OFG Bancorp - 10-K annual report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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:
Monacillos Ward
1000 San Roberto Street
Río Piedras, Puerto Rico 00926
Telephone Number: (787) 771-6800

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock
($1.00 par value per share)

7.125% Non-cumulative Monthly Income Preferred Stock, Series A
($1.00 par value per share, $25.00 liquidation preference per share)

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X          No     

Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

As of August 31, 2001, Oriental Financial Group Inc. (the "Group") had 12,452,117 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Group was $193.5 million based upon the reported closing price of $19.50 on the New York Stock Exchange on that date.

Documents Incorporated By Reference

Portions of the Group's annual report to stockholders for fiscal 2001 are incorporated herein by reference to Items 5 through 8 of Part II and Item 14 of Part IV.

Portions of the Group's definitive proxy statement relating to the 2001 annual meeting of stockholders are incorporated by reference in response to Items 10 through 13 of Part III.

ORIENTAL FINANCIAL GROUP INC.
FORM 10-K
TABLE OF CONTENTS

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PART—I

ITEM 1—BUSINESS

General

Except for historical information contained herein, the matters discussed in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "may", "intend", "expect" and similar expressions identify certain of such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of Oriental Financial Group Inc. (the "Group") and are subject to a number of risks and uncertainties, including but not limited to, the risks and uncertainties associated with: the impact and effects of increased leverage, economic, competitive and other factors affecting the Group and its operations, markets, products and services, credit risks and the related sufficiency of its allowance for loan losses, changes in interest rates and economic policies, the success of technological, strategic and business initiatives, the profitability of its banking as well as non-banking initiatives, and other factors discussed elsewhere in this report filed by the Group with the Securities and Exchange Commission ("SEC"). Many of these factors are beyond the Group's control.

The Group

The Group is a diversified, publicly-owned financial holding company, incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto Rico, which provides a wide variety of financial services through its subsidiaries.

Oriental Bank and Trust (the "Bank"), the Group's main subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and with twenty branches located throughout Puerto Rico. The Bank was incorporated in 1964 as a federal mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking laws of the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in its businesses, placing the Bank in the main stream of financial services in Puerto Rico. The Bank offers mortgage, commercial and consumer lending, saving and time deposits products, financial planning, insurance, and corporate and individual trust services.

Oriental Financial Services Corp. ("OFSC") and FISA Insurance Agency Inc., ("FISA") are the Group's two other subsidiaries engaged in securities brokerage (including investment advisory services) and insurance activities, respectively. OFSC, a member of the National Association of Securities Dealers, Inc. (the "NASD") and the Securities Investor Protection Corporation, is a registered securities broker-dealer pursuant to Section 15(b) of the Exchange Act. OFSC does not carry customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule. The SEC, NASD and the Commissioner of Financial Institutions of Puerto Rico (the "Commissioner") regulate the securities activities of OFSC. FISA is an insurance agency licensed by the Insurance Commissioner of Puerto Rico.

Oriental Mortgage Corporation ("Oriental Mortgage"), the Bank's subsidiary engaged in mortgage-banking activities and services, is licensed as a mortgage bank by the Commissioner.

The Group is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (the "Bank Holding Company Act") and, accordingly, subject to the supervision and regulation of the Board of

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Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the Commissioner and the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC insures the Bank's deposits up to $100,000 per depositor. The Bank is further subject to the regulation by the Puerto Rico Finance Board. Other government agencies, such as the SEC, regulate additional aspects of the Group's operations (see "Regulation and Supervision").

The Group is a legal entity separate and distinct from the Bank, OFSC and FISA. There are various legal limitations governing the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Group or its other subsidiaries.

Market Area and Business Segments

Puerto Rico, where the banking market is highly competitive, is the main geographic business and service area of the Group. As of June 30, 2001, Puerto Rico had 17 banking institutions with a total of approximately $45.7 billion in assets according to industry statistics published by the Commissioner. The Group ranked ninth based on total assets at June 30, 2001. The largest banks in order of size (total assets) were Banco Popular de Puerto Rico, Banco Santander Puerto Rico and Firstbank. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States.

