<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, 1998
COMMISSION FILE NO. 001-12647
ORIENTAL FINANCIAL GROUP INC.
INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO
IRS EMPLOYER IDENTIFICATION NO. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
68 MUNOZ RIVERA AVENUE
501 HATO REY TOWER
HATO REY, PUERTO RICO 00918
TELEPHONE NUMBER: (787) 766-1986
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE)
13,554,653 SHARES OUTSTANDING AS OF DECEMBER 31, 1998
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),and (2) has been subject to
such filing requirements for the past 90 days. Yes x No .
--- ---
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
- -------------------------------------------------------------------------------
PART - 1
- -------------------------------------------------------------------------------
<S> <C>
ITEM - 1 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT
DECEMBER 31, 1998 (UNAUDITED) AND JUNE 30, 1998. 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE
QUARTER AND SIX MONTHS PERIOD ENDED DECEMBER 31, 1998
AND 1997. 2
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS PERIOD ENDED DECEMBER 31, 1998 AND
1997. 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS PERIOD ENDED DECEMBER 31, 1998 AND 1997. 4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5-8
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-23
PART - 2
- -------------------------------------------------------------------------------
ITEM - 1 LEGAL PROCEEDINGS 23
ITEM - 2 CHANGE IN SECURITIES - NONE 23
ITEM - 3 DEFAULTS UPON SENIOR SECURITIES - NONE 23
ITEM - 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE 23
ITEM - 5 OTHER INFORMATION 23
ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 23
SIGNATURES 23
</TABLE>
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 (UNAUDITED) AND JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Cash and due from banks $ 12,279 $ 8,831
----------- -----------
MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell -- 5,000
Time deposits with other banks 1,000 2,000
Other short-term investments, at cost 2,405 3,658
----------- -----------
3,405 10,658
----------- -----------
INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at fair value 33,463 42,440
Investment securities available-for-sale, at fair value 658,527 481,360
Investment securities held-to-maturity, at amortized cost , with a fair
value of $130,315 at December 31, 1998 and $164,404 at June 30, 1998 128,668 162,151
Federal Home Loan Bank (FHLB) stock, at cost 13,257 10,043
----------- -----------
833,915 695,994
----------- -----------
LOANS:
Loans held-for-sale, at lower of cost or market 41,559 36,359
Loans receivable 523,229 514,719
----------- -----------
TOTAL LOANS 564,788 551,078
Allowance for loan losses (9,693) (5,658)
----------- -----------
555,095 545,420
----------- -----------
Accrued interest receivable 14,172 14,926
Foreclosed real estate, net 316 413
Premises and equipment, net 20,927 19,555
Other assets, net 17,367 15,591
----------- -----------
TOTAL ASSETS $ 1,457,476 $ 1,311,388
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Deposits $ 618,622 $ 571,431
Securities sold under agreements to repurchase 534,290 416,171
Advances and borrowings from Federal Home Loan Bank 60,100 74,800
Term notes and bonds payable 106,500 114,588
Accrued expenses and other liabilities 27,192 27,368
----------- -----------
TOTAL LIABILITIES 1,346,704 1,204,358
----------- -----------
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; 13,554,653
issued and outstanding at December 31, 1998 and 10,149,358 13,555 10,149
issued and outstanding at June 30,1998
Additional paid-in capital 23,968 27,261
Legal surplus 6,468 5,908
Retained earnings 72,596 63,756
Treasury stock, at cost, 495,486 at December 31, 1998 and 221,500 shares
at June 30, 1998 (11,890) (6,199)
Accumulated other comprehensive income, net of taxes 6,075 6,155
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 110,772 107,030
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,457,476 $ 1,311,388
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
1
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER AND SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS PERIOD ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -------------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $15,231 $15,202 $30,795 $29,536
Mortgage-backed securities 8,593 5,789 15,331 11,035
Investment securities 3,601 3,624 8,111 7,104
Other interest-earning assets 337 262 636 656
------- ------- ------- -------
TOTAL INTEREST INCOME 27,762 24,877 54,873 48,331
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 7,270 6,396 14,541 12,753
Securities sold under agreements to repurchase 6,298 4,531 12,243 8,556
Other borrowed funds and interest rate risk management 2,491 3,458 5,204 6,646
------- ------- ------- -------
TOTAL INTEREST EXPENSE 16,059 14,385 31,988 27,955
------- ------- ------- -------
NET INTEREST INCOME 11,703 10,492 22,885 20,376
------- ------- ------- -------
Provision for loan losses 7,150 3,700 9,750 5,000
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,553 6,792 13,135 15,376
------- ------- ------- -------
NON-INTEREST INCOME:
Bank service charges and fees 851 986 1,645 2,010
Trust, money management and brokerage fees 2,280 1,866 4,594 4,013
Mortgage banking activities 1,239 639 2,033 1,599
Rent and other operating income 87 165 222 351
Gain on sale of investment securities 6,841 264 8,447 375
Trading net activity 21 58 70 168
Servicing income -- 123 -- 695
Gain on sale of servicing assets -- 2,707 -- 2,707
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 11,319 6,808 17,011 11,918
------- ------- ------- -------
NON-INTEREST EXPENSES:
Compensation and benefits 3,799 3,734 7,273 7,631
Occupancy and equipment 1,188 1,144 2,426 2,274
Professional and service fees 654 314 995 653
Advertising and business promotion 703 466 1,262 1,135
Insurance, including deposits insurance 102 265 192 387
Communications 413 328 758 705
Municipal and other general taxes 428 411 857 821
Printing, postage, stationery and supplies 202 163 358 332
Other 732 702 1,464 1,378
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 8,221 7,527 15,585 15,316
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 7,651 6,073 14,561 11,978
Provision for income taxes 1,284 857 2,135 1,825
------- ------- ------- -------
NET INCOME $ 6,367 $ 5,216 $12,426 $10,153
------- ------- ------- -------
------- ------- ------- -------
INCOME PER COMMON SHARE:
Basic $ 0.49 $ 0.39 $ 0.95 $ 0.77
------- ------- ------- -------
Diluted $ 0.47 $ 0.38 $ 0.92 $ 0.74
------- ------- ------- -------
Average shares outstanding 13,077 13,285 13,125 13,242
Average shares equivalents 393 469 397 451
------- ------- ------- -------
13,470 13,754 13,522 13,693
------- ------- ------- -------
</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
AND OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CHANGES IN STOCKHOLDERS' EQUITY:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at beginning of period $ 10,149 $ 7,990
Stock split 3,385 1,912
Stock options exercised 21 68
--------- ---------
BALANCE AT END OF PERIOD 13,555 9,970
--------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 27,261 28,631
Stock split (3,385) (1,912)
Stock options exercised 92 287
--------- ---------
BALANCE AT END OF PERIOD 23,968 27,006
--------- ---------
LEGAL SURPLUS:
Balance at beginning of period 5,908 4,002
Transfer from retained earnings 560 427
--------- ---------
BALANCE AT END OF PERIOD 6,468 4,429
--------- ---------
RETAINED EARNINGS:
Balance at beginning of period 63,756 49,694
Net income 12,426 10,153
Dividends declared and cash paid on fractional shares (3,026) (2,474)
Transfer to legal surplus (560) (427)
--------- ---------
BALANCE AT END OF PERIOD 72,596 56,946
--------- ---------
TREASURY STOCK:
Balance at beginning of period (6,199) --
Treasury stock purchased (5,691) (1,836)
--------- ---------
BALANCE AT END OF PERIOD (11,890) (1,836)
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES:
Balance at beginning of period 6,155 913
Net change in fair value of securities available-for-sale, net of taxes (80) 1,319
--------- ---------
BALANCE AT END OF PERIOD 6,075 4,777
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 110,772 $ 101,292
--------- ---------
--------- ---------
COMPREHENSIVE INCOME:
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,426 $ 10,153
--------- ---------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized net gains on securities arising during the period 8,367 1,694
Less: reclass adjustment for gains and losses included in net income (8,447) (375)
--------- ---------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (80) 1,319
--------- ---------
COMPREHENSIVE INCOME $ 12,346 $ 11,472
--------- ---------
--------- ---------
</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, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,426 $ 10,153
--------- ---------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of deferred loan origination fees and costs (2,437) (1,681)
Amortization of premiums and accretion of discounts on investment securities 1,115 495
Depreciation and amortization of premises and equipment 1,399 1,209
Provision for loan losses 7,150 5,000
Gain on sale of available-for-sale securities (8,447) (375)
Gain on sale of servicing assets -- (2,707)
Gain on sale of loans held-for-sale (584) (584)
Decrease (increase) in trading securities 8,977 (9,328)
Decrease (increase) in accrued interest receivable 754 (1,094)
(Increase) decrease in other assets (1,679) 3,164
Increase (decrease) in accrued expenses and liabilities 813 (9,764)
--------- ---------
TOTAL ADJUSTMENTS 7,061 (15,665)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 19,487 (5,512)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in:
Securities purchased under agreements to resell 5,000 13,500
Federal Home Loan Bank of New York stock (3,214) --
Purchases of investment securities available-for-sale (337,291) (117,785)
Sales of investment securities available-for-sale 169,600 25,887
Maturities of investment securities available-for-sale 29,863 23,580
Purchases of investment securities held-to-maturity -- (3,041)
Maturities and redemptions of investment securities held-to-maturity 33,301 8,816
Proceeds from sale of loans held-for-sale 51,115 --
Proceeds from sale of servicing assets -- 11,855
Net origination of loans (97,986) (95,927)
Capital expenditures (2,771) (1,329)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (152,383) (134,444)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits 47,191 33,516
Securities sold under agreements to repurchase 118,119 82,793
Advances and borrowings from FHLB (14,700) 14,400
Repayments of term notes and bonds payable (8,088) (238)
Proceeds from exercise of stock options 113 355
Treasury stock acquired (5,691) --
Dividends and cash paid on fractional shares (2,853) (2,417)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 134,091 128,409
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,195 (11,547)
Cash and cash equivalents at beginning of period 14,489 26,036
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,684 $ 14,489
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 57,600 $ 26,800
--------- ---------
Income taxes 2,546 923
--------- ---------
Real estate loans securitized into mortgage-backed securities $ 33,100 $ 60,800
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC.
