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| OFG > SEC Filings for OFG > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
SELECTED FINANCIAL DATA
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter ended June 30, Six months ended June 30,
EARNINGS DATA: 2009 2008 Variance % 2009 2008 Variance %
Interest income $ 82,051 $ 85,158 -3.6 % $ 165,982 $ 167,259 -0.8 %
Interest expense 46,563 56,723 -17.9 % 99,829 113,915 -12.4 %
Net interest income 35,488 28,435 24.8 % 66,153 53,344 24.0 %
Provision for loan
losses 3,650 1,980 84.3 % 6,850 3,630 88.7 %
Net interest income
after provision for
loan losses 31,838 26,455 20.3 % 59,303 49,714 19.3 %
Non-interest income 46,051 6,650 592.5 % 63,297 15,514 308.0 %
Non-interest expenses 22,214 18,080 22.9 % 41,487 35,810 15.9 %
Income before income
taxes 55,675 15,025 270.5 % 81,113 29,418 175.7 %
Income tax expense
(benefit) 4,761 598 696.2 % 5,451 (1,857 ) -393.5 %
Net Income 50,914 14,427 252.9 % 75,662 31,275 141.9 %
Less: dividends on
preferred stock (1,200 ) (1,200 ) 0.0 % (2,401 ) (2,401 ) 0.0 %
Net Income available
to common
shareholders $ 49,714 $ 13,227 275.9 % $ 73,261 $ 28,874 153.7 %
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PER SHARE DATA: Basic $ 2.05 $ 0.54 279.6 % $ 3.02 $ 1.19 153.8 % Diluted $ 2.04 $ 0.54 277.8 % $ 3.02 $ 1.19 153.8 % Average common shares outstanding 24,303 24,290 0.1 % 24,274 24,227 0.2 % Average potential common share-options 15 94 -84.0 % 6 110 -94.5 % Average shares and shares equivalents 24,318 24,384 -0.3 % 24,280 24,337 -0.2 % Book value per common share $ 12.04 $ 9.60 25.4 % $ 12.04 $ 9.60 25.4 % Market price at end of period $ 9.70 $ 14.26 -32.0 % $ 9.70 $ 14.26 -32.0 % Cash dividends declared per common share $ 0.04 $ 0.14 -71.4 % $ 0.08 $ 0.28 -71.4 % Cash dividends declared on common shares $ 972 $ 3,405 -71.5 % $ 1,944 $ 6,804 -71.4 % Return on average assets (ROA) 3.05 % 0.95 % 221.1 % 2.30 % 1.01 % 127.7 % Return on average common equity (ROE) 80.89 % 20.65 % 291.7 % 66.98 % 20.64 % 224.5 % Equity-to-assets ratio 5.17 % 4.97 % 4.0 % 5.17 % 4.97 % 4.0 % Efficiency ratio 51.43 % 51.82 % -0.8 % 51.54 % 53.20 % -3.1 % Expense ratio 1.22 % 0.78 % 56.4 % 1.02 % 0.74 % 37.8 % Interest rate spread 2.17 % 1.68 % 29.2 % 1.98 % 1.53 % 29.4 % Interest rate margin 2.29 % 1.90 % 20.5 % 2.13 % 1.80 % 18.3 % Number of financial centers 23 24 -4.2 % 23 24 -4.2 % |
June 30, December 31,
PERIOD END BALANCES AND CAPITAL RATIOS: 2009 2008 Variance %
(In thousands)
Investments and loans
Investment securities $ 4,971,511 $ 3,945,626 26.0 %
Loans (including loans held-for-sale), net 1,187,074 1,219,112 -2.6 %
Securities sold but not yet delivered 360,764 834,976 -56.8 %
$ 6,519,349 $ 5,999,714 8.7 %
Deposits and Borrowings
Deposits $ 1,852,446 $ 1,785,300 3.8 %
Repurchase agreements 3,757,510 3,761,121 -0.1 %
Other borrowings 451,383 373,718 20.8 %
Securities purchased but not yet received 497,360 398 124864.8 %
$ 6,558,699 $ 5,920,537 10.8 %
Stockholders' equity
Preferred equity $ 68,000 $ 68,000 0.0 %
Common equity 291,634 193,317 50.9 %
$ 359,634 $ 261,317 37.6 %
Capital ratios
Leverage capital 7.31 % 6.38 % 14.6 %
Tier 1 risk-based capital 14.62 % 17.11 % -14.6 %
Total risk-based capital 15.13 % 17.73 % -14.7 %
Trust assets managed $ 1,677,344 $ 1,706,286 -1.7 %
Broker-dealer assets gathered 1,169,775 1,195,739 -2.2 %
Assets managed 2,847,119 2,902,025 -1.9 %
Assets owned 6,950,304 6,205,536 12.0 %
Total financial assets managed and assets owned $ 9,797,423 $ 9,107,561 7.6 %
