<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 DECEMBER 31, 1997
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)
9,969,562 SHARES OUTSTANDING AS OF DECEMBER 31, 1997
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 .
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<PAGE>
TABLE OF CONTENTS
PAGE
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<TABLE>
<CAPTION>
PART - 1
<S> <C> <C>
ITEM - 1 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31,
1997 (UNAUDITED) AND JUNE 30, 1997. 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER
AND SIX MONTHS PERIOD ENDED DECEMBER 31, 1997 AND 1996. 2
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS PERIOD ENDED DECEMBER 31, 1997 AND 1996. 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS PERIOD ENDED DECEMBER 30, 1997 AND 1996. 4-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-11
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12-27
</TABLE>
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<TABLE>
<CAPTION>
PART - 2
<S> <C> <C>
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 28
ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 28
SIGNATURES 28
</TABLE>
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 (UNAUDITED) AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 9,585 $ 12,812
---------- ----------
MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell 1,500 15,000
Time deposits with other banks 4,000 8,000
Other short-term investments, at cost 2,051 5,224
---------- ----------
TOTAL MONEY MARKET INVESTMENTS 7,551 28,224
---------- ----------
INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at market 40,258 30,930
Investment securities available-for-sale, at market 331,936 197,607
Investment securities held-to-maturity, at cost 195,831 201,790
Federal Home Loan Bank (FHLB) stock, at cost 10,043 10,043
---------- ----------
TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 578,068 440,370
---------- ----------
LOANS:
Loans held for sale 29,100 29,285
Loans receivable 537,026 509,093
---------- ----------
TOTAL LOANS 566,126 538,378
Allowance for loan losses (7,131) (5,408)
---------- ----------
TOTAL LOANS, NET 558,995 532,970
---------- ----------
Accrued interest receivable 13,44 12,350
Foreclosed real estate, net 567 698
Premises and equipment, net 19,498 19,378
Other assets, net 14,837 21,794
---------- ----------
TOTAL ASSETS $1,202,545 $1,068,596
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Deposits $ 531,058 $ 497,542
Securities sold under agreements to repurchase 330,708 247,915
Borrowings under lines of credit - -
Advances and borrowings from Federal Home Loan Bank 104,200 89,800
Term notes and bonds payable 114,778 115,016
Accrued expenses and other liabilities 20,509 28,929
---------- ----------
TOTAL LIABILITIES 1,101,253 979,202
---------- ----------
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;
9,969,562 issued and outstanding in December 31, 1997
and 7,989,787 issued and outstanding in June 30,1997. 9,970 7,990
Additional paid-in capital 27,006 28,631
Legal surplus 4,429 4,002
Retained earnings 56,946 49,694
Treasury stock, at cost, 81,200 shares at December 31,
and June 30, 1997 (1,836) (1,836)
Unrealized gain on securities available-for-sale, net of taxes 4,777 913
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 101,292 89,394
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,202,545 $1,068,596
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER AND SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1997 and 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans $15,202 $13,402 29,536 $26,352
Mortgage-backed securities 5,789 4,151 11,035 8,091
Investment securities 3,624 2,359 7,104 4,488
Other interest-earning assets 262 246 656 543
------- ------- ------- -------
TOTAL INTEREST INCOME 24,877 20,158 48,331 39,474
------- ------- ------- -------
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 6,396 5,108 12,753 9,695
Securities sold under agreements to repurchase 4,531 2,587 8,556 5,502
Other borrowed funds and interest rate risk management 3,458 3,315 6,646 6,213
------- ------- ------- -------
TOTAL INTEREST EXPENSE 14,385 11,010 27,955 21,410
------- ------- ------- -------
------- ------- ------- -------
NET INTEREST INCOME 10,492 9,148 20,376 18,064
------- ------- ------- -------
Provision for loan losses 3,700 1,200 5,000 2,100
------- ------- ------- -------
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,792 7,948 15,376 15,964
------- ------- ------- -------
NON-INTEREST INCOME:
Bank service charges and fees 968 1,291 1,976 2,565
Trust, money management and brokerage fees 1,817 1,551 3,918 3,078
Mortgage banking activities 763 882 2,294 1,446
Gain on sale of servicing rights 2,707 - 2,707 -
Gain on sale of investment securities 264 156 375 313
Trading account income 58 33 168 3
Rent and other operating income 165 198 351 380
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 6,742 4,111 11,789 7,785
------- ------- ------- -------
------- ------- ------- -------
NON-INTEREST EXPENSES:
Compensation and benefits 3,685 3,407 7,536 6,848
Occupancy and equipment 1,246 1,061 2,477 2,057
Professional fees 314 356 653 666
Advertising and promotion 462 362 1,127 703
Real estate owned expenses 11 32 40 99
Insurance, including deposit insurance 265 275 387 548
Communications 328 306 705 566
Other 1,150 988 2,262 1,830
SAIF one-time capitalization assessment - - - 1,823
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 7,461 6,787 15,187 15,140
------- ------- ------- -------
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 6,073 5,272 11,978 8,609
Provision for income taxes 857 875 1,825 1,360
------- ------- ------- -------
NET INCOME $ 5,216 $ 4,397 $10,153 $ 7,249
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Average common shares outstanding 9,966 9,884 9,934 9,899
Average common stock equivalents - options 352 365 338 386
------- ------- ------- -------
TOTAL 10,318 10,249 10,272 10,285
------- ------- ------- -------
------- ------- ------- -------
INCOME PER COMMON SHARE
Basic $ 0.52 $ 0.44 $ 1.02 $ 0.73
------- ------- ------- -------
------- ------- ------- -------
Diluted $ 0.51 $ 0.43 $ 0.99 $ 0.70
------- ------- ------- -------
------- ------- ------- -------
</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 SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<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 70 54
Common stock repurchased and retired - (89)
-------- --------
BALANCE AT END OF PERIOD 9,970 7,916
-------- --------
-------- --------
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 285 118
Common stock repurchased and retired - (1,618)
-------- --------
BALANCE AT END OF PERIOD 27,006 28,416
-------- --------
-------- --------
LEGAL SURPLUS:
Balance at beginning of period 4,002 2,498
Transfer from retained earnings 427 665
-------- --------
BALANCE AT END OF PERIOD 4,429 3,163
-------- --------
-------- --------
RETAINED EARNINGS:
Balance at beginning of period 49,694 39,005
Net income 10,153 7,249
Dividends declared and cash paid on fractional shares (2,474) (1,979)
Transfer to legal surplus (427) (665)
-------- --------
BALANCE AT END OF PERIOD 56,946 43,610
-------- --------
-------- --------
TREASURY STOCK:
Balance at beginning of period (1,836) -
Treasury stock purchased - -
-------- --------
BALANCE AT END OF PERIOD (1,836) -
-------- --------
-------- --------
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 3,864 104
-------- --------
BALANCE AT END OF PERIOD 4,777 637
-------- --------
-------- --------
TOTAL STOCKHOLDERS' EQUITY $101,292 $ 83,742
-------- --------
-------- --------
</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 SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 10,153 $ 7,249
--------- ---------
--------- ---------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Amortization of deferred loan origination fees and costs (1,681) (1,472)
Amortization of premiums and accretion of discounts
mortgage-backed and investment securities 495 2,852
Depreciation and amortization of premises and equipment 1,209 1,059
Provision for loan losses 5,000 2,100
Gain on sale of available-for-sale securities (375) (313)
Gain on sale of servicing rights (2,707) -
Mortgage banking activities (1,438) (1,446)
Increase in trading securities (9,328) (5,205)
Increase in accrued interest receivable (1,094) (1,871)
Decrease (increase) in other assets 9,664 (2,319)
Decrease in accrued expenses and liabilities (9,764) (413)
--------- ---------
TOTAL ADJUSTMENTS (10,019) (7,028)
--------- ---------
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES 134 221
--------- ---------
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in securities purchased under agreements to resell 13,500 2,129
Purchases of investment securities available-for-sale (117,785) (48,256)
Sales of investment securities available-for-sale 25,887 82,490
Maturities of investment securities available-for-sale 23,580 50
Purchases of investment securities held-to-maturity (3,041) (24,702)
Maturities and redemptions of investment securities held-to-maturity 8,816 2,926
Purchases of Federal Home Loan Bank Stock - (394)
Redemption of Federal Home Loan Bank Stock - -
Net origination of loans (88,571) (96,770)
Capital expenditures (1,329) (2,082)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES $(138,942) $ (84,609)
--------- ---------
--------- ---------
</TABLE>
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits $ 33,516 $ 51,819
Securities sold under agreements to repurchase 82,793 (37,456)
Borrowings under lines of credit - -
Advances and borrowings from FHLB 14,400 23,900
Issuance of term notes - 60,000
Payment of term notes - (13,000)
Principal payments of bonds payable (238) (271)
Proceeds from exercise of stock options 355 172
Repurchase of common stock - (1,707)
Dividends and cash paid on fractional shares (2,417) (1,979)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 128,409 81,478
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,400) (2,910)
Cash and cash equivalents at beginning of period 26,036 16,955
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,636 $ 14,045
--------- ---------
--------- ---------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 9,585 $ 8,235
Time deposits with other banks 4,000 4,700
Other short-term investments 2,051 1,110
--------- ---------
$ 15,636 $ 14,045
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 26,800 $ 15,300
--------- ---------
--------- ---------
Income taxes $ 923 $ 2,634
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate foreclosed as payment of loans $ 80 $ 90
--------- ---------
--------- ---------
Real estate loans securiticized into mortgage-backed securities $ 60,800 $ 63,400
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
<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 December 31, 1996 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 December 31, 1997 and June
30, 1997 as well as the results of operations and cash flows for the six months
ended December 31, 1997 and December 31, 1996. The results of operations for
the six months ended December 31, 1997 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 sixteen 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:
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 income per common share
includes the effect of common stock equivalents which are computed using the
Treasury Stock Method. Stock options outstanding under Oriental's stock
option plan for officers and employees are the only outstanding common stock
equivalents. The weighted average common shares and common stock equivalent
shares outstanding for the quarter and six months period ended December 31,
1997 and 1996 were 10,318,149 and 10,248,705, respectively, and 10,272,295
and 10,285,910, respectively. For the income per share calculation refer to
the consolidated statement of income at page 2.
