ORINETAL 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, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE 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 þ No o
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:
24,512,042 common shares ($1.00 par value per share)
outstanding as of July 31, 2007
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 local, 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, 2007 AND DECEMBER 31, 2006
(In thousands, except share data)
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June 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Cash and cash equivalents: |
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Cash and due from banks |
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$ |
21,727 |
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$ |
15,341 |
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Money market investments |
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48,480 |
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18,729 |
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|
|
|
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Total cash and cash equivalents |
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70,207 |
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34,070 |
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|
|
|
|
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Investments: |
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Securities purchased under agreements to resell |
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16,200 |
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Time deposits with other banks |
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5,000 |
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5,000 |
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|
Trading securities, at fair value with amortized cost of $548 (December 31,
2006 - $246) |
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548 |
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243 |
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Investment securities available-for-sale, at fair value with amortized cost
of $1,940,707 (December 31, 2006 - $984,060) |
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Securities pledged that can be repledged |
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1,846,450 |
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947,880 |
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Other investment securities |
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|
59,878 |
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|
27,080 |
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Total investment securities available-for-sale |
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1,906,328 |
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|
974,960 |
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Investment securities held-to-maturity, at amortized cost with fair value of
$1,714,608 (December 31, 2006 - $1,931,720) |
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Securities pledged that can be repledged |
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1,620,932 |
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1,814,746 |
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Other investment securities |
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143,653 |
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|
152,731 |
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Total investment securities held-to-maturity |
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1,764,585 |
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1,967,477 |
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Other Investments |
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31,770 |
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30,949 |
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Federal Home Loan Bank (FHLB) stock, at cost |
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13,909 |
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|
13,607 |
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Total investments |
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3,738,340 |
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|
2,992,236 |
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|
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|
|
|
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Securities sold but not yet delivered |
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|
46,461 |
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|
|
6,430 |
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|
|
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|
|
|
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Loans: |
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|
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|
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Mortgage loans held-for-sale, at lower of cost or market |
|
|
66,032 |
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|
10,603 |
|
Loans receivable, net of allowance for loan losses of $8,432 (December 31,
2006 - $8,016) |
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|
1,206,145 |
|
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|
1,201,767 |
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|
|
|
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|
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Total loans, net |
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|
1,272,177 |
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|
1,212,370 |
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|
|
|
|
|
|
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Accrued interest receivable |
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|
45,807 |
|
|
|
27,940 |
|
Premises and equipment, net |
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19,390 |
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|
20,153 |
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Deferred tax asset, net |
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18,005 |
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|
14,150 |
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Foreclosed real estate |
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4,971 |
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4,864 |
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Other assets |
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75,291 |
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61,477 |
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Total assets |
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$ |
5,290,649 |
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$ |
4,373,690 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Demand deposits |
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$ |
111,686 |
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$ |
132,434 |
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Savings accounts |
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326,124 |
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266,184 |
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Certificates of deposit |
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891,852 |
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834,370 |
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Total deposits |
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1,329,662 |
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1,232,988 |
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Borrowings: |
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Federal funds purchased and other short term borrowings |
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24,641 |
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13,568 |
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Securities sold under agreements to repurchase |
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3,283,796 |
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2,535,923 |
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Advances from FHLB |
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180,000 |
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|
181,900 |
|
Term notes |
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15,000 |
|
Subordinated capital notes |
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|
36,083 |
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|
36,083 |
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|
|
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Total borrowings |
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3,524,520 |
|
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|
2,782,474 |
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|
|
|
|
|
|
|
|
|
|
|
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Securities purchased but not yet received |
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|
100,067 |
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Accrued expenses and other liabilities |
|
|
22,925 |
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|
|
21,802 |
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Total liabilities |
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|
4,977,174 |
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4,037,264 |
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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 |
|
|
68,000 |
|
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|
68,000 |
|
Common stock, $1 par value; 40,000,000 shares authorized; 25,542,960
shares issued (December 31, 2006 - 25,430,929 shares) |
|
|
25,543 |
|
|
|
25,431 |
|
Additional paid-in capital |
|
|
209,860 |
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|
209,033 |
|
Legal surplus |
|
|
38,312 |
|
|
|
36,245 |
|
Retained earnings |
|
|
32,883 |
|
|
|
26,772 |
|
Treasury stock, at cost 1,022,600 shares (December 31, 2006 - 989,405 shares) |
|
|
(13,311 |
) |
|
|
(12,956 |
) |
Accumulated other comprehensive loss, net of tax of $4,030
(December 31, 2006 - $290) |
|
|
(47,812 |
) |
|
|
(16,099 |
) |
|
|
|
|
|
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|
Total stockholders equity |
|
|
313,475 |
|
|
|
336,426 |
|
|
|
|
|
|
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Total liabilities and stockholders equity |
|
$ |
5,290,649 |
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|
$ |
4,373,690 |
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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, 2007 AND 2006
(In thousands, except per share data)
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Quarter ended June 30, |
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|
Six-Month Period Ended June 30, |
|
|
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2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
22,315 |
|
|
$ |
18,311 |
|
|
$ |
44,163 |
|
|
$ |
34,564 |
|
Mortgage-backed securities |
|
|
25,268 |
|
|
|
23,887 |
|
|
|
50,766 |
|
|
|
48,387 |
|
Investment
securities and other |
|
|
23,218 |
|
|
|
14,696 |
|
|
|
37,371 |
|
|
|
29,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
70,801 |
|
|
|
56,894 |
|
|
|
132,300 |
|
|
|
112,886 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
13,601 |
|
|
|
11,146 |
|
|
|
25,849 |
|
|
|
21,644 |
|
Securities sold under agreements to repurchase |
|
|
36,546 |
|
|
|
31,128 |
|
|
|
69,334 |
|
|
|
57,491 |
|
Advances from FHLB, term notes an other borrowings |
|
|
2,198 |
|
|
|
2,568 |
|
|
|
4,515 |
|
|
|
5,190 |
|
Subordinated capital notes |
|
|
766 |
|
|
|
1,344 |
|
|
|
1,524 |
|
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
53,111 |
|
|
|
46,186 |
|
|
|
101,222 |
|
|
|
86,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
17,690 |
|
|
|
10,708 |
|
|
|
31,078 |
|
|
|
25,920 |
|
Provision for loan losses |
|
|
1,375 |
|
|
|
947 |
|
|
|
2,450 |
|
|
|
2,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
16,315 |
|
|
|
9,761 |
|
|
|
28,628 |
|
|
|
23,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial service revenues |
|
|
4,049 |
|
|
|
4,066 |
|
|
|
8,892 |
|
|
|
7,317 |
|
Banking service revenues |
|
|
2,265 |
|
|
|
2,511 |
|
|
|
4,139 |
|
|
|
4,687 |
|
Investment banking revenues |
|
|
|
|
|
|
852 |
|
|
|
|
|
|
|
2,561 |
|
Mortgage banking activities |
|
|
170 |
|
|
|
634 |
|
|
|
232 |
|
|
|
1,070 |
|
Net gain (loss) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
10 |
|
|
|
|
|
|
|
369 |
|
|
|
19 |
|
Derivatives |
|
|
88 |
|
|
|
(23 |
) |
|
|
8,384 |
|
|
|
859 |
|
Trading securities |
|
|
2 |
|
|
|
(8 |
) |
|
|
2 |
|
|
|
21 |
|
Income (loss) from other investments |
|
|
1,159 |
|
|
|
(574 |
) |
|
|
777 |
|
|
|
(270 |
) |
Other |
|
|
53 |
|
|
|
63 |
|
|
|
132 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income, net |
|
|
7,796 |
|
|
|
7,521 |
|
|
|
22,927 |
|
|
|
16,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employees benefits |
|
|
6,916 |
|
|
|
5,627 |
|
|
|
13,661 |
|
|
|
11,801 |
|
Occupancy and equipment |
|
|
3,343 |
|
|
|
2,793 |
|
|
|
6,337 |
|
|
|
5,682 |
|
Professional and service fees |
|
|
1,984 |
|
|
|
1,546 |
|
|
|
3,522 |
|
|
|
2,902 |
|
Advertising and business promotion |
|
|
1,118 |
|
|
|
1,077 |
|
|
|
1,911 |
|
|
|
2,014 |
|
Directors and investor relations |
|
|
769 |
|
|
|
295 |
|
|
|
1,300 |
|
|
|
708 |
|
Loan servicing expenses |
|
|
540 |
|
|
|
509 |
|
|
|
1,063 |
|
|
|
964 |
|
Taxes, other than payroll and income taxes |
|
|
489 |
|
|
|
573 |
|
|
|
937 |
|
|
|
1,173 |
|
Electronic banking charges |
|
|
457 |
|
|
|
494 |
|
|
|
916 |
|
|
|
962 |
|
Clearing and wrap fees expenses |
|
|
310 |
|
|
|
393 |
|
|
|
675 |
|
|
|
789 |
|
Communication |
|
|
308 |
|
|
|
395 |
|
|
|
646 |
|
|
|
843 |
|
Insurance |
|
|
211 |
|
|
|
219 |
|
|
|
427 |
|
|
|
432 |
|
Foreclosure expenses |
|
|
338 |
|
|
|
131 |
|
|
|
405 |
|
|
|
232 |
|
Printing, postage, stationery and supplies |
|
|
189 |
|
|
|
359 |
|
|
|
391 |
|
|
|
544 |
|
Other |
|
|
505 |
|
|
|
373 |
|
|
|
1,113 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
17,477 |
|
|
|
14,784 |
|
|
|
33,304 |
|
|
|
29,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
6,634 |
|
|
|
2,498 |
|
|
|
18,251 |
|
|
|
10,679 |
|
Income tax expense (benefit) |
|
|
187 |
|
|
|
(21 |
) |
|
|
811 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6,447 |
|
|
|
2,519 |
|
|
|
17,440 |
|
|
|
10,569 |
|
Less: Dividends on preferred stock |
|
|
(1,201 |
) |
|
|
(1,201 |
) |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
5,246 |
|
|
$ |
1,318 |
|
|
$ |
15,039 |
|
|
$ |
8,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
$ |
0.61 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
$ |
0.61 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
24,488 |
|
|
|
24,599 |
|
|
|
24,480 |
|
|
|
24,608 |
|
Average potential common shares-options |
|
|
75 |
|
|
|
106 |
|
|
|
97 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,563 |
|
|
|
24,705 |
|
|
|
24,577 |
|
|
|
24,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
FOR THE SIX-MONTH PERIODS ENDED ENDED JUNE 30, 2007 AND 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, |
|
CHANGES IN STOCKHOLDERS EQUITY: |
|
2007 |
|
|
2006 |
|
Preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
68,000 |
|
|
$ |
68,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
25,431 |
|
|
|
25,350 |
|
Stock options exercised |
|
|
112 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
25,543 |
|
|
|
25,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
209,033 |
|
|
|
208,454 |
|
Stock-based compensation expense |
|
|
12 |
|
|
|
16 |
|
Stock options exercised |
|
|
815 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
209,860 |
|
|
|
208,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal surplus: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
36,245 |
|
|
|
35,863 |
|
Transfer from retained earnings |
|
|
2,067 |
|
|
|
1,251 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
38,312 |
|
|
|
37,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
26,772 |
|
|
|
52,340 |
|
Net income |
|
|
17,440 |
|
|
|
10,569 |
|
Cash dividends declared on common stock |
|
|
(6,861 |
) |
|
|
(6,889 |
) |
Cash dividends declared on preferred stock |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
Transfer to legal surplus |
|
|
(2,067 |
) |
|
|
(1,251 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
32,883 |
|
|
|
52,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(12,956 |
) |
|
|
(10,332 |
) |
Stock used to match defined contribution plan 1165(e) |
|
|
175 |
|
|
|
135 |
|
Stock purchased |
|
|
(530 |
) |
|
|
(582 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(13,311 |
) |
|
|
(10,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(16,099 |
) |
|
|
(37,884 |
) |
Other comprehensive loss, net of tax |
|
|
(31,713 |
) |
|
|
(2,526 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(47,812 |
) |
|
|
(40,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
313,475 |
|
|
$ |
340,283 |
|
|
|
|
|
|
|
|
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED ENDED JUNE 30, 2007 AND 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
COMPREHENSIVE INCOME |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
6,447 |
|
|
$ |
2,519 |
|
|
$ |
17,440 |
|
|
$ |
10,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available-for-sale |
|
|
(31,286 |
) |
|
|
(9,807 |
) |
|
|
(26,086 |
) |
|
|
(21,351 |
) |
Realized gain on investment securities available-for-sale included in net income |
|
|
(10 |
) |
|
|
|
|
|
|
(369 |
) |
|
|
(19 |
) |
Unrealized gain on derivatives designated as cash flows hedges arising during the period |
|
|
|
|
|
|
8,106 |
|
|
|
|
|
|
|
18,022 |
|
Gains on derivatives designated as cash flow hedges included in net income |
|
|
|
|
|
|
|
|
|
|
(773 |
) |
|
|
(749 |
) |
Gain from termination of cash flow hedging |
|
|
|
|
|
|
|
|
|
|
(8,225 |
) |
|
|
|
|
Income tax effect related to unrealized loss on securities available-for-sale |
|
|
4,381 |
|
|
|
992 |
|
|
|
3,740 |
|
|
|
1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss for the period |
|
|
(26,915 |
) |
|
|
(709 |
) |
|
|
(31,713 |
) |
|
|
(2,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(20,468 |
) |
|
$ |
1,810 |
|
|
$ |
(14,273 |
) |
|
$ |
8,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
- 3 -
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,440 |
|
|
$ |
10,569 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Amortization of deferred loan origination fees, net of costs |
|
|
(771 |
) |
|
|
(760 |
) |
Amortization of premiums, net of accretion of discounts |
|
|
4,143 |
|
|
|
1,045 |
|
Depreciation and amortization of premises and equipment |
|
|
2,916 |
|
|
|
2,672 |
|
Deferred income tax benefit |
|
|
(116 |
) |
|
|
(1,068 |
) |
Equity in (earnings) losses of investment in limited liability partnership |
|
|
(75 |
) |
|
|
271 |
|
Provision for loan losses |
|
|
2,450 |
|
|
|
2,048 |
|
Common stock used to match defined contribution plan 1165(e) |
|
|
175 |
|
|
|
135 |
|
Stock-based compensation |
|
|
12 |
|
|
|
16 |
|
Gain on: |
|
|
|
|
|
|
|
|
Sale of securities available-for-sale |
|
|
(369 |
) |
|
|
(19 |
) |
Mortgage banking activities |
|
|
(232 |
) |
|
|
(1,070 |
) |
Derivatives |
|
|
(8,898 |
) |
|
|
(859 |
) |
Sale of foreclosed real estate |
|
|
(67 |
) |
|
|
(115 |
) |
Sale of premises and equipment |
|
|
(20 |
) |
|
|
(8 |
) |
Originations of loans held-for-sale |
|
|
(80,420 |
) |
|
|
(33,830 |
) |
Proceeds from sale of loans held-for-sale |
|
|
25,223 |
|
|
|
13,525 |
|
Net decrease in: |
|
|
|
|
|
|
|
|
Trading securities |
|
|
(305 |
) |
|
|
(222 |
) |
Accrued interest receivable |
|
|
(17,867 |
) |
|
|
(2,246 |
) |
Other assets |
|
|
(4,597 |
) |
|
|
(7,375 |
) |
Net increase (decrease) in: |
|
|
|
|
|
|
|
|
Accrued interest on deposits and borrowings |
|
|
(4,216 |
) |
|
|
(2,492 |
) |
Other liabilities |
|
|
1,015 |
|
|
|
(2,030 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(64,579 |
) |
|
|
(21,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net decrease in time deposits with other banks |
|
|
|
|
|
|
30,000 |
|
Net increase in securities purchased under agreements to resell |
|
|
(16,200 |
) |
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
(1,053,377 |
) |
|
|
(278,566 |
) |
Investment securities held-to-maturity |
|
|
(10,772 |
) |
|
|
(6,500 |
) |
Other Investments |
|
|
(701 |
) |
|
|
|
|
Equity options |
|
|
(9,504 |
) |
|
|
(9,733 |
) |
FHLB stock |
|
|
(17,162 |
) |
|
|
|
|
Maturities and redemptions of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
70,857 |
|
|
|
73,173 |
|
Investment securities held-to-maturity |
|
|
273,663 |
|
|
|
108,975 |
|
FHLB stock |
|
|
16,860 |
|
|
|
11,466 |
|
Proceeds from sales of: |
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
23,043 |
|
|
|
57,130 |
|
Foreclosed real estate |
|
|
1,414 |
|
|
|
2,142 |
|
Loan production: |
|
|
|
|
|
|
|
|
Origination and purchase of loans, excluding loans held-for-sale |
|
|
(85,230 |
) |
|
|
(321,068 |
) |
Principal repayment of loans |
|
|
77,719 |
|
|
|
68,474 |
|
Additions to premises and equipment, net |
|
|
(2,133 |
) |
|
|
(5,194 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(731,523 |
) |
|
|
(269,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
96,770 |
|
|
|
(85,449 |
) |
Securities sold under agreements to repurchase |
|
|
750,161 |
|
|
|
425,516 |
|
Federal funds purchased and other short term borrowings |
|
|
11,073 |
|
|
|
12,643 |
|
Proceeds from: |
|
|
|
|
|
|
|
|
Advances from FHLB |
|
|
2,463,370 |
|
|
|
1,322,995 |
|
Exercise of stock options |
|
|
927 |
|
|
|
170 |
|
Repayments of advances from FHLB |
|
|
(2,465,270 |
) |
|
|
(1,350,795 |
) |
Repurchase of treasury stocks |
|
|
(530 |
) |
|
|
(582 |
) |
Maturity of term note |
|
|
(15,000 |
) |
|
|
|
|
Dividend paid in common and preferred stock |
|
|
(9,262 |
) |
|
|
(9,294 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
832,239 |
|
|
|
315,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
36,137 |
|
|
|
23,690 |
|
Cash and cash equivalents at beginning of period |
|
|
34,070 |
|
|
|
17,269 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
70,207 |
|
|
$ |
40,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
96,790 |
|
|
$ |
90,826 |
|
|
|
|
|
|
|
|
Mortgage loans securitized into mortgage-backed securities |
|
$ |
|
|
|
$ |
20,447 |
|
|
|
|
|
|
|
|
Securities sold but not yet delivered |
|
$ |
46,461 |
|
|
$ |
710 |
|
|
|
|
|
|
|
|
Securities and loans purchased but not yet received |
|
$ |
100,067 |
|
|
$ |
6,539 |
|
|
|
|
|
|
|
|
Transfer from loans to foreclosed real estate |
|
$ |
1,454 |
|
|
$ |
1,604 |
|
|
|
|
|
|
|
|
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 statement of financial condition as of June
30, 2007 and December 31, 2006, and the consolidated results of operations and cash flows for
the six-month periods ended June 30, 2007 and 2006. 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. The results of operations and cash flows for the six-month periods ended June 30, 2007
and 2006 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
year ended December 31, 2006, included in the Groups 2006
annual report on Form 10-K.
