SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30, 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 June 30, 1997
(Unaudited) and December 31, 1996............................ 3
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1997 and 1996 (Unaudited)........................... 5
Consolidated Statements of Cash Flows for the Three and Six Months
Ended June 30, 1997 and 1996 (Unaudited) .................... 7
Notes to Unaudited Consolidated Financial Statements ................10
Item 2. Management's Discussion and Analysis................................ 16
Part II - Other Information
Item 1. Legal Proceedings .................................................22
Item 2. Changes in Securities .............................................22
Item 3. Defaults upon Senior Securities ...................................22
Item 4. Submission of Matters to a Vote of Security Holders ...............22
Item 5. Other Information .................................................23
Item 6. Exhibits and Reports on Form 8-K ..................................23
Signatures ...................................................................24
2
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
1997 1996
---------- ----------
(Unaudited)
($ in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 33,739 $ 31,990
Money market investments:
Securities purchased under agreements to resell ......... 14,005 19,633
Time deposits with other banks .......................... 31,441 33,233
Federal funds sold ...................................... -- 14,000
Mortgage loans held for sale, at lower of cost or market ..... 31,246 54,450
Mortgage-backed securities held for trading, at fair value ... 237,313 108,146
Mortgage-backed securities available for sale, at fair value . 46,760 50,841
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1997 - $35,117; 1996 - $37,104) ..... 35,563 37,900
Investment securities held for trading, at fair value ........ 1,393 1,351
Investment securities available for sale, at fair value ...... 61,897 30,973
Investment securities held to maturity, at amortized cost
(estimated market value: 1997 - $5,394; 1996 - $5,241) ....... 5,374 5,270
Loans receivable, net ........................................ 719,803 603,751
Accounts receivable, including advances to investors, net .... 5,390 5,764
Accrued interest receivable .................................. 8,166 6,632
Mortgage servicing rights .................................... 15,162 12,595
Excess servicing receivable .................................. -- 770
Premises and equipment ....................................... 8,949 7,768
Other assets ................................................. 11,929 12,730
---------- ----------
$1,268,130 $1,037,797
========== ==========
(Continued)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
($ in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................................... $ 674,021 $ 615,567
Securities sold under agreements to repurchase .............................................. 198,317 97,444
Federal funds purchased ..................................................................... 11,850 --
Notes Payable ............................................................................... 164,812 126,842
Advances from FHLB .......................................................................... 30,000 15,000
Other secured borrowings .................................................................... 48,728 50,463
Accounts payable and accrued liabilities: ................................................... 9,650 9,999
Other liabilities ........................................................................... 2,803 3,599
--------- ---------
1,140,181 918,914
--------- ---------
Subordinated notes ............................................................................ 3,250 3,250
--------- ---------
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 51
Class B - $.01 par value, 15,000,000 shares authorized, 2,735,839 shares issued and
outstanding in 1997 and 1996 .................................................. 27 27
Additional paid-in capital ............................................................. 38,411 38,411
Retained earnings ...................................................................... 85,068 75,785
Capital reserves of the Bank ........................................................... 1,461 1,461
Unrealized loss on securities available for sale ....................................... (319) (102)
--------- ---------
124,699 115,633
--------- ---------
$1,268,130 $1,037,797
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Six month
period ended period ended
June 30, June 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest Income:
Loans .............................................. $ 16,616 $ 13,916 $ 31,959 $ 25,370
Money market and other investments ................. 1,186 927 2,729 1,805
