<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 MARCH 31, 2000
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)
13,797,235 SHARES OUTSTANDING AS OF MARCH 31, 2000
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- ----
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
- ------------------------------------------------------------------------------------------------------------------------------------
PART - 1
- ------------------------------------------------------------------------------------------------------------------------------------
Item - 1 FINANCIAL STATEMENTS
<S> <C>
Consolidated statements of financial condition at March 31,
2000 (unaudited) and June 30, 1999. 1
Unaudited consolidated statements of income for the third
quarter and nine-month period ended March 31, 2000 and 1999. 2
Unaudited consolidated statements of stockholders' equity and
comprehensive income for the nine-month period ended
March 31, 2000 and 1999. 3
Unaudited consolidated statements of cash flows for the
nine-months period ended March 31, 2000 and 1999. 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 24
Item - 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
Signatures 25
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2000 (UNAUDITED) AND JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------- ------------------------
MARCH 31, JUNE 30,
2000 1999
----------------------- ------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 11,953 $ 8,060
----------------------- ------------------------
INVESTMENTS AND SECURITIES:
Money market investments 11,330 27,991
Trading securities, at fair value 50,254 17,307
Investment securities available-for-sale, at fair value 213,177 379,894
Investment securities held-to-maturity, at cost ( fair value $778,245;
June 30,1999 - $499,234 ) 806,242 508,080
Federal Home Loan Bank (FHLB) stock, at cost 10,757 13,257
----------------------- ------------------------
TOTAL INVESTMENTS AND SECURITIES 1,091,760 946,529
----------------------- ------------------------
LOANS:
Loans held-for-sale, at lower of cost or market 3,574 55,206
Loans receivable, net 576,077 519,110
----------------------- ------------------------
TOTAL LOANS, NET 579,651 574,316
----------------------- ------------------------
Accrued interest receivable 19,363 18,017
Foreclosed real estate, net 548 383
Premises and equipment, net 22,091 21,651
Other assets, net 26,462 18,391
----------------------- ------------------------
TOTAL ASSETS $ 1,751,828 $ 1,587,347
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand $ 135,283 $ 142,679
Time and IRA accounts 513,082 508,648
----------------------- ------------------------
648,365 651,327
Accrued interest 4,689 5,661
----------------------- ------------------------
TOTAL DEPOSITS 653,054 656,988
----------------------- ------------------------
BORROWINGS:
Securities sold under agreements to repurchase 754,760 596,226
Advances and borrowings from Federal Home Loan Bank 94,375 68,400
Term notes and other borrowings 86,500 106,500
----------------------- ------------------------
TOTAL BORROWINGS 935,635 771,126
----------------------- ------------------------
Accrued expenses and other liabilities 32,898 35,201
----------------------- ------------------------
TOTAL LIABILITIES 1,621,587 1,463,315
----------------------- ------------------------
COMMITMENTS AND CONTINGENCIES - -
----------------------- ------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized; $25 33,500 33,500
liquidation value, shares issued and outstanding 1,340,000
Common stock, $1 par value; 20,000,000 shares authorized; shares
issued and outstanding 13,797,235 (June 30, 1999 - 13,738,814) 13,797 13,739
Additional paid-in capital 23,756 23,313
Legal surplus 10,917 8,673
Retained earnings 92,739 79,920
Treasury stock, at cost, 996,799 shares (June 30, 1999 - 903,786) (25,494) (23,401)
Accumulated other comprehensive loss , net of deferred taxes (18,974) (11,712)
----------------------- ------------------------
TOTAL STOCKHOLDERS' EQUITY 130,241 124,032
----------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,751,828 $ 1,587,347
======================= ========================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 1 -
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THIRD QUARTER NINE-MONTH PERIOD
MARCH 31, MARCH 31,
----------------------------------------- -------------------
2000 1999 2000
------------------- ------------------- -------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans and leases $ 13,464 $ 14,165 $ 41,818
Mortgage-backed securities 14,140 10,451 39,472
Investment securities 4,157 3,099 11,797
Money market investments 51 111 173
------------------- -------------------- -------------------
TOTAL INTEREST INCOME 31,812 27,826 93,260
------------------- -------------------- -------------------
INTEREST EXPENSE:
Deposits 7,837 7,091 22,663
Securities sold under agreements to repurchase 11,092 6,793 29,032
Other borrowed funds and interest rate risk management 2,306 2,433 7,093
------------------- -------------------- ------------------
TOTAL INTEREST EXPENSE 21,235 16,317 58,788
------------------- -------------------- ------------------
NET INTEREST INCOME 10,577 11,509 34,472
Provision for loan losses 1,500 3,200 4,750
------------------- -------------------- ------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,077 8,309 29,722
------------------- -------------------- ------------------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 3,378 2,457 8,785
Mortgage banking activities 1,504 2,282 5,238
Bank service charges and fees and other operating income 1,512 1,136 4,507
Gain on sale of investment securities 407 2,017 1,066
Trading net activity (59) (68) 6
------------------- -------------------- ------------------
TOTAL NON-INTEREST INCOME 6,742 7,824 19,602
------------------- -------------------- ------------------
NON-INTEREST EXPENSES:
Compensation and benefits 3,719 3,776 11,098
Occupancy and equipment, net 1,602 1,424 4,714
Advertising and business promotion 823 846 2,051
Professional and service fees 695 581 1,782
Communications 431 349 1,156
Taxes other than income 477 427 1,432
Insurance, including deposit insurance 100 120 372
Printing, postage, stationery and supplies 237 204 652
Other 621 713 1,789
------------------- --------------------- -----------------
TOTAL NON-INTEREST EXPENSE 8,705 8,440 25,046
------------------- --------------------- -----------------
INCOME BEFORE INCOME TAXES 7,114 7,693 24,278
Provision for income taxes 452 1,070 1,672
------------------- --------------------- -----------------
NET INCOME 6,662 6,623 22,606
Less: dividends on preferred stock (597) - (1,791)
------------------- --------------------- -----------------
NET INCOME AVAILABLE TO COMMON SHARES $ 6,065 $ 6,623 $ 20,815
------------------- --------------------- -----------------
INCOME PER COMMON SHARE:
Basic $ 0.47 $ 0.51 $ 1.63
------------------- --------------------- -----------------
Diluted $ 0.46 $ 0.50 $ 1.59
------------------- --------------------- -----------------
Average common shares outstanding 12,794 13,034 12,791
Average potential common share options 284 325 274
------------------- --------------------- -----------------
13,078 13,359 13,065
------------------- --------------------- -----------------
<CAPTION>
NINE-MONTH PERIOD
MARCH 31,
-------------------
1999
-------------------
INTEREST INCOME:
<S> <C>
Loans and leases $ 42,294
Mortgage-backed securities 25,781
Investment securities 11,596
Money market investments 361
-------------------
TOTAL INTEREST INCOME 80,032
-------------------
INTEREST EXPENSE:
Deposits 21,632
Securities sold under agreements to repurchase 19,036
Other borrowed funds and interest rate risk management 7,637
-------------------
TOTAL INTEREST EXPENSE 48,305
-------------------
NET INTEREST INCOME 31,727
Provision for loan losses 12,950
-------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,777
-------------------
NON-INTEREST INCOME:
Trust, money management and brokerage fees 7,089
Mortgage banking activities 6,754
Bank service charges and fees and other operating income 3,248
Gain on sale of investment securities 10,464
Trading net activity 1
-------------------
TOTAL NON-INTEREST INCOME 27,556
-------------------
NON-INTEREST EXPENSES:
Compensation and benefits 11,049
Occupancy and equipment, net 3,890
Advertising and business promotion 2,108
Professional and service fees 1,576
Communications 1,123
Taxes other than income 1,284
Insurance, including deposit insurance 313
Printing, postage, stationery and supplies 563
Other 2,173
------------------
TOTAL NON-INTEREST EXPENSE 24,079
------------------
INCOME BEFORE INCOME TAXES 22,254
Provision for income taxes 3,205
------------------
NET INCOME 19,049
Less: dividends on preferred stock -
------------------
NET INCOME AVAILABLE TO COMMON SHARES $ 19,049
------------------
INCOME PER COMMON SHARE:
Basic $ 1.46
------------------
Diluted $ 1.42
------------------
Average common shares outstanding 13,125
Average potential common share options 397
------------------
13,522
------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 2 -
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
NINE MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------
MARCH 31,
------------------------------------------------------
2000 1999
----------------------- ------------------------
CHANGES IN STOCKHOLDERS' EQUITY:
- --------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
<S> <C> <C>
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 58 91
----------------------- ------------------------
BALANCE AT END OF PERIOD 13,797 13,625
----------------------- ------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 23,313 27,261
Stock split - (3,385)
Stock options exercised 443 293
----------------------- ------------------------
BALANCE AT END OF PERIOD 23,756 24,169
----------------------- ------------------------
LEGAL SURPLUS:
Balance at beginning of period 8,673 5,908
Transfer from retained earnings 2,244 2,722
----------------------- ------------------------
BALANCE AT END OF PERIOD 10,917 8,630
----------------------- ------------------------
RETAINED EARNINGS:
Balance at beginning of period 79,920 63,756
Net income 22,606 19,049
Dividends declared on common stock (5,752) (5,443)
Dividends declared on preferred stock (1,791) -
Transfer to legal surplus (2,244) (2,722)
----------------------- ------------------------
BALANCE AT END OF PERIOD 92,739 74,640
----------------------- ------------------------
TREASURY STOCK:
Balance at beginning of period (23,401) (6,199)
Treasury stock purchased (2,093) (7,511)
----------------------- ------------------------
BALANCE AT END OF PERIOD (25,494) (13,710)
----------------------- ------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF DEFERRED TAXES:
Balance at beginning of period (11,712) 913
Other comprehensive loss for the period ended, net of taxes (7,262) (3,291)
----------------------- ------------------------
BALANCE AT END OF PERIOD (18,974) (2,378)
----------------------- ------------------------
TOTAL STOCKHOLDERS' EQUITY $ 130,241 $ 104,976
======================= ========================
COMPREHENSIVE INCOME:
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 22,606 $ 19,049
----------------------- ------------------------
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized loss on securities arising during the period (8,190) (13,350)
Realized gains included in net income 1,066 10,464
Income tax expense related to items of other comprehensive income (138) (405)
----------------------- ------------------------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE,
NET OF TAXES (7,262) (3,291)
----------------------- ------------------------
COMPREHENSIVE INCOME $ 15,344 $ 15,758
======================= ========================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
- 3 -
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------
MARCH 31,
--------------------------------------------
2000 1999
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 22,606 $ 19,049
-------------------- ---------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred loan origination fees and costs 256 209
Amortization of premiums and accretion of discounts on investment securities 54 1,602
Depreciation and amortization of premises and equipment 2,377 2,087
Provision for loan losses 4,750 12,950
Gain on sale of investment securities available-for-sale (1,066) (10,464)
Mortgage banking activities (5,238) (6,754)
Proceeds from sale of loans held-for-sale 27,795 90,586
(Decrease) increase in accrued expenses and other liabilities (6,803) 12,232
Net (increase) decrease in:
Trading securities (17,233) 7,609
Accrued interest receivable (1,346) (1,628)
Other assets (8,236) (3,182)
-------------------- ---------------------
TOTAL ADJUSTMENTS (4,690) 105,247
-------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,916 124,296
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (180,500) (475,246)
Purchases of investment securities held-to-maturity (90,700) -
Sales of investment securities available-for-sale 56,813 242,121
Maturities and redemptions of investment securities available-for-sale 66,851 21,670
Maturities and redemptions of investment securities held-to-maturity 56,262 50,406
Redemption of Federal Home Loan Bank of New York stock 2,500 -
Purchases of Federal Home Loan Bank of New York stock - (3,214)
Net origination of loans (90,516) (162,941)
Capital expenditures (2,817) (3,854)
-------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (182,107) (331,058)
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits (3,934) 67,579
Securities sold under agreements to repurchase 158,534 165,349
Advances and borrowings from FHLB 25,975 (13,200)
Repayments of term notes and other borrowings (20,000) -
Proceeds from exercise of stock options 501 385
Treasury stock acquired (2,093) (7,511)
Dividends paid (7,560) (4,357)
-------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 151,423 200,157
-------------------- ---------------------
DECREASE IN CASH AND CASH EQUIVALENTS (12,768) (6,605)
Cash and cash equivalents at beginning of period 36,051 19,489
-------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,283 $ 12,884
-------------------- ---------------------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 11,953 $ 8,906
Money market investments 11,330 3,978
-------------------- ---------------------
$ 23,283 $ 12,884
-------------------- ---------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 56,810 $ 45,300
-------------------- ---------------------
Income taxes paid $ 1,050 $ 3,946
-------------------- ---------------------
Real estate loans securitized into mortgage-backed securities $ 57,620 $ 40,700
-------------------- ---------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
- 4 -
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP
INC.
