ORIENTAL FINANCIAL GROUP, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANG ACT OF 1934 |
For the transition period from to
Commission File Number 001-12647
Oriental Financial Group Inc.
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Incorporated in the Commonwealth of Puerto Rico,
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IRS Employer Identification No. 66-0538893 |
Principal Executive Offices:
997 San Roberto Street
Oriental Center 10th Floor
Professional Offices Park
San Juan, Puerto Rico 00926
Telephone Number: (787) 771-6800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Number of shares outstanding of the registrants common stock, as of the latest practicable date:
24,572,557_common shares ($1.00 par value per share)
outstanding as of September 30, 2006
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by Oriental Financial Group Inc. (the Group)
with the Securities and Exchange Commission (the SEC), in the Groups press releases or
other public or shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases would be, will allow, intends to,
will likely result, are expected to, will continue, is anticipated, estimated,
project, believe, should or similar expressions are intended to identify
forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995.
The future results of the Group could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Groups assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements.
The Group wishes to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made and are based on managements current
expectations, and to advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates, credit and other
risks of lending and investment activities, competitive, and regulatory factors, legislative
changes and accounting pronouncements, could affect the Groups financial performance and
could cause the Groups actual results for future periods to differ materially from those
anticipated or projected. The Group does not undertake, and specifically disclaims, any
obligation to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2006 AND DECEMBER 31, 2005
(In thousands, except share data)
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June 30, |
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December 31, |
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2006 |
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2005 |
|
ASSETS |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Cash and due from banks |
|
$ |
35,237 |
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$ |
13,789 |
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|
|
|
|
|
|
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Investments: |
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|
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Time deposits with other banks |
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30,000 |
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60,000 |
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Money market investments |
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5,722 |
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3,480 |
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Short term investments |
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35,722 |
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63,480 |
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Trading securities, at fair value with amortized cost of $362 (December 31,
2005 - $144) |
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368 |
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146 |
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Investment securities available-for-sale, at fair value with amortized cost
of $1,245,907 (December 31, 2005 - $1,069,649) |
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Securities pledged that can be repledged |
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974,763 |
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558,719 |
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Other investment securities |
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225,481 |
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488,165 |
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Total investment securities available-for-sale |
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1,200,244 |
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1,046,884 |
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Investment securities held-to-maturity, at amortized cost with fair value
of $2,158,770 (December 31, 2005 - $2,312,832) |
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Securities pledged that can be repledged |
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1,960,268 |
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1,917,805 |
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Other investment securities |
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282,951 |
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428,450 |
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|
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Total investment securities held-to-maturity |
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2,243,219 |
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|
2,346,255 |
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Federal Home Loan Bank (FHLB) stock, at cost |
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18,269 |
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20,002 |
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Total investments |
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3,497,822 |
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3,476,767 |
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Securities sold but not yet delivered |
|
|
710 |
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44,009 |
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Loans: |
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Mortgage loans held-for-sale, at lower of cost or market |
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|
9,564 |
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8,946 |
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Loans receivable, net of allowance for loan losses of $7,501 (December 31,
2005 - $6,630) |
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|
1,144,374 |
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|
894,362 |
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|
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|
|
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Total loans, net |
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1,153,938 |
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|
903,308 |
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Accrued interest receivable |
|
|
31,313 |
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|
29,067 |
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Premises and equipment, net |
|
|
17,358 |
|
|
|
14,828 |
|
Deferred tax asset, net |
|
|
14,861 |
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|
|
12,222 |
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Foreclosed real estate |
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|
4,379 |
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|
4,802 |
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Other assets |
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77,044 |
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|
48,157 |
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Total assets |
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$ |
4,832,662 |
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$ |
4,546,949 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Demand deposits |
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$ |
141,260 |
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$ |
146,623 |
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Savings accounts |
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171,034 |
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82,641 |
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Certificates of deposit |
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901,553 |
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1,069,304 |
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Total deposits |
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1,213,847 |
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1,298,568 |
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Borrowings: |
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Federal funds purchased and other short term borrowings |
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17,098 |
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4,455 |
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Securities sold under agreements to repurchase |
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2,856,361 |
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2,427,880 |
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Advances from FHLB |
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285,500 |
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313,300 |
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Term notes |
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15,000 |
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15,000 |
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Subordinated capital notes |
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72,166 |
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72,166 |
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Total borrowings |
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3,246,125 |
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2,832,801 |
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Securities purchased but not yet received |
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|
6,539 |
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|
43,354 |
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Accrued expenses and other liabilities |
|
|
25,868 |
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|
30,435 |
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|
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Total liabilities |
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|
4,492,379 |
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4,205,158 |
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Commitments and Contingencies |
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Stockholders equity: |
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Preferred stock, $1 par value; 5,000,000 shares authorized; $25
liquidation value; 1,340,000 shares of Series A and 1,380,000 shares
of Series B issued and outstanding |
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|
68,000 |
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68,000 |
|
Common stock, $1 par value; 40,000,000 shares authorized; 25,369,875
shares issued (December 31, 2005 - 25,350,125 shares) |
|
|
25,370 |
|
|
|
25,350 |
|
Additional paid-in capital |
|
|
208,620 |
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|
|
208,454 |
|
Legal surplus |
|
|
37,114 |
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|
|
35,863 |
|
Retained earnings |
|
|
52,368 |
|
|
|
52,340 |
|
Treasury stock, at cost 807,713 shares (December 31, 2005 - 770,472 shares) |
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|
(10,779 |
) |
|
|
(10,332 |
) |
Accumulated other comprehensive loss, net of tax of $3,381
(December 31, 2005 - $1,810) |
|
|
(40,410 |
) |
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|
(37,884 |
) |
|
|
|
|
|
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|
Total stockholders equity |
|
|
340,283 |
|
|
|
341,791 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,832,662 |
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|
$ |
4,546,949 |
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|
|
|
|
|
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|
See notes to unaudited consolidated financial statements.
-1-
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(In thousands, except per share data)
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Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As Restated) |
|
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|
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|
|
(As Restated) |
|
|
|
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|
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|
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|
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|
|
|
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Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
18,311 |
|
|
$ |
14,934 |
|
|
$ |
34,564 |
|
|
$ |
28,357 |
|
Mortgage-backed securities |
|
|
23,887 |
|
|
|
22,626 |
|
|
|
48,387 |
|
|
|
47,401 |
|
Investment securities |
|
|
13,973 |
|
|
|
11,037 |
|
|
|
28,473 |
|
|
|
20,335 |
|
Short term investments |
|
|
723 |
|
|
|
279 |
|
|
|
1,462 |
|
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
56,894 |
|
|
|
48,876 |
|
|
|
112,886 |
|
|
|
96,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
11,146 |
|
|
|
8,697 |
|
|
|
21,644 |
|
|
|
16,320 |
|
Securities sold under agreements to repurchase |
|
|
31,128 |
|
|
|
17,583 |
|
|
|
57,491 |
|
|
|
33,969 |
|
Advances from FHLB, term notes and other
borrowings |
|
|
2,568 |
|
|
|
2,143 |
|
|
|
5,190 |
|
|
|
4,188 |
|
Subordinated capital notes |
|
|
1,344 |
|
|
|
1,165 |
|
|
|
2,641 |
|
|
|
2,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
46,186 |
|
|
|
29,588 |
|
|
|
86,966 |
|
|
|
56,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,708 |
|
|
|
19,288 |
|
|
|
25,920 |
|
|
|
39,698 |
|
Provision for loan losses |
|
|
947 |
|
|
|
850 |
|
|
|
2,048 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
9,761 |
|
|
|
18,438 |
|
|
|
23,872 |
|
|
|
38,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial service revenues |
|
|
4,066 |
|
|
|
3,249 |
|
|
|
7,317 |
|
|
|
6,419 |
|
Banking service revenues |
|
|
2,511 |
|
|
|
2,064 |
|
|
|
4,687 |
|
|
|
3,893 |
|
Investment banking revenues |
|
|
852 |
|
|
|
162 |
|
|
|
2,561 |
|
|
|
339 |
|
Net gain (loss) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking activities |
|
|
634 |
|
|
|
1,168 |
|
|
|
1,070 |
|
|
|
2,241 |
|
Securities available-for-sale |
|
|
|
|
|
|
1,420 |
|
|
|
19 |
|
|
|
4,056 |
|
Derivatives |
|
|
(23 |
) |
|
|
(1,866 |
) |
|
|
859 |
|
|
|
(4,670 |
) |
Trading securities |
|
|
(8 |
) |
|
|
(42 |
) |
|
|
21 |
|
|
|
(53 |
) |
Other |
|
|
(511 |
) |
|
|
282 |
|
|
|
(60 |
) |
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income, net |
|
|
7,521 |
|
|
|
6,437 |
|
|
|
16,474 |
|
|
|
12,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
5,627 |
|
|
|
4,402 |
|
|
|
11,801 |
|
|
|
7,697 |
|
Occupancy and equipment |
|
|
2,793 |
|
|
|
3,066 |
|
|
|
5,682 |
|
|
|
5,532 |
|
Advertising and business promotion |
|
|
1,300 |
|
|
|
1,420 |
|
|
|
2,366 |
|
|
|
2,907 |
|
Professional and service fees |
|
|
1,601 |
|
|
|
1,777 |
|
|
|
3,225 |
|
|
|
3,614 |
|
Communication |
|
|
395 |
|
|
|
410 |
|
|
|
843 |
|
|
|
786 |
|
Loan servicing expenses |
|
|
509 |
|
|
|
430 |
|
|
|
964 |
|
|
|
831 |
|
Taxes, other than payroll and income taxes |
|
|
573 |
|
|
|
471 |
|
|
|
1,173 |
|
|
|
934 |
|
Electronic banking charges |
|
|
494 |
|
|
|
543 |
|
|
|
962 |
|
|
|
1,060 |
|
Printing, postage, stationery and supplies |
|
|
359 |
|
|
|
207 |
|
|
|
544 |
|
|
|
416 |
|
Insurance |
|
|
219 |
|
|
|
188 |
|
|
|
432 |
|
|
|
375 |
|
Other |
|
|
914 |
|
|
|
979 |
|
|
|
1,675 |
|
|
|
1,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
14,784 |
|
|
|
13,893 |
|
|
|
29,667 |
|
|
|
26,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,498 |
|
|
|
10,982 |
|
|
|
10,679 |
|
|
|
24,684 |
|
Income tax expense (benefit) |
|
|
(21 |
) |
|
|
377 |
|
|
|
110 |
|
|
|
(2,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,519 |
|
|
|
10,605 |
|
|
|
10,569 |
|
|
|
26,978 |
|
Less: Dividends on preferred stock |
|
|
(1,201 |
) |
|
|
(1,202 |
) |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,318 |
|
|
$ |
9,403 |
|
|
$ |
8,168 |
|
|
$ |
24,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.37 |
|
|
$ |
0.33 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
24,599 |
|
|
|
24,847 |
|
|
|
24,608 |
|
|
|
24,571 |
|
Average potential common shares-options |
|
|
106 |
|
|
|
601 |
|
|
|
128 |
|
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,705 |
|
|
|
25,448 |
|
|
|
24,736 |
|
|
|
25,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share of common stock |
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
-2-
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, |
|
CHANGES IN STOCKHOLDERS EQUITY: |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
|
|
Preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and
end of period |
|
$ |
68,000 |
|
|
$ |
68,000 |
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
25,350 |
|
|
|
24,601 |
|
Stock options exercised |
|
|
20 |
|
|
|
503 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
25,370 |
|
|
|
25,104 |
|
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
Balance at beginning of period
as previously reported |
|
|
|
|
|
|
186,405 |
|
Prior period adjustment |
|
|
|
|
|
|
13,241 |
|
|
|
|
|
|
|
|
|
Balance at beginning of period
as restated |
|
|
208,454 |
|
|
|
199,646 |
|
Stock-based compensation
expense |
|
|
16 |
|
|
|
6,261 |
|
Stock options exercised |
|
|
150 |
|
|
|
905 |
|
Common stock issuance cost |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
208,620 |
|
|
|
206,804 |
|
|
|
|
|
|
|
|
|
Legal surplus: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
35,863 |
|
|
|
31,280 |
|
Transfer from retained earnings |
|
|
1,251 |
|
|
|
2,613 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
37,114 |
|
|
|
33,893 |
|
|
|
|
|
|
|
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of period
as previously reported |
|
|
|
|
|
|
59,884 |
|
Prior period adjustment |
|
|
|
|
|
|
(28,203 |
) |
|
|
|
|
|
|
|
|
Balance at beginning of period
as restated |
|
|
52,340 |
|
|
|
31,681 |
|
Net income |
|
|
10,569 |
|
|
|
26,978 |
|
Cash dividends declared on
common stock |
|
|
(6,889 |
) |
|
|
(6,940 |
) |
Cash dividends declared on
preferred stock |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
Transfer to legal surplus |
|
|
(1,251 |
) |
|
|
(2,613 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
52,368 |
|
|
|
46,705 |
|
|
|
|
|
|
|
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(10,332 |
) |
|
|
(91 |
) |
Stock used to match defined
contribution plan 1165(e) |
|
|
135 |
|
|
|
235 |
|
Stock purchased |
|
|
(582 |
) |
|
|
(3,512 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(10,779 |
) |
|
|
(3,368 |
) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss), net of tax: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(37,884 |
) |
|
|
(37,023 |
) |
Other comprehensive income
(loss), net of tax |
|
|
(2,526 |
) |
|
|
(1,360 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(40,410 |
) |
|
|
(38,383 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
340,283 |
|
|
$ |
338,755 |
|
|
|
|
|
|
|
|
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
COMPREHENSIVE INCOME |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
(As Restated) |
|
|
Net income |
|
$ |
2,519 |
|
|
$ |
10,605 |
|
|
$ |
10,569 |
|
|
$ |
26,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss)
gain on
securities
available-for-sale
arising during
the period |
|
|
(9,788 |
) |
|
|
6,717 |
|
|
|
(21,351 |
) |
|
|
(8,991 |
) |
Realized (gain)
loss on
investment
securities
available-for-sale
included in net
income |
|
|
(19 |
) |
|
|
832 |
|
|
|
(19 |
) |
|
|
(1,804 |
) |
Unrealized gain
(loss) on
derivatives
designated as
cash flows hedges
arising during
the period |
|
|
8,106 |
|
|
|
(6,565 |
) |
|
|
18,022 |
|
|
|
7,018 |
|
Realized loss
(gain) on
derivatives
designated as
cash flow hedges
included in net
income |
|
|
|
|
|
|
820 |
|
|
|
(749 |
) |
|
|
2,743 |
|
Income tax effect
related to
unrealized loss
on securities
available-for-sale |
|
|
992 |
|
|
|
(405 |
) |
|
|
1,571 |
|
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
(loss) income for
the period, net of
tax |
|
|
(709 |
) |
|
|
1,399 |
|
|
|
(2,526 |
) |
|
|
(1,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,810 |
|
|
$ |
12,004 |
|
|
$ |
8,043 |
|
|
$ |
25,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
-3-
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As Restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,569 |
|
|
$ |
26,978 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Amortization of deferred loan origination fees, net of costs |
|
|
(760 |
) |
|
|
(982 |
) |
Amortization of premiums, net of accretion of discounts on
investment securities |
|
|
1,045 |
|
|
|
4,987 |
|
Depreciation and amortization of premises and equipment |
|
|
2,672 |
|
|
|
3,143 |
|
Deferred income tax expense (benefit) |
|
|
(1,068 |
) |
|
|
205 |
|
Equity in losses (earnings) of investment in limited liability
partnership |
|
|
271 |
|
|
|
(247 |
) |
Provision for loan losses |
|
|
2,048 |
|
|
|
1,510 |
|
Stock-based compensation (benefit) |
|
|
16 |
|
|
|
(6,287 |
) |
Loss (gain) on: |
|
|
|
|
|
|
|
|
Sale of securities available-for-sale |
|
|
(19 |
) |
|
|
(4,056 |
) |
Mortgage banking activities |
|
|
(1,070 |
) |
|
|
(2,241 |
) |
Derivatives |
|
|
(859 |
) |
|
|
4,670 |
|
Sale of foreclosed real estate |
|
|
(115 |
) |
|
|
|
|
Sale of premises and equipment |
|
|
(8 |
) |
|
|
|
|
Originations of loans held-for-sale |
|
|
(33,830 |
) |
|
|
(107,035 |
) |
Proceeds from sale of loans held-for-sale |
|
|
13,525 |
|
|
|
28,893 |
|
Net decrease (increase) in: |
|
|
|
|
|
|
|
|
Trading securities |
|
|
(222 |
) |
|
|
850 |
|
Accrued interest receivable |
|
|
(2,246 |
) |
|
|
(2,446 |
) |
Other assets |
|
|
(7,375 |
) |
|
|
(10,454 |
) |
Net increase (decrease) in: |
|
|
|
|
|
|
|
|
Accrued interest on deposits and borrowings |
|
|
(2,492 |
) |
|
|
3,329 |
|
Other liabilities |
|
|
(2,030 |
) |
|
|
7,351 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(21,948 |
) |
|
|
(51,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net decrease (increase) in time deposits with other banks |
|
|
30,000 |
|
|
|
(30,000 |
) |
Purchases of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
(278,566 |
) |
|
|
(623,529 |
) |
Investment securities held-to-maturity |
|
|
(6,500 |
) |
|
|
(236,399 |
) |
Equity options and put options |
|
|
|
|
|
|
(739 |
) |
FHLB stock |
|
|
(9,733 |
) |
|
|
|
|
Maturities and redemptions of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
73,173 |
|
|
|
400,720 |
|
Investment securities held-to-maturity |
|
|
108,975 |
|
|
|
100,340 |
|
FHLB stock |
|
|
11,466 |
|
|
|
1,102 |
|
Proceeds from sales of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
57,130 |
|
|
|
449,622 |
|
Foreclosed real estate |
|
|
2,142 |
|
|
|
2,149 |
|
Premises and equipment |
|
|
|
|
|
|
3,355 |
|
Loan production: |
|
|
|
|
|
|
|
|
Origination and purchase of loans, excluding loans held-for-sale |
|
|
(321,068 |
) |
|
|
(164,269 |
) |
Principal repayment of loans |
|
|
68,474 |
|
|
|
108,314 |
|
Additions to premises and equipment |
|
|
(5,194 |
) |
|
|
(2,340 |
) |
|
|
|
|
|
|
|
Net cash
provided by (used in) investing activities |
|
|
(269,701 |
) |
|
|
8,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(85,449 |
) |
|
|
178,064 |
|
Securities sold under agreements to repurchase |
|
|
425,516 |
|
|
|
(146,070 |
) |
Federal
funds purchased and other short term borrowings |
|
|
12,643 |
|
|
|
12,310 |
|
Proceeds from: |
|
|
|
|
|
|
|
|
Advances from FHLB |
|
|
1,322,995 |
|
|
|
917,570 |
|
Exercise of stock options, net |
|
|
170 |
|
|
|
1,408 |
|
Repayments of advances from FHLB |
|
|
(1,350,795 |
) |
|
|
(917,570 |
) |
Common stocks used to match defined contribution plan 1165(e) |
|
|
135 |
|
|
|
(3,157 |
) |
Repurchase of treasury stocks |
|
|
(582 |
) |
|
|
|
|
Dividends paid |
|
|
(9,294 |
) |
|
|
(9,321 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
315,339 |
|
|
|
33,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
23,690 |
|
|
|
(10,272 |
) |
Cash and cash equivalents at beginning of period |
|
|
17,269 |
|
|
|
34,955 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
40,959 |
|
|
$ |
24,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents include: |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
35,237 |
|
|
$ |
14,892 |
|
Money market investments |
|
|
5,722 |
|
|
|
9,791 |
|
|
|
|
|
|
|
|
|
|
$ |
40,959 |
|
|
$ |
24,683 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
90,826 |
|
|
$ |
53,421 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
|
|
|
$ |
554 |
|
|
|
|
|
|
|
|
Mortgage loans securitized into mortgage-backed securities |
|
$ |
20,447 |
|
|
$ |
33,662 |
|
|
|
|
|
|
|
|
Accrued dividend payable |
|
$ |
3,441 |
|
|
$ |
3,487 |
|
|
|
|
|
|
|
|
Other comprehensive loss for the period |
|
$ |
2,526 |
|
|
$ |
1,360 |
|
|
|
|
|
|
|
|
Securities sold but not yet delivered |
|
$ |
710 |
|
|
$ |
1,034 |
|
|
|
|
|
|
|
|
Securities and loans purchased but not yet received |
|
$ |
6,539 |
|
|
$ |
22,772 |
|
|
|
|
|
|
|
|
Transfer from loans to foreclosed real estate |
|
$ |
1,604 |
|
|
$ |
1,937 |
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
-4-
ORIENTAL FINANCIAL GROUP INC.
Notes to Unaudited Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION:
The accounting and reporting policies of Oriental Financial Group Inc. (the Group or Oriental)
conform with U.S. generally accepted accounting principles (GAAP) and to financial services
industry practices.
The unaudited consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). In the opinion of management, these
consolidated financial statements include all adjustments necessary, all of which are of normal
recurring nature, to present fairly the consolidated financial condition as of June 30, 2006 and
December 31, 2005, and the results of operations, and the cash flows for the six-month periods ended June 30, 2006 and 2005. All significant intercompany balances and
transactions have been eliminated in the accompanying unaudited consolidated financial statements.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations.
Management believes that the disclosures made are adequate to make the information presented not
misleading. Financial information as of December 31, 2005 has been derived from the Groups
audited consolidated financial statements. The results of operations
and cash flows for the six-month periods ended June 30, 2006 and 2005 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto for the transition period ended December 31, 2005,
included in the Groups Form 10-K.
