraised value;
(f) due date;
5
<PAGE>
(g) date of origination;
(h) original term in months;
(i) the interest rate payable thereunder;
(j) the scheduled monthly level payment of principal and interest;
(k) the date of maturity;
(l) a code indicating the property type; and
(m) amount of escrow funds, if any.
2.2 DELIVERY OF LOAN DOCUMENTS. On the Transfer Date, the Bank shall
deliver to R&G copies of each of the following documents to the extent
applicable, for each Loan:
(a) Copy of original note or other evidence of the indebtedness of a Loan.
(b) The deed of trust or other instrument evidencing the security interest
for each Loan (the "Mortgage") with evidence of recording thereon;
(c) If the Loan is evidenced by a consolidated mortgage or consolidated
loan, the recorded consolidation agreement, unless the consolidation was
accomplished within the body of the most recent Mortgage of record;
(d) Title insurance policy;
(e) All assumption, extension and modification agreements;
(f) Recorded intermediate assignments of the Mortgage, including
warehousing assignments, if any;
(g) Guaranties of repayment of the Loan, if any;
(h) Any pledge agreement issued in connection with the Loan.
(i) Each instrument necessary to complete identification of any exception
set forth in the exception schedule in the title policy, i.e., map or plat,
restrictions, easements, sewer agreements, home association declarations, etc.
(j) Hazard insurance policy and, if required by law, flood insurance
policy, with extended coverage of the hazard insurance policy.
(k) Copy of completion survey of the property pledged as security with
respect to any Loan (the "Mortgage Property") delivered in connection with the
origination of the
6
<PAGE>
Loan, identifying the premises by legal description and by address and showing
the dimensions of the lot and such other conditions as are customarily shown on
surveys made in the locality.
(l) Guaranties of repayment of the Loan, if any.
(m) If the Mortgage Property is not owner occupied the following to the
extent available:
(i) Operating statements for the Mortgage Property from the owner
thereof for the last 3 years;
(ii) Current rent roll showing tenant, space occupied, term of
lease, base rent, additional rent and escalation provisions;
(iii) Copies of all leases, including guaranties;
(iv) Estoppel letters from each tenant stating that the term of the
lease has commenced, the space occupied, and the fact that the landlord is
not in default.
(n) The most recent Appraisal of the Mortgage Property.
(o) Photograph of Mortgage Property.
(p) Amortization schedule indicating the original principal amount, the
date of origination, the interest rate, the term, the scheduled monthly payment
of principal and interest and the outstanding principal balance as of the close
of business on the Transfer Date.
(q) Management or operating agreements.
(r) Original Certificate of Occupancy of the Mortgage Property, or legal
equivalent.
(s) Documentation relating to any full or partial releases of security or
any waivers of liability.
(t) Loan application, if available.
(u) Closing statement, if available.
(v) Tax receipts, insurance premium receipts, ledger sheets, payment
records, insurance claim files and correspondence, the amount of funds held in
escrow by the Bank and any correspondence with respect to such escrow account,
general correspondence, the Bank's loan number, current and historical
computerized data files, underwriting standards
7
<PAGE>
used for origination and all other papers and records developed or originated by
the Bank or others required to document the Loan or to service the Loan.
3.0 R&G TO SERVICE THE LOANS.
3.1 LOANS SUBJECT TO THIS AGREEMENT. The Loans of the Bank will be
serviced exclusively by R&G, on the terms and conditions herein provided.
3.2 FEE. The Bank shall pay R&G a fee for servicing the Loans (the
"Servicing Fee") as follows:
(i) For loans secured by residential real estate, with an
outstanding principal balance of $50,000 and below, the Servicing Fee shall
be 0.30% of the outstanding principal balance, per month;
(ii) For loans secured by residential real estate, with an
outstanding principal balance above $50,000, the Servicing Fee shall be
0.25% of the outstanding principal balance, per month;
(iii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with an outstanding principal balance
of $100,000 or above, the Servicing Fee shall be 0.25% of the outstanding
principal balance, per month;
(iv) For loans secured by commercial real estate, commercial,
business, consumer and other loans, with an outstanding principal balance
below $100,000, the Servicing Fee shall be 0.30% of the outstanding
principal balance, per month;
(v) Notwithstanding the above, for all loans secured by second
mortgages, the Servicing Fee shall be a flat fee of $4.50 per loan, per
month, during the first year that R&G services the Loan pursuant to this
Agreement. During the second year that R&G services the Loan pursuant to
this Agreement, the Servicing Fee shall be $4.00 per loan, per month;
during the third year that R&G services the Loan pursuant to this
Agreement, and thereafter, the Servicing Fee shall be $3.50 per loan, per
month.
4.0 ADMINISTRATION AND SERVICING OF THE MORTGAGES.
4.1 R&G TO ACT AS SERVICER. Continuously from the date hereof until the
principal and interest of the Loans are paid in full, and except as otherwise
provided in this Agreement, R&G will proceed diligently to collect all payments
in accordance with the terms of the Loans, as and when the same shall become due
and payable. R&G will promptly discharge all the obligations of the mortgagee,
as well as every obligation arising
8
<PAGE>
hereunder and under the contract of insurance issued under the National Housing
Act of 1934, as amended and supplemented (hereafter called the "Housing Act") or
any guaranty issued under the Servicemen's Readjustment Act of 1984, as amended
and supplemented (hereafter called the "Servicemen's Act") if applicable.
4.2 REMITTANCE OF FUNDS. R&G on or before the 20th day of each month,
will forward to the Bank all funds it has received which are applicable to the
payment of principal and interest under the terms of each Loan and which have
not been previously remitted to the Bank by R&G. Until such funds are remitted,
R&G shall hold such funds in trust for the Bank in a custodial account. R&G
will also hold in trust for the Bank in a custodial account all other funds
received and shall apply these funds in accordance with the terms of the
Mortgage, this Agreement and any applicable regulations of the Housing Act and
Servicemen's Act. Said funds will be maintained in a separate account at the
Bank.
4.3 NOTICES. R&G shall advise the Bank monthly as to the status of each
Loan, including a description of the Loan balance at the beginning of the period
covered, all payments of all interest, principal and maintenance charges and the
outstanding balance as of the end of the period covered. The term "Maintenance
Charges" as herein used means all payments for whatever purpose required by the
terms of the Loan other than principal and interest. R&G will submit annually a
certification as to payment of real estate taxes, property insurance, and where
applicable, FHA or private mortgage insurance.
4.4 ASSIGNMENT.
(a) Upon any subsequent assignment of the Loan, the Bank shall mail
written notice thereof to R&G, giving the name and address of the Assignee.
Until R&G receives such written notice, the Bank shall be presumed to continue
to be the owner of the Loan and R&G will be fully protected in continuing to
make payments of principal and interest to the Bank. Upon such assignment by
the Bank, the Bank shall be IPSO FACTO released from any and all obligations
hereunder.
(b) R&G may assign its rights and obligations to service the Mortgage only
with the written consent of the Bank to another duly qualified institution.
Upon such assignment by R&G, R&G shall be IPSO FACTO released from any and all
obligations hereunder.
4.5 HAZARD INSURANCE. During the term of this Agreement R&G will ensure
that at all times while a Loan covered by this Agreement is outstanding, all of
the buildings upon the premises covered by the Loan are kept insured against
loss or damage by fire and the perils normally insured against by extended
coverage, without co-insurance and with the standard mortgagee clause without
contribution by the Bank, by insurance companies satisfactory to the Bank but at
the Bank's expense in the event of failure by the mortgagor or other owner to
maintain such insurance in force. The amount of coverage will be equal to the
unpaid principal balance of the Loan or the full insurable value of such
buildings and improvements upon the premises covered by the Loan, whichever is
the lesser.
9
<PAGE>
R&G shall promptly notify the Bank in writing of any damage by fire or
other loss to the Mortgage Property when R&G learns of same and such damage
exceeds One Thousand Dollars ($1,000.00).
R&G shall process and endorse on behalf of the Bank, fire and extended
coverage loss drafts payable to the Bank where the total is One Thousand Dollars
($1,000.00) or less.
4.6 INSPECTIONS. R&G at its own expense will make inspections of the
Mortgage Property, under any of the following circumstances:
(a) When R&G becomes aware of fire or other damage to the Mortgage
Property and the amount of damage exceeds One Thousand Dollars ($1,000.00).
(b) When the Loan payments become delinquent and the Mortgage Property is
to be inspected as part of R&G's normal collection cycle.
(c) When R&G has to make inspections pursuant to information received from
any regulatory authority having jurisdiction.
(d) Under any other circumstances, in order to comply with Department of
Veterans Affairs, FHA, or private mortgage insurance regulations, if applicable.
4.7 NOTICES REQUIRED. R&G shall promptly notify the Bank in writing of
any of the following which may come to the attention of R&G:
(a) Any loss or damage by fire.
(b) Any failure by the borrower to perform any covenant or obligation
under the Loan, if such failure continues for a period of thirty (30) days.
(c) Any sale or transfer of the legal or equitable title to any Mortgage
Property, and the date of the instrument transferring the title thereto.
(d) Any vacancy in the Mortgage Property continuing for more than two (2)
months.
(e) Any lack of repair or other deterioration or waste suffered or
committed in respect of any Mortgage Property.
(f) Abandonment of the Mortgage Property.
(g) Any other matter which would adversely affect or result in the
diminution of value of the security for any Loan.
10
<PAGE>
(h) Under any other circumstances, in order to comply with Department of
Veterans Affairs, FHA, or private mortgage insurance regulations, if applicable.
4.8 COMPLIANCE. R&G will comply in all respects with the Housing Act and
the Servicemen's Act wherever applicable, and with all rules and regulations
issued thereunder as the same apply to the obligations of the mortgagee,
including the maintenance of records and giving of notice, insofar as they may
apply so that, the full benefit of any contract of insurance or any guaranty
will inure to the benefit of the Bank.
4.9 DEFAULTS AND FORECLOSURE. In case of default on any Loan by the
borrower, the Bank, if it so elects, shall have the right to institute
foreclosure proceedings or, at its option, may authorize R&G to institute and
conduct foreclosure proceedings on its behalf or acquire the property by other
means. R&G will conduct all proceedings in accordance with the Housing Act or
the Servicemen's Act or the requirements of a private insurer, if applicable,
and as the case may be, and if the property is conveyed to the Federal Housing
Administration or the Secretary of the Department of Veterans Affairs, R&G will,
if requested by the Bank, attend to all settlement proceedings incidental to
such conveyance. The Bank will reimburse R&G for all reasonable attorneys' fees
and costs and all other reasonable out-of-pocket expenses in connection with the
foreclosure. Service foreclosure be paid by the Bank to R&G based on the
interest collected by the Bank in the claim filed with the Department of
Veterans Affairs or Federal Housing Administration, if applicable. R&G will
notify the Bank of any attorney's fees with respect to foreclosure proceedings
on any Loan of $450.00, exclusive of expenses.
4.10 RECORDS. R&G agrees that a representative of the Bank may at any time
during ordinary business hours examine all books and records of R&G relating to
any of the Loans serviced under the terms of this Agreement.
4.11 FIDELITY INSURANCE. While this Agreement is in force, R&G shall, at
its expense, maintain at all times policies of fidelity, theft, forgery and
errors and omission insurance. Such policies shall be in amounts and with
coverage satisfactory to the Bank, and shall be written to provide for notice of
cancellation to the Bank. Upon execution of this Agreement, R&G shall provide
each policy showing such coverage to the Bank and R&G shall promptly provide the
Bank with copies of any changes of such policies.