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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 quarter ended June 30, 2009, the strategies in place enabled the
Group to continue to perform well despite the turbulent credit market and the
recession in Puerto Rico. Highlights of the second quarter included:
• Pre-tax operating income (net interest income, core non-interest income from
banking and financial service revenues, less non-interest expenses) of
approximately $17.3 million - an increase when compared to the
$13.0 million-to-$14.8 million range the Group has generated since the first
quarter of 2008.
• Strong increase in net interest income of 24.8% and 15.7% compared to the year-ago quarter and the previous quarter, respectively, and a corresponding improvement in the net interest margin to 2.29% (compared to 1.90% and 1.98% in the year-ago and previous quarter, respectively), mainly reflecting the reduction in the cost of funds.
• Growth in core banking and financial service revenues of 19.4% and 15.8% compared to the year-ago and previous quarter, respectively. On a sequential quarter basis, the Group saw increases in mortgage banking activities of 30.3%, banking service revenues of 15.0%, and financial service revenues of 5.5%.
• Benefitting from the strategic positioning of its investment securities
portfolio, the Group took advantage of market conditions during the quarter
to realize gains on: (i) sales of securities of $10.5 million,
(ii) derivative activities of $19.4 million, and (iii) trading activities of
$13.0 million. These gains more than offset credit-related other than
temporary impairment charges of $4.4 million on securities.
• Sustained growth in retail deposits of $110.4 million (9.3%) on a sequential quarter basis and $220.7 million (20.4%) on a year-to-date basis.
• Stockholders' equity increased $40.3 million during the quarter and $98.3 million since December 31, 2008, representing an increase of 37.6% on a year-to-date basis.
• Book value per common share increased to $12.04, from $10.38 at March 31, 2009 and $7.96 at December 31, 2008.
• Non-interest expenses were negatively affected by approximately $2.9 million, representing the increase in the Group's insurance expense corresponding to the industry-wide FDIC special assessment on insured depository institutions and payable on September 30, 2009.
Income Available to Common Shareholders
For the quarter and six-month period ended June 30, 2009, the Group's income
available to common shareholders totaled $49.7 million and $73.3 million,
respectively, compared to $13.2 million and $28.9 million, respectively, in the
comparable year-ago quarter and six-month period. Earnings per basic and fully
diluted common share were $2.05 and $2.04, respectively, for the quarter ended
June 30, 2009, compared to $0.54 per basic and fully diluted common share in the
same year-ago period, and $3.02 for the six-month period ended June 30, 2009,
compared to $1.19 in the year ago period.
Return on Average Assets and Common Equity
Return on average common equity (ROE) for the quarter and six-month period ended
June 30, 2009, was 80.89% and 66.98%, respectively, up from 20.65% and 20.64%
for the quarter and six-month period ended June 30, 2008 respectively. Return on
average assets (ROA) for the quarter and six-month period ended June 30, 2009,
was 3.05% and 2.30%, respectively, up from 0.95% and 1.01%, for the quarter and
six-month period ended June 30, 2008, respectively.
