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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the Fiscal Year Ended June 30, 2001, or |
| / / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the Transition Period from to . |
Commission File No. 001-12647
ORIENTAL FINANCIAL GROUP INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0259436
Principal Executive Offices:
Monacillos Ward
1000 San Roberto Street
Río Piedras, Puerto Rico 00926
Telephone Number: (787) 771-6800
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock
($1.00 par value per share)
7.125% Non-cumulative Monthly Income Preferred Stock, Series A
($1.00 par value per share, $25.00 liquidation preference per share)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of August 31, 2001, Oriental Financial Group Inc. (the "Group") had 12,452,117 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Group was $193.5 million based upon the reported closing price of $19.50 on the New York Stock Exchange on that date.
Documents Incorporated By Reference
Portions of the Group's annual report to stockholders for fiscal 2001 are incorporated herein by reference to Items 5 through 8 of Part II and Item 14 of Part IV.
Portions of the Group's definitive proxy statement relating to the 2001 annual meeting of stockholders are incorporated by reference in response to Items 10 through 13 of Part III.
ORIENTAL FINANCIAL GROUP INC.
FORM 10-K
TABLE OF CONTENTS
| | | PAGE | ||
|---|---|---|---|---|
| PART—I | ||||
| Item—1 | Business | 3-11 | ||
| Item—2 | Properties | 12 | ||
| Item—3 | Legal Proceedings | 12 | ||
| Item—4 | Submissions of Matters to the Vote of Security Holders | 13 | ||
PART—II | ||||
| Item—5 | Market for Registrant's Common Stock and Related Stockholder Matters | 13 | ||
| Item—6 | Selected Financial Data | 14 | ||
| Item—7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
| Item—7A | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
| Item—8 | Financial Statements and Supplementary Data | 15 | ||
| Item—9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 15 | ||
PART—III | ||||
| Item—10 | Directors and Executive Officers of the Registrant | 15 | ||
| Item—11 | Executive Compensation | 15 | ||
| Item—12 | Security Ownership of Certain Beneficial Owners and Management | 15 | ||
| Item—13 | Certain Relationships and Related Transactions | 15 | ||
PART—IV | ||||
| Item—14 | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 15 |
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General
Except for historical information contained herein, the matters discussed in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate", "believe", "estimate", "may", "intend", "expect" and similar expressions identify certain of such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based largely on the expectations of Oriental Financial Group Inc. (the "Group") and are subject to a number of risks and uncertainties, including but not limited to, the risks and uncertainties associated with: the impact and effects of increased leverage, economic, competitive and other factors affecting the Group and its operations, markets, products and services, credit risks and the related sufficiency of its allowance for loan losses, changes in interest rates and economic policies, the success of technological, strategic and business initiatives, the profitability of its banking as well as non-banking initiatives, and other factors discussed elsewhere in this report filed by the Group with the Securities and Exchange Commission ("SEC"). Many of these factors are beyond the Group's control.
The Group
The Group is a diversified, publicly-owned financial holding company, incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto Rico, which provides a wide variety of financial services through its subsidiaries.
Oriental Bank and Trust (the "Bank"), the Group's main subsidiary, is a full-service commercial bank with its main office located in San Juan, Puerto Rico and with twenty branches located throughout Puerto Rico. The Bank was incorporated in 1964 as a federal mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking laws of the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in its businesses, placing the Bank in the main stream of financial services in Puerto Rico. The Bank offers mortgage, commercial and consumer lending, saving and time deposits products, financial planning, insurance, and corporate and individual trust services.
Oriental Financial Services Corp. ("OFSC") and FISA Insurance Agency Inc., ("FISA") are the Group's two other subsidiaries engaged in securities brokerage (including investment advisory services) and insurance activities, respectively. OFSC, a member of the National Association of Securities Dealers, Inc. (the "NASD") and the Securities Investor Protection Corporation, is a registered securities broker-dealer pursuant to Section 15(b) of the Exchange Act. OFSC does not carry customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule. The SEC, NASD and the Commissioner of Financial Institutions of Puerto Rico (the "Commissioner") regulate the securities activities of OFSC. FISA is an insurance agency licensed by the Insurance Commissioner of Puerto Rico.
Oriental Mortgage Corporation ("Oriental Mortgage"), the Bank's subsidiary engaged in mortgage-banking activities and services, is licensed as a mortgage bank by the Commissioner.
The Group is subject to the provisions of the U.S. Bank Holding Company Act of 1956 (the "Bank Holding Company Act") and, accordingly, subject to the supervision and regulation of the Board of
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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 and the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC insures the Bank's deposits up to $100,000 per depositor. The Bank is further subject to the regulation by the Puerto Rico Finance Board. Other government agencies, such as the SEC, regulate additional aspects of the Group's operations (see "Regulation and Supervision").
The Group is a legal entity separate and distinct from the Bank, OFSC and FISA. 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 its other subsidiaries.
Market Area and Business Segments
Puerto Rico, where the banking market is highly competitive, is the main geographic business and service area of the Group. As of June 30, 2001, Puerto Rico had 17 banking institutions with a total of approximately $45.7 billion in assets according to industry statistics published by the Commissioner. The Group ranked ninth based on total assets at June 30, 2001. The largest banks in order of size (total assets) were Banco Popular de Puerto Rico, Banco Santander Puerto Rico and Firstbank. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States.
In addition, the Group competes with brokerage firms with retail operations, credit unions, small loan companies and mortgage banks in Puerto Rico. The Group encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. The Group competes for loans with other financial institutions, most of which are larger and have greater resources available than those of the Group. There can be no assurance that in the future the Group will be able to continue to increase its deposit base or originate loans in the manner or on the terms on which it has done so in the past.
Management believes that the Group has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive features, by pricing its products at competitive interest rates and by offering convenient branch locations and by emphasizing the quality of its service. The Group's ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions.
The Group has three reportable segments: Retail Banking, Financial Services and Mortgage Banking. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group's organizational chart, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments based on pre-established goals of different financial parameters such as income before tax, net interest income, loan production and fees generated.
The Group's largest business segment is retail banking. The Bank's branches and treasury are its main components, with traditional banking products such as deposits, electronic banking and lending.
The Bank's lending activity is with consumers located in Puerto Rico. The Bank's loan transactions include a diversified number of industries and activities all of which are encompassed within three main categories: mortgage, commercial and consumer. The Bank's loan portfolio has a higher concentration of residential mortgage loans followed by consumer loans such as personal loans, then commercial loans. The Bank continues to concentrate the major share of its lending activities in mortgage originations, which represent low credit risk and highly lucrative returns. Lending related to individual real estate ownership has traditionally been one of the most secure areas of financing in Puerto Rico because of the delinquency and foreclosure experience.
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The Group's investment activity is strictly debt securities. Its portfolio consists primarily of money market investments, U.S. Treasury notes and Government agency bonds, mortgage-backed securities, collateralized mortgage obligations and P.R. Government municipal bonds. At June 30, 2001, the Group's investment portfolio was of high quality. Approximately 98% was rated AAA and it generated a significant amount of tax-exempt interest, which lowers the Group's effective tax rate.
Mortgage-backed securities, the largest component, are pools of residential loans that are made to consumers and then resold by the Government National Mortgage Corporation (the "GNMA"), Federal National Mortgage Association (the "FNMA") and Federal Home Loan Mortgage Corporation (the "FHLMC") in the open market. The Government of Puerto Rico is the only issuer, other than the U.S. Government, of instruments that are payable and secured by the same source of revenue or taxing authority that exceeded 10% of stockholders' equity at June 30, 2001 and 2000.
The Bank's principal funding sources are branch deposits, collateralized deposits, Federal Home Loan Bank (the"FHLB") funds, securities sold under agreements to repurchase, and term notes. Borrowings are the Bank's largest funding source. It mainly consist of advances and borrowings from the FHLB, repurchase agreements, term notes, notes payable and lines of credit. Deposits represent the Bank's second largest source of funding. Through its branch system, the Bank offers personal, commercial and mortgage loans, individual non-interest bearing checking accounts, savings accounts, personal interest-bearing checking accounts, certificates of deposit, individual retirement accounts and commercial non-interest bearing checking accounts. The FDIC insures the Bank's deposit accounts up to applicable limits. Management makes retail deposit pricing decisions periodically through the Assets and Liabilities Committee (the "ALCO"), which adjusts the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, LIBOR and mainland United States market interest rates.
The Group's second largest business segment is its financial services, which is comprised of the Bank's trust division ("Oriental Trust"), OFSC and FISA. The core operations of this segment are financial planning, money management, insurance and investment brokerage services, as well as corporate and individual trust services. Oriental Trust offers various types of individual retirement accounts and manages 401(k) and Keogh retirement plans, custodian accounts and corporate trust accounts. OFSC and FISA offers a wide array of investment alternatives to its client base such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds.
The Group's third largest business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans and subsequently sell them in the secondary market. Oriental Mortgage originates FHA insured and VA guaranteed mortgages for issuance of GNMA mortgage-backed securities and conventional mortgage loans for issuance of FNMA or FHLMC mortgage-backed securities. Mortgages included in the resulting GNMA, FNMA and FHLMC pools are serviced by another institution.
Regulation and Supervision
The Group is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board and SEC periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires directly or indirectly ownership or control of more than 5% of the voting shares of a second bank. Furthermore, Federal Reserve Board approval must also be obtained before such a company acquires all or substantially all of the assets of a second bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has authority to issue cease and desist orders against holding companies and their non-bank subsidiaries.
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A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging, directly or indirectly, in any business unrelated to the business of banking or of managing or controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding company of the shares of any company if the Federal Reserve Board, after due notice and opportunity for hearing, by regulation or order has determined that the activities of the company in question are so closely related to the business of banking or of managing or controlling banks as to be a proper incident thereto.
Under the Federal Reserve Board policy, a bank holding company such as the Group is expected to act as a source of financial strength to its main banking subsidiaries and to also commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to the federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of the Group.
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, revises and expands the existing provisions of the Bank Holding Company Act by including a new section that permits a bank holding company to elect to become a financial holding company to engage in a full range of activities that are "financial in nature". The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that all the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company must be and remain at all times "well capitalized" and "well managed". On May 21, 2000, the Group elected to become a financial holding company pursuant to the provisions of the Gramm-Leach-Bliley Act.
Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity provided it "does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally." The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be "financial in nature": (a) lending, trust and other banking activities; (b) insurance activities; (c) financial or economic advice or services; (d) securitization of assets; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of "financial" or "incidental" activities, but requires consultation with the U.S. Treasury Department, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is "complementary" to a financial activity and does not "pose a substantial risk to the safety and soundness of depository institutions or the financial system generally."
The Bank is subject to extensive regulation and examination by the Commissioner and the FDIC, which insures its deposits to the maximum extent permitted by law, and subject to certain requirements established by the Federal Reserve Board. The federal and Puerto Rico laws and regulations which are applicable to the Bank, regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. In addition to the impact of such 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.
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Holding Company Structure
The Bank is subject to restrictions under federal laws 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.
Since the Group is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of depository institution subsidiaries) except to the extent that the Group is a creditor with recognized claims against the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or a receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. The Bank is currently the only FDIC-insured depository institution subsidiary of the Group. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled insured depository institutions.
Dividend Restrictions
The principal source of funds for the Group is dividends from the Bank. The ability of the Bank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the "Puerto Rico Banking Act"), the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Act 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 Act provides that until said capital has been restored to its original amount and the reserve fund to twenty percent (20%) of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.
The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured
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depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991(the "FDICIA").
Federal Home Loan Bank System
The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board (the "FHFB"). The FHLB's serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHFB and the boards of directors of the FHLB's.
As a system member, the Bank is entitled to borrow from the FHLB of New York (the "FHLB-NY") and is required to own capital stock in the FHLB-NY in an amount equal to the greater of 1% of the aggregate of the unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each fiscal year, which for this purpose is deemed to be not less than 30% of assets or 5% of the total amount of advances by the FHLB-NY to the Bank. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB-NY to the Bank are secured by a portion of the Bank's mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by the Bank.
FDICIA
Under FDICIA, the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA and regulations issued there under established five capital tiers: (i) "well capitalized", if it has a total risk-based capital ratio 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 of the five examinations rating categories: asset quality, management, earnings, liquidity and sensitivity to market risk. As of June 30, 2001, 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 in restoring the depository institution's capital.
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Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from corresponding banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
Insurance of Accounts and FDIC Insurance Assessments
The FDIC insures the Bank's deposit accounts up to the applicable limits. The insurance of deposit accounts by the FDIC 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, the FDIC may terminate insurance of accounts of the Bank.
The Bank is subject to FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured institution is also assigned to one of the following "supervisory subgroups": "A","B", or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions with respect to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIFA") was enacted and signed into law. DIFA repealed the statutory minimum premium. Thereafter, premiums related to deposits assessed by both the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF") are assessed at a rate of 0 to 27 basis points per $100 deposits based on the risk-based assessment. DIFA also provided for a special one-time assessment on deposits insured by SAIF to recapitalize the SAIF and to bring it up to statutory required levels of approximately 65 basis points on institutions holding SAIF deposits on March 31, 1995. Accordingly, the Group recorded a special reserve of $1,823,000, net of taxes of $490,000, during the first quarter of 1997 to account for its share of the one-time payment of SAIF insurance premium. As result of this special assessment, in January 1997, the Group's deposit insurance premium was reduced to $0.062 for every $100 of deposits from $.23 for every $100 of deposits. Currently, the Bank's deposit insurance premium is the minimum charged by the SAIF.
Regulatory Capital Requirements
The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under the guidelines the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of common equity, retained earnings, minority interest in unconsolidated subsidiaries, non-cumulative perpetual preferred stock and the disallowed portion of deferred tax assets ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other investments and a limited amount of loan and lease loss reserves ("Tier 2 Capital").
The Federal Reserve Board has adopted regulations with respect to risk-based and leverage capital ratios that require most intangibles, including core deposit intangibles, to be deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights and purchased credit card relationships and include a "grand fathered" provision permitting inclusion of certain existing intangibles.
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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 a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. At June 30, 2001, the Group was in compliance with all capital requirements, exceeding those applicable to a "well-capitalized" institution.
Safety and Soundness Standards
Section 39 of the FDIA, amended by the FDICIA, requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal control, information systems and internal audit system, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency also is required to adopt for all insured depository institutions and their holding companies standards that specify (i) a maximum ratio of classified assets to capital, (ii) minimum earnings sufficient to absorb losses without impairing capital, (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of the institution or holding company, and (iv) such other standards relating to asset quality, earnings and valuation as the agency deems appropriate. Finally, each federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution or holding company fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until it is corrected, may impose other restrictions on the institution or holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA. Pursuant to FDICIA, regulations to implement these operational standards were required to become effective on December 1, 1993.
In August 1995, the FDIC and the other federal banking agencies published Interagency Guidelines Establishing Standards for Safety and Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems, loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation.
Activities and Investments of Insured State-Chartered Banks
Section 24 of the FDIA, as amended by the FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under FDIC regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not
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permissible for a national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
In December 1993, the FDIC adopted amendments to its regulations governing the activities and investments of insured state banks that 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, which contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, savings, lending capital and investment requirements and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rulemaking power and administrative discretion under the Puerto Rico Banking Act. The Commissioner generally examines the Bank at least once every year.
The Puerto Rico Banking Act requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the total of paid-in capital on common and preferred stock.
The Puerto Rico Banking Act also provides that when the expenditures of a bank are greater that the receipts, the excess of the former over the latter shall be charged against the undistributed profits of the Bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital.
The Puerto Rico Banking Act further requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral.
The Puerto Rico Banking Act further requires change of control filings. When any person or entity will own, directly or indirectly, upon consummation of a transfer, 5% or more of the outstanding voting capital stock of the Bank, the acquiring parties must inform the Commissioner of the details not less than 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 Puerto Rico Banking Act, a change of control is presumed if an acquirer who did not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer.
The Puerto Rico Banking Act generally restricts the amount the Bank can lend to one borrower to an amount that may not exceed 15% of the aggregate of the paid-in capital of the Bank and the reserve fund. The Bank may also not accept the security of any one borrower in an amount exceeding 15% of
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its paid-in capital and reserve fund. If such loans are secured by collateral worth at least 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. As of June 30, 2001, there were no loans that exceeded the maximum amount that the Bank could have loaned to one borrower.
The Puerto Rico Finance Board, which is composed of the Commissioner, the President of the Government Development Bank for Puerto Rico, the President of the Puerto Rico Housing Bank and the Puerto Rico Secretaries of Commerce, Treasury and Consumer Affairs and three public interest representatives, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth. The Puerto Rico Finance Board promulgates regulations that specify maximum rates on various types of loans to individuals.
The current regulations of the Puerto Rico 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 Puerto Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is no maximum rate for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums.
Employees
At June 30, 2001, the Group employed 358 persons. None of its employees is represented by a collective bargaining group. The Group considers its employee relations to be good.
At June 30, 2001, the Bank owned 9 branch premises and other facilities throughout the Commonwealth. In addition, as of such date, the Bank leased properties for branch operations and main office in 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. The Bank's main branch is the only activity conducted at this location. Approximately 60% of the office space is leased to outside tenants. The book value of this property at June 30, 2001 was $5 million.
- •
- Las Cumbres Building—a two-story structure located at 1990 Las Cumbres Avenue, Rio Piedras, Puerto Rico. A branch, collections and mortgage originating departments are the main activities conducted at this location. The book value of this property at June 30, 2001 was $1.3 million.
On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of its independent accountants and legal counsel. The investigation determined losses of $9.5 million resulting from dishonest and fraudulent acts and omissions involving several former Group's employees. In the opinion of the Group's management and its legal counsel, the losses
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determined by the investigation are covered by the Group's fidelity insurance. The Group's fidelity insurance carrier has denied claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the District of Puerto Rico against Federal Insurance Company, Inc., a stock insurance corporation organized under the laws of the state of Indiana, seeking payment of its $9.5 million insurance claim and the payment of consequential damages resulting from the denial of the claim. Initial conference meetings have taken place. The losses caused by the irregularities and claims to the insurer were expensed in prior years.
In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to their 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.
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 stock for each quarter in fiscal 2001 and the previous two fiscal years, as well as cash dividends declared for the last three fiscal years, and cash dividends declared is contained in Table 12 ("Capital, Dividends and Stock Data") 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 the common stock held by stockholders of record on September 30, 1998. As a result, approximately 3,385,000 shares of common stock were distributed on October 15, 1998.
As of August 31, 2001 the Group had over 2,000 stockholders of record of its common stock, including all directors and officers of the Group, excluding beneficial owners whose shares are held in street name by securities brokers or other nominees. The NYSE closing price for the Group's common stock on such date was $19.50 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 stock issue, the Group generated $32,300,000 in net proceeds for general corporate purposes. The Series A Preferred Stock has the following characteristics: (1) annual dividends of $1.78125 per share payable monthly, if declared by the board of directors; (2) missed dividends are not cumulative; (3) redeemable at the Group's option beginning on May 30, 2004; (4) no mandatory redemption or stated maturity date; and (5) a liquidation value of $25 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 Puerto Rico corporations to individuals, whether residents of Puerto Rico or not, trusts, estates, and special partnerships at a special 10% withholding tax rate. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may
–13–
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. Dividends distributed by Puerto Rico corporations to foreign corporations or partnerships, not engaged in trade or business in Puerto Rico, are also generally subject to withholding tax at a 10% rate.
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 the 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 in the MD&A (see Financial Data Index herein) and is incorporated herein by reference. The following selected financial data of the Group should be read in conjunction with the MD&A and the audited consolidated financial statements. Selected financial data are presented for five fiscal years. The Group's financial statements for the fiscal years ending June 30, 1999 and 1998 were restated. The Group spent a substantial amount of time, effort and expense over a two-year period investigating certain irregularities and illegal conduct by former employees to identify the items that required the restatement of the results of fiscal years 1999 and 1998. The Group was not able, however, to determine how to allocate an additional amount of $5.8 million (after tax) that relates to periods prior to fiscal year 1998. Accordingly, that amount has been recognized as an adjustment to beginning retained earnings for fiscal 1998. The Group believes that it would require an unreasonable effort and expense to determine how to restate the financial statements for periods prior to fiscal 1998, if such allocations could be determined at all. Therefore, financial data for fiscal years 1997 has not been restated and should not be relied upon.
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:
| Ratio of Earnings to Fixed Charges: | FY2001 | FY2000 | FY1999 | FY1998 | FY1997 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Excluding Interest on Deposits | 1.13 | 1.39 | 1.74 | 1.72 | 1.31 | |||||
| Including Interest on Deposits | 1.08 | 1.24 | 1.41 | 1.39 | 1.43 | |||||
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: | ||||||||||
| Excluding Interest on Deposits | 1.07 | 1.31 | 1.60 | 1.56 | 1.60 | |||||
| Including Interest on Deposits | 1.04 | 1.19 | 1.35 | 1.32 | 1.34 |
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 that is deemed representative of interest factor. In fiscal years 2001, 2000 and 1999, the Group had preferred stock issued and outstanding amounting to $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 in the MD&A (see Financial Data Index herein) and is incorporated herein by reference.
–14–
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Group appears 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 in the consolidated financial statements, and is incorporated herein by reference. The financial data index 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
The Company's Board of Directors requested and obtained proposals from several accounting firms in Puerto Rico, including PricewaterhouseCoopers LLP, in connection with the Company's annual and quarterly financial statements for each of the three fiscal years in the period ending June 30, 2004. After reviewing and considering each proposal, the Audit Committee recommended to the Board of Directors the appointment of Deloitte & Touche ("D&T") as the Company's independent auditors for fiscals 2002, 2003 and 2004. On September 25, 2001, the Board of Directors accepted such recommendation and appointed D&T as the Company's independent auditors for fiscals 2002, 2003 and 2004. This decision was based on the amount of fees quoted by each firm and the scope of services to be provided.
PricewaterhouseCoopers LLP's report on the Company's financial statements for each of the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope or accounting principles. During such two-year period and the current interim period through September 25, 2001, there were no disagreements between the Company and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements if not resolved to PricewaterhouseCoopers LLP's satisfaction would have caused them to make reference to such disagreements in their reports on the financial statements for such years.
The information required by this part appears in the Group's definitive proxy statement for the 2001 annual meeting of stockholders and is incorporated herein by reference.
ITEM 14—EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
The list of financial statements required by this item is set forth in the Financial Data Index of this report.
(a)(2)—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 (a)(1) above.
No current reports on Form 8-K were filed during the last quarter of fiscal 2001.
