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, 1997 COMMISSION FILE NO. 001-12647 ORIENTAL FINANCIAL GROUP INC. INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO IRS EMPLOYER IDENTIFICATION NO. 66-0259436 PRINCIPAL EXECUTIVE OFFICES: 68 MUNOZ RIVERA AVENUE 501 HATO REY TOWER HATO REY, PUERTO RICO 00918 TELEPHONE NUMBER: (787) 766-1986 - ------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK ($1.00 PAR VALUE) 9,965,940 SHARES OUTSTANDING AS OF SEPTEMBER 30, 1997 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> <CAPTION> TABLE OF CONTENTS PAGE - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ <S> <C> <C> PART - 1 ITEM - 1 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997. 1 UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 2 UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 3 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 4-5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-11 ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-25 - ------------------------------------------------------------------------------------------ PART - 2 ITEM - 1 LEGAL PROCEEDINGS - NONE 25 ITEM - 2 CHANGE IN SECURITIES - NONE 25 ITEM - 3 DEFAULTS UPON SENIOR SECURITIES - NONE 25 ITEM - 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS 26 ITEM - 5 OTHER INFORMATION - NONE 26 ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 26 SIGNATURES 27 </TABLE>
ORIENTAL FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997 (IN THOUSANDS) <TABLE> <CAPTION> ASSETS - ----------------------------------------------------------------------------------------------------------- September 30, June 30, 1997 1997 <S> <C> <C> ------------- ------------- Cash and due from banks $ 13,724 $ 12,812 ------------- ------------- MONEY MARKET INVESTMENTS: Securities purchased under agreements to resell - 15,000 Time deposits with other banks 4,000 8,000 Other short-term investments, at cost 1,070 5,224 ------------- ------------- TOTAL MONEY MARKET INVESTMENTS 5,070 28,224 ------------- ------------- INVESTMENT SECURITIES AND OTHER INVESTMENTS: Trading securities, at market 35,046 25,276 Investment securities available-for-sale, at market 256,992 203,261 Investment securities held-to-maturity, at cost 233,920 201,790 Federal Home Loan Bank (FHLB) stock, at cost 10,043 10,043 ------------- ------------- TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 536,001 440,370 ------------- ------------- LOANS: Loans held for sale 28,882 29,285 Loans receivable 529,114 509,093 ------------- ------------- TOTAL LOANS 557,996 538,378 Allowance for loan losses (5,454) (5,408) ------------- ------------- TOTAL LOANS, NET 552,542 532,970 ------------- ------------- Accrued interest receivable 14,096 12,350 Foreclosed real estate, net 779 698 Premises and equipment, net 19,471 19,378 Other assets, net 20,081 21,794 ------------- ------------- TOTAL ASSETS $ 1,161,764 $ 1,068,596 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 525,609 $ 497,542 Securities sold under agreements to repurchase 303,646 247,915 Borrowings under lines of credit - - Advances and borrowings from Federal Home Loan Bank 91,700 89,800 Term notes and bonds payable 114,892 115,016 Accrued expenses and other liabilities 31,161 28,929 ------------- ------------- TOTAL LIABILITIES 1,067,008 979,202 ------------- ------------- Commitments and contingencies - - ------------- ------------- STOCKHOLDERS' EQUITY: Preferred stock, no par value; 5,000,000 shares authorized; none issued Common stock, $1 par value; 20,000,000 shares authorized; 9,965,940 issued and outstanding in September 30,1997 and 7,989,787 issued and outstanding in June 30,1997. 9,966 7,990 Additional paid-in capital 26,990 28,631 Legal surplus 4,429 4,002 Retained earnings 52,975 49,694 Treasury stock, at cost, 81,200 shares at September 30, and June 30, 1997 (1,836) (1,836) Unrealized gain on securities available-for-sale, net of taxes 2,232 913 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 94,756 89,394 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,161,764 $ 1,068,596 ------------- ------------- ------------- ------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 and 1996 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION) <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------- 1997 1996 ------------- ------------- <S> <C> <C> INTEREST INCOME: Loans 14,334 $ 12,950 Mortgage-backed securities 5,246 3,941 Investment securities 3,480 2,129 Other interest-earning assets 394 297 ------------- ------------- TOTAL INTEREST INCOME 23,454 19,317 ------------- ------------- INTEREST EXPENSE: Deposits 6,356 4,587 Securities sold under agreements to repurchase 4,025 2,915 Other borrowed funds and interest rate risk management 3,188 2,899 ------------- ------------- TOTAL INTEREST EXPENSE 13,569 10,401 ------------- ------------- NET INTEREST INCOME 9,885 8,916 Provision for loan losses 1,300 900 ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,585 8,016 ------------- ------------- NON-INTEREST INCOME: Bank service charges and fees 1,007 1,274 Trust, money management and brokerage fees 2,101 1,528 Mortgage banking activities 1,531 563 Gain on sale of investment securities 111 157 Trading account income 110 (30) Rent and other operating income 186 182 ------------- ------------- TOTAL NON-INTEREST INCOME 5,046 3,674 ------------- ------------- NON-INTEREST EXPENSES: Compensation and benefits 3,850 3,441 Occupancy and equipment 1,174 996 Professional fees 339 309 Advertising and promotion 665 341 Real estate owned expenses 29 67 Insurance, including deposit insurance 122 273 Communications 378 260 Other 1,169 843 SAIF one-time capitalization assessment - 1,823 ------------- ------------- TOTAL NON-INTEREST EXPENSE 7,726 8,353 ------------- ------------- INCOME BEFORE INCOME TAXES 5,905 3,337 Provision for income taxes 968 485 ------------- ------------- NET INCOME $ 4,937 $ 2,852 ------------- ------------- ------------- ------------- WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Average common shares outstanding 9,903 9,915 Average common stock equivalents - options 325 408 ------------- ------------- TOTAL 10,228 10,323 ------------- ------------- INCOME PER COMMON SHARE $ 0.48 $ 0.28 ------------- ------------- ------------- ------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996 (IN THOUSANDS) 1997 1996 --------- --------- COMMON STOCK: Balance at beginning of period $ 7,990 $ 6,633 Five-for-four stock split 1,912 - Six-for-five stock split - 1,318 Stock options exercised 64 19 Common stock repurchased and retired - (64) --------- --------- BALANCE AT END OF PERIOD 9,966 7,906 --------- --------- --------- --------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 28,631 31,234 Five-for-four stock split (1,912) - Six-for-five stock split - (1,318) Stock options exercised 271 54 Common stock repurchased and retired - (1,185) --------- --------- BALANCE AT END OF PERIOD 26,990 28,785 --------- --------- --------- --------- LEGAL SURPLUS: Balance at beginning of period 4,002 2,498 Transfer from retained earnings 427 228 --------- --------- BALANCE AT END OF PERIOD 4,429 2,726 --------- --------- --------- --------- RETAINED EARNINGS: Balance at beginning of period 49,694 39,005 Net income 4,937 2,852 Dividends declared and cash paid on fractional shares (1,229) (989) Transfer to legal surplus (427) (228) --------- --------- BALANCE AT END OF PERIOD 52,975 40,640 --------- --------- --------- --------- TREASURY STOCK: Balance at beginning of period (1,836) - Treasury stock purchased - - --------- --------- BALANCE AT END OF PERIOD (1,836) - --------- --------- --------- --------- UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES: Balance at beginning of period 913 533 Net change in fair value of securities available-for-sale, net of taxes 1,319 (368) --------- --------- BALANCE AT END OF PERIOD 2,232 165 --------- --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY $ 94,756 $ 80,222 --------- --------- --------- --------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 4,937 $ 2,852 --------- --------- --------- --------- Adjustments to reconcile net income to net cash (used in) operating activities: Amortization of deferred loan origination fees and costs (807) (710) Amortization of premiums and accretion of discounts mortgage-backed and investment securities 219 (125) Depreciation and amortization of premises and equipment 597 504 Provision for loan losses 1,300 900 Gain on sale of available-for-sale securities (111) (157) Mortgage banking activities (1,531) (563) Increase in trading securities (9,880) (10,202) Increase in accrued interest receivable (1,746) (71) Decrease in other assets 1,713 371 Increase in accrued expenses and liabilities 1,784 1,953 --------- --------- TOTAL ADJUSTMENTS (8,462) (8,100) --------- --------- --------- --------- NET CASH USED IN OPERATING ACTIVITIES (3,525) (5,248) --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in securities purchased under agreements to resell 15,000 3,829 Purchases of investment securities available-for-sale (49,401) (37,893) Sales of investment securities available-for-sale 12,495 57,237 Maturities of investment securities available-for-sale 23,580 - Purchases of investment securities held-to-maturity (36,424) (5,749) Maturities and redemptions of investment securities held-to-maturity 4,191 1,190 Net origination of loans (57,313) (42,738) Capital expenditures (690) (1,083) --------- --------- NET CASH USED IN INVESTING ACTIVITIES $ (88,562) $ (25,207) --------- --------- --------- --------- </TABLE> CONTINUED THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 ---------- ---------- <S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in: Deposits $ 28,067 $ 16,185 Securities sold under agreements to repurchase 55,731 (18,082) Borrowings under lines of credit - (10,000) Advances and borrowings from FHLB 1,900 4,500 Issuance of term notes - 55,000 Payment of term notes - (8,000) Principal payments of bonds payable (124) (198) Proceeds from exercise of stock options 335 73 Repurchase of common stock - (1,249) Dividends and cash paid on fractional shares (1,064) (748) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 84,845 37,481 ---------- ---------- ---------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,242) 7,026 Cash and cash equivalents at beginning of period 26,036 16,955 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,794 $ 23,981 