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, 2000
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 check mark 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, 2000:
10,219,012. (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, 2000 (Unaudited) and December 31, 1999...... 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 (Unaudited)...... 4
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2000 and 1999 (Unaudited)....... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (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 ................................................. 18
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,
2000 1999
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks ........................................................ $ 34,818,742 $ 42,251,508
Money market investments:
Securities purchased under agreements to resell ............................ 7,017,275 --
Time deposits with other banks ............................................. 28,494,723 23,744,037
Federal funds sold ......................................................... -- --
Mortgage loans held for sale, at lower of cost or market ....................... 97,976,426 77,277,133
Mortgage-backed securities held for trading, at fair value ..................... 14,966,981 43,563,817
Mortgage-backed securities available for sale, at fair value ................... 703,737,979 712,705,165
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 2000 - $21,517,036; 1999 - $23,305,029) ............... 22,338,300 23,249,247
Investment securities available for sale, at fair value ........................ 320,655,791 258,163,657
Investment securities held to maturity, at amortized cost
(estimated market value: 2000- $5,395,170; 1999- $5,403,755) ................... 5,435,820 5,437,630
Loans receivable, net .......................................................... 1,714,800,299 1,563,006,802
Accounts receivable, including advances to investors, net ...................... 17,068,195 16,230,457
Accrued interest receivable .................................................... 22,623,770 22,386,746
Servicing Asset ................................................................ 86,603,354 84,252,506
Premises and equipment ......................................................... 19,241,061 19,459,353
Other assets ................................................................... 26,056,413 20,264,778
--------------- ---------------
$ 3,121,835,129 $ 2,911,992,836
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................................. $ 1,434,860,852 $ 1,330,506,368
Federal funds purchased ................................................... 25,000,000 15,000,000
Securities sold under agreements to repurchase ............................ 780,850,091 731,341,340
Notes payable ............................................................. 113,995,751 132,707,001
Advances from FHLB ........................................................ 435,000,000 384,000,000
Other borrowings .......................................................... 9,557,172 9,842,894
Accounts payable and accrued liabilities .................................. 41,072,337 33,917,329
Other liabilities ......................................................... 6,269,599 5,142,627
--------------- ---------------
2,846,605,802 2,642,457,559
--------------- ---------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
7.40% Monthly Income Preferred Stock, Series A, $25 liquidation value,
2,000,000 shares authorized, issued and outstanding .................. 50,000,000 50,000,000
7.75% Monthly Income Preferred Stock, Series B, $25 liquidation value,
1,000,000 shares authorized, issued and outstanding .................. 25,000,000 25,000,000
Common stock: ............................................................. 184,406 184,406
Class A - $.01 par value, 40,000,000 shares authorized, 18,440,556
issued and outstanding ............................................... 102,190 102,177
Class B - $.01 par value, 20,000,000 shares authorized, 10,219,012
issued and outstanding in 2000 (1999 - 10,217,731) .................. 40,761,539 40,753,856
Additional paid-in capital ................................................ 162,981,363 156,193,131
Retained earnings ......................................................... 5,095,658 5,095,658
Capital reserves of the Bank .............................................. (8,895,829) (7,793,951)
--------------- ---------------
Accumulated other comprehensive loss ...................................... 275,229,327 269,535,277
--------------- ---------------
$ 3,121,835,129 $ 2,911,992,836
=============== ===============
</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,
------------------------------
2000 1999
------------ ----------
(Unaudited)
<S> <C> <C>
Interest income:
Loans ............................................ $ 36,728,899 $ 26,053,747
Money market and other investments ............... 5,207,548 1,296,223
