<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1996
REGISTRATION NO. 333-06245
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
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.................................. $34,500,000 $11,897(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 $13,430.
</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 12, 1996
PROSPECTUS
2,000,000 SHARES
[LOGO]
CLASS B COMMON STOCK
Of the 2,000,000 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").
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,
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 2,000,000 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, Mr. Victor J. Galan will
own 71.92% of the outstanding Common Stock of the Company and will be entitled
to exercise 83.67% of the voting rights outstanding (69.01% and 81.67%,
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."
The Class B Shares have been conditionally 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
Underwriters 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 UNDERWRITERS, SUBJECT TO RECEIPT AND
ACCEPTANCE BY THEM, TO PRIOR SALE AND TO THE UNDERWRITERS' 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, THE REPRESENTATIVE OF THE SEVERAL
UNDERWRITERS (THE "REPRESENTATIVE"), OR IN BOOK ENTRY FORM THROUGH THE BOOK
ENTRY FACILITIES OF THE DEPOSITORY TRUST COMPANY 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. In connection with the reorganization of R&G Mortgage and
the Bank into the bank holding company form of organization, the Company in July
1996 acquired the approximately 88.1% ownership interest of the Bank held by Mr.
Galan. During the quarter following completion of the Offering, the Company
anticipates that it will 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 an exchange transaction in which, in
consideration of the acquisition of such interests, the Company will provide
such stockholders with additional Class B Shares. See "Capitalization."
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
3
<PAGE>
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.
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
4
<PAGE>
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, 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 OFFERING
<TABLE>
<S> <C>
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: The Company's Chairman of the Board and Chief Executive
Officer, 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. See
"Underwriting."
COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERING: 5,122,377 Class A Shares and 2,000,000 Class B Shares
(2,300,000 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 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 proceeds 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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
receive dividends from the Bank and/or R&G Mortgage. See
"Use of Proceeds" and "Dividends and Market for Class B
Shares."
NASDAQ SYMBOL: The Class B Shares have been conditionally approved 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............ 534,114 329,345 473,841 301,614 216,620 117,428 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......................... 541,123 389,919 518,187 380,148 312,151 169,998 128,226
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 -- -- 394 -- --
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 0.95
Allowance for loan losses to
total loans at end of period.... 0.61 0.79 0.72 0.92 1.34 0.95 0.83
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 56.60
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. During the quarter following
completion of the Offering, the Company plans to register with the
Securities and Exchange Commission ("Commission") approximately an
additional 296,396 Class B Shares, which it intends to provide to the
stockholders of the Bank in exchange for and in satisfaction of all of such
outstanding shares of Bank common stock. See "Capitalization."
(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 at December 31, 1995, March 31, 1996 and June 30, 1996 and for
the three and six months ended June 30, 1996 and 1995, respectively. 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 at March
31, 1996 and at and 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 $ 133,088
Loan servicing portfolio.......................... 2,450,767 2,205,343 2,450,767 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...... 3.47 3.35 3.47 3.62
ASSET QUALITY RATIOS(9):
Non-performing loans to total loans at end of
period........................................... 2.15% 2.12% 2.15% 2.12%
Non-performing assets to total assets at end of
period........................................... 1.49 1.26 1.49 1.26
Allowance for loan losses to total loans at end of
period........................................... 0.51 0.67 0.51 0.67
Allowance for loan losses to total non-performing
loans at end of period........................... 23.89 31.43 23.89 31.43
BANK REGULATORY CAPITAL RATIOS (10):
Tier 1 risk-based capital ratio................... 10.04% 10.53% 10.04% 10.53%
Total risk-based capital ratio.................... 11.02 12.03 11.02 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. During the quarter following
completion of the Offering, the Company plans to register with the
Commission approximately an additional 296,396 Class B Shares, which it
intends to provide to the stockholders of the Bank in exchange for and in
satisfaction of all of such outstanding shares of Bank common stock. See
"Capitalization."
(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 $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.
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 32.3% and 33.9% 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 $77.9 million or 8.97%
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 in a revised bill, which has been
approved by both houses of Congress and now must be signed by the President.
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 Offering, there has been no public market for the Company's
Class B Shares. The Class B Shares have been conditionally 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 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
Class B Shares."
