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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock ($1.00 par value)
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 September 10, 1998 the Group had 10,154,358 shares of common stock
outstanding, including 2,709,737 shares held by all directors and officers of
the Registrant and by the Group as treasury shares. The aggregate market value
of the common stock held by non-affiliates of the Group was $273,589,822 based
upon the reported closing price of $36.75 on the New York Stock Exchange on that
date.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Group's Annual Report to Shareholders for the fiscal year
ended June 30, 1998 are incorporated herein by reference in response to
Item 1 of Part I and Item 8 of Part II.
2. Portions of the Group's Definitive Proxy Statement relating to the 1998
Group's Stockholders Annual Meeting are incorporated herein 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 3-7
ITEM - 2 Properties 8
ITEM - 3 Legal Proceedings 8
ITEM - 4 Submissions of Matters to the Vote of Security Holders 8
PART - II
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ITEM - 5 Market for Registrant's Common Stock and Related Stockholder Matters 8
ITEM - 6 Selected Financial Data 9
ITEM - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9
ITEM - 7A Quantitative and Qualitative Disclosures About Market Risk 9
ITEM - 8 Financial Statements and Supplementary Data 9
ITEM - 9 Submissions to Matters to Vote of Security Holders 9
PART - III
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ITEM - 10 Directors and Executive Officers of the Registrant 9
ITEM - 11 Executive Compensation 9
ITEM - 12 Security Ownership of Certain Beneficial Owners and Mangement 9
ITEM - 13 Certain Relationships and Related Transaction 9
PART - IV
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ITEM - 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 9-10
2
PART - I
ITEM 1 - BUSINESS
Oriental Financial Group Inc. (the "Group" or "Oriental") is a diversified,
publicly owned bank holding company, incorporated in 1997 under the laws of
the Commonwealth of Puerto Rico which provides a wide variety of financial
services through its direct and indirect 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 seventeen 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 directly or through its wholly-owned, broker-dealer
subsidiary, Oriental Financial Services Corp., offers mortgage, commercial
and consumer lending, auto and equipment lease financing, financial planning,
money management and investment brokerage services, and corporate and
individual trust services.
The Group is subject to the provisions of the U.S. Bank Holding Company Act
of 1956 ( the "BHC 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 ("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 ("Finance
Board"). Other agencies, such as the National Association of Securities
Dealers ("NASD"), and the Securities and Exchange Commission ("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 the Bank's
subsidiaries. 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.
The Group's business is described on pages 1 through 16 of the of the Group's
Annual Report to Shareholders for the year ended June 30, 1998, which
information is incorporated herein by reference.
REGULATION AND SUPERVISION
GENERAL
The Group is a bank holding company subject to the supervision and regulation of
the Federal Reserve Board under the BHC Act. As a bank holding company, the
Group's activities and those of its banking and non-banking subsidiaries are
limited to the business of banking and activities closely related to banking,
and the Group may not directly or indirectly acquire the ownership or control of
more than 5% of any class of voting shares or substantially all the assets of
any company in the United States including a bank, without the approval of the
Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the BHC Act from engaging in non-banking activities, subject to
certain exceptions.
The Bank is subject to extensive regulation and examination by the Commissioner
and by 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 state laws and regulations which are applicable to banks,
regulate, among other things, the scope of their business, their investments,
their 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.
3
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.
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 (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 a 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.
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 Law, the Federal Deposit Insurance Act 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 Federal Deposit Insurance Act and the FDIC regulations restrict the payment
of dividends when the Bank is undercapitalized, when the bank has failed to pay
insurance assessments, or when there are safety and soundness concerns regarding
such 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 ("FDICIA").
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank ( the "FHLB") system of which the Bank is a member,
consists of 12 regional FHLB's governed and regulated by the Federal Housing
Finance Board ("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 Federal Home Loan
Bank of New York (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 are 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.
4
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:
"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, 1998, the Group is a "well-capitalized"
institution.
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 restoring the depository
institution's capital. Significantly undercapitalized depository institutions
may be subject to 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
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
Savings Associations Insurance Fund "SAIF" 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 of 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 ("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 (BIF) and SAIF are to be 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.
REGULATORY CAPITAL REQUIREMENTS
The Federal Reserve Board has adopted a 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").
5
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, 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 string
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 expansion or new activities.
Failure to meet the capital guidelines could subject an institution to variety
of enforcement remedies, including the termination deposit insurance by the
FDIC, and to certain restrictions on its business. At June 30, 1998, the Group
was in compliance with all capital requirements, exceeding those of a
"well-capitalized" institution.
Information about the Group's capital and regulatory capital ratios as of June
30, 1998 and for four previous years is found in pages 23 and 24 of the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A) (see Financial Data Index herein) and is incorporated herein
by reference.
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 and benefits and 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 fails to submit an acceptable plan or fails to implement the plan,
the appropriate federal banking agency will require the institution to correct
the deficiency and, until it is corrected, may impose other restrictions on the
institution or 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 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.
6
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 Act of
1933, as amended (the "Banking Law"). The 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 Banking Law. The
Commissioner generally examines the Bank at least once every year.
The 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 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 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 Banking Law further requires change of control filings. When any person
or entity owns, 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 the
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 which may not exceed 15% of the Bank's paid-in capital
and 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.
As of June 30, 1998, the maximum amount which the Bank could have loaned to
one borrower was approximately $6.5 million. 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.
The Finance Board, which composed of the 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 business 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
regulates 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, 1998 the Group employed 380 persons. None of its employees is
represented by a collective bargaining group. The Group considers its employee
relations to be good. For information about the Group's employee benefit plans
refer to Note 14 of the Group's consolidated financial statements (see Financial
Data Index herein).
7
ITEM 2 - PROPERTIES
As of June 30, 1998, the Bank owned 8 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 9 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. A branch, the auditing and the computer center are
the main activities conducted at this location. Approximately 60% of the
office space is leased to outside tenants. The book value of this property
at June 30, 1998 was $5,931,000.
- - LAS CUMBRES BUILDING - two story structure located at 1990 Las Cumbres
Avenue, Rio Piedras, Puerto Rico. A branch, the accounting, leasing and
mortgage originating departments are the main activities conducted at this
location. The book value of this property at June 30, 1998 was $1,825,000.
ITEM 3 - 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 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART - II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Group's common stock is traded in the New York Stock Exchange (NYSE) under
the symbol OFG. Information concerning the range of high and low sales prices
for the Group's common shares for each quarter during fiscal 1998 and the
previous two fiscal years, as well as cash dividends declared for the last three
fiscal years, is included on the Group's Annual Report for the year ended June
30, 1998 under the "Capital, Stock Data and Dividends" caption in the MD&A, (see
Financial Data Index herein) and is incorporated herein by reference.
Information concerning legal or regulatory restrictions on the payment of
dividends by the Group and the Bank is contained under the caption "Dividend
Restrictions" in Item 1 herein.
Subsequent to the close of fiscal 1998, on August 18, 1998, the Group declared a
four-for-three (33.3%) stock split on common stock held by registered
shareholders as of September 30, 1998. The stock split will be distributed on
October 15, 1998. In addition, on August 11, 1997, the Group declared a
five-for-four (25%) stock split on common stock held by registered shareholders
as of September 30, 1997. As a result 1,910,316 shares of common stock were
distributed on October 15, 1997.
As of September 10, 1998 the Group had over 2,000 stockholders of record of its
Common Stock, including all directors and officers of the Registrant, excluding
beneficial owners whose shares are held in record names of brokers or other
nominees. The last sales price for the Group's Common Stock on such date, as
quoted on the NYSE was $36.75 per share.
The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a
withholding tax on the amount of any dividends paid by corporations to
individuals, whether residents of Puerto Rico or not, trusts, estates, and
special partnerships at a special 10% withholding tax rate. If the recipient is
foreign corporation or partnership not engaged in trade or business in Puerto
Rico the rate of withholding is 10%. Prior to the first dividend distribution
for the taxable year, individuals who are residents of Puerto Rico may elect to
be taxed on the dividends at the regular rates, in which case the special 10%
tax will not be withheld from such year's distributions.
United States citizens who are non-residents of Puerto Rico will not be subject
to Puerto Rico tax on dividends if said individual's gross income from sources
within Puerto Rico during the taxable year does not exceed $1,300 if single, or
$3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department
"Withholding Tax Exemption Certificate for the Purpose of Section 1147" is filed
with the withholding agent. U.S. income tax law permits a credit against U.S.
income tax liability, subject to certain limitations, for certain foreign income
taxes paid or deemed paid with respect to such dividends.
8
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item appears on page 14 in the MD&A (see
Financial Data Index herein) and on page 53 in Note 21 in the consolidated
financial statements (see Financial Data Index herein) and is incorporated
herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item appears on pages 13 through 28 in the MD&A
(see Financial Data Index herein), and is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Group appears on page 27 in the
MD&A (see Financial Data Index herein), under caption "Quantitative and
Qualitative Disclosures about Market Risk" and is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages 29 through 53 in the
consolidated financial statements, and is incorporated herein by reference. The
financial data index in page 12 of this report sets forth the listing of all
reports required by this item and included herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART - III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Information with respect to
Nominees for Director, Directors Whose Terms Continue and Executive Officers",
and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Group's
definitive proxy statement for the Group's Stockholders Annual Meeting, filed
with Securities and Exchange Commission on September 29, 1998, (the "Proxy
Statement"), is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" "Report of the
Compensation Committee on Executive Compensation and "Performance Graph" of the
Proxy Statement is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Executive Compensation-Certain
Transactions" of the Proxy Statement is incorporated herein by reference.
PART - IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A1 - FINANCIAL STATEMENTS
The listing of financial statements required by this item is set forth in the
Financial Data Index in page 12 of this report.
A2 - 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 A1 above.
9
B - REPORTS ON FORM 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30,1998.
C - EXHIBITS
Exhibits filed as part of this Form 10-K
NO. EXHIBITS PAGE
- ---------------------- ------------------------------------------ --------------
2.0 Agreement and Plan of Merger dated as *
of June 18,1996 by and
between the Registrant, the Bank and
Oriental Interim Bank
3.1 Amended and Restated Certificate of
Incorporation of Registrant *
3.2 By-laws of Registrant *
10.1 Employment Agreement between Jose E.
Fernandez and the Bank *
10.2 Bank 1988 Stock Option Plan *
10.3 Bank's Amended and Restated 1996 Stock
Option Plan **
10.4 Group's 1998 Stock Option Plan ***
13.0 Registrant's Annual Report to
Shareholders for fiscal year ending June
30, 1998 E-1 to E-17****
21.0 List of Subsidiaries E-18
27.0 Financial Data Schedule E-19
* - Incorporated by reference from Registration Statement on
Form 8-B filed by the Group on January 10, 1997.
** - Incorporated by reference from Definitive Proxy
Statement (Attachment A) for the Group's 1997 Annual
Meeting of Shareholders filed by the Registrant on
September 19, 1997.
*** - Incorporated by reference from Definitive Proxy
Statement (Attachment A) for the Group's 1998 Annual
Meeting of Shareholders filed by the Registrant on
September 29, 1998.
**** - Those pages of the Group Annual Report to Shareholders
for the fiscal year ending June 30, 1998 (the "Annual
Report") are incorporated by reference in this Annual
Report on Form 10-K and are being filed in electronic
format as an exhibit herein. The Annual Report, including
the remaining portions which are not incorporated by
reference into this annual report on Form 10-K, is
specifically incorporated by reference herein as an
exhibit from the filing of such annual report in paper
format by the Group on or about September 30, 1998
pursuant to Commission Rule 14a-3(c).
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
(REGISTRANT)
By: S/JOSE E. FERNANDEZ
--------------------------
Jose E. Fernandez
Chairman of the Board, President
and Chief Executive Officer
Dated: 10-9-98 (Principal Executive and
----------- Financial Officer)
By: S/RAFAEL VALLADARES
--------------------------
Rafael Valladares
Senior Vice President
Comptroller
Dated: 10-9-98 (Principal Accounting Officer)
-----------
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: 10-9-98
-------
By: S/PABLO I. ALTIERI
- -----------------------------
Dr. Pablo I. Altieri
Director Dated: 10-9-98
-------
By: S/DIEGO PERDOMO
- -----------------------------
Diego Perdomo
Director Dated: 10-9-98
-------
By: S/EFRAIN ARCHILLA
- -----------------------------
Efrain Archilla
Director Dated: 10-9-98
-------
By: S/JULIAN INCLAN
- -----------------------------
Julian Inclan
Director Dated: 10-9-98
-------
By: S/EMILIO RODRIGUEZ, JR.
- -----------------------------
Emilio Rodriguez, Jr.
Director Dated: 10-9-98
-------
By: S/ALBERTO RICHA
Alberto Richa
Director Dated: 10-9-98
-------
11
ORIENTAL FINANCIAL GROUP, INC.
FORM-10K
FINANCIAL DATA INDEX
PAGE
----
- --------------------------------------------------------------------------------
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-28
Selected Financial Data 14
Quantitative and Qualitative Disclosures About Market Risk 27
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Accountants -
Consolidated Statements of Financial Condition as of June 30,
1998 and 1997 29
Consolidated Statements of Income for each of the years in the
three-year period ended June 30, 1998 30
Consolidated Statements of Changes in Stockholders' Equity
and of Comprehensive Income for each of the
years in the three-year period ended June 30, 1998 31
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended June 30, 1998 32
Notes to the Consolidated Financial Statements 33-53
* The Group was given an unqualified opinion for the fiscal year ended June
30, 1998 by its independent accountant (Pricewaterhouse Coopers LLP) on an
independent's accountant report signed on July 31, 1998. A copy of the
independent accountant unqualified opinion appears on page 34 of the
Group's Annual Report for the year ended June 30, 1998 and is incorporated
herein by reference.
12
ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF FINANCIAL PERFORMANCE
In fiscal 1998 the Group earned a record $21.4 million, 20% over the
$17.9 million (excluding SAIF assessment) earned in fiscal 1997.
Earnings per common share for fiscal 1998 were $2.15 per share (basic)
or 19% higher than the $1.81 per share (basic) reported in fiscal 1997.
The Group's earnings growth reflects increases in both interest income and
non-interest income, driven by a solid growth of 25% in interest-earning
assets and strong performances in mortgage banking activities and trust,
money management and brokerage fees. These factors served to offset the
impact of increases in the provision for loan losses and in non-interest
expenses. The Group's profitability ratios for fiscal 1998, represented
returns of 1.74% on assets (ROA) and 21.24% on stockholder's equity (ROE)
compared with 1.84% and 21.17%, respectively, in fiscal 1997.
During the second quarter of fiscal 1998, the Group sold its mortgage loans
servicing portfolio, including $550 million serviced for others, to a local
mortgage banking institution. 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
originations, trust, money management, brokerage, leasing, personal loans and
deposit accounts with the highest earnings potential.
Oriental's diversified asset base (excluding the mortgage servicing division
which was sold) experienced an impressive growth of 25% that contributed to a
large extent to income expansion across its business lines. At June 30, 1998,
total financial assets owned or managed grew to $3.36 billion from the $2.7
billion owned or managed one year ago. Total financial assets at June 30,
1998, consisted of $1.31 billion owned by the Bank, $1.31 billion managed by
the trust and $741 million gathered by the broker-dealer.
For fiscal 1998 the Group provided $9.6 million for loan losses compared with
$4.9 million the year before. At June 30, 1998, the Group's allowance for
loan losses amounted to $5.7 million or 1.03% of total loans versus $5.4
million or 1.00% of total loans the prior year. The higher provision for
fiscal 1998 was primarily due to a response to the significant rise in net
charge-offs experienced by the Group's consumer and leasing portfolios and to
current and expected economic conditions.
The Group's focus in managing and controlling its non-interest expenses was
reflected on earnings performance. Recurring non-interest expenses for fiscal
1998 increased 8% to $30.9 million from $28.7 million a year earlier. The
efficiency ratio and the expense ratio for fiscal 1998 improved to 50.27% and
1.13%, respectively, from 52.76% and 1.34%, respectively, the year before.
Stockholders' equity at June 30, 1998, totaled $107.0 million compared to
$89.4 million the year before, an increase of 20%. The Group continues to be
a "well capitalized" institution, the highest classification available under
the capital standards set by the Federal Deposit Insurance Corporation
("FDIC") for bank or bank holding companies. Total risk-based and leverage
capital ratios as of June 30, 1998 were 21.68% and 7.70%, respectively,
which are well above the minimum capital ratios required by regulatory
agencies.
The following pages discuss in detail the different components that
resulted in the Group's continued profitability.
RESULT OF OPERATIONS
As a diversified financial services provider, 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.
13
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED JUNE 30, (IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
CONDENSED EARNINGS REPORT:
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME $ 101,580 $ 82,629 $ 70,447 $ 58,143 $ 46,475
INTEREST EXPENSE 58,139 45,098 37,694 30,423 22,843
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME 43,441 37,531 32,753 27,720 23,632
RECURRING NON-INTEREST INCOME 17,303 14,774 11,961 9,157 8,363
NON-RECURRING NON-INTEREST INCOME 5,342 2,578 2,801 2,275 1,609
RECURRING NON-INTEREST EXPENSES 30,881 28,491 24,608 21,590 18,752
NON-RECURRING NON-INTEREST EXPENSES 400 1,830 - - -
PROVISION FOR LOAN LOSSES 9,545 4,900 4,600 2,550 2,000
PROVISION FOR INCOME TAXES 3,850 3,100 3,571 2,905 3,025
----------- ----------- ----------- ----------- -----------
NET INCOME 21,410 16,562 4,736 12,107 9,827
SAIF ADJUSTMENT, NET OF TAXES - 1,333 - - -
----------- ----------- ----------- ----------- -----------
NET INCOME EXCLUDING SAIF $ 21,410 $ 17,895 $ 14,736 $ 12,107 $ 9,827
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
INCOME PER SHARE (EXCLUDING SAIF IN 1997):
- ----------------------------------------------------------------------------------------------------------------------------
BASIC $ 2.15 $ 1.81 $ 1.47 $ 1.27 $ 1.31
----------- ----------- ----------- ----------- -----------
DILUTED $ 2.08 $ 1.74 $ 1.41 $ 1.19 $ 1.21
----------- ----------- ----------- ----------- -----------
DIVIDENDS DECLARED PER SHARE $ 0.55 $ 0.44 $ 0.30 $ 0.18 $ 0.10
----------- ----------- ----------- ----------- -----------
BOOK VALUE $ 10.65 $ 8.95 $ 8.03 $ 6.97 $ 6.13
----------- ----------- ----------- ----------- -----------
MARKET PRICE $ 36.88 $ 22.60 $ 12.67 $ 10.14 $ 7.31
----------- ----------- ----------- ----------- -----------
AVERAGE COMMON SHARES OUTSTANDING 9,946 9,888 10,038 9,560 7,528
AVERAGE POTENTIAL COMMON STOCK OPTIONS 330 372 399 653 615
----------- ----------- ----------- ----------- -----------
TOTAL AVERAGES SHARES AND EQUIVALENTS 10,276 10,260 10,437 10,213 8,143
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE FIGURES WERE RETROACTIVELY ADJUSTED FOR
THE EFFECT OF THE 25% STOCK SPLIT DISTRIBUTED ON
OCTOBER 15, 1997.