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Oriental Financial Group Inc. (the
"Group" or, "Oriental") conform with generally accepted accounting principles
("GAAP") and financial services industry practices. The following is a
description of the Group's most significant accounting policies:
NATURE OF OPERATIONS AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The Group is a bank holding company incorporated under the laws of the
Commonwealth of Puerto Rico, which provides a variety of financial services
through its subsidiaries. The Group is subject to the regulation and supervision
of the Federal Reserve Board. Oriental Bank and Trust (the "Bank"), the Group's
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 Group through its banking and broker-dealer subsidiaries,
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 March 31, 1999 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 March 31, 2000 and June 30, 1999, and the
results of operations and cash flows for the third quarter and nine-month period
ended March 31, 2000 and 1999, 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 March 31, 2000 and June 30, 1999 the Group's money market investments were
comprised of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
MARCH 31, JUNE 30,
-------------------- -------------------
<S> <C> <C>
Securities purchased under agreements to resell $ 9,788 $24,350
Time deposits with other banks 1,416 -
Money market accounts and other short-term investments 126 3,641
-------------------- -------------------
$ 11,330 $27,991
-------------------- -------------------
</TABLE>
- 5 -
<PAGE>
TRADING SECURITIES
A summary of trading securities owned by the Group at March 31, 2000 and June
30, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
MARCH 31, JUNE 30,
-------------------- -------------------
<S> <C> <C>
U.S. Treasury securities $22,161 $ 3,527
P.R. Government securities 14,682 -
Mortgage-backed securities 11,206 11,278
CMO residuals, interest only 2,204 2,502
-------------------- -------------------
$50,254 $17,307
-------------------- -------------------
-------------------- -------------------
</TABLE>
At March 31, 2000, the Group's trading portfolio weighted average yield was
8.12% (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 March 31, 2000
and June 30, 1999, were as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 (IN THOUSANDS)
------------------ --------------- ------------- -------------- ------------
GROSS GROSS AVERAGE
AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED
COST GAINS LOSS VALUE YIELD
------------------ --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities $ 97,877 $151 $ 5,931 $ 92,097 5.20%
U.S. Government Agencies 104,461 - 4,002 100,459 6.76%
P.R. Government securities 518 8 - 526 5.31%
CMOs 2,227 - 17 2,210 7.78%
GNMA certificates 17,981 1 97 17,885 7.81%
------------------ --------------- ------------- -------------- ------------
223,064 160 10,047 213,177 6.16%
------------------ --------------- ------------- -------------- ------------
HELD-TO-MATURITY
P.R. Government securities 3,553 2 25 3,530 8.03%
CMOs 113,644 - 5,392 108,252 6.46%
Other debt securities 4,864 - - 4,864 8.10%
GNMA certificates 381,738 492 10,049 372,181 7.23%
FNMA certificates 195,731 16 7,659 188,088 6.54%
FHLMC certificates 106,712 38 5,420 101,330 6.43%
------------------ --------------- ------------- -------------- ------------
806,242 548 28,544 778,245 6.86%
------------------ --------------- ------------- -------------- ------------
FHLB stock 10,757 - - 10,757 6.42%
------------------ --------------- ------------- -------------- ------------
$1,040,062 $708 $38,591 $1,002,179 6.70%
================== =============== ============= ============== ============
</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
U.S. Treasury securities $105,343 $ 130 $ 3,875 $101,598 5.33%
U.S. Government Agencies 75,820 - 1,321 74,499 6.79%
P.R. 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
P.R. Government securities 3,563 - 33 3,530 7.40%
CMOs 119,497 - 2,365 117,132 6.67%
Other debt securities 4,863 - - 4,863 8.58%
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 March 31, 2000, by contractual maturity, are shown in the next table.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
------------------------------- ------------------------------- -------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due within 1 year $ 73 $ 73 $ - $ - $ 73 $ 73
After 1 year to 5 years 12,662 12,716 1,078 1,084 13,740 13,800
After 5 years to 10 years 190,586 180,749 20,305 20,267 210,891 201,016
Due after 10 years 19,743 19,639 784,858 756,894 804,601 776,533
FHLB stock - - - - 10,757 10,757
-------------- ------------ ------------- -------------- ------------- --------------
$223,064 $213,177 $806,242 $778,245 $1,040,062 $1,002,179
-------------- ------------ ------------- -------------- ------------- --------------
</TABLE>
Proceeds from the sale of investment securities available-for-sale during the
first nine months of fiscal 2000 totaled $56,813,000 (1999 - $242,121,000).
Gross realized gains and losses on those sales during fiscal 2000 were
$1,077,000 and $11,000, respectively (1999 - $10,464,000 and $0).
Of Oriental's investments at March 31, 2000 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 14% and 19% of stockholders' equity, respectively. At March 31,
2000, the amortized cost and fair value of investments from the Government of
Puerto Rico were approximately $18,754,000 (June 30, 1999 - $23,723,000) and
$18,739,000 (June 30, 1999 - $24,102,000), respectively. At March 31, 2000,
$14,683,000 (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 residential mortgage loans, personal loans, and auto
leases. The composition of the Group's loan portfolio at March 31, 2000 and June
30, 1999 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------
MARCH 31, JUNE 30,
--------------------- ------------------
<S> <C> <C>
LOANS SECURED BY REAL ESTATE:
Residential $314,702 $263,540
Non-residential real estate loans 5,195 6,531
Home equity loans and personal loans collateralized by real estate 26,547 16,278
--------------------- ------------------
346,444 286,349
Less: net deferred loan fees (1,798) (1,302)
--------------------- ------------------
344,646 285,047
--------------------- ------------------
OTHER LOANS:
Commercial 20,917 10,555
Personal consumer loans and credit lines 127,603 122,213
Financing leases, net of unearned interest 89,756 110,297
--------------------- ------------------
238,276 243,065
--------------------- ------------------
LOANS RECEIVABLE 582,922 528,112
Allowance for loan losses (6,845) (9,002)
-------------------- ------------------
LOANS RECEIVABLE, NET 576,077 519,110
Loans held-for-sale 3,574 55,206
-------------------- ------------------
TOTAL LOANS, NET $579,651 $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 third quarter and nine-month period ended March 31, 2000 and
1999.
The Group evaluates all loans, some individually and other as homogeneous
groups, for purposes of determining impairment. At March 31, 2000 and June 30,
1999, the Group determined that no impairment reserve was necessary.
NOTE 4 - PLEDGED ASSETS:
At March 31, 2000, residential mortgage loans and investment securities
amounting to $138,670,000 (June 30, 1999 - $100,509,000), and $899,713,000 (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 March 31, 2000 and June 30, 1999 are set
forth in the table below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
MARCH 31, JUNE 30,
----------------- -----------------
<S> <C> <C>
SWAPS:
Pay fixed swaps notional amount $370,000 $245,000
Weighted average pay rate - fixed 5.83% 5.66%
Weighted average receive rate - floating 6.04% 5.09%
Maturity in months 1 to 17 2 to 26
Floating rate as a percent of LIBOR 85 to 100% 85 to 100%
CAPS:
Cap agreements notional amount $60,000 $100,000
Cap rate 6.50% 6.50%
Maturity in months 2 to 9 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 March 31, 2000, the
notional amount of these agreements totaled $93,430,000 (June 30, 1999 -
$79,815,000) at a weighted average rate of 5.84% (June 30, 1999 - 5.81%).
