<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 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
- --------------------------------------------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
13,755,027 SHARES OUTSTANDING AS OF SEPTEMBER 30, 1999
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
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- ----------------------------------------------------------------------------------------------------------------------
PART - 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item - 1 FINANCIAL STATEMENTS
Consolidated statements of Financial condition at September 30,
1999 (unaudited) and June 30, 1998. 1
Unaudited consolidated statements of income for the first
quarter ended September 30, 1999 and 1998. 2
Unaudited consolidated statements of stockholders' equity and
comprehensive income for the three months period ended
September 30, 1999 and 1998. 3
Unaudited consolidated statements of cash flows for the
three months period ended September 30, 1999 and 1998. 4
Notes to unaudited consolidated financial statements 10
Item - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11-24
PART - 2
- ----------------------------------------------------------------------------------------------------------------------
Item - 1 Legal Proceedings 23
Item - 2 Change in securities - None 23
Item - 3 Defaults upon senior securities - None 23
Item - 4 Submissions of Matters to a Vote of Security Holders 23
Item - 5 Other Information - None 24
Item - 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
Signatures 24
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 (UNAUDITED) AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 10,428 $ 8,060
--------------- ---------------
INVESTMENTS AND SECURITIES:
Money market investments 400 27,991
Trading securities, at fair value 38,185 17,307
Investment securities available-for-sale, at fair value 481,435 379,894
Investment securities held-to-maturity, at cost ( fair value $481,334; 494,939 508,080
June 30,1999 - $499,234 )
Federal Home Loan Bank (FHLB) stock, at cost 13,257 13,257
--------------- ---------------
TOTAL INVESTMENTS AND SECURITIES 1,028,216 946,529
--------------- ---------------
--------------- ---------------
LOANS:
Loans held-for-sale, at lower of cost or market 55,114 55,206
Loans receivable, net 502,673 519,110
--------------- ---------------
TOTAL LOANS, NET 557,787 574,316
--------------- ---------------
--------------- ---------------
Accrued interest receivable 21,716 18,017
Foreclosed real estate, net 383 383
Premises and equipment, net 21,664 21,651
Other assets, net 20,278 18,391
--------------- ---------------
TOTAL ASSETS $ 1,660,472 $ 1,587,347
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 152,905 $ 142,679
Time and IRA accounts 499,493 508,648
Accrued interest 4,238 5,661
--------------- ---------------
TOTAL DEPOSITS 656,636 656,988
--------------- ---------------
--------------- ---------------
BORROWINGS:
Securities sold under agreements to repurchase 701,322 596,226
Advances and borrowings from Federal Home Loan Bank 46,700 68,400
Term notes and other borrowings 106,500 106,500
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TOTAL BORROWINGS 854,522 771,126
--------------- ---------------
--------------- ---------------
Accrued expenses and other liabilities 24,943 35,201
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TOTAL LIABILITIES 1,536,101 1,463,315
--------------- ---------------
--------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation 33,500 33,500
value, shares issued and outstanding 1,340,000
Common stock, $1 par value; 20,000,000 shares authorized; shares
issued and outstanding 13,755,027 (June 30, 1999 - 13,738,814) 13,755 13,739
Additional paid-in capital 23,384 23,313
Legal surplus 9,476 8,673
Retained earnings 84,551 79,920
Treasury stock, at cost, 978,879 shares (June 30, 1999 - 903,786) (25,133) (23,401)
Accumulated other comprehensive loss , net of deferred taxes (15,162) (11,712)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 124,371 124,032
--------------- ---------------
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,660,472 $ 1,587,347
--------------- ---------------
--------------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 1 -
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FIRST QUARTER ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
<S> <C> <C>
INTEREST INCOME:
Loans $ 15,082 $ 15,457
Mortgage-backed securities and collateralized mortgage obligations 12,077 6,738
Investment securities 3,702 4,691
Money market investments 70 117
---------------------- -----------------------
TOTAL INTEREST INCOME 30,931 27,003
---------------------- -----------------------
---------------------- -----------------------
INTEREST EXPENSE:
Deposits 7,330 7,271
Securities sold under agreements to repurchase 8,144 5,945
Other borrowed funds and interest rate risk management 2,410 2,712
---------------------- -----------------------
TOTAL INTEREST EXPENSE 17,884 15,928
---------------------- -----------------------
---------------------- -----------------------
NET INTEREST INCOME 13,047 11,075
---------------------- -----------------------
Provision for loan losses 1,750 2,600
---------------------- -----------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,297 8,475
---------------------- -----------------------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 2,627 2,333
Mortgage banking activities 1,356 794
Bank service charges and fees and other operating income 1,138 1,025
Gain on sale of investment securities 599 1,606
Trading net activity (133) 49
---------------------- -----------------------
TOTAL NON-INTEREST INCOME 5,587 5,807
---------------------- -----------------------
---------------------- -----------------------
NON-INTEREST EXPENSES:
Compensation and benefits 3,749 3,474
Occupancy and equipment, net 1,525 1,246
Advertising and business promotion 631 560
Professional and service fees 509 341
Communications 370 345
Taxes other than income 479 429
Insurance, including deposit insurance 133 91
Printing, postage, stationery and supplies 197 156
Other 642 730
---------------------- -----------------------
TOTAL NON-INTEREST EXPENSE 8,235 7,372
---------------------- -----------------------
---------------------- -----------------------
INCOME BEFORE INCOME TAXES 8,649 6,910
Provision for income taxes 702 851
---------------------- -----------------------
NET INCOME 7,947 6,059
Less: dividends on preferred stock (597) -
---------------------- -----------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 7,350 $ 6,059
---------------------- -----------------------
---------------------- -----------------------
INCOME PER COMMON SHARE:
Basic $ 0.57 $ 0.46
---------------------- -----------------------
Diluted $ 0.56 $ 0.45
---------------------- -----------------------
---------------------- -----------------------
Average common shares outstanding 12,806 13,038
Average potential common share options 229 407
---------------------- -----------------------
13,035 13,445
---------------------- -----------------------
---------------------- -----------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 2 -
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
FIRST QUARTER ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CHANGES IN STOCKHOLDERS' EQUITY:
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK:
Balance at beginning of period $ 33,500 $ -
---------------------- ----------------------
BALANCE AT END OF PERIOD 33,500 -
---------------------- ----------------------
---------------------- ----------------------
COMMON STOCK:
Balance at beginning of period 13,739 10,149
Stock options exercised 16 5
---------------------- ----------------------
BALANCE AT END OF PERIOD 13,755 10,154
---------------------- ----------------------
---------------------- ----------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 23,313 27,261
Stock options exercised 71 46
---------------------- ----------------------
BALANCE AT END OF PERIOD 23,384 27,307
---------------------- ----------------------
---------------------- ----------------------
LEGAL SURPLUS:
Balance at beginning of period 8,673 5,908
Transfer from retained earnings 803 560
---------------------- ----------------------
BALANCE AT END OF PERIOD 9,476 6,468
---------------------- ----------------------
---------------------- ----------------------
RETAINED EARNINGS:
Balance at beginning of period 79,920 63,756
Net income 7,947 6,059
Dividends declared on common stock (1,916) (1,492)
Dividends declared on preferred stock (597) -
Transfer to legal surplus (803) (560)
---------------------- ----------------------
BALANCE AT END OF PERIOD 84,551 67,763
---------------------- ----------------------
---------------------- ----------------------
TREASURY STOCK:
Balance at beginning of period (23,401) (6,199)
Treasury stock purchased (1,732) (3,356)
---------------------- ----------------------
BALANCE AT END OF PERIOD (25,133) (9,555)
---------------------- ----------------------
---------------------- ----------------------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF DEFERRED TAXES:
Balance at beginning of period (11,712) 913
Other comprehensive (loss) income for the period ended, net of taxes (3,450) 17,513
---------------------- ----------------------
BALANCE AT END OF PERIOD (15,162) 18,426
---------------------- ----------------------
---------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY $ 124,371 $ 120,563
---------------------- ----------------------
---------------------- ----------------------
COMPREHENSIVE INCOME:
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,947 $ 6,059
---------------------- ----------------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on securities arising during the period (2,971) 19,115
Realized gains and losses included in net income (599) (1,606)
Income tax expense related to items of other comprehensive income 120 4