Nature of Operations
The Group is a diversified, publicly-owned financial holding company incorporated on June 14, 1996
under the laws of the Commonwealth of Puerto Rico. It has four wholly-owned subsidiaries, Oriental
Bank and Trust (the Bank), Oriental Financial Services Corp. (Oriental Financial Services),
Oriental Insurance, Inc. (Oriental Insurance), and Caribbean Pension Consultants, Inc. (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
comprehensive financial services to its clients through a complete range of banking and financial
solutions, including 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 (OCIF) 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 operates
one international banking entity (IBE) pursuant to the International Banking Center Regulatory
Act of Puerto Rico, as amended (the IBE Act): Oriental International Bank Inc., which is a
wholly-owned subsidiary of the Bank. 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. The Group previously had another IBE, which
was liquidated on May 31, 2007, after obtaining all the
corresponding regulatory approvals.
Oriental Financial Services is subject to the supervision, examination and regulation of the
National Association of Securities Dealers, Inc. (now the Financial
Industry Regulatory Authority), the SEC, and the OCIF. Oriental Insurance is subject to the supervision,
examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.
The Groups mortgage banking activities are conducted through Oriental Mortgage, a division of the
Bank. The mortgage banking activities primarily consist of the origination and purchase of
residential mortgage loans for the Groups own portfolio and from time to time, if the conditions
so warrant, the Group may engage in the sale of such loans to other financial institutions in the
secondary market. The Group originates Federal Housing Administration (FHA)-insured and Veterans
Administration (VA)-guaranteed mortgages that are primarily securitized for issuance of
Government National Mortgage Association (GNMA) mortgage-backed securities which can be resold to
individual or institutional investors in the secondary market. Conventional loans that meet the
underwriting requirements for sale or exchange under standard Federal National Mortgage Association
(the FNMA) or the
- 5 -
Federal Home Loan Mortgage Corporation (the FHLMC) programs are referred to
as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed
securities. In 2006, and after FNMAs approval for the Group to sell FNMA-conforming conventional
mortgage loans directly in the secondary market, the Group became an approved seller of FNMA, as
well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Group
is also an approved issuer of GNMA mortgage-backed securities. The Group continues to outsource the
servicing of the GNMA, FNMA and FHLMC pools that it issues and of its mortgage loan portfolio.
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
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 probable
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 under the provisions of SFAS No. 5, Accounting for
Contingencies, as amended, 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.
The Group, using a 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 current available information in estimating possible loan losses, factors beyond
the Groups control such as those affecting general economic conditions may require future changes
to the allowance.
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 as part of non-interest income, 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
- 6 -
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 fair 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.
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. 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 39%
and 43.5% as of June 30, 2007 and 2006, respectively, 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 entity.
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, 2007, a valuation allowance of approximately $3.9 million was
recorded to offset deferred tax assets from loss carry forwards that the Group considers it may not
realize 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, 2007. 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.
Effective
at the beginning of the first quarter of 2007, the Group adopted the provisions of
Financial Accounting Standard Board (FASB) Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon ultimate settlement.
- 7 -
The total amount of gross unrecognized tax benefits as of the date of adoption that would affect
the effective tax rate was $5.7 million. The Group classifies unrecognized tax benefits in income
taxes payable. No adjustments resulted by the implementation of FIN 48. These gross unrecognized
tax benefits would affect the effective tax rate if realized.
The Groups policy to include interest and penalties related to unrecognized tax benefits within
the provision for taxes on the consolidated condensed statements of income did not change as a
result of implementing the provisions of FIN 48. As of the date of adoption of FIN 48, the Group
had accrued $1.3 million for the payment of interest and penalties relating to unrecognized tax
benefits. The Group does not anticipate significant changes in unrecognized tax benefits during
2007.
Equity
Compensation Plans
On April 25, 2007, the Board of Directors (the "Board") formally adopted the Oriental Financial Group Inc. 2007
Omnibus Performance Incentive Plan (the Omnibus Plan), which was subsequently approved at the
annual meeting of stockholders held on June 27, 2007. The Omnibus Plan provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units and dividend equivalents, as well as equity-based performance
awards.
The purpose of the Omnibus Plan is to provide flexibility to the Group to attract, retain and
motivate directors, officers, and key employees through the grant of awards based on performance
and to adjust its compensation practices to the best compensation practice and corporate
governance trends as they develop from time to time. The Omnibus Plan is further intended to
motivate high levels of individual performance coupled with increased shareholder returns.
Therefore, awards under the Omnibus Plan (each, an Award) are intended to be based upon the
recipients individual performance, level of responsibility and potential to make significant
contributions to the Group. Generally, the Omnibus Plan will terminate as of (a) the date when no more of
the Groups shares of common stock are available for issuance under the Omnibus Plan,
or, if earlier, (b) the date the Omnibus Plan is terminated by
the the Groups Board.
The Compensation Committee of the the Groups Board, or such other committee as the Board may designate (the
Committee), has full authority to interpret and administer the Omnibus Plan in order to carry
out its provisions and purposes. The Committee has the authority to determine those persons
eligible to receive an Award and to establish the terms and conditions of any Award. The Committee
may delegate, subject to such terms or conditions or guidelines as it shall determine, to any
employee or group of employees any portion of its authority and powers under the Omnibus Plan with
respect to participants who are not directors or executive officers subject to the reporting
requirements under Section 16(a) of the Securities Exchange Act of 1934. Only the Committee may
exercise authority in respect of Awards granted to such participants. Awards vest upon completion
of specified years of service.
The
Omnibus Plan replaced and superseded the Oriental Financial Group
Inc. 1996, 1998 and 2000 Incentive Stock Option Plans (the
Stock Option Plans). All outstanding stock options under
the Stock Option Plans continue in full force and effect, subject to
their original terms.
Effective July 1, 2005, the Group adopted Statement of Financial Accounting Standards (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 $12,000 and $16,000 during the six-month periods ended June 30,
2007 and 2006, respectively, 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, 2007, was approximately $450,000 and the weighted average period of time over which
this cost will be recognized is approximately 7 years.
The average fair value of each option granted during the six-month periods ended June 30, 2007 and
2006 was $2.16 and $4.05, 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
- 8 -
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, |
|
|
2007 |
|
2006 |
Weighted Average Assumptions: |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
4.54 |
% |
|
|
3.87 |
% |
Expected volatility |
|
|
33.34 |
% |
|
|
34.26 |
% |
Risk-free interest rate |
|
|
4.65 |
% |
|
|
4.19 |
% |
Expected life (in years) |
|
|
8.5 |
|
|
|
8.5 |
|
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.
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, 2007 and December 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 (In thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored agencies |
|
$ |
950,000 |
|
|
$ |
|
|
|
$ |
18,211 |
|
|
$ |
931,789 |
|
|
|
5.88 |
% |
Puerto Rico Government and agency obligations |
|
|
20,292 |
|
|
|
64 |
|
|
|
1,095 |
|
|
|
19,261 |
|
|
|
5.68 |
% |
Corporate bonds and other |
|
|
26,108 |
|
|
|
|
|
|
|
130 |
|
|
|
25,978 |
|
|
|
5.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
996,400 |
|
|
|
64 |
|
|
|
19,436 |
|
|
|
977,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
238,809 |
|
|
|
|
|
|
|
5,103 |
|
|
|
233,706 |
|
|
|
5.68 |
% |
GNMA certificates |
|
|
39,284 |
|
|
|
175 |
|
|
|
873 |
|
|
|
38,586 |
|
|
|
5.61 |
% |
Collateralized mortgage obligations (CMOs) |
|
|
666,214 |
|
|
|
46 |
|
|
|
9,252 |
|
|
|
657,008 |
|
|
|
5.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
944,307 |
|
|
|
221 |
|
|
|
15,228 |
|
|
|
929,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
|
1,940,707 |
|
|
|
285 |
|
|
|
34,664 |
|
|
|
1,906,328 |
|
|
|
5.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of US Government sponsored agencies |
|
|
668,500 |
|
|
|
4 |
|
|
|
13,189 |
|
|
|
655,315 |
|
|
|
3.84 |
% |
Puerto Rico Government and agency obligations |
|
|
55,239 |
|
|
|
|
|
|
|
4,701 |
|
|
|
50,538 |
|
|
|
5.29 |
% |
Corporate bonds and other |
|
|
60,000 |
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
6.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
783,739 |
|
|
|
4 |
|
|
|
17,890 |
|
|
|
765,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
663,310 |
|
|
|
|
|
|
|
24,153 |
|
|
|
639,157 |
|
|
|
5.05 |
% |
GNMA certificates |
|
|
170,883 |
|
|
|
|
|
|
|
5,610 |
|
|
|
165,273 |
|
|
|
5.35 |
% |
Collateralized mortgage obligations |
|
|
146,653 |
|
|
|
|
|
|
|
2,328 |
|
|
|
144,325 |
|
|
|
5.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
980,846 |
|
|
|
|
|
|
|
32,091 |
|
|
|
948,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held-to-maturity |
|
|
1,764,585 |
|
|
|
4 |
|
|
|
49,981 |
|
|
|
1,714,608 |
|
|
|
4.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,705,292 |
|
|
$ |
289 |
|
|
$ |
84,645 |
|
|
$ |
3,620,936 |
|
|
|
5.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 9 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 (In thousands) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Weighted |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Yield |
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico Government and agency obligations |
|
$ |
20,254 |
|
|
$ |
64 |
|
|
$ |
872 |
|
|
$ |
19,446 |
|
|
|
5.68 |
% |
Corporate bonds and other |
|
|
50,598 |
|
|
|
520 |
|
|
|
2,347 |
|
|
|
48,771 |
|
|
|
6.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
70,852 |
|
|
|
584 |
|
|
|
3,219 |
|
|
|
68,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
150,099 |
|
|
|
|
|
|
|
1,506 |
|
|
|
148,593 |
|
|
|
5.45 |
% |
GNMA certificates |
|
|
40,690 |
|
|
|
408 |
|
|
|
235 |
|
|
|
40,863 |
|
|
|
5.61 |
% |
Collateralized mortgage obligations (CMOs) |
|
|
722,419 |
|
|
|
7 |
|
|
|
5,139 |
|
|
|
717,287 |
|
|
|
5.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
913,208 |
|
|
|
415 |
|
|
|
6,880 |
|
|
|
906,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
|
984,060 |
|
|
|
999 |
|
|
|
10,099 |
|
|
|
974,960 |
|
|
|
5.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury securities |
|
|
15,022 |
|
|
|
|
|
|
|
127 |
|
|
|
14,895 |
|
|
|
2.71 |
% |
Obligations of US Government sponsored agencies |
|
|
848,400 |
|
|
|
7 |
|
|
|
17,529 |
|
|
|
830,878 |
|
|
|
3.85 |
% |
Puerto Rico Government and agency obligations |
|
|
55,262 |
|
|
|
|
|
|
|
3,961 |
|
|
|
51,301 |
|
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
918,684 |
|
|
|
7 |
|
|
|
21,617 |
|
|
|
897,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA and FHLMC certificates |
|
|
713,171 |
|
|
|
628 |
|
|
|
11,529 |
|
|
|
702,270 |
|
|
|
5.04 |
% |
GNMA certificates |
|
|
182,874 |
|
|
|
215 |
|
|
|
2,176 |
|
|
|
180,913 |
|
|
|
5.35 |
% |
Collateralized mortgage obligations |
|
|
152,748 |
|
|
|
18 |
|
|
|
1,303 |
|
|
|
151,463 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed-securities and CMOs |
|
|
1,048,793 |
|
|
|
861 |
|
|
|
15,008 |
|
|
|
1,034,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held-to-maturity |
|
|
1,967,477 |
|
|
|
868 |
|
|
|
36,625 |
|
|
|
1,931,720 |
|
|
|
4.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,951,537 |
|
|
$ |
1,867 |
|
|
$ |
46,724 |
|
|
$ |
2,906,680 |
|
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of the Groups investment securities available-for-sale and
held-to-maturity at June 30, 2007, 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 1 year |
|
$ |
2,000 |
|
|
$ |
2,001 |
|
|
$ |
124,993 |
|
|
$ |
124,443 |
|
Due after 1 to 5 years |
|
|
|
|
|
|
|
|
|
|
187,386 |
|
|
|
182,837 |
|
Due after 5 to 10 years |
|
|
903,380 |
|
|
|
885,264 |
|
|
|
256,269 |
|
|
|
252,120 |
|
Due after 10 years |
|
|
91,020 |
|
|
|
89,763 |
|
|
|
215,091 |
|
|
|
206,453 |
|
|
|
|
|
|
|
|
|
996,400 |
|
|
|
977,028 |
|
|
|
783,739 |
|
|
|
765,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after 1 to 5 years |
|
|
1,014 |
|
|
|
1,051 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
943,293 |
|
|
|
928,249 |
|
|
|
980,846 |
|
|
|
948,755 |
|
|
|
|
|
|
|
|
|
944,307 |
|
|
|
929,300 |
|
|
|
980,846 |
|
|
|
948,755 |
|
|
|
|
|
|
|
|
$ |
1,940,707 |
|
|
$ |
1,906,328 |
|
|
$ |
1,764,585 |
|
|
$ |
1,714,608 |
|
|
|
|
|
|
Securities not due on a single contractual maturity date, such as collateralized mortgage
obligations, are classified in the period of final contractual maturity. The expected maturities
of collateralized mortgage obligations and certain other securities may differ from their
contractual maturities because they may be subject to prepayments or may be called by the issuer.
Proceeds from the sale of investment securities available-for-sale during the six-month periods
ended June 30, 2007 and 2006 totaled $23.0 million and $57.1 million, respectively. Realized gains
on those sales during the six-month periods ended June 30, 2007 and 2006 were $369,000 and $19,000,
respectively. There were no losses in either period. 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, 2007.