At March 31, 2000, interest rate swap and caps maturities by fiscal year are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(IN THOUSANDS)
--------------------------- ----------------------------------------------------------------------------
YEAR ENDING JUNE 30, INTEREST RATE EQUITY TOTAL
--------------------------- ---------------------- -------------------- -----------------------
<S> <C> <C> <C>
2000 $115,000 $6,630 $121,630
2001 315,000 86,800 401,800
---------------------- -------------------- -----------------------
$430,000 $93,430 $523,430
---------------------- -------------------- -----------------------
</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 the 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 third quarters and nine-month periods ended March 31:
<TABLE>
<CAPTION>
UNAUDITED - NINE-MONTH PERIOD ENDED (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net interest income $34,088 $384 $ - $ - $34,472
Non-interest income 5,799 8,785 5,238 (220) 19,602
Non-interest expenses 17,926 4,455 2,885 (220) 25,046
Provision for loan losses 4,750 - - - 4,750
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $17,211 $4,714 $2,353 $ - $24,278
--------------- -------------- --------------- --------------- --------------
FISCAL 1999
Net interest income 31,270 $457 $ - $ - $31,727
Non-interest income 13,942 7,089 6,754 (229) 27,556
Non-interest expenses 16,901 4,147 3,260 (229) 24,079
Provision for loan losses 12,950 - - - 12,950
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $15,361 $3,399 $3,494 $ - $22,254
--------------- -------------- --------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED - THIRD QUARTER ENDED (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
RETAIL FINANCIAL MORTGAGE
BANKING SERVICES BANKING ELIMINATIONS TOTAL
--------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 2000
Net interest income $ 10,417 $ 160 $ - $ - $ 10,577
Non-interest income 1,866 3,378 1,504 (6) 6,742
Non-interest expenses 5,781 2,338 592 (6) 8,705
Provision for loan losses 1,500 - - - 1,500
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 5,002 $ 1,200 $ 912 $ - $ 7,114
--------------- -------------- --------------- --------------- --------------
FISCAL 1999
Net interest income $ 11,339 $ 170 $ - $ - $ 11,509
Non-interest income 3,208 2,457 2,282 (123) 7,824
Non-interest expenses 6,424 1,727 412 (123) 8,440
Provision for loan losses 3,200 - - - 3,200
--------------- -------------- --------------- --------------- --------------
NET INCOME BEFORE TAXES $ 4,923 $ 900 $1,870 $ - $ 7,693
--------------- -------------- --------------- --------------- --------------
TOTAL ASSETS -- AS OF:
March 31, 2000 $1,742,786 $ 7,132 $2,000 $ (90) $1,751,828
--------------- -------------- --------------- --------------- --------------
March 31, 1999 $1,522,942 $10,150 $2,000 $ (80) $1,535,012
--------------- -------------- --------------- --------------- --------------
</TABLE>
- 10 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
As shown in the selected financial data table on page 12, the Group's net
income for the first nine months of fiscal 2000 totaled $22.60 million, up
18.7% from $19.04 million reported for the comparable nine-month period of
fiscal 1999. Earnings per share for the nine-month period ended March 31,
2000 was $1.59, a 12% increase when compared to $1.42 tallied the similar
period ended March 31, 1999. Preferred dividends paid were $1.79 million
during the first nine months of fiscal 2000 versus none in the comparable
period of fiscal 1999.
Higher core revenues along with strict cost control measures, which helped
minimize the impact caused by the increase in the cost of funds that followed
the hike in interest rates, drove this earnings improvement. Return on common
equity (ROE) was 30.61% for the nine-month period, up from 22.77% the previous
comparable period. Return on assets (ROA) rose to 1.80%, from 1.78% tallied the
previous nine-month period, while the efficiency ratio improved to 47.23% from
48.40%.
Net income for the third quarter of fiscal 2000 amounted to $6.66 million or
$0.46 earnings per share compared with $6.62 million or $0.50 per share
reported in the same quarter of fiscal 1999. Quarterly results ROE was 26.18%
(up from 25.02%), ROA was 1.53% (down from 1.76%) and the efficiency ratio
was 51.21% (up from 48.02%). The increase in the efficiency ratio is
attributed to the increase in the cost of funds, as a result of the Fed
interest rates hikes, which reduced the interest rate spread of the bank to
2.43 % during the third quarter from 3.5% the quarter ended March 31, 1999.
Financial assets, which include the Group's assets and assets managed by the
trust and brokerage business, reached $3.989 billion at the end of the third
quarter of fiscal 2000 -- up 7.7% from $3.704 billion at the end of the same
period of fiscal 1999. The Group's assets grew 14.1% to $1.752 billion at March
31, 2000, up from $1.535 billion a year ago. Assets managed by the trust and
broker-dealer increased 3.1% to $2.238 billion from $2.169 billion the year
before.
The following pages discuss in detail the different components that influenced
the Group's performance. Tables 1 to 10 on pages 12 to 18 provide relevant
operational ratios and information for the periods analyzed as follows:
<TABLE>
<CAPTION>
TABLE DESCRIPTION PAGE NO.
<S> <C> <C>
Selected Financial Data Earnings, Dividends Declared and Per Share Information - 12 -
Period End Balances (as of March 31) - 12 -
Selected Financial Ratios (in percent) and Other Information - 12 -
Table 1 Year-to-date Analysis of Net Interest Income and Changes due to Volume / Rate - 13 -
Table 1A Quarterly Analysis of Net Interest Income and Changes due to Volume / Rate - 14 -
Table 2 Revenues Summary and Composition - 15 -
Table 3 Non-Interest Income Summary and Composition - 15 -
Table 4 Non-Interest Expenses Summary and Composition - 15 -
Table 5 Bank Assets Summary and Composition - 16 -
Table 6 Liabilities Summary and Composition - 16 -
Table 7 Capital, Dividends and Stock Data - 17 -
Table 8 Financial Assets Summary - 17 -
Table 9 Allowance for Loan Losses Summary and Loan Losses Statistics - 18 -
Table 10 Non-Perfoming Assets (as of March 31) - 18 -
</TABLE>
- 11 -
<PAGE>
SELECTED FINANCIAL DATA
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
<TABLE>
<CAPTION>
------------------------------------------------------
THIRD QUARTER
MARCH 31,
------------------------------------------------------
2000 1999 VARIANCE %
------------------------------------------------------
<S> <C> <C> <C>
EARNINGS:
- -------------------------------------------------------------------------------------------------------
Interest income $ 31,812 $ 27,826 14.3%
Interest expense 21,235 16,317 30.1%
------------------- ------------------ -------------
NET INTEREST INCOME 10,577 11,509 -8.1%
Provision for loan losses 1,500 3,200 -53.1%
------------------- ------------------ -------------
NET CREDIT INCOME 9,077 8,309 9.2%
Recurrent non-interest income 6,394 5,875 8.8%
Non recurrent non-interest income 348 1,949 -82.1%
Recurrent non-interest expenses 8,690 8,440 3.0%
Non recurrent non-interest expenses 15 - 100.0%
Provision for income taxes 452 1,070 -57.8%
------------------- ------------------ -------------
NET INCOME 6,662 6,623 0.6%
Less: dividends on preferred stock (597) - -100.0%
------------------- ------------------ -------------
NET INCOME AVAILABLE TO COMMON SHARES $ 6,065 $ 6,623 -8.4%
=================== ================== =============
PER SHARE INFORMATION:
- -------------------------------------------------------------------------------------------------------------
Basic Income $ 0.47 $ 0.51 -7.8%
------------------- ------------------ -------------
Diluted Income $ 0.46 $ 0.50 -8.0%
------------------- ------------------ -------------
Book value $ 7.55 $ 7.70 -1.9%
------------------- ------------------ -------------
DIVIDENDS DECLARED INFORMATION:
- -------------------------------------------------------------------------------------------------------------
Dividends declared per share $ 0.150 $ 0.113 32.7%
------------------- ------------------ -------------
Dividends declared $ 1,916 $ 1,492 28.4%
------------------- ------------------ -------------
Average shares and equivalents 13,078 13,359 -2.1%
------------------- ------------------ -------------
SELECTED FINANCIAL RATIOS (IN PERCENT) AND OTHER
INFORMATION:
- -------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.53% 1.76% -12.8%
------------------- ------------------ -------------
Return on average common equity (ROE) 26.18% 25.02% 4.6%
------------------- ------------------ -------------
Efficiency ratio 51.21% 48.02% 6.7%
------------------- ------------------ -------------
Expense ratio 0.55% 0.73% -24.7%
------------------- ------------------ -------------
Interest rate spread 2.24% 3.07% -27.0%
------------------- ------------------ -------------
Number of banking offices
<CAPTION>
------------------------------------------------------------------
NINE-MONTH PERIOD
MARCH 31,
------------------------------------------------------------------
2000 1999 VARIANCE %
------------------------------------------------------------------
EARNINGS:
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 93,260 $ 80,032 16.5%
Interest expense 58,788 48,305 21.7%
------------------- ------------------- ----------------
NET INTEREST INCOME 34,472 31,727 8.7%
Provision for loan losses 4,750 12,950 -63.3%
------------------- ------------------- ----------------
NET CREDIT INCOME 29,722 18,777 58.3%
Recurrent non-interest income 18,530 17,091 8.4%
Non recurrent non-interest income 1,072 10,465 -89.8%
