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, 1999
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 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,
1999: 10,192,891 (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, 1999 (Unaudited) and December 31, 1998 ....... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited)........ 4
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)............................................ 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (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.... 16
Part II - Other Information
- ----------------------------
Item 1. Legal Proceedings ............................................ 16
Item 2. Changes in Securities ........................................ 16
Item 3. Defaults upon Senior Securities .............................. 16
Item 4. Submission of Matters ........................................ 17
Item 5. Other Information ............................................ 17
Item 6. Exhibits and Reports on Form 8-K ............................. 18
Signatures ............................................... 18
-2-
<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,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,927,917 $ 51,804,750
Money market investments:
Securities purchased under agreements to resell 10,002,847 11,544,123
Time deposits with other banks 12,691,371 30,361,527
Federal funds sold -- 10,018,048
Mortgage loans held for sale, at lower of cost or market 75,205,656 117,126,040
Mortgage-backed securities held for trading, at fair value 44,457,191 450,546,034
Mortgage-backed securities available for sale, at fair value 530,712,426 95,040,331
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1999 - $25,462,066; 1998 - $28,260,925) 25,303,394 28,255,518
Investment securities available for sale, at fair value 124,578,329 59,502,140
Investment securities held to maturity, at amortized cost
(estimated market value: 1999- $ 6,131,155; 1998- $6,378,634) 6,141,250 6,343,929
Loans receivable, net 1,315,053,005 1,073,668,278
Accounts receivable, including advances to investors, net 13,841,206 9,665,290
Accrued interest receivable 14,919,249 12,505,431
Servicing asset 66,173,253 58,221,052
Premises and equipment 15,154,370 12,962,435
Other assets 22,284,380 17,216,602
--------------- ---------------
$ 2,309,445,844 $ 2,044,781,528
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,160,276,440 $ 1,007,297,304
Securities sold under agreements to repurchase 522,235,642 471,421,726
Notes payable 123,010,129 182,747,956
Advances from FHLB 219,000,000 121,000,000
Other borrowings 9,000,000 9,000,000
Accounts payable and accrued liabilities 31,173,978 28,020,080
Other liabilities 6,813,073 4,132,603
--------------- ---------------
2,071,509,262 1,823,619,669
--------------- ---------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
<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 50,000,000 50,000,000
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 18,440,556
issued and outstanding 184,406 184,406
Class B - $.01 par value, 30,000,000 shares authorized, 10,192,891
issued and outstanding in 1999 (1998-10,146,091) 101,929 101,461
Additional paid-in capital 41,732,410 41,544,378
Retained earnings 143,561,850 124,418,278
Capital reserves of the Bank 3,547,798 3,547,798
Accumulated other comprehensive (loss) income (1,191,811) 1,365,538
--------------- ---------------
237,936,582 221,161,859
--------------- ---------------
$ 2,309,445,844 $ 2,044,781,528
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Six month
period ended period ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 27,957 $ 21,487 $ 54,574 $ 40,144
Money market and other investments 7,608 1,538 1,605 2,966
Mortgage-backed securities 872 6,921 15,643 14,612
------------ ------------ ------------ ------------
Total interest income 36,437 29,946 71,822 57,722
------------ ------------ ------------ ------------
Interest expense:
Deposits 12,699 9,084 24,159 17,429
Securities sold under agreements to repurchase 5,598 5,846 10,972 11,539
Notes payable 3,254 3,140 6,983 6,110
Other 2,358 1,064 3,946 1,846
------------ ------------ ------------ ------------
Total interest expense 23,909 19,134 46,060 36,924
------------ ------------ ------------ ------------
Net interest income 12,528 10,812 25,762 20,798
Provision for loan losses (1,100) (1,500) (2,400) (3,000)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 11,428 9,312 23,362 17,798
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale 9,304 7,660 19,801 15,217
Loan administration and servicing fees 6,618 3,833 12,379 7,520
Service charges, fees and other 2,090 1,472 3,575 2,656
------------ ------------ ------------ ------------
18,012 12,965 35,755 25,393
------------ ------------ ------------ ------------
Total revenues 29,440 22,277 59,117 43,191
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Six month
period ended period ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C>
Operating expenses:
Employee compensation and benefits 5,462 4,212 10,232 7,770
Office occupancy and equipment 2,717 2,166 5,107 3,991
Other administrative and general 7,379 5,905 15,057 10,700
------------ ------------ ------------ ------------
15,558 12,283 30,396 22,461
------------ ------------ ------------ ------------
Income before income taxes 13,882 9,994 28,721 20,730
------------ ------------ ------------ ------------
Income tax expense:
Current 1,473 747 3,397 2,607
Deferred 599 1,276 2,364 2,672
------------ ------------ ------------ ------------
2,072 2,023 5,761 5,279
------------ ------------ ------------ ------------
Net income $ 11,810 $ 7,971 $ 22,960 $ 15,451
============ ============ ============ ============
Earnings per common share - Basic $ 0.38 $ 0.28 $ 0.74 $ 0.55
------------ ------------ ------------ ------------
- Diluted $ 0.37 $ 0.27 $ 0.72 $ 0.53
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic 28,631,073 28,289,504 28,615,943 28,289,504
- Diluted 29,408,611 29,045,504 29,382,772 29,045,504
</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,
--------------------- ----------------------
1999 1998 1999 1998
------- ------ ------- -------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $11,810 $7,971 $22,960 $15,451
------- ------ ------- -------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period (3,573) 549 (4,773) 309
Less: Reclassification adjustments for (gains) losses included
in net income 445 --- 581 (149)
------- ------ ------- -------
(3,128) 549 (4,192) 160
Income tax benefit (expense) related to items of other comprehensive income 1,220 (214) 1,635 (62)
------- ------ ------- -------
Other comprehensive (loss) income, net of tax (1,908) 335 (2,557) 98
------- ------ ------- -------
Comprehensive income, net of tax $ 9,902 $8,306 $20,403 $15,549
======= ====== ======= =======
</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,
------------------------
1999 1998
--------- ---------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net income $ 22,960 $ 15,451
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,824 1,347
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net 121 (9)
Amortization of servicing rights 3,381 1,323
Provision for loan losses 2,400 3,000
Provision for bad debts in accounts receivable 150 150
Gain on sales of loans (5,183) (2,662)
Loss (gain) on sales of mortgage-backed and investment securities available for sale 581 (149)
Unrealized loss (profit) on trading securities 746 (1,888)
Increase in mortgage loans held for sale 41,920 (43,454)
Net increase in mortgage-backed securities held for trading (22,066) (42,797)
Increase in receivables (6,740) (1,534)
Increase in other assets (5,407) (694)
(Decrease) increase in notes payable (59,738) 58,485
Increase in accounts payable and accrued liabilities 5,220 3,013
Increase in other liabilities 2,681 562
--------- ---------
Total adjustments (40,110) (25,307)
--------- ---------
Net cash used in operating activities (17,150) (9,856)
--------- ---------
Cash flows from investing activities:
Purchases of investment securities (84,605) (31,501)
Proceeds from sales and maturities of securities available for sale 111,236 39,663
Proceeds from maturities of securities held to maturity 209 4,405
Proceeds from sales of loans 99,809 73,398
Net originations of loans (436,234) (287,438)
Purchases of FHLB stock, net (4,096) (4,160)
Acquisition of premises and equipment (3,676) (2,764)
Acquisition of servicing rights (11,332) (8,712)
--------- ---------
Net cash used by investing activities (328,689) (217,109)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month
period ended
June 30,
------------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net 152,548 98,421
Decrease in federal funds purchased -- 5,000
(Decrease) increase in securities sold under agreements to repurchase - net 50,814 42,786
Advances from FHLB 98,000 79,400
Repayment of advances from FHLB -- --
Repayment of subordinate notes -- (3,250)
Capital contribution to subsidiary -- (12)
Proceeds from issuance of common stock 189 --
Cash dividends on common stock (3,817) (1,468)
--------- ---------
Net cash provided by financing activities 297,733 220,877
--------- ---------
Net decrease in cash and cash equivalents (48,106) (6,088)
Cash and cash equivalents at beginning of period 103,728 68,366
--------- ---------
Cash and cash equivalents at end of period $ 55,622 $ 62,278
========= =========
Cash and cash equivalents include:
Cash and due from banks $ 32,928 $ 22,900
Securities purchased under agreements to resell 10,003 8,000
Time deposits with other banks 12,691 31,378
Federal funds sold -- --
--------- ---------
$ 55,622 $ 62,278
========= =========
</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 twenty branches located mainly in the northern part of the Commonwealth
of Puerto Rico. The Bank also provides private banking and trust and other
financial services to its customers. The Bank is subject to the regulations of
certain federal and local agencies, and undergoes periodic examinations by those
regulatory agencies.