–15–
| Exhibit No.: | Description of Document: | |
|---|---|---|
| 2.0 | Agreement and Plan of Merger dated as of June 18, 1996 by and between the Group, the Bank and Oriental Interim Bank.* | |
| 3(i) | Amended and Restated Certificate of Incorporation.** | |
| 3(ii) | By-Laws.*** | |
| 10.1 | Employment Agreement between Jose Rafael Fernandez and the Group. | |
| 10.2 | Employment Agreement between Marcial Diaz and the Group. | |
| 10.3 | 1996 Incentive Stock Option Plan.**** | |
| 10.4 | 1998 Incentive Stock Option Plan.***** | |
| 10.5 | 2000 Incentive Stock Option Plan.****** | |
| 21.0 | List of Subsidiaries | |
| 23.0 | Consent of PricewaterhouseCoopers LLP |
| * | Incorporated by reference to the Group's registration statement on Form 8-B filed on January 10, 1997. | |
| ** | Incorporated by reference to Exhibit 3 of the Group's registration statement on Form S-3 filed on April 2, 1999. | |
| *** | Incorporated by reference to Exhibit 3 of the Group's current report on Form 8-K filed on September 7, 2000. | |
| **** | Incorporated by reference to the Group's definitive proxy statement for the 1997 annual meeting of stockholders filed on September 19, 1997. | |
| ***** | Incorporated by reference to the Group's definitive proxy statement for the 1998 annual meeting of stockholders filed on September 29, 1998. | |
| ****** | Incorporated by reference to the Group's definitive proxy statement for the 2000 annual meeting of stockholders filed on November 17, 2000. |
–16–
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
By: | ||||
| /s/ JOSÉ E. FERNÁNDEZ José E. Fernández Chairman of the Board, President and Chief Executive Officer | Dated: September 25, 2001 | |||
By: | ||||
| /s/ RAFAEL VALLADARES Rafael Valladares Senior Vice President and Principal Financial Officer | Dated: September 25, 2001 |
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/ JOSÉ E. FERNÁNDEZ José E. Fernández Chairman of the Board, President and Chief Executive Officer | Dated: September 25, 2001 | |||
By: | ||||
| /s/ DR. PABLO I. ALTIERI Dr. Pablo I. Altieri Director | Dated: September 25, 2001 | |||
By: | ||||
| /s/ DIEGO PERDOMO Diego Perdomo Director | Dated: September 25, 2001 | |||
By: | ||||
| /s/ EFRAÍN ARCHILLA Efraín Archilla Director | Dated: September 25, 2001 |
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By: | ||||
| /s/ JULIAN INCLÁN Julian Inclán Director | Dated: September 25, 2001 | |||
By: | ||||
| /s/ EMILIO RODRÍGUEZ, JR. Emilio Rodríguez, Jr. Director | Dated: September 25, 2001 | |||
By: | ||||
| /s/ ALBERTO RICHA Alberto Richa Director | Dated: September 25, 2001 | |||
By: | ||||
| /s/ FRANCISCO ARRIVÍ Francisco Arriví Director | Dated: September 25, 2001 |
–18–
ORIENTAL FINANCIAL GROUP, INC.
FORM-10K
FINANCIAL DATA INDEX
| | PAGE | |
|---|---|---|
| FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION | ||
Selected Financial Data | F-1 to F-9 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | F-10 to F-18 | |
Quantitative and Qualitative Disclosures About Market Risk | F-19 | |
FINANCIAL STATEMENTS | ||
Report of Independent Accountants | F-20 | |
Consolidated Statements of Financial Condition as of June 30, 2000 and 2001 | F-21 | |
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 2001 | F-22 | |
Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income for each of the years in the three-year period ended June 30, 2001 | F-23 | |
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2001 | F-24 | |
Notes to the Consolidated Financial Statements | F-25 to F-52 |
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
| EARNINGS, PER SHARE AND DIVIDENDS: | June 30, 2001 | June 30, 2000 | June 30, 1999 | June 30, 1998 | June 30, 1997 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest income | $ | 120,344 | $ | 126,226 | $ | 107,809 | $ | 96,940 | $ | 79,384 | |||||||
| Interest expense | 91,281 | 81,728 | 64,775 | 58,046 | 45,098 | ||||||||||||
| Net interest income | 29,063 | 44,498 | 43,034 | 38,894 | 34,286 | ||||||||||||
| Provision for loan losses | 2,903 | 8,150 | 14,473 | 9,545 | 4,900 | ||||||||||||
| Net credit income | 26,160 | 36,348 | 28,561 | 29,349 | 29,386 | ||||||||||||
| Recurrent non-interest income | 23,971 | 22,600 | 22,683 | 20,102 | 15,164 | ||||||||||||
| Net core revenues | 50,131 | 58,948 | 51,244 | 49,451 | 44,550 | ||||||||||||
| Recurrent non-interest expenses | 38,195 | 36,035 | 32,732 | 30,328 | 28,138 | ||||||||||||
| Core operating activities | 11,936 | 22,913 | 18,512 | 19,123 | 16,412 | ||||||||||||
| Non recurrent non-interest (loss) income | (4,599 | ) | 578 | 11,270 | 7,142 | 5,080 | |||||||||||
| Non recurrent non-interest expenses | (22 | ) | (3,817 | ) | (2,878 | ) | (4,306 | ) | (1,340 | ) | |||||||
| Total non-recurrent activities | (4,621 | ) | (3,239 | ) | 8,392 | 2,836 | 3,740 | ||||||||||
| Income before taxes | 7,315 | 19,674 | 26,904 | 21,959 | 20,152 | ||||||||||||
| Income tax benefit (expense) | 1,318 | (108 | ) | (200 | ) | (2,563 | ) | (3,590 | ) | ||||||||
| Income before cumulative effect of change in accounting principle | 8,633 | 19,566 | 26,704 | 19,396 | 16,562 | ||||||||||||
| Cumulative effect of change in accounting principle, net of tax | (164 | ) | — | — | — | — | |||||||||||
| Net Income | 8,469 | 19,566 | 26,704 | 19,396 | 16,562 | ||||||||||||
| Less: dividends on preferred stock | (2,387 | ) | (2,387 | ) | (350 | ) | — | — | |||||||||
| Net income available to common shareholders | $ | 6,082 | $ | 17,179 | $ | 26,354 | $ | 19,396 | $ | 16,562 | |||||||
| Basic EPS before cumulative effect of change in accounting principle | $ | 0.50 | $ | 1.34 | $ | 2.02 | $ | 1.46 | $ | 1.25 | |||||||
| Basic EPS after cumulative effect of change in accounting principle | $ | 0.49 | $ | 1.34 | $ | 2.02 | $ | 1.46 | $ | 1.25 | |||||||
| Diluted EPS before cummulative effect of change in accounting principle | $ | 0.49 | $ | 1.31 | $ | 1.93 | $ | 1.39 | $ | 1.21 | |||||||
| Diluted EPS after cumulative effect of change in accounting principle | $ | 0.48 | $ | 1.31 | $ | 1.93 | $ | 1.39 | $ | 1.21 | |||||||
| Average shares and potential shares | 12,769 | 13,162 | 13,633 | 13,948 | 13,676 | ||||||||||||
| Book value per common share | $ | 6.40 | $ | 6.64 | $ | 6.45 | $ | 7.50 | $ | 6.72 | |||||||
| Market price at end of period | $ | 19.00 | $ | 14.44 | $ | 24.13 | $ | 27.66 | $ | 16.95 | |||||||
| Dividends declared per common share | $ | 0.60 | $ | 0.60 | $ | 0.56 | $ | 0.41 | $ | 0.33 | |||||||
| Dividends declared on common share | $ | 7,534 | $ | 7,657 | $ | 7,369 | $ | 5,442 | $ | 4,369 | |||||||
Note: Per share related information has been retroactively adjusted to reflect stock splits, when applicable.
| PERIOD END BALANCES (as of June 30,): | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total financial assets | |||||||||||||||||
| Trust assets managed | $ | 1,444,534 | $ | 1,456,500 | $ | 1,380,200 | $ | 1,310,000 | $ | 1,088,600 | |||||||
| Broker-dealer assets gathered | 1,002,253 | 914,900 | 885,800 | 741,400 | 524,900 | ||||||||||||
| Assets managed | 2,446,787 | 2,371,400 | 2,266,000 | 2,051,400 | 1,613,500 | ||||||||||||
| Group total assets | 2,038,940 | 1,851,214 | 1,580,800 | 1,301,400 | 1,068,600 | ||||||||||||
| $ | 4,485,727 | $ | 4,222,614 | $ | 3,846,800 | $ | 3,352,800 | $ | 2,682,100 | ||||||||
| Interest-earning assets | |||||||||||||||||
| Investments and securities | $ | 1,499,681 | $ | 1,179,484 | $ | 946,411 | $ | 706,535 | $ | 468,594 | |||||||
| Loans and leases (including loans held-for-sale), net | 466,482 | 600,878 | 568,711 | 541,750 | 532,970 | ||||||||||||
| $ | 1,966,163 | $ | 1,780,362 | $ | 1,515,122 | $ | 1,248,285 | $ | 1,001,564 | ||||||||
| Interest-bearing liabilities | |||||||||||||||||
| Deposits | $ | 797,965 | $ | 723,681 | $ | 655,853 | $ | 570,297 | $ | 497,542 | |||||||
| Repurchase agreements | 915,471 | 816,493 | 596,226 | 416,171 | 247,915 | ||||||||||||
| Borrowings | 165,000 | 156,500 | 174,900 | 189,388 | 204,816 | ||||||||||||
| $ | 1,878,436 | $ | 1,696,674 | $ | 1,426,979 | $ | 1,175,856 | $ | 950,273 | ||||||||
| Stockholders' equity | |||||||||||||||||
| Preferred equity | $ | 33,500 | $ | 33,500 | $ | 33,500 | $ | — | $ | — | |||||||
| Common equity | 79,990 | 84,369 | 82,798 | 99,240 | 89,394 | ||||||||||||
| $ | 113,490 | $ | 117,869 | $ | 116,298 | $ | 99,240 | $ | 89,394 | ||||||||
| Capital ratios | |||||||||||||||||
| Leverage capital | 6.68% | 7.49% | 8.30% | 7.70% | 8.17% | ||||||||||||
| Total risk-based capital | 19.96% | 29.29% | 24.21% | 20.45% | 17.53% | ||||||||||||
| Tier 1 risk-based capital | 19.53% | 30.54% | 22.95% | 21.68% | 18.66% | ||||||||||||
| SELECTED FINANCIAL RATIOS AND OTHER INFORMATION: | |||||||||||||||||
| Return on average assets (ROA) | 0.49% | 1.15% | 1.84% | 1.59% | 1.84% | ||||||||||||
| Return on average common equity (ROE) | 7.85% | 18.73% | 24.41% | 20.41% | 21.17% | ||||||||||||
| Efficiency ratio | 72.06% | 58.56% | 53.38% | 57.75% | 52.76% | ||||||||||||
| Expense ratio | 0.85% | 1.00% | 0.88% | 1.19% | 1.34% | ||||||||||||
| Interest rate spread | 1.49% | 2.43% | 2.94% | 3.17% | 3.89% | ||||||||||||
| Number of financial centers | 20 | 19 | 19 | 17 | 16 | ||||||||||||
F–1
SELECTED FINANCIAL DATA
PERIOD ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
TABLE 1 — FISCAL YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE:
| | Interest | Average rate | Average balance | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TAX EQUIVALENT SPREAD | Fiscal 2001 | Fiscal 2000 | Variance in % | Fiscal 2001 | Fiscal 2000 | Variance in BP | Fiscal 2001 | Fiscal 2000 | Variance in % | ||||||||||||||||
| Interest-earning assets | $ | 120,344 | $ | 126,226 | -4.66% | 7.18% | 7.72% | -0.54% | $ | 1,677,786 | $ | 1,635,098 | 2.61% | ||||||||||||
| Tax equivalent adjustment | 35,226 | 24,786 | 42.12% | 4.20% | 1.52% | 2.68% | — | — | 0.00% | ||||||||||||||||
| Interest-earning assets — tax equivalent | 155,570 | 151,012 | 3.02% | 11.38% | 9.24% | 2.14% | 1,677,786 | 1,635,098 | 2.61% | ||||||||||||||||
| Interest-bearing liabilities | 91,281 | 81,728 | 11.69% | 5.69% | 5.29% | 0.40% | 1,604,295 | 1,543,557 | 3.93% | ||||||||||||||||
| Net interest income / spread | $ | 64,289 | $ | 69,284 | -7.21% | 5.69% | 3.95% | 1.74% | $ | 73,491 | $ | 91,541 | -19.72% | ||||||||||||
| NORMAL SPREAD | |||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||||
| Investment securities | $ | 75,172 | $ | 68,070 | 10.4% | 6.75% | 6.66% | 0.09% | $ | 1,113,667 | $ | 1,022,261 | 8.94% | ||||||||||||
| Investment management fees | (1,016 | ) | — | -100.0% | -0.08% | 0.00% | -0.08% | — | — | 0.00% | |||||||||||||||
| Total investment securities | 74,156 | 68,070 | 8.9% | 6.67% | 6.66% | 0.01% | 1,113,667 | 1,022,261 | 8.94% | ||||||||||||||||
| Trading securities | 2,735 | 2,269 | 20.5% | 7.55% | 8.08% | -0.53% | 36,223 | 28,098 | 28.92% | ||||||||||||||||
| Money market investments | 4,691 | 510 | 819.8% | 5.97% | 6.29% | -0.32% | 78,630 | 8,109 | 869.66% | ||||||||||||||||
| 81,582 | 70,849 | 15.1% | 6.65% | 6.69% | -0.04% | 1,228,520 | 1,058,468 | 16.07% | |||||||||||||||||
| Loans: | |||||||||||||||||||||||||
| Real estate (1) | 32,970 | 25,986 | 26.9% | 8.20% | 7.75% | 0.45% | 401,916 | 335,353 | 19.85% | ||||||||||||||||
| Consumer | 3,008 | 16,612 | -81.9% | 15.41% | 13.27% | 2.14% | 19,517 | 125,199 | -84.41% | ||||||||||||||||
| Financing leases | 409 | 10,579 | -96.1% | 8.33% | 11.13% | -2.80% | 4,907 | 95,012 | -94.84% | ||||||||||||||||
| Commercial | 2,375 | 2,200 | 8.0% | 10.36% | 10.45% | -0.09% | 22,926 | 21,066 | 8.83% | ||||||||||||||||
| 38,762 | 55,377 | -30.0% | 8.62% | 9.60% | -0.98% | 449,266 | 576,630 | -22.09% | |||||||||||||||||
| 120,344 | 126,226 | -4.7% | 7.18% | 7.72% | -0.54% | 1,677,786 | 1,635,098 | 2.61% | |||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||
| Savings and demand | 3,126 | 3,059 | 2.2% | 2.36% | 2.17% | 0.19% | 132,559 | 140,900 | -5.92% | ||||||||||||||||
| Time and IRA accounts | 33,516 | 28,364 | 18.2% | 5.89% | 5.48% | 0.41% | 569,415 | 517,289 | 10.08% | ||||||||||||||||
| 36,642 | 31,423 | 16.6% | 5.22% | 4.77% | 0.45% | 701,974 | 658,189 | 6.65% | |||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||
| Repurchase agreements | 46,727 | 41,116 | 13.6% | 5.91% | 5.77% | 0.14% | 790,498 | 713,061 | 10.86% | ||||||||||||||||
| Interest rate risk management | 1,141 | (478 | ) | 338.7% | 0.14% | -0.05% | 0.19% | — | — | — | |||||||||||||||
| Management fees | 179 | — | 100.0% | 0.02% | 0.00% | 0.02% | — | — | — | ||||||||||||||||
| Total repurchase agreements | 48,047 | 40,638 | 18.2% | 6.08% | 5.72% | 0.35% | 790,498 | 713,061 | 10.86% | ||||||||||||||||
| FHLB funds and term notes | 6,592 | 9,667 | -31.8% | 5.90% | 5.61% | 0.29% | 111,823 | 172,307 | -35.10% | ||||||||||||||||
| 54,639 | 50,305 | 8.6% | 6.05% | 5.68% | 0.37% | 902,321 | 885,368 | 1.91% | |||||||||||||||||
| 91,281 | 81,728 | 11.7% | 5.69% | 5.29% | 0.40% | 1,604,295 | 1,543,557 | 3.93% | |||||||||||||||||
| Net interest income / spread | $ | 29,063 | $ | 44,498 | -34.7% | 1.49% | 2.43% | -0.94% | |||||||||||||||||
| Interest rate margin | 1.73% | 2.72% | -0.99% | ||||||||||||||||||||||
| Excess of interest-earning assets over interest-bearing liabilities | $ | 73,491 | $ | 91,541 | -19.72% | ||||||||||||||||||||
| Interest-earning assets over interest-bearing liabilities ratio | 104.58% | 105.93% | -1.27% | ||||||||||||||||||||||
FISCAL 2000 VERSUS 1999
| | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Interest | Average rate | Average balance | |||||||||||||||||||
| | Fiscal 2000 | Fiscal 1999 | Variance in % | Fiscal 2000 | Fiscal 1999 | Variance in BP | Fiscal 2000 | Fiscal 1999 | Variance in % | |||||||||||||
| Interest Income: | ||||||||||||||||||||||
| Loans (1) | $ | 55,377 | $ | 55,596 | -0.4% | 9.60% | 10.05% | -0.45% | $ | 576,630 | $ | 553,122 | 4.25% | |||||||||
| Investments | 70,849 | 52,213 | 35.7% | 6.69% | 6.48% | 0.21% | 1,058,468 | 805,730 | 31.37% | |||||||||||||
| 126,226 | 107,809 | 17.1% | 7.72% | 7.93% | -0.21% | 1,635,098 | 1,358,852 | 20.33% | ||||||||||||||
| Interest Expense: | ||||||||||||||||||||||
| Deposits | 31,423 | 28,785 | 9.2% | 4.77% | 4.66% | 0.11% | 658,189 | 615,945 | 6.86% | |||||||||||||
| Borrowings | 50,305 | 35,990 | 39.8% | 5.68% | 5.29% | 0.39% | 885,368 | 681,453 | 29.92% | |||||||||||||
| 81,728 | 64,775 | 26.2% | 5.29% | 4.99% | 0.30% | 1,543,557 | 1,297,398 | 18.97% | ||||||||||||||
| Net interest income / spread | $ | 44,498 | $ | 43,034 | 3.4% | 2.43% | 2.94% | -0.51% | $ | 91,541 | $ | 61,454 | 49.0% | |||||||||
| Interest rate margin | 2.72% | 3.17% | -0.45% | |||||||||||||||||||
CHANGES IN NET INTEREST INCOME DUE TO:
| | Fiscal 2001 versus 2000 | Fiscal 2000 versus 1999 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Volume | Rate | Total | Volume | Rate | Total | |||||||||||||
| Interest Income: | |||||||||||||||||||
| Loans (1) | $ | (12,227 | ) | $ | (4,388 | ) | $ | (16,615 | ) | $ | 1,413 | $ | (1,632 | ) | $ | (219 | ) | ||
| Investments | 11,376 | (643 | ) | 10,733 | 16,379 | 2,257 | 18,636 | ||||||||||||
| (851 | ) | (5,031 | ) | (5,882 | ) | 17,792 | 625 | 18,417 | |||||||||||
Interest Expense: | |||||||||||||||||||
| Deposits | 2,089 | 3,130 | 5,219 | 1,908 | 730 | 2,638 | |||||||||||||
| Borrowings | 963 | 3,371 | 4,334 | 10,503 | 3,812 | 14,315 | |||||||||||||
| 3,052 | 6,501 | 9,553 | 12,411 | 4,542 | 16,953 | ||||||||||||||
| Net Interest Income | $ | (3,903 | ) | $ | (11,532 | ) | $ | (15,435 | ) | $ | 5,381 | $ | (3,917 | ) | $ | 1,464 | |||
- (1)
- — Real estate averages include loans held-for-sale.