Recurrent non-interest expenses 25,030 23,742 5.4%
Non recurrent non-interest expenses 16 337 -95.3%
Provision for income taxes 1,672 3,205 -47.8%
------------------- ------------------- ----------------
NET INCOME 22,606 19,049 18.7%
Less: dividends on preferred stock (1,791) - -100.0%
------------------- ------------------- ----------------
NET INCOME AVAILABLE TO COMMON SHARES $ 20,815 $ 19,049 9.3%
=================== =================== ================
PER SHARE INFORMATION:
- ---------------------------------------------------------------------------------------------------------------
Basic Income $ 1.63 $ 1.46 11.6%
------------------- ------------------- ----------------
Diluted Income $ 1.59 $ 1.42 12.0%
------------------- ------------------- ----------------
Book value $ 7.55 $ 7.70 -1.9%
------------------- ------------------- ----------------
DIVIDENDS DECLARED INFORMATION:
- ---------------------------------------------------------------------------------------------------------------
Dividends declared per share $ 0.450 $ 0.413 9.0%
------------------- ------------------- ----------------
Dividends declared $ 5,753 $ 5,443 5.7%
------------------- ------------------- ----------------
Average shares and equivalents 13,065 13,522 -3.4%
------------------- ------------------- ----------------
PERIOD END BALANCES (AS OF MARCH 31,):
- ---------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,387,300 $ 1,337,700 3.7%
Broker-dealer assets gathered 850,300 831,700 2.2%
------------------- ------------------- ----------------
ASSETS MANAGED 2,237,600 2,169,400 3.1%
Bank total assets 1,751,800 1,535,000 14.1%
------------------- ------------------- ----------------
$ 3,989,400 $ 3,704,400 7.7%
=================== =================== ================
INTEREST-EARNING ASSETS
Investments and securities $ 1,091,760 $ 895,731 21.9%
Loans and loans held-for-sale 579,651 573,283 1.1%
------------------- ------------------- ----------------
$ 1,671,411 $ 1,469,014 13.8%
=================== =================== ================
INTEREST-BEARING LIABILITIES
Deposits $ 662,974 $ 659,226 0.6%
Repurchase agreements 754,760 581,520 29.8%
Borrowings 180,875 168,100 7.6%
------------------- ------------------- ----------------
$ 1,598,609 $ 1,408,846 13.5%
=================== =================== ================
STOCKHOLDERS' EQUITY
Preferred equity $ 33,500 $ - 100.0%
Common equity 96,741 104,976 -7.8%
------------------- ------------------- ----------------
$ 130,241 $ 104,976 24.1%
=================== =================== ================
COMMON SHARES
Outstanding common shares 13,797 13,625 1.3%
Shares held by treasury (997) (555) 79.6%
------------------- ------------------- ----------------
12,800 13,070 -2.1%
=================== =================== ================
CAPITAL RATIOS
Leverage capital 8.59% 7.04% 22.0%
------------------- ------------------- ----------------
Total risk-based capital 26.30% 19.94% 31.9%
------------------- ------------------- ----------------
Tier 1 risk-based capital 25.05% 18.69% 34.0%
------------------- ------------------- ----------------
SELECTED FINANCIAL RATIOS (IN PERCENT) AND
OTHER INFORMATION:
- ----------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.80% 1.78% 1.1%
------------------- ------------------- ----------------
Return on average common equity (ROE) 30.61% 22.77% 34.4%
------------------- ------------------- ----------------
Efficiency ratio 47.23% 48.40% -2.4%
------------------- ------------------- ----------------
Expense ratio 0.54% 0.67% -19.4%
------------------- ------------------- ----------------
Interest rate spread 2.59% 2.99% -13.4%
------------------- ------------------- ----------------
Number of banking offices 19 18 5.6%
------------------- ------------------- ----------------
</TABLE>
- 12 -
<PAGE>
SELECTED FINANCIAL DATA
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE:
<TABLE>
<CAPTION>
INTEREST AVERAGE RATE
-------------------------------------------- -------------
2000 1999 VARIANCE % 2000
------------- ------------ ------------- ------------
A -- TAX EQUIVALENT SPREAD
<S> <C> <C> <C> <C>
Interest-earning assets $ 93,260 $ 80,032 16.5% 7.75%
Tax equivalent adjustment 16,822 10,460 60.8% 1.40%
------------- ------------ ------------- ------------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 110,082 90,492 21.6% 9.15%
Interest-bearing liabilities 58,788 48,305 21.7% 5.16%
------------- ------------ ------------- ------------
NET INTEREST INCOME / SPREAD $ 51,294 $ 42,187 21.6% 3.99%
------------- ------------ ------------- ------------
B - NORMAL SPREAD
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities $ 49,684 $ 35,619 39.5% 6.61%
Trading securities 1,585 1,759 -9.9% 8.24%
Money market investments 173 360 -51.9% 5.68%
------------- ------------ ------------- ------------
51,442 37,738 36.3% 6.65%
------------- ------------ ------------- ------------
LOANS:
Real estate (1) 18,534 17,935 3.3% 7.59%
Consumer 13,491 12,613 7.0% 14.14%
Financing leases 8,182 10,693 -23.5% 11.03%
Commercial and auto loans 1,611 1,053 53.0% 10.55%
------------- ------------ ------------- ------------
41,818 42,294 -1.1% 9.74%
------------- ------------ ------------- ------------
93,260 80,032 16.5% 7.75%
------------- ------------ ------------- ------------
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 2,213 2,166 2.2% 2.06%
Time and IRA accounts 20,450 19,466 5.1% 5.38%
------------- ------------ ------------- ------------
22,663 21,632 4.8% 4.65%
------------- ------------ ------------- ------------
BORROWINGS:
Repurchase agreements 29,032 19,036 52.5% 5.55%
FHLB funds 3,091 2,698 14.6% 5.74%
Term notes and other sources of funds 3,943 4,115 -4.2% 5.21%
Interest rate risk management 59 824 -92.8% 0.01%
------------- ------------ ------------- ------------
36,125 26,673 35.4% 5.54%
------------- ------------ ------------- ------------
58,788 48,305 21.7% 5.16%
------------- ------------ ------------- ------------
NET INTEREST INCOME / SPREAD $ 34,472 $ 31,727 8.7% 2.59%
============= ============ ============= ============
INTEREST RATE MARGIN 2.88%
============
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO
<CAPTION>
AVERAGE RATE AVERAGE BALANCE
----------------------------- ----------------------------------
1999 VARIANCE BP 2000 1999 VARIANCE %
------------- -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
A - TAX EQUIVALENT SPREAD
Interest-earning assets 8.07% -0.32% $1,602,225 $1,321,321 21.3%
Tax equivalent adjustment 1.06% 0.34% - - 0.0%
------------- -------------- ------------ --------- ----------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 9.13% 0.02% 1,602,225 1,321,321 21.3%
Interest-bearing liabilities 5.08% 0.08% 1,512,460 1,265,732 19.5%
------------- -------------- ------------ --------- ----------
NET INTEREST INCOME / SPREAD 4.05% -0.06% $ 89,765 $ 55,589 61.5%
------------- -------------- ------------ --------- ----------
B - NORMAL SPREAD
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities 6.44% 0.17% $1,001,694 $ 737,328 35.9%
Trading securities 8.89% -0.65% 25,655 26,369 -2.7%
Money market investments 4.58% 1.10% 4,050 10,496 -61.4%
------------- -------------- ------------ --------- ----------
6.50% 0.15% 1,031,399 774,193 33.2%
------------- -------------- ------------ --------- ----------
LOANS:
Real estate (1) 8.20% -0.61% 325,498 291,534 11.7%
Consumer 13.67% 0.47% 126,602 122,944 3.0%
Financing leases 11.98% -0.95% 98,438 118,945 -17.2%
Commercial and auto loans 10.24% 0.31% 20,288 13,705 48.0%
------------- -------------- ------------ --------- ----------
10.30% -0.56% 570,826 547,128 4.3%
------------- -------------- ------------ --------- ----------
8.07% -0.32% 1,602,225 1,321,321 21.3%
------------- -------------- ------------ --------- ----------
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 2.27% -0.21% 142,414 127,132 12.0%
Time and IRA accounts 5.42% -0.04% 504,156 477,465 5.6%
------------- -------------- ------------ --------- ----------
4.76% -0.11% 646,570 604,597 6.9%
------------- -------------- ------------ --------- ----------
BORROWINGS:
Repurchase agreements 5.19% 0.36% 694,093 488,625 42.1%
FHLB funds 5.73% 0.01% 71,426 62,756 13.8%
Term notes and other sources of funds 4.99% 0.22% 100,371 109,754 -8.5%
Interest rate risk management 0.18% -0.17% - - 0.0%
------------- -------------- ------------ --------- ----------
5.38% 0.16% 865,890 661,135 31.0%
------------- -------------- ------------ --------- ----------
5.08% 0.08% 1,512,460 1,265,732 19.5%
------------- -------------- ------------ --------- ----------
NET INTEREST INCOME / SPREAD 2.99% -0.40%
============= ==============
INTEREST RATE MARGIN 3.20% -0.32%
============= ==============
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING
LIABILITIES $ 89,765 $ 55,589 61.5%
=========== ========= ===========
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.94% 104.39%
=========== =========
</TABLE>
<TABLE>
<CAPTION>
=============================================== =================================================
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL
- ----------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 1,127 $ (1,603) $ (476)
Investments 12,500 1,204 13,704
---------------- ----------------- ------------
13,627 (399) 13,228
---------------- ----------------- ------------
INTEREST EXPENSE:
Deposits 1,226 (195) 1,031
Borrowings 8,055 1,397 9,452
---------------- ----------------- -----------
9,281 1,202 10,483
---------------- ----------------- ------------
NET INTEREST INCOME $ 4,346 $ (1,601) $ 2,745
================ ================= ===========
</TABLE>
(1) - Real estate averages include loans held-for-sale.
