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, 1998
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) 758-2424
- --------------------------------------------------------------------------------
(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, 1998:
9,848,948. (Does not include 18,440,556 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, 1998 (Unaudited) and December 31, 1997.......... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998 and 1997 (Unaudited).......... 4
Consolidated Statements of Comprehensive Income for the Three and
Six Months Ended June 30, 1998 and 1997 (Unaudited)...... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) ................ 6
Notes to Unaudited Consolidated Financial Statements ............. 7
Item 2 Management's Discussion and Analysis.............................. 14
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 17
Part II - Other Information
Item 1. Legal Proceedings ................................................ 17
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 ................................................ 19
Item 6. Exhibits and Reports on Form 8-K ................................. 19
Signatures ....................................................... 19
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1:..Consolidated Financial Statements
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
1998 1997
---------- ----------
(Unaudited)
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks .................................................... $ 22,900 $ 32,607
Money market investments:
Securities purchased under agreements to resell ........................ 8,000 16,000
Time deposits with other banks ......................................... 31,378 16,759
Federal funds sold ..................................................... -- 3,000
Mortgage loans held for sale, at lower of cost or market ................... 90,339 46,885
Mortgage-backed securities held for trading, at fair value ................. 445,126 400,457
Mortgage-backed securities available for sale, at fair value ............... 43,645 46,004
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1998 - $ 30,905; 1997 - $33,186) .................. 31,124 33,326
Investment securities held for trading, at fair value ...................... 597 581
Investment securities available for sale, at fair value .................... 76,765 75,863
Investment securities held to maturity, at amortized cost ..................
(estimated market value: 1998 - $6,229; 1997 - $10,656) .................... 6,264 10,693
Loans receivable, net ...................................................... 944,403 765,059
Accounts receivable, including advances to investors, net .................. 6,998 7,359
Accrued interest receivable ................................................ 12,090 10,346
Servicing asset ........................................................... 28,602 21,213
Premises and equipment ..................................................... 11,181 9,528
Other assets ............................................................... 15,523 15,065
---------- ----------
$1,774,935 $1,510,745
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................................. $ 820,919 $ 722,418
Federal funds purchased ............................................... 15,000 10,000
Securities sold under agreements to repurchase ........................ 425,069 382,283
Notes payable ......................................................... 217,789 159,304
Advances from FHLB .................................................... 121,400 42,000
Other secured borrowings .............................................. -- 34,359
Accounts payable and accrued liabilities .............................. 18,868 15,872
Other liabilities ..................................................... 3,767 3,205
---------- ----------
1,622,812 1,369,442
---------- ----------
Subordinated notes ........................................................ -- 3,250
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(continued)
June 30, December 31,
1998 1997
---------- ----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Stockholders'equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
issued and outstanding ..................................................... -- --
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized; issued
and outstanding - 18,440,556 shares in 1998 and 9,220,278 in 1997 184 92
Class B - $.01 par value, 20,000,000 shares authorized; issued and
outstanding - 9,848,948 shares in 1998 and 4,924,474 in 1997 .... 99 49
Additional paid-in capital ............................................ 38,194 38,348
Retained earnings ..................................................... 110,113 96,129
Capital reserves of the Bank .......................................... 2,215 2,215
Accumulated other comprehensive income ................................ 1,318 1,220
---------- ----------
152,123 138,054
---------- ----------
$1,774,935 $1,510,745
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Six month
period ended period ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans ............................................. $ 21,487 $ 16,616 $ 40,144 $ 31,959
Money market and other investments ................ 1,538 1,186 2,966 2,729
Mortgage-backed securities ........................ 7,237 4,962 14,928 8,484
------------ ------------ ------------ ------------
Total interest income ........................ 30,262 22,764 58,038 43,172
------------ ------------ ------------ ------------
Interest expense:
Deposits .......................................... 9,084 8,037 17,429 15,768
Securities sold under agreements to repurchase .... 6,162 2,505 11,855 3,818
Notes payable ..................................... 3,140 2,354 6,110 4,412
Secured borrowings ................................ -- 959 -- 1,933
Other ............................................. 1,064 318 1,846 597
------------ ------------ ------------ ------------
Total interest expense ....................... 19,450 14,173 37,240 26,528
------------ ------------ ------------ ------------
Net interest income .................................... 10,812 8,591 20,798 16,644
