<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM -------------
TO -------------.
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
- ------------------------------------------------------------------------------
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 766-2424
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s) and (b) has been subject to
such filing requirements for at least 90 days.
YES NO X
------ ----
As of June 30, 1996, the Registrant was a newly organized private
corporation. The Registrant completed an initial public offering on August
27, 1996. For additional information, see Note 1 to the Unaudited
Consolidated Financial Statements included herein.
Number of shares of Class B Common Stock outstanding as of September 25,
1996: 2,435,000. (Does not include 5,122,377 Class A Shares of Common Stock
which are exchangeable into Class B Shares of Common Stock at the option of
the holder.)
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
PART I--FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Statement of Financial Condition as of
June 30, 1996 (Unaudited) and December 31, 1995 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS.
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C> <C>
Cash and due from banks........................................... $21,520,637 $32,559,429
Money market investments:
Securities purchased under agreements to resell................ 13,429,913 21,694,675
Time deposits with other banks................................. 22,426,693 44,930,015
Federal funds sold............................................. -- 5,011,048
Mortgage loans held for sale, at lower of cost or market.......... 18,319,736 21,318,340
Mortgage-backed securities held for trading, at fair value........ 136,575,958 113,808,624
Mortgage-backed securities available for sale, at fair value...... 44,468,857 61,008,432
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1995 -- $40,784,831; 1994 --
$78,844,972)..................................................... 39,472,739 41,730,889
Investment securities held for trading, at fair value............. 989,826 --
Investment securities available for sale, at fair value........... 23,107,710 3,279,610
Investment securities held to maturity, at amortized cost
(estimated market value: 1995 -- $1,996,307; 1994 --
$2,108,318)...................................................... 8,685,216 2,046,046
Loans receivable, net............................................. 598,182,075 473,840,637
Accounts receivable, including advances to investors, net......... 6,361,582 5,578,965
Accrued interest receivable....................................... 5,266,000 4,051,702
Mortgage servicing rights......................................... 9,810,060 8,209,661
Excess servicing receivable....................................... 809,173 847,938
Premises and equipment............................................ 6,856,119 6,973,325
Other assets...................................................... 9,269,411 6,316,826
------------ -----------
$965,551,705 $853,206,162
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits...................................................... $563,147,365 $518,186,563
Securities sold under agreements to repurchase................ 98,293,546 98,483,188
Notes payable................................................. 142,882,861 81,130,032
Advances from FHLB............................................ 11,000,000 6,007,135
Long-term debt................................................ 4,524,476 5,323,899
Other secured borrowings...................................... 53,531,846 55,983,501
Accounts payable and accrued liabilities...................... 11,586,794 12,068,490
Other liabilities............................................. 2,500,866 2,431,577
------------ ------------
887,467,754 779,614,385
------------ ------------
Subordinated notes................................................ 3,250,000 3,250,000
------------ ------------
Minority interest in the Bank..................................... 4,365,363 3,956,597
------------ ------------
Stockholder's equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding.................................. -- --
Common stock:
Class A -- $.01 par value, 10,000,000 shares authorized,
5,189,044 shares issued and outstanding................. 51,890 51,890
Class B -- $.01 par value, 15,000,000 shares authorized,
none issued and
outstanding............................................. -- --
Additional paid-in capital.................................... 362,710 362,710
Retained earnings............................................. 69,592,059 64,351,564
Capital reserves of the Bank.................................. 1,021,166 666,767
Unrealized (loss) gains on securities available for sale...... (559,237) 952,249
---------- ----------
70,468,588 66,385,180
---------- ----------
$965,551,705 $853,206,162
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three month Six month
period ended period ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans.............................................. $16,104,648 $10,892,241 $29,572,089 $20,437,173
Money market and other investments................. 926,424 380,918 1,804,874 731,362
Mortgage-backed securities......................... 1,323,593 1,538,615 2,968,545 3,169,224
----------- ----------- ----------- -----------
Total interest income........................... 18,354,665 12,811,774 34,345,508 24,337,759
