<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No.
June 30, 2000 001-12647
ORIENTAL FINANCIAL GROUP INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
Monacillos 1000
San Roberto Street
Rio Piedras, Puerto Rico 00926
Telephone (787) 771-6800
AMENDMENT NO. 2 TO ANNUAL REPORT ON FORM 10K
The undersigned Registrant hereby amends the financial statements of its Annual
Report on Form 10-K for the year ended June 30, 2000 as set forth in the pages
attached hereto: Add the following items to Part II: Item 8. - Financial
Statements and Supplementary Data. Such items are attached hereto
-1-
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
AMENDMENT
NO.2
FORM 10-K
TABLE OF CONTENTS
PAGE
--------------------------------------------------------------------------------
PART - II
--------------------------------------------------------------------------------
Item - 8 Financial Statements and Supplementary Data 3
-2-
<PAGE>
PART - II
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-1 through F-28 in
the consolidated financial statements, and is incorporated herein by reference.
The financial data index in page 4 of this report sets forth the listing of all
reports required by this item and included herein.
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.
By: /S/ JOSE E. FERNANDEZ
-------------------
Jose E. Fernandez
Chairman of the Board, President and Dated: October 20, 2000
Chief Executive Officer ----------------
By: /S/ RAFAEL VALLADARES
-------------------
Rafael Valladares
Comptroller and Principal Financial Officer Dated: October 20, 2000
----------------
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<PAGE>
ORIENTAL FINANCIAL GROUP, INC.
AMENDMENT
N0. 2
FORM-10K
FINANCIAL DATA INDEX
<TABLE>
<CAPTION>
PAGE
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FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants F-1
Consolidated Statements of Financial Condition as of June 30, 2000 and 1999 F-2
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 2000 F-3
Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income for each of the
Years in the three-year period ended June 30, 2000 F-4
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2000 F-5
Notes to the Consolidated Financial Statements F-6 to F-28
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Oriental Financial Group Inc.
In our opinion, the accompanying consolidated statement of financial condition
and the related consolidated statements of income, of changes in stockholders'
equity and of comprehensive income, and of cash flows present fairly, in all
material respects, the financial position of Oriental Financial Group Inc. and
its subsidiaries at June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company has restated its financial statements for the years ended June 30,
1999 and 1998, as well as the beginning balance of retained earnings for fiscal
year 1998.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
September 29, 2000
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1677873 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 and 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
ASSETS As Restated
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,322 $ 8,060
----------- -----------
INVESTMENTS:
Money market investments 23,511 27,873
Trading securities, at fair value 64,443 17,307
Investment securities available-for-sale, at fair value 282,900 379,894
Investment securities held-to-maturity, at amortized cost (fair value of $770,851; 1999 - $499,234) 797,484 508,080
Federal Home Loan Bank (FHLB) stock, at cost 11,146 13,257
----------- -----------
TOTAL INVESTMENTS 1,179,484 946,411
----------- -----------
LOANS:
Loans held-for-sale, at lower of cost or market 180,788 55,206
Loans receivable, net 420,090 513,505
----------- -----------
TOTAL LOANS, NET 600,878 568,711
----------- -----------
Accrued interest receivable 13,485 15,502
Foreclosed real estate, net 398 220
Premises and equipment, net 21,706 21,809
Other assets, net 23,961 20,040
----------- -----------
TOTAL ASSETS $ 1,850,234 $ 1,580,753
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 130,919 $ 141,544
Time and IRA accounts 587,931 508,648
----------- -----------
718,850 650,192
Accrued interest 4,831 5,661
----------- -----------
TOTAL DEPOSITS 723,681 655,853
----------- -----------
BORROWINGS:
Securities sold under agreements to repurchase 816,493 596,226
Advances and borrowings from FHLB 70,000 68,400
Term notes and other borrowings 86,500 106,500
----------- -----------
TOTAL BORROWINGS 972,993 771,126
----------- -----------
Accrued expenses and other liabilities 35,691 37,476
----------- -----------
TOTAL LIABILITIES 1,732,365 1,464,455
----------- -----------
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 13,805,135 (1999 - 13,738,814) 13,805 13,739
Additional paid-in capital 23,786 23,313
Legal surplus 10,578 8,673
Retained earnings 79,809 72,186
Treasury stock, at cost, 1,107,799 shares (1999 - 903,786) (27,116) (23,401)
Accumulated other comprehensive loss, net of deferred taxes of $1,413 (1999 - $107) (16,493) (11,712)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 117,869 116,298
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,850,234 $ 1,580,753
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
AS RESTATED
---------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans and leases $ 55,377 $ 55,596 $ 56,138
Mortgage-backed securities 54,583 36,970 23,874
Investment securities 15,756 14,812 16,575
Money market investments 510 431 353
---------- ---------- ----------
TOTAL INTEREST INCOME 126,226 107,809 96,940
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 31,423 28,785 25,968
Securities sold under agreements to repurchase 41,116 25,923 19,216
Other borrowed funds and interest rate risk management 9,189 10,067 12,862
---------- ---------- ----------
TOTAL INTEREST EXPENSE 81,728 64,775 58,046
---------- ---------- ----------
NET INTEREST INCOME 44,498 43,034 38,894
Provision for loan losses 8,150 14,473 9,545
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,348 28,561 29,349
---------- ---------- ----------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 12,046 10,211 8,416
Mortgage banking activities 5,891 9,124 8,563
Banking service revenues 4,663 3,348 3,123
Net gain on sale of securities available-for-sale 1,202 10,460 1,030
Trading net activity (382) (184) 915
Leasing revenues 956 994 981
Loss on loans under contract-to-sell (1,198) - -
Mortgage servicing revenues - - 713
Gain on sale of servicing assets - - 3,503
---------- ---------- ----------
TOTAL NON-INTEREST INCOME 23,178 33,953 27,244
---------- ---------- ----------
NON-INTEREST EXPENSES:
Compensation and benefits 15,698 15,158 15,071
Occupancy and equipment, net 6,417 5,345 4,151
Advertising and business promotion 3,094 3,045 2,602
Professional and service fees 3,216 2,144 1,393
Communications 1,681 1,496 1,427
Taxes other than on income 1,920 1,711 1,633
Insurance, including deposit insurance 469 458 733
Printing, postage, stationery and supplies 826 738 724
Other 6,531 5,515 6,900
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 39,852 35,610 34,634
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 19,674 26,904 21,959
Income taxes 108 200 2,563
---------- ---------- ----------
NET INCOME 19,566 26,704 19,396
Less: Dividends on preferred stock (2,387) (350) -
---------- ---------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 17,179 $ 26,354 $ 19,396
---------- ---------- ----------
INCOME PER COMMON SHARE:
Basic $ 1.34 $ 2.02 $ 1.46
---------- ---------- ----------
Diluted $ 1.31 $ 1.93 $ 1.39
---------- ---------- -----------
Average common shares outstanding 12,787 13,051 13,257
Average potential common share options 375 582 691
---------- ---------- -----------
13,162 13,633 13,948
---------- ---------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS RESTATED
----------------------------
2000 1999 1998
--------- --------- -----------
<S> <C> <C> <C>
CHANGES IN STOCKHOLDERS' EQUITY:
-------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ 33,500 $ - $ -
Issuance of preferred stock - 33,500 -
--------- --------- ---------
BALANCE AT END OF YEAR 33,500 33,500 -
--------- --------- ---------
COMMON STOCK:
Balance at beginning of year 13,739 13,534 13,387
Stock options exercised 66 205 147
--------- --------- ---------
BALANCE AT END OF YEAR 13,805 13,739 13,534
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 23,313 23,876 23,234
Stock options exercised 473 637 642
Preferred stock isssuance costs - (1,200) -
--------- --------- ---------
BALANCE AT END OF YEAR 23,786 23,313 23,876
--------- --------- ---------
LEGAL SURPLUS:
Balance at beginning of year 8,673 5,908 4,002
Transfer from retained earnings 1,905 2,765 1,906
--------- --------- ---------
BALANCE AT END OF YEAR 10,578 8,673 5,908
--------- --------- ---------
RETAINED EARNINGS:
Balance at beginning of year - as previously reported (see Note 2) 79,920 63,756 49,694
Amount of restatement, net of taxes (7,734) (7,790) (5,776)
Beginning balance - as restated 72,186 55,966 43,918
Net income 19,566 26,704 19,396
Dividends declared on common stock (7,651) (7,369) (5,442)
Dividends declared on preferred stock (2,387) (350) -
Transfer to legal surplus (1,905) (2,765) (1,906)
--------- --------- ---------
BALANCE AT END OF YEAR 79,809 72,186 55,966
--------- --------- ---------
TREASURY STOCK:
Balance at beginning of year (23,401) (6,199) (1,836)
Treasury stock purchased (3,715) (17,202) (4,363)
--------- --------- ---------
BALANCE AT END OF YEAR (27,116) (23,401) (6,199)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF DEFERRED TAXES:
Balance at beginning of year (11,712) 6,155 913
Other comprehensive loss for the year ended, net of taxes (4,781) (17,867) 5,242
--------- --------- ---------
BALANCE AT END OF YEAR (16,493) (11,712) 6,155
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 117,869 $ 116,298 $ 99,240
========= ========= =========
COMPREHENSIVE INCOME:
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,566 $ 26,704 $ 19,396
--------- --------- ---------
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized loss on securities arising during the period (7,289) (30,485) 5,975
Realized gains included in net income 1,202 10,460 1,030
Income tax expense related to items of other comprehensive income 1,306 2,158 (1,763)
--------- --------- ---------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (4,781) (17,867) 5,242
--------- --------- ---------
COMPREHENSIVE INCOME $ 14,785 $ 8,837 $ 24,638
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS RESTATED
--------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,566 $ 26,704 $ 19,396
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and costs 346 282 135
Amortization of premiums and accretion of discounts on investment securities 275 1,818 1,157
Depreciation and amortization of premises and equipment 3,767 2,894 2,498
Provision for loan losses 8,150 14,473 9,545
Gain on sale of securities (1,202) (10,460) (1,030)
Loss on loans under contract-to-sell 1,198 - -
Gain on sale of servicing assets - - (3,503)
Mortgage banking activities (5,891) (9,124) (8,563)
Proceeds from sale of loans held-for-sale 27,795 92,871 57,904
Increase (decrease) in accrued expenses and other liabilities (1,764) 11,215 (1,759)
Net (increase) decrease in:
Trading securities (11,422) 25,133 (14,200)
Accrued interest receivable 2,017 (2,175) (976)
Other assets (4,099) (9,335) (2,660)
---------- ---------- ----------
