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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended June 30, 2000, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from _____ to ______.
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:
Monacillos 1000
San Roberto Street
Rio Piedras, Puerto Rico 00926
Telephone Number: (787) 771-6800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock
($1.00 par value per share)
7.125% Non-cumulative Monthly Income Preferred Stock, Series A
($1.00 par value per share, $25.00 liquidation preference per share)
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
------- -------
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 31, 2000, Oriental Financial Group Inc. (the "Group") had
13,805,135 shares of common stock outstanding, including 4,430,540 shares
held by its directors and officers and by the Group as treasury stock. The
aggregate market value of the common stock held by non-affiliates of the
Group was $123.0 million based upon the reported closing price of $13.125 on
the New York Stock Exchange on that date.
The following disclosure items have been omitted from this Form 10-K and are
expected to be filed as an amendment to this Form 10-K on or before October
13, 2000: (1) Part II: Items 6, 7, 7A, 8 and 9; and (2) Part IV: Items
14(a)(1), (a)(2) and (d).
DOCUMENTS INCORPORATED BY REFERENCE
Portion's of the Group's definitive proxy statement relating to the 2000
annual meeting of stockholders are incorporated by reference in response to
Items 10 through 13 of Part III.
-1-
ORIENTAL FINANCIAL GROUP INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART - I
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Item - 1 Business 3-9
Item - 2 Properties 10
Item - 3 Legal Proceedings 11
Item - 4 Submissions of Matters to the Vote of Security Holders 11
PART - II
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Item - 5 Market for Registrant's Common Stock and Related Stockholder Matters 11
Item - 6 Selected Financial Data 11
Item - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item - 7A Quantitative and Qualitative Disclosures About Market Risk 11
Item - 8 Financial Statements and Supplementary Data 11
Item - 9 Submissions to Matters to Vote of Security Holders 11
PART - III
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Item - 10 Directors and Executive Officers of the Registrant 11
Item - 11 Executive Compensation 11
Item - 12 Security Ownership of Certain Beneficial Owners and Management 11
Item - 13 Certain Relationships and Related Transactions 11
PART - IV
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ITEM - 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11
-2-
PART - I
ITEM 1 - BUSINESS
GENERAL
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that involve substantial risks and uncertainties. When used in this
report, or in the documents incorporated by reference herein, the words
"anticipate", "believe", "estimate", "may", "intend", "expect" and similar
expressions identify certain of such forward-looking statements. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of Oriental Financial Group Inc. (the "Group") and are subject
to a number of risks and uncertainties, including but not limited to, the
risks and uncertainties associated with: the impact and effects of increased
leverage, economic, competitive and other factors affecting the Group and its
operations, markets, products and services, credit risks and the related
sufficiency of its allowance for loan losses, changes in interest rates and
economic policies, the success of technological, strategic and business
initiatives, the profitability of its banking as well as non-banking
initiatives, and other factors discussed elsewhere in this report filed by
the Group with the Securities and Exchange Commission ("SEC"). Many of these
factors are beyond the Group's control.
THE GROUP
The Group is a diversified, publicly-owned financial holding company,
incorporated on June 14, 1998 under the laws of the Commonwealth of Puerto
Rico, which provides a wide variety of financial services through its
subsidiaries.
Oriental Bank and Trust (the "Bank"), the Group's main subsidiary, is a
full-service commercial bank with its main office located in San Juan, Puerto
Rico and with nineteen branches located throughout the island. The Bank was
incorporated in 1964 as a federal mutual savings and loan association. It
became a federal mutual savings bank in July 1983 and converted to a federal
stock savings bank in April 1987. Its conversion from a federally-chartered
savings bank to a commercial bank chartered under the banking laws of the
Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more
effectively pursue opportunities in its market and obtain more flexibility in
its businesses, placing the Bank in the main stream of financial services in
Puerto Rico. The Bank offers mortgage, commercial and consumer lending,
saving and time deposits products, financial planning, and corporate and
individual trust services.
Oriental Financial Services Corp. ("OFSC"), the Group's other subsidiary, is
engaged in brokerage and investment advisory services and is member of the
National Association of Securities Dealers, Inc. (the "NASD") and the
Securities Investor Protection Corporation. OFSC is a registered
broker-dealer pursuant to Section 15(b) of the Exchange Act. OFSC does not
carry customer accounts and is, accordingly, exempt from the Customer
Protection Rule (SEC Rule 15c3-3) pursuant to provision k(2)ii of such rule.
Oriental Mortgage Corp. is the bank's subsidiary engaged in mortgage banking
activities and services.