----------- ----------- ----------- -----------
Interest expense:
Deposits........................................... 6,661,513 5,057,298 13,044,579 9,769,092
Securities sold under agreements to repurchase..... 1,307,725 1,927,851 2,583,639 3,524,909
Notes payable...................................... 1,880,467 801,882 2,961,970 1,488,150
Secured borrowings................................. 1,056,923 -- 2,140,032 --
Other.............................................. 102,244 264,203 169,466 441,804
--------- -------- --------- ---------
Total interest expense.......................... 11,008,872 8,051,234 20,899,686 15,223,955
---------- --------- ---------- ----------
Net interest income................................ 7,345,793 4,760,540 13,445,822 9,113,804
(Provision) credit for loan losses................... (350,000) -- (356,525) 50,000
---------- ---------- ---------- ---------
Net interest income after provision for loan losses.. 6,995,793 4,760,540 13,089,297 9,163,804
--------- --------- ---------- ---------
Other income:
Net gain (loss) on sale of loans................... 2,021,210 877,914 3,992,254 2,209,961
Unrealized gain (loss) on trading securities....... (424,166) 2,294,711 (621,341) 2,294,711
Change in provision for cost in excess of market
value of loans held for sale...................... -- 295,000 -- 70,000
Net gain on trading account........................ 450,722 -- 586,772 --
Net gain on sales of investments................... -- -- 329,225 --
Loan administration and servicing fees............. 3,487,687 2,469,247 6,496,442 5,234,908
Service charges, fees and other.................... 624,015 693,149 1,819,006 1,251,470
--------- ----------- ---------- -----------
6,159,468 6,630,021 12,602,358 11,061,050
---------- ---------- ---------- ----------
13,155,261 11,390,561 25,691,655 20,224,854
---------- ---------- ---------- ----------
Operating expenses:
Employee compensation and benefits.................... 3,304,815 1,487,303 5,954,752 3,363,424
Office occupancy and equipment........................ 1,482,479 1,003,678 2,895,115 2,010,379
Other administrative and general...................... 3,109,100 3,173,063 6,516,141 6,378,156
---------- ---------- ---------- ----------
7,977,394 5,664,044 15,366,008 11,751,959
--------- --------- ---------- ----------
Income before minority interest and income taxes....... 5,177,867 5,726,517 10,325,647 8,472,895
--------- --------- ---------- ----------
Minority interest in the Bank.......................... 223,905 220,854 408,766 344,978
--------- --------- ---------- ----------
Income before income taxes............................. 4,953,962 5,505,663 9,916,881 8,127,917
--------- --------- --------- ---------
Income taxes:
Current.............................................. 2,731,529 1,749,043 4,773,888 2,942,308
Deferred............................................. (944,187) 100,019 (951,901) (68,396)
--------- --------- --------- ---------
1,787,342 1,849,062 3,821,987 2,873,912
--------- --------- --------- ---------
Net income........................................... $3,166,620 $3,656,601 $6,094,894 $5,254,005
---------- ---------- ---------- ----------
Earnings per common share
Income before cumulative effect of change in
accounting principle................................. $0.62 $0.70 $1.17 $1.01
==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
JUNE 30,
-------------------------
1996 1995
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $6,094,894 $5,254,005
---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 990,294 700,326
Amortization of premium on investments and
mortgage-backed securities, net................. 116,132 58,589
Amortization of deferred loan origination fees
and accretion of discount on loans.............. (253,401) 24,944
Amortization of excess servicing receivable...... 38,765 65,534
Amortization of servicing rights................. 653,206 948,695
Change in provision for cost in excess of market
value of loans held for sale..................... -- (70,000)
Provision (credit) for loan losses................ 356,525 (50,000)
Provision for bad debts in accounts receivable.... 150,000 150,000
Gain on sales of mortgage loans................... (95,096) (177,484)
Gain on sale of investment securities............. (329,225) --
Unrealized loss (gain) on trading securities...... 621,341 (2,294,711)
Minority interest in earnings of the Bank......... 408,766 344,978
(Increase) decrease in mortgage loans held for
sale............................................. 2,998,604 (5,835,364)
Net (increase) decrease in mortgage-backed securities
held for trading................................. (23,467,171) (17,252,925)
(Increase) decrease in receivables................ (2,146,915) 3,524,185
Decrease (increase) in other assets............... (2,389,083) (3,574,402)
(Decrease) increase in notes payable.............. 11,752,829 (1,703,297)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 1,633,389 2,003,189
(Decrease) increase in deferred taxes.............. (951,901) (68,396)
Increase (decrease) in income taxes payable........ (75,236) 2,197,871
Increase (decrease) in other liabilities........... 69,289 137,776
----------- ----------
Total adjustments.............................. (9,918,888) (20,870,492)
---------- -----------
Net cash used in operating activities.......... (3,823,994) (15,616,487)
(CONTINUED)
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
JUNE 30,
------------------------
1996 1995