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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 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), the pro
forma net tangible book value at March 31, 1996 would have been $13.07 per
share, representing an immediate dilution of $1.93 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 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 71.92% of the Company's
outstanding Common Stock, or approximately 69.01% 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 83.67% of the voting rights
outstanding (81.67% 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 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."
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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. In connection with the reorganization
of R&G Mortgage and the Bank into the bank holding company form of organization,
the Company in July 1996 acquired the approximately 88.1% ownership interest of
the Bank held by Mr. Galan. During the quarter following completion of the
Offering, the Company anticipates that it will acquire the approximately 11.9%
ownership interest in the Bank which, as of March 31, 1996, was held by the
Minority Bank Stockholders in an exchange transaction in which, in consideration
of the acquisition of such interests, the Company will provide such stockholders
with additional Class B Shares. See "Capitalization."
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
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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.
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, $124.6
million, $57.9 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.
23
<PAGE>
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-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."
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
24
<PAGE>
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 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 Offering, there has been no established market for the Class B
Shares. The Company expects that following the Offering, the Class B Shares will
be traded in the over-the-counter market. The Class B Shares have been
conditionally approved for quotation 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 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.
25
<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 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; and (b)
the future anticipated issuance of approximately 296,396 additional Class B
Shares to the Minority Bank Stockholders in exchange for and in complete
satisfaction of their interests in the Bank, as discussed in Note 5. See "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
AS ADJUSTED FOR
OFFERING AND
FUTURE BANK
AS ADJUSTED STOCKHOLDER
FOR EXCHANGE
ACTUAL OFFERING TRANSACTION(5)(6)
----------- ----------- ----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Deposits................................................................ $ 541,123 $ 541,123 $ 541,123
Securities sold under agreements to repurchase.......................... 95,314 95,314 95,314
Notes payable........................................................... 73,585 73,585 73,585
Other borrowings(1)..................................................... 65,653 65,653 65,653
Accounts payable and other liabilities.................................. 17,513 17,513 17,513
----------- ----------- ----------------
Total liabilities................................................. $ 793,188 $ 793,188 $ 793,188
----------- ----------- ----------------
----------- ----------- ----------------
Subordinated notes(2)................................................... $ 3,250 $ 3,250 $ 3,250
----------- ----------- ----------------
----------- ----------- ----------------
Minority interest in the Bank(3)........................................ $ 4,141 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 51 51
Class B Shares, 15,000,000 shares authorized, issued shares adjusted
as shown(3).......................................................... -- 20 23
Additional paid-in capital............................................ 363 26,479 30,922
Retained earnings..................................................... 66,426 66,426 66,426
Capital reserve(4).................................................... 1,021 1,021 1,021
Unrealized (loss) on securities available for sale, net............... (148) (148) (148)
----------- ----------- ----------------
Total stockholders' equity........................................ 67,714 93,849 98,295
----------- ----------- ----------------
Total capitalization................................................ $ 868,293 $ 894,428 $ 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.
(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 approximately 11.9% interest in the Bank of the Minority Bank
Stockholders which is expected to be exchanged for Class B Shares following
the Offering. See Note 5.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
26
<PAGE>
(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) During the quarter following the completion of the Offering, the Company
intends to acquire the approximately 11.9% ownership interest in the Bank
which, as of March 31, 1996, was held by 205 Minority Bank Stockholders in
an exchange transaction in which, in consideration of the acquisition of
such interests, the Company will provide such stockholders with additional
Class B Shares. In order to accomplish this transaction, 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"), following the
receipt of all requisite regulatory and stockholder approvals, Interim shall
be merged with and into the Bank, with the Bank as the surviving corporation
(the "Merger").
The Bank intends to call a Special Meeting of Stockholders of the Bank, at
which meeting such stockholders will be asked to approve the Merger
Agreement and the transactions contemplated thereby. The stockholders of the
Bank previously voted to approve the Merger Agreement at a Special Meeting
of Stockholders of the Bank which was held on July 30, 1996. However,
because the Special Meeting was held and the vote was taken prior to the
effectiveness of the Company's registration statement, the prior vote is
being rescinded by the Bank and a new meeting of stockholders will be
called. A vote of 75% of the aggregate number of issued and outstanding
common and preferred stock of the Bank is required to approve the Merger
Agreement and the transactions contemplated thereby. The Merger Agreement is
expected to be approved because the Company, which owns approximately 88.1%
of the Bank's common stock, and R&G Mortgage, which owns 100% of the Bank's
outstanding preferred stock (both of which represent, in the aggregate,
90.0% of the Bank's outstanding stock), have indicated an intention to vote
for the Merger Agreement and the transactions contemplated thereby.
