SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 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) 13,624,834 SHARES OUTSTANDING AS OF MARCH 31, 1999 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes x No . ---- ----
<TABLE> <CAPTION> TABLE OF CONTENTS PAGE - ---------------------------------------------------------------------------------------------------------------------------- PART - 1 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Item - 1 FINANCIAL STATEMENTS Consolidated statements of Financial condition at March 31, 1999 (unaudited) and June 30, 1998. 1 Unaudited consolidated statements of income for the quarter and nine months period ended March 31, 1999 and 1998. 2 Unaudited consolidated statements of stockholders' equity and comprehensive income for the nine months period ended March 31, 1999 and 1998. 3 Unaudited consolidated statements of cash flows for the nine months period ended March 31, 1999 and 1998. 4 Notes to unaudited consolidated financial statements 5-8 Item - 2 Management's discussion and analysis of financial condition and results of operations 9-23 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 - None 23 Item - 5 Other Information 23 Item - 6 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23 Signatures 23 </TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 1999 (UNAUDITED) AND JUNE 30, 1998 (IN THOUSANDS) <TABLE> <CAPTION> ASSETS - --------------------------------------------------------------------------------------------------------------------------------- March 31, 1999 June 30, 1998 -------------------------- ------------------- <S> <C> <C> Cash and due from banks $ 9,816 $ 8,831 -------------------------- ------------------- INVESTMENTS AND SECURITIES: Money market investments 3,978 10,658 Trading securities, at fair value 34,831 42,440 Investment securities available-for-sale, at fair value 732,131 481,360 Investment securities held-to-maturity, at cost, with a fair value of $113,218 at March 31, 1999 and $164,404 at June 30, 1998 111,533 162,151 Federal Home Loan Bank (FHLB) stock, at cost 13,257 10,043 -------------------------- ------------------- TOTAL INVESTMENTS AND SECURITIES 895,730 706,652 -------------------------- ------------------- LOANS: Loans held-for-sale, at lower of cost or market 47,872 36,359 Loans receivable, net 521,976 509,061 -------------------------- ------------------- TOTAL LOANS, NET 569,848 545,420 -------------------------- ------------------- Accrued interest receivable 16,554 14,926 Foreclosed real estate, net 316 413 Premises and equipment, net 21,322 19,555 Other assets, net 18,870 15,591 -------------------------- ------------------- TOTAL ASSETS $ 1,532,456 $ 1,311,388 -------------------------- ------------------- -------------------------- ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Savings and demand $ 146,087 $ 112,533 Time and IRA accounts 487,632 455,061 Accrued interest 5,291 3,837 -------------------------- ------------------- TOTAL DEPOSITS 639,010 571,431 -------------------------- ------------------- BORROWINGS: Securities sold under agreements to repurchase 581,520 416,171 Advances and borrowings from Federal Home Loan Bank 61,600 74,800 Term notes and other short-term borrowings 106,500 114,588 -------------------------- ------------------- TOTAL BORROWINGS 749,620 605,559 -------------------------- ------------------- Accrued expenses and other liabilities 38,849 27,368 -------------------------- ------------------- TOTAL LIABILITIES 1,427,479 1,204,358 -------------------------- ------------------- 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; 13,624,834 and 10,149,358 shares issued and outstanding, respectively 13,625 10,149 Additional paid-in capital 24,170 27,261 Legal surplus 8,630 5,908 Retained earnings 74,640 63,756 Treasury stock, at cost, 555,486 and 221,500 shares, respectively (13,710) (6,199) Accumulated other comprehensive income, net of taxes (2,378) 6,155 -------------------------- ------------------- TOTAL STOCKHOLDERS' EQUITY 104,977 107,030 -------------------------- ------------------- Total liabilities and stockholders' equity $ 1,532,456 $ 1,311,388 -------------------------- ------------------- -------------------------- ------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTER AND NINE MONTHS PERIOD ENDED ON MARCH 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION) <TABLE> <CAPTION> QUARTER ENDED MARCH 31, ---------------------------------------- 1999 1998 ------------------ ------------------ <S> <C> <C> INTEREST INCOME: Loans $ 15,853 $ 15,432 Mortgage-backed securities and collateralized mortgage obligations 10,451 6,107 Investment securities 2,881 4,277 Money market investments and FHLB stock 329 263 ------------------ ------------------ TOTAL INTEREST INCOME 29,514 26,079 ------------------ ------------------ INTEREST EXPENSE: Deposits 7,091 6,425 Securities sold under agreements to repurchase 6,793 5,192 Other borrowed funds and interest rate risk management 2,433 3,182 ------------------ ------------------ TOTAL INTEREST EXPENSE 16,317 14,799 ------------------ ------------------ NET INTEREST INCOME 13,197 11,280 ------------------ ------------------ Provision for loan losses 3,200 1,900 ------------------ ------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,997 9,380 ------------------ ------------------ NON-INTEREST INCOME: Trust, money management and brokerage fees 2,440 2,021 Mortgage banking activities 726 985 Bank service charges and fees and other operating income 842 1,088 Gain on sale of investment securities 2,017 210 Trading net activity (68) 139 Servicing income - - Gain on sale of servicing assets - - ------------------ ------------------ TOTAL NON-INTEREST INCOME 5,957 4,443 ------------------ ------------------ NON-INTEREST EXPENSES: Compensation and benefits 3,776 3,629 Occupancy and equipment 1,245 1,167 Professional and service fees 581 290 Advertising and business promotion 846 695 Insurance, including deposits insurance 120 238 Communications 349 326 Municipal and other general taxes 427 405 Printing, postage, stationery and supplies 204 161 Other 713 649 ------------------ ------------------ TOTAL NON-INTEREST EXPENSE 8,261 7,560 ------------------ ------------------ INCOME BEFORE INCOME TAXES 7,693 6,263 Provision for income taxes 1,070 825 ------------------ ------------------ NET INCOME $ 6,623 $ 5,438 ------------------- ----------------- ------------------- ----------------- INCOME PER COMMON SHARE: Basic $ 0.51 $ 0.41 ------------------ ------------------ Diluted $ 0.50 $ 0.40 ------------------ ------------------ Average shares outstanding 13,034 13,282 Average shares equivalents 325 443 ------------------ ------------------ 13,359 13,725 ------------------ ------------------ <CAPTION> NINE MONTHS PERIOD ENDED MARCH 31, --------------------------------------- 1999 1998 ------------------- ----------------- <S> <C> <C> INTEREST INCOME: Loans $ 46,648 $ 44,968 Mortgage-backed securities and collateralized mortgage obligations 25,781 17,142 Investment securities 10,992 11,381 Money market investments and FHLB stock 965 919 ------------------- ----------------- TOTAL INTEREST INCOME 84,386 74,410 ------------------- ----------------- INTEREST EXPENSE: Deposits 21,632 19,177 Securities sold under agreements to repurchase 19,036 13,747 Other borrowed funds and interest rate risk management 7,637 9,829 ------------------- ----------------- TOTAL INTEREST EXPENSE 48,305 42,753 ------------------- ----------------- NET INTEREST INCOME 36,081 31,657 ------------------- ----------------- Provision for loan losses 12,950 6,900 ------------------- ----------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 23,131 24,757 ------------------- ----------------- NON-INTEREST INCOME: Trust, money management and brokerage fees 7,035 6,034 Mortgage banking activities 2,759 2,584 Bank service charges and fees and other operating income 2,725 3,454 Gain on sale of investment securities 10,464 586 Trading net activity 1 307 Servicing income - 690 Gain on sale of servicing assets - 2,707 ------------------- ----------------- TOTAL NON-INTEREST INCOME 22,984 16,362 ------------------- ----------------- NON-INTEREST EXPENSES: Compensation and benefits 11,049 11,260 Occupancy and equipment 3,671 3,441 Professional and service fees 1,576 943 Advertising and business promotion 2,108 1,830 Insurance, including deposits insurance 313 625 Communications 1,123 1,031 Municipal and other general taxes 1,284 1,226 Printing, postage, stationery and supplies 562 493 Other 2,175 2,029 ------------------- ----------------- TOTAL NON-INTEREST EXPENSE 23,861 22,878 ------------------- ----------------- INCOME BEFORE INCOME TAXES 22,254 18,241 Provision for income taxes 3,205 2,650 ------------------- ----------------- NET INCOME $ 19,049 $ 15,591 ------------------- ----------------- ------------------- ----------------- INCOME PER COMMON SHARE: Basic $ 1.46 $ 1.18 ------------------- ----------------- Diluted $ 1.42 $ 1.14 ------------------- ----------------- Average shares outstanding 13,095 13,249 Average shares equivalents 373 448 ------------------- ----------------- 13,468 13,697 ------------------- ----------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1999 AND 1998 (IN THOUSANDS) <TABLE> <CAPTION> 1999 1998 --------------- ------------ CHANGES IN STOCKHOLDERS' EQUITY: - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> COMMON STOCK: Balance at beginning of period $ 10,149 $ 7,990 Stock split 3,385 1,912 Stock options exercised 91 102 --------------- ------------ BALANCE AT END OF PERIOD 13,625 10,004 --------------- ------------ ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 27,261 28,631 Stock split (3,385) (1,912) Stock options exercised 294 407 --------------- ------------ BALANCE AT END OF PERIOD 24,170 27,126 --------------- ------------ LEGAL SURPLUS: Balance at beginning of period 5,908 4,002 Transfer from retained earnings 2,722 1,382 --------------- ------------ BALANCE AT END OF PERIOD 8,630 5,384 --------------- ------------ RETAINED EARNINGS: Balance at beginning of period 63,756 49,694 Net income 19,049 15,591 Dividends declared and cash paid on fractional shares (5,443) (3,956) Transfer to legal surplus (2,722) (1,382) --------------- ------------ BALANCE AT END OF PERIOD 74,640 59,947 --------------- ------------ TREASURY STOCK: Balance at beginning of period (6,199) - Treasury stock purchased (7,511) (1,836) --------------- ------------ BALANCE AT END OF PERIOD (13,710) (3,227) --------------- ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES: Balance at beginning of period 6,155 913 Net change in fair value of securities available-for-sale, net of taxes (8,533) 1,319 --------------- ------------ BALANCE AT END OF PERIOD (2,378) 4,733 --------------- ------------ TOTAL STOCKHOLDERS' EQUITY $ 104,977 $ 103,967 --------------- ------------ --------------- ------------ COMPREHENSIVE INCOME: - ------------------------------------------------------------------------------------------------------------------ NET INCOME $ 19,049 $ 15,591 --------------- ------------ OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized net gains on securities arising during the period 1,931 1,905 Less: reclass adjustment for gains and losses included in net income (10,464) (586) --------------- ------------ NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES (8,533) 1,319 --------------- ------------ COMPREHENSIVE INCOME $ 10,516 $ 16,910 --------------- ------------ --------------- ------------ </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS PERIOD ENDED ON MARCH 31, 1999 AND 1998 (IN THOUSANDS) <TABLE> <CAPTION> 1999 1998 --------------- ------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,049 $ 15,591 --------------- ------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred loan origination fees and costs (3,994) (2,764) Amortization of premiums and accretion of discounts on investment securities 1,602 761 Depreciation and amortization of premises and equipment 2,087 1,815 Provision for loan losses 12,950 6,900 Gain on sale of investment securities available-for-sale (10,464) (586) Gain on sale of servicing assets - (2,707) Gain on sale of loans held-for-sale (471) (1,005) Decrease in trading securities 7,609 1,095 Increase in accrued interest receivable (1,628) (2,394) Increase in other assets (3,182) (2,652) Increase in accrued expenses and other liabilities 12,232 1,128 --------------- ------------- TOTAL ADJUSTMENTS 16,741 (409) --------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 35,790 15,182 --------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available-for-sale (475,246) (181,806) Sales of investment securities available-for-sale 242,121 31,103 Maturities of investment securities available-for-sale 21,670 23,580 Purchases of investment securities held-to-maturity - (914) Maturities and redemptions of investment securities held-to-maturity 50,406 12,175 Increase in Federal Home Loan Bank of New York stock (3,214) - Proceeds from sale of loans held-for-sale 90,586 32,504 Proceeds from sale of servicing assets - 11,855 Net origination of loans (164,111) (136,110) Capital expenditures (3,854) (1,895) --------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (241,642) (209,508) --------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in: Deposits 67,579 53,941 Securities sold under agreements to repurchase 165,349 132,842 Advances and borrowings from FHLB (13,200) (10,800) Repayments of term notes and other short-term borrowings (8,088) (367) Proceeds from exercise of stock options 385 509 Treasury stock acquired (7,511) (1,391) Dividends and cash paid on fractional shares (4,357) (3,702) --------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 200,157 171,032 --------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,695) (23,294) Cash and cash equivalents at beginning of period 19,489 41,036 --------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,794 $ 17,742 --------------- ------------- --------------- ------------- CASH AND CASH EQUIVALENTS INCLUDE: Cash and due from banks $ 9,816 $ 13,194 Money market investments 3,978 4,548 --------------- ------------- $ 13,794 $ 17,742 --------------- ------------- SUPPLEMENTAL DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES: Interest paid $ 88,050 $ 40,600 --------------- ------------- Income taxes 3,946 1,516 --------------- ------------- Real estate loans securitized into mortgage-backed securities $ 40,700 $ 76,100 --------------- ------------- </TABLE> THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4
NOTES TO UNAUDITED CONSOLIDATED ORIENTAL FINANCIAL GROUP INC. - ------------------------------------------------------------------------------- FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND 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 banking industry general practices. These principles require 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 Group is a bank holding company that 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 a delivery system of 19 branches located throughout Puerto Rico. The Bank directly or through its wholly-owned, broker-dealer subsidiary, Oriental Financial Services Corp., offers mortgage, consumer and commercial lending, auto and equipment lease financing, financial planning, money management and investment brokerage services, 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, 1998 contained in Oriental's 1998 Annual Report. Certain reclassifications have been made to the March 31, 1998 and June 30, 1998 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 March 31, 1999 and June 30, 1998, and the results of operations and cash flows for the quarter and nine months ended March 31, 1999 and 1998, in conformity with generally accepted accounting principles. NOTE 2 - INVESTMENT 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 as a separate component of stockholders' equity. 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 its par value. As a result, this investment is carried at cost and its redemption value represents its fair value. Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statement of income. Cost of securities is determined on the specific identification method. MONEY MARKET INVESTMENTS: At March 31, 1999 and June 30, 1998, the Group's money market investments were comprised of: <TABLE> <CAPTION> ( IN THOUSANDS) ----------------------------------------- MARCH 31, JUNE 30, ------------------ ------------------- <S> <C> <C> Securities purchased under agreements to resell $ - $ 5,000 Time deposits with other banks - 2,000 Money market accounts and other short-term investments 3,978 3,658 ------------------ ------------------- $3,978 $10,658 ------------------ ------------------- </TABLE> 5
TRADING SECURITIES: A summary of trading securities owned by the Group at March 31, 1999 and June 30, 1998, is as follows: <TABLE> <CAPTION> ( IN THOUSANDS) ----------------------------------------- MARCH 31, JUNE 30, ------------------ ------------------- <S> <C> <C> US Treasury securities $ 3,600 $ 3,574 Mortgage-backed securities 28,629 35,903 Pass-through certificates 2,602 2,963 ------------------ ------------------- $34,831 $42,440 ------------------ ------------------- </TABLE> The Group's trading portfolio weighted average yield at the dates above was 6.65% and 7.40%, respectively. 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 March 31, 1999 and June 30, 1998, were as follows: <TABLE> <CAPTION> MARCH 31, 1999 ( IN THOUSANDS) ----------------------------------------------------------------------------------- GROSS GROSS AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR WEIGHTED COST GAINS LOSS VALUE YIELD ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE US Treasury securities $ 76,327 $ 523 $ 1,184 $ 75,666 5.14% US Government agencies securities 80,875 638 23 81,490 6.84% PR Government securities 21,705 468 16 22,157 7.93% Mortgage-backed securities 432,432 1,694 3,489 430,637 6.74% Collateralized mortgage obligations 122,956 99 874 122,181 6.53% ---------------- -------------- ------------- ------------- ------------ $734,295 3,422 5,586 $732,131 6.58% ---------------- -------------- ------------- ------------- ------------ HELD-TO-MATURITY PR Government securities 3,566 4 35 3,535 7.40% Mortgage-backed securities 107,967 2,011 295 109,683 6.67% ---------------- -------------- ------------- ------------- ------------ 111,533 2,015 330 113,218 6.69% ---------------- -------------- ------------- ------------- ------------ FHLB stock 13,257 - - 13,257 6.75% ---------------- -------------- ------------- ------------- ------------ $859,085 $ 5,437 $ 5,916 $858,606 6.60% ---------------- -------------- ------------- ------------- ------------ ---------------- -------------- ------------- ------------- ------------ <CAPTION> JUNE 30, 1998 ( 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 $158,606 $ 4,753 152 $163,207 6.08% US Government agencies securities 85,619 1,393 - 87,012 6.89% PR Government securities 26,074 1 194 25,881 8.72% Mortgage-backed securities 202,855 2,446 41 205,260 6.86% ---------------- -------------- ------------- ------------- ------------ 473,154 8,593 387 481,360 6.71% ---------------- -------------- ------------- ------------- ------------ HELD-TO-MATURITY PR Government securities 3,575 1 - 3,576 7.40% Mortgage-backed securities 158,576 2,695 443 160,828 6.89% ---------------- -------------- ------------- ------------- ------------ 162,151 2,696 443 164,404 6.90% ---------------- -------------- ------------- ------------- ------------ FHLB stock 10,043 - - 10,043 7.15% ---------------- -------------- ------------- ------------- ------------ $645,348 $11,289 $ 830 $655,807 6.72% ---------------- -------------- ------------- ------------- ------------ ---------------- -------------- ------------- ------------- ------------ </TABLE> 6
