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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, 1999
Commission File No. 001-12647
ORIENTAL FINANCIAL GROUP INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
268 Munoz Rivera Avenue
501 Hato Rey Tower
Hato Rey, Puerto Rico 00918
Telephone Number: (787) 766-1986
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Non-cumulative Monthly Income Preferred Stock,
Series A (Liquidation value of $25.00 per share)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ---
Indicate by check mark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K .
----
The aggregate market value of registrant's common stock held by
non-affiliates is $242,912,714, based on the closing price of August 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Group's Annual Report to Shareholders for the fiscal year
ended June 30, 1999 are incorporated herein by reference in response to
Item 1 of Part I, Items 5 to 8 of Part II and Item 14 of Part IV.
2. Portions of the Group's Definitive Proxy Statement relating to the 1999
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 Management 9
Item - 13 Certain Relationships and Related Transactions 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
Puerto Rico ("Puerto Rico"). Oriental 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 nineteen branches located throughout the island. The Bank was
incorporated in 1964 as a federal mutual savings and loan association, it
became a federal mutual savings bank in July 1983 and converted to a federal
stock savings bank in April 1987. Its conversion from a federally-chartered
savings bank to a commercial bank chartered under the banking laws of 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 Puerto Rico. Its main regulators are the Commissioner of
Financial Institutions of Puerto Rico (the "Commissioner") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Bank's deposits are insured
up to $100,000 per depositor by the Savings Association Insurance Fund (the
"SAIF"), which is administered by the FDIC. The Bank is further subject to
the regulation of the Puerto Rico Finance Board ("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" below).
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 15 of the of the Group's
Annual Report to Shareholders for the year ended June 30, 1999, 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 of 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, subject to certain requirements established by the
Federal Reserve Board. The federal and state banking laws and regulations
that 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 also to commit to support 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 agencies 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 default is likely to occur in the absence of
regulatory assistance. 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
banking laws of Puerto Rico, the Federal Deposit Insurance Act and FDIC
regulations. In general terms, the banking laws of Puerto Rico provide 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 banking laws of Puerto Rico provide
that until said capital has been restored to its original amount and the
reserve fund has been restored 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 a bank is undercapitalized, the bank has failed to pay
insurance assessments, or when there are safety and soundness concerns.
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 authorities, a depository institution 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 authorities may require, after notice
and hearing, that a 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 Improvement 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 system serves 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. For this purpose,
such obligations 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, federal banking regulators must take prompt corrective action
with respect to depository institutions that do not meet minimum capital
requirements. FDICIA and regulations promulgated thereunder established five
capital tiers: (i) "well capitalized" for depository institutions that have a
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" for depository institutions that have 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" for depository institutions that have
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" for depository institutions that have 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" for depository institutions that have 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, 1999, the Group is a "well-capitalized"
institution.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividends) 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. Federal
banking regulatory 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 a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements
to reduce total assets, and cessation of receipt of deposits from
corresponding banks. Critically undercapitalized depository institutions are
subject to appointment of a receiver or conservator.
INSURANCE OF ACCOUNTS AND FDIC INSURANCE ASSESSMENTS
The Bank's deposits accounts are insured up to the applicable limits by the
SAIF 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 violates 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 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.
The Deposit Insurance Funds Act of 1996 ("DIFA") repealed the statutory
minimum premium assessed on deposits by both the Bank Insurance Fund (BIF)
and SAIF. Premiums on deposits are now 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 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 "grandfather" provision permitting inclusion of
certain existing intangibles.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 Capital to quarterly average assets) guidelines for bank holding
companies and member banks. These guidelines provide for a minimum leverage
ratio of 3% for bank holding companies and member banks that meet certain
specified criteria, including that they have the highest regulatory rating.
All other bank holding companies and member banks are required to maintain a
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions are expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a "tangible
Tier 1 leverage ratio" and other indicia of capital strength in evaluating
proposals for expansion or new activities.
Failure to meet the capital guidelines could subject an institution to
variety of enforcement remedies, including the termination of deposit
insurance by the FDIC, and certain restrictions on its business. As of June
30, 1999, the Group was in compliance with all capital requirements,
exceeding those of a "well-capitalized" institution.
Relevant information concerning the Group's capital and regulatory capital
ratios as of June 30, 1999 is set forth in pages 51 and 52 of the
consolidated financial statements (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
regulatory 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 other federal banking regulatory 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 ACT
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 Act"). The Banking Act 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 a
bank and its affairs. In addition, the Commissioner is given extensive
rulemaking power and administrative discretion under the Banking Act. The
Commissioner generally examines the Bank at least once every year.
The Banking Act 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 Act also provides that when the expenditures of a bank are
greater that the receipts, the excess 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 has been restored to 20% of the original capital.
The Banking Act 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 Act 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 Act, 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 Act generally restricts the amount the Bank can lend to one
borrower to an amount that may not exceed 15% of the Bank's paid-in capital
and reserve fund. The Bank also may 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, 1999, the maximum amount that the Bank could have loaned to
one borrower was approximately $4.9 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 are 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 is composed of the Commissioner, the President of
the Government Development Bank for Puerto Rico, the President of the Puerto
Rico Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and
Consumer Affairs and three public interest representatives, have the
authority to regulate the maximum interest rates and finance charges that may
be charged on loans to individuals and unincorporated businesses in the
Commonwealth. The Finance Board promulgates regulations which specify maximum
rates on various types of loans to individuals.
The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses
(including real estate development loans but excluding certain other personal
and commercial loans secured by mortgages on real estate property) is to be
determined by free market competition. The Finance Board also has the
authority to regulate maximum finance charges on retail installment sales
contracts and 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, 1999 the Group has 373 employees. None of the employees are
represented by a collective bargaining group or subject to a collective
bargaining agreement. The Group believes that its employee relations to be
good. For information about the Group's employee benefit plans refer to Note
11 of the Group's consolidated financial statements (see Financial Data Index
herein).
-7-
ITEM 2 - PROPERTIES
At June 30, 1999, the Bank owned 8 branch premises and other facilities
throughout Puerto Rico. In addition, as of such date, the Bank leased
properties for branch operations and main office in 11 locations in Puerto
Rico. The Bank's management 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, 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
as of June 30, 1999 was $5,541,000.
- - LAS CUMBRES BUILDING - two story structure located at 1990 Las Cumbres
Avenue, Rio Piedras, Puerto Rico. A branch, leasing and
mortgage originating departments are the main activities conducted at this
location. The book value of this property at June 30, 1999 was $1,641,000.