---------------------- ----------------------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (3,450) 17,513
---------------------- ----------------------
---------------------- ----------------------
COMPREHENSIVE INCOME $ 4,497 $ 23,572
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 3 -
<PAGE>
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,947 $ 6,059
------------------- -------------------
------------------- -------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of deferred loan origination fees and costs (786) (1,145)
Amortization of premiums and accretion of discounts on investment securities 129 555
Depreciation and amortization of premises and equipment 818 709
Provision for loan losses 1,750 2,600
Gain on sale of investment securities available-for-sale (599) (1,606)
Gain on sale of loans held-for-sale (827) (135)
Proceeds from sale of loans held-for-sale 21,715 6,900
(Decrease) increase in accrued expenses and other liabilities (10,236) 6,607
Net (increase) decrease in:
Trading securities (20,878) 1,397
Accrued interest receivable (3,699) (615)
Other assets (1,887) (4,723)
------------------- -------------------
TOTAL ADJUSTMENTS (14,500) 10,544
------------------- -------------------
------------------- -------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,553) 16,603
------------------- -------------------
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (86,110) (75,068)
Sales of investment securities available-for-sale 11,920 47,935
Maturities and redemptions of investment securities available-for-sale 7,797 1,186
Maturities and redemptions of investment securities held-to-maturity 13,003 11,027
Net origination of loans (43,313) (53,694)
Capital expenditures (831) (864)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (97,534) (69,478)
------------------- -------------------
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits (352) 41,671
Securities sold under agreements to repurchase 105,096 30,223
Advances and borrowings from FHLB (21,700) (14,400)
Repayments of term notes and other borrowings - (88)
Proceeds from exercise of stock options 87 51
Treasury stock acquired (1,732) (3,356)
Dividends and cash paid on fractional shares (2,535) (1,491)
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 78,864 52,610
------------------- -------------------
------------------- -------------------
DECREASE IN CASH AND CASH EQUIVALENTS (25,223) (265)
Cash and cash equivalents at beginning of period 36,051 19,489
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,828 $ 19,224
------------------- -------------------
------------------- -------------------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 10,428 $ 6,343
Money market investments 400 12,881
------------------- -------------------
$ 10,828 $ 19,224
------------------- -------------------
------------------- -------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 17,210 $ 15,290
------------------- -------------------
Real estate loans securitized into mortgage-backed securities $ 38,000 $ 16,600
------------------- -------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 4 -
<PAGE>
NOTES TO UNAUDITED 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 the
Commonwealth of Puerto Rico, which provides a variety of financial services
through its subsidiaries. The Group is subject to the regulation and
supervision of the Federal Reserve Board. Oriental Bank and Trust (the
"Bank"), the Group's banksubsidiary, 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., 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 regulations of certain
federal and local agencies.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q. Complete information regarding
the financial statements can be found in the notes to the financial statements
for the year ended June 30, 1999 contained in Oriental's 1999 Annual Report.
Certain reclassifications have been made to the September 30, 1998 and June 30,
1999 consolidated financial statements to conform to the presentation of the
current period consolidated financial statements.
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting mainly of normal recurring
adjustments) necessary to present fairly, in all material respects, the
financial position of the Group at September 30, 1999 and June 30, 1999, and the
results of operations and cash flows for the quarter ended September 30, 1999
and 1998, in conformity with generally accepted accounting principles.
NOTE 2 - INVESTMENTS AND 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.
The Group classifies as trading those securities that are acquired and held
principally for the purpose of selling them in the near term. These securities
are carried at estimated fair value with realized and unrealized changes in
market value included in earnings in the period in which the changes occur.
Interest revenue arising from trading instruments is included in the statement
of income as part of net interest income rather than in the trading profit or
loss account.
The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock
has no readily determinable fair value and can only be sold back to the FHLB at
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
- 5 -
<PAGE>
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.
MONEY MARKET INVESTMENTS:
At September 30,1999 and June 30, 1999 the Group's money market investments were
comprised of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
SEPTEMBER 30, JUNE 30,
-------------------- -------------------
<S> <C> <C>
Securities purchased under agreements to resell $ - $24,350
Time deposits with other banks - -
Money market accounts and other short-term investments 400 3,641
-------------------- -------------------
$ 400 $27,991
-------------------- -------------------
-------------------- -------------------
</TABLE>
At June 30, 1999, the securities purchased under agreements to resell included
in money market investments were collateralized by FNMA certificates with an
estimated market value of $24,836,000. These securities were in the Group's
possession and the counterparty retained effective control over the collateral.
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 September 30,
1999 and June 30, 1999, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 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 $106,411 $ 90 $ 4,511 $101,990 5.29%
US Government agencies securities 98,208 271 1,879 96,600 6.75%
PR Government securities 18,756 301 6 19,051 8.71%
GNMA certificates 146,254 649 1,481 145,422 7.25%
FNMA certificates 94,969 - 3,199 91,770 6.75%
FHLMC certificates 27,428 - 826 26,602 6.79%
------------------ --------------- ------------- -------------- ------------
492,026 1,311 11,902 481,435 6.65%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
HELD-TO-MATURITY
PR Government securities 3,560 - 30 3,530 7.40%
Collateralized mortgage obligations 118,333 - 3,222 115,111 6.67%
Other debt securities 4,863 - - 4,863 8.58%
GNMA certificates 172,130 549 4,272 168,407 6.59%
FNMA certificates 112,152 160 3,837 108,475 6.74%
FHLMC certificates 83,901 58 3,011 80,948 6.65%
------------------ --------------- ------------- -------------- ------------
494,939 767 14,372 481,334 6.68%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
FHLB stock 13,257 - - 13,257 6.93%
------------------ --------------- ------------- -------------- ------------
$1,000,222 $2,078 $26,274 $976,026 6.67%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
</TABLE>
- 6 -
<PAGE>
<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>
The amortized cost and estimated fair value of the Group's investment securities
at September 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 $2,055 $2,050 $ - $ - $2,055 $2,050
After 1 year to 5 years 12,650 12,699 1,042 1,044 13,692 13,743
After 5 years to 10 years 195,953 189,818 18,218 18,277 214,171 208,095
Due after 10 years 281,368 276,868 475,679 462,013 757,047 738,881
FHLB stock - - - - 13,257 13,257
-------------- ------------ ------------- -------------- ------------- -------------
$492,026 $481,435 $494,939 $481,334 $1,000,222 $976,026
-------------- ------------ ------------- -------------- ------------- -------------
-------------- ------------ ------------- -------------- ------------- -------------
</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 $16,935,000
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
$49,994,000, of the short-end of certain Puerto Rico GNMA tax-exempt serial
certificates with an average expected life of 4 to 6 years.
Proceeds from the sale of investment securities available-for-sale during the
first quarter of fiscal 2000 totaled $11,920,000 (1999 - $47,935,000). Gross
realized gains and losses on those sales during fiscal 2000 were $599,000 and
$0, respectively (1999 - $1,606,000 and $0).
Of Oriental's investments at September 30,1999 and June 30, 1999 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 18% and 19% of stockholders' equity, respectively. At
September 30, 1999, the amortized cost and fair value of investments from the
Government of Puerto Rico were approximately $22,316,000 (June 30, 1999 -
$23,723,000) and $22,581,000 (June 30, 1999 - $24,102,000), respectively. At
September 30, 1999, $16,935,000 (June 30, 1999 - $18,456,000) of these
investments were an AAA-rated Puerto Rico municipal bond collateralized with
mortgage-backed securities.
- 7 -
<PAGE>
TRADING SECURITIES:
A summary of trading securities owned by the Group at September 30, 1999 and
June 30, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
SEPTEMBER 30, JUNE 30,
-------------------- -------------------
<S> <C> <C>
US Treasury securities $ 3,516 $ 3,527
Mortgage-backed securities 31,456 11,278
PR Government securities 814 -
CMO residuals, interest only 2,399 2,502
-------------------- -------------------
$38,185 $17,307
-------------------- -------------------
-------------------- -------------------
</TABLE>
At September 30, 1999, the Group's trading portfolio weighted average yield was
7.11% (June 30, 1999 - 7.79%).
