SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_________________.
Commission file number: 000-21137
R&G FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
- --------------------------------------------------------------------------------
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 766-2424
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [ X ] NO [ ]
Number of shares of Class B Common Stock outstanding as of March 31, 1997:
2,735,839. (Does not include 5,122,377 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
Part I - Financial Information Page
Item 1. Consolidated Financial Statements 3
Consolidated Statement of Financial Condition as of
March 31, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 14
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements.
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
March 31, December 31,
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash and due from banks ...................................................... $ 22,814,749 $ 31,989,944
Money market investments:
Securities purchased under agreements to resell ........................... 13,817,480 19,633,178
Time deposits with other banks ............................................ 32,948,447 33,232,809
Federal funds sold ........................................................ 5,514,023 14,000,000
Mortgage loans held for sale, at lower of cost or market ..................... 19,922,089 54,450,159
Mortgage-backed securities held for trading, at fair value ................... 163,316,426 108,146,120
Mortgage-backed securities available for sale, at fair value ................. 46,377,292 50,841,165
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1997 - $34,810,480; 1996 - $37,104,391) ............. 36,456,107 37,899,847
Investment securities held for trading, at fair value ........................ 1,483,428 1,350,827
Investment securities available for sale, at fair value ...................... 54,408,577 30,973,260
Investment securities held to maturity, at amortized cost
(estimated market value: 1997 - $5,216,138; 1996 - $5,241,146) ............... 5,371,389 5,269,850
Loans receivable, net ........................................................ 654,173,343 603,750,621
Accounts receivable, including advances to investors, net .................... 5,603,950 5,764,331
Accrued interest receivable .................................................. 6,923,852 6,632,250
Mortgage servicing rights .................................................... 13,776,497 12,595,020
Excess servicing receivable .................................................. -- 770,408
Premises and equipment ....................................................... 8,831,641 7,767,680
Other assets ................................................................. 11,666,565 12,730,060
--------------- ---------------
$ 1,103,405,855 $ 1,037,797,529
=============== ===============
<PAGE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 651,035,093 $ 615,567,481
Securities sold under agreements to repurchase ............................ 120,882,717 97,444,448
Notes payable ............................................................. 134,410,636 126,842,099
Advances from FHLB ........................................................ 10,000,000 15,000,000
Other secured borrowings .................................................. 49,510,439 50,462,619
Accounts payable and accrued liabilities .................................. 12,401,350 9,998,768
Other liabilities ......................................................... 2,775,017 3,599,222
--------------- ---------------
981,015,252 918,914,637
--------------- ---------------
Subordinated notes ........................................................... 3,250,000 3,250,000
Stockholders' 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, 5,122,377 shares
issued and outstanding in 1997 and 1996 .............................. 51,223 51,223
Class B - $.01 par value, 15,000,000 shares authorized, 2,735,839 issued
and outstanding in 1997 and 1996 ..................................... 27,360 27,360
Additional paid-in capital ................................................ 38,410,683 38,410,683
Retained earnings ......................................................... 80,279,561 75,784,804
Capital reserves of the Bank .............................................. 1,460,707 1,460,707
Unrealized loss on securities available for sale .......................... (1,088,931) (101,885)
--------------- ---------------
119,140,603 115,632,892
--------------- ---------------
$ 1,103,405,855 $ 1,037,797,529
=============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
----------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans ....................................... $ 15,344,276 $ 11,453,689
Money market and other investments .......... 1,543,297 878,450
Mortgage-backed securities .................. 3,520,921 3,658,704
------------ ------------
Total interest income .................... 20,408,494 15,990,843
------------ ------------
Interest expense:
Deposits .................................... 7,731,489 6,383,066
Securities sold under agreements to
repurchase ............................... 1,313,134 1,275,914
Notes payable ............................... 2,057,987 1,081,503
Secured borrowings .......................... 974,166 1,083,109
Other ....................................... 278,647 67,222