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. For purposes of this table, it is
assumed that 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 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 number of Class B Shares to be issued to Minority Bank Stockholders will
be determined by an independent valuation described in the registration
statement with respect to such Class B Shares. The table does not reflect
purchase accounting adjustments, if any, that may be required in connection
with such 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
27
<PAGE>
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 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 $13.07 per share, representing an
immediate dilution of $1.93 per share to new investors purchasing the Class B
Shares offered hereby at an assumed Price to Public of $15.00 per share. See
"Underwriting."
<TABLE>
<S> <C> <C>
Assumed Price to Public............................................ $ 15.00
Net tangible book value per share before Offering.................. $ 12.90
Increase per share attributable to new investors................... .17
---------
Pro forma net tangible book value per share after Offering(1)...... 13.07
---------
Dilution per share to new investors after Offering(1).............. $ 1.93
---------
---------
</TABLE>
- ------------------------
(1) Does not reflect the issuance by the Company of approximately 296,396 Class
B Shares which the Company anticipates it will issue to the Minority Bank
Stockholders in exchange for their interest in the Bank following the
Offering. Also does not reflect the issuance of 20,000 additional Class B
Shares to an employee following the Offering, which shares are not being
registered in the Offering. See "Capitalization" and "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 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).
<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 72.18% $ 9,685 24.40% $ 1.87
New investors(2)................................... 2,000,000 27.82 30,000 75.60 15.00
</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."
28
<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 of assets and liabilities, unrealized gains and losses,
purchase and sale activity and maturities of
29
<PAGE>
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 $77.9 million, or 8.97% 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 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
30
<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"), 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 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).
31
<PAGE>
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 ($19.2 million of which is being
utilized for hedging purposes and $10.7 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
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.
32
<PAGE>
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 $ 44,543 $ 79,432 $ 57,740 $ 146,551 $ 341,731
Construction loans.......................... 2,066 7,255 -- -- -- 9,321
Commercial real estate loans................ 60,185 2,149 443 550 5,516 68,843
Consumer loans.............................. 12,359 26,943 34,013 11,969 2,839 88,123
Commercial business loans................... 21,437 7,830 -- -- -- 29,267
Mortgage loans held for sale.................. 6,449 19,727 -- -- -- 26,176
Mortgage-backed securities(2)(3).............. 14,717 45,244 32,349 25,288 87,457 205,055
Investment securities(3)...................... 17,946 378 9,087 6,066 5,369 38,846
Other interest-earning assets(4).............. 10,359 60 -- -- -- 10,419
------------ --------- ----------- ----------- ----------- ---------
Total................................... $ 158,983 $ 154,129 $ 155,324 $ 101,613 $ 247,732 $ 817,781
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
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 24,941 46,942
Certificates of deposit..................... 89,306 166,857 37,668 39,683 4,672 338,186
FHLB advances................................. 1,000 5,000 -- -- -- 6,000
Reverse repurchase agreements................. 95,314 -- -- -- -- 95,314
Other borrowings(7)........................... 22,585 41 2,983 107,709 2,400 135,718
------------ --------- ----------- ----------- ----------- ---------
Total................................... 216,284 194,701 72,315 173,040 116,409 772,749
------------ --------- ----------- ----------- ----------- ---------
Effect of hedging instruments................. (35,000) 15,000 10,000 10,000 -- --
------------ --------- ----------- ----------- ----------- ---------
$ 181,284 $ 209,701 $ 82,315 $ 183,040 $ 116,409 $ 772,749
------------ --------- ----------- ----------- ----------- ---------
------------ --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities............ $ (22,301) $ (55,572) $ 73,009 $ (86,291) $ 131,323
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities.................................. $ (22,301) $ (77,873) $ (4,864) $ (86,414) $ 45,032
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets..... (2.57)% (8.93)% (0.56)% (9.90)% 5.16%
------------ --------- ----------- ----------- -----------
------------ --------- ----------- ----------- -----------
</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.