TOTAL ADJUSTMENTS 19,170 117,592 38,548
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,736 144,296 57,944
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (285,033) (513,546) (296,115)
Purchases of investment securities held-to-maturity (100,700) (4,863) (914)
Purchases of FHLB stock (389) - -
Maturities and redemptions of investment securities available-for-sale 35,958 21,884 23,580
Maturities and redemptions of investment securities held-to-maturity 74,737 70,725 37,297
Redemption of FHLB stock 2,500 - -
Proceeds from sales of investment securities available-for-sale 104,402 242,121 103,864
Proceeds from sale of servicing assets - - 11,855
Net origination of loans (125,107) (195,599) (173,437)
Capital expenditures (3,664) (4,990) (2,675)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (297,296) (384,268) (296,545)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits 67,828 85,554 73,093
Securities sold under agreements to repurchase 220,267 180,055 168,256
Advances and borrowings from FHLB 1,600 (6,400) (15,000)
Repayments of term notes and other borrowings (20,000) (8,088) (428)
Net proceeds from issuance of preferred stock - 32,300 -
Proceeds from exercise of stock options 539 842 789
Treasury stock acquired (3,715) (17,202) (4,363)
Dividends paid (10,059) (7,300) (5,195)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 256,460 259,761 217,152
---------- ---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,100) 19,789 (21,449)
Cash and cash equivalents at beginning of year 35,933 16,144 37,593
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,833 $ 35,933 $ 16,144
---------- ---------- ----------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 10,322 $ 8,060 $ 5,603
Money market investments 23,511 27,873 10,541
---------- ---------- ----------
$ 33,833 $ 35,933 $ 16,144
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 79,080 $ 62,190 $ 55,806
---------- ---------- ----------
Income taxes paid $ 1,050 $ 3,946 $ 2,860
---------- ---------- ----------
Investment securities available-for-sale transferred to held-to-maturity $ 263,793 $ 405,526 $ -
---------- ---------- ----------
Real estate loans securitized into mortgage-backed securities $ 61,340 $ 67,500 $ 102,300
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Oriental Financial Group Inc. (the
"Group" or, "Oriental") conform with accounting principles generally accepted in
the U.S.A. ("GAAP") and with financial services industry practices. The
following is a description of the Group's most significant accounting policies:
NATURE OF OPERATIONS
The Group is a bank holding company incorporated under the laws of the
Commonwealth of Puerto Rico. It has two subsidiaries, Oriental Bank and Trust
(the "Bank"), and Oriental Financial Services Corp. (the "Oriental Financial
Services"). Through these subsidiaries, the Group provides a wide range of
financial services such as mortgage, commercial and consumer lending, financial
planning, money management and investment brokerage services, as well as
corporate and individual trust services. Note 17 to the consolidated financial
statements present further information as to the nature of operations of the
Group's business segments.
Both the Group and Bank main offices are located in San Juan, Puerto Rico. The
Bank operates through nineteen branches located throughout the island and is
subject to the supervision, examination and regulation of the Office of the
Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit
Insurance Corporation (FDIC), which insures its deposits through the Savings
Association Insurance Fund (SAIF).
RESTATEMENT
Financial data for 1999 and prior years have been restated, as applicable, as
discussed in Note 2.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements. These estimates and
assumptions also affect the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Group and its direct and indirect wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Group considers as cash
equivalents all money market instruments with maturities of three months or less
at the date of acquisition.
INCOME PER COMMON SHARE
Basic earnings per share excludes potential dilution and is calculated by
dividing net income available to common shares (net income reduced by dividends
on preferred stock) by the weighted average number of outstanding common shares.
Diluted earnings per share is similar to the computation of basic earnings per
share except that the weighted average common shares are increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. Any stock splits are
retroactively recognized in all periods presented in the financial statements.
SECURITIES PURCHASED / SOLD UNDER AGREEMENTS TO RESELL / REPURCHASE
The Group purchases securities under agreements to resell the same or similar
securities. Amounts advanced under these agreements represent short-term loans
and are reflected as assets in the statements of financial condition. It is the
Group's policy to take possession of securities purchased under resale
agreements while the counterparty retains effective control over the securities.
The Group monitors the market value of the underlying securities as compared to
the related receivable, including accrued interest, and requests additional
collateral when deemed appropriate. Also, the Group sells securities under
agreements to repurchase the same or similar securities. The Group retains
control over the securities sold under these agreements, accordingly, such
agreements are treated as financing agreements, and the obligations to
repurchase the securities sold are reflected as a liability. The securities
underlying the financing agreements remain included in the asset accounts.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
INVESTMENT SECURITIES
The Group's securities are classified as held-to-maturity, available-for-sale or
trading. Securities for which the Group has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are carried at amortized
cost. Securities that might be sold prior to maturity because of interest rate
changes, to meet liquidity needs, or to better match the repricing
characteristics of funding sources are classified as available-for-sale. These
securities are reported at fair value, with unrealized gains and losses excluded
from earnings and reported net of deferred taxes in other comprehensive income.
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 fair
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 interest income.
The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock
has no readily determinable fair value and can only be sold back to the FHLB at
par value. Therefore, this investment is carried at cost and its redemption
value represents its fair value.
Premiums and discounts are amortized to interest income over the life of the
related securities using the interest method. Net realized gains or losses on
sales of investment securities and unrealized loss valuation adjustments
considered other than temporary, if any, on securities classified as either
available-for-sale or held-to-maturity are reported separately in the statement
of income. The cost of securities sold is determined on the specific
identification method.
INTEREST RATE RISK MANAGEMENT
The Group enters into interest rate exchange agreements in the form of swaps and
caps to manage its interest rate risk exposure. Interest rate swaps and caps are
not recognized in the consolidated statement of financial condition and are not
marked-to-market. The net effect of amounts to be paid or received under
interest rate swaps is recorded as an adjustment to interest expense in the
period in which realized. Premiums on caps are amortized over the term of the
contract. Income or expenses arising from the instruments are recorded in the
category appropriate to the related asset or liability.
Swap and cap agreements are designated at inception by the Group's Asset
Liability Management Committee ("ALCO") as hedges of the Group's interest rate
risk arising from the repricing of repurchase agreements, the Group's main
source of short-term borrowing, as well as from certain floating rate advances
and notes payable. The floating rate side of the swap and cap agreements is
generally 90 days LIBOR-based, which directly correlates with the repricing
basis of the repurchase agreements. As part of its periodic assessment of the
Group's interest rate risk management strategy, ALCO also monitors the
effectiveness of the swap and cap agreements.
In the event that the criteria for hedge accounting (risk reduction,
designation, correlation and effectiveness) are not met or if the hedged item
matures or is sold, the derivative contract would be marked to market and any
gain or loss would be recognized in trading activities in the period it occurs.
In the event of a termination of a derivative contract designated as a hedge,
any gain or loss would be deferred and amortized over the remaining term of the
original derivative contract or the item hedged.
MORTGAGE BANKING ACTIVITIES AND LOANS HELD-FOR-SALE
From time to time, if conditions so warrant, the Group may sell loans to other
financial institutions or securitize conforming mortgage loans into GNMA, FNMA
and FHLMC certificates. Mortgages included in the resulting GNMA, FNMA and FHLMC
pools are serviced by another institution. These mortgage and other loans
intended for are stated at the lower of cost or market and are reported as loans
held-for-sale. When these loans are sold or securitized into mortgage-backed
securities, a gain or loss is recognized to the extent that the fair value of
the securities or cash received exceeds, or is less than, the carrying value of
the loans sold.
Servicing rights on mortgage loans held by the Group are sold to another
financial institution. The gain on the sale of these rights is determined by
allocating the total cost of mortgage loans to be sold to the mortgage servicing
rights and the loans (without the mortgage servicing rights), based on their
relative fair values. This gain is deferred and amortized over the expected life
of the loan, unless the loans are sold at which time the deferred gain is taken
into income.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their outstanding principal balance, less undisbursed
portion, unearned interest and allowance for loan losses. Loan origination fees
and costs are deferred and amortized over the estimated life of the loans as an
adjustment of yield using the interest method. Unearned interest on installment
loans is recognized as income under a method which approximates the interest
method. Interest on loans not made on a discounted basis is credited to income
based on the loan principal outstanding at stated interest rates.
Recognition of interest is discontinued when loans are 90 days or more in
arrears on principal and interest, except for well collaterized real estate
loans where recognition is discontinued when other factors indicate that
collection of interest or principal is doubtful. Loans for which the recognition
of interest income has been discontinued are designated as non-accruing. Such
loans are not reinstated to accrual status until interest is received on a
current basis and other factors indicative of doubtful collection cease to
exist.
The Group provides allowances for estimated loan losses based on an evaluation
of the risk characteristics of the loan portfolio, loss experience, economic
conditions and other pertinent factors. Loan losses are charged and recoveries
are credited to the allowance for loan losses.
