UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] 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.
| Incorporated in the Commonwealth of Puerto Rico, | IRS Employer Identification No. 66-0538893 | |
Principal Executive Offices:
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 [x] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [x] No [ ].
Number of shares outstanding of the registrant’s common stock, as of the latest practicable date:
22,287,998 common shares ($1.00 par value per share)
TABLE OF CONTENTS
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 Group’s 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 Group’s 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 management’s current expectations, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive, and regulatory factors, legislative changes and accounting pronouncements, could affect the Group’s financial performance and could cause the Group’s 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
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2004 AND JUNE 30, 2004
(In thousands, except share data)
| September 30, | June 30, | |||||||
| 2004 |
2004 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 11,321 | $ | 9,284 | ||||
Investments: |
||||||||
Short term investments |
74,602 | 7,747 | ||||||
Trading securities, at fair value with amortized cost of $52 (June 30, 2004 - $561) |
54 | 574 | ||||||
Investment securities available-for-sale, at fair value with amortized cost of $1,573,600
(June 30, 2004 - $1,533,145): |
||||||||
Securities pledged that can be repledged |
1,145,672 | 986,165 | ||||||
Other investment securities |
434,349 | 541,242 | ||||||
Total investment securities available-for-sale |
1,580,021 | 1,527,407 | ||||||
Investment securities held-to-maturity, at amortized cost with fair value of $1,332,739
(June 30, 2004 - $1,275,534): |
||||||||
Securities pledged that can be repledged |
1,100,916 | 1,002,041 | ||||||
Other investment securities |
218,260 | 280,821 | ||||||
Total investment securities held-to-maturity |
1,319,176 | 1,282,862 | ||||||
Federal Home Loan Bank (FHLB) stock, at cost |
28,160 | 28,160 | ||||||
Total investments |
3,002,013 | 2,846,750 | ||||||
Securities sold but not yet delivered |
23,369 | 47,312 | ||||||
Loans: |
||||||||
Mortgage loans held-for-sale, at lower of cost or market |
5,968 | 5,814 | ||||||
Loans receivable, net of allowance for loan losses of $7,860 (June 30, 2004 - $7,553) |
820,297 | 737,642 | ||||||
Total loans, net |
826,265 | 743,456 | ||||||
Accrued interest receivable |
19,071 | 19,127 | ||||||
Premises and equipment, net |
17,874 | 18,552 | ||||||
Deferred tax asset, net |
6,649 | 7,337 | ||||||
Foreclosed real estate, net |
978 | 888 | ||||||
Other assets |
30,851 | 32,989 | ||||||
Total assets |
$ | 3,938,391 | $ | 3,725,695 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Deposits: |
||||||||
Demand deposits |
$ | 126,233 | $ | 126,296 | ||||
Savings accounts |
91,718 | 88,463 | ||||||
Certificates of deposit |
814,480 | 809,590 | ||||||
Total deposits |
1,032,431 | 1,024,349 | ||||||
Borrowings: |
||||||||
Securities sold under agreements to repurchase |
2,101,340 | 1,895,865 | ||||||
Advances from FHLB |
300,000 | 300,000 | ||||||
Subordinated capital notes |
72,166 | 72,166 | ||||||
Term notes |
15,000 | 15,000 | ||||||
Total borrowings |
2,488,506 | 2,283,031 | ||||||
Securities purchased but not yet received |
53,300 | 89,068 | ||||||
Accrued expenses and other liabilities |
49,290 | 34,580 | ||||||
Total liabilities |