FISCAL END BALANCES:
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL BANK ASSETS $ 1,311,400 $ 1,068,600 $ 877,400 $ 744,400 $ 655,000
TRUST ASSETS MANAGED 1,310,000 1,088,600 874,500 699,000 545,400
ASSETS GATHERED BY BROKER-DEALER 741,400 524,900 293,100 195,400 153,200
----------- ----------- ----------- ----------- -----------
TOTAL FINANCIAL ASSETS BEFORE SERVICING 3,362,800 2,682,100 2,045,000 1,638,800 1,353,600
LOANS SERVICED TO THIRD PARTIES - 515,700 401,300 272,900 153,700
----------- ----------- ----------- ----------- -----------
TOTAL FINANCIAL ASSETS $ 3,362,800 $ 3,197,800 $ 2,446,300 $ 1,911,700 $ 1,507,300
----------- ----------- ----------- ----------- -----------
INVESTMENT AND TRADING SECURITIES $ 706,652 $ 468,594 $ 350,736 $ 289,106 $ 279,303
LOANS AND LOANS HELD-FOR-SALE, NET 545,420 532,970 476,110 409,391 339,216
----------- ----------- ----------- ----------- -----------
INTEREST-EARNING ASSETS $ 1,252,072 $ 1,001,564 $ 826,846 $ 698,497 $ 618,519
----------- ----------- ----------- ----------- -----------
DEPOSITS $ 571,431 $ 497,542 $ 382,557 $ 313,542 $ 249,192
REPURCHASE AGREEMENTS 416,171 247,915 242,335 195,337 -
BORROWINGS 189,388 204,816 145,466 137,472 327,870
----------- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES $ 1,176,990 $ 950,273 $ 770,358 $ 646,351 $ 577,062
----------- ----------- ----------- ----------- -----------
CAPITAL $ 107,030 $ 89,394 $ 79,903 $ 69,705 $ 55,684
----------- ----------- ----------- ----------- -----------
REGULATORY CAPITAL RATIOS (IN PERCENT):
- ----------------------------------------------------------------------------------------------------------------------------
LEVERAGE CAPITAL 7.70% 8.17% 8.71% 8.89% 8.49%
----------- ----------- ----------- ----------- -----------
TOTAL RISK-BASED CAPITAL 21.68% 18.66% 19.14% 17.73% 19.92%
----------- ----------- ----------- ----------- -----------
TIER 1 RISK-BASED CAPITAL 20.45% 17.53% 18.07% 17.00% 18.90%
----------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL RATIOS (IN PERCENT):
- ----------------------------------------------------------------------------------------------------------------------------
AFTER ISSUANCE 845,000 NEW SHARES ISSUED IN 1994 AND BEFORE SAIF IN 1997.
RETURN ON AVERAGE EQUITY (ROE) 21.24% 21.17% 19.30% 19.05% 26.52%
----------- ----------- ----------- ----------- -----------
RETURN ON AVERAGE ASSETS (ROA) 1.74% 1.84% 1.82% 1.77% 1.68%
----------- ----------- ----------- ----------- -----------
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS 8.16% 8.69% 9.44% 9.31% 6.33%
----------- ----------- ----------- ----------- -----------
EXPENSE RATIO 1.13% 1.34% 1.52% 1.61% 1.80%
----------- ----------- ----------- ----------- -----------
EFFICIENCY RATIO 50.27% 52.76% 53.43% 59.65% 61.04%
----------- ----------- ----------- ----------- -----------
OTHER INFORMATION:
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF BANKING OFFICES 17 16 16 15 14
----------- ----------- ----------- ----------- -----------
14
NET INTEREST INCOME
Net interest income for fiscal 1998 reached $43.4 million, 16% or $5.9
million higher than the $37.5 million reported in fiscal 1997. In fiscal
1996, net interest income was $32.8 million. This improvement in net
interest income reflects an increase of $6.3 million due to a higher
volume of net interest-earning assets; partially offset by an
unfavorable effect in rate of $376,000, as a result of a reduction of 39
basis points in the interest rate margin. In fiscal 1998, interest rate
spread and net interest margin were 3.57% and 3.80%, as compared to
3.89% and 4.19%, respectively, in fiscal 1997. In fiscal 1996, they were
4.03% and 4.38%, respectively.
Table 1 presents a comparative analysis of the net interest income and
rates, excluding income tax effect, for the past three fiscal years.
It also presents for the last two years an analysis of the major
categories of interest-earning assets and interest-bearing liabilities
and their impact on the net interest income variances due to (1) changes
in volume (changes in volume multiplied by old rates) and (2) changes in
rate (changes in rate multiplied by old volume). Rate-volume variances
(changes in rates multiplied by the changes in volume) have been
proportionally allocated to the changes in volume and changes in rate
based upon their respective percentage of the combined total.
The Group's interest income for fiscal 1998 increased by 23% or $19
million to $101.6 million from $82.6 million posted in fiscal 1997. In
fiscal 1996, interest income totaled $70.4 million. The growth in
interest income was driven by a positive volume variance of $19.4
million due to a larger average volume of interest-earning assets,
offset by a negative rate variance of $470,000 resulting from a
reduction of 33 basis points in the interest-earning assets yield
performance.
Average interest-earning assets increased to $1.1 billion compared with
$896 million in fiscal 1997, a 28% increase. The principal contributor
to the growth in average interest-earning assets was a rise of 50% in
average investment securities followed by an increase of 9% in average
loans. This average investment volume growth was fueled by increases in
investment and mortgage-backed securities which volume rose to $237
million and $341 million, respectively, from $135 million and $241
million, respectively, in fiscal 1997. There were two main reasons for
the increase in investments and mortgage-backed securities. First, was
the creation, during the latter part of fiscal 1997, of OBT
International Branch under the International Banking Center Law which
invests primarily in U.S. mortgage-baked securities that provide the
Group significant tax advantages. Finally, was a shift in the Group's
investing strategy due to the change in the GNMA's tax-exemption in July
1997. For more on this change to the Puerto Rico tax code refer to the
income taxes section of the Consolidated Financial Statements included
therein. As a result of these changes, total investments amounted to
52.3% of average interest-earning assets in fiscal 1998 versus 44.4% a
year ago. The additional loan volume was another contributor to the rise
in the Group's interest income. This volume growth relates mainly to
increases in the real estate and consumer loans portfolios, which
increased to $280 million and $104 million, respectively, from $249
million and $83 million, respectively, the year before.
The average yield on interest-earning assets for fiscal 1998 was 8.89%
or 33 basis points lower than the 9.22% attained in fiscal 1997. The
main reason for this reduction was the proportionately higher increase
in the total average investments portfolio, which carries a lower yield
than the loan portfolio but generates a significant amount of tax-
exempt interest which lowers the Group's effective tax rate. The average
yield on investments securities fell to 6.84% or 14 basis points lower
than the 7.00% attained in fiscal 1997, due to a general reduction on
market rates. The yield on loans for fiscal 1998 improved to 11.14%, or
14 basis points higher than the 11.00% reported in fiscal 1997, mostly
due to the significant growth in average consumer loans, which yield
performance improved to 13.66%, 113 basis points higher than the 12.53%
reported in fiscal 1997.
Interest expense for fiscal 1998 rose 29% or $13 million to $58.1
million from $45.1 million reported in fiscal 1997. In fiscal 1996,
interest expense amounted $37.7 million. The increase was driven by a
higher volume of interest-bearing liabilities used to fund the interest-
earning assets growth that contributed to a rise in total interest
expense during fiscal 1998 of $8 million. To a lesser extent, interest
expense was positively affected by a rate variance of $118,000 due to
lower average cost of funds attained in fiscal 1998.
Average interest-bearing liabilities for fiscal 1998 reached $1.1
billion versus $845 million in fiscal 1997, a 26% increase. They totaled
$696 million in fiscal 1996. The growth in interest-bearing liabilities
average volume reflect strong increases in the average volume of
deposits and repurchase agreements which rose $97.2 million and $132.6
million, respectively. In fiscal 1998 average deposits rose to $528.2
million from $431 million in fiscal 1997, a $97.2 million or 23%
increase. Certificates of deposits were the main contributor to the
rise, increasing $58.5 million or 21.1%, followed by IRA accounts and
savings and demand accounts, which increased by 45.1% or $27.1 million
and 12.3% or $ 11.6 million, respectively. The average volume of
repurchase agreements rose by 59% to $357.8 million from $225.2 million
in fiscal 1997. The increase in certificates of deposit was concentrated
in customer CD's, public funds and broker CD's. The rise in average
repurchase agreements and FHLB advances was necessary to fund the asset
growth at the OBT International Branch, as previously mentioned.
15
TABLE 1 - ANALYSIS OF NET INTEREST INCOME
INTEREST
--------
DESCRIPTION 1998 1997 1996
- --------------------------------------------------- ---------- ---------- ---------
INTEREST-EARNING ASSETS:
- -----------------------
REAL ESTATE LOANS (2) $ 27,292 $ 24,591 $ 21,079
CONSUMER LOANS 14,262 10,400 9,115
COMMERCIAL LOANS 1,103 1,204 931
FINANCING LEASES 17,997 18,575 17,863
---------- --------- ---------
TOTAL LOANS (1) 60,654 54,770 48,988
---------- --------- ---------
---------- --------- ---------
MORTAGE-BACKED SECURITIES 23,874 17,138 12,593
INVESTMENT SECURITIES 15,863 9,642 7,508
OTHER INTEREST-EARNING ASSETS 1,189 1,079 1,358
---------- --------- ---------
TOTAL INVESTMENTS 40,926 27,859 21,459
---------- --------- ---------
---------- --------- ---------
TOTAL INTEREST-EARNING ASSETS $ 101,580 $ 82,629 $ 70,447
---------- --------- ---------
---------- --------- ---------
INTEREST-BEARING LIABILITIES:
- ----------------------------
SAVINGS AND DEMAND ACCOUNTS $ 2,781 $ 2,455 $ 2,159
CERTIFICATES OF DEPOSIT 18,134 14,649 12,483
IRA'S AND ZERO COUPON BONDS 5,282 3,908 2,744
---------- --------- ---------
TOTAL DEPOSITS 26,197 21,012 17,386
---------- --------- ---------
---------- --------- ---------
REPURCHASE AGREEMENTS 19,216 11,340 9,906
LINES OF CREDIT 47 398 768
FHLB ADVANCES 3,722 2,024 2,342
FHLB BORROWINGS 1,579 1,601 1,466
BONDS PAYABLE 27 63 104
TERM NOTES 6,026 6,387 4,147
---------- --------- ---------
TOTAL BASIC OTHER BORROWINGS 30,617 21,813 18,733
INTEREST RATE RISK MANAGEMENT 1,325 2,273 1,575
---------- --------- ---------
TOTAL ADJUSTED OTHER BORROWINGS 31,942 24,086 20,308
---------- --------- ---------
---------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 58,139 $ 45,098 $ 37,694
---------- --------- ---------
---------- --------- ---------
NET INTEREST INCOME $ 43,441 $ 37,531 $ 32,753
---------- --------- ---------
---------- --------- ---------
NET INTEREST EARNING ASSETS
INTEREST RATE MARGIN
INTEREST-EARNING ASSETS TO INTEREST BEARING LIABILITIES RATIO
VOLUME / RATE ANALYSIS
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
AVERAGE BALANCE
----------------
DESCRIPTION 1998 1997 1996
- --------------------------------------------------- ---------- ---------- ---------
INTEREST-EARNING ASSETS:
- ------------------------
REAL ESTATE LOANS (2) $ 280,160 $ 249,364 $ 215,079
CONSUMER LOANS 104,395 82,992 72,167
COMMERCIAL LOANS 9,723 8,650 8,382
FINANCING LEASES 150,011 156,769 148,786
---------- --------- ---------
TOTAL LOANS (1) 544,289 497,775 444,414
---------- --------- ---------
---------- --------- ---------
MORTAGE-BACKED SECURITIES 341,018 240,828 171,757
INVESTMENT SECURITIES 237,416 134,697 104,856
OTHER INTEREST-EARNING ASSETS 19,801 22,526 25,300
---------- --------- ---------
TOTAL INVESTMENTS 598,235 398,051 301,913
---------- --------- ---------
---------- --------- ---------
TOTAL INTEREST-EARNING ASSETS $ 1,142,524 $ 895,826 $ 746,327
---------- --------- ---------
---------- --------- ---------
INTEREST-BEARING LIABILITIES:
- -----------------------------
SAVINGS AND DEMAND ACCOUNTS $ 105,523 $ 93,945 $ 81,104
CERTIFICATES OF DEPOSIT 335,228 276,751 225,400
IRA'S AND ZERO COUPON BONDS 87,453 60,269 39,840
---------- --------- ---------
TOTAL DEPOSITS 528,204 430,965 346,344
---------- --------- ---------
---------- --------- ---------
REPURCHASE AGREEMENTS 357,800 225,182 205,748
LINES OF CREDIT 194 5,070 9,683
FHLB ADVANCES 64,768 35,822 38,155
FHLB BORROWINGS 25,577 26,000 23,545
BONDS PAYABLE 301 721 1,195
TERM NOTES 114,500 121,195 71,640
---------- --------- ---------
TOTAL BASIC OTHER BORROWINGS 563,140 413,990 349,966
INTEREST RATE RISK MANAGEMENT - - -
---------- --------- ---------
TOTAL ADJUSTED OTHER BORROWINGS 563,140 413,990 349,966
---------- --------- ---------
---------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 1,091,344 $ 844,955 $ 696,310
---------- --------- ---------
---------- --------- ---------
NET INTEREST INCOME
NET INTEREST EARNING ASSETS $ 51,180 $ 50,871 $ 50,017
---------- --------- ---------
---------- --------- ---------
INTEREST RATE MARGIN
INTEREST-EARNING ASSETS TO INTEREST
BEARING LIABILITIES RATIO 104.69% 106.02% 107.18%
---------- --------- ---------
VOLUME / RATE ANALYSIS
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
TABLE 1 - ANALYSIS OF NET INTEREST INCOME
AVERAGE RATE
-------------
DESCRIPTION 1998 1997 1996
- --------------------------------------------------- ---------- ---------- ---------
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS (2) 9.74% 9.86% 9.80%
CONSUMER LOANS 13.66% 12.53% 12.63%
COMMERCIAL LOANS 11.35% 13.91% 11.10%
FINANCING LEASES 12.00% 11.85% 12.01%
------ ------ ------
TOTAL LOANS (1) 11.14% 11.00% 11.02%
------ ------ ------
------ ------ ------
MORTAGE-BACKED SECURITIES 7.00% 7.12% 7.33%
INVESTMENT SECURITIES 6.68% 7.16% 7.16%
OTHER INTEREST-EARNING ASSETS 5.92% 4.72% 5.34%
------ ------ ------
TOTAL INVESTMENTS 6.84% 7.00% 7.10%
------ ------ ------
TOTAL INTEREST-EARNING ASSETS 8.89% 9.22% 9.43%
------ ------ ------
------ ------ ------
INTEREST-BEARING LIABILITIES:
SAVINGS AND DEMAND ACCOUNTS 2.64% 2.61% 2.66%
CERTIFICATES OF DEPOSIT 5.41% 5.29% 5.54%
IRA'S AND ZERO COUPON BONDS 6.04% 6.49% 6.89%
------ ------ ------
TOTAL DEPOSITS 4.96% 4.88% 5.02%
------ ------ ------
------ ------ ------
REPURCHASE AGREEMENTS 5.37% 5.04% 4.81%
LINES OF CREDIT 23.77% 7.75% 7.82%
FHLB ADVANCES 5.75% 5.65% 6.14%
FHLB BORROWINGS 6.17% 6.16% 6.23%
BONDS PAYABLE 9.12% 8.75% 8.69%
TERM NOTES 5.26% 5.27% 5.79%
------ ------ ------
TOTAL BASIC OTHER BORROWINGS 5.44% 5.27% 5.35%
INTEREST RATE RISK MANAGEMENT 0.24% 0.55% 0.45%
------ ------ ------
TOTAL ADJUSTED OTHER BORROWINGS 5.67% 5.82% 5.80%
------ ------ ------
------ ------ ------
TOTAL INTEREST-BEARING LIABILITIES 5.32% 5.33% 5.41%
------ ------ ------
------ ------ ------
NET INTEREST INCOME 3.57% 3.89% 4.03%
------ ------ ------
------ ------ ------
NET INTEREST EARNING ASSETS
INTEREST RATE MARGIN 3.80% 4.19% 4.38%
------ ------ ------
INTEREST-EARNING ASSETS TO INTEREST BEARING LIABILITIES RATIO
VOLUME / RATE ANALYSIS
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
FISCAL 1998 VS FISCAL 1997 FISCAL 1997 VS FISCAL 1996
-------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- --------- --------- -------- --------- ---------
INTEREST-EARNING ASSETS:
- ------------------------
REAL ESTATE LOANS (2) $ 3,037 $ (336) $ 2,701 $ 3,360 $ 152 $ 3,512
CONSUMER LOANS 2,682 1,180 3,862 1,367 (82) 1,285
COMMERCIAL LOANS 149 (250) (101) 30 243 273
FINANCING LEASES (801) 223 (578) 958 (246) 712
---------- --------- --------- -------- --------- ---------
TOTAL LOANS (1) 5,067 817 5,884 5,720 62 5,782
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
MORTAGE-BACKED SECURITIES 7,130 (394) 6,736 5,062 (517) 4,545
INVESTMENT SECURITIES 7,353 (1,132) 6,221 2,135 (1) 2,134
OTHER INTEREST-EARNING ASSETS (129) 239 110 (148) (131) (279)
---------- --------- --------- -------- --------- ---------
TOTAL INVESTMENTS 14,354 (1,287) 13,067 7,049 (649) 6,400
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
TOTAL INTEREST-EARNING ASSETS $ 19,421 $ (470) $ 18,951 $ 12,769 $ (587) $ 12,182
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
INTEREST-BEARING LIABILITIES:
- -----------------------------
SAVINGS AND DEMAND ACCOUNTS $ 303 $ 23 $ 326 $ 342 $ (46) $ 296
CERTIFICATES OF DEPOSIT 3,095 390 3,485 2,844 (678) 2,166
IRA'S AND ZERO COUPON BONDS 1,763 (389) 1,374 1,407 (243) 1,164
---------- --------- --------- -------- --------- ---------
TOTAL DEPOSITS 5,161 24 5,185 4,593 (967) 3,626
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
REPURCHASE AGREEMENTS 6,678 1,198 7,876 936 498 1,434
LINES OF CREDIT (378) 27 (351) (361) (9) (370)
FHLB ADVANCES 1,635 63 1,698 (143) (175) (318)
FHLB BORROWINGS (26) 4 (22) 153 (18) 135
BONDS PAYABLE (37) 1 (36) (41) - (41)
TERM NOTES (353) (8) (361) 2,869 (629) 2,240
---------- --------- --------- -------- --------- ---------
TOTAL BASIC OTHER BORROWINGS 7,519 1,285 8,804 3,413 (333) 3,080
INTEREST RATE RISK MANAGEMENT 455 (1,403) (948) 288 410 698
---------- --------- --------- -------- --------- ---------
TOTAL ADJUSTED OTHER BORROWINGS 7,974 (118) 7,856 3,701 77 3,778
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
NET INTEREST INCOME $ 13,135 $ (94) $ 13,041 $ 8,294 $ (890) $ 7,404
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
NET INTEREST EARNING ASSETS $ 6,286 $ (376) $ 5,910 $ 4,475 $ 303 $ 4,778
---------- --------- --------- -------- --------- ---------
---------- --------- --------- -------- --------- ---------
NOTES:
- ------
(1) - LOANS AVERAGE BALANCES EXCLUDE NON-PERFORMING LOANS.
(2) - REAL ESTATE AVERAGE BALANCES INCLUDE LOANS-HELD-FOR-SALE.
16
The average cost of funds on interest-earning liabilities for fiscal
1998 was 5.32% or 1 basis point lower than the 5.33% attained in fiscal
1997. However, the cost of funds excluding the effect of the interest
rate risk management activities increased during fiscal 1998. This
increase was mostly related to a rise of 33 basis points in the cost of
repurchase agreements, which represent 32.5% of total average interest-
bearing liabilities, from 5.04% in fiscal 1997 to 5.37% in fiscal 1998.
