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 SEPTEMBER 30, 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) 13,755,027 SHARES OUTSTANDING AS OF SEPTEMBER 30, 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 ---- - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- PART - 1 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Item - 1 FINANCIAL STATEMENTS Consolidated statements of Financial condition at September 30, 1999 (unaudited) and June 30, 1998. 1 Unaudited consolidated statements of income for the first quarter ended September 30, 1999 and 1998. 2 Unaudited consolidated statements of stockholders' equity and comprehensive income for the three months period ended September 30, 1999 and 1998. 3 Unaudited consolidated statements of cash flows for the three months period ended September 30, 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 23 Item - 2 Change in securities - None 23 Item - 3 Defaults upon senior securities - None 23 Item - 4 Submissions of Matters to a Vote of Security Holders 23 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 SEPTEMBER 30, 1999 (UNAUDITED) AND JUNE 30, 1999 (IN THOUSANDS) <TABLE> <CAPTION> ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, --------------- --------------- <S> <C> <C> Cash and due from banks $ 10,428 $ 8,060 --------------- --------------- INVESTMENTS AND SECURITIES: Money market investments 400 27,991 Trading securities, at fair value 38,185 17,307 Investment securities available-for-sale, at fair value 481,435 379,894 Investment securities held-to-maturity, at cost ( fair value $481,334; 494,939 508,080 June 30,1999 - $499,234 ) Federal Home Loan Bank (FHLB) stock, at cost 13,257 13,257 --------------- --------------- TOTAL INVESTMENTS AND SECURITIES 1,028,216 946,529 --------------- --------------- --------------- --------------- LOANS: Loans held-for-sale, at lower of cost or market 55,114 55,206 Loans receivable, net 502,673 519,110 --------------- --------------- TOTAL LOANS, NET 557,787 574,316 --------------- --------------- --------------- --------------- Accrued interest receivable 21,716 18,017 Foreclosed real estate, net 383 383 Premises and equipment, net 21,664 21,651 Other assets, net 20,278 18,391 --------------- --------------- TOTAL ASSETS $ 1,660,472 $ 1,587,347 --------------- --------------- --------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Savings and demand $ 152,905 $ 142,679 Time and IRA accounts 499,493 508,648 Accrued interest 4,238 5,661 --------------- --------------- TOTAL DEPOSITS 656,636 656,988 --------------- --------------- --------------- --------------- BORROWINGS: Securities sold under agreements to repurchase 701,322 596,226 Advances and borrowings from Federal Home Loan Bank 46,700 68,400 Term notes and other borrowings 106,500 106,500 --------------- --------------- TOTAL BORROWINGS 854,522 771,126 --------------- --------------- --------------- --------------- Accrued expenses and other liabilities 24,943 35,201 --------------- --------------- TOTAL LIABILITIES 1,536,101 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 13,755,027 (June 30, 1999 - 13,738,814) 13,755 13,739 Additional paid-in capital 23,384 23,313 Legal surplus 9,476 8,673 Retained earnings 84,551 79,920 Treasury stock, at cost, 978,879 shares (June 30, 1999 - 903,786) (25,133) (23,401) Accumulated other comprehensive loss , net of deferred taxes (15,162) (11,712) --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 124,371 124,032 --------------- --------------- --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,660,472 $ 1,587,347 --------------- --------------- --------------- --------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS - 1 -
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FIRST QUARTER ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION) <TABLE> <CAPTION> 1999 1998 ---------------------- ----------------------- <S> <C> <C> INTEREST INCOME: Loans $ 15,082 $ 15,457 Mortgage-backed securities and collateralized mortgage obligations 12,077 6,738 Investment securities 3,702 4,691 Money market investments 70 117 ---------------------- ----------------------- TOTAL INTEREST INCOME 30,931 27,003 ---------------------- ----------------------- ---------------------- ----------------------- INTEREST EXPENSE: Deposits 7,330 7,271 Securities sold under agreements to repurchase 8,144 5,945 Other borrowed funds and interest rate risk management 2,410 2,712 ---------------------- ----------------------- TOTAL INTEREST EXPENSE 17,884 15,928 ---------------------- ----------------------- ---------------------- ----------------------- NET INTEREST INCOME 13,047 11,075 ---------------------- ----------------------- Provision for loan losses 1,750 2,600 ---------------------- ----------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,297 8,475 ---------------------- ----------------------- NON-INTEREST INCOME: Trust, money management and brokerage fees 2,627 2,333 Mortgage banking activities 1,356 794 Bank service charges and fees and other operating income 1,138 1,025 Gain on sale of investment securities 599 1,606 Trading net activity (133) 49 ---------------------- ----------------------- TOTAL NON-INTEREST INCOME 5,587 5,807 ---------------------- ----------------------- ---------------------- ----------------------- NON-INTEREST EXPENSES: Compensation and benefits 3,749 3,474 Occupancy and equipment, net 1,525 1,246 Advertising and business promotion 631 560 Professional and service fees 509 341 Communications 370 345 Taxes other than income 479 429 Insurance, including deposit insurance 133 91 Printing, postage, stationery and supplies 197 156 Other 642 730 ---------------------- ----------------------- TOTAL NON-INTEREST EXPENSE 8,235 7,372 ---------------------- ----------------------- ---------------------- ----------------------- INCOME BEFORE INCOME TAXES 8,649 6,910 Provision for income taxes 702 851 ---------------------- ----------------------- NET INCOME 7,947 6,059 Less: dividends on preferred stock (597) - ---------------------- ----------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 7,350 $ 6,059 ---------------------- ----------------------- ---------------------- ----------------------- INCOME PER COMMON SHARE: Basic $ 0.57 $ 0.46 ---------------------- ----------------------- Diluted $ 0.56 $ 0.45 ---------------------- ----------------------- ---------------------- ----------------------- Average common shares outstanding 12,806 13,038 Average potential common share options 229 407 ---------------------- ----------------------- 13,035 13,445 ---------------------- ----------------------- ---------------------- ----------------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS - 2 -
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME FIRST QUARTER ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) <TABLE> <CAPTION> 1999 1998 ---------------------- ---------------------- CHANGES IN STOCKHOLDERS' EQUITY: - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 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 options exercised 16 5 ---------------------- ---------------------- BALANCE AT END OF PERIOD 13,755 10,154 ---------------------- ---------------------- ---------------------- ---------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 23,313 27,261 Stock options exercised 71 46 ---------------------- ---------------------- BALANCE AT END OF PERIOD 23,384 27,307 ---------------------- ---------------------- ---------------------- ---------------------- LEGAL SURPLUS: Balance at beginning of period 8,673 5,908 Transfer from retained earnings 803 560 ---------------------- ---------------------- BALANCE AT END OF PERIOD 9,476 6,468 ---------------------- ---------------------- ---------------------- ---------------------- RETAINED EARNINGS: Balance at beginning of period 79,920 63,756 Net income 7,947 6,059 Dividends declared on common stock (1,916) (1,492) Dividends declared on preferred stock (597) - Transfer to legal surplus (803) (560) ---------------------- ---------------------- BALANCE AT END OF PERIOD 84,551 67,763 ---------------------- ---------------------- ---------------------- ---------------------- TREASURY STOCK: Balance at beginning of period (23,401) (6,199) Treasury stock purchased (1,732) (3,356) ---------------------- ---------------------- BALANCE AT END OF PERIOD (25,133) (9,555) ---------------------- ---------------------- ---------------------- ---------------------- 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 (3,450) 17,513 ---------------------- ---------------------- BALANCE AT END OF PERIOD (15,162) 18,426 ---------------------- ---------------------- ---------------------- ---------------------- TOTAL STOCKHOLDERS' EQUITY $ 124,371 $ 120,563 ---------------------- ---------------------- ---------------------- ---------------------- COMPREHENSIVE INCOME: - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,947 $ 6,059 ---------------------- ---------------------- OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: Unrealized (loss) gain on securities arising during the period (2,971) 19,115 Realized gains and losses included in net income (599) (1,606) 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 (3,450) 17,513 ---------------------- ---------------------- ---------------------- ---------------------- COMPREHENSIVE INCOME $ 4,497 $ 23,572 ---------------------- ---------------------- ---------------------- ---------------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS - 3 -