In addition, the Group competes with brokerage firms with retail operations, credit unions, small loan companies and mortgage banks in Puerto Rico. The Group encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. The Group competes for loans with other financial institutions, most of which are larger and have greater resources available than those of the Group. There can be no assurance that in the future the Group will be able to continue to increase its deposit base or originate loans in the manner or on the terms on which it has done so in the past.

Management believes that the Group has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive features, by pricing its products at competitive interest rates and by offering convenient branch locations and by emphasizing the quality of its service. The Group's ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions.

The Group has three reportable segments: Retail Banking, Financial Services and Mortgage Banking. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group's organizational chart, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as income before tax, net interest income, loan production and fees generated.

The Group's largest business segment is retail banking. The Bank's branches and treasury are its main components, with traditional banking products such as deposits, electronic banking and lending.

    The Bank's lending activity is with consumers located in Puerto Rico. The Bank's loan transactions include a diversified number of industries and activities all of which are encompassed within three main categories: mortgage, commercial and consumer. The Bank's loan portfolio has a higher concentration of residential mortgage loans followed by consumer loans such as personal loans, then commercial loans. The Bank continues to concentrate the major share of its lending activities in mortgage originations, which represent low credit risk and highly lucrative returns. Lending related to individual real estate ownership has traditionally been one of the most secure areas of financing in Puerto Rico because of the delinquency and foreclosure experience.

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The Group's investment activity is strictly debt securities. Its portfolio consists primarily of money market investments, U.S. Treasury notes and Government agency bonds, mortgage-backed securities, collateralized mortgage obligations and P.R. Government municipal bonds. At June 30, 2001, the Group's investment portfolio was of high quality. Approximately 98% was rated AAA and it generated a significant amount of tax-exempt interest, which lowers the Group's effective tax rate.

Mortgage-backed securities, the largest component, are pools of residential loans that are made to consumers and then resold by the Government National Mortgage Corporation (the "GNMA"), Federal National Mortgage Association (the "FNMA") and Federal Home Loan Mortgage Corporation (the "FHLMC") in the open market. The Government of Puerto Rico is the only issuer, other than the U.S. Government, of instruments that are payable and secured by the same source of revenue or taxing authority that exceeded 10% of stockholders' equity at June 30, 2001 and 2000.

The Bank's principal funding sources are branch deposits, collateralized deposits, Federal Home Loan Bank (the"FHLB") funds, securities sold under agreements to repurchase, and term notes. Borrowings are the Bank's largest funding source. It mainly consist of advances and borrowings from the FHLB, repurchase agreements, term notes, notes payable and lines of credit. Deposits represent the Bank's second largest source of funding. Through its branch system, the Bank offers personal, commercial and mortgage loans, individual non-interest bearing checking accounts, savings accounts, personal interest-bearing checking accounts, certificates of deposit, individual retirement accounts and commercial non-interest bearing checking accounts. The FDIC insures the Bank's deposit accounts up to applicable limits. Management makes retail deposit pricing decisions periodically through the Assets and Liabilities Committee (the "ALCO"), which adjusts the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, LIBOR and mainland United States market interest rates.

The Group's second largest business segment is its financial services, which is comprised of the Bank's trust division ("Oriental Trust"), OFSC and FISA. The core operations of this segment are financial planning, money management, insurance and investment brokerage services, as well as corporate and individual trust services. Oriental Trust offers various types of individual retirement accounts and manages 401(k) and Keogh retirement plans, custodian accounts and corporate trust accounts. OFSC and FISA offers a wide array of investment alternatives to its client base such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds.

The Group's third largest 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. Oriental Mortgage originates FHA insured and VA guaranteed mortgages for issuance of GNMA mortgage-backed securities and conventional mortgage loans for issuance of FNMA or FHLMC mortgage-backed securities. Mortgages included in the resulting GNMA, FNMA and FHLMC pools are serviced by another institution.

Regulation and Supervision

    The Group is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board and SEC periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires directly or indirectly ownership or control of more than 5% of the voting shares of a second bank. Furthermore, Federal Reserve Board approval must also be obtained before such a company acquires all or substantially all of the assets of a second bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has authority to issue cease and desist orders against holding companies and their non-bank subsidiaries.