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial condition as of June 30, 1999 and the results of
operations and changes in its cash flows for the three and six months ended June
30, 1999 and 1998.
The results of operations for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected for the
year ending December 31, 1999. 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, 1998.
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 period ended June 30, 1998 to conform to the presentation for the
1999 respective periods.
-7-
<PAGE>
Basis of consolidation
All significant intercompany balances and transactions have been eliminated in
the accompanying unaudited financial statements.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three and six month periods ended
June 30, 1999 and 1998 are computed by dividing net income for such periods by
the weighted average number of shares of common stock outstanding during such
periods. 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.
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.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(Unaudited)
Mortgage-backed securities held for trading:
<S> <C> <C>
CMO residuals and interest only strips $ 9,296,265 $ 7,146,762
GNMA certificates 35,160,926 443,399,272
----------- ------------
$44,457,191 $450,546,034
=========== ============
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------ ----------------------------
Amortized Fair Amortized Fair
cost value cost value
------------ ------------ ------------ ------------
(Unaudited)
Mortgage-backed securities available for sale:
<S> <C> <C> <C> <C>
CMO residuals and other mortgage-backed securities $ 8,765,722 $ 10,576,856 $ 7,845,382 $ 9,661,171
------------ ------------ ------------ ------------
FNMA certificates:
Due from five to ten years 846,601 836,813 -- --
Due over ten years 6,553,891 6,407,634 8,091,335 8,161,704
------------ ------------ ------------ ------------
7,400,492 7,244,447 8,091,335 8,161,704
------------ ------------ ------------ ------------
FHLMC certificates:
Due from one to five years 237,882 241,470 89,209 90,765
Due from five to ten years 1,243,349 1,233,012 240,394 244,140
Due over ten years 17,152,607 16,948,992 21,368,689 21,723,711
------------ ------------ ------------ ------------
18,633,838 18,423,474 21,698,292 22,058,616
------------ ------------ ------------ ------------
GNMA certificates:
Due over ten years 496,072,179 494,467,649 55,158,840 55,158,840
------------ ------------ ------------ ------------
$530,872,231 $530,712,426 $ 92,793,849 $ 95,040,331
============ ============ ============ ============
Investment securities available for sale:
U.S. Treasury securities:
Due from one to five years $ 4,996,520 $ 4,946,875 $ 4,995,028 $ 4,990,625
------------ ------------ ------------ ------------
U.S. Government and Agencies securities:
Due from one to five years 85,951,128 84,713,528 38,100,000 38,106,648
Due from five to ten years 19,923,596 19,416,860 5,010,140 5,000,000
------------ ------------ ------------ ------------
105,874,724 104,130,388 43,110,140 43,106,648
------------ ------------ ------------ ------------
FHLB stock 15,501,066 15,501,066 11,404,867 11,404,867
------------ ------------ ------------ ------------
$126,372,310 $124,578,329 $ 59,510,035 $ 59,502,140
============ ============ ============ ============
</TABLE>
Mortgage-backed securities available for sale include interest only
securities with an amortized cost of $4,213,054 as of June 30, 1999, which are
primarily associated with the sale in prior years of collateralized mortgage
obligations. These sales were not made in connection with the Company's mortgage
banking activities.