- ------------------------------------------------------------------------------- UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FIRST QUARTER ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> 1999 1998 ------------------- ------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,947 $ 6,059 ------------------- ------------------- ------------------- ------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred loan origination fees and costs (786) (1,145) Amortization of premiums and accretion of discounts on investment securities 129 555 Depreciation and amortization of premises and equipment 818 709 Provision for loan losses 1,750 2,600 Gain on sale of investment securities available-for-sale (599) (1,606) Gain on sale of loans held-for-sale (827) (135) Proceeds from sale of loans held-for-sale 21,715 6,900 (Decrease) increase in accrued expenses and other liabilities (10,236) 6,607 Net (increase) decrease in: Trading securities (20,878) 1,397 Accrued interest receivable (3,699) (615) Other assets (1,887) (4,723) ------------------- ------------------- TOTAL ADJUSTMENTS (14,500) 10,544 ------------------- ------------------- ------------------- ------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,553) 16,603 ------------------- ------------------- ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available-for-sale (86,110) (75,068) Sales of investment securities available-for-sale 11,920 47,935 Maturities and redemptions of investment securities available-for-sale 7,797 1,186 Maturities and redemptions of investment securities held-to-maturity 13,003 11,027 Net origination of loans (43,313) (53,694) Capital expenditures (831) (864) ------------------- ------------------- NET CASH USED IN INVESTING ACTIVITIES (97,534) (69,478) ------------------- ------------------- ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in: Deposits (352) 41,671 Securities sold under agreements to repurchase 105,096 30,223 Advances and borrowings from FHLB (21,700) (14,400) Repayments of term notes and other borrowings - (88) Proceeds from exercise of stock options 87 51 Treasury stock acquired (1,732) (3,356) Dividends and cash paid on fractional shares (2,535) (1,491) ------------------- ------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 78,864 52,610 ------------------- ------------------- ------------------- ------------------- DECREASE IN CASH AND CASH EQUIVALENTS (25,223) (265) Cash and cash equivalents at beginning of period 36,051 19,489 ------------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,828 $ 19,224 ------------------- ------------------- ------------------- ------------------- CASH AND CASH EQUIVALENTS INCLUDE: Cash and due from banks $ 10,428 $ 6,343 Money market investments 400 12,881 ------------------- ------------------- $ 10,828 $ 19,224 ------------------- ------------------- ------------------- ------------------- SUPPLEMENTAL CASH FLOW DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES: Interest paid $ 17,210 $ 15,290 ------------------- ------------------- Real estate loans securitized into mortgage-backed securities $ 38,000 $ 16,600 ------------------- ------------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS - 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 banksubsidiary, 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 September 30, 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 September 30, 1999 and June 30, 1999, and the results of operations and cash flows for the quarter ended September 30, 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 - 5 -
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 September 30,1999 and June 30, 1999 the Group's money market investments were comprised of: <TABLE> <CAPTION> (IN THOUSANDS) ------------------------------------------- SEPTEMBER 30, JUNE 30, -------------------- ------------------- <S> <C> <C> Securities purchased under agreements to resell $ - $24,350 Time deposits with other banks - - Money market accounts and other short-term investments 400 3,641 -------------------- ------------------- $ 400 $27,991 -------------------- ------------------- -------------------- ------------------- </TABLE> 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. 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 September 30, 1999 and June 30, 1999, were as follows: <TABLE> <CAPTION> SEPTEMBER 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 $106,411 $ 90 $ 4,511 $101,990 5.29% US Government agencies securities 98,208 271 1,879 96,600 6.75% PR Government securities 18,756 301 6 19,051 8.71% GNMA certificates 146,254 649 1,481 145,422 7.25% FNMA certificates 94,969 - 3,199 91,770 6.75% FHLMC certificates 27,428 - 826 26,602 6.79% ------------------ --------------- ------------- -------------- ------------ 492,026 1,311 11,902 481,435 6.65% ------------------ --------------- ------------- -------------- ------------ ------------------ --------------- ------------- -------------- ------------ HELD-TO-MATURITY PR Government securities 3,560 - 30 3,530 7.40% Collateralized mortgage obligations 118,333 - 3,222 115,111 6.67% Other debt securities 4,863 - - 4,863 8.58% GNMA certificates 172,130 549 4,272 168,407 6.59% FNMA certificates 112,152 160 3,837 108,475 6.74% FHLMC certificates 83,901 58 3,011 80,948 6.65% ------------------ --------------- ------------- -------------- ------------ 494,939 767 14,372 481,334 6.68% ------------------ --------------- ------------- -------------- ------------ ------------------ --------------- ------------- -------------- ------------ FHLB stock 13,257 - - 13,257 6.93% ------------------ --------------- ------------- -------------- ------------ $1,000,222 $2,078 $26,274 $976,026 6.67% ------------------ --------------- ------------- -------------- ------------ ------------------ --------------- ------------- -------------- ------------ </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 September 30, 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 $2,055 $2,050 $ - $ - $2,055 $2,050 After 1 year to 5 years 12,650 12,699 1,042 1,044 13,692 13,743 After 5 years to 10 years 195,953 189,818 18,218 18,277 214,171 208,095 Due after 10 years 281,368 276,868 475,679 462,013 757,047 738,881 FHLB stock - - - - 13,257 13,257 -------------- ------------ ------------- -------------- ------------- ------------- $492,026 $481,435 $494,939 $481,334 $1,000,222 $976,026 -------------- ------------ ------------- -------------- ------------- ------------- -------------- ------------ ------------- -------------- ------------- ------------- </TABLE> The category of securities available-for-sale due after ten years includes a mortgage-backed Puerto Rico municipal bond with a fair value of $16,935,000 which commenced repaying principal on August 1, 1994, and is expected to be fully collected within the next two fiscal years. This category also includes $49,994,000, 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 first quarter of fiscal 2000 totaled $11,920,000 (1999 - $47,935,000). Gross realized gains and losses on those sales during fiscal 2000 were $599,000 and $0, respectively (1999 - $1,606,000 and $0). Of Oriental's investments at September 30,1999 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 18% and 19% of stockholders' equity, respectively. At September 30, 1999, the amortized cost and fair value of investments from the Government of Puerto Rico were approximately $22,316,000 (June 30, 1999 - $23,723,000) and $22,581,000 (June 30, 1999 - $24,102,000), respectively. At September 30, 1999, $16,935,000 (June 30, 1999 - $18,456,000) of these investments were an AAA-rated Puerto Rico municipal bond collateralized with mortgage-backed securities. - 7 -