The Group is subject to the provisions of the U.S. Bank Holding Company Act
of 1956 (the "Bank Holding Company Act") and, accordingly, subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Bank is regulated by various
agencies in the United States and the Commonwealth of Puerto Rico. Its main
regulators are the Commissioner of Financial Institutions of Puerto Rico (the
"Commissioner") and the Federal Deposit Insurance Corporation (the "FDIC").
The Bank's deposits are insured up to $100,000 per depositor by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the FDIC.
The Bank is further subject to the regulation of the Puerto Rico Finance
Board (the "Board"). Other agencies, such as the NASD, and the SEC, regulate
additional aspects of the Bank's operations. (See "Regulation and
Supervision").
The Group is a legal entity separate and distinct from the Bank and OFSC.
There are various legal limitations governing the extent to which the Bank
may extend credit, pay dividends or otherwise supply funds to, or engage in
transactions with, the Group or certain of its other subsidiaries.
-3-
MARKET AREA AND BUSINESS SEGMENTS
Puerto Rico, where the banking market is highly competitive, is the main
geographic business and service area of the Group. At June 30, 2000, Puerto
Rico had 17 banking institutions with a total of approximately $50.4 billion
in assets according to industry statistics published by the Commissioner. The
Group ranked ninth based on total assets at June 30, 2000. The largest banks
in order of size were Banco Popular de Puerto Rico, Banco Santander Puerto
Rico and Firstbank. Puerto Rico banks are subject to the same federal laws,
regulations and supervision that apply to similar institutions on the United
States mainland.
In addition, the Group competes with brokerage firms with retail operations,
credit unions, cooperatives, small loan companies and mortgage banks in
Puerto Rico. The Group encounters intense competition in attracting and
retaining deposits and in its consumer and commercial lending activities. The
Group competes for loans with other financial institutions, most of which are
larger and have greater resources available than those of the Group. There
can be no assurance that in the future the Group will be able to continue to
increase its deposit base or originate loans in the manner or on the terms on
which it has done so in the past.
Management believes that the Group has been able to compete effectively for
deposits and loans by offering a variety of transaction account products and
loans with competitive features, by pricing its products at competitive
interest rates and by offering convenient branch locations and by emphasizing
the quality of its service. The Group's ability to originate loans depends
primarily on the rates and fees charged and the service it provides to its
borrowers in making prompt credit decisions.
The Group has three reportable segments: Retail Banking, Financial Services
and Mortgage Banking. Management determined the reportable segments based on
the internal reporting used to evaluate performance and to assess where to
allocate resources. Other factors such as the Group's organizational chart,
nature of products, distribution channels and economic characteristics of the
products were also considered in the determination of the reportable
segments. The Group measures the performance of these reportable segments
based on pre-established goals of different financial parameters such as net
income, interest spread, loan production, fees generated, and increase in
market share.
The Group's largest business segment is retail banking. The Bank's branches,
treasury and trust functions are its main components, with traditional
banking products such as deposits, electronic banking and mortgage lending.
The Group's lending activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit
organizations, all of which are encompassed within four main categories:
mortgage, commercial, consumer and leasing (leasing was discontinued in June
2000). Oriental's loan portfolio has a higher concentration of residential
mortgage loans followed by consumers loans such as personal loans, then
commercial loans. Oriental continues to concentrate the major share of its
lending activities in mortgage originations, which represent low credit risk
and highly lucrative returns. Lending related to individual real estate
ownership has traditionally been one of the most secure areas of financing in
Puerto Rico because of the relatively low delinquency and foreclosure
experience.
The Group's investment activity is strictly debt securities. Its portfolio
consists primarily of money market investments, U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities, Collateralized
Mortgage Obligations and P. R. Government municipal bonds. At June 30, 2000,
the Group's investment portfolio was of high quality. Approximately 98% was
rated AAA and it generated a significant amount of tax-exempt interest which
lowers the Group's effective tax rate.
Mortgage-backed securities, the largest component, are pools of residential
loans which are made to consumers and then resold by the Government National
Mortgage Corporation (the "GNMA"), Federal National Mortgage Association (the
"FNMA") and Federal Home Loan Mortgage Corporation (the "FHLMC") in the open
market. The Government of Puerto Rico is the only issuer, other than the U.S.
Government, of instruments that are payable and secured by the same source of
revenue or taxing authority that exceeded 10% of stockholders' equity at June
30, 2000 and 1999.