-9-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)
Mortgage-backed securities held to maturity:
<S> <C> <C> <C> <C>
GNMA certificates:
Due from one to five years $ 21,506 $ 23,065 $ 27,227 $ 29,201
Due from five to ten years 11,515,431 11,274,125 13,024,960 12,751,640
Due over ten years 2,315,522 2,263,333 2,359,713 2,306,529
----------- ----------- ----------- -----------
13,852,459 13,560,523 15,411,900 15,087,370
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years 11,239,902 11,696,220 12,607,700 12,944,020
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years 211,033 205,323 235,918 229,535
----------- ----------- ----------- -----------
$25,303,394 $25,462,066 $28,255,518 $28,260,925
=========== =========== =========== ===========
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year $ 200,000 $ 199,500 $ 194,892 $ 196,000
----------- ----------- ----------- -----------
U.S. Government and Agencies securities:
Due within one year -- -- 204,167 204,167
----------- ----------- ----------- -----------
Puerto Rico Government and Agencies obligations:
Due from one to five years 1,280,000 1,283,200 -- --
Due from five to ten years 4,661,250 4,648,455 5,944,870 5,978,467
----------- ----------- ----------- -----------
5,941,250 5,931,655 5,944,870 5,978,467
----------- ----------- ----------- -----------
$ 6,141,250 $ 6,131,155 $ 6,343,929 $ 6,378,634
=========== =========== =========== ===========
</TABLE>
-10-
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage $ 950,484,488 $ 735,457,756
Residential - second mortgage 15,911,693 18,633,916
Land 684,475 337,250
Construction 58,409,002 34,391,170
Commercial 142,683,760 121,393,030
--------------- ---------------
1,168,173,418 910,213,122
Undisbursed portion of loans in process (34,849,356) (18,170,178)
Net deferred loan costs (fees) 148,868 (166,056)
--------------- ---------------
1,133,472,930 891,876,888
--------------- ---------------
Other loans:
Commercial 48,040,540 46,532,311
Consumer:
Secured by deposits 16,896,735 17,225,437
Secured by real estate 86,481,278 85,054,815
Other 39,391,033 41,381,304
Unamortized discount (302,415) (163,499)
Unearned interest (138,381) (183,546)
--------------- ---------------
190,368,790 189,846,822
--------------- ---------------
Total loans 1,323,841,720 1,081,723,710
Allowance for loan losses (8,788,715) (8,055,432)
--------------- ---------------
$ 1,315,053,005 $ 1,073,668,278
=============== ===============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
1999 1998
------- -------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance, beginning of period $ 8,055 $ 6,772
Provision for loan losses 2,400 3,000
Loans charged-off (1,997) (3,212)
Recoveries 331 135
------- -------
Balance, end of period $ 8,789 $ 6,695
======= =======
</TABLE>
-11-
<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 $485.2
million at June 30, 1999. 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 $156.9 million at June 30, 1999.
Commitments to buy and sell GNMA certificates
As of June 30, 1999, the Company had open commitments to issue GNMA
certificates of approximately $138.2 million.
Commitments to sell mortgage loans
As of June 30, 1999 the Company had commitments to sell mortgage
loans to third party investors amounting to approximately $ 30.6 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, 1999, 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 $612.5 million at June 30, 1999. Liability, if any,
under the recourse provisions at June 30, 1999 is estimated by management to be
insignificant.
-12-
<PAGE>
Item 2: Management's Discussion and Analysis
- ------------------------------------------------
Financial Condition
At June 30, 1999, the Company's total assets amounted to $2.3
billion, as compared to $2.0 billion at December 31, 1998. The $264.7 million or
12.9% increase in total assets during the six month period ended June 30, 1999
was attributable to a $241.4 million or 22.5% increase in loans receivable, net,
which reflects net originations following repayments and sales, and a $65.1
million or 109.4% increase in investment securities available for sale, which is
the result of the purchase of $82.5 million of such securities during the
period. Such increases were partially offset by a $48.1 million or 46.4%
decrease in cash and cash equivalents due to the use of excess liquidity to fund
increased loan originations during the period.
Effective January 1, 1999, the Company made a reclassification of
$427.4 million of mortgage backed securities from trading to available for sale
in connection with the adoption of SFAS 134. This adoption resulted principally
in an increase in mortgage-backed securities available for sale and a
corresponding decrease in mortgage-backed securities held for trading.
The increase in the Company's assets were primarily funded by
increased deposits of $153.0 million or 15.2%, and by a $98.0 million or 81.0%
increase in FHLB advances.