Mortgage-backed securities ......................... 4,962 3,511 8,484 7,170
-------- -------- -------- --------
Total interest income .......................... 22,764 18,354 43,172 34,345
-------- -------- -------- --------
Interest expense:
Deposits ........................................... 8,037 6,661 15,768 13,044
Securities sold under agreements to repurchase ..... 2,505 1,308 3,818 2,584
Notes payable ...................................... 2,354 1,880 4,412 2,962
Secured borrowings ................................. 959 1,057 1,933 2,140
Other .............................................. 318 102 597 169
-------- -------- -------- --------
Total interest expense ....................... 14,173 11,008 26,528 20,899
-------- -------- -------- --------
Net interest income ..................................... 8,591 7,346 16,644 13,446
Provision for loan losses ............................... (1,695) (351) (2,945) (357)
-------- -------- -------- --------
Net interest income after provision for loan losses ..... 6,896 6,995 13,699 13,089
-------- -------- -------- --------
Other income:
Net gain on origination and sale of loans ......... 4,469 1,347 8,659 3,371
Net profit (loss) on trading account .............. (374) 451 (358) 587
Net gain on sales of investments available for sale -- -- 25 329
Loan administration and servicing fees ............ 3,535 3,488 6,843 6,497
Service charges, fees and other ................... 1,357 874 2,210 1,819
-------- -------- -------- --------
8,987 6,160 17,379 12,603
-------- -------- -------- --------
Total Revenues ............................... 15,883 13,155 31,078 25,692
-------- -------- -------- --------
(Continued)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Three month Six month
period ended period ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Operating expenses:
Employee compensation and benefits ........ 2,743 2,854 5,156 5,203
Office occupancy and equipment ............ 2,014 1,482 3,619 2,895
Other administrative and general .......... 3,590 3,641 7,117 7,268
----------- ----------- ----------- -----------
8,347 7,977 15,892 15,366
----------- ----------- ----------- -----------
Income before minority interest and income taxes 7,536 5,178 15,186 10,326
Minority interest in the Bank .................. -- 224 -- 409
----------- ----------- ----------- -----------
Income before income taxes ..................... 7,536 4,954 15,186 9,917
----------- ----------- ----------- -----------
Income tax expense (credit):
Current ................................... 1,119 2,732 2,826 4,774
Deferred .................................. 1,039 (945) 1,947 (952)
----------- ----------- ----------- -----------
2,158 1,787 4,773 3,822
----------- ----------- ----------- -----------
Net income .............................. $ 5,378 $ 3,167 $ 10,413 $ 6,095
=========== =========== =========== ===========
Eamings per common share ....................... $ 0.68 $ 0.61 $ 1.33 $ 1.17
=========== =========== =========== ===========
Weighted average number of shares outstanding .. 7,858,216 5,189,044 7,858,216 5,189,044
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month
period ended
June 30,
------------------------
1997 1996
(Unaudited)
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................................... $ 10,413 $ 6,095
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..................................................................... 1,324 990
Amortization of premium (accretion of discount) on investments and mortgage- backed securities, net (202) 116
Amortization of deferred loan origination fees and accretion of discount on loans ................. (317) (253)
Amortization of excess servicing receivable ....................................................... -- 39
Amortization of servicing rights .................................................................. 813 653
Provision for loan losses ......................................................................... 2,945 357
Provision for bad debts in accounts receivable .................................................... 150 150
Gain on sales of mortgage loans ................................................................... (125) (95)
Gain on sales of investment securities available for sale ......................................... (25) (329)
Unrealized (profit) loss on trading securities .................................................... (5,604) 621
Minority interest in earnings of the Bank ......................................................... -- 409
Decrease in mortgage loans held for sale .......................................................... 23,204 2,998
Net increase in mortgage-backed securities held for trading ....................................... (122,793) (23,467)
Increase in receivables ........................................................................... (1,309) (2,147)
Decrease (increase) in other assets ............................................................... 601 (2,389)