The Group measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the observable market price of the loan or the fair
value of the collateral, if the loan is collateral dependent. Loans are
individually evaluated for impairment, except large groups of small balance,
homogeneous loans that are collectively evaluated for impairment and for leases
and loans that are recorded at fair value or at the lower of cost or market. The
Group measures for impairment all commercial loans over $250,000. The portfolios
of mortgage and consumer loans and auto loans and leases are considered
homogeneous and are evaluated collectively for impairment.
SALE OF THE MORTGAGE SERVICING PORTFOLIO
In early fiscal 1998, the Group sold its mortgage servicing portfolio to a local
mortgage banking institution. At the date of this transaction, the underlying
principal balance on the mortgages in the servicing portfolio and related
servicing rights amounted to approximately $550,000,000 and $6,121,000,
respectively. The Group recorded a net gain of $3.5 million (after restatement)
on this transaction. The mortgage servicing portfolio had generated servicing
fees of $713,000 before its was sold.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of each type of asset. Amortization of leasehold improvements is
computed using the straight-line method over the terms of the leases or
estimated useful lives of the improvements, whichever are shorter.
Long-lived assets and identifiable intangibles related to those assets to be
held and used, except for financial instruments, and mortgage and other
servicing rights, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There were no impairment losses in fiscal years 2000, 1999 and
1998.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of the related loan
balance or its fair value at the date of foreclosure. At the time properties are
acquired in full or partial satisfaction of loans, any excess of the loan
balance over the estimated fair market value of the property is charged against
the allowance for loan losses. The carrying value of these properties
approximates the lower of cost or fair value less estimated cost to sell. Any
excess of the carrying value over the estimated fair market value is charged to
operations.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Group follows the specific criteria established by Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" to determine when control
has been surrendered in a transfer of financial assets. As such, it recognizes
the financial assets and servicing assets it controls and the liabilities its
has incurred. At the same time, it derecognizes financial assets when control
has been surrendered and liabilities when they are extinguished.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
INCOME TAXES
The Group follows an asset and liability approach to the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Group's financial statements or tax returns.
Deferred income tax assets and liabilities are determined for differences
between financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future. The computation is based
on enacted laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
STOCK OPTION PLAN
As further discussed in Note 3 to the consolidated financial statements, the
Group has three stock options plans. These plans offer key officers and
employees an opportunity to purchase shares of the Group's common stock. The
Group follows the intrinsic value-based method of accounting for measuring
compensation expense, if any. Compensation expense is generally recognized for
any excess of the quoted market price of the Group's stock at measurement date
over the amount an employee must pay to acquire the stock.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances, except for
those resulting from investments by owners and distributions to owners. In
Oriental's case, in addition to net income, other comprehensive income results
from the changes in the unrealized gains and losses on securities that are
classified as available-for-sale. The presentation of comprehensive income
required by this statement is set forth in the statement of changes in
stockholders' equity and of comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS:
ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING
ACTIVITIES
This SFAS 133, "Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities" becomes effective for all fiscal quarters beginning
after June 15, 2000. In June 2000, the Board issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities", this
statement amends the accounting and reporting standards of SFAS 133 for certain
derivatives instruments and certain hedging activities.
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments and for hedging activities and requires all derivatives to be
measured at fair value and to be recognized as either assets or liabilities in
the statement of financial position. Under this Standard, derivatives used in
hedging activities are to be designated into one of the following categories:
(a) fair value hedge; (b) cash flow hedge; and (c) foreign currency exposure
hedge. The changes in fair value (that is, gains and losses) will be either
recognized as part of earnings in the period when the change occurs or as a
component of other comprehensive income (outside earnings) depending on their
intended use and resulting designation. Management is in the process of
determining the impact of SFAS 133 on the Group.
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The FASB recently issued SFAS 140 "Accounting for transfers and servicing of
Financial Assets and Extinguishments of liabilities, a replacement of SFAS 125."
SFAS 140 revises the standards for accounting for secuirity transactions and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. SFAS 140 is effective on transactions ocurring after March 31,
2000. Management has not yet determined the impact, if any, of this statement in
the Group's financial statements.
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform with the presentation of the 2000 consolidated
financial statements.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In August 1998 an employee of Oriental admitted that he had been involved in a
scheme to embezzle funds belonging to Oriental for the previous three (3) years.
He admitted that he had been manipulating and altering various books and records
of the company and intentionally failing to perform reliable account analyses
and reconciliations. After firing the employee, the company began an internal
investigation assisted by its legal counsel and reported the activity to
appropriate regulatory authorities and its fidelity insurance carrier.
During the course of the investigation in fiscal 1999, Oriental discovered that
certain other employees had altered various books and records of the company and
failed to perform appropriate reconciliations. It also reported those items to
the regulatory authorities and to the fidelity insurance carrier. As a result of
this discovery, the company broadened the scope of its internal investigation
and, in May 1999, engaged its independent accountants to assist it.
Based upon the additional information discovered in the investigation, Oriental
filed initial claims with its fidelity insurance carrier for losses in the
aggregate amount of $488,194 during the second quarter of fiscal 2000. During
the third quarter of fiscal 2000, Oriental reported its discovery of additional
alterations of records and deletions of reconciliation items to the regulatory
authorities and its fidelity insurance carrier and then filed with the fidelity
insurance carrier claims for recovery of losses relating to these irregularities
in the amount of approximately $9.0 million.
In its interim report on Form 10-Q for the third quarter of 2000, Oriental
reported that it had discovered those $9.5 million (5.8 million net of taxes) of
losses resulting from the dishonest and fraudulent acts and omissions of several
former employees. In addition, it stated that, in consultation with legal
counsel, it had concluded that the losses were covered by Oriental's fidelity
insurance policy and recovery was considered highly probable.
In July 2000, Oriental's fidelity insurance carrier notified Oriental that it
was denying all of the filed claims. This denial triggered Oriental's decision
to restate its financial statements. Thereafter, Oriental continued its
investigation primarily to determine how the losses should be allocated to prior
financial statements. Oriental filed a legal action against the insurance
carrier as explained on Note 15 to the consolidated financial statements.
In October 2000, Oriental announced that it had completed the investigation and
identified total charges of $12.7 million, net of tax effect. This amount
includes $900,000 (net of tax) loss relating to the contract to sell the
consumer loans and lease portfolio. With the assistance of its independent
accountants, Oriental determined that $9.6 million (net of tax) of the $12.7
million charges was related to events in prior fiscal years and thus would
require restatement of previous financial statements. The remaining $3.1 million
($12.7 million less the $9.6 million restatement, both net of tax) was charged
in the fiscal year 2000. A significant portion ($5.8 million, net of taxes) of
the $9.6 million requiring restatement is related to the previously disclosed
losses arising from the former employees' actions, and affects fiscal year 1998
and prior periods.
The $9.6 million charges are recognized as follows, net of tax:
- $5.6 million against beginning retained earnings for fiscal 1998.
- $2.1 million against earnings of fiscal 1998.
- $1.9 million against earnings of fiscal 1999.
Furthermore, it was determined that additional closing adjustments of $2.1
million (net of tax) were necessary, though not related to the matter discussed
above. Approximately $1.8 million, net of tax, of these additional items affects
fiscal year 2000. Fiscal 1999 earnings were affected by $224,000, a credit of
$53,000 was made to 1998 earnings, and a charge of $178,000 was made against the
beginning retained earnings of fiscal year 1998 (all items net of tax).
Additionally, a $2.2 million favorable tax adjustment related to fiscal year
1999 was also identified. Therefore, the restatement (net of tax) to previously
issued financial statements will be:
- $5.8 million against beginning retained earnings for fiscal 1998.
- $2 million against earnings of fiscal 1998.
- A favorable $58,000 increase to fiscal year 1999 earnings.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The effect of the restatement on the Consolidated Statement of Income for fiscal
years 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -----------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
TOTAL INTEREST INCOME (1) $113,775 $107,809 $101,307 $96,940
TOTAL INTEREST EXPENSE 64,840 64,775 58,139 58,046
-------- -------- -------- -------
NET INTEREST INCOME 48,935 43,034 43,168 38,894
-------- -------- -------- -------
Provision for loan losses 15,095 14,473 9,545 9,545
-------- -------- -------- -------
NET CREDIT INCOME 33,840 28,561 33,623 29,349
-------- -------- -------- -------
NON-INTEREST INCOME:
Mortgage banking activities 5,891 9,124 4,485 8,563
Gain on sale of servicing assets - - 2,707 3,503
All other non-interest income 23,308 24,829 15,178 15,178
-------- -------- -------- -------
TOTAL NON-INTEREST INCOME 29,199 33,953 22,370 27,244
======== ======== ======== =======
NON-INTEREST EXPENSES:
Compensation and benefits 15,057 15,158 15,071 15,071
Other non-interest expenses 2,979 5,515 2,999 6,900
All other non-interest expenses 14,937 14,937 12,663 12,663
-------- -------- -------- -------
TOTAL NON-INTEREST EXPENSE 32,973 35,610 30,733 34,634
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 30,066 26,904 25,260 21,959
Income taxes 3,418 200 3,850 2,563
======== ======== ======== =======
NET INCOME $26,648 $26,704 $21,410 $19,396
======== ======== ======== =======
INCOME PER COMMON SHARE:
Basic $2.02 $2.02 $1.62 $1.46
-------- -------- -------- -------
Diluted $1.97 $1.93 $1.57 $1.39
-------- -------- -------- -------
</TABLE>
(1) Amounts include reclassification of revenues from interest income to
mortgage banking activities which management believes better reflects the nature
of the revenues. Amounts reclassified in 1999 and 1998 amounted to $5.0 million
and $4.1 million, respectively.
Additionally, the calculation of income per common share for 1999 and 1998 was
restated to reflect the inclusion of dilutive potential common shares.
NOTE 3 - STOCKHOLDERS' EQUITY:
STOCK SPLITS
Stock splits were retroactively reflected for all periods presented in the
accompanying Consolidated Statements of Financial Position and of Changes in
Stockholder's Equity and of Comprehensive Income and for all share and per share
amounts.