- ------------------------------------------------------------------------------
NOTE 1 -- NATURE OF OPERATIONS AND 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 banking industry general practices. These
principles require 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 Group is a bank holding company that 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 a delivery system of 19
branches located throughout Puerto Rico. The Bank directly or through its
wholly-owned, broker-dealer subsidiary, Oriental Financial Services Corp.,
offers mortgage, consumer and commercial ending, auto and equipment lease
financing, financial planning, money management and investment brokerage
services, corporate and individual trust services. The Bank is subject to the
regulations of certain federal and local agencies.
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, 1998 contained in Oriental's 1998
Annual Report. Certain reclassifications have been made to the December 31,
1997 and June 30, 1998 consolidated financial statements to conform to the
presentation of the current period consolidated financial statements.
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting mainly of normal recurring
adjustments) necessary to present fairly, in all material respects, the
financial position of the Group at December 31, 1998 and June 30, 1998, and
the results of operations and cash flows for the quarter and six months ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
NOTE 2 -- INVESTMENT AND TRADING SECURITIES:
The Group's securities are classified as held-to-maturity, available-for-sale
or trading. Securities for which the Group has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost. Securities that might be sold prior to maturity
because of interest rate changes, to meet liquidity needs, or to better match
the repricing characteristics of funding sources are classified as
available-for-sale. 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 Group classifies as trading those securities that are acquired and held
principally for the purpose of selling them in the near term. These
securities are carried at estimated fair value with realized and unrealized
changes in market value included in earnings in the period in which the
changes occur. Interest revenue arising from trading instruments is included
in the statement of income as part of net interest income rather than in the
trading profit or loss account.
The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock
has no readily determinable fair value and can only be sold back to the FHLB
at its par value. As a result, this investment is carried at cost and its
redemption value represents its fair value.
Premiums and discounts are amortized to interest income over the life of the
related securities using the interest method. Net realized gains or losses on
sales of investment securities and unrealized loss valuation adjustments
considered other than temporary, if any, on securities classified as either
available-for-sale or held-to-maturity are reported separately in the
statement of income. Cost of securities is determined on the specific
identification method.
TRADING SECURITIES:
A summary of trading securities owned by the Group at December 31, 1998 and
June 30, 1998, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
DECEMBER 31, JUNE 30,
------------ ------------
<S> <C> <C>
US GOVERNMENT SECURITIES $ 3,653 $ 3,574
MORTGAGE-BACKED SECURITIES 27,094 35,903
PASS-THROUGH CERTIFICATES 2,716 2,963
------------ ------------
$33,463 $42,440
------------ ------------
</TABLE>
The Group's trading portfolio weighted average yield at the dates above was
7.50% and 7.40%, respectively.
5
<PAGE>
INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, estimated fair value,
and weighted average yield of the securities owned by the Group at December 31,
1998 and June 30, 1998, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (IN THOUSANDS)
----------------------------------------------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSS VALUE YIELD
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
US GOVERNMENT SECURITIES $158,282 $4,588 $ - $162,870 6.24%
PR GOVERNMENT SECURITIES 23,461 539 23 23,977 8.72%
MORTGAGE-BACKED SECURITIES 375,377 3,273 762 377,888 6.62%
COLLATERIZED MORTGAGE OBLIGATIONS 94,443 89 740 93,792 6.50%
-------------- -------------- ------------- -------------- ------------
$651,563 8,489 1,525 $658,527 6.59%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
HELD-TO-MATURITY
- ----------------
PR GOVERNMENT SECURITIES 3,569 3 37 3,535 7.40%
MORTGAGE-BACKED SECURITIES 125,099 2,162 481 126,780 6.89%
-------------- -------------- ------------- -------------- ------------
$128,668 2,165 518 130,315 6.90%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
FHLB STOCK 13,257 - - 13,257 7.20%
-------------- -------------- ------------- -------------- ------------
$793,488 $10,654 $2,043 $802,099 6.61%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998 (IN THOUSANDS)
----------------------------------------------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSS VALUE YIELD
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
- ------------------
US GOVERNMENT SECURITIES $244,225 $6,146 $ 152 $250,219 6.37%
PR GOVERNMENT SECURITIES 26,074 1 194 25,881 8.72%
MORTGAGE-BACKED SECURITIES 202,855 2,446 41 205,260 6.86%
-------------- -------------- ------------- -------------- ------------
$473,154 8,593 387 481,360 6.71%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
HELD-TO-MATURITY
- ----------------
PR GOVERNMENT SECURITIES 3,575 1 - 3,576 7.40%
MORTGAGE-BACKED SECURITIES 158,576 2,695 443 160,828 6.89%
-------------- -------------- ------------- -------------- ------------
162,151 2,696 443 164,404 6.90%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
FHLB STOCK 10,043 - - 10,043 7.15%
-------------- -------------- ------------- -------------- ------------
$645,348 $11,289 $830 $655,807 6.72%
-------------- -------------- ------------- -------------- ------------
-------------- -------------- ------------- -------------- ------------
</TABLE>
The amortized cost and estimated fair value of the Group's investment
securities at December 31, 1998, by contractual maturity, are shown in the
next table. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
----------------------------- ----------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
DUE WITHIN ONE YEAR $ - $ - $ 10 $ 10 $ 10 $ 10
AFTER ONE YEAR TO FIVE YEARS 32,440 33,030 1,041 1,055 33,481 34,085
AFTER FIVE TO TEN YEARS 119,241 123,051 7,791 7,938 127,032 130,989
DUE AFTER TEN YEARS 499,882 502,448 119,826 121,312 619,708 623,758
EQUITY SECURITIES - - - - 13,257 13,257
------------ ------------ ------------ ------------ ------------ -----------
$651,563 $658,527 $128,668 $130,315 $793,488 $802,099
------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ -----------
</TABLE>
6
<PAGE>
Securities in the due after ten years category, include an AAA-rated
mortgage-backed Puerto Rico municipal bond with a fair value of $21,897,000,
which commenced paying down principal on August 1, 1994 and is expected to be
fully collected within the next two fiscal years. This category also includes
$67,147,000 of the short-end of certain Puerto Rico GNMA tax-exempt serial
certificates with an average expected life of 4 to 6 years.
Proceeds from the sale of investment securities available-for-sale during the
first six months of fiscals 1999 and 1998 were $169,600,000 and $25,887,000,
respectively. Gross realized gains and losses on those sales during the first
six months of fiscal 1999 were $8,447,000 and $0, respectively. These were
$445,000 and $70,000, respectively, in the same period of fiscal 1998.
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
- -------------------------------------------------------
The Group's lending activity is with borrowers 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 non-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 auto leases, personal
loans, and residential mortgage loans. The composition of the Group's loan
portfolio at December 31, 1998 and June 30, 1998 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, JUNE 30,
------------ --------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
RESIDENTIAL $245,089 $233,161
COMMERCIAL 6,989 7,007
HOME EQUITY LOANS AND PERSONAL LOANS COLLATERALIZED BY REAL ESTATE 17,065 16,457
CONSTRUCTION, LAND ACQUISITION AND LAND IMPROVEMENTS 331 909
------------ --------
272,474 257,534
LESS: NET DEFERRED LOAN FEES AND SERVICING RIGHTS SOLD (3,041) (2,363)
------------ --------
269,433 255,171
------------ --------
OTHER LOANS:
COMMERCIAL LOANS 9,813 9,428
AUTO LOANS 4,648 7,340
PERSONAL LOANS AND LINES OF CREDIT 109,682 99,808
CASH COLLATERAL AND MARGIN LOANS 4,574 2,764
FINANCING LEASES, NET OF UNEARNED INTEREST 125,079 140,208
------------ --------
253,796 259,548
------------ --------
LOANS RECEIVABLE 523,229 514,719
ALLOWANCE FOR LOAN LOSSES (9,693) (5,658)
------------ --------
LOANS RECEIVABLE, NET 513,536 509,061
LOANS HELD-FOR-SALE 41,559 36,359
------------ --------
TOTAL LOANS, NET $555,095 $545,420
------------ --------
------------ --------
</TABLE>
At December 31, 1998 and June 30, 1998 mortgage loans held-for-sale amounted
$41,559,000 and $36,359,000 respectively. All mortgage loans originated and
sold during the first six months of fiscal 1999 and 1998 were sold based on
pre-established commitments or at market values, which in both situations
equal or exceeded the carrying value of the loans. Net gains on those sales
during the first six months of fiscal years 1999 and 1998 were $584,200 and
$583,700, respectively, and are included in the statement of income as part
of mortgage banking activities.
Refer to Table 10 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 ended December 31,
1998 and 1997.
NOTE 4 - INTEREST RATE RISK MANAGEMENT
- --------------------------------------
The Group utilizes interest rate swaps and caps 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. Under the caps, 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.
7
<PAGE>
The following table indicates the types of swaps and caps outstanding and
their terms at December 31 and June 30, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS): DEC. 31, 1998 JUNE 30, 1998
- ----------------------- ------------- -------------
<S> <C> <C>
INTEREST RATE SWAPS
- -------------------
NOTIONAL AMOUNT $220,000 $370,000
WEIGHTED AVERAGE PAY RATE -- FIXED 5.76% 5.73%
WEIGHTED AVERAGE RECEIVE RATE -- FLOATING 5.29% 5.43%
MATURITY IN MONTHS 1 TO 32 1 TO 35
FLOATING RATE IN PERCENT OF LIBOR 85 TO 100% 84 TO 100%
CAPS
- ----
NOTIONAL AMOUNT $170,000 $150,000
CAP RATE 6.00-6.50% 6.50%
CURRENT 90 DAY LIBOR 5.07% 5.72%
MATURITY IN MONTHS 2 TO 15 3 TO 18
</TABLE>
The caps and interest rate swaps were entered 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.
S&P INTEREST RATE SWAP
- ----------------------
The Group offers its customers certificates of deposit which yields are tied
to the performance of a stock market index, Investor IRA and Investor CD. 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 utilizes interest rate swap/hedge agreements with
major money center banks to manage its exposure to the stock market. Under the
terms of the agreements, the Group will receive the average increase of the
month-end value of the Standard & Poor's index in exchange for a semiannual
fixed interest cost. At December 31, 1998, the notional amount of these
agreements totaled $54,332,000.