Mortgage-backed securities ....................... 11,346,540 8,035,385
------------ ------------
53,282,987 35,385,355
------------ ------------
Interest expense:
Deposits ......................................... 17,026,210 11,460,159
Securities sold under agreements to repurchase ... 10,535,209 5,374,542
Notes payable .................................... 3,364,353 3,729,187
Other ....................................... 5,597,206 1,587,320
------------ ------------
Total interest expense ...................... 36,522,978 22,151,208
------------ ------------
Net interest income ................................... 16,760,009 13,234,147
Provision for loan losses ............................. (1,350,000) (1,300,000)
------------ ------------
Net interest income after provision for loan losses ... 15,410,009 11,934,147
------------ ------------
Other income:
Net gain on origination and sale of loans ........ 7,324,164 10,497,736
Loan administration and servicing fees ........... 7,611,148 5,760,770
Service charges, fees and other .................. 1,488,632 1,485,172
------------ ------------
16,423,944 17,743,678
------------ ------------
Total revenues .............................. 31,833,953 29,677,825
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Operating expenses:
Employee compensation and benefits ............... 7,227,430 4,770,004
Office occupancy and equipment ................... 3,251,909 2,389,800
Other administrative and general ................. 9,593,130 7,677,815
------------ ------------
20,072,469 14,837,619
------------ ------------
Income before income taxes ............................ 11,761,484 14,840,206
------------ ------------
Income tax expense:
Current .......................................... 2,431,428 1,924,408
Deferred ......................................... (157,174) 1,764,920
------------ ------------
2,274,254 3,689,328
------------ ------------
Net income .................................. 9,487,230 11,150,878
Less: Dividends on preferred stoxk ................... 1,409,375 925,000
------------ ------------
Net income available to common stockholders ........... $ 8,077,855 10,225,878
============ ============
Earnings per common share - Basic ..................... $ 0.28 $ 0.36
============ ============
- Diluted ................... $ 0.28 $ 0.35
============ ============
Weighted average number of shares outstanding - Basic . 28,659,107 28,600,647
- Diluted 29,316,344 29,342,647
</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,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income ...................................................... $ 9,487,230 $ 11,150,878
------------ ------------
Other comprehensive income, before tax:
Unrealized losses on securities:
Arising during period ...................................... (1,886,302) (1,200,797)
Less: Reclassification adjustments for losses included in
net income ..................................... 79,945 136,002
------------ ------------
(1,806,357) (1,064,795)
Income tax benefit related to items of other comprehensive income 704,479 415,270
------------ ------------
Other comprehensive loss, net of tax ............................ (1,101,878) (649,525)
------------ ------------
Comprehensive income, net of tax ................................ $ 8,385,352 $ 10,501,353
============ ============
</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
--------------------------------
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 9,487,230 $ 11,150,878
------------- -------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................... 1,231,838 891,342
Amortization of premium on investments and mortgage-backed .................. 62,433 13,141
securities, net ....................................................... 2,315,595 1,634,426
Amortization of servicing rights ............................................ 1,350,000 1,300,000
Provision for loan losses ................................................... 150,000 100,000
Provision for bad debts in accounts receivable ............................. -- (2,578,960)
Gain on sales of loans ..................................................... 79,945 136,002
Loss on sales of mortgage-backed and investment securities available for sale 62,872 181,718
Unrealized loss on trading securities ....................................... (37,885,010) (42,955,011)
Increase in mortgage loans held for sale .................................... 28,533,964 (2,260,268)
Net decrease (increase) in mortgage-backed securities held for trading ..... (1,224,762) (3,911,376)
Increase in receivables ..................................................... (5,999,110) 310,741
(Increase) decrease in other assets ......................................... (18,996,972) (10,278,927)
Decrease in notes payable ................................................... 7,859,487 (930,362)
Increase (decrease) in accounts payable and accrued liabilities
Increase in other liabilities ............................................... 1,126,972 1,683,583
