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OFG > SEC Filings for OFG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ORIENTAL FINANCIAL GROUP INC

Form 10-Q for ORIENTAL FINANCIAL GROUP INC


9-Nov-2012

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

                                                                                 Quarter Ended September 30,                               Nine-Month Period Ended September 30,
                                                                                                                        Variance                                                 Variance
                                                                              2012                         2011            %                2012                   2011             %
EARNINGS DATA:                                                                                          (In thousands, except per share data)
Interest income                                              $                               65,686    $      71,536       -8.2%   $              196,393    $        231,772      -15.3%
Interest expense                                                                             25,483           39,066      -34.8%                   84,251             119,214      -29.3%
   Net interest income                                                                       40,203           32,470       23.8%                  112,142             112,558       -0.4%
Provision for non-covered loan and lease losses                                               3,600            3,800       -5.3%                   10,400              11,400       -8.8%
Provision for (recapture of) covered loan and lease losses,
net                                                                                             221          (1,936)      111.4%                    8,845             (1,387)      737.7%
   Total provision for loan and lease losses, net                                             3,821            1,864      105.0%                   19,245              10,013       92.2%
     Net interest income after provision for loan
       and lease losses                                                                      36,382           30,606       18.9%                   92,897             102,545       -9.4%
Non-interest income                                                                          13,652           16,965      -19.5%                   43,368              40,700        6.6%
Non-interest expenses                                                                        30,379           30,203        0.6%                   88,006              91,248       -3.6%
   Income before taxes                                                                       19,655           17,368       13.2%                   48,259              51,997       -7.2%
Income tax expense                                                                            1,894              580      226.6%                    4,888               5,661      -13.7%
   Net Income                                                                                17,761           16,788        5.8%                   43,371              46,336       -6.4%
Less: dividends on preferred stock                                                          (3,039)          (1,201)      153.0%                  (5,440)             (3,602)       51.0%
   Income available to common shareholders                   $                               14,722    $      15,587       -5.5%   $               37,931    $         42,734      -11.2%
PER SHARE DATA:
Basic                                                        $                                 0.36    $        0.35        2.1%   $                 0.93    $           0.95       -2.1%
Diluted                                                      $                                 0.35    $        0.35       -2.3%   $                 0.92    $           0.95       -3.0%
Average common shares outstanding                                                            40,738           44,015       -7.4%                   40,828              45,050       -9.4%
Average common shares outstanding and equivalents                                            47,978           44,105        8.8%                   43,316              45,141       -4.0%
Book value per common share                                  $                                15.40    $       15.05        2.3%   $                15.40    $          15.05        2.3%
Tangible book value per common share                         $                                15.30    $       14.96        2.3%   $                15.30    $          14.96        2.3%
Market price at end of period                                $                                10.52    $        9.67        8.8%   $                10.52    $           9.67        8.8%
Cash dividends declared per common share                     $                                 0.06    $        0.05       20.0%   $                 0.18    $           0.15       20.0%
Cash dividends declared on common shares                     $                                2,445    $       2,202       11.0%   $                7,331    $          6,677        9.8%
PERFORMANCE RATIOS:
Return on average assets (ROA)                                                                 1.11%            0.95%      16.7%                     0.89%               0.86%       4.0%
Return on average common equity (ROE)                                                          9.27%            9.41%      -1.5%                     8.01%               8.65%      -7.3%
Equity-to-assets ratio                                                                        12.75%           10.36%      23.0%                    12.75%              10.36%      23.0%
Efficiency ratio                                                                              59.04%           69.30%     -14.8%                    60.13%              63.49%      -5.3%
Expense ratio                                                                                  1.32%            1.19%      10.6%                     1.22%               1.23%      -0.9%
Interest rate spread                                                                           2.69%            1.97%      36.7%                     2.48%               2.27%       9.3%
Interest rate margin                                                                           2.77%            2.03%      36.4%                     2.55%               2.31%      10.4%


SELECTED FINANCIAL DATA - (Continued)

