SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (I.R.S. Employer
or organization) Identification No.)
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(787) 758-2424
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s) and (b) has been subject to such filing
requirements for at least 90 days.
YES [ X ] NO [ ]
Number of shares of Class B Common Stock outstanding as of September 30, 1999:
10,217,731 (Does not include 18,440,556 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)
<PAGE>
R&G FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
- --------------------------------
Page
ITEM 1. Consolidated Financial Statements ....................................3
Consolidated Statement of Financial Condition as of
September 30, 1999 (Unaudited) and December 31, 1998.......3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited).......4
Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)..5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) .............6
Notes to Unaudited Consolidated Financial Statements ...............8
ITEM 2...Management's Discussion and Analysis ................................13
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 ...............................................16
ITEM 5. Other Information ...................................................16
ITEM 6. Exhibits and Reports on Form 8-K ....................................16
Signatures ......................................................17
2
<PAGE>
PART 1-FINANCIAL INFORMATION
----------------------------
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
($ in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................ $ 38,024 $ 51,805
Money market investments:
Securities purchased under agreements to resell ............................ 12,600 11,544
Time deposits with other banks ............................................. 25,493 30,362
Federal funds sold ......................................................... -- 10,018
Mortgage loans held for sale, at lower of cost or market ....................... 71,600 117,126
Mortgage-backed securities held for trading, at fair value ..................... 50,232 450,546
Mortgage-backed securities available for sale, at fair value ................... 684,518 95,040
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1999 - $24,181,932; 1998 - $28,260,925) ............... 24,112 28,256
Investment securities available for sale, at fair value ........................ 224,236 59,502
Investment securities held to maturity, at amortized cost
(estimated market value: 1999- $ 5,910,805; 1998- $6,378,634) .................. 5,939 6,344
Loans receivable, net .......................................................... 1,370,661 1,073,668
Accounts receivable, including advances to investors, net ...................... 15,416 9,665
Accrued interest receivable .................................................... 18,910 12,506
Servicing asset ................................................................ 71,419 58,221
Premises and equipment ......................................................... 17,246 12,963
Other assets ................................................................... 23,341 17,216
----------- -----------
$ 2,653,747 $ 2,044,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 1,270,212 $ 1,007,297
Securities sold under agreements to repurchase ............................ 672,883 471,422
Federal funds purchased ................................................... 10,000 --
Notes payable ............................................................. 111,629 182,748
Advances from FHLB ........................................................ 273,500 121,000
Other borrowings .......................................................... 29,000 9,000
Accounts payable and accrued liabilities .................................. 30,609 28,020
Other liabilities ......................................................... 10,495 4,133
----------- -----------
2,408,328 1,823,620
----------- -----------
<PAGE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
($ in thousands)
<S> <C> <C>
Stockholders'equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
7.40% Monthly Income Non-cumulative Preferred Stock, Series A, $25
liquidation value, 2,000,000 shares authorized, issued and outstanding 50,000 50,000
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 18,440,556
issued and outstanding ............................................. 184 184
Class B - $.01 par value, 30,000,000 shares authorized, 10,217,731
issued and outstanding in 1999 (1998-10,146,091) ................... 102 102
Additional paid-in capital ................................................ 41,832 41,544
Retained earnings ......................................................... 151,651 124,418
Capital reserves of the Bank .............................................. 3,548 3,548
Accumulated other comprehensive (loss) income ............................. (1,898) 1,366
245,419 221,162
----------- -----------
$ 2,653,747 $ 2,044,782
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month Nine month
period ended period ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans .......................................... $ 30,291 $ 24,591 $ 84,865 $ 64,735
Money market and other investments ............. 4,374 1,425 5,979 4,391
Mortgage-backed securities ..................... 9,281 7,164 24,924 21,776
------------ ------------ ------------ ------------
Total interest income ..................... 43,946 33,180 115,768 90,902
------------ ------------ ------------ ------------
Interest expense:
Deposits ...................................... 14,114 10,128 38,273 27,557
Securities sold under agreements to repurchase 7,493 6,038 18,465 17,577
Notes payable ................................. 3,361 3,295 10,344 9,405
Other ......................................... 3,174 1,983 7,120 3,829
------------ ------------ ------------ ------------
Total interest expense .................... 28,142 21,444 74,202 58,368
------------ ------------ ------------ ------------
Net interest income ................................. 15,804 11,736 41,566 32,534
Provision for loan losses ........................... (1,000) (1,500) (3,400) (4,500)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses . 14,804 10,236 38,166 28,034
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans
and sales of securities available for sale .... 8,674 9,070 28,475 24,287
Loan administration and servicing fees ......... 6,535 3,700 18,914 11,220
Service charges, fees and other ................ 1,434 1,403 5,009 4,059
------------ ------------ ------------ ------------
16,643 14,173 52,398 39,566
------------ ------------ ------------ ------------
Total revenues ............................ 31,447 24,409 90,564 67,600
------------ ------------ ------------ ------------
<PAGE>
<CAPTION>
Three month Nine month
period ended period ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
($ in thousands except for per share data)
<S> <C> <C> <C> <C>
Operating expenses:
Employee compensation and benefits ............. 6,182 4,181 16,414 11,951
Office occupancy and equipment ................. 2,887 2,209 7,994 6,200
Other administrative and general ............... 8,472 5,672 23,529 16,372
------------ ------------ ------------ ------------
17,541 12,062 47,937 34,523
------------ ------------ ------------ ------------
Income before income taxes .......................... 13,906 12,347 42,627 33,077
------------ ------------ ------------ ------------
Income tax expense:
Current ........................................ 1,484 2,759 4,881 5,366
Deferred ....................................... 2,305 1,051 4,669 3,723
------------ ------------ ------------ ------------
3,789 3,810 9,550 9,089
------------ ------------ ------------ ------------
Net income ................................ 10,117 8,537 33,077 23,988
Less: Dividends on preferred stock ................. (925) (308) (2,775) (308)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 9,192 $ 8,229 $ 30,302 $ 23,680
============ ============ ============ ============
Earnings per common share - Basic ................... $ 0.32 $ 0.29 $ 1.06 $ 0.85
------------ ------------ ------------ ------------
- Diluted ................. $ 0.31 $ 0.28 $ 1.03 $ 0.82
------------ ------------ ------------ ------------
Weighted average number of shares outstanding - Basic 28,639,528 28,487,599 28,623,892 28,355,536
29,342,647 29,243,599 29,342,647 29,111,536
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Month Nine Month
period ended period ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
($ in thousands)
<S> <C> <C> <C> <C>
Net Income ................................................................ $ 10,117 $ 8,537 $ 33,077 $ 23,988
-------- -------- -------- --------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period ................................................ (1,159) 1,020 (5,351) 1,330
Less: Reclassification adjustments for (gains) losses included
in net income ............................................... 218 (122) 800 (271)
-------- -------- -------- --------
(941) 898 (4,551) 1,059
Income tax benefit (expense) related to items of other comprehensive income 367 (350) 1,775 (413)
-------- -------- -------- --------
Other comprehensive (loss) income, net of tax ............................ (574) 548 (2,776) 646
-------- -------- -------- --------
Comprehensive income, net of tax .......................................... $ 9,543 $ 9,085 $ 30,301 $ 24,634
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine month period ended
September 30,
----------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................... $ 33,077 $ 23,988
------------ ------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 2,803 2,104
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net .............................................. 188 (45)
Amortization of servicing rights ................................................... 5,158 2,172
Provision for loan losses .......................................................... 3,400 4,500
Provision for bad debts in accounts receivable .................................... 275 225
Gain on sales of loans ............................................................ (7,472) (5,371)
Loss (gain) on sales of mortgage-backed and investment securities available for sale 800 (271)
Unrealized loss (profit) on trading securities ..................................... 17 (4,117)
Decrease (increase) in mortgage loans held for sale ................................ 45,526 (40,270)
Net increase in mortgage-backed securities held for trading ....................... (34,258) (63,615)
Increase in receivables ............................................................ (12,430) (2,724)
Increase in other assets ........................................................... (6,633) (260)
(Decrease) increase in notes payable ............................................... (61,119) 8,084
Increase in accounts payable and accrued liabilities ............................... 6,220 10,961
Increase in other liabilities ...................................................... 6,362 601
------------ ------------
Total adjustments .............................................................. (51,163) (88,026)
------------ ------------
Net cash used in operating activities .......................................... (18,086) (64,038)
------------ ------------
Cash flows from investing activities:
Purchases of investment securities ...................................................... (198,291) (37,542)
Proceeds from sales and maturities of securities available for sale ..................... 139,211 81,949
Proceeds from maturities of securities held to maturity ................................. 409 4,715
Proceeds from sales of loans ............................................................ 120,975 172,917
Net originations of loans ............................................................... (665,053) (422,388)
Purchases of FHLB stock, net ........................................................... (11,619) (6,211)
Net assets acquired, net of cash received ............................................... -- 4,288
Acquisition of premises and equipment ................................................... (6,577) (3,931)
Acquisition of servicing rights ......................................................... (18,357) (13,947)
------------ ------------
Net cash used by investing activities .......................................... (639,302) (220,150)
------------ ------------
<PAGE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine month period ended
September 30,
----------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net ............................................................... 261,371 131,938