------ ------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Purchases of investment securities.................. $(30,531,762) $ --
Proceeds from sale and maturities of investment securities
available for sale................................... 17,281,780 --
Principal repayments on mortgage-backed
securities.................................... 4,576,531 4,226,800
Proceeds from sale of loans........................... 4,929,156 12,345,507
Net originations of loans.............................. (132,344,517) (82,808,291)
(Purchases) redemptions of FHLB stock,
net......................................... (795,600) (1,401,700)
Acquisition of premises and
equipment............................................ (1,051,423) (1,333,876)
Proceeds from sales of premises and
equipment....................................... 350,000 --
Net (increase) decrease in foreclosed real
estate....................................... (735,167) (61,827)
Acquisition of servicing rights......................... (564,287) (600,050)
----------- ----------
Net cash used by investing
activities.................................... (138,885,289) (69,633,437)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of notes
payable........................................... 50,000,000 --
Payments of long-term debt.......................... (799,423) (600,003)
Increase in deposits -- net......................... 44,832,079 103,817,079
(Decrease) increase in securities sold under agreements to
repurchase -- net................................. (189,642) 15,613,561
Payments on secured borrowings...................... (2,451,655) --
Advances from FHLB................................... 6,000,000 --
Repayment of advances from FHLB...................... (1,000,000) --
Proceeds from issuance of common stock to minority
shareholders........................................ -- 5,060
Cash dividends on common stock................... (500,000) --
----------- -----------
Net cash provided by financing
activities................................. 95,891,359 118,835,697
----------- -----------
Net (decrease) increase in cash and cash
equivalents................................... (46,817,924) 33,585,773
Cash and cash equivalents at beginning of
period...................................... 104,195,167 45,622,362
----------- ----------
Cash and cash equivalents at end of
period.......................................... $57,377,243 $79,208,135
=========== ===========
Cash and cash equivalents include:
Cash and due from banks......................... $21,520,637 $26,735,482
Securities purchased under agreements to
resell....................................... 13,429,913 22,531,517
Time deposits with other banks................. 22,426,693 29,941,136
----------- -----------
$57,377,243 $79,208,135
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- REPORTING ENTITY, PUBLIC OFFERING AND STOCK OPTIONS AND BASIS OF
PRESENTATION
REPORTING ENTITY
The accompanying unaudited consolidated financial statements of R&G
Financial Corporation (the "Company") include the accounts of R&G Mortgage
Corp. ("R&G Mortgage"), a Puerto Rico corporation, and R-G Premier Bank of
Puerto Rico (the "Bank"), a commercial bank chartered under the laws of the
Commonwealth of Puerto Rico. The Company was formed in March 1996 for the
sole purpose of becoming the parent corporation and sole stockholder of R&G
Mortgage and the Bank. On July 19, 1996, the Company acquired the 88%
ownership interest of the Bank and the 100% ownership interest of R&G
Mortgage held by the Company's Chairman of the Board and Chief Executive
Officer (CEO). In consideration of the acquisition of such interests, the
Company issued the CEO 5,189,044 shares of its Class A $.01 par value newly
issued common stock (the "Class A Shares"), in exchange for his 100%
ownership interest in R&G Mortgage and 88% ownership interest in the Bank.
As a result of this transaction, the accompanying unaudited consolidated
financial statements have been restated to reflect the consolidated financial
condition as of June 30, 1996 (unaudited), the related consolidated
statements of income and retained earnings for the three and six months ended
June 30, 1996 and 1995 (unaudited), and of cash flows for the six months
ended June 30, 1996 and 1995 (unaudited) as if the above transaction had been
consummated as of January 1, 1995. The transaction has been accounted for at
historical cost in a manner similar to pooling of interests accounting.
The Company intends to acquire as well the 12% minority ownership
interest in the Bank which, as of July 19, 1996, was held by approximately
200 other stockholders (the "Minority Bank Stockholders") following the
receipt of all required regulatory approvals through the issuance of Class B
$.01 par value common stock (the "Class B Shares") of the Company. All
Minority Bank Stockholders will receive, in exchange for their aggregate 12%
interest in the Bank's common stock, a specified number of shares of the
Company's Class B shares to be determined based on an independent valuation
of the Bank. Such transaction will be accounted for under the purchase method
of accounting; based on presently available information, management of the
Company does not believe that this transaction will have a material effect on
the Company's Consolidated Financial Statements or earnings per share. The
Company filed a Registration Statement with the Securities and Exchange
Commission with respect to this transaction on September 30, 1996.