On August 18, 1998, the Group declared a four-for-three (33.3%) stock split on
common stock held by registered shareholders as of September 30, 1998. As a
result, approximately 3,385,000 shares of common stock were distributed on
October 15, 1998. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered shareholders
as of September 30, 1997. Approximately 2,012,000 shares of common stock were
distributed on October 15, 1997 as result of this stock split.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
TREASURY STOCK
As of June 30, 2000, the Board of Directors (the "Board") had authorized
management to repurchase up to 1,417,000 shares. The authority granted by the
Board of Directors does not require the Group to repurchase any shares. The
repurchase of shares will be made in the open market at such times and prices as
market conditions shall warrant, and in compliance with the terms of applicable
federal and Puerto Rico laws and regulations. The activity of common shares held
by the Group's treasury for the years ended June 30, 2000 and 1999 is set forth
below.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------
2000 1999
--------------------------------- ----------------------------------
DOLLAR DOLLAR
SHARES AMOUNT SHARES AMOUNT
------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Beginning of period 903.8 $23,401 295.3 $6,199
Common shares repurchased 203.9 3,715 608.5 17,202
------------- ---------------- --------------- --------------
END OF PERIOD 1,107.7 $27,116 903.8 $23,401
============= ================ =============== ==============
</TABLE>
STOCK OPTIONS
The Group has three stock options plans, the 1988, 1996 and the 1998 Incentive
Stock Option Plans ("The Plans"). These plans offer key officers and employees
an opportunity to purchase shares of the Group's common stock. The Compensation
Committee of the Board of Directors has sole authority and absolute discretion
as to the number of stock options to be granted, their vesting rights, and the
options exercise price. The Plans provide for a proportionate adjustment in the
exercise price and the number of shares that can be purchased in case of a stock
split, reclassification of stock, and a merger or reorganization. Stock options
vest upon completion of specified years of service. In the case of the stock
options granted under the 1996 and 1998 Plan, the contracts include provisions
that would accelerate the vesting of the options upon the attainment of certain
financial performance goals. The activity in outstanding options for the year
ended June 30, 2000 and 1999, is set forth below:
<TABLE>
<CAPTION>
2000 1999
------------------------------------- ------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
Beginning of period 1,290,815 $ 15.97 1,150,253 $10.34
Options granted 446,834 19.13 396,000
26.17
Options exercised (66,321) 8.37 (204,782) 4.24
Options forfeited (148,571) 16.26 (50,656) 15.72
-------------- ----------------- ---------------- --------------
END OF PERIOD 1,522,757 $17.20 1,290,815 $15.97
=============== ================== ================ ==============
</TABLE>
The following table summarizes the range of exercise prices and the weighted
average remaining contractual life of the options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE CONTRACT EXERCISE
STOCK OPTION PLAN OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
----------------------------- ------------------ ------------- --------------- ------------------ ---------------
<C> <C> <C> <C> <C> <C>
1988 PLAN 236,036 $5.78 1.0 116,304 $5.35
1996 PLAN 949,887 19.35 7.5 35,839 11.10
1998 PLAN 336,834 19.13 9.1 - -
------------------ ------------- --------------- ------------------ ---------------
1,522,757 $17.20 6.90 152,143 $6.71
================== ============= =============== ================== ===============
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
As described in Note 1, the Group uses the intrinsic value based method to
account for stock options. Under this method, the stock options compensation
recorded in fiscal 2000 amounted $289,000 (1999 - $100,000; 1998 - $0). The
following table presents the Group's net income and earnings per common share
assuming the Group had used the fair value method to recognize compensation
expenses with respect to the options:
<TABLE>
<CAPTION>
2000 1999 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
COMPENSATION AND BENEFITS:
Reported $15,698 $15,158 $15,071
--------------- ---------------- ----------------
Pro forma $16,534 $15,845 $15,436
--------------- ---------------- ----------------
NET INCOME:
Reported $19,566 $26,704 $19,396
--------------- ---------------- ----------------
Pro forma $18,730 $26,017 $19,031
--------------- ---------------- ----------------
BASIC EARNINGS PER SHARE:
Reported $1.34 $ 2.02 $1.46
--------------- ---------------- ----------------
Pro forma $1.28 $ 1.97 $1.44
--------------- ---------------- ----------------
DILUTED EARNINGS PER SHARE:
Reported $1.31 $1.93 $1.39
--------------- ---------------- ----------------
Pro forma $1.24 $1.88 $1.36
--------------- ---------------- ----------------
</TABLE>
The fair value of each option granted in fiscal years 2000, 1999 and 1998 was
estimated using the Black-Scholes option pricing model with the following
assumptions: (1) - The market price of the stock at the date of fiscal 2000,
1999 and 1998 grants was $22.75, $30.38 and $16.99. The weighted average
exercise price of the option was $19.13, $26.17 and $16.99. In the case of
fiscal 1999 and 1998 grants, the price of the options granted equaled the quoted
market price of the stock. (2) - The expected option term is 7 years. (3) - The
expected volatility is 32% for options granted in fiscal 2000 (1999 -31%, 1998
-30%). (4) - The expected Dividend Yield - 2.64% for options granted in fiscal
2000 (1999 - 1.98%, 1998 -3.32%). (5) - The risk-free interest rate is 5.79% for
options granted in fiscal 2000 (1999 - 4.93%, 1998 - 6.12%). (6) - The weighted
average fair value of the options granted in 2000 was $8.80 (1999 - $12.04; 1998
- $5.92).
LEGAL SURPLUS
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of the Bank's net income for the year be transferred to capital surplus
until such surplus equals the greater of 10% of total deposits or paid-in
capital. At June 30, 2000, legal surplus amounted to $10,578,000 (1999 -
$8,673,000). The amount transferred to the legal surplus account is not
available for payment of dividends to shareholders. In addition, the Federal
Reserve Board has issued a policy statement that bank holding companies should
generally pay dividends only from current operating earnings.
PREFERRED STOCK
In May 1999, the Group issued 1,340,000 shares of its 7.125% Noncummulative
Monthly Income Preferred Stock, Series A at $25 per share. The Group generated
$32,300,000 in net proceeds from this issue for general corporate purposes. The
Series A Preferred Stock has the following characteristics: (1) Annual dividends
of $1.78125 per share, payable monthly, if declared by the board of directors.
Missed dividends are not cumulative, (2) Redeemable at the Group's option
beginning on May 30, 2004, (3) No mandatory redemption or stated maturity date
and (4) Liquidation value of $25 per share.
REGULATORY CAPITAL
The Group is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Group's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Group's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Group to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that, as of June 30, 2000, Oriental
meets all capital adequacy requirements to which it is subject.
As of March 31, 2000, the most recent notification from the FDIC, dated August
2000, categorized the Group as a "well capitalized institution" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Group must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that date that management believes have changed the
institution's category. The Group's and the Bank's actual capital amounts and
ratios of total risk-based capital, Tier 1 risk-based capital and Tier 1 capital
at June 30, were as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- -------------------------- -----------------------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ----------- ----------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
GROUP RATIOS
AS OF JUNE 30, 2000
Tier I Capital (to Average Assets) $134,339 7.49% $71,717 4.00% $89,646 5.00%
Tier I Risk-Based (to Risk-Weighted Assets) $134,339 29.29% $18,349 4.00% $27,523 6.00%
Total Capital (to Risk-Weighted Assets) $140,087 30.54% $36,697 8.00% $45,871 10.00%
AS OF JUNE 30, 1999
Tier I Capital (to Average Assets) $127,986 8.30% $61,710 4.00% $77,138 5.00%
Tier I Risk-Based (to Risk-Weighted Assets) $127,986 22.95% $22,308 4.00% $33,461 6.00%
Total Capital (to Risk-Weighted Assets) $134,979 24.21% $44,595 8.00% $55,744 10.00%
BANK RATIOS
AS OF JUNE 30, 2000
Tier I Capital (to Average Assets) $125,663 7.02% $71,565 4.00% $89,456 5.00%
Tier I Risk-Based (to Risk-Weighted Assets) $125,663 27.55% $18,247 4.00% $27,371 6.00%
Total Capital (to Risk-Weighted Assets) $131,379 28.80% $36,495 8.00% $45,618 10.00%
AS OF JUNE 30, 1999
Tier I Capital (to Average Assets) $127,986 8.29% $61,729 4.00% $77,161 5.00%
Tier I Risk-Based (to Risk-Weighted Assets) $127,986 22.93% $22,330 4.00% $33,495 6.00%
Total Capital (to Risk-Weighted Assets) $134,986 24.19% $44,640 8.00% $55,800 10.00%
</TABLE>
NOTE 4 - INVESTMENTS
MONEY MARKET INVESTMENTS:
At June 30, the Group's money market investments were comprised of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Securities purchased under agreements to resell $ - $24,350
Time deposits with other banks 1,350 -
Money market accounts and other short-term investments 22,161 3,523
------------------ -------------------
$23,511 $27,873
================== ===================
</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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, estimated fair value, and
weighted average yield of the securities owned by the Group at June 30, 2000 and
1999, were as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 (IN THOUSANDS)
----------------- ----------------- --------------- ---------------- ---------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSSES VALUE YIELD
----------------- ----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE AND FHLB STOCK
US Treasury securities $87,710 $3 $4,979 $82,734 5.18%
US Government agencies securities 104,482 - 3,842 100,640 6.81%
Other debt securities 4,417 - 66 4,351 8.32%
PR Government securities 465 5 19 451 6.19%
CMOs 212 - - 212 5.78%
FNMA and FHLMC certificates 56,743 100 99 56,744 8.00%
GNMA certificates 37,875 154 261 37,768 7.62%
----------------- ----------------- --------------- ---------------- ---------------
291,904 262 9,266 282,900 6.65%
FHLB stock 11,146 - - 11,146 6.27%
