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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 st