33
<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 1.8%. The $230.7 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."
34
<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, $281.7 million, $212.3 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 0.61% 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 $25.9 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
35
<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.
36
<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 $55.2 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 15 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 $4.1 million, $4.0 million and $3.2
million, which represented the interest of the Minority Bank Stockholders in the
Bank. The Company anticipates that it will acquire the Minority Bank
Stockholders' interests in the Bank in exchange for Class B Shares of the
Company during the quarter following the completion of the Offering. See
"Capitalization."
37
<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.
38
<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.
39
<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 83.3% 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 $1.3 million increase
in total operating expenses, a $1.0 million 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.
40
<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)
41
<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, 5.37%; investment securities held to maturity, 5.59%;
investment securities available for sale, 6.12%; mortgage-backed securities
held for trading, 6.62%; mortgage loans available for sale, 8.05%; loans
receivable, net, 8.99%; FHLB of New York stock, 6.50%; total
interest-earning assets, 8.17%; deposits, 4.99%; securities sold under
agreements to repurchase, 4.82%; notes payable, 5.93%; other borrowings,
7.89%; subordinated debt, 10.00%; total interest-bearing liabilities, 5.28%;
interest rate spread, 2.88%.
(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.
42
<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)
43
<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 38.8%
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.
44
<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 $970,000 or 370.2% during the three months ended March
31, 1996, as compared to the same period in the prior year, increased by $39,000
or 4.3% during the year ended December 31, 1995 and increased by $186,000 or
25.7% 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).
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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 9,326
Gain on sale of servicing rights.......................... -- -- -- 2,915 --
Service charges, fees and other........................... 1,195 558 3,172 2,523 1,179
--------- --------- --------- --------- ---------
Total other income.................................... $ 6,443 $ 4,431 $ 23,442 $ 9,814 $ 39,925
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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
46
<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 mortgage 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 $1.2 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 $649,000 or 25.7% 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.
47
<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 $ 5,252 $ 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 41.3% 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%,
14.4% and 34.8%, 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.
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<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
49
<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
50
<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, $322.7 million, $488.1 million and $834.7
million of loans, respectively. These aggregate originations
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<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 57%, 48%, 29% and 22%, 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 73.6%, 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
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<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.
53
<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>
54
<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.
55
<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.
56
<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."
57
<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 8.0% 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.
58
<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
Average loan size(5)............... $ 48 $ 49 $ 48 $ 49 $ 48
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 an average servicing rate of 0.225%.
59
<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
60
<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 $237.0 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
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<PAGE>
approximately $145,000, $0, $43,000 and $239,000, 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 (ii) qualified possession source
investment income ("QPSII"). QPSII includes interest derived from
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<PAGE>
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 Credit provisions of the House SBJPA in two
material ways. First, the Senate SBJPA extends the
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<PAGE>
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. As part of a compromise, the Conference SBJPA adopted the House
SBJPA's 10-year phase-out of the 936 Credit for Existing Claimants and 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. On August 2, 1996, the
Conference SBJPA was passed by the House of Representatives and the Senate. The
Conference SBJPA is expected to be signed by the President during the week of
August 19, 1996.
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 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
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<PAGE>
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.
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<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% 313,345 100.00% 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) (11,731) (8,814) (11,418) (10,548)
-------- -------- -------- -------- --------
Loans receivable,
net(4)................ $473,841 $301,614 $216,618 $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, $22.0 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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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 4,024
Consumer loans............................... 4,398 2,773 15,944 -- --
---------- ---------- ----------- ----------- -----------
Total loans originated by R&G Mortgage..... 56,933 26,518 156,307 142,572 180,779
---------- ---------- ----------- ----------- -----------
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 12,837 1,590
---------- ---------- ----------- ----------- -----------
Total loans originated and purchased....... 87,104 56,206 281,738 213,339 223,051
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 26,860 128,126 124,325 103,117
Loans securitized and transferred to
mortgage-backed securities...................... -- (1,008) (17,631) (51,492) --
Other increases (decreases)...................... 458 (347) 179 (2,519) (1,665)
---------- ---------- ----------- ----------- -----------
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
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<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, $12.8 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, $8.4 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
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<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
70
<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, $64.6 million or 11.9% 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
71
<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
72
<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% 0.95%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</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 $1.8 million at December
31, 1991 to $13.0 million at March 31, 1996, the Company's net loans receivable
portfolio has increased by 453% 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 0.95% 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
74
<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..................... 0.61% 0.79% 0.72% 0.92% 1.34% 0.95% 0.83%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Allowance for loan losses as a percent of
non-performing loans........................ 27.27% 39.52% 33.19% 50.10% 59.87% 52.72% 56.60%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
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.