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS INCLUDE: Cash and due from banks $ 13,724 $ 9,429 Time deposits with other banks 4,000 8,000 Other short-term investments 1,070 6,552 ---------- ---------- $ 18,794 $ 23,981 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE: Interest paid $ 13,200 $ 10,400 ---------- ---------- ---------- ---------- Income taxes $ - $ - ---------- ---------- ---------- ---------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Real estate foreclosed as payment of loans $ 80 $ 90 ---------- ---------- ---------- ---------- Real estate loans securiticized into mortgage-backed securities $ 38,700 $ 34,700 ---------- ---------- ---------- ---------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ORIENTAL FINANCIAL GROUP INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accounting and reporting policies of Oriental Financial Group (the "Group", "Oriental") and its subsidiaries conform with generally accepted accounting principles and with general practices within the banking industry. The preparation of financial statements with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period and, as such, these statements include amounts based on judgments and estimates made by Management. Actual results could differ from those estimates. The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q. Complete information regarding the financial statements can be found in the notes to the financial statements for the year ended June 30, 1997 contained in Oriental's annual report. Certain reclassifications have been made to the September 30, 1996 and June 30, 1997 consolidated financial statements to conform with the presentation of the current period consolidated financial statements. In the opinion of management, such unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position at September 30, 1997 and June 30, 1997 as well as the results of operations and cash flows for the three months ended September 30, 1997 and September 30, 1996. The results of operations for the three months ended September 30, 1997 are not necessarily indicative of the results to be expected for the entire year. NOTE 2 - NATURE OF OPERATIONS: The Group was incorporated on January 24,1997 under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for Oriental Bank and Trust (the "Bank"). As a result of this reorganization each of the Bank's outstanding shares of common stock was converted into one share of common stock of the new bank holding company. The Group provides a wide variety of financial services through its subsidiaries. Oriental Bank and Trust, the Group's bank subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and sixteen branches located throughout Puerto Rico. The Bank directly or through its broker-dealer subsidiary, Oriental Financial Services Corp., offers commercial and consumer leasing, consumer lending, investment, money management and brokerage services, corporate and individual trust services and mortgage lending. NOTE 3 - INCOME PER COMMON SHARE Income per common share is calculated by dividing net income by the weighted average of common shares and common stock equivalent shares outstanding after giving retroactive effect to common stock dividends and splits. Common stock equivalents are computed using the Treasury Stock Method. Stock options outstanding under Oriental's stock option plan for officers and employees are common stock equivalents and therefore, considered in the computation of income per common share. The weighted average common shares and common stock equivalent shares outstanding at September 30, 1997 and 1996 were 10,228,313 and 10,323,115, respectively. For the income per share calculation refer to the consolidated statement of income at page 2. NOTE 4 - INVESTMENT SECURITIES: TRADING SECURITIES: The Group classifies as trading debt and equity securities that are bought and held principally for the purpose of selling them in the near term. The securities are carried at estimated fair value with realized and unrealized changes in market value recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue arising from trading instruments are included in the statement of income as part of net interest income rather than in the trading profit or loss account. 6
The fair value of trading securities is based on quoted market prices. At September 30, 1997 and and June 30, 1997 , the amortized cost and fair market value of securities held for trading were $34,948,000 and $35,046,000 and $25,255,000 and $25,276,000,respectively. At September 30, 1997, gross holding unrealized gains and gross unrealized losses amounted to $104,000 and $6,000, respectively. INVESTMENT SECURITIES AVAILABLE-FOR-SALE The Group classifies as available-for-sale debt and equity securities not classified as either held-to-maturity or trading securities. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes as a separate component of stockholders' equity. The estimated fair value of investment securities is based on quoted market prices or dealer quotes. Expected maturities of mortgage-backed securities may differ from contractual maturities because of prepayments and other market factors. The amortized cost , estimated fair value, weighted average yield and related contractual maturities of debt and equity securities available-for-sale by category at September 30, and June 30, 1997 are as follows ( in thousands): <TABLE> <CAPTION> SEPTEMBER 30, 1997 JUNE 30, 1997 ---------------------------------- ---------------------------------- AVERAGE AVERAGE AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED COST VALUE YIELD COST ALUE YIELD ---------------------------------- ---------------------------------- <S> <C> <C> <C> <C> <C> <C> UNITED STATES GOVERNMENT OBLIGATIONS: Average maturity of 5 years and 9 months at September and 5 years and 1 month at June. Due from one to five years $ 42,838 $ 43,614 6.92% $ 62,847 $ 63,197 6.76% Due from five to ten years 118,350 119,766 6.42 47,339 47,435 6.78 -------- -------- ----- -------- -------- ------ 161,188 163,380 6.59 110,186 110,632 6.77 -------- -------- ----- -------- -------- ------ PUERTO RICO GOVERNMENT OBLIGATIONS: Average maturity of 9 years and 7 months at September and 8 years and 4 months at June. Due from one to five years 5,188 5,170 5.55 5,212 5,170 5.55 Due over ten years 27,455 27,514 8.00 28,879 29,107 7.97 -------- -------- ----- -------- -------- ------ 32,643 32,684 7.61 34,091 34,277 7.60 -------- -------- ----- -------- -------- ------ MORTGAGE - BACKED SECURITIES: Average maturity of 20 years and 6 months at September and 20 years and 9 months at June. Due from one to five years 439 431 5.94 416 408 5.94 Due from five to ten years 1,590 1,620 6.89 797 807 6.98 Due over ten years 58,155 58,877 6.88 56,553 57,137 6.91 -------- -------- ----- -------- -------- ------ 60,185 60,928 6.87 57,766 58,352 6.90 -------- -------- ----- -------- -------- ------ $254,016 $256,992 6.79% $202.043 $203,261 6.94% -------- -------- ----- -------- -------- ------ -------- -------- ----- -------- -------- ------ </TABLE> At September 30, and June 30, 1997 mortgage-backed securities available-for-sale consisted of (in thousands): <TABLE> <CAPTION> SEPTEMBER 30, 1997 JUNE 30, 1997 ----------------------- ------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------------------- ------------------------- <S> <C> <C> <C> <C> MORTGAGE - BACKED SECURITIES: GNMA $39,940 $40,501 $47,274 $47,832 FHLMC 20,191 20,361 10,438 10,454 Mortgage Pass Through Certificates 54 66 54 66 ------- ------- ------- ------- $60,185 $60,928 $57,766 $58,352 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> 7
The Puerto Rico government obligations due over ten years category includes an AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of $27,514,000 which commenced paying down principal on August 1, 1994, and is expected to be fully collected during 1998. At September 30, 1997, gross unrealized gains and gross unrealized losses amounted to $3,092,000 and $116,000, respectively. These amounted to $1,620,000 and $402,000, respectively at June 30, 1997. At September 30, and June 30, 1997 unrealized gains on securities available-for-sale of $2,232,000 and $913,000, respectively, net of deferred income tax of $744,000 and $305,000 respectively, were reported as a separate component of stockholders' equity. Proceeds from the sale of investment securities available-for-sale during the three months period ended September 30, 1997, were $12,495,000. Gross realized gains and losses on those sales during the year were $157,000 and $46,000, respectively. INVESTMENT SECURITIES HELD-TO-MATURITY: The Group classifies as held-to-maturity debt securities for which the Group has the positive intent and ability to hold to maturity. These securities are carried at amortized cost. Expected maturities of mortgage-backed securities may differ from contractual maturities because of prepayments and other market factors. The carrying value, estimated fair value, weighted average yield and related contractual maturities of debt and equity securities held-to-maturity by category at September 30, and June 30, 1997 are as follows ( in thousands): <TABLE> <CAPTION> SEPTEMBER 30, 1997 JUNE 30, 1997 ---------------------------------- ---------------------------------- AVERAGE AVERAGE AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED COST VALUE YIELD COST ALUE YIELD ---------------------------------- ---------------------------------- <S> <C> <C> <C> <C> <C> <C> PUERTO RICO GOVERNMENT OBLIGATIONS: Average maturity of 8 years at September and 8 years and 3 months at June. Due from five to ten years $ 1,010 $ 1,020 6.73% $ 1,013 $ 1,020 6.73 Due over ten years 2,573 2,608 7.69 2,583 2,588 7.69 -------- -------- ----- -------- -------- ---- 3,583 3,608 7.41 3,586 3,608 7.41 -------- -------- ----- -------- -------- ---- MORTGAGE - BACKED SECURITIES: Average maturity of 17 years and 7 months at September and 14 years and 6 months at June. Due from one to five years 162 164 7.45 261 261 6.27 Due from five to ten years 4,786 4,868 6.82 3,285 3,346 6.99 Due over ten years 225,389 227,693 7.26 194,658 195,228 6.97 -------- -------- ----- -------- -------- ---- 230,337 232,725 7.25 198,204 198,835 6.97 -------- -------- ----- -------- -------- ---- $233,920 $236,333 7.25% $201,790 $202,443 6.94% -------- -------- ----- -------- -------- ---- -------- -------- ----- -------- -------- ---- </TABLE> The mortgage-backed securities due over ten years category includes approximately $83,000,000 of the short end of certain Puerto Rico GNMA tax exempt serial certificates with an average expected life of 4 to 6 years. At September 30, mortgage-backed securities held-to-maturity were comprised of the following (in thousands): <TABLE> <CAPTION> SEPTEMBER 30, 1997 JUNE 30, 1997 ----------------------- ----------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------------------- ----------------------- <S> <C> <C> <C> <C> MORTGAGE - BACKED SECURITIES: GNMA $ 148,127 $ 149,005 $ 149,275 $ 149,081 FNMA 72,985 73,668 38,439 38,650 FHLMC 6,155 6,341 7,205 7,369 Mortgage Pass Through Certificates 3,070 3,711 3,285 3,735 --------- --------- --------- --------- $ 230,337 $ 232,725 $ 198,204 $ 198,835 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> Gross unrealized gains and gross unrealized losses at September 30, 1997 amounted to $2,881,000 and $470,000 respectively. These amounted to $1,652,000 and $999,000, respectively, at June 30, 1997. 8
