SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 March 31, 1999:
10,185,691. (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
March 31, 1999 (Unaudited) and December 31, 1998....... 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 (Unaudited)....... 4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1999 and 1998 (Unaudited)....... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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......... 17
Part II - Other Information
- ------- -------------------
Item 1. Legal Proceedings ................................................. 17
Item 2. Changes in Securities ............................................. 17
Item 3. Defaults upon Senior Securities ................................... 17
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
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,700,762 $ 51,804,750
Money market investments:
Securities purchased under agreements to resell 7,501,490 11,544,123
Time deposits with other banks 5,171,966 30,361,527
Federal funds sold -- 10,018,048
Mortgage loans held for sale, at lower of cost or market 109,990,674 117,126,040
Mortgage-backed securities held for trading, at fair value 25,216,189 450,546,034
Mortgage-backed securities available for sale, at fair value 528,757,067 95,040,331
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1999 - $26,829,846; 1998 - $28,260,925) 26,834,199 28,255,518
Investment securities available for sale, at fair value 71,572,197 59,502,140
Investment securities held to maturity, at amortized cost
(estimated market value: 1999- $ 6,367,577; 1998- $6,378,634) 6,348,172 6,343,929
Loans receivable, net 1,167,240,530 1,073,668,278
Accounts receivable, including advances to investors, net 12,233,705 9,665,290
Accrued interest receivable 13,748,392 12,505,431
Servicing Asset 61,944,250 58,221,052
Premises and equipment 13,549,816 12,962,435
Other assets 16,736,038 17,216,602
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY $2,102,545,447 $2,044,781,528
Liabilities: ============== ==============
Deposits $1,094,290,510 $1,007,297,304
Securities sold under agreements to repurchase 423,340,922 471,421,726
Notes payable 172,469,029 182,747,956
Advances from FHLB 141,000,000 121,000,000
Other borrowings 9,000,000 9,000,000
Accounts payable and accrued liabilities 26,674,448 28,020,080
Other liabilities 5,816,186 4,132,603
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Preferred stock, $.01 par value, 10,000,000 shares authorized, 7.40% 1,872,591,095 1,823,619,669
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, 20,000,000 shares authorized, 10,185,691
issued and outstanding in 1999 and 10,146,091 in 1998 101,857 101,461
Additional paid-in capital 41,703,482 41,544,378
Retained earnings 133,700,796 124,418,278
Capital reserves of the Bank 3,547,798 3,547,798
Accumulated other comprehensive income 716,013 1,365,538
-------------- --------------
229,954,352 221,161,859
-------------- --------------
$2,102,545,447 $2,044,781,528
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 26,616,509 $ 18,656,942
Money market and other investments 733,461 1,428,203
Mortgage-backed securities 8,035,385 7,691,106
------------ ------------
Total interest income 35,385,355 27,776,251
------------ ------------
Interest expense:
Deposits 11,460,159 8,345,253
Securities sold under agreements to repurchase 5,374,542 5,693,530
Notes payable 3,729,187 2,969,761
Other 1,587,320 781,866
------------ ------------
Total interest expense 22,151,208 17,790,410
------------ ------------
Net interest income 13,234,147 9,985,841
Provision for loan losses (1,300,000) (1,500,000)
------------ ------------
Net interest income after provision for loan losses 11,934,147 8,485,841
------------ ------------
Other income:
Net gain on origination and sale of loans 10,478,205 7,392,555
Net profit on trading account -- 14,580
Net gain on sales of investments available for sale 19,531 149,468
5,760,770 3,687,057
Loan administration and servicing fees
Service charges, fees and other 1,485,172 1,184,384
------------ ------------
17,743,678 12,428,044
------------ ------------
Total revenues 29,677,825 20,913,885
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month
period ended
March 31,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Operating expenses:
Employee compensation and benefits 4,770,004 3,558,222
Office occupancy and equipment 2,389,800 1,824,971
Other administrative and general 7,677,815 4,794,354
------------ ------------
14,837,619 10,177,547
------------ ------------
Income before income taxes 14,840,206 10,736,338
------------ ------------
Income tax expense:
Current 1,924,408 1,860,651
Deferred 1,764,920 1,395,852
------------ ------------
3,689,328 3,256,503
------------ ------------
Net income $ 11,150,878 $ 7,479,835
============ ============
Earnings per common share - Basic $ 0.36 $ 0.26
------------ ------------
- Diluted $ 0.35 $ 0.26
------------ ------------
Weighted average number of shares outstanding - Basic 28,600,647 28,289,504