This funding cost increase was due to the replacing of 936 repurchase
agreements, which currently represent 18% of Group's total repos
portfolio versus 54% a year ago, with higher-cost conventional
repurchase agreements. Said increase was offset by a decline in the cost
of interest-hedging activities (swaps and caps) of 31 basis points.
PROVISION FOR LOAN LOSSES
For fiscal 1998 the Group provided $9.6 million for loan losses, an
increase of $4.7 million or 95% as compared to the $4.9 million of
fiscal 1997. The Group provided $4.6 million for fiscal 1996. The higher
provision for fiscal 1998 was primarily due to a response to the
significant rise in net charge-offs experienced by the Group's consumer
and leasing portfolios. This increase was mainly 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
Non-interest income rose 30% to $22.6 million in fiscal 1998, from $
17.4 million in fiscal 1997. In fiscal 1996, these revenues totaled
$14.8 million. During fiscal 1998 non-interest income continued to be a
major driver of the Group's earnings improvement as most of its
categories experienced a strong growth in fiscal 1998, particularly fees
generated by trust, money management and brokerage and mortgage banking
activities (excluding fees from mortgage loans serviced for others
which portfolio was sold to a local mortgage banking institution in
October 1997), see Table 2.
Recurring non-interest income for fiscal 1998 totaled $17.3 million,
which represents an increase of 17% or $2.5 million from the $14.8
million reported in fiscal 1997. In fiscal 1996, these revenues totaled
$12.0 million. The ratio of recurring non-interest income to recurring
non-interest expenses also increased to 56.03% in fiscal 1998 from
51.85% in fiscal 1997, showing that recurring non-interest income has
become an important contributor to the growth in the Group's revenues,
in line with the Group's business strategy.
Bank services fees and charges, which consist primarily of service
charges on deposit accounts, leasing fees and late charges collected on
loans, amounted to $3.8 million for fiscal 1998, a decrease of 23% when
compared to the $4.9 million reported a year earlier. This net decrease
was a combination of a decrease in lease handling fees, as result of
Group's a lower leasing's lending activity, partially offset by an
increase in fees on deposit accounts as a result of a larger volume of
deposit accounts and revision of service charges. Table 3 summarizes the
bank service fees and charges generated for of the periods analyzed.
Trust, money management and brokerage fees, the principal component of
recurring non-interest income, reflected strong results during fiscal
1998. For fiscal 1998 totaled $8.4 million which represents an increase
of 24% from the $6.8 million recorded the year before. This increase
was 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 and "Financial Condition" section.
Recurring mortgage banking activities, which exclude fees on loans
serviced to third parties, reached $4.5 million in fiscal 1998, $2.2
million or 95% higher than the $2.3 million earned in fiscal 1997. This
increase was mostly achieved through greater mortgage origination volume
and favorable market conditions for the sale of such loans in the
secondary market. Table 4 presents the components of the Group's
mortgage banking activities and certain relevant selected financial data
for of the periods analyzed.
In October 1997, in a move to strengthen its future earnings, the Group
sold its mortgage loans servicing portfolio, including $550 million
serviced for others, to a local mortgage banking institution. The Group
recorded a net gain of $2.7 million on this transaction. The divestiture
of the mortgage servicing operation reflects a wider strategy guiding
the Group to concentrate on mortgage originations, trust, money
management, brokerage, leasing, personal loans and deposit accounts with
the highest earnings potential. As result of this sale, mortgage
servicing fees decreased of 59% during fiscal 1998 as compared to fiscal
1997.
Gains on sale of securities were $1 million in fiscal 1998, a 21%
increase from the $850,000 reported in fiscal 1997. All securities sales
were from the available-for-sale portfolio and were made in connection
with the Group's asset/liability management activities. Net gains from
the sale of investment securities varies from year to year based on,
among other things, the interest rate environment, alternative
investment opportunities and the Group's goals in managing its available-
for-sale portfolio. For further discussion of the Group's investment
securities, see Note 3 of the attached Consolidated Financial Statements.
Also, fiscal 1998 trading activities reflected profits of $915,000, a
significant rise from the $54,000 realized in fiscal 1997. In fiscal
1998 the Group benefited from favorable market conditions.
17
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
TABLE 2 - NON-INTEREST INCOME SUMMARY
- ----------------------------------------------------------------------------------------------
BANK SERVICE FEES AND CHARGES $ 3,793 $ 4,909 $ 3,801
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 8,362 6,750 5,913
RECURRING MORTGAGE BANKING ACTIVITIES 4,485 2,297 1,702
RENT AND OTHER OPERATING INCOME 663 818 545
--------- --------- ---------
RECURRING NON-INTEREST INCOME 17,303 14,774 11,961
--------- --------- ---------
--------- --------- ---------
NET GAIN ON SALE OF INVESTMENTS 1,030 849 1,482
TRADING ACCOUNT INCOME (LOSS) 915 54 (20)
FEES FROM MORTGAGE LOANS HELD FOR OTHERS, NET OF
AMORTIZATION 690 1,675 1,339
NET GAIN ON SALE OF SERVICING ASSETS 2,707 - -
--------- --------- ---------
NON RECURRING NON-INTEREST INCOME 5,342 2,578 2,801
--------- --------- ---------
TOTAL NON-INTEREST INCOME $ 22,645 $ 17,352 $ 14,762
--------- --------- ---------
--------- --------- ---------
RECURRING NON-INTEREST-INCOME DISTRIBUTION:
BANK SERVICE FEES AND CHARGES 21.9% 33.2% 31.8%
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 48.3% 45.7% 49.4%
RECURRING MORTGAGE BANKING ACTIVITIES 25.9% 15.5% 14.2%
RENT AND OTHER OPERATING INCOME 3.9% 5.6% 4.6%
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 56.03% 51.85% 48.61%
--------- --------- ---------
--------- --------- ---------
TABLE 3 - BANK SERVICE FEES SUMMARY:
---------------------------------------------------------------------------------------------
SERIVICE CHARGES ON DEPOSIT ACCOUNTS $ 1,547 $ 1,211 $ 830
OTHER SERVICE FEES 165 166 132
LOAN LATE CHARGES AND CREDIT LIFE INSURANCE FEES 1,269 1,082 982
LEASING ORIGINATION FEES, NET 812 2,450 1,857
--------- --------- ---------
$ 3,793 $ 4,909 $ 3,801
--------- --------- ---------
--------- --------- ---------
TABLE 4 - MORTGAGE BANKING ACTIVITIES SUMMARY:
---------------------------------------------------------------------------------------------
SERVICING ASSETS SOLD $ 2,499 $ 1,766 $ 1,200
NET GAIN ON SALE OF LOANS 1,986 531 502
--------- --------- ---------
RECURRING MORTGAGE BANKING ACTIVITIES 4,485 2,297 1,702
FEES FROM MORTAGE LOANS SERVICED FOR OTHERS, NET 690 1,675 1,339
NET GAIN ON SALE OF SERVICING ASSETS 2,707 - -
--------- --------- ---------
TOTAL MORTGAGE BANKING ACTIVITIES $ 7,882 $ 3,972 $ 3,041
--------- --------- ---------
--------- --------- ---------
SELECTED RELEVANT DATA:
MORTGAGE LOANS ORIGINATED $ 182,877 $ 138,085 $ 118,973
--------- --------- ---------
MORTGAGE LOANS PURCHASED $ 28,530 $ 54,707 $ 78,977
--------- --------- ---------
MORTGAGE LOANS SOLD $ 57,511 $ - $ 23,448
--------- --------- ---------
MORTGAGE LOANS SECURITIZED INTO MORTAGE-BACKED
SECURITES $ 102,300 $ 147,536 $ 99,091
--------- --------- ---------
18
NON-INTEREST EXPENSES
As shown on Table 5 recurring non-interest expenses for fiscal year 1998
increased 8% to $30.9 million, as compared to $28.5 million in fiscal
1997. However, the efficiency ratio and the expense ratio for fiscal
1998 improved to 50.27% and 1.13%, respectively, from 52.76% and 1.34%,
respectively, the year before; reflecting management's strict cost-
control policy.
Employee compensation and benefits, the Group's largest expense
category, amounted to $15.1 million for fiscal 1998, a slight increase
of 2% or $343,000 when compared to the $14.7 million reported for fiscal
1997. This increase was driven by a growth in variable compensation
which increased 5% or $243,000 due to the Group's greater use of a
variable pay by performance compensation structure which is tied to
productivity. For fiscal 1998 variable compensation represented 36% of
total compensation versus 32% in fiscal 1997. Compensation and benefits
as a percentage of total average assets ratio for fiscal 1998 improved
to 1.22% versus 1.53% the year before. Table 6 presents the composition
of the Group's employee compensation and benefits at the end of the
periods analyzed.
All other recurring non-interest expenses for fiscal 1998 increased 15%
to $15.8 million as compared to $13.8 million in fiscal 1997. This rise
was led by an increase in advertising and promotion of 31% or $615,000,
followed by increases in occupancy and equipment expenses and municipal
and property taxes of 9% or $403,000 and 67% or $659,000, respectively.
The increase in advertising and promotion resulted mainly from the
ongoing campaign to increase the volume of business, 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 EDP depreciation and maintenance costs as result of the
investment the Group has made to its systems to enable the Group to
offer new products, expand electronic delivery channels and more
important improve the customers service delivery.
On September 30, 1996, the United States Congress approved and President
Clinton signed into law a bill to recapitalize the Savings Association
Insurance Fund. This bill called for a special one-time charge on
institutions deposits on March 31, 1995, insured by the Savings
Association Insurance Funds ("SAIF") of approximately 66 basis points.
Accordingly, Oriental recorded a special charge of $1.8 million, net of
taxes of $490,000, during the first quarter of fiscal 1997 to account
for its share of the one-time payment of SAIF insurance premium.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal 1998 amounted to $3.9 million
compared with $3.1 million in fiscal 1997 and $3.6 million in fiscal
1996. The increase in fiscal 1998 was primarily attributable to higher
pre-tax earnings of $5.6 million, partially offset by higher level of
tax-exempt interest income. The effective tax rate for fiscals 1998,
1997 and 1996 was 15.2%, 15.7% and 17.2%, respectively. 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. Also, earnings related to Oriental's
International Branch, created during the latter part of fiscal 1997, are
exempt for income tax purposes. Please refer to Note 12 of the
Consolidated Financial Statements for additional information on income
taxes.
19
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
TABLE 5 - NON-INTEREST EXPENSES SUMMARY
---------------------------------------------------------------------------------------------
NON-INTEREST-EXPENSES COMPOSITION:
COMPENSATION AND BENEFITS $ 15,071 $ 14,728 $ 12,732
OCCUPANCY AND EQUIPMENT 4,698 4,295 3,329
PROFESSIONAL FEES 1,393 1,569 1,182
ADVERTISING AND PROMOTION 2,602 1,987 1,575
INSURANCE, INCLUDING DEPOSITS INSURANCE 733 801 1,039
REAL ESTATE OWNED EXPENSES 87 150 119
COMMUNICATIONS 1,427 1,283 1,059
MUNICIPAL AND PROPERTY TAXES 1,633 974 934
PRINTING, STATIONERY, POSTAGE AND SUPPLIES 724 643 655
OTHER OPERATING EXPENSES 2,513 2,061 1,984
--------- --------- ---------
TOTAL RECURRING NON-INTEREST EXPENSES 30,881 28,491 24,608
--------- --------- ---------
--------- --------- ---------
SAIF ONE-TIME ASSESSMENT - 1,823 -
OTHER NON-RECURRING EXPENSES 400 7 -
--------- --------- ---------
TOTAL NON-RECURRING NON-INTEREST EXPENSES 400 1,830 -
--------- --------- ---------
--------- --------- ---------
TOTAL NON-INTEREST EXPENSES $ 31,281 $ 30,321 $ 24,608
--------- --------- ---------
--------- --------- ---------
NON-INTEREST-EXPENSES DISTRIBUTION:
COMPENSATION AND BENEFITS 48.2% 48.6% 51.7%
OCCUPANCY AND EQUIPEMENT 15.0% 14.2% 13.5%
ADVERTISING AND PROMOTION 8.3% 6.6% 6.4%
OTHER RECURRING OPERATING EXPENSES 27.2% 24.7% 28.4%
--------- --------- ---------
TOTAL RECURRING NON-INTEREST EXPENSES 98.7% 94.1% 100.0%
NON-RECURRING NON-INTEREST EXPENSES 1.3% 5.9% 0.0%
--------- --------- ---------
TOTAL NON-INTEREST EXPENSES 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
CORRESPONDING RATIOS:
EFFICIENCY RATIO 50.27% 52.76% 53.43%
--------- --------- ---------
EXPENSE RATIO 1.13% 1.34% 1.52%
--------- --------- ---------
TABLE 6 - COMPENSATION AND BENEFITS SUMMARY
---------------------------------------------------------------------------------------------
COMPENSATION AND BENEFITS COMPOSITION:
FIXED COMPENSATION $ 8,334 $ 8,353 $ 7,620
VARIABLE COMPENSATION 5,417 5,174 3,999
OTHER COMPENSATION AND BENEFITS 1,320 1,201 1,113
--------- --------- ---------
TOTAL COMPENSATION $ 15,071 $ 14,728 $ 12,732
--------- --------- ---------
--------- --------- ---------
COMPENSATION AND BENEFITS DISTRIBUTION:
FIXED COMPENSATION 55.3% 56.7% 59.9%
VARIABLE COMPENSATION 35.9% 35.1% 31.4%
OTHER COMPENSATION AND BENEFITS 8.8% 8.2% 8.7%
--------- --------- ---------
TOTAL COMPENSATION 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
COMPENSATION AND BENEFITS AS A PERCENTAGE (%) OF:
TOTAL AVERAGE ASSETS 1.22% 1.53% 1.58%
--------- --------- ---------
AVERAGE COMPENSATION PER EMPLOYEE $ 38.8 $ 36.9 $ 34.3
--------- --------- ---------
BANK ASSETS PER EMPLOYEE $ 3,779 $ 2,827 $ 2,667
--------- --------- ---------
GROUP'S WORK FORCE:
BANK STAFF 347 378 329
TRUST STAFF 23 33 28
BROKERAGE STAFF 10 10 15
--------- --------- ---------
380 421 372
--------- --------- ---------
--------- --------- ---------
AVERAGE # OF FULL EMPLOYEES 388 403 355
--------- --------- ---------
20
FINANCIAL CONDITION
As shown on Table 10 Oriental's diversified asset base (excluding the
mortgage servicing division which servicing rights were sold on October
1997) experienced an impressive growth of 25% that contributed to a
large extent to income expansion across its business lines. At June 30,
1998, total financial assets owned or managed grew to $3.4 billion from
the $2.7 billion owned or managed one year ago. Total financial assets
at June 30, 1998, consisted of $1.31 billion owned by the Bank, $1.31
billion managed by the trust and $741 million gathered by the broker-
dealer. Detailed information concerning each of the items that comprise
the Group's financial assets managed follows:
GROUP'S OWNED ASSETS
At the end of fiscal 1998 the Group's total assets amounted $1.31
billion, an increase of 23% when compared to the $1.07 billion at the
end of the of fiscal 1997. At the same date, interest-earning assets
reached $1.25 billion, an increase of $251 million or 23% versus the
$1.0 billion at the end of the of fiscal 1997. This increase reflects a
significant growth in total investments of $238 million or 51% and a $12
million or 2% increase in loans receivable, which includes loans held-
for-sale and is net of the allowance for loan losses. Refer to Tables 7
and 10 for the Group's assets summary.
Total investments is Oriental's largest interest-earning assets
component. It mainly consists mainly of money market investments, U.S.
Treasury notes, U.S. Government agencies bonds, mortgage-backed
securities and P.R. Government municipal bonds. The investment portfolio
is of a high quality, approximately 98% is rated AAA at the of fiscal
1998, and generates a significant amount of tax exempt interest which
lowers the Group's effective tax rate.
The increase of $238 million in investment portfolio was driven by a
strong growth in debt securities which grew to $256 million from $148
million the year before, an increase of $108 million or 73% This was
primarily attributable to the significant increase in U.S. government
and agency obligations, which picks up a higher after-tax yield, since
they are exempt from Puerto Rico taxes. Also, mortgage-backed securities
increased $130 million or 51% to $388 million from $257 million a year
ago contributing to the increase in this interest-earning asset
component. Oriental continues its strategy of pooling guaranteed real
estate loans into mortgage-backed securities. During fiscal 1998,
Oriental converted $102.3 million of loans held-for-sale into mortgage-
backed securities. Refer to Table 8 for the Group's investments
summary and composition.
At June 30,1998, Oriental's loan portfolio, the second largest category
of the Group's interest-earning assets, amounted to $545 million for
an increase of $12 million or 2% over the $533 million at the end of
fiscal 1997. This rise was led by an increase in the consumer
portfolio of 37% or $32 million, followed by real estate loans which
increased $7 million or 2%, partially offset by reductions in lease
financing and commercial loans portfolios of $25.5 million or 15% and
$1.1 million or 10%, respectively. Table 9 presents the Group's loan
portfolio composition and mix at the end of the periods analyzed.
At the end of fiscal 1998, the consumer loans portfolio totaled $122
million or 22% of the Group's loan portfolio, a 36% growth versus the
$90 million or 17% of the Group's loan portfolio at the end of fiscal
1997. Personal loans which amounted to $92 million at the end of
fiscal 1998, or 47% over the $62 million reported at the end of fiscal
1997, 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 Group's real estate loans portfolio amounted to $278 million or 50%
of the loan portfolio of the at the end of fiscal 1998, a 3% increase
versus $271 million or 50% Group's loan portfolio the year before. The
increase was mostly caused by an increase 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.
The Group's leasing portfolio amounted to $141.1 million or 26% of the
loan portfolio of the at the end of fiscal 1998, a 15% decrease versus
$166.7 million or 31% Group's loan portfolio a year ago. The decrease
was due to a decline in the volume of 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.
TOTAL ASSETS MANAGED BY THE TRUST
Total assets managed by the Group's trust increased 20% to $1.3 billion
at the end of fiscal 1998, up from $1.1 billion reported at the end of
fiscal 1997. The most significant assets managed are individual
retirement accounts (IRA) which increased to $460 million at the end of
the period analyzed from $351 million a year ago. Oriental Trust offers
various different type of IRA products and manages 401(K) and Keogh
retirement plans, custodian and corporate trust accounts.
