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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
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:
268 Munoz Rivera Avenue
501 Hato Rey Tower
Hato Rey, Puerto Rico 00918
Telephone Number: (787) 766-1986
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Non-cumulative Monthly Income Preferred Stock,
Series A (Liquidation value of $25.00 per share)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
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Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K .
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The aggregate market value of registrant's common stock held by
non-affiliates is $242,912,714, based on the closing price of August 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Group's Annual Report to Shareholders for the fiscal year
ended June 30, 1999 are incorporated herein by reference in response to
Item 1 of Part I, Items 5 to 8 of Part II and Item 14 of Part IV.
2. Portions of the Group's Definitive Proxy Statement relating to the 1999
Group's Stockholders Annual Meeting are incorporated herein by reference in
response to Items 10 through 13 of Part III.
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ORIENTAL FINANCIAL GROUP INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART - I
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Item - 1 Business 3-7
Item - 2 Properties 8
Item - 3 Legal Proceedings 8
Item - 4 Submissions of Matters to the Vote of Security Holders 8
PART - II
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Item - 5 Market for Registrant's Common Stock and Related Stockholder Matters 8
Item - 6 Selected Financial Data 9
Item - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item - 7A Quantitative and Qualitative Disclosures About Market Risk 9
Item - 8 Financial Statements and Supplementary Data 9
Item - 9 Submissions to Matters to Vote of Security Holders 9
PART - III
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Item - 10 Directors and Executive Officers of the Registrant 9
Item - 11 Executive Compensation 9
Item - 12 Security Ownership of Certain Beneficial Owners and Management 9
Item - 13 Certain Relationships and Related Transactions 9
PART - IV
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Item - 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 9-10
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PART - I
ITEM 1 - BUSINESS
Oriental Financial Group Inc. (the "Group" or "Oriental") is a diversified,
publicly-owned bank holding company, incorporated in 1997 under the laws of
Puerto Rico ("Puerto Rico"). Oriental provides a wide variety of financial
services through its direct and indirect subsidiaries.
Oriental Bank and Trust (the "Bank"), the Group's main subsidiary, is a
full-service commercial bank with its main office located in San Juan, Puerto
Rico and with nineteen branches located throughout the island. The Bank was
incorporated in 1964 as a federal mutual savings and loan association, it
became a federal mutual savings bank in July 1983 and converted to a federal
stock savings bank in April 1987. Its conversion from a federally-chartered
savings bank to a commercial bank chartered under the banking laws of Puerto
Rico, on June 30, 1994, allowed the Bank to more effectively pursue
opportunities in its market and obtain more flexibility in its businesses,
placing the Bank in the main stream of financial services in Puerto Rico. The
Bank directly or through its wholly-owned, broker-dealer subsidiary, Oriental
Financial Services Corp., offers mortgage, commercial and consumer lending,
auto and equipment lease financing, financial planning, money management and
investment brokerage services, and corporate and individual trust services.
The Group is subject to the provisions of the U.S. Bank Holding Company Act
of 1956 (the "BHC Act") and, accordingly, subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System ("the
Federal Reserve Board"). The Bank is regulated by various agencies in the
United States and Puerto Rico. Its main regulators are the Commissioner of
Financial Institutions of Puerto Rico (the "Commissioner") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Bank's deposits are insured
up to $100,000 per depositor by the Savings Association Insurance Fund (the
"SAIF"), which is administered by the FDIC. The Bank is further subject to
the regulation of the Puerto Rico Finance Board ("Finance Board"). Other
agencies, such as the National Association of Securities Dealers ("NASD"),
and the Securities and Exchange Commission ("SEC"), regulate additional
aspects of the Bank's operations. (See "Regulation and Supervision" below).
The Group is a legal entity separate and distinct from the Bank and the
Bank's subsidiaries. There are various legal limitations governing the extent
to which the Bank may extend credit, pay dividends or otherwise supply funds
to, or engage in transactions with, the Group or certain of its other
subsidiaries.
The Group's business is described on pages 1 through 15 of the of the Group's
Annual Report to Shareholders for the year ended June 30, 1999, which
information is incorporated herein by reference.
REGULATION AND SUPERVISION
GENERAL
The Group is a bank holding company subject to the supervision and regulation
of the Federal Reserve Board under the BHC Act. As a bank holding company,
the Group's activities and those of its banking and non-banking subsidiaries
are limited to the business of banking and activities closely related to
banking, and the Group may not directly or indirectly acquire the ownership
or control of more than 5% of any class of voting shares or of substantially
all the assets of any company in the United States including a bank, without
the approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions.
The Bank is subject to extensive regulation and examination by the
Commissioner and by the FDIC, which insures its deposits to the maximum
extent permitted by law, subject to certain requirements established by the
Federal Reserve Board. The federal and state banking laws and regulations
that are applicable to banks, regulate, among other things, the scope of
their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. In addition to the impact of the
regulations, commercial banks are affected significantly by the actions of
the Federal Reserve Board as it attempts to control the money supply and
credit availability in order to influence the economy.
HOLDING COMPANY STRUCTURE
The Bank is subject to restrictions under federal law that limit the transfer
of funds to its affiliates (including the Group), whether in the form of
loans, other extensions of credit, investments or asset purchases. Such
transfers are limited to 10% of the transferring institution's capital stock
and surplus with respect to any affiliate (including the Group), and with
respect to all affiliates to an aggregate of 20% of the transferring
institution's capital stock and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts.
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Under the Federal Reserve Board policy, a bank holding company such as the
Group, is expected to act as a source of financial strength to its main
banking subsidiaries and also to commit to support them. This support may be
required at times when, absent such policy, the bank holding company might
not otherwise provide such support. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to the federal bank
regulatory agencies to maintain capital of a subsidiary bank will be assumed
by the bankruptcy trustee and be entitled to a priority of payment. In
addition, any capital loans by a bank holding company to any of its
subsidiary banks must be subordinated in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. The Bank is currently the
only depository institution subsidiary of the Group.
Because the Group is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will
be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of depository institution subsidiaries) except to the
extent that the Group is a creditor with recognized claims against the
subsidiary.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
(which definition includes both banks and savings associations), the deposits
of which are insured by the FDIC, can be held liable for any loss incurred
by, or reasonably expected to be incurred by the FDIC in connection with (1)
the default of a commonly controlled FDIC-insured depository institution or
(2) any assistance provided by the FDIC to any commonly controlled
FDIC-insured depository institution "in danger of default". "Default" is
defined generally as the appointment of a conservator or a receiver and "in
danger of default" is defined generally as the existence of certain
conditions indicating that default is likely to occur in the absence of
regulatory assistance. In some circumstances (depending upon the amount of
the loss or anticipated loss suffered by the FDIC), cross-guarantee liability
may result in the ultimate failure or insolvency of one or more insured
depository institutions in a holding company structure. Any obligation or
liability owed by a subsidiary bank to its parent company is subordinated to
the subsidiary bank's cross-guarantee liability with respect to commonly
controlled insured depository institutions.
DIVIDEND RESTRICTIONS
The principal source of funds for the Group is dividends from the Bank. The
ability of the Bank to pay dividends on its common stock is restricted by the
banking laws of Puerto Rico, the Federal Deposit Insurance Act and FDIC
regulations. In general terms, the banking laws of Puerto Rico provide that
when the expenditures of a bank are greater than receipts, the excess of
expenditures over receipts shall be charged against the undistributed profits
of the bank and the balance, if any, shall be charged against the required
reserve fund of the bank. If there is no sufficient reserve fund to cover
such balance in whole or in part, the outstanding amount shall be charged
against, the bank's capital account. The banking laws of Puerto Rico provide
that until said capital has been restored to its original amount and the
reserve fund has been restored to twenty percent (20%) of the original
capital, the bank may not declare any dividends. In general terms, the
Federal Deposit Insurance Act and the FDIC regulations restrict the payment
of dividends when a bank is undercapitalized, the bank has failed to pay
insurance assessments, or when there are safety and soundness concerns.
The payment of dividends by the Bank may also be affected by other regulatory
requirements and policies, such as maintenance of adequate capital. If, in
the opinion of the regulatory authorities, a depository institution is
engaged in, or is about to engage in, an unsafe or unsound practice (that,
depending on the financial condition of the depository institution, could
include the payment of dividends), such authorities may require, after notice
and hearing, that a depository institution cease and desist from such
practice. The Federal Reserve Board has issued a policy statement that
provides that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings. In addition, all insured
depository institutions are subject to the capital-based limitations required
by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank (the "FHLB") system, of which the Bank is a
member, consists of 12 regional FHLB's governed and regulated by the Federal
Housing Finance Board ("FHFB"). The FHLB system serves as reserve or credit
facilities for member institutions within their assigned regions. They are
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB system. They make loans (i.e., advances) to members
in accordance with policies and procedures established by the FHFB and the
boards of directors of the FHLB's.
As a system member, the Bank is entitled to borrow from the Federal Home Loan
Bank of New York ("FHLB-NY") and is required to own capital stock in the
FHLB-NY in an amount equal to the greater of 1% of the aggregate of the
unpaid principal of its home mortgage loans, home purchase contracts, and
similar obligations at the beginning of each fiscal year. For this purpose,
such obligations are deemed to be not less than 30% of assets, or 5% of the
total amount of advances by the FHLB-NY to the Bank. The Bank is in
compliance with the stock ownership rules described above with respect to
such advances, commitments and letters of credit and home mortgage loans and
similar obligations. All loans, advances and other extensions of credit made
by the FHLB-NY to the Bank are secured by a portion of the Bank's mortgage
loan portfolio, certain other investments and the capital stock of the
FHLB-NY held by the Bank.
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FDICIA
Under FDICIA, federal banking regulators must take prompt corrective action
with respect to depository institutions that do not meet minimum capital
requirements. FDICIA and regulations promulgated thereunder established five
capital tiers: (i) "well capitalized" for depository institutions that have a
total risk-based capital of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more
and is not subject to any written capital order or directive; (ii)
"adequately capitalized" for depository institutions that have a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio
of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized", (iii) "undercapitalized" for depository institutions that have
a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" for depository institutions that have a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that
is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%,
and (v) "critically undercapitalized" for depository institutions that have a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
A depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives
a less than satisfactory examination rating in any one of the four
categories. As of June 30, 1999, the Group is a "well-capitalized"
institution.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividends) or paying any management fees
to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations
and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an
amount equal to the lesser of five percent of the depository institution's
assets at the time it becomes undercapitalized or the amount of the capital
deficiency when the institution fails to comply with the plan. Federal
banking regulatory agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed restoring the depository institution's
capital. Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements
to reduce total assets, and cessation of receipt of deposits from
corresponding banks. Critically undercapitalized depository institutions are
subject to appointment of a receiver or conservator.
INSURANCE OF ACCOUNTS AND FDIC INSURANCE ASSESSMENTS
The Bank's deposits accounts are insured up to the applicable limits by the
SAIF administered by the FDIC. The insurance of deposit accounts by SAIF
subjects the Bank to comprehensive regulation, supervision, and examination
by the FDIC. If the Bank violates its duties as an insured institution,
engages in unsafe and unsound practices, is in an unsound and unsafe
condition, or violates any applicable FDIC requirements, insurance of
accounts of the Bank may be terminated by the FDIC.
The Bank is subject to FDIC deposit insurance assessments. Pursuant to
FDICIA, the FDIC has adopted a risk-based assessment system, under which the
assessment rate for an insured depository institution varies according to the
level of risk incurred in its activities. An institution's risk category is
based partly upon whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. Each insured institution is
also assigned to one of the following "supervisory subgroups" : "A", "B", or
"C". Group "A" institutions are financially sound institutions with a few
minor weaknesses; Group "B" institutions are institutions that demonstrate
weaknesses that, if not corrected, could result in significant deterioration;
and Group "C" institutions are institutions of which there is a substantial
probability that the FDIC will suffer a loss in connection with the
institution unless effective action is taken to correct the areas of weakness.
The Deposit Insurance Funds Act of 1996 ("DIFA") repealed the statutory
minimum premium assessed on deposits by both the Bank Insurance Fund (BIF)
and SAIF. Premiums on deposits are now assessed at a rate of 0 to 27 basis
points per $100 deposits based on the risk-based assessment. DIFA also
provided for a special one-time assessment on deposits insured by SAIF to
recapitalize the SAIF and to bring it up to statutory required levels of
approximately 65 basis points on institutions holding SAIF deposits on March
31, 1995. Accordingly, the Group recorded a special reserve of $1,823,000,
net of taxes of $490,000, during the first quarter of 1997 to account for its
share of the one-time payment of SAIF insurance premium. As result of this
special assessment, in January 1997, the Group's deposit insurance premium
was reduced to $0.062 for every $100 of deposits from $.23 for every $100 of
deposits.
REGULATORY CAPITAL REQUIREMENTS
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. Under the guidelines, the minimum ratio of qualifying
total capital to risk-weighted assets is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, minority
interest in unconsolidated subsidiaries, non-cumulative perpetual preferred
stock and the disallowed portion of deferred tax assets ("Tier 1 Capital").
The remainder may consist of a limited amount of subordinated debt, other
preferred stock, certain other investments and a limited amount of loan and
lease loss reserves ("Tier 2 Capital").
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The Federal Reserve Board has adopted regulations with respect to risk-based
and leverage capital ratios that require most intangibles, including core
deposit intangibles, to be deducted from Tier 1 Capital. The regulations,
however, permit the inclusion of a limited amount of intangibles related to
originated and purchased mortgage servicing rights, purchased credit card
relationships and include a "grandfather" provision permitting inclusion of
certain existing intangibles.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 Capital to quarterly average assets) guidelines for bank holding
companies and member banks. These guidelines provide for a minimum leverage
ratio of 3% for bank holding companies and member banks that meet certain
specified criteria, including that they have the highest regulatory rating.
All other bank holding companies and member banks are required to maintain a
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions are expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a "tangible
Tier 1 leverage ratio" and other indicia of capital strength in evaluating
proposals for expansion or new activities.
Failure to meet the capital guidelines could subject an institution to
variety of enforcement remedies, including the termination of deposit
insurance by the FDIC, and certain restrictions on its business. As of June
30, 1999, the Group was in compliance with all capital requirements,
exceeding those of a "well-capitalized" institution.
Relevant information concerning the Group's capital and regulatory capital
ratios as of June 30, 1999 is set forth in pages 51 and 52 of the
consolidated financial statements (see Financial Data Index herein) and is
incorporated herein by reference.
SAFETY AND SOUNDNESS STANDARDS
Section 39 of the FDIA, amended by the FDICIA, requires each federal banking
regulatory agency to prescribe for all insured depository institutions,
standards relating to internal control, information systems and internal
audit system, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. In
addition, each federal banking agency also is required to adopt for all
insured depository institutions and their holding companies standards that
specify (i) a maximum ratio of classified assets to capital, (ii) minimum
earnings sufficient to absorb losses without impairing capital, (iii) to the
extent feasible, a minimum ratio of market value to book value for
publicly-traded shares of the institution or holding company, and (iv) such
other standards relating to asset quality, earnings and valuation as the
agency deems appropriate. Finally, each federal banking agency is required to
prescribe standards for the employment contracts and other compensation
arrangements of executive officers, employees, directors and principal
stockholders of insured depository institutions that would prohibit
compensation and benefits and arrangements that are excessive or that could
lead to a material financial loss for the institution. If an insured
depository institution or its holding company fails to meet any of the
standards described above, it will be required to submit to the appropriate
federal banking agency a plan specifying the steps that will be taken to cure
the deficiency. If an institution fails to submit an acceptable plan or fails
to implement the plan, the appropriate federal banking agency will require
the institution to correct the deficiency and, until it is corrected, may
impose other restrictions on the institution or company, including any of the
restrictions applicable under the prompt corrective action provisions of
FDICIA. Pursuant to FDICIA, regulations to implement these operational
standards were required to become effective on December 1, 1993.
In August 1995, the FDIC and other federal banking regulatory agencies
published Interagency Guidelines Establishing Standards for Safety and
Soundness that, among other things, set forth standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit, underwriting, interest rate exposure, asset growth and employee
compensation.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Section 24 of the FDIA, as amended by the FDICIA, generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to
those that are permissible for national banks. Under FDIC regulations dealing
with equity investments, an insured state bank generally may not directly or
indirectly acquire or retain any equity investment of a type, or in an
amount, that is not permissible for a national bank. An insured state bank is
not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing
project, provided that such limited partnership investments may not exceed 2%
of the Bank's total assets, (iii) acquiring up to 10% of the voting stock of
a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group
insurance coverage for insured depository institutions, and (iv) acquiring or
retaining the voting shares of a depository institution if certain
requirements are met.
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In December 1993, the FDIC adopted amendments to its regulations governing
the activities and investments of insured state banks which further
implemented Section 24 of the FDIA, as amended by FDICIA. Under the
amendments, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as "principal" in any activity that is not
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member
and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly engaged
in any activity that is not permitted for a national bank must cease the
impermissible activity.
PUERTO RICO BANKING ACT
As a Puerto Rico chartered commercial bank, the Bank is subject to regulation
and supervision by the Commissioner under the Puerto Rico Banking Act of
1933, as amended (the "Banking Act"). The Banking Act contains provisions
governing the incorporation and organization, rights and responsibilities of
directors, officers and stockholders as well as the corporate powers,
savings, lending capital and investment requirements and other aspects of a
bank and its affairs. In addition, the Commissioner is given extensive
rulemaking power and administrative discretion under the Banking Act. The
Commissioner generally examines the Bank at least once every year.
The Banking Act requires that at least ten percent (10%) of the yearly net
income of the Bank be credited annually to a reserve fund. This apportionment
shall be done every year until the reserve fund shall be equal to the total
of paid-in capital on common and preferred stock.
The Banking Act also provides that when the expenditures of a bank are
greater that the receipts, the excess shall be charged against the
undistributed profits of the Bank, and the balance, if any, shall be charged
against the reserve fund, as a reduction thereof. If there is no reserve fund
sufficient to cover such balance in whole or in part, the outstanding amount
shall be charged against the capital account and no dividend shall be
declared until said capital has been restored to its original amount and the
reserve fund has been restored to 20% of the original capital.
The Banking Act requires every bank to maintain a legal reserve which shall
not be less than 20% of its demand liabilities, except government deposits
(federal, state and municipal) which are secured by actual collateral.
The Banking Act further requires change of control filings. When any person
or entity owns, directly or indirectly, upon consummation of a transfer, 5%
or more of the outstanding voting capital stock of the Bank, the acquiring
parties must inform the Commissioner of the details not less than sixty (60)
days prior to the date said transfer is to be consummated. The transfer shall
require the approval of the Commissioner if it results in a change of control
of the Bank. Under the Banking Act, a change of control is presumed if the
acquirer who did not own more than 5% of the voting capital stock before the
transfer exceeds such percentage after the transfer.
The Banking Act generally restricts the amount the Bank can lend to one
borrower to an amount that may not exceed 15% of the Bank's paid-in capital
and reserve fund. The Bank also may not accept the security of any one
borrower in an amount exceeding 15% of its paid-in capital and reserve fund.
As of June 30, 1999, the maximum amount that the Bank could have loaned to
one borrower was approximately $4.9 million. If such loans are secured by
collateral worth at least twenty-five percent (25%) more than the amount of
the loan, the aggregate maximum amount may reach one third of the
paid-in-capital of the Bank, plus its reserve fund. There are no restrictions
on the amount of loans that are wholly secured by bonds, securities and other
evidence of indebtedness of the Government of the United States or the
Commonwealth, or by current debt bonds, not in default, of municipalities or
instrumentalities of the Commonwealth.
The Finance Board, which is composed of the Commissioner, the President of
the Government Development Bank for Puerto Rico, the President of the Puerto
Rico Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and
Consumer Affairs and three public interest representatives, have the
authority to regulate the maximum interest rates and finance charges that may
be charged on loans to individuals and unincorporated businesses in the
Commonwealth. The Finance Board promulgates regulations which specify maximum
rates on various types of loans to individuals.
The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses
(including real estate development loans but excluding certain other personal
and commercial loans secured by mortgages on real estate property) is to be
determined by free market competition. The Finance Board also has the
authority to regulate maximum finance charges on retail installment sales
contracts and credit card purchases. There is no maximum rate for installment
sales contracts involving motor vehicles, commercial, agricultural and
industrial equipment, commercial electric appliances and insurance premiums.
EMPLOYEES
At June 30, 1999 the Group has 373 employees. None of the employees are
represented by a collective bargaining group or subject to a collective
bargaining agreement. The Group believes that its employee relations to be
good. For information about the Group's employee benefit plans refer to Note
11 of the Group's consolidated financial statements (see Financial Data Index
herein).
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ITEM 2 - PROPERTIES
At June 30, 1999, the Bank owned 8 branch premises and other facilities
throughout Puerto Rico. In addition, as of such date, the Bank leased
properties for branch operations and main office in 11 locations in Puerto
Rico. The Bank's management believes that each of its facilities is
well-maintained and suitable for its purpose. The principal properties owned
by the Bank for banking operations and other services are described below:
- - ORIENTAL CENTER - a four story office building located at 908 State Road,
Humacao, Puerto Rico. A branch, and the computer center are
the main activities conducted at this location. Approximately 60% of the
office space is leased to outside tenants. The book value of this property
as of June 30, 1999 was $5,541,000.
- - LAS CUMBRES BUILDING - two story structure located at 1990 Las Cumbres
Avenue, Rio Piedras, Puerto Rico. A branch, leasing and
mortgage originating departments are the main activities conducted at this
location. The book value of this property at June 30, 1999 was $1,641,000.