- 10 -
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
(In thousands) |
|
|
Less than 12 months |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Obligations of U.S. government entities |
|
$ |
950,000 |
|
|
$ |
18,211 |
|
|
$ |
931,789 |
|
Puerto Rico Government and agency obligations |
|
|
2,376 |
|
|
|
341 |
|
|
|
2,035 |
|
Mortgage-backed securities and CMOs |
|
|
926,821 |
|
|
|
14,878 |
|
|
|
911,943 |
|
Corporate bonds and other |
|
|
26,000 |
|
|
|
130 |
|
|
|
25,870 |
|
|
|
|
|
1,905,197 |
|
|
|
33,560 |
|
|
|
1,871,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Puerto Rico Government and agency obligations |
|
|
14,119 |
|
|
|
754 |
|
|
|
13,365 |
|
Mortgage-backed securities and CMOs |
|
|
8,543 |
|
|
|
350 |
|
|
|
8,193 |
|
|
|
|
|
22,662 |
|
|
|
1,104 |
|
|
|
21,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Obligations of U.S. government entities |
|
$ |
950,000 |
|
|
$ |
18,211 |
|
|
$ |
931,789 |
|
Puerto Rico Government and agency obligations |
|
|
16,495 |
|
|
|
1,095 |
|
|
|
15,400 |
|
Mortgage-backed securities and CMOs |
|
|
935,364 |
|
|
|
15,228 |
|
|
|
920,136 |
|
Corporate bonds and other |
|
|
26,000 |
|
|
|
130 |
|
|
|
25,870 |
|
|
|
|
$ |
1,927,859 |
|
|
$ |
34,664 |
|
|
$ |
1,893,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
(In thousands) |
|
|
Less than 12 months |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Obligations of U.S government sponsored entities |
|
$ |
56,499 |
|
|
$ |
2,183 |
|
|
$ |
54,316 |
|
Puerto Rico Government and agency obligations |
|
|
4,272 |
|
|
|
36 |
|
|
|
4,236 |
|
Mortgage-backed securities and CMOs |
|
|
527,726 |
|
|
|
12,935 |
|
|
|
514,791 |
|
|
|
|
|
588,497 |
|
|
|
15,154 |
|
|
|
573,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Obligations of U.S government sponsored entities |
|
|
512,231 |
|
|
|
11,006 |
|
|
|
501,225 |
|
Puerto Rico Government and agency obligations |
|
|
50,968 |
|
|
|
4,665 |
|
|
|
46,303 |
|
Mortgage-backed securities and CMOs |
|
|
453,120 |
|
|
|
19,156 |
|
|
|
433,964 |
|
|
|
|
|
1,016,319 |
|
|
|
34,827 |
|
|
|
981,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Loss |
|
Value |
Obligations of U.S government sponsored entities |
|
|
568,730 |
|
|
|
13,189 |
|
|
|
555,541 |
|
Puerto Rico Government and agency obligations |
|
|
55,240 |
|
|
|
4,701 |
|
|
|
50,539 |
|
Mortgage-backed securities and CMOs |
|
|
980,846 |
|
|
|
32,091 |
|
|
|
948,755 |
|
|
|
|
$ |
1,604,816 |
|
|
$ |
49,981 |
|
|
$ |
1,554,835 |
|
|
Securities in an unrealized loss position at June 30, 2007 are mainly composed of securities issued
or backed by U.S. government agencies and U.S. government sponsored agencies. The vast majority of
these securities are rated the equivalent of AAA by nationally recognized rating organizations. The
investment portfolio is structured primarily with highly liquid securities that 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, 2007 are temporary and are substantially related to market interest rate
fluctuations and not to deterioration in the creditworthiness of the issuers. Also, Management has
the intent and ability to hold these investments for a reasonable period of time for a forecasted
recovery of fair value up to (or beyond) the cost of these investments.
- 11 -
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, 2007, and December 31, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Residential mortgage loans |
|
$ |
922,865 |
|
|
$ |
899,162 |
|
Home equity loans and secured personal loans |
|
|
31,232 |
|
|
|
36,270 |
|
Commercial loans, mainly secured by real estate |
|
|
232,164 |
|
|
|
241,702 |
|
Personal consumer loans and lines of credit |
|
|
30,905 |
|
|
|
35,772 |
|
|
|
|
|
|
|
|
Loans receivable, gross |
|
|
1,217,166 |
|
|
|
1,212,906 |
|
Less: deferred loan fees, net |
|
|
(2,589 |
) |
|
|
(3,123 |
) |
|
|
|
|
|
|
|
Loans receivable |
|
|
1,214,577 |
|
|
|
1,209,783 |
|
Allowance for loan losses |
|
|
(8,432 |
) |
|
|
(8,016 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
|
1,206,145 |
|
|
|
1,201,767 |
|
Mortgage loans held-for-sale |
|
|
66,032 |
|
|
|
10,603 |
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,272,177 |
|
|
$ |
1,212,370 |
|
|
|
|
|
|
|
|
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
additional details related to the changes in the allowance for loan losses for the quarters and
six-month periods ended June 30, 2007 and 2006.
The Group evaluates all loans, some individually, and others as homogeneous groups, for purposes of
determining impairment. At June 30, 2007 and December 31, 2006, the total investment in impaired
loans was $1.7 million and $2.0 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.
NOTE 4 PLEDGED ASSETS
At June 30, 2007, residential mortgage loans amounting to $580.0 million were pledged to secure
advances and borrowings from the FHLB. Investment securities with fair values totaling $3.368
billion, $91.1 million, and $8.0 million at June 30, 2007, were pledged to secure securities sold
under agreements to repurchase, public fund deposits and other funds, respectively. Also,
investment securities with fair value totaling $119,100 at June 30, 2007, were pledged to the
Puerto Rico Treasury Department.
As of June 30, 2007, investment securities available-for-sale and held-to-maturity not pledged
amounted to $59.9 million and $93.7 million, respectively. As of June 30, 2007, mortgage loans not
pledged amounted to $395.3 million.
- 12 -
NOTE 5 OTHER ASSETS
Other assets at June 30, 2007 and December 31, 2006 include the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Investment in equity indexed options |
|
$ |
43,358 |
|
|
$ |
34,216 |
|
Investment in limited partnership |
|
|
11,988 |
|
|
|
11,913 |
|
Deferred charges |
|
|
944 |
|
|
|
1,037 |
|
Prepaid expenses |
|
|
3,504 |
|
|
|
2,152 |
|
Investment in Statutory Trusts |
|
|
1,086 |
|
|
|
1,086 |
|
Goodwill |
|
|
2,006 |
|
|
|
2,006 |
|
Servicing asset |
|
|
1,419 |
|
|
|
1,507 |
|
Accounts receivable and other assets |
|
|
10,986 |
|
|
|
7,560 |
|
|
|
|
|
|
|
|
|
|
$ |
75,291 |
|
|
$ |
61,477 |
|
|
|
|
|
|
|
|
NOTE 6 SUBORDINATED CAPITAL NOTES
Subordinated capital notes amounted to $36,083,000 at June 30, 2007 and December 31, 2006.
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 by each of the Statutory Trust I and the Statutory Trust II,
respectively, 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 call provision of the subordinated capital
note purchased by the Statutory Trust I was exercised by the Group in December 2006 and the Group
recorded a $915,000 loss related to the write-off of unamortized issuance cost of the note. The
other subordinated capital note has a par value of $36.1 million, bears interest based on 3-month
LIBOR plus 295 basis points (8.31% at June 30, 2007 and December 31, 2006), payable quarterly, and
matures on September 17, 2033. The subordinated capital note purchased by the Statutory Trust II
may be called at par after five years (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. Under Federal Reserve Board rules, 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, 2007, 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 and their respective accrued interest at June 30,
2007 mature as follows:
- 13 -
|
|
|
|
|
|
|
(In thousands) |
|
|
|
Balance |
|
Due within 30 days |
|
$ |
125,328 |
|
Due after 30 to 60 days |
|
|
2,195 |
|
Due after 60 to 90 days |
|
|
6,273 |
|
Due after 3 to 5 years |
|
|
1,250,000 |
|
Due after 5 to 10 years |
|
|
1,900,000 |
|
|
|
|
|
|
|
$ |
3,283,796 |
|
|
|
|
|
At June 30, 2007, the advances from the FHLB mature as follows:
|
|
|
|
|
|
|
(In thousands) |
|
|
|
Balance |
|
Due within 30 days |
|
$ |
25,000 |
|
Due after 1 to 3 years |
|
|
50,000 |
|
Due after 3 to 5 years |
|
|
50,000 |
|
Due after 5 to 10 years |
|
|
55,000 |
|
|
|
|
|
|
|
$ |
180,000 |
|
|
|
|
|
NOTE 8 DERIVATIVES ACTIVITIES
The Group utilizes various derivative instruments 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 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 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 paid a fixed monthly or quarterly cost
and received 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. The Group decided to unwind all of its outstanding
interest rate swaps with aggregate notional amounts of $1.1 billion in two separate transactions in
July and December 2006.
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 150% 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.
There were no derivatives designated as a hedge as of June 30, 2007 and December 31, 2006. Other
derivatives consist of purchased options used to manage the exposure to the stock market on stock
indexed deposits with notional amounts of $145,975,000 and $131,530,000 as of June 30, 2007 and
December 31, 2006, respectively; embedded options on stock indexed deposits with notional amounts
of $139,721,000 and $122,924,000 as of June 30, 2007 and December 31, 2006, respectively.
During the six-month periods ended June 30, 2007 and 2006, gains of $8.4 million and $859,000,
respectively, were recognized as earnings and reflected as Derivatives Activities in the
unaudited consolidated statements of income, mainly due to the $8.2 million gain recognized in the
first quarter of 2007 because of the elimination of the forecasted transactions on the cash flow
hedges of the swaps previously terminated, which gains were
- 14 -
previously included in other
comprehensive income. During the six-month period ended June 30, 2006, unrealized gains of $18.0
million on derivatives designated as cash flow hedges were included in other comprehensive income
(loss). There are no such unrealized gains or losses at June 30, 2007.
At June 30, 2007 and December 31, 2006, the fair value of derivatives was recognized as either
assets or liabilities in the unaudited consolidated statements of financial condition as follows:
the purchased options used to manage the exposure to the stock market on stock indexed deposits
represented an asset of $43.4 million and $34.2 million, respectively, presented in other assets;
the options sold to customers embedded in the certificates of deposit represented a liability of
$41.4 million and $32.2 million, respectively, recorded in deposits.
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.
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-backed
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 asset 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 placements 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.
Inter-segment 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 annual report on 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,
2007 and 2006:
- 15 -
Unaudited Quarters Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
|
|
|
|
|
Consolidated |
|
|
|
Banking |
|
|
Treasury |
|
|
Services |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
22,666 |
|
|
$ |
48,078 |
|
|
$ |
57 |
|
|
$ |
70,801 |
|
|
$ |
|
|
|
$ |
70,801 |
|
Interest expense |
|
|
(8,001 |
) |
|
|
(44,878 |
) |
|
|
(232 |
) |
|
|
(53,111 |
) |
|
|
|
|
|
|
(53,111 |
) |
|
|
|
|
|
|
Net interest income |
|
|
14,665 |
|
|
|
3,200 |
|
|
|
(175 |
) |
|
|
17,690 |
|
|
|
|
|
|
|
17,690 |
|
Non-interest income |
|
|
1,747 |
|
|
|
2,194 |
|
|
|
3,855 |
|
|
|
7,796 |
|
|
|
|
|
|
|
7,796 |
|
Non-interest expenses |
|
|
(13,683 |
) |
|
|
(848 |
) |
|
|
(2,946 |
) |
|
|
(17,477 |
) |
|
|
|
|
|
|
(17,477 |
) |
Intersegment revenue |
|
|
928 |
|
|
|
|
|
|
|
|
|
|
|
928 |
|
|
|
(928 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(152 |
) |
|
|
(776 |
) |
|
|
(928 |
) |
|
|
928 |
|
|
|
|
|
Provision for loan losses |
|
|
(1,375 |
) |
|
|
|
|
|
|
|
|
|
|
(1,375 |
) |
|
|
|
|
|
|
(1,375 |
) |
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
2,282 |
|
|
$ |
4,394 |
|
|
$ |
(42) |
|
|
$ |
6,634 |
|
|
$ |
|
|
|
$ |
6,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June 30, 2007 |
|
$ |
1,748,466 |
|
|
$ |
3,829,549 |
|
|
$ |
12,077 |
|
|
$ |
5,590,092 |
|
|
$ |
(299,443 |
) |
|
$ |
5,290,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) 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 |
|
|
|
|
|
|
|
Unaudited Six-Month Periods Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
|
|
|
|
|
Consolidated |
|
|
|
Banking |
|
|
Treasury |
|
|
Services |
|
|
Segments |
|
|
Eliminations |
|
|
Total |
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
45,009 |
|
|
$ |
87,161 |
|
|
$ |
130 |
|
|
$ |
132,300 |
|
|
$ |
|
|
|
$ |
132,300 |
|
Interest expense |
|
|
(14,972 |
) |
|
|
(85,809 |
) |
|
|
(441 |
) |
|
|
(101,222 |
) |
|
|
|
|
|
|
(101,222 |
) |
|
|
|
|
|
|
Net interest income |
|
|
30,037 |
|
|
|
1,352 |
|
|
|
(311 |
) |
|
|
31,078 |
|
|
|
|
|
|
|
31,078 |
|
Non-interest income |
|
|
3,024 |
|
|
|
11,146 |
|
|
|
8,757 |
|
|
|
22,927 |
|
|
|
|
|
|
|
22,927 |
|
Non-interest expenses |
|
|
(25,734 |
) |
|
|
(1,579 |
) |
|
|
(5,991 |
) |
|
|
(33,304 |
) |
|
|
|
|
|
|
(33,304 |
) |
Intersegment revenue |
|
|
1,876 |
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
|
(1,876 |
) |
|
|
|
|
Intersegment expense |
|
|
|
|
|
|
(298 |
) |
|
|
(1,578 |
) |
|
|
(1,876 |
) |
|
|
1,876 |
|
|
|
|
|
Provision for loan losses |
|
|
(2,450 |
) |
|
|
|
|
|
|
|
|
|
|
(2,450 |
) |
|
|
|
|
|
|
(2,450 |
) |
|
|
|
|
|
|
Income before income taxes |
|
$ |
6,753 |
|
|
$ |
10,621 |
|
|
$ |
877 |
|
|
$ |
18,251 |
|
|
$ |
|
|
|
$ |
18,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of June 30, 2007 |
|
$ |
1,748,467 |
|
|
$ |
3,829,602 |
|
|
$ |
12,023 |
|
|
$ |
5,590,092 |
|
|
$ |
(299,443 |
) |
|
$ |
5,290,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
- 16 -
NOTE 10 RECENT ACCOUNTING DEVELOPMENTS:
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 evaluating the impact that this accounting standard may have on the Groups
consolidated financial statements.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115
On February 15, 2007, the FASB issued SFAS 159, The Fair Value Option for Financial assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115. SFAS 159 provides an
alternative measurement treatment for certain financial assets and financial liabilities, under an
instrument-by-instrument election, that permits fair value to be used for both initial and
subsequent measurement, with changes in fair value recognized in earnings. While SFAS 159 is
effective for the Group beginning January 1, 2008, earlier adoption is permitted as of January 1,
2007, provided that the entity also adopts all of the requirements of SFAS 157. Management decided
not to pursue early adoption and is evaluating the impact that this accounting standard may have on
the Groups Consolidated Financial Statements.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, (FIN 48). On
January 1, 2007, the Group adopted FIN 48. FIN 48 establishes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Pursuant to FIN 48, the effects of a tax position
are recognized in the financial statements when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination by the taxing authority. Conversely,
previously recognized tax positions are derecognized when it is no longer more likely than not that
the tax position would be sustained upon examination. FIN 48 also requires certain disclosures
regarding unrecognized tax benefits and the amounts and classification of the related interest and
penalties.
As of January 1, 2007, the Companys unrecognized tax benefit totaled $7.0 million, of which $1.3
million related to interest and penalties. No adjustment resulted from the implementation of FIN
48. In accordance with the Groups policy, any tax-related interest and/or penalties are
classified as a component of income taxes in the consolidated statements of financial position and
results of operations. The tax periods ended June 30, 2003, 2004, and 2005, and December 31, 2005
and 2006 remain subject to examination by the Puerto Rico Department of Treasury.
NOTE 11 SUBSEQUENT EVENT:
On July 27, 2007, the Board of Directors approved a new stock repurchase program pursuant to which
the Group is authorized to purchase in the open market up to $15.0 million of its outstanding share
of common stocks. The shares of common stock so repurchased are to be held by the Group as
Treasury shares. The new program will substitute the Group stock repurchase program adopted on
August 30, 2005. The new program effectively doubles the funds available to repurchase shares under
the previous program.
