SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 March 31, 1998:
4,924,474. (Does not include 9,220,278 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
Part I - Financial Information
Page
Item 1. Consolidated Financial Statements ..................................3
Consolidated Statement of Financial Condition as of
March 31, 1998 (Unaudited) and December 31, 1997...........3
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 (Unaudited)...........4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1998 and 1997 (Unaudited)...........5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited) ................ 6
Notes to Unaudited Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis
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 ......................................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
March 31, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks
Money market investments: $ 21,371,646 $ 32,607,001
Securities purchased under agreements to resell
Time deposits with other banks 21,292,213 16,000,000
Federal funds sold 12,708,690 16,758,722
Mortgage loans held for sale, at lower of cost or market -- 3,000,000
Mortgage-backed securities held for trading, at fair value 56,196,609 46,885,323
Mortgage-backed securities available for sale, at fair value 409,883,636 400,457,456
Mortgage-backed securities held to maturity, at amortized cost 45,328,594 46,003,849
(estimated market value: 1998 - $ 32,075,652; 1997 - $33,185,672)
Investment securities held for trading, at fair value 32,427,551 33,326,472
Investment securities available for sale, at fair value 589,333 581,332
Investment securities held to maturity, at amortized cost 77,876,643 75,863,353
(estimated market value: 1998 - $ 6,247,081; 1997 - $10,655,981)
Loans receivable, net 6,271,909 10,692,802
Accounts receivable, including advances to investors, net 813,080,315 765,059,419
Accrued interest receivable 6,413,901 7,358,663
Mortgage servicing rights 10,707,124 10,345,722
Premises and equipment 23,724,878 21,212,998
Other assets 10,247,827 9,527,559
12,745,948 15,064,845
-------------- --------------
$1,560,866,817 $1,510,745,516
============== ==============
<PAGE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Federal funds purchased $ 763,393,297 $ 722,418,494
Securities sold under agreements to repurchase -- 10,000,000
Notes payable 392,885,988 382,282,810
Advances from FHLB 174,495,643 159,304,315
Other secured borrowings 62,000,000 42,000,000
Accounts payable and accrued liabilities -- 34,359,168
Other liabilities 16,883,458 15,871,770
3,368,645 3,205,043
-------------- --------------
Subordinated notes 1,413,027,031 1,369,441,600
-------------- --------------
3,250,000 3,250,000
-------------- --------------
Stockholders'equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding -- --
Common stock:
Class A - $.01 par value, 10,000,000 shares authorized,
9,220,278 issued and outstanding 92,203 92,203
Class B - $.01 par value, 15,000,000 shares authorized, 49,245 49,245
4,924,474 issued and outstanding 38,347,818 38,347,818
Additional paid-in capital 102,901,737 96,129,140
Retained earnings 2,215,172 2,215,172
Capital reserves of the Bank 983,611 1,220,338
Accumulated other comprehensive income
144,589,786 138,053,916
-------------- --------------
$1,560,866,817 $1,510,745,516
============== ==============
</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
period ended
March 31,
------------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 18,656,942 $ 15,344,276
Money market and other investments 1,428,203 1,543,297
Mortgage-backed securities 7,691,106 3,520,921
------------ ------------
Total interest income 27,776,251 20,408,494
------------ ------------
Interest expense:
Deposits 8,345,253 7,731,489
Securities sold under agreements to repurchase 5,693,530 1,313,134
Notes payable 2,969,761 2,057,987
Secured borrowings -- 974,166
Other 781,866 278,647
------------ ------------
Total interest expense 17,790,410 12,355,423
------------ ------------
Net interest income 9,985,841 8,053,071
Provision for loan losses (1,500,000) (1,250,000)
------------ ------------
Net interest income after provision for loan losses 8,485,841 6,803,071
------------ ------------
Other income:
Net gain on origination and sale of loans 7,392,555 5,489,406
Net profit on trading account 14,580 16,635
Net gain on sales of investments available for sale 149,468 24,984
Loan administration and servicing fees 3,687,057 3,308,411
Service charges, fees and other 1,184,384 852,733
------------ ------------
12,428,044 9,692,169
------------ ------------
Total revenues 20,913,885 16,495,240
------------ ------------
<PAGE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
------------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Operating expenses:
Employee compensation and benefits 3,558,222 3,142,339
Office occupancy and equipment 1,824,971 1,605,238
Other administrative and general 4,794,354 4,097,743
------------ ------------
10,177,547 8,845,320
Income before income taxes 10,736,338 7,649,920
------------ ------------
Income tax expense:
Current 1,860,651 1,707,090
Deferred 1,395,852 907,821
------------ ------------
3,256,503 2,614,911
------------ ------------
Net income $ 7,479,835 $ 5,035,009
============ ============
Earnings per common share - Basic $0.53 $0.36
------------ ------------
- Diluted $0.51 $0.35
------------ ------------
Weighted average number of shares outstanding - Basic 14,144,752 14,144,752
- Diluted 14,522,752 14,516,753
</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
period ended
March 31,
----------------------------
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Net Income $ 7,479,835 $ 5,035,009
----------- -----------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period (238,609) (1,593,124)
Less: Reclassification adjustments for gains included in
net income (149,468) (24,984)
----------- -----------
(388,077) (1,618,108)
----------- -----------
Comprehensive income, before tax 7,091,758 3,416,901
Income tax benefit related to items of other comprehensive income 151,350 631,062
----------- -----------
Other comprehensive income, net of tax $ 7,243,108 $ 4,047,963
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month
period ended
March, 31
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,479,835 $ 5,035,009
------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 644,587 623,110
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net (21,695) (96,977)
Amortization of deferred loan origination fees and accretion of
discount on loans, net 71,678 (207,963)
Amortization of servicing rights 614,327 400,684
Provision for loan losses 1,500,000 1,250,000
Provision for bad debts in accounts receivable 75,000 75,000
Gain on sales of mortgage loans (1,089,913) (74,498)
Gain on sales of investment securities available for sale (149,468) (24,984)
Unrealized profit on trading securities (743,970) (2,366,998)
(Increase) decrease in mortgage loans held for sale (9,311,286) 34,528,070
Net increase in mortgage-backed and investment securities held for trading (8,690,211) (52,032,900)
Decrease (increase) in receivables 508,360 (206,221)
Decrease in other assets 3,051,217 915,424
Increase in notes payable 15,191,328 7,568,537
Increase in accounts payable and accrued liabilities 1,225,264 3,178,694
Increase (decrease) in other liabilities 163,602 (824,205)
------------- -------------
Total adjustments 3,038,820 (7,295,227)
------------- -------------
Net cash used in operating activities 10,518,655 (2,260,218)
------------- -------------
Cash flows from investing activities:
Purchases of investment securities (24,500,846) (27,649,800)
Proceeds from sales and maturities of securities available for sale 23,783,062 6,819,777
Proceeds from maturities of securities held to maturity 4,405,420 --
Principal repayments on mortgage-backed securities 1,770,729 2,122,488
Proceeds from sales of loans 24,399,022 3,814,538
Net originations of loans (107,260,851) (55,204,799)
Purchases of FHLB stock, net (1,693,500) (550,457)
Acquisition of premises and equipment (1,246,796) (1,556,511)
Net (increase) decrease in foreclosed real estate (850,379) 17,511
Acquisition of servicing rights (3,126,207) (1,582,161)
------------- -------------
Net cash used by investing activities (84,320,346) (73,769,414)
------------- -------------
<PAGE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month
period ended
March, 31
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net 40,912,577 35,322,563
Decrease in federal funds purchased (10,000,000) --
Increase in securities sold under agreements to repurchase - net 10,603,178 23,438,269
Payments on secured borrowings -- (952,180)
Advances from FHLB 20,000,000 5,000,000
Repayment of advances from FHLB -- (10,000,000)
Cash dividends on common stock (707,238) (540,252)
------------- -------------
Net cash provided by financing activities 60,808,517 52,268,400
------------- -------------
Net decrease in cash and cash equivalents (12,993,174) (23,761,232)
Cash and cash equivalents at beginning of period 68,365,723) 98,855,931
------------- -------------
Cash and cash equivalents at end of period $ 55,372,549 $ 75,094,699
============= =============
Cash and cash equivalents include:
Cash and due from banks $ 21,371,646 $ 22,814,749
Securities purchased under agreements to resell 21,292,213 13,817,480
Time deposits with other banks 12,708,690 32,948,447
Federal funds sold -- 5,514,023
------------- -------------
$ 55,372,549 $ 75,094,699
============= =============
</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 Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.