NOTE 3 - 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. The composition of the Group's loan portfolio at September 30, 1999 and
June 30, 1999 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------
SEPTEMBER 30, JUNE 30,
--------------------- ------------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $236,039 $263,540
Non-residential real estate loanS 6,324 6,531
Home equity loans and personal loans collateralized by real estate 18,925 16,278
--------------------- ------------------
261,288 286,349
Less: net deferred loan fees (1,498) (1,302)
--------------------- ------------------
259,790 285,047
--------------------- ------------------
OTHER LOANS:
Commercial and auto loans 21,258 10,555
Personal consumer loans and credit lines 126,620 122,213
Financing leases, net of unearned interest 103,736 110,297
--------------------- ------------------
251,614 243,065
--------------------- ------------------
LOANS RECEIVABLE 511,404 528,112
Allowance for loan losses (8,731) (9,002)
--------------------- ------------------
LOANS RECEIVABLE, NET 502,673 519,110
Loans held-for-sale 55,114 55,206
-------------------- ------------------
TOTAL LOANS, NET $557,787 $574,316
--------------------- ------------------
--------------------- ------------------
</TABLE>
- 8 -
<PAGE>
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. Refer to Table 9 of the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the changes in
the allowance for loan losses for the first quarter ended September 30, 1999 and
1998.
The Group evaluates all loans, some individually and other as homogeneous
groups, for purposes of determining impairment. At September 30, 1999 and
June 30, 1999, the Group determined that no impairment reserve was necessary.
NOTE 4 - PLEDGED ASSETS:
At September 30, 1999, residential mortgage loans and investment securities
amounting to $127,694,000 (June 30, 1999 - $100,509,000), and $927,409,000 (June
30, 1999 - $737,448,000), 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 5 - 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 September 30, 1999 and June 30, 1999 are set
forth in the table below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
SEPTEMBER 30, JUNE 30,
----------------- -----------------
<S> <C> <C>
SWAPS:
Pay fixed swaps notional amount $275,000 $245,000
Weighted average pay rate - fixed 5.68% 5.66%
Weighted average receive rate - floating 5.41% 5.09%
Maturity in months 1 TO 23 2 TO 26
Floating rate as a percent of LIBOR 85 TO 100% 85 TO 100%
CAPS:
Cap agreements notional amount $100,000 $100,000
Cap rate 6.50% 6.50%
Maturity in months 1 TO 12 4 TO 15
</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.
The Group offers its customers certificates of deposit tied to the
performance of one of the following stock market indexes, Standard & Poor's
500 Composite Stock Index, Dow Jones Industrial Average and 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 September 30, 1999, the notional amount of
these agreements totaled $82,565,000 (June 30, 1999 - $79,815,000) at a
weighted average rate of 5.84% (June 30, 1999 - 5.81%).
- 9 -
<PAGE>
At September 30, 1999, interest rate swap and caps maturities by fiscal year are
as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(IN THOUSANDS)
--------------------------- ----------------------------------------------------------------------------
YEAR ENDING JUNE 30, INTEREST RATE EQUITY TOTAL
--------------------------- ---------------------- -------------------- -----------------------
<S> <C> <C> <C>
2000 $255,000 $455 $255,455
2001 120,000 82,110 202,110
---------------------- -------------------- -----------------------
$275,000 $82,565 $457,565
---------------------- -------------------- -----------------------
</TABLE>
NOTE 6 - 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, which is mainly
comprised 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
Bank's mortgage loans and the Group's 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). 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 Oriental Mortgage,
whose principal activity is to originate and purchase mortgage loans and
subsequently sell them in the secondary market. Following are the results of
operations and the selected financial information by operating segment for each
of the first quarters ended September 30:
<TABLE>
<CAPTION>
UNAUDITED (Dollars in thousands)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
- -----------
Net interest income $ 12,139 $ 122 $ 786 $ -- $ 13,046
Non-interest income 1,831 2,614 1,356 (214) 5,587
Non-interest expenses 5,905 1,600 944 (214) 8,235
Provision for loan losses 1,750 -- -- -- 1,750
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 6,315 $ 1,136 $1,198 $ -- $ 8,649
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
Total assets $1,647,905 $12,715 $2,000 $(2,148) $1,660,572
--------------- -------------- --------------- --------------- --------------
FISCAL 1999
- -----------
Net interest income 9,841 $ 87 $1,147 $ -- $ 11,075
Non-interest income 2,433 2,686 794 (106) 5,807
Non-interest expenses 5,063 1,243 1,172 (106) 7,372
Provision for loan losses 2,600 -- -- -- 2,600
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 4,611 $ 1,530 $ 769 $ -- $ 6,910
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
Total assets $1,380,243 $ 7,592 $ -- $ (212) $1,387,623
--------------- -------------- --------------- --------------- --------------
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1999 1998 VARIANCE %
------------------------ ------------------------ ------------------
EARNINGS, DIVIDENDS DECLARED AND PER SHARE
INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 30,931 $ 27,003 14.5%
Interest expense 17,884 15,928 12.3%
------------------------ ------------------------ ------------------
NET INTEREST INCOME 13,047 11,075 17.8%
Recurring non-interest income 5,121 4,152 23.3%
Non recurring non-interest income 466 1,655 -71.8%
Recurring non-interest expenses 8,235 7,244 13.7%
Non recurring non-interest expenses - 128 -100.0%
Provision for loan losses 1,750 2,600 -32.7%
Provision for income taxes 702 851 -17.5%
------------------------ ------------------------ ------------------
NET INCOME 7,947 6,059 31.2%
Less: dividends on preferred stock (597) - -100.0%
------------------------ ------------------------ ------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 7,350 $ 6,059 21.3%
------------------------ ------------------------ ------------------
Dividends declared $ 1,916 $ 1,492 28.4%
------------------------ ------------------------ -----------------
Dividends declared per share $ 0.150 $ 0.113 32.7%
------------------------ ------------------------ -----------------
Basic $ 0.57 $ 0.46 23.9%
------------------------ ------------------------ -----------------
Diluted $ 0.56 $ 0.45 24.4%
------------------------ ------------------------ -----------------
Book value $ 7.11 $ 9.18 -22.5%
------------------------ ------------------------ -----------------
Market price at end of period $ 22.75 $ 28.84 -21.1%
------------------------ ------------------------ -----------------
Average shares and equivalents 13,035 13,445 -3.0%
------------------------ ------------------------ -----------------
PERIOD END BALANCES ( SEPTEMBER 30, ):
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,394,800 $ 1,292,500 7.9%
Broker-dealer assets gathered 864,700 736,500 17.4%
------------------------ ------------------------ -----------------
ASSETS MANAGED 2,259,500 2,029,000 11.4%
Bank total assets 1,660,500 1,387,600 19.7%
------------------------ ------------------------ -----------------
$ 3,920,000 $ 3,416,600 14.7%
------------------------ ------------------------ -----------------
INTEREST-EARNING ASSETS
Investments and securities $ 1,028,216 $ 750,944 36.9%
Loans and loans held-for-sale 557,787 574,454 -2.9%
------------------------ ------------------------ -----------------
$ 1,586,003 $ 1,325,398 19.7%
------------------------ ------------------------ -----------------
INTEREST-BEARING LIABILITIES
Deposits $ 656,636 $ 613,102 7.1%
Repurchase agreements 701,322 446,394 57.1%
Borrowings 153,200 174,900 -12.4%
------------------------ ------------------------ -----------------
$ 1,511,158 $ 1,234,396 22.4%
------------------------ ------------------------ -----------------
CAPITAL AND RELATED REGULATORY RATIOS
Stockholders' equity $ 124,371 $ 120,563 3.2%
------------------------ ------------------------ -----------------
Leverage capital 8.72% 7.46% 17.0%
------------------------ ------------------------ -----------------
Total risk-based capital 24.74% 20.87% 18.5%
------------------------ ------------------------ -----------------
Tier 1 risk-based capital 23.48% 19.79% 18.6%
------------------------ ------------------------ -----------------
SELECTED FINANCIAL RATIOS (IN PERCENT):
- ---------------------------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.99% 1.78% 11.5%
------------------------ ------------------------ -----------------
Return on average common equity (ROE) 33.59% 21.28% 57.9%
------------------------ ------------------------ -----------------
Efficiency ratio 45.33% 47.69% -5.0%
------------------------ ------------------------ -----------------
Expense ratio 0.81% 1.02% -20.1%
------------------------ ------------------------ -----------------
Interest rate spread 3.17% 3.34% -5.0%
------------------------ ------------------------ -----------------
OTHER INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Number of banking offices 19 18 5.6%
------------------------ ------------------------ -----------------
</TABLE>
- 11 -
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental posted diluted earnings per share of $0.56 for the first quarter of
fiscal 2000, which is up 24% when compared to the $0.45 tallied in the same
quarter of fiscal 1999. Quarterly net income available to common shareholders
increased 21% to $7.4 million, up from $6.1 million posted in the first
quarter of fiscal 1999. The Group's fiscal 2000 first quarter earnings growth
was principally due to a higher level of interest-earning assets, sound
performance by the brokerage and trust divisions and continued effective
management of interest rate risk.