----------------- ----------------- --------------- ---------------- ---------------
$303,050 $262 $9,266 $294,046 6.66%
----------------- ----------------- --------------- ---------------- ---------------
HELD-TO-MATURITY
PR Government securities 3,551 3 24 3,530 7.89%
US Government agencies securities 9,993 - 457 9,536 6.46%
CMOs 110,967 - 6,316 104,651 6.52%
Other debt securities 4,864 - - 4,864 8.32%
FNMA and FHLMC certificates 295,039 54 11,601 283,492 6.61%
GNMA certificates 373,070 469 8,761 364,778 7.19%
----------------- ----------------- --------------- ---------------- ---------------
797,484 526 27,159 770,851 6.88%
----------------- ----------------- --------------- ---------------- ---------------
$1,100,534 $788 $36,425 $1,064,897 6.82%
================= ================= =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999 (IN THOUSANDS)
----------------- ----------------- --------------- --------------- ---------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSSES VALUE YIELD
----------------- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE AND FHLB STOCK
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%
FNMA and FHLMC certificates 125,584 40 2,653 122,971 6.67%
GNMA certificates 60,128 871 745 60,254 6.93%
----------------- ----------------- --------------- --------------- ---------------
387,035 1,464 8,605 379,894 6.47%
FHLB stock 13,257 - - 13,257 6.74%
----------------- ----------------- --------------- --------------- ---------------
400,292 1,464 8,605 393,151 6.48%
----------------- ----------------- --------------- --------------- ---------------
HELD-TO-MATURITY
PR Government securities 3,563 - 33 3,530 7.40%
CMOs 119,497 - 2,365 117,132 6.67%
Other debt securities 4,863 - - 4,863 8.58%
FNMA and FHLMC certificates 200,708 321 4,404 196,625 6.70%
GNMA certificates 179,449 796 3,161 177,084 6.59%
----------------- ----------------- --------------- --------------- ---------------
508,080 1,117 9,963 499,234 6.68%
----------------- ----------------- --------------- --------------- ---------------
$908,372 $2,581 $18,568 $892,385 6.59%
================= ================= =============== =============== ===============
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The amortized cost and estimated fair value of the Group's investment securities
at June 30, 2000, 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>
Within 1 year $ 49 $ 50 $ 9,993 $ 9,536 $ 10,042 $9,586
After 1 to 5 years 3,915 3,860 1,063 1,068 4,978 4,928
After 5 to 10 years 188,852 180,111 20,621 20,599 209,473 200,710
After 10 years 99,088 98,879 765,807 739,648 864,895 838,527
FHLB stock - - - - 11,146 11,146
----------------- --------------- ----------------- --------------- ----------------- ---------------
$291,904 $282,900 $797,484 $770,851 $1,100,534 $1,064,897
================= ================ ================= =============== ================= ===============
</TABLE>
The category of securities held-to-maturity due after ten years includes
$49,826,000 (1999 - $52,610,000), of certain Puerto Rico GNMA serial
certificates with an average expected life of 4 to 6 years.
Proceeds from the sale of investment securities available-for-sale during fiscal
2000 totaled $104,402,000 (1999 - $242,121,000; 1998 - $103,864,000). Gross
realized gains and losses on those sales during fiscal 2000 were $1,249,000 and
$47,000, respectively (1999 -$10,515,000 and $55,000; 1998 - $1,180,000 and
$150,000).
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 at June
30, 2000 and 1999. For the years ended on June 30, 2000 and 1999, the fair value
of these investments represented 15% and 19% of stockholders' equity,
respectively. At June 30, 2000, the amortized cost and fair value of investments
from the Government of Puerto Rico were approximately $17,686,000 (1999 -
$23,723,000) and $17,652,000 (1999 - $24,102,000), respectively. At June 30,
2000, $13,670,000 (1999 -$18,456,000) of these investments was an AAA-rated
Puerto Rico municipal bond collateralized with mortgage-backed securities.
After a thorough evaluation of the Group's investment portfolio, the Group
transferred available-for-sale securities (at fair value) of $263,793,000 (1999
- $405,526,000) to the held-to-maturity portfolio. The unrealized net holding
loss on these securities at the date of the transfer of $4,858,000 (1999 -
$4,571,000) remained as part of accumulated other comprehensive income within
stockholders' equity and is being amortized over the remaining life of the
securities as an adjustment to yield.
TRADING SECURITIES:
A summary of trading securities owned by the Group at June 30, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
US Treasury securities $42,734 $ 3,527
PR Government securities 13,513 -
Mortgage-backed securities 6,058 11,278
CMO residuals, interest only 2,138 2,502
---------------- -----------------
$64,443 $17,307
================= ==================
</TABLE>
At June 30, 2000, the Group's trading portfolio weighted average yield was 7.49%
(1999 - 7.79%).
NOTE 5 - PLEDGED ASSETS:
At June 30, 2000, residential mortgage loans amounting to $254,312,000 (1999 -
$100,509,000), and investments securities totaling $1,062,000,000 (1999 -
$737,448,000) were pledged to secure public fund deposits, investment securities
sold under agreements to repurchase, letters of credit, advances and borrowings
from the FHLB, term notes and interest rate swap agreements.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
NOTE 6 - 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 residential mortgage loans and personal loans. The
composition of the Group's loan portfolio at June 30, was as follows:
<TABLE>
<CAPTION>
( In thousands)
-------------------------------------------------
2000 1999
-------------------------------------------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $331,150 $257,936
Non-residential real estate loans 4,974 6,531
Home equity loans and secured personal loans 40,306 16,278
-------------------------------------------------
376,430 280,745
Less: Deferred loan fees, net (2,103) (1,302)
-------------------------------------------------
374,327 279,443
-------------------------------------------------
OTHER LOANS:
Commercial and auto loans 24,117 10,554
Personal consumer loans and credit lines 19,698 122,213
Financing leases, net of unearned interest 8,785 110,297
-------------------------------------------------
52,600 243,064
-------------------------------------------------
LOANS RECEIVABLE 426,927 522,507
Allowance for loan losses (6,837) (9,002)
-------------------------------------------------
LOANS RECEIVABLE, NET 420,090 513,505
Loans held-for-sale 180,788 55,206
-------------------------------------------------
TOTAL LOANS, NET $600,878 $568,711
=================================================
</TABLE>
At June 30, 2000, residential mortgage loans held-for-sale amounted to
$13,302,000 (1999 - $55,206,000). All mortgage residential loans originated and
sold during fiscal 2000 were sold based on pre-established commitments or at
market values. In fiscal 2000, the Group recognized gains of $5,891,000, (1999 -
$9,124,000; 1998 - $8,563,000) in these sales which are included in the
statement of income as part of mortgage banking activities.
On July 7, 2000, the Group sold its non-delinquent unsecured personal loan and
lease portfolio to a local financial institution. At June 30, 2000 these loans
were under a contract to sell, thus they were valued by reference to the
contracted price. A loss of $1.2 million was recorded in fiscal 2000 in
connection with this contract.
At June 30, 2000, loans on which the accrual of interest has been discontinued
amounted to approximately $16,875,000 (1999 -$19,542,000). The gross interest
income that would have been recorded in fiscal 2000 if non-accrual loans had
performed in accordance with their original terms amounted to approximately
$1,692,000 (1999 - $2,041,000; 1998 - $2,138,000).
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
The Group's management has the responsibility for establishing the allowance for
loan losses and for determining that the allowance is adequate to absorb
probable and inherent losses in the loan portfolio at each reporting date. For
this purpose, management employs a systematic methodology to estimate the
allowance, which incorporates quantitative and qualitative factors. Management
documents the policies, procedures and assumptions surrounding the determination
of the allowance at least on a quarterly basis. The principal factors used to
determine the level of allowance for loan losses are the Group's historical and
current credit loss experience. These factors are combined with the qualitative
factors such as the growth of the loan portfolio, concentrations of credit
(e.g., local industries, etc.) that might affect loss experience across one or
more components of the portfolio, effects of any changes in lending policies and
procedures, including underwriting standards, collections and credit scoring
systems, as well as the general economic environment in the market. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Group's allowance for loan losses as well as the
methodology followed. Such agencies may require the Group to recognize changes
to the allowance based on their judgment of information available at the time of
their examinations.
These factors are applied in the context of GAAP and the Joint Interagency
Guidance on the importance of depository institutions having prudent,
conservative, but not excessive loan loss allowances that fall within an
acceptable range of estimated losses. While management uses available
information in estimating possible loan losses, future changes to the allowance
may be necessary based on factors beyond the Group's control, such as factors
affecting general economic conditions in Puerto Rico. The changes in the
allowance for loan losses for the last three fiscal years ended June 30, were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- ------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 9,002 $ 5,658 $ 5,408
Provision for loan losses 8,150 14,473 9,545
Loans charged-off (13,422) (13,499) (11,484)
Recoveries 3,107 2,370 2,189
--------------------- -------------------- ------------------
BALANCE AT END OF PERIOD $ 6,837 $ 9,002 $ 5,658
--------------------- -------------------- ------------------
</TABLE>
As described in Note 1, the Group evaluates all loans, some individually and
others as homogeneous groups, for purposes of determining impairment. At June
30, 2000 and 1999, the Group determined that no specific impairment reserve was
required for those loans evaluated for impairement.
CONCENTRATION OF RISK:
Substantially all loans in the Group are to residents in Puerto Rico, therefore,
it is susceptible to events affecting Puerto Rico's economy. The vast majority
of the loans are well collateralized, thus reducing the risk of potential
losses.
