<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 001-12647
ORIENTAL FINANCIAL GROUP INC.
INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO
IRS EMPLOYER IDENTIFICATION NO. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
268 Munoz Rivera Avenue
501 Hato Rey Tower
Hato Rey, Puerto Rico 00918
Telephone Number: (787) 766-1986
- --------------------------------------------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
13,764,191 SHARES OUTSTANDING AS OF DECEMBER 31, 1999
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
PART - 1
- -----------------------------------------------------------------------------------------------------------
Item - 1 FINANCIAL STATEMENTS
Consolidated statements of Financial condition at December 31,
1999 (unaudited) and June 30, 1998. 1
Unaudited consolidated statements of income for the second
quarter and six months period ended December 31, 1999 and 1998. 2
Unaudited consolidated statements of stockholders' equity and
comprehensive income for the six months period ended
December 31, 1999 and 1998. 3
Unaudited consolidated statements of cash flows for the
six months period ended December 31, 1999 and 1998. 4
Notes to unaudited consolidated financial statements 10
Item - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11-24
PART - 2
- ------------------------------------------------------------------------------------------------------------------------------
Item - 1 Legal Proceedings 24
Item - 2 Change in securities - None 24
Item - 3 Defaults upon senior securities - None 24
Item - 4 Submissions of Matters to a Vote of Security Holders -None 24
Item - 5 Other Information - None 24
Item - 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
Signatures 24
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 (UNAUDITED) AND JUNE 30, 1999
(IN THOUSANDS)
ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------- -----------
<S> <C> <C>
Cash and due from banks $ 9,349 $ 8,060
----------- -----------
INVESTMENTS AND SECURITIES:
Money market investments 1,978 27,991
Trading securities, at fair value 36,588 17,307
Investment securities available-for-sale, at fair value 196,232 379,894
Investment securities held-to-maturity, at cost ( fair value $797,547; June 30,1999 - $499,234 ) 821,885 508,080
Federal Home Loan Bank (FHLB) stock, at cost 13,257 13,257
----------- -----------
TOTAL INVESTMENTS AND SECURITIES 1,069,940 946,529
----------- -----------
----------- -----------
LOANS:
Loans held-for-sale, at lower of cost or market 10,000 55,206
Loans receivable, net 557,573 519,110
----------- -----------
TOTAL LOANS, NET 567,573 574,316
----------- -----------
----------- -----------
Accrued interest receivable 20,200 18,017
Foreclosed real estate, net 245 383
Premises and equipment, net 22,340 21,651
Other assets, net 27,854 18,391
----------- -----------
TOTAL ASSETS $ 1,717,501 $ 1,587,347
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 153,119 $ 142,679
Time and IRA accounts 497,200 508,648
Accrued interest 3,912 5,661
----------- -----------
TOTAL DEPOSITS 654,231 656,988
----------- -----------
----------- -----------
BORROWINGS:
Securities sold under agreements to repurchase 739,349 596,226
Advances and borrowings from Federal Home Loan Bank 81,200 68,400
Term notes and other borrowings 96,500 106,500
----------- -----------
TOTAL BORROWINGS 917,049 771,126
----------- -----------
----------- -----------
Accrued expenses and other liabilities 21,465 35,201
----------- -----------
TOTAL LIABILITIES 1,592,745 1,463,315
----------- -----------
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation 33,500 33,500
value, shares issued and outstanding 1,340,000
Common stock, $1 par value; 20,000,000 shares authorized; shares
issued and outstanding 13,764,191 (June 30, 1999 - 13,738,814) 13,764 13,739
Additional paid-in capital 23,427 23,313
Legal surplus 10,283 8,673
Retained earnings 89,229 79,920
Treasury stock, at cost, 986,799 shares (June 30, 1999 - 903,786) (25,301) (23,401)
Accumulated other comprehensive loss , net of deferred taxes (20,146) (11,712)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 124,756 124,032
----------- -----------
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,717,501 $ 1,587,347
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
-1-
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SECOND QUARTER SIX-MONTHS PERIOD
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 14,873 $ 15,110 $ 29,883 $ 30,568
Mortgage-backed securities and collateralized mortgage obligations 13,256 8,593 25,332 15,331
Investment securities 3,938 3,806 7,640 8,497
Money market investments 87 133 157 250
-------- -------- -------- --------
TOTAL INTEREST INCOME 32,154 27,642 63,012 54,646
-------- -------- -------- --------
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 7,544 7,270 14,826 14,494
Securities sold under agreements to repurchase 9,832 6,298 17,976 12,243
Other borrowed funds and interest rate risk management 2,329 2,491 4,787 5,251
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 19,705 16,059 37,589 31,988
-------- -------- -------- --------
-------- -------- -------- --------
NET INTEREST INCOME 12,449 11,583 25,423 22,658
Provision for loan losses 1,500 7,150 3,250 9,750
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,949 4,433 22,173 12,908
-------- -------- -------- --------
-------- -------- -------- --------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 2,779 2,298 5,406 4,631
Mortgage banking activities 850 1,239 2,206 2,033
Bank service charges and fees and other operating income 1,785 1,088 2,995 2,112
Gain on sale of investment securities 60 6,841 659 8,447
Trading net activity 198 21 65 70
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 5,672 11,487 11,331 17,293
-------- -------- -------- --------
-------- -------- -------- --------
NON-INTEREST EXPENSES:
Compensation and benefits 3,630 3,799 7,379 7,273
Occupancy and equipment, net 1,587 1,219 3,112 2,465
Advertising and business promotion 447 703 1,078 1,262
Professional and service fees 578 654 1,086 995
Communications 355 429 725 758
Taxes other than income 477 428 955 857
Insurance, including deposit insurance 138 102 272 192
Printing, postage, stationery and supplies 218 202 415 358
Other 676 733 1,318 1,479
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 8,106 8,269 16,340 15,639
-------- -------- -------- --------
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 8,515 7,651 17,164 14,562
Provision for income taxes 518 1,284 1,220 2,135
-------- -------- -------- --------
NET INCOME 7,997 6,367 15,944 12,427
Less: dividends on preferred stock (597) -- (1,193) --
-------- -------- -------- --------
NET INCOME AVAILABLE TO COMMON SHARES $ 7,400 $ 6,367 $ 14,751 $ 12,427
-------- -------- -------- --------
-------- -------- -------- --------
INCOME PER COMMON SHARE:
Basic $ 0.58 $ 0.49 $ 1.15 $ 0.95
-------- -------- -------- --------
Diluted $ 0.57 $ 0.47 $ 1.13 $ 0.92
-------- -------- -------- --------
Average common shares outstanding 12,777 13,077 12,791 13,125
Average potential common share options 318 393 274 397
-------- -------- -------- --------
13,095 13,470 13,065 13,522
-------- -------- -------- --------
-------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
-2-
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
--------- ---------
<S> <C> <C>
CHANGES IN STOCKHOLDERS' EQUITY:
- ---------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of period $ 33,500 $ --
--------- ---------
BALANCE AT END OF PERIOD 33,500 --
--------- ---------
--------- ---------
COMMON STOCK:
Balance at beginning of period 13,739 10,149
Stock split -- 3,385
Stock options exercised 25 21
--------- ---------
BALANCE AT END OF PERIOD 13,764 13,555
--------- ---------
--------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 23,313 27,261
Stock split -- (3,385)
Stock options exercised 114 92
--------- ---------
BALANCE AT END OF PERIOD 23,427 23,968
--------- ---------
--------- ---------
LEGAL SURPLUS:
Balance at beginning of period 8,673 5,908
Transfer from retained earnings 1,610 560
--------- ---------
BALANCE AT END OF PERIOD 10,283 6,468
--------- ---------
--------- ---------
RETAINED EARNINGS:
Balance at beginning of period 79,920 63,756
Net income 15,944 12,427
Dividends declared on common stock (3,832) (3,027)
Dividends declared on preferred stock (1,193) --
Transfer to legal surplus (1,610) (560)
--------- ---------
BALANCE AT END OF PERIOD 89,229 72,596
--------- ---------
--------- ---------
TREASURY STOCK:
Balance at beginning of period (23,401) (6,199)
Treasury stock purchased (1,900) (5,690)
--------- ---------
BALANCE AT END OF PERIOD (25,301) (11,889)
--------- ---------
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF DEFERRED TAXES:
Balance at beginning of period (11,712) 913
Other comprehensive (loss) income for the period ended, net of taxes (8,434) 5,162
--------- ---------
BALANCE AT END OF PERIOD (20,146) 6,075
--------- ---------
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 124,756 $ 110,773
========= =========
COMPREHENSIVE INCOME:
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 15,944 $ 12,427
--------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized (loss) gain on securities arising during the period (7,895) 13,605
Realized gains and losses included in net income (659) (8,447)
Income tax expense related to items of other comprehensive income 120 4
--------- ---------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (8,434) 5,162
--------- ---------
--------- ---------
COMPREHENSIVE INCOME $ 7,510 $ 17,589
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
-3-
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,944 $ 12,427
--------- ---------
--------- ---------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of deferred loan origination fees and costs (1,527) (2,437)
Amortization of premiums and accretion of discounts on investment securities (91) 1,115
Depreciation and amortization of premises and equipment 1,668 1,399
Provision for loan losses 3,250 7,150
Gain on sale of investment securities available-for-sale (659) (8,447)
Gain on sale of loans held-for-sale (1,114) (584)
Proceeds from sale of loans held-for-sale 27,795 51,115
(Decrease) increase in accrued expenses and other liabilities (18,390) 813
Net (increase) decrease in:
Trading securities (3,567) 8,977
Accrued interest receivable (2,183) 754
Other assets (9,325) (1,680)
--------- ---------
TOTAL ADJUSTMENTS (4,143) 58,175
--------- ---------
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 11,801 70,602
--------- ---------
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (124,100) (370,358)
Purchases of investment securities held-to-maturity (90,700) --
Sales of investment securities available-for-sale 34,383 169,600
Maturities and redemptions of investment securities available-for-sale 38,329 62,930
Maturities and redemptions of investment securities held-to-maturity 40,741 33,301
Purchase of Federal Home Loan Bank of New York stock -- (3,214)
Net origination of loans (69,179) (97,986)
Capital expenditures (2,357) (2,771)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (172,883) (208,498)
--------- ---------
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits (2,757) 47,191
Securities sold under agreements to repurchase 143,123 118,119
Advances and borrowings from FHLB 12,800 --
Repayments of term notes and other borrowings (10,000) (14,700)
Proceeds from exercise of stock options 139 113
Treasury stock acquired (1,900) (5,691)
Dividends and cash paid on fractional shares (5,047) (2,853)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 136,358 134,091
--------- ---------
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (24,724) (3,805)
Cash and cash equivalents at beginning of period 36,051 19,489
--------- ---------
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,327 $ 15,684
--------- ---------
--------- ---------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 9,349 $ 12,279
Money market investments 1,978 3,405
--------- ---------
$ 11,327 $ 15,684
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 36,920 $ 29,700
--------- ---------
Income taxes paid $ 1,050 $ 2,546
--------- ---------
Real estate loans securitized into mortgage-backed securities $ 47,600 $ 33,100
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
-4-
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP
INC.
