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Oriental Financial Group First Quarter 2012 Results

Stocks in this article: OFG

Oriental Financial Group Inc. (NYSE: OFG) today announced results for the first quarter ended March 31, 2012.

“Our excellent first quarter performance shows our great progress so far towards achieving our goals for 2012,” said José Rafael Fernández, President, Chief Executive Officer and Vice Chairman of the Board. “The investments we are making in our commercial banking capabilities, active management of our risk exposures, and transforming our financial model have resulted in a growing franchise with a very strong capital position.

“Net interest margin increased to 2.59% sequentially due to higher yields on both loans and investment securities and lower cost of deposits and wholesale borrowings. We had strong year over year growth in banking and wealth management fee revenues, and record commercial loan production and assets under management levels.

“We continued to move away from our reliance on our investment securities portfolio by improving interest income from our loan portfolio. We also continued to effectively manage our non-interest expenses and share buy back program.

“Complementary to our focus in growing our commercial business, we achieved a noticeable improvement in asset quality, resulting in a reduction in non-performing, non-covered loans.”

1Q12 Financial Summary

  • Income available to common shareholders of $9.5 million, or 0.23 per diluted share, compares to $1.9 million, or $0.04 per share, in the year ago quarter and a loss of ($13.1) million, or ($0.31) per share, in the preceding 2011 quarter.
  • Pre-tax operating income of $11.3 million compares to $12.4 million in the year ago quarter and $6.1 million in the preceding quarter.
  • Net interest rate margin of 2.59% versus 2.26% in the year ago quarter and 1.76% in the preceding quarter.
  • Loan production totaled $110.2 million, up 41.3% year over year and 2.7% quarter over quarter. The strategically significant commercial category hit a record $55.4 million in production, a more than three-fold increase from the year ago quarter and 16.7% greater than in the preceding quarter.
  • Using available cash, Oriental paid off in mid-March 2012 $105 million in maturing FDIC Temporary Liquidity Guarantee Program (TLGP) Notes with a cost of 3.75%.
  • Non-performing non-covered loans were down 9.2% from the preceding quarter.
  • Book value per share at March 31, 2012 amounted to $15.27, up 7.4% from a year ago and 0.4% from December 31, 2011.
  • Cash dividends per common share of $0.06 were up 20.0% from the year ago quarter.
  • Common shares outstanding at March 31, 2012 were 40.7 million, a reduction of 10.3% from a year ago and 1.3% from December 31, 2011, reflecting the Company’s stock repurchase program.

1Q12 Income Statement Analysis

  • Interest income from loans of $39.7 million represented an increase of 23.2% year over year and 0.7% quarter over quarter. Year over year growth stems from improved performance of covered loans (the former Eurobank portfolio). Sequentially, results benefited from growth of Oriental’s non-covered commercial, auto leasing and consumer loan portfolio. Interest income from loans, as a percentage of total interest income, equaled 57%, up from 41% in the year ago quarter, underscoring Oriental’s emphasis on increased banking activity.
  • Interest income from investment securities of $30.3 million declined 34.0% year over year and increased 17.0% quarter over quarter. The year over year reduction reflects lower yields and the strategic decision to reduce the size of the investment securities portfolio. The quarter over quarter improvement benefited from a $7.8 million reduction in premium amortization on mortgage backed securities, as repayments slowed.
  • Total interest expense of $31.1 million declined 23.8% year over year and 16.9% quarter over quarter, reflecting lower cost of funds and balances of both deposits and wholesale funding.
  • Total banking and wealth management revenues of $11.7 million rose 14.2% year over year. Wealth management revenues grew 25.8% due to increased brokerage, trust and insurance business. Assets under management were a record $4.4 billion at March 31, 2012, up 9.7% from a year ago and 7.0% from the end of the preceding quarter, due to new assets and improved market valuations.
  • Total non-core, non-interest income was $1.3 million compared to a loss of ($2.8) million in the year ago quarter and a loss of ($22.8) million in the preceding quarter. First quarter 2012 results primarily reflect: (i) a net gain on the sale of securities of $7.4 million as Oriental took strategic advantage of market opportunities; and (ii) amortization of $4.8 million of the FDIC loss-share indemnification assets mainly due to an improvement in the revised cash flow projections of certain former Eurobank loan pools in 2011.
  • Due to effective cost controls, non-interest expenses of $29.1 million were down 5.5% from a year ago and 4.3% below the preceding quarter.