The amortized cost and estimated fair value of the Group's investment securities at March 31, 1999, by contractual maturity, are shown in the next table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> 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 one year $ 2,066 $ 2,050 $ - $ - $ 2,066 $ 2,050 After one year to five years 25,350 25,724 1,052 1,058 26,402 26,782 After five years to ten years 132,081 131,659 8,733 8,849 140,814 140,508 Due after ten years 574,798 572,698 101,748 103,311 676,546 676,009 FHLB stock - - - - 13,257 13,257 ------------- ------------- ------------- -------------- ------------ ------------ $734,295 $732,131 $111,533 $113,218 $859,085 $858,606 ------------- ------------- ------------- -------------- ------------ ------------ </TABLE> Securities in the due after ten years category, include an AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of $19,986,000 which commenced paying down principal on August 1, 1994, and is expected to be fully collected within the next two fiscal years. This category also includes $60,641,000 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 nine months of fiscals 1999 and 1998 were $242,121,000 and $31,103,000, respectively. Gross realized gains and losses on those sales during the first nine months of fiscal 1999 were $10,515,000 and $51,000, respectively. These were $878,000 and $292,000, respectively, in the same period of fiscal 1998. NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES: The Group's lending activity is with borrowers 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 non-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 personal loans, and residential mortgage loans. The composition of the Group's loan portfolio at March 31,1999 and June 30, 1998 was as follows: <TABLE> <CAPTION> ( IN THOUSANDS) MARCH 31, JUNE 30, ---------------- ------------- <S> <C> <C> LOANS SECURED BY REAL ESTATE: Residential $264,486 $233,161 Construction and non-residential real estate loans 6,926 7,916 Home equity loans and personal loans collateralized by real estate 16,087 16,457 ---------------- ------------- 287,499 257,534 Less: net deferred loan fees and servicing rights sold (3,463) (2,363) ---------------- ------------- 284,036 255,171 ---------------- ------------- OTHER LOANS: Commercial and auto loans 12,473 16,768 Personal consumer loans and credit lines 117,492 102,572 Financing leases, net of unearned interest 117,583 140,208 ---------------- ------------- 247,548 259,548 ---------------- ------------- LOANS RECEIVABLE 531,584 514,719 Allowance for loan losses (9,608) (5,658) ---------------- ------------- LOANS RECEIVABLE, NET 521,976 509,061 Loans held-for-sale 47,872 36,359 ---------------- ------------- TOTAL LOANS, NET $569,848 $545,420 ---------------- ------------- ---------------- ------------- </TABLE> 7
At March 31, 1999 and June 30, 1998 residential mortgage loans held-for-sale amounted $47,872,000 and $36,359,000 respectively. All mortgage loans originated and sold during the first nine months of fiscal 1999 and 1998 were sold based on pre-established commitments or at market values. Net gains on those sales during the first nine months of fiscal years 1999 and 1998 were $471,200 and $1,005,000 respectively, and are included in the statement of income as part of mortgage banking activities. Refer to Table 9 at page 20 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 third quarter and nine months ended March 31, 1999 and 1998. NOTE 4 - INTEREST RATE RISK MANAGEMENT The Group utilizes 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 following table indicates the types of swaps and caps outstanding and their terms at March 31, 1999: <TABLE> <CAPTION> (DOLLARS N THOUSANDS): <S> <C> INTEREST RATE SWAPS Notional amount $205,000 Weighted average pay rate - fixed 5.71% Weighted average receive rate - floating 5.08% Maturity in months 2 to 29 Floating rate in percent of Libor 85 to 100% CAPS Notional amount $120,000 Cap rate 6.00-6.50% Current 90 day Libor 5.07% Maturity in months 1 to 18 </TABLE> The caps and interest rate swaps were entered 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 which yields are tied to the performance of one of the following stock market indexes, Standard & Poor's 500, Dow Jones Industrial Average and Russell 2000. 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 utilizes interest rate swap/hedge 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 of the month-end value of the corresponding index in exchange for a semiannual fixed interest cost. At March 31, 1999, the notional amount of these agreements totaled $55,255,000. NOTE 7- INCOME PER COMMON SHARE AND STOCK SPLIT On August 18, 1998, the Group declared a four-for-three (33.3%) stock split on its 10,154,358 shares of common stock outstanding at September 30, 1998. As a result, 3,384,674 shares of common stock were issued on October 15, 1998 thus increasing shares to 13,539,032 at such date. Earnings per share for all periods presented in the Consolidated Statements of Income are computed in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per share excludes potential dilution and is calculated by dividing net income by the weighted average number of outstanding common shares. Diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average common shares are increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Exercisable stock options outstanding under the Group's stock option plan were considered in the diluted earnings per share. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- OVERVIEW OF FINANCIAL PERFORMANCE Oriental reported an increase of 25% in diluted earnings per share for the third quarter of fiscal 1999, as net income rose to $6.6 million or $.50 per share from $5.4 million or $.40 per share in the same period of fiscal 1998. The Group's profitability ratios for the third quarter of fiscal 1999 reflect annualized returns of 1.76% on assets (ROA) and 25.02% on stockholder's equity (ROE) versus 1.72% and 20.95%, respectively, in the comparable fiscal 1998 period. For the first nine months of fiscal 1999, the Group's diluted earnings per share also climbed 25%, as net income reached $19.0 million or $1.42 per share compared with $15.6 million or $1.14 per share in the same period of fiscal 1998. The ROA and ROE for the first nine months of fiscal 1999 were 1.78% and 22.78%, respectively, up from 1.73% and 21.04%, respectively, in the same period of fiscal 1998. The Group's earnings growth was driven by increases in net interest income and non-interest income; partially offset by a rise in the provision for loan losses. A solid growth in interest-earning assets and strong performances by the Group's trust, brokerage and money management and treasury business units fueled the Group's operating income improvement. At March 31, 1999, the Group's total financial assets owned or managed, which consists of Bank assets, assets managed by the trust and assets gathered by the broker-dealer, reached $3.7 billion, an increase of 16% when compared to the $3.2 billion a year ago. At March 31, 1999, Bank assets reached $1.532 billion from $1.262 billion a year ago, an increase of 21%. Assets managed by the trust grew 8% to $1.338 billion versus $1.243 billion a year ago, and assets gathered by the broker-dealer increased 21% to $831.7 million from $686 million the year before. See "Selected Financial Data" on page 10 for more details. The different components that resulted in the Group's continued profitability are discussed in detail in the following pages. RESULT OF OPERATIONS As a diversified financial services provider, 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 third quarter of fiscal 1999, the Group's net interest income grew 17% to $13.2 million from $11.3 million reported in the same period of fiscal 1998 and the interest rate spread remained flat at 3.53% versus the same period of fiscal 1998. For the first nine months of fiscal 1999, net interest income rose 14% to $36.1 million from $31.7 million in the same period a year ago and the interest rate spread narrowed 14 basis points to 3.43% from 3.57% in the same period of fiscal 1998. These rises in net interest income were propelled by the larger volume of interest-earning assets and a modest reduction in the Group's cost of funds. Tables 1 and 1-A analyzes the major categories of interest-earning assets and interest-bearing liabilities, and their respective interest income and expenses and yields and costs, and their impact on net interest income due to their changes in volume and rates. The Group's interest income for the third quarter of fiscal of 1999 increased by 13% or $3.4 million to $29.5 million from $26.1 million posted in the third quarter of fiscal 1998. For the first nine months of fiscal 1999, interest income totaled $84.4 million, up 13% from the $74.4 million posted in fiscal 1998. These growths in interest income were driven by larger average volume of interest-earning assets, partially offset by a decline in the yield performance of interest-earning assets. Average interest-earning assets for the third quarter of fiscal 1999 reached $1.402 billion an increase of 19% compared with $1.179 billion for the same quarter of fiscal 1998. For the first nine months of fiscal 1999, average interest-earning assets grew 19% to $1.321 billion from $1.111 million a year ago. These volume increase were fueled by a solid growth on the Group's investment portfolios, mainly mortgage-backed securities as Oriental continues its strategy of securiticizing its larger mortgage loan production. 9
