<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NO. 001-12647
ORIENTAL FINANCIAL GROUP INC.
INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO
IRS EMPLOYER IDENTIFICATION NO. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
68 MUNOZ RIVERA AVENUE
501 HATO REY TOWER
HATO REY, PUERTO RICO 00918
TELEPHONE NUMBER: (787) 766-1986
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE)
10,004,478 SHARES OUTSTANDING AS OF MARCH 31, 1998
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
-------- -------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
- ----------------------------------------------------------------------------------
PART - 1
- ---------
ITEM - 1 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT MARCH 31,
1998 (UNAUDITED) AND JUNE 30, 1997. 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER
AND NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 2
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5-11
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12-27
- -----------------------------------------------------------------------------------
PART - 2
- --------
ITEM - 1 LEGAL PROCEEDINGS - NONE 27
ITEM - 2 CHANGE IN SECURITIES - NONE 27
ITEM - 3 DEFAULTS UPON SENIOR SECURITIES - NONE 27
ITEM - 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE 27
ITEM - 5 OTHER INFORMATION 27
ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 27
SIGNATURES 28
</TABLE>
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998 (UNAUDITED) AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- -------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
1998 1997
--------- --------
<S> <C> <C>
Cash and due from banks $ 13,194 $ 12,812
--------- ---------
MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell - 15,000
Time deposits with other banks 3,000 8,000
Other short-term investments, at cost 1,548 5,224
--------- ---------
TOTAL MONEY MARKET INVESTMENTS 4,548 28,224
--------- ---------
INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at market 29,835 30,930
Investment securities available-for-sale, at market 405,896 197,607
Investment securities held-to-maturity, at cost 190,286 201,790
Federal Home Loan Bank (FHLB) stock, at cost 10,043 10,043
--------- ---------
TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 636,060 440,370
LOANS:
Loans held for sale 32,661 29,285
Loans receivable 531,888 509,093
--------- ---------
TOTAL LOANS 564,549 538,378
Allowance for loan losses (6,816) (5,408)
--------- ---------
TOTAL LOANS, NET 557,733 532,970
--------- ---------
Accrued interest receivable 14,744 12,350
Foreclosed real estate, net 405 698
Premises and equipment, net 19,458 19,378
Other assets, net 15,298 21,794
--------- ---------
TOTAL ASSETS $ 1,261,440 $ 1,068,596
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
Deposits $ 551,483 $ 497,542
Securities sold under agreements to repurchase 380,757 247,915
Borrowings under lines of credit - -
Advances and borrowings from Federal Home Loan Bank 79,000 89,800
Term notes and bonds payable 114,649 115,016
Accrued expenses and other liabilities 31,584 28,929
---------- ----------
TOTAL LIABILITIES 1,157,473 979,202
---------- ----------
Commitments and contingencies - -
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued
Common stock, $1 par value;
20,000,000 shares authorized; 10,004,478 issued
and outstanding in March 31,1998 and 7,989,787
issued and outstanding in June 30,1997. 10,004 7,990
Additional paid-in capital 27,126 28,631
Legal surplus 4,429 4,002
Retained earnings 60,902 49,694
Treasury stock, at cost, 146,500 shares at March 31, 1998
and 81,200 at June 30, 1997 (3,227) (1,836)
Unrealized gain on securities available-for-sale,
net of taxes 4,733 913
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 103,967 89,394
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,261,440 $ 1,068,596
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER AND NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 and 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 15,432 $ 14,035 $ 44,968 $ 40,387
Mortgage-backed securities 6,107 4,387 17,142 12,478
Investment securities 4,277 2,505 11,381 6,993
Other interest-earning assets 263 237 919 780
--------- --------- --------- ---------
TOTAL INTEREST INCOME 26,079 21,164 74,410 60,638
--------- --------- --------- ---------
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 6,425 5,523 19,177 15,218
Securities sold under agreements to repurchase 5,192 2,770 13,747 8,272
Other borrowed funds and interest rate risk management 3,182 3,191 9,829 9,404
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 14,799 11,484 42,753 32,894
--------- --------- --------- ---------
NET INTEREST INCOME 11,280 9,680 31,657 27,744
--------- --------- --------- ---------
Provision for loan losses 1,900 1,300 6,900 3,400
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,380 8,380 24,757 24,344
--------- --------- --------- ---------
NON-INTEREST INCOME:
Bank service charges and fees 861 1,159 2,759 3,725
Trust, money management and brokerage fees 1,971 1,839 5,890 4,917
Mortgage banking activities 1,036 1,265 3,406 2,710
Gain on sale of servicing rights - - 2,707 -
Gain on sale of investment securities 210 71 586 384
Trading account income 139 9 307 12
Rent and other operating income 159 199 509 580
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 4,376 4,542 16,164 12,328
--------- --------- --------- ---------
--------- --------- --------- ---------
NON-INTEREST EXPENSES:
Compensation and benefits 3,579 3,782 11,115 10,630
Occupancy and equipment 1,268 1,083 3,745 3,140
Professional fees 290 485 943 1,151
Advertising and promotion 691 676 1,818 1,379
Real estate owned expenses 16 17 56 116
Insurance, including deposit insurance 238 121 625 670
Communications 326 347 1,031 913
Other 1,085 845 3,347 2,675
SAIF one-time capitalization assessment - - - 1,823
--------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 7,493 7,356 22,680 22,497
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 6,263 5,566 18,241 14,175
Provision for income taxes 825 961 2,650 2,321
--------- --------- --------- ---------
NET INCOME $ 5,438 $ 4,605 $ 15,591 $ 11,854
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Average common shares outstanding 9,964 9,884 9,939 9,894
Average common stock equivalents - options 332 375 336 383
--------- --------- --------- ---------
TOTAL 10,296 10,259 10,275 10,277
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME PER COMMON SHARE
Basic $ 0.55 $ 0.47 $ 1.57 $ 1.20
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ 0.53 $ 0.45 $ 1.52 $ 1.15
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
COMMON STOCK:
Balance at beginning of period $ 7,990 $ 6,633
Five-for-four stock split 1,910 -
Six-for-five stock split - 1,318
Stock options exercised 104 85
Common stock repurchased and retired - (89)
-------- --------
BALANCE AT END OF PERIOD 10,004 7,947
-------- --------
-------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 28,631 31,234
Five-for-four stock split (1,910) -
Six-for-five stock split - (1,318)
Stock options exercised 405 164
Common stock repurchased and retired - (1,618)
-------- --------
BALANCE AT END OF PERIOD 27,126 28,462
-------- --------
-------- --------
LEGAL SURPLUS:
Balance at beginning of period 4,002 2,498
Transfer from retained earnings 427 1,083
-------- --------
BALANCE AT END OF PERIOD 4,429 3,581
-------- --------
-------- --------
RETAINED EARNINGS:
Balance at beginning of period 49,694 39,005
Net income 15,591 11,854
Dividends declared and cash paid on fractional shares (3,956) (3,169)
Transfer to legal surplus (427) (1,083)
-------- --------
BALANCE AT END OF PERIOD 60,902 46,607
-------- --------
-------- --------
TREASURY STOCK:
Balance at beginning of period (1,836) -
Treasury stock purchased (1,391) (907)
-------- --------
BALANCE AT END OF PERIOD (3,227) (907)
-------- --------
-------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF TAXES:
Balance at beginning of period 913 533
Net change in fair value of securities
available-for-sale, net of taxes 3,820 (578)
-------- --------
BALANCE AT END OF PERIOD 4,733 (45)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 103,967 $ 85,645
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 15,591 $ 11,854
----------- -----------
----------- -----------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Amortization of deferred loan origination fees and costs (2,764) (2,499)
Amortization of premiums and accretion of discounts
mortgage-backed and investment securities 761 307
Depreciation and amortization of premises and equipment 1,815 1,629
Provision for loan losses 6,900 3,400
Gain on sale of available-for-sale securities (586) (384)
Gain on sale of servicing rights (2,707) -
Mortgage banking activities (2,550) (2,710)
Decrease (increase) in trading securities 1,095 (20,298)
Increase in accrued interest receivable (2,394) (2,377)
Increase in other assets (2,652) (4,005)
Decrease in accrued expenses and liabilities 1,128 1,862
----------- -----------
TOTAL ADJUSTMENTS (1,954) (25,074)
----------- -----------
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 13,637 (13,220)
----------- -----------
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in securities purchased under agreements to
resell 15,000 (2,871)
Purchases of investment securities available-for-sale (181,806) (49,508)
Sales of investment securities available-for-sale 31,103 108,957
Maturities of investment securities available-for-sale 23,580 430
Purchases of investment securities held-to-maturity (914) (30,544)
Maturities and redemptions of investment securities
held-to-maturity 12,175 5,768
Purchases of Federal Home Loan Bank Stock - (2,392)
Net origination of loans (134,565) (134,334)
Proceeds from sale of loans 32,504 -
Proceeds from sale of servicing assets 11,855 -
Capital expenditures (1,895) (2,638)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $ (192,963) $ (107,132)
----------- -----------
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits $ 53,941 $ 84,913
Securities sold under agreements to repurchase 132,842 (16,138)
Borrowings under lines of credit - (10,000)
Advances and borrowings from FHLB (10,800) 32,100
Issuance of term notes - 60,000
Payment of term notes - (13,000)
Principal payments of bonds payable (367) (349)
Proceeds from exercise of stock options 509 249
Repurchase of common stock and purchases of treasury stock (1,391) (2,614)
Dividends and cash paid on fractional shares (3,702) (3,169)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 171,032 131,992
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,294) 11,640
Cash and cash equivalents at beginning of period 26,036 16,955
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,742 $ 28,595
----------- -----------
----------- -----------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 13,194 $ 15,552
Time deposits with other banks 3,000 13,000
Other short-term investments 1,548 43
----------- -----------
$ 17,742 $ 28,595
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE AND SCHEDULE OF
NONCASH ACTIVITIES:
Interest paid $ 40,600 $ 31,400
----------- -----------
----------- -----------
Income taxes 1,516 3,800
----------- -----------
----------- -----------
Real estate foreclosed as payment of loans 974 1,271
----------- -----------
----------- -----------
Real estate loans securiticized into mortgage-backed
securities $ 76,100 $ 90,500
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
- -------------------------------
The accounting and reporting policies of Oriental Financial Group (the
"Group", "Oriental") and its subsidiaries conform with generally accepted
accounting principles and with general practices within the banking industry.
The preparation of financial statements with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period and, as such, these statements include amounts based on
judgments and estimates made by Management. Actual results could differ from
those estimates.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-Q. Complete information
regarding the financial statements can be found in the notes to the financial
statements for the year ended June 30, 1997 contained in Oriental's annual
report. Certain reclassifications have been made to the March 31, 1997 and
June 30, 1997 consolidated financial statements to conform with the
presentation of the current period consolidated financial statements.
In the opinion of management, such unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position at March 31,
1998 and June 30, 1997 as well as the results of operations and cash flows
for the nine months ended March 31, 1998 and March 31, 1997. The results of
operations for the nine months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the entire year.
NOTE 2 - NATURE OF OPERATIONS:
- ------------------------------
The Group was incorporated on January 24,1997 under the laws of the
Commonwealth of Puerto Rico to serve as the bank holding company for Oriental
Bank and Trust (the "Bank"). As a result of this reorganization each of the
Bank's outstanding shares of common stock was converted into one share of
common stock of the new bank holding company.
The Group provides a wide variety of financial services through its
subsidiaries. Oriental Bank and Trust, the Group's bank subsidiary, is a
full-service commercial bank with its main office located in San Juan, Puerto
Rico and seventeen branches located throughout Puerto Rico. The Bank
directly or through its broker-dealer subsidiary, Oriental Financial Services
Corp., offers commercial and consumer leasing, consumer lending, investment,
money management and brokerage services, corporate and individual trust
services and mortgage lending.
NOTE 3 - INCOME PER COMMON SHARE:
- ---------------------------------
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("SFAS 128") became effective for the Group as of December 31, 1997. Earnings
per share for all periods presented in the Consolidated Statement of Income
are computed in accordance with the provisions of this statement which
replaces the presentation of primary earnings per share with the presentation
of basic earnings per share and requires the dual presentation of basic and
diluted earnings per share computation on the face of the income statement
for all entities with complex capital structures. SFAS 128 also requires the
reconciliation of the numerator and denominator of the basic and diluted
earnings per share computation and the restatement of earnings per share for
all periods presented in the Group's financial statements.