- 13 -
<PAGE>
SELECTED FINANCIAL DATA
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
TABLE 1A - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO
VOLUME/RATE:
<TABLE>
<CAPTION>
INTEREST
--------------------------------------------------------
2000 1999 VARIANCE %
----------------- ---------------- -----------------
<S> <C> <C> <C>
A -- TAX EQUIVALENT SPREAD
Interest-earning assets $ 31,812 $ 27,826 14.3%
Tax equivalent adjustment 5,999 4,136 45.0%
----------------- ----------------- ----------------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 37,811 31,962 18.3%
Interest-bearing liabilities 21,235 16,317 30.1%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD $ 16,576 $ 15,645 6.0%
================= ================ =================
B - NORMAL SPREAD
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities $ 17,648 $ 12,946 36.3%
Trading securities 649 604 7.5%
Money market investments 51 111 -54.1%
----------------- ---------------- -----------------
18,348 13,661 34.3%
----------------- ---------------- -----------------
LOANS:
Real estate (1) 6,277 6,136 2.3%
Consumer 4,243 4,322 -1.8%
Financing leases 2,599 3,441 -24.5%
Commercial and auto loans 345 266 29.7%
----------------- ---------------- -----------------
13,464 14,165 -4.9%
----------------- ---------------- -----------------
31,812 27,826 14.3%
----------------- ---------------- -----------------
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 712 721 -1.2%
Time and IRA accounts 7,125 6,370 11.9%
----------------- ---------------- -----------------
7,837 7,091 10.5%
----------------- ---------------- -----------------
BORROWINGS:
Repurchase agreements 11,092 6,793 63.3%
FHLB funds 1,256 825 52.2%
Term notes and other sources of funds 1,239 1,248 -0.7%
Interest rate risk management (189) 360 -152.5%
----------------- ---------------- -----------------
13,398 9,226 45.2%
----------------- ---------------- -----------------
21,235 16,317 30.1%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD $ 10,577 $ 11,509 -8.1%
================= ================ =================
INTEREST RATE MARGIN
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO
<CAPTION>
AVERAGE RATE
--------------------------------------------------------
2000 1999 VARIANCE BP
----------------- ---------------- -----------------
A -- TAX EQUIVALENT SPREAD
<S> <C> <C> <C>
Interest-earning assets 7.64% 7.98% -0.34%
Tax equivalent adjustment 1.44% 1.18% 0.26%
----------------- ---------------- -----------------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 9.08% 9.16% -0.08%
Interest-bearing liabilities 5.40% 4.91% 0.49%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD 3.68% 4.25% -0.57%
================= ================ =================
B - NORMAL SPREAD
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities 6.69% 6.37% 0.32%
Trading securities 8.05% 9.61% -1.56%
Money market investments 7.16% 4.98% 2.18%
----------------- ---------------- -----------------
6.73% 6.45% 0.28%
----------------- ---------------- -----------------
LOANS:
Real estate (1) 7.51% 8.09% -0.58%
Consumer 13.21% 13.87% -0.66%
Financing leases 11.20% 12.44% -1.24%
Commercial and auto loans 6.60% 9.54% -2.94%
----------------- ---------------- -----------------
9.34% 10.32% -0.98%
----------------- ---------------- -----------------
7.64% 7.98% -0.34%
----------------- ---------------- -----------------
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 2.10% 2.08% 0.02%
Time and IRA accounts 5.57% 5.33% 0.24%
----------------- ---------------- -----------------
4.84% 4.60% 0.24%
----------------- ---------------- -----------------
BORROWINGS:
Repurchase agreements 5.90% 4.95% 0.95%
FHLB funds 6.01% 5.65% 0.36%
Term notes and other sources of funds 5.49% 4.75% 0.74%
Interest rate risk management -0.08% 0.20% -0.28%
----------------- ---------------- -----------------
5.79% 5.18% 0.61%
----------------- ---------------- -----------------
5.40% 4.91% 0.49%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD 2.24% 3.07% -0.83%
================= ================ ==================
INTEREST RATE MARGIN 2.53% 3.26% -0.73%
================= ================ ==================
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO
<CAPTION>
AVERAGE BALANCE
-------------------------------------------------------
2000 1999 VARIANCE %
----------------- ---------------- ----------------
A -- TAX EQUIVALENT SPREAD
<S> <C> <C> <C>
Interest-earning assets $1,667,380 $1,402,656 18.9%
Tax equivalent adjustment - - 0.0%
----------------- ---------------- -----------------
INTEREST-EARNING ASSETS -- TAX EQUIVALENT 1,667,380 1,402,656 18.9%
Interest-bearing liabilities 1,577,303 1,347,275 17.1%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD $ 90,077 $ 55,381 62.6%
================= ================ =================
B - NORMAL SPREAD
INTEREST-EARNING ASSETS:
INVESTMENTS:
Investment securities $1,055,004 $ 815,466 29.4%
Trading securities 32,242 25,151 28.2%
Money market investments 2,874 8,890 -67.7%
----------------- ---------------- -----------------
1,090,120 849,507 28.3%
----------------- ---------------- -----------------
LOANS:
Real estate (1) 334,374 303,330 10.2%
Consumer 128,861 126,328 2.0%
Financing leases 93,088 112,194 -17.0%
Commercial and auto loans 20,937 11,297 85.3%
----------------- ---------------- -----------------
577,260 553,149 4.4%
----------------- ---------------- -----------------
1,667,380 1,402,656 18.9%
----------------- ---------------- -----------------
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Savings and demand 135,768 140,641 -3.5%
Time and IRA accounts 513,150 484,564 5.9%
----------------- ---------------- -----------------
648,918 625,205 3.8%
----------------- ---------------- -----------------
BORROWINGS:
Repurchase agreements 753,954 556,367 35.5%
FHLB funds 83,845 59,203 41.6%
Term notes and other sources of funds 90,586 106,500 -14.9%
Interest rate risk management - - 0.0%
----------------- ---------------- -----------------
928,385 722,070 28.6%
----------------- ---------------- -----------------
1,577,303 1,347,275 17.1%
----------------- ---------------- -----------------
NET INTEREST INCOME / SPREAD
INTEREST RATE MARGIN
EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 90,077 $ 55,381 62.6%
================== ================ =================
INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.71% 104.11%
================== ================
</TABLE>
<TABLE>
<CAPTION>
=============================================== ===============================================
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans (1) $ 352 $ (1,053) $ (701)
Investments 3,910 777 4,687
--------------- -------------- -------------
4,262 (276) 3,986
--------------- -------------- -------------
INTEREST EXPENSE:
Deposits 402 344 746
Borrowings 2,652 1,520 4,172
--------------- -------------- -------------
3,054 1,864 4,918
--------------- -------------- -------------
NET INTEREST INCOME $ 1,208 $ (2,140) $ (932)
=============== ============== =============
</TABLE>
(1) - Real estate averages include loans held-for-sale.
- 14 -
<PAGE>
SELECTED FINANCIAL DATA
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------
THIRD QUARTER
MARCH 31,
-------------------------------------------------
2000 1999 VARIANCE %
-------------------------------------------------
TABLE 2 - REVENUES SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net credit income $ 9,077 $ 8,309 9.2%
Recurrent non-interest income 6,394 5,875 8.8%
Non- recurrent non-interest income 348 1,949 -82.1%
----------- ----------- -----------
$ 15,819 $ 16,133 -1.9%
=========== =========== ===========
REVENUES COMPOSITION:
Net credit income 57.40% 51.50%
Recurrent non-interest income 40.40% 36.40%
Non-recurrent non-interest income 2.20% 12.10%
----------- -----------
100.00% 100.00%
=========== ===========
TABLE 3 - NON-INTEREST INCOME SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------
Trust, money management and brokerage fees $ 3,378 $ 2,457 37.5%
----------- ----------- -----------
Mortgage banking activities 1,504 2,282 -34.1%
----------- ----------- -----------
Fees on deposit accounts 654 326 100.6%
Bank service charges and commissions 673 524 28.4%
Leasing revenues 179 282 -36.5%
Other operating revenues 6 4 50.0%
----------- ----------- -----------
BANK SERVICE REVENUES AND OTHER OPERATING INCOME 1,512 1,136 33.1%
----------- ----------- -----------
RECURRENT NON-INTEREST INCOME 6,394 5,875 8.8%
Securities and trading net activity 348 1,949 -82.1%
----------- ----------- -----------
TOTAL NON-INTEREST INCOME $ 6,742 $ 7,824 -13.8%
=========== =========== ===========
RECURRENT NON-INTEREST INCOME / NON-INTEREST EXPENSES RATIO 73.58% 69.61%
----------- -----------
TABLE 4 - NON-INTEREST EXPENSES SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------
Fixed compensation $ 2,604 $ 2,247 15.9%
Variable compensation 1,115 1,529 -27.1%
----------- ----------- -----------
TOTAL COMPENSATION AND BENEFITS 3,719 3,776 -1.5%
----------- ----------- -----------
Occupancy and equipment 1,602 1,424 12.5%
Advertising and business promotion 823 846 -2.7%
Professional and service fees 695 581 19.6%
Communications 431 349 23.5%
Municipal and other general taxes 477 427 11.7%
Insurance, including deposits insurance 100 120 -16.7%
Printing, postage, stationery and supplies 237 204 16.2%
Other operating expenses 606 713 -15.0%
----------- ----------- -----------
OTHER NON-INTEREST EXPENSES 4,971 4,664 6.6%
----------- ----------- -----------
RECURRENT NON-INTEREST EXPENSES 8,690 8,440 3.0%
Other non-recurrent expenses 15 - 100.0%
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSES $ 8,705 $ 8,440 3.1%
=========== =========== ===========
RELEVANT RATIOS AND DATA:
Efficiency ratio 51.20% 48.02%
----------- -----------
Expense ratio 0.55% 0.73%
----------- -----------
Compensation to recurrent non-interest expenses 74.8% 81.0%
----------- -----------
Variable compensation to total compensation 30.0% 40.5%
----------- -----------
Compensation to total average assets 0.86% 1.00%
----------- -----------
Average compensation per employee $ 42.1 $ 42.0
----------- -----------
Average number of full-time employees 354 360
----------- -----------
Bank assets per employee
Bank
Trust
Brokerage
TOTAL WORK FORCE
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------
NINE-MONTH PERIOD
MARCH 31,
--------------------------------------------------------
2000 1999 VARIANCE %
--------------------------------------------------------
TABLE 2 - REVENUES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net credit income $ 29,722 $ 18,777 58.3%
Recurrent non-interest income 18,530 17,091 8.4%
Non- recurrent non-interest income 1,072 10,465 -89.8%
----------- ----------- ----------
$ 49,324 $ 46,333 6.5%
=========== =========== ==========
REVENUES COMPOSITION:
Net credit income 60.30% 40.50%
Recurrent non-interest income 37.60% 36.90%
Non-recurrent non-interest income 2.10% 22.60%
----------- -----------
100.00% 100.00%
=========== ===========
TABLE 3 - NON-INTEREST INCOME SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------
Trust, money management and brokerage fees $ 8,785 $ 7,089 23.9%
----------- ----------- ----------
Mortgage banking activities 5,238 6,754 -22.4%
----------- ----------- ----------
Fees on deposit accounts 1,577 985 60.1%
Bank service charges and commissions 1,924 1,418 35.7%
Leasing revenues 814 762 6.8%
Other operating revenues 192 83 131.3%
----------- ----------- ----------
BANK SERVICE REVENUES AND OTHER OPERATING INCOME 4,507 3,248 38.8%
----------- ----------- ----------
RECURRENT NON-INTEREST INCOME 18,530 17,091 8.4%
Securities and trading net activity 1,072 10,465 -89.8%
----------- ----------- ----------
TOTAL NON-INTEREST INCOME $ 19,602 $ 27,556 -28.9%
=========== =========== ==========
RECURRENT NON-INTEREST INCOME / NON-INTEREST EXPENSES RATIO 74.03% 71.99%
----------- -----------