21
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
1998 1997 1996
----------- ----------- -----------
TABLE 7 - ASSETS OWNED SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 706,652 $ 468,594 $ 350,737
TOTAL LOANS, NET 545,420 532,970 475,912
----------- ----------- -----------
INTEREST-EARNING ASSETS 1,252,072 1,001,564 826,649
NON INTEREST-EARNING ASSETS 59,316 67,032 50,775
----------- ----------- -----------
TOTAL ASSETS $ 1,311,388 $ 1,068,596 $ 877,424
----------- ----------- -----------
----------- ----------- -----------
TABLE 8 - INVESTMENTS SUMMARY AND COMPOSITION
- ----------------------------------------------------------------------------------------------------------------------------------
% % %
----- ----- -----
TRADING SECURITIES $ 42,440 6.0% $ 25,276 5.4% $ 331 0.1%
MORTGAGE-BACKED SECURITIES 387,553 54.8% 256,556 54.8% 212,688 60.6%
INVESTMENT SECURITIES 255,958 36.2% 148,495 31.7% 113,311 32.3%
FHLB STOCK 10,043 1.4% 10,043 2.1% 7,412 2.1%
MONEY MARKET INVESTMENTS 10,658 1.6% 28,224 6.0% 16,995 4.9%
----------- ------ ----------- ------ ----------- ------
TOTAL INVESTMENTS $ 706,652 100.0% $ 468,594 100.0% $ 350,737 100.0%
----------- ------ ----------- ------ ----------- ------
----------- ------ ----------- ------ ----------- ------
TABLE 9 - LOANS SUMMARY AND COMPOSITION
- ----------------------------------------------------------------------------------------------------------------------------------
% % %
----- ----- -----
REAL ESTATE LOANS $ 278,256 50.5% $ 271,249 50.4% $ 236,736 49.3%
CONSUMER LOANS 122,281 22.2% 89,957 16.7% 80,663 16.8%
COMMERCIAL LOANS 9,428 1.7% 10,512 2.0% 7,177 1.5%
CONSTRUCTION LOANS - 0.0% - 0.0% 221 0.0%
FINANCING LEASES 141,113 25.6% 166,660 30.9% 155,808 32.4%
----------- ----- ----------- ----- ----------- -----
TOTAL LOANS AND LOANS HELD FOR SALE 551,078 100.0% 538,378 100.0% 480,606 100.0%
----- ----- -----
ALLOWANCE FOR LOAN LOSSES (5,658) (5,408) (4,496)
----------- ----------- -----------
TOTAL LOANS, NET $ 545,420 $ 532,970 $ 476,110
----------- ----------- -----------
----------- ----------- -----------
TABLE 10 - FINANCIAL ASSETS SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL GROUP ASSETS OWNED $ 1,311,400 $ 1,068,600 $ 877,400
TRUST ASSETS MANAGED 1,310,000 1,088,600 874,500
ASSETS GATHERED BY BROKER-DEALER 741,400 524,900 293,100
----------- ----------- -----------
TOTAL FINANCIAL ASSETS BEFORE SERVICING 3,362,800 2,682,100 2,045,000
(A) LOANS SERVICED TO THIRD PARTIES - 515,700 401,343
----------- ----------- -----------
TOTAL FINANCIAL ASSETS $ 3,362,800 $ 3,197,800 $ 2,446,343
----------- ----------- -----------
----------- ----------- -----------
(A) SERVICING WAS SOLD TO A LOCAL FINANCIAL
INSTITUTION IN OCTOBER 1997.
TABLE 11 - LIABILITIES SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES $ 1,176,990 $ 950,273 $ 770,358
NON INTEREST-BEARING LIABILITIES 27,368 28,929 27,163
----------- ----------- -----------
TOTAL LIABILITIES $ 1,204,358 $ 979,202 $ 797,521
----------- ----------- -----------
----------- ----------- -----------
22
TOTAL ASSETS GATHERED BY BROKER-DEALER
Total assets gathered by the broker-dealer from its customer investment
accounts increased by 41% to $741 million from $525 million a year ago.
The Group's broker-dealer subsidiary offers a wide array of investment
alternatives to its clients base such as fixed and variable annuities,
tax-advantaged fixed income securities, mutual funds, stocks and bonds.
LIABILITIES
As shown in Table 11, at June 30, 1998, Oriental's total liabilities
reached $1.2 billion, reflecting an increase of $225 million or 23%
when compared to $979 million a year ago. Interest-bearing liabilities,
the Group's sources of funding, amounted to $1.17 billion at the end
of fiscal 1998 versus $950 million the year before, a 24% increase, see
Table 12. This growth was driven by increases in deposits and
repurchase agreements of 15% or $74 million and 68% or $168 million,
respectively.
Deposits at the end of fiscal 1998, the largest category of the Group's
interest-bearing liabilities and a cost effective source of funding,
reached $571 million, up 15% versus the $498 million a year ago. This
growth was fueled by significant increases in certificate of deposits of
$42.1 million or 10% and IRA accounts of $35.1 million or 45% followed
by a modest growth of $5.5 million or 5% in savings, demand and NOW
accounts. Table 13 presents the composition of the Group's deposits at
the end of the periods analyzed.
In addition to deposits, Oriental has a diversified source of funding
through the use of FHLB advances and borrowings, repurchase agreements,
term notes, notes payable and lines of credit. At June 30, 1998,
repurchase agreements and other borrowings amounted to $416 million and
$189 million, respectively, compared to $248 million and $205 million,
respectively, at the end of fiscal 1997. A substantial number of these
repurchase agreements and borrowings have floating rates that are
generally hedged through the Group's overall interest rate risk
management process discussed in the Note 11 of the attached Group's
financial statements.
The increase in repurchase agreements and other borrowings was necessary
to fund the increase in interest-earning assets, particularly investment
securities, experienced during the period. The increase in other
borrowings was mainly due to increases in advances from the Federal Home
Bank of New York ("FHLB-NY"). The FHLB system functions as a source of
credit to financial institutions which 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 14
presents the composition of the Group's other borrowings at the end of
the periods analyzed.
CAPITAL, STOCK DATA AND DIVIDENDS
At June 30, 1998 Oriental's total capital increased by $17.6 million or
20% to $107 million, from $89.4 million a year ago. This increase was
mainly attained through earnings of $21.4 million posted for fiscal
1998, combined with a positive change in the valuation account for
investment securities available-for-sale, partially offset by dividends
paid and stock repurchase. As authorized by the board of directors, the
Group repurchased 120,000 and 228,000 shares during fiscal 1998 and
1997, respectively, of its common stock at a cost of $4,363,000 and
$3,543,000, respectively. Of a total of 558,000 shares repurchased up
to June 30, 1998, 336,500 shares were retired from circulation, as
required by the Puerto Rico Banking law, in fiscal 1997 and 221,500
shares with a cost of $6,199,000 are held in treasury by the Group.
During fiscal 1998 and 1997, the Group declared dividends amounting to
$5.4 million compared to $4.4 million in fiscal 1997, an increase of $1
million or 23%. This represents total dividends declared per common
share of $0.55 for fiscal 1998 and $0.44 for fiscal 1997. The Group
increased its quarterly dividend from $0.125 to $.015 per share, a 20%
increase, during the third quarter of fiscal 1998. For fiscal 1998, the
dividend payout ratio and dividend yield were 25.42% and 1.69%,
respectively, compared to 24.4% and 2.63%, 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 June 30, 1998, the Group had a leverage ratio
of 7.70%; a Tier 1 risk-based ratio of 20.45%; and a total risk-based
capital ratio of 21.68% compared to 8.17%, 17.53% and 18.66%,
respectively, at the same date in fiscal 1997.
On August 11, 1997, the Group declared a five-for-four (25%) stock split
on its 8,054,015 shares of common stock outstanding at September 30,
1997. As a result, 1,910,053 shares of common stock were issued on
October 15, 1997 thus increasing shares to 9,965,940 at such date.
The Group's common stock is traded in the New York Stock Exchange (NYSE)
under the symbol OFG. Refer to Table 17 for the high, low and closing
prices of the Group's stock for each quarter of the last three fiscal
periods. The price per share on the reported last sale price on the NYSE
on June 30, 1988 was $36.88. This represents an increase of 63% from
the last sale price a year ago of $22.60, already adjusted for the five-
for-four (25%) stock split. The book value per share at June 30, 1998,
rose to $10.65 from $8.95 (as adjusted) a year earlier.
23
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
1998 1997 1996
----------- ----------- ----------
TABLE 12 - INTEREST-BEARING LIABILITIES SUMMARY AND COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
% % %
----- ----- -----
DEPOSITS $ 571,431 48.6% $ 497,542 52.4% $ 382,557 49.7%
REPURCASE AGREEMENTS 416,171 35.4% 247,915 26.1% 242,335 31.5%
OTHER BORROWINGS 189,388 16.0% 204,816 21.5% 145,466 18.8%
----------- ----- ----------- ----- ----------
- -----
INTEREST-BEARING LIABILITIES $ 1,176,990 100.0% 950,273 100.0% 770,358 100.0%
----------- ----- ----------- ----- ---------- -----
----------- ----- ----------- ----- ---------- -----
TABLE 13 - DEPOSITS SUMMARY AND COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
% % %
---- ----- -----
SAVINGS ACCOUNTS $ 76,523 13.4% $ 72,872 14.6% $ 62,204 16.3%
DEMAND AND NOW ACCOUNTS 36,005 6.3% 34,123 6.9% 24,681 6.5%
CERTIFICATES OF DEPOSIT 342,439 59.9% 310,320 62.4% 239,390 62.6%
IRA ACCOUNTS 112,622 19.7% 77,516 15.6% 54,287 14.2%
ACCRUED INTEREST 3,842 0.7% 2,711 0.5% 1,995 0.4%
----------- ----- ----------- ----- ---------- -----
TOTAL DEPOSITS $ 571,431 100.0% $ 497,542 100.0% $ 382,557 100.0%
----------- ----- ----------- ----- ---------- -----
----------- ----- ----------- ----- ---------- -----
TABLE 14 - OTHER BORROWINGS SUMMARY AND
COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB FUNDS $ 74,800 $ 89,800 $ 46,000
BONDS PAYABLE 88 516 966
TERM NOTES 114,500 114,500 88,500
LINES OF CREDIT - - 10,000
----------- ----------- ----------
TOTAL OTHER BORROWINGS $ 189,388 $ 204,816 $ 145,466
----------- ----------- ----------
----------- ----------- ----------
TABLE 15 - CAPITAL AND DIVIDENDS
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL $ 107,030 $ 89,394 $ 79,903
----------- ----------- ----------
OUTSTANDING SHARES (SPLIT ADJUSTED IN 1997 AND
1996) 10,047 9,987 9,950
----------- ----------- ----------
CAPITAL TO ASSETS RATIO 8.16% 8.37% 9.11%
----------- ----------- ----------
DIVIDENDS DECLARED $ 5,442 $ 4,369 $ 3,184
----------- ----------- ----------
DIVIDEND PER SHARE $ 0.55 $ 0.44 $ 0.30
----------- ----------- ----------
TABLE 16 - CAPITAL REGULATORY RATIOS (IN PERCENT):
- ------------------------------------------------------------------------------------------------------------------------------------
LEVERAGE CAPITAL (minimum required - 3.00%) 7.70% 8.17% 8.71%
----------- ----------- ----------
TOTAL RISK-BASED CAPITAL (minimum required - 8.00%) 21.68% 18.66% 19.14%
----------- ----------- ----------
TIER 1 RISK-BASED CAPITAL (minimum required -
4.00%) 20.45% 17.53% 18.07%
----------- ----------- ----------
TABLE 17 - MARKET PRICES AND STOCK DATA
- ------------------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE $ 36.88 $ 22.60 $ 12.67
----------- ----------- ----------
HIGH $ 46.13 $ 22.60 $ 16.15
----------- ----------- ----------
LOW $ 22.60 $ 14.60 $ 10.13
----------- ----------- ----------
BOOK VALUE $ 10.65 $ 8.95 $ 8.03
----------- ----------- ----------
PAYOUT RATIO 25.42% 24.40% 21.60%
----------- ----------- ----------
DIVIDEND YIELD 1.69% 2.63% 2.86%
----------- ----------- ----------
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.
HIGH LOW DIVIDEND
QUARTER ENDED: PRICE PRICE PER SHARE
- ------------- ----------- ----------- ----------
FISCAL 1998
- -----------
JUNE 1997 $ 46.13 $ 36.88 $ 0.150
----------- ----------- ----------
MARCH 1997 $ 39.13 $ 33.13 $ 0.150
----------- ----------- ----------
DECEMBER 1996 $ 31.50 $ 24.50 $ 0.125
----------- ----------- ----------
SEPTEMBER 1996 $ 29.70 $ 22.60 $ 0.125
----------- ----------- ----------
FISCAL 1997
- -----------
JUNE 1997 $ 22.60 $ 18.20 $ 0.120
----------- ----------- ----------
MARCH 1997 $ 21.60 $ 16.70 $ 0.120
----------- ----------- ----------
DECEMBER 1996 $ 17.60 $ 14.60 $ 0.100
----------- ----------- ----------
SEPTEMBER 1996 $ 13.08 $ 14.60 $ 0.100
----------- ----------- ----------
FISCAL 1996
- -----------
JUNE 1996 $ 16.15 $ 13.75 $ 0.080
----------- ----------- ----------
MARCH 1996 $ 14.58 $ 13.33 $ 0.080
----------- ----------- ----------
DECEMBER 1995 $ 14.50 $ 11.57 $ 0.080
----------- ----------- ----------
SEPTEMBER 1995 $ 12.13 $ 10.13 $ 0.064
----------- ----------- ----------
24
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS:
At June 30, 1998, the Group's allowance for loan losses amounted to $5.7
million or 1.03% of total loans versus $5.4 million or 1.00% 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 to them at the time of their examinations.
Net charge-offs for fiscal 1998, totaled $9.3 million or 1.66% of
average loans, compared to $4 million or 0.78%, respectively, in fiscal
1997. The level of net charge-offs recorded in fiscal 1998 was primarily
associated to the losses experienced in the consumer loans and financing
leases portfolios, see Provision for Loan Losses under Results of
Operations. Table 18 sets forth an analysis of activity in the
allowance for loan losses and presents selected loan loss statistics
for the last five fiscal years.
As shown on Table 19, at June 30, 1998, the Group's non-performing
assets consisted of non-performing loans, foreclosed real estate owned
and other repossessed assets. At the end fiscal 1998, the Group's non-
performing assets reached $17.6 million or 1.34% of total assets, an
increase of $1.9 million or 12% when compared to the $15.7 million or
1.47% of total assets a year earlier. The increase was principally due
to an increase in non-performing loans.
The increase in non-performing loans was mainly financing leases,
associated in part to the record level of personal bankruptcies
experienced in Puerto Rico during the last year. As result, over the
past year the Group's management carried out several actions, such as
the full-implementation of a credit scoring system and the tightening of
underwriting standards, to improve the portfolio's quality, as well as
reducing its credit risk exposure. The result of such actions commenced
to materialize during the latter part of the fiscal year as Oriental
exhibited a significant improvement in asset quality as non-performing
assets decreased from a high of $22.9 million or 4.07% of total assets
at December 31, 1997 to $17.6 million or 1.34% of total assets at the
end of fiscal 1998. Detailed information concerning each of the items
that comprise non-performing assets follows:
- - REAL ESTATE LOANS - Oriental places real estate loans delinquent 90 days or
more in non-accruing status. Non-performing loans in this category are
primarily residential mortgage loans. Even though these loans are in non-
accruing status, based on the value of the underlying collateral and the
loan to value ratios, management considers that no material losses will be
incurred on this portfolio. Real estate loans are charged-off based on the
specific evaluation of the collateral underlying the loan.
- - COMMERCIAL BUSINESS LOANS - Commercial business loans are placed on non-
accrual basis when they become 90 days past due. At the date of our
analysis, the Group's non-performing commercial business loans consisted of
twelve loans amounting to $640,000 (average of $53,333). Of the total
balance, $446,000 or seven loans are guaranteed by real estate. Commercial
loans are charged-off based on the specific evaluation of the collateral
underlying the loan.
- - FINANCE LEASES - Leases are placed on non-accrual status when they become 90
days past due. At the date of our analysis, Oriental's non-performing leases
consisted of three hundred and seven auto leases amounting to $5.4 million
(average of $17,590), and three hundred thirty-eight equipment leases
amounting to $2.5 million (average of $7,396). Such loans are secured by the
underlying collateral.
- - CONSUMER LOANS - Consumer loans are placed on non-accrual status when they
become 90 days past due. The Group's non-performing consumer loans
consisted of eighty-six loans amounting to $713,000 (average of $8,333).
- - FORECLOSED REAL ESTATE - 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 - 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 June 30,
1998, the inventory of repossessed automobiles consisted of sixty-one units
amounting to $951,000 (average of $10,670) and the inventory of repossessed
equipment consisted of forty-four units amounting to $344,000 (average of
$7,818).
25
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ----------
TABLE 18 - ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF FISCAL PERIOD
$ 5,408 $ 4,496 $ 3,127 $ 3,934 $ 3,504
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
PROVISION FOR LOAN LOSSES 9,545 4,900 4,600 2,550 2,000
---------- --------- ---------- ---------- ----------
CHARGE-OFFS (11,484) (5,261) (3,979) (3,519) (1,844)
RECOVERIES 2,189 1,273 748 162 274
---------- --------- ---------- ---------- ----------
NET CHARGE OFF'S (9,295) (3,988) (3,231) (3,357) (1,570)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
BALANCE AT END OF FISCAL PERIOD $ 5,658 $ 5,408 $ 4,496 $ 3,127 $ 3,934
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
CHARGE-OFFS:
CONSUMER $ (5,197) $ (1,850) $ (1,131) $ (1,594) $ (868)
OVERDRAFT (397) (3) (229) - (42)
REAL ESTATE (187) (53) (106) (147) (163)
AUTO LEASES (4,506) (2,596) (1,814) (1,175) (368)
EQUIPMENT LEASES (936) (652) (698) (392) (123)
COMMERCIAL AND OTHERS (261) (107) (1) (212) (280)
---------- --------- ---------- ---------- ----------
(11,484) (5,261) (3,979) (3,519) (1,844)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
RECOVERIES:
CONSUMER 417 250 205 59 72
OVERDRAFT 72 11 31 - -
REAL ESTATE 12 30 - 25 202
AUTO LEASES 1,110 685 350 - -
EQUIPMENT LEASES 435 271 147 - -
COMMERCIAL AND OTHERS 143 26 15 78 -
---------- --------- ---------- ---------- -----------
2,189 1,273 748 162 274
---------- --------- ---------- ---------- -----------
---------- --------- ---------- ---------- -----------
NET CHARGE-OFFS:
CONSUMER (4,780) (1,600) (926) (1,535) (796)
OVERDRAFT (325) 8 (198) - (42)
REAL ESTATE (175) (23) (106) (122) 39
AUTO LEASES (3,396) (1,911) (1,464) (1,175) (368)
EQUIPMENT LEASES (501) (381) (551) (392) (123)
COMMERCIAL AND OTHERS (118) (81) 14 (134) (280)
---------- --------- ---------- ---------- ----------
$ (9,295) $ (3,988) $ (3,231) $ (3,357) $ (1,570)
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
LOANS:
OUTSTANDING AT JUNE 30, $ 551,077 $ 538,378 $ 480,606 $ 412,519 $ 343,150
---------- --------- ---------- ---------- ----------
AVERAGE $ 560,184 $ 511,060 $ 454,777 $ 366,152 $ 291,465
---------- --------- ---------- ---------- ----------
RATIOS:
RECOVERIES TO CHARGE-OFF'S 19.1% 24.2% 18.8% 4.6% 14.9%
--------- -------- --------- --------- ---------
NET CHARGE-OFFS TO AVERAGE LOANS 1.66% 0.78% 0.71% 0.92% 0.54%
--------- -------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 1.03% 1.00% 0.94% 0.76% 1.15%
--------- -------- --------- --------- ---------
TABLE 19 - NON-PERFORMING ASSETS (AT JUNE 30,)
- -----------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING LOANS:
REAL ESTATE LOANS $ 6,663 $ 5,575 $ 4,069 $ 4,211 $ 3,972
CONSUMER LOANS 713 2,118 1,228 318 865
COMMERCIAL LOANS 640 814 301 556 -
CONSTRUCTION LOANS - - 211 926 1,111
FINANCING LEASES 7,879 4,778 3,641 1,539 1,036
---------- --------- ---------- ---------- ----------
$ 15,895 $ 13,285 $ 9,450 $ 7,550 $ 6,984
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
NON-PERFORMING ASSETS:
NON-PERFORMING LOANS $ 15,895 $ 13,285 $ 9,450 $ 7,550 $ 6,984
FORECLOSED REAL ESTATE 413 698 842 800 2,445
REPOSSESSED VEHICLES 951 1,253 831 892 34
REPOSSESSED EQUIPMENT 344 486 486 157 27
---------- --------- ---------- ---------- ----------
$ 17,603 $ 15,722 $ 11,608 $ 9,399 $ 9,490
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
RATIOS:
NON-ACCRUAL LOANS TO TOTAL LOANS 2.88% 2.47% 1.97% 1.84% 2.04%
--------- -------- --------- --------- ---------
ALLOWANCE TO NON-ACCRUAL LOANS 35.60% 40.71% 47.58% 41.43% 56.33%
--------- -------- --------- --------- ---------
NON-PERFORMING ASSETS TO TOTAL ASSETS 1.34% 1.47% 1.32% 1.26% 1.45%
--------- -------- --------- --------- ---------
NON-PERFORMING ASSETS TO TOTAL CAPITAL 16.45% 17.59% 14.53% 13.58% 17.04%
--------- -------- --------- --------- ---------
26
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 risk. ALCO is also
involved in the 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 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 June 30, 1998
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:
(IN THOUSANDS)
-------------------------- ------------ ----------- ------------
CHANGE IN EXPECTED AMOUNT PERCENT
INTEREST RATE NII (1) CHANGE CHANGE
-------------------------- ------------ ----------- ------------
Base Scenario $39,657 $ - -
+ 200 Basis points 34,957 (4,700) -11.85%
- 200 Basis points 43,583 $ 3,926 9.90%
NOTE:
1. The NII figures showed exclude the effect of the amortization of loan fees.
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.
