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, 1998 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: 68 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) 10,004,478 SHARES OUTSTANDING AS OF MARCH 31, 1998 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 . -------- -------
TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> - ---------------------------------------------------------------------------------- PART - 1 - --------- ITEM - 1 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 1998 (UNAUDITED) AND JUNE 30, 1997. 1 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER AND NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 2 UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 3 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS PERIOD ENDED MARCH 31, 1998 AND 1997. 4 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5-11 ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-27 - ----------------------------------------------------------------------------------- PART - 2 - -------- ITEM - 1 LEGAL PROCEEDINGS - NONE 27 ITEM - 2 CHANGE IN SECURITIES - NONE 27 ITEM - 3 DEFAULTS UPON SENIOR SECURITIES - NONE 27 ITEM - 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE 27 ITEM - 5 OTHER INFORMATION 27 ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 27 SIGNATURES 28 </TABLE>
ORIENTAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 1998 (UNAUDITED) AND JUNE 30, 1997 (IN THOUSANDS) <TABLE> <CAPTION> ASSETS - ------------------------------------------------------------------------------------- MARCH 31, JUNE 30, 1998 1997 --------- -------- <S> <C> <C> Cash and due from banks $ 13,194 $ 12,812 --------- --------- MONEY MARKET INVESTMENTS: Securities purchased under agreements to resell - 15,000 Time deposits with other banks 3,000 8,000 Other short-term investments, at cost 1,548 5,224 --------- --------- TOTAL MONEY MARKET INVESTMENTS 4,548 28,224 --------- --------- INVESTMENT SECURITIES AND OTHER INVESTMENTS: Trading securities, at market 29,835 30,930 Investment securities available-for-sale, at market 405,896 197,607 Investment securities held-to-maturity, at cost 190,286 201,790 Federal Home Loan Bank (FHLB) stock, at cost 10,043 10,043 --------- --------- TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 636,060 440,370 LOANS: Loans held for sale 32,661 29,285 Loans receivable 531,888 509,093 --------- --------- TOTAL LOANS 564,549 538,378 Allowance for loan losses (6,816) (5,408) --------- --------- TOTAL LOANS, NET 557,733 532,970 --------- --------- Accrued interest receivable 14,744 12,350 Foreclosed real estate, net 405 698 Premises and equipment, net 19,458 19,378 Other assets, net 15,298 21,794 --------- --------- TOTAL ASSETS $ 1,261,440 $ 1,068,596 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------- Deposits $ 551,483 $ 497,542 Securities sold under agreements to repurchase 380,757 247,915 Borrowings under lines of credit - - Advances and borrowings from Federal Home Loan Bank 79,000 89,800 Term notes and bonds payable 114,649 115,016 Accrued expenses and other liabilities 31,584 28,929 ---------- ---------- TOTAL LIABILITIES 1,157,473 979,202 ---------- ---------- Commitments and contingencies - - --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized; none issued Common stock, $1 par value; 20,000,000 shares authorized; 10,004,478 issued and outstanding in March 31,1998 and 7,989,787 issued and outstanding in June 30,1997. 10,004 7,990 Additional paid-in capital 27,126 28,631 Legal surplus 4,429 4,002 Retained earnings 60,902 49,694 Treasury stock, at cost, 146,500 shares at March 31, 1998 and 81,200 at June 30, 1997 (3,227) (1,836) Unrealized gain on securities available-for-sale, net of taxes 4,733 913 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 103,967 89,394 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,261,440 $ 1,068,596 ---------- ---------- ---------- ---------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 1
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER AND NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 and 1997 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION) <TABLE> <CAPTION> THIRD QUARTER ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------ ------------------------ 1998 1997 1998 1997 --------- --------- --------- --------- <S> <C> <C> <C> <C> INTEREST INCOME: Loans $ 15,432 $ 14,035 $ 44,968 $ 40,387 Mortgage-backed securities 6,107 4,387 17,142 12,478 Investment securities 4,277 2,505 11,381 6,993 Other interest-earning assets 263 237 919 780 --------- --------- --------- --------- TOTAL INTEREST INCOME 26,079 21,164 74,410 60,638 --------- --------- --------- --------- --------- --------- --------- --------- INTEREST EXPENSE: Deposits 6,425 5,523 19,177 15,218 Securities sold under agreements to repurchase 5,192 2,770 13,747 8,272 Other borrowed funds and interest rate risk management 3,182 3,191 9,829 9,404 --------- --------- --------- --------- TOTAL INTEREST EXPENSE 14,799 11,484 42,753 32,894 --------- --------- --------- --------- NET INTEREST INCOME 11,280 9,680 31,657 27,744 --------- --------- --------- --------- Provision for loan losses 1,900 1,300 6,900 3,400 --------- --------- --------- --------- --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,380 8,380 24,757 24,344 --------- --------- --------- --------- NON-INTEREST INCOME: Bank service charges and fees 861 1,159 2,759 3,725 Trust, money management and brokerage fees 1,971 1,839 5,890 4,917 Mortgage banking activities 1,036 1,265 3,406 2,710 Gain on sale of servicing rights - - 2,707 - Gain on sale of investment securities 210 71 586 384 Trading account income 139 9 307 12 Rent and other operating income 159 199 509 580 --------- --------- --------- --------- TOTAL NON-INTEREST INCOME 4,376 4,542 16,164 12,328 --------- --------- --------- --------- --------- --------- --------- --------- NON-INTEREST EXPENSES: Compensation and benefits 3,579 3,782 11,115 10,630 Occupancy and equipment 1,268 1,083 3,745 3,140 Professional fees 290 485 943 1,151 Advertising and promotion 691 676 1,818 1,379 Real estate owned expenses 16 17 56 116 Insurance, including deposit insurance 238 121 625 670 Communications 326 347 1,031 913 Other 1,085 845 3,347 2,675 SAIF one-time capitalization assessment - - - 1,823 --------- --------- --------- --------- TOTAL NON-INTEREST EXPENSE 7,493 7,356 22,680 22,497 --------- --------- --------- --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 6,263 5,566 18,241 14,175 Provision for income taxes 825 961 2,650 2,321 --------- --------- --------- --------- NET INCOME $ 5,438 $ 4,605 $ 15,591 $ 11,854 --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Average common shares outstanding 9,964 9,884 9,939 9,894 Average common stock equivalents - options 332 375 336 383 --------- --------- --------- --------- TOTAL 10,296 10,259 10,275 10,277 --------- --------- --------- --------- --------- --------- --------- --------- INCOME PER COMMON SHARE Basic $ 0.55 $ 0.47 $ 1.57 $ 1.20 --------- --------- --------- --------- --------- --------- --------- --------- Diluted $ 0.53 $ 0.45 $ 1.52 $ 1.15 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 AND 1997 (IN THOUSANDS) <TABLE> <CAPTION> 1998 1997 -------- -------- <S> <C> <C> COMMON STOCK: Balance at beginning of period $ 7,990 $ 6,633 Five-for-four stock split 1,910 - Six-for-five stock split - 1,318 Stock options exercised 104 85 Common stock repurchased and retired - (89) -------- -------- BALANCE AT END OF PERIOD 10,004 7,947 -------- -------- -------- -------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 28,631 31,234 Five-for-four stock split (1,910) - Six-for-five stock split - (1,318) Stock options exercised 405 164 Common stock repurchased and retired - (1,618) -------- -------- BALANCE AT END OF PERIOD 27,126 28,462 -------- -------- -------- -------- LEGAL SURPLUS: Balance at beginning of period 4,002 2,498 Transfer from retained earnings 427 1,083 -------- -------- BALANCE AT END OF PERIOD 4,429 3,581 -------- -------- -------- -------- RETAINED EARNINGS: Balance at beginning of period 49,694 39,005 Net income 15,591 11,854 Dividends declared and cash paid on fractional shares (3,956) (3,169) Transfer to legal surplus (427) (1,083) -------- -------- BALANCE AT END OF PERIOD 60,902 46,607 -------- -------- -------- -------- TREASURY STOCK: Balance at beginning of period (1,836) - Treasury stock purchased (1,391) (907) -------- -------- BALANCE AT END OF PERIOD (3,227) (907) -------- -------- -------- -------- UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES: Balance at beginning of period 913 533 Net change in fair value of securities available-for-sale, net of taxes 3,820 (578) -------- -------- BALANCE AT END OF PERIOD 4,733 (45) -------- -------- TOTAL STOCKHOLDERS' EQUITY $ 103,967 $ 85,645 -------- -------- -------- -------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1998 AND 1997 (IN THOUSANDS) <TABLE> <CAPTION> 1998 1997 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 15,591 $ 11,854 ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash (used in) operating activities: Amortization of deferred loan origination fees and costs (2,764) (2,499) Amortization of premiums and accretion of discounts mortgage-backed and investment securities 761 307 Depreciation and amortization of premises and equipment 1,815 1,629 Provision for loan losses 6,900 3,400 Gain on sale of available-for-sale securities (586) (384) Gain on sale of servicing rights (2,707) - Mortgage banking activities (2,550) (2,710) Decrease (increase) in trading securities 1,095 (20,298) Increase in accrued interest receivable (2,394) (2,377) Increase in other assets (2,652) (4,005) Decrease in accrued expenses and liabilities 1,128 1,862 ----------- ----------- TOTAL ADJUSTMENTS (1,954) (25,074) ----------- ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES 13,637 (13,220) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in securities purchased under agreements to resell 15,000 (2,871) Purchases of investment securities available-for-sale (181,806) (49,508) Sales of investment securities available-for-sale 31,103 108,957 Maturities of investment securities available-for-sale 23,580 430 Purchases of investment securities held-to-maturity (914) (30,544) Maturities and redemptions of investment securities held-to-maturity 12,175 5,768 Purchases of Federal Home Loan Bank Stock - (2,392) Net origination of loans (134,565) (134,334) Proceeds from sale of loans 32,504 - Proceeds from sale of servicing assets 11,855 - Capital expenditures (1,895) (2,638) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES $ (192,963) $ (107,132) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in: Deposits $ 53,941 $ 84,913 Securities sold under agreements to repurchase 132,842 (16,138) Borrowings under lines of credit - (10,000) Advances and borrowings from FHLB (10,800) 32,100 Issuance of term notes - 60,000 Payment of term notes - (13,000) Principal payments of bonds payable (367) (349) Proceeds from exercise of stock options 509 249 Repurchase of common stock and purchases of treasury stock (1,391) (2,614) Dividends and cash paid on fractional shares (3,702) (3,169) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 171,032 131,992 ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,294) 11,640 Cash and cash equivalents at beginning of period 26,036 16,955 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,742 $ 28,595 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS INCLUDE: Cash and due from banks $ 13,194 $ 15,552 Time deposits with other banks 3,000 13,000 Other short-term investments 1,548 43 ----------- ----------- $ 17,742 $ 28,595 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES: Interest paid $ 40,600 $ 31,400 ----------- ----------- ----------- ----------- Income taxes 1,516 3,800 ----------- ----------- ----------- ----------- Real estate foreclosed as payment of loans 974 1,271 ----------- ----------- ----------- ----------- Real estate loans securiticized into mortgage-backed securities $ 76,100 $ 90,500 ----------- ----------- ----------- ----------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4