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A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging, directly or indirectly, in any business unrelated to the business of banking or of managing or controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding company of the shares of any company if the Federal Reserve Board, after due notice and opportunity for hearing, by regulation or order has determined that the activities of the company in question are so closely related to the business of banking or of managing or controlling banks as to be a proper incident thereto.

Under the Federal Reserve Board policy, a bank holding company such as the Group is expected to act as a source of financial strength to its main banking subsidiaries and to also commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to the federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of the Group.

The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, revises and expands the existing provisions of the Bank Holding Company Act by including a new section that permits a bank holding company to elect to become a financial holding company to engage in a full range of activities that are "financial in nature". The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that all the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company must be and remain at all times "well capitalized" and "well managed". On May 21, 2000, the Group elected to become a financial holding company pursuant to the provisions of the Gramm-Leach-Bliley Act.

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity provided it "does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally." The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be "financial in nature": (a) lending, trust and other banking activities; (b) insurance activities; (c) financial or economic advice or services; (d) securitization of assets; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities.

In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of "financial" or "incidental" activities, but requires consultation with the U.S. Treasury Department, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is "complementary" to a financial activity and does not "pose a substantial risk to the safety and soundness of depository institutions or the financial system generally."

The Bank is subject to extensive regulation and examination by the Commissioner and the FDIC, which insures its deposits to the maximum extent permitted by law, and subject to certain requirements established by the Federal Reserve Board. The federal and Puerto Rico laws and regulations which are applicable to the Bank, regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. In addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

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Holding Company Structure

The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including the Group), whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers are limited to 10% of the transferring institution's capital stock and surplus with respect to any affiliate (including the Group), and with respect to all affiliates to an aggregate of 20% of the transferring institution's capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts.

Since the Group is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of depository institution subsidiaries) except to the extent that the Group is a creditor with recognized claims against the subsidiary.

Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. The Bank is currently the only FDIC-insured depository institution subsidiary of the Group. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions.

Dividend Restrictions

The principal source of funds for the Group is dividends from the Bank. The ability of the Bank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the "Puerto Rico Banking Act"), the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Act provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank's capital account. The Puerto Rico Banking Act provides that until said capital has been restored to its original amount and the reserve fund to twenty percent (20%) of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.

The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured

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depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991(the "FDICIA").

Federal Home Loan Bank System

The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board (the "FHFB"). The FHLB's serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHFB and the boards of directors of the FHLB's.

As a system member, the Bank is entitled to borrow from the FHLB of New York (the "FHLB-NY") and is required to own capital stock in the FHLB-NY in an amount equal to the greater of 1% of the aggregate of the unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each fiscal year, which for this purpose is deemed to be not less than 30% of assets or 5% of the total amount of advances by the FHLB-NY to the Bank. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB-NY to the Bank are secured by a portion of the Bank's mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by the Bank.

FDICIA

    Under FDICIA, the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations issued there under established five capital tiers: (i) "well capitalized", if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more, and is not subject to any written capital order or directive; (ii) "adequately capitalized", if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized", (iii) "undercapitalized", if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized", if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized", if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any of the five examinations rating categories: asset quality, management, earnings, liquidity and sensitivity to market risk. As of June 30, 2001, the Group is a "well-capitalized" institution.

FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of five percent of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital.

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Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from corresponding banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.

Insurance of Accounts and FDIC Insurance Assessments

The FDIC insures the Bank's deposit accounts up to the applicable limits. The insurance of deposit accounts by the FDIC subjects the Bank to comprehensive regulation, supervision, and examination by the FDIC. If the Bank violates its duties as an insured institution, engages in unsafe and unsound practices, is in an unsound and unsafe condition, or has violated any applicable FDIC requirements, the FDIC may terminate insurance of accounts of the Bank.

The Bank is subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured institution is also assigned to one of the following "supervisory subgroups": "A","B", or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions with respect to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness.