ITEM 3 - LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal
proceedings incidental to its business. The Group is vigorously contesting
such claims. Based upon a review by 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 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART - II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Group's common stock is traded in the New York Stock Exchange (NYSE)
under the symbol OFG. Information concerning the range of high and low sales
prices for the Group's common shares for each quarter during fiscal 1999 and
the previous two fiscal years, as well as cash dividends declared for the
last three fiscal years, is contained under Table 7 ("Capital, Dividends and
Stock Date") on page F-9 and under the "Stockholders' Equity" caption in the
Management Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), (see Financial Data Index herein) and is incorporated
herein by reference.
Information concerning legal or regulatory restrictions on the payment of
dividends by the Group and the Bank is contained under the caption "Dividend
Restrictions" in Item 1 herein.
On August 18, 1998, the Group declared a four-for-three (33.3%) stock split
on common stock held by registered shareholders as of September 30, 1998. As
a result, approximately 3,385,000 shares of common stock were distributed on
October 15, 1998. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered
shareholders as of September 30, 1997. As a result, approximately 2,012,000
shares of common stock were distributed on October 15, 1997.
As of August 30, 1999 the Group had over 2,000 stockholders of record of its
Common Stock, including all directors and officers of the Registrant,
excluding beneficial owners whose shares are held in record names of brokers
or other nominees. The last sales price for the Group's Common Stock on such
date, as quoted on the NYSE was $23.63 per share.
In May 1999, the Group issued 1,340,000 shares of its 7.125% Non-cumulative
Monthly Income Preferred Stock, Series A at $25 per share. As a result of
this issuance, the Group generated $32,300,000 in net proceeds for general
corporate purposes. The Series A Preferred Stock has the following
characteristics:
- - Annual dividends of $1.78125 per share payable monthly, if declared by the
board of directors. Missed dividends are not cumulative.
- - Redeemable at the Group's option beginning on May 30, 2004.
- - No mandatory redemption or stated maturity date.
- - Has a liquidation value of $25 per share.
-8-
<PAGE>
The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes
a withholding tax of 10% on the amount of any dividends paid by corporations
to individuals, whether residents of Puerto Rico or not, trusts, estates, and
special partnerships. If the recipient is foreign corporation or partnership
not engaged in trade or business in Puerto Rico the rate of withholding is
also 10%. Prior to the first dividend distribution for the taxable year,
individuals who are residents of Puerto Rico may elect to be taxed on the
dividends at the regular rates, in which case the special 10% tax will not be
withheld from such year's distributions.
United States citizens who are non-residents of Puerto Rico will not be
subject to Puerto Rico tax on dividends if said individual's gross income
from sources within Puerto Rico during the taxable year does not exceed
$1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico
Treasury Department "Withholding Tax Exemption Certificate for the Purpose of
Section 1147" is filed with the withholding agent. U.S. income tax law
permits a credit against U.S. income tax liability, subject to certain
limitations, for certain foreign income taxes paid or deemed paid with
respect to such dividends.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item appears on pages F-1 and F-13 of the MD&A
(see Financial Data Index herein) and is incorporated herein by reference.
The ratios shown below demonstrate the Group's ability to generate sufficient
earnings to pay the fixed charges of its debt and preferred stock dividends.
The Group's ratio of earnings to fixed charges on a consolidated basis for
each of the last five years is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES: 1999 1998 1997 1996 1995
- ----------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Excluding Interest on Deposits 1.83 1.78 1.81 1.89 1.79
------------------------------------------------------------
Including Interest on Deposits 1.46 1.43 1.43 1.48 1.49
------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES AND
- --------------------------------------
PREFERRED STOCK DIVIDENDS
- -------------------------
Excluding Interest on Deposits 1.68 1.62 1.60 1.64 1.54
------------------------------------------------------------
Including Interest on Deposits 1.39 1.36 1.34 1.37 1.35
------------------------------------------------------------
</TABLE>
For purposes of computing these consolidated ratios, earnings represent
income before taxes, plus fixed charges. Fixed charges represent all interest
expense (ratios are presented both excluding and including interest in
deposits), amortization of debt costs, and the portion of net rental expense
which is deemed representative of interest factor.
Only in fiscal 1999 the Group had preferred stock issued and outstanding,
$33,500,000 or 1,340,000 shares at a $25 liquidation value.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item appears on pages F-1 through F-14 in
the MD&A (see Financial Data Index herein), and is incorporated herein by
reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Group appears on page F-12
in the MD&A (see Financial Data Index herein), under caption "Quantitative
and Qualitative Disclosures about Market Risk" and is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-15 through F-38 in
the consolidated financial statements, and is incorporated herein by
reference. The financial data index in page 13 of this report sets forth the
listing of all reports required by this item and included herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-9-
<PAGE>
PART - III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Information with respect to
Nominees for Director, Directors Whose Terms Continue and Executive
Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" of
the Group's definitive proxy statement for the Group's Stockholders Annual
Meeting (the "Proxy Statement"), filed with Securities Exchange Commission on
September 24, 1999, and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" "Report of the
Compensation Committee on Executive Compensation and "Performance Graph" of
the Proxy Statement is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Executive Compensation-Certain
Transactions" of the Proxy Statement is incorporated herein by reference.
PART - IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A1 - FINANCIAL STATEMENTS
The listing of financial statements required by this item is set forth in the
Financial Data Index in page 13 of this report.
A2 - 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 A1 above.
B - CURRENT REPORTS ON FORM 8-K
During the last quarter of fiscal 1999 two Current Reports on Form 8-K (the
"Reports") related to the sale of 7.125% Noncumulative Monthly Income
Preferred Stock, Series A were filed. These Reports were filed with
Securities and Exchange Commission on April 8, 1999 and May 5,
1999, respectively, and are incorporated herein by reference.
C - EXHIBITS
Exhibits filed as part of this Form 10-K
<TABLE>
<CAPTION>
NO. EXHIBITS PAGE
- ------------ ----------------------------------------------------------------------- -----------------
<S> <C> <C>
2.0 Agreement and Plan of Merger dated as of June 18, 1996 by and between *
the Registrant, the Bank and Oriental Interim Bank
3.1 Amended and Restated Certificate of Incorporation of Registrant *
3.2 By-laws of Registrant *
10.1 Employment Agreement between Jose E. Fernandez and the Bank *
10.2 Bank's 1988 Stock Option Plan *
10.3 Bank's 1996 Stock Option Plan **
10.4 Group's 1998 Stock Option Plan ***
13.0 Registrant's Annual Report to Shareholders for fiscal year ending E -1 to E-17 ****
June 30, 1999
21.0 List of Subsidiaries E-18
23.0 Consent of Independent Accountants E-20
27.0 Financial Data Schedule E-19
</TABLE>
-10-
<PAGE>
* - Incorporated by reference from Registration Statement on Form 8-B filed by
the Group on January 10, 1997.
** - Incorporated by reference from Definitive Proxy Statement (Attachment A)
for the Group's 1997 Annual Meeting of Stockholders filed by the Registrant
on September 19, 1997.
*** - Incorporated by reference from Definitive Proxy Statement (Attachment A)
for the Group's 1998 Annual Meeting of Stockholders filed by the Registrant
on September 29, 1998.
**** - Those pages of the Group Annual Report to Shareholders for the fiscal
year ending June 30, 1999 (the "Annual Report") are incorporated by
reference in this Annual Report on Form 10-K and are being filed in
electronic format as an exhibit herein. The Annual Report, including the
remaining portions which are not incorporated by reference into this annual
report on Form 10-K, is specifically incorporated by reference herein as an
exhibit of the filing of such annual report in paper format by the Group on
or about September 30, 1998 pursuant to Commission Rule 14a-3(c).
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(REGISTRANT)
<TABLE>
<S> <C>
By: S/JOSE E. FERNANDEZ
-----------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer
(Principal Executive and Financial Officer) Dated: September 20, 1999
------------------
By: S/RAFAEL VALLADARES
-----------------------
Rafael Valladares
Senior Vice President - Comptroller
(Principal Financial Officer) Dated: September 20, 1999
------------------
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dated indicated.
<TABLE>
<S> <C>
By: S/JOSE E. FERNANDEZ
-----------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer Dated: September 20, 1999
------------------
By: S/PABLO I. ALTIERI
-----------------------
Dr. Pablo I. Altieri
Director Dated: September 20, 1999
------------------
By: S/DIEGO PERDOMO
-----------------------
Diego Perdomo
Director Dated: September 20, 1999
------------------
By: S/EFRAIN ARCHILLA
-----------------------
Efrain Archilla
Director Dated: September 20, 1999
------------------
By: S/JULIAN INCLAN
-----------------------
Julian Inclan
Director Dated: September 20, 1999
------------------
By: S/EMILIO RODRIGUEZ, JR.
-----------------------
Emilio Rodriguez, Jr.
Director Dated: September 20, 1999
------------------
By: S/ALBERTO RICHA
-----------------------
Alberto Richa
Director Dated: September 20, 1999
------------------
By: S/FERNANDO ARRIVI
-----------------------
Fernando Arrivi
Director Dated: September 20, 1999
------------------
By: S/MARI CARMEN APONTE
-----------------------
Mari Carmen Aponte
Director Dated: September 20, 1999
------------------
</TABLE>
-12-
<PAGE>
ORIENTAL FINANCIAL GROUP, INC.
FORM-10K
FINANCIAL DATA INDEX
<TABLE>
<CAPTION>
PAGE
----
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations F-1 to F-14
Selected Financial Data F-1
Quantitative and Qualitative Disclosures About Market Risk F-12
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Report of Independent Accountants *
Consolidated Statements of Financial Condition as of June 30, 1999 and 1998 F-15
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 1999 F-16
Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income for each of the
years in the three-year period ended June 30, 1999 F-17
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 1999 F-18
Notes to the Consolidated Financial Statements F-19 to F-38
</TABLE>
- - The Group was given an unqualified opinion for the fiscal year ended June
30, 1999 by its independent accountant (PricewaterhouseCoopers LLP) on an
independent's accountant report signed on August 6, 1999. A copy of the
independent accountant unqualified opinion appears on page 31 of the
Group's Annual Report for the year ended June 30, 1999.
-13-
<PAGE>
SELECTED FINANCIAL DATA
YEARS ENDED ON JUNE, 30
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
EARNINGS AND DIVIDENDS DECLARED:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 113,775 $ 101,307 $ 82,629 $ 70,447 $ 58,143
Interest expense 64,840 58,139 45,098 37,694 30,423
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME 48,935 43,168 37,531 32,753 27,720
Recurring non-interest income 18,923 17,005 14,421 11,527 10,222
Non recurring non-interest income 10,276 5,365 2,578 2,801 1,210
Recurring non-interest expenses 32,633 30,333 28,138 24,174 21,590
Non recurring non-interest expenses 340 400 1,830 - -
Provision for loan losses 15,095 9,545 4,900 4,600 2,550
Provision for income taxes 3,418 3,850 3,100 3,571 2,905
----------- ----------- ----------- ----------- -----------
NET INCOME 26,648 21,410 16,562 14,736 12,107
Less: dividends on preferred stock (350) - - - -
----------- ----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 26,298 $ 21,410 $ 16,562 $ 14,736 $ 12,107
----------- ----------- ----------- ----------- -----------
Dividends declared $ 7,369 $ 5,442 $ 4,369 $ 3,184 $ 1,709
----------- ----------- ----------- ----------- -----------
Dividends declared per share $ 0.563 $ 0.413 $ 0.330 $ 0.225 $ 0.135
----------- ----------- ----------- ----------- -----------
PER SHARE INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Basic $ 2.02 $ 1.62 $ 1.25 $ 1.11 $ 0.95
----------- ----------- ----------- ----------- -----------
Diluted $ 1.97 $ 1.57 $ 1.21 $ 1.06 $ 0.89
----------- ----------- ----------- ----------- -----------
Book value $ 7.05 $ 8.09 $ 6.72 $ 6.03 $ 5.23
----------- ----------- ----------- ----------- -----------
Market price at end of period $ 24.13 $ 27.66 $ 16.95 $ 9.50 $ 7.61
----------- ----------- ----------- ----------- -----------
Average shares and equivalents 13,386 13,696 13,676 13,912 13,614
----------- ----------- ----------- ----------- -----------
PERIOD END BALANCES (JUNE 30,):
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,380,200 $ 1,310,000 $ 1,088,600 $ 874,500 $ 699,000
Broker-dealer assets gathered 885,800 741,400 524,900 293,100 195,400
----------- ----------- ----------- ----------- -----------
ASSETS MANAGED 2,266,000 2,051,400 1,613,500 1,167,600 894,400
Bank total assets 1,587,300 1,313,300 1,068,600 877,400 744,400
----------- ----------- ----------- ----------- -----------
$ 3,853,300 $ 3,364,700 $ 2,682,100 $ 2,045,000 $ 1,638,800
=========== =========== =========== =========== ===========
INTEREST-EARNING ASSETS
Investments and securities $ 946,529 $ 706,652 $ 468,594 $ 350,736 $ 290,106
Loans and loans held-for-sale 574,316 547,354 532,970 476,110 409,391
----------- ----------- ----------- ----------- -----------
$ 1,520,845 $ 1,254,006 $ 1,001,564 $ 826,846 $ 699,497
=========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES
Deposits $ 656,988 $ 571,432 $ 497,542 $ 382,557 $ 313,542
Repurchase agreements 596,226 416,171 247,915 242,335 195,337
Borrowings 174,900 189,388 204,816 145,466 137,472
----------- ----------- ----------- ----------- -----------
$ 1,428,114 $ 1,176,991 $ 950,273 $ 770,358 $ 646,351
=========== =========== =========== =========== ===========
CAPITAL AND RELATED REGULATORY RATIOS
Stockholders' equity $ 124,032 $ 107,030 $ 89,394 $ 79,903 $ 69,705
----------- ----------- ----------- ----------- -----------
Leverage capital 8.78% 7.70% 8.17% 8.71% 8.89%
----------- ----------- ----------- ----------- -----------
Total risk-based capital 24.02% 20.45% 17.53% 18.07% 17.00%
----------- ----------- ----------- ----------- -----------
Tier 1 risk-based capital 25.28% 21.68% 18.66% 19.14% 17.73%
----------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL RATIOS (IN PERCENT):
- ---------------------------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.84% 1.74% 1.84% 1.82% 1.77%
----------- ----------- ----------- ----------- -----------
Return on average common equity (ROE) 24.36% 21.24% 21.17% 19.30% 19.05%
----------- ----------- ----------- ----------- -----------
Efficiency ratio 48.09% 50.27% 52.76% 53.43% 59.65%
----------- ----------- ----------- ----------- -----------
Expense ratio 1.01% 1.13% 1.34% 1.52% 1.61%
----------- ----------- ----------- ----------- -----------
Interest rate spread 3.37% 3.54% 3.88% 4.03% 4.04%
----------- ----------- ----------- ----------- -----------
Dividend payout ratio 28.02% 25.42% 24.40% 21.60% 14.12%
----------- ----------- ----------- ----------- -----------
OTHER INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Number of banking offices 19 17 16 16 15
----------- ----------- ----------- ----------- -----------
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental extended its string of record earnings to 10 years by posting diluted
earnings per share of $1.97 for fiscal year 1999, which is up 25% from $1.57 in
fiscal 1998. The Group's fiscal 1999 double-digit growth was principally due to
the record volume of mortgage originations, sound performance by the brokerage
and trust divisions, continued effective management of interest rate risk and a
tight control over operating expenses. Net income available to common
shareholders increased to $26.3 million, up 23% from $21.4 million in fiscal
1998. The Group's profitability ratios for 1999 represented returns of 1.84% on
assets (ROA) and 24.36% on common stockholders' equity (ROE), compared with an
ROA and ROE of 1.74% and 21.24%, respectively, in fiscal 1998.
Financial assets, which include the Group's assets and assets managed by the
trust and brokerage business, reached $3.9 billion at the end of fiscal 1999,
up 15% from $3.4 billion at the end of fiscal 1998. At June 30, 1999, the
Group's assets reached $1.587 billion from $1.313 billion a year ago, an
increase of 21%. Assets managed by the trust grew 5% to $1.380 billion versus
$1.310 billion a year ago, and assets gathered by the broker-dealer increased
19% to $885.8 million from $741.4 million the year before.
Different components that impacted the Group's performance are discussed in
detail in the following pages. In addition, the selected financial data table on
page F-1 provides relevant operational ratios and information for the last five
years.
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
For fiscal 1999, the Group's net interest income rose 13% to $48.9 million from
$43.2 million in fiscal 1998 while the interest rate spread narrowed 17 basis
points to 3.37% from 3.54% in fiscal 1998. This growth in net interest income
was propelled by a larger volume of interest-earning assets and a modest
reduction in the Group's cost of funds. Table 1 analyzes the major categories of
interest-earning assets and interest-bearing liabilities, their respective
interest income, expenses, yields and costs, and their impact on net interest
income due to changes in volume and rates.
The Group's interest income for fiscal 1999 totaled $113.8 million, up 12% from
the $101.3 million posted in fiscal 1998. This increase in interest income was
driven by a favorable volume variance of $15.9 million due to a larger average
volume of interest-earning assets, partially offset by a unfavorable rate
variance of $3.4 million attributed to a decline in the yield performance of
interest-earning assets.
Average interest-earning assets for fiscal 1999 reached $1.359 billion, an
increase of 19% compared with $1.142 billion in fiscal 1998. This volume
increase was fueled by a solid growth in the Group's investment portfolio,
mainly mortgage-backed securities and collateralized mortgage obligations, as
Oriental continued to replace residential real estate loans sold in the
secondary market with tax-advantaged investment securities.
In fiscal 1999, the average yield on interest-earning assets was 8.37%, 50 basis
points lower than the 8.87% attained in fiscal 1998. There were two main reasons
for the yield erosion experienced in fiscal 1999. First, the strong expansion of
Group's investment portfolio, which carries a lower yield than the loan
portfolio but generates a significant amount of tax-exempt interest. Another
factor was the compression of the investment portfolio yield, which decreased by
37 basis points to 6.47% from 6.84% attained in fiscal 1998. The decline in the
portfolio's yield stemmed from a lower interest rate scenario and the high level
of high coupon mortgage-backed securities refinancing activity experienced in
fiscal 1999.
Interest expense for fiscal 1999 rose 11.5% or $6.7 million to $64.8 million
from $58.1 million reported in fiscal 1998. The principal reason for the
increase was the larger base of interest-bearing liabilities used to fund the
Group's interest-earning assets growth. This volume effect of $10.1 million was
partially tempered by a favorable rate variance of $3.4 million due to a lower
average cost of funds. Average interest-bearing liabilities for fiscal 1999
reached $1.297 billion, up 19% from the $1.091 billion a year ago. A larger
volume of repurchase agreements and deposits, mainly time deposits and IRA
accounts, drove this increase. These increases were used primarily to fund the
Group's investment portfolio growth and to repurchase common shares.
F-2
<PAGE>
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------
INTEREST AVERAGE RATE
------------------------------------------ -------------------------------
1999 1998 1997 1999 1998 1997
------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOANS:
Real estate $ 29,412 $ 27,292 $ 24,591 9.80% 9.74% 9.86%
Consumer 17,092 13,322 8,792 13.75% 13.95% 13.30%
Commercial and auto loans 1,325 1,939 2,812 10.34% 10.42% 11.01%
Financing leases 13,800 17,828 18,575 11.91% 11.91% 11.85%
------------------------------------------ -------------------------------
61,629 60,381 54,770 11.14% 11.10% 11.00%
========================================== ===============================
INVESTMENTS:
Mortgage-backed securities and CMO's 36,874 23,874 17,138 6.52% 7.00% 7.12%
US and PR Government investment securities 14,014 15,863 9,642 6.42% 6.68% 7.16%
FHLB stock and other investments 1,258 1,189 1,079 5.78% 6.01% 4.79%
------------------------------------------ -------------------------------
52,146 40,926 27,859 6.47% 6.84% 7.00%
------------------------------------------ -------------------------------
$ 113,775 $ 101,307 $ 82,629 8.37% 8.87% 9.22%
========================================== ===============================
DEPOSITS:
Savings and demand $ 2,920 $ 2,781 $ 2,455 2.22% 2.64% 2.61%
Time and IRA accounts 25,930 23,416 18,557 5.36% 5.54% 5.51%
------------------------------------------ -------------------------------
28,850 26,197 21,012 4.68% 4.96% 4.88%
------------------------------------------ -------------------------------
BORROWINGS:
Repurchase agreements 25,923 19,216 11,340 5.08% 5.37% 5.04%
FHLB funds 3,555 5,300 3,625 5.69% 5.87% 5.86%
Term notes and other sources of funds 5,314 6,101 6,849 4.88% 5.31% 5.32%
Interest rate risk management 1,198 1,325 2,272 0.18% 0.24% 0.55%
------------------------------------------ -------------------------------
35,990 31,942 24,086 5.28% 5.67% 5.82%
========================================== ===============================
$ 64,840 $ 58,139 $ 45,098 5.00% 5.33% 5.34%
========================================== ===============================
NET INTEREST INCOME $ 48,935 $ 43,168 $ 37,531 3.37% 3.54% 3.88%
========================================== ===============================
INTEREST RATE MARGIN 3.60% 3.78% 4.18%
===============================
EXCESS OF INTEREST-EARNING ASSETS
OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER
INTEREST-BEARING LIABILITIES RATIO
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------------
AVERAGE BALANCE
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
LOANS:
Real estate $ 300,127 $ 280,160 $ 249,364
Consumer 124,316 95,510 66,103
Commercial and auto loans 12,812 18,607 25,539
Financing leases 115,867 149,678 156,769
----------------------------------------
553,122 543,955 497,775
----------------------------------------
INVESTMENTS:
Mortgage-backed securities and CMO's 565,904 341,018 240,828
US and PR Government investment securities 218,130 237,416 134,697
FHLB stock and other investments 21,760 19,801 22,526
----------------------------------------
805,794 598,235 398,051
----------------------------------------
$1,358,916 $1,142,190 $ 895,826
========================================
DEPOSITS:
Savings and demand $ 131,791 $ 105,523 $ 93,945
Time and IRA accounts 484,154 422,681 337,021
----------------------------------------
615,945 528,204 430,966
----------------------------------------
BORROWINGS:
Repurchase agreements 510,049 357,800 225,182
FHLB funds 62,463 90,345 61,822
Term notes and other sources of funds 108,941 114,995 126,985
Interest rate risk management - - -
----------------------------------------
681,453 563,140 413,989
========================================
$1,297,398 $1,091,344 $ 844,955
========================================
NET INTEREST INCOME
INTEREST RATE MARGIN
EXCESS OF INTEREST-EARNING ASSETS
OVER INTEREST-BEARING LIABILITIES $ 61,518 $ 50,846 $ 50,871
========================================
INTEREST-EARNING ASSETS OVER
INTEREST-BEARING LIABILITIES RATIO 104.74% 104.66% 106.02%
----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999 VS 1998
-----------------------------------------------
BASIS
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans (1) (2) $ 1,332 $ (84) $ 1,248 0.04%
Investments 14,572 (3,352) 11,220 -0.37%
-----------------------------------------------
$ 15,904 $ (3,436) $ 12,468 -0.50%
===============================================
INTEREST EXPENSE:
Deposits $ 4,098 $ (1,445) $ 2,653 -0.28%
Borrowings 6,009 (1,961) 4,048 -0.39%
-----------------------------------------------
10,107 (3,406) 6,701 -0.33%
===============================================
NET INTEREST INCOME $ 5,797 $ (30) $ 5,767 -0.17%
===============================================
<CAPTION>
FISCAL 1999 VS 1998
-----------------------------------------------
BASIS
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans (1) (2) $ 5,384 $ 227 $ 5,611 0.10%
Investments 14,352 (1,285) 13,067 -0.15%
-----------------------------------------------
$ 19,737 $ (1,059) $ 18,678 -0.35%
===============================================
INTEREST EXPENSE:
Deposits $ 5,021 $ 164 $ 5,185 0.08%
Borrowings 8,169 (313) 7,856 -0.15%
-----------------------------------------------
13,190 (149) 13,041 -0.01%
-----------------------------------------------
Net Interest Income $ 6,547 $ (910) $ 5,637 -0.34%
===============================================
</TABLE>
(1) - Loans averages exclude non-performing loans.