ITEM 3 - LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal
proceedings incidental to its business. The Group is vigorously contesting
such claims. Based upon a review by legal counsel and the development of
these matters to date, management is of the opinion that the ultimate
aggregate liability, if any, resulting from these claims will not have a
material adverse effect on the Group's financial position or the result of
operations.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART - II
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 1999 and
the previous two fiscal years, as well as cash dividends declared for the
last three fiscal years, is contained under Table 7 ("Capital, Dividends and
Stock Date") on page F-9 and under the "Stockholders' Equity" caption in the
Management Discussion and Analysis of Financial Condition and Results of
Operations ("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.
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. As
a result, approximately 3,385,000 shares of common stock were 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, approximately 2,012,000
shares of common stock were distributed on October 15, 1997.
As of August 30, 1999 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 $23.63 per share.
In May 1999, the Group issued 1,340,000 shares of its 7.125% Non-cumulative
Monthly Income Preferred Stock, Series A at $25 per share. As a result of
this issuance, the Group generated $32,300,000 in net proceeds for general
corporate purposes. The Series A Preferred Stock has the following
characteristics:
- - Annual dividends of $1.78125 per share payable monthly, if declared by the
board of directors. Missed dividends are not cumulative.
- - Redeemable at the Group's option beginning on May 30, 2004.
- - No mandatory redemption or stated maturity date.
- - Has a liquidation value of $25 per share.
-8-
The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes
a withholding tax of 10% on the amount of any dividends paid by corporations
to individuals, whether residents of Puerto Rico or not, trusts, estates, and
special partnerships. If the recipient is foreign corporation or partnership
not engaged in trade or business in Puerto Rico the rate of withholding is
also 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.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item appears on pages F-1 and F-13 of the MD&A
(see Financial Data Index herein) and is incorporated herein by reference.
The ratios shown below demonstrate the Group's ability to generate sufficient
earnings to pay the fixed charges of its debt and preferred stock dividends.
The Group's ratio of earnings to fixed charges on a consolidated basis for
each of the last five years is as follows:
YEAR ENDED JUNE 30,
------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES: 1999 1998 1997 1996 1995
- ----------------------------------- ------------------------------------------------------------
Excluding Interest on Deposits 1.83 1.78 1.81 1.89 1.79
------------------------------------------------------------
Including Interest on Deposits 1.46 1.43 1.43 1.48 1.49
------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES AND
- --------------------------------------
PREFERRED STOCK DIVIDENDS
- -------------------------
Excluding Interest on Deposits 1.68 1.62 1.60 1.64 1.54
------------------------------------------------------------
Including Interest on Deposits 1.39 1.36 1.34 1.37 1.35
------------------------------------------------------------
For purposes of computing these consolidated ratios, earnings represent
income before taxes, plus fixed charges. Fixed charges represent all interest
expense (ratios are presented both excluding and including interest in
deposits), amortization of debt costs, and the portion of net rental expense
which is deemed representative of interest factor.
Only in fiscal 1999 the Group had preferred stock issued and outstanding,
$33,500,000 or 1,340,000 shares at a $25 liquidation value.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item appears on pages F-1 through F-14 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 F-12
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 F-15 through F-38 in
the consolidated financial statements, and is incorporated herein by
reference. The financial data index in page 13 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.
-9-
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 (the "Proxy Statement"), filed with Securities Exchange Commission on
September 24, 1999, and 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 13 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.
B - CURRENT REPORTS ON FORM 8-K
During the last quarter of fiscal 1999 two Current Reports on Form 8-K (the
"Reports") related to the sale of 7.125% Noncumulative Monthly Income
Preferred Stock, Series A were filed. These Reports were filed with
Securities and Exchange Commission on April 8, 1999 and May 5,
1999, respectively, and are incorporated herein by reference.
C - EXHIBITS
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's 1988 Stock Option Plan *
10.3 Bank's 1996 Stock Option Plan **
10.4 Group's 1998 Stock Option Plan ***
13.0 Registrant's Annual Report to Shareholders for fiscal year ending E -1 to E-17 ****
June 30, 1999
21.0 List of Subsidiaries E-18
23.0 Consent of Independent Accountants E-20
27.0 Financial Data Schedule E-19
-10-
* - 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 Stockholders 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 Stockholders filed by the Registrant
on September 29, 1998.
**** - Those pages of the Group Annual Report to Shareholders for the fiscal
year ending June 30, 1999 (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 of 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).
-11-
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
(Principal Executive and Financial Officer) Dated: September 20, 1999
------------------
By: S/RAFAEL VALLADARES
-----------------------
Rafael Valladares
Senior Vice President - Comptroller
(Principal Financial Officer) Dated: September 20, 1999
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dated indicated.
By: S/JOSE E. FERNANDEZ
-----------------------
Jose E. Fernandez
Chairman of the Board, President and Chief Executive Officer Dated: September 20, 1999
------------------
By: S/PABLO I. ALTIERI
-----------------------
Dr. Pablo I. Altieri
Director Dated: September 20, 1999
------------------
By: S/DIEGO PERDOMO
-----------------------
Diego Perdomo
Director Dated: September 20, 1999
------------------
By: S/EFRAIN ARCHILLA
-----------------------
Efrain Archilla
Director Dated: September 20, 1999
------------------
By: S/JULIAN INCLAN
-----------------------
Julian Inclan
Director Dated: September 20, 1999
------------------
By: S/EMILIO RODRIGUEZ, JR.
-----------------------
Emilio Rodriguez, Jr.
Director Dated: September 20, 1999
------------------
By: S/ALBERTO RICHA
-----------------------
Alberto Richa
Director Dated: September 20, 1999
------------------
By: S/FERNANDO ARRIVI
-----------------------
Fernando Arrivi
Director Dated: September 20, 1999
------------------
By: S/MARI CARMEN APONTE
-----------------------
Mari Carmen Aponte
Director Dated: September 20, 1999
------------------
-12-
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 F-1 to F-14
Selected Financial Data F-1
Quantitative and Qualitative Disclosures About Market Risk F-12
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Report of Independent Accountants *
Consolidated Statements of Financial Condition as of June 30, 1999 and 1998 F-15
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 1999 F-16
Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income for each of the
years in the three-year period ended June 30, 1999 F-17
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 1999 F-18
Notes to the Consolidated Financial Statements F-19 to F-38
- - The Group was given an unqualified opinion for the fiscal year ended June
30, 1999 by its independent accountant (PricewaterhouseCoopers LLP) on an
independent's accountant report signed on August 6, 1999. A copy of the
independent accountant unqualified opinion appears on page 31 of the
Group's Annual Report for the year ended June 30, 1999.