TABLE 4 - NON-INTEREST EXPENSES SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed compensation $ 7,622 $ 6,595 15.6%
Variable compensation 3,476 4,454 -22.0%
----------- ----------- ----------
TOTAL COMPENSATION AND BENEFITS 11,098 11,049 0.4%
----------- ----------- ----------
Occupancy and equipment 4,714 3,890 21.2%
Advertising and business promotion 2,051 2,108 -2.7%
Professional and service fees 1,782 1,576 13.1%
Communications 1,156 1,123 2.9%
Municipal and other general taxes 1,432 1,284 11.5%
Insurance, including deposits insurance 372 313 18.8%
Printing, postage, stationery and supplies 652 563 15.8%
Other operating expenses 1,773 1,836 -3.4%
----------- ----------- ----------
OTHER NON-INTEREST EXPENSES 13,932 12,693 9.8%
----------- ----------- ----------
RECURRENT NON-INTEREST EXPENSES 25,030 23,742 5.4%
Other non-recurrent expenses 16 337 -95.3%
----------- ----------- ----------
TOTAL NON-INTEREST EXPENSES $ 25,046 $ 24,079 4.0%
=========== =========== ==========
RELEVANT RATIOS AND DATA:
Efficiency ratio 47.22% 48.40%
----------- -----------
Expense ratio 0.54% 0.67%
----------- -----------
Compensation to recurrent non-interest expenses 79.7% 87.0%
----------- -----------
Variable compensation to total compensation 31.3% 40.3%
----------- -----------
Compensation to total average assets 0.89% 1.03%
----------- -----------
Average compensation per employee $ 41.2 $ 40.6
----------- -----------
Average number of full-time employees 359 363
----------- -----------
Bank assets per employee $ 5,597 $ 4,723
----------- -----------
Bank 313 325
Trust 27 28
Brokerage 11 11
----------- -----------
TOTAL WORK FORCE 351 364
=========== ===========
</TABLE>
- 15 -
<PAGE>
SELECTED FINANCIAL DATA
AS OF MARCH 31, 2000 AND 1999 AND JUNE 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------- --------------------- ----------------- ---------------
MARCH 31, MARCH 31, VARIANCE JUNE 30,
2000 1999 % 1999
----------------- --------------------- ----------------- ---------------
TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENTS:
Mortgage-backed securities and CMO's $ 831,330 $ 692,023 20.1% $ 696,252
U.S. and P.R. Government securities 238,343 186,473 27.8% 209,232
FHLB stock and other investments 22,087 17,235 28.2% 41,045
------------- -------------- ----------- ------------
1,091,760 895,731 21.9% 946,529
------------- -------------- ----------- ------------
LOANS:
Real estate 348,220 335,172 3.9% 340,254
Consumer 127,603 117,663 8.4% 122,212
Financing leases 89,756 117,583 -23.7% 110,297
Commercial and auto 20,917 12,473 67.7% 10,555
------------- -------------- ----------- ------------
586,496 582,891 0.6% 583,318
Allowance for loan losses (6,845) (9,608) -28.8% (9,002)
------------- -------------- ----------- ------------
579,651 573,283 1.1% 574,316
------------- -------------- ----------- ------------
TOTAL INTEREST-EARNING ASSETS 1,671,411 1,469,014 13.8% 1,520,845
Non-interest earning assets 80,417 65,998 21.8% 66,502
------------- -------------- ----------- ------------
TOTAL ASSETS $ 1,751,828 $ 1,535,012 14.1% $ 1,587,347
============= ============== =========== ============
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMO's 76.1% 77.3% 73.6%
U.S. and P.R. Government securities 21.8% 20.8% 22.1%
FHLB stock and other investments 2.1% 1.9% 4.3%
------------- -------------- ------------
100.0% 100.0% 100.0%
============= ============== ============
LOAN PORTFOLIO COMPOSITION:
Real Estate 59.4% 57.5% 58.3%
Consumer 21.8% 20.2% 21.0%
Financing leases 15.3% 20.2% 18.9%
Commercial and auto 3.5% 2.1% 1.8%
------------- -------------- ------------
100.0% 100.0% 100.0%
============= ============== ============
TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand deposits $ 135,283 $ 146,931 -7.9% $ 142,679
Time deposits and IRA accounts 513,082 486,974 5.4% 508,648
------------- -------------- ----------- ------------
648,365 633,905 2.3% 651,327
Accrued Interest 4,689 5,105 -8.1% 5,661
------------- -------------- ----------- ------------
653,054 639,010 2.2% 656,988
------------- -------------- ----------- ------------
BORROWINGS:
Repurchase agreements 754,760 581,520 29.8% 596,226
FHLB funds 94,375 61,600 53.2% 68,400
Term notes and other sources of funds 86,500 106,500 -18.8% 106,500
------------- -------------- ----------- ------------
935,635 749,620 24.8% 771,126
------------- -------------- ----------- ------------
TOTAL INTEREST-BEARING LIABILITIES 1,588,689 1,388,630 14.4% 1,428,114
Non interest-bearing liabilities 32,898 41,406 -20.5% 35,201
------------- -------------- ----------- ------------
TOTAL LIABILITIES $ 1,621,587 $ 1,430,036 13.4% $ 1,463,315
============= ============== =========== ============
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 20.7% 23.0% 21.7%
Time deposits and IRA accounts 78.6% 76.2% 77.4%
Accrued Interest and manager checks 0.7% 0.8% 0.9%
------------- -------------- ------------
100.0% 100.0% 100.0%
============= ============== ============
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 80.7% 77.6% 77.3%
FHLB funds 10.1% 8.2% 8.9%
Term notes and other sources of funds 9.2% 14.2% 13.8%
------------- -------------- ------------
100.0% 100.0% 100.0%
============= ============== ============
</TABLE>
- 16 -
<PAGE>
SELECTED FINANCIAL DATA
AS OF MARCH 31, 2000 AND 1999 AND JUNE 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------ ------------------ -------------- --------------
MARCH 31, MARCH 31, VARIANCE JUNE 30,
2000 1999 % 1999
------------------ ------------------ -------------- --------------
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL DATA:
Stockholders' equity $ 130,241 $ 104,976 24.1% $ 124,032
-------------- ------------- -------- --------------
Leverage Capital ( minimum required - 4.00%) 8.59% 7.04% 22.0% 8.78%
-------------- ------------- -------- --------------
Total Risk-Based Capital (minimum required - 8.00%) 26.30% 19.94% 31.9% 25.28%
-------------- ------------- -------- --------------
Tier 1 Risk-Based capital (minimum required - 4.00%) 25.05% 18.69% 34.0% 24.02%
-------------- ------------- -------- --------------
STOCK DATA:
Outstanding common shares, net of treasury 12,800 13,070 -2.1% 12,835
-------------- ------------- -------- --------------
Book value $ 7.55 $ 7.70 -1.9% $ 7.05
-------------- ------------- -------- --------------
Market Price at end of period $ 19.00 $ 27.94 -32.0% $ 24.13
-------------- ------------- -------- --------------
Market capitalization $ 243,204 $ 380,683 -36.1% $ 309,644
-------------- ------------- -------- --------------
DIVIDEND DATA:
Dividends declared $ 5,753 $ 5,443 5.7% $ 7,369
-------------- ------------- -------- --------------
Dividends declared per share $ 0.450 $ 0.413 9.0% $ 0.563
-------------- ------------- -------- --------------
Payout ratio 27.64% 28.57% -3.3% 28.02%
-------------- ------------- -------- --------------
Dividend yield 2.78% 1.86% 49.5% 1.94%
-------------- ------------- -------- --------------
</TABLE>
The following provides the high and low prices and dividend per share of the
Group's stock for each quarter of the last three fiscal periods. Common stock
prices were adjusted to give retroactive effect to the stock splits declared on
the Group's common stock.
<TABLE>
<CAPTION>
----------------------------------- ------------
PRICE DIVIDEND
-----------------------------------
HIGH LOW PER SHARE
----------------- ---------------- ------------
<S> <C> <C> <C>
FISCAL 2000:
March 31, 2000 $ 26.00 $ 17.75 $ 0.150
----------------- ---------------- ------------
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>
<TABLE>
<CAPTION>
TABLE 8 - FINANCIAL ASSETS SUMMARY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Trust assets managed $ 1,387,300 $ 1,337,700 3.7% $1,394,800
Assets gathered by broker-dealer 850,300 831,700 2.2% 864,700
-------------- ------------- -------- --------------
MANAGED ASSETS 2,237,600 2,169,400 3.1% 2,259,500
Group assets 1,751,800 1,535,000 14.1% 1,587,300
-------------- ------------- -------- --------------
$ 3,989,400 $ 3,704,400 7.7% $3,846,800
============== ============= ======== ==============
</TABLE>
- 17 -
<PAGE>
SELECTED FINANCIAL DATA
THIRD QUARTER AND NINE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------- -----------------------------------------------
THIRD QUARTER NINE-MONTH PERIOD
MARCH 31, MARCH 31,
---------------------------------------------- -----------------------------------------------
2000 1999 VARIANCE % 2000 1999 VARIANCE %
---------------------------------------------- -----------------------------------------------
TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE $ 7,659 $ 9,693 $ 9,002 $ 5,658
Provision for loan losses 1,500 3,200 -53.1% 4,750 12,950 -63.3%
Net charge-off's (2,314) (3,285) -29.6% (6,907) (9,000) -23.3%
----------- ----------- --------- ---------- ---------- ---------
ENDING BALANCE $ 6,845 $ 9,608 -28.8% $ 6,845 $ 9,608 -28.8%
=========== =========== ========= ========== ========== =========
CHARGE-OFF'S:
Real estate $ (4) $ -- -100.0% $ (28) $ (2) 1300.0%
Consumer (1,796) (1,446) 24.2% (5,560) (4,628) 20.1%
Leasing (1,045) (2,266) -53.9% (3,448) (5,577) -38.2%
Commercial and others (229) (718) -68.1% (396) (1,002) -60.5%
----------- ----------- --------- ---------- ---------- ---------
(3,074) (4,430) -30.6% (9,432) (11,209) -15.9%
----------- ----------- --------- ---------- ---------- ---------
RECOVERIES:
Real estate -- -- 0.0% -- 16 -100.0%
Consumer 436 630 -30.8% 1,370 1,120 22.3%
Leasing 353 279 26.5% 1,023 779 31.3%
Commercial and others (29) 236 -112.3% 132 294 -55.1%
----------- ----------- --------- ---------- ---------- ---------
760 1,145 -33.6% 2,525 2,209 14.3%
----------- ----------- --------- ---------- ---------- ---------
NET CHARGE-OFF'S:
Real estate (4) -- -100.0% (28) 14 -300.0%
Consumer (1,360) (816) 66.7% (4,190) (3,508) 19.4%
Leasing (692) (1,987) -65.2% (2,425) (4,798) -49.5%
Commercial and others (258) (482) -46.5% (264) (708) -62.7%
----------- ----------- --------- ---------- ---------- ---------
$ (2,314) $ (3,285) -29.6% $ (6,907) $ (9,000) -23.3%
=========== =========== ========= ========== ========== =========
LOANS:
Outstanding at March 31, $586,496 $582,891 $586,496 $582,891
----------- ----------- ---------- ----------
Average loans $577,260 $573,556 $570,826 $567,535
----------- ----------- ---------- ----------
RATIOS:
Recoveries to net-charge-off's 24.7% 25.8% 26.8% 19.7%
----------- ----------- ---------- ----------
Net charge-off's to average loans 1.60% 2.29% 1.61% 2.11%
----------- ----------- ---------- ----------
Allowance coverage ratio 1.17% 1.65% 1.17% 1.65%
----------- ----------- ---------- ----------
<CAPTION>
TABLE 10 - NON-PERFORMING ASSETS ( AS OF MARCH 31, ):
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NON-PERFORMING ASSETS:
Real estate $ 7,434 $ 11,043 -32.7%
Consumer 945 560 68.8%
Financing leases 7,208 7,697 -6.4%
Commercial 984 1,107 -11.1%
---------- ---------- --------
NON-PERFORMING LOANS 16,571 20,407 -18.8%
Foreclosed real estate 548 316 73.4%
Repossessed autos 308 634 -51.4%
Repossessed equipment 2 68 -97.1%
---------- ---------- --------
$ 17,429 $ 21,425 -18.7%
========== ========== ========
NON-PERFORMING LOANS COMPOSITION:
Real estate 44.9% 54.1%
Consumer 5.7% 2.7%
Financing leases 43.5% 37.7%
Commercial 5.9% 5.4%
---------- ---------
100.0% 100.0%
========== =========
RELEVANT RATIOS:
Non-performing loans to total loans 2.83% 3.50%
---------- ---------
Non-performing loans reserve coverage ratio 41.31% 47.08%
---------- ---------
Non-performing loans reserve coverage ratio (excluding real estate loans) 74.92% 102.61%
---------- ---------
Non-perfoming assets to total assets 0.99% 1.40%
---------- ---------
Non-perfoming assets to total capital 13.38% 20.41%
---------- ---------
</TABLE>
- 18 -
<PAGE>
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income is the Group's main source of earnings. It 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.