SELECTED FINANCIAL DATA FOR THE QUARTER AND NINE MONTHS PERIOD ENDED ON MARCH, 31 1999 AND 1998 (IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS) <TABLE> <CAPTION> QUARTER ENDED NINE MONTHS PERIOD ENDED MARCH 31, MARCH 31, --------------------------------------- ------------------------------------- Inc. / INC./ 1999 1998 (dec.) 1999 1998 (dec.) ------------- ------------- ------- -------------- ----------- ----- EARNINGS AND DIVIDENDS DECLARED: - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest income $ 29,514 $ 26,079 13% $ 84,386 $ 74,410 13% Interest expense 16,317 14,799 10% 48,305 42,753 13% ------------- ------------- ------- -------------- ------------ ----- NET INTEREST INCOME 13,197 11,280 17% 36,081 31,657 14% Provision for loan losses 3,200 1,900 68% 12,950 6,900 88% Recurring non-interest income 4,008 4,094 (2)% 12,519 12,072 4% Non recurring non-interest income 1,949 349 458% 10,465 4,290 144% Recurring non-interest expenses 8,261 7,478 10% 23,524 22,745 3% Non recurring non-interest expenses - 82 (100)% 337 133 153% Provision for income taxes 1,070 825 30% 3,205 2,650 21% ------------- ------------- ------- -------------- ------------ ----- NET INCOME $ 6,623 $ 5,438 22% $ 19,049 $ 15,591 22% ------------- ------------- ------- -------------- ------------ ----- ------------- ------------- ------- -------------- ------------ ----- Dividends declared $ 1,960 $ 1,482 32% $ 5,443 $ 3,956 38% ------------- ------------- ------- -------------- ------------ ----- Dividends declared per share $ 0.150 $ 0.113 33% $ 0.413 $ 0.300 38% ------------- ------------- ------- -------------- ------------ ----- PER SHARE INFORMATION: - --------------------------------------------------------------------------------------------------------------------------------- Basic $ 0.51 $ 0.41 24% $ 1.46 $ 1.18 24% ------------- ------------- ------- -------------- ------------ ----- Diluted $ 0.50 $ 0.40 25% $ 1.42 $ 1.14 25% ------------- ------------- ------- -------------- ------------ ----- Average shares and equivalents 13,359 13,725 (3)% 13,468 13,697 (2)% ------------- ------------- ------- -------------- ------------ ----- Book value $ 7.70 $ 7.80 (1)% -------------- ------------ ----- Market price at end of period $ 27.94 $ 27.85 0% -------------- ------------ ----- PERIOD END BALANCES: ( MARCH 31, ) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FINANCIAL ASSETS Total Bank assets $ 1,532,500 $ 1,261,500 21% Trust assets managed 1,337,700 1,242,900 8% Assets gathered by broker-dealer 831,700 686,000 21% -------------- ------------ ----- $ 3,701,900 $ 3,190,400 16% -------------- ------------ ----- INTEREST-EARNING ASSETS Investments and securities $ 895,730 $ 640,608 40% Loans and loans held-for-sale 569,848 557,733 2% -------------- ------------ ----- $ 1,465,578 $ 1,198,341 22% -------------- ------------ ----- INTEREST-BEARING LIABILITIES Deposits $ 639,010 $ 551,483 16% Repurchase agreements 581,520 380,757 53% Borrowings 168,100 193,649 (13)% -------------- ------------ ----- $ 1,388,630 $ 1,125,889 23% -------------- ------------ ----- CAPITAL AND RELATED REGULATORY RATIOS: Stockholders' equity $ 104,977 $ 103,967 1% -------------- ------------ ----- Leverage capital 7.04% 7.82% (10)% -------------- ------------ ----- Total risk-based capital 20.07% 19.79% 1% -------------- ------------ ----- Tier 1 risk-based capital 18.82% 18.54% 1% -------------- ------------ ----- SELECTED FINANCIAL RATIOS (IN PERCENT): - --------------------------------------------------------------------------------------------------------------------------------- Return on average assets (ROA) 1.76% 1.72% 1.78% 1.73% ------------- ------------- -------------- ------------ Return on average equity (ROE) 25.02% 20.95% 22.77% 21.04% ------------- ------------- -------------- ------------ Efficiency ratio 48.02% 48.52% 48.40% 50.99% ------------- ------------- -------------- ------------ Expense ratio 1.21% 1.15% 1.11% 1.20% ------------- ------------- -------------- ------------ Interest rate spread 3.53% 3.53% 3.43% 3.57% ------------- ------------- -------------- ------------ OTHER INFORMATION: - --------------------------------------------------------------------------------------------------------------------------------- Number of banking offices 19 18 -------------- ------------ </TABLE> 10
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: <TABLE> <CAPTION> (IN THOUSANDS) THIRD QUARTER OF FISCAL, - -------------------------------------------------- ------------------------------------------------------------------------- INTEREST AVERAGE RATE AVERAGE BALANCE ----------------------- -------------------- ---------------------------- DESCRIPTION 1999 1998 1999 1998 1999 1998 - -------------------------------------------------- ----------- ---------- ---------- ------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> LOANS: Real Estate $ 7,692 $ 6,861 10.14% 9.67% $ 303,330 $ 283,705 Consumer 4,515 3,753 14.04% 13.74% 130,457 110,776 Commercial 173 257 9.67% 10.54% 7,168 9,754 Financing Leases 3,472 4,560 12.38% 12.30% 112,194 148,257 ------------ --------- ----------- ------- -------------- ------------ 15,852 15,431 11.51% 11.21% 553,149 552,492 ------------ --------- ----------- ------- -------------- ------------ INVESTMENTS: Mortgage-backed securities and CMO's 10,451 6,107 6.48% 6.96% 644,902 350,909 Investment Securities 2,881 4,277 6.32% 6.67% 182,459 256,598 Other-interest earning assets 329 264 6.03% 5.57% 22,147 19,202 ------------ --------- ----------- ------- -------------- ------------- 13,661 10,648 6.43% 6.80% 849,508 626,709 ------------ --------- ----------- ------- -------------- ------------- TOTAL INTEREST-EARNING ASSETS $ 29,513 $ 26,079 8.44% 8.87% $ 1,402,657 $1,179,201 ------------ --------- ----------- ------- -------------- ------------- DEPOSITS: Savings and demand $ 721 $ 693 2.08% 2.66% $ 140,641 $ 105,749 Time deposits and IRA accounts 6,370 5,731 5.33% 5.57% 484,564 417,641 ------------ --------- ----------- ------- -------------- ------------- 7,091 6,424 4.60% 4.98% 625,205 523,390 ------------ --------- ----------- ------- -------------- ------------- BORROWINGS: Repurchase agreements 6,793 5,192 4.95% 5.40% 556,367 389,590 FHLB funds 825 1,385 5.65% 5.84% 59,203 96,155 Term notes and other sources of funds 1,248 1,516 4.75% 5.36% 106,500 114,723 Interest rate risk management 361 282 0.20% 0.19% - - ------------ --------- ----------- ------- -------------- ------------- 9,227 8,375 5.18% 5.66% 722,070 600,468 ------------ --------- ----------- ------- -------------- ------------- TOTAL INTEREST-BEARING LIABILITIES $ 16,318 $ 14,799 4.91% 5.34% $ 1,347,275 $1,123,858 ------------ --------- ----------- ------- -------------- ------------- NET INTEREST INCOME $ 13,195 $ 11,280 3.53% 3.53% ------------ --------- ----------- ------- ------------ --------- ----------- ------- INTEREST RATE MARGIN 3.72% 3.78% ----------- ------- ----------- ------- EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 55,382 $ 55,343 -------------- ------------- -------------- ------------- INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 104.11% 104.92% -------------- ------------- <CAPTION> - ---------------------------------------------------------------------------------------------------- BASIS CHANGE IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME: Loans (1) (2) $ (26) $ 447 $ 421 0.30% Investments 3,921 (908) 3,013 (0.36)% ------------ --------- ----------- ------- $ 3,895 $ (461) $ 3,434 (0.43)% ------------ --------- ----------- ------- INTEREST EXPENSE: Deposits $ 1,163 $ (496) $ 667 (0.38)% Borrowings 1,555 (703) 852 (0.48)% ------------ --------- ----------- ------- 2,718 (1,199) 1,519 (0.43)% ------------ --------- ----------- ------- NET INTEREST INCOME $ 1,177 $ 738 $ 1,915 0.00% ------------ --------- ----------- ------- ------------ --------- ----------- ------- </TABLE> (1) - Loans averages exclude non-performing loans. (2) - Real-estate averages include loans held-for-sale. 11
TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE: <TABLE> <CAPTION> (IN THOUSANDS) FIRST NINE MONTHS OF FISCAL, - --------------------------------------------------- --------------------------------------------------------------------------- INTEREST AVERAGE RATE AVERAGE BALANCE ------------------------- ------------------ ---------------------------- DESCRIPTION 1999 1998 1999 1998 1999 1998 - --------------------------------------------------- ------------- ---------- -------- -------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> LOANS: Real Estate $ 21,929 $20,089 10.03% 9.57% $ 291,534 $ 280,001 Consumer 13,228 10,246 13.77% 13.65% 127,979 100,031 Commercial 705 818 10.85% 11.11% 8,670 9,824 Financing Leases 10,786 13,815 12.09% 12.04% 118,945 153,001 ------------- ---------- -------- -------- ------------- -------------- 46,648 44,968 11.36% 11.04% 547,128 542,857 ------------- ---------- -------- -------- ------------- -------------- Investments: Mortgage-backed securities and CMO's 25,781 17,142 6.53% 7.08% 526,698 322,874 Investment Securities 10,992 11,381 6.50% 6.73% 225,445 225,531 Other-interest earning assets 965 920 5.83% 6.13% 22,049 19,979 ------------- ---------- -------- -------- ------------- -------------- 37,738 29,443 6.50% 6.91% 774,192 568,384 ------------- ---------- -------- -------- ------------- -------------- TOTAL INTEREST-EARNING ASSETS $ 84,386 $74,411 8.51% 8.93% $ 1,321,320 $ 1,111,241 ------------- ---------- -------- -------- ------------- -------------- DEPOSITS: Savings and demand $ 2,166 $ 2,052 2.27% 2.63% $ 127,132 $ 103,755 Time and IRA accounts 19,466 17,125 5.43% 5.56% 477,465 410,585 ------------- ---------- -------- -------- ------------- -------------- 21,632 19,177 4.77% 4.97% 604,597 514,340 ------------- ---------- -------- -------- ------------- -------------- BORROWINGS: Repurchase agreements 19,036 13,747 5.19% 5.44% 488,625 336,891 FHLB funds 2,698 4,235 5.73% 5.87% 62,756 96,148 Term notes and other sources of funds 4,115 4,611 4.99% 5.34% 109,754 115,114 Interest rate risk management 824 982 0.17% 0.24% - - ------------- ---------- -------- -------- ------------- -------------- 26,673 23,575 5.37% 5.73% 661,135 548,153 ------------- ---------- -------- -------- ------------- -------------- TOTAL INTEREST-BEARING LIABILITIES $ 48,305 $42,752 5.08% 5.36% $ 1,265,732 $ 1,062,493 ------------- ---------- -------- -------- ------------- -------------- NET INTEREST INCOME $ 36,081 $31,659 3.43% 3.57% ------------- ---------- -------- -------- ------------- ---------- -------- -------- INTEREST RATE MARGIN 3.64% 3.80% -------- -------- -------- -------- EXCESS OF INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES $ 55,588 $ 48,748 ------------- -------------- ------------- -------------- INTEREST-EARNING ASSETS OVER INTEREST-BEARING LIABILITIES RATIO 104.39% 104.59% ------------- -------------- <CAPTION> - ---------------------------------------------------------------------------------------------------- BASIS CHANGE IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME: Loans (1) (2) $ 516 $ 1,164 $ 1,680 0.32% Investments 10,912 (2,617) 8,295 -0.41% ---------- ---------- --------- ------- $ 11,428 $(1,453) $ 9,975 -0.42% ---------- ---------- --------- ------- INTEREST EXPENSE: Deposits $ 3,249 $ (794) $ 2,455 -0.20% Borrowings 4,345 (1,247) 3,098 -0.36% ---------- ---------- --------- ------- 7,594 (2,041) 5,553 -0.28% ---------- ---------- --------- ------- Net Interest Income $ 3,834 $ 588 $ 4,422 -0.14% ---------- ---------- --------- ------- ---------- ---------- --------- ------- </TABLE> (1) - Loans averages exclude non-performing loans. (2) - Real-estate averages include loans held-for-sale. 12