------------- -------------
Total adjustments .................................................. (21,332,748) (56,663,951)
------------- -------------
Net cash (used) provided in operating activities ................. (11,845,518) (45,513,073)
------------- -------------
Cash flows from investing activities:
Purchases of investment securities .......................................... (58,790,740) (29,600,000)
Proceeds from sales and maturities of securities available for sale ........ 25,977,231 63,415,118
Proceeds from maturities of securities held to maturity ..................... -- --
Proceeds from sales of loans ................................................ 19,306,593 49,660,184
Net originations of loans ................................................... (172,450,090) (143,853,477)
Purchases of FHLB stock, net ............................................... (4,561,700) --
Acquisition of premises and equipment ....................................... (806,071) (1,308,900)
Acquisition of servicing rights ............................................. (4,666,443) (5,357,624)
------------- -------------
Net cash used by investing activities .............................. (195,991,220) (67,044,699)
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits - net ........................................................ 104,354,484 86,993,206
Increase in federal funds purchased ............................................... 10,000,000 --
Increase (decrease) in securities sold under agreements to repurchase - net ....... 49,508,751 (48,080,804)
Advances from FHLB, net ........................................................... 51,000,000 20,000,000
Proceeds from issuance of common stock ............................................ 7,696 159,500
Cash dividends:
Common stock ................................................................. (1,289,623) (943,360)
Preferred stock .............................................................. (1,409,375) (925,000)
Net cash provided by financing activities .................................. 212,171,933 57,203,542
Cash and cash equivalents at beginning of period ..................................... 4,335,195 (55,354,230)
Cash and cash equivalents at end of period ............................................. 65,995,545 103,728,448
------------- -------------
$ 70,330,740 $ 48,374,218
============= =============
Cash and cash equivalents include:
Cash and due from banks ........................................................... $ 34,818,742 $ 35,700,762
Securities purchased under agreements to resell ................................... 7,017,275 7,501,490
Time deposits with other banks .................................................... 28,494,723 5,171,966
Federal funds sold ................................................................ -- --
------------- -------------
$ 70,330,740 $ 48,374,218
============= =============
</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.
R&G Mortgage is also engaged in the business of originating
non-conforming conventional first mortgage loans on residential real estate (1
to 4 families), including B&C credit quality loans, through its wholly-owned
subsidiary Champion Mortgage Corporation.
The Bank provides a full range of banking services, including
residential, commercial and personal loans and a diversified range of deposit
products through twenty- three branches located mainly in the northeastern 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.
The Bank also is engaged in the business of originating FHA insured, VA
guaranteed and privately insured first and second mortgage loans on residential
real estate (1 to 4 families) in the State of New York through its wholly-owned
subsidiary Continental Capital Corporation.
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, 2000 and the results of
operations and changes in its cash flows for the three months ended March 31,
2000 and 1999.
7
<PAGE>
The results of operations for the three month period ended March 31,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000. 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, 1999.
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, 1999 to conform to the presentation for the quarter
ended March 31, 2000.
Basis of consolidation
All significant inter-company balances and transactions have been
eliminated in the accompanying unaudited financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the 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. In June 1999 the FASB delayed the effective date
of this statement to all fiscal quarters of fiscal years beginning after June
15, 2000. Initial application of the statement should be as of the beginning of
an entity's fiscal quarter. 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.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share for the three months ended March 31,
2000 and 1999 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.