------------ ------------
Total interest expense ................... 12,355,423 9,890,814
------------ ------------
Net interest income ............................ 8,053,071 6,100,029
Provision for loan losses ...................... (1,250,000) (6,525)
------------ ------------
Net interest income after provision for
loan losses ................................ 6,803,071 6,093,504
------------ ------------
Other income:
Net gain on origination and sale of loans ... 1,822,865 1,971,044
Unrealized profit on trading securities ..... 2,366,998 53,335
Net profit on trading account ............... 16,635 136,050
Net gain on sales of investments available
for sale ................................. 24,984 329,225
Loan administration and servicing fees ...... 3,308,411 3,008,755
Service charges, fees and other ............. 852,733 944,481
------------ ------------
8,392,626 6,442,890
------------ ------------
Total Revenues: ........................ 15,195,697 12,536,394
------------ ------------
<PAGE>
<CAPTION>
Three month
period ended
March 31,
----------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Operating expenses:
Employee compensation and benefits .......... 2,411,891 2,348,937
Office occupancy and equipment .............. 1,605,238 1,412,636
Other administrative and general ............ 3,528,648 3,627,041
------------ ------------
7,545,777 7,388,614
------------ ------------
Income before minority interest and income
taxes ........................................ 7,649,920 5,147,780
------------ ------------
Minority interest in the Bank .................. -- 184,861
------------ ------------
Income before income taxes ..................... 7,649,920 4,962,919
------------ ------------
Income tax expense (credit):
Current ..................................... 1,707,090 2,042,359
Deferred ................................... 907,821 (7,714)
------------ ------------
2,614,911 2,034,645
------------ ------------
Net income ............................... $ 5,035,009 $ 2,928,274
------------ ------------
Earnings per common share ...................... $ 0.64 $ 0.56
============ ============
Weighted average number of shares outstanding .. 7,858,216 5,189,044
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month
period ended
March 31,
------------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 5,035,009 $ 2,928,274
------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................... 623,110 478,599
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net ......................................... (96,977) 27,552
Amortization of deferred loan origination fees and accretion of discount
on loans ................................................................ (207,963) 46,175
Amortization of excess servicing receivable ............................... -- 19,384
Amortization of servicing rights .......................................... 400,684 291,375
Provision for loan losses ................................................. 1,250,000 6,525
Provision for bad debts in accounts receivable ............................ 75,000 75,000
Gain on sales of mortgage loans ........................................... (74,498) (42,652)
Gain on sale of investment securities available for sale .................. (24,984) (329,225)
Unrealized profit on trading securities ................................... (2,366,998) (53,335)
Minority interest in earnings of the Bank ................................. -- 184,861
Decrease (increase) in mortgage loans held for sale ....................... 34,528,070 (4,547,519)
Net increase in mortgage-backed securities held for trading ............... (52,032,900) (2,459,202)
Increase in receivables .................................................. (206,221) (1,010,800)
Decrease in other assets ................................................. 915,424 26,335
Increase (decrease) in notes payable ...................................... 7,568,537 (7,545,175)
Increase in accounts payable and accrued liabilities ...................... 3,178,694 3,733,030
(Decrease) increase in other liabilities .................................. (824,205) 136,855
------------- -------------
Total adjustments ..................................................... (7,295,227) (10,962,217)
Net cash used in operating activities .................................. (2,260,218) (8,033,943)
<PAGE>
<CAPTION>
Three month
period ended
March 31,
------------------------------
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Purchases of investment securities .......................................... $ (27,649,800) $ (22,900,000)
Proceeds from sale and maturities of investment securities available for sale 6,819,777 12,643,887
Proceeds from sales and maturities of investment securities held for trading -- --
Principal repayments on mortgage-backed securities .......................... 2,122,488 2,504,429
Proceeds from sale of loans ................................................. 3,814,538 2,058,869
Net originations of loans ................................................... (55,204,799) (62,342,318)
Purchases of FHLB stock, net ................................................ (550,457) (795,600)
Acquisition of premises and equipment ....................................... (1,556,511) (729,004)
Net decrease (increase) in foreclosed real estate ........................... 17,511 (440,667)
Acquisition of servicing rights ............................................. (1,582,161) (744,088)