NOTE 4 - INVESTMENT SECURITIES:
TRADING SECURITIES:
The Group classifies as trading debt and equity securities that are bought and
held principally for the purpose of selling them in the near term. The
securities 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.
6
<PAGE>
The fair value of trading securities is based on quoted market prices. At
December 31, 1997 and and June 30, 1997 , the amortized cost and fair market
value of securities held for trading were $40,140,000 and $40,258,000 and
$30,909,000 and $30,930,000, respectively. At December 31, 1997, gross holding
unrealized gains and gross unrealized losses amounted to $118,000 and $0,
respectively.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The Group classifies as available-for-sale debt and equity securities not
classified as either held-to-maturity or trading securities. 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 estimated fair value of investment securities is based
on quoted market prices or dealer quotes. Expected maturities of mortgage-
backed securities may differ from contractual maturities because of prepayments
and other market factors. The amortized cost, estimated fair value, weighted
average yield and related contractual maturities of debt and equity securities
available-for-sale by category at December 31, and June 30, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
--------------------------------------- -----------------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST VALUE YIELD
--------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES GOVERNMENT OBLIGATIONS:
Average maturity of 6 years and
8 months at December and 5 years and
1 month at June.
Due from one to five years $42,838 $43,776 6.92% $62,847 $63,197 6.76%
Due from five to ten years 144,428 148,706 6.50 47,339 47,435 6.78
---------- --------- ------ --------- --------- -------
187,266 192,482 6.60 110,186 110,632 6.77
---------- --------- ------ --------- --------- -------
PUERTO RICO GOVERNMENT OBLIGATIONS:
Average maturity of 14 years and
5 months at December and 14 years and
11 months at June.
Due from one to five years 5,165 5,095 5.55 5,212 5,170 5.55
Due over ten years 26,312 26,250 8.00 28,879 29,107 7.97
---------- --------- ------ --------- --------- -------
31,477 31,345 7.61 34,091 34,277 7.60
---------- --------- ------ --------- --------- -------
---------- --------- ------ --------- --------- -------
MORTGAGE - BACKED SECURITIES:
Average maturity of 18 years and
5 months at September and 20 years
and 9 months at June.
Due from one to five years 26 26 6.67 416 408 5.94
Due from five to ten years 1,485 1,513 6.78 797 807 6.98
Due over ten years 105,314 106,570 7.16 50,899 51,483 6.91
---------- --------- ------ --------- --------- -------
106,824 108,109 7.15 52,122 52,698 6.90
---------- --------- ------ --------- --------- -------
$325,567 $331,936 6.87% $196,389 $197,607 6.94%
---------- --------- ------ --------- --------- -------
---------- --------- ------ --------- --------- -------
</TABLE>
At December 31, and June 30, 1997 mortgage-backed securities available-for-sale
consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------- --------------------------
<S> <C> <C> <C> <C>
MORTGAGE - BACKED SECURITIES:
GNMA $ 31,847 $32,398 $ 41,620 $ 42,178
FNMA 55,656 56,113 - -
FHLMC 19,267 19,532 10,438 10,454
Mortgage Pass Through Certificates 54 66 54 66
----------- ---------- --------- ----------
$106,824 $108,109 $52,112 $52,698
----------- ---------- --------- ----------
----------- ---------- --------- ----------
</TABLE>
7
<PAGE>
The Puerto Rico government obligations due over ten years category includes an
AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of
$27,250,000 which commenced paying down principal on August 1, 1994, and is
expected to be fully collected during 1998.
At December 31, 1997, gross unrealized gains and gross unrealized losses
amounted to $6,525,000 and $156,000, respectively. These amounted to $1,620,000
and $402,000, respectively at June 30, 1997. At December 31, and June 30, 1997
unrealized gains on securities available-for-sale of $4,777,000 and $913,000,
respectively, net of deferred income tax of $1,592,000 and $305,000
respectively, were reported as a separate component of stockholders' equity.
Proceeds from the sale of investment securities available-for-sale during the
six months period ended December 31, 1997, were $25,887,000. Gross realized
gains and losses on those sales during the year were $445,000 and 70,000,
respectively.
INVESTMENT SECURITIES HELD-TO-MATURITY:
The Group classifies as held-to-maturity debt securities for which the Group has
the positive intent and ability to hold to maturity. These securities are
carried at amortized cost. Expected maturities of mortgage-backed securities may
differ from contractual maturities because of prepayments and other market
factors. The carrying value, estimated fair value, weighted average yield and
related contractual maturities of debt and equity securities held-to-maturity
by category at December 31, and June 30, 1997 are as follows ( in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
--------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST VALUE YIELD
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PUERTO RICO GOVERNMENT OBLIGATIONS:
Average maturity of 8 years and
2 months at December and 8 years and
8 months at June.
Due from five to ten years $ 1,010 $ 1,020 6.73% $ 1,013 $ 1,020 6.73%
Due over ten years 2,571 2,588 7.69 2,583 2,588 7.69
---------- --------- ------ --------- --------- -------
3,581 3,608 7.41 3,586 3,608 7.41
---------- --------- ------ --------- --------- -------
MORTGAGE - BACKED SECURITIES:
Average maturity of 12 years and
4 months at December and 14 years and
6 months at June.
Due from one to five years 119 121 7.56 261 261 6.27
Due from five to ten years 10,438 10,627 7.10 3,285 3,346 6.99
Due over ten years 181,693 184,199 7.22 194,658 195,228 6.97
---------- --------- ------ --------- --------- -------
192,250 194,947 7.21 198,204 198,835 6.97
---------- --------- ------ --------- --------- -------
$195,831 $198,555 7.21% $201,790 $202,443 6.94%
---------- --------- ------ --------- --------- -------
---------- --------- ------ --------- --------- -------
</TABLE>
The mortgage-backed securities due over ten years category includes
approximately $81,000,000 of the short end of certain Puerto Rico GNMA tax
exempt serial certificates with an average expected life of 4 to 6 years. At
December 31, mortgage-backed securities held-to-maturity were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
------------------------- --------------------------
CARRYING FAIR AMORTIZED FAIR
VALUE VALUE VALUE VALUE
------------------------- --------------------------
<S> <C> <C> <C> <C>
MORTGAGE - BACKED SECURITIES:
GNMA $ 142,480 $ 143,533 $ 149,275 $ 149,081
FNMA 41,480 42,331 38,439 38,650
FHLMC 5,431 5,579 7,205 7,369
Mortgage Pass Through Certificates 2,859 3,504 3,285 3,735
----------- ---------- --------- ----------
$192,250 $ 194,947 $ 198,204 $ 198,835
----------- ---------- --------- ----------
----------- ---------- --------- ----------
</TABLE>
Gross unrealized gains and gross unrealized losses at December 31, 1997 amounted
to $3,067,000 and $343,000, respectively. These amounted to $1,652,000 and
$999,000, respectively, at June 30, 1997.
8
<PAGE>
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.
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,
manufacturing, tourism, government, 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 December 31, and June 30, 1997 was
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------- ------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $ 241,694 $ 225,382
Commercial 8,658 9,087
Home equity loans 3,408 5,436
Construction, land acquisition and land improvements 3,889 4,391
-------------- ------------
257,649 244,296
Less: net deferred loan fees and servicing rights sold (2,515) (239)
Less: undisbursed portion of loans in process (1,053) (2,093)
-------------- ------------
LOANS SECURED BY REAL ESTATE, NET 254,081 241,964
-------------- ------------
OTHER LOANS:
Commercial loans 11,036 10,512
Auto loans 10,199 14,882
Personal loans 91,007 69,773
Personal lines of credit 6,125 5,190
Cash collateral loans 2,815 2,827
Financing leases 199,767 205,077
-------------- ------------
320,949 308,261
Less: unearned interest (38,004) (41,131)
-------------- ------------
OTHER LOANS, NET 282,945 267,130
-------------- ------------
Loans receivable 537,026 509,093
Allowance for loan losses (7,131) (5,408)
-------------- ------------
LOANS RECEIVABLE, NET 529,895 503,685
Loans held for sale 29,100 29,285
-------------- ------------
TOTAL LOANS,NET $ 558,995 $ 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 December
31, 1997 and 1996 and their average for the six months period ended is not
significant.
9
<PAGE>
Refer to Table D at page 21 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 six months period ended
December 31, 1997 and 1996.