Increase in notes payable ......................................................................... 40,370 11,753
(Decrease) increase in accounts payable and accrued liabilities ................................... (139) 606
(Decrease) increase in other liabilities .......................................................... (796) 69
--------- ---------
Total adjustments .......................................................................... (61,903) (9,919)
--------- ---------
Net cash used in operating activities ...................................................... (51,490) (3,824)
--------- ---------
(Continued)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Six month
period ended
June 30,
-----------------------
1997 1996
-------- --------
(Unaudited)
($ in thousands)
<S> <C> <C>
Cash flows for investing activities:
Purchases of investment securities ............................................. (37,963) (30,531)
Proceeds from sale and maturities of investment securities available for sale .. 9,820 17,282
Proceeds from sale and maturities of investment securities held for trading .... -- --
Principal repayments on mortgage-backed securities ............................. 3,912 4,576
Proceeds from sales of loans .................................................. 6,016 4,929
Net originations of loans ...................................................... (124,571) (132,345)
Purchases of FHLB stock, net ................................................... (550) (796)
Acquisition of premises and equipment .......................................... (2,243) (701)
Net increase in foreclosed real estate ......................................... (62) (735)
Acquisition of servicing rights ................................................ (3,380) (564)
-------- --------
Net cash used in investing activities .................................... (149,021) (138,885)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ........................................ -- 50,000
Payments on long-term debt ..................................................... -- (799)
Increase in deposits - net ..................................................... 58,383 44,832
Increase (decrease) in securities sold under agreements to repurchase - net .... 100,873 (190)
Increase in federal funds purchased ............................................ 11,850 --
Payments on notes payable ...................................................... (2,400) --
Payments on secured borrowings ................................................. (1,735) (2,452)
Advances from FHLB ............................................................. 35,000 6,000
Repayment of advances from FHLB ................................................ (20,000) (1,000)
Cash dividends on common stock ................................................. (1,130) (500)
-------- --------
Net cash provided by financing activities ................................ 180,841 95,891
-------- --------
(Continued)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six month
period ended
June 30,
-----------------------
1997 1996
-------- --------
(Unaudited)
($ in thousands)
<S> <C> <C>
Net decrease in cash and cash equivalents ...... (19,670) (46,818)
Cash and cash equivalents at beginning of period 98,856 104,195
--------- ---------
Cash and cash equivalents at end of period ..... $ 79,186 $ 57,377
========= =========
Cash and cash equivalents include:
Cash and due from banks ........................ $ 33,739 $ 21,520
Securities purchased under agreements to resell 14,006 13,430
Time deposits with other banks ................. 31,441 22,427
--------- ---------
$ 79,186 $ 57,377
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
9
<PAGE>
R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- REPORTING ENTITY AND BASIS OF PRESENTATION
Reporting entity
The accompanying unaudited consolidated financial statements 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 June 30, 1997 and the
results of operations and changes in its cash flows for the three and six month
periods ended June 30, 1997 and 1996.
10
<PAGE>
The results of operations for the three and six month periods
ended June 30, 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 for the quarter
and six month periods ended June 30, 1996 to conform to the presentation for the
quarter and six month periods ended June 30, 1997.
Basis of consolidation
All significant inter-company balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Stock option plans
The pro-forma net income and earnings per share disclosures for
the three and six month periods ended June 30, 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 and six month
periods ended June 30, 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 shares for the three and
six month periods ended June 30, 1997, and 5,189,044 for the three and six month
periods ended June 30, 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.
