Oriental Financial Group Inc. (NYSE: OFG) today announced results for the second quarter ended June 30, 2012. 2Q12 Financial Summary
- Income per common share (diluted) of $0.34 compares to $0.23 in the preceding 2012 quarter and $0.56 in the year ago quarter.
- Income available to common shareholders of $13.8 million compares to $9.5 million in the preceding 2012 quarter and $25.3 million in the year ago quarter.
- Book value per share of $15.32 at June 30, 2012 compares to $15.27 at March 31, 2012 and $14.91 at June 30, 2011.
- Cash dividends per common share of $0.06 are up 20% from the year ago quarter.
“Complementary to our focus on growing our banking business, our planned acquisition of BBVA’s Puerto Rico operations has been well received and remains on target for closing before year end 2012, subject to customary regulatory approvals.”2Q12 Income Statement Analysis All comparisons are to the preceding quarter unless otherwise noted
- Net interest income (after provision for loan and lease losses) was $27.8 million, a $0.9 million decline from the preceding quarter.
- Interest income from non-covered loans declined $0.9 million, primarily due to lower residential mortgage loan balances. Oriental typically sells most new residential mortgage loans into the secondary market rather than holding them in its portfolio, and, in keeping with its emphasis on banking activity, Oriental has been building its commercial and consumer loan and auto leasing portfolios. Interest income from covered loans declined $1.2 million due to lower balances as they continued to pay down in line with projections.
- Interest income from investment securities declined $7.0 million. Approximately $4.4 million of the reduction was attributable to lower yield and lower balances, and approximately $2.6 million was due to higher premium amortization on Oriental’s mortgage backed securities (MBS) portfolio. During the second quarter of 2012, approximately $343 million of MBS were sold at a net gain of $11.9 million, reflecting Oriental’s ongoing strategy to sell MBS subject to higher prepayment speeds.
- In all, interest income from loans equaled 62% of total interest income, up from 35% in the year ago quarter, underscoring Oriental’s emphasis on increased banking activity.
- Total interest expense from deposits declined $1.3 million, primarily reflecting continuing progress in repricing Oriental’s core retail deposits. Total interest expense from borrowings declined $2.1 million, primarily reflecting actions Oriental took prior to the second quarter to reduce cost of funds. To further reduce cost of borrowings, in May 2012, Oriental renewed $350 million in repos costing 4.26% at a new effective rate of approximately 1.90%.
- While net interest rate margin was 2.28% versus 2.59% in the first quarter of 2012, Oriental expects it to be around 2.50% for all of 2012 primarily due to plans to further reduce cost of funds.
- Total banking and wealth management revenues of $11.7 million were level with the preceding quarter, but increased 14.7% year over year. Compared to the year ago quarter, wealth management revenues grew 29.0% due to increased brokerage, trust and insurance business. Assets under management were a record $4.5 billion at June 30, 2012, up 9.3% from a year ago. Banking service revenues rose 5.3% due to increased electronic banking activity.
- Total non-core, non-interest income was $5.5 million compared to $1.3 million in the preceding quarter. Second quarter 2012 results primarily reflect: (i) an $11.9 million net gain on the sale of above mentioned MBS as Oriental took advantage of market opportunities; and (ii) a $5.6 million amortization of the FDIC shared-loss 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 were approximately level at $29.0 million.
- Cash and cash equivalents (including securities purchased under agreements to resell) of $689.6 million increased $70.7 million, reflecting repayments on MBS and the gain on the sale of securities.
- Total investments of $3.5 billion declined $113.6 million, reflecting the previously noted sale of securities.
- Total non-covered loans of approximately $1.2 billion declined $19.4 million, primarily due to the repayment of residential mortgage loans. Covered loans of $447.7 million declined $14.0 million as they continued to pay down in line with projections.
- Year to date, production of commercial loans totaled $90.9 million, up 45.9% from the year ago period, including $35.5 million in the second quarter of 2012. Based on the current pipeline, Oriental continues to anticipate originating approximately $200 million in new commercial loans in 2012.
- Retail deposits of $2.0 billion declined slightly, while the cost of those deposits dropped to 1.34% from 1.52%. Wholesale deposits declined $87.0 million as Oriental continued to allow short-term brokered CDs to mature.
- Borrowings of $3.4 billion remained approximately level with their cost dropping to 2.34% from 2.52% due to steps taken to reduce these costs of funds.
- Stockholders’ equity of $692.2 million increased $2.9 million.
- Credit Quality – Non-Covered Assets: Non-performing assets of $139.7 million and allowance for loan and lease losses of $37.4 million were relatively unchanged. Net credit losses increased $1.1 million and provision for loan and lease losses increased $0.8 million. Early delinquency loans (30-89 days past due) declined $2.6 million, while total delinquency (30 days and over past due) fell $11.9 million.
- Credit Quality – Covered Assets (the former Eurobank loans): Provision for loan and lease losses was $1.5 million, a decline of $5.7 million, reflecting the results of quarterly revisions to the expected cash flows based on recent experiences of certain pools of loans. The provision is net of the estimated losses claimable to the FDIC.
- Capital: Oriental maintains regulatory capital ratios well above the requirements for a well-capitalized institution. At June 30, 2012, the Leverage Capital Ratio was 10.81%, Tier-1 Risk-Based Capital Ratio was 32.52%, and Total Risk-Based Capital Ratio was 33.82%.
- New Capital: The foregoing results concerning capital do not include $84.0 million of 8.75% non-cumulative convertible perpetual preferred stock raised in connection with the proposed acquisition of BBVA’s PR operations. As this transaction settled in early July, the net increase in capital will be reflected in the third quarter of 2012.
Oriental’s management has reported and discussed the results of operations herein both on a GAAP basis and on a pre-tax pre-provision operating income basis (defined as net interest income, plus banking and wealth management revenues, less non-interest expenses, and calculated on the accompanying table). Oriental’s management believes that, given the nature of the items excluded from the definition of pre-tax pre-provision operating income, it is useful to state what the results of operations would have been without them so that investors can see the financial trends from Oriental’s continuing business.Tangible common equity consists of common equity less goodwill. Management believes that the ratios of tangible common equity to total assets and to risk-weighted assets assist investors in analyzing Oriental’s capital position. Forward-Looking Statements The information included in this document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and involve certain risks and uncertainties that may cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference include, but are not limited to (i) the ability to receive and timing of necessary regulatory approvals to consummate the acquisition of BBVA’s Puerto Rico operations, (ii) difficulties in integrating BBVA’s Puerto Rico operations into Oriental’s operations; (iii) the amounts by which our assumptions related to the acquisition, including future financing, fail to approximate actual results; (iv) the rate of declining growth in the economy and employment levels, as well as general business and economic conditions; (v) changes in interest rates, as well as the magnitude of such changes; (vi) the fiscal and monetary policies of the federal government and its agencies; (vii) changes in federal bank regulatory and supervisory policies, including required levels of capital; (viii) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in Puerto Rico; (ix) the performance of the stock and bond markets; (x) competition in the financial services industry; (xi) possible legislative, tax or regulatory changes; and (xii) difficulties in combining the operations of any other acquired entity.
For a discussion of such factors and certain risks and uncertainties to which Oriental is subject, see Oriental’s annual report on Form 10-K for the year ended December 31, 2011, as well as its other filings with the U.S. Securities and Exchange Commission. Other than to the extent required by applicable law, including the requirements of applicable securities laws, Oriental assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.