F–2
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
| | Fiscal 2001 | Fiscal 2000 | Variance % | Fiscal 1999 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TABLE 2 — NON-INTEREST INCOME SUMMARY | ||||||||||||||
Trust, money management and brokerage fees | $ | 12,013 | $ | 12,046 | -0.3% | $ | 10,211 | |||||||
| Mortgage banking activities | 7,783 | 5,891 | 32.1% | 9,124 | ||||||||||
| Non-banking service revenues | 19,796 | 17,937 | 10.4% | 19,335 | ||||||||||
Fees on deposit accounts | 2,162 | 2,131 | 0 | 1,324 | ||||||||||
| Bank service charges and commissions | 1,654 | 2,387 | -30.7% | 1,940 | ||||||||||
| Other operating revenues | 359 | 145 | 147.6% | 84 | ||||||||||
| Bank service revenues | 4,175 | 4,663 | -10.5% | 3,348 | ||||||||||
| Recurrent non-interest income | 23,971 | 22,600 | 6.1% | 22,683 | ||||||||||
| Recurrent non-interest income to expenses ratio | 65.32% | 62.72% | 2.61% | 69.30% | ||||||||||
TABLE 3 — NON-INTEREST EXPENSES SUMMARY | ||||||||||||||
Fixed compensation | $ | 10,349 | $ | 11,504 | -10.0% | $ | 9,771 | |||||||
| Variable compensation | 3,824 | 4,194 | -8.8% | 5,387 | ||||||||||
| Compensation and benefits (1) | 14,173 | 15,698 | -9.7% | 15,158 | ||||||||||
| Occupancy and equipment | 7,141 | 6,417 | 11.3% | 5,345 | ||||||||||
| Advertising and business promotion | 4,298 | 3,094 | 38.9% | 3,045 | ||||||||||
| Professional and service fees | 3,765 | 3,216 | 17.1% | 2,144 | ||||||||||
| Communications | 1,633 | 1,681 | -2.9% | 1,496 | ||||||||||
| Municipal and other general taxes | 1,951 | 1,920 | 1.6% | 1,711 | ||||||||||
| Insurance, including deposits insurance | 474 | 469 | 1.1% | 458 | ||||||||||
| Printing, postage, stationery and supplies | 683 | 826 | -17.3% | 738 | ||||||||||
| Other operating expenses (1) | 2,578 | 2,714 | -5.0% | 2,637 | ||||||||||
| Other non-interest expenses | 22,523 | 20,337 | 10.7% | 17,574 | ||||||||||
Recurrent non-interest expenses | 36,696 | 36,035 | 1.8% | 32,732 | ||||||||||
| Relevant ratios and data: | ||||||||||||||
| Efficiency ratio | 72.06% | 58.56% | 53.38% | |||||||||||
| Expense ratio | 0.85% | 1.00% | 0.88% | |||||||||||
| Compensation to recurrent non-interest expenses | 38.6% | 43.6% | 46.3% | |||||||||||
| Variable compensation to total compensation | 27.0% | 26.7% | 35.5% | |||||||||||
| Compensation to total average assets | 0.81% | 0.92% | 1.04% | |||||||||||
| Average compensation per employee | $ | 41.8 | $ | 43.9 | $ | 41.3 | ||||||||
| Bank assets per employee | $ | 6,020 | $ | 5,896 | $ | 4,761 | ||||||||
Total work force: | ||||||||||||||
| Banking operations | 314 | 314 | 332 | |||||||||||
| Trust operations | 27 | 27 | 29 | |||||||||||
| Brokerage operations | 22 | 11 | 12 | |||||||||||
| Insurance operations | 13 | — | — | |||||||||||
| 376 | 352 | 373 | ||||||||||||
| (1) Excludes non-recurring charges shown on table 4 below. | ||||||||||||||
TABLE 4 — NON-RECURRING ACTIVITIES | ||||||||||||||
Securities net activity | (1,175 | ) | 1,202 | -197.8% | 10,460 | |||||||||
| Trading net activity | (484 | ) | (382 | ) | 26.7% | (184 | ) | |||||||
| Derivatives activity | (3,919 | ) | — | -100.0% | — | |||||||||
| Securities, derivatives and trading activities | (5,578 | ) | 820 | -780.2% | 10,276 | |||||||||
Leasing revenues (discontinued June 2000) | 65 | 956 | -93.2% | 994 | ||||||||||
| Gain (loss) on sale of leases and consumer loans | 914 | (1,198 | ) | -176.3% | — | |||||||||
| Other non-recurrent expenses | (22 | ) | (3,817 | ) | -99.4% | (2,878 | ) | |||||||
| Stock option cancellation | (1,499 | ) | — | -100.0% | — | |||||||||
| Other activities | (542 | ) | (4,059 | ) | -86.6% | (1,884 | ) | |||||||
| Total non-recurrent activities | $ | (6,120 | ) | $ | (3,239 | ) | 88.9% | $ | 8,392 | |||||
F–3
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
| | Fiscal 2001 | Fiscal 2000 | Change in % | Fiscal 1999 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TABLE 5 — ALLOWANCE FOR LOAN LOSSES SUMMARY | ||||||||||||||
Beginning balance | $ | 6,837 | $ | 9,002 | -24.1% | $ | 5,658 | |||||||
| Provision for loan losses | 2,903 | 8,150 | -64.4% | 14,473 | ||||||||||
| Net credit losses — see table 6 | (6,884 | ) | (10,315 | ) | -33.3% | (11,129 | ) | |||||||
| Ending balance | $ | 2,856 | $ | 6,837 | -58.2% | $ | 9,002 | |||||||
Selected Data and Ratios: | ||||||||||||||
| Outstanding loans at June 30, | $ | 469,338 | $ | 608,174 | -22.8% | $ | 577,713 | |||||||
| Recoveries to net charge-off's | 23.8% | 23.1% | 2.7% | 17.6% | ||||||||||
| Allowance coverage ratio | ||||||||||||||
| Total loans | 0.61% | 1.12% | -45.9% | 1.56% | ||||||||||
| Non-performing loans | 16.90% | 40.52% | -58.3% | 46.06% | ||||||||||
| Non-real estate non-performing loans | 103.37% | 82.15% | 25.8% | 92.23% | ||||||||||
TABLE 6 — NET CREDIT LOSSES STATISTICS | ||||||||||||||
Real estate | ||||||||||||||
| Charge-offs | $ | (77 | ) | $ | (28 | ) | 175.0% | $ | (2 | ) | ||||
| Recoveries | — | — | 0.0% | 16 | ||||||||||
| (77 | ) | (28 | ) | 175.0% | 14 | |||||||||
Consumer | ||||||||||||||
| Charge-offs | (2,326 | ) | (7,415 | ) | -68.6% | (6,020 | ) | |||||||
| Recoveries | 1,182 | 1,606 | -26.4% | 932 | ||||||||||
| (1,144 | ) | (5,809 | ) | -80.3% | 5,088 | ) | ||||||||
Leasing | ||||||||||||||
| Charge-offs | (4,769 | ) | (4,692 | ) | 1.6% | (7,059 | ) | |||||||
| Recoveries | 736 | 1,268 | -42.0% | 1,903 | ||||||||||
| (4,033 | ) | (3,424 | ) | 17.8% | (5,966 | ) | ||||||||
Commercial | ||||||||||||||
| Charge-offs | (1,858 | ) | (1,287 | ) | 44.4% | (419 | ) | |||||||
| Recoveries | 228 | 233 | -2.1% | 330 | ||||||||||
| (1,630 | ) | (1,054 | ) | 54.6% | (89 | ) | ||||||||
Net credit losses | ||||||||||||||
| Total charge-offs | (9,030 | ) | (13,422 | ) | -32.7% | (13,500 | ) | |||||||
| Total recoveries | 2,146 | 3,107 | -30.9% | 2,371 | ||||||||||
| $ | (6,884 | ) | $ | (10,315 | ) | -33.3% | $ | (11,129 | ) | |||||
Net credit losses to average: | ||||||||||||||
| Real estate | 0.02% | 0.01% | 0.00% | |||||||||||
| Consumer | 5.86% | 4.64% | 4.05% | |||||||||||
| Leasing | 82.19% | 3.60% | 4.83% | |||||||||||
| Commercial | 7.11% | 8.68% | -0.03% | |||||||||||
| Total | 1.53% | 1.79% | 1.94% | |||||||||||
Average: | ||||||||||||||
| Real estate | 401,916 | 335,353 | 19.8% | 309,909 | ||||||||||
| Consumer | 19,517 | 125,199 | -84.4% | 125,482 | ||||||||||
| Leasing | 4,907 | 95,012 | -94.8% | 123,519 | ||||||||||
| Commercial | 22,926 | 21,066 | 8.8% | 13,978 | ||||||||||
| Total | $ | 449,266 | $ | 576,630 | -22.1% | $ | 572,888 | |||||||
F–4
SELECTED FINANCIAL DATA
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
| | Fiscal 2001 | Fiscal 2000 | Change in % | Fiscal 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TABLE 7 — LOAN LOSS RESERVE BREAKDOWN (as of June 30,): | |||||||||||||
Consumer | $ | 1,318 | $ | 1,354 | -2.6% | $ | 4,186 | ||||||
| Financing leases | 303 | 4,519 | -93.3% | 4,282 | |||||||||
| Commercial | 419 | 376 | 11.4% | 461 | |||||||||
| Non-real estate | 2,040 | 6,249 | -67.4% | 8,929 | |||||||||
| Real estate | 816 | 588 | 38.8% | 73 | |||||||||
| $ | 2,856 | $ | 6,837 | -58.2% | $ | 9,002 | |||||||
TABLE 8 — NON-PERFORMING ASSETS (as of June 30,): | |||||||||||||
Non-performing assets | |||||||||||||
| Non-performing loans | 16,903 | 16,875 | 0.2% | 19,542 | |||||||||
| Foreclosed real estate | 847 | 398 | 112.8% | 383 | |||||||||
| Repossessed autos | 107 | 552 | -80.6% | 438 | |||||||||
| Repossessed equipment | — | 2 | -100.0% | 46 | |||||||||
| $ | 17,857 | $ | 17,827 | 0.2% | $ | 20,409 | |||||||
Non-performing loans to | |||||||||||||
| Total loans | 3.60% | 2.78% | 29.7% | 3.22% | |||||||||
| Total assets | 0.88% | 0.96% | -9.1% | 1.10% | |||||||||
| Total capital | 15.73% | 15.12% | 4.0% | 17.31% | |||||||||
| TABLE 9 — NON-PERFORMING LOANS (as of June 30,): | |||||||||||||
Non-performing loans | |||||||||||||
| Consumer | $ | 588 | $ | 1,544 | -61.9% | $ | 942 | ||||||
| Financing leases | 640 | 5,878 | -89.1% | 7,652 | |||||||||
| Commercial | 1,535 | 901 | 70.4% | 1,166 | |||||||||
| Non-real estate | 2,763 | 8,323 | -66.8% | 9,760 | |||||||||
| Real estate | 14,140 | 8,552 | 65.3% | 9,782 | |||||||||
| Total | $ | 16,903 | $ | 16,875 | 0.2% | $ | 19,542 | ||||||
Non-performing loans composition | |||||||||||||
| Consumer | 3.5% | 9.1% | -62.0% | 4.8% | |||||||||
| Financing leases | 3.8% | 34.8% | -89.1% | 39.2% | |||||||||
| Commercial | 9.1% | 5.3% | 70.1% | 6.0% | |||||||||
| Non-real estate | 16.3% | 49.3% | -66.9% | 49.9% | |||||||||
| Real estate | 83.7% | 50.7% | 65.1% | 50.1% | |||||||||
| Total | 100.0% | 100.0% | 0.0% | 100.0% | |||||||||
F–5
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
| | June 30, 2001 | June 30, 2000 | Variance % | June 30, 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TABLE 10 — BANK ASSETS SUMMARY AND COMPOSITION | |||||||||||||
Investments: | |||||||||||||
| Mortgage-backed securities and CMOs | $ | 1,337,200 | $ | 882,455 | 51.5% | $ | 696,252 | ||||||
| U.S. and P.R. Government securities | 54,344 | 262,372 | -79.3% | 209,090 | |||||||||
| Investments in equity options | 26,973 | — | 100.0% | — | |||||||||
| FHLB stock and other investments | 81,164 | 34,657 | 134.2% | 41,069 | |||||||||
| 1,499,681 | 1,179,484 | 27.1% | 946,411 | ||||||||||
Loans: | |||||||||||||
| Real estate | 419,966 | 387,629 | 8.3% | 334,649 | |||||||||
| Consumer | 22,717 | 19,698 | 15.3% | 122,212 | |||||||||
| Financing leases | 827 | 8,785 | -90.6% | 110,297 | |||||||||
| Commercial | 25,828 | 24,117 | 7.1% | 10,555 | |||||||||
| 469,338 | 440,229 | 6.6% | 577,713 | ||||||||||
| Consumer loans and leases under contract-to-sell | — | 167,486 | -100.0% | — | |||||||||
| 469,338 | 607,715 | -22.8% | 577,713 | ||||||||||
| Allowance for loan losses | (2,856 | ) | (6,837 | ) | -58.2% | (9,002 | ) | ||||||
| 466,482 | 600,878 | -22.4% | 568,711 | ||||||||||
| Total interest-earning assets | 1,966,163 | 1,780,362 | 10.4% | 1,515,122 | |||||||||
| Non-interest earning assets | 72,777 | 70,852 | 2.7% | 65,631 | |||||||||
| Total assets | $ | 2,038,940 | $ | 1,851,214 | 10.1% | $ | 1,580,753 | ||||||
| Investments portfolio composition: | |||||||||||||
| Mortgage-backed securities and CMOs | 89.2% | 74.8% | 73.6% | ||||||||||
| U.S. and P.R. Government securities | 3.6% | 22.2% | 22.1% | ||||||||||
| Equity options investments | 1.8% | 0.0% | 0.0% | ||||||||||
| FHLB stock and other investments | 7.2% | 3.0% | 4.3% | ||||||||||
| 100.0% | 100.0% | 100.0% | |||||||||||
Loan portfolio composition: | |||||||||||||
| Real Estate | 89.5% | 63.8% | 57.9% | ||||||||||
| Consumer | 4.8% | 3.2% | 21.2% | ||||||||||
| Financing leases | 0.2% | 1.4% | 19.1% | ||||||||||
| Commercial | 5.5% | 31.6% | 1.8% | ||||||||||
| 100.0% | 100.0% | 100.0% | |||||||||||
TABLE 11 — LIABILITIES SUMMARY AND COMPOSITION | |||||||||||||
Deposits: | |||||||||||||
| Savings and demand deposits | $ | 133,980 | $ | 130,919 | 2.3% | $ | 141,544 | ||||||
| Time deposits and IRA accounts | 661,701 | 587,931 | 12.5% | 508,648 | |||||||||
| 795,681 | 718,850 | 10.7% | 650,192 | ||||||||||
| Accrued interest | 2,284 | 4,831 | -52.7% | 5,661 | |||||||||
| 797,965 | 723,681 | 10.3% | 655,853 | ||||||||||
Borrowings: | |||||||||||||
| Repurchase agreements | 915,471 | 816,493 | 12.1% | 596,226 | |||||||||
| FHLB funds | 105,000 | 70,000 | 50.0% | 68,400 | |||||||||
| Term notes and other sources of funds | 60,000 | 86,500 | -30.6% | 106,500 | |||||||||
| 1,080,471 | 972,993 | 11.0% | 771,126 | ||||||||||
| Total interest-bearing liabilities | 1,878,436 | 1,696,674 | 10.7% | 1,426,979 | |||||||||
| Non interest-bearing liabilities | 47,014 | 36,671 | 28.2% | 37,476 | |||||||||
| Total liabilities | $ | 1,925,450 | $ | 1,733,345 | 11.1% | $ | 1,464,455 | ||||||
Deposits portfolio composition: | |||||||||||||
| Savings and demand deposits | 16.8% | 18.1% | 21.6% | ||||||||||
| Time deposits and IRA accounts | 82.9% | 81.2% | 77.6% | ||||||||||
| Accrued Interest | 0.3% | 0.7% | 0.8% | ||||||||||
| 100.0% | 100.0% | 100.0% | |||||||||||
Borrowings portfolio composition: | |||||||||||||
| Repurchase agreements | 84.7% | 83.9% | 77.3% | ||||||||||
| FHLB funds | 9.7% | 7.2% | 8.9% | ||||||||||
| Term notes and other sources of funds | 5.6% | 8.9% | 13.8% | ||||||||||
| 100.0% | 100.0% | 100.0% | |||||||||||
F–6
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
| | June 30, 2001 | June 30, 2000 | Variance % | June 30, 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| TABLE 12 — CAPITAL, DIVIDENDS AND STOCK DATA | ||||||||||||
Capital data: | ||||||||||||
| Stockholders' equity | $ | 113,490 | $ | 117,869 | -3.7% | $ | 116,298 | |||||
| Leverage Capital (minimum required — 4.00%) | 6.68% | 7.49% | -10.8% | 8.30% | ||||||||
| Total Risk-Based Capital (minimum required — 8.00%) | 19.96% | 29.29% | -31.8% | 24.21% | ||||||||
| Tier 1 Risk-Based capital (minimum required — 4.00%) | 19.53% | 30.54% | -36.0% | 22.95% | ||||||||
Stock data: | ||||||||||||
| Outstanding common shares, net of treasury | 12,506 | 12,697 | -1.5% | 12,835 | ||||||||
| Book value | $ | 6.40 | $ | 6.64 | -3.7% | $ | 6.45 | |||||
| Market Price at end of period | $ | 19.00 | $ | 14.44 | 31.6% | $ | 24.13 | |||||
| Market capitalization | $ | 237,620 | $ | 183,316 | 29.6% | $ | 309,644 | |||||
Common dividend data: | ||||||||||||
| Dividends declared | $ | 7,534 | $ | 7,657 | -1.6% | $ | 7,369 | |||||
| Dividends declared per share | $ | 0.60 | $ | 0.60 | 0.4% | $ | 0.56 | |||||
| Payout ratio | 123.87% | 50.36% | 146.0% | 28.02% | ||||||||
| Dividend yield | 5.92% | 2.99% | 98.0% | 1.94% | ||||||||
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 Per share | |||||||||
| | High | Low | ||||||||
| Fiscal 2001: | ||||||||||
| June 30, 2001 | $ | 19.00 | $ | 12.85 | $ | 0.150 | ||||
| March 31, 2001 | $ | 14.81 | $ | 12.75 | $ | 0.150 | ||||
| December 31, 2000 | $ | 15.06 | $ | 11.00 | $ | 0.150 | ||||
| September 30, 2000 | $ | 15.50 | $ | 11.68 | $ | 0.150 | ||||
Fiscal 2000: | ||||||||||
| June 30, 2000 | $ | 19.31 | $ | 13.18 | $ | 0.150 | ||||
| March 31, 2000 | $ | 26.00 | $ | 17.75 | $ | 0.150 | ||||
| December 30, 1999 | $ | 23.87 | $ | 19.69 | $ | 0.150 | ||||
| September 30, 1999 | $ | 28.00 | $ | 21.50 | $ | 0.150 | ||||
Fiscal 1999: | ||||||||||
| June 30, 1999 | $ | 29.87 | $ | 24.13 | $ | 0.150 | ||||
| March 31, 1999 | $ | 29.63 | $ | 27.50 | $ | 0.150 | ||||
| December 30, 1998 | $ | 32.00 | $ | 28.00 | $ | 0.150 | ||||
| September 30, 1998 | $ | 32.26 | $ | 28.84 | $ | 0.113 | ||||
| TABLE 13 — FINANCIAL ASSETS SUMMARY | |||||||||||||
| Financial assets: | |||||||||||||
| Trust assets managed | $ | 1,444,534 | $ | 1,456,500 | -0.8% | $ | 1,380,200 | ||||||
| Assets gathered by broker-dealer | 1,002,253 | 914,900 | 9.5% | 885,800 | |||||||||
| Managed assets | 2,446,787 | 2,371,400 | 3.2% | 2,266,000 | |||||||||
| Group assets | 2,038,940 | 1,851,214 | 10.1% | 1,580,800 | |||||||||
| $ | 4,485,727 | $ | 4,222,614 | 6.2% | $ | 3,846,800 | |||||||
F–7
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2001, 2000 AND 1999
(dollars in thousands)
TABLE 14 — SELECTED QUARTERLY FINANCIAL DATA
| | September 30, | December 31, | March 31, | June 30, | YTD | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FISCAL 2001 | |||||||||||||||||
| Interest income | $ | 30,369 | $ | 28,561 | $ | 29,914 | $ | 31,500 | $ | 120,344 | |||||||
| Interest expense | 23,884 | 22,474 | 23,331 | 21,592 | 91,281 | ||||||||||||
| Net interest income | 6,485 | 6,087 | 6,583 | 9,908 | 29,063 | ||||||||||||
| Provision for loan losses | 1,400 | 500 | 506 | 497 | 2,903 | ||||||||||||
| Net credit income | 5,085 | 5,587 | 6,077 | 9,411 | 26,160 | ||||||||||||
| Non-interest income | 107 | 5,974 | 7,535 | 5,756 | 19,372 | ||||||||||||
| Non-interest expenses | 8,188 | 9,112 | 9,443 | 11,474 | 38,217 | ||||||||||||
| Income (loss) before taxes | (2,996 | ) | 2,449 | 4,169 | 3,692 | 7,315 | |||||||||||
| Income tax (expense) benefit | 1,280 | 269 | 354 | (585 | ) | 1,318 | |||||||||||
| Net income (loss) before cumulative effect of change in accounting principle | (1,716 | ) | 2,718 | 4,523 | 3,107 | 8,633 | |||||||||||
| Cumulative effect in accounting principle, net of tax | (164 | ) | — | — | — | (164 | ) | ||||||||||
| Net income (loss) | (1,880 | ) | 2,718 | 4,523 | 3,107 | 8,469 | |||||||||||
| Less: Dividends on preferred stock | (597 | ) | (597 | ) | (597 | ) | (596 | ) | (2,387 | ) | |||||||
| Net income (loss) available to common shareholders | $ | (2,477 | ) | $ | 2,121 | $ | 3,926 | $ | 2,511 | $ | 6,082 | ||||||
| — | — | — | — | — | |||||||||||||
Per share data: | |||||||||||||||||
| Basic before cumulative effect of change in accounting principle | $ | (0.18 | ) | $ | 0.17 | $ | 0.31 | $ | 0.20 | $ | 0.50 | ||||||
| Basic after cumulative effect of change in accounting principle | $ | (0.20 | ) | $ | 0.17 | $ | 0.31 | $ | 0.20 | $ | 0.49 | ||||||
| Diluted before cumulative effect of change in accounting principle | $ | (0.18 | ) | $ | 0.17 | $ | 0.31 | $ | 0.20 | $ | 0.49 | ||||||
| Diluted after cumulative effect of change in accounting principle | $ | (0.20 | ) | $ | 0.17 | $ | 0.31 | $ | 0.20 | $ | 0.48 | ||||||
| Average shares and potential shares | 12,797 | 12,699 | 12,776 | 12,800 | 12,769 | ||||||||||||
| Selected Financial Ratios: | |||||||||||||||||
| Return on average assets (ROA) | -0.39% | 0.64% | 1.03% | 0.73% | 0.49% | ||||||||||||
| Return on average equity (ROE) | -10.59% | 11.80% | 19.79% | 13.98% | 7.85% | ||||||||||||
| Efficiency ratio | 68.65% | 74.89% | 71.13% | 72.91% | 72.06% | ||||||||||||
| Expense ratio | 0.65% | 0.78% | 0.66% | 1.27% | 0.85% | ||||||||||||
| Interest rate spread | 1.26% | 1.60% | 1.79% | 2.15% | 1.49% | ||||||||||||
FISCAL 2000 | |||||||||||||||||
Interest income | $ | 29,739 | $ | 31,455 | $ | 31,931 | $ | 33,101 | $ | 126,226 | |||||||
| Interest expense | 17,821 | 19,746 | 21,186 | 22,975 | 81,728 | ||||||||||||
| Net interest income | 11,918 | 11,709 | 10,745 | 10,126 | 44,498 | ||||||||||||
| Provision for loan losses | 1,750 | 1,500 | 1,500 | 3,400 | 8,150 | ||||||||||||
| Net credit income | 10,168 | 10,209 | 9,245 | 6,726 | 36,348 | ||||||||||||
| Non-interest income | 6,241 | 6,222 | 6,496 | 4,217 | 23,176 | ||||||||||||
| Non-interest expenses | 8,535 | 8,799 | 9,234 | 13,282 | 39,850 | ||||||||||||
| Income before taxes | 7,874 | 7,632 | 6,507 | (2,339 | ) | 19,674 | |||||||||||
| Provision for income tax | 631 | 298 | 406 | (1,227 | ) | 108 | |||||||||||
| Net income | 7,243 | 7,334 | 6,101 | (1,112 | ) | 19,566 | |||||||||||
| Less: Dividends on preferred stock | (597 | ) | (597 | ) | (597 | ) | (596 | ) | (2,387 | ) | |||||||
| Net income available to common shareholders | $ | 6,646 | $ | 6,737 | $ | 5,504 | $ | (1,708 | ) | $ | 17,179 | ||||||
Per share data: | |||||||||||||||||
| Basic | $ | 0.52 | $ | 0.53 | $ | 0.43 | $ | (0.13 | ) | $ | 0.49 | ||||||
| Diluted | $ | 0.50 | $ | 0.51 | $ | 0.42 | $ | (0.13 | ) | $ | 0.48 | ||||||
| Average shares and potential shares | 13,305 | 13,219 | 13,142 | 12,981 | 12,769 | ||||||||||||
Selected Financial Ratios: | |||||||||||||||||
| Return on average assets (ROA) | 1.81% | 1.83% | 1.41% | -0.26% | 1.15% | ||||||||||||
| Return on average equity (ROE) | 30.38% | 30.80% | 23.76% | -7.38% | 18.73% | ||||||||||||
| Efficiency ratio | 48.25% | 49.78% | 54.66% | 84.83% | 58.56% | ||||||||||||
| Expense ratio | 0.72% | 0.70% | 0.74% | 1.79% | 1.00% | ||||||||||||
| Interest rate spread | 2.81% | 2.93% | 2.60% | 2.33% | 2.43% | ||||||||||||
F–8
SELECTED FINANCIAL DATA
AS OF JUNE 30, 2001, 2000 AND 1999
(dollars in thousands)
TABLE 15 — SELECTED QUARTERLY FINANCIAL DATA
| Change in Interest rate | Expected NII (1) | Amount Change | Percent Change | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Base Scenario | |||||||||
| Flat | $ | 53,824 | $ | — | 0.00% | ||||
| + 200 Basis points | $ | 46,956 | $ | (6,868 | ) | -12.76% | |||
| - 200 Basis points | $ | 57,772 | $ | 3,948 | 7.34% | ||||
Growth Scenario | |||||||||
| Flat | $ | 60,898 | $ | — | 0.00% | ||||
| + 200 Basis points | $ | 56,387 | $ | (4,511 | ) | -7.41% | |||
| — 200 Basis points | $ | 64,123 | $ | 3,225 | 5.30% | ||||
TABLE 16 — CASH FLOW DATA
| | For the Years Ended June 30, | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 1999 | Cumulative | ||||||||||
| Net cash provided (used) | ||||||||||||||
| Operating activities | $ | 73,984 | $ | 41,384 | $ | 146,881 | $ | 262,249 | ||||||
| Investing activities | (249,180 | ) | (297,296 | ) | (384,268 | ) | (930,744 | ) | ||||||
| Financing activities | 171,250 | 253,812 | 257,176 | 682,238 | ||||||||||
| (Decrease) increase in cash and cash equivalents | (3,946 | ) | (2,100 | ) | 19,789 | 13,743 | ||||||||
| Cash and cash equivalents at beginning of year | 33,833 | 35,933 | 16,144 | 16,144 | ||||||||||
| Cash and cash equivalents at end of year | $ | 29,887 | $ | 33,833 | $ | 35,933 | $ | 29,887 | ||||||
F–9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2001
OVERVIEW OF FINANCIAL PERFORMANCE
Financial results for fiscal year 2001 reflect a period of change in Oriental Financial Group, Inc. (the "Group"). Management strategies geared at improving the Group's future performance helped mitigate the impact of previously reported non-recurring charges, such as the restructuring of the Group's investment portfolio, the adoption of new accounting standards for derivatives activities, litigation to collect a denied insurance claim and a $1.5 million non-cash charge related to the cancellation of certain employee stock options.