FEDERAL HOME LOAN BANK STOCK: At September 30, and June 30, 1997 there was an investment in Federal Home Loan Bank (FHLB) of New York Stock with a book and fair value of $10,043,000 and $10,043,000, respectively. The fair value of such investment is its redemption value. NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES: The Group's business activity is with consumers located in Puerto Rico. Oriental's loan transactions include a diversified number of industries and activities such as individuals, sole proprietorships, partnerships, 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 and residential mortgage loans. The composition of the loan portfolio at September 30, and June 30, 1997 was as follows (in thousands): SEPTEMBER 30, JUNE 30, 1997 1997 ---------- ---------- LOANS SECURED BY REAL ESTATE: Residential $ 235,091 $ 225,143 Commercial 8,949 9,087 Home equity loans 5,630 5,436 Construction, land acquisition and land improvements 4,533 4,391 ---------- ---------- 254,203 244,057 Less: undisbursed portion of loans in process (1,173) (2,093) ---------- ---------- LOANS SECURED BY REAL ESTATE, NET 253,030 241,964 ---------- ---------- ---------- ---------- OTHER LOANS: Commercial loans 11,129 10,512 Auto loans 13,333 14,882 Personal loans 79,629 69,773 Personal lines of credit 5,834 5,190 Cash collateral loans 2,244 2,827 Financing leases 203,990 205,077 ---------- ---------- 316,164 308,261 Less: unearned interest (40,075) (41,131) ---------- ---------- OTHER LOANS, NET 276,084 267,130 ---------- ---------- ---------- ---------- Loans receivable 529,114 509,093 Allowance for loan losses (5,454) (5,408) ---------- ---------- LOANS RECEIVABLE, NET 523,660 503,685 Loans held for sale 28,882 29,285 ---------- ---------- TOTAL LOANS,NET $ 552,542 $ 532,970 ---------- ---------- ---------- ---------- The Group provides allowances for estimated loan losses based on an evaluation of the risk characteristics of the loan portfolio, loss experience, economic conditions and other pertinent factors. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Group measures impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. All loans are evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment, leases and loans that are recorded at fair value or at the lower of cost or fair value. The Group measures for impairment all commercial loans and leases over $250,000. The portfolios of mortgage and consumer loans and auto loans and leases are considered homogeneous and are evaluated collectively for impairment. Over 95% of the group's loan portfolio is composed of smaller homogenous loans which are evaluated collectively for impairment. Accordingly, the balance of impaired commercial loans and leases at september 30, 1997 and 1996 and their average for the quarter is not significant. 9
Refer to Table D at page 19 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, 1997 and 1996. NOTE 6 - ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK: At September 30, and June 30, 1997 advances and borrowings from the Federal Home Loan Bank of New York (FHLB) consist of the following (in thousands): <TABLE> <CAPTION> TYPE SEPT. 30, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> ADVANCE $ - $15,000 JULY 1997 Fixed - 5.79% ADVANCE - 15,000 AUGUST 1997 Fixed - 5.80% ADVANCE 15,000 - OCTOBER 1997 Fixed - 5.75% ADVANCE 10,000 10,000 NOVEMBER 1997 Floating due quarterly - 5.74% at 9/30/97 ADVANCE 10,000 10,000 FEBRUARY 1998 Floating due monthly - 5.71% at 9/30/97 ADVANCE 12,700 13,800 OVERNIGHT LINE OF CREDIT Floating due daily - 6.75% at 9/30/97 ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.71% - Callable March 1998 ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.85% - Callable September 1998 BORROWING - 12,000 SEPTEMBER 1997 Fixed - 6.04% BORROWING 14,000 14,000 JULY 1998 Fixed - 6.28% BORROWING 10,000 - SEPTEMBER 1999 Fixed - 6.03% - Callable March 1999 ------------------- $91,700 $89,800 ------------------- ------------------- </TABLE> Advances are received from the FHLB under an agreement whereby Oriental is required to maintain a minimum amount of qualifying collateral with a market value of at least 110% of the outstanding advances. The floating rate advances are considered generally hedged through the overall interest rate risk management process discussed in note 8. NOTE 7 - TERM NOTES AND BONDS PAYABLE: At September 30, and June 30, 1997 Term Notes and Bonds Payable consist of the following ( in thousands): <TABLE> <CAPTION> TYPE SEPT. 30, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 Fixed - 4.81% TERM NOTE 10,000 10,000 DECEMBER 1999 Floating due quarterly - 4.62% at 9/30/97 (a) (c) TERM NOTE 10,000 10,000 JANUARY 2000 Floating due quarterly - 4.62% at 9/30/97 (a) (c) TERM NOTE 6,500 6,500 DECEMBER 2000 Floating due quarterly - 4.78% at 9/30/97 (b) (c) TERM NOTE 20,000 20,000 MARCH 2001 Floating due quarterly - 5.29% at 9/30/97 (b) (c) TERM NOTE 10,000 10,000 SEPTEMBER 2001 Floating due quarterly - 5.51% at 9/30/97 (b) (c) TERM NOTE 30,000 30,000 SEPTEMBER 2001 Floating due quarterly - 5.29% at 9/30/97 (b) (c) TERM NOTE 5,000 5,000 DECEMBER 2001 Floating due quarterly - 4.83% at 9/30/97 (b) (c) TERM NOTE 15,000 15,000 MARCH 2007 Floating due quarterly - 5.34% at 9/30/97 (b) (c) BOND 392 516 APRIL 2008 Fixed - 8.38% (d) ------------------- $114,892 $115,016 ------------------- ------------------- </TABLE> (A) - GUARANTEED BY LETTERS OF CREDIT FROM THE FLHB. (B) - COLLATERALIZED WITH U.S. GOVERNMENT SECURITIES AND/OR MORTGAGE-BACKED SECURITIES. (C) - THE FLOATING RATE NOTES ARE CONSIDERED GENERALLY HEDGED THROUGH THE OVERALL INTEREST RATE RISK MANAGEMENT PROCESS DISCUSSED IN NOTE 8. (D) - COLLATERIZED WITH FHLMC CERTIFICATES. 10
NOTE 8- INTEREST RATE RISK MANAGEMENT INTEREST RATE SWAP AGREEMENTS The following table indicates the types of swaps used and their terms at September 30, 1997 (in thousands): Pay fixed swaps - notional amount $385,000 Weighted average pay rate - fixed 5.77% Weighted average receive rate - floating 5.39% Maturity (in months) 1 to 32 Floating rate - percent of LIBOR 84 to 100% The agreements were signed to convert short term borrowings into fixed rate liabilities for longer periods of time and provide protection against increases in interest rates. The amounts potentially subject to credit loss are the net streams of payments under the agreements and not the notional principal amounts used to express the volume of the swaps. The Group controls the credit risk of its interest rate swap agreements through approvals, limits, monitoring procedures and collateral, where considered necessary. The Group does not anticipate nonperformance by the counterparties. At September 30, 1997, interest rate swap maturities by fiscal year are as follows (in thousands): YEAR ENDING JUNE 30, AMOUNT -------------------- -------- 1998 $180,000 1999 195,000 2000 10,000 -------- $385,000 -------- -------- The following table summarizes the changes in notional amounts of swaps outstanding during three months period ended on September 30, 1997 (in thousands): Balance at June 30, 1997 $370,000 New swaps 25,000 Maturities (10,000) -------- BALANCE AT SEPTEMBER 30, 1997 $385,000 -------- -------- INTEREST RATE PROTECTION AGREEMENTS (CAPS) The Group also uses interest rate protection agreements (Caps) to limit its exposure to rising interest rates. Under these agreements, Oriental pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. The following table indicates the agreements outstanding at September 30, 1997 (in thousands): Cap agreements - notional amount $100,000 Cap rate 6.00 - 6.50% Current 90 day LIBOR 5.77% Maturity (in months) 14 to 29 S&P INTEREST RATE SWAP In January 1994, the Group introduced new certificates of deposit called Investors' CD and Investors' IRA which have their yields tied to the performance of a stock market index. At the end of five years, the depositor will receive a specified percent of the average increase of the month-end value of the Standard & Poor's 500 stock index. If such index decreases, the depositor receives the principal without any interest. The Group has entered into interest rate swap/hedge agreements with a notional amount of $29,432,000 with major money center banks to manage the Investors' CD and IRA exposure to the stock market. Under the terms of the agreements, Oriental will receive the average increase of the month-end value of the Standard and Poor's index in exchange for a semiannual fixed interest cost. Thus, the Group has exchanged the variable interest payment for a known fixed rate semiannual interest payment. At September 30, 1997 total Investors' CD and IRA deposits amounted to $30,762,000. 11