11
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------
Amortized cost Fair value
(unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year ..................................... $ 99,491 $ 99,000
Due from one to five years .............................. 309,702 310,000
----------- -----------
409,193 409,000
----------- -----------
Puerto Rico Government obligations:
Due within one year ..................................... 1,000,000 1,012,500
Due from five to ten years .............................. 531,377 500,000
Due over ten years ...................................... 55,297 55,297
----------- -----------
1,586,674 1,567,797
----------- -----------
Corporate securities -
Due within one year ..................................... 3,378,122 3,417,470
----------- -----------
$ 5,373,989 $ 5,394,267
=========== ===========
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from five to ten years .............................. $ 70,228 $ 71,173
Due over ten years ...................................... 19,934,889 19,127,203
----------- -----------
20,005,117 19,198,376
----------- -----------
Federal National Mortgage Association (FNMA) certificates -
Due over ten years ...................................... 15,258,417 15,626,231
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC) certificates -
Due over ten years ...................................... 300,016 291,898
----------- -----------
$35,563,550 $35,116,505
=========== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------
Amortized cost Fair value
----------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 7,036,610 $ 8,165,379
----------- -----------
FNMA certificates:
Due over ten years .......................... 10,452,456 10,217,563
----------- -----------
FHLMC certificates:
Due from five to ten years .................. 449,850 461,934
Due over ten years .......................... 28,554,808 27,914,865
----------- -----------
29,004,658 28,376,799
----------- -----------
$46,493,724 $46,759,741
=========== ===========
Investment securities available for sale:
U.S. Treasury securities:
Due from one to five years .................. $20,050,186 $19,881,260
----------- -----------
U.S. Government and agencies securities:
Due from one to five years .................. 32,496,820 32,355,168
Due from five to ten years .................. 5,024,336 4,863,350
----------- -----------
37,521,156 37,218,518
----------- -----------
FHLB stock ....................................... 4,797,767 4,797,767
----------- -----------
$62,369,109 $61,897,545
=========== ===========
</TABLE>
Mortgage-backed securities available for sale include interest
only securities with an amortized cost of $2,363,941 as of June 30, 1997, which
are associated with the sale in prior years of collaterized 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 were being hedged with options and financial
futures contracts based on U.S. Treasury securities and Eurodollars. During the
quarter ended June 30, 1997, the Company discontinued all hedging activities for
such securities. The Company continues to execute hedging strategies for all
mortgage-backed securities available for sale (excluding CMOs). At June 30,
1997, no futures or option contracts were outstanding for hedging purposes.
13
<PAGE>
<TABLE>
<CAPTION>
June 30,
1997
-----------
(Unaudited)
<S> <C>
Mortgage-backed securities held for trading:
CMO Certificates....................................... $ 15,147,000
CMO Residuals (all interest only)...................... 8,490,686
GNMA Certificates...................................... 213,675,463
------------
$237,313,149
============
</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,
including the purchase and/or sale of futures and/or option contracts based on
U.S. Treasury Securities. At June 30, 1997, this investment advisory firm was
managing Company assets with a market value of approximately $13.7 million, of
which $3.8 million was designated for trading. No open positions on futures or
option contracts were outstanding at June 30, 1997 for trading purposes.
14
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
June 30,
1997
-------------
(Unaudited)
<S> <C>
Real estate loans:
Residential - first mortgage ...................... $ 466,758,260
Residential - second mortgage ..................... 16,801,018
Construction ...................................... 8,040,493
Commercial ........................................ 77,264,572
-------------
568,864,345
Undisbursed portion of loans in process ................ (4,093,129)
Net deferred loan fees ................................. 314,578
-------------
565,085,792
Other loans:
Commercial ........................................ 34,584,601
Consumer:
Secured by deposits ............................ 10,430,991
Secured by real estate ......................... 55,190,332
Other .......................................... 59,619,891
Unamortized discount ................................... (235,515)
Unearned interest ...................................... (462,908)
-------------
159,127,392
Total loans .................................... 724,213,184
Allowance for loan losses ......................... (4,410,639)
-------------
$ 719,802,545
=============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
1997 1996
------- -------
(Unaudited)
($ in thousands)
<S> <C> <C>
Balance, beginning of year ............... $ 3,332 $ 3,510
Provision for loan losses ................ 2,945 357
Loans charged-off ........................ (2,090) (771)
Recoveries ............................... 224 106
------- -------
Balance, end of year ..................... $ 4,411 $ 3,202
======= =======
</TABLE>
15
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments to developers providing end loans
The Company has outstanding commitments for the origination of
permanent loans for various projects in the process of completion. Total
commitments amounted to approximately $455,306,000 at June 30, 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 amount to
approximately $104,810,000 at June 30, 1997.
Commitments to buy and sell GNMA certificates
As of June 30, 1997, the Company had open commitments to issue
GNMA certificates of approximately $20,737,000.