R&G Mortgage is engaged primarily in the business of originating FHA
insured, VA guaranteed, and privately insured first and second mortgage loans
on residential real estate
7
<PAGE>
(1 to 4 families). R&G Mortgage pools FHA and VA loans into GNMA (Government
National Mortgage Association) mortgage-backed securities and collateralized
mortgage obligation (CMO) certificates for sale to permanent investors. After
selling the loans, it retains the servicing function. R&G Mortgage is also a
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) Seller-Servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage
company and is duly authorized to do business in the Commonwealth of Puerto
Rico.
The Bank provides a full range of banking services through fourteen
branches located mainly in the northern part of the Commonwealth of Puerto
Rico. The Bank is subject to the regulations of certain federal and local
agencies, and undergoes periodic examinations by those regulatory agencies.
As of the close of business on November 30, 1994, the Bank was converted from
a federally chartered savings bank to a commercial bank chartered under the
laws of the Commonwealth of Puerto Rico.
PUBLIC OFFERING AND STOCK OPTIONS
On August 27, 1996, the Company sold 2,348,333 Class B Shares of its
Common Stock to the general public in an underwritten offering. The
Company's CEO also converted 66,667 of his Class A Shares into Class B Shares
and sold such shares in the public offering. As a result of such
transaction, an aggregate of 2,415,000 Class B Shares have publicly issued
and are now traded on the NASDAQ Stock Market. The Company received gross
proceeds of $35,017,500 in the transaction, which resulted in estimated net
proceeds of $30,822,271 after payment of the underwriting discount and
expenses. Immediately following the Company's initial public offering, the
Company issued an additional 20,000 Class B Shares to the Company's Vice
Chairman of the Board in consideration for his past and ongoing services,
which shares were not registered in such offering.
In connection with the public offering, R&G Financial adopted a Stock
Option Plan, which is designed to attract and retain qualified personnel in
key positions, provide officers and key employees of R&G Financial and its
subsidiaries with a proprietary interest in R&G Financial as an incentive to
contribute to the success of R&G Financial and reward key employees for
outstanding performance and the attainment of targeted goals. The Stock
Option Plan was approved by R&G Financial's stockholder in June 1996. An
amount of Common Stock equal to 10% of the aggregate number of Class B Shares
sold in R&G Financial's initial public offering (241,500 shares) were
authorized under the Stock Option Plan, which may be filled by authorized but
unissued shares, treasury shares or shares purchased by R&G Financial on the
open market or from private sources. The Stock Option Plan provides for the
grant of stock options and stock appreciation rights (collectively "Awards").
In connection with R&G Financial's initial public offering, R&G Financial
awarded options for 200,000 shares to 28 employees of R&G Mortgage and the
Bank at the initial public offering price of $14.50 per share.
8
<PAGE>
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q. Additional information
regarding the Company's consolidated financial statements and the Notes to
Consolidated Financial Statements for the year ended December 31, 1995 is
included in the Company's Registration Statement on Form S-1. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments (principally consisting of normal recurring accruals)
necessary for a fair presentation of the Company's financial condition as of
June 30, 1996 and December 31, 1995 and the results of operations and changes
in its cash flows for the three and six months ended June 30, 1996 and 1995.
BASIS OF CONSOLIDATION
All significant balances and transactions have been eliminated in the
accompanying unaudited consolidated financial statements.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, and
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, and stops recognizing financial assets when
control has been surrendered, and liabilities when extinguished.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the
9
<PAGE>
assets sold, if any, and retained interest, if any, based on their relative
fair values at the date of the transfer. Servicing assets and liabilities
must be subsequently measured by (a) amortization in proportion to and over
the period of estimated net servicing income or loss and (b) assessment for
asset impairment or increased obligation based on their fair value.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996,
and must be applied prospectively. Earlier or retroactive application is not
permitted. Management has not estimated yet the effect, if any, of the
adoption of this Statement on the Consolidated Financial Statements of the
Company.
NOTE 2 - EARNINGS PER SHARE
Primary earnings per common share for the three and six months ended
June 30, 1996 and 1995 were computed by dividing net income for such periods
by the weighted average number of shares of common stock outstanding during
such periods, which was 5,189,044 shares.