NOTE 7 - NON-INTEREST EARNING ASSETS
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
USEFUL LIFE ---------------------------------------
(YEARS) 2000 1999
----------------- ------------------- ----------------
<S> <C> <C> <C>
Land - $ 1,348 $ 1,348
Buildings and improvements 40 12,150 12,239
Leasehold improvements 5 - 10 3,903 2,921
Furniture and fixtures 3 - 7 5,395 4,222
EDP and other equipment 3 - 7 13,503 12,139
------------------- ----------------
36,299 32,869
Less: Accumulated depreciation and amortization (14,593) (11,060)
------------------- ----------------
$21,706 $21,809
=================== ================
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment for the year ended June
30, 2000 totaled $3,767,000 (1999 - $2,894,000; 1998 - $2,498,000). These are
included in the statement of income as part of occupancy and equipment expenses.
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS:
Accrued interest receivable at June 30, consists of $4,367,000 from loans (1999
- $4,096,000) and $9,118,000 (1999 - $11,406,000) from investments.
Other assets at June 30, include the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Prepaid expenses and other assets $ 4,844 $ 5,622
Tax refund claim 7,188 7,057
Deferred tax asset 7,369 4,251
Accounts receivable and insurance claims, net 4,012 2,625
Other repossessed property 518 485
--------------- --------------
$23,961 $ 20,040
================ ===============
</TABLE>
NOTE 8 - DEPOSITS AND RELATED INTEREST:
At June 30, 2000, the weighted average interest rate of the Group's deposits was
4.75% (1999 - 4.68%) considering non-interest bearing deposits of $31,568,000
(1999 - $40,133,000). Refer to the Consolidated Statement of Financial Condition
for the composition of deposits at June 30, 2000 and 1999. Interest expense for
the last three fiscal years ending June 30, is set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------------
2000 1999 1998
------------------ --------------- ---------------
<S> <C> <C> <C>
NOW accounts and saving deposits $ 3,059 $ 2,920 $ 2,781
Certificates of deposit and IRA accounts 28,364 25,865 23,187
------------------ --------------- ---------------
$31,423 $28,785 $ 25,968
================== =============== ===============
</TABLE>
At June 30, 2000 time deposits in denominations of $100,000 or higher amounted
to $258,848,000, (1999- $242,680,000) including brokered certificates of deposit
of $101,129,000, (1999- $92,821,000) at a weighted average rate of 6.61%, (1999-
5.25%) and public funds certificates of deposit from various local government
agencies, collateralized with investment securities, of $65,547,000, (1999 -
$72,254,000) at a weighted average rate of 6.22% (1999 - 5.00%).
Scheduled maturities of certificates of deposit and IRA accounts at June 30,
2000 are as follow:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------
BELOW $100,000 OVER $100,000 TOTAL
------------------- ---------------- ----------------
<S> <C> <C> <C>
Within one year:
Three (3) months or less $58,944 $177,771 $236,715
Over 3 months through 1 year 90,711 72,911 163,622
------------------- ---------------- ----------------
149,655 250,682 400,337
Over 1 through 3 years 78,906 4,259 83,165
Over 3 years 92,229 12,200 104,429
------------------- ---------------- ----------------
$320,790 $267,141 $587,931
=================== ================ ================
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
NOTE 9 - BORROWINGS:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At June 30, 2000, securities underlying agreements to repurchase were delivered
to, and are being held by, the counterparties with whom the repurchase
agreements were transacted. The counterparties have agreed to resell to the
Group the same or similar securities at the maturity of the agreements.
At June 30, 2000, substantially all securities sold under agreements to
repurchase mature within 180 days. The following securities were sold under
agreements to repurchase at June 30:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------------------------
2000 1999
------------------------------------ -----------------------------------
REPURCHASE MARKET VALUE REPURCHASE MARKET VALUE
LIABILITY OF COLLATERAL LIABILITY OF COLLATERAL
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
US Treasury securities $85,695 $85,141 $65,268 $65,181
US Government agencies securities 25,911 27,138 21,337 21,309
GNMA certificates 328,967 331,709 126,864 126,695
FNMA certificates 169,126 174,370 173,315 173,084
FHLMC certificates 108,642 112,862 99,664 99,531
Collateralized mortgage obligations 98,152 102,320 107,752 107,608
CMO residuals, interest only - - 2,026 2,024
--------------- ----------------- --------------- ---------------
$816,493 $833,540 $596,226 $595,432
=============== =============== =============== ==============
</TABLE>
At June 30, 2000, the weighted average interest rate of the Group's repurchase
agreements was 6.39% (1999 - 4.89%) and included agreements with interest
ranging from 5.75% to 7.15%. The following summarizes significant data on
securities sold under agreements to repurchase for fiscals 2000 and 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Average daily aggregate balance outstanding $802,556 $510,049
------------------- -----------------
Maximum amount outstanding at any month-end $816,493 $596,226
------------------- -----------------
Weighted average interest rate during the year 5.77% 5.08%
------------------- -----------------
</TABLE>
ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK
At June 30, advances and borrowings from the Federal Home Loan Bank of New York
(FHLB) consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------
TYPE 2000 1999 MATURITY DATE INTEREST RATE DESCRIPTION
-------------------- --------------- ------------- -------------------------- ------------------------------------------------
<S> <C> <C> <C> <C>
ADVANCE $5,000 $ - July 2000 Fixed - 6.16%
ADVANCE 10,000 - July 2000 Fixed - 6.19%
ADVANCE 20,000 - August 2000 Fixed - 6.24%
ADVANCE 15,000 - August 2000 Fixed - 6.29%
ADVANCE 15,000 - April 2001 Floating due quarterly - 6.19%
ADVANCE 5,000 - November 2001 Fixed - 7.18%
Advance - 8,400 Demand Floating due daily - 5.98%
ADVANCE - 10,000 September 1999 Fixed - 5.71%
ADVANCE - 10,000 September 1999 Fixed - 5.85%
ADVANCE - 10,000 July 1999 Fixed - 5.07%
ADVANCE - 20,000 October 2002 Fixed - 5.42%
BORROWING - 10,000 September 1999 Fixed - 6.03%
--------------- --------------
$70,000 $68,400
=============== =============
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
Advances are received from the FHLB under an agreement whereby Oriental is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. At June 30, 2000 and 1999,
these advances and borrowings were secured by mortgage loans and investment
securities. Also, at June 30, 2000, the Group has an additional borrowing
capacity with the FHLB of $102 million (1999 - $149 million).
TERM NOTES AND BONDS PAYABLE
At June 30, term notes and bonds payable consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------
TYPE 2000 1999 MATURITY DATE INTEREST RATE DESCRIPTION
----------------- -------------- -------------- ----------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Term Note $ - $10,000 December 1999 Floating due quarterly - 4.10% in 1999 (a) (c)
Term Note - 10,000 January 2000 Floating due quarterly - 4.10% in 1999 (a) (c)
Term Note 6,500 6,500 December 2000 Floating due quarterly - 5.75% (1999 - 4.30%) (b) (c)
Term Note 20,000 20,000 March 2001 Floating due quarterly - 5.69% (1999 - 4.48%) (b) (c)
Term Note 10,000 10,000 September 2001 Floating due quarterly - 6.06% (1999 - 4.78%) (b) (c)
Term Note 30,000 30,000 September 2001 Floating due quarterly - 5.82% (1999 - 4.58%) (b) (c)
Term Note 5,000 5,000 December 2001 Floating due quarterly - 5.68% (1999 - 4.28%) (b) (c)
Term Note 15,000 15,000 March 2007 Floating due quarterly - 5.88% (1999 - 4.63%) (b) (c)
-------------- --------------
$86,500 $106,500
============== ==============
</TABLE>
(a) - Guaranteed by letters of credit from the FHLB.
(b) - Collateralized with investment securities.
(c) - The interest rate risk exposure on floating notes was hedged through the
interest rate risk management process discussed in Note 9.
UNUSED LINES OF CREDIT
The Group maintains various lines of credit with other financial institutions
from which funds are drawn as needed. At June 30, 2000, the Group's total
available funds under these lines of credit totaled $62,960,000 (1999 -
$53,000,000). At June 30, 2000 and 1999, there was no balance outstanding under
these lines of credit.
CONTRACTUAL MATURITIES
At June 30, 2000, the contractual maturities of securities sold under agreements
to repurchase, advances and borrowings from the FHLB, and bond payable and term
notes by fiscal year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------
ADVANCES & TERM NOTES
REPURCHASE BORROWINGS AND BONDS
YEAR ENDING JUNE 30, AGREEMENTS FROM FHLB PAYABLE
-------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C>
2001 $766,493 $65,000 $26,500
2002 50,000 5,000 45,000
2007 - - 15,000
----------------- ---------------- ------------------
$816,493 $70,000 $86,500
================= ================ ==================
</TABLE>
NOTE 10 - 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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The Group's swaps and caps outstanding and their terms at June 30, are set forth
in the table below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
SWAPS:
Pay fixed swaps notional amount $100,000 $245,000
Weighted average pay rate - fixed 7.07% 5.66%
Weighted average receive rate - floating 6.76% 5.09%
Maturity in months 24 2 to 26
Floating rate as a percent of LIBOR 100% 85 to 100%
CAPS:
Cap agreements notional amount $250,000 $100,000
Cap rate 7.00% 6.50%
Current 90 day LIBOR 6.82% 5.29%
Maturity in months 23 4 to 15
</TABLE>
The agreements were entered into to convert short-term borrowings into fixed
rate liabilities for longer periods and provide protection against increases in
short-term interest rates. The amounts potentially subject to credit loss are
the net streams of payments under the agreements and not the notional principal
amounts. 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. All interest rate swap and caps at June 30, 2000 mature during
fiscal year 2002.
As part of its interest rate risk management, during fiscal 2000 the Group
closed certain interest rate swaps and caps agreements with notional value of
approximately $390,000,000. This transaction generated gains of approximately
$1,720,000, which are being amortized as an adjustment to yield over the
remaining original terms of the agreements.