ORIENTAL FINANCIAL GROUP INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION: - ------------------------------- The accounting and reporting policies of Oriental Financial Group (the "Group", "Oriental") and its subsidiaries conform with generally accepted accounting principles and with general practices within the banking industry. The preparation of financial statements with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period and, as such, these statements include amounts based on judgments and estimates made by Management. Actual results could differ from those estimates. 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, 1997 contained in Oriental's annual report. Certain reclassifications have been made to the March 31, 1997 and June 30, 1997 consolidated financial statements to conform with the presentation of the current period consolidated financial statements. In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position at March 31, 1998 and June 30, 1997 as well as the results of operations and cash flows for the nine months ended March 31, 1998 and March 31, 1997. The results of operations for the nine months ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire year. NOTE 2 - NATURE OF OPERATIONS: - ------------------------------ The Group was incorporated on January 24,1997 under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for Oriental Bank and Trust (the "Bank"). As a result of this reorganization each of the Bank's outstanding shares of common stock was converted into one share of common stock of the new bank holding company. The Group provides a wide variety of financial services through its subsidiaries. Oriental Bank and Trust, the Group's bank subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and seventeen branches located throughout Puerto Rico. The Bank directly or through its broker-dealer subsidiary, Oriental Financial Services Corp., offers commercial and consumer leasing, consumer lending, investment, money management and brokerage services, corporate and individual trust services and mortgage lending. NOTE 3 - INCOME PER COMMON SHARE: - --------------------------------- Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128") became effective for the Group as of December 31, 1997. Earnings per share for all periods presented in the Consolidated Statement of Income are computed in accordance with the provisions of this statement which replaces the presentation of primary earnings per share with the presentation of basic earnings per share and requires the dual presentation of basic and diluted earnings per share computation on the face of the income statement for all entities with complex capital structures. SFAS 128 also requires the reconciliation of the numerator and denominator of the basic and diluted earnings per share computation and the restatement of earnings per share for all periods presented in the Group's financial statements. Basic income per common share is calculated by dividing net income by the weighted average of common shares outstanding after giving retroactive effect to common stock dividends and splits. Diluted earnings per share includes the effect of common stock equivalents for the Group. The only potentially dilutive securities that are outstanding are the stock options outstanding under Oriental's stock option plan for officers and employees. The number of options assumed to be exercised is computed using the Treasury Stock Method. The computation of the basic earnings per share and diluted earnings per share is presented in the face of the Consolidated Statement of Income. 5
NOTE 4 - INVESTMENT SECURITIES: - -------------------------------- Oriental classifies its investments in debt and equity securities into one of the following three categories: - HELD-TO-MATURITY: Debt securities for which the Group has the positive intent and ability to hold to maturity are carried at amortized cost. This is the purchase price increased by the accretion of discounts or decreased by the amortization of premiums using the effective interest method. Discount is the excess of the face value of the security over the cost. Premium is the excess of cost over the face value of the security. The Group may not sell or transfer held-to-maturity without calling into question its intent to hold other debt securities to maturity, unless a non-recurring or unusual event that could not have been reasonably anticipated occurred. - TRADING: Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are carried at estimated fair value with realized and unrealized changes in market value recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue arising from trading instruments are included in the statement of income as part of net interest income rather than in the trading profit or loss account. - AVAILABLE-FOR-SALE: Debt and equity securities which may 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 included in this category. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes as a separate component of stockholders' equity. The amortization of premiums is deducted and the accretion of discounts is added 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. TRADING SECURITIES: - ------------------- The fair value of trading securities is based on quoted market prices. At March 31, 1998, the Group's trading portfolio was comprised primarily of securities collateralized by real estate assets located in Puerto Rico or issued by U.S. government entities with an amortized cost and fair market value of $29,835,000 and $29,652,000, respectively, and with gross unrealized gains and gross unrealized losses of $183,000 and $0, respectively. At such date the trading portfolio's weighted average yield was 6.52% At June 30, 1997, the amortized cost and fair market value of securities held for trading was $30,909,000 and $30,930,000, respectively, with gross unrealized gains and gross unrealized losses of $41,400 and $19,800, respectively. At such date the weighted average yield of the trading portfolio was 6.27% FEDERAL HOME LOAN BANK STOCK: - ----------------------------- At December 31, and June 30, 1997 there was an investment in Federal Home Loan Bank (FHLB) of New York Stock with a book and fair value of $10,043,000 and $10,043,000, respectively. The fair value of such investment is its redemption value. 6
INVESTMENT SECURITIES AVAILABLE-FOR-SALE: - ----------------------------------------- The estimated fair value of investment securites available-for-sale is based on quoted market quotes. The amortized cost, estimated fair value, and weighted average yield of debt and equity securities available-for-sale by category at March 31,1998 and June 30,1997 are as follows: <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 ---------------------------------------- ---------------------------------------- AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED COST VALUE AVE_YIELD COST VALUE AVE_YIELD ---------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> UNITED STATES GOVERNMENT OBLIGATIONS: $ 222,827 $ 227,785 6.56% $ 110,186 $ 110,632 6.77% ---------- ---------- ----- ---------- ---------- ----- PUERTO RICO GOVERNMENT OBLIGATIONS: 27,322 27,187 7.82% 34,091 34,277 7.60% ---------- ---------- ----- ---------- ---------- ----- MORTGAGE-BACKED SECURITIES: GNMA 43,281 43,795 6.68% 41,620 42,178 6.91% FNMA 87,436 88,103 7.17% - - - FHLMC 18,666 18,960 7.00% 10,438 10,454 7.39% MORTGAGE PASS-THROUGH CERTIFICATES 53 66 7.69% 54 66 7.69% ---------- ---------- ----- ---------- ---------- ----- $ 149,436 $ 150,924 7.01% $ 52,112 $ 52,698 6.90% ---------- ---------- ----- ---------- ---------- ----- $ 399,585 $ 405,896 6.81% $ 196,389 $ 197,607 6.94% ---------- ---------- ----- ---------- ---------- ----- ---------- ---------- ----- ---------- ---------- ----- </TABLE> The amortized cost and estimated fair value of available-for-sale securities at the end of the periods above, by contractual maturity, are shown in the next table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 ------------------------- ------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> DUE WITHIN ONE YEAR $ 3,112 $ 3,176 $ - $ - DUE FROM ONE TO FIVE YEARS 51,618 52,501 68,475 68,775 DUE FROM FIVE TO TEN YEARS 170,236 174,223 48,136 48,242 DUE OVER TEN YEARS 174,619 175,996 79,778 80,590 ---------- ---------- ---------- ---------- $ 399,585 $ 405,896 $ 196,389 $ 197,607 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> Available-for-sale securities due over ten years includes a AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of approximately $27 million which commenced paying down principal in august 1994 and is expected to be fully collected by 1998. The following table sets forth a summary of Oriental's unrealized gains and losses at the periods analyzed above: <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 ------------------------------------------ ------------------------------------------ GROSS GROSS NET GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED GAINS LOSSES GAIN / (LOSS) GAINS LOSSES GAIN / (LOSS) ------------------------------------------ ------------------------------------------ <S> <C> <C> <C> <C> <C> <C> UNITED STATES GOVERNMENT OBLIGATIONS: $ 5,249 $ (291) $ 4,958 $ 446 $ - $ 446 -------- ------- -------- ------ ---- ------ PUERTO RICO GOVERNMENT OBLIGATIONS: - (135) (135) 186 - 186 -------- ------- -------- ------ ---- ------ MORTGAGE-BACKED SECURITIES: GNMA 586 (72) 514 558 - 558 FNMA 718 (51) 667 - - - FHLMC 294 - 294 16 - 16 MORTGAGE PASS-THROUGH CERTIFICATES 13 - 13 12 - 12 -------- ------- -------- ------ ---- ------ $ 1,611 $ (123) $ 1,488 $ 586 $ - $ 586 -------- ------- -------- ------ ---- ------ $ 6,860 $ (549) $ 6,311 $ 1,218 $ - $ 1,218 -------- ------- -------- ------ ---- ------ -------- ------- -------- ------ ---- ------ </TABLE> The proceeds received from sales or calls of debt securities and the gross gains and losses that were recognized during the first nine months of fiscals 1998 and 1997 are shown in the next table ( in thousands). <TABLE> <CAPTION> 1998 1997 --------- ------ <S> <C> <C> Proceeds from sales of available-for-sale securities $ 31,103 $ 384 --------- ------ --------- ------ Gross realized gains $ 878 $ 480 Gross realized losses (292) (96) --------- ------ Gain on sale of investment securities available-for-sale $ 586 $ 384 --------- ------ --------- ------ </TABLE> 7
INVESTMENT SECURITIES HELD-TO-MATURITY: - --------------------------------------- The estimated fair value of investment securites held-to-maturity is based on quoted market quotes. The amortized cost, estimated fair value, and weighted average yield of debt securities held-to-maturity by category at March 31,1998 and June 30,1997 are as follows: <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 ---------------------------------------- ---------------------------------------- AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED COST VALUE AVE_YIELD COST VALUE AVE_YIELD ---------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> PUERTO RICO GOVERNMENT OBLIGATIONS: 3,578 3,608 7.40% 3,586 3,608 7.40% ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ MORTGAGE-BACKED SECURITIES: GNMA 139,702 140,703 6.92% 149,275 149,081 6.91% FNMA 39,310 40,173 7.29% 38,439 38,650 7.29% FHLMC 5,056 5,195 8.25% 7,205 7,369 8.02% MORTGAGE PASS-THROUGH CERTIFICATES 2,640 3,218 14.62% 3,285 3,735 14.62% ---------- ---------- ------ ---------- ---------- ------ $ 186,708 $ 189,289 7.14% $ 198,204 $ 198,835 7.15% ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ $ 190,286 $ 192,897 7.15% $ 201,790 $ 202,443 7.16% ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ </TABLE> The amortized cost and estimated fair value of held-to-maturity securities at the end of the periods above, by contractual maturity, are shown in the next table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 ------------------------- ------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------------------------- ------------------------- <S> <C> <C> <C> <C> DUE WITHIN ONE YEAR $ - $ - $ - $ - DUE FROM ONE TO FIVE YEARS 1,146 1,159 261 261 DUE FROM FIVE TO TEN YEARS 12,442 12,654 4,298 4,366 DUE OVER TEN YEARS 176,698 179,084 197,231 197,816 ---------- ---------- ---------- ---------- $ 190,286 $ 192,897 $ 201,790 $ 202,443 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> Held-to-maturity securities due over ten years includes approximately $83 million of the short end of certain Puerto Rico GNMA tax exempt serial certificates with an average expected life of 4 to 6 years. The following table sets forth unrealized gains and losses in the periods analyzed above: <TABLE> <CAPTION> MARCH 31, 1998 JUNE 30, 1997 --------------------------------------- -------------------------------------- GROSS GROSS NET GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZ UNREALIZED GAINS LOSSES GAIN / (LOSS) GAINS LOSSES GAIN / (LOSS) --------------------------------------- -------------------------------------- <S> <C> <C> <C> <C> <C> <C> PUERTO RICO GOVERNMENT OBLIGATIONS: 30 - 30 22 - 22 -------- ------- -------- -------- ------- ------ -------- ------- -------- -------- ------- ------ MORTGAGE-BACKED SECURITIES: GNMA 1,261 (260) 1,001 332 (526) (194) FNMA 926 (63) 863 305 (94) 211 FHLMC 139 - 139 164 - 164 MORTGAGE PASS-THROUGH CERTIFICATES 578 - 578 450 - 450 -------- ------- -------- -------- ------- ------ $ 2,904 $ (323) $ 2,581 $ 1,251 $ (620) $ 631 -------- ------- -------- -------- ------- ------ $ 2,934 $ (323) $ 2,611 $ 1,273 $ (620) $ 653 -------- ------- -------- -------- ------- ------ -------- ------- -------- -------- ------- ------ </TABLE> 8