Commitments to sell mortgage loans
As of June 30, 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 June 30, 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,
amount to approximately $226,519,000 at June 30, 1997. Liability, if any, under
the recourse provisions at June 30, 1997 is estimated by management to be
insignificant.
16
<PAGE>
In July 1997 the Government of Puerto Rico amended the tax law
that provided tax exemption on interest income generated by FHA and VA loans
secured by real estate property located in Puerto Rico and mortgage backed
securities secured by such mortgage loans (GNMA's). Under the amended law, FHA
and VA loans closed prior to August 1, 1997, will contunue to be exempt. The
interst income on FHA and VA mortgage loans originated on or after August 1,
1997 for purposes other than to finance the acquisition of new housing, and
GNMA's secured by such loans, will no longer be exempt, and would be taxed at a
preferential 17% tax rate to individuals and certain other taxpayers other than
corporations. FHA and VA loans to finanace the purchase of new housing, and
GNMA's secured by such loans, will continue to be exempt. While the Company has
benefited from the previously available tax exemption, management believes based
on currently available information that the adoption of the enacted changes
should not have a significant adverse effect in the results of operations of the
Company.
Item 2: Management's Discussion and Analysis
Financial Condition
At June 30, 1997, the Company's total assets amounted to $1.3
billion, as compared to $1.0 billion at December 31, 1996. The $230.3 million or
22.2% increase in total assets during the six month period ended June 30, 1997
was primarily attributable to a $116.1 million or 19.2% increase in loans
receivable, net, which reflects net originations following repayments and sales,
and a $129.2 million or 119.4% increase in mortgage-backed securities held for
trading, reflecting an increase in the volume of loan originations of
approximately 40.3% to approximately $419.9 million during the 1997 period as
the Company continues to increse its market position in Puerto Rico. The Company
also experienced a $30.9 million or 99.8% increase in investment securities
available for sale, principally due to the purchase of approximately $38.0
million of U.S. Treasury and Government Agencies securities during the six month
period ended June 30, 1997. Such increases were partially offset by a $23.2
million or 42.6% decrease in mortgage loans held for sale due to the conversion
of such loans into mortgage-backed securities held for trading, and a $19.7
million or 19.9% decrease in cash and cash equivalents.
The increase in the Company's assets was funded primarily by
increased deposits of $58.5 million or 9.5%, a $100.9 million or 103.5% increase
in securities sold under agreements to repurchase, a $38.0 million or 29.9%
increase in notes payable, and a $15.0 million or 100.0% increase in FHLB
advances.
At June 30, 1997, the Company's stockholders' equity amounted to
$124.7 million, which is an increase of $9.1 million or 7.8% from the amount
reported at December 31, 1996. The primary reason for the increase was the net
income earned during the six month period ended June 30, 1997, which was
partially offset by $1.1 million of dividends paid during such period. At June
30, 1997, the Bank's leverage and Tier 1 risk-based capital amounted to 7.65%
and 12.63% of adjusted total assets, respectively, compared to a 4.0% minimum
requirement, and its total risk-based capital amounted to 13.47%, compared to an
8.0% minimum requirement.
17
<PAGE>
Results of Operations
The Company reported net income of $5.4 million and $10.4 million
during the three and six month periods ended June 30, 1997, respectively, as
compared to $3.2 million and $6.1 million during the prior comparable periods.
The significant increase in net income during the three and six month periods in
1997 over the comparable 1996 periods of $2.2 million or 69.8% and $4.3 million
or 70.8%, respectively, was achieved notwithstanding the Company taking a $2.6
million ($1.6 million net of taxes) increase in the provision for loan losses
during the six month period ended June 30, 1997, as discussed below.