4.12 TERMINATION OF R&G'S SERVICING OF LOANS. The Bank may, at its option
and subject to the provisions in Section 11.0, by ninety (90) days written
notice to R&G, terminate this Agreement as to Loans being serviced by R&G with
or without cause.
5.0 BANK TO COLLECT LOAN PAYMENTS.
(a) By mutual agreement of the parties, the Bank will provide for the
receipt of payments of the Loans and any other loans serviced by R&G. Nothing
herein shall release R&G from its obligations pursuant to the remaining terms of
this Agreement, PROVIDED,
11
<PAGE>
however, that the Bank shall be under no obligation to provide for the receipt
of payments in arrears.
(b) R&G shall pay the Bank a fee on a monthly basis for each transaction
represented by one payment, or a group of payments covered by one receipt, made
by one borrower on each occasion, as per the following schedule:
NUMBER OF TRANSACTIONS CUMULATIVE FEE ($)
1,000 and less $1.00
1,000 to 1,500 $0.90
1,500 to 2,000 $0.80
2,000 to 2,500 $0.70
2,500 to 3,000 $0.60
3,000 and up $0.50
(c) R&G shall provide computer equipment to the Bank to assist the Bank in
providing its services under this Section 5.0.
6.0 R&G TO OFFER SECURITIZATION SERVICES.
At no extra charge to the Bank, and upon execution of this Agreement, R&G
shall proceed to review the Loans for the purpose of securitizing and including
said Loans in mortgage-backed securities (the "Mortgage-Backed Securities").
R&G may, upon such terms as the Bank and R&G agree to, issue the Mortgage-Backed
Securities. Upon issuance of the Mortgage-Backed Securities, if any, R&G shall
continue to service the Loans included therein, and shall be paid a Servicing
Fee in accordance with Section 1.0 hereof, net of any charges to be paid as cost
of securitization to the Federal National Mortgage Association and/or the
Federal Home Loan Mortgage Corporation. Any excesses in rounding above the
minimum Servicing Fees will be reimbursed to the Bank on a monthly basis.
7.0 REPRESENTATIONS AND WARRANTIES OF THE BANK.
The Bank hereby represents and warrants to R&G that:
(a) The Bank is a federally-chartered savings bank duly organized, validly
existing, and in good standing under the laws of the United States and the
Commonwealth of Puerto Rico and has all licenses necessary to carry on its
business as now being conducted; the Bank has corporate power and authority to
execute and deliver this Agreement and to perform in accordance herewith; the
execution, delivery and performance of this Agreement (including all instruments
of transfer to be delivered pursuant to this Agreement) by the Bank and the
consummation of the transactions contemplated hereby have been duly and
12
<PAGE>
validly authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Bank; and all requisite corporate action has been taken by the
Bank to make this Agreement valid and binding upon the Bank in accordance with
its terms;
(b) The consummation of the transactions contemplated by this Agreement
will not result in the breach of any term or provision of the charter or by-laws
of the Bank or result in the breach of any term or provision of, or conflict
with or constitute a default under or result in the acceleration of any
obligation under, any material agreement, indenture or loan or credit agreement
or other instrument to which the Bank or its property is subject, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Bank or its property is subject;
(c) Neither this Agreement nor any statement, report or other document
furnished or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains any untrue statement of fact or
omits to state a material fact necessary to make the statements contained
therein or herein not misleading;
(d) The origination and collection practices used by the Bank with respect
to each Loan, the Servicing Rights of which are acquired hereby, have been in
all material respects legal, proper, prudent and customary in the mortgage
servicing business;
(e) The Bank does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant contained in this
Agreement; and
(f) The Bank is an approved seller/servicer of conventional mortgage loans
for FNMA in good standing and the Bank's deposits are insured by the FSLIC to
the maximum extent permitted by law.
(g) The Bank has full right and power to hold and to transfer the
Servicing Rights to R&G free and clear of any equity, lien, pledge charge,
claim, participation interest, security interest or any other encumbrance.
(h) Upon execution of this Agreement, R&G shall have the exclusive right
to service any Loan owned by the Bank, or that in the future may be owned by the
Bank.
(i) As to each Loan, as to which R&G is acquiring the Servicing Rights,
the Bank has furnished all the documents that it must produce hereunder and all
such documents, to the best knowledge of the Bank, are true and correct in all
material respects.
(j) The Bank is relying and shall rely upon R&G's representations and
warranties in connection with the execution, performance and delivery of this
Agreement, notwithstanding any investigation made by the Bank or otherwise on
the Bank's behalf.
13
<PAGE>
On any Transfer Date, or upon any request to R&G by the Bank to service any
Loans, as applicable, the Bank shall be deemed to repeat all the foregoing
representations and warranties.
8.0 REPRESENTATIONS AND WARRANTIES OF R&G.
(a) R&G is a mortgage banking firm duly organized, validly existing, and
in good standing under the laws of the Commonwealth of Puerto Rico and has all
licenses necessary to carry on its business as now being conducted; R&G has
corporate power and authority to execute and deliver this Agreement and to
perform in accordance herewith; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be delivered pursuant to
this Agreement) by R&G and the consummation of the transactions contemplated
hereby have been duly and validly authorized; this Agreement evidences the
valid, binding and enforceable obligation of R&G; and all requisite corporate
action has been taken by R&G to make this Agreement valid and binding upon R&G
in accordance with its terms;
(b) The consummation of the transactions contemplated by this Agreement
will not result in the breach of any term or provision of the certificate of
incorporation or by-laws of R&G or result in the breach of any term or provision
of, or conflict with or constitute a default under or result in the acceleration
of any obligation under, any material agreement, indenture or loan or credit
agreement or other instrument to which R&G or its property is subject, or result
in the violation of any law, rule, regulation, order, judgment or decree to
which R&G or its property is subject;
(c) Neither this Agreement nor any statement, report or other document
furnished or to be furnished by R&G pursuant to this Agreement or in connection
with the transactions contemplated hereby contains any untrue statement of fact
or omits to state a material fact necessary to make the statements contained
therein or herein not misleading;
(d) R&G does not believe, nor does it have any reason or cause to believe,
that it cannot perform each and every covenant contained in this Agreement; and
(e) R&G is relying and shall rely upon the Bank's representations and
warranties in connection with the execution, performance and delivery of this
Agreement, notwithstanding any investigation made by R&G or otherwise on R&G's
behalf.
(f) R&G is an approved seller/servicer of conventional mortgage loans for
FNMA in good standing.
14
<PAGE>
9.0 CONDITIONS PRECEDENT.
(a) The parties shall have obtained such licenses, permits and approvals
of Federal and Commonwealth regulatory agencies, to the extent that their
approvals or consents are required by applicable law or regulations, for the
consummation of the transactions contemplated hereby and as may be required in
order for the fulfillment of the parties' obligations.
(b) All actions, proceedings, instruments and documents deemed necessary
or appropriate by R&G or the Bank, as the case may be, to effectuate this
Agreement and the consummation of the transactions contemplated hereby, or
incidental thereto, shall have been received or completed.
(c) The Bank shall have terminated any and all agreements with any third
party to service any Loan owned by the Bank heretofore in force and effect;
PROVIDED, HOWEVER, that any cancellation fee incurred by the Bank in terminating
any such agreement or agreements shall be reimbursed by R&G to the Bank.
10.0 COVENANTS OF THE BANK AND R&G.
(a) Each of the Bank and R&G will use their best efforts to obtain any
consents of third parties and regulatory approvals required for the consummation
of this Agreement and the transactions contemplated hereby and provided that
unreasonable effort or expense is not required, and will give full cooperation
to obtain all necessary consents, approvals and authorizations subsequent to the
date hereof to the extent that such consent, approvals and authorizations are
not obtained prior to the date hereof.
(b) The Bank and R&G shall respectively execute and deliver such documents
and instruments and do such other things as be reasonably required more fully
and definitely to vest in the parties such rights, powers, duties,
responsibilities, obligations and liabilities of the Bank and R&G as is
contemplated hereunder.
(c) Each and every representation and warranty made by R&G and the Bank
shall survive the execution and delivery of this Agreement, and shall be deemed
to have been effectively repeated by R&G and the Bank, as the case may be, upon:
(i) each Transfer Date and (ii) any collection by the Bank of any loan payment
pursuant to Section 5.0 hereof.
11.0 TERMINATION FEE.
The Bank may terminate this Agreement at any time without cost or
obligation in the event that R&G shall lose its status as an approved
seller/servicer under governmental programs. If this Agreement is terminated
for any reason other than as set forth in the
15
<PAGE>
preceding sentence, the Bank shall pay R&G a termination fee (the "Termination
Fee"). If this Agreement is terminated within two years of any Transfer Date,
the Termination Fee shall be equal to 100% of the Purchase Price for any such
transfer. If this Agreement is terminated after two years from any Transfer
Date, but before five years from the Transfer Date, the Termination Fee shall be
80% of the Purchase Price for any such transfer. If this Agreement is
terminated after five years, but before seven years after the Transfer Date, the
Termination Fee shall be 70% of the Purchase Price for any such transfer. If
this Agreement is terminated after seven years, but before nine years after the
Transfer Date, the Termination Fee shall be 60% for any such transfer. If this
Agreement is terminated after nine years after the Transfer Date, the
Termination Fee shall be 50% of the Purchase Price for any such transfer.
R&G shall promptly deliver to any successor to its responsibilities
hereunder any funds due and payable to the Bank and all documents and statements
held by it hereunder and R&G shall account for all funds and shall execute and
deliver such instruments and do such other things as may reasonably be required
to more fully and definitively vest in the successor all such rights, powers,
duties, responsibilities, obligations and liabilities of R&G.
12.0 AMENDMENT.
This Agreement may be amended from time to time by the Bank and R&G,
subject to and conditioned upon all necessary regulatory approvals, by written
agreement signed by the Bank and R&G.
13.0 GOVERNING LAW.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Puerto Rico and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or to give to any person or entity other than the parties hereto,
any rights or remedies under or by reason of this Agreement.
14.0 NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if personally delivered at or mailed by
registered mail, postage prepaid, to (a) in the case of the Bank, Jardines
Shopping Center, Guaynabo, Puerto Rico 00657, Attention: President, or such
other address as may hereafter be furnished to R&G in writing by the Bank, (b)
in the case of R&G, G.P.O. Box 2394, San
16
<PAGE>
Juan, Puerto Rico 00936, Attention: Mr. Victor Galan, or such other address that
may be furnished to the Bank in writing by R&G.
15.0 SEVERABILITY OF PROVISIONS.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement which is not essential to the effectuation or the basic purpose
of this Agreement is held invalid for any reason whatsoever, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other provisions of this
Agreement.
16.0 INDEMNIFICATION.
R&G shall indemnify the Bank and hold it harmless against any loss,
liability or expense (including reasonable legal and other fees and expenses)
arising out of or in connection with the performance of its duties hereunder,
except that the Bank shall not be indemnified against any such loss, liability
or expense arising out of its bad faith, gross negligence or willful failure to
perform its obligations hereunder, including the costs and expenses of defending
itself against any claim or liability in connection therewith. The Bank shall
notify R&G in writing of the written assertion of a claim against the Bank or
the summons or other legal process commencing any action against it promptly
after the Bank shall have received any such written assertion of a claim or
shall have been served with a summons or other legal process giving information
as to the nature and basis of the claim. R&G shall be entitled to participate
in the defense of any such claim or legal action, and if it so elects at any
time after receipt of such notice, R&G may assume the defense of any suit
brought to enforce any such claim, PROVIDED, HOWEVER, that if separate defenses
to any such suit are available to the Bank which require that it be represented
by separate counsel, then R&G shall be responsible for payment of reasonable
attorney's fees of one separate counsel.
17.0 EXECUTION.
This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same agreement.