On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium. Thereafter, premiums related to deposits assessed by both the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF") are assessed at a rate of 0 to 27 basis points per $100 deposits based on the risk-based assessment. DIFA also provided for a special one-time assessment on deposits insured by SAIF to recapitalize the SAIF and to bring it up to statutory required levels of approximately 65 basis points on institutions holding SAIF deposits on March 31, 1995. Accordingly, the Group recorded a special reserve of $1,823,000, net of taxes of $490,000, during the first quarter of 1997 to account for its share of the one-time payment of SAIF insurance premium. As result of this special assessment, in January 1997, the Group's deposit insurance premium was reduced to $0.062 for every $100 of deposits from $.23 for every $100 of deposits. Currently, the Bank's deposit insurance premium is the minimum charged by the SAIF.

Regulatory Capital Requirements

The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of common equity, retained earnings, minority interest in unconsolidated subsidiaries, non-cumulative perpetual preferred stock and the disallowed portion of deferred tax assets ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other investments and a limited amount of loan and lease loss reserves ("Tier 2 Capital").

The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights and purchased credit card relationships and include a "grand fathered" provision permitting inclusion of certain existing intangibles.

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In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 Capital to quarterly average assets) guidelines for bank holding companies and member banks. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies and member banks that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies and member banks are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" and other indicia of capital strength in evaluating proposals for expansion or new activities.

Failure to meet the capital guidelines could subject an institution to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. At June 30, 2001, the Group was in compliance with all capital requirements, exceeding those applicable to a "well-capitalized" institution.

Safety and Soundness Standards

Section 39 of the FDIA, amended by the FDICIA, requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal control, information systems and internal audit system, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency also is required to adopt for all insured depository institutions and their holding companies standards that specify (i) a maximum ratio of classified assets to capital, (ii) minimum earnings sufficient to absorb losses without impairing capital, (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of the institution or holding company, and (iv) such other standards relating to asset quality, earnings and valuation as the agency deems appropriate. Finally, each federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution or holding company fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until it is corrected, may impose other restrictions on the institution or holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA. Pursuant to FDICIA, regulations to implement these operational standards were required to become effective on December 1, 1993.

In August 1995, the FDIC and the other federal banking agencies published Interagency Guidelines Establishing Standards for Safety and Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems, loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation.

Activities and Investments of Insured State-Chartered Banks

Section 24 of the FDIA, as amended by the FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under FDIC regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not

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permissible for a national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

In December 1993, the FDIC adopted amendments to its regulations governing the activities and investments of insured state banks that further implemented Section 24 of the FDIA, as amended by FDICIA. Under the amendments, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as "principal" in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Puerto Rico Banking Act

As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the Commissioner under the Puerto Rico Banking Act, which contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, savings, lending capital and investment requirements and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rulemaking power and administrative discretion under the Puerto Rico Banking Act. The Commissioner generally examines the Bank at least once every year.

The Puerto Rico Banking Act requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the total of paid-in capital on common and preferred stock.

The Puerto Rico Banking Act also provides that when the expenditures of a bank are greater that the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the Bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital.

The Puerto Rico Banking Act further requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral.

The Puerto Rico Banking Act further requires change of control filings. When any person or entity will own, directly or indirectly, upon consummation of a transfer, 5% or more of the outstanding voting capital stock of the Bank, the acquiring parties must inform the Commissioner of the details not less than 60 days prior to the date said transfer is to be consummated. The transfer shall require the approval of the Commissioner if it results in a change of control of the Bank. Under the Puerto Rico Banking Act, a change of control is presumed if an acquirer who did not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer.

The Puerto Rico Banking Act generally restricts the amount the Bank can lend to one borrower to an amount that may not exceed 15% of the aggregate of the paid-in capital of the Bank and the reserve fund. The Bank may also not accept the security of any one borrower in an amount exceeding 15% of

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its paid-in capital and reserve fund. If such loans are secured by collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in-capital of the Bank, plus its reserve fund. There are no restrictions on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States or the Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth. As of June 30, 2001, there were no loans that exceeded the maximum amount that the Bank could have loaned to one borrower.