(2) - Real-estate averages include loans held-for-sale.
F-3
<PAGE>
The average cost of funds on interest-bearing liabilities for fiscal 1999 was
5.00%, 33 basis points lower than the 5.33% attained in fiscal 1998. This
decrease was principally related to a decline in the cost of repurchase
agreements, time deposits, IRA accounts 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.
NON-INTEREST INCOME
In fiscal 1999, non-interest revenues continued to be a catalyst of the Group's
earnings performance as recurring non-interest income totaled $18.9 million, up
11% versus the $17 million in fiscal 1998. Higher trust, brokerage and money
management revenues drove this improvement (see Table 2).
Trust, money management and brokerage fees, the principal component of recurring
non-interest income, reflected strong results during fiscal 1999. These fees
totaled $10.2 million in fiscal 1999, up 21% versus the $8.4 million in fiscal
1998. This increase was related to a larger volume of accounts and assets
managed by both the Group's trust department and the broker-dealer subsidiary
(see "Financial Condition" section).
Fees generated by mortgage banking activities for fiscal 1999 amounted to $4.4
million, 3% lower than the $4.5 million earned in fiscal 1998. The net decrease
experienced during the past year was mainly due to losses the Group incurred on
the sale of mortgage loans during the last quarter of fiscal 1999. These losses
reflect management's decision to sell a large group of real estate loans with a
5.50% yield, which was hindering the loans portfolio yield performance, to
improve the Group's yield performance and interest rate risk exposure. The lower
amount of gains realized from sale of mortgage loans was partially offset by 43%
increase in servicing rights sold. This reflects the larger volume of mortgage
loans originated and subsequently sold in fiscal 1999.
Bank services fees and other operating revenues, which consist primarily of fees
on deposit accounts, leasing fees, and bank service charges and commissions,
totaled $4.3 million in fiscal 1999, a 5% hike versus the $4.1 million reported
in fiscal 1998. This improvement was driven by a 24% or $379,000 rise in bank
service charges and commissions.
For fiscal 1999, securities and trading gains amounted to $10.3 million versus
1.9 million reported in the same period a year ago. As a result of the favorable
market opportunities, during the second and third quarters of fiscal 1999 the
Group sold a significant quantity of investment securities as part of its
asset/liability management. 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 for others. 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 higher earnings potential. The lack of servicing income in
fiscal 1999 was directly related to this divestiture.
NON-INTEREST EXPENSES
As shown in Table 3, recurring non-interest expenses for fiscal 1999 increased
7.6% to $32.6 million from $30.3 million in fiscal 1998. Notwithstanding the
above increase, the efficiency and expense ratios for fiscal 1999 improved to
48.09% and 1.01%, respectively, from 50.27% and 1.13%, respectively, a year
earlier.
Employee compensation and benefits, the Group's largest expense category,
amounted to $15.1 million or 1.04 % of total average assets for fiscal 1999
versus $15.1 million or 1.22 % of total average assets in fiscal 1998. This lack
of growth results from the lower employment levels during the first months of
fiscal 1999 as result of the divestiture of the mortgage servicing department
and the reengineering of some of the Group's support departments. This favorable
variance was offset by merit salary increases and the higher commissions
and bonuses paid as result of the increased productivity experienced in fiscal
1999. Consequently, the average compensation per employee in fiscal 1999 rose 6%
to $41,300 from $38,800 in fiscal 1998. The composition of the Group's employee
compensation and benefits for the periods analyzed remained similar as variable
compensation represented about 40% of the total compensation (see Table 4).
Other recurring non-interest expenses for fiscal 1999 increased 15% to $17.6
million as compared to $15.3 million in fiscal 1998. This rise was 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 resulted from additional banking offices
opened during the past 18 months and the enhancements made to the Group's
systems to enable the expansion of its electronic delivery capability and
improve the customers' service delivery.
F-4
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------- ---------
1999 1998 INC./(DEC.) 1997
------------------------------------- ---------
TABLE 2 - NON-INTEREST INCOME SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RECURRING NON-INTEREST INCOME:
Trust, money management and brokerage fees $10,211 $ 8,416 21.3% $ 6,960
Mortgage banking activities 4,371 4,485 -2.5% 2,297
Fees on deposit accounts 1,324 1,500 -11.7% 1,211
Bank service charges and commissions 1,941 1,562 24.3% 1,249
Leasing revenues 994 981 1.3% 2,502
Other operating revenues 82 61 34.4% 202
------- ------- ------- -------
18,923 17,005 11.3% 14,421
------- ------- ------- -------
NON RECURRING NON-INTEREST INCOME:
Securities and trading net activity 10,276 1,945 428.3% 903
Servicing income - 713 -100.0% 1,675
Net gain on sale of servicing assets - 2,707 -100.0% -
------- ------- ------- -------
10,276 5,365 91.5% 2,578
------- ------- ------- -------
TOTAL NON-INTEREST INCOME $29,199 $22,370 30.5% $16,999
======= ======= ======= =======
RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 57.99% 56.06% 51.25%
------- ------- -------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Compensation and benefits $15,057 $15,071 -0.1% $14,867
Occupancy and equipment,net 5,345 4,151 28.8% 3,556
Advertising and business promotion 3,045 2,602 17.0% 2,085
Professional and service fees 2,144 1,393 53.9% 1,499
Communications 1,496 1,427 4.8% 1,283
Municipal and other general taxes 1,711 1,633 4.8% 974
Insurance, including deposits insurance 458 733 -37.5% 801
Printing, postage, stationery and supplies 738 724 1.9% 643
Real estate owned expenses 26 87 -70.1% 128
Other operating expenses 2,613 2,512 4.0% 2,302
------- ------- ------- -------
RECURRING NON-INTEREST EXPENSES 32,633 30,333 7.6% 28,138
Other non-recurring expenses 340 400 -15.0% 1,830
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSES $32,973 $30,733 7.3% $29,968
======= ======= ======= =======
RELEVANT RATIOS:
Efficiency ratio 48.09% 50.27% 52.76%
------- ------- -------
Expense ratio 1.01% 1.13% 1.34%
------- ------- -------
TABLE 4 - COMPENSATION AND BENEFITS SUMMARY
- ------------------------------------------------------------------------------------------------------------------
COMPENSATION AND BENEFITS:
Fixed $ 9,066 $ 9,134 -0.7% $ 9,180
Variable 5,991 5,937 0.9% 5,687
------- ------- ------- -------
$15,057 $15,071 -0.1% $14,867
======= ======= ======= =======
RELEVANT RATIOS:
Compensation and benefits to recurring non-interest expenses 46.1% 49.7% 52.8%
------- -------
Variable compensation to total compensation 39.8% 39.4% 38.3%
------- -------
Compensation to total average assets 1.04% 1.22% 1.53%
------- ------- -------
Average compensation per employee $ 41.3 $ 38.8 $ 36.9
------- ------- -------
Bank assets per employee $ 4,781 $ 3,785 $ 2,827
------- ------- -------
GROUP'S WORK FORCE:
Bank 332 347 378
Trust 29 23 33
Brokerage 12 10 10
------- ------- -------
373 380 421
------- ------- -------
</TABLE>
F-5
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses in fiscal 1999 totaled $15.1 million, a $5.5
million increase from the $9.6 million reported in fiscal 1998. The provision
for loan losses for fiscal 1997 was $4.9 million. The increase in the
provision for fiscal 1999 was in response to the higher level of net
charge-offs and non-performing assets, and current and expected economic
conditions.
This increase in the provision boosted the Group's coverage ratio of reserve
to total loans to 1.54% from 1.03% a year ago. Please refer to the allowance
for loan losses and non-performing assets section for a more detailed
analysis of the allowances for loan losses, net charge-offs and credit
quality statistics.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal 1999 amounted to $3.4 million or
11.4% of pre-tax earnings compared with $3.9 million or 15.2% of pre-tax
earnings a year ago, down 11%. The reduction in fiscal 1999 was due to higher
amount of tax-exempt income generated by the Group's investment portfolio.
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.
FINANCIAL CONDITION
GROUP'S ASSETS
At the end of fiscal 1999, the Group's total assets amounted to $1.587
billion, an increase of 21% when compared to the $1.313 billion a year ago.
At the same date, interest-earning assets reached $1.521 billion, an increase
of $267 million or 21% versus the $1.254 billion a year earlier. This robust
assets growth reflects a significant increase in the investment portfolio of
$240 million or 34% (see Table 5).
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, collateralized
mortgage obligations and P.R. Government municipal bonds. The investment
portfolio is of a high quality, approximately 98% is rated AAA at the end of
fiscal 1999 and generates a significant amount of tax-exempt interest which
lowers the Group's effective tax rate (see Table 5 and Note 2 of the attached
Consolidated Financial Statements).
The investment portfolio expansion was driven by a strong growth in
mortgage-backed securities and CMO's, which increased to $701 million or 74%
of the total portfolio from $403 million or 57% the year before, as Oriental
continued its strategy of pooling residential real estate loans into
mortgage-backed securities. However, investment securities decreased 28% to
$204 million or 22% of the total portfolio from $283 million or 40% a year
ago. This reduction reflects the significant quantity of U.S. Government
securities sold during fiscal 1999 as part of the Group's asset/liability
management. The investment securities sold were replaced with mortgage-backed
securities and CMO's that provide the Group with a higher yield and more
liquid position (see Table 5 for the Group's investments summary and
composition).
At June 30,1999, Oriental's loan portfolio, the second largest category of
the Bank's interest-earning assets, amounted to $574 million, 5% or $27
million higher than the $547 million a year ago. This growth was led by a
rise in the consumer loan portfolio of 18% or $20.4 million, followed by a
$46.1 million or 17% increase in the real estate portfolio. These were
partially offset by downsized leasing, commercial and auto loans portfolios
and an increase in the allowance for loan losses of $3.3 million or 59%.
Table 5 presents the Group's loan portfolio composition and mix at the end of
the periods analyzed.
The Bank's real estate loans portfolio amounted to $326 million or 56% of the
loan portfolio at June 30, 1999, a 17% increase compared to $280 million or
51% of the loan's portfolio the year before. The rise results from a sharp
growth in originations due to the lower interest rate environment that
increased the demand for mortgage loans to purchase homes as well as the
demand for refinancing existing mortgages.
At the end of fiscal 1999, the consumer loans portfolio totaled $136 million
or 23% of the Group's loan portfolio, a 18% growth compared to the $116
million or 21% of the Group's loan portfolio a year ago. Personal loans which
amounted to $109 million at the end of fiscal 1999, or 20% over the $91
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 implemented using a credit scoring
system.
The Bank's leasing portfolio amounted to $110 million or 19% of the loan
portfolio at the end of fiscal 1999, a 22% decrease versus $141 million or
26% of the loan portfolio a year ago. The downsizing reflects the Group's
intentional slowdown in lease 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").
F-6
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------- ------------
1999 1998 INC./(DEC.) 1997
-------------------------------------------- ------------
TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENTS:
Mortgage-backed securities and CMO's $ 701,054 $ 402,703 74.1% $ 278,349
US and PR Government securities 204,227 283,248 -27.9% 151,978
FHLB stock and other investments 41,248 20,701 99.3% 38,267
---------- ---------- ----- ----------
946,529 $ 706,652 33.9% 468,594
---------- ---------- ----- ----------
LOANS:
Real estate 326,291 280,190 16.5% 271,249
Consumer 136,175 115,788 17.6% 77,627
Financing leases 110,297 141,113 -21.8% 166,660
Commercial and auto 10,555 15,921 -33.7% 22,842
---------- ---------- ----- ----------
583,318 553,012 5.5% 538,378
Allowance for loan losses (9,002) (5,658) 59.1% (5,408)
---------- ---------- ----- ----------
574,316 547,354 4.9% 532,970
---------- ---------- ----- ----------
TOTAL INTEREST-EARNING ASSETS 1,520,845 1,254,006 21.3% 1,001,564
---------- ---------- ----- ----------
Non-interest earning assets 66,502 $ 59,318 12.1% $ 67,032
---------- ---------- ----- ----------
TOTAL ASSETS $1,587,347 $1,313,324 20.9% $1,068,596
========== ========== ===== ==========
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMO's 74.0% 57.0% 59.4%
US and PR Government securities 21.6% 40.1% 32.4%
FHLB stock and other investments 4.4% 2.9% 8.2%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
LOAN PORTFOLIO COMPOSITION:
Real Estate 56.0% 50.7% 50.4%
Consumer 23.3% 20.9% 14.4%
Financing leases 18.9% 25.5% 31.0%
Commercial and auto 1.8% 2.9% 4.2%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
- -------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand deposits $ 142,679 $ 112,533 26.8% $ 106,995
Time deposits and IRA accounts 508,648 455,061 11.8% 387,836
Accrued Interest 5,661 3,838 47.5% 2,711
---------- ---------- ----- ----------
656,988 $ 571,432 15.0% $ 497,542
---------- ---------- ----- ----------
BORROWINGS:
Repurchase agreements 596,226 $ 416,171 43.3% $ 247,915
FHLB funds 68,400 74,800 -8.6% 89,800
Term notes and other sources of funds 106,500 114,588 -7.1% 115,016
---------- ---------- ----- ----------
771,126 $ 605,559 27.3% $ 452,731
---------- ---------- ----- ----------
TOTAL INTEREST-BEARING LIABILITIES 1,428,114 1,176,991 21.3% 950,273
---------- ---------- ----- ----------
Non interest-bearing liabilities 35,201 $ 29,303 20.1% 28,929
---------- ---------- ----- ----------
TOTAL LIABILITIES $1,463,315 $1,206,294 21.3% $ 979,202
========== ========== ===== ==========
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 21.7% 19.7% 21.5%
Time deposits and IRA accounts 77.4% 79.6% 78.0%
Accrued Interest 0.9% 0.7% 0.5%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 77.3% 68.7% 54.8%
FHLB funds 8.9% 12.4% 19.8%
Term notes and other sources of funds 13.8% 18.9% 25.4%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
- -------------------------------------------------------------------------------------------------------------------
CAPITAL DATA:
Stockholders' equity $ 124,032 $ 107,030 15.9% $ 89,394
---------- ---------- ----- ----------
Leverage Capital (minimum required - 4.00%) 8.78% 7.70% 14.1% 8.17%
---------- ---------- ----- ----------
Total Risk-Based Capital (minimum required - 8.00%) 24.02% 20.45% 17.5% 17.53%
---------- ---------- ----- ----------
Tier 1 Risk-Based capital (minimum required - 4.00%) 25.28% 21.68% 16.6% 18.66%
---------- ---------- ----- ----------
STOCK DATA:
Outstanding common shares, net of treasury shares 12,835 13,234 -2.0% 13,177
---------- ---------- ----- ----------
Book value $ 7.05 $ 8.09 -12.9% $ 6.72
---------- ---------- ----- ----------
Market Price at end of period $ 24.13 $ 27.66 -12.8% $ 16.95
---------- ---------- ----- ----------
Market capitalization $ 309,644 $ 362,295 -14.5% $ 223,409
---------- ---------- ----- ----------
DIVIDEND DATA:
Dividends declared $ 7,369 $ 5,442 35.4% $ 4,369
---------- ---------- ----- ----------
Dividends declared per share $ 0.563 $ 0.413 36.5% $ 0.330
---------- ---------- ----- ----------
Payout ratio 28.02% 25.42% 10.2% 24.40%
---------- ---------- ----- ----------
Dividend yield 1.94% 1.69% 14.8% 2.63%
---------- ---------- ----- ----------
</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>
-------------------- ---------
PRICE
-------------------- DIVIDEND
HIGH LOW PER SHARE
------- ------- ---------
<S> <C> <C> <C>
FISCAL 1999:
June 30, 1999 $ 29.87 $ 24.13 $ 0.150
------- ------- -------
March 31, 1999 $ 29.63 $ 27.50 $ 0.150
------- ------- -------
December 31, 1998 $ 32.00 $ 28.00 $ 0.150
------- ------- -------
September 30, 1998 $ 32.26 $ 28.84 $ 0.113
------- ------- -------
FISCAL 1998:
June 30, 1998 $ 34.60 $ 27.66 $ 0.113
------- ------- -------
March 31, 1998 $ 29.35 $ 24.85 $ 0.113
------- ------- -------
December 31, 1997 $ 23.63 $ 18.38 $ 0.094
------- ------- -------
September 30, 1997 $ 22.28 $ 16.95 $ 0.094
------- ------- -------
FISCAL 1997:
June 30, 1998 $ 16.95 $ 13.65 $ 0.090
------- ------- -------
March 31, 1998 $ 16.20 $ 12.53 $ 0.090
------- ------- -------
December 31, 1997 $ 13.20 $ 10.95 $ 0.075
------- ------- -------
September 30, 1997 $ 9.81 $ 10.95 $ 0.075
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
TABLE 8 - FINANCIAL ASSETS SUMMARY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Trust assets managed $1,380,200 $1,310,000 5.4% $1,088,600
Assets gathered by broker-dealer 885,800 741,400 19.5% 524,900
---------- ---------- ----- ----------
MANAGED ASSETS 2,266,000 2,051,400 10.5% 1,613,500
Group assets 1,587,300 1,313,300 20.9% 1,068,600
---------- ---------- ----- ----------
$3,853,300 $3,364,700 14.5% $2,682,100
========== ========== ===== ==========
</TABLE>
F-7
<PAGE>
LIABILITIES AND FUNDING SOURCES
As shown in Table 6, at June 30, 1999, Oriental's total liabilities reached
$1.463 billion, 21% higher than the $1.206 billion reported a year earlier.
Interest-bearing liabilities, the Group's funding sources, amounted to $1.428
billion at the end of fiscal 1999 versus $1.177 billion the year before, a
21% increase. This growth was driven by increases in deposits and repurchase
agreements of 15% or $86 million and 43% or $180 million, respectively.
Deposits at the end of fiscal 1999, the second largest category of the
Group's interest-bearing liabilities and a cost-effective source of funding,
reached $656.9 million, up 15% versus the $571.4 million a year ago. This
rise, driven by a 12% growth in time deposits and IRA accounts, reflects the
inflow of assistance and insurance payments from Hurricane Georges as well as
a long-term trend toward greater usage of banks in the Puerto Rican economy.
Table 6 presents the composition of the Group's deposits at the end of the
periods analyzed.
Borrowings are Oriental's largest interest-bearing liability component. It
consists of diversified funding sources through the use of Federal Home Loan
Bank of New York (FHLB) advances and borrowings, repurchase agreements, term
notes, notes payable and lines of credit. As of June 30, 1999, they amounted
to $771.1 million, 27% higher than the $605.5 million a year ago. This
increase reflects a strong growth in repurchase agreements, which was
necessary to fund the increase in interest-earning assets experienced during
the period, particularly investment securities.
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
FHLB, the Group can obtain advances from the FHLB, secured by the FHLB stock
owned by the Group, as well as by certain of the Group's mortgages and
investment securities. Table 7 presents the composition of the Group's other
borrowings at the end of the periods analyzed.
STOCKHOLDERS' EQUITY
At June 30, 1999, Oriental's total stockholders' equity reached $124
million, a 16% increase from $107 million a year ago. Fiscal 1999 earnings of
$26.6 million and $32.3 million net proceeds generated from the issuance of
preferred stock drove this growth. These were partially offset by a decline
in accumulated other comprehensive income, an increase in dividends declared
and treasury stock repurchases. For more information about the Group's of
stockholders' equity expansion, refer to the Consolidated Statement of
Changes in Stockholders' Equity included in the attached consolidated
financial statements.