Net Interest Income after Provision for Loan Losses
Net interest income after provision for loan losses increased 20.3% for the
quarter and 19.3% for the six-month period ended June 30, 2009, totaling
$31.8 million and $59.3 million, respectively, compared with $26.5 million and
$49.7 million for the same periods last year. Growth reflects the significant
reduction in cost of funds, which has declined more rapidly than the yield on
interest-earning assets.
Non-Interest Income
Non-interest income was $46.1 million and $63.3 million, respectively, for the
quarter and six-month period ended June 30, 2009, representing an increase of
592.5% and 308.0% when compared to the corresponding periods ended June 30,
2008. Core banking and financial service revenues increased 19.4% and 2.8% when
compared to the corresponding quarter and six-month period ended June 30, 2008.
In addition, the Group took advantage of market conditions during the quarter to
realize gains on: (i) sales of securities of $10.5 million, (ii) derivative
activities of $19.4 million, and (iii) trading activities of 15.0 million.
Non-Interest Expenses
Non-interest expenses of $22.2 million and $41.5 million, respectively, for the
quarter and six-month period ended June 30, 2009, compared to $18.1 million and
$35.8 million, respectively, in the year ago periods, resulting in an efficiency
ratio of 57.29% and 54.53%, respectively, for the quarter and six-month period
ended June 30, 2009 (compared to 51.82% and 53.20% in the year-ago periods).
Non-interest expense were negatively affected by approximately $2.9 million,
representing the increase in the Group's insurance expense corresponding to the
industry-wide FDIC special assessment on insured depository institutions and
payable on September 30, 2009.
Income Tax Expense
The income tax expense was $4.8 million and $5.5 million, respectively, for the
quarter and six-month period ended June 30, 2009, which includes Puerto Rico's
additional taxes on international banking entities and financial institutions,
compared to an expense of $598 thousand and a benefit of $1.9 million for the
respective periods ended June 30, 2008.
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 June 30, 2009, total financial assets
reached $9.797 billion, compared to $9.108 billion at December 31, 2008, a 7.6%
increase. When compared to December 31, 2008, there was 12.0% increase in assets
owned as of June 30, 2009, while assets managed by the trust division and the
broker-dealer subsidiary decreased from $2.9 billion as of December 31, 2008 to
$2.8 billion as of June 30, 2009.
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 June 30, 2009, total
assets managed by the Group's trust division and CPC amounted to $1.677 billion,
compared to $1.706 billion at December 31, 2008. 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 June 30, 2009, total assets gathered by
the broker-dealer from its customer investment accounts decreased to
$1.170 billion, compared to $1.196 billion at December 31, 2008.
Interest Earning Assets
The investment portfolio amounted to $4.972 billion at June 30, 2009, a 26.0%
increase compared to $3.946 billion at December 31, 2008, while the loan
portfolio decreased 2.6% to $1.187 billion at June 30, 2009, compared to
$1.219 billion at December 31, 2008.
The mortgage loan portfolio totaled $983.7 million at June 30, 2009, a 4.9%
decrease from $1.034 billion at June 30, 2008, and a decrease of 3.9%, from
$1.023 billion at December 31, 2008. Mortgage loan production for the quarter
and six-month period ended June 30, 2009, totaled $63.9 million and
$131.8 million, respectively, which represents a decrease of 15.9% for the
quarter and a 5.2% increase for the six-month period.
Interest Bearing Liabilities
Total deposits amounted to $1.852 billion at June 30, 2009, an increase of 3.8%
compared to $1.785 billion at December 31, 2008, primarily due to increased
retail deposits, particularly in demand deposit accounts.
Stockholders' Equity
Stockholders' equity at June 30, 2009, was $359.6 million, compared to
$261.3 million at December 31, 2008, mainly reflecting increased earnings in the
six-month period.
The Group's capital ratios remain above regulatory capital requirements, with
risk-based capital ratios above regulatory capital adequacy guidelines. At
June 30, 2009, Tier 1 Leverage Capital Ratio was 7.31% (1.8 times the minimum of
4.00%), Tier 1 Risk-Based Capital Ratio was 14.62% (3.7 times the minimum of
4.00%), and Total Risk-Based Capital Ratio was 15.13% (1.9 times the minimum of
8.00%).