The Group's principal funding sources are branch deposits, collateralized
deposits, Federal Home Loan Bank (the "FHLB") funds, securities sold under
agreements to repurchase, and term notes. Borrowings are the Group's largest
funding source. These mainly consist of advances and borrowings from the FHLB,
repurchase agreements, term notes, notes payable and lines of credit.
Deposits represent the Group's second largest source of funding. Through its
branch banking system the Group offers individual non-interest bearing
checking accounts, savings accounts, personal interest-bearing checking
accounts, certificates of deposit, IRA accounts and commercial non-interest
bearing checking accounts. The Group's deposit accounts are insured up to
applicable limits by the SAIF. Management makes retail deposit pricing
decisions periodically through the Assets and Liabilities Committee (the
"ALCO"), which adjusts the rates paid on retail deposits in response to
general market conditions and local competition. Pricing decisions take into
account the rates being offered by other local banks, LIBOR and mainland
United States market interest rates.
-4-
The Group's second largest business segment is its financial services, which
is comprised of the Bank's trust division (Oriental Trust) and the Bank's
brokerage subsidiary (OFSC). The core operations of this segment are
financial planning, money management and investment brokerage services, as
well as corporate and individual trust services. The Group's trust offers
various different types of IRA products and manages 401(k) and Keogh
retirement plans, custodian and corporate trust accounts. 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.
The Group's smallest business segment is mortgage banking. It consists of
Oriental Mortgage, whose principal activity is to originate and purchase
mortgage loans for the group's own portfolio. From time to time, if conditions
so warrant, it may sell loans to other financial institutions or securitize
conforming loans into GNMA, FNMA and FHLMC certificates. Mortgages included
in the resulting GNMA, FNMA and FHLMC pools are serviced by another
institution. The Group also sells the rights to service mortgage loans for
others.
REGULATION AND SUPERVISION
The Group is subject to ongoing regulation, supervision, and examination by
the Federal Reserve Board, and is required to file with the Federal Reserve
Board periodic and annual reports and other information concerning its own
business operations and those of its subsidiaries. In addition, under the
provisions of the Bank Holding Company Act, a bank holding company must
obtain Federal Reserve Board approval before it acquires directly or
indirectly ownership or control of more than 5% of the voting shares of a
second bank. Furthermore, Federal Reserve Board approval must also be
obtained before such a company acquires all or substantially all of the
assets of a second bank or merges or consolidates with another bank holding
company. The Federal Reserve Board also has authority to issue cease and
desist orders against holding companies and their non-bank subsidiaries.
A bank holding company is prohibited under the Bank Holding Company Act, with
limited exceptions, from engaging, directly or indirectly, in any business
unrelated to the business of banking, managing or controlling corporations.
One of the exceptions to these prohibitions permits ownership by a bank
holding company of the shares of any company if the Federal Reserve Board,
after due notice and opportunity for hearing, by regulation or order has
determined that the activities of the company in question are so closely
related to the business of banking or of managing or controlling banks as to
be a proper incident thereto.
Under the Federal Reserve Board policy, a bank holding company such as the
Group is expected to act as a source of financial strength to its main
banking subsidiaries and to also commit support to them. This support may be
required at times when, absent such policy, the bank holding company might
not otherwise provide such support. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to the federal bank
regulatory agency to maintain capital of a subsidiary bank will be assumed by
the bankruptcy trustee and be entitled to a priority of payment. In addition,
any capital loans by a bank holding company to any of its subsidiary banks
must be subordinated in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. The Bank is currently the only
depository institution subsidiary of the Group.
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, revises and
expands the existing provisions of the Bank Holding Company Act by including
a new section that permits a bank holding company to elect to become a
financial holding company to engage in a full range of financial activities.
The qualification requirements and the process for a bank holding company
that elects to be treated as a financial holding company requires that all
the subsidiary banks controlled by the bank holding company at the time of
election to become a financial holding company must be and remain at all
times "well capitalized" and "well managed".
The Gramm-Leach-Bliley Act further requires that, in the event that the bank
holding company elects to become a financial holding company, the election
must be made by filing a written declaration with the appropriate Federal
Reserve Bank that: (i)states that the bank holding company elects to become
a financial holding company; (ii) provides the name and head office address
of the bank holding company and each depository institution controlled by the
bank holding company; (iii) certifies that all depository institutions
controlled by the bank holding company are "well capitalized" as of the date
the bank holding company files for the election; (iv) provides the capital
ratios for all relevant capital measures as of the close of the previous
quarter for each depository institution controlled by the bank holding
company; and (v) certifies that all depository institutions controlled by the
bank holding company are "well managed" as of the date the bank holding
company files the election. The bank holding company must have also achieved
at least a rating of "satisfactory record of meeting community credit needs"
under the Community Reinvestment Act during the institution's most recent
examination. In May 2000, the Group elected to become a financial holding
company pursuant to the provisions of the Gramm-Leach-Bliley Act.