18.0 NO ASSIGNMENT.
Neither the Bank nor R&G shall assign this Agreement without the prior
written consent of the Bank and R&G.
17
<PAGE>
IN WITNESS WHEREOF, the Bank and R&G have caused their names to be
signed hereto by their respective officers thereunto duly authorized as of the
day and year first above written.
GUAYNABO FEDERAL SAVINGS BANK
By: /s/ Martin J. Rovira
-----------------------------------
Name: Martin J. Rovira
Title: Chief Executive Officer
R&G MORTGAGE CORP.
By: /s/ Victor J. Galan
-----------------------------------
Name: Victor J. Galan
Title: President
18
<PAGE>
Amendment To The Master Purchase,
Servicing and Collection Agreement
(April 1, 1991)
<PAGE>
AMENDMENT TO THE
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
GUAYNABO FEDERAL SAVINGS BANK (NOW R & G FEDERAL
SAVINGS BANK)
on February 16, 1990
This AMENDMENT to the MASTER PURCHASE, SERVICING AND COLLECTION AGREEMENT,
executed on April 1, 1991, by and between R & G Mortgage Corp., a mortgage
banking firm organized under the laws of the Commonwealth of Puerto Rico ("R &
G") and R & G Federal Savings Bank, a federally-chartered stock savings bank
(the "Bank").
WITNESSETH
WHEREAS, R & G and the Bank entered into a Master Purchase, Servicing and
Collection Agreement dated February 16, 1990; and
WHEREAS, on its ordinary meeting held on March 27, 1991, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to approve a request by R & G to establish a
securitization fee of .125% to be calculated on the principal balance of of
every mortgage loan which is pooled into a mortgage-backed security.
NOW, THEREFORE, intending to legally bound, the parties hereby agree to
amend the Agreement as follows:
I. The first sentence in Section 6.0 of the Agreement is hereby amended and
restated to read as follows:
Upon execution of this Agreement, R & G shall proceed to review the
Loans for the purpose of securitizing and including said Loans in mortgage-
backed securities (the "Mortgage-Backed Securities"), and will charge the Bank
for this service a Securitization Fee of .125% to be calculated on the principal
balance of every mortgage loan which is pooled under this Agreement, at the time
of such securitization.
<PAGE>
II. The rest, residue and remainder of the Agreement is hereby reaffirmed,
ratified and ncorporated as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to
the Agreement this April 1, 1991.
R & G Federal Savings Bank
By: /s/ Osvaldo Domenech
--------------------------------------
Osvaldo Domenech
Executive Vice President
R & G Mortgage Corp.
By: /s/ Ramon Prats
--------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
Amendment to the Master Purchase,
Servicing and Collection Agreement
(December 1, 1991)
<PAGE>
AMENDMENT TO THE
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
GUAYNABO FEDERAL SAVINGS BANK
(NOW R & G FEDERAL SAVINGS BANK)
on February 16, 1990
This AMENDMENT to the MASTER PURCHASE, SERVICING AND COLLECTION AGREEMENT,
executed on December 1, 1991, by and between R & G Mortgage Corp., a mortgage
banking firm organized under the laws of the Commonwealth of Puerto Rico ("R &
G") and R & G Federal Savings Bank, a federally-chartered stock savings bank
(the "Bank").
WITNESSETH
WHEREAS, a R & G and the Bank entered into a Master Purchase, Servicing and
Collection Agreement dated February 16, 1990; which was subsequently amended on
April 1, 1991; and
WHEREAS, on its ordinary meeting held on November 26, 1991, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to establish a securitization fee of 0.25% to be
calculated on the principal balance of every mortgage loan which is pooled into
a mortgage-backed security.
NOW, THEREFORE, intending to legally bound, the parties hereby agree to
amend the Agreement as follows:
I. The first sentence in Section 6.0 of the Agreement is hereby amended
and restated to read as follows:
Upon execution of this Agreement, R & G shall proceed to review the Loans
for the purpose of securitizing and including said Loans in mortgage-backed
securities (the "Mortgage-Backed Securities"), and will charge the Bank for this
service a Securitization Fee of 0.25% to be calculated on the principal balance
of every mortgage loan which is pooled under this Agreement, at the time of such
securitization.
<PAGE>
II. The rest, residue and remainder of the Agreement is hereby reaffirmed,
ratified and incorporated as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to
the Agreement this December 1, 1991.
R & G FEDERAL SAVINGS BANK
By: /s/ Osvaldo Domenech Rivera
-------------------------------------
Osvaldo Domenech Rivera
Executive Vice President
R & G MORTGAGE CORPORATION
By: /s/ Ramon Prats
-------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
Amendment to the Master Purchase,
Servicing and Collection Agreement
(February 1, 1994)
<PAGE>
AMENDMENT TO THE
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
GUAYNABO FEDERAL SAVINGS BANK
(NOW R & G FEDERAL SAVINGS BANK)
on February 16, 1990
This AMENDMENT to the MASTER PURCHASE, SERVICING AND COLLECTION AGREEMENT,
executed on February 1, 1994, by and between R & G Mortgage Corp., a mortgage
banking firm organized under the laws of the Commonwealth of Puerto Rico ("R &
G") and R & G Federal Savings Bank, a federally-chartered stock savings bank
(the "Bank").
WITNESSETH
WHEREAS, a R & G and the Bank entered into a Master Purchase, Servicing and
Collection Agreement dated February 16, 1990; which was subsequently amended on
April 1, 1991; and on December, 1, 1991;
WHEREAS, on its ordinary meeting held on January 27, 1994, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to establish a securitization fee to be
calculated on the principal balance of every mortgage loan which is pooled into
a mortgage-backed security, and using as a basis for the determination of such
securitization fee, the premium that is generated on the sale of each mortgage-
backed security;
NOW, THEREFORE, intending to legally bound, the parties hereby agree to
amend the Agreement as follows:
I. The first sentence in Section 6.0 of the Agreement is hereby amended
and restated to read as follows:
"Upon execution of this Agreement, R & G shall proceed to review the Loans
for the purpose of securitizing and including said Loans in mortgage-backed
securities (the "Mortgage-Backed Securities"), and will charge the Bank for this
service a Securitization Fee to be calculated on the principal balance of every
mortgage loan which is pooled under this
<PAGE>
Agreement, at the time of such securitization, which Securitization Fee will
vary in accordance with the premium that is generated on the sale of each
mortgage-backed security as follows; (a) If the premium on sale is from 0% to 2%
then the Fee will be equal to .0025%; (b) If the premium on sale is more than
2%, and up to 3%, the Fee will be equal to .00375, and (c) If the premium on
sale is more than 3%, the Fee will be equal to .0050% "
II. The rest, residue and remainder of the Agreement is hereby reaffirmed,
ratified and incorporated as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment to
the Agreement this February 1, 1994
R & G FEDERAL SAVINGS BANK
By: /s/ Osvaldo Domenech Rivera
-------------------------------------
Osvaldo Domenech Rivera
Executive Vice President
R & G MORTGAGE CORPORATION
By: /s/ Ramon Prats
-------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
Amendment to the Master Purchase,
Servicing and Collection Agreement
(July 1, 1994)
<PAGE>
AMENDMENT TO THE
MASTER PURCHASE, SERVICING
AND COLLECTION AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
GUAYNABO FEDERAL SAVINGS BANK
(NOW R & G FEDERAL SAVINGS BANK)
on February 16, 1990
This AMENDMENT to the MASTER PURCHASE, SERVICING AND COLLECTION AGREEMENT,
executed on July 1, 1994, by and betwenn R & G Mortgage Corp., a mortgage
banking firm organized under the laws of the Commonwealth of Puerto Rico (R & G)
and R. & G Federal Savings Bank, a federally-chartered stock savings bank (the
"Bank").
WITNESSETH
WHEREAS, a R & G and the Bank entered into a Master Purchase, Servicing
and Collection Agreement dated February 16, 1990; which was subsequently amended
on April 1, 1991; on December, 1, 1991;
and on February 1, 1994;
WHEREAS, on its ordinary meeting held on June 30, 1994, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to provide for the granting, by the Bank to R&G,
of the right to service the loans which are contemplated under the Agreement, on
a sixty-days advance cancellation, non-exclusive basis; to provide for the
payment, by R&G to the Bank, of a consideration for such servicing as described
below, only when, and if, any loans serviced under the Agreement are sold by the
Bank, be it on a securitized or on a whole loan sales basis; to provide for a
reduction in the service fees to be paid by the Bank to R&G under the Agreement,
as indicated below; and to provide for the maintenance, by R&G, of balances in
its "escrow" accounts at the Bank of not less than an average of $10 million
monthly during the term of the Agreement;
NOW, THEREFORE, intending to legally bound, the parties hereby agree to
amend the Agreement as follows:
<PAGE>
I. Subsection (b) of Section 1.0 of the Agreement is hereby amended and
restated to read as follows;
"(b) The purchase price of the Servicing Rights with respect to the Loans
shall be a percentage of the outstanding principal of such Loans (the "Purchase
Price"), shall depend on the length of the remaining time to maturity, and will
be paid to the Bank only when and if the Bank sells such Loans, be it on a
securitized or on a whole loan sales basis, as follows;
(i) For loans secured by first mortgages on residential real estate,
with outstanding principal of $50,000, or below:
TIME TO MATURITY PURCHASE PRICE
30 years or less, but
more than 15 years 0.80%
15 years or less, but
more than 10 years 0.20%
10 years or less 0.05%
(ii) For loans secured by first mortgages on residential real estate,
with outstanding principal above $50,000:
TIME TO MATURITY PURCHASE PRICE
30 years or less, but
more than 15 years 1.00%
15 years or less, but
more than 10 years 0.425%
10 years or less 0.10%
(iii) For loans secured by second mortgages on residential real
estate, with outstanding principal of $10,000 or less:
2
<PAGE>
TIME TO MATURITY PURCHASE PRICE
10 years or less, but
more than 15 years 0.00%
15 years or less, but
more than 10 years 0.00%
20 years or less 0.05%
(iv) For loans secured by second mortgages on residential real estate,
with outstanding principal greater than $10,000 but less than $15,000:
TIME TO MATURITY PURCHASE PRICE
10 years or less, 0.00%
15 years or less, but
more than 10 years 0.05%
20 years or less, but
more than 15 years 0.175%
(v) For loans secured by second mortgages on residential real estate,
with outstanding principal of $15,000 or more:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.00%
15 years or less, but
more than 10 years 0.25%
20 years or less, but
more than 15 years 0.425%
(vi) For loans secured by commercial real estate, commercial business,
consumer and other loans, with outstanding principal of $50,000:
3
<PAGE>
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.00%
15 years or less, but
more than 10 years 0.175%
20 years or less, but
more than 15 years 0.30%
(vii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with outstanding principal of $50,000 or
above but not more than $100,000:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.175%
15 years or less, but
more than 10 years 0.80%
20 years or less, but
more than 15 years 1.05%
(viii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with outstanding principal above $100,000:
TIME TO MATURITY PURCHASE PRICE
5 years or less 0.00%
10 years or less, but
more than 5 years 0.55%
15 years or less, but
more than 10 years 1.05%
4
<PAGE>
20 years or less, but
more than 15 years 1.05%
(ix) For purposes of clauses (iii), (iv)) and (v), the Purchase Price
of second mortgages with a maturity of more than 20 years and an outstanding
principal of $50,000 or less shall be 0.80; if the second mortgage has an
outstanding principal of more than $50,000 and a maturity of more than 20 years,
the Purchase Price shall be 1.05%."