The Group offers its customers certificates of deposit tied to the performance
of one of the following stock market indexes, Standard & Poor's 500, Dow Jones
Industrial Average and Russell 2000. 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 changes in
those indexes. Under the terms of the agreements, the Group will receive the
average increase in the month-end value of the corresponding index in exchange
for a semiannual fixed interest cost. At June 30, 2000, the notional amount of
these agreements totaled $132,975,000 (1999 - $79,815,000) at a weighted average
rate of 5.84% (1999- 5.81%).
The Group offers its customers certificates of deposit with high interest rates
and therefore uses interest rate swap agreements to lower the cost of these
deposits. Under the terms of the agreements the Group pays a floating rate (90
days LIBOR less a spread) and receives a fixed payment (the cost of the
certificates of deposit). These swaps mature in seven years with an option to
cancel after the third year. This option is at the counterparty's call. The
certificates of deposit are issued with this same option, the Group has the
right to call and consequently cancel the certificates of deposit. At June 30,
2000, the notional amount of these agreements totaled $40,000,000 (1999 - $0) at
a weighted average rate of 5.82% (1999- 0%). Of this amount, swaps with notional
amount of $16.2 million did not meet the criteria for hedge accounting. As of
June 30, 2000, the fair value of these swaps was ($173,000). This amount was
recorded in income in fiscal year 2000.
At June 30, 2000, the contractual maturities of interest rate swaps and caps by
fiscal year were as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-------------------------------------------------------------------------------
INTEREST EQUITY CERTIFICATES OF
YEAR ENDING JUNE 30, RATE INDEXED DEPOSIT TOTAL
-------------------- ---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
2001 $- $6,175 $- $6,175
2002 350,000 13,300 - 363,300
2003 - 21,750 - 21,750
2004 - 40,750 - 40,750
2005 - 51,000 - 51,000
2007 - - 40,000 40,000
---------------- --------------- ------------------ -----------------
$350,000 $132,975 $40,000 $522,975
================ =============== ================== =================
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
NOTE 11 - EMPLOYEE BENEFITS PLAN:
The Group has a cash or deferred arrangement profit sharing plan 401(k). Under
this plan, the Group contributes shares of its common stock to match individual
employee contributions up to $1,040. The plan is entitled to acquire and hold
qualified employer securities as part of its investment of the trust assets
pursuant to ERISA Section 407. During fiscal 2000 the Group contributed 6,519,
(1999 - 4,916; 1998 - 4,186), shares of its common stock with a market value of
approximately $124,269, (1999 - $119,000; 1998 - $153,000) at the time of
contribution. The Group's contribution becomes 100% vested once the employee
attains five years of participation in the plan.
NOTE 12 - RELATED PARTY TRANSACTIONS:
The Group grants loans to its directors, executive officers and to certain
related individuals or organizations in the ordinary course of business. These
do not involve more than the normal risk of collectibility or present other
unfavorable features. The movement and balance of these loans were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Balance at the beginning of period $2,835 $2,675
New loans 215 880
Payments (343) (720)
---------------- -----------------
BALANCE AT THE END OF PERIOD $2,707 $2,835
================ =================
</TABLE>
NOTE 13 - INCOME TAXES:
Under the Puerto Rico Internal Revenue Code, all companies are treated as
separate taxable entities and are not entitled to file consolidated returns. The
Group is subject to Puerto Rico income tax on all its income. The components of
income tax expense for the years ended June 30, are summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ------------------
<S> <C> <C> <C>
Current income tax expense $1,920 $2,011 $4,558
Deferred income tax benefit (1,812) (1,811) (1,995)
----------------- ---------------- ------------------
PROVISION FOR INCOME TAXES $108 $200 $2,563
================= ================ ==================
</TABLE>
The Group maintained an effective tax rate lower than the statutory rate of 39%
mainly due to the interest income arising from certain mortgage loans,
investments and mortgage-backed securities exempt for Puerto Rico income tax
purposes, net of expenses attributable to the exempt income. During fiscal 2000,
the Group generated tax-exempt interest income of $71,881,000 (1999 -
$49,458,000; 1998 - $38,971,000). Exempt interest relates mostly to interest
earned on obligations of the United States and Puerto Rico Governments and
certain mortgage-backed securities, including securities held by the Group's
International Banking Entity.
The reconciliation between the Puerto Rico income tax statutory rate and the
effective tax rate as reported for each of the last three fiscal years ended
June 30, follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- ---------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ------------ ------------ --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $7,673 39.0% $10,493 39.0% $ 8,564 39.0%
Decrease in rate resulting from:
Exempt interest income, net (8,588) (43.7) (7,867) (29.3) (5,786) (26.3)
Charges disallowed 1,023 5.2 - - - -
Other non-taxable items, net - - (2,426) (9.0) (215) (1.0)
------------ ------------ ------------ --------- -------------- ----------
PROVISION FOR INCOME TAXES $108 0.5% $ 200 0.7% $ 2,563 11.7%
============ ============ ============ ========= ============== ==========
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The components of the Group's
deferred tax asset and liability at June 30, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------------
2000 1999
---------------- ------------------
DEFERRED TAX ASSET:
<S> <C> <C>
Allowance for loan losses, net $2,666 $3,511
Deferred income 1,424 1,302
Net deferred loan origination fee 780 -
Other temporary differences 1,086 -
Unrealized loss on securities available-for-sale 1,413 107
---------------- ------------------
GROSS DEFERRED TAX ASSET 7,369 4,920
---------------- ------------------
DEFERRED TAX LIABILITY:
Net deferred loan origination costs - (154)
Other temporary differences - (515)
---------------- ------------------
GROSS DEFERRED TAX LIABILITY - (669)
---------------- ------------------
NET DEFERRED TAX ASSET $7,369 $4,251
================ ==================
</TABLE>
NOTE 14 - COMMITMENTS:
LOAN COMMITMENTS
At June 30, 2000, there was $12,555,000, (1999 - $9,923,000) of unused lines of
credit provided to individual customers and $1,250,000 in commitments to
originate loans (1999 - $10,000,000). Commitments to extend credit are
agreements to lend to customers as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and may require payment of a fee. Since the commitments may
expire unexercised, the total commitment amounts do not necessarily represent
future cash requirements. The Group evaluates each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Group upon extension of credit, is based on management's credit
evaluation of the customer.
LEASE COMMITMENTS
The Group has entered into various operating lease agreements for branch
facilities and administrative offices. Rent expense for fiscal 2000 amounted to
$1,499,000 (1999 - $1,013,000; 1998 - $847,000). As of June 30, 2000, future
rental commitments under the terms of the leases, exclusive of taxes, insurance
and maintenance expenses payable by the Group, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, (IN THOUSANDS)
---------------------------- ----------------------
<S> <C>
2001 $1,047
2002 1,018
2003 740
2004 611
2005 587
Thereafter 1,915
----------------------
$5,918
----------------------
</TABLE>
NOTE 15 - LITIGATION:
On August 14, 1998, as a result of a review of its accounts in connection with
the admission by a former Group officer of having embezzled funds, the Group
became aware of certain irregularities. The Group notified the appropriate
regulatory authorities and commenced an intensive investigation with the
assistance of its independent accountants and legal counsel.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The recently completed investigation determined losses of $9.5 million ($5.8 net
of tax) resulting from dishonest and fraudulent acts and omissions involving
several former Group employees. In the opinion of the Group's management and its
legal counsel, the losses determined by the investigation are covered by the
Group's fidelity insurance. However, claims for such losses have been denied by
the Group's fidelity insurance carrier. On August 11, 2000, the Group filed a
lawsuit in the United States District Court for the district of Puerto Rico
against Federal Insurance Company, Inc., a stock insurance corporation organized
under the laws of the state of Indiana, seeking payment of its $9.5 million
insurance claim and the payment of consequential damages resulting from the
denial of the claim.
In addition, the Group and its subsidiaries are defendants in a number of legal
proceedings incidental to its business. The Group is vigorously contesting such
claims. Based upon a review by legal counsel and the development of these
matters to date, management is of the opinion that the ultimate aggregate
liability, if any, resulting from these claims will not have a material adverse
effect on the Group's financial position or the results of operations.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
The reported fair values of financial instruments are based on either quoted
market prices for identical or comparable instruments or estimated based on
assumptions concerning the amount and timing of estimated future cash flows and
assumed discount rates reflecting varying degrees of risk. Accordingly, the fair
values may not represent the actual values of the financial instruments that
could have been realized as of year-end or that will be realized in the future.
The fair value estimates are made at a point in time based on the type of
financial instruments and related relevant market information. Quoted market
prices are used for financial instruments in which an active market exists.
However, because no market exists for a portion of the Group's financial
instruments, fair value estimates are based on judgments regarding the amount
and timing of estimated future cash flows, assumed discount rates reflecting
varying degrees of risk, and other factors. Because of the uncertainty inherent
in estimating fair values, these estimates may vary from the values that would
have been used had a ready market for these financial instruments existed.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment. Changes in assumptions could affect these fair value
estimates. The fair value estimates do not take into consideration the value of
future business and the value of assets and liabilities that are not financial
instruments. Other significant tangible and intangible assets that are not
considered financial instruments are the value of long-term customer
relationships of the retail deposits, and premises and equipment. The estimated
fair value and carrying value of the Group's financial instruments at June 30,
follows:
<TABLE>
<CAPTION>
(In thousands)
--------------------------------- ------- ------------------------------
2000 1999
--------------------------------- ------------------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $11,145 $11,145 $ 8,060 $ 8,060
Money market investments 23,511 23,511 27,873 27,873
Trading securities 64,443 64,443 17,307 17,307
Investment securities available-for-sale 282,900 282,900 379,894 379,894
Investment securities held-to-maturity 770,851 797,484 499,234 508,080
Federal Home Loan Bank (FHLB) stock 11,146 11,146 13,257 13,257
Loans, net (including loans held-for-sale) 580,927 601,337 578,717 568,711
Accrued interest receivable 13,485 13,485 15,502 15,502
LIABILITIES:
Deposits 719,783 723,681 661,721 671,395
Repurchase agreements 816,493 816,493 596,226 596,226
Advances and borrowings from FHLB 70,000 70,000 68,400 68,400
Term notes and bonds payable 86,500 86,500 106,500 106,500
Accrued expenses and other liabilities 35,691 35,691 14,801 14,801
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps and caps:
Equity index 33,544 - 1,358 -
Interest rate (1,991) - (60) -
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at June 30, 2000 and 1999.