NOTE 6 - ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK:
At December 31, 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 DEC. 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 10,000 FEBRUARY 1998 Floating due monthly - 6.05% at 12/31/97
ADVANCE 30,200 13,800 OVERNIGHT LINE OF CREDIT Floating due daily - 6.48% at 12/31/97
ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.71% - Callable March 1998
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
---------------------------
104,200 $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 December 31, and June 30, 1997 Term Notes and Bonds Payable consist of the
following ( in thousands):
<TABLE>
<CAPTION>
TYPE DEC. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 Fixed - 4.81%
TERM NOTE 10,000 10,000 DECEMBER 1999 Floating due quarterly - 4.77% at 12/31/97 (A) (C)
TERM NOTE 10,000 10,000 JANUARY 2000 Floating due quarterly - 4.77% at 12/31/97 (A) (C)
TERM NOTE 6,500 6,500 DECEMBER 2000 Floating due quarterly - 5.08% at 12/31/97 (B) (C)
TERM NOTE 20,000 20,000 MARCH 2001 Floating due quarterly - 5.18% at 12/31/97 (B) (C)
TERM NOTE 10,000 10,000 SEPTEMBER 2001 Floating due quarterly - 5.51% at 12/31/97 (B) (C)
TERM NOTE 30,000 30,000 SEPTEMBER 2001 Floating due quarterly - 5.29% at 12/31/97 (B) (C)
TERM NOTE 5,000 5,000 DECEMBER 2001 Floating due quarterly - 5.02% at 12/31/97 (B) (C)
TERM NOTE 15,000 15,000 MARCH 2007 Floating due quarterly - 5.34% at 12/31/97 (B) (C)
BOND 278 516 APRIL 2008 Fixed - 8.38% (d)
---------------------------
$114,778 $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
December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Pay fixed swaps - notional amount $345,000
Weighted average pay rate - fixed 5.78%
Weighted average receive rate - floating 5.46%
Maturity (in months) 1 to 28
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 December 31, 1997, interest
rate swap maturities by fiscal year are as follows (in thousands):
<TABLE>
YEAR ENDING JUNE 30, AMOUNT
-------------------- -----------
<S> <C>
1998 $ 140,000
1999 195,000
2000 10,000
-----------
$ 345,000
-----------
-----------
</TABLE>
The following table summarizes the changes in notional amounts of swaps
outstanding during six months period ended on December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at June 30, 1997 $ 370,000
New swaps 55,000
Maturities (80,000)
-----------
Balance at December 31, 1997 $ 345,000
-----------
-----------
</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 December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Cap agreements - notional amount $120,000
Cap rate 6.00 - 6.50%
Current 90 day LIBOR 5.69%
Maturity (in months) 9 to 15
</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 $29,432,000 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 December
31, 1997 total Investors' CD and IRA deposits amounted to $30,883,000.
11
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW SUMMARY
Oriental Financial Group, the bank holding company of Oriental Bank & Trust,
reported an increase of 19% in net income for the second quarter of fiscal
1998. The Group's net income for the second quarter of fiscal 1998 increased
to $5,215,887 or $.51 per share from $4,396,730 or $.43 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 increased 40% to $10,152,805 or $.99 per share versus
$7,249,524 or $.70 per share reported a year ago. Excluding the SAIF $1.3
million adjustment in fiscal 1997, net income for the six-month period
increased 18% from $8,581,526 or $.83 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 fee revenues.
Oriental continued to experience a favorable growth in its diversified asset
base which contributed to income expansion across its business lines. Total
financial assets owned or managed (excluding loans serviced for third parties
which were sold on October 1997) increased 27% to $ 2.9 billion at December
31, 1997 from the $ 2.3 billion owned or managed one year ago. As of
December 31, 1997, total financial assets consisted of $1.2 billion owned by
the Bank, $ 1.1 billion managed by the trust and $561 million gathered by
the broker-dealer.
During this past quarter, 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.
For the second quarter of fiscal 1998 trust, money management and brokerage
fees increased 20% to $1.8 million, compared to $1.5 million in the same
quarter of fiscal 1997. Mortgage banking activities (excluding servicing
income) increased 98% to $623,000 compared to $314,000 for the same period
fiscal 1997. Bank services fees and charges and other income amounted to $1.1
million, compared to $1.5 million in fiscal 1997, a decrease of 27%.
For the first six months of fiscal 1998 trust, money management and brokerage
fees increased 26% to $3.9 million, compared to $3.1 million the year before.
Mortgage banking activities (excluding servicing income) increased 300% to
$1.4 million, compared to $358,000 for the same period a year ago. Bank
services fees and charges and other income amounted to $2.3 million, compared
to $2.9 million in fiscal 1997, a decrease of 21%.
Net interest income for the second quarter of fiscal 1998 rose 15% to $10.5
million versus $9.1 million reported in the same period of fiscal 1997. For
the six-month period net interest income increased 13% to $20.4 million from
$18.1 million reported in the same period a year ago. The increase in net
interest income resulted from growth in the Group's loan portfolio and other
interest-earning assets. Average interest-earning assets for the second
quarter of fiscal 1998 reached $1.1 billion an increase of 27% compared with
$867 million for the same quarter of fiscal 1997. For the six-month period
average interest-earning assets grew 27% to $ 1.1 billion from $851 million a
year ago.
For the second quarter of fiscal 1998 the Group provided $ 3.7 million for
loan losses compared with $1.2 million for the same period of fiscal 1997, an
increase of $2.5 or 208 %. For the six-month period ended December 31, 1997,
the provision for loan losses amounted to $5 million compared with $2.1
million a 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.
Recurring non-interest expenses for the second quarter of fiscal 1998
increased 9% million to $7.4 million as compared to $6.8 million during the
same period of fiscal 1997. For the first six months of fiscal 1998 they
increased 14% to $15.1 million from $13.3 million a year ago. The increase
results mainly from the expanded push in the retail area and higher outlays
for support services as the Group's businesses continue to expand. The
efficiency ratio and the expense ratio for the first six months of fiscal
1998 amounted 52.35% and 1.22%, respectively, compared to 52.16% and 1.35%,
respectively, the year before.
12
<PAGE>
ORIENTAL FINANCIAL GROUP
FINANCIAL HIGHLIGHTS
IN THOUSANDS (EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION> --------------------------------
PERCENT FISCAL
INCREASE --------------------------------
(DECREASE) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PERIOD END BALANCES:
INTEREST-EARNING ASSETS 26% $ 1,144,614 $ 908,611
-------------- ------------- -----------
TOTAL BANK ASSETS 25% 1,202,545 965,876
-------------- ------------- -----------
TOTAL FINANCIAL ASSETS (EXCLUDING LOANS SERVICED FOR OTHERS) 27% 2,883,900 2,278,400
-------------- ------------- -----------
INTEREST-BEARING LIABILITIES 26% 1,080,744 855,350
-------------- ------------- -----------
TOTAL LIABILITIES 25% 1,101,253 882,134
-------------- ------------- -----------
CAPITAL 21% $ 101,292 $ 83,742
-------------- ------------- -----------
OPERATING RESULTS:
INTEREST INCOME 22% $ 48,331 $ 39,474
INTEREST EXPENSE 31% 27,955 21,410
-------------- ------------- -----------
NET INTEREST INCOME 13% 20,376 18,064
PROVISION FOR LOAN LOSSES 138% 5,000 2,100
-------------- ------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES (4%) 15,376 15,964
-------------- ------------- -----------
BANK SERVICE CHARGES AND FEES AND OTHER INCOME (21%) 2,327 2,945
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 27% 3,918 3,078
MORTAGE BANKING ACTIVITIES 59% 2,294 1,446
GAIN ON SALE OF SERVICING RIGHTS 100% 2,707 -
NET GAIN ON SALE OF INVESTMENT SECURITIES 72% 543 316
NON-INTEREST EXPENSES 14% 15,187 13,317
SPECIAL SAIF ONE-TIME CAPITALIZATION ASSESSMENT (100%) - 1,823
-------------- ------------- -----------
NET INCOME BEFORE INCOME TAXES 39% 11,978 8,609
PROVISION FOR INCOME TAXES 34% 1,825 1,360
-------------- ------------- -----------
NET INCOME 40% 10,153 7,249
SAIF ASSESSMENT, NET OF INCOME TAXES (100%) - 1,333
-------------- ------------- -----------
NET OPERATING INCOME (EXCLUDING SAIF ASSESSMENT) 18% $ 10,153 $ 8,582
-------------- ------------- -----------
PER SHARE DATE:
NET INCOME EXCLUDING SAIF - BASIC 18% $ 1.02 $ 0.87
-------------- ------------- -----------
NET INCOME EXCLUDING SAIF - DILUTED 18% 0.99 0.83
-------------- ------------- -----------
BOOK VALUE 20% 10.16 8.46
-------------- ------------- -----------
MARKET PRICE 77% 29.56 16.70
-------------- ------------- -----------
DIVIDENDS DECLARED 25% 2,474 1,979
-------------- ------------- -----------
OUTSTANDING SHARES AT END OF PERIOD 1% $ 9,970 $ 9,895
-------------- ------------- -----------
FINANCIAL RATIOS:
RETURN ON AVERAGE ASSETS 1.73% 1.86%
------------- -----------
------------- -----------
RETURN ON AVERAGE EQUITY 21.09% 20.89%
------------- -----------
------------- -----------
EFFICIENCY RATIO 52.35% 52.16%
------------- -----------
------------- -----------
EXPENSE RATIO 1.22% 1.35%
------------- -----------
------------- -----------
</TABLE>
13
<PAGE>
Oriental's total bank assets at December 31, 1997 reached $1.2 billion, an
increase of 25% when compared to $966 million at the end of the same period
of fiscal 1997. This resulted from the growth in investment and trading
securities of $190 million or 49%, to $578 million from $388 million a year
ago, and loans receivable and loans held for sale, net of the allowance for
loan losses, of $49 million, or 10%, from $510 million at December 31, 1996
to $559 million at December 31, 1997. In response to the change in asset mix,
return on average assets amounted to 1.73% versus 1.86% during the same
period of last year.
Stockholders' equity at December 31, 1997 reached $101 million compared to
$84 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 December 31, 1997 were 19.45% and 7.97%, respectively, which are well
above the minimum capital ratios required by regulatory agencies. Return on
average equity improved to 21.09% from 20.60%.