TRADING SECURITIES: A summary of trading securities owned by the Group at September 30, 1999 and June 30, 1999 is as follows: <TABLE> <CAPTION> (IN THOUSANDS) ------------------------------------------- SEPTEMBER 30, JUNE 30, -------------------- ------------------- <S> <C> <C> US Treasury securities $ 3,516 $ 3,527 Mortgage-backed securities 31,456 11,278 PR Government securities 814 - CMO residuals, interest only 2,399 2,502 -------------------- ------------------- $38,185 $17,307 -------------------- ------------------- -------------------- ------------------- </TABLE> At September 30, 1999, the Group's trading portfolio weighted average yield was 7.11% (June 30, 1999 - 7.79%). 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 September 30, 1999 and June 30, 1999 was as follows: <TABLE> <CAPTION> (IN THOUSANDS) ---------------------------------------- SEPTEMBER 30, JUNE 30, --------------------- ------------------ <S> <C> <C> LOANS SECURED BY REAL ESTATE: Residential $236,039 $263,540 Non-residential real estate loanS 6,324 6,531 Home equity loans and personal loans collateralized by real estate 18,925 16,278 --------------------- ------------------ 261,288 286,349 Less: net deferred loan fees (1,498) (1,302) --------------------- ------------------ 259,790 285,047 --------------------- ------------------ OTHER LOANS: Commercial and auto loans 21,258 10,555 Personal consumer loans and credit lines 126,620 122,213 Financing leases, net of unearned interest 103,736 110,297 --------------------- ------------------ 251,614 243,065 --------------------- ------------------ LOANS RECEIVABLE 511,404 528,112 Allowance for loan losses (8,731) (9,002) --------------------- ------------------ LOANS RECEIVABLE, NET 502,673 519,110 Loans held-for-sale 55,114 55,206 -------------------- ------------------ TOTAL LOANS, NET $557,787 $574,316 --------------------- ------------------ --------------------- ------------------ </TABLE> - 8 -
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 first quarter ended September 30, 1999 and 1998. The Group evaluates all loans, some individually and other as homogeneous groups, for purposes of determining impairment. At September 30, 1999 and June 30, 1999, the Group determined that no impairment reserve was necessary. NOTE 4 - PLEDGED ASSETS: At September 30, 1999, residential mortgage loans and investment securities amounting to $127,694,000 (June 30, 1999 - $100,509,000), and $927,409,000 (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. 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 September 30, 1999 and June 30, 1999 are set forth in the table below: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------------------------- SEPTEMBER 30, JUNE 30, ----------------- ----------------- <S> <C> <C> SWAPS: Pay fixed swaps notional amount $275,000 $245,000 Weighted average pay rate - fixed 5.68% 5.66% Weighted average receive rate - floating 5.41% 5.09% Maturity in months 1 TO 23 2 TO 26 Floating rate as a percent of LIBOR 85 TO 100% 85 TO 100% CAPS: Cap agreements notional amount $100,000 $100,000 Cap rate 6.50% 6.50% Maturity in months 1 TO 12 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 Group 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 September 30, 1999, the notional amount of these agreements totaled $82,565,000 (June 30, 1999 - $79,815,000) at a weighted average rate of 5.84% (June 30, 1999 - 5.81%). - 9 -
At September 30, 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> 2000 $255,000 $455 $255,455 2001 120,000 82,110 202,110 ---------------------- -------------------- ----------------------- $275,000 $82,565 $457,565 ---------------------- -------------------- ----------------------- </TABLE> NOTE 6 - SEGMENT REPORTING: 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 the retail banking, which is mainly comprised 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 and the Group's investment portfolios and of the treasury functions. Oriental'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 brokerage 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 first quarters ended September 30: <TABLE> <CAPTION> UNAUDITED (Dollars in thousands) ----------------------------------------------------------------------------------- RETAIL FINANCIAL MORTGAGE BANKING SERVICES BANKING ELIMINATIONS TOTAL --------------- -------------- --------------- --------------- -------------- <S> <C> <C> <C> <C> <C> FISCAL 2000 - ----------- Net interest income $ 12,139 $ 122 $ 786 $ -- $ 13,046 Non-interest income 1,831 2,614 1,356 (214) 5,587 Non-interest expenses 5,905 1,600 944 (214) 8,235 Provision for loan losses 1,750 -- -- -- 1,750 --------------- -------------- --------------- --------------- -------------- NET INCOME BEFORE TAXES $ 6,315 $ 1,136 $1,198 $ -- $ 8,649 --------------- -------------- --------------- --------------- -------------- --------------- -------------- --------------- --------------- -------------- Total assets $1,647,905 $12,715 $2,000 $(2,148) $1,660,572 --------------- -------------- --------------- --------------- -------------- FISCAL 1999 - ----------- Net interest income 9,841 $ 87 $1,147 $ -- $ 11,075 Non-interest income 2,433 2,686 794 (106) 5,807 Non-interest expenses 5,063 1,243 1,172 (106) 7,372 Provision for loan losses 2,600 -- -- -- 2,600 --------------- -------------- --------------- --------------- -------------- NET INCOME BEFORE TAXES $ 4,611 $ 1,530 $ 769 $ -- $ 6,910 --------------- -------------- --------------- --------------- -------------- --------------- -------------- --------------- --------------- -------------- Total assets $1,380,243 $ 7,592 $ -- $ (212) $1,387,623 --------------- -------------- --------------- --------------- -------------- </TABLE> - 10 -
<TABLE> <CAPTION> FIRST QUARTER ENDED SEPTEMBER 30, ----------------------------------------------------------------------------- 1999 1998 VARIANCE % ------------------------ ------------------------ ------------------ EARNINGS, DIVIDENDS DECLARED AND PER SHARE INFORMATION: - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest income $ 30,931 $ 27,003 14.5% Interest expense 17,884 15,928 12.3% ------------------------ ------------------------ ------------------ NET INTEREST INCOME 13,047 11,075 17.8% Recurring non-interest income 5,121 4,152 23.3% Non recurring non-interest income 466 1,655 -71.8% Recurring non-interest expenses 8,235 7,244 13.7% Non recurring non-interest expenses - 128 -100.0% Provision for loan losses 1,750 2,600 -32.7% Provision for income taxes 702 851 -17.5% ------------------------ ------------------------ ------------------ NET INCOME 7,947 6,059 31.2% Less: dividends on preferred stock (597) - -100.0% ------------------------ ------------------------ ------------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 7,350 $ 6,059 21.3% ------------------------ ------------------------ ------------------ Dividends declared $ 1,916 $ 1,492 28.4% ------------------------ ------------------------ ----------------- Dividends declared per share $ 0.150 $ 0.113 32.7% ------------------------ ------------------------ ----------------- Basic $ 0.57 $ 0.46 23.9% ------------------------ ------------------------ ----------------- Diluted $ 0.56 $ 0.45 24.4% ------------------------ ------------------------ ----------------- Book value $ 7.11 $ 9.18 -22.5% ------------------------ ------------------------ ----------------- Market price at end of period $ 22.75 $ 28.84 -21.1% ------------------------ ------------------------ ----------------- Average shares and equivalents 13,035 13,445 -3.0% ------------------------ ------------------------ ----------------- PERIOD END BALANCES ( SEPTEMBER 30, ): - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FINANCIAL ASSETS Trust assets managed $ 1,394,800 $ 1,292,500 7.9% Broker-dealer assets gathered 864,700 736,500 17.4% ------------------------ ------------------------ ----------------- ASSETS MANAGED 2,259,500 2,029,000 11.4% Bank total assets 1,660,500 1,387,600 19.7% ------------------------ ------------------------ ----------------- $ 3,920,000 $ 3,416,600 14.7% ------------------------ ------------------------ ----------------- INTEREST-EARNING ASSETS Investments and securities $ 1,028,216 $ 750,944 36.9% Loans and loans held-for-sale 557,787 574,454 -2.9% ------------------------ ------------------------ ----------------- $ 1,586,003 $ 1,325,398 19.7% ------------------------ ------------------------ ----------------- INTEREST-BEARING LIABILITIES Deposits $ 656,636 $ 613,102 7.1% Repurchase agreements 701,322 446,394 57.1% Borrowings 153,200 174,900 -12.4% ------------------------ ------------------------ ----------------- $ 1,511,158 $ 1,234,396 22.4% ------------------------ ------------------------ ----------------- CAPITAL AND RELATED REGULATORY RATIOS Stockholders' equity $ 124,371 $ 120,563 3.2% ------------------------ ------------------------ ----------------- Leverage capital 8.72% 7.46% 17.0% ------------------------ ------------------------ ----------------- Total risk-based capital 24.74% 20.87% 18.5% ------------------------ ------------------------ ----------------- Tier 1 risk-based capital 23.48% 19.79% 18.6% ------------------------ ------------------------ ----------------- SELECTED FINANCIAL RATIOS (IN PERCENT): - --------------------------------------------------------------------------------------------------------------------------------- Return on average assets (ROA) 1.99% 1.78% 11.5% ------------------------ ------------------------ ----------------- Return on average common equity (ROE) 33.59% 21.28% 57.9% ------------------------ ------------------------ ----------------- Efficiency ratio 45.33% 47.69% -5.0% ------------------------ ------------------------ ----------------- Expense ratio 0.81% 1.02% -20.1% ------------------------ ------------------------ ----------------- Interest rate spread 3.17% 3.34% -5.0% ------------------------ ------------------------ ----------------- OTHER INFORMATION: - --------------------------------------------------------------------------------------------------------------------------------- Number of banking offices 19 18 5.6% ------------------------ ------------------------ ----------------- </TABLE> - 11 -
- -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF FINANCIAL PERFORMANCE Oriental posted diluted earnings per share of $0.56 for the first quarter of fiscal 2000, which is up 24% when compared to the $0.45 tallied in the same quarter of fiscal 1999. Quarterly net income available to common shareholders increased 21% to $7.4 million, up from $6.1 million posted in the first quarter of fiscal 1999. The Group's fiscal 2000 first quarter earnings growth was principally due to a higher level of interest-earning assets, sound performance by the brokerage and trust divisions and continued effective management of interest rate risk. Financial assets, which include the Group's assets and assets managed by the trust and brokerage business, reached $3.9 billion at the end of the first quarter of fiscal 2000, up 15% from $3.4 billion at the end of the same period of fiscal 1999. At September 30,1999, the Group's assets reached $1.660 billion from $1.388 billion a year ago, an increase of 20%. Assets managed by the trust grew 8% to $1.395 billion versus $1.293 billion a year ago, and assets gathered by the broker-dealer increased 17% to $865 million from $737 million the year before. Profitability ratios reached satisfactory levels again this past quarter. The Group's return on common equity was 33.59%, up from 21.28% posted the comparable first quarter of fiscal 1999. Likewise, return on assets (ROA) for the quarter rose to 1.99%, up from 1.78% posted the previous first quarter. The efficiency ratio improved to 45.33%, down from 47.69% in the comparable period of fiscal 1999. Different components that impacted the Group's performance are discussed in detail in the following pages. In addition, the selected financial data table on page 11 provides 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 first quarter of fiscal 2000, the Group's net interest income amounted $13.0 million, up 18% from $11.3 million in the same period of fiscal 1999. A larger volume of interest-earning assets and a modest reduction in the Group's cost of funds propelled this growth in net interest income. On the other hand, interest rate spread narrowed 17 basis points to 3.17% from 3.34%, due to a change in the mix of interest-earning assets toward low-risk and tax-free investment securities. Table 1 analyzes 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 first quarter of fiscal 2000 totaled $30.9 million, up 14.5% from the $27.0 million posted in the same period of fiscal 1999. A favorable volume variance of $4.6 million due to a larger average volume of interest-earning assets drove this increase. An unfavorable rate variance of $675,000 attributed to a decline in the yield performance of interest-earning assets due to the reason previously explained, partially offset this volume rise. Average interest-earning assets for the first quarter of fiscal 2000 reached $1.530 billion, an increase of 22% compared with $1.256 billion in fiscal 1999. This volume increase was fueled by a solid growth in the Group's investment portfolio, mainly mortgage-backed securities, as Oriental continues its strategy of converting residential real estate loans sold in the secondary market with tax-advantaged mortgage-backed securities. In the first quarter of fiscal 2000, the average yield on interest-earning assets was 8.09%, 51 basis points lower than the 8.60% attained in the same period of fiscal 1999. There were two main reasons for the yield erosion experienced in the first quarter of fiscal 2000. First, the strong expansion of Group's investment portfolio, which carries a lower yield than the loan portfolio but generates a significant amount of tax-exempt interest. Another factor was the compression of the loan portfolio yield, which decreased by 72 basis points to 10.48% from 11.20% attained in the comparable period of fiscal 1999. A change in the portfolio mix toward low-risk residential mortgage loans caused this yield decline. Interest expense for the first quarter of fiscal 2000 rose 12% to $17.8 million from $15.9 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, which contributed to a volume increase of $3.0 million, was the principal reason for the rise. This was partially tempered by a favorable rate variance of $1.1 million due to a lower average cost of funds as the Bank's core deposits base expanded. - 12 -
TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------------------- ----------------------------------------------- INTEREST AVERAGE RATE ----------------------------------------------- ----------------------------------------------- 2000 1999 VARIANCE % 2000 1999 VARIANCE BP ------------- ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> INVESTMENTS: Investment securities $ 15,384 $ 10,794 42.5% 6.63% 6.50% 0.13% Trading securities 395 634 -37.7% 7.15% 8.61% -1.46% Money market investments 70 117 -40.2% 6.26% 4.53% 1.73% ------------- ------------- ------------- ------------- ------------- ------------- 15,849 11,545 37.3% 6.65% 6.56% 0.09% ------------- ------------- ------------- ------------- ------------- ------------- LOANS: Real estate (1) 7,219 7,265 -0.6% 8.91% 9.96% -1.05% Consumer 4,249 4,032 5.4% 13.81% 13.53% 0.28% Financing leases 2,850 3,749 -24.0% 10.81% 11.85% -1.04% Commercial and auto loans 764 411 85.9% 13.22% 11.21% 2.01% 15,082 15,457 -2.4% 10.48% 11.20% -0.72% ------------- ------------- ------------- ------------- ------------- ------------- $ 30,931 $ 27,002 14.6% 8.09% 8.60% -0.51% ------------- ------------- ------------- ------------- ------------- ------------- DEPOSITS: Savings and demand 764 744 2.7% 2.12% 2.57% -0.45% Time and IRA accounts 6,566 6,527 0.6% 5.29% 5.55% -0.26% ------------- ------------- ------------- ------------- ------------- ------------- 7,330 7,271 0.8% 4.57% 4.96% -0.39% ------------- ------------- ------------- ------------- ------------- ------------- BORROWINGS: Repurchase agreements 8,144 5,945 37.0% 5.00% 5.40% -0.40% FHLB funds 842 997 -15.5% 6.05% 5.78% 0.27% Term notes and other sources of funds 1,280 1,501 -14.7% 4.77% 5.20% -0.43% Interest rate risk management 288 214 34.6% 0.14% 0.14% 0.00% ------------- ------------- ------------- ------------- ------------- ------------- 10,554 8,657 21.9% 5.19% 5.54% -0.35% ------------- ------------- ------------- ------------- ------------- ------------- 17,884 15,928 12.3% 4.92% 5.26% -0.34% ------------- ------------- ------------- ------------- ------------- ------------- NET INTEREST INCOME $ 13,047 $ 11,074 17.8% 3.17% 3.34% -0.17% ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- INTEREST RATE MARGIN 3.41% 3.53% -0.12% ------------- ------------- ------------- ------------- ------------- ------------- <CAPTION> ----------------------------------------------- AVERAGE BALANCE ----------------------------------------------- 2000 1999 VARIANCE % ------------- ------------- ------------- <S> <C> <C> <C> INVESTMENTS: Investment securities $ 927,447 $ 663,813 $ 39.7% Trading securities 22,086 29,457 -25.0% Money market investments 4,445 10,308 -56.9% ------------- ------------- ------------- 953,978 703,578 35.6% ------------- ------------- ------------- LOANS: Real estate (1) 323,988 291,796 11.0% Consumer 123,103 119,214 3.3% Financing leases 105,453 126,544 -16.7% Commercial and auto loans 23,097 14,689 57.2% ------------- ------------- ------------- 575,641 552,243 4.2% ------------- ------------- ------------- 1,529,619 1,255,821 21.8% ------------- ------------- ------------- DEPOSITS: Savings and demand 143,192 114,970 24.5% Time and IRA accounts 492,622 466,379 5.6% ------------- ------------- ------------- 635,814 581,349 9.4% ------------- ------------- ------------- BORROWINGS: Repurchase agreements 645,808 436,806 47.8% FHLB funds 55,200 68,368 -19.3% Term notes and other sources of funds 106,500 114,542 -7.0% Interest rate risk management - - 0.0% ------------- ------------- ------------- 807,508 619,716 30.3% ------------- ------------- ------------- 1,443,322 1,201,065 20.2% ------------- ------------- ------------- EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 86,297 $ 54,756 57.6% ------------- ------------- ------------- ------------- ------------- ------------- INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 105.98% 104.56% ------------- ------------- ------------- ------------- </TABLE> <TABLE> <CAPTION> - ----------------------------------------- ------------- ------------- ------------- CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL - ----------------------------------------- ------------- ------------- ------------- <S> <C> <C> <C> INTEREST INCOME: Loans (1) $ 545 $ (920) $ (375) Investments 4,059 245 4,304 ------------- ------------- ------------- 4,604 (675) 3,929 ------------- ------------- ------------- INTEREST EXPENSE: Deposits 545 (486) 59 Borrowings 2,521 (624) 1,897 ------------- ------------- ------------- 3,066 (1,110) 1,956 ------------- ------------- ------------- NET INTEREST INCOME $ 1,538 $ 435 $ 1,973 ------------- ------------- ------------- ------------- ------------- ------------- </TABLE> (1) - Real-estate averages include loans held-for-sale. - 13 -
Average interest-bearing liabilities for the first quarter of fiscal 2000 reached $1.443 billion, up 20% from the $1.201 billion a year ago. Larger volumes of repurchase agreements and deposits, mainly time deposits and IRA accounts, drove this increase. These increases were used primarily to fund the Group's investment portfolio growth. In the other hand, the average cost of funds on interest-bearing liabilities was 4.92%, 34 basis points lower than the 5.26% attained in the same quarter of fiscal 1999. A lower interest scenario that prevailed during the first quarter of fiscal 2000 combined with a growth in the core deposit base caused this overall decrease. 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 during the first quarter of fiscal 2000. They rose 12% to $2.6 million from $2.3 million in the preceding year first quarter. Higher trust, brokerage, money management and mortgage banking revenues drove this improvement (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 first quarter of fiscal 2000, rising 12% to $2.6 million from $2.3 million in the preceding first quarter. The larger volume of accounts and assets managed by both the Group's trust department and the broker-dealer subsidiary triggered this growth (see "Financial Condition" section). For the first quarter of fiscal 2000, gains generated by mortgage banking activities amounted to $1.4 million, 71% greater than the $794,000 earned in same quarter of fiscal 1999. The larger volume of loans sold coupled by higher spreads attained in certain of the loan products sold fueled this increase. Bank services fees and other operating revenues, which consist primarily of fees on deposit accounts, leasing fees, and bank service charges and commissions, totaled $1.1 million in the first quarter of fiscal 2000, a 11% hike versus the $1 million reported in the same period fiscal of 1999. A 22% growth in bank service charges and commissions drove this rise. This increase was principally attributed to the expansion of the Group's electronic banking business and fees generated from the larger saving sand demand deposits base. For the first quarter of fiscal 2000, non-current securities and trading gains amounted to $466,000 versus $1.7 million reported in the same period a year ago. NON-INTEREST EXPENSES As shown in Table 4, non-interest expenses for the first quarter of fiscal 2000 increased 12% to $8.2 million from $7.4 million in the comparable period of fiscal 1999. Notwithstanding the above increase, the efficiency and expense ratios for the first quarter of fiscal 2000 improved to 45.33% and 0.81%, respectively, from 47.69% and 1.02%, respectively, a year earlier. Employee compensation and benefits, the Group's largest expense category, amounted to $3.7 million or 0.94% of total average assets for the first quarter of fiscal 2000 versus $3.5 million or 1.02% of total average assets in the same 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 first quarter of fiscal 2000 increased 19% to $4.5 million as compared to $3.8 million in the same period of fiscal 1999. Increases in professional and service fees, advertising and business promotion and occupancy and equipment led this rise and are directly related to the Group's expansion and new lines of business. 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. The advertising and promotion growth results mainly from the ongoing campaign to promote the Group's image and the launching of new products and services. The main contributors in the growth of occupancy and equipment costs were increases in capital expenditures from 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. - 14 -
<TABLE> <CAPTION> FIRST QUARTER ENDED SEPTEMBER 30, ------------------------------------------------------ 1999 1998 VARIANCE % ------------------------------------------------------ TABLE 2 - REVENUES SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net interest income $ 13,047 $ 11,075 17.8% Recurrent non-interest income 5,121 4,152 23.3% Non- recurrent non-interest income 466 1,655 -71.8% ---------------- ---------------- ---------------- $ 18,634 $ 16,882 10.4% ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- REVENUES COMPOSITION: Net interest income 70.00% 65.60% Recurrent non-interest income 27.50% 24.60% Non- recurrent non-interest income 2.50% 9.80% ---------------- ---------------- 100.00% 100.00% ---------------- ---------------- ---------------- ---------------- </TABLE> <TABLE> <CAPTION> FIRST QUARTER ENDED SEPTEMBER 30, ------------------------------------------------------ 1999 1998 INC. / (DEC.) ------------------------------------------------------ TABLE 3 - NON-INTEREST INCOME SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> NON-INTEREST INCOME: Bank service charges and fees and other operating income Fees on deposit accounts $ 362 $ 336 7.7% Bank service charges and commissions 504 414 21.7% Leasing revenues 268 207 29.5% Other operating revenues 4 68 -94.1% ---------------- ---------------- ---------------- 1,138 1,025 11.0% Trust, money management and brokerage fees 2,627 2,333 12.6% Mortgage banking activities 1,356 794 70.8% ---------------- ---------------- ---------------- RECURRENT NON-INTEREST INCOME 5,121 4,152 23.3% Securities and trading net activity 466 1,655 -71.8% ---------------- ---------------- ---------------- TOTAL NON-INTEREST INCOME $ 5,587 $ 5,807 -3.8% ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 62.19% 57.32% ---------------- ---------------- TABLE 4 - NON-INTEREST EXPENSES SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES: Compensation and benefits Fixed $ 2,485 $ 2,185 13.7% Variable 1,264 1,289 -1.9% ---------------- ---------------- ---------------- 3,749 3,474 7.9% ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Occupancy and equipment,net 1,525 1,246 22.4% Advertising and business promotion 631 560 12.7% Professional and service fees 509 341 49.3% Communications 370 345 7.2% Municipal and other general taxes 479 429 11.7% Insurance, including deposits insurance 133 91 46.2% Printing, postage, stationery and supplies 197 156 26.3% Other operating expenses 642 602 6.6% ---------------- ---------------- ---------------- OTHER NON-INTEREST EXPENSES 4,486 3,770 19.0% ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Other non-recurring expenses - 128 -100.0% ---------------- ---------------- ---------------- TOTAL NON-INTEREST EXPENSES $ 8,235 $ 7,372 11.7% ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- RELEVANT RATIOS: Efficiency ratio 45.33% 47.69% ---------------- ---------------- Expense ratio 0.81% 1.02% ---------------- ---------------- Compensation and benefits to recurring non-interest expenses 45.5% 48.0% ----------------------------------- Variable compensation to total compensation 33.7% 37.1% ----------------------------------- Compensation to total average assets 0.94% 1.02% ----------------------------------- Average compensation per employee $ 40.9 $ 37.3 ---------------- ---------------- Bank assets per employee $ 5,047 $ 4,205 ---------------- ---------------- GROUP'S WORK FORCE: Bank 329 330 Trust 28 24 Brokerage 12 10 ---------------- ---------------- 369 364 ---------------- ---------------- ---------------- ---------------- Average number of full-time employees 367 373 ---------------- ---------------- </TABLE> - 15 -