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 the first
quarter of fiscal 2000, up 15% from $3.4 billion at the end of the same period
of fiscal 1999. At September 30,1999, the Group's assets reached $1.660 billion
from $1.388 billion a year ago, an increase of 20%. Assets managed by the trust
grew 8% to $1.395 billion versus $1.293 billion a year ago, and assets gathered
by the broker-dealer increased 17% to $865 million from $737 million the year
before.
Profitability ratios reached satisfactory levels again this past quarter. The
Group's return on common equity was 33.59%, up from 21.28% posted the
comparable first quarter of fiscal 1999. Likewise, return on assets (ROA) for
the quarter rose to 1.99%, up from 1.78% posted the previous first quarter.
The efficiency ratio improved to 45.33%, down from 47.69% in the comparable
period of fiscal 1999. 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 11 provides relevant operational ratios
and information for the periods analyzed.
RESULT OF OPERATIONS
As a diversified financial services provider ( See table 2), 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 the first quarter of fiscal 2000, the Group's net interest income
amounted $13.0 million, up 18% from $11.3 million in the same period of
fiscal 1999. A larger volume of interest-earning assets and a modest
reduction in the Group's cost of funds propelled this growth in net interest
income. On the other hand, interest rate spread narrowed 17 basis points to
3.17% from 3.34%, due to a change in the mix of interest-earning assets
toward low-risk and tax-free investment securities. 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 first quarter of fiscal 2000 totaled $30.9
million, up 14.5% from the $27.0 million posted in the same period of fiscal
1999. A favorable volume variance of $4.6 million due to a larger average
volume of interest-earning assets drove this increase. An unfavorable rate
variance of $675,000 attributed to a decline in the yield performance of
interest-earning assets due to the reason previously explained, partially
offset this volume rise.
Average interest-earning assets for the first quarter of fiscal 2000 reached
$1.530 billion, an increase of 22% compared with $1.256 billion in fiscal
1999. This volume increase was fueled by a solid growth in the Group's
investment portfolio, mainly mortgage-backed securities, as Oriental
continues its strategy of converting residential real estate loans sold in
the secondary market with tax-advantaged mortgage-backed securities.
In the first quarter of fiscal 2000, the average yield on interest-earning
assets was 8.09%, 51 basis points lower than the 8.60% attained in the same
period of fiscal 1999. There were two main reasons for the yield erosion
experienced in the first quarter of fiscal 2000. 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 loan portfolio yield, which decreased by 72
basis points to 10.48% from 11.20% attained in the comparable period of fiscal
1999. A change in the portfolio mix toward low-risk residential mortgage loans
caused this yield decline.
Interest expense for the first quarter of fiscal 2000 rose 12% to $17.8 million
from $15.9 million reported in the comparable period of fiscal 1999. A larger
base of interest-bearing liabilities used to fund the Group's interest-earning
assets growth, which contributed to a volume increase of $3.0 million, was the
principal reason for the rise. This was partially tempered by a favorable rate
variance of $1.1 million due to a lower average cost of funds as the Bank's
core deposits base expanded.
- 12 -
<PAGE>
TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------- -----------------------------------------------
INTEREST AVERAGE RATE
----------------------------------------------- -----------------------------------------------
2000 1999 VARIANCE % 2000 1999 VARIANCE BP
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS:
Investment securities $ 15,384 $ 10,794 42.5% 6.63% 6.50% 0.13%
Trading securities 395 634 -37.7% 7.15% 8.61% -1.46%
Money market investments 70 117 -40.2% 6.26% 4.53% 1.73%
------------- ------------- ------------- ------------- ------------- -------------
15,849 11,545 37.3% 6.65% 6.56% 0.09%
------------- ------------- ------------- ------------- ------------- -------------
LOANS:
Real estate (1) 7,219 7,265 -0.6% 8.91% 9.96% -1.05%
Consumer 4,249 4,032 5.4% 13.81% 13.53% 0.28%
Financing leases 2,850 3,749 -24.0% 10.81% 11.85% -1.04%
Commercial and auto loans 764 411 85.9% 13.22% 11.21% 2.01%
15,082 15,457 -2.4% 10.48% 11.20% -0.72%
------------- ------------- ------------- ------------- ------------- -------------
$ 30,931 $ 27,002 14.6% 8.09% 8.60% -0.51%
------------- ------------- ------------- ------------- ------------- -------------
DEPOSITS:
Savings and demand 764 744 2.7% 2.12% 2.57% -0.45%
Time and IRA accounts 6,566 6,527 0.6% 5.29% 5.55% -0.26%
------------- ------------- ------------- ------------- ------------- -------------
7,330 7,271 0.8% 4.57% 4.96% -0.39%
------------- ------------- ------------- ------------- ------------- -------------
BORROWINGS:
Repurchase agreements 8,144 5,945 37.0% 5.00% 5.40% -0.40%
FHLB funds 842 997 -15.5% 6.05% 5.78% 0.27%
Term notes and other sources
of funds 1,280 1,501 -14.7% 4.77% 5.20% -0.43%
Interest rate risk management 288 214 34.6% 0.14% 0.14% 0.00%
------------- ------------- ------------- ------------- ------------- -------------
10,554 8,657 21.9% 5.19% 5.54% -0.35%
------------- ------------- ------------- ------------- ------------- -------------
17,884 15,928 12.3% 4.92% 5.26% -0.34%
------------- ------------- ------------- ------------- ------------- -------------
NET INTEREST INCOME $ 13,047 $ 11,074 17.8% 3.17% 3.34% -0.17%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
INTEREST RATE MARGIN 3.41% 3.53% -0.12%
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
-----------------------------------------------
AVERAGE BALANCE
-----------------------------------------------
2000 1999 VARIANCE %
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENTS:
Investment securities $ 927,447 $ 663,813 $ 39.7%
Trading securities 22,086 29,457 -25.0%
Money market investments 4,445 10,308 -56.9%
------------- ------------- -------------
953,978 703,578 35.6%
------------- ------------- -------------
LOANS:
Real estate (1) 323,988 291,796 11.0%
Consumer 123,103 119,214 3.3%
Financing leases 105,453 126,544 -16.7%
Commercial and auto loans 23,097 14,689 57.2%
------------- ------------- -------------
575,641 552,243 4.2%
------------- ------------- -------------
1,529,619 1,255,821 21.8%
------------- ------------- -------------
DEPOSITS:
Savings and demand 143,192 114,970 24.5%
Time and IRA accounts 492,622 466,379 5.6%
------------- ------------- -------------
635,814 581,349 9.4%
------------- ------------- -------------
BORROWINGS:
Repurchase agreements 645,808 436,806 47.8%
FHLB funds 55,200 68,368 -19.3%
Term notes and other sources of funds 106,500 114,542 -7.0%
Interest rate risk management - - 0.0%
------------- ------------- -------------
807,508 619,716 30.3%
------------- ------------- -------------
1,443,322 1,201,065 20.2%
------------- ------------- -------------
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 86,297 $ 54,756 57.6%
------------- ------------- -------------
------------- ------------- -------------
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.98% 104.56%
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------- ------------- ------------- -------------
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL
- ----------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 545 $ (920) $ (375)
Investments 4,059 245 4,304
------------- ------------- -------------
4,604 (675) 3,929
------------- ------------- -------------
INTEREST EXPENSE:
Deposits 545 (486) 59
Borrowings 2,521 (624) 1,897
------------- ------------- -------------
3,066 (1,110) 1,956
------------- ------------- -------------
NET INTEREST INCOME $ 1,538 $ 435 $ 1,973
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(1) - Real-estate averages include loans held-for-sale.