Basic income per common share is calculated by dividing net income by the
weighted average of common shares outstanding after giving retroactive effect
to common stock dividends and splits. Diluted earnings per share includes
the effect of common stock equivalents for the Group. The only potentially
dilutive securities that are outstanding are the stock options outstanding
under Oriental's stock option plan for officers and employees. The number of
options assumed to be exercised is computed using the Treasury Stock Method.
The computation of the basic earnings per share and diluted earnings per
share is presented in the face of the Consolidated Statement of Income.
5
<PAGE>
NOTE 4 - INVESTMENT SECURITIES:
- --------------------------------
Oriental classifies its investments in debt and equity securities into one of
the following three categories:
- HELD-TO-MATURITY: Debt securities for which the Group has the positive
intent and ability to hold to maturity are carried at amortized cost.
This is the purchase price increased by the accretion of discounts or
decreased by the amortization of premiums using the effective interest
method. Discount is the excess of the face value of the security over the
cost. Premium is the excess of cost over the face value of the security.
The Group may not sell or transfer held-to-maturity without calling into
question its intent to hold other debt securities to maturity, unless a
non-recurring or unusual event that could not have been reasonably
anticipated occurred.
- TRADING: Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are carried at estimated
fair value with realized and unrealized changes in market value recorded
separately in the trading profit or loss account in the period in which
the changes occur. Interest revenue arising from trading instruments are
included in the statement of income as part of net interest income rather
than in the trading profit or loss account.
- AVAILABLE-FOR-SALE: Debt and equity securities which may be sold prior to
maturity because of interest rate changes, to meet liquidity needs, or to
better match the repricing characteristics of funding sources are included
in this category. These securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported net of
deferred taxes as a separate component of stockholders' equity.
The amortization of premiums is deducted and the accretion of discounts is
added to interest income over the life of the related securities using the
interest method. Net realized gains or losses on sales of investment
securities and unrealized loss valuation adjustments considered other than
temporary, if any, on securities classified as either available-for-sale or
held-to-maturity are reported separately in the statement of income. Cost of
securities is determined on the specific identification method.
TRADING SECURITIES:
- -------------------
The fair value of trading securities is based on quoted market prices. At
March 31, 1998, the Group's trading portfolio was comprised primarily of
securities collateralized by real estate assets located in Puerto Rico or
issued by U.S. government entities with an amortized cost and fair market
value of $29,835,000 and $29,652,000, respectively, and with gross unrealized
gains and gross unrealized losses of $183,000 and $0, respectively. At such
date the trading portfolio's weighted average yield was 6.52%
At June 30, 1997, the amortized cost and fair market value of securities held
for trading was $30,909,000 and $30,930,000, respectively, with gross
unrealized gains and gross unrealized losses of $41,400 and $19,800,
respectively. At such date the weighted average yield of the trading
portfolio was 6.27%
FEDERAL HOME LOAN BANK STOCK:
- -----------------------------
At December 31, and June 30, 1997 there was an investment in Federal Home
Loan Bank (FHLB) of New York Stock with a book and fair value of $10,043,000
and $10,043,000, respectively. The fair value of such investment is its
redemption value.
6
<PAGE>
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
- -----------------------------------------
The estimated fair value of investment securites available-for-sale is based
on quoted market quotes. The amortized cost, estimated fair value, and
weighted average yield of debt and equity securities available-for-sale by
category at March 31,1998 and June 30,1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
---------------------------------------- ----------------------------------------
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE AVE_YIELD COST VALUE AVE_YIELD
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES GOVERNMENT OBLIGATIONS: $ 222,827 $ 227,785 6.56% $ 110,186 $ 110,632 6.77%
---------- ---------- ----- ---------- ---------- -----
PUERTO RICO GOVERNMENT OBLIGATIONS: 27,322 27,187 7.82% 34,091 34,277 7.60%
---------- ---------- ----- ---------- ---------- -----
MORTGAGE-BACKED SECURITIES:
GNMA 43,281 43,795 6.68% 41,620 42,178 6.91%
FNMA 87,436 88,103 7.17% - - -
FHLMC 18,666 18,960 7.00% 10,438 10,454 7.39%
MORTGAGE PASS-THROUGH CERTIFICATES 53 66 7.69% 54 66 7.69%
---------- ---------- ----- ---------- ---------- -----
$ 149,436 $ 150,924 7.01% $ 52,112 $ 52,698 6.90%
---------- ---------- ----- ---------- ---------- -----
$ 399,585 $ 405,896 6.81% $ 196,389 $ 197,607 6.94%
---------- ---------- ----- ---------- ---------- -----
---------- ---------- ----- ---------- ---------- -----
</TABLE>
The amortized cost and estimated fair value of available-for-sale securities
at the end of the periods above, by contractual maturity, are shown in the
next table. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DUE WITHIN ONE YEAR $ 3,112 $ 3,176 $ - $ -
DUE FROM ONE TO FIVE YEARS 51,618 52,501 68,475 68,775
DUE FROM FIVE TO TEN YEARS 170,236 174,223 48,136 48,242
DUE OVER TEN YEARS 174,619 175,996 79,778 80,590
---------- ---------- ---------- ----------
$ 399,585 $ 405,896 $ 196,389 $ 197,607
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Available-for-sale securities due over ten years includes a AAA-rated
mortgage-backed Puerto Rico municipal bond with a fair value of approximately
$27 million which commenced paying down principal in august 1994 and is
expected to be fully collected by 1998.
The following table sets forth a summary of Oriental's unrealized gains and
losses at the periods analyzed above:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
------------------------------------------ ------------------------------------------
GROSS GROSS NET GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAIN / (LOSS) GAINS LOSSES GAIN / (LOSS)
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES GOVERNMENT OBLIGATIONS: $ 5,249 $ (291) $ 4,958 $ 446 $ - $ 446
-------- ------- -------- ------ ---- ------
PUERTO RICO GOVERNMENT OBLIGATIONS: - (135) (135) 186 - 186
-------- ------- -------- ------ ---- ------
MORTGAGE-BACKED SECURITIES:
GNMA 586 (72) 514 558 - 558
FNMA 718 (51) 667 - - -
FHLMC 294 - 294 16 - 16
MORTGAGE PASS-THROUGH CERTIFICATES 13 - 13 12 - 12
-------- ------- -------- ------ ---- ------
$ 1,611 $ (123) $ 1,488 $ 586 $ - $ 586
-------- ------- -------- ------ ---- ------
$ 6,860 $ (549) $ 6,311 $ 1,218 $ - $ 1,218
-------- ------- -------- ------ ---- ------
-------- ------- -------- ------ ---- ------
</TABLE>
The proceeds received from sales or calls of debt securities and the gross
gains and losses that were recognized during the first nine months of fiscals
1998 and 1997 are shown in the next table ( in thousands).
<TABLE>
<CAPTION>
1998 1997
--------- ------
<S> <C> <C>
Proceeds from sales of available-for-sale securities $ 31,103 $ 384
--------- ------
--------- ------
Gross realized gains $ 878 $ 480
Gross realized losses (292) (96)
--------- ------
Gain on sale of investment securities available-for-sale $ 586 $ 384
--------- ------
--------- ------
</TABLE>
7
<PAGE>
INVESTMENT SECURITIES HELD-TO-MATURITY:
- ---------------------------------------
The estimated fair value of investment securites held-to-maturity is based
on quoted market quotes. The amortized cost, estimated fair value, and
weighted average yield of debt securities held-to-maturity by category at
March 31,1998 and June 30,1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
---------------------------------------- ----------------------------------------
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE AVE_YIELD COST VALUE AVE_YIELD
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PUERTO RICO GOVERNMENT OBLIGATIONS: 3,578 3,608 7.40% 3,586 3,608 7.40%
---------- ---------- ------ ---------- ---------- ------
---------- ---------- ------ ---------- ---------- ------
MORTGAGE-BACKED SECURITIES:
GNMA 139,702 140,703 6.92% 149,275 149,081 6.91%
FNMA 39,310 40,173 7.29% 38,439 38,650 7.29%
FHLMC 5,056 5,195 8.25% 7,205 7,369 8.02%
MORTGAGE PASS-THROUGH CERTIFICATES 2,640 3,218 14.62% 3,285 3,735 14.62%
---------- ---------- ------ ---------- ---------- ------
$ 186,708 $ 189,289 7.14% $ 198,204 $ 198,835 7.15%
---------- ---------- ------ ---------- ---------- ------
---------- ---------- ------ ---------- ---------- ------
$ 190,286 $ 192,897 7.15% $ 201,790 $ 202,443 7.16%
---------- ---------- ------ ---------- ---------- ------
---------- ---------- ------ ---------- ---------- ------
</TABLE>
The amortized cost and estimated fair value of held-to-maturity securities at
the end of the periods above, by contractual maturity, are shown in the next
table. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------- -------------------------
<S> <C> <C> <C> <C>
DUE WITHIN ONE YEAR $ - $ - $ - $ -
DUE FROM ONE TO FIVE YEARS 1,146 1,159 261 261
DUE FROM FIVE TO TEN YEARS 12,442 12,654 4,298 4,366
DUE OVER TEN YEARS 176,698 179,084 197,231 197,816
---------- ---------- ---------- ----------
$ 190,286 $ 192,897 $ 201,790 $ 202,443
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Held-to-maturity securities due over ten years includes approximately $83
million of the short end of certain Puerto Rico GNMA tax exempt serial
certificates with an average expected life of 4 to 6 years.
The following table sets forth unrealized gains and losses in the periods
analyzed above:
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
--------------------------------------- --------------------------------------
GROSS GROSS NET GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZ UNREALIZED
GAINS LOSSES GAIN / (LOSS) GAINS LOSSES GAIN / (LOSS)
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PUERTO RICO GOVERNMENT OBLIGATIONS: 30 - 30 22 - 22
-------- ------- -------- -------- ------- ------
-------- ------- -------- -------- ------- ------
MORTGAGE-BACKED SECURITIES:
GNMA 1,261 (260) 1,001 332 (526) (194)
FNMA 926 (63) 863 305 (94) 211
FHLMC 139 - 139 164 - 164
MORTGAGE PASS-THROUGH CERTIFICATES 578 - 578 450 - 450
-------- ------- -------- -------- ------- ------
$ 2,904 $ (323) $ 2,581 $ 1,251 $ (620) $ 631
-------- ------- -------- -------- ------- ------
$ 2,934 $ (323) $ 2,611 $ 1,273 $ (620) $ 653
-------- ------- -------- -------- ------- ------
-------- ------- -------- -------- ------- ------
</TABLE>
8
<PAGE>
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
- --------------------------------------------------------
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships, tourism,
insurance and not-for-profit organizations, all of which are encompassed
within four main categories: mortgage, commercial, consumer and leasing.
Oriental's loan portfolio has a higher concentration of loans to consumers
such as residential mortgage loans and auto finance leases. The composition
of the loan portfolio at March 31,1998, and June 30, 1997 was as follows (in
thousands):
<TABLE>
<CAPTION>
31-MAR-98 30-JUN-97
------------- ------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $ 236,658 $ 225,382
Commercial 8,167 9,087
Home equity loans 3,358 5,436
Construction, land acquisition and land improvements 3,220 4,391
---------- ----------
251,403 244,296
Less: net deferred loan fees and servicing rights sold (861) (239)
Less: undisbursed portion of loans in process (2,747) (2,093)
---------- ----------
Loans secured by real estate, net 247,795 241,964
---------- ----------
---------- ----------
OTHER LOANS:
Commercial loans 10,571 10,512
Auto loans 8,775 14,882
Personal loans 102,929 69,773
Personal lines of credit 6,423 5,190
Cash collateral loans 2,548 2,827
Financing leases 187,593 205,077
---------- ----------
318,839 308,261
Less: unearned interest (34,746) (41,131)
---------- ----------
Other loans, net 284,093 267,130
---------- ----------
Loans receivable 531,888 509,093
Allowance for loan losses (6,816) (5,408)
---------- ----------
LOANS RECEIVABLE, NET 525,072 503,685
Loans held for sale 32,661 29,285
---------- ----------
TOTAL LOANS,NET $ 557,733 $ 532,970
---------- ----------
---------- ----------
</TABLE>
The Group provides allowances for estimated loan losses based on an
evaluation of the risk characteristics of the loan portfolio, loss
experience, economic conditions and other pertinent factors. Loan losses are
charged and recoveries are credited to the allowance for loan losses.
The Group measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the observable market price of the loan or
the fair value of the collateral, if the loan is collateral dependent. All
loans are evaluated for impairment, except large groups of small balance,
homogeneous loans that are collectively evaluated for impairment, leases and
loans that are recorded at fair value or at the lower of cost or fair value.