Nature of Operations
Oriental is a diversified, publicly-owned financial holding company incorporated under the laws of
the Commonwealth of Puerto Rico. It has four direct subsidiaries, Oriental Bank and Trust (the
Bank), Oriental Financial Services Corp. (Oriental Financial Services), Oriental Insurance,
Inc. (Oriental Insurance), and Caribbean Pension Consultants, Inc., which is located in Boca
Raton, Florida. The Group also has two special purpose entities, Oriental Financial (PR) Statutory
Trust I (the Statutory Trust I) and Oriental Financial (PR) Statutory Trust II (the Statutory
Trust II). Through these subsidiaries and its divisions, the Group provides a wide range of
financial services such as mortgage, commercial and consumer lending, financial planning,
insurance sales, money management and investment banking and brokerage services, as well as
corporate and individual trust services. Note 9 to the unaudited consolidated financial statements present
further information about the operations of the Groups business segments.
The main offices of the Group and its subsidiaries are located in San Juan, Puerto Rico. The Group
is subject to examination, regulation and periodic reporting under the U.S. Bank Holding Company
Act of 1956, as amended, which is administered by the Board of Governors of the Federal Reserve
System.
The Bank operates through twenty-four branches located throughout Puerto Rico and is subject to
the supervision, examination and regulation of the Office of the Commissioner of Financial
Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (FDIC). The Bank
offers banking services such as commercial and consumer lending, saving and time deposit products,
financial planning, and corporate and individual trust services, and capitalizes on its commercial
banking network to provide mortgage lending products to its clients. The Bank also operates two
international banking entities (IBEs) pursuant to the International Banking Center Regulatory
Act of Puerto Rico, as amended (the IBE Act): O.B.T. International Bank, which is a unit of the
Bank, and Oriental International Bank Inc., which is a wholly-owned subsidiary of the Bank. On
January 1, 2004, the Group transferred most of the assets and liabilities of O.B.T. International
Bank to Oriental International Bank Inc. The IBE offers the Bank certain Puerto Rico tax
advantages and its services are limited under Puerto Rico law to persons and assets/liabilities
located outside of Puerto Rico.
Oriental Financial Services is subject to the supervision, examination and regulation of the
National Association of Securities Dealers, Inc., the SEC, and the Office of the Commissioner of
Financial Institutions of Puerto Rico. Oriental Insurance is subject to the supervision,
examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.
Change of Fiscal Year
On August 30, 2005, the Groups Board of Directors (the Board) approved an amendment to Section
1 of Article IX of the Groups By-Laws to change its fiscal year to a calendar year. The Groups
fiscal year was from July 1 of each year to June 30 of the following year. The Groups transition
period was from July 1, 2005 to December 31, 2005.
Significant Accounting Policies
The unaudited consolidated financial statements of the Group are prepared in accordance with GAAP
and with the general practices within the financial services industry. In preparing the
consolidated financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
-5-
revenues and expenses during the reporting period. Actual results could differ from those
estimates. The Group believes that of its significant accounting policies, the following may
involve a higher degree of judgment and complexity.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses based on losses
that are estimated to occur. Loan losses are charged against the allowance when the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The Group follows a systematic methodology to establish and evaluate the adequacy of the allowance
for loan losses. This methodology consists of several key elements. The allowance for loan losses
is evaluated on a regular basis by management and is based upon managements periodic review of
the collectibility of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revision as
more information becomes available.
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to
individual review and grading. Where appropriate, allowances are allocated to individual loans
based on managements estimate of the borrowers ability to repay the loan given the availability
of collateral, other sources of cash flow and legal options available to the Group.
Included in the review of individual loans are those that are impaired, as provided in the
Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan. A loan is considered impaired when, based on current information and
events, it is probable that the Group will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows discounted at the
loans effective interest rate, or as a practical expedient, at the observable market price of the
loan or the fair value of the collateral, if the loan is collateral dependent. Loans are
individually evaluated for impairment, except large groups of small balance homogeneous loans that
are collectively evaluated for impairment and loans that are recorded at fair value or at the
lower of cost or market. The Group measures for impairment all commercial loans over $250,000. The
portfolios of mortgage and consumer loans are considered homogeneous, and are evaluated
collectively for impairment.
For loans that are not individually graded, the Group uses a methodology that follows a loan
credit risk rating process that involves dividing loans into risk categories. The following are
the credit risk categories: pass, special mention, substandard, doubtful and loss.
The Group, using an aged-based rating system, applies an overall allowance percentage to each loan
portfolio category based on historical credit losses adjusted for current conditions and trends.
This delinquency-based calculation is the starting point for managements determination of the
required level of the allowance for loan losses. Other data considered in this determination
includes: the overall historical loss trends and other information including underwriting
standards and economic trends.
Loan loss ratios and credit risk categories are updated quarterly and are applied in the context
of GAAP and the importance of depository institutions having prudent, conservative, but not
excessive loan allowances that fall within an acceptable range of estimated losses. While
management uses available information in estimating possible loan losses, future changes to the
allowance may be necessary based on factors beyond the Groups control, such as factors affecting
general economic conditions.
Financial Instruments
Certain financial instruments including derivatives, hedged items, trading securities and
investment securities available-for-sale are recorded at fair value and unrealized gains and
losses are recorded in other comprehensive income or other gains and losses as appropriate. Fair
values are based on listed market prices, if available. If listed market prices are not
available, fair value is determined based on other relevant factors, including price quotations
for similar instruments. The fair values of certain derivative contracts are derived from pricing
models that consider current market and contractual prices for the underlying financial
instruments as well as time value and yield curve or volatility factors underlying the positions.
Impairment of Investment Securities
The Group evaluates its securities available-for-sale and held-to-maturity for impairment. An
impairment charge in the consolidated statements of income is recognized when the decline in the
fair value of investments below their cost basis is judged to be other-than-temporary. The Group
considers various factors in determining whether it should recognize an impairment charge,
including, but not limited to the length of time and extent to which the fair value has been less
than its cost basis, and the Groups ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in market value. For debt securities, the
Group also considers, among other factors, the investors repayment ability on its debt obligations
and its cash and capital generation ability.
-6-
Income Taxes
In preparing the consolidated financial statements, the Group is required to estimate income
taxes. This involves an estimate of current income tax expense together with an assessment of
temporary differences resulting from differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The
determination of current income tax expense involves estimates and assumptions that require the
Group to assume certain positions based on its interpretation of current tax laws and regulations.
Changes in assumptions affecting estimates may be required in the future and estimated tax assets
or liabilities may need to be increased or decreased accordingly. The accrual for tax
contingencies is adjusted in light of changing facts and circumstances, such as the progress of
tax audits, case law and emerging legislation. The Groups effective tax rate includes the impact
of tax contingency accruals and changes to such accruals, including related interest and
surcharges, as considered appropriate by management. When particular matters arise, a number of
years may elapse before such matters are audited and finally resolved. Favorable resolution of
such matters could be recognized as a reduction to the Groups effective rate in the year of
resolution. Unfavorable settlement of any particular issue could increase the effective rate and
may require the use of cash in the year of resolution.
The Group maintained an effective tax rate lower than the maximum marginal statutory rate of 43.5%
as of June 30, 2006, mainly due to the interest income arising from investments exempt from Puerto
Rico income taxes, net of expenses attributable to the exempt income. Exempt interest relates
mostly to interest earned on obligations of the United States and Puerto Rico governments and
certain mortgage-backed securities, including securities held by the Banks international banking
entities.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of
assets and liabilities that generate temporary differences. The carrying value of the Groups net
deferred tax assets assumes that the Group will be able to generate sufficient future taxable
income based on estimates and assumptions. If these estimates and related assumptions change in the
future, the Group may be required to record valuation allowances against its deferred tax assets
resulting in additional income tax expense in the consolidated statements of income.
Management evaluates the realizability of the deferred tax assets on a regular basis and assesses
the need for a valuation allowance. A valuation allowance is established when management believes
that it is more likely than not that some portion of its deferred tax assets will not be realized.
Changes in valuation allowance from period to period are included in the Groups tax provision in
the period of change. As of June 30, 2006, a valuation allowance of approximately $2.0 million was
recorded to offset deferred tax assets from loss carry forwards that the Group considers it will
not be realized in future periods.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the projections of future
taxable income over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Group will realize the benefits of these deductible
differences, net of the existing valuation allowances at June 30, 2006. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if estimates of future
taxable income during the carry forward period are reduced.
On August 1, 2005 the Puerto Rico Legislature approved Act No. 41 that imposes an additional tax of
2.5% on taxable income exceeding $20,000. The law is effective for tax years beginning after
December 31, 2004 and ending on or before December 31, 2006. This additional tax imposition did not
have a material effect on the Groups consolidated operational results for the six-month period
ended June 30, 2006 due to the tax exempt composition of the Groups investments.
On May 13, 2006, the Puerto Rico Governor signed into law Act No. 89 to (i) increase the recapture
tax that is imposed on corporations and partnerships generating taxable income in excess of
$500,000 with the purpose of increasing the maximum marginal corporate income tax rate for these
entities from 39% to 41.5%, and (ii) to impose an additional tax of 2% on the taxable income of
banking corporations covered under the Puerto Rico the Groups investments.
On May 16, 2006, the Puerto Rico Governor also signed into law Act No. 98 to impose a one-time 5%
extraordinary tax that is imposed on an amount equal to the net taxable income of non-exempt
corporations and partnerships for the last taxable year ended on or before December 31, 2005. On
July 31, 2006 Act No. 137 was signed into law to amend various provisions of Act No. 98. The
payment of this extraordinary tax constitutes, in effect, a prepayment, as the taxpayer will be
allowed to credit the amount so paid against its Puerto Rico income tax liability for taxable years
beginning after July 31, 2006 provided the credit claimed in any taxable year does not exceed 25%
of the extraordinary tax paid. Since no member of the Group generated taxable income for the year
2005, this additional tax imposition will not apply and, therefore, it will not affect on the
Groups consolidated operational results.
Stock Option Plans
At June 30, 2006, the Group had three stock-based employee compensation plans: the 1996, 1998, and
2000 Incentive Stock Option Plans. These plans offer key officers, directors and employees an
opportunity to purchase shares of the Groups common stock. The Compensation Committee of the
Board of Directors has sole authority and absolute discretion as to the number of stock options to
be granted to any officer, director or employee, their vesting rights, and the options exercise
-7-
prices. The plans provide for a proportionate adjustment in the exercise price and the number of
shares that can be purchased in case of merger, consolidation, combination, exchange of shares,
other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse
stock split in which the number of shares of common stock of the Group as a whole are increased,
decreased, changed into or exchanged for a different number or kind of shares or securities. Stock
options vest upon completion of specified years of service.
Up to June 30, 2005, the Group accounted for its stock compensation award plans under the
recognition and measurement principles of the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations. Compensation
expense for option awards with traditional terms was generally recognized for any excess of the
quoted market price of the Groups stock at measurement date over the amount an employee must pay
to acquire the stock. No stock-based employee compensation cost was reflected for the awards with
traditional terms as the options had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Financial Accounting Standards Board (FASB)
Interpretation No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans (FIN 28) an interpretation of APB 25 clarifies aspects of accounting for
compensation related to stock appreciation rights and other variable stock option or award plans.
With regards to stock option awards with anti-dilution provisions, where the terms are such that
the number of shares that the employee is entitled to receive and the purchase price depends on
events occurring after the date of the grant, compensation is measured at the end of each period
as the amount by which the quoted market value of the shares of the enterprises stock covered by
a grant exceeds the option price and is accrued as a charge to expense over the periods the
employee performs the related services. Changes in the quoted market value are reflected as an
adjustment of accrued compensation and compensation expense in the periods in which the changes
occur.
On June 30, 2005, the Compensation Committee of the Groups Board of Directors approved the
acceleration of the vesting of all outstanding options to purchase shares of common stock of the
Group that were held by employees, officers and directors as of that date. As a result, options to
purchase 1,219,333 shares became exercisable. The purpose of the accelerated vesting was to enable
the Group to avoid recognizing in its income statement compensation expense associated with these
options in future periods, upon adoption of FASB Statement No. 123(R).
Effective July 1, 2005, the Group adopted SFAS No. 123R Share-Based Payment (SFAS 123R), an
amendment of SFAS 123 Accounting for Stock-Based Compensation using the modified prospective
transition method. SFAS 123R requires measurement of the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award with
the cost to be recognized over the service period. SFAS 123R is effective for financial statements
as of the beginning of the first interim or annual reporting period of the first fiscal year that
began after June 15, 2005. SFAS No. 123R applies to all awards unvested and granted after this
effective date and awards modified, repurchased, or cancelled after that date.
The Group recorded approximately $16,000 during the six-month period ended June 30, 2006 related
to compensation expense for options issued subsequent to the adoption of SFAS 123R. The remaining
unrecognized compensation cost related to unvested awards as of June 30, 2006, was approximately
$249,000 and the weighted average period of time over which this cost will be recognized is
approximately 7 years.
Had the estimated fair value of the options granted been included in compensation expense for the
period indicated below, the Groups net earnings and earnings per share would have been as
follows:
-8-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-month |
|
|
|
Quarter Ended |
|
|
Period Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
(In thousands, except for per share data) |
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
10,605 |
|
|
$ |
26,978 |
|
Deduct: Shared-based compensation reduction
included in reported earnings |
|
|
(2,964 |
) |
|
|
(6,287 |
) |
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards |
|
|
(303 |
) |
|
|
(716 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
|
7,338 |
|
|
|
19,975 |
|
Less: Dividends on preferred stock |
|
|
(1,202 |
) |
|
|
(2,401 |
) |
|
|
|
|
|
|
|
Pro forma income available to common shareholders |
|
$ |
6,136 |
|
|
$ |
17,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.38 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.25 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.37 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.24 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
24,847 |
|
|
|
24,571 |
|
Average potential common share-options |
|
|
601 |
|
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
25,448 |
|
|
|
25,675 |
|
|
|
|
|
|
|
|
The average fair value of each option granted during the six-month period ended June 30, 2006 and
2005 was $4.05 and $15.32, respectively. The average fair value of each option granted was
estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that
have no restrictions and are fully transferable and negotiable in a free trading market.
Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent
in the Groups employee options. Use of an option valuation model, as required by GAAP, includes
highly subjective assumptions based on long-term predictions, including the expected stock price
volatility and average life of each option grant.
The following assumptions were used in estimating the fair value of the options granted:
|
|
|
|
|
|
|
|
|
|
|
Six-month period ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Weighted Average Assumptions: |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
3.87 |
% |
|
|
3.71 |
% |
Expected volatility |
|
|
34.26 |
% |
|
|
42.33 |
% |
Risk-free interest rate |
|
|
4.19 |
% |
|
|
3.92 |
% |
Expected life (in years) |
|
|
8.5 |
|
|
|
7 |
|
The expected term of share options granted represents the period of time that share options
granted are expected to be outstanding. Expected volatilities are based on historical volatility
of the Groups shares over the most recent period equal to the expected term of the share option.
-9-
NOTE 2 INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of
the investment securities as of June 30, 2006 and December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 (In thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities |
|
$ |
199,746 |
|
|
$ |
|
|
|
$ |
9,144 |
|
|
$ |
190,602 |
|
|
|
3.64 |
% |
Puerto Rico Government and agency obligations |
|
|
28,396 |
|
|
|
76 |
|
|
|
1,355 |
|
|
|
27,117 |
|
|
|
5.59 |
% |
Corporate bonds and other |
|
|
112,383 |
|
|
|
|
|
|
|
3,112 |
|
|
|
109,271 |
|
|
|
4.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
340,525 |
|
|
|
76 |
|
|
|
13,611 |
|
|
|
326,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
567,958 |
|
|
|
|
|
|
|
22,054 |
|
|
|
545,904 |
|
|
|
4.71 |
% |
GNMA certificates |
|
|
48,587 |
|
|
|
281 |
|
|
|
543 |
|
|
|
48,325 |
|
|
|
5.58 |
% |
Collateralized mortgage obligations (CMOs) |
|
|
288,837 |
|
|
|
6 |
|
|
|
9,818 |
|
|
|
279,025 |
|
|
|
5.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
905,382 |
|
|
|
287 |
|
|
|
32,415 |
|
|
|
873,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
$ |
1,245,907 |
|
|
$ |
363 |
|
|
$ |
46,026 |
|
|
$ |
1,200,244 |
|
|
|
4.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities |
|
|
40,059 |
|
|
|
|
|
|
|
375 |
|
|
|
39,684 |
|
|
|
2.52 |
% |
Obligations of U.S. government sponsored entities |
|
|
1,028,246 |
|
|
|
|
|
|
|
37,261 |
|
|
|
990,985 |
|
|
|
3.74 |
% |
Puerto Rico Government and agency obligations |
|
|
55,284 |
|
|
|
|
|
|
|
5,886 |
|
|
|
49,398 |
|
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
1,123,589 |
|
|
|
|
|
|
|
43,522 |
|
|
|
1,080,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
763,141 |
|
|
|
|
|
|
|
29,956 |
|
|
|
733,185 |
|
|
|
5.03 |
% |
GNMA certificates |
|
|
198,057 |
|
|
|
|
|
|
|
6,690 |
|
|
|
191,367 |
|
|
|
5.33 |
% |
Collateralized mortgage obligations |
|
|
158,432 |
|
|
|
|
|
|
|
4,281 |
|
|
|
154,151 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
1,119,630 |
|
|
|
|
|
|
|
40,927 |
|
|
|
1,078,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held-to-maturity |
|
|
2,243,219 |
|
|
|
|
|
|
|
84,449 |
|
|
|
2,158,770 |
|
|
|
5.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,489,126 |
|
|
$ |
363 |
|
|
$ |
130,475 |
|
|
$ |
3,359,014 |
|
|
|
4.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-10-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 (In thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities |
|
$ |
174,836 |
|
|
$ |
|
|
|
$ |
5,599 |
|
|
$ |
169,237 |
|
|
|
3.45 |
% |
Puerto Rico Government and agency obligations |
|
|
28,356 |
|
|
|
183 |
|
|
|
340 |
|
|
|
28,199 |
|
|
|
5.29 |
% |
Corporate bonds and other |
|
|
92,005 |
|
|
|
|
|
|
|
1,468 |
|
|
|
90,537 |
|
|
|
4.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
295,197 |
|
|
|
183 |
|
|
|
7,407 |
|
|
|
287,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
488,356 |
|
|
|
|
|
|
|
12,193 |
|
|
|
476,163 |
|
|
|
5.17 |
% |
GNMA certificates |
|
|
36,799 |
|
|
|
630 |
|
|
|
129 |
|
|
|
37,300 |
|
|
|
5.83 |
% |
Collateralized mortgage obligations (CMOs) |
|
|
249,297 |
|
|
|
552 |
|
|
|
4,401 |
|
|
|
245,448 |
|
|
|
5.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
774,452 |
|
|
|
1,182 |
|
|
|
16,723 |
|
|
|
758,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
|
1,069,649 |
|
|
|
1,365 |
|
|
|
24,130 |
|
|
|
1,046,884 |
|
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities |
|
|
60,168 |
|
|
|
|
|
|
|
818 |
|
|
|
59,350 |
|
|
|
2.84 |
% |
Obligations of US Government sponsored agencies |
|
|
1,021,634 |
|
|
|
77 |
|
|
|
19,661 |
|
|
|
1,002,050 |
|
|
|
4.09 |
% |
Puerto Rico Government and agency obligations |
|
|
62,084 |
|
|
|
|
|
|
|
2,987 |
|
|
|
59,097 |
|
|
|
5.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
1,143,886 |
|
|
|
77 |
|
|
|
23,466 |
|
|
|
1,120,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
822,870 |
|
|
|
1,238 |
|
|
|
10,389 |
|
|
|
813,719 |
|
|
|
5.05 |
% |
GNMA certificates |
|
|
216,237 |
|
|
|
1,371 |
|
|
|
1,196 |
|
|
|
216,412 |
|
|
|
5.52 |
% |
Collateralized mortgage obligations |
|
|
163,262 |
|
|
|
129 |
|
|
|
1,187 |
|
|
|
162,204 |
|
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
1,202,369 |
|
|
|
2,738 |
|
|
|
12,772 |
|
|
|
1,192,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held-to-maturity |
|
|
2,346,255 |
|
|
|
2,815 |
|
|
|
36,238 |
|
|
|
2,312,832 |
|
|
|
4.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,415,904 |
|
|
$ |
4,180 |
|
|
$ |
60,368 |
|
|
$ |
3,359,716 |
|
|
|
4.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of the Groups investment securities available-for-sale and
held-to-maturity at June 30, 2006, by contractual maturity, are shown in the next table. Expected
maturities may differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Available-for-sale |
|
Held-to-maturity |
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
|
|
|
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
5,000 |
|
|
$ |
4,975 |
|
|
$ |
274,860 |
|
|
$ |
272,055 |
|
Due after 1 to 5 years |
|
|
295,202 |
|
|
|
283,026 |
|
|
|
412,359 |
|
|
|
398,674 |
|
Due after 5 to 10 years |
|
|
1,890 |
|
|
|
1,835 |
|
|
|
281,241 |
|
|
|
264,817 |
|
Due after 10 years |
|
|
38,433 |
|
|
|
37,154 |
|
|
|
155,129 |
|
|
|
144,521 |
|
|
|
|
|
|
|
|
|
340,525 |
|
|
|
326,990 |
|
|
|
1,123,589 |
|
|
|
1,080,067 |
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
|
228 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
Due after 1 to 5 years |
|
|
10,242 |
|
|
|
10,262 |
|
|
|
|
|
|
|
|
|
Due after 5 to 10 years |
|
|
3,327 |
|
|
|
3,163 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
891,585 |
|
|
|
859,601 |
|
|
|
1,119,630 |
|
|
|
1,078,703 |
|
|
|
|
|
|
|
|
|
905,382 |
|
|
|
873,254 |
|
|
|
1,119,630 |
|
|
|
1,078,703 |
|
|
|
|
|
|
|
|
$ |
1,245,907 |
|
|
$ |
1,200,244 |
|
|
$ |
2,243,219 |
|
|
$ |
2,158,770 |
|
|
|
|
|
|
Proceeds from the sale of investment securities available-for-sale during the six-month period
ended June 30, 2006 totaled approximately $57,130,000 (2005
approximately $449,622,000). Gross realized gains on those sales
during the six-month period ended June 30, 2006 were
approximately $19,000 (2005 gains of approximately $4.6 million and
losses of approximately $500,000).