II. Sections 3.1 and 3.2 of the Agreement are hereby amended and
restated to read as follows;
3.1 LOANS SUBJECT TO THIS AGREEMENT. The Loans of the Bank will be
serviced by R&G on a non-exclusive basis, subject to a sixty (60) days
cancellation notice, on the terms and conditions herein provided.
3.2 FEE. The Bank shall pay R&G a fee for servicing the Loans (the
"servicing fee") as follows:
(i) For loans secured by residential real estate, with an outstanding
principal balance of $50,000 and below, the Servicing Fee shall be 0.2500 of the
outstanding principal balance per month:
(ii) For loans secured by residential real estate, with an outstanding
principal balance above $50,000, the Srvicing Fee shall be 0.20% of the
outstanding principal balance, per month;
(iii) For loans secured by commercial real estate, commercial
business, consumer and other loans, with an outstanding principal balance of
$100,000 or above, the Servicing Fee shall be 0.20% of the outstanding principal
balance, per month;
(iv) For loans secured by commercial real estate, commercial business,
consumer and other loans, with an outstanding principal balance below $100,000,
the Servicing Fee shall be 0.25% of the outstanding principal balance, per
month;
(v) Notwithstanding the above, for all loans secured by second
mortgages, the Servicing Fee shall be a flat fee of $4.00 per loan, per month,
during the first year that R&G services the Loan pursuant to this Agreement.
During the second year that R&G services the Loan pursuant to this Agreement,
the Servicing Fee shall be $3.50 per loan, per month; during the third year that
R&G services the Loan pursuant to this Agreement, and thereafter, the Servicing
Fee shall be $3.00 per loan, per month.
5
<PAGE>
(vi) R&G will maintain balances in its "escrow" accounts at the Bank
of not less than an average of TEN MILLION DOLLARS ($10,000,000) monthly during
the term of the Agreement."
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment to the Agreement this July 1, 1994.
R & G FEDERAL SAVINGS BANK
By: /s/ Osvaldo Domenech Rivera
--------------------------------------
Osvaldo Domenech Rivera
Executive Vice President
R & G MORTGAGE CORPORATION
By: /s/ Ramon Prats
--------------------------------------
Ramon Prats
Executive Vice President
6
<PAGE>
EXHIBIT 10.2
MASTER CUSTODIAN AGREEMENT
BETWEEN
R&G MORTGAGE CORP.
AND
GUAYNABO FEDERAL SAVINGS BANK
DATED FEBRUARY 16, 1990
<PAGE>
MASTER CUSTODIAN AGREEMENT
MASTER CUSTODIAN AGREEMENT, dated February 16, 1990, by and between R&G
Mortgage Corporation, a mortgage banking corporation organized under the laws of
the Commonwealth of Puerto Rico ("R&G") and Guaynabo Federal Savings Bank, a
federally-chartered stock savings bank (the "Bank").
W I T N E S S E T H
WHEREAS, the Bank and R&G have entered into a Stock Purchase Agreement
dated August 8, 1989, as amended (the "Stock Purchase Agreement") hereof;
WHEREAS, it is a condition precedent to the consummation of the
transactions contemplated by the Stock Purchase Agreement that R&G and the Bank,
subject to and conditioned upon all required regulatory approvals, execute this
Agreement; and
WHEREAS, R&G desires that the Bank become the custodial agent for R&G of
all the documentation related to the issuance of Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ( "FNMA" ) or the
Federal Home Loan Mortgage Corporation ("FHLMC") mortgage-backed loans (the
"Documentation") as, from time to time, R&G shall specify and make subject to
the terms hereof.
NOW, THEREFORE, INTENDING TO BE LEGALLY BOUND, THE PARTIES AGREE AS
FOLLOWS:
1.0 APPLICABILITY. From time to time, R&G shall deposit with the Bank the
Documentation that, in R&G's sole discretion, R&G shall designate and make
subject to the terms hereof. Said Documentation shall be held by the Bank as
custodian for R&G and
2
<PAGE>
is to be maintained and disposed by the Bank pursuant to written instructions
given by R&G and in accordance with all applicable laws and regulations.
2.0 BANK NOT TO ACT AS NOMINEE. For purposes of this Agreement, the Bank
shall not, and shall not be deemed to, act as R&G's nominee.
3.0 FEES. The Bank shall provide its custodial services hereunder at a
fee of $4.00 per each mortgage-backed loan per year.
4.0 STATEMENT OF HOLDINGS. On a monthly basis, the Bank shall send to R&G
a statement of the Documentation holdings that indicates the status of R&G's
custodial account. Any perceived discrepancy with the instructions given by R&G
to the Bank should be notified by the 30th day of every month.
5.0 COVENANTS OF THE PARTIES.
(a) The Bank shall comply with any applicable laws, rules, and
regulations, including, but not limited to, providing and obtaining
appropriate safe-keeping facilities and insurance policies, and entering
into such custodial agreements with, and as reasonably required by, GNMA,
the FNMA or the FHLMC.
(b) Each of the Bank and R&G will use their respective best efforts
to obtain any consents of third parties and regulatory approvals and,
provided that unreasonable effort and expense is not required, will give
full cooperation to obtain all consents, approvals and authorizations
needed by the parties to perform and fulfill the obligations hereunder.
6.0 INDEMNIFICATION. R&G shall indemnify the Bank and hold it harmless
against any loss, liability or expense (including reasonable legal and other
fees and expenses) arising
3
<PAGE>
out of or in connection with the performance of its duties hereunder, except
that the Bank shall not be indemnified against any such loss, liability or
expense arising out of its bad faith, gross negligence or willful failure to
perform its obligations hereunder, including the costs and expenses of defending
itself against any claim or liability in connection therewith. The Bank shall
notify R&G in writing of the written assertion of a claim against the Bank or
the summons or other legal process commencing any action against it promptly
after the Bank shall have received any such written assertion of a claim or
shall have been served with a summons or other legal process giving information
as to the nature and basis of the claim. R&G shall be entitled to participate
in the defense of any such claim or legal action, and if it so elects at any
time after receipt of such notice, R&G may assume the defense of any suit
brought to enforce any such claim, PROVIDED, HOWEVER, that if separate defenses
to any such suit are available to the Bank which require that it be represented
by separate counsel, then R&G shall be responsible for payment of reasonable
attorney's fees of one separate counsel.
7.0 NOTICES. Unless otherwise agreed herein, any notices or other
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered at or mailed, postage-prepaid, to (a) in the
case of the Bank, Los Jardines Shopping Center, Guaynabo, Puerto Rico 00651,
Attention: President, or such other address as may hereafter be furnished to
R&G in writing by the Bank; (b) in the case of R&G, G.P.O. Box 2394, San Juan,
Puerto Rico 00936, Attention: Mr. Victor Galan, or such other address that may
be furnished to the Bank by R&G.
4
<PAGE>
8.0 TERMINATION. Either party may terminate this Agreement at any time
upon one-hundred and twenty (120) days written notice after obtaining all
necessary regulatory approvals.
IN WITNESS WHEREFORE, the Bank and R&G have caused their names to be signed
hereto by their respective officers thereunder duly authorized as of the day and
year first above written.
GUAYNABO FEDERAL SAVINGS BANK
By: /s/ Martin J. Rovira
-----------------------------------
Name: Martin J. Rovira
Title: Chief Executive Officer
R&G MORTGAGE CORP.
By: /s/ Victor J. Galan
-----------------------------------
Name: Victor J. Galan
Title: President
5
<PAGE>
Amendment To The
Master Custodian Agreement
June 27, 1996
<PAGE>
AMENDMENT TO THE
MASTER CUSTODIAN AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
R & G FEDERAL SAVINGS BANK
(NOW R-G PREMIER BANK OF PUERTO RICO)
This AMENDMENT to the MASTER CUSTODIAN AGREEMENT, executed on June 27,
1996, by and between R & G Mortgage Corp., a mortgage banking firm organized
under the laws of the Commonwealth of Puerto Rico ("R&G") and R-G Premier Bank
of Puerto Rico, a locally-chartered commercial bank (the "Bank").
WITNESSETH
WHEREAS, R & G and the Bank entered into a Master Custodial Agreement dated
February 16, 1990 (the "Agreement");
WHEREAS, by action of the Ancillary Agreements Committee of the Board of
Directors of the Bank at a meeting held on December 14, 1990, the Committee
RESOLVED to increase the custodial fees charged to R&G Mortgage from $4.00 per
case per year to $5.00 per case per year;
WHEREAS, by action of the Board of Directors of the Bank at a meeting held
on December 21, 1990, the Board of Directors RESOLVED to accept the
recommendation of the Ancillary Agreements Committee and increase the custodial
fees charged to R&G Mortgage from $4.00 per case per year to $5.00 per case per
year;
WHEREAS, the sole stockholder of R&G authorized the increase in custodial
fees charged to R&G following the action of the Board of Directors of the Bank;
WHEREAS, the parties hereto have since December 1990 conducted themselves
under the Agreement as if the same had formally been amended to reflect such
increase in custodial fees and now desire to formalize such amendment;
NOW, THEREFORE, intending to be legally bound, the parties hereby agree to
amend the Agreement as follows:
I. The reference to $4.00 in Section 3.0 of the Agreement is changed to
$5.00.
<PAGE>
II. The rest, residue and remainder of the Agreement is hereby reaffirmed,
ratified and incorporated as is fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this amendment to
the Agreement this 27th day of June, 1996.
R-G PREMIER BANK OF PUERTO RICO
By: /s/ Osvaldo Domenech
------------------------------------------
Osvaldo Domenech
Executive Vice President
R & G MORTGAGE CORP.
By: /s/ Ramon Prats
------------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
EXHIBIT 10.3
MASTER PRODUCTION AGREEMENT
BETWEEN
R&G MORTGAGE CORP.
AND
GUAYNABO FEDERAL SAVINGS BANK
DATED FEBRUARY 16, 1990
<PAGE>
MASTER PRODUCTION AGREEMENT
MASTER PRODUCTION AGREEMENT, dated February 16, 1990, by and between R&G
MORTGAGE CORP., a mortgage banking firm organized under the laws of the
Commonwealth of Puerto Rico ("R&G") and GUAYNABO FEDERAL SAVINGS BANK, a
federally-chartered stock savings bank (the "Bank").
W I T N E S S E T H
WHEREAS, R&G and the Bank have entered into a Stock Purchase Agreement,
dated August 8, 1989, as amended (the "Stock Purchase Agreement"); and
WHEREAS, it is a condition precedent to the consummation of the
transactions contemplated by the Stock Purchase Agreement that the Bank and R&G,
subject to and conditioned upon all required regulatory approvals, enter into
this Agreement.
NOW, THEREFORE, intending to be legally bound, the parties agree as
follows:
1.0 ESTABLISHMENT OF LOAN PRODUCTION GOALS AND BANK NEEDS. Consistent
with its business plan and any applicable regulatory directives, the Bank shall,
by the month-end following the execution of this Agreement and every thirty (30)
days thereafter, determine the Bank's targets and goals (the "Loan Production
Goals") for the production of loan agreements during the next thirty (30) days
(including, without limitation, agreements with respect to loans secured by
first-mortgages, or second mortgages on residential real estate and home equity
loans (the "Loan Agreements")). The Loan Production Goals shall be determined
by the Bank, in its sole discretion and will be based,
2
<PAGE>
without limitation, on the availability and cost of funds and such other factors
as deemed appropriate by the Bank.