The Group measures for impairment all commercial loans and leases over
$250,000. The portfolios of mortgage and consumer loans and auto loans and
leases are considered homogeneous and are evaluated collectively for
impairment. Over 95% of the group's loan portfolio is composed of smaller
homogenous loans which are evaluated collectively for impairment.
Accordingly, the balance of impaired commercial loans and leases at March 31,
1998 and 1997 and their average for the nine months period ended is not
significant.
Refer to Table I at page 23 of the management's discussion and analysis of
financial condition and results of operations for the changes in the allowance
for loan losses for the quarter and nine months period ended March 31, 1998 and
1997.
9
<PAGE>
NOTE 6 - ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK:
- -----------------------------------------------------------------
At March 31, 1998 and June 30, 1997 advances and borrowings from the Federal
Home Loan Bank of New York (FHLB) consist of the following (in thousands):
<TABLE>
<CAPTION>
TYPE MAR. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVANCE $ - $15,000 JULY 1997 Fixed - 5.79%
ADVANCE - 15,000 AUGUST 1997 Fixed - 5.80%
ADVANCE - 10,000 NOVEMBER 1997 Floating due quarterly - 5.25% at 6/30/97
ADVANCE - 10,000 FEBRUARY 1998 Floating due monthly - 5.48% at 6/30/97
ADVANCE - 13,800 OVERNIGHT LINE OF CREDIT Floating due daily - 6.38 at 6/30/97
ADVANCE 15,000 - ABRIL 1998 Fixed - 5.64%
ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.71%
ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.85% - Callable September 1998
ADVANCE 20,000 - OCTOBER 2002 Fixed - 5.42% - Callable October 1998
BORROWING - 12,000 SEPTEMBER 1997 Fixed - 6.04%
BORROWING 14,000 14,000 JULY 1998 Fixed - 6.28 %
BORROWING 10,000 - SEPTEMBER 1999 Fixed - 6.03% - Callable March 1999
------------------------
79,000 $89,800
------------------------
------------------------
</TABLE>
Advances are received from the FHLB under an agreement whereby Oriental is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. The floating rate
advances are considered generally hedged through the overall interest rate
risk management process discussed in note 8.
NOTE 7 - TERM NOTES AND BONDS PAYABLE:
- ---------------------------------------
At March 31, 1998 and June 30, 1997 Term Notes and Bonds Payable consist of
the following ( in thousands):
<TABLE>
<CAPTION>
TYPE MAR. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 Fixed - 4.81% (b)
TERM NOTE 10,000 10,000 DECEMBER 1999 Floating due quarterly - 4.77% at 3/31/98 (a) (c)
TERM NOTE 10,000 10,000 JANUARY 2000 Floating due quarterly - 4.77% at 3/31/98 (a) (c)
TERM NOTE 6,500 6,500 DECEMBER 2000 Floating due quarterly - 4.78% at 3/31/98 (b) (c)
TERM NOTE 20,000 20,000 MARCH 2001 Floating due quarterly - 5.24% at 3/31/98 (b) (c)
TERM NOTE 10,000 10,000 SEPTEMBER 2001 Floating due quarterly - 5.57% at 3/31/98 (b) (c)
TERM NOTE 30,000 30,000 SEPTEMBER 2001 Floating due quarterly - 5.34% at 3/31/98 (b) (c)
TERM NOTE 5,000 5,000 DECEMBER 2001 Floating due quarterly - 4.73% at 3/31/98 (b) (c)
TERM NOTE 15,000 15,000 MARCH 2007 Floating due quarterly - 5.40% at 3/31/98 (b) (c)
BOND 149 516 APRIL 2008 Fixed - 8.38% (d)
-----------------------
$114,649 $115,016
-----------------------
-----------------------
</TABLE>
(A) - GUARANTEED BY LETTERS OF CREDIT FROM THE FLHB.
(B) - COLLATERALIZED WITH U.S. GOVERNMENT SECURITIES AND/OR MORTGAGE-BACKED
SECURITIES.
(C) - THE FLOATING RATE NOTES ARE CONSIDERED GENERALLY HEDGED THROUGH THE
OVERALL INTEREST RATE RISK MANAGEMENT PROCESS DISCUSSED IN NOTE 8.
(D) - COLLATERIZED WITH FHLMC CERTIFICATES.
10
<PAGE>
NOTE 8- INTEREST RATE RISK MANAGEMENT:
- ---------------------------------------
INTEREST RATE SWAP AGREEMENTS:
- ------------------------------
The following table indicates the types of swaps used and their terms at
March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Pay fixed swaps - notional amount $305,000
Weighted average pay rate - fixed 5.79%
Weighted average receive rate - floating 5.32%
Maturity (in months) 1 to 26
Floating rate - percent of LIBOR 84 to 100%
</TABLE>
The agreements were signed to convert short term borrowings into fixed rate
liabilities for longer periods of time and provide protection against
increases in interest rates. The amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. The Group
controls the credit risk of its interest rate swap agreements through
approvals, limits, monitoring procedures and collateral, where considered
necessary. The Group does not anticipate nonperformance by the
counterparties. At March 31, 1998, interest rate swap maturities by fiscal
year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- -----------
<S> <C>
1998 $ 55,000
1999 180,000
2000 70,000
----------
$ 305,000
----------
----------
</TABLE>
The following table summarizes the changes in notional amounts of swaps
outstanding during the first nine months of fiscal 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 370,000
New swaps 55,000
Maturities (120,000)
-----------
Balance at end of period $ 305,000
-----------
-----------
</TABLE>
INTEREST RATE PROTECTION AGREEMENTS (CAPS):
The Group also uses interest rate protection agreements (Caps) to limit its
exposure to rising interest rates. Under these agreements, Oriental pays an
up front premium or fee for the right to receive cash flow payments in excess
of the predetermined cap rate; thus, effectively capping its interest rate
cost for the duration of the agreement. The following table indicates the
agreements outstanding at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cap agreements - notional amount $120,000
Cap rate 6.00 - 6.50%
Current 90 day LIBOR 5.72%
Maturity (in months) 6 to 12
</TABLE>
S&P INTEREST RATE SWAP:
- ------------------------
In January 1994, the Group introduced new certificates of deposit called
Investors' CD and Investors' IRA which have their yields tied to the
performance of a stock market index. At the end of five years, the depositor
will receive a specified percent of the average increase of the month-end
value of the Standard & Poor's 500 stock index. If such index decreases, the
depositor receives the principal without any interest. The Group has entered
into interest rate swap/hedge agreements with a notional amount of
$38,632,000 with major money center banks to manage the Investors' CD and IRA
exposure to the stock market. Under the terms of the agreements, Oriental
will receive the average increase of the month-end value of the Standard and
Poor's index in exchange for a semiannual fixed interest cost. Thus, the
Group has exchanged the variable interest payment for a known fixed rate
semiannual interest payment. At March 31, 1998 total Investors' CD and IRA
deposits amounted to $39,619,000.
11
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW SUMMARY
- ------------------------
Oriental Financial Group reported an increase of 18% in net income for the
third quarter of fiscal 1998. The Group's net income for the third quarter
ended on March 31, 1998 increased to $5.4 million or $.53 per share from
$4.6 million or $.45 per share in the same period of fiscal 1997. All per
share figures have been retroactively adjusted for the five-for-four (25%)
stock split on common stock distributed on October 15, 1997.
The Group's net income for the first nine months of fiscal 1998 increased
32% to $15.6 million or $1.52 per share versus $11.9 million or $1.15 per
share reported a year ago. Net income for fiscal 1997 includes a SAIF $1.3
million one-time industry wide assessment. Excluding SAIF, net income for
the nine-month period increased 18% from $13.2 million or $1.28 per share in
the same period the year before. The Group's earnings growth reflects
increases in both interest income and non-interest income, driven by a solid
growth in interest-earning assets and strong performances by mortgage banking
activities and trust, money management and brokerage fees. Annualized
return on assets and return on equity for the first nine months of fiscal
1998 were 1.73% and 21.04% respectively, compared to 1.85% and 21.10% for the
first nine months of fiscal 1997.
Oriental 's diversified asset base continued to experience a favorable growth
that contributed in large measure to income expansion across its business
lines. At March 31, 1998, total financial assets owned or managed
(excluding loans serviced for third parties sold on October 1997) increased
32% to $ 3.2 billion from the $ 2.4 billion owned or managed one year ago.
Total financial assets consisted of $1.26 billion owned by the Bank, $1.24
billion managed by the trust and $686 million gathered by the broker-dealer
at March 31, 1998.
For the third quarter of fiscal 1998 mortgage banking activities (excluding
servicing income) increased 62% to $1 million compared to $638,000 for the
same period fiscal 1997. Trust, money management and brokerage fees increased
by 7% to $2 million, compared to $1.8 million in the same quarter of fiscal
1997. Bank services fees and charges and other income amounted to $1 million,
compared to $1.3 million in fiscal 1997, a decrease of 25%. Thie decline was
attributable to a decrease in the Group's leasing's lending activity.
For the first nine months of fiscal 1998 trust, money management and
brokerage fees increased 18% to $5.9 million, compared to $4.9 million the
year before. Mortgage banking activities (excluding servicing income)
increased 156% to $2.6 million, compared to $1 million for the same period a
year ago. Bank services fees and charges and other income amounted to $3.3
million, compared to $4.3 million in fiscal 1997, a decrease of 24%,
reflecting reduced leasing loan volumes.
Net interest income for the third quarter of fiscal 1998 rose 17% to $11.3
million versus $9.7 million reported in the same period of fiscal 1997. For
the nine months period ended net interest income increased 14% to $31.7
million from $27.7 million reported in the same period a year ago. The
improvement was achieved through the growth in the Group's loan and
securities portfolios. Average interest-earning assets for the third quarter
of fiscal 1998 reached $1.2 billion an increase of 21% compared with $923
million for the same quarter of fiscal 1997. For the nine months period
average interest-earning assets grew 27% to $ 1.1 billion from $875 million a
year ago.
For the third quarter of fiscal 1998 the Group provided $ 1.9 million for
loan losses compared with $1.3 million for the same period of fiscal 1997.
For the first nine months of fiscal 1998 the provision for loan losses
amounted to $6.9 million compared with $3.4 million a in the same period the
year before. At March 31, 1998 the Group's allowance for loan losses
amounted to $6.8 million or 1.21% of total loans versus $4.8 million or
.091% of total loans a year ago. The higher provision for fiscal 1998 was
primarily due to Management's goal of further increasing the Group's ratio of
reserves to total loans and non-performing loans, as well as to respond to
the rise in net charge-offs experienced by the Group and to current and
expected economic conditions.
Recurring non-interest expenses for the third quarter of fiscal 1998
increased 2% to $7.5 million as compared to $7.4 million during the same
period of fiscal 1997. For the first nine months of fiscal 1998 they
increased 9% to $22.5 million from $20.6 million a year ago. The efficiency
ratio and the expense ratio for the first nine months of fiscal 1998
improved to 50.99% and 1.20%, respectively, from 52.59% and 1.29%,
respectively, the year before.
Oriental's total bank assets at March 31, 1998 reached $1.26 billion, an
increase of 23% when compared to $1.02 billion at the end of the same period
of fiscal 1997. This resulted from the growth in investment and trading
securities of $207 million or 48%, to $641 million from $434 million a year
ago, and loans receivable and loans held for sale, net of the allowance for
loan losses, of $37 million, or 7%, from $521 million at March 31, 1997 to
$558 million at March 31, 1998.