See additional information on Note 11 of the Group's Financial Statements
included herein.
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 fiscal 1998, the Group's liquidity was deemed appropriate. It
included $56 million available from unused lines of credit with other
financial institutions and $36 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.
At June 30, 1998, the Group had $11.1 million of outstanding loan commitments
for unused line of credits and to originate loans. The Group anticipates that
it will have the sufficient funds available to meet these obligations.
27
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with GAAP, which requires the measurement of financial positions
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike most individual companies, substantially all of the assets and
liabilities of the Group are monetary in nature. As a result, interest rates
have a more significant impact on the Group's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily change in the same direction or as much as the prices of goods and
services.
YEAR 2000 COMPLIANCE
The Group has a Year 2000 compliance committee that consists of senior
management, MIS and internal audit personnel and two outside consultants. This
committee has organized a contingency plan to identify and correct all of the
Group's computer applications and softwares that were designed and develop
without considering the impact of the upcoming change in the century. The
committee determined that all of the Group's systems are Year 2000 compliant
with the exception of a portion of the trust (expected June 1999) and the
broker-dealer (expected December 1999). The Group began its testing to insure
compliance in May 1998.
The process is well under way and management estimates that the costs of
addressing the Year 2000 issues will not exceed $2.5 million. Most of this
cost first relates to the purchase of equipment and software, the cost of which
will be amortized over the useful life of the investment, and to the assignment
of internal staff rather than hiring of outside consultants or additional
staff. Management therefore does not anticipate a material impact to the
Group's results of operations or financial position.
RECENT DEVELOPMENTS
STOCK SPLIT
Subsequent to the close of fiscal 1998, on August 18, 1998, the Group declared
a four-for-three (33.3%) stock split on common stock held by registered
shareholders as of September 30, 1998. The stock split will be distributed on
October 15, 1998. The pro-forma effect of this stock split on income per
common share is disclosed in the Consolidated Statements of Income included
herein.
28
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(IN THOUSANDS)
ASSETS
- --------------------------------------------------------------------------------
1998 1997
------------ ------------
Cash and due from banks $ 8,831 $ 12,812
------------ ------------
MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell 5,000 15,000
Time deposits with other banks 2,000 8,000
Other short-term investments, at cost 3,658 5,224
------------ ------------
TOTAL MONEY MARKET INVESTMENTS 10,658 28,224
------------ ------------
INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at fair value 42,440 25,276
Investment securities available-for-sale, at
fair value 481,360 203,261
Investment securities held-to-maturity,
at amortized cost, with a fair value of
$164,404 in 1998 and $202,443 in 1997 162,151 201,790
Federal home loan bank (FHLB) stock, at cost 10,043 10,043
------------ ------------
TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 695,994 440,370
------------ ------------
LOANS:
Loans held-for-sale, at lower of cost or market 36,359 29,285
Loans receivable 514,719 509,093
------------ ------------
TOTAL LOANS 551,078 538,378
Allowance for loan losses (5,658) (5,408)
------------ ------------
TOTAL LOANS, NET 545,420 532,970
------------ ------------
Accrued interest receivable 14,926 12,350
Foreclosed real estate, net 413 698
Premises and equipment, net 19,555 19,378
Other assets, net 15,591 21,794
------------ ------------
TOTAL ASSETS $ 1,311,388 $ 1,068,596
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 571,431 $ 497,542
Securities sold under agreements to repurchase 416,171 247,915
Advances and borrowings from Federal Home Loan Bank 74,800 89,800
Term notes and bonds payable 114,588 115,016
Accrued expenses and other liabilities 27,368 28,929
------------ ------------
TOTAL LIABILITIES 1,204,358 979,202
------------ ------------
Commitments and contingencies - -
------------ ------------
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued Common stock, $1
par value; 20,000,000 shares authorized;
10,047,358 and 7,989,787 issued and outstanding
in 1998 and 1997, respectively 10,047 7,990
Additional paid-in capital 27,363 28,631
Legal surplus 5,908 4,002
Retained earnings 63,756 49,694
Treasury stock, at cost, 221,500 and 81,200 shares
in 1998 and 1997, respectively (6,199) (1,836)
Accumulated other comprehensive income, net of
taxes 6,155 913
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 107,030 89,394
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,311,388 $ 1,068,596
------------ ------------
------------ ------------
The accompanying notes are an integral part of
these consolidated financial statements
29
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED ON JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
1998 1997 1996
--------- --------- ---------
INTEREST INCOME:
Loans $ 60,654 $ 54,770 $ 48,988
Mortgage-backed securities 23,874 17,138 12,593
Investment securities 15,863 9,642 7,508
Other interest-earning assets 1,189 1,079 1,358
---------- --------- ---------
TOTAL INTEREST INCOME 101,580 82,629 70,447
---------- --------- ---------
---------- --------- ---------
INTEREST EXPENSE:
Deposits 26,197 21,012 17,386
Securities sold under agreements to repurchase 19,216 11,340 9,906
Other borrowed funds and interest rate risk management 12,726 12,746 10,402
---------- --------- ---------
TOTAL INTEREST EXPENSE 58,139 45,098 37,694
---------- --------- ---------
---------- --------- ---------
NET INTEREST INCOME 43,441 37,531 32,753
Provision for loan losses
9,545 4,900 4,600
---------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 33,896 32,631 28,153
NON-INTEREST INCOME:
Bank service charges and fees 3,793 4,909 3,801
Trust, money management and brokerage fees 8,362 6,750 5,913
Mortgage banking activities 5,175 3,972 3,041
Gain on sale of investment securities 1,030 849 1,482
Trading account income (loss) 915 54 (20)
Gain on sale of servicing rights 2,707 - -
Rent and other operating income 663 818 545
---------- --------- ---------
TOTAL NON-INTEREST INCOME 22,645 17,352 14,762
---------- --------- ---------
NON-INTEREST EXPENSES:
Compensation and benefits 15,071 14,728 12,732
Occupancy and equipment 4,698 4,295 3,329
Professional and service fees 1,393 1,569 1,182
Advertising and business promotion 2,602 1,987 1,575
Insurance, including deposits insurance 733 801 1,039
Real estate owned expenses 87 150 119
Communications 1,427 1,283 1,059
Municipal and other general taxes 1,633 974 934
Printing, postage, stationery and supplies 724 643 655
Other 2,913 2,068 1,984
SAIF one-time capitalization assessment - 1,823 -
---------- --------- ---------
TOTAL NON-INTEREST EXPENSE 31,281 30,321 24,608
---------- --------- ---------
INCOME BEFORE INCOME TAXES 25,260 19,662 18,307
Provision for income taxes 3,850 3,100 3,571
---------- --------- ---------
NET INCOME $ 21,410 $ 16,562 $ 14,736
---------- --------- ---------
---------- --------- ---------
INCOME PER COMMON SHARE:
Basic $ 2.15 $ 1.67 $ 1.47
---------- --------- ---------
---------- --------- ---------
Diluted $ 2.08 $ 1.61 $ 1.41
---------- --------- ---------
---------- --------- ---------
PRO-FORMA INCOME PER COMMON SHARE AFTER
RETROACTIVE EFFECT OF (33.3%) STOCK SPLIT
DECLARED IN AUGUST 1998 (UNAUDITED):
Basic $ 1.62 $ 1.26 $ 1.10
---------- --------- ---------
---------- --------- ---------
Diluted $ 1.57 $ 1.21 $ 1.06
---------- --------- ---------
---------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements
30
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED ON JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
CHANGES IN STOCKHOLDERS' EQUITY: --------- --------- ---------
- -------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 7,990 $ 6,633 $ 5,334
Stock split 1,910 1,318 1,341
Stock options exercised 147 120 98
Common stock repurchased and retired - (81) (140)
---------- --------- --------
BALANCE AT END OF PERIOD 10,047 7,990 6,633
---------- --------- --------
---------- --------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 28,631 31,234 34,528
Stock split (1,910) (1,318) (1,341)
Stock options exercised 642 341 329
Common stock repurchased and retired - (1,626) (2,282)
---------- --------- --------
BALANCE AT END OF PERIOD 27,363 28,631 31,234
---------- --------- --------
---------- --------- --------
LEGAL SURPLUS:
Balance at beginning of period 4,002 2,498 1,211
Transfer from retained earnings 1,906 1,504 1,287
---------- --------- --------
BALANCE AT END OF PERIOD 5,908 4,002 2,498
---------- --------- --------
---------- --------- --------
RETAINED EARNINGS:
Balance at beginning of period 49,694 39,005 28,740
Net income 21,410 16,562 14,736
Dividends declared and cash paid on fractional shares (5,442) (4,369) (3,184)
Transfer to legal surplus (1,906) (1,504) (1,287)
---------- --------- --------
BALANCE AT END OF PERIOD 63,756 49,694 39,005
---------- --------- --------
---------- --------- --------
TREASURY STOCK:
Balance at beginning of period (1,836) - -
Treasury stock purchased (4,363) (1,836) -
---------- --------- --------
BALANCE AT END OF PERIOD (6,199) (1,836) -
---------- --------- --------
---------- --------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES:
Balance at beginning of period 913 533 (108)
Net change in fair value of securities
available-for-sale, net of taxes 5,242 380 641
---------- --------- --------
BALANCE AT END OF PERIOD 6,155 913 533
---------- --------- --------
---------- --------- --------
TOTAL STOCKHOLDERS' EQUITY $ 107,030 $ 89,394 $ 79,903
---------- --------- --------
---------- --------- --------
COMPREHENSIVE INCOME:
- ----------------------------------------------------------------------------------------------
NET INCOME $ 21,410 $ 16,562 $ 14,736
---------- --------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized net gains on securities arising
during the period 5,375 407 641
Less: reclass adjustment for gains and losses
included in net income (133) (27) -
---------- --------- --------
NET CHANGE IN FAIR VALUE OF SECURITIES AVAILABLE-
FOR-SALE, NET OF TAXES 5,242 380 641
---------- --------- --------
---------- --------- --------
COMPREHENSIVE INCOME $ 26,652 $ 16,942 $ 15,377
---------- --------- --------
---------- --------- --------
The accompanying notes are an integral part of these consolidated financial
statements
31
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED ON JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 21,410 $ 16,562 $ 14,736
---------- --------- ---------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of deferred loan origination fees and costs (4,228) (3,165) (2,779)
Amortization of premiums and accretion of discounts on
investment securities 1,157 451 559
Depreciation and amortization of premises and equipment 2,498 2,216 1,544
Provision for loan losses 9,545 4,900 4,600
Gain on sale of available-for-sale securities (1,030) (849) (1,482)
Gain on sale of servicing assets (2,707) - -
Mortgage banking activities 4,485 (3,972) (3,041)
(increase) decrease in trading securities (14,200) (24,945) 16,383
Increase in accrued interest receivable (2,576) (2,282) (2,022)
Increase in other assets (2,945) (7,150) (3,194)
(decrease) increase in accrued expenses and liabilities (3,554) 1,307 (1,501)
---------- --------- ---------
TOTAL ADJUSTMENTS (13,555) (33,489) 9,067
---------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,855 (16,927) 23,803
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased under
agreements to resell 10,000 (7,871) 3,875
Purchases of investment securities available-for-sale (296,115) (34,920) (108,474)
Sales of investment securities available-for-sale 103,864 131,885 45,977
Maturities of investment securities available-for-sale 23,580 3,430 26,798
Purchases of investment securities held-to-maturity (914) (36,775) (3,576)
Maturities and redemptions of investment securities
held-to-maturity 37,297 5,768 49,481
Purchases of Federal Home Loan Bank stock - (2,631) (379)
Redemption of Federal Home Loan Bank stock - - 1,824
Proceeds from sale of loans held-for-sale 57,904 - 23,448
Proceeds from sale of servicing assets 11,855 - -
Net origination of loans (182,146) (202,015) (188,079)
Capital expenditures (2,675) (3,659) (4,350)
---------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES $ (237,350) $(146,788) $(153,455)
---------- --------- ---------
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits $ 73,889 $ 114,985 $ 69,016
Securities sold under agreements to repurchase 168,256 5,580 46,998
Borrowings under lines of credit - (10,000) 2,500
Advances and borrowings from FHLB (15,000) 43,800 (20,600)
Issuance of term notes - 60,000 26,500
Payment of term notes - (34,000 -
Principal payments of bonds payable (428) (45) (406)
Proceeds from exercise of stock options 789 461 429
Repurchase of common stock and purchases of treasury stock (4,363) (3,543) (2,424)
Dividends and cash paid on fractional shares (5,195) (4,037) (3,076)
---------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 217,948 172,796 118,937
---------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,547) 9,081 (10,715)
Cash and cash equivalents at beginning of period 26,036 16,955 27,674
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,489 $ 26,036 $ 16,959
---------- --------- ---------
---------- --------- ---------
CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 8,831 $ 12,812 $ 7,089
Time deposits with other banks 2,000 8,000 7,500
Other short-term investments 3,658 5,224 2,366
---------- --------- ---------
$ 14,489 $ 26,036 $ 16,955
---------- --------- ---------
---------- --------- ---------
SUPPLEMENTAL DISCLOSURE AND SCHEDULE OF NONCASH ACTIVITIES:
Interest paid $ 55,806 $ 44,261 $ 37,839
---------- --------- ---------
Income taxes 2,860 5,031 3,951
---------- --------- ---------
Real estate foreclosed as payment of loans 974 1,695 905
---------- --------- ---------
Real estate loans securitized into mortgage-backed securities $ 102,300 $ 147,536 $ 99,091
---------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORIENTAL FINANCIAL GROUP INC.
NOTE 1 - NATURE OF OPERATIONS:
Oriental Financial Group (the "Group" or, "Oriental") is a bank holding
company incorporated 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 Group's bank subsidiary, is a full-service
commercial bank with its main office located in San Juan, Puerto Rico and
with seventeen branches located throughout the island. The Bank directly or
through its wholly-owned, broker-dealer subsidiary, Oriental Financial
Services Corp., offers mortgage, commercial and consumer lending, auto 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Group conform with generally
accepted accounting principles ("GAAP") and with practices within the banking
industry. The following is a description of the Group's most significant
accounting policies:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in accordance with GAAP requires
management to make certain estimates and assumptions which affect the reported
amounts of assets and liabilities as well as contingent assets and liabilities
as of the date of the financial statements. These estimates and assumptions
also affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Group and its direct and indirect wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Group considers as cash
equivalents all highly liquid debt instruments with original maturities of three
months or less.
INCOME PER COMMON SHARE
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"), which replaces
the presentation of primary earnings per share with the presentation of basic
earnings per share and requires the dual presentation of basic and diluted
earnings per share computation on the face of the income statement for all
entities with complex capital structures.
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.
Weighted average common shares and potential common stock options outstanding at
June 30, follow:
(IN THOUSANDS) 1998 1997 1996
-------------- -------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING 9,946 9,888 10,038
AVERAGE POTENTIAL COMMON STOCK OPTIONS 330 372 399
-------- --------- ---------
TOTAL 10,276 10,260 10,437
-------- --------- ---------
33
SECURITIES PURCHASED / SOLD UNDER AGREEMENTS TO RESELL / REPURCHASE
The Group purchases securities under agreements to resell the same or similar
securities. Amounts advanced under these agreements represent short-term loans
and are reflected as assets in the statements of financial condition. It is the
Group's policy to take possession or control of securities purchased under
resale agreements. The Group monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest,
and requests additional collateral where deemed appropriate. Also, the Group
sells securities under agreements to repurchase the same or similar securities.
Such agreements are treated as financing agreements, and the obligations to
repurchase the securities sold are reflected as a liability. The securities
underlying the financing agreements remain included in the asset accounts.
INVESTMENT SECURITIES
Oriental classifies its investments in debt and equity securities into one of
the following three categories:
- - HELD-TO-MATURITY : Debt securities which the Group has the positive intent
and ability to hold to maturity are carried at amortized cost. The Group
may not sell or transfer held-to-maturity securities without calling into
question its intent to hold other debt securities to maturity, unless a
non-recurring or unusual event that could not have been reasonably foreseen
occurs.
- - TRADING: Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are carried at estimated
fair value with realized and unrealized changes in market value are
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.
- - AVAILABLE-FOR-SALE: Debt and equity securities which may 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 included
in this category. 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 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. Such 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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Group enters into interest rate exchange agreements, such as swaps and caps,
and other derivative financial instruments to manage its interest rate risk
exposure. The net effect of amounts to be paid or received under interest rate
swaps is recorded as adjustments to interest expense in the period in which
realized. Premiums on caps are amortized over the term of the contract. Income
or expenses arising from the instruments are recorded in the category
appropriate to the related asset or liability.
MORTGAGE BANKING ACTIVITIES
The Group pools FHA insured and VA guaranteed mortgages for issuance of GNMA
mortgage-backed securities and conventional mortgage loans for issuance of FNMA
or FHLMC mortgage-backed securities. The Group also engages in the
securitization of mortgage pools into CMOs. Mortgages included in the resulting
GNMA and FNMA pools, CMO certificates and certain pools of conventional loans
sold to investors are serviced by another institution.
Mortgage loans intended for sale in the secondary market are stated at the lower
of cost or market and are reported as loans held-for-sale. When these loans are
sold or securitized into mortgage-backed securities, a gain or loss is
recognized to the extent that the fair value of the securities or cash received
exceeds, or are less than, the carrying value of the loans sold. Also, the
Group sells the rights to service these loans to another financial institution.
The gains or losses resulting from these transactions are reported in the
statement of income as part of mortgage banking activities.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their outstanding principal balance, less undisbursed
portion, unearned interest and allowance for loan losses. Loan origination
fees and costs are deferred and amortized over the estimated life of the
loans as an adjustment of the yield using the interest method. Unearned
interest on installment loans is recognized as income under a method which
approximates the interest method. Interest on loans not made on a discounted
basis is credited to income based on the loan principal outstanding at stated
interest rates.
34
Recognition of interest on all loans is discontinued when loans are 90 days
or more in arrears on payments of principal or interest or when other factors
indicate that collection of interest or principal is doubtful. Loans for
which the recognition of interest income has been discontinued are designated
as non-accruing. Such loans are not reinstated to accrual status until
interest is received on a current basis and other factors indicative of
doubtful collection cease to exist.
The Group provides allowances for estimated loan losses based on an evaluation
of the risk characteristics of the loan portfolio, loss experience, economic
conditions and other pertinent factors. Loan losses are charged and recoveries
are credited to the allowance for loan losses.