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Oriental Financial Group Inc. (the
"Group" or, "Oriental") conform with generally accepted accounting principles
("GAAP") and financial services industry practices. The following is a
description of the Group's most significant accounting policies:
NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The Group is a bank holding company incorporated under the laws of the
Commonwealth of Puerto Rico, which provides a variety of financial services
through its subsidiaries. The Group is subject to the regulation and supervision
of the Federal Reserve Board. Oriental Bank and Trust (the "Bank"), the Group's
banking subsidiary, is a full-service commercial bank with its main office
located in San Juan, Puerto Rico and with nineteen branches located throughout
the island. The Bank directly or through its wholly-owned, broker-dealer
subsidiary, Oriental Financial Services Corp., offers mortgage, commercial and
consumer lending, auto lease financing, financial planning, money management and
investment brokerage services, as well as corporate and individual trust
services. The Bank is subject to the regulations of certain federal and local
agencies.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q. Complete information regarding
the financial statements can be found in the notes to the financial statements
for the year ended June 30, 1999 contained in Oriental's 1999 Annual Report.
Certain reclassifications have been made to the December 31, 1998 and June 30,
1999 consolidated financial statements to conform to the presentation of the
current period consolidated financial statements.
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting mainly of normal recurring
adjustments) necessary to present fairly, in all material respects, the
financial position of the Group at December 31, 1999 and June 30, 1999, and the
results of operations and cash flows for the second quarter and six month period
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
NOTE 2 - INVESTMENTS AND SECURITIES:
The Group's securities are classified as held-to-maturity, available-for-sale or
trading. Securities for which the Group has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are carried at amortized
cost. Securities that might be sold prior to maturity because of interest rate
changes, to meet liquidity needs, or to better match the repricing
characteristics of funding sources are classified as available-for-sale. These
securities are reported at fair value, with unrealized gains and losses excluded
from earnings and reported net of deferred taxes in other comprehensive income.
The Group classifies as trading those securities that are acquired and held
principally for the purpose of selling them in the near term. These securities
are carried at estimated fair value with realized and unrealized changes in
market value included in earnings in the period in which the changes occur.
Interest revenue arising from trading instruments is included in the statement
of income as part of net interest income rather than in the trading profit or
loss account.
The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock
has no readily determinable fair value and can only be sold back to the FHLB at
par value. Therefore, this investment is carried at cost and its redemption
value represents its fair value. Premiums and discounts are amortized to
interest income over the life of the related securities using the interest
method. Net realized gains or losses on sales of investment securities and
unrealized loss valuation adjustments considered other than temporary, if any,
on securities classified as either available-for-sale or held-to-maturity are
reported separately in the statement of income. Cost of securities is determined
on the specific identification method.
MONEY MARKET INVESTMENTS:
At December 31,1999 and June 30, 1999 the Group's money market investments were
comprised of:
<TABLE>
<CAPTION>
( IN THOUSANDS)
----------------------------------------------
DECEMBER 31, JUNE 30,
----------------------- ----------------------
<S> <C> <C>
Securities purchased under agreements to resell $ - $24,350
Time deposits with other banks 1,851 -
Money market accounts and other short-term investments 127 3,641
----------------------- ----------------------
$ 1,978 $27,991
----------------------- ----------------------
----------------------- ----------------------
</TABLE>
-5-
<PAGE>
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.
TRADING SECURITIES:
A summary of trading securities owned by the Group at December 31, 1999 and June
30, 1999 is as follows:
<TABLE>
<CAPTION>
( IN THOUSANDS)
-------------------------------------------
DECEMBER 31, JUNE 30,
--------------------- -------------------
<S> <C> <C>
US Treasury securities $ 2,494 $ 3,527
PR Government securities 16,626 -
Mortgage-backed securities 15,074 11,278
CMO residuals, interest only 2,394 2,502
-------------------- -------------------
$36,588 $17,307
-------------------- -------------------
-------------------- -------------------
</TABLE>
At December 31, 1999, the Group's trading portfolio weighted average yield was
9.74% (June 30, 1999 - 7.79%).
INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, estimated fair value, and
weighted average yield of the securities owned by the Group at December 31, 1999
and June 30, 1999, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 ( IN THOUSANDS)
------------------------------------- --------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSS VALUE YIELD
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
US Treasury securities $106,410 $ - $7,178 $99,232 5.26%
US Government agencies securities 98,229 - 3,730 94,499 6.69%
PR Government securities 2,427 8 2,435 6.61%
GNMA certificates 65 1 66 7.69%
------------------ --------------- ------------- -------------- ------------
207,131 9 10,908 196,232 5.96%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
HELD-TO-MATURITY
PR Government securities 3,557 1 28 3,530 8.03%
Collateralized mortgage obligations 115,961 - 5,389 110,572 6.46%
Other debt securities 4,863 - - 4,863 8.10%
GNMA certificates 389,514 517 8,430 381,601 7.23%
FNMA certificates 199,472 91 6,454 193,109 6.54%
FHLMC certificates 108,518 44 4,690 103,872 6.43%
------------------ --------------- ------------- -------------- ------------
821,885 653 24,991 797,547 6.86%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
FHLB stock 13,257 - - 13,257 6.81%
------------------ --------------- ------------- -------------- ------------
$1,042,273 $662 $35,899 $1,007,036 6.68%
================== =============== ============= ============== ============
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1999 ( IN THOUSANDS)
------------------------------------- --------------------------------------------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSS VALUE YIELD
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
US Treasury securities $105,343 $ 130 $ 3,875 $101,598 5.33%
US Government agencies securities 75,820 - 1,321 74,499 6.79%
PR Government securities 20,160 423 11 20,572 8.71%
GNMA certificates 60,128 871 745 60,254 6.93%
FNMA certificates 97,270 40 2,081 95,229 6.68%
FHLMC certificates 28,314 - 572 27,742 6.66%
------------------ --------------- ------------- -------------- ------------
387,035 1,464 8,605 379,894 6.47%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
HELD-TO-MATURITY
PR Government securities 3,563 - 33 3,530 7.40%
Collateralized mortgage obligations 119,497 - 2,365 117,132 6.67%
Other debt securities 4,863 - - 4,863 8.58%
GNMA certificates 179,449 796 3,161 177,084 6.59%
FNMA certificates 114,824 248 2,445 112,627 6.74%
FHLMC certificates 85,884 73 1,959 83,998 6.65%
------------------ --------------- ------------- -------------- ------------
508,080 1,117 9,963 499,234 6.68%
------------------ --------------- ------------- -------------- ------------
------------------ --------------- ------------- -------------- ------------
FHLB stock 13,257 - - 13,257 6.74%
------------------ --------------- ------------- -------------- ------------
$908,372 $2,581 $18,568 $892,385 6.59%
================== =============== ============= ============== ============
</TABLE>
The amortized cost and estimated fair value of the Group's investment securities
at December 31, 1999, by contractual maturity, are shown in the next table.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
-------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------------------------------- ------------------------------ -------------------------------
------------------------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $2,050 $2,050 $ - $ - $2,050 $2,050
After 1 year to 5 years 12,638 12,479 1,038 1,040 13,676 13,519
After 5 years to 10 years 192,001 181,251 21,190 21,200 213,191 202,452
Due after 10 years 442 452 799,657 775,307 800,099 775,758
FHLB stock - - - - 13,257 13,257
-------------- ------------ ------------- -------------- ------------- --------------
$207,131 $196,232 $821,885 $797,547 $1,042,273 $1,007,036
-------------- ------------ ------------- -------------- ------------- --------------
-------------- ------------ ------------- -------------- ------------- --------------
</TABLE>
The category of securities held-to-maturity due after ten years includes
$56,195,000, of the short-end of certain Puerto Rico GNMA tax-exempt serial
certificates with an average expected life of 4 to 6 years.
Proceeds from the sale of investment securities available-for-sale during the
second quarter of fiscal 2000 totaled $34,383,000 (1999 - $169,600,000). Gross
realized gains and losses on those sales during fiscal 2000 were $690,000 and
$31,000, respectively (1999 - $8,447,000 and $0).
Of Oriental's investments at December 31,1999 and June 30, 1999 the Government
of Puerto Rico was the only issuer, other than the U.S. Government, of
instruments that are payable and secured by the same source of revenue or taxing
authority that exceeded 10% of stockholders' equity. The fair value of these
investments represented 17% and 19% of stockholders' equity, respectively. At
December 31, 1999, the amortized cost and fair value of investments from the
Government of Puerto Rico were approximately $21,791,000 (June 30, 1999 -
$23,723,000) and $21,680,000 (June 30, 1999 - $24,102,000), respectively. At
December 31, 1999, $15,715,000 (June 30, 1999 - $18,456,000) of these
investments were an AAA-rated Puerto Rico municipal bond collateralized with
mortgage-backed securities.
-7-
<PAGE>
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
LOANS RECEIVABLE
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit organizations,
all of which are encompassed within four main categories: mortgage, commercial,
consumer and leasing. Oriental's loan portfolio has a higher concentration of
loans to consumers such as auto leases, personal loans, and residential mortgage
loans. The composition of the Group's loan portfolio at December 31, 1999 and
June 30, 1999 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------
----------------------------------------
DECEMBER 31, JUNE 30,
--------------------- ------------------
--------------------- ------------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $285,429 $263,540
Non-residential real estate loans 8,595 6,531
Home equity loans and personal loans collateralized by real estate 22,661 16,278
--------------------- ------------------
316,684 286,349
Less: net deferred loan fees (1,417) (1,302)
--------------------- ------------------
315,133 285,047
--------------------- ------------------
--------------------- ------------------
OTHER LOANS:
Commercial and auto loans 20,602 10,555
Personal consumer loans and credit lines 132,599 122,213
Financing leases, net of unearned interest 96,898 110,297
--------------------- ------------------
250,099 243,065
--------------------- ------------------
--------------------- ------------------
LOANS RECEIVABLE 565,232 528,112
Allowance for loan losses (7,659) (9,002)
-------------------- ------------------
LOANS RECEIVABLE, NET 557,573 519,110
Loans held-for-sale 10,000 55,206
-------------------- ------------------
TOTAL LOANS, NET $567,573 $574,316
==================== ==================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Group maintains an allowance for loan losses at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks. Oriental's allowance for loan losses policy provides
for a detailed quarterly analysis of possible losses. The analysis includes a
review of historical loan loss experience, value of underlying collateral,
current economic conditions, financial condition of borrowers and other
pertinent factors.
While management uses available information in estimating possible loan losses,
future additions to the allowance may be necessary based on factors beyond
Oriental's control, such as factors affecting Puerto Rico economic conditions.
Refer to Table 9 of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for the changes in the allowance for loan
losses for the second quarter ended December 31, 1999 and 1998.
The Group evaluates all loans, some individually and other as homogeneous
groups, for purposes of determining impairment. At December 31, 1999 and June
30, 1999, the Group determined that no impairment reserve was necessary.