                                                    September 30,             December 31,     Variance
                                                        2012                      2011            %
PERIOD END BALANCES AND CAPITAL RATIOS:               (In thousands, except per share data)
Investments and loans
   Investments securities                  $                    3,153,082    $    3,867,970      -18.5%
   Loans and leases not covered under
shared-loss
     agreements with the FDIC, net                              1,182,730         1,169,917        1.1%
   Loans and leases covered under
shared-loss
     agreements with the FDIC, net                                413,588           496,276      -16.7%
     Total investments and loans           $                    4,749,400    $    5,534,163      -14.2%
Deposits and borrowings
   Deposits                                $                    2,214,367    $    2,435,185       -9.1%
   Securities sold under agreements to
repurchase                                                      2,652,366         3,056,238      -13.2%
   Other borrowings                                               321,478           423,670      -24.1%
     Total deposits and borrowings         $                    5,188,211    $    5,915,093      -12.3%
Stockholders' equity
   Preferred stock                         $                      152,000    $       68,000      123.5%
   Common stock                                                    47,842            47,809        0.1%
   Additional paid-in capital                                     495,155           499,096       -0.8%
   Legal surplus                                                   54,407            50,178        8.4%
   Retained earnings                                               94,520            68,149       38.7%
   Treasury stock, at cost                                       (81,300)          (74,808)       -8.7%
   Accumulated other comprehensive income                           9,063            37,131      -75.6%
     Total stockholders' equity            $                      771,687    $      695,555       10.9%
Capital ratios
   Leverage capital                                                 10.91%             9.65%      13.0%
   Tier 1 risk-based capital                                        36.33%            31.84%      14.1%
   Total risk-based capital                                         37.63%            33.12%      13.6%
   Tier 1 common equity to risk-weighted
assets                                                              31.03%            27.01%      14.9%
Financial assets managed
   Trust assets managed                    $                    2,449,718    $    2,216,088       10.5%
   Broker-dealer assets gathered                                2,167,379         1,926,147       12.5%
Total assets managed                       $                    4,617,097    $    4,142,235       11.5%


OVERVIEW OF FINANCIAL PERFORMANCE

The following discussion of the Group's financial condition and results of operations should be read in conjunction with the foregoing "Selected Financial Data" and the Group's unaudited consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see "Forward-Looking Statements" and "Risk Factors" for discussion of the uncertainties, risks and assumptions associated with these statements.

The Group is a publicly-owned financial holding company that provides a full range of banking and wealth management services through its subsidiaries. It provides comprehensive banking and wealth management services through a complete range of banking and financial solutions, including mortgage, commercial and consumer lending; financing leases; checking and savings accounts; financial planning, insurance, wealth management, and investment brokerage; and corporate and individual trust and retirement services. The Group operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service and marketing efforts focused on mid and high net worth individuals and families, including professionals and owners of small and mid-sized businesses, primarily in Puerto Rico. The Group has 28 financial centers in Puerto Rico and a subsidiary in Boca Raton, Florida. The Group's long-term goal is to strengthen its banking and wealth management franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and wealth management services, maintaining effective asset-liability management, growing non-interest revenues from banking and wealth management services, and improving operating efficiencies.

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 retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, the Group's commitment is to continue producing a balanced and growing revenue stream.

By acquiring the BBVAPR Companies, we will accelerate our longstanding goal of creating a more stable balance sheet, with a larger and more diversified loan portfolio, a greater retail deposit funding base, and a smaller investment securities portfolio, improving earnings stability. Furthermore, in connection with the BBVAPR Acquisition, we plan to complete the sale of approximately $1.6 billion of our and BBVAPR Bank's investment securities and use the proceeds from such sales as well as approximately $200 million of cash to repay approximately $1.8 billion of wholesale funding. In addition to reducing the sensitivity of our balance sheet to interest rates, the planned deleveraging would improve our capital ratios by reducing the size of our balance sheet.