-13-
SELECTED FINANCIAL DATA
YEARS ENDED ON JUNE, 30
(IN THOUSANDS, EXCEPT FOR PER SHARE RESULTS)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
EARNINGS AND DIVIDENDS DECLARED:
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $ 113,775 $ 101,307 $ 82,629 $ 70,447 $ 58,143
Interest expense 64,840 58,139 45,098 37,694 30,423
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME 48,935 43,168 37,531 32,753 27,720
Recurring non-interest income 18,923 17,005 14,421 11,527 10,222
Non recurring non-interest income 10,276 5,365 2,578 2,801 1,210
Recurring non-interest expenses 32,633 30,333 28,138 24,174 21,590
Non recurring non-interest expenses 340 400 1,830 - -
Provision for loan losses 15,095 9,545 4,900 4,600 2,550
Provision for income taxes 3,418 3,850 3,100 3,571 2,905
----------- ----------- ----------- ----------- -----------
NET INCOME 26,648 21,410 16,562 14,736 12,107
Less: dividends on preferred stock (350) - - - -
----------- ----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 26,298 $ 21,410 $ 16,562 $ 14,736 $ 12,107
----------- ----------- ----------- ----------- -----------
Dividends declared $ 7,369 $ 5,442 $ 4,369 $ 3,184 $ 1,709
----------- ----------- ----------- ----------- -----------
Dividends declared per share $ 0.563 $ 0.413 $ 0.330 $ 0.225 $ 0.135
----------- ----------- ----------- ----------- -----------
PER SHARE INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Basic $ 2.02 $ 1.62 $ 1.25 $ 1.11 $ 0.95
----------- ----------- ----------- ----------- -----------
Diluted $ 1.97 $ 1.57 $ 1.21 $ 1.06 $ 0.89
----------- ----------- ----------- ----------- -----------
Book value $ 7.05 $ 8.09 $ 6.72 $ 6.03 $ 5.23
----------- ----------- ----------- ----------- -----------
Market price at end of period $ 24.13 $ 27.66 $ 16.95 $ 9.50 $ 7.61
----------- ----------- ----------- ----------- -----------
Average shares and equivalents 13,386 13,696 13,676 13,912 13,614
----------- ----------- ----------- ----------- -----------
PERIOD END BALANCES (JUNE 30,):
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL ASSETS
Trust assets managed $ 1,380,200 $ 1,310,000 $ 1,088,600 $ 874,500 $ 699,000
Broker-dealer assets gathered 885,800 741,400 524,900 293,100 195,400
----------- ----------- ----------- ----------- -----------
ASSETS MANAGED 2,266,000 2,051,400 1,613,500 1,167,600 894,400
Bank total assets 1,587,300 1,313,300 1,068,600 877,400 744,400
----------- ----------- ----------- ----------- -----------
$ 3,853,300 $ 3,364,700 $ 2,682,100 $ 2,045,000 $ 1,638,800
=========== =========== =========== =========== ===========
INTEREST-EARNING ASSETS
Investments and securities $ 946,529 $ 706,652 $ 468,594 $ 350,736 $ 290,106
Loans and loans held-for-sale 574,316 547,354 532,970 476,110 409,391
----------- ----------- ----------- ----------- -----------
$ 1,520,845 $ 1,254,006 $ 1,001,564 $ 826,846 $ 699,497
=========== =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES
Deposits $ 656,988 $ 571,432 $ 497,542 $ 382,557 $ 313,542
Repurchase agreements 596,226 416,171 247,915 242,335 195,337
Borrowings 174,900 189,388 204,816 145,466 137,472
----------- ----------- ----------- ----------- -----------
$ 1,428,114 $ 1,176,991 $ 950,273 $ 770,358 $ 646,351
=========== =========== =========== =========== ===========
CAPITAL AND RELATED REGULATORY RATIOS
Stockholders' equity $ 124,032 $ 107,030 $ 89,394 $ 79,903 $ 69,705
----------- ----------- ----------- ----------- -----------
Leverage capital 8.78% 7.70% 8.17% 8.71% 8.89%
----------- ----------- ----------- ----------- -----------
Total risk-based capital 24.02% 20.45% 17.53% 18.07% 17.00%
----------- ----------- ----------- ----------- -----------
Tier 1 risk-based capital 25.28% 21.68% 18.66% 19.14% 17.73%
----------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL RATIOS (IN PERCENT):
- ---------------------------------------------------------------------------------------------------------------------------------
Return on average assets (ROA) 1.84% 1.74% 1.84% 1.82% 1.77%
----------- ----------- ----------- ----------- -----------
Return on average common equity (ROE) 24.36% 21.24% 21.17% 19.30% 19.05%
----------- ----------- ----------- ----------- -----------
Efficiency ratio 48.09% 50.27% 52.76% 53.43% 59.65%
----------- ----------- ----------- ----------- -----------
Expense ratio 1.01% 1.13% 1.34% 1.52% 1.61%
----------- ----------- ----------- ----------- -----------
Interest rate spread 3.37% 3.54% 3.88% 4.03% 4.04%
----------- ----------- ----------- ----------- -----------
Dividend payout ratio 28.02% 25.42% 24.40% 21.60% 14.12%
----------- ----------- ----------- ----------- -----------
OTHER INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Number of banking offices 19 17 16 16 15
----------- ----------- ----------- ----------- -----------
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF FINANCIAL PERFORMANCE
Oriental extended its string of record earnings to 10 years by posting diluted
earnings per share of $1.97 for fiscal year 1999, which is up 25% from $1.57 in
fiscal 1998. The Group's fiscal 1999 double-digit growth was principally due to
the record volume of mortgage originations, sound performance by the brokerage
and trust divisions, continued effective management of interest rate risk and a
tight control over operating expenses. Net income available to common
shareholders increased to $26.3 million, up 23% from $21.4 million in fiscal
1998. The Group's profitability ratios for 1999 represented returns of 1.84% on
assets (ROA) and 24.36% on common stockholders' equity (ROE), compared with an
ROA and ROE of 1.74% and 21.24%, respectively, in fiscal 1998.