- 13 -
<PAGE>
Average interest-bearing liabilities for the first quarter of fiscal 2000
reached $1.443 billion, up 20% from the $1.201 billion a year ago. Larger
volumes 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. In the other hand, the average cost
of funds on interest-bearing liabilities was 4.92%, 34 basis points lower
than the 5.26% attained in the same quarter of fiscal 1999. A lower interest
scenario that prevailed during the first quarter of fiscal 2000 combined with
a growth in the core deposit base caused this overall decrease.
NON-INTEREST INCOME
In line with the Group's strategy of revenue expansion, recurrent non-interest
revenues continued to be a catalyst of the Group's earnings performance during
the first quarter of fiscal 2000. They rose 12% to $2.6 million from $2.3
million in the preceding year first quarter. Higher trust, brokerage, money
management and mortgage banking revenues drove this improvement (see Table 3).
Trust, money management and brokerage fees, the principal component of recurrent
non-interest income, continued its well-established growth pattern during the
first quarter of fiscal 2000, rising 12% to $2.6 million from $2.3 million in
the preceding first quarter. The larger volume of accounts and assets managed by
both the Group's trust department and the broker-dealer subsidiary triggered
this growth (see "Financial Condition" section).
For the first quarter of fiscal 2000, gains generated by mortgage banking
activities amounted to $1.4 million, 71% greater than the $794,000 earned in
same quarter of fiscal 1999. The larger volume of loans sold coupled by higher
spreads attained in certain of the loan products sold fueled this increase.
Bank services fees and other operating revenues, which consist primarily of fees
on deposit accounts, leasing fees, and bank service charges and commissions,
totaled $1.1 million in the first quarter of fiscal 2000, a 11% hike versus the
$1 million reported in the same period fiscal of 1999. A 22% growth in bank
service charges and commissions drove this rise. This increase was principally
attributed to the expansion of the Group's electronic banking business and fees
generated from the larger saving sand demand deposits base.
For the first quarter of fiscal 2000, non-current securities and trading
gains amounted to $466,000 versus $1.7 million reported in the same period a
year ago.
NON-INTEREST EXPENSES
As shown in Table 4, non-interest expenses for the first quarter of fiscal 2000
increased 12% to $8.2 million from $7.4 million in the comparable period of
fiscal 1999. Notwithstanding the above increase, the efficiency and expense
ratios for the first quarter of fiscal 2000 improved to 45.33% and 0.81%,
respectively, from 47.69% and 1.02%, respectively, a year earlier.
Employee compensation and benefits, the Group's largest expense category,
amounted to $3.7 million or 0.94% of total average assets for the first
quarter of fiscal 2000 versus $3.5 million or 1.02% of total average assets
in the same period of fiscal 1999. Tight control over the Group's level of
staff achieved this slight increase (see Table 4), despite an increase in the
volume of business and the asset base. Refer to Table 4 for more selected
data regarding employee compensation and benefits.
Other recurring non-interest expenses for the first quarter of fiscal 2000
increased 19% to $4.5 million as compared to $3.8 million in the same period of
fiscal 1999. Increases in professional and service fees, advertising and
business promotion and occupancy and equipment led this rise and are directly
related to the Group's expansion and new lines of business.
The larger amount of professional and service fees reflect the Group's higher
expenditures related with consulting and technical support. Also,
expenditures to prepare the Group for the year 2000 (Y2K) computer readiness
and other expenses related to the recent conversion of the Group's electronic
core system were responsible for this growth.
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 capital expenditures from leasehold improvements and EDP
equipment. This reflects the additional banking and administrative 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
improvement of customers' service.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SEPTEMBER 30,
------------------------------------------------------
1999 1998 VARIANCE %
------------------------------------------------------
TABLE 2 - REVENUES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 13,047 $ 11,075 17.8%
Recurrent non-interest income 5,121 4,152 23.3%
Non- recurrent non-interest income 466 1,655 -71.8%
---------------- ---------------- ----------------
$ 18,634 $ 16,882 10.4%
---------------- ---------------- ----------------
---------------- ---------------- ----------------
REVENUES COMPOSITION:
Net interest income 70.00% 65.60%
Recurrent non-interest income 27.50% 24.60%
Non- recurrent non-interest income 2.50% 9.80%
---------------- ----------------
100.00% 100.00%
---------------- ----------------
---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SEPTEMBER 30,
------------------------------------------------------
1999 1998 INC. / (DEC.)
------------------------------------------------------
TABLE 3 - NON-INTEREST INCOME SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NON-INTEREST INCOME:
Bank service charges and fees and other operating income
Fees on deposit accounts $ 362 $ 336 7.7%
Bank service charges and commissions 504 414 21.7%
Leasing revenues 268 207 29.5%
Other operating revenues 4 68 -94.1%
---------------- ---------------- ----------------
1,138 1,025 11.0%
Trust, money management and brokerage fees 2,627 2,333 12.6%
Mortgage banking activities 1,356 794 70.8%
---------------- ---------------- ----------------
RECURRENT NON-INTEREST INCOME 5,121 4,152 23.3%
Securities and trading net activity 466 1,655 -71.8%
---------------- ---------------- ----------------
TOTAL NON-INTEREST INCOME $ 5,587 $ 5,807 -3.8%
---------------- ---------------- ----------------
---------------- ---------------- ----------------
RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 62.19% 57.32%
---------------- ----------------
TABLE 4 - NON-INTEREST EXPENSES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Compensation and benefits
Fixed $ 2,485 $ 2,185 13.7%
Variable 1,264 1,289 -1.9%
---------------- ---------------- ----------------
3,749 3,474 7.9%
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Occupancy and equipment,net 1,525 1,246 22.4%
Advertising and business promotion 631 560 12.7%
Professional and service fees 509 341 49.3%
Communications 370 345 7.2%
Municipal and other general taxes 479 429 11.7%
Insurance, including deposits insurance 133 91 46.2%
Printing, postage, stationery and supplies 197 156 26.3%
Other operating expenses 642 602 6.6%
---------------- ---------------- ----------------
OTHER NON-INTEREST EXPENSES 4,486 3,770 19.0%
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Other non-recurring expenses - 128 -100.0%
---------------- ---------------- ----------------
TOTAL NON-INTEREST EXPENSES $ 8,235 $ 7,372 11.7%
---------------- ---------------- ----------------
---------------- ---------------- ----------------
RELEVANT RATIOS:
Efficiency ratio 45.33% 47.69%
---------------- ----------------
Expense ratio 0.81% 1.02%
---------------- ----------------
Compensation and benefits to recurring non-interest expenses 45.5% 48.0%
-----------------------------------
Variable compensation to total compensation 33.7% 37.1%
-----------------------------------
Compensation to total average assets 0.94% 1.02%
-----------------------------------
Average compensation per employee $ 40.9 $ 37.3
---------------- ----------------
Bank assets per employee $ 5,047 $ 4,205
---------------- ----------------
GROUP'S WORK FORCE:
Bank 329 330
Trust 28 24
Brokerage 12 10
---------------- ----------------
369 364
---------------- ----------------
---------------- ----------------
Average number of full-time employees 367 373
---------------- ----------------
</TABLE>
- 15 -
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses in the first quarter of fiscal 2000 totaled $1.75
million, down 33% from the $2.6 million reported in the same period of fiscal
1999. The decline in the provision was in response to the lower level of net
credit losses and non-performing assets, and current and expected economic
conditions. Please refer to the allowance for loan losses and non-performing
assets section for a more detailed analysis of the allowances for loan losses,
net credit losses and credit quality statistics.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of fiscal 2000 amounted to
$702,000 or 8.1% of pre-tax earnings compared with $851,000 or 12.3% of pre-tax
earnings a year ago, down 18%. The reduction in the first quarter of fiscal 2000
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 the first quarter of fiscal 2000, the Group's total assets
amounted to $1.660 billion, an increase of 20% when compared to the $1.388
billion a year ago. At the same date, interest-earning assets reached $1.586
billion, an increase of $261 million or 20% versus the $1.325 billion a year
earlier. This robust assets growth reflects a significant increase in the
investment portfolio of $277million or 37% (see Table 5).