The Bank provides a full range of banking services, including
residential, commercial and personal loans and a diversified range of deposit
products through sixteen branches located mainly in the northern part of the
Commonwealth of Puerto Rico. The Bank also provides private banking and trust
and other financial services to its customers. The Bank is subject to the
regulations of certain federal and local agencies, and undergoes periodic
examinations by those regulatory agencies.
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of March 31, 1998 and the results of
operations and changes in its cash flows for the three months ended March 31,
1998 and 1997.
The results of operations for the three month period ended March 31,
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
quarter ended March 31, 1997 to conform to the presentation for the quarter
ended March 31, 1998.
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 No. 130- "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying of 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.
Stock option plans
The pro-forma net income and earnings per share disclosures for the
three month periods ended March 31, 1998 and 1997 required by SFAS No. 123 -
"Accounting for Stock-Based Compensation," as if compensation cost had been
determined based on the fair value at the grant date for awards made under the
Company's Stock Option Plan, have not been made because the effects on net
income and earnings per share of compensation costs so determined are not
significant.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three months ended March 31,
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 14,144,752. 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 14,522,752 and 14,516,753 for the three month periods
ended March 31, 1998 and 1997, respectively.
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.
8
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------
Amortized cost Fair value
-------------- -----------
(Unaudited)
<S> <C> <C>
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year $ 309,908 $ 310,872
----------- -----------
Puerto Rico Government obligations:
Due from five to ten years 5,945,947 5,920,155
Due over ten years 16,054 16,054
----------- -----------
5,962,001 5,936,209
----------- -----------
$ 6,271,909 $ 6,247,081
=========== ===========
Mortgage-backed securities held to maturity:
GNMA certificates:
Due from one to five years $ 46,022 $ 46,750
Due over ten years 17,828,733 17,266,109
----------- -----------
17,874,755 17,312,859
Federal National Mortgage Association (FNMA) certificates -
Due over ten years 14,279,062 14,501,792
----------- -----------
Federal Home Loan Mortgage Corporation (FHLMC)
certificates -
Due over ten years 273,734 261,001
----------- -----------
$32,427,551 $32,075,652
=========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------
Amortized cost Fair value
-------------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals and other mortgage-backed securities $ 7,650,337 $ 9,193,628
----------- -----------
FNMA certificates:
Due over ten years 9,109,309 9,075,177
----------- -----------
FHLMC certificates:
Due from one to five years 44,571 44,446
Due from five to ten years 343,216 350,384
Due over ten years 26,527,856 26,664,959
----------- -----------
26,915,643 27,059,789
----------- -----------
$43,675,289 $45,328,594
=========== ===========
Investment securities available for sale:
U.S. Treasury securities:
Due within one year $ 784,661 $ 784,661
Due from one to five years 30,515,532 30,503,119
----------- -----------
31,300,193 31,287,780
----------- -----------
U.S. Government and agencies securities:
Due from one to five years 34,995,523 34,994,946
Due from five to ten years 5,022,188 4,994,350
----------- -----------
40,017,711 39,989,296
----------- -----------
FHLB stock 6,599,567 6,797,767
----------- -----------
$77,917,471 $77,876,643
=========== ===========
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $3,022,667 as of March 31, 1998, which are
primarily associated with the sale in prior years of collaterized mortgage
obligations. These sales were not made in connection with the Company's mortgage
banking activities.