NOTE 7 - INCOME PER COMMON SHARE AND STOCK SPLIT
- ------------------------------------------------
On August 18, 1998, the Group declared a four-for-three (33.3%) stock split
on its 10,154,358 shares of common stock outstanding at September 30, 1998.
As a result, 3,384,674 shares of common stock were issued on October 15, 1998
thus increasing shares to 13,539,032 at such date.
Earnings per share for all periods presented in the Consolidated Statements
of Income are computed in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
Basic earnings per share excludes potential dilution and is calculated by
dividing net income by the weighted average number of outstanding common
shares. Diluted earnings per share is similar to the computation of basic
earnings per share except that the weighted average common shares are
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
Exercisable stock options outstanding under the Group's stock option plan
were considered in the diluted earnings per share.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental reported an increase of 24% in diluted earnings per share for the
second quarter of fiscal 1999, as net income increased to $6.4 million or
$.47 per share from $5.2 million or $.38 per share in the same period of
fiscal 1998. For the first six months of fiscal 1999, the Group's diluted
earnings per share also increased 24%, as net income reached $12.4 million or
$.92 per share compared with $10.2 million or $.74 per share in the same
period of fiscal 1998. All per share figures have been retroactively adjusted
for the four-for-three (33.3%) stock split on common stock distributed on
October 15, 1998.
The Group's earnings growth reflects increases in both net interest income
and non-interest income, partially offset by an increase in the provision for
loan losses. This earnings improvement results from a solid growth in
interest-earning assets and strong performances by the Group's mortgage
banking, treasury, trust, brokerage and money management business units. The
Group's profitability ratios for the first six months of fiscal 1999 reflect
returns of 1.79% on assets (ROA) and 21.73% on stockholder's equity (ROE)
versus 1.73% and 21.09%, respectively, in the comparable fiscal 1998 period.
At December 31, 1998, the Group's total financial assets owned or managed,
which consists of assets owned by the Bank, assets managed by the trust and
assets gathered by the broker-dealer, reached $3.585 billion, an increase of
24% when compared to the $2.884 billion a year ago. At December 31, 1998,
assets owned by the Bank reached $1.458 billion from $1.203 million a year
ago, an increase of 21%. Assets managed by the trust grew 17% to $1.314
billion versus $1.121 billion a year ago, and assets gathered by the
broker-dealer increased 45% to $813.3 million from $560.6 million the year
before.
See "Selected Financial Data" on page 10 for more details. The different
components that resulted in the Group's continued profitability are discussed
in detail in the following pages.
RESULT OF OPERATIONS
As a diversified financial services provider, the Group'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, the Group's main source of
earnings, 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). As further discussed in the Risk Management section, the Group
constantly monitors the composition and repricing of its assets and
liabilities to maintain its net interest income at adequate levels and to
avoid undertaking highly sensitive positions that could affect its earnings
capacity in a volatile interest rate environment. Non-interest income, the
second largest source of earnings, 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 of fiscal 1999 reached $11.70
million, 12% or $1.21 million higher than the $10.49 million reported in the
same period of fiscal 1998. For the first six months of fiscal 1999, net
interest income also rose 12% to $22.89 million from $20.38 million fin the
same period a year ago. The net interest income growth for the second quarter
and first six months of fiscal 1999 was driven by increases due to a higher
volume of net interest-earning assets and was partially offset by a margin
erosion due to changes in rates and in the composition of interest-earning
assets and related interest-bearing liabilities.
For the second quarter of fiscal 1999 the interest rate spread and margin
were 3.39% and 3.61%, as compared to 3.60% and 3.83%, respectively, in the
same period of fiscal 1998. For the first six months of fiscal 1999 these
were 3.37% and 3.60%, respectively, versus 3.58% and 3.81%, respectively, in
the same period of fiscal 1998. Table 1 and 1-A analyzes the major categories
of interest-earning assets and interest-bearing liabilities, and their
respective interest income and expenses and yields and costs, and their
impact on net interest income due to their changes in volume and rates.
The Group's interest income for the second quarter of fiscal of 1999
increased by 12% or $2.88 million to $27.76 million from $24.88 million
posted in the second quarter of fiscal 1998. For the first six months of
fiscal 1999, interest income rose by 14% or $6.54 million to $54.87 million
from $48.33 million posted in fiscal 1998. These growths in interest income
were driven by larger average volume of interest-earning assets, partially
offset by a decline in the yield performance of interest-earning assets.
Average interest-earnings assets for the second quarter of fiscal 1999
reached $1.306 billion an increase of 18% compared with $1.105 billion for
the same quarter of fiscal 1998. For the first six months of fiscal 1999,
average interest-earning assets grew 19% to $1.281 billion from $1.078
million a year ago. These volume increase were fueled by a solid growth on
the Group's investment portfolios, mainly mortgaged-backed securities as
Oriental continues its strategy of securiticizing its larger mortgage loan
production.
9
<PAGE>
SELECTED FINANCIAL DATA
FOR THE QUARTER AND SIX MONTHS PERIOD ENDED ON DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS PERIOD ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------- --------------------------------------
1998 1997 1998 1997
-------------------- ------------------- ------------------- ---------------
CONDENSED EARNINGS REPORT:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $27,762 $24,877 $54,873 $48,331
INTEREST EXPENSE 16,059 14,385 31,988 27,955
--------------- ------------------- ------------------- -----------------
NET INTEREST INCOME 11,703 10,492 22,885 20,376
PROVISION FOR LOAN LOSSES 7,150 3,700 9,750 5,000
RECURRING NON-INTEREST INCOME 4,457 3,656 8,494 7,973
NON-RECURRING NON-INTEREST INCOME 6,862 3,152 8,517 3,945
RECURRING NON-INTEREST EXPENSES 8,012 7,476 15,248 15,265
NON-RECURRING NON-INTEREST EXPENSES 209 51 337 51
PROVISION FOR INCOME TAXES 1,284 857 2,135 1,825
--------------- ------------------- ------------------- -----------------
NET INCOME $ 6,367 $ 5,216 $12,426 $10,153
--------------- ------------------- ------------------- -----------------
INCOME PER SHARE:
- ------------------------------------------------------------------------------------------------------------------------------
BASIC $ 0.49 $ 0.39 $ 0.95 $ 0.77
--------------- ------------------- ------------------- -----------------
DILUTED $ 0.47 $ 0.38 $ 0.92 $ 0.74
--------------- ------------------- ------------------- -----------------
DIVIDENDS DECLARED PER SHARE $ 0.115 $ 0.094 $ 0.228 $ 0.188
--------------- ------------------- ------------------- -----------------
AVERAGE COMMON SHARES OUTSTANDING 13,077 13,285 13,125 13,242
AVERAGE POTENTIAL COMMON STOCK OPTIONS 393 469 397 451
--------------- ------------------- ------------------- -----------------
TOTAL AVERAGES SHARES AND EQUIVALENTS 13,470 13,754 13,522 13,693
--------------- ------------------- ------------------- -----------------
BOOK VALUE $ 8.17 $ 7.62
------------------- -----------------
MARKET PRICE AT PERIOD END $ 31.31 $ 22.18
------------------- -----------------
PERIOD END BALANCES: (DECEMBER 31, )
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL BANK ASSETS $1,457,500 $1,202,600
TRUST ASSETS MANAGED 1,313,800 1,120,700
ASSETS GATHERED BY BROKER-DEALER 813,300 560,600
------------------- -----------------
TOTAL FINANCIAL ASSETS $3,584,600 $2,883,900
------------------- -----------------
INVESTMENT AND TRADING SECURITIES $ 837,320 $ 585,619
LOANS AND LOANS HELD-FOR-SALE, NET 555,095 558,995
------------------- -----------------
INTEREST-EARNING ASSETS $1,392,415 $1,144,614
------------------- -----------------
DEPOSITS $ 618,622 $ 531,058
REPURCHASE AGREEMENTS 534,290 330,708
BORROWINGS 166,600 218,978
------------------- -----------------
INTEREST-BEARING LIABILITIES $1,319,512 $1,080,744
------------------- -----------------
CAPITAL $ 110,772 $ 101,292
------------------- -----------------
REGULATORY CAPITAL RATIOS (IN PERCENT):
- ------------------------------------------------------------------------------------------------------------------------------
LEVERAGE CAPITAL 7.24% 7.97%
------------------- -----------------
TOTAL RISK-BASED CAPITAL 19.62% 19.45%
------------------- -----------------
TIER 1 RISK-BASED CAPITAL 18.37% 18.20%
------------------- -----------------
SELECTED FINANCIAL RATIOS (IN PERCENT):
- ------------------------------------------------------------------------------------------------------------------------------
RETURN ON AVERAGE EQUITY (ROE) 1.79% 1.73%
------------------- -----------------
RETURN ON AVERAGE ASSETS (ROA) 21.73% 21.09%
------------------- -----------------
EFFICIENCY RATIO 48.59% 52.35%
------------------- -----------------
EXPENSE RATIO 1.05% 1.22%
