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