Investments are Oriental's largest interest-earning assets component. It
mainly consists 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. At September 30,
1999, the investment portfolio is of a high quality, approximately 98% is
rated AAA at the end of the first quarter 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 Unaudited Consolidated
Financial Statements).
The investment portfolio expansion was driven by a strong growth in
mortgage-backed securities and CMO's, which increased to $784 million or 76% of
the total portfolio from $463 million or 62% the year before, as Oriental
continued its strategy of pooling residential real estate loans into
mortgage-backed securities. However, investment securities decreased 13% to $230
million or 22% of the total portfolio from $265 million or 35% a year ago. This
reduction reflects the significant quantity of U.S. Government securities sold
during the first half of fiscal 1999 as part of the Group's asset/liability
management. These securities were replaced with mortgage-backed securities and
CMO's that provide the Group with a higher yield and liquid position (see Table
5 for the Group's investments summary and composition).
At September 30,1999, Oriental's loan portfolio, the second largest category of
the Bank's interest-earning assets, amounted to $558 million, 3% or $16 million
lower than the $574 million a year ago. Leasing and real estate portfolios
downsizing and an increase in the allowance for loan losses led this reduction;
partially offset by expansions in the consumer and commercial and auto loans
portfolios. Table 5 presents the Group's loan portfolio composition and mix at
the end of the periods analyzed.
The Group's real estate loans portfolio amounted to $315 million or 56% of the
loan portfolio at September 30, 1999, a 2% decrease when compared to $323
million or 56% of the loan's portfolio the year before. This reflects the sale
of over $200 million in residential loans sold during the past twelve months as
management took advantage of market conditions to convert the bulk of its
mortgage origination into mortgage-backed securities.
At the end of the first quarter of fiscal 2000, the consumer loans portfolio
totaled $127million or 22% of the Group's loan portfolio, a 15% growth compared
to the $110 million or 19% of the Group's loan portfolio a year ago. Personal
loans which amounted to $111 million at the end of the first quarter of fiscal
2000, or 13% over the $98 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 Group's leasing portfolio amounted to $104 million or 18% of the loan
portfolio at the end of the first quarter of fiscal 2000, a 21% decrease
versus $131 million or 23% of the loan portfolio a year ago. The Group's
intentional slowdown in lease originations, due to stronger underwriting
standards and discontinued equipment-leasing origination in March 1999,
caused the downsizing.
- 16 -
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------- ---------------
SEP-99 SEP-98 INC. / (DEC.) JUN-99
--------------------------------------------------- ---------------
TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENTS:
Mortgage-backed securities and CMO's $ 784,170 $ 462,673 69.5% $ 696,252
US and PR Government securities 230,389 265,347 -13.2% 209,232
FHLB stock and other investments 13,657 22,924 -40.4% 41,045
--------------- --------------- ------------ ---------------
1,028,216 750,944 36.9% 946,529
--------------- --------------- ------------ ---------------
LOANS:
Real estate 314,904 322,791 -2.4% 340,254
Consumer 126,620 110,006 15.1% 122,212
Financing leases 103,736 131,447 -21.1% 110,297
Commercial and auto 21,258 15,893 33.8% 10,555
--------------- --------------- ------------ ---------------
566,518 580,137 -2.3% 583,318
Allowance for loan losses (8,731) (5,683) 53.6% (9,002)
--------------- --------------- ------------ ---------------
557,787 574,454 -2.9% 574,316
--------------- --------------- ------------ ---------------
TOTAL INTEREST-EARNING ASSETS 1,586,003 1,325,398 19.7% 1,520,845
--------------- --------------- ------------ ---------------
Non-interest earning assets 74,469 62,225 19.7% 66,502
--------------- --------------- ------------ ---------------
TOTAL ASSETS $ 1,660,472 $ 1,387,623 19.7% $ 1,587,347
--------------- --------------- ------------ ---------------
--------------- --------------- ------------ ---------------
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMO's 76.3% 61.6% 73.6%
US and PR Government securities 22.4% 35.3% 22.1%
FHLB stock and other investments 1.3% 3.1% 4.3%
--------------- --------------- ---------------
100.0% 100.0% 100.0%
--------------- --------------- ---------------
LOAN PORTFOLIO COMPOSITION:
Real Estate 55.6% 55.6% 58.3%
Consumer 22.4% 19.0% 21.0%
Financing leases 18.3% 22.7% 18.9%
Commercial and auto 3.7% 2.7% 1.8%
--------------- --------------- ---------------
100.0% 100.0% 100.0%
--------------- --------------- ---------------
<CAPTION>
TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEPOSITS:
Savings and demand deposits $ 152,905 $ 122,394 24.9% $ 142,679
Time deposits and IRA accounts 499,493 486,425 2.7% 508,648
Accrued Interest 4,238 4,283 -1.1% 5,661
--------------- --------------- ------------ ---------------
$ 656,636 $ 613,102 7.1% $ 656,988
--------------- --------------- ------------ ---------------
BORROWINGS:
Repurchase agreements $ 701,322 $ 446,394 57.1% $ 596,226
FHLB funds 46,700 60,400 -22.7% 68,400
Term notes and other sources of funds 106,500 114,500 -7.0% 106,500
--------------- --------------- ------------ ---------------
$ 854,522 $ 621,294 37.5% $ 771,126
--------------- --------------- ------------ ---------------
TOTAL INTEREST-BEARING LIABILITIES 1,511,158 1,234,396 22.4% 1,428,114
--------------- --------------- ------------ ---------------
Non interest-bearing liabilities $ 24,943 $ 32,664 -23.6% $ 35,201
--------------- --------------- ------------ ---------------
TOTAL LIABILITIES $ 1,536,101 $ 1,267,060 21.2% $ 1,463,315
--------------- --------------- ------------ ---------------
--------------- --------------- ------------ ---------------
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 23.3% 20.0% 21.7%
Time deposits and IRA accounts 76.1% 79.3% 77.4%
Accrued Interest 0.6% 0.7% 0.9%
--------------- --------------- ---------------
100.0% 100.0% 100.0%
--------------- --------------- ---------------
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 82.1% 71.8% 77.3%
FHLB funds 5.5% 9.7% 8.9%
Term notes and other sources of funds 12.4% 18.5% 13.8%
--------------- --------------- ---------------
100.0% 100.0% 100.0%
--------------- --------------- ---------------
</TABLE>
- 17 -
<PAGE>
LIABILITIES AND FUNDING SOURCES
As shown in Table 6, at September 30, 1999, Oriental's total liabilities reached
$1.536 billion, 21% higher than the $1.267 billion reported a year earlier.
Interest-bearing liabilities, the Group's funding sources, amounted to $1.511
billion at the end of the first quarter of fiscal 2000 versus $1.234 billion the
year before, a 22% increase. Increases in demand and saving deposits and
repurchase agreements drove this growth.
Deposits at the end of the first quarter of fiscal 2000, the second largest
category of the Group's interest-bearing liabilities and a cost-effective source
of funding, reached $657 million, up 7% versus the $613 million a year ago. A
$31 million or 25% increase in demand and savings deposits realized most of the
growth, followed by a $13 million or 3% rise in time deposits and IRA accounts.
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 mainly 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. At September 30, 1999, they
amounted to $855 million, 38% higher than the $622 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 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 September 30, 1999, Oriental's total stockholders' equity reached $124
million, a 3% increase from $121 million a year ago. Earnings reported during
the past 12 months and $32.3 million net proceeds generated from the issuance of
preferred stock were the main reasons for this growth. These were partially
offset by a $33.5 million decline in accumulated other comprehensive loss and
$15.6 million spent on treasury stock repurchases. For more in the Group's of
stockholders' equity expansion, refer to the Unaudited Consolidated Statement of
Changes in Stockholders' Equity and of Comprehensive Income included in the
attached Unaudited Consolidated Financial Statements.
During the first quarter of fiscal 2000, the Group continued its aggressive
repurchase program, as authorized by the board of directors, and repurchased
approximately 75,000 shares of its common stock. This brings to 978,879 shares
with a cost of $25.1 million the number of shares held by the Group's treasury.