------------------- -----------------
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 7.60% 8.42%
------------------- -----------------
INTEREST RATE SPREAD 3.37% 3.58%
------------------- -----------------
OTHER INFORMATION:
- ------------------------------------------------------------------------------------------------------------------------------
NUMBER OF BANKING OFFICES 19 18
------------------- -----------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) SECOND QUARTER OF FISCAL,
- ----------------------------------------- --------------------------------------------------------------------------------------
INTEREST AVERAGE RATE AVERAGE BALANCE
------------------------------- ------------------------ -------------------------
DESCRIPTION 1999 1998 1999 1998 1999 1998
- ----------------------------------------- -------------- -------------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
- ------------------------
REAL ESTATE LOANS (2) $ 6,972 $ 6,734 9.95% 9.53% $ 280,169 $ 282,721
CONSUMER LOANS 4,468 3,443 13.80% 13.77% 128,462 99,217
COMMERCIAL LOANS 257 268 10.18% 10.61% 10,103 10,119
FINANCING LEASES 3,534 4,757 11.97% 12.41% 118,096 153,349
---------- ---------- --------- --------- ---------- ---------
TOTAL LOANS (1) 15,231 15,202 11.32% 11.12% 536,830 545,406
---------- ---------- --------- --------- ---------- ---------
MORTAGE-BACKED SECURITIES 8,593 5,789 6.49% 7.13% 529,596 324,990
INVESTMENT SECURITIES 3,601 3,624 6.66% 6.74% 216,246 215,124
OTHER INTEREST-EARNING ASSETS 337 262 5.59% 5.15% 23,651 19,890
---------- ---------- --------- --------- ---------- ---------
TOTAL INVESTMENTS 12,531 9,675 6.51% 6.91% 769,493 560,004
---------- ---------- --------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $ 27,762 $ 24,877 8.49% 8.99% $1,306,323 $1,105,410
---------- ---------- --------- --------- ---------- ---------
INTEREST-BEARING LIABILITIES:
- -----------------------------
SAVINGS AND DEMAND ACCOUNTS $ 701 $ 687 2.21% 2.64% $ 125,785 $ 103,247
CERTIFICATES OF DEPOSIT 4,902 4,484 5.28% 5.42% 368,102 328,336
IRA'S AND ZERO COUPON BONDS 1,667 1,225 5.83% 6.14% 113,350 79,268
---------- ---------- --------- --------- ---------- ---------
TOTAL DEPOSITS 7,270 6,396 4.75% 4.97% 607,237 510,851
---------- ---------- --------- --------- ---------- ---------
REPURCHASE AGREEMENTS 6,298 4,531 5.29% 5.51% 472,701 326,259
FHLB BORROWINGS AND ADVANCES 876 1,550 5.73% 5.85% 60,697 105,204
TERM NOTES AND OTHER SOURCES OF FUNDS 1,366 1,553 4.94% 5.25% 108,220 115,637
INTEREST RATE RISK MANAGEMENT 249 355 0.15% 0.26% -- --
---------- ---------- --------- --------- ---------- ---------
TOTAL OTHER BORROWINGS 8,789 7,989 5.44% 5.79% 641,618 547,100
---------- ---------- --------- --------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 16,059 $ 14,385 5.10% 5.39% $1,248,855 $1,057,951
---------- ---------- --------- --------- ---------- ---------
NET INTEREST INCOME $ 11,703 $ 10,492 3.39% 3.60%
---------- ---------- --------- ---------
---------- ---------- --------- ---------
INTEREST RATE MARGIN 3.61% 3.83%
--------- ---------
NET INTEREST EARNING ASSETS $ 57,468 $ 47,459
--------- ---------
--------- ---------
INTEREST-EARNING ASSETS TO INTEREST BEARING LIABILITIES RATIO 104.60% 104.49%
--------- ---------
<CAPTION>
CHANGE IN NET INTEREST INCOME DUE TO VOLUME/RATE: VOLUME RATE TOTAL
------------------- ---------------- -----------------
<S> <C> <C> <C>
INTEREST INCOME
- ---------------
LOANS (1) (2) $ (147) $ 176 $ 29
MORTAGE-BACKED SECURITIES 3,645 (841) 2,804
INVESTMENT SECURITIES 19 (42) (23)
OTHER INTEREST-EARNING ASSETS 48 27 75
------- ------- -------
TOTAL INTEREST INCOME $ 3,565 $ (680) $ 2,885
------- ------- -------
INTEREST EXPENSE
- ----------------
DEPOSITS $ 1,211 $ (337) $ 874
REPURCHASE AGREEMENTS 2,017 (250) 1,767
FHLB ADVANCES AND BORROWINGS (650) (24) (674)
TERM NOTES AND OTHER SOURCES OF FUNDS (97) (90) (187)
INTEREST RATE RISK MANAGEMENT (52) (54) (106)
------- ------- -------
TOTAL INTEREST EXPENSE $ 2,429 $ (755) $ 1,674
------- ------- -------
NET INTEREST INCOME $ 1,136 $ 75 $ 1,211
------- ------- -------
------- ------- -------
</TABLE>
NOTES:
(1) - LOANS AVERAGE BALANCES EXCLUDE NON-PERFORMING LOANS.
(2) - REAL ESTATE AVERAGE BALANCES INCLUDE LOANS-HELD-FOR-SALE.
11
<PAGE>
TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FIRST SIX MONTHS OF FISCAL,
- -------------------------------------------- -----------------------------------------------------------------------------------
INTEREST AVERAGE RATE AVERAGE BALANCE
-------------------------- --------------------- ---------------------------
DESCRIPTION 1999 1998 1999 1998 1999 1998
- -------------------------------------------- ---------- ---------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
- ------------------------
REAL ESTATE LOANS (2) $ 14,237 $ 13,227 9.96% 9.51% $ 285,982 $ 278,149
CONSUMER LOANS 8,712 6,493 13.63% 13.61% 126,791 94,658
COMMERCIAL LOANS 532 561 11.27% 11.38% 9,443 9,859
FINANCING LEASES 7,314 9,255 11.96% 11.87% 122,320 155,902
---------- ---------- -------- ------ ---------- ----------
TOTAL LOANS (1) 30,795 29,536 11.28% 10.94% 544,536 538,568
---------- ---------- -------- ------ ---------- ----------
MORTAGE-BACKED SECURITIES 15,331 11,035 6.56% 7.15% 467,596 308,857
INVESTMENT SECURITIES 8,111 7,104 6.57% 6.77% 246,906 209,998
OTHER INTEREST-EARNING ASSETS 636 656 5.65% 6.30% 22,001 20,367
---------- ---------- -------- ------ ---------- ----------
TOTAL INVESTMENTS 24,078 18,795 6.53% 6.97% 736,503 539,222
---------- ---------- -------- ------ ---------- ----------
TOTAL INTEREST-EARNING ASSETS $ 54,873 $ 48,331 8.55% 8.95% $1,281,039 $1,077,790
---------- ---------- -------- ------ ---------- ----------
INTEREST-BEARING LIABILITIES:
- -----------------------------
SAVINGS AND DEMAND ACCOUNTS $ 1,445 $ 1,359 2.38% 2.62% $ 120,377 $ 102,759
CERTIFICATES OF DEPOSIT 9,777 8,965 5.37% 5.41% 360,961 328,694
IRA'S AND ZERO COUPON BONDS 3,319 2,429 5.83% 6.15% 112,955 78,363
---------- ---------- -------- ------ ---------- ----------
TOTAL DEPOSITS 14,541 12,753 4.85% 4.96% 594,293 509,816
---------- ---------- -------- ------ ---------- ----------
REPURCHASE AGREEMENTS 12,243 8,556 5.34% 5.47% 454,753 310,541
FHLB BORROWINGS AND ADVANCES 1,873 2,851 5.67% 5.78% 64,533 96,144
TERM NOTES AND OTHER SOURCES OF FUNDS 2,867 3,095 5.04% 5.25% 111,381 115,309
INTEREST RATE RISK MANAGEMENT 464 700 0.15% 0.27% -- --
---------- ---------- -------- ------ ---------- ----------
TOTAL OTHER BORROWINGS 17,447 15,202 5.49% 5.78% 630,667 521,994
---------- ---------- -------- ------ ---------- ----------
TOTAL INTEREST-BEARING LIABILITIES $ 31,988 $ 27,955 5.18% 5.37% $1,224,960 $1,031,810
---------- ---------- -------- ------ ---------- ----------
NET INTEREST INCOME $ 22,885 $ 20,376 3.37% 3.58%
---------- ---------- -------- ------
---------- ----------
INTEREST RATE MARGIN 3.60% 3.81%
-------- ------
NET INTEREST EARNING ASSETS $ 56,079 $ 45,980
---------- ----------
---------- ----------
INTEREST-EARNING ASSETS TO INTEREST BEARING LIABILITIES RATIO 104.58% 104.46%
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN NET INTEREST INCOME DUE TO VOLUME/RATE: VOLUME RATE TOTAL
- ------------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
- ---------------
LOANS (1) (2) $ 541 $ 718 $ 1,259
MORTAGE-BACKED SECURITIES 5,671 (1,375) 4,296
INVESTMENT SECURITIES 1,249 (242) 1,007
OTHER INTEREST-EARNING ASSETS 51 (71) (20)
------- ------- -------
TOTAL INTEREST INCOME $ 7,512 $ (970) $ 6,542
------- ------- -------
INTEREST EXPENSE
- ----------------
DEPOSITS $ 2,167 $ (379) $ 1,788
REPURCHASE AGREEMENTS 3,941 (254) 3,687
FHLB ADVANCES AND BORROWINGS (914) (64) (978)
TERM NOTES AND OTHER SOURCES OF FUNDS (103) (125) (228)
INTEREST RATE RISK MANAGEMENT (108) (128) (236)
------- ------- -------
TOTAL INTEREST EXPENSE 4,983 (950) 4,033
------- ------- -------
NET INTEREST INCOME $ 2,529 $ (20) $ 2,509
------- ------- -------
</TABLE>
NOTES:
- ------
(1) - LOANS AVERAGE BALANCES EXCLUDE NON-PERFORMING LOANS.
(2) - REAL ESTATE AVERAGE BALANCES INCLUDE LOANS-HELD-FOR-SALE.
12
<PAGE>
The average yield on interest-earning assets for the second quarter of fiscal
1999 was 8.49% or 50 basis points lower than the 8.99% attained in fiscal
1998. For the first six months of fiscal 1999 was to 8.55% or 40 basis points
lower than the 8.95% reported a year ago. The main reason for these
reductions was the proportionately higher increase in the total average
investment portfolio, which carries a lower yield than the loan portfolio but
generates a significant amount of tax-exempt interest, which lowers the
Group's effective tax rate.
For the second quarter and first six months of fiscal 1999, the average yield
on investments securities fell to 6.51% and 6.53%, respectively, versus the
6.91% and 6.97%, respectively, attained in fiscal 1998, due to a general
reduction on market rates. The yield on loans improved to 11.32% and 11.28%,
respectively, versus the 11.12% and 10.94% reported in the respective periods
of fiscal 1998. The improvements in the loan yield performance were fueled by
the higher yields attained on the consumer and real estate loan portfolios.
Interest expense for the second quarter fiscal 1999 rose 12% or $1.67 million
to $16.06 million from $14.39 million reported in fiscal 1998. For the first
six months of fiscal 1999, interest expense also grew by 12% or $4.03 million
to $31.99 million from $27.96 million posted in fiscal 1998. These increases
were driven by a higher volume of interest-bearing liabilities used to fund
the Group's interest-earning assets growth, as previously explained;
tempered by a decline in the average cost of funds.