PROVISION FOR LOAN LOSSES The provision for loan losses in the first quarter of fiscal 2000 totaled $1.75 million, down 33% from the $2.6 million reported in the same period of fiscal 1999. The decline in the provision was 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 first quarter of fiscal 2000 amounted to $702,000 or 8.1% of pre-tax earnings compared with $851,000 or 12.3% of pre-tax earnings a year ago, down 18%. The reduction in the first quarter of fiscal 2000 was due to 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 the end of the first quarter of fiscal 2000, the Group's total assets amounted to $1.660 billion, an increase of 20% when compared to the $1.388 billion a year ago. At the same date, interest-earning assets reached $1.586 billion, an increase of $261 million or 20% versus the $1.325 billion a year earlier. This robust assets growth reflects a significant increase in the investment portfolio of $277million or 37% (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 September 30, 1999, the investment portfolio is of a high quality, approximately 98% is rated AAA at the end of the first quarter of fiscal 1999 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). The investment portfolio expansion was driven by a strong growth in mortgage-backed securities and CMO's, which increased to $784 million or 76% of the total portfolio from $463 million or 62% the year before, as Oriental continued its strategy of pooling residential real estate loans into mortgage-backed securities. However, investment securities decreased 13% to $230 million or 22% of the total portfolio from $265 million or 35% a year ago. This reduction reflects the significant quantity of U.S. Government securities sold during the first half of fiscal 1999 as part of the Group's asset/liability management. These securities were replaced with mortgage-backed securities and CMO's that provide the Group with a higher yield and liquid position (see Table 5 for the Group's investments summary and composition). At September 30,1999, Oriental's loan portfolio, the second largest category of the Bank's interest-earning assets, amounted to $558 million, 3% or $16 million lower than the $574 million a year ago. Leasing and real estate portfolios downsizing and an increase in the allowance for loan losses led this reduction; partially offset by expansions in the consumer and commercial and auto loans portfolios. 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 amounted to $315 million or 56% of the loan portfolio at September 30, 1999, a 2% decrease when compared to $323 million or 56% of the loan's portfolio the year before. This reflects the sale of over $200 million in residential loans sold during the past twelve months as management took advantage of market conditions to convert the bulk of its mortgage origination into mortgage-backed securities. At the end of the first quarter of fiscal 2000, the consumer loans portfolio totaled $127million or 22% of the Group's loan portfolio, a 15% growth compared to the $110 million or 19% of the Group's loan portfolio a year ago. Personal loans which amounted to $111 million at the end of the first quarter of fiscal 2000, or 13% over the $98 million reported the year before, was the largest contributor to this growth. The increase in personal loans 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 amounted to $104 million or 18% of the loan portfolio at the end of the first quarter of fiscal 2000, a 21% decrease versus $131 million or 23% 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. - 16 -
<TABLE> <CAPTION> --------------------------------------------------- --------------- SEP-99 SEP-98 INC. / (DEC.) JUN-99 --------------------------------------------------- --------------- TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INVESTMENTS: Mortgage-backed securities and CMO's $ 784,170 $ 462,673 69.5% $ 696,252 US and PR Government securities 230,389 265,347 -13.2% 209,232 FHLB stock and other investments 13,657 22,924 -40.4% 41,045 --------------- --------------- ------------ --------------- 1,028,216 750,944 36.9% 946,529 --------------- --------------- ------------ --------------- LOANS: Real estate 314,904 322,791 -2.4% 340,254 Consumer 126,620 110,006 15.1% 122,212 Financing leases 103,736 131,447 -21.1% 110,297 Commercial and auto 21,258 15,893 33.8% 10,555 --------------- --------------- ------------ --------------- 566,518 580,137 -2.3% 583,318 Allowance for loan losses (8,731) (5,683) 53.6% (9,002) --------------- --------------- ------------ --------------- 557,787 574,454 -2.9% 574,316 --------------- --------------- ------------ --------------- TOTAL INTEREST-EARNING ASSETS 1,586,003 1,325,398 19.7% 1,520,845 --------------- --------------- ------------ --------------- Non-interest earning assets 74,469 62,225 19.7% 66,502 --------------- --------------- ------------ --------------- TOTAL ASSETS $ 1,660,472 $ 1,387,623 19.7% $ 1,587,347 --------------- --------------- ------------ --------------- --------------- --------------- ------------ --------------- INVESTMENTS PORTFOLIO COMPOSITION: Mortgage-backed securities and CMO's 76.3% 61.6% 73.6% US and PR Government securities 22.4% 35.3% 22.1% FHLB stock and other investments 1.3% 3.1% 4.3% --------------- --------------- --------------- 100.0% 100.0% 100.0% --------------- --------------- --------------- LOAN PORTFOLIO COMPOSITION: Real Estate 55.6% 55.6% 58.3% Consumer 22.4% 19.0% 21.0% Financing leases 18.3% 22.7% 18.9% Commercial and auto 3.7% 2.7% 1.8% --------------- --------------- --------------- 100.0% 100.0% 100.0% --------------- --------------- --------------- <CAPTION> TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> DEPOSITS: Savings and demand deposits $ 152,905 $ 122,394 24.9% $ 142,679 Time deposits and IRA accounts 499,493 486,425 2.7% 508,648 Accrued Interest 4,238 4,283 -1.1% 5,661 --------------- --------------- ------------ --------------- $ 656,636 $ 613,102 7.1% $ 656,988 --------------- --------------- ------------ --------------- BORROWINGS: Repurchase agreements $ 701,322 $ 446,394 57.1% $ 596,226 FHLB funds 46,700 60,400 -22.7% 68,400 Term notes and other sources of funds 106,500 114,500 -7.0% 106,500 --------------- --------------- ------------ --------------- $ 854,522 $ 621,294 37.5% $ 771,126 --------------- --------------- ------------ --------------- TOTAL INTEREST-BEARING LIABILITIES 1,511,158 1,234,396 22.4% 1,428,114 --------------- --------------- ------------ --------------- Non interest-bearing liabilities $ 24,943 $ 32,664 -23.6% $ 35,201 --------------- --------------- ------------ --------------- TOTAL LIABILITIES $ 1,536,101 $ 1,267,060 21.2% $ 1,463,315 --------------- --------------- ------------ --------------- --------------- --------------- ------------ --------------- DEPOSITS PORTFOLIO COMPOSITION: Savings and demand deposits 23.3% 20.0% 21.7% Time deposits and IRA accounts 76.1% 79.3% 77.4% Accrued Interest 0.6% 0.7% 0.9% --------------- --------------- --------------- 100.0% 100.0% 100.0% --------------- --------------- --------------- BORROWINGS PORTFOLIO COMPOSITION: Repurchase agreements 82.1% 71.8% 77.3% FHLB funds 5.5% 9.7% 8.9% Term notes and other sources of funds 12.4% 18.5% 13.8% --------------- --------------- --------------- 100.0% 100.0% 100.0% --------------- --------------- --------------- </TABLE> - 17 -