The Group's common stock is traded in the New York Stock Exchange (NYSE)
under the symbol OFG. The market value of the Group's common stock on the
NYSE at September 30, 1999 was $22.75 per share versus $28.84 per share a
year earlier. The Group's market capitalization decreased to $291 million as
compared to $378 million a year ago, reflecting a significant decline in the
fair value of securities available-for-sale (included as part of accumulated
other comprehensive loss) loss and increase in treasury stock.
During the first quarter of fiscal 2000, the Group declared dividends amounting
to $1.9 million or $0.15 per share compared to $1.5 million or $0.113 per share
in the same period of fiscal 1999, up 33%. For the first quarter of fiscal 2000,
the dividend payout ratio and dividend yield were 26.07% and 2.55%,
respectively, compared to 24.36% and 1.56%, respectively, in the preceding
fiscal year.
Under the regulatory framework for prompt corrective action, banks and bank
holding companies, which meet or exceed a Tier I risk-based ratio of 6%, a total
capital risk-based ratio of 10% and a leverage ratio of 5% are considered well
capitalized. As shown on Table 7, the Group exceeds those regulatory risk-based
capital requirements, due to the high level of capital and the conservative
nature of the Group's assets.
GROUP'S FINANCIAL ASSETS
As shown on Table 8, at September 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 $3.920 billion, an
increase of 15% when compared to the $3.417 billion a year ago. 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, refer to Group's Assets under Financial Condition.
Oriental's second largest financial assets 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 September 30, 1999, total assets managed by the Group's trust
amounted $1.395 billion, 8% higher than the $1.293 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 $524 million versus the
$460 million a year ago, followed by a 26% growth in 401(K) and Keogh retirement
plans managed.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------- ---------------
SEP-99 SEP-98 INC. / (DEC.) JUN-99
--------------------------------------------------- ---------------
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL DATA:
Stockholders' equity $ 124,371 $ 120,563 3.2% $ 124,032
--------------- --------------- ------------ ---------------
Leverage Capital ( minimum required - 4.00%) 8.72% 7.46% 17.0% 8.78%
--------------- --------------- ------------ ---------------
Total Risk-Based Capital (minimum required - 8.00%) 24.74% 20.87% 18.5% 25.28%
--------------- --------------- ------------ ---------------
Tier 1 Risk-Based capital (minimum required - 4.00%) 23.48% 19.79% 18.6% 24.02%
--------------- --------------- ------------ ---------------
STOCK DATA:
Outstanding common shares 12,776 13,120 -2.6% 12,835
--------------- --------------- ------------ ---------------
Book value $ 7.11 $ 9.18 -22.5% $ 7.05
--------------- --------------- ------------ ---------------
Market Price at end of period $ 22.75 $ 28.84 -21.1% $ 24.13
--------------- --------------- ------------ ---------------
Market capitalization $ 290,657 $ 378,381 -23.2% $ 309,644
--------------- --------------- ------------ ---------------
DIVIDEND DATA:
Dividends declared $ 1,916 $ 1,492 28.4% $ 7,369
--------------- --------------- ------------ ---------------
Dividends declared per share $ 0.150 $ 0.113 32.7% $ 0.563
--------------- --------------- ------------ ---------------
Payout ratio 26.07% 24.36% 7.0% 28.02%
--------------- --------------- ------------ ---------------
Dividend yield 2.55% 1.56% 63.5% 1.94%
--------------- --------------- ------------ ---------------
<CAPTION>
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.
---------------------------------------------------
PRICE
----------------------------------- DIVIDEND
HIGH LOW PER SHARE
--------------- --------------- ------------
<S> <C> <C> <C>
FISCAL 2000:
September 30, 1999 $ 28.00 $ 21.50 $ 0.150
--------------- --------------- ------------
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
--------------- --------------- ------------
<CAPTION>
TABLE 8 - FINANCIAL ASSETS SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Trust assets managed $ 1,394,800 $ 1,292,500 7.9% $ 1,394,800
Assets gathered by broker-dealer 864,700 736,500 17.4% 864,700
--------------- --------------- ------------ ---------------
MANAGED ASSETS 2,259,500 2,029,000 11.4% 2,259,500
Group assets 1,660,500 1,387,600 19.7% 1,587,300
--------------- --------------- ------------ ---------------
$ 3,920,000 $ 3,416,600 14.7% $ 3,846,800
--------------- --------------- ------------ ---------------
</TABLE>
- 19 -
<PAGE>
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 September 30, 1999, total
assets gathered by the broker-dealer from its customer investment accounts
reached $865 million, up 17% from $737 million a year ago.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
At September 30, 1999, the Group's allowance for loan losses amounted to $8.7
million or 1.54% of total loans versus $5.7 million or 0.98% of total loans 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 pertinent factors.
While management uses available information in estimating possible loan losses,
future additions to the allowance may be necessary based on factors beyond
Oriental's control, such as factors affecting Puerto Rico economic conditions.
In addition, 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 their examinations.
Net credit losses for the first quarter of fiscal 2000, totaled $2.0 million
or 1.40% of average loans, compared to $2.6 million or 1.80% of average loans
for the same period of fiscal 1999. The lower level of credit losses
experienced during the first quarter of fiscal 2000 was primarily associated
to a reduction in financing leases net credit losses. It is worth noting that
consumer loans credit losses fell slightly despite a 15% growth in the
portfolio and that tighter underwriting standards and collection procedures
implemented last year are showing positive results. As such, management
expects the level of credit losses to continue to improve 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, the Group's non-performing assets consisted of
non-performing loans, foreclosed real estate owned and other repossessed
assets. At the end of the first quarter of fiscal 2000, the Group's asset
quality improved as non-performing assets totaled $18.7 million or 1.12% of
total assets versus $20.4 million or 1.47% of total assets at the same date
of fiscal 1999. The decrease was principally due to a lower level of
non-performing loans; mainly non-performing financing leases which decreased
25%. This improvement stems from tighter underwriting standards and
collection procedures implemented, as previously explained.
At September 30, 1999, the allowance for loan losses to non-performing loans
coverage ratio improved to 48.73% from 30.14% a year ago; excluding the lesser
risk real estate loans, the ratio substantially improved to 97.79% from 53.38%
for the respective periods. Detailed information concerning each of the items
that comprise non-performing assets follows:
- - REAL ESTATE LOANS - are placed on a non-accrual basis when they become 90
days or more past due, except for well secured by real estate collateral.
At September 30, 1999, except for non-performing real estate loans totaled
$9 million or 50.2% 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 considers that no significant 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 September 30, 1999, the Group's
non-performing commercial business loans amounted to $1.2 million or 6.8%
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 unless well secured by collateral. At September 30, 1999, the
Group's non-performing auto and equipment leases portfolio amounted to
$6.6 million or 37% of the Group's total non-performing loans. the
underlying collateral secures these financing leases.
- - CONSUMER LOANS - are placed on non-accrual status when they become 90 days
past due. At September 30, 1999, the Group's non-performing consumer loans
amounted to $1.1 million or 6.0% of the Group's total non-performing loans.
Consumer loans are charged-off when payments are delinquent 120 days.
