SELECTED FINANCIAL DATA
Quarter Ended June 30, Six-Month Period Ended June 30,
Variance Variance
2012 2011 % 2012 2011 %
EARNINGS DATA: (In thousands, except per share data)
Interest income $ 60,788 $ 82,202 -26.1% $ 130,708 $ 160,236 -18.4%
Interest expense 27,712 39,389 -29.6% 58,769 80,147 -26.7%
Net interest income 33,076 42,813 -22.7% 71,939 80,089 -10.2%
Provision for non-covered loan
and lease losses 3,800 3,800 0.0% 6,800 7,600 -10.5%
Provision for covered loan and
lease losses, net 1,467 - 100.0% 8,624 549 1470.9%
Total provision for loan and
lease losses, net 5,267 3,800 38.6% 15,424 8,149 89.3%
Net interest income after
provision for loan
and lease losses 27,809 39,013 -28.7% 56,515 71,940 -21.4%
Non-interest income 17,212 16,759 2.7% 30,181 24,164 24.9%
Non-interest expenses 29,006 30,696 -5.5% 58,092 61,475 -5.5%
Income before taxes 16,015 25,076 -36.1% 28,604 34,629 -17.4%
Income tax expense (benefit) 1,057 (1,391) 176.0% 2,994 5,081 -41.1%
Net Income 14,958 26,467 -43.5% 25,610 29,548 -13.3%
Less: Dividends on preferred
stock (1,200) (1,200) 0.0%
(2,401) (2,401) 0.0%
Income available to common
shareholders $ 13,758 $ 25,267 -45.5% $ 23,209 $ 27,147 -14.5%
PER SHARE DATA:
Basic $ 0.34 $ 0.56 -39.3% $ 0.57 $ 0.60 -5.0%
Diluted $ 0.34 $ 0.56 -39.3% $ 0.57 $ 0.59 -3.4%
Average common shares
outstanding and equivalents 40,808 45,135 -9.6% 40,986 45,656 -10.2%
Book value per common share $ 15.32 $ 14.91 2.7% $ 15.32 $ 14.91 2.7%
Tangible book value per common
share $ 15.23 $ 14.82 2.8% $ 15.23 $ 14.82 2.8%
Market price at end of period $ 11.08 $ 12.63 -12.3% $ 11.08 $ 12.63 -12.3%
Cash dividends declared per
common share $ 0.06 $ 0.05 20.0% $ 0.12 $ 0.10 20.0%
Cash dividends declared on
common shares $ 2,444 $ 2,206 10.8% $ 4,887 $ 4,477 9.2%
PERFORMANCE RATIOS:
Return on average assets (ROA) 0.94% 1.48% -36.5% 0.79% 0.82% -3.7%
Return on average common equity
(ROE) 8.73% 15.37% -43.2% 7.38% 8.26% -10.7%
Equity-to-assets ratio 10.86% 10.23% 6.2% 10.86% 10.23% 6.2%
Efficiency ratio 64.71% 57.85% 11.9% 60.92% 61.13% -0.3%
Expense ratio 1.19% 1.26% -5.6% 1.18% 1.25% -5.6%
Interest rate spread 2.23% 2.61% -14.6% 2.38% 2.41% -1.2%
Interest rate margin 2.28% 2.64% -13.6% 2.44% 2.45% -0.4%
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SELECTED FINANCIAL DATA
June 30, December 31, Variance
2012 2011 %
PERIOD END BALANCES AND CAPITAL RATIOS: (In thousands, except per share data)
Investments and loans
Investments securities $ 3,531,490 $ 3,867,970 -8.7%
Loans and leases not covered under shared-loss
agreements with the FDIC, net 1,172,636 1,169,917 0.2%
Loans and leases covered under shared-loss
agreements with the FDIC, net 447,720 496,276 -9.8%
Total investments and loans $ 5,151,846 $ 5,534,163 -6.9%
Deposits and borrowings
Deposits $ 2,222,942 $ 2,435,185 -8.7%
Securities sold under agreements to repurchase 3,053,865 3,056,238 -0.1%
Other borrowings 322,736
423,670 -23.8%
Total deposits and borrowings $ 5,599,543 $ 5,915,093 -5.3%
Stockholders' equity
Preferred stock $ 68,000 $ 68,000 0.0%
Common stock 47,842 47,809 0.1%
Additional paid-in capital 499,852 499,096 0.2%
Legal surplus 52,668 50,178 5.0%
Retained earnings 83,982 68,149 23.2%
Treasury stock, at cost (81,403) (74,808) -8.8%
Accumulated other comprehensive income 21,261 37,131 -42.7%
Total stockholders' equity $ 692,202 $ 695,555 -0.5%
Capital ratios
Leverage capital 10.75% 9.65% 11.4%
Tier 1 risk-based capital 32.50% 31.52% 3.1%
Total risk-based capital 33.79% 32.80% 3.0%
Tier 1 common equity to risk-weighted assets 29.22% 28.28% 3.3%
Financial assets managed
Trust assets managed $ 2,412,785 $ 2,216,088 8.9%
Broker-dealer assets gathered 2,097,095 1,926,147 8.9%
Total assets managed $ 4,509,880 $ 4,142,235 8.9%
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OVERVIEW OF FINANCIAL PERFORMANCE
The following discussion of the Group's financial condition and results of
operations should be read in conjunction with the foregoing "Selected Financial
Data" and the Group's unaudited consolidated financial statements and related
notes. This discussion and analysis contains forward-looking statements. Please
see "Forward-Looking Statements" and "Risk Factors" for discussion of the
uncertainties, risks and assumptions associated with these statements.
The Group is a publicly-owned financial holding company that provides a full
range of banking and wealth management services through its subsidiaries. It
provides comprehensive banking and wealth management services through a complete
range of banking and financial solutions, including mortgage, commercial and
consumer lending; financing leases; checking and savings accounts; financial
planning, insurance, wealth management, and investment brokerage; and corporate
and individual trust and retirement services. The Group operates through three
major business segments: Banking, Wealth Management, and Treasury, and
distinguishes itself based on quality service and marketing efforts focused on
mid and high net worth individuals and families, including professionals and
owners of small and mid-sized businesses, primarily in Puerto Rico. The Group
has 28 financial centers in Puerto Rico and a subsidiary in Boca Raton, Florida.
The Group's long-term goal is to strengthen its banking and wealth management
franchise by expanding its lending businesses, increasing the level of
integration in the marketing and delivery of banking and wealth management
services, maintaining effective asset-liability management, growing non-interest
revenues from banking and wealth management services, and improving operating
efficiencies.
The Group's 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 retirement plan administration).
Although all of these businesses, to varying degrees, are affected by interest
rate and financial market fluctuations and other external factors, the Group's
commitment is to continue producing a balanced and growing revenue stream.
During the quarter ended June 30, 2012, the Group benefited from new commercial,
consumer and auto lending; lower cost of deposits as well as reduced cost of
wholesale funding; and increased banking activity and cross selling of services
from the Group's growing customer base. The Group also continued to effectively
manage non-interest expenses, while reducing its reliance on investment
securities.
On June 28, 2012, the Group entered into a definitive Acquisition Agreement (the
"Acquisition Agreement") with Banco Bilbao Vizcaya Argentaria, S.A. ("BBVA"),
pursuant to which BBVA agreed to sell to the Group, and the Group agreed to
purchase from BBVA, all of the outstanding common stock of each of BBVA PR
Holding Corporation (the sole shareholder of Banco Bilbao Vizcaya Argentaria
Puerto Rico, a Puerto Rico chartered commercial bank ("BBVA Puerto Rico"), and
BBVA Seguros, Inc., a subsidiary offering insurance services) and BBVA
Securities of Puerto Rico, Inc., a registered broker-dealer (the "BBVA-PR
Acquisition") for an aggregate purchase price of $500.0 million in cash.
Immediately following the closing of the BBVA-PR Acquisition (the "Closing"),
the Group will merge BBVA Puerto Rico with and into Oriental Bank and Trust, the
Group's wholly owned banking subsidiary (the "Bank"), with the Bank continuing
as the surviving entity. Consummation of the BBVA-PR Acquisition is subject to
certain customary conditions, including the receipt of required regulatory
approvals without the imposition of a materially burdensome regulatory
condition, as described in the Acquisition Agreement, and is targeted for before
December 31, 2012. The Group may be subject to a reverse break-up fee of $25.0
million if the closing of the transaction does not occur before one year after
execution of the Acquisition Agreement (or before fifteen months after execution
of the Acquisition Agreement in certain circumstances), subject to certain
conditions. Also, under certain conditions, if BBVA proves that is sustained
losses in connection with such non-consummation in excess of the reverse
break-up fee amount, BBVA may recover from us up to an additional $25.0 million
in losses.
To finance the purchase price, on July 3, 2012, the Group completed its sale to
various institutional purchasers of $84.0 million of its 8.750% Non-Cumulative
Convertible Perpetual Preferred Stock, Series C (the "Convertible Preferred
Stock"), through a private placement, pursuant to a Subscription Agreement dated
June 28, 2012, between the Group and each of the purchasers. In addition to the
sale of the Convertible Preferred Stock, prior to the Closing, the Group expects
to raise at least an additional $66.0 million through the sale of additional
equity. The Group intends to use its own excess capital to fund the balance of
the purchase price.
The BBVA-PR Acquisition will combine two of the healthiest banks in Puerto Rico
to create a market leading bank with an expanded customer base and a greater
share of the core deposit market. Also, it will provide the Group with a
strategic advantage in continuing to serve a market that desires both
personalized attention and access to a broad array of financial products and
services offered at competitive prices. The Group believes that the Puerto Rico
customers of BBVA will generally fit the Group's traditional customer
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profile. The BBVA-PR Acquisition is anticipated to result in earnings growth and
strengthen the Group's franchise. Moreover, in keeping with the Bank's strategy
of expanding its banking business, the Bank's balance sheet will be transformed
with a larger and more diversified loan portfolio, a diminished reliance on
investment securities and wholesale funding, and improved earnings stability.