The Puerto Rico Finance Board, which is composed of the Commissioner, the President of the Government Development Bank for Puerto Rico, the President of the Puerto Rico Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and Consumer Affairs and three public interest representatives, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth. The Puerto Rico Finance Board promulgates regulations that specify maximum rates on various types of loans to individuals.

The current regulations of the Puerto Rico Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans, but excluding certain other personal and commercial loans secured by mortgages on real estate property) is to be determined by free competition. The Puerto Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is no maximum rate for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums.

Employees

At June 30, 2001, the Group employed 358 persons. None of its employees is represented by a collective bargaining group. The Group considers its employee relations to be good.

ITEM 2—PROPERTIES

At June 30, 2001, the Bank owned 9 branch premises and other facilities throughout the Commonwealth. In addition, as of such date, the Bank leased properties for branch operations and main office in 11 locations in Puerto Rico. The Bank's management believes that each of its facilities is well maintained and suitable for its purpose. The principal properties owned by the Bank for banking operations and other services are described below:

•

Oriental Center—a four-story office building located at 908 State Road, Humacao, Puerto Rico. The Bank's main branch is the only activity conducted at this location. Approximately 60% of the office space is leased to outside tenants. The book value of this property at June 30, 2001 was $5 million.



•

Las Cumbres Building—a two-story structure located at 1990 Las Cumbres Avenue, Rio Piedras, Puerto Rico. A branch, collections and mortgage originating departments are the main activities conducted at this location. The book value of this property at June 30, 2001 was $1.3 million.

ITEM 3—LEGAL PROCEEDINGS

On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of its independent accountants and legal counsel. The investigation determined losses of $9.5 million 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

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determined by the investigation are covered by the Group's fidelity insurance. The Group's fidelity insurance carrier has denied claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the state of Indiana, seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim. Initial conference meetings have taken place. The losses caused by the irregularities and claims to the insurer were expensed in prior years.

    In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the result of operations.

ITEM 4—SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART—II

ITEM 5—MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. Information concerning the range of high and low sales prices for the Group's common stock for each quarter in fiscal 2001 and the previous two fiscal years, as well as cash dividends declared for the last three fiscal years, and cash dividends declared is contained in Table 12 ("Capital, Dividends and Stock Data") and under the "Stockholders' Equity" caption in the Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), (see Financial Data Index herein) and is incorporated herein by reference.

Information concerning legal or regulatory restrictions on the payment of dividends by the Group and the Bank is contained under the caption "Dividend Restrictions" in Item 1 herein.

On August 18, 1998, the Group declared a four-for-three (33.3%) stock split on the common stock held by stockholders of record on September 30, 1998. As a result, approximately 3,385,000 shares of common stock were distributed on October 15, 1998.

As of August 31, 2001 the Group had over 2,000 stockholders of record of its common stock, including all directors and officers of the Group, excluding beneficial owners whose shares are held in street name by securities brokers or other nominees. The NYSE closing price for the Group's common stock on such date was $19.50 per share.

In May 1999, the Group issued 1,340,000 shares of its 7.125% Non-cumulative Monthly Income Preferred Stock, Series A at $25 per share. As a result of this stock issue, the Group generated $32,300,000 in net proceeds for general corporate purposes. The Series A Preferred Stock has the following characteristics: (1) annual dividends of $1.78125 per share payable monthly, if declared by the board of directors; (2) missed dividends are not cumulative; (3) redeemable at the Group's option beginning on May 30, 2004; (4) no mandatory redemption or stated maturity date; and (5) a liquidation value of $25 per share.

The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax on the amount of any dividends paid by Puerto Rico corporations to individuals, whether residents of Puerto Rico or not, trusts, estates, and special partnerships at a special 10% withholding tax rate. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may

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elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year's distributions. Dividends distributed by Puerto Rico corporations to foreign corporations or partnerships, not engaged in trade or business in Puerto Rico, are also generally subject to withholding tax at a 10% rate.