Results for the latter part of fiscal year 2001 evidence that the institution has turned the corner and is ready to take advantage of various opportunities that will favorably impact its performance during fiscal year 2002.
Net income for the Group's fiscal year ended June 30, 2001 was $8.5 million ($0.48 diluted per share), a 57-percent decrease when compared with net income of $19.6 million ($1.31 per share) for the year ended June 30, 2000. Net income for the Group's fiscal fourth quarter ended June 30, 2001, was $3.1 million ($0.20 per share), which is in sharp contrast to the loss ($1.1 million) reported in the fourth quarter of fiscal 2000.
Excluding gains and losses for non-recurring activities (see Table 4), core income before taxes for fiscal year 2001 was $11.9 million compared to $22.9 million for fiscal year 2000. This decline is mostly attributable to lower net interest income as interest rate increases previously made by the Federal Reserve during fiscal years 2000 and 1999 weighed heavily during the first six months of the Group's fiscal year 2001, combined with the fact that the full effect of interest rate reductions made by the Federal Reserve since January 2001 was not yet fully-absorbed by June 30, 2001.
Management defines core income as net credit income plus recurrent non-interest income less recurrent non-interest expenses, categories representing the Group's day-to-day operations.
Net credit income (interest income less interest expense and provisions for loan losses) decreased 28 percent from $36.3 million for fiscal year 2000 to $26.2 million for fiscal year 2001. This is a result of a 5-percent decrease in interest income, from $126.2 million to $120.3 million, and a 12-percent increase in interest expense, from $81.7 million to $91.3 million. This was mitigated by management's strategy to focus on secured lending, evident in the 64-percent reduction in the provision for loan losses, which declined to $2.9 million for fiscal year 2001 as opposed to $8.2 million for the previous fiscal year.
Non-interest revenues—mainly, money management, brokerage, insurance, mortgage and bank service fees—increased 6 percent from $22.6 million to $24 million. Most notably, mortgage-banking revenues increased 32 percent to reach $7.8 million compared to $5.9 million in fiscal year 2000. The Group has cultivated its non-interest revenue operations for many years, which has proved to be a reliable source of earnings.
On a quarterly basis, core results evidence the Group's improved performance trend, with core income before taxes for the quarter ended June 30, 2001, reaching $5.4 million, a 91-percent increase from $2.8 million for the quarter ended June 30, 2000, and a 49-percent increase from core income of $3.6 million for the quarter ended March 31, 2001.
Management's emphasis on secured lending, coupled with interest rate cuts made by the Federal Reserve during the past seven months, paved the way for a 40-percent increase in quarterly net credit income, which reached $9.4 million compared to $6.7 million in the quarter ended June 30, 2000. Although management's decision to focus on secured lending temporarily affected interest income,
F–10
which decreased 4.8 percent from $33.1 million to $31.5 million when comparing those quarters, the Group's loan portfolio quality has improved dramatically, evident in the 85-percent decrease in the provision for loan losses, which was $497,000 for the quarter ended June 30, 2001, as opposed to $3.4 million in the fourth quarter of fiscal year 2000. Quarterly net credit income was further helped by a 6-percent decrease in interest expense from $23 million to $21.6 million, attributable to interest rate cuts made by the Federal Reserve since January 2001.
When comparing the last quarters of fiscal years 2001 and 2000, a 5-percent increase from $5.5 million to $5.8 million in recurrent non-interest revenues helped offset a 5-percent increase (from $9.4 million to $9.9 million) in non-interest expenses. Specifically, brokerage, trust and insurance revenues grew 12 percent, from $3.3 million in the June 2000 quarter to $3.7 million, as emphasis on operations that generate fees further strengthened the Group's earnings potential.
When comparing the quarter ended June 30, 2001, to the quarter ended March 31, 2001, net credit income increased 55 percent from $6.1 million to $9.4 million as interest income increased 5 percent and interest expense declined more than 7 percent from the trailing quarter. Brokerage, trust and insurance fees show a 28-percent increase during the same period.
Total Financial Assets Increased
Total financial assets (banking assets plus assets managed by the trust department and broker-dealer subsidiary) increased 6 percent to a record $4.486 billion as of June 30, 2001 from $4.221 billion reported at the end of the previous fiscal year. Assets managed by the Group's trust department and broker-dealer subsidiary increased 3 percent to $2.447 billion from $2.371 billion, despite the declining equity market experienced during the past year. The Group's bank assets increased a robust 10 percent to surpass the $2 billion level for the first time in its history, reaching $2.039 billion as of June 30, 2001, versus $1.850 billion as of June 30, 2000. Interest-earning assets also increased 10 percent from $1.780 billion to $1.966 billion.
On the liability side, deposits increased 10 percent from $723.7 million to $798 million. IRA deposits were the largest contributor to this growth, increasing $58 million during the year, followed by retail deposits, which grew approximately $22 million when comparing both fiscal years.
NET INTEREST INCOME
Table 1 analyzes the major categories of interest-earning assets and interest-bearing liabilities, their respective revenues, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates.
Net interest income is affected by the difference between rates 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 of this report, the Group constantly monitors the composition and repricing of its assets and liabilities to maintain its net interest income at adequate levels.
For its fiscal year ended June 30, 2001, the Group's net interest income amounted to $29.1 million, down 35 percent from $44.5 million in fiscal 2000. As reflected in Table 1, the impact of the reduction of net interest income was substantially lower on a tax-equivalent basis.
The reduction in net interest income was mainly due to a negative rate variance of $11.5 million as result of a higher average cost of funds (5.69 percent in fiscal 2001 versus 5.29 percent in fiscal 2000) in line with interest-rate increases made by the Fed in prior years, combined with a negative volume variance of $3.9 million, which mainly stems from the previously reported sale of the lease and
F–11
unsecured consumer loan portfolios, with the proceeds used to pay debt and/or invested in higher-quality investments.
The interest-rate spread narrowed 94-basis points during fiscal year 2001 to 1.49 percent from 2.43 percent in fiscal year 2000. This was mainly due to an increase in the average cost of funds and a change in the mix of interest-earning assets to focus on lower-risk loans and tax-free investments.
The Group's interest income for fiscal 2001 totaled $120.3 million, down 4.7 percent from $126.2 million posted in fiscal 2000. This decline is mainly due to: (i) the expansion of the Group's investment portfolio, which carries a lower yield than the loan portfolio but provides less risk and generates a significant amount of tax-exempt interest; and (ii) the reduction in the loan portfolio yield, which decreased 98-basis points for fiscal year 2001, reflecting the previously reported sale of almost $170 million of leases and unsecured loans made in July 2000.
Average interest-earning assets increased 3 percent, from $1.64 billion to $1.68 billion, year-to-year. This moderate increase reflects management's decision to grow its assets with interest-earning assets that enhance the Group's profitability, and reflects the sale of the unsecured consumer loans and leases, which proceeds were used to repay debt and invest in higher-quality securities. The average balance of investments grew by 16 percent (from $1.06 billion to $1.23 billion) when compared to the previous fiscal year. However, the average balance of loans decreased 22 percent ($449 million versus $578 million) when comparing both years, as a result of the previously mentioned sale of loans.
Interest expense for fiscal 2001 rose 12 percent to $91.3 million from $81.7 million reported in fiscal 2000. A larger base of interest-bearing liabilities ($1.60 billion versus $1.54 billion, when comparing both years) to fund the growth of the Group's interest-earning assets, combined with a higher average cost of funds (5.69 percent versus 5.29 percent) drove the increase. Larger volumes of repurchase agreements and deposits, which were necessary to fund the growth of the Group's investment portfolio, drove this increase in interest-bearing liabilities. For the year ended June 30, 2001, the cost of borrowings increased 37-basis points (6.05 percent versus 5.68 percent) when compared to fiscal 2000. The cost of short-term financing substantially increased during calendar year 2000 as a result of interest rate hikes made by the Fed, but the Group benefited slightly and should continue to benefit considerably from interest rate reductions made since January 2001.
NON-INTEREST INCOME
Table 2 shows recurrent revenues derived from non-interest income activities. Non-interest income is affected by the activity of trust assets under management, transactions generated by the broker-dealer subsidiary, the level of mortgage-banking activities, insurance distribution fees, and service fees generated from loans and deposit accounts. As a diversified financial planning services provider, the Group's earnings enjoy a recurrent inflow of significant fees and other non-interest income, which at one point during fiscal year 2001 represented approximately half of the recurrent revenue mix. Furthermore, the Group enjoys a 67-percent coverage ratio when comparing recurrent non-interest income with non-interest expenses.
For the year ended June 30, 2001, recurrent non-interest revenues increased 6 percent to $24 million from $22.6 million in fiscal 2000. This growth was mainly achieved through a 32-percent increase in mortgage-banking activities, which offset declines in other types of fees.
Trust, money management, brokerage and insurance fees, the principal component of recurrent non-interest income, declined less than 1 percent, mainly due to a bearish U.S. securities market and public concern over the global economic outlook that influenced the volume and value of client investments managed. For fiscal years 2001 and 2000, these revenues were $12.01 million and $12.05 million, respectively.
F–12
The second largest component of non-interest revenues is mortgage-banking activities, which increased 32 percent to reach $7.8 million in fiscal year 2001, from $5.9 million the previous fiscal year. The increases are mostly a result of management's previously reported strategy of focusing resources on secured lending operations that provide an attractive source of fees and lower credit risks. The strategy has improved the origination of fees and servicing rights, which are recognized in income over the life of the loan or when the related loan is sold.
Bank services fees and other operating revenues consist primarily of fees generated by depository accounts, electronic banking and customer services. These revenues totaled $4.2 million in fiscal 2001, an 11-percent decline from $4.7 million in fiscal 2000. This decline is mostly related to fewer late payment fees following the discontinuation of leasing and unsecured lending activities and the sale of related loans.
NON-INTEREST EXPENSES
Table 3 details non-interest expenses (excluding non-operating charges). Excluding a $1.5 million non-cash expense for the cancellation of certain non-vested employee stock options discussed below under non-operating activities, recurrent non-interest expenses increased less than 2 percent from year-to-year, reflecting management's strict cost control policies.
Increases in advertising and occupancy and equipment were basically offset by decreases in compensation (excluding the stock option cancellation expense), supplies and service fees. Specifically, employee compensation and benefits (the Group's largest expense category) decreased almost 10 percent from $15.7 million in fiscal 2000 to $14.2 million (excluding the stock option cancellation). These savings were mostly obtained from leasing operations that were discontinued in June 2000.
Non-interest expenses other than compensation increased almost 11 percent to $22.5 million for fiscal 2001, compared to $20.3 million for fiscal year 2000. A $1.2 million or 39-percent increase in advertising expenses was mainly responsible for this increase, as the Group has moved aggressively during fiscal year 2001 to position itself as a provider of financial planning services. Additionally, a $700,000 increase in occupancy and equipment costs used to improve the Group's service capabilities and long-term performance was also part of the increase in non-interest expenses.
NON-OPERATING ACTIVITIES
As seen in Table 4, the Group reported derivative activities following the adoption of Statement of Financial Accounting Standards No. 133. This accounting standard requires the recognition of derivatives on the balance sheet at fair value and that changes in their fair value be recognized in the statement of income or equity depending on certain hedge accounting criteria. The implementation of SFAS No. 133 resulted in a $3.9 million loss for the year ended June 30, 2001. The Group reported a $164,000 unrealized loss, net of income tax effect, in the first quarter of fiscal 2001 to recognize the cumulative effect of the change in accounting principle.
As reported in the quarter ended September 30, 2000, the Group also incurred a $3.7 million loss in the sale of treasury securities following the recommendation of its external consultants to place these funds in higher-yielding securities to improve their long-term performance. The Group has been able to recover a significant portion of this loss through subsequent gains in securities activities, which now reflect a $1.2 million loss for the fiscal year. In summary, the Group has a total $7 million loss from non-recurrent activities during fiscal year 2001, which contrasts with a $3.2 million loss recognized in fiscal year 2000.
During the quarter ended June 30, 2001, the Board of Directors cancelled approximately 367,834 non-vested stock options granted at a discount price to its directors, officers and employees during calendar years 1999 and 1998. As a result of stock option accounting rules, Oriental was required to
F–13
recognize a $1.5 million non-cash compensation expense with a corresponding offsetting credit in additional paid-in capital.
PROVISION FOR LOAN LOSSES
The provision for loan losses in fiscal 2001 totaled $2.9 million, down 64 percent from the $8.2 million reported in 2000. The decline reflects the new composition of the Group's loan portfolio, mostly secured by real estate, following the sale of leases and unsecured loans, curtailing net credit losses. Please refer to Tables 5 through 9 for a more detailed analysis of the allowance for loan losses, net credit losses and credit quality statistics.
INCOME TAXES
The Group recognized a $1.3 million tax credit for fiscal year 2001, which compares with the $108,000 provision made in fiscal 2000. The income tax benefit resulted from losses related to the aforementioned non-operating activities. Furthermore, the difference between the tax credit and the maximum statutory tax rate for the Group, which is 39 percent, is also attributable to tax-advantaged interest income earned on certain investments and loans, net of the disallowance of related expenses attributable to the exempt income.
FINANCIAL CONDITION
GROUP'S ASSETS
As of June 30, 2001, the Group's total assets amounted to $2.039 billion, a 10-percent increase when compared to $1.850 billion a year ago. At the same date, interest-earning assets reached $1.966 billion, up 10 percent versus $1.780 billion a year earlier.
As detailed in Table 10, investments are the Group's largest interest-earning assets component. They mainly consist of money market investments, mortgage-backed securities, and Puerto Rico and U.S. government bonds. As of June 30, 2001, the Group's investment portfolio was of high quality and generated significant amount of tax-exempt interest income that lowered the Group's tax obligations. Note 3 to the Consolidated Financial Statements further details the Group's investments.
An increase in mortgage-backed securities drove the investment portfolio growth, increasing 52 percent to $1.337 billion (89 percent of the total portfolio) from $882 million (75 percent of the total portfolio) the year before, in part reflecting the Group's strategy of pooling residential real estate loans to create mortgage-backed securities.
Also detailed in Table 10 is the Group's loan portfolio, the second largest category of the Bank's interest-earning assets, which amounted to $466 million, 22-percent lower than the $601 million of a year ago. As previously reported, the Group refocused its lending strategy to concentrate on collateralized originations (primarily, mortgage loans and personal loans with mortgage collateral) and discontinued leasing operations on June 30, 2000, while substantially downsizing its unsecured lending activities. On July 7, 2000, the Group sold almost $170 million of leases and unsecured loans, maintaining only a marginal amount of these loans in its portfolio. Substantially all of the Group's loans have a fixed interest rate.
The Group's real estate loan portfolio mainly comprises residential loans, home equity loans and personal loans collateralized by real estate. As shown in Table 10, the real estate loans portfolio amounted to $420 million or almost 90 percent of the loan portfolio as of June 30, 2001, which is an extremely positive increase from its 64-percent share of a year ago.
The second largest component of the Group's loan portfolio is secured commercial loans, representing around 5 percent of the portfolio versus 32 percent a year before—an amount expected to
F–14
increase as the Group has emphasized its secured commercial lending capabilities during fiscal year 2001. Consumer loans are the Group's third largest category with $22.7 million or less than 5 percent of the portfolio, an amount that should remain at a minimum since the Group has moved away from unsecured lending.
LIABILITIES AND FUNDING SOURCES
As shown in Table 11, as of June 30, 2001, the Group's total liabilities reached $1.925 billion, 11 percent higher than the $1.732 billion reported a year earlier. Interest-bearing liabilities, the Group's principal funding source, amounted to $1.878 billion at the end of fiscal 2001 versus $1.697 billion the year before, also an 11-percent increase.
Borrowings, the Group's largest interest-bearing liability, consist of repurchase agreements, FHLB of New York (FHLB) advances, term notes, notes payable and lines of credit. As of June 30, 2001, borrowings amounted to $1.080 million; 11 percent more than the $973 million reported a year before. Almost 85 percent of these borrowings are repurchase agreements.
The Group also uses FHLB funds, an alternative source of funding for financial institutions that are members of a regional Federal Home Loan Bank. As a member of the FHLB of New York, the Group can obtain advances from the FHLB, secured by FHLB stock owned by the Group and certain of the Group's mortgages and investment securities. As of June 30, 2001, the Group increased its FHLB advances by 50 percent when compared to the previous year, reaching $105 million from $70 million the previous year. The Group took advantage of market conditions that favored the low-cost funding available from FHLB.
As of June 30, 2001, deposits (the second largest category of the Group's interest-bearing liabilities) reached $798 million, up 10 percent from $724 million a year ago. A 27-percent increase in IRA accounts (from $212 million last year to $270 million) plus a 12-percent increase in retail deposits (from $189 million to $211 million) more than offset a 3-percent decline in wholesale deposits, which went from $187 million to $181 million.
STOCKHOLDERS' EQUITY
Stockholders' equity data is provided in Table 12. As of June 30, 2001, total stockholders' equity was $113.5 million, declining almost 4 percent from $117.9 million as of June 30, 2000. The main reason for this decrease was the valuation of certain hedges recognized in equity pursuant to the adoption of SFAS No. 133. The Group's "Consolidated Statements of Changes in Stockholder's Equity and of Comprehensive Income" and the accompanying notes provide more details of SFAS No. 133 and its impact on the financial statements.
The Group repurchased 270,900 common shares for $3.7 million, bringing to 1,378,699 shares (with a cost of $30.7 million) the total number of treasury shares. As of June 30, 2001, the Group's market value for its outstanding common stock, traded in the New York Stock Exchange ("NYSE") under the symbol OFG, was $237.6 million or $19.00 per share.
During fiscal year 2001, the Group declared dividends amounting to $7.5 million ($0.60 per share). The dividend yield was 5.92 percent and 2.99 percent for fiscal years 2001 and 2000, respectively. Management expects to continue declaring dividends at the present rate in forthcoming quarters.
Financial holding companies are considered well capitalized under the regulatory framework for prompt corrective action if they meet or exceed a Tier I risk-based capital ratio of 6 percent, a total risk-based capital ratio of 10 percent and a leverage capital ratio of 5 percent. As shown in Table 12, the Group comfortably exceeds these benchmarks due to the high level of capital and the quality and conservative nature of its assets.
F–15
GROUP'S FINANCIAL ASSETS
Table 13 shows the Group's total financial assets, which include the Group's assets plus client assets managed by the Group's trust department and broker-dealer subsidiary. As of June 30, 2001, total financial assets reached $4.486 billion, up 6 percent from $4.222 billion a year ago. Assets owned by the Group (of which 99 percent are owned by the Group's banking subsidiary) are the main component of the Group's financial assets. These assets are explained in a previous section entitled Group's Assets.
The Group's second largest financial asset component is managed by the trust department, which includes various types of IRA products, 401(K) and Keogh retirement plans, custodian and corporate trust accounts. As of June 30, 2001, total assets managed by the Group's trust department amounted to $1.445 billion, 1 percent lower than the $1.457 billion reported a year ago. This decrease is mostly a result of the bearish securities market experienced the past 12 months, which affected the market valuation of these assets under management.
The other financial asset component is assets gathered by the Group's broker-dealer, which offers a wide array of investment alternatives to its clients, such as fixed and variable annuities, tax-advantaged fixed income securities, mutual funds, stocks and bonds. As of June 30, 2001, total assets gathered by the broker-dealer from its customer investment accounts exceeded $1 billion for the first time, reaching $1.002 billion, up 10 percent from $915 million a year ago, despite the sluggish U.S. securities market experienced the past fiscal year.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The Group maintains an allowance for loan losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Group's allowance for loan losses policy requires a detailed quarterly analysis of probable losses.
As of June 30, 2001, the allowance for loan losses (see Tables 5 through 7) amounted to $2.9 million, or 0.61 percent of total loans, versus $6.8 million, or 1.12 percent of total loans a year earlier. The reduction is directly related to the significant decline in credit risk achieved through management's previously reported strategy of focusing on collateralized lending and the aforementioned sale of leases and unsecured loans. Excluding real estate loans, which carry minimum risk of loss due to their collateral, the allowance for loan losses amounted to 103% of non-real estate non-performing loans.