Financial assets, which include the Group's assets and assets managed by the
trust and brokerage business, reached $3.9 billion at the end of fiscal 1999,
up 15% from $3.4 billion at the end of fiscal 1998. At June 30, 1999, the
Group's assets reached $1.587 billion from $1.313 billion a year ago, an
increase of 21%. Assets managed by the trust grew 5% to $1.380 billion versus
$1.310 billion a year ago, and assets gathered by the broker-dealer increased
19% to $885.8 million from $741.4 million the year before.
Different components that impacted the Group's performance are discussed in
detail in the following pages. In addition, the selected financial data table on
page F-1 provides relevant operational ratios and information for the last five
years.
RESULT OF OPERATIONS
As a diversified financial services provider, the Group's earnings depend not
only on the net interest income generated from its banking activity, but also
from fees and other non-interest income generated from the wide array of
financial services offered. Net interest income, the Group's main source of
earnings, is affected by the difference between rates of interest earned on the
Group's interest-earning assets and rates paid on its interest-bearing
liabilities (interest rate spread) and the relative amounts of its
interest-earning assets and interest-bearing liabilities (interest rate margin).
As further discussed in the Risk Management section, the Group constantly
monitors the composition and repricing of its assets and liabilities to maintain
its net interest income at adequate levels and to avoid undertaking highly
sensitive positions that could affect its earnings capacity in a volatile
interest rate environment. Non-interest income, the second largest source of
earnings, is affected by the level of trust assets under management,
transactions generated by gathering of financial assets by the broker-dealer
subsidiary, the level of mortgage banking activities, and fees generated from
loans and deposit accounts.
NET INTEREST INCOME
For fiscal 1999, the Group's net interest income rose 13% to $48.9 million from
$43.2 million in fiscal 1998 while the interest rate spread narrowed 17 basis
points to 3.37% from 3.54% in fiscal 1998. This growth in net interest income
was propelled by a larger volume of interest-earning assets and a modest
reduction in the Group's cost of funds. Table 1 analyzes the major categories of
interest-earning assets and interest-bearing liabilities, their respective
interest income, expenses, yields and costs, and their impact on net interest
income due to changes in volume and rates.
The Group's interest income for fiscal 1999 totaled $113.8 million, up 12% from
the $101.3 million posted in fiscal 1998. This increase in interest income was
driven by a favorable volume variance of $15.9 million due to a larger average
volume of interest-earning assets, partially offset by a unfavorable rate
variance of $3.4 million attributed to a decline in the yield performance of
interest-earning assets.
Average interest-earning assets for fiscal 1999 reached $1.359 billion, an
increase of 19% compared with $1.142 billion in fiscal 1998. This volume
increase was fueled by a solid growth in the Group's investment portfolio,
mainly mortgage-backed securities and collateralized mortgage obligations, as
Oriental continued to replace residential real estate loans sold in the
secondary market with tax-advantaged investment securities.
In fiscal 1999, the average yield on interest-earning assets was 8.37%, 50 basis
points lower than the 8.87% attained in fiscal 1998. There were two main reasons
for the yield erosion experienced in fiscal 1999. First, the strong expansion of
Group's investment portfolio, which carries a lower yield than the loan
portfolio but generates a significant amount of tax-exempt interest. Another
factor was the compression of the investment portfolio yield, which decreased by
37 basis points to 6.47% from 6.84% attained in fiscal 1998. The decline in the
portfolio's yield stemmed from a lower interest rate scenario and the high level
of high coupon mortgage-backed securities refinancing activity experienced in
fiscal 1999.
Interest expense for fiscal 1999 rose 11.5% or $6.7 million to $64.8 million
from $58.1 million reported in fiscal 1998. The principal reason for the
increase was the larger base of interest-bearing liabilities used to fund the
Group's interest-earning assets growth. This volume effect of $10.1 million was
partially tempered by a favorable rate variance of $3.4 million due to a lower
average cost of funds. Average interest-bearing liabilities for fiscal 1999
reached $1.297 billion, up 19% from the $1.091 billion a year ago. A larger
volume of repurchase agreements and deposits, mainly time deposits and IRA
accounts, drove this increase. These increases were used primarily to fund the
Group's investment portfolio growth and to repurchase common shares.
F-2
TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------------------
INTEREST AVERAGE RATE
------------------------------------------ -------------------------------
1999 1998 1997 1999 1998 1997
------------------------------------------ -------------------------------
LOANS:
Real estate $ 29,412 $ 27,292 $ 24,591 9.80% 9.74% 9.86%
Consumer 17,092 13,322 8,792 13.75% 13.95% 13.30%
Commercial and auto loans 1,325 1,939 2,812 10.34% 10.42% 11.01%
Financing leases 13,800 17,828 18,575 11.91% 11.91% 11.85%
------------------------------------------ -------------------------------
61,629 60,381 54,770 11.14% 11.10% 11.00%
========================================== ===============================
INVESTMENTS:
Mortgage-backed securities and CMO's 36,874 23,874 17,138 6.52% 7.00% 7.12%
US and PR Government investment securities 14,014 15,863 9,642 6.42% 6.68% 7.16%
FHLB stock and other investments 1,258 1,189 1,079 5.78% 6.01% 4.79%
------------------------------------------ -------------------------------
52,146 40,926 27,859 6.47% 6.84% 7.00%
------------------------------------------ -------------------------------
$ 113,775 $ 101,307 $ 82,629 8.37% 8.87% 9.22%
========================================== ===============================
DEPOSITS:
Savings and demand $ 2,920 $ 2,781 $ 2,455 2.22% 2.64% 2.61%
Time and IRA accounts 25,930 23,416 18,557 5.36% 5.54% 5.51%
------------------------------------------ -------------------------------
28,850 26,197 21,012 4.68% 4.96% 4.88%
------------------------------------------ -------------------------------
BORROWINGS:
Repurchase agreements 25,923 19,216 11,340 5.08% 5.37% 5.04%
FHLB funds 3,555 5,300 3,625 5.69% 5.87% 5.86%
Term notes and other sources of funds 5,314 6,101 6,849 4.88% 5.31% 5.32%
Interest rate risk management 1,198 1,325 2,272 0.18% 0.24% 0.55%
------------------------------------------ -------------------------------