Oriental Financial Group is a bank holding company, established in fiscal
1997, to provide greater flexibility in managing the diversified financial
services offered to clients throughout Puerto Rico. The core businesses of
the Group are trust, money management, financial planning and investment
brokerage services, as well as consumer banking through a 16 branch
islandwide network, which concentrates on serving the market with auto and
equipment lease financing, mortgage lending, personal loans and deposit
accounts.
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 second quarter ended on December 31, 1997
increased by 15% or $1.3 million to $10.5 million from $9.1 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. For the first six months period net interest income
was up by 13% or $2.3 million to $20.4 million from $18.1 million in the
prior fiscal year. The improvement in net interest income was the result of
an increase of $2.9 million due to a higher volume of interest-earning
assets partially offset by an unfavorable effect in rate of $613,000 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 fell to 3.60% and 3.82%,
respectively, for the second quarter of fiscal 1998 as compared to 3.94% and
4.25% respectively, for the second quarter of fiscal 1997. The interest rate
spread and net interest margin decreased to 3.58% and 3.81%, respectively,
for the six months ended on December 31, 1997 as compared to 3.96% and 4.27%
attained during the same period the year before. The interest-earning assets
to interest-bearing liabilities ratio for the second quarter of fiscal 1998
amounted to 104.49% versus 106.18%. Total average interest earning assets
exceeded total average interest bearing liabilities by $47.5 million. For
the six month periods ended the ratio amounted to 104.46% versus 106.27% and
total average interest earning assets exceeded total average interest bearing
liabilities by $46 million. The decrease in these ratios 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 24.
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.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE - A SECOND 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> <C>
INTEREST-EARNING ASSETS:
(A) REAL ESTATE LOANS $ 6,734 $ 282,718 9.53% $ 6,035 $ 243,300 9.92%
(A) CONSUMER LOANS 3,443 99,250 13.76% 2,598 82,688 12.46%
(A) COMMERCIAL LOANS 268 10,119 10.61% 231 8,755 10.57%
(A) FINANCING LEASES 4,757 153,349 12.41% 4,538 153,807 11.80%
-------- ----------- ------ -------- ---------- ------
TOTAL LOANS 15,202 545,436 11.12% 13,402 488,550 10.95%
-------- ----------- ------ -------- ---------- ------
MORTAGE-BACKED SECURITIES 5,789 324,990 7.13% 4,151 231,025 7.19%
INVESTMENT SECURITIES 3,624 215,125 6.74% 2,359 128,001 7.37%
OTHER INTEREST-EARNING ASSETS 262 19,890 5.15% 246 19,825 4.86%
-------- ----------- ------ -------- ---------- ------
TOTAL INVESTMENTS 9,675 560,005 6.91% 6,756 378,851 7.13%
-------- ----------- ------ -------- ---------- ------
TOTAL INTEREST-EARNING ASSETS $ 24,877 $ 1,105,441 8.99% 20,158 $ 867,401 9.28%
-------- ----------- ------ -------- ---------- ------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 687 $ 103,247 2.64% $ 600 $ 92,810 2.56%
CERTIFICATES OF DEPOSIT 4,484 328,336 5.42% 3,575 266,234 5.33%
OTHER CERTIFICATES OF DEPOSIT 1,225 79,268 6.14% 933 56,139 6.59%
-------- ----------- ------ -------- ---------- ------
TOTAL DEPOSITS 6,396 510,851 4.97% 5,108 415,183 4.88%
-------- ----------- ------ -------- ---------- ------
REPURCHASE AGREEMENTS 4,531 326,258 5.51% 2,587 205,255 5.00%
LINES OF CREDIT 23 778 11.76% 110 6,111 7.04%
FHLB ADVANCES 1,108 76,473 5.75% 433 30,527 5.63%
FHLB BORROWINGS 442 28,731 6.10% 404 26,000 6.17%
BONDS PAYABLE 8 359 8.98% 16 732 8.79%
TERM NOTES 1,521 114,500 5.27% 1,741 133,134 5.19%
INTEREST RATE RISK MANAGEMENT 356 YIELD AJE. 0.26% 611 YIELD AJE. 0.60%
-------- ----------- ------ -------- ---------- ------
TOTAL OTHER BORROWINGS 7,989 547,099 5.79% 5,902 401,759 5.83%
-------- ----------- ------ -------- ---------- ------
-------- ----------- ------ -------- ---------- ------
TOTAL INTEREST-BEARING LIABILITIES $ 14,385 $ 1,057,950 5.39% $ 11,010 $ 816,942 5.34%
-------- ----------- ------ -------- ---------- ------
-------- ----------- ------ -------- ---------- ------
NET INTEREST EARNING ASSETS $ 10,492 $ 47,491 3.60% $ 9,148 $ 50,459 3.94%
-------- ----------- ------ -------- ---------- ------
-------- ----------- ------ -------- ---------- ------
INTEREST RATE MARGIN 3.82% 4.25%
----------- ----------
----------- ----------
NET INTEREST-EARNING ASSETS RATIO 104.49% 106.18%
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PART - I I INCREASE / (DECREASE) DUE TO:
- -------------------------------------------------------------------------------------------------------------------------------
FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL %
------- -------- ------ -----
<S><C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 939 $ (240) $ 699 12.0%
CONSUMER LOANS 576 269 845 33.0%
COMMERCIAL LOANS 36 1 37 16.0%
FINANCING LEASES (14) 233 219 5.0%
------- -------- ------ -----
TOTAL LOANS 1,537 263 1,800 13.0%
------- -------- ------ -----
MORTAGE-BACKED SECURITIES 1,673 (35) 1,638 39.0%
INVESTMENT SECURITIES 1,468 (203) 1,265 54.0%
OTHER INTEREST-EARNING ASSETS 2 14 16 7.0%
------- -------- ------ -----
TOTAL INVESTMENTS 3,143 (224) 2,919 43.0%
------- -------- ------ -----
TOTAL INTEREST-EARNING ASSETS $4,680 $ 39 $4,719 23.0%
------- -------- ------ -----
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 69 $ 18 $ 87 15.0%
CERTIFICATES OF DEPOSIT 849 60 909 25.0%
OTHER CERTIFICATES OF DEPOSIT 356 (64) 292 31.0%
------- -------- ------ -----
TOTAL DEPOSITS 1,274 14 1,288 25.0%
------- -------- ------ -----
REPURCHASE AGREEMENTS 1,683 261 1,944 75.0%
LINES OF CREDIT (159) 72 (87) (79.0%)
FHLB ADVANCES 666 9 675 156.0%
FHLB BORROWINGS 42 (4) 38 9.0%
BONDS PAYABLE (8) - (8) (50.0%)
TERM NOTES (247) 27 (220) (13.0%)
INTEREST RATE RISK MANAGEMENT 92 (347) (255) (42.0%)
------- -------- ------ -----
TOTAL OTHER BORROWINGS 2,069 18 2,087 35.0%
------- -------- ------ -----
------- -------- ------ -----
TOTAL INTEREST-BEARING LIABILITIES $3,343 $ 32 $3,375 31.0%
------- -------- ------ -----
------- -------- ------ -----
NET INTEREST EARNING ASSETS $1,337 $ 7 $1,344 15.0%
------- -------- ------ -----
------- -------- ------ -----
(A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
TABLE - A1 SIX 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> <C>
INTEREST-EARNING ASSETS:
(A) REAL ESTATE LOANS $ 13,227 $ 278,147 9.51% $ 11,820 $ 239,314 9.88%
(A) CONSUMER LOANS 6,493 94,675 13.60% 5,055 80,964 12.39%
(A) COMMERCIAL LOANS 561 9,859 11.38% 419 7,972 10.51%
(A) FINANCING LEASES 9,255 155,902 11.87% 9,058 152,253 11.90%
--------- ---------- ------ --------- ---------- ------
TOTAL LOANS 29,536 538,583 10.94% 26,352 480,503 10.95%
--------- ---------- ------ --------- ---------- ------
MORTAGE-BACKED SECURITIES 11,035 308,857 7.15% 8,091 225,249 7.18%
INVESTMENT SECURITIES 7,104 209,999 6.77% 4,488 123,671 7.26%
OTHER INTEREST-EARNING ASSETS 656 20,367 6.30% 543 22,122 4.80%
--------- ---------- ------ --------- ---------- ------
TOTAL INVESTMENTS 18,795 539,223 6.97% 13,122 371,042 7.07%
--------- ---------- ------ --------- ---------- ------
TOTAL INTEREST-EARNING ASSETS $ 48,331 $1,077,806 8.95% 39,474 $ 851,545 9.26%
--------- ---------- ------ --------- ---------- ------
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 1,359 $ 102,759 2.62% $ 1,176 $ 90,409 2.58%
CERTIFICATES OF DEPOSIT 8,965 328,694 5.41% 6,680 249,289 5.32%
OTHER CERTIFICATES OF DEPOSIT 2,429 78,363 6.15% 1,839 55,382 6.59%
--------- ---------- ------ --------- ---------- ------
