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 SEPTEMBER 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 September 30, 1998:
10,146,091. (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
September 30, 1998 (Unaudited) and December 31, 1997...... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... 4
Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 1998 and 1997 (Unaudited).. 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 ................................................. 18
Item 2. Changes in Securities ............................................. 18
Item 3. Defaults upon Senior Securities ................................... 18
Item 4. Submission of Matters to a Vote of security Holders................ 18
Item 5. Other Information ................................................. 18
Item 6. Exhibits and Reports on Form 8-K .................................. 18
Signatures ........................................................ 19
-2-
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1998 1997
---------- ----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................ $ 20,635 $ 32,607
Money market investments:
Securities purchased under agreements to resell ............................ 7,000 16,000
Time deposits with other banks ............................................. 34,645 16,759
Federal funds sold ......................................................... -- 3,000
Mortgage loans held for sale, at lower of cost or market ....................... 163,536 46,885
Mortgage-backed securities held for trading, at fair value ..................... 468,770 400,457
Mortgage-backed securities available for sale, at fair value ................... 42,319 46,004
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1998 - $ 29,256; 1997 - $33,186) ...................... 29,451 33,326
Investment securities held for trading, at fair value .......................... -- 581
Investment securities available for sale, at fair value ........................ 46,527 75,863
Investment securities held to maturity, at amortized cost
(estimated market value: 1998 - $6,312; 1997 - $10,656) ........................ 6,340 10,693
Loans receivable, net .......................................................... 926,799 765,059
Accounts receivable, including advances to investors, net ...................... 7,442 7,359
Accrued interest receivable .................................................... 12,936 10,346
Servicing asset ............................................................... 32,989 21,213
Premises and equipment ......................................................... 11,708 9,528
Other assets ................................................................... 18,933 15,065
---------- ----------
$1,830,030 $1,510,745
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 875,492 $ 722,418
Federal funds purchased ................................................... -- 10,000
Securities sold under agreements to repurchase ............................ 440,238 382,283
Notes payable ............................................................. 167,388 159,304
Advances from FHLB ........................................................ 101,700 42,000
Other secured borrowings .................................................. -- 34,359
Accounts payable and accrued liabilities .................................. 27,761 15,872
Other liabilities ......................................................... 4,031 3,205
---------- ----------
Subordinated notes ............................................................ 1,616,610 1,369,442
---------- ----------
-- 3,250
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued)
September 30, December 31,
1998 1997
---------- ----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Stockholders'equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
7.40% Monthly Income Preferred Stock, Series A, $25 liquidation value,
2,000,000 shares authorized, issued and outstanding .................. 50,000 --
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
Class B - $.01 par value, 20,000,000 shares authorized; issued and ... 184 92
Outstanding - 10,146,091 shares in 1998 and 4,924,474 in 1997 ....... 102 49
Additional paid-in capital ................................................ 41,544 38,348
Retained earnings ......................................................... 117,509 96,129
Capital reserves of the Bank .............................................. 2,215 2,215
Accumulated other comprehensive income .................................... 1,866 1,220
---------- ----------
213,420 138,054
---------- ----------
$1,830,030 $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 Nine month
period ended period ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans ................................................ $ 24,591 $ 18,859 $ 64,735 $ 50,818
Money market and other investments ................... 1,425 1,295 4,391 4,024
Mortgage-backed securities ........................... 8,446 6,059 23,374 14,543
------------ ------------ ------------ ------------
Total interest income ........................... 34,462 26,213 92,500 69,385
------------ ------------ ------------ ------------
Interest expense:
Deposits ............................................. 10,128 8,363 27,557 24,131
Securities sold under agreements to repurchase ....... 7,320 3,936 19,175 7,754
Notes payable ........................................ 3,295 2,573 9,405 6,985
Secured borrowings ................................... -- 936 -- 2,869
Other ................................................ 1,983 619 3,829 1,216
------------ ------------ ------------ ------------
Total interest expense .......................... 22,726 16,427 59,966 42,955