ORIENTAL FINANCIAL GROUP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW SUMMARY Oriental Financial Group reported an increase of 18% in net operating profits for the first quarter of fiscal 1998. The Group's net operating profits for the first quarter of fiscal 1998 increased to $4,936,918 from $4,184,795 (excluding a special reserve of $1.3 million, net of taxes, recorded during the first quarter of 1997 to account for its share of a one-time industry-wide SAIF assessment) in the same period of fiscal 1997. On a per share basis, net operating profits rose to $.48 a share against $.41 a share a year earlier for a 17% gain. All per share figures have been retroactively adjusted for the five-for-four (25%) stock split on common stock held by registered shareholders as of september 30, 1997 to be distributed on october 15, 1997. Net income (including the one-time industry-wide SAIF assessment in fiscal 1997) increased to $4,936,918 or $.48 per share compared to $2,852,295 or $.28 per share in fiscal 1997, an increase of 73%. The Group's earnings growth reflects increases in both interest income and non-interest income, driven by a solid growth in interest-earning assets and fee revenues. Oriental continued to experience a favorable growth in its diversified asset base which contributed to income expansion across all its business lines. Total financial assets owned or managed increased 32% to $3.3 billion at September 30, 1997 from the $2.5 billion owned or managed one year ago. As of September 30, 1997, total financial assets consisted of $1.16 billion owned by the Bank, $1.1 billion managed by the trust, $544 million gathered by the broker-dealer and $533 million in mortgages serviced for third parties. In a move to strengthen its future earnings the Group announced in September the sale of its servicing operation to Doral Financial Corporation. Management expects the mortgage servicing transaction to be completed by November 30, 1997. The divestiture of the mortgage servicing operation is indicative of a wider strategy guiding the Group to concentrate on trust, money management, brokerage, leasing, personal loans and deposit accounts with the highest earnings potential. During the first quarter of fiscal 1998 recurring non-interest income increased by $1.3 million or 36% to $4.8 million from $3.5 million reported in the same quarter of fiscal 1997. Trust and money management fees, service charges and other income increased 14% to $3.3 million, compared to $2.9 million in the same quarter of fiscal 1997. Mortgage banking activities increased 172% to $1.5 million, compared to $563,000 for the same period fiscal 1997. Non recurring non-operating interest income, which consists mainly of securities and trading gains and losses, amounted to $221,000 for the first quarter fiscal 1998 versus $127,000 for the same period of last year. Net interest income before provision for loan losses rose to $9.9 million for the first quarter of fiscal 1998, compared to $8.9 million reported during the same period of fiscal 1997, an increase of 11%. The increase in net interest income resulted from growth in the Group's loan portfolio and other interest-earning assets. Average interest-earning assets for the first quarter of fiscal 1998 increased by 26% to $1.05 billion, compared to $837 million in the same period of fiscal 1997. For the first quarter of fiscal 1998 the Group provided $1.3 million for loan losses compared with $900,000 for the same period of fiscal 1997, an increase of $400,000 or 44%. The increase in the provision for fiscal 1998 was based on the growth of the Group's loan portfolio, as well as a rise in net charge-offs experienced by the Group and current and expected economic conditions. Recurring non-interest expenses (excluding the $1.8 million recorded during the first quarter of 1997 to account for the one-time industry-wide SAIF assessment) for the first quarter of fiscal 1998 increased by $1.2 million or 18% to $7.7 million as compared to $6.5 million during the same period of fiscal 1997. The increase results mainly from the expanded push in the retail area and higher outlays for support services as the Group's businesses continue to expand. The efficiency ratio, which is the ratio of non-interest expense to the sum of net interest income and recurring non-interest income, was 52.52% for the first quarter of fiscal 1998 compared to 52.40% a year ago. The expense ratio, which is the ratio of net recurring operating expenses to average interest-earning assets, improved to 1.11% for the first quarter of fiscal 1998, compared to 1.43% last year. Oriental Bank total assets at September 30, 1997 reached $1.16 billion, an increase of 26% when compared to $919 million at the end of the same period of fiscal 1997. This resulted from the growth in investment and trading securities of $159 million, or 42%, to $541 million from $382 million a year ago, and loans receivable and loans held for sale, net of the allowance for loan losses, of $69 million, or 14%, from $484 million at September 30, 1996 to $553 million at september 30, 1997. In response to the change in asset mix, return on average assets amounted to 1.71% versus 1.86% during the same period of last year. 12
ORIENTAL FINANCIAL GROUP FINANCIAL HIGHLIGHTS IN THOUSANDS (EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> ---------------------------- PERCENT FISCAL INCREASE ---------------------------- (DECREASE) 1998 1997 - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> PERIOD END BALANCES: INTEREST-EARNING ASSETS 26% $ 1,093,613 $ 865,923 --------- ----------- ------------ TOTAL BANK ASSETS 26% 1,161,764 919,219 --------- ----------- ------------ TOTAL FINANCIAL ASSETS 32% 3,342,900 2,540,200 --------- ----------- ------------ INTEREST-BEARING LIABILITIES 28% 1,035,847 809,764 --------- ----------- ------------ TOTAL LIABILITIES 27% 1,067,008 838,998 --------- ----------- ------------ CAPITAL 18% $ 94,756 $ 80,221 --------- ----------- ------------ OPERATING RESULTS: INTEREST INCOME 21% $ 23,454 $ 19,317 INTEREST EXPENSE 30% 13,569 10,401 --------- ----------- ------------ NET INTEREST INCOME 11% 9,885 8,916 PROVISION FOR LOAN LOSSES 44% 1,300 900 --------- ----------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7% 8,585 8,016 --------- ----------- ------------ BANK SERVICE CHARGES AND FEES AND OTHER INCOME -18% 1,193 1,456 TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 38% 2,101 1,528 MORTAGE BANKING ACTIVITIES 172% 1,531 563 NET GAIN ON SALE OF INVESTMENT SECURITIES 74% 221 127 NON-INTEREST EXPENSES 18% 7,726 6,530 SPECIAL SAIF ONE-TIME CAPITALIZATION ASSESSMENT -100% - 1,823 --------- ----------- ------------ NET INCOME BEFORE INCOME TAXES 77% 5,905 3,337 PROVISION FOR INCOME TAXES 100% 968 485 --------- ----------- ------------ NET INCOME 73% 4,937 2,852 SAIF ASSESSMENT, NET OF INCOME TAXES -100% - 1,333 --------- ----------- ------------ NET OPERATING INCOME (EXCLUDING SAIF ASSESSMENT) 18% $ 4,937 $ 4,185 --------- ----------- ------------ PER SHARE DATE: NET INCOME EXCLUDING SAIF 17% $ 0.48 $ 0.41 --------- ----------- ------------ BOOK VALUE 17% 9.51 8.12 --------- ----------- ------------ MARKET PRICE 121% 28.80 13.03 --------- ----------- ------------ DIVIDENDS DECLARED 24% 1,229 989 --------- ----------- ------------ OUTSTANDING SHARES AT END OF PERIOD 1% $ 9,966 $ 9,883 --------- ----------- ------------ FINANCIAL RATIOS: RETURN ON AVERAGE ASSETS 1.71% 1.86% =========== ============ RETURN ON AVERAGE EQUITY 21.19% 20.60% =========== ============ EFFICIENCY RATIO 52.52% 52.40% =========== ============ EXPENSE RATIO 1.11% 1.43% =========== ============ </TABLE> 13
Stockholders' equity at September 30, 1997 reached $95 million compared to $80 million at September 30, 1996. The Group continues to be a "well capitalized" institution, the highest classification available under the capital standards set by the Federal Deposit Insurance Corporation for bank or bank holding companies. Total risk-based and leverage capital ratios as of September 30, 1997 were 18.47% and 7.72%, respectively, which are well above the minimum capital ratios required by regulatory agencies. Return on average equity improved to 21.18% from 20.60%. Oriental Financial Group is a bank holding company, established in fiscal 1997, to provide greater flexibility in managing the diversified financial services offered to clients throughout Puerto Rico. The core businesses of the Group are trust, money management, financial planning and investment brokerage services, as well as consumer banking through a 16 branch islandwide network, which concentrates on serving the market with auto and equipment lease financing, mortgage lending, personal loans and deposit accounts. The following pages discuss in detail the different components that resulted in the Group's continued profitability. RESULT OF OPERATIONS As a diversified financial services provider, Oriental's earnings depend not only on the net interest income generated from its banking activity, but also from fees and other non-interest income generated from the wide array of financial services offered. Net interest income is affected by the difference between rates of interest earned on the Group's interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest-earning assets and interest-bearing liabilities (interest rate margin). Non-interest income is affected by the level of trust assets under management, transactions generated by gathering of financial assets by the broker-dealer subsidiary, the level of mortgage banking activities, and fees generated from loans and deposit accounts. NET INTEREST INCOME Net interest income for the first quarter of fiscal 1998 increased by $1 million or 11% to $ 9.9 million from $8.9 million in fiscal 1997. The improvement in net interest income was the result of an increase of $1.2 million due to a higher volume of net interest earning assets partially offset by an unfavorable effect in rate of $274,000 due to a lower average yield of interest-earning assets and a slight increase in the cost of funds. The interest rate spread and net interest margin for the first quarter of fiscal 1998 fell to 3.57% and 3.79%, respectively, as compared to 3.98% and 4.29%, respectively, for fiscal 1997. At the end the first quarter of fiscal 1998 total average interest-earning assets exceeded total average interest bearing liabilities by $44.3 million for a interest-earning assets to interest-bearing liabilities ratio of 104.41% versus $50 million and 106.37%, respectively, in fiscal 1997. Table A on page 15 sets forth a detailed analysis of net interest income. Part one presents the dollar amount of and average rates on Oriental's interest-earning assets and liabilities, the ratio of net interest-earning assets over interest-bearing liabilities, the average interest rate spread and the net yield on average interest-earning assets. Part two describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Oriental's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rates) and (2) changes in rate (changes in rate multiplied by old volume). Rate-volume variances (changes in rates multiplied by the changes in volume) have been proportionally allocated to the changes