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| OFG > SEC Filings for OFG > Form 10-Q on 17-Nov-2008 | All Recent SEC Filings |
17-Nov-2008
Quarterly Report
SELECTED FINANCIAL DATA
FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007
(In thousands, except per share data)
Quarter ended September 30, Nine-months ended September 30,
EARNINGS DATA: 2008 2007 Variance % 2008 2007 Variance %
Interest income $ 84,744 $ 74,926 13.1 % $ 252,003 $ 207,226 21.6 %
Interest expense 56,703 55,276 2.6 % 170,468 156,498 8.9 %
Net interest income 28,041 19,650 42.7 % 81,535 50,728 60.7 %
Provision for loan losses 1,950 1,614 20.8 % 5,580 4,064 37.3 %
Net interest income after
provision for loan losses 26,091 18,036 44.7 % 75,955 46,664 62.8 %
Non-interest income (loss) (57,016 ) 7,134 -899.2 % (41,652 ) 30,060 -238.6 %
Non-interest expenses 18,197 16,522 10.1 % 54,007 49,827 8.4 %
Income (loss) before taxes (49,122 ) 8,648 -668.0 % (19,704 ) 26,897 -173.3 %
Income tax expense (benefit) (4,226 ) 196 -2256.1 % (6,083 ) 1,007 -704.1 %
Net Income (loss) (44,896 ) 8,452 -631.2 % (13,621 ) 25,890 -152.6 %
Less: dividends on preferred
stock (1,200 ) (1,200 ) - (3,601 ) (3,601 ) -
Income (loss) available to
common shareholders $ (46,096 ) $ 7,252 -735.6 % $ (17,222 ) $ 22,289 -177.3 %
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PER SHARE DATA: Basic $ (1.90 ) $ 0.30 -733.3 % $ (0.71 ) $ 0.91 -178.0 % Diluted $ (1.89 ) $ 0.30 -730.0 % $ (0.71 ) $ 0.91 -178.0 % Average common shares outstanding 24,292 24,230 0.3 % 24,249 24,396 -0.6 % Average potential common share-options 82 31 164.5 % 100 110 -9.1 % Average shares and shares equivalents 24,374 24,261 0.5 % 24,349 24,506 -0.6 % Book value per common share $ 7.16 $ 11.35 -36.9 % Market price at end of period $ 17.86 $ 11.36 57.2 % Equity-to-assets ratio 4.09 % 5.84 % -30.0 % Cash dividends declared per common share $ 0.14 $ 0.14 - $ 0.42 $ 0.42 - Cash dividends declared on common share $ 3,402 $ 3,377 0.7 % $ 10,206 $ 10,235 -0.3 % Return on average assets (ROA) -2.99 % 0.59 % -606.8 % -0.30 % 0.66 % -145.5 % Return on average common equity (ROE) -88.58 % 11.17 % -893.0 % -8.97 % 11.20 % -180.1 % Efficiency ratio 53.03 % 62.65 % -15.4 % 53.07 % 70.47 % -24.7 % Expense ratio 0.80 % 0.73 % 9.6 % 0.76 % 0.80 % -5.0 % Interest rate spread 1.63 % 1.19 % 37.0 % 1.56 % 1.10 % 41.8 % Interest rate margin 1.88 % 1.46 % 28.8 % 1.82 % 1.36 % 33.8 % Number of financial centers 23 24 -4.2 % |
September 30, December 31,
PERIOD END BALANCES AND CAPITAL RATIOS: 2008 2007 Variance %
(In thousands)
Investments and loans
Investment securities $ 4,520,514 $ 4,585,610 -1.4 %
Loans (including loans held-for-sale), net 1,219,838 1,179,566 3.4 %
Securities sold but not yet delivered 4,857 - 100.0 %
$ 5,745,209 $ 5,765,176 -0.3 %
Deposits and Borrowings
Deposits $ 1,517,789 $ 1,246,420 21.8 %
Repurchase agreements 3,770,755 3,861,411 -2.3 %
Other borrowings 358,833 395,441 -9.3 %
Securities purchased but not yet received - 111,431 -100.0 %
$ 5,647,377 $ 5,614,703 0.6 %
Stockholders' equity
Preferred equity $ 68,000 $ 68,000 -
Common equity 174,018 291,461 -40.3 %
$ 242,018 $ 359,461 -32.7 %
Capital ratios
Leverage capital 5.98 % 6.69 % -10.6 %
Tier 1 risk-based capital 15.93 % 18.59 % -14.3 %
Total risk-based capital 16.49 % 19.06 % -13.5 %
Trust assets managed $ 1,839,702 $ 1,962,226 -6.2 %
Broker-dealer assets gathered 1,236,760 1,281,168 -3.5 %
Assets managed 3,076,462 3,243,394 -5.1 %
Assets owned 5,914,666 5,999,855 -1.4 %