NOTE 3 -- INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes,
except for the investment in Federal Home Loan Bank (FHLB) stock which is
valued at its redemption value.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
(Unaudited)
<S> <C> <C>
INVESTMENT SECURITIES HELD
TO MATURITY
Puerto Rico Government obligations:
Due within one
year.................... $ -- $ --
Due from one to five
years.................. 1,038,618 1,015,000
Due over ten
years.................. 603,528 596,029
---------- ----------
1,642,146 1,611,029
Corporate securities --
Due within one
year................... 3,719,547 3,719,547
Due from one to five
years................ 3,323,524 3,323,524
---------- ----------
7,043,070 7,043,070
---------- ----------
$8,685,216 $8,654,099
========== ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
(Unaudited)
<S> <C> <C>
MORTGAGE-BACKED SECURITIES HELD
TO MATURITY
GNMA certificates:
Due from one
to five years........... $ 105,694 $ 108,117
Due over ten
years................... 23,077,413 21,886,629
------------ -----------
23,183,107 21,994,746
------------ ------------
Federal National Mortgage
Association (FNMA)
-- Due over ten years........ 15,941,568 16,139,570
------------- -----------
Federal Home Loan Mortgage
Corporation (FHLMC)
participation certificates
-- Due over ten years....... 348,066 338,648
----------- -----------
348,066 338,648
----------- -----------
$39,472,739 $38,472,964
=========== ===========
<CAPTION>
JUNE 30, 1996
----------------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
(Unaudited)
<S> <C> <C>
MORTGAGE-BACKED
SECURITIES AVAILABLE
FOR SALE:
CMO residuals and other
mortgage-backed
securities.............. $7,091,610 $7,871,551
----------- -----------
Federal National Mortgage
Association (FNMA) -- Due
over ten
years................... 15,425,377 14,990,973
----------- -----------
FHLMC participation
certificates:
Due from five to ten
years............... 585,531 594,462
Due over ten
years.............. 21,788,422 21,011,871
----------- -----------
22,373,953 21,606,333
----------- -----------
$44,890,940 $44,468,857
=========== ===========
INVESTMENT
SECURITIES AVAILABLE
FOR SALE:
U.S. Government and
agencies
securities......... $19,527,199 $19,032,500
FHLB
stock................ 4,075,210 4,075,210
----------- -----------
$23,602,409 $23,107,710
=========== ===========
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $2,363,941 as of June 30, 1996, which
are associated with the sale in prior years of collateralized mortgage
obligations, and not the Company's mortgage banking activities.
11
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
(Unaudited)
<S> <C>
MORTGAGE-BACKED SECURITIES HELD
FOR TRADING:
CMO Certificates............................. $15,147,000
CMO Residuals (all interest only)............ 9,444,230
GNMA Certificates............................ 111,984,728
------------
$136,575,958
============
</TABLE>
During 1996, the Company entered into various agreements with an
unrelated investment management firm whereby such firm has been appointed as
investment advisor with respect to a portion of the Company's securities
portfolio. Pursuant to such agreements, this investment advisory firm
advises and recommends management on the purchase and/or sale of otherwise
eligible investments as well as the execution of various hedging strategies
to reduce interest rate risk, mainly through the use of various financial
instruments. At June 30, 1996, this investment advisory firm was managing
Company assets with a market value of approximately $32.1 million of which
$13.1 million was designated for trading. Such assets were invested as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
AMORTIZED COST FAIR VALUE
-------------- ----------
(Unaudited)
<S> <C> <C>
Cash and due from
banks............................ $1,934,179 $1,934,179
----------- -----------
HELD-FOR-TRADING SECURITIES
U.S. Treasury Bills.............. 989,826 989,826
Money market investments......... 10,136,693 10,136,693
----------- -----------
11,126,519 11,126,519
----------- -----------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agencies
securities...................... 19,527,199 19,032,500
----------- -----------
$32,587,897 $32,093,198
=========== ===========
</TABLE>
The above available for sale securities are being hedged with financial
futures contracts based on U.S. Treasury securities and Eurodollars which
are settled on a quarterly basis. Such firm also executes hedging strategies
on behalf of the Company for all mortgage-backed securities which are
available for sale (excluding CMOs) or held for trading. At June 30, 1996 no
such contracts were outstanding.