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES: - -------------------------------------------------------- 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, tourism, insurance and not-for-profit organizations, all of which are encompassed within four main categories: mortgage, commercial, consumer and leasing. Oriental's loan portfolio has a higher concentration of loans to consumers such as residential mortgage loans and auto finance leases. The composition of the loan portfolio at March 31,1998, and June 30, 1997 was as follows (in thousands): <TABLE> <CAPTION> 31-MAR-98 30-JUN-97 ------------- ------------ <S> <C> <C> LOANS SECURED BY REAL ESTATE: Residential $ 236,658 $ 225,382 Commercial 8,167 9,087 Home equity loans 3,358 5,436 Construction, land acquisition and land improvements 3,220 4,391 ---------- ---------- 251,403 244,296 Less: net deferred loan fees and servicing rights sold (861) (239) Less: undisbursed portion of loans in process (2,747) (2,093) ---------- ---------- Loans secured by real estate, net 247,795 241,964 ---------- ---------- ---------- ---------- OTHER LOANS: Commercial loans 10,571 10,512 Auto loans 8,775 14,882 Personal loans 102,929 69,773 Personal lines of credit 6,423 5,190 Cash collateral loans 2,548 2,827 Financing leases 187,593 205,077 ---------- ---------- 318,839 308,261 Less: unearned interest (34,746) (41,131) ---------- ---------- Other loans, net 284,093 267,130 ---------- ---------- Loans receivable 531,888 509,093 Allowance for loan losses (6,816) (5,408) ---------- ---------- LOANS RECEIVABLE, NET 525,072 503,685 Loans held for sale 32,661 29,285 ---------- ---------- TOTAL LOANS,NET $ 557,733 $ 532,970 ---------- ---------- ---------- ---------- </TABLE> The Group provides allowances for estimated loan losses based on an evaluation of the risk characteristics of the loan portfolio, loss experience, economic conditions and other pertinent factors. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Group measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. All loans are evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment, leases and loans that are recorded at fair value or at the lower of cost or fair value. The Group measures for impairment all commercial loans and leases over $250,000. The portfolios of mortgage and consumer loans and auto loans and leases are considered homogeneous and are evaluated collectively for impairment. Over 95% of the group's loan portfolio is composed of smaller homogenous loans which are evaluated collectively for impairment. Accordingly, the balance of impaired commercial loans and leases at March 31, 1998 and 1997 and their average for the nine months period ended is not significant. Refer to Table I at page 23 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 quarter and nine months period ended March 31, 1998 and 1997. 9
NOTE 6 - ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK: - ----------------------------------------------------------------- At March 31, 1998 and June 30, 1997 advances and borrowings from the Federal Home Loan Bank of New York (FHLB) consist of the following (in thousands): <TABLE> <CAPTION> TYPE MAR. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> ADVANCE $ - $15,000 JULY 1997 Fixed - 5.79% ADVANCE - 15,000 AUGUST 1997 Fixed - 5.80% ADVANCE - 10,000 NOVEMBER 1997 Floating due quarterly - 5.25% at 6/30/97 ADVANCE - 10,000 FEBRUARY 1998 Floating due monthly - 5.48% at 6/30/97 ADVANCE - 13,800 OVERNIGHT LINE OF CREDIT Floating due daily - 6.38 at 6/30/97 ADVANCE 15,000 - ABRIL 1998 Fixed - 5.64% ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.71% ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.85% - Callable September 1998 ADVANCE 20,000 - OCTOBER 2002 Fixed - 5.42% - Callable October 1998 BORROWING - 12,000 SEPTEMBER 1997 Fixed - 6.04% BORROWING 14,000 14,000 JULY 1998 Fixed - 6.28 % BORROWING 10,000 - SEPTEMBER 1999 Fixed - 6.03% - Callable March 1999 ------------------------ 79,000 $89,800 ------------------------ ------------------------ </TABLE> Advances are received from the FHLB under an agreement whereby Oriental is required to maintain a minimum amount of qualifying collateral with a market value of at least 110% of the outstanding advances. The floating rate advances are considered generally hedged through the overall interest rate risk management process discussed in note 8. NOTE 7 - TERM NOTES AND BONDS PAYABLE: - --------------------------------------- At March 31, 1998 and June 30, 1997 Term Notes and Bonds Payable consist of the following ( in thousands): <TABLE> <CAPTION> TYPE MAR. 31, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 Fixed - 4.81% (b) TERM NOTE 10,000 10,000 DECEMBER 1999 Floating due quarterly - 4.77% at 3/31/98 (a) (c) TERM NOTE 10,000 10,000 JANUARY 2000 Floating due quarterly - 4.77% at 3/31/98 (a) (c) TERM NOTE 6,500 6,500 DECEMBER 2000 Floating due quarterly - 4.78% at 3/31/98 (b) (c) TERM NOTE 20,000 20,000 MARCH 2001 Floating due quarterly - 5.24% at 3/31/98 (b) (c) TERM NOTE 10,000 10,000 SEPTEMBER 2001 Floating due quarterly - 5.57% at 3/31/98 (b) (c) TERM NOTE 30,000 30,000 SEPTEMBER 2001 Floating due quarterly - 5.34% at 3/31/98 (b) (c) TERM NOTE 5,000 5,000 DECEMBER 2001 Floating due quarterly - 4.73% at 3/31/98 (b) (c) TERM NOTE 15,000 15,000 MARCH 2007 Floating due quarterly - 5.40% at 3/31/98 (b) (c) BOND 149 516 APRIL 2008 Fixed - 8.38% (d) ----------------------- $114,649 $115,016 ----------------------- ----------------------- </TABLE> (A) - GUARANTEED BY LETTERS OF CREDIT FROM THE FLHB. (B) - COLLATERALIZED WITH U.S. GOVERNMENT SECURITIES AND/OR MORTGAGE-BACKED SECURITIES. (C) - THE FLOATING RATE NOTES ARE CONSIDERED GENERALLY HEDGED THROUGH THE OVERALL INTEREST RATE RISK MANAGEMENT PROCESS DISCUSSED IN NOTE 8. (D) - COLLATERIZED WITH FHLMC CERTIFICATES. 10
NOTE 8- INTEREST RATE RISK MANAGEMENT: - --------------------------------------- INTEREST RATE SWAP AGREEMENTS: - ------------------------------ The following table indicates the types of swaps used and their terms at March 31, 1998 (in thousands): <TABLE> <CAPTION> <S> <C> Pay fixed swaps - notional amount $305,000 Weighted average pay rate - fixed 5.79% Weighted average receive rate - floating 5.32% Maturity (in months) 1 to 26 Floating rate - percent of LIBOR 84 to 100% </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. At March 31, 1998, interest rate swap maturities by fiscal year are as follows (in thousands): <TABLE> <CAPTION> YEAR ENDING JUNE 30, AMOUNT -------------------- ----------- <S> <C> 1998 $ 55,000 1999 180,000 2000 70,000 ---------- $ 305,000 ---------- ---------- </TABLE> The following table summarizes the changes in notional amounts of swaps outstanding during the first nine months of fiscal 1998 (in thousands): <TABLE> <CAPTION> <S> <C> Balance at beginning of period $ 370,000 New swaps 55,000 Maturities (120,000) ----------- Balance at end of period $ 305,000 ----------- ----------- </TABLE> INTEREST RATE PROTECTION AGREEMENTS (CAPS): The Group also uses interest rate protection agreements (Caps) to limit its exposure to rising interest rates. Under these agreements, 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 following table indicates the agreements outstanding at March 31, 1998 (in thousands): <TABLE> <CAPTION> <S> <C> Cap agreements - notional amount $120,000 Cap rate 6.00 - 6.50% Current 90 day LIBOR 5.72% Maturity (in months) 6 to 12 </TABLE> S&P INTEREST RATE SWAP: - ------------------------ In January 1994, the Group introduced new certificates of deposit called Investors' CD and Investors' IRA which have their yields tied to the performance of a stock market 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 Standard & Poor's 500 stock index. If such index decreases, the depositor receives the principal without any interest. The Group has entered into interest rate swap/hedge agreements with a notional amount of $38,632,000 with major money center banks to manage the Investors' CD and IRA exposure to the stock market. Under the terms of the agreements, Oriental will receive the average increase of the month-end value of the Standard and Poor's index in exchange for a semiannual fixed interest cost. Thus, the Group has exchanged the variable interest payment for a known fixed rate semiannual interest payment. At March 31, 1998 total Investors' CD and IRA deposits amounted to $39,619,000. 11
ORIENTAL FINANCIAL GROUP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW SUMMARY - ------------------------ Oriental Financial Group reported an increase of 18% in net income for the third quarter of fiscal 1998. The Group's net income for the third quarter ended on March 31, 1998 increased to $5.4 million or $.53 per share from $4.6 million or $.45 per share in the same period of fiscal 1997. All per share figures have been retroactively adjusted for the five-for-four (25%) stock split on common stock distributed on October 15, 1997. The Group's net income for the first nine months of fiscal 1998 increased 32% to $15.6 million or $1.52 per share versus $11.9 million or $1.15 per share reported a year ago. Net income for fiscal 1997 includes a SAIF $1.3 million one-time industry wide assessment. Excluding SAIF, net income for the nine-month period increased 18% from $13.2 million or $1.28 per share in the same period the year before. The Group's earnings growth reflects increases in both interest income and non-interest income, driven by a solid growth in interest-earning assets and strong performances by mortgage banking activities and trust, money management and brokerage fees. Annualized return on assets and return on equity for the first nine months of fiscal 1998 were 1.73% and 21.04% respectively, compared to 1.85% and 21.10% for the first nine months of fiscal 1997. Oriental 's diversified asset base continued to experience a favorable growth that contributed in large measure to income expansion across its business lines. At March 31, 1998, total financial assets owned or managed (excluding loans serviced for third parties sold on October 1997) increased 32% to $ 3.2 billion from the $ 2.4 billion owned or managed one year ago. Total financial assets consisted of $1.26 billion owned by the Bank, $1.24 billion managed by the trust and $686 million gathered by the broker-dealer at March 31, 1998. For the third quarter of fiscal 1998 mortgage banking activities (excluding servicing income) increased 62% to $1 million compared to $638,000 for the same period fiscal 1997. Trust, money management and brokerage fees increased by 7% to $2 million, compared to $1.8 million in the same quarter of fiscal 1997. Bank services fees and charges and other income amounted to $1 million, compared to $1.3 million in fiscal 1997, a decrease of 25%. Thie decline was attributable to a decrease in the Group's leasing's lending activity. For the first nine months of fiscal 1998 trust, money management and brokerage fees increased 18% to $5.9 million, compared to $4.9 million the year before. Mortgage banking activities (excluding servicing income) increased 156% to $2.6 million, compared to $1 million for the same period a year ago. Bank services fees and charges and other income amounted to $3.3 million, compared to $4.3 million in fiscal 1997, a decrease of 24%, reflecting reduced leasing loan volumes. Net interest income for the third quarter of fiscal 1998 rose 17% to $11.3 million versus $9.7 million reported in the same period of fiscal 1997. For the nine months period ended net interest income increased 14% to $31.7 million from $27.7 million reported in the same period a year ago. The improvement was achieved through the growth in the Group's loan and securities portfolios. Average interest-earning assets for the third quarter of fiscal 1998 reached $1.2 billion an increase of 21% compared with $923 million for the same quarter of fiscal 1997. For the nine months period average interest-earning assets grew 27% to $ 1.1 billion from $875 million a year ago. For the third quarter of fiscal 1998 the Group provided $ 1.9 million for loan losses compared with $1.3 million for the same period of fiscal 1997. For the first nine months of fiscal 1998 the provision for loan losses amounted to $6.9 million compared with $3.4 million a in the same period the year before. At March 31, 1998 the Group's allowance for loan losses amounted to $6.8 million or 1.21% of total loans versus $4.8 million or .091% of total loans a year ago. The higher provision for fiscal 1998 was primarily due to Management's goal of further increasing the Group's ratio of reserves to total loans and non-performing loans, as well as to respond to the rise in net charge-offs experienced by the Group and to current and expected economic conditions. Recurring non-interest expenses for the third quarter of fiscal 1998 increased 2% to $7.5 million as compared to $7.4 million during the same period of fiscal 1997. For the first nine months of fiscal 1998 they increased 9% to $22.5 million from $20.6 million a year ago. The efficiency ratio and the expense ratio for the first nine months of fiscal 1998 improved to 50.99% and 1.20%, respectively, from 52.59% and 1.29%, respectively, the year before. Oriental's total bank assets at March 31, 1998 reached $1.26 billion, an increase of 23% when compared to $1.02 billion at the end of the same period of fiscal 1997. This resulted from the growth in investment and trading securities of $207 million or 48%, to $641 million from $434 million a year ago, and loans receivable and loans held for sale, net of the allowance for loan losses, of $37 million, or 7%, from $521 million at March 31, 1997 to $558 million at March 31, 1998. 12