During fiscal 1999, the Group continued its aggressive repurchase program, as
authorized by the board of directors, and repurchased 608,526 shares of its
common stock. This brings to 903,786 shares with a cost of $23.4 million the
number of shares held by the Group's treasury.
The Group's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol OFG. The market value of the Group's common stock on the
NYSE at June 30, 1999 was $24.13 per share versus $27.66 per share a year
earlier. The Group's market capitalization decreased to $309.6 million as
compared to $362.3 million a year ago. The book value per share as of June
30, 1999 fell to $7.05 from $8.09 a year ago. The decrease in book value
reflects the lower amount of common equity due to the significant decline in
accumulated other comprehensive income.
During fiscal 1999, the Group declared dividends amounting to $7.4 million or
$0.563 per share compared to $5.4 million or $0.413 per share in fiscal 1998,
up 36.5%. For fiscal 1999, the dividend payout ratio and dividend yield were
28.02% and 1.94%, respectively, compared to 25.42% and 1.69%, 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, banks
or bank holding companies must meet or exceed a leverage ratio of 5%, have a
Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of
10%. At June 30, 1999, the Group had a leverage ratio of 8.78%; a Tier 1
risk-based ratio of 25.28%; and a total risk-based capital ratio of 24.02%
compared to 7.70%, 20.45% and 21.68%, respectively, a year ago.
GROUP'S FINANCIAL ASSETS
At June 30, 1999, the Group`s total financial assets owned or managed, which
consists of the Group's assets, assets managed by the trust and assets
gathered by the broker-dealer, reached $3.853 billion, an increase of 15%
when compared to the $3.364 billion a year ago. At June 30, 1999, the Group's
consolidated assets reached $1.587 billion from $1.313 billion a year ago, an
increase of 21%. Assets managed by the trust grew 5% to $1.380 billion versus
$1.310 billion a year ago, and assets gathered by the broker-dealer increased
20% to $885.8 million from $741.4 million the year before (see Table 8).
The main component of the Group's financial assets is the assets owned by the
Group, of which about 99% are owned by the Group's banking subsidiary. For
more on this financial asset component, please refer to Group's Assets under
Financial Condition.
F-8
<PAGE>
F-9
<PAGE>
Oriental's second largest financial asset component is 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 June 30, 1999, total assets managed by the Group's trust
amounted $1.380 billion, 5% higher than the $1.310 billion a year ago. This
increase was fueled by a solid 14% growth in individual retirement accounts
(IRA), the most significant asset managed, which totaled $527.1 million
versus the $462.5 million a year ago, followed by a 20% growth in 401(K) and
Keogh retirement plans managed.
The other financial asset component is assets gathered by the 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
June 30, 1999, total assets gathered by the broker-dealer from its customer
investment accounts reached $885.8 million, up 20% from $741.4 million a year
ago.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
As of June 30, 1999, the Group's allowance for loan losses amounted to $9.0
million or 1.54% of total loans versus $5.7 million or 1.03% a year earlier.
The Group maintains an allowance for loan losses 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 relevant 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's economic
condition. In addition, bank regulatory 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 at the time of the
examinations.
Net credit losses for fiscal 1999, totaled $11.8 million or 2.05% of average
loans, compared to $9.3 million or 1.66% of average loans for fiscal 1998.
The higher level of credit losses experienced during fiscal 1999 was
primarily associated with a rise in consumer loans and financing leases net
credit losses; see Provision for Loan Losses under Results of Operations. It
is worth noting that the health of the consumer sector in Puerto Rico appears
to be improving, as management expects the level of credit losses in
these portfolios to stabilize in fiscal 2000. Table 9 sets forth an analysis
of activity in the allowance for loan losses and presents selected loan loss
statistics.
As shown on Table 10, as of June 30, 1999, the Group's non-performing assets
consisted of non-performing loans, foreclosed real estate owned and other
repossessed assets. At the end of fiscal 1999, the Group's asset quality
remained stable as non-performing assets totaled $20.4 million or 1.29% of
total assets versus $17.6 million or 1.34% of total assets at the same
date in fiscal 1998. The increase was principally due to a rise in
non-performing loans, mainly well secured real estate loans. Higher loan
volumes and the increased level of personal bankruptcies were leading factors
for this growth.
At June 30, 1999, the allowance for loan losses to non-performing loans
coverage ratio improved to 46.06% from 35.60% a year ago; excluding the
lesser risk real estate loans, the ratio substantially improved to 92.23%
from 61.29% for the respective periods. Detailed information concerning each
of the items that comprise non-performing assets follows:
- - REAL ESTATE LOANS - Except for well secured residential loans, are
placed on a non-accrual basis when they become 90 days or more
past due. At June 30, 1999, the Group's non-performing real estate
loans totaled $9.7 million or 50.1% of the Group's non-performing loans.
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 believes 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 June 30, 1999, the Group's
non-performing commercial business loans amounted to $1.2 million or 5.9%
of the Group's non-performing loans. Of the total balance, $990,000 or 11
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 June 30, 1999, the Group's non-performing auto and
equipment leases portfolio amounted to $7.7 million or 39.2% of the Group's
total non-performing loans and was comprised of 651 units. The underlying
collateral secures these financing leases.
- - CONSUMER LOANS - are placed on non-accrual status when they become 90 days
past due. At June 30, 1999, the Group's non-performing consumer loans
amounted to $942,000 or 4.8% of the Group's total non-performing loans.
Consumer loans are charged-off when payments are delinquent 120 days.
F-10
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE $ 5,658 $ 5,408 $ 4,496 $ 3,127 $ 3,934
========== ========== ========== ========== ==========
Provision for loan losses 15,095 9,545 4,900 4,600 2,550
Net charge-off's (11,751) (9,295) (3,988) (3,231) (3,357)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) 3,344 250 912 1,369 (807)
========== ========== ========== ========== ==========
ENDING BALANCE $ 9,002 $ 5,658 $ 5,408 $ 4,496 $ 3,127
========== ========== ========== ========== ==========
CHARGE-OFF'S:
Real estate $ (2) $ (187) $ (53) $ (193) $ (147)
Consumer (6,020) (5,197) (1,850) (1,131) (1,594)
Leasing (7,059) (5,442) (3,248) (2,424) (1,566)
Commercial and others (1,532) (658) (110) (231) (212)
---------- ---------- ---------- ---------- ----------
(14,613) (11,484) (5,261) (3,979) (3,519)
========== ========== ========== ========== ==========
RECOVERIES:
Real estate $ 16 $ 12 $ 30 $ - $ 25
Consumer 1,423 417 250 204 59
Leasing 1,093 1,545 956 497 -
Commercial and others 330 215 37 47 78
---------- ---------- ---------- ---------- ----------
2,862 2,189 1,273 748 162
========== ========== ========== ========== ==========
NET CHARGE-OFF'S:
Real estate 14 (175) (23) (193) (122)
Consumer (4,597) (4,780) (1,600) (927) (1,535)
Leasing (5,966) (3,897) (2,292) (1,927) (1,566)
Commercial and others (1,202) (443) (73) (184) (134)
---------- ---------- ---------- ---------- ----------
$ (11,751) $ (9,295) $ (3,988) $ (3,231) $ (3,357)
========== ========== ========== ========== ==========
LOANS:
Outstanding $ 583,318 $ 551,078 $ 537,881 $ 480,606 $ 412,519
---------- ---------- ---------- ---------- ----------
Average loans $ 572,664 $ 560,184 $ 512,219 $ 454,777 $ 366,152
---------- ---------- ---------- ---------- ----------
RATIOS:
Recoveries to net-charge-off's 19.6% 19.1% 24.2% 18.8% 4.6%
---------- ---------- ---------- ---------- ----------
Net charge-off's to average loans 2.05% 1.66% 0.78% 0.71% 0.92%
---------- ---------- ---------- ---------- ----------
Allowance coverage ratio 1.54% 1.03% 1.01% 0.94% 0.76%
---------- ---------- ---------- ---------- ----------
TABLE 10 - NON-PERFORMING ASSETS (AT JUNE 30,):
- ---------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS:
Non-performing loans $ 19,542 $ 15,895 $ 13,285 $ 9,450 $ 7,550
Foreclosed real estate 383 413 698 842 800
Repossessed autos 438 951 1,253 831 892
Repossessed equipment 46 344 486 486 157
---------- ---------- ---------- ---------- ----------
$ 20,409 $ 17,603 $ 15,722 $ 11,608 $ 9,399
========== ========== ========== ========== ==========
NON-PERFORMING LOANS:
Real estate $ 9,782 $ 6,663 $ 5,575 $ 4,069 $ 4,211
Consumer 942 713 2,118 1,228 318
Financing leases 7,652 7,879 4,778 3,641 1,539
Commercial 1,166 640 814 512 1,482
---------- ---------- ---------- ---------- ----------
$ 19,542 $ 15,895 $ 13,285 $ 9,450 $ 7,550
========== ========== ========== ========== ==========
NON-PERFORMING LOANS COMPOSITION:
Real estate 50.1% 41.9% 42.0% 43.1% 55.8%
Consumer 4.8% 4.5% 15.9% 13.0% 4.2%
Financing leases 39.2% 49.6% 36.0% 38.5% 20.4%
Commercial 5.9% 4.0% 6.1% 5.4% 19.6%
---------- ---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
RELEVANT RATIOS:
Non-performing loans to total loans 3.35% 2.87% 2.47% 1.97% 1.83%
---------- ---------- ---------- ---------- ----------
Non-performing loans reserve coverage ratio 46.06% 35.60% 40.71% 47.58% 41.42%
---------- ---------- ---------- ---------- ----------
Non-performing loans reserve coverage ratio
(excluding real estate loans) 92.23% 61.29% 70.14% 83.55% 93.65%
---------- ---------- ---------- ---------- ----------
Non-performing assets to total assets 1.29% 1.34% 1.47% 1.32% 1.26%
---------- ---------- ---------- ---------- ----------
Non-performing assets to total capital 16.45% 16.45% 17.59% 14.53% 13.48%
---------- ---------- ---------- ----------- -----------
</TABLE>
F-11
<PAGE>
- - FORECLOSED REAL ESTATE - is initially recorded at the lower of the related
loan balance or 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. 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. At June 30, 1999, the inventory of repossessed automobiles
and equipment consisted of 27 units and 8 units, respectively, amounting to
$438,000 ($16,220 average per unit) and $46,000 ($5,750 average per unit),
respectively.
YEAR 2000 READINESS DISCLOSURE
The Group is the only bank holding company in Puerto Rico to close its fiscal
year on June 30th; we are already in fiscal year 2000. Therefore, our
additional computer capacity and all of the Management Information Systems
(MIS) have been Y2K tested and are fully compliant with regulatory guidelines.
SELECTED QUARTERLY FINANCIAL DATA
Table 11 sets forth selected unaudited quarterly financial information.
However, in management's opinion, all adjustments necessary to fairly present
the results of operations of such periods, are reflected therein.
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 composed 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 and
liquidity risks. ALCO is also involved in formulating economic projections
and strategies used by the Group in its planning and budgeting process,
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 uses 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 June 30, 1999
remained constant, or increase or decrease on an instantaneous and sustained
change of plus or minus 200 basis points, and (2) all scheduled repricing,
reinvestments and estimated prepayments, and reissuances are at such
constant, or increase 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 $46,959 $ - -
+200 Basis points $41,671 $(5,288) -11.2%
-200 Basis points $52,521 $ 5,562 11.9%
</TABLE>
NOTE:
1. The NII figures exclude the effect of the amortization of loan fees.
F-12
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, YTD
------------- ------------- ------------- ------------ ------------
TABLE 11- SELECTED QUARTERLY FINANCIAL INFORMATION:
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999
Interest income $ 27,003 $ 27,642 $ 29,382 $ 29,748 $ 113,775
Interest expense 15,928 16,060 16,317 16,535 64,840
------------- ------------- ------------- ------------ ------------
NET INTEREST INCOME 11,075 11,582 13,065 13,213 48,935
Provision for loan losses 2,600 7,150 3,200 2,145 15,095
Non-interest income 5,807 11,488 6,268 5,637 29,200
Non-interest expenses 7,372 8,269 8,440 8,893 32,974
Provision for income taxes 851 1,284 1,070 213 3,418
------------- ------------- ------------- ------------ ------------
NET INCOME 6,059 6,367 6,623 7,599 26,648
Less: dividends on preferred stock - - - (350) (350)
------------- ------------- ------------- ------------ ------------
NET INCOME AVAILABLE TO SHAREHOLDERS $ 6,059 $ 6,367 $ 6,623 $ 7,249 $ 26,298
============= ============= ============= ============ ============
PER SHARE DATA:
Basic $ 0.46 $ 0.49 $ 0.51 $ 0.56 $ 2.02
------------- ------------- ------------- ------------ ------------
Diluted $ 0.45 $ 0.47 $ 0.50 $ 0.55 $ 1.97
------------- ------------- ------------- ------------ ------------
Average common shares and equivalents 13,444 13,471 13,358 13,139
------------- ------------- ------------- ------------
SELECTED AVERAGE BALANCES:
Interest-earning assets $ 1,256,096 $ 1,306,323 $ 1,402,657 $ 1,471,437
------------- ------------- ------------- ------------
Interest-bearing liabilities 1,201,065 1,248,855 1,347,275 1,392,394
------------- ------------- ------------- ------------
Total assets 1,359,396 1,427,877 1,505,737 1,545,070
------------- ------------- ------------- ------------
Total stockholders' equity $ 113,892 $ 114,908 $ 105,870 $ 112,972
------------- ------------- ------------- ------------
SELECTED RATIOS:
Return on average assets (ROA) 1.78% 1.78% 1.76% 1.97%
------------- ------------- ------------- ------------
Return on average common equity (ROE) 21.28% 22.16% 25.02% 29.95%
------------- ------------- ------------- ------------
Efficiency ratio 47.69% 49.58% 48.02% 46.69%
------------- ------------- ------------- ------------
Expense ratio 1.02% 1.09% 1.21% 0.83%
------------- ------------- ------------- ------------
Interest rate spread 3.36% 3.39% 3.53% 3.33%
------------- ------------- ------------- ------------
FISCAL 1998
Interest income $ 23,420 $ 24,819 $ 26,000 $ 27,069 $ 101,308
Interest expense 13,569 14,385 14,800 15,386 58,140
------------- ------------- ------------- ------------ ------------
NET INTEREST INCOME 9,851 10,434 11,200 11,683 43,168
Provision for loan losses 1,300 3,700 1,900 2,645 9,545
Non-interest income 5,011 6,728 4,386 6,245 22,370
Non-interest expenses 7,657 7,389 7,423 8,264 30,733
Provision for income taxes 968 857 825 1,200 3,850
------------- ------------- ------------- ------------ ------------
NET INCOME 4,937 5,216 5,438 5,819 21,410
------------- ------------- ------------- ------------ ------------
PER SHARE DATA:
Basic $ 0.38 $ 0.39 $ 0.41 $ 0.44 $ 1.62
------------- ------------- ------------- ------------ ------------
Diluted $ 0.36 $ 0.38 $ 0.40 $ 0.43 $ 1.57
------------- ------------- ------------- ------------ ------------
Average common shares and equivalents 13,634 13,754 13,725 13,386
------------- ------------- ------------- ------------
SELECTED AVERAGE BALANCES:
Interest-earning assets $ 1,049,981 $ 1,105,441 $ 1,179,258 $ 1,235,253
------------- ------------- ------------- ------------
Interest-bearing liabilities 1,005,669 1,057,950 1,123,857 1,177,901
------------- ------------- ------------- ------------
Total assets 1,151,815 1,192,454 1,262,333 1,315,048
------------- ------------- ------------- ------------
Total stockholders' equity $ 93,210 $ 99,379 $ 103,820 $ 106,868
------------- ------------- ------------- ------------
SELECTED RATIOS:
Return on average assets (ROA) 1.71% 1.75% 1.72% 1.77%
------------- ------------- ------------- ------------
Return on average common equity (ROE) 21.19% 20.99% 20.95% 21.78%
------------- ------------- ------------- ------------
Efficiency ratio 52.52% 47.37% 48.52% 47.38%
------------- ------------- ------------- ------------
Expense ratio 1.11% 1.15% 1.15% 0.93%
------------- ------------- ------------- ------------
Interest rate spread 3.57% 3.60% 3.53% 3.53%
------------- ------------- ------------- ------------
</TABLE>
F-13
<PAGE>
LIQUIDITY RISK MANAGEMENT
Liquidity refers to the level of cash, eligible investments easily converted
into cash and lines of credit available to meet unanticipated requirements.
The objective of the Group's liquidity management is to meet operating
expenses and ensure sufficient cash flow to fund the origination and
acquisition of assets, the repayment of deposit withdrawals and the
maturities of borrowings. 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 fiscal 1999, the Group's liquidity was deemed appropriate. It
included $53 million available from unused lines of credit with other
financial institutions and $149 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, and the repayment of maturing deposits and
borrowings.