The principal factor that the Group uses to determine the level of allowance for loan losses is the Group's historical and current credit loss experience. This factor is combined with qualitative factors such as: the growth of the loan portfolio, concentrations of credit (e.g., local industries, etc.) that might affect loss experience across one or more components of the portfolio, delinquencies, effects of any changes in lending policies and procedures (including underwriting standards), collections and general economic conditions.
The methodology that the Group uses follows a loan credit risk rating process that involves dividing loans into risk categories and is based on aging. The following are credit-risk categories used and established by the FDIC Interagency Policy Statement of 1993:
- 1.
- PASS—loans considered highly collectible due to their repayment history or current status (to be in this category a loan cannot be more than 90 days past due).
- 2.
- SPECIAL MENTION—loans with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan.
F–16
- 3.
- SUBSTANDARD—loans inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
- 4.
- DOUBTFUL—loans that have all the weaknesses inherent in substandard, with the added characteristic that collection or liquidation in full is highly questionable and improbable.
- 5.
- LOSS—loans considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
The Group, using an aging-based rating system, applies an overall reserve percentage to each loan portfolio category based on historical credit losses adjusted for current or expected conditions and trends. This delinquency-based calculation is the starting point for management's determination of the required level of the allowance for loan losses. Other data considered in this determination include:
- 1.
- Overall historical loss trends (one year and three years), and
- 2.
- Other information including underwriting standards, economic trends and unusual events such as hurricanes.
Loan loss ratios and credit risk categories are updated annually and applied in the context of GAAP and following the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating loan losses, future changes to the allowance may be necessary based on factors beyond the Group's control, such as factors affecting general economic conditions.
Net credit losses for fiscal year 2001, detailed in Table 6, totaled $6.9 million or 1.53 percent of average loans, 33-percent lower than the $10.3 million in losses (1.79 percent of average loans) in fiscal 2000. The lower level of net credit losses experienced was primarily associated with a reduction in consumer loans and financing leases as a result of the sale of the related portfolios.
As shown in Table 8, the Group's non-performing assets include non-performing loans, foreclosed real estate owned and other repossessed assets. Non-performing assets totaled $17.9 million (0.88 percent of total assets) as of June 30, 2001, versus $17.8 million (0.96 percent of total assets) for fiscal 2000.
REAL ESTATE LOANS—are placed on non-accrual basis when they become 90 days or more past due, except well-secured residential loans, and are charged-off based on the specific evaluation of the underlying collateral. As of June 30, 2001, the Group's non-performing real estate loans totaled $14.1 million (84 percent of non-performing loans). At the same date, the Group had $10.8 million of residential real estate loans contractually 90 days or more past due and accruing (2000—$7.5 million). Based on the value of the underlying collateral and the loan-to-value ratios, management considers that no significant losses will be incurred on this portfolio.
COMMERCIAL BUSINESS LOANS—are placed on non-accrual basis when they become 90 days or more past due and are charged-off based on the specific evaluation of the underlying collateral. As of June 30, 2001, the Group's non-performing commercial business loans amounted to $1.5 million (9 percent of non-performing loans). Most of this portfolio is also collateralized by real estate and no significant losses are expected.
FINANCE LEASES—are placed on non-accrual status when they become 90 days past due. As of June 30, 2001, the Group's non-performing financing leases portfolio amounted to $640,000 (3.8 percent of the Group's total non-performing loans). The underlying collateral secures these financing leases. As reported, the Group discontinued leasing operations on June 30, 2000.
F–17
CONSUMER LOANS—are placed on non-accrual status when they become 90 days past due and charged-off when payments are delinquent 120 days. As of June 30, 2001, the Group's non-performing consumer loans amounted to $588,000 (3.5 percent of the Group's total non-performing loans).
FORECLOSED REAL ESTATE—initially recorded at the lower of the related loan balance or fair value less disposal cost at the date of foreclosure, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. Subsequently, any excess of the carrying value over the estimated fair market value less disposition cost is charged to operations. Management is actively seeking prospective buyers for these foreclosed real estate properties. As of June 30, 2001, foreclosed real estate balance was $847,000.
OTHER REPOSSESSED ASSETS—initially recorded at estimated net realizable value. At the time of disposition, any additional losses incurred are charged against the allowance for loan losses. As of June 30, 2001, the repossessed assets amounted to $107,000.
F–18
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND ASSET/LIABILITY MANAGEMENT
The Group's interest-rate risk and asset/liability management is the responsibility of the Asset and Liability Management Committee ("ALCO"), which reports to the Board of Directors and is composed of members of the Group's senior management. The principal objective of ALCO is to enhance profitability while maintaining an appropriate level of interest rate and liquidity risks. ALCO is also involved in formulating economic projections and strategies used by the Group in its planning and budgeting process, and oversees the Group's sources, uses and pricing of funds.
Interest rate risk can be defined as the exposure of the Group's operating results or financial position to adverse movements in market interest rates, which mainly occurs when assets and liabilities reprice at different times and at different rates. This difference is commonly referred to as a "maturity mismatch" or "gap". The Group employs various techniques to assess the degree of interest rate risk.
The Group is liability sensitive due to its fixed rate and medium to long-term asset composition being funded with shorter-term repricing liabilities. As a result, the Group uses interest rate swaps and caps as a mechanism to offset said mismatch and control exposures to interest rate risk. Under the swaps, the Group pays a fixed annual cost and receives a floating ninety-day payment based on LIBOR. Floating rate payments received from the swap counterpart correspond to the floating rate payments made on the borrowings or notes thus resulting in a net fixed rate cost to the Group. Interest rate caps provide protection against increases in interest rates above cap rates.
LIQUIDITY RISK MANAGEMENT
Liquidity refers to the level of cash, eligible investments easily converted into cash and lines of credit available to meet unanticipated requirements. The objective of the Group's liquidity management is to meet operating expenses and ensure sufficient cash flow to fund the origination and acquisition of assets, the repayment of deposit withdrawals and the maturities of borrowings. Other objectives pursued in the Group's liquidity management are the diversification of funding sources and the control of interest rate risk. Management tries to diversify its financing sources to avoid undue reliance on any particular source.
As of June 30, 2001, the Group's liquidity was deemed adequate, as liquid assets amounted to $1.241 billion or 12 percent more than the previous year when they were $1.108 billion. In addition, the Group has $24.4 million available from unused lines of credit with other financial institutions and $52.8 million of borrowing potential with the FHLB of New York. The Group's liquidity position is reviewed and monitored by the ALCO Committee on a regular basis. Management believes that the Group will continue to maintain adequate liquidity levels in the future.
The Group's principal sources of funds are net deposit inflows, loan repayments, mortgage-backed and investment securities principal and interest payments, repurchase agreements, FHLB of New York advances and other borrowings. The Group has obtained long-term funding through the issuance of notes and long-term repurchase agreements. The Group's principal uses of funds are the origination and purchase of loans, the purchase of mortgage-backed and investment securities and the repayment of maturing deposits and borrowings.
DISCLAIMER
This report contains certain assumptions and forward-looking statements that reflect management's beliefs and expectations. It is subject to change given risks and uncertainties that may affect the Company's businesses, including (without limitation) the effects of economic and market conditions, the level and volatility of interest rates and securities, the actions undertaken by both current and potential competitors, the impact of current, pending or future legislation and regulation both in the United States and in Puerto Rico, and the potential effects of technological changes.
F–19
Report of Independent Accountants
To the Board of Directors and Stockholders of
Oriental Financial Group Inc.
In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of income, of changes in stockholders' equity, of comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Oriental Financial Group Inc. and its subsidiaries at June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the accompanying consolidated financial statements, in fiscal year 2001, the Group adopted the Statement of Financial Accounting Standards No. 133, "Accounting for Certain Derivatives Instruments and Certaing Hedging Activities," as amended, which effect was accounted for as a cumulative effect of a change in accounting principle.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
August 17, 2001
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1756877 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F–20
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2001 AND 2000
(IN THOUSANDS)
| | 2001 | 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| Cash and due from banks | $ | 8,220 | $ | 10,322 | ||||||
Investments: | ||||||||||
| Money market investments | 21,667 | 23,511 | ||||||||
| Other short-term investments | 42,124 | — | ||||||||
| Total money market and other short term investments | 63,791 | 23,511 | ||||||||
| Trading securities, at fair value: | ||||||||||
| Securities pledged that can be repledged | — | 40,343 | ||||||||
| Other investment securities | 76,760 | 24,100 | ||||||||
| Total trading securities | 76,760 | 64,443 | ||||||||
| Investment securities available-for-sale, at fair value: | ||||||||||
| Securities pledged that can be repledged | 920,320 | 151,277 | ||||||||
| Other investment securities | 396,565 | 131,623 | ||||||||
| Total investment securities available-for-sale | 1,316,885 | 282,900 | ||||||||
| Investment securities held-to-maturity, at amortized cost (fair value $770,851): | ||||||||||
| Securities pledged that can be repledged | — | 669,505 | ||||||||
| Other investment securities | — | 127,979 | ||||||||
| Total investment securities held-to-maturity | — | 797,484 | ||||||||
| Federal Home Loan Bank (FHLB) stock, at cost | 15,272 | 11,146 | ||||||||
| Investments in equity options | 26,973 | — | ||||||||
| Total investments | 1,499,681 | 1,179,484 | ||||||||
Loans: | ||||||||||
| Loans held-for-sale, at lower of cost or market | 23,570 | 180,788 | ||||||||
| Loans receivable, net of allowance for loan losses of $2,856 (2000 -$6,837) | 442,912 | 420,090 | ||||||||
| Total loans, net | 466,482 | 600,878 | ||||||||
Accrued interest receivable | 16,646 | 13,485 | ||||||||
| Foreclosed real estate, net | 847 | 398 | ||||||||
| Premises and equipment, net | 20,936 | 21,706 | ||||||||
| Other assets, net | 26,128 | 24,941 | ||||||||
Total assets | $ | 2,038,940 | $ | 1,851,214 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Deposits: | ||||||||||
| Savings and demand | $ | 133,980 | $ | 130,919 | ||||||
| Time and IRA accounts | 661,701 | 587,931 | ||||||||
| 795,681 | 718,850 | |||||||||
| Accrued interest | 2,284 | 4,831 | ||||||||
| Total deposits | 797,965 | 723,681 | ||||||||
Borrowings: | ||||||||||
| Securities sold under agreements to repurchase | 915,471 | 816,493 | ||||||||
| Advances from FHLB | 105,000 | 70,000 | ||||||||
| Term notes | 60,000 | 86,500 | ||||||||
| Total borrowings | 1,080,471 | 972,993 | ||||||||
Accrued expenses and other liabilities | 47,014 | 36,671 | ||||||||
Total liabilities | 1,925,450 | 1,733,345 | ||||||||
Commitments and contingencies | — | — | ||||||||
Stockholders' equity: | ||||||||||
| Preferred stock, $1 par value; 5,000,000 shares authorized; $25 liquidation value; 1,340,000 shares issued and outstanding | 33,500 | 33,500 | ||||||||
| Common stock, $1 par value; 20,000,000 shares authorized; 13,885,468 shares issued (2000—13,805,135) | 13,885 | 13,805 | ||||||||
| Additional paid-in capital | 26,004 | 23,786 | ||||||||
| Legal surplus | 12,118 | 10,578 | ||||||||
| Retained earnings | 76,818 | 79,809 | ||||||||
| Treasury stock, at cost, 1,378,699 shares (2000—1,107,799) | (30,651 | ) | (27,116 | ) | ||||||
| Accumulated other comprehensive loss, net of $280 tax benefit (2000 — $1,413 tax benefit) | (18,184 | ) | (16,493 | ) | ||||||
| Total stockholders' equity | 113,490 | 117,869 | ||||||||
Total liabilities and stockholders' equity | $ | 2,038,940 | $ | 1,851,214 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F–21
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
| | 2001 | 2000 | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest income: | ||||||||||||
| Loans and leases | $ | 38,762 | $ | 55,377 | $ | 55,596 | ||||||
| Mortgage-backed securities | 66,916 | 54,583 | 36,970 | |||||||||
| Investment securities | 9,975 | 15,756 | 14,812 | |||||||||
| Short term investments | 4,691 | 510 | 431 | |||||||||
| Total interest income | 120,344 | 126,226 | 107,809 | |||||||||
Interest expense: | ||||||||||||
| Deposits | 36,642 | 31,423 | 28,785 | |||||||||
| Securities sold under agreements to repurchase | 48,047 | 41,116 | 25,923 | |||||||||
| Other borrowed funds | 6,592 | 9,189 | 10,067 | |||||||||
| Total interest expense | 91,281 | 81,728 | 64,775 | |||||||||
Net interest income | 29,063 | 44,498 | 43,034 | |||||||||
| Provision for loan losses | 2,903 | 8,150 | 14,473 | |||||||||
| Net interest income after provision for loan losses | 26,160 | 36,348 | 28,561 | |||||||||
Non-interest income (losses): | ||||||||||||
| Trust, money management and brokerage fees | 12,013 | 12,046 | 10,211 | |||||||||
| Mortgage banking activities | 7,783 | 5,891 | 9,124 | |||||||||
| Gain (loss) on sale of loans | 914 | (1,198 | ) | — | ||||||||
| Banking service revenues | 4,175 | 4,663 | 3,348 | |||||||||
| Net (loss) gain on sale of securities available-for-sale | (1,175 | ) | 1,202 | 10,460 | ||||||||
| Derivatives activities, net | (3,919 | ) | — | — | ||||||||
| Trading activity, net | (484 | ) | (382 | ) | (184 | ) | ||||||
| Leasing revenues | 65 | 956 | 994 | |||||||||
| Total non-interest income | 19,372 | 23,178 | 33,953 | |||||||||
Non-interest expenses: | ||||||||||||
| Compensation and benefits | 15,672 | 15,698 | 15,158 | |||||||||
| Occupancy and equipment, net | 7,141 | 6,417 | 5,345 | |||||||||
| Advertising and business promotion | 4,298 | 3,094 | 3,045 | |||||||||
| Professional and service fees | 3,765 | 3,216 | 2,144 | |||||||||
| Communications | 1,633 | 1,681 | 1,496 | |||||||||
| Taxes other than on income | 1,951 | 1,920 | 1,711 | |||||||||
| Insurance, including deposit insurance | 474 | 469 | 458 | |||||||||
| Printing, postage, stationery and supplies | 683 | 826 | 738 | |||||||||
| Other | 2,600 | 6,531 | 5,515 | |||||||||
| Total non-interest expense | 38,217 | 39,852 | 35,610 | |||||||||
Income before income taxes | 7,315 | 19,674 | 26,904 | |||||||||
| Income tax benefit (expense) | 1,318 | (108 | ) | (200 | ) | |||||||
| Income before cumulative effect of change in accounting principles, net of tax | 8,633 | 19,566 | 26,704 | |||||||||
| Cumulative effect of change in accounting principle, net of tax | (164 | ) | — | — | ||||||||
| Net income | 8,469 | 19,566 | 26,704 | |||||||||
| Less: Dividends on preferred stock | (2,387 | ) | (2,387 | ) | (350 | ) | ||||||
| Net income available to common shareholders | $ | 6,082 | $ | 17,179 | $ | 26,354 | ||||||
Income per common share: | ||||||||||||
| Basic before cumulative effect of change in accounting principle | $ | 0.50 | $ | 1.34 | $ | 2.02 | ||||||
| Basic after cumulative effect of change in accounting principle | $ | 0.49 | $ | 1.34 | $ | 2.02 | ||||||
Diluted before cumulative effect of change in accounting principle | $ | 0.49 | $ | 1.31 | $ | 1.93 | ||||||
| Diluted after cumulative effect of change in accounting principle | $ | 0.48 | $ | 1.31 | $ | 1.93 | ||||||
Average common shares outstanding | 12,542 | 12,787 | 13,051 | |||||||||
| Average potential common share options | 227 | 375 | 582 | |||||||||
| 12,769 | 13,162 | 13,633 | ||||||||||
| Dividends per share of common stock | $ | 0.60 | $ | 0.60 | $ | 0.56 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F–22
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND OF COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(IN THOUSANDS)
| | 2001 | 2000 | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CHANGES IN STOCKHOLDERS' EQUITY: | ||||||||||||
Preferred stock: | ||||||||||||
| Balance at beginning of year | $ | 33,500 | $ | 33,500 | $ | — | ||||||
| Issuance of preferred stock | — | — | 33,500 | |||||||||
| Balance at end of year | 33,500 | 33,500 | 33,500 | |||||||||
Common stock: | ||||||||||||
| Balance at beginning of year | 13,805 | 13,739 | 13,534 | |||||||||
| Stock options exercised | 80 | 66 | 205 | |||||||||
| Balance at end of year | 13,885 | 13,805 | 13,739 | |||||||||
Additional paid-in capital: | ||||||||||||
| Balance at beginning of year | 23,786 | 23,313 | 23,876 | |||||||||
| Stock options exercised | 316 | 473 | 637 | |||||||||
| Stock options cancelled | 1,902 | — | — | |||||||||
| Preferred stock isssuance costs | — | — | (1,200 | ) | ||||||||
| Balance at end of year | 26,004 | 23,786 | 23,313 | |||||||||
Legal surplus: | ||||||||||||
| Balance at beginning of year | 10,578 | 8,673 | 5,908 | |||||||||
| Transfer from retained earnings | 1,540 | 1,905 | 2,765 | |||||||||
| Balance at end of year | 12,118 | 10,578 | 8,673 | |||||||||
Retained earnings: | ||||||||||||
| Beginning balance | 79,809 | 72,186 | 55,966 | |||||||||
| Net income | 8,469 | 19,566 | 26,704 | |||||||||
| Dividends declared on common stock | (7,533 | ) | (7,651 | ) | (7,369 | ) | ||||||
| Dividends declared on preferred stock | (2,387 | ) | (2,387 | ) | (350 | ) | ||||||
| Transfer to legal surplus | (1,540 | ) | (1,905 | ) | (2,765 | ) | ||||||
| Balance at end of year | 76,818 | 79,809 | 72,186 | |||||||||
Treasury stock: | ||||||||||||
| Balance at beginning of year | (27,116 | ) | (23,401 | ) | (6,199 | ) | ||||||
| Treasury stock purchased | (3,535 | ) | (3,715 | ) | (17,202 | ) | ||||||
| Balance at end of year | (30,651 | ) | (27,116 | ) | (23,401 | ) | ||||||
Accumulated other comprehensive loss, net of deferred tax: | ||||||||||||
| Balance at beginning of year | (16,493 | ) | (11,712 | ) | 6,155 | |||||||
| Other comprehensive loss, net of taxes | (1,691 | ) | (4,781 | ) | (17,867 | ) | ||||||
| Balance at end of year | (18,184 | ) | (16,493 | ) | (11,712 | ) | ||||||
Total stockholders' equity | $ | 113,490 | $ | 117,869 | $ | 116,298 | ||||||
COMPREHENSIVE INCOME: | ||||||||||||
Net income | $ | 8,469 | $ | 19,566 | $ | 26,704 | ||||||
Other comprehensive loss, net of tax: | ||||||||||||
| Unrealized gains (losses) on securities arising during the period | 34,939 | (4,885 | ) | (9,565 | ) | |||||||
| Realized (gains) losses included in net income | 1,175 | (1,202 | ) | (10,460 | ) | |||||||
| Unrealized loss on derivatives designated as cash flows hedges arising during the period | (9,521 | ) | — | — | ||||||||
| Amount reclassified into earnings during the period related to transition adjustment | 358 | — | — | |||||||||
| Income tax credit (expense) related to items of other comprehensive income | (1,475 | ) | 1,306 | 2,158 | ||||||||
| 25,476 | (4,781 | ) | (17,867 | ) | ||||||||
| Cumulative effect of change in accounting principle, net of tax | (27,167 | ) | — | — | ||||||||
| Other comprehensive loss for the period | (1,691 | ) | (4,781 | ) | (17,867 | ) | ||||||
Comprehensive income | $ | 6,778 | $ | 14,785 | $ | 8,837 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F–23
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(IN THOUSANDS)
| | June 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 1999 | ||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 8,469 | $ | 19,566 | $ | 26,704 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
| Amortization of deferred loan origination fees and costs | (673 | ) | 346 | 282 | |||||||||
| Amortization of premiums and accretion of discounts on investment securities | 370 | 275 | 1,818 | ||||||||||
| Depreciation and amortization of premises and equipment | 4,564 | 3,767 | 2,894 | ||||||||||
| Provision for loan losses | 2,903 | 8,150 | 14,473 | ||||||||||
| Loss (gain) on sale of securities available-for-sale | 1,175 | (1,202 | ) | (10,460 | ) | ||||||||
| (Gain) loss on sale of loans | (914 | ) | 1,198 | — | |||||||||
| Derivatives activities | 4,083 | — | — | ||||||||||
| Mortgage banking activities | (7,783 | ) | (5,891 | ) | (9,124 | ) | |||||||
| Proceeds from sale of loans held-for-sale | 122,800 | 27,795 | 92,871 | ||||||||||
| Cancellation of stock options | 1,902 | — | — | ||||||||||
| Net increase (decrease) in: | |||||||||||||
| Accrued liabilities and accounts payable | 6 | (1,764 | ) | 11,215 | |||||||||
| Deposits accrued interest | (2,547 | ) | 2,648 | 2,585 | |||||||||
| Net (increase) decrease in: | |||||||||||||
| Other short term investments | (42,124 | ) | — | — | |||||||||
| Trading securities | (12,317 | ) | (11,422 | ) | 25,133 | ||||||||
| Accrued interest receivable | (3,161 | ) | 2,017 | (2,175 | ) | ||||||||
| Other assets | (2,769 | ) | (4,099 | ) | (9,335 | ) | |||||||
| Total adjustments | 65,515 | 21,818 | 120,177 | ||||||||||
Net cash provided by operating activities | 73,984 | 41,384 | 146,881 | ||||||||||
Cash flows from investing activities: | |||||||||||||
| Purchases of investment securities available-for-sale | (1,136,931 | ) | (285,033 | ) | (513,546 | ) | |||||||
| Purchases of investment securities held-to-maturity | — | (100,700 | ) | (4,863 | ) | ||||||||
| Purchases of FHLB stock | (4,126 | ) | (389 | ) | — | ||||||||
| Maturities and redemptions of investment securities available-for-sale | 481,464 | 35,958 | 21,884 | ||||||||||
| Maturities and redemptions of investment securities held-to-maturity | — | 74,737 | 70,725 | ||||||||||
| Redemption of FHLB stock | — | 2,500 | — | ||||||||||
| Proceeds from sales of investment securities available-for-sale | 532,442 | 104,402 | 242,121 | ||||||||||
| Proceeds from sale of consumer loans and leases portfolios | 167,900 | — | — | ||||||||||
| Loans production, net | (286,135 | ) | (125,107 | ) | (195,599 | ) | |||||||
| Capital expenditures | (3,794 | ) | (3,664 | ) | (4,990 | ) | |||||||
| Net cash used in investing activities | (249,180 | ) | (297,296 | ) | (384,268 | ) | |||||||
Cash flows from financing activities: | |||||||||||||
| Net increase (decrease) in: | |||||||||||||
| Demand, saving and time (including IRA accounts) deposits | 76,831 | 65,180 | 82,969 | ||||||||||
| Securities sold under agreements to repurchase | 98,978 | 220,267 | 180,055 | ||||||||||
| Advances and borrowings from FHLB | 35,000 | 1,600 | (6,400 | ) | |||||||||
| Repayments of term notes and other borrowings | (26,500 | ) | (20,000 | ) | (8,088 | ) | |||||||
| Net proceeds from issuance of preferred stock | — | — | 32,300 | ||||||||||
| Proceeds from exercise of stock options | 396 | 539 | 842 | ||||||||||
| Treasury stock acquired | (3,535 | ) | (3,715 | ) | (17,202 | ) | |||||||
| Dividends paid | (9,920 | ) | (10,059 | ) | (7,300 | ) | |||||||
| Net cash provided by financing activities | 171,250 | 253,812 | 257,176 | ||||||||||
Increase (decrease) in cash and cash equivalents | (3,946 | ) | (2,100 | ) | 19,789 | ||||||||
| Cash and cash equivalents at beginning of year | 33,833 | 35,933 | 16,144 | ||||||||||
| Cash and cash equivalents at end of year | $ | 29,887 | $ | 33,833 | $ | 35,933 | |||||||
Cash and cash equivalents include: | |||||||||||||
| Cash and due from banks | $ | 8,220 | $ | 10,322 | $ | 8,060 | |||||||
| Money market investments | 21,667 | 23,511 | 27,873 | ||||||||||
| $ | 29,887 | $ | 33,833 | $ | 35,933 | ||||||||
Supplemental Cash Flow Disclosure and Schedule of Noncash Activities: | |||||||||||||
| Interest paid | $ | 100,530 | $ | 79,080 | $ | 62,190 | |||||||
| Income taxes paid | $ | 225 | $ | 1,050 | $ | 3,946 | |||||||
| Investment securities available-for-sale transferred to held-to-maturity | $ | — | $ | 263,793 | $ | 405,526 | |||||||
| Investment securities held-to-maturity transferred to available-for-sale | $ | 797,484 | $ | — | $ | — | |||||||
| Real estate loans securitized into mortgage-backed securities | $ | 133,900 | $ | 61,340 | $ | 67,500 | |||||||
The accompanying notes are an integral part of these consolidated financial statements
F–24
ORIENTAL FINANCIAL GROUP, INC.