in volume and changes in rate based upon their respective percentage of the combined total. Oriental's interest income for the first quarter of fiscal 1998 increased by $4.1 million or 21% to $23.4 million from $19.3 million posted in fiscal year 1997. The growth in interest income results from a rise of $4.3 million due to a higher average volume of interest-earning assets. Average interest-earning assets increased to $1.05 billion for the first quarter of fiscal 1998 compared with $836 million in fiscal 1997. To a lesser extent, interest income was negatively affected by $133,000 due to the lower yields attained on interest-earning assets. The increase in the average volume of interest-earning assets for the first quarter fiscal 1998 relates primarily to rise in investment and mortgage-backed securities of $85 million or 72% and $72 million or 33%, respectively. There were two main reasons for the increase in investment and mortgage-backed securities. First, was the creation, during the latter part of fiscal 1997, of OBT International Branch under the International Banking Center Law which invests primarily in U.S. mortgage-baked securities that provide the Group significant tax advantages. Finally, was a shift in the Group's investing strategy due to the change in the GNMA's tax-exemption in July 1997. For more on this change to the Puerto Rico tax code refer to the income taxes section of this report at page 18. The end result of these changes is that total investments amounted to 49% of average interest-earning assets in fiscal 1998 versus 44% in fiscal 1997. 14
<TABLE> <CAPTION> TABLE - A FIRST QUARTER ENDED SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------ PART - I FISCAL 1998 FISCAL 1997 - ------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE INTEREST BALANCE RATE INTEREST BALANCE RATE --------- ---------- ------- -------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS: REAL ESTATE LOANS $ 6,493 $ 273,852 9.48% $ 5,785 $ 235,328 9.83% CONSUMER LOANS 3,050 89,911 13.46% 2,458 79,240 12.31% COMMERCIAL LOANS 293 9,599 12.20% 187 7,190 10.44% FINANCING LEASES 4,498 158,455 11.35% 4,520 150,699 12.00% -------- ---------- ------ -------- ---------- ------ TOTAL LOANS 14,334 531,817 10.76% 12,950 472,457 10.94% -------- ---------- ------ -------- ---------- ------ MORTAGE-BACKED SECURITIES 5,246 292,448 7.18% 3,941 219,472 7.18% INVESTMENT SECURITIES 3,480 204,872 6.79% 2,129 119,341 7.14% OTHER INTEREST-EARNING ASSETS 394 20,844 7.40% 297 24,419 4.76% -------- ---------- ------ -------- ---------- ------ TOTAL INVESTMENTS 9,120 518,164 7.03% 6,367 363,232 7.00% -------- ---------- ------ -------- ---------- ------ TOTAL INTEREST-EARNING ASSETS $ 23,454 $1,049,981 8.92% 19,317 $ 835,689 9.23% -------- ---------- ------ -------- ---------- ------ INTEREST-BEARING LIABILITIES DEPOSITS $ 6,356 $ 508,781 4.96% $ 4,587 $ 374,975 4.85% REPURCHASE AGREEMENTS 4,025 294,822 5.42% 2,915 252,944 4.57% LINES OF CREDIT 14 - 0.00% 125 6,427 7.60% FHLB ADVANCES 902 61,506 5.82% 434 31,233 5.51% FHLB BORROWINGS 398 25,578 6.17% 403 26,000 6.15% BONDS PAYABLE 11 482 8.77% 19 895 8.70% TERM NOTES 1,518 114,500 5.26% 1,271 93,200 5.41% INTEREST RATE RISK MANAGEMENT 345 YIELD AJE. 0.28% 647 YIELD AJE. 0.62% -------- ---------- ------ -------- ---------- ------ TOTAL INTEREST-BEARING LIABILITIES $ 13,569 $1,005,669 5.35% $ 10,401 $ 785,674 5.25% -------- ---------- ------ -------- ---------- ------ NET INTEREST EARNING ASSETS $ 9,885 $ 44,312 3.57% $ 8,916 $ 50,015 3.98% -------- ---------- ------ -------- ---------- ------ INTEREST RATE MARGIN 3.79% 4.29% ---------- ---------- NET INTEREST-EARNING ASSETS RATIO 104.41% 106.37% -------- --------- </TABLE> <TABLE> <CAPTION> FISCAL 1998 COMPARED TO 1997 - ---------------------------------------------------------------------------- PART - II INCREASE/(DECREASE) DUE TO: - ---------------------------------------------------------------------------- VOLUME RATE TOTAL --------- -------- --------- <S> <C> <C> <C> INTEREST-EARNING ASSETS: REAL ESTATE LOANS $ 914 $ (206) $ 708 CONSUMER LOANS 365 228 593 COMMERCIAL LOANS 73 32 105 FINANCING LEASES 220 (242) (22) -------- -------- --------- TOTAL LOANS 1,572 (188) 1,384 -------- -------- --------- MORTAGE-BACKED SECURITIES 1,309 (4) 1,305 INVESTMENT SECURITIES 1,453 (102) 1,351 OTHER INTEREST-EARNING ASSETS (64) 161 97 -------- -------- --------- TOTAL INVESTMENTS 2,698 55 2,753 -------- -------- --------- TOTAL INTEREST-EARNING ASSETS $ 4,270 $ (133) $ 4,137 -------- -------- --------- INTEREST-BEARING LIABILITIES DEPOSITS $ 1,672 $ 97 $ 1,769 REPURCHASE AGREEMENTS 577 533 1,110 LINES OF CREDIT 11 (122) (111) FHLB ADVANCES 443 25 468 FHLB BORROWINGS (6) 1 (5) BONDS PAYABLE (8) - (8) TERM NOTES 282 (35) 247 INTEREST RATE RISK MANAGEMENT 56 (358) (302) -------- -------- --------- TOTAL INTEREST-BEARING LIABILITIES $ 3,027 $ 141 $ 3,168 -------- -------- --------- NET INTEREST INCOME $ 1,243 $ (274) $ 969 -------- -------- --------- </TABLE> 15
The yield on interest-earning assets for the first quarter of fiscal 1998 decreased to 8.92% from 9.23% attained in the same period of fiscal 1997. The main reason for this decline was the proportionately higher increase in the total average investments portfolio, which carries a lower yield than the loan portfolio, as previously discussed. Interest expense for the first quarter of fiscal 1998 increased to $13.6 million from $10.4 million reported in the same period of fiscal 1997, an increase of $3.2 million or 30%. This is result of a higher volume of interest-bearing liabilities used to fund the increase in interest-earning assets. This increase in volume contributed to a rise in total interest expense of $3 million during the first quarter of fiscal 1998. The Group's average interest-bearing liabilities rose by $219 million or 28% to $1 billion in fiscal 1998 compared with $786 million during fiscal 1997. The growth in average volume was mainly attributed to the significant increase in the average volume of deposits and term notes. For the first quarter of fiscal 1998 the average volume of deposits grew by $134 million or 36% while the average volume of term notes increased by $21.3 million or 23%. The increase in deposits was concentrated in certificates of deposit, mostly customer and broker CD's, and IRA accounts. The rise in average term notes was attributed to four new term notes issued during the second quarter of fiscal 1997. The average cost of funds for the first quarter of fiscal 1998 increased ten basis points to 5.35% from 5.25% in fiscal 1997 contributing to a rise in interest expense of $141,000. This increase in the average cost of funds responds mainly to a rise in the cost of repurchase agreements of 85 basis points to 5.42% from 4.57%. This increase was due to the replacing of 936 repos, which currently represent 39% of total repos portfolio versus 100% a year ago, with higher-cost conventional repos. However, it is important to mention that this increase in costs was in part mitigated by a favorable effect of $358,000 from the Group's interest-hedging activities. NON-INTEREST INCOME Table B at page 17 shows the fees and other non-interest income generated by the Group for the first quarter ended September 30, 1997 and 1996. In the first quarter of fiscal 1998 recurring non-interest income continued to be a major driver of the Group's earnings improvement as it increased by $1.3 million or 36% to $4.8 million from $3.5 million reported in the same period of fiscal 1997. Bank services fees and charges, which consist primarily of service charges on deposit accounts, leasing fees and late charges collected on loans, decreased by 21% to $1 million from $1.3 million in fiscal 1997. This net decrease was a combination of a decrease in lease handling fees due to weaker a production offset by an increase in fees on deposit accounts as a result of a larger volume of deposit accounts. Trust, money management and brokerage fees, which represented 44% of recurring non-interest income for the first quarter of fiscal year 1998 grew to $2.1 million from $1.5 million in fiscal year 1997. This increase was possible to a larger volume of accounts and assets managed by the trust department and the assets gathered by the broker-dealer subsidiary. Mortgage banking activities which rose to $1.5 million from $563,000 in fiscal 1997, an increase of $967,000 or 172%, was another category which contributed to the fiscal 1998 increase. This was mainly attributed to a higher volume of mortgages originated and sold. Non recurring non-operating interest income, which consists mainly of securities and trading gains and losses, amounted to $211,000 for the first quarter of fiscal 1998 compared to $127,000 in the earlier fiscal year. NON-INTEREST EXPENSES As shown on table C at page 17 recurring non-interest expenses for the first quarter of fiscal 1998 increased by $1.2 million or 18% to $7.7 million as compared to $6.5 million for fiscal 1997. The increase results mainly from the expanded push in the retail area and higher outlays for support services as the group's businesses continue to expand. The efficiency ratio, which is the ratio of non-interest expense to the sum of net interest income and recurring non-interest income, was 52.52% for the first quarter of fiscal 1998 compared to 52.40% a year ago. The expense ratio, which is the ratio of net recurring operating expenses to average interest-earning assets, improved to 1.11% for the first quarter of fiscal 1998, compared to 1.43% last year. Employee compensation and benefits, the Group's largest expense category, increased $400,000 or 12% to $3.8 million from $3.4 million in fiscal 1997. The growth in personnel cost was led by an increase of $200,000 or 50% of the total increase due to the increased headcount in response to the expanded sales force and services. The Group's full-time equivalent employees amounted to 412 at September 30,1997, up from 390 a year ago. The rest of the increase of the total increase was a result of the greater use of variable based compensation structure to compensate for higher productivity and sales efforts and to annual performance merit increases. For the three months ended period variable compensation represented 34% of total compensation versus 28% a year ago. 16