At June 30, 1999, the Company's stockholders' equity amounted to
$237.9 million, which is an increase of $16.8 million or 7.6% from the amount
reported at December 31, 1998. The primary reason for the increase was the net
income earned for the quarter, which was partially offset by a $2.6 million
decrease in unrealized gains on securities available for sale, net of income tax
benefits, and $3.8 million in dividends paid during the period. At June 30,
1999, the Bank's leverage and Tier 1 risk-based capital amounted to 6.59% and
11.24% of adjusted total assets, respectively, compared to a 4.0% minimum
requirement, and its total risk-based capital amounted to 12.15%, compared to an
8.0% minimum requirement.
Results of Operations
The Company reported net income of $11.8 million and $ 23.0 million
during the three and six months period ended June 30, 1999, as compared to $8.0
million and $15.5 million during the prior comparable periods.
Total revenues for the six month period ended June 30, 1999 amounted
to $59.1 million compared to $43.2 million for the prior comparable period. The
36.9% increase was due to an increase in net interest income of $5.0 million or
23.9% during the six months ended June 30, 1999 over the prior comparable
period, primarily due to a $14.4 million or 35.9% increase in interest income on
loans, primarily associated with an increase in the average balance of the
outstanding loan portfolio.
<PAGE>
Contributing to the 36.9% increase in revenues during the six month
period ended June 30, 1999 was a $4.7 million or 31.4% increase in net gain on
origination and sale of loans, which reflects a 31.5% increase in mortgage loan
originations during the 1999 period, associated with the Company's expansion of
its existing branch network during fiscal year 1998. Loan administration and
servicing fees also increased by $4.9 million or 64.6% due to an increase in the
Company's loan servicing portfolio. Service charges, fees and other also
increased by $919,000 or 34.6%, due mainly to an increase in banking fees
associated with an increased number of deposit accounts during the 1999 period,
and other fees due to an expanded customer base as a result of the acquisition
of a $1.1 billion servicing portfolio in late 1998 from another financial
institution.
-13-
<PAGE>
Total revenues for the quarter ended June 30, 1999 amounted to $29.4
million, a $7.2 million or 32.2% increase over the comparable quarter in 1998.
The increase in total revenues during the 1999 quarter was primarily
attributable to a $1.7 million or 15.9% increase in net interest income, a $1.6
million or 21.5% increase in net gain on origination and sale of loans and a
$2.8 million or 72.7% increase in loan administration and servicing fees.
Total expenses increased by $7.9 million or 35.3% during the six
months ended June 30, 1999 over the prior comparable period. The increase during
the six month period in 1999 was due primarily to a $2.5 million or 31.7%
increase in employee compensation and benefits, due to an increase in the number
of employees as a result of new branch openings and increased loan production
during the 1999 period. The increase in employee expenses was accompanied by a
$4.4 million or 40.7% increase in other miscellaneous expenses, mainly as a
result of a $614,000 increase in advertising costs and other expense increases
associated with an increase in loan production, and a $2.1 million increase in
amortization expenses of the Company's servicing asset. Finally, occupancy
expenses increased by $1.1 million or 28.0%, mainly as a result of the operation
of five additional branches completed during fiscal 1998 and an additional
branch completed in early 1999.
Total expenses increased by $3.3 million or 26.7% during the three
month period ended June 30, 1999. The increase was due to a $1.3 million or
29.7% increase in employee compensation and benefits, a $551,000 or 25.4%
increase in occupancy expenses, and a $1.5 million or 25.0% increase in other
miscellaneous expenses. These expenses increased during such three month period
for the reasons noted above.
Total income tax expense increased by $49,000 or 2.4%, and $482,000
or 9.1% during the three and six month period ended June 30, 1999, respectively
over the prior comparable periods. The Company's effective tax rate amounted to
18.5% and 21.8%, respectively, during the three and six months periods ended
June 30, 1999 (excluding the effect of a $500,000 tax credit recorded in the
second quarter of 1999 related to the purchase of certain investment tax
credits), compared to 20.2% and 25.5% in the 1998 comparable periods. The
decrease in 1999 of the Company's effective tax rate is primarily attributable
to the more effective management of the Company's exempt 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 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.
-14-
<PAGE>
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, 1999, the Company had $200.0 million in borrowing capacity
under warehousing lines of credit, $376.1 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.