Increase (decrease) in federal funds purchased .......................................... 10,000 (10,000)
Increase in securities sold under agreements to repurchase - net ......................... 201,461 57,955
Advances from FHLB ....................................................................... 152,500 114,400
Repayment of advances from FHLB .......................................................... -- (58,400)
Repayment of term notes .................................................................. (10,000) --
Increase in other borrowings ............................................................. 20,000 --
Repayment of subordinated notes .......................................................... -- (3,250)
Net proceeds from issuance of Series A Preferred Stock ................................... -- 48,079
Capital contribution to subsidiary ....................................................... -- (12)
Proceeds from issuance of common stock ................................................... 289 --
Cash dividends:
Preferred stock .................................................................... (2,775) (308)
Common stock ....................................................................... (3,069) (2,300)
------------ ------------
Net cash provided by financing activities ...................................... 629,777 278,102
------------ ------------
Net decrease in cash and cash equivalents ..................................................... (27,611) (6,086)
Cash and cash equivalents at beginning of period ............................................ 103,728 68,366
------------ ------------
Cash and cash equivalents at end of period .................................................... $ 76,117 $ 62,280
============ ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine month period ended
September 30,
----------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents include:
Cash and due from banks .................................................................. $ 38,024 $ 20,635
Securities purchased under agreements to resell .......................................... 12,600 7,000
Time deposits with other banks ........................................................... 25,493 34,645
------------ ------------
$ 76,117 $ 62,280
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<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-one 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 September 30, 1999 and the results of
operations and changes in its cash flows for the three and nine months ended
September 30, 1999 and 1998.
The results of operations for the three and nine month periods ended
September 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 nine month period ended September 30, 1998 to conform to the
presentation for the 1999 respective periods.
8
<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 nine month periods
ended September 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.
Per share information for all periods presented takes into
consideration a 2 for 1 stock split paid by the Company in the form of a stock
dividend 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>
September 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
MORTGAGE-BACKED SECURITIES HELD FOR TRADING:
CMO residuals and interest only strips $ -- $ 7,146,762
GNMA certificates 50,232,035 443,399,272
----------- ------------
$50,232,035 $450,546,034
=========== ============
</TABLE>
Effective January 1, 1999, the Company reclassified $427.4 million of
mortgage backed securities from trading to available for sale in connection with
the adoption of SFAS 134. The adoption resulted principally in an increase in
mortgage-backed securities available for sale and a corresponding decrease in
mortgage-backed securities held for trading. In addition, on July 1, 1999 the
Company reclassified $9.3 million of mortgage-backed securities from trading to
available for sale.
9
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
CMO residuals and other mortgage-backed securities ......... $ 19,699,980 $ 21,757,623 $ 7,845,382 $ 9,661,171
------------ ------------ ------------ ------------
FNMA certificates:
Due from five to ten years ............................ 798,278 784,309 -- --
Due over ten years .................................... 112,947,234 112,764,038 8,091,335 8,161,704
------------ ------------ ------------ ------------
113,745,512 113,548,347 8,091,335 8,161,704
------------ ------------ ------------ ------------
FHLMC certificates:
Due from one to five years ............................ 106,572 108,122 89,209 90,765
Due from five to ten years ............................ 1,300,751 1,283,909 240,394 244,140
Due over ten years .................................... 16,227,230 15,902,068 21,368,689 21,723,711
------------ ------------ ------------ ------------
17,634,553 17,294,099 21,698,292 22,058,616
------------ ------------ ------------ ------------
GNMA certificates:
Due over ten years ................................... 534,081,324 531,917,599 55,158,840 55,158,840
------------ ------------ ------------ ------------
$685,161,369 $684,517,668 $ 92,793,849 $ 95,040,331
============ ============ ============ ============
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities:
Due within one year ................................... $ 4,997,266 $ 4,953,905 $ -- $ --
Due from one to five years ............................ -- -- 4,995,028 4,990,625
------------ ------------ ------------ ------------
U.S. Government and Agencies securities:
Due from one to five years ........................... 111,953,853 110,362,710 38,100,000 38,106,648
Due from five to ten years ........................... 86,729,531 85,895,300 5,010,140 5,000,000
------------ ------------ ------------ ------------
198,683,384 196,258,010 43,110,140 43,106,648
------------ ------------ ------------ ------------
FHLB stock ................................................ 23,024,367 23,024,367 11,404,867 11,404,867
------------ ------------ ------------ ------------
$226,705,017 $224,236,282 $ 59,510,035 $ 59,502,140
============ ============ ============ ============
</TABLE>
<PAGE>
Mortgage-backed securities available for sale include interest only
securities with an amortized cost of $10.0 million as of September 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.