12
<PAGE>
ORIENTAL FINANCIAL GROUP
FINANCIAL HIGHLIGHTS
IN THOUSANDS (EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
---------------------------
FISCAL
PERCENT ---------------------------
INCREASE
(DECREASE) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PERIOD END BALANCES:
- -------------------------------------------------------------------------------------------
TOTAL BANK ASSETS 23% 1,261,500 1,022,400
TRUST ASSETS MANAGED 28% 1,242,900 970,000
ASSETS GATHERED BY BROKER AND DEALER 59% 686,000 430,800
-------- --------- ---------
TOTAL FINANCIAL ASSETS (EXCLUDING SERVICING) 32% 3,190,400 2,423,200
LOANS SERVICED TO THIRD PARTIES (100%) - 472,600
-------- --------- ---------
TOTAL FINANCIAL ASSETS 10% 3,190,400 2,895,800
-------- --------- ---------
INTEREST-EARNING ASSETS 25% $ 1,198,341 $ 955,628
-------- --------- ---------
INTEREST-BEARING LIABILITIES 24% 1,125,889 907,884
-------- --------- ---------
TOTAL LIABILITIES 24% 1,157,473 936,716
-------- --------- ---------
CAPITAL 21% $ 103,967 $ 85,644
-------- --------- ---------
- ------------------------------------------------------------------------------------------
OPERATING RESULTS:
- ------------------------------------------------------------------------------------------
INTEREST INCOME 23% $ 74,410 $ 60,638
INTEREST EXPENSE 30% 42,753 32,894
-------- --------- ---------
NET INTEREST INCOME 14% 31,657 27,744
PROVISION FOR LOAN LOSSES 103% 6,900 3,400
-------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2% 24,757 24,344
-------- --------- ---------
BANK SERVICE CHARGES AND FEES AND OTHER INCOME (24%) 3,268 4,305
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 20% 5,890 4,917
MORTAGE BANKING ACTIVITIES 26% 3,406 2,710
GAIN ON SALE OF SERVICING RIGHTS 100% 2,707 -
NET GAIN ON SALE OF INVESTMENT SECURITIES 126% 893 396
NON-INTEREST EXPENSES 10% 22,680 20,674
SPECIAL SAIF ONE-TIME CAPITALIZATION ASSESSMENT (100%) - 1,823
-------- --------- ---------
NET INCOME BEFORE INCOME TAXES 29% 18,241 14,175
PROVISION FOR INCOME TAXES 14% 2,650 2,321
-------- --------- ---------
NET INCOME 32% 15,591 11,854
SAIF ASSESSMENT, NET OF INCOME TAXES (100%) - 1,333
-------- --------- ---------
NET OPERATING INCOME (EXCLUDING SAIF ASSESSMENT) 18% $ 15,591 $ 13,187
-------- --------- ---------
- --------------------------------------------------------------------------------------------
PER SHARE DATE:
- --------------------------------------------------------------------------------------------
NET INCOME EXCLUDING SAIF - BASIC 18% $ 1.57 $ 1.33
-------- --------- ---------
NET INCOME EXCLUDING SAIF - DILUTED 18% 1.52 1.28
-------- --------- ---------
BOOK VALUE 20% 10.39 8.63
-------- --------- ---------
MARKET PRICE 85% 37.13 20.10
-------- --------- ---------
DIVIDENDS DECLARED 25% 3,956 3,170
-------- --------- ---------
OUTSTANDING SHARES AT END OF PERIOD 1% $ 10,004 $ 9,923
-------- --------- ---------
- --------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
- --------------------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS 1.73% 1.85%
--------- ---------
--------- ---------
RETURN ON AVERAGE EQUITY 21.04% 21.10%
--------- ---------
--------- ---------
EFFICIENCY RATIO 50.99% 52.59%
--------- ---------
--------- ---------
EXPENSE RATIO 1.20% 1.29%
--------- ---------
--------- ---------
</TABLE>
13
<PAGE>
Stockholders' equity at March 31, 1998 totaled $104 million compared to
$85.6 million the year before, an increase of 21%. The Group continues to be
a "well capitalized" institution, the highest classification available under
the capital standards set by the Federal Deposit Insurance Corporation for
bank or bank holding companies. Total risk-based and leverage capital ratios
as of March 31, 1998 were 19.79% and 7.82%, respectively, which are well
above the minimum capital ratios required by regulatory agencies.
The following pages discuss in detail the different components that resulted
in the Group's continued profitability.
RESULT OF OPERATIONS
- --------------------
As a diversified financial services provider, Oriental's earnings depend not
only on the net interest income generated from its banking activity, but also
from fees and other non-interest income generated from the wide array of
financial services offered. Net interest income is affected by the
difference between rates of interest 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). Non-interest income is
affected by the level of trust assets under management, transactions
generated by gathering of financial assets by the broker-dealer subsidiary,
the level of mortgage banking activities, and fees generated from loans and
deposit accounts.
NET INTEREST INCOME
- -------------------
Net interest income for the third quarter ended on March 31, 1998 increased
by 17% or $1.6 million to $11.3 million from $9.7 million posted in the same
period of the earlier fiscal year. This improvement in net interest income
reflects an increase of $1.3 million due to a higher volume of
interest-earning assets and a $276,000 increase due to rate, mostly from a
reduction in the cost of the Bank's interest rate risk managment. The
interest rate spread and net interest margin fell to 3.53% and 3.77%,
respectively, for the third quarter of fiscal 1998 as compared to 3.84% and
4.14% respectively, for the third quarter of fiscal 1997. The
interest-earning assets to interest-bearing liabilities ratio for the third
quarter of fiscal 1998 amounted to 104.93% versus 105.99% the year before and
total average interest earning assets exceeded total average interest bearing
liabilities by $55.4 million versus $52.1 a year ago.
For the first nine months period net interest income was up by 14% or $3.9
million to $31.7 million from $27.7 million in the prior fiscal year. The
improvement in net interest income was the result of an increase of $4.5
million due to a higher volume of interest-earning assets partially offset
by an unfavorable effect in rate of $561,000 due to a lower average yield of
interest-earning assets and a slight increase in the cost of funds. The
interest rate spread and net interest margin decreased to 3.57% and 3.80%,
respectively, for the first nine months of fiscal 1998 as compared to 3.92%
and 4.23% attained during the same period the year before. For the nine
months period ended the ratio amounted to 104.62% versus 106.17% and total
average interest earning assets exceeded total average interest bearing
liabilities by $49.1 million compared to $50.8 million in fiscal 1997. The
decrease in this ratio was attributable to the increase in non-accruing
loans, which are excluded from our spread and yield calculation. For more on
non-accruing loans refer to the non-performing assets section of this
analysis at page 22.
Tables A and A-1 on pages 15 and page 16 sets forth a detailed analysis of
net interest income. Part one presents the dollar amount of and average
rates on Oriental's interest-earning assets and liabilities, the ratio of net
interest-earning assets over interest-bearing liabilities, the average
interest rate spread and the net yield on average interest-earning assets.
Part two describes the extent to which changes in interest rates and changes
in volume of interest-related assets and liabilities have affected Oriental's
interest income and interest expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rates) and (2) changes in rate (changes
in rate multiplied by old volume). Rate-volume variances (changes in rates
multiplied by the changes in volume) have been proportionally allocated to
the changes in volume and changes in rate based upon their respective
percentage of the combined total.
Oriental's interest income for the third quarter of fiscal 1998 increased
by 23% or $4.9 million to $26 million from $21.2 million posted in fiscal
1997. The growth in interest income was totally due to a positive volume
variance of $4.8 million resulting from a growth in the average volume of
interest-earning assets. Average interest-earning assets for the third
quarter of fiscal 1998 reached $1.18 billion versus $923 million a year ago,
an increase of $256 million or 28%. This average volume increase was fueled
by increases in investment and mortgage-backed securities which volume grew
to $256 million and $351 million, respectively, from $140 million and $250
million, respectively, in the preceding year.
For the first nine months of fiscal 1998 interest income rose by 23% or $13.8
million to $74.4 million from $60.6 million posted in fiscal 1997. This
growth was possible to a favorable volume variance of $13.8 million as result
of a larger average volume of interest-earning assets. For the nine months
period ended average interest-earning assets increased to $1.112 billion
versus $875 million in fiscal 1997, up 30% or $256 million. This increase was
driven by a significant growth in the average volume of investment and
mortgage-backed securities which grew by 74% to $226 from $129 million a year
ago and 39% to $322 from $233 million, respectively.
14
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TABLE - A THIRD QUARTER ENDED
-------------------------------------------------------------------------------------
PART - I FISCAL 1998 FISCAL 1997
----------------------------------------- ------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST BALANCE RATE INTEREST BALANCE RATE
-------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
(A) REAL ESTATE LOANS $ 6,861 $ 283,705 9.67% $ 6,325 $ 255,664 9.90%
(A) CONSUMER LOANS 3,753 110,776 13.74% 2,608 84,267 12.55%
(A) COMMERCIAL LOANS 257 9,754 10.54% 292 9,999 11.67%
(A) FINANCING LEASES 4,561 148,313 12.30% 4,810 161,811 11.89%
-------- ---------- -------- -------- ---------- --------
TOTAL LOANS 15,432 552,548 11.21% 14,035 511,741 11.00%
-------- ---------- -------- -------- ---------- --------
MORTAGE-BACKED SECURITIES 6,107 350,909 6.96% 4,387 249,312 7.04%
INVESTMENT SECURITIES 4,277 256,599 6.67% 2,505 139,906 7.16%
OTHER INTEREST-EARNING ASSETS 263 19,202 5.49% 237 22,161 4.29%
-------- ---------- -------- -------- ---------- --------
TOTAL INVESTMENTS 10,647 626,710 6.80% 7,129 411,379 6.93%
-------- ---------- -------- -------- ---------- --------
TOTAL INTEREST-EARNING ASSETS $ 26,079 $ 1,179,258 8.86% 21,164 $ 923,120 9.19%
-------- ---------- -------- -------- ---------- --------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 693 $ 105,749 2.66% $ 620 $ 95,724 2.63%
CERTIFICATES OF DEPOSIT 4,441 332,515 5.42% 3,957 305,163 5.26%
OTHER CERTIFICATES OF DEPOSIT 1,291 85,126 6.15% 946 58,245 6.58%
-------- ---------- -------- -------- ---------- --------
TOTAL DEPOSITS 6,425 523,390 4.98% 5,523 459,132 4.88%
-------- ---------- -------- -------- ---------- --------
REPURCHASE AGREEMENTS 5,192 389,589 5.40% 2,770 216,523 5.19%
LINES OF CREDIT 8 - 0.00% 42 1,505 11.07%
FHLB ADVANCES 1,017 72,155 5.72% 439 31,617 5.63%
FHLB BORROWINGS 367 24,000 6.21% 394 26,000 6.15%
BONDS PAYABLE 5 223 9.43% 15 669 8.74%
TERM NOTES 1,502 114,500 5.32% 1,743 135,500 5.22%
INTEREST RATE RISK MANAGEMENT 283 YIELD AJE. 0.19% 558 YIELD AJE. 0.55%
-------- ---------- -------- -------- ---------- --------
TOTAL OTHER BORROWINGS 8,374 600,467 5.66% 5,961 411,814 5.87%
-------- ---------- -------- -------- ---------- --------
TOTAL INTEREST-BEARING
LIABILITIES $ 14,799 $ 1,123,857 5.34% $ 11,484 $ 870,946 5.34%
-------- ---------- -------- -------- ---------- --------
NET INTEREST EARNING ASSETS $ 11,280 $ 55,401 3.53% $ 9,680 $ 52,174 3.84%
-------- ---------- -------- -------- ---------- --------
-------- ---------- -------- -------- ---------- --------
INTEREST RATE MARGIN 3.77% 4.14%
---------- ----------
---------- ----------
NET INTEREST-EARNING ASSETS
RATIO 104.93% 105.99%
------- -------
------- -------
- -------------------------------------------------------------------------------------------------------------------------
PART - I I INCREASE / (DECREASE) DUE TO:
------------------------------------------------------------
FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL %
----------------- ------------ ----------- -----------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 677 $ (141) $ 536 8.0%
CONSUMER LOANS 894 251 1,145 44.0%
COMMERCIAL LOANS (7) (28) (35) (12.0%)
FINANCING LEASES (414) 165 (249) (5.0%)
--------- -------- -------- ---------
TOTAL LOANS 1,150 247 1,397 10.0%
--------- -------- -------- ---------
MORTAGE-BACKED SECURITIES 1,768 (48) 1,720 39.0%
INVESTMENT SECURITIES 1,945 (173) 1,772 71.0%
OTHER INTEREST-EARNING ASSETS (40) 66 26 11.0%
--------- -------- -------- ---------
TOTAL INVESTMENTS 3,673 (155) 3,518 49.0%
--------- -------- -------- ---------
TOTAL INTEREST-EARNING ASSETS $ 4,823 $ 92 $ 4,915 23.0%
--------- -------- -------- ---------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 66 $ 7 $ 73 12.0%