NOTE 4 - PLEDGED ASSETS:
At December 31, 1999, residential mortgage loans and investment securities
amounting to $127,694,000 (June 30, 1999 - $100,509,000), and $898,902,000 (June
30, 1999 - $737,448,000), respectively, were pledged to secure public fund
deposits, investment securities sold under agreements to repurchase, letters of
credit, advances and borrowings from the Federal Home Loan Bank of New York,
term notes and interest rate swap agreements .
-8-
<PAGE>
NOTE 5 - INTEREST RATE RISK MANAGEMENT
The Group uses interest rate swaps and caps as an interest rate risk hedging
mechanism. Under the swaps, the Group pays a fixed annual cost and receives a
floating ninety-day payment based on LIBOR. Floating rate payments received from
the swap counterparty correspond to the floating rate payments made on the
borrowings or notes thus resulting in a net fixed rate cost to the Group. Under
the caps, Oriental pays an up front premium or fee for the right to receive cash
flow payments in excess of the predetermined cap rate; thus, effectively capping
its interest rate cost for the duration of the agreement. The Group's swaps and
caps outstanding and their terms at December 31, 1999 and June 30, 1999 are set
forth in the table below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
DECEMBER 31, JUNE 30,
----------------- -----------------
<S> <C> <C>
SWAPS:
Pay fixed swaps notional amount $340,000 $245,000
Weighted average pay rate - fixed 5.80% 5.66%
Weighted average receive rate - floating 6.07% 5.09%
Maturity in months 1 to 20 2 to 26
Floating rate as a percent of LIBOR 85 to 100% 85 to 100%
CAPS:
Cap agreements notional amount $80,000 $100,000
Cap rate 6.50% 6.50%
Maturity in months 2 to 13 4 to 15
</TABLE>
The agreements were signed to convert short-term borrowings into fixed rate
liabilities for longer periods of time and provide protection against increases
in interest rates. The amounts potentially subject to credit loss are the net
streams of payments under the agreements and not the notional principal amounts
used to express the volume of the swaps. The Group controls the credit risk of
its interest rate swap agreements through approvals, limits, monitoring
procedures and collateral, where considered necessary. The Group does not
anticipate nonperformance by the counterparties.
The Bank offers its customers certificates of deposit tied to the performance of
one of the following stock market indexes, Standard & Poor's 500 Composite Stock
Index, Dow Jones Industrial Average and Russell 2000 Small Stock Index. At the
end of five years, the depositor will receive a specified percent of the average
increase of the month-end value of the corresponding stock index. If such index
decreases, the depositor receives the principal without any interest. The Group
uses interest rate swap agreements with major money center banks to manage its
exposure to the stock market. Under the terms of the agreements, the Group will
receive the average increase in the month-end value of the corresponding index
in exchange for a semiannual fixed interest cost. At December 31, 1999, the
notional amount of these agreements totaled $88,565,000 (June 30, 1999 -
$79,815,000) at a weighted average rate of 5.88% (June 30, 1999 - 5.81%).
At December 31, 1999, interest rate swap and caps maturities by fiscal year are
as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(IN THOUSANDS)
--------------------------- ----------------------------------------------------------------------------
YEAR ENDING JUNE 30, INTEREST RATE EQUITY TOTAL
--------------------------- ---------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
2000 $335,000 $590 $335,590
2001 85,000 87,975 172,975
---------------------- -------------------- -----------------------
$420,000 $88,565 $508,565
---------------------- -------------------- -----------------------
---------------------- -------------------- -----------------------
</TABLE>
NOTE 6 - SEGMENT REPORTING (UNAUDITED):
The Group operates three major reportable segments: Financial Services, Mortgage
Banking and Retail Banking. Management determined the reportable segments based
on the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as the Group's organizational chart,
nature of products, distribution channels and economic characteristics of the
products were also considered in the determination of the reportable segments.
The Group monitors the performance of these reportable segments, based on
pre-established goals of different financial parameters such as net income,
interest spread, loan production, fees generated, and increase in market share.
The Group's largest business segment is retail banking, which is mainly
comprised of the Bank's branches and loan centers with such retail products as
deposits and consumer loans. Commercial and finance leases are also considered
in the retail business. This segment is also responsible for the Bank's mortgage
loans portfolio, and the Group's investment portfolios and treasury functions.
-9-
<PAGE>
The Group'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
registered broker-dealer subsidiary (Oriental Financial Services). The core
operations of this segment are financial planning, money management and
investment brokerage services, as well as corporate and individual trust
services. The last and smallest business segment is mortgage banking. It
consists of Oriental Mortgage, whose principal activity is to originate and
purchase mortgage loans and subsequently sell them in the secondary market.
Following are the results of operations and the selected financial information
by operating segment for each of the second quarters and six-month periods ended
December 31:
<TABLE>
<CAPTION>
UNAUDITED - SIX MONTHS PERIOD ENDED RESULTS (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net interest income $23,608 $269 $1,546 $- $25,423
Non-interest income 3,961 5,406 2,206 (242) 11,331
Non-interest expenses 11,785 3,097 1,700 (242) 16,340
Provision for loan losses 3,250 - - - 3,250
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $12,534 $2,578 $2,052 $- $17,164
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
FISCAL 1999
Net interest income 20,024 $196 $2,438 $- $22,658
Non-interest income 10,975 4,631 2,033 (346) 17,293
Non-interest expenses 11,192 2,624 2,169 (346) 15,639
Provision for loan losses 9,750 - - - 9,750
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $10,057 $2,203 $2,302 $- $14,562
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED -SECOND QUARTER ENDED RESULTS (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net interest income $11,568 $122 $759 $- $12,449
Non-interest income 2,071 2,779 850 (28) 5,672
Non-interest expenses 6,178 1,454 502 (28) 8,106
Provision for loan losses 1,500 - - - 1,500
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $5,961 $1,447 $1,107 $- $8,515
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
FISCAL 1999
Net interest income $10,206 $87 $1,290 $- $11,583
Non-interest income 8,190 2,298 1,239 (240) 11,487
Non-interest expenses 6,233 1,093 1,183 (240) 8,269
Provision for loan losses 7,150 - - - 7,150
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $5,013 $1,292 $1,346 $- $7,651
--------------- -------------- --------------- --------------- --------------
--------------- -------------- --------------- --------------- --------------
TOTAL ASSETS ( AT DECEMBER 31,)
December 31, 1999 $1,703,565 $12,194 $2,000 $(258) $1,717,501
--------------- -------------- --------------- --------------- --------------
December 31, 1998 $1,448,612 $9,249 $2,000 $(431) $1,459,430
--------------- -------------- --------------- --------------- --------------
</TABLE>
<PAGE>
SELECTED FINANCIAL DATAMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental posted diluted earnings per share ("EPS") of $0.57 for the second
quarter of fiscal 2000, a 21.3% increase when compared to the $0.47 tallied in
the same quarter of fiscal 1999. EPS for the first six months of fiscal 2000 was
$1.13, 22.8% higher than the $0.92 reported in the comparable period of fiscal
1999.
Quarterly net income increased 25.6% to $7.99 million, up from $6.37 million
posted in the second quarter of fiscal 1999. For the first six months of fiscal
2000 amounted to $15.94 million, 28.3% higher than $12.43 million reported in
the comparable period of fiscal 1999. The Group's fiscal 2000 earnings growth
was principally due to a higher level of interest-earning assets, sound
performance by the brokerage and trust divisions, effective management of
interest rate risk and a tight control over operating expenses.
Financial assets, which include the Group's assets and assets managed by the
trust and brokerage business, reached $3.993 billion at the end of the second
quarter of fiscal 2000 -- up 11.3% from $3.587 billion at the end of the same
period of fiscal 1999. The Group's assets grew 17.7% to $1.718 billion at
December 31, 1999, up from $1.459 billion a year ago. Assets managed by the
trust and broker-dealer increased 7.0% to $2.275 billion from $2.127 billion the
year before.
Profitability ratios reached satisfactory levels again this past quarter. The
Group's return on common equity (ROE) was 32.25%, up from 22.16% posted the
comparable second quarter of fiscal 1999. Likewise, return on assets (ROA) for
the quarter rose to 1.91%, up from 1.78% posted the previous second quarter. The
efficiency ratio improved to 45.38%, down from 49.58% in the comparable period
of fiscal 1999. For the first six months of fiscal 2000 ROE was 32.91% (up from
21.73% in fiscal 1999), ROA was 1.95% (up from 1.79% in fiscal 1999) and the
efficiency ratio improved to 45.35% (down from 48.59% in fiscal 1999).
Different components that influenced the Group's performance are discussed in
detail in the following pages. In addition, the selected financial data table on
page 12 and Tables 1 to 10 from page 13 to 18 provide relevant operational
ratios and information for the periods analyzed.
RESULT OF OPERATIONS
As a diversified financial services provider (See table 2), the Group's earnings
depend not only on the net interest income generated from its banking activity,
but also from fees and other non-interest income generated from the wide array
of financial services offered. Net interest income, the Group's main source of
earnings, is affected by the difference between rates of interest earned on the
Group's interest-earning assets and rates paid on its interest-bearing
liabilities (interest rate spread) and the relative amounts of its
interest-earning assets and interest-bearing liabilities (interest rate margin).
As further discussed in the Risk Management section, the Group constantly
monitors the composition and repricing of its assets and liabilities to maintain
its net interest income at adequate levels and to avoid undertaking highly
sensitive positions that could affect its earnings capacity in a volatile
interest rate environment. Non-interest income, the second largest source of
earnings, is affected by the level of trust assets under management,
transactions generated by gathering of financial assets by the broker-dealer
subsidiary, the level of mortgage banking activities, and fees generated from
loans and deposit accounts.
NET INTEREST INCOME
For the second quarter of fiscal 2000, the Group's net interest income amounted
$12.5 million, up 7.5% from $11.6 million in the same period of fiscal 1999. For
the first six months of fiscal 2000, it rose 12.2% to $25.4 million from $22.7
million in the comparable period a year earlier. A larger volume of
interest-earning assets propelled these growths in net interest income.
In the other hand, for the second quarter of fiscal 2000, interest rate spread
narrowed 49 basis points to 2.86% from 3.35% the year before. For the first six
months of fiscal 2000, it declined 36 basis points to 2.97% from 3.33% a year
earlier. A change in the mix of interest-earning assets toward low-risk and
tax-free investment securities was the main reason for both spread compressions.
Tables 1 and 1A analyze the major categories of interest-earning assets and
interest-bearing liabilities, their respective interest income, expenses, yields
and costs, and their impact on net interest income due to changes in volume and
rates.
The Group's interest income for second quarter of fiscal 2000 totaled $32.2
million, up 16.3% from $27.6 million posted in the same period of fiscal 1999.
For the first six months of fiscal 2000, rose 15.3% to $63.0 million from $54.6
million in the comparable period a year earlier. A greater average volume of
interest-earning assets, partially offset by a decline in their yield
performance, due to the reason explained above, drove these increases. See
Tables 1 and 1A for the impact in interest income due to changes in volume and
rates.
