UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 þ No o.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o.
Number of shares outstanding of the registrant’s common stock, as of the latest practicable date:
24,625,440 common shares ($1.00 par value per share)
outstanding as of January 31, 2005
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.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2004 AND JUNE 30, 2004
(In thousands, except share data)
| December 31, | June 30, | |||||||
| 2004 | 2004 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 9,843 | $ | 9,284 | ||||
Investments: |
||||||||
Short term investments |
25,112 | 7,747 | ||||||
Trading securities, at fair value with amortized cost of $1,101 (June 30, 2004 - $561) |
1,115 | 574 | ||||||
Investment securities available-for-sale, at fair value with amortized cost of $1,234,081
(June 30, 2004 - $1,533,145): |
||||||||
Securities pledged that can be repledged |
470,910 | 986,165 | ||||||
Other investment securities |
766,243 | 541,242 | ||||||
Total investment securities available-for-sale |
1,237,153 | 1,527,407 | ||||||
Investment securities held-to-maturity, at amortized cost with fair value of $2,020,056
(June 30, 2004 - $1,275,534): |
||||||||
Securities pledged that can be repledged |
1,219,711 | 1,002,041 | ||||||
Other investment securities |
788,778 | 280,821 | ||||||
Total investment securities held-to-maturity |
2,008,489 | 1,282,862 | ||||||
Federal Home Loan Bank (FHLB) stock, at cost |
28,160 | 28,160 | ||||||
Total investments |
3,300,029 | 2,846,750 | ||||||
Securities sold but not yet delivered |
688 | 47,312 | ||||||
Loans: |
||||||||
Mortgage loans held-for-sale, at lower of cost or market |
5,567 | 5,814 | ||||||
Loans receivable, net of allowance for loan losses of $7,565 (June 30, 2004 - $7,553) |
766,142 | 737,642 | ||||||
Total loans, net |
771,709 | 743,456 | ||||||
Accrued interest receivable |
21,289 | 19,127 | ||||||
Premises and equipment, net |
17,571 | 18,552 | ||||||
Deferred tax asset, net |
6,207 | 7,337 | ||||||
Foreclosed real estate, net |
2,687 | 888 | ||||||
Other assets |
38,147 | 32,989 | ||||||
Total assets |
$ | 4,168,170 | $ | 3,725,695 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Deposits: |
||||||||
Demand deposits |
$ | 158,228 | $ | 126,296 | ||||
Savings accounts |
96,658 | 88,463 | ||||||
Certificates of deposit |
811,037 | 809,590 | ||||||
Total deposits |
1,065,923 | 1,024,349 | ||||||
Borrowings: |
||||||||
Securities sold under agreements to repurchase |
2,337,826 | 1,895,865 | ||||||
Advances from FHLB |
300,000 | 300,000 | ||||||
Term notes |
15,000 | 15,000 | ||||||
Subordinated capital notes |
72,166 | 72,166 | ||||||
Total borrowings |
2,724,992 | 2,283,031 | ||||||
Securities purchased but not yet received |
87 | 89,068 | ||||||
Accrued expenses and other liabilities |
44,112 | 34,580 | ||||||
Total liabilities |
3,835,114 | 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; 24,601,195 shares issued
(June 30, 2004 - 22,253,084 shares) |
24,601 | 22,253 | ||||||
Additional paid-in capital |
186,405 | 125,206 | ||||||
Legal surplus |
31,280 | 27,425 | ||||||
Retained earnings |
59,884 | 101,723 | ||||||
Treasury stock, at cost, 3,579 shares (June 30, 2004 - 246,441 shares) |
(91 | ) | (4,578 | ) | ||||
Accumulated other comprehensive loss, net of tax effect of $359
(June 30, 2004 - $4,148) |
(37,023 | ) | (45,362 | ) | ||||
Total stockholders’ equity |
333,056 | 294,667 | ||||||
Total liabilities and stockholders’ equity |
$ | 4,168,170 | $ | 3,725,695 | ||||
See notes to unaudited consolidated financial statements.