Total financial assets managed and owned $ 8,991,128 $ 9,243,249 -2.7 %
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OVERVIEW OF FINANCIAL PERFORMANCE
Introduction
The Group's diversified mix of businesses and products generates both the
interest income traditionally associated with a banking institution and
non-interest income traditionally associated with a financial services
institution (generated by such businesses as securities brokerage, fiduciary
services, investment banking, insurance and pension administration). Although
all of these businesses, to varying degrees, are affected by interest rate and
financial markets fluctuations and other external factors, the Group's
commitment is to continue producing a balanced and growing revenue stream.
During the third quarter of 2008, the Group reported an other -than-temporary
impairment of $55.8 million, net of tax ($2.29 per diluted share); a net of tax
loss of $4.14 million ($0.17 per diluted share), in connection with equity index
option agreements in which performance by the counterparty (Lehman Brothers
Finance S.A.) is uncertain; and an income tax benefit of $500,000 ($0.02 per
share), for the reassessment of the valuation allowance for the Group's deferred
tax asset.
Excluding these items, the Company had income available to common shareholders
of $13.4 million, equal to $0.55 per share (diluted), an increase of 83.6% over
the year ago quarter's $7.3 million, equal to $0.30 per diluted share.
The securities subject to an other-than-temporary impairment are an ALT A Hybrid
ARM collateralized mortgage obligation purchased in late 2006 (the "ALT A CMO")
and certain collateralized debt obligations purchased in mid 2007 (the "impaired
CDOs").
Impairment charges of $38.9 million were recorded with respect to the ALT A CMO,
representing the difference between the amortized cost of $159.0 million and the
estimated fair value of $120.1 million, both at September 30, 2008.
The aggregate fair value of the impaired CDOs has been estimated at
$40.1 million at September 30, 2008, a difference of $19.9 million from its
aggregate principal balance of $60.0 million. Although no loss is projected on
the
impaired CDOs as a result of a recently achieved optimization of the investment
structure, the Group has determined that the entire amount of the unrealized
loss on these securities constituted an other-than-temporary impairment at
September 30, 2008, requiring a $19.9 million charge against operations, net of
the anticipated tax effect of $3.0 million.
A substantial portion of the charges may be recovered and applied to earnings
through the remaining life of these securities. This will result in a
prospective increase to NII and NIM, to the extent these securities continue to
perform as anticipated.
Income Available (Loss) to Common Shareholders
For the quarter and nine-month periods ended September 30, 2008, the Group
recorded a loss to common shareholders of $46.1 million and $17.2 million,
respectively, compared to income of $7.3 million and $22.3 million,
respectively, in the comparable year-ago quarter and nine-month period. Losses
per basic and fully diluted common share were $1.90 and $1.89, respectively, for
the quarter ended September 30, 2008, compared to income of $0.30 per basic and
fully diluted common share in the same year-ago quarter, and losses of $0.71 per
basic and fully diluted common share for the nine-month period ended
September 30, 2008, compared to income of $0.91 in the year ago period.