10
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-----------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
-----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
GNMA certificates:
Due from one to five years ........................... $ 18,532 $ 19,875 $ 27,227 $ 29,201
Due from five to ten years ........................... 11,146,170 10,865,108 13,024,960 12,751,640
Due over ten years ................................... 2,155,746 2,099,487 2,359,713 2,306,529
----------- ----------- ----------- -----------
13,320,448 12,984,470 15,411,900 15,087,370
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years .................................... 10,594,199 11,007,091 12,607,700 12,944,020
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years .................................... 197,642 190,371 235,918 229,535
----------- ----------- ----------- -----------
$24,112,289 $24,181,932 $28,255,518 $28,260,925
=========== =========== =========== ===========
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. Treasury securities:
Due within one year ................................... $ -- $ -- $ 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 .......................... 580,000 578,550 -- --
Due from five to ten years .......................... 5,359,440 5,332,255 5,944,870 5,978,467
----------- ----------- ----------- -----------
5,939,440 5,910,805 5,944,870 5,978,467
----------- ----------- ----------- -----------
$ 5,939,440 $ 5,910,805 $ 6,343,929 $ 6,378,634
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage ........ $ 965,279,663 $ 735,457,756
Residential - second mortgage ....... 10,178,691 18,633,916
Land ................................ 1,375,468 337,250
Construction ........................ 66,810,770 34,391,170
Commercial .......................... 190,137,256 121,393,030
--------------- ---------------
1,233,781,848 910,213,122
Undisbursed portion of loans in process .. (36,463,935) (18,170,178)
Net deferred loan costs (fees) ........... (486,977) (166,056)
--------------- ---------------
1,196,830,936 891,876,888
--------------- ---------------
Other loans:
Commercial .......................... 51,532,825 46,532,311
Consumer:
Secured by deposits .............. 18,846,319 17,225,437
Secured by real estate ........... 73,900,710 85,054,815
Other ............................ 39,009,140 41,381,304
Unamortized discount ..................... (346,751) (163,499)
Unearned interest ........................ (102,189) (183,546)
--------------- ---------------
182,840,054 189,846,822
--------------- ---------------
Total loans ...................... 1,379,670,990 1,081,723,710
Allowance for loan losses ........... (9,010,119) (8,055,432)
--------------- ---------------
$ 1,370,660,871 $ 1,073,668,278
=============== ===============
</TABLE>
<PAGE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1999 1998
------- -------
(Unaudited)
($ in thousands)
<S> <C> <C>
Balance, beginning of period ................. $ 8,055 $ 6,772
Provision for loan losses .................... 3,400 4,500
Acquired reserves ............................ -- 363
Loans charged-off ............................ (3,039) (4,501)
Recoveries ................................... 594 240
------- -------
Balance, end of period ....................... $ 9,010 $ 7,374
======= =======
</TABLE>
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
FINANCIAL CONDITION
At September 30, 1999, the Company's total assets amounted to $2.7
billion, as compared to $2.0 billion at December 31, 1998. The $609.0 million or
29.8% increase in total assets during the nine month period ended September 30,
1999 was attributable to a $297.0 million or 27.7% increase in loans receivable,
net, which reflects net originations following repayments and sales, and a
$164.7 million or 276.9% increase in investment securities available for sale,
which is the result of the purchase of $175.8 million of such securities during
the period. In addition, the Company had a $189.2 million or 34.7% increase in
mortgage-backed securities available for sale and held for trading, which are
attributable to increased mortgage loan originations and subsequent
securitizations during the period.
The increase in the Company's assets were primarily funded by increased
deposits of $262.9 million or 26.1%, by a $152.5 million or 126.0% increase in
FHLB advances, and by a $201.5 million or 42.7% increase in securities sold
under agreements to repurchase.
At September 30, 1999, the Company's stockholders' equity amounted to
$245.4 million, which is an increase of $24.3 million or 11.0% from the amount
reported at December 31, 1998. The primary reason for the increase was the net
income earned for the nine month period ended September 30, 1999, which was
partially offset by a $3.3 million decrease in unrealized gains on securities
available for sale, net of income tax benefits, and $5.8 million in dividends
paid during the period. At September 30, 1999, the Bank's leverage and Tier 1
risk-based capital amounted to 6.66% and 11.82% of adjusted total assets,
respectively, compared to a 4.0% minimum requirement, and its total risk-based
capital amounted to 12.67%, compared to an 8.0% minimum requirement.