- 1 -
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2004 AND 2003
(In thousands, except per share data)
| Quarter Period | Six-month period | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 13,320 | $ | 13,403 | $ | 26,610 | $ | 27,033 | ||||||||
Mortgage-backed securities |
27,723 | 26,563 | 56,024 | 48,734 | ||||||||||||
Investment securities |
6,769 | 2,066 | 10,059 | 3,591 | ||||||||||||
Short term investments |
105 | 53 | 171 | 93 | ||||||||||||
Total interest income |
47,917 | 42,085 | 92,864 | 79,451 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
6,905 | 7,763 | 13,423 | 15,303 | ||||||||||||
Securities sold under agreements to repurchase |
14,747 | 8,444 | 26,555 | 16,940 | ||||||||||||
Advances from FHLB and term notes |
2,074 | 2,107 | 4,125 | 4,034 | ||||||||||||
Subordinated capital notes |
1,129 | 825 | 2,046 | 1,329 | ||||||||||||
Total interest expense |
24,855 | 19,139 | 46,149 | 37,606 | ||||||||||||
Net interest income |
23,062 | 22,946 | 46,715 | 41,845 | ||||||||||||
Provision for loan losses |
1,105 | 1,014 | 1,805 | 2,354 | ||||||||||||
Net interest income after provision for loan losses |
21,957 | 21,932 | 44,910 | 39,491 | ||||||||||||
Non-interest income (losses): |
||||||||||||||||
Commissions and fees from brokerage, insurance and fiduciary activities |
3,917 | 4,294 | 7,612 | 8,857 | ||||||||||||
Banking service revenues |
1,908 | 1,709 | 3,859 | 3,405 | ||||||||||||
Net gain (loss) on sale and valuation of: |
||||||||||||||||
Mortgage banking activities |
3,476 | 1,708 | 5,532 | 4,454 | ||||||||||||
Securities available-for-sale |
2,398 | 2,247 | 5,642 | 6,211 | ||||||||||||
Derivatives activities |
248 | (608 | ) | (322 | ) | (660 | ) | |||||||||
Trading securities |
(32 | ) | (17 | ) | (33 | ) | (9 | ) | ||||||||
Other |
28 | 24 | 57 | 39 | ||||||||||||
Total non-interest income, net |
11,943 | 9,357 | 22,347 | 22,297 | ||||||||||||
Non-interest expenses: |
||||||||||||||||
Compensation and employees’ benefits |
5,911 | 5,719 | 12,679 | 11,774 | ||||||||||||
Occupancy and equipment |
2,549 | 2,324 | 5,050 | 4,618 | ||||||||||||
Advertising and business promotion |
2,282 | 2,097 | 3,599 | 4,167 | ||||||||||||
Professional and service fees |
1,705 | 1,435 | 3,380 | 3,075 | ||||||||||||
Communication |
393 | 471 | 843 | 924 | ||||||||||||
Loan servicing expenses |
447 | 464 | 896 | 927 | ||||||||||||
Taxes, other than payroll and income taxes |
451 | 433 | 902 | 865 | ||||||||||||
Electronic banking charges |
500 | 396 | 1,015 | 781 | ||||||||||||
Printing, postage, stationery and supplies |
226 | 295 | 474 | 589 | ||||||||||||
Insurance, including deposit insurance |
194 | 198 | 392 | 393 | ||||||||||||
Other |
850 | 771 | 1,460 | 1,870 | ||||||||||||
Total non-interest expenses |
15,508 | 14,603 | 30,690 | 29,983 | ||||||||||||
Income before income taxes |
18,392 | 16,686 | 36,567 | 31,805 | ||||||||||||
Income tax benefit (expense) |
123 | (998 | ) | (645 | ) | (2,558 | ) | |||||||||
Net income |
18,515 | 15,688 | 35,922 | 29,247 | ||||||||||||
Less: Dividends on preferred stock |
(1,200 | ) | (1,200 | ) | (2,401 | ) | (1,797 | ) | ||||||||
Net income available to common shareholders |
$ | 17,315 | $ | 14,488 | $ | 33,521 | $ | 27,450 | ||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.71 | $ | 0.67 | $ | 1.38 | $ | 1.27 | ||||||||
Diluted |
$ | 0.68 | $ | 0.63 | $ | 1.32 | $ | 1.20 | ||||||||
Average common shares outstanding |
24,552 | 21,685 | 24,407 | 21,540 | ||||||||||||
Average
potential common share-options |
883 | 1,259 | 954 | 1,337 | ||||||||||||
| 25,435 | 22,944 | 25,361 | 22,877 | |||||||||||||
Cash dividends per share of common stock |
$ | 0.14 | $ | 0.13 | $ | 0.27 | $ | 0.25 | ||||||||
See notes to unaudited consolidated financial statements.