------------ ------------ ------------ ------------
Net interest income ....................................... 11,736 9,786 32,534 26,430
Provision for loan losses ................................. (1,500) (1,700) (4,500) (4,645)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ....... 10,236 8,086 28,034 21,785
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans ............ 8,948 6,109 24,001 17,400
Net profit (loss) on trading account ................. -- (386) 15 (744)
Net gain on sales of investments available for sale .. 122 31 271 56
Loan administration and servicing fees ............... 3,700 2,895 11,220 9,738
Service charges, fees and other ...................... 1,403 1,278 4,059 3,488
------------ ------------ ------------ ------------
14,173 9,927 39,565 29,938
------------ ------------ ------------ ------------
Total revenues .................................. 24,409 18,013 67,600 51,723
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (continued)
Three month Nine month
period ended period ended
September 30, September 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 ................... 4,181 3,269 11,951 9,485
Office occupancy and equipment ....................... 2,209 1,902 6,200 5,521
Other administrative and general ..................... 5,672 4,440 16,372 12,769
------------ ------------ ------------ ------------
12,062 9,611 34,523 28,135
------------ ------------ ------------ ------------
Income before income taxes ................................ 12,347 8,402 33,077 23,588
------------ ------------ ------------ ------------
Income tax expense:
Current .............................................. 2,759 1,067 5,366 3,893
Deferred ............................................. 1,051 1,284 3,723 3,231
------------ ------------ ------------ ------------
3,810 2,351 9,089 7,124
------------ ------------ ------------ ------------
Net income ...................................... $ 8,537 $ 6,051 $ 23,988 $ 16,464
============ ============ ============ ============
Earnings per common share - Basic ........................ $ 0.30 $ 0.21 $ 0.85 $ 0.58
------------ ------------ ------------ ------------
Diluted ...................... $ 0.29 $ 0.21 $ 0.82 $ 0.57
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic ..... 28,487,599 28,289,504 28,355,536 28,289,504
- Diluted ... 29,243,599 29,045,504 29,111,536 29,041,504
</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 Nine month
period ended period ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income ........................................... $ 8,537 $ 6,051 $ 23,988 $ 16,464
-------- -------- -------- --------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period ............................ 1,020 (1,626) 1,330 1,358
Less: Reclassification adjustments for gains
included in net income .................. (122) (31) (271) (56)
-------- -------- -------- --------
898 (1,657) 1,059 1,302
Income tax (expense) benefit related to items of other
comprehensive income ................................. (350) (646) (413) (508)
-------- -------- -------- --------
Other comprehensive income, net of tax ............... 548 (1,011) 646 794
-------- -------- -------- --------
Comprehensive income, net of tax ..................... $ 9,085 $ 5,040 $ 23,634 $ 17,258
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month
Period ended
September 30,
-----------------------
1998 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................ $ 23,988 $ 16,464
--------- ---------
Adjustments to reconcile net income to net cash provided by operating activities: 2,104
Depreciation and amortization ................................................... 2,104 2,013
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net ............................................ (45) (321)
Accretion of discount on loans, net ............................................. (136) (375)
Amortization of servicing rights ................................................ 2,172 1,261
Provision for loan losses ....................................................... 4,500 4,645
Provision for bad debts in accounts receivable ................................. 225 225
Gain on sales of mortgage loans ................................................. (5,371) (1,208)
Gain on sales of investment securities available for sale ....................... (271) (56)
Unrealized profit on trading securities ......................................... (4,117) (8,479)
Increase in mortgage loans held for sale ........................................ (40,270) (57,699)
Net increase in mortgage-backed and investment securities held for
trading ..................................................................... (63,615) (205,263)
Increase in receivables ......................................................... (2,724) (3,215)
Decrease in other assets ........................................................ 879 1,441
Increase in notes payable ....................................................... 8,084 32,223
Increase in accounts payable and accrued liabilities ............................ 10,961 3,670
Increase (decrease) in other liabilities ........................................ 601 (549)
--------- ---------
Total adjustments ........................................................... (87,023) (231,687)
--------- ---------
Net cash used in operating activities ....................................... (63,035) (215,223)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities ................................................... (37,542) (60,465)
Proceeds from sales and maturities of securities available for sale .................. 72,367 25,403
Proceeds from maturities of securities held to maturity .............................. 4,715 100