The Group measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the observable market price of the loan or the fair
value of the collateral, if the loan is collateral dependent. All loans are
evaluated for impairment, except large groups of small balance, homogeneous
loans that are collectively evaluated for impairment and for leases and loans
that are recorded at fair value or at the lower of cost or market. The Group
measures for impairment all commercial loans and leases over $250,000. The
portfolios of mortgage and consumer loans and auto loans and leases are
considered homogeneous and are evaluated collectively for impairment.
SERVICING ASSETS AND SALE OF THE MORTGAGE SERVICING PORTFOLIO
Mortgage loans serviced for others, which consists of collecting payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing, are not included in the accompanying financial statements. At June
30,1997, the Group's mortgage servicing portfolio and custodial escrow balances
maintained in connection with the loans amounted to approximately $515,690,000
and $ 2,193,000, respectively. This portfolio and related servicing rights were
sold to a local mortgage banking institution in October 1997. At the date of
this transaction, the servicing portfolio and related servicing rights amounted
to approximately $550,000,000 and $6,121,000, respectively. The Group recorded
a net gain of $2.7 million on this transaction. For the years ended June 30,
1998, 1997 and 1996, the mortgage servicing portfolio generated servicing fees
of $874,000, $2,376,000, and $1,732,000, respectively.
Before the sale of the Group's mortgage servicing portfolio, the Group
recognized the rights to service mortgage loans for others as separate assets,
whether those servicing rights were originated or purchased. The total cost of
mortgage loans to be sold with servicing rights retained was allocated to the
mortgage servicing rights and the loans (without the mortgage servicing rights),
based on their relative fair values. These servicing rights were amortized in
proportion to and over the period of estimated net servicing income. Mortgage
servicing rights of $539,000 and $2,526,000 were capitalized in fiscals 1998
and 1997, respectively. At June 30, 1997, purchased and originated mortgage
servicing rights totaled approximately $5,783,000. Amortization of servicing
rights was $161,000 and $701,000 in 1998 and 1997, respectively. There were no
write-downs of mortgage servicing rights to fair value in either fiscal year.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of each type of asset. Amortization of leasehold improvements is
computed using the straight-line method over the terms of the leases or
estimated useful lives of the improvements, whichever are shorter.
Long-lived assets and identifiable intangibles related to those assets to be
held and used, except for financial instruments, long-term customer
relationships of financial institutions, mortgage and other servicing rights and
deferred tax assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There were no impairment losses reported in the result of
operations in fiscal years 1998, 1997 and 1996.
FORECLOSED REAL ESTATE
Foreclosed real estate is initially recorded at the lower of the related loan
balance or its fair value at the date of foreclosure. At the time properties
are acquired in full or partial satisfaction of loans, any excess of the loan
balance over the estimated fair market value of the property is charged against
the allowance for loan losses. The carrying value of these properties
approximates the lower of cost or fair value less estimated cost to sell. Any
excess of the carrying value over the estimated fair market value is charged to
operations.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
In January 1997, the Group adopted SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. Those standards are based
on consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
its has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
35
Also, as required by SFAS 127, "Deferral of the Effective Date of Certain
Provisions of SFAS Statement No. 125," the provisions dealing with repurchase
agreements, dollar-roll, securities lending, and similar transactions, were
adopted in January 1998. The adoption of these statements did not have a
material impact on the Group's financial position or results of operations.
INCOME TAXES
The Group follows an asset and liability approach to the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Group's financial statements or tax returns.
Deferred income tax assets and liabilities are determined for differences
between financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future. The computation is based
on enacted laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
STOCK OPTION PLAN
SFAS 123, "Accounting for Stock-Based Compensation", supersedes and amends the
guidance offered by Accounting Principles Board Opinion (APB) No. 25 relating to
stock based compensation states that the cost associated with the stock option
plan under which certain employees receive options to buy shares of stock of an
entity must be recognized either by the fair value-based method or the intrinsic
value-based method. Under the fair value-based method, cost is measured at the
grant date based on the fair value of the employee stock option and is
recognized ratably over the service period of the option, which is usually the
vesting period. Under the intrinsic value-based method, compensation expense is
recognized for the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
This statement, which prefers the use of the fair value-based method, allows
entities to continue reporting its stock-based compensation arrangements
under the intrinsic value-based method followed by APB No. 25. The Group
believes that intrinsic value-based method better reflects the motivation for
its issuance of stock options because they are incentives for future
performance rather than compensation for past performance. Therefore, in
adopting SFAS 123, the Group chose to continue to account for its stock
option plans in accordance with APB No. 25. SFAS 123 requires entities that
elect to retain the intrinsic value-based method prescribed by APB No. 25 to
present pro forma disclosures of net income and earnings per share as if the
fair value-based method of accounting had been applied, if amounts are
material. The Group presents these disclosures in Note 13.
NEW ACCOUNTING PRONOUNCEMENTS:
REPORTING COMPREHENSIVE INCOME
On June 30, 1998, the Group adopted SFAS No. 130, "Reporting Comprehensive
Income". This statement requires the presentation of a statement of
comprehensive income. In Oriental's case, in addition to net income, other
comprehensive income results from the changes in the unrealized gains and
losses on securities that are classified as available-for-sale.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The provisions of the statement will
become effective for the Group with the financial statements that will be
issued for fiscal 1999. SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim reports issued to
shareholders. It also requires disclosure of product and services,
geographic areas and major customers. This statement supersedes SFAS 14, "
Financial Reporting for Segments of a Business Enterprise" , but retains the
requirements to report information about major customers. Oriental's
management has preliminarily determined that the Bank's operations and the
trust and money management operations are the Group's business lines that
fulfill the segment definition described above. This statement affects only
financial statement presentation and disclosure. Therefore management
believes that its adoption will not have any effect on the Group's
financial position or results of operations.
ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING
ACTIVITIES
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". This new standard,
which becomes effective for all fiscal quarters beginning after June 15, 1999,
but with earlier application permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998, establishes accounting and reporting standards for
derivative financial instruments and for hedging activities and requires all
derivatives to be measured at fair value and to be recognized as either assets
or liabilities in the statement of financial position. Under this Standard,
derivatives used in hedging activities are to be designated into one of the
following categories: (a) fair value hedge; (b) cash flow hedge; and (c) foreign
currency exposure hedge. The changes in fair value (that is, gains and losses)
will be either recognized as part of earnings in the period when the change
occurs or as a component of other comprehensive income (outside earnings)
depending on their intended use and resulting designation. Management has
preliminarily determined to adopt this statement during either the second or
third quarter of fiscal 1999 and believes that such adoption will not have a
material effect on the Group's financial position or results of operations.
36
RECLASSIFICATIONS
Certain minor reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the presentation of the 1998 consolidated
financial statements.
NOTE 3 - INVESTMENT SECURITIES:
TRADING SECURITIES:
The fair value of trading securities is based on quoted market prices. At June
30, 1998 and 1997, the Group's trading portfolio was comprised primarily of
securities collateralized by real estate assets located in Puerto Rico or issued
by U.S. government entities and pass-through interest only certificates (IO's)
with a fair market value of $42,440,000 and $25,276,000, respectively. Gross
unrealized holding gains and losses in the trading portfolio at June 30, 1998
amounted to $741,000 and $1,600, respectively. These amounted to $41,400 and
$19,800, respectively, at June 30, 1997. The trading portfolio's weighted
average yield at such dates was 7.40% and 6.27%, respectively.
AVAILABLE-FOR-SALE :
The estimated fair value of investment securities available-for-sale is based
on quoted market prices. The amortized cost, estimated fair value, and weighted
average yield of debt and equity securities available-for-sale by category at
June 30, 1998 and 1997 are as follows:
(IN THOUSANDS) 1998 1997
------------------------------------------------ -------------------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST VALUE YIELD
------------------------------------------------ -------------------------------------------
US GOVERNMENT SECURITIES $244,225 $250,219 6.37% $110,186 $110,632 6.77%
------------- ------------ --------- ----------- ----------- ---------
PR GOVERNMENT SECURITIES 26,074 25,881 8.72% 34,091 34,277 7.60%
------------- ------------ --------- ----------- ----------- ---------
MORTGAGE-BACKED SECURITIES:
GNMA 35,517 36,471 7.14% 47,274 47,832 6.91%
FNMA 128,956 129,890 6.74% - - -
FHLMC 38,317 38,833 6.99% 10,438 10,454 7.39%
PASS-THROUGH CERTIFICATES 65 66 7.69% 54 66 7.69%
------------- ------------ --------- ----------- ----------- ---------
202,855 205,260 6.86% 57,766 58,352 6.90%
------------- ------------ --------- ----------- ----------- ---------
$473,154 $481,360 6.71% $202,043 $203,261 6.94%
------------- ------------ --------- ----------- ----------- ---------
------------- ------------ --------- ----------- ----------- ---------
At June 30, 1998, gross unrealized gains and gross unrealized losses amounted to
$8,593,000 and $387,000, respectively. At June 30, 1997, gross unrealized gains
and gross unrealized losses amounted to $1,620,000 and $402,000, respectively.
At June 30, 1998 and 1997, unrealized gains on securities available-for-sale of
$6,155,000 and $913,000, respectively, net of deferred income tax of $2,051,000
and $305,000, respectively, were reported as a separate component of
stockholders' equity.
The amortized cost and estimated fair value of available-for-sale securities at
June 30, 1998 and 1997, 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.
(IN THOUSANDS) 1998 1997
------------------------------ -------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------------ -------------------------------
DUE WITHIN ONE YEAR $ - $ - $ - $ -
AFTER ONE YEAR TO FIVE YEARS 47,537 48,219 68,475 68,775
AFTER FIVE YEARS TO TEN YEARS 188,927 194,173 48,136 48,242
DUE AFTER TEN YEARS 236,690 238,968 85,432 86,244
---------- ----------- ---------- ----------
$473,154 $481,360 $202,043 $203,261
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
37
Available-for-sale securities in the due after ten years category include an
AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of
$23,922,000, which commenced paying down principal on August 1, 1994, and is
expected to be fully collected within the next two fiscal years.
Proceeds from the sale of investment securities available-for-sale during 1998,
1997 and 1996 were $103,864,000, $131,885,000, and $45,977,000, respectively.
Gross realized gains and losses on those sales during fiscal year 1998 were
$1,180,000 and $150,000, respectively. For fiscal year 1997 were $958,000 and
$109,000, respectively, and for fiscal year 1996 were $1,482,000 and $0,
respectively.
The Government of Puerto Rico was the only issuer, other than the U.S.
Government, of instruments that are payable and secured by the same source of
revenue or taxing authority that exceeded 10% of stockholders' equity at June
30, 1998 and 1997. The amortized cost and fair value of investments from the
Government of Puerto Rico as of the dates mentioned above was approximately
$29,649,000 and $29,457,000, respectively, and $37,677,000 and $37,885,000,
respectively. At June 30, 1998 and 1997, $23,922,000 and $28,717,000 of these
investments were an AAA-rated Puerto Rico municipal bond collaterized with
mortgage-backed securities. At June 30, 1998 and 1997, the fair value of these
investments represented 28% and 42% of stockholders' equity.
HELD-TO-MATURITY:
The estimated fair value of investment securities held-to-maturity is based on
quoted market prices. The amortized cost, estimated fair value, and weighted
average yield of debt and equity securities held-to-maturity by category at
June 30, 1998 and 1997 are as follows:
(IN THOUSANDS) 1998 1997
------------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST VALUE YIELD
------------------------------------------- ----------------------------------------
PR GOVERNMENT SECURITIES $ 3,575 $ 3,576 7.40% $ 3,586 $ 3,608 7.40%
---------- ---------- -------- -------- -------- -------
MORTGAGE-BACKED SECURITIES:
GNMA 125,415 126,805 6.80% 149,275 149,081 6.91%
FNMA 28,732 29,453 7.25% 38,439 38,650 7.29%
FHLMC 4,429 4,570 7.00% 7,205 7,369 8.02%
PASS-THROUGH CERTIFICATES - - - 3,285 3,735 14.62%
---------- ---------- -------- -------- -------- -------
158,576 160,828 6.89% 198,204 198,835 7.15%
---------- ---------- -------- -------- -------- -------
$162,151 $164,404 6.87% $201,790 $202,443 7.16%
---------- ---------- -------- -------- -------- -------
---------- ---------- -------- -------- -------- -------
Gross unrealized gains and gross unrealized losses at June 30, 1998 amounted to
$2,696,000 and $443,000, respectively. These amounted to $1,652,000 and
$999,000, respectively, at June 30, 1997.
The amortized cost and estimated fair value of held-to-maturity securities at
June 30, 1998 and 1997, 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.
(IN THOUSANDS) 1998 1997
----------------------------- -----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------------- -----------------------------------
DUE WITHIN ONE YEAR $ 10 $ 10 $ - $ -
AFTER ONE YEAR TO FIVE YEARS 1,061 1,074 261 261
AFTER FIVE YEARS TO TEN YEARS 8,067 8,221 4,298 4,366
DUE AFTER TEN YEARS 153,013 155,099 197,231 197,816
----------- ----------- ----------- ----------
$162,151 $164,404 $201,790 $202,443
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
The held-to-maturity securities due after ten years category includes
approximately $64,525,000 of the short end of certain Puerto Rico GNMA
tax-exempt serial certificates with an average expected life of 4 to 6 years.
38
FEDERAL HOME LOAN BANK STOCK:
At June 30, 1998 and 1997 there was an investment in Federal Home Loan Bank
(FHLB) of New York stock with a book and fair value of $10,043,000. The fair
value of such investment is its redemption value.
TAX-EXEMPT INTEREST INCOME:
Interest income on investment securities for the year ended June 30, 1998,
includes tax-exempt interest of $38,971,000. Tax-exempt interest amounted to
$20,613,000 and $14,371,000, respectively, for the years ended June 30, 1997 and
1996. Exempt interest relates mostly to interest earned on obligations of the
United States and Puerto Rico governments and certain mortgage-backed
securities.
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOANS LOSSES:
LOANS RECEIVABLE
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit organizations,
all of which are encompassed within four main categories: mortgage, commercial,
consumer and leasing. Oriental's loan portfolio has a higher concentration of
loans to consumers such as auto leases, personal loans, and residential mortgage
loans. The composition of the Group's loan portfolio at June 30, was as
follows:
( IN THOUSANDS) 1998 1997
--------------- ---------------
LOANS SECURED BY REAL ESTATE:
RESIDENTIAL $233,161 $225,382
COMMERCIAL 7,007 9,087
HOME EQUITY LOANS 3,184 5,436
CONSTRUCTION, LAND ACQUISITION AND LAND IMPROVEMENTS 2,032 4,391
--------------- ---------------
245,384 244,296
LESS: NET DEFERRED LOAN FEES AND SERVICING RIGHTS SOLD (2,363) (239)
LESS: UNDISBURSED PORTION OF LOANS IN PROCESS (1,123) (2,093)
--------------- ---------------
241,898 241,964
--------------- ---------------
--------------- ---------------
OTHER LOANS:
COMMERCIAL LOANS 9,428 10,512
AUTO LOANS 7,340 14,882
PERSONAL LOANS 105,955 69,773
PERSONAL LINES OF CREDIT 7,126 5,190
CASH COLLATERAL LOANS 2,764 2,827
FINANCING LEASES 170,525 205,077
--------------- ---------------
303,138 308,261
LESS: UNEARNED INTEREST (30,317) (41,131)
--------------- ---------------
272,821 267,130
--------------- ---------------
--------------- ---------------
LOANS RECEIVABLE 514,719 509,093
ALLOWANCE FOR LOAN LOSSES (5,658) (5,408)
--------------- ---------------
LOANS RECEIVABLE, NET 509,061 503,685
LOANS HELD-FOR-SALE 36,359 29,285
--------------- ---------------
TOTAL LOANS, NET $545,420 $532,970
--------------- ---------------
--------------- ---------------
At June 30, 1998 and 1997 mortgage loans held-for-sale amounted $36,359,000 and
$29,285,000, respectively. All mortgage loans originated and sold during
fiscals 1998 and 1997 were sold based on pre-established commitments or at
market values which in both situations equal or exceeded the carrying value of
the loans. Net gains on those sales during fiscal years 1998, 1997 and 1996
were $1,881,000, $531,000 and $502,000, respectively, and are included in the
statement of income as part of mortgage banking activities.
39
Loans on which the accrual of interest has been discontinued amounted to
approximately $15,895,000 and $13,285,000, at June 30, 1998 and 1997,
respectively. The gross interest income that would have been recorded if
non-accrual loans had performed in accordance with their original terms
amounted to approximately $2,138,000 in 1998, $1,360,500 in 1997, and
$1,072,000 in 1996.
The components of the net financing leases receivable at June 30, were as
follows:
(IN THOUSANDS) 1998 1997
----------- ----------
TOTAL MINIMUM LEASE PAYMENTS $147,108 $179,407
ESTIMATED RESIDUAL VALUES OF LEASED PROPERTY 23,417 25,670
----------- ----------
TOTAL GROSS MINIMUM LEASE PAYMENTS 170,525 205,077
LESS - UNEARNED FINANCING INCOME (29,412) (38,417)
----------- ----------
NET MINIMUM LEASE PAYMENTS $141,113 $166,660
----------- ----------
----------- ----------
Estimated residual value is generally established at amounts which should be
sufficient to cover Oriental's investment. The future minimum lease payments
expected to be received at June 30, were as follows:
YEAR ENDING JUNE 30, (IN THOUSANDS)
-------------------- ----------------
1999 $ 52,294
2000 39,828
2001 28,781
2002 18,270
2003 AND THEREAFTER 7,935
---------
$147,108
---------
---------
ALLOWANCE FOR LOAN LOSSES
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. The changes in the allowance
for loan losses for the year ended June 30, were as follows:
(IN THOUSANDS) 1998 1997 1996
----------- ------------ ------------
BALANCE AT BEGINNING OF PERIOD $ 5,408 $ 4,496 $ 3,127
----------- ------------ ------------
PROVISION FOR LOAN LOSSES 9,545 4,900 4,600
LOANS CHARGED-OFF (11,484) (5,262) (3,979)
RECOVERIES 2,189 1,274 748
----------- ------------ ------------
NET INCREASE (DECREASE) 250 912 1,369
----------- ------------ ------------
BALANCE AT END OF PERIOD $ 5,658 $ 5,408 $ 4,496
----------- ------------ ------------
----------- ------------ ------------
Over 95% of the Group's loan portfolio is composed of smaller homogenous loans
which are evaluated collectively for impairment. Accordingly, the balance of
impaired commercial loans and leases at June 30, 1998 and 1997 and their average
for the year is not significant.
NOTE 5 - PLEDGED ASSETS:
At June 30, 1998 and 1997, residential mortgage loans and investment securities,
including mortgage-backed securities, amounting to $147,899,000 and
$562,921,000, respectively, and $153,313,000 and $398,108,000, respectively,
were pledged to secure public fund deposits, securities and mortgages sold under
agreements to repurchase, letters of credit, advances and borrowings from the
Federal Home Loan Bank of New York, term notes and interest rate swap
agreements.
40
NOTE 6 - ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at June 30, consists of the following:
(IN THOUSANDS) 1998 1997
----------- ----------
LOANS $ 3,771 $ 3,296
MORTGAGE-BACKED SECURITIES 5,450 5,142
OTHER INVESTMENT SECURITIES 5,705 3,912
----------- ----------
$14,926 $12,350
----------- ----------
----------- ----------
NOTE 7 - PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization as follows:
USEFUL LIFE
(IN THOUSANDS) (YEARS) 1998 1997
----------- --------- ----------
LAND - $ 1,385 $ 1,385
BUILDINGS AND IMPROVEMENTS 20 - 50 11,838 11,935
LEASEHOLD IMPROVEMENTS 5 - 10 2,435 2,194
FURNITURE AND FIXTURES 3 - 7 4,460 4,195
EDP AND OTHER EQUIPMENT 3 - 7 9,098 8,161
--------- ----------
29,216 27,870
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION (9,661) (8,492)
--------- ----------
$19,555 $19,378
--------- ----------
--------- ----------
Depreciation and amortization of premises and equipment for the year ended June
30, 1998, 1997 and 1996 totaled $2,498,000, $2,216,000 and $1,544,000,
respectively. They are included in the statement of income as part of occupancy
and equipment expenses.