F-14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 AND 1998
(IN THOUSANDS)
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash and due from banks $ 8,060 $ 8,831
----------- -----------
INVESTMENTS AND SECURITIES:
Money market investments 27,991 10,658
Trading securities, at fair value 17,307 42,440
Investment securities available-for-sale, at fair value 379,894 481,360
Investment securities held-to-maturity, at cost ( fair value $499,234; 1998 - $164,404 ) 508,080 162,151
Federal Home Loan Bank (FHLB) stock, at cost 13,257 10,043
----------- -----------
TOTAL INVESTMENTS AND SECURITIES 946,529 706,652
=========== ===========
LOANS:
Loans held-for-sale, at lower of cost or market 55,206 36,359
Loans receivable, net 519,110 510,995
----------- -----------
TOTAL LOANS, NET 574,316 547,354
=========== ===========
Accrued interest receivable 18,017 14,928
Foreclosed real estate, net 383 413
Premises and equipment, net 21,651 19,555
Other assets, net 18,391 15,591
----------- -----------
TOTAL ASSETS $ 1,587,347 $ 1,313,324
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 142,679 $ 112,533
Time and IRA accounts 508,648 455,061
Accrued interest 5,661 3,838
----------- -----------
TOTAL DEPOSITS 656,988 571,432
=========== ===========
BORROWINGS:
Securities sold under agreements to repurchase 596,226 416,171
Advances and borrowings from Federal Home Loan Bank 68,400 74,800
Term notes and other borrowings 106,500 114,588
----------- -----------
TOTAL BORROWINGS 771,126 605,559
=========== ===========
Accrued expenses and other liabilities 35,201 29,303
----------- -----------
TOTAL LIABILITIES 1,463,315 1,206,294
=========== ===========
COMMITMENTS AND CONTINGENCIES - -
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation 33,500 -
value, shares issued and outstanding 1,340,000 in 1999
Common stock, $1 par value; 20,000,000 shares authorized; shares
issued and outstanding 13,738,814 (1998 - 10,149,358) 13,739 10,149
Additional paid-in capital 23,313 27,261
Legal surplus 8,673 5,908
Retained earnings 79,920 63,756
Treasury stock, at cost, 903,786 shares (1998 - 221,500) (23,401) (6,199)
Accumulated other comprehensive (loss) income, net of deferred taxes (11,712) 6,155
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 124,032 107,030
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,587,347 $ 1,313,324
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 61,628 $ 60,381 $ 54,770
Mortgage-backed securities and collateralized mortgage obligations 36,874 23,874 17,138
Investment securities 14,014 15,863 9,642
Money market investments and FHLB stock 1,259 1,189 1,079
--------- --------- ---------
TOTAL INTEREST INCOME 113,775 101,307 82,629
========= ========= =========
INTEREST EXPENSE:
Deposits 28,850 26,197 21,012
Securities sold under agreements to repurchase 25,923 19,216 11,340
Other borrowed funds and interest rate risk management 10,067 12,726 12,746
--------- --------- ---------
TOTAL INTEREST EXPENSE 64,840 58,139 45,098
--------- --------- ---------
NET INTEREST INCOME 48,935 43,168 37,531
--------- --------- ---------
Provision for loan losses 15,095 9,545 4,900
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 33,840 33,623 32,631
--------- --------- ---------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 10,211 8,416 6,960
Mortgage banking activities 4,371 4,485 2,297
Bank service charges and fees and other operating income 4,341 4,104 5,164
Gain on sale of investment securities 10,460 1,030 849
Trading net activity (184) 915 54
Mortgage servicing income - 713 1,675
Gain on sale of servicing assets - 2,707 -
--------- --------- ---------
TOTAL NON-INTEREST INCOME 29,199 22,370 16,999
========= ========= =========
NON-INTEREST EXPENSES:
Compensation and benefits 15,057 15,071 14,867
Occupancy and equipment, net 5,345 4,151 3,556
Advertising and business promotion 3,045 2,602 2,085
Professional and service fees 2,144 1,393 1,499
Communications 1,496 1,427 1,283
Taxes other than income 1,711 1,633 974
Insurance, including deposit insurance 458 733 801
Printing, postage, stationery and supplies 738 724 643
Other 2,979 2,999 2,437
SAIF one-time capitalization assessment - - 1,823
--------- --------- ---------
TOTAL NON-INTEREST EXPENSE 32,973 30,733 29,968
========= ========= =========
INCOME BEFORE INCOME TAXES 30,066 25,260 19,662
Provision for income taxes 3,418 3,850 3,100
--------- --------- ---------
NET INCOME 26,648 21,410 16,562
Less: dividends on preferred stock (350) -- --
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 26,298 $ 21,410 $ 16,562
========= ========= =========
INCOME PER COMMON SHARE:
Basic $ 2.02 $ 1.62 $ 1.25
--------- --------- ---------
Diluted $ 1.97 $ 1.57 $ 1.21
--------- --------- ---------
Average common shares outstanding 13,051 13,257 13,181
Average potential common share options 335 439 495
--------- --------- ---------
13,386 13,696 13,676
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-16
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
CHANGES IN STOCKHOLDERS' EQUITY:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of period $ - $ - $ -
Issuance of preferred stock 33,500 - -
--------- --------- ---------
BALANCE AT END OF PERIOD 33,500 - -
========= ========= =========
COMMON STOCK:
Balance at beginning of period 10,149 7,990 6,633
Stock split 3,385 2,012 1,318
Stock options exercised 205 147 120
Common stock repurchased and retired - - (81)
--------- --------- ---------
BALANCE AT END OF PERIOD 13,739 10,149 7,990
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 27,261 28,631 31,234
Stock split (3,385) (2,012) (1,318)
Stock options exercised 637 642 341
Preferred stock isssuance costs (1,200) - -
Common stock repurchased and retired - - (1,626)
--------- --------- ---------
BALANCE AT END OF PERIOD 23,313 27,261 28,631
========= ========= =========
LEGAL SURPLUS:
Balance at beginning of period 5,908 4,002 2,498
Transfer from retained earnings 2,765 1,906 1,504
--------- --------- ---------
BALANCE AT END OF PERIOD 8,673 5,908 4,002
========= ========= =========
RETAINED EARNINGS:
Balance at beginning of period 63,756 49,694 39,005
Net income 26,648 21,410 16,562
Dividends declared on common stock (7,369) (5,442) (4,369)
Dividends declared on preferred stock (350) -- --
Transfer to legal surplus (2,765) (1,906) (1,504)
--------- --------- ---------
BALANCE AT END OF PERIOD 79,920 63,756 49,694
========= ========= =========
TREASURY STOCK:
Balance at beginning of period (6,199) (1,836) -
Treasury stock purchased (17,202) (4,363) (1,836)
--------- --------- ---------
BALANCE AT END OF PERIOD (23,401) (6,199) (1,836)
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF DEFERRED TAXES:
Balance at beginning of period 6,155 913 533
Other comprehensive (loss) income for the year, net of taxes (17,867) 5,242 380
--------- --------- ---------
BALANCE AT END OF PERIOD (11,712) 6,155 913
========= ========= =========
TOTAL STOCKHOLDERS' EQUITY $ 124,032 $ 107,030 $ 89,394
========= ========= =========
COMPREHENSIVE INCOME:
NET INCOME $ 26,648 $ 21,410 $ 16,562
--------- --------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on securities arising during the period (7,816) 6,064 1,017
Realized gains and losses included in net income (10,460) (1,030) (849)
Income tax expense related to items of other comprehensive income 409 208 212
--------- --------- ---------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (17,867) 5,242 380
--------- --------- ---------
COMPREHENSIVE INCOME $ 8,781 $ 26,652 $ 16,942
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,648 $ 21,410 $ 16,562
========= ========= =========
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of deferred loan origination fees and costs (5,255) (4,228) (3,165)
Amortization of premiums and accretion of discounts on investment securities 1,818 1,157 451
Depreciation and amortization of premises and equipment 2,894 2,498 2,216
Provision for loan losses 15,095 9,545 4,900
Gain on sale of investment securities available-for-sale (10,460) (1,030) (849)
Gain on sale of servicing assets -- (2,707) --
Gain on sale of loans held-for-sale (1,118) (1,986) (531)
Decrease (increase) in trading securities 25,133 (14,200) (24,945)
Increase in accrued interest receivable (3,089) (2,576) (2,282)
Increase in other assets (2,770) (2,660) (7,150)
Increase (decrease) in accrued expenses and other liabilities 2,960 (3,554) 1,307
--------- --------- ---------
TOTAL ADJUSTMENTS 25,208 (19,741) (30,048)
========= ========= =========
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 51,856 1,669 (13,486)
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (513,546) (296,115) (34,920)
Sales of investment securities available-for-sale 242,121 103,864 131,885
Maturities and redemptions of investment securities available-for-sale 21,884 23,580 3,430
Purchases of investment securities held-to-maturity (4,863) (914) (36,775)
Maturities and redemptions of investment securities held-to-maturity 70,725 37,297 5,768
Purchase of Federal Home Loan Bank of New York stock (3,214) -- (2,631)
Proceeds from sale of loans held-for-sale 92,871 57,904 --
Proceeds from sale of servicing assets -- 11,855 --
Net origination of loans (196,045) (175,960) (205,456)
Capital expenditures (4,990) (2,675) (3,659)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (295,057) (241,164) (142,358)
========= ========= =========
Cash flows from financing activities:
Net increase (decrease) in:
Deposits 85,556 73,889 114,985
Securities sold under agreements to repurchase 180,055 168,256 5,580
Advances and borrowings from FHLB (6,400) (15,000) 43,800
Issuance of term notes -- -- 60,000
Repayments of term notes and other borrowings (8,088) (428) (44,450)
Net proceeds from issuance of preferred stock 32,300 -- --
Proceeds from exercise of stock options 842 789 461
Treasury stock acquired (17,202) (4,363) (3,543)
Dividends and cash paid on fractional shares (7,300) (5,195) (4,037)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 259,763 217,948 172,796
========= ========= =========
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,562 (21,547) 16,952
Cash and cash equivalents at beginning of period 19,489 41,036 24,084
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,051 $ 19,489 $ 41,036
========= ========= =========
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 8,060 $ 8,831 $ 12,812
Money market investments 27,991 10,658 28,224
--------- --------- ---------
$ 36,051 $ 19,489 $ 41,036
========= ========= =========
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities:
Interest paid $ 62,190 $ 55,806 $ 44,261
--------- --------- ---------
Income taxes paid $ 3,946 $ 2,860 $ 5,031
--------- --------- ---------
Investment securities available-for-sale transferred to held-to-maturity $ 405,526 $ -- $ --
--------- --------- ---------
Real estate loans securitized into mortgage-backed securities $ 67,500 $ 102,300 $ 147,536
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Oriental Financial Group Inc.
(the "Group" or "Oriental") conform with generally accepted accounting
principles ("GAAP") and financial services industry practices. The following
is a description of the Group's most significant accounting policies:
NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The Group is a bank holding company incorporated under the laws of Puerto
Rico, which provides a variety of financial services through its
subsidiaries. Oriental Bank and Trust (the "Bank"), the Group's bank
subsidiary, is a full-service commercial bank with its main office located in
San Juan, Puerto Rico and with nineteen branches located throughout the
island. The Bank directly or through its wholly-owned, broker-dealer
subsidiary, Oriental Financial Services Corp. "OFS", offers mortgage,
commercial and consumer lending, auto lease financing, financial planning,
money management and investment brokerage services, as well as corporate and
individual trust services. The Bank is subject to the laws and regulations of
federal and local agencies.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions which affect the
reported amounts of assets and liabilities as well as contingent assets and
liabilities as of the date of the financial statements. These estimates and
assumptions also affect the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Group and its direct and indirect wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Group considers as cash
equivalents all liquid debt instruments with maturities of three months or
less at the date of acquisition.
INCOME PER COMMON SHARE
Basic earnings per share excludes potential dilution and is calculated by
dividing net income available to common shareholders (net income reduced by
dividends on preferred stock) 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. For
purposes of the diluted earnings per share computation, the Group includes
outstanding common stock options when their issuance is not contingent on the
attainment of a certain predefined amount of earnings in the future by
application of the treasury stock method. Contingent shares are considered in
the computation when the condition is attained. Any stock splits are
retroactively recognized in all periods presented in the financial statements.
SECURITIES PURCHASED / SOLD UNDER AGREEMENTS TO RESELL / REPURCHASE
The Group purchases securities under agreements to resell the same or similar
securities. Amounts advanced under these agreements represent short-term
loans and are reflected as assets in the statements of financial condition.
It is the Group's policy to take possession of securities purchased under
resale agreements. The Group monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest,
and requests additional collateral when deemed appropriate. Also, the Group
sells securities under agreements to repurchase the same or similar
securities. Such agreements are treated as financing agreements, and the
obligations to repurchase the securities sold are reflected as a liability.
The securities underlying the financing agreements remain included in the
asset accounts.
INVESTMENT 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 in other comprehensive income.
F-19
<PAGE>
The Group classifies as trading, those securities that are acquired and held
principally for the purpose of selling them in the near term. Trading
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 securities 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 par value. Therefore, 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.
INTEREST RATE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
The Group enters into interest rate exchange agreements, such as swaps and
caps, and other derivative financial instruments to manage its interest rate
risk exposure. Interest rate swaps and caps are not recognized in the
consolidated statement of financial condition and are not marked-to-market.
The net effect of amounts to be paid or received under interest rate swaps is
recorded as an adjustment to interest expense in the period in which
realized. Premiums on caps are amortized over the term of the contract.
Income or expenses arising from the instruments are recorded in the category
appropriate to the related asset or liability.
MORTGAGE BANKING ACTIVITIES AND LOANS HELD-FOR-SALE
The Group originates FHA insured and VA guaranteed mortgages for issuance of
GNMA mortgage-backed securities and conventional mortgage loans for issuance
of FNMA or FHLMC mortgage-backed securities. Mortgages included in the
resulting GNMA, FNMA and FHLMC pools are serviced by another institution.
Mortgage loans intended for sale in the secondary market are stated at the
lower of cost or market and are reported as loans held-for-sale. When these
loans are sold or securitized into mortgage-backed securities, a gain or loss
is recognized to the extent that the fair value of the securities or cash
received exceeds, or is less than, the carrying value of the loans sold.
The Group sells the rights to service mortgage loans for others. The gain on
the sale of these rights is determined by allocating the total cost of
mortgage loans to be sold to the mortgage servicing rights and the loans
(without the mortgage servicing rights), based on their relative fair values.
Servicing rights on mortgage loans held by the Group are also sold. This gain
is deferred and amortized over the expected life of the loan.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their outstanding principal balance, less undisbursed
portion, unearned interest and allowance for loan losses. Loan origination
fees and costs are deferred and amortized over the estimated life of the
loans as an adjustment of yield using the interest method. Unearned interest
on installment loans is recognized as income under a method which
approximates the interest method. Interest on loans not made on a discounted
basis is credited to income based on the loan principal outstanding at stated
interest rates.
Recognition of interest is discontinued when loans are 90 days or more in
arrears on principal and interest, except for well collaterized real estate
loans where recognition is discontinued when other factors indicate that
collection of interest or principal is doubtful. Loans for which the
recognition of interest income has been discontinued are designated as
non-accruing. Such loans are not reinstated to accrual status until interest
is received on a current basis and other factors indicative of doubtful
collection cease to exist.
The Group provides allowances for estimated loan losses based on an
evaluation of the risk characteristics of the loan portfolio, loss
experience, economic conditions and other pertinent factors. Loan losses are
charged and recoveries are credited to the allowance for loan losses.
The Group measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the observable market price of the loan or
the fair value of the collateral, if the loan is collateral dependent. All
loans are evaluated for impairment, except large groups of small balance,
homogeneous loans that are collectively evaluated for impairment and for
leases and loans that are recorded at fair value or at the lower of cost or
market. The Group measures for impairment all commercial loans over $250,000.
The portfolios of mortgage and consumer loans and auto loans and leases are
considered homogeneous and are evaluated collectively for impairment.
F-20
<PAGE>
SALE OF THE MORTGAGE SERVICING PORTFOLIO
In October 1997, the Group sold its mortgage servicing portfolio to a local
mortgage banking institution. At the date of this transaction, the servicing
portfolio and related servicing rights amounted to approximately $550,000,000
and $6,121,000, respectively. The Group recorded a net gain of $2.7 million
on this transaction. For the years ended June 30, 1998 and 1997, the mortgage
servicing portfolio generated servicing fees of $874,000 and $2,376,000,
respectively.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of each type of asset. Amortization of leasehold improvements is
computed using the straight-line method over the terms of the leases or
estimated useful lives of the improvements, whichever are shorter.
Long-lived assets and identifiable intangibles related to those assets to be
held and used, except for financial instruments, long-term customer
relationships, mortgage and other servicing rights and deferred tax assets,
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. There
were no impairment losses reported in fiscal years 1999, 1998 and 1997.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of the related loan
balance or its fair value at the date of foreclosure. At the time properties
are acquired in full or partial satisfaction of loans, any excess of the loan
balance over the estimated fair market value of the property is charged
against the allowance for loan losses. The carrying value of these properties
approximates the lower of cost or fair value less estimated cost to sell. Any
excess of the carrying value over the estimated fair market value is charged
to operations.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Group follows the specific criteria established by Statement of Financial
Accounting Standard 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" to determine when control has been
surrendered in a transfer of financial assets. As such, it recognizes on its
financial statements the financial assets and servicing assets it controls
and the liabilities its has incurred. At the same time, it derecognizes
financial assets when control has been surrendered and liabilities when they
are extinguished.
INCOME TAXES
The Group follows an asset and liability approach to the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Group's financial statements or
tax returns. Deferred income tax assets and liabilities are determined for
differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
The computation is based on enacted laws and rates applicable to periods in
which the temporary differences are expected to be recovered or settled.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
STOCK OPTION PLAN
As further discussed in Note 10 to the consolidated financial statements, the
Group has two stock options plans. These plans offer key officers and
employees an opportunity to purchase shares of the Group's common stock. The
Group follows the intrinsic value-based method of accounting for measuring
compensation expense, if any. Compensation expense is generally recognized
for any excess of the quoted market price of the Group's stock at measurement
date over the amount an employee must pay to acquire the stock.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", requires the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a financial statement be displayed with the same prominence as
other financial statements. Comprehensive income has been defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances, except for those resulting from
investments by owners and distributions to owners. In Oriental's case, in
addition to net income, other comprehensive income results from the changes
in the unrealized gains and losses on securities that are classified as
available-for-sale. The presentation of comprehensive income required by this
statement is set forth in the statement of changes in stockholders' equity
and of comprehensive income.
F-21
<PAGE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
During fiscal 1999, the Group adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim reports issued to shareholders. It also requires disclosure of
product and services, geographic areas and major customers. Such disclosures
are included in Note 17.
NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING
ACTIVITIES
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities." This new standard becomes effective for all fiscal quarters
beginning after June 15, 2000, pursuant to SFAS No.137 "Deferring of SFAS 133
Effective Date."
SFAS 133 establishes accounting and reporting standards for derivative
financial instruments and for hedging activities and requires all derivatives
to be measured at fair value and to be recognized as either assets or
liabilities in the statement of financial position. Under this Standard,
derivatives used in hedging activities are to be designated into one of the
following categories: (a) fair value hedge; (b) cash flow hedge; and (c)
foreign currency exposure hedge. The changes in fair value (that is, gains
and losses) will be either recognized as part of earnings in the period when
the change occurs or as a component of other comprehensive income (outside
earnings) depending on their intended use and resulting designation.
Management believes that the adoption of SFAS No. 133 will not have a
material effect on the Group's financial position or results of operations.
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform with the presentation of the
1999 consolidated financial statements.
NOTE 2 - INVESTMENTS AND SECURITIES:
MONEY MARKET INVESTMENTS:
At June 30, the Group's money market investments were comprised of:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-----------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Securities purchased under agreements to resell $24,350 $5,000
Time deposits with other banks - 2,000
Money market accounts and other short-term investments 3,641 3,658
------------------ -------------------
$27,991 $10,658
------------------ -------------------
</TABLE>
At June 30, 1999, the securities purchased under agreements to resell included
in money market investments were collateralized by FNMA certificates (1998 -
GNMA certificates) with an estimated market value of $24,836,000 (1998 -
$5,560,000). These securities were in the Group's possession and the
counterparty retained effective control over the collateral.
TRADING SECURITIES:
A summary of trading securities owned by the Group at June 30, is as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-----------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
US Treasury securities $ 3,527 $3,574
Mortgage-backed securities 11,278 35,903
CMO residuals, interest only 2,502 2,963
------------------ -------------------
$17,307 $42,440
------------------ -------------------
</TABLE>
At June 30, 1999, the Group's trading portfolio weighted average yield was 7.79%
(1998 - 7.40%).
F-22
<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 June 30, 1999 and
1998, were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 ( 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 Treasury securities $105,343 $ 130 $ 3,875 $101,598 5.33%
US Government agencies securities 75,820 - 1,321 74,499 6.79%
PR Government securities 20,160 423 11 20,572 8.71%
GNMA certificates 60,128 871 745 60,254 6.93%
FNMA certificates 97,270 40 2,081 95,229 6.68%
FHLMC certificates 28,314 - 572 27,742 6.66%
------------------ --------------- ------------- -------------- ------------
387,035 1,464 8,605 379,894 6.47%
================== =============== ============= ============== ============
HELD-TO-MATURITY
PR Government securities 3,563 - 33 3,530 7.40%
Collateralized mortgage obligations 119,497 - 2,365 117,132 6.67%
Other debt securities 4,863 - - 4,863 8.58%
GNMA certificates 179,449 796 3,161 177,084 6.59%
FNMA certificates 114,824 248 2,445 112,627 6.74%
FHLMC certificates 85,884 73 1,959 83,998 6.65%
------------------ --------------- ------------- -------------- ------------
508,080 1,117 9,963 499,234 6.68%
------------------ --------------- ------------- -------------- ------------
FHLB stock 13,257 - - 13,257 6.74%
------------------ --------------- ------------- -------------- ------------
$908,372 $2,581 $18,568 $892,385 6.59%
================== =============== ============= ============== ============
</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 Treasury securities $158,606 $4,753 $152 $163,207 6.08%
US Government agencies securities 85,619 1,393 - 87,012 6.89%
PR Government securities 26,074 1 194 25,881 8.72%
GNMA certificates 35,517 992 40 36,469 7.14%
FNMA certificates 128,956 936 1 129,891 6.74%
FHLMC certificates 38,382 518 - 38,900 6.99%
------------------ --------------- ------------- -------------- ------------
473,154 8,593 387 481,360 6.71%
================== =============== ============= ============== ============
HELD-TO-MATURITY
PR Government securities 3,575 1 - 3,576 7.40%
GNMA certificates 125,394 1,791 400 126,785 6.80%
FNMA certificates 28,732 753 32 29,453 7.25%
FHLMC certificates 4,450 151 11 4,590 7.00%
------------------ --------------- ------------- -------------- ------------
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>
F-23
<PAGE>
The amortized cost and estimated fair value of the Group's investment securities
at June 30, 1999, by contractual maturity, are shown in the next table. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
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 1 year $2,061 $2,050 $ - $ - $ 2,061 $2,050
After 1 year to 5 years 10,344 10,474 1,046 1,048 11,390 11,522
After 5 years to 10 years 173,922 168,676 14,968 15,022 188,890 183,698
Due after 10 years 200,708 198,694 492,066 483,164 692,774 681,858
FHLB stock - - - - 13,257 13,257
-------------- ------------ ------------- -------------- ------------ ------------
$387,035 $379,894 $508,080 $499,234 $908,372 $892,385
============== ============ ============= ============== ============ ===========
</TABLE>
The category of securities available-for-sale due after ten years includes a
mortgage-backed Puerto Rico municipal bond with a fair value of $18,456,000
which commenced repaying principal on August 1, 1994, and is expected to be
fully collected within the next two fiscal years. This category also includes
$52,610,000, 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
fiscal 1999 totaled $242,121,000 (1998 - $103,864,000; 1997 - $131,885,000).
Gross realized gains and losses on those sales during fiscal 1999 were
$10,515,000 and $55,000, respectively (1998 -$1,180,000 and $150,000; 1997 -
$958,000 and $109,000).
Of Oriental's investments at June 30, 1999 and 1998, the Government of Puerto
Rico was the only issuer, other than the U.S. Government, of instruments that
are payable and secured by the same source of revenue or taxing authority
that exceeded 10% of stockholders' equity. The fair value of these
investments represented 19% and 28% of stockholders' equity, respectively. At
June 30, 1999, the amortized cost and fair value of investments from the
Government of Puerto Rico were approximately $23,723,000 (1998 - $29,649,000)
and $24,102,000 (1998 -$29,457,000), respectively. At June 30, 1999,
$18,456,000 (1998 -$23,922,000) of these investments were an AAA-rated Puerto
Rico municipal bond collateralized with mortgage-backed securities.
In April 1998, after a thorough evaluation of the Group's portfolio, the
Group transferred available-for-sale securities with a fair value of
$405,526,000 to held-to-maturity portfolio. Pursuant to SFAS 115 provisions,
the unrealized net holding loss on securities at the date transfer of
$4,571,000, will continue to be reported in accumulated other comprehensive
income within stockholders' equity and will be amortized over the remaining
life of the securities as an adjustment to yield.
NOTE 3 - PLEDGED ASSETS:
At June 30, 1999, residential mortgage loans and investment securities
amounting to $100,509,000 (1998 - $147,899,000), and $737,448,000 (1998 -
$562,921,000), respectively, were pledged to secure public fund deposits,
investment securities sold under agreements to repurchase, letters of credit,
advances and borrowings from the Federal Home Loan Bank of New York, term
notes and interest rate swap agreements.
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
LOANS RECEIVABLE
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit
organizations, all of which are encompassed within four main categories:
mortgage, commercial, consumer and leasing. Oriental's loan portfolio has a
higher concentration of loans to consumers such as auto leases, personal
loans, and residential mortgage loans.
As of June 30, 1999, residential mortgage loans held-for-sale amounted to
$55,206,000 (1998 - $36,359,000). All mortgage residential loans originated
and sold during fiscal 1999 were sold based on pre-established commitments or
at market values. In fiscal 1999, the Group recognized gains of $1,118,000,
(1998 -$1,986,000; 1997 - $531,000) in these sales and are included in the
statement of income as part of mortgage banking activities.