- - 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.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 VARIANCE %
------------------ ----------------- -----------
TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND
LOAN LOSSES STATISTICS
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
BEGINNING BALANCE $ 9,002 $ 5,658
------------------ -----------------
Provision for loan losses 1,750 2,600
Net charge-off's (2,021) (2,575)
------------------ -----------------
NET INCREASE (DECREASE) (271) 25
------------------ -----------------
ENDING BALANCE $ 8,731 $ 5,683
------------------ -----------------
CHARGE-OFF'S:
Real estate $ - $ (2) -100.0%
Consumer (1,749) (1,586) 10.3%
Leasing (974) (1,303) -25.2%
Commercial and others (35) (136) -74.3%
------------------ ----------------- ------------
(2,758) (3,027) -0.9%
------------------ ----------------- ------------
RECOVERIES:
Real estate $ - $ 16 -100.0%
Consumer 382 118 233.7%
Leasing 295 282 4.6%
Commercial and others 60 36 66.7%
------------------ ----------------- ------------
737 452 63.1%
------------------ ----------------- ------------
NET CHARGE-OFF'S:
Real estate - 14 -100.0%
Consumer (1,367) (1,468) -6.9%
Leasing (679) (1,021) -33.5%
Commercial and others 25 (100) -125.0%
------------------ ----------------- ------------
$ (2,021) $ (2,575) -21.5%
------------------ ----------------- ------------
LOANS:
Outstanding $ 566,518 $ 580,137
------------------ -----------------
Average loans $ 575,641 $ 571,101
------------------ -----------------
RATIOS:
Recoveries to net-charge-off's 26.7% 14.9%
------------------ -----------------
Net charge-off's to average loans 1.40% 1.80%
------------------ -----------------
Allowance coverage ratio 1.54% 0.98%
------------------ -----------------
<CAPTION>
TABLE 10 - NON-PERFORMING ASSETS
( AT SEPTEMBER 30, ):
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NON-PERFORMING ASSETS:
Non-performing loans $ 17,917 $ 18,858 -5.0%
Foreclosed real estate 383 316 21.2%
Repossessed autos 347 946 -63.3%
Repossessed equipment 26 323 -92.0%
------------------ ----------------- ------------
$ 18,673 $ 20,443 -0.7%
------------------ ----------------- ------------
NON-PERFORMING LOANS:
Real estate $ 8,989 $ 8,211 9.5%
Consumer 1,072 765 40.1%
Financing leases 6,635 8,884 -25.3%
Commercial 1,221 998 22.3%
------------------ ----------------- ------------
$ 17,917 $ 18,858 5.0%
------------------ ----------------- ------------
NON-PERFORMING LOANS COMPOSITION:
Real estate 50.2% 43.5%
Consumer 6.0% 4.1%
Financing leases 37.0% 47.1%
Commercial 6.8% 5.3%
------------------ -----------------
100.0% 100.0%
------------------ -----------------
RELEVANT RATIOS:
Non-performing loans to total loans 3.16% 3.25%
------------------ -----------------
Non-performing loans reserve coverage ratio 48.73% 30.14%
------------------ -----------------
Non-performing loans reserve coverage ratio
(excluding real estate loans) 97.79% 53.38%
------------------ -----------------
Non-performing assets to total assets 1.12% 1.47%
------------------ -----------------
Non-performing assets to total capital 15.01% 16.96%
------------------ -----------------
</TABLE>
- 21 -
<PAGE>
- - 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 September 30, 1999, the inventory of repossessed
automobiles and equipment consisted of 21 units and 4 units, respectively,
amounting to $347,000 ($16,220 average per unit) and $26,000 ($6500 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
tested and are fully certified as being Y2K compliant, in accordance with
regulatory guidelines.
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; and oversees the Group's
sources, uses and pricing of funds.
Interest rate risk can be defined as the exposure of the Group's operating
results or financial position to adverse movements in market interest rates
which mainly occurs when assets and liabilities reprice at different times and
at different rates. This difference is commonly referred to as a "maturity
mismatch" or "gap". The Group employs various techniques to assess the degree of
interest rate risk.
The Group is liability sensitive due to its fixed rate and medium-term asset
composition being funded with shorter-term repricing liabilities. As a result,
the Group 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.
Based on the June 30, 1999 analysis, last time this type of analysis was
performed, 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.
- 22 -
<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 the first quarter of fiscal 2000, the Group's liquidity was
deemed appropriate. In addition to $875 million in liquid assets, includes
$53 million available from unused lines of credit with other financial
institutions and $167 million of borrowing potential with the FHLB. The
Group's liquidity position is reviewed and monitored by the ALCO Committee on
a regular basis. Management believes that the Group will continue to maintain
adequate liquidity levels in the future.
The Group's principal sources of funds are net deposit inflows, loan repayments,
mortgage-backed and investment securities principal and interest payments,
reverse repurchase agreements, FHLB advances and other borrowings. The Group has
obtained long-term funding through the issuance of notes and long-term reverse
repurchase agreements. The Group's principal uses of funds are the origination
and purchase of loans, the purchase of mortgage-backed and investment
securities, the repayment of maturing deposits and borrowings.
PART - 2
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims under
various theories of damages arising out of, and incidental to its business. The
Group is vigorously contesting those claims. Based upon a review with legal
counsel and the development of these matters to date, management is of the
opinion that the ultimate aggregate liability, if any, resulting from these
claims will not have a material adverse effect on the Group's financial position
or the result of operations.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual stockholder meeting of the Group was held on October 28, 1999. A
quorum was obtained with 11,712,902 votes in person or by proxy, which
represented 91.2% of all votes eligible to be cast. The following proposals
were voted upon at the meeting with the following results:
- - PROPOSAL 1: To elect four directors to three-year terms expiring with the
2002 Annual Meeting or until their successors have been elected and
qualified.
<TABLE>
<CAPTION>
NOMINEES FOR THREE-YEAR TERM VOTES FOR VOTES AGAINST VOTES WITHHOLD
- -------------------------------------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C>
PABLO I. ALTIERI 11,639,108 - (90.6%) - 73,794
DIEGO PERDOMO 11,587,639 - (90.2%) - 125,263
FRANCISCO ARRIVI 11,639,856 - (90.6%) - 76,046
MARI CARMEN APONTE 11,636,608 - (90.6%) - 76,294
</TABLE>
- - PROPOSAL 2 : To consider and approve the adoption of the Oriental Financial
Group 1998 Incentive Stock Option Plan and the Oriental Bank and Trust 1996
Incentive Stock Option Plan to include, as eligible participants,
independent contractors who perform services to the Group and/or any of its
subsidiaries.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAIN VOTES WITHHOLD
- ---------------------------------------- ----------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
11,217,910 - (87.3%) 292,013 202,977 -
</TABLE>
- 23 -
<PAGE>
- - PROPOSAL 3: Ratify the appointment of Pricewaterhouse Coopers LLP as the
Group's independent auditors for the year ending June 30, 2000.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAIN VOTES WITHHOLD
- ---------------------------------------- ----------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
11,710,234 - (91.1%) 2,266 402 -
</TABLE>
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A - FINANCIAL STATEMENTS SCHEDULES
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - REPORTS ON FORM 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30,1999.
C - EXHIBITS
EXHIBITS FILED AS PART OF THIS FORM 10-Q
27.0 FINANCIAL DATA SCHEDULE E-1
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)
By: S/JOSE E. FERNANDEZ
-------------------
Jose E. Fernandez
Chairman of the Board, President and
Chief Executive Officer Dated: November 13, 1999
-----------------
By: S/RAFAEL VALLADARES
-------------------
Rafael Valladares
Senior Vice President - Principal Financial
Officer Dated: November 13, 1999
-----------------
- 24 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001030469
<NAME> ORIENTAL FINANCIAL GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,428
<INT-BEARING-DEPOSITS> 400
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 38,185
<INVESTMENTS-HELD-FOR-SALE> 481,435
<INVESTMENTS-CARRYING> 494,939
<INVESTMENTS-MARKET> 481,334
<LOANS> 557,787
<ALLOWANCE> 8,731
<TOTAL-ASSETS> 1,660,472
<DEPOSITS> 656,636
<SHORT-TERM> 698,022
<LIABILITIES-OTHER> 27,368
<LONG-TERM> 156,500
0
33,500
<COMMON> 13,755
<OTHER-SE> 77,116
<TOTAL-LIABILITIES-AND-EQUITY> 1,660,472
<INTEREST-LOAN> 15,082
<INTEREST-INVEST> 15,779
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 30,931
<INTEREST-DEPOSIT> 7,330
<INTEREST-EXPENSE> 17,884
<INTEREST-INCOME-NET> 13,047
<LOAN-LOSSES> 1,750
<SECURITIES-GAINS> 599
<EXPENSE-OTHER> 8,235
<INCOME-PRETAX> 8,649
<INCOME-PRE-EXTRAORDINARY> 8,649
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,947
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 8.09
<LOANS-NON> 13,114
<LOANS-PAST> 4,803
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,002
<CHARGE-OFFS> 2,758
<RECOVERIES> 737
<ALLOWANCE-CLOSE> 8,731
<ALLOWANCE-DOMESTIC> 8,731
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