- 17 -
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, 2007 AND 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
EARNINGS PER SHARE AND DIVIDENDS DATA: |
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
Interest income |
|
$ |
70,801 |
|
|
$ |
56,894 |
|
|
|
24.4 |
% |
|
$ |
132,300 |
|
|
$ |
112,886 |
|
|
|
17.2 |
% |
Interest expense |
|
|
53,111 |
|
|
|
46,186 |
|
|
|
15.0 |
% |
|
|
101,222 |
|
|
|
86,966 |
|
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
17,690 |
|
|
|
10,708 |
|
|
|
65.2 |
% |
|
|
31,078 |
|
|
|
25,920 |
|
|
|
19.9 |
% |
Provision for loan losses |
|
|
1,375 |
|
|
|
947 |
|
|
|
45.2 |
% |
|
|
2,450 |
|
|
|
2,048 |
|
|
|
19.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
16,315 |
|
|
|
9,761 |
|
|
|
67.1 |
% |
|
|
28,628 |
|
|
|
23,872 |
|
|
|
19.9 |
% |
Non-interest income |
|
|
7,796 |
|
|
|
7,521 |
|
|
|
3.7 |
% |
|
|
22,927 |
|
|
|
16,474 |
|
|
|
39.2 |
% |
Non-interest expenses |
|
|
17,477 |
|
|
|
14,784 |
|
|
|
18.2 |
% |
|
|
33,304 |
|
|
|
29,667 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
6,634 |
|
|
|
2,498 |
|
|
|
165.6 |
% |
|
|
18,251 |
|
|
|
10,679 |
|
|
|
70.9 |
% |
Income tax expense (benefit) |
|
|
187 |
|
|
|
(21 |
) |
|
|
990.5 |
% |
|
|
811 |
|
|
|
110 |
|
|
|
637.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
6,447 |
|
|
|
2,519 |
|
|
|
155.9 |
% |
|
|
17,440 |
|
|
|
10,569 |
|
|
|
65.0 |
% |
Less: dividends on preferred stock |
|
|
(1,201 |
) |
|
|
(1,201 |
) |
|
|
|
% |
|
|
(2,401 |
) |
|
|
(2,401 |
) |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
5,246 |
|
|
$ |
1,318 |
|
|
|
298.0 |
% |
|
$ |
15,039 |
|
|
$ |
8,168 |
|
|
|
84.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
|
320.0 |
% |
|
$ |
0.61 |
|
|
$ |
0.33 |
|
|
|
84.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
|
320.0 |
% |
|
$ |
0.61 |
|
|
$ |
0.33 |
|
|
|
84.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
24,488 |
|
|
|
24,599 |
|
|
|
-0.5 |
% |
|
|
24,480 |
|
|
|
24,608 |
|
|
|
-0.5 |
% |
Average potential common share-options |
|
|
75 |
|
|
|
106 |
|
|
|
-29.3 |
% |
|
|
97 |
|
|
|
128 |
|
|
|
-24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average shares outstanding and equivalents |
|
|
24,563 |
|
|
|
24,705 |
|
|
|
-0.6 |
% |
|
|
24,577 |
|
|
|
24,736 |
|
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (ROA) |
|
|
0.49 |
% |
|
|
0.22 |
% |
|
|
122.7 |
% |
|
|
0.70 |
% |
|
|
0.92 |
% |
|
|
-23.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity (ROE) |
|
|
7.87 |
% |
|
|
1.94 |
% |
|
|
305.7 |
% |
|
|
11.22 |
% |
|
|
7.93 |
% |
|
|
41.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-to-assets ratio |
|
|
5.93 |
% |
|
|
7.69 |
% |
|
|
-22.9 |
% |
|
|
5.93 |
% |
|
|
7.69 |
% |
|
|
-22.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
68.99 |
% |
|
|
78.76 |
% |
|
|
-12.4 |
% |
|
|
73.81 |
% |
|
|
71.39 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
0.78 |
% |
|
|
0.60 |
% |
|
|
30.0 |
% |
|
|
0.81 |
% |
|
|
0.63 |
% |
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
1.17 |
% |
|
|
0.70 |
% |
|
|
67.1 |
% |
|
|
1.04 |
% |
|
|
0.89 |
% |
|
|
16.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
1.40 |
% |
|
|
0.96 |
% |
|
|
45.8 |
% |
|
|
1.30 |
% |
|
|
1.16 |
% |
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of financial centers |
|
|
24 |
|
|
|
24 |
|
|
|
|
% |
|
|
24 |
|
|
|
24 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
PERIOD END BALANCES AND CAPITAL RATIOS: |
|
2007 |
|
|
2006 |
|
|
Variance |
|
Investments and loans |
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities |
|
$ |
3,738,339 |
|
|
$ |
2,992,236 |
|
|
|
24.9 |
% |
Loans (including loans held-for-sale), net |
|
|
1,272,177 |
|
|
|
1,212,370 |
|
|
|
4.9 |
% |
Securities and loans sold but not yet delivered |
|
|
46,461 |
|
|
|
6,430 |
|
|
|
622.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,056,977 |
|
|
$ |
4,211,036 |
|
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,329,662 |
|
|
$ |
1,232,988 |
|
|
|
7.8 |
% |
Repurchase agreements |
|
|
3,283,796 |
|
|
|
2,535,923 |
|
|
|
29.5 |
% |
Other borrowings |
|
|
240,724 |
|
|
|
246,551 |
|
|
|
-2.4 |
% |
Securities and loans purchased but not yet received |
|
|
100,067 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,954,249 |
|
|
$ |
4,015,462 |
|
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity |
|
$ |
68,000 |
|
|
$ |
68,000 |
|
|
|
|
% |
Common equity |
|
|
245,475 |
|
|
|
268,426 |
|
|
|
-8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
313,475 |
|
|
$ |
336,426 |
|
|
|
-6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital |
|
|
7.23 |
% |
|
|
8.42 |
% |
|
|
-14.1 |
% |
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
19.32 |
% |
|
|
21.57 |
% |
|
|
-10.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
19.75 |
% |
|
|
22.04 |
% |
|
|
-10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets managed |
|
$ |
1,881,043 |
|
|
$ |
1,848,596 |
|
|
|
1.8 |
% |
Broker-dealer assets gathered |
|
|
1,088,336 |
|
|
|
1,143,668 |
|
|
|
-4.8 |
% |
|
|
|
|
|
|
|
|
|
|
Assets managed |
|
|
2,969,379 |
|
|
|
2,992,264 |
|
|
|
-0.8 |
% |
Assets owned |
|
|
5,290,649 |
|
|
|
4,373,690 |
|
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total financial assets managed and owned |
|
$ |
8,260,028 |
|
|
$ |
7,365,954 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
- 18 -
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 continue producing a balanced
and growing revenue stream.
During the quarter and six-month period ended June 30, 2007, the Group continued targeting the
personal and commercial needs of mid and high net worth individuals and families, including
professionals and owners of small and mid-size businesses, primarily in Puerto Rico.
During the fourth quarter of 2006, the Group completed a review of its available-for-sale (AFS)
investment portfolio in light of asset/liability management considerations and changing market
conditions, and strategically repositioned this portfolio. The repositioning involved open market
sales of approximately $865 million of securities with a weighted average yield of 4.60% at a loss
of approximately $16.0 million which was included as non-interest income in the accompanying
consolidated financials statements. Following the sale, $860 million of triple-A securities at a
weighted average yield of 5.55% were purchased and classified as AFS. As part of this
repositioning, the Group entered into a $900 million, 5-year structured repurchase agreement ($450
million non-put 1-year and $450 million non-put 2-years) with a weighted average rate paid of
4.52%. Proceeds were used to repay repurchase agreements with a weighted average rate paid of
5.25%. In February 2007, the Group continued its strategic repositioning of the repurchase
agreements portfolio, restructuring an additional $1 billion of short-term borrowings, with a
weighted average rate being paid of approximately 5.35%, into 10-year, non-put 2-year structured
repurchased agreements, priced at 95 basis points under 90-day LIBOR (for a current rate of 4.40%).
These strategic actions are expected to significantly improve the Groups net interest income
position for 2007. Separately, the Group purchased in February 2007 approximately $900 million in
U.S. government agency securities for the AFS portfolio which were funded with a net spread of
approximately 150 basis points, locked in for two years on $750 million and one year on $150
million. These securities are intended to replenish scheduled repayments and maturities of
securities that occurred in 2006 and are expected to occur in 2007. Most of the actions the Group
took to reposition the AFS portfolio and its funding in December 2006 did not take effect until
January 2007, and the transactions undertaken to further restructure the Groups funding in
February 2007 did not take effect until March 2007. These changes were reflected in the June 2007
quarter, as evidenced in the increase in interest rate spread from 0.89% in the March 2007 quarter
to 1.17% in the June 2007 quarter, and also in interest rate margin, from 1.18% to 1.40% for the
same comparable periods.
Income Available to Common Shareholders
For the quarter and six-month period ended June 30, 2007, the Groups income available to common
shareholders totaled $5.2 million and $15.0 million, respectively, compared to $1.3 million and
$8.2 million, respectively, in the comparable year ago quarter and six-month period. Earnings per
basic and fully diluted common share was $0.21 compared to $0.05 in the year-ago quarter, and $0.61
for the six-month period ended June 30, 2007 compared to $0.33 in the year ago period.
Return on Average Assets and Common Equity
Return on average common equity (ROE) for the quarter and six-month period ended June 30, 2007 was
7.87% and 11.22%, respectively, from 1.94% and 7.93%, for the quarter and six-months ended June 30,
2006, respectively. Return on average assets (ROA) for the quarter and six-month period ended June
30, 2007 was 0.49% and 0.70%, respectively.
Net Interest Income after Provision for Loan Losses
Net interest income after provision for loan losses increased 67.1% and 19.9% for the quarter and
six-month period ended June 30, 2007, totaling $16.3 million and $28.6 million, respectively,
compared with $9.8 million and $23.9 million, respectively, for the same periods in the previous
year. Net interest income after provision for loan losses also improved as compared to the last
three preceding quarters due to the favorable effects of the aforementioned repositioning of the
AFS investment portfolio and restructuring of the funding portfolio. Increases of 24.4% and 17.2%
in interest income for the quarter and six-month period ended June 30, 2007, respectively, as
compared to same periods last year was mainly due to higher loan volume and higher average yields
on interest earning assets. These increases were partially offset by higher interest rates and
increased borrowings. Net interest margin for the June 30, 2007 quarter and six-month period was
1.40% and 1.30%,
- 19 -
respectively, compared to 0.96% and 1.16%, for the corresponding year-ago periods, and 1.18% and
0.72% for the quarters ended March 31, 2007 and December 31, 2006, respectively.
Non-Interest Income
Total non-interest income was $7.8 million and $22.9 million for the quarter and six-month period
ended June 30, 2007, respectively, an increase of 3.7% and 39.2%
over the same
quarter and six-month period a year ago. These results reflect year-over-year growth in commissions and fees
from brokerage activities, trust activities, securities net gain and derivatives net gain, which
more than offset declines in banking service revenues and mortgage banking activities, and the
absence of investment banking revenues. Commission and fees from brokerage and insurance
activities remained flat at $4.1 million quarter over quarter, and increased 21.5% to $8.9 million
for the six-month period ended June 30, 2007 as compared to $7.3 million for the year-ago period,
reflecting growth strategies at work in those businesses. Net gains of $88,000 and $8.4 million in
derivatives activities for the quarter and six-month period ended June 30, 2007, compared to a
$23,000 loss and a $859,000 gain in the year ago periods. The increase for the six-month period
ended June 30, 2007, reflects the recognition in the March 2007 quarter of the remaining net gain
from the July 2006 unwinding of interest rate swaps that had been used to hedge rising interest
costs of short-term repurchase agreements, which had previously been included in other
comprehensive income.
Non-Interest Expenses
Non-interest expenses totaled $17.5 million and $33.3 million, respectively, for the quarter and
six-month period ended June 30, 2007, compared to $14.8 million and $29.7 million, respectively, in
the year ago periods reflecting higher advertising expenses, professional fees, severance costs and
foreclosure expenses.
Income Tax Expense
The income tax expense was $187,000 and $811,000, respectively, for the quarter and six-month
period ended June 30, 2007, compared to a benefit of $21,000 and an expense of $110,000 for the
respective periods ended June 30, 2006. The current income tax provision is lower than the
provision based on the statutory tax rate for the Group, which is 39.0%, 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 entity.
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, 2007, total financial assets reached $8.260 billion compared to $7.366
billion at December 31, 2006, a 12.1% increase. There was 21.0% increase in assets owned when
compared to December 31, 2006, while assets managed by the trust division remained flat at $3.0
billion. Owned assets are approximately 98% owned by the Groups banking 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, 2007, total assets managed by the Groups trust division and CPC amounted to $1.881
billion, compared to the $1.849 billion reported at December 31, 2006. 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, 2007, total assets gathered by the securities
broker-dealer from its customer investment accounts, decreased to $1.088 billion compared to $1.144
billion as of December 31, 2006.
- 20 -
Interest Earning Assets
The investment portfolio amounted to $3.738 billion as of June 30, 2007, a 24.9% increase compared
to $2.992 billion as of December 31, 2006, while the loan portfolio increased 4.9% to $1.272
billion as of June 30, 2007, compared to $1.212 billion as of December 31, 2006. The increase in
investment securities relates to the $900 million purchase of U.S. Government agency securities in
the March 2007 quarter for the AFS portfolio. That transaction was intended to replenish scheduled
repayments and maturities expected for 2007, and provide a new source
of interest income in accordance with the Groups strategy in
light of current market conditions.
The mortgage loan portfolio totaled $1.017 billion as of June 30, 2007, a 7.9% increase from $942.9
million at December 31, 2006, and a 13.8% increase from $894.2 million a year ago. Mortgage loan
production for the six-month period ended June 30, 2007 totaled $86.3 million, a 35.6% decrease
compared to the year ago period, excluding purchases from third party originators. Mortgage loans
purchased amounted to $48.7 million for the six-month period ended June 30, 2007, compared to
$181.8 million for the corresponding year ago period.
Interest Bearing Liabilities
Total deposits amounted to $1.330 billion at June 30, 2007, an increase of 7.8% compared to
December 31, 2006, due to the continued success of the Oriental Money savings account product.
Borrowings at June 30, 2007 totaled $3.525 billion, an increase of 26.7% from December 31, 2006,
primarily due to the increased use of repurchase agreements, specifically related to the $900
million increase in investments securities.
Stockholders Equity
Stockholders equity as of June 30, 2007, was $313.5 million, compared to $336.4 million as of
December 31, 2006.
The Group continues to be well-capitalized, with ratios significantly above regulatory capital
adequacy guidelines. At June 30, 2007, Tier 1 Leverage Capital Ratio was 7.23% (1.8 times the
minimum of 4.00%), Tier 1 Risk-Based Capital Ratio was 19.32% (4.8 times the minimum of 4.00%), and
Total Risk-Based Capital Ratio was 19.75% (2.5 times the minimum of 8.00%).