ORIENTAL FINANCIAL GROUP FINANCIAL HIGHLIGHTS IN THOUSANDS (EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> --------------------------- FISCAL PERCENT --------------------------- INCREASE (DECREASE) 1998 1997 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> - ------------------------------------------------------------------------------------------- PERIOD END BALANCES: - ------------------------------------------------------------------------------------------- TOTAL BANK ASSETS 23% 1,261,500 1,022,400 TRUST ASSETS MANAGED 28% 1,242,900 970,000 ASSETS GATHERED BY BROKER AND DEALER 59% 686,000 430,800 -------- --------- --------- TOTAL FINANCIAL ASSETS (EXCLUDING SERVICING) 32% 3,190,400 2,423,200 LOANS SERVICED TO THIRD PARTIES (100%) - 472,600 -------- --------- --------- TOTAL FINANCIAL ASSETS 10% 3,190,400 2,895,800 -------- --------- --------- INTEREST-EARNING ASSETS 25% $ 1,198,341 $ 955,628 -------- --------- --------- INTEREST-BEARING LIABILITIES 24% 1,125,889 907,884 -------- --------- --------- TOTAL LIABILITIES 24% 1,157,473 936,716 -------- --------- --------- CAPITAL 21% $ 103,967 $ 85,644 -------- --------- --------- - ------------------------------------------------------------------------------------------ OPERATING RESULTS: - ------------------------------------------------------------------------------------------ INTEREST INCOME 23% $ 74,410 $ 60,638 INTEREST EXPENSE 30% 42,753 32,894 -------- --------- --------- NET INTEREST INCOME 14% 31,657 27,744 PROVISION FOR LOAN LOSSES 103% 6,900 3,400 -------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2% 24,757 24,344 -------- --------- --------- BANK SERVICE CHARGES AND FEES AND OTHER INCOME (24%) 3,268 4,305 TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 20% 5,890 4,917 MORTAGE BANKING ACTIVITIES 26% 3,406 2,710 GAIN ON SALE OF SERVICING RIGHTS 100% 2,707 - NET GAIN ON SALE OF INVESTMENT SECURITIES 126% 893 396 NON-INTEREST EXPENSES 10% 22,680 20,674 SPECIAL SAIF ONE-TIME CAPITALIZATION ASSESSMENT (100%) - 1,823 -------- --------- --------- NET INCOME BEFORE INCOME TAXES 29% 18,241 14,175 PROVISION FOR INCOME TAXES 14% 2,650 2,321 -------- --------- --------- NET INCOME 32% 15,591 11,854 SAIF ASSESSMENT, NET OF INCOME TAXES (100%) - 1,333 -------- --------- --------- NET OPERATING INCOME (EXCLUDING SAIF ASSESSMENT) 18% $ 15,591 $ 13,187 -------- --------- --------- - -------------------------------------------------------------------------------------------- PER SHARE DATE: - -------------------------------------------------------------------------------------------- NET INCOME EXCLUDING SAIF - BASIC 18% $ 1.57 $ 1.33 -------- --------- --------- NET INCOME EXCLUDING SAIF - DILUTED 18% 1.52 1.28 -------- --------- --------- BOOK VALUE 20% 10.39 8.63 -------- --------- --------- MARKET PRICE 85% 37.13 20.10 -------- --------- --------- DIVIDENDS DECLARED 25% 3,956 3,170 -------- --------- --------- OUTSTANDING SHARES AT END OF PERIOD 1% $ 10,004 $ 9,923 -------- --------- --------- - -------------------------------------------------------------------------------------------- FINANCIAL RATIOS: - -------------------------------------------------------------------------------------------- RETURN ON AVERAGE ASSETS 1.73% 1.85% --------- --------- --------- --------- RETURN ON AVERAGE EQUITY 21.04% 21.10% --------- --------- --------- --------- EFFICIENCY RATIO 50.99% 52.59% --------- --------- --------- --------- EXPENSE RATIO 1.20% 1.29% --------- --------- --------- --------- </TABLE> 13
Stockholders' equity at March 31, 1998 totaled $104 million compared to $85.6 million the year before, an increase of 21%. The Group continues to be a "well capitalized" institution, the highest classification available under the capital standards set by the Federal Deposit Insurance Corporation for bank or bank holding companies. Total risk-based and leverage capital ratios as of March 31, 1998 were 19.79% and 7.82%, respectively, which are well above the minimum capital ratios required by regulatory agencies. The following pages discuss in detail the different components that resulted in the Group's continued profitability. RESULT OF OPERATIONS - -------------------- As a diversified financial services provider, Oriental's earnings depend not only on the net interest income generated from its banking activity, but also from fees and other non-interest income generated from the wide array of financial services offered. Net interest income 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). Non-interest income is affected by the level of trust assets under management, transactions generated by gathering of financial assets by the broker-dealer subsidiary, the level of mortgage banking activities, and fees generated from loans and deposit accounts. NET INTEREST INCOME - ------------------- Net interest income for the third quarter ended on March 31, 1998 increased by 17% or $1.6 million to $11.3 million from $9.7 million posted in the same period of the earlier fiscal year. This improvement in net interest income reflects an increase of $1.3 million due to a higher volume of interest-earning assets and a $276,000 increase due to rate, mostly from a reduction in the cost of the Bank's interest rate risk managment. The interest rate spread and net interest margin fell to 3.53% and 3.77%, respectively, for the third quarter of fiscal 1998 as compared to 3.84% and 4.14% respectively, for the third quarter of fiscal 1997. The interest-earning assets to interest-bearing liabilities ratio for the third quarter of fiscal 1998 amounted to 104.93% versus 105.99% the year before and total average interest earning assets exceeded total average interest bearing liabilities by $55.4 million versus $52.1 a year ago. For the first nine months period net interest income was up by 14% or $3.9 million to $31.7 million from $27.7 million in the prior fiscal year. The improvement in net interest income was the result of an increase of $4.5 million due to a higher volume of interest-earning assets partially offset by an unfavorable effect in rate of $561,000 due to a lower average yield of interest-earning assets and a slight increase in the cost of funds. The interest rate spread and net interest margin decreased to 3.57% and 3.80%, respectively, for the first nine months of fiscal 1998 as compared to 3.92% and 4.23% attained during the same period the year before. For the nine months period ended the ratio amounted to 104.62% versus 106.17% and total average interest earning assets exceeded total average interest bearing liabilities by $49.1 million compared to $50.8 million in fiscal 1997. The decrease in this ratio was attributable to the increase in non-accruing loans, which are excluded from our spread and yield calculation. For more on non-accruing loans refer to the non-performing assets section of this analysis at page 22. Tables A and A-1 on pages 15 and page 16 sets forth a detailed analysis of net interest income. Part one presents the dollar amount of and average rates on Oriental's interest-earning assets and liabilities, the ratio of net interest-earning assets over interest-bearing liabilities, the average interest rate spread and the net yield on average interest-earning assets. Part two describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Oriental's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rates) and (2) changes in rate (changes in rate multiplied by old volume). Rate-volume variances (changes in rates multiplied by the changes in volume) have been proportionally allocated to the changes in volume and changes in rate based upon their respective percentage of the combined total. Oriental's interest income for the third quarter of fiscal 1998 increased by 23% or $4.9 million to $26 million from $21.2 million posted in fiscal 1997. The growth in interest income was totally due to a positive volume variance of $4.8 million resulting from a growth in the average volume of interest-earning assets. Average interest-earning assets for the third quarter of fiscal 1998 reached $1.18 billion versus $923 million a year ago, an increase of $256 million or 28%. This average volume increase was fueled by increases in investment and mortgage-backed securities which volume grew to $256 million and $351 million, respectively, from $140 million and $250 million, respectively, in the preceding year. For the first nine months of fiscal 1998 interest income rose by 23% or $13.8 million to $74.4 million from $60.6 million posted in fiscal 1997. This growth was possible to a favorable volume variance of $13.8 million as result of a larger average volume of interest-earning assets. For the nine months period ended average interest-earning assets increased to $1.112 billion versus $875 million in fiscal 1997, up 30% or $256 million. This increase was driven by a significant growth in the average volume of investment and mortgage-backed securities which grew by 74% to $226 from $129 million a year ago and 39% to $322 from $233 million, respectively. 14
<TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- TABLE - A THIRD QUARTER ENDED ------------------------------------------------------------------------------------- PART - I FISCAL 1998 FISCAL 1997 ----------------------------------------- ------------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE INTEREST BALANCE RATE INTEREST BALANCE RATE ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS: (A) REAL ESTATE LOANS $ 6,861 $ 283,705 9.67% $ 6,325 $ 255,664 9.90% (A) CONSUMER LOANS 3,753 110,776 13.74% 2,608 84,267 12.55% (A) COMMERCIAL LOANS 257 9,754 10.54% 292 9,999 11.67% (A) FINANCING LEASES 4,561 148,313 12.30% 4,810 161,811 11.89% -------- ---------- -------- -------- ---------- -------- TOTAL LOANS 15,432 552,548 11.21% 14,035 511,741 11.00% -------- ---------- -------- -------- ---------- -------- MORTAGE-BACKED SECURITIES 6,107 350,909 6.96% 4,387 249,312 7.04% INVESTMENT SECURITIES 4,277 256,599 6.67% 2,505 139,906 7.16% OTHER INTEREST-EARNING ASSETS 263 19,202 5.49% 237 22,161 4.29% -------- ---------- -------- -------- ---------- -------- TOTAL INVESTMENTS 10,647 626,710 6.80% 7,129 411,379 6.93% -------- ---------- -------- -------- ---------- -------- TOTAL INTEREST-EARNING ASSETS $ 26,079 $ 1,179,258 8.86% 21,164 $ 923,120 9.19% -------- ---------- -------- -------- ---------- -------- INTEREST-BEARING LIABILITIES SAVINGS AND DEMAND ACCOUNTS $ 693 $ 105,749 2.66% $ 620 $ 95,724 2.63% CERTIFICATES OF DEPOSIT 4,441 332,515 5.42% 3,957 305,163 5.26% OTHER CERTIFICATES OF DEPOSIT 1,291 85,126 6.15% 946 58,245 6.58% -------- ---------- -------- -------- ---------- -------- TOTAL DEPOSITS 6,425 523,390 4.98% 5,523 459,132 4.88% -------- ---------- -------- -------- ---------- -------- REPURCHASE AGREEMENTS 5,192 389,589 5.40% 2,770 216,523 5.19% LINES OF CREDIT 8 - 0.00% 42 1,505 11.07% FHLB ADVANCES 1,017 72,155 5.72% 439 31,617 5.63% FHLB BORROWINGS 367 24,000 6.21% 394 26,000 6.15% BONDS PAYABLE 5 223 9.43% 15 669 8.74% TERM NOTES 1,502 114,500 5.32% 1,743 135,500 5.22% INTEREST RATE RISK MANAGEMENT 283 YIELD AJE. 0.19% 558 YIELD AJE. 0.55% -------- ---------- -------- -------- ---------- -------- TOTAL OTHER BORROWINGS 8,374 600,467 5.66% 5,961 411,814 5.87% -------- ---------- -------- -------- ---------- -------- TOTAL INTEREST-BEARING LIABILITIES $ 14,799 $ 1,123,857 5.34% $ 11,484 $ 870,946 5.34% -------- ---------- -------- -------- ---------- -------- NET INTEREST EARNING ASSETS $ 11,280 $ 55,401 3.53% $ 9,680 $ 52,174 3.84% -------- ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- -------- INTEREST RATE MARGIN 3.77% 4.14% ---------- ---------- ---------- ---------- NET INTEREST-EARNING ASSETS RATIO 104.93% 105.99% ------- ------- ------- ------- - ------------------------------------------------------------------------------------------------------------------------- PART - I I INCREASE / (DECREASE) DUE TO: ------------------------------------------------------------ FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL % ----------------- ------------ ----------- ----------- - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST-EARNING ASSETS: REAL ESTATE LOANS $ 677 $ (141) $ 536 8.0% CONSUMER LOANS 894 251 1,145 44.0% COMMERCIAL LOANS (7) (28) (35) (12.0%) FINANCING LEASES (414) 165 (249) (5.0%) --------- -------- -------- --------- TOTAL LOANS 1,150 247 1,397 10.0% --------- -------- -------- --------- MORTAGE-BACKED SECURITIES 1,768 (48) 1,720 39.0% INVESTMENT SECURITIES 1,945 (173) 1,772 71.0% OTHER INTEREST-EARNING ASSETS (40) 66 26 11.0% --------- -------- -------- --------- TOTAL INVESTMENTS 3,673 (155) 3,518 49.0% --------- -------- -------- --------- TOTAL INTEREST-EARNING ASSETS $ 4,823 $ 92 $ 4,915 23.0% --------- -------- -------- --------- INTEREST-BEARING LIABILITIES SAVINGS AND DEMAND ACCOUNTS $ 66 $ 7 $ 73 12.0% CERTIFICATES OF DEPOSIT 364 120 484 12.0% OTHER CERTIFICATES OF DEPOSIT 408 (63) 345 36.0% --------- -------- -------- --------- TOTAL DEPOSITS 838 64 902 16.0% --------- -------- -------- --------- REPURCHASE AGREEMENTS 2,305 117 2,422 87.0% LINES OF CREDIT 8 (42) (34) (81.0%) FHLB ADVANCES 571 7 578 132.0% FHLB BORROWINGS (31) 4 (27) (7.0%) BONDS PAYABLE (11) 1 (10) (67.0%) TERM NOTES (276) 35 (241) (14.0%) INTEREST RATE RISK MANAGEMENT 95 (370) (275) (49.0%) --------- -------- -------- --------- TOTAL OTHER BORROWINGS 2,661 (248) 2,413 40.0% --------- -------- -------- --------- --------- -------- -------- --------- TOTAL INTEREST-BEARING LIABILITIES $ 3,499 $ (184) $ 3,315 29.0% --------- -------- -------- --------- --------- -------- -------- --------- NET INTEREST EARNING ASSETS $ 1,324 $ 276 $ 1,600 17.0% --------- -------- -------- --------- --------- -------- -------- --------- (A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS. </TABLE> 15
<TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- TABLE - A1 NINE MONTHS ENDED ---------------------------------------------------------------------------------------- PART - I FISCAL 1998 FISCAL 1997 ---------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE INTEREST BALANCE RATE INTEREST BALANCE RATE ----------- ------------- ----------- ------------- ------------- ------------- - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS: (A) REAL ESTATE LOANS $ 20,089 $ 280,001 9.57% $ 18,145 $ 244,764 9.88% (A) CONSUMER LOANS 10,246 100,031 13.65% 7,663 82,065 12.44% (A) COMMERCIAL LOANS 818 9,824 11.11% 711 8,648 10.96% (A) FINANCING LEASES 13,815 153,372 12.01% 13,868 155,439 11.90% --------- ---------- -------- --------- ---------- --------- TOTAL LOANS 44,968 543,228 11.03% 40,387 490,916 10.96% --------- ---------- -------- --------- ---------- --------- MORTAGE-BACKED SECURITIES 17,142 322,874 7.08% 12,478 233,270 7.13% INVESTMENT SECURITIES 11,381 225,532 6.73% 6,993 129,082 7.22% OTHER INTEREST-EARNING ASSETS 919 19,979 6.05% 780 22,135 4.63% --------- ---------- -------- --------- ---------- --------- TOTAL INVESTMENTS 29,442 568,385 6.90% 20,251 384,487 7.02% --------- ---------- -------- --------- ---------- --------- TOTAL INTEREST-EARNING ASSETS $ 74,410 $ 1,111,613 8.92% 60,638 $ 875,403 9.23% --------- ---------- -------- --------- ---------- --------- INTEREST-BEARING LIABILITIES SAVINGS AND DEMAND ACCOUNTS $ 2,052 $ 103,755 2.63% $ 1,796 $ 92,181 2.60% CERTIFICATES OF DEPOSIT 13,406 329,968 5.41% 10,638 267,914 5.29% OTHER CERTIFICATES OF DEPOSIT 3,719 80,617 6.15% 2,784 56,336 6.58% --------- ---------- -------- --------- ---------- --------- TOTAL DEPOSITS 19,177 514,340 4.97% 15,218 416,431 4.87% --------- ---------- -------- --------- ---------- --------- REPURCHASE AGREEMENTS 13,747 336,890 5.44% 8,272 224,907 4.90% LINES OF CREDIT 46 259 23.17% 276 4,681 7.76% FHLB ADVANCES 3,028 70,045 5.76% 1,305 31,126 5.59% FHLB BORROWINGS 1,207 26,103 6.16% 1,202 26,000 6.16% BONDS PAYABLE 24 355 8.98% 50 765 8.74% TERM NOTES 4,542 114,500 5.28% 4,755 120,611 5.25% INTEREST RATE RISK MANAGEMENT 982 YIELD AJE. 0.24% 1,816 YIELD AJE. 0.59% --------- ---------- -------- --------- ---------- --------- TOTAL OTHER BORROWINGS 23,576 548,152 5.73% 17,676 408,090 5.77% --------- ---------- -------- --------- ---------- --------- TOTAL INTEREST-BEARING LIABILITIES $ 42,753 $1,062,492 5.36% $ 32,894 $ 824,521 5.31% --------- ---------- -------- --------- ---------- --------- NET INTEREST EARNING ASSETS $ 31,657 $ 49,121 3.57% $ 27,744 $ 50,882 3.92% --------- ---------- -------- --------- ---------- --------- --------- ---------- -------- --------- ---------- INTEREST RATE MARGIN 3.80% 4.23% ---------- ---------- ---------- ---------- NET INTEREST-EARNING ASSETS RATIO 104.62% 106.17% --------- --------- --------- --------- - ---------------------------------------------------------------------------------------------------------------------------- PART - II INCREASE / (DECREASE) DUE TO: -------------------------------------------------------------- FISCAL 1998 COMPARED TO 1997 VOLUME RATE TOTAL % ------------------ --------- ------------ ----------- - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST-EARNING ASSETS: REAL ESTATE LOANS $ 2,528 $ (584) $ 1,944 11.0% CONSUMER LOANS 1,841 742 2,583 34.0% COMMERCIAL LOANS 97 10 107 15.0% FINANCING LEASES (186) 133 (53) 0.0% ---------- ------- -------- -------- TOTAL LOANS 4,280 301 4,581 11.0% ---------- ------- -------- -------- MORTAGE-BACKED SECURITIES 4,758 (94) 4,664 37.0% INVESTMENT SECURITIES 4,867 (479) 4,388 63.0% OTHER INTEREST-EARNING ASSETS (95) 234 139 18.0% ---------- ------- -------- -------- TOTAL INVESTMENTS 9,530 (339) 9,191 45.0% ---------- ------- -------- -------- TOTAL INTEREST-EARNING ASSETS $ 13,810 $ (38) $ 13,772 23.0% ---------- ------- -------- -------- INTEREST-BEARING LIABILITIES SAVINGS AND DEMAND ACCOUNTS $ 229 $ 27 $ 256 14.0% CERTIFICATES OF DEPOSIT 2,521 247 2,768 26.0% OTHER CERTIFICATES OF DEPOSIT 1,120 (185) 935 34.0% ---------- ------- -------- -------- TOTAL DEPOSITS 3,870 89 3,959 26.0% ---------- ------- -------- -------- REPURCHASE AGREEMENTS 4,570 905 5,475 66.0% LINES OF CREDIT (771) 541 (230) (83.0%) FHLB ADVANCES 1,683 40 1,723 132.0% FHLB BORROWINGS 4 1 5 0.0% BONDS PAYABLE (27) 1 (26) (52.0%) TERM NOTES (242) 29 (213) (4.0%) INTEREST RATE RISK MANAGEMENT 249 (1,083) (834) (46.0%) ---------- ------- -------- -------- TOTAL OTHER BORROWINGS 5,466 434 5,900 33.0% ---------- ------- -------- -------- ---------- ------- -------- -------- TOTAL INTEREST-BEARING LIABILITIES $ 9,336 $ 523 $ 9,859 30.0% ---------- ------- -------- -------- ---------- ------- -------- -------- NET INTEREST EARNING ASSETS $ 4,474 $ (561) $ 3,913 14.0% ---------- ------- -------- -------- ---------- ------- -------- -------- </TABLE> (A) AVERAGE BALANCES ARE NET OF NON-ACCRUING LOANS. 16
There were two main reasons for the increase in investments and mortgage-backed securities. First, was the creation, during the latter part of fiscal 1997, of OBT International Branch under the International Banking Center Law which invests primarily in U.S. mortgage-baked securities that provide the Group significant tax advantages. Finally, was a shift in the Group's investing strategy due to the change in the GNMA's tax-exemption in July 1997. For more on this change to the Puerto Rico tax code refer to the income taxes section of this report at page 21. The end result of these changes is that for the periods analyzed above total investments amounted to 53% and 51%, respectively, of average interest-earning assets in fiscal 1998 versus 45% and 44%, respectively, a year ago. The yield on interest-earning assets for the third quarter and first nine months of fiscal 1998 decreased to 8.86% and 8.92% ,respectively, from 9.19% and 9.23%, respectively, attained in the same periods of fiscal 1997. The main reason for this decline was the proportionately higher increase in the total average investments portfolio, which carries a lower yield than the loan portfolio but generates a significant amount of tax exempt interest which lowers the Group's effective tax rate. Interest expense for the third quarter of fiscal 1998 increased 29% or $3.3 million to $14.8 million from $11.5 million reported in the same period of fiscal 1997. For the first nine months of fiscal 1998 it increased 30% or $9.9 million to $42.8 million from $32.9 million reported in the same period the year before. These increases were driven by a higher volume of interest-bearing liabilities used to fund the interest-earning assets growth and contributed to a rise in total interest expense during the second quarter and first nine months of fiscal 1998 of $3.5 million and $9.4 million, respectively. Average interest-bearing liabilities for the second quarter of fiscal 1998 reached $1.124 billion versus $871 million a year ago, a 29% increase. For the first nine months of fiscal 1998 average interest-bearing liabilities rose by 28% or $231 million to $1.062 billion in fiscal 1998 compared with $824 million during fiscal 1997. The growth in interest-bearing liabilities average volume for the periods analyzed above reflect strong increases in the average volume of deposits and repurchase agreements. For the third quarter of fiscal 1998 the average volume deposits, mainly certificates of deposits and IRA accounts, grew by 14% to $524 million from $459 in fiscal 1997 million while the average volume of repurchase agreements rose by 80% to $390 million from $217 million in fiscal 1997. For fiscal 1998 nine months period ended the average volume deposits grew by 24% to $514 million from $416 million the year before and the average volume of repurchase agreements rose by 49% to $3336 million from $225 million reported a year ago. The increase in certificates of deposit was concentrated in customer CD's, public funds and broker CD's. The rise in average repos was necessary to fund the asset growth at the OBT International Branch. The average cost of funds for the third quarter of fiscals 1998 and 1997 was 5.34%. For the first nine months of fiscal 1998 average costs of funds rose five basis points to 5.36% from 5.31% in fiscal 1997 which contributed to $523,000 of the period's total interest expense increase. This increase in the average cost of funds responds mainly to a rise in the cost of repurchase agreements of 21 basis points and 54 basis points, respectively, during the third quarter and first nine months of fiscal 1998. This cost increase was due to the replacing of 936 repos, which currently represent 22% of Group's total repos portfolio versus 61% a year ago, with higher-cost conventional repos. However, it is important to mention that this increase in costs was mitigated by a favorable effect from the Group's interest-hedging activities of $275,000 during the third quarter ended and $834,000 during the nine month period ended. PROVISION FOR LOAN LOSSES - ------------------------- For the third quarter of fiscal 1998 the Group provided $ 1.9 million for loan losses compared with $1.3 million for the same period of fiscal 1997, an increase of $600,000 or 46%. For the nine month period ended March 31, 1998, the provision for loan losses amounted to $6.9 million compared with $3.4 million in the same period the year before. The increase in the provision for fiscal 1998 was primarily due to management's goal of further increasing the Group's ratio of reserves to total loans and non-performing loans as well as to the rise in net charge-off experienced by the Group 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 allowance for loan losses, net charge-offs and credit quality statistics. NON-INTEREST INCOME - ------------------- Table B at page 19 shows the fees and other non-interest income generated by the Group for the third quarter and nine months period ended March 31, 1998 and 1997. Non-interest income continues to be a major driver of the Group's earnings improvement as most of its categories exhibited growth in fiscal 1998, with strong results reflected in trust, money management and brokerage fees and mortgage banking activities ( excluding servicing income which was sold during October 1997). Recurring non-interest income for the third quarter of fiscal 1998 the Group totaled $4 million, which represents an increase of 5% or $200,000 from the $3.8 million reported in the same period of fiscal 1997. For the nine months period ended it rose by 15% to $11.7 million from $10.2 million posted the year before. Bank services fees and charges, which consist primarily of service charges on deposit accounts, leasing fees and late charges collected on loans, amounted to $861,000 for the second quarter of fiscal 1998, a decrease of 26% when compared to the $1.16 million reported for the second quarter of fiscal 1997. For the six month period ended bank services fees and charges totaled $2.6 million which represents a decrease of 26% from the $3.7 million posted a year ago. This net decrease was a combination of a decrease in lease handling fees as result of Group's weaker leasing's lending activity partially offset by an increase in fees on deposit accounts as a result of a larger volume of deposit accounts and selected fee increases. 17