Average interest-bearing liabilities for the second quarter and first six
months of fiscal 1999 reached $1.24 billion and $1.22 billion, respectively,
versus $1.06 billion and $1.03 billion, respectively, in fiscal 1998, an
increase of 18% and 19%, respectively. The growths in interest-bearing
liabilities average volume reflect strong increases in the average volume of
deposits and repurchase agreements. In the second quarter and first six
months of fiscal 1999 average deposits volume rose to $607.2 million and
$594.3, respectively, from $510.9 million and $509.8, respectively, in fiscal
1998, an increase of 19% and 16%, respectively. IRA accounts were the main
contributor to the rise, followed by certificates of deposits and savings and
demand accounts. The average volume of repurchase agreements for the second
quarter of fiscal 1999 rose by 45% to $472.7 million from $326.2 million in
fiscal 1998. For the first six months of fiscal 1999, grew by 46% to $454.8
from $310.5 million in fiscal 1998. These rises were necessary to fund the
Group's total interest-earning asset growth.
The average cost of funds on interest-bearing liabilities for the second
quarter of fiscal 1999 was 5.10% or 29 basis points lower than the 5.39%
attained in fiscal 1998. For the first six months of fiscal 1999, was 5.18%
or 19 basis points lower than the 5.37% attained in fiscal 1998. Both
decreases were principally related to a decline in the cost of repurchase
agreements, IRA funds and term notes; enhanced by a reduction in the cost of
interest-hedging activities (swaps and caps). A favorable lower interest rate
scenario resulting from short-term interest rate cuts by the federal reserve
triggered the overall reduction in cost of funds.
PROVISION FOR LOAN LOSSES
For the second quarter of fiscal 1999, the Group provided $7.15 million for
loan losses compared with $3.7 million for the same period of fiscal 1998.
For the six-month period ended December 31, 1998, the provision for loan
losses amounted to $9.75 million compared with $5 million in the same period
the year before. The main reason for the increase in the provision for fiscal
1999 was management's goal of further expanding the Group's coverage ratio of
reserve to total loans, which increased to 1.72% from .98% a quarter ago.
Also to respond to the higher level of credit losses in the consumer and
leasing portfolios due to a record level of personal bankruptcies experienced
in Puerto Rico. Please refer to the allowance for loan losses and
non-performing assets section for a more detailed analysis of the allowance
for loan losses, net charge-offs and credit quality statistics.
NON-INTEREST INCOME
During the second quarter and first six months of fiscal 1999 non-interest
income continued to be a major driver of the Group's earnings improvement as
it reached $11.32 million and $17.01, respectively, from $6.81 million and
$11.92 million, respectively, in the same period of fiscal 1998, see Table 2.
Recurring non-interest income for the second quarter and first six months of
fiscal 1999 totaled $4.46 million and $8.49 million, respectively, which
represents an increase of 22% and 7%, respectively, versus the $3.66 million
and $7.97 million, respectively, in the same period of fiscal 1998. These
rises were fueled by increases in mortgage banking activities and trust,
brokerage and money management revenues; partially tempered by a decline in
bank service fees and charges and other income as result of a lower leasing
activity.
Trust, money management and brokerage fees, the principal component of
recurring non-interest income, reflected strong results during fiscal 1999.
For the second quarter and first six months of fiscal 1999, this fees totaled
$2.28 million and $4.59 million, respectively, versus the $1.87 million and
$4.01 million recorded in the same period the year before, up 22% and 14%,
respectively. This 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, see "Financial Condition" section.
13
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS PERIOD ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
TABLE 2 - NON-INTEREST INCOME SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK SERVICE FEES AND CHARGES $ 851 $ 986 $ 1,645 $ 2,010
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 2,280 1,866 4,594 4,013
RECURRING MORTGAGE BANKING ACTIVITIES 1,239 639 2,033 1,599
RENT AND OTHER OPERATING INCOME 87 165 222 351
------- ------- ------- -------
RECURRING NON-INTEREST INCOME 4,457 3,656 8,494 7,973
------- ------- ------- -------
NET GAIN ON SALE OF INVESTMENTS 6,841 264 8,447 375
TRADING ACCOUNT INCOME 21 58 70 168
FEES FROM MORTGAGE LOANS SERVICED FOR OTHERS, NET -- 123 -- 695
NET GAIN ON SALE OF SERVICING ASSETS -- 2,707 -- 2,707
------- ------- ------- -------
NON RECURRING NON-INTEREST INCOME 6,862 3,152 8,517 3,945
------- ------- ------- -------
TOTAL NON-INTEREST INCOME $11,319 $ 6,808 $17,011 $11,918
------- ------- ------- -------
------- ------- ------- -------
RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 55.63% 48.90% 55.71% 52.23%
------- ------- ------- -------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
COMPENSATION AND BENEFITS $ 3,799 $ 3,734 $ 7,273 $ 7,631
OCCUPANCY AND EQUIPMENT 1,188 1,144 2,426 2,274
PROFESSIONAL FEES 654 314 995 653
ADVERTISING AND PROMOTION 703 466 1,262 1,135
INSURANCE, INCLUDING DEPOSITS INSURANCE 102 265 192 387
REAL ESTATE OWNED EXPENSES 5 11 12 40
COMMUNICATIONS 413 328 758 705
MUNICIPAL AND PROPERTY TAXES 428 411 857 821
PRINTING, STATIONERY, POSTAGE AND SUPPLIES 202 163 358 332
OTHER OPERATING EXPENSES 518 640 1,115 1,287
------- ------- ------- -------
TOTAL RECURRING NON-INTEREST EXPENSES 8,012 7,476 15,248 15,265
OTHER NON-RECURRING EXPENSES 209 51 337 51
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSES $ 8,221 $ 7,527 $15,585 $15,316
------- ------- ------- -------
RELEVANT RATIOS:
- ----------------
EFFICIENCY RATIO 49.58% 52.84% 48.59% 52.35%
------- ------- ------- -------
EXPENSE RATIO 1.09% 1.34% 1.05% 1.22%
------- ------- ------- -------
TABLE 4 - COMPENSATION AND BENEFITS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED COMPENSATION $ 2,030 $ 2,146 $ 4,017 $ 4,368
VARIABLE COMPENSATION 1,439 1,208 2,611 2,513
OTHER COMPENSATION AND BENEFITS 330 380 645 750
------- ------- ------- -------
TOTAL COMPENSATION $ 3,799 $ 3,734 $ 7,273 $ 7,631
------- ------- ------- -------
RELEVANT RATIOS:
COMPENSATION TO TOTAL RECURRING NON-INTEREST EXPENSES 47.42% 49.95% 47.70% 49.99%
------- ------- ------- -------
VARIABLE COMPENSATION OF TOTAL COMPENSATION 41.48% 36.02% 39.39% 36.52%
------- ------- ------- -------
COMPENSATION TO TOTAL AVERAGE ASSETS 1.06% 1.24% 1.05% 1.29%
------- ------- ------- -------
AVERAGE COMPENSATION PER EMPLOYEE $ 39.9 $ 37.7
------- -------
BANK ASSETS PER EMPLOYEE $ 4,642 $ 3,181
------- -------
GROUP'S WORK FORCE:
- -------------------
BANK STAFF 314 347
TRUST STAFF 28 24
BROKERAGE STAFF 11 7
------- -------
353 378
------- -------
</TABLE>
14
<PAGE>
Recurring mortgage banking activities, amounted to $1.24 million in the
second quarter of fiscal 1999, 94% higher than the $639,000 earned in the
same period of fiscal 1998. They totaled $2.03 million for the first six
months of fiscal 1999, an increase of 27% versus the $1.60 million a year
ago. Both increases were driven by a higher volume of loan origination
combined with gains realized on sale of mortgage loans in the secondary
market. This increase reflects the robust home finance market in Puerto Rico
as Oriental's consolidates as the third largest mortgage origination producer.
Bank services fees and charges, which consist primarily of service charges on
deposit accounts, leasing fees and late charges collected on loans, amounted
to $851,000 for the second quarter fiscal 1999, 14% lower when compared to
the $986,000 reported on the same period a year earlier. They totaled $1.65
million for the first six months of fiscal 1999, a 18% drop versus the $2.01
million on the same period in fiscal 1998. Both decreases were a combination
of a decline in leasing fees, as result of Group's lower leasing's lending
activity, partially offset by a rise in fees on deposit accounts and other
service fees.
For the second quarter of fiscal 1999, securities and trading gains amounted
to $6.86 million versus $322,000 in the same period of fiscal 1998. For the
first six months of fiscal 1999, they increased to $8.52 million from
$543,000 reported in the same period a year ago. As a result of the favorable
market opportunities, during the past quarter the Group sold a significant
quantity of investment securities as part of its asset/liability management,
which reflects the Group's strategy of maximizing profits in the
available-for-sale securities portfolio. The gains realized resulted from
favorable market conditions as interest rates declined during the latter part
of 1998. For further discussion of the Group's investment securities, see
Note 2 of the attached Consolidated Financial Statements.
During the second quarter of fiscal 1998, 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 mortgage origination, trust, money management,
brokerage, personal loans and deposit accounts with the highest earnings
potential. The decrease is servicing income is directly related to the
divestiture mentioned above.
NON-INTEREST EXPENSES
As shown on Table 3, recurring non-interest expenses for the second quarter
of fiscal 1999, increased 7% to $8.01 million from $7.48 million during the
same period of fiscal 1998. For the first six months of fiscal 1999 and 1998
they remained flat at $15.2 million. The efficiency ratio and the expense
ratio for the first six months of fiscal 1999 improved to 48.59% and 1.05%,
respectively, from 52.35% and 1.22%, respectively, the year before.