We expect that the completion of the planned deleveraging will result in a one-time charge to income before income taxes of approximately $10 million (or $7.6 million after giving effect to income taxes), in the aggregate, which includes the expected securities mark-to-market gains or losses and the expected cost on the termination of the wholesale funding agreements. There is no expected one-time charge from the planned deleveraging of BBVAPR Bank's securities portfolio and wholesale funding since the purchase accounting fair value adjustments will reflect the sales price of the securities and the liquidation value of the liabilities being deleveraged. The $1.8 billion planned deleveraging is also expected to result in a reduction to pre-tax income of approximately $6.2 million in 2013 and approximately $4.0 million in 2014 (or $4.3 million and $2.8 million, respectively, after giving effect to income taxes). Actual amounts will depend on market prices for the investment securities to be sold and the remaining term under the wholesale funding agreements at the time of the deleveraging transactions.

To finance in part the BBVAPR Acquisition, we have raised an aggregate amount of approximately $158.5 million (before expenses) in common and preferred stock through the private placement of $84 million in Convertible Preferred Stock, which closed on July 3, 2012, the underwritten public offering of approximately $51.5 million in common stock, which closed on October 31, 2012, and the underwritten public offering of approximately $23 million in Series D Preferred Stock, which closed on November 5, 2012.

We focused on two main initiatives during the quarter ended September 30, 2012, that is, continuing to grow our banking operations, and achieving the milestones necessary to successfully close the BBVAPR Acquisition before the end of the year. Operating revenues for the quarter ended September 30, 2012 increased 8.9%, or $4.4 million, to $53.9 million when compared to the same period in 2011. Operating revenues for the nine-month period ended 2012 increased 1.5%, or $2.3 million, to $155.5 million when compared to the same period in 2011.


The table below presents the Group's operating revenues for the quarters and nine-month periods ended September 30, 2012 and 2011:

                                                Quarter Ended September 30,                     Nine-Month Period Ended September 30,
                                                2012                        2011                      2012                      2011
                                                                                (In thousands)
OPERATING REVENUE
   Net interest income              $                      40,203    $           32,470    $                   112,142     $      112,558
   Non-interest income, net                                13,652                16,965                         43,368             40,700
     Total operating revenues       $                      53,855    $           49,435    $                   155,510     $      153,258

Interest Income

Total interest income for the quarter and nine-month period ended September 30, 2012 decreased 8.2% to $65.7 million and 15.3% to $196.4 million, respectively, as compared to the same periods in 2011. Such decrease primarily reflects a 29.6% and 41.6% decrease on interest income from investments for the quarter and nine-month period ended September 30, 2012, respectively, primarily related to lower yields and a lower balance in the investment securities portfolio as a result of the sale of $962.8 million in mortgage-backed securities. Also, there was an increase in premium amortization due to increased prepayment speeds. The yield on investments decreased from 3.08% and 3.79% for the quarter and nine-month period ended September 30, 2011, respectively, to 2.44% and 2.50% for the quarter and nine-month period ended September 30, 2012.

The decrease in interest income on investments was mitigated by an increase in interest income from covered loans from $18.2 million and $45.5 million for the quarter and nine-month period ended September 30, 2011, respectively, to $22.3 million and $64.2 million for the quarter and nine-month period ended September 30, 2012. Also, the yield on covered loans increased from 13.73% and 10.61% for the quarter and nine-month period ended September 30, 2011, respectively, to 20.38% and 18.50% for the quarter and nine-month period ended September 30, 2012. This increase in yield is the result of higher projected cash flows on certain pools of covered loans, as credit losses have been lower than initially estimated for these loan pools. The accretable yield amounted to $183.8 million at September 30, 2012 compared to $188.8 million at December 31, 2011. Interest income from non-covered loans remained level.

Interest Expense

Total interest expense for the quarter and nine-month period ended September 30, 2012 decreased 34.8% to $25.5 million and 29.3% to $84.3 million, respectively, as compared to the same periods in 2011. This reflects the lower cost of both, securities sold under agreements to repurchase (2.03% vs. 2.72%; 2.16% vs. 2.74%) and deposits (1.32% vs. 1.90%; 1.44% vs. 1.88%) for the quarter and nine-month period ended September 30, 2012, as compared to the same periods in 2011, which reflects continuing progress in the repricing of the Group's core retail deposits and further reductions in its cost of funds.