Trust, money management and brokerage fees, the principal component of recurring non-interest income, reflected strong results during fiscal 1998. For the third quarter of fiscal 1998 totaled $2 million which represents an increase of 7% from the $1.8 million recorded in the same quarter of fiscal 1997 and for the first nine months of fiscal 1998 rose 20% to $5.9 million, compared to $4.9 million the year before. These increases were possible to a larger volume of accounts and assets managed by the trust department and a significant growth in the assets gathered by the broker-dealer subsidiary. Reflecting greater mortgage origination volume and favorable market conditions for the sale of such loans to investors, mortgage banking activities (excluding servicing income) rose 62% to $1 million from $638,000 in fiscal 1997 during the third quarter of fiscal 1998 and for first nine months of fiscal 1998 increased 156% to $2.6 million from $995,000 in fiscal 1997. During October 1997, in a move to strengthen its future earnings, the Group sold its mortgage loans servicing portfolio, including $550 million serviced to others, to Doral Financial Corporation. The Group recorded a net gain of $2.7 million on this transaction. The divestiture of the mortgage servicing operation is indicative of a wider strategy guiding the Group to concentrate on trust, money management, brokerage, leasing, personal loans and deposit accounts with the highest earnings potential. The gain was used primarily to increase the Group's allowance for loan losses. As result of this sale mortgage servicing income exhibited a decrease of 100% during the past quarter and of 50% for the first nine months of fiscal 1998. Investment securities and trading gains and losses for the second quarter and first nine months of fiscal 1998 amounted to $349,000 and $893,000 , respectively, versus $78,000 and $396,000, respectively, in the earlier fiscal year. NON-INTEREST EXPENSES - --------------------- As shown on Table C at page 19 recurring non-interest expenses for the third quarter of fiscal 1998 increased 1% to $7.4 million as compared to $7.3 million during the same period of fiscal 1997. For the first nine months of fiscal 1998 they increased 9% to $22.5 million from $20.7 million a year ago. The efficiency ratio and the expense ratio for the first nine months of fiscal 1998 amounted 50.99% and 1.20%, respectively, compared to 52.59% and 1.29%, respectively, the year before. Employee compensation and benefits, the Group's largest expense category, amounted to $3.6 million for the third quarter of fiscal 1998 , a decrease of 5% or $200,000 when compared to the $3.4 million reported for the third quarter of fiscal 1997. For the nine month period ended employee compensation and benefits rose by 5% or $500,000 to $11.1 million from $10.6 million a year ago. These increases were driven by a growth in variable compensation which increased 6% or $80,000 during the third quarter and 17% or $555,000 in the first nine months as result of the Group's greater use of a variable based compensation structure to compensate for higher productivity and sales efforts and for annual performance merit increases. For the third quarter and first nine months of fiscal 1998 variable compensation represented 36% and 34%, respectively, of total compensation versus 32% and 31% , respectively, in fiscal 1997. Compensation and benefits as a percentage of total average assets and average-interest earning assets ratio for the first nine months of fiscal 1998 improved to 1.23% and 1.33%, respectively, compared to 1.49% and 1.62%, respectively, the year before. Table C1 at page 19 presents the composition of the Group's employee compensation and benefits at the end of the periods analyzed. All other recurring non-interest expenses for the second quarter of fiscal 1998 increased 7% to $3.8 million as compared to $3.6 million during the same period of fiscal 1997. This rise was driven by increases in occupancy and equipment expenses of 17% or $185,000 and other operating expenses of $130,000 or 15% mainly to an increase of 69% increase in property taxes. For the first nine months of fiscal 1998 they increased 14% or $1.4 million to $11.4 million from $10 million a year ago. This was led by increases in advertising and promotion of 32% or $439,000 and in occupancy and equipment expenses of 19% or $605,000. The increase in advertising and promotion resulted mainly from the ongoing campaign to promote the Group's image and the launching of new products and services. The main contributors in the growth of occupancy and equipment costs were increases in EDP depreciation and property taxes as result of the enhancements the Group has made to its systems to enable the Group to offer new products, expand electronic delivery capabilities and more important improve the customers service delivery. On September 30, 1996 the United States Congress approved and President Clinton signed into law a bill to recapitalize the Savings Association Insurance Fund. This bill called for a special one-time charge on institutions holding SAIF deposits on March 31, 1995 of approximately 66 basis points. Accordingly, Oriental recorded a special reserve of $1.8 million net of taxes of $470,000 during the first quarter of fiscal 1997 to account for its share of the one-time payment of FDIC insurance premium. PROVISION FOR INCOME TAXES - -------------------------- The provision for income taxes for the third quarter of fiscal 1998 amounted to $825,000 versus $961,000 in fiscal 1997, resulting in an effective tax rate of 13.2% versus 17.2% for the same quarter of fiscal 1997. For the six months period ended totaled to $2.65 million versus $2.3 million in fiscal 1997. The effective tax rate was 14.5% in fiscal 1998 compared to 16.3% in fiscal 1997. The Group has maintained an effective tax rate lower than the statutory rate of 39% mainly due to interest income earned on certain investments and loans which is exempt from income taxes, net of the disallowance of expenses attributable to the exempt income. In addition, during 1997 the Group created OBT International Branch to take advantage of additional tax incentives available under the International Banking Center law. 18
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> THIRD QUARTER ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ----------------------------------------------------------------------- 1998 1997 % 1998 1997 % --------- -------- -------- --------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> - ---------------------------------------------------------------------------------------------------------------------------------- TABLE B - NON-INTEREST INCOME SUMMARY - ---------------------------------------------------------------------------------------------------------------------------------- BANK SERVICE FEES AND CHARGES $ 861 $ 1,159 (26%) $ 2,759 $ 3,725 (26%) TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 1,971 1,839 7% 5,890 4,917 20% MORTGAGE BANKING ACTIVITIES (EXCLUDING SERVICING INCOME) 1,036 638 62% 2,550 995 156% RENT AND OTHER OPERATING INCOME 159 199 (20%) 509 580 (12%) ------- -------- ------ -------- ---------- --------- RECURRING NON-INTEREST INCOME 4,027 3,835 5% 11,708 10,217 15% ------- -------- ------ -------- ---------- --------- NET GAIN ON SALE OF INVESTMENTS 210 71 196% 586 384 53% TRADING ACCOUNT INCOME 139 9 1444% 307 12 2458% SERVICING INCOME - 627 (100%) 856 1,715 (50%) NET GAIN ON SALE OF SERVICING RIGHTS - - 100% 2,707 - 0% ------- -------- ------ -------- ---------- --------- NON RECURRING NON-INTEREST INCOME 349 707 (51%) 4,456 2,111 111% ------- -------- ------ -------- ---------- --------- TOTAL NON-INTEREST INCOME $ 4,376 $ 4,542 (4%) $ 16,164 $ 12,328 31% ------- -------- ------ -------- ---------- --------- ------- -------- ------ -------- ---------- --------- - --------------------------------------------------------------------------------------------------------------------------------- TABLE C - NON-INTEREST EXPENSES SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- COMPENSATION AND BENEFITS $ 3,579 $ 3,782 (5%) $ 11,115 $ 10,630 5% OCCUPANCY AND EQUIPMENT 1,268 1,083 17% 3,745 3,140 19% PROFESSIONAL FEES 290 485 (40%) 943 1,151 (18%) ADVERTISING AND PROMOTION 691 676 2% 1,818 1,379 32% REAL ESTATE OWNED EXPENSES 16 17 (6%) 56 116 (52%) INSURANCE 238 121 97% 625 670 (7%) COMMUNICATIONS 326 347 (6%) 1,031 913 13% OTHER OPERATING EXPENSES 1,003 836 20% 3,214 2,666 21% ------- -------- ------ -------- ---------- --------- TOTAL RECURRING NON-INTEREST EXPENSES 7,411 7,347 1% 22,547 20,665 9% ------- -------- ------ -------- ---------- --------- SAIF ONE-TIME ASSESSMENT - - 0% - 1,823 (100%) OTHER NON-RECURRING EXPENSES 82 9 811% 133 9 1378% ------- -------- ------ -------- ---------- --------- 82 9 811% 133 1,832 (93%) ------- -------- ------ -------- ---------- --------- TOTAL NON-INTEREST EXPENSES $ 7,493 $ 7,356 2% $ 22,680 $ 22,497 1% ------- -------- ------ -------- ---------- --------- EFFICIENCY RATIO 50.99% 52.59% -------- ---------- EXPENSE RATIO 1.20% 1.29% -------- ---------- - --------------------------------------------------------------------------------------------------------------------------------- TABLE C1 - COMPENSATIONAND BENEFITS SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- FIXED COMPENSATION $ 1,970 $ 2,177 (10%) $ 6,338 $ 6,366 0% VARIABLE COMPENSATION 1,293 1,215 6% 3,806 3,241 17% OTHER COMPENSATION AND BENEFITS 316 390 (19%) 971 1,023 (5%) ------- -------- ------ -------- ---------- --------- TOTAL NON-INTEREST EXPENSES $ 3,579 $ 3,782 (5%) $ 11,115 $ 10,630 5% ------- -------- ------ -------- ---------- --------- COMPENSATION AND BENEFITS COMPOSITION: FIXED COMPENSATION 55% 58% 57% 60% VARIABLE COMPENSATION 36% 32% 34% 31% OTHER COMPENSATION AND BENEFITS 9% 10% 9% 10% ------- ------- -------- -------- TOTAL NON-INTEREST EXPENSES 100% 100% 100% 100% ------- ------- -------- -------- AVERAGE # OF FULL TIME EMPLOYEES 372 399 390 399 ------- ------- -------- -------- COMPENSATION AND BENEFITS AS A PERCENTAGE (%) OF: TOTAL AVERAGE ASSETS 1.13% 1.49% 1.23% 1.49% ------- ------- -------- -------- ------- ------- -------- -------- TOTAL AVERAGE INTEREST-EARNING ASSETS 1.21% 1.64% 1.33% 1.62% ------- ------- -------- -------- ------- ------- -------- -------- GROUP'S WORK FORCE: BANK STAFF 339 353 ------- ------- ------- ------- TRUST STAFF 22 33 ------- ------- ------- ------- BROKERAGE STAFF 6 10 ------- ------- ------- ------- </TABLE> 19
On July 22, 1997 the Governor of Puerto Rico signed into law changes to the Puerto Rico tax code that will impact the Group's operations going forward. Under this law effective August 1, 1997, interest earned on FHA , VA loans and securities backed by such loans originated after July 31, 1997, which were previously tax exempt (after-disallowance of related expenses) will begin to pay income taxes except for FHA mortgages for new construction projects. The legislation does not alter the tax-exempt status of FHA and VA loans and securities backed by such loans originated prior to July 31, 1997. This will reduce the amount of tax-exempt mortgages originated in the Puerto Rico market and decrease the overall level of tax-exempt interest earned by Group. Management believes the increased operations of OBT International Branch will mitigate the expected rise on the Group's income taxes as result of this new bill. Thus, management does not expect this change to have a significant impact on the Group's financial condition or results of operations. FINANCIAL CONDITION COMMENTS - ---------------------------- As shown on Table G at page 21 Oriental continued to experience a favorable growth in its diversified asset base which contributed to income expansion across its business lines. At March 31, 1998, total financial assets owned or managed (excluding loans serviced for third parties sold on October 1997) increased 32% to $ 3.2 billion from the $ 2.4 billion owned or managed one year ago. Total financial assets consisted of $1.26 billion owned by the Bank, $1.24 billion managed by the trust and $686 million gathered by the broker-dealer at March 31, 1998. Detailed information concerning each of the items that comprise the Group's financial assets managed follows: GROUP'S OWNED ASSETS - -------------------- Oriental's total assets at March 31, 1998 amounted $1.261 billion, an increase of 23% when compared to $1.022 million at the end of the same quarter of fiscal 1997. At March 31, 1998 interest-earning assets reached $1.2 billion, an increase of $ 225 million or 25% versus the $955 million the year before. This increase reflects significant growth in total investments of $187 million or 47% and a $38 million or 7% increase in loans receivable and loans held for sale, net of the allowance for loan losses. Average assets for the first nine months of fiscal 1998 were $1.2 billion compared to $950 million for fiscal 1997, a 26% gain. Refer to Table D at page 21 for the Group's assets summary. Total investments is Oriental's largest interest-earning assets component. It mainly consists mainly of money market investments, U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities and P.R. Government municipal bonds. The investment portfolio is very high quality, approximately 98% is rated AAA at the end of the third quarter of fiscal 1998, and generates a significant amount of tax exempt interest which lowers the Group's effective tax rate. Also during fiscal 1997 the Group formed an International Banking Entity (IBE) which houses U.S. mortgage-backed securities in a tax-advantaged setting. The increase of $187 million in investment securities was driven by a strong growth in debt securities of $118 million or 84% to $259 million from $141 million the year before. This was primarily attributable to the significant increase in tax-exempt U.S. government and agency