10
<PAGE>
<TABLE>
<CAPTION>
March 31,
1998
------------
(Unaudited)
<S> <C>
Mortgage-backed securities held for trading:
CMO Residuals (all interest only) $ 7,986,377
GNMA Certificates 401,897,259
------------
$409,883,636
============
</TABLE>
11
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage $ 518,201,255 $ 416,728,996
Residential - second mortgage 17,603,924 17,831,079
Construction 13,254,295 13,367,513
Commercial 95,112,471 87,506,802
------------- -------------
644,171,945 595,434,390
Undisbursed portion of loans in process (6,594,897) (6,218,039)
Net deferred loan fees 182,948 172,019
------------- -------------
637,759,996 589,388,370
------------- -------------
Other loans:
Commercial 39,133,069 38,598,227
Consumer:
Secured by deposits 12,413,924 12,471,772
Secured by real estate 85,706,982 81,251,989
Other 44,914,337 50,632,418
Unamortized discount (122,991) (151,460)
Unearned interest (316,986) (360,195)
------------- -------------
181,728,335 182,442,751
------------- -------------
Total loans 819,488,331 771,831,121
Allowance for loan losses (6,408,016) (6,771,702)
------------- -------------
$ 813,080,315 $ 765,059,419
============= =============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 6,771,698 $ 3,331,645
Provision for loan losses 1,500,000 1,250,000
Loans charged-off (1,980,602) (1,035,471)
Recoveries 44,920 99,435
----------- -----------
Balance, end of period $ 6,408,016 $ 3,645,609
=========== ===========
</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 $415.9
million at March 31, 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 $135.6 million at March 31, 1998.
Commitments to buy and sell GNMA certificates
As of March 31, 1998, the Company had open commitments to issue GNMA
certificates of approximately $33.4 million.
Commitments to sell mortgage loans
As of March 31, 1998 the Company had commitments to sell mortgage loans
to third party investors amounting to approximately $17.4 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 March 31, 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,
amounts to approximately $370.4 million at March 31, 1998. Liability, if any,
under the recourse provisions at March 31, 1998 is estimated by management to be
significant.
13
<PAGE>
Item 2: Management's Discussion and Analysis
Financial Condition
At March 31, 1998, the Company's total assets amounted to $1.56
billion, as compared to $1.51 billion at December 31, 1997. The $50.1 million or
3.3% increase in total assets during the three month period ended March 31, 1998
was attributable to a $48.0 million or 6.3% increase in loans receivable, net,
which reflects net originations following repayments and sales, and a $9.3
million or 19.9% increase in mortgage loans held for sale, reflecting an
increase in the volume of loan originations of approximately 56% to
approximately $282 million during the 1998 period. Such increases were partially
offset by a $13.0 million or 19.0% decrease in cash and cash equivalents due to
the use of excess liquidity to fund increased loan originations during the
period.
The increase in the Company's assets were also primarily funded by
increased deposits of $41.0 million or 5.7%, by a $10.6 million or 2.8% increase
in securities sold under agreements to repurchase, by a $15.2 million or 9.5%
increase in notes payable, and by a $20.0 million or 47.6% increase in FHLB
advances.
At March 31, 1998, the Company's stockholders' equity amounted to
$144.6 million, which is an increase of $6.5 million or 4.7% from the amount
reported at December 31, 1997. The primary reason for the increase was the net
income earned for the quarter, which was partially offset by a $236,000 decrease
in unrealized gains on securities available for sale, net of income tax
benefits, and $707,000 in dividends paid during the period. At March 31, 1998,
the Bank's leverage and Tier 1 risk-based capital amounted to 7.22% and 11.95%
of adjusted total assets, respectively, compared to a 4.0% minimum requirement,
and its total risk-based capital amounted to 13.01%, compared to an 8.0% minimum
requirement.