Short-term financial instruments, which include cash and due from banks, money
market investments, accrued interest receivable and accrued expenses and other
liabilities have been valued at the carrying amounts reflected in the
Consolidated Statements of Financial Condition as these are reasonable estimates
of fair value given the short-term nature of the instruments.
The fair value of investment securities is estimated based on bid quotations
from securities dealers. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities. Investments in
FHLB stock are valued at their redemption value.
The estimated fair value for loans held-for-sale is based on secondary market
prices or contractual agreements to sell. The fair value of the loan portfolio
has been estimated for loan portfolios with similar financial characteristics.
Loans are segregated by type, such as commercial, real estate mortgage and
consumer. Each loan category is further segmented into fixed and adjustable
interest rates and by performing and non-performing categories. The fair value
of performing loans is calculated by discounting contractual cash flows,
adjusted for prepayment estimates, if any, using estimated current market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The fair value for significant non-performing loans is based on specific
evaluations of discounted expected future cash flows from the loans or its
collateral using current appraisals and market rates.
The fair value of non-interest bearing demand deposits, savings and NOW accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposits is based on the discounted value of the
contractual cash flows, using estimated current market discount rates for
deposits of similar remaining maturities.
For short-term borrowings, the carrying amount is considered a reasonable
estimate of fair value. The fair value of long-term borrowings is based on the
discounted value of the contractual cash flows, using current estimated market
discount rates for borrowings with similar terms and remaining maturities.
Interest rate swap and cap agreements are fair valued based on discounted value
analysis. The values represent the estimated amount the Group would receive or
pay to terminate the contracts or agreements at the reporting date, considering
current interest rates and the credit-worthiness of the counterparties.
NOTE 17 - SEGMENT REPORTING:
The Group operates three major reportable segments: Financial Services, Mortgage
Banking, and Retail Banking. Management determined the reportable segments based
on the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as the Group's organizational chart,
nature of products, distribution channels and economic characteristics of the
products were also considered in the determination of the reportable segments.
The Group measures 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 retail banking. The Bank's branches and
treasury functions are its main components, with traditional banking products
such as deposits, electronic banking and finance leases.
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 Group's smallest business segment is mortgage banking. It consists of
Oriental Mortgage, whose principal activity is to originate and purchase
mortgage loans for the Group's own portfolio. From time to time, if conditions
so warrant, it may sell loans to other financial institutions or securitize
conforming loans into GNMA, FNMA and FHLMC certificates. Mortgages included in
the resulting GNMA, FNMA, and FHLMC pools are serviced by another institution.
The Group also sells the rights to service mortgage loans for others.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
The accounting policies of the segments are the same as those described in Note
1 - "Summary of Significant Accounting Policies." Following are the results of
operations and the selected financial information by operating segment for each
of the three years ended June 30:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
---------------- ---------------- ---------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net interest income $ 43,705 $ 428 $ 365 $ - $ 44,498
Non-interest income 6,357 12,046 5,891 (1,116) 23,178
Non-interest expenses 30,499 6,510 3,959 (1,116) 39,852
Provision for loan losses 8,150 - - - 8,150
------------- ------------- ------------- --------------- -----------------
NET INCOME BEFORE TAXES $ 11,413 $ 5,964 $ 2,297 $ - $ 19,674
------------- ------------- ------------- --------------- -----------------
Total assets $ 1,845,343 $ 6,016 $ 2,000 $ (3,125) $ 1,850,234
------------- ------------- ------------- --------------- -----------------
FISCAL 1999 (AS RESTATED)
Net interest income $ 42,389 $ 438 $ 207 $ - $ 43,034
Non-interest income 17,422 10,147 9,124 (2,740) 33,953
Non-interest expenses 25,997 7,175 5,178 (2,740) 35,610
Provision for loan losses 14,473 - - - 14,473
------------- ------------- ------------- --------------- -----------------
NET INCOME BEFORE TAXES $ 19,341 $ 3,410 $ 4,153 $ - $ 26,904
------------- ------------- ------------- --------------- -----------------
Total assets $ 1,570,675 $ 10,512 $ 2,000 $ (2,434) $ 1,580,753
------------- ------------- ------------- --------------- -----------------
Fiscal 1998 (as restated)
Net interest income $ 38,223 $ 536 $ 135 $ - $ 38,894
Non-interest income 9,700 9,351 8,417 (224) 27,244
Non-interest expenses 25,043 5,357 4,458 (224) 34,634
Provision for loan losses 9,545 - - - 9,545
------------- ------------- ------------- --------------- -----------------
NET INCOME BEFORE TAXES $ 13,335 $ 4,530 $ 4,094 $ - $ 21,959
------------- ------------- ------------- --------------- -----------------
Total assets $ 1,292,850 $ 8,664 $ - $ (157) $ 1,301,357
------------- ------------- ------------- --------------- -----------------
</TABLE>
NOTE 18 - ORIENTAL FINANCIAL GROUP, INC. ( HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:
The principal source of income for the Group consists of dividends from the
Bank. As a member subject to the regulations of the Federal Reserve Board, the
Group must obtain approval from the Federal Reserve Board for any dividend if
the total of all dividends declared by it in any calendar year would exceed the
total of its consolidated net profits for the year, as defined by the Federal
Reserve Board, combined with its retained net profits for the two preceding
years. The payment of dividends by the Bank to the Group may also be affected by
other regulatory requirements and policies, such as the maintenance of certain
regulatory capital levels.
The following condensed financial information presents the financial position of
the Holding Company only as of June 30, 2000 and 1999 and the results of its
operations and its cash flows for the years ended June 30, 2000, 1999 and 1998.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
--------------------------------------------------------------------------------
HOLDING COMPANY TABLES (FINANCIALS)
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL POSITION AS JUNE 30, AS RESTATED
-----------
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 25 $ 35,440
Investment securities available-for-sale, at fair value.............. 16,265 7,827
Investment in Oriental Bank and Trust (OBT), at equity............... 109,307 98,557
Investment in Oriental Financial Services (OFSC), at equity.......... 4,472 -
Other assets......................................................... 338 355
------------ -----------
TOTAL ASSETS..................................................... $ 130,407 $ 142,179
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase....................... $ - $ 7,499
Dividend payable..................................................... 1,715 1,746
Advances from subsidiaries........................................... 10,635 16,579
Accrued expenses and other liabilities............................... 195 57
Stockholders' equity................................................. 117,862 116,298
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 130,407 142,179
------------ -----------
------------ -----------
</TABLE>
<TABLE>
<CAPTION>
AS RESTATED
-----------
STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME FOR PERIODS ENDED JUNE 30, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Interest income...................................................... $ 796 $ 571 $ 103
Dividends from Bank.................................................. - 14,680 5,442
Equity in undistributed earnings from banking subsidiary............. 19,169 12,346 14,195
Equity in undistributed earnings from non-banking subsidiary......... 472 - -
------------ ------------ ------------
TOTAL INCOME..................................................... 20,437 27,597 19,740
------------ ------------ ------------
------------ ------------ ------------
EXPENSES:
Interest expenses.................................................... 115 463 98
Operating expenses................................................... 756 430 245
------------ ------------ ------------
TOTAL EXPENSES................................................... 871 893 343
------------ ------------ ------------
------------ ------------ ------------
INCOME BEFORE INCOME TAXES............................................ 19,566 26,704 19,397
Income taxes......................................................... - - -
------------ ------------ ------------
NET INCOME.......................................................... 19,566 26,704 19,397
Other comprehensive income, net of taxes............................. (4,781) (17,867) 5,242
------------ ------------ ------------
COMPREHENSIVE INCOME................................................ $ 14,785 $ 8,837 $ 24,639
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
AS RESTATED
-----------
STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30,: 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 19,566 $ 26,704 $ 19,397
------------ ------------ -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings from banking subsidiary........................... (19,169) (12,346) (14,195)
Equity in earnings from non-banking subsidiary....................... (472) - -
Decrease (increase) in other assets.................................. 17 62 124
Increase (decrease) in accrued expenses and liabilities.............. 138 (172) 117
------------ ------------ -----------
TOTAL ADJUSTMENTS................................................... (19,486) (12,456) (13,954)
------------ ------------ -----------
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 80 14,248 5,449
------------ ------------ -----------
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale................ (9,326) - (9,438)
Acquisition of non-banking subsidiary................................ (4,000) - -
Redemptions and sales of investment securities available-for-sale.... 897 1,772 -
------------ ------------ -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.................... (12,429) 1,772 (9,438)
------------ ------------ -----------
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in securities sold under agreements to repurchase....... (7,499) (1,601) 9,100
Proceeds from exercise of stock options.............................. 539 842 789
Net advances from subsidiaries....................................... (2,347) 12,157 2,569
Net proceeds from issuance of preferred stock........................ - 32,300 -
Purchases of treasury stock.......................................... (3,715) (17,202) (4,363)
Dividends paid....................................................... (10,044) (7,300) (5,195)
------------ ------------ -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.................... (23,066) 19,196 2,900
------------ ------------ -----------
------------ ------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (35,415) 35,216 (1,095)
Cash and cash equivalents at beginning of period...................... 35,440 224 1,319
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 25 $ 35,440 $ 224
------------ ------------ -----------
------------ ------------ -----------w
</TABLE>
F-28