CERTIFICATES OF DEPOSIT 364 120 484 12.0%
OTHER CERTIFICATES OF DEPOSIT 408 (63) 345 36.0%
--------- -------- -------- ---------
TOTAL DEPOSITS 838 64 902 16.0%
--------- -------- -------- ---------
REPURCHASE AGREEMENTS 2,305 117 2,422 87.0%
LINES OF CREDIT 8 (42) (34) (81.0%)
FHLB ADVANCES 571 7 578 132.0%
FHLB BORROWINGS (31) 4 (27) (7.0%)
BONDS PAYABLE (11) 1 (10) (67.0%)
TERM NOTES (276) 35 (241) (14.0%)
INTEREST RATE RISK MANAGEMENT 95 (370) (275) (49.0%)
--------- -------- -------- ---------
TOTAL OTHER BORROWINGS 2,661 (248) 2,413 40.0%
--------- -------- -------- ---------
--------- -------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 3,499 $ (184) $ 3,315 29.0%
--------- -------- -------- ---------
--------- -------- -------- ---------
NET INTEREST EARNING ASSETS $ 1,324 $ 276 $ 1,600 17.0%
--------- -------- -------- ---------
--------- -------- -------- ---------
(A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TABLE - A1 NINE MONTHS ENDED
----------------------------------------------------------------------------------------
PART - I FISCAL 1998 FISCAL 1997
----------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST BALANCE RATE INTEREST BALANCE RATE
----------- ------------- ----------- ------------- ------------- -------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
(A) REAL ESTATE LOANS $ 20,089 $ 280,001 9.57% $ 18,145 $ 244,764 9.88%
(A) CONSUMER LOANS 10,246 100,031 13.65% 7,663 82,065 12.44%
(A) COMMERCIAL LOANS 818 9,824 11.11% 711 8,648 10.96%
(A) FINANCING LEASES 13,815 153,372 12.01% 13,868 155,439 11.90%
--------- ---------- -------- --------- ---------- ---------
TOTAL LOANS 44,968 543,228 11.03% 40,387 490,916 10.96%
--------- ---------- -------- --------- ---------- ---------
MORTAGE-BACKED SECURITIES 17,142 322,874 7.08% 12,478 233,270 7.13%
INVESTMENT SECURITIES 11,381 225,532 6.73% 6,993 129,082 7.22%
OTHER INTEREST-EARNING ASSETS 919 19,979 6.05% 780 22,135 4.63%
--------- ---------- -------- --------- ---------- ---------
TOTAL INVESTMENTS 29,442 568,385 6.90% 20,251 384,487 7.02%
--------- ---------- -------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $ 74,410 $ 1,111,613 8.92% 60,638 $ 875,403 9.23%
--------- ---------- -------- --------- ---------- ---------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 2,052 $ 103,755 2.63% $ 1,796 $ 92,181 2.60%
CERTIFICATES OF DEPOSIT 13,406 329,968 5.41% 10,638 267,914 5.29%
OTHER CERTIFICATES OF DEPOSIT 3,719 80,617 6.15% 2,784 56,336 6.58%
--------- ---------- -------- --------- ---------- ---------
TOTAL DEPOSITS 19,177 514,340 4.97% 15,218 416,431 4.87%
--------- ---------- -------- --------- ---------- ---------
REPURCHASE AGREEMENTS 13,747 336,890 5.44% 8,272 224,907 4.90%
LINES OF CREDIT 46 259 23.17% 276 4,681 7.76%
FHLB ADVANCES 3,028 70,045 5.76% 1,305 31,126 5.59%
FHLB BORROWINGS 1,207 26,103 6.16% 1,202 26,000 6.16%
BONDS PAYABLE 24 355 8.98% 50 765 8.74%
TERM NOTES 4,542 114,500 5.28% 4,755 120,611 5.25%
INTEREST RATE RISK MANAGEMENT 982 YIELD AJE. 0.24% 1,816 YIELD AJE. 0.59%
--------- ---------- -------- --------- ---------- ---------
TOTAL OTHER BORROWINGS 23,576 548,152 5.73% 17,676 408,090 5.77%
--------- ---------- -------- --------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES $ 42,753 $1,062,492 5.36% $ 32,894 $ 824,521 5.31%
--------- ---------- -------- --------- ---------- ---------
NET INTEREST EARNING ASSETS $ 31,657 $ 49,121 3.57% $ 27,744 $ 50,882 3.92%
--------- ---------- -------- --------- ---------- ---------
--------- ---------- -------- --------- ----------
INTEREST RATE MARGIN 3.80% 4.23%
---------- ----------
---------- ----------
NET INTEREST-EARNING ASSETS
RATIO 104.62% 106.17%
--------- ---------
--------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
PART - II INCREASE / (DECREASE) DUE TO:
--------------------------------------------------------------
FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL %
------------------ --------- ------------ -----------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 2,528 $ (584) $ 1,944 11.0%
CONSUMER LOANS 1,841 742 2,583 34.0%
COMMERCIAL LOANS 97 10 107 15.0%
FINANCING LEASES (186) 133 (53) 0.0%
---------- ------- -------- --------
TOTAL LOANS 4,280 301 4,581 11.0%
---------- ------- -------- --------
MORTAGE-BACKED SECURITIES 4,758 (94) 4,664 37.0%
INVESTMENT SECURITIES 4,867 (479) 4,388 63.0%
OTHER INTEREST-EARNING ASSETS (95) 234 139 18.0%
---------- ------- -------- --------
TOTAL INVESTMENTS 9,530 (339) 9,191 45.0%
---------- ------- -------- --------
TOTAL INTEREST-EARNING ASSETS $ 13,810 $ (38) $ 13,772 23.0%
---------- ------- -------- --------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 229 $ 27 $ 256 14.0%
CERTIFICATES OF DEPOSIT 2,521 247 2,768 26.0%
OTHER CERTIFICATES OF DEPOSIT 1,120 (185) 935 34.0%
---------- ------- -------- --------
TOTAL DEPOSITS 3,870 89 3,959 26.0%
---------- ------- -------- --------
REPURCHASE AGREEMENTS 4,570 905 5,475 66.0%
LINES OF CREDIT (771) 541 (230) (83.0%)
FHLB ADVANCES 1,683 40 1,723 132.0%
FHLB BORROWINGS 4 1 5 0.0%
BONDS PAYABLE (27) 1 (26) (52.0%)
TERM NOTES (242) 29 (213) (4.0%)
INTEREST RATE RISK MANAGEMENT 249 (1,083) (834) (46.0%)
---------- ------- -------- --------
TOTAL OTHER BORROWINGS 5,466 434 5,900 33.0%
---------- ------- -------- --------
---------- ------- -------- --------
TOTAL INTEREST-BEARING LIABILITIES $ 9,336 $ 523 $ 9,859 30.0%
---------- ------- -------- --------
---------- ------- -------- --------
NET INTEREST EARNING ASSETS $ 4,474 $ (561) $ 3,913 14.0%
---------- ------- -------- --------
---------- ------- -------- --------
</TABLE>
(A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS.
16
<PAGE>
There were two main reasons for the increase in investments and
mortgage-backed securities. First, was the creation, during the latter part
of fiscal 1997, of OBT International Branch under the International Banking
Center Law which invests primarily in U.S. mortgage-baked securities that
provide the Group significant tax advantages. Finally, was a shift in the
Group's investing strategy due to the change in the GNMA's tax-exemption in
July 1997. For more on this change to the Puerto Rico tax code refer to the
income taxes section of this report at page 21. The end result of these
changes is that for the periods analyzed above total investments amounted to
53% and 51%, respectively, of average interest-earning assets in fiscal 1998
versus 45% and 44%, respectively, a year ago.
The yield on interest-earning assets for the third quarter and first nine
months of fiscal 1998 decreased to 8.86% and 8.92% ,respectively, from 9.19%
and 9.23%, respectively, attained in the same periods of fiscal 1997. The
main reason for this decline was the proportionately higher increase in the
total average investments portfolio, which carries a lower yield than the
loan portfolio but generates a significant amount of tax exempt interest
which lowers the Group's effective tax rate.
Interest expense for the third quarter of fiscal 1998 increased 29% or $3.3
million to $14.8 million from $11.5 million reported in the same period of
fiscal 1997. For the first nine months of fiscal 1998 it increased 30% or
$9.9 million to $42.8 million from $32.9 million reported in the same period
the year before. These increases were driven by a higher volume of
interest-bearing liabilities used to fund the interest-earning assets growth
and contributed to a rise in total interest expense during the second quarter
and first nine months of fiscal 1998 of $3.5 million and $9.4 million,
respectively. Average interest-bearing liabilities for the second quarter of
fiscal 1998 reached $1.124 billion versus $871 million a year ago, a 29%
increase. For the first nine months of fiscal 1998 average interest-bearing
liabilities rose by 28% or $231 million to $1.062 billion in fiscal 1998
compared with $824 million during fiscal 1997.
The growth in interest-bearing liabilities average volume for the periods
analyzed above reflect strong increases in the average volume of deposits and
repurchase agreements. For the third quarter of fiscal 1998 the average
volume deposits, mainly certificates of deposits and IRA accounts, grew by
14% to $524 million from $459 in fiscal 1997 million while the average volume
of repurchase agreements rose by 80% to $390 million from $217 million in
fiscal 1997. For fiscal 1998 nine months period ended the average volume
deposits grew by 24% to $514 million from $416 million the year before and
the average volume of repurchase agreements rose by 49% to $3336 million from
$225 million reported a year ago. The increase in certificates of deposit
was concentrated in customer CD's, public funds and broker CD's. The rise in
average repos was necessary to fund the asset growth at the OBT
International Branch.
The average cost of funds for the third quarter of fiscals 1998 and 1997 was
5.34%. For the first nine months of fiscal 1998 average costs of funds rose
five basis points to 5.36% from 5.31% in fiscal 1997 which contributed to
$523,000 of the period's total interest expense increase. This increase in
the average cost of funds responds mainly to a rise in the cost of repurchase
agreements of 21 basis points and 54 basis points, respectively, during the
third quarter and first nine months of fiscal 1998. This cost increase was
due to the replacing of 936 repos, which currently represent 22% of Group's
total repos portfolio versus 61% a year ago, with higher-cost conventional
repos. However, it is important to mention that this increase in costs was
mitigated by a favorable effect from the Group's interest-hedging activities
of $275,000 during the third quarter ended and $834,000 during the nine
month period ended.
PROVISION FOR LOAN LOSSES
- -------------------------
For the third quarter of fiscal 1998 the Group provided $ 1.9 million for
loan losses compared with $1.3 million for the same period of fiscal 1997, an
increase of $600,000 or 46%. For the nine month period ended March 31, 1998,
the provision for loan losses amounted to $6.9 million compared with $3.4
million in the same period the year before. The increase in the provision for
fiscal 1998 was primarily due to management's goal of further increasing the
Group's ratio of reserves to total loans and non-performing loans as well as
to the rise in net charge-off experienced by the Group and current and
expected economic conditions. Please refer to the allowance for loan losses
and non-performing assets section for a more detailed analysis of the
allowance for loan losses, net charge-offs and credit quality statistics.
NON-INTEREST INCOME
- -------------------
Table B at page 19 shows the fees and other non-interest income generated by
the Group for the third quarter and nine months period ended March 31, 1998
and 1997. Non-interest income continues to be a major driver of the Group's
earnings improvement as most of its categories exhibited growth in fiscal
1998, with strong results reflected in trust, money management and brokerage
fees and mortgage banking activities ( excluding servicing income which was
sold during October 1997). Recurring non-interest income for the third
quarter of fiscal 1998 the Group totaled $4 million, which represents an
increase of 5% or $200,000 from the $3.8 million reported in the same period
of fiscal 1997. For the nine months period ended it rose by 15% to $11.7 million
from $10.2 million posted the year before.
Bank services fees and charges, which consist primarily of service charges on
deposit accounts, leasing fees and late charges collected on loans, amounted
to $861,000 for the second quarter of fiscal 1998, a decrease of 26% when
compared to the $1.16 million reported for the second quarter of fiscal 1997.
For the six month period ended bank services fees and charges totaled $2.6
million which represents a decrease of 26% from the $3.7 million posted a
year ago. This net decrease was a combination of a decrease in lease
handling fees as result of Group's weaker leasing's lending activity
partially offset by an increase in fees on deposit accounts as a result of a
larger volume of deposit accounts and selected fee increases.
17
<PAGE>
Trust, money management and brokerage fees, the principal component of
recurring non-interest income, reflected strong results during fiscal 1998.
For the third quarter of fiscal 1998 totaled $2 million which represents an
increase of 7% from the $1.8 million recorded in the same quarter of fiscal
1997 and for the first nine months of fiscal 1998 rose 20% to $5.9 million,
compared to $4.9 million the year before. These increases were possible to a
larger volume of accounts and assets managed by the trust department and a
significant growth in the assets gathered by the broker-dealer subsidiary.