TOTAL DEPOSITS 12,753 509,816 4.96% 9,695 395,080 4.87%
--------- ---------- ------ --------- ---------- ------
REPURCHASE AGREEMENTS 8,556 310,540 5.47% 5,502 229,099 4.76%
LINES OF CREDIT 38 389 18.87% 235 6,269 7.33%
FHLB ADVANCES 2,011 68,990 5.78% 866 30,880 5.57%
FHLB BORROWINGS 840 27,154 6.13% 808 26,000 6.16%
BONDS PAYABLE 19 421 8.86% 36 813 8.74%
TERM NOTES 3,039 114,500 5.27% 3,012 113,167 5.28%
INTEREST RATE RISK MANAGEMENT 699 YIELD AJE. 0.27% 1,256 YIELD AJE. 0.61%
--------- ---------- ------ --------- ---------- ------
TOTAL OTHER BORROWINGS 15,202 521,994 5.78% 11,715 406,228 5.72%
--------- ---------- ------ --------- ---------- ------
--------- ---------- ------ --------- ---------- ------
TOTAL INTEREST-BEARING LIABILITIES $ 27,955 $1,031,810 5.37% $ 21,410 $ 801,308 5.30%
--------- ---------- ------ --------- ---------- ------
--------- ---------- ------ --------- ---------- ------
NET INTEREST EARNING ASSETS $ 20,376 $ 45,996 3.58% $ 18,064 $ 50,237 3.96%
--------- ---------- ------ --------- ---------- ------
--------- ---------- ------ --------- ---------- ------
INTEREST RATE MARGIN 3.81% 4.27%
---------- ----------
---------- ----------
NET INTEREST-EARNING ASSETS RATIO 104.46% 106.27%
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
PART - I I INCREASE / (DECREASE) DUE TO:
FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL %
-------- ------- -------- -----
<S><C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 1,847 $ (440) $ 1,407 12.0%
CONSUMER LOANS 945 493 1,438 28.0%
COMMERCIAL LOANS 107 35 142 34.0%
FINANCING LEASES 217 (20) 197 2.0%
-------- ------- -------- -----
TOTAL LOANS 3,116 68 3,184 12.0%
-------- ------- -------- -----
MORTAGE-BACKED SECURITIES 2,988 (44) 2,944 36.0%
INVESTMENT SECURITIES 2,921 (305) 2,616 58.0%
OTHER INTEREST-EARNING ASSETS (53) 166 113 21.0%
-------- ------- -------- -----
TOTAL INVESTMENTS 5,856 (183) 5,673 43.0%
-------- ------- -------- -----
TOTAL INTEREST-EARNING ASSETS $ 8,972 $ (115) $ 8,857 22.0%
-------- ------- -------- -----
INTEREST-BEARING LIABILITIES
SAVINGS AND DEMAND ACCOUNTS $ 163 $ 20 $ 183 16.0%
CERTIFICATES OF DEPOSIT 2,167 118 2,285 34.0%
OTHER CERTIFICATES OF DEPOSIT 711 (121) 590 32.0%
-------- ------- -------- -----
TOTAL DEPOSITS 3,041 17 3,058 32.0%
-------- ------- -------- -----
REPURCHASE AGREEMENTS 2,251 803 3,054 56.0%
LINES OF CREDIT (559) 362 (197) (84.0%)
FHLB ADVANCES 1,112 33 1,145 132.0%
FHLB BORROWINGS 35 (3) 32 4.0%
BONDS PAYABLE (17) - (17) (47.0%)
TERM NOTES 35 (8) 27 1.0%
INTEREST RATE RISK MANAGEMENT 149 (706) (557) (44.0%)
-------- ------- -------- -----
TOTAL OTHER BORROWINGS 3,006 481 3,487 30.0%
-------- ------- -------- -----
TOTAL INTEREST-BEARING LIABILITIES $ 6,047 $ 498 $ 6,545 31.0%
-------- ------- -------- -----
NET INTEREST EARNING ASSETS $ 2,925 $ (613) $ 2,312 13.0%
-------- ------- -------- -----
(A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS.
</TABLE>
16
<PAGE>
Oriental's interest income for the second quarter of fiscal 1998 increased
by 23% or $4.7 million to $24.9 million from $20.2 million posted in fiscal
1997. The growth in interest income was totally due to a positive volume
variance of $4.7 million resulting from a growth in the average volume of
interest-earning assets of $238 million or 27%. Average interest-earning
assets for the second quarter of fiscal 1998 reached $1.1 billion versus
$867 million a year ago.
For the first six months of fiscal 1998 interest income rose by 22% or $8.8
million to $48.3 million from $39.5 million posted in fiscal 1997. This
growth was possible to a positive volume variance of $9 million as result of
a larger average volume of interest-earning assets. Average interest-earning
assets increased to $1.077 billion for the first quarter of fiscal 1998
compared with $852 million in fiscal 1997, up %27 or $226 million. To a
lesser extent, interest income was negatively affected by $115,000 due to the
lower yields attained on interest-earning assets.
The growth in the average volume of interest-earning assets for the periods
analyzed was fueled by increases in investment and mortgage-backed
securities. For second quarter of fiscal 1998 average investments and
mortgage-backed securities rose 68% or $87 million and 41% or $94 million,
respectively. For six month period of fiscal 1998 average investments and
mortgage-backed securities increased 70% or $86 million and 37% or $84
million, respectively. 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 51% and 50%, respectively, of average
interest-earning assets in fiscal 1998 versus 44% and 43%, respectively, a
year ago.
The yield on interest-earning assets for the first quarter and first six
months of fiscal 1998 decreased to 8.99% and 8.95% ,respectively, from 9.28%
and 9.26%, 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, as previously discussed.
Interest expense for the second quarter of fiscal 1998 increased 31% or $3.4
million to $14.4 million from $11 million reported in the same period of
fiscal 1997. For the first six months of fiscal 1998 it increased 31% or
$6.5 million to $27.9 million from $21.4 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 six months of fiscal 1998 of $3.3 million and $6 million,
respectively. Average interest-bearing liabilities for the second quarter of
fiscal 1998 reached $1.058 billion versus $817 million a year ago, a 29%
increase. For the first six months of fiscal 1998 average interest-bearing
liabilities rose by 29% or $231 million to $1.032 billion in fiscal 1998
compared with $801 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 certificates
of deposit and repurchase agreements. For the second quarter of fiscal 1998
the average volume of certificates of deposit grew by 23% to $328 million
from $266 in fiscal 1997 million while the average volume of repurchase
agreements rose by 89% to $326 million from $205 million in fiscal 1997. For
fiscal 1998 six months period ended the average volume of certificates of
deposit grew by 32% to $328 million from $249 million the year before and
the average volume of repurchase agreements rose by 35% to $310 million from
$229 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 OBT International
Branch.
The average cost of funds for the second quarter of fiscal 1998 increased
five basis points basis points to 5.39% from 5.34% in fiscal 1997 and
contributed to a slight rise in total interest expense during the second
quarter of fiscal 1998 of $32,000. For the first six months of fiscal 1998
average costs of funds rose seven basis points to 5.37% from 5.30% in fiscal
1997 which contributed to $498,000 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 51 basis points and 71 basis
points, respectively, during the second quarter and first six months of
fiscal 1998. This cost increase was due to the replacing of 936 repos, which
currently represent 31% of Group's total repos portfolio versus 79% a year
ago, with higher-cost conventional repos. However, it is important to mention
that this increase in costs was in part mitigated by a favorable effect from
the Group's interest-hedging activities of $347,000 during the second quarter
ended and $706,000 during the six month period ended.
NON-INTEREST INCOME
Table B at page 18 shows the fees and other non-interest income generated by
the Group for the second quarter and six months period ended December 31,
1997 and 1996. 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).
Recurring non-interest income for the second quarter of fiscal 1998 the
Group totaled $3.6 million, which represents an increase of 7% or $200,000
from the $3.4 million reported in the same period of fiscal 1997. For the
six months period ended rose by 20% to $7.7 million from $6.4 million posted
the year before.