- 21 -
TABLE 1 QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Average rate |
|
Average balance |
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
2007 |
|
2006 |
|
in % |
|
2007 |
|
2006 |
|
in BP |
|
2007 |
|
2006 |
|
in % |
|
|
|
|
|
|
|
A TAX EQUIVALENT SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
$ |
70,801 |
|
|
$ |
56,894 |
|
|
|
24.4 |
% |
|
|
5.61 |
% |
|
|
5.08 |
% |
|
|
53 |
|
|
$ |
5,046,726 |
|
|
$ |
4,480,608 |
|
|
|
12.6 |
% |
Tax equivalent adjustment |
|
|
14,668 |
|
|
|
13,051 |
|
|
|
12.4 |
% |
|
|
1.16 |
% |
|
|
1.17 |
% |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets tax equivalent |
|
|
85,469 |
|
|
|
69,945 |
|
|
|
22.2 |
% |
|
|
6.77 |
% |
|
|
6.25 |
% |
|
|
52 |
|
|
|
5,046,726 |
|
|
|
4,480,608 |
|
|
|
12.6 |
% |
Interest-bearing liabilities |
|
|
53,111 |
|
|
|
46,186 |
|
|
|
15.0 |
% |
|
|
4.44 |
% |
|
|
4.38 |
% |
|
|
6 |
|
|
|
4,781,105 |
|
|
|
4,215,139 |
|
|
|
13.4 |
% |
|
|
|
|
|
|
|
Tax equivalent net interest income / spread |
|
$ |
32,358 |
|
|
$ |
23,759 |
|
|
|
36.2 |
% |
|
|
2.33 |
% |
|
|
1.87 |
% |
|
|
46 |
|
|
$ |
265,621 |
|
|
$ |
265,469 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
Tax equivalent interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.56 |
% |
|
|
2.13 |
% |
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B NORMAL SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
47,595 |
|
|
$ |
38,251 |
|
|
|
24.4 |
% |
|
|
5.11 |
% |
|
|
4.44 |
% |
|
|
67 |
|
|
$ |
3,727,268 |
|
|
$ |
3,443,554 |
|
|
|
8.2 |
% |
Investment management fees |
|
|
|
|
|
|
(395 |
) |
|
|
-100.0 |
% |
|
|
0.00 |
% |
|
|
-0.05 |
% |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
47,595 |
|
|
|
37,856 |
|
|
|
25.7 |
% |
|
|
5.11 |
% |
|
|
4.40 |
% |
|
|
71 |
|
|
|
3,727,268 |
|
|
|
3,443,554 |
|
|
|
8.2 |
% |
Trading securities |
|
|
3 |
|
|
|
4 |
|
|
|
-25.0 |
% |
|
|
6.45 |
% |
|
|
7.34 |
% |
|
|
(89 |
) |
|
|
186 |
|
|
|
218 |
|
|
|
-14.9 |
% |
Money market investments |
|
|
888 |
|
|
|
723 |
|
|
|
22.8 |
% |
|
|
5.73 |
% |
|
|
4.72 |
% |
|
|
101 |
|
|
|
61,965 |
|
|
|
61,269 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
48,486 |
|
|
|
38,583 |
|
|
|
25.7 |
% |
|
|
5.12 |
% |
|
|
4.40 |
% |
|
|
72 |
|
|
|
3,789,419 |
|
|
|
3,505,041 |
|
|
|
8.1 |
% |
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
16,888 |
|
|
|
13,003 |
|
|
|
29.9 |
% |
|
|
6.78 |
% |
|
|
7.28 |
% |
|
|
(50 |
) |
|
|
995,669 |
|
|
|
714,649 |
|
|
|
39.3 |
% |
Commercial |
|
|
4,554 |
|
|
|
4,202 |
|
|
|
8.4 |
% |
|
|
7.93 |
% |
|
|
7.55 |
% |
|
|
38 |
|
|
|
229,750 |
|
|
|
222,574 |
|
|
|
3.2 |
% |
Consumer |
|
|
873 |
|
|
|
1,106 |
|
|
|
-21.1 |
% |
|
|
10.95 |
% |
|
|
11.54 |
% |
|
|
(59 |
) |
|
|
31,889 |
|
|
|
38,344 |
|
|
|
-16.8 |
% |
|
|
|
|
|
|
|
|
|
|
22,315 |
|
|
|
18,311 |
|
|
|
21.9 |
% |
|
|
7.10 |
% |
|
|
7.51 |
% |
|
|
(41 |
) |
|
|
1,257,308 |
|
|
|
975,567 |
|
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,801 |
|
|
|
56,894 |
|
|
|
24.4 |
% |
|
|
5.61 |
% |
|
|
5.08 |
% |
|
|
53 |
|
|
|
5,046,727 |
|
|
|
4,480,608 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,827 |
|
|
|
39,897 |
|
|
|
-10.2 |
% |
Now accounts |
|
|
206 |
|
|
|
214 |
|
|
|
-3.7 |
% |
|
|
1.19 |
% |
|
|
1.07 |
% |
|
|
12 |
|
|
|
69,131 |
|
|
|
80,077 |
|
|
|
-13.7 |
% |
Savings |
|
|
3,351 |
|
|
|
1,014 |
|
|
|
230.5 |
% |
|
|
4.27 |
% |
|
|
2.87 |
% |
|
|
140 |
|
|
|
314,151 |
|
|
|
141,139 |
|
|
|
122.6 |
% |
Certificates of deposit |
|
|
10,044 |
|
|
|
9,918 |
|
|
|
1.3 |
% |
|
|
4.66 |
% |
|
|
4.12 |
% |
|
|
54 |
|
|
|
861,244 |
|
|
|
961,794 |
|
|
|
-10.5 |
% |
|
|
|
|
|
|
|
|
|
|
13,601 |
|
|
|
11,146 |
|
|
|
22.0 |
% |
|
|
4.25 |
% |
|
|
3.65 |
% |
|
|
60 |
|
|
|
1,280,353 |
|
|
|
1,222,907 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
36,542 |
|
|
|
32,932 |
|
|
|
11.0 |
% |
|
|
4.46 |
% |
|
|
5.04 |
% |
|
|
(58 |
) |
|
|
3,274,576 |
|
|
|
2,616,058 |
|
|
|
25.2 |
% |
Interest rate risk management |
|
|
|
|
|
|
(1,930 |
) |
|
|
-100.0 |
% |
|
|
0.00 |
% |
|
|
-0.30 |
% |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees |
|
|
(25 |
) |
|
|
126 |
|
|
|
-119.8 |
% |
|
|
0.00 |
% |
|
|
0.02 |
% |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total repurchase agreements |
|
|
36,517 |
|
|
|
31,128 |
|
|
|
17.3 |
% |
|
|
4.46 |
% |
|
|
4.76 |
% |
|
|
(30 |
) |
|
|
3,274,576 |
|
|
|
2,616,058 |
|
|
|
25.2 |
% |
FHLB advances |
|
|
1,981 |
|
|
|
2,248 |
|
|
|
-11.9 |
% |
|
|
4.57 |
% |
|
|
3.22 |
% |
|
|
135 |
|
|
|
173,419 |
|
|
|
279,497 |
|
|
|
-38.0 |
% |
Subordinated capital notes |
|
|
766 |
|
|
|
1,344 |
|
|
|
-43.0 |
% |
|
|
8.75 |
% |
|
|
7.45 |
% |
|
|
130 |
|
|
|
35,000 |
|
|
|
72,166 |
|
|
|
-51.5 |
% |
Term notes |
|
|
6 |
|
|
|
159 |
|
|
|
-96.2 |
% |
|
|
2.19 |
% |
|
|
4.24 |
% |
|
|
(205 |
) |
|
|
1,108 |
|
|
|
15,000 |
|
|
|
-92.6 |
% |
Other borrowings |
|
|
240 |
|
|
|
161 |
|
|
|
49.3 |
% |
|
|
5.77 |
% |
|
|
6.77 |
% |
|
|
(100 |
) |
|
|
16,650 |
|
|
|
9,511 |
|
|
|
75.1 |
% |
|
|
|
|
|
|
|
|
|
|
39,510 |
|
|
|
35,040 |
|
|
|
12.8 |
% |
|
|
4.51 |
% |
|
|
4.68 |
% |
|
|
(17 |
) |
|
|
3,500,753 |
|
|
|
2,992,232 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,111 |
|
|
|
46,186 |
|
|
|
15.0 |
% |
|
|
4.44 |
% |
|
|
4.38 |
% |
|
|
6 |
|
|
|
4,781,106 |
|
|
|
4,215,139 |
|
|
|
13.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income / spread |
|
$ |
17,690 |
|
|
$ |
10,708 |
|
|
|
65.2 |
% |
|
|
1.17 |
% |
|
|
0.70 |
% |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.40 |
% |
|
|
0.96 |
% |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of average interest-earning assets over average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,621 |
|
|
$ |
265,469 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets over average interest-bearing liabilities ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105.56 |
% |
|
|
106.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C CHANGES IN NET INTEREST INCOME DUE TO: |
|
Volume |
|
Rate |
|
Total |
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
2,623 |
|
|
|
7,280 |
|
|
|
9,903 |
|
Loans |
|
|
5,046 |
|
|
|
(1,042 |
) |
|
|
4,004 |
|
|
|
|
|
|
|
7,669 |
|
|
|
6,238 |
|
|
|
13,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
489 |
|
|
|
1,966 |
|
|
|
2,455 |
|
Repurchase agreements |
|
|
7,442 |
|
|
|
(2,054 |
) |
|
|
5,388 |
|
Other borrowings |
|
|
(1,812 |
) |
|
|
894 |
|
|
|
(918 |
) |
|
|
|
|
|
|
6,119 |
|
|
|
806 |
|
|
|
6,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
1,550 |
|
|
$ |
5,432 |
|
|
$ |
6,982 |
|
|
|
|
- 22 -
TABLE 1A YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Average rate |
|
Average balance |
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
Variance |
|
|
2007 |
|
2006 |
|
in % |
|
2007 |
|
2006 |
|
in BP |
|
2007 |
|
2006 |
|
in % |
|
|
|
|
|
|
|
A TAX EQUIVALENT SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
$ |
132,300 |
|
|
$ |
112,886 |
|
|
|
17.2 |
% |
|
|
5.54 |
% |
|
|
5.06 |
% |
|
|
48 |
|
|
$ |
4,777,612 |
|
|
$ |
4,461,132 |
|
|
|
7.1 |
% |
Tax equivalent adjustment |
|
|
28,346 |
|
|
|
26,773 |
|
|
|
5.9 |
% |
|
|
1.19 |
% |
|
|
1.20 |
% |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets tax equivalent |
|
|
160,646 |
|
|
|
139,659 |
|
|
|
15.0 |
% |
|
|
6.73 |
% |
|
|
6.26 |
% |
|
|
47 |
|
|
|
4,777,612 |
|
|
|
4,461,132 |
|
|
|
7.1 |
% |
Interest-bearing liabilities |
|
|
101,222 |
|
|
|
86,966 |
|
|
|
16.4 |
% |
|
|
4.50 |
% |
|
|
4.17 |
% |
|
|
33 |
|
|
|
4,501,684 |
|
|
|
4,168,052 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
Tax equivalent net interest income / spread |
|
$ |
59,424 |
|
|
$ |
52,693 |
|
|
|
12.8 |
% |
|
|
2.23 |
% |
|
|
2.09 |
% |
|
|
14 |
|
|
$ |
275,928 |
|
|
$ |
293,080 |
|
|
|
-5.9 |
% |
|
|
|
|
|
|
|
Tax equivalent interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.49 |
% |
|
|
2.36 |
% |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B NORMAL SPREAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
87,069 |
|
|
$ |
77,570 |
|
|
|
12.2 |
% |
|
|
5.00 |
% |
|
|
4.50 |
% |
|
|
50 |
|
|
$ |
3,483,777 |
|
|
$ |
3,447,122 |
|
|
|
1.1 |
% |
Investment management fees |
|
|
(290 |
) |
|
|
(714 |
) |
|
|
-59.4 |
% |
|
|
-0.02 |
% |
|
|
-0.04 |
% |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
86,779 |
|
|
|
76,856 |
|
|
|
12.9 |
% |
|
|
4.98 |
% |
|
|
4.46 |
% |
|
|
52 |
|
|
|
3,483,777 |
|
|
|
3,447,122 |
|
|
|
1.1 |
% |
Trading securities |
|
|
14 |
|
|
|
3 |
|
|
|
366.7 |
% |
|
|
4.28 |
% |
|
|
3.30 |
% |
|
|
98 |
|
|
|
654 |
|
|
|
182 |
|
|
|
259.3 |
% |
Money market investments |
|
|
1,344 |
|
|
|
1,463 |
|
|
|
-8.1 |
% |
|
|
5.76 |
% |
|
|
4.50 |
% |
|
|
126 |
|
|
|
46,682 |
|
|
|
65,019 |
|
|
|
-28.2 |
% |
|
|
|
|
|
|
|
|
|
|
88,137 |
|
|
|
78,322 |
|
|
|
12.5 |
% |
|
|
4.99 |
% |
|
|
4.46 |
% |
|
|
53 |
|
|
|
3,531,113 |
|
|
|
3,512,323 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
33,215 |
|
|
|
24,201 |
|
|
|
37.2 |
% |
|
|
6.77 |
% |
|
|
6.75 |
% |
|
|
2 |
|
|
|
981,416 |
|
|
|
716,601 |
|
|
|
37.0 |
% |
Commercial |
|
|
9,156 |
|
|
|
8,298 |
|
|
|
10.3 |
% |
|
|
7.90 |
% |
|
|
8.51 |
% |
|
|
(61 |
) |
|
|
231,915 |
|
|
|
194,913 |
|
|
|
19.0 |
% |
Consumer |
|
|
1,792 |
|
|
|
2,065 |
|
|
|
-13.2 |
% |
|
|
10.81 |
% |
|
|
11.08 |
% |
|
|
(27 |
) |
|
|
33,168 |
|
|
|
37,295 |
|
|
|
-11.1 |
% |
|
|
|
|
|
|
|
|
|
|
44,163 |
|
|
|
34,564 |
|
|
|
27.8 |
% |
|
|
7.09 |
% |
|
|
7.29 |
% |
|
|
(20 |
) |
|
|
1,246,499 |
|
|
|
948,809 |
|
|
|
31.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,300 |
|
|
|
112,886 |
|
|
|
17.2 |
% |
|
|
5.54 |
% |
|
|
5.06 |
% |
|
|
48 |
|
|
|
4,777,612 |
|
|
|
4,461,132 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
36,266 |
|
|
|
40,965 |
|
|
|
-11.5 |
% |
Now accounts |
|
|
409 |
|
|
|
433 |
|
|
|
-5.5 |
% |
|
|
1.16 |
% |
|
|
1.05 |
% |
|
|
11 |
|
|
|
70,282 |
|
|
|
82,617 |
|
|
|
-14.9 |
% |
Savings |
|
|
6,268 |
|
|
|
1,271 |
|
|
|
393.2 |
% |
|
|
4.18 |
% |
|
|
2.24 |
% |
|
|
194 |
|
|
|
299,900 |
|
|
|
113,717 |
|
|
|
163.7 |
% |
Certificates of deposit |
|
|
19,172 |
|
|
|
19,940 |
|
|
|
-3.9 |
% |
|
|
4.56 |
% |
|
|
4.01 |
% |
|
|
55 |
|
|
|
840,369 |
|
|
|
993,618 |
|
|
|
-15.4 |
% |
|
|
|
|
|
|
|
|
|
|
25,849 |
|
|
|
21,644 |
|
|
|
19.4 |
% |
|
|
4.15 |
% |
|
|
3.52 |
% |
|
|
63 |
|
|
|
1,246,817 |
|
|
|
1,230,917 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
69,636 |
|
|
|
60,487 |
|
|
|
15.1 |
% |
|
|
4.60 |
% |
|
|
4.75 |
% |
|
|
(15 |
) |
|
|
3,025,163 |
|
|
|
2,548,638 |
|
|
|
18.7 |
% |
Interest rate risk management |
|
|
(773 |
) |
|
|
(3,250 |
) |
|
|
-76.2 |
% |
|
|
-0.05 |
% |
|
|
-0.26 |
% |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing fees |
|
|
441 |
|
|
|
254 |
|
|
|
73.6 |
% |
|
|
0.03 |
% |
|
|
0.02 |
% |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total repurchase agreements |
|
|
69,305 |
|
|
|
57,491 |
|
|
|
20.5 |
% |
|
|
4.58 |
% |
|
|
4.51 |
% |
|
|
7 |
|
|
|
3,025,163 |
|
|
|
2,548,638 |
|
|
|
18.7 |
% |
FHLB advances |
|
|
3,905 |
|
|
|
4,597 |
|
|
|
-15.1 |
% |
|
|
4.60 |
% |
|
|
3.15 |
% |
|
|
145 |
|
|
|
169,725 |
|
|
|
292,213 |
|
|
|
-41.9 |
% |
Subordinated capital notes |
|
|
1,524 |
|
|
|
2,641 |
|
|
|
-42.3 |
% |
|
|
8.58 |
% |
|
|
7.32 |
% |
|
|
126 |
|
|
|
35,539 |
|
|
|
72,166 |
|
|
|
-50.8 |
% |
Term notes |
|
|
195 |
|
|
|
316 |
|
|
|
-38.3 |
% |
|
|
5.12 |
% |
|
|
4.21 |
% |
|
|
91 |
|
|
|
7,044 |
|
|
|
15,000 |
|
|
|
-53.0 |
% |
Other borrowings |
|
|
445 |
|
|
|
277 |
|
|
|
60.6 |
% |
|
|
5.29 |
% |
|
|
6.08 |
% |
|
|
(79 |
) |
|
|
17,397 |
|
|
|
9,118 |
|
|
|
90.8 |
% |
|
|
|
|
|
|
|
|
|
|
75,373 |
|
|
|
65,322 |
|
|
|
15.4 |
% |
|
|
4.63 |
% |
|
|
4.45 |
% |
|
|
18 |
|
|
|
3,254,868 |
|
|
|
2,937,135 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,222 |
|
|
|
86,966 |
|
|
|
16.4 |
% |
|
|
4.50 |
% |
|
|
4.17 |
% |
|
|
33 |
|
|
|
4,501,685 |
|
|
|
4,168,052 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income / spread |
|
$ |
31,078 |
|
|
$ |
25,920 |
|
|
|
19.9 |
% |
|
|
1.04 |
% |
|
|
0.89 |
% |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.30 |
% |
|
|
1.16 |
% |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
of average interest-earning assets over average interest-bearing
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
275,928 |
|
|
$ |
293,080 |
|
|
|
-5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-earning assets over average interest-bearing liabilities
ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106.13 |
% |
|
|
107.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C CHANGES IN NET INTEREST INCOME DUE TO: |
|
Volume |
|
Rate |
|
Total |
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
417 |
|
|
|
9,398 |
|
|
|
9,815 |
|
Loans |
|
|
10,571 |
|
|
|
(972 |
) |
|
|
9,599 |
|
|
|
|
|
|
|
10,988 |
|
|
|
8,426 |
|
|
|
19,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
276 |
|
|
|
3,929 |
|
|
|
4,205 |
|
Repurchase agreements |
|
|
10,932 |
|
|
|
882 |
|
|
|
11,814 |
|
Other borrowings |
|
|
(3,766 |
) |
|
|
2,003 |
|
|
|
(1,763 |
) |
|
|
|
|
|
|
7,442 |
|
|
|
6,814 |
|
|
|
14,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
3,546 |
|
|
$ |
1,612 |
|
|
$ |
5,158 |
|
|
|
\ |
- 23 -
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, 2007, net interest income amounted to $17.7
million and $31.1 million, respectively, an increase of 65.2% and 19.9% from $10.7 million and
$25.9 million in the same periods of the previous year. The increase for the quarter and six-month
period reflects a 24.4% and 17.2% increase in interest income, due to a $7.7 million positive
volume variance and a $6.2 million positive rate variance in the quarter ended June 30, 2007, and a
$11.0 million positive volume variance and a $8.4 million positive rate variance in the six-month
period ended June 30, 2007. Increases of 15.0% and 16.4% in interest expense for the quarter and
six-month period ended June 30, 2007, were caused by an increase of $6.1 million in expenses due to
higher borrowings volume and $806,000 due to interest rate changes for the quarterly period, and
increases of $7.4 million from higher borrowings volume and $6.8 million due to interest rate changes for
the six-month period ended June 30, 2007. Interest rate spread increased 47 basis points to 1.17%
for the quarter ended June 30, 2007, from 0.70% in the
June 30, 2006 quarter, and 15 basis points to 1.04% for the six-month period ended June 30, 2007 from 0.89% for the year ago period. These
increases reflect the full benefits of the actions taken by the Group to reposition the AFS
portfolio and its funding in December 2006 and February 2007.