Reflecting greater mortgage origination volume and favorable market
conditions for the sale of such loans to investors, mortgage banking
activities (excluding servicing income) rose 62% to $1 million from $638,000
in fiscal 1997 during the third quarter of fiscal 1998 and for first nine
months of fiscal 1998 increased 156% to $2.6 million from $995,000 in fiscal
1997.
During October 1997, in a move to strengthen its future earnings, the Group
sold its mortgage loans servicing portfolio, including $550 million serviced
to others, to Doral Financial Corporation. The Group recorded a net gain of
$2.7 million on this transaction. The divestiture of the mortgage servicing
operation is indicative of a wider strategy guiding the Group to concentrate
on trust, money management, brokerage, leasing, personal loans and deposit
accounts with the highest earnings potential. The gain was used primarily to
increase the Group's allowance for loan losses. As result of this sale
mortgage servicing income exhibited a decrease of 100% during the past
quarter and of 50% for the first nine months of fiscal 1998.
Investment securities and trading gains and losses for the second quarter
and first nine months of fiscal 1998 amounted to $349,000 and $893,000 ,
respectively, versus $78,000 and $396,000, respectively, in the earlier
fiscal year.
NON-INTEREST EXPENSES
- ---------------------
As shown on Table C at page 19 recurring non-interest expenses for the third
quarter of fiscal 1998 increased 1% to $7.4 million as compared to $7.3
million during the same period of fiscal 1997. For the first nine months of
fiscal 1998 they increased 9% to $22.5 million from $20.7 million a year
ago. The efficiency ratio and the expense ratio for the first nine months of
fiscal 1998 amounted 50.99% and 1.20%, respectively, compared to 52.59% and
1.29%, respectively, the year before.
Employee compensation and benefits, the Group's largest expense category,
amounted to $3.6 million for the third quarter of fiscal 1998 , a decrease of
5% or $200,000 when compared to the $3.4 million reported for the third
quarter of fiscal 1997. For the nine month period ended employee compensation
and benefits rose by 5% or $500,000 to $11.1 million from $10.6 million a
year ago. These increases were driven by a growth in variable compensation
which increased 6% or $80,000 during the third quarter and 17% or $555,000 in
the first nine months as result of the Group's greater use of a variable
based compensation structure to compensate for higher productivity and sales
efforts and for annual performance merit increases. For the third quarter
and first nine months of fiscal 1998 variable compensation represented 36%
and 34%, respectively, of total compensation versus 32% and 31% ,
respectively, in fiscal 1997. Compensation and benefits as a percentage of
total average assets and average-interest earning assets ratio for the first
nine months of fiscal 1998 improved to 1.23% and 1.33%, respectively,
compared to 1.49% and 1.62%, respectively, the year before. Table C1 at page
19 presents the composition of the Group's employee compensation and benefits
at the end of the periods analyzed.
All other recurring non-interest expenses for the second quarter of fiscal
1998 increased 7% to $3.8 million as compared to $3.6 million during the same
period of fiscal 1997. This rise was driven by increases in occupancy and
equipment expenses of 17% or $185,000 and other operating expenses of
$130,000 or 15% mainly to an increase of 69% increase in property taxes. For
the first nine months of fiscal 1998 they increased 14% or $1.4 million to
$11.4 million from $10 million a year ago. This was led by increases in
advertising and promotion of 32% or $439,000 and in occupancy and equipment
expenses of 19% or $605,000. The increase in advertising and promotion
resulted mainly from the ongoing campaign to promote the Group's image and
the launching of new products and services. The main contributors in the
growth of occupancy and equipment costs were increases in EDP depreciation
and property taxes as result of the enhancements the Group has made to its
systems to enable the Group to offer new products, expand electronic delivery
capabilities and more important improve the customers service delivery.
On September 30, 1996 the United States Congress approved and President
Clinton signed into law a bill to recapitalize the Savings Association
Insurance Fund. This bill called for a special one-time charge on
institutions holding SAIF deposits on March 31, 1995 of approximately 66
basis points. Accordingly, Oriental recorded a special reserve of $1.8
million net of taxes of $470,000 during the first quarter of fiscal 1997 to
account for its share of the one-time payment of FDIC insurance premium.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes for the third quarter of fiscal 1998 amounted
to $825,000 versus $961,000 in fiscal 1997, resulting in an effective tax
rate of 13.2% versus 17.2% for the same quarter of fiscal 1997. For the
six months period ended totaled to $2.65 million versus $2.3 million in
fiscal 1997. The effective tax rate was 14.5% in fiscal 1998 compared to
16.3% in fiscal 1997. The Group has maintained an effective tax rate lower
than the statutory rate of 39% mainly due to interest income earned on
certain investments and loans which is exempt from income taxes, net of the
disallowance of expenses attributable to the exempt income. In addition,
during 1997 the Group created OBT International Branch to take advantage of
additional tax incentives available under the International Banking Center
law.
18
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------------------------------
1998 1997 % 1998 1997 %
--------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE B - NON-INTEREST INCOME SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------
BANK SERVICE FEES AND CHARGES $ 861 $ 1,159 (26%) $ 2,759 $ 3,725 (26%)
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 1,971 1,839 7% 5,890 4,917 20%
MORTGAGE BANKING ACTIVITIES (EXCLUDING SERVICING INCOME) 1,036 638 62% 2,550 995 156%
RENT AND OTHER OPERATING INCOME 159 199 (20%) 509 580 (12%)
------- -------- ------ -------- ---------- ---------
RECURRING NON-INTEREST INCOME 4,027 3,835 5% 11,708 10,217 15%
------- -------- ------ -------- ---------- ---------
NET GAIN ON SALE OF INVESTMENTS 210 71 196% 586 384 53%
TRADING ACCOUNT INCOME 139 9 1444% 307 12 2458%
SERVICING INCOME - 627 (100%) 856 1,715 (50%)
NET GAIN ON SALE OF SERVICING RIGHTS - - 100% 2,707 - 0%
------- -------- ------ -------- ---------- ---------
NON RECURRING NON-INTEREST INCOME 349 707 (51%) 4,456 2,111 111%
------- -------- ------ -------- ---------- ---------
TOTAL NON-INTEREST INCOME $ 4,376 $ 4,542 (4%) $ 16,164 $ 12,328 31%
------- -------- ------ -------- ---------- ---------
------- -------- ------ -------- ---------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE C - NON-INTEREST EXPENSES SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
COMPENSATION AND BENEFITS $ 3,579 $ 3,782 (5%) $ 11,115 $ 10,630 5%
OCCUPANCY AND EQUIPMENT 1,268 1,083 17% 3,745 3,140 19%
PROFESSIONAL FEES 290 485 (40%) 943 1,151 (18%)
ADVERTISING AND PROMOTION 691 676 2% 1,818 1,379 32%
REAL ESTATE OWNED EXPENSES 16 17 (6%) 56 116 (52%)
INSURANCE 238 121 97% 625 670 (7%)
COMMUNICATIONS 326 347 (6%) 1,031 913 13%
OTHER OPERATING EXPENSES 1,003 836 20% 3,214 2,666 21%
------- -------- ------ -------- ---------- ---------
TOTAL RECURRING NON-INTEREST EXPENSES 7,411 7,347 1% 22,547 20,665 9%
------- -------- ------ -------- ---------- ---------
SAIF ONE-TIME ASSESSMENT - - 0% - 1,823 (100%)
OTHER NON-RECURRING EXPENSES 82 9 811% 133 9 1378%
------- -------- ------ -------- ---------- ---------
82 9 811% 133 1,832 (93%)
------- -------- ------ -------- ---------- ---------
TOTAL NON-INTEREST EXPENSES $ 7,493 $ 7,356 2% $ 22,680 $ 22,497 1%
------- -------- ------ -------- ---------- ---------
EFFICIENCY RATIO 50.99% 52.59%
-------- ----------
EXPENSE RATIO 1.20% 1.29%
-------- ----------
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE C1 - COMPENSATIONAND BENEFITS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED COMPENSATION $ 1,970 $ 2,177 (10%) $ 6,338 $ 6,366 0%
VARIABLE COMPENSATION 1,293 1,215 6% 3,806 3,241 17%
OTHER COMPENSATION AND BENEFITS 316 390 (19%) 971 1,023 (5%)
------- -------- ------ -------- ---------- ---------
TOTAL NON-INTEREST EXPENSES $ 3,579 $ 3,782 (5%) $ 11,115 $ 10,630 5%
------- -------- ------ -------- ---------- ---------
COMPENSATION AND BENEFITS COMPOSITION:
FIXED COMPENSATION 55% 58% 57% 60%
VARIABLE COMPENSATION 36% 32% 34% 31%
OTHER COMPENSATION AND BENEFITS 9% 10% 9% 10%
------- ------- -------- --------
TOTAL NON-INTEREST EXPENSES 100% 100% 100% 100%
------- ------- -------- --------
AVERAGE # OF FULL TIME EMPLOYEES 372 399 390 399
------- ------- -------- --------
COMPENSATION AND BENEFITS AS A PERCENTAGE (%) OF:
TOTAL AVERAGE ASSETS 1.13% 1.49% 1.23% 1.49%
------- ------- -------- --------
------- ------- -------- --------
TOTAL AVERAGE INTEREST-EARNING ASSETS 1.21% 1.64% 1.33% 1.62%
------- ------- -------- --------
------- ------- -------- --------
GROUP'S WORK FORCE:
BANK STAFF 339 353
------- -------
------- -------
TRUST STAFF 22 33
------- -------
------- -------
BROKERAGE STAFF 6 10
------- -------
------- -------
</TABLE>
19
<PAGE>
On July 22, 1997 the Governor of Puerto Rico signed into law changes to the
Puerto Rico tax code that will impact the Group's operations going forward.
Under this law effective August 1, 1997, interest earned on FHA , VA loans
and securities backed by such loans originated after July 31, 1997, which
were previously tax exempt (after-disallowance of related expenses) will
begin to pay income taxes except for FHA mortgages for new construction
projects. The legislation does not alter the tax-exempt status of FHA and VA
loans and securities backed by such loans originated prior to July 31, 1997.
This will reduce the amount of tax-exempt mortgages originated in the Puerto
Rico market and decrease the overall level of tax-exempt interest earned by
Group. Management believes the increased operations of OBT International
Branch will mitigate the expected rise on the Group's income taxes as result
of this new bill. Thus, management does not expect this change to have a
significant impact on the Group's financial condition or results of
operations.
FINANCIAL CONDITION COMMENTS
- ----------------------------
As shown on Table G at page 21 Oriental continued to experience a favorable
growth in its diversified asset base which contributed to income expansion
across its business lines. At March 31, 1998, total financial assets owned
or managed (excluding loans serviced for third parties sold on October 1997)
increased 32% to $ 3.2 billion from the $ 2.4 billion owned or managed one
year ago. Total financial assets consisted of $1.26 billion owned by the
Bank, $1.24 billion managed by the trust and $686 million gathered by the
broker-dealer at March 31, 1998. Detailed information concerning each of
the items that comprise the Group's financial assets managed follows:
GROUP'S OWNED ASSETS
- --------------------
Oriental's total assets at March 31, 1998 amounted $1.261 billion, an
increase of 23% when compared to $1.022 million at the end of the same
quarter of fiscal 1997. At March 31, 1998 interest-earning assets reached
$1.2 billion, an increase of $ 225 million or 25% versus the $955 million the
year before. This increase reflects significant growth in total investments
of $187 million or 47% and a $38 million or 7% increase in loans receivable
and loans held for sale, net of the allowance for loan losses. Average assets
for the first nine months of fiscal 1998 were $1.2 billion compared to $950
million for fiscal 1997, a 26% gain. Refer to Table D at page 21 for the
Group's assets summary.
Total investments is Oriental's largest interest-earning assets component. It
mainly consists mainly of money market investments, U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities and P.R. Government
municipal bonds. The investment portfolio is very high quality, approximately
98% is rated AAA at the end of the third quarter of fiscal 1998, and
generates a significant amount of tax exempt interest which lowers the
Group's effective tax rate. Also during fiscal 1997 the Group formed an
International Banking Entity (IBE) which houses U.S. mortgage-backed
securities in a tax-advantaged setting.
The increase of $187 million in investment securities was driven by a strong
growth in debt securities of $118 million or 84% to $259 million from $141
million the year before. This was primarily attributable to the significant
increase in tax-exempt U.S. government and agency obligations, which picks up
a higher after-tax yield since they are exempt from Puerto Rico taxes. Also,
an increase mortgage-backed securities of $97 million or 40% to $337
million from $240 million a year ago contributed to the increase in this
interest-earning asset component. Oriental continues its strategy of pooling
guaranteed real estate loans into mortgage-backed securities. During the
first nine months of fiscal 1998, Oriental converted $76 million of loans
held for sale into mortgage-backed securities. Refer to Table E at page 21
for the Group's investments summary and composition.