12
<PAGE>
NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(Unaudited)
<S> <C>
Real estate loans:
Residential -- first mortgage................. $378,271,815
Residential -- second mortgage................ 14,377,467
Construction.................................. 7,991,512
Commercial.................................... 71,778,065
------------
472,418,859
Undisbursed portion of loans in
process......................................... (2,795,132)
Net deferred loan fees........................... (96,864)
------------
469,526,863
------------
Other loans:
Commercial................................... 33,289,651
Consumer:
Loans secured by deposits................. 8,934,114
Other...................................... 91,038,251
Unamortized discount......................... (298,719)
Unearned interest............................ (1,106,458)
------------
131,856,839
------------
Total loans.............................. 601,383,702
Allowance for loan losses........................ (3,201,627)
------------
$598,182,075
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Balance, beginning of year................... $3,510,251 $2,887,099
Provision (credit) for loan
losses...................................... 356,525 (50,000)
Allowance for acquired
loans....................................... -- --
Loans charged-off............................ (770,808) (196,598)
Recoveries................................... 105,659 107,318
Other........................................ -- --
---------- ----------
Balance, end of year......................... $3,201,627 $2,747,819
</TABLE>
13
<PAGE>
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO DEVELOPERS PROVIDING END LOANS
The Company has outstanding commitments for various projects in the
process of completion. Total commitments amounted to approximately
$362,454,890 at June 30, 1996. All commitments are subject
to prevailing market prices at time of closing with no market risk exposure
against the Company or with firm back-to-back commitments extended in favor
of the mortgagee.
LOANS IN PROCESS
Loans in process pending final approval and/or closing amounting to
approximately $80,564,000 at June 30, 1996.
COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES
As of June 30, 1996, the Company had open commitments to issue GNMA
certificates in the amount of $53,903,086.
COMMITMENTS TO SELL MORTGAGE LOANS
As of June 30, 1996, the Company had commitments to sell mortgage loans
to third party investors amounting to $15.5 million.
LEASE COMMITMENTS
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating
leases. The leases expire at various dates with options for renewals.
OTHERS
At June 30, 1996, the Company is liable under limited recourse provisions
resulting from the sale of loans to several investors principally FHLMC. The
principal balance of these loans, which are serviced by the Company, amounts
to approximately $217,226,000 at June 30, 1996. Liability, if any, under the
recourse provisions at June 30, 1996 is estimated by management to be
insignificant.
NOTE 6 -- SUBSEQUENT EVENTS
On June 29, 1996, the Company settled with the Puerto Rico Treasury
Department (PRTD) an income tax examination of R&G Mortgage's income tax
returns for the years 1989 to 1992. While the Company believes that it had
valid defenses for its positions,
14
<PAGE>
management believes that it was in the Company's best interest to settle the
case rather than entering into an expensive, protracted negotiation with the
PRTD. The settlement reached was for $1.6 million. The effect of this
settlement was to record additional income tax expense for the six months
ended June 30, 1996 of approximately $400,000. The remainder of the
settlement was reserved for during prior periods.
On August 29, 1996 as a result of a review of its loan portfolio,
management of the Bank became aware of certain potential loan losses related
to the operation of its insurance premiums financing business and began an
intensive investigation. The Bank believes that there were irregularities
with respect to the origination and administration of a number of loans
in contravention of established Bank policies by the former loan officer in
charge of the department and has also notified the appropriate regulatory
enforcement authorities. While the Bank's investigation is in its early
stages, management is in the process of reviewing the collectibility of
the loans in question and believes, based on information
available to date, that its maximum loss exposure is $3.2 million, which
does not take into consideration recovery efforts already initiated with
existing obligors. While management presently is not able to estimate its
actual loss exposure, management plans to continue to review its portfolio
and to increase its reserve for loan losses during the third quarter.
Furthermore, management believes that the claims which it will submit
pursuant to its fidelity insurance policy will ultimately result in the
recovery of a substantial portion of the amounts not recoverable from
existing obligors.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGES IN FINANCIAL CONDITION
At June 30, 1996, the Company's total assets amounted to $965.6 million,
as compared to $868.3 million at March 31, 1996. The $97.3 million or 11.2%
increase in total assets during the three months ended June 30, 1996 was
primarily the result of a $64.1 million or 12.0% increase in loans
receivable, net, which is attributable to the origination of $162.5 million
of loans, primarily single-family residential loans, before reduction for
repayments and sales, a $20.9 million or 17.9% increase in mortgage-backed
and investment securities held for trading, which is the result of
securitization of mortgage loans into mortgage-backed securities, net of
sales, and a $14.5 million or 33.8% increase in cash and cash equivalents,
which is primarily attributable to a $7.1 million or 20.2% increase in cash
and due from banks and a $6.9 million or 106.6% increase in securities
purchased under agreements to sell. These increases were partially offset by
a $7.5 million or 29.2% decrease in mortgage loans held for sale.