3,623,527 | 3,431,028 | ||||||
Commitments and contingencies |
— | — | ||||||
Stockholders’ equity: |
||||||||
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 | 68,000 | ||||||
Common stock, $1 par value; 40,000,000 shares authorized; 22,503,066 shares issued
(June 30, 2004 - 22,253,084 shares) |
22,503 | 22,253 | ||||||
Additional paid-in capital |
127,121 | 125,206 | ||||||
Legal surplus |
29,306 | 27,425 | ||||||
Retained earnings |
112,930 | 101,723 | ||||||
Treasury stock, at cost, 242,854 shares (June 30, 2004 - 246,441 shares) |
(4,482 | ) | (4,578 | ) | ||||
Accumulated other comprehensive loss, net of tax effect of $196
(June 30, 2004 - $4,148) |
(40,514 | ) | (45,362 | ) | ||||
Total stockholders’ equity |
314,864 | 294,667 | ||||||
Total liabilities and stockholders’ equity |
$ | 3,938,391 | $ | 3,725,695 | ||||
See notes to consolidated financial statements. |
||||||||
- 1 -
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands, except per share data)
| 2004 |
2003 |
|||||||
Interest income: |
||||||||
Loans |
$ | 13,289 | $ | 13,630 | ||||
Mortgage-backed securities |
28,469 | 22,353 | ||||||
Investment securities |
3,123 | 1,343 | ||||||
Short term investments |
66 | 39 | ||||||
Total interest income |
44,947 | 37,365 | ||||||
Interest expense: |
||||||||
Deposits |
6,518 | 7,540 | ||||||
Securities sold under agreements to repurchase |
11,808 | 8,496 | ||||||
Other borrowed funds |
2,051 | 1,927 | ||||||
Subordinated capital notes |
917 | 505 | ||||||
Total interest expense |
21,294 | 18,468 | ||||||
Net interest income |
23,653 | 18,897 | ||||||
Provision for loan losses |
700 | 1,340 | ||||||
Net interest income after provision for loan losses |
22,953 | 17,557 | ||||||
Non-interest income: |
||||||||
Commissions and fees from brokerage, insurance and fiduciary activities |
3,697 | 4,564 | ||||||
Banking service revenues |
1,951 | 1,697 | ||||||
Net gain (loss) on sale and valuation of: |
||||||||
Mortgage banking activities |
2,057 | 2,746 | ||||||
Securities available-for-sale |
3,245 | 3,965 | ||||||
Derivatives activities |
(570 | ) | (52 | ) | ||||
Trading securities |
(2 | ) | 7 | |||||
Other |
26 | 16 | ||||||
Total non-interest income, net |
10,404 | 12,943 | ||||||
Non-interest expenses: |
||||||||
Compensation and employees’ benefits |
6,768 | 6,055 | ||||||
Occupancy and equipment |
2,501 | 2,294 | ||||||
Advertising and business promotion |
1,341 | 2,070 | ||||||
Professional and service fees |
1,674 | 1,640 | ||||||
Communication |
451 | 453 | ||||||
Loan servicing expenses |
449 | 463 | ||||||
Taxes, other than payroll and income taxes |
450 | 432 | ||||||
Electronic banking charges |
490 | 385 | ||||||
Printing, postage, stationery and supplies |
248 | 294 | ||||||
Insurance, including deposit insurance |
198 | 195 | ||||||
Other |
613 | 1,100 | ||||||
Total non-interest expenses |
15,183 | 15,381 | ||||||
Income before income taxes |
18,174 | 15,119 | ||||||
Income tax expense |
(768 | ) | (1,560 | ) | ||||
Net income |
17,406 | 13,559 | ||||||
Less: Dividends on preferred stock |
(1,200 | ) | (597 | ) | ||||
Net income available to common shareholders |
$ | 16,206 | $ | 12,962 | ||||
Income per common share: |
||||||||
Basic |
$ | 0.73 | $ | 0.67 | ||||
Diluted |
$ | 0.71 | $ | 0.63 | ||||
Average common shares outstanding |
22,056 | 19,449 | ||||||
Average potential common share-options |
756 | 1,115 | ||||||
| 22,812 | 20,564 | |||||||
Cash dividends per share of common stock |
$ | 0.14 | $ | 0.13 | ||||
See notes to consolidated financial statements.