For the third quarter of fiscal 2000, the Group's net interest income amounted
to $10.6 million, down 8.1% from $11.5 million in the same period of fiscal
1999. The reduction in net interest income was directly due to a negative rate
variance of $2.1 million as result of a higher average cost of funds (5.40% in
2000 versus 4.91% in 1999) in line with the Fed is interest rates hikes. For the
first nine months of fiscal 2000, net interest income rose 8.7% to $34.5 million
from $31.7 million in the comparable period a year earlier. A larger volume of
interest-earning assets ($1.60 billion in 2000 versus $1.32 billion in 1999)
propelled this growth in net interest income.
For the third quarter of fiscal 2000, interest rate spread narrowed 83 basis
points to 2.24% from 3.07% the year before. For the first nine months of fiscal
2000, it declined 40 basis points to 2.59% from 2.99% a year earlier. An
increase in the average cost of funds combined with a change in the mix of
interest-earning assets toward a higher volume of lower risk and tax-free
investment securities was responsible for both spread reductions. 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 third quarter of fiscal 2000 totaled $31.8
million, up 14.3% from $27.8 million posted in the same period of fiscal 1999.
The increase in interest income results from a larger average volume of
interest-earning assets ($1.667 billion in 2000 versus $1.403 billion in 1999)
tempered by a decline in their yield performance (7.64% in 2000 versus 7.98% in
1999). For the first nine months of fiscal 2000, interest income rose 16.5% to
$93.3 million from $80.0 million in the comparable period a year earlier. A
greater average volume of interest-earning assets ($1.602 billion in 2000 versus
$1.321 billion in 1999), partially offset by a decline in their yield
performance (7.75% in 2000 versus 8.07% in 1999) triggered this increase. See
Tables 1 and 1A for the impact in interest income due to changes in volume and
rates.
Average interest-earning assets for the third quarter of fiscal 2000 reached
$1.667 billion, an increase of 18.9% compared with $1.402 billion in fiscal
1999. For the first nine months of fiscal 2000, they reached $1.602 billion,
21.3% higher than $1.321 billion a year earlier. Most of the increase in
interest-earning assets was reflected on the investment portfolio. For the third
quarter of fiscal 2000, the average volume of total investments grew by 28.3%
($1.090 billion in 2000 versus $849.5 million in 1999) when compared to the same
period a year earlier. For first nine months of fiscal 2000, they increased
33.2% ($1.032 billion in 2000 versus $774.1 million in 1999) versus the
comparative period of fiscal 1999. Both increases were concentrated in
mortgage-backed securities as Oriental continued converting residential real
estate loans sold in the secondary market into tax-advantaged mortgage-backed
securities.
In the third quarter of fiscal 2000, the average yield on interest-earning
assets was 7.64%, 34 basis points lower than the 7.98% attained in the same
period of fiscal 1999. For the first nine months of fiscal 2000 it was 7.75%, 32
basis points lower than the 8.07% reported a year ago. The yield dilution
experienced in both periods of fiscal 2000 was primarily related to 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. Another factor was also the dilution of the loan portfolio
yield, which decreased by 98 basis points (9.34% versus 10.32%) in the third
quarter and 56 basis points (9.74% versus 10.30%) during the first nine months.
A change in the loan portfolio mix toward low-risk residential mortgage loans
was the main reason for this yield decline.
Interest expense for the third quarter of fiscal 2000 rose 30.1% to $21.2
million from $16.3 million reported in the comparable period of fiscal 1999. A
larger base of interest-bearing liabilities ($1.577 billion in 2000 versus
$1.347 billion in 1999) used to fund the growth of Group's interest-earning
assets combined with a higher average cost of funds (5.40% versus 4.91%), due to
Fed interest rates hikes, drove the increase. For the first nine months of
fiscal 2000, interest expense grew by 21.7% to $58.8 million from $48.3 million
posted the year before. A higher volume of interest-bearing liabilities ($1.512
billion in 2000 versus $1.266 billion in 1999) combined with a higher average
cost of funds (5.16% versus 5.08%), due to rates hikes, caused this rise. Larger
volumes of repurchase agreements and deposits, which were necessary to fund the
growth of the Group's investment portfolio, drove both increases in
interest-bearing liabilities. See Tables 1 and 1A for the impact in interest
expense due to changes in volume and rates.
For the third quarter of fiscal 2000, the average cost of funds on
interest-bearing liabilities was 5.40%, compared with 4.91% attained in fiscal
1999, up 49 basis points. For the first nine months of fiscal 2000, it only rose
8 basis points (5.16% versus 5.08%). A higher interest rate scenario as result
of the tightening policy by the Federal Reserve triggered the rise. The cost of
short-term financing has substantially increased since early fiscal 2000. This
had an adverse effect on the Group's cost of funds, primarily during the past
two quarters, as the cost of funds of the Group's short-term repricing
borrowings, mainly comprised of repurchase agreements, has substantially
increased. For the third quarter ended March 31, 2000, the cost of borrowings
increased 61 basis points (5.79% versus 5.18%) mainly due to an increase in the
cost of repurchase agreements of 95 basis points (5.90% versus 4.95%).
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<PAGE>
NON-INTEREST INCOME
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. 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.
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 third quarter, they rose 8.8% to $6.4 million
from $5.9 million in the preceding year third quarter. For the first nine months
they were 8.4% higher, $18.5 million versus $17.1 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 an excellent growth pattern during the third
quarter of fiscal 2000, rising 37.5% to $3.4 million from $2.5 million in the
preceding third quarter. For the first nine months, grew 23.9% to $8.8 million
from $7.1 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 third quarter of fiscal 2000, gains generated by mortgage banking
activities amounted to $1.5 million, 34.1% lower than the $2.3 million, earned
in same quarter of fiscal 1999. This decrease reflects a lower volume of loans
sold during the past quarter. For the first nine months of fiscal 2000, mortgage
banking activities totaled $5.2 million versus $6.8 million in the comparable
period of fiscal 1999, down 22.4%. Decreased volume of loan production,
partially offset by higher spreads attained in certain of the loan products sold
in the first half of fiscal 2000, caused this reduction.
Bank services fees and other operating revenues consist primarily of fees
generated by deposit accounts, leasing, electronic banking and customer
services. These revenues totaled $1.5 million in the third quarter of fiscal
2000, a 33.1% hike versus the $1.1 million reported in the same period of fiscal
1999. For the first nine months of fiscal 2000, they totaled $4.5 million, up
38.8% versus $3.2 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 third quarter of fiscal 2000, non-recurrent securities and trading gains
which are subject to market conditions amounted to $348,000 versus $1.9 million
reported in the same period a year ago. For the first nine months, they amounted
to $1.1 million versus $10.5 million the year before.
NON-INTEREST EXPENSES
As shown in Table 4, non-interest expenses for the third quarter of fiscal 2000
only increased 3.1% to $8.7 million from $8.4 million in the comparable period
of fiscal 1999. The efficiency and expense ratios for this quarter were 51.20%
(up from 48.02%) and 0.55% (improve from 0.73%), respectively. For the first
nine months of fiscal 2000, non-interest expenses totaled $25.0 million, up 4.0%
from $24.1 million in the same period of 1999. Notwithstanding this increase,
the efficiency and expense ratios for the nine month period improved to 47.22%
(down from 48.40% in 1999) and 0.54% (down from 0.67% in 1999), respectively.
The marginally increases on non-interest expenses reflects the Group's strict
cost control policy.
Employee compensation and benefits is the Group's largest expense category. For
the third quarter of fiscal 2000, it decreased 1.5% to $3.7 million (0.86% of
total average assets) versus $3.8 million (1.00 % 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 nine
months of fiscal 2000, compensation amounted $11.1 million (0.89% of total
average assets) versus $11.0 million (1.03% 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 non-interest expenses for the third quarter of fiscal 2000 increased 6.6%
to $5.0 million as compared to $4.7 million in the same period of fiscal 1999.