At March 31,1998, Oriental's loan portfolio, the second largest category of
the Group's interest-earning assets but the most profitable, amounted $558
million for an increase of $36 million or 7% over the $521 million at the
end of the same quarter of fiscal 1997. This rise was led by increases in
the real estate and consumer portfolios of $15 million or 6%, and $32 million
or 37%, respectively.
At March 31, 1998 the Group's loan portfolio mix was somewhat similar to
the one a year ago as real estate loans represented 50% of the total
portfolio, while lease financing were 27%, consumer loans 21%, and commercial
loans comprised 2%. This compares with 50%, 31%, 17% and 2%, respectively,
at the end of the same period of fiscal 1997 for the same categories. Table
F at page 21 presents the composition of the Group's loan portfolio at the
end of the periods analyzed.
TOTAL ASSETS MANAGED BY THE TRUST DEPARTMENT
- --------------------------------------------
Total assets managed by the trust department increased 28% to $1.24 billion
at March 31, 1998, up from $970 million reported at the end of the same
quarter of fiscal 1997. The most significant assets managed are individual
retirement accounts (IRA) which increased to $409 million at the end of the
period analyzed from $327 million a year ago. Oriental Trust offers five
IRA products: (1) Diversified Growth IRA, a bond and equity unit investment
trust, (2) Multi-IRA, a taxable fixed income account, (3) Investors IRA, for
which the yield is tied to the performance of the stock market and (4)
Guaranteed IRA-Exenta, a tax exempt fixed income account and (5) Annuity IRA,
designed for people close to retirement. Other assets managed include 401
(K) and Keogh retirement plans, custodian and corporate trust accounts.
20
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, JUNE 30,
------------ ------------- ------------
1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE D - ASSETS SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 640,608 $ 434,189 $ 468,594
TOTAL LOANS, NET 557,733 521,439 532,970
----------- ----------- ----------
INTEREST-EARNING ASSETS 1,198,341 955,628 1,001,564
NON INTEREST-EARNING ASSETS 63,099 66,732 67,032
----------- ----------- ----------
TOTAL ASSETS $1,261,440 $1,022,360 $1,068,596
----------- ----------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
TABLE E - INVESTMENTS SUMMARY AND COMPOSITION
- -----------------------------------------------------------------------------------------------------------------------------
TRADING SECURITIES $ 29,835 $ 20,629 $ 30,930
MORTGAGE-BACKED SECURITIES 337,632 239,965 250,902
DEBT SECURITIES 258,550 140,748 148,495
FHLB STOCK 10,043 9,804 10,043
MONEY MARKET INVESTMENTS 4,548 23,043 28,224
----------- ---------- ----------
TOTAL INVESTMENTS $ 640,608 $ 434,189 $ 468,594
----------- ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------
TABLE F - LOANS COMPOSITION SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------
% % %
------ -------- -------
REAL ESTATE LOANS 280,457 50.0% 264,777 50.0% 271,249 50.0%
CONSUMER LOANS 119,340 21.0% 86,908 17.0% 89,957 17.0%
COMMERCIAL LOANS 10,571 2.0% 9,120 2.0% 10,512 2.0%
CONSTRUCTION LOANS - 0.0% 218 0.0% - 0.0%
FINANCING LEASES 154,181 27.0% 165,229 31.0% 166,660 31.0%
------------------------------------------------------------------------
TOTAL LOANS AND LOANS HELD FOR SALE 564,549 100.0% 526,253 100.0% 538,378 100.0%
------ ------ -----
ALLOWANCE FOR LOAN LOSSES (6,816) (4,813) (5,408)
---------- --------- --------
TOTAL LOANS, NET 557,733 521,439 532,970
---------- --------- --------
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE G - FINANCIAL ASSETS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL GROUP ASSETS OWNED $ 1,261,500 $1,022,400 $ 1,068,600
TRUST ASSETS MANAGED 1,242,900 970,000 1,088,600
ASSETS GATHERED BY BROKER-DEALER 686,000 430,800 524,900
----------- ---------- --------
TOTAL FINANCIAL ASSETS BEFORE SERVICING 3,190,400 2,423,200 2,682,100
(A) LOANS SERVICED TO THIRD PARTIES - 472,600 515,700
----------- ---------- --------
TOTAL FINANCIAL ASSETS $ 3,190,400 $2,895,800 $ 3,197,800
----------- ---------- --------
(A) SERVICING WAS SOLD TO A LOCAL FINANCIAL
INSTITUTION IN OCTOBER 1997.
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE H - NON PERFORMING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE LOANS $ 7,087 $ 5,284 $ 5,575
CONSUMER LOANS 1,994 1,755 2,118
COMMERCIAL LOANS 1,464 454 814
CONSTRUCTION LOANS - 211 -
FINANCING LEASES 10,134 3,806 4,778
---------- --------- --------
TOTAL NON ACCRUAL LOANS $ 20,679 $ 11,510 $ 13,285
---------- --------- --------
NON-ACCRUAL LOANS $ 20,679 $ 11,510 $ 13,285
REO 405 686 698
REPO VEHICLES 1,003 1,174 1,253
REPO EQUIPMENT 215 391 486
---------- --------- --------
TOTAL NON-PERFORMING ASSETS $ 22,302 $ 13,761 $ 15,722
---------- --------- --------
% NON-ACCRUAL TO TOTAL LOANS 3.66% 2.19% 2.47%
---------- --------- --------
---------- --------- --------
ALLOWANCE TO NON-ACCRUALS 32.96% 41.82% 40.71%
---------- --------- --------
---------- --------- --------
% NON-PERFORMING TO TOTAL ASSETS 1.77% 1.35% 1.47%
---------- --------- --------
---------- --------- --------
% NON-PERFORMING TO TOTAL CAPITAL 21.45% 16.07% 17.59%
---------- --------- --------
---------- --------- --------
</TABLE>
21
<PAGE>
ASSETS GATHERED BY BROKER-DEALER
- --------------------------------
Since its inception in April 1993, Oriental's broker-dealer subsidiary offers
a wide array of investment vehicles to its clients base. Presently these
include: - Fixed and Variable Annuities.-Tax-advantaged Fixed Income
Securities. -Mutual Funds-Stocks and Bonds. Total assets gathered by the
broker-dealer from its customer investment accounts increased by 60% to $686
million from $431 million a year ago.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
- ---------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
- --------------------------
At March 31, 1998 the Group's allowance for loan losses was $ 6.8 million or
1.21% of total loans. This compares to an allowance for loan losses of $4.8
million or .091% of total loans a year ago. The Group maintains an allowance
for loan losses on its portfolio at a level that management considers
adequate to provide for potential losses based upon an evaluation of known
and inherent risks. Oriental's allowance for loan losses policy provides for
a detailed quarterly analysis of possible losses. The analysis includes a
review of historical loan loss experience, value of underlying collateral,
current economic conditions, financial condition of borrowers and other
pertinent factors. While management uses available information in
estimating possible loan losses, future additions to the allowance may be
necessary based on factors beyond Oriental's control, such as factors
affecting Puerto Rico economic conditions. In addition, various regulating
agencies, as an integral part of their examination process, periodically
review the Group's allowance for loan losses. Such agencies may require the
Group to recognize additions to the allowance based on their judgment of
information available to them at the time of their examinations. Based on
current and expected economic conditions, management considers the allowance
for loan losses at March 31, 1998 adequate to absorb future losses inherent
in the Group's loan portfolio.
Net charge-offs for the third quarter and first nine months of fiscal 1998
totaled $2.2 million or 1.54% and $5.5 million or 1.95%, respectively, of
average loans, compared to $1.1 million or 0.87% and $3 million or 1.23%,
respectively, in fiscal 1997. The level of net charge-offs recorded in fiscal
1998 was primarily associated to the losses experienced in the consumer loans
and financing leases portfolios. Table H at page 23 sets forth an analysis
of the activity in the allowance for loan losses and presents selected loan
losses statistics for the quarters and nine months periods ended March 31,
1998 and 1997.
NON-PERFORMING ASSETS:
- ----------------------
As shown on Table I at page 21 at March 31,1998 the Group's non-performing
assets consist of the sum of non-performing loans, real estate owned and
repossessed assets. Detailed information concerning each of the items that
comprise non-performing assets follows:
- DELINQUENT REAL ESTATE LOANS: Oriental classifies real estate loans
delinquent 90 days or more in non-accruing status. Due to the limited
supply of land in Puerto Rico, real estate market values have remained
stable. Even though these loans are in non-accruing status, based on
the value of the underlying collateral and the loan to value ratios,
management considers that no material losses will be incurred on this
portfolio. The estimated losses have been considered in the
determination of the level of allowances for loan losses at the date of
our analysis. Real estate loans are charged-off based on the specific
evaluation of the collateral underlying the loan.
- DELINQUENT COMMERCIAL BUSINESS LOANS : Commercial business loans
are placed on non-accrual basis when they become 90 days past due. At
the date of our analysis the Group's non-accrual commercial business
loans consisted of eighteen loans amounting to $1.5 million (average of
$81,000), with five loans having balances exceeding $100,000. Of the
total balance, $1 million or 11 loans are guaranteed by real estate.
Commercial loans are charged-off based on the specific evaluation of the
collateral underlying the loan.
- DELINQUENT FINANCE LEASES: Leases are placed on non-accrual status
when they become 90 days past due. At the date of our analysis
Oriental's non-accrual leases consisted of three hundred and twenty-five
auto leases amounting to $7.3 million (average of $22,400), and three
hundred thirty-three equipment leases amounting to $2.8 million (average
of $ 8,400), none of the non-accruing leases was over $100,000.
- DELINQUENT CONSUMER LOANS: Consumer loans are placed on non-accrual
status when they become 90 days past due. The Group's non-accrual
consumer loans consisted of two hundred and forty loans amounting to $2
million (average of $8,333).
- REPOSSESSED ASSETS: Repossessed assets are initially recorded at
estimated net realizable value. Any additional losses on the
disposition of such assets are charged against the allowance for loan
losses at the time of disposition. The estimated loss on disposition of
such assets has been considered in the determination of the allowance
for loan losses. At December 31, 1997 the inventory of repossessed
automobiles consisted of seventy-two units amounting to $1 million
(average of $16,700), and the inventory of repossessed equipment
consisted of thirty-seven units amounting to $215,000 (average of
$4,570).
22
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ---------------------------
1998 1997 1998 1997
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE I -ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 7,131 $ 4,652 $ 5,408 $ 4,496
-------- --------- -------- --------
PROVISON FOR LOAN LOSSES 1,900 1,300 6,900 3,400
-------- --------- -------- --------
CHARGE-OFF'S (2,886) (1,580) (6,905) (3,972)
RECOVERIES 672 442 1,414 890
-------- --------- -------- --------
NET CHARGE OFF'S (2,214) (1,138) (5,491) (3,082)
-------- --------- -------- --------
BALANCE AT END OF PERIOD $ 6,817 $ 4,814 $ 6,817 $ 4,814
-------- --------- -------- --------
CHARGE-OFF'S:
CONSUMER $ (935) $ (686) $ (2,683) $ (1,658)
OVERDRAFT (393) (1) (393) (1)
REAL ESTATE (16) (3) (127) (22)
AUTO LEASES (1,175) (696) (2,777) (1,718)
EQUIPMENT LEASES (249) (182) (720) (509)
COMMERCIAL AND OTHERS (118) (12) (205) (64)
-------- --------- -------- --------
(2,886) (1,580) (6,905) (3,972)
-------- --------- -------- --------
RECOVERIES:
CONSUMER 126 109 264 172
OVERDRAFT 49 2 50 10
REAL ESTATE - 15 - 15
AUTO LEASES 237 220 643 472
EQUIPMENT LEASES 130 90 327 208
COMMERCIAL AND OTHERS 130 6 130 13
-------- --------- -------- --------
672 442 1,414 890
-------- --------- -------- --------
NET CHARGE OFF:
CONSUMER (809) (577) (2,419) (1,486)
OVERDRAFT (344) 1 (343) 9
REAL ESTATE (16) 12 (127) (7)
AUTO LEASES (938) (476) (2,134) (1,246)
EQUIPMENT LEASES (119) (92) (393) (301)
COMMERCIAL AND OTHERS 12 (6) (75) (51)
-------- --------- -------- --------
$ (2,214) $ (1,138) $ (5,491) $ (3,082)
-------- --------- -------- --------
LOANS:
OUTSTANDING $ 564,549 $ 526,252 $ 564,549 $ 526,252
-------- --------- -------- --------
AVERAGE $ 573,227 $ 523,040 $ 563,907 $ 502,215
-------- --------- -------- --------
RATIOS:
RECOVERIES TO CHARGE-OFF'S 23.3% 28.0% 20.5% 22.4%
-------- --------- -------- --------
-------- --------- -------- --------
NET CHARGE-OFF TO AVERAGE LOANS 1.54% 0.87% 1.95% 1.23%
-------- --------- -------- --------
-------- --------- -------- --------
PROVISION FOR LOAN LOSSES TO NET CHARGE-OFFS 0.86 1.14 1.26 1.10
-------- --------- -------- --------
-------- --------- -------- --------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.21% 0.91% 1.21% 0.91%
-------- --------- -------- --------
-------- --------- -------- --------
</TABLE>
23
<PAGE>
- FORECLOSED REAL ESTATE (OREO): Foreclosed real estate is
initially recorded at the lower of the related loan balance or fair
value at the date of foreclosure. At the time of acquisition of
properties in full or partial satisfaction of loans, any excess of the
loan balance over the estimated fair market value of the property is
charged against the allowance for loan losses. The carrying value of
these properties is estimated to approximate the lower of cost or fair
value less estimated cost to sell. Any excess of the carrying value over
the estimated fair market value is charged to operations. Therefore, no
material losses are expected on the final disposition of OREO's.