The average yield on interest-earning assets for the third quarter of fiscal 1999 was 8.43% or 43 basis points lower than the 8.86% attained in fiscal 1998. For the first nine months of fiscal 1999 was to 8.51% or 41 basis points lower than the 8.92% reported a year ago. Both declines result from 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, coupled by a slight decline in the investment portfolio yield performance due to general market conditions. Interest expense for the third quarter fiscal 1999 rose 10% or $1.5 million to $16.3 million from $14.8 million reported in fiscal 1998. For the first nine months of fiscal 1999, interest expense totaled $48.3 million, up 13% from $42.8 million posted in fiscal 1998. These increases were driven by a higher volume of interest-bearing liabilities used to fund the Group's interest-earning assets growth, as previously explained; tempered by a decline in the average cost of funds. Average interest-bearing liabilities for the third quarter of fiscal 1999 reached $1.347 billion, up 20% from the $1.124 billion for the same quarter of fiscal 1998. For the first nine months of fiscal 1999, interest-bearing liabilities climbed 19% to $1.266 billion from $1.062 million a year ago. These increases in volume reflect strong growths in repurchase agreements and deposits, mainly time deposits and IRA accounts. These rises were necessary to fund the Group's total interest-earning asset growth. The average cost of funds on interest-bearing liabilities for the third quarter of fiscal 1999 was 4.91% or 43 basis points lower than the 5.34% attained in fiscal 1998. For the first nine months of fiscal 1999, was 5.08% or 28 basis points lower than the 5.36% attained in fiscal 1998. Both decreases were principally related to a decline in the cost of repurchase agreements, time deposits and IRA accounts and term notes; enhanced by a reduction in the cost of interest-hedging activities (swaps and caps). A favorable lower interest rate scenario resulting from short-term interest rate cuts by the federal reserve triggered the overall reduction in cost of funds. PROVISION FOR LOAN LOSSES The Group's provision for loans losses for the third quarter of fiscal 1999 increased to $3.2 million from $1.9 million for the same period of fiscal 1998. For the first nine months of fiscal 1999, the provision for loan losses amounted to $13 million versus $6.9 million in the same period the year before. The main reason for the increase in the provision was management's goal of further boosting the Group's coverage ratio of reserve to total loans, which increased to 1.66% from 1.21% a year ago. Also to respond to the higher level of credit losses in the consumer and leasing portfolios due to a record level of personal bankruptcies experienced in Puerto Rico. Please refer to the allowance for loan losses and non-performing assets section for a more detailed analysis of the allowance for loan losses, net charge-offs and credit quality statistics. NON-INTEREST INCOME Recurring non-interest income for the third quarter totaled $4.0 million, a 2% drop versus the $4.1 million in the same period of fiscal 1998. This slight decrease stems from declines in mortgage banking activities and bank service fees and other operating revenues, partially tempered by higher trust, brokerage and money management revenues, see Table 2. For the first nine months of fiscal 1999 rose $12.5 million, 4% higher than the $12.1 million in the same period of fiscal 1998. This improvement reflects increases in mortgage banking activities and trust, brokerage and money management revenues offset partially by lower bank service fees and other operating revenues. Trust, money management and brokerage fees, the principal component of recurring non-interest income, reflected strong results during fiscal 1999. For the third quarter and first nine months of fiscal 1999, this fees totaled $2.4 million and $7.0 million, respectively, versus the $2.0 million and $6.0 million recorded in the same period the year before, up 21% and 17%, respectively. These increases were possible to a larger volume of accounts and assets managed by the trust department and a significant growth in the assets gathered by the broker-dealer subsidiary, see "Financial Condition" section. Mortgage banking activities for the third quarter of fiscal 1999 amounted to $726,000, 26% lower than the $985,000 earned in the same period of fiscal 1998. The net decrease experienced during the past quarter results mainly from losses the Group incurred on the sale of mortgage loans in the secondary market. This losses reflect management's decision of selling a large group of real estate loans with a 5.50% yield, that were hindering the loans portfolio yield performance, to improve the Group's yield performance and interest rate risk exposure. For the first nine months of fiscal 1999, mortgage banking activities totaled $2.8 million, an increase of 7% versus the $2.6 million a year ago. This increase was driven by a higher volume of loan origination combined with gains realized on sale of mortgage loans in the secondary market. This increase reflects the robust home finance market in Puerto Rico as Oriental's consolidates as the third largest mortgage origination producer. Bank services fees and other operating revenues, which consist primarily of service charges on deposit accounts, leasing fees, late charges collected on loans and rental revenues, amounted to $842,000 for the third quarter fiscal 1999, 23% lower when compared to the $1.1 million reported on the same period a year earlier. They totaled $2.7 million for the first nine months of fiscal 1999, a 21% drop versus the $3.5 million on the same period in fiscal 1998. Both decreases were a combination of a decline in leasing fees and rental revenues, partially offset by higher service charges on deposit accounts and late charges collected on loans. 13
SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> ------------------------------ ------------------------------- QUARTER ENDED NINE MONTHS PERIOD ENDED MARCH 31, MARCH 31, ------------------------------ ------------------------------- 1999 1998 % 1999 1998 % ------------------------------ ------------------------------- TABLE 2 - NON-INTEREST INCOME SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> RECURRING NON-INTEREST INCOME: Trust, money management and brokerage fees $ 2,440 $ 2,021 21% $ 7,035 $ 6,034 17% Mortgage banking activities 726 985 -26% 2,759 2,584 7% Bank service fees and other operating revenues 842 1,088 -23% 2,725 3,454 -21% ------------ ----------- ------ -------- -------- ------ 4,008 4,094 -2% 12,519 12,072 4% ------------ ----------- ------ -------- -------- ------ NON RECURRING NON-INTEREST INCOME: Securities and trading net activity 1,949 349 458% 10,465 893 1072% Servicing income - - 0% - 690 -100% Net gain on sale of servicing assets - - 0% - 2,707 -100% ------------ ----------- ------ -------- -------- ------ 1,949 349 458% 10,465 4,290 144% ------------ ----------- ------ -------- -------- ------ TOTAL NON-INTEREST INCOME $ 5,957 $ 4,443 34% $22,984 $16,362 40% ------------ ----------- ------ -------- -------- ------ ------------ ----------- ------ -------- -------- ------ RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 48.52% 54.75% 53.22% 53.08% ------------ ----------- -------- -------- TABLE 3 - NON-INTEREST EXPENSES SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES: Compensation and benefits $ 3,776 $ 3,629 4% $11,049 $11,260 -2% Occupancy and equipment 1,245 1,167 7% 3,671 3,441 7% Professional fees 581 290 100% 1,576 943 67% Advertising and business promotion 846 695 22% 2,108 1,830 15% Insurance, including deposits insurance 120 238 -50% 313 625 -50% Real estate owned expenses 12 16 -25% 24 56 -57% Communications 349 326 7% 1,123 1,031 9% Municipal and property taxes 427 405 5% 1,284 1,226 5% Printing, stationery, postage and supplies 204 161 27% 562 493 14% Other operating expenses 701 551 27% 1,814 1,840 -1% ------------ ----------- ------ -------- -------- ------ RECURRING NON-INTEREST EXPENSES 8,261 7,478 10% 23,524 22,745 3% Other non-recurring expenses - 82 -100% 337 133 153% ------------ ----------- ------ -------- -------- ------ TOTAL NON-INTEREST EXPENSES $ 8,261 $ 7,560 9% $23,861 $22,878 4% ------------ ----------- ------ -------- -------- ------ RELEVANT RATIOS: Efficiency ratio 48.02% 48.52% 48.40% 50.99% ------------ ----------- -------- -------- Expense ratio 1.21% 1.15% 1.11% 1.20% ------------ ----------- -------- -------- TABLE 4 - COMPENSATION AND BENEFITS SUMMARY - --------------------------------------------------------------------------------------------------------------------------------- COMPENSATION AND BENEFITS: Fixed $ 2,247 $ 2,158 4% $ 6,595 $ 6,763 -2% Variable 1,529 1,471 4% 4,454 4,497 -1% ------------ ----------- ------ -------- -------- ------ $ 3,776 $ 3,629 4% $11,049 $11,260 -2% ------------ ----------- ------ -------- -------- ------ RELEVANT RATIOS: Compensation and benefits to recurring non-interest expenses 45.71% 48.53% 46.97% 49.51% ------------ ----------- -------- -------- Variable compensation to total compensation 40.49% 40.53% 40.31% 39.94% ------------ ----------- -------- -------- Compensation to total average assets 1.00% 1.13% 1.03% 1.23% ------------ ----------- -------- -------- Average compensation per employee $ 40.6 $ 38.1 -------- -------- Bank assets per employee $ 4,715 $ 3,721 -------- -------- GROUP'S WORK FORCE: Bank 325 339 Trust 28 22 Brokerage 11 6 -------- -------- 364 367 -------- -------- </TABLE> 14
