Oriental Financial Group Reports Third Quarter 2012 Results
Oriental Financial Group Reports Third Quarter 2012 Results
3Q12 Financial Summary
- Income per common share (diluted) of $0.35 increased 2.9% from $0.34 in the preceding 2012 quarter and was $0.35 in the year ago quarter.
- Income available to common shareholders of $14.7 million increased 7.0% from the preceding 2012 quarter and declined 5.5% from the year ago quarter.
- Results included $1.8 million in dividends declared during third quarter 2012 on the $84 million convertible preferred stock issued earlier in the quarter. The capital raise was related to the acquisition of BBVA's Puerto Rico operations (BBVA PR), which is anticipated to close in the fourth quarter of 2012.
- Book value per common share of $15.40 at September 30, 2012 compared to $15.39 at June 30, 2012 and $15.05 at September 30, 2011.
- Cash dividend per common share of $0.06 was 20% greater than in the year ago quarter.
"During the quarter, we posted improvements in almost every key area, including higher interest income from loans and securities, increased loan production, lower cost of funds, and stronger credit quality," said José Rafael Fernández, President, Chief Executive Officer and Vice Chairman of the Board.
"At the same time, we continued to prepare for the BBVA PR acquisition, in order to create a market leading bank that is strongly capitalized, locally controlled and totally focused on Puerto Rico. In addition to raising capital through the issuance of preferred stock, we took advantage of market conditions later in the quarter to initiate our previously announced deleveraging plan ahead of schedule, by selling $532.4 million of our investment securities and cancelling $400 million of our repurchase agreement funding. In addition, we have been working closely with BBVA PR's highly experienced management and staff to ensure a smooth transition for both our teams.
"In sum, we are continuing to move in the right direction for achieving our goals for 2012 and beyond. With the local economy showing signs of stabilization, the investments made to expand our banking capabilities, our proactive risk management practices, and the changeover in our financial model, we have transformed Oriental into a growth oriented franchise with a strong capital position. Complementary to growing our banking business, our planned acquisition of BBVA PR continues to remain on target for closing before the year end, subject to customary regulatory approvals."
Over the past year, Oriental has sold securities to lock in gains, deleveraged its balance sheet, reduced wholesale funding costs, and built up its cash position, putting the Company in a favorable position to move forward once it receives the regulatory approvals for the $500 million cash BBVA PR acquisition. Registration statements for the sale of common and preferred shares to raise an additional $66 million in related capital have been filed with the SEC. Once each is effective, the sale of the securities is expected to get underway immediately.
3Q12 Income Statement Analysis
All comparisons are to the preceding quarter unless otherwise noted
- Net interest income (after provision for loan and lease losses) increased 30.8% to $36.4 million.
- Interest income increased 8.1%, to $65.7 million. Income from non-covered loans increased 4.3%, to $18.0 million, due to growth in all major categories, but especially residential mortgage and commercial loans. Income from covered loans (the former Eurobank loans) increased 9.5%, to $22.3 million, due to improved cash flows and credit performance. Income from investment securities increased 9.5%, to $25.4 million, due to reduced premium amortization on mortgage backed securities (MBS). This was partly a result of Oriental's strategy, executed during the first half of the year, of selling MBS subject to higher prepayment speeds.
- Loans generated 61% of total interest income, up from 49% in the year ago quarter, underscoring Oriental's emphasis on increased banking activity.
- Interest expense fell 8.0%, to $25.5 million. This reflects a decline of 8.2%, to $7.3 million, in the cost of deposits, as average rates paid fell to 1.32% from 1.42%, primarily due to a reduction in rates in line with local market conditions for both retail and wholesale deposits. Reflecting another of Oriental's strategies, interest expense on borrowings fell 8.0%, to $18.2 million, as did their cost, to 2.17% from 2.34%.
- Net Interest Margin (NIM) was 2.77% versus 2.28% in the second quarter of 2012 and 2.55% for the first nine months of 2012, based on lower premium amortization on MBS, the reduction in the cost of funds, and the increasing proportion of loans vs. securities in the asset mix. Oriental's NIM target range for 2012 remains 2.50%-2.60%, as projected earlier this year.