35,990 31,942 24,086 5.28% 5.67% 5.82%
========================================== ===============================
$ 64,840 $ 58,139 $ 45,098 5.00% 5.33% 5.34%
========================================== ===============================
NET INTEREST INCOME $ 48,935 $ 43,168 $ 37,531 3.37% 3.54% 3.88%
========================================== ===============================
INTEREST RATE MARGIN 3.60% 3.78% 4.18%
===============================
EXCESS OF INTEREST-EARNING ASSETS
OVER INTEREST-BEARING LIABILITIES
INTEREST-EARNING ASSETS OVER
INTEREST-BEARING LIABILITIES RATIO
(DOLLARS IN THOUSANDS)
----------------------------------------
AVERAGE BALANCE
----------------------------------------
1999 1998 1997
----------------------------------------
LOANS:
Real estate $ 300,127 $ 280,160 $ 249,364
Consumer 124,316 95,510 66,103
Commercial and auto loans 12,812 18,607 25,539
Financing leases 115,867 149,678 156,769
----------------------------------------
553,122 543,955 497,775
----------------------------------------
INVESTMENTS:
Mortgage-backed securities and CMO's 565,904 341,018 240,828
US and PR Government investment securities 218,130 237,416 134,697
FHLB stock and other investments 21,760 19,801 22,526
----------------------------------------
805,794 598,235 398,051
----------------------------------------
$1,358,916 $1,142,190 $ 895,826
========================================
DEPOSITS:
Savings and demand $ 131,791 $ 105,523 $ 93,945
Time and IRA accounts 484,154 422,681 337,021
----------------------------------------
615,945 528,204 430,966
----------------------------------------
BORROWINGS:
Repurchase agreements 510,049 357,800 225,182
FHLB funds 62,463 90,345 61,822
Term notes and other sources of funds 108,941 114,995 126,985
Interest rate risk management - - -
----------------------------------------
681,453 563,140 413,989
========================================
$1,297,398 $1,091,344 $ 844,955
========================================
NET INTEREST INCOME
INTEREST RATE MARGIN
EXCESS OF INTEREST-EARNING ASSETS
OVER INTEREST-BEARING LIABILITIES $ 61,518 $ 50,846 $ 50,871
========================================
INTEREST-EARNING ASSETS OVER
INTEREST-BEARING LIABILITIES RATIO 104.74% 104.66% 106.02%
----------------------------------------
FISCAL 1999 VS 1998
-----------------------------------------------
BASIS
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS
- --------------------------------------------------------------------------------------
INTEREST INCOME:
Loans (1) (2) $ 1,332 $ (84) $ 1,248 0.04%
Investments 14,572 (3,352) 11,220 -0.37%
-----------------------------------------------
$ 15,904 $ (3,436) $ 12,468 -0.50%
===============================================
INTEREST EXPENSE:
Deposits $ 4,098 $ (1,445) $ 2,653 -0.28%
Borrowings 6,009 (1,961) 4,048 -0.39%
-----------------------------------------------
10,107 (3,406) 6,701 -0.33%
===============================================
NET INTEREST INCOME $ 5,797 $ (30) $ 5,767 -0.17%
===============================================
FISCAL 1999 VS 1998
-----------------------------------------------
BASIS
CHANGES IN NET INTEREST INCOME DUE TO: VOLUME RATE TOTAL POINTS
- --------------------------------------------------------------------------------------
INTEREST INCOME:
Loans (1) (2) $ 5,384 $ 227 $ 5,611 0.10%
Investments 14,352 (1,285) 13,067 -0.15%
-----------------------------------------------
$ 19,737 $ (1,059) $ 18,678 -0.35%
===============================================
INTEREST EXPENSE:
Deposits $ 5,021 $ 164 $ 5,185 0.08%
Borrowings 8,169 (313) 7,856 -0.15%
-----------------------------------------------
13,190 (149) 13,041 -0.01%
-----------------------------------------------
Net Interest Income $ 6,547 $ (910) $ 5,637 -0.34%
===============================================
(1) - Loans averages exclude non-performing loans.
(2) - Real-estate averages include loans held-for-sale.
F-3
The average cost of funds on interest-bearing liabilities for fiscal 1999 was
5.00%, 33 basis points lower than the 5.33% attained in fiscal 1998. This
decrease was principally related to a decline in the cost of repurchase
agreements, time deposits, IRA accounts and term notes; enhanced by a reduction
in the cost of interest-hedging activities (swaps and caps). A favorable lower
interest rate scenario resulting from short-term interest rate cuts by the
Federal Reserve triggered the overall reduction in cost of funds.
NON-INTEREST INCOME
In fiscal 1999, non-interest revenues continued to be a catalyst of the Group's
earnings performance as recurring non-interest income totaled $18.9 million, up
11% versus the $17 million in fiscal 1998. Higher trust, brokerage and money
management revenues drove this improvement (see Table 2).
Trust, money management and brokerage fees, the principal component of recurring
non-interest income, reflected strong results during fiscal 1999. These fees
totaled $10.2 million in fiscal 1999, up 21% versus the $8.4 million in fiscal
1998. This increase was related to a larger volume of accounts and assets
managed by both the Group's trust department and the broker-dealer subsidiary
(see "Financial Condition" section).
Fees generated by mortgage banking activities for fiscal 1999 amounted to $4.4
million, 3% lower than the $4.5 million earned in fiscal 1998. The net decrease
experienced during the past year was mainly due to losses the Group incurred on
the sale of mortgage loans during the last quarter of fiscal 1999. These losses
reflect management's decision to sell a large group of real estate loans with a
5.50% yield, which was hindering the loans portfolio yield performance, to
improve the Group's yield performance and interest rate risk exposure. The lower
amount of gains realized from sale of mortgage loans was partially offset by 43%
increase in servicing rights sold. This reflects the larger volume of mortgage
loans originated and subsequently sold in fiscal 1999.
Bank services fees and other operating revenues, which consist primarily of fees
on deposit accounts, leasing fees, and bank service charges and commissions,
totaled $4.3 million in fiscal 1999, a 5% hike versus the $4.1 million reported
in fiscal 1998. This improvement was driven by a 24% or $379,000 rise in bank
service charges and commissions.
For fiscal 1999, securities and trading gains amounted to $10.3 million versus
1.9 million reported in the same period a year ago. As a result of the favorable
market opportunities, during the second and third quarters of fiscal 1999 the
Group sold a significant quantity of investment securities as part of its
asset/liability management. The gains realized resulted from favorable market
conditions as interest rates declined during the latter part of 1998. For
further discussion of the Group's investment securities, see Note 2 of the
attached Consolidated Financial Statements.