Provision for loan losses .............................. (1,500) (1,695) (3,000) (2,945)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses .... 9,312 6,896 17,798 13,699
Other income: .......................................... ------------ ------------ ------------ ------------
Net gain on origination and sale of loans ......... 7,660 5,802 15,053 11,291
Net profit (loss) on trading account .............. -- (374) 15 (358)
Net gain on sales of investments available for sale -- -- 149 25
Loan administration and servicing fees ............ 3,833 3,535 7,520 6,843
Service charges, fees and other ................... 1,472 1,357 2,656 2,210
------------ ------------ ------------ ------------
12,965 10,319 25,393 20,011
------------ ------------ ------------ ------------
Total revenues ............................... 22,277 17,215 43,191 33,710
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME(continued)
Three month Six month
period ended period ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Operating expenses:
Employee compensation and benefits ................ 4,212 3,434 7,770 6,576
Office occupancy and equipment .................... 2,166 2,014 3,991 3,619
Other administrative and general .................. 5,906 4,231 10,700 8,329
------------ ------------ ------------ ------------
12,283 9,679 22,461 18,524
------------ ------------ ------------ ------------
Income before income taxes ............................. 9,994 7,536 20,730 15,186
------------ ------------ ------------ ------------
Income tax expense:
Current ........................................... 747 1,119 2,607 2,826
Deferred .......................................... 1,276 1,039 2,672 1,947
------------ ------------ ------------ ------------
2,023 2,158 5,279 4,773
------------ ------------ ------------ ------------
Net income .................................. $ 7,971 $ 5,378 $ 15,451 $ 10,413
============ ============ ============ ============
Earnings per common share - Basic ...................... $ 0.28 $ 0.19 $ 0.55 $ 0.37
------------ ------------ ------------ ------------
Diluted .................... $ 0.27 $ 0.18 $ 0.53 $ 0.36
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic .. 28,289,504 28,289,504 28,289,504 28,289,504
- Diluted. 29,045,504 29,045,504 29,045,504 29,039,504
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
R&G Financial Corporation
Consolidated Statements of Comprehensive Income
Three month Six month
period ended period ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income ........................................... $ 7,971 $ 5,378 $ 15,451 $ 10,413
-------- -------- -------- --------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period ........................... 549 1,262 309 (331)
Less: Reclassification adjustments for gains
included in net income .......................... -- -- (149) (25)
-------- -------- -------- --------
549 1,262 160 (356)
Income tax (expense) benefit related to items of other
comprehensive income ................................. (214) (492) (62) 139
-------- -------- -------- --------
Other comprehensive income, net of tax ............... 335 770 98 (217)
-------- -------- -------- --------
Comprehensive income, net of tax ..................... $ 8,306 $ 6,148 $ 15,549 $ 10,196
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month
Period ended
June 30,
----------------------
1998 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities: ....................................................... $ 15,451 $ 10,413
--------- ---------
Depreciation and amortization ....................................... 1,347 1,324
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net ................................... (9) (202)
Amortization of deferred loan origination fees and accretion of
discount on loans, net ............................................ (109) (317)
Amortization of servicing rights .................................... 1,323 813
Provision for loan losses ........................................... 3,000 2,945
Provision for bad debts in accounts receivable ..................... 150 150
Gain on sales of mortgage loans ..................................... (2,662) (125)
Gain on sales of investment securities available for sale ........... (149) (25)
Unrealized profit on trading securities ............................. (1,888) (5,604)
(Increase) decrease in mortgage loans held for sale ................. (43,454) 23,204
Net increase in mortgage-backed and investment securities held for
trading ........................................................... (42,797) (122,793)
Increase in receivables ............................................. (1,534) (1,309)
Decrease in other assets ............................................ 376 601
Increase in notes payable ........................................... 58,485 40,370
Increase (decrease) in accounts payable and accrued liabilities ..... 3,013 (139)
Decrease in other liabilities ....................................... 562 (796)
--------- ---------
Total adjustments ............................................... (24,346) (61,903)
--------- ---------
Net cash used in operating activities ........................... (8,895) (51,490)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities ....................................... (31,501) (37,963)
Proceeds from sales and maturities of securities available for sale ...... 33,933 9,820
Proceeds from maturities of securities held to maturity .................. 4,405 --
Principal repayments on mortgage-backed securities ....................... 5,730 3,912
Proceeds from sales of loans ............................................. 73,398 6,016
Net originations of loans ................................................ (287,329) (124,571)
Purchases of FHLB stock, net ............................................ (4,160) (550)
Acquisition of premises and equipment .................................... (2,764) (2,243)
Net increase in foreclosed real estate .................................. (1,070) (62)
Acquisition of servicing rights .......................................... (8,712) (3,380)
--------- ---------
Net cash used by investing activities ........................... (218,070) (149,021)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