2.0 R&G TO USE BEST EFFORTS. Upon written notification by the Bank to R&G
of the Bank's Loan Production Goals, R&G shall use its best efforts as are
agreed to by the Bank as reasonable and appropriate to assist the Bank in
reaching the Loan Production Goals. In assisting the Bank to reach its Loan
Production Goals, R&G shall, without limitation, advertise and promote its
services to the general public and provide organizational and marketing support
to the Bank in the Commonwealth of Puerto Rico. R&G shall interview prospective
borrowers, process the initial application of such prospective borrowers (the
"Loan Applications") and forward and refer such Loan Applications which are in
accordance with the Bank's written underwriting policies to the Bank for
approval and credit review. R&G shall only forward such Loan Applications where
it has determined that an extension of credit to the applicant would be in
accordance with the Bank's underwriting standards and consistent with its Loan
Production Goals. R&G shall also assist the Bank in providing personnel and
facilities with respect to the execution of any Loan Agreements approved by the
Bank. Notwithstanding anything herein to the contrary, the Bank shall retain
sole discretion in determining which Loan Applications the Bank shall underwrite
and approve, in accordance with sound banking practices. The Bank shall also
retain sole discretion to waive or rescind any special underwriting requirements
in such cases in which R&G either gives a guaranty of repurchase or timely
repayment in connection with the Loan Agreement.
3
<PAGE>
3.0 FEES. In consideration of the mutual covenants and agreements
contained herein, and other valuable considerations, the Bank shall pay R&G a
fee equal to 50% of the processing or originating fees charged to the borrowers
under Loan Agreements where the principal amount is greater than $20,000 and 75%
of the processing or originating fees charged to the borrowers under Loan
Agreements where the principal amount is less than $20,000 (the "Loan Processing
and Other Fees").
4.0 GENERAL PROVISIONS.
4.1 STATEMENTS. Within ten (10) days of the end of the calendar month
close, R&G shall deliver one or more statements to the Bank showing the
outstanding Loan Processing and Other Fees for the past month. Each such
statement will be paid by the Bank within five (5) days of receipt by the Bank.
4.2 NOTICES. All demands, notices and communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered to (a) in
the case of the Bank, Los Jardines Shopping Center, Guaynabo, Puerto Rico 00657
Attention: President, or such other address as may hereafter be furnished to
R&G in writing by the Bank; (b) in the case of R&G, 280 Jesus T. Pinero Avenue,
Hato Rey, Puerto Rico 00918, Attention: Mr. Victor Galan; or such other address
that may be furnished to the Bank by R&G.
4.3 NO ASSIGNMENT. Neither the Bank nor R&G shall assign or delegate this
Agreement without the prior written consent of the other.
4.4 WAIVERS. Any waiver by R&G or the Bank of any breach of or failure to
comply with any provision of this Agreement by the other party must be in
writing and shall
4
<PAGE>
not be construed as, or constitute, a continuing waiver of such provision, or a
waiver of any other breach of, or failure to comply with, any other provision of
this Agreement.
4.5 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the Commonwealth of Puerto Rico.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity, other than the parties hereto, any
rights or remedies as such or by reason of this Agreement.
4.6 SEPARABILITY OF PROVISIONS. Each provision of this Agreement shall be
considered separable and if for any reason any provision that is not essential
to the effectuation of the basic purpose of this Agreement is determined to be
invalid and contrary to any existing or future law, such invalidity shall not
impair the operation of or affect those provisions of this Agreement that are
valid.
4.7 HEADINGS. The headings of the sections of this Agreement are inserted
for convenience of reference only and shall not be deemed to constitute a part
hereof.
4.8 TERMINATION AND SURVIVAL. This Agreement may be terminated at any
time by either party by giving thirty (30) days notice to the other. In the
event of a default by either party of any of its obligations hereunder, the non-
defaulting party shall give prompt notice to the other of such default. If the
defaulting party does not cure such default within ten (10) days of receiving
such notice, the other may terminate this Agreement upon written notice. Upon
termination pursuant to this Section and if there is no notice of default that
had been delivered by the defaulting party hereunder and that had not been cured
by the other, neither
5
<PAGE>
party shall have any rights or obligations to one another other than the rights
and obligations contained in Section 4.1.
5.0 COVENANTS OF THE PARTIES. The Bank and R&G shall use their best
efforts to obtain any consents of third parties and regulatory approvals
required for the consummation of this Agreement and, provided that unreasonable
effort or expense is not required, will give full cooperation to obtain all
consents, approvals and authorizations needed by the parties to fulfill the
parties' obligations hereunder.
IN WITNESS WHEREOF, the Bank and R&G have caused their names to be signed
hereto by their respective officers thereunto duly authorized as of the day and
year first above written.
GUAYNABO FEDERAL SAVINGS BANK
By: /s/ Martin J. Rovira
-----------------------------------
Name: Martin J. Rovira
Title: Chief Executive Officer
R&G MORTGAGE CORP.
By: /s/ Victor J. Galan
-----------------------------------
Name: Victor J. Galan
Title: President
6
<PAGE>
Amendment To The Master
Production Agreement
August 30, 1991
<PAGE>
AMENDMENT TO THE
MASTER PRODUCTION AGREEMENT
EXECUTED PREVIOUSLY BETWEEN
R & G MORTGAGE CORP.
AND
GUAYNABO FEDERAL SAVINGS BANK (NOW R & G FEDERAL
SAVINGS BANK)
ON FEBRUARY 16, 1990
This AMENDMENT to the MASTER PRODUCTION AGREEMENT, executed on August 30,
1991, by and between R & G Mortgage Corp., a mortgage banking firm organized
under the laws of the Commonwealth of Puerto Rico ("R & G") and R & G Federal
Savings Bank, a federally-chartered stock savings bank (the "Bank").
WITNESSETH
WHEREAS, R & G and the Bank entered into a Master Production Agreement
dated February 16, 1990 (the "Agreement"); and
WHEREAS, on its ordinary meeting held on March 27, 1991, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to approve a request by R & G to increase the fee
to be paid to R & G and a request by the Bank to insert language in the
Agreement to reflect the accounting procedure used by the Bank with respect to
the mentioned fees, to be effective as of April 1, 1991; and
WHEREAS, on its ordinary meeting held on August 30, 1991, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements Committee, resolved to approve a request by the Management of the
Bank to designate R & G as escrow and closing agent of the Bank with respect to
loans originated under the Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree to
amend the Agreement as follows:
I. The fifth sentence in Section 2.0 of the Agreement is hereby amended and
restated to read as follows:
R & G shall also assist the Bank in providing personnel and facilities
with respect to the execution of any Loan Agreements approved by the Bank and
with respect to the
<PAGE>
disbursement of all moneys related to such Loan Agreements, and will act as
Closing and Escrow Agent of the Bank.
II. Section 3.0 of the Agreement is hereby amended and restated to read as
follows:
In consideration of the mutual covenants and agreements contained
herein, and other valuable considerations, the Bank shall pay R & G a fee equal
to 75% of the processing or originating fees charged to the borrowers under all
Loan Agreement executed under this Agreement, and the Bank will pay such fees to
R & G, first from the the discount fee charged to borrowers: and then, from the
origination fees charged to said borrowers.
III. The rest, residue and remainder of the Agreement is hereby reaffirmed
ratified and incorporated as if fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have duly executed this amendment to
the Agreement this 30th. day of August 1991.
R & G FEDERAL SAVINGS BANK
By: /s/ Osvaldo Domenech
--------------------------------------
Osvaldo Domenech
Executive Vice President
R & G MORTGAGE CORP.
By: /s/ Ramon Prats
--------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
Amendment To The
Master Production Agreement
March 31, 1995
<PAGE>
AMENDMENT TO THE
MASTER PRODUCTION AGREEMENT
executed previously between
R & G MORTGAGE CORP.
and
R & G FEDERAL SAVINGS BANK
(NOW R-G PREMIER BANK OF PUERTO RICO)
on February 16, 1990
This AMENDMENT to the MASTER PRODUCTION AGREEMENT, executed on March 31,
1995, by and between R & G Mortgage Corp., a mortgage banking firm organized
under the laws of the Commonwealth of Puerto Rico ("R & G") and R-G Premier Bank
of Puerto Rico, a locally-chartered commercial bank (the "Bank").
WITNESSETH
WHEREAS, R & G and the Bank entered into a Master Production Agreement
dated February 16, 1990 (the "Agreement"); which was subsequently amended on
August 30, 1991;
WHEREAS, on its ordinary meeting held on March 31, 1995, the Board of
Directors of the Bank, pursuant to the recommendation of its Ancillary
Agreements committee, resolved to approve a request by R & G to charge the Bank
a fee of 2.0% for the processing services rendered in the origination of
consumer mortgage loans.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree to
amend the Agreement as follows:
I. A sentence will be added to the paragraph under Section 3.0 of the
Agreement which will read as follows:
Also, the Bank will pay a fee of 2.00% to R-G for the services rendered
to the Bank with respect to the processing and origination of each consumer
mortgage loan which is closed on behalf of the Bank.
II. The rest, residue and remainder of the Agreement is hereby reaffirmed
ratified and incorporated as is fully set forth herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this amendment to
the Agreement this 31th day of March, 1995.
R-G PREMIER BANK OF PUERTO RICO
By: /s/ Osvaldo Domenech
------------------------------------------
Osvaldo Domenech
Executive Vice President
R & G MORTGAGE CORP.
By: /s/ Ramon Prats
------------------------------------------
Ramon Prats
Executive Vice President
2
<PAGE>
EXHIBIT 10.4
RG PREMIER BANK OF PUERTO RICO
DATA PROCESSING COMPUTER SERVICE AGREEMENT
This agreement made and entered into this 1st day of January 1995 by RG Mortgage
Corp. a mortgage banker organized and existing under and by virtue of the Laws
of the Commonwealth of Puerto Rico, (hereinafter referred to as "RG Mort),
represented herein by its authorized representative Mr. Juan Jose Diaz Homs, of
legal age, married and Senior Vice President of RG Mortgage Corp. who agrees to
present evidence of his authority to represent RG Mortgage Corp. wherever and
whenever so required.
RG Premier Bank of Puerto Rico, having its business office at 282 Pinero Ave. in
the municipality of San Juan, Puerto Rico (hereinafter referred to as RGPB),
represented herein by Osvaldo Domenech Rivera, of legal age, married and
Executive Vice President of RG Premier Bank of Puerto Rico, resident of Rio
Piedras, Puerto Rico, who RG Premier Bank of Puerto Rico agrees to present
evidence of his authority to represent RG Premier Bank of Puerto Rico wherever
and whenever so required.
This agreement sets forth the terns and conditions under which RG Premier Bank
Of Puerto Rico shall provide RG Mortgage Corp. the necessary data processing
services for its mortgage loan application and the production of the reports of
the Mortgage Computer Applications provided by RG Premier Bank Of Puerto Rico
and effective as of the date of this contract.
WITNESSETH
1. TERM
The initial term of this agreement shall begin on the first day of the month of
January 1995 and remain in effect for (3) three years thereafter. This agreement
shall continue thereafter until terminated by either party by notice in writing
to the other, which notice shall be delivered not less than ninety days (90)
prior to the date of the desired termination. Notice of intention by either
party to terminate, or to make any change in services, or rates as per Schedule
A after the end of the initial three years term, shall be given in writing and
delivered by registered mail to the other not less than ninety (90) days prior
to such desired termination of change.
RG Mort reserves the right to terminate this agreement upon 30 days written
notice to RGPB in the event RGPB fail to carry out any of its obligations under
this agreement of fail consistently service RG Mort in an efficient and timely
manner in conformity with the performance specifications for the services to be
provided under this agreement. It is agreed that if RGPB corrects any such
service deficiencies to comply with the performance specifications or notifies
in writing to RG Mort of its plans and timetable to correct such deficiencies
within said thirty (30) days period and RG Mort accepts in writing, then the
within its terms. If RGPB fails to correct the deficiencies within the period
specified or notified to RG Mort, RG Mort right to terminate this agreement
remains.