-5-
Financial holding companies may engage, directly or indirectly, in any
activity that is determined to be (i) financial in nature, (ii) incidental to
such financial activity, or (iii) complementary to a financial activity
provided "does not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally." The
Gramm-Leach-Bliley Act specifically provides that the following activities
have been determined to be "financial in nature": (a) lending, trust and
other banking activities; (b) insurance activities; (c) financial or economic
advice or services; (d) pooled investments; (e) securities underwriting and
dealing; (f) existing bank holding company domestic activities; (g) existing
bank holding company foreign activities; and (h) merchant banking
activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal
Reserve Board the authority, by regulation or order, to expand the list of
"financial" or "incidental" activities, but requires consultation with the
U.S. Treasury Department, and gives the Federal Reserve Board authority to
allow a financial holding company to engage in any activity that is
"complementary" to a financial activity and does not "pose a substantial risk
to the safety and soundness of depository institutions or the financial
system generally."
The Bank is subject to extensive regulation and examination by the
Commissioner and the FDIC, which insures its deposits to the maximum extent
permitted by law, and subject to certain requirements established by the
Federal Reserve Board. The federal and Puerto Rico laws and regulations which
are applicable to the Bank, regulate, among other things, the scope of its
business, its investments, its reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral
for certain loans. In addition to the impact of the regulations, commercial
banks are affected significantly by the actions of the Federal Reserve Board
as it attempts to control the money supply and credit availability in order
to influence the economy.
HOLDING COMPANY STRUCTURE
The Bank is subject to restrictions under federal law that limit the transfer
of funds to its affiliates (including the Group), whether in the form of
loans, other extensions of credit, investments or asset purchases. Such
transfers are limited to 10% of the transferring institution's capital stock
and surplus with respect to any affiliate (including the Group), and with
respect to all affiliates to an aggregate of 20% of the transferring
institution's capital stock and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts.
The Federal Reserve Board policy requires a bank holding company, such as the
Group, to act as a source of financial strength to its main banking
subsidiaries and to also commit support to them. This support may be required
at times when, absent such policy, the bank holding company might not
otherwise provide such support. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to the federal bank
regulatory agency to maintain capital of a subsidiary bank will be assumed by
the bankruptcy trustee and be entitled to a priority of payment. In
addition, any capital loans by a bank holding company to any of its
subsidiary banks must be subordinated in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. The Bank is currently the
only depository institution subsidiary of the Group.
Because the Group is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will
be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of depository institution subsidiaries) except to the
extent that the Group is a creditor with recognized claims against the
subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which definition includes both banks and savings associations),
the deposits of which are insured by the FDIC, can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (1) the default of a commonly controlled FDIC-insured
depository institution or (2) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a conservator
or a receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that default is likely to occur in
the absence of regulatory assistance. The Bank is currently the only
FDIC-insured depository institution subsidiary of the Group. In some
circumstances (depending upon the amount of the loss or anticipated loss
suffered by the FDIC), cross-guarantee liability may result in the ultimate
failure or insolvency of one or more insured depository institutions in a
holding company structure. Any obligation or liability owed by a subsidiary
bank to its parent company is subordinated to the subsidiary bank's
cross-guarantee liability with respect to commonly controlled insured
depository institutions.
-6-
DIVIDEND RESTRICTIONS
The principal source of funds for the Group is dividends from the Bank. The
ability of the Bank to pay dividends on its common stock is restricted by the
Puerto Rico Banking Act of 1933, as amended (the "Puerto Rico Banking Law"),
the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Law
provides that when the expenditures of a bank are greater than receipts, the
excess of expenditures over receipts shall be charged against the
undistributed profits of the bank and the balance, if any, shall be charged
against the required reserve fund of the bank. If there is no sufficient
reserve fund to cover such balance in whole or in part, the outstanding
amount shall be charged against the bank's capital account. The Puerto Rico
Banking Law provides that until said capital has been restored to its
original amount and the reserve fund to twenty percent (20%) of the original
capital, the bank may not declare any dividends. In general terms, the FDIA
and the FDIC regulations restrict the payment of dividends when a bank is
undercapitalized, when a bank has failed to pay insurance assessments, or
when there are safety and soundness concerns regarding a bank.