-10-
<PAGE>
SELECTED FINANCIAL DATA
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
<TABLE>
<CAPTION>
SECOND QUARTER SIX-MONTHS PERIOD
DECEMBER 31, DECEMBER 31,
-------------------------------------------- -------------------------------------------------
1999 1998 VARIANCE % 1999 1998 VARIANCE %
-------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS, DIVIDENDS DECLARED AND PER SHARE INFORMATION:
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $32,154 $27,642 16.3% $ 63,012 $ 54,646 15.3%
Interest expense 19,705 16,059 22.7% 37,589 31,988 17.5%
--------------- -------------- ------------ ----------------- ------------------ ------------
NET INTEREST INCOME 12,449 11,583 7.5% 25,423 22,658 12.2%
Recurring non-interest income 5,414 4,625 17.1% 10,607 8,776 20.9%
Non recurring non-interest income 258 6,862 -96.2% 724 8,517 -91.5%
Recurrent non-interest expenses 8,106 8,060 0.6% 16,340 15,302 6.8%
Non recurrent non-interest expenses - 209 -100.0% - 337 -100.0%
Provision for loan losses 1,500 7,150 -79.0% 3,250 9,750 -66.7%
Provision for income taxes 518 1,284 -59.7% 1,220 2,135 -42.9%
--------------- ------------- ------------ ----------------- ------------------ ------------
NET INCOME 7,997 6,367 25.6% 15,944 12,427 28.3%
Less: dividends on preferred stock (597) - -100.0% (1,193) - -100.0%
--------------- ------------- ------------ ----------------- ------------------ ------------
NET INCOME AVAILABLE TO
COMMON SHARES $ 7,400 $ 6,367 16.2% $ 14,751 $ 12,427 18.7%
--------------- -------------- ------------ ----------------- ------------------ ------------
--------------- -------------- ------------ ----------------- ------------------ ------------
Basic $ 0.58 $ 0.49 18.4% $ 1.15 $ 0.95 21.1%
--------------- -------------- ------------ ----------------- ------------------ ------------
Diluted $ 0.57 $ 0.47 21.3% $ 1.13 $ 0.92 22.8%
--------------- -------------- ------------ ----------------- ------------------ ------------
Book value $ 7.12 $ 8.17 -12.9% $ 7.12 $ 8.17 1.0%
--------------- -------------- ------------ ----------------- ------------------ ------------
Market price at end of period $ 22.06 $ 31.31 -29.5% $ 22.06 $ 31.31 -8.6%
--------------- -------------- ------------ ----------------- ------------------ ------------
Dividends declared per share $ 0.150 $ 0.113 32.7% $ 0.300 $ 0.263 14.1%
--------------- -------------- ------------ ----------------- ------------------ ------------
Dividends declared $ 1,916 $ 1,492 28.4% $ 3,833 $ 3,451 11.1%
--------------- -------------- ------------ ----------------- ------------------ ------------
Average shares and equivalents 13,095 13,470 -2.8% 13,065 13,522 -3.4%
--------------- -------------- ------------ ----------------- ------------------ ------------
PERIOD END BALANCES (DECEMBER 31,):
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,402,600 $ 1,313,800 6.8%
Broker-dealer assets gathered 872,500 813,300 7.3%
----------------- ------------------ ------------
ASSETS MANAGED 2,275,100 2,127,100 7.0%
Bank total assets 1,717,500 1,459,400 17.7%
----------------- ------------------ ------------
$ 3,992,600 $ 3,586,500 11.3%
----------------- ------------------ ------------
----------------- ------------------ ------------
INTEREST-EARNING ASSETS
Investments and securities $ 1,069,940 $ 837,320 27.8%
Loans and loans held-for-sale 567,573 557,050 1.9%
----------------- ------------------ ------------
$ 1,637,513 $ 1,394,370 17.4%
----------------- ------------------ ------------
----------------- ------------------ ------------
INTEREST-BEARING LIABILITIES
Deposits $ 654,231 $ 618,622 5.8%
Repurchase agreements 739,349 534,290 38.4%
Borrowings 177,700 166,600 6.7%
----------------- ------------------ ------------
$ 1,571,280 $ 1,319,512 19.1%
----------------- ------------------ ------------
----------------- ------------------ ------------
STOCKHOLDERS' EQUITY
Preferred equity $ 33,500 $ - 100.0%
Common equity 91,256 110,773 -17.6%
----------------- ------------------ ------------
$ 124,756 $ 110,773 12.6%
----------------- ------------------ ------------
----------------- ------------------ ------------
COMMON SHARES
Outstanding common shares 13,764 13,555 1.5%
Shares held by treasury (987) (495) 99.3%
----------------- ------------------ ------------
12,777 13,060 -2.2%
----------------- ------------------ ------------
----------------- ------------------ ------------
CAPITAL RATIOS
Leverage capital 8.63% 7.24% 19.3%
----------------- ------------------ ------------
Total risk-based capital 26.35% 19.62% 34.3%
----------------- ------------------ ------------
Tier 1 risk-based capital 25.10% 18.37% 36.6%
----------------- ------------------ ------------
SELECTED FINANCIAL RATIOS (IN PERCENT) AND OTHER INFORMATION:
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.91% 1.78% 6.9% 1.95% 1.79% 9.1%
--------------- -------------- ------------ ----------------- ------------------ ------------
Return on average common equity (ROE) 32.25% 22.16% 45.5% 32.91% 21.73% 51.5%
--------------- -------------- ------------ ----------------- ------------------ ------------
Efficiency ratio 45.38% 49.58% -8.5% 45.35% 48.59% -6.7%
--------------- -------------- ------------ ----------------- ------------------ ------------
Expense ratio 0.67% 1.09% -38.4% 0.73% 1.05% -30.7%
--------------- -------------- ------------ ----------------- ------------------ ------------
Interest rate spread 2.86% 3.35% -14.7% 2.97% 3.33% -10.8%
--------------- -------------- ------------ ----------------- ------------------ ------------
Number of banking offices 19 18 5.6%
----------------- ------------------ ------------
</TABLE>
-12-
<PAGE>
SELECTED FINANCIAL DATA
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998 (Dollars
in thousands)
TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
--------------------------------- --------------------------------- --------------------------------
INTEREST AVERAGE RATE AVERAGE BALANCE
--------------------------------- --------------------------------- --------------------------------
1999 1998 VARIANCE % 1999 1998 VARIANCE BP 1999 1998 VARIANCE %
--------- ---------- ------------ --------- ---------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
- -----------------------
INVESTMENTS:
Investment securities $ 32,036 $ 22,673 41.3% 6.57% 6.49% 0.08% $ 975,040 $ 698,259 39.6%
Trading securities 936 1,155 -19.0% 8.37% 8.56% -0.19% 22,362 26,977 -17.1%
Money market investments 157 250 -37.2% 6.76% 4.42% 2.34% 4,638 11,299 -59.0%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
33,129 24,078 37.6% 6.61% 6.54% 0.07% 1,002,040 736,535 36.0%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
Loans:
Real estate (1) 13,785 14,237 -3.2% 8.59% 9.97% -1.38% 321,060 285,637 12.4%
Consumer 9,247 8,291 11.5% 14.62% 13.56% 1.06% 125,472 121,251 3.5%
Financing leases 5,583 7,251 -23.0% 10.95% 11.76% -0.81% 101,113 122,320 -17.3%
Commercial and auto loans 1,268 789 60.7% 12.61% 10.49% 2.12% 19,964 14,909 33.9%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
29,883 30,568 -2.2% 10.48% 11.19% -0.71% 567,609 544,117 4.3%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
63,012 54,646 15.3% 8.01% 8.51% -0.50% 1,569,649 1,280,652 22.6%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
INTEREST-BEARING
LIABILITIES:
- ------------
DEPOSITS:
Savings and demand 1,501 1,445 3.9% 2.04% 2.38% -0.34% 145,737 120,378 21.1%
Time and IRA accounts 13,325 13,049 2.1% 5.29% 5.46% -0.17% 499,658 473,916 5.4%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
14,826 14,494 2.3% 4.56% 4.84% -0.28% 645,395 594,294 8.6%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
Borrowings:
Repurchase agreements 17,976 12,243 46.8% 5.37% 5.34% 0.03% 664,163 454,753 46.0%
FHLB funds 1,836 1,873 -2.0% 5.58% 5.76% -0.18% 65,216 64,533 1.1%
Term notes and other 2,704 2,868 -5.7% 5.10% 5.11% -0.01% 105,263 111,381 -5.5%
sources of funds
Interest rate risk
management 248 510 -51.4% 0.06% 0.16% -0.10% - - 0.0%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
22,764 17,494 30.1% 5.41% 5.50% -0.09% 834,642 630,667 32.3%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
37,590 31,988 17.5% 5.04% 5.18% -0.14% 1,480,037 1,224,961 20.8%
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
--------- ---------- ------------ --------- ---------- --------- ---------- ---------- -----------
NET INTEREST INCOME
/ SPREAD $ 25,422 $ 22,658 12.2% 2.97% 3.33% -0.36%
========= ========== ============ ========= ========== =========
INTEREST RATE MARGIN 3.22% 3.52% -0.29%
========= ========== =========
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 89,612 $ 55,691 60.9%
========== ========== ===========
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 106.05% 104.55%
========== ==========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------ -----------------------------------------
CHANGES IN NET INTEREST
INCOME DUE TO: VOLUME RATE TOTAL
- ------------------------ -----------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 1,070 $ (1,755) $ (685)
Investments 8,637 414 9,051
------ --------- -------
9,707 (1,341) 8,366
------ --------- -------
------ --------- -------
INTEREST EXPENSE:
Deposits 852 (520) 332
Borrowings 5,448 (178) 5,270
------ --------- -------
6,300 (698) 5,602
------ --------- -------
------ --------- -------
NET INTEREST INCOME $ 3,407 $ (643) $2,764
======= ========= =======
</TABLE>
(1) - Real estate averages include loans held-for-sale.