At June 30, 1999, the Company had outstanding commitments to extend
credit totaling $54.1 million. Certificates of deposit which are scheduled to
mature within one year totaled $612.3 million at June 30, 1999, and borrowings
that are scheduled to mature within the same period amounted to $721.7 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, 1999, 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 6.59%, 11.24% and 12.15%, 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.
-15-
<PAGE>
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 risks are
presented at December 31, 1998 in Item 7A of the Comapany's Annual report on
Form 10-K. Management believes there have been no material changes in the
Company's market risk since December 31, 1998.
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.
9
<PAGE>
Item 2: Changes in Securities
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
-16-
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 29,
1999.
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 2002 or until their
respective successors are elected and qualified, the following
were the number of shares voted for each nominee:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Victor J. Galan Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,363,784 Withheld 3,900 Against 0
Ramon Prats Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,363,784 Withheld 3,900 Against 0
Enrique Umpierre-Suarez Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,363,784 Withheld 3,900 Against 0
Eduardo McCormack Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,363,784 Withheld 3,900 Against 0
</TABLE>
2. With respect to the amendment of the Company's certificate of
Incorporation to increase the authorized number of shares of
Class B Common Stock from 20,000,000 to 30,000,000, the
following are the number of shares voted:
Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,328,111 Withheld 8,672 Against 19,401
3. With respect to the ratification of the appointment of
PricewaterhouseCoopers, LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999, the
following are the number of shares voted:
Class A-For 18,440,556 Withheld 0 Against 0
Class B-For 27,294,387 Withheld 1,400 Against 825
Item 5: Other Information
On July 29, 1999 the Company entered into a definitive agreement to
acquire by merger mortgage banking company Continental Capital Corp., Huntington
Station, New York ("Continental"). The Company is acquiring Continental for an
undisclosed amount of cash, plus an additional amount to be paid over a four
year period to those Continental shareholders who will remain with the Company
under employment contracts. Continental is one of the largest single family
residential mortgage loan originators in Suffolk County, New York and the
largest FHA/VA mortgage loan originator in the New York metropolitan area,
originating $340 million of loans in 1998. In addition to its origination
business, Continental engages in loan servicing and as of June 30, 1999 its loan
servicing portfolio equaled $485 million.
-17-
<PAGE>
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: August 13, 1999 By: /S/ VICTOR J. GALAN
-------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JOSEPH R. SANDOVAL
----------------------
Joseph R. Sandoval
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,927,917
<INT-BEARING-DEPOSITS> 12,691,371
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 44,457,191
<INVESTMENTS-HELD-FOR-SALE> 655,290,755
<INVESTMENTS-CARRYING> 31,444,644
<INVESTMENTS-MARKET> 31,593,221
<LOANS> 1,315,053,005
<ALLOWANCE> 8,788,715
<TOTAL-ASSETS> 2,309,445,844
<DEPOSITS> 1,160,276,440
<SHORT-TERM> 873,245,771
<LIABILITIES-OTHER> 37,987,051
<LONG-TERM> 0
0
50,000,000
<COMMON> 42,018,745
<OTHER-SE> 145,917,837
<TOTAL-LIABILITIES-AND-EQUITY> 2,309,445,844
<INTEREST-LOAN> 54,573,465
<INTEREST-INVEST> 15,643,003
<INTEREST-OTHER> 1,605,425
<INTEREST-TOTAL> 71,821,893
<INTEREST-DEPOSIT> 24,158,672
<INTEREST-EXPENSE> 46,059,844
<INTEREST-INCOME-NET> 25,762,049
<LOAN-LOSSES> 2,400,000
<SECURITIES-GAINS> (1,327,593)
<EXPENSE-OTHER> 30,396,324
<INCOME-PRETAX> 28,721,519
<INCOME-PRE-EXTRAORDINARY> 22,960,322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,960,322
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 7.52
<LOANS-NON> 47,301,374
<LOANS-PAST> 383,758
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,556,285
<ALLOWANCE-OPEN> 8,055,432
<CHARGE-OFFS> 1,997,054
<RECOVERIES> 330,336
<ALLOWANCE-CLOSE> 8,788,715
<ALLOWANCE-DOMESTIC> 8,788,715
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