The payment of dividends by the Bank may also be affected by other regulatory
requirements and policies, such as maintenance of adequate capital. If, in
the opinion of the regulatory authority, a depository institution under its
jurisdiction is engaged in, or is about to engage in, an unsafe or unsound
practice (that, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such depository institution cease and
desist from such practice. The Federal Reserve Board has issued a policy
statement that provides that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings. In addition,
all insured depository institutions are subject to the capital-based
limitations required by the Federal Deposit Insurance Corporation Act of
1991(the "FDICIA").
FEDERAL HOME LOAN BANK SYSTEM
The FHLB system of which the Bank is a member, consists of 12 regional FHLBs
governed and regulated by the Federal Housing Finance Board (the "FHFB").
The FHLB's serve as reserve or credit facilities for member institutions
within their assigned regions. They are funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB system. They
make loans (i.e., advances) to members in accordance with policies and
procedures established by the FHFB and the boards of directors of the FHLB's.
As a system member, the Bank is entitled to borrow from the FHLB of New York
(the "FHLB-NY") and is required to own capital stock in the FHLB-NY in an
amount equal to the greater of 1% of the aggregate of the unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at
the beginning of each fiscal year, which for this purpose is deemed to be not
less than 30% of assets, or 5% of the total amount of advances by the FHLB-NY
to the Bank. The Bank is in compliance with the stock ownership rules
described above with respect to such advances, commitments and letters of
credit and home mortgage loans and similar obligations. All loans, advances
and other extensions of credit made by the FHLB-NY to the Bank are secured by
a portion of the Bank's mortgage loan portfolio, certain other investments
and the capital stock of the FHLB-NY held by the Bank.
FDICIA
Under FDICIA, the federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder established five capital
tiers: (i) "well capitalized", if it has total risk-based capital of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I
leverage capital ratio of 5.0% or more and is not subject to any written
capital order or directive; (ii) "adequately capitalized", if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio
of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized", (iii) "undercapitalized", if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based ratio that is less than
4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized", if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that
is less than 3.0%, and (v) "critically undercapitalized", if it has a ratio
of tangible equity to total assets that is equal to or less than 2.0%. A
depository institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives a
less than satisfactory examination rating in any one of the four categories.
As of June 30, 2000, the Group is a "well-capitalized" institution.
-7-
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fees
to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations
and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an
amount equal to the lesser of five percent of the depository institution's
assets at the time it becomes undercapitalized or the amount of the capital
deficiency when the institution fails to comply with the plan. The federal
banking agencies may not accept a capital plan without determining, among
other things, that the plan is based on realistic assumptions and is likely
to succeed in restoring the depository institution's capital. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total assets,
and cessation of receipt of deposits from corresponding banks. Critically
undercapitalized depository institutions are subject to the appointment of a
receiver or conservator.
INSURANCE OF ACCOUNTS AND FDIC INSURANCE ASSESSMENTS
The Bank's deposits accounts are insured up to the applicable limits by the
SAIF, which is administered by the FDIC. The insurance of deposit accounts by
SAIF subjects the Bank to comprehensive regulation, supervision, and
examination by the FDIC. If the Bank violates its duties as an insured
institution, engages in unsafe and unsound practices, is in an unsound and
unsafe condition, or has violated any applicable FDIC requirements, insurance
of accounts of the Bank may be terminated by the FDIC.
The Bank is subject to FDIC deposit insurance assessments. Pursuant to
FDICIA, the FDIC has adopted a risk-based assessment system, under which the
assessment rate for an insured depository institution varies according to the
level of risk incurred in its activities. An institution's risk category is
based partly upon whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. Each insured institution is
also assigned to one of the following "supervisory subgroups" : "A", "B", or
"C". Group "A" institutions are financially sound institutions with only a
few minor weaknesses; Group "B" institutions are institutions that
demonstrate weaknesses that, if not corrected, could result in significant
deterioration; and Group "C" institutions are institutions with respect to
which there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct
the areas of weakness.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIFA")
was enacted and signed into law. DIFA repealed the statutory minimum premium.
Thereafter, premiums related to deposits assessed by both the Bank Insurance
Fund (the "BIF") and SAIF are assessed at a rate of 0 to 27 basis points per
$100 deposits based on the risk-based assessment. DIFA also provided for a
special one-time assessment on deposits insured by SAIF to recapitalize the
SAIF and to bring it up to statutory required levels of approximately 65
basis points on institutions holding SAIF deposits on March 31, 1995.