F-24
<PAGE>
The composition of the Group's loan portfolio at June 30, was as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
----------------------------------------
1999 1998
--------------------- ------------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $263,540 $233,161
Non-residential real estate loans 6,531 7,916
Home equity loans and personal loans collateralized by real estate 16,278 16,457
--------------------- ------------------
286,349 257,534
Less: net deferred loan fees (1,302) (428)
--------------------- ------------------
285,047 257,106
==================== ==================
OTHER LOANS:
Commercial and auto loans 10,555 15,921
Personal consumer loans and credit lines 122,213 102,513
Financing leases, net of unearned interest 110,297 141,113
--------------------- ------------------
243,065 259,547
==================== ==================
LOANS RECEIVABLE 528,112 516,653
Allowance for loan losses (9,002) (5,658)
-------------------- ------------------
LOANS RECEIVABLE, NET 519,110 510,995
Loans held-for-sale 55,206 36,359
-------------------- ------------------
TOTAL LOANS, NET $574,316 $547,354
==================== ==================
</TABLE>
At June 30, 1999, loans on which the accrual of interest has been discontinued
amounted to approximately $19,542,000 (1998 -$15,895,000). The gross interest
income that would have been recorded in fiscal 1999 if non-accrual loans had
performed in accordance with their original terms amounted to approximately
$2,041,000 (1998 - $2,138,000; 1997 - $1,361,000).
ALLOWANCE FOR LOAN LOSSES
The Group maintains an allowance for loan losses 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. The changes in the allowance for loan losses for the last
three fiscal years ended June 30, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 5,658 $ 5,408 $ 4,496
Provision for loan losses 15,095 9,545 4,900
Loans charged-off (14,612) (11,484) (5,262)
Recoveries 2,861 2,189 1,274
--------------------- -------------------- ------------------
BALANCE AT END OF PERIOD $ 9,002 $ 5,658 $ 5,408
===================== ==================== ==================
</TABLE>
As described in Note 1, the Group evaluates all loans, some individually and
other as homogeneous groups, for purposes of determining impairment. At June 30,
1999 and 1998, the Group determined that no impairment reserve was necessary.
F-25
<PAGE>
NOTE 5 - NON-INTEREST EARNING ASSETS
ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at June 30, consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Loans $6,709 $3,773
Mortgage-backed and investment securities 11,308 11,155
------------------- ------------------
$18,017 $14,928
=================== ==================
</TABLE>
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
USEFUL LIFE ---------------------------------------
(YEARS) 1999 1998
----------------- ------------------- ----------------
<S> <C> <C> <C>
Land - $ 1,348 $1,385
Buildings and improvements 20 - 50 12,081 11,838
Leasehold improvements 5 - 10 2,921 2,435
Furniture and fixtures 3 - 7 4,222 4,460
EDP and other equipment 3 - 7 12,139 9,098
------------------- ----------------
32,711 29,216
Less: Accumulated depreciation and amortization (11,060)
(9,661)
------------------- ----------------
$21,651 $19,555
=================== ================
</TABLE>
Depreciation and amortization of premises and equipment for the year ended June
30, 1999 totaled $2,894,000 (1998 - $2,498,000; 1997 - $2,216,000). These are
included in the statement of income as part of occupancy and equipment expenses.
OTHER ASSETS:
Other assets at June 30, include the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Prepaid expenses and other assets $5,121 $5,448
Deferred tax asset 4,676 2,816
Accounts receivable and insurance claims 8,109 6,032
Other repossessed property 485 1,295
---------------- ---------------
$ 18,391 $ 15,591
================ ===============
</TABLE>
F-26
<PAGE>
NOTE 6 - DEPOSITS AND RELATED INTEREST:
At June 30, 1999, the weighted average interest rate of the Group's deposits was
4.43% (1998 - 4.86%) considering non-interest bearing deposits of $40,133,000
(1998 - $26,880,000). Refer to the Consolidated Statement of Financial Condition
for the composition of deposits at June 30, 1999 and 1998. Interest expense for
the last three fiscal years ending June 30, is set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------
1999 1998 1997
-------------------- ----------------- ----------------
<S> <C> <C> <C>
NOW accounts and saving deposits $ 2,920 $ 2,781 $ 2,455
Certificates of deposit and IRA accounts 25,930 23,416 18,557
-------------------- ----------------- ----------------
$28,850 $ 26,197 $ 21,012
==================== ================= ================
</TABLE>
At June 30, 1999, time deposits in denominations of $100,000 or higher amounted
to $242,680,000, (1998- $250,122,000) including brokered certificates of deposit
of $92,821,000, (1998- $74,843,000) at a weighted average rate of 5.25%, (1998-
5.79%) and public funds certificates of deposit from various local government
agencies, collateralized with investment securities, of $72,254,000, (1998 -
$59,821,000) at a weighted average rate of 5.00% (1998 - 5.68%).
Scheduled maturities of certificates of deposit and IRA accounts at June 30,
1999 are as follow:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------
BELOW $100,000 OVER $100,000 TOTAL
-------------------- ----------------- ----------------
<S> <C> <C> <C>
Within one year:
Three (3) months or less $53,726 $155,871 $209,597
Over 3 months through 1 year 80,005 78,718 158,723
-------------------- ----------------- ---------------
133,731 234,589 368,320
Over 1 through 3 years 53,103 2,348 55,451
Over 3 years 79,134 5,743 84,877
-------------------- ----------------- ----------------
$265,969 $242,680 $508,648
==================== ================= ================
</TABLE>
NOTE 7 - BORROWINGS:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At June 30, 1999, securities underlying agreements to repurchase were
delivered to, and are being held by, the counterparties with whom the repurchase
agreements were transacted. The counterparties have agreed to resell to the
Group the same or similar securities at the maturity of the agreements. At
June 30, 1999, substantially all securities sold under agreements to repurchase
mature within 180 days. The following securities were sold under agreements to
repurchase at June 30:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
REPURCHASE MARKET VALUE REPURCHASE MARKET VALUE
LIABILITY OF COLLATERAL LIABILITY OF COLLATERAL
---------------------------------- --------------------------------
<S> <C> <C> <C> <C>
US Treasury securities $65,268 $65,181 $125,381 $127,216
US Government agencies securities 21,337 21,309 40,989 41,589
GNMA certificates 126,864 126,695 79,258 80,418
FNMA certificates 173,315 173,084 108,278 109,863
FHLMC certificates 99,664 99,531 62,265 63,177
Collateralized mortgage obligations 107,752 107,608 - -
CMO residuals, interest only 2,026 2,024 - -
--------------- --------------- ------------- ---------------
$596,226 $595,432 $416,171 $422,263
=============== =============== ============= ===============
</TABLE>
At June 30, 1999, the weighted average interest rate of the Group's
repurchase agreements was 4.89% (1998 - 5.24%) and included agreements with
interest ranging from 2.69% to 5.85%.
F-27
<PAGE>
The following summarizes significant data on securities sold under agreements to
repurchase for fiscals 1999 and 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------
1999 1998
-------------------- -----------------
<S> <C> <C>
Average daily aggregate balance outstanding $510,049 $423,150
-------------------- -----------------
Maximum amount outstanding at any month-end $582,201 $424,456
-------------------- -----------------
Weighted average interest rate during the year 5.08% 5.37%
-------------------- -----------------
</TABLE>
ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK
At June 30, advances and borrowings from the Federal Home Loan Bank of New
York (FHLB) consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
TYPE 1999 1998 MATURITY DATE INTEREST RATE DESCRIPTION
- ------------------ ------------- -------------- ----------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
ADVANCE $8,400 $ 800 Demand Floating due daily - 5.98% (1998 - 6.13%)
ADVANCE - 10,000 July 1998 Fixed - 5.74%
ADVANCE 10,000 10,000 September 1999 Fixed - 5.71%
ADVANCE 10,000 10,000 September 1999 Fixed - 5.85%
ADVANCE 10,000 - July 1999 Fixed - 5.07%
ADVANCE 20,000 20,000 October 2002 Fixed - 5.42%
BORROWING - 14,000 July 1998 Fixed - 6.28 %
BORROWING 10,000 10,000 September 1999 Fixed - 6.03%
------------- --------------
$68,400 $74,800
============= ==============
</TABLE>
Advances are received from the FHLB under an agreement whereby Oriental is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. At June 30, 1999 and
1998, these advances and borrowings were secured by mortgage loans and
investment securities. Also, at June 30, 1999, the Group has an additional
borrowing capacity with the FHLB of $149 million (1998 - $33 million).
TERM NOTES AND BONDS PAYABLE
At June 30, term notes and bonds payable consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------
TYPE 1999 1998 MATURITY DATE INTEREST RATE DESCRIPTION
- ----------------- -------------- -------------- ----------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
TERM NOTE $ - $ 8,000 October 1998 Fixed - 4.81% (b)
TERM NOTE 10,000 10,000 December 1999 Floating due quarterly - 4.10% (1998 - 4.62%) (a) (c)
TERM NOTE 10,000 10,000 January 2000 Floating due quarterly - 4.10% (1998 - 4.62%) (a) (c)
TERM NOTE 6,500 6,500 December 2000 Floating due quarterly - 4.30% (1998 - 4.78%) (b) (c)
TERM NOTE 20,000 20,000 March 2001 Floating due quarterly - 4.48% (1998 - 5.12%) (b) (c)
TERM NOTE 10,000 10,000 September 2001 Floating due quarterly - 4.78% (1998 - 5.45%) (b) (c)
TERM NOTE 30,000 30,000 September 2001 Floating due quarterly - 4.58% (1998 - 5.23%) (b) (c)
TERM NOTE 5,000 5,000 December 2001 Floating due quarterly - 4.28% (1998 - 4.73%) (b) (c)
TERM NOTE 15,000 15,000 March 2007 Floating due quarterly - 4.63% (1998 - 5.28%) (b) (c)
BOND - 88 April 2008 Fixed - 8.38% (d)
-------------- --------------
$106,500 $114,588
-------------- --------------
-------------- --------------
</TABLE>
(a) - Guaranteed by letters of credit from the FHLB.
(b) - Collateralized with investment securities.
(c) - The interest rate risk exposure on floating notes was hedged through the
interest rate risk management process discussed in Note 8.
(d) - Collaterized with FHLMC certificates.
F-28
<PAGE>
UNUSED LINES OF CREDIT
The Group maintains various lines of credit with other financial institutions
from which funds are drawn as needed. At June 30, 1999, the Group's total
available funds under these lines of credit totaled $53 million (1998 - $56
million). At June 30, 1999 and 1998, there was no balance outstanding under
these lines of credit.
CONTRACTUAL MATURITIES
As of June 30, 1999, the contractual maturities of securities sold under
agreements to repurchase, advances and borrowings from the FHLB, and bonds
payable and term notes by fiscal year are as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-----------------------------------------------------------
ADVANCES & TERM NOTES
REPURCHASE BORROWINGS AND BONDS
YEAR ENDING JUNE 30, AGREEMENTS FROM FHLB PAYABLE
-------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C>
2000 $546,226 $48,400 $20,000
2001 50,000 - 26,500
2002 - - 45,000
2003 - 20,000 -
2007 - - 15,000
----------------- ---------------- ------------------
$596,226 $68,400 $106,500
----------------- ---------------- ------------------
</TABLE>
NOTE 8 - INTEREST RATE RISK MANAGEMENT
The Group uses 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.
The Group's swaps and caps outstanding and their terms at June 30, are set forth
in the table below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
SWAPS:
Pay fixed swaps notional amount $245,000 $260,000
Weighted average pay rate - fixed 5.66% 5.70%
Weighted average receive rate - floating 5.09% 5.23%
Maturity in months 2 to 26 1 to 35
Floating rate as a percent of LIBOR 85 to 100% 84 to 100%
CAPS:
Cap agreements notional amount $100,000 $150,000
Cap rate 6.50% 6.50%
Current 90 day LIBOR 5.29% 5.72%
Maturity in months 4 to 15 3 to 18
</TABLE>
The agreements were signed to convert short-term borrowings into fixed rate
liabilities for longer periods of time and provide protection against
increases in interest rates. The amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. The Group controls
the credit risk of its interest rate swap agreements through approvals,
limits, monitoring procedures and collateral, where considered necessary. The
Group does not anticipate nonperformance by the counterparties. At June 30,
1999, interest rate swap and caps maturities by fiscal year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, (IN THOUSANDS)
--------------------------- ----------------------
<S> <C>
2000 $160,000
2001 185,000
----------------------
$345,000
----------------------
</TABLE>
F-29
<PAGE>
The Group offers its customers certificates of deposit tied to the
performance of one of the following stock market indexes, the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average or
Russell 2000 Small Stock Index. At the end of five years, the depositor will
receive a specified percent of the average increase of the month-end value of
the corresponding stock index. If such index decreases, the depositor
receives the principal without any interest. The Group uses interest rate
swap 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 in the month-end value of the corresponding index in
exchange for a semiannual fixed interest cost. At June 30, 1999, the notional
amount of these agreements totaled $79,815,000 (1998 - $49,632,000) at a
weighted average rate of 5.81% (1998- 5.72%).
NOTE 9 - INCOME TAXES:
Under the Puerto Rico Internal Revenue Code, all companies are treated as
separate taxable entities and are not entitled to file consolidated returns. All
income of the Group is subject to Puerto Rico income tax. The components of
income tax expense for the years ended June 30, are summarized below:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-----------------------------------------------------------
1999 1998 1997
----------------- ---------------- ------------------
<S> <C> <C> <C>
Current Income tax expense $5,139 $5,876 $3,310
Deferred income tax benefit (1,721) (2,026) (210)
----------------- ---------------- ------------------
PROVISION FOR INCOME TAXES $3,418 $3,850 $3,100
----------------- ---------------- ------------------
</TABLE>
The Group maintained an effective tax rate lower than the statutory rate of 39%
mainly due to the interest income arising from certain mortgage loans and
investment and mortgage-backed securities exempt for Puerto Rico income tax
purposes, net of the disallowance of expenses attributable to the exempt income.
In addition, the Group established during 1997 an international banking entity
(IBE) under Puerto Rico's International Banking Center Regulatory Act of 1989.
The income earned by the IBE is exempt from Puerto Rico income taxes. During
fiscal 1999 the Group generated tax-exempt interest income on investment
securities of $49,458,000 (1998 - $38,971,000; 1997 - $20,613,000). Exempt
interest relates mostly to interest earned on obligations of the United States
and Puerto Rico governments and certain mortgage-backed securities.
The reconciliation between the Puerto Rico income tax statutory rate and the
effective tax rate as reported for each of the last three fiscal years ended
June 30, follows:
<TABLE>
<CAPTION>
( DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- ---------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- -------- -------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $11,725 39.0% $ 9,851 39.0% $ 7,668 39.0%
Decrease in rate resulting from:
Exempt interest income, net (8,041) (26.7) (5,786) (22.9) (4,349) (22.1)
Other non-taxable items, net (266) (.9) (215) (.9) (219) (1.1)
------------- -------- -------------- --------- -------------- ----------
PROVISION FOR INCOME TAXES $3,418 11.4% $ 3,850 15.2% $ 3,100 15.8%
------------- -------- -------------- --------- -------------- ----------
</TABLE>
F-30
<PAGE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The components of the Group's
deferred tax asset and liability at June 30, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------
1999 1998
---------------- ------------------
<S> <C> <C>
DEFERRED TAX ASSET:
Allowance for loan losses, net $3,511 $1,902
Deferred income 1,165 914
---------------- ------------------
GROSS DEFERRED TAX ASSET 4,676 2,816
---------------- ------------------
DEFERRED TAX LIABILITY:
Net deferred loan origination costs (154) (104)
Other temporary differences (347) -
Unrealized gain on trading securities - (260)
Unrealized gain on available for sale securities - (2,051)
---------------- ------------------
GROSS DEFERRED TAX LIABILITY (501) (2,415)
---------------- ------------------
NET DEFERRED TAX ASSET $4,175 $401
================ ==================
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY:
STOCK OPTIONS
The Group has two stock options plans, the 1996 and the 1988 Incentive Stock
Option Plans (the "Plans"). These plans offer key officers and employees an
opportunity to purchase shares of the Group's common stock. The Compensation
Committee of the Board of Directors has sole authority and absolute
discretion as to the number of stock options to be granted, their vesting
rights, and the option's exercise price. The Plans provide for a
proportionate adjustment in the exercise price and the number of shares that
can be purchased in the event of a stock split, reclassification of stock and
a merger or a reorganization. Stock options vest upon completion of specified
years of service and, in the case of the 1996 Plan, the attainment of certain
financial performance goals. The activity in outstanding options for the year
ended June 30, 1999 and 1998, is set forth below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Beginning of period 837,138 $13.59 644,267 $ 8.94
Stock split 313,115 (3.29) 145,103 (1.79)
Options granted 396,000 26.17 283,000 22.50
Options exercised (204,782) 4.24 (155,017) 5.17
Options forfeited (50,656) 15.72 ( 80,215) 17.34
------------- --------------- --------------- --------------
END OF PERIOD 1,290,815 $15.97 837,138 $13.59
------------- --------------- --------------- --------------
</TABLE>
During fiscal 1999 the Group granted 396,000 (1998 - 283,000) options to buy
shares of the Group's stock, which are contingent on Group's net income equaling
or exceeding $33 million in fiscal 2001 (1998 - $28 million in 2000) and are
exercisable over a period ranging from five to ten years. Options prices were
between 10% to 20% lower than the quoted market price of the stock at the grant
date. No compensation expense was recognized in fiscal 1999 because the price of
the stock at June 30, 1999 was lower than the exercise price of the options.
F-31
<PAGE>
The following table summarizes the range of exercise prices and the weighted
average remaining contractual life of the options outstanding at June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACT EXERCISE
STOCK OPTION PLAN OUTSTANDING LIFE (YEARS) PRICE
- ------------------------------------------------- ---------------- -------------------------------------
<S> <C> <C> <C>
1988 PLAN 286,143 2.0 $5.82
1996 PLAN - FISCAL 1997 GRANT 294,092 7.4 11.10
1996 PLAN - FISCAL 1998 GRANT 325,580 8.0 16.99
1996 PLAN - FISCAL 1999 GRANT 385,000 9.4 26.17
---------------- ----------------- ----------------
1,290,815 7.0 $15.97
---------------- ----------------- ----------------
</TABLE>
As described in Note 1,the Group uses the intrinsic value based method to
account for stock options. The Group implemented the provisions of SFAS 123 for
disclosure purposes only by adopting the method of recognizing compensation
expense over the expected life of the options based on their fair market value.
The Group's net income and earnings per common share would have been reduced to
proforma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
COMPENSATION AND BENEFITS:
Reported $15,057 $15,071 $14,728
---------------- ----------------- ----------------
Pro forma $15,844 $15,436 $14,833
---------------- ----------------- ----------------
NET INCOME:
Reported $26,648 $21,410 $16,562
---------------- ----------------- ----------------
Pro forma $26,092 $21,045 $16,457
---------------- ----------------- ----------------
BASIC EARNINGS PER SHARE:
Reported $ 2.02 $ 1.62 $1.25
---------------- ----------------- ----------------
Pro forma $ 2.00 $ 1.59 $1.25
---------------- ----------------- ----------------
DILUTED EARNINGS PER SHARE:
Reported $1.97 $1.57 $1.21
---------------- ----------------- ----------------
Pro forma $1.95 $1.54 $1.20
---------------- ----------------- ----------------
</TABLE>
The fair value of each option granted in fiscals 1999, 1998 and 1997 was
estimated using the Black-Scholes option pricing model with the following
assumptions:
- - STOCK PRICE AND EXERCISE PRICE - The market price of the stock at the date
of fiscal 1999 grant was $30.38. The weighted average exercise price of the
option was $25.50. In the case of fiscal 1998 and 1997 grants, the price of
the option granted equaled the quoted market price of the stock.
- - EXPECTED OPTION TERM - 10 years
- - EXPECTED VOLATILITY - 31% for options granted in fiscal 1999 (1998 -30%).
- - EXPECTED DIVIDEND YIELD - 1.98% options granted in fiscal 1999 (1998 -
3.32%).
- - RISK-FREE INTEREST RATE - 4.93% for options granted in fiscal 1999 (1998 -
6.12%)
- - FAIR VALUE OF OPTIONS - The weighted average fair value of the options
granted in 1999 was $12.04 (1998 - $5.92; 1997 - $2.12).
STOCK SPLITS
On August 18, 1998, the Group declared a four-for-three (33.3%) stock split on
common stock held by registered shareholders as of September 30, 1998. As a
result, approximately 3,385,000 shares of common stock were distributed on
October 15, 1998. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered shareholders
as of September 30, 1997. As a result, approximately 2,012,000 shares of common
stock were distributed on October 15, 1997. For purposes of the computation of
income per common share, the stock splits were retroactively recognized for all
periods presented in the accompanying Consolidated Financial Statements.