- Diluted 29,342,647 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
period ended
March 31,
------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Net Income $ 11,150,878 $ 7,479,835
------------ ------------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Arising during period (1,045,264) (238,609)
Less: Reclassification adjustments for gains included in
net income (19,531) (149,468)
------------ ------------
(1,064,795) (388,077)
------------ ------------
Income tax benefit related to items of other comprehensive income 415,270 151,350
------------ ------------
Other comprehensive (loss) income, net of tax (649,525) (236,727)
------------ ------------
Comprehensive income, net of tax $ 10,501,353 $ 7,243,108
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month
period ended
March, 31
------------------------------------
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,150,878 $ 7,479,835
------------- -------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 891,342 644,587
Amortization of premium (accretion of discount) on investments and
mortgage-backed securities, net 13,141 (21,695)
Amortization of deferred loan origination (fees) costs, net (391,574) 71,678
Amortization of servicing rights 1,634,426 614,327
Provision for loan losses 1,300,000 1,500,000
Provision for bad debts in accounts receivable 100,000 75,000
Gain on sales of loans (2,578,960) (1,089,913)
Loss (gain) on sales of mortgage-backed and investment securities
available for sale 136,102 (149,468)
Unrealized loss (profit) on trading securities 181,718 (743,970)
Increase in mortgage loans held for sale (42,955,011) (9,311,286)
Net increase in mortgage-backed securities held for trading (2,260,268) (8,690,211)
(Increase) decrease in receivables (3,911,376) 508,360
Decrease in other assets 310,741 2,200,838
(Decrease) increase in notes payable (10,278,927) 15,191,328
(Decrease) increase in accounts payable and accrued liabilities (381,350) 1,225,264
1,683,583 163,602
------------- -------------
Total adjustments (56,506,413) 2,188,441
------------- -------------
Net cash (used in) provided by operating activities (45,355,535) 9,668,276
------------- -------------
Cash flows from investing activities:
Purchases of investment securities (29,600,000) (23,842,120)
Proceeds from sales and maturities of securities available for sale 63,415,018 25,553,791
Proceeds from maturities of securities held to maturity -- 4,405,420
Proceeds from sales of loans 49,660,184 24,399,022
Net originations of loans (143,461,903) (107,919,577)
Purchases of FHLB stock, net -- (1,693,500)
Acquisition of premises and equipment (1,308,900) (1,246,796)
Acquisition of servicing rights (5,357,624) (3,126,207)
------------- -------------
Net cash used by investing activities (66,653,225) (83,469,967)
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month
period ended
March, 31
------------------------------------
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net 86,444,194 40,912,577
Decrease in federal funds purchased -- (10,000,000)
(Decrease) increase in securities sold under agreements to repurchase - net (48,080,804) 10,603,178
Advances from FHLB 20,000,000 20,000,000
Proceeds from issuance of common stock 159,500 --
Cash dividends on common stock (1,868,360) (707,238)
------------- -------------
Net cash provided by financing activities 56,654,530 60,808,517
------------- -------------
Net decrease in cash and cash equivalents (55,354,230) (12,993,174)
Cash and cash equivalents at beginning of period 103,728,448 68,365,723
------------- -------------
Cash and cash equivalents at end of period $ 48,374,218 $ 55,372,549
============= =============
Cash and cash equivalents include:
Cash and due from banks $ 35,700,762 $ 21,371,646
Securities purchased under agreements to resell 7,501,490 21,292,213
Time deposits with other banks 5,171,966 12,708,690
Federal funds sold -- --
------------- -------------
$ 48,374,218 $ 55,372,549
============= =============
</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 March 31, 1999 and the results of
operations and changes in its cash flows for the three months ended March 31,
1999 and 1998.
The results of operations for the three month period ended March 31,
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
quarter ended March 31, 1998 to conform to the presentation for the quarter
ended March 31, 1999.
-7-
<PAGE>
Basis of consolidation
All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133- "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically accounted as a hedge. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management is evaluating its hedging strategy in
light of this new pronouncement to establish the initial designation of its
hedging activities and determine the effect and timing of adoption. However, due
to the relatively limited extent to which the Company is using derivative
instruments and the simple nature of the instruments used, management does not
expect the impact of adoption to be significant.