obligations, which picks up a higher after-tax yield since they are exempt from Puerto Rico taxes. Also, an increase mortgage-backed securities of $97 million or 40% to $337 million from $240 million a year ago contributed to the increase in this interest-earning asset component. Oriental continues its strategy of pooling guaranteed real estate loans into mortgage-backed securities. During the first nine months of fiscal 1998, Oriental converted $76 million of loans held for sale into mortgage-backed securities. Refer to Table E at page 21 for the Group's investments summary and composition. At March 31,1998, Oriental's loan portfolio, the second largest category of the Group's interest-earning assets but the most profitable, amounted $558 million for an increase of $36 million or 7% over the $521 million at the end of the same quarter of fiscal 1997. This rise was led by increases in the real estate and consumer portfolios of $15 million or 6%, and $32 million or 37%, respectively. At March 31, 1998 the Group's loan portfolio mix was somewhat similar to the one a year ago as real estate loans represented 50% of the total portfolio, while lease financing were 27%, consumer loans 21%, and commercial loans comprised 2%. This compares with 50%, 31%, 17% and 2%, respectively, at the end of the same period of fiscal 1997 for the same categories. Table F at page 21 presents the composition of the Group's loan portfolio at the end of the periods analyzed. TOTAL ASSETS MANAGED BY THE TRUST DEPARTMENT - -------------------------------------------- Total assets managed by the trust department increased 28% to $1.24 billion at March 31, 1998, up from $970 million reported at the end of the same quarter of fiscal 1997. The most significant assets managed are individual retirement accounts (IRA) which increased to $409 million at the end of the period analyzed from $327 million a year ago. Oriental Trust offers five IRA products: (1) Diversified Growth IRA, a bond and equity unit investment trust, (2) Multi-IRA, a taxable fixed income account, (3) Investors IRA, for which the yield is tied to the performance of the stock market and (4) Guaranteed IRA-Exenta, a tax exempt fixed income account and (5) Annuity IRA, designed for people close to retirement. Other assets managed include 401 (K) and Keogh retirement plans, custodian and corporate trust accounts. 20
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, MARCH 31, JUNE 30, ------------ ------------- ------------ 1998 1997 1997 ------------ ------------- ------------ <S> <C> <C> <C> <C> <C> - ----------------------------------------------------------------------------------------------------------------------------- TABLE D - ASSETS SUMMARY - ----------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 640,608 $ 434,189 $ 468,594 TOTAL LOANS, NET 557,733 521,439 532,970 ----------- ----------- ---------- INTEREST-EARNING ASSETS 1,198,341 955,628 1,001,564 NON INTEREST-EARNING ASSETS 63,099 66,732 67,032 ----------- ----------- ---------- TOTAL ASSETS $1,261,440 $1,022,360 $1,068,596 ----------- ----------- ---------- - ----------------------------------------------------------------------------------------------------------------------------- TABLE E - INVESTMENTS SUMMARY AND COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------- TRADING SECURITIES $ 29,835 $ 20,629 $ 30,930 MORTGAGE-BACKED SECURITIES 337,632 239,965 250,902 DEBT SECURITIES 258,550 140,748 148,495 FHLB STOCK 10,043 9,804 10,043 MONEY MARKET INVESTMENTS 4,548 23,043 28,224 ----------- ---------- ---------- TOTAL INVESTMENTS $ 640,608 $ 434,189 $ 468,594 ----------- ---------- ---------- - ----------------------------------------------------------------------------------------------------------------------------- TABLE F - LOANS COMPOSITION SUMMARY - ----------------------------------------------------------------------------------------------------------------------------- % % % ------ -------- ------- REAL ESTATE LOANS 280,457 50.0% 264,777 50.0% 271,249 50.0% CONSUMER LOANS 119,340 21.0% 86,908 17.0% 89,957 17.0% COMMERCIAL LOANS 10,571 2.0% 9,120 2.0% 10,512 2.0% CONSTRUCTION LOANS - 0.0% 218 0.0% - 0.0% FINANCING LEASES 154,181 27.0% 165,229 31.0% 166,660 31.0% ------------------------------------------------------------------------ TOTAL LOANS AND LOANS HELD FOR SALE 564,549 100.0% 526,253 100.0% 538,378 100.0% ------ ------ ----- ALLOWANCE FOR LOAN LOSSES (6,816) (4,813) (5,408) ---------- --------- -------- TOTAL LOANS, NET 557,733 521,439 532,970 ---------- --------- -------- - --------------------------------------------------------------------------------------------------------------------------------- TABLE G - FINANCIAL ASSETS SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- TOTAL GROUP ASSETS OWNED $ 1,261,500 $1,022,400 $ 1,068,600 TRUST ASSETS MANAGED 1,242,900 970,000 1,088,600 ASSETS GATHERED BY BROKER-DEALER 686,000 430,800 524,900 ----------- ---------- -------- TOTAL FINANCIAL ASSETS BEFORE SERVICING 3,190,400 2,423,200 2,682,100 (A) LOANS SERVICED TO THIRD PARTIES - 472,600 515,700 ----------- ---------- -------- TOTAL FINANCIAL ASSETS $ 3,190,400 $2,895,800 $ 3,197,800 ----------- ---------- -------- (A) SERVICING WAS SOLD TO A LOCAL FINANCIAL INSTITUTION IN OCTOBER 1997. - --------------------------------------------------------------------------------------------------------------------------------- TABLE H - NON PERFORMING ASSETS - --------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE LOANS $ 7,087 $ 5,284 $ 5,575 CONSUMER LOANS 1,994 1,755 2,118 COMMERCIAL LOANS 1,464 454 814 CONSTRUCTION LOANS - 211 - FINANCING LEASES 10,134 3,806 4,778 ---------- --------- -------- TOTAL NON ACCRUAL LOANS $ 20,679 $ 11,510 $ 13,285 ---------- --------- -------- NON-ACCRUAL LOANS $ 20,679 $ 11,510 $ 13,285 REO 405 686 698 REPO VEHICLES 1,003 1,174 1,253 REPO EQUIPMENT 215 391 486 ---------- --------- -------- TOTAL NON-PERFORMING ASSETS $ 22,302 $ 13,761 $ 15,722 ---------- --------- -------- % NON-ACCRUAL TO TOTAL LOANS 3.66% 2.19% 2.47% ---------- --------- -------- ---------- --------- -------- ALLOWANCE TO NON-ACCRUALS 32.96% 41.82% 40.71% ---------- --------- -------- ---------- --------- -------- % NON-PERFORMING TO TOTAL ASSETS 1.77% 1.35% 1.47% ---------- --------- -------- ---------- --------- -------- % NON-PERFORMING TO TOTAL CAPITAL 21.45% 16.07% 17.59% ---------- --------- -------- ---------- --------- -------- </TABLE> 21
ASSETS GATHERED BY BROKER-DEALER - -------------------------------- Since its inception in April 1993, Oriental's broker-dealer subsidiary offers a wide array of investment vehicles to its clients base. Presently these include: - Fixed and Variable Annuities.-Tax-advantaged Fixed Income Securities. -Mutual Funds-Stocks and Bonds. Total assets gathered by the broker-dealer from its customer investment accounts increased by 60% to $686 million from $431 million a year ago. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS - --------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: - -------------------------- At March 31, 1998 the Group's allowance for loan losses was $ 6.8 million or 1.21% of total loans. This compares to an allowance for loan losses of $4.8 million or .091% of total loans a year ago. The Group maintains an allowance for loan losses on its portfolio 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, various regulating 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 to them at the time of their examinations. Based on current and expected economic conditions, management considers the allowance for loan losses at March 31, 1998 adequate to absorb future losses inherent in the Group's loan portfolio. Net charge-offs for the third quarter and first nine months of fiscal 1998 totaled $2.2 million or 1.54% and $5.5 million or 1.95%, respectively, of average loans, compared to $1.1 million or 0.87% and $3 million or 1.23%, respectively, in fiscal 1997. The level of net charge-offs recorded in fiscal 1998 was primarily associated to the losses experienced in the consumer loans and financing leases portfolios. Table H at page 23 sets forth an analysis of the activity in the allowance for loan losses and presents selected loan losses statistics for the quarters and nine months periods ended March 31, 1998 and 1997. NON-PERFORMING ASSETS: - ---------------------- As shown on Table I at page 21 at March 31,1998 the Group's non-performing assets consist of the sum of non-performing loans, real estate owned and repossessed assets. Detailed information concerning each of the items that comprise non-performing assets follows: - DELINQUENT REAL ESTATE LOANS: Oriental classifies real estate loans delinquent 90 days or more in non-accruing status. Due to the limited supply of land in Puerto Rico, real estate market values have remained stable. Even though these loans are in non-accruing status, based on the value of the underlying collateral and the loan to value ratios, management considers that no material losses will be incurred on this portfolio. The estimated losses have been considered in the determination of the level of allowances for loan losses at the date of our analysis. Real estate loans are charged-off based on the specific evaluation of the collateral underlying the loan. - DELINQUENT COMMERCIAL BUSINESS LOANS : Commercial business loans are placed on non-accrual basis when they become 90 days past due. At the date of our analysis the Group's non-accrual commercial business loans consisted of eighteen loans amounting to $1.5 million (average of $81,000), with five loans having balances exceeding $100,000. Of the total balance, $1 million or 11 loans are guaranteed by real estate. Commercial loans are charged-off based on the specific evaluation of the collateral underlying the loan. - DELINQUENT FINANCE LEASES: Leases are placed on non-accrual status when they become 90 days past due. At the date of our analysis Oriental's non-accrual leases consisted of three hundred and twenty-five auto leases amounting to $7.3 million (average of $22,400), and three hundred thirty-three equipment leases amounting to $2.8 million (average of $ 8,400), none of the non-accruing leases was over $100,000. - DELINQUENT CONSUMER LOANS: Consumer loans are placed on non-accrual status when they become 90 days past due. The Group's non-accrual consumer loans consisted of two hundred and forty loans amounting to $2 million (average of $8,333). - REPOSSESSED ASSETS: Repossessed assets are initially recorded at estimated net realizable value. Any additional losses on the disposition of such assets are charged against the allowance for loan losses at the time of disposition. The estimated loss on disposition of such assets has been considered in the determination of the allowance for loan losses. At December 31, 1997 the inventory of repossessed automobiles consisted of seventy-two units amounting to $1 million (average of $16,700), and the inventory of repossessed equipment consisted of thirty-seven units amounting to $215,000 (average of $4,570). 22
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> THIRD QUARTER ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------- --------------------------- 1998 1997 1998 1997 ---------- ------------ ----------- --------- <S> <C> <C> <C> <C> - --------------------------------------------------------------------------------------------------------------------------------- TABLE I -ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 7,131 $ 4,652 $ 5,408 $ 4,496 -------- --------- -------- -------- PROVISON FOR LOAN LOSSES 1,900 1,300 6,900 3,400 -------- --------- -------- -------- CHARGE-OFF'S (2,886) (1,580) (6,905) (3,972) RECOVERIES 672 442 1,414 890 -------- --------- -------- -------- NET CHARGE OFF'S (2,214) (1,138) (5,491) (3,082) -------- --------- -------- -------- BALANCE AT END OF PERIOD $ 6,817 $ 4,814 $ 6,817 $ 4,814 -------- --------- -------- -------- CHARGE-OFF'S: CONSUMER $ (935) $ (686) $ (2,683) $ (1,658) OVERDRAFT (393) (1) (393) (1) REAL ESTATE (16) (3) (127) (22) AUTO LEASES (1,175) (696) (2,777) (1,718) EQUIPMENT LEASES (249) (182) (720) (509) COMMERCIAL AND OTHERS (118) (12) (205) (64) -------- --------- -------- -------- (2,886) (1,580) (6,905) (3,972) -------- --------- -------- -------- RECOVERIES: CONSUMER 126 109 264 172 OVERDRAFT 49 2 50 10 REAL ESTATE - 15 - 15 AUTO LEASES 237 220 643 472 EQUIPMENT LEASES 130 90 327 208 COMMERCIAL AND OTHERS 130 6 130 13 -------- --------- -------- -------- 672 442 1,414 890 -------- --------- -------- -------- NET CHARGE OFF: CONSUMER (809) (577) (2,419) (1,486) OVERDRAFT (344) 1 (343) 9 REAL ESTATE (16) 12 (127) (7) AUTO LEASES (938) (476) (2,134) (1,246) EQUIPMENT LEASES (119) (92) (393) (301) COMMERCIAL AND OTHERS 12 (6) (75) (51) -------- --------- -------- -------- $ (2,214) $ (1,138) $ (5,491) $ (3,082) -------- --------- -------- -------- LOANS: OUTSTANDING $ 564,549 $ 526,252 $ 564,549 $ 526,252 -------- --------- -------- -------- AVERAGE $ 573,227 $ 523,040 $ 563,907 $ 502,215 -------- --------- -------- -------- RATIOS: RECOVERIES TO CHARGE-OFF'S 23.3% 28.0% 20.5% 22.4% -------- --------- -------- -------- -------- --------- -------- -------- NET CHARGE-OFF TO AVERAGE LOANS 1.54% 0.87% 1.95% 1.23% -------- --------- -------- -------- -------- --------- -------- -------- PROVISION FOR LOAN LOSSES TO NET CHARGE-OFFS 0.86 1.14 1.26 1.10 -------- --------- -------- -------- -------- --------- -------- -------- ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.21% 0.91% 1.21% 0.91% -------- --------- -------- -------- -------- --------- -------- -------- </TABLE> 23