------------- -------------
Net cash used by investing activities ................................. (73,769,414) (70,744,492)
------------- -------------
Cash flows from financing activities:
Payments on long-term debt .................................................. -- (400,001)
Increase in deposits - net .................................................. 35,322,563 22,783,124
Increase (decrease) in securities sold under agreements to repurchase - net . 23,438,269 (3,168,819)
Payments on secured borrowings .............................................. (952,180) (1,256,048)
Advances from FHLB .......................................................... 5,000,000 --
Repayment of advances from FHLB ............................................. (10,000,000) --
Cash dividends on common stock .............................................. (540,252) (500,000)
Net cash provided by financing activities ............................. 52,268,400 17,458,256
Net (decrease) in cash and cash equivalents ................................. (23,761,232) (61,320,179)
Cash and cash equivalents at beginning of period ............................ 98,855,931 104,195,167
------------- -------------
Cash and cash equivalents at end of period .................................. $ 75,094,699 42,874,988
============= =============
Cash and cash equivalents include:
Cash and due from banks ..................................................... $ 22,814,749 $ 22,943,443
Securities purchased under agreements to resell ............................. 13,817,480 6,501,579
Time deposits with other banks .............................................. 32,948,447 13,429,966
Federal Funds Sold .......................................................... 5,514,023 --
------------- -------------
$ 75,094,699 $ 42,874,988
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - REPORTING ENTITY, PUBLIC OFFERING AND STOCK OPTIONS
AND BASIS OF PRESENTATION
Reporting entity
The accompanying unaudited consolidated financial statements of R&G
Financial Corporation (the "Company") include the accounts of R&G Mortgage Corp.
("R&G Mortgage"), a Puerto Rico corporation, and R-G Premier Bank of Puerto Rico
(the "Bank"), a commercial bank chartered under the laws of the Commonwealth of
Puerto Rico. The Company was formed in March 1996 for the sole purpose of
becoming the parent corporation and sole stockholder of R&G Mortgage and the
Bank. During 1996, the Company acquired a 100% ownership interest in the Bank
and R&G Mortgage. See Note 1 to R&G Financial's Consolidated Financial
Statements for the year ended December 31, 1996.
R&G Mortgage is engaged primarily in the business of originating
FHA-insured, VA guaranteed, and privately insured first and second mortgage
loans on residential real estate. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the 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, including
residential, commercial and personal loans and a diversified range of deposit
products through fifteen branches located mainly in the northern part of the
Commonwealth of Puerto Rico. The Bank also provides private banking and trust
and other financial services to its customers. The Bank is subject to the
regulations of certain federal and local agencies, and undergoes periodic
examinations by those regulatory agencies.
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of March 31, 1997 and the results of
operations and changes in its cash flows for the three months ended March 31,
1997 and 1996.
6
<PAGE>
The results of operations for the three month period ended March 31,
1997 are not necessarily indicative of the results to be expected for the year
ending December 31, 1997. The unaudited consolidated financial statements and
notes thereto should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1996.
Certain reclassifications (not affecting income before income taxes or
net income) have been made to the consolidated statements of income and of cash
flows for the quarter ended March 31, 1996 to conform to the presentation for
the quarter ended March 31, 1997.
Basis of consolidation
All significant inter-company balances and transactions have been
eliminated in the accompanying unaudited consolidated financial statements.
Accounting for transfers and servicing of financial assets and
extinguishment of liabilities
Effective January 1, 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended by SFAS No. 127. 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 value.
Upon the adoption of this Statement, the Company reclassified
approximately $770,000 of excess servicing receivable associated with the sale
in prior years of collateralized mortgage obligations into interest only
mortgage backed securities held for trading, recognizing no income or loss on
such transaction. The adoption of this Statement had no effect on the Company's
financial condition or results of operations.
7
<PAGE>
Stock option plans
The pro-forma net income and earnings per share disclosures for the
three months periods ended March 31, 1997 and 1996 required by SFAS No. 123 -
"Accounting for Stock- Based Compensation," as if compensation cost had been
determined based on the fair value at the grant date for awards made under the
Company's Stock Option Plan, have not been made because the effects on net
income and earnings per share of compensation costs so determined are not
significant.