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued SFAS No. 134- "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No.
65 to require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interest based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998. In connection with the adoption of this
Statement on January 1, 1999 the Company reclassified approximately $427.4
million of mortgage-backed securities from trading to available for sale.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three months ended March 31,
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, which was 28,600,647 and 28,289,504, respectively. Outstanding stock
options granted in connection with the Company's Stock Option Plan are included
in the weighted average number of shares for purposes of the diluted earnings
per share computation. The Company's weighted average number of shares
outstanding for purposes of diluted earnings per share was 29,342,647 and
29,045,504 for the three month periods ended March 31, 1999 and 1998,
respectively.
-8-
<PAGE>
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 in 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>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities held for trading:
CMO Residuals (all interest only) $ 8,261,442 $ 7,146,762
GNMA Certificates 16,954,747 443,399,272
------------ ------------
$ 25,216,189 $450,546,034
============ ============
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
March 31, 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 $ 8,338,991 $ 10,154,780 $ 7,845,382 $ 9,661,171
------------ ------------ ------------ ------------
FNMA certificates:
Due over ten years 7,699,654 7,704,471 8,091,335 8,161,704
------------ ------------ ------------ ------------
FHLMC certificates:
Due from one to five years 83,754 85,363 89,209 90,765
Due from five to ten years 1,003,828 1,015,858 240,394 244,140
Due over ten years 18,990,388 19,185,453 21,368,689 21,723,711
------------ ------------ ------------ ------------
20,077,970 20,286,674 21,698,292 22,058,616
------------ ------------ ------------ ------------
GNMA certificates:
Due over ten years 491,138,214 490,611,142 55,158,840 55,158,840
------------ ------------ ------------ ------------
$527,254,829 $528,757,067 $ 92,793,849 $ 95,040,331
============ ============ ============ ============
Investment securities available for sale:
U.S. Treasury securities:
Due from one to five years $ 4,995,772 $ 4,963,280 $ 4,995,028 $ 4,990,625
------------ ------------ ------------ ------------
U.S. Government and agencies securities:
Due from one to five years 55,500,000 55,204,050 38,100,000 38,106,648
Due from five to ten years 5,010,140 5,000,000
------------ ------------ ------------ ------------
55,500,000 55,204,050 43,110,140 43,106,648
------------ ------------ ------------ ------------
FHLB stock 11,404,867 11,404,867 11,404,867 11,404,867
------------ ------------ ------------ ------------
$ 71,900,639 $ 71,572,197 $ 59,510,035 $ 59,502,140
============ ============ ============ ============
</TABLE>
Mortgage backed securities available for sale include interest only
securities with an amortized cost of $3,771,323 as of March 31, 1999, which are
primarily associated with the sale in prior years of collaterized mortgage
obligations. These sales were not made in connection with the Company's mortgage
banking activities.
-10-
<PAGE>
<TABLE>
<CAPTION>
March 31, 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 $ 24,404 $ 26,173 $ 27,227 $ 29,201
Due from five to ten years 12,406,776 12,146,591 13,024,960 12,751,640
Due over ten years 2,338,609 2,285,900 2,359,713 2,306,529
----------- ----------- ----------- -----------
14,769,789 14,458,664 15,411,900 15,087,370
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years 11,842,243 12,155,027 12,607,700 12,944,020
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years 222,167 216,155 235,918 229,535
----------- ----------- ----------- -----------
$26,834,199 $26,829,846 $28,255,518 $28,260,925
=========== =========== =========== ===========
Investment securities held to maturity:
U.S. Treasury securities:
Due within one year $ 197,446 $ 197,000 $ 194,892 $ 196,000
----------- ----------- ----------- -----------
U.S. Government and agencies securities:
Due within one year 207,066 206,910 204,167 204,167
----------- ----------- ----------- -----------
Puerto Rico Government and Agencies obligations:
Due from five to ten years 5,943,660 5,963,667 5,944,870 5,978,467
----------- ----------- ----------- -----------
$ 6,348,172 $ 6,367,577 $ 6,343,929 $ 6,378,634
=========== =========== =========== ===========
</TABLE>
-11-