During the second quarter of fiscal 1998, in a move to strengthen its future
earnings, the Group sold its mortgage loans servicing portfolio, including $550
million serviced for others. The Group recorded a net gain of $2.7 million on
this transaction. The divestiture of the mortgage servicing operation is
indicative of a wider strategy guiding the Group to concentrate on mortgage
origination, trust, money management, brokerage, personal loans and deposit
accounts with higher earnings potential. The lack of servicing income in
fiscal 1999 was directly related to this divestiture.
NON-INTEREST EXPENSES
As shown in Table 3, recurring non-interest expenses for fiscal 1999 increased
7.6% to $32.6 million from $30.3 million in fiscal 1998. Notwithstanding the
above increase, the efficiency and expense ratios for fiscal 1999 improved to
48.09% and 1.01%, respectively, from 50.27% and 1.13%, respectively, a year
earlier.
Employee compensation and benefits, the Group's largest expense category,
amounted to $15.1 million or 1.04 % of total average assets for fiscal 1999
versus $15.1 million or 1.22 % of total average assets in fiscal 1998. This lack
of growth results from the lower employment levels during the first months of
fiscal 1999 as result of the divestiture of the mortgage servicing department
and the reengineering of some of the Group's support departments. This favorable
variance was offset by merit salary increases and the higher commissions
and bonuses paid as result of the increased productivity experienced in fiscal
1999. Consequently, the average compensation per employee in fiscal 1999 rose 6%
to $41,300 from $38,800 in fiscal 1998. The composition of the Group's employee
compensation and benefits for the periods analyzed remained similar as variable
compensation represented about 40% of the total compensation (see Table 4).
Other recurring non-interest expenses for fiscal 1999 increased 15% to $17.6
million as compared to $15.3 million in fiscal 1998. This rise was led by
increases in professional and service fees, advertising and business
promotion and occupancy and equipment. The larger amount of professional and
service fees reflect the Group's higher expenditures related with consulting
and technical support. The advertising and promotion growth results mainly
from the ongoing campaign to promote the Group's image and the launching of
new products and services. The main contributors in the growth of occupancy
and equipment costs were increases in depreciation from leasehold
improvements and EDP equipment. This resulted from additional banking offices
opened during the past 18 months and the enhancements made to the Group's
systems to enable the expansion of its electronic delivery capability and
improve the customers' service delivery.
F-4
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
------------------------------------- ---------
1999 1998 INC./(DEC.) 1997
------------------------------------- ---------
TABLE 2 - NON-INTEREST INCOME SUMMARY
- ------------------------------------------------------------------------------------------------------------------
RECURRING NON-INTEREST INCOME:
Trust, money management and brokerage fees $10,211 $ 8,416 21.3% $ 6,960
Mortgage banking activities 4,371 4,485 -2.5% 2,297
Fees on deposit accounts 1,324 1,500 -11.7% 1,211
Bank service charges and commissions 1,941 1,562 24.3% 1,249
Leasing revenues 994 981 1.3% 2,502
Other operating revenues 82 61 34.4% 202
------- ------- ------- -------
18,923 17,005 11.3% 14,421
------- ------- ------- -------
NON RECURRING NON-INTEREST INCOME:
Securities and trading net activity 10,276 1,945 428.3% 903
Servicing income - 713 -100.0% 1,675
Net gain on sale of servicing assets - 2,707 -100.0% -
------- ------- ------- -------
10,276 5,365 91.5% 2,578
------- ------- ------- -------
TOTAL NON-INTEREST INCOME $29,199 $22,370 30.5% $16,999
======= ======= ======= =======
RECURRING NON-INTEREST INCOME TO NON-INTEREST EXPENSES RATIO 57.99% 56.06% 51.25%
------- ------- -------
TABLE 3 - NON-INTEREST EXPENSES SUMMARY
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Compensation and benefits $15,057 $15,071 -0.1% $14,867
Occupancy and equipment,net 5,345 4,151 28.8% 3,556
Advertising and business promotion 3,045 2,602 17.0% 2,085
Professional and service fees 2,144 1,393 53.9% 1,499
Communications 1,496 1,427 4.8% 1,283
Municipal and other general taxes 1,711 1,633 4.8% 974
Insurance, including deposits insurance 458 733 -37.5% 801
Printing, postage, stationery and supplies 738 724 1.9% 643
Real estate owned expenses 26 87 -70.1% 128
Other operating expenses 2,613 2,512 4.0% 2,302
------- ------- ------- -------
RECURRING NON-INTEREST EXPENSES 32,633 30,333 7.6% 28,138
Other non-recurring expenses 340 400 -15.0% 1,830
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSES $32,973 $30,733 7.3% $29,968
======= ======= ======= =======
RELEVANT RATIOS:
Efficiency ratio 48.09% 50.27% 52.76%
------- ------- -------
Expense ratio 1.01% 1.13% 1.34%
------- ------- -------
TABLE 4 - COMPENSATION AND BENEFITS SUMMARY
- ------------------------------------------------------------------------------------------------------------------
COMPENSATION AND BENEFITS:
Fixed $ 9,066 $ 9,134 -0.7% $ 9,180
Variable 5,991 5,937 0.9% 5,687
------- ------- ------- -------
$15,057 $15,071 -0.1% $14,867
======= ======= ======= =======
RELEVANT RATIOS:
Compensation and benefits to recurring non-interest expenses 46.1% 49.7% 52.8%
------- -------
Variable compensation to total compensation 39.8% 39.4% 38.3%
------- -------
Compensation to total average assets 1.04% 1.22% 1.53%
------- ------- -------
Average compensation per employee $ 41.3 $ 38.8 $ 36.9
------- ------- -------
Bank assets per employee $ 4,781 $ 3,785 $ 2,827
------- ------- -------
GROUP'S WORK FORCE:
Bank 332 347 378
Trust 29 23 33
Brokerage 12 10 10
------- ------- -------
373 380 421
------- ------- -------
F-5
PROVISION FOR LOAN LOSSES
The provision for loan losses in fiscal 1999 totaled $15.1 million, a $5.5
million increase from the $9.6 million reported in fiscal 1998. The provision
for loan losses for fiscal 1997 was $4.9 million. The increase in the
provision for fiscal 1999 was in response to the higher level of net
charge-offs and non-performing assets, and current and expected economic
conditions.