The following table shows the Groups gross unrealized losses and fair value of investment
securities available-for-sale and held-to-maturity, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position at June 30,
2006.
-11-
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
$ |
24,895 |
|
|
$ |
(131 |
) |
|
$ |
24,764 |
|
Puerto Rico Government and agency obligations |
|
|
18,696 |
|
|
|
(853 |
) |
|
|
17,843 |
|
Corporate bonds and other |
|
|
92,135 |
|
|
|
(3,040 |
) |
|
|
89,095 |
|
Mortgage-backed securities and CMOs |
|
|
364,510 |
|
|
|
(5,695 |
) |
|
|
358,815 |
|
|
|
|
|
500,236 |
|
|
|
(9,719 |
) |
|
|
490,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
|
174,852 |
|
|
|
(9,013 |
) |
|
|
165,839 |
|
Puerto Rico Government and agency obligations |
|
|
4,207 |
|
|
|
(502 |
) |
|
|
3,705 |
|
Corporate bonds and other |
|
|
91 |
|
|
|
(72 |
) |
|
|
19 |
|
Mortgage-backed securities and CMOs |
|
|
524,814 |
|
|
|
(26,720 |
) |
|
|
498,094 |
|
|
|
|
|
703,964 |
|
|
|
(36,307 |
) |
|
|
667,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
|
199,747 |
|
|
|
(9,144 |
) |
|
|
190,603 |
|
Puerto Rico Government and agency obligations |
|
|
22,903 |
|
|
|
(1,355 |
) |
|
|
21,548 |
|
Corporate bonds and other |
|
|
92,226 |
|
|
|
(3,112 |
) |
|
|
89,114 |
|
Mortgage-backed securities and CMOs |
|
|
889,324 |
|
|
|
(32,415 |
) |
|
|
856,909 |
|
|
|
|
$ |
1,204,200 |
|
|
$ |
(46,026 |
) |
|
$ |
1,158,174 |
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
$ |
331,086 |
|
|
$ |
(12,441 |
) |
|
$ |
318,645 |
|
Puerto Rico Government and agency
obligations |
|
|
9,966 |
|
|
|
(791 |
) |
|
|
9,175 |
|
Mortgage-backed securities and CMOs |
|
|
774,431 |
|
|
|
(23,321 |
) |
|
|
751,110 |
|
|
|
|
|
1,115,483 |
|
|
|
(36,553 |
) |
|
|
1,078,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
|
737,219 |
|
|
|
(25,195 |
) |
|
|
712,024 |
|
Puerto Rico Government and agency
obligations |
|
|
45,318 |
|
|
|
(5,095 |
) |
|
|
40,223 |
|
Mortgage-backed securities and CMOs |
|
|
345,199 |
|
|
|
(17,606 |
) |
|
|
327,593 |
|
|
|
|
|
1,127,736 |
|
|
|
(47,896 |
) |
|
|
1,079,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
US Treasury securities |
|
|
1,068,305 |
|
|
|
(37,636 |
) |
|
|
1,030,669 |
|
Puerto Rico Government and agency
obligations |
|
|
55,284 |
|
|
|
(5,886 |
) |
|
|
49,398 |
|
Mortgage-backed securities and CMOs |
|
|
1,119,630 |
|
|
|
(40,927 |
) |
|
|
1,078,703 |
|
|
|
|
$ |
2,243,219 |
|
|
$ |
(84,449 |
) |
|
$ |
2,158,770 |
|
|
Securities in an unrealized loss position at June 30, 2006 are mainly composed of securities issued
or backed by U.S. government agencies. The vast majority of them are rated the equivalent of AAA
by nationally recognized rating organizations. The investment portfolio is structured primarily
with highly liquid securities, which have a large and efficient secondary market. Valuations are
performed on a monthly basis using a third party provider and dealer quotes. Management believes
that the unrealized losses in the investment portfolio at June 30, 2006 are mainly related to
market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.
The Group is a well capitalized financial institution, which has the ability to hold the investment
securities with unrealized losses until maturity or until the unrealized losses are recovered, and
expects to continue its pattern of holding the securities until the forecasted recovery of fair
value.
-12-
NOTE 3 LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
Loans Receivable
The Groups credit activities are mainly with customers located in Puerto Rico. The Groups loan
transactions are encompassed within three main categories: mortgage, commercial and consumer. The
composition of the Groups loan portfolio at June 30, 2006, and December 31, 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans |
|
$ |
848,473 |
|
|
$ |
599,163 |
|
Home equity loans and secured personal loans |
|
|
39,147 |
|
|
|
41,034 |
|
Commercial loans, mainly secured by real estate |
|
|
228,008 |
|
|
|
228,163 |
|
Consumer |
|
|
39,074 |
|
|
|
35,482 |
|
|
|
|
|
|
|
|
Loans receivable, gross |
|
|
1,154,702 |
|
|
|
903,842 |
|
Less: deferred loan fees, net |
|
|
(2,827 |
) |
|
|
(2,850 |
) |
|
|
|
|
|
|
|
Loans receivable |
|
|
1,151,875 |
|
|
|
900,992 |
|
Allowance for loan losses |
|
|
(7,501 |
) |
|
|
(6,630 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
|
1,144,374 |
|
|
|
894,362 |
|
Mortgage loans held-for-sale |
|
|
9,564 |
|
|
|
8,946 |
|
|
|
|
Total loans, net |
|
$ |
1,153,938 |
|
|
$ |
903,308 |
|
|
|
|
Allowance for Loan Losses
The Group maintains an allowance for loan losses at a level that management considers adequate to
provide for probable losses based upon an evaluation of known and inherent risks. The Groups
allowance for loan losses policy provides for a detailed quarterly analysis of probable losses.
The analysis includes a review of historical loan loss experience, value of underlying collateral,
current economic conditions, financial condition of borrowers and other pertinent factors.
While management uses available information in estimating probable loan losses, future additions to
the allowance may be required based on factors beyond the Groups control. Refer to Table 4 of the
Managements Discussion and Analysis of Financial Condition and Results of Operations for the
changes in the allowance for loan losses for the quarters and six-month periods ended June 30, 2006
and December 31, 2005.
The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of
determining impairment. At June 30, 2006 and December 31, 2005, the total investment in impaired
loans was $1.8 million and $3.6 million, respectively. The impaired loans were measured based on
the fair value of collateral. The Group determined that no specific impairment allowance was
required for such loans.
-13-
NOTE 4 PLEDGED ASSETS
At June 30, 2006, residential mortgage loans amounting to $349,712,000 and investment securities
with fair values amounting to $15,663,000 were pledged to secure advances and borrowings from the
FHLB. Investment securities with fair values totaling $2,902,985,000, $135,282,000 and $15,860,000
at June 30, 2006, were pledged to secure securities sold under agreements to repurchase, public
fund deposits, and term notes, respectively. Also, investment securities with fair value totaling
$803,000 at June 30, 2006, were pledged to the Puerto Rico Treasury Department.
As of June 30, 2006, investment securities available-for-sale and held-to-maturity not pledged
amounted to $143,215,000 and $71,435,000 respectively. As of June 30, 2006, mortgage loans not
pledged amounted to $547,471,000.
NOTE 5 OTHER ASSETS
Other assets at June 30, 2006 and December 31, 2005 include the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
Investment in equity options |
|
$ |
25,999 |
|
|
$ |
22,054 |
|
Derivative asset |
|
|
20,347 |
|
|
|
2,509 |
|
Deferred charges |
|
|
2,814 |
|
|
|
3,213 |
|
Prepaid expenses |
|
|
2,763 |
|
|
|
2,698 |
|
Investment in Statutory Trusts |
|
|
2,169 |
|
|
|
2,169 |
|
Goodwill |
|
|
2,006 |
|
|
|
2,006 |
|
Investment in limited partnership |
|
|
10,814 |
|
|
|
11,085 |
|
Accounts receivable and other assets, net |
|
|
10,132 |
|
|
|
2,423 |
|
|
|
|
|
|
|
|
|
|
$ |
77,044 |
|
|
$ |
48,157 |
|
|
|
|
|
|
|
|
NOTE 6 SUBORDINATED CAPITAL NOTES
Subordinated capital notes amounted to $72,166,000 at June 30, 2006 and December 31, 2005.
In October 2001 and August 2003, the Statutory Trust I and the Statutory Trust II, respectively,
special purpose entities of the Group, were formed for the purpose of issuing trust redeemable
preferred securities. In December 2001 and September 2003, $35.0 million of trust redeemable
preferred securities were issued each by the Statutory Trust I and the Statutory Trust II, as part
of pooled underwriting transactions. Pooled underwriting involves participating with other bank
holding companies in issuing the securities through a special purpose pooling vehicle created by
the underwriters.
The proceeds from these issuances were used by the Statutory Trust I and the Statutory Trust II to
purchase a like amount of floating rate junior subordinated deferrable interest debentures
(subordinated capital notes) issued by the Group. The first of these subordinated capital notes
has a par value of $36.1 million, bears interest based on 3 month LIBOR plus 360 basis points
(9.00% at June 30, 2006; 8.10% at December 31, 2005), provided, however, that prior to December 18,
2006, this interest rate shall not exceed 12.5%, payable quarterly, and matures on December 23,
2031. The second one, has a par value of $36.1 million, bears interest based on 3 month LIBOR plus
295 basis points (8.35% at June 30, 2006; December 31, 2005 7.45%), payable quarterly, and
matures on September 17, 2033. Both subordinated capital notes may be called at par after five
years (Statutory Trust I December 2006; Statutory Trust II September 2008). The trust
redeemable preferred securities have the same maturity and call provisions as the subordinated
capital notes. The subordinated deferrable interest debentures issued by the Group are accounted
for as a liability denominated as subordinated capital notes on the unaudited consolidated
statements of financial condition.
The subordinated capital notes are treated as Tier 1 capital for regulatory purposes. On March 4,
2005, the Federal Reserve Board issued a final rule that continues to allow trust preferred
securities to be included in Tier I regulatory capital, subject to stricter quantitative and
qualitative limits. Under this rule, restricted core capital elements, which are qualifying trust
preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and
certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more
than 25% of a bank holding companys core capital elements (including restricted core capital
elements), net of goodwill less any associated deferred tax liability.
NOTE 7 OTHER BORROWINGS
At June 30, 2006, securities underlying agreements to repurchase were delivered to, and are being
held by, the counterparties with whom the repurchase agreements were transacted. The counterparties
have agreed to resell to the Group the same or similar securities at the maturity of the
agreements.
Securities sold under agreements to repurchase at June 30, 2006 mature as follows:
-14-
|
|
|
|
|
|
|
(In thousands) |
|
|
|
Balance |
|
|
|
|
|
|
Due within 30 days |
|
$ |
1,391,111 |
|
Due after 30 to 90 days |
|
|
1,365,109 |
|
Due after 90 to 120 days |
|
|
100,141 |
|
|
|
|
|
|
|
$ |
2,856,361 |
|
|
|
|
|
At June 30, 2006, the contractual maturities of advances from the FHLB and term notes by year are
as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, |
|
Advances from FHLB |
|
|
Term Notes |
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
210,500 |
|
|
$ |
|
|
2008 |
|
|
25,000 |
|
|
|
15,000 |
|
2009 |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
285,500 |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
NOTE 8 DERIVATIVES ACTIVITIES
The Group utilizes various derivative instruments for hedging purposes as part of its asset and
liability management. These transactions involve both credit and market risks. The notional amounts
are amounts on which calculations, payments, and the value of the derivatives are based. Notional
amounts do not represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received or paid, if any. The actual risk of loss
is the cost of replacing, at market, these contracts in the event of default by the counterparties.
The Group controls the credit risk of its derivative financial instrument agreements through credit
approvals, limits, monitoring procedures and collateral, when considered necessary.
The Group generally uses interest rate swaps and options in managing its interest rate risk
exposure. Certain swaps were entered into to convert the forecasted rollover of short-term
borrowings into fixed rate liabilities for longer periods and provide protection against increases
in short-term interest rates. Under these swaps, the Group pays a fixed monthly or quarterly cost
and receives a floating thirty or ninety-day payment based on LIBOR. Floating rate payments
received from the swap counterparties partially offset the interest payments to be made on the
forecasted rollover of short-term borrowings.
In August 2004, the Group entered into a $35.0 million notional amount interest rate swap to fix
the cost of the subordinated capital notes of the Statutory Trust I. This swap was fixed at a rate
of 2.98% and matures on December 18, 2006.
The Groups swaps, including those not designated as a hedge, and their maturity terms at June 30,
2006 and December 31, 2005 are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
June 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Swaps: |
|
|
|
|
|
|
|
|
Pay fixed swaps notional amount |
|
$ |
1,350,000 |
|
|
$ |
1,275,000 |
|
Weighted average pay rate fixed |
|
|
4.48 |
% |
|
|
3.90 |
% |
Weighted average receive rate floating |
|
|
5.24 |
% |
|
|
4.39 |
% |
Maturity in months |
|
|
3 to 54 |
|
|
|
1 to 60 |
|
Floating rate as a percent of LIBOR |
|
|
100 |
% |
|
|
100 |
% |
The Group offers its customers certificates of deposit with an option tied to the performance of
the Standard & Poors 500 stock market index. At the end of five years depositors receive a return
equal to the greater of 15% of the principal in the account or 125% of the average increase in the
month-end value of the index. The Group uses option agreements with major broker-dealer companies
to manage its exposure to changes in this index. Under the terms of the option agreements, the
Group receives the average increase in the month-end value of the index in exchange for a fixed
premium. The changes in fair value of the option agreements used to manage the exposure in the
stock market in the certificates of deposit are recorded in earnings in accordance with SFAS No.
133, as amended.
Derivative instruments are generally negotiated over-the-counter (OTC) contracts. Negotiated OTC
derivatives are generally entered into between two counterparties that negotiate specific
contractual terms, including the underlying instrument, amount, exercise price and maturity.
-15-
Derivatives designated as a hedge consist of interest rate swaps primarily used to hedge securities
sold under agreements to repurchase with notional amounts of $1.315 billion and $1.240 billion as
of June 30, 2006 and December 31, 2005, respectively. Derivatives not designated as a hedge consist
of purchased options used to manage the exposure to the stock market on stock indexed deposits with
notional amounts of $146,090,000 and $173,280,000 as of June 30, 2006 and December 31, 2005, respectively;
embedded options on stock indexed deposits with notional amounts of $137,995,000 and $164,651,000 as of
June 30, 2006 and December 31, 2005, respectively; and interest rate swaps with notional amounts of
$35 million as of June 30, 2006 and December 31, 2005.
During the six-month periods ended June 30, 2006 and 2005, gains (losses) of $859,000 and
($4.7 million), respectively, were credited (charged) to earnings and reflected as Derivatives
Activities in the unaudited consolidated statements of income. During the six-month periods ended
June 30, 2006 and 2005, unrealized gains of $18.0 million and unrealized losses of $7.0 million,
respectively, on derivatives designated as cash flow hedges were included in other comprehensive
income (loss).
At June 30, 2006 and December 31, 2005, the fair value of derivatives was recognized as either
assets or liabilities in the unaudited consolidated statements of financial condition as follows: the fair
value of the interest rate swaps to fix the cost of the forecasted rollover of short-term
borrowings represented an asset of $20.3 million and $2.5 million, as of June 30, 2006 and December
31, 2005, respectively, presented in other assets; the purchased options used to manage the
exposure to the stock market on stock indexed deposits represented an asset of $26.0 million and $22.1
million, respectively, also presented in other assets; the options sold to customers embedded in
the certificates of deposit represented a liability of $24.6 million and $21.1 million,
respectively, recorded in deposits.
The Groups Asset and Liability Management Committee (ALCO) decided in July 2006 to unwind
interest rate swaps with an aggregate notional amount of $640 million, which had been designated as
cash flow hedges and had maturity dates ranging from September 2010 to December 2010. Management
concluded that it was beneficial to Oriental to lock-in the fair value of these swaps at
approximately $11 million. The net gain of $11 million on this transaction will continue to be
included in other comprehensive income, and will be reclassified into earnings during the
originally remaining term of the swaps, starting in the September 2006 quarter and through December
2010, by reducing the interest expense on borrowings.
NOTE 9 SEGMENT REPORTING:
The Group segregates its businesses into the following major reportable segments: Banking,
Treasury, and Financial Services. Management established the reportable segments based on the
internal reporting used to evaluate performance and to assess where to allocate resources. Other
factors such as the Groups organization, nature of products, distribution channels and economic
characteristics of the products were also considered in the determination of the reportable
segments. The Group measures the performance of these reportable segments based on pre-established
goals of different financial parameters such as net income, net interest income, loan production
and fees generated. During this quarter, Management decided to reclassify and present investment
banking revenues in the Treasury segment rather than into the Financial Services segment. This
reclassification was retroactively presented in the disclosure.
Banking includes the Banks branches and mortgage banking, with traditional banking products such
as deposits and mortgage, commercial and consumer loans. Mortgage banking activities are carried
out by the Banks mortgage banking division, whose principal activity is to originate mortgage
loans for the Groups own portfolio. From time to time, if conditions so warrant, the Group may
sell loans directly into the secondary market or securitize conforming loans into mortgage-baked
securities certificates. The Group outsourced the servicing of mortgages included in the resulting
mortgage-backed securities pools, as well as loans maintained in portfolio.
The Treasury segment encompasses all of the Groups assets and liability management activities such
as: purchases and sales of investment securities, interest rate risk management, derivatives, and
borrowings as well as investment banking revenues on public offerings and private placement of debt
and equity securities.
Financial services is comprised of the Banks trust division (Oriental Trust), the brokerage
subsidiary (Oriental Financial Services Corp.), the insurance agency subsidiary (Oriental
Insurance, Inc.), and the pension plan administration subsidiary (Caribbean Pension Consultants,
Inc.). The core operations of this segment are financial planning, money management and investment
brokerage services, insurance sales, corporate and individual trust and retirement services, as
well as pension plan administration services.
Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to
third parties, that is, at current market prices. The accounting policies of the segments are the
same followed by the Group, which are described in the Summary of Significant Accounting Policies
included in the Groups Form 10-K. Following are the results of operations and the selected
financial information by operating segment for the quarters and six-month periods ended June 30,
2006 and 2005:
-16-
Unaudited quarters ended June 30, (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
Total |
|
|
|
|
|
Consolidated |
|
|
Banking |
|
Treasury |
|
Services |
|
Segments |
|
Eliminations |
|
Total |
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
18,653 |
|
|
$ |
38,191 |
|
|
$ |
50 |
|
|
$ |
56,894 |
|
|
|
|
|
|
$ |
56,894 |
|
Interest expense |
|
|
(6,831 |
) |
|
|
(39,355 |
) |
|
|
|
|
|
|
(46,186 |
) |
|
|
|
|
|
|
(46,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
11,822 |
|
|
|
(1,164 |
) |
|
|
50 |
|
|
|
10,708 |
|
|
|
|
|
|
|
10,708 |
|
Non-interest income |
|
|
4,111 |
|
|
|
112 |
|
|
|
3,298 |
|
|
|
7,521 |
|
|
|
|
|
|
|
7,521 |
|
Non-interest expenses |
|
|
(12,082 |
) |
|
|
(314 |
) |
|
|
(2,388 |
) |
|
|
(14,784 |
) |
|
|
|
|
|
|
(14,784 |
) |
Intersegment revenue |
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
(576 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(240 |
) |
|
|
(336 |
) |
|
|
(576 |
) |
|
|
576 |
|
|
|
|
|
Provision for loan losses |
|
|
(947 |
) |
|
|
|
|
|
|
|
|
|
|
(947 |
) |
|
|
|
|
|
|
(947 |
) |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
3,480 |
|
|
$ |
(1,606 |
) |
|
$ |
624 |
|
|
$ |
2,498 |
|
|
$ |
|
|
|
$ |
2,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June
30, 2006 |
|
$ |
1,583,909 |
|
|
$ |
3,667,383 |
|
|
$ |
12,265 |
|
|
$ |
5,263,557 |
|
|
$ |
(430,895 |
) |
|
$ |
4,832,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
15,006 |
|
|
$ |
33,857 |
|
|
$ |
13 |
|
|
$ |
48,876 |
|
|
|
|
|
|
$ |
48,876 |
|
Interest expense |
|
|
(5,386 |
) |
|
|
(24,202 |
) |
|
|
|
|
|
|
(29,588 |
) |
|
|
|
|
|
|
(29,588 |
) |
|
|
|
|
|
|
|
|
Net interest income |
|
|
9,620 |
|
|
|
9,655 |
|
|
|
13 |
|
|
|
19,288 |
|
|
|
|
|
|
|
19,288 |
|
Non-interest income |
|
|
4,348 |
|
|
|
(430 |
) |
|
|
2,519 |
|
|
|
6,437 |
|
|
|
|
|
|
|
6,437 |
|
Non-interest expenses |
|
|
(10,163 |
) |
|
|
(596 |
) |
|
|
(3,134 |
) |
|
|
(13,893 |
) |
|
|
|
|
|
|
(13,893 |
) |
Intersegment revenue |
|
|
1,193 |
|
|
|
|
|
|
|
|
|
|
|
1,193 |
|
|
|
(1,193 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(347 |
) |
|
|
(846 |
) |
|
|
(1,193 |
) |
|
|
1,193 |
|
|
|
|
|
Provision for loan losses |
|
|
(850 |
) |
|
|
|
|
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
4,148 |
|
|
$ |
8,282 |
|
|
$ |
(1,448 |
) |
|
$ |
10,982 |
|
|
$ |
|
|
|
$ |
10,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June
30, 2005 |
|
$ |
973,296 |
|
|
$ |
3,655,649 |
|
|
$ |
9,582 |
|
|
$ |
4,638,527 |
|
|
$ |
(391,662 |
) |
|
$ |
4,246,865 |
|
|
|
|
|
|
|
|
|
-17-
Unaudited six-months period ended June 30, (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
Total |
|
|
|
|
|
Consolidated |
|
|
Banking |
|
Treasury |
|
Services |
|
Segments |
|
Eliminations |
|
Total |
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
35,253 |
|
|
$ |
77,547 |
|
|
$ |
86 |
|
|
$ |
112,886 |
|
|
|
|
|
|
$ |
112,886 |
|
Interest expense |
|
|
(12,833 |
) |
|
|
(74,133 |
) |
|
|
|
|
|
|
(86,966 |
) |
|
|
|
|
|
|
(86,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
22,420 |
|
|
|
3,414 |
|
|
|
86 |
|
|
|
25,920 |
|
|
|
|
|
|
|
25,920 |
|
Non-interest income |
|
|
7,544 |
|
|
|
3,062 |
|
|
|
5,868 |
|
|
|
16,474 |
|
|
|
|
|
|
|
16,474 |
|
Non-interest expenses |
|
|
(24,247 |
) |
|
|
(697 |
) |
|
|
(4,723 |
) |
|
|
(29,667 |
) |
|
|
|
|
|
|
(29,667 |
) |
Intersegment revenue |
|
|
1,189 |
|
|
|
|
|
|
|
|
|
|
|
1,189 |
|
|
|
(1,189 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(407 |
) |
|
|
(782 |
) |
|
|
(1,189 |
) |
|
|
1,189 |
|
|
|
|
|
Provision for loan losses |
|
|
(2,048 |
) |
|
|
|
|
|
|
|
|
|
|
(2,048 |
) |
|
|
|
|
|
|
(2,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
4,858 |
|
|
$ |
5,372 |
|
|
$ |
449 |
|
|
$ |
10,679 |
|
|
$ |
|
|
|
$ |
10,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June
30, 2006 |
|
$ |
1,583,909 |
|
|
$ |
3,667,383 |
|
|
$ |
12,265 |
|
|
$ |
5,263,557 |
|
|
$ |
(430,895 |
) |
|
$ |
4,832,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
28,577 |
|
|
$ |
67,833 |
|
|
$ |
38 |
|
|
$ |
96,448 |
|
|
|
|
|
|
$ |
96,448 |
|
Interest expense |
|
|
(10,471 |
) |
|
|
(46,279 |
) |
|
|
|
|
|
|
(56,750 |
) |
|
|
|
|
|
|
(56,750 |
) |
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,106 |
|
|
|
21,554 |
|
|
|
38 |
|
|
|
39,698 |
|
|
|
|
|
|
|
39,698 |
|
Non-interest income |
|
|
6,617 |
|
|
|
794 |
|
|
|
5,125 |
|
|
|
12,536 |
|
|
|
|
|
|
|
12,536 |
|
Non-interest expenses |
|
|
(20,035 |
) |
|
|
(1,128 |
) |
|
|
(4,877 |
) |
|
|
(26,040 |
) |
|
|
|
|
|
|
(26,040 |
) |
Intersegment revenue |
|
|
1,954 |
|
|
|
|
|
|
|
|
|
|
|
1,954 |
|
|
|
(1,954 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(541 |
) |
|
|
(1,413 |
) |
|
|
(1,954 |
) |
|
|
1,954 |
|
|
|
|
|
Provision for loan losses |
|
|
(1,510 |
) |
|
|
|
|
|
|
|
|
|
|
(1,510 |
) |
|
|
|
|
|
|
(1,510 |
) |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,132 |
|
|
$ |
20,679 |
|
|
$ |
(1,127 |
) |
|
$ |
24,684 |
|
|
$ |
|
|
|
$ |
24,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June
30, 2005 |
|
$ |
973,296 |
|
|
$ |
3,655,649 |
|
|
$ |
9,582 |
|
|
$ |
4,638,527 |
|
|
$ |
(391,662 |
) |
|
$ |
4,246,865 |
|
|
|
|
|
|
|
|
|
NOTE 10 RECENT ACCOUNTING DEVELOPMENTS:
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB
Statements No. 133 and 140
In
February 2006, FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments
an amendment of FASB Statements No. 133 and 140. This statement amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues
addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. SFAS No. 155:
|
|
|
Permits fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation; |
|
|
|
|
Clarifies, which interest-only strips and principal-only strips are not subject to
the requirements of Statement 133; |
|
|
|
|
Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation; |
|
|
|
|
Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives; |
|
|
|
|
Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. |
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after September 15, 2006. The fair value election
provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of this statement for
hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to
the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entitys
fiscal year, provided the entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year.
-18-
Provisions of this statement may be applied to instruments that an entity holds at the date of
adoption on an instrument-by-instrument basis.
At adoption, any difference between the total carrying amount of the individual components of the
existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial
instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings.
An entity should separately disclose the gross gains and losses that make up the cumulative-effect
adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated.
The Group is evaluating the impact that this recently issued accounting pronouncement may have on
its financial condition and results of operations.
SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statements No.
133 and 140
In March 2006, FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, to (1) require the recognition of a servicing asset or servicing
liability under specified circumstances, (2) require that, if practicable, all separately
recognized servicing assets and liabilities be initially measured at fair value, (3) create a
choice for subsequent measurement of each class of servicing assets or liabilities by applying
either the amortization method or the fair value method, and (4) permit the one-time
reclassification of securities identified as offsetting exposure to changes in fair value of
servicing assets or liabilities from available-for-sale securities to trading securities under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. In addition, SFAS No.
156 amends SFAS No. 140 to require significantly greater disclosure concerning recognized servicing
assets and liabilities. SFAS No. 156 is effective for all separately recognized servicing assets
and liabilities acquired or issued after the beginning of an entitys fiscal year that begins after
September 15, 2006, with early adoption permitted.
The adoption of SFAS No. 156 is not expected to have a material effect on the Groups consolidated
financial position or results of operations.
FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes
During July 2006, the Financial Accounting Standards Board adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 was issued to clarify the
requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,
relating to the recognition of income tax benefits. FIN 48 provides a two-step approach to
recognizing and measuring tax benefits when the benefits realization is uncertain. The first step
is to determine whether the benefit is to be recognized; the second step is to determine the amount
to be recognized:
|
|
|
Income tax benefits should be recognized when, based on the technical merits of a
tax position, the entity believes that if a dispute arose with the taxing authority and
were taken to a court of last resort, it is more likely than not (i.e. a probability of
greater than 50 percent) that the tax position would be sustained as filed. |
|
|
|
|
If a position is determined to be more likely-than not of being sustained, the
reporting enterprise should recognize the largest amount of tax benefit that is greater
than 50 percent likely of being realized upon ultimate settlement with the taxing
authority. |
FIN 48 is applicable to the Group beginning in the first quarter of 2007. The cumulative effect of
applying the provisions of FIN 48 upon adoption must be reported as an adjustment to beginning
retained earnings. Management is assessing the effect of the adoption of FIN 48 on the Group.
SFAS
No. 157, Fair Value Measurements
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Accordingly, this Statement does not require
any new fair value measurements. The changes to current practice resulting from the application of
this Statement relate to the definition of fair value, the methods used to measure fair value, and
the expanded disclosures about fair value measurements.
This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial statements for that
fiscal year, including financial statements for an interim period within that fiscal year.
Management is assessing the effect of the adoption of SFAS 157 on the Group.
-19-
NOTE 11 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of the Groups June 30, 2005 consolidated financial statements, the
Groups management determined that the accounting treatment for certain mortgage-related
transactions previously treated as purchases under SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and the treatment of certain
employee stock option awards as fixed awards instead of variable awards did not conform to GAAP,
as discussed below. As a result, the accompanying unaudited consolidated financial statements as
of June 30, 2005 have been restated from the amounts previously reported to correct the accounting
for these transactions. Refer to Note 2 to the consolidated financial statements for the
transition period ended December 31, 2005, included in the Groups Form 10-K.
A summary of the significant effects of the restatement as of June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2005 |
|
Six-Month Period Ended June 30, 2005 |
|
|
(Unaudited) |
|
(Unaudited) |
|
|
As Previously |
|
|
|
|
|
As Previously |
|
|
|
|
Reported |
|
As Restated |
|
Reported |
|
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
employees benefits |
|
$ |
7,366 |
|
|
$ |
4,402 |
|
|
$ |
13,984 |
|
|
$ |
7,697 |
|
Total non-interest
expenses |
|
|
16,857 |
|
|
|
13,893 |
|
|
|
32,327 |
|
|
|
26,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,018 |
|
|
|
10,982 |
|
|
|
18,397 |
|
|
|
24,684 |
|
Net income |
|
$ |
7,641 |
|
|
$ |
10,605 |
|
|
$ |
20,691 |
|
|
$ |
26,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.26 |
|
|
$ |
0.38 |
|
|
$ |
0.74 |
|
|
$ |
1.00 |
|
Diluted |
|
$ |
0.26 |
|
|
$ |
0.37 |
|
|
$ |
0.72 |
|
|
$ |
0.96 |
|
-20-
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
56,894 |
|
|
$ |
48,876 |
|
|
|
16.4 |
% |
|
$ |
112,886 |
|
|
$ |
96,448 |
|
|
|
17.0 |
% |
Interest expense |
|
|
46,186 |
|
|
|
29,588 |
|
|
|
56.1 |
% |
|
|
86,966 |
|
|
|
56,750 |
|
|
|
53.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,708 |
|
|
|
19,288 |
|
|
|
-44.5 |
% |
|
|
25,920 |
|
|
|
39,698 |
|
|
|
-34.7 |
% |
Provision for loan losses |
|
|
947 |
|
|
|
850 |
|
|
|
11.4 |
% |
|
|
2,048 |
|
|
|
1,510 |
|
|
|
35.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
9,761 |
|
|
|
18,438 |
|
|
|
-47.1 |
% |
|
|
23,872 |
|
|
|
38,188 |
|
|
|
-37.5 |
% |
Non-interest income |
|
|
7,521 |
|
|
|
6,437 |
|
|
|
16.8 |
% |
|
|
16,474 |
|
|
|
12,536 |
|
|
|
31.4 |
% |
Non-interest expenses |
|
|
14,784 |
|
|
|
13,893 |
|
|
|
6.4 |
% |
|
|
29,667 |
|
|
|
26,040 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2,498 |
|
|
|
10,982 |
|
|
|
-77.3 |
% |
|
|
10,679 |
|
|
|
24,684 |
|
|
|
-56.7 |
% |
Income tax (benefit) expense |
|
|
(21 |
) |
|
|
377 |
|
|
|
-105.6 |
% |
|
|
110 |
|
|
|
(2,294 |
) |
|
|
-104.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,519 |
|
|
|
10,605 |
|
|
|
76.2 |
% |
|
|
10,569 |
|
|
|
26,978 |
|
|
|
-60.8 |
% |
Less: Dividends on preferred stock |
|
|
(1,201 |
) |
|
|
(1,202 |
) |
|
|
-0.1 |
% |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
1,318 |
|
|
$ |
9,403 |
|
|
|
-86.0 |
% |
|
$ |
8,168 |
|
|
$ |
24,577 |
|
|
|
-66.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
|
$ |
0.38 |
|
|
|
-86.8 |
% |
|
$ |
0.33 |
|
|
$ |
1.00 |
|
|
|
-67.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.05 |
|
|
$ |
0.37 |
|
|
|
-86.5 |
% |
|
$ |
0.33 |
|
|
$ |
0.96 |
|
|
|
-65.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
24,599 |
|
|
|
24,847 |
|
|
|
-1.0 |
% |
|
|
24,608 |
|
|
|
24,571 |
|
|
|
0.2 |
% |
Average potential common share-options |
|
|
106 |
|
|
|
601 |
|
|
|
82.4 |
% |
|
|
128 |
|
|
|
1,104 |
|
|
|
-88.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and shares equivalents |
|
|
24,705 |
|
|
|
25,448 |
|
|
|
-2.9 |
% |
|
|
24,736 |
|
|
|
25,675 |
|
|
|
-3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (ROA) |
|
|
0.22 |
% |
|
|
1.01 |
% |
|
|
|
|
|
|
0.92 |
% |
|
|
1.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity (ROE) |
|
|
1.94 |
% |
|
|
13.86 |
% |
|
|
|
|
|
|
7.93 |
% |
|
|
18.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
78.76 |
% |
|
|
53.58 |
% |
|
|
|
|
|
|
71.39 |
% |
|
|
49.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
0.60 |
% |
|
|
0.71 |
% |
|
|
|
|
|
|
0.63 |
% |
|
|
0.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
0.70 |
% |
|
|
1.68 |
% |
|
|
|
|
|
|
0.89 |
% |
|
|
1.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
0.96 |
% |
|
|
1.89 |
% |
|
|
|
|
|
|
1.16 |
% |
|
|
1.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of financial centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERIOD END BALANCES AND CAPITAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and loans |
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
3,497,822 |
|
|
$ |
3,476,767 |
|
|
|
0.6 |
% |
Loans and leases (including loans held-for-sale), net |
|
|
1,153,938 |
|
|
|
903,308 |
|
|
|
27.7 |
% |
Securities sold but not yet delivered |
|
|
710 |
|
|
|
44,009 |
|
|
|
-98.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,652,470 |
|
|
$ |
4,424,084 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,213,847 |
|
|
$ |
1,298,568 |
|
|
|
-6.5 |
% |
Repurchase agreements |
|
|
2,856,361 |
|
|
|
2,427,880 |
|
|
|
17.6 |
% |
Other borrowings |
|
|
389,764 |
|
|
|
404,921 |
|
|
|
-3.7 |
% |
Securities purchased but not yet received |
|
|
6,539 |
|
|
|
43,354 |
|
|
|
-84.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,466,511 |
|
|
$ |
4,174,723 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity |
|
$ |
68,000 |
|
|
$ |
68,000 |
|
|
|
0.0 |
% |
Common equity |
|
|
272,283 |
|
|
|
273,791 |
|
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340,283 |
|
|
$ |
341,791 |
|
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
Capital ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital |
|
|
9.39 |
% |
|
|
10.13 |
% |
|
|
-7.3 |
% |
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
29.60 |
% |
|
|
34.70 |
% |
|
|
-14.7 |
% |
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
30.11 |
% |
|
|
35.22 |
% |
|
|
-14.5 |
% |
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
24,562 |
|
|
|
24,580 |
|
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets managed |
|
$ |
1,933,912 |
|
|
$ |
1,875,300 |
|
|
|
3.1 |
% |
Broker-dealer assets gathered |
|
|
1,172,726 |
|
|
|
1,132,286 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
Assets managed |
|
|
3,106,638 |
|
|
|
3,007,586 |
|
|
|
3.3 |
% |
Assets owned |
|
|
4,832,662 |
|
|
|
4,546,949 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total financial assets managed and owned |
|
$ |
7,939,300 |
|
|
$ |
7,554,535 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
OVERVIEW OF FINANCIAL PERFORMANCE
Introduction
The Groups 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 Groups commitment is to produce a balanced and
growing revenue stream.
-21-
During the quarter and six-month period ended June 30, 2006, the Group continued to implement the
Oriental Way program to deliver world-class products and services, targeting the personal and
commercial needs of Puerto Ricos mid net-worth individuals, professionals and owners of small and
mid-sized businesses. The results of these efforts included continued growth in commercial loans
and tight control over non-interest expenses.
Change of Fiscal Year
On August 30, 2005, the Groups Board of Directors approved an amendment to Section 1 of Article IX
of the Groups By-Laws to change its fiscal year to a calendar year. The Groups fiscal year was
from July 1 of each year to June 30 of the following year. The Groups transition period was from
July 1, 2005 to December 31, 2005.
Net Income
For the quarter and six-month period ended June 30, 2006, the Groups net income available to
common shareholders totaled $1.3 million and $8.2 million, respectively, compared to $9.4 million
and $24.6 million in the comparable year ago periods. Earnings per common share fully diluted was
$0.05 compared to $0.37 in the year-ago quarter and $0.33 compared to $0.96 in the year ago
six-month period. As a result of the Groups previously disclosed restatement, the year ago quarter
and six-month period included a $3.0 million and $6.3 million reduction, respectively, in non-cash
compensation expense. These reductions increased income available to common shareholders by $0.12
and $0.25 per common share fully diluted in the quarter and six-month period, respectively.
Return
on Assets and Common Equity
Return on common equity (ROE) and return on assets (ROA) for the quarter and six-month period ended
June 30, 2006 were 1.94%, 0.22%, 7.93% and 0.92%, respectively, which represent decreases of 86.0%
and 56.5% in ROE from 13.86% and 18.22% for the quarter and six-month period ended June 30, 2005,
and a decrease of 78.2% and 28.7% in ROA from 1.01% and 1.29% for the quarter and six-month period
ended June 30, 2005, mainly due to reduced net income available to common shareholders.
Net Interest Income after Provision for Loan Losses
Net interest income after provision for loan losses decreased 47.1% and 37.5% for the quarter and
six-month period ended June 30, 2006, totaling $9.8 million and $23.9 million, compared with $18.4
million and $38.2 million for the same periods in the previous year. Increases of 16.4% and 17.0%
in interest income for the quarter and six-month period ended June 30, 2006 as compared to same
periods last year was mainly due to higher loan volume, and higher average yields on both
investment securities and loans. These increases were more than offset by higher interest rates
and increased volume on borrowings. Net interest margin for the June 30, 2006 quarter and six-month
period was 0.96% and 1.16%, respectively compared to 1.89% and 1.95% for the quarter and six-month
period. Investment yields increased despite the Groups continued repositioning of its portfolio,
shifting into short-term government securities and away from long-term, mortgage-backed securities.
Interest income from commercial and consumer loans also increased on both increased volume and
yields.
Non-Interest Income
Total non-interest income was $7.5 million and $16.5 million, an increase of 16.8% and 31.4% over
the June 2005 quarter and six-month period, respectively. Financial service revenues totaled $4.1
million and $7.3 million compared to $3.2 million and $6.4 million in the year ago quarter and
six-month period, respectively, while banking service revenues totaled $2.5 million and $4.7
million versus $2.1 million and $3.9 million in the June 2005 quarter and six-month period then
ended, respectively. Investment banking revenues totaled $0.9 million and $2.6 million, versus $0.2
million and $0.3 million in the June 2005 quarter and six-month period, respectively. Mortgage
banking activities totaled $0.6 million and $1.1 million, versus $1.2 million and $2.2 million in
the June 2005 quarter and six-month period then ended, respectively. Combined (losses) gains from
net (loss) gain on sale of securities, derivatives and other totaled ($0.5 million) and $0.8
million, versus ($0.2 million) and ($0.4 million) in the June 2005 quarter and six-month period, respectively.
Improvements of both items reflect the SWAP program mark to market valuation of financial
instruments put in place last year to offset partially the effect of rising rates on interest
expense.
Non-Interest Expenses
Non-interest expenses totaled $14.8 million and $29.7 million, compared to $13.9 million and $26.0
million, in the June 2005 quarter and six-month period, respectively. The June 2006 quarter
reflected sequential declines in compensation expense (excluding non-cash compensation reduction);
advertising and business promotion expenses; professional and service fees; and other costs. Even
though these expenses declined, non-interest expenses did include higher accounting fees related to
the Groups change in its fiscal year; start-up expenses related to new and expanded branches; and
acceleration of amortization of existing leasehold improvements related to the Groups May 2006
move to new corporate offices, where most non-branch operations have been consolidated for
increased efficiencies. Compensation and employee
-22-
benefit expense for the last years quarter and six-month period includes reduction in non-cash compensation expense of $3.0 million and $6.3
million, respectively, due to the Groups previously disclosed restatement.
Income Tax Expense
The income (benefit) tax expense was ($21,000) and $110,000 for the quarter and six-month period
June 30, 2006, respectively, compared to $377,000 and ($2.3 million) for the same periods ended
June 30, 2005. The current income tax provision is lower than the provision based on the statutory
tax rate for the Group, which is 43.5%, due to the high level of tax-advantaged interest income
earned on certain investments and loans, net of the disallowance of related expenses attributable
to the exempt income. Exempt interest relates principally to interest earned on obligations of the
United States and Puerto Rico governments and certain mortgage-backed securities, including
securities held by the Groups international banking entities. The tax benefit for the quarter
ended June 30, 2005 takes into account, among other things, the expiration of certain tax
contingencies.
Groups Financial Assets
The Groups 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, 2006, total financial assets reached $7.940 billion compared to $7.555
billion at December 31, 2005, reflecting a 5.1% increase. There was 3.3% increase in assets managed
by the trust division and broker-dealer subsidiary when compared to December 31, 2005. Owned
assets, the Groups largest financial asset component, are approximately 99% owned by the Groups
banking subsidiary.
The Groups second largest financial asset component is assets managed by the trust division and
the retirement plan administration subsidiary. The Groups 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, 2006, total assets managed by the Groups
trust division and CPC amounted to $1.934 billion, compared to the $1.875 billion reported at
December 31, 2005. The other financial asset component is assets gathered by the
securities broker-dealer. The Groups securities 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, 2006, total assets
gathered by the securities broker-dealer from its customer investment accounts, increased to $1.173
billion compared to $1.132 billion as of December 31, 2005. Both financial asset components reflect
the Groups success attracting financial assets, as well as improved equity market conditions.