Accordingly, the Group recorded a special reserve of $1,823,000, net of taxes
of $490,000, during the first quarter of 1997 to account for its share of the
one-time payment of SAIF insurance premium. As result of this special
assessment, in January 1997, the Group's deposit insurance premium was
reduced to $0.062 for every $100 of deposits from $.23 for every $100 of
deposits. Currently, the Group's deposit insurance premium is the minimum
charged by the SAIF.
REGULATORY CAPITAL REQUIREMENTS
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. Under the guidelines the minimum ratio of qualifying total
capital to risk-weighted assets is 8%. At least half of the total capital is
to be comprised of common equity, retained earnings, minority interest in
unconsolidated subsidiaries, non-cumulative perpetual preferred stock and the
disallowed portion of deferred tax assets ("Tier 1 Capital"). The remainder
may consist of a limited amount of subordinated debt, other preferred stock,
certain other investments and a limited amount of loan and lease loss
reserves ("Tier 2 Capital").
The Federal Reserve Board has adopted regulations with respect to risk-based
and leverage capital ratios that require most intangibles, including core
deposit intangibles, to be deducted from Tier 1 Capital. The regulations,
however, permit the inclusion of a limited amount of intangibles related to
originated and purchased mortgage servicing rights and purchased credit card
relationships and include a "grandfathered" provision permitting inclusion of
certain existing intangibles.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 Capital to quarterly average assets) guidelines for bank holding
companies and member banks. These guidelines provide for a minimum leverage
ratio of 3% for bank holding companies and member banks that meet certain
specified criteria, including that they have the highest regulatory rating.
All other bank holding companies and member banks are required to maintain a
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions are expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a
"tangible Tier 1 leverage ratio" and other indicia of capital strength in
evaluating proposals for
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expansion or new activities.
Failure to meet the capital guidelines could subject an institution to a
variety of enforcement remedies, including the termination deposit insurance
by the FDIC, and to certain restrictions on its business. At June 30, 2000,
the Group was in compliance with all capital requirements, exceeding those
applicable to a "well-capitalized" institution.
SAFETY AND SOUNDNESS STANDARDS
Section 39 of the FDIA, amended by the FDICIA, requires each federal banking
agency to prescribe for all insured depository institutions standards
relating to internal control, information systems and internal audit system,
loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. In addition, each
federal banking agency also is required to adopt for all insured depository
institutions and their holding companies standards that specify (i) a
maximum ratio of classified assets to capital, (ii) minimum earnings
sufficient to absorb losses without impairing capital, (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly-traded
shares of the institution or holding company, and (iv) such other standards
relating to asset quality, earnings and valuation as the agency deems
appropriate. Finally, each federal banking agency is required to prescribe
standards for the employment contracts and other compensation arrangements of
executive officers, employees, directors and principal stockholders of
insured depository institutions that would prohibit compensation, benefits
and other arrangements that are excessive or that could lead to a material
financial loss for the institution. If an insured depository institution or
its holding company fails to meet any of the standards described above, it
will be required to submit to the appropriate federal banking agency a plan
specifying the steps that will be taken to cure the deficiency. If an
institution or holding company fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company to correct the deficiency and, until it is
corrected, may impose other restrictions on the institution or holding
company, including any of the restrictions applicable under the prompt
corrective action provisions of FDICIA. Pursuant to FDICIA, regulations to
implement these operational standards were required to become effective on
December 1, 1993.
In August 1995, the FDIC and the other federal banking agencies published
Interagency Guidelines Establishing Standards for Safety and Soundness that,
among other things, set forth standards relating to internal controls,
information systems and internal audit systems, loan documentation, credit,
underwriting, interest rate exposure, asset growth and employee compensation.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Section 24 of the FDIA, as amended by the FDICIA, generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to
those that are permissible for national banks. Under FDIC regulations
dealing with equity investments, an insured state bank generally may not
directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state
bank, such as the Bank, is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as
a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of
a qualified housing project, provided that such limited partnership
investments may not exceed 2% of the bank's total assets, (iii) acquiring up
to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions,
and (iv) acquiring or retaining the voting shares of a depository institution
if certain requirements are met.
In December 1993, the FDIC adopted amendments to its regulations governing
the activities and investments of insured state banks which further
implemented Section 24 of the FDIA, as amended by FDICIA. Under the
amendments, an insured state-chartered bank may not, directly, or indirectly
through a subsidiary, engage as "principal" in any activity that is not
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member
and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.
PUERTO RICO BANKING LAW
As a Puerto Rico chartered commercial bank, the Bank is subject to regulation
and supervision by the Commissioner under the Puerto Rico Banking Law. The
Puerto Rico Banking Law contains provisions governing the incorporation and
organization, rights and responsibilities of directors, officers and
stockholders as well as the corporate powers, savings, lending capital and
investment requirements and other aspects of the Bank and its affairs. In
addition, the Commissioner is given extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Law. The
Commissioner generally examines the Bank at least once every year.