- 2 -
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
| CHANGES IN STOCKHOLDERS’ EQUITY: |
2004 |
2003 |
||||||
Preferred stock: |
||||||||
Balance at beginning of period |
$ | 68,000 | $ | 33,500 | ||||
Issuance of preferred stock |
— | 34,500 | ||||||
Balance at end of period |
68,000 | 68,000 | ||||||
Common stock: |
||||||||
Balance at beginning of period |
22,253 | 19,684 | ||||||
Stock options exercised |
250 | 200 | ||||||
Balance at end of period |
22,503 | 19,884 | ||||||
Additional paid-in capital: |
||||||||
Balance at beginning of period |
125,206 | 57,236 | ||||||
Stock options exercised |
1,915 | 1,452 | ||||||
Preferred stock issuance costs |
— | (1,401 | ) | |||||
Balance at end of period |
127,121 | 57,287 | ||||||
Legal surplus: |
||||||||
Balance at beginning of period |
27,425 | 21,099 | ||||||
Transfer from retained earnings |
1,881 | 1,324 | ||||||
Balance at end of period |
29,306 | 22,423 | ||||||
Retained earnings: |
||||||||
Balance at beginning of period |
101,723 | 106,358 | ||||||
Net income |
17,406 | 13,559 | ||||||
Cash dividends declared on common stock |
(3,118 | ) | (2,505 | ) | ||||
Cash dividends declared on preferred stock |
(1,200 | ) | (597 | ) | ||||
Transfer to legal surplus |
(1,881 | ) | (1,324 | ) | ||||
Balance at end of period |
112,930 | 115,491 | ||||||
Treasury stock: |
||||||||
Balance at beginning of period |
(4,578 | ) | (35,888 | ) | ||||
Stock used (purchased) |
96 | (394 | ) | |||||
Balance at end of period |
(4,482 | ) | (36,282 | ) | ||||
Accumulated other comprehensive income (loss), net of deferred tax: |
||||||||
Balance at beginning of period |
(45,362 | ) | (309 | ) | ||||
Other comprehensive income (loss), net of tax |
4,848 | (41,471 | ) | |||||
Balance at end of period |
(40,514 | ) | (41,780 | ) | ||||
Total stockholders’ equity |
$ | 314,864 | $ | 205,023 | ||||
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
| COMPREHENSIVE INCOME |
2004 |
2003 |
||||||
Net income |
$ | 17,406 | $ | 13,559 | ||||
Other comprehensive income (loss), net of tax: |
||||||||
Unrealized gain (loss) on securities available-for-sale arising during the period |
$ | 20,772 | $ | (48,392 | ) | |||
Realized gains on investment securities available-for-sale included in net income |
(3,245 | ) | (3,965 | ) | ||||
Unrealized gain (loss) on derivatives designated as cash flows hedges
arising during the period |
(16,886 | ) | 3,946 | |||||
Realized loss on derivatives designated as cash flow hedges included in net income |
4,403 | 4,203 | ||||||
Amount reclassified into earnings during the period related to
transition adjustment on derivative activities |
— | 164 | ||||||
Income tax
effect related to unrealized loss (gain) on securities available-for-sale |
(196 | ) | 2,573 | |||||
Other comprehensive income (loss) for the period |
4,848 | (41,471 | ) | |||||
Comprehensive income (loss) |
$ | 22,254 | $ | (27,912 | ) | |||
See notes to consolidated financial statements.
- 3 -
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands)
| 2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 17,406 | $ | 13,559 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Amortization of deferred loan origination fees and costs |
(915 | ) | (797 | ) | ||||
Amortization of premiums and accretion of discounts on investment securities, net |
2,542 | 4,805 | ||||||
Depreciation and amortization of premises and equipment |
1,347 | 1,138 | ||||||
Deferred income tax expense (benefit) |
(24 | ) | 437 | |||||
Provision for loan losses |
700 | 1,340 | ||||||
Loss (gain) on: |
||||||||
Sale of securities available-for-sale |
(3,245 | ) | (3,965 | ) | ||||
Mortgage banking activities |
(2,057 | ) | (2,746 | ) | ||||
Derivatives activities |
570 | 52 | ||||||
Originations of loans held-for-sale |
(26,346 | ) | (105,366 | ) | ||||
Proceeds from sale of loans held-for-sale |
11,143 | 74,756 | ||||||
Net decrease (increase) in: |
||||||||
Trading securities |
520 | (1,117 | ) | |||||
Accrued interest receivable |
56 | 88 | ||||||
Other assets |