The Group believes that the BBVA-PR Acquisition is well timed in light of the
ongoing stabilization of the Puerto Rico economy. The unaudited consolidated
financial statements do not contemplate the effect of the BBVA-PR Acquisition as
the transaction has not been consummated at June 30, 2012.
Operating revenues for the quarter ended June 30, 2012 decreased 15.6%, or $9.3
million, to $50.3 million from the same period in 2011. Operating revenues for
the six-month period ended June 30, 2012 decreased 2.0%, or $2.1 million, to
$102.1 million from the same period in 2011. Following is a tabular presentation
of the Group's operating revenues for the quarters and six-month periods ended
June 30, 2012 and 2011:
Quarter Ended June 30, Six-Month Period Ended June 30,
2012 2011 2012 2011
(In thousands)
OPERATING REVENUE
Net interest income $ 33,076 $ 42,813 $ 71,939 $ 80,089
Non-interest income, net 17,212 16,759 30,181 24,164
Total operating revenues $ 50,288$ 59,572 $ 102,120 $ 104,253
Interest Income
Total interest income for the quarter and six-month period ended June 30, 2012
decreased 26.1% to $60.8 million and 18.4% to $130.7 million, as compared to the
same periods in 2011. Such decrease primarily reflects a 56.3% and 46.0%
decrease, respectively, on interest income from investments, related to lower
yields and a lower balance in the investment securities portfolio as a result of
the sale of $407.3 million in mortgage-backed securities. Also, there was an
increase in premium amortization due to increased prepayment speeds. The yield
on investments decreased from 4.49% and 4.14% for the quarter and six-month
period ended June 30, 2011 to 2.25% and 2.53% for the quarter and six-month
period ended June 30, 2012.
The decrease in interest income on investments was mitigated by an increase in
interest income from covered loans from $13.1 million and $27.3 million for the
quarter and six-month period ended June 30, 2011 to $20.3 million and $41.9
million for the quarter and six-month period ended June 30, 2012. Also, the
yield on covered loans increased from 9.12% and 9.21% for the quarter and
six-month period ended June 30, 2011 to 17.75% and 17.64% for the quarter and
six-month period ended June 30, 2012. This increase in yield was the result of
the Group's assessment in 2011 of higher projected cash flows on certain pools
of covered loans, as credit losses have been lower than initially estimated for
these loan pools. The accretable yield amounted to $177.2 million at June 30,
2012 compared to $188.8 million at December 31, 2011. Interest income from
non-covered loans remained level.
Interest Expense
Total interest expense for the quarter and six-month period ended June 30, 2012
fell 29.6% to $27.7 million and 26.7% to $58.8 million, as compared to the same
periods in 2011. This reflects the lower cost of both securities sold under
agreements to repurchase (2.17% vs. 2.72%; 2.23% vs. 2.75%) and deposits (1.42%
vs. 1.86%; 1.49% vs. 1.88%) for the quarter and six-month period ended June 30,
2012 as compared to the same periods in 2011, which reflects continuing progress
in the repricing of the Group's core retail deposits and further reductions in
its cost of funds.
In December 2011, $600 million in repurchase agreements, with an average cost of
4.23%, matured. The Group paid off $300 million of these repurchase agreements.
The remaining balance of $300 million was renewed for an average period of
approximately three and a half years at an effective fixed rate of 2.36%. To
further reduce cost of borrowings, in May 2012, the Group renewed $350 million
in repurchase agreements, with an average cost of 4.26%, at a new effective rate
of approximately 1.90%. As a result of the aforementioned transactions, total
interest expense on securities sold under agreements to repurchase declined
29.5% and 28.4% as compared to quarter and six-month period ended June 30, 2011,
respectively.
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Net Interest Income
Net interest income for the quarter and six-month period ended June 30, 2012 was
$33.1 million and $71.9 million, decreasing 22.7% and 10.2% when compared with
the same periods of the previous year. Such decrease was mostly due to a
decrease of 56.3% and 46.0% decrease, respectively, for such periods on interest
income from investments, related to lower yields and a lower balance in the
investment securities portfolio, and an increase in premium amortization.
Net interest margin of 2.28% and 2.44% for the quarter and six-month period
ended June 30, 2012 decreased 36 and 1 basis points, respectively, when compared
with the same periods in 2011.
Provision for Loan and Lease Losses
Provision for non-covered loans and lease losses for the quarter remained
unchanged compared with the same quarter of the previous year. For the six-month
period ended June 30, 2012, the provision for non-covered loans and lease losses
decreased 10.5% as compared to the same period in 2011. Provision for covered
loans and lease losses for the quarter and six-month period ended June 30, 2012
was $1.5 million and $8.6 million, reflecting the Group's revision to the
expected cash flows in the covered loan portfolio considering actual experiences
and changes in the Group's expectations for the remaining terms of the loan
pools. During the first quarter of the six-month period ending June 30, 2012,
some covered construction and development and commercial real estate loan pools
underperformed, which required a provision amounting to $7.2 million, net of the
estimated reimbursement from the FDIC.
Non-Interest Income
The Group's niche market approach to the integrated delivery of services to mid
and high net worth clients performed well as the Group expanded its market share
through the 2010 FDIC-assisted acquisition of Eurobank and the Group's capital
strength and focus on providing a market-leading service, as opposed to using
rates to attract loans or deposits. During the quarter and six-month period
ended June 30, 2012, core banking and wealth management revenues increased 14.7%
and 14.4% to $11.7 million and $23.4 million, respectively, as compared to the
same periods in 2011, primarily reflecting a $1.2 million and $2.5 million
increase in wealth management revenues to $5.9 million and $11.8 million,
respectively, attributed to an increase of 9.3% in assets under management.
Net amortization of the FDIC shared-loss indemnification asset of $5.6 million
and $10.4 million for the quarter and six-month period ended June 30, 2012,
respectively, compared to a net accretion of $1.0 million and $2.2 million for
the same periods in 2011, resulted from the ongoing evaluation of expected cash
flows of the loan portfolio acquired in the FDIC-assisted acquisition of
Eurobank. As a result of such evaluation, the Group expects a decrease in losses
to be collected from the FDIC and the improved re-yielding of the accretable
yield on the covered loans. This reduction in claimable losses amortizes the
shared-loss indemnification asset through the life of the shared-loss
agreements. This amortization is net of the accretion of the discount recorded
to reflect the expected claimable loss at its net present value.
Results for the quarter and six-month period ended June 30, 2012 also include a
$12.0 million and $19.3 million gains on the sale of investment securities with
a book value of $331.4 million and $534.3 million, respectively, as the Group
took advantage of market opportunities.
Non-Interest Expenses
Due to effective cost controls, non-interest expenses decreased to $29.0 million
for the quarter, and $58.1 million for the six-month period, ended June 30,
2012, compared to $30.7 and $61.5 million, respectively, in the same periods of
the previous year. As a result, the efficiency ratio for the quarter and
six-month period ended June 30, 2012 was 64.71% and 60.92%, respectively,
compared to 57.85% and 61.13% for the quarter and six-month period ended June
30, 2011.
Income Tax Expense
Income tax expense was $1.1 million and $3.0 million for the quarter and
six-month period ended June 30, 2012, respectively, compared to a benefit of
$1.4 million and an expense of $5.1 million for the same periods in 2011. The
effective tax rate for 2012 decreased from 2011 primarily as a result of an
increase in tax exempt income associated with OIB.
At December 31, 2011, OIB had $2.9 million in the income tax effect of
unrecognized gain on available-for-sale securities included in other
comprehensive income. Following the change in OIB's applicable tax rate from 5%
to 0% as a result of new legislation adopted
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in 2011, this remaining tax balance will flow through income as these securities
are repaid or sold in future periods, due to the OIB becoming tax exempt under
Puerto Rico law. During the quarter and six-month period ended June 30, 2012,
income tax provision included $166 thousand and $724 thousand, respectively,
related to this residual tax effect from OIB.
Income Available to Common Shareholders
For the quarter and six-month period ended June 30, 2012, the Group's income
available to common shareholders amounted to $13.8 million and $23.2 million,
respectively, compared to $25.3 million and $27.1 million, respectively, for the
same periods in 2011. Earnings per basic and fully diluted common share were
$0.34 and $0.57 for the quarter and six-month period ended June 30, 2012,
compared to income per basic common share and fully diluted common share of
$0.56 for the quarter, and $0.60 of income per basic common share and $0.59 per
fully diluted common share for the six-month period ended June 30, 2011.
Interest Earning Assets
The investment portfolio amounted to $3.531 billion at June 30, 2012, an 8.7%
decrease compared to $3.868 billion at December 31, 2011, while the loan
portfolio decreased 2.8% to $1.620 billion at June 30, 2012, compared to $1.666
billion at December 31, 2011. The decrease in the investment portfolio reflects
a reduction of 11.7%, or $347.1 million, in the available-for-sale portfolio,
due to the sale of approximately $534.3 million in investment securities as part
of the Group's ongoing strategy of replacing securities with loans and selling
mortgage-backed securities subject to high prepayment speeds, which was
partially offset by an increase of 1.3%, or $11.5 million, in the
held-to-maturity portfolio. The decrease in the loan portfolio is mostly due to
an increase of $21.4 million, in the allowance for loan and lease losses on
covered loans. In addition, the loan portfolio had a decrease in covered loans
of 5.1% as they continue to be repaid.