Increased communication and occupancy and equipment costs (mainly technology)
led this rise. These increases reflect the additional investment required to
support the growth of the Group's business activity 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 nine months of fiscal 2000, other recurring non-interest expenses
increased 7.6% to $25.5 million as compared to $23.7 million in fiscal 1999
comparable period. A greater amount of occupancy and equipment expenses,
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.
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<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses in the third quarter of fiscal 2000 totaled $1.5
million, down 53.1% from the $3.2 million reported in the same period of fiscal
1999. For the first nine months of fiscal 2000 it amounted to $4.75 million,
63.3% lower than $12.95 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 third quarter of fiscal 2000 amounted to
$452,000 (6.4% of pre-tax earnings) compared with $1.07 million (13.9% of
pre-tax earnings) a year ago, down 57.8%. For the first nine months of fiscal
2000, they amounted to $1.67 million (6.9% of pre-tax earnings) versus $3.21
million (14.4% of pre-tax earnings) the year before, 47.8% lower. These
reductions were principally due to a higher amount of tax-exempt income
generated by the Group's investment portfolio. The difference between the
effective tax rates and the maximum statutory tax rate for the Group, which is
39%, is primarily due to the interest income earned on certain investments and
loans which is exempt from income tax, net of the disallowance of related
expenses attributable to the exempt income.
FINANCIAL CONDITION
GROUP'S ASSETS
At March 31, 2000, the Group's total assets amounted to $1.752 billion, an
increase of 14.1% when compared to $1.535 billion a year ago. At the same date,
interest-earning assets reached $1.671 billion, up 13.8% versus $1.469 billion a
year earlier. An expansion of 13.8% 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, CMO's and P. R. Government municipal
bonds. At March 31, 2000, the Group's investment portfolio is of high quality.
Approximately 98% is rated AAA and it 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 20.1% to $831.3 million (76.1% of the total
portfolio) from $692 million (77.3% of the total portfolio) the year before, as
Oriental continued its strategy of pooling residential real estate loans into
mortgage-backed securities. Also, a 28.2% rise in the FHLB stock and other
investments along with increase of 27.8% in U. S. and P. R. government
securities portfolio enhanced this growth. At March 31, 2000, they amounted to
$22.0 (2.1 % of the total portfolio) and $238.3 million (21.8% of the total
portfolio), respectively, versus $17.2 million (1.9% of the total portfolio) and
$186.4 million or (20.8% of the total portfolio) respectively, a year ago.
At March 31, 2000, Oriental's loan portfolio, the second largest category of the
Bank's interest-earning assets, amounted to $586.5 million, 0.6% higher than the
$582.9 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. LATE IN THE SECOND QUARTER ENDED
DECEMBER 31, 1999, THE GROUP'S LOANS ORIGINATIONS STRATEGY CHANGED TOWARD
COLLATERALIZED LOANS, PRIMARILY MORTGAGE LOANS AND PERSONAL LOANS WITH MORTGAGE
COLLATERAL WHILE DE-EMPHASIZING UNSECURED PERSONAL LOANS. THIS STRATEGY SHOULD
SIGNIFICANTLY REDUCE CREDIT LOSSES AND ENHANCE PORTFOLIO QUALITY. 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
March 31, 2000, the real estate loans portfolio amounted to $348.2 million
(59.4% of the loan portfolio), a 3.9% increase when compared to $335.2 million
(57.5% 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 March 31,2000, the consumer loans portfolio totaled
$127.6 million (21.8% of the Group's loan portfolio), a 8.4% growth compared to
the $117.7 million (20.2% of the Group's loan portfolio) a year ago. The largest
contributors to this rise were unsecured personal loans and personal credit
cards, which grew 3.5% and 32.9%, respectively over the past twelve months.
Personal Unsecured Loans increased to $108.6 million from $104.9 million
reported last year, while personal credit cards rose to $10.3 million from $7.7
million.
The Group's leasing portfolio consists of auto and equipment leases. At March
31, 2000, it amounted to $89.8 million (15.3% of the loan portfolio), down
23.7% versus $117.6 million (20.2% 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.
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<PAGE>
LIABILITIES AND FUNDING SOURCES
As shown in Table 6, at March 31, 2000, Oriental's total liabilities reached
$1.621 billion, 13.4% higher than the $1.430 billion reported a year earlier.
Interest-bearing liabilities, the Group's funding sources, amounted to
$1,588.6 billion at the end of the third quarter of fiscal 2000 versus
$1,388.6 billion the year before, a 14.4% increase. A rise in borrowed funds,
mainly on FHLB funds and repurchase agreements, drove these growths.
At March 31, 2000, DEPOSITS, the second largest category of the Group's
interest-bearing liabilities and a cost-effective source of funding, reached
$648.4 million, up 2.3% versus the $633.9 million a year ago. A $26.1 million or
5.4% increase in time deposits and IRA accounts realized most of the growth,
partially offset by a $11.6 million or 7.9% decrease in demand and savings
deposits. 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 March 31, 2000, they amounted
to $935.6 million, 24.8% higher than the $749.6 million a year ago. This
increase reflects a strong growth in repurchase agreements, which was necessary
to fund the increase in interest-earning assets experienced during the period,
particularly investment securities.
The FHLB system functions as a source of credit to financial institutions that
are members of a regional Federal Home Loan Bank. As a member of the of the FHLB
the Group can obtain advances from the FHLB, secured by the FHLB stock owned by
the Group, as well as by certain of the Group's mortgages and investment
securities. Table 6 presents the composition of the Group's other borrowings at
the end of the periods analyzed.
STOCKHOLDERS' EQUITY
At March 31, 2000, Oriental's total stockholders' equity reached $130.2 million,
a 24.1% increase from $104.9 million a year ago. The main reasons for this
growth were earnings reported during the past 12 months combined 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 nine months of fiscal 2000, the Group repurchased 92,900 common
shares bringing to 996,799 shares (with a cost of $25.5 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 March 31, 2000, the
Group's market value for its outstanding stock was $243.2 million ($19.00 per
share) versus $380.7 million ($27.94 per share) a year earlier.
At March 31, 2000, the Group's book value per share was $7.55 versus $7.70 a
year ago. A $16.6 million unfavorable turnaround in the fair value of securities
available-for-sale (included as part of accumulated other comprehensive loss)
along with $11.8 million on treasury stock repurchases over the last 12 months
caused this book value drop.
During the first nine months of fiscal 2000, the Group declared dividends
amounting to $5.8 million ($0.45 per share) compared to $5.4 million ($0.413 per
share) in the same period of fiscal 1999, up 5.7%. For the first nine months of
fiscal 2000, the dividend payout ratio and dividend yield were 27.64% and 2.78%,
respectively, compared to 28.57% and 1.86%, respectively, in the preceding
fiscal year.
Under the regulatory framework for prompt corrective action, for 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 March 31,
2000, they reached $3.989 billion - up 7.7% from $3.704 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 March 31, 2000, total assets managed by the Group's trust amounted
$1.387 billion, 3.7% higher than the $1.338 billion a year ago. This increase
was fueled by a solid 12.3% growth in individual retirement accounts (IRA), the
most significant asset managed, which totaled $553.2 million versus the $492.5
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 March 31, 2000, total
assets gathered by the broker-dealer from its customer investment accounts
reached $850.3 million, up 2.2% from $831.7 million a year ago.
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<PAGE>
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
At March 31, 2000, the Group's allowance for loan losses amounted to $6.85
million (1.17% of total loans) versus $9.61 million (1.65% 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 third quarter of fiscal 2000, totaled $2.31 million
(1.60% of average loans), a decrease of 29.6% when compared to $3.29 million
(2.29% of average loans) for the same period of fiscal 1999. For the first nine
months of fiscal 2000, they amounted to $6.91 million (1.61% of average loans),
a decrease of 23.3% when compared to $9.0 million (2.11% 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 the tighter underwriting standards and
collection procedures implemented last year are showing positive results. 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 March 31, 2000, the
Group's asset quality improved as non-performing assets totaled $17.4 million
(0.99% of total assets) versus $21.4 million (1.40% 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 March 31, 2000, the allowance for loan losses to non-performing loans
coverage ratio was 41.31%. Excluding the lesser-risk real estate loans, the
ratio is much higher, 74.92%. Detailed information concerning each of the items
that comprise non-performing assets follows:
- - REAL ESTATE LOANS - are placed on a non-accrual basis when they become 90
days or more past due, except for well-secured residential loans, and are
charged-off based on the specific evaluation of the collateral underlying
the loan. At March 31, 2000, the Group's non-performing real estate loans
totaled $7.43 million (44.9% 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 March 31, 2000, the
Group's non-performing commercial business loans amounted to $984,000 (5.9%
of the Group's non-performing loans). Of the total balance, $835,000 (8
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 March 31, 2000, the
Group's non-performing auto and equipment leases portfolio amounted to
$7.21 million (43.5% 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 March
31, 2000, the Group's non-performing consumer loans amounted to $945,000
(5.7% 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 March 31,
2000, 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 critical 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.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The Group's interest rate risk and asset/liability management is 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.
At March 31, 2000, the Group's liquidity was deemed appropriate. At such date
the Group's liquid assets amounted to $991 million, this includes $62.9 million
available from unused lines of credit with other financial institutions and
$43.6 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
On August 14, 1998, as a result of a review of its accounts in connection with
the admission of a former Group officer of having embezzled funds, the Group
became aware of certain irregularities. The Group notified the appropriate
regulatory authorities and commenced an intensive investigation with the
assistance of its independent auditors and legal counsel. The recently completed
investigation determined losses of $9,500,616 resulting from dishonest and
fraudulent acts and omissions involving several former Group's employees. In the
opinion of the Group's management and its legal counsel, the losses determined
by the investigation are covered by the Group's fidelity insurance. Claims for
such losses have been presented to the Group's fidelity insurance carrier and
they are being vigorously pursued. Management and legal counsel are of the
opinion that collection of the losses from the fidelity insurer is highly
probable.
- 24 -
<PAGE>
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 March 31, 2000.
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: May 8, 2000
-----------
By: /s/RAFAEL VALLADARES
----------------------
Rafael Valladares
Senior Vice President - Principal Financial Officer
Dated: May 8, 2000
-----------
- 25 -
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