8
<PAGE>
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,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Mortgage-backed securities held for trading:
CMO Residuals (all interest only) $ -- $ --
GNMA Certificates 14,966,981 43,563,817
----------- -----------
$14,966,981 $43,563,817
=========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------------------- -----------------------------
Amortized Fair Amortized Fair
cost value cost value
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Mortgage-backed securities available for sale:
CMO residuals (interest only) and other mortgage-backed
securities ............................................ $ 21,352,402 $ 23,434,272 $ 20,709,050 $ 22,772,039
------------ ------------ ------------ ------------
FNMA certificates:
Due from five to ten years ....................... 701,027 675,396 740,977 718,979
Due over ten years ............................... 107,830,121 106,100,841 110,854,889 109,705,450
------------ ------------ ------------ ------------
108,531,148 106,776,237 111,595,866 110,424,429
------------ ------------ ------------ ------------
FHLMC certificates:
Due from one to five years ....................... 90,650 90,198 98,693 98,882
Due from five to ten years ....................... 1,227,344 1,187,206 1,891,072 1,840,979
Due over ten years ............................... 14,511,439 13,887,686 14,586,274 14,036,216
------------ ------------ ------------ ------------
15,829,433 15,165,090 16,576,039 15,976,077
------------ ------------ ------------ ------------
GNMA certificates:
Due from five to ten years ....................... 10,005,167 9,848,595 -- --
Due over ten years ............................... 555,872,271 548,513,785 570,748,830 563,532,620
------------ ------------ ------------ ------------
565,877,438 558,362,380 570,748,830 563,532,620
------------ ------------ ------------ ------------
$711,590,421 $703,737,979 $719,629,785 $712,705,165
============ ============ ============ ============
Investment securities available for sale:
U.S. Treasury securities:
Due within one year .............................. $ 6,998,757 $ 6,950,630 $ 4,998,011 $ 4,944,500
------------ ------------ ------------ ------------
U.S. Government and agencies securities:
Due from one to five years ...................... 161,176,856 157,553,824 133,955,940 130,950,440
Due from five to ten years ...................... 121,824,195 118,764,470 92,236,888 89,443,550
283,001,051 276,318,294 226,192,828 220,393,990
------------ ------------ ------------ ------------
FHLB stock ............................................ 37,386,867 37,386,867 32,825,167 32,825,167
------------ ------------ ------------ ------------
$327,386,675 $320,655,791 $264,016,006 $258,163,657
============ ============ ============ ============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 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 within one year .................. $ 12,344 $ 13,239 $ -- $ --
Due from one to five years ........... -- -- 15,478 16,601
Due from five to ten years ........... 10,200,307 9,941,718 10,659,910 10,390,712
Due over ten years ................... 2,061,578 1,161,560 2,132,629 2,074,108
----------- ----------- ----------- -----------
12,274,229 11,116,517 12,808,017 12,481,421
----------- ----------- ----------- -----------
FNMA certificates:
Due over ten years ........................ 9,881,614 10,227,437 10,252,615 10,643,767
----------- ----------- ----------- -----------
FHLMC certificates:
Due over ten years ........................ 182,457 173,082 188,615 179,841
----------- ----------- ----------- -----------
$22,338,300 $21,517,036 $23,249,247 $23,305,029
=========== =========== =========== ===========
Investment securities held to maturity:
Puerto Rico Government and Agencies obligations:
Due from one to five years .............. $ 1,280,000 $ 1,270,400 $ 1,280,000 $ 1,272,000
Due from five to ten years .............. 4,155,820 4,124,770 4,157,630 4,131,755
----------- ----------- ----------- -----------
$ 5,435,820 $ 5,395,170 $ 5,437,630 $ 5,403,755
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Real estate loans:
Residential - first mortgage ..... $ 1,184,531,026 $ 1,097,891,436
Residential - second mortgage .... 13,391,975 13,028,816
Land ............................. 2,505,993 1,952,043
Construction ..................... 107,184,950 95,201,185
Commercial ....................... 245,232,063 226,036,358
--------------- ---------------
1,552,846,007 1,434,109,838
Undisbursed portion of loans in process (54,324,571) (50,622,579)
Net deferred loan costs (fees) ........ 268,609 (436,852)
--------------- ---------------
1,498,790,045 1,383,050,407
--------------- ---------------
Other loans:
Commercial ....................... 83,177,536 54,230,506
Consumer:
Secured by deposits ........... 20,961,848 20,538,734
Secured by real estate ........ 82,289,452 76,944,484
Other ......................... 39,543,885 37,653,140
Unamortized discount .................. (372,585) (356,142)
Unearned interest ..................... (69,840) (83,722)
--------------- ---------------
225,530,296 188,927,000
--------------- ---------------
Total loans ................... 1,724,320,341 1,571,977,407
Allowance for loan losses ........ (9,520,042) (8,970,605)
--------------- ---------------
$ 1,714,800,299 $ 1,563,006,802
=============== ===============
</TABLE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
2000 1999
(Unaudited)
<S> <C> <C>
Balance, beginning of period ......... $ 8,970,605 $ 8,055,432
Provision for loan losses ............ 1,350,000 1,300,000
Loans charged-off .................... (1,026,608) (1,039,726)
Recoveries ........................... 226,045 177,411
----------- -----------
Balance, end of period ............... $ 9,520,042 $ 8,493,117
=========== ===========
</TABLE>
12
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments to buy and sell GNMA certificates
As of March 31, 2000, the Company had open commitments to issue GNMA
certificates of approximately $119.3 million.