17
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 % 1997 1996 %
------ -------- ----- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
TABLE B - NON-INTEREST INCOME SUMMARY
BANK SERVICE FEES AND CHARGES $ 968 $ 1,291 (25%) $ 1,976 $ 2,565 (23%)
TRUST, MONEY MANAGEMENT AND
BROKERAGE FEES 1,817 1,551 17% 3,918 3,078 27%
MORTGAGE BANKING ACTIVITIES
( EXCLUDING SERVICING INCOME) 623 314 98% 1,438 358 302%
RENT AND OTHER OPERATING INCOME 165 198 (17%) 351 380 (8%)
------ -------- ----- -------- -------- ----
RECURRING NON-INTEREST INCOME 3,573 3,354 7% 7,683 6,381 20%
------ -------- ----- -------- -------- ----
NET GAIN ON SALE OF INVESTMENTS 264 156 69% 375 313 20%
TRADING ACCOUNT INCOME 58 33 76% 168 3 5500%
SERVICING INCOME 140 568 (75%) 856 1,088 (21%)
NET GAIN ON SALE OF SERVICING RIGHTS 2,707 - 100% 2,707 - 0%
------ -------- ----- -------- -------- ----
NON RECURRING NON-INTEREST INCOME 3,169 757 319% 4,106 1,404 192%
------ -------- ----- -------- -------- ----
TOTAL NON-INTEREST INCOME $6,742 $ 4,111 64% $ 11,789 $ 7,785 51%
------ -------- ----- -------- -------- ----
------ -------- ----- -------- -------- ----
TABLE C - NON-INTEREST EXPENSES SUMMARY
COMPENSATION AND BENEFITS $3,685 $ 3,407 8% $ 7,536 $ 6,848 10%
OCCUPANCY AND EQUIPMENT 1,246 1,061 17% 2,477 2,057 20%
PROFESSIONAL FEES 314 356 (12%) 653 666 (2%)
ADVERTISING AND PROMOTION 462 362 28% 1,127 703 60%
REAL ESTATE OWNED EXPENSES 11 32 (66%) 40 99 (60%)
INSURANCE 265 275 (4%) 387 548 (29%)
COMMUNICATIONS 328 306 7% 705 566 25%
OTHER OPERATING EXPENSES 1,099 988 11% 2,211 1,830 21%
------ -------- ----- -------- -------- ----
TOTAL RECURRING NON-INTEREST EXPENSES 7,410 6,787 9% 15,136 13,317 14%
------ -------- ----- -------- -------- ----
------ -------- ----- -------- -------- ----
SAIF ONE-TIME ASSESSMENT - - 0% - 1,823 (100%)
OTHER NON-RECURRING EXPENSES 51 - 100% 51 - 100%
------ -------- ----- -------- -------- ----
51 - 100% 51 1,823 (97%)
------ -------- ----- -------- -------- ----
TOTAL NON-INTEREST EXPENSES $7,461 $ 6,787 10% $ 15,187 $ 15,140 0%
------ -------- ----- -------- -------- ----
------ -------- ----- -------- -------- ----
EFFICIENCY RATIO 52.35% 52.16%
-------- --------
-------- --------
EXPENSE RATIO 1.22% 1.35%
-------- --------
-------- --------
TABLE C1 - COMPENSATION AND BENEFITS SUMMARY
FIXED COMPENSATION $2,146 $ 2,038 5% $ 4,368 $ 4,189 4%
VARIABLE COMPENSATION 1,208 1,048 15% 2,513 2,026 24%
OTHER COMPENSATION AND BENEFITS 331 321 3% 655 633 3%
------ -------- ----- -------- -------- ----
TOTAL NON-INTEREST EXPENSES $3,685 $ 3,407 8% $ 7,536 $ 6,848 10%
------ -------- ----- -------- -------- ----
------ -------- ----- -------- -------- ----
COMPENSATION AND BENEFITS COMPOSITION:
FIXED COMPENSATION 58% 60% 58% 61%
VARIABLE COMPENSATION 33% 31% 33% 30%
OTHER COMPENSATION AND BENEFITS 9% 9% 9% 9%
------ -------- -------- --------
TOTAL NON-INTEREST EXPENSES 100% 100% 100% 100%
------ -------- -------- --------
------ -------- -------- --------
AVERAGE # OF EMPLOYEES 387 409 399 400
------ -------- -------- --------
COMPENSATION AND BENEFITS AS A
PERCENTAGE (%) OF:
TOTAL AVERAGE ASSETS 1.24% 1.45% 1.29% 1.49%
------ -------- -------- --------
------ -------- -------- --------
TOTAL AVERAGE INTEREST-EARNING ASSETS 1.33% 1.57% 1.40% 1.61%
------ -------- -------- --------
------ -------- -------- --------
</TABLE>
18
<PAGE>
Bank services fees and charges, which consist primarily of service charges on
deposit accounts, leasing fees and late charges collected on loans, amounted
to $968,000 for the second quarter of fiscal 1998, a decrease of 25% when
compared to the $1.3 million reported for the second quarter of fiscal 1997.
For the six month period ended bank services fees and charges totaled $2
million which represents a decrease of 23% from the $2.6 million posted a
year ago. This net decrease was a combination of a decrease in lease
handling fees due to weaker a production offset by an increase in fees on
deposit accounts as a result of a larger volume of deposit accounts and
selected fee increases.
Trust, money management and brokerage fees, the principal component of
recurring non-interest income, reflected strong results during fiscal 1998.
For the second quarter of fiscal 1998 totaled $1.8 million which represents
an increase of 17% from the $1.5 million recorded in the same quarter of
fiscal 1997 and for the first six months of fiscal 1998 rose 27% to $3.9
million, compared to $3.1 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 98% to $623,000 from $314,000 in
fiscal 1997 during the second quarter of fiscal 1998 and for first six months
of fiscal 1998 increased 302% to $1.4 million from $358,000 in fiscal 1997.
During this past quarter, 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 75% during the
past quarter and of 21% for the first six months of fiscal 1998.
Investment securities and trading gains and losses for the second quarter
and first six months of fiscal 1998 amounted to $322,000 and $543,000 ,
respectively, versus $189,000 and $316,000, respectively, in the earlier
fiscal year.
NON-INTEREST EXPENSES
As shown on Table C at page 18 recurring non-interest expenses for the second
quarter of fiscal 1998 increased 9% to $7.4 million as compared to $6.8
million during the same period of fiscal 1997. For the first six months of
fiscal 1998 they increased 14% to $15.1 million from $13.3 million a year
ago. The increase results mainly from the expanded push in the retail area
and higher outlays for support services as the Group's businesses continue to
expand. The efficiency ratio and the expense ratio for the first six months
of fiscal 1998 amounted 52.35% and 1.22%, respectively, compared to 52.16%
and 1.35%, respectively, the year before.
Employee compensation and benefits, the Group's largest expense category,
amounted to $3.7 million for the second quarter of fiscal 1998 , an increase
of 8% or $300,000 when compared to the $3.4 million reported for the second
quarter of fiscal 1997. For the six month period ended employee compensation
and benefits rose by 10% or $700,000 to $7.5 million from $6.8 million a year
ago. This growth was driven by a 15% or $160,000 and 24% or $487,000,
respectively, increase in variable compensation reflecting 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 second quarter and first six months of fiscal 1998
variable compensation represented 33% and 33%, respectively, of total
compensation versus 31% and 30% , respectively, in fiscal 1997. Compensation
and benefits as a percentage of total average assets and average-interest
earning assets ratio for the first six months of fiscal 1998 improved to
1.29% and 1.40%, respectively, compared to 1.49% and 1.61%, respectively, the
year before. Table C1 at page 18 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 10% to $3.7 million as compared to $3.4 million during the
same period of fiscal 1997. For the first six months of fiscal 1998 they
increased 17% or $1.1 million to $7.6 million from $6.5 million a year ago.
This was led by increases in advertising and promotion of 28% or $100,000
and 60% or $424,000, respectively, and in occupancy and equipment expenses of
17% or $185,000 and 20% or $420,000, respectively. 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.
19
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of fiscal 1998 amounted
to $857,000 versus $875,000 in fiscal 1997, resulting in an effective tax
rate of 14.1% versus 16.6% for the same quarter of fiscal 1997. For the six
months period ended totaled to $1.8 million versus $1.4 million in fiscal
1997. The effective tax rate was 15.2% in fiscal 1998 compared to 15.8% 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.
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.
PROVISION FOR LOAN LOSSES
For the second quarter of fiscal 1998 the Group provided $ 3.7 million for
loan losses compared with $1.2 million for the same period of fiscal 1997, an
increase of $2.5 or 208%. For the six month period ended December 31, 1997,
the provision for loan losses amounted to $5 million compared with $2.1
million a 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.
Net charge-offs for the second quarter and first six months of fiscal 1998
totaled $2 million or 1.42% and $3.3 million or 1.17%, respectively, of
average loans, compared to $1.4 million or 0.94% and $2.4 million or 0.79%,
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.
At December 31, 1997 the Group's allowance for loan losses was $ 7.1 million
or 1.26% of total loans. This compares to an allowance for loan losses of
$4.7 million or .090% of total loans a year ago. Table D at page 21 sets forth
an analysis of the activity in the allowance for loan losses and presents
selected loan losses statistics for the quarters and six months periods ended
December 31, 1997 and 1996.
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 December 31, 1997 adequate to absorb future
losses inherent in the Group's loan portfolio.
20
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1997 1996 1997 1996
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
TABLE D -ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES
STATISTICS
BALANCE AT BEGINNING OF PERIOD $ 5,454 $ 4,627 $ 5,408 $ 4,496
--------- -------- -------- ----------
PROVIISON FOR LOAN LOSSES 3,700 1,200 5,000 2,100
--------- -------- -------- ----------
CHARGE-OFF'S (2,366) (1,390) (4,019) (2,392)
RECOVERIES 343 215 742 448
--------- -------- -------- ----------
NET CHARGE OFF'S (2,023) (1,175) (3,277) (1,944)
--------- --------- -------- ----------
BALANCE AT END OF PERIOD $ 7,131 $ 4,652 $ 7,131 $ 4,652
--------- --------- -------- ----------
CHARGE-OFF'S:
CONSUMER $ (1,168) $ (693) $ (1,748) $ (972)
OVERDRAFT - - - -
REAL ESTATE (50) (19) (111) (19)
AUTO LEASES (704) (512) (1,602) (1,022)
EQUIPMENT LEASES (386) (117) (471) (327)
COMMERCIAL AND OTHERS (58) (49) (87) (52)
--------- --------- -------- ----------
(2,366) (1,390) (4,019) (2,392)
--------- --------- -------- ----------
RECOVERIES:
CONSUMER 62 21 138 63
OVERDRAFT - 2 1 8
REAL ESTATE - - - -
AUTO LEASES 189 121 406 252
EQUIPMENT LEASES 92 64 197 118
COMMERCIAL AND OTHERS - 7 - 7
--------- --------- -------- ----------
343 215 742 448
--------- --------- -------- ----------
NET CHARGE OFF:
CONSUMER (1,106) (672) (1,610) (909)
OVERDRAFT - 2 1 8
REAL ESTATE (111) (19) (172) (19)
AUTO LEASES (515) (391) (1,196) (770)
EQUIPMENT LEASES (294) (53) (274) (209)
COMMERCIAL AND OTHERS 3 (42) (26) (45)
--------- --------- -------- ----------
$ (2,023) $ (1,175) $ (3,277) $ (1,944)
--------- --------- -------- ----------
LOANS:
OUTSTANDING $ 566,126 $ 514,551 $ 566,126 $ 514,551
--------- --------- -------- ----------
AVERAGE $ 568,423 $ 501,354 $ 561,570 $ 493,307
--------- --------- --------- ----------
RATIOS:
RECOVERIES TO CHARGE-OFF'S 14.5% 15.5% 18.5% 18.7%
--------- --------- --------- ----------
--------- --------- --------- ----------
NET CHARGE-OFF TO AVERAGE LOANS 1.42% 0.94% 1.17% 0.79%
--------- --------- --------- ----------
--------- --------- --------- ----------
PROVISION FOR LOAN LOSSES TO NET CHARGE-OFFS 1.83 1.02 1.53 1.08
--------- --------- --------- ----------
--------- --------- --------- ----------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.26% 0.90% 1.26% 0.90%
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
21
<PAGE>
FINANCIAL CONDITION COMMENTS
ASSETS
ASSETS OWNED
Oriental's total assets at December 31, 1997 reached $1.202 billion, an
increase of 25% when compared to $966 million at the end of the same quarter
of fiscal 1997. Average assets for the first six months of fiscal 1998 were
$1.17 billion compared to $922,000 million for fiscal 1997, a 21% gain. Refer
to Table E at page 23 for the Group's assets summary.