Interest Bearing Liabilities
Total deposits amounted to $2.223 billion at June 30, 2012, a decrease of 8.7%
compared to $2.435 billion at December 31, 2011. Core retail deposits, which
exclude institutional and brokered deposits, declined $19.6 million, or 1.0%,
compared to December 31, 2011, while wholesale deposits decreased $192.7 million
or 45.4% as higher cost deposits matured during the period. Interest-bearing
savings and demand deposits and individual retirement accounts increased 2.1%
and 1.8%, respectively, while non-interest bearing demand deposits and retail
certificates of deposits decreased 2.0% and 12.0%, respectively.
Using available cash, in March 2012, the Group's banking subsidiary repaid at
maturity the $105.0 million in senior unsecured notes issued in March 2009 under
the FDIC's Temporary Liquidity Guarantee Program ("TLGP") with an all-in cost of
3.75%. Due to the repayment of the TLGP notes, total borrowings decreased 3.0%
to $3.377 billion at June 30, 2012, compared to $3.480 billion at December 31,
2011.
During the quarter ended June 30, 2012, the Group renewed $350 million in
repurchase agreements costing 4.26% at a new effective rate of approximately
1.90%, as one-month short-term repurchase agreements. The repurchase agreements
are being rolled over on a monthly basis on the same terms as the variable rate
leg of the interest rate swaps that are designated as cash flow hedges of such
repurchase agreements.
Stockholders' Equity
Stockholders' equity at June 30, 2012 was $692.2 million, compared to $695.6
million at December 31, 2011, a decrease of 0.5%. This decrease reflects a
decrease in other comprehensive income in addition to the stock repurchases by
the Group during the first quarter of 2012, partially offset by the net income
for the six-month period ended June 30, 2012.
Book value per share was $15.32 at June 30, 2012 compared to $15.22 at December
31, 2011.
The Group maintains capital ratios in excess of regulatory requirements. At June
30, 2012, Tier 1 Leverage Capital Ratio was 10.75% (2.69 times the requirement
of 4.00%), Tier 1 Risk-Based Capital Ratio was 32.50% (8.13 times the
requirement of 4.00%), and Total Risk-Based Capital Ratio was 33.79% (4.22 times
the requirement of 8.00%).
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Return on Average Assets and Common Equity
Return on average common equity ("ROE") for the quarter and six-month period
ended June 30, 2012 was 8.73% and 7.38%, respectively, down from 15.37% and
8.26% for the quarter and six-month period ended June 30, 2011. Return on
average assets ("ROA") for the quarter and six-month period ended June 30, 2012
was 0.94% and 0.79%, respectively, down from 1.48% and 0.82% for the quarter and
six-month period ended June 30, 2011. The decrease is mostly due to a 43.5% and
13.3% decrease in net income from $26.5 million and $29.5 million in the quarter
and six-month period ended June 30, 2011 to $15.0 million and $25.6 million in
the quarter and six-month period ended June 30, 2012, respectively.
Assets under Management
Assets managed by the Group's trust division, the pension plan administration
subsidiary (CPC), and Oriental Financial Services increased from $4.142 billion
as of December 31, 2011 to $4.510 billion as of June 30, 2012. The 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 CPC manages the administration of private retirement plans. At
June 30, 2012, total assets managed by the Group's trust division and CPC
increased to $2.413 billion, compared to $2.216 billion at December 31, 2011,
mainly related to capital market appreciation. At June 30, 2012, total assets
managed by Oriental Financial Services from its customer investment accounts
increased to $2.097 billion, compared to $1.926 billion at December 31, 2011,
also mainly because of capital market appreciation.
Lending
Total loan production of $206.9 million for the six-month period ended June 30,
2012 increased 6.3% year over year, including $96.4 million in the quarter ended
June 30, 2012. Total commercial loan production of $91.2 million for the
six-month period ended June 30, 2012, increased 46.5% from the year ago period,
including $35.5 million in the quarter ended June 30, 2012.
The Group sells most of its conforming mortgages in the secondary market, and
retains servicing rights. As a result, mortgage banking activities now reflect
originations as well as a growing servicing portfolio, a source of recurring
revenue.
Mortgage loan production of $48.9 million and $93.9 million for the quarter and
six-month period ended June 30, 2012, respectively, decreased 18.1% and 16.5%
from the same periods in 2011. Leasing and consumer loans production for the
quarter and six-month period ended June 30, 2012 totaled $12.0 million and $21.8
million, up 6.1% and 9.6% from the same periods in 2011.
Credit Quality on Non-Covered Loans
Net credit losses increased $1.6 million to $6.4 million during the six-month
period ended June 30, 2012, representing 1.07% of average non-covered loans
outstanding, versus 0.82% in 2011. The allowance for loan and lease losses on
non-covered loans increased to $37.4 million (3.17% of total non-covered loans)
at June 30, 2012, compared to $37.0 million (3.12% of total non-covered loans)
at December 31, 2011.
Non-performing loans ("NPLs"), which excludes loans covered under shared-loss
agreements with the FDIC, decreased 10.5%, or $14.2 million, in the six-month
period ended June 30, 2012. The Group does not expect NPLs to result in
significantly higher losses as most are well-collateralized with adequate
loan-to-value ratios. In residential mortgage lending, more than 90% of the
Group's portfolio consists of fixed-rate, fully amortizing, fully documented
loans that do not have the level of risk generally associated with subprime
loans. In commercial lending, more than 90% of all loans are collateralized by
real estate. Early delinquency loans (30-89 days past due) dropped 11.1% from
December 31, 2011. Covered loans are considered to be performing due to the
application of the accretion method under ASC 310-30.
Non-GAAP Measures
The Group uses certain non-GAAP measures of financial performance to supplement
the financial statements presented in accordance with GAAP. The Group presents
non-GAAP measures that management believes is useful and meaningful to
investors. Non-GAAP measures do not have any standardized meaning and are
therefore unlikely to be comparable to similar measures presented by other
companies. The presentation of non-GAAP measures is not intended to be a
substitute for, and should not be considered in isolation from, the financial
measures reported in accordance with GAAP.
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The Group's management has reported and discussed the results of operations
herein both on a GAAP basis and on a pre-tax pre-provision operating income
basis (defined as net interest income, plus banking and wealth management
revenues, less non-interest expenses, as calculated on the table below). The
Group's management believes that, given the nature of the items excluded from
the definition of pre-tax pre-provision operating income, it is useful to state
what the results of operations would have been without them so that investors
can see the financial trends from the Group's continuing business.
Tangible common equity consists of common equity less goodwill and core deposit
intangibles. Management believes that the ratios of tangible common equity to
total assets and to risk-weighted assets assist investors in analyzing the
Group's capital position.
During the quarter and six-month period ended June 30, 2012, the Group's pre-tax
pre-provision operating income was approximately $15.8 million and $37.3
million, respectively, a decrease of 29.3% and 4.7% from $22.4 million and $39.1
million in the same periods of last year. Pre-tax pre-provision operating income
is calculated as follows:
Quarter Ended June 30, Six-Month Period Ended June 30,
2012 2011 2012 2011
(In thousands)
PRE-TAX PRE-PROVISION OPERATING
INCOME
Net interest income $ 33,076 $ 42,813 $
71,939 $ 80,089
Core non-interest income:
Wealth management revenues 5,903 4,575 11,791 9,257
Banking service revenues 3,407 3,234 6,693 6,958
Mortgage banking activities 2,436 2,435 4,938 4,258
Total core non-interest 11,746 10,244 23,422 20,473
income
Less non interest expenses (29,006) (30,696) (58,092) (61,475)
Total pre-tax $ 15,816 $ 22,361 $ 37,269 $ 39,087
pre-provision operating income
At June 30, 2012, tangible common equity to total assets was 9.73% compared to
9.32% at December 31, 2011. Tangible common equity to risk-weighted assets and
total equity to risk-weighted assets at June 30, 2012 increased to 29.88% and
33.34%, respectively, from 29.71% and 33.14% at December 31, 2011.