-13-
<PAGE>
SELECTED FINANCIAL DATA
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
TABLE 1A - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE RATE AVERAGE BALANCE
------------------------------- ------------------------------- --------------------------------
1999 1998 VARIANCE % 1999 1998 VARIANCE BP 1999 1998 VARIANCE %
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
- -----------------------
INVESTMENTS:
Investment securities $ 16,653 $ 11,878 40.2% 6.60% 6.48% 0.12% $1,009,201 $ 732,705 37.7%
Trading securities 541 521 3.8% 8.48% 8.50% -0.02% 25,529 24,497 4.2%
Money market investments 87 133 -34.6% 7.64% 4.33% 3.31% 4,565 12,291 -62.9%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
17,281 12,532 37.9% 6.65% 6.51% 0.14% 1,039,295 769,493 35.1%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
LOANS:
Real estate (1) 7,077 6,972 1.5% 8.91% 9.98% -1.07% 317,858 279,478 13.7%
Consumer 4,514 4,259 6.0% 13.94% 13.71% 0.23% 128,468 123,289 4.2%
Financing leases 2,767 3,502 -21.0% 10.94% 11.76% -0.82% 100,373 118,096 -15.0%
Commercial and auto loans 515 377 36.6% 9.68% 9.87% -0.19% 21,150 15,129 39.8%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
14,873 15,110 -1.6% 10.43% 11.23% -0.79% 567,849 535,992 5.9%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
32,154 27,642 16.3% 7.99% 8.45% -0.46% 1,607,144 1,305,485 23.1%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES:
- ----------------------------
DEPOSITS:
Savings and demand 736 701 5.0% 2.00% 2.21% -0.21% 146,239 125,785 16.3%
Time and IRA accounts 6,808 6,569 3.6% 5.37% 5.41% -0.04% 503,164 481,452 4.5%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
7,544 7,270 3.8% 4.61% 4.75% -0.14% 649,403 607,237 6.9%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
BORROWINGS:
Repurchase agreements 9,832 6,298 56.1% 5.58% 5.29% 0.29% 698,715 472,701 47.8%
FHLB funds 993 876 13.4% 5.54% 5.73% -0.19% 71,121 60,697 17.2%
Term notes and other sources 1,424 1,366 4.2% 5.43% 5.01% 0.42% 104,027 108,220 -3.9%
of funds
Interest rate risk management (88) 249 -135.3% -0.04% 0.15% -0.19% - - 0.0%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
12,161 8,789 38.4% 5.52% 5.44% 0.08% 873,863 641,618 36.2%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
19,705 16,059 22.7% 5.13% 5.10% 0.03% 1,523,266 1,248,855 22.0%
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
-------- --------- ---------- -------- --------- ----------- ---------- ---------- ----------
NET INTEREST INCOME / SPREAD $ 12,449 $ 11,583 7.5% 2.86% 3.35% -0.49%
======== ========= ========== ======== ========= ===========
INTEREST RATE MARGIN 3.08% 3.53% -0.45%
======== ========= ===========
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 83,878 $ 56,630 48.1%
========= ========== =========
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.51% 104.53%
========= ==========
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------- --------------------------------------------------------
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL
- --------------------------------------- --------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 764 $ (1,001) $ (237)
Investments 4,417 332 4,749
-------- --------- ----------
5,181 (669) 4,512
-------- --------- ----------
-------- --------- ----------
INTEREST EXPENSE:
Deposits 349 (75) 274
Borrowings 3,085 287 3,372
-------- --------- ----------
3,434 212 3,646
-------- --------- ----------
-------- --------- ----------
NET INTEREST INCOME $ 1,747 $ (881) $ 866
======== ========= =========
</TABLE>
(1) - Real estate averages include loans held-for-sale.
-14-
<PAGE>
SELECTED FINANCIAL DATA
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
SECOND QUARTER SIX-MONTHS PERIOD
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1999 1998 VARIANCE % 1999 1998 VARIANCE %
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TABLE 2 - REVENUES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 12,449 $ 11,583 7.5% $ 25,423 $ 22,658 12.2%
Recurrent non-interest income 5,414 4,625 17.1% 10,607 8,776 20.9%
Non- recurrent non-interest income 258 6,862 -96.2% 724 8,517 -91.5%
-------- -------- ------- -------- -------- -------
$ 18,121 $ 23,070 -21.5% $ 36,754 $ 39,951 -8.0%
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
REVENUES COMPOSITION:
Net interest income 68.70% 50.20% 69.20% 56.70%
Recurrent non-interest income 29.90% 20.00% 28.90% 22.00%
Non-recurrent non-interest income 1.40% 29.80% 1.90% 21.30%
-------- --------- -------- -------
100.00% 100.00% 100.00% 100.00%
-------- --------- -------- -------
-------- --------- -------- -------
TABLE 3 - NON-INTEREST INCOME SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Bank service charges and fees and other
operating income
Fees on deposit accounts $ 562 $ 323 74.0% $ 924 $ 659 40.2%
Bank service charges and commissions 675 481 40.3% 1,251 895 39.8%
Leasing revenues 367 272 34.9% 635 479 32.6%
Other operating revenues 181 12 1408.3% 185 79 134.2%
-------- -------- ------- -------- -------- -------
1,785 1,088 64.1% 2,995 2,112 41.8%
Trust, money management and brokerage fees 2,779 2,298 20.9% 5,406 4,631 16.7%
Mortgage banking activities 850 1,239 -31.4% 2,206 2,033 8.5%
-------- -------- ------- -------- -------- -------
RECURRENT NON-INTEREST INCOME 5,414 4,625 17.1% 10,607 8,776 20.9%
Securities and trading net activity 258 6,862 -96.2% 724 8,517 -91.5%
-------- -------- ------- -------- -------- -------
TOTAL NON-INTEREST INCOME $ 5,672 $ 11,487 -50.6% $ 11,331 $ 17,293 -34.5%
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
RECURRING NON-INTEREST INCOME TO NON-INTEREST
EXPENSES RATIO 66.79% 57.38% 64.91% 57.35%
-------- --------- -------- --------
TABLE 4 - NON-INTEREST EXPENSES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Compensation and benefits
Fixed $ 2,534 $ 2,223 14.0% $ 5,019 $ 4,408 13.9%
Variable 1,096 1,576 -30.5% 2,360 2,865 -17.6%
-------- -------- ------- -------- -------- -------
3,630 3,799 -4.4% 7,379 7,273 1.5%
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
Occupancy and equipment,net 1,587 1,219 30.2% 3,112 2,465 26.2%
Advertising and business promotion 447 703 -36.4% 1,078 1,262 -14.6%
Professional and service fees 578 654 -11.6% 1,086 995 9.1%
Communications 355 429 -17.2% 725 758 -4.4%
Municipal and other general taxes 477 428 11.4% 955 857 11.4%
Insurance, including deposits insurance 138 102 35.3% 272 192 41.7%
Printing, postage, stationery and supplies 218 202 7.9% 415 358 15.9%
Other operating expenses 676 524 29.0% 1,318 1,142 15.4%
-------- -------- ------- -------- -------- -------
OTHER NON-INTEREST EXPENSES 4,476 4,261 5.0% 8,961 8,029 11.6%
Other non-recurring expenses - 209 -100.0% - 337 -100.0%
-------- -------- ------- -------- -------- -------
TOTAL NON-INTEREST EXPENSES $ 8,106 $ 8,269 -2.0% $ 16,340 $ 15,639 4.5%
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
RELEVANT RATIOS:
Efficiency ratio 45.38% 49.58% 45.35% 48.59%
-------- -------- -------- --------
Expense ratio 0.67% 1.09% 0.73% 1.05%
-------- -------- -------- --------
Compensation and benefits to
recurrent non-interest expenses 44.8% 47.1% 45.2% 47.5%
-------- -------- -------- --------
Variable compensation to total compensation 30.2% 41.5% 32.0% 39.4%
-------- -------- -------- --------
Compensation to total average assets 0.87% 1.06% 0.90% 1.05%
-------- -------- -------- --------
Average compensation per employee $ 40.6 $ 42.6 $ 40.8 $ 39.9
-------- -------- -------- --------
Bank assets per employee $ 5,470 $ 4,648
-------- --------
GROUP'S WORK FORCE:
Bank 314 314
Trust 26 28
Brokerage 12 11
-------- --------
352 353
-------- --------
-------- --------
Average number of full-time employees 357 356 362 365
-------- --------- -------- --------
</TABLE>
-15-
<PAGE>
SELECTED FINANCIAL DATA
AS OF DECEMBER 31, 1999 AND 1998 AND JUNE 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------ -----------------
December 31, 1999 DECEMBER 31, 1998 VARIANCE % JUNE 30, 1999
------------------------------------------------------------ -----------------
<S> <C> <C> <C> <C>
TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
Mortgage-backed securities and CMO's $ 831,819 $ 626,521 32.8% $ 696,252
US and PR Government securities 222,886 194,137 14.8% 209,232
FHLB stock and other investments 15,235 16,662 -8.6% 41,045
------------------- -------------------- ----------- ---------------
1,069,940 837,320 27.8% 946,529
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
LOANS:
Real estate 325,133 312,945 3.9% 340,254
Consumer 132,599 114,257 16.1% 122,212
Financing leases 96,898 125,079 -22.5% 110,297
Commercial and auto 20,602 14,462 42.5% 10,555
------------------- -------------------- ----------- ---------------
575,232 566,743 1.5% 583,318
Allowance for loan losses (7,659) (9,693) -21.0% (9,002)
------------------- -------------------- ----------- ---------------
567,573 557,050 1.9% 574,316
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
TOTAL INTEREST-EARNING ASSETS 1,637,513 1,394,370 17.4% 1,520,845
Non-interest earning assets 79,988 65,060 22.9% 66,502
------------------- -------------------- ----------- ---------------
TOTAL ASSETS $ 1,717,501 $ 1,459,430 17.7% $ 1,587,347
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMO's 77.7% 74.8% 73.6%
US and PR Government securities 20.8% 23.2% 22.1%
FHLB stock and other investments 1.5% 2.0% 4.3%
------------------- -------------------- ---------------
100.0% 100.0% 100.0%
------------------- -------------------- ---------------
------------------- -------------------- ---------------
LOAN PORTFOLIO COMPOSITION:
Real Estate 56.5% 55.2% 58.3%
Consumer 23.1% 20.2% 21.0%
Financing leases 16.8% 22.1% 18.9%
Commercial and auto 3.6% 2.5% 1.8%
------------------- -------------------- ---------------
100.0% 100.0% 100.0%
------------------- -------------------- ---------------
------------------- -------------------- ---------------
TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
- -------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand deposits $ 153,119 $ 134,603 13.8% $ 142,679
Time deposits and IRA accounts 497,200 479,540 3.7% 508,648
Accrued Interest 3,912 4,479 -12.7% 5,661
------------------- -------------------- ----------- ---------------
654,231 618,622 5.8% 656,988
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
BORROWINGS:
Repurchase agreements 739,349 534,290 38.4% 596,226
FHLB funds 81,200 60,100 35.1% 68,400
Term notes and other sources of funds 96,500 106,500 -9.4% 106,500
------------------- -------------------- ----------- ---------------
917,049 700,890 30.8% 771,126
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
TOTAL INTEREST-BEARING LIABILITIES 1,571,280 1,319,512 19.1% 1,428,114
Non interest-bearing liabilities 21,465 29,145 -26.4% 35,201
------------------- -------------------- ----------- ---------------
TOTAL LIABILITIES $ 1,592,745 $ 1,348,657 18.1% $ 1,463,315
------------------- -------------------- ----------- ---------------
------------------- -------------------- ----------- ---------------
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 23.4% 21.8% 21.7%
Time deposits and IRA accounts 76.0% 77.5% 77.4%
Accrued Interest 0.6% 0.7% 0.9%
------------------- -------------------- ---------------
100.0% 100.0% 100.0%
------------------- -------------------- ---------------
------------------- -------------------- ---------------
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 80.6% 76.2% 77.3%
FHLB funds 8.9% 8.6% 8.9%
Term notes and other sources of funds 10.5% 15.2% 13.8%
------------------- -------------------- ---------------
100.0% 100.0% 100.0%
------------------- -------------------- ---------------
------------------- -------------------- ---------------
</TABLE>
-16-
<PAGE>
SELECTED FINANCIAL DATA
AS OF DECEMBER 31, 1999 AND 1998 AND JUNE 30, 1999
(Dollars in thousands)
>
<TABLE>
<CAPTION>
---------------------------------------- ----------
DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 VARIANCE % 1999
---------------------------------------- ----------
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL DATA:
Stockholders' equity $ 124,756 $ 110,773 12.6% $ 124,032
----------- ----------- -------- -----------
Leverage Capital ( minimum required - 4.00%) 8.63% 7.24% 19.3% 8.78%
----------- ----------- -------- -----------
Total Risk-Based Capital (minimum required - 8.00%) 26.35% 19.62% 34.3% 25.28%
----------- ----------- -------- -----------
Tier 1 Risk-Based capital (minimum required - 4.00%) 25.10% 18.37% 36.6% 24.02%
----------- ----------- -------- -----------
STOCK DATA:
Outstanding common shares, net of treasury 12,777 13,060 -2.2% 12,835
----------- ----------- -------- -----------
Book value $ 7.12 $ 8.17 -12.9% $ 7.05
----------- ----------- -------- -----------
Market Price at end of period $ 22.06 $ 31.31 -29.5% $ 24.13
----------- ----------- -------- -----------
Market capitalization $ 281,865 $ 408,909 -31.1% $ 309,644
----------- ----------- -------- -----------
DIVIDEND DATA:
Dividends declared $ 3,833 $ 3,451 11.1% $ 7,369
----------- ----------- -------- -----------
Dividends declared per share $ 0.300 $ 0.263 14.1% $ 0.563
----------- ----------- -------- -----------
Payout ratio 25.98% 24.35% 6.7% 28.02%
----------- ----------- -------- -----------
Dividend yield 2.69% 1.50% 79.3% 1.94%
----------- ----------- -------- -----------
The following provides the high and low prices and dividend per share of the
Group's stock for each quarter of the last three fiscal periods. Common stock
prices were adjusted to give retroactive effect to the stock splits declared on
the Group's common stock.