Interest Earning Assets
The investment portfolio amounted to $3.498 billion as of June 30, 2006, a 0.6% increase compared
to $3.477 billion as of December 31, 2005, while the loan portfolio increased 27.7% to $1.154
billion as of June 30, 2006, compared to $903.3 million as of December 31, 2005. The nominal
sequential change in investment securities reflects the Groups strategy of growing loans faster
than investment securities.
Mortgage loans totaled $897.2 million as of June 30, 2006, a 38.2% increase from $649.1
million at December 31, 2005, and 38.8% increase from
$646.4 million a year ago. Mortgage loan
production totaled $70.8 million and $134.0 million, a 9.1% and 4.6% decrease compared to the same
quarter and six-month period of the prior fiscal year, excluding purchases from third party
originators. Mortgage loans purchased amounted to $174.2 million and $181.8 million for the
quarter and six-month period ended June 30, 2006, respectively, compared to $22.2 million and $37.8
million for the June 2005 periods.
Interest Bearing Liabilities
Deposits of $1.214 billion at June 30, 2006 decreased 6.5% compared to December 31, 2005,
reflecting reduced IRA CD balances as the Groups customers transferred funds into Orientals
Diversified Growth IRA investment product, partially offset by the success of Orientals new
savings account products. Borrowings at June 30, 2006 totaled $3.246 billion, an increase of 14.6% from
December 31, 2005, primarily due to the Groups use of repurchase agreements. While the Groups
long-term strategy is to use deposits rather than borrowings to fund asset growth, from time to
time it is more cost effective for the Group to use repurchase agreements.
Stockholders Equity
Stockholders equity as of June 30, 2006, was $340.3 million, slightly lower than the $341.8
million as of December 31, 2005.
-23-
On August 30, 2005, the Board of Directors of the Group approved a program for the repurchase of up
to $12.1 million of the Groups outstanding shares of common stock, which replaced the former
program. On June 20, 2006, the Board of Directors approved an increase of $3.0 million to the
initial amount, for the repurchase of up to $15.1 million. During the quarter and six-month period
ended June 30, 2006, the Group repurchased 46,600 of its shares of common stock in the open market,
at a total cost of $582,000.
The Group continues to be well-capitalized, with ratios significantly above regulatory capital
adequacy guidelines. At June 30, 2006, Tier 1 Leverage Capital Ratio was 9.39% (more than 2.3 times
the minimum of 4.00%), Tier 1 Risk-Based Capital Ratio was 29.60% (more than 7.4 times the minimum
of 4.00%), and Total Risk-Based Capital Ratio was 30.11% (more than 3.7 times the minimum of
8.00%).
Dividends
During the quarter and six-month period ended June 30, 2006, the Group declared cash dividends of
$3.4 million and $1.2 million and $6.9 million and $2.4 million on its common and preferred stocks,
respectively, similar to the $3.5 million and $1.2 million and $6.9
million and $2.4 million declared for the same periods a year ago.
-24-
TABLE 1 QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Average rate |
|
Average balance |
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
2006 |
|
2005 |
|
in % |
|
2006 |
|
2005 |
|
in BP |
|
2006 |
|
2005 |
|
in % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A TAX
EQUIVALENT SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets |
|
$ |
56,894 |
|
|
$ |
48,876 |
|
|
|
16.4 |
% |
|
|
5.08 |
% |
|
|
4.78 |
% |
|
|
30 |
|
|
$ |
4,480,608 |
|
|
$ |
4,091,543 |
|
|
|
9.5 |
% |
Tax equivalent
adjustment |
|
|
13,051 |
|
|
|
10,523 |
|
|
|
24.0 |
% |
|
|
1.17 |
% |
|
|
1.03 |
% |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets tax
equivalent |
|
|
69,945 |
|
|
|
59,399 |
|
|
|
17.8 |
% |
|
|
6.25 |
% |
|
|
5.81 |
% |
|
|
44 |
|
|
|
4,480,608 |
|
|
|
4,091,543 |
|
|
|
9.5 |
% |
Interest-bearing
liabilities |
|
|
46,186 |
|
|
|
29,588 |
|
|
|
56.1 |
% |
|
|
4.38 |
% |
|
|
3.10 |
% |
|
|
128 |
|
|
|
4,215,139 |
|
|
|
3,814,410 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
Tax equivalent net
interest income /
spread |
|
$ |
23,759 |
|
|
$ |
29,811 |
|
|
|
-20.3 |
% |
|
|
1.87 |
% |
|
|
2.71 |
% |
|
|
(84 |
) |
|
$ |
265,469 |
|
|
$ |
277,133 |
|
|
|
-4.2 |
% |
|
|
|
|
|
|
|
|
|
|
Tax equivalent
interest rate
margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.13 |
% |
|
|
2.92 |
% |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B NORMAL SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities |
|
$ |
38,251 |
|
|
$ |
34,153 |
|
|
|
12.0 |
% |
|
|
4.44 |
% |
|
|
4.32 |
% |
|
|
12 |
|
|
$ |
3,443,554 |
|
|
$ |
3,165,901 |
|
|
|
8.8 |
% |
Investment
management fees |
|
|
(395 |
) |
|
|
(495 |
) |
|
|
-20.2 |
% |
|
|
-0.05 |
% |
|
|
-0.06 |
% |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total investment
securities |
|
|
37,856 |
|
|
|
33,658 |
|
|
|
12.5 |
% |
|
|
4.40 |
% |
|
|
4.25 |
% |
|
|
15 |
|
|
|
3,443,554 |
|
|
|
3,165,901 |
|
|
|
8.8 |
% |
Trading securities |
|
|
4 |
|
|
|
5 |
|
|
|
-20.0 |
% |
|
|
7.34 |
% |
|
|
5.99 |
% |
|
|
135 |
|
|
|
218 |
|
|
|
334 |
|
|
|
-34.7 |
% |
Money market
investments |
|
|
723 |
|
|
|
279 |
|
|
|
159.1 |
% |
|
|
4.72 |
% |
|
|
2.97 |
% |
|
|
175 |
|
|
|
61,269 |
|
|
|
37,583 |
|
|
|
63.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
38,583 |
|
|
|
33,942 |
|
|
|
13.7 |
% |
|
|
4.40 |
% |
|
|
4.24 |
% |
|
|
16 |
|
|
|
3,505,041 |
|
|
|
3,203,818 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
13,003 |
|
|
|
11,030 |
|
|
|
17.9 |
% |
|
|
7.28 |
% |
|
|
7.05 |
% |
|
|
23 |
|
|
|
714,649 |
|
|
|
625,556 |
|
|
|
14.2 |
% |
Commercial |
|
|
4,202 |
|
|
|
3,190 |
|
|
|
31.7 |
% |
|
|
7.55 |
% |
|
|
5.43 |
% |
|
|
212 |
|
|
|
222,574 |
|
|
|
235,023 |
|
|
|
-5.3 |
% |
Consumer |
|
|
1,106 |
|
|
|
714 |
|
|
|
54.9 |
% |
|
|
11.54 |
% |
|
|
10.52 |
% |
|
|
102 |
|
|
|
38,344 |
|
|
|
27,146 |
|
|
|
41.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
18,311 |
|
|
|
14,934 |
|
|
|
22.6 |
% |
|
|
7.51 |
% |
|
|
6.73 |
% |
|
|
78 |
|
|
|
975,567 |
|
|
|
887,725 |
|
|
|
9.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
56,894 |
|
|
|
48,876 |
|
|
|
16.4 |
% |
|
|
5.08 |
% |
|
|
4.78 |
% |
|
|
30 |
|
|
|
4,480,608 |
|
|
|
4,091,543 |
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
39,897 |
|
|
|
64,573 |
|
|
|
-38.2 |
% |
Now Accounts |
|
|
214 |
|
|
|
232 |
|
|
|
-7.8 |
% |
|
|
1.07 |
% |
|
|
1.05 |
% |
|
|
2 |
|
|
|
80,077 |
|
|
|
88,357 |
|
|
|
-9.4 |
% |
Savings |
|
|
1,014 |
|
|
|
236 |
|
|
|
329.7 |
% |
|
|
2.87 |
% |
|
|
1.01 |
% |
|
|
186 |
|
|
|
141,139 |
|
|
|
93,705 |
|
|
|
50.6 |
% |
Certificates of
Deposit |
|
|
9,918 |
|
|
|
8,229 |
|
|
|
20.5 |
% |
|
|
4.12 |
% |
|
|
3.41 |
% |
|
|
71 |
|
|
|
961,794 |
|
|
|
964,839 |
|
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
11,146 |
|
|
|
8,697 |
|
|
|
28.2 |
% |
|
|
3.65 |
% |
|
|
2.87 |
% |
|
|
78 |
|
|
|
1,222,907 |
|
|
|
1,211,474 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements |
|
|
32,932 |
|
|
|
16,598 |
|
|
|
98.4 |
% |
|
|
5.04 |
% |
|
|
3.01 |
% |
|
|
203 |
|
|
|
2,616,058 |
|
|
|
2,202,757 |
|
|
|
18.8 |
% |
Interest rate risk
management |
|
|
(1,930 |
) |
|
|
819 |
|
|
|
-335.7 |
% |
|
|
-0.30 |
% |
|
|
0.15 |
% |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
Financing fees |
|
|
126 |
|
|
|
166 |
|
|
|
-24.1 |
% |
|
|
0.02 |
% |
|
|
0.03 |
% |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total repurchase
agreements |
|
|
31,128 |
|
|
|
17,583 |
|
|
|
77.0 |
% |
|
|
4.76 |
% |
|
|
3.19 |
% |
|
|
157 |
|
|
|
2,616,058 |
|
|
|
2,202,757 |
|
|
|
18.8 |
% |
FHLB advances |
|
|
2,248 |
|
|
|
2,001 |
|
|
|
12.3 |
% |
|
|
3.22 |
% |
|
|
2.60 |
% |
|
|
62 |
|
|
|
279,497 |
|
|
|
308,389 |
|
|
|
-9.4 |
% |
Subordinated
capital notes |
|
|
1,344 |
|
|
|
1,166 |
|
|
|
15.3 |
% |
|
|
7.45 |
% |
|
|
6.46 |
% |
|
|
99 |
|
|
|
72,166 |
|
|
|
72,166 |
|
|
|
0.0 |
% |
Term Notes |
|
|
159 |
|
|
|
107 |
|
|
|
48.6 |
% |
|
|
4.24 |
% |
|
|
2.85 |
% |
|
|
139 |
|
|
|
15,000 |
|
|
|
15,000 |
|
|
|
0.0 |
% |
Other borrowings |
|
|
161 |
|
|
|
34 |
|
|
|
373.5 |
% |
|
|
6.77 |
% |
|
|
2.98 |
% |
|
|
379 |
|
|
|
9,511 |
|
|
|
4,624 |
|
|
|
105.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
35,040 |
|
|
|
20,891 |
|
|
|
67.7 |
% |
|
|
4.68 |
% |
|
|
3.21 |
% |
|
|
147 |
|
|
|
2,992,232 |
|
|
|
2,602,936 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
46,186 |
|
|
|
29,588 |
|
|
|
56.1 |
% |
|
|
4.38 |
% |
|
|
3.10 |
% |
|
|
128 |
|
|
|
4,215,139 |
|
|
|
3,814,410 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
Net interest income
/ spread |
|
$ |
10,708 |
|
|
$ |
19,288 |
|
|
|
-44.5 |
% |
|
|
0.70 |
% |
|
|
1.68 |
% |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.96 |
% |
|
|
1.89 |
% |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of average
interest-earning
assets over average
interest-bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,469 |
|
|
$ |
277,133 |
|
|
|
-4.2 |
% |
|
|
|
|
|
|
|
|
|
|
Average
interest-earning
assets over average
interest-bearing
liabilities ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106.30 |
% |
|
|
107.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Changes in net
interest income due to: |
|
Volume |
|
Rate |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
13,617 |
|
|
|
(8,976 |
) |
|
|
4,641 |
|
Loans |
|
$ |
1,884 |
|
|
$ |
1,493 |
|
|
$ |
3,377 |
|
|
|
|
|
|
|
15,501 |
|
|
|
(7,483 |
) |
|
|
8,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
325 |
|
|
|
2,124 |
|
|
|
2,449 |
|
Repurchase agreements |
|
|
9,187 |
|
|
|
4,358 |
|
|
|
13,545 |
|
Other borrowings |
|
|
(833 |
) |
|
|
1,437 |
|
|
|
604 |
|
|
|
|
|
|
|
8,679 |
|
|
|
7,919 |
|
|
|
16,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
6,822 |
|
|
$ |
(15,402 |
) |
|
$ |
(8,580 |
) |
|
|
|
25
TABLE 1A FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTHS RERIOD ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Average rate |
|
Average balance |
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
2006 |
|
2005 |
|
in % |
|
2006 |
|
2005 |
|
in BP |
|
2006 |
|
2005 |
|
in % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A TAX EQUIVALENT SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
$ |
112,886 |
|
|
$ |
96,448 |
|
|
|
17.0 |
% |
|
|
5.06 |
% |
|
|
4.74 |
% |
|
|
32 |
|
|
$ |
4,461,132 |
|
|
$ |
4,072,091 |
|
|
|
9.6 |
% |
Tax equivalent adjustment |
|
|
26,773 |
|
|
|
21,244 |
|
|
|
26.0 |
% |
|
|
1.20 |
% |
|
|
1.04 |
% |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Interest-earning assets tax equivalent |
|
|
139,659 |
|
|
|
117,692 |
|
|
|
18.7 |
% |
|
|
6.26 |
% |
|
|
5.78 |
% |
|
|
48 |
|
|
|
4,461,132 |
|
|
|
4,072,091 |
|
|
|
9.6 |
% |
Interest-bearing liabilities |
|
|
86,966 |
|
|
|
56,750 |
|
|
|
53.2 |
% |
|
|
4.17 |
% |
|
|
2.99 |
% |
|
|
118 |
|
|
|
4,168,052 |
|
|
|
3,795,220 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
Tax equivalent net interest income / spread |
|
$ |
52,693 |
|
|
$ |
60,942 |
|
|
|
-13.5 |
% |
|
|
2.09 |
% |
|
|
2.79 |
% |
|
|
(70 |
) |
|
$ |
293,080 |
|
|
$ |
276,871 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.36 |
% |
|
|
2.99 |
% |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B NORMAL SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
77,570 |
|
|
$ |
68,671 |
|
|
|
13.0 |
% |
|
|
4.50 |
% |
|
|
4.31 |
% |
|
|
19 |
|
|
$ |
3,447,122 |
|
|
$ |
3,189,098 |
|
|
|
8.1 |
% |
Investment management fees |
|
|
(714 |
) |
|
|
(941 |
) |
|
|
-24.1 |
% |
|
|
-0.04 |
% |
|
|
-0.06 |
% |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
76,856 |
|
|
|
67,730 |
|
|
|
13.5 |
% |
|
|
4.46 |
% |
|
|
4.25 |
% |
|
|
21 |
|
|
|
3,447,122 |
|
|
|
3,189,098 |
|
|
|
8.1 |
% |
Trading securities |
|
|
3 |
|
|
|
6 |
|
|
|
-50.0 |
% |
|
|
3.30 |
% |
|
|
3.50 |
% |
|
|
(20 |
) |
|
|
182 |
|
|
|
343 |
|
|
|
-46.9 |
% |
Money market investments |
|
|
1,463 |
|
|
|
355 |
|
|
|
312.6 |
% |
|
|
4.50 |
% |
|
|
2.23 |
% |
|
|
227 |
|
|
|
65,019 |
|
|
|
31,787 |
|
|
|
104.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
78,322 |
|
|
|
68,091 |
|
|
|
15.0 |
% |
|
|
4.46 |
% |
|
|
4.23 |
% |
|
|
23 |
|
|
|
3,512,323 |
|
|
|
3,221,228 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
24,201 |
|
|
|
21,494 |
|
|
|
12.6 |
% |
|
|
6.75 |
% |
|
|
6.63 |
% |
|
|
12 |
|
|
|
716,601 |
|
|
|
648,321 |
|
|
|
10.5 |
% |
Commercial |
|
|
8,298 |
|
|
|
5,560 |
|
|
|
49.2 |
% |
|
|
8.51 |
% |
|
|
6.30 |
% |
|
|
221 |
|
|
|
194,913 |
|
|
|
176,474 |
|
|
|
10.4 |
% |
Consumer |
|
|
2,065 |
|
|
|
1,303 |
|
|
|
58.5 |
% |
|
|
11.08 |
% |
|
|
10.00 |
% |
|
|
108 |
|
|
|
37,295 |
|
|
|
26,068 |
|
|
|
43.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
34,564 |
|
|
|
28,357 |
|
|
|
21.9 |
% |
|
|
7.29 |
% |
|
|
6.67 |
% |
|
|
62 |
|
|
|
948,809 |
|
|
|
850,863 |
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,886 |
|
|
|
96,448 |
|
|
|
17.0 |
% |
|
|
5.06 |
% |
|
|
4.74 |
% |
|
|
32 |
|
|
|
4,461,132 |
|
|
|
4,072,091 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
40,965 |
|
|
|
59,314 |
|
|
|
-30.9 |
% |
Now Accounts |
|
|
433 |
|
|
|
462 |
|
|
|
-6.4 |
% |
|
|
1.05 |
% |
|
|
1.04 |
% |
|
|
1 |
|
|
|
82,617 |
|
|
|
88,627 |
|
|
|
-6.8 |
% |
Savings |
|
|
1,271 |
|
|
|
469 |
|
|
|
171.0 |
% |
|
|
2.24 |
% |
|
|
1.00 |
% |
|
|
124 |
|
|
|
113,717 |
|
|
|
93,824 |
|
|
|
21.2 |
% |
Certificates of Deposit |
|
|
19,940 |
|
|
|
15,389 |
|
|
|
29.6 |
% |
|
|
4.01 |
% |
|
|
3.36 |
% |
|
|
65 |
|
|
|
993,618 |
|
|
|
916,577 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21,644 |
|
|
|
16,320 |
|
|
|
32.6 |
% |
|
|
3.52 |
% |
|
|
2.82 |
% |
|
|
70 |
|
|
|
1,230,917 |
|
|
|
1,158,342 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
60,487 |
|
|
|
30,890 |
|
|
|
95.8 |
% |
|
|
4.75 |
% |
|
|
2.76 |
% |
|
|
199 |
|
|
|
2,548,638 |
|
|
|
2,240,004 |
|
|
|
13.8 |
% |
Interest rate risk management |
|
|
(3,250 |
) |
|
|
2,742 |
|
|
|
-218.5 |
% |
|
|
-0.26 |
% |
|
|
0.24 |
% |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
Financing fees |
|
|
254 |
|
|
|
337 |
|
|
|
-24.6 |
% |
|
|
0.02 |
% |
|
|
0.03 |
% |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total repurchase agreements |
|
|
57,491 |
|
|
|
33,969 |
|
|
|
69.2 |
% |
|
|
4.51 |
% |
|
|
3.03 |
% |
|
|
148 |
|
|
|
2,548,638 |
|
|
|
2,240,004 |
|
|
|
13.8 |
% |
FHLB advances |
|
|
4,597 |
|
|
|
3,960 |
|
|
|
16.1 |
% |
|
|
3.15 |
% |
|
|
2.58 |
% |
|
|
57 |
|
|
|
292,213 |
|
|
|
307,383 |
|
|
|
-4.9 |
% |
Subordinated capital notes |
|
|
2,641 |
|
|
|
2,273 |
|
|
|
16.2 |
% |
|
|
7.32 |
% |
|
|
6.30 |
% |
|
|
102 |
|
|
|
72,166 |
|
|
|
72,166 |
|
|
|
0.0 |
% |
Term Notes |
|
|
316 |
|
|
|
194 |
|
|
|
62.9 |
% |
|
|
4.21 |
% |
|
|
2.59 |
% |
|
|
180 |
|
|
|
15,000 |
|
|
|
15,000 |
|
|
|
21.2 |
% |
Other borrowings |
|
|
277 |
|
|
|
34 |
|
|
|
714.7 |
% |
|
|
6.08 |
% |
|
|
2.92 |
% |
|
|
362 |
|
|
|
9,118 |
|
|
|
2,325 |
|
|
|
155.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
65,322 |
|
|
|
40,430 |
|
|
|
61.6 |
% |
|
|
4.45 |
% |
|
|
3.07 |
% |
|
|
138 |
|
|
|
2,937,135 |
|
|
|
2,636,878 |
|
|
|
11.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,966 |
|
|
|
56,750 |
|
|
|
53.2 |
% |
|
|
4.17 |
% |
|
|
2.99 |
% |
|
|
118 |
|
|
|
4,168,052 |
|
|
|
3,795,220 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income / spread |
|
$ |
25,920 |
|
|
$ |
39,698 |
|
|
|
-34.7 |
% |
|
|
0.89 |
% |
|
|
1.75 |
% |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.16 |
% |
|
|
1.95 |
% |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of average interest-earning assets over average interest-bearing liabilities |
|
$ |
293,080 |
|
|
$ |
276,871 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets over average interest-bearing liabilities ratio |
|
|
107.03 |
% |
|
|
107.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Changes in net interest income due to: |
|
Volume |
|
Rate |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
28,060 |
|
|
|
(17,829 |
) |
|
|
10,231 |
|
Loans |
|
$ |
19,398 |
|
|
$ |
(13,191 |
) |
|
$ |
6,207 |
|
|
|
|
|
|
|
|
47,458 |
|
|
|
(31,020 |
) |
|
|
16,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
3,747 |
|
|
|
1,577 |
|
|
|
5,324 |
|
Repurchase agreements |
|
|
15,125 |
|
|
|
8,397 |
|
|
|
23,522 |
|
Other borrowings |
|
|
(556 |
) |
|
|
1,926 |
|
|
|
1,370 |
|
|
|
|
|
|
|
|
18,316 |
|
|
|
11,900 |
|
|
|
30,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
29,142 |
|
|
$ |
(42,920 |
) |
|
$ |
(13,778 |
) |
|
|
|
|
-26-
Net interest income is a function of the difference between rates earned on the Groups
interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread)
and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest
rate margin). Typically, bank liabilities re-price in line with changes in short-term rates, while
many asset positions are affected by longer-term rates. The Group constantly monitors the
composition and re-pricing of its assets and liabilities to maintain its net interest income at
adequate levels.