At December 31, 1997 interest-earning assets amounted to $1.145 billion
compared to $909 million the year before. This reflects a growth in all of
its categories as investment and trading securities and other
interest-earning assets increased 47% or $187,000 to $586 million from $399
million at the end of the first quarter of fiscal 1997 and loans receivable
and loans held for sale, net of the allowance for loan losses, exhibited an
increase of 10% or $49 million, to $559 million from $510 million the year
before.
Oriental's investment and trading securities and other-interest earning
assets, the largest component of interest-earning assets, 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 second 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 and trading securities and
other-interest earning assets was driven by a strong growth in debt and
trading securities of $102 million or 79% to $231 million from $129 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 and have no
prepayment or credit risk are an attractive investment for Oriental. Also, an
increase mortgage-backed securities of $86 million or 34% to $337 million
from $250 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 six months of fiscal 1998, Oriental converted $61 million of loans held
for sale into mortgage-backed securities. Refer to Table F at page 23 for
the Group's investments summary and composition.
Loans are the second largest category of the Group's earning assets but the
most profitable. At December 31,1997, total loans were $559 million compared
with $510 million at the end of the same quarter of fiscal 1997, for an
increase of $49 million or 10%. This rise was led by increases in the real
estate and consumer portfolios of $28 million or 34%, and $23 million or 27%,
respectively. The growth in Group's loan portfolio was mainly attained due to
strong marketing efforts coupled with the launch of new products.
At December 31, 1997 the 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 29%, consumer loans 19%, 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 G at page 23
presents the composition of the Group's loan portfolio at the end of the
periods analyzed.
FINANCIAL ASSETS GATHERED OR MANAGED
As shown on Table H at page 23 Oriental continued to experience a favorable
growth in its diversified asset base which contributed to income expansion
across its business lines. Total financial assets owned or managed (excluding
loans serviced for third parties which were sold on October 1997) increased
27% to $ 2.884 billion at December 31, 1997 from the $ 2.278 billion owned or
managed one year ago. As of December 31, 1997, total financial assets
consisted of $1.202 billion owned by the Bank, $ 1.121 billion managed by the
trust and $561 million gathered by the broker-dealer. Detailed information
concerning each of the items that comprise the Group's financial assets
managed follows:
- - GROUP'S OWNED ASSETS - Refer to the section above for detailed information
concerning this item.
- - TRUST ASSETS MANAGED - Total assets managed by the trust department increased
21% to $1.121 billion at December 31, 1997, up from $927 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 $350
million at the end of the period analyzed from $308 million a year ago.
Oriental Trust offers four 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. Other assets managed include 401 (K) and Keogh
retirement plans, custodian and corporate trust accounts.
- - 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 45% to $561 million
from $386 million a year ago.
22
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1997
------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
TABLE E - ASSETS SUMMARY
INVESTMENTS, TRADING SECURITIES
AND OTHER INTEREST-EARNING ASSETS $ 585,619 $ 398,713 $ 468,594
TOTAL LOANS, NET 558,995 509,898 532,970
---------- ---------- ----------
INTEREST-EARNING ASSETS 1,144,614 908,611 1,001,564
NON INTEREST-EARNING ASSETS 57,931 57,265 67,032
---------- ---------- ----------
TOTAL ASSETS $1,202,545 $ 965,876 $1,068,596
---------- ---------- ----------
TABLE F - INVESTMENTS SUMMARY
AND COMPOSITION
MORTGAGE-BACKED SECURITIES $ 337,056 $ 250,706 $ 278,349
DEBT AND TRADING SECURITIES 230,969 129,391 151,978
MONEY MARKET INVESTMENTS AND
FHLB STOCK 17,594 18,616 38,267
---------- ---------- ----------
TOTAL INVESTMENT SECURITIES $ 585,619 $ 398,713 $ 468,594
---------- ---------- ----------
TABLE G - LOANS COMPOSITION SUMMARY
% % %
------ ------ ------
REAL ESTATE LOANS 283,181 50.0% 255,407 50.0% 271,249 50.0%
CONSUMER LOANS 108,589 19.0% 85,955 17.0% 89,957 17.0%
COMMERCIAL LOANS 11,036 2.0% 8,802 1.0% 10,512 2.0%
CONSTRUCTION LOANS - 0.0% 218 0.0% - 0.0%
FINANCING LEASES 163,320 29.0% 164,169 32.0% 166,660 31.0%
---------- ------ ---------- ------ ---------- ------
TOTAL LOANS AND LOANS HELD
FOR SALE 566,126 100.0% 514,551 100.0% 538,378 100.0%
------ ------ ------
ALLOWANCE FOR LOAN LOSSES (7,131) (4,653) (5,408)
---------- ---------- ----------
TOTAL LOANS, NET 558,995 509,898 532,970
---------- ---------- ----------
TABLE H - FINANCIAL ASSETS SUMMARY
TOTAL GROUP ASSETS OWNED $1,202,600 $ 965,900 $1,068,600
TRUST ASSETS MANAGED 1,120,700 926,700 1,088,600
ASSETS GATHERED BY BROKER-DEALER 560,600 385,800 524,900
---------- ---------- ----------
TOTAL FINANCIAL ASSETS BEFORE
SERVICING 2,883,900 2,278,400 2,682,100
(A) LOANS SERVICED TO THIRD PARTIES - 457,800 515,700
---------- ---------- ----------
TOTAL FINANCIAL ASSETS $2,883,900 $2,736,200 $3,197,800
---------- ---------- ----------
(A) SERVICING WAS SOLD TO A LOCAL
FINANCIAL INSTITUTION IN OCTOBER 1997.
TABLE I - NON PERFORMING ASSETS
REAL ESTATE LOANS $ 9,035 $ 5,564 $ 5,575
CONSUMER LOANS 2,080 1,715 2,118
COMMERCIAL LOANS 989 910 814
CONSTRUCTION LOANS - 211 -
FINANCING LEASES 10,883 4,404 4,778
---------- ---------- ----------
TOTAL NON ACCRUAL LOANS $ 22,987 $ 12,804 $ 13,285
---------- ---------- ----------
NON-ACCRUAL LOANS $ 22,988 $ 12,804 $ 13,285
REO 567 1,170 698
REPO VEHICLES 1,158 1,162 1,253
REPO EQUIPMENT 169 358 486
---------- ---------- ----------
TOTAL NON-PERFORMING ASSETS $ 24,882 $ 15,495 $ 15,722
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
25
<PAGE>
NON-PERFORMING ASSETS
As shown on Table I at page 23 at December 31,1997 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 December 31,1997. 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. The Bank's
non-accrual commercial business loans at September 30, 1997 consisted of
seventeen loans amounting to $989,000 (average of $58,000), with three
loans having balances exceeding $100,000. Of the total balance, $671,000
or 8 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 December 31, 1997 Oriental's non-accrual
leases consisted of three hundred and sixty-two auto leases amounting to
$8.1 million (average of $22,400), and three hundred nineteen equipment
leases amounting to $2.7 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 ninety-six loans amounting
to $2.1 million (average of $7,095).
- - 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 $1.2 million (average of
$16,700), and the inventory of repossessed equipment consisted of
thirty-seven units amounting to $169,000 (average of $4,570).
- - 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.
As shown in Table J at page 25 at December 31, 1997 Oriental's total
liabilities reached $1.101 billion, reflecting an increase of $219 million or
25% when compared to $882 million a year ago. Interest-bearing liabilities,
the Group's sources of funding, amounted to $1.081 billion at December 31,
1997, an increase of $226 million or 26% as compared to $855 million at
September 30, 1996. This increase was the result of a growth in deposits and
repurchase agreements of 22% or $97 million and 61% or $126 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 $531 million from $434 million at the same date last year, up
22%. This growth was fueled by significant increases in certificate of
deposits and IRA accounts of 21% or $60 million and 41% or $24 million,
respectively. At the end of the second quarter of fiscal 1998 deposits
represented 49% of the Group's funding sources versus 51% the year before.