--------------------------- -----------
PRICE DIVIDEND
---------------------------
HIGH LOW PER SHARE
------------ ------------ -----------
FISCAL 2000:
December 31, 1999 $ 23.87 $ 19.69 $ 0.150
----------- ----------- ----------
September 30, 1999 $ 28.00 $ 21.50 $ 0.150
----------- ----------- ----------
FISCAL 1999:
June 30, 1999 $ 29.87 $ 24.13 $ 0.150
----------- ----------- ----------
March 31, 1999 $ 29.63 $ 27.50 $ 0.150
----------- ----------- ----------
December 31, 1998 $ 32.00 $ 28.00 $ 0.150
----------- ----------- ----------
September 30, 1998 $ 32.26 $ 28.84 $ 0.113
----------- ----------- ----------
FISCAL 1998:
June 30, 1998 $ 34.60 $ 27.66 $ 0.113
----------- ----------- ----------
March 31, 1998 $ 29.35 $ 24.85 $ 0.113
----------- ----------- ----------
December 31, 1997 $ 23.63 $ 18.38 $ 0.094
----------- ----------- ----------
September 30, 1997 $ 22.28 $ 16.95 $ 0.094
----------- ----------- ----------
TABLE 8 - FINANCIAL ASSETS SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Trust assets managed $ 1,402,600 $ 1,313,800 6.8% $ 1,394,800
Assets gathered by broker-dealer 872,500 813,300 7.3% 864,700
------------ ------------ --------- ------------
MANAGED ASSETS 2,275,100 2,127,100 7.0% 2,259,500
Group assets 1,717,500 1,459,400 17.7% 1,587,300
------------ ------------ ---------- ------------
$ 3,992,600 $ 3,586,500 11.3% $ 3,846,800
------------ ------------ --------- ------------
------------ ------------ --------- ------------
</TABLE>
-17-
<PAGE>
SELECTED FINANCIAL DATA
SECOND QUARTER AND SIX-MONTHS PERIOD ENDED DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
SECOND QUARTER SIX-MONTHS PERIOD
DECEMBER 31, DECEMBER 31,
-------------------------------------- ------------------------------------
1999 1998 VARIANCE % 1999 1998 VARIANCE %
-------------------------------------- ------------------------------------
TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE $ 8,731 $ 5,683 $ 9,002 $ 5,658
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Provision for loan losses 1,500 7,150 3,250 9,750
Net charge-off's (2,572) (3,140) (4,593) (5,715)
----------- ----------- ---------- -----------
NET INCREASE (DECREASE) (1,072) 4,010 (1,343) 4,035
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
ENDING BALANCE $ 7,659 $ 9,693 $ 7,659 $ 9,693
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
CHARGE-OFF'S:
Real estate $ (24) $ - -100.0% $ (24) $ (2) 1100.0%
Consumer (2,015) (1,596) 26.3% (3,764) (3,183) 18.3%
Leasing (1,429) (2,007) -28.8% (2,404) (3,311) -27.4%
Commercial and others (135) (149) -9.4% (169) (284) -40.5%
----------- ----------- --------- ---------- ----------- ---------
(3,603) (3,752) -4.0% (6,361) (6,780) -6.2%
----------- ----------- --------- ---------- ----------- ---------
----------- ----------- --------- ---------- ----------- ---------
RECOVERIES:
Real estate - - 0.0% - 16 -100.0%
Consumer 552 365 51.2% 934 484 93.0%
Leasing 375 218 72.0% 670 501 33.7%
Commercial and others 104 29 258.6% 164 64 156.3%
----------- ----------- --------- ---------- ----------- ---------
1,031 612 68.5% 1,768 1,065 66.0%
----------- ----------- --------- ---------- ----------- ---------
----------- ----------- --------- ---------- ----------- ---------
NET CHARGE-OFF'S:
Real estate (24) - -100.0% (24) 14 -271.4%
Consumer (1,463) (1,231) 18.8% (2,830) (2,699) 4.9%
Leasing (1,054) (1,789) -41.1% (1,734) (2,810) -38.3%
Commercial and others (31) (120) -74.2% (5) (220) -97.7%
----------- ----------- --------- ---------- ----------- ---------
$ (2,572) $ (3,140) -18.1% $ (4,593) $ (5,715) -19.6%
----------- ----------- --------- ---------- ----------- ---------
----------- ----------- --------- ---------- ----------- ---------
LOANS:
Outstanding at December 31, $ 575,232 $ 566,743 $ 575,232 $ 566,743
----------- ----------- ---------- -----------
Average loans $ 567,849 $ 557,786 $ 567,609 $ 565,911
----------- ----------- ---------- -----------
RATIOS:
Recoveries to net-charge-off's 28.6% 16.3% 27.8% 15.7%
----------- ----------- ---------- -----------
Net charge-off's to average loans 1.81% 2.25% 1.62% 2.02%
----------- ----------- ---------- -----------
Allowance coverage ratio 1.33% 1.71% 1.33% 1.71%
----------- ----------- ---------- -----------
TABLE 10 - NON-PERFORMING ASSETS (AT DECEMBER 31,):
- -----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS:
Non-performing loans $ 17,623 $ 21,794 -19.1%
Foreclosed real estate 245 316 -22.5%
Repossessed autos 308 613 -49.8%
Repossessed equipment - 270 -100.0%
---------- ----------- ---------
$ 18,176 $ 22,993 -20.9%
---------- ----------- ---------
---------- ----------- ---------
NON-PERFORMING LOANS:
Real estate $ 7,852 $ 11,707 -32.9%
Consumer 1,183 660 79.2%
Financing leases 7,536 8,588 -12.2%
Commercial 1,052 839 25.4%
---------- ----------- ---------
$ 17,623 $ 21,794 -19.1%
---------- ----------- ---------
---------- ----------- ---------
NON-PERFORMING LOANS COMPOSITION:
Real estate 44.6% 53.7%
Consumer 6.7% 3.0%
Financing leases 42.8% 39.4%
Commercial 5.9% 3.9%
---------- -----------
100.0% 100.0%
---------- -----------
---------- -----------
RELEVANT RATIOS:
Non-performing loans to total loans 3.06% 3.85%
---------- -----------
Non-performing loans reserve coverage ratio 43.46% 44.48%
---------- -----------
Non-performing loans reserve coverage ratio (excluding real estate loans) 78.39% 96.09%
---------- -----------
Non-perfoming assets to total assets 1.06% 1.58%
---------- -----------
Non-perfoming assets to total capital 14.57% 20.76%
---------- -----------
</TABLE>
-18-
<PAGE>
Average interest-earning assets for the second quarter of fiscal 2000 reached
$1.607 billion, an increase of 23.1% compared with $1.305 billion in fiscal
1999. For the first six months of fiscal 2000, reached $1.570 billion, 22.6%
higher than $1.281 billion a year earlier. Both rises were fueled by a solid
growth in the Group's investment portfolio, particularly mortgage-backed
securities, as Oriental continues its strategy of converting residential real
estate loans sold in the secondary market to tax-advantaged mortgage-backed
securities.
In the second quarter of fiscal 2000, the average yield on interest-earning
assets was 7.99%, 46 basis points lower than the 8.45% attained in the same
period of fiscal 1999. For the first six months of fiscal 2000 it was 8.01%,
50 basis points lower than the 8.51% reported a year ago. There were two main
reasons for the yield erosion experienced in both periods of fiscal 2000.
First, the strong expansion of Group's investment portfolio -- which carries
a lower yield than the loan portfolio but provides less risk and generates a
significant amount of tax-exempt interest. The other factor was the
compression of the loan portfolio yield, which decreased by 79 basis points
(10.43% versus 11.23%) in the second quarter and 71 basis points (10.48%
versus 11.19%) during the first six months. A change in the loan portfolio
mix toward low-risk residential mortgage loans caused this yield decline.
Interest expense for the second quarter of fiscal 2000 rose 22.7% to
$19.7 million from $16.1 million reported in the comparable period of fiscal
1999. A larger base of interest-bearing liabilities used to fund the Group's
interest-earning assets growth, coupled by a slightly higher average cost of
funds drove the increase. For the first six months of fiscal 2000, interest
expense grew by 17.5% to $37.6 million from $31.9 million posted the year
before. A higher volume of interest-bearing liabilities as previously
explained; tempered by a decline in the average cost of funds caused this
rise. See Tables 1 and 1A for the impact in interest expense due to changes
in volume and rates.
Average interest-bearing liabilities for the second quarter of fiscal 2000
reached $1.523 billion, up 22.0% from the $1.249 billion a year ago. For the
first six months of fiscal 2000, they reached $1.480 billion, 20.8% higher than
$1.225 billion a year earlier. Larger volumes of repurchase agreements and
deposits, which were necessary to fund the Group's investment portfolio growth,
drove both increases.
For the second quarter of fiscal 2000, the average cost of funds on
interest-bearing liabilities was 5.13%, compared with 5.10% attained in
fiscal 1999, up 3 basis points. A higher interest rate scenario resulting
from two interest rate hikes by the federal reserve triggered this rise.
During the past quarter, the Federal Reserve increased rates by 25 basis
points for two successive months. In the other hand, the Group's average cost
of funds for the first six months of fiscal 2000 was 34 basis points lower
than in fiscal 1999, 5.04% versus 5.18%. A lower interest scenario that
prevailed during the first half of fiscal 2000 as compared to the same period
of fiscal 1999 caused this overall cost decline.