NOTE 8 - OTHER ASSETS:
Other assets at June 30, include the following:
(IN THOUSANDS) 1998 1997
---------- ----------
SERVICING ASSETS $ - $ 5,783
PREPAID EXPENSES AND DEFERRED COSTS 7,352 5,930
ACCOUNTS RECEIVABLE 4,782 5,665
INSURANCE CLAIMS 1,254 1,190
OTHER ASSETS 908 1,487
OTHER REPOSSESSED PROPERTY 1,295 1,739
---------- ---------
$ 15,591 $ 21,794
---------- ---------
---------- ---------
NOTE 9 - DEPOSITS AND RELATED INTEREST:
Deposits at June 30, is comprised of:
1998 1997
---------------------- ----------------------
(IN THOUSANDS) AMOUNT % AMOUNT %
----------- -------- ------------ --------
SAVINGS DEPOSITS $ 76,523 13 $ 72,872 14
DEMAND AND NOW ACCOUNTS 36,005 6 34,124 7
IRA ACCOUNTS 112,622 20 73,846 15
CERTIFICATES OF DEPOSIT 342,439 60 313,990 63
----------- -------- ------------ --------
567,589 99 494,832 99
ACCRUED INTEREST PAYABLE 3,842 1 2,710 1
----------- -------- ------------ --------
$571,431 100% $ 497,542 100%
----------- -------- ------------ --------
----------- -------- ------------ --------
At June 30, 1998 and 1997 non-interest bearing deposits totaled to $26,880,000
and $20,095,000 respectively. The weighted average interest rate on total
deposits at June 30, 1998 and 1997 was 4.86% and 4.92%, respectively.
41
At June 30, 1998 and 1997, time deposits in denominations of $100,000 or
higher amounted to approximately $250,122,000 and $192,741,000, respectively,
including brokered certificates of deposit amounting to $74,843,000 and
$61,188,000, respectively, at a weighted average rate of 5.79% and 5.87%,
respectively, and certificates of deposit held by various tax-exempt (936)
corporations aggregating to $20,076,000 and $38,093,000, respectively, with a
weighted-average interest rate of 4.71% and 4.87%, respectively. Also,
included at June 30, 1998 are certificates of deposit from different local
government agencies public funds totaling to $59,821,000, at a weighted
average rate of 5.68%, which are collaterized with investment securities.
Scheduled maturities of certificates of deposit and IRA accounts at June 30,
1998 are as follow:
YEAR ENDING JUNE 30, (IN THOUSANDS)
---------------------------- --------------------
1999 $ 358,485
2000 33,445
2001 14,108
2002 16,463
2003 28,395
THEREAFTER 4,165
--------------------
$455,061
--------------------
--------------------
Interest expense on deposits for the years ended June 30, follows:
(IN THOUSANDS) 1998 1997 1996
- -------------- ---------- ---------- ----------
NOW ACCOUNTS $ 298 $ 256 $ 224
SAVINGS DEPOSITS 2,483 2,199 1,935
CERTIFICATES OF DEPOSIT 18,133 14,649 12,483
IRA ACCOUNTS 5,283 3,908 2,744
--------- ---------- ----------
$ 26,197 $ 21,012 $17,386
--------- ---------- ----------
--------- ---------- ----------
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At June 30, 1998 and 1997, securities sold under agreements to repurchase
("repurchase agreements") amounted to $416,171,000 and $247,915,000,
respectively. The securities underlying the agreements to repurchase were
delivered to, and are being held by, the counterparties with whom the repurchase
agreements were transacted. The counterparties have agreed to resell to the
Group the same or similar securities at the maturity of the agreements. The
following securities were sold under agreements to repurchase at June 30,:
(IN THOUSANDS) 1998 1997
----------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------------- -----------------------------
US GOVERNMENT SECURITIES $165,266 $168,805 $ 73,705 $ 73,571
MORTGAGE-BACKED SECURITIES 250,647 253,458 163,276 166,769
MONEY MARKET INVESTMENTS - - 15,000 15,000
-------------- ------------ -------------- ------------
$415,913 $422,263 $251,981 $255,340
-------------- ------------ -------------- ------------
-------------- ------------ -------------- ------------
The following summarizes significant data about securities sold under agreements
to repurchase for the years ended June 30,1998, 1997 and 1996:
(IN THOUSANDS) 1998 1997 1996
- -------------- --------- ---------- ----------
AVERAGE DAILY AGGREGATE BALANCE OUTSTANDING $423,150 $231,747 $205,748
--------- ---------- ----------
--------- ---------- ----------
MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END $424,456 $264,203 $244,398
--------- ---------- ----------
--------- ---------- ----------
WEIGHTED AVERAGE INTEREST RATE DURING THE YEAR 5.37% 5.04% 4.81%
--------- ---------- ----------
--------- ---------- ----------
WEIGHTED AVERAGE INTEREST RATE DURING AT YEAR END 5.28% 5.56% 4.51%
--------- ---------- ----------
--------- ---------- ----------
42
UNUSED LINES OF CREDIT
The Group maintains various lines of credit with other financial institutions
from which funds are drawn as needed. At June 30, 1998 and 1997, the Group's
total available funds under these lines of credit totaled $56 million and $80
million, respectively. These lines range from unsecured Federal Funds-based
lines of credit to one year LIBOR-based line of credit, secured by leasing
warehousing facilities. At June 30, 1998 and 1997, there was no balance
outstanding under these lines of credit.
ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK
At June 30, advances and borrowings from the Federal Home Loan Bank of New York
(FHLB) consist of the following:
(IN THOUSANDS)
TYPE 1998 1997 MATURITY DATE INTEREST RATE DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------
ADVANCE $ - $15,000 JULY 1997 FIXED - 5.79%
ADVANCE - 15,000 AUGUST 1997 FIXED - 5.80%
ADVANCE - 10,000 NOVEMBER 1997 FLOATING DUE QUARTERLY - 5.52% AT 6/30/97
ADVANCE - 10,000 FEBRUARY 1998 FLOATING DUE MONTHLY - 5.48% AT 6/30/97
ADVANCE 800 13,800 DEMAND FLOATING DUE DAILY - 6.13% AT 6/30/98
ADVANCE 10,000 - JULY 1998 FIXED - 5.74%
ADVANCE 10,000 - SEPTEMBER 1999 FIXED - 5.71%
ADVANCE 10,000 - SEPTEMBER 1999 FIXED - 5.85% - CALLABLE SEPTEMBER 1998
ADVANCE 20,000 - OCTOBER 2002 FIXED - 5.42% - CALLABLE OCTOBER 1998
BORROWING - 12,000 SEPTEMBER 1997 FIXED - 6.04%
BORROWING 14,000 14,000 JULY 1998 FIXED - 6.28 %
BORROWING 10,000 - SEPTEMBER 1999 FIXED - 6.03% - CALLABLE MARCH 1999
--------------------------
$74,800 $89,800
--------------------------
--------------------------
Advances are received from the FHLB under an agreement whereby Oriental is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. At June 30, 1998 and 1997
these advances and borrowings were secured by mortgage loans and investment
securities. Also, at June 30, 1998 and 1997, the Group has an additional
borrowing capacity with the FHLB of $33 million and $26 million, respectively.
TERM NOTES AND BONDS PAYABLE
At June 30, term notes and bonds payable consist of the following:
(IN THOUSANDS)
TYPE 1998 1997 MATURITY DATE INTEREST RATE DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------
TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 FIXED - 4.81% IN 1998 (B)
TERM NOTE 10,000 10,000 DECEMBER 1999 FLOATING DUE QUARTERLY - 4.62% AT 6/30/98 (A) (C)
TERM NOTE 10,000 10,000 JANUARY 2000 FLOATING DUE QUARTERLY - 4.62% AT 6/30/98 (A) (C)
TERM NOTE 6,500 6,500 DECEMBER 2000 FLOATING DUE QUARTERLY - 4.78% AT 6/30/98 (B) (C)
TERM NOTE 20,000 20,000 MARCH 2001 FLOATING DUE QUARTERLY - 5.12% AT 6/30/98 (B) (C)
TERM NOTE 10,000 10,000 SEPTEMBER 2001 FLOATING DUE QUARTERLY - 5.45% AT 6/30/98 (B) (C)
TERM NOTE 30,000 30,000 SEPTEMBER 2001 FLOATING DUE QUARTERLY - 5.23% AT 6/30/98 (B) (C)
TERM NOTE 5,000 5,000 DECEMBER 2001 FLOATING DUE QUARTERLY - 4.73% AT 6/30/98 (B) (C)
TERM NOTE 15,000 15,000 MARCH 2007 FLOATING DUE QUARTERLY - 5.28% AT 6/30/98 (B) (C)
BOND 88 516 APRIL 2008 FIXED - 8.38% (D)
--------------------------
$114,588 $115,016
--------------------------
--------------------------
(A) - Guaranteed by letters of credit from the FHLB.
(B) - Collateralized with investment securities.
(C) - The interest rate risk exposure on floating notes was hedged through the
interest rate risk management process discussed in Note 11.
(D) - Collaterized with FHLMC certificates.
43
CONTRACTUAL MATURITIES
At June 30, 1998, the contractual maturities of securities sold under agreements
to repurchase, advances and borrowings from the FHLB, and bonds payable and term
notes by fiscal year are as follows:
(IN THOUSANDS) ADVANCES & TERM NOTES
REPURCHASE BORROWINGS AND BONDS
YEAR ENDING JUNE 30, AGREEMENTS FROM FHLB PAYABLE
------------------- ---------- ----------- ----------
1999 $346,171 $ 24,800 $ 8,088
2000 20,000 30,000 20,000
2001 50,000 - 26,500
2002 - - 45,000
2003 - 20,000 -
THEREAFTER - - 15,000
-------- --------- --------
$416,171 $ 74,800 $114,588
-------- --------- --------
-------- --------- --------
NOTE 11 - INTEREST RATE RISK MANAGEMENT
INTEREST RATE SWAP AGREEMENTS
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. The
following table indicates the types of swaps used and their terms at June 30:
(DOLLARS N THOUSANDS): 1998 1997
--------------------- ---------- ----------
PAY FIXED SWAPS NOTIONAL AMOUNT $260,000 $370,000
WEIGHTED AVERAGE PAY RATE - FIXED 5.70% 5.73%
WEIGHTED AVERAGE RECEIVE RATE - FLOATING 5.23% 5.43%
MATURITY IN MONTHS 1 to 35 1 to 35
FLOATING RATE IN PERCENT OF LIBOR 84 to 100% 84 to 100%
The agreements were signed to convert short-term borrowings into fixed rate
liabilities for longer periods of time and provide protection against increases
in interest rates. The amounts potentially subject to credit loss are the net
streams of payments under the agreements and not the notional principal amounts
used to express the volume of the swaps. The Group controls the credit risk of
its interest rate swap agreements through approvals, limits, monitoring
procedures and collateral, where considered necessary. The Group does not
anticipate nonperformance by the counterparties. The following table summarizes
the changes in notional amounts of swaps outstanding during years ended on June
30:
(IN THOUSANDS): 1998 1997
-------------- --------- ---------
BALANCE AT BEGINNING OF YEAR $ 370,000 $ 300,000
--------- ---------
NEW SWAPS 55,000 205,000
MATURITIES (165,000) (135,000)
--------- ---------
NET (DECREASE)INCREASE (110,000) 70,000
--------- ---------
BALANCE AT END OF THE YEAR $ 260,000 $ 370,000
--------- ---------
--------- ---------
At June 30, 1998, interest rate swap maturities by fiscal year are as follows:
YEAR ENDING JUNE 30, (IN THOUSANDS)
-------------------- --------------
1999 $170,000
2000 80,000
2001 10,000
--------
$260,000
--------
--------
44
INTEREST RATE PROTECTION AGREEMENTS (CAPS)
The Group also uses interest rate protection agreements (Caps) to limit its
exposure to rising interest rates. Under these agreements, Oriental pays an up
front premium or fee for the right to receive cash flow payments in excess of
the predetermined cap rate; thus, effectively capping its interest rate cost for
the duration of the agreement. The following table indicates the agreements
outstanding at June 30:
(DOLLARS N THOUSANDS): 1998 1997
- --------------------- -------- -------
CAP AGREEMENTS NOTIONAL AMOUNT $150,000 $60,000
CAP RATE 6.50% 6.50%
CURRENT 90 DAY LIBOR 5.72 5.75%
MATURITY IN MONTHS 3 to 18 16 to 21
S&P INTEREST RATE SWAP
In January 1994, the Group introduced new certificates of deposit called
Investors' CD and Investors' IRA which have their yields tied to the performance
of a stock market index. At the end of five years, the depositor will receive a
specified percent of the average increase of the month-end value of the
Standard & Poor's 500 stock index. If such index decreases, the depositor
receives the principal without any interest. The Group has entered into interest
rate swap/hedge agreements with a notional amount of $49,632,000 (1997 -
$27,882,000) with major money center banks to manage the Investors' CD and IRA
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 Standard and Poor's
index in exchange for a semiannual fixed interest cost. Thus, the Group has
exchanged the variable interest payment for a known fixed rate semiannual
interest payment.
NOTE 12 - INCOME TAXES:
Under the Puerto Rico Internal Revenue Code, the Group and its subsidiaries are
treated as separate taxable entities and are not entitled to file consolidated
returns. The Group is subject to Puerto Rico income tax on all its income. The
components of income tax expense for the years ended June 30, are summarized
below:
(IN THOUSANDS) 1998 1997 1996
------ ------ ------
CURRENT INCOME TAX EXPENSE $5,876 $3,310 $3,635
DEFERRED INCOME TAX BENEFIT (2,026) (210) (64)
------ ------ ------
PROVISION FOR INCOME TAXES $3,850 $3,100 $3,571
------ ------ ------
------ ------ ------
The Group has maintained an effective tax rate lower than the statutory rate of
39% mainly due to the interest income arising from certain mortgage loans and
investment and mortgage-backed securities which are exempt for Puerto Rico
income tax purposes, net of the disallowance of expenses attributable to the
exempt income. In addition, during 1997 the Group established OBT International
Banking Entity (IBE). Under Puerto Rico's International Banking Center
Regulatory Act of 1989, the income earned by the IBE is exempt from Puerto Rico
income taxes. The reasons for the differences between the Puerto Rico income tax
statutory rate and the effective tax rate as reported for each of the last three
fiscal years ended June 30, follows:
1998 1997 1996
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
- -----------------------
STATUTORY RATE $ 9,851 39.0% $ 7,668 39.0% $ 7,139 39.0%
DEACREASE IN RATE RESULTING FROM:
EXEMPT INTEREST INCOME, NET (5,786) (22.9) (4,349) (22.1) (2,565) (14.0)
OTHER NON-TAXABLE ITEMS, NET (215) (.9) (219) (1.1) (1,003) (5.5)
------- ----- ------- ------ -------- -----
PROVISION FOR INCOME TAXES $ 3,850 15.2% $ 3,100 15.8% $ 3,571 19.5%
------- ----- ------- ------ -------- -----
------- ----- ------- ------ -------- -----
In July 1997, the Goverment of Puerto Rico signed into law changes to the
Puerto Rico tax code that will impact the Group's operations going forward.
Under this law effective August 1, 1997, interest earned on FHA , VA loans
and securities backed by such loans originated after July 31, 1997, which were
previously tax-exempt (after-disallowance of related expenses) will begin to pay
income taxes except for FHA mortgages for new construction projects.
45
The legislation does not alter the tax-exempt status of FHA and VA loans and
securities backed by such loans originated prior to July 31, 1997. This law will
reduce the amount of tax-exempt mortgages originated in the Puerto Rico market
and decrease the overall level of tax-exempt interest earned by Group.
Management believes the increased operations of OBT International Branch will
mitigate the expected rise on the Group's income taxes as result of this new
bill. Thus, management does not expect this change to have a significant impact
on the Group's financial condition or results of operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The components of the Group's
deferred tax asset and liability at June 30, were as follows:
1998 1997
------ ------
(IN THOUSANDS)
DEFERRED TAX ASSET:
ALLOWANCE FOR LOAN LOSSES, NET $1,902 $1,499
DEFERRED INCOME 914 -
OTHER TEMPORARY DIFFERENCES - 166
------ -----
GROSS DEFERRED TAX ASSET 2,816 1,665
------ -----
------ -----
DEFERRED TAX LIABILITY:
NET DEFERRED LOAN ORIGINATION COSTS (104) (82)
UNREALIZED GAIN ON TRADING SECURITIES (260) (16)
UNREALIZED GAIN ON AVAILABLE FOR SALE SECURITIES (2,051) (288)
MORTGAGE SERVICING RIGHTS - (1,140)
------ -----
GROSS DEFERRED TAX LIABILITY (2,415) (1,526)
------ -----
NET DEFERRED TAX ASSET $ 401 $ 139
------ -----
------ -----
NOTE 13 - STOCKHOLDERS' EQUITY:
STOCK OPTIONS
The Group has two stock options plans, the 1996 and the 1988 Group's Incentive
Stock Option Plans ( "The Plans"). These plans offer key officers and employees
an opportunity to purchase shares of the Group's common stock. The Compensation
Committee of the Board of Directors has sole authority and absolute discretion
as to the number stock options to be granted, their vesting rights, and the
option's exercise price. The Plans provide for a proportionate adjustment in the
exercise price and the number of shares that can be purchased in the event of a
stock split, reclassification of stock and a merger or a reorganization. Stock
options vest upon completion of specified years of service and, in the case of
the 1996 Plan the attainment of certain financial performance goals. The
activity in outstanding options for the year ended June 30, 1998 and 1997 is
summarized below. Weighted average prices for the year ended June 30, 1997 were
restated to reflect the five-for-four (25%) stock split on common stock as of
September 30, 1997.
1998 1997
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- ---------
OPTIONS OUTSTANDING AT BEGINNING OF YEAR 644,267 $ 8.94 478,072 $ 4.82
FIVE-FOR -FOUR (25%) STOCK SPLIT 145,103 13.59 - -
SIX-FOR -FIVE (20%) STOCK SPLIT - - 91,874 5.74
OPTIONS GRANTED 283,000 22.50 205,500 14.80
OPTIONS EXERCISED (155,017) 5.17 (120,226) 3.84
OPTIONS CANCELED OR FORFEITED (80,215) 17.34 (10,953) 8.22
-------- ------ -------- ------
OPTIONS OUTSTANDING AT END OF YEAR 837,138 $13.59 644,267 $ 8.94
-------- ------ -------- ------
-------- ------ -------- ------
During fiscal 1997 the Group granted 205,500 options to buy shares of the
Group's stock, which are contingent on Group's net income equaling or exceeding
$25 million in fiscal 1999 and are exercisable over a period ranging from five
to ten years. These options vest upon completion of specified years of service.
In addition, during fiscal 1998 the Group granted 283,000 options to buy shares
of the Group's stock, which are contingent on Group's net income equaling or
exceeding $28 million in fiscal 2000 and are exercisable over a period ranging
from five to ten years. All of the options prices equaled the quoted market
price of the stock at the grant date, therefore, no compensation cost was
recognized on the options granted.