29
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
TABLE J - LIABILITIES SUMMARY
DEPOSITS $ 531,058 $ 434,376 $ 497,542
REPURCASE AGREEMENTS 330,708 204,879 247,915
OTHER BORROWINGS 218,978 216,095 204,816
------------ ------------ --------
INTEREST-BEARING LIABILITIES 1,080,744 855,350 950,273
------------ ------------ --------
NON INTEREST-BEARING LIABILITIES 20,509 26,784 28,929
------------ ------------ --------
TOTAL LIABILITIES $ 1,101,253 $ 882,134 $ 979,202
------------ ------------ --------
AS A % OF TOTAL INTEREST -
BEARING LIABILITIES:
DEPOSITS 49% 51% 52%
REPURCASE AGREEMENTS 31% 24% 26%
OTHER BORROWINGS 20% 25% 22%
------------ ------------ --------
INTEREST-BEARING LIABILITIES 100% 100% 100%
------------ ------------ --------
TABLE J1 - DEPOSITS SUMMARY
% % %
------ ------ ------
SAVINGS ACCOUNTS $ 74,634 14.1% $ 66,721 15.4% $ 72,872 14.6%
DEMAND AND NOW ACCOUNTS 30,903 5.8% 26,854 6.2% 34,123 6.9%
---------------------------------------------------------------------------------------
TOTAL SAVINGS, DEMAND AND
NOW ACCOUNTS 105,537 19.9% 93,575 21.6% 106,995 21.5%
CERTIFICATES OF DEPOSIT 340,608 64.1% 280,787 64.6% 310,320 62.4%
IRA ACCOUNTS 81,463 15.3% 57,606 13.3% 77,516 15.6%
---------------------------------------------------------------------------------------
TOTAL DEPOSITS (EXCLUDING
ACCRUED INTEREST) 527,608 99.3% 431,968 99.5% 494,831 99.5%
ACCRUED INTEREST 3,450 0.7% 2,408 0.5% 2,711 0.5%
---------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 531,058 100.0% $ 434,376 100.0% $ 497,542 100.0%
---------------------------------------------------------------------------------------
TABLE J2 - OTHER BORROWINGS
SUMMARY
FHLB FUNDS $ 104,200 $ 69,900 $ 89,800
BONDS PAYABLE 278 695 516
TERM NOTES 114,500 135,500 114,500
LINES OF CREDIT - 10,000 -
------------ ------------ --------
TOTAL OTHER BORROWINGS $ 218,978 $ 216,095 $ 204,816
------------ ------------ --------
TABLE K - CAPITAL AND
CORRESPONDING REGULATORY
CAPITAL RATIOS (IN PERCENT):
CAPITAL $ 101,292 $ 83,742 $ 89,394
------------ ------------ --------
OUTSTANDING SHARES 9,970 9,895 9,988
------------ ------------ --------
DIVIDENDS DECLARED $ 2,474 $ 1,979 $ 4,369
------------ ------------ --------
LEVERAGE CAPITAL 7.97% 8.33% 8.17%
------------ ------------ --------
------------ ------------ --------
TIER 1 RISK-BASED CAPITAL 18.20% 18.02% 17.53%
------------ ------------ --------
------------ ------------ --------
TOTAL RISK-BASED CAPITAL 19.45% 19.06% 18.66%
------------ ------------ --------
------------ ------------ --------
TABLE L - MARKET PRICES AND
STOCK DATA
CLOSING PRICE $ 29.56 $ 16.70 $ 22.60
HIGH 31.50 17.60 22.60
LOW 24.50 14.60 18.20
BOOK VALUE 10.16 8.46 8.95
DIVIDEND PER SHARE $ 0.125 $ 0.100 $ 0.120
PAYOUT RATIO 24.37% 23.06% 24.40%
------------ ------------ --------
------------ ------------ --------
DIVIDEND YIELD 1.79% 2.83% 2.63%
------------ ------------ --------
------------ ------------ --------
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.
<CAPTION>
- ----------------------------- ---------- ---------- -----------
QUARTER ENDED HIGH LOW PER SHARE
- ----------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
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>
LIABILITIES AND CAPITAL
LIABILITIES
At December 31, 1997 the deposits mix was similar to the one the year before
as savings, demand and NOW accounts represented 19.9% of the total portfolio,
while certificates of deposit were 64.1%, IRA accounts were 15.3%, and
accrued interest comprised .07%. This compares with 21.6%, 64.6%, 13.3% 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 December 31, 1997 repurchase
agreements and other borrowings amounted to $331 million and $219 million,
respectively, compared to $205 million and $216 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 December 31, 1997 Oriental's total capital increased by $17 million or 21%
to $101 million, from $84 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%.
As of December 31, 1997 the Group had a leverage ratio of 7.97%; a Tier 1
risk-based ratio of 18.20%; and a total risk based capital ratio of 19.45%
compared to 8.33%, 18.02% and 19.06%, 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
December, 1997 was $29.56. This represents an increase of 77% from the last
sale price a year ago of $ 16.70 already adjusted for the five-for-four (25%)
stock split. The book value at December 31, 1997 rose to $10.16 from $8.46
reported at the same date last year.
During the first six months of fiscal 1998, the Group declared dividends
amounting to $2.5 million compared to $2 million in fiscal 1996, an increase
of $500,000 or 25%. This represents total dividends declared per common share
of $0.25 for the first six months of fiscal 1998 versus $0.20 for the same
period of fiscal 1997, a 25% increase. The dividend payout ratio and dividend
yield for the quarter ended amounted to 24.37% and 1.79%, respectively,
compared to 23.06% and 2.83%, respectively, for the same quarter last year.
ASSET / LIABILITY MANAGEMENT
The Group through its Asset and Liability Management Committee (ALCO) has
developed policies whose primary goal is to enhance profitability while
maintaining an appropriate relationship between the amount of
interest-earning assets and interest-bearing liabilities that mature or
reprice during the same period. This difference is commonly referred to as a
"maturity mismatch" or "gap".
The Group is liability sensitive on a cumulative basis (negative one year
gap) due to its fixed rate asset composition being funded with shorter
repricing liabilities. However, since the traditional end cap static gap
representation does not capture all of the complex factors that influence
asset and liability repricings, the Group places greater emphasis on
simulation analysis. The Group utilizes different rate and growth scenarios
to develop strategies to maintain its net interest income within the
prescribed policy limits.
The Group utilizes interest rate swap end cap as an interest rate risk hedging
mechanism. Under the swaps, the Group pays a fixed annual cost and receives a
floating ninety-day payment based on LIBOR. Floating rate payments received
from the swap counterparty correspond to the floating rate payments made on
the borrowings or notes thus resulting in a net fixed rate cost to the Group.
Interest rate caps provide protection against increase in interest rates above
the cap vote. (See footnote 8 of the Group's Financial Statements included
herein).
The interest rate swap end cap agreements are subject to the risk of
non-performance by the counterparty. The Group enters into agreements
only with the approved investment grade money center banks and major
broker-dealers. The Group has established policies that limit the maximum
exposure to any one counterparty. These policies are reviewed by the Board of
Directors on a yearly basis. At December 31, 1997, the Group had entered
into interest rate swap agreements with ten counterparties.
26
<PAGE>
LIQUIDITY
Liquidity refers to cash and other investments easily converted into cash
that are available to meet unanticipated requirements. The objective of the
Group's liquidity management is to ensure sufficient cash flow to fund the
origination and acquisition of assets, the repayment of deposit withdrawals
and the wholesale borrowings maturities, and meet operating expenses. The
Group's liquidity position is reviewed and monitored by the ALCO Committee on
a regular basis.
The Group's principal sources of funds are net deposit inflows, loan
repayments, mortgage-backed and investment securities principal and interest
payments, reverse repurchase agreements, FHLB advances and other borrowings.
The Group has obtained long-term funding through the issuance of notes and
long-term reverse repurchase agreements. The Group's principal uses of funds
are the origination and purchase of loans, the purchase of mortgage-backed
and investment securities, the repayment of maturing deposits and borrowings.
During the first quarter of fiscal 1997 President Clinton signed into law a
bill phasing out the tax incentives offered to manufacturing companies
operating in Puerto Rico under Section 936 of the Internal Revenue Code. The
phase out of the manufacturing tax benefits will occur over a ten-year
period, and the benefits related to the passive income (QPSII) were
eliminated effective July 1, 1996. Financial institutions and other eligible
borrowers in Puerto Rico have benefited throughout the years from the lower
cost of these QPSII funds.
The elimination of the Section 936 tax credit for the Puerto Rico operations
of U.S. companies and benefits to QPSII did not have a significant impact on
the Group's liquidity position. This was mainly due to the fact that the law
change came with plenty of warning, so the Group was able to replace 936
funding with longer- term obligations. During fiscal 1997 the Group locked-in
about $185,000 million of non-cancelable long-term funding, with maturities
ranging from three to ten years.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with GAAP, which requires the measurement of financial
positions and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due
to inflation. Unlike most individual companies, substantially all of the
assets and liabilities of the Group are monetary in nature. As a result,
interest rates have a more significant impact on the Group's performance than
the general level of inflation. Over short periods of time, interest rates
may not necessarily change in the same direction or as much as the prices of
goods and services.
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
27
<PAGE>
ITEM 5. OTHER INFORMATION
A - 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 managment estimates that the costs of
addressing the Year 2000 issues will not exceed $1 million, which includes
the salary of employees and proffessional fees to third parties. Management
understands that costs will not have a material effect on the Group's
financial position or results of operations and that the Group will be in
full compliance when the turn of the century arrives.
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
NO. EXHIBITS PAGE
- ------ ----------------------------- ------
27.0 Financial Data Schedule E-1
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: February 13, 1997 BY: /S/ JOSE E. FERNANDEZ
--------------------- JOSE E. FERNANDEZ
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATE: FEBRUARY 13, 1997 BY: /S/ RICARDO N. RAMOS
--------------------- RICARDO RAMOS
SENIOR VICE PRESIDENT FINANCE
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,585
<INT-BEARING-DEPOSITS> 4,000
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 40,258
<INVESTMENTS-HELD-FOR-SALE> 331,936
<INVESTMENTS-CARRYING> 195,831
<INVESTMENTS-MARKET> 198,555
<LOANS> 566,126
<ALLOWANCE> 7,131
<TOTAL-ASSETS> 1,202,545
<DEPOSITS> 531,058
<SHORT-TERM> 434,908
<LIABILITIES-OTHER> 20,509
<LONG-TERM> 114,778
0
0
<COMMON> 9,970
<OTHER-SE> 91,322
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</TABLE>