Principal repayments on mortgage-backed securities ................................... 9,582 6,503
Proceeds from sales of loans ......................................................... 172,917 55,607
Net originations of loans ............................................................ (422,252) (146,963)
Purchases of FHLB stock, net ........................................................ (6,211) (659)
Net assets acquired, net of cash received ............................................ 4,288 --
Acquisition of premises and equipment ................................................ (3,931) (2,740)
Net increase in foreclosed real estate .............................................. (1,139) (302)
Acquisition of servicing rights ...................................................... (13,947) (6,448)
--------- ---------
Net cash used by investing activities ....................................... (221,153) (129,964)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine month
Period ended
September 30,
-----------------------
1998 1997
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net ............................................................ 131,938 86,808
Decrease in federal funds purchased ................................................... (10,000) --
Increase in securities sold under agreements to repurchase - net ...................... 57,955 235,234
Payments on secured borrowings ........................................................ -- (13,315)
Advances from FHLB .................................................................... 114,400 151,700
Repayment of advances from FHLB ....................................................... (58,400) (124,500)
Repayment of subordinated notes ....................................................... (3,250) --
Payments on notes payable ............................................................. -- (2,400)
Net proceeds from issuance of Series A Preferred Stock ................................ 48,079 --
Capital contribution to subsidiary .................................................... (12) --
Cash paid in lieu of fractional shares on stock split ................................. -- (11)
Cash dividends on common stock ........................................................ (2,608) (1,739)
--------- ---------
Net cash provided by financing activities ................................... 278,102 331,777
--------- ---------
Net decrease in cash and cash equivalents .................................................. (6,086) (13,410)
Cash and cash equivalents at beginning of period ......................................... 68,366 98,856
--------- ---------
Cash and cash equivalents at end of period ................................................. $ 62,280 $ 85,446
========= =========
Cash and cash equivalents include:
Cash and due from banks ............................................................... $ 20,635 $ 27,386
Securities purchased under agreements to resell ....................................... 7,000 7,501
Time deposits with other banks ........................................................ 34,645 50,559
--------- ---------
Federal funds sold .................................................................... $ 62,280 $ 85,446
========= =========
</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 September 30, 1998, and the results of operations and
changes in its cash flows for the three and nine months ended September 30, 1998
and 1997.
The results of operations for the three and nine month periods ended
September 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 nine month periods ended September 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.
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.
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.
-8-
<PAGE>
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three and nine months ended
September 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 28,487,599 and 28,355,536 for the three and nine month
periods ended September 30, 1998, respectively, and 28,289,504 for the three and
nine month periods ended September 30, 1997. 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 29,243,599 and 29,045,504 for the
three month periods ended September 30, 1998 and 1997, respectively, and
29,111,536 and 29,041,504 for the nine month periods ended September 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 split paid by the Company in June
1998.
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.
September 30,
1998
--------------
(Unaudited)
Mortgage-backed securities held for trading:
CMO residuals (all interest only).................. $ 7,581,271
GNMA certificates.................................. 461,188,966
--------------
$ 468,770,237
==============
-9-
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------
Amortized cost Fair value
----------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 7,991,355 $ 9,703,108
----------- -----------
FNMA certificates-
Due over ten years .......................... 8,461,638 8,772,270
----------- -----------
FHLMC certificates:
Due from one to five years .................. 95,595 97,193
Due from five to ten years .................. 253,515 258,610
Due over ten years .......................... 22,562,506 23,487,857
----------- -----------
22,911,616 23,843,660
----------- -----------
$39,364,609 $42,319,038
=========== ===========
Investment securities available for sale:
U.S. Government and agencies securities: ......... $29,997,015 $30,099,222
Due from one to five years .................. 5,020,757 5,023,300
----------- -----------
Due from five to ten years .................. 35,017,772 35,122,522
----------- -----------