Employee compensation and benefits, the Group's largest expense category,
amounted to $3.80 million for the second quarter of fiscal 1999, a 2%
increase when compared to the $3.73 million reported in the same period of
fiscal 1998. For the first six months of fiscal 1999 totaled $7.27 million,
5% lower than $7.63 million reported in fiscal 1998. The increase in the
second quarter was driven by a growth in variable compensation, which
increased 19% or $231,000 due to the Group's greater use of variable pay by
performance compensation structure that is tied to the increase in
production. In the second quarter of fiscal 1999, variable compensation
represented 41.48% of total compensation versus 36.02% in fiscal 1998. The
reduction for the first six months of fiscal 1999 was driven by a 7%
reduction in Group's personnel as result of the divestiture of the mortgage
servicing department and reengineering of some of the Group's support
departments. Compensation and benefits as a percentage of total average
assets ratio for the first six months of fiscal 1999 improved to 1.05% versus
1.29% the in the same period of the year before. Table 4 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 12.6% to $4.21 million as compared to $3.74 million during the
same period of fiscal 1998. For the first six months of fiscal 1999, they
totaled $7.97 million or 4.5% higher than $7.63 million reported in fiscal
1998. These rises were led by increases in professional and service fees,
advertising and business promotion and occupancy and equipment. The larger
amount of professional and service fees reflect the Group's higher
expenditures related with consulting and technical support. The advertising
and promotion growth results 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
depreciation from leasehold improvements and EDP equipment. This results from
the additional banking offices opened during the past 12 months and the
enhancements made to the Group's systems to enable them expand its electronic
delivery capabilities and improve the customers' service delivery.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of fiscal 1999 amounted
to $1.28 million or 16.7% of pre-tax earnings compared with $857,000 million
or 14.1% of pre-tax earnings a year ago, up 50%. For the first six months of
fiscal 1999, they totaled $2.14 million or 17% higher than $1.83 million
reported in fiscal 1998. The effective tax rate for the first six months of
fiscals 1999 and 1998 were 14.6% and 15.2%, respectively. The net increase in
fiscal 1999 was mainly due to higher pre-tax earnings, partially offset by
the larger level of tax-exempt interest. 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 are exempt from income taxes,
net of the disallowance of expenses attributable to the exempt income.
15
<PAGE>
FINANCIAL CONDITION
As shown on Table 5, at December 31, 1998, the Group's total financial assets
owned or managed, which consists of assets owned by the Bank, assets managed
by the trust and assets gathered by the broker-dealer, reached $3.585
billion, an increase of 24% when compared to the $2,884 billion a year ago.
At December 31, 1998, assets owned by the Bank reached $1,457 billion from
$1,203 million a year ago, an increase of 21%. Assets managed by the trust
grew 17% to $1.314 billion versus 1.121 billion a year ago, and assets
gathered by the broker-dealer increased 45% to $813.3 million from $560.6
million the year before. Detailed information concerning each of the items
that comprise the Group's financial assets managed follows:
GROUP'S OWNED ASSETS
At the end of the second quarter of fiscal 1999, the Bank's total assets
amounted $1.457 billion, an increase of 21% when compared to the $1.203
billion a year ago. At the same date, interest-earning assets reached $1.392
billion, an increase of $247 million or 22% versus the $1.145 billion a year
earlier. This increase reflects a significant growth in total investments of
$252 million or 43%. Refer to Table 6 for the Bank's assets summary.
Total investments are Oriental's largest interest-earning assets component. It
consists mainly of money market investments, U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities and PR Government
municipal bonds. The investment portfolio is of a high quality, approximately
98% is rated AAA at the end of the second quarter of fiscal 1999, and
generates a significant amount of tax-exempt interest which lowers the
Group's effective tax rate, see Table 6.
The investment portfolio expansion was driven by a strong growth in
mortgage-backed securities, which increased to $596.7 million or 71% of the
total portfolio from $300.4 million or 51% the year before, as Oriental
continues its strategy of pooling guaranteed real estate loans into
mortgage-backed securities. However, debt securities decreased 18% to $190.5
million or 23% of the total portfolio from $233.6 million or 40% a year ago.
This reduction reflects the significant quantity of US Government securities
sold during the past quarter as part of the Group's asset/liability
management, as previously explained. All of the investment securities sold
were replenished with mortgage-backed securities that provide the Group a
better yield performance and liquidity position. Refer to Table 6 for the
Group's investments summary and composition.
At December 31, 1998, Oriental's loan portfolio, the second largest category
of the Bank's interest-earning assets, amounted to $555.1 million, 1% lower
than the $559.0 million a year ago. This net decline was led by a downsize in
the leasing and commercial portfolio's of $38.3 million or 23% and $1.2
million or 11%, respectively, followed by an increase in the allowance for
loan losses of $2.6 million or 36%. These were partially offset by increases
in real estate and consumer loans portfolios of $13.4 million or 5% and $24.7
million or 23%, respectively. Table 6 presents the Bank's loan portfolio
composition and mix at the end of the periods analyzed.
At the end of the second quarter of fiscal 1999, the consumer loans portfolio
totaled $133.3 million or 23.6% of the Group's loan portfolio, a 23% growth
versus the $108.6 million or 19.2% of the Group's loan portfolio a year ago.
Personal loans which amounted to $101.6 million at the end of the second
quarter of fiscal 1999, or 27% over the $79.9 million reported the year
before, was the largest contributor to this growth. The increase in personal
loans was mainly attained through strong marketing efforts and the launching
of new products while controlling credit risk through prudent underwriting
standards and credit scoring system.
The Bank's real estate loans portfolio amounted to $296.6 million or 52.5% of
the loan portfolio at December 31, 1998, a 5% increase versus $283.2 million
or 50% of the loan's portfolio the year before. The increase was mostly
caused by an increase in originations due to the lower interest rate
environment which increased the demand for mortgage loans for home purchases,
as well as the demand for refinancing existing mortgages.
The Bank's leasing portfolio amounted to $125.1 million or 22.2% of the loan
portfolio at the end of the second quarter of fiscal 1999, a 23% decrease
versus $163.3 million or 28.9% of the loan portfolio a year ago. The decrease
was due to a decline in the volume of originations, largely attributed to the
strengthening of the underwriting standards in response to credit losses
experienced during the past year, see "Provision for Loan Losses" under
"Results of Operations".
TOTAL ASSETS MANAGED BY THE TRUST
The Group's trust offers various different types of IRA products and manages
401(K) and Keogh retirement plans, custodian and corporate trust accounts. At
December 31, 1998, total assets managed by the Group's trust amounted $1.314
billion, 17% higher than the $1.121 billion a year ago. This increase was
fueled by a solid 33.9% growth in individual retirement accounts (IRA), the
most significant asset managed, which totaled $477.8 million versus the
$356.8 million a year ago, followed by a 31.6% growth in 401(K) and Keogh
retirement plans managed.
16
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER-98 DECEMBER-97 JUNE-98
----------- ---------- ----------
TABLE 5 - FINANCIAL ASSETS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL GROUP ASSETS OWNED $1,457,500 $1,202,600 $1,311,400
TRUST ASSETS MANAGED 1,313,800 1,120,700 1,310,000
ASSETS GATHERED BY BROKER-DEALER 813,300 560,600 741,400
---------- ---------- ----------
TOTAL FINANCIAL ASSETS $3,584,600 $2,883,900 $3,362,800
---------- ---------- ----------
<CAPTION>
TABLE 6 - ASSETS SUMMARY AND COMPOSITION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% % %
TOTAL INVESTMENTS $ 837,320 57.5% $ 585,619 48.7% $ 706,652 53.9%
TOTAL LOANS, NET 555,095 38.1% 558,995 46.5% 545,420 41.6%
----------- ------- ----------- ---------- ----------- ----------
INTEREST-EARNING ASSETS 1,392,415 95.6% 1,144,614 95.2% 1,252,072 95.5%
NON INTEREST-EARNING ASSETS 65,061 4.4% 57,931 4.8% 59,316 4.5%
----------- ------- ----------- ---------- ----------- ----------
$1,457,476 100.0% $1,202,545 100.0% $1,311,388 100.0%
----------- ------- ----------- ---------- ----------- ----------
INVESTMENT SECURITIES:
- ----------------------
TRADING SECURITIES $ 33,463 4.0% $ 34,087 5.8% $ 42,440 6.0%
MORTGAGE-BACKED SECURITIES 596,695 71.3% 300,359 51.3% 363,836 51.5%
INVESTMENT SECURITIES 190,500 22.8% 233,579 39.9% 279,675 39.6%
FHLB STOCK 13,257 1.6% 10,043 1.7% 10,043 1.4%
MONEY MARKET INVESTMENTS 3,405 0.3% 7,551 1.3% 10,658 1.5%
----------- ------- ----------- ---------- ----------- ----------
$ 837,320 100.0% $ 585,619 100.0% $ 706,652 100.0%
----------- ------- ----------- ---------- ----------- ----------
LOANS, NET :
- ------------
REAL ESTATE LOANS $ 296,558 52.5% $ 283,181 50.0% $ 278,256 50.5%
CONSUMER LOANS 133,339 23.6% 108,588 19.2% 122,281 22.2%
COMMERCIAL LOANS 9,813 1.7% 11,036 1.9% 9,428 1.7%
FINANCING LEASES 125,079 22.2% 163,320 28.9% 141,113 25.6%
----------- ------- ----------- ---------- ----------- ----------
564,789 100.0% 566,125 100.0% 551,078 100.0%
------- ---------- ----------- ----------
ALLOWANCE FOR LOAN LOSSES (9,693) (7,131) (5,658)
-----------
$ 555,096 $ 558,994 $ 545,420
----------- ----------- -----------
<CAPTION>
TABLE 7 - LIABILITIES SUMMARY AND COMPOSITION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% % %
DEPOSITS $ 618,622 45.90% $ 531,058 48.20% $ 571,431 47.40%
REPURCASE AGREEMENTS 534,290 39.7% 330,708 30.0% 416,171 34.6%
OTHER BORROWINGS 166,600 12.4% 218,978 19.9% 189,388 15.7%
----------- ------- ----------- ---------- ----------- ----------
INTEREST-BEARING LIABILITIES 1,319,512 98.0% 1,080,744 98.1% 1,176,990 97.7%
NON-INTEREST BEARING LIABILITES 27,192 2.0% 20,509 1.9% 27,368 2.3%
----------- ------- ----------- ---------- ----------- ----------
$1,346,704 100.0% $1,101,253 100.0% $1,204,358 100.0%
----------- ------- ----------- ---------- ----------- ----------
DEPOSITS:
- ---------
SAVINGS ACCOUNTS $ 85,985 13.9% $ 74,634 14.1% $ 76,523 13.4%
DEMAND AND NOW ACCOUNTS 48,617 7.9% 30,903 5.8% 36,005 6.3%
CERTIFICATES OF DEPOSIT 365,352 59.1% 340,608 64.1% 342,439 59.9%
IRA ACCOUNTS 114,189 18.5% 81,463 15.3% 112,622 19.7%
ACCRUED INTEREST 4,479 0.6% 3,450 0.7% 3,842 0.7%
----------- ------- ----------- ---------- ----------- ----------
$ 618,622 100.0% $ 531,058 100.0% $ 571,431 100.0%
----------- ------- ----------- ---------- ----------- ----------
OTHER BORROWINGS:
- -----------------
FHLB FUNDS $ 60,100 36.10% $ 104,200 47.60% $ 74,800 39.50%
BONDS PAYABLE -- 0.00% 278 0.10% 88 0.00%
TERM NOTES 106,500 63.90% 114,500 52.30% 114,500 60.50%
LINES OF CREDIT -- 0.00% -- 0.00% -- 0.00%
----------- ------- ----------- ---------- ----------- ----------
$ 166,600 100.00% $ 218,978 100.00% $ 189,388 100.00%
----------- ------- ----------- ---------- ----------- ----------
</TABLE>
17
<PAGE>
TOTAL ASSETS GATHERED BY BROKER-DEALER
The Group's broker-dealer subsidiary offers a wide array of investment
alternatives to its client's base such as fixed and variable annuities,
tax-advantaged fixed income securities, mutual funds, stocks and bonds. At
December 31, 1998, total assets gathered by the broker-dealer from its
customer investment accounts reached $813.3 million, up 45% from $560.6
million a year ago.