Results of Operations
The Company reported net income of $7.5 million during the three months
ended March 31, 1998, as compared to $5.0 million during the prior comparable
period.
Total revenues amounted to $20.9 million during the three months ended
March 31, 1998 compared to $16.5 million for the prior comparable period. The
26.8% increase was due to an increase in net interest income of $1.9 million or
24.0% during the three months ended March 31, 1998 over the prior comparable
period, primarily due to a $3.3 million or 21.6% increase in interest income on
loans, primarily associated with an increase in the average balance of the
outstanding loan portfolio, and to a $4.2 million or 118.4% increase in interest
income on mortgage-backed securities due to an increase in securities held for
trading in the 1998 period.
Contributing to the 26.8% increase in revenues during the March 31,
1998 quarter was a $1.9 million or 34.7% increase in net gain on origination and
sale of loans, which reflects an increase in mortgage loan originations during
the 1998 period, and an increase in loan administration and servicing fees of
$379,000 or 11.4% due to an increase in the loan servicing portfolio. Service
charges, fees and other also increased by $332,000 or 38.9% due mainly to an
increase in banking fees associated with an increased number of deposit accounts
during the 1998 period.
14
<PAGE>
Total expenses increased by $1.3 million or 15.1% during the three
months ended March 31, 1998 over the prior comparable period. The increase
during the three month period in 1998 was due primarily to a $416,000 or 13.2%
increase in employee compensation and benefits associated with salary increases
to employees and higher loan production during the 1998 period, and a $220,000
or 13.7% 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. These increases in expenses were accompanied by a $696,000 or 17.0%
increase in other miscellaneous expenses mainly as a result of a $237,000
increase in advertising costs associated with an increase in loan production and
a $212,000 increase in amortization expenses of the Company's servicing asset.
Total income tax expense increased by $641,000 or 24.5% during the
three months ended March 31, 1998 over the prior comparable period, due
primarily to a $3.1 million or 40.3% increase in income before taxes during the
1998 period. The Company's effective tax rate amounted to 30.3% during the three
month period ended March 31, 1998 compared to 34.2% in the 1997 comparable
period. The decrease in 1998 of the Company's effective tax rate was primarily
attributable to an increase in the Company's exempt interest income.
Liquidity and Capital Resources
Liquidity - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At March 31, 1998, the Company had $138.4 million in borrowing capacity
under warehousing lines of credit, $256.9 million in borrowings capacity under a
line of credit with the FHLB of New York and $ 15 million 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.
15
<PAGE>
At March 31, 1998, the Company had outstanding commitments (mainly
unused lines of credit) to originate non-mortgage loans of $15.0 million.
Certificates of deposit which are scheduled to mature within one year totaled
$365.7 million at March 31, 1998, and borrowings that are scheduled to mature
within the same period amounted to $548.5 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 March 31,
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 7.22%,
11.95% and 13.01%, 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.
16
<PAGE>
Subsequent events
The Company's authorized number of shares of common stock was increased
from 25 million shares to 60 million shares at the Company's Annual
Stockholders' meeting held on April 23, 1998 . Through an amendment of the
Company's Certificate of Incorporation, the number of shares of common stock
designated as Class A Shares was increased from 10 million to 40 million, and
the number of shares of common stock designated as Class B Shares was increased
from 15 million to 20 million.
On April 27, 1998 the Company announced its Board of directors had
approved a 2 for 1 stock split on the Company's common stock, to be effected in
the form of a stock dividend of one additional share of common stock to be
issued on June 25, 1998 for each share of common stock held of record as of June
12, 1998. Following distribution of the additional shares, the Company will have
28,289,504 common shares outstanding compared to 14,144,752 presently
outstanding.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
---
27 Financial Data Schedule E-1
b) On March 19,1998 the Registrant filed a Form 8-K
report to provide information on the Company's
proposed acquisition of Fajardo Federal Saving Bank.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: May 12, 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-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,371,646
<INT-BEARING-DEPOSITS> 34,000,903
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<NET-INCOME> 7,479,835
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