Notes to Consoldiated Financial Statements
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Oriental Financial Group Inc. (the "Group" or "Oriental") conform with accounting principles generally accepted in the United States of America ("GAAP") and to financial services industry practices. The following is a description of the Group's most significant accounting policies:
Nature of Operations
Oriental is a bank holding company incorporated under the laws of the Commonwealth of Puerto Rico. It has three subsidiaries, Oriental Bank and Trust (the "Bank"), Oriental Financial Services Corp. ("Oriental Financial Services") and FISA Insurance Agency, Inc. Through these subsidiaries, the Group provides a wide range of financial services such as mortgage, commercial and consumer lending, financial planning, insurance sales, money management and investment brokerage services, as well as corporate and individual trust services. Note 16 to the consolidated financial statements presents further information about the operations of the Group's business segments.
Main offices for the Group and its subsidiaries are located in San Juan, Puerto Rico. The Bank operates through twenty branches located throughout the island and is subject to the supervision, examination and regulation of the Federal Reserve Bank, Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its deposits through the Savings Association Insurance Fund (SAIF). Oriental Financial Services is subject to the supervision, examination and regulation of the National Association of Securities Dealer, the Securities and Exchange Commission, and the Office of the Commissioner of Financial Institutions of Puerto Rico.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. These estimates and assumptions also affect the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Group and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Statement of Cash Flows
For purposes of the statement of cash flows, the Group considers as cash equivalents all money market instruments that are not pledge with maturities of three months or less at the date of acquisition.
Income per Common Share
Basic earnings per share excludes potential dilutive common shares and is calculated by dividing net income available to common shares (net income reduced by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average of common shares is
F–25
increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued, assuming that proceeds from exercise are used to repurchase shares in the market. Any stock splits are retroactively recognized in all periods presented in the financial statements.
Securities Purchased / Sold Under Agreements to Resell / Repurchase
The Group purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements represent short-term loans and are reflected as assets in the statements of financial condition. It is the Group's policy to take possession of securities purchased under resale agreements while the counterpart retains effective control over the securities. The Group monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate. The Group also sells securities under agreements to repurchase the same or similar securities. The Group retains effective control over the securities sold under these agreements; accordingly, such agreements are treated as financing agreements, and the obligations to repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the asset accounts. The counterpart to repurchase agreements generally has the right to re-pledge the securities received as collateral. Those securities are presented separately in the statement of financial condition as securities pledged to creditors that can be repledged.
Investment Securities
The Group's securities are classified as held-to-maturity, available-for-sale or trading. Securities for which the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the repricing characteristics of funding sources are classified as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in other comprehensive income.
The Group classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future. These securities are carried at estimated fair value with realized and unrealized changes in fair value included in earnings in the period in which the changes occur. Interest revenue arising from trading instruments is included in the statement of income as part of interest income.
The Group's investment in the Federal Home Loan Bank (FHLB) of New York stock has no readily determinable fair value and can only be sold back to the FHLB at par value. Therefore, this investment is carried at cost and its redemption value represents its fair value.
Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statement of income. The cost of securities sold is determined on the specific identification method.
Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities
The Group enters into interest rate exchange agreements in the form of swaps and caps to manage its interest rate risk exposure. Swap and cap agreements are designated at inception by the Group's Asset Liability Management Committee ("ALCO") as hedges of the Group's interest rate risk arising from the repricing of repurchase agreements, the Group's main source of short-term borrowings. The floating rate side of the swap agreements generally correlates directly with the repricing basis of the
F–26
repurchase agreements. As part of its periodic assessment of the Group's interest rate risk management strategy, ALCO also monitors the effectiveness of the swap and cap agreements.
The Group adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities", as amended, on July 1, 2000 (Refer to Note 9). SFAS No. 133 established accounting and reporting standards for derivative financial instruments and for hedging activities and requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of financial position. Under this Standard, derivatives used in hedging activities are to be designated into one of the following categories: (a) fair value hedge; (b) cash flow hedge; and (c) foreign currency exposure hedge. The changes in fair value (that is, gains and losses) will be either recognized as part of earnings in the period when the change occurs or as a component of other comprehensive income depending on their intended use and designation. The ineffective portion of a hedging instrument is inmediately recognized in earnings.
Prior to the implementation of SFAS No. 133, substantially all of the Group's derivatives were accounted for as off-balance sheet hedging contracts not marked to market. The net effect of amounts to be paid or received under interest rate swaps was recorded as an adjustment to interest expense. Premiums on caps were amortized over the term of the contract. Income or expenses arising from the instruments were recorded in the category appropriate to the related asset or liability.
Mortgage Banking Activities and Loans Held-For-Sale
From time to time, the Group sells loans to other financial institutions or securitizes conforming mortgage loans into GNMA, FNMA and FHLMC certificates. Another institution services the mortgages included in the resulting GNMA, FNMA and FHLMC pools. These mortgages and other loans are reported as loans held-for-sale and are stated at the lower of cost or market. When these mortgage loans are sold or securitized into mortgage-backed securities, a gain or loss is recognized to the extent that the fair value of the securities or cash received exceeds, or is less than, the carrying value of the loans sold.
Servicing rights on mortgage loans held by the Group are sold to another financial institution. The gain on the sale of these rights is determined by allocating the total cost of mortgage loans to be sold to the mortgage servicing rights and the loans (without the mortgage servicing rights), based on their relative fair values. This gain is deferred and amortized over the expected life of the loan, unless the loans are sold at which time the deferred gain is taken into income.
Loans and Allowance for Loan Losses
Loans are stated at their outstanding principal balance, less any portion not disbursed, unearned interest and the allowance for loan losses. Loan origination fees and costs and premiums and discounts on loans purchased are deferred and amortized over the estimated life of the loans as an adjustment of their yield using a method that approximates the interest method. Unearned interest on installment loans is recognized as income under a method that approximates the interest method. Interest on loans not made on a discounted basis is credited to income based on the loan principal outstanding at stated interest rates.
Interest recognition is discontinued when loans are 90 days or more in arrears on principal and interest, except for well-collateralized real estate loans for which recognition is discontinued when other factors indicate that collection of interest or principal is doubtful. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist.
F–27
The Group provides allowances for estimated loan losses based on an evaluation of the risk characteristics of the loan portfolio, loss experience, delinquency, economic conditions and other pertinent factors. Loan losses are charged and recoveries are credited to the allowance for loan losses.
The Group measures the impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance, homogeneous loans that are collectively evaluated for impairment and for leases and loans that are recorded at fair value or at the lower of cost or market. The Group measures for impairment all commercial loans over $250,000. The portfolios of mortgages, consumer loans, and leases are considered homogeneous and are evaluated collectively for impairment.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method over the terms of the leases or estimated useful lives of the improvements, whichever are shorter.
Long-lived assets and identifiable intangibles related to those assets to be held and used, except for financial instruments, and mortgage and other servicing rights, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment losses in fiscal years 2001, 2000 and 1999.
Foreclosed Real Estate
Foreclosed real estate is initially recorded at the lower of the related loan balance or its fair value at the date of foreclosure. At the time properties are acquired in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair market value of the property is charged against the allowance for loan losses. The carrying value of these properties approximates the lower of cost or fair value less estimated cost to sell. Any excess of the carrying value over the estimated fair market value is charged to operations.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
The Group follows the specific criteria established by SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to determine when control has been surrendered in a transfer of financial assets. As such, it recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished. Certain provisions of SFAS No. 140 became effective for transactions occurring after March 31, 2001. Since SFAS No. 140 carried over most of SFAS No. 125 provisions, its implementation did not have any significant impact in the Group's financial statements.
Income Taxes
The Group follows an asset and liability approach to the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Group's financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted laws and rates applicable to periods in which temporary differences will be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
F–28
Stock Option Plan
As further discussed in Note 2 to the consolidated financial statements, the Group has four stock options plans. These plans offer key officers and employees an opportunity to purchase shares of the Group's common stock. The Group follows the intrinsic value-based method of accounting for measuring compensation expense, if any. Compensation expense is generally recognized for any excess of the quoted market price of the Group's stock at measurement date over the amount an employee must pay to acquire the stock.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except for those resulting from investments by owners and distributions to owners. In the Group's case, in addition to net income, other comprehensive income results from changes in the unrealized gains and losses on securities that are classified as available-for-sale and derivative activities that qualify and are designated for cash flows hedge accounting. The presentation of comprehensive income required by this statement is set forth in the statement of changes in stockholders' equity and of comprehensive income.
New Accounting Pronouncements:
Business Combinations
In June 2001, the Financial Accounting Standard Board (FASB) issued SFAS No. 141, "Business Combinations". SFAS No. 141 addresses financial accounting and reporting for business combinations. This pronouncement requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001 and requires the recognition of intangible assets apart from goodwill if they meet certain criteria. SFAS No. 141 also added certain disclosure requirements in addition to those required by APB Opinion No. 16. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.
Goodwill and Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Group will adopt the provisions of this statement on July 1, 2002. Management believes that this statement will not have any material effect in the Group's financial statements.
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for the Group's fiscal year beginning on July 1, 2002 but earlier adoption is permitted. Management believes that SFAS No. 143 will not have any material effect in the Group's financial statements.
F–29
Reclassifications
Certain minor reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform to the presentation of the 2001 consolidated financial statements.
NOTE 2—STOCKHOLDERS' EQUITY:
Stock Splits
Stock splits were retroactively reflected for all periods presented in the Group's Consolidated Statements of Financial Position and of Changes in Stockholder's Equity and of Comprehensive Income and for all share and per share amounts.
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.
Treasury Stock
As of June 30, 2001, the Board of Directors authorized management to repurchase up to 1,417,000 shares. The authority granted by the Board of Directors does not require the Group to repurchase any shares. The repurchase of shares will be made in the open market at such times and prices as market conditions shall warrant, and in compliance with the terms of applicable federal and Puerto Rico laws and regulations. The activity of common shares held by the Group's treasury for the years ended June 30, 2001 and 2000 is set forth below.
| | (In thousands) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 1999 | ||||||||||||
| | Shares | Dollar Amount | Shares | Dollar Amount | Shares | Dollar Amount | |||||||||
| | (In thousands) | ||||||||||||||
| Beginning of year | 1,107.7 | $ | 27,116 | 903.8 | $ | 23,401 | 295.3 | $ | 6,199 | ||||||
| Common shares repurchased | 270.9 | 3,535 | 203.9 | 3,715 | 608.5 | 17,202 | |||||||||
| End of year | 1,378.6 | $ | 30,651 | 1,107.7 | $ | 27,116 | 903.8 | $ | 23,401 | ||||||
Stock Options
The Group has four stock options plans; the 1988, 1996, 1998 and 2000 Incentive Stock Option Plans. These plans offer key officers and employees an opportunity to purchase shares of the Group's common stock. The Compensation Committee of the Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted, their vesting rights, and the options exercise price. The plans provide for a proportionate adjustment in the exercise price and the number of shares that can be purchased in case of a stock split, reclassification of stock, and a merger
F–30
or reorganization. Stock options vest upon completion of specified years of service. The activity in outstanding options for the year ended June 30, 2001 and 2000, is set forth below:
| | 2001 | 2000 | 1999 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Number Of Options | Weighted Average Exercise Price | Number Of Options | Weighted Average Exercise Price | Number Of Options | Weighted Average Exercise Price | |||||||||
| Beginning of year | 1,522,757 | $ | 17.20 | 1,290,815 | $ | 15.97 | 1,150,253 | $ | 10.34 | ||||||
| Options granted | 1,187,000 | 12.62 | 446,834 | 19.13 | 396,000 | 26.17 | |||||||||
| Options exercised | (80,333 | ) | 4.95 | (66,321 | ) | 8.37 | (204,782 | ) | 4.24 | ||||||
| Options forfeited | (281,267 | ) | 16.91 | (148,571 | ) | 16.26 | (50,656 | ) | 15.72 | ||||||
| Options cancelled | (367,834 | ) | 21.64 | — | — | — | — | ||||||||
| End of year | 1,980,323 | $ | 14.16 | 1,522,757 | $ | 17.20 | 1,290,815 | $ | 15.97 | ||||||
The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at June 30, 2001:
| | Outstanding | Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Stock Option Plan | Options | Weighted Average Price | Weighted Average Contract Life (years) | Options | Weighted Average Exercise Price | |||||||
| 1988 Plan | 156,836 | $ | 6.39 | 1.0 | 62,752 | $ | 6.40 | |||||
| 1996 Plan | 1,221,087 | 15.69 | 7.8 | 148,961 | 13.78 | |||||||
| 1998 Plan | 65,000 | 19.13 | 8.1 | — | — | |||||||
| 2000 Plan | 537,400 | 12.38 | 9.6 | — | — | |||||||
| 1,980,323 | $ | 14.16 | 7.70 | 211,713 | $ | 11.60 | ||||||
As described in Note 1, the Group uses the intrinsic value based method to account for stock options. In June 2001, the Group canceled 367,834 non-vested options granted with a discount in fiscal years 1999 and 2000. At the cancellation, the unrecognized compensation cost was recorded with a charge to income and a credit to additional paid in capital. The stock options compensation recorded in fiscal 2001 amounted to $1.7 million (2000—$289,000; 1999—$100,000). The following table presents
F–31
the Group's net income and earnings per common share assuming the Group had used the fair value method to recognize compensation expenses with respect to the options:
| (In thousands except for per share data) | 2001 | 2000 | 1999 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Compensation and Benefits: | ||||||||||
| Reported | $ | 15,672 | $ | 15,698 | $ | 15,158 | ||||
| Pro forma | $ | 17,989 | $ | 16,534 | $ | 15,845 | ||||
Net Income: | ||||||||||
| Reported | $ | 8,469 | $ | 19,566 | $ | 26,704 | ||||
| Pro forma | $ | 6,152 | $ | 18,730 | $ | 26,017 | ||||
Basic Earnings Per share: | ||||||||||
| Reported | $ | 0.49 | $ | 1.34 | $ | 2.02 | ||||
| Pro forma | $ | 0.30 | $ | 1.28 | $ | 1.97 | ||||
Diluted Earnings Per share: | ||||||||||
| Reported | $ | 0.48 | $ | 1.31 | $ | 1.93 | ||||
| Pro forma | $ | 0.29 | $ | 1.24 | $ | 1.88 | ||||
The fair value of each option granted in fiscal years 2001, 2000 and 1999 was estimated using the Black-Scholes option pricing model with the following assumptions: (1)—The weighted average market price of the stock at the end of the fiscal 2001, 2000 and 1999 grants was $12.63, $22.75 and $30.38. The weighted average exercise price of the options in 2001 was $12.63, $19.13 and $26.17 respectively. The exercise price of options granted in fiscal 2001 equaled the quoted market price of the stock while options granted in fiscals 2000 and 1999 were granted with a discount. (2)—The expected option term is 7 years. (3)—The expected weighted average volatility is 31% for options granted in fiscal 2001 (2000 - 32%, 1999 - 31%). (4)—The expected weighted average dividend yield—4.76% for options granted in fiscal 2001 (2000 - 2.64%, 1999 - 1.98%). (5)—The weighted average risk-free interest rate is 5.56% for options granted in fiscal 2001 (2000 - 5.79%, 1999 - 4.93%). (6)—The weighted average fair value of the options granted in 2001 was $3.05 (2000—$8.80; 1999—$12.04).
F–32
Earnings per Common Share
The calculation of earnings per common share for the fiscal years ended June 30, 2001, 2000 and 1999 follows:
| | June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share data) | |||||||||||
| 2001 | 2000 | 1999 | |||||||||
| Net income | $ | 8,469 | $ | 19,566 | $ | 26,704 | |||||
| Less: Preferred stock dividend | (2,387 | ) | (2,387 | ) | (350 | ) | |||||
| Net income attributable to common stockholders | $ | 6,082 | $ | 17,179 | $ | 26,354 | |||||
Earnings per common share — basic: | |||||||||||
Net income — available to common stockholders | $ | 6,082 | $ | 17,179 | $ | 26,354 | |||||
| Weighted average common shares outstanding | 12,542 | 12,787 | 13,051 | ||||||||
| Earnings per common share — basic | $ | 0.49 | $ | 1.34 | $ | 2.02 | |||||
Earnings per common share — diluted: | |||||||||||
Net income — available to common stockholders | $ | 6,082 | $ | 17,179 | $ | 26,354 | |||||
| Weighted average common shares and share equivalents: | |||||||||||
| Average common shares outstanding | 12,542 | 12,787 | 13,051 | ||||||||
| Common stock equivalents — options | 227 | 375 | 582 | ||||||||
| Total | 12,769 | 13,162 | 13,633 | ||||||||
| Earnings per common share — diluted | $ | 0.48 | $ | 1.31 | $ | 1.93 | |||||
Stock options without dilutive effect on earnings per share not included in the calculation amounted to 1,335,000 in fiscal 2001, (2000 - 483,000, 1999 - 96,0000).
Legal Surplus
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of the Bank's net income for the year be transferred to capital surplus until such surplus equals the total of paid in capital on common and preferred stocks. At June 30, 2001, legal surplus amounted to $12,118,000 (2000—$10,578,000). The amount transferred to the legal surplus account is not available for payment of dividends to shareholders. In addition, the Federal Reserve Board has issued a policy statement that bank holding companies should generally pay dividends only from operating earnings of the current and preceding two years.
Preferred Stock
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. The Group generated $32,300,000 in net proceeds from this issue for general corporate purposes. The Series A Preferred Stock has the following characteristics: (1) Annual dividends of $1.78 per share, payable monthly, if declared by the Board of Directors. Missed dividends are not cumulative, (2) Redeemable at the Group's option beginning on May 30, 2004, (3) No mandatory redemption or stated maturity date and (4) Liquidation value of $25 per share.
F–33
Accumulated Other Comprehensive loss
Accumulated other comprehensive loss, net of income tax, as of June 30 consisted of:
| | (In thousands) | ||||||
|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||
| Unrealized loss on derivatives designated as cash flows hedges | $ | (9,469 | ) | $ | — | ||
| Unrealized loss on securities available-for-sale | (8,399 | ) | (16,493 | ) | |||
| Transition adjustment of SFAS No. 133 | (316 | ) | — | ||||
| $ | (18,184 | ) | $ | (16,493 | ) | ||
Regulatory Capital
The Group is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Group's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Group's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Group to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of June 30, 2001, Oriental meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the FDIC dated August 2001 categorized the Group as a "well capitalized institution" under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Group must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that date that management believes have changed the institution's category.
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The Group's and the Bank's actual capital amounts and ratios of total risk-based capital, Tier 1 risk-based capital and Tier 1 capital at June 30, were as follows:
| | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||
| | (Dollars in thousands) | ||||||||||||||
| Group Ratios | |||||||||||||||
| As of June 30, 2001 | |||||||||||||||
| Tier I Capital (to Average Assets) | $ | 131,673 | 6.68% | $ | 78,793 | 4.00% | $ | 98,492 | 5.00% | ||||||
| Tier I Risk-Based (to Risk-Weighted Assets) | $ | 131,482 | 19.53% | $ | 26,927 | 4.00% | $ | 40,391 | 6.00% | ||||||
| Total Capital (to Risk-Weighted Assets) | $ | 134,338 | 19.96% | $ | 53,854 | 8.00% | $ | 67,318 | 10.00% | ||||||
As of June 30, 2000 | |||||||||||||||
| Tier I Capital (to Average Assets) | $ | 134,339 | 7.49% | $ | 71,717 | 4.00% | $ | 89,646 | 5.00% | ||||||
| Tier I Risk-Based (to Risk-Weighted Assets) | $ | 134,339 | 29.29% | $ | 18,349 | 4.00% | $ | 27,523 | 6.00% | ||||||
| Total Capital (to Risk-Weighted Assets) | $ | 140,087 | 30.54% | $ | 36,697 | 8.00% | $ | 45,871 | 10.00% | ||||||
Bank Ratios | |||||||||||||||
| As of June 30, 2001 | |||||||||||||||
| Tier I Capital (to Average Assets) | $ | 115,302 | 5.80% | $ | 79,540 | 4.00% | $ | 99,425 | 5.00% | ||||||
| Tier I Risk-Based (to Risk-Weighted Assets) | $ | 115,111 | 17.13% | $ | 26,874 | 4.00% | $ | 40,311 | 6.00% | ||||||
| Total Capital (to Risk-Weighted Assets) | $ | 117,967 | 17.56% | $ | 53,748 | 8.00% | $ | 67,186 | 10.00% | ||||||
As of June 30, 2000 | |||||||||||||||
| Tier I Capital (to Average Assets) | $ | 125,663 | 7.02% | $ | 71,565 | 4.00% | $ | 89,456 | 5.00% | ||||||
| Tier I Risk-Based (to Risk-Weighted Assets) | $ | 125,663 | 27.55% | $ | 18,247 | 4.00% | $ | 27,371 | 6.00% | ||||||
| Total Capital (to Risk-Weighted Assets) | $ | 131,379 | 28.80% | $ | 36,495 | 8.00% | $ | 45,618 | 10.00% | ||||||
NOTE 3—INVESTMENTS
Money Market and Other Short Investments
At June 30, 2001,the money market investments include $20,100,000 (2000—$0) of securities purchased under agreements to resell that were collateralized by U.S. Treasury notes with an estimated market value of $20,000,000. These securities were in the Group's possession and the counterpart retained effective control over the collateral. None of the underlying securities were repledged by the Group.