The increase in the Company's assets was funded primarily by a $69.3
million or 94.2% increase in notes payable, which is the result of a $50.0
million or 98.0% increase in term notes and a $19.3 million or 85.4% increase
in warehousing lines of credit which funded increased loan production. In
addition, deposits, primarily certificates of deposit, increased by $22.0
million or 4.1%, as the result of an active advertising campaign and the
offering of competitive rates.
At June 30, 1996, the Company's stockholder's equity amounted to $70.5
million, as compared to $67.7 million at March 31, 1996. The $2.8 million or
4.1% increase in stockholder's equity was attributable to the Company's net
income of $3.2 million for the quarter ended June 30, 1996, which amount was
reduced by $559,000 of unrealized loss on securities available for sale, net
of income tax benefits. At June 30, 1996, the Bank's leverage and Tier 1
risk-based capital amounted to 6.09% and 10.04% of adjusted total assets,
compared to a 4.0% minimum requirement, and its total risk-based capital
amounted to 11.02% compared to an 8.0% minimum requirement.
RESULTS OF OPERATIONS
The Company reported net income of $3.2 million and $6.1 million during
the three and six months ended June 30, 1996, as compared to $3.7 million and
$5.3 million during the prior comparable periods. While net income for the
three months ended June 30, 1996
15
<PAGE>
increased by $239,000 or 8.2% over the immediately prior quarter ended March
31, 1996, the Company's net income decreased by $491,000 or 13.4% when
compared to the prior comparable quarter in 1995. The decline was
attributable to a $2.3 million or 40.9% increase in total expenses, primarily
due to the effect of a full year of operating six branches acquired from a
commercial bank in June 1995, which more than offset a $1.8 million or 15.5%
increase in total revenue and a $62,000 or 3.4% reduction in income taxes.
During the six months ended June 30, 1996, net income increased by $840,000
or 16.0% over the prior comparable period, as a $5.5 million or 27.0%
increase in total revenue net of interest expense was significantly offset
by a $3.6 million or 30.8% increase in total expenses, again principally
attributable to the increased expenses associated with the 1995 branch
acquisition.
The $1.8 million or 15.5% increase in total revenue net of interest
expense for the three months ended June 30, 1996 over the prior comparable
quarter was primarily attributable to a $1.1 million increase in net gain on
origination and sale of loans, a $2.2 million or 47.0% increase in net
interest income after provision for loan losses, and an increase of $1.0
million or 41.2% in loan administration and servicing fees, which was offset
by a change of $2.7 million in unrealized gains (losses) on trading
securities. The increase in net gain on origination and sale of loans, which
increased from $878,000 during the June 1995 quarter to $2.0 million, was
primarily due to an increase in loan origination fees attributable to
increased loan originations when compared to the prior period. In addition,
the Company's adoption of Statement of Financial Accounting Standards
("SFAS") No. 122 had the effect of increasing net gain on sales of loans.
See Note 1 of the Notes to Consolidated Financial Statements. The increase
in net interest income after provision for loan losses was primarily
attributable to an increased average loan portfolio balance. The increase in
loan administration and servicing fees was primarily due to an increase in
the servicing portfolio, which amounted to $2.45 billion at June 30, 1996
compared to $2.36 billion at March 31, 1996. The change in unrealized gains
(losses) on trading securities reflect the Company's adoption of SFAS No.
115, which requires that unrealized gains and losses with respect to trading
securities be recognized in other income in the period in which such
unrealized gains or losses occur.
The $5.5 million or 27.0% increase in total revenue during the six months
ended June 30, 1996 over the prior comparable period was primarily
attributable to a $3.9 million or 42.8% increase in net interest income after
provision for loan losses, a $1.8 million or 80.6% increase in net gain on
origination and sale of loans and a $1.3 million or 24.1% increase in loan
administration and servicing fees, which was offset by a $2.9 million change
in unrealized gains (losses) on sale of trading securities. The increase in
net interest income after provision for loan losses was primarily due to the
increase in interest-earning assets. The increase in net gain on origination
and sale of loans during the three month period ended June 30, 1996 was
attributable to increased loan originations and increased net gains on sale
of loans attributable to SFAS No. 122. The increase in loan administration
and servicing fees was primarily due to the increased loan servicing
portfolio. The changes in the recognition of unrealized gains (losses) on
trading securities during the periods reflects the market adjustments
required by SFAS 115.