LIABILITIES AND FUNDING SOURCES As shown in Table 6, at September 30, 1999, Oriental's total liabilities reached $1.536 billion, 21% higher than the $1.267 billion reported a year earlier. Interest-bearing liabilities, the Group's funding sources, amounted to $1.511 billion at the end of the first quarter of fiscal 2000 versus $1.234 billion the year before, a 22% increase. Increases in demand and saving deposits and repurchase agreements drove this growth. Deposits at the end of the first quarter of fiscal 2000, the second largest category of the Group's interest-bearing liabilities and a cost-effective source of funding, reached $657 million, up 7% versus the $613 million a year ago. A $31 million or 25% increase in demand and savings deposits realized most of the growth, followed by a $13 million or 3% 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 September 30, 1999, they amounted to $855 million, 38% higher than the $622 million a year ago. This increase reflects a strong growth in repurchase agreements, which was necessary to fund the increase in interest-earning assets experienced during the period, particularly investment securities. The FHLB system functions as a source of credit to financial institutions that are members of a regional Federal Home Loan Bank. As a member of the of the FHLB the Group can obtain advances from the FHLB, secured by the FHLB stock owned by the Group, as well as by certain of the Group's mortgages and investment securities. Table 7 presents the composition of the Group's other borrowings at the end of the periods analyzed. STOCKHOLDERS' EQUITY At September 30, 1999, Oriental's total stockholders' equity reached $124 million, a 3% increase from $121 million a year ago. Earnings reported during the past 12 months and $32.3 million net proceeds generated from the issuance of preferred stock were the main reasons for this growth. These were partially offset by a $33.5 million decline in accumulated other comprehensive loss and $15.6 million spent on treasury stock repurchases. 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 quarter of fiscal 2000, the Group continued its aggressive repurchase program, as authorized by the board of directors, and repurchased approximately 75,000 shares of its common stock. This brings to 978,879 shares with a cost of $25.1 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. The market value of the Group's common stock on the NYSE at September 30, 1999 was $22.75 per share versus $28.84 per share a year earlier. The Group's market capitalization decreased to $291 million as compared to $378 million a year ago, reflecting a significant decline in the fair value of securities available-for-sale (included as part of accumulated other comprehensive loss) loss and increase in treasury stock. During the first quarter of fiscal 2000, the Group declared dividends amounting to $1.9 million or $0.15 per share compared to $1.5 million or $0.113 per share in the same period of fiscal 1999, up 33%. For the first quarter of fiscal 2000, the dividend payout ratio and dividend yield were 26.07% and 2.55%, respectively, compared to 24.36% and 1.56%, 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, at September 30, 1999, the Group`s total financial assets owned or managed, which consists of the Group's assets, assets managed by the trust and assets gathered by the broker-dealer, reached $3.920 billion, an increase of 15% when compared to the $3.417 billion a year ago. The main component of the Group's financial assets 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 September 30, 1999, total assets managed by the Group's trust amounted $1.395 billion, 8% higher than the $1.293 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 $524 million versus the $460 million a year ago, followed by a 26% growth in 401(K) and Keogh retirement plans managed. - 18 -
<TABLE> <CAPTION> --------------------------------------------------- --------------- SEP-99 SEP-98 INC. / (DEC.) JUN-99 --------------------------------------------------- --------------- TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CAPITAL DATA: Stockholders' equity $ 124,371 $ 120,563 3.2% $ 124,032 --------------- --------------- ------------ --------------- Leverage Capital ( minimum required - 4.00%) 8.72% 7.46% 17.0% 8.78% --------------- --------------- ------------ --------------- Total Risk-Based Capital (minimum required - 8.00%) 24.74% 20.87% 18.5% 25.28% --------------- --------------- ------------ --------------- Tier 1 Risk-Based capital (minimum required - 4.00%) 23.48% 19.79% 18.6% 24.02% --------------- --------------- ------------ --------------- STOCK DATA: Outstanding common shares 12,776 13,120 -2.6% 12,835 --------------- --------------- ------------ --------------- Book value $ 7.11 $ 9.18 -22.5% $ 7.05 --------------- --------------- ------------ --------------- Market Price at end of period $ 22.75 $ 28.84 -21.1% $ 24.13 --------------- --------------- ------------ --------------- Market capitalization $ 290,657 $ 378,381 -23.2% $ 309,644 --------------- --------------- ------------ --------------- DIVIDEND DATA: Dividends declared $ 1,916 $ 1,492 28.4% $ 7,369 --------------- --------------- ------------ --------------- Dividends declared per share $ 0.150 $ 0.113 32.7% $ 0.563 --------------- --------------- ------------ --------------- Payout ratio 26.07% 24.36% 7.0% 28.02% --------------- --------------- ------------ --------------- Dividend yield 2.55% 1.56% 63.5% 1.94% --------------- --------------- ------------ --------------- <CAPTION> 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 --------------- --------------- ------------ <S> <C> <C> <C> FISCAL 2000: 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 --------------- --------------- ------------ <CAPTION> TABLE 8 - FINANCIAL ASSETS SUMMARY - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> FINANCIAL ASSETS: Trust assets managed $ 1,394,800 $ 1,292,500 7.9% $ 1,394,800 Assets gathered by broker-dealer 864,700 736,500 17.4% 864,700 --------------- --------------- ------------ --------------- MANAGED ASSETS 2,259,500 2,029,000 11.4% 2,259,500 Group assets 1,660,500 1,387,600 19.7% 1,587,300 --------------- --------------- ------------ --------------- $ 3,920,000 $ 3,416,600 14.7% $ 3,846,800 --------------- --------------- ------------ --------------- </TABLE> - 19 -
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 September 30, 1999, total assets gathered by the broker-dealer from its customer investment accounts reached $865 million, up 17% from $737 million a year ago. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS: At September 30, 1999, the Group's allowance for loan losses amounted to $8.7 million or 1.54% of total loans versus $5.7 million or 0.98% 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 first quarter of fiscal 2000, totaled $2.0 million or 1.40% of average loans, compared to $2.6 million or 1.80% of average loans for the same period of fiscal 1999. The lower level of credit losses experienced during the first quarter of fiscal 2000 was primarily associated to a reduction in financing leases net credit losses. It is worth noting that consumer loans credit losses fell slightly despite a 15% 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. As shown on Table 10, the Group's non-performing assets consisted of non-performing loans, foreclosed real estate owned and other repossessed assets. At the end of the first quarter of fiscal 2000, the Group's asset quality improved as non-performing assets totaled $18.7 million or 1.12% of total assets versus $20.4 million or 1.47% 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 financing leases which decreased 25%. This improvement stems from tighter underwriting standards and collection procedures implemented, as previously explained. At September 30, 1999, the allowance for loan losses to non-performing loans coverage ratio improved to 48.73% from 30.14% a year ago; excluding the lesser risk real estate loans, the ratio substantially improved to 97.79% from 53.38% for the respective periods. Detailed information concerning each of the items that comprise non-performing assets follows: - - REAL ESTATE LOANS - are placed on a non-accrual basis when they become 90 days or more past due, except for well secured by real estate collateral. At September 30, 1999, except for non-performing real estate loans totaled $9 million or 50.2% 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. Real estate loans are charged-off based on the specific evaluation of the collateral underlying the loan. - - COMMERCIAL BUSINESS LOANS - are placed on non-accrual basis when they become 90 days or more past due. At September 30, 1999, the Group's non-performing commercial business loans amounted to $1.2 million or 6.8% of the Group's non-performing loans. Of the total balance, $990,000 or 11 loans are guaranteed by real estate. Commercial loans are charged-off based on the specific evaluation of the collateral underlying the loan. - - FINANCE LEASES - are placed on non-accrual status when they become 90 days past due unless well secured by collateral. At September 30, 1999, the Group's non-performing auto and equipment leases portfolio amounted to $6.6 million or 37% 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. At September 30, 1999, the Group's non-performing consumer loans amounted to $1.1 million or 6.0% of the Group's total non-performing loans. Consumer loans are charged-off when payments are delinquent 120 days. - - 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. - 20 -