For the quarter and six-month period ended June 30, 2006, net interest income amounted to $10.7
million and $25.9 million, respectively, a 44.5% and 34.8% decrease from $19.3 million and $39.7
million in the same period of the previous year. The decrease for the quarter reflects a 16.4%
increase in interest income, due to a $15.5 million positive volume variance and a $7.5 million
negative rate variance, more than offset by an increase of 56.1% in interest expense, caused by an
increase of $8.7 million from borrowings volume and $7.9 million due to interest rate changes. The
decrease for the six-month period reflects a 17.0% increase in interest income, due to a $47.5
million positive volume variance and a $31.0 million negative interest rate variance, offset by an
increase of 53.2% in interest expense, caused by an increase of $18.3 million from borrowings
volume and $11.9 million attributable to interest rate changes. Interest rate spread dropped 98
basis points, to 0.70% from 1.68% in the June 2005 quarter, and 86 basis points to 0.89% from 1.75%
in the six-month period ended June 2005. This decline was due to an increase of 30 and 32 basis
points, respectively, in the combined average yield of investments and loans for the quarters and
six-month periods and an increase of 128 and 118 basis points, respectively, caused by an increase
in the average cost of funds.
For the quarter and six-month period ended June 30, 2006, the average balance of total
interest-earnings assets grew 9.5% to $4.481 billion versus $4.092 billion and 9.6% to $4.461
billion compared to $4.072 billion for the same periods of the previous year. The increase in the
average balance reflects growth of 9.4% in the investment portfolio to $3.505 billion and a 9.9%in
loans, to $975.6 million for the quarter, and 9.0% in the investment portfolio to $3.512 billion,
and 11.5% in loans, to $948.8 million for the six-month period. Most of the dollar increase in
loans came from the residential mortgage loan portfolio average balance, which increased by 14.2% to $714.6
million for the quarter ended June 30, 2006 from $625.6 million for the quarter ended June 30, 2005
and 10.5% to $716.6 million for the six-month period ended June 30, 2006 from $648.3 million a year
ago.
For the quarter and six-month period ended June 30, 2006, the average yield on interest-earning
assets was 5.08%and 5.06%, respectively, compared to 4.78% and 4.74% in the comparable year ago
periods. Higher average yields were due to increases in both of the investments and loan portfolio
yields. The investment portfolio yield increased to 4.40% in the quarter ended June 30, 2006,
versus 4.24% in the corresponding year ago quarter and to 4.46% in the six-month period ended June
30, 2006, versus 4.23% in the corresponding period a year ago, due to additions of higher yield
investments. The increase of 78 basis points in the yield of the loan portfolio for the quarter
and 62 basis points for the six-month period was due to higher rates on mortgage, commercial and
consumer loans new production reflecting higher rates on variable rate loans due to the higher
interest rate environment for lending.
For the quarter and six-month period ended June 30, 2006, interest expense increased 56.1% to $46.2
million from $29.6 million for the year ago quarter and 53.2% to $87.0 million from $56.8 million
for the year ago six-month period, both resulting from higher volume and rate variances due to the
increased interest earnings asset portfolio.
For the quarter and six-month period ended June 30, 2006, the cost of deposits increased 78 basis
points to 3.65% as compared to 2.87% in the year ago quarter and 70 basis points to 3.52% as
compared to 2.82% in the year ago six-month period. The increase reflects higher average rates paid
on higher balances, specifically in savings accounts. For the quarter and six-month period ended
June 30, 2006, the cost of borrowings increased 147 basis points to 4.68% as compared to 3.21% in
the year ago quarter and 138 basis points to 4.45% as compared to 3.07% in the year ago six-month
period. The increase was mainly the result of higher average rates paid on increased volume of
repurchase agreements. Repurchase agreements increased 203 basis points, to 5.04% from 3.01% for
the quarter ended June 30, 2005 and 199 basis points to 4.75% as compared to 2.76% in the year ago
six-month period, reflecting the effect of interest rate increases by the Board of Governors of the
Federal Reserve System of 300 basis points since December 2004. The cost of repurchase agreements was
offset by a 45 basis point reduction in the Groups hedging costs for the quarter ended June 30,
2006 and 50 basis points for the six-month period, as the Groups use of interest rate swaps in a
rising interest rate environment partially offset rising borrowing costs. The cost of FHLB advances
increased 62 basis points to 3.22% versus 2.60% for the quarter ended June 30, 2005, and 57 basis
points to 3.15% as compared to 2.58% in the year ago six-month period.
-27-
TABLE 2 NON-INTEREST INCOME SUMMARY:
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended June 30, |
|
Six-Month
Period Ended June 30, |
|
|
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking
activities |
|
$ |
634 |
|
|
$ |
1,168 |
|
|
|
-45.7 |
% |
|
$ |
1,070 |
|
|
$ |
2,241 |
|
|
|
-52.3 |
% |
Commissions and
fees from broker,
insurance
activities |
|
|
4,066 |
|
|
|
3,249 |
|
|
|
25.1 |
% |
|
|
7,317 |
|
|
|
6,419 |
|
|
|
14.0 |
% |
Investment banking
revenues |
|
|
852 |
|
|
|
162 |
|
|
|
425.9 |
% |
|
|
2,561 |
|
|
|
339 |
|
|
|
655.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-banking
service revenues |
|
|
5,552 |
|
|
|
4,579 |
|
|
|
21.2 |
% |
|
|
10,948 |
|
|
|
8,999 |
|
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on deposit
accounts |
|
|
1,315 |
|
|
|
1,233 |
|
|
|
6.7 |
% |
|
|
2,734 |
|
|
|
2,392 |
|
|
|
14.3 |
% |
Bank service
charges and
commissions |
|
|
656 |
|
|
|
367 |
|
|
|
78.7 |
% |
|
|
1,275 |
|
|
|
929 |
|
|
|
37.2 |
% |
Other operating
revenues |
|
|
540 |
|
|
|
464 |
|
|
|
16.2 |
% |
|
|
678 |
|
|
|
572 |
|
|
|
18.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service
revenues |
|
|
2,511 |
|
|
|
2,064 |
|
|
|
21.6 |
% |
|
|
4,687 |
|
|
|
3,893 |
|
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities net gain |
|
|
|
|
|
|
1,420 |
|
|
|
-100.0 |
% |
|
|
19 |
|
|
|
4,056 |
|
|
|
-99.5 |
% |
Trading net (loss)
gain |
|
|
(8 |
) |
|
|
(42 |
) |
|
|
-81.0 |
% |
|
|
21 |
|
|
|
(53 |
) |
|
|
-139.6 |
% |
Derivatives net
(loss) gain |
|
|
(23 |
) |
|
|
(1,866 |
) |
|
|
-98.8 |
% |
|
|
859 |
|
|
|
(4,670 |
) |
|
|
-118.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities,
derivatives and
trading activities |
|
|
(31 |
) |
|
|
(488 |
) |
|
|
-93.6 |
% |
|
|
899 |
|
|
|
(667 |
) |
|
|
234.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(loss) |
|
|
(511 |
) |
|
|
282 |
|
|
|
-281.2 |
% |
|
|
(60 |
) |
|
|
311 |
|
|
|
-119.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-interest
income |
|
|
(511 |
) |
|
|
282 |
|
|
|
-281.2 |
% |
|
|
(60 |
) |
|
|
311 |
|
|
|
-119.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
income |
|
$ |
7,521 |
|
|
$ |
6,437 |
|
|
|
16.8 |
% |
|
$ |
16,474 |
|
|
$ |
12,536 |
|
|
|
31.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income, the second largest source of earnings, is affected by the amount of securities
and trading transactions, the level of trust assets under management, transactions generated by the
gathering of financial assets by the securities broker-dealer subsidiary, the level of investment
and mortgage banking activities, and the fees generated from loans, deposit accounts, and
insurance.
Non-interest income totaled $7.5 million and $16.5 million in the quarter and six-months ended June
30, 2006, respectively a 16.8% and 31.4% increase when compared to $6.4 million and $12.5 million
in the same periods of the previous year. Performance in the quarter and six-months ended June 30,
2006, reflects increases in commissions and fees from brokerage investment banking, and insurance
activities reflecting increased activities from the financial services area, as well as higher
banking service revenues. This was partially offset by less mortgage banking activities, primarily
reflecting the Groups strategy, initiated during the quarter ended June 30, 2005, to retain more
mortgages for their recurring interest income rather than selling the loans for a gain.
Non-banking service revenues, generated from trust, mortgage banking, investment banking,
brokerage, and insurance activities, is one of the principal components of non-interest income.
For the quarter and six-month period ended June 30, 2006, these revenues increased 21.2% and 21.7%
to $5.6 million and $10.9 million, respectively, from $4.6 million and $9.0 million for the year
ago periods. Mortgage banking activities decreased 45.7%, to $634,000 from $1.2 million in the
year ago quarter and 52.3%, to $1.1 million from $2.2 million in the year ago six-month period.
Commissions and fees from brokerage and insurance activities increased 25.1% to $4.1 million from
$3.2 million in the year ago quarter and 14.0%, to $7.3 million from $6.4 million in the year ago
six-month period. Growth reflected the general improvement in the equity markets and increased
underwriting activities. Investment banking revenues increased to $852,000 from $162,000 the year
ago quarter and to $2.6 million from $339,000 the year ago six-month period.
Banking service revenues, another major component of non-interest income, consists primarily of
fees generated by deposit accounts, electronic banking services, and bank service commissions. For
the quarter and six-month period ended June 30, 2006, these revenues increased 21.6% to $2.5
million compared to the year ago quarter and 20.4% to $4.7 million the year ago six-month period,
primarily due to increase in fee income on deposit accounts, mainly overdraft fees, and the ongoing
success of the Groups product and service marketing programs. Fees on deposit accounts increased
6.7% to $1.3 million from $1.2 million in the year ago quarter and 14.3% to $2.7 million from $2.4
million in the year ago six-month period. Bank service charges and commissions increased 78.7% to
$656,000 from $367,000 in the year ago quarter and 37.2% to $1.3 million from $929,000 in the year
ago reflecting higher transactional volume in the Banks debit and credit cards.
For the quarter ended June 30, 2006, (losses) gains from securities, derivatives and trading
activities was ($31,000) compared to ($488,000) for the year ago quarter and $899,000 compared to
($667,000) for the year ago six-month period. The improvement for both periods was primarily due to
higher mark to market valuation of financial instruments used to partially offset the effect of
rising rates on interest expense.
-28-
TABLE 3 NON-INTEREST EXPENSES SUMMARY
FOR THE QUARTER AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
employee benefits |
|
$ |
5,627 |
|
|
$ |
4,402 |
|
|
|
27.8 |
% |
|
$ |
11,801 |
|
|
$ |
7,697 |
|
|
|
53.3 |
% |
Occupancy and
equipment |
|
|
2,793 |
|
|
|
3,066 |
|
|
|
-8.9 |
% |
|
|
5,682 |
|
|
|
5,532 |
|
|
|
2.7 |
% |
Advertising and
business promotion |
|
|
1,300 |
|
|
|
1,420 |
|
|
|
-8.5 |
% |
|
|
2,366 |
|
|
|
2,907 |
|
|
|
-18.6 |
% |
Professional and
service fees |
|
|
1,601 |
|
|
|
1,777 |
|
|
|
-9.9 |
% |
|
|
3,225 |
|
|
|
3,614 |
|
|
|
-10.8 |
% |
Communications |
|
|
395 |
|
|
|
410 |
|
|
|
-3.7 |
% |
|
|
843 |
|
|
|
786 |
|
|
|
7.3 |
% |
Loan servicing
expenses |
|
|
509 |
|
|
|
430 |
|
|
|
18.4 |
% |
|
|
964 |
|
|
|
831 |
|
|
|
16.0 |
% |
Taxes, other than
payroll and income
taxes |
|
|
573 |
|
|
|
471 |
|
|
|
21.7 |
% |
|
|
1,173 |
|
|
|
934 |
|
|
|
25.6 |
% |
Electronic banking
charges |
|
|
494 |
|
|
|
543 |
|
|
|
-9.0 |
% |
|
|
962 |
|
|
|
1,060 |
|
|
|
-9.2 |
% |
Printing, postage,
stationery and
supplies |
|
|
359 |
|
|
|
207 |
|
|
|
73.4 |
% |
|
|
544 |
|
|
|
416 |
|
|
|
30.8 |
% |
Insurance,
including deposits
insurance |
|
|
219 |
|
|
|
188 |
|
|
|
16.5 |
% |
|
|
432 |
|
|
|
375 |
|
|
|
15.2 |
% |
Other operating
expenses |
|
|
914 |
|
|
|
979 |
|
|
|
-6.6 |
% |
|
|
1,675 |
|
|
|
1,888 |
|
|
|
-11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest
expenses |
|
$ |
14,784 |
|
|
$ |
13,893 |
|
|
|
6.4 |
% |
|
$ |
29,667 |
|
|
$ |
26,040 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relevant ratios and
data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits to
non-interest
expenses |
|
|
38.1 |
% |
|
|
31.7 |
% |
|
|
|
|
|
|
39.8 |
% |
|
|
29.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation to
total assets |
|
|
0.47 |
% |
|
|
0.41 |
% |
|
|
|
|
|
|
0.49 |
% |
|
|
0.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
compensation per
employee
(annualized) |
|
$ |
42.4 |
|
|
$ |
33.8 |
|
|
|
|
|
|
$ |
44.6 |
|
|
$ |
28.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of
employees |
|
|
531 |
|
|
|
521 |
|
|
|
|
|
|
|
529 |
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank assets per
employee |
|
$ |
9,101 |
|
|
$ |
8,151 |
|
|
|
|
|
|
$ |
9,177 |
|
|
$ |
7,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total work force: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
537 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses for the quarter and six-month period ended June 30, 2006, were $14.8 million
and $29.7 million, respectively, compared to $13.9 million and $26.0 million in the year ago
periods, with an efficiency ratio of 78.76% compared to 53.58% in the quarter ended June 30, 2005
and 71.39% compared to 49.52% for the six-month period ended June 30, 2005. The efficiency ratio
measures how much of a companys revenue is used to pay operating expenses. The Group computes its
efficiency ratio by dividing operating expenses by the sum of its net interest income and recurring
non-interest income, but excluding gains on sale of investments securities, derivatives gains or
losses and other income.
The Group has been successful in limiting expense growth to those areas that directly contribute to
increase efficiency, service quality, and profitability. Non-interest
expenses increased 6.4% and
13.9%, respectively, compared to the year ago quarter and six months
ended June 30, 2005, which included a
non-cash compensation benefit of $3.0 million and $6.3 million, respectively, as a result of the
Groups previously disclosed restatement. Excluding the year ago non-cash compensation benefit, non
interest expense declined 12.3% and 8.2%, respectively, from the comparable year ago periods.
Compensation and employee benefits, the largest non-interest expense category accounted for 38.1%
and 39.8% of the total non-interest expense, for the quarter and six-month period ended June 30,
2006, respectively. Total compensation and employee benefits amounted to $5.6 million and $11.8
million, respectively, for the quarter and six-month period ended June 30, 2006, compared to $4.4
million and $11.8 million, in the comparable year ago periods, which benefited from the previously
mentioned non-cash variable accounting reduction.
Occupancy and equipment expenses amounted to $2.8 million and $5.7 million, decreasing 8.9% from
$3.1 million for the quarter ended June 30, 2005 and increasing 2.7% from $5.5 million for the
six-month period ended June 30, 2005. The variation is mainly due to the acceleration of leasehold
improvements amortization expense due to the relocation in May 2006 of the Groups main offices to
a new financial center building, where most non-branch operations have been consolidated for
increased efficiencies.
Taxes,
other than payroll and income taxes, increased 21.6% to $573,000 from
$471,000 for the last
quarter and 25.6% to $1.2 million from $934,000 for the six-month period a year ago, mainly due to
the increase in revenues and income subject to volume of business tax.
The total decrease in advertising and business promotion, professional and service fees, and
electronic banking charges was principally due to effective cost controls.
-29-
TABLE 4 ALLOWANCE FOR LOAN LOSSES SUMMARY
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Change in |
|
|
Six-Month Period Ended June 30, |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
7,160 |
|
|
$ |
6,980 |
|
|
|
2.6 |
% |
|
$ |
6,630 |
|
|
$ |
7,565 |
|
|
|
-12.4 |
% |
Provision for loan
losses |
|
|
947 |
|
|
|
850 |
|
|
|
11.4 |
% |
|
|
2,048 |
|
|
|
1,510 |
|
|
|
35.6 |
% |
Net credit losses
see Table 5 |
|
|
(606 |
) |
|
|
(1,335 |
) |
|
|
-54.6 |
% |
|
|
(1,177 |
) |
|
|
(2,580 |
) |
|
|
-54.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
7,501 |
|
|
$ |
6,495 |
|
|
|
15.5 |
% |
|
$ |
7,501 |
|
|
$ |
6,495 |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Data and
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding gross
loans at June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,161,439 |
|
|
$ |
910,099 |
|
|
|
27.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries to
charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.4 |
% |
|
|
9.9 |
% |
|
|
85.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance coverage
ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.65 |
% |
|
|
0.71 |
% |
|
|
-8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.55 |
% |
|
|
21.05 |
% |
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage
non-performing
loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213.52 |
% |
|
|
139.02 |
% |
|
|
53.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 5 NET CREDIT LOSSES STATISTICS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Change in |
|
|
Six-Month Period Ended June 30, |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
$ |
(178 |
) |
|
$ |
(911 |
) |
|
|
-80.5 |
% |
|
$ |
(377 |
) |
|
$ |
(1,663 |
) |
|
|
-77.3 |
% |
Recoveries |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178 |
) |
|
|
(911 |
) |
|
|
-80.5 |
% |
|
|
(377 |
) |
|
|
(1,663 |
) |
|
|
-77.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(196 |
) |
|
|
(170 |
) |
|
|
15.3 |
% |
|
|
(220 |
) |
|
|
(485 |
) |
|
|
-54.6 |
% |
Recoveries |
|
|
76 |
|
|
|
11 |
|
|
|
590.9 |
% |
|
|
83 |
|
|
|
14 |
|
|
|
492.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
(159 |
) |
|
|
-24.5 |
% |
|
|
(137 |
) |
|
|
(471 |
) |
|
|
-70.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(389 |
) |
|
|
(378 |
) |
|
|
2.9 |
% |
|
|
(845 |
) |
|
|
(715 |
) |
|
|
18.2 |
% |
Recoveries |
|
|
81 |
|
|
|
113 |
|
|
|
-28.3 |
% |
|
|
182 |
|
|
|
269 |
|
|
|
-32.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308 |
) |
|
|
(265 |
) |
|
|
16.2 |
% |
|
|
(663 |
) |
|
|
(446 |
) |
|
|
48.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(763 |
) |
|
|
(1,459 |
) |
|
|
-47.7 |
% |
|
|
(1,442 |
) |
|
|
(2,863 |
) |
|
|
-49.6 |
% |
Total recoveries |
|
|
157 |
|
|
|
124 |
|
|
|
26.6 |
% |
|
|
265 |
|
|
|
283 |
|
|
|
-6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(606 |
) |
|
$ |
(1,335 |
) |
|
|
-54.6 |
% |
|
$ |
(1,177 |
) |
|
$ |
(2,580 |
) |
|
|
-54.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit losses
to average
outstanding
(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
0.10 |
% |
|
|
0.58 |
% |
|
|
|
|
|
|
0.11 |
% |
|
|
0.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
0.22 |
% |
|
|
0.27 |
% |
|
|
|
|
|
|
0.14 |
% |
|
|
0.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
3.21 |
% |
|
|
3.90 |
% |
|
|
|
|
|
|
3.56 |
% |
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
0.25 |
% |
|
|
0.60 |
% |
|
|
|
|
|
|
0.25 |
% |
|
|
0.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
714,649 |
|
|
$ |
625,556 |
|
|
|
14.2 |
% |
|
$ |
716,601 |
|
|
$ |
648,321 |
|
|
|
10.5 |
% |
Commercial |
|
|
222,574 |
|
|
|
235,023 |
|
|
|
-5.3 |
% |
|
|
194,913 |
|
|
|
176,474 |
|
|
|
10.4 |
% |
Consumer |
|
|
38,344 |
|
|
|
27,146 |
|
|
|
41.3 |
% |
|
|
37,295 |
|
|
|
26,068 |
|
|
|
43.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
975,567 |
|
|
$ |
887,725 |
|
|
|
9.9 |
% |
|
$ |
948,809 |
|
|
$ |
850,863 |
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-30-
TABLE 6 ALLOWANCE FOR LOSSES BREAKDOWN
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2005 |
|
|
Allowance for loan losses breakdown: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
3,463 |
|
|
$ |
3,185 |
|
|
|
8.7 |
% |
|
$ |
3,167 |
|
Commercial |
|
|
1,721 |
|
|
|
1,723 |
|
|
|
-0.1 |
% |
|
|
1,714 |
|
Consumer |
|
|
2,088 |
|
|
|
1,417 |
|
|
|
47.4 |
% |
|
|
1,335 |
|
Unallocated allowance |
|
|
229 |
|
|
|
305 |
|
|
|
-24.9 |
% |
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,501 |
|
|
$ |
6,630 |
|
|
|
13.1 |
% |
|
$ |
6,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
46.2 |
% |
|
|
48.0 |
% |
|
|
|
|
|
|
48.7 |
% |
Commercial |
|
|
22.9 |
% |
|
|
26.0 |
% |
|
|
|
|
|
|
26.4 |
% |
Consumer |
|
|
27.8 |
% |
|
|
21.4 |
% |
|
|
|
|
|
|
20.6 |
% |
Unallocated allowance |
|
|
3.1 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for loan losses for the quarter and six-month period ended June 30, 2006, totaled
$947,000, an 11.4% increase from the $850,000 reported for the same quarter of the previous year,
and $2.0 million, an 35.6% increase from the $1.5 million reported for the same six-month period of
the previous year. Based on an analysis of the credit quality and composition of its loan
portfolio, the Group determined that the provision for the first six months of the current year
was adequate in order to maintain the allowance for loan losses at an appropriate level.