FHLB stock ....................................... 11,404,867 11,404,867
----------- -----------
$46,422,639 $46,527,389
=========== ===========
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $3,393,687 as of September 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>
September 30, 1998
-----------------------------
Amortized cost Fair value
-------------- ----------
(Unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities-
Due within one year .................................. $ 192,338 $ 192,000
U.S. Government and agencies securities-
Due within one year .................................. 201,266 200,640
Puerto Rico Government obligations-
Due from five to ten years ........................... 5,946,059 5,919,355
----------- -----------
$ 6,339,663 $ 6,311,995
=========== ===========
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from one to five years ........................... $ 29,977 $ 32,151
Due over ten years ................................... 16,061,291 15,553,956
----------- -----------
16,091,268 15,586,107
----------- -----------
Federal National Mortgage Association (FNMA) certificates -
Due over ten years ................................... 13,110,495 13,426,858
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC)
certificates -
Due over ten years ................................... 249,564 242,812
----------- -----------
$29,451,327 $29,255,777
=========== ===========
</TABLE>
-11-
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage ........ $ 605,558,694 $ 476,728,996
Residential - second mortgage ....... 18,666,160 17,831,079
Construction ........................ 20,694,759 13,367,513
Commercial .......................... 111,380,778 87,506,802
------------- -------------
756,300,391 595,434,390
Undisbursed portion of loans in process .. (8,975,962) (6,218,039)
Net deferred loan fees ................... 265,199 172,019
------------- -------------
747,589,628 589,388,370
------------- -------------
Other loans:
Commercial .......................... 44,025,021 39,127,363
Consumer:
Secured by deposits .............. 15,349,809 12,471,772
Secured by real estate ........... 84,028,404 81,251,989
Other ............................ 43,556,029 50,103,282
Unamortized discount ..................... (146,592) (151,460)
Unearned interest ........................ (229,254) (360,195)
------------- -------------
186,583,417 182,442,751
Total loans ...................... 934,173,045 771,831,121
Allowance for loan losses ........... (7,374,462) (6,771,702)
------------- -------------
$ 926,798,583 $ 765,059,419
============= =============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1998 1997
------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance, beginning of period ............... $ 6,772 $ 3,332
Provision for loan losses .................. 4,500 4,645
Acquired reserves .......................... 363 --
Loans charged-off .......................... (4,501) (3,943)
Recoveries ................................. 240 288
------- -------
Balance, end of period ..................... $ 7,374 $ 4,322
======= =======
</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 $392.9
million at September 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 $154.5 million at September 30, 1998.
Commitments to buy and sell GNMA certificates
As of September 30, 1998, the Company had open commitments to issue
GNMA certificates of approximately $19.0 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 September 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 $456.5 million at September 30, 1998. Liability, if any,
under the recourse provisions at September 30, 1998 is estimated by management
to be insignificant.
-13-
<PAGE>
Item 2: Management's Discussion and Analysis
Financial Condition
At September 30, 1998, the Company's total assets amounted to $1.8
billion, as compared to $1.5 billion at December 31, 1997. The $321.7 million or
21.3% increase in total assets during the nine month period ended September 30,
1998 was primarily attributable to a $161.7 million or 21.1% increase in loans
receivable, net, which reflects net originations following repayments and sales,
a $68.3 million or 17.1% increase in mortgage-backed securities held for
trading, and a $116.7 million or 248.8% increase in mortgage loans held for
sale.
The increase in the Company's assets was funded primarily by increased
deposits of $153.1 million or 21.2%, a $59.7 million or 142.1% increase in FHLB
advances, and a $58.0 million or 15.2% increase in securities sold under
agreements to repurchase.
At September 30, 1998, the Company's stockholders' equity amounted to
$213.4 million, which is an increase of $75.4 million or 54.6% from the amount
reported at December 31, 1997. The primary reason for the increase was the
issuance of 2,000,000 shares in August 31,1998 of 7.40% Monthly Income Preferred
Stock, Series A, for an aggregate $50 million. Also contributing to the increase
in stockholders' equity was the net income for the nine month period ended
September 30, 1998 of $24.0 million, which was partially offset by $2.6 million
of dividends paid during such period. At September 30, 1998, the Bank's leverage
and Tier 1 risk-based capital amounted to 9.01% and 15.47% of adjusted total
assets, respectively, compared to a 4.0% minimum requirement, and its total
risk-based capital amounted to 16.60%, compared to an 8.0% minimum requirement.
Results of Operations
The Company reported net income of $8.5 million and $24.0 million
during the three and nine month periods ended September 30, 1998, respectively,
as compared to $6.0 million and $16.5 million during the prior comparable
periods, or an increase during such periods of $2.5 million or 45.7% and $7.5
million or 41.1%, respectively.