- FORECLOSED REAL ESTATE (OREO): Foreclosed real estate is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure. At the time of acquisition of properties in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. The carrying value of these properties is estimated to approximate the lower of cost or fair value less estimated cost to sell. Any excess of the carrying value over the estimated fair market value is charged to operations. Therefore, no material losses are expected on the final disposition of OREO's. Management is actively seeking prospective buyers for these foreclosed real estate properties. LIABILITIES AND CAPITAL - ----------------------- LIABILITIES - ----------- As shown in Table J at page 25 at March 31, 1998 Oriental's total liabilities reached $1.157 billion, reflecting an increase of $221 million or 24% when compared to $937 million a year ago. Interest-bearing liabilities, the Group's sources of funding, amounted to $1.125 billion at March 31, 1998 versus $908 million the year before, a 24% increase. This growth was driven by increases in deposits and repurchase agreements of 18% or $84 million and 68% or $154 million, respectively. Deposits, the largest category of the Group's interest -bearing liabilities and a cost effective source of funding, showed growth in all areas as they increased to $551 million from $467 million at the same date last year, up 18%. This growth was fueled by significant increases in certificate of deposits of 16% or $47 million and IRA accounts of 52% or $32 million. At the end of the third quarter of fiscal 1998 deposits represented 49% of the Group's funding sources versus 51% the year before. At March 31, 1998 the deposits mix was similar to the one the year before as savings, demand and NOW accounts represented 19.6% of the total portfolio, while certificates of deposit were 62.8%, IRA accounts were 16.9%, and accrued interest comprised .07%. This compares with 22.3%, 64.1%, 13.1% and .05%, respectively, at the end of the same period of fiscal 1997 for the same categories. Table J1 at page 25 presents the composition of the Group's deposits at the end of the periods analyzed. In addition to deposits, Oriental has a diversified source of funding through the use of FHLB advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. As of March 31, 1998 repurchase agreements and other borrowings amounted to $381 million and $194 million, respectively, compared to $226 million and $214 million, respectively, at the end of the same quarter of fiscal 1997. A substantial number of these repurchase agreements and borrowings have floating rates that are generally hedged through the Group's overall interest rate risk management process discussed in the Note 8 of the attached Group's financial statements. The increase in repurchase agreements and other borrowings was necessary to fund the increase in interest-earning assets experienced during the period. The increase in other borrowings was mainly due to increases in advances from the Federal Home Bank of New York ( "FHLB-NY") since these advances were often the most available source of funds to the Group. The FHLB system functions as a source of credit to financial institutions which are members of a regional Federal Home Loan Bank. As a member of the of the FHLB-NY the Group can apply for advances from the FHLB-NY secured by the FHLB-NY stock owned by the Group, certain of the Group's mortgages and other assets. Table J2 at page 25 presents the composition of the Group's other borrowings at the end of the periods analyzed. CAPITAL AND MARKET PRICES , STOCK DATA AND DIVIDENDS - ----------------------------------------------------- At March 31, 1998 Oriental's total capital increased by $18.4 million or 21% to $104 million, from $85.6 million a year ago. This increase was mainly attained through earnings retention and a positive change in the valuation account for investment securities available-for-sale. See pages 1 and 3 of this report for Oriental's capital composition at the end of the period. The Group continues to be a "well capitalized" institution, the highest classification available under the capital standards set by the Federal Deposit Insurance Corporation. To be in a "well capitalized" position, bank or bank holding companies must meet or exceed a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. At the end of the period analyzed the Group had a leverage ratio of 7.82%; a Tier 1 risk-based ratio of 18.54%; and a total risk based capital ratio of 19.79% compared to 8.23%, 17.77% and 18.81% ,respectively, at the same date in fiscal 1997. On August 11, 1997, the Group declared a five-for-four (25%) stock split on its 8,054,015 shares of common stock outstanding at September 30, 1997. As a result, 1,910,053 shares of common stock were issued on October 15, 1997 thus increasing shares to 9,965,940. The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. Refer to table L at page 25 for the high, low and closing prices of the Group's stock for each quarter of the last two fiscal periods. The price per share on the reported last sale price on the NYSE on March 31, 1988 was $37.13. This represents an increase of 77% from the last sale price a year ago of $ 20.10 already adjusted for the five-for-four (25%) stock split. The book value at March 31, 1998 rose to $10.39 from $8.63 reported at the same date last year. 24
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, MARCH 31, JUNE 30, 1998 1997 1997 <S> <C> <C> <C> <C> <C> <C> - ----------------------------------------------------------------------------------------------------------------------------------- TABLE J - LIABILITIES SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- DEPOSITS $ 551,483 $ 467,470 $ 497,542 REPURCASE AGREEMENTS 380,757 226,197 247,915 OTHER BORROWINGS 193,649 214,217 204,816 ------------ ---------- ---------- INTEREST-BEARING LIABILITIES 1,125,889 907,884 950,273 NON INTEREST-BEARING LIABILITIES 31,584 28,832 28,929 ------------ ---------- ---------- TOTAL LIABILITIES $ 1,157,473 $ 936,716 $ 979,202 ------------ ---------- ---------- AS A % OF TOTAL INTEREST -BEARING LIABILITIES: DEPOSITS 49% 51% 52% REPURCASE AGREEMENTS 34% 25% 26% OTHER BORROWINGS 17% 24% 22% ------------ ---------- ---------- INTEREST-BEARING LIABILITIES 100% 100% 100% ------------ ---------- ---------- - --------------------------------------------------------------------------------------------------------------------------------- TABLE J1 - DEPOSITS SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- % % % ----- ----- ----- SAVINGS ACCOUNTS $ 76,120 13.8% $ 71,335 15.3% $ 72,872 14.6% DEMAND AND NOW ACCOUNTS 32,053 5.8% 32,599 7.0% 34,123 6.9% ------------------------------------------------------------------ TOTAL SAVINGS, DEMAND AND NOW ACCOUNTS 108,173 19.6% 103,934 22.3% 106,995 21.5% CERTIFICATES OF DEPOSIT 346,553 62.8% 299,745 64.1% 310,320 62.4% IRA ACCOUNTS 93,310 16.9% 61,096 13.1% 77,516 15.6% ------------------------------------------------------------------ TOTAL DEPOSITS (excluding accrued interest) 548,036 99.3% 464,775 99.5% 494,831 99.5% ACCRUED INTEREST 3,447 0.7% 2,695 0.5% 2,711 0.5% ------------------------------------------------------------------ TOTAL DEPOSITS $ 551,483 100.0% $ 467,470 100.0% $ 497,542 100.0% ------------------------------------------------------------------ - ----------------------------------------------------------------------------------------------------------------------------------- TABLE J2 - OTHER BORROWINGS SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- FHLB FUNDS $ 79,000 $ 78,100 $ 89,800 BONDS PAYABLE 149 617 516 TERM NOTES 114,500 135,500 114,500 LINES OF CREDIT - - - ------------ ---------- ---------- TOTAL OTHER BORROWINGS $ 193,649 $ 214,217 $ 204,816 ------------ ---------- ---------- - ----------------------------------------------------------------------------------------------------------------------------------- TABLE K - CAPITAL AND CORRESPONDING REGULATORY CAPITAL RATIOS (IN PERCENT): - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL $ 103,967 $ 85,644 $ 89,394 ------------ ---------- ---------- OUTSTANDING SHARES 10,004 9,923 9,988 ------------ ---------- ---------- DIVIDENDS DECLARED $ 3,956 $ 3,170 $ 4,369 ------------ ---------- ---------- LEVERAGE CAPITAL 7.82% 8.23% 8.17% ------------ ---------- ---------- TIER 1 RISK-BASED CAPITAL 18.54% 17.77% 17.53% ------------ ---------- ---------- TOTAL RISK-BASED CAPITAL 19.79% 18.81% 18.66% ------------ ---------- ---------- - ----------------------------------------------------------------------------------------------------------------------------------- TABLE L - MARKET PRICES AND STOCK DATA - ----------------------------------------------------------------------------------------------------------------------------------- CLOSING PRICE $ 37.13 $ 20.10 $ 22.60 ------------ ---------- ---------- HIGH 39.13 21.60 22.60 ------------ ---------- ---------- LOW 33.13 16.70 18.20 ------------ ---------- ---------- BOOK VALUE 10.39 8.63 8.95 ------------ ---------- ---------- DIVIDEND PER SHARE $ 0.150 $ 0.120 $ 0.120 ------------ ---------- ---------- PAYOUT RATIO 25.37% 25.57% 24.40% ------------ ---------- ---------- DIVIDEND YIELD 1.81% 2.70% 2.63% ------------ ---------- ---------- </TABLE> The following provides the high and low prices of the Group's stock for each quarter of the last two fiscal periods. Common stock prices were adjusted to give retroactive effect to the stock splits declared on the Group's common stock. <TABLE> <CAPTION> QUARTER ENDED HIGH LOW PER SHARE - ------------------------------------------------------ ------------------ ---------------- ------------------- <S> <C> <C> <C> MARCH 1998 $ 39.13 $ 33.13 $ 0.150 ------------ ---------- ---------- DECEMBER 1997 31.50 24.50 0.125 ------------ ---------- ---------- SEPTEMBER 1997 29.70 22.60 0.125 ------------ ---------- ---------- JUNE 1997 22.60 18.20 0.120 ------------ ---------- ---------- MARCH 1997 21.60 16.70 0.120 ------------ ---------- ---------- DECEMBER 1996 17.60 14.60 0.100 ------------ ---------- ---------- SEPTEMBER 1996 $ 13.08 $ 13.00 $ 0.100 ------------ ---------- ---------- </TABLE> 25
YEAR 2000 COMPLIANCE - -------------------- The Group has a Year 2000 compliance committee that consists of senior management, MIS and internal audit personnel and two outside consultants. This committee has organized a contingency plan to identify and correct all of the Group's computer applications and softwares that were designed and develop without considering the impact of the upcoming change in the century. This process is well under way and management estimates that the costs of addressing the Year 2000 issues will not exceed $1 million. Most of this cost first relates to the assignment of internal staff rather than hiring of outside consultants or additional staff and second to the purchase of equipment and software, the cost of which will be amortized over a number of years. Management therefore does not anticipate a material impact to the Group's results of operations or financial position and that the Group will be in full compliance when the turn of the century arrives. During the quarter, the committee determined that all of the Group's systems are Year 2000 compliant with the exception of a portion of the trust (expected June 1998) and the broker-dealer (expected December 1998) . The Group will begin testing to insure compliance during May 1998. OTHER INFORMATION - ------------------ 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 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A - FINANCIAL STATEMENTS SCHEDULES - ---------------------------------- No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements or in the notes thereto described in 6(c) below. B - REPORTS ON FORM 8-K - ----------------------- No current reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended September 30,1997. C - EXHIBITS - ------------ Exhibits filed as part of this Form 10-Q <TABLE> <CAPTION> NO. EXHIBITS PAGE - ------------- ------------------------------ ------------- <S> <C> <C> 27.0 Financial Data Schedule E-1 </TABLE> 26
SIGNATURES Pursuant to the requirements of the Securities 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. DATE: May 13, 1998 By: /s/ Jose E. Fernandez ----------------- ------------------------------ JOSE E. FERNANDEZ CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER DATE: May 13, 1998 By: /s/ Ricardo N. Ramos ------------------ ----------------------------- RICARDO RAMOS SENIOR VICE PRESIDENT FINANCE 27