Management is actively seeking prospective buyers for these foreclosed
real estate properties.
LIABILITIES AND CAPITAL
- -----------------------
LIABILITIES
- -----------
As shown in Table J at page 25 at March 31, 1998 Oriental's total liabilities
reached $1.157 billion, reflecting an increase of $221 million or 24% when
compared to $937 million a year ago. Interest-bearing liabilities, the
Group's sources of funding, amounted to $1.125 billion at March 31, 1998
versus $908 million the year before, a 24% increase. This growth was driven
by increases in deposits and repurchase agreements of 18% or $84 million and
68% or $154 million, respectively.
Deposits, the largest category of the Group's interest -bearing
liabilities and a cost effective source of funding, showed growth in all
areas as they increased to $551 million from $467 million at the same
date last year, up 18%. This growth was fueled by significant increases
in certificate of deposits of 16% or $47 million and IRA accounts of 52%
or $32 million. At the end of the third quarter of fiscal 1998 deposits
represented 49% of the Group's funding sources versus 51% the year
before.
At March 31, 1998 the deposits mix was similar to the one the year
before as savings, demand and NOW accounts represented 19.6% of the
total portfolio, while certificates of deposit were 62.8%, IRA accounts
were 16.9%, and accrued interest comprised .07%. This compares with
22.3%, 64.1%, 13.1% and .05%, respectively, at the end of the same
period of fiscal 1997 for the same categories. Table J1 at page 25
presents the composition of the Group's deposits at the end of the
periods analyzed.
In addition to deposits, Oriental has a diversified source of funding
through the use of FHLB advances and borrowings, repurchase agreements,
term notes, notes payable and lines of credit. As of March 31, 1998
repurchase agreements and other borrowings amounted to $381 million and
$194 million, respectively, compared to $226 million and $214 million,
respectively, at the end of the same quarter of fiscal 1997. A
substantial number of these repurchase agreements and borrowings have
floating rates that are generally hedged through the Group's overall
interest rate risk management process discussed in the Note 8 of the
attached Group's financial statements.
The increase in repurchase agreements and other borrowings was necessary
to fund the increase in interest-earning assets experienced during the
period. The increase in other borrowings was mainly due to increases in
advances from the Federal Home Bank of New York ( "FHLB-NY") since these
advances were often the most available source of funds to the Group. The
FHLB system functions as a source of credit to financial institutions
which are members of a regional Federal Home Loan Bank. As a member of
the of the FHLB-NY the Group can apply for advances from the FHLB-NY
secured by the FHLB-NY stock owned by the Group, certain of the Group's
mortgages and other assets. Table J2 at page 25 presents the
composition of the Group's other borrowings at the end of the periods
analyzed.
CAPITAL AND MARKET PRICES , STOCK DATA AND DIVIDENDS
- -----------------------------------------------------
At March 31, 1998 Oriental's total capital increased by $18.4 million or
21% to $104 million, from $85.6 million a year ago. This increase was
mainly attained through earnings retention and a positive change in the
valuation account for investment securities available-for-sale. See
pages 1 and 3 of this report for Oriental's capital composition at the
end of the period.
The Group continues to be a "well capitalized" institution, the highest
classification available under the capital standards set by the Federal
Deposit Insurance Corporation. To be in a "well capitalized" position,
bank or bank holding companies must meet or exceed a leverage ratio of
5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based
capital ratio of 10%. At the end of the period analyzed the Group had a
leverage ratio of 7.82%; a Tier 1 risk-based ratio of 18.54%; and a
total risk based capital ratio of 19.79% compared to 8.23%, 17.77% and
18.81% ,respectively, at the same date in fiscal 1997.
On August 11, 1997, the Group declared a five-for-four (25%) stock split
on its 8,054,015 shares of common stock outstanding at September 30,
1997. As a result, 1,910,053 shares of common stock were issued on
October 15, 1997 thus increasing shares to 9,965,940.
The Group's common stock is traded in the New York Stock Exchange (NYSE)
under the symbol OFG. Refer to table L at page 25 for the high, low and
closing prices of the Group's stock for each quarter of the last two
fiscal periods. The price per share on the reported last sale price on
the NYSE on March 31, 1988 was $37.13. This represents an increase of
77% from the last sale price a year ago of $ 20.10 already adjusted for
the five-for-four (25%) stock split. The book value at March 31, 1998
rose to $10.39 from $8.63 reported at the same date last year.
24
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, JUNE 30,
1998 1997 1997
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE J - LIABILITIES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS $ 551,483 $ 467,470 $ 497,542
REPURCASE AGREEMENTS 380,757 226,197 247,915
OTHER BORROWINGS 193,649 214,217 204,816
------------ ---------- ----------
INTEREST-BEARING LIABILITIES 1,125,889 907,884 950,273
NON INTEREST-BEARING LIABILITIES 31,584 28,832 28,929
------------ ---------- ----------
TOTAL LIABILITIES $ 1,157,473 $ 936,716 $ 979,202
------------ ---------- ----------
AS A % OF TOTAL INTEREST -BEARING LIABILITIES:
DEPOSITS 49% 51% 52%
REPURCASE AGREEMENTS 34% 25% 26%
OTHER BORROWINGS 17% 24% 22%
------------ ---------- ----------
INTEREST-BEARING LIABILITIES 100% 100% 100%
------------ ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE J1 - DEPOSITS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
% % %
----- ----- -----
SAVINGS ACCOUNTS $ 76,120 13.8% $ 71,335 15.3% $ 72,872 14.6%
DEMAND AND NOW ACCOUNTS 32,053 5.8% 32,599 7.0% 34,123 6.9%
------------------------------------------------------------------
TOTAL SAVINGS, DEMAND AND NOW ACCOUNTS 108,173 19.6% 103,934 22.3% 106,995 21.5%
CERTIFICATES OF DEPOSIT 346,553 62.8% 299,745 64.1% 310,320 62.4%
IRA ACCOUNTS 93,310 16.9% 61,096 13.1% 77,516 15.6%
------------------------------------------------------------------
TOTAL DEPOSITS (excluding accrued interest) 548,036 99.3% 464,775 99.5% 494,831 99.5%
ACCRUED INTEREST 3,447 0.7% 2,695 0.5% 2,711 0.5%
------------------------------------------------------------------
TOTAL DEPOSITS $ 551,483 100.0% $ 467,470 100.0% $ 497,542 100.0%
------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE J2 - OTHER BORROWINGS SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
FHLB FUNDS $ 79,000 $ 78,100 $ 89,800
BONDS PAYABLE 149 617 516
TERM NOTES 114,500 135,500 114,500
LINES OF CREDIT - - -
------------ ---------- ----------
TOTAL OTHER BORROWINGS $ 193,649 $ 214,217 $ 204,816
------------ ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE K - CAPITAL AND CORRESPONDING REGULATORY
CAPITAL RATIOS (IN PERCENT):
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL $ 103,967 $ 85,644 $ 89,394
------------ ---------- ----------
OUTSTANDING SHARES 10,004 9,923 9,988
------------ ---------- ----------
DIVIDENDS DECLARED $ 3,956 $ 3,170 $ 4,369
------------ ---------- ----------
LEVERAGE CAPITAL 7.82% 8.23% 8.17%
------------ ---------- ----------
TIER 1 RISK-BASED CAPITAL 18.54% 17.77% 17.53%
------------ ---------- ----------
TOTAL RISK-BASED CAPITAL 19.79% 18.81% 18.66%
------------ ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE L - MARKET PRICES AND STOCK DATA
- -----------------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE $ 37.13 $ 20.10 $ 22.60
------------ ---------- ----------
HIGH 39.13 21.60 22.60
------------ ---------- ----------
LOW 33.13 16.70 18.20
------------ ---------- ----------
BOOK VALUE 10.39 8.63 8.95
------------ ---------- ----------
DIVIDEND PER SHARE $ 0.150 $ 0.120 $ 0.120
------------ ---------- ----------
PAYOUT RATIO 25.37% 25.57% 24.40%
------------ ---------- ----------
DIVIDEND YIELD 1.81% 2.70% 2.63%
------------ ---------- ----------
</TABLE>
The following provides the high and low prices of the Group's stock
for each quarter of the last two fiscal periods. Common stock prices
were adjusted to give retroactive effect to the stock splits
declared on the Group's common stock.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW PER SHARE
- ------------------------------------------------------ ------------------ ---------------- -------------------
<S> <C> <C> <C>
MARCH 1998 $ 39.13 $ 33.13 $ 0.150
------------ ---------- ----------
DECEMBER 1997 31.50 24.50 0.125
------------ ---------- ----------
SEPTEMBER 1997 29.70 22.60 0.125
------------ ---------- ----------
JUNE 1997 22.60 18.20 0.120
------------ ---------- ----------
MARCH 1997 21.60 16.70 0.120
------------ ---------- ----------
DECEMBER 1996 17.60 14.60 0.100
------------ ---------- ----------
SEPTEMBER 1996 $ 13.08 $ 13.00 $ 0.100
------------ ---------- ----------
</TABLE>
25
<PAGE>
YEAR 2000 COMPLIANCE
- --------------------
The Group has a Year 2000 compliance committee that consists of senior
management, MIS and internal audit personnel and two outside consultants.
This committee has organized a contingency plan to identify and correct all
of the Group's computer applications and softwares that were designed and
develop without considering the impact of the upcoming change in the century.
This process is well under way and management estimates that the costs of
addressing the Year 2000 issues will not exceed $1 million. Most of this
cost first relates to the assignment of internal staff rather than hiring of
outside consultants or additional staff and second to the purchase of
equipment and software, the cost of which will be amortized over a number of
years. Management therefore does not anticipate a material impact to the
Group's results of operations or financial position and that the Group will
be in full compliance when the turn of the century arrives.
During the quarter, the committee determined that all of the Group's systems
are Year 2000 compliant with the exception of a portion of the trust
(expected June 1998) and the broker-dealer (expected December 1998) . The
Group will begin testing to insure compliance during May 1998.
OTHER INFORMATION
- ------------------
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims
under various theories of damages arising out of, and incidental to its
business. The Group is vigorously contesting those claims. Based upon a
review with legal counsel and the development of these matters to date,
management is of the opinion that the ultimate aggregate liability, if any,
resulting from these claims will not have a material adverse effect on the
Group's financial position or the result of operations.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A - FINANCIAL STATEMENTS SCHEDULES
- ----------------------------------
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - REPORTS ON FORM 8-K
- -----------------------
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30,1997.
C - EXHIBITS
- ------------
Exhibits filed as part of this Form 10-Q
<TABLE>
<CAPTION>
NO. EXHIBITS PAGE
- ------------- ------------------------------ -------------
<S> <C> <C>
27.0 Financial Data Schedule E-1
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
DATE: May 13, 1998 By: /s/ Jose E. Fernandez
----------------- ------------------------------
JOSE E. FERNANDEZ
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: May 13, 1998 By: /s/ Ricardo N. Ramos
------------------ -----------------------------
RICARDO RAMOS
SENIOR VICE PRESIDENT FINANCE
27
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