NON-INTEREST INCOME
In line with the Group's strategy of revenue expansion, recurrent
non-interest revenues continued to be a catalyst of the Group's earnings
performance for both periods of fiscal 2000. For the second quarter, they
rose 17.1% to $5.4 million from $4.6 million in the preceding year second
quarter. For the first six months they were 20.9% higher, $10.6 million
versus $8.8 million in the same period of fiscal 1999. Higher trust,
brokerage, money management and bank service fees drove these improvements
(see Table 3).
Trust, money management and brokerage fees, the principal component of
recurrent non-interest income, continued its well-established growth pattern
during the second quarter of fiscal 2000, rising 20.9% to $2.8 million from
$2.3 million in the preceding second quarter. For the first six months, grew
16.7% to $5.4 million from $4.6 million the year before. The larger volume of
accounts and assets managed by both the Group's trust department and the
broker-dealer subsidiary triggered these growths (see "Financial Condition"
section).
For the second quarter of fiscal 2000, gains generated by mortgage banking
activities amounted to $850,000, 31.4% lower than the $1.2 million, earned in
same quarter of fiscal 1999. Lower volume of loans sold during the past
quarter caused this decrease. For the first six months of fiscal 2000,
mortgage banking activities totaled $2.2 million versus $2.0 million in the
first half of fiscal 1999, up 8.5%. Higher spreads attained in certain of the
loan products sold in the first half of fiscal 2000 fueled this increase.
Bank services fees and other operating revenues consist primarily of fees
generated by deposit accounts, leasing, electronic banking and customer
services. These revenues totaled $1.8 million in the second quarter of fiscal
2000, a 64.1% hike versus the $1.1 million reported in the same period of
fiscal 1999. For the first six months of fiscal 2000, they totaled $3.0
million, up 41.8% versus $2.1 million in the comparable period of fiscal
1999. Increases in both periods reflect higher revenues from bank services
and deposit accounts, which were driven by a new banking fees structure,
expansion of the electronic banking business and a growth in its core deposit
base.
For the second quarter of fiscal 2000, non-recurrent securities and trading
gains amounted to $258,000 versus $6.9 million reported in the same period a
year ago. For the first six months, they amounted to $724,000 versus
$8.5 million the year before.
-19-
<PAGE>
NON-INTEREST EXPENSES
As shown in Table 4, non-interest expenses for the second quarter of fiscal
2000 decreased 2% to $8.1 million from $8.3 million in the comparable period
of fiscal 1999. The efficiency and expense ratios this quarter improved to
45.38% and 0.67%, respectively, from 49.58% and 1.09%, respectively, a year
earlier.
In the other hand, non-interest expenses slightly increased 4.5% for the
first six months of fiscal 2000, $16.3 million versus $15.6 million in the
comparable period of 1999. Notwithstanding the above increase, the efficiency
and expense ratios for the period improved to 45.35% and 0.73%, respectively,
from 48.59% and 1.05%, respectively, a year earlier.
Employee compensation and benefits is the Group's largest expense category.
For the second quarter of fiscal 2000, it amounted $3.6 million (0.87 % of
total average assets) versus $3.8 million (1.06 % of total average assets) in
the same period of fiscal 1999. A decline in variable compensation (which is
tied to production) was the main reason for the decrease. For the first six
months of fiscal 2000, it amounted $7.4 million (0.90% of total average
assets) versus $7.3 million (1.05% of total average assets) in the comparable
period of fiscal 1999. Tight control over the Group's level of staff achieved
this slight increase (see Table 4), despite an increase in the volume of
business and the asset base. Refer to Table 4 for more selected data
regarding employee compensation and benefits.
Other recurring non-interest expenses for the second quarter of fiscal 2000
increased 5% to $4.5 million as compared to $4.3 million in the same period
of fiscal 1999. Larger occupancy and equipment expenses led this rise. The
main contributors in the growth of occupancy and equipment costs were
increases in capital expenditures on leasehold improvements and EDP
equipment. This reflects the additional banking and administrative offices
opened during the past 18 months and the enhancements made to the Group's
systems to enable the expansion of its electronic delivery capability and
improvement of customers' service
For the first six months of fiscal 2000, other recurring non-interest
expenses increased 11.6% to $9.0 million as compared to $8.0 million in
fiscal 1999 comparable period. A greater amount of occupancy and equipment
expenses, as previously explained, combined with higher professional and
service fees led this rise -- directly related to the Group's expansion and
new lines of businesses.
The larger amount of professional and service fees reflect the Group's higher
expenditures related with consulting and technical support. Also,
expenditures to prepare the Group for the year 2000 (Y2K) computer readiness
and other expenses related to the recent conversion of the Group's electronic
core system were responsible for this growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses in the second quarter of fiscal 2000 totaled
$1.5 million, down 79% from the $7.15 million reported in the same period of
fiscal 1999. For the first six months of fiscal 2000 it amounted to
$3.25 million, 66.7% lower than $9.75 million reported in fiscal 1999
comparable period. Both declines were in response to the lower level of net
credit losses and non-performing assets, and current and expected economic
conditions. Please refer to the allowance for loan losses and non-performing
assets section for a more detailed analysis of the allowances for loan
losses, net credit losses and credit quality statistics.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of fiscal 2000 amounted
to $518,000 (6.1% of pre-tax earnings) compared with $1.28 million (16.8% of
pre-tax earnings) a year ago, down 59.7%. For the second quarter of fiscal
2000, they amounted to $1.22 million (7.1% of pre-tax earnings) versus
$2.14 million (14.7% of pre-tax earnings) the year before, 42.9% lower. These
reductions were principally due to a higher amount of tax-exempt income
generated by the Group's investment portfolio. The Group has maintained an
effective tax rate lower than the statutory rate of 39% mainly due to
interest income earned on certain investments and loans which are exempt from
income taxes, net of the disallowance of expenses attributable to the exempt
income.
FINANCIAL CONDITION
GROUP'S ASSETS
At December 31, 1999, the Group's total assets amounted to $1.718 billion, an
increase of 17.7% when compared to $1.459 billion a year ago. At the same
date, interest-earning assets reached $1.638 billion, up 17.4% versus
$1.394 billion a year earlier. A significant expansion of 27.8% in the Group's
investment portfolio, particularly mortgage-backed securities, made both
increases possible (see Table 5).
Investments are Oriental's largest interest-earning assets component. It
mainly consists of money market investments, U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities, collateralized
mortgage obligations and P.R. Government municipal bonds. At December 31,
1999, the Group's investment portfolio is of a high quality. Approximately
98% is rated AAA and generates a significant amount of tax-exempt interest
which lowers the Group's effective tax rate (see Table 5 and Note 2 of the
attached Unaudited Consolidated Financial Statements).
A strong growth in mortgage-backed securities and CMO's drove the investment
portfolio expansion. They increased 32.8% to $831.8
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<PAGE>
million (77.7% of the total portfolio) from $626.5 million (74.8% of the
total portfolio) the year before, as Oriental continued its strategy of
pooling residential real estate loans into mortgage-backed securities. Also,
a 14.8% rise in the US and PR government securities portfolio enhanced this
growth. At December 31, 1999, they amounted to $222.9 million (20.8% of the
total portfolio) versus $194.1 million or (23.2% of the total portfolio) a
year ago.
At December 31,1999, Oriental's loan portfolio, the second largest category
of the Bank's interest-earning assets, amounted to $567.5 million, 1.9%
higher than the $557.1 million a year ago. Expansions in the real estate and
consumer portfolios and a decrease in the allowance for loan losses led this
increase; partially offset by a downsize in the leasing portfolio. Table 5
presents the Group's loan portfolio composition and mix at the end of the
periods analyzed.
The Group's real estate loans portfolio is mainly comprised of residential
loans, home equity loans and personal loans collateralized by real estate. At
December 31, 1999, the real estate loans portfolio amounted to $325.1 million
(56.5% of the loan portfolio), a 3.9% increase when compared to $312.9
million (55.2% of the loan's portfolio) the year before. This growth was
achieved despite the sale of over $200 million in residential loans during
the past twelve months as management took advantage of market conditions to
convert the bulk of its mortgage origination into mortgage-backed securities.
The second largest component of the Group's loan portfolio is consumer loans,
which mainly includes unsecured personal loans, margin loans, cash collateral
loans and credit lines. At December 31,1999, the consumer loans portfolio
totaled $132.5 million (23.1% of the Group's loan portfolio), a 16.1% growth
compared to the $114.2 million (20.2% of the Group's loan portfolio) a year
ago. The largest contributor to this rise was personal loans, which grew
12.7% over the past twelve months to $114.5 from $101.6 million reported the
year before. The increase was mainly attained through strong marketing
efforts and the launching of new products while controlling credit risk
through prudent underwriting standards implemented using a credit scoring
system.
The Group's leasing portfolio consists of auto and equipment leases. At
December 31,1999, it amounted to $96.9 million (16.8% of the loan portfolio),
down 22.5%versus $125.1 million (22.1% of the loan portfolio) a year ago. The
Group's intentional slowdown in lease originations, due to stronger
underwriting standards and discontinued equipment-leasing origination in
March 1999, caused the downsizing.
LIABILITIES AND FUNDING SOURCES
As shown in Table 6, at December 31, 1999, Oriental's total liabilities
reached $1.593 billion, 18.1% higher than the $1.349 billion reported a year
earlier. Interest-bearing liabilities, the Group's funding sources, amounted
to $1.571 billion at the end of the second quarter of fiscal 2000 versus
$1.320 billion the year before, a 19.1% increase. Increases in deposits and
repurchase agreements drove these growths.
At December 31, 1999, deposits, the second largest category of the Group's
interest-bearing liabilities and a cost-effective source of funding, reached
$654.2 million, up 5.8% versus the $618.6 million a year ago. A $18.5 million
or 13.8% increase in demand and savings deposits realized most of the growth,
followed by a $17.7 million or 3.7% rise in time deposits and IRA accounts.
Table 6 presents the composition of the Group's deposits at the end of the
periods analyzed.
Borrowings are Oriental's largest interest-bearing liability component. It
consists mainly of diversified funding sources through the use of Federal
Home Loan Bank of New York (FHLB) advances and borrowings, repurchase
agreements, term notes, notes payable and lines of credit. At December 31,
1999, they amounted to $917.0 million, 30.8% higher than the $700.9 million a
year ago. This increase reflects a strong growth in repurchase agreements,
which was necessary to fund the increase in interest-earning assets
experienced during the period, particularly mortgage-backed securities.
The FHLB system functions as a source of credit to financial institutions
that are members of a regional Federal Home Loan Bank. As a member of the of
the FHLB the Group can obtain advances from the FHLB, secured by the FHLB
stock owned by the Group, as well as by certain of the Group's mortgages and
investment securities. Table 7 presents the composition of the Group's other
borrowings at the end of the periods analyzed.
STOCKHOLDERS' EQUITY
At December 31, 1999, Oriental's total stockholders' equity reached
$124.8 million, a 12.6% increase from $110.7 million a year ago. The main
reasons for this growth were earnings reported during the past 12 months along
with $32.3 million in net proceeds generated from the issuance of preferred
stock. For more in the Group's of stockholders' equity expansion, refer to the
Unaudited Consolidated Statement of Changes in Stockholders' Equity and of
Comprehensive Income included in the attached Unaudited Consolidated
Financial Statements.