For the quarter and six-month period ended June 30, 2007, the average balances of total
interest-earnings assets were $5.047 billion and $4.778 billion, respectively, a 12.6% and 7.1%
increase from the same periods of the previous year. The increase in the average balance reflects
increases of 8.1% to $3.789 billion in the investment portfolio
and 28.9% to $1.257 billion in the loans portfolio for the quarter.
It also reflects an increase of 0.5%
to $3.501 billion in the investment portfolio and 31.4% to $1.246 billion in the loans portfolio for the six-month period. Most of the dollar increase in average
loans is the result of a higher average balance on the residential mortgage loan portfolio.
For the quarter and six-month period ended June 30, 2007, the average yield on interest-earning
assets was 5.61% and 5.54%, respectively, compared to 5.08% and 5.06% in the comparable year-ago
periods due to higher average yields in the investment portfolio offset by lower yields in the loan
portfolio. The investment portfolio yield increased to 5.12% in the quarter ended June 30, 2007,
versus 4.40% in the corresponding year ago quarter, and to 4.99% in the six-month period ended June
30, 2007, versus 4.46% in the corresponding year ago period, due to additions of higher-yielding
investments. The increase was a result of the AFS repositioning that occurred in the fourth
quarter of 2006 and the the first quarter of 2007.
For the quarter and six-month period ended June 30, 2007,
interest expense amounted to $53.1
million and $101.2 million, respectively, an increase of 15.0% and 16.4% from $46.2 million and
$87.0 million in the same periods of the previous year, resulting from both higher volume and rate
variances.
For the quarter and six-month period ended June 30, 2007,
the cost of deposits increased 60 basis points to 4.25% and 63 basis points to 4.15% as
compared to the same periods a year ago. The increase reflects higher average rates paid on higher balances, specifically in savings accounts due
to the continued success of the Oriental Money account product in attracting new customers and deposits. For the quarter ended June 30, 2007, the
cost of borrowings decreased 17 basis points to 4.51% from the same
quarter a year ago, and for the six-month period ended June 30,
2007, it increased
18 basis points to 4.63% from 4.45% in the same period a year ago.
TABLE 2 NON-INTEREST INCOME SUMMARY:
FOR THE QUARTERS AND SIX-MONTHS PERIODS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Variance % |
|
|
2007 |
|
|
2006 |
|
|
Variance % |
|
|
|
|
|
|
Mortgage banking activities |
|
$ |
170 |
|
|
$ |
634 |
|
|
|
-73.2 |
% |
|
$ |
232 |
|
|
$ |
1,070 |
|
|
|
-78.3 |
% |
Commissions and fees from trust, brokerage and insurance activities |
|
|
4,049 |
|
|
|
4,066 |
|
|
|
-0.4 |
% |
|
|
8,892 |
|
|
|
7,317 |
|
|
|
21.5 |
% |
Investment banking revenues |
|
|
|
|
|
|
852 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
2,561 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-banking service revenues |
|
|
4,219 |
|
|
|
5,552 |
|
|
|
-24.0 |
% |
|
|
9,124 |
|
|
|
10,948 |
|
|
|
-16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on deposit accounts |
|
|
1,229 |
|
|
|
1,315 |
|
|
|
-6.5 |
% |
|
|
2,454 |
|
|
|
2,734 |
|
|
|
-10.2 |
% |
Bank service charges and commissions |
|
|
893 |
|
|
|
656 |
|
|
|
36.1 |
% |
|
|
1,487 |
|
|
|
1,275 |
|
|
|
16.6 |
% |
Other operating revenues |
|
|
143 |
|
|
|
540 |
|
|
|
-73.5 |
% |
|
|
198 |
|
|
|
678 |
|
|
|
-70.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service revenues |
|
|
2,265 |
|
|
|
2,511 |
|
|
|
-9.8 |
% |
|
|
4,139 |
|
|
|
4,687 |
|
|
|
-11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale gains |
|
|
10 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
369 |
|
|
|
19 |
|
|
|
1842.1 |
% |
Trading net gain |
|
|
2 |
|
|
|
(8 |
) |
|
|
125.0 |
% |
|
|
2 |
|
|
|
21 |
|
|
|
-90.5 |
% |
Derivatives net gain |
|
|
88 |
|
|
|
(23 |
) |
|
|
482.6 |
% |
|
|
8,384 |
|
|
|
859 |
|
|
|
876.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities, derivatives and trading activities |
|
|
100 |
|
|
|
(31 |
) |
|
|
422.6 |
% |
|
|
8,755 |
|
|
|
899 |
|
|
|
873.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from investment in limited liability partnership |
|
|
967 |
|
|
|
(574 |
) |
|
|
268.5 |
% |
|
|
76 |
|
|
|
(270 |
) |
|
|
128.1 |
% |
Income from other investments |
|
|
192 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
701 |
|
|
|
|
|
|
|
100.0 |
% |
Other income |
|
|
53 |
|
|
|
63 |
|
|
|
-15.9 |
% |
|
|
132 |
|
|
|
210 |
|
|
|
-37.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-interest income (loss) |
|
|
1,212 |
|
|
|
(511 |
) |
|
|
337.2 |
% |
|
|
909 |
|
|
|
(60 |
) |
|
|
1615.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
7,796 |
|
|
$ |
7,521 |
|
|
|
3.7 |
% |
|
$ |
22,927 |
|
|
$ |
16,474 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 24 -
Non-interest income 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 $7.8 million and $22.9 million in the quarter and six-month periods
ended June 30, 2007, an increase of 3.7% and 39.2% when compared to $7.5 million and $16.5 million
in the same periods of the previous year. Improvement reflects increases in commissions and fees
from brokerage, trust, insurance, derivatives net gain, and securities net gain, partially offset
by reduced mortgage banking activities and no investment banking revenues for the quarter and
six-month period ended June 30, 2007.
Non-banking service revenues, generated from trust, mortgage banking, investment banking,
brokerage, and insurance activities, is the principal recurring component of non-interest income.
For the quarter and six-month period ended June 30, 2007, revenues from such activities were $4.2
million and $9.1 million, respectively, a decrease of 24.0% from
$5.6 million and 16.7% from $10.9
million recorded by the Group for the same periods a year ago. Commissions and fees from brokerage and
insurance activities remained level at $4.0 for the quarter ended June 30, 2007 compared to last
years quarter, and increased 21.5% to $8.9 million for the six-month period ended June 30, 2007,
from $7.3 million the same period of the previous year. Growth reflected the general improvement in
the equity markets. Revenues from mortgage banking activities for the quarter and six-month period
ended June 30, 2007 were $170,000 and $232,000, respectively, a decrease of 73.2% and 78.3% from
$634,000 and $1.1 million, respectively, for the same periods a year ago. There were no investment banking revenues for
the quarter and six-month period ended June 30, 2007, compared to revenues of $852,000 and $2.6
million from the corresponding year-ago periods.
Banking service revenue, 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, 2007, these revenues were $2.3 million and $4.1
million, respectively, a decrease of 9.8% from $2.5 million and
11.7% from $4.7 million for the
same periods a year ago, reflecting reduced consumer banking activity. Fees on deposit accounts for the
quarter and six-month period ended June 30, 2007 were $1.2 million and $2.5 million, respectively,
a decrease of 6.5% from $1.3 million and 10.2% from
$2.7 million for the same periods a year ago. Bank
service charges and commissions for the quarter and six-month period ended June 30, 2007 were
$893,000 and $1.5 million, respectively, an increase of 36.1%
from $656,000 and 16.6% from $1.3
million for the same periods a year ago, reflecting higher transactional volume in the Banks debit and
credit card products.
For the
quarter and six-month period ended June 30, 2007, gains from securities, derivatives and
trading activities were $292,000 compared to a loss of $31,000, and
gains of $9.5 million compared to $899,000, for the same year-ago periods. Results for the first six months of 2007 reflect the Groups
previously announced net gain of approximately $11 million from the July 2006 unwinding of interest
rate swaps that had been used to hedge rising interest costs of short-term repurchase agreements.
This gain was included in other comprehensive income, and was being recognized into earnings as a
reduction of interest expense on remaining short-term borrowings. The recent repurchase agreements
restructuring, however, significantly reduced the Groups short-term borrowings during the March
2007 quarter, eliminating the forecasted transactions that the swaps were intended to hedge. As a
result, Oriental recognized the remaining balance of $8.2 million (equal to $0.33 per basic and
fully diluted share) of the gain as non-interest income in the quarter ended March 31, 2007.
- 25 -
TABLE 3 NON-INTEREST EXPENSES SUMMARY
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Six-Month Period Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Variance % |
|
|
2007 |
|
|
2006 |
|
|
Variance % |
|
|
|
|
|
|
Compensation and employee benefits |
|
$ |
6,916 |
|
|
$ |
5,627 |
|
|
|
22.9 |
% |
|
$ |
13,661 |
|
|
$ |
11,801 |
|
|
|
15.8 |
% |
Occupancy and equipment |
|
|
3,343 |
|
|
|
2,793 |
|
|
|
19.7 |
% |
|
|
6,337 |
|
|
|
5,682 |
|
|
|
11.5 |
% |
Professional and service fees |
|
|
1,984 |
|
|
|
1,546 |
|
|
|
28.3 |
% |
|
|
3,522 |
|
|
|
2,902 |
|
|
|
21.4 |
% |
Advertising and business promotion |
|
|
1,118 |
|
|
|
1,077 |
|
|
|
3.8 |
% |
|
|
1,911 |
|
|
|
2,014 |
|
|
|
-5.1 |
% |
Loan servicing expenses |
|
|
540 |
|
|
|
509 |
|
|
|
6.1 |
% |
|
|
1,063 |
|
|
|
964 |
|
|
|
10.3 |
% |
Directors and investor relations expenses |
|
|
769 |
|
|
|
295 |
|
|
|
160.7 |
% |
|
|
1,300 |
|
|
|
708 |
|
|
|
83.6 |
% |
Taxes, other than payroll and income taxes |
|
|
489 |
|
|
|
573 |
|
|
|
-14.7 |
% |
|
|
937 |
|
|
|
1,173 |
|
|
|
-20.1 |
% |
Electronic banking charges |
|
|
457 |
|
|
|
494 |
|
|
|
-7.5 |
% |
|
|
916 |
|
|
|
962 |
|
|
|
-4.8 |
% |
Clearing and wrap fees expenses |
|
|
310 |
|
|
|
393 |
|
|
|
-21.1 |
% |
|
|
675 |
|
|
|
789 |
|
|
|
-14.4 |
% |
Communications |
|
|
308 |
|
|
|
395 |
|
|
|
-22.0 |
% |
|
|
646 |
|
|
|
843 |
|
|
|
-23.4 |
% |
Insurance |
|
|
211 |
|
|
|
219 |
|
|
|
-3.7 |
% |
|
|
427 |
|
|
|
432 |
|
|
|
-1.2 |
% |
Foreclosure expenses |
|
|
338 |
|
|
|
131 |
|
|
|
158.0 |
% |
|
|
405 |
|
|
|
232 |
|
|
|
74.6 |
% |
Printing, postage, stationery and supplies |
|
|
189 |
|
|
|
359 |
|
|
|
-47.4 |
% |
|
|
391 |
|
|
|
544 |
|
|
|
-28.1 |
% |
Other expenses |
|
|
505 |
|
|
|
373 |
|
|
|
35.4 |
% |
|
|
1,113 |
|
|
|
621 |
|
|
|
79.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
$ |
17,477 |
|
|
$ |
14,784 |
|
|
|
18.2 |
% |
|
$ |
33,304 |
|
|
$ |
29,667 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relevant ratios and data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits to non-interest expenses |
|
|
39.6 |
% |
|
|
38.1 |
% |
|
|
|
|
|
|
41.0 |
% |
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation to total assets |
|
|
0.52 |
% |
|
|
0.47 |
% |
|
|
|
|
|
|
0.52 |
% |
|
|
0.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensation per employee (annualized) |
|
$ |
53.6 |
|
|
$ |
42.4 |
|
|
|
|
|
|
$ |
52.1 |
|
|
$ |
44.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of employees |
|
|
516 |
|
|
|
531 |
|
|
|
|
|
|
|
524 |
|
|
|
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets owned
per average employee |
|
$ |
10,253 |
|
|
$ |
9,101 |
|
|
|
|
|
|
$ |
10,097 |
|
|
$ |
9,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total work force |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses for the quarter and six-month period ended June 30, 2007, were $17.5
million and $33.3 million, respectively, compared to
$14.8 million and $29.7 million in the same periods a year
ago.
These results reflect an efficiency ratio of 68.99% for the quarter ended June 30, 2007 compared to
78.76% in the same quarter a year ago, and an efficiency ratio of 73.81% for the six-month period ended June 30, 2007 compared
to 71.39% in the six-moth period ended June 30, 2006. The efficiency ratio measures how much of a
companys revenue is used to pay operating expenses. The Group computes its efficiency ratio by
dividing non-interest expenses by the sum of its net interest income and non-interest income, but
excluding gains on sale of investments securities, derivatives gains or losses and other income
that may be considered volatile in nature. Management believes that the exclusion of those items
permit greater comparability. Amounts presented as part of
non-interest income that are excluded from the
efficiency ratio computation amounted to $153,000
and $8.9 million for the quarter and six-month period ended June 30, 2007, respectively, and
$542,000 and $206,000 for the quarter and six-month period ended
June 30, 2006, respectively, because they were considered volatile in nature.
The Group has been successful in limiting expense growth to those areas that directly contribute to
increases in efficiency, service quality, and profitability. Non-interest expenses increased 18.2%
and 12.3%, respectively, as compared to the quarter and six-month period ended June 30, 2006.
Second quarter expenses included more than $1.5 million from items such as the launch of a new
television advertising campaign, certain improvements to the information technology platform,
professional service fees, severance costs related to right sizing the mortgage business in line
with market demand and foreclosure expenses.