Total revenues for the nine month period ended September 30, 1998
amounted to $67.6 million, a $15.9 million or 30.7% increase over the comparable
1997 period. The increase in revenues during the nine month period ended
September 30, 1998 was primarily attributable to a $6.1 million or 23.1%
increase in net interest income and a $6.6 million or 37.9% increase in net gain
on origination and sale of loans. The increase in net interest income is
primarily due to a $13.9 million or 27.4% 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 $8.8 million or 60.7% 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 56% to approximately $1.02 billion
during such period. Contributing also to the increase in revenues during the
nine month period ended September 30, 1998 was a $1.5 million or 15.2% increase
in loan administration and servicing fees, as the Company's servicing portfolio
expanded by 18.9% over the prior year to $3.6 billion, and a $571,000 or 16.4%
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 September 30, 1998 amounted to
$24.4 million, a $6.4 million or 35.5% increase over the comparable quarter in
1997. The increase in total revenues during the 1998 quarter was primarily
attributable to a $2.1 million or 22.0% increase in net interest income, a $2.8
million or 46.5% increase in net gain on origination and sale of loans and a
$805,000 or 27.8% increase in loan administration and servicing fees. In
addition, an increase in trading revenue resulted from the absence of a $386,000
loss in the 1997 quarter.
Total expenses increased by $6.4 million or 22.7% during the nine
months ended September 30, 1998, over the prior comparable period. The increase
during the nine month period ended September 30, 1998 was due primarily to a
$2.1 million or 21.4% increase in employee compensation and benefits associated
with an increase in the number of employees to accomodate higher loan production
during the 1998 period, and a $679,000 or 12.3% increase in occupancy expenses
related to the operation of three additional branches during 1998 and the
completion (in late 1997) of the remodeling work of six branches acquired in
1995 from another financial institution. Other miscellaneous expenses increased
by $3.6 million or 28.2% mainly as a result of a $652,000 increase in
amortization expenses of the Company's servicing asset, a $845,000 increase in
advertising costs, and other expense increases associated with an increase in
loan production.
Total operating expenses increased by $2.4 million or 25.5% during the
three month period ended September 30, 1998. The increase was due to a $912,000
or 27.9% increase in employee compensation and benefits, a $307,000 or 16.1%
increase in occupancy expenses, and a $1.2 million or 27.7% increase in other
miscellaneous expenses. These expenses increased during such three month period
for the reasons noted above.
Total income tax expense increased by $1.5 million or 62.1% and $2.0 or
27.6% during the three and nine month periods ended September 30, 1998,
respectively, over the prior comparable periods. The increase during the three
and nine month periods ended September 30, 1998 is due primarily to a $3.9
million or 47.0% and a $9.5 million or 40.2%, respective increase in income
before taxes during such periods. Such increases also result from the absence of
a $500,000 tax credit recorded in the third quarter of 1997 related to the
purchase, at a discount, of certain investment tax credits. The Company's
effective tax rate amounted to 30.9% and 27.5% during the three and nine month
periods ended September 30, 1998, respectively, compared to 33.9% and 32.3%
(excluding the referenced $500,000 tax credit) 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 an increased GNMA
mortgage backed securities portfolio.
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
-15-
<PAGE>
levels and the scheduled maturities of its borrowings. The Company can minimize
the cash required during the times of heavy loan demand by modifying its credit
policies or reducing its marketing efforts. Liquidity demand caused by net
reductions in deposits are usually caused by factors over which the Company has
limited control. The Company derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings. Liquidity
is derived from liabilities by maintaining a variety of funding sources,
including deposits, advances from the FHLB of New York and other short and
long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At September 30, 1998, the Company had $166.0 million in borrowing
capacity under warehousing lines of credit, $501.6 million in borrowing 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 September 30, 1998, the Company had outstanding commitments to
extend credit totaling $25.6 million. Certificates of deposit which are
scheduled to mature within one year totaled $456.7 million at September 30,
1998, and borrowings that are scheduled to mature within the same period
amounted to $637.6 million. The Company anticipates that it will have sufficient
funds available to meet its current loan commitments.
Capital Resources - The FDIC's capital regulations establish a minimum
3.0 % Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier 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
-16-
<PAGE>
supplementary capital cannot exceed 100% of core capital. At September 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 9.01%, 15.47%
and 16.60%, 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.
"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.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
27 Financial Data Schedule E-1
b) On August 31, 1998 the Company filed a Form 8-K with
respect to the completion of the offering of its
Noncumulative Perpetual Monthly Income Preferred
Stock, Series A. The Form 8-K included copies of the
Press Release and Certificate of Designations and
Preferences with respect to such Preferred Stock.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: November 4, 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
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
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