LIABILITIES AND SOURCES OF FUNDS
As shown in Table 7, at December 31, 1998, Oriental's total liabilities
reached $1.347 billion, 22% higher than the $1.101 billion reported a year
ago. Interest-bearing liabilities, the Group's sources of funding, amounted
to $1.320 billion at the end of the second quarter of fiscal 1999 versus
$1.081 billion the year before, a 22% increase. This growth was driven by
increases in deposits and repurchase agreements of 16% or $87.6 million and
62% or $203.6 million, respectively.
Deposits at the end of the second quarter of fiscal 1999, the largest
category of the Group's interest-bearing liabilities and a cost effective
source of funding, reached $618.6 million, up 16% versus the $531.1 million a
year ago. This growth was driven by a 40% rise in IRA accounts followed by
increases in savings and demand accounts and certificates of deposit of 28%
or 29.1 million and 7% or $24.7 million, respectively. Table 7 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. At December 31, 1998, repurchase
agreements and other borrowings amounted to $534.3 million and $166.6
million, respectively, compared to $330.7 million and $219.0 million,
respectively, a year ago.
The increase in repurchase agreements and other borrowings was necessary to
fund the increase in interest-earning assets experienced during the period,
particularly investment securities. The decrease in other borrowings was
mainly due to decline in advances from the Federal Home Bank of New York
("FHLB-NY"). The FHLB system functions as a source of credit to financial
institutions that are members of a regional Federal Home Loan Bank. As a
member of the of the FHLB-NY the Group can obtain 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 7 presents the composition of the Group's
other borrowings at the end of the periods analyzed.
CAPITAL STOCK DATA AND DIVIDENDS
At December 31, 1998, Oriental's total capital reached $110.8 million, a 9%
increase from $101.3 million a year ago. This increase was mainly attained
through earnings of $23.7 million posted during the past 12 months, combined
with a positive change in the valuation account for investment securities
available-for sale, partially offset by dividends paid and stock repurchase.
As authorized by the board of directors, during the first six months of
fiscal 1999, the Group repurchased 200,266 of its common stock. Of a total of
944,041 shares repurchased up to December 31, 1998, 448,555 shares were
retired from circulation in fiscal 1997, as required by the Puerto Rico
Banking law, and 495,486 shares with a cost of $11.9 million are held in
treasury by the Group.
On August 18, 1998, the Group declared a four-for-three (33.3%) stock split
on its 10,154,358 shares of common stock outstanding at September 30, 1998.
As a result, 3,384,674 shares of common stock were issued on October 15, 1998
thus increasing shares to 13,539,032 at such date.
During the first six months of fiscal 1999, the Group declared dividends
amounting to $3.0 million or $0.23 per share versus $2.5 million or $0.19 per
share in fiscal 1998, up 20%. For the first six months of fiscal 1999, the
dividend payout ratio and dividend yield were 24.35% and 1.50%, respectively,
compared to 24.37% and 1.79%, respectively, in the preceding fiscal year.
The Group continues to be a "well capitalized" institution, the highest
classification available under the capital standards set by the Federal
Deposit Insurance Corporation. To be in a "well capitalized" position, bank
or bank holding companies must meet or exceed a leverage ratio of 5%, a Tier
1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%.
At December 31, 1998, the Group had a leverage ratio of 7.24%; a Tier 1
risk-based ratio of 18.37%; and a total risk-based capital ratio of 19.62%
compared to 7.97%, 18.20% and 19.45%, respectively, a year ago.
The Group's common stock is traded in the New York Exchange (NYSE) under the
symbol OFG. The market value of the Group's common stock on the NYSE at
December 31, 1988, was $31.31 per share, 41% higher than the $22.18 per share
a year earlier, as a result the Group's market capitalization increased to
$424 million as compared to $295 million a year ago. The book value per share
at December 31, 1998 rose to $8.17 from $7.62 a year ago. Refer to Table 9
for the high, low and closing prices of the Group's stock for each quarter of
the last three fiscal periods.
18
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER-98 DECEMBER-97 JUNE-98
----------- ---------- ----------
TABLE 8 - CAPITAL, DIVIDENDS AND REGULATORY RATIOS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL $ 110,772 $ 101,292 $ 107,030
----------- ----------- -----------
OUTSTANDING SHARES 13,555 13,290 13,529
----------- ----------- -----------
CAPITAL TO ASSETS RATIO 7.60% 8.42% 8.16%
----------- ----------- -----------
DIVIDENDS DECLARED $ 3,026 $ 2,474 $ 5,442
----------- ----------- -----------
DIVIDEND PER SHARE $ 0.23 $ 0.19 $ 0.41
----------- ----------- -----------
LEVERAGE CAPITAL ( minimum
required - 3.00%) 7.24% 7.97% 7.70%
----------- ----------- -----------
TOTAL RISK-BASED CAPITAL
(minimum required - 8.00%) 19.62% 19.45% 21.68%
----------- ----------- -----------
TIER 1 RISK-BASED CAPITAL
(minimum required - 4.00%) 18.37% 18.20% 20.45%
----------- ----------- -----------
<CAPTION>
TABLE 9 - MARKET PRICES AND STOCK DATA
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE INFORMATION:
- ------------------
CLOSING PRICE $ 31.31 $ 22.18 $ 27.66
----------- ----------- -----------
HIGH $ 32.00 $ 23.63 $ 34.60
----------- ----------- -----------
LOW $ 28.00 $ 18.38 $ 27.66
----------- ----------- -----------
BOOK VALUE $ 8.17 $ 7.62 $ 7.99
----------- ----------- -----------
RELEVANT RATIOS:
- ----------------
PAYOUT RATIO 24.35% 24.37% 25.42%
----------- ----------- -----------
DIVIDEND YIELD 1.50% 1.79% 1.69%
----------- ----------- -----------
</TABLE>
The following provides the high and low prices and dividend per share of the
Group's stock for each quarter of the last three fiscal periods. Common stock
prices were adjusted to give retroactive effect to the stock splits declared on
the Group's common stock.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
QUARTER ENDED: PRICE PRICE PER SHARE
- ------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
FISCAL 1999
- -----------
DECEMBER 1998 $ 32.00 $ 28.00 $ 0.115
----------- ----------- -----------
SEPTEMBER 1998 $ 32.26 $ 28.84 $ 0.113
----------- ----------- -----------
FISCAL 1998
- -----------
JUNE 1998 $ 34.60 $ 27.67 $ 0.113
----------- ----------- -----------
MARCH 1998 $ 29.35 $ 24.85 $ 0.113
----------- ----------- -----------
DECEMBER 1997 $ 23.63 $ 18.38 $ 0.094
----------- ----------- -----------
SEPTEMBER 1997 $ 22.28 $ 16.95 $ 0.094
----------- ----------- -----------
FISCAL 1997
- -----------
JUNE 1997 $ 16.95 $ 13.65 $ 0.090
----------- ----------- -----------
MARCH 1997 $ 16.20 $ 12.53 $ 0.090
----------- ----------- -----------
DECEMBER 1996 $ 13.20 $ 10.95 $ 0.075
----------- ----------- -----------
SEPTEMBER 1996 $ 9.81 $ 10.95 $ 0.075
----------- ----------- -----------
</TABLE>
19
<PAGE>
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
At December 31, 1998, the Group's allowance for loan losses amounted to $9.69
million or 1.72% of total loans versus $7.13 million or 1.26% a year earlier.
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.
Net charge-offs for the second quarter of fiscal 1999, totaled $3.1 million
or 2.25% of average loans, compared to $2.0 million or 1.26%, respectively,
in the same period of fiscal 1998. For the first six months of fiscal 1999,
net charge-offs amounted to $5.72 million of 2.02% of average loans versus to
$3.3 million or 1.17% of average loans in fiscal 1998. The higher level of
credit losses experienced during the second quarter and first six months of
fiscal 1999 was primarily associated to a rise in consumer loans and
financing leases net charge-offs, see Provision for Loan Losses under Results
of Operations. Table 10 sets forth an analysis of activity in the allowance
for loan losses and presents selected loan loss statistics.
As shown on Table 11, at December 31, 1998, the Group's non-performing assets
consisted of non-performing loans, foreclosed real estate owned and other
repossessed assets. At the end of the second quarter of fiscal 1999, the
Group's non-performing assets totaled $23.0 million or 1.58% of total assets
versus $24.9 million or 2.07% of total assets a year earlier, 8% lower. The
reduction was principally due to a decline in non-performing loans and
repossessed vehicles. The decrease in non-performing loans was mainly on
consumer and finance leases as the Group continues to improve the quality of
these portfolios through stricter credit standards. Therefore, the level or
charge-offs in these portfolios should stabilize during the rest of fiscal
1999.