77
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ANALYSIS OF RESULTS OF
OPERATIONS
TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2012 AND 2011
Interest Average rate Average balance
June June June June June June
2012 2011 2012 2011 2012 2011
(Dollars in thousands)A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 60,788$ 82,202 4.20% 5.08% $ 5,794,684$ 6,477,778
Tax equivalent adjustment 13,097 27,615 0.90% 1.71%
- -
Interest-earning assets - tax 73,885 109,817 5.10% 6.79%
5,794,684 6,477,778
equivalent
Interest-bearing 27,712 39,389 1.97% 2.47% 5,626,256 6,369,156
liabilities
Tax equivalent net interest 46,173 70,428 3.13% 4.32% 168,428 108,622
income / spread
Tax equivalent interest rate 3.19% 4.35%
margin
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 22,842 52,903 2.61% 4.82% 3,501,015 4,389,403
Money market investments 381 270 0.24% 0.31% 634,707 348,761
Total investments 23,223 53,173 2.25% 4.49% 4,135,722 4,738,164
Loans not covered under
shared-loss agreements
with the FDIC:
Mortgage 11,909 11,349 5.80% 5.16% 821,807 879,551
Commercial 4,054 3,500 5.21% 5.78% 311,299 242,006
Leasing 570 286 8.17% 8.78% 27,908 13,026
Consumer 690 834 6.97% 10.39% 39,623 32,093
Total non-covered loans 17,223 15,969 5.74% 5.48% 1,200,637 1,166,676
Loans covered under
shared-loss agreements
with the FDIC:
Loans secured by 5,133 3,385 13.33% 7.64% 154,004 173,173
residential properties
Commercial and construction 13,054 7,516 19.37% 8.19% 269,509 320,247
Leasing 1,882 1,794 31.64% 11.01% 23,793 65,162
Consumer 273 365 9.91% 8.58% 11,019 14,356
Total covered loans 20,342 13,060 17.75% 9.12% 458,325 572,938
Total loans 37,565 29,029 9.01% 6.67% 1,658,962 1,739,614
Total interest 60,788 82,202 4.20% 5.08% 5,794,684 6,477,778
earning assets
Interest-bearing liabilities:
Deposits:
Non-interest bearing - - - - 172,615 182,521
deposits
Now accounts 2,268 3,140 1.04% 1.57% 876,041 799,960
Savings and money market 580 832 0.99% 1.40% 234,762 238,536
Individual retirement 2,122 2,451 2.30% 2.74% 369,519 358,426
accounts
Retail certificates of 1,653 2,738 2.00% 2.36%
330,644 463,143
deposits
Total retail deposits 6,623 9,161 1.34% 1.79% 1,983,581 2,042,586
Institutional deposits 411 920 1.72% 1.67% 95,382 220,736
Brokered deposits 930 1,465 2.22% 2.68% 167,207 218,430
Total wholesale deposits 1,341 2,385 2.04% 2.17% 262,589 439,166
Total deposits 7,964 11,546 1.42% 1.86% 2,246,170 2,481,752
Borrowings:
Securities sold under 16,586 23,512 2.17% 2.72%
3,057,598 3,462,085
agreements to repurchase
Advances from FHLB and 2,841 3,002 3.97% 4.23%
286,405 283,875
other borrowings
FDIC-guaranteed term notes - 1,021 0.00% 3.88% - 105,361
Subordinated capital notes 321 308 3.56% 3.41% 36,083 36,083
Total borrowings 19,748 27,843 2.34% 2.86% 3,380,086 3,887,404
Total interest bearing 27,712 39,389 1.97% 2.47% 5,626,256 6,369,156
liabilities
Net interest income / spread $ 33,076 $ 42,813 2.23% 2.61%
Interest rate margin 2.28% 2.64%
Excess of average
interest-earning assets $ 168,428$ 108,622
over average
interest-bearing liabilities
Average interest-earning
assets to average 102.99% 101.71%
interest-bearing
liabilities ratio
78
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C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investments $ (6,761) $ (23,189) $ (29,950)
Loans (2,148) 10,684 8,536
Total interest income (8,909) (12,505) (21,414)
Interest Expense:
Deposits (1,096) (2,486) (3,582)
Securities sold under agreements to repurchase (2,747) (4,179) (6,926)
Other borrowings (1,047) (122) (1,169)
Total interest expense (4,890) (6,787) (11,677)
Net Interest Income $ (4,019) $ (5,718) $ (9,737)
79
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TABLE 1/A - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011
Interest Average rate Average balance
June June June June June June
2012 2011 2012 2011 2012 2011
(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets $ 130,708 $ 160,236 4.43% 4.90% $ 5,900,367$ 6,535,278
Tax equivalent adjustment 28,201 31,332 0.96% 0.96%
- -
Interest-earning assets - tax 158,909 191,568 5.39% 5.86%
5,900,367 6,535,278
equivalent
Interest-bearing 58,769 80,147 2.05% 2.49% 5,724,700 6,426,420
liabilities
Tax equivalent net interest 100,140 111,421 3.34% 3.37% 175,667 108,858
income / spread
Tax equivalent interest rate 3.39% 3.41%
margin
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities 52,692 98,497 2.92% 4.45% 3,611,510 4,425,391
Money market investments 787 520 0.26% 0.30% 614,517 353,241
Total investments 53,479 99,017 2.53% 4.14% 4,226,027 4,778,632
Loans not covered under
shared-loss agreements
with the FDIC:
Mortgage 24,721 24,739 5.97% 5.59% 828,700 885,720
Commercial 8,150 7,004 5.34% 5.91% 305,116 237,114
Leasing 1,118 561 8.37% 10.70% 26,719 10,490
Consumer 1,356 1,630 6.99% 10.54% 38,798 30,934
Total non-covered loans 35,345 33,934 5.89% 5.83% 1,199,333 1,164,258
Loans covered under
shared-loss agreements
with the FDIC:
Loans secured by 10,331 6,881 13.32% 7.63% 155,084 176,471
residential properties
Commercial and construction 26,721 15,274 19.10% 8.12% 279,815 331,047
Leasing 4,254 4,278 30.00% 12.28% 28,362 69,654
Consumer 578 852 9.84% 9.59% 11,746 15,216
Total covered loans 41,884 27,285 17.64% 9.21% 475,007 592,388
Total loans 77,229 61,219 9.23% 6.97% 1,674,340 1,756,646
Total interest 130,708 160,236 4.43% 4.90% 5,900,367 6,535,278
earning assets
Interest-bearing liabilities:
Deposits:
Non-interest bearing - - - - 174,497 179,640
deposits
Now accounts 4,817 6,766 1.11% 1.67% 869,525 808,561
Savings and money market 1,207 1,859 1.03% 1.53% 235,019 243,122
Individual retirement 4,452 5,084 2.43% 2.83% 367,009 359,388
accounts
Retail certificates of 3,769 5,604 2.18% 2.40% 345,644 466,563
deposits
Total retail deposits 14,245 19,313 1.43% 1.88% 1,991,694 2,057,274
Institutional deposits 870 1,823 1.66% 1.53% 104,648 237,870
Brokered deposits 2,095 2,693 2.03% 2.19% 206,049 245,413
Total wholesale deposits 2,965 4,516 1.91% 1.87% 310,697 483,283
Total deposits 17,210 23,829 1.49% 1.88% 2,302,391 2,540,557
Borrowings:
Securities sold under 34,156 47,671 2.23% 2.75% 3,057,858 3,462,170
agreements to repurchase
Advances from FHLB and 5,845 5,994 4.11% 4.25% 284,188 282,009
other borrowings
FDIC-guaranteed term notes 909 2,042 4.11% 3.87% 44,180 105,601
Subordinated capital notes 649 611 3.60% 3.39% 36,083 36,083
Total borrowings 41,559 56,318 2.43% 2.90% 3,422,309 3,885,863
Total interest bearing 58,769 80,147 2.05% 2.49% 5,724,700 6,426,420
liabilities
Net interest income / spread $ 71,939 $ 80,089 2.38% 2.41%
Interest rate margin 2.44% 2.45%
Excess of average
interest-earning assets $ 175,667$ 108,858
over average
interest-bearing liabilities
Average interest-earning
assets to average 103.07% 101.69%
interest-bearing
liabilities ratio
80
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C - CHANGES IN NET INTEREST INCOME DUE TO:
Volume Rate Total
(In thousands)
Interest Income:
Investments $ (11,450) $ (34,088) $ (45,538)
Loans (4,384) 20,394 16,010
Total interest income (15,834) (13,694) (29,528)
Interest Expense:
Deposits (2,234) (4,385) (6,619)
Securities sold under agreements to repurchase (5,567) (7,948) (13,515)
Other borrowings (1,209) (35) (1,244)
Total interest expense (9,010) (12,368) (21,378)
Net Interest Income $ (6,824) $ (1,326) $ (8,150)
81
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Net Interest Income
Net interest income is a function of the difference between rates earned on the
Group's 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). The
Group constantly monitors the composition and re-pricing of its assets and
liabilities to maintain its net interest income at adequate levels. Tables 1 and
1A above show the major categories of interest-earning assets and
interest-bearing liabilities, their respective interest income, expenses, yields
and costs, and their impact on net interest income due to changes in volume and
rates for the quarters and six-month periods ended June 30, 2012 and 2011,
respectively.
Net interest income amounted to $33.1 million and $71.9 million for the quarter
and six-month period ended June 30, 2012, a decrease of 22.7% and 10.2% from
$42.8 million and $80.1 million for the same periods in 2011. These changes
reflect a decrease of 56.3% in interest income from investments, partially
offset by a 29.4% increase in interest income from loans and a decrease of 29.6%
in interest expense for the quarter ended June 30, 2012 compared to the same
period in 2011. They also reflect a decrease of 46.0% in interest income from
investments, partially offset by a 26.2% increase in interest income from loans
and a decrease of 26.7% in interest expense for the six-month period ended June
30, 2012 compared to the same period in 2011.
Interest rate spread decreased 38 basis points to 2.23% for the quarter ended
June 30, 2012 from 2.61% in the quarter ended June 30, 2011. This decrease
reflects an 88 basis points decrease in the average yield of interest earning
assets to 4.20% from 5.08%, as further explained below, partially offset by a 50
basis points decrease in the average cost of funds to 1.97% from 2.47%. For the
six-month period ended June 30, 2012, interest rate spread decreased 3 basis
points to 2.38% from 2.41% in the same period of 2011. This decrease reflects a
47 basis points decrease in the average yield of interest earning assets to
4.43% from 4.90%, partially offset by a 44 basis points decrease in the average
cost of funds to 2.05% from 2.49%.
The decrease in interest income for the quarter was primarily the result of a
decrease of $8.9 million in interest-earning assets volume variance, and a $12.5
million decrease in interest rate variance. The six-month period decrease in
interest income was primarily the result of a decrease of $15.8 million in
interest-earning assets volume variance, and a $13.7 million decrease in
interest rate variance. Interest income from loans increased 29.4% to $37.6
million and 26.2% to $77.2 million for the quarter and six-month period ended
June 30, 2012, respectively. During the quarter and six-month period ended June
30, 2012, interest income from covered loans increased 55.8% to $20.3 million
and 53.5% to $41.9 million, respectively, compared to the same periods in 2011,
mainly due to the re-yielding of various pools of covered loans mainly during
the second half of 2011. Interest income on investments decreased 56.3% to $23.2
million and 46.0% to $53.5 million for the quarter and six-month period ended
June 31, 2012, respectively, compared to the same periods in 2011, reflecting
lower balance in the investment securities portfolio, lower yield on investment
securities and an increase in premium amortization due to increased prepayment
speeds.