In December 2011, $600 million in repurchase agreements, with an average cost of 4.23%, matured. The Group paid off $300 million of these repurchase agreements. The remaining balance of $300 million was renewed for an average period of approximately 3.5 years at an effective fixed rate of 2.36%. To further reduce its cost of borrowings, in May 2012, the Group renewed $350 million in repurchase agreements, with an average cost of 4.26%, at a new effective rate of approximately 1.90%. During the quarter ended September 30, 2012, the Group initiated a plan to deleverage its balance sheet in connection with the BBVAPR Acquisition ahead of schedule by terminating repurchase agreements amounting to $400 million with an average cost of 3.25%. In accordance with the terms of the repurchase agreements the Group had to pay cancellation fees amounting to $24.3 million. As a result of the aforementioned transactions, total interest expense on securities sold under agreements to repurchase declined 33.9% and 30.3% during the quarter and nine-month period ended September 30, 2012, respectively, as compared to the same periods in 2011.


Net Interest Income

Net interest income for the quarter and nine-month period ended September 30, 2012 was $40.2 million and $112.1 million, respectively, an increase of 23.8% and a slight decrease of 0.4% when compared with the same periods in 2011. The increase for the quarter ended September 30, 2012 was mostly due to the net effect of a 22.3% increase in interest income from covered loans as a result of higher yields and a 34.8% decrease in interest expense due to lower cost of funds, offset by a decrease of 29.6% on interest income from investments, related to lower yields and a lower balance in the investment securities portfolio.

Net interest margin of 2.77% and 2.55% for the quarter and nine-month period ended September 30, 2012 increased 74 and 24 basis points, respectively, when compared to the same periods in 2011.

Provision for Loan and Lease Losses

Provision for non-covered loans and lease losses for the quarter and nine-month period ended September 30, 2012 decreased $200 thousand and $1 million, respectively, when compared to the same periods in the previous year. Provision for covered loans and lease losses for the quarter and nine-month period ended September 30, 2012 was $221 thousand and $8.8 million, respectively, reflecting the Group's revision to the expected cash flows in the covered loan portfolio considering actual experiences and changes in the Group's expectations for the remaining terms of the loan pools. During the first quarter of 2012, some covered construction and development and commercial real estate loan pools underperformed, which required a provision amounting to $7.2 million, net of the estimated reimbursement from the FDIC. Additional net provisions of $1.5 million and $221 thousand were recorded for the quarters ended June 30, 2012 and September 30, 2012, respectively.

Non-Interest Income

During the quarter and nine-month period ended September 30, 2012, core banking and wealth management revenues increased 1.2% to $11.3 million and 9.8% to $34.2 million, respectively, as compared to the same periods in 2011, primarily reflecting a $655 thousand and $3.2 million increase in wealth management revenues to $6.0 million and $17.8 million, respectively, attributed to an increase of 11.5% in assets under management from December 31, 2011.

Net amortization of the FDIC shared-loss indemnification asset of $8.1 million and $18.5 million for the quarter and nine-month period ended September 30, 2012, respectively, compared to a net amortization of $2.4 million and $191 thousand for the same periods in 2011, resulted from the ongoing evaluation of expected cash flows of the loan portfolio acquired in the FDIC-assisted acquisition. As a result of such evaluation, the Group expects a decrease in losses to be collected from the FDIC and the improved re-yielding of the accretable yield on the covered loans. This reduction in claimable losses amortizes the shared-loss indemnification asset through the life of the shared-loss agreements. This amortization is net of the accretion of the discount recorded to reflect the expected claimable loss at its net present value.

The quarter and nine-month period ended September 30, 2012 include a gain on the sale of investment securities of $36.4 million and $55.7 million, respectively, as the Group took advantage of market opportunities and initiated its deleverage in connection with the BBVAPR Acquisition. The purpose of the deleverage plan is to reduce the Group's capital needs for the BBVAPR Acquisition; to enhance its returns going forward; and to have a more traditional bank balance sheet following the BBVAPR Acquisition. As part of this plan, in the quarter ended September 30, 2012, the Group sold $532.4 million of securities with an average book yield of 3.86%. At the same time, the Group terminated prior to maturity $400 million of repurchase agreements with an average cost of 3.33%.