F-32
<PAGE>
TREASURY STOCK
During fiscal 1997, the Board of Directors of the Group (the "Board") authorized
management, subject to the required shareholder and regulatory approvals, to
repurchase up to 816,463 shares, as adjusted for stock splits, of its issued and
outstanding common stock. In addition, in fiscal 1999, the Board also approved
management to repurchase up to 600,000 additional shares over those originally
authorized. The authority granted by the Board of Directors does not require the
Group to repurchase any shares. The repurchase of shares will be made in the
open market at such times and prices as market conditions shall warrant, and in
full compliance with the terms of applicable federal and Puerto Rico laws and
regulations. The activity of common shares held by the Group's treasury for the
years ended June 30, 1999 and 1998 is set forth below.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
DOLLAR DOLLAR
SHARES AMOUNT SHARES AMOUNT
------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Beginning of period 221.5 $6,199 81.5 $1,836
Stock split 73.8 - 20 -
Common shares repurchased 608.5 17,202 120 4,363
------------- ---------------- --------------- --------------
END OF PERIOD 903.8 $23,401 221.5 $6,199
------------- ---------------- --------------- --------------
</TABLE>
LEGAL SURPLUS
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of the Bank's net income for the year be transferred to capital surplus
until such surplus equals the greater of 10% of total deposits or paid-in
capital. At June 30, 1999, legal surplus amounted to $8,673,000 (1998 -
$5,908,000). The amount transferred to the legal surplus account is not
available for payment of dividends to shareholders. In addition, the Federal
Reserve Board has issued a policy statement that bank holding companies should
generally pay dividends only from current operating earnings.
PREFERRED STOCK
In May 1999, the Group issued 1,340,000 shares of its 7.125% Noncummulative
Monthly Income Preferred Stock, Series A (the "Series A, Preferred Stock) at $25
per share. The Group generated $32,300,000 in net proceeds from this issue for
general corporate purposes. The Series A Preferred Stock has the following
characteristics:
- - Annual dividends of $1.78125 per share, payable monthly, if declared by
the board of directors. Missed dividends are not cumulative.
- - Redeemable at the Group's option beginning on May 30, 2004.
- - No mandatory redemption or stated maturity date.
- - Liquidation value of $25 per share.
NOTE 11 - EMPLOYEE BENEFITS PLAN:
The Group has a cash or deferred arrangement profit sharing plan 401(k). Under
this plan, the Group contributes shares of its common stock to match individual
employee contributions up to $1,040. The plan is entitled to acquire and hold
qualified employer securities as part of its investment of the trust assets
pursuant to ERISA Section 407. During fiscal 1999 the Group contributed 4,916 ,
(1998 - 4,186; 1997 - 4,312), shares of its common stock with a market value of
approximately $119,000, (1998 - $153,000; 1997 - $122,000) at the time of
contribution. The Group's contribution becomes 100% vested once the employee
attains five years of participation in the plan.
NOTE 12 - RELATED PARTY TRANSACTIONS:
The Group grants loans to its directors, executive officers and to certain
related individuals or organizations in the ordinary course of business. These
do not involve more than the normal risk of collectibility or present other
unfavorable features. The movement and balance of these loans were as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
---------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Balance at the beginning of period $2,675 $2,796
New loans 880 -
Payments (720) (121)
---------------- -----------------
BALANCE AT THE END OF PERIOD $2,835 $2,675
---------------- -----------------
</TABLE>
F-33
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Group has entered into various operating lease agreements for branch
facilities and administrative offices. Rent expense for fiscal 1999 amounted to
$1,013,000 (1998 - $847,000; 1997 - $575,000). As of June 30, 1999, future
rental commitments under the terms of the leases, exclusive of taxes, insurance
and maintenance expenses payable by the Group, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, (IN THOUSANDS)
--------------------------- ----------------------
<S> <C>
2000 $1,454
2001 1,498
2002 1,517
2003 1,536
2004 1,549
Thereafter 3,518
----------------------
$11,072
----------------------
</TABLE>
LOAN COMMITMENTS
At June 30, 1999, there was $9,923,000 of unused lines of credit provided to
individual customers and $10,000,000 of commitments to originate loans.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require payment of a fee. Since
the commitments may expire unexercised, the total commitment amounts do not
necessarily represent future cash requirements. The Group evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Group upon extension of credit, is based on
management's credit evaluation of the customer.
CONTINGENCIES
The Group and its subsidiaries are defendants in a number of legal proceedings
incidental to its business. The Group is vigorously contesting such claims.
Based upon a review by 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.
NOTE 14 - REGULATORY MATTERS:
SAIF ASSESSMENT
On September 30, 1996, the United States Congress approved and President Clinton
signed into law a bill to recapitalize the Savings Association Insurance Fund
("SAIF"). This bill called for a special one-time charge of approximately 65
basis points on institutions holding SAIF deposits on March 31, 1995.
Accordingly, the Group recorded a special reserve of $1,823,000, net of taxes of
$490,000, during the first quarter of 1997 to account for its share of the
one-time payment of SAIF insurance premium. As result of this special
assessment, in January 1997, the Group's deposit insurance premium was reduced
to $0.062 for every $100 of deposits from $.23 for every $100 of deposits.
CAPITAL
The Group is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Group's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Group's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Group to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that, as of June 30, 1999, Oriental
meets all capital adequacy requirements to which it is subject.
F-34
<PAGE>
At June 30, 1999, the most recent notification from the FDIC, dated August
1999, categorized the Group as a "well capitalized institution" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Group must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that date that management believes have changed the
institution's category. The Group's actual capital amounts and ratios of total
risk-based capital, Tier 1 risk-based capital and Tier 1 capital at June 30,
were as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ---------------------- ---------------------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ---------- ---------- ----------- ------------- -------------
<S> <S> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1999
- -------------------
Tier I Capital ( to Average Assets) $135,721 8.78% $61,800 4.00% $77,250 5.00%
Tier I Risk-Based ( to Risk-Weighted Assets) $135,721 24.02% $22,598 4.00% $33,897 6.00%
Total Capital ( to Risk-Weighted Assets) $142,807 25.28% $45,194 8.00% $56,492 10.00%
AS OF JUNE 30, 1998
- -------------------
Tier I Capital ( to Average Assets) $101,318 7.70% $52,643 4.00% $65,804 5.00%
Tier I Risk-Based ( to Risk-Weighted Assets) $101,318 20.45% $19,820 4.00% $29,730 6.00%
Total Capital ( to Risk-Weighted Assets) $107,410 21.68% $39,640 8.00% $49,550 10.00%
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
The reported fair values of financial instruments are based on either quoted
market prices for identical or comparable instruments or estimated based on
assumptions concerning the amount and timing of estimated future cash flows and
assumed discount rates reflecting varying degrees of risk. Accordingly, the fair
values may not represent the actual values of the financial instruments that
could have been realized as of year-end or that will be realized in the future.
The estimated fair value and carrying value of the Group's financial instruments
at June 30, follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------- ------- ------------------------------
1999 1998
-------------- -- --------------- ------------------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 8,060 $ 8,060 $ 8,831 $ 8,831
Money market investments 27,991 27,991 10,658 10,658
Trading securities 17,307 17,307 42,440 42,440
Investment securities available-for-sale 379,894 379,894 481,360 481,360
Investment securities held-to-maturity 499,234 508,080 164,404 162,151
Federal Home Loan Bank (FHLB) stock 13,257 13,257 10,043 10,043
Loans, net (including loans held-for-sale) 578,717 574,316 551,544 547,354
Accrued interest receivable 18,017 18,017 14,928 14,928
LIABILITIES:
Deposits 647,314 656,988 571,337 571,431
Securities sold under agreements to repurchase 596,226 596,226 416,171 416,171
Advances and borrowings from FHLB 68,400 68,400 74,818 74,800
Term notes and bonds payable 106,500 106,500 114,667 114,588
Accrued expenses and other liabilities 35,201 35,201 29,303 29,303
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps-in a net payable position (1,363) (1,203)
Commitments to extend credit 19,933 11,144
</TABLE>
The fair value estimates are made at a point in time based on a variety of
factors. Quoted market prices are used for financial instruments in which an
active market exists. However, because no market exists for a portion of the
Group's financial instruments, fair value estimates are based on judgments
regarding the amount and timing of estimated future cash flows, assumed discount
rates reflecting varying degrees of risk, and other factors. Because of the
uncertainty inherent in estimating fair values, these estimates may vary from
the values that would have been used had a ready market for these financial
instruments existed. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment. Changes in assumptions could
affect these fair value estimates.
F-35
<PAGE>
The fair value estimates do not take into consideration the value of future
business and the value of assets and liabilities that are not financial
instruments. Other significant tangible and intangible assets that are not
considered financial instruments are the value of long-term customer
relationships of the retail deposits, and premises and equipment. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value.
SHORT-TERM FINANCIAL INSTRUMENTS
Short-term financial instruments, which include cash and due from banks, money
market investments, accrued interest receivable and accrued expenses and other
liabilities have been valued at the carrying amounts reflected in the
Consolidated Statements of Financial Condition as these are reasonable estimates
of fair value given the short-term nature of the instruments.
INVESTMENT SECURITIES AND FHLB STOCK
The fair value of investment securities is estimated based on bid quotations
from securities dealers. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities. Investments in
FHLB stock are valued at their redemption value.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as commercial, real estate
mortgage and consumer. Each loan category is further segmented into fixed and
adjustable interest rates and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting contractual cash
flows, adjusted for prepayment estimates, if any, using estimated current market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The fair value for significant nonperforming loans is based on specific
evaluations of discounted expected future cash flows from the loans or its
collateral using current appraisals and market rates.
DEPOSITS
The fair value of non-interest bearing demand deposits, savings and NOW accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposits is based on the discounted value of the
contractual cash flows, using estimated current market discount rates for
deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
For short-term borrowings, the carrying amount is considered a reasonable
estimate of fair value. The fair value of long-term borrowings is based on the
discounted value of the contractual cash flows, using current estimated market
discount rates for borrowings with similar terms and remaining maturities.
INTEREST RATE SWAP AND CAP AGREEMENTS
The fair value of interest rate swap and cap agreements is based on discounted
value analysis. The values represent the estimated amount the Group would
receive or pay to terminate the contracts or agreements at the reporting date,
taking into account current interest rates and the credit-worthiness of the
counterparties.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is calculated by discounting
scheduled cash flows at market discount rates that reflect the credit and
interest rate risk inherent in the commitments to extend credit guarantees and
letters of credit. Assumptions regarding credit risks, cash flows and discount
rates are judgmentally determined using market and specific borrower
information.
NOTE 16 - ORIENTAL FINANCIAL GROUP, INC. ( HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:
The principal source of income for the Group consists of dividends from the
Bank. As a member subject to the regulations of the Federal Reserve Board, the
Group must obtain approval from the Federal Reserve Board for any dividend if
the total of all dividends declared by it in any calendar year would exceed the
total of its consolidated net profits for the year, as defined by the Federal
Reserve Board, combined with its retained net profits for the two preceding
years. The payment of dividends by the Bank to the Group may also be affected by
other regulatory requirements and policies, such as the maintenance of certain
regulatory capital levels.
The following condensed financial information presents the financial position
of the Holding Company only as of June 30, 1999 and 1998 and the results of
its operations and its cash flows for the years ended June 30, 1999 and 1998
and for the five months period ended June 30, 1997.
F-36
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL POSITION AS JUNE 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 35,440 $ 224
Investment securities available-for-sale, at fair value 7,827 9,438
Investment in Oriental Bank and Trust (OBT), at equity 106,291 108,454
Other assets 355 417
----------------- ---------------
TOTAL ASSETS $ 149,913 $ 118,533
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 7,499 $ 9,100
Dividend payable 1,746 1,326
Advances from subsidiaries 16,579 848
Accrued expenses and other liabilities 57 229
Stockholders' equity 124,032 107,030
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 149,913 $ 118,533
----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME FOR
PERIODS ENDED JUNE 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Interest income $ 571 $ 103 $ -
Dividends from Bank 14,680 5,442 2,968
Equity in undistributed earnings of subsidiary 12,290 16,208 4,848
----------------- --------------- -----------------
----------------- --------------- -----------------
TOTAL INCOME 27,541 21,753 7,816
----------------- --------------- -----------------
EXPENSES:
Interest expenses 463 98 -
Operating expenses 430 245 31
----------------- --------------- -----------------
TOTAL EXPENSES 893 343 31
----------------- --------------- -----------------
INCOME BEFORE INCOME TAXES 26,648 21,410 7,785
Income taxes - - -
-----------------
----------------- --------------- -----------------
NET INCOME 26,648 21,410 7,785
Other comprenhensive income, net of taxes (17,867) 5,242 277
----------------- --------------- -----------------
COMPREHENSIVE INCOME $ 8,781 $ 26,652 $ 8,062
----------------- --------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30, : 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,648 $ 21,410 $ 7,785
----------------- --------------- -----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiary (12,290) (16,208) (4,848)
Decrease (increase) in other assets 62 124 (541)
Increase in accrued expenses and liabilities (172) 117 112
----------------- --------------- -----------------
----------------- --------------- -----------------
TOTAL ADJUSTMENTS (12,400) (15,967) (5,277)
----------------- --------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,248 5,443 2,508
----------------- --------------- -----------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale - (9,438) -
Redemptions of investment securities available-for-sale 1,772 - -
----------------- --------------- -----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,772 (9,438) -
----------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in securities sold under agreements to repurchase (1,601) 9,100 -
Proceeds from exercise of stock options 842 789 356
Net advances from subsidiaries 12,157 2,569 1,601
Net proceeds from issuance of preferred stock 32,300 - -
Purchases of treasury stock (17,202) (4,363) (1,836)
Dividends paid (7,300) (5,195) (1,310)
----------------- --------------- -----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 19,196 2,900 (1,189)
----------------- --------------- -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,216 (1,095) 1,319
Cash and cash equivalents at beginning of period 224 1,319 -
----------------- --------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,440 $ 224 $ 1,319
----------------- --------------- -----------------
</TABLE>
F-37
<PAGE>
NOTE 17 - SEGMENT REPORTING:
The Group operates three major reportable segments: Financial Services, Mortgage
Banking and Retail Banking. Management determined the reportable segments based
on the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as the Group's organizational chart,
nature of products, distribution channels and economic characteristics of the
products were also considered in the determination of the reportable segments.
The Group monitors the performance of these reportable segments, based on
pre-established goals of different financial parameters such as net income,
interest spread, loan production, fees generated, and increase in market share.
The Group's largest business segment is the retail banking. It comprises mainly
the Bank's branches and loan centers with such retail products as deposits and
consumer loans. Commercial and finance leases are also considered in the retail
business. This segment is also responsible for the Group's mortgage loans and
investment portfolios and of the treasury functions.
Oriental's second largest business segment is the financial services, which is
comprised of the Bank's trust division (Oriental Trust) and of the Bank's
brokerage subsidiary (Oriental Financial Services Corp.). The core operations of
this segment are financial planning, money management and investment brokerage
services, as well as corporate and individual trust services.
The last and smallest business segment is mortgage banking. It consists of
the Oriental Mortgage whose principal activity is to originate and purchase
mortgage loans and subsequently sell them in the secondary market.
The accounting policies of the segments are the same as those described in Note
1 - "Summary of Significant Accounting Policies." Following are the results of
operations and the selected financial information by operating segment for each
of the three years ended June 30:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999
- -----------
Net interest income $ 43,242 $ 438 $ 5,255 $ - $ 48,935
Non-interest income 17,421 10,147 4,371 (2,740) 29,199
Non-interest expenses 23,360 7,175 5,178 (2,740) 32,973
Provision for loan losses 15,095 - - - 15,095
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 22,208 $ 3,410 $ 4,448 $ - $ 30,066
--------------- -------------- --------------- --------------- --------------
Total assets $ 1,577,269 $ 10,512 $ 2,000 $ (2,434) $ 1,587,347
--------------- -------------- --------------- --------------- --------------
FISCAL 1998
- -----------
Net interest income $ 38,565 $ 536 $ 4,067 $ - $ 43,168
Non-interest income 8,758 9,351 4,485 (224) 22,370
Non-interest expenses 21,142 5,357 4,458 (224) 30,733
Provision for loan losses 9,545 - - - 9,545
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 16,636 $ 4,530 $ 4,094 $ - $ 25,260
--------------- -------------- --------------- --------------- --------------
Total assets $ 1,304,817 $ 8,664 $ - $ (157) $ 1,313,324
--------------- -------------- --------------- --------------- --------------
FISCAL 1997
- -----------
Net interest income $ 34,006 $ 281 $ 3,244 $ - $ 37,531
Non-interest income 7,275 8,039 2,297 (612) 16,999
Non-interest expenses 21,364 4,711 4,505 (612) 29,968
Provision for loan losses 4,900 - - - 4,900
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 15,017 $ 3,609 $ 1,036 $ - $ 19,662
--------------- -------------- --------------- --------------- --------------
Total assets $ 1,056,986 $ 11,821 $ - $ (211) $ 1,068,596
--------------- -------------- --------------- --------------- --------------
</TABLE>
F-38
<PAGE>
ORIENTAL FINANCIAL GROUP
- ------------------------------------------------------------------------- [LOGO]
1999 ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights ............................ 1
Message to Stockholders ......................... 2
Value-Added Banking ............................. 7
Organizational Chart ............................ 8
Financial Services .............................. 8
Trust ........................................... 10
Mortgage ........................................ 12
Board of Directors .............................. 14
Top Management .................................. 16
Selected Financial Data ........................ 17
Management's Discussion and Analysis ............ 18
Report of Independent Accountants ............... 31
Consolidated Audited Financial Statements ....... 32
General Information ............................. Back Inside Cover
</TABLE>
EARNINGS PER SHARE
[CHART]
NET INCOME (in thousands)
[CHART]
RETURN ON EQUITY
[CHART]
<PAGE>
FINANCIAL
- ------------------------------------------------------------------------- [LOGO]
HIGHLIGHTS
NET INTEREST INCOME (in thousands)
[CHART]
DEPOSITS (in millions)
[CHART]
FINANCIAL ASSETS (in millions)
[CHART]
RECURRENT NON-INTEREST INCOME (in thousands)
[CHART]
MORTGAGE ORIGINATIONS (in thousands)
[CHART]
<PAGE>
MESSAGE TO
- ------------------------------------------------------------------------- [LOGO]
STOCKHOLDERS
[PHOTO]
I am pleased to report results for fiscal year 1999 ended June 30th.
Fully diluted earnings per share (EPS) increased over 25% from $1.57 to $1.97
during the year. Likewise, net income reached $26.3 million, up 23% from
$21.4 million the previous fiscal year. This was the 10th consecutive year
Oriental Financial Group (the "Group") achieved earnings growth of 20% or
better.
Our 24.52% return on equity (ROE) for fiscal 1999 is among the best in the
U.S., financial industry. A return on assets (ROA) of 1.83% and an efficiency
ratio of 48.09% further evidence the Group's profitable operations.
Stockholders received dividends totaling $7.4 million in fiscal 1999 or
$0.563 on a per share basis. This is 35% more that the $5.4 million or $0.413
per share paid in fiscal 1998.
Net interest income was up by 13% increasing to $48.9 million from $43.2
million the previous year. Recurrent non-interest income rose 11%, reaching
$18.9 million from $17.0 million a year earlier.
Financial assets, which include the Group's assets and assets managed by the
trust division and the investment broker-dealer, reached $3.8 billion for
fiscal 1999, up from $3.4 billion in fiscal 1998. The Group's assets
increased 21% to reach approximately $1.6 billion versus $1.3 billion in
fiscal year 1998. This growth was in part driven by mortgage originations,
which tallied $230 million for the year or a 26% increase when compared to
$182 million in originations during fiscal 1998.
Managed assets, comprising assets managed by the trust division and assets
gathered by the broker-dealer, continued a well-established growth pattern
through fiscal 1999, rising more than 10% to $2.3 billion from $2.0 billion a
year ago.
We were able to make necessary investments for business growth while
improving the efficiency and expense ratios in fiscal 1999 thanks to a
vigorous cost control program. Business development strategies for fiscal
1999 were accomplished within the framework of strict controls. Recurring
non-interest expenses increased only 8% to $32.6 million for fiscal 1999 when
compared with $30.3 million in fiscal 1998.
We successfully improved the quality of our assets. Furthermore, the
provision against possible loan losses was increased to $9 million, compared
to $5.7 million in the previous year. This allowed management to achieve the
goal of improving the coverage ratio of reserves to total loans, which
increased to 1.54% from 1.03% a year ago.
Though founded 35 years ago in the eastern coast town of Humacao, Puerto
Rico, the evolution of Oriental Bank & Trust ("Oriental"), the Group's Bank
subsidiary, from a small regional bank into a profitable source of innovative
products for the entire island of Puerto Rico began just 10 years ago. The
excellent performance in fiscal 1999 is the result of a dedicated management
team
E-2
<PAGE>
MESSAGE TO
- ------------------------------------------------------------------------- [LOGO]
STOCKHOLDERS
that has worked hard to transform the institution into a competitive
financial group. Although a decade is hardly a milestone in the life of a
financial institution, the past 10 years defined a promising future for
Oriental as our corporate culture and operating philosophy matured.
Oriental seeks to create and deliver financial services of the highest
possible quality to our clients. Teams of energetic professionals constantly
strive to improve our operations through the application of imaginative
financial strategies and technologies in an effort to help our clients reach
their financial goals.
Looking forward, it is important to note that Oriental is the only commercial
bank in Puerto Rico to close its fiscal year on June 30th; we are already in
fiscal year 2000. Our management information systems have been tested and are
certified to be Y2K compliant.
Oriental's substantial investment in new technology has greatly expanded
electronic applications for many of our products and services, making them
available through the telephone, fax and Internet. We expect our stand-alone
Internet websites to fully integrate our operations and give clients reliable
access to their complete financial profile.
Our commitment to strengthen the retail banking franchise as the primary
point of sale for our total package of financial and investment planning
services continues. Oriental's 19 financial centers throughout the island are
the platform for establishing valuable client relationships which bring our
well-trained and highly-motivated financial and investment advisers into
closer contact with people where they live and work.
Comparison of 8-year Cumulative Total Return
[CHART]
These financial centers are the venues where our clients access highly
competitive products and services such as mortgages, retirement products
investment services and consumer loans as well as conduct their daily money
management transactions through savings and checking accounts.