(58 | ) | (1,596 | ) | ||||
Net increase in: |
||||||||
Accrued interest on deposits and borrowings |
3,934 | 2,443 | ||||||
Other liabilities |
1,844 | 1,322 | ||||||
Total adjustments |
(9,989 | ) | (29,206 | ) | ||||
Net cash provided by (used in) operating activities |
7,417 | (15,647 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchases of: |
||||||||
Investment securities available-for-sale |
(679,028 | ) | (549,456 | ) | ||||
Investment securities held-to-maturity |
(25,395 | ) | (51,091 | ) | ||||
Net purchases of equity options |
(475 | ) | (620 | ) | ||||
Maturities and redemptions of: |
||||||||
Investment securities available-for-sale |
57,525 | 245,541 | ||||||
Investment securities held-to-maturity |
49,559 | 7,931 | ||||||
Proceeds from sale of: |
||||||||
Investment securities available-for-sale |
522,394 | 104,684 | ||||||
Foreclosed real estate |
390 | — | ||||||
Loan production: |
||||||||
Origination and purchase of loans, excluding loans held-for-sale, net |
(125,944 | ) | (12,887 | ) | ||||
Principal repayment of loans |
44,622 | 50,536 | ||||||
Additions to
premises and equipment |
(669 | ) | (2,591 | ) | ||||
Net cash used in investing activities |
(157,021 | ) | (207,953 | ) | ||||
Cash flows from financing activities: |
||||||||
Net increase in: |
||||||||
Deposits |
15,139 | (36,719 | ) | |||||
Securities sold under agreements to repurchase |
205,475 | 42,483 | ||||||
Proceeds from: |
||||||||
Advances from FHLB |
28,500 | 257,200 | ||||||
Exercise of stock options |
2,165 | 1,652 | ||||||
Repayments of advances from FHLB |
(28,500 | ) | (81,200 | ) | ||||
Issuance of subordinated capital notes |
— | 33,960 | ||||||
Issuance of preferred stock, net |
— | 33,099 | ||||||
Common stock purchased |
— | (394 | ) | |||||
Dividends paid |
(4,283 | ) | (3,073 | ) | ||||
Net cash provided by financing activities |
218,496 | 247,008 | ||||||
Net increase in cash and cash equivalents |
68,892 | 23,408 | ||||||
Cash and cash equivalents at beginning of period |
17,031 | 17,097 | ||||||
Cash and cash equivalents at end of period |
$ | 85,923 | $ | 40,505 | ||||
Cash and cash equivalents include: |
||||||||
Cash and due from banks |
$ | 11,321 | $ | 9,155 | ||||
Short term investments |
74,602 | 31,350 | ||||||
| $ | 85,923 | $ | 40,505 | |||||
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities: |
||||||||
Interest paid |
$ | 17,360 | $ | 16,009 | ||||
Income taxes paid |
$ | — | $ | 1,800 | ||||
Real estate loans securitized into mortgage-backed securities |
$ | 15,238 | $ | 31,111 | ||||
Investment securities available-for-sale transferred to held-to-maturity |
$ | 60,460 | $ | 856,037 | ||||
Accrued dividend payable |
$ | 3,116 | $ | 2,501 | ||||
Other comprehensive income (loss) for the period |
$ | 4,848 | $ | (41,471 | ) | |||
Securities sold but not yet delivered |
$ | 23,369 | $ | 156,487 | ||||
Securities purchased but not yet received |
$ | 53,300 | $ | 50,520 | ||||
Transfer from loans to foreclosed real estate |
$ | 481 | $ | 85 | ||||
See notes to consolidated financial statements.
- 4 -
ORIENTAL FINANCIAL GROUP INC.
NOTE 1 – BASIS OF PRESENTATION:
The accounting and reporting policies of Oriental Financial Group Inc. (the “Group” or “Oriental”) conform with accounting principles generally accepted in the United States of America (“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 financial statements include all adjustments necessary, to present fairly the consolidated financial condition as of September 30, 2004 and June 30, 2004, and the results of operations and cash flows for the three-month periods ended September 30, 2004 and 2003. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Financial information as of June 30, 2004 has been derived from the Group’s audited Consolidated Financial Statements. The results of operations and cash flows for the three-month periods ended September 30, 2004 and 2003 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 June 30, 2004, included in the Group’s Annual Report on Form 10-K.