<PAGE>
2. SERVICES
The data processing services to be performed regarding RG Mort's Mortgages Data
Processing Services (hereafter referred to as DPS) shall be listed in Schedule A
attach hereto and made part hereof.
RGPB warrants and represents that it is fully advised and informed of all
services that it must render under this agreement and that it has the necessary
knowledge, personnel, skills and facilities to comply with all its obligations
under this agreement. RG Mort warrants and represents that the services listed
in Schedule A are all Services to be rendered under this agreement.
3. RATES
A. The charges or rates for services to be performed under this agreement are
detailed in Schedule A attached hereto and made a part hereof. The monthly
charges or rates applicable to the DPS service will be effective on the date the
service commences in accordance with section 1. in the event the commencement
date is later than the first working day of the month, the initial total monthly
charge shall be prorated in proportion to the number of days in which the
service was provided in that month.
B. Upon review of the monthly billing submitted by RGPB, RG Mort will process
and pay the invoice within fifteen (15) days of its receipt. In case of items in
dispute, RG Mort may request from RGPB additional information for clarification
of the matter and payment will processed upon agreement between parties. Any
items not in dispute will be process and paid by RG Mort within fifteen (15)
days of the reception of the monthly billing.
C. All special forms and supplies including those that carry the printed name or
logo of RG Mort and that are for its sole use (such as continuous forms, payment
coupon books, envelopes and the like) that are to be used in providing services
detailed herein are to be provided by RG Mort, it being understood that standard
stock paper 14 7/8 x 11 shall be provided by RGPB as part of this agreement at
its own cost and expenses.
4. SYSTEM DESIGN AND PROGRAMMING
A. Any additional work requested by RG Mort will be quoted at the system and
programming rates of the software vendor (Systematics) and must be accepted by
RG Mort in writing before the work is performed.
5. GENERAL CONDITIONS
A. RG Mort shall be responsible for the completeness and accuracy of all
information imputed thru the on-line terminals. If RGPB is obligated to perform
additional operations resulting for incomplete or inaccurate imputed data, RG
Mort shall reimburse RGPB at the them prevailing rates for such work.
2
<PAGE>
B. If RG Mort fails to input its data to RGPB in the form and in accordance with
schedule set forth herein, RGPB shall use its best efforts to re-schedule or
correct and process RG Mort's work as promptly as possible, but RG Mort agrees
to extend the schedule to cover reasonable delays caused by RG Mort's failure to
input its data in correct form or on a schedule and shall reimburse RGPB for the
extra time incurred in re-scheduling or correcting and processing RG Mort's work
to the them prevailing rates.
C. Neither party shall be liable for delays in performance or completion of its
obligation under this agreement caused by riots, epidemics, war, governmental
regulations, data transmission lines failure, acts of god, or other caused
beyond its reasonable control. Failure for performance due to all these causes
will not be deemed a default by any of the contracting parties in this
agreement.
D. All specifications, tapes, programs, and similar materials utilized or
developed by RGPB in connection with this agreement (unless specifically
furnished by RG Mort shall be and remain the exclusive property of RGPB). RG
Mort accepts the use of the on-line service on a non-transferrable basis. RG
Mort shall not permit any other person except RG Mort's employees to see, copy,
use or benefit from the on-line service, screens, screen displays, manuals,
reports or any related documentation, without first obtaining written approval
from RGPB.
E. RGPB shall not be liable for loss of data in transit except when such losses
occur with reports in transit form RGPB to RG Mort, and deliver by RGPB
personnel or designated messenger by RGPB in which case the replacement of such
reports will be made within 24 hours.
F. RGPB shall not be liable for any damages caused by delay in delivery of
equipment to RG Mort.
G. In the event any errors in processed data result from RGPB performance
hereunder, RGPB will correct such errors within 24 hours and RGPB obligation
hereunder in such event is limited to such correction.
H. In no event shall RGPM be liable for special damages arising from this
agreement or its performance, or non-performance. In the event of direct or
indirect loss or destruction of or damage to record as a result of RGPB handling
or processing, RGPB liability shall be limited to the cost of replacing such
record within 24 hours.
I. In the event that RGPB computer fails for any reason other than failure of
the power supply, RGPB shall have provided for, and shall use, back-up computers
to provide RG Mort the services hereunder within a period not greater than 48
working hours.
J. RG Mort shall notify RGPB of any incomplete or inaccurate results delivered
to RG Mort within five (5) working days of delivered whereupon RGPB shall
undertake to complete and/or correct the work without charge to RG Mort. Failure
to notify RGPB of any such defect within
3
<PAGE>
the specified time shall relieve RGPB of any obligations to complete or correct
the work without charge.
K. RGPB warrants and represents that all data relating to RG Mort's business
which is required to be submitted by RG Mort to RGPB pursuant to this agreement
shall be safeguarded by RGPB to the same extent that RGPB currently safeguards
data relating to its own business. Confidential information revealed by RG Mort
to RGPB shall be held in confidence and used only in the performance of the
contract.
L. RGPB will comply with applicable Laws and Regulations of the governments of
the United States of America and the Commonwealth of Puerto Rico, and their
agencies and political subdivisions, for electronic data processing and for the
use of information revealed by RG Mort to RGPB and RGPB accepts the inspections,
requirements and guidelines that from time to time they may request or issue.
M. RGPB will provide for appropriate equipment back-up agreement with a provider
acceptable to RG Mort and data files back-up arrangement to be used in case of
equipment failure or for disaster recovery in case the equipment or RGPB
premises for any reason became unusable for any length of time. The data files
back-up will be located at a proper site other than RGPB premises with safety
precautions as required by Federal and Commonwealth Regulatory Agencies.
N. There are not warranties, expressed or implied, oral or written, in fact, by
operation of law, or otherwise except as herein expressly stated, with the
exception of those related to services provided under this agreement.
O. Upon request, RGPB will provide to RG Mort certified annual financial
statements and any other pertinent information requested by Federal and
Commonwealth Regulatory Agencies in the discharge of their supervisory functions
within the Scope of their Authority.
6. ADDITIONAL RIGHT OF TERMINATION
It is agreed by the parties hereto that in the event that any authorization, of
any governmental regulatory agency or body, that may be required for the lawful
performance of the services contemplated is not obtained by RG Mort or is
revoked to RG Mort, then this agreement shall be terminated upon written notice
to RGPB thirty (30) days in advance. RG Mort shall then be liable for six (6)
monthly payments of the monthly average processing charges for the previous six
(6) months.
7. PROPERTY RIGHTS
RGPB agreed that RG Mort's master file records, statistical data derived from
same, computer programs designed under specific written request of and paid by
RG Mort for its exclusive and confidential use, forms and documents paid for by
RG Mort except for the mortgage loan software which belongs Systematics, Inc.
and all other programs and documentation which shall
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remain the exclusive property of RGPB but RG Mort's data shall not be released
by RGPB, its employees or agents to any party without prior written consent of
RG Mort.
In the event of termination under any provision of this agreement RGPB agrees
that it shall promptly turn over to RG Mort all master records, pertinent data
and other property of RG Mort in such form as to enable RG Mort to secure an
alternative source to render RG Mort's Mortgage Servicing. RG Mort will supply
any necessary materials and pay the reasonable costs relating to such work.
8. RGPB, upon notification in advance shall fully cooperate with any Federal or
Commonwealth regulatory agency which by law has the right or duty to examine
RGPB usage of sound operating controls in its data processing center and the
books and records of RG Mort. RGPB shall permit such routine examinations upon
written authorization by RG Mort to the same extent as if the examinations were
being performed on RG Mort's premises. Audits of extraordinary nature, which by
definition, do not permit a previous notification by RG Mort, will be permitted
when the purpose of the audit is duly authenticated by the intervening agency or
by RG Mort, whenever it is under its control. RGPB shall provide reasonable
assurance that services provided to RG Mort hereunder will meet the standards of
any valid rule or regulation of such agency. Nothing contained in this paragraph
shall require RGPB's representatives to travel outside the Commonwealth of
Puerto Rico, except at RG Mort's request and RGPB's acceptance.All required and
reasonable travel expenses and per diem charges, will be reimbursed to RGPB by
RG Mort.
Upon request in advance and written authorization by RG Mort, RGPB shall permit
and fully cooperate with RG Mort Internal Auditors and RG Mort's External
Auditors assigned to perform annual audits or examinations of RGPB usage of
sound operating controls in its data processing center and of RG Mort's books
and record located on RGPB premises related to the services provided under this
agreement. Any extra work required by internal, external or regulatory auditors
which may require RGPB's manpower, extra hardware and software time and use,
shall reimbursed by RG Mort to RGPB at the prevailing rates or charges.
9. SECURITY AND INSURANCE
RGPB shall maintain an "All Risk Insurance Policy" to cover the following:
A. Insuring the cost of reconstructing information in the event RG Mort's
documents or other "valuable papers" source information are lost, damaged
or destroyed for whatsoever causes.
B. Insuring RGPB against loss or damage to media and covering the cost of
reconstructing information contained on said media.
C. Insuring RGPB against loss damage on all risks basis to all its
electronics data processing equipment.
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At RG Mort's request RGPB shall provide Certificates of Insurance to evidence
the existence of all insurance policies mentioned above.
RGPB shall have no liability to first resulting from any claims arising from the
fact that forms used in the program do not comply with the Laws of the United
States of America or the Commonwealth of Puerto Rico. RG Mort has the right to
approve all such forms used in the program. Any extra cost to change special
forms shall be reimbursed by RG Mort to RGPB.
10. SPECIAL PROVISIONS
RGPB shall operate its on-line services for data transmission during all hours
when any office of the RG Mort is open for business, but no earlier than 8:30 AM
or later than 5:30 PM Monday through Friday (except for the use of the on-line
collection module, the system will be on-line up to 8:30 PM at no extra cost,
with the understanding that the use will be limited to inquiry and entering
collection efforts comments into the system) such hours to be local time, San
Juan, Puerto Rico. Any change in the working hours will be notified in advance.
However, its is understood that changes in working hours will be made
temporarily as required due to maintenance of hardware and software equipment.
No such service, however, shall be available on the following holidays:
DIA DE ANO NUEVO
DIA DE REYES
NATALICIO DE EUGENIO M. DE HOSTOS
NATALICIO MARTIN LUTHER KING
NATALICIO GEORGE WASHINGTON
DIA DE LA ABOLICION
VIERNES SANTOS
NATALICIO DE JOSE DE DIEGO
DIA DE LA RECORDACION
DIA DE LA INDEPENDENCIA DE EEUU
NATALICIO DE LUIS MUNOZ RIVERA
NATALICIO DE JOSE CELSO BARBOSA
DIA DE LA CONSTITUCION DEL ELA
DIA DEL TRABAJO
DESCUBRIMIENTO DE AMERICA
DIA DEL VETERANO
DESCUBRIMIENTO DE PUERTO RICO
DIA DE ACCION DE GRACIAS
DIA DE NAVIDAD
At the inception of services hereunder RG Mort shall provide RGPB with a
schedule of its office hours, and shall give five (5) days notice of any change
in such hours.
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RGPB shall make available to RG Mort, at its Mortgage Banking Department, the
applicable reports with the frequency as listed in the mortgage loan section of
the Horizon manuals provided by RGPB and effective as of the date of this
contract.
It is understood and agreed that reasonable deviations in methods and sequence
of operations shall not constitute a breach of this agreement.
RG Mort shall automatically be entitled to use any addition or improvements upon
the mortgage package at the time said improvements and/or additions are
implemented for the servicing portfolio of RGPB.
RG Mort is entitled to RG Mort's data file backup tapes of RGPB, after
reimbursing RGPB the cost of the tape.