- 26 -
TABLE 4 ALLOWANCE FOR LOAN LOSSES SUMMARY
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Change in |
|
|
Six-Month Period Ended June 30, |
|
|
Change in |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2007 |
|
|
2006 |
|
|
% |
|
Balance at beginning of period |
|
$ |
8,046 |
|
|
$ |
7,160 |
|
|
|
12.4 |
% |
|
$ |
8,016 |
|
|
$ |
6,630 |
|
|
|
20.9 |
% |
Provision for loan losses |
|
|
1,375 |
|
|
|
947 |
|
|
|
45.2 |
% |
|
|
2,450 |
|
|
|
2,048 |
|
|
|
19.7 |
% |
Net credit losses see Table 5 |
|
|
(989 |
) |
|
|
(606 |
) |
|
|
63.2 |
% |
|
|
(2,034 |
) |
|
|
(1,177 |
) |
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
8,432 |
|
|
$ |
7,501 |
|
|
|
12.4 |
% |
|
$ |
8,432 |
|
|
$ |
7,501 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Data and Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding gross loans at June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,280,609 |
|
|
$ |
1,161,439 |
|
|
|
10.3 |
% |
Recoveries to net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5 |
% |
|
|
18.4 |
% |
|
|
-43.0 |
% |
Allowance coverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.65 |
% |
|
|
0.65 |
% |
|
|
0.00 |
% |
Non-performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.70 |
% |
|
|
25.55 |
% |
|
|
-34.60 |
% |
Non-mortgage non-performing loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217.30 |
% |
|
|
213.52 |
% |
|
|
1.80 |
% |
TABLE 5 NET CREDIT LOSSES STATISTICS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, |
|
|
Change in |
|
|
Six-Month Period Ended June 30, |
|
|
Change in |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2007 |
|
|
2006 |
|
|
% |
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
$ |
(480 |
) |
|
$ |
(178 |
) |
|
|
169.7 |
% |
|
$ |
(1,026 |
) |
|
$ |
(377 |
) |
|
|
171.9 |
% |
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480 |
) |
|
|
(178 |
) |
|
|
169.7 |
% |
|
|
(1,026 |
) |
|
|
(377 |
) |
|
|
171.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(14 |
) |
|
|
(196 |
) |
|
|
-92.9 |
% |
|
|
(14 |
) |
|
|
(220 |
) |
|
|
-93.6 |
% |
Recoveries |
|
|
13 |
|
|
|
76 |
|
|
|
-82.9 |
% |
|
|
22 |
|
|
|
83 |
|
|
|
-73.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(120 |
) |
|
|
-99.2 |
% |
|
|
8 |
|
|
|
(137 |
) |
|
|
-105.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(611 |
) |
|
|
(389 |
) |
|
|
57.1 |
% |
|
|
(1,232 |
) |
|
|
(844 |
) |
|
|
46.0 |
% |
Recoveries |
|
|
103 |
|
|
|
81 |
|
|
|
27.2 |
% |
|
|
216 |
|
|
|
182 |
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(508 |
) |
|
|
(308 |
) |
|
|
64.9 |
% |
|
|
(1,016 |
) |
|
|
(662 |
) |
|
|
53.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(1,105 |
) |
|
|
(763 |
) |
|
|
44.8 |
% |
|
|
(2,272 |
) |
|
|
(1,442 |
) |
|
|
57.6 |
% |
Total recoveries |
|
|
116 |
|
|
|
157 |
|
|
|
-26.1 |
% |
|
|
238 |
|
|
|
265 |
|
|
|
-10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(989 |
) |
|
$ |
(606 |
) |
|
|
63.2 |
% |
|
$ |
(2,034 |
) |
|
$ |
(1,177 |
) |
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit losses (recoveries) to average loans outstanding (1): |
|
|
|
|
|
|
|
|
Mortgage |
|
|
0.19 |
% |
|
|
0.10 |
% |
|
|
|
|
|
|
0.21 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
0.00 |
% |
|
|
0.22 |
% |
|
|
|
|
|
|
-0.01 |
% |
|
|
0.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
6.37 |
% |
|
|
3.21 |
% |
|
|
|
|
|
|
6.13 |
% |
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
0.31 |
% |
|
|
0.25 |
% |
|
|
|
|
|
|
0.33 |
% |
|
|
0.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
995,669 |
|
|
$ |
714,649 |
|
|
|
39.3 |
% |
|
$ |
981,416 |
|
|
$ |
716,601 |
|
|
|
37.0 |
% |
Commercial |
|
|
229,750 |
|
|
|
222,574 |
|
|
|
3.2 |
% |
|
|
231,915 |
|
|
|
194,913 |
|
|
|
19.0 |
% |
Consumer |
|
|
31,889 |
|
|
|
38,344 |
|
|
|
-16.8 |
% |
|
|
33,168 |
|
|
|
37,295 |
|
|
|
-11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,257,308 |
|
|
$ |
975,567 |
|
|
|
28.9 |
% |
|
$ |
1,246,499 |
|
|
$ |
948,809 |
|
|
|
31.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 6 ALLOWANCE FOR LOSSES BREAKDOWN
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Allowance for loan losses breakdown: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
4,476 |
|
|
$ |
3,721 |
|
|
|
20.3 |
% |
|
$ |
3,463 |
|
Commercial |
|
|
1,953 |
|
|
|
1,831 |
|
|
|
6.7 |
% |
|
|
1,721 |
|
Consumer |
|
|
1,711 |
|
|
|
1,944 |
|
|
|
-12.0 |
% |
|
|
2,088 |
|
Unallocated allowance |
|
|
292 |
|
|
|
520 |
|
|
|
-43.8 |
% |
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,432 |
|
|
$ |
8,016 |
|
|
|
5.2 |
% |
|
$ |
7,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
53.1 |
% |
|
|
46.4 |
% |
|
|
|
|
|
|
46.2 |
% |
Commercial |
|
|
23.2 |
% |
|
|
22.8 |
% |
|
|
|
|
|
|
22.9 |
% |
Consumer |
|
|
20.3 |
% |
|
|
24.3 |
% |
|
|
|
|
|
|
27.8 |
% |
Unallocated allowance |
|
|
3.5 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 27 -
The provision for loan losses for the quarter and six-month
periods ended June 30, 2007, totaled
$1.4 million and $2.5 million, respectively, representing increases of 45.2% and 19.6% from the
$947,000 and $2.0 million reported for the same quarter and six-month period, respectively, 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 quarter and six-month period ended June 30, 2007
was adequate in order to maintain the allowance for loan losses at an appropriate level.
Net credit losses for the quarter and six-month periods ended June 30, 2007 increased from $606,000
(0.25% of average loans outstanding) in the quarter ended June 30, 2006, to $989,000 (0.31%) in the
corresponding quarter of 2007, and from $1.2 million (0.25% of average loans outstanding) in the
first six months of 2006, to $2.0 million (0.33%) for the same period of 2007. The increases were
primarily due to higher net credit losses for mortgage loans and consumer loans. Non-performing
loans of $50.5 million as of June 30, 2007 were 72.0% higher than the $29.4 million as of June 30,
2006 (Table 9). The increase in non-performing loans reflects the effects of the current economic
slowdown in Puerto Rico.
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 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.
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, 2007, the total investment in impaired loans
was $1.7 million, compared to $2.0 million at December 31, 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 a 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
overall historical loss trends and 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 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 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.
- 28 -
FINANCIAL CONDITION
TABLE 7 ASSETS SUMMARY AND COMPOSITION
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
1,910,348 |
|
|
$ |
1,955,566 |
|
|
|
-2.3 |
% |
|
$ |
1,993,034 |
|
U.S. Government and agency obligations |
|
|
1,618,549 |
|
|
|
863,019 |
|
|
|
87.5 |
% |
|
|
1,258,975 |
|
P.R. Government and agency obligations |
|
|
100,070 |
|
|
|
100,729 |
|
|
|
-0.7 |
% |
|
|
82,474 |
|
Other investment securities |
|
|
74,252 |
|
|
|
54,315 |
|
|
|
36.7 |
% |
|
|
109,348 |
|
Short-term investments |
|
|
21,211 |
|
|
|
5,000 |
|
|
|
324.2 |
% |
|
|
35,722 |
|
FHLB stock |
|
|
13,908 |
|
|
|
13,607 |
|
|
|
2.2 |
% |
|
|
18,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,738,338 |
|
|
|
2,992,236 |
|
|
|
24.9 |
% |
|
|
3,497,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
951,508 |
|
|
|
932,309 |
|
|
|
2.1 |
% |
|
|
884,671 |
|
Commercial, mainly secured by real estate |
|
|
232,164 |
|
|
|
241,702 |
|
|
|
-3.9 |
% |
|
|
227,744 |
|
Consumer |
|
|
30,905 |
|
|
|
35,772 |
|
|
|
-13.6 |
% |
|
|
39,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
|
1,214,577 |
|
|
|
1,209,783 |
|
|
|
0.4 |
% |
|
|
1,151,875 |
|
Allowance for loan losses |
|
|
(8,432 |
) |
|
|
(8,016 |
) |
|
|
5.2 |
% |
|
|
(7,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net |
|
|
1,206,145 |
|
|
|
1,201,767 |
|
|
|
0.4 |
% |
|
|
1,144,374 |
|
Mortgage loans held for sale |
|
|
66,032 |
|
|
|
10,603 |
|
|
|
522.8 |
% |
|
|
9,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net |
|
|
1,272,177 |
|
|
|
1,212,370 |
|
|
|
4.9 |
% |
|
|
1,153,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet delivered |
|
|
46,461 |
|
|
|
6,430 |
|
|
|
622.6 |
% |
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities and loans |
|
|
5,056,976 |
|
|
|
4,211,036 |
|
|
|
20.1 |
% |
|
|
4,652,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
70,207 |
|
|
|
34,070 |
|
|
|
106.1 |
% |
|
|
35,237 |
|
Accrued interest receivable |
|
|
45,807 |
|
|
|
27,940 |
|
|
|
63.9 |
% |
|
|
31,313 |
|
Premises and equipment, net |
|
|
19,390 |
|
|
|
20,153 |
|
|
|
-3.8 |
% |
|
|
17,358 |
|
Deferred tax asset, net |
|
|
18,005 |
|
|
|
14,150 |
|
|
|
27.2 |
% |
|
|
14,861 |
|
Foreclosed real estate |
|
|
4,971 |
|
|
|
4,864 |
|
|
|
2.2 |
% |
|
|
4,379 |
|
Other assets |
|
|
75,293 |
|
|
|
61,477 |
|
|
|
22.5 |
% |
|
|
77,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
233,673 |
|
|
|
162,654 |
|
|
|
43.7 |
% |
|
|
180,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,290,649 |
|
|
$ |
4,373,690 |
|
|
|
21.0 |
% |
|
$ |
4,832,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
51.1 |
% |
|
|
65.4 |
% |
|
|
|
|
|
|
56.9 |
% |
U.S. Government and agency obligations |
|
|
43.3 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
36.0 |
% |
P.R. Government and agency obligations |
|
|
2.7 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
2.4 |
% |
FHLB stock, short term and other investments |
|
|
2.9 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
77.7 |
% |
|
|
77.1 |
% |
|
|
|
|
|
|
77.0 |
% |
Commercial, mainly secured by real estate |
|
|
19.7 |
% |
|
|
20.0 |
% |
|
|
|
|
|
|
19.6 |
% |
Consumer |
|
|
2.6 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2007, the Groups total assets amounted to $5.291 billion, an increase of 21.0%, when
compared to $4.374 billion at December 31, 2006. Interest-earning assets were
$5.057 billion at June 30, 2007, a 20.1% increase compared to $4.211 billion at December 31, 2006.
Investments principally consist of money market instruments, U.S. government and agency
obligations, mortgage-backed securities, collateralized mortgage obligations, and Puerto Rico
government bonds. At June 30, 2007, the investment portfolio increased 24.9% to $3.738 billion,
from $2.992 billion as of December 31, 2006. The increase reflects securities purchased during the
first quarter of 2007 amounting to approximately $900 million.
At June 30, 2007, the Groups loan portfolio increased by 4.9% to $1.272 billion when compared to
$1.212 billion at December 31, 2006. Loan production and purchases for the quarter and six-month
period ended June 30, 2007, declined 67.1% and 55.3%, respectively, to $86.4 million and $158.7
million, compared to the quarter and six-month period ended June 30, 2006.
- 29 -
During and after the end of the second quarter, the Group entered into several transactions to
enhance the servicing of its mortgage loan portfolio. The first transaction occurred on June 15,
2007, when the Group acquired from Doral Financial Corporation all the servicing rights on the
portion of its mortgage loan portfolio that Doral had been servicing. The second transaction took
place on July 13, 2007, when the Group unwound certain mortgage related transactions entered in
2004 and 2005 with R-G Premier Bank of Puerto Rico (R-G Premier) (these transactions were
subsequently reclassified as a single commercial loan) with an unpaid principal balance of $71.4
million as of July 1, 2007. The Group has retained certain mortgage loans with an unpaid principal
balance of $26.6 million as of such date, R-G Premier substituted certain mortgage loans with an
unpaid principal balance of $25.9 million as of such date with mortgage loans selected by the Group
that comply with its credit underwriting policies, and the remaining
balance of the loans were paid
by R-G Premier in cash. The Group will classify as residential mortgage loans the new balance of
$52.5 million in loans that it purchased from R-G Premier on a servicing released basis. As a
result of these transactions, the Group owns the servicing rights for all its outstanding mortgage
loans and has contracted out the sub-servicing to a third party.
TABLE 8 NON-PERFORMING ASSETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Non-performing assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- Accruing Loans |
|
$ |
19,902 |
|
|
$ |
17,845 |
|
|
|
11.5 |
% |
|
$ |
15,096 |
|
Accruing Loans |
|
|
30,598 |
|
|
|
20,453 |
|
|
|
49.6 |
% |
|
|
14,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-performing loans |
|
|
50,500 |
|
|
|
38,298 |
|
|
|
31.9 |
% |
|
|
29,360 |
|
Foreclosed real estate |
|
|
4,971 |
|
|
|
4,864 |
|
|
|
2.2 |
% |
|
|
4,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,471 |
|
|
$ |
43,162 |
|
|
|
28.5 |
% |
|
$ |
33,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets |
|
|
1.05 |
% |
|
|
0.99 |
% |
|
|
|
|
|
|
0.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 9 NON-PERFORMING LOANS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change in |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
46,626 |
|
|
$ |
34,404 |
|
|
|
35.5 |
% |
|
$ |
25,847 |
|
Commercial, mainly secured by real estate |
|
|
3,204 |
|
|
|
3,167 |
|
|
|
1.2 |
% |
|
|
2,930 |
|
Consumer |
|
|
670 |
|
|
|
727 |
|
|
|
-7.8 |
% |
|
|
583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50,500 |
|
|
$ |
38,298 |
|
|
|
31.9 |
% |
|
$ |
29,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans composition: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
92.3 |
% |
|
|
89.8 |
% |
|
|
|
|
|
|
88.0 |
% |
Commercial, mainly secured by real estate |
|
|
6.3 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
10.0 |
% |
Consumer |
|
|
1.3 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
3.94 |
% |
|
|
3.14 |
% |
|
|
25.48 |
% |
|
|
2.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
0.95 |
% |
|
|
0.88 |
% |
|
|
7.95 |
% |
|
|
0.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
|
16.11 |
% |
|
|
11.38 |
% |
|
|
41.56 |
% |
|
|
8.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2007, the Groups non-performing assets totaled $55.5 million (1.05% of total assets)
versus $43.2 million (0.99% of total assets) at December 31, 2006. Foreclosed real estate
properties increased by 2.2% to $5.0 million, when compared to $4.9 million reported as of December
31, 2006.
At June 30, 2007, the allowance for loan losses to non-performing loans coverage ratio was 16.7%.
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, 2007, the Groups non-performing mortgage loans
totaled $46.6 million (92.3% of the Groups
non-performing loans), a 35.5% increase from the $34.4
million (89.8% of the Groups non-performing loans)
reported at December 31, 2006. Non-performing loans in
this category are primarily residential mortgage loans. |
|
|
|
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,
|
- 30 -
|
|
2007, the Groups non-performing commercial loans
amounted to $3.2 million (6.3% of the Groups
non-performing loans), at the same level of
non-performing commercial loans of $3.2 million reported
at December 31, 2006 (8.3% of the Groups non-performing
loans). Most of this portfolio is collateralized by
commercial real estate properties. |
|
|
|
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,
2007, the Groups non-performing consumer loans amounted
to $670,000 (1.3% of the Groups total non-performing
loans), which decreased from the $727,000 reported at December 31, 2006 (1.9% 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 value of the property is charged against the allowance for loan losses.
Subsequently, any excess of the carrying value over the estimated fair value less disposition
cost is charged to operations. Proceeds from sales of foreclosed real
estate properties during the six-month period ended June 30,
2007, totaled $1.4 million. |
At June 30, 2007, the Groups total liabilities were $4.977 billion, 23.3% higher than the $4.037
billion reported at December 31, 2006. Deposits and borrowings, the Groups funding sources,
amounted to $4.854 billion at June 30, 2007, an increase of 20.9% when compared to $4.015 billion
reported at December 31, 2006. At June 30, 2007, borrowings represented 72.6% of interest-bearing
liabilities and deposits represented 27.4%, versus 69.3% and 30.7%, respectively, at December 31,
2006.
Borrowings consist 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, 2007,
borrowings amounted to $3.525 billion, 26.7% greater than the $2.782 billion at December 31, 2006,
mainly due to an increase of 29.5% in repurchase agreements, reflecting the funding needed to
finance the Groups investment and loan portfolio.
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 $180.0 million at June 30, 2007, and $181.9
million at December 31, 2006. The Group has the capacity to expand FHLB funding up to a maximum of
$452.5 million based on the assets pledged by the Group on the FHLB.
At June 30, 2007, deposits reached $1.330 billion, up 7.8%, compared to the $1.233 billion reported
as of December 31, 2006. Deposits reflected an increase for the first six-months of 2007 of 6.7% in
certificates of deposits, to $885.2 million, primarily due to an increase in brokered deposits.
Savings accounts increased 22.5% to $326.1 million as of June 30, 2007 from $266.2 million as of
December 31, 2006.