Non-Interest Expense

Non-interest expense slightly increased to $30.4 million for the quarter ended September 30, 2012, and decreased to $88.0 million for the nine-month period then ended, compared to $30.2 million and $91.2 million in the same periods of the previous year. The quarter ended September 30, 2012 included approximately $1.5 million in expenses related to the proposed BBVAPR Acquisition.

The efficiency ratio for the quarter and nine-month period ended September 30, 2012 was 59.04% and 60.13%, respectively, compared to 69.30% and 63.49% for the quarter and nine-month period ended September 30, 2011.


Income Tax Expense

Income tax expense was $1.9 million and $4.9 million for the quarter and nine-month period ended September 30, 2012, respectively, compared to an expense of $580 thousand and $5.7 million for the same periods in 2011.

At December 31, 2011, OIB had $2.9 million in income tax effect of unrecognized gain on available-for-sale securities included in other comprehensive income. Following the change in OIB's applicable tax rate from 5% to 0% as a result of new Puerto Rico legislation adopted in 2011, this remaining tax balance will flow through income as these securities are repaid or sold in future periods. During the quarter and nine-month period ended September 30, 2012, income tax provision included $1.1 million and $1.8 million, respectively, related to this residual tax effect from OIB.

Income Available to Common Shareholders

For the quarter and nine-month period ended September 30, 2012, the Group's income available to common shareholders amounted to $14.7 million and $37.9 million, respectively, compared to $15.6 million and $42.7 million for the same periods in 2011. Earnings per basic common share and fully diluted common share were $0.36 and $0.35 for the quarter ended September 30, 2012, respectively, compared to income per basic and fully diluted common share of $0.35 for the quarter ended September 30, 2011. Income per basic common share and fully diluted common share were $0.93 and $0.92, respectively, for the nine-month period ended September 30, 2012, compared to income per basic and fully diluted common share of $0.95 for the nine-month period ended September 30, 2011. The quarter ended September 30, 2012 included $1.8 million in dividends declared on the Convertible Preferred Stock issued early in the quarter in connection with the BBVAPR Acquisition.

Interest Earning Assets

The investment portfolio amounted to $3.153 billion at September 30, 2012, a 18.5% decrease compared to $3.868 billion at December 31, 2011. The decrease in the investment portfolio reflects a reduction of 22.51%, or $666.4 million, in the available-for-sale portfolio, due to the sale of approximately $1.090 billion in investment securities as part of the Group's ongoing strategy of replacing securities with loans and selling mortgage-backed securities subject to high prepayment speeds, and a decrease of 5.5%, or $48.9 million, in the held-to-maturity portfolio. The decrease is also attributed to the sale of $532.4 million of securities during the quarter ended September 30, 2012 as part of our balance sheet deleveraging in connection with the BBVAPR Acquisition. The loan portfolio decreased 4.2% to $1.596 billion at September 30, 2012, compared to $1.666 billion at December 31, 2011. The decrease in the loan portfolio is mostly due to an increase of $19.6 million, in the allowance for loan and lease losses on covered loans and a decrease of 11.8% in covered loans as they continue to be repaid.

Interest Bearing Liabilities

Total deposits amounted to $2.214 billion at September 30, 2012, a decrease of 9.1% compared to $2.435 billion at December 31, 2011. Core retail deposits, which exclude institutional and brokered deposits, declined $11.6 million, or 0.6%, compared to December 31, 2011, while wholesale deposits decreased $209.2 million or 49.3% as higher cost deposits matured during the period. Non-interest bearing demand deposits, interest-bearing savings and demand deposits and individual retirement accounts increased 2.8%, 1.9% and 2.3%, respectively, while retail certificates of deposits decreased 12.1%.

Using available cash, in March 2012, the Bank repaid at maturity $105.0 million in senior unsecured notes issued in March 2009 under the FDIC's Temporary Liquidity Guarantee Program ("TLGP") with an all-in cost of 3.75%.

During the nine-month period ended September 30, 2012, the Group renewed $350 million in repurchase agreements with an average cost of 4.26%, at a new effective rate of approximately 1.90%, as one-month short-term repurchase agreements. The repurchase agreements are being rolled over on a monthly basis on the same terms as the variable rate leg of the interest rate swaps that are . . .

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