16
<PAGE>
Total expenses increased by $2.3 million or 40.9% during the three months
ended June 30, 1996 and by $3.6 million or 30.8% during the six months ended
June 30, 1996, in each case over the prior comparable periods. The increases
during both the three and six month periods were due to increases of $1.8
million or 122.3% and $2.6 million or 77.1%, respectively, in compensation
and benefits and, to a lesser extent, increases of $17,000 or 0.5% and
$138,000 or 2.1%, respectively, in general and administrative expenses and
$479,000 or 47.7% and $885,000 or 44.0%, respectively, in occupancy expenses.
The 1995 branch acquisition was the primary reason for the increases in
compensation and benefits and occupancy expenses during both the three and
six month periods of 1996.
The Company's income tax provision amounted to $1.8 million and $3.8
million during the three and six months ended June 30, 1996, as compared to
$1.8 million and $2.9 million during the same respective periods in the prior
year. On June 29, 1996, R&G Mortgage and the Puerto Rico Treasury Department
settled all taxes due for the years 1989 through and including 1992 which
were under audit. The settlement reached was for $1.6 million. The effect of
this settlement was to record additional income tax expense during the three
and six months ended June 30, 1996 of $50,000 and $400,000, respectively. The
remainder of the settlement was reserved for during prior periods. See Note 6
of the Notes to Unaudited Consolidated Financial Statements. The Company's
effective tax rate amounted to 34.5% and 37.0% during the three and six
months ended June 30, 1996, as compared to 32.3% and 33.9% during the same
respective periods in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to
outstanding borrowings and to pay operating expenses. It is management's
policy to maintain greater liquidity than required in order to be in a
position to fund loan purchases and originations, to meet withdrawals from
deposit accounts, to make principal and interest payments with respect to
outstanding borrowings and to make investments that take advantage of
interest rate spreads. The Company monitors its liquidity in accordance with
guidelines established by the Company and applicable regulatory requirements.
The Company's need for liquidity is affected by loan demand, net changes in
deposit levels and the scheduled maturities of its borrowings. The Company
can minimize the cash required during the times of heavy loan demand by
modifying its credit policies or reducing its marketing efforts. Liquidity
demand caused by net reductions in deposits are usually caused by factors
over which the Company has limited control. The Company derives its liquidity
from both its assets and liabilities. Liquidity is derived from assets by
receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral
for borrowings. Liquidity is derived from liabilities by maintaining a
variety of funding sources, including deposits, advances from the FHLB of New
York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally invested in short-term
investments such as
17
<PAGE>
securities purchased under agreements to resell, federal funds sold and
certificates of deposit in other financial institutions. If the Company
requires funds beyond its ability to generate them internally, various forms
of both short and long-term borrowings provide an additional source of funds.
At June 30, 1996, the Company had $39.5 million in borrowing capacity under
unused warehouse lines of credit and $39.0 million in borrowing capacity
under a line of credit with the FHLB of New York. The Company has generally
not relied upon brokered deposits as a source of liquidity, and does not
anticipate a change in this practice in the foreseeable future.
At June 30, 1996, the Company had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and
non-mortgage loans of $374.0 million. Certificates of deposit which are
scheduled to mature within one year totalled $273.1 million at June 30, 1996,
and borrowings that are scheduled to mature within the same period amounted
to $202.6 million. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments.
CAPITAL RESOURCES. The FDIC's capital regulations establish a minimum
3.0% Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100
to 200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier I leverage ratio for such other
banks to 4.0% to 5.0% or more. Under the FDIC's regulations, the
highest-rated banks are those that the FDIC determines are not anticipating
or experiencing significant growth and have well diversified risk, including
no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong
banking organization and are rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2)
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC
believes are inherent in the type of asset or item. The components of Tier I
capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain
subordinated debt and intermediate preferred stock and general allowances for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of core capital. At June 30, 1996, the Bank met each of
its capital requirements, with Tier I leverage
18
<PAGE>
capital, Tier I risk-based capital and total risk-based capital ratios of
6.09%, 10.04% and 11.02%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to
those adopted by FDIC regarding state-chartered banks, as described above.
The Company is currently in compliance with such regulatory capital
requirements.
INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position
and operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, substantially all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
19
<PAGE>
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Registrant is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition
and results of operations of the Registrant.
ITEM 2: CHANGES IN SECURITIES
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Not applicable
b) No Form 8-K reports were filed during the quarter.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: October 1, 1996 By: /S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /S/ ANA M. ARMENDARIZ
---------------------
Ana M. Armendariz
Controller and Treasurer
(Principal Accouting Officer)