March 31, 2012 Balance Sheet Analysis

  • Borrowings of $3.4 billion declined 2.9% from December 31, 2011, due to the aforementioned pay down of the FDIC notes. In December 2011, as previously reported, $600 million in repurchase agreement (repo) funding with an average cost of 4.23% matured. Half of the repos were paid off and the balance was renewed at an effective rate of 2.36%. As a result of these transactions, cost of borrowings declined to 2.49% in the first quarter of 2012 from 2.82% in the preceding quarter.
  • Retail deposits of $2.0 billion declined slightly compared to December 31, 2011 as cost of those deposits dropped to 1.54% from 1.66%. Wholesale deposits were $105.7 million below December 31, 2011, with the cost dropping to 1.81% from 2.45%.
  • Stockholders’ equity of $689.3 million declined 0.9% from December 31, 2011, which includes the effect of stock repurchases. Book value per share, however, increased to $15.27, from $15.22.
  • Cash and cash equivalents (including securities purchased under agreements to resell) of $624.0 million increased 3.1% from December 31, 2011, reflecting repayments on MBS, partially offset by the pay down of the FDIC notes and of wholesale deposits.
  • Total investments of $3.6 billion declined 5.8% from December 31, 2011, primarily reflecting the aforementioned sale of securities.
  • Total non-covered loans of approximately $1.2 billion increased 1.8% from December 31, 2011. Growth of commercial and auto leasing loans more than offset the reduction of residential mortgage loans. Covered loans of $461.8 million declined 7.0% from December 31, 2011 as they continued to pay down in line with projections.

Other 1Q12 Highlights

  • Credit Quality – Non-Covered Assets: Non-performing assets declined 6.4% from December 31, 2011. Net credit losses of $2.7 million were approximately level with the fourth quarter of 2011. Provision for loan and lease losses of $3.0 million declined 21.1% compared to the year ago and the preceding quarters. The allowance of $37.4 million increased 0.9% from the preceding quarter. Early delinquency loans (30-89 days past due) dropped 7.0% year over year and 5.1% from the preceding quarter.
  • Credit Quality – Covered Assets (the former Eurobank loans): Provision for loan and lease losses was $7.2 million, reflecting the results of quarterly revisions to the expected cash flows considering recent experiences of certain other pools of loans. The provision is net of the estimated losses claimable to the FDIC.
  • Stock Repurchases: Under its authorization to repurchase $70 million in shares of its common stock in the open market, Oriental bought approximately 603,000 shares, at an average price of $11.61 per share, during the quarter ended March 31, 2012. Approximately $33 million remains under the present buyback authorization. During 2011, Oriental bought approximately 5.2 million shares at an average price of $11.28 per share.
  • Capital: Oriental maintains regulatory capital ratios well above the requirements for a well-capitalized institution. At March 31, 2012, the Leverage Capital Ratio was 10.12%, Tier-1 Risk-Based Capital Ratio was 32.34%, and Total Risk-Based Capital Ratio was 33.64%.

Conference Call

A conference call to discuss Oriental’s results, outlook and related matters will be held Monday, April 23, 2012, at 10:00 AM Eastern and Puerto Rico Time. The call will be accessible live via a webcast on Oriental’s Investor Relations website at www.orientalfg.com. A webcast replay will be available shortly thereafter. Access the webcast link in advance to download any necessary software.

Full Financial Tables

Full financial tables for the first quarter of 2012 can be found on the Webcasts, Presentations & Other Files page of Oriental’s Investor Relations website at www.orientalfg.com.

About Oriental Financial Group

Oriental Financial Group Inc. is a diversified financial holding company that operates under U.S. and Puerto Rico banking laws and regulations, principally through its two subsidiaries, Oriental Bank and Trust and Oriental Financial Services. Now in its 48 th year in business, Oriental provides a full range of commercial, consumer and mortgage banking services, as well as financial planning, trust, insurance, investment brokerage and investment banking services, primarily in Puerto Rico, through 30 financial centers. Investor information about Oriental can be found at www.orientalfg.com.

Non-GAAP Financial Measures

From time to time, Oriental uses certain non-GAAP measures of financial performance to supplement the financial statements presented in accordance with GAAP. Oriental presents non-GAAP measures when its management believes that the additional information is useful and meaningful to investors. Non-GAAP measures do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other companies. The presentation of non-GAAP measures is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP.

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