- 31 -
TABLE 10 LIABILITIES SUMMARY AND COMPOSITION
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
$ |
44,867 |
|
|
$ |
59,603 |
|
|
|
-24.7 |
% |
|
$ |
62,266 |
|
Now accounts |
|
|
66,819 |
|
|
|
72,810 |
|
|
|
-8.2 |
% |
|
|
78,970 |
|
Savings accounts |
|
|
326,124 |
|
|
|
266,181 |
|
|
|
22.5 |
% |
|
|
171,030 |
|
Certificates of deposit |
|
|
885,184 |
|
|
|
829,867 |
|
|
|
6.7 |
% |
|
|
896,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,322,994 |
|
|
|
1,228,461 |
|
|
|
7.7 |
% |
|
|
1,208,837 |
|
Accrued interest payable |
|
|
6,668 |
|
|
|
4,527 |
|
|
|
47.3 |
% |
|
|
5,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,329,662 |
|
|
|
1,232,988 |
|
|
|
7.8 |
% |
|
|
1,213,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
3,283,796 |
|
|
|
2,535,923 |
|
|
|
29.5 |
% |
|
|
2,856,361 |
|
Advances from FHLB |
|
|
180,000 |
|
|
|
181,900 |
|
|
|
-1.0 |
% |
|
|
285,500 |
|
Subordinated capital notes |
|
|
36,083 |
|
|
|
36,083 |
|
|
|
|
|
|
|
72,166 |
|
Term notes |
|
|
|
|
|
|
15,000 |
|
|
|
-100.0 |
% |
|
|
15,000 |
|
Federal funds purchased and other short term borrowings |
|
|
24,641 |
|
|
|
13,568 |
|
|
|
81.6 |
% |
|
|
17,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,524,520 |
|
|
|
2,782,474 |
|
|
|
26.7 |
% |
|
|
3,246,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and borrowings |
|
|
4,854,182 |
|
|
|
4,015,462 |
|
|
|
20.9 |
% |
|
|
4,459,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities purchased but not yet received |
|
|
100,067 |
|
|
|
|
|
|
|
100.0 |
% |
|
|
6,539 |
|
Other liabilities |
|
|
22,925 |
|
|
|
21,802 |
|
|
|
5.2 |
% |
|
|
25,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
4,977,174 |
|
|
$ |
4,037,264 |
|
|
|
23.3 |
% |
|
$ |
4,492,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits portfolio composition percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
3.4 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
5.2 |
% |
Now accounts |
|
|
5.0 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
6.5 |
% |
Savings accounts |
|
|
24.7 |
% |
|
|
21.7 |
% |
|
|
|
|
|
|
14.1 |
% |
Certificates of deposit |
|
|
66.9 |
% |
|
|
67.6 |
% |
|
|
|
|
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings portfolio composition percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
93.2 |
% |
|
|
91.1 |
% |
|
|
|
|
|
|
88.0 |
% |
Advances from FHLB |
|
|
5.1 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
8.8 |
% |
Subordinated capital notes |
|
|
1.0 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
2.2 |
% |
Term notes |
|
|
|
|
|
|
0.5 |
% |
|
|
|
|
|
|
0.5 |
% |
Federal funds purchased and other short term borrowings |
|
|
0.7 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at quarter-end |
|
$ |
3,283,796 |
|
|
$ |
2,535,923 |
|
|
|
|
|
|
$ |
2,856,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average outstanding balance |
|
$ |
3,287,489 |
|
|
$ |
2,627,323 |
|
|
|
|
|
|
$ |
2,548,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding balance at any month-end |
|
$ |
3,319,688 |
|
|
$ |
2,923,796 |
|
|
|
|
|
|
$ |
2,856,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
Stockholders equity as of June 30, 2007 was $313.5 million, or $9.99 per share, compared to $336.4
million as of December 31, 2006, or $10.98 per share.
During the
quarter ended June 30, 2007, the Group repurchased 45,000 common
shares at an average price of $11.77 and a total cost of
$530,000 under the August 30, 2005 program.
On July 27, 2007, the Board of Directors approved a new stock repurchase
program pursuant to which the Group is authorized to purchase in the open market up to $15.0
million of its outstanding share of common stocks. The shares of common stock so repurchased are
to be held by the Group as Treasury shares. The new program
substitutes the Groups previous stock
repurchase program. The new program effectively doubles the funds
available to repurchase shares under the previous program.
The Groups common stock is traded on the New York Stock Exchange (NYSE) under the symbol OFG. At
June 30, 2007, the Groups market capitalization for its outstanding common stock was $267.5
million ($10.91 per share).
- 32 -
On April 25, 2007, the Board of Directors formally adopted the Oriental Financial Group Inc. 2007
Omnibus Performance Incentive Plan (the Omnibus Plan), which was subsequently approved at the
June 27, 2007 Annual Meeting of Stockholders. The Omnibus Plan provides for equity-based
compensation incentives through the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units and dividend equivalents, as well as equity-based performance awards.
Refer to Note 1 of the accompanying unaudited consolidate financial statements for additional
information regarding the Omnibus Plan.
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, 2007 and 2006, and
December 31, 2006:
TABLE 11 CAPITAL, DIVIDENDS AND STOCK DATA
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
|
2006 |
|
Capital data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
$ |
313,475 |
|
|
$ |
336,426 |
|
|
|
-6.8 |
% |
|
$ |
340,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Capital Ratio |
|
|
7.23 |
% |
|
|
8.42 |
% |
|
|
-14.1 |
% |
|
|
9.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Leverage Capital Ratio Required |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Capital |
|
$ |
381,489 |
|
|
$ |
372,558 |
|
|
|
2.4 |
% |
|
$ |
435,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Capital Required |
|
$ |
210,972 |
|
|
$ |
176,987 |
|
|
|
19.2 |
% |
|
$ |
185,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital Ratio |
|
|
19.32 |
% |
|
|
21.57 |
% |
|
|
-10.4 |
% |
|
|
29.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Risk-Based Capital Ratio Required |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Risk-Based Capital |
|
$ |
381,489 |
|
|
$ |
372,558 |
|
|
|
2.4 |
% |
|
$ |
435,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Tier 1 Risk-Based Capital Required |
|
$ |
78,970 |
|
|
$ |
67,830 |
|
|
|
16.4 |
% |
|
$ |
58,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital Ratio |
|
|
19.75 |
% |
|
|
22.04 |
% |
|
|
-10.4 |
% |
|
|
30.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total Risk-Based Capital Ratio Required |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Total Risk-Based Capital |
|
$ |
389,921 |
|
|
$ |
380,574 |
|
|
|
2.5 |
% |
|
$ |
443,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Total Risk-Based Capital Required |
|
$ |
157,940 |
|
|
$ |
135,677 |
|
|
|
16.4 |
% |
|
$ |
117,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding common shares, net of treasury |
|
|
24,520 |
|
|
|
24,453 |
|
|
|
0.3 |
% |
|
|
24,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
9.99 |
|
|
$ |
10.98 |
|
|
|
-9.0 |
% |
|
$ |
11.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price at end of period |
|
$ |
10.91 |
|
|
$ |
12.95 |
|
|
|
-15.8 |
% |
|
$ |
12.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market capitalization |
|
$ |
267,517 |
|
|
$ |
316,671 |
|
|
|
-15.5 |
% |
|
$ |
313,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Variance |
|
|
|
2007 |
|
|
2006 |
|
|
% |
|
Common dividend data: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
$ |
6,858 |
|
|
$ |
6,889 |
|
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Payout ratio |
|
|
45.90 |
% |
|
|
84.34 |
% |
|
|
-45.6 |
% |
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
3.48 |
% |
|
|
4.24 |
% |
|
|
-17.9 |
% |
|
|
|
|
|
|
|
|
|
|
The following provides the high and low prices and dividend per share at the Groups stock for each
quarter of the last three perios. Common stock prices and cash dividend per share were adjusted to
give retroactive effect to the stock dividend declared on the Groups common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICE |
|
Cash Dividend |
|
|
High |
|
Low |
|
per share |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
12.42 |
|
|
|
10.81 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
14.04 |
|
|
|
11.65 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
13.57 |
|
|
|
11.47 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
12.86 |
|
|
|
11.82 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 33 -
As of June 30, 2007 and December 31, 2006, the
FDIC classified the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
classified as well
capitalized, and institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Variance |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
% |
|
Oriental Bank and Trust |
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 Capital to Total Assets |
|
|
5.85 |
% |
|
|
6.43 |
% |
|
|
-9.0 |
% |
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Capital |
|
$ |
302,160 |
|
|
$ |
285,323 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum Capital Requirement (4%) |
|
$ |
206,615 |
|
|
$ |
177,495 |
|
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum to be well capitalized (5%) |
|
$ |
258,269 |
|
|
$ |
222,098 |
|
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to Risk-Weighted Average |
|
|
15.52 |
% |
|
|
17.01 |
% |
|
|
-8.8 |
% |
|
|
|
|
|
|
|
|
|
|
Actual Tier 1 Risk-Based Capital |
|
$ |
302,160 |
|
|
$ |
285,323 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum Capital Requirement (4%) |
|
$ |
77,900 |
|
|
$ |
67,095 |
|
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum to be well capitalized (6%) |
|
$ |
116,850 |
|
|
$ |
100,543 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted assets |
|
|
15.95 |
% |
|
|
17.49 |
% |
|
|
-8.8 |
% |
|
|
|
|
|
|
|
|
|
|
Actual Total Risk-Based Capital |
|
$ |
310,592 |
|
|
$ |
293,339 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum Capital Requirement (8%) |
|
$ |
155,800 |
|
|
$ |
134,174 |
|
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum to be well capitalized (10%) |
|
$ |
194,750 |
|
|
$ |
167,651 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
- 34 -
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 Asset/Liability Management
Committee (ALCO). 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. These differences are commonly
referred to as a maturity mismatch or gap and basis mismatch, respectively. 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 may use from time to
tie various derivative instruments for hedging both 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
controlled the credit risk of its derivative financial instrument agreements through credit
approvals, limits, monitoring procedures and collateral, when considered necessary. As discussed
in Item 2 under overview of Financial Performance, during the December 2006 and March 2007
quarters, the Group restructured a significant part of its repurchase agreements portfolio into
longer term structured repurchase agreements, some fixed and others variable, reducing
significantly its sensitivity to short-term interest rate repricing.
The Group may enter into interest rate swaps and interest rate options in managing its interest
rate risk exposure. The swaps are used 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 paid a fixed monthly or quarterly cost and received 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, 2007, gains of $88,000 and $8.4 million,
respectively, were recognized as earnings and reflected as Derivatives in the consolidated
statements of income, compared to losses of $23,000 and gains of $859,000 for the corresponding
periods of 2006. 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. The Group previously announced a net gain of approximately
$11 million from the July 2006 unwinding of interest rate swaps that had been used to hedge rising
interest costs of short-term repurchase agreement. This gain was included in other comprehensive
income, and was being recognized into earnings as a reduction of interest expense on remaining
short-term borrowings. The recent repurchase agreement restructuring, however, significantly
reduced the Groups short-term borrowings during the December 2006 and March 2007 quarters,
eliminating the forecasted transactions the swaps were intended to hedge. As a result, Oriental
recognized the remaining balance of $8.2 million (equal to $0.33 per basic and fully diluted share)
of the gain as non-interest income in the quarter ended March 31, 2007.
At June 30, 2007 and December 31, 2006, the fair value of derivatives recognized as either assets
or liabilities in the unaudited consolidated statements of financial condition are as follows: the
purchased options used to manage the exposure to the stock market on stock indexed deposits
represented an asset of $43.4 million
and $34.2 million, respectively, are presented as other assets and the options sold to customers
embedded in the certificates of deposit represented a liability are recorded as deposits amounting
$41.4 million and $32.2 million, respectively.
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,
2007 and December 31, 2006 consider gradual and parallel changes of plus and minus 200 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:
- 35 -
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Change in |
|
Expected |
|
|
Amount |
|
|
Percent |
|
Interest rate |
|
NII |
|
|
Change |
|
|
Change |
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Base Scenario |
|
|
|
|
|
|
|
|
|
|
|
|
Flat |
|
$ |
82,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ 200 Basis points |
|
$ |
68,259 |
|
|
$ |
(14,051 |
) |
|
|
-17.07 |
% |
|
|
|
|
|
|
|
|
|
|
- 200 Basis points |
|
$ |
95,960 |
|
|
$ |
13,650 |
|
|
|
16.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Base Scenario |
|
|
|
|
|
|
|
|
|
|
|
|
Flat |
|
$ |
47,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+ 200 Basis points |
|
$ |
30,999 |
|
|
$ |
(16,354 |
) |
|
|
-34.54 |
% |
|
|
|
|
|
|
|
|
|
|
- 200 Basis points |
|
$ |
66,541 |
|
|
$ |
19,189 |
|
|
|
40.52 |
% |
|
|
|
|
|
|
|
|
|
|
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, 2007, the Group had
approximately $153.6 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 7.23% 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, 2007, the Group has an additional
borrowing capacity with the FHLB of $452.5 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, 2007, the Bank had a 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, 2007 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 in the Groups annual report on form 10-K for the fiscal
year December 31, 2006 form 10-K). 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.
- 36 -
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 benefits from favorable tax treatment
under regulations relating to the activities of its international banking entity. 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.
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
There were no changes in the Groups internal control over financial reporting (as such term is
defined on rules 13-a-15(e) and 15d-15(e) under the Exchange Act) during the six-month period ended
June 30, 2007.
- 37 -
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 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. Jury trial in connection with the
$3.4 million claim related to the bank cash accounts commenced on June 25, 2007 and is expected to
conclude during the week of August 13, 2007.
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
There have been no material changes to the risk factors as previously disclosed under Item 1A to
Part 1 of the Groups annual report on Form 10-K for the fiscal year ended December 31, 2006.
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.
The following table sets forth issuer purchases of equity securities made by the Group during the
quarter ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
|
|
|
Approximate Dollar Value of |
|
|
Part of Publicly |
|
|
|
Shares that May Yet Be |
|
|
Announced Plans or |
|
Average Price Paid |
|
Purchased Under the Plans or |
Month |
|
Programs |
|
per Share |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2007 |
|
|
|
|
|
|
$ |
|
|
$ |
8,052,590 |
|
May 2007 |
|
|
31,600 |
|
|
|
$11.84 |
|
|
$ |
7,678,446 |
|
June 2077 |
|
|
13,400 |
|
|
|
$11.61 |
|
|
$ |
7,522,872 |
|
|
|
|
45,000 |
|
|
|
$11.77 |
|
|
|
|
|
On August 30, 2005, the Groups Board approved a stock repurchase program for the
repurchase of up to $12.1 million of the Groups outstanding shares of common stock, which replaced
the former program. The program was announced on September 1, 2005. On June 20, 2006, the Board approved an increase of $3.0 million
to the initial amount of the program, for the repurchase of up to $15.1 million. In the
quarter ended June 30, 2007, the Group repurchased 45,000 shares of its common stock in the open
market, at a total cost of approximately $530,000, under such program.
On
July 27 2007, the Groups Board approved a new stock repurchase program
pursuant to which the Group is authorized to purchase in the open market up to $15.0 million
of its outstanding share of common stock. The program was announced
on July 31, 2007. The shares of common stock so repurchased are to be
held by the Group as treasury shares. The new program will substitute
the previous program approved on August 30, 2005, effectively
doubling the funds now available for repurchases.
- 38 -
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of stockholders of the Group was held on June 27, 2007, for (i) the election
of one director for a two-year term and four directors for a four-year term; and (ii) the approval
of the Oriental Financial Group Inc. 2007 Omnibus Performance Incentive Plan (the Omnibus Plan).
There was no solicitation in opposition to the managements nominees, which were all elected, and
the Omnibus Plan was approved. The voting results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
|
Abstain |
|
|
# |
|
% |
|
# |
|
% |
|
# |
|
% |
Proposal 1 Election of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two-year term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pedro Morazzani |
|
|
19,579,859 |
|
|
|
84.39 |
% |
|
|
3,623,811 |
|
|
|
15.61 |
% |
|
|
|
|
|
|
|
|
Four-year term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
José J. Gil de Lamadrid |
|
|
19,647,537 |
|
|
|
84.68 |
% |
|
|
3,556,113 |
|
|
|
15.32 |
% |
|
|
|
|
|
|
|
|
José Rafael Fernández |
|
|
20,035,796 |
|
|
|
86.35 |
% |
|
|
3,167,874 |
|
|
|
13.65 |
% |
|
|
|
|
|
|
|
|
Maricarmen Aponte |
|
|
22,740,405 |
|
|
|
98.01 |
% |
|
|
463,265 |
|
|
|
1.99 |
% |
|
|
|
|
|
|
|
|
Miguel Vázquez Deynes |
|
|
18,643,069 |
|
|
|
80.35 |
% |
|
|
4,560,602 |
|
|
|
19.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
|
# |
|
% |
|
# |
|
% |
|
# |
|
% |
Proposal 2 Approval of the Omnibus Plan |
|
|
18,343,180 |
|
|
|
96.03 |
% |
|
|
718,691 |
|
|
|
3.76 |
% |
|
|
38,917 |
|
|
|
0.20 |
% |
Item 5. OTHER INFORMATION
a) None
b) None
Item 6. EXHIBITS
|
|
|
|
|
|
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. |
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32.2 |
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Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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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)
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By:
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/s/ José Rafael Fernández
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Dated: August 8, 2007 |
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Jose Rafael Fernández |
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President and Chief Executive Officer |
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By:
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/s/ Norberto González
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Dated: August 8, 2007 |
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Norberto González |
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Executive Vice President and Chief Financial Officer |
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