NOTE 2 - EARNINGS PER SHARE
Primary earnings per common share for the three months ended March 31,
1997 and 1996 were computed by dividing net income for such periods by the
weighted average number of shares of common stock outstanding during such
periods, which was 7,858,216 and 5,189,044 shares for the three months periods
ended March 31, 1997 and 1996, respectively. Outstanding stock options granted
in connection with the Company's Stock Option Plan were excluded from the
weighted average number of shares because their dilutive effect is not
significant.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.
<TABLE>
<CAPTION>
March 31, 1997
--------------------------
Amortized cost Fair value
-------------- ----------
(Unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year ........................... $ 97,966 $ 97,000
Due from one to five years .................... 309,633 309,613
---------- ----------
407,599 406,613
---------- ----------
Puerto Rico Government obligations:
Due within one year ............................. 1,000,000 1,001,250
Due from five to ten years ...................... 533,188 500,000
Due over ten years .............................. 66,150 66,150
---------- ----------
1,599,338 1,567,400
---------- ----------
Corporate securities -
Due within one year ............................ 3,364,452 3,242,125
---------- ----------
$5,371,389 $5,216,138
========== ==========
8
<PAGE>
<CAPTION>
March 31, 1997
--------------------------
Amortized cost Fair value
-------------- ----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from five to ten years ................... $ 92,018 $ 94,127
Due over ten years ........................... 20,594,307 19,201,890
---------- ----------
20,686,325 19,296,017
---------- ----------
Federal National Mortgage Association
(FNMA) certificates -
Due over ten years ........................... 15,459,773 15,212,842
---------- ----------
Federal Home Loan Mortgage Corporation (FHLMC)
certificates -
Due over ten years ........................... 310,009 301,621
---------- ----------
$36,456,107 $34,810,480
=========== ===========
9
<PAGE>
<CAPTION>
March 31, 1997
---------------------------
Amortized cost Fair value
-------------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities . $ 7,051,610 $ 8,180,379
----------- -----------
FNMA certificates:
Due over ten years .............................. 10,335,812 9,863,123
----------- -----------
FHLMC certificates:
Due from five to ten years ...................... 508,248 520,238
Due over ten years .............................. 29,216,249 27,813,552
----------- -----------
29,724,497 28,333,790
----------- -----------
$47,111,919 $46,377,292
=========== ===========
Investment securities available for sale:
U.S. Treasury securities:
Due from one to five years ..................... $20,052,282 $19,614,060
U.S. Government and agencies securities:
Due from five to ten years ..................... 30,526,765 29,996,750
FHLB stock ......................................... 4,797,767 4,797,767
----------- -----------
$55,376,814 $54,408,577
=========== ===========
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $2,363,941 as of March 31, 1997, which are
associated with the sale in prior years of collateralized mortgage obligations.
These sales were not made in connection with the Company's mortgage banking
activities.
The interest rate risk on the above available for sale U.S. Government and
agency securities are being hedged with options and financial futures contracts
based on U.S. Treasury securities and Eurodollars. The Company also executes
hedging strategies for all mortgage-backed securities available for sale
(excluding CMOs). At March 31, 1997, no futures contracts were outstanding for
hedging purposes. Option contracts held for hedging purposes at March 31, 1997
consist of put and call options on futures contracts based on US Treasury
Securities with notional amounts of $30.0 million and $30.0 million,
respectively, expiring in May, 1997. Mortgage backed securities available for
sale for which the Company enters into hedging contracts had a fair value of
approximately $38.2 million at March 31, 1997.
10
<PAGE>
<TABLE>
<CAPTION>
March 31,
1997
-----------
(Unaudited)
<S> <C>
Mortgage-backed securities held for trading:
CMO Certificates ..................................... $15,147,000
CMO Residuals (all interest only) .................... 8,895,121
GNMA Certificates..................................... 139,274,305
------------
$163,316,426
============
</TABLE>
The Company has entered into various agreements with an unrelated
investment management firm whereby such firm has been appointed as investment
advisor with respect to a portion of the Company's securities portfolio.