Return on Average Assets and Common Equity
Return on average common equity (ROE) for the quarter and nine-month period
ended September 30, 2008, was (88.58%) and (8.97%), respectively, compared to
11.17% and 11.20%, for the quarter and nine-months ended September 30, 2007,
respectively. Return on average assets (ROA) for the quarter and nine-month
period ended September 30, 2008, was (2.99%) and (0.30%), respectively, compared
to 0.59% and 0.66%, for the quarter and nine-months ended September 30, 2007,
respectively.
Net Interest Income after Provision for Loan Losses
Net interest income after provision for loan losses increased 44.7% for the
quarter and 62.8% for the nine-month period ended September 30, 2008, totaling
$26.1 million and $76.0 million, respectively, compared with $18.0 million and
$46.7 million for the same periods last year. The increase of 13.1% and 21.6% in
interest income for the quarter and nine-month period ended September 30, 2008,
totaling $84.7 million and $252.0 million, respectively, compared with $74.9
million and $207.2 million, respectively, for the same periods last year, was
mainly due to higher volumes of investment securities and higher average yields.
Interest expense increased by 2.6% and 8.9% for the quarter and nine-month
periods ended September 30, 2008, as compared to same periods last year,
primarily due to higher average balances in the deposits and borrowings
portfolios. Net interest margin for the quarter and nine-month periods ended
September 30, 2008, was 1.88% and 1.82%, respectively, compared to 1.46% and
1.36%, respectively, for the same periods last year.
Non-Interest Income (Loss)
Total non-interest losses, including the aforementioned other-than-temporary
impairment non-cash loss and charges in connection with derivative transactions
under equity index option agreements in which performance by the counterparty is
uncertain, were $57.0 million and $41.7 million, respectively, for the quarter
and nine-month period ended September 30, 2008, compared to income of
$7.1 million and $30.1 million for the same periods last year. Total banking and
financial services revenues amounted to $6.3 million for the quarter ended
September 30, 2008, a decrease of 6.7% from the $6.7 million recorded for the
same period a year ago, and amounted to $20.2 million for the nine-month period
ended September 30, 2008, an increase of 1.3% from the $20.0 million for the
same period a year ago.
Securities, derivatives and trading activities revenues for the quarter and
nine-month period ended September 30, 2008 amounted to a loss of $63.3 million
and $61.9 million, respectively, compared to a gain of $412,000 and
$10.0 million, respectively, for the same periods a year-ago. Results for the
nine months of 2008 include an interest-rate swap contract that the Group
entered in January 2008 to manage the Group's interest rate risk exposure with a
notional amount of $500 million, which was subsequently terminated resulting in
a loss to the Group of approximately $7.9 million. Also, during the third
quarter of 2008, the Group charged $4.9 million as a loss in connection with
equity index option agreements, and recorded an other-than-temporary I non-cash
loss of $58.8 million. For the nine-month period ended September 30, 2007, gains
of $8.5 million were recognized and reflected as "Derivatives" in the unaudited
consolidated statements of operations. There were no outstanding interest-rate
swap contracts at September 30, 2008 and December 31, 2007.
Non-Interest Expenses
Non-interest expenses totaled $18.2 million and $54.0 million, respectively, for
the quarter and nine-month period ended September 30, 2008, compared to
$16.5 million and $49.8 million, respectively, in the year ago periods. The
efficiency ratio improved to 53.03% from 62.65% in the year ago quarter, and to
53.07% from 70.47% for the nine month period.
Income Taxes
The Group recorded an income tax benefit of $4.2 million and $6.1 million,
respectively, for the quarter and nine-month period ended September 30, 2008,
compared to an expense of $196,000 and $1.0 million for the respective periods
ended September 30, 2007, mainly due to the deferred tax effect related to the
other than temporary impairment and derivative transaction losses recorded in
the third quarter of 2008, and the expiration of certain tax contingencies, the
reassessment of the valuation allowance for deferred tax assets.