RGPB agrees to make available personnel whenever needed to supervise the
training of RG Mort personnel during and after conversion.
Upon request form RG Mort, RGPB shall deliver within reasonable time all or part
of the information relative to all or part of the RG Mort accounts. RG Mort
agrees to pay RGPB on a time and the material basis for preparation costs.
11. NOTICES
Any notice required or permitted to be given hereunder all be deemed to have
been effectively given if sent by registered or certified mail, postage paid,
addressed to the party for whom it is intended at party's address appearing on
the first page hereof or to such other address as that party shall have
designated by written notice to the other party.
This agreement and the rights and obligations hereunder shall be governed by the
Laws of the Commonwealth of Puerto Rico.
This agreement shall be executed in duplicate and each copy shall constitute an
original binding agreement.
RG PREMIER BANK OF PUERTO RICO RG MORTGAGE CORP.
BY: BY:
-------------------------- --------------------------------
OSVALDO DOMENECH RIVERA JUAN JOSE DIAZ HOMS
EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT
& COO
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SCHEDULE A
Made part of the Computer Data Processing Service Agreement between RG Premier
Bank of Puerto Rico & RG Mortgage Corp.
RATE SCHEDULE
RG Premier Bank will charge on a monthly basis calculated at the first of each
year the average cost per user. (User mean each terminal, printer or any device
attach to the IBM AS/400 ar RG Mortgage Corp. facilities) This average cost per
user will be multiple by the number of users at RG Mortgage facilities.
These cost also include telephone support during working hours. The regular
maintenance of change and enhancements as required by regulatory agencies.
It does not include any other special forms, such as payment coupons, GNMA or
FNMA forms, delinquency notices, late charges billing notices, labels, letters,
forms, checks, etc., which most be provided by RG mortgage Corp. Not any special
report requested by any individual investors.
OTHER CHARGES
$25.00 for any tape generate to a third parties.
CONVERTION COSTS
They will be paid by RG Mortgage Corp.
HARDWARE COSTS
Hardware will be provide by RG Mortgage Corp.
TELEPHONE LINES (Communication lines)
Cost related to data communication lines will be paid by RG Premier Bank of
Puerto Rico.
Accepted by
- ------------------------------ -----------------------------------
SR. OSVALDO DOMENECH RIVERA SR. JUAN JOSE DIAZ HOMS
EXECUTIVE VICE PRESIDENT & COO SENIOR VICE PRESIDENT
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EXHIBIT 10.5
SECURITIZATION AGREEMENT
SECURITIZATION AGREEMENT, dated July 1, 1995, by and between R & G Premier
Bank of Puerto Rico, a commercial bank organized under the Banking Law of the
Commonwealth of Puerto Rico ("the Bank"), and R & G Mortgage Corporation, a
mortgage banking firm organized under the Laws of the Commonwealth of Puerto
Rico ("R & G Mortgage").
WITNESSETH
WHEREAS, in conformity with the provisions of the Master Purchase,
Servicing and Collection Agreement, as amended, executed by and between the
parties hereto, on February 16, 1990, R&G Mortgage has rendered securitization
services to the Bank, consisting said services in the review of mortgage loans
for the purpose of securitizing and including said loans in mortgage-backed
securities to be issued by R & G Mortgage.
WHEREAS, the Bank's Board of Directors adopted, on its ordinary meeting
held on November 29, 1993, a Resolution approving a Securitization Policy for
the Bank, which established the basic criteria and procedures to be used in
connection with the securitization activities of the Bank, and a copy of which
is hereby made an integral part of this Agreement.
WHEREAS, it is the desire of the appearing Parties to execute one single
agreement, which will contain all the relevant provisions regarding the
securitization activities which are being, and which will be conducted, by R&G
Mortgage for the benefit of the Bank in the future,
WHEREAS, the Bank's Board of Directors, upon the recommendation of its
Ancillary Agreements Committee, adopted a Resolution on its ordinary meeting
held on June 29, 1995, and the Board of Directors of R&G Mortgage also adopted a
Resolution on June 29, 1995, authorizing the execution of this Securitization
Agreement (the "Agreement") subject to the terms and conditions contained in the
Agreement, which contains all the relevant provisions and covenants relative to
the aforementioned securitization services rendered by R & G Mortgage, and by
virtue of which R & G Mortgage will continue to render said securitization
services to the Bank;
NOW, THEREFORE, INTENDING TO BE LEGALLY BOUND, THE PARTIES AGREE AS
FOLLOWS:
FIRST: SECURITIZATION POLICY PRINCIPLES
The Bank will continue, as in the past, to conduct its mortgage loan
origination activities in a similar fashion as a mortgage banker, providing the
funds to finance the inventory from deposits from clients of the Bank.
Additionally, the carry-over of said inventory will continue to take a longer
period of time than is typical of a mortgage banking concern, and that could be
from ninety (90) days to one (1) year, if it is intended to place in the
Secondary Market all the mortgage production of the Bank.
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Consequently, the Securitization Policy Principles which will be complied
with by Parties hereto, are;
1. CONFORMING LOANS - These are the loans that comply will all the rules
and regulations established by the Institutions which constitute the Secondary
Market and which are dedicated to the acquisition of mortgage loans and the
issuance of mortgage-backed securities, such as: Freddie Mac and Fannie Mae.
2. POSSIBLE CONFORMING - These are the loans that are considered almost
conforming, but that, during the processing of said loans, some conditions such
as documentation, income, or some other specific areas that were considered
minimal and that could be approved under the concept of "common sense
underwriting", have not been complied with.
3. CONFORMING AFTER SEASONING - These are the loans that might have minor
deficiencies produced during the underwriting period or that can be securitized
provided that, after a one year period they have been delinquent for no more
than one payment during that 12-month period, and that the loans are fully are
fully documented.
4. NON-CONFORMING - These are the loans that, due to the amount, loan-to-
value ratio at the time of closing, or any special conditions that were arranged
during the underwriting period, even though are good credit risks, are not
acceptable for inclusion in mortgage-backed securities in accordance with the
rules and regulations established by Fannie Mae and Freddie Mac. Although these
loans are not acceptable for securitization through the previously mentioned
institutions, they could be sold in the Secondary Market as "whole loans",
retaining the Bank some participation, or providing repurchase or timely
payments to the investor or include the package in certificates of mortgage
obligations to be sold in the market through private issues prepared by the
Bank.
5. FHLB COLLATERAL - These are loans that are considered good credit risks
but which cannot be approved under any other of the prior classifications, but
which the FHLB will take as collateral for advances or for guaranty in any
specific transaction such as letters of credit or some other type of instrument
providing liquidity to our Institution.
6. Additional classifications will cover those specific loans that cannot
be securitized, but sold in the Secondary Market as whole loans or CMO's, such
as: Jumbos, Second Mortgages, and Construction Loans.
7. Once the loans are closed, each one will be classified for the purpose
of disposing them in the secondary market, either directly through the issuance
of mortgage-backed securities, of later, if not eligible as conforming loans,
after seasoning for one year or more as required by FHLMC or FNMA. Those that
do not qualify for securitization either after closing or after
seasoning, will be grouped for mortgage derivatives, such as certificates of
mortgage obligations (CMOs).
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8. Second mortgages will be classified by R&G Mortgage, either for
immediate sale to FNMA as whole loans to said entity, or for sale to other local
lending institutions looking for second mortgages.
9. Secured personal loans will be retained in the Bank's portfolio up to
maturity due to the fact that they cannot be securitized or sold in the
secondary market. These loans will be reserved for inclusion in warehousing
lines with 936 funds, or to be placed as collateral for the issuance of
commercial paper, or to collateralize advances from the Federal Home Loan Bank,
or any other type of collaterized investment instrument.
10. The Bank will establish the required controls and conditions to
properly match short and intermediate funds available with the longer term of
mortgage loans through the use of synthetic hedges provided by interest rate
swaps, or interest rate caps, which when combined with long term CD's issued in
the 936 market will provide the required protection against the risk of interest
rate increases, in accordance with the Bank's Investment Policy, and with this
purpose, all the loans will be packaged under some alternative available in the
secondary market either immediate or long term, as follows:
a. Mortgage backed securities to be issued through FNMA or FHLMC.
b. Sale of whole loans, specially second mortgages, through the
whole loan program of FNMA for second mortgages.
c. Issuance of mortgage-backed securities once the loans are
seasoned in accordance with terms and conditions established by
FHLMC for this type of loans.
d. For the issuance of CMOs (Certificates of Mortgage Obligations)
to be sold in the local 936 market.
e. For financing through warehousing lines with local Banks, or for
the issuance of commercial paper, to be financed in the local
market with 936 funds.
SECOND: SECURITIZATION SERVICES TO BE RENDERED BY R&G
MORTGAGE AND SECURITIZATION FEE TO BE CHARGED
1. As soon as conventional loan elegible for securitization is closed by
the Bank, it will be referred to R&G Mortgage to be entered into the
securitization system, and thus, reviewed by R&G Mortgage, and classified in
accordance with the Securitization Principles outlined above.
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2. Loans classified as conforming will be sold by R&G Mortgage in the
Secondary Market (Fannie Mae or Freddie Mac) in Mortgage Backed Securities or as
Whole Loans to cash market.
3. Loans packaged into Mortgage-Backed Securities can be kept in portfolio
by R&G Mortgage until it is advisable to effect their sale, in consultation
with, and with prior approval by the Bank.
4. Non-conforming loans will be sold by R&G Mortgage to banks or other
investors in packages or sizes as required by the Secondary Market.
5. Loans classified by R&G Mortgage for CMO can be structured for future
issuance according to market needs, and R&G Mortgage will, consequently advise
the Bank of the desirability of issuance, according to prevailing market
conditions, need for funds, etc.
6. From time to time, R&G Mortgage will review previously classified
loans in order to determine which loans can be re-classified and sold.
7. According to the characteristic of the portfolio, R&G Mortgage will
negotiate special Master Commitments with the mentioned Agencies in order to
facilitate the sale of mortgages that otherwise can not be sold.
8. After the mortgages are sold, R&G Mortgage will coordinate with the
Agencies as they conduct Post Funding audits in which approximately 5% of the
loans are normally reviewed. R&G Mortgage will prepare the selected loans and
submit them to the respective Agencies' Quality Control Dept.
9. At the end of each month, R&G Mortgage will charge the Bank 0.25% if
the repurchase condition is provided by R&G Mortgage, and 0.20% if it is
provided by the Bank. This fee will be calculated on the principal balance of
all loans sold or securitized under the Agreement, and the Bank will pay the
amount of said invoices within the next five (5) days upon receipt of the
invoices.
10. In the cases of "buy-downs" or buy-ups" when negotiating the sales
price of mortgage-backed securities, R&G Mortgage will conduct the price
negotiations. Any price differential will be rounded to the nearest 1/8 of 1%
and will be to the benefit of the Bank, or paid by the Bank when applicable.
THIRD: ADDITIONAL SERVICES INHERENT TO SECURITIZATION
ACTIVITIES TO BE RENDERED BY R&G MORTGAGE
1. All mortgage loans will be analyzed by R&G Mortgage and included in a
database in which R&G Mortgage will keep a record of all the characteristics
required by the Secondary Market to make these loans acceptable for
securitization, sale, or packageable.
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2. Special conditions will be established at time of underwriting, with
the purpose of classifying these loans in accordance with the mentioned
Agencies's Regulations.
3. These conditions will breakdown these loans by type, as indicated in
the Policy Principles outlined above and, in addition, by the different types of
characteristics that they could have to make them acceptable in the Secondary
Market.