Pursuant to such agreements, this investment advisory firm makes recommendations
with respect to the purchase and/or sale of otherwise eligible investments as
well as the execution of various hedging strategies to reduce interest rate
risk, mainly through the use of various financial instruments. At March 31,
1997, this investment advisory firm was managing Company assets with a market
value of approximately $40.3 million, of which $4.3 million was designated for
trading, including short and long positions on futures contacts with notional
amounts of $27.5 million and $7.5 million, respectively, which expire in June
1997, and short and long positions on put options on futures contacts with
notional amounts of $10.0 million and $10.0 million, respectively, which expire
in May 1997. All positions on futures contacts and put options are based on U.S.
Treasury Securities.
11
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
March 31,
1997
-------------
(Unaudited)
<S> <C>
Real estate loans:
Residential - first mortgage ......................... $ 416,059,131
Residential - second mortgage ........................ 16,350,975
Construction ......................................... 5,849,459
Commercial ........................................... 73,940,941
-------------
512,200,506
Undisbursed portion of loans in process ................. (2,656,764)
Net deferred loan fees .................................. 271,902
-------------
509,815,644
-----------
Other loans:
Commercial ........................................... 33,526,428
Consumer:
Secured by deposits ............................... 9,741,286
Secured by real estate ............................ 46,498,381
Other ............................................. 59,011,761
Unamortized discount ................................. (241,704)
Unearned interest .................................... (532,844)
-------------
148,003,308
-----------
Total loans ..................................... 657,818,952
Allowance for loan losses ............................ (3,645,609)
-------------
$ 654,173,343
=============
</TABLE>
<PAGE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Balance, beginning of year ............. $ 3,331,645 $ 3,510,251
Provision for loan losses .............. 1,250,000 6,525
Loans charged-off ...................... (1,035,471) (255,851)
Recoveries ............................. 99,435 48,026
----------- -----------
Balance, end of year ................... $ 3,645,609 $ 3,308,951
=========== ===========
</TABLE>
12
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments to developers providing end loans
The Company has outstanding commitments for various projects in the
process of completion. Total commitments amounted to approximately $456,787,000
at March 31, 1997. 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 $79,665,000 at March 31, 1997.
Commitments to buy and sell GNMA certificates
As of March 31, 1997, the Company had open commitments to issue GNMA
certificates of approximately $31,813,000.
Commitments to sell mortgage loans
As of March 31, 1997 the Company had commitments to sell mortgage loans to third
party investors amounting to $5.0 million.
Lease commitments
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
Other
At March 31, 1997, the Company is liable under limited recourse
provisions resulting from the sale of loans to several investors, principally
FHLMC. The principal balance of these loans, which are serviced by the Company,
amounts to approximately $234,659,000 at March 31, 1997. Liability, if any,
under the recourse provisions at March 31, 1997 is estimated by management to be
insignificant.
13
<PAGE>
Item 2: Management's Discussion and Analysis
Financial Condition
At March 31, 1997, the Company's total assets amounted to $1.1 billion,
as compared to $1.0 billion at December 31, 1996. The $65.6 million or 6.3%
increase in total assets during the three month period ended March 31, 1997 was
attributable to a $50.4 million or 8.4% increase in loans receivable, net, which
reflects net originations following repayments and sales, reflecting an increase
in the volume of loan originations of approximately 35.9% to approximately
$180.5 million during the 1997 period as the Company attains a dominant position
in the Puerto Rico mortgage market, a $55.2 million or 51.0% increase in
mortgage-backed securities held for trading, for the reasons discussed below,
and a $23.4 million or 75.7% increase in investment securities available for
sale, principally due to the purchase of approximately $20.1 million of U.S.
Treasury securities during the 1997 quarter, which increases were partially
offset by a $34.5 million or 63.4% decrease in mortgage loans held for sale due
to the conversion of such loans into mortgage-backed securities held for
trading, and a $23.8 million or 24.0% decrease in cash and cash equivalents.
The increase in the Company's assets was funded primarily by increased
deposits of $35.5 million or 5.8%, by a $23.4 million or 24.1% increase in
securities sold under agreements to repurchase, and by a $7.6 million or 6.0%
increase in notes payable, which increases were partially offset by a $6.0
million or 9.1% decrease in other borrowings, primarily the net repayment of
$5.0 million of FHLB advances.