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage $ 814,544,472 $ 735,457,756
Residential - second mortgage 18,368,941 18,633,916
Land 388,750 337,250
Construction 36,024,315 34,391,170
Commercial 139,092,081 121,393,030
--------------- ---------------
1,008,418,559 910,213,122
Undisbursed portion of loans in process (19,489,007) (18,170,178)
Net deferred loan costs (fees) 249,207 (166,056)
--------------- ---------------
989,178,759 891,876,888
--------------- ---------------
Other loans:
Commercial 44,921,382 46,532,311
Consumer:
Secured by deposits 16,998,053 17,225,437
Secured by real estate 85,837,802 85,054,815
Other 39,150,532 41,381,304
Unamortized discount (187,188) (163,499)
Unearned interest (165,693) (183,546)
--------------- ---------------
186,554,888 189,846,822
--------------- ---------------
Total loans 1,175,733,647 1,081,723,710
Allowance for loan losses (8,493,117) (8,055,432)
--------------- ---------------
$ 1,167,240,530 $ 1,073,668,278
=============== ===============
</TABLE>
<PAGE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 8,055,432 $ 6,771,698
Provision for loan losses 1,300,000 1,500,000
Loans charged-off (1,039,726) (1,980,602)
Recoveries 177,411 44,920
----------- -----------
Balance, end of period $ 8,493,117 $ 6,408,016
=========== ===========
</TABLE>
-12-
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments to developers providing end loans
The Company has outstanding commitments for various projects in the
process of completion. Total commitments amounted to approximately $478.0
million at March 31, 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 $153.7 million at March 31, 1999.
Commitments to buy and sell GNMA certificates
As of March 31, 1999, the Company had open commitments to issue GNMA
certificates of approximately $118.8 million.
Commitments to sell mortgage loans
As of March 31, 1999 the Company had commitments to sell mortgage loans
to third party investors amounting to approximately $76.9 million.
Lease commitments
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
Other
At March 31, 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 $567.8 million at March 31, 1999. Liability, if any,
under the recourse provisions at March 31, 1999 is estimated by management to be
significant.
-13-
<PAGE>
Item 2: Management's Discussion and Analysis
- ------- ------------------------------------
Financial Condition
At March 31, 1999, the Company's total assets amounted to $2.1 billion,
as compared to $2.0 billion at December 31, 1998. The $57.8 million or 2.8%
increase in total assets during the three month period ended March 31, 1999 was
attributable to a $93.6 million or 8.7% increase in loans receivable, which
reflects net originations following repayments and sales, and a $19.0 million
increase in the Company's investments portfolio. Such increases were partially
offset by a $55.4 million or 53.4% decrease in cash and cash equivalents due to
the use of excess liquid assets to fund increased loan originations and
investments during the period.
Effective January 1, 1999, the Company reclassified of $427.4 million
of mortgage backed securities from trading to available for sale in connection
with the adoption of SFAS 134. The adoption resulted in an increase in
mortgage-backed securities available for sale for the same amount, 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 $87.0 million or 8.6% during the three month period ended March 31,
1999.
At March 31, 1999, the Company's stockholders' equity amounted to
$229.9 million, which is an increase of $8.8 million or 4.0% 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 $650,000 decrease
in unrealized gains on securities available for sale, net of income tax
benefits, and $1,868,000 in dividends paid during the period. At March 31, 1999,
the Bank's leverage and Tier 1 risk-based capital amounted to 7.42% and 12.57%
of adjusted total assets, respectively, compared to a 4.0% minimum requirement,
and its total risk-based capital amounted to 13.58%, compared to an 8.0% minimum
requirement.
Results of Operations
The Company reported net income of $11.1 million during the three
months ended March 31, 1999, as compared to $7.5 million during the prior
comparable period.
Total revenues amounted to $29.7 million during the three months ended
March 31, 1999 compared to $20.9 million for the prior comparable period. The
41.9% increase was due to an increase in net interest income of $3.2 million or
32.5% during the three months ended March 31, 1999 over the prior comparable
period, primarily due to a $8.0 million or 42.7% increase in interest income on
loans, which was primarily associated with an increase in the average balance of
the outstanding loan portfolio.