Six month
Period ended
June 30,
----------------------
1998 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net ................................................ 98,421 58,383
Increase in federal funds purchased ....................................... 5,000 11,850
Increase in securities sold under agreements to repurchase - net .......... 42,786 100,873
Payments on secured borrowings ............................................ -- (1,735)
Advances from FHLB ........................................................ 79,400 35,000
Repayment of advances from FHLB ........................................... -- (20,000)
Repayment of subordinated notes ........................................... (3,250) --
Payments on notes payable ................................................. -- (2,400)
Capital contribution to subsidiary ........................................ (12) --
Cash dividends on common stock ............................................ (1,468) (1,130)
--------- ---------
Net cash provided by financing activities ....................... 220,877 180,841
--------- ---------
Net decrease in cash and cash equivalents ...................................... (6,088) (19,670)
Cash and cash equivalents at beginning of period ............................. 68,366 98,856
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 62,278 $ 79,186
========= =========
Cash and cash equivalents include:
Cash and due from banks ................................................... $ 22,900 $ 33,739
Securities purchased under agreements to resell ........................... 8,000 14,006
Time deposits with other banks............................................. 31,378 31,441
Federal funds sold ........................................................ -- --
--------- ---------
$ 62,278 $ 79,186
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<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 include
the accounts of R&G Financial Corporation (the Company) and its wholly owned
subsidiaries, 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.
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 Commissioner of Financial Institutions 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 eighteen branches located mainly in the northern part of the
Commonwealth of Puerto Rico. The Bank also provides private banking, 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 (consisting
of normal recurring accruals) necessary for a fair presentation of the Company's
financial condition as of June 30, 1998, and the results of operations and
changes in its cash flows for the three and six months ended June 30, 1998 and
1997.
The results of operations for the three and six month periods ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the year ending December 31, 1998. 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, 1997.
Certain reclassifications (not affecting income before income taxes or
net income) have been made to the consolidated statements of income for the
three and six month periods ended June 30, 1997 to conform to the presentation
for the 1998 respective periods.
-7-
<PAGE>
Basis of consolidation
All significant inter-company balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130- "Reporting Comprehensive Income." This
Statement establishes standards for reporting and displaying comprehensive
income and its components in general-purpose financial statements. Comprehensive
income is intended to report all changes in the equity of a business enterprise
during a period from transactions and other events or circumstances, except
those resulting from investments by or distribution to owners. The only item of
comprehensive income reported by the Company is the unrealized gains on
securities available for sale which, at January 1, 1998, amounted to $1.2
million net of tax.
Accountings for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
accounted as a hedge. The accounting for changes in fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation, as follows:
For a derivative designated as hedging the exposure to changes in the fair
value of a recognized asset or liability or a firm commitment (referred to
as a fair value hedge), the gain or loss is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged
item attributable to the risk being hedged.
For a derivative designated as hedging the exposure to variable cash flows
of a forecasted transaction (referred to as cash flow hedge), the effective
portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects
earnings. The ineffective portion of the gain or loss is reported in
earnings immediately.
For a derivative designated as hedging the foreign currency exposure of a
net investment in a foreign operation, the gain or loss is reported in
other comprehensive income (outside earnings) as part of the cumulative
translation adjustment.
For a derivative not designated as a hedging instrument, the gain or loss
is recognized in earnings in the period of change.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement.
-8-
<PAGE>
Management is evaluating its hedging strategy in light of this new pronouncement
to establish the initial designation of its hedging activities and determine the
effect and timing of adoption. However, due to the relatively limited extent to
which the Company is using derivative instruments and the simple nature of the
instruments used, management does not expect the impact of adoption to be
significant.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three and six months ended June
30, 1998 and 1997 are computed by dividing net income for such periods by the
weighted average number of shares of common stock outstanding during such
periods, which was 28,289,504. Outstanding stock options granted in connection
with the Company's Stock Option Plan are included in the weighted average number
of shares for purposes of the diluted earnings per share computation. The
Company's weighted average number of shares outstanding for purposes of diluted
earnings per share was 29,045,504 for the three month periods ended June 30,
1998 and 1997, respectively, and 29,045,504 and 29,039,504 for the six month
periods ended June 30, 1998 and 1997, respectively.