Our dedicated employees, clients and stockholders can rely on Oriental to
continue to innovate and work diligently to develop the necessary resources
that add value to banking services. We will introduce new concepts in
financial and investment planning as well as explore other market niches.
Oriental Financial Group greatly appreciates your continued support. We
sincerely appreciate the confidence that you our stockholders have
demonstrated in our financial institution as we move forward to expand a
growth oriented franchise for your benefit as well as for the benefit of our
clients and employees. We will continue to work hard and add value to
Oriental's products and services in an effort to lead the way to financial
success.
E-3
<PAGE>
VALUE ADDED BANKING
- ------------------------------------------------------------------------- [LOGO]
THE KEY TO FINANCIAL SUCCESS
We believe that maintaining a dynamic and thorough financial operation will
allow our clients to draw closer to their financial success. At Oriental
Financial Group (the "Group") we feel the need to continuously innovate the
products and services we offer, manage effectively the informational and
technological challenges we encounter, evolve into a more complete financial
resource and help the market grow and progress. This, in a nutshell, is our
strategy to provide value and financial success.
[PHOTO]
INNOVATION
Banking is no longer the somewhat stagnant business it used to be. Today, it
thrives on innovation. The Group has been a leader in Puerto Rico using its
banking franchise to be more creative, agile and efficient in the delivery of
a whole range of innovative financial services. This has been the key to our
growth and financial success.
We seek to anticipate our clients' financial needs in order to help them
build growth into their financial future. This process relies heavily on the
effective development of long-standing relationships with our clients --
understanding that our financial success depends entirely on their financial
success. We see our role not as traditional bankers who are limited to
opening accounts and moving money, but as financial managers and providers
who serve every aspect of money management.
The Group is constantly improving and restructuring its financial services
to meet the specific needs of people at every stage in their lives. We stand
behind our clients and help them realize their financial objectives with
strategies geared at achieving long-term growth.
INFORMATION AND TECHNOLOGY
Invaluable to financial success in today's rapidly changing world is the
ability to feed minds. The Group continues to invest considerable resources
to keep its clients and the marketplace well informed about the wide array of
options in debt and money management as well as financial and investment
planning. This requires continuing education and training of our personnel,
as well as reaching out to the community through seminars, conferences,
infomercials and newspaper articles.
We strongly believe that an aggressive public information cam-
E-4
<PAGE>
VALUE ADDED BANKING
- ------------------------------------------------------------------------- [LOGO]
THE KEY TO FINANCIAL SUCCESS
paign adds substantial value to the financial success of our clients and
directly contributes to the Group's superior performance.
In addition, the Group places great emphasis on delivering extensive
financial products and services through 19 conveniently located financial
centers throughout the island. We have developed important new technologies
that allow clients to access our services electronically. This enhanced
computer capability, certified as Y2K compliant, places the Group at the
leading edge in electronic delivery of financial services and information.
As a bank holding company, the Group has been dealing with the Y2K challenge
for more than two years. We are pleased to report that new computer software
architecture fully compliant with Y2K requirements will debut during fiscal
year 2000. The system will deliver important service enhancements on multiple
levels.
Dimension is the name of our new core banking computer system, which is
provided by the Kirchman Corporation and is currently in use in over 500
banks worldwide. Working closely with Kirchman's
[PHOTO]
consultants, our own MIS staff has tailored a system that will serve our
growing computer needs well into the future.
As a result, clients are assured of not only the integrity of the system in
place, but of its potential as a tool for broader applications that will
better serve their financial objectives.
EVOLUTION
The Group will take several steps within the near future that will make the
financial group an even more successful provider of financial services. These
include:
- - MORTGAGE ORIGINATION OPERATIONS WILL BE ORGANIZED INTO A STAND-ALONE
SUBSIDIARY TO COMPETE MORE EFFECTIVELY IN THE MORTGAGE BANKING INDUSTRY.
- - AT LEAST 10 RETAIL FINANCIAL CENTERS WILL BE OPENED WITHIN THE NEXT FIVE
YEARS, CONCENTRATING IN MAJOR METROPOLITAN AREAS FOR THE GREATEST MARKET
PENETRATION.
- - A NATIONAL BANK FRANCHISE WILL BE ESTABLISHED TO DEVELOP THE POTENTIAL OF
OFFERING INSURANCE PRODUCTS, AS WELL AS EXPANDING INTO THE U.S. STATE-SIDE
MARKETS.
THE HUMAN ELEMENT
Hit a computer mouse and move your life savings into a risky new stock issue,
buy more insurance than you need or not enough, take the proceeds from your
401(k), Keogh or IRA in a lump sum and pay the Treasury Department
unnecessary taxes.
The concept of seamless, computer-driven, financial services holds great
potential, simplifying and speeding up all aspects of money management.
However, the interface of experienced professionals who can provide the
expert advice necessary for making informed and correct decisions about
financial manners will still be required.
The Group provides that all-important interface through teams of well-trained
young professionals, who are prepared to serve the specific financial needs
of individuals, families, professionals and small business owners. They
provide assistance on how best to apply the extensive banking, financial and
investment services available at any of our 19 financial centers.
These professionals help determine immediate financial requirements, such as
proper savings for emergencies, adequate insurance coverage and the ability
to meet regular expenses. They prepare basic financial profiles or budgets
which provide a roadmap to a more successful financial future and suggests
ways to make the best of financial realities for growth. The vehicles for
such growth are many and can work together to allow clients the best possible
results. Afterwards, electronic tools of a seamless financial system can be
applied effectively.
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<PAGE>
VALUE ADDED BANKING
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THE KEY TO FINANCIAL SUCCESS
COMMUNITY INVOLVEMENT
The Group uses its independent position as a full-service banking, financial
and investment institution to obtain and share the best available
information. We work with our clients and the market in many ways, using mass
media to reach as many people as possible.
The approach is fine-tuned through specific seminars and conferences at our
branches about such topics as budgeting and debt management, small business
financing and leasing, home financing, college planning and retirement
planning.
In addition, our staff experts host televised programs that draw on outside
expertise to keep people better informed about financial and investment
alternatives.
We believe a better-informed client has the best possible opportunity to
achieve financial success. That is what financial empowerment is all about
and the Group fully subscribes to that goal.
Moreover, we are making the goal a reality for an expanding client
[PHOTO]
[PHOTO]
base throughout Puerto Rico. During fiscal 1999, that process was further
refined. In the course of mounting our own educational campaign over recent
years, the Group has become increasingly involved in supporting education in
all forms. We confirmed what we already knew -- education enriches and
empowers people's lives.
Our commitment to educate goes beyond our clients. The Group is increasingly
involved with colleges and universities throughout Puerto Rico, donating
scholarships and supporting their efforts.
The Group will institutionalize its sponsorship of educational programs at
colleges and universities during fiscal 2000 to extend opportunities to
promising young people with the establishment of the Oriental Endowment Fund.
This fund will be created with an initial donation by Oriental and will seek
to attract support from other local businesses.
The Fund will also control the Group's participation in many of its community
service endeavors. The Group supported many non-profit causes in fiscal 1999,
such as the United Way of Puerto Rico and relief efforts after the
devastation caused by Hurricane Georges in September 1998.
This involvement is consistent with the Group's commitment to the future of
our community as well as our own future as a thriving financial institution.
That commitment has led us to take several major steps to assure continuing
growth for the Group as we move ahead.
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<PAGE>
ORGANIZATION
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CHART
[CHART]
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<PAGE>
ORIENTAL
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FINANCIAL SERVICES CORP.
[PHOTO]
INVESTING IS THE BEST WAY TO SAVE
The Hato Rey financial district in San Juan, Puerto Rico is a very nice
place to work. However, why should investors from all over the island have to
go there to achieve their own financial success?
Oriental Financial Services Corp. ("OFS") -- the Group's full-service
investment broker-dealer -- emphasizes providing investment planning services
through its established investment centers. OFS has financial outlets in Las
Cumbres, Caguas, Ponce, Mayaguez, Arecibo, Bayamon and Carolina, Puerto Rico,
as well as its principal offices at the Hato Rey Tower in San Juan's
financial district. As our branch network expands, so will our reach to
potential investors throughout the island.
The emphasis on taking investment services to people where they live and bank
is paying off handsomely for OFS. In fiscal 1999, financial assets gathered
by OFS increased 19% to reach $886 million, up from $741.1 million the
previous fiscal year. At the same time, OFS contributed significantly to the
Group's growth in fee income. Combined trust, money management and brokerage
fees amounted to $10.2 million in fiscal 1999, up 21.3% from $8.4 million in
fiscal 1998.
The performance of OFS in fiscal 1999 underscores the strong demand for
investment services in Puerto Rico. By stationing investment executives
within key regions of the island, we are building client relationships for
the long term. These investment executives are qualified to assist clients in
identifying and implementing an appropriate investment plan to reach their
long-term financial objectives.
We have found that when the advantages of sound investment planning are
presented to Oriental Bank and Trust's ("Oriental") clients, regardless of
the location, they are very interested in pursuing the strategies that are
right for them. Increasingly, our clients are realizing that Oriental's
financial centers can efficiently and conveniently serve all of their
financial requirements, from traditional banking to long-term investments.
A bank branch environment is th ideal setting to ascertain people understand
that investing is the best way to save. Our ongoing program of seminars and
conferences throughout the island demonstrates how diversification is
critical to financial security. OFS has a wide choice of quality investment
instruments which includes mutual funds, stocks, bonds, annuities, IRAs and
Keogh plans.
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<PAGE>
ORIENTAL
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FINANCIAL SERVICES CORP.
[PHOTO]
We structure investment plans to meet the particular needs of individuals,
families, professionals and business owners. The synergy of working
hand-in-hand with our Trust Division, independent from a commitment to any
individual investment house, means that our clients have the advantage of
true one-stop shopping for investments that best suit their objectives.
OFS is working to expand its penetration of potential markets by recruiting
additional investment executives from different regions of Puerto Rico with
financial backgrounds and keen awareness of areas they will be serving. OFS
increased its ranks of licensed investment advisors to 34 in fiscal 1999. It
expects to double that number in the next year as a result of recruitment
seminars running throughout the island, which are producing highly attractive
prospects.
For a complete review of OFS investment products, services and workshops,
please visit our Internet site at www.orientalfinancial.com.
[PHOTO]
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<PAGE>
ORIENTAL
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TRUST
[PHOTO]
ASSET GROWTH
Oriental Trust, the Group's trust department, seeks to secure and grow assets
for individuals and organizations. Oriental Trust accomplished that task with
flying colors over the past decade. It is, and will remain the leader in
Puerto Rico in providing investment options to building retirement income
through the most extensive product line of IRAs, 401(k), and Keogh plans and
qualified pension plans.
At June 30, 1999, total assets under management by Oriental Trust totaled
$1.38 billion versus $1.32 billion the year before or a 5% increase. The
growth in trust resources is much larger when you eliminate the effect of the
custodian portion of the portfolio that was downsized by $50 million during
fiscal 1999 because of lack of profitability. The much more profitable
retirement portion of the trust division with products such as IRAs, 401(k)
and Keogh plans did grow by $110 million in fiscal 1999.
Leader in its field, Oriental Trust feels a keen responsibility to serve the
market with the best available alternatives and respond to changing economic
conditions that may impact retirement plans. We closely monitor industrial
trends on the island to advise management and their employees when they are
faced with difficult decisions related to the downsizing and restructuring of
operations.
During fiscal 1999, Oriental Trust saw a growing need to counsel managers and
employees of companies that provide 401(k) retirement investment programs and
for whatever reason, are forced to make early distributions from the
programs. Oriental Trust is offering onsite orientation seminars to such
companies to explain the various implications of taking lump sum
distributions of 401(k) benefits, not the least of which is the 20 percent
withholding tax burden. By suggesting alternatives to lump sum distributions
we have made it possible for 401(k) participants to protect their hard-earned
retirement income more effectively.
Oriental Trust working in conjunction with branch officers and Oriental
Financial Services Corp -- the Group's investment broker-dealer subsidiary --
is providing direction to clients on the wide array of retirement planning
options available to them.
Our seminars conferences, newspaper articles and infomercials have become a
standard for keeping clients and the general public informed about the
diverse menu of tax-advantaged retirement investments available in Puerto
Rico.
In addition, since IRAs were first established 15 years ago, Oriental Trust
has offered clients the convenience of telephone hotline, fax, and messenger
services to make it easier to invest in an IRA. This year, Oriental Trust
went on-line to provide clients the convenience of conducting an IRA
transaction through its web site, www.iraoriental.com. Oriental Trust's
clients also were able to use their Visa or MasterCard accounts to make their
IRA contribution.
Oriental Trust has created high performance IRAs that provide the investor
with the best possible yield under different retirement scenarios from one
source. For example, Oriental Trust was the first to respond to the
liberalization of the rules governing how IRA funds can be invested,
including the ability to invest up to 33 percent of their assets in U.S.
equity securities.
The creation of the "Diversified Growth IRA" during fiscal year 1999 led
Oriental Trust to establish an office in New York's financial district in
September 1998 to closely monitor money managers who invest the U.S. portion
of the portfolio.
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<PAGE>
ORIENTAL
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MORTGAGE CORP.
ORIGINATE AGGRESSIVELY
Oriental Bank and Trust's ("Oriental") mortgage banking division became
synonymous with superior home financing services. Over recent years, the
personalized, one-stop approach we developed to carry mortgages from
application to closing has become an industry standard. Furthermore, our
dedication to home-buyer orientation through seminars, newspaper articles and
television infomercials has created strong client loyalty.
Mortgage lending has become the largest segment of Oriental's overall loan
portfolio. In fiscal 1999, mortgage originations amounted to $230 million, a
26% increase when compared with $183 million the previous fiscal year. Such
outstanding performance builds further on the 32% increase achieved in fiscal
1998.
The solid growth momentum built in mortgage lending has led Oriental to give
greater flexibility to its mortgage origination operations by forming a
separate subsidiary under the name Oriental Mortgage Corporation ("Oriental
Mortgage") that will be able to compete more effectively with the island's
leading mortgage bankers.
By working outside of the commercial banking framework, Oriental Mortgage
will be able to build a stronger independent brand name identity and
integrate other efficiencies, such as outsourcing some of its processes.
Oriental Mortgage will be working on a 24/7 schedule, meaning 24 hours a day,
seven days a week, to provide a broader range of mortgage services.
Moreover, Oriental Mortgage will aggressively apply electronic marketing
approaches, including an extensive use of telemarketing and the Internet.
The outlook is to increase the number of mortgage centers to 16 over the next
several years and expand our staff of 50 account executives accordingly. At
the same time, new lines of mortgage products will be pursued. Most notably,
the objective is to become a top underwriter of Fannie Mae and Freddie Mac
conforming loans. Oriental Mortgage also has its sights set on participating
more aggressively in the federally guaranteed Farmers Home Administration
program for rural development, which provides as much as 100 percent
financing for qualifying commercial mortgage loans.
Oriental Mortgage has already provided financing under the program for a
school project in Las Piedras and a manufacturing plant in Cidra, Puerto
Rico. The 80 percent federal guarantee and related tax exemption give such
venture capital projects a high loan to value ratio that benefits the
mortgage lender as well as the borrower.
[PHOTO]
E-11
<PAGE>
ORIENTAL
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BANK & TRUST
[PHOTO]
BRANCHING OUT
The branch network improved in every department in fiscal 1999, effectively
extending Oriental Bank and Trust ("Oriental") into the communities it serves
as a relationship banker. The penetration of communities to meet the total
financial needs of individuals, families, professionals and small businesses
is the primary objective of our branch officers, who offer an extensive
assortment of banking, financial and investment products. They also connect
our clients to expert advice in financial and investment planning, making
Oriental an all-inclusive commercial bank, serving the financial requirements
of a lifetime.
This innovative consumer banking approach contributed to significant growth
in the personal loan portfolio as well as in total deposits held by Oriental.
In fiscal 1999, personal loans increased to $122.3 million, compared to
$102.6 million in fiscal 1998, a 10% increase. The consumer-lending
portfolio grew because of broader support for such products as FaxCash and
TeleCash, two well established products for their convenience and competitive
pricing.
Oriental further extended its loan offerings in fiscal 1999 with a highly
flexible mortgage-guaranteed personal loan product, which gives homeowners
the ability to use the equity in their mortgages to finance various consumer
activities and take advantage of the tax deduction allowed on the interest
paid on mortgages.
Based on the evaluation of Oriental's "Credit Desk," which employs a very
reliable credit scoring system, borrowers with superior credit can secure
loans from 70 to 100 percent or more of the value of the collateral. Such
secured loans can be used for personal or business purposes at competitive
interest rates. For example, a small business that owns property might use
the financing for cash flow purposes, while a family might use the money to
finance a college education, a vacation trip or a margin investment account.
During the past year, Oriental carefully reduced its leasing business as
tighter credit controls implemented slowed down originations. In addition,
Oriental discontinued equipment leasing origination in March 1999. As a
result, Oriental's leasing portfolio downsized to $110.2 million in fiscal
1999 from $141.1 million in fiscal 1998, down 22%.
E-12
<PAGE>
ORIENTAL
- ------------------------------------------------------------------------- [LOGO]
BANK & TRUST
In addition, Oriental expanded its credit facilities for the convenience of
its clients through the issuance of new credit cards. The new "Oriental
Check Card" combines debit card features with Visa Card acceptance at
commercial establishments. Oriental is working closely with merchants and
other businesses as a new point-of-sale issuer for both Visa and MasterCard.
Cross-selling strategies helped substantially to increase total deposits
during fiscal 1999, which reached $657 million versus $571 million in fiscal
1998. This 15% increase was largely due to broader acceptance of our savings
and checking account products, such as the Oriental Pro and Oriental Platinum
accounts, which combine highly attractive features for our customers.
The popularity of Oriental's high-yielding certificates of deposit and the
IRA Plus account, which allows people to systematically save for their annual
individual retirement account contributions, were contributing factors as
well. Savings and checking deposits grew to $142.6 million in fiscal 1999
versus $112.5 million in fiscal 1998, a 27% increase.
Geographically, Oriental now covers every major metropolitan region of Puerto
Rico through its existing branch network. However, our relationship approach
to banking requires a somewhat greater presence in key areas, where our full
range of services can be successful.
Oriental is committed to adding 10 new financial centers to the network over
the next five years. However, we are not committed to owning more real
estate, firmly believing that financial products and services are our most
important assets. We will continue to maintain a lean presence in the
communities we serve, while investing considerable resources to prepare the
people who work out of our new branches to carry our services to more closely
targeted markets.
Target outlets within the San Juan Metropolitan Area will include Guaynabo
and an additional center in Bayamon. Afterwards, we will reach out to
Aguadilla and Manati, in
[PHOTO]
the northwestern region of Puerto Rico. We believe
there are still areas of the island that are under-banked when it comes to
building relations for a lifetime of service. That is the guiding force of
our retail banking operations.
[PHOTO]
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<PAGE>
BOARD
- ------------------------------------------------------------------------[LOGO]
OF DIRECTORS
[PHOTO] [PHOTO] [PHOTO]
Jose Enrique Pablo I. Altien Mari Carmen Aponte
Fernandez
[PHOTO] [PHOTO]
Diego Perdomo Alberto Richa
E-14
<PAGE>
- ------------------------------------------------------------------------[LOGO]
[PHOTO] [PHOTO] [PHOTO]
Efrain Archilla Francisco Arrivi Julian Inclan
[PHOTO] [PHOTO] [PHOTO]
Emilio Rodriguez Carlos Souffront, Esq. Angeles Torres, Esq.
Secretary Assistant Secretary
E-15
<PAGE>
TOP MANAGEMENT
- ------------------------------------------------------------------------[LOGO]
SENIOR VICE-PRESIDENTS
[PHOTO]
ABOVE
Juan Berrios, Esq.
Senior Vice President
Loan Servicing
BELOW
Milton Jimenez
Senior Vice President
MIS Operations
Dennis Soto
Senior Vice President
Manager Western Region
[PHOTO]
[PHOTO]
[PHOTO]
[PHOTO]
[PHOTO]
ABOVE
Eli Diaz
Senior Vice President
Branch Administration
Marcial Diaz
Senior Vice President
Mortgage Origination
Andres Morgado, CPA, PFS and CFI
Senior Vice President
Trust Officer
BELOW
Jose R. Fernandez
Senior Vice-President
Oriental Financial Services
Andres J. Muniz
Senior Vice President
Communications
Rafael Valladares, CPA
Senior Vice President
Principal Financial Officer
[PHOTO]
[PHOTO]
[PHOTO]
E-16
<PAGE>
EXHIBIT 21.0
LIST OF REGISTRANT'S SUBSIDIARIES
A. ORIENTAL BANK AND TRUST - commercial bank organized and existing under the
laws of the Commonwealth of Puerto Rico.
SUBSIDIARIES OF ORIENTAL BANK AND TRUST:
1. Oriental Financial Services Corp. - corporation organized and existing
under the laws of the Commonwealth of Puerto Rico.
2. Eastern Services Corporation - corporation organized and existing under
the laws of the Commonwealth of Puerto Rico.
3. Eastern Funding Corporation - corporation organized and existing under
the laws of the Commonwealth of Puerto Rico.
4. Oriental Mortgage Corporation - corporation organized and existing under
the laws of the Commonwealth of Puerto Rico.
<PAGE>
[LOGO] EXHIBIT 23
- ------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
PO Box 363566
San Juan PR 00936-3566
Telephone (787) 754-9090
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-84473) of Oriental Financial Group Inc. of our
report dated August 6, 1999, relating to the financial statements, which
appears in this 1999 Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
September 22, 1999
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<PAGE>
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<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 8,060
<INT-BEARING-DEPOSITS> 3,641
<FED-FUNDS-SOLD> 24,350
<TRADING-ASSETS> 17,307
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,648
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