Interest expense decreased 29.6% to $27.7 million and 26.7% to $58.8 million for
the quarter and six-month period ended June 30, 2012, respectively. The decrease
for the quarter was primarily the result of a $6.8 million decrease in interest
rate variance, and a $4.9 million decrease in interest-bearing liabilities
volume variance. The six-month period decrease was primarily the result of a
$12.4 million decrease in interest rate variance, and a $9.0 million decrease in
interest-bearing liabilities volume variance. These decreases are due to a
reduction in the balance of interest bearing liabilities and the cost of funds,
which decreased 50 basis points to 1.97% and 44 basis points to 2.05% for the
quarter and six-month period ended June 30, 2012, respectively, from the same
periods in 2011. The cost of deposits decreased by 44 basis points to 1.42% and
39 basis points to 1.49% during the quarter and six-month period ended June 30,
2012, respectively, compared to 1.86% and 1.88% for the same periods in 2011
primarily due to continuing progress in repricing the core retail deposits and
to the maturity during the period of higher cost wholesale deposits. The cost of
borrowings decreased by 52 basis points to 2.34% and 47 basis points to 2.43%
during the quarter and six-month period ended June 30, 2012, respectively,
compared to 2.86% and 2.90% for the same periods in 2011. This decrease in the
cost of borrowing is attributable to the fact that during December 2011, as
previously reported, $600 million in repurchase agreements, with an average cost
of 4.23%, matured. The Group paid off $300 million of these repurchase
agreements, and the remaining balance of $300 million was renewed for an average
period of approximately three and a half years at an effective fixed rate of
2.36%. To further reduce cost of borrowings, in May 2012, the Group renewed
$350.0 million in repurchase agreements, with an average cost of 4.26%, at a new
effective rate of approximately 1.90%. Also, total borrowings decreased due to
the repayment in March 2012, at maturity, of the notes issued under the FDIC's
Temporary Liquidity Guarantee Program.
For the quarter and six-month period ended June 30, 2012, the average balance of
total interest-earning assets was $5.795 billion and $5.900 billion,
respectively, a decrease of 10.5% and 9.7% from the same periods in 2011. This
decrease in average balance of interest-earning assets was mainly attributable
to a 12.7% and 11.6% decrease for the quarter and six-month period ended June
30, 2012, respectively, in average investments, in addition to a 4.6% and 4.7%
decrease in average loans compared to the same periods in
82
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2011, resulting from normal pay downs of covered loans and to the re-yielding of
various pools of covered loans mainly during the second half of 2011. The
decrease in the investment portfolio reflects a reduction in the
available-for-sale portfolio, due to the sale of approximately $534.3 million in
investment securities during the six-month period ended June 30, 2012. As of
June 30, 2012, the Group had $464.6 million in cash and cash equivalents and
$225.0 million in securities purchased under agreements to resell, compared to
$591.5 million in cash and cash equivalents and no securities purchased under
agreements to resell as of December 31, 2011.
For the quarter ended June 30, 2012, the average yield on interest-earning
assets was 4.20% compared to 5.08% for the same period in 2011, and for the
six-month period ended June 30, 2012 was 4.43% compared to 4.90% for the same
period in 2011. This was mainly due to a decrease in the investment portfolio
yield to 2.25% from 4.49% and to 2.53% from 4.14% for the quarter and six-month
period ended June 30, 2012, respectively. However, such decrease was partially
offset by the higher average yields in the loan portfolio, mainly due to the
covered loans that had an average yield of 17.75% and 17.64% for the quarter and
six-month period ended June 30, 2012, respectively, compared to 9.12% and 9.21%
for the same periods in 2011.
TABLE 2 - NON-INTEREST INCOME SUMMARY
Quarter Ended June 30, Six-Month Period Ended June 30,
2012 2011 Variance 2012 2011 Variance
(Dollars in thousands)
Wealth management revenues $ 5,903$ 4,575 29.0% $ 11,792$ 9,257 27.4%
Banking service revenues
3,407 3,234 5.3% 6,692 6,958 -3.8%
Mortgage banking activities 2,436 2,435 0.0%
4,938 4,258 16.0%
Total banking and wealth
management revenues 11,746 10,244 14.7% 23,422 20,473 14.4%
Net accretion (amortization) of
FDIC shared-loss
indemnification asset (5,583) 1,020 -647.4% (10,410) 2,231 -566.6%
Net gain (loss) on:
Sale of securities 11,979 9,126 31.3% 19,331 9,093 112.6%
Derivatives (107) (3,704) 97.1% (108) (7,660) 98.6%
Foreclosed real estate (886) (3) -100.0% (1,284) (135) -851.1%
Other 63 76 -17.1% (770) 162 -575.3%
5,466 6,515 -16.1% 6,759 3,691 83.1%
Total non-interest income, net $ 17,212$ 16,759 2.7% $ 30,181$ 24,164 24.9%
Non-Interest Income
Non-interest income is affected by the amount of securities, derivatives and
trading transactions, the level of trust assets under management, transactions
generated by clients' financial assets serviced by the securities broker-dealer
and insurance subsidiaries, the level of mortgage banking activities, and the
fees generated from loans and deposit accounts. It is also affected by the net
accretion (amortization) of the FDIC shared-loss indemnification asset, which
varies depending on the results of the on-going evaluation of expected cash
flows of the loan portfolio acquired in the 2010 FDIC-assisted acquisition of
Eurobank.
As shown in Table 2 above, the Group recorded non-interest income in the amount
of $17.2 million and $30.2 million for the quarter and six-month period ended
June 30, 2012, respectively, compared to $16.8 million and $24.2 million for the
same periods in 2011, an increase of $453 thousand and $6.0 million,
respectively. This increase is mainly related to the $12.0 million and $19.3
million gains on sale of securities, as the Group took advantage of market
opportunities during the quarter and six-month period ended June 30, 2012, which
was partially offset by the amortization of the FDIC shared-loss indemnification
asset during the periods.
The net amortization of the FDIC shared-loss indemnification asset of $5.6
million and $10.4 million for the quarter and six-month period ended June 30,
2012, respectively, compared to net accretion of $1.0 million and $2.2 million
for the same periods in 2011, resulted from the ongoing evaluation of expected
cash flows of the covered loan portfolio, which resulted in reduced losses
expected to be collected from the FDIC and the improved re-yielding of the
accretable yield on the covered loans. This reduction in claimable losses
amortizes the loss-share indemnification asset at a rate that mirrors the
aforementioned re-yielding on the covered loans. This amortization is net of the
accretion of the discount recorded to reflect the expected claimable loss at its
net present value.
83
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The losses related to derivatives decreased approximately $3.6 million and $7.6
million as compared to the quarter and six-month period ended June 30, 2011,
respectively, during which period the Group realized a loss of $4.3 million on
the termination of forward-settlement swaps with a notional amount of $1.25
billion, which were not designated as cash flow hedges, and a realized loss of
$2.2 million on the sale of the remaining swap options. At the same time, the
Group entered into new forward-settlement swap contracts with a notional amount
of $1.43 billion, all of which were designated as cash flow hedges.
Wealth management revenues, which consist of commissions and fees from fiduciary
activities, and securities brokerage and insurance activities, increased 29.0%
to $5.9 million and 27.4% to $11.8 million in the quarter and six-month period
ended June 30, 2012, respectively, from $4.6 million and $9.3 million for the
same periods in 2011, due to increased brokerage, trust and insurance business
and transactions.
Banking service revenues, which consist primarily of fees generated by deposit
accounts, electronic banking services, and customer services, increased 5.3% to
$3.4 million in the quarter ended June 30, 2012 and decreased 3.8% to $6.7
million in the six-month period ended June 30, 2012, from $3.2 million and $7.0
million, respectively, for the same periods in 2011. This decrease for the
six-month period is attributable to a decrease in loan fees.
Income generated from mortgage banking activities remained level at $2.4 million
in the quarter ended June 30, 2012 and increased 16.0% to $4.9 million in the
six-month period ended June 30, 2012, compared to the same periods in 2011. Such
increase is mainly a result of favorable pricing of mortgages sold into the
secondary market.
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
Quarter Ended June 30, Six-Month Period Ended June 30,
2012 2011 Variance % 2012 2011 Variance %
(Dollars in thousands)
Compensation and
employee benefits $ 11,184 $ 11,230 -0.4% $ 21,550 $ 22,918 -6.0%
Professional and service
fees 5,144 5,750 -10.5% 10,442 11,197 -6.7%
Occupancy and equipment 4,270 4,214 1.3% 8,455 8,619 -1.9%
Insurance 1,442 1,646 -12.4% 3,262 3,632 -10.2%
Electronic banking
charges 1,609 1,155 39.3% 3,166 2,610 21.3%
Taxes, other than
payroll and income taxes (107) 858 -112.5% 1,067 2,237 -52.3%
Loan servicing and
clearing expenses 955 1,076 -11.2% 1,923 2,097 -8.3%
Foreclosure and
repossession expenses 1,198 761 57.4% 2,153 1,484 45.1%
Advertising, business
promotion,
and strategic
initiatives 1,564 1,508 3.7% 2,412 2,700 -10.7%
Communication 415 425 -2.4% 827 822 0.6%
Director and investors
relations 342 339 0.9% 651 625 4.2%
Printing, postage,
stationery and supplies 322 362 -11.0% 630 644 -2.2%
Other operating expenses 668 1,372 -51.3% 1,554 1,890 -17.8%
Total non-interest
expenses $ 29,006 $ 30,696 -5.5% $ 58,092 $ 61,475 -5.5%
Relevant ratios and
data:
Efficiency ratio 64.71% 57.85% 60.92% 61.13%
Expense ratio 1.19% 1.26% 1.18% 1.25%
Compensation and
benefits to
non-interest
expense 38.56% 37.97% 37.10% 37.28%
Compensation to total
assets owned 0.70% 0.63% 0.68% 0.65%
Average number of
employees 751 728 748 726
Average compensation
per employee $ 59.6 $ 61.7 $ 57.6 $ 63.1
Assets owned per
average employee $ 8,490 $ 9,729 $ 8,524 $ 9,755
Non-Interest Expenses
Non-interest expenses for the quarter ended June 30, 2012 decreased 5.5% to
$29.0 million, compared to $30.7 million for the same period in 2011. For the
six-month period ended June 30, 2012, non-interest expense reached $58.1
million, representing a decrease of 5.5% compared to $61.5 million for the same
period in 2011 as a result of the effective implementation of cost controls.