Group's Financial Assets
The Group's total financial assets include owned assets and the assets managed
by the trust division, the securities broker-dealer subsidiary, and the private
pension plan administration subsidiary. At September 30, 2008, total financial
assets reached $8.991 billion, compared to $9.243 billion at December 31, 2007,
a 2.7% decrease. When compared to December 31, 2007, there was a 1.4% decrease
in assets owned at September 30, 2008, while assets managed by the trust
division and the broker-dealer subsidiary decreased by only 5.1% to
$3,076 billion in September 2008, from $3.243 billion in December 2007, despite
2008's sharp decline in the stock and bond markets. Owned assets are
approximately 95% owned by the Group's banking subsidiary and its IBE
subsidiary.
The Group's trust division offers various types of individual retirement
accounts ("IRA") and manages 401(K) and Keogh retirement plans and custodian and
corporate trust accounts, while Caribbean Pension Consultants, Inc. ("CPC")
manages the administration of private pension plans. At September 30, 2008,
total assets managed by the Group's trust division and CPC amounted to $1.840
billion, compared to $1.962 billion at December 31, 2007. The Group's
broker-dealer subsidiary offers a wide array of investment alternatives to its
client base, such as tax-advantaged fixed income securities, mutual funds,
stocks, bonds and money management wrap-fee programs. At September 30, 2008,
total assets gathered by the broker-dealer from its customer investment accounts
decreased to $1.237 billion, compared to $1.281 billion at December 31, 2007.
Interest Earning Assets
The investment portfolio amounted to $4.521 billion at September 30, 2008, a
1.4% decrease compared to $4.586 billion at December 31, 2007, while the loan
portfolio increased 3.4% to $1.220 billion at September 30, 2008, compared to
$1.180 billion at December 31, 2007.
The mortgage loan portfolio totaled $1.031 billion at September 30, 2008, a 1.3%
increase from $1.017 billion at September 30, 2007, and an increase of 2.7%,
from $1.003 million at December 31, 2007. Mortgage loan production (excluding
purchases) for the nine-month period ended September 30, 2008, totaled
$176.2 million, which represents a 57.7% increase compared to the same period
last year.
Interest Bearing Liabilities
Total deposits amounted to $1.518 billion at September 30, 2008, an increase of
21.8% compared to $1.246 billion at December 31, 2007, primarily due to
increased wholesale certificates of deposit that are used as a more economical
and flexible alternative for replacing higher cost deposits and short-term
repurchase agreements.
Stockholders' Equity
Stockholders' equity at September 30, 2008, was $242.0 million, compared to
$359.5 million at December 31, 2007, reflecting decreased mark-to-market
valuation on the available-for-sale investment securities portfolio and lower
retained earnings as a result of the loss recorded for the quarter ended
September 30, 2008.
The Group's capital ratios remain above regulatory capital requirements, with
risk-based capital ratios significantly above regulatory capital adequacy
guidelines. At September 30, 2008, Tier 1 Leverage Capital Ratio was 5.98% (1.5
times the minimum of 4.00%), Tier 1 Risk-Based Capital Ratio was 15.93% (4.0
times the minimum of 4.00%), and Total Risk-Based Capital Ratio was 16.49% (2.1
times the minimum of 8.00%).
TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE
FOR THE QUARTERS ENDED SEPTEMBER 30, 2008 AND 2007
(In thousands)
Interest Average rate Average balance
Variance Variance Variance
2008 2007 in % 2008 2007 in BPS 2008 2007 in %
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A - TAX EQUIVALENT SPREAD Interest-earning assets $ 84,744 $ 74,926 13.1 % 5.67 % 5.59 % 8 $ 5,980,562 $ 5,358,037 11.6 % Tax equivalent adjustment 27,951 20,902 33.7 % 1.87 % 1.56 % 31 - - - Interest-earning assets - tax equivalent 112,695 95,828 17.6 % 7.54 % 7.15 % 39 5,980,562 5,358,037 11.6 % Interest-bearing liabilities 56,703 55,276 2.6 % 4.04 % 4.40 % (36 ) 5,612,134 5,027,622 11.6 % Tax equivalent net interest income / spread $ 55,992 $ 40,552 38.1 % 3.50 % 2.75 % 75 $ 368,428 $ 330,415 11.5 % Tax equivalent interest rate margin 3.74 % 3.03 % 71 |
B - NORMAL SPREAD
Interest-earning
assets:
Investments:
Investment
securities $ 64,478 $ 52,175 23.6 % 5.47 % 5.17 % 30 $ 4,717,589 $ 4,036,594 16.9 %
Investment
management fees - 80 -100.0 % - 0.01 % (1 ) - - -
Total investment
securities 64,478 52,255 23.4 % 5.47 % 5.18 % 29 4,717,589 4,036,594 16.9 %
Trading securities 2 4 -50.0 % 1.54 % 1.20 % 34 518 1,337 -61.3 %
Money market
investments 293 968 -69.7 % 3.07 % 5.84 % (277 ) 38,137 66,346 -42.5 %
64,773 53,227 21.7 % 5.45 % 5.19 % 26 4,756,244 4,104,277 15.9 %
Loans:
Mortgage 16,706 17,389 -3.9 % 6.48 % 6.64 % (16 ) 1,030,894 1,048,265 -1.7 %
Commercial 2,663 3,491 -23.7 % 6.29 % 7.96 % (167 ) 169,297 175,449 -3.5 %
Consumer 602 819 -26.5 % 9.98 % 10.90 % (92 ) 24,127 30,046 -19.7 %
19,971 21,699 -8.0 % 6.52 % 6.92 % (40 ) 1,224,318 1,253,760 -2.3 %
84,744 74,926 13.1 % 5.67 % 5.59 % 8 5,980,562 5,358,037 11.6 %
Interest-bearing
liabilities:
Deposits:
Non-interest
bearing deposits - - - - - - 35,638 35,322 0.9 %
Now accounts 912 203 349.3 % 2.40 % 1.23 % 117 152,314 66,045 130.6 %
Savings 2,298 3,673 -37.4 % 2.92 % 4.40 % (148 ) 315,124 333,652 -5.6 %
Certificates of
deposit 8,992 9,685 -7.2 % 3.87 % 4.67 % (80 ) 930,053 829,263 12.2 %
12,202 13,561 -10.0 % 3.41 % 4.29 % (88 ) 1,433,129 1,264,282 13.4 %
Borrowings:
Repurchase
agreements 40,456 37,431 8.1 % 4.27 % 4.39 % (12 ) 3,787,608 3,412,662 11.0 %
Financing fees - (25 ) -100.0 % - - - - - -
Total repurchase
agreements 40,456 37,406 8.2 % 4.27 % 4.38 % (11 ) 3,787,608 3,412,662 11.0 %
FHLB advances 3,323 3,255 2.1 % 4.19 % 4.46 % (27 ) 317,184 291,667 8.7 %
Subordinated
capital notes 540 770 -29.8 % 5.99 % 8.80 % (281 ) 36,083 35,000 3.1 %
Term notes - 7 -100.0 % - 2.63 % (263 ) - 1,050 -100.0 %
Other borrowings 182 277 -34.4 % 1.91 % 4.83 % (292 ) 38,130 22,961 66.1 %
44,501 41,715 6.7 % 4.26 % 4.43 % (17 ) 4,179,005 3,763,340 11.0 %
56,703 55,276 2.6 % 4.04 % 4.40 % (36 ) 5,612,134 5,027,622 11.6 %
Net interest income
/ spread $ 28,041 $ 19,650 42.7 % 1.63 % 1.19 % 44
Interest rate
margin 1.88 % 1.46 % 42
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Excess of average interest-earning assets over average interest-bearing liabilities $ 368,428 $ 330,415 11.5 %
Average interest-earning assets over average interest-bearing liabilities ratio 106.56 % 106.57 %
C. Changes in net interest income due to: Volume Rate Total
Interest Income:
Investments $ 8,454 $ 3,092 $ 11,546
Loans (510 ) (1,218 ) (1,728 )
7,944 1,874 9,818
Interest Expense:
Deposits 1,811 (3,169 ) (1,358 )
Repurchase agreements 4,110 (1,061 ) 3,049
Other borrowings 500 (764 ) (264 )
. . .
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