Contributing to the 41.9% increase in revenues during the March 31,
1999 quarter was a $3.1 million or 41.7% increase in net gain on origination and
sale of loans, which reflects a 45% increase in mortgage loan originations
during the 1999 period associated with an expansion of the Company's existing
branch network during fiscal year 1998. Loan administration and servicing fees
also increased by $2.1 million or 56.2% due to an increase of the Company's loan
servicing portfolio as a result of an increase in the number of loans serviced.
Service charges, fees and other also increased by $301,000 or 25.4% due mainly
to an increase in banking fees associated with an increased number of deposit
accounts during the 1999 period.
-14-
<PAGE>
Total expenses increased by $9.3 million or 28.3% during the three
months ended March 31, 1999 over the prior comparable period. The increase
during the three month period in 1999 was due primarily to a $1.2 million or
34.1% increase in employee compensation and benefits associated with an increase
in the number of employees to accommodate increased loan production during the
1999 period, and a $565,000 or 30.9% increase in occupancy expenses mainly
related to the operation of five additional branches completed during fiscal
1998 and an additional branch completed in early 1999. These increases in
expenses were accompanied by a $2.9 million or 60.1% increase in other
miscellaneous expenses, mainly as a result of a $481,000 increase in advertising
costs and other expense increases associated with an increase in loan
production, and a $1.0 million increase in amortization expenses of the
Company's servicing asset.
Total income tax expense increased by $433,000 or 13.3% during the
three months ended March 31, 1999 over the prior comparable period, due
primarily to a $4.1 million or 38.2% increase in income before taxes during the
1999 period. The Company's effective tax rate amounted to 24.9% during the three
month period ended March 31, 1999 compared to 30.3% in the 1998 comparable
period. The decrease in 1999 of the Company's effective tax rate was primarily
attributable to an increase in the Company's exempt interest income.
Liquidity and Capital Resources
Liquidity - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.
The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At March 31, 1999, the Company had $200.0 million in borrowing capacity
under warehousing lines of credit, $335.7 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 March 31, 1999, the Company had outstanding commitments to extend
credit totaling $37.0
-15-
<PAGE>
million. Certificates of deposit which are scheduled to mature within one year
totaled $956.2 million at March 31, 1999, and borrowings that are scheduled to
mature within the same period amounted to $584.3 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments.
Capital Resources - The FDIC's capital regulations establish a minimum
3.0 % Tier I leverage capital requirement for the most highly-rated
state-chartered, non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member banks, which
effectively will increase the minimum Tier 1 leverage ratio for such other banks
to 4.0% to 5.0% or more. Under the FDIC's regulations, the highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders'equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At March 31,
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 7.42%,
12.57% and 13.58%, respectively.
In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.
Inflation and Changing Prices
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value), without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
-16-
<PAGE>
"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 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
Not applicable
-17-
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
No.
---
27 Financial Data Schedule E-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R&G FINANCIAL CORPORATION
Date: May 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 35,700,762
<INT-BEARING-DEPOSITS> 5,171,966
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 25,216,189
<INVESTMENTS-HELD-FOR-SALE> 600,329,264
<INVESTMENTS-CARRYING> 33,182,371
<INVESTMENTS-MARKET> 33,197,423
<LOANS> 1,167,240,530
<ALLOWANCE> 8,493,117
<TOTAL-ASSETS> 2,102,545,447
<DEPOSITS> 1,094,290,510
<SHORT-TERM> 745,809,951
<LIABILITIES-OTHER> 32,490,634
<LONG-TERM> 0
0
50,000,000
<COMMON> 41,989,745
<OTHER-SE> 137,964,607
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<INTEREST-OTHER> 733,461
<INTEREST-TOTAL> 35,385,355
<INTEREST-DEPOSIT> 11,460,159
<INTEREST-EXPENSE> 22,151,208
<INTEREST-INCOME-NET> 13,234,147
<LOAN-LOSSES> 1,300,000
<SECURITIES-GAINS> (162,187)
<EXPENSE-OTHER> 14,837,619
<INCOME-PRETAX> 14,840,206
<INCOME-PRE-EXTRAORDINARY> 11,150,878
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,150,878
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 7.52
<LOANS-NON> 47,781,109
<LOANS-PAST> 422,360
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 50,011,862
<ALLOWANCE-OPEN> 8,055,432
<CHARGE-OFFS> 1,039,726
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<ALLOWANCE-CLOSE> 8,493,117
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