75
<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>
76
<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 ($19.2 million of which is being utilized for hedging purposes and
$10.7 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.
77
<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 1,000 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 $43,996 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>
78
<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)
79
<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
80
<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.
81
<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.................. 74,849 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......... $ 509,942 5.01% $ 431,833 5.05% $ 340,461 4.25% $ 232,848 4.45%
--------- --- --------- --- --------- --- --------- ---
--------- --- --------- --- --------- --- --------- ---
</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 4.82%.
See Note 10 of the Notes to Consolidated Financial Statements.
82
<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 3.89%.
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
83
<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.
84
<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.................... 5.35% 5.72% 5.87% 4.74% 2.65%
Average interest rate at end of period..................... 4.82% 5.61% 5.47% 4.20% --%
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 31,626 134,271 133,913
Balance outstanding at end of period....................... 22,585 20,288 30,130 22,215 133,913
Average interest rate during the period.................... 4.15% 4.10% 4.92% 5.15% 5.40%
Average interest rate at end of period..................... 4.59% 3.32% 3.00% 3.50% 5.60%
THE BANK:
FHLB OF NEW YORK ADVANCES:
Average balance outstanding................................ $ 6,003 $ 13,557 $ 11,796 $ 12,060 $ 9,110
Maximum amount outstanding at any month-end during the
period.................................................... 6,005 13,562 13,562 14,592 28,108
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% 6.00% 6.06% 5.36%
Average interest rate at end of period..................... 6.74% 5.84% 6.74% 5.84% 5.90%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
Average balance outstanding................................ $ 3,354 $ 11,612 $ 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.
85
<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>
86
<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>
87
<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.
88
<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.
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<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.
90
<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.
91
<PAGE>
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
92
<PAGE>
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
93
<PAGE>
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 Company presently does not anticipate that it will pay salaries to
its officers until such time as activities are specifically performed for it.
Except as set forth in the footnotes to the table, the compensation expense
shown below was incurred by the subsidiary (R&G Mortgage or the Bank) for whom
the executive officer is employed.
<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 (4)
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.
(4) Mr. Prats day to day services are conducted on behalf of, and he is
compensated by, 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 R&G Mortgage 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 of R&G Mortgage determine the bonuses for the President and Executive
Vice President, which are based on profitability of that company's 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.
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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 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.
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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, 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 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. 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 company are affiliates of the financial
institution. Generally, Sections 23A and 23B (i) limit the extent
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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).
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The following table sets forth the anticipated beneficial ownership
following consummation of 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 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) 71.92
Ana M. Armendariz............................................................. -- --
Ramon Prats(4)................................................................ -- --
Juan J. Diaz.................................................................. -- --
Victor L. Galan............................................................... -- --
Enrique Umpierre-Suarez....................................................... -- --
Pedro Ramirez................................................................. -- --
Laureno Caros Abarca.......................................................... -- --
Eduardo McCormack............................................................. -- --
Gilberto Rivera-Arreaga....................................................... -- --
Benigno R. Fernandez.......................................................... -- --
ADDITIONAL R&G MORTGAGE DIRECTORS AND OFFICERS
Nelida Galan.................................................................. -- --
ADDITIONAL BANK DIRECTORS AND OFFICERS
Martin J. Rovira Garcia....................................................... -- --
Jeanne Ubinas................................................................. -- --
Osvaldo Domenech.............................................................. -- --
Jose L. Ortiz................................................................. -- --
All Directors and Officers of the Company, R&G Mortgage and the Bank as a
group (16 persons)........................................................... 5,122,377(4) 71.92
</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 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) 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, R&G Financial will have outstanding
5,122,377 Class A Shares and 2,000,000 Class B Shares (taking into consideration
the sale of shares of Common Stock by the
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Selling Stockholder) (2,300,000 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 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.
Under Rule 144 promulgated by the Commission 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 Commission. 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
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).