Net credit losses for the quarter and six-month period decreased 54.6%, from $1.3 million in the
quarter ended June 30, 2005, to $606,000 in the quarter ended June 30, 2006 and 54.4%, from $2.6
million in the six-month period ended June 30, 2005, to $1.2 million in the six-month period ended
June 30, 2006. The decreases were primarily due to reductions in net credit losses for mortgage of
$729,000 for the quarter and $1.4 million for the six-month period, respectively, when compared to
the same periods in the previous year. For the quarter and six-month period of the current year,
the net credit losses average ratio was 0.25% for both periods, compared to 0.60% and 0.61%,
respectively reported for the same periods of the prior fiscal year. Non-performing loans of $29.4
million as of June 30, 2006 were 4.8% lower than the $30.9 million as of June 30, 2005, and 3.3%
higher than the $28.4 million reported as of December 31, 2005 (Table 9).
At June 30, 2006, the Groups allowance for loan losses amounted to $7.5 million (0.65% of total
loans) compared to $6.6 million (0.73% of total loans) reported at December 31, 2005. Consumer and
mortgage loan allowances increased by 47.4% and 8.7%, or $671,000 and $278,000, respectively, when
compared with balances recorded at December 31, 2005. Commercial loans allowance decreased 0.1% or
$2,000, when compared to December 31, 2005. Unallocated allowance decreased 25.0%, or $76,000, when
compared to December 31, 2005.
The Group maintains an allowance for loan losses at a level that management considers adequate to
provide for potential losses based upon an evaluation of known and inherent risks. The Groups
allowance for loan losses policy provides for a detailed quarterly analysis of possible losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectibility of the loans in light of historical loss
experience, the nature and volume of the loan portfolio, adverse situations that may affect the
borrowers ability to repay, the estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
The Group uses a methodology that follows a loan credit risk rating process that involves dividing
loans into risk categories. The following are the credit risk categories used:
1. |
|
Pass loans considered highly collectible due to their repayment history or current
status. |
|
2. |
|
Special Mention loans with potential weaknesses that deserve managements close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects of the loan. |
|
3. |
|
Substandard loans inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. They are characterized by the
distinct possibility that the institution will sustain some loss if the deficiencies are not
corrected. |
-31-
4. |
|
Doubtful loans that have all the weaknesses inherent in substandard, with the added
characteristic that collection or liquidation in full is highly questionable and improbable. |
|
5. |
|
Loss loans considered uncollectible and of such little value that their continuance
as bankable assets is not warranted. |
Larger commercial loans that exhibit potential or observed credit weaknesses are subject to
individual review and grading. Where appropriate, allowances are allocated to individual loans
based on managements estimate of the borrowers ability to repay the loan given the availability
of collateral, other sources of cash flow and legal options available to the Group.
Included in the review of individual loans are those that are impaired. A loan is considered
impaired when, based on current information and events, it is probable that the Group will be
unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loans effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of the collateral, if the
loan is collateral dependent.
The Group evaluates all loans, some individually and others as homogeneous groups, for purposes of
determining impairment. The portfolios of mortgages and consumer loans are considered homogeneous
and are evaluated collectively for impairment. For the commercial loans portfolio, all loans over
$250,000 are evaluated for impairment. At June 30, 2006, the total investment in impaired loans
was $1.8 million, a 50% reduction from the $3.6 million at
December 31, 2005, mainly due to certain commercial loans
collected during the quarter ended June 30, 2006. Impaired loans are measured based on the fair
value of collateral. The Group determined that no specific impairment allowance was required for
such loans.
The Group, using an aged-based rating system, applies an overall allowance percentage to each loan
portfolio category based on historical credit losses adjusted for current conditions and trends.
This delinquency-based calculation is the starting point for managements determination of the
required level of the allowance for loan losses. Other data considered in this determination
includes:
|
1. |
|
Overall historical loss trends; and |
|
2. |
|
Other information including underwriting standards, economic trends and unusual
events |
Loan loss ratios and credit risk categories are updated quarterly and are applied in the context of
GAAP and the Joint Interagency Guidance on the importance of depository institutions having
prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range
of estimated losses. While management uses available information in estimating possible loan
losses, future changes to the allowance may be necessary, based on factors beyond the Groups
control, such as factors affecting general economic conditions.
An unallocated allowance is established recognizing the estimation risk associated with the
aged-based rating system and with the specific allowances. It is based upon managements evaluation
of various conditions, the effects of which are not directly measured in determining the aged-based
rating system and the specific allowances. These conditions include then-existing general economic
and business conditions affecting our key lending areas; credit quality trends, including trends in
non-performing loans expected to result from existing conditions, collateral values, loan volumes
and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments
of the portfolio, regulatory examination results, and findings by the Groups management. The
evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio segments.
-32-
FINANCIAL CONDITION
TABLE 7 ASSETS SUMMARY AND COMPOSITION
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
1,993,034 |
|
|
$ |
1,961,285 |
|
|
|
1.6 |
% |
|
$ |
1,959,760 |
|
U.S. Government and agency obligations |
|
|
1,258,975 |
|
|
|
1,251,058 |
|
|
|
0.6 |
% |
|
|
1,029,980 |
|
P.R. Government and agency obligations |
|
|
82,474 |
|
|
|
90,333 |
|
|
|
-8.7 |
% |
|
|
108,968 |
|
Other investment securities |
|
|
109,348 |
|
|
|
90,609 |
|
|
|
20.7 |
% |
|
|
66,023 |
|
Short-term investments |
|
|
35,722 |
|
|
|
63,480 |
|
|
|
-43.7 |
% |
|
|
39,791 |
|
FHLB stock |
|
|
18,269 |
|
|
|
20,002 |
|
|
|
-8.7 |
% |
|
|
27,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,497,822 |
|
|
|
3,476,767 |
|
|
|
0.6 |
% |
|
|
3,231,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
884,671 |
|
|
|
637,318 |
|
|
|
38.8 |
% |
|
|
735,971 |
|
Commercial, mainly secured by real estate |
|
|
227,744 |
|
|
|
227,846 |
|
|
|
0.0 |
% |
|
|
129,670 |
|
Consumer |
|
|
39,460 |
|
|
|
35,828 |
|
|
|
10.1 |
% |
|
|
30,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
1,151,875 |
|
|
|
900,992 |
|
|
|
27.8 |
% |
|
|
895,923 |
|
Allowance for loan losses |
|
|
(7,501 |
) |
|
|
(6,630 |
) |
|
|
13.1 |
% |
|
|
(6,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net |
|
|
1,144,374 |
|
|
|
894,362 |
|
|
|
28.0 |
% |
|
|
889,428 |
|
Mortgage loans held for sale |
|
|
9,564 |
|
|
|
8,946 |
|
|
|
6.9 |
% |
|
|
17,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net |
|
|
1,153,938 |
|
|
|
903,308 |
|
|
|
27.7 |
% |
|
|
907,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold but not yet delivered |
|
|
710 |
|
|
|
44,009 |
|
|
|
-98.4 |
% |
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities and loans |
|
|
4,652,470 |
|
|
|
4,424,084 |
|
|
|
5.2 |
% |
|
|
4,140,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
35,237 |
|
|
|
13,789 |
|
|
|
155.5 |
% |
|
|
14,892 |
|
Accrued interest receivable |
|
|
31,313 |
|
|
|
29,067 |
|
|
|
7.7 |
% |
|
|
23,735 |
|
Premises and equipment, net |
|
|
17,358 |
|
|
|
14,828 |
|
|
|
17.1 |
% |
|
|
15,269 |
|
Deferred tax asset, net |
|
|
14,861 |
|
|
|
12,222 |
|
|
|
21.6 |
% |
|
|
6,191 |
|
Foreclosed real estate, net |
|
|
4,379 |
|
|
|
4,802 |
|
|
|
-8.8 |
% |
|
|
4,186 |
|
Other assets |
|
|
77,044 |
|
|
|
48,157 |
|
|
|
60.0 |
% |
|
|
46,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
180,192 |
|
|
|
122,865 |
|
|
|
46.7 |
% |
|
|
110,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,832,662 |
|
|
$ |
4,546,949 |
|
|
|
6.3 |
% |
|
$ |
4,250,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
56.9 |
% |
|
|
56.4 |
% |
|
|
|
|
|
|
60.6 |
% |
U.S. Government and agency obligations |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
31.9 |
% |
P.R. Government and agency obligations |
|
|
2.4 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
3.4 |
% |
FHLB stock, short term investments and debt securities |
|
|
4.7 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
77.0 |
% |
|
|
71.0 |
% |
|
|
|
|
|
|
82.5 |
% |
Commercial, mainly secured by real estate |
|
|
19.6 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
14.2 |
% |
Consumer |
|
|
3.4 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the Groups total assets amounted to $4.833 billion, an increase of 6.3%, when
compared to $4.547 billion at December 31, 2005. At June 30, 2006, interest-earning assets were
$4.652 billion, a 5.2% increase compared to $4.424 billion at December 31, 2005.
Investments are the Groups largest interest-earning assets component. Investments principally
consist of money market instruments, U.S. government bonds, mortgage-backed securities,
collateralized mortgage obligations, and Puerto Rico government bonds. At June 30, 2006, the
investment portfolio increased 0.6% to $3.498 billion, from $3.477 billion as of December 31, 2005.
The increase reflects additional mortgage-backed securities investments. The Group maintains its
strategy in a rising interest rate environment of investing in fixed and variable rate, short-term
and medium-term government securities, and the sale of long-term mortgage-backed securities.
-33-
At June 30, 2006, the Groups loan portfolio, the second largest category of the Groups
interest-earning assets, increased by 27.7% to $1.154 billion when compared to $903.3 million at
December 31, 2005. This was principally due to increased production and purchases of mortgage and
commercial loans. Mortgage and consumer loans grew by 38.8% and 10.1%, respectively, to $884.7
million and $39.5 million, when compared to $637.3 million and $35.8 million at December 31, 2005.
Such increases reflect the Groups strategy to expand its loan portfolios. During the quarter and
six-month period ended June 30, 2006, total loan production amounted to $262.2 million and $354.9,
respectively, an increase of 118.0% and 26.7% over the year ago periods. During the quarter and
six-month period ended June 30, 2006, the Group purchased $174.2 million and $181.8 million,
respectively in real estate mortgage loans. During the six-month ended June 30, 2005, the Group
granted $46.8 million in a commercial real estate loan backed by real estate mortgages.
TABLE 8 NON-PERFORMING ASSETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- Accruing Loans |
|
$ |
15,096 |
|
|
$ |
18,986 |
|
|
|
-20.5 |
% |
|
$ |
21,859 |
|
Accruing Loans |
|
|
14,264 |
|
|
|
9,447 |
|
|
|
60.0 |
% |
|
|
8,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-performing loans |
|
|
29,360 |
|
|
|
28,433 |
|
|
|
3.3 |
% |
|
|
30,856 |
|
Foreclosed real estate |
|
|
4,379 |
|
|
|
4,802 |
|
|
|
-8.8 |
% |
|
|
4,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,739 |
|
|
$ |
33,235 |
|
|
|
1.5 |
% |
|
$ |
35,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets |
|
|
0.70 |
% |
|
|
0.73 |
% |
|
|
|
|
|
|
0.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 9 NON-PERFORMING LOANS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
25,847 |
|
|
$ |
23,535 |
|
|
|
9.8 |
% |
|
$ |
26,184 |
|
Commercial, mainly secured by real estate |
|
|
2,930 |
|
|
|
4,600 |
|
|
|
-36.3 |
% |
|
|
4,549 |
|
Consumer |
|
|
583 |
|
|
|
298 |
|
|
|
95.6 |
% |
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,360 |
|
|
$ |
28,433 |
|
|
|
3.3 |
% |
|
$ |
30,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
88.0 |
% |
|
|
82.8 |
% |
|
|
|
|
|
|
84.9 |
% |
Commercial, mainly secured by real estate |
|
|
10.0 |
% |
|
|
16.2 |
% |
|
|
|
|
|
|
14.7 |
% |
Consumer |
|
|
2.0 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
2.53 |
% |
|
|
3.12 |
% |
|
|
-18.9 |
% |
|
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
0.61 |
% |
|
|
0.63 |
% |
|
|
-3.2 |
% |
|
|
0.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
|
8.63 |
% |
|
|
8.32 |
% |
|
|
3.7 |
% |
|
|
9.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, the Groups non-performing assets totaled $33.7 million (0.70% of total assets)
versus $33.2 million (0.73% of total assets) at December 31, 2005. Foreclosed real estate
properties decreased 8.8% to $4.4 million, when compared to $4.8 million reported as of December
31, 2005.
Non-performing consumer loans increased to $583,000 as of June 30, 2006, from $298,000 as of
December 31, 2005, mainly due to the higher charge-offs due to current economical conditions.
Non-performing mortgage loans increased 9.8% to $25.8 million as of June 30, 2006, when compared to
December 31, 2005 non-performing level of $23.5 million, and non-performing commercial loans
decreased by 36.3% to $2.9 million as of June 30, 2006 compared to $4.6 million at December 31,
2005.
-34-
At June 30, 2006, the allowance for loan losses to non-performing loans coverage ratio was
25.55%. Detailed information concerning each of the items that comprise non-performing assets
follows:
|
|
Mortgage loans are placed on a non-accrual
basis when they become 365 days or more past due and are
written-down, if necessary, based on the specific
evaluation of the collateral underlying the loan. At June
30, 2006, the Groups non-performing mortgage loans
totaled $25.8 million (88.0% of the Groups
non-performing loans), a 9.8% increase from the $23.5
million (82.8% of the Groups non-performing loans)
reported at December 31, 2005. Non-performing loans in
this category are primarily residential mortgage loans.
Based on the value of the underlying collateral, the
loan-to-value ratios and credit loss experience,
management considers that no significant losses will be
incurred on this portfolio. |
|
|
|
Commercial loans are placed on non-accrual status when
they become 90 days or more past due and are
written-down, if necessary, based on the specific
evaluation of the underlying collateral, if any. At June
30, 2006, the Groups non-performing commercial loans
amounted to $2.9 million (10.0% of the Groups
non-performing loans), a 36.3% decrease from $4.6 million
reported at December 31, 2005 (16.2% of the Groups
non-performing loans). Most of this portfolio is
collateralized by real estate and no significant losses
are expected. |
|
|
|
Consumer loans are placed on non-accrual status when they
become 90 days past due and written-off when payments are
delinquent 120 days in personal loans and 180 days in
credit cards and personal lines of credit. At June 30,
2006, the Groups non-performing consumer loans amounted
to $583,000 (2.0% of the Groups total non-performing
loans), which increased from the $298,000 reported at
December 31, 2005 (1% of total non-performing loans). |
|
|
|
Foreclosed real estate is initially recorded at
the lower of the related loan balance or fair value at
the date of foreclosure. Any excess of the loan balance
over the fair market value of the property is charged
against the allowance for loan losses. Subsequently, any
excess of the carrying value over the estimated fair
market value less disposition cost is charged to
operations. |
At June 30, 2006, the Groups total liabilities were $4.492 billion, 6.8% higher than the $4.205
billion reported at December 31, 2005. Deposits and borrowings, the Groups funding sources,
amounted to $4.460 billion at June 30, 2006, an increase of 8.0% when compared to $4.131 billion
reported at December 31, 2005. At June 30, 2006, borrowings represented 73% of interest-bearing
liabilities and deposits represented 27%, versus 69% and 31%, respectively, at December 31, 2005.
Borrowings
is the Groups largest interest-bearing liability component. It
consists mainly of
diversified funding sources through the use of repurchase agreements, FHLB advances, subordinated
capital notes, term notes, and lines of credit. At June 30, 2006, borrowings amounted to $3.246
billion, 14.6% greater than the $2.833 billion at
December 31, 2005, mainly due to an increase of 17.6% in repurchase agreements, reflecting the funding needed to finance the Groups
investment and loan portfolios.
The FHLB system functions as a source of credit to financial institutions that are members of a
regional Federal Home Loan Bank. As a member of the FHLB, the Group can obtain advances from the
FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Groups mortgages
and investment securities. FHLB advances totaled $285.5 million at June 30, 2006, and $313.3
million at December 31, 2005. The Group has the capacity to expand FHLB funding up to a maximum of
$288.6 million based on the current $18.3 million capital contribution by the Group to the FHLB.
At June 30, 2006, deposits, the second largest category of the Groups interest-bearing
liabilities, reached $1.214 billion, down 6.5%, compared to the $1.299 billion reported as of
December 31, 2005. Deposits reflected a quarterly decrease of 15.5% in certificates of deposit, to
$896.6 million primarily due to a decrease in brokered deposits, partially offset by an increase in
savings accounts of 107.0%, to $171.0 million as of June 30, 2006 from $82.6 million as of December
31, 2005.
-35-
TABLE 10 LIABILITIES SUMMARY AND COMPOSITION
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Variance % |
|
|
June 30, 2005 |
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
$ |
62,266 |
|
|
$ |
61,473 |
|
|
|
1.3 |
% |
|
$ |
62,205 |
|
Now accounts |
|
|
78,970 |
|
|
|
85,119 |
|
|
|
-7.2 |
% |
|
|
89,930 |
|
Savings accounts |
|
|
171,030 |
|
|
|
82,640 |
|
|
|
107.0 |
% |
|
|
93,920 |
|
Certificates of deposit |
|
|
896,571 |
|
|
|
1,061,401 |
|
|
|
-15.5 |
% |
|
|
1,002,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,208,837 |
|
|
|
1,290,633 |
|
|
|
-6.3 |
% |
|
|
1,248,963 |
|
Accrued interest payable |
|
|
5,010 |
|
|
|
7,935 |
|
|
|
-36.9 |
% |
|
|
3,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213,847 |
|
|
|
1,298,568 |
|
|
|
-6.5 |
% |
|
|
1,252,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
2,856,361 |
|
|
|
2,427,880 |
|
|
|
17.6 |
% |
|
|
2,191,756 |
|
Advances from FHLB |
|
|
285,500 |
|
|
|
313,300 |
|
|
|
-8.9 |
% |
|
|
300,000 |
|
Subordinated capital notes |
|
|
72,166 |
|
|
|
72,166 |
|
|
|
0.0 |
% |
|
|
72,166 |
|
Term notes |
|
|
15,000 |
|
|
|
15,000 |
|
|
|
0.0 |
% |
|
|
15,000 |
|
Federal
funds purchased and other short term borrowings |
|
|
17,098 |
|
|
|
4,455 |
|
|
|
283.8 |
% |
|
|
12,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,246,125 |
|
|
|
2,832,801 |
|
|
|
14.6 |
% |
|
|
2,591,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowings |
|
|
4,459,972 |
|
|
|
4,131,369 |
|
|
|
8.0 |
% |
|
|
3,844,129 |
|
Securities purchased but not yet received |
|
|
6,539 |
|
|
|
43,354 |
|
|
|
-84.9 |
% |
|
|
22,772 |
|
Other liabilities |
|
|
25,868 |
|
|
|
30,435 |
|
|
|
-15.0 |
% |
|
|
42,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
4,492,379 |
|
|
$ |
4,205,158 |
|
|
|
6.8 |
% |
|
$ |
3,909,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits portfolio composition percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
5.2 |
% |
|
|
4.8 |
% |
|
|
|
|
|
|
5.0 |
% |
Now accounts |
|
|
6.5 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
7.2 |
% |
Savings accounts |
|
|
14.1 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
7.5 |
% |
Certificates of deposit |
|
|
74.2 |
% |
|
|
82.2 |
% |
|
|
|
|
|
|
80.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings portfolio composition percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
88.0 |
% |
|
|
85.7 |
% |
|
|
|
|
|
|
84.6 |
% |
Advances from FHLB |
|
|
8.8 |
% |
|
|
11.1 |
% |
|
|
|
|
|
|
11.6 |
% |
Subordinated capital notes |
|
|
2.2 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
2.8 |
% |
Term notes |
|
|
0.5 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
0.6 |
% |
Federal
funds purchased and other short term borrowings |
|
|
0.5 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at quarter-end |
|
$ |
2,856,361 |
|
|
$ |
2,427,880 |
|
|
|
|
|
|
$ |
2,191,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average outstanding balance |
|
$ |
2,548,638 |
|
|
$ |
2,270,145 |
|
|
|
|
|
|
$ |
2,174,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding balance at any
month-end |
|
$ |
2,856,361 |
|
|
$ |
2,427,880 |
|
|
|
|
|
|
$ |
2,398,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
Stockholders equity as of June 30, 2006 was $340.3 million, a 0.4% decrease from $341.8 million as
of December 31, 2005. This decrease reflects dividend payments and stock repurchased under the
Groups stock repurchase program, partially offset by the impact of earnings retention and the
improvement in derivatives valuation from December 31, 2005.
On August 30, 2005, the Board of Directors of the Group approved a new stock repurchase program
pursuant to which the Group is authorized to purchase in the open market of up to $12.1 million of
its outstanding shares of common stock. The program superseded the program established in March
2003. On June 20, 2006, the Board of Directors approved an increase of $3.0 million to the initial
amount, for the repurchase of up to $15.1 million. The shares of common stock so repurchased are to
be held by the Group as treasury shares. During the quarter and six-month period ended June 30,
2006, the Group purchased 46,600 of its shares of common stock in the open market, at a total cost
of $582,000, under such program.