- 2 -
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX-MONTH PERIODS ENDED DECEMBER 31, 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 |
354 | 344 | ||||||
Stock dividend |
1,994 | — | ||||||
Balance at end of period |
24,601 | 20,028 | ||||||
Additional paid-in capital: |
||||||||
Balance at beginning of period |
125,206 | 57,236 | ||||||
Stock options exercised |
2,745 | 2,716 | ||||||
Stock dividend |
58,456 | 14,526 | ||||||
Common stock issuance costs |
(2 | ) | — | |||||
Preferred stock issuance costs |
— | (1,443 | ) | |||||
Balance at end of period |
186,405 | 73,035 | ||||||
Legal surplus: |
||||||||
Balance at beginning of period |
27,425 | 21,099 | ||||||
Transfer from retained earnings |
3,855 | 2,272 | ||||||
Balance at end of period |
31,280 | 23,371 | ||||||
Retained earnings: |
||||||||
Balance at beginning of period |
101,723 | 106,358 | ||||||
Net income |
35,922 | 29,247 | ||||||
Cash dividends declared on common stock |
(6,582 | ) | (5,275 | ) | ||||
Stock dividend |
(64,923 | ) | (46,335 | ) | ||||
Cash dividends declared on preferred stock |
(2,401 | ) | (1,797 | ) | ||||
Transfer to legal surplus |
(3,855 | ) | (2,272 | ) | ||||
Balance at end of period |
59,884 | 79,926 | ||||||
Treasury stock: |
||||||||
Balance at beginning of period |
(4,578 | ) | (35,888 | ) | ||||
Stock used (purchased) |
14 | (394 | ) | |||||
Stock dividend |
4,473 | 31,809 | ||||||
Balance at end of period |
(91 | ) | (4,473 | ) | ||||
Accumulated other comprehensive income (loss), net of deferred tax: |
||||||||
Balance at beginning of period |
(45,362 | ) | (309 | ) | ||||
Other comprehensive income (loss), net of tax |
8,339 | (36,061 | ) | |||||
Balance at end of period |
(37,023 | ) | (36,370 | ) | ||||
Total stockholders’ equity |
$ | 333,056 | $ | 223,517 | ||||
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
QUARTERS AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2004 AND 2003
(In thousands)
| Quarter period | Six-Month Period | |||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income |
$ | 18,515 | $ | 15,688 | $ | 35,922 | $ | 29,247 | ||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gain (loss) on
securities available-for-sale
arising during the period |
$ | (952 | ) | $ | 669 | $ | 19,821 | $ | (47,721 | ) | ||||||
Realized gains on investment
securities available-for-sale
included in net income |
(2,398 | ) | (2,247 | ) | (5,642 | ) | (6,211 | ) | ||||||||
Unrealized gain (loss) on
derivatives designated as cash
flows hedges arising during the
period |
3,496 | 1,185 | (13,390 | ) | 5,376 | |||||||||||
Realized loss on derivatives
designated as cash flow hedges
included in net income |
2,987 | 4,609 | 7,388 | 8,828 | ||||||||||||
Amount reclassified into earnings
during the period related to
transition adjustment on
derivative activities |
— | 93 | — | 260 | ||||||||||||
Income tax effect related to
unrealized (gain) loss on
securities available-for-sale |
359 | 841 | 162 | 3,407 | ||||||||||||