<TABLE> <CAPTION> FIRST QUARTER ENDED SEPTEMBER 30, ----------------------------------------------------- 1999 1998 VARIANCE % ------------------ ----------------- ----------- TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS - ----------------------------------------------------------------------------------------------- <S> <C> <C> BEGINNING BALANCE $ 9,002 $ 5,658 ------------------ ----------------- Provision for loan losses 1,750 2,600 Net charge-off's (2,021) (2,575) ------------------ ----------------- NET INCREASE (DECREASE) (271) 25 ------------------ ----------------- ENDING BALANCE $ 8,731 $ 5,683 ------------------ ----------------- CHARGE-OFF'S: Real estate $ - $ (2) -100.0% Consumer (1,749) (1,586) 10.3% Leasing (974) (1,303) -25.2% Commercial and others (35) (136) -74.3% ------------------ ----------------- ------------ (2,758) (3,027) -0.9% ------------------ ----------------- ------------ RECOVERIES: Real estate $ - $ 16 -100.0% Consumer 382 118 233.7% Leasing 295 282 4.6% Commercial and others 60 36 66.7% ------------------ ----------------- ------------ 737 452 63.1% ------------------ ----------------- ------------ NET CHARGE-OFF'S: Real estate - 14 -100.0% Consumer (1,367) (1,468) -6.9% Leasing (679) (1,021) -33.5% Commercial and others 25 (100) -125.0% ------------------ ----------------- ------------ $ (2,021) $ (2,575) -21.5% ------------------ ----------------- ------------ LOANS: Outstanding $ 566,518 $ 580,137 ------------------ ----------------- Average loans $ 575,641 $ 571,101 ------------------ ----------------- RATIOS: Recoveries to net-charge-off's 26.7% 14.9% ------------------ ----------------- Net charge-off's to average loans 1.40% 1.80% ------------------ ----------------- Allowance coverage ratio 1.54% 0.98% ------------------ ----------------- <CAPTION> TABLE 10 - NON-PERFORMING ASSETS ( AT SEPTEMBER 30, ): - ----------------------------------------------------------------------------------------------- <S> <C> <C> NON-PERFORMING ASSETS: Non-performing loans $ 17,917 $ 18,858 -5.0% Foreclosed real estate 383 316 21.2% Repossessed autos 347 946 -63.3% Repossessed equipment 26 323 -92.0% ------------------ ----------------- ------------ $ 18,673 $ 20,443 -0.7% ------------------ ----------------- ------------ NON-PERFORMING LOANS: Real estate $ 8,989 $ 8,211 9.5% Consumer 1,072 765 40.1% Financing leases 6,635 8,884 -25.3% Commercial 1,221 998 22.3% ------------------ ----------------- ------------ $ 17,917 $ 18,858 5.0% ------------------ ----------------- ------------ NON-PERFORMING LOANS COMPOSITION: Real estate 50.2% 43.5% Consumer 6.0% 4.1% Financing leases 37.0% 47.1% Commercial 6.8% 5.3% ------------------ ----------------- 100.0% 100.0% ------------------ ----------------- RELEVANT RATIOS: Non-performing loans to total loans 3.16% 3.25% ------------------ ----------------- Non-performing loans reserve coverage ratio 48.73% 30.14% ------------------ ----------------- Non-performing loans reserve coverage ratio (excluding real estate loans) 97.79% 53.38% ------------------ ----------------- Non-performing assets to total assets 1.12% 1.47% ------------------ ----------------- Non-performing assets to total capital 15.01% 16.96% ------------------ ----------------- </TABLE> - 21 -
- - OTHER REPOSSESSED ASSETS - are initially recorded at estimated net realizable value. Any additional losses on the disposition of such assets are charged against the allowance for loan losses at the time of disposition. At September 30, 1999, the inventory of repossessed automobiles and equipment consisted of 21 units and 4 units, respectively, amounting to $347,000 ($16,220 average per unit) and $26,000 ($6500 average per unit), respectively. YEAR 2000 READINESS DISCLOSURE The Group is the only bank holding company in Puerto Rico to close its fiscal year on June 30th; we are already in fiscal year 2000. Therefore, our additional computer capacity and all of the Management Information Systems (MIS) have been tested and are fully certified as being Y2K compliant, in accordance with 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. The Group is exposed to a reduction in the level of Net Interest Income ("NII") in a rising interest rate environment. NII will fluctuate pursuant to changes in the levels of interest rates and of interest sensitive assets and liabilities. Based on the June 30, 1999 analysis, last time this type of analysis was performed, if (1) the weighted average rates in effect at June 30, 1999 remained constant, or increase or decrease on an instantaneous and sustained change of plus or minus 200 basis points, and (2) all scheduled repricing, reinvestments and estimated prepayments, and reissuances are at such constant, or increase or decrease accordingly; NII will fluctuate as shown on the table below: <TABLE> <CAPTION> (IN THOUSANDS) --------------------------------------------------------------------------------------------------------------- CHANGE IN EXPECTED AMOUNT PERCENT INTEREST RATE NII (1) CHANGE CHANGE --------------------------- ----------------------- ---------------------- ----------------------- <S> <C> <C> <C> Base Scenario $46,959 $ - - +200 Basis Points $41,671 $(5,288) -11.2% -200 Basis Points $52,521 $ 5,562 11.9% </TABLE> NOTE: 1. The NII figures exclude the effect of the amortization of loan fees. - 22 -
LIQUIDITY RISK MANAGEMENT Liquidity refers to the level of cash, eligible investments easily converted into cash and lines of credit available to meet unanticipated requirements. The objective of the Group's liquidity management is to meet operating expenses and ensure sufficient cash flow to fund the origination and acquisition of assets, the repayment of deposit withdrawals and the maturities of borrowings. Other objectives pursued in the Group's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify the sources of financing used by the Group to avoid undue reliance on any particular source. At the end of the first quarter of fiscal 2000, the Group's liquidity was deemed appropriate. In addition to $875 million in liquid assets, includes $53 million available from unused lines of credit with other financial institutions and $167 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 The annual stockholder meeting of the Group was held on October 28, 1999. A quorum was obtained with 11,712,902 votes in person or by proxy, which represented 91.2% of all votes eligible to be cast. The following proposals were voted upon at the meeting with the following results: - - PROPOSAL 1: To elect four directors to three-year terms expiring with the 2002 Annual Meeting or until their successors have been elected and qualified. <TABLE> <CAPTION> NOMINEES FOR THREE-YEAR TERM VOTES FOR VOTES AGAINST VOTES WITHHOLD - -------------------------------------------------- ---------------------- --------------------- --------------------- <S> <C> <C> <C> PABLO I. ALTIERI 11,639,108 - (90.6%) - 73,794 DIEGO PERDOMO 11,587,639 - (90.2%) - 125,263 FRANCISCO ARRIVI 11,639,856 - (90.6%) - 76,046 MARI CARMEN APONTE 11,636,608 - (90.6%) - 76,294 </TABLE> - - PROPOSAL 2 : To consider and approve the adoption of the Oriental Financial Group 1998 Incentive Stock Option Plan and the Oriental Bank and Trust 1996 Incentive Stock Option Plan to include, as eligible participants, independent contractors who perform services to the Group and/or any of its subsidiaries. <TABLE> <CAPTION> VOTES FOR VOTES AGAINST ABSTAIN VOTES WITHHOLD - ---------------------------------------- ----------------------------- ----------------------- --------------------- <S> <C> <C> <C> 11,217,910 - (87.3%) 292,013 202,977 - </TABLE> - 23 -
- - PROPOSAL 3: Ratify the appointment of Pricewaterhouse Coopers LLP as the Group's independent auditors for the year ending June 30, 2000. <TABLE> <CAPTION> VOTES FOR VOTES AGAINST ABSTAIN VOTES WITHHOLD - ---------------------------------------- ----------------------------- ----------------------- --------------------- <S> <C> <C> <C> 11,710,234 - (91.1%) 2,266 402 - </TABLE> 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 September 30,1999. 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: November 13, 1999 ----------------- By: S/RAFAEL VALLADARES ------------------- Rafael Valladares Senior Vice President - Principal Financial Officer Dated: November 13, 1999 ----------------- - 24 -