4. R&G Mortgage will use its Securitization Department for the purpose of
classifying these mortgage loans under the terms and conditions established by
this Agreement and the Policy Principles. The Securitization Department will
have at least one (1) person with expertise in Secondary Market classification
in charge of the Program. In addition, at the time of closing these loans, the
Credit Department of the Bank will establish a preliminary classification
indicating the different characteristics of each loan in the Secondary Market.
5. The information required by this database of mortgage loans will be
kept by R&G Mortgage with the purpose of maintaining a computer database in
which all the loans originated by the Bank since February 1990 will be kept
under the terms and conditions established by the Agreement.
6. In those cases in which R&G Mortgage will guarantee the repurchase of
loans due to foreclosure proceedings, to the Agencies, R&G Mortgage will assume
any losses which may be produced as a result of said repurchase, and will charge
the Bank a guarantee fee of .25% of the principal balance of each such
repurchased loan.
7. It is also agreed that, in those cases in which R&G Mortgage has to
repurchase a loan under its repurchase guarantee previously issued to the
Agencies, and such repurchase is made as a result of documentation problems with
the loan, then the Bank will not have to pay R&G Mortgage any guarantee fee.
FOURTH: CONVEYANCE OF DOCUMENTS AND INFORMATION BY THE
BANK TO R&G MORTGAGE
1. MORTGAGE SCHEDULE. As to each Loan for which the Securitization
Services will be rendered by R&G Mortgage to the Bank pursuant to this
Agreement, the Bank will provide to R&G Mortgage the following information
("Mortgage Loan Schedule"):
(a) address if the mortgaged property and the same name of the mortgagor
thereunder;
(b) the principal balance as of the close of business on the closing date;
(c) loan number;
(d) original principal amount;
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(e) appraised value;
(f) due date;
(g) date of origination;
(h) original term in months;
(i) the interest rate payable thereunder;
(j) the scheduled monthly level payment of principal and interest, if the
loan is on the permanent stage;
(k) the date of maturity;
(l) a code indicating the property type; and
(m) amount of escrow funds, if any.
2. DELIVERY OF LOAN DOCUMENTS. On the closing date, the Bank will deliver
to R&G Mortgage copies of each of the following documents to the extent
applicable, for each Loan:
(a) Copy of the original note or other evidence of the indebtedness of the
Loan; upon effecting a sale of a loan, the Bank will duly endorse the
original of the mortgage note to R&G Mortgage for negotiation;
(b) The deed of mortgage or other instrument evidencing the security
interest for each Loan (the "Mortgage"), with evidence of recording
thereon;
(c) If the Loan is evidenced by a consolidated mortgage or consolidated
loan, the recorded consolidation agreement, unless the consolidation
was accomplished within the body of the most recent Mortgage of
record;
(d) Title insurance policy;
(e) Hazard insurance policy and, if required by law, flood insurance
policy, with extended coverage of the hazard insurance policy;
(f) Copy of a completion survey of the property pledged as security with
respect to any Loan (The "Mortgage Property") delivered in connection
with the origination of the Loan, identifying the premises by legal
description and by address and showing the dimensions of the lot as
such other conditions as are customarily shown on surveys made in the
locality;
(g) Title study performed on the Mortgage property.
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(h) The Appraisal made on the Mortgage Property;
(i) Form signed by the Borrower required by the Equal Credit Opportunity
Act (E.C.O.A.).
(j) Amortization schedule indicating the original principal amount, the
date of origination, the interest rate, the term, the scheduled
monthly payment of principal and interest and the outstanding
principal balance as of the close of business on the Transfer Date;
(k) Loan application, and credit report;
(l) Closing statement, if available;
(m) Tax receipts, insurance premium receipts, ledger sheets, payment
records, insurance claim files and correspondence, the amount of funds
held in escrow by the Bank and any correspondence with respect to such
escrow account, general correspondence, the Bank's loan number,
current and historical computerized data files, underwriting standards
used for origination and all other papers and records developed or
originated by the Bank or others required to document the Loan or to
service the Loan.
FIFTH: REPRESENTATIONS AND WARRANTIES BY R&G MORTGAGE
R & G Mortgage hereby represents and warrants to the Bank that:
(a) R & G Mortgage is a mortgage banking firm duly organized, validly
existing, and in good standing under the laws of the Commonwealth of Puerto Rico
and has all licenses necessary to carry on its business as now being conducted;
R & G Mortgage has corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by R & G Mortgage and the consummation of
the transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, binding and enforceable obligation of R & G
Mortgage; and all requisite corporate action has been taken by R & G Mortgage to
make this Agreement valid and binding upon R & G Mortgage in accordance with its
terms;
(b) The consummation of the transactions contemplated by this Agreement
will not result in the breach of any term or provision of the charter or by-laws
of R & G Mortgage or result in the breach of any term or provision of, or
conflict with or constitute a default under or result in the acceleration of any
obligation under, any material agreement, indenture or loan or credit agreement
or other instrument to which R & G Mortgage or its property is subject, or
result in the violation of any law, rule, regulation, order, judgement or decree
to which R & G Mortgage or its property is subject;
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(c) Neither this Agreement nor any statement, report or other document
furnished or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains any untrue statement of fact or
omits to state a material fact necessary to make the statements contained
therein or herein not misleading;
(d) The securitization and sales practices used by the
R & G Mortgage with respect to each Loan, the Securitization Rights of which are
acquired hereby, have been, and will be, in all material respects legal, proper,
prudent and customary in the Secondary Market and with respect to the Agencies
involved.
(e) R & G Mortgage does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
Agreement; and
(f) R & G Mortgage relying and shall rely upon the Bank's representations
and warranties in connection with the execution, performance and delivery of
this Agreement, notwithstanding any investigation made by R & G Mortgage or
otherwise on R & G Mortgage's behalf. Consequently, upon any request to the Bank
by R & G Mortgage to securitize any loans, as applicable, R & G Mortgage shall
be deemed to repeat all the foregoing representations and warranties.
SIXTH: REPRESENTATIONS AND WARRANTIES OF THE BANK
(a) The Bank is a locally-chartered commercial bank duly organized,
validly existing, and in good standing under the laws of the Commonwealth of
Puerto Rico and has all licenses necessary to carry on its business as now
being conducted; the Bank has corporate power and authority to execute and
deliver this Agreement and to perform in accordance herewith; the execution,
delivery and performance of this Agreement (including all instruments of
transfer to be delivered pursuant to this Agreement) by the Bank and the
consummation of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Bank; and all requisite corporate action has been taken by the
Bank to make this Agreement valid and binding upon the Bank in accordance with
its terms;
(b) The consummation of the transactions contemplated by this Agreement
will not result in the breach of any term or provision of the certificate of
incorporation or by-laws of the Bank or result in the breach of any term or
provision of, or conflict with or constitute a default under or result in the
acceleration of any obligation under, any material agreement, indenture or loan
or credit agreement or other instrument to which the Bank or its property is
subject, or result in the violation of any law, rule, regulation, order,
judgment or decree to which the Bank or its property is subject;
(c) Neither this Agreement nor any statement, report or other document
furnished or to be furnished by the Bank pursuant to this Agreement or in
connection with the transactions
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contemplated hereby contains any untrue statement of fact or omits to state a
material fact necessary to make the statements contained therein or herein not
misleading;
(d) The Bank does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant contained in this
Agreement; and
(e) The Bank is relying and shall rely upon R & G Mortgage's
representations and warranties in connection with the execution, performance and
delivery of this Agreement, notwithstanding any investigation made by the Bank
or otherwise, on the Bank's behalf;
SEVENTH: CONDITIONS PRECEDENT
(a) The parties shall have obtained such licenses, permits and approvals
of Federal and Commonwealth regulatory agencies, to the extent that their
approvals or consents are required by applicable law or regulations, for the
consummation of the transactions contemplated hereby and as may be required in
order for the fulfillment of the parties and obligations;
(b) All actions, proceedings, endorsements, instruments and documents
deemed necessary appropriate by the Bank or R & G Mortgage, as the case may be,
to effectuate this Agreement and the consummation of the transactions
contemplated hereby, or incidental thereto, shall have been received or
completed.
EIGHTH: COVENANTS OF THE BANK AND R&G MORTGAGE
(a) Both the Bank and R & G Mortgage will use their best efforts to obtain
any consents of the Bank's Board of Directors upon the recommendation of its
Ancillary Agreements Committee, and of R & G Mortgage's Board of Directors,
required for the consummation of this Agreement and the transactions
contemplated hereby and provided that unreasonable effort or expense is not
required, and will give full cooperation to obtain all necessary consents,
approvals and authorizations subsequent to the date hereof to the extent that
such consent, approvals and authorizations are not obtained prior to the date
hereof.
(b) The Bank and R & G Mortgage shall respectively execute and deliver
such documents and instruments and do such other things as may be reasonably
required more fully and definitely to vest in the parties such rights, powers,
duties, responsibilities, obligations and liabilities of the Bank and R & G
Mortgage as is contemplated hereunder;
(c) Each and every representation and warranty made by R & G Mortgage and
the Bank shall survive the execution and delivery of this Agreement, and shall
be deemed to have been effectively repeated by R & G Mortgage and the Bank, as
the case may be, upon: (i) each Transfer Date and (ii) any collection by R & G
Mortgage of any loan payment pursuant to Section 5.0 hereof.
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NINTH: AMENDMENTS
This Agreement may be amended from time to time by the Bank and R & G
Mortgage, subject to, an conditioned upon, all necessary Board of Directors
regulatory approvals, by written agreement signed by the Bank and R & G
Mortgage.
TENTH: GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Puerto Rico and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
Nothing herein expressed or implied is intended or shall be construed to
confer upon or to give to any person or entity other than the parties hereto,
any rights or remedies under or by reason of this Agreement.
ELEVENTH: NOTICES
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly give if personally delivered at or mailed by
registered mail, postage prepaid, to (a) in the case of the Bank, R&G Plaza,
Hato Rey, Puerto Rico 00657, Attention: the President, or such other address
as may hereafter be furnished to R & G Mortgage in writing by the Bank, (b) in
the case of R & G Mortgage, G.P.O. Box 2394, San Juan, Puerto Rico 00936,
Attention: the President, or such other address that may be furnished to the
Bank in writing by R & G Mortgage.
TWELFTH: SEVERABILITY OF PROVISIONS
If any one or more of the covenants, agreements, provisions or terms of
this Agreement which is not essential to the effectuation or the basic purpose
of this Agreement is held invalid for any reason whatsoever, the such covenants,
agreements, provisions or terms shall be deemed severable from the remaining
covenants, agreements, provisions or terms of this Agreement and shall in no way
affect the validity or enforceability of the other provisions of this Agreement.
THIRTEENTH: EXECUTION
This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be on original; such counterparts, together, shall
constitute one and the same agreement.
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FOURTEENTH: NO ASSIGNMENT
Neither the Bank nor R & G Mortgage shall assign this Agreement without the
prior written consent of the Bank and R & G Mortgage.
IN WITNESS WHEREOF, the Bank and R & G Mortgage have caused their names to
be signed hereto by their respective officers thereunto duly authorized as of
the day and year first above written.
R-G PREMIER BANK OF PUERTO RICO
By: /s/ Osvaldo Domenech
----------------------------------------
Name: Osvaldo Domenech
Title: Executive Vice President
R-G MORTGAGE CORPORATION
By: /s/ Ramon Prats
----------------------------------------
Name: Ramon Prats
Title: Executive Vice President
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[ LETTERHEAD ]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 12, 1996, except
as to the stock exchange transaction described in Note 1 which is as of
July 19, 1996, relating to the consolidated financial statements of R&G
Financial Corporation, which appears in such Prospectus. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse
PRICE WATERHOUSE
San Juan, Puerto Rico
July 31, 1996