On June 25, 1998 the Company effected a 2 for 1 stock split on the
Company's common stock, in the form of a stock dividend of one additional share
of common stock for each share of common stock held of record as of June 12,
1998. Following distribution of the additional shares, the Company had
28,289,504 common shares outstanding. Per share information for all periods
presented take into consideration the stock splits paid by the Company in June
1998 and September 1997.
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.
June 30,
1998
--------------
(Unaudited)
Mortgage-backed securities held for trading:
CMO residuals (all interest only)......................... $ 8,020,658
GNMA certificates......................................... 437,105,550
-----------
$445,126,208
============
-9-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
----------------------------
Amortized cost Fair value
----------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 8,135,222 $ 9,784,843
----------- -----------
FNMA certificates:
Due over ten years .......................... 8,650,944 8,734,477
----------- -----------
FHLMC certificates:
Due from one to five years .................. 102,302 103,935
Due from five to ten years .................. 267,419 272,438
Due over ten years .......................... 24,348,684 24,749,005
----------- -----------
24,718,405 25,125,378
----------- -----------
$41,504,571 $43,644,698
=========== ===========
Investment securities available for sale:
U.S. Treasury securities:
Due within one year ......................... $ 796,165 $ 796,000
Due from one to five years .................. 30,514,345 30,543,368
----------- -----------
31,310,510 31,339,368
----------- -----------
U.S. Government and agencies securities:
Due within one year ......................... 5,000,000 4,998,830
Due from one to five years .................. 26,345,956 26,359,825
Due from five to ten years .................. 5,021,473 5,000,810
----------- -----------
36,367,429 36,359,465
----------- -----------
FHLB stock ....................................... 9,066,367 9,066,367
----------- -----------
$76,744,306 $76,765,200
=========== ===========
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $3,522,553 as of June 30, 1998, which are
primarily associated with the sale by the Company in prior years of collaterized
mortgage obligations. These sales were not made in connection with the Company's
mortgage banking activities.
-10-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------
Amortized cost Fair value
----------- -----------
(Unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities-
Due within one year .................................. $ 309,977 $ 310,000
Puerto Rico Government obligations-
Due from five to ten years ........................... 5,953,560 5,919,424
----------- -----------
$ 6,263,537 $ 6,229,424
=========== ===========
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from one to five years ........................... $ 42,608 $ 43,282
Due over ten years ................................... 17,130,644 16,589,595
----------- -----------
17,173,252 16,632,877
----------- -----------
Federal National Mortgage Association (FNMA) certificates -
Due over ten years ................................... 13,689,027 14,017,261
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC)
certificates -
Due over ten years ................................... 261,466 254,544
----------- -----------
$31,123,745 $30,904,682
=========== ===========
</TABLE>
-11-
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage ........ $ 649,101,374 $ 476,728,996
Residential - second mortgage ....... 18,453,562 17,831,079
Construction ........................ 17,409,652 13,367,513
Commercial .......................... 99,295,900 87,506,802
------------- -------------
784,260,488 595,434,390
Undisbursed portion of loans in process .. (8,524,465) (6,218,039)
Net deferred loan fees ................... 90,267 172,019
------------- -------------
775,826,290 589,388,370
------------- -------------
Other loans:
Commercial .......................... 42,624,109 39,127,363
Consumer:
Secured by deposits .............. 14,087,109 12,471,772
Secured by real estate ........... 76,186,607 81,251,989
Other ............................ 42,776,592 50,103,282
Unamortized discount ..................... (143,351) (151,460)
Unearned interest ........................ (259,148) (360,195)
------------- -------------
175,271,918 182,442,751
------------- -------------
Total loans ...................... 951,098,208 771,831,121
Allowance for loan losses ........... (6,694,925) (6,771,702)
------------- -------------
$ 944,403,283 $ 765,059,419
============= =============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------
1998 1997
------- -------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance, beginning of period ............... $ 6,772 $ 3,332
Provision for loan losses .................. 3,000 2,945
Loans charged-off .......................... (3,212) (2,090)
Recoveries................................. 135 224
------- -------
Balance, end of period ..................... $ 6,695 $ 4,411
======= =======
</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 $407.4
million at June 30, 1998. 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 amounted to
approximately $150.7 million at June 30, 1998.