84
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Taxes, other than payroll and income taxes, for the quarter and six-month period
ended June 30, 2012 decreased 112.5% to a benefit of $107 thousand and 52.3% to
an expense of $1.1 million, respectively, as compared to the same periods in
2011, principally due to the effect of the Eurobank integration, which for 2011
contemplated municipal license and property taxes for all of Eurobank's former
facilities. During the quarter ended June 30, 2012, the Group recorded a
municipal license benefit of $1.4 million, attributed to a settlement reached
with the municipality of San Juan, in which the Group paid $60 thousand in full
and final satisfaction of any and all claims for municipal license taxes for all
fiscal years prior to and including 2011.
Compensation and employee benefits decreased 0.4% and 6.0% to $11.2 million and
$21.6 million for the quarter and six-month period ended June 30, 2012,
respectively, from $11.2 million and $22.9 million for the same periods in 2011.
The decrease is related to an excess provision for bonus amounting to $857
thousand compared to the amount finally paid during the first quarter of 2012,
resulting in a benefit in the six-month period ended June 30, 2012.
Insurance expense decreased 12.4% and 10.2% for the quarter and six-month period
ended June 30, 2012, respectively, as compared to the same periods in 2011,
principally due to a change in FDIC assessment rates and a change in the
methodology of the assessment applied to the Bank. The current methodology is
based on average consolidated total assets less average tangible equity, instead
of average total domestic deposits.
The Group's cost control initiatives also yielded savings in professional and
service fees and loan servicing and clearing expenses by 10.5% and 11.2%,
respectively, in the quarter ended June 30, 2012, and 6.7% and 8.3%,
respectively, in the six-month period ended June 30, 2012. This is mainly driven
by consulting and outsourcing services that were eliminated or renegotiated.
Other expenses decreased 51.3% to $668 thousand and 17.8% to $1.6 million for
the quarter and six-month period ended June 30, 2012, respectively, as compared
to $1.4 million and $1.9 million for the same periods in 2011, mainly due to a
non-recurring operational loss item amounting to $350 thousand recorded in 2011
in addition to cost control initiatives during the quarter and six-month period
ended June 30, 2012.
The decrease in the Group's net-interest income resulted in an increase in the
efficiency ratio to 64.71% for the quarter ended June 30, 2012 compared to
57.85% for the quarter ended June 30, 2011, while it decreased to 60.92% for the
six-month period ended June 30, 2012 from 61.13% in the prior year. The
efficiency ratio measures how much of a company's 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, credit-related other-than-temporary impairment losses, net accretion
or amortization of FDIC shared-loss indemnification assets, and other income
that may be considered volatile in nature. Management believes that the
exclusion of those items permits greater comparability. Amounts presented as
part of non-interest income that are excluded from the efficiency ratio
computation amounted to gains of $5.5 million and $6.8 million for the quarter
and six-month period ended June 30, 2012, respectively, compared to gains of
$6.5 million and $3.7 million for the quarter and six-month period ended June
30, 2011. Revenues for purposes of the efficiency ratio for the quarter and
six-month period ended June 30, 2012 amounted to $44.8 million and $95.4
million, respectively, compared to $53.1 million and $100.6 million for the same
periods in 2011.
Provision for Loan and Lease Losses
The provision for non-covered loan and lease losses for the quarter ended June
30, 2012 remained level at $3.8 million, and totaled $6.8 million for the
six-month period ended June 30, 2012, a 10.5% decrease from the $7.6 million
reported for the same period in 2011. Based on an analysis of the credit quality
and the composition of the Group's loan portfolio, management determined that
the provision for the quarter and six-month period ended June 30, 2012 was
adequate in order to maintain the allowance for loan and lease losses at an
adequate level to provide for probable losses based upon an evaluation of known
and inherent risks. The Group's allowance for loan and lease losses policy
provides for a detailed quarterly analysis of probable losses. The six-month
period decrease in the provision for loan and lease losses is supported by the
following observed trends during the six-month period ended June 30, 2012:
• Current loans to total gross loans increased from 85.8% at December 31, 2011
to 87.6% at June 30, 2012.
• Loans 90 days past due to total gross loans decreased from 10.6% at December
31, 2011 to 9.2% at June 30, 2012.
• Non-accruing loans decreased from $134.8 million at December 31, 2011 to
$120.5 million at June 30, 2012.
85
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The decrease in non-accruing loans is mainly related to an improvement in the
non-performing residential mortgage and commercial loan portfolios as described
in Table 12 below.
During the quarter and six-month period ended June 30, 2012, net credit losses
amounted to $3.8 million and $6.4 million, respectively, a 63.6% and 33.5%
increase when compared to $2.3 million and $4.8 million reported for the same
periods in 2011. The increase was primarily due to a $974 thousand and $2.3
million increase in net credit losses for commercial loans during the quarter
and six-month period ended June 30, 2012, respectively, compared to the same
periods in 2011. Net credit losses on mortgage loans increased 53.6% during the
quarter ended June 30, 2012, but decreased 5.7% during the six-month period
ended June 30, 2012 compared to the same periods in 2011. Net credit losses on
consumer loans and leases decreased $159 thousand and $34 thousand,
respectively, for the quarter ended June 30, 2012, and $423 thousand and $68
thousand during the six-month period ended June 30, 2012, compared to the same
periods in 2011. Total charge-offs increased 62.4% to $3.9 million and 32.2% to
$6.6 million in the quarter and six-month period ended June 30, 2012,
respectively, as compared to the same periods in 2011, and total recoveries
increased from $75 thousand and $209 thousand in the quarter and six-month
period ended June 30, 2011, respectively, to $94 thousand and $216 thousand in
the quarter and six-month period ended June 30, 2012, respectively. As a result,
the recoveries to charge-offs ratio decreased from 3.16% and 4.17% in the
quarter and six-month period ended June 30, 2011 to 2.44% and 3.26% in the
quarter and six-month period ended June 30, 2012.
The loans covered by the FDIC shared-loss agreement were recognized at fair
value as of April 30, 2010, which included the impact of expected credit losses.
To the extent credit deterioration occurs in covered loans after the date of
acquisition, the Group would record an allowance for loan and lease losses.
Also, the Group would record an increase in the FDIC share-loss indemnification
asset for the expected reimbursement from the FDIC under the shared-loss
agreements. As part of the Group's assessment of actual versus expected cash
flows on covered loans during the quarter and six-month period ended June 30,
2012, the Group observed that some pools of construction and development loans
and commercial real estate loans underperformed. These observations required a
provision for covered loan and lease losses of $8.6 million, net of the effect
from the FDIC shared-loss indemnification asset, for the six-month period ended
June 30, 2012, an increase from the provision for covered loans and lease losses
of $8.1 million for the same period in 2011.
Please refer to the "Allowance for Loan and Lease Losses and Non-Performing
Assets" section in this MD&A and Table 8 through Table 13 below for a more
detailed analysis of the allowances for loan and lease losses, net credit losses
and credit quality statistics.
Income Taxes
Income tax expense was $1.1 million and $3.0 million for the quarter and
six-month period ended June 30, 2012, respectively, compared to a benefit of
$1.4 million and an expense of $5.1 million for the same periods in 2011. The
increase during the quarter ended June 30, 2012 was attributed to various
contingencies settled with the Puerto Rico Treasury Department during the
quarter ended June 30, 2011. The decrease during the six-month period ended June
30, 2012 was mainly due to the $5.4 million income tax expense recorded during
the quarter ended March 31, 2011 related to the re-measurement of the net
deferred tax assets due to a reduction in the marginal corporate income tax
rates from 40.95% to 30%, which was partially offset by the contingencies
settled during the quarter ended June 30, 2011 mentioned before.
At December 31, 2011, OIB had $2.9 million in the income tax effect of
unrecognized gain on available-for-sale securities included in other
comprehensive income. Following the change in OIB's applicable tax rate from 5%
to 0% as a result of new legislation adopted in 2011, this remaining tax balance
will flow through income as these securities are repaid or sold in future
periods, due to OIB becoming tax exempt under Puerto Rico law. During the
quarter and six-month period ended June 30, 2012, income tax provision included
$166 thousand and $724 thousand, respectively, related to this residual tax
effect from the OIB.