At December 31, 1998, the allowance for loan losses to non-performing loans
coverage ratio improved to 44.48% from 31.02% a year ago; excluding the
lesser risk real estate loans, the ratio substantially improved to 96.09%
from 51.11% for the respective periods. Detailed information concerning each
of the items that comprise non-performing assets follows:
- - REAL ESTATE LOANS - are placed on non-accrual basis when they become 90
days or more past due, unless they are well secured by real estate
collateral. Non-performing loans in this category are primarily residential
mortgage loans. 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. Real estate loans are charged-off based on
the specific evaluation of the collateral underlying the loan.
- - COMMERCIAL BUSINESS LOANS - are placed on non-accrual basis when they
become 90 days or more past due. At the date of our analysis, the Group's
non-performing commercial business loans consisted of 14 loans amounting
to $838,000 or $59,850 average per loan. Of the total balance, $696,000 or
9 loans are guaranteed by real estate. Commercial loans are charged-off
based on the specific evaluation of the collateral underlying the loan.
- - FINANCE LEASES - are placed on non-accrual status when they become 90 days
past due. At the date of our analysis, the Group's nonperforming auto and
equipment leases portfolio consisted of 385 units and 348 units,
respectively, amounting to $5.88 million or $15,260 average per lease and
$2.71 million or $7,795 average per lease, respectively. The underlying
collateral particularly secures these loans.
- - CONSUMER LOANS - are placed on non-accrual status when they become 90 days
past due. The Group's non-performing consumer loans consisted of 74 loans
amounting to $660,000 or $8,920 average per loan.
- - FORECLOSED REAL ESTATE - is initially recorded at the lower of the related
loan balance of fair value at the date of foreclosure, any excess of the
loan balance over the estimated fair market value of the property is
charged against the allowance for loan losses. Subsequently, any excess of
the carrying value over the estimated fair market value less disposition
cost is charged to operations. Therefore, no material losses are expected
on the final disposition. Management is actively seeking prospective
buyers for these foreclosed real estate properties.
- - OTHER 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, 1998, the inventory of repossessed automobiles and equipment
consisted of 39 units and 24 units, respectively, amounting to $613,000
or $15,720 average per unit and $270,000 or $11,250 average per unit,
respectively.
20
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS PERIOD ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
TABLE 10 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $ 5,683 $ 5,454 $ 5,658 $ 5,408
--------- --------- --------- ---------
PROVISION FOR LOAN LOSSES 7,150 3,700 9,750 5,000
--------- --------- --------- ---------
CHARGE-OFFS (3,752) (2,366) (6,780) (4,019)
RECOVERIES 612 343 1,065 742
--------- --------- --------- ---------
NET CHARGE OFF'S (3,140) (2,023) (5,715) (3,277)
--------- --------- --------- ---------
ENDING BALANCE $ 9,693 $ 7,131 $ 9,693 $ 7,131
--------- --------- --------- ---------
CHARGE-OFFS:
- ------------
REAL ESTATE -- (50) (2) (111)
CONSUMER $ (1,596) $ (1,168) $ (3,183) $ (1,748)
LEASING (2,007) (1,090) (3,311) (2,073)
COMMERCIAL AND OTHERS (149) (58) (284) (87)
--------- --------- --------- ---------
(3,752) (2,366) (6,780) (4,019)
--------- --------- --------- ---------
RECOVERIES:
- -----------
REAL ESTATE -- -- 16 --
CONSUMER 365 62 484 138
LEASING 218 281 501 603
COMMERCIAL AND OTHERS 29 -- 64 1
--------- --------- --------- ---------
612 343 1,065 742
--------- --------- --------- ---------
NET CHARGE-OFFS:
- ----------------
REAL ESTATE -- (50) 14 (111)
CONSUMER (1,231) (1,106) (2,699) (1,610)
LEASING (1,789) (809) (2,810) (1,470)
COMMERCIAL AND OTHERS (120) (58) (220) (86)
--------- --------- --------- ---------
$ (3,140) $ (2,023) $ (5,715) $ (3,277)
--------- --------- --------- ---------
LOANS:
- ------
OUTSTANDING AT DECEMBER 31, $ 564,788 $ 566,126 $ 564,788 $ 566,126
--------- --------- --------- ---------
AVERAGE $ 558,624 $ 568,393 $ 566,330 $ 561,555
--------- --------- --------- ---------
RATIOS:
- -------
RECOVERIES TO CHARGE-OFF'S 16.3% 14.5% 15.7% 18.5%
--------- --------- --------- ---------
NET CHARGE-OFFS TO AVERAGE LOANS 2.25% 1.42% 2.02% 1.17%
--------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.72% 1.26% 1.72% 1.26%
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
TABLE 11 - NON-PERFORMING ASSETS ( AT DECEMBER 31, )
- ----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS: % %
- ---------------------- ----- ------
<S> <C> <C> <C> <C>
-REAL ESTATE LOANS $11,707 53.7% $ 9,035 39.3%
-CONSUMER LOANS 660 3.0% 2,080 9.0%
-COMMERCIAL LOANS 839 3.8% 989 4.3%
-FINANCING LEASES 8,588 39.5% 10,883 47.4%
------- ------ ------- ------
NON-PERFORMING LOANS 21,794 100.0% 22,987 100.0%
------- ------ ------- ------
NON-PERFORMING LOANS 21,794 94.8% 22,987 92.4%
FORECLOSED REAL ESTATE 316 1.4% 567 2.3%
REPOSSESSED VEHICLES 613 2.7% 1,158 4.7%
REPOSSESSED EQUIPMENT 270 1.2% 169 0.7%
------- ------ ------- ------
$22,993 100.0% $24,881 100.0%
------- ------ ------- ------
RATIOS:
- -------
NON-PERFORMING LOANS TO TOTAL LOANS 3.86% 4.06%
------- ------
ALLOWANCE TO NON-PERFORMING LOANS 44.48% 31.02%
------- ------
ALLOWANCE TO NON-PERFORMING LOANS (EXCLUDING MORTGAGE) 96.09% 51.11%
------- ------
NON-PERFORMING ASSETS TO TOTAL ASSETS 1.58% 2.07%
------- ------
NON-PERFORMING ASSETS TO TOTAL CAPITAL 20.76% 24.56%
------- ------
</TABLE>
21
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The Group's Interest rate risk and asset/liability management are the
responsibility of the Asset and Liability Management Committee ("ALCO"),
which reports to the Board of Directors and is comprised of members of the
Group's senior management. The principal objective of ALCO is to enhance
profitability while maintaining an appropriate level of interest rate risk.
ALCO is also involved in the formulating economic projections and a strategy
used by the Group in its planning and budgeting process; and oversees the
Group's sources, uses and pricing of funds.
Interest rate risk can be defined as the exposure of the Group's operating
results or financial position to adverse movements in market interest rates
which mainly occurs when assets and liabilities reprice at different times
and at different rates. This difference is commonly referred to as a
"maturity mismatch" or "gap". The Group employs various techniques to assess
the degree of interest rate risk.
The Group is liability sensitive due to its fixed rate and medium-term asset
composition being funded with shorter-term repricing liabilities. As a
result, the Group utilizes interest rate swaps and caps as a hedging
mechanism to offset said mismatch and control exposures of interest rate
risk. 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 increases in interest rates
above cap rates.
The Group is exposed to a reduction in the level of Net Interest Income
("NII") in a rising interest rate environment. NII will fluctuate pursuant to
changes in the levels of interest rates and of interest sensitive assets and
liabilities. If (1) the weighted average rates in effect at December 31, 1998
remained constant, or increased or decreased on an instantaneous and
sustained change of plus or minus 200 basic points, and (2) all scheduled
repricing, reinvestments and estimated prepayments, and reissuances are at
such constant, or increased or decrease accordingly; NII will fluctuate as
shown on the table below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------------------------------------------
CHANGE IN EXPECTED AMOUNT PERCENT
INTEREST RATE NII(1) CHANGE CHANGE
- ----------------------- ----------------- --------------- -------------
<S> <C> <C> <C>
BASE SCENARIO $46,839 $ -- --
+ 200 Basis points 41,991 (4,848) -10.35%
- 200 Basis points 51,172 $ 4,333 9.25%
</TABLE>
NOTE:
- -----
1. The NII figures showed exclude the effect of the amortization of loan
fees.
LIQUIDITY RISK MANAGEMENT
Liquidity refers to the level of cash, eligible investments easily converted
into cash and available lines of credit 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. Other objectives pursued in the Group's liquidity
management are the diversification of funding sources and the control of
interest rate risk. Management tries to diversify the sources of financing
used by the Group to avoid undue reliance on any particular source.
At the end of the second quarter of fiscal 1999, the Group's liquidity was
deemed appropriate. It included $48.5 million available from unused lines of
credit with other financial institutions and $42.3 million of borrowing
potential with the FHLB. The Group's liquidity position is reviewed and
monitored by the ALCO Committee on a regular basis. Management believes that
the Group will continue to maintain adequate liquidity levels in the future.
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.
22
<PAGE>
YEAR 2000 READINESS DISCLOSURE
As discussed on page 28 in the Group's Fiscal 1998 Annual Report on Form
10-K, the Group initiated a firm-wide program (the "Year 2000 Program") to
prepare its computer programs, applications and infrastructure for properly
processing dates after December 31, 1999. The Group's Year 2000 Program is
proceeding on schedule and it is the Group's expectation that it will have
its firm-wide Year 2000 solution in place by June 30, 1999, in accordance
with regulatory guidelines.
PART - 2
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims
under various theories of damages arising out of, and incidental to its
business. The Group is vigorously contesting those claims. Based upon a
review with legal counsel and the development of these matters to date,
management is of the opinion that the ultimate aggregate liability, if any,
resulting from these claims will not have a material adverse effect on the
Group's financial position or the result of operations.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
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 December 31, 1998.
C-EXHIBITS
No exhibits were filed as part of this Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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 12, 1999 By: /s/ Jose E. Fernandez
----------------- ---------------------
Jose E. Fernandez
Chairman of the Board,
President, and CEO
Date: February 12, 1999 By: /s/ Rafael Valladares
----------------- ---------------------
Rafael Valladares, CPA
Senior Vice President and
Controller
23