At March 31, 1997, the Company's stockholders' equity amounted to
$119.1 million, which is an increase of $3.5 million or 3.0% from the amount
reported at December 31, 1996. The primary reason for the increase was the net
income earned for the quarter, which was partially offset by $987,000 of
unrealized loss on securities available for sale, net of income tax benefits. At
March 31, 1997, the Bank's leverage and Tier 1 risk-based capital amounted to
7.91% and 13.59% of adjusted total assets, compared to a 4.0% minimum
requirement, and its total risk-based capital amounted to 14.52%, compared to an
8.0% minimum requirement.
Results of Operations
The Company reported net income of $5.0 million during the three months
ended March 31, 1997, as compared to $2.9 million during the prior comparable
period. The significant increase in net income during the three month period in
1997 over the comparable 1996 period of $ 2.1 million or 72.0 % was achieved
notwithstanding the Company taking a $ 1.2 million ($ 759,000 net of taxes)
increase in the provision for loan losses during the March 1997 quarter, as
discussed below.
Total revenues amounted to $15.2 million during the three months ended
March 31, 1997 compared to $12.5 million for the prior comparable period. The
21.2% increase was
14
<PAGE>
due to an increase in net interest income of $2.0 million or 32.0% during the
three months ended March 31, 1997 over the prior comparable period, primarily
due to a $3.9 million or 34.0% increase in interest income on loans. However,
the aforementioned increase in the provision for loan losses significantly
offset the increase in net interest income. The increase in the provision for
loan losses was taken both due to a $ 50.4 million increase in the Company's
loan portfolio during the same period as well as the level of charge-offs
experienced by the Company during the quarter, which consist primarily of
consumer loans. During the quarter, the Company increased the loss factors which
are associated with reserving for each of the loan categories in its portfolio,
taking into consideration the current delinquency experience. This resulted in
an increase to the Company's provision for loan losses of $500,000 during the
quarter. During the first quarter of 1997, the Company determined to limit the
origination of personal loans to those collateralized by mortgages and to
refinancings of existing loans.
Contributing to the 21.2% increase in revenues during the March 31,
1997 quarter was a change of $2.3 million in unrealized gain on trading
securities from a $53,000 unrealized gain during the March 1996 quarter to a
$2.4 million unrealized gain during the 1997 quarter and an increase in loan
administration and servicing fees of $300,000 or 10.0% due to an increase in the
loan servicing portfolio. Service charges, fees and other decreased by $92,000
or 9.7%, while net profit on trading decreased by $119,000 or 87.8%.
Total expenses increased by $157,000 or 2.1% during the three months
ended March 31, 1997 over the prior comparable period. The increase during the
three month period in 1997 reflects the full operation of the Company's new data
processing center as well as increased costs associated with additional space at
branch locations for parking and drive-in tellers. For the three months ended
March 31, 1997, office occupancy and equipment increased by $192,000 or 13.6%,
and employee compensation and benefits increased by $63,000 or 2.7% These
increases in expenses were offset by a $98,000 or 2.7 % decrease in other
administrative and general expenses.
Total income tax expense increased by $580,000 or 28.5% during the
three months ended March 31, 1997 over the prior comparable period, due
primarily to a $2.7 million or 54.1% increase in income before taxes during the
1997 period.
15
<PAGE>
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, 1997, the Company had $138.4 million in borrowing capacity
under unused warehouse lines of credit and $40.0 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, 1997, the Company had outstanding commitments (mainly
unused lines of credit) to originate non-mortgage loans of $9.6 million.
Certificates of deposit which are scheduled to mature within one year totalled
$346.0 million at March 31, 1997, and borrowings that are scheduled to mature
within the same period amounted to $178.8 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
16
<PAGE>
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,
1997, 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 7.91%,
13.59% and 14.52%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
Inflation and Changing Prices
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
17
<PAGE>
PART II OTHER INFORMATION
Item 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
---
27 Financial Data Schedule E-1
b) No Form 8-K reports were filed during the quarter.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: May 8, 1997 By: /S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JOSEPH R. SANDOVAL
-----------------------
Joseph R. Sandoval
Vice President and
Chief Financial Officer
19
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<NAME> R&G FINANCIAL CORPORATION
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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