86
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ANALYSIS OF FINANCIAL CONDITION
TABLE 4 - ASSETS SUMMARY AND COMPOSITION
June 30, December 31,
2012 2011 Variance %
(Dollars in thousands)
Investments:
FNMA and FHLMC certificates $ 2,913,369 $ 3,560,807 -18.2%
Obligations of US Government sponsored
agencies 28,791
- 100.0%
US Treasury Securities 154,998
- 100.0%
CMOs issued by US Government sponsored
agencies 323,394
130,045 148.7%
GNMA certificates 22,491
28,336 -20.6%
Structured credit investments 27,280
37,288 -26.8%
Puerto Rico Government and agency obligations 22,352 81,482 -72.6%
FHLB stock 22,868 23,779 -3.8%
Other debt securities 15,664 5,980 161.9%
Other investments 283 253 11.9%
Total investments 3,531,490 3,867,970 -8.7%
Loans:
Loans not covered under shared-loss agreements
with the FDIC 1,175,320 1,179,988 -0.4%
Allowance for loan and lease losses on non
covered loans (37,402)
(37,010) -1.1%
Non covered loans receivable, net 1,137,918 1,142,978 -0.4%
Mortgage loans held for sale 34,718
26,939 28.9%
Total loans not covered under shared-loss
agreements with the FDIC, net 1,172,636 1,169,917 0.2%
Loans covered under shared-loss agreements
with the FDIC 506,348
533,532 -5.1%
Allowance for loan and lease losses on covered
loans (58,628)
(37,256) -57.4%
Total loans covered under shared-loss
agreements with the FDIC, net 447,720 496,276 -9.8%
Total loans, net 1,620,356 1,666,193 -2.8%
Securities purchased under agreements to resell 225,000 - 100.0%
Total securities and loans 5,376,846 5,534,163 -2.8%
Other assets:
Cash and due from banks 459,917 587,624 -21.7%
Money market investments 4,662 3,863 20.7%
FDIC shared-loss indemnification asset 359,767 392,367 -8.3%
Foreclosed real estate 31,631
27,679 14.3%
Accrued interest receivable 17,258
20,182 -14.5%
Deferred tax asset, net 35,887
32,023 12.1%
Premises and equipment, net 20,090 21,520 -6.6%
Servicing assets 10,776 10,454 3.1%
Derivative assets 11,367 9,317 22.0%
Other assets 47,447 54,483 -12.9%
Total other assets 998,802 1,159,512 -13.9%
Total assets $ 6,375,648 $ 6,693,675 -4.8%
Investments portfolio composition:
FNMA and FHLMC certificates 82.5% 92.1%
Obligations of US Government sponsored
agencies 0.8%
0.0%
US Treasury Securities 4.4%
0.0%
CMOs issued by US Government sponsored
agencies 9.2%
3.4%
GNMA certificates 0.6%
0.7%
Structured credit investments 0.8%
1.0%
Puerto Rico Government and agency obligations 0.6%
2.1%
FHLB stock 0.6%
0.6%
Other debt securities and other investments 0.5% 0.1%
100.0% 100.0%
87
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Assets Owned
At June 30, 2012, the Group's total assets amounted to $6.376 billion, a
decrease of 4.8% when compared to $6.694 billion at December 31, 2011, and
interest-earning assets decreased 2.8% from $5.534 billion at December 31, 2011
to $5.377 billion at June 30, 2012.
As set forth in Table 4 above, investments are the Group's largest component of
interest-earning assets. Investments principally consist of U.S. treasury
securities, U.S. government and agency bonds, mortgage-backed securities and
Puerto Rico government and agency bonds. At June 30, 2012, the investment
portfolio decreased 8.7% to $3.531 billion from $3.868 billion at December 31,
2011. This decrease is mostly due to a decrease of $647.4 million, or 18.2%, in
FNMA and FHLMC certificates. During the six-month period ended June 30, 2012,
the Group had net realized gains of $19.3 million, mainly due to sales of
mortgage-backed securities and CMOs of $427.2 million with a book value at sales
of $407.3 million. During the six-month period ended June 30, 2011, the Group
had gross realized gains of $9.1 million, mainly due to sales of mortgage-backed
securities of $238.7 million with a book value at sales of $229.6 million.
At June 30, 2012, approximately 98% of the Group's investment securities
portfolio consists of fixed-rate mortgage-backed securities or notes guaranteed
or issued by FNMA, FHLMC or GNMA, and U.S. agency senior debt obligations backed
by a U.S. government-sponsored entity or the full faith and credit of the U.S.
government, compared to 96% at December 31, 2011.
The Group's loan portfolio is comprised of residential loans, home equity loans,
commercial loans collateralized by mortgages on real estate located in Puerto
Rico, other commercial and industrial loans, consumer loans, and leases. At June
30, 2012, the Group's loan portfolio, the second largest category of the Group's
interest-earning assets, decreased 2.8% to $1.620 billion compared to the loan
portfolio at December 31, 2011 of $1.666 billion. The covered loan portfolio
decreased $48.6 million, or 9.8%, mainly due an increase of $21.4 million in the
allowance for loan and lease losses on covered loans, and as a net effect of the
repayment of loans and the portion of the accretable yield recognized as
interest income. The non-covered loan portfolio increased $2.7 million, or 0.2%.
At June 30, 2012, the Group's non-covered loan portfolio composition and trends
were as follows:
† Mortgage loan portfolio amounted to $788.2 million (66.8% of the gross
non-covered loan portfolio), compared to $821.1 million (69.1% of the gross
non-covered loan portfolio) at December 31, 2011. Mortgage loan production and
purchases totaled $48.9 million and $93.9 million for the quarter and six-month
period ended June 30, 2012, respectively, decreases of 18.1% and 16.5% from
$59.7 million and $112.5 million in the previous year quarter and six-month
period, respectively.
† Commercial loan portfolio amounted to $321.7 million (27.3% of the gross
non-covered loan portfolio), compared to $301.6 million (25.3% of the gross
non-covered loan portfolio) at December 31, 2011. Commercial loan production
decreased 22.3% to $35.5 million for the quarter ended June 30, 2012, but
increased 46.5% to $91.2 million for the six-month period ended June 30, 2012
from $45.6 million and $62.3 million for the same periods in 2011.
† Consumer loan portfolio amounted to $39.4 million (3.3% of the gross
non-covered loan portfolio), compared to $36.1 million (3.1% of the gross
non-covered loan portfolio) at December 31, 2011. Consumer loan production
increased 35.5% to $7.7 million for the quarter ended June 30, 2012 and 38.1% to
$12.8 million for the six-month period ended June 30, 2012 from $5.7 million and
$9.3 million for the same periods in 2011.
† Leasing portfolio amounted to $30.0 million (2.5% of the gross non-covered
loan portfolio), compared to $25.8 million (2.2% of the gross non-covered loan
portfolio) at December 31, 2011. Leasing production decreased 23.3% to $4.4
million for the quarter ended June 30, 2012 and 15.4% to $8.9 million for the
six-month period ended June 30, 2012 from $5.7 million and $10.5 million for the
same periods in 2011.
The FDIC shared-loss indemnification asset amounted to $359.8 million and $392.4
million as of June 30, 2012 and December 31, 2011, respectively. The FDIC
shared-loss indemnification asset is reduced as claims over losses recognized on
covered loans are collected from the FDIC. Realized credit losses in excess of
previously forecasted estimates result in an increase in the FDIC shared-loss
indemnification asset. Conversely, if realized credit losses are less than
previously forecasted estimates, the FDIC shared-loss indemnification asset is
amortized through the term of the shared-loss agreements. The decrease in the
FDIC shared-loss indemnification asset is mainly related to reimbursements
received from the FDIC during the six-month period ended June 30, 2012 of $39.7
million and to an amortization of $10.4 million, which was partially offset by
an increase of $12.7 million in expected credit impairment losses to be covered
under shared-loss agreements, net.
88
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TABLE 5 - LOANS RECEIVABLE COMPOSITION
June 30, December 31, Variance
2012 2011 %
(In thousands)
Loans not covered under shared-loss agreements
with FDIC:
Loans secured by real estate:
Residential $ 787,359 $ 819,651 -3.9%
Home equity loans and others 840 1,411 -40.5%
Commercial 227,012 218,261 4.0%
Deferred loan fees, net (4,035) (4,300) 6.2%
Total loans secured by real estate 1,011,176 1,035,023 -2.3%
Other loans:
Commercial 94,672 83,312 13.6%
Personal consumer loans and credit lines 39,442 36,130 9.2%
Leasing 30,024 25,768 16.5%
Deferred loan fees, net 6 (245) 102.4%
Total other loans 164,144 144,965 13.2%
Loans receivable 1,175,320 1,179,988 -0.4% Allowance for loan and lease losses on (37,402) (37,010) -1.1%
non-covered loans
Loans receivable, net 1,137,918
1,142,978 -0.4%
Mortgage loans held-for-sale 34,718 26,939 28.9%
Total loans not covered under shared-loss 1,172,636 1,169,917 0.2%
agreements with FDIC, net
Loans covered under shared-loss agreements with
FDIC:
Loans secured by 1-4 family residential 139,237 140,824 -1.1%
properties
Construction and development secured by 1-4 19,130 16,976 12.7%
family residential properties
Commercial and other construction 317,534 325,832 -2.5%
Leasing 18,655 36,122 -48.4%
Consumer 11,792 13,778 -14.4%
Total loans covered under shared-loss 506,348 533,532 -5.1%
agreements with FDIC
Allowance for loan and lease losses on (58,628) (37,256) -57.4%
covered loans
Total loans covered under shared-loss 447,720 496,276 -9.8%
agreements with FDIC, net
Total loans receivable, net $ 1,620,356 $ 1,666,193 -2.8%
89
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TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
June 30, December 31, Variance
2012 2011 %
(Dollars in thousands)
Deposits:
Non-interest bearing deposits $ 188,329 $ 192,257 -2.0%
Now accounts 873,510
850,762 2.7%
Savings and money market accounts 230,920 230,672 0.1%
Certificates of deposit 927,124 1,157,002 -19.9%
Total deposits 2,219,883 2,430,693 -8.7%
Accrued interest payable 3,059 4,492 -31.9% Total deposits and accrued interest payable 2,222,942 2,435,185 -8.7%
Borrowings:
Securities sold under agreements to repurchase 3,053,865 3,056,238 -0.1%
Advances from FHLB 286,653 281,753 1.7%
FDIC-guaranteed term notes - 105,834 -100.0%
Subordinated capital notes 36,083 36,083 0.0%
Total borrowings 3,376,601 3,479,908 -3.0%
Total deposits and borrowings 5,599,543 5,915,093 -5.3%
Derivative liabilities 56,217 47,425 18.5%
Other liabilities 27,686 35,602 -22.2%
Total liabilities $ 5,683,446 $ 5,998,120 -5.2%
Deposits portfolio composition percentages:
Non-interest bearing deposits 8.5% 7.9%
Now accounts 39.3%
35.0%
Savings and money market accounts 10.4% 9.5%
Certificates of deposit 41.8% 47.6%
100.0% 100.0%Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase 90.4% 87.9%
Advances from FHLB 8.5% 8.1%
FDIC-guaranteed term notes 0.0% 3.0%
Subordinated capital notes 1.1% 1.0%
100.0% 100.0%Securities sold under agreements to repurchase
Amount outstanding at quarter-end $ 3,053,865 $
3,056,238
Daily average outstanding balance $ 3,057,858 $
3,417,892
Maximum outstanding balance at any month-end $ 3,060,578$ 3,466,480
90
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Liabilities and Funding Sources
As shown in Table 6 above, at June 30, 2012, the Group's total liabilities were
$5.683 billion, 5.2% lower than the $5.998 billion reported at December 31,
2011. Deposits and borrowings, the Group's funding sources, amounted to $5.600
billion at June 30, 2012 versus $5.915 billion at December 31, 2011, a 5.3%
decrease.
