SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[ 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
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(Exact name of registrant as specified in its charter)
Puerto Rico 66-0532217
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(State of incorporation (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
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(Address of principal executive offices) (Zip Code)
(787) 758-2424
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(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.)
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Note: The undersigned registrant hereby amends and restates in its entirety
Item 2 of Part I of its Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998. Item 2 of Part I has been amended solely to
insert a Year 2000 discussion.
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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.
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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
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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
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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.
Year 2000 Issue
The Year 2000 problem is caused by the situation where computers
worldwide were programmed to read only the last two digits of a calendar year to
save computer memory. Those programs could read "00" as the year 1900 instead of
the year 2000, and thus may not recognize dates after December 31, 1999. This
misinterpretation of data could cause significant problems to banking and
mortgage banking entities, such as the Company, as the use of the date
calculations is extensive in daily operations for matters such as interest
accruals, maturity dates, delinquency status, and customer statements. Year 2000
problems go beyond computer systems of the Company, and affect anything that
uses an internal microchip such as telephones, fax machines, security and alarm
systems, vaults, elevators and air conditioning systems.
The Company does not own any proprietary software systems or
applications and relies on those provided by third party vendors. The Company
has completed the assessment of its computer hardware, software programs and
data processing applications, including those provided by third party vendors.
The Company has received revised programs from its third party vendors that have
been modified to address the Year 2000 problem for the principal applications
used in its mortgage banking and banking businesses. The Company began the
testing of these revised programs and applications during November 1998, and the
testing is scheduled to be completed by December 31, 1998. If the tests reveal
that such programs and applications do not adequately deal with the Year 2000
problems, the Company will seek to obtain replacement programs and applications
with other alternative suppliers. The Company's main computer, used principally
in banking and mortgage banking operations, is Year 2000 compliant, meaning that
it can properly process and calculate date-related information after January 1,
2000. The Company is in the process of replacing other equipment, primarily
desktop computers that are not Year 2000 compliant. The Company intends to
develop a contingency plan which is expected to be completed by March 31, 1999.
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The Company does not anticipate that the Year 2000 problem will have a
material adverse effect on its financial condition or results in operations.
However, Year 2000 problems suffered by third party providers of basic services,
such as telephone, waste, sewer and electricity, could have an adverse impact on
the daily operations of the Company. The Company would attempt to deal with any
disruption of such basic services caused by the Year 2000 problem with its
existing business interruption contingency plans. Under the Company's
contingency plans, most office branches of the Company are presently equipped
with power plants and/or generators.
The Company estimates that the cost of addressing the Year 2000 issue
will be approximately $300,000, most of which will be incurred during 1999. Most
of such costs are directly related to the costs of replacing existing equipment,
primarily desktop computers, which have been fully depreciated on the Company's
financial statements.
As a bank holding company, the Company could be subject to enforcement
action by federal banking authorities if it fails to adequately address Year
2000 issues.
"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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: March 16, 1999 By: /S/ VICTOR J. GALAN
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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)