United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department "Withholding Tax Exemption Certificate for the Purpose of Section 1147" is filed with the withholding agent. U.S. income tax law permits a credit against the U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends.

ITEM 6—SELECTED FINANCIAL DATA

The information required by this item appears in the MD&A (see Financial Data Index herein) and is incorporated herein by reference. The following selected financial data of the Group should be read in conjunction with the MD&A and the audited consolidated financial statements. Selected financial data are presented for five fiscal years. The Group's financial statements for the fiscal years ending June 30, 1999 and 1998 were restated. The Group spent a substantial amount of time, effort and expense over a two-year period investigating certain irregularities and illegal conduct by former employees to identify the items that required the restatement of the results of fiscal years 1999 and 1998. The Group was not able, however, to determine how to allocate an additional amount of $5.8 million (after tax) that relates to periods prior to fiscal year 1998. Accordingly, that amount has been recognized as an adjustment to beginning retained earnings for fiscal 1998. The Group believes that it would require an unreasonable effort and expense to determine how to restate the financial statements for periods prior to fiscal 1998, if such allocations could be determined at all. Therefore, financial data for fiscal years 1997 has not been restated and should not be relied upon.

The ratios shown below demonstrate the Group's ability to generate sufficient earnings to pay the fixed charges of its debt and preferred stock dividends. The Group's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:

For purposes of computing these consolidated ratios, earnings represent income before taxes, plus fixed charges. Fixed charges represent all interest expense (ratios are presented both excluding and including interest in deposits), amortization of debt costs, and the portion of net rental expense that is deemed representative of interest factor. In fiscal years 2001, 2000 and 1999, the Group had preferred stock issued and outstanding amounting to $33,500,000 or 1,340,000 shares at a $25 liquidation value.

ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item appears in the MD&A (see Financial Data Index herein) and is incorporated herein by reference.

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ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information regarding the market risk of the Group appears in the MD&A (see Financial Data Index herein), under caption "Quantitative and Qualitative Disclosures about Market Risk" and is incorporated herein by reference.

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears in the consolidated financial statements, and is incorporated herein by reference. The financial data index of this report sets forth the listing of all reports required by this item and included herein.

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    The Company's Board of Directors requested and obtained proposals from several accounting firms in Puerto Rico, including PricewaterhouseCoopers LLP, in connection with the Company's annual and quarterly financial statements for each of the three fiscal years in the period ending June 30, 2004. After reviewing and considering each proposal, the Audit Committee recommended to the Board of Directors the appointment of Deloitte & Touche ("D&T") as the Company's independent auditors for fiscals 2002, 2003 and 2004. On September 25, 2001, the Board of Directors accepted such recommendation and appointed D&T as the Company's independent auditors for fiscals 2002, 2003 and 2004. This decision was based on the amount of fees quoted by each firm and the scope of services to be provided.

    PricewaterhouseCoopers LLP's report on the Company's financial statements for each of the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope or accounting principles. During such two-year period and the current interim period through September 25, 2001, there were no disagreements between the Company and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements if not resolved to PricewaterhouseCoopers LLP's satisfaction would have caused them to make reference to such disagreements in their reports on the financial statements for such years.

PART—III

The information required by this part appears in the Group's definitive proxy statement for the 2001 annual meeting of stockholders and is incorporated herein by reference.

PART—IV

ITEM 14—EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)—Financial Statements

The list of financial statements required by this item is set forth in the Financial Data Index of this report.

(a)(2)—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 (a)(1) above.

(b)—Reports on Form 8-k

No current reports on Form 8-K were filed during the last quarter of fiscal 2001.

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C—Exhibits

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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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dated indicated.

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ORIENTAL FINANCIAL GROUP, INC.
FORM-10K
FINANCIAL DATA INDEX

SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

Note: Per share related information has been retroactively adjusted to reflect stock splits, when applicable.

F–1

SELECTED FINANCIAL DATA
PERIOD ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)

TABLE 1 — FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:

FISCAL 2000 VERSUS 1999

CHANGES IN NET INTEREST INCOME DUE TO:

(1)

— Real estate averages include loans held-for-sale.

F–2

SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)

F–3

SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)