Commitments to sell mortgage loans
As of March 31, 2000 the Company had commitments to sell mortgage loans
to third party investors amounting to approximately $40.6 million.
Lease commitments
The Company is obligated under several noncancellable leases for office
space and equipment rentals, all of which are accounted for as operating leases.
The leases expire at various dates with options for renewals.
Other
At March 31, 2000, 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 $671.3 million at March 31, 2000. Liability, if any,
under the recourse provisions at March 31, 2000 is estimated by management to be
in significant.
13
<PAGE>
Item 2: Management's Discussion and Analysis
- ------- ------------------------------------
Financial Condition
At March 31, 2000, the Company's total assets amounted to $3.1 billion,
as compared to $2.9 billion at December 31, 1999. The $209.8 million or 7.2%
increase in total assets during the three month period ended March 31, 2000 was
attributable to a $151.8 million or 9.7% increase in loans receivable, which
reflects net originations following repayments and sales, and a $62.5 million
increase in investment securities available for sale, principally as a result of
purchases of such securities during the period, which amounted to $58.8 million.
The increase in the Company's assets were primarily funded by increased
deposits of $104.4 million or 7.8%, increased repurchase agreements of $49.5
million or 6.8% and increased Federal Home Loan Bank Advances of $51.0 million
or 13.3% during the three month period ended March 31, 2000.
At March 31, 2000, the Company's stockholders' equity amounted to
$275.2 million, which is an increase of $5.7 million or 2.1% from the amount
reported at December 31, 1999. The primary reason for the increase was the net
income earned for the quarter, which was partially offset by a $1.1 million
increase in unrealized losses on securities available for sale, net of income
tax benefits, and $2.7 million in dividends paid during the period. At March 31,
2000, the Bank's leverage and Tier 1 risk-based capital amounted to 6.52% and
11.33% of adjusted total assets, respectively, compared to a 4.0% minimum
requirement, and its total risk-based capital amounted to 12.03%, compared to an
8.0% minimum requirement.
Results of Operations
The Company reported net income of $9.5 million during the three months
ended March 31, 2000, as compared to $11.1 million during the prior comparable
period.
Total revenues amounted to $31.8 million during the three months ended
March 31, 2000 compared to $29.7 million for the prior comparable period. The
7.3% increase was due to an increase in net interest income of $14.4 million or
64.9% during the three months ended March 31, 2000 over the prior comparable
period, primarily due to a $10.7 million or 41.0% 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 7.3% increase in revenues during the March 31, 2000
quarter was a $1.9 million or 32.1% increase in loan administration and
servicing fees due to an increase of the Company's loan servicing portfolio, as
a result of an increase in the number of loans serviced. These increases in
revenues were partially offset by a $3.2 million or 30.2% decrease in net gain
on origination and sale of loans, which reflects increases in interest rates for
mortgage loans, which have reduced the level of loans being refinanced.
Total expenses increased by $5.2 million or 35.3% during the three
months ended March 31, 2000 over the prior comparable period. The quarter ended
March 31, 2000 includes expenses associated with the operations of Continental
Capital, the Company's recently acquired mortgage banking subsidiary in Long
<PAGE>
Island, New York, which was a significant reason for the increase in expenses
during the quarter. Excluding expenses associated with Continental Capital,
expenses during the quarter increased by $2.9 million or 19.3%, due primarily to
a $1.3 million or 27.1% increase in employee compensation and benefits
associated with employees hired for new branch openings and the Company's
commercial loans department expansion,
14
<PAGE>
in both instances after March of last year, and a $739,000 or 30.9% increase in
occupancy expenses mainly related to the operation of six additional branches
completed during the latter part of 1999 and an additional branch completed in
early 2000. These increases in expenses were accompanied by a $825,000 or 10.7%
increase in other miscellaneous expenses, mainly as a result of a $681,000
increase in amortization expenses of the Company's servicing asset.