RESULTS OF OPERATIONS
The Company reported net income of $10.1 million and $ 33.1 million
during the three and nine months period ended September 30, 1999, as compared to
$8.5 million and $24.0 million during the prior comparable periods.
Total revenues for the nine month period ended September 30, 1999
amounted to $90.6 million compared to $67.6 million for the prior comparable
period. The 34.0% increase was due to an increase in net interest income of $9.0
million or 27.8% during the nine months ended September 30, 1999 over the prior
comparable period, primarily due to a $20.1 million or 31.1% increase in
interest income on loans, primarily associated with an increase in the average
balance of the outstanding loan portfolio.
Contributing to the increase in revenues during the nine month period
ended September 30, 1999 was a $4.2 million or 17.2% increase in net gain on
origination and sale of loans, which reflects increased mortgage loan
originations during the 1999 period, primarily associated with the Company's
expansion of its existing branch network during fiscal year 1998. Loan
administration and servicing fees also increased by $7.7 million or 68.6% due to
an increase in the Company's loan servicing portfolio. Service charges, fees and
other also increased by $950,000 or 23.4%, 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.
Total revenues for the quarter ended September 30, 1999 amounted to
$31.4 million, a $7.0 million or 28.8% increase over the comparable quarter in
1998. The increase in total revenues during the 1999 quarter was primarily
attributable to a $4.1 million or 34.7% increase in net interest income, and a
$2.8 million or 76.6% increase in loan administration and servicing fees.
13
<PAGE>
Total expenses increased by $13.4 million or 38.9% during the nine
months ended September 30, 1999 over the prior comparable period. The increase
during the nine month period in 1999 was due primarily to a $4.5 million or
37.3% increase in employee compensation and benefits, due to an increase in the
number of employees as a result of new branch openings, and increased bonus
payments associated with increased loan production during the 1999 period. The
increase in employee expenses was accompanied by a $7.2 million or 43.7%
increase in other miscellaneous expenses, mainly as a result of a $967,000
increase in advertising costs, and other expense increases associated with an
increase in loan production and general growth in the Company's operations. In
addition the Company had a $3.0 million increase in amortization expenses of the
Company's servicing asset, primarily associated with the purchase in late 1998
of a $1.1 billion servicing portfolio from another financial institution.
Finally, occupancy expenses increased by $1.8 million or 28.9%, mainly as a
result of the operation of six additional branches completed during fiscal 1998
and three additional branches completed during the 1999 period.
Total expenses increased by $5.5 million or 45.4% during the three
month period ended September 30, 1999. The increase was due to a $2.0 million or
47.9% increase in employee compensation and benefits, a $678,000 or 30.7%
increase in occupancy expenses, and a $2.8 million or 49.4% increase in other
miscellaneous expenses. These expenses increased during such three month period
for the same reason as noted above for the nine month period in 1999.
Total income tax expense decreased by $21,000 or 0.6%, and increased by
$461,000 or 5.1% during the three and nine month period ended September 30,
1999, respectively, over the prior comparable periods. The Company's effective
tax rate amounted to 27.2% and 22.4%, respectively, during the three and nine
months periods ended September 30, 1999, compared to 30.9% and 27.5% in the 1998
comparable periods. The decrease in 1999 of the Company's effective tax rate is
primarily attributable to an increase in 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.
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, 1999, the Company had $180.0 million in borrowing
capacity under warehousing lines of credit, $404.2 million in borrowings
capacity under a line of credit with the FHLB of New York and $25.0 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.
14
<PAGE>
At September 30, 1999, the Company had outstanding commitments to
extend credit totaling $59.8 million. Certificates of deposit which are
scheduled to mature within one year totaled $695.2 million at September 30,
1999, and borrowings that are scheduled to mature within the same period
amounted to $970.5 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 September
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 6.66%,
11.82% and 12.67%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
15
<PAGE>
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 Company's Annual report on Form
10-K. Management believes there have been no material changes in the Company's
market risk since December 31, 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.
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
On October 7, 1999 the Company completed its acquisition by merger of
Continental Capital Corp., Huntington Station, New York ("Continental"), a
mortgage banking company. 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 September 30, 1999 its
loan servicing portfolio equaled $496.3 million.
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.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: November 5, 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)
<TABLE> <S> <C>
<ARTICLE> 9
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<NET-INCOME> 33,077,181
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