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) SEPTEMBER 30, ------------- 1997 1996 % -------- -------- ----- TABLE B - NON-INTEREST INCOME SUMMARY BANK SERVICE FEES AND CHARGES $ 1,007 $ 1,274 (21%) TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 2,101 1,528 38% MORTGAGE BANKING ACTIVITIES 1,531 563 172% RENT AND OTHER OPERATING INCOME 186 182 2% -------- -------- ----- RECURRING NON-INTEREST INCOME 4,825 3,547 36% -------- -------- ----- NET GAIN ON SALE OF INVESTMENTS 111 157 (29%) TRADING ACCOUNT INCOME 110 (30) (467%) -------- -------- ----- NON RECURRING NON-INTEREST INCOME 221 127 74% -------- -------- ----- TOTAL NON-INTEREST INCOME $ 5,046 $ 3,674 37% -------- -------- ----- TABLE C - NON-INTEREST EXPENSES SUMMARY COMPENSATION AND BENEFITS $ 3,850 $ 3,441 12% OCCUPANCY AND EQUIPMENT 1,174 996 18% PROFESSIONAL FEES 339 309 10% ADVERTISING AND PROMOTION 665 341 95% REAL ESTATE OWNED EXPENSES 29 67 (57%) INSURANCE 122 273 (55%) COMMUNICATIONS 378 260 45% OTHER OPERATING EXPENSES 1,169 843 39% -------- -------- ----- TOTAL RECURRING NON-INTEREST EXPENSES 7,726 6,530 18% SAIF ONE-TIME ASSESSMENT -- 1,823 (100%) -------- -------- ----- TOTAL NON-INTEREST EXPENSES $ 7,726 $ 8,353 (8%) -------- -------- ----- EFFICIENCY RATIO 52.52% 52.40% -------- -------- EXPENSE RATIO 1.11% 1.43% -------- -------- COMPENSATION AND BENEFITS AS A PERCENTAGE (%) OF: TOTAL AVERAGE ASSETS 1.34% 1.53% -------- -------- TOTAL AVERAGE INTEREST-EARNING ASSETS 1.47% 1.65% -------- --------
All other recurring non-interest expenses for the first quarter of fiscal 1998 grew by $ 790,000 or 26% to $3.8 million from $3.09 million in fiscal 1997. This increase was mainly attributed to increases in advertising and promotion of $324,000 or 95% and business development and general operating costs of $444,000 or 41%. The increase in advertising and promotion resulted mainly from the ongoing campaign to promote the Group's image and the launching of new products and services. Increases in communications and loan servicing expenses were the main contributors in the growth of business development and general operating costs. On September 30, 1996 the United States Congress approved and President Clinton signed into law a bill to recapitalize the Savings Association Insurance Fund. This bill called for a special one-time charge on institutions holding SAIF deposits on March 31, 1995 of approximately 66 basis points. Accordingly, Oriental recorded a special reserve of $1.8 million net of taxes of $470,000 during the first quarter of fiscal 1997 to account for its share of the one-time payment of FDIC insurance premium. PROVISION FOR INCOME TAXES The provision for income taxes for the first quarter of fiscal 1998 amounted to $968,000 versus $485,000 in fiscal 1997. The effective tax rate was 16.4% in fiscal 1998 compared to 14.53% for the same quarter of fiscal 1997. The Group has maintained an effective tax rate lower than the statutory rate of 39% mainly due to interest income earned on certain investments and loans which is exempt from income taxes, net of the disallowance of expenses attributable to the exempt income. In addition, during 1997 the Group created OBT International Branch to take advantage of additional tax incentives available under the International Banking Center law. On July 22, 1997 the governor of Puerto Rico signed into law changes to the Puerto Rico Tax Code that will impact the group's operations going forward. Under this law effective august 1, 1997, interest earned on FHA , VA loans and securities backed by such loans originated after July 31, 1997, which were previously tax exempt (after-disallowance of related expenses) will begin to pay income taxes except for FHA mortgages for new construction projects. The legislation does not alter the tax-exempt status of FHA and VA loans and securities backed by such loans originated prior to July 31, 1997. this will reduce the amount of tax-exempt mortgages originated in the Puerto Rico market and decrease the overall level of tax-exempt interest earned by group. Management believes the increased operations of obt international branch will mitigate the expected rise on the group's income taxes as result of this new bill. Thus, management does not expect this change to have a significant impact on the group's financial condition or results of operations. PROVISION FOR LOAN LOSSES For the first quarter of fiscal 1998 the Group provided $1.3 million for loan losses compared with $900,000 for fiscal 1997, an increase of $400,000 or 44%. The increase in the provision for fiscal 1997 was based mostly on the growth of the Group's portfolio, as well as a rise in net charge-offs experienced by the Group and current and expected economic conditions. Table D at page 19 sets forth an analysis of the activity in the allowance for loan losses and presents selected loan losses statistics for the quarters ended September 30, 1997 and 1996. Net charge-offs for the first quarter of fiscal 1998 totaled $1.3 million or 0.09% of average loans, compared to $768,000 or 0.06% in fiscal 1997. The level of net charge-offs recorded in fiscal 1998 was primarily associated to the losses experienced in the consumer loans and financing leases portfolios. The Group maintains an allowance for loan losses on its portfolio at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risk. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses. The analysis includes a review of historical experience, value of underlying collateral and current economic conditions, among others. Based upon the results of this quarterly analysis, loan loss reserves are computed for each portfolio.
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) SEPTEMBER 30, ----------------------- 1997 1996 ---------- ---------- TABLE D -ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS BALANCE AT BEGINNING OF PERIOD $ 5,408 $ 4,496 ---------- ---------- PROVIISON FOR LOAN LOSSES 1,300 900 ---------- ---------- CHARGE-OFF'S (1,653) (1,002) RECOVERIES 399 234 ---------- ---------- NET CHARGE OFF'S (1,254) (768) ---------- ---------- ---------- ---------- BALANCE AT END OF PERIOD $ 5,454 $ 4,628 ---------- ---------- ---------- ---------- CHARGE-OFF'S: CONSUMER $ 580 $ 279 OVERDRAFT - - REAL ESTATE 61 - AUTO LEASES 898 400 EQUIPMENT LEASES 85 210 COMMERCIAL AND OTHERS 29 113 ---------- ---------- 1,653 1,002 ---------- ---------- ---------- ---------- RECOVERIES: CONSUMER 76 42 OVERDRAFT 1 6 REAL ESTATE - - AUTO LEASES 217 121 EQUIPMENT LEASES 105 54 COMMERCIAL AND OTHERS - 11 ---------- ---------- 399 234 ---------- ---------- ---------- ---------- NET CHARGE OFF: CONSUMER (504) (237) OVERDRAFT 1 6 REAL ESTATE (61) - AUTO LEASES (681) (279) EQUIPMENT LEASES 20 (156) COMMERCIAL AND OTHERS (29) (102) ---------- ---------- $ (1,254) $ (768) ---------- ---------- ---------- ---------- LOANS: OUTSTANDING $ 557,996 $ 489,081 ---------- ---------- ---------- ---------- AVERAGE $ 548,938 $ 481,118 ---------- ---------- ---------- ---------- RATIOS: RECOVERIES TO CHARGE-OFF'S 24.1% 23.4% ---------- ---------- ---------- ---------- NET CHARGE-OFF TO AVERAGE LOANS 0.91% 0.64% ---------- ---------- ---------- ---------- PROVISION FOR LOAN LOSSES TO NET CHARGE-OFFS 1.04 1.17 ---------- ---------- ---------- ---------- ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 0.98% 0.95% ---------- ---------- ---------- ----------
FINANCIAL CONDITION COMMENTS ASSETS ASSETS OWNED Oriental's total assets at September 30, 1997 reached $1.16 billion, an increase of 26% when compared to $919 million at the end of the same quarter of fiscal 1997. Average assets for the first quarter of fiscal 1998 were $1.15 billion compared to $902,000 million for fiscal 1997, a 28% gain. Refer to Table E at page 21 for the Group's assets summary. At September 30, 1997 interest-earning assets amounted to $1.1 billion compared to $866 million at September 30, 1996. This increase was the combination of a growth in investment and trading securities of $160 million or 42%, to $541 million from $381 million at the end of the first quarter of fiscal 1997, assisted by a higher volume of loans receivable and loans held for sale, net of the allowance for loan losses, of $69 million, or 14%, from $484 million at September 30, 1996 to $553 million at September 30, 1997. Oriental's investment and trading securities, the largest component of interest-earning assets, consists mainly of U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities and P.R. Government municipal bonds. The investment portfolio is very high quality, approximately 98% is rated AAA at the end of the first quarter of fiscal 1998, and generates a significant amount of tax exempt interest which lowers the Group's effective tax rate. Also during fiscal 1997 the Group formed an International Banking Entity (IBE) which houses U.S. mortgage-backed securities in a tax-advantaged setting. The increase of $160 million in investment and trading securities was driven by a growth in mortgage-backed securities of $95 million or 42% to $322 million at September 30, 1997 from $227 million a year ago as Oriental continues its strategy of pooling guaranteed real estate loans into mortgage-backed securities. During the first quarter of fiscal 1998, Oriental converted $39 million of loans held for sale into mortgage-backed securities. Also a significant growth in tax exempt U.S. government and agency obligations of $73 million or 57% contributed to the increase in this earning asset component. U.S. government and agency obligations, which picks up a higher after-tax yield since they are exempt from Puerto Rico taxes and have no prepayment or credit risk are an attractive investment for Oriental. Refer to Table F at page 21 for the Group's investments summary and composition. Loans are the second largest category of the Group's earning assets but the most profitable. At September 30,1997, total loans were $553 million compared with $484 million at the end of the same quarter of fiscal 1997, for an increase of $69 million or 14%. This rise was led by increases in the real estate and consumer portfolios of $43 million or 18%, and $16 million or 19%, respectively. The growth in Group's loan portfolio was mainly attained due to strong marketing efforts coupled with the launch of new products. At September 30, 1997 the loan portfolio mix was similar to the one at the end of the preceding fiscal year as real estate loans represented 51% of the total portfolio, while lease financing were 30%, consumer loans 18%, and commercial loans comprised 2%. This compares with 49%, 32%, 17% and 2%, respectively, at the end