Total income tax expense decreased by $1.4 mililon or 38.4% during the
three months ended March 31, 2000 over the prior comparable period, due
primarily to a $3.1 million or 20.7% decrease in income before taxes during the
2000 period. The Company's effective tax rate amounted to 19.3% during the three
month period ended March 31, 2000 compared to 24.9% in the 1999 comparable
period. The decrease in 2000 of the Company's effective tax rate is primarily
attributable to an increase in the Company's exempt interest income and certain
tax planning strategies implemented during the 2000 period.
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, 2000, the Company had $238.4 million in borrowing capacity
under warehousing and other lines of credit, $710.2 million in borrowings
capacity under a line of credit with the FHLB of New York and $25 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, 2000, the Company had outstanding commitments to extend
credit totaling $16.5 million (excluding the undisbursed portion of loans in
process). Certificates of deposit which are scheduled to mature within one year
totaled $821.3 million at March 31, 2000, and borrowings that are scheduled to
mature within the same period amounted to $1.3 billion. The Company anticipates
that it will have sufficient funds available to meet its current loan
commitments.
15
<PAGE>
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,
2000, 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 6.52%,
11.33% and 12.03%, 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, 1999 in Item 7A of the Comapany's Annual report on
Form 10-K. Management believes there have been no material changes in the
Company's market risk since December 31, 1999.
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
17
<PAGE>
Item 5: Other Information
The Registrant received notification from the Federal Reserve Bank of New York
that its election to become a financial holding company within the meaning of
the Bank Holding Company Act of 1956, as recently amended by the
Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Modernization Act"),
was effective May 12, 2000. The Registrant had filed its election on April 13,
2000. The Modernization Act allows, among other things, bank holding companies
meeting management, capital and Community Reinvestment Act ("CRA") standards to
engage in a substantially broader range of nonbanking activities than was
previously permissible, including insurance underwriting and making merchant
banking investments in commercial and financial companies. The activities
permissible for a financial holding company are contained in the Federal
Reserve's Regulation Y. In order to qualify for the election, the Registrant
certified that each depository institution that it controlled was well
capitalized, well managed and had an appropriate satisfactory CRA rating.
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 15, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 34,818,742
<INT-BEARING-DEPOSITS> 28,494,723
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 14,966,981
<INVESTMENTS-HELD-FOR-SALE> 1,024,393,770
<INVESTMENTS-CARRYING> 27,774,120
<INVESTMENTS-MARKET> 26,912,206
<LOANS> 1,714,800,299
<ALLOWANCE> 9,520,042
<TOTAL-ASSETS> 3,121,835,129
<DEPOSITS> 1,434,860,852
<SHORT-TERM> 1,364,403,014
<LIABILITIES-OTHER> 47,341,936
<LONG-TERM> 0
0
75,000,000
<COMMON> 41,048,135
<OTHER-SE> 159,181,192
<TOTAL-LIABILITIES-AND-EQUITY> 3,121,835,129
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<INTEREST-INVEST> 11,364,540
<INTEREST-OTHER> 5,207,548
<INTEREST-TOTAL> 53,282,987
<INTEREST-DEPOSIT> 17,026,210
<INTEREST-EXPENSE> 36,522,978
<INTEREST-INCOME-NET> 16,760,009
<LOAN-LOSSES> 1,350,000
<SECURITIES-GAINS> (142,817)
<EXPENSE-OTHER> 20,072,469
<INCOME-PRETAX> 11,761,484
<INCOME-PRE-EXTRAORDINARY> 11,761,484
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,487,230
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 7.72
<LOANS-NON> 59,950,411
<LOANS-PAST> 422,492
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