The Groups common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At
June 30, 2006, the Groups market capitalization for its outstanding common stock was $313.6
million ($12.76 per share).
-36-
Under the regulatory framework for prompt corrective action, banks that meet or exceed a Tier I
capital risk-based ratio of 6%, a total capital risk-based ratio of 10% and a leverage ratio of 5%
are considered well capitalized. The Bank exceeds those regulatory capital requirements.
The following are the consolidated capital ratios of the Group at June 30, 2006 and December 31,
2005:
TABLE 11 CAPITAL, DIVIDENDS AND STOCK DATA
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
|
2005 |
|
Capital data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
$ |
340,283 |
|
|
$ |
341,791 |
|
|
|
-0.4 |
% |
|
$ |
338,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Capital Ratio |
|
|
9.39 |
% |
|
|
10.13 |
% |
|
|
-7.3 |
% |
|
|
10.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Leverage Capital Ratio Required |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Capital |
|
$ |
435,973 |
|
|
$ |
447,669 |
|
|
|
-2.6 |
% |
|
$ |
445,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Capital Required |
|
$ |
185,712 |
|
|
$ |
176,790 |
|
|
|
5.0 |
% |
|
$ |
168,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital Ratio |
|
|
29.60 |
% |
|
|
34.70 |
% |
|
|
-14.7 |
% |
|
|
36.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Risk-Based Capital Ratio
Required |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Risk-Based Capital |
|
$ |
435,973 |
|
|
$ |
447,669 |
|
|
|
-2.6 |
% |
|
$ |
445,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Risk-Based Capital Required |
|
$ |
58,912 |
|
|
$ |
51,602 |
|
|
|
14.2 |
% |
|
$ |
48,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio |
|
|
30.11 |
% |
|
|
35.22 |
% |
|
|
-14.5 |
% |
|
|
37.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total Risk-Based Capital Ratio Required |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Total Risk-Based Capital |
|
$ |
443,474 |
|
|
$ |
454,299 |
|
|
|
-2.4 |
% |
|
$ |
451,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total Risk-Based Capital Required |
|
$ |
117,825 |
|
|
$ |
103,204 |
|
|
|
14.2 |
% |
|
$ |
96,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding common shares, net of treasury |
|
|
24,562 |
|
|
|
24,580 |
|
|
|
0.0 |
% |
|
|
24,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
11.09 |
|
|
$ |
11.14 |
|
|
|
-0.5 |
% |
|
$ |
10.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Price at end of period |
|
$ |
12.76 |
|
|
$ |
12.36 |
|
|
|
3.2 |
% |
|
$ |
15.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market capitalization |
|
$ |
313,615 |
|
|
$ |
303,809 |
|
|
|
3.2 |
% |
|
$ |
379,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Variance |
|
|
|
2006 |
|
|
2005 |
|
|
% |
|
Common dividend data: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
$ |
6,889 |
|
|
$ |
6,940 |
|
|
|
-0.7 |
% |
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Payout ratio |
|
|
84.34 |
% |
|
|
28.24 |
% |
|
|
198.7 |
% |
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
4.24 |
% |
|
|
2.57 |
% |
|
|
65.0 |
% |
|
|
|
|
|
|
|
|
|
|
The following provides the high and low prices and dividend per share of the
Groups stock for each quarter of the last three periods. Common stock prices
and cash dividend per share were adjusted to give retroactive effect to the
stock dividend declared on the Groups common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
Price |
|
|
Dividend |
|
|
|
High |
|
|
Low |
|
|
Per share |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
$ |
13.99 |
|
|
$ |
11.96 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
$ |
14.46 |
|
|
$ |
12.41 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
$ |
13.12 |
|
|
$ |
10.16 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
$ |
15.98 |
|
|
$ |
11.91 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
$ |
23.47 |
|
|
$ |
13.66 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 |
|
$ |
28.94 |
|
|
$ |
22.97 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
$ |
28.41 |
|
|
$ |
24.37 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
$ |
26.64 |
|
|
$ |
22.76 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004 |
|
$ |
29.77 |
|
|
$ |
23.26 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2004 |
|
$ |
29.55 |
|
|
$ |
22.45 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-37-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk and Asset/Liability Management
The Groups interest rate risk and asset/liability management is the responsibility of the ALCO,
which is composed of members of the Groups senior management. The principal objective of ALCO is
to enhance profitability while maintaining an appropriate level of interest rate and liquidity
risks. ALCO is also involved in formulating economic projections and strategies used by the Group
in its planning and budgeting process. In addition, ALCO oversees the Groups sources, uses and
pricing of funds.
Interest rate risk can be defined as the exposure of the Groups operating results or financial
position to adverse movements in market interest rates, which mainly occur when assets and
liabilities reprice at different times and at different rates. This difference is commonly referred
to as a maturity mismatch or gap. The Group employs various techniques to assess its degree of
interest rate risk.
The Group is liability sensitive due to its fixed rate and medium to long-term asset composition
being funded with shorter-term repricing liabilities. As a result, the Group utilizes various
derivative instruments for hedging credit and market risk. The notional amounts are amounts from
which calculations and payments are based. Notional amounts do not represent direct credit
exposures. Direct credit exposure is limited to the net difference between the calculated amount to
be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these
contracts in the event of default by the counterparties. The Group controls the credit risk of its
derivative financial instrument agreements through credit approvals, limits, monitoring procedures
and collateral, when considered necessary.
The Group generally uses interest rate swaps and interest rate options in managing its interest
rate risk exposure. The swaps were entered into to convert short-term borrowings into fixed rate
liabilities for longer periods and provide protection against increases in short-term interest
rates. Under these swaps, the Group pays a fixed monthly or quarterly cost and receives a floating
monthly or quarterly payment based on LIBOR. Floating rate payments received from the swap
counterparties correspond to the floating rate payments made on the short-term borrowings thus
resulting in a net fixed rate cost to the Group. Please refer to Note 8-Derivatives Activities of
the accompanying unaudited consolidated financial statements for more information related to the Groups
swaps, including derivatives used to manage exposure to the stock market on the certificates of
deposit with an option tied to the performance of the Standard & Poors 500 stock market index.
During the quarter and six-month period ended June 30, 2006, (losses) gains of ($23,000) and
$859,000, respectively, compared to ($1.9 million) and
($4.7 million) for the same periods a year ago, were
charged to earnings and reflected as Derivatives Activities in the consolidated statements of
income. For the quarter and six-month period ended June 30, 2006 unrealized gains of $8.1 million
and $18.0 million, respectively, on derivatives designated as cash flow hedges were included in
other comprehensive income (loss).
At June 30, 2006 and December 31, 2005, the fair value of derivatives was recognized as either
assets or liabilities in the unaudited consolidated statements of financial condition as follows: the fair
value of the interest rate swaps to fix the cost of the forecasted rollover of short-term
borrowings represented an asset of $20.3 million and $2.5 million, as of June 30, 2006 and December
31, 2005, respectively, presented in other assets; the purchased options used to manage the
exposure to the stock market on stock indexed deposits represented an asset of $26.0 million
and $22.1 million, respectively also presented in other assets; the options sold to customers embedded in the certificates of
deposit represented a liability of $24.6 million and $21.1 million, respectively, recorded in
deposits.
The Groups ALCO decided in July 2006 to unwind interest rate swaps with an aggregate notional
amount of $640 million, which had been designated as cash flow hedges and had maturity dates
ranging from September 2010 to December 2010. Management concluded that it was beneficial to
Oriental to lock-in the fair value of these swaps at approximately $11 million. The net gain of $11
million on this transaction will continue to be included in other comprehensive income, and will be
reclassified into earnings during the originally remaining term of the swaps, starting in the
September 2006 quarter and through December 2010, by reducing the interest expense on borrowings.
The Group is exposed to a reduction in the level of net interest income (NII) in a rising
interest rate environment. NII will fluctuate with changes in the levels of interest rates,
affecting interest-sensitive assets and liabilities. The hypothetical rate scenarios as of June 30,
2006 consider a gradual change of plus and minus 200 basis points during a forecasted twelve-month
period. The hypothetical rate scenarios as of December 31, 2005 consider a gradual change of plus
200 and minus 100 basis points during a forecasted twelve-month period. If (1) the rates in effect
at year-end remain constant, or increase or decrease on instantaneous and sustained changes in the
amounts presented for each forecasted period, and (2) all scheduled repricing, reinvestments and
estimated prepayments, and reissuances are constant, or increase or decrease accordingly; NII will
fluctuate as shown on the following table:
-38-
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Change in |
|
Expected |
|
|
Amount |
|
|
Percent |
|
Interest rate |
|
NII |
|
|
Change |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Base Scenario |
|
|
|
|
|
|
|
|
|
|
|
|
Flat |
|
$ |
34,805 |
|
|
$ |
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
+ 200 Basis points |
|
$ |
13,395 |
|
|
$ |
(21,410 |
) |
|
|
-61.5 |
% |
|
|
|
|
|
|
|
|
|
|
- 200 Basis points |
|
$ |
59,085 |
|
|
$ |
24,280 |
|
|
|
69.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Base Scenario |
|
|
|
|
|
|
|
|
|
|
|
|
Flat |
|
$ |
56,798 |
|
|
$ |
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
+ 200 Basis points |
|
$ |
38,043 |
|
|
$ |
(18,755 |
) |
|
|
-33.0 |
% |
|
|
|
|
|
|
|
|
|
|
- 100 Basis points |
|
$ |
65,168 |
|
|
$ |
8,370 |
|
|
|
14.7 |
% |
|
|
|
|
|
|
|
|
|
|
Liquidity Risk Management
The objective of the Groups asset and liability management function is to maintain consistent
growth in net interest income within the Groups policy limits. This objective is accomplished
through management of the Groups balance sheet composition, liquidity, and interest rate risk
exposure arising from changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet changes in loan demand or
unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of
investment securities, maintaining sufficient unused borrowing capacity in the national money
markets and delivering consistent growth in core deposits. As of June 30, 2006, the Group had
approximately $313.7 million in investments available to cover liquidity needs. Additional
asset-driven liquidity is provided by securitizable loan assets. These sources, in addition to the
Groups 9.39% average equity capital base, provide a stable funding base.
In
addition to core deposit funding, the Bank also accesses a variety of other short-term and
long-term funding sources. Short-term funding sources mainly include securities sold under
agreements to repurchase. Borrowing funding source limits are determined annually by each
counterparty and depend on the Banks financial condition and delivery of acceptable collateral
securities. The Bank may be required to provide additional collateral based on the fair value of
the underlying securities. The Group also uses the FHLB as a funding source, issuing notes
payable, such as advances, through its FHLB member subsidiary, the Bank. This funding source
requires the Bank to maintain a minimum amount of qualifying collateral with a fair value of at
least 110% of the outstanding advances. At June 30, 2006, the Group has an additional borrowing
capacity with the FHLB of $3.1 million.
In addition, the Bank utilizes the National Certificate of Deposit (CD) Market as a source of
cost effective deposit funding in addition to local market deposit inflows. Depositors in this
market consist of credit unions, banking institutions, CD brokers and some private corporations or
non-profit organizations. The Banks ability to acquire brokered deposits can be restricted if it
becomes in the future less than well capitalized. An adequately-capitalized bank, by regulation,
may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC.
As of June 30, 2006, the Bank had line of credit agreement with other financial institutions
permitting the Bank to borrow a maximum aggregate amount of $15.0 million (no borrowings were made
during the six-month period ended June 30, 2006 and December 31, 2005 under such lines of credit).
The agreements provide for unsecured advances to be used by the Group on an overnight basis.
Interest rates are negotiated at the time of the transaction. The credit agreements are renewable
annually.
The Groups liquidity targets are reviewed monthly by ALCO and are based on the Groups commitment
to make loans and investments and its ability to generate funds.
The principal source of funds for the Group is dividends from the Bank. The ability of the Bank to
pay dividends is restricted by regulatory authorities (see Dividend Restrictions under
Regulation and Supervision in Item 1). Primarily, through such dividends the Group meets its cash
obligations and pays dividends to its common and preferred stockholders. Management believes that
the Group will continue to meet its cash obligations as they become due and pay dividends as they
are declared.
Changes in statutes and regulations, including tax laws and rules
The Group, as a Puerto Rico-chartered financial holding company, and its subsidiaries, are each
subject to extensive federal and local governmental supervision and regulation relating to its
banking, securities, and insurance business. The Group also
-39-
benefits from favorable tax treatment under regulations relating to the activities of its international banking entities. In addition,
there are laws and other regulations that restrict transactions between the Group and its
subsidiaries. Any change in such tax or other regulations, whether by applicable regulators or as a
result of legislation subsequently enacted by the Congress of the United States or the Legislature
of Puerto Rico, could have an effect on the Groups results of operations and financial condition.
Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under
Puerto Rico law. The IBE Act, as amended, imposes income taxes at normal statutory rates on each
IBE that operates as a unit of a bank if the IBEs net income exceeds 20 percent of the banks net
income in taxable years commencing on July 1, 2005 and thereafter. It does not impose income
taxation on an IBE that operates as a subsidiary of a bank.
The Group has an IBE that operates as a unit of the Bank. In November 2003, the Group organized a
new IBE that operates as a subsidiary of the Bank. The Bank transferred as of January 1, 2004,
substantially all of the Banks IBE assets to the new IBE subsidiary. Although this transfer of
IBE assets allows the Group to continue enjoying tax benefits, there cannot be any assurance that
the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to
the IBE subsidiary.
On August 1, 2005 the Puerto Rico Legislature approved Act No. 41, known as the Act for the
Educational Future of the Puerto Rican Children. This law imposes an additional tax of 2.5% on
taxable net income. This law is applicable to all corporations and partnerships with a taxable net
income over $20,000, according to part (a) of Section 1015 of the Puerto Rico Internal Revenue Code
of 1994, as amended. The law is effective for tax years beginning after December 31, 2004 and
ending on or before December 31, 2006. Although the effectiveness of this law was subject to the
final approval of the Legislatures Joint Resolution No. 445, concerning the Commonwealths General
Budget of the 2005-2006 fiscal year, which Joint Resolution was vetoed by the Puerto Rico Governor,
the Puerto Rico Treasury Department has taken the position that the law is in effect.
-40-
On October 20, 2005, the Puerto Rico Legislature approved a new tax bill. This bill imposes an
additional tax of 1% on the net taxable income of banks. This bill is applicable to all
banking corporations covered under the Puerto Rico Banking Act of 1933, as amended. The additional
funds expected to be obtained from this tax will be assigned to the Department of Education of
Puerto Rico. The additional tax is effective for the tax years commencing after June 30, 2005 and
ending on or before December 31, 2006.
On May 13, 2006, the Puerto Rico Governor signed into law Act No. 89, which amends the Puerto Rico
Internal Revenue Code of 1994, as amended, to impose an additional tax of 2% on the taxable income
exceeding $20,000 of banking corporations covered under the Puerto Rico Banking Act of 1933, as
amended. The law is effective for taxable years beginning after December 31, 2005 and ending on or
before December 31, 2006. This additional tax imposition is not expected to have a material effect
on the Groups consolidated operational results due to the tax exempt composition of the Groups
investments.
On May 16, 2006, the Puerto Rico Governor also signed into law Act No. 98 to impose a one-time
extraordinary tax on the net available income of non-exempt corporations and partnerships for the
last taxable year ended on or before December 31, 2005. This extraordinary tax constitutes, in
effect, a prepayment, as the taxpayer will be allowed to credit the amount so paid against its
Puerto Rico income tax liability for taxable years beginning after December 31, 2005; any unused
credit can be claimed by the taxpayer in four equal installments, beginning on the taxable year
following that in which the extraordinary tax is paid. This additional tax imposition is not
expected to have a material effect on the Groups consolidated operational results due to the tax
exempt composition of the Groups investments.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was
carried out under the supervision and with the participation of the Groups management, including
the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness
of the design and operation of the Groups disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the
CEO and the CFO have concluded that, as of the end of such period, the Groups disclosure controls
and procedures are effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Group in the reports that it files or submits
under the Exchange Act.
Internal Control over Financial Reporting
During the
quarter ended June 30, 2006, the Group
enhanced its internal controls to address the material weaknesses
identified in managements report on internal control over
financial reporting included in the Groups Form 10-K for the
transition period ended December 31, 2005. Specifically, the
Group has strengthened its review and documentation procedures over
significant non-routine transactions in order to identify and
consider all relevant terms and conditions for the proper accounting
treatment. These enhanced controls have been applied to certain
non-routine transactions that have taken place during and after the
quarter ended June 30, 2006, and their operating effectiveness
has been tested accordingly. The Group will continue to monitor the
design and operating effectiveness of these controls as part of the current years
management assessment of internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On August 14, 1998, as a result of a review of its accounts in connection with the admission by a
former Group officer of having embezzled funds and manipulated bank accounts and records, the Group
became aware of certain irregularities. The Group notified the appropriate regulatory authorities
and commenced an intensive investigation with the assistance of forensic accountants, fraud
experts, and legal counsel. The investigation determined losses of $9.6 million, resulting from
dishonest and fraudulent acts and omissions involving several former Group employees. These losses
were submitted to the Groups fidelity insurance policy (the Policy) issued by Federal Insurance
Company, Inc. (FIC). In the opinion of the Groups management, its legal counsel and experts, the
losses determined by the investigation were covered by the Policy. However, FIC denied all claims
for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court
for the District of Puerto Rico against FIC, a stock insurance corporation organized under the laws
of the State of Indiana, for breach of insurance contract, breach of covenant of good faith and
fair dealing and damages, seeking payment of the Groups $9.6 million insurance claim loss and the
payment of consequential damages of no less than $13.0 million resulting from FIC capricious,
arbitrary fraudulent and without cause denial of the Groups claim. The losses resulting from such
dishonest and fraudulent acts and omissions were expensed in prior years. On October 3, 2005, a
jury rendered a verdict of $7.5 million in favor of the Group and against FIC, the defendant. The
jury granted the Group $453,219 for fraud and loss documentation in connection with its Accounts
Receivable Returned Checks Account. However, the jury could not reach a decision on the Groups
claim for $3.4 million in connection with fraud in its Cash Accounts, thus forcing a new trial on
this issue. The jury denied the Groups claim for $5.6 million in connection with fraud in the
Mortgage Loans Account, but the jury determined that FIC had acted in bad faith and with malice.
It, therefore, awarded the Group $7.1 million in consequential damages. The court decided not to
enter a final judgment for the aforementioned awards until a new trial on
-41-
the fraud in the Cash Accounts claim is held. After a final judgment is entered, the parties would be entitled to
exhaust their post-judgment and appellate rights. The Group has not recognized any income on this
claim since the appellate rights have not been exhausted and the amount to be collected has not
been determined. The Group expects to request and recover prejudgment interest, costs, fees and
expenses related to its prosecution of this case. However, no specific sum can be anticipated as
they are subject to the discretion of the court. To date, the court has not scheduled this new
trial.
In addition, the Group and its subsidiaries are defendants in a number of legal proceedings
incidental to their business. The Group is vigorously contesting such claims. Based upon a review
by legal counsel and the development of these matters to date, management is of the opinion that
the ultimate aggregate liability, if any, resulting from these claims will not have a material
adverse effect on the Groups financial condition or results of operations.
Item 1A. RISK FACTORS
Except as noted below, there have been no material changes to the risk factors as previously
disclosed under Item 1A. in the Groups Form 10-K for the transition period ended December 31,
2005.
Puerto Ricos current economic condition may have an adverse effect in our loan portfolio and other
revenue sources
The economic uncertainty that exists in Puerto Rico, our primary market, caused in part by the
disagreements of the legislative and executive branches of the Puerto Rico government regarding the
tax and fiscal reform and the budget approval, has resulted in an economic slowdown in the Island.
Also, increases in the price of petroleum and other consumer goods and services, coupled with a
recently approved sales tax of 7%, are additional concerns impacting the Islands economic
situation. Puerto Rico economic growth remains subdued, with an apparent reduction in private
sector employment. Tax and fiscal reforms were recently signed into law by the Puerto Rico
government, including the governments budget for fiscal year 2007.
The above economic concerns and uncertainty in the private and public sectors may also have an
adverse effect in the credit quality of our loan portfolios, as
delinquency rates may increase in the short-term, until the economy stabilizes. Also, potential reduction in consumer
spending may also impact growth in our other interest and non-interest revenue sources.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
a) |
|
None |
|
|
b) |
|
Not applicable |
|
|
c) |
|
Purchases of equity securities by the issuer and affiliated purchasers |
On August 30, 2005, the Board of Directors of the Group approved a program for the repurchase
of up to $12.1 million of the Groups outstanding shares of common stock, which replaced the
former program. On June 20, 2006, the Board of Directors approved an increase of $3.0 million
to the initial amount, for the repurchase of up to
$15.1 million. During May 2006, the Group purchased 46,600 of its shares of common stock
in the open market, at an average price of $12.50, for a total cost of $582,000. The approximate
dollar value of shares that may yet be purchased under this program
amounted to $10.3 million at June 30, 2006.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
-42-
Item 5. OTHER INFORMATION
Item 6. EXHIBITS
|
|
|
10.1 |
|
Change in Control Compensation Agreement between Oriental Financial Group Inc. and Mari Evelyn Rodriguez |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
-43-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
(Registrant)
|
|
|
|
|
|
|
By:
|
|
/s/ José Rafael Fernández
José Rafael Fernández
President and Chief Executive Officer
|
|
|
|
Dated: October 17, 2006 |
|
|
|
|
|
|
|
By:
|
|
/s/ Norberto González
Norberto González
Executive Vice President and Chief Financial Officer
|
|
|
|
Dated: October 17, 2006 |
-44-