For the third quarter of fiscal 1999, securities and trading gains amounted to $1.9 million versus $349,000 in the same period of fiscal 1998. For the first nine months of fiscal 1999, they increased to $10.5 million from $893,000 reported in the same period a year ago. As result of the favorable market opportunities, during the past two quarters the Group sold a significant quantity of investment securities as part of its asset/liability management. The gains realized resulted from favorable market conditions as interest rates declined during the latter part of 1998. For further discussion of the Group's investment securities, see Note 2 of the attached Consolidated Financial Statements. During the second quarter of fiscal 1998, in a move to strengthen its future earnings, the Group sold its mortgage loans servicing portfolio, including $550 million serviced to others, to Doral Financial Corporation. The Group recorded a net gain of $2.7 million on this transaction. The divestiture of the mortgage servicing operation is indicative of a wider strategy guiding the Group to concentrate on mortgage origination, trust, money management, brokerage, personal loans and deposit accounts with the highest earnings potential. The decrease in servicing income is directly related to the divestiture mentioned above. NON-INTEREST EXPENSES Recurring non-interest expenses for the third quarter of fiscal 1999, increased 11% to $8.3 million from $7.5 million during the same period of fiscal 1998, see Table 3. Notwithstanding the above increase, the annualized efficiency ratio and the expense ratio for the third quarter of fiscal 1999 were 48.02% and 1.21%, respectively, versus 48.52% and 1.15%, respectively, the year before. For the first nine months of fiscal 1999 recurring non-interest expenses amounted to $23.5 million versus $22.7 million, up 3%. The efficiency ratio and the expense ratio for the first nine months of fiscal 1999 substantially improved to 48.40% and 1.11%, respectively, from 50.99% and 1.20%, respectively, a year earlier. Employee compensation and benefits, the Group's largest expense category, amounted to $3.8 million or 1.0 % of total average assets for the third quarter of fiscal 1999, 4% higher than the $3.6 million or 1.13 % of total average assets reported in the same period of fiscal 1998. This increase results from modest growths in both fixed and variable compensation. The rise in fixed compensation reflects salary merit increases and the climb in variable compensation stems from larger commissions and bonuses paid as result of the increased real estate loan and brokerage productivity. For the first nine months of fiscal 1999 totaled $11.0 million or 1.03 % of total average assets, 2% lower than $11.3 million or 1.23 % of total average assets reported in fiscal 1998. This reduction results mainly from lower employment levels during the first months of fiscal 1999 as result of the divestiture of the mortgage servicing department and reengineering of some of the Group's support departments. The composition of the Group's employee compensation and benefits for the periods analyzed remained similar as variable compensation represented about 40% of the total compensation, see table 4. All other recurring non-interest expenses for the third quarter of fiscal 1998 increased 16% to $4.5 million as compared to $3.9 million during the same period of fiscal 1998. For the first nine months of fiscal 1999, they totaled $12.5 million or 9% higher than $11.5 million reported in fiscal 1998. These rises were led by increases in professional and service fees, advertising and business promotion and occupancy and equipment. The larger amount of professional and service fees reflect the Group's higher expenditures related with consulting and technical support. 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 depreciation from leasehold improvements and EDP equipment. This result from the additional banking offices opened during the past 18 months and the enhancements made to the Group's systems to enable them expand its electronic delivery capabilities and improve the customers' service delivery. PROVISION FOR INCOME TAXES The provision for income taxes for the third quarter of fiscal 1999 amounted to $1.1 million or 13.9% of pre-tax earnings compared with $825,000 or 13.2% of pre-tax earnings a year ago, up 30%. For the first nine months of fiscal 1999, they totaled $3.2 or 14.4% of pre-tax earnings versus with $2.7 million or 14.5% of pre-tax earnings a year ago, an increase of 21%. The increase in fiscal 1999 was mainly due to higher pre-tax earnings. 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. 15
FINANCIAL CONDITION GROUP'S ASSETS At the end of the third quarter of fiscal 1999, the Group's total assets amounted to $1.532 billion, an increase of 21% when compared to the $1.261 billion a year ago. At the same date, interest-earning assets reached $1.466 billion, an increase of $267 million or 22% versus the $1.198 billion a year earlier. This robust assets growth reflects a significant gain in the investment portfolio of $255 million or 40% see Table 5. Total investments are Oriental's largest interest-earning assets component. It consists mainly of money market investments, U.S. Treasury notes, U.S. Government agencies bonds, mortgage-backed securities, collateralized mortgage obligations and PR Government municipal bonds. The investment portfolio is of a high quality, approximately 98% is rated AAA at the end of the third 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 financial statements. The investment portfolio expansion was driven by a strong growth in mortgage-backed securities and CMO's, which increased to $692 million or 77% of the total portfolio from $364 million or 57% the year before, as Oriental continues its strategy of pooling guaranteed real estate loans into mortgage-backed securities. However, investment securities decreased 29% to $186 million or 21% of the total portfolio from $262 million or 41% a year ago. This reduction reflects the significant quantity of US Government securities sold during the past two quarters as part of the Group's asset/liability management, as previously explained. All of the investment securities sold were replenished with mortgage-backed securities and CMO's that provide the Group a better yield performance and liquidity position, see Table 5 for the Group's investments summary and composition At March 31,1998, Oriental's loan portfolio, the second largest category of the Bank's interest-earning assets, amounted to $570 million, 2% higher than the $558 million a year ago. This growth was led by increases in the real estate and consumer portfolios of 14% and 13%, respectively. These were partially offset by a downsize in the leasing and commercial portfolio's and an increase in the allowance for loan losses of $2.8 million or 41%. Table 5 presents the Group's loan portfolio composition and mix at the end of the periods analyzed. The Bank's real estate loans portfolio amounted to $318 million or 55% of the loan portfolio at March 31, 1999, a 14% increase versus $280 million or 50% of the loan's portfolio the year before. The rise results from a sharp growth in originations due to the lower interest rate environment which increased the demand for mortgage loans for home purchases, as well as the demand for refinancing existing mortgages. At the end of the third quarter of fiscal 1999, the consumer loans portfolio totaled $135 million or 23% of the Group's loan portfolio, a 13% growth versus the $119 million or 21% of the Group's loan portfolio a year ago. Personal loans which amounted to $104 million at the end of the third quarter of fiscal 1999, or 16% over the $90 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 and credit scoring system. The Bank's leasing portfolio amounted to $118 million or 20% of the loan portfolio at the end of the third quarter of fiscal 1999, a 24% decrease versus $154 million or 27% of the loan portfolio a year ago. The downsize reflects the Group's intentional slowdown in lease originations, largely attributed to the strengthening of the underwriting standards in response to credit losses experienced during the past year, see "Provision for Loan Losses" under "Results of Operations". LIABILITIES AND SOURCES OF FUNDS As shown in Table 6, at March 31, 1999, Oriental's total liabilities reached $1.427 billion, 23% higher than the $1.157 billion reported a year ago. Interest-bearing liabilities, the Group's sources of funding, amounted to $1.389 billion at the end of the third quarter of fiscal 1999 versus $1.126 billion the year before, a 23% increase. This growth was driven by increases in deposits and repurchase agreements of 16% or $88 million and 53% or $201 million, respectively. Deposits at the end of the third quarter of fiscal 1999, the second largest category of the Group's interest-bearing liabilities and a cost effective source of funding, reached $639 million, up 16% versus the $551 million a year ago. This rise, driven by a 11% growth in time deposits and IRA accounts, reflects the inflow of assistance and insurance payments from Hurricane Georges as well as a long-term trend toward greater usage of banks in the Puerto Rican economy. Table 6 presents the composition of the Group's deposits at the end of the periods analyzed. Total borrowings are Oriental's largest interest-bearing liability component. It consists mainly of diversified sources of funding through the use of FHLB advances and borrowings, repurchase agreements, term notes, notes payable and lines of credit. At March 31, 1999, they amounted to $750 million, 31% higher than the $574 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. 16
SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> ----------- ----------- -------------- ---------- MARCH-99 MARCH-98 INC. / (DEC.) JUNE-98 ----------- ----------- -------------- ---------- TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> INVESTMENTS Mortgage-backed securities and CMO's 692,022 363,904 90% 402,703 Investment securities 186,473 262,113 -29% 283,248 FHLB stock and money market investments 17,235 14,591 18% 20,701 ----------- ----------- -------------- ---------- 895,730 $ 640,608 40% $ 706,652 ----------- ----------- -------------- ---------- LOANS: Real Estate 318,347 280,457 14% 278,256 Consumer 134,844 119,340 13% 122,281 Financing leases 117,583 154,181 -24% 141,113 Commercial 8,682 10,571 -18% 9,428 ----------- ----------- -------------- ---------- 579,456 564,549 3% 551,078 Allowance for loan losses (9,608) (6,816) 41% (5,658) ----------- ----------- -------------- ---------- 569,848 557,733 2% 545,420 ----------- ----------- -------------- ---------- TOTAL INTEREST-EARNING ASSETS 1,465,578 1,198,341 22% 1,252,072 ----------- ----------- -------------- ---------- Non-interest earning assets 66,878 $ 63,099 6% 59,316 ----------- ----------- -------------- ---------- TOTAL ASSETS $ 1,532,456 $ 1,261,440 21% $ 1,311,388 ----------- ----------- -------------- ---------- ----------- ----------- -------------- ---------- INVESTMENTS PORTFOLIO COMPOSITION: Mortgage-backed securities and CMO's 77.3% 56.8% 57.0% Investment securities 20.8% 40.9% 40.1% FHLB stock and money market investments 1.9% 2.3% 2.9% ----------- ----------- ---------- 100.0% 100.0% 100.0% ----------- ----------- ---------- LOAN PORTFOLIO COMPOSITION: Real Estate 54.9% 49.7% 50.5% Consumer 23.3% 21.1% 22.2% Financing leases 20.3% 27.3% 25.6% Commercial 1.5% 1.9% 1.7% ----------- ----------- ---------- 100.0% 100.0% 100.0% ----------- ----------- ---------- TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Savings and demand deposits $ 146,087 $ 108,183 35% $ 112,533 Time deposits and IRA accounts 487,632 439,862 11% 455,061 Accrued Interest 5,291 3,438 54% 3,837 ----------- ----------- -------------- ---------- 639,010 $ 551,483 16% $ 571,431 ----------- ----------- -------------- ---------- BORROWINGS: Repurchase agreements 581,520 $ 380,757 53% $ 416,171 FHLB funds 61,600 79,000 -22% 74,800 Term notes and other sources of funds 106,500 114,649 -7% 114,588 ----------- ----------- -------------- ---------- 749,620 $ 574,406 31% $ 605,559 ----------- ----------- -------------- ---------- TOTAL INTEREST-BEARING LIABILITIES 1,388,630 1,125,889 23% 1,176,990 ----------- ----------- -------------- ---------- Non interest-bearing liabilities 38,849 $ 31,584 23% 27,368 ----------- ----------- -------------- ---------- TOTAL LIABILITIES $ 1,427,479 $ 1,157,473 23% $ 1,204,358 ----------- ----------- -------------- ---------- ----------- ----------- -------------- ---------- DEPOSITS PORTFOLIO COMPOSITION: Savings and demand deposits 22.9% 19.6% 19.7% Time deposits and IRA accounts 76.3% 79.8% 79.6% Accrued Interest 0.8% 0.6% 0.7% ----------- ----------- ---------- 100.0% 100.0% 100.0% ----------- ----------- ---------- BORROWINGS PORTFOLIO COMPOSITION: Repurchase agreements 77.6% 66.3% 68.7% FHLB funds 8.2% 13.8% 12.4% Term notes and other sources of funds 14.2% 20.0% 18.9% ----------- ----------- ---------- 100.0% 100.1% 100.0% ----------- ----------- ---------- </TABLE> 17
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-NY the Group can obtain advances from the FHLB-NY, secured by the FHLB-NY stock owned by the Group, certain of the Group's mortgages and other assets. Table 7 presents the composition of the Group's other borrowings at the end of the periods analyzed. STOCKHOLDERS' EQUITY At March 31, 1999, Oriental's total stockholders' equity reached $105 million, a 1% increase from $104 million a year ago. This lack of stockholders' equity growth reflects earnings of $24.9 million posted during the past 12 months offset by a negative change in the valuation account for investment securities available-for-sale and increases in declared dividends and treasury stock repurchases. During the first nine months of fiscal 1999, the Group continued its aggressive repurchase program, as authorized by the board of directors, and repurchased 260,226 shares of its common stock. Of a total of 944,041 shares repurchased up to March 31, 1999, 448,555 shares were retired from circulation in fiscal 1997, as required by the Puerto Rico Banking law, and 555,486 shares with a cost of $13.7 million are held in treasury by the Group. 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 March 31, 1999 was $27.94 per share versus $27.85 per share a year earlier, as a result the Group's market capitalization increased to $381 million as compared to $371 million a year ago. The book value per share at March 31, 1999 fell to $7.70 from $7.80 a year ago. During the first nine months of fiscal 1999, the Group declared dividends amounting to $5.4 million or $0.413 per share versus $4.0 million or $0.30 per share in fiscal 1998, up 38%. For the first nine months of fiscal 1999, the dividend payout ratio and dividend yield were 28.57% and 1.86%, respectively, compared to 25.37% and 1.81%, respectively, in the preceding fiscal year. The Group continues to be a "well capitalized" institution, the highest classification available under the capital standards set by the Federal Deposit Insurance Corporation. To be in a "well capitalized" position, bank or bank holding companies must meet or exceed a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. At March 31, 1999, the Group had a leverage ratio of 7.04%; a Tier 1 risk-based ratio of 20.07%; and a total risk-based capital ratio of 18.82% compared to 7.82%, 19.79% and 18.54%, respectively, a year ago. GROUP'S FINANCIAL ASSETS At March 31, 1999, the Group's total financial assets owned or managed, which consists of Bank assets, assets managed by the trust and assets gathered by the broker-dealer, reached $3.7 billion, an increase of 16% when compared to the $3.2 billion a year ago. At March 31, 1999, Bank assets reached $1.532 billion from $1.262 billion a year ago, an increase of 21%. Assets managed by the trust grew 8% to $1.338 billion versus $1.243 billion a year ago, and assets gathered by the broker-dealer increased 21% to $832 million from $686 million the year before, see Table 8 The first and main component of the Group's financial assets is the assets owned by the Group, of which 99% are owned by the Group's banking subsidiary. For more on this refer to Group's assets owned section on page 17. The second component of the Group's financial assets 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 March 31, 1999, total assets managed by the Group's trust amounted $1.338 billion, 8% higher than the $1.243 billion a year ago. This increase was fueled by a solid 18% growth in individual retirement accounts (IRA), the most significant asset managed, which totaled $493 million versus the $417 million a year ago, followed by a 23% growth in 401(K) and Keogh retirement plans managed. The last component of the Group's financial assets 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 March 31, 1999, total assets gathered by the broker-dealer from its customer investment accounts reached $832 million, up 21% from $686 million a year ago. 18
SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> ----------- ---------- ----------- ---------- MARCH-99 MARCH-99 INC./(DEC.) JUNE-98 ----------- ---------- ----------- ---------- TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CAPITAL DATA: Stockholders' equity $ 104,977 $ 103,967 1% $ 107,030 ----------- ---------- ----------- ---------- Leverage Capital ( minimum required - 3.00%) 7.04% 7.82% -10% 7.70% ----------- ---------- ----------- ---------- Total Risk-Based Capital (minimum required - 8.00%) 20.07% 19.79% 1% 21.68% ----------- ---------- ----------- ---------- Tier 1 Risk-Based capital (minimum required - 4.00%) 18.82% 18.54% 1% 20.45% ----------- ---------- ----------- ---------- STOCK DATA: Outstanding common shares 13,625 13,335 2% 13,529 ----------- ---------- ----------- ---------- Book value $ 7.70 $ 7.80 -1% $ 7.91 ----------- ---------- ----------- ---------- Market Price at end of period $ 27.94 $ 27.85 0% $ 27.66 ----------- ---------- ----------- ---------- Market capitalization $ 380,683 $ 371,380 3% $ 374,202 ----------- ---------- ----------- ---------- DIVIDEND DATA: Dividends declared $ 5,443 $ 3,956 38% $ 5,442 ----------- ---------- ----------- ---------- Dividends declared per share $ 0.413 $ 0.300 38% $ 0.413 ----------- ---------- ----------- ---------- Payout ratio 28.57% 25.37% 13% 25.42% ----------- ---------- ----------- ---------- Dividend yield 1.86% 1.81% 3% 1.69% ----------- ---------- ----------- ---------- </TABLE> 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. <TABLE> <CAPTION> PRICE ----------- - -------------------------------------------------------- --------------------------- DIVIDEND QUARTER ENDED: HIGH LOW PER SHARE - -------------------------------------------------------- ------- -------- ----------- <S> <C> <C> <C> FISCAL 1999: March 1999 $ 29.63 $ 27.50 $ 0.150 --------------------------- ------- December 1998 $ 32.00 $ 28.00 $ 0.150 --------------------------- ------- September 1998 $ 32.26 $ 28.84 $ 0.113 --------------------------- ------- FISCAL 1998: June 1998 $ 34.60 $ 27.67 $ 0.113 --------------------------- ------- March 1998 $ 29.35 $ 24.85 $ 0.113 --------------------------- ------- December 1997 $ 23.63 $ 18.38 $ 0.094 --------------------------- ------- September 1997 $ 22.28 $ 16.95 $ 0.094 --------------------------- ------- FISCAL 1997: June 1997 $ 16.95 $ 13.65 $ 0.090 --------------------------- ------- March 1997 $ 16.20 $ 12.53 $ 0.090 --------------------------- ------- December 1996 $ 13.20 $ 10.95 $ 0.075 --------------------------- ------- September 1996 $ 9.81 $ 10.95 $ 0.075 --------------------------- ------- TABLE 8 - FINANCIAL ASSETS SUMMARY - ------------------------------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS Group assets $ 1,532,500 $ 1,261,500 21% $ 1,311,400 Trust assets managed 1,337,700 1,242,900 8% 1,310,000 Assets gathered by broker-dealer 831,700 686,000 21% 741,400 -------------------------------- -------- ------------ $ 3,701,900 $ 3,190,400 16% $ 3,362,800 -------------------------------- -------- ------------ </TABLE> 19