Due to the initial adoption of FSP FAS 115-2, the Group reclassified the
noncredit-related portion of an other-than-temporary impairment loss previously
recognized in earnings in the third quarter of 2008 for an amount of
$14.4 million that increased retained earnings and accumulated other
comprehensive loss. This reclassification had a positive impact on regulatory
capital ratios and no impact on tangible equity.
Financial Service-Banking Franchise
The Group's niche market approach to the integrated delivery of services to mid
and high net worth clients performed well, as it expanded market share based on
its service proposition and capital strength, as opposed to using rates to
attract loans or deposits.
Lending
Total loan production of $73.5 million remained strong, as the Group's capital
levels and low credit losses, compared to most banking institutions, enabled it
to continue prudent lending. The average FICO score was 722 and the average loan
to value ratio was 81% on residential mortgage loans originated in the quarter.
The Group sells most of its conforming mortgages into the secondary market, but
retains servicing rights. Mortgage banking activities on a sequential quarter
basis reflect the continued high level of originations as well as its growing
servicing portfolio, a source of recurring revenue.
Deposits
Growth in retail deposits during the quarter primarily reflects a $121.1 million
increase in savings and demand deposits. At the same time, Oriental also reduced
brokered deposits by $42.7 million
Assets Under Management
Assets under management, which generate recurring fees, increased 5.23% from
March 31, 2009, to $2.85 billion. This growth, plus the Group's participation in
the selling of Puerto Rico's COFINA II bonds, resulted in the sequential
increase in financial service revenues.
Credit Quality
Net credit losses declined by 11.42%, to $2.1 million (0.70% of average loans
outstanding), from $2.3 million (0.78%), in the previous quarter. The Group
increased its provision for loan losses to $3.7 million (176% of net credit
losses), from $3.2 million in the previous quarter, resulting in a $16.7 million
allowance at June 30, 2009, up 10.37% from the previous quarter.
Non-performing loans (NPLs) increased $3.3 million in the quarter. The Group's
NPLs generally reflect the economic environment in Puerto Rico. Based on
historical performance, however, the Group does not expect non-performing loans
to result in significantly higher losses as most are well-collateralized with
adequate loan-to-value ratios. In residential mortgage lending, more than 90% of
the Group's portfolio consists of fixed-rate, fully amortizing, fully documented
loans that do not have the level of risk generally associated with subprime
loans. In commercial lending, more than 90% of its loans are collateralized by
real estate.
The Investment Securities Portfolio
The average balance of the investment securities portfolio was $5.0 billion, up
4.7% from the year ago quarter and up 0.38% from the previous quarter. Yield
declined slightly due to higher prepayments in the first half of the quarter.
Approximately 87% of the portfolio consists of fixed-rate mortgage-backed
securities or notes, guaranteed or issued by FNMA, FHLMC, or GNMA and U.S.
agency senior debt obligations, backed by a U.S. government sponsored entity or
the full faith and credit of the U.S. government (86%), and Puerto Rico
Government and agency obligations (1%). The remaining balance consists of
non-agency collateralized mortgage obligations (10%), the majority of which are
backed by prime fixed-rate residential mortgage collateral, and structured
credit investments (3%).
Subsequent Event
Subsequent to June 30, 2009, as part of its general banking and asset and
liability management strategies, the Group executed a $200 million deleverage of
its balance sheet at the holding company level by terminating certain repurchase
agreements at a cost of approximately $17.5 million (before income taxes). This
transaction increases the Group's financial flexibility, creates additional
liquidity, and helps to offset the Group's income tax liability.
TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2009 AND 2008
(Dollars in thousands)
Interest Average rate Average balance
Variance Variance Variance
2009 2008 in % 2009 2008 in BPS 2009 2008 in %
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 82,051 $ 85,158 -3.6 % 5.30 % 5.69 % (39 ) $ 6,192,317 $ 5,984,658 3.5 %
Tax equivalent adjustment 27,063 28,113 -3.7 % 1.75 % 1.88 % (13 ) - - -
Interest-earning assets - tax
equivalent 109,114 113,271 -3.7 % 7.05 % 7.57 % (52 ) 6,192,317 5,984,658 3.5 %
Interest-bearing liabilities 46,562 56,723 -17.9 % 3.13 % 4.01 % (88 ) 5,959,343 5,664,472 5.2 %
Tax equivalent net interest
income / spread $ 62,552 $ 56,548 10.6 % 3.92 % 3.56 % 36 $ 232,974 $ 320,186 -27.2 %
Tax equivalent interest rate
margin 4.04 % 3.78 % 26
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B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities $ 62,183 $ 64,858 -4.1 % 5.19 % 5.49 % (30 ) $ 4,793,808 $ 4,728,682 1.4 %
Trading securities 912 4 22700.0 % 6.87 % 5.00 % 187 53,126 320 16501.9 %
Money market investments 249 614 -59.4 % 0.66 % 5.16 % (450 ) 151,987 47,558 219.6 %
63,344 65,476 -3.3 % 5.07 % 5.48 % (41 ) 4,998,921 4,776,560 4.7 %
Loans:
Mortgage 15,538 16,608 -6.4 % 6.35 % 6.47 % (12 ) 978,855 1,026,184 -4.6 %
Commercial 2,679 2,438 9.9 % 5.51 % 6.26 % (75 ) 194,311 155,889 24.6 %
Consumer 490 636 -23.0 % 9.69 % 9.78 % (9 ) 20,230 26,025 -22.3 %
18,707 19,682 -5.0 % 6.27 % 6.52 % (25 ) 1,193,396 1,208,098 -1.2 %
82,051 85,158 -3.6 % 5.30 % 5.69 % (39 ) 6,192,317 5,984,658 3.5 %
Interest-bearing liabilities:
Deposits:
Non-interest bearing deposits - - - - - - 42,715 37,874 12.8 %
Now accounts 4,514 187 2313.9 % 3.16 % 1.05 % 211 570,877 71,306 700.6 %
Savings 205 3,313 -93.8 % 1.38 % 3.04 % (166 ) 59,482 435,257 -86.3 %
Certificates of deposit 9,430 8,765 7.6 % 3.52 % 3.97 % (45 ) 1,070,725 883,467 21.2 %
14,149 12,265 15.4 % 3.25 % 3.44 % (19 ) 1,743,799 1,427,904 22.1 %
Borrowings:
Repurchase agreements 27,929 40,208 -30.5 % 2.98 % 4.20 % (122 ) 3,750,000 3,832,251 -2.1 %
FHLB advances 2,999 3,507 -14.5 % 4.28 % 4.24 % 4 280,000 330,559 -15.3 %
Subordinated capital notes 389 534 -27.2 % 4.31 % 5.92 % (161 ) 36,083 36,083 0.0 %
FDIC-guaranteed term notes 1,021 - 100.0 % 3.75 % 0.00 % 375 108,846 - 100.0 %
Other borrowings 76 209 -63.6 % 0.74 % 2.22 % (148 ) 40,615 37,675 7.8 %
32,414 44,458 -27.1 % 3.08 % 4.20 % (112 ) 4,215,544 4,236,568 -0.5 %
46,563 56,723 -17.9 % 3.13 % 4.01 % (88 ) 5,959,343 5,664,472 5.2 %
Net interest income / spread $ 35,488 $ 28,435 24.8 % 2.17 % 1.68 % 49
Interest rate margin 2.29 % 1.90 % 39
Excess of average
interest-earning assets over
average interest-bearing
liabilities $ 232,974 $ 320,186 -27.2 %
Average interest-earning assets
over average interest-bearing
liabilities ratio 103.91 % 105.65 %
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C. Changes in net interest income due to: Volume Rate Total
Interest Income:
. . .
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