This increase in the provision boosted the Group's coverage ratio of reserve
to total loans to 1.54% from 1.03% a year ago. Please refer to the allowance
for loan losses and non-performing assets section for a more detailed
analysis of the allowances for loan losses, net charge-offs and credit
quality statistics.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal 1999 amounted to $3.4 million or
11.4% of pre-tax earnings compared with $3.9 million or 15.2% of pre-tax
earnings a year ago, down 11%. The reduction in fiscal 1999 was due to higher
amount of tax-exempt income generated by the Group's investment portfolio.
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.
FINANCIAL CONDITION
GROUP'S ASSETS
At the end of fiscal 1999, the Group's total assets amounted to $1.587
billion, an increase of 21% when compared to the $1.313 billion a year ago.
At the same date, interest-earning assets reached $1.521 billion, an increase
of $267 million or 21% versus the $1.254 billion a year earlier. This robust
assets growth reflects a significant increase in the investment portfolio of
$240 million or 34% (see Table 5).
Investments are Oriental's largest interest-earning assets component. It
consists mainly of money market investments, U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities, collateralized
mortgage obligations and P.R. Government municipal bonds. The investment
portfolio is of a high quality, approximately 98% is rated AAA at the end of
fiscal 1999 and generates a significant amount of tax-exempt interest which
lowers the Group's effective tax rate (see Table 5 and Note 2 of the attached
Consolidated Financial Statements).
The investment portfolio expansion was driven by a strong growth in
mortgage-backed securities and CMO's, which increased to $701 million or 74%
of the total portfolio from $403 million or 57% the year before, as Oriental
continued its strategy of pooling residential real estate loans into
mortgage-backed securities. However, investment securities decreased 28% to
$204 million or 22% of the total portfolio from $283 million or 40% a year
ago. This reduction reflects the significant quantity of U.S. Government
securities sold during fiscal 1999 as part of the Group's asset/liability
management. The investment securities sold were replaced with mortgage-backed
securities and CMO's that provide the Group with a higher yield and more
liquid position (see Table 5 for the Group's investments summary and
composition).
At June 30,1999, Oriental's loan portfolio, the second largest category of
the Bank's interest-earning assets, amounted to $574 million, 5% or $27
million higher than the $547 million a year ago. This growth was led by a
rise in the consumer loan portfolio of 18% or $20.4 million, followed by a
$46.1 million or 17% increase in the real estate portfolio. These were
partially offset by downsized leasing, commercial and auto loans portfolios
and an increase in the allowance for loan losses of $3.3 million or 59%.
Table 5 presents the Group's loan portfolio composition and mix at the end of
the periods analyzed.
The Bank's real estate loans portfolio amounted to $326 million or 56% of the
loan portfolio at June 30, 1999, a 17% increase compared to $280 million or
51% of the loan's portfolio the year before. The rise results from a sharp
growth in originations due to the lower interest rate environment that
increased the demand for mortgage loans to purchase homes as well as the
demand for refinancing existing mortgages.
At the end of fiscal 1999, the consumer loans portfolio totaled $136 million
or 23% of the Group's loan portfolio, a 18% growth compared to the $116
million or 21% of the Group's loan portfolio a year ago. Personal loans which
amounted to $109 million at the end of fiscal 1999, or 20% over the $91
million reported the year before, was the largest contributor to this growth.
The increase in personal loans was mainly attained through strong marketing
efforts and the launching of new products while controlling credit risk
through prudent underwriting standards implemented using a credit scoring
system.
The Bank's leasing portfolio amounted to $110 million or 19% of the loan
portfolio at the end of fiscal 1999, a 22% decrease versus $141 million or
26% of the loan portfolio a year ago. The downsizing reflects the Group's
intentional slowdown in lease originations, largely attributed to the
strengthening of the underwriting standards in response to credit losses
experienced during the past year, (see "Provision for Loan Losses" under
"Results of Operations").
F-6
SELECTED FINANCIAL DATA
(Dollars in thousands)
-------------------------------------------- ------------
1999 1998 INC./(DEC.) 1997
-------------------------------------------- ------------
TABLE 5 - BANK ASSETS SUMMARY AND COMPOSITION
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
Mortgage-backed securities and CMO's $ 701,054 $ 402,703 74.1% $ 278,349
US and PR Government securities 204,227 283,248 -27.9% 151,978
FHLB stock and other investments 41,248 20,701 99.3% 38,267
---------- ---------- ----- ----------
946,529 $ 706,652 33.9% 468,594
---------- ---------- ----- ----------
LOANS:
Real estate 326,291 280,190 16.5% 271,249
Consumer 136,175 115,788 17.6% 77,627
Financing leases 110,297 141,113 -21.8% 166,660
Commercial and auto 10,555 15,921 -33.7% 22,842
---------- ---------- ----- ----------
583,318 553,012 5.5% 538,378
Allowance for loan losses (9,002) (5,658) 59.1% (5,408)
---------- ---------- ----- ----------
574,316 547,354 4.9% 532,970
---------- ---------- ----- ----------
TOTAL INTEREST-EARNING ASSETS 1,520,845 1,254,006 21.3% 1,001,564
---------- ---------- ----- ----------
Non-interest earning assets 66,502 $ 59,318 12.1% $ 67,032
---------- ---------- ----- ----------
TOTAL ASSETS $1,587,347 $1,313,324 20.9% $1,068,596
========== ========== ===== ==========
INVESTMENTS PORTFOLIO COMPOSITION:
Mortgage-backed securities and CMO's 74.0% 57.0% 59.4%
US and PR Government securities 21.6% 40.1% 32.4%
FHLB stock and other investments 4.4% 2.9% 8.2%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
LOAN PORTFOLIO COMPOSITION:
Real Estate 56.0% 50.7% 50.4%
Consumer 23.3% 20.9% 14.4%
Financing leases 18.9% 25.5% 31.0%
Commercial and auto 1.8% 2.9% 4.2%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
TABLE 6 - LIABILITIES SUMMARY AND COMPOSITION
- -------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Savings and demand deposits $ 142,679 $ 112,533 26.8% $ 106,995
Time deposits and IRA accounts 508,648 455,061 11.8% 387,836
Accrued Interest 5,661 3,838 47.5% 2,711
---------- ---------- ----- ----------
656,988 $ 571,432 15.0% $ 497,542
---------- ---------- ----- ----------
BORROWINGS:
Repurchase agreements 596,226 $ 416,171 43.3% $ 247,915
FHLB funds 68,400 74,800 -8.6% 89,800
Term notes and other sources of funds 106,500 114,588 -7.1% 115,016
---------- ---------- ----- ----------
771,126 $ 605,559 27.3% $ 452,731
---------- ---------- ----- ----------
TOTAL INTEREST-BEARING LIABILITIES 1,428,114 1,176,991 21.3% 950,273
---------- ---------- ----- ----------
Non interest-bearing liabilities 35,201 $ 29,303 20.1% 28,929
---------- ---------- ----- ----------
TOTAL LIABILITIES $1,463,315 $1,206,294 21.3% $ 979,202
========== ========== ===== ==========
DEPOSITS PORTFOLIO COMPOSITION:
Savings and demand deposits 21.7% 19.7% 21.5%
Time deposits and IRA accounts 77.4% 79.6% 78.0%
Accrued Interest 0.9% 0.7% 0.5%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
BORROWINGS PORTFOLIO COMPOSITION:
Repurchase agreements 77.3% 68.7% 54.8%
FHLB funds 8.9% 12.4% 19.8%
Term notes and other sources of funds 13.8% 18.9% 25.4%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
TABLE 7 - CAPITAL, DIVIDENDS AND STOCK DATA
- -------------------------------------------------------------------------------------------------------------------
CAPITAL DATA:
Stockholders' equity $ 124,032 $ 107,030 15.9% $ 89,394
---------- ---------- ----- ----------
Leverage Capital (minimum required - 4.00%) 8.78% 7.70% 14.1% 8.17%
---------- ---------- ----- ----------
Total Risk-Based Capital (minimum required - 8.00%) 24.02% 20.45% 17.5% 17.53%
---------- ---------- ----- ----------
Tier 1 Risk-Based capital (minimum required - 4.00%) 25.28% 21.68% 16.6% 18.66%
---------- ---------- ----- ----------
STOCK DATA:
Outstanding common shares, net of treasury shares 12,835 13,234 -2.0% 13,177
---------- ---------- ----- ----------
Book value $ 7.05 $ 8.09 -12.9% $ 6.72
---------- ---------- ----- ----------
Market Price at end of period $ 24.13 $ 27.66 -12.8% $ 16.95
---------- ---------- ----- ----------
Market capitalization $ 309,644 $ 362,295 -14.5% $ 223,409
---------- ---------- ----- ----------
DIVIDEND DATA:
Dividends declared $ 7,369 $ 5,442 35.4% $ 4,369
---------- ---------- ----- ----------
Dividends declared per share $ 0.563 $ 0.413 36.5% $ 0.330
---------- ---------- ----- ----------
Payout ratio 28.02% 25.42% 10.2% 24.40%
---------- ---------- ----- ----------
Dividend yield 1.94% 1.69% 14.8% 2.63%
---------- ---------- ----- ----------
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.
-------------------- ---------
PRICE
-------------------- DIVIDEND
HIGH LOW PER SHARE
------- ------- ---------
FISCAL 1999:
June 30, 1999 $ 29.87 $ 24.13 $ 0.150
------- ------- -------
March 31, 1999 $ 29.63 $ 27.50 $ 0.150
------- ------- -------
December 31, 1998 $ 32.00 $ 28.00 $ 0.150
------- ------- -------
September 30, 1998 $ 32.26 $ 28.84 $ 0.113
------- ------- -------
FISCAL 1998:
June 30, 1998 $ 34.60 $ 27.66 $ 0.113
------- ------- -------
March 31, 1998 $ 29.35 $ 24.85 $ 0.113
------- ------- -------
December 31, 1997 $ 23.63 $ 18.38 $ 0.094
------- ------- -------
September 30, 1997 $ 22.28 $ 16.95 $ 0.094
------- ------- -------
FISCAL 1997:
June 30, 1998 $ 16.95 $ 13.65 $ 0.090
------- ------- -------
March 31, 1998 $ 16.20 $ 12.53 $ 0.090
------- ------- -------
December 31, 1997 $ 13.20 $ 10.95 $ 0.075
------- ------- -------
September 30, 1997 $ 9.81 $ 10.95 $ 0.075
------- ------- -------
TABLE 8 - FINANCIAL ASSETS SUMMARY
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Trust assets managed $1,380,200 $1,310,000 5.4% $1,088,600
Assets gathered by broker-dealer 885,800 741,400 19.5% 524,900
---------- ---------- ----- ----------
MANAGED ASSETS 2,266,000 2,051,400 10.5% 1,613,500
Group assets 1,587,300 1,313,300 20.9% 1,068,600
---------- ---------- ----- ----------
$3,853,300 $3,364,700 14.5% $2,682,100
========== ========== ===== ==========
F-7
LIABILITIES AND FUNDING SOURCES
As shown in Table 6, at June 30, 1999, Oriental's total liabilities reached
$1.463 billion, 21% higher than the $1.206 billion reported a year earlier.
Interest-bearing liabilities, the Group's funding sources, amounted to $1.428
billion at the end of fiscal 1999 versus $1.177 billion the year before, a
21% increase. This growth was driven by increases in deposits and repurchase
agreements of 15% or $86 million and 43% or $180 million, respectively.
Deposits at the end of fiscal 1999, the second largest category of the
Group's interest-bearing liabilities and a cost-effective source of funding,
reached $656.9 million, up 15% versus the $571.4 million a year ago. This
rise, driven by a 12% growth in time deposits and IRA accounts, reflects the
inflow of assistance and insurance payments from Hurricane Georges as well as
a long-term trend toward greater usage of banks in the Puerto Rican economy.
Table 6 presents the composition of the Group's deposits at the end of the
periods analyzed.
Borrowings are Oriental's largest interest-bearing liability component. It
consists of diversified funding sources through the use of Federal Home Loan
Bank of New York (FHLB) advances and borrowings, repurchase agreements, term
notes, notes payable and lines of credit. As of June 30, 1999, they amounted
to $771.1 million, 27% higher than the $605.5 million a year ago. This
increase reflects a strong growth in repurchase agreements, which was
necessary to fund the increase in interest-earning assets experienced during
the period, particularly investment securities.
The FHLB system functions as a source of credit to financial institutions
that are members of a regional Federal Home Loan Bank. As a member of the
FHLB, the Group can obtain a