Other short-term investments include $29,407,000 placed with counterpart as collateral for interest rate swaps.
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With the adoption of SFAS No. 133 (See Note 9), the Group transfered the held-to-maturity portfolio to the available-for-sale investment category. As of July 1, 2000, the unrealized loss on those securities amounting to $26,633,000 was recorded in other comprehensive income as a cumulative effect of a change in accounting principle.
The amortized cost, gross unrealized gains and losses, estimated fair value, and weighted average yield of the securities owned by the Group at June 30, 2001 and 2000, were as follows:
| | June 30, 2001 (In thousands) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Average Weighted Yield | ||||||||||
| Available-for-Sale | ||||||||||||||
| US Treasury securities | $ | 3,623 | $ | 103 | $ | — | $ | 3,726 | 7.56% | |||||
| US Government agencies securities | 30,159 | 193 | — | 30,352 | 7.16% | |||||||||
| Other debt securities | 9,288 | — | — | 9,288 | 7.73% | |||||||||
| PR Government securities | 8,189 | 11 | 58 | 8,142 | 6.33% | |||||||||
| CMOs | 218,833 | 935 | 1,912 | 217,856 | 6.72% | |||||||||
| FNMA and FHLMC certificates | 811,892 | 3,097 | 6,620 | 808,368 | 6.59% | |||||||||
| GNMA certificates | 237,528 | 2,478 | 854 | 239,153 | 7.13% | |||||||||
| $ | 1,319,512 | $ | 6,817 | $ | 9,444 | $ | 1,316,885 | 6.73% | ||||||
| | June 30, 2000 (In thousands) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Average Weighted Yield | |||||||||
| Available-for-Sale | ||||||||||||||
| US Treasury securities | $ | 87,710 | $ | 3 | $ | 4,979 | $ | 82,734 | 5.18% | |||||
| US Government agencies securities | 104,482 | — | 3,842 | 100,640 | 6.81% | |||||||||
| Other debt securities | 4,417 | — | 66 | 4,351 | 8.32% | |||||||||
| PR Government securities | 465 | 5 | 19 | 451 | 6.19% | |||||||||
| CMOs | 212 | — | — | 212 | 5.78% | |||||||||
| FNMA and FHLMC certificates | 56,743 | 100 | 99 | 56,744 | 8.00% | |||||||||
| GNMA certificates | 37,875 | 154 | 261 | 37,768 | 7.62% | |||||||||
| 291,904 | 262 | 9,266 | 282,900 | 6.65% | ||||||||||
Held-to-Maturity | ||||||||||||||
| PR Government securities | 3,551 | 3 | 24 | 3,530 | 7.89% | |||||||||
| US Government agencies securities | 9,993 | — | 457 | 9,536 | 6.46% | |||||||||
| CMOs | 110,967 | — | 6,316 | 104,651 | 6.52% | |||||||||
| Other debt securities | 4,864 | — | — | 4,864 | 8.32% | |||||||||
| FNMA and FHLMC certificates | 295,039 | 54 | 11,601 | 283,492 | 6.61% | |||||||||
| GNMA certificates | 373,070 | 469 | 8,761 | 364,778 | 7.19% | |||||||||
| 797,484 | 526 | 27,159 | 770,851 | 6.88% | ||||||||||
| $ | 1,089,388 | $ | 788 | $ | 36,425 | $ | 1,053,751 | 6.82% | ||||||
The amortized cost and estimated fair value of the Group's investment securities at June 30, 2001, by contractual maturity, are shown in the next table. Expected maturities may differ from contractual
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maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | Available-for-sale | |||||
|---|---|---|---|---|---|---|
| | Amortized Cost | Fair Value | ||||
| | (In thousands) | |||||
| Within 1 year | $ | 560 | $ | 503 | ||
| After 1 to 5 years | 4,357 | 4,460 | ||||
| After 5 to 10 years | 48,221 | 48,620 | ||||
| After 10 years | 1,266,374 | 1,263,302 | ||||
| $ | 1,319,512 | $ | 1,316,885 | |||
Proceeds from the sale of investment securities available-for-sale during fiscal 2001 totaled $531,898,000 (2000 - 104,402,000; 1999—$242,121,000). Gross realized gains and losses on those sales during fiscal 2001 were $7,393,000 and $8,546,000, respectively (2000—$1,249,000 and $47,000; 1999—$10,515,000 and $55,000).
Trading Securities
A summary of trading securities owned by the Group at June 30, is as follows:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| | (In thousands) | |||||
| US Treasury securities | $ | 2,579 | $ | 42,734 | ||
| PR Government securities | 339 | 13,513 | ||||
| Mortgage-backed securities | 73,791 | 6,058 | ||||
| CMO residuals, interest only | 51 | 2,138 | ||||
| $ | 76,760 | $ | 64,443 | |||
At June 30, 2001, the Group's trading portfolio weighted average yield was 7.92% (2000 - 7.49%).
NOTE 4—PLEDGED ASSETS:
At June 30, 2001, residential and commercial mortgage loans amounting to $211,699,000 (2000—$254,312,000), investments securities with fair values totaling $1,306,272,000 (2000—$1,062,000,000), and other short term investment amounting to $29,407,000 (2000—$0) were pledged to secure public fund deposits, investment securities sold under agreements to repurchase, letters of credit, advances and borrowings from the FHLB, term notes and interest rate swap agreements.
NOTE 5—LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
Loans Receivable
The Group's business activity is with consumers located in Puerto Rico. Oriental's loan transactions are encompassed within three main categories: mortgage, commercial, and consumer.
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Oriental's loan portfolio has a higher concentration of loans to consumers such as residential mortgage loans and personal loans. The composition of the Group's loan portfolio at June 30, was as follows:
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||
| Loans secured by real estate: | ||||||||
| Residential | $ | 321,690 | $ | 331,150 | ||||
| Non-residential real estate loans | 3,827 | 4,974 | ||||||
| Home equity loans and secured personal loans | 74,759 | 40,306 | ||||||
| 400,275 | 376,430 | |||||||
| Less: Deferred loan fees, net | (3,880 | ) | (2,103 | ) | ||||
| 396,395 | 374,327 | |||||||
Other loans: | ||||||||
| Commercial | 25,828 | 24,117 | ||||||
| Personal consumer loans and credit lines | 22,718 | 19,698 | ||||||
| Financing leases, net of unearned interest | 827 | 8,785 | ||||||
| 49,373 | 52,600 | |||||||
Loans receivable | 445,768 | 426,927 | ||||||
| Allowance for loan losses | (2,856 | ) | (6,837 | ) | ||||
| Loans receivable, net | 442,912 | 420,090 | ||||||
| Loans held-for-sale | 23,570 | 180,788 | ||||||
| Total loans, net | $ | 466,482 | $ | 600,878 | ||||
At June 30, 2001, residential mortgage loans held-for-sale amounted to $23,570,000 (2000—$13,302,000). All mortgage residential loans originated and sold during fiscal 2001 were sold based on pre-established commitments or at market values. In fiscal 2001, the Group recognized gains of $7,783,000 (2000—$5,891,000; 1999—$9,124,000) in these sales that are presented in the statement of income as mortgage-banking activities.
On July 7, 2000, the Group sold approximately $167.5 million of its non-delinquent unsecured personal loan and lease portfolios to a local financial institution. At June 30, 2000, these loans were under a contract to sell, thus they were valued by reference to the contracted price. A loss of $1.2 million was recorded in fiscal 2000 in connection with this contract. In fiscal 2001, the Group realized a $914,000 gain on the sale of loans that had been previously written off.
At June 30, 2001, loans on which the accrual of interest has been discontinued amounted to approximately $16,903,000 (2000—$16,875,000). The gross interest income that would have been recorded in fiscal 2001 if non-accrual loans had performed in accordance with their original terms amounted to approximately $1,462,000 (2000—$1,692,000; 1999—$2,041,000).
Allowance for Loan Losses
The Group's management has the responsibility for establishing the allowance for loan losses and for determining that the allowance is adequate to absorb probable and inherent losses in the loan portfolio at each reporting date. For this purpose, management employs a systematic methodology to estimate the allowance, which incorporates quantitative and qualitative factors. Management documents the policies, procedures and assumptions surrounding the determination of the allowance at least on a quarterly basis. The principal factors used to determine the level of allowance for loan losses are the Group's historical and current credit loss experience. These factors are combined with the qualitative
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factors such as the growth of the loan portfolio, concentrations of credit (e.g., local industries, etc.) that might affect loss experience across one or more components of the portfolio, effects of any changes in lending policies and procedures, including underwriting standards, collections and credit scoring systems, as well as the general economic environment. Various regulatory agencies, as an integral part of their examination process, periodically review the Group's allowance for loan losses as well as the methodology followed.
These factors are applied in the context of GAAP and the Joint Interagency Guidance on the importance of depository institutions having prudent, conservative, but not excessive loan loss allowances that fall within an acceptable range of estimated losses. While management uses available information in estimating loan losses, future changes to the allowance may be necessary based on factors beyond the Group's control, such as factors affecting general economic conditions in Puerto Rico. The changes in the allowance for loan losses for the last three fiscal years ended June 30, were as follows:
| | 2001 | 2000 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||||
| Balance at beginning of period | $ | 6,837 | $ | 9,002 | $ | 5,658 | |||||
| Provision for loan losses | 2,903 | 8,150 | 14,473 | ||||||||
| Loans charged-off | (9,030 | ) | (13,422 | ) | (13,499 | ) | |||||
| Recoveries | 2,146 | 3,107 | 2,370 | ||||||||
| Balance at end of period | $ | 2,856 | $ | 6,837 | $ | 9,002 | |||||
The lower level of the allowance for loan losses as of June 30, 2001, as compared to prior year, reflects a higher quality loan portfolio of which approximately 95% is collateralized by real estate (including commercial loans).
As described in Note 1, the Group evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. At June 30, 2001 and 2000, the Group determined that no specific impairment allowance was required for those loans evaluated for impairment.
Concentration of Risk
Substantially all loans in the Group are to residents in Puerto Rico, therefore, it is susceptible to events affecting Puerto Rico's economy. The vast majority of the loans are well collateralized, thus reducing the risk of potential losses.
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NOTE 6—Non-interest earning assets
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
| | Useful Life (Years) | (In thousands) | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||||
| Land | — | $ | 1,332 | $ | 1,348 | ||||
| Buildings and improvements | 40 | 12,382 | 12,150 | ||||||
| Leasehold improvements | 5 – 10 | 4,135 | 3,903 | ||||||
| Furniture and fixtures | 3 – 7 | 5,185 | 5,395 | ||||||
| EDP and other equipment | 3 – 7 | 12,803 | 13,503 | ||||||
| 35,837 | 36,299 | ||||||||
| Less: Accumulated depreciation and amortization | (14,901 | ) | (14,593 | ) | |||||
| $ | 20,936 | $ | 21,706 | ||||||
Depreciation and amortization of premises and equipment for the year ended June 30, 2001 totaled $4,564,000 (2000—$3,767,000; 1999—$2,894,000). These are included in the statement of income as part of occupancy and equipment expenses.
Accrued Interest Receivable and Other Assets:
Accrued interest receivable at June 30, consists of $4,423,000 from loans (2000—$4,367,000) and $12,223,000 (2000—$9,118,000) from investments.
Other assets at June 30, include the following:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| | (In thousands) | |||||
| Prepaid expenses and other assets | $ | 5,939 | $ | 4,874 | ||
| Income tax receivable | 8,514 | 7,188 | ||||
| Deferred tax asset | 7,586 | 8,349 | ||||
| Accounts receivable, net | 3,982 | 4,012 | ||||
| Other repossessed property | 107 | 518 | ||||
| $ | 26,128 | $ | 24,941 | |||
NOTE 7—DEPOSITS AND RELATED INTEREST:
At June 30, 2001, the weighted average interest rate of the Group's deposits was 4.69% (2000 - 4.75%) considering non-interest bearing deposits of $29,169,000 (2000—$31,568,000). Refer to the Consolidated Statement of Financial Condition for the composition of deposits at June 30, 2001 and 2000. Interest expense for the last three fiscal years ending June 30, is set forth below:
| | 2001 | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||
| NOW accounts and saving deposits | $ | 3,126 | $ | 3,059 | $ | 2,920 | |||
| Certificates of deposit and IRA accounts | 33,516 | 28,364 | 25,865 | ||||||
| $ | 36,642 | $ | 31,423 | $ | 28,785 | ||||
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At June 30, 2001, time deposits in denominations of $100,000 or higher amounted to $248,452,000 (2000- $258,848,000) including brokered certificates of deposit of $25,000,000, (2000—$101,129,000) at a weighted average rate of 6.69%, (2000- 6.61%) and public funds certificates of deposit from various local government agencies, collateralized with investment securities of $124,091,000 (2000—$65,547,000) at a weighted average rate of 5.88% (2000 - 6.22%).
Scheduled maturities of certificates of deposit and IRA accounts at June 30, 2001 are as follow:
| | (In thousands) | |||
|---|---|---|---|---|
| Within one year: | ||||
| Three (3) months or less | $ | 238,020 | ||
| Over 3 months through 1 year | 165,291 | |||
| 403,311 | ||||
Over 1 through 2 years | 68,168 | |||
| Over 2 through 3 years | 70,697 | |||
| Over 3 through 4 years | 56,256 | |||
| Over 4 through 5 years | 58,736 | |||
| Over 5 years | 4,533 | |||
| $ | 661,701 | |||
NOTE 8—BORROWINGS:
Securities Sold Under Agreements to Repurchase
At June 30, 2001, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparts with whom the repurchase agreements were transacted. The counter parties have agreed to resell to the Group the same or similar securities at the maturity of the agreements.
At June 30, 2001, substantially all securities sold under agreements to repurchase mature within 90 days. The following securities were sold under agreements to repurchase at June 30:
| | 2001 | 2000 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Repurchase Liability | Market Value of Collateral | Repurchase Liability | Market Value of Collateral | ||||||||
| | (In thousands) | |||||||||||
| US Treasury securities | $ | 19,950 | $ | 20,000 | $ | 85,695 | $ | 85,141 | ||||
| US and PR Government agencies securities | 1,045 | 1,045 | 25,911 | 27,138 | ||||||||
| GNMA certificates | 218,582 | 220,164 | 328,967 | 331,709 | ||||||||
| FNMA certificates | 398,542 | 397,415 | 169,126 | 174,370 | ||||||||
| FHLMC certificates | 132,734 | 133,027 | 108,642 | 112,862 | ||||||||
| Collateralized mortgage obligations | 144,618 | 144,618 | 98,152 | 102,320 | ||||||||
| $ | 915,471 | $ | 920,320 | $ | 816,493 | $ | 833,540 | |||||
At June 30, 2001, the weighted average interest rate of the Group's repurchase agreements was 4.12% (2000 - 6.39%) and included agreements with interest ranging from 3.10% to 4.51%. The
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following summarizes significant data on securities sold under agreements to repurchase for fiscals 2001 and 2000:
| | 2001 | 2000 | ||||
|---|---|---|---|---|---|---|
| | (In thousands) | |||||
| Average daily aggregate balance outstanding | $ | 790,498 | $ | 713,061 | ||
| Maximum amount outstanding at any month-end | $ | 955,745 | $ | 816,493 | ||
| Weighted average interest rate during the year | 6.07% | 5.77% | ||||
Advances from the Federal Home Loan Bank
At June 30, advances from the Federal Home Loan Bank of New York (FHLB) consist of the following:
| 2001 | 2000 | Maturity date | Interest Rate Description | |||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | | | ||||||
| $ | 5,000 | $ | 5,000 | November 2001 | Fixed — 7.18% | |||
| 50,000 | — | June 2002 | Fixed — 3.99% | |||||
| 50,000 | — | May 2003 | Fixed — 4.83% | |||||
| - | 15,000 | August 2000 | Fixed — 6.29% | |||||
| - | 15,000 | April 2001 | Floating due quarterly — 6.19% | |||||
| - | 10,000 | July 2000 | Fixed — 6.19% | |||||
| - | 20,000 | August 2000 | Fixed — 6.24% | |||||
| - | 5,000 | July 2000 | Fixed — 6.16% | |||||
| $ | 105,000 | $ | 70,000 | |||||
Advances are received from the FHLB under an agreement whereby Oriental is required to maintain a minimum amount of qualifying collateral with a market value of at least 110% of the outstanding advances. At June 30, 2001 and 2000, these advances were secured by mortgage loans and investment securities amounting $157,858,000 (2000 - 172,253,000). Also, at June 30, 2001, the Group has an additional borrowing capacity with the FHLB of $53 million (2000—$102 million).
Term Notes
At June 30, term notes collateralized with investments securities consist of the following:
| 2001 | 2000 | Maturity date | Interest Rate Description | |||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | | | ||||||
| $ | — | $ | 6,500 | December 2000 | Floating due quarterly — 5.75% | |||
| - | 20,000 | March 2001 | Floating due quarterly — 5.69% | |||||
| 10,000 | 10,000 | September 2001 | Floating due quarterly — 4.66% (2000—6.06%) | |||||
| 30,000 | 30,000 | September 2001 | Floating due quarterly — 4.47% (2000—5.82%) | |||||
| 5,000 | 5,000 | December 2001 | Floating due quarterly — 3.19% (2000—5.68%) | |||||
| 15,000 | 15,000 | March 2007 | Floating due quarterly — 4.51% (2000—5.88%) | |||||
| $ | 60,000 | $ | 86,500 | |||||
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Unused Lines of Credit
The Group maintains various lines of credit with other financial institutions from which funds are drawn as needed. At June 30, 2001, the Group's total available funds under these lines of credit totaled $24,400,000 (2000—$62,960,000). At June 30, 2001 and 2000, there was no balance outstanding under these lines of credit.
Contractual Maturities
At June 30, 2001, the contractual maturities of securities sold under agreements to repurchase, advances from the FHLB, and term notes by fiscal year are as follows:
| Year Ending June 30, | Repurchase Agreements | Advances from FHLB | Term Notes | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||
| 2002 | $ | 915,471 | $ | 55,000 | $ | 45,000 | |||
| 2003 | — | 50,000 | — | ||||||
| 2007 | — | — | 15,000 | ||||||
| $ | 915,471 | $ | 105,000 | $ | 60,000 | ||||
NOTE 9—DERIVATIVES AND HEDGING ACTIVITIES
The Group uses interest rate swaps and caps to hedge its interest rate risk exposure. Under the swaps, the Group pays a fixed annual cost and receives a floating thirty or ninety-day payment based on LIBOR. Floating rate payments received from the swap counterpart correspond to the floating rate payments made on the borrowings thus resulting in a net fixed rate cost to the Group (cash flow hedging instruments). Under the caps, Oriental pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement.
The Group's swaps and caps outstanding and their terms at June 30, are set forth in the table below:
| | 2001 | 2000 | |||||
|---|---|---|---|---|---|---|---|
| | (Dollars in thousands) | ||||||
| Swaps: | |||||||
| Pay fixed swaps notional amount | $ | 300,000 | $ | 100,000 | |||
| Weighted average pay rate — fixed | 6.65% | 7.07% | |||||
| Weighted average receive rate — floating | 3.95% | 6.76% | |||||
| Maturity in months | 12 to 112 | 24 | |||||
| Floating rate as a percent of LIBOR | 100% | 100% | |||||
Caps: | |||||||
| Cap agreements notional amount | $ | 250,000 | $ | 250,000 | |||
| Cap rate | 7.00% | 7.00% | |||||
| Current 90 day LIBOR | 3.84% | 6.82% | |||||
| Maturity in months | 10 | 23 | |||||
The agreements were entered into to convert short-term borrowings into fixed rate liabilities for longer periods and provide protection against increases in short-term interest rates. The amounts potentially subject to credit loss are the net streams of payments under the agreements and not the notional principal amounts. The Group controls the credit risk of its interest rate swap agreements through approvals, limits, monitoring procedures and collateral, when considered necessary. The Group does not anticipate nonperformance by the counterparts.
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As part of its interest rate risk management, during fiscal year 2000 the Group closed certain interest rate swaps and caps agreements with an aggregate notional value of approximately $390,000,000. This transaction generated gains of approximately $1,720,000, which were amortized as an adjustment to the yield over the remaining original terms of the agreements.
The Group offers its customers certificates of deposit with an option tied to the performance of one of the following stock market indexes, Standard & Poor's 500, Dow Jones Industrial Average and Russell 2000. At the end of five years, the depositor will receive a specified percentage of the average increase of the month-end value of the corresponding stock index. If such index decreases, the depositor receives the principal without any interest. The Group uses option agreements with major money center banks to manage its exposure to changes in those indexes. Under the terms of the agreements, the Group will receive the average increase in the month-end value of the corresponding index in exchange for a fixed premium. At June 30, 2001, the notional amount of these agreements totaled $180,950,000 (2000—$132,975,000). The changes in fair value of the options purchased and the options embedded in the certificates of deposits are recorded in earnings.
From time to time the Group offers its customers certificates of deposit with fixed high interest rates and uses interest rate swap agreements to lower the cost of these deposits. Under the terms of the agreements, the Group pays a floating rate and receives a fixed payment (the cost of the certificates of deposit). At June 30, 2001, there were no swap agreements outstanding (2000—$40,000,000).