Total revenues for the six month period ended June 30, 1997
amounted to $31.1 million, a $5.4 million or 21.0% increase over the comparable
1996 period. The increase in revenues during the six month period ended June 30,
1997 was primarily attributable to a $5.3 million or 157% increase in net gain
on origination and sale of loans due to a change of $6.2 million in unrealized
profit on trading securities from a $621,000 unrealized loss during the
comparable 1996 period to a $5.6 million unrealized gain in the 1997 period,
which is associated with an increase in the market value of GNMA certificates
held by the Company and an increase in the volume of mortgage loans originated
and securitized as the Company attains a dominant position in the market for
such loans in Puerto Rico. Also the Company had a $3.2 million or 23.8% increase
in net interest income, as the Bank recognized significantly increased interest
income on its loan portfolio, a $391,000 or 21.5% increase in service charges,
fees, and other due to increased fees on deposit accounts and new deposit
products and services, and a $346,000 or 5.3% increase in loan administration
and servicing fees, as the Company's servicing portfolio expanded by 5.4% over
the prior year. 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 $118.1 million or 19.6%
increase in the Company's loan portfolio during the 1997 period as well as to
increased net charge-offs experienced by the Company associated primarily with
consumer loans. Net charge-offs totalled approximately $1.9 million during the
six month period ended June 30, 1997. During the first quarter of 1997, the
Company increased the loss factors which are associated with reserving for each
of the loan categories in its portfolio, taking into consideration the rising
delinquency in consumer loans experienced by the Company and the banking
industry in Puerto Rico. Even though the level of charge-offs leveled off during
the second quarter of 1997, management has adopted more stringent consumer
underwriting procedures to address problems experienced generally in the market
for personal loans. During the first quarter of 1997, the Company also
determined to increase collateralized consumer lending.
The increase in the revenues for the six month period ended June
30, 1997 was also partially offset by a $304,000 or 93.5% decrease in net gains
on sales of investment securities available for sale, and a change of $945,000
in net profit in trading from a $ 587,000 profit in the comparable 1996 period
to a $ 358,000 loss during the six month period ended June 30, 1997.
18
<PAGE>
Total revenues for the quarter ended June 30, 1997 amounted to
$15.9 million, a $2.7 million or 20.8% increase over the comparable quarter in
1996. The increase in total revenues during the 1997 quarter was primarily
attributable to a $3.1 million or 232% increase in net gain on origination and
sale of loans due to a change of $3.9 million in unrealized profit on trading
securities, from a $674,000 unrealized loss during the comparable 1996 period to
a $3.2 million unrealized gain in the 1997 period, a $1.2 million or 16.9%
increase in net interest income, and a $483,000 or 55.3% increase in service
charges, fees and other miscellaneous revenue sources. The increase in the
revenues for the 1997 quarter was partially offset by a $1.3 million increase in
the provision for loan losses and a change of $825,000 in net profit in trading
from a $451,000 profit in the comparable 1996 period to a $374,000 loss during
the three month period ended June 30, 1997.
Employee compensation and benefits expenses decreased by $111,000
or 3.9%, and other miscellaneous expenses decreased by $41,000 or 1.1% during
the second quarter of 1997 as management continued to aggressively control
operating costs to enhance profitability. These reductions in expenses were
achieved notwithstanding an increase in loan originations during the quarter
ended June 30, 1997 over the comparable 1996 period. These decreases in expenses
were offset by a $532,000 or 35.9% increase in occupancy expenses during in the
second quarter of 1997 due to the operation during the full period in 1997 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. The
increase in occupancy expenses resulted in a net increase in total operating
expenses during the second quarter of 1997 of $380,000 or 4.8% compared to the
prior respective 1996 period. Total operating expenses for the six month period
ended June 30, 1997 increased by $536,000 or 3.5% due principally to increased
occupancy expenses.
Total income tax expense increased by $371,000 or 20.8% and
$951,000 or 24.9% during the three and six month periods ended June 30, 1997,
respectivively, over the prior comparable periods, due primarily to a $2.6
million or 52.1% and a $5.3 million or 53.1% increase in income before taxes
during the three and six month periods ended June 30, 1997, respectively.
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
19
<PAGE>
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 June 30, 1997, the Company had $57.7 million in borrowing capacity
under unused warehouse lines of credit and $20.0 million in borrowings capacity
under a line of credit with the FHLB of New York. The Company has generally not
relied upon brokered deposits as a source of liquidity, and does not anticipate
a change in this practice in the foreseeable future.