Commitments to buy and sell GNMA certificates
As of June 30, 1998, the Company had open commitments to issue GNMA
certificates of approximately $38.4 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, 1998, 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 $379.7 million at June 30, 1998. Liability, if any,
under the recourse provisions at June 30, 1998 is estimated by management to be
insignificant.
-13-
<PAGE>
Item 2: Management's Discussion and Analysis
Financial Condition
At June 30, 1998, the Company's total assets amounted to $1.8 billion,
as compared to $1.5 billion at December 31, 1997. The $264.2 million or 17.5%
increase in total assets during the six month period ended June 30, 1998 was
primarily attributable to a $179.3 million or 23.4% increase in loans
receivable, net, which reflects net originations following repayments and sales,
a $44.7 million or 11.1% increase in mortgage-backed securities held for
trading, and a $43.4 million or 92.6% increase in mortgage loans held for sale,
respectively.
The increase in the Company's assets was funded primarily by increased
deposits of $98.5 million or 13.6%, a $79.4 million or 189.0% increase in FHLB
advances, a $58.5 million or 36.7% increase in notes payable, and a $42.8
million or 11.2% increase in securities sold under agreements to repurchase.
At June 30, 1998, the Company's stockholders' equity amounted to $152.1
million, which is an increase of $14.1 million or 10.2% from the amount reported
at December 31, 1997. The primary reason for the increase was the net income
earned during the six month period ended June 30, 1998, which was partially
offset by $1.5 million of dividends paid during such period. At June 30, 1998,
the Bank's leverage and Tier 1 risk-based capital amounted to 6.83% and 11.42%
of adjusted total assets, respectively, compared to a 4.0% minimum requirement,
and its total risk-based capital amounted to 12.44%, compared to an 8.0% minimum
requirement.
Results of Operations
The Company reported net income of $8.0 million and $15.5 million
during the three and six month periods ended June 30, 1998, respectively, as
compared to $5.4 million and $10.4 million during the prior comparable periods,
or an increase during such periods of $2.6 million or 48.2% and $5.0 million or
48.4%, respectively.
Total revenues for the six month period ended June 30, 1998 amounted to
$43.2 million, a $9.5 million or 28.1% increase over the comparable 1997 period.
The increase in revenues during the six month period ended June 30, 1998 was
primarily attributable to a $4.1 million or 25.0% increase in net interest
income and a $3.8 million or 33.3% increase in net gain on origination and sale
of loans. The increase in net interest income is primarily due to an $8.2
million or 25.6% increase in interest income on loans, which is primarily
associated with an increase in the average balance of the outstanding loan
portfolio, and to a $6.4 million or 75.9% increase in interest income on
mortgage - backed securities due to an increase in securities held for trading
in the 1998 period. The increase in net gain on origination and sale of loans
reflects an increase in mortgage loan originations during the 1998 period. The
volume of loan originations increased 63% to approximately $684.1 million during
such period. Contributing also to the increase in revenues during the six month
period ended June 30, 1998 was a $677,000 or 9.9% increase in loan
administration and servicing fees, as the Company's servicing portfolio expanded
by 13.1% over the prior year to $3.4 billion, and a $446,000 or 20.2% increase
in service charges, fees and other miscellaneous revenue sources, due mainly to
an increase in banking fees associated with an increased number of deposit
accounts during the 1998 period.
-14-
<PAGE>
Total revenues for the quarter ended June 30, 1998 amounted to $22.3
million, a $5.1 million or 29% increase over the comparable quarter in 1997. The
increase in total revenues during the 1998 quarter was primarily attributable to
a $2.2 million or 25.8% increase in net interest income, a $1.8 million or 32.0%
increase in net gain on origination and sale of loans and a $298,000 or 8.4%
increase in loan administration and servicing fees. In addition, an increase in
trading revenue resulted from the absence of a $374,000 loss in the 1997
quarter.