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The Puerto Rico Banking Law requires that at least ten percent (10%) of the
yearly net income of the Bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal
to the total of paid-in capital on common and preferred stock.
The Puerto Rico Banking Law also provides that when the expenditures of a
bank are greater that the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the Bank, and the
balance, if any, shall be charged against the reserve fund, as a reduction
thereof. If there is no reserve fund sufficient to cover such balance in
whole or in part, the outstanding amount shall be charged against the capital
account and no dividend shall be declared until said capital has been
restored to its original amount and the reserve fund to 20% of the original
capital.
The Puerto Rico Banking Law further requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by
actual collateral.
The Puerto Rico Banking Law further requires change of control filings. When
any person or entity will own, directly or indirectly, upon consummation of a
transfer, 5% or more of the outstanding voting capital stock of the Bank, the
acquiring parties must inform the Commissioner of the details not less than
sixty (60) days prior to the date said transfer is to be consummated. The
transfer shall require the approval of the Commissioner if it results in a
change of control of the Bank. Under the Banking Law, a change of control is
presumed if an acquirer who did not own more than 5% of the voting capital
stock before the transfer exceeds such percentage after the transfer.
The Banking Law generally restricts the amount the Bank can lend to one
borrower to an amount that may not exceed 15% of the aggregate of the paid-in
capital of the Bank and the reserve fund. The Bank may also not accept the
security of any one borrower in an amount exceeding 15% of its paid-in
capital and reserve fund. If such loans are secured by collateral worth at
least twenty-five percent (25%) more than the amount of the loan, the
aggregate maximum amount may reach one third of the paid-in-capital of the
Bank, plus its reserve fund. There no restrictions on the amount of loans
that are wholly secured by bonds, securities and other evidence of
indebtedness of the Government of the United States or the Commonwealth, or
by current debt bonds, not in default, of municipalities or instrumentalities
of the Commonwealth. As of June 30, 2000, there were no loans that exceeded
the maximum amount that the Bank could have loaned to one borrower.
The Finance Board, which is composed of the Commissioner, the President of
the Government Development Bank for Puerto Rico, the President of the Puerto
Rico Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and
Consumer Affairs and three public interest representatives, has the authority
to regulate the maximum interest rates and finance charges that may be
charged on loans to individuals and unincorporated businesses in the
Commonwealth. The Finance Board promulgates regulations which specify maximum
rates on various types of loans to individuals.
The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses (
including real estate development loans but excluding certain other personal
and commercial loans secured by mortgages on real estate property) is to be
determined by free competition. The Finance Board also has the authority to
regulate maximum finance charges on retail installment sales contracts and
for credit card purchases. There is no maximum rate for installment sales
contracts involving motor vehicles, commercial, agricultural and industrial
equipment, commercial electric appliances and insurance premiums.
EMPLOYEES
At June 30, 2000 the Group employed 353 persons. None of its employees is
represented by a collective bargaining group. The Group considers its
employee relations to be good.
ITEM 2 - PROPERTIES
At June 30, 2000, the Bank owned 9 branch premises and other facilities
throughout the Commonwealth. In addition, as of such date, the Bank leased
properties for branch operations and main office in 10 locations in Puerto
Rico. The Bank's management's believes that each of its facilities is
well-maintained and suitable for its purpose. The principal properties owned
by the Bank for banking operations and other services are described below:
- - Oriental Center - a four story office building located at 908 State Road,
Humacao, Puerto Rico. The Bank's main branch is the only activity conducted
at this location. Approximately 60% of the office space is leased to outside
tenants. The book value of this property at June 30, 2000 was $5,282,000.
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- - Las Cumbres Building - two story structure located at 1990 Las Cumbres
Avenue, Rio Piedras, Puerto Rico. A branch, collections and mortgage
originating departments are the main activities conducted at this location.
The book value of this property at June 30, 2000 was $1,385,000.