At June 30, 1997, the Company had outstanding commitments (mainly
unused lines of credit) to originate non-mortgage loans of $13.7 million.
Certificates of deposit which are scheduled to mature within one year totaled
$357.0 million at June 30, 1997, and borrowings that are scheduled to mature
within the same period amounted to $320.9 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 1 leverage ratio for such other banks
to 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders'equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital
standard. The risk-based capital standard for banks requires the maintenance of
total capital (which is defined as Tier I capital and supplementary (Tier 2)
capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets,
20
<PAGE>
pluscertain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset or
item. The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage capital standard. The components of supplementary capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 1997, the
Bank met each of its capital requirements, with Tier 1 leverage capital, Tier 1
risk-based capital and total risk-based capital ratios of 7.65%, 12.63% and
13.47%, 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.
21
<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
The Company's Annual Meeting of Stockholders was held on April 24, 1997.
1. With respect to the election of three directors to serve three-year
terms expiring at the Annual Meeting of Stockholders to be held in the
year 2000 or until their respective successors are elected and
qualified, the following were the number of shares voted for each
nominee:
<TABLE>
<CAPTION>
<S> <C> <C>
Juan J. Diaz Class A - For 10,244,754 Withheld 0
Class B - For 1,875,267 Withheld 0
Gilberto Rivera-Arreaga Class A - For 10,244,754 Withheld 0
Class B - For 1,875,267 Withheld 0
Laureano Carus Abarca Class A - For 10,244,754 Withheld 0
Class B- For 1,875,267 Withheld 0
2. With respect to the ratification of the appointment of Price
Waterhouse as the Company's independent auditors for the fiscal year
ending December 31, 1997, the following are the number of shares voted:
<S> <C> <C> <C> <C>
Class A - For 10,244,754 Against 0 Abstain 0
Class B - For 1,870,717 Against 400 Abstain 4,150
</TABLE>
22
<PAGE>
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.
23
<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: August 8, 1997 By: /S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman of the Board
and Chief Executive Officer
By: /S/ JOSEPH R. SANDOVAL
Joseph R. Sandoval
Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001016933
<NAME> R&G FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 33,739,166
<INT-BEARING-DEPOSITS> 31,441,149
<FED-FUNDS-SOLD> 14,005,675
<TRADING-ASSETS> 238,705,880
<INVESTMENTS-HELD-FOR-SALE> 108,657,286
<INVESTMENTS-CARRYING> 40,937,538
<INVESTMENTS-MARKET> 40,510,772
<LOANS> 719,802,545
<ALLOWANCE> 4,410,639
<TOTAL-ASSETS> 1,268,130,372
<DEPOSITS> 674,020,617
<SHORT-TERM> 456,956,808
<LIABILITIES-OTHER> 12,453,633
<LONG-TERM> 0
0
0
<COMMON> 38,489,266
<OTHER-SE> 86,210,048
<TOTAL-LIABILITIES-AND-EQUITY> 1,268,130,372
<INTEREST-LOAN> 31,959,371
<INTEREST-INVEST> 11,212,154
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 43,171,525
<INTEREST-DEPOSIT> 15,768,399
<INTEREST-EXPENSE> 26,527,616
<INTEREST-INCOME-NET> 16,643,909
<LOAN-LOSSES> 2,945,000
<SECURITIES-GAINS> 5,628,548
<EXPENSE-OTHER> 15,891,620
<INCOME-PRETAX> 15,186,192
<INCOME-PRE-EXTRAORDINARY> 15,186,192
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,412,963
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 8.34
<LOANS-NON> 21,252,953
<LOANS-PAST> 91,847
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 24,757,936
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<CHARGE-OFFS> 2,090,041
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<ALLOWANCE-CLOSE> 4,410,639
<ALLOWANCE-DOMESTIC> 4,410,639
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