Total expenses increased by $3.9 million or 21.2% during the six months
ended June 30, 1998, over the prior comparable periods. The increase during the
six month period ended June 30, 1998 was due primarily to a $1.2 million or
18.2% increase in employee compensation and benefits associated with an increase
in the number of employees to accomodate a higher loan production during the
1998 period, and a $372,000 or 10.3% increase in occupancy expenses related to
the completion in late 1997 of the remodeling work of six branches acquired in
1995 from another financial institution. Other miscellaneous expenses increased
by $2.4 million or 28.5% mainly as a result of a $450,000 increase in
advertising costs associated with an increase in loan production and a $515,000
increase in amortization expenses of the Company's servicing asset.
Total operating expenses increased by $2.6 million or 26.9% during the
three month period ended June 30, 1998. The increase was due to a $778,000 or
22.6% increase in employee compensation and benefits, a $152,000 or 7.5%
increase in occupancy expenses, and a $1.7 million or 39.6% increase in other
miscellaneous expenses. These expenses increased during such three month period
for the reasons noted above.
Total income tax expense decreased by $135,000 or 6.3% and increased by
$506,000 or 10.6% during the three and six month periods ended June 30, 1998,
respectively, over the prior comparable periods. The decrease during the three
month period ended June 30, 1998 is primarily associated with the purchase, at a
discount, of certain investment tax credits during the period. The increase
during the six month period ended June 30, 1998 is due primarily to a $5.5
million or 36.5% increase in income before taxes during such period. The
Company's effective tax rate amounted to 20.2% and 25.5% during the three and
six month periods ended June 30, 1998, compared to 28.6% and 31.4% in the 1997
comparable periods. The decrease in 1998 of the Company's effective tax rate is
primarily associated with an increase in the Company's exempt interest income
from GNMA mortgage backed securities .
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
-15-
<PAGE>
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, 1998, the Company had $141.0 million in borrowing capacity
under warehousing lines of credit, $441.2 million in borrowings capacity under a
line of credit with the FHLB of New York and $ 15 million of borrowing capacity
under federal funds lines of credit. 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, 1998, the Company had outstanding commitments to originate
non-mortgage loans of $19.1 million. Certificates of deposit which are scheduled
to mature within one year totaled $397.0 million at June 30, 1998, and
borrowings that are scheduled to mature within the same period amounted to
$695.2 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, 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 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,
1998, 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 6.83%,
11.42% and 12.44%, respectively.
-16-
<PAGE>
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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of government legislation and regulation (which changes
from time to time and over which the Company has no control), and other risks
detailed in this Form 10-Q and in the Company's other Securities and Exchange
Commission ("SEC") filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are
presented at December 31, 1997 in Item 7A of the Company's Annual report on Form
10-K. Management believes there have been no material changes in the Company's
market risk since December 31, 1997.
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.
-17-
<PAGE>
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 23,
1998.
1. With respect to the election of four directors to serve three-year
terms expiring at the Annual Meeting of Stockholders to be held in
the year 2001 or until their respective successors are elected and
qualified, the following were the number of shares voted for each
nominee:
Ana M. Armendariz Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,647,250 Withheld 0 Against 9,100
Victor L. Galan Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,647,250 Withheld 0 Against 9,100
Benigno Fernandez Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,647,250 Withheld 0 Against 9,100
Pedro L. Ramirez Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,647,250 Withheld 0 Against 9,100
2. With respect to the amendment of the Company's certificate of
Incorporation to increase the authorized number of shares of
Common Stock from 25,000,000 to 60,000,000, the following are the
number of shares voted:
Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,648,410 Withheld 180 Against 9,210
3. With respect to the ratification of the appointment of Price
Waterhouse as the Company's independent auditors for the fiscal
year ending December 31, 1998, the following are the number of
shares voted:
Class A - For 18,440,556 Withheld 0 Against 0
Class B - For 3,657,800 Withheld 0 Against 0
-18-
<PAGE>
Item 5. Other Information
Deadlines for Shareholder Proposals
Pursuant to Rule 14a-5(e) under the Securities Exchange Act of 1934, as amended,
effective June 29, 1998:
(1) The deadline for submitting shareholder proposals for inclusion in the
Company's proxy statement and form of proxy for the Company's 1999
Annual Meeting of Stockholders pursuant to Rule 14a-8 is December 1,
1998.
(2) The date after which notice of a shareholder proposal submitted outside
the processes of Rule 14a-8 is considered untimely is December 31, 1998.
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.
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: July 31, 1998 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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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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