of the same period of fiscal 1997 for the same categories. Table G at page 21 presents the composition of the Group's loan portfolio at September 30, 1997 and 1996. FINANCIAL ASSETS GATHERED OR MANAGED As shown on Table H at page 21 Oriental continued to experience a favorable growth in its diversified asset base which contributed to income expansion across all its business lines. Total financial assets owned or managed increased 32% to $3.3 billion at September 30, 1997 from the $2.5 billion owned or managed one year ago. As of September 30, 1997, total financial assets consisted of $1.16 billion owned by the Bank, $1.1 billion managed by the trust, $544 million gathered by the broker-dealer and $533 million in mortgages serviced for third parties. Detailed information concerning each of the items that comprise the Group's financial assets managed follows: - - GROUP'S OWNED ASSETS - Refer to the section above for detailed information concerning this item. - - TRUST ASSETS MANAGED - Total assets managed by the trust department increased 24% to $1.1 billion at September 30, 1997, up from $890 million reported at September 30, 1996 . The most significant assets managed are individual retirement accounts (IRA) which increased to $346 million at September 30, 1997 from $316 million at September 30, 1996. Oriental Trust offers three IRA products: (1) IRA-Exenta, a tax exempt unit investment trust, (2) Multi-IRA, a taxable fixed income account and (3) Investors IRA, for which the yield is tied to the performance of the stock market. Other assets managed include 401 (K) and Keogh retirement plans, custodian and corporate trust accounts. - - ASSETS GATHERED BY BROKER-DEALER - Since its inception in April 1993, Oriental's broker-dealer subsidiary offers a wide array of investment vehicles to its clients base. Presently these include: - Fixed and Variable Annuities. - Tax-advantaged Fixed Income Securities. - Mutual Funds - Stocks and Bonds. Total assets gathered by the broker-dealer from its customer investment accounts increased by 81% to $544 million at September 30, 1997 from $300 million at September 30, 1996. 20
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> SEPTEMBER 30, --------------------------- 1997 1996 ------------ ------------ <S> <C> <C> TABLE E - ASSETS SUMMARY INVESTMENT AND TRADING SECURITIES $ 541,071 $ 381,470 TOTAL LOANS,NET 552,542 484,453 ------------ ------------ INTEREST-EARNING ASSETS 1,093,613 865,923 NON INTEREST-EARNING ASSETS 68,151 53,296 ------------ ------------ TOTAL ASSETS $ 1,161,764 $ 919,219 ------------ ------------ ------------ ------------ TABLE F - INVESTMENTS SUMMARY AND COMPOSITION MORTGAGE BACKED SECURITIES $ 322,783 $ 226,675 INVESTMENT AND TRADING SECURITIES 203,175 129,532 MONEY MARKET INVESTMENTS AND FHLB STOCK 15,113 25,264 ------------ ------------ TOTAL INVESTMENT SECURITIES $ 541,071 $ 381,471 ------------ ------------ ------------ ------------ TABLE G - LOANS COMPOSITION SUMMARY REAL ESTATE LOANS 281,912 238,518 CONSUMER LOANS 98,656 83,014 COMMERCIAL LOANS 11,129 9,089 CONSTRUCTION LOANS - 218 FINANCING LEASES 166,299 158,241 ------------ ------------ TOTAL LOANS AND LOANS HELD FOR SALE 557,996 489,080 ALLOWANCE FOR LOAN LOSSES (5,454) (4,628) ------------ ------------ TOTAL LOANS, NET 552,542 484,452 ------------ ------------ ------------ ------------ COMPOSITION AS A %: REAL ESTATE LOANS 51% 49% CONSUMER LOANS 18% 17% COMMERCIAL LOANS 2% 2% CONSTRUCTION LOANS 0% 0% FINANCING LEASES 30% 32% ------------ ------------ TOTAL LOANS AND LOANS HELD FOR SALE 100% 100% ------------ ------------ ------------ ------------ TABLE H - FINANCIAL ASSETS SUMMARY TOTAL GROUP ASSETS OWNED $ 1,161,800 $ 919,300 TRUST ASSETS MANAGED 1,104,300 890,100 LOANS SERVICED TO THIRD PARTIES 533,300 430,300 ASSETS GATHERED BY BROKER-DEALER 543,500 300,500 ------------ ------------ TOTAL FINANCIAL ASSETS $ 3,342,900 $ 2,540,200 ------------ ------------ ------------ ------------ </TABLE>
- - LOANS SERVICED FOR THIRD PARTIES - The Group's loan administration division services mortgage loans for third parties which include federal agencies such as GNMA, FNMA and FHLMC, as well as local issuers such as the P.R. Housing Bank. Total loans serviced for third parties increased 24% to $533 million at September 30, 1997 from $430 million at September 30, 1996. In a move to strengthen its future earnings the Group announced in September the sale of its servicing operation to Doral Financial Corporation. Management expects the mortgage servicing transaction to be completed by November 30, 1997. The divestiture of the mortgage servicing operation is indicative of a wider strategy guiding the Group to concentrate on trust, money management, brokerage, leasing, personal loans and deposit accounts with the highest earnings potential. NON-PERFORMING ASSETS As shown on Table I at page 23 at September 30,1997 the Group's non-performing assets consist of the sum of non-performing loans, real estate owned and repossessed assets. Detailed information concerning each of the items that comprise non-performing assets follows: - - DELINQUENT REAL ESTATE LOANS - Oriental classifies real estate loans delinquent 90 days or more in non-accruing status. Due to the limited supply of land in Puerto Rico, real estate market values have remained stable. Even though these loans are in non-accruing status, based on the value of the underlying collateral and the loan to value ratios, management considers that no material losses will be incurred on this portfolio. The estimated losses have been considered in the determination of the level of allowances for loan losses as of September 30, 1997. Real estate loans are charged-off based on the specific evaluation of the collateral underlying the loan. - - DELINQUENT COMMERCIAL BUSINESS LOANS - Commercial business loans are placed on non-accrual basis when they become 90 days past due. The Bank's non-accrual commercial business loans at September 30, 1997 consisted of sixteen loans amounting to $944,000 (average of $59,000), with three loans having balances exceeding $100,000. Of the total balance, $541,000 are guaranteed by real estate. Commercial loans are charged-off based on the specific evaluation of the collateral underlying the loan. - - DELINQUENT FINANCE LEASES - Leases are placed on non-accrual status when they become 90 days past due. Oriental's non-accrual leases at September 30, 1997 consisted of three hundred and thirty-two auto leases amounting to $6 million (average of $18,000), and two hundred thirty-nine equipment leases amounting to $2.5 million (average of $7,100). At September 30, 1997, there were no non-accrual equipment leases over $100,000. - - DELINQUENT CONSUMER LOANS - Consumer loans are placed on non-accrual status when they become 90 days past due. The Group's non-accrual consumer loans consisted of three hundred thirteen loans amounting to $2.6 million (average of $8,290). - - REPOSSESSED ASSETS - Repossessed assets are initially recorded at estimated net realizable value. Any additional losses on the disposition of such assets are charged against the allowance for loan losses at the time of disposition. The estimated loss on disposition of such assets has been considered in the determination of the allowance for loan losses. As of June 30, 1997 the inventory of repossessed automobiles consisted of sixty-three units amounting to $ 1.1 million (average of $17,300), and the inventory of repossessed equipment consisted of twenty-eight units amounting to $465,000 (average of $16,600). - - FORECLOSED REAL ESTATE (OREO) - Foreclosed real estate is initially recorded at the lower of the related loan balance or fair value at the date of foreclosure. At the time of acquisition of properties in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. The carrying value of these properties is estimated to approximate the lower of cost or fair value less estimated cost to sell. Any excess of the carrying value over the estimated fair market value is charged to operations. Therefore, no material losses are expected on the final disposition of OREO's. Management is actively seeking prospective buyers for these foreclosed real estate properties. LIABILITIES AND CAPITAL LIABILITIES As shown in Table J at page 23 at September 30, 1997 Oriental's total liabilities reached $1.07 billion, reflecting an increase of $228 million or 27% when compared to $839 million at September 30, 1996. Interest-bearing liabilities, the Group's sources of funding, amounted to $1.04 billion at September 30, 1997, an increase of $224 million or 28% as compared to $810 million at September 30, 1996. This increase was the result of a growth in deposits and repurchase agreements of $126 million or 32% and $79 million or 35%, respectively. 22
ORIENTAL FINANCIAL GROUP SELECTED FINANCIAL DATA (IN THOUSANDS) SEPTEMBER 30, ----------------------- 1997 1996 ---------- --------- TABLE I - NON PERFORMING ASSETS REAL ESTATE LOANS $ 5,258 $ 4,076 CONSUMER LOANS 2,593 1,671 COMMERCIAL LOANS 944 236 CONSTRUCTION LOANS - 211 FINANCING LEASES 8,542 4,833 ---------- --------- TOTAL NON ACCRUAL LOANS $ 17,337 $ 11,027 ---------- --------- NON-ACCRUAL LOANS $ 17,337 $ 11,027 REO 779 941 REPO VEHICLES 1,091 950 REPO EQUIPMENT 465 460 ---------- --------- TOTAL NON-PERFORMING ASSETS $ 19,672 $ 13,377 ---------- --------- % NON-ACCRUAL TO TOTAL LOANS 3.11% 2.25% ---------- --------- ---------- --------- ALLOWANCE TO NON-ACCRUALS 31.46% 41.97% ---------- --------- ---------- --------- % NON-PERFORMING TO TOTAL ASSETS 1.69% 1.46% ---------- --------- ---------- --------- % NON-PERFORMING TO TOTAL CAPITAL 20.76% 16.68% ---------- --------- ---------- --------- TABLE J - LIABILITIES SUMMARY DEPOSITS $ 525,609 $ 398,743 REPURCASE AGREEMENTS 303,646 224,253 OTHER BORROWINGS 206,592 186,768 ---------- --------- INTEREST-BEARING LIABILITIES 1,035,847 809,764 NON INTEREST-BEARING LIABILITIES 31,161 29,234 ---------- --------- TOTAL LIABILITIES $1,067,008 $ 838,998 ---------- --------- TABLE K - CAPITAL AND CORRESPONDING REGULATORY CAPITAL RATIOS (IN PERCENT): CAPITAL $ 94,756 $ 80,221 OUTSTANDING SHARES 9,966 9,883 DIVIDENDS DECLARED $ 1,229 $ 989 LEVERAGE CAPITAL 7.72% 8.40% ---------- --------- ---------- --------- TIER 1 RISK-BASED CAPITAL 17.39% 17.77% ---------- --------- ---------- --------- TOTAL RISK-BASED CAPITAL 18.47% 18.84% ---------- --------- ---------- --------- TABLE L - MARKET PRICES AND STOCK DATA CLOSING PRICE $ 28.80 $ 13.03 HIGH 29.70 13.08 LOW 22.60 13.00 BOOK VALUE 9.51 8.12 DIVIDEND PER SHARE 0.12 0.10 PAYOUT RATIO 24.90% 23.63% ---------- --------- ---------- --------- DIVIDEND YIELD 1.71% 3.07% ---------- --------- ---------- --------- The following provides the high and low prices of the Group's stock for each quarter of the last two fiscal periods. Common stock prices were adjusted to give retroactive effect to the stock splits declared on the Group's common stock. QUARTER ENDED HIGH LOW PER SHARE SEPTEMBER 1997 $ 29.7 $ 22.6 $0.12 JUNE 1997 22.6 18.2 0.12 MARCH 1997 21.6 16.7 0.12 DECEMBER 1996 17.6 14.6 0.10 SEPTEMBER 1996 $ 13.1 $ 13.0 $0.10 23