46
The following table summarizes the range of exercise prices and the weighted
average remaining contractual life of the options outstanding at June 30, 1998:
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE CONTRACT EXERCISE
STOCK OPTION PLAN PRICES OUTSTANDING LIFE (YEARS) PRICE
- ------------------------------- ------------- ----------- ------------ ---------
1988 PLAN $2.39 - $8.00 371,013 3.0 $6.87
1996 PLAN 14.80 215,625 10.0 14.80
1996 PLAN 22.50 250,500 10.0 22.50
------- ---- ------
837,138 6.9 $13.59
------- ---- ------
------- ---- ------
In implementing the provisions of SFAS 123 as described in Note 2, the Group
adopted the disclosure provisions permitted by SFAS 123. Accordingly, no
compensation cost has been recognized for the Group's stock option plans. Had
the Group implemented the provisions of SFAS 123 by adopting the new method of
recognizing compensation expense over the expected life of the options based on
their fair market value the Group's net income and earnings per common share
would have been reduced to the proforma amounts indicated below:
1998 1997
------- -------
COMPENSATION AND BENEFITS:
REPORTED $15,071 $14,728
------- -------
PRO FORMA $15,436 $14,833
------- -------
NET INCOME:
REPORTED $21,410 $16,562
------- -------
PRO FORMA $21,187 $16,498
------- -------
BASIC EARNINGS PER SHARE:
REPORTED $ 2.15 $ 1.67
------- -------
PRO FORMA $ 2.13 $ 1.67
------- -------
DILUTED EARNINGS PER SHARE:
REPORTED $ 2.08 $ 1.61
------- -------
PRO FORMA $ 2.06 $ 1.61
------- -------
The fair value of each option granted in fiscals 1997 and 1998 was estimated
using the Black-Scholes option pricing model with the following assumptions:
- - STOCK PRICE AND EXERCISE PRICE - The estimated fair value, based on
the term of the awards, was $14.80 per option granted in fiscal 1997
and $22.50 per option granted in fiscal 1998.
- - EXPECTED OPTION TERM - 10 years
- - EXPECTED VOLATILITY - 30% for options granted in fiscals 1997 and
1998.
- - EXPECTED DIVIDEND YIELD - 2.19% options granted in fiscal 1997 and
3.32% for options granted in fiscal 1998.
- - RISK-FREE INTEREST RATE - 6.12% for options granted
STOCK SPLITS
On August 11, 1997, the Group declared a five-for-four (25%) stock split on
common stock held by registered shareholders as of September 30, 1997. As a
result 1,910,316 shares of common stock were distributed on October 15, 1997.
In addition, On August 26, 1996, Oriental declared a six-for-five (20%) stock
split on common stock held by registered shareholders as of September 30, 1996.
As a result, a total of 1,318,712 shares of common stock were issued on October
17, 1996. For purposes of the computation of income per common share, the stock
splits were retroactively recognized for all periods presented in the
accompanying consolidated financial statements.
47
COMMON STOCK REPURCHASE PROGRAM
The Board of Directors of the Group authorized management, subject to the
required shareholder and regulatory approvals, to repurchase up to 612,500
shares of its issued and outstanding common stock. The authority granted by
the Board of Directors does not require the Group to repurchase any shares. The
repurchase of the shares will be made in the open market at such times and
prices as market conditions shall warrant, and in full compliance with the
terms of applicable federal and Puerto Rico laws and regulations. During fiscal
1998 and 1997, the Group repurchased 120,000 and 228,000 shares, respectively,
of its common stock at a cost of $4,363,000 and $3,543,000, respectively. Of a
total of 558,000 shares repurchased up to June 30, 1998, 336,500 shares were
retired from circulation in fiscal 1997 and 221,500 shares with a cost of
$6,199,000 are held by the Group's treasury. All common share figures were
retroactively adjusted for the five-for-four (25%) stock split on common stock
distributed on October 15, 1997.
LEGAL SURPLUS
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of the Bank's net income for the year be transferred to capital surplus
until such surplus equals the greater of 10% of total deposits or paid-in
capital. At June 30, 1998 and 1997, this legal surplus amounted to $5,908,000
and $4,002,000, respectively.
NOTE 14 - EMPLOYEE BENEFITS PLAN:
The Group has a cash or deferred arrangement profit sharing plan 401(k). Under
this plan, the Group contributes shares of its common stock to match employee
contributions up to $1,040. The plan is entitled to acquire and hold qualified
employer securities as part of its investment of the trust assets pursuant to
ERISA Section 407. During fiscal 1998, 1997 and 1996, the Group contributed
4,186, 4,312 and 6,337 shares, respectively, of its common stock with a market
value of approximately $153,000, $122,000, and $111,000, respectively, at the
time of the contribution. The Group's contribution becomes 100% vested once the
employee attains five years of participation in the plan.
NOTE 15 - RELATED PARTY TRANSACTIONS:
The Group grants loans to its directors, executive officers and to certain
related individuals or organizations in the ordinary course of the business.
These do not involve more than the normal risk of collectibility or present
other unfavorable features. The movement and balance of these loans were as
follows:
(IN THOUSANDS) 1998 1997
- -------------- ------ ------
BALANCE AT THE BEGINNING OF THE PERIOD: $2,796 $2,888
------ ------
NEW LOANS - 62
PAYMENTS (121) (154)
------ ------
(121) (92)
------ ------
BALANCE AT THE END OF THE PERIOD: $2,675 $2,796
------ ------
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Group has entered into various operating lease agreements for branch
facilities and administrative offices. Rent expense for the years ended June
30, 1998, 1997 and 1996 was $847,000, $705,000 and $575,000, respectively.
As of June 30, 1998, future rental commitments under the terms of the
leases, exclusive of taxes, insurance and maintenance expenses payable by the
Group, are summarized as follows:
YEAR ENDING JUNE 30, (IN THOUSANDS)
-------------------- --------------
1999 $793
2000 790
2001 793
2002 810
2003 817
THEREAFTER 821
------
$4,824
------
------
48
LOAN COMMITMENTS
At June 30, 1998 there were $10,878,000 of unused lines of credit provided to
individual customers and $266,000 of commitments to originate loans.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and may require payment of
a fee. Since the commitments may expire unexercised, the total commitment
amounts do not necessarily represent future cash requirements. The Group
evaluates each customer's credit-worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Group upon
extension of credit, is based on management's credit evaluation of the
customer.
CONTINGENCIES
The Group and its subsidiaries are defendants in a number of legal
proceedings incidental to its business. The Group is vigorously contesting
those said 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.
NOTE 17 - REGULATORY MATTERS:
CAPITAL
The Group is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Group's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Group's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Group to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes that, as of June 30, 1998,
Oriental meets all capital adequacy requirements to which it is subject.
As of June 30, 1998 the Group was a "well capitalized institution" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Group must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that date that management believes
have changed the institution's category. The Group's actual capital amounts
and ratios of total risk-based capital, Tier 1 risk-based capital and Tier 1
capital at June 30, were as follows:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------------
AS OF JUNE 30, 1998
Total Capital (To Risk-Weighted Assets) $107,410 21.68% $39,640 8.00% $49,550 10.00%
Tier I Risk-Based (To Risk-Weighted Assets) $101,318 20.45% $19,820 4.00% $29,730 6.00%
Tier I Capital (To Average Assets) $101,318 7.70% $52,643 4.00% $65,804 5.00%
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------------
AS OF JUNE 30, 1997
Total Capital (To Risk-Weighted Assets) $89,668 18.66% $38,452 8.00% $48,066 10.00%
Tier I Risk-Based (To Risk-Weighted Assets) $84,259 17.53% $19,226 4.00% $28,839 6.00%
Tier I Capital (To Average Assets) $84,259 8.17% $41,230 4.00% $51,538 5.00%
SAIF ASSESSMENT
On September 30, 1996, the United States Congress approved and President
Clinton signed into law a bill to recapitalize the Savings Association
Insurance Fund ("SAIF"). This bill called for a special one-time charge 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.
49
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
The reported fair values of financial instruments are based on either quoted
market prices for identical or comparable instruments or estimated based on
assumptions concerning the amount and timing of estimated future cash flows
and assumed discount rates reflecting varying degrees of risk. Accordingly,
the fair values may not represent the actual values of the financial
instruments that could have been realized as of year-end or that will be
realized in the future. The estimated fair value and carrying value of the
Group's financial instruments at June 30, follows:
1998 1997
----------------------------- ---------------------------
FAIR CARRYING FAIR CARRYING
(IN THOUSANDS): VALUE VALUE VALUE VALUE
--------------- ------------- ----------- ------------- ------------
ASSETS:
Cash and due from banks $ 8, 831 $ 8,831 $ 12,812 $ 12,812
Money market investments 10,658 10,658 15,000 15,000
Trading securities 42,440 42,440 25,276 25,276
Investment securities available-for-sale 481,360 481,360 203,261 203,261
Investment securities held-to-maturity 164,404 162,151 202,443 201,790
Federal home loan bank (fhlb) stock 10,043 10,043 10,043 10,043
Loans (including loans held-for-sale) 551,544 545,420 539,537 532,970
Servicing assets - - 9,051 5,783
Accrued interest receivable $ 14,926 $ 14,926 $ 12,350 $ 12,350
LIABILITIES:
Deposits $ 571,337 $ 571,431 $497,371 $ 497,542
Securities sold under agreements to repurchase 416,171 416,171 247,915 247,915
Advances and borrowings from fhlb 79,818 79,800 89,787 89,800
Term notes and bonds payable 114,667 114,588 115,212 115,016
Accrued expenses and other liabilities $ 27,368 $ 27,368 $ 28,929 $ 28,929
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate swaps-in a net payable position $ (1,203) $ (1,104)
Commitments to extend credit $ 11,144 $ 2,156
The fair value estimates are made at a point in time based on a variety of
factors. Quoted market prices are used for financial instruments in which an
active market exists. However, because no market exists for a portion of the
Group's financial instruments, fair value estimates are based on judgments
regarding the amount and timing of estimated future cash flows, assumed
discount rates reflecting varying degrees of risk, and other factors.
Because of the uncertainty inherent in estimating fair values, these
estimates may vary from the values that would have been used had a ready
market for these financial instruments existed. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment. Changes in assumptions could affect these fair value estimates.
The fair value estimates do not take into consideration the value of future
business and the value of assets and liabilities that are not financial
instruments. Other significant tangible and intangible assets that are not
considered financial instruments are the value of long-term customer
relationships of the retail deposits, and premises and equipment. The
following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
SHORT-TERM FINANCIAL INSTRUMENTS
Short-term financial instruments, which include cash and due from banks,
money market investments, accrued interest receivable and accrued expenses
and other liabilities have been valued at the carrying amounts reflected in
the Consolidated Statements of Financial Condition as these are reasonable
estimates of fair value given the short-term nature of the instruments.
INVESTMENT SECURITIES AND FHLB STOCK
The fair value of investment securities is estimated based on bid quotations
from securities dealers. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Investments in FHLB stock are valued at their redemption value.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as commercial, real
estate mortgage and consumer. Each loan category is further segmented into
fixed and adjustable interest rates and by performing and nonperforming
categories.
50
The fair value of performing loans is calculated by discounting contractual
cash flows, adjusted for prepayment estimates, if any, using estimated
current market discount rates that reflect the credit and interest rate risk
inherent in the loan. The fair value for significant nonperforming loans is
based on specific evaluations of discounted expected future cash flows from
the loans or its collateral using current appraisals and market rates.
DEPOSITS
The fair value of non-interest bearing demand deposits, savings and NOW
accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposits is based on the discounted
value of the contractual cash flows, using estimated current market discount
rates for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
For short-term borrowings, the carrying amount is considered a reasonable
estimate of fair value. The fair value of long-term borrowings is based on
the discounted value of the contractual cash flows, using current estimated
market discount rates for borrowings with similar terms and remaining
maturities.
INTEREST RATE SWAP AND CAP AGREEMENTS
The fair value of interest rate swap and cap agreements is based on
discounted value analysis. The values represent the estimated amount the
Group would receive or pay to terminate the contracts or agreements at the
reporting date, taking into account current interest rates and the
credit-worthiness of the counterparties.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is calculated by discounting
scheduled cash flows at market discount rates that reflect the credit and
interest rate risk inherent in the commitments to extend credit guarantees
and letters of credit. Assumptions regarding credit risks, cash flows and
discount rates are judgmentally determined using market and specific borrower
information.
NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED):
Subsequent to the close of fiscal 1998, on August 18, 1998, the Group
declared a four-for-three (33.3%) stock split on common stock held by
registered shareholders as of September 30, 1998. The stock split will be
distributed on October 15, 1998. The pro-forma effect of this stock split on
income per common share is disclosed in the Consolidated Statements of
Income. The pro-forma information on common stock issued and outstanding and
related stockholders' equity accounts after the stock split is as follows:
(IN THOUSANDS)
---------------
COMMON STOCK SHARES ISSUED AND
OUTSTANDING 13,393
--------
COMMON STOCK $ 13,393
--------
ADDITIONAL PAID-IN CAPITAL 24,017
--------
STOCKHOLDERS' EQUITY $107,030
--------
NOTE 20 - ORIENTAL FINANCIAL GROUP INC, (HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:
The principal source of income for the Group consists of dividends from the
Bank. As a member subject to the regulations of the Federal Reserve Board,
the Group must obtain approval from the Federal Reserve Board for any
dividend if the total of all dividends declared by it in any calendar year
would exceed the total of its consolidated net profits for the year, as
defined by the Federal Reserve Board, combined with its retained net profits
for the two preceding years. The payment of dividends by the Bank to the
Group may also be affected by other regulatory requirements and policies,
such as the maintenance of certain regulatory capital levels.
The following condensed financial information presents the financial position
of the Holding Company only as of June 30, 1998 and 1997 and the results of
its operations and its cash flows for the year ended June 30, 1998 and for
the five-month period since the reorganization on January 24, 1997 to June
30, 1997.
51
STATEMENT OF FINANCIAL POSITION JUNE 30,
- --------------------------------------------------------------------------------------------------------
1998 1997
--------- ----------
ASSETS
Cash $ 224 $ 1,319
Investment securities available-for-sale, at fair value 9,438
Investment in Oriental Bank and Trust (OBT), at equity 108,454 88,884
Other assets 417 541
-------- ---------
TOTAL ASSETS $118,533 $ 90,744
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase $ 9,100 $ -
Dividend payable 1,326 1,080
Advances from subsidiaries 848 158
Accrued expenses and other liabilities 229 112
Stockholders' equity 107,030 89,394
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,533 $ 90,744
-------- ---------
YEAR FIVE MONTHS
STATEMENT OF INCOME ENDED ENDED
- --------------------------------------------------------------------------------------------------------
1998 1997
-------- ---------
INCOME:
Interest income $ 103 $ -
Dividends from Bank 5,442 2,968
-------- ---------
TOTAL INCOME 5,545 2,968
-------- ---------
EXPENSES:
Interest expenses 98 -
Operating expenses 245 31
-------- ---------
TOTAL EXPENSES 343 31
-------- ---------
-------- ---------
INCOME BEFORE INCOME TAXES 5,202 2,937
Income taxes - -
-------- ---------
NET INCOME BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES $ 5,202 $ 2,937
-------- ---------
-------- ---------
Equity in earnings of subsidiary 16,208 4,848
-------- ---------
NET INCOME $ 21,410 $ 7,785
-------- ---------
YEAR FIVE MONTHS
STATEMENT OF CASH FLOWS ENDED ENDED
- --------------------------------------------------------------------------------------------------------
1998 1997
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 21,410 $ 7,785
-------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in earnings of subsidiary (16,208) (4,848)
Dividends received from subsidiary 5,195 1,310
Decrease (increase) in other assets 124 (541)
Increase in accrued expenses and liabilities 117 112
-------- ---------
TOTAL ADJUSTMENTS (10,772) (3,967)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,638 3,818
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale (9,438) -
-------- ---------
(9,438) -
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in securities sold under agreements to repurchase 9,100 -
Proceeds from exercise of stock options 789 356
Net (payments) advances from subsidiaries (2,626) 291
Purchases of treasury stock (4,363) (1,836)
Dividends paid (5,195) (1,310)
-------- ---------
NET CASH USED BY FINANCING ACTIVITIES (2,295) (2,499)
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS (1,095) 1,319
Cash and cash equivalents at beginning of period 1,319 -
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 224 $ 1,319
-------- ---------
-------- ---------
52
NOTE 21 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following quarterly financial information is unaudited. However, in the
opinion of management, all adjustments necessary to present fairly the results
of operations of such periods, are reflected therein:
(IN THOUSANDS, EXCEPT PER SHARES AMOUNTS) 30-SEP 31-DEC 31-MAR 30-JUN TOTAL
- ----------------------------------------- ----------- ---------- ---------- ----------- ------------
FISCAL 1998
INTEREST INCOME $ 23,454 $ 24,877 $ 26,079 $ 27,170 $ 101,580
INTEREST EXPENSE 13,569 14,385 14,799 15,386 58,139
--------- --------- --------- --------- ----------
NET INTEREST INCOME 9,885 10,492 11,280 11,784 43,441
PROVISION FOR LOAN LOSSES 1,300 3,700 1,900 2,645 9,545
NON-INTEREST INCOME 5,110 6,808 4,443 6,284 22,645
NON-INTEREST EXPENSES 7,790 7,527 7,560 8,404 31,281
INCOME TAXES 968 857 825 1,200 3,850
--------- --------- --------- --------- ----------
NET INCOME $ 4,937 $ 5,216 $ 5,438 $ 5,819 $ 21,410
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
INCOME PER COMMON SHARE:
BASIC $ 0.50 $ 0.52 $ 0.55 $ 0.58 $ 2.15
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
DILUTED $ 0.47 $ 0.51 $ 0.53 $ 0.57 $ 2.08
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
FISCAL 1997
INTEREST INCOME $ 19,317 $ 20,158 $ 21,164 $ 21,990 $ 82,629
INTEREST EXPENSE 10,401 11,010 11,484 12,203 45,098
--------- --------- --------- --------- ----------
NET INTEREST INCOME 8,916 9,148 9,680 9,787 37,531
PROVISION FOR LOAN LOSSES 900 1,200 1,300 1,500 4,900
NON-INTEREST INCOME 3,675 4,111 4,542 5,024 17,352
NON-INTEREST EXPENSES 6,531 6,787 7,356 7,824 28,498
ONE-TIME SAIF RECAPITALIZATION ADJUSTMENT 1,823 - - - 1,823
INCOME TAXES 485 875 961 779 3,100
--------- --------- --------- --------- ----------
NET INCOME $ 2,852 $ 4,397 $ 4,605 $ 4,708 $ 16,562
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
INCOME PER COMMON SHARE:
BASIC $ 0.28 $ 0.44 $ 0.47 $ 0.48 $ 1.67
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
DILUTED $ 0.27 $ 0.43 $ 0.45 $ 0.46 $ 1.61
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
FISCAL 1996
INTEREST INCOME $ 16,426 $ 17,416 $ 17,853 $ 18,752 $ 70,447
INTEREST EXPENSE 8,923 9,426 9,508 9,837 37,694
--------- --------- --------- --------- ----------
NET INTEREST INCOME 7,503 7,990 8,345 8,915 32,753
PROVISION FOR LOAN LOSSES 700 2,000 850 1,050 4,600
NON-INTEREST INCOME 3,022 4,441 3,487 3,812 14,762
NON-INTEREST EXPENSES 5,728 5,979 6,208 6,693 24,608
INCOME TAXES 775 873 963 960 3,571
--------- --------- --------- --------- ----------
NET INCOME $ 3,322 $ 3,579 $ 3,811 $ 4,024 $ 14,736
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
INCOME PER COMMON SHARE:
BASIC $ 0.33 $ 0.35 $ 0.38 $ 0.41 $ 1.47
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
DILUTED $ 0.32 $ 0.34 $ 0.37 $ 0.38 $ 1.41
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
53