- Total banking and wealth management revenues were approximately level at $11.3 million. These operations, including mortgage banking activities, performed generally in line with plans. Total assets under management increased 2.4%, to a record $4.6 billion, from June 30, 2012 to September 30, 2012.
- Non-core, non-interest income of $2.4 million compared to $5.5 million in the preceding quarter. Third quarter 2012 results primarily reflected:
- $35.0 million from the gain on sale of securities and derivative activities, partially offset by an early extinguishment cost of $24.3 million on $400.0 million of related repurchase agreement funding; and
- $8.1 million in amortization of FDIC shared-loss indemnification asset, compared to $5.6 million in the preceding quarter. The increase is primarily due to an improvement in revised cash flow projections of certain former Eurobank loan pools in 2011.
- Non-interest expenses were $30.4 million compared to $28.7 million in the second quarter of 2012. Costs associated with the BBVA PR acquisition were approximately $1.5 million in the third quarter of 2012 and $0.4 million in the preceding quarter. The second quarter also included approximately $1.0 million in tax credits. Excluding these items from both periods, third quarter non-interest expenses were lower than in the preceding quarter.
September 30, 2012 Balance Sheet Analysis
All comparisons are to June 30, 2012 unless otherwise noted
- Cash and cash equivalents (including securities purchased under agreements to resell) increased 13.9%, to $785.5 million, including net proceeds from the July 3, 2012 preferred stock issuance, repayments on MBS and the net gain on the sale of securities.
- Total investments of $3.2 billion declined 10.7%, reflecting the previously noted sale of MBS. The investment portfolio is now down 22.9% year over year as Oriental has transformed its balance sheet in line with its deleveraging and emphasis on increased banking activity.
- Loans receivable not covered under shared loss agreements with the FDIC, net, increased modestly, to $1.2 billion, reflecting increases of 5.2% in commercial loans, 12.5% in auto leasing, and 10.2% in consumer loans, and a 2.1% decline in residential mortgages as they continue to pay down. Oriental typically sells more than 90% of its monthly residential mortgage production into the secondary market.
- Loan production increased 10.4%, to $106.4 million, reflecting increases of 22.9% in commercial loans, 44.9% in auto leasing, and 24.1% in consumer loans. Year to date, production of commercial loans totaled $134.8 million, up 46%.
- Total covered loans, net, of $413.6 million declined 7.6% as they continue to pay down in line with current projections.
- Retail deposits of $2.0 billion remained approximately level, while wholesale deposits of $214.9 million declined 7.2% as Oriental continued to allow short-term brokered CDs to mature.
- Borrowings of $3.0 billion declined 11.9%, reflecting the previously mentioned extinguishment of repurchase agreement funding. Borrowings are now down 21.3% year over year due to Oriental's deleveraging and emphasis on increased banking activity.
- Stockholders' equity of $771.7 million increased 11.5%. The increase primarily reflects the previously mentioned issuance of preferred stock, and the increase in retained earnings.
Other 3Q12 Highlights
All comparisons are to the preceding quarter or June 30, 2012 unless otherwise noted
- Positive trends continued concerning the credit quality of non-covered assets. Non-performing assets declined 2.0%, to $136.9 million. Net credit losses declined 49.9%, to $1.9 million. The allowance for loan and lease losses increased 4.6%, to $39.1 million. Provision for loan and lease losses declined 5.3%, to $3.2 million. Total delinquency loans (30 days and over past due) also declined.
- The credit quality of covered assets (the former Eurobank loans) also showed positive trends. Provision for loan and lease losses was $0.2 million, a decline of $1.2 million, reflecting the results of quarterly revisions to the expected cash flows based on recent experiences of certain pools of loans.
- Oriental maintains regulatory capital ratios well above the requirements for a well-capitalized institution. At September 30, 2012, the Leverage Capital Ratio was 10.91%, Tier-1 Risk-Based Capital Ratio was 36.52%, and Total Risk-Based Capital Ratio was 37.81%.
A conference call to discuss Oriental's results, outlook and related matters will be held Thursday, October 25, 2012, at 9:00 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 third quarter of 2012 can be found on the Webcasts, Presentations & Other Files page, under the News & Presentations page, on 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 48th 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 28 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.
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.
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 and the ability to raise the necessary capital 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.
Oriental Financial Group Inc.
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KEYWORDS: United States North America Caribbean Puerto Rico New York
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