Deposits, the largest category of the Group's interest -bearing liabilities, showed growth in all areas as they increased to $527 million at September 30, 1997, from $398 million at the same date last year. At the end of the first quarter of fiscal 1998 deposits represented 51% of total interest bearing liabilities versus 50% at the end of the preceding fiscal year. Demand and saving deposits were up by $10 million or 11%, to $104 million at September 30, 1997, from $94 million at September 30, 1996 and certificates of deposit rose by $116 million or 32%, to $418 million at June 30, 1997, from $302 million at September 30, 1996. As of September 30, 1997 total borrowings amounted to $ 511 million compared to $ 411 million at September 30, 1996. Oriental has a diversified source of funding through the use of FHLB advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. The increase in borrowings was mainly due to increases in advances from the Federal Home Bank of New York and repurchase agreements. The increase in total borrowings was necessary to fund the increase in interest-earning assets experienced during the period. A substantial number of these borrowings have floating rates that are generally hedged through the Group's overall interest rate risk management process discussed in the Note 8 of the attached Group's financial statements. CAPITAL AND MARKET PRICES, STOCK DATA AND DIVIDENDS At September 30, 1997 Oriental's total capital increased by $14.5 million or 18% to $94.7 million, from $80.2 million at September 30, 1996. This increase was the result of earnings of $18.6 million recorded during the fiscal year increased by $716 thousand from stock options exercised and a $2.1 million positive change in the valuation account for investment securities available-for-sale. This increase was offset by $4.6 million in dividends declared and $2.3 million used repurchase Oriental shares in the open market. The Group continues to be a "well capitalized" institution, the highest classification available under the capital standards set by the Federal Deposit Insurance Corporation. To be in a "well capitalized" position, bank or bank holding companies must meet or exceed a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. As of September 30, 1997 the Group had a leverage ratio of 7.72%; a Tier 1 risk-based ratio of 17.39%; and a total risk based capital ratio of 18.47% compared to 8.40%, 17.77% and 18.84% ,respectively, at the same date in fiscal 1997. On August 11, 1997, the Group declared a five-for-four (25%) stock split on its 8,054,015 shares of common stock outstanding at September 30, 1997. As a result, 1,911,925 shares of common stock were issued on October 15, 1997 thus increasing shares to 9,965,940. The Group's common stock is traded in the New York Stock Exchange (NYSE) under the symbol OFG. Refer to table L at page 23 for the high, low and closing prices of the Group's stock for each quarter of the last two fiscal periods. The price per share on the reported last sale price on the NYSE on September 30, 1997 was $28.80. This represents an increase of 121% from the last sale price a year ago of $ 13.03 already adjusted for the five-for-four (25%) stock split. The book value at September 30, 1997 rose to $9.51 from $8.12 reported at the same date last year. During the first quarter of fiscal 1998, the Group declared dividends amounting to $1.2 million compared to $989,000 in fiscal 1996, an increase of $240,000 or 24%. This represents total dividends declared per common share of $0.12 for the first quarter of fiscal 1998 versus $0.10 for the same period of fiscal 1997, a 23% increase. The dividend payout ratio and dividend yield for the quarter ended amounted to 24.9% and 1.71%, respectively, compared to 23.63% and 3.07%, respectively, for the same quarter last year. ASSET/LIABILITY MANAGEMENT The Group through its Asset and Liability Management Committee (ALCO) has developed policies whose primary goal is to enhance profitability while maintaining an appropriate relationship between the amount of interest-earning assets and interest-bearing liabilities that mature or reprice during the same period. This difference is commonly referred to as a "maturity mismatch" or "gap". The Group is liability sensitive on a cumulative basis (negative one year gap) due to its fixed rate asset composition being funded with shorter repricing liabilities. However, since the traditional static gap representation does not capture all of the complex factors that influence asset and liability repricings, the Group places greater emphasis on simulation analysis. The Group utilizes different rate and growth scenarios to develop strategies to maintain its net interest income within the prescribed policy limits. The Group utilizes interest rate swaps 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. (See footnotes of the Group's Financial Statements included herein). The interest rate swap agreements are subject to the risk of non-performance by the counterparty. The Group enters into interest rate swaps only with the approved investment grade money center banks and major broker-dealers. The Group has established policies that limit the maximum exposure to any one counterparty. These policies are reviewed by the Board of Directors on a yearly basis. At September 30, 1997, the Group had entered into interest rate swap agreements with ten counterparties with a remaining average life of approximately two years. 24
LIQUIDITY Liquidity refers to cash and other investments easily converted into cash that are available to meet unanticipated requirements. The objective of the Group's liquidity management is to ensure sufficient cash flow to fund the origination and acquisition of assets, the repayment of deposit withdrawals and the wholesale borrowings maturities, and meet operating expenses. The Group's liquidity position is reviewed and monitored by the ALCO Committee on a regular basis. 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. During the first quarter of fiscal 1997 President Clinton signed into law a bill phasing out the tax incentives offered to manufacturing companies operating in Puerto Rico under Section 936 of the Internal Revenue Code. The phase out of the manufacturing tax benefits will occur over a ten-year period, and the benefits related to the passive income (QPSII) were eliminated effective July 1, 1996. Financial institutions and other eligible borrowers in Puerto Rico have benefited throughout the years from the lower cost of these QPSII funds. The elimination of the Section 936 tax credit for the Puerto Rico operations of U.S. companies and benefits to QPSII did not have a significant impact on the Group's liquidity position. This was mainly due to the fact that the law change came with plenty of warning, so the Group was able to replace 936 funding with longer- term obligations. During fiscal 1997 the Group locked-in about $185,000 million of non-cancelable long-term funding, with maturities ranging from three to ten years. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial positions and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most individual companies, substantially all of the assets and liabilities of the Group are monetary in nature. As a result, interest rates have a more significant impact on the Group's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily change in the same direction or as much as the prices of goods and services. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Group and its subsidiaries are defendants in a number of legal claims under various theories of damages arising out of, and incidental to its business. The Group is vigorously contesting those claims. Based upon a review with legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the result of operations. ITEM 2. CHANGES IN SECURITIES - NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On October 21 1997, the annual stockholders meeting of the Bank was held. A quorum was obtained with 7,396,257 votes in person or by proxy, which represented 92.3% of all votes eligible to be cast. The following proposals were voted upon at the meeting with the following results: - PROPOSAL 1: To elect three directors to three-year terms expiring with the 2000 Annual Meeting or until their successors have been elected and qualified. <TABLE> <CAPTION> NOMINEES FOR THREE-YEAR TERM VOTES FOR VOTES AGAINST VOTES WITHHELD <S> <C> <C> <C> Director #1 7,394,084 - (92.3%) 2,173 0 Director #2 7,391,894 - (92.3%) 4,363 0 Director #3 7,391,894 - (92.3%) 4,363 0 </TABLE> - PROPOSAL 2 To consider and approve the adoption of the Oriental Bank and Trust 1996 Incentive Stock option plan, which would, upon approval, reserve the issuance 630,000 shares of the Group's common stock, $1.00 par value, or approximately %8.0 of the Group's issued and outstanding common stock as of the voting date of September 15, 1997 for issuance pursuant to the terms thereof. FOR: 4,585,215 (57.2%) AGAINST: 59,802 ABSTAIN: 2,751,240 ----------------- ------ --------- - PROPOSAL 3: Ratify the appointment of Price Waterhouse & Co. as the Bank's independent auditors for the year ending June 30, 1997. FOR: 7,394,244 (92.3%) AGAINST: 0 ABSTAIN: 2,013 ----------------- ------ --------- 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 30,1997. C - EXHIBITS Exhibits filed as part of this Form 10-Q NO. EXHIBITS PAGE ---------- ----------------------- ---- 27.0 Financial Data Schedule E-1 26
SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORIENTAL FINANCIAL GROUP INC. DATE: November 14, 1997 BY: /s/ RICARDO N. RAMOS ------------------------ RICARDO RAMOS SENIOR VICE PRESIDENT FINANCE DATE: November 14, 1997 BY: /s/ ROBERTO A. FERNANDEZ ------------------------ ROBERTO A. FERNANDEZ SENIOR VICE PRESIDENT ACCOUNTING AND LOAN ADMINISTRATION 27