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS: At March 31, 1999, the Group's allowance for loan losses amounted to $9.6 million or 1.66% of total loans versus $6.8 million or 1.21% a year earlier. The Group maintains an allowance for loan losses on its portfolio at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks. Oriental's allowance for loan losses policy provides for a detailed quarterly analysis of possible losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating possible loan losses, future additions to the allowance may be necessary based on factors beyond Oriental's control, such as factors affecting Puerto Rico economic conditions. In addition, various regulating agencies, as an integral part of their examination process, periodically review the Group's allowance for loan losses. Such agencies may require the Group to recognize additions to the allowance based on their judgment of information available at the time of their examinations. Net credit losses for the third quarter of fiscal 1999, totaled $3.3 million or 2.29% of average loans, compared to $2.2 million or 1.55%, respectively, in the same period of fiscal 1998. For the first nine months of fiscal 1999, net credit losses amounted to $9.0 million or 1.66% of average loans versus $5.5 million or 1.21% of average loans in fiscal 1998. The higher level of credit losses experienced during the third quarter and first nine months of fiscal 1999 was primarily associated to a rise in consumer loans and financing leases net credit losses, see Provision for Loan Losses under Results of Operations. 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, at March 31, 1999, the Group's non-performing assets consisted of non-performing loans, foreclosed real estate owned and other repossessed assets. At the end of the third quarter of fiscal 1999, the Group's asset quality remained stable as non-performing assets totaled $21 million or 1.40% of total assets versus $22 million or 1.77% of total assets a year earlier, 4% lower. The reduction was principally due to a decline in repossessed assets and non-performing loans. The decrease in non-performing loans was mainly on consumer and finance leases as the Group continues to improve the quality of these portfolios through stricter credit standards. It is worth noting that the health of the consumer sector in Puerto Rico appears to be improving, as such management expects the level of credit losses in these portfolios to stabilize during the rest of fiscal 1999. At March 31, 1999, the allowance for loan losses to non-performing loans coverage ratio improved to 47.08% from 32.97% a year ago; excluding the lesser risk real estate loans, the ratio substantially improved to 102.61% from 50.15% for the respective periods. Detailed information concerning each of the items that comprise non-performing assets follows: - - REAL ESTATE LOANS - are placed on non-accrual basis when they become 90 days or more past due, unless they are well secured by real estate collateral. At the date of our analysis, the Group's non-performing real estate loans totaled $11.0 million or 54% 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 material 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 the date of our analysis, the Group's non-performing commercial business loans amounted to $1.1 million or 5% of the Group's non-performing loans. Of the total balance, $696,000 or 9 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. At the date of our analysis, the Group's non-performing auto and equipment leases portfolio amounted to $7.7 million or 38% of the Group's total non-performing loans and was comprised of 651 units. The underlying collateral particularly secures these financing leases. - - CONSUMER LOANS - are placed on non-accrual status when they become 90 days past due. At the date of our analysis, the Group's non-performing consumer loans amounted to 560,000 or 3% 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. Therefore, no material losses are expected on the final disposition. Management is actively seeking prospective buyers for these foreclosed real estate properties. - - 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. The estimated loss on disposition of such assets has been considered in the determination of the allowance for loan losses. At March 31, 1999, the inventory of repossessed automobiles and equipment consisted of 39 units and 12 units, respectively, amounting to $634,000 or $16,250 average per unit and $68,000 or $5,660 average per unit, respectively. 20
SELECTED FINANCIAL DATA (IN THOUSANDS) <TABLE> <CAPTION> QUARTER ENDED NINE MONTHS PERIOD ENDED MARCH 31, MARCH 31, -------------------------------------- -------------------------------------------- 1999 1998 1999 1998 ------------- ---------------- ----------- -------------- TABLE 9 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> BEGINNING BALANCE $ 9,693 $ 7,131 $ 5,658 $ 5,408 ------------- ---------------- ----------- --------------- Provision for loan losses 3,200 1,900 12,950 6,900 Net charge-off's (3,285) (2,214) (9,000) (5,491) ------------- ---------------- ----------- --------------- NET INCREASE (DECREASE) (85) (314) 3,950 1,409 ------------- ---------------- ----------- --------------- ENDING BALANCE $ 9,608 $ 6,817 $ 9,608 $ 6,817 ------------- ---------------- ----------- --------------- CHARGE-OFF'S: Real estate $ - $ (16) $ (2) $ (127) Consumer (1,446) (935) (4,628) (2,683) Leasing (2,266) (1,424) (5,577) (3,497) Commercial and others (718) (511) (1,002) (598) ------------- ---------------- ----------- --------------- (4,430) (2,886) (11,209) (6,905) ------------- ---------------- ----------- --------------- RECOVERIES: Real estate - - 16 - Consumer 630 126 1,120 264 Leasing 279 367 779 970 Commercial and others 236 179 294 180 ------------- ---------------- ----------- --------------- 1,145 672 2,209 1,414 ------------- ---------------- ----------- --------------- NET CHARGE-OFF'S: Real estate - (16) 14 (127) Consumer (816) (809) (3,508) (2,419) Leasing (1,987) (1,057) (4,798) (2,527) Commercial and others (482) (332) (708) (418) ------------- ---------------- ----------- --------------- $ (3,285) $ (2,214) $ (9,000) $ (5,491) ------------- ---------------- ----------- --------------- LOANS: Outstanding $579,456 $564,549 $579,456 $564,549 ------------- ---------------- ----------- --------------- Average loans $573,556 $573,171 $567,535 $563,536 ------------- ---------------- ----------- --------------- RATIOS: Recoveries to net-charge-off's 25.8% 23.3% 19.7% 20.5% ------------- ---------------- ----------- --------------- Net charge-off's to average loans 2.29% 1.55% 2.11% 1.30% ------------- ---------------- ----------- --------------- Allowance coverage ratio 1.66% 1.21% 1.66% 1.21% ------------- ---------------- ----------- --------------- TABLE 10 - NON-PERFORMING ASSETS ( AT MARCH 31, ) - ---------------------------------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS: % % ----- ----- Non-performing loans $ 20,407 95.2% $ 20,679 92.7% Foreclosed real estate 316 1.5% 405 1.8% Repossessed autos 634 3.0% 1,003 4.5% Repossessed equipment 68 0.3% 215 1.0% ----------- -------- ----------- -------- $ 21,425 100.0% $ 22,302 100.0% ----------- -------- ----------- -------- NON-PERFORMING LOANS: Real estate $ 11,043 54.1% $ 7,087 34.3% Consumer 560 2.7% 1,994 9.6% Financing leases 7,697 37.8% 10,134 49.0% Commercial 1,107 5.4% 1,464 7.1% ----------- -------- ----------- -------- $ 20,407 100.0% $ 20,679 100.0% ----------- -------- ----------- -------- RATIOS: Non-performing loans to total loans 3.52% 3.66% ----------- ----------- Non-performing loans reserve coverage ratio 47.08% 32.97% ----------- ----------- Non-performing loans reserve coverage ratio (excluding real estate loans) 102.61% 50.15% ----------- ----------- Non-perfoming assets to total assets 1.40% 1.77% ----------- ----------- Non-perfoming assets to total capital 20.41% 21.45% ----------- ----------- </TABLE> 21
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 comprised 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 utilizes 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. If (1) the weighted average rates in effect at March 31, 1999 remained constant, or increased or decreased 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 increased 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 $48,437 $ - - + 200 Basis points 42,381 (6,057) -12.5% - 200 Basis points 53,932 $5,495 11.3% </TABLE> NOTE: 1. The NII figures showed exclude the effect of the amortization of loan fees. LIQUIDITY RISK MANAGEMENT Liquidity refers to the level of cash, eligible investments easily converted into cash and available lines of credit 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. 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 third quarter of fiscal 1999, the Group's liquidity was deemed appropriate. It included $58.6 million available from unused lines of credit with other financial institutions and $31.9 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. 22
YEAR 2000 READINESS DISCLOSURE As discussed on page 28 in the Group's Fiscal 1998 Annual Report on Form 10-K, the Group initiated a firm-wide program (the "Year 2000 Program") to prepare its computer programs, applications and infrastructure for properly processing dates after December 31, 1999. The Group's Year 2000 Program is in progress and it is the Group's expectation that it will have its firm-wide Year 2000 solution in place by June 30, 1999, in accordance with regulatory guidelines. PART - 2 ITEM 1. LEGAL PROCEEDINGS The Group and its subsidiaries are defendants in a number of legal claims under various theories of damages arising out of, and incidental to its business. The Group is vigorously contesting those claims. Based upon a review with legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the result of operations. ITEM 2. CHANGES IN SECURITIES - NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE ITEM 5. OTHER INFORMATION On May 5, 1999, the Group closed the sale of 1,225,000 shares of its 7.125% Noncumulative Monthly Income Preferred Stock, Series A, through a group of underwriters led by Santander Securities Corporation of Puerto Rico at a price to the public of $25.00 per share. The Group received proceeds of approximately $30.6 million from the offering, before deducting the expenses of the offering. 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 Before the issuance of this report on Form 10-Q two reports on Form 8-K (the "Reports") related to the sale of 7.125% Noncumulative Monthly Income Preferred Stock, Series A, mentioned on Item 5 above were filed. These Reports were filed with Securities and Exchange Commission on April 8, 1999 and May 5, 1999,respectively, and are incorporated herein by reference. C - EXHIBITS No exhibits were filed as part of this Form 10-Q SIGNATURES Pursuant to the requirements 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. Date: May 13, 1999 By: /s/ Jose E. Fernandez ------------- ------------------------------------ Jose E. Fernandez Chairman of the Board, President, and CEO Date: May 13, 1999 By: /s/ Rafael Valladares ------------- ------------------------------------ Rafael Valladares, CPA Senior Vice President and Controller 23