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.
COMMON STOCK
GENERAL. The Class B Shares being offered hereby in the Offering will be,
upon payment therefor, 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
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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 exchange transaction with
Minority Bank Stockholders which the Company anticipates will occur following
the Offering, see "Capitalization"), 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 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.
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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 provides 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 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
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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.
111
<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 Offering, Mr. Galan will own 5,122,377 Class A Shares, which will
represent 71.92% of the Company's outstanding Common Stock.
UNDERWRITING
The Underwriters named below, represented by Friedman, Billings, Ramsey &
Co., Inc. (the "Representative"), have severally 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 an aggregate of
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 several Underwriters have
agreed to purchase the number of shares set forth opposite the name of each
Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ....................................................
-----------
Total.................................................................................. 2,000,000
-----------
-----------
</TABLE>
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 Underwriters have advised R&G Financial that the Underwriters propose
initially to offer the Class B Shares to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share, and the Underwriters 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 Underwriters. 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 Underwriters, 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 Underwriters, 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 Underwriters. To the extent that the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional Class B Shares. The Underwriters 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 Underwriters against certain liabilities,
including civil liabilities under the Act, or will contribute to the payments
the Underwriters 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
112
<PAGE>
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 Representative. 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.
The Representative intends to make a market in the Class B Shares on
completion of the Offering, as permitted by applicable laws and regulations. The
Representative, 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 Representative.
The Representative of the Underwriters have advised the Company and the
Selling Stockholders that the Underwriters do not intend to confirm sales to any
account over which they exercise discretionary authority.
The Class B Shares have been conditionally 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
113
<PAGE>
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.
114
<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.
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 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.
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)
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 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
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)
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 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
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)
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 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.
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)
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.
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.
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 23 -- SUPPLEMENTAL DISCLOSURE ON THE STATEMENT OF CASH FLOWS: (CONTINUED)
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-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)
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-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 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-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:
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-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)
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-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 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-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:
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-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,
----------------------------------------------------------------------------
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-45
<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-46
<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
Use of Proceeds........................................................... 24
Dividends and Market for Class B Shares................................... 25
Capitalization............................................................ 26
Dilution.................................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business of the Company................................................... 51
Management................................................................ 89
The Commonwealth of Puerto Rico........................................... 98
Regulation................................................................ 100
Beneficial Ownership of Securities........................................ 106
Shares Eligible For Future Sale........................................... 107
Description of Capital Stock.............................................. 108
Selling Stockholder....................................................... 112
Underwriting.............................................................. 112
Legal Matters............................................................. 113
Experts................................................................... 113
Transfer Agent and Registrar.............................................. 113
Additional Information.................................................... 113
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.
2,000,000 SHARES
[LOGO]
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 August 9, 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 August 9, 1996
Victor J. Galan officer)
Director, Controller and
/s/ ANA M. ARMENDARIZ* Treasurer (principal
------------------------------------------- financial and accounting August 9, 1996
Ana M. Armendariz officer)
/s/ RAMON PRATS*
------------------------------------------- Executive Vice President August 9, 1996
Ramon Prats and Director
/s/ ENRIQUE UMPIERRE-SUAREZ*
------------------------------------------- Director and Secretary August 9, 1996
Enrique Umpierre-Suarez
/s/ VICTOR L. GALAN FUNDORA*
------------------------------------------- Director August 9, 1996
Victor L. Galan Fundora
/s/ JUAN J. DIAZ*
------------------------------------------- Director August 9, 1996
Juan J. Diaz
/s/ PEDRO RAMIREZ*
------------------------------------------- Director August 9, 1996
Pedro Ramirez
/s/ LAURENO CARUS ABARCA*
------------------------------------------- Director August 9, 1996
Laureno Carus Abarca
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------------------------- ------------------------- ----------------
<C> <S> <C>
------------------------------------------- Director
Eduardo McCormack
/s/ GILBERTO RIVERA-ARREAGA*
------------------------------------------- Director August 9, 1996
Gilberto Rivera-Arreaga
/s/ BENIGNO R. FERNANDEZ*
------------------------------------------- Director August 9, 1996
Benigno R. Fernandez
</TABLE>
- ------------------------
*By Victor J. Galan pursuant to Power of Attorney.
II-8
<PAGE>
[ 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
August 9, 1996