ITEM 3 - LEGAL PROCEEDINGS
On August 14, 1998, as a result of a review of its accounts in connection
with the admission by a former Group officer of having embezzled funds, the
Group became aware of certain irregularities. The Group notified the
appropriate regulatory authorities and commenced an intensive investigation
with the assistance of its independent auditors and legal counsel. The
recently completed investigation determined losses of $9,500,616 resulting
from dishonest and fraudulent acts and omissions involving several former
Group's employees. In the opinion of the Group's management and its legal
counsel, the losses determined by the investigation are covered by the
Group's fidelity insurance. Claims for such losses have been denied by the
Group's fidelity insurance carrier. On August 11, 2000, the Group filed a
lawsuit in the United States District Court for the District of Puerto Rico
against Federal Insurance Company, Inc., a stock insurance corporation
organized under the laws of the state of Indiana, seeking payment of its $9.5
million insurance claim and the payment of consequential damages resulting
from the denial of the claim.
In addition, the Group and its subsidiaries are defendants in a number of
legal proceedings incidental to its business. The Group is vigorously
contesting such claims. Based upon a review by 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 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART - II
The Group disclosed in the Form 8-K filed on August 24, 2000, that the
release of the Group's financial results for the fiscal year ended June 30,
2000 was being delayed until the Group's management in consultation with its
independent accountants determine the appropriate accounting treatment for a
previously disclosed loss (see item 3 above) resulting from dishonest and
fraudulent acts and omissions by a group of former employees of the Group.
As a result, Items 5 through 9 will be provided by amendment to this Form
10-K under cover of Form 10-K/A.
PART - III
Items 10 through 13 will be provided by incorporating the information
required under such items by reference to the Group's definitive proxy
statement to be filed with the SEC, no later than 120 days after the end of
the year covered by this Form 10K, or, alternatively, by amendment to this
Form 10-K under cover of Form 10-K/A no later than the end of such 120-day
period.
PART - IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A1 - FINANCIAL STATEMENTS
As previously mentioned in Part II, financial statements will be filed by
amendment to this Form 10-K under cover of Form 10-K/A.
A2 - FINANCIAL STATEMENTS SCHEDULES
All schedules are omitted, as the required information is either not
applicable or presented in the Consolidated Financial Statements or in the
notes thereto described in A1 above.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed during the last
quarter of fiscal 2000.
(c) Exhibits.
EXHIBIT NO.: DESCRIPTION OF DOCUMENT:
2.0 Agreement and Plan of Merger dated as of June 18, 1996 by
and between the Group, the Bank and Oriental Interim Bank.*
3(i) Amended and Restated Certificate of Incorporation.**
3(ii) By-laws.***
10.1 Employment Agreement between Rafael Valladares and the Bank.
10.2 1996 Incentive Stock Option Plan.****
10.3 1998 Incentive Stock Option Plan.*****
21.0 List of Subsidiaries
23.0 Consent of PricewaterhouseCoopers, LLP
* Incorporated by reference to the Group's registration statement on
Form 8-B filed on January 10, 1997.
** Incorporated by reference to Exhibit 3 of the Group's registration
statement on Form S-3 filed on April 2, 1999.
*** Incorporated by reference to Exhibit 3 of the Group's current report
on Form 8-K filed on September 7, 2000.
**** Incorporated by reference to the Group's definitive proxy statement
for the 1997 annual meeting of stockholders filed on September 19,
1997.
***** Incorporated by reference to the Group's definitive proxy statement
for the 1998 annual meeting of stockholders filed on September 29,
1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
By: S/JOSE E. FERNANDEZ
-------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer Dated: SEPTEMBER 27, 2000
By: S/RAFAEL VALLADARES
-------------------
Rafael Valladares
Comptroller and Principal Financial Officer Dated: SEPTEMBER 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dated indicated.
BY: S/JOSE E. FERNANDEZ
-------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer Dated: SEPTEMBER 27, 2000
BY: S/PABLO I. ALTIERI
------------------
Dr. Pablo I. Altieri
Director Dated: SEPTEMBER 27, 2000
BY: S/DIEGO PERDOMO
---------------
Diego Perdomo
Director Dated: SEPTEMBER 27, 2000
BY: S/EFRAIN ARCHILLA
-----------------
Efrain Archilla
Director Dated: SEPTEMBER 27, 2000
BY: S/JULIAN INCLAN
---------------
Julian Inclan
Director Dated: SEPTEMBER 27, 2000
BY: S/EMILIO RODRIGUEZ, JR.
-----------------------
Emilio Rodriguez, Jr.
Director Dated: SEPTEMBER 27, 2000
BY: S/ALBERTO RICHA
---------------
Alberto Richa
Director Dated: SEPTEMBER 27, 2000
BY: S/FRANCISCO ARRIVI
------------------
Francisco Arrivi
Director Dated: SEPTEMBER 27, 2000
BY: S/MARI CARMEN APONTE
--------------------
Mari Carmen Aponte
Director Dated: SEPTEMBER 27, 2000
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