During the first six months of fiscal 2000, the Group repurchased 82,900
common shares bringing to 986,799 shares (with a cost of $25.3 million) the
number of shares held by the Group's treasury. The Group's common stock is
traded in the New York Stock Exchange (NYSE) under the symbol OFG. At
December 31, 1999, the Group's market value for its outstanding stock was
$281.9 million ($22.06 per share) versus $408.9 million ($31.31 per share) a
year earlier.
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<PAGE>
At December 31, 1999, the Group's book value per share was $7.12 versus $8.17
a year ago. A $26.2 million unfavorable turnaround in the fair value of
securities available-for-sale (included as part of accumulated other
comprehensive loss) along with $13.4 million spent on treasury stock
repurchases over the last 12 months caused this book value drop.
During the first six months of fiscal 2000, the Group declared dividends
amounting to $3.8 million ($0.30 per share) compared to $3.4 million ($0.263
per share) in the same period of fiscal 1999, up 11.1%. For the first six
months of fiscal 2000, the dividend payout ratio and dividend yield were
25.98% and 2.69%, respectively, compared to 24.35% and 1.50%, respectively,
in the preceding fiscal year.
Under the regulatory framework for prompt corrective action, banks and bank
holding companies, which meet or exceed a Tier I risk-based ratio of 6%, a
total capital risk-based ratio of 10% and a leverage ratio of 5% are
considered well capitalized. As shown on Table 7, the Group exceeds those
regulatory risk-based capital requirements, due to the high level of capital
and the conservative nature of the Group's assets.
GROUP'S FINANCIAL ASSETS
As shown on Table 8, the Group`s total financial assets include the Group's
assets and assets managed by the trust and brokerage business. At December
31, 1999, they reached $3.993 billion - up 11.3% from $3.587 billion a year
ago. The Group's financial assets main component is the assets owned by the
Group, of which about 99% are owned by the Group's banking subsidiary. For
more on this financial asset component, refer to Group's Assets under
Financial Condition.
Oriental's second largest financial assets component is assets managed by the
trust. The Group's trust offers various different types of IRA products and
manages 401(K) and Keogh retirement plans, custodian and corporate trust
accounts. At December 31, 1999, total assets managed by the Group's trust
amounted $1.403 billion, 6.8% higher than the $1.314 billion a year ago. This
increase was fueled by a solid 14% growth in individual retirement accounts
(IRA), the most significant asset managed, which totaled $548.2 million
versus the $477.8 million a year ago.
The other financial asset component is assets gathered by the broker-dealer.
The Group's broker-dealer subsidiary offers a wide array of investment
alternatives to its client's base such as fixed and variable annuities,
tax-advantaged fixed income securities, mutual funds, stocks and bonds. At
December 31, 1999, total assets gathered by the broker-dealer from its
customer investment accounts reached $872.5 million, up 7.3% from $813.3
million a year ago.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
At December 31, 1999, the Group's allowance for loan losses amounted to
$7.66 million (1.33% of total loans) versus $9.69 million (1.71% of total
loans) a year earlier. The Group maintains an allowance for loan losses at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks. Oriental's allowance for loan
losses policy provides for a detailed quarterly analysis of possible losses.
The analysis includes a review of historical loan loss experience, value of
underlying collateral, current economic conditions, financial condition of
borrowers and other pertinent factors.
While management uses available information in estimating possible loan
losses, future additions to the allowance may be necessary based on factors
beyond Oriental's control, such as factors affecting Puerto Rico economic
conditions. In addition, bank regulatory agencies, as an integral part of
their examination process, periodically review the Group's allowance for loan
losses. Such agencies may require the Group to recognize additions to the
allowance based on their judgment of information available at the time of
their examinations.
Net credit losses for the second quarter of fiscal 2000, totaled $2.57
million (1.81% of average loans), compared to $3.14 million (2.25% of average
loans) for the same period of fiscal 1999. For the first six months of fiscal
2000, they amounted to $4.59 million (1.62% of average loans), compared to
$5.72 million (2.02% of average loans) for the comparable period of fiscal
1999.
The lower level of net credit losses experienced during both periods of
fiscal 2000 was primarily associated to a reduction in financing leases net
credit losses. It is worth noting that consumer loans net credit losses fell
slightly despite a 16.1% growth in the portfolio and that tighter
underwriting standards and collection procedures implemented last year are
showing positive results. As such, management expects the level of credit
losses to continue to improve in fiscal 2000. Table 9 sets forth an analysis
of activity in the allowance for loan losses and presents selected loan loss
statistics.
The Group's non-performing assets include non-performing loans, foreclosed
real estate owned and other repossessed assets (see Table 10). At
December 31, 1999, the Group's asset quality improved as non-performing assets
totaled $18.2 million (1.06% of total assets) versus $22.9 million (1.58% of
total assets) at the same date of fiscal 1999. The decrease was principally
due to a lower level of non-performing loans; mainly non-performing real estate
loans and financing leases. This improvement stems from tighter underwriting
standards and collection procedures implemented, as previously explained.
At December 31, 1999, the allowance for loan losses to non-performing loans
coverage ratio was 43.46%. Excluding the lesser-risk real estate loans, the
ratio is much higher, 78.39%. A year ago, these ratios were 44.48% and
96.09%, respectively. Detailed information concerning each of the items that
comprise non-performing assets follows:
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<PAGE>
- - REAL ESTATE LOANS - are placed on a non-accrual basis when they become 90
days or more past due, except for well-secured residential loans, and are
charged-off based on the specific evaluation of the collateral underlying
the loan. At December 31, 1999, the Group's non-performing real estate
loans totaled $7.85 million (44.6% of the Group's non-performing loans).
Non-performing loans in this category are primarily residential mortgage
loans. Based on the value of the underlying collateral and the
loan-to-value ratios, management considers that no significant losses will
be incurred on this portfolio.
- - COMMERCIAL BUSINESS LOANS - are placed on non-accrual basis when they
become 90 days or more past due and are charged-off based on the specific
evaluation of the collateral underlying the loan. At December 31, 1999, the
Group's non-performing commercial business loans amounted to $1.05 million
(5.9% of the Group's non-performing loans). Of the total balance, $944,000
(10 loans) are guaranteed by real estate.
- - FINANCE LEASES - are placed on non-accrual status when they become 90 days
past due unless well secured by its collateral. At December 31, 1999, the
Group's non-performing auto and equipment leases portfolio amounted to
$7.53 million (42.8% of the Group's total non-performing loans). The
underlying collateral secures these financing leases.
- - CONSUMER LOANS - are placed on non-accrual status when they become 90 days
past due and charged-off when payments are delinquent 120 days. At
December 31, 1999, the Group's non-performing consumer loans amounted
to $1.18 million (6.7% of the Group's total non-performing loans).
- - FORECLOSED REAL ESTATE - is initially recorded at the lower of the related
loan balance or fair value at the date of foreclosure, any excess of the
loan balance over the estimated fair market value of the property is
charged against the allowance for loan losses. Subsequently, any excess of
the carrying value over the estimated fair market value less disposition
cost is charged to operations. Management is actively seeking prospective
buyers for these foreclosed real estate properties.
- - OTHER REPOSSESSED ASSETS - are initially recorded at estimated net
realizable value. At the time of disposition, any additional losses
incurred are charged against the allowance for loan losses. At December 31,
1999, the inventory of repossessed automobiles consisted of 27 units
amounting to $308,000 ($11,410 average per unit).
YEAR 2000 READINESS DISCLOSURE
The millennium date change did not cause any problems to the Group's computers
and management information systems, which already had been tested and fully
certified as being Y2K compliant under regulatory guidelines.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The Group's interest rate risk and asset/liability management are the
responsibility of the Asset and Liability Management Committee ("ALCO"),
which reports to the Board of Directors and is composed of members of the
Group's senior management. The principal objective of ALCO is to enhance
profitability while maintaining an appropriate level of interest rate and
liquidity risks. ALCO is also involved in formulating economic projections
and strategies used by the Group in its planning and budgeting process; and
oversees the Group's sources, uses and pricing of funds.
Interest rate risk can be defined as the exposure of the Group's operating
results or financial position to adverse movements in market interest rates
which mainly occurs when assets and liabilities reprice at different times
and at different rates. This difference is commonly referred to as a
"maturity mismatch" or "gap". The Group employs various techniques to assess
the degree of interest rate risk.
The Group is liability sensitive due to its fixed rate and medium-term asset
composition being funded with shorter-term repricing liabilities. As a
result, the Group uses interest rate swaps and caps as a hedging mechanism to
offset said mismatch and control exposures of interest rate risk. Under the
swaps, the Group pays a fixed annual cost and receives a floating ninety-day
payment based on LIBOR. Floating rate payments received from the swap
counterparty correspond to the floating rate payments made on the borrowings
or notes thus resulting in a net fixed rate cost to the Group. Interest rate
caps provide protection against increases in interest rates above cap rates.
LIQUIDITY RISK MANAGEMENT
Liquidity refers to the level of cash, eligible investments easily converted
into cash and lines of credit available to meet unanticipated requirements.
The objective of the Group's liquidity management is to meet operating
expenses and ensure sufficient cash flow to fund the origination and
acquisition of assets, the repayment of deposit withdrawals and the
maturities of borrowings. Other objectives pursued in the Group's liquidity
management are the diversification of funding sources and the control of
interest rate risk. Management tries to diversify the sources of financing
used by the Group to avoid undue reliance on any particular source.
-23-
<PAGE>
At December 31, 1999, the Group's liquidity was deemed appropriate. In
addition to $886 million in liquid assets, includes $62.9 million available
from unused lines of credit with other financial institutions and
$23.7 million of borrowing potential with the FHLB. The Group's liquidity
position is reviewed and monitored by the ALCO Committee on a regular basis.
Management believes that the Group will continue to maintain adequate
liquidity levels in the future.
The Group's principal sources of funds are net deposit inflows, loan
repayments, mortgage-backed and investment securities principal and interest
payments, reverse repurchase agreements, FHLB advances and other borrowings.
The Group has obtained long-term funding through the issuance of notes and
long-term reverse repurchase agreements. The Group's principal uses of funds
are the origination and purchase of loans, the purchase of mortgage-backed
and investment securities, the repayment of maturing deposits and borrowings.
PART - 2
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims
under various theories of damages arising out of, and incidental to its
business. The Group is vigorously contesting those claims. Based upon a
review with legal counsel and the development of these matters to date,
management is of the opinion that the ultimate aggregate liability, if any,
resulting from these claims will not have a material adverse effect on the
Group's financial position or the result of operations.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A - FINANCIAL STATEMENTS SCHEDULES
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - REPORTS ON FORM 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended December 31,1999.
C - EXHIBITS
Exhibits filed as part of this Form 10-Q
27.0 Financial Data Schedule E-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
(REGISTRANT)
By: S/JOSE E. FERNANDEZ
-------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer
Dated: JANUARY 28, 2000
----------------
By: S/RAFAEL VALLADARES
-------------------
Rafael Valladares
Senior Vice President - Principal Financial Officer
Dated: JANUARY 28, 2000
----------------
-24-
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