At June 30, 2001, the contractual maturities of interest rate swaps and caps, and equity indexed options, by fiscal year were as follows:
| Year Ending June 30, | Interest Rate | Equity Indexed | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||||
| 2002 | $ | 350,000 | $ | 13,300 | $ | 363,300 | |||
| 2003 | 50,000 | 21,750 | 71,750 | ||||||
| 2004 | — | 40,750 | 40,750 | ||||||
| 2005 | — | 51,000 | 51,000 | ||||||
| 2006 | — | 48,750 | 48,750 | ||||||
| 2007 | — | 5,400 | 5,400 | ||||||
| 2011 | 150,000 | — | 150,000 | ||||||
| $ | 550,000 | $ | 180,950 | $ | 730,950 | ||||
Adoption of SFAS No. 133
The adoption of SFAS No. 133 on July 1, 2000 resulted in a transition adjustment recorded as a cumulative effect of a change in accounting principle of $270,000 unrealized loss ($164,000 net of tax effect) charged to earnings and reflected in the Consolidated Statements of Income and an $875,000 unrealized loss on derivatives ($534,000 net of tax effect) charged to other comprehensive income and reflected in the Consolidated Statements of Changes in Stockholders' Equity and of Comprehensive Income. The transition adjustment in other comprehensive income also includes an unrealized loss of $26.6 million on securities transferred from held-to-maturity to available-for-sale on July 1, 2000.
In addition, $3.9 million of unrealized losses were charged to earnings during the fiscal year ended June 30, 2001, and reflected as "Derivatives Activities" in the Consolidated Statements of Income. Unrealized losses of $9.5 million on derivatives designated as cash flow hedges were charged to other comprehensive income during the same period. The amount charged to other comprehensive income is related to interest rate swaps designated as cash flows hedges for a portion of the Group's borrowings in the second quarter of fiscal 2001. No ineffectiveness was charged to earnings during the period. As
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of June 30, 2001, the estimated amount of unrealized losses included in accumulated other comprehensive income expected to be reclassified to earnings during fiscal 2002 is $7.5 million.
At June 30, 2001, the fair value of derivatives was recognized as either assets or liabilities in the Consolidated Statements of Financial Condition as follows: the fair value of the equity indexed options purchased represented an investment of $27.0 million and the options sold to customers embedded in the certificates of deposit represented a liability of $34.2 million recorded in deposits. The interest rate swaps with a notional amount of $300 million represented a liability of $10.3 million presented in "Accrued expenses and Other Liabilities." The caps did not have carrying value as of June 30, 2001.
NOTE 10—EMPLOYEE BENEFITS PLAN:
The Group has a cash or deferred arrangement profit sharing plan 401(k). Under this plan, the Group contributes shares of its common stock to match individual employee contributions up to $1,040. The plan is entitled to acquire and hold qualified employer securities as part of its investment of the trust assets pursuant to ERISA Section 407. During fiscal year 2001 the Group contributed 7,873 (2000—6,519; 1999—4,916) shares of its common stock with a market value of approximately $110,750 (2000—$124,269; 1999—$119,000) at the time of contribution. The Group's contribution becomes 100% vested once the employee attains five years of participation in the plan.
NOTE 11—RELATED PARTY TRANSACTIONS:
The Group grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These do not involve more than the normal risk of collectibility or present other unfavorable features. The movement and balance of these loans were as follows:
| | 2001 | 2000 | |||||
|---|---|---|---|---|---|---|---|
| | (In thousands) | ||||||
| Balance at the beginning of year | $ | 2,707 | $ | 2,835 | |||
| New loans | 415 | 215 | |||||
| Payments | (217 | ) | (343 | ) | |||
| Balance at the end of year | $ | 2,905 | $ | 2,707 | |||
NOTE 12—INCOME TAX:
Under the Puerto Rico Internal Revenue Code, all companies are treated as separate taxable entities and are not entitled to file consolidated returns. The components of income tax expense for the years ended June 30, follows:
| | 2001 | 2000 | 1999 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||||
| Current income tax expense | $ | (1,219 | ) | $ | 1,920 | $ | 2,011 | |||
| Deferred income tax benefit | (99 | ) | (1,812 | ) | (1,811 | ) | ||||
| Provision (benefit) for income tax | $ | (1,318 | ) | $ | 108 | $ | 200 | |||
The Group maintained an effective tax rate lower than the statutory rate of 39% mainly due to the interest income arising from certain mortgage loans, investments and mortgage-backed securities exempt for Puerto Rico income tax purposes, net of expenses attributable to the exempt income. During fiscal 2001, the Group generated tax-exempt interest income of $74,176,000 (2000—$71,881,000; 1999—$49,458,000). Exempt interest relates mostly to interest earned on obligations of the United
F–45
States and Puerto Rico Governments and certain mortgage-backed securities, including securities held by the Group's International Banking Entity.
The reconciliation between the Puerto Rico income tax statutory rate and the effective tax rate as reported for each of the last three fiscal years ended June 30, follows:
| | 2001 | 2000 | 1999 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||
| | (Dollars in thousands) | ||||||||||||||||
| Statutory rate | $ | 2,853 | 39.0% | $ | 7,673 | 39.0% | $ | 10,493 | 39.0% | ||||||||
| Decrease in rate resulting from: | |||||||||||||||||
| Exempt interest income, net | (4,369 | ) | (59.7 | ) | (8,588 | ) | (43.7 | ) | (7,867 | ) | (29.3 | ) | |||||
| Non deductible charges | 675 | 9.2 | 1,023 | 5.2 | — | — | |||||||||||
| Other items, net | (477 | ) | (6.5 | ) | — | — | (2,426 | ) | (9.0 | ) | |||||||
| Provision (benefit) for income tax | $ | (1,318 | ) | (18.00% | ) | $ | 108 | 0.5% | $ | 200 | 0.7% | ||||||
Deferred income tax reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. The components of the Group's deferred tax asset and liability at June 30, were as follows:
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||
| Deferred tax asset: | ||||||||
| Allowance for loan losses, net | $ | 1,114 | $ | 2,666 | ||||
| Deferred gain on sale of servicing rights | 1,559 | 1,424 | ||||||
| Unrealized losses | 1,573 | 1,086 | ||||||
| Deferred loan origination fees | 2,674 | 1,760 | ||||||
| Other temporary differences | 386 | — | ||||||
| Unrealized losses in other comprehensive income | 280 | 1,413 | ||||||
| Gross deferred tax asset | 7,586 | 8,349 | ||||||
Deferred tax liability: | ||||||||
| Deferred loan origination costs | 1,251 | 980 | ||||||
| 1,251 | 980 | |||||||
| Net deferred tax asset | $ | 6,335 | $ | 7,369 | ||||
NOTE 13—COMMITMENTS:
Loan Commitments
At June 30, 2001, there was $12,255,000, (2000—$12,555,000) of unused lines of credit provided to individual customers and $4,110,000 in commitments to originate loans (2000—$1,250,000). Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. The Group evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management's credit evaluation of the customer.
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Lease Commitments
The Group has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for fiscal 2001 amounted to $1,511,000 (2000—$1,499,000; 1999—$1,013,000). As of June 30, 2001, future rental commitments under the terms of the leases, exclusive of taxes, insurance and maintenance expenses payable by the Group, are summarized as follows:
| Year Ending June 30, | (In thousands) | ||
|---|---|---|---|
| 2002 | $ | 1,557 | |
| 2003 | 1,473 | ||
| 2004 | 1,100 | ||
| 2005 | 1,046 | ||
| 2006 | 961 | ||
| Thereafter | 1,675 | ||
| $ | 7,812 | ||
NOTE 14—LITIGATION:
On August 14, 1998, as a result of a review of its accounts in connection with the admission by a former Group officer of having embezzled funds, the Group became aware of certain irregularities. The Group notified the appropriate regulatory authorities and commenced an intensive investigation with the assistance of its independent accountants and legal counsel. The investigation determined losses of $9.5 million ($5.8 net of tax) resulting from dishonest and fraudulent acts and omissions involving several former Group employees. In the opinion of the Group's management and its legal counsel, the losses determined by the investigation are covered by the Group's fidelity insurance. However, the Group's fidelity insurance carrier has denied claims for such losses. On August 11, 2000, the Group filed a lawsuit in the United States District Court for the district of Puerto Rico against Federal Insurance Group, Inc., a stock insurance corporation organized under the laws of the state of Indiana, seeking payment of its $9.5 million insurance claim and the payment of consequential damages of no less than $13 million resulting from the denial of the claim. Initial conference meetings have taken place. The losses caused by the irregularities and claims to the insurer were expensed in prior years.
In addition, the Group and its subsidiaries are defendants in a number of legal proceedings incidental to its business. The Group is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Group's financial position or the results of operations.
NOTE 15—FAIR VALUES OF FINANCIAL INSTRUMENTS:
The reported fair values of financial instruments are based on either quoted market prices for identical or comparable instruments or estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent the actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.
The fair value estimates are made at a point in time based on the type of financial instruments and related relevant market information. Quoted market prices are used for financial instruments in which an active market exists. However, because no market exists for a portion of the Group's financial instruments, fair value estimates are based on judgments regarding the amount and timing of estimated future cash flows, assumed discount rates reflecting varying degrees of risk, and other factors. Because
F–47
of the uncertainty inherent in estimating fair values, these estimates may vary from the values that would have been used had a ready market for these financial instruments existed.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of the retail deposits, and premises and equipment. The estimated fair value and carrying value of the Group's financial instruments at June 30, follows:
| | 2001 | 2000 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||
| | (In thousands) | ||||||||||||||
| Assets: | |||||||||||||||
| Cash and due from banks | $ | 8,220 | $ | 8,220 | $ | 10,322 | $ | 10,322 | |||||||
| Money market investments | 21,667 | 21,667 | 23,511 | 23,511 | |||||||||||
| Other short-term investments | 42,124 | 42,124 | — | — | |||||||||||
| Trading securities | 76,760 | 76,760 | 64,443 | 64,443 | |||||||||||
| Investment securities available-for-sale | 1,316,885 | 1,316,885 | 282,900 | 282,900 | |||||||||||
| Investment securities held-to-maturity | — | — | 770,851 | 797,484 | |||||||||||
| Equity options investment | 26,973 | 26,973 | — | — | |||||||||||
| Federal Home Loan Bank (FHLB) stock | 15,272 | 15,272 | 11,146 | 11,146 | |||||||||||
| Loans, net (including loans held-for-sale) | 487,571 | 466,482 | 580,927 | 600,878 | |||||||||||
| Accrued interest receivable | 16,646 | 16,646 | 13,485 | 13,485 | |||||||||||
Liabilities: | |||||||||||||||
| Deposits | 782,688 | 797,965 | 719,783 | 723,681 | |||||||||||
| Repurchase agreements | 915,471 | 915,471 | 816,493 | 816,493 | |||||||||||
| Advances and borrowings from FHLB | 105,000 | 105,000 | 70,000 | 70,000 | |||||||||||
| Term notes | 60,000 | 60,000 | 86,500 | 86,500 | |||||||||||
| Accrued expenses and other liabilities | 47,014 | 47,014 | 35,691 | 35,691 | |||||||||||
Off-Balance Sheet Financial instruments: | |||||||||||||||
| Interest rate swaps and caps: | |||||||||||||||
| Equity indexed swaps | (1 | ) | — | 28,713 | — | ||||||||||
| Interest rate swaps | (1 | ) | — | (511 | ) | (219 | ) | ||||||||
| Caps | (1 | ) | — | 1,361 | 1,940 | ||||||||||
- (1)
- Effective July 1, 2000, derivatives are recognized in the balance sheet at fair value, see Note 9.
The following methods and assumptions were used to estimate the fair values of significant financial instruments at June 30, 2001 and 2000.
Short-term financial instruments, which include cash and due from banks, money market investments, accrued interest receivable and accrued expenses and other liabilities have been valued at the carrying amounts reflected in the Consolidated Statements of Financial Condition as these are reasonable estimates of fair value given the short-term nature of the instruments.
The fair value of investment securities is estimated based on bid quotations from securities dealers. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Investments in FHLB stock are valued at their redemption value.
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The estimated fair value for loans held-for-sale is based on secondary market prices or contractual agreements to sell. The fair value of the loan portfolio has been estimated for loan portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate mortgage and consumer. Each loan category is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates, if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value for significant non-performing loans is based on specific evaluations of discounted expected future cash flows from the loans or its collateral using current appraisals and market rates.
The fair value of non-interest bearing demand deposits, savings and NOW accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.
For short-term borrowings, the carrying amount is considered a reasonable estimate of fair value. The fair value of long-term borrowings is based on the discounted value of the contractual cash flows, using current estimated market discount rates for borrowings with similar terms and remaining maturities.
Interest rate swap and cap agreements are fair valued based on market price.
NOTE 16—SEGMENT REPORTING:
The Group operates three major reportable segments: Financial Services, Mortgage Banking, and Retail Banking. Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Group's organizational chart, nature of products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Group measures the performance of these reportable segments, based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated.
The Group's largest business segment is retail banking. The Bank's branches and treasury functions are its main components, with traditional banking products such as deposits, electronic banking and finance leases.
Oriental's second largest business segment is the financial services, which is comprised of the Bank's trust division (Oriental Trust), the brokerage subsidiary (Oriental Financial Services) and the insurance subsidiary (FISA Insurance Agency, Inc.). The core operations of this segment are financial planning, money management and investment brokerage services, insurance sales activity, as well as corporate and individual trust services.
The Group's smallest business segment is mortgage banking. It consists of Oriental Mortgage, whose principal activity is to originate and purchase mortgage loans for the Group's own portfolio. From time to time, if conditions so warrant, it may sell loans to other financial institutions or securitize conforming loans into GNMA, FNMA and FHLMC certificates. Another institution services mortgages included in the resulting GNMA, FNMA, and FHLMC pools. The Group also sells the rights to service mortgage loans for others.
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The accounting policies of the segments are the same as those described in Note 1—"Summary of Significant Accounting Policies." Following are the results of operations and the selected financial information by operating segment for each of the three years ended June 30:
| | Retail Banking | Financial Services | Mortgage Banking | Eliminations | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (Dollars in thousands) | ||||||||||||||
| Fiscal 2001 | |||||||||||||||
| Net interest income | $ | 27,712 | $ | 494 | $ | 857 | $ | — | $ | 29,063 | |||||
| Non-interest income | 1,576 | 12,013 | 7,783 | (3,422 | ) | 19,372 | |||||||||
| Non-interest expenses | 26,662 | 9,420 | 4,135 | (3,422 | ) | 38,217 | |||||||||
| Provision for loan losses | 2,903 | — | — | — | 2,903 | ||||||||||
| Net income (loss) before tax | $ | (277 | ) | $ | 3,087 | $ | 4,505 | $ | — | $ | 7,315 | ||||
Total assets as of June 30, | $ | 2,031,622 | $ | 7,749 | $ | 2,000 | $ | (2,431 | ) | $ | 2,038,940 | ||||
Fiscal 2000 | |||||||||||||||
| Net interest income | $ | 43,705 | $ | 428 | $ | 365 | $ | — | $ | 44,498 | |||||
| Non-interest income | 6,357 | 12,046 | 5,891 | (1,116 | ) | 23,178 | |||||||||
| Non-interest expenses | 30,499 | 6,510 | 3,959 | (1,116 | ) | 39,852 | |||||||||
| Provision for loan losses | 8,150 | — | — | — | 8,150 | ||||||||||
| Net income before tax | $ | 11,413 | $ | 5,964 | $ | 2,297 | $ | — | $ | 19,674 | |||||
Total assets as of June 30, | $ | 1,845,343 | $ | 6,016 | $ | 2,000 | $ | (3,125 | ) | $ | 1,850,234 | ||||
Fiscal 1999 | |||||||||||||||
| Net interest income | $ | 42,389 | $ | 438 | $ | 207 | $ | — | $ | 43,034 | |||||
| Non-interest income | 17,422 | 10,147 | 9,124 | (2,740 | ) | 33,953 | |||||||||
| Non-interest expenses | 25,997 | 7,175 | 5,178 | (2,740 | ) | 35,610 | |||||||||
| Provision for loan losses | 14,473 | — | — | — | 14,473 | ||||||||||
| Net income before tax | $ | 19,341 | $ | 3,410 | $ | 4,153 | $ | — | $ | 26,904 | |||||
Total assets as of June 30, | $ | 1,570,675 | $ | 10,512 | $ | 2,000 | $ | (2,434 | ) | $ | 1,580,753 | ||||
NOTE 17—ORIENTAL FINANCIAL GROUP, INC. (Holding Group Only) FINANCIAL INFORMATION:
The principal source of income for the Group consists of dividends from the Bank. As a member subject to the regulations of the Federal Reserve Board, the Group must obtain approval from the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its consolidated net profits for the year, as defined by the Federal Reserve Board, combined with its retained net profits for the two preceding years. The payment of dividends by the Bank to the Group may also be affected by other regulatory requirements and policies, such as the maintenance of certain regulatory capital levels.
The following condensed financial information presents the financial position of the Holding Group only as of June 30, 2001 and 2000 and the results of its operations and its cash flows for the years ended June 30, 2001, 2000 and 1999.
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Holding Group tables (Financials)
ORIENTAL FINANCIAL GROUP, INC.
STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30,
(Dollars in thousands)
| | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Cash | $ | 377 | $ | 25 | ||||
| Investment securities available-for-sale, at fair value | 12,298 | 16,265 | ||||||
| Investment in Oriental Bank and Trust (OBT), at equity | 97,270 | 109,200 | ||||||
| Investment in Oriental Financial Services (OFSC), at equity | 4,761 | 4,472 | ||||||
| Investment in FISA Insurance Agency (FISA), at equity | (230 | ) | — | |||||
| Other assets | 1,201 | 452 | ||||||
| Total assets | $ | 115,678 | $ | 130,414 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Dividend payable | $ | 1,877 | $ | 1,715 | ||||
| Advances from subsidiaries | 193 | 10,635 | ||||||
| Accrued expenses and other liabilities | 118 | 195 | ||||||
| Stockholders' equity | 113,490 | 117,869 | ||||||
| Total liabilities and stockholders' equity | $ | 115,678 | $ | 130,414 | ||||
STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME FOR FISCAL YEARS ENDED JUNE 30,
(Dollars in thousands)
| | 2001 | 2000 | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income: | ||||||||||||
| Interest income | $ | 683 | $ | 796 | $ | 571 | ||||||
| Investment and trading activities, net | (15 | ) | — | — | ||||||||
| Equity in undistributed earnings from banking subsidiary | 8,578 | 19,055 | 27,026 | |||||||||
| Equity in undistributed earnings from non-banking subsidiaries | 88 | 472 | — | |||||||||
| Total income | 9,334 | 20,323 | 27,597 | |||||||||
Expenses: | ||||||||||||
| Interest expenses | — | 115 | 463 | |||||||||
| Operating expenses | 852 | 642 | 430 | |||||||||
| Total expenses | 852 | 757 | 893 | |||||||||
Income before income taxes | 8,482 | 19,566 | 26,704 | |||||||||
| Income taxes | 13 | — | — | |||||||||
| Net income | 8,469 | 19,566 | 26,704 | |||||||||
| Other comprenhensive income, net of taxes | (1,691 | ) | (4,781 | ) | (17,867 | ) | ||||||
| Comprehensive income | $ | 6,778 | $ | 14,785 | $ | 8,837 | ||||||
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STATEMENTS OF CASH FLOWS FOR FISCAL YEARS ENDED JUNE 30,:
(Dollars in thousands)
| | 2001 | 2000 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 8,469 | $ | 19,566 | $ | 26,704 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Equity in earnings from banking subsidiary | (8,578 | ) | (19,055 | ) | (27,026 | ) | |||||
| Equity in earnings from non-banking subsidiaries | (88 | ) | (472 | ) | — | ||||||
| Amortization of premiums and accretion of discounts on investment securities | 395 | — | — | ||||||||
| Amortization of goodwill | 18 | ||||||||||
| Decrease (increase) in other assets | (556 | ) | (97 | ) | 62 | ||||||
| Increase (decrease) in accrued expenses and liabilities | — | 138 | (172 | ) | |||||||
| Total adjustments | (8,809 | ) | (19,486 | ) | (27,136 | ) | |||||
Net cash provided (used) by operating activities | (340 | ) | 80 | (432 | ) | ||||||
Cash flows from investing activities: | |||||||||||
| Purchase of investment securities available for sale | — | (9,326 | ) | — | |||||||
| Adquisition of non-banking subsidiary | (1 | ) | (4,000 | ) | — | ||||||
| Redemptions and sales of investment securities available-for-sale | 4,195 | 897 | 1,772 | ||||||||
| Net cash provided (used) by operating activities | 4,194 | (12,429 | ) | 1,772 | |||||||
Cash flows from financing activities: | |||||||||||
| Net decrease in securities sold under agreements to repurchase | — | (7,499 | ) | (1,601 | ) | ||||||
| Proceeds from exercise of stock options | 396 | 539 | 842 | ||||||||
| Net increase (decrease) in advances from subsidiaries | (10,442 | ) | (2,347 | ) | 12,157 | ||||||
| Net proceeds from issuance of preferred stock | — | — | 32,300 | ||||||||
| Purchases of treasury stocks | (3,535 | ) | (3,715 | ) | (17,202 | ) | |||||
| Dividends received from banking subsidiary | 20,000 | — | 14,680 | ||||||||
| Dividends paid | (9,920 | ) | (10,044 | ) | (7,300 | ) | |||||
| Net cash provided (used) by financing activities | (3,501 | ) | (23,066 | ) | 33,876 | ||||||
Increase (decrease) in cash and cash equivalents | 352 | (35,415 | ) | 35,216 | |||||||
| Cash and cash equivalents at beginning of period | 25 | 35,440 | 224 | ||||||||
| Cash and cash equivalents at end of period | $ | 377 | $ | 25 | $ | 35,440 | |||||
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Table of Contents
- PART—I
ITEM 1—BUSINESS
ITEM 2—PROPERTIES
ITEM 3—LEGAL PROCEEDINGS
ITEM 4—SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART—II
ITEM 5—MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6—SELECTED FINANCIAL DATA
ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART—III
PART—IV
ITEM 14—EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)—Financial Statements
(a)(2)—Financial Statements Schedules
(b) —Reports on Form 8-k
C—Exhibits
SELECTED FINANCIAL DATA YEARS ENDED JUNE 30, 2001, 2000, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
SELECTED FINANCIAL DATA PERIOD ENDED JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA AS OF JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA AS OF JUNE 30, 2001, 2000 AND 1999 (Dollars in thousands)
SELECTED FINANCIAL DATA AS OF JUNE 30, 2001, 2000 AND 1999 (dollars in thousands)
SELECTED FINANCIAL DATA AS OF JUNE 30, 2001, 2000 AND 1999 (dollars in thousands)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2001
Report of Independent Accountants
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2001 AND 2000 (IN THOUSANDS)
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS)
ORIENTAL FINANCIAL GROUP, INC. Notes to Consoldiated Financial Statements
ORIENTAL FINANCIAL GROUP, INC. STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, (Dollars in thousands)
STATEMENTS OF INCOME AND OF COMPREHENSIVE INCOME FOR FISCAL YEARS ENDED JUNE 30, (Dollars in thousands)
STATEMENTS OF CASH FLOWS FOR FISCAL YEARS ENDED JUNE 30,: (Dollars in thousands)