At June 30, 2012, borrowings represented 60.3% of interest-bearing liabilities
and deposits represented 39.7%. Borrowings consist mainly of funding sources
through the use of repurchase agreements, FHLB advances, and subordinated
capital notes. At June 30, 2012, borrowings amounted to $3.377 billion, 3.0%
lower than the $3.480 billion reported at December 31, 2011. The Bank's FDIC
guaranteed senior unsecured notes issued under the TLGP totaling $105 million
were repaid in full at maturity in March 2012. Repurchase agreements as of June
30, 2012 remained level at $3.054 billion.
As a member of the Federal Home Loan Bank ("FHLB"), the Bank can obtain advances
from the FHLB, secured by the FHLB stock owned by the Bank, as well as by
certain of the Bank's mortgage loans and investment securities. Advances from
FHLB amounted to $286.7 million and $281.8 million as of June 30, 2012 and
December 31, 2011, respectively. These advances mature from July 2012 through
April 2017.
At June 30, 2012, deposits and accrued interest payable, the second largest
category of the Group's interest-bearing liabilities, were $2.223 billion, down
8.7% from $2.435 billion at December 31, 2011. This decrease was mainly
attributable to a decrease in higher cost brokered deposits and other wholesale
institutional deposits which decreased 42.9% and 49.3%, respectively, to $146.1
million and $85.4 million in June 30, 2012 from $255.9 million and $168.3
million as of December 31, 2011.
Stockholders' Equity
At June 30, 2012, the Group's total stockholders' equity was $692.2 million, a
0.5% decrease when compared to $695.6 million at December 31, 2011. This
decrease reflects stock repurchases under the Group's $70 million stock
repurchase program during the first quarter of 2012 and a decrease of 42.7% or
$15.9 million in other comprehensive income, partially offset by the net income
for the six-month period ended June 30, 2012.
Tangible common equity to risk-weighted assets and total equity to risk-weighted
assets at June 30, 2012 increased to 29.88% and 33.34%, respectively, from
29.71% and 33.14% at December 31, 2011.
The Group maintains capital ratios in excess of regulatory requirements. At June
30, 2012, Tier 1 Leverage Capital Ratio was 10.75% (2.69 times the requirement
of 4.00%), Tier 1 Risk-Based Capital Ratio was 32.50% (8.13 times the
requirement of 4.00%), and Total Risk-Based Capital Ratio was 33.79% (4.22 times
the requirement of 8.00%).
Taking into consideration the Group's strong capital position, the quarterly
cash dividend per common share was increased by 20% to $0.06 per share on
November 30, 2011. On an annualized basis, this represents an increase from
$0.20 to $0.24 per share.
91
--------------------------------------------------------------------------------The following are the consolidated capital ratios of the Group at June 30, 2012
and December 31, 2011:
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
June 30, December 31, Variance
2012 2011 %
(Dollars in thousands, except per share data)
Capital data:
Stockholders' equity $ 692,202 $ 695,555 -0.5%
Regulatory Capital Ratios data:
Leverage Capital Ratio 10.75% 9.65% 11.4%
Minimum Leverage Capital Ratio Required 4.00% 4.00%
Actual Tier 1 Capital $ 674,804 $ 661,614 2.0%
Minimum Tier 1 Capital Required $ 251,187 $ 274,230 -8.4%
Excess over regulatory requirement $ 423,617 $ 387,384 9.4%
Tier 1 Risk-Based Capital Ratio 32.50% 31.52% 3.1%
Minimum Tier 1 Risk-Based Capital Ratio
Required 4.00% 4.00%
Actual Tier 1 Risk-Based Capital $ 674,804 $ 661,614 2.0%
Minimum Tier 1 Risk-Based Capital Required $ 83,059 $ 83,964 -1.1%
Excess over regulatory requirement $ 591,746 $ 577,650 2.4%
Risk-Weighted Assets $ 2,076,467 $ 2,099,109 -1.1%
Total Risk-Based Capital Ratio 33.79%
32.80% 3.0%
Minimum Total Risk-Based Capital Ratio
Required 8.00% 8.00%
Actual Total Risk-Based Capital $ 701,632 $ 688,452 1.9%
Minimum Total Risk-Based Capital Required $ 166,117 $ 167,929 -1.1%
Excess over regulatory requirement $ 535,515 $ 520,523 2.9%
Risk-Weighted Assets $ 2,076,467 $
2,099,109 -1.1%
Tangible common equity (common equity less
goodwill
and core deposit intangible) to total
assets 9.73% 9.32% 4.4%
Tangible common equity to risk-weighted
assets 29.88% 29.71% 0.6%
Total equity to total assets 10.86% 10.39% 4.5%
Total equity to risk-weighted assets 33.34% 33.14% 0.6%
Tier 1 common equity to risk-weighted
assets 29.22%
28.28% 3.3%
Tier 1 Common Equity Capital $ 606,804 $ 593,614 2.2%
Stock data:
Outstanding common shares 40,730,831
41,244,533 -1.2%
Book value per common share $ 15.32 $ 15.22 0.7%
Market price at end of period $ 11.08 $ 12.11 -8.5%
Market capitalization at end of period $ 451,298 $ 499,471 -9.6%
Six-Month Period Ended June 30, Variance
2012 2011 %
(Dollars in thousands, except per share data)
Common dividend data:
Cash dividends declared $ 4,887 $ 4,477 9.2%
Cash dividends declared per share $ 0.12 $ 0.10 20.0%
Payout ratio 21.19% 17.11% 23.8%
Dividend yield 2.17% 1.55% 39.6%
92
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The table that follows presents a reconciliation of the Group's total
stockholders' equity to tangible common equity and total assets to tangible
assets at June 30, 2012 and December 31, 2011:
June 30, December 31,
2012 2011
(In thousands, except share or per
share information)
Total stockholders' equity $ 692,202 $ 695,555
Preferred stock (68,000) (68,000)
Goodwill (2,701) (2,701)
Core deposit intangible (1,114) (1,185)
Total tangible common equity $ 620,387 $ 623,669
Total assets 6,375,648 6,693,675
Goodwill (2,701) (2,701)
Core deposit intangible (1,114) (1,185)
Total tangible assets $ 6,371,833 $ 6,689,789
Tangible common equity to tangible assets 9.73% 9.32%
Common shares outstanding at end of period 40,730,831
41,244,533
Tangible book value per common share $ 15.23 $ 15.12
The tangible common equity ratio and tangible book value per common share are
non-GAAP measures. Management and many stock analysts use the tangible common
equity ratio and tangible book value per common share in conjunction with more
traditional bank capital ratios to compare the capital adequacy of banking
organizations. Neither tangible common equity nor tangible assets or related
measures should be considered in isolation or as a substitute for stockholders'
equity, total assets or any other measure calculated in accordance with GAAP.
Moreover, the manner in which the Group calculates its tangible common equity,
tangible assets and any other related measures may differ from that of other
companies reporting measures with similar names.
The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP
measure. Ratios calculated based upon Tier 1 common equity have become a focus
of regulators and investors, and management believes ratios based on Tier 1
common equity assist investors in analyzing the Group's capital position. In
connection with the Supervisory Capital Assessment Program, the Federal Reserve
Board began supplementing its assessment of the capital adequacy of a bank
holding company based on a variation of Tier 1 capital, known as Tier 1 common
equity.
Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1
capital, codified in the federal banking regulations, this measure is considered
to be a non-GAAP financial measure. Non-GAAP financial measures have inherent
limitations, are not required to be uniformly applied and are not audited. To
mitigate these limitations, the Group has procedures in place to calculate these
measures using the appropriate GAAP or regulatory components. Although these
non-GAAP financial measures are frequently used by stakeholders in the
evaluation of a company, they have limitations as analytical tools and should
not be considered in isolation or as a substitute for analyses of results as
reported under GAAP.
93
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The table below presents a reconciliation of the Group's total common equity
(GAAP) at June 30, 2012 and December 31, 2011 to Tier 1 common equity as defined
by the Federal Reserve Board, FDIC and other bank regulatory agencies
(non-GAAP):
June 30, December 31,
2012 2011
(In thousands)
Common stockholders' equity $ 624,202 $ 627,555
Unrealized gains on available-for-sale securities,
net of income tax
(70,700)
(79,244)
Unrealized losses on cash flow hedges, net of income
tax
49,439
42,113
Disallowed deferred tax assets (26,243) (26,879)
Disallowed servicing assets (1,079) (1,045)
Intangible assets:
Goodwill (2,701) (2,701)
Other disallowed intangibles (1,114) (1,185)
Subordinated capital notes 35,000 35,000
Total Tier 1 common equity $ 606,804 $ 593,614
Tier 1 common equity to risk-weighted assets 29.22% 28.28%
The